MB Wealth Corp. Weekly Commentary
For October 15th - October 19th 2007
By: Matthew Bradbard
You need more than just an umbrella to weather this storm. Volatility is starting to pick up in the indexes again and it is ever so present in the commodities. In this trading environment we cannot stress how important risk management is; just as important as finding winning trades is to cut losses and exit when trades are not working. Remember it is about patience and capital appreciation, not a win/loss record. If you are not prepared to be wrong, trading is not for you. I was talking to a client last week, he was shocked when I told him I’ve lost money in almost every commodity market over my career, however I also told him, I too have made money in virtually every market. It boils down to good timing not a good or bad market. Markets on our radar that we feel merit your immediate attention are corn, cotton, sugar, silver and gold. To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ With about one month left in hurricane season, energy traders are paying close attention to an inactive season because of thoughts that we are overdue. The weather in the Gulf of Mexico was calm again this past week, but November crude oil still closed up over $2.00, at a new contract high of $83.69. The Department of Energy said that crude supplies were down 1.7 million barrels last week, due to a drop in imports. Talks that Turkey may be preparing to attack northern Iraq also did not help. The recent draws in oil have partly been blamed on near-month futures contracts' recently developed premium over later months. The situation, known as backwardation, makes it less profitable to store oil than under the reverse situation, known as contango. Contango makes storage more attractive because when front-month futures prices are cheaper than further out months, it is more profitable to lock in prices further down the track and hold on to the oil. We feel oil will continue trending higher but current conditions are too dicey and we’ll be on the sidelines until getting a better handle. Analysts predict the U.S. is on track to see natural gas inventories fill to near-record highs, or even to exceed the record by the start of winter. A surplus of gas in storage left over from last winter's mild weather, this year's increase in domestic gas production, record-high liquefied natural gas imports, and a near-zero loss of production from Gulf Coast hurricanes have contributed to the build-up in U.S. gas stocks. Add to that expectations for mild fall weather and slack demand, and the nation could be facing record levels of gas in storage Nov. 1. The hefty supply doesn't necessarily mean gas prices will plunge dramatically. The market generally waits until later in the winter to determine how much gas the nation is likely to use. As we have said previously we will get long natural gas between 6.30/6.50 looking for the 6.00 level to serve as support. Until we get a better read on crude we are not too excited about trading XROB or heating oil. Both trends appear as if higher prices are in our future and volume has been growing, but we prefer to get long from lower levels as opposed to speculating at these prices. ____________________________________________________________________ We covered our lean hog trade from last week at break even and feel like a winner after Friday’s action. The outlook for hog prices has gone from bad to worse. Earlier this year, there was hope that hog producers would restrain production due to high corn prices and a fear that the ethanol market was going to use up all the corn. Roughly a month ago, there was hope that China's pork shortage would lead more U.S. exports. Now it’s October and hopes for significant purchases from China have faded. A late September hog inventory report showed that hog producers have not reduced their numbers. So far in 2007, pork production is up 2.9% from a year ago and rising. This week's hog slaughter was another new record high of 2.348 million head, up 8.7% from a year ago. Lean hogs are not done going down but when they are, it will be one hell of a buy. If the beef industry could generate some international business, it would be great for producers, but the industry appears to be stuck in a rut. Very few countries want to buy our beef and production is up modestly; not exactly a formula for high beef prices. Needless to say, the seasonal tendency is for higher prices in live cattle and we’ll most likely start to look for an entry to buy soon. Feeder cattle would start to look more attractive on a close back above the 100 day moving average of 114.36 on November. ____________________________________________________________________ Stocks: It’s hard to believe, given all the problems in the news about sub prime and a poor housing sector, but the indexes are back to their contract highs. Looking at the current condition, the adage of “I’d rather be safe than sorry” comes to mind so we will remind you again HEDGE YOUR PORTFOLIO. Without new contract highs this week, look for a pullback across the board. The global boom will go on but you may want to take a lead from Warren Buffet who is lightening up on some of his exposure. Housing numbers as well as CPI are due out Wednesday. Bonds: The debt market looks to play off the lead of the indexes. With the Fed meeting another 2 ½ weeks away there is still some question to what the next move on interest rates will be. Our personal opinion is that the Fed will leave rates as is, but we thought they would do 25 points at their previous meeting so who knows. Our view is that we do have an inflation dilemma based on a weakening dollar and rising food and energy prices. We will access the situation in bonds and notes this week before committing either way. We’ll continue to trade the Euro Dollar with spreads playing the yield curve. ____________________________________________________________________ The U.S. dollar continues to be pressured by a slow housing market and a soft interest rate environment. On Thursday, the U.S. Census Bureau said that exports increased .4% in August to a record high $138.3 billion. The December U.S. dollar index ended the week down at 78.16. If the economy gets any more positive news like the most recent employment report or Friday's retail sales report, the dollar could find a temporary bottom and we might see a small appreciation. We are by no means implying a trend reversal as we see a weak dollar throughout Q4, but our short term models indicate a short term bounce in the dollar. We maintain a move below 140.00 is soon to come in the Euro. We have chosen to play this with options vs. futures so we’re ok with last week’s appreciation. Our view will change only on a new contract high on a closing basis. MACD still support a move lower while the daily stochastics are really no help in the 50’s. On Tuesday, the U.K.'s Chancellor Darling told Parliament that real GDP would be up 3.0% in 2007, but only be up 2.25% in 2008, less than they wanted to hear. The December British pound ended down about 1 cent at $2.0308. Current conditions could take the pound either way so we will watch from the sidelines. Australia's economy is blistering and should remain that way on commodity appreciation and steady exports. On Thursday, Australia's unemployment rate improved from 4.3% to 4.2%, the lowest in 33 years. The December Australian dollar was up .59 to a new contract high of 90.04 and should slowly rally to parity. Last week, Moody's raised Japan's credit rating one step to A1, citing support for Prime Minister Fukuda's plans to restrain government spending. The December yen dropped .0054 to .8569 as there is no hurry to raise the .50% interest rate anytime soon. As long as investors are willing to accept the current risk environment, the yen should chop lower. As we stated last week on a break of .8550 expect to see .8300. The Canadian dollar continued making new highs this week, benefiting from a weak U.S. dollar and rising commodity prices. The December Canadian dollar closed up at a new contract high of $1.0277. A meeting on interest rates will take place on Tuesday; we do not expect any rate change. We are looking for some profit taking ahead of the meeting and it would be healthy for this market to take a breath. Like many of the crosses in the Swiss franc there is no defined trend so stay away. The double top at .8650 serves as resistance, while significant support is much lower, so unless you are day trading or scalping we have no interest. ____________________________________________________________________ Corn: Weekly exports last week of 2.319 m.m.t. was the highest weekly sales number for 2007, much of which attributed to exportable feed grains to Asia. The monthly USDA crop report put corn production at 13.318 billion bushels. The yield came in at 154.7 bushels/acre, 3 bushels below pre report estimates and 1 bushel below the September report. Ending stocks were 1.997 b.b. up 322 m.b. from last month. The bullish export sales report and a crop report not as bearish as anticipated, led to higher prices on short covering and unwinding of spreads put on in the days prior the report. Sunday night into Monday is critical. A higher close over 3.70 for March sets us up for a test of 3.84 and closure of a previous gap, but if we start out lower and finish lower we will quickly test the contract lows. Near term we are supply side bearish but long term bullish, looking at demand and the expected run in acreage. With a harvest low soon to follow, if not already made, we like being long December 08’ as long as the 200 day moving average holds which was tested last week on three occasions. Beans: Weekly exports last week of 550 t.m.t. of beans were sold. The USDA crop report put production at 2.598 b.b. down 21 m.b. from the September report and roughly 50 m.b. under pre-report trade guesses with 2008 ending stocks unchanged from last month at 215 m.b. Though bullish on the surface, it was not as bullish as rumors had it the two days prior with traders discussing a more bullish scenario and may have been disappointed. Long term we remain extremely bullish beans but near term is mixed and we look to next week for direction. May beans need a close over 10.25 next week to turn chart bullish with support down at 9.86 the bottom of a near term chart gap. Beans could go either way; we would rather be long corn or short wheat. Until getting a better grip in beans we will not be trading soy meal or soy oil either. Wheat: Weekly exports last week of 934 t.m.t. of wheat were sold, 40% under the four week average, indicating current high prices may perhaps be affecting exports. The trade thinking is lower prices are needed to increase demand once again. Overall demand remains robust but is clearly softening. The USDA crop report put ending stocks for 2008 at 307 m.b., 55 m.b. under the September report. These are the lowest ending stocks in over 50 years. World stocks are at 31 year lows. This was largely factored in and aligned with pre report positioning, traders quickly sold the market to limit down 30 cents in early trade with Chicago down 25 cents on the close. Unless March closes back over 9.00, the trend remains down with next support at 8.35. A close under 8.35 sets up a move under 8.00. A close over 9.00 negates the technical downtrend. The USDA‘s estimate of 2007-2008 U.S. ending stocks was 307 million bushels, the lowest since 1948-49. The USDA's estimate of world ending stocks was 107 million tons, the lowest since 1975-76. ____________________________________________________________________ U.S. cotton exports for 2007-2008 remain strong, up 125% from a year ago according to the USDA, but cotton stocks still seem abundant. The USDA increased its 2007-2008 U.S. ending stocks estimate from 6.2 to 6.4 million bales, or 30% of annual use. December 08’cotton closed the week at 73.40 with 30% of the crop harvested. We are still looking for an entry to buy closer to 70 cents. There was nothing to break the negative tone of the lumber market this week. The National Association of Realtors reduced its estimate of U.S. existing home sales again for the eight consecutive months this year. January lumber fell $11.40 to a new contract low of $256.90 and lower prices are to come. Cocoa generally trades off the dollar and pound and we do not have a good read on either so we would not put on significant size. It is worthy of a trade getting long on a close above the 50 day moving average at 1866 on December. The stochastics are reading oversold and if this market can garner some momentum you have a potential “W” formation. Although premature, if this were to play out cocoa would move $300 higher over the next 2-3 months. It was the same old story this week for coffee. The crop in Brazil needs rain this month for its critical flowering stage and, so far, there is no significant rain in sight. December coffee had its’ highest close this year and with a close over 140 in coming weeks coffee could gain more attention from the funds as that would put coffee above overhead resistance from late 06’ and talk of $2.00/lb coffee would start. With some rain in Brazil expect some profit taking. The first USDA estimate of the Florida orange crop is often a big price mover and this year's estimate was no different. On Friday, the USDA said that the Florida crop will total 168 million boxes, up from last year's 129 million boxes, but less than expected. January orange juice climbed 7 cents on the week to $1.4360, the highest close in four months. Another week of range bound trading for sugar, bouncing between 10.00 and 9.70 cents a pound. That low from October 8 of 9.59 on March 08’ contract will now be a key support zone to watch. If the market can hold above that floor in the days and weeks ahead, the mildly bullish technical uptrend will have legs to continue building higher ultimately in our view finding its way to 13.00. Sugar should be in every commodity portfolio via futures or options as funds continue to hold sizeable net longs and it will just be a matter of time! As we stated last week, we are long November milk looking for the trend line to hold and so far so good. Assuming Tuesday’s low of 16.75 holds, we should see a 61.8% retracement up to 18.38 in coming weeks. ____________________________________________________________________ Comex gold futures traded on Nymex reached record open interest levels last week. The open interest in gold futures peaked at almost 480,000 contracts. December gold ended the week up $6.60 at $753.80, the highest weekly close in 17 months. In the last couple of months, gold has been supported by the Federal Reserve's half-percent rate cuts, a weaker U.S. dollar, and growing difficulties in the mining industry; it is getting more difficult and more expensive to find new deposits. We are still expecting a pullback near $725 but have chosen to step in with mini futures or a lesser number of contracts as we do not want to be absent from more upward movement while waiting for a correction that may not come. Ultimately we are thinking gold could find its way to $850 so we are ok venturing in here but cautiously not getting married to the position. Silver, like gold, is moving higher and although we anticipate a correction back to $13.00, we lightly joined the party last week. We feel not having any exposure on a break above $14 is a graver risk than taking a small position and accepting the fact that we may need to weather a pullback before the ensuing move to $15 plus happens. December copper was a little softer this week, ending down 7.30 cents at $3.6525 with concerns that these high prices may be finally having an effect on China's buying enthusiasm. That, in combination with a US housing market that is dying on the vine, would make us expect to see copper prices slowly grind lower looking for $3.4500 in coming weeks.
If a portion of your portfolio is not already in gold or silver we highly suggest you diversify into these metals as we expect to see much higher prices in coming months due to inflationary concerns and the “smart” money moving into this sector.
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