For December 8th– December 12th 2008

By: Matthew Bradbard

“The Recession is Official”

The recession is official and it appears we have been in it for just about a year, but what does that really mean? If in fact the current recession has now lasted 12 months it has gone longer than the past two recessions in 2001 and in 1990-91, each lasting eight months. We recognize that no two recessions are alike and this one to date has been brutal with credit crises, record job losses, falling home prices, a roller coaster ride in commodities and a declining stock market, leaving no where to hide. Those who keep cool heads, make rational decisions by diversifying, and not letting greed or emotions get involved in their investment philosophies will come out ahead. As opposed to evaluating one’s portfolio on a quarterly basis we would suggest checking on a monthly, or in some instances, a weekly basis to make sure you are situated the way you want to be.

To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997.

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The US Department of Energy said crude oil supplies were down 400,000 barrels to 320.4 million barrels.  January crude was lower all 5 sessions last week finishing down $13.81 or 25% with prices approaching $40/barrel. We have not seen Crude oil this low since July 04’. We start the week with support at $41 and resistance at $43.50 followed 47.50. $35 is entirely possible in the near future unless OPEC on their December 17th meeting can stabilize prices. We would caution trying to pick a bottom with futures and would prefer investors to use options with at least 3 months time if wanting to gain exposure.

Supplies of gasoline were down 1.6 million barrels while heating oil supplies were down 2.1 million barrels. The DOE also reported that refinery use fell from 86.2% to 84.3% of capacity last week. Over the past four weeks, gasoline demand is down 3.2% from a year ago while distillate demand is down 2.2% from a year ago. Both January heating oil and RBOB lost over 30 cents/gallon last week. When I got into the commodity business and if you were to see that type of move over several months it was notable and prices just shed 30 cents/gallon last week alone. Prices of heating oil are oversold, but we would caution any play with current volatility. RBOB experienced its first weekly close below $1/ gallon since February 04’.  Again, because of the current volatility we have no interest.

The US Department of Energy said underground supplies of natural gas were down 64 billion cubic feet to 3.358 trillion cubic feet. This is the second consecutive week we have seen a draw on inventories. Supplies are now down 3% from a year ago. January natural gas ended down 81 cents on the week, the lowest close in over three years. If we do experience colder weather and the 5.50 level is able to hold, we should see a turn up to resistance, which we see at 6.30 followed by 7.00 then 7.40. We advised clients to buy February $8 call; our average cost last week was $1400 per. We have a target of $3000-3500 on a move back above 7.00 in the coming weeks. On the weekly chart the MACD and stochastic look to be turning higher; look for confirmation this week.

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After the close Friday, the USDA estimated the week's beef production at 481.9 million pounds, down 8.2% from a year ago. February live cattle were 530 ticks lower on the week which allowed us to cover our shorts. We are now looking for a rally this week to sell once again most likely in the area of 84.25. We see support at 80.50.  January feeder cattle closed 425 ticks lower on the week making a new contract low. Support comes in at last week’s low at 85.45 with first resistance at 88.20. We expect to see a bounce to 88.75/89.50 which we will most likely sell. 

Pork production was estimated at 480.6 million pounds, down 1.2% from a year ago. February lean hogs closed down 265 ticks but the 61.8% Fibonacci retracement level held at 63.00. Resistance comes in between 64.80 and 65.00. Short term prices may come lower, but we do think the lows are within site, although we cannot rule out a trade to 58.00 just yet. Once we get a trade above 67.00 the lows have been established and we would use a trade up to 70.00 to trade out of the April 90 calls previously purchased for clients. 

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Stocks: The US Labor Department said that the unemployment rate increased from 6.5% to 6.7% in November with a loss of 533,000 non-farm payrolls, a much larger drop than expected. It is the highest unemployment rate in 15 years and the biggest monthly decline in non-farm payrolls since December of 1974. The Dow ended last week down 194 or 2.2% to 8635. The S&P 500 gave up 20 or 2.3% to 876.  The NASDAQ fell 26 or 1.7% to 1509. Stocks may have discounted the worst case scenario being that last week was not uglier than it was. That should not be viewed as a buy recommendation because until we are able to repair the confidence of investors, traders, fund managers and the like…we are selling rallies looking for a new low. As with commodities we would suggest investors in stocks consider the re-inflation play as governments around the globe continue to flood the system with money.

Bonds: It has been 5 weeks now that 10-yr notes and 30-yr bonds have traded higher. 30-yr bonds in March gained over 5 basis points last week to trade at levels not seen since October 98’. We hate to buck the trend, however we have started to price out puts and see the primary sell zone between 135’00 and 137’00 in March. 135’02.5, which is the contract high, should serve as first resistance with support at 131’16 to 132’00. 10-yr notes gained, but at a more modest level picking up 2 basis points. Resistance comes in at 124’12 with support at 122’16. The flight to quality trade may be getting exhausted and on any pick up of confidence or significant pop in equities we could see a trade to 119’00 swiftly. Like bonds we have started to price out puts; the 116 to 120 strikes are on our radar for March.

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Statistics Canada reported that the unemployment rate increased from 6.2% to 6.3% in November with a loss of 71,000 jobs. It was the biggest monthly loss of jobs since June 82’. The Loonie lost 266 ticks last week hitting a fresh 4 year low, but we did see a reversal at week’s end. Look for the triple bottom at .7690 to serve as solid support as long as metals and energies do not completely fall apart. The BOC will most likely cut rates 50 points this week. Resistance comes in at .7970 in December. Looking for long exposure we recommended the March 82 calls, 78/82 call spread both for $1500, and finally long the futures with a stop just below Friday’s low.

The ECB reduced its interest rate from 3.25% to 2.50%; the third cut this year and the lowest rate in over two years. On the week December was down 19 ticks. Still the 125/130 range remains with sellers coming in near 130 and buyers protecting the 125 level. On a breach of that level we could see 123 and although currently no exposure with clients, we have a bearish bias expecting a breakdown in the near future.

The December Swissie gave up 57 ticks closing over 2 cents off its weekly high. The last 2 weeks rallies have been rejected.  Resistance is at .8400 with support at .8150.  If we hold support again this week we will most likely start to explore longs in March.

The Bank of England reduced its interest rate from 3.00% to 2.00%; the fifth cut this year and the lowest rate since 51’. The Pound was down 666 ticks last week; perhaps a sign of how wicked the performance has been of late. Although a new contract low was rejected, we are not looking for many positives out of the UK. 1.4630 should remain as support with 1.5380 as resistance.

The RBNZ reduced its interest rate from 6.5% to 5.0%, the lowest in nearly five years. The Kiwi lost 117 ticks last week but closed well off the lows. For the last 3 weeks trades below .5250 have been bought.   We see a trade up to .5500 in the coming week and then will re-evaluate.

The Aussie was 91 ticks lower last week after the RBA reduced rates 1.0% to 4.25%. The latest cut is expected to be the last cut for a while as their central bank seems comfortable with current economic policy. .6300 should continue to act as support with resistance at .6530. A move above that level should take prices up to .6670.

The Japanese yen was 283 ticks higher last week, registering its 5th consecutive positive week hitting a six week high. We traded out of the March 105/110 call spreads for clients at a 45% profit. We begin the week with support at 1.0750 followed by the 9 day moving average at 1.0625. We could see a trade down to the bottom of the trading channel we have been in since late October just below 1.0500. We would continue to use dips to gain long exposure via futures and options; currently we are flat.

The US dollar index gained 61 ticks last week, however the flight to quality play that had the dollar in the spotlight may be dim by year’s end. Although we are not ready to call a top we feel that from higher levels we like getting short with futures, look for more specific recommendations in future commentaries.  We see resistance at 87.70 with support at 86.25. On a close above 87.90 we would expect a move to 89.00.

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USDA crop report Thursday 12/11

Corn: Lower oil prices and a continued decline in equities had Index funds liquidating long positions in the agriculture markets. There is little fundamental news for the grains to trade on and the path of least resistance will remain down until fund liquidation is over. I believe the direction in crude oil and the dollar is the key and once oil bottoms and the dollar rolls over, the grains should find a foundation. Specific to corn, March came under pressure last week losing 57 cents. After a break of 3.50 which had previously served as support, the flood gates opened. Prices got within 5 cents of $3 on March, but with basis tightening we should be close to a turn higher in prices. We suggest waiting for a bottom to build a position in futures, but for now would be comfortable with the delta neutral futures and options strategy that we mentioned in recent weeks in the May contract as well as selling puts 50 cents under the market to help finance out of the money calls. 3.00 should serve as support with resistance at 3.45. We expect on a move higher for the gap at 3.28 ¾ to be filled in quick fashion. 

Beans: China announced they will double their imports of soybeans for their strategic reserve inventory from 1.5m.t. To 3.m.t. This alone was not enough to keep January beans from falling 95 ¾ cents last week losing 11%. Some of the weakness could be attributed to improved crop conditions in Brazil. Like corn, beans too follow outside markets as Index funds are reducing their long soybean position. We are not entirely against May calls and a similar delta neutral strategy like we have suggested in corn and cotton in recent weeks for traders looking to gain exposure. Support comes in at 7.75 with resistance at 8.20 followed by 8.40. Regardless of how the week ends, which will largely be guided by movement in outside markets and the USDA report, we expect the gap at 8.05 ¾ to be filled.

Wheat: March CBOT wheat lost 85 ¾ cents last week with prices now below $5.00. On a weekly closing basis, the last time the first digit was a four was 18 months ago. We see support at 4.70 and resistance at 5.15.  KCBOT was 78 ¼ cents lower last week, but prices remained above $5.00 for now. Support comes in at 5.00 with resistance at 5.45. As we have said in previous weeks we see no reason to have any exposure in wheat, the only viable play is the March spread: KCBOT against CBOT. The spread settled at 27 ¾ last Friday premium to KCBOT. We still feel this spread will get to 50 cents and recommend a current close only stop loss at 15 cents. 

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March cocoa was $140 lower last week, but as we said last week we would suggest buying dips that hold the 20 day moving average on a closing basis, which is currently 2075. Arrivals in the Ivory Coast have been coming in about one-third below last year's pace. There has also been talk that the quality of the beans may come in below average due to the dry weather. Support exists at 2095 followed by 2044; at present we have a target of 2400.

March sugar was not so sweet last week losing 131 ticks or 11%. As long as prices this week hold support for the week at 10.44, the same level that held 7 weeks ago, we will continue to advise clients to buy May futures and options. Currently we like the idea of owning 12, 13 and 14 strikes.
 
The month of December is historically kind to coffee, but that is not how the month started. March coffee fell over 12 cents to a new contract low. The USDA estimated 08-09 world coffee production at a record-high 138.4 million (60 kg) bags with implied use of 133.3 million bags. That put 08-09 ending coffee stocks at 39.6 million bags, or 29% of annual use which, the USDA says, is historically "tight." Brazil's crop was pegged at 51.1 million bags, up from 37.6 million bags the previous year. Vietnam's crop was estimated at 17.0 million bags, down from 18.3 million bags the previous year. We see support at last week’s low at 102.15 with resistance at 110.50 followed by 113.00 then 115.50. As for trades we are pricing our 15-20 bull call spreads for clients in May.

March cotton was 6 ½ cents lower last week or 13.5% as prices are making their way back to 40 cents.  As we said in previous weeks you should be able to get May below 40 cents and then start to build a long position. For traders who could not wait and wanted exposure, we had recommended to get short futures while simultaneously buying calls, we would be looking to cover shorts this week. On a rally, you can start over or look to sit on the calls for the next few months and ride the move north. 

Parts of central Florida reported frost last week but it is not likely that the citrus crop suffered any significant damage and temperatures are expected to gradually warm up from here. January fcoj was down less than 1 penny last week but we were stopped on client’s longs at 72.00. 71.00 did hold and we may take another go this week with a tight stop. Pay close attention to the spike in volume on 12/1 which was 4 times the average volume in recent weeks; it is not uncommon to see volume spikes on a change in trend.

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March silver lost 89 cents last week while prices remained within the $1.50 trading range we have been in for the last 7 weeks. We are advising clients to get long futures near $9/ounce. Additionally, we are continuing to accumulate the December 09’ $15/20 call spreads for approximately $1600. Prices are forming a strong base which we feel will be the floor for the ensuing push higher still expecting $12 early 09’.  If for whatever reason prices get near 8.50 we will be looking to purchase March calls looking to pay 15-20 cents; most likely the $12.50 or $13 strike.

February gold lost its luster last week down $66.80 closing just above $750/ounce. We see support at 743 followed by 731; on a break of those levels we could see a trade down to 700. Resistance is seen at 780 followed by 800. We suggest paying very close attention to the dollar to help navigate trade with gold.  We do have clients that have orders to buy futures at slightly lower levels but we prefer looking for an entry to buy April and June $100 bull call spreads. There is no doubt in my mind that prices will make their way to higher ground eventually, but from what level and when will the inflation trade really take effect? Make sure you do not get in early, fall in love with the trade and lose your capital so that you have no exposure next year to take advantage of the inevitable fact that when inflation returns gold will shine once again.

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Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.