MB Wealth Corp. Weekly Commentary
For October 8th - October 12th 2007
By: Matthew Bradbard
China’s recent inflation rate jumped to 6.5% in August, is the United States soon to follow? As the debate over inflation intensifies, it affects consumers in different ways. Being from Boston and a connoisseur of Samuel Adams it has been brought to my attention that we have the sharpest surge in decades in the cost of hops and barley, which equates to higher beer prices. With the government denying we have inflation, the rising costs of food are even affecting the common beer drinking folks. Although beer is not tradable on any exchange we are taking advantage of higher commodity prices such as energies, grains, and metals. MB Wealth will continue to play the dollar from the short side. To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ Crude oil has moved 20% higher in the last 2 months with little to no retracement. The market appears to be congesting near the highs after posting all time highs on 9/28 and is approaching potential seasonal weakness. December crude rallies in September have been reversed in October 9 out of 13 times. October is a dangerous month as we move away from potential hurricane disruptions and head into peak winter demand. As we have said in previous weeks, crude for now, should back off until fresh buying enters and then trade up closer to $90 by years end. This trade is not for the faint of heart and should be exited on a spike in volume or new highs. With still a month of potential hurricane activity, supply disruptions could in fact become a reality for natural gas traders. Without a significant hurricane threat, given high inventories, we would expect to see lower prices in the next few weeks that would set up nicely for a long into the winter. Expect $7.50 to serve as resistance for November and as we have said in the past we will start to get long closer to $6.50. We will remain on the sidelines on XROB but are still looking for a viable long entry in heating oil. As crude goes so does heating oil. We got the 15 cent break we’ve been talking about in previous newsletters for an entry, but the market only stayed there for about 1 minute and unless you had pre-placed orders you probably missed the window. We continue to stress the tightness in this market and with some cold weather from Mother Nature in the coming months, $2.50 wholesale prices are very attainable. We will continue to buy dips and if we don’t see prices come off again in the near future, we may have to devise a strategy to play with a combination of futures and options, not just out right futures. ____________________________________________________________________ Live cattle futures were 3.5 cents lower on the week, pressured by fund selling closing at the lowest level since 7/5. The head-and-shoulders top formation looks pretty evident now after the break of the 100 day moving average on Friday. Our current objective of about 95.00 seems possible since fund led long liquidation is just getting started, but it would take some disappointing cash news to push futures much lower with futures already oversold. October is national pork month so we are buying. Not for that reason but prices look over stretched and we should see a bounce in coming weeks. Lean hog futures have been mixed trying to find a bottom. Although we are not generally pig traders, the risk to reward dynamic makes this attractive so we are long LH looking for 4-5 cents risking 1-1.5 cents. On a close above 61.20 on December we would add to our position. ____________________________________________________________________ Stocks: The Dow has climbed in the fourth quarter for nine consecutive years, and in 24 of the past 27 years. The S&P has produced fourth-quarter rallies in 13 of the last 15 years. Will this year be different? Consumer spending has already showed signs of slowing, rates have eased but credit is tighter and a reprieve in energy prices and other commodities is unlikely. Although continued weakness in the dollar will enhance the competitive allure of US goods in the global market and will boost profits from foreign sales. Getting mixed signals, we prefer booking profits! With waning volume and without follow through in coming weeks we would expect to see a near-term top in the market followed by a subsequent decline that should dominate the fourth quarter. The NASDAQ continues to lead. However, an early indication of a peaking technology sector which typically leads the broad market is reason enough for us to be cautious. I know it sounds like a broken record but we still fear what is around the next bend and would play defensively; booking profits, trailing stops and hedging your holdings. With so much bullish history this time of year it would be tough to take a short position today, but be prepared for violent downward pressure on any further surprises. Bonds: Ever since the problems in the sub prime mortgage market turned into a liquidity crunch, there have been concerns that the U.S. economy would slide into recession. Those fears were greatly relieved on Friday when the U.S. Labor Department issued a healthy employment report. The economy created 110,000 new jobs in September, but even more important, added 118,000 more jobs in August and July than were earlier reported. The debt market sold off hard assuming that the Fed may now not need to cut rates again at the end of the month, which had previously been priced in. Look for further weakness in bonds and notes, December bonds should chop lower finding support around 108 and notes at 106. We are spread in Eurodollars; long December 07 and short December 08 looking for this spread to widen. ____________________________________________________________________ Generally when the entire market is screaming one thing the opposite happens, so we would expect to see a bounce in the US dollar. This does not mean a trend reversal as we expect to see a weak dollar for quarters if not years, but with the Fed likely in a temporary holding pattern too much bad news may have been previously priced in. After declining below key long term support, the dollar is in no-man’s land looking for any potential price support. Both daily and weekly charts are extremely oversold and after a 5.0% break in a little over 2 months we are looking for a bounce, even though it may only be a dead cat bounce. The big winner this past week was the Canadian dollar, helped by news that September's unemployment report improved to 5.9%, the best in 33 years. The December Canadian dollar closed up 1.59 cents Friday at a new contract high of $1.0194. If you are not already long we would not suggest getting long at these levels. The Bank of England kept their interest rates steady this week, as expected. Although the overall trend does look higher for the Pound we prefer playing other crosses. Australia's economy continues to look strong. The December Australian dollar finished the week up just shy of 1 cent at a new contract high of 89.45. Believe it or not this could be the next currency to see parity with the US dollar. We did get a slight dip, not as much as we had hoped, and will continue to play the Aussie dollar from the long side buying pullbacks. As the appetite for risk re-emerges, the carry trade lives on. As a speculator we are only interested on a break below 85.50 which should lead to more weakness eventually taking the yen back to 83.00, levels not seen since mid July. The Swiss initially benefited from the flight to quality swoon by investors and if that was to resurface, we like getting long but until that, stay away as there is not a defined trend. Additionally, on a break above the contract high of 86.50 there is very little upside resistance. After hitting and exceeding our 88 target, the Aussie looks destined for a retraction. After 9 straight days of gains the Australian dollar is showing signs of being overbought, assuming a high on Monday October 1st look for re-establishing longs closer to 86. ____________________________________________________________________ Corn: Thursday's weekly export sales report showed 1.150 m.m.t. of corn was sold last week. This week demand fundamentals take a back seat to supply side fundamentals as Friday we get our next look at harvest production with the USDA monthly crop production report. Most private crop estimates look for an increase in production over the September report as harvest yields have generally come in above expectations. We are harvesting an enormous crop and corn experienced near ideal growing conditions. Corn's only hope for any strength this week would come from a potentially firmer bean trade as some forecasters are calling for a bullish bean number. Without a bean influence, corn looks to trade lower to the bottom of recent range taking March to the low 340’s. However, once the current selling spree dries up, we expect corn to find increasing support from the continuing strong demand from overseas buyers. This support should be particularly well felt in deferred corn futures, where concerns about acreage losses to rival crops this coming spring are already raising expectations for a rally. Dec 2008 corn has yet to break the 200 day moving average and if we start to see some fund buying, this should be where they play. Once we start moving you should see this contract trade to new highs. Beans: Thursday's weekly export sales report showed 666 t.m.t. of beans were sold last week. It’s a friendly demand signal considering it came with prices trading almost at $10 a bushel. Tuesday's near limit break broke beans through support leaving the charts looking weak. Beans broke out of a 25 cent channel they had been trading in since mid August. There are pre-report trade guesses of a lower production number this Friday, without this we would expect 9.11 near term to be tested for November futures which serves as the 38.2% retracement from H/L. The flip side is a bullish mindset developing and a lower report number means beans will quickly find their way back to contract highs. On the product front, soy-meal and soybean oil futures were also hit by the profit taking seen in the beans, and closed sharply lower on the week. Look for continued weakness in meal, bean oil seems to be playing more off crude oil than soybeans of late so look for crude for guidance here. The short bean oil trade we spoke of in past newsletters was covered at a profit last week. Wheat: Thursday's weekly export sales report showed 1.598 m.m.t. of wheat was sold last week. It is clearly bullish as we hit historic high prices last week and demand strengthened. With world stocks at 30 year lows and Australia's crop another disappointment, the world has no choice but to continue to turn to U.S. ports for near term needs. The world's stuck buying right here and only price determines the size of purchases. If current export sales are any indicator of near term demand, then we are still bullish from a demand perspective. The large index funds are 90% technical and signs of weakness are in the charts. We will need to see a trade and close below 890 on December wheat to see additional chart damage. On a further break, look for wheat to find solid support at 780 on December old crop. We need a close over 9.50 this week to turn chart bullish once again. Traders do expect wheat's carryover on ending stocks number to come in lower on the USDA report, but that could already be factored into prices. We like buying put options here with some time because we contend that although wheat prices may stay historically high, present prices should be unsustainable for an extended period of time.
____________________________________________________________________ There hasn’t been any good housing news out lately but it appears, at least technically speaking, lumber is finding a bottom. Without some fundamental support we will not take the trade, but buying lumber may be worth taking a look at. There have been concerns about black pod disease in West Africa and the quality of the cocoa crop, but this week, some suggested that the concerns may be over-blown. As stated last week, we shorted December cocoa off a triple top looking for a break, but were pleasantly surprised by how much of a break we got, $178 this week to almost $1,850. With the much anticipated crop report this Friday we will remain on the sidelines with OJ. Citrus analysts peg the number between 175 and 200 million 90 lb boxes, up from a 17 year low of 129 million boxes last year. Every week we are defending being long Sugar and the current market conditions are like watching paint dry so we devised another strategy for investors that believe sugar will move higher, but like us do not know when. We went long March 09 and short March 08 looking for the spread to widen. We are essentially saying that longer term sugar is moving up, but shorter term we are not sure. Coffee continues to trade up while dry weather in Brazil is in the critical budding stage. We were there early, made our money and left; again a reminder that if you are in a good position stay there. We are getting closer to our target to buy December 08 cotton at 70 cents. If given the opportunity, we will scale into this position ahead of the crop report. We do not trade a lot of milk, but we went long November late last week looking for a trend line dating back to 06’ to hold under current prices. In addition to short covering, new spec buying was encouraged by the higher cheese prices. The bullish world outlook is due to reduced production in Australia and in Europe as high feed prices and droughts discouraged production, while demand remains strong with growing appetites in India and China looking for dairy product supplies.
____________________________________________________________________ Markets in China were closed this past week for holiday and copper workers are still on strike in Peru. Good news from Friday's U.S. jobs report was also supportive. December copper climbed to a new contract high trading as high as $3.78 on Wednesday. Failing to break higher this week should confirm a triple top and we would not be surprised to see copper in the coming weeks trade closer to $3.45 than $3.75. If you are in agreement with us on inflation you must have a buy dips mentality in gold. That is certainly how the market is trading as well, as $10-15 breaks are being defended. On a break above $750 in December, $800 should be soon to follow. This is a frightening trade, buying at these historically high levels especially after just seeing $100 dollars appreciation in the last 60 days but new highs are still likely all things considered. Need I remind you that prior to 06’ copper price had not traded above $2.00 ever in history and we are currently at $3.70 and have been above$4.00. We are extremely bullish silver but would like to see a break before getting long. December silver has been down 14 of the last 18 years and 11 of the last 13 rallies in September have reversed in October. We realize that past performance is never indicative of future trading results but only a fool chooses to ignore and not learn from history. We are looking for a 50 cent to $1.00 break in coming weeks that should be used as an entry to get long looking for a noteworthy move higher into 08’.
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