MB Wealth Corp. Weekly Commentary
For January 14th - January 18th 2008
By: Matthew Bradbard The debate continues of whether the Fed needs to be focused more on economic growth, the current credit and housing problems, or the mounting threat of inflation. Based on recent comments from the Fed, it’s our view they will continue to lower rates hoping to prevent the economy from stalling despite the very real risk that lower rates will fuel inflation. With or without rates moving lower a recession is in our future and further economic decisions will only affect the scale of pain to come. With unemployment now at 5.0% and gold trading above $900 an ounce for the first time in history we are starting to see the unambiguous signs. Regardless of the current environment or your opinion on Fed policy and/or inflation, commodities continue to be the place to be. If you have the risk capital you should consider if, a portion of your portfolio should be allocated to commodities; if you have not read our most recent special report on why agricultures and softs should be included in your portfolio, please click here. To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ As predicted last week, oil prices grinded lower hitting our target by week’s end closing on Friday at $92.69 on February. The daily stochastics still indicate lower prices are to come with $91.10; the 38.2% Fibonacci retracement from the recent H/L serving as the next support. If that level is taken out $89 should be soon to follow, but be very careful playing oil from the short side as this market could turn higher on a dime. Even with inventories declining for the 8th consecutive week crude oil prices were off, seems oil traders are more concerned about a slowing economy and the effect it could have on demand than the current supplies. Although we felt natural gas prices would start heading lower last week it appears we were off with our timing. Prices remain overbought and we are looking for a confirmation that a temporary top is in still expecting a 35-50 cent pullback in the very near future. January remains the weakest month on record for Natural gas. Between 1990 and 2007, March Natural gas futures have lost a total of $3.145/mmBtu or an average of $0.21/mmBtu in January. We recommended our clients to exit the February heating oil/unleaded gas spread at a profit of roughly 3 cents last week, as the current volatility in petroleum products make other trades look like a better place for client funds. After trading at 23 cents on the spread Friday it settled with February heating oil 21.80 premium to February gasoline. ______________________________________________________________________ Friday the USDA said that it expects U.S. beef production to drop 1% in 2008 and also increased its estimate of the 2008 average steer price from 90.5 to 91.5 cents per pounds. February live cattle dropped 1.85 to 91.35, the lowest close in a year. We have yet to recommend a long in April live cattle but stay tuned because we could start to see signs of a bottom soon as a move to 94.50 was rejected on Friday. April live cattle futures have gained in January 19 times (76.0%) and in the first quarter 16 times (64.0%) between 1983 and 2007. Given these strong historical tendencies, we will continue to look for an entry for our customers but will remain patient as higher grain prices are pressuring prices in cattle currently. The USDA expects U.S. pork production to increase almost 4% in 2008 and largely because of that, they reduced their estimate of the 2008 average price for barrows and gilts from 45.5 to 42.5 cents per pound. After the close, the USDA estimated this week's hog slaughter at 2.444 million head, up 16% from a year ago and the second most ever. February lean hogs fell 1.52 to a new contract low of 54.00 with no sign of a bottom in place. This goes to show you that lower pricing alone is not a good enough reason to buy. ____________________________________________________________________ Stocks: Bernanke made it clear that the Fed would act aggressively to support a weakening economy. He said “the outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced.” Translation; things are worse than we previously expected and we will do whatever necessary to fix the problem. Short term lowering rates will most likely deliver upside in securities but only in the short term as we will advise clients to sell rallies and continue to hedge their portfolios as we still feel risk is to the downside. In the last four recessions that began in 1973, 1980, 1981 and 1990 the S&P on average fell 23% from its peak. At current pricing the Dow and S&P are nearly 6% below their 200 day averages, while the NASDAQ is off 6.7%. This weeks CPI and PPI will be critical in determining market direction, we will either see a recovery bounce or a break of support and more selling. We choose to be spectators here until a clear signal is given or direction is determined. Bonds: The debt market has priced in 50 more basis points expecting the Fed to lower rates to 3.75% at months end or perhaps sooner. Although we do not support that decision, one must listen to the market and I have more faith in the bond market being right than the stock market. Without any significant changes, look for the rates below 4.0% for the first time since 05’ by months end. On the charts both bonds and notes look overpriced but we will not fight the Fed. Anything less than a 50 basis point cut than prices should come back to 115 for bonds and 113 for notes. ____________________________________________________________________ The dollar should find support just below current levels devoid of any surprises and find its way back up to 77.50 – 78.00 in coming weeks. The worst case scenario has already been priced in, so any positive news should aid in a dollar recovery. The seasonal tendency is a rally at the start of the year. New-year monetary or fiscal policy? New beginnings? The unemployment rate in Canada was unchanged at 5.9% in December with a net loss of 18,700 jobs, weaker than expected. The March Canadian dollar closed down 1.71 cents on the week just above .9800 slowly making its way to .9400. The Loonie may find some support at current prices and rally but this rally should be contained at 1.0000 and be sold. The pound is suffering because the British economy is facing some of the same problems we are facing in the US. Although last week they left rates unchanged at 5.5% their central bank is expected to lower rates as early as next month. On a break of last week’s low of 1.9435 on March we would expect to see 1.9100 soon there after. The Australian dollar put in a good showing last week bouncing off the 100 day moving average and gaining almost 2 cents on the week. We would advise buying dips as this currency should continue to benefit from commodity appreciation and the carry trade. The danger here is if commodities pullback or a sizeable move lower in the yen occurs. Make sure you are long before the March contract makes a new high, which currently is .9311. The Swiss franc remains on our no interest list but we favor a move to the downside as long as .9229 holds for March. A pullback to .8900 is what we expect but we will not direct any play here as it could go either way. As we have said in previous commentaries the yen’s direction will be determined by the stock market. The relationship is like a teeter totter, as one goes up the other goes down. We expect the yen to retreat short term before an explosive move up, being that the stock market should rally into the fed meeting which occurs at the end of the month. We will look to issue a buy recommendation closer to .8900 in coming weeks. We continue to advise clients to sell the Euro on strength as the seasonal tendency for a down January exists; 8 of the last 9 years the Euro has retreated on an average of 2 plus cents. The ECB left rates unchanged as well at 4.0% last week and Trichet voiced that the threat of higher inflation remains the Bank’s top concern. The head and shoulders formation is also supportive of a move lower; our target remains 1.4500 on March. Our skepticism of a down move here lies with a trade higher in gold and the correlation, so tread lightly. ____________________________________________________________________ The fight for acreage is definitely underway!! Corn: The monthly USDA crop report came out putting the final 2007 corn production number at a historic high 13.074 b.b. and the yield was pegged at 151.1 b.p.a. Ending stocks on September 1, 2008 were projected at 1.438 b.b., down 359 m.b. from last month's report. This confirms that usage continues to outpace production. The large drop in ending stocks came largely from increased corn used for feed. This had corn open up the 20 cent limit on Friday. The 15.3 m.a. more planted in 2007 and record crop is not enough acres to meet growing demand. Corn is now trading above $5 but we do not feel that prices have found a high yet. The story here is corn is now being use for food, feed and fuel. Ethanol production here and abroad will continue to expand. The key to trading is to look at the big picture and prices globally as they relate to prices on the board domestically constantly recognizing that a market can remain overbought for an extended period during demand led rallies. We start the week with support for March futures at 5.00 then 4.70. Beans: As far as for beans the USDA crop report was not quite as bullish as corn but again the fight for acreage is on. Final 2007 production was 2.585 b.b. down 9 m.b. from the November report with a yield at 41.2 b.p.a. with ending stocks for September 1, 2008 at 175 m.b. vs. 185 last month. Changes were fairly modest but still we saw prices into mid-session 40 to 50 cents higher on spillover strength from corn and wheat. Bean’s mission is to find a price high enough by March, not only to keep from losing more acres to corn but to find 6 to 9 m.a. more to insure we do not run out into 09’. Stay long but know where the exit is in case the long awaited correction comes. Support on March beans lies at 12.60 with numerous gaps below. Wheat: If there were any surprises out of the USDA crop report it was in wheat as record high prices suggest an increase in planting. The winter wheat crop came in at 46.6 m.a. planted up 1.6 m.a. from our last crop but 2.0 m.a. under pre-report trade guesses. With ending stocks inventory put at 292 m.b. or roughly a 30 year low we need many more acres planted, not less. This will make the March through May growing season extremely volatile as we need better than perfect growing weather. Needless to say, spread traders will talk up the long Kansas City contracts short Chicago Board of Trade. The current spread of May Kansas City/Chicago is 11 cents to the Kansas City contract and we are looking for this spread to widen to 40 plus cents. ____________________________________________________________________ The USDA said that Florida's orange crop will total 168 million boxes and have an estimated juice yield of 1.60 gallons per box. March orange juice ended the week at 133.15 after being at 140.00 early in the week. Orange juice prices were down 30% in 2007 and may soon be a buy to funds that are looking to park money in undervalued commodities. Prices are currently trading around the 50% Fibonacci retracement level from 04’ lows and 06’ highs. Prices generally are at their yearly lows between mid January and late February. The move higher in sugar may just be getting under way but we would advise stepping to the sidelines for now as prices are having trouble holding above 12 cents on the May contract. Ideally you took advantage of the recent move as Sugar has advanced almost $2,500 in the futures market per contract within the last 60 days. After January strength in sugar, it has reversed in February 10 of the last 14 times so we are also looking not to get caught in a position as we expect a pullback that will allow us to get long at lower prices and hold for a rally taking sugar through 16 cents/lb. Ignore the fundamentals for now as the exports have been extremely soft in cotton. The story here is that if cotton doesn’t trade higher it will lose acreage to other crops that are used for food and fuel as opposed to fiber. The USDA did not even deliver a bullish report and cotton traded limit up on Friday. Fund money must be finding its way into this commodity as the open interest has been jumping significantly. We are currently buying July call options for our clientele and will be looking for an entry in December 08’ futures for our customers. January historically has been a mixed month for coffee. We would ideally like to see a break that would allow a long entry as we expect to see coffee trade higher on impending drought fears and stronger consumption in coming weeks. Furthermore, February is the second strongest month on record for coffee so a trade down to 130 would probably be good enough for a long futures entry. If we are not that fortunate we will most likely advise a bull call spread within the next few weeks. After selling off an additional $10 last week March lumber looks even more attractive. Although there is no confirmation of a bottom we will continue to look for an entry but most likely will not recommend a move until we get more housing numbers which are due out next on January 17th. March cocoa had an impressive week gaining $74 and put in a new contract high of 2183. On a US dollar rally we expect a pullback in cocoa and will be looking to get long below 2100 thinking there is at least a few hundred dollars left in this move depending of course on the African harvest. ____________________________________________________________________ Gold briefly poked its head above $900/ounce last week. The question many traders have is if gold will have a similar reaction to oil when it traded over $100/barrel just weeks ago. The difference being is if the economy does in fact end up in recession, oil more than likely would trade down on the slowing of demand, but the move higher in gold may continue because of the large influx of money into gold that has been a flight to quality or safe haven play that will not decrease but increase with more economic pain. As we voiced last week we are expecting a sizeable correction, but it appears for now even intra-day pullbacks are being bought. In any case we would rather be on the sidelines wishing we were in the market than in the market wishing we were on the sidelines. On a break to $840/850 we will be recommending getting rather aggressive buying as we have raised our 08’ target to 4 digits; $1000. March silver is not anywhere near a record high but it is only a few cents from its contract high reached in November of $16.445. Although this run may still have some legs we advised clients to step to the sidelines in silver as well as we feel much like gold, prices are due for a correction any day now. Unfortunately we have left some money on the table for existing clients and subscribers but being caught the wrong way on a profit taking led correction is not something we want to be a part of. As industrial metals tend to outperform precious metals this time of year we are more eager to get back in silver than gold. Because of the volatility we will take it day to day but we are looking for an entry to re-establish longs.
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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