MB Wealth Corp. Weekly Commentary
For October 29th - November 2nd 2007
By: Matthew Bradbard
The debate this week is will it be a trick or a treat on Wednesday when the Fed delivers their decision on interest rates. The decision and market’s reaction are extremely critical in determining our position on future trades, especially as most markets in the current environment are intertwined. The equity markets, bond market, commodity market and even housing market seem to be playing off one another. To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ The oil market is as stressed as ever and moving on any report of increasing tensions. On Thursday, the U.S. government announced new sanctions against Iran, their banks and businesses. At the same time, Turkey is preparing to go after Kurdish rebels in northern Iraq and there are legitimate concerns that the oil pipeline that runs from northern Iraq into Turkey may be vulnerable. December crude oil closed $7 off its weekly lows closing at an all time high of $91.86. The path of least resistance remains up, although $100 is possible we feel oil is a bubble with current fundamentals more reflective of oil in the 70’s. The odd thing about the big run up in oil prices is that gasoline prices have been tame, by comparison. On Wednesday, the Department of Energy said that crude oil supplies were down 5.3 million barrels last week, but it wasn't because of increased refining activity, it was due to a big drop in U.S. imports. Refining activity remains lethargic, at 87.1% of capacity. December reformulated gasoline climbed to a new contract high of $2.2725. Heating oil also climbed on the week approaching $2.5000 a gallon. With winter and increased demand fast approaching we will maintain a buy breaks mentality looking for substantially higher heating oil prices in weeks and months to come. With record high pricing in crude oil, you might have expected natural gas prices to follow, but that didn't happen. Hurricane season in the Gulf of Mexico has been mild and on Thursday, the Department of Energy said that underground supplies of natural gas were 7% above their five-year average. December natural gas finished the week virtually unchanged at $7.808 after some volatility. The daily and weekly charts look constructive and we went long December last week looking for prices to trade back to the consolidation levels from summer between $8.400/$8.800. ____________________________________________________________________ The numbers of cattle on feed in the U.S. was down 3.7% on October 1st and September beef production was down 3% from a year ago. December live cattle closed down just over 2 cents last week at 95.125, the lowest close in four months with concerns about a slow U.S. economy and rising grain prices. Next support lies just above 94.000. Feeder cattle should be bullied lower and find support near 106.000. This was the fourth consecutive week that more that 2.0 million hogs were slaughtered and that trend will probably not change anytime soon. December lean hogs finished down 2 plus cents at 54.520 after bouncing off a new contract low of 54.150. The USDA said on Tuesday that there were 17 million pounds of frozen pork bellies in storage at the end of September, more than expected. Anyone that sold bellies reacting to this, soon found themselves caught in a bear trap. On Friday, February bellies closed up their 3-cent daily limit to end the week slightly higher at 83.52 potentially putting in a bottom if this rally holds. ____________________________________________________________________ Stocks: The Dow was up every day last week gaining just under 300 points but the rally was not too convincing. The path of least resistance remains up, without any Fed surprises the seasonal trend is extremely supportive. The December S&P 500 finished the week up 37 points at 1,543.00, just surpassing a 50% retracement from the H/L marks in October. With future earnings likely to determine the immediate direction in stocks, companies missing earnings have suffered declines averaging 3.8% while those beating forecasts have climbed only 1.5%, I thought this was interesting. Those meeting forecasts slipped 1.8%. Tech is back! The NASDAQ 100 has moved roughly 17% off August lows and with a breach of overhead resistance of 2220 looks poised for another 3-5% leap higher. Bonds: On Wednesday, the National Association of Realtors said that U.S. existing home sales in September hit their lowest point since records began in 1999. On Thursday, U.S. new home sales for September were down 23% from a year ago and the figures for August were revised lower. On Friday, the University of Michigan's consumer sentiment index dropped to 80.9 in October, the lowest in over a year. The December T-bonds ended the week up 9/32 at 113’16 with notes coming in at 110’20.5 down 1/32. Although the debt market will continue to serve as a flight to quality the market looks heavy and has started to roll over, possibly on profit taking. The next leg will be determined by the Fed decision out on Wednesday. A 25 basis point cut is factored in and the debate intensifies as the decision on rates is fast approaching. ____________________________________________________________________ Sometimes our models are early and other times they are just wrong. Our model has been calling for a dollar bounce for the last couple weeks; once again not a trend reversal but just a bounce. It will be apparent that the markets reaction to the Fed will deliver this anticipated bounce or we are most likely incorrect. Although the dollar index is extremely oversold we are not looking for a long entry here, rather we would look to play other markets that are dollar sensitive and look here for direction. Consumer prices in Australia were up 2.9% in the third quarter from a year ago and expectations are high for another rate increase soon propelling the Aussie higher. The December Australian dollar climbed 2 1/4 cents last week to a record high 91.51 slowly making its way to parity which we expect in 08’. Buy dips. Deflation still has a grip on Japan; consumer prices were down 0.2% in September from a year ago. Until that changes, it’s hard to imagine much of any increase in the yen. The December yen closed up marginally at .8804, benefiting more from problems with the economic outlook than anything positive in the Japanese economy. Though short term the trend is uncertain the market may need to start pricing in the expected rate increases by the Bank of Japan expected in early 08’. Retail sales in Canada were up an impressive .7% in August. That, plus higher commodity prices, helped the December Canadian dollar close out the week up just shy of 1.0400, posting a new 33-year spot high. The trend remains up but with technical indicators overbought and a likely pullback in oil trail your stops if long. The Euro currency is trading at record highs and chatter is starting to emerge of the potential 1.5000 Euro against the dollar. Although we feel unlikely in this leg that it will happen, without some help from the Fed the trend remains up. However the ECB are apt to cut rates moving forward as higher prices will further erode export pricing. The Swiss franc has made its way back to resistance levels but will need to gain more momentum to push thru the 86.50 level. On a successful move above 86.50 there is little to no upside resistance so look for follow thru. The cable looks to fill a gap from late July and to challenge the contract highs of 2.0593 but we would not expect much more than that unless the dollar was to free fall after the Fed decision. We will stay on the sidelines here. ____________________________________________________________________ Corn: Thursday's weekly export sales of 1.55 m.m.t. showed the profound demand for corn exhibiting its usage as feed, food, and fuel. Corn will continue to follow beans’ lead to the upside in hopes of staying high enough in price relationship to beans, not to give back too much of the acres we planted this past year. Corn also found strength from the dollar index moving down sharply on the week and climbed on the back of higher energies and metals. Without fresh fundamental supply side news, corn will continue to look to outside markets for direction. Corn's risk this week comes as Wednesday is month’s end and if outside markets take profits, such as energies or metals, corn will be dragged lower. The charts have support on March at 3.73 with resistance at 3.91. A close over 3.91 sets up a test of 4.04, the high in late September. Ideally we will have an opportunity to buy December 08’ closer to 4.00 on month’s end profit taking. Beans: Thursday's weekly export sales report showed 463 t.m.t. of beans were sold last week. Like corn, beans too have a strong support longer term. Prices need to move high enough into next spring to encourage farmers to plant at least 5 million more acres or run out of beans with current usage in 2009. This dynamic will not go away until the crop is in the ground next May. The daily influence continues to come from the direction of energies, the dollar index, and the metals. Long term, beans remain the strongest bull market in the grain complex. Near term downside risk comes from potential month’s end profit taking from outside markets spilling over to beans which should be viewed as a buying opportunity. The two week consolidation between 10.00 and 10.25 basis March futures was broken last week setting up a likely move to new contract highs. Minor support now is 10.20 and major support at 10.00 which on a break sets up a move to 9.72. Wheat: Thursday's weekly export sales report showed 556 t.m.t. of wheat was sold last week, a major decline from previous weeks. As previously forecasted, we are seeing increases in newly planted world winter wheat crops; tight world stocks will improve into 2008 assuming we do not experience weather problems. What are the odds that all the major growing areas will get hit with weather problems again next year? The risk to the upside this week comes from potential profit taking as we dropped 1.40 from the October contract high and 70 cents last week alone. If we get some upside momentum early we would likely fill the gap and trade up to 8.60 on March. Without major short coverings we are destined to fill the downward gap closer to 8.00. Perhaps a little early but we have been targeting a move to 8.00 which we expect to be followed by another leg down to 7.00. The head and shoulders formation also supports our theory of a break to the downside but with month’s end soon, tighten stops or go to the sidelines and look to sell rallies. ____________________________________________________________________ Cocoa prices were quiet this week until it was reported on Friday that the Ivory Coast government froze the bank account of a fund that distributes chemicals to cocoa farmers. The action was part of an investigation of several agencies that make up the country's cocoa and coffee boards. December cocoa closed up $86 on Friday at $1,911 just above the 200 day moving average. As we previously pointed out this could be a “W” in the making and if symmetrical would take cocoa $200-250 higher from current prices. The only concern of coffee traders over the past month has been whether or not the coffee crop in Brazil has gotten enough rain for a healthy flowering process. December coffee closed down 3 cents at $1.2145, the lowest weekly close in over a month with reports of rain on the crop and more in the forecast. Although we are not ready to commit today, coffee is starting to look worthy of a long entry very soon. After reaching the 50% retracement of the contract H/L mark in mid October, January OJ prices have come off nearly 20 cents. The path of least resistance is down and we would expect to see sub 130 levels in coming weeks. Cotton prices remain range bound and have not let us in yet as we have not met our target entry on Dec 08’ cotton. We maintain that when the run for acreage begins, cotton should be a main beneficiary; as cotton is likely to be a big land looser vs. other crops. “The need to replenish food stocks trumps the need for fiber any day.” Debbie Carlson in Barron’s Oct. 27 We exceeded our target for our most recent milk trade. After support held at 16.75 on November in less than 2 weeks milk prices moved 12% or just shy of $4000 per contract off lows. One might think that sugar would have traded higher this past week in sympathy with crude oil, given its use in ethanol production, but that assumption would be wrong. March sugar briefly poked its head above the 200 day moving average, trading as high as 10.46 before profit taking began. If we are lucky enough to see sugar trade below 10 cents a lb again use this as a buying opportunity as the funds continue to build longs; as we have been touting for weeks this is a must in commodity portfolios with 13 cents/lb expected early next year. Traders should look at strength in sugar in October as a precursor for year end strength, as 10 of the last 12 times sugar rallied in October it translated to continued gains into November and December. ____________________________________________________________________ After trading below 750 on Monday, December gold reversed and found its way to 787 by week’s end. A combination of a weaker dollar, rising crude oil, and increased political tensions with Iran, all helped December gold close up $19 at a new weekly contract high. As an investor we hope you are listening, gold is screaming that inflation is coming. If you are going to trade this expect volatility and use down days as long entries with either futures or options with a medium to longer term time horizon. Following October strength gold has continued higher 85% of the time into November. December silver also traded higher, closing up 64.5 cents at 14.28, its highest close in six months. Next resistance lies at 14.60 and then we should see $15.00. I caution all traders in gold and silver today as month’s end is upon us and we also have an impending fed decision that stops the need to be implemented and it may be safer on option plays to wait for late in the week to enter. Copper traders are concerned about a slowing U.S. economy, but they don't need to worry about China, at least yet after posting a most impressive third quarter. December copper ended the week down 1.40 cents at $3.5375 and this week looks like it will trade higher but we will be spectators not speculators until we get a better feel. 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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