MB Wealth's Weekly Commentary 1-888-920-9997
Energies Livestock Financials Currencies Grains Softs Metals
For December 29th– January 2nd 2009
“2008 - The year that was, is almost over” With 2008 trading coming to a close, the majority of prices in commodities as a whole, much like other asset classes, are off considerably from their highs and volatility has been greater than ever. We see no reason for this volatility to end just because we have a new number on the calendar. Hopefully traders learned some lessons about risk management and diversification, so they can apply those lessons to trading in 2009. For those of you who have not made commodities an integral part of your portfolio as of yet, what are you waiting for? It is our opinion that the printing of paper being done by Central banks globally, will set the stage for inflation at some point in 2009. We also believe that the FOMC has made it clear that one way to get us out of this credit mess is to devalue our dollar, which again is commodity friendly. Deleveraging should continue in Q1, but at a less rampant pace than what we have experienced of late. We will be doing a 2008 year in review and a 2009 outlook in the next few weeks in hopes to keep all informed. On top of that, we will be doing an analysis of the CTA’s that we have been recommending for clients. We expect the growth in the Managed Futures to continue for years to come and would suggest all seeking to learn more about Managed Futures to make inquiries. To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ The US Department of Energy said that crude oil supplies were down 3.1 million barrels, supplies of gasoline were up 3.3 million barrels, while heating oil supplies were up 1.8 million barrels. In spite of the announcement that OPEC will cut production by 2.2 million barrels per day on January 1st, February crude oil fell to a new contract low, weighed down by expectations of slow demand ahead. February Crude oil closed down $5.09 off 12% on the week. $42 is viewed as resistance with the 9 day moving average at $41.64. We see mild support at $35, if the market believes OPEC member countries will stick to their cuts we could get a bounce. February heating oil closed down 15 cents on the week. 1.42 should serve as resistance with 1.2250 serving as support. Before we suggest a bottom, we would like to see a trade back above 1.65. For now we would stand aside, although some clients have suggested selling puts under the market once a bottom is in place. Looking at the premium 6 months out heating oil prices are only 12% higher. Comparing this to RBOB where prices 6 months out hold a 35% premium? February RBOB was just over 12 cents lower last week. We see resistance in February between.95/1.00 with support at .80. A similar play could be made selling puts once a bottom is established. February natural gas gained 50 cents or 9% last week closing the week at the 20 day moving average at $5.85 helped by colder weather in the Mid-west and Northeast and the recent withdrawals on inventory. We currently hold February $7 calls with an average cost of $600 and $8 calls with an average cost of $1400. Assuming the intra-week low last week holds at $5.25 we would expect momentum to carry prices higher meeting resistance at 6.14, 6.42, and then 6.70. Looking at the weekly chart we see a bullish engulfing candle that should support a move back over $8 in the next 3-6 months. We will be looking at longer term plays over the next few weeks. Weather remains the focus; the weather so far this year appears to be the most extreme in the last 8 years. ___________________________________________________________________ Last week Mexico banned imports of meat from 30 US processing plants, reportedly due to food safety concerns. Some say that the real reason may be that Mexico objects to the new country-of-origin labeling law that the US enacted on October 1st. After the close Friday, the USDA estimated the week's beef production at 352.8 million pounds, down 7.4% from a year ago. The USDA said that there were 11.345 million head of cattle on feed as of December 1st, down 6.2% from a year ago and roughly as expected. February live cattle closed down .60 on the week giving back all of the weekly gains on Friday. It appears to be profit taking from over bought levels after an 800 point advance the last 2 weeks. On a further setback we will again be shopping for long entries for clients. We see resistance just above 88.00 with support at 85.45 followed by 83.60. January feeder cattle were 1.125 lower on the week as we saw profit taking as well after a 1000 point advance in recent weeks. Resistance is seen at 95.00 with support at 91.30 followed by 90.20 then 89.00. February hogs closed down 2.55 at a new contract low of 58.95, hurt by ongoing concerns about the world economy. We advised clients to take off their shorts in February taking a profit and moving to April. At the same time we suggested getting short April, we advised buying either three 74 cent calls or four 76 calls against their futures position. The idea would be to cover the shorts in the short term and look for a recovery to trade out of the calls at a later date. On Tuesday, the USDA will release its quarterly hog and pig inventory report. We see resistance at 60.60 with no real support level but most likely will look to take our shorts off 1.50-3.00 lower. The USDA said that there were 34.5 million pounds of frozen pork bellies in storage on November 30th, up slightly from a year ago, but a little less than expected. Frozen pork totaled 517.2 million pounds, up 9% from a year ago. Pork production was estimated at 357.2 million pounds, down .4% from a year ago. ____________________________________________________________________ Stocks: The S&P 500 fell 1.7% last week closing just above 870 and assuming flat trade this week is on track to finish the year down approximately 40%. For the last 3 weeks prices have been contained inside a trading range between 850 and 915 and we see no reason to believe this week should be different. The Dow gave back less than 1% last week and closed just north of 8500. We should finish the year down approximately 35% here. The NASDAQ fell just over 2% last week closing at 1530 and all things being equal should be hit the hardest closing down over 40% this year. Although we could get a decent rally into years end and ahead of the new administration, we are yet to be convinced the worst is behind us. Though the longer we stay above the November lows the more confidence we get, it is our opinion that we still could get an additional 20-30% move lower across the board with US indices the first part of 09’. We continue to remain extremely defensive and have not suggested our clients to put money back to work in the stock market being that we feel the risk far out ways the potential reward, unless you are a stock picker and extremely nimble. It appears we are not the only ones with that opinion being that record inflows into Treasuries with a practical 0% yield. I guess safety is more important than returns for now. The Madoff scandal’s full effect is yet to be felt and we think it is possible we’ll see a lot more hedge fund redemptions (ie. forced selling) with investor’s shaken confidence. ____________________________________________________________________ Prices slid in the March Japanese yen 182 ticks as concerns over the 27% decline in exports and talk of possible intervention by the BOJ. This was the first weekly decline in 8 weeks, but we felt it was largely telegraphed by selling at the highs the 2 previous weeks. We expect a decline to at least 1.08 and are a bit surprised that we did not see any intervention last week, being it was a thinly traded week and it would have taken far less effort to see price manipulation. On a sharp break we will be looking to get long via futures and options. We support between 1.06 and 1.07 with resistance at 1.1145; the 9 day moving average. The March Euro was 165 ticks higher last week and had its third consecutive positive week. The last 4 weeks have been truly spectacular, gaining 16 cents or 13%. Assuming the contract high at 1.57 and the contract low at 1.24, we’re at the 50% Fibonacci level as of the close Friday. We currently have no exposure with clients and could see the Euro go to 1.44 or 1.36 this week or the next. We see resistance at 1.4200 followed by 1.4375 and support at 1.3870 followed by 1.3650. The March Swissie gained 300 ticks on the week, an impressive 14.5% in the last 3 weeks. If you view our most recent commentaries we have voiced that we liked the Swiss Franc in the low 80’s; the current price is .9400. On a setback to support we will look for an entry. The most recent move may have been too much too quick so we would not be shocked to see a violent correction. We may start buying as high as .8925 so follow our recommendations on our daily blog, MB Wealth’s Commodity Blog. The Australian dollar was 428 ticks higher on the week, but virtually the entire move can be attributed to the last few hours of trading on Friday. Being that on Sunday night most of that move was retraced on the open, most likely there was a big order or a trading glitch? There was a partial fill of the gap from early October that we would expect to be filled completely in the coming months on a trade up to .7668, but we first should see a trade back down to the .6400 area. We will be looking for a long entry, but from lower levels. We want to see if the market first respects the .6700 level. The Loonie gave up 26 ticks and even though we currently have no exposure with clients, we are looking for a move down between .7800 and .8000 in March. We chose not to play the short side but instead will be looking for a long entry on the ensuing setback. The recent move up to .8400 did allow us to trade out of the futures and options trades we recommended in prior weeks for clients at a profit. See previous commentaries. The March Cable has been lower the last 7 days and lost 283 ticks last week. If the contract low at 1.4500 is able to hold this week we may look for a long trading opportunity. Our objective, if all things line up, would be between 1.55 and 1.60. After a 25% reduction we certainly could see a bounce, stay tuned. Support is seen at 1.4500 with resistance at 1.4750 followed by 1.4850. The Kiwi was only 5 ticks higher last week, but we did manage to hit our 60 cent objective that we forecasted 2 weeks ago. We anticipated it to take much longer to arrive at that level, but sometimes we are lucky enough to be at the right place at the right time. Prices could go either way for now and we would suggest the sidelines. We see support at .5590 followed by .5490 with resistance at .5825 followed by .5950. The US dollar index lost 34 ticks last week and had its third consecutive losing week, but prices were down far less than the 2 previous weeks. We expect to see range bound trading between 79.00 and 83.00 the next few weeks with a bearish bias. The key will be to see if the 100 day moving average remains the line in the sand. Last week we made 4 attempts to cross that line and failed. On a close above the 100 day moving average which is currently 82.48, look for a trade back to 83.00 but on further weakness look for mild support at 81.25 followed by 80.00. Look for trades in the dollar to help in positioning in other trades; dollar up should equate to commodities down and vice versa. ____________________________________________________________________ Corn: March corn gained 32 ¼ cents or 8% last week closing higher the last 3 weeks. Prices are now back to the levels seen in late October. The question is whether this move has enough legs to take prices to 4.40. We expect to see those prices, but first we anticipate a pullback that should be used to get positioned long ahead of the next USDA report. Support is seen between 3.65/3.70 in March with resistance between 4.15/4.20. China’s plan to build a corn reserve along with its soybean reserve could see Q1 purchases pull US corn higher. Near term demand remains a question, however long term bodes well. South American weather remains a concern and may have been priced in last week. A trading idea we have suggested to clients is selling May calls and using that premium to buy March puts while simultaneously getting long March futures; for exact pricing, risk and profit considerations contact us. Beans: March soybeans gained 79 ½ cents or 9% last week and like corn, have now gained the last 3 weeks. Strength continues to come from very hot and dry weather in Southern America and light farmer selling of soybeans by US farmers. We closed above the 9, 20, and 40 day moving averages which had not happened since prices were above $16/bushel. We see support at 9.30 followed by 9.00 with resistance at 9.70 followed by 10.00. Similar to corn we have priced out strategies in soybeans selling May calls, buying March puts and going long March futures. The idea would be to cover the options on a break lower in the short-term and hold onto the long futures position for the next 3 months to take advantage of the next leg higher. If played properly you could make money on the options that you did not pay for as well as the futures on a move higher. Wheat: March CBOT wheat moved 33 ¾ cents higher last week with KCBOT gaining 33 ¼ but we still favor long plays in corn and soybeans and without their spillover strength we see no reason to be long at current levels. Profits may also be taken on recent longs as the potential weather damage to wheat may have been exaggerated. Support is seen at 5.85 then 5.65 on CBOT and 5.80 on KCBOT with resistance at 6.00 followed by 6.22 on CBOT and 6.30 followed by 6.65 in KCBOT. The March KCBOT/CBOT spread was virtually unchanged on the week, but we still see it as a viable trade not changing our target to 50 cents. It is a low cost trade in terms of margin and we do not see a tremendous amount of risk, but it is simply boring so that is why we have not been pushing this position. ____________________________________________________________________ March cocoa closed up $39 with ongoing concerns that this year's harvest in the Ivory Coast will be smaller than expected due to black pod disease and the possibility of desert winds. For the last 2 weeks prices above 2700 have been unsustainable so that would lead us to believe prices are due for a setback. Assuming 2715 acts as an interim top we could see a pullback to 2400/2450 maybe as deep as 2300. Traders looking to play this could have a sell stop to open at 2500. March orange juice finished down 5.50 cents after the USDA said that Florida's citrus trees were doing well. It was the lowest spot close in four years. The USDA also reported that there were 1.037 billion pounds of frozen orange juice concentrate in storage on November 30th, up 84% from a year ago. We currently have clients positioned long futures with at the money puts as well as lightly long the 90 March calls for a cost of $375. If we do not see a weekly close above 80 cents over the next 2 weeks we will most likely cut losses and need to re-evaluate. March sugar was lower by 15 ticks last week. For the last 6 weeks prices have been contained between 10.50 and 12 cents so we would suggest playing this range using these confines for your buy and sell decisions. We are advising clients to get long May futures in addition to buying May 14 cent calls options. We are expecting a move up to 12.50/13.00 over the next 60-120 days. March cotton was higher by 73 ticks last week. Lately our only trade recommendation in cotton was to buy the March 44 cent puts for $1000 looking for a trade to the high 30’s and covering the option for $2000. We were able to hold the 9 day moving average last week, but on a failure of this level we should see the move lower we have been anticipating. We did our part drinking coffee at least 6 of the 7 days last week but prices were still off 2.65 cents in March. We see support at 1.0650 and resistance at 1.11. We have very light long exposure with clients and expect a decent move higher in prices in 09’ because of the supply/demand dynamic, but for now we see no compelling reason to have a sizable position. On a further setback we may have some more defined suggestions, however for now we are content in longer term (May, July, September) bull call spreads. ____________________________________________________________________ March silver closed 36 cents lower last week and looking at the weekly chart we experienced lower highs and lower lows so we should see prices fade in the short term. We managed to stay above the 20 day moving average last week at 10.25, but on a breach of that level expect a trade below 9.50. We would use a setback to get long futures at those levels in addition to purchasing $15/20 bull call spreads for December 09’ looking to pay approximately $1600. In recent pricing when silver was near $11.50 in March this spread was well above $3000 and ultimately we expect this spread to make its way to $10,000. The closer prices were to $8.50 the more aggressive we would suggest being. We still expect to see prices near $12/ounce early 09’. If this level looks to hold and we do not get a break we will look to lengthen our long position for customers as silver remains our top bullish play. February gold was $31.80 higher last week; much of that came on Friday as prices gained $23. We see resistance at 880 followed by 930 with support at 829 followed by 808. The key here still remains the dollar as an inverse relationship should continue to play out. We would suggest using any setback to buy June $100 call spreads. One week means little, although pay close attention to see if in future weeks we continue to see a divergence, as gold gained and silver declined last week. We are longer term extremely bullish in gold but have been seeing some credible evidence that we could get a sizeable pullback in the neighborhood of 200 plus dollars so tread lightly and do not commit too much margin. You could see this type of move that would do little damage to the longer term bull market so it isn’t totally impracticable. We will explore this in more detail over the next few weeks.
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