For December 15th– December 19th 2008

By: Matthew Bradbard

“Have Commodities bottomed?”

To figure out where commodities are going, the main questions that need to be answered are: what type of demand will come out of China and where is the US dollar going? Is the Chinese driven commodity boom over? Not over, but expect a significant slowdown. The Chinese government said that exports were down 2.2% in November from a year ago, the first decline in seven years. Imports were down almost 18%. Over the next few months commodity investors will need to closely monitor China’s economy. In terms of the dollar, after an 18% rally from mid September we have seen the dollar fold 6.5% in the last 3 weeks. We are betting that an interim top has been made and we will see a re-visit of the 75 level before we see 90 in the US dollar index. This should bode well for commodities that are priced in dollars. Deeper than that though, weakness in the US dollar should signal a modest stabilization for the global financial system as investors are becoming more willing to take some risks. Investors will remain skittish for months to come, but as the central banks race to zero, investor’s will look for other homes for their capital.

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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February crude oil was up $5.43 or 12%, helped by a weaker dollar and anticipation that OPEC will announce another 1.5-2.0 M cut in production this Wednesday. We see support at $43 with resistance at $51/52. It may be premature to call a bottom, but under the right circumstances; a weakening dollar, stable stock performance and OPEC cuts, we could see a bounce to $65. The US Department of Energy said that crude oil supplies were up 400,000 barrels last week to 320.8 million barrels. Supplies of gasoline were up 3.8 million barrels, more than expected thanks to increased imports. Heating oil supplies were up 1.7 million barrels. February RBOB was 14.22 cents higher last week gaining 14% with a close back above $1.00/gallon. Support is seen at the 9 day moving average at 1.0461 followed by 1.0000 with resistance at 1.2500. To play OPEC or a potential short covering rally look at the January 110/120 call spread for $1400. This is a $4200 spread with only 9 days so you will get quick results, win or lose. Put in a gtc sell order for $3000 and if not filled look to hold until expiration with a break even at approximately 1.1350. A new low was rejected in heating oil with just under a 1 penny gain on the week. $1.50 should serve as the pivot point on the February contract.  You could see a move back to the low 140’s or to 1.65. At present we would advise waiting for more evidence on the sidelines for a futures play. We do see a trade back over 2.00 over the next 3 months, traders eager to get exposure could look at the 160/180 call spreads for $2500 or the 170/190 call spread for $2000; both in March. 

The US Department of Energy said underground supplies of natural gas were down 67 billion cubic feet last week to 3.291 trillion cubic feet. Supplies are now down 1% from a year ago. January natural gas was down 22 cents, pressured by warmer temperatures across the US. This is the lowest price seen since August of 04’ and currently we are long and wrong with clients positioned in February $8 calls.  We are still expecting a bounce and will either use a bounce to cut losses or potentially roll the position forward depending on the magnitude of the move.  We see support on January between 5.40/5.45 with first resistance at 6.00 but we expect to see a trade up to the 6.25/6.75 level, the question is when and from where?

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After the close Friday, the USDA estimated the week's beef production at 474.8 million pounds, down 6.6% from a year ago. They estimated that beef production will be down slightly in 09’ and the average price of choice steers was reduced from 96.5 to 95.5 cents per pound. February live cattle were down 12 ticks last week and for now we would continue to sell rallies. The trend is still pointing lower, with resistance at .8400 followed by .8520 and support coming in between .8220/.8240. We could fill the gap at .8760 or we could challenge the lows at .8060 so tread lightly. January feeder cattle were 87 ticks lower. There is a good chance that the lows made on 12/5 at .8545 will remain the line in the sand especially if this level is challenged again and holds. .8830 should act as resistance; we will remain bearish until we get 2 consecutive closes above the 9 day moving average; currently at .8763.

Pork production was estimated by the USDA at 473.4 million pounds, down 1.9% from a year ago. They estimated that pork production will be down 1% in 09’ and the average price of barrows and gilts was kept at 50 cents per pound (roughly 68 cents lean). February hogs were down 182 ticks last week.  Support comes in between .6140/.6160 with the path of least resistance still being down. On a move higher we could fill the gap from last week at .6305 but would expect .6375; the 50% Fibonacci level and the 9 day moving average to cap rallies.

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Stocks: The Dow may have well not opened last week as prices slipped 6 points to 8630. The S&P 500 ended the week up 4 to 880- nearly 17% above the 11 ½ year low made in November, however well off the highs in May, in the order of 39%. The NASDAQ fared a bit better closing 31 points higher on the week at 1541. Volatility will continue and although we may see some year end window dressing we are not feeling that the worse is behind us just yet. There are just too many people out there calling for a market bottom for us to believe a bottom has been established. The bottom will not happen in securities until everyone stops looking and calling for it. What to watch for this week would be the Fed meeting, new developments in TARP, OPEC, the government’s role in the bailout of the “Big 3” and Hank Paulsen’s speech. Regardless of where we are going into Thursday, we would expect to see weakness into the close and follow thru into Friday.

Bonds: The streak continues, it has now been 6 consecutive weeks that 30-yr bonds and 10-yr notes have traded higher. The recent sideways consolidation in March bonds could be one of two things; either the market is taking a breath for the next leg up or indecision and the potential start of a downward reversal.  As we said last week we have March puts on our radar in addition to a NOB spread, which entails selling bonds and buying notes 1:1 at the same time playing the spread. Resistance is seen at the contract high at 135’27 with support in the high 131’s. If this is the beginning of a down move we could see a drop to 127 quickly. 10-yr notes also advanced as fear continues to plague the markets gaining 1’16 last week.  Resistance comes in at the contract high at 125’13.5 with support near 122’00. Once the rollover begins we expect to see 4-5 points, based on current pricing that takes March to 119’16. We continue to monitor March puts and have started to recommend the 118 puts to some of our clients. As of Friday these were $1200 and we would advise buying ¼ to ½ your position and then look to add to the trade. You have 67 days but the main catalyst could be the FOMC meeting this Wednesday where the Fed is expected to lower the fed funds rate 25-50 basis points. The problem is the overnight money rate already trades well below that target. What will be more interesting is to see what additional steps the Fed will take as the rate approaches zero. One idea has been for the Fed to issue their own line of debt, which has never been done.

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The BOC met and agreed to reduce its interest rate from 2.25% to 1.50%, the lowest in 50 years. It was the sixth cut this year and 25 basis points more than most were anticipating. Even in the face of this, the Loonie gained 1.69 cents last week largely helped by gains from energies and metals. As we have pointed out in recent posts we expect the triple bottom at 77.00 in March to hold. We suggested long futures and to buy the 82 calls and 78/82 call spread in March for $1500. Look for an exit on options at $2500-3000. For new entries look for a long entry between .7850/.7900. 

 The March Euro closed up 6.36 cents, the highest close in seven weeks, encouraged by comments from the ECB that the economy may start to recover in the second half of 09’. After a close above the 50 day moving average mid-week we saw strong follow thru to the end of the week. We could see a trade up to 1.36/1.37 but we do not see much more. Support comes in at 1.3285 and then 1.2930 with first resistance at 1.3560.

The Swiss National Bank lowered its interest rate target from 1.00% to .50%. The March Swissie gained 2.87 cents or 3.5% last week. Support has held for the last 4 weeks and we would now be exploring the long side buying dips. Support comes in at the 9 day moving average at .8366 with resistance at .8636. We expect the gap at .8821 from 10/30 to be filled in coming weeks.

The Aussie dollar was 1.65 cents higher last week which was a bit disappointing considering the rally commodity wide. Resistance is seen at last week’s high at .6757 with support at .6460 followed by .6350.  We figure perhaps the Aussie had gotten ahead of itself moving 8.5% higher in the last 3 weeks and may need time to rest. We would be positioned on the sidelines.

For 6 consecutive weeks now the Japanese yen has strengthened against the greenback, gaining 1.94 cents last week and at one point trading as high as 1.1373; the highest level seen since August of 95’. If the carry trade unwind were to continue into 09’ we could see a challenge of 1.25; the highs from 95’. This would be an additional 14% increase on top of the last 4 month gains of 21%. We are currently flat with our retail clients looking for a long opportunity. Our best performing CTA which is up 120% ytd still has exposure and feels we have a way to go. They are positioned in both futures and options; contact us for more details. Support in March is seen at the 9 day moving average at 1.0850 followed by last week’s low at the 50% Fibonacci retracement levels at 1.0687. I would not be surprised to see a sharp pullback to 1.0525, which would do little chart damage. First resistance is seen at 1.1125. Japans’ central bank could cut rates on Friday from 0.3%, but we think they will hold and continue with quantitative easing. 

The March pound picked up 2.40 cents last week. 1.4650 should serve as support with mild resistance coming in at 1.5100 and major resistance at 1.5350. We would be positioned on the sidelines expecting a bounce that would set up a good short opportunity. 

The Kiwi dollar was only 10 ticks higher and at times was like watching paint dry. We suggest getting long futures with a stop below the previous week’s low at .5164 anticipating a move back over 60 cents in the March contract within the next few months. Patience will need to be exercised because this could be a slow mover. Interest rates after next week should be .50/.75% in the US and 5.0% in New Zealand; you do the math.

The March US dollar index fell 3.62 cents or just over 4.0%, the lowest close in seven weeks, hurt by expectations that the US will likely have to keep interest rates low for a long time. This was the largest weekly move since mid-October. Last week’s low challenged the 38.2% Fibonacci retracement with next support seen at 82.50. Resistance comes in at 85.60 and for now it appears an interim top has been established. We would advise selling rallies while the direction will largely be governed by the FOMC decision on rates, the Fed’s comments and how other markets react.

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Corn: March corn was 62 ½ cents or 20% higher last week with prices on the board now looking like a trade over $4 is in the not to distant future. We are now trading over the down trend-line from late October and currently see support at 3.45/3.50 with resistance at 3.79 followed by 3.94. We expect to see a trade up to 4.35 in the coming weeks. As we have suggested in previous weeks, we like bullish strategies in the month of May and if you took our advice selling puts under the market and buying calls, we would suggest to start looking for an exit strategy as wild swings could quickly take those profits away. The USDA increased its estimate of 08-09 U.S. ending stocks from 1.124 to 1.474 billion bushels, much more than expected. That puts the 09’ ending stocks to use ratio at 12%. On the world scene, the USDA is looking for 08-09 ending stocks to slip from 128 to 124 million tons, or 16% of annual use. Informa Economics predicted that US corn acres will be down 4% in 09’.  

Beans: January soybeans gained 64 ¾ cents or 8% last week and should have enough momentum to see trade back above $9 this week. We see first support at 8.30/8.35 followed by 7.90 with resistance at the 40 day moving average at 8.84.  As with corn, we like bullish strategies in the month of May. The USDA kept the estimate of 08-09 ending stocks at 205 million bushels, the same as in 07-08. The resulting 09’ ending stocks to use ratio is 7%, still a tight situation. Worldwide, the USDA estimated that 08-09 ending stocks will increase from 53 to 54 million tons or 23% of annual use. Informa Economics predicted that US soybean acres will be up 7% in 09’.

Wheat: March CBOT wheat was 32 cents higher last week closing back above $5/bushel. Support comes in at 4.82 with resistance at 5.35 followed by 5.50. KCBOT wheat was 31 ¼ cents higher on the week and was positive 4 of the 5 sessions closing the week out at just below 5.40. Support comes in between 5.12/5.16 with resistance at 5.48 followed by 6.65. The March KCBOT/CBOT spread ended the week at 25 ¼ cents premium to KC; we advise getting long between 20/25 cents with a stop only close at 15 cents and a target of 50 cents. The USDA increased its estimate of 08-09 U.S. ending stocks from 603 to 623 million bushels, a significant jump up from the previous year's 306 million bushels. The result is that the US ending stocks to use ratio is at a comfortable 27%. Worldwide, the USDA is expecting 08-09 ending stocks to increase from 119 to 147 million tons, or 22% of annual use. Informa Economics predicted that US winter wheat acres will be down 5% in 09’.  

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March cotton was 1.44 cents higher last week.  We expect the 41.37; low weekly close to be challenged this or next week. The double top from 2 weeks ago at 48.00 should remain as resistance and we still believe we can get long in the 30’s for clients. The USDA increased its estimate of 08-09 US ending stocks from 6.2 to 7.1 million bales, down from 10 million bales the previous year. That puts the 09’ ending stocks to use ratio at 43%, down from the previous two years, but still plentiful. Worldwide, the USDA expects 09’ ending stocks to fall from 61 to 59 million bales, or 50% of annual use. Informa Economics predicted that U.S. cotton acres will be down 19% in 09’. The supplies are getting smaller but the demand is decreasing even more so, this formula should lead to lower prices in the short run. Longer term farmers may get squeezed out of the business and with less cotton being planted when the demand comes back, cotton could move substantially higher.

January fcoj was 4.40 cents higher last week and as long as 71.15 holds, we are expecting a bounce to 85.00/90.00. We closed above the short-term down trend-line while the longer-term down trend-line comes in at 81.00. One idea would be to buy at the money puts and simultaneously go long the futures.  The USDA reduced its estimate of the 08-09 Florida orange crop from 166 to 165 million boxes. The projected juice yield was also reduced from 1.59 to 1.58 gallons per box at 42.0 degrees Brix.

March cocoa closed up $206 or 9% on the week, the highest close in two months, supported by a reduced harvest in the Ivory Coast and increased talk of the possibility of a harmattan (desert wind) sometime between now and March. The trend-line at 2400 has yet to be violated on a closing basis, but if we do 2453 is seen as next resistance. With more weakness in the US dollar and problems in producing countries we could see the gap in the chart from 9/26 at 2720 filled. We would continue to buy dips that hold the 20 day moving. We executed a back spread options strategy for clients last week selling the 2400 calls and buying 3 times as many 2600 calls for $1050 with an initial objective of $1950. 

March sugar was 88 ticks higher last week but remained in the 10.50/12.00 consolidation range we have been in for the last 9 weeks. Both Thursday and Friday prices closed over the 50 day moving average which had not happened since late September when pries were at 14.50. We see the next resistance at 12.50 with support at 11.30. We have been buying May calls for customers and still own March calls that were previously purchased. For new entries we still like May and have started to price out July and October. We remain bullish, but as some have you may read over the weekend in Barron’s, it may make sense to use options protection against your futures being that we could see fund redemption or force selling in the weeks to come.

March coffee put on 7.15 cents last week after a rough start to December, the previous week gaining all 5 days. We are now 10% off the lows just in the last 6 trading sessions and would expect this trend to continue with the strong seasonal tendency. Past performance is not indicative of futures results. Some potential trade ideas are with 58 days buying March call spreads; 115/130 for $1400 with a $3700 target or 120/140 for $1100 with a $2500 target.

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March silver was 73 cents higher last week but remained in the $1.50 trading range we have been in for 8 weeks running. This may sound familiar because I have pointed this out the last few weeks; the significance is that we feel this market is acting like a coiled spring. The longer we see sideways action the larger the breakout; we expect the move to be to the upside. 10.50 still serves as resistance while a weekly close above that level should mean prices are on their way to $13-15. We continue to accumulate the December 09’ $15/20 call spreads and will be a buyer again this week for clients near $1700 if given the opportunity. We would be a buyer of March futures on dips looking for guidance from gold, crude and the dollar. We would start scaling into longs at 9.50 followed by 9.00 and as long as the 8.51 low from 10/28 holds, on a closing basis we like being long. Looking at the weekly charts both the stochastic and MACD still support that we are in the beginning stages of a trend reversal. The silver to gold ratio currently sits roughly at 80:1 and we feel next year it will revert back to at least 50:1. That being said if gold moves to$1000 silver should be at $20. 

February gold was higher by $65.30 last week; this move mirrored the previous week’s move of $66.80 just in the opposite direction. This was a seven week high and principally caused by US dollar weakness and investors turning to gold amid financial uncertainty. $750 should continue to act as support with $835 as resistance, a level hit but not penetrated in prior weeks.  A close above $835 should propel prices to $865. Although the daily movement shows tremendous volatility, looking at the weekly and monthly charts gives longer term traders cause for excitement. We have seen more notice from investors with an increase in volume and open interest in recent weeks. We have suggested to clients to look at $100 call spreads in April and June; one such idea was the June 800/900 call at $2700. Friday’s settlement was $3670.

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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.