MB Wealth Corp. Weekly Commentary
For October 22nd - October 26th 2007
By: Matthew Bradbard
Anyone who trades commodities knows how humbling these markets can be even when times are good. It appears that we may get some profit taking commodity wide, so if you are long grains, metals, energies or currencies against the dollar, tighten stops as prices look due for an adjustment lower. This should also enable us into markets that we have been waiting to enter like cotton, gold, silver, and heating oil just to name a few. Additionally, you can play commodities betting on lower prices with the same risk/reward dynamic as betting on appreciation in prices. To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ December natural gas is off approximately 60 cents from last week’s high of $8.256, with mild fall temperatures over most of the U.S. and plenty of inventories available for winter. The U.S. Department of Energy said on Thursday that underground supplies of natural gas are up almost 7% from the five-year average and there has been no recent mention of hurricanes in the Gulf of Mexico. If this pullback takes natural gas for December closer to $7.000 we will use this as a buying opportunity. On Wednesday, Turkey's parliament granted approval for a military strike against the Kurds in northern Iraq. The world flow of crude oil is already tight, and fighting in northern Iraq threatens to disrupt the 600 mile pipeline that delivers 1 million barrels of crude oil per day to the port of Ceyhan in Turkey. November crude oil shot up over $4.00 last week to a new record high of $90.07. November will expire this week and December will become the front month trading close to $86 to start off the week. Crude oil looks heavy at these prices and we’re starting to get sell signals again, but with many talking about $100 oil trading, from the short side could be painful. With some profit taking most likely to come and an increase in momentum from Friday, expect $80.77 on a pullback which serves as the 38.2% Fibonacci retracement and as the trend line from August lows. As crude goes so does heating oil and gasoline. We would expect that if crude is able to garner a pullback so will the products. Although wholesale prices look destined to pullback to $2.00 a gallon in coming weeks, do not expect the same for retail prices. With the recent explosion in crude prices it is yet to be felt at the pump, but expect gas prices to jump 15-25 cents per gallon at the pump as rising prices will be passed thru to the consumer in the immediate future. We are still looking for an entry to get long heating oil and ideally will get a chance this week on a 10-15 cent break. If not meant to be this week we will devise a bullish strategy with spreads or options looking to play higher prices over coming months. ____________________________________________________________________ Dow Jones Newswires reported that Russia may accept U.S. beef imports again, possibly as soon as next week. After the close Friday, the USDA said that there were 10.967 million head of cattle on feed as of October 1st, down 3.7% from a year ago, but more than expected. Placements were up 9% from a year ago while marketings were down 3%. December cattle ended the week at 97.30, virtually unchanged. As stated last week, on a close above the 100 day moving average of approximately 98.00 a long could be established looking for 101.00 and a trade back to the triple top resistance dating back to July. Trying to pick a bottom in feeder cattle is like catching a falling knife so we will remain on the sidelines. Pork production was estimated at 467.3 million pounds, up 6.0% from a year ago. December lean hogs closed down almost 2 cents on the week at 56.92, the lowest close in a year. Technical indicators are extremely oversold but hogs could continue to get cheaper. We are looking for a confirmation of a bottom or multiple buy indicators before building any size here. ____________________________________________________________________ Stocks: Hopefully at least one client or subscriber listened to us when we have been instructing stock investors to lighten up and to hedge your portfolios week after week. We don’t feel we are done moving south and as investors wake up and smell how big of a problem we could be facing with a slowdown in consumer spending, the credit bubble and housing risk will assess differently. I don’t want to say we told you so but we have been looking for this correction for some time now and it took a 20 year anniversary of “Black Monday” to deliver. This down trend could feed on itself as global equity markets may add fuel to the fire. Bonds: The one market that benefits from slow economic news is interest rates. The December U.S. T-bonds closed up almost 3 full points at 113 7/32nds, the highest close in a month. As far as the debt market goes, moving forward we should see an inverse to equities. We will continue to buy dips until the equity market turns or we get a clearer sign of what the Fed will due come month end. For now the market is pricing in a 25 basis point move lower taking rates to 4.50%. ____________________________________________________________________ With the dollar index trading at its lowest level in forty years, talk of the end of the world is staring to surface. Admittedly the dollar has fallen off a cliff of late but our models are still saying that a low will be established soon and we are looking for a bounce. Whether it be short covering or new buying, if the dollar can turn around we would expect a move to 78.50/79.00; no more. A move of this magnitude, roughly 2% would also cause other currencies to back off. Last week real GDP was up .8% in the third quarter and up 3.3% from a year ago in the UK, stronger than expected and the best performance in three years. The December British Pound ended up .0049 at $2.0465, the highest close in nearly three months. After touching the upper end of Bollinger bands and reversing, look for a re visit to the 50 day moving average of $2.0155. Canada reported that consumer prices were up .2% in September and up 2.5% from a year ago, the biggest annual jump in over a year, thanks mostly to higher energy prices. The December Canadian dollar shot up 1 cent to a new contract high of $1.0368. It was the highest spot close in 33 years. Fridays high should serve as strong resistance and look for a setback with a pullback in commodity prices. This uptrend is not over but it should be quiet at least for the week. On Tuesday, Japan said their housing starts in August were down 43% form a year ago because of a new regulation that is supposed to protect homes from earthquake damage. Japan's economy does not have much to cheer about, but this week everybody beat the U.S. dollar. The December yen looks like it has legs and will continue to move higher as long as global equity markets come under pressure as carry trades will be lifted. Our patience may be rewarded this week with our Euro currency puts, as the euro is trading lower; as we have said in previous weeks looking for a trade below 140.00. Although using a little imagination, one could argue of a head-and-shoulders pattern forming that would substantiate a move lower, perhaps significantly lower. The Swiss franc made an attempt and failed to get through upside resistance overnight Sunday. This currency like others looks like it will trade lower in conjunction with the US dollars recent bounce. We would not expect the Swiss to get much beyond 0.8440. Every move eventually comes to an end, after a 17.0% appreciation in just over 2 months the Australian dollar is finally giving a little back. We still contend that this cross will hit parity so use this retraction as an entry for a buy looking for 0.8500 to serve as first support. ____________________________________________________________________ Corn: Thursday's weekly export sales report showed 1.851 m.m.t. of corn was sold last week. Corn demand will fluctuate up and down but overall we expect demand will remain strong through 2008. Friday saw all corn contracts fill their gaps on the charts from the first of the month. Strength came from outside markets all week. The U.S. dollar saw steep declines which allow foreign importers an opportunity to buy U.S. grains cheaper. The higher crude oil and other energies lend thought to higher corn based ethanol while metals surged on inflationary concerns. Of late, corn has benefited from spill over strength but it to will be effected by commodity wide weakness so stay on top of your positions. Longer term we are very bullish corn but currently prices could come under pressure. With less than half the crop to come to harvest and our next U.S.D.A. supply side report not until November 9th, corn will look for guidance from other markets. One thing to watch for between now and October 31st, month end is a possible bigger pull back in corn. If the large funds take month end profits in crude oil profit taking will come at some point in corn. A close over 3.88 March futures sets up next resistance at 4.00. Support lies at 3.70, the 40 day moving average. Beans: Thursday's weekly export sales report showed 750 t.m.t. of beans were sold last week, up 36% from the prior week. Like corn, beans too near term follow the lead of crude oil and the dollar index until new supply side news surfaces on the November 9th crop report. Demand looks to remain robust and weather in Brazil is still longer term friendly as hot and dry conditions have persisted for almost 2 months. Once beans are 75% planted there, weather will be traded aggressively. Watch out for month end profit taking in crude, it could lead to a bigger break in beans. March futures remain technically in an uptrend until minor support at 10.10 fails, leading us to next support of 10.00 even. Looking at the charts it could go either way, but we prefer the idea of a break coming towards month’s end as opposed to higher prices. We are short bean oil looking for lower crude and month’s end profit taking to lead bean oil towards 39.10. As long as contract highs hold in December we will look to get as much out of this trade as it will offer. Wheat: December has wheat sold off from its record highs for two and a half weeks, but on Friday, it closed up its 30-cent daily limit, encouraged by strong exports and a weak U.S. dollar. December officially ended the week down 2 cents at $8.555. Thursday's weekly export sales report showed 984 t.m.t. of wheat was sold last week. Though we are under recent averages, it’s still a good demand number coming in just shy of 1 m.m.t. It would take a number below 700 t.m.t. to raise a red flag to assume high prices are affecting demand. Most see it as a signal that the recent break is not encouraging more hoarding or panic buying but recent purchases just as required demand. On March wheat we are trading on both sides of the 40 day moving average looking for direction. A close over resistance would change the technical trend to at least near term friendly with next resistance at 9.00 for March. Our longer term goal of 8.00 and further down the road of 7.00 remains intact, unless something enters that’s not there now, such as a sharp increase in demand back on weekly export sales reports or a reduction in acreage which would be highly unlikely. ____________________________________________________________________ The USDA said that Brazil will produce 32.1 million tons of sugar in 2007-2008, up 2% from the previous year. Additionally they expect Brazil to produce 20.75 billion liters (roughly 5.5 billion gallons) of ethanol, up 16% from the previous year. March sugar closed up .12 at 10.21, the highest close in two months. We remain bullish sugar and will continue to accumulate longs, but short term may see a set back on a dollar bounce. As long as the funds continue to build a position, so will we. The U.S. Chocolate Manufacturer's Association said that 94,179 tons of cocoa beans were ground in the third quarter, down 14% from a year ago. December cocoa slowly advanced higher last week but with weakness in the pound and strength in the dollar, cocoa will most likely find its way back to 1800. It’s still not clear if Brazil's coffee crop will get enough rain for a healthy flowering process this month. Prices failed to get thru 140.00 in December coffee and backed off hard last week. If you have the stomach for coffee, technicals are starting to signal another buy. If the 200 day moving average of 122.00 is able to hold, look for December coffee to get back above 130.00 in a hurry. Remember technicals only go so far and current pricing largely depends on weather out of brazil, so any word of rain make sure you have stop loss orders. After trending higher for the past six straight weeks FCOJ ran into some resistance at 156.00 for January. We would expect prices to slowly track lower ultimately looking for 130/140 to become the new trading range. U.S. cotton farmers are in a tough predicament. They need China to buy more U.S. cotton, but relations between the U.S. and China are increasingly strained. Fortunately for cotton producers, the market chose to focus instead on the weak dollar and the fact that U.S. cotton exports are up 124% from a year ago. December cotton finished the week up near contract highs of 76 cents. We are still vigilant and remain on the sidelines looking to get long December 08’ at lower pricing closer to 70 cents. ____________________________________________________________________ A slow U.S. economy leads to a soft interest rate outlook and a weak U.S. dollar. December gold continued to benefit, climbing $15 this week to another new 17-month high of $776.90. With bullish sentiment at 90% this market is destined for a pullback. Although a bit contrarian if every body on the street is calling for higher gold prices, I want to be tightening up stops, booking a profit on longs and be expecting a break. Expect sharp volatile movements and one may want to scale into longs on down days because I don’t think we will get a significant retracement. As previously stated we are looking for $850 early next year. To put things into to perspective for naysayer’s who say gold is too expensive. Crude oil has moved six fold in the same time it has taken gold to move three-fold so yes we think there is plenty of upside to come. Silver will follow gold and we have the same stance ultimately looking for $15 plus once this correction makes its way through the system. The 50 day moving average of $12.950 for now serves as the line in the sand unless the dollar has a complete reversal, at this point we do not think that is the case. Remember as we said a few weeks ago, 14 of the last 18 years December silver has moved lower in October so this is the norm. December copper is more concerned about a slowing U.S. economy and finished the week down 11 cents at $3.5415, the lowest close in nearly a month. We in previous newsletters pointed out the triple top in the charts and have hit our target of $3.4500 from 2 weeks ago. If this levels gives way look for $3.3000; if you are not already short we would not recommend selling here and will give you an entry in coming weeks as we access the new support and resistance levels.
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.
____________________________________________________________________ |
