MB Wealth Corp. Weekly Commentary
For September 24th - September 28th 2007
By: Matthew Bradbard The Fed cut its key lending rate by a greater than expected 50 basis points in addition to lowering the discount window 50 basis points, hopeful to pre-empt further adverse effects on the broader market caused by the tightening of credit conditions and the housing correction. Judging by their actions the Fed has shifted their focus from inflation to economic growth. This is absurd with record high energy prices, rising food prices, and with a declining dollar that will only fade further as rates are decreased. The Fed's decision seems to signal that the economic threat posed by the housing slump could be far worse than they thought at the last meeting, only back in August. Early interviews post meeting had bulls cheering that the Fed had rescued us from a recession, but our interpretation is a bit different. By taking such swift action the Fed has confirmed we are on the brink of a collapse and only one more serious hardship away from recession. Many are saying the worst is behind us but I am not in that camp just yet. With millions of resets in the housing market we still feel that could be the straw that eventually breaks the camels back. To find out exactly how we are positioning in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ We still maintain that oil is due for a temporary set back and aggressive traders can get short. Investors not that brave wait for the coming pullback on the sidelines and look for an entry to get long to ride oil back up into the end of the year. We are short November futures and also bought put options in December and will stay committed to this trade as long as we do not make new highs or see a significant jump in long posturing by funds. We are looking for $77.08 which serves as the 38.2% retracement from the most recent H/L assuming the low was $68.46 on 8/22 and the high was $82.40 on 9/21. Boone Pickens takes a simple look at supply and demand: "The trend is up, and if your supplies are 85 million barrels per day (bpd) globally, and you look at what demand is predicted to be for the fourth quarter, it is 88 million bpd." With natural gas turning higher and increasing volatility, you now have to pay a bit more to play. As per previous newsletters we have been accumulating bull call spreads on pullbacks and will continue to do so, but we must pick our points because 5% daily moves are becoming commonplace. We are not as concerned about where prices will be in two weeks but are assuming higher prices in two months. With hurricane season still lurking and winter just around the corner we feel the potential reward is worth the risk. You must also listen to what the market is telling you; if you go out just 3 months in the future prices are at a 35% premium to cash. Consumer’s major distress in the energy sector could soon be heating oil. Prices have already hit all time highs, months before the first snow flake is expected to fall. Refiners have yet to fully switch over and are still devoting their efforts towards RBOB gasoline and peak demand is fast approaching. We have to hope to see a warm winter to avoid some real economic pain that could make this summer’s gasoline prices look cheap. With a $4-5 pullback in Crude oil you would expect to see heating oil back off as well. For November a 38.2 % retracement comes in at 2.1639, a 50.0% retracement at 2.1279 and a 61.8% retracement at 2.0919. Our advice here would be to buy pullbacks that hold support and look to start to build a position. Because of the extreme volatility in this contract you must be well funded and start small and parlay the position. ____________________________________________________________________ The USDA said that pork production totaled 1.85 billion pounds in August, up 4% from a year ago. Beef production totaled 2.45 billion pounds, up slightly from a year ago. October lean hog finished down just over 1 cent at 61.35, the lowest close in over two months. After the close, the USDA said that there were 457.9 million pounds of frozen pork in storage on August 31st, up 10% from a year ago. Frozen bellies totaled 22.7 million pounds, up 90% from a year ago. After the close, the USDA said that there were 10.302 million head of cattle on feed on September 1st, down 6.2% from a year ago, but a little more than expected. Placements in August were down 7.5% and marketings were nearly even. December live cattle closed up 1.22 at 100.17 just above the 20 day moving average. ____________________________________________________________________ Stocks: Right or wrong the market certainly liked what the fed had to say. Stocks have put on an impressive rally off August 16 lows but we feel the parade is going to come to an abrupt end in the very near future. We are looking for an entry to get short as a speculator and would highly recommend stock investors to hedge their portfolios by getting short futures or at a BEAR minimum to buy puts. After making an attempt at the highs we are looking for a run to the lows. We have said this week after week and hope you are all listening! The only reason we are not already short is that you have a potential flag and pennant formation which could serve as a bullish set up if confirmed. Bonds: The flight to quality bid that dominated trade in recent weeks in the debt market has been partially erased in just a few trading sessions after the Fed meeting. The fall may not be done; with notes likely to extend down to 106 and bonds to 108-10 but a temporary bottom is likely lurking around the corner as both markets are showing preliminary signs of being oversold. If you took our advice on the Euro Dollar trade we have booked a profit and may re-enter on the next set up. ____________________________________________________________________ The extreme rate cut by the Fed is having disastrous consequences worldwide for the dollar. The dollar is weakening versus just about every counterpart. Although the dollar is oversold we will continue to sell rallies until the outlook of the market changes. The only thing the dollar has going for it is in a stock market rout, which is not too far fetched the dollar will serve as a flight to quality and should benefit from safe haven buying. The Canadian dollar's surge in recent days has taken it’s currency to parity with the US dollar and a 31 year high. With rising commodity prices; the overall weakness in the dollar, strength in the Canadian economy, and the Canadian government’s fiscal policy, the overall trend should remain up. Buy dips, trail stops, and ultimately look for higher highs. If Germany and France can continue to support the EU and traders see the slightest possibility of a rate increase in the future, the EC can continue higher. We may have to consolidate before the next major move; ideally a pullback close to 1.4000 could be bought. For the Yen expect the same with volatile swings with there being no clear trend for now. Higher oil prices and a weaker dollar may weigh on prices in the future, but lower equity prices and any run-up should force some carry-traders to take money off the table and cover JY shorts forcing prices higher. Why is nobody talking about Northern Rock and the potential ramifications if more issues in the future occur and its effects on the Pound? Maybe if the FOMC meeting did not occur the media would have grabbed a hold but this is notable. Authorities in the United Kingdom rushed to the aid of banking clients that were frantically withdrawing monies. For now, without further consequence the trend has started up again and if December can get thru recent consolidation of 2.0320 look for a 2.0500 trade. The Aussie continues to be our favorite foreign currency play; as per previous newsletters we are looking for 0.8800 in coming weeks on the December contract. The Australian dollar has gained 6% in the last 4 weeks and we feel it should be accumulated on pullbacks as the best it yet to come. ____________________________________________________________________ Corn: Thursday's weekly export sales were impressive; 2.032 m.m.t. of corn was sold, up 95% from the week prior and the highest weekly sales number for 2007. What is to come of corn prices depends on the extent of expansion in ethanol consumption here and abroad, as well as the probable increased feed usage for 2008 because of high wheat prices. It is critical for corn to keep a price high enough not to lose acres next spring to bean or wheat growers. Corn has to go high enough to lose no more than 5 million acres as a loss of 7 million acres or more would pull our 2009 ending stocks well under 1 billion bushels. Longer term, after harvest you could see March 08’corn go to new contract highs above $4.39 and potentially make a run to $5.00. Near term we have a gap in the chart between $3.58 and $3.64 on December futures that we are now above. If we get a pull back into the gap, buy December and get out on a trade below $3.46. We want to be a part of the current up move but we expect to see a pull back before the bigger move happens in early 2008. It is hard not to have some light exposure in corn after witnessing the recent moves in wheat and beans. Beans: Thursday's weekly export sales report showed 513 t.m.t. up 48% from the week prior and our second highest number since July. As previously discussed, beans must trade high enough to entice South American acres. May 08’ beans have moved above $10 but the trend still remains up until support is broken which is now at $9.90. Near term, watch out for next week, as funds might take month end profits pressuring prices. Wheat: Thursday's weekly export sales report showed 1.440 m.m.t. of wheat was sold last week down 33% from last week's record weekly sale. Weather in Australia remains dry through next week, further lending to thoughts of even lower production numbers ahead. The market has factored in 15.5 million tons, but with a crop smaller than that because of ongoing weather issues it’s likely the top may yet to be. Harvest begins in October. The bullish supply side news can not go away until new crop production comes to market from some country outside of the US. From a technical viewpoint the bull market is not over until we get a close under support. A close under support could take December to $7.75 and March the $7.50 area. Just like the beans, look for month end profit taking by funds that could start this move south. ____________________________________________________________________ Coffee has put on an impressive rally of late and hopefully you’ve listened to our advice with bull call spreads which we are now out of. The market has been supported by the lack of rain in the Brazilian coffee-growing regions in addition to short covering on a breach of technical levels. The market is currently overbought at these levels and we could see a retracement in the near term. Cocoa never got the pullback we anticipated, so new entries did not get in, but for those who have been with us from the lows this has turned into a pretty good trade. Continue to trail stops and look for a complete fill in the gap you started to fill on Friday which would take December to 2035. We are looking to sell FCOJ from slightly higher levels, do not get sucked in on a hurricane play. We finally got a trade above 10 cents in Sugar #11 on impressive volume but we are not 100% convinced the train is ready to leave the station because much of the recent move has been short covering. With a little more confirmation we will get involved with futures but for now continue to accumulate out of the money calls with a lot of time, as when the train leaves you want to be onboard. This trade just got away from us and we must wait for a pullback to enter December 08’ Cotton from the long side but prefer the sidelines right now. We will start looking for an entry when we are closer to 70 cents as opposed to the current 75 cents. Keep on your radar as this could be a big one! ____________________________________________________________________ Gold continues to build as it rides the dollar’s weakness and inflationary concerns resume. Adding to the major bullish tone was the decision by the Fed to reduce both the federal funds rate and discount rate by 50 basis points, far more aggressive than most expected. While this may have injected some sort of spark into the economy, rising inflation still seems to be on the minds of many analysts as gold hit a 27 year high, trading above $745 on December. If we are fortunate enough to get a setback we will add to our longs and we’ll start new entries at $720/725 on December. Bullion has advanced 14% this year, heading for its seventh-consecutive annual gain, as investors seek a hedge against inflation. Silver although officially classified as a precious metal has many industrial applications and could also be considered a base metal. Silver benefited from Tuesday’s rate cut rallying even more than gold, days after the decision. Silver rose because the cut could help the US economy; which would help with the industrial application of silver, and that inflation may rise; which means Silver could be used as a cheaper alternative to hedge for those who do not want to shell out the cash for gold. Expect some resistance at $13.90 but on a trade above $14.00 we would not rule out a jump to $15.00.
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