MB Wealth Corp. Weekly Commentary
For September 17th - September 21st 2007
By: Matthew Bradbard The coming Fed decision and markets’ interpretation will set the tone in the financial markets and broader economy for the remainder of the year. Bernanke has remained vigilant about his inflation concerns, with rising food, energy prices, and a weakening dollar there is excellent reason for his concern. Last week alone wheat, oil, and the Euro-currency hit all time highs. What commodity will be next and how we are currently positioning our portfolios, will be covered in this and all future commentaries. To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ On Tuesday, OPEC surprised the market by announcing a 500,000 barrel per day production increase effective November 1st. The very next day, in its weekly energy report, the Department of Energy said that U.S. crude oil supplies dropped 7.1 million barrels and gasoline supplies were down 700,000 barrels. It is very hard to see at this point how refiners are going to be able to increase heating oil supplies for winter without reducing record-low gasoline supplies even further. Compounding the situation further, Humberto shifted from a tropical depression to a hurricane and hit East Texas and Louisiana with heavy rain and damaging winds. There was no significant damage reported to the oil or gas rigs in the Gulf of Mexico however refineries were forced to shut down after power outages. Crude has been higher 14 of the last 17 sessions and should take a much needed rest. After trading above $80 the last three days we are looking for a set back to 74.50/76.00 in coming weeks which would serve as a 38.2% retracement on the most recent move that started on 8/22 at $69. If correct on our assumption with crude, October RBOB should see $1.900 before going off the board at the end of the month. As stated previously, use pullbacks in heating oil as long entries; you should get a break of 10-15 cents in coming days to weeks. Last week for natural gas began with news that militants sabotaged six gas pipelines in Mexico and then the market absorbed concerns about Hurricane Humberto. Despite the shock, U.S. natural gas supplies remain high, at 3.069 billion cubic feet with another six weeks available to build even more supplies. Talk about volatility; moves of 5.0% daily are becoming commonplace. October natural gas ended the week up over 90 cents at $6.279 on short covering and weather premium. We have been saying for weeks to accumulate calls from these depressed levels and will continue to offer that advice, recommending layering in before the premium makes this play unattractive. ____________________________________________________________________ On Friday, the USDA officially expanded its policy to allow cattle imports from Canada that were born after March 1, 1999. U.S. cattle producers do not like the increased competition, but the USDA feels that they need to send a message to the world that North American health standards are high and meat quality is safe. Unfortunately, South Korea banned another shipment of U.S. beef this week after bones were found again. Feeder and live cattle ended lower on the week and we still feel there is a little more downside before we will be buyers in feeders but you can start nibbling on live cattle. Even though pork prices are high in China and many are hoping they will import more U.S. pork, trade negotiators failed to convince China this week to accept pork with ractopamine, a drug that is commonly used in the U.S. to promote leanness. Lean hog prices are cheap but could get cheaper, we prefer the sidelines. If you went long on bellies as we loosely suggested keeping stops below the lows, congratulations, start trailing a stop and take what they will give you; which on February should not be much more than 94.500. ____________________________________________________________________ Stocks: Rallies have come on slow news days and on unimpressive volume so we would not expect much here. Since the low on August 16, the Dow has finished either up or down 100 points nine times. Many technical investment advisories are defining this period as the most volatile market environment in the last 60 years. We would expect the indexes to stay range bound with a negative bias; our analysis would change only on a 50 basis point cut, which we do not expect. However, to be devils advocate, if the Fed did deliver 50 basis points the Dow would most likely surge to 13,800 and the S&P to 1530. The way we see it the Fed will not cave to the pressure and may not cut rates at all, and at best cut from 5.25% to 5.0%. That being said we feel the ceiling on the Dow is 13,550 and 1500 on the S&P short-term. Bonds: The debt market had factored in 50 basis points and is now taking some of that premium out. A 25 basis point cut avoids the look of panic and still leaves room for the fed to lower rates again in the future. The debt market appears heavy and we should see bonds to notes come off a few points in the futures. As opposed to playing an out right long or short position as a speculator, try playing the yield curve or playing the same underlier on different maturities. We are currently spread EDZ7 against EDZ8. ____________________________________________________________________ The Dollar Index is extremely oversold and should see a technical correction in coming days to weeks. We do not expect much more than 80.00 if we can even get there, which would be a 1.0% move from the double bottom 0f 79.14 last week. The U.K. posted a favorable jobs report on Wednesday, showing a total of 31.69 million jobs, the most since records began in 1959. However, nerves were tested on Friday when the Bank of England said that it made an emergency loan to Northern Rock, the U.K.'s fifth largest mortgage lender. The Bank of England has maintained a stricter response to the subprime problems than either Europe or the U.S. and Friday's big drop in the pound hinted at the consequences of that policy. The December pound closed the week down over 2 cents at $2.0049 and looks poised for further selling. On the back of rallies in both metals and energies the Canadian dollar hit a 30 year high and like the energizer bunny, should keep going and going. The Loonie gained over 2 cents last week and after some consolidation and perhaps slight reprise this week should start the ascent to par by early October. It was a tough week for the yen. On Monday, Japan's Cabinet Office reported that the economy contracted .3% in the second quarter of 2007, much worse than anticipated. Then on Wednesday, Prime Minister Shinzo Abe unexpectedly resigned from office and checked himself into a hospital for stress-related illness. The ruling Liberal Democratic Party will hold an election on September 19th to choose the next Prime Minister. In the meantime, the December yen finished the week down 1 ½ cents at .8784. Australia is one economy that has slipped by most of the recent financial problems unscathed. The International Monetary Fund said on Thursday that they expect Australia's real GDP to increase 4.4% in the fiscal year that ends on June 30, 2008. The December Australian dollar climbed 1.62 cents to 84.02 and clawing its way to our ultimate target in December to the previous contract high of 88.33. A bullish flag is forming in the December Swiss franc, that, coupled with the Swiss National Bank’s increase in rates last week, supports further appreciation. Buy high and sell higher! The Euro hit an all time high against the US dollar and after a profit taking led correction to 1.3750 for December we expect another record high to be made. ____________________________________________________________________ Corn: The USDA's new supply and demand estimates came out on Wednesday and they predicted a larger, 13.308 billion bushel corn crop with a yield of 155.8 bu/acre vs. the 8/1 estimate of 152.8 bu/acre. December 07’ old crop corn edged up 1.5 cents to $3.49on the week. In spite of this fall's large corn harvest, some are wondering if corn acres will be lost next spring if soybean and wheat prices stay high. It is our opinion that new crop corn will need to trade higher as to not avoid a significant drop in acreage. Beans: Beans hit a three year high off Wednesday's USDA crop report. We continued to push higher Thursday and Friday on talk of a frost hitting northern tier Midwest states. Most believe much of the crop is too far long to hurt, but others see late planted beans in Minnesota and Wisconsin as being in harm's way. Beans are bullish into March of next year as beans try to find a price high enough to buy back at least 5 million acres of the 11 it lost this year. Near term charts are friendly until a close under $9.40 occurs on the November futures. The 1.70 rally since August 16th leaves room for a pull back if the frost is only a scare, wheat remains weak and yields come in better than expected. As of the most recent USDA report we are looking for a yield of 41.4 bu/acre. Stay long until support is broken; remember the trend is your friend. Wheat: Thursday's weekly export sales report showed weekly sales of 2.132 m.m.t. sold last week which is the largest week in 11 years. After failing to hold above $9.00 we started to see some profit taking and a chart led correction. Prices broke through support at $8.52 on December futures Thursday, hitting a low of $8.31 then $8.30 Friday, before recovering mid-session. This week looks dry again in Australia but wetter in Argentina. The fundamentals are changing with Canada's crop coming for sale this month and Australia’s October 1, putting a lot more wheat for sale other than what the U.S. has put up the last 60 days. Demand still looks strong as Thursday's export sales report proved with little to no price rationing yet. Funds are generally technically motivated and to stay in an uptrend we have to hold support of 8.18 or we are looking at filling multiple chart gaps and $7.10 potentially very swiftly. ____________________________________________________________________ With the US dollar finding its footing and the British pound coming off cocoa will most likely give back some of its gains from previous weeks. If lows hold we are still going to stay long with the larger fundamentals, and potential for black pod disease, a case can be made for a run at 2000. Cotton is alive and moving higher once again. Use any dips in December 08 contracts as entry points for longs ultimately looking for 76 cents. November FCOJ gained 8.25 cents to end the week at $1.2345. With no hurricane activity in Florida as of yet, traders are nervously anticipating the next crop and the USDA's first estimate on October 12th. Private estimates put the new Florida crop between 180 and 200 million boxes, but there is a wide margin of error on those guesses. Although it has been easy to fall asleep watching the movement in 08’ Sugar contracts, this could be the sleeper market in Commodities as funds continue to hold sizeable net long positions and at these levels there is an attractive risk/reward dynamic. Coffee remains range bound but we have a bullish bias and have been pricing out bull call spreads. The upward momentum has yet to initiate and may take a settlement above the 200 day moving average of 122.70 December. ____________________________________________________________________ December gold finished the week up $8.10 at $717.80; the highest spot close in over a year, with high hopes that the Federal Reserve will cut the federal funds rate when they meet on September 18th. After breaking out of the wedge we have spoken about in previous newsletters, gold has put on an impressive twenty-five dollars. For the moment gold looks like we will see correction and test of the breakout at $694. Presently looking for a quick move back below $700, that should be used as an opportunity to get long looking for $750 plus on the next leg, current longs trail stops. On Tuesday, copper prices got a lift after a report showed that China's copper imports were up 43% in the first eight months of 2007 from a year ago. Copper has been a little torn lately between strong economic news from China and weak economic news here in the U.S. By Friday afternoon, December copper had gained back last week's loss, closing up 14.10 cents at $3.3925. Copper is too volatile and unpredictable currently for our tastes; a 30 cent move either up or down would not surprise us. Silver has yet to break through $13 as predicted on the December contract. Although it may take a bit longer than we originally anticipated we still maintain our vigilance that when it happens you want to be there because $14 should be soon to follow. After the current dollar bounce has run its course look for the Silver bug to come alive again.
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