For July 14th–July 18th 2008

By: Matthew Bradbard

The Fed has really backed itself into a corner as they walk the tight rope looking to aid in growth and fight inflation. Unfortunately, by lowering rates to assist in growth they have, in effect, fueled inflation by weakening the greenback. Whether it be inflation or stagflation the price of raw materials are moving higher, as investors you should have 5-20% of your portfolio positioned to take advantage of higher commodity prices as we believe this is an ongoing theme for at least the next few years. Stop blaming speculators and become one, make commodities a part of your portfolio.

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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For such a volatile week to finish up only 81 cents doesn’t tell the entire story. We printed a new record high as oil continues its march towards $150/barrel. Additionally, crude had its biggest 1 day drop in dollar terms since 1991, followed by the second largest advance in dollar terms in Nymex history. After dancing around the trend line mid-week, buyers came in supported by further unrest in Nigeria, activity in the Middle East, and comments from the IEA saying inventories will be relatively low for the next few years as demand from the developing world and limited growth in production will keep prices at historically higher prices. Momentum has shifted up again with support under Friday’s close at the 9 day moving average at 141.90 with resistance at the mythical 150 level. If and when we reach that level, expect buy programs to kick in causing another leg up. If you are trading oil keep your eye on the ball with increasing volatility and we would only play from the long side for the moment.

Heating oil and RBOB both traded higher following Crude’s lead. Even though gasoline demand has declined domestically for the first time since 1991, we’re not seeing prices come down because of the insatiable demand for diesel and crude. Heating oil stayed contained between 4.10 and 3.80 for August, which has served as the recent range for the last 2 weeks. For aggressive traders, you may have taken our recommendation from last week to buy a 15-20 cent correction. If so, trail a stop and look for the market to take you out of your position, because with this volatility and the fact that we’re at record highs, who knows where this path leads?  RBOB, like heating oil, acted like a ping pong ball last week trading down early in the week only to close back near the highs by week’s end for August. Even with big intra-day movement prices closed less than 1 cent higher on the week. We continue to feel that RBOB will be the weak sister in the oil complex and would prefer trading crude and diesel.

Natural gas traded lower last week; believe it or not we had prices back off $1.60 or 12% for the first losing week in six. The most recent ascent higher started in late March, from those levels we have seen a 40% move with the most recent move pulling back to the 38.2% Fibonacci retracement level assuming a $9.50 low and $13.50 high. We will look to see if last week’s low holds and start probing longs with futures for clients. Furthermore, we will start working orders for 50 cent call spreads in September, once a low is confirmed. Be cautious as we may get more movement south on weather, ultimately the 100 day moving average at 11.30 should support a further pullback.

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The USDA reduced its estimate of 2008 beef production from 26.83 to 26.57 billion pounds and increased the average price estimate of choice steers from 91 to 92.5 cents per pound. After months of protests, South Korea is officially open to import U.S. beef from cows that are 30 months or younger. After the close Friday, the USDA estimated the week's beef production at 533.7 million pounds, up 1.0% from a year ago. In the markets, August feeder cattle was virtually unchanged still trading on both sides of the 50 day moving average. It appeared the market was breaking out, but we ran into stiff resistance at 114, which will need to be penetrated before we make it to higher ground. We will be buying setbacks looking for higher prices to come. August live cattle lost a little over 2 cents on the week closing at the 50 day moving average of 101.25. As we said last week, we would look to add length closer to 102 and being that prices are a bit lower, you could lightly buy live cattle, but if forced to choose between the two, we prefer longs in feeder cattle.

The USDA increased its estimate of 2008 pork production from 23.38 to 23.48 billion pounds and kept the average price estimate of barrows and gilts at 47 cents per pound (63.5 cents lean). Pork production was estimated at 426.7 million pounds, up 10.4% from a year ago. Lean hogs along the curve started trending higher last week which bodes well for our recent purchases of October and December for clients (see recent commentaries). We are positioned long via futures and options and expect to see a stair step higher in prices into the fall. As we forecasted, we filled the gap from 2 weeks ago with October gaining just better than 2 cents, our next target is 73.50. December put on just under 1 cent and should make its way to 77 on this leg.

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Stocks: Although we got a close above 11000 on the Dow, we traded below that threshold for the first time in 2 years last week. The S&P and NASDAQ fell last week for the sixth straight week while the Dow’s loosing streak is only four weeks. The Dow ended the week down 188 points, or 1.7% to 11101.  The S&P lost 23 points or 1.9% to 1239. The NASDAQ held up the best, but still gave up 6 points or 0.3% to end at 2239. We are looking for a 5-10% bounce that should be used to exit longs or to establish fresh shorts as we do think there is more to the downside. We think the S&P will have trouble maintaining a price above 1300 on a rally and the Dow could fill a gap from 3 weeks ago, taking prices to 11800, but we would not expect much more than a dead cat bounce. The vix is finally starting to track higher, but we would anticipate it to get in the low thirties before a bottom in stocks was in; the current price is just under 28. 

Bonds:  With both the CPI and PPI out this week, watch for the debt markets to look for guidance from inflation expectations in addition to how the government chooses to deal with Fannie and Freddie. Rumors are flying on whether the Fed will allow them to access the discount window or a capital injection. Either scenario would be bearish for US debt. It is evident based on the action late last week, that yields could climb and prices may well retreat. September bonds only lost 6 ticks last week but the momentum has shifted and prices look like they will move lower. We see resistance around 116’16 with support at 114’20. The same goes for 10-yr notes with resistance at 115’00 and support coming in at 113’16. On the short end of the curve we are also looking for prices to retract for the Euro-dollar looking for last weeks highs to serve as resistance. We bought edu8 puts for clients looking for prices to come off 25-30 points and double our premium for 9700 put options over the next 3-4 weeks.

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Statistics Canada said the unemployment rate increased from 6.1% to 6.2% in June and showed a net loss of 5,000 jobs, weaker than expected. The September Canadian dollar ended just about 1 cent higher on the week but below recent resistance. If prices move higher in energies and metals, the Loonie could be pulled higher, but we would expect selling to emerge close to par and we will be shopping for a short entry on that move.

The Australian economy is in the midst of a sustained commodity boom which has unemployment at its lowest level since the mid 70’s. As we have voiced in recent commentaries buy dips here as a trade to par should happen. Last week we made a new all-time high and ytd prices have advanced almost 13%. For now stay long, we should still see prices track higher, but if you start to see an indication of dollar strength the Aussie could get hit hard, so trail stops.

For weeks now the September yen has been basing out trading between .9300 and .9500 collecting steam for what we believe will be a move higher. We would continue to advise buying dips closer to .9300 and it appears the yen will continue to have an inverse relationship with equities. Being that we are looking for a bounce in stocks, this should allow a better long entry from lower levels. We need to see a settlement above the 50 day moving average at .9500 to see a shift in momentum. We see the Bank of Japan holding rates where they are this week.

Last week we were not looking for much out of the Swissie, but we did issue a short recommendation in September with stops just above .9900 and if you took the trade you should still be short. Nothing has changed; we are still looking for prices to make their way back to .9600 in coming sessions. This is more so a trade off the charts as there is no fresh news fundamentally.

Last week the Euro traded up almost 2 cents and got within a few ticks of the highs from mid-April largely supported by hawkish ECB comments. We used that as an opportunity to get short futures for clients and with any luck this week we will use strength as selling opportunities. The closer you can sell to 1.5900 in September the better. If futures are not for you, we also like the September 150 put that is currently valued at $450.

Last week the British pound ended marginally higher just below the 200 day moving average. We will continue to look for opportunities from the short side as we sense prices are moving lower.  Assuming the highs from 2 weeks ago serve as resistance at 1.9900 we should see a trade back to 1.9450/1.9550 in coming weeks. The bank of England kept rates unchanged on fears that their economy may slip into a recession as inflation rises. Inflation is expected to rise to over 4.0% later this year which would be double their target.

The dollar pared losses last week as prices retreated 65 ticks making its way towards contract lows at 71.76. We did see some buying late in the week, but we think it may have been short covering as opposed to long entries. The path of least resistance remains down and for now 72.90 should serve as resistance with support coming in at 72.00 followed by 71.75. Continue to monitor movement in the dollar as many of the commodities we trade have an inverse relationship to the dollar and are being influenced. As a contrarian play you could get long with stops below lows, but there may not be much profit in this trade. If you want to feel patriotic as opposed to buying dollars look to sell the Pound or Euro.

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Corn: Weekly export sales showed 337 t.m.t. of corn was sold last week.  Friday’s USDA monthly crop report put ending stock at 833 million bushels vs. 673 the month prior and the average guess of 820 m.b.  It‘s all weather and its impact on determining the final yields. We will need ideal growing weather to not drive ending stocks to crop rationing levels. The government cut expected yields to 148.4 b.p.a. vs. 148.9 last month. Because of late plantings and reseedings, a report on August 12th will have final planted acreage numbers. Traders should be acquiring longs ahead of that report.  If we see rain, December futures could pull back to 6.75 which would serve as the 61.8% Fibonacci retracement. A close on December under 7.00 sets up a test of 6.75 and potentially 6.50. On the daily charts we are oversold and it would not take much to see this market reverse and track higher. We are buying $8 calls for clients and lightly getting long the futures; first we expect to see the gap filled from last Monday’s open at 7.47 and then a trade back to the highs. We still expect weather to be an issue and think that the report in August will give corn one more push before the highs are in.

Beans: Weekly export sales showed 66.4 t.m.t. of beans were sold last week. Friday’s USDA crop report showed 2008 ending stocks at 125 m.b. unchanged from last month and 2009 ending stocks at 140 m.b., down from 175 the month prior and pre-report estimates of 139 m.b. Like corn, soybeans too have no room for error in terms of weather for the next 2 months as stocks are tight. November beans were down 19 cents on the week, but this was after a 60 cent washout. As we said last week, we prefer the long side and would be buying dips, the closer to $15 the more aggressive we feel you could be. For now support comes in at the 20 day moving average at 15.56 followed by 15.27. We would recommend adding to length on a close above $16. Outside of just trading soybeans we also like soy meal. December meal should be supported at last week’s low 386.00, as we expect new contract highs and a potential run to 450. Look at the 480 strike for around $2000.

Wheat: Weekly export sales showed 617 t.m.t. of wheat was sold last week. It is a bullish demand signal as millers and exporters chase badly needed supplies. Demand should remain strong through the spring harvest. Friday’s crop report put all wheat production at 2.461 b.b vs. pre-report estimate of 2.478, soft red wheat at 607 m.b. vs. last month’s of 572. Hard red winter wheat production was at 1.040 b.b. vs. 1.030 last month. Spring wheat production was 507 m.b. vs. 537 last month. The USDA said that global wheat production will hit a record high 664 million tons in 2008-2009, a big improvement from last year's drought-stricken crop of 611 million tons. September CBOT wheat has support at 8.00 and with the chart looking oversold we could get a bounce to 8.40/8.60. Last week we failed to get thru the 40 day moving average on a closing basis and would need to see a settlement above that level for me to be convinced higher prices are to come. September KCBOT lost 18 cents last week, but for now the downside may take a rest. We would be cautious putting any size on because there is a gap on the chart below at 8.28 from late May that we expect to be filled, but if last week’s lows hold we could see a bounce. On a trade above the 50 day moving average; 8.72, look for prices to track back to the $9 level.

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The USDA increased its estimate of the 07-08 Florida orange crop from 169 to 170 million boxes with a record high juice yield of 1.67 gallons per box at 42.0 degrees Brix. According to the most recent Commitment of traders report, funds are flipping from being short to long on both futures and options.  The funds may be early, but we will join them with our clients getting long November futures from lower levels and have started getting positioned long in options as of late last week. Buy in times of weakness, as our clients got long options on Friday when prices were down 700 points. The 50 day moving average just above 121 should hold on a further retracement.

The USDA reduced 08-09 ending stocks of sugar from 1,273,000 to 607,000 tons. This took the stock to usage ratio from 11% to 5%, which in our eyes is bullish. We continue to like sugar from the long side with a longer time horizon. We would suggest using pullbacks in March 09 to get long futures or to buy calls. We will be looking to buy the 17 strike for $900 on a setback. 

The USDA reduced 08-09 ending stocks of cotton from 5.40 to 5.30 million bales. For the cotton crop that is currently in the ground the USDA estimated production at 14 million bales, below the 14.50 million bale estimate in June. US exports were lowered from 14.50 million bales from the USDA’s previous estimate of 15 million. The export forecast was lowered due to lower US supplies and lower foreign import demand. With no real surprise from the USDA and looking at the oversold conditions on the chart, we are looking for cotton to track higher looking for guidance from outside markets. Without some much needed precipitation we will get some stress on the crop and yields will become an issue. We have clients positioned long 10 cent bull call spreads in December as well as long December futures, anticipating prices to get to 90 cents with last week slow of 70.86 to hold.

Cocoa has cooperated and we got the correction from overbought levels that we were looking for.  September gave up $167 last week and we ended the week almost $400 off the recent highs. Support comes in at 2850 and stochastic on the daily charts are at 13 so you could lightly start getting long.  We would recommend a stop below last week’s low of 2857 and look to add length if the market turned higher. We continue to recommend watching the dollar for entry and exit signals as an inverse relationship is ever so present.

We did not quite get to $1.59 as previously suggested, but we certainly got the pullback we were calling for. Since we warned that prices were over due for a setback, September coffee has lost 15 cents or 10%.  Prices are now trading below the 100 day moving average and for now we would step to the sidelines as we are getting mixed signals. If this market was to give back an additional 10 cents we would look to start pricing out long strategies, but for now have no trade recommendation. 

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Last week August gold closed up $26 at $960.60, the highest close in over three months, supported by nervousness about the economy and unfounded rumors of war with Iran. Flight to quality buying may have contributed as well, as investors fleeing stocks may have found a home in gold. You are on the upper end of the Bollinger bands at current price points and by Monday morning you have also reached resistance at the 38.2% Fibonacci retracement level, so stay alert. Being long has been working and we still have that bias, but we would not get too committed as the recent advance may have gotten ahead of itself. What was resistance now becomes support at 946, with resistance now coming in at 1000.  Investors can buy dips and we will also be pricing out $50 call spreads in December.

For the week, September silver closed up 60 cents at $18.82, also the highest close in over three months.  We have now cleared the resistance levels and this should open up the doors for an advance to $20 plus in coming weeks. We would recommend buying dips for new entries and will be adding to our clients’ longs on pullbacks in September and December futures. As we expressed last week, if looking for option plays, investors can buy $1-2 call spreads in December looking for prices to make their way back to contract highs.

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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.