MB Wealth Corp. Weekly Commentary
For January 7th - January 11th 2008
By: Matthew Bradbard
If the first week of 08’ in the commodities market is any indication of what this year has to offer then fasten your seatbelts because we’re off to the races. Where do I begin; crude oil, gold, soybeans, rice all hit record high prices and we are only one week into the year. If commodities have not found their way into your portfolio yet you must ask yourself what you are waiting for. Don’t think you’re in commodities if you are trading commodity stocks; if you are in Phelps Dodge you are not playing copper, in Mobil Exxon you are not playing oil, and if you are invested in Bungee you are not truly in the grain sector. We feel that every financially suitable investor should have a portion of their portfolio in commodity futures and options. Stock investors need to recognize that if we experience stagnant growth and rampant inflation, i.e. stagflation, commodities should help you weather that storm as commodities typically are an asset class that performs well during inflationary times. The slowing growth, although not contained to the US, should not cripple the global growth engine that has been fueling commodities for years. To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ Oil prices breached $100 for the first time ever last week as inventories have fallen for seven consecutive weeks and the question remains, where from here? The DOE estimated in 2008 that they expect 87.2 mbd of world consumption and 87.4 mbd of production. Crude prices are expected to average $87 in the first quarter of 2008, up from $58 a year ago. Currently prices are overbought and should find their way to $93-94 in coming sessions. Distillate supplies are down 11% from a year ago and demand for all distillates over the past four weeks was up approximately 5.0% from a year ago. Refiners emphasized gasoline production this summer, but they need to produce more heating fuel now that winter is upon us. Currently heating oil supplies are down 36% from a year ago which could lead to higher pricing. With waning demand we would expect to see more down than up in gasoline. We advised our clients to buy February heating oil against February gasoline; the current spread is 17 cents and we have a target of 23-25 cents for our customers. The U.S. Department of Energy said that underground supplies of natural gas were down 87 billion cubic feet last week, not as big of a drawdown as expected. Supplies are now down 5% from a year ago, but up 8% from the five-year average. After advancing almost $1 off the December 27th lows, natural gas appears like it could experience a set back. We will not advise clients to get short but we do expect a 35-50 cent set back in the very near future. ______________________________________________________________________ After the close Friday, the USDA estimated this week's beef production at 412.6 million pounds, up .4% from a year ago. Pork production was estimated at 409.7 million pounds, up 8.8% from a year ago. Demand for live cattle deliverable in winter, when retail beef consumption is heavy, rises into January. But by mid month, producers who wish to deliver sell more aggressively and those who prefer not to take delivery of February futures begin to liquidate long positions. In contrast, the seasonal decline in hog slaughter has begun and continues into May/June. Even as production slows, inventories are aggressively accumulated to meet demand during July/August when retail pork consumption peaks. All things considered we are looking to buy June hogs and sell June cattle for our clients; the current spread is -21.65 and we are looking for -18.00 in coming weeks. In past commentaries we have also pointed out the strong seasonal tendency for April live cattle to strengthen in December and into January so we are still looking for an entry for our clients ideally closer to 96. ____________________________________________________________________ Stocks: After just the first week of trading we are off to the worst start since 1932. The U.S. Labor Department said that the unemployment rate increased from 4.7% to 5.0% in December with a net gain of 18,000 jobs, less than expected and the weakest monthly report in over four years. Across the board the NASDAQ, S&P and Dow all suffered, taking prices down to levels not seen since mid November. This will be a critical juncture for equities; if November’s lows hold, expect a modest bounce if not further bears to join the party. The critical support levels are for the Dow 12830, for the S&P 1416, and the NASDAQ traded below support on Friday’s dramatic sell off. We will continue to be the voice of reason and advise inventors at minimum to hedge a portion of their portfolios with shorts or puts on the indices. Anyone who has listened to our advice in previous months should be thankful and continue to employ this strategy. Bonds: Despite inflationary signs like oil trading above $100 a barrel and gold exceeding its 1980 record of $850 an ounce the Treasury market is trading at yields far below the 4.25% where the Fed is pegging the fed-funds rate. That’s a sign that something’s got to give, and with the economy on the edge of recession, it’s likely to be the Fed which is scheduled to meet on January 29th. For now prices across the yield curve seem to be a bit ahead of themselves and we are looking for a pullback but would expect prices to be range bound ahead of the Fed meeting, March bonds between 114-118 and March notes between 113-115. ____________________________________________________________________ For better or worse, the US dollar for now will remain the world's reserve currency. US dollars have exhibited a strong tendency to decline into year end only to reverse abruptly - at least for a month or two. The dollar index bounced off the lower Bollinger band on Friday and appears poised for a rally as both the stochastic and RSI on the daily chart are oversold. We would not expect much more than a move back to 78 before the onslaught begins again with dollar selling, and as we think a major theme for 08’ will be foreigners diversifying out of dollars. The ECB is expected to hold rates steady on Thursday. In eight of its nine years of existence the Euro currency has declined throughout much of January. We will advise clients to get short in coming days looking for a trade down to 1.4500. The Bank of England, which cut rates a quarter point in December, is also expected to stand pat. The British pound has usually found at least an interim peak by mid January. Currently the market is oversold and we would wait for a rally to advise a short entry for our customers closer to 2.0010. It is evident on the daily chart that the British pound has been stair stepping lower since its high in November. The Swiss franc often peaks in December, declines into mid January, recovers into late January, and then accelerates lower into mid February. We will look to enter a short position for our clients on a break of .9000 which serves as the 61.8% Fibonacci retracement from the recent H/L looking for an eventual trade down to .8880. As we have previously outlined, the inverse correlation between the Japanese yen and the equity market lives on. With a significant break in stocks the yen gained almost 4 ½ cents on the week, starting the week at .8854 and finishing at .9287 for March. The daily chart is starting to show signs of failing and with a bounce in equities coupled with seasonal weakness we expect to see prices back off to .9000 in coming weeks. As metals and energies go so does the Canadian dollar. Being that we expect a pullback in energies and metals it would only make sense to see a reprise in pricing in the Loonie. Now trading back below parity we would expect to see a slow grind lower eventually making its way back to the .9400 level, maybe not for a few months. For now prices seem to be headed lower but this will only set up a better buying opportunity as we see the Australian dollar making an assault at parity this year. After failing to get thru .8800 this past week, which serves as resistance, the Aussie hovers around the 100 day moving average of .8660. On a move down to .8500 that holds support look to establish a long or buy call options. ____________________________________________________________________ USDA Crop report out on Friday 1/11/08 Corn: Weekly exports showed 700 t.m.t. of corn was sold last week. Although on the lower end of estimates, it wasn’t totally unexpected as last week had one less export day due to holiday. Longer term corn remains extremely bullish as the world's fund money continues to see feed and food grains as severely undervalued at a time when demand for agriculture continues to explode. Although the charts are overbought, we may stay overbought for an extended period as higher prices are inevitable and the run for acreage should only aid in lifting prices even higher. Use setbacks as an opportunity to get long new crop corn. March corn has support at 4.56. A close under there and we could see a setback to 4.40. We should see some jockeying for position ahead of Friday’s U.S.D.A. crop report which will give us the final 07’ production numbers. Beans: Weekly exports showed 140 t.m.t. of beans was sold last week, a new marketing year low. Long term demand looks large, but near term softer exports should be expected. Beans in the teens is now a reality as beans hit record highs this past week amid shrinking global supplies, strong world demand and massive buying from speculative funds. March has support at 12.46. A close under there and a gap should be filled at 12.19 and a trade down to 12.00 is likely. Stay long if you have a longer term view, know where support is and trail stops. We initiated an option play for clients last week selling the $13 calls for May and buying twice the number of $14 calls for approximately $800 plus the cost of commission. If soybeans continue to move higher we have a delta of approximately 16% in our favor and on a setback we will look to buy back the $13 calls for our clients. This enables traders to carry a bullish position into the crop report but not get run over on a correction which we feel is overdue. Beans expect a friendly U.S.D.A. crop report. Wheat: Weekly exports showed 118 t.m.t. of wheat was sold last week. Not too impressive, and with the sharp rally into Thursday and holiday closings we will most likely experience light numbers next week as well. With the winter crop dormant until March demand fundamentals control prices. With so much volatility early in the week prices could go either way, but come Friday the crop report should set the tone. March support is at 9.16, a close under there and 9.00 is next support. Strong resistance is 9.58, on a trade thru that expect a test of the contract highs. The monthly crop report should be bullish as the USDA may cut domestic and or world ending stocks. ____________________________________________________________________ March lumber fell to another new contract low of $250.00 with no help from the weak unemployment report. Prices are cheap and even tempting to buy but it appears there may not be a bottom in sight yet. Patients are a virtue. After watching paint dry for months sugar has finally started to reward those who stuck with it. March sugar finished up .18 at 11.32, the highest close in almost ten months, helped by high energy prices and the need for more ethanol. Sugar has advanced roughly 17% in the last 60 days after doing virtually nothing for the better part of 6 months. March orange juice dropped 4.30 cents to $1.3755 after it looked like Florida's citrus groves escaped this week's cold weather without any significant damage. Our clients exited their shorts last week and will remain on the sidelines for now. Cotton prices had a down day on Friday prompted by pathetic economic data, and I feel there is more to come. Cotton exports have been shoddy, yet prices have been responding to the line of reasoning that cotton prices are undervalued relative to other grains. The trend is up but the market is overbought and I expect to see some pressure this week and have a target of 66 on the March contract. On Friday coffee prices came under pressure trading 5 cents lower intra-day and closing 3 cents lower at 132.00 on March. There remains expectation that fund activity will provide strength this week, but the market is now in jeopardy. March appears prepared to attempt a move lower to the 100 day moving average of 129.34. On the upside 135 will serve as resistance. March cocoa traded $44 higher on the week closing at 2100. I am mildly bullish expecting further sideways to higher action but cannot get too excited based on my stance with the British Pound and US dollar. A close below 2025 will look ugly and lead to additional declines below 2000. It will be critical to monitor events in the Ivory Coast and see how this strike action plays out. ____________________________________________________________________ Gold topped $850 an ounce for the first time since 1980 but we have traded out of our longs for our customers and are looking to reposition on this pullback. After gaining $80 in less than 3 weeks we see a high likelihood of a pullback; even just a 50% retracement puts February gold back at $826. By no means do we think the move higher in gold is over but it is healthy for any bull market to take a breath. It is entirely possible that we see $900-925 in Q1 of 08’. After riding Silver up from $14 we decided to advise clients to take some money off the table, look for a pullback and then re-enter. Much like gold we think silver is far from done appreciating but after advancing 11% in just 2 weeks and trading higher 13 days in a row we felt it would be prudent to take some money off the table. Remember bulls and bears make money but pigs get slaughtered. We will start looking for a re-entry for customers around $14.50. Seasonally from the beginning of January to the beginning of February, March silver has advanced 13 of the last 15 years on average 27 cents. Weaker than expected jobs data and a wave of profit taking by traders weighed down copper prices late last week after earlier prices were lifted by a one day strike in Chile. Copper futures should trend lower if economic data continue to point toward economic weakness. We are currently recommending remaining on the sidelines in copper but would expect prices to be range bound between 290 and 320 in coming weeks.
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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