For March 3rd - March 7th 2008

By: Matthew Bradbard

Two quick stories from the previous week: The government statistics may not have confirmed that we have inflation yet, but it is apparent to me as last week on Hollywood beach my girlfriend and I questioned why our gyros were lacking meat and our server explained that it was because prices of everything have been moving higher and they have to cut back on their portions. Additionally one of my neighbors, a retired office manager, suggested that she open a speculative commodity account and buy wheat. This to me confirms that a high is either in or very close. The moral of this story is when your butcher or milk man is giving you investment advice it is time to book a profit and go elsewhere with your capital. These lessons seem very trivial but it sometimes is as easy as being logical and using common sense to make investment decisions. Just ask one of my current customers who profited from shorting orange juice just weeks ago because he noticed at his grocery store that FCOJ was not selling.

There will be plenty of news for the markets to react to this week, here are the highlights: Central banks from Canada, Australia, Japan, England and the ECB all meet on rates, OPEC meets on current production on Wednesday and then the Non-farm payroll number on Friday.

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

April crude oil continued it’s upward march gaining $2.85 on the week and trading above $103 for the first time in history.  Although we are incapable of picking a top and many have tried unsuccessfully to do so in crude oil, we are expecting prices to retreat unless OPEC cuts production at their scheduled meeting on Wednesday in Vienna. We expect prices to be range bound between $105 and $97 for the next few weeks. We view there to be much better trading opportunities in other sectors and currently wish to be on the sidelines in oil. If you feel obligated to be in oil, we would advise selling rallies. Let it be known that you are betting against the crowd if you go short as the net long increased by 50% week over week according to the CFTC Commitment of traders report.

Since natural gas has broken out of the head and shoulders pattern about 4 weeks ago there has been no looking back. The theory is that the market has changed direction, and should continue higher once it breaks the neckline and this has certainly been the case. We are still looking for an entry to get long June for our customers but have yet seen the window to jump thru. The seemingly endless winter weather in the Midwestern US lends support to this natural gas market with forecasts for continued cold weather. Another draw in stocks this past week has given a boost to what was an over-supplied market just a few months ago. The U.S. Department of Energy said that underground supplies of natural gas were down 151 billion cubic feet last week to 1.752 trillion cubic feet. Supplies are now down 8% from a year ago. June natural gas closed up 12 cents on the week at 9.47. The seasonal trade we have spoken of has not been forgotten but becomes increasingly riskier as natural gas continues higher. 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.

With yet to advise an outright long in the distillates, we maintain a spread position for our larger clients, long June gasoline and short June heating oil looking for the spread to widen. For smaller clients that were in this trade we were forced to take a loss as gasoline moved 1.80 cents lower and heating oil moved 10 cents higher which means the spread widened by almost 12 cents last week alone. As of Friday’s close, the spread settled at a 6 cent premium to heating oil.  Our target remains at 8-10 cents on the spread premium to gasoline which from these levels the trade looks good but for customers that got in early we have a lot of ground to just get back to where we started. We are staying with this because as the cold weather passes, demand for heating oil subsides and the increase in consumption picks up in gasoline. We expect this trade to be in a different place with gasoline gaining significantly on heating oil.

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After the close, the USDA estimated last week's beef production at 487.7 million pounds, up 2.9% from a year ago. Pork production was estimated at 443.9 million pounds, up 16.2% from a year ago. April lean hogs dropped 1.30 cents on Friday to a new contract low of 59.95, weighed down by too much production and concerns about weak U.S. demand. Even withstanding that we are probing for a bottom here, not brave enough to hold onto futures we will look to attack these markets by purchasing call options for clients. Both RSI and stochastics show an oversold market that when it turns we feel will move higher like a sling shot. We expect the gap formed from last Monday’s open to be filled on a move higher in coming days to weeks. Additionally all of the fund money that is finding its way into commodities has yet to move into livestock and when it does you better be long or you will be wrong.  Buy the 61 calls; Friday’s settlement was 155 points ($620) plus commissions and fees. Look for this to go intrinsic when the gap is filled and be trading roughly at 300 points ($1200). The trend is still down in May pork bellies and there are still gaps in the daily chart but Friday found support at the 38.2% Fibonacci retracement so we may see a bounce short-term.

April live cattle were down just under 50 ticks on the week closing below the 10 day moving average at 94.325 hurt by the slow U.S. economy. We most likely will be advising a long entry on live cattle this week but for now have clients on the sidelines. 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 still appear to be trending lower and we would look for prices to make their way to 105/106 this week.

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Stocks: Friday’s 316 point drop in the Dow was the second worst one day loss of the New Year and wiped out earlier gains in the week.  The Dow ended the week 115 points lower to 12,266.  The Dow is down 7.5% this year and gave up 3% just in February, for its fourth straight loosing month.The S&P index fell 1.7% or 37 points on the week fast approaching the levels seen in the first of the year. The S&P is down 9.4% for the year. The NASDAQ lost 1.4% on the week and 4.95% on the month and is down 14% on the year. Currently the indices that we monitor are below moving average and would look for more downside expecting another 3-5% reduction in prices. 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. 

Federal Reserve Chairman Bernanke made his semi-annual visit to Congress today. Among other things, he told them that "the risks to this outlook remain to the downside." And that, "the risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further." Friday’s jobs report could provide the clearest sign yet to whether the US economy is in a recession or still teetering on the edge. Jobs declined by 17,000 in January, the first monthly decline in four years. Economists forecast anywhere from a loss of 50,000 to a gain of 25,000 for February, neither of which are too impressive. The recession talk would definitely accelerate if we were to get 2 months in a row of job losses.

Bonds:  Futures markets expect the fed to lower its target for short-term interest rates to 2.5% from the current 3% at its next meeting on March 18, with a possibility of the rate falling to 2.25%. It appears after the 2 day semiannual economic testimony to Congress by the Fed, there was more reason for investors to be long government debt. On the week 30 year bonds held the 100 day moving average on a closing basis and found their way to 120 by week’s end moving 4 ½ basis points off the low. Light resistance lies at just above last week’s high with more significant resistance at 121’16. Current support comes in at 118’13 then 117’15. 10 year notes gained almost 2 ½ points on the week reaching their highest level since January 23rd. On increased selling in stocks a new contract high most likely will be made, currently 119’05.0.

We traded out of the Euro-dollars spread for our clients last week. It goes to show you that in some cases it is worth hanging onto a trade sometimes when it initially moves against you if you truly believe the current movement is unjustified. Over the life of the trade it had moved against our clients over $1250 per spread and they were able to turn a profit only days later.

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Coming Central Bank rate decisions:  Bank of Canada, Bank of Australia – March 4, Reserve Bank of New Zealand – March 5, ECB , Bank of England – March 6, Bank of Japan – March 7, Swiss National Bank – March 13, US Federal Reserve – March 18.

After making a new contract high last week the Swiss franc continued higher ending the week just below .9600 gaining 3.73 cents on the week. We would look for the Swissie to pullback to .9350/.9450 but for now will recommend remaining a spectator.

Boy, were we wrong in our assessment of the Euro; we did not expect 150 let alone a new record high and trade above 152. Perhaps a week early but we are still looking for an interim top and for the Euro to come back to earth, thinking this recent appreciation of 5% in the last three weeks to be over extended.  Assuming a triple top on March if the Euro was to roll-over you should see a quick move back under 150 with first support around 1.4925. We are advising the purchase of inexpensive put options that expire this Friday looking to take $2-3 out for every $1 put up. Although these options may indeed expire worthless and we view this trade worthy of 300 some odd dollars of risk.

The time had finally come for traders to take profits after the recent 9 cent push higher in the Aussie after reaching a 25 year high. Prices last week still ended 84 ticks higher on March but this after a 154 point down day on Friday. While we still expect to see the Aussie reach parity this year a move back to .9100 will most likely happen first. We would suggest using this pullback as a long entry. With March options expiring on Friday and only two weeks time on March futures we will look for an entry in June for our clients between .8900 and .9050. We fully expect the Reserve Bank of Australia to raise rates to 7.50% for the 12th hike in five years.

Although the Canadian dollar traded above 102 it stayed contained on a closing basis, closing at 102.59 Thursday of last week which was the high reached back in December on March futures.  The Loonie will continue to look for guidance from metals and energies but the immediate movement will be governed by the BofC decision on Tuesday. Support lies at 1.0050 with resistance at last week’s high of 1.0298. On a breach of that expect the Canadian to find it’s way to 1.0500 in a hurry. We will wait for direction from the BofC meeting before issuing a trade recommendation. We suspect that the Canadian will be back below par by week’s end.

The Japanese yen continues to move inversely to the stock market, gaining just under 3 cents last week ending the week at .9629; the highest close since March 05’.  With further selling in equity markets we would not rule out a move above .9800 in coming weeks. We would advise buying dips that hold support, paying very close attention to the movement in the stock market.  .9500/.9560 should serve as buying support on pullbacks for March. 

As a student of the market we know all to well that past performance is not indicative of future results, but the last two occasions the British pound was around current levels selling ensued taking the pound 6-9 cents lower. We are looking for the same end result here advising clients to hold onto their shorts even though we are taking on water and also advising new entrants to get short looking for the pound to get pounded in coming weeks. Resistance is at last week’s high of 1.9949, while support at 1.9960 followed by 1.9590 and then 1.9500. With no surprises from the Bank of England we expect the March pound contract to be back below 1.9600 in coming weeks, and we will continue to advise selling on rallies as we view the Cable as one of the most over valued currencies.

The dollar has fallen off a cliff of late loosing 3% of it’s value in the last week alone. Although you have the world selling dollars with the increasing prospect of inflation in the US, we feel it will be just a matter of time before the Fed stops cutting rates so we may not be as bearish as everyone else. In fact a reversal is not likely but we do see the recent rout as overdone and see the greenback moving back to 75 in coming weeks. Current support sits at the overnight low of 73.50 on March with resistance just above 75.00.

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Corn:  Last week you saw month end profit taking pattern as funds continued to sell rallies. With month end profit taking now behind us, corn should begin trending again as traders go from profit taking to positioning ahead of the upcoming USDA and planting intentions reports. Weekly export sales showed 601 t.m.t. of corn was sold last week vs. 1.141 m.m.t. the prior week. Exporting countries are raising export tariffs to suspending exports until this year's grain growing season kicks off.  We looked to open higher Monday as Sunday’s session had corn a dime higher. We would advise buying dips in December as traders get positioned long ahead of the March 11 USDA Crop Report that could cut ending stocks. December corn has support at 5.57 and then at 5.48.

Beans:   Like corn, beans too saw more than its share of profit taking off rallies as funds went to the bank before month's end with beans largely range bound on the week. Weekly export sales showed 583 t.m.t. of beans were sold last week. China continues to be a buyer as the devastating winter storm will cut their high protein vegetable crops considerably. With their mandate to bring more protein into their diet we look to see China and Asian neighbors continue to keep an aggressive buying pace into harvest. Beans look to open higher Monday with a 20-30 cent advance Sunday night depending on the month. We would expect dips to be bought and prefer approaching November from the long side even though currently you are seeing more movement in old crop. Funds should remain buyers on the fear the March 11 USDA report may lower Brazil's bean crop prospects cutting ending stocks here. November has minor support at 14.40. On a correction or any bearish sentiment, or even spill over weakness from outside markets soybeans could loose $1 plus in a hurry so manage the trade.

On top of playing beans we are also advising clients to get long July Soybean meal looking for a trade above 400 in coming sessions. Prices seem to be supported around 375.0 and we are looking for a further advancement to new contract highs. Buying July Soybean meal on 3/5 and holding to 6/18 has been profitable 14 of the last 15 years for an average move of $1051 per contract.

Wheat:  Last Wednesday may have been the craziest day I have ever seen in grains in my career as prices on Chicago and KCBT wheat traded up and down the daily limit in the same session and experienced over a 24% trading range.  We prefer watching from the sidelines and equate trading wheat in this current environment as playing the tables in Vegas. Weekly export sales showed 308 t.m.t. of wheat was sold last week which was 23% over the four week average. Chicago May wheat has support at 1063 with resistance at 1172, KCBT May has resistance at 1207 and should stay supported at 1149 followed by more significant support at 1090. Although we hit our target of 75 cents on the May KCBT over CBOT wheat we are still expecting KCBT to gain on Chicago wheat but one must be brave and be willing to assume plenty of risk to weather this play. 

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It has been very difficult to stay long or to look for long entries if you pay attention to the charts but remember the funds are moving more money into the soft sector so although it sometimes may be trying trail stops and you may need to buy smaller breaks than you are accustomed to.

According to Dow Jones Newswires, the International Cocoa Organization said that they expect world production of cocoa to fall short of consumption by 51,000 tons in 2007-2008. They also increased their estimate of the previous year's production deficit from 242,000 to 299,000 tons. May cocoa ended the week higher by $177 gaining almost 7%, finishing the week at 2739 after making a new contract high on Thursday above 2800. As long as the dollar stays under pressure cocoa could continue moving higher but we would not be recommending any significant size on your longs at these levels. We would advise buying as close to 2650 as possible and would not rule out an advance to 3000. 

According to Dow Jones Newswires, weather conditions for Brazil's coffee crop continue to be "favorable," but May coffee keeps climbing to new contract highs. May coffee traded as high as 171.90 last week but closed at 166.80 on the week moving just shy of a five cent move higher. Although sellers have emerged the flow of fund money into soft commodities have helped assist in the surge higher. With a loss in momentum we would not rule out a profit taking led correction to 156; which is the 20 day moving average.  As opposed to stepping in front of this train and getting short we would prefer to recommend buying this pullback if it happens.

Dow Jones Newswires reported that the International Sugar Organization (ISO) reduced its estimate of the 2007-2008 world sugar production surplus from 11.1 to 9.3 million tons. July sugar closed up .55 at 14.75 on the week and has been able to stay above the 9 day moving average for weeks now. The ISO also predicted that world ethanol production will increase 29% in 2008. With supply being decreased and demand being increased it should come as no surprise that we maintain our feeling that the trend in sugar will remain up. March is generally a strong month for sugar; May sugar is up 16 of the last 25 years.  However 6 of the last 7 march gains reversed in April so you must really mange this trade if you are long.

FCOJ are finally joining the party. May orange juice prices gained just over 4 cents last week and are now back above the 20 day moving average. This movement allowed our clients to get in and out of a long futures play and bullish option strategy. Hopefully we did not get off the train too early and are currently looking for an entry to re-position long. Current support in May comes in at 130 with resistance at 133.50 followed by 137.50.

We are looking for a setback to get long December futures and view cotton as one of the best buy and hold scenarios in commodities currently.  Because December has not cooperated and continued to inch its way higher with massive amounts of fund money finding a home we have advised another approach. As opposed to just closing your eyes and buying we would recommend getting long December 08 while simultaneously selling May 08. The current spread is about 5 ½ cents to December and we could easily see this get to an 8-10 cent premium. Charting the spread you are very close to getting buy signals from stochastics and MACD. Why we like this is, if prices were to move lower in the short term one could lift the May short, book a profit, and hold onto the December contract once they felt the pullback had run its course. We ultimately feel that with the lack of acreage and potential drought conditions to come December cotton could trade above $1.00.

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What goes up must come down right. Not in the case of gold which has continued climbing the hill of worry as the US dollar got hit hard last week and the market is becoming increasingly concerned with inflation. April gold advanced $27 last week and is up 16% YTD as of this morning within $8 of the mythical $1000 mark. We feel brainless not taking advantage of this momentous move but eye on the side of caution and although we did miss some nice profits for customers short-term, we view the big picture and getting long on a correction as a more appropriate trade looking for gold to move much higher in the month to come. There is little to no upside resistance, pullback should be supported at $950 then $936.

Silver has moved higher the last 10 days, picking up over $3 and finally trading over $20/ounce which has not happened since 1980. Although the charts are extremely overbought and conventional wisdom dictates there should be a correction, March is the strongest month on record for silver since 1985. It appears investor’s interest in silver is growing as some in the market think gold is overdone and have been selling gold to buy silver. Like gold we prefer the sidelines with customers but perhaps we are being to conservative and costing clients and subscribers money by not being in the greatest silver move I have seen in my career which dates back 8 years. In most commodities, much like silver, if you had ignored all the noise and just bought in recent months this plan would have worked.  It is reminiscent of the late 90’s in the stock market and we all know how that ended so we prefer to be safe rather than sorry. The secular bull market in commodities, we feel has many more years left, so if we miss a move here and there for our clients we are ok with that. What is scary is silver prices could pullback $2.50 or 12% and do absolutely no damage to the long–term charts.

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.