For February 25th- February 29th 2008

By: Matthew Bradbard

Call it inflation, call it stagflation, call it whatever you want but prices in commodities are moving higher.  I met with some clients over the weekend and told them I expect to see $200 crude oil and $2,000 gold in coming years and they were in disbelief, as I’m sure some of you are as you read this. It seems outrageous to make such predictions, but let’s look at some recent moves in other commodities before you rule out these projections: In late 06’ corn was trading just above $2 /bushel, its current price is over $5/bushel. Around the same time frame that corn made this impressive leap in prices, wheat advanced from $3/bushel to over $11/bushel. Platinum prices in the last 6 years have more than quadrupled from $500/ounce to a recent record high above $2100/ounce. Even markets off the beaten path have shown sizeable price increases. For example feeder cattle prices advanced 50% from 04’ until a record high was attained in late 07’. Even currencies have joined the party with the most notable movement in some commodity currencies like the Canadian and Australian dollars. In 2007 alone the Canadian currency moved from a low of 84 cents up to as high as 1.10, which was an advance of over 30%. From the beginning of 06’ to currently, the Australian dollar has appreciated 23% and appears poised for more movement as we forecast it will reach parity with the US dollar in 08’. We deem it necessary to note that although we have seen some dramatic movement, not all commodities have moved higher. The ones that have moved higher didn’t do so in a straight line and investors can and do lose money even in this environment. It’s not as easy as buying and sitting while waiting for the next big move.

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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OPEC meeting on March 5th

The U.S. Department of Energy (DOE) said that crude oil supplies were up 4.2 million barrels last week to 305.3 million barrels. Gasoline supplies were up 1.1 million barrels and heating oil supplies were down 4.5 million barrels. The DOE also said that refinery use fell from 85.1% to 83.5% of capacity last week. Over the past four weeks, gasoline demand was up .5% from a year ago while distillate demand was down 1.9% from a year ago. In terms of pricing in the markets April crude oil advanced $3.35 on the week and made a new record high trading above $101 before the March contract went off the board. As long as last week’s low of 96.87 holds, we should see new highs this week. With a successful close above $100 and without a production cut from OPEC we would not rule out a $105-110 trade in coming weeks. On a break lower expect prices to find their way to 93 in a hurry.

The DOE also said that underground supplies of natural gas were down 172 billion cubic feet to 1.770 trillion cubic feet. That put supplies down 6.7% from a year ago and up 5.8% from the five-year average. April natural gas traded 43 cents higher on the week finishing above $9 at a two year high. So much for the pullback we were forecasting last week. The trade is anticipating that the recent cold weather will eat into supplies, leaving less gas in storage ahead of the summer cooling season. The seasonal trade now becomes more risky as prices have advanced over 20% in recent weeks. Buying June natural gas on February 25 and holding until April 15 has been profitable 15 of the last 15 years for an average profit of $3,140 per contract. We will adjust this strategy and wait for a break before initiating longs for our clients. This is not a gimme trade as price swings could be sizeable; as the best equity in the last 15 years has been $11,960 per contract with the worst equity at ($7,460) so tread lightly.

With yet to advise an outright long in the distillates, we maintain a spread position for clients, long June gasoline and short June heating oil looking for the spread to widen. Stay on top of this and put in a profit order when you enter because of the volatility; this spread traded below 2 cents and as wide as 8 1/2 cents last week. As of Friday’s close, the spread settled at about 3 cents and we are expecting a turn in direction and a move back to at least 6 cents this week. As expressed in previous weeks our target remains at 8-10 cents on the spread premium to gasoline. This may continue to be a bumpy road but it is less volatile than outright being long or short and utilizes less margin so we will advise staying the course.

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The U.S. Department of Agriculture reported the February on-feed number at 102.0%, compared to the average estimate of 102.3% and a range from 101.0% to 103.1%. January placements were quoted at 106.0% versus a 109.5% average estimate. The projected placement range was 103.3% to 112.8%. The January marketed number came in at 101.0%, against a 101.7% forecasted average derived from a 97.0% to 103.0% estimated range. On-feed and marketings were viewed as no big deal because they were close to average projections. The placement number that came in well under the average is a little bullish barring anything else the market might see from cash cattle quotes.

Out of the Ag Forum on Friday the USDA said that the "U.S. cattle herd expansion that began in 2004 came to a halt during 2007." They also said that "the number of cattle available for slaughter this year is expected to be relatively tight."

We lightened up on our live cattle longs for our customers ahead of the report on Friday and will now advise them to step back in getting long after the current correction runs its course. We expect to be buying April closer to 93 cents still expecting the January 17th low of 92.30 to hold. We are forecasting prices to get through the 50 day moving average of 95.75 in coming weeks, and for prices to get into the high 90’s on this subsequent leg higher. April feeder cattle appear to be trending lower and we would look for prices to make their way to 105/106 this week. April lean hogs were successful in filling the gap from late January as we had anticipated, but we had expected more follow through selling. If you are short, stay short, but trail a stop-loss as there may more downside. Pork bellies remain on our no interest list; prices appear they could go either way so we will stay on the sidelines.

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Stocks: The Philadelphia Federal Reserve's regional index of manufacturing fell from -20.9 to -24.0 in February, much weaker than expected and the lowest in seven years. Consumer prices jumped more than expected as well, up 0.4% in January and by 4.3% over the past 12 months. The Federal Reserve lowered its 2008 forecast for economic growth to 1.3% - 2.0%, down 0.5% from its previous estimate. In terms of the agenda this week we have PPI, Q4 GDP, in addition to some Fed speech. There was much talk of a “wedge” or “pennant” formation in the charts of stock indices last week which is technical jargon and should not be ignored. When we break out of this wedge the markets will most likely move in the direction of the breakout. For now the S&P appears range bound and we will advise clients to stay clear until we get above 1373 or below 1325 on a closing basis on March. The NASDAQ 100 appears to be supported around the 1740 level on March and current resistance exists at 1825 and then 1865. Support on the Dow appears to be around 12,150 while resistance lies at 12,550. We are approaching the apex of a wedge that has been forming for about the last month in the Dow. It should break out of this “wedge’’ this week so pay close attention as this should set the tone for the next leg. On a move higher we would expect prices to exceed 13,000 and on a move lower we would anticipate to see a new low made. Other indices should follow the Dow higher or lower.

We cannot stress how vital it is to hedge your portfolios and protect against further selling. Think of it as insurance on one of your largest assets. We have refrained from recommending intraday trading on equity futures as we would equate that to gambling but will continue to recommend hedges for all stock investors. Call to inquire how you can protect your stock portfolio with index futures and options. 

Bonds:  For the first time since late 2004, we are seeing 10 year note and 30 year bond prices reach nominal parity. I think this is the beginning of a major trend towards a steepening yield curve, where the long bonds weaken dramatically relative to the notes. You could take advantage of this by simultaneously going long futures in notes and short futures in the bonds or by purchasing puts on bonds and calls on notes but we are looking for a more optimal entry point and wish to price out a strategy before issuing an exact trade recommendation. Support on March bonds lie at the 100 day moving average of 116’01 with resistance at 118’13. For March notes support lies just above 116 with current resistance at 117’18. We are still holding the Euro-dollars spread for customers from previous weeks. It is our opinion this spread (Long September 09/ Short September 08) reversed last week. By the end of last week this spread had advanced 17 points off its widest margin which in dollar terms is $425/spread. Both stochastics and MACD should support a move higher as we expect this spread to find its way to -0.45 to -0.40; which would be an additional $500/spread.

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The U.K.'s Office for National Statistics said that the retail sales volume was up .8% in January, stronger than expected and the biggest gain in 11 months. On this news the British pound was able to garner a move higher reversing earlier action and finishing the week up 109 points. Friday’s close was just below resistance; the 38.2% Fibonacci retracement at 1.9685 which has served as resistance for several weeks now. With a trade back below the middle of the Bollinger bands just below 196.00, we would expect increased selling to ensue so we will stay short with clients still expecting new lows.

The European Commission reduced its estimate of 2008 real GDP growth from 2.2% to 1.8% for the Euro area. The March Euro closed up 1 1/2 cents on the week reaching a 2 week high. Although with increased dollar selling there is talk of a 150 trade on the Euro, we currently don’t see it. If you were to approach the Euro we would advise playing from the short side but it is not our favorite cross at these levels. We anticipate the Euro to remain range bound ahead of the next ECB meeting on March 6.

Currently weighing on the yen is the repatriation flows ahead of the end of Japan’s fiscal year on March 31. The inverse relationship with the yen and the stock market should carry on. The current line in the sand on March comes in at .9240/.9260 and should serve as support. We will continue to buy for clients around those levels as this trade has been working in previous sessions looking to pick up 50-75 points.

The RBA revealed last week in it’s minutes from their February meeting that the policy-making board discussed a possible 50 basis point boost before opting for the most recent 25 basis point increase, putting rates at 7.25%. We still maintain prices will reach parity but are awaiting a setback for better positioning.  We will most likely start to advise longs if we are fortunate enough to get a setback to .9050. 

With little to no economic numbers out this week from Canada this market will look for guidance from outside markets, mainly energies and metals. The Bank of Canada’s next meeting on rates is March 4. The March Canadian dollar appears to be making its way back to the top of the range around 1.0100. If given the opportunity we would recommend buying the March Loonie at .9850 with a stop below .9800. Continue to play the range.

The March Swiss franc has acted like a ping pong ball moving back and forth between .9000 and .9200 for weeks now and we expect this to continue. Last week we advised taking longs off at .9200 and reversing and going short looking for a move back to .9000. Although we expect a move lower be cognizant that the Swiss could serve as a flight to quality if S%&# were to hit the fan, have stops in place.

The US dollar will continue to be the world’s reserve currency and if the volatility and uncertainty persist in global equity markets, the dollar should not lose too much ground even with falling rates. Currently futures have fully priced in 100% likelihood that the Fed will cut 50 basis points at its March meeting. If the Fed indicates they may take a break because of the up tick in inflation, we could see an advance. Current RSI and stochastics indicate a move to the downside with support at last week’s low of 75.42, with resistance at 76.20. We expect the dollar to find its footing and chop higher, but instead recommending of buying dollars we are interested in selling other crosses against the dollar.

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Corn:  Weekly export sales report showed 1.141 m.m.t. of corn was sold last week. This is up 22% from the previous week but 16% below the four week average. Early planting estimates came in at 90 million acres down 4.0% from the previous year. They put yield at 154.9 bushels per acre vs. 151.1 last year. The USDA expects 12.81 billion bushels of production to result in 1.243 billion bushels of ending stocks, the lowest in five years. Of the 13.0 billion bushels of total use they foresee, 4.1 billion bushels are expected to go into ethanol production, up from 3.2 billion bushels the previous year. The market largely shrugged this off as almost everything came in line with expectations and the market is clearly more interested in the USDA crop production report on March 11th and March 31st’s planting intentions. Prices remain overbought and we would not rule out a month end profit taking correction, although it would be unlikely to see a significant correction as both upcoming reports are expected to be friendly to corn so many traders do not want to be out of the market. Resistance on May comes in at the contract high 5.41’4 with support at 5.25 on a pullback. For December 08’ we will continue to advise pullbacks to be bought and would not rule out a trade above $6 ahead of the planting intentions report and much higher prices once corn is in the ground if we have any weather issues. You should be supported at 5.40 unless funds book a profit which could take December back to 5.00 which would be an opportunity to buy with both hands.

Beans:   Weekly export sales report showed 630 t.m.t. up 92% from the week prior. This seems like a significant jump but can be misleading because previous sales were light due to the Chinese new year when little buying took place. Recent winter storms caused significant damage to China’s high protein crops so we would imagine exports to be strong in coming weeks. China's increased needs will keep them from cancelling any previous U.S. buys for cheaper South American beans as their harvest gets under way. The USDA Ag Forum put bean acreage at 71 (up 12% from the previous yr.) vs. 63.6 last year with a yield of 42.1 vs. 42.2. They raised the crush rate of beans for its oil and meal but lowered exports a small amount. They put ending stocks at 169 m.b. vs. 160. If we have any late month profit taking this week, look for an entry to get long November, first support at 13.60. May beans have support between 14.20 and 14.25 with little resistance over head. We devised a strategy to be long beans without being concerned with the day to day volatility for our clients. Last week, for our clients, we sold $14 call options for November collecting approximately $8000 per sale, we bought twice as many $14 puts for May investing about $6000.  So far our clients have a $2000 credit on the trade, and we then went long November futures for them. This is a three part transaction that should allow us to make about 50% of the appreciation on the way up in addition to be protected on the way down loosing only about 25% if beans were to drop according to the current deltas on the options.

On top of playing beans we are also advising clients to get long May Soybean meal looking for new contract highs. Prices seem to be supported around 360.0 and we are looking for a further advancement to new contract highs. Buying May Soybean meal on 2/7 and holding through March has been profitable 12 of the last 15 years for an average move of $1044 per contract.

Wheat:  Weekly export sales showed 101 t.m.t. of wheat was sold last week. Not a good demand signal and clearly the absence of key world buyers of wheat suggests recent price declines have them patiently waiting, hoping for lower prices to buy. The USDA put wheat acreage at 64 million acres, up 6% from the previous year. We spent the past week consolidating as KCBT and CBOT wheat stayed contained within a 50 cent trading range trying to decide on the direction of the next move. The inflationary world grain cycles still suggest new highs lie ahead on crop rationing. Near term, March CBOT wheat futures have minor support at 10.50 with long term major support at 10.00, minor resistance at 10.93, followed by the psychological breach of $11 and then the contract high of 11.53. The real excitement lies in what the future will bring for KCBT wheat as we feel this is our best play at seeing higher prices in wheat to come. As dormancy breaks, KCBT wheat should build a weather premium. The KCBT crop largely goes to the export market leaving uncertainty over demand and futures while the Minneapolis spring wheat crop largely stays home for domestic milling. The long and short of this is although spring wheat futures may go higher into the March 31st report it is the KCBT futures crop that has the best chance for appreciable gains before spring wheat planting begins.

Since 1988 May KCBT has gained relative to CBOT wheat 15 of the 19 years (78.9%) from February through April for an average gain of 9 ½ cents/bushel, but we are looking for a much greater margin this year. The current spread is approximately 51 cents premium to KCBT making its way back to the upper 60’s, a level we have not seen in a few weeks. In coming weeks to months we are looking for this spread to accelerate and make its way to 75+ cents.

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Dow Jones Newswires reported that Fortis Bank reduced its estimate of the 2007-2008 world cocoa crop from a 32,000-ton production surplus to a 74,000-ton production deficit. Although May cocoa only traded $50 higher on the week finding support mid-week at the 10 day moving average, the move was good enough for our clients to be in and out, trading the same bullish option spread we did in previous weeks. While we will not advise a short, prices may have reached an interim top and we would not rule out a retraction. Resistance lies at the contract high of 2587 while a pullback could comeback 200 without any chart damage. We still feel the overall trend should remain up and expect at some future date a print of $3,000 for cocoa.

We are currently advising clients to be on the sidelines waiting for a pullback in sugar expecting prices to follow oil lower as investors take money off the table. We advise keeping a close eye on this market as we will jump back long for clients on any sizeable corrections with both futures and options, ideally looking for an entry in May closer to the 20 day moving average; 13.24 cents. Even if we are repetitive advising the accumulation of sugar options and futures week after week, we view sugar as a buy and hold opportunity as prices comparative to other commodities is cheap and we expect patience to be rewarded as we anticipate 15.50/16 in 08’ and 20 cents/lb in 09’.

May FCOJ is approaching 1.2000, as we have voiced in previous weeks, that is the level we have an interest in starting to explore long entries in for our clients. With the help of a bearish engulfing candle on Friday we could reach that level this week. Buying May FCOJ on 2/26 and selling on 3/17 has been profitable 13 of the last 15 years for an average profit of $545 per contract.

Coffee made new highs on Friday as funds and speculators bought and shorts covered while stops were elected. May coffee is trading at new contract highs; moving 30 plus cents in the last 30 days, as farmers appear to be holding back supplies ahead of Brazil's next harvest. I also hear that Vietnamese growers are taking advantage of the price move by hoarding beans. I guess farmers hope is that prices will break the May 1997 record of $2,660 per ton in Robusta. Being that prices have moved higher 20 of the last 21 sessions you could say the trend is up and we will continue to advise buying dips as the high may yet to be in. Be prepared for pullbacks as first support is 10 cents below current levels.

The USDA forecast a global crop shortfall of 6.5 million bales, against 7.1 million foreseen for this season, with world consumption rising 2.5% to 129.5 million bales and production expanding 3.2% to 123 million bales despite the sharp U.S. cutback. The USDA expects 9.5 million acres of cotton to be planted in the U.S., the lowest in 25 years. This should result in 15.0 million bales of production and ending stocks of 3.7 million bales, the lowest in five years. The US crop would be the smallest since 1998 when domestic output totaled 13.918 million bales. The wildcard remains what type of demand we get, which if last week’s exports are any indication, we advise you should be buying dips. Weekly sales came in at 483,800 running bales; two and one-quarter times the previous week and the four week average. December cotton advanced over 5 cents gaining almost 7% on the week. This move allowed us to trade out of July call options at a 250% profit for clients. We are looking for a setback to get long December futures and July call options once again and view cotton as one of the best buy and hold scenarios in commodities currently.

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Gold may need to take some time out to consolidate recent gains before making a push toward $1,000 level, but any correction should remain above solid support around $920. Higher food and energy prices and warning signs of stagflation for the US economy are helping gold, which often is bought as a hedge against inflation and market uncertainties. Last week gold moved up over $40 trading as high as 958.40 on April. As we alluded to in earlier commentaries we have lightly worked our way back long gold for our clients. We chose to enter $100 bull call spreads for clients in June buying the 900 calls and selling the 1000 calls. We elected to trade June because the length of time on the contract and the fact that we still have a sneaking suspicion of a major correction yet to come. Our clients invested just over $3000 per spread and we will look to trade out of it between $5500-7000, currently valued at $4700. We have decided not to fight the tape and are looking to enter longs in futures on $25-40 breaks. Remember in volatile environments like these traders can use mini-gold futures that are 1/3 the size of the traditional 100 troy ounce contract.

We should have listened to our own advice last week on picking a top in the metals market as our clients were stopped out at a slight loss trying to short silver last week. The key was not getting married to the position as the market is always right. As soon as new highs were made the losses were taken and we moved our clients into other positions. We still maintain that prices are overdue for a correction but we will wait on the sidelines and use the ensuing correction as an opportunity to get long. We remain long term extremely bullish and will use pullbacks as buying opportunities fully expecting to see $20 plus in 08’.

If a portion of your portfolio is not already in gold or silver we highly suggest you diversify into these metals as we expect to see much higher prices in coming months due to inflationary concerns.

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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.