For March 10th - March 14th 2008

By: Matthew Bradbard

As a commodities broker, last week was one of the most taxing weeks I can remember ever having. Although it’s sometimes a challenge to ignore all the market noise, always remain alert. Before putting even $1 at risk, evaluate the risk to reward dynamic in each opportunity. Increased volatility appears to be the norm, so as traders, we must closely monitor open positions. We have to evolve as the market changes, perhaps by trading more options as opposed to outright futures. Be willing to risk a bit more on trades, and yes, even be willing to overlook trades if we view the risk too grave. For clients, there are some markets I used to be comfortable trading with $10,000 in margin, those same markets are ones that I may need to allocate $20,000 to be adequately funded. We suggest assessing your financial situation to make sure you are comfortable with larger swings and increased volatility. Remember leverage and volatility are double edged swords that can work for and against you. We continue to believe that commodities are in a secular bull market that should last for years. It appears that short term some markets are taking a much needed breath and we would advise looking for long entries to position for the next leg up.

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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Last week in crude oil, an unexpected draw on US oil inventories sparked a leap in prices. The DOE showed a 3.1 million barrel decrease whereas analysts had expected a 2.2 million build.  Also supportive, was the fact that with prices hovering above $100, OPEC failed to raise the production quota. April oil traded as high as $106.54 and gained over $6 off the mid week lows by Friday. This allowed crude to trade above the inflation weighted previous high making a new record. Upward momentum exists, but we feel it’s just a matter of time until crude experiences a moderate correction, such as other commodities began to last week. That being said, we would still advise selling rallies or remaining on the sidelines, until you can get positioned long after a correction.

Natural gas is staring to show signs of an interim top, but this isn’t a market that you really want to jump in front of, as it can be truly unforgiving. Short coverings continue to be the theme as rising prices are not justified by the current supply situation. Money that was previously betting on lower prices is starting to jump to the other camp, as cold weather and increased interest in finding undervalued commodities has become the new theme.  Additionally, it could also be that last year’s dogs could be a lot kinder to investors this year, such as natural gas, sugar, and orange juice may find new money flows looking for value. Currently, prices seem too high, and we expect to see a modest retracement in the neighborhood of 50-80 cents. For clients, we’re still looking for a long entry in deferred months like June, July, or August, expecting the trend to remain up into April, as long as we don’t see an unwinding of longs throughout the entire energy complex.

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. It appears, for now, the worst could be behind us, as the spreads gained 6 cents the latter part of the week.  We feel ok advising an entry with stops below the recent low, which is just over 20 cents, premium to heating oil. As of Sunday evening, the spread was trading at a 13 cent premium to heating oil. Our target remains at 8-10 cents on the spread, premium to gasoline, which from these levels represents almost $9,000. We are staying with this because, as the cold weather passes, demand for heating oil subsides, and consumption increases 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 Friday, the USDA estimated the week's beef production at 495.0 million pounds, up nearly 3% from a year ago. Pork production was estimated at 452.4 million pounds, up 5% from a year ago. So far in 2008, beef production is down .4% from a year ago, while pork production is up 10.5% from a year ago. April live cattle lost almost 3 1/2 cents on the week, but found some bargain hunting on Friday, bouncing slightly and closing 75 ticks off the lows. Technically speaking, the market remains extremely oversold, if we are able to hold the lows thru next week, we should start seeing prices head higher. Cattle could get some additional help from falling grain prices. Weighing the risk vs. reward, one could get long April Feeder cattle putting a stop below the January lows of 102.700 looking for a technical bounce to 107.

Pork bellies, regardless of the month, remain on our no interest list. We continue to maintain longs for our clients in April lean hogs, encouraged by the mid week lows holding. Although, it may be too early to characterize the recent lows as a double bottom, we are positioned long looking for a move higher, filling the gap from previous weeks at 63.450.  Both RSI and stochastics on the daily chart are signaling an oversold market, we will most likely advise clients to parlay this position once we have more of a lead, presumably on a trade above 60. Generally, hog prices are supported this time of year by lack of slaughter ready supply.

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Stocks:  The S&P 500 ended the week down 37 points, or 2.8% to 1292.75, it’s lowest close since August 06’. The index is now down 17% off it’s October high. Mild support at 1282.25, which was Friday’s intraday low, we are expecting a challenge of the contract low in coming sessions at 1255.50.  The DJIA fell almost 400 points or 3% to 11,894. Resistance exists around the recent consolidation area of 12.250, with support 300 points lower at the contract lows. Last week, the NASDAQ slipped 59 points, or 2.6%, to 2212 and has declined 9 of the last 11 weeks. Current pricing in the NASDAQ is off 23% from the October highs. As ugly as the recent performance reflects, the indices are not as oversold as they were during the January slide and we still expect rallies to be sold. The biggest culprit in the recent move lower is weak job numbers, we have the largest payroll drop in 5 years, plus two consecutive months of job losses for the first time in years. Conditions like this have only existed when a recession was looming.

We cannot stress enough 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:  The U.S. Labor Department said that the unemployment rate improved from 4.9% to 4.8% in February, while non-farm payrolls declined 63,000. The drop in the number of jobs was weaker than expected and the largest monthly decline in five years. Manufacturing–Sector index weakens to a five year low, foreclosures on homes hit a record high in the 4th Quarter, and more and more homeowners are falling behind on their payments. Just a few of the recent headlines that create a stronger argument for the Fed to cut rates further, at their next meeting scheduled for March 18th. We may not be in full agreement with further cuts, but that appears to be the path the Fed has chosen and that is exactly what the market is pricing in. Instead of trying to outsmart the markets, look for what the market is telling you, and trade accordingly because the market is always right. Short–term rates currently stand at 3%, the market is back and forth pricing in an additional 50-75 basis pt reduction. If you are currently trading March debt instruments move out to June. Current support in June bonds exists at last week’s low, just above 116 with resistance just above 118.  On June notes, look for last week’s lows around 116’10.0 to serve as support, with the contract high of 118’03.0 to provide minor resistance.

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The unemployment rate in Canada remained at 5.8% in February, the lowest in 33 years, with a net gain of 43,300 jobs, much more than expected. The Bank of Canada lowered rates more than expected, taking rates from 4.0% to 3.50% last week. On the week, the March Canadian dollar lost 36 ticks but remained in the recent trading range. We expect the Loonie to get guidance from metals and energies this week, without a clearer picture look to trade other currencies.

The Bank of Japan met and kept it’s interest rate unchanged at .50%, as expected. The yen should continue to be the primary beneficiary of stock market weakness in coming weeks. The March Japanese yen closed up 93 ticks on the week at a new contract high of .9752. Although we feel it will be a bumpy ride higher, Japan’s finance and economy ministers, as recent as last week, voiced concern about the yen’s rapid appreciation against the dollar, potentially slowing the Japanese economy. We would not rule out verbal intervention, reminiscent of a few years back where manipulation was commonplace in the yen.  Look to buy dips, positioning in June futures or call options.

In the last three weeks, the Swiss franc has benefited from not only dollar weakness, but also with safe haven buying appreciating 8%, making a new all-time high against the dollar reaching .9869 on March futures. The path of least resistance remains up, but it may be too late to join the party as we would advise waiting for a set back. If looking for a long entry, June should be well supported around .9550.

Our trade from last week, purchasing put options in the Euro, didn’t work as our client’s options expired worthless on Friday, loosing approximately $250/option. Doing it all over again, we would have obviously preferred a different result, but weighing the risks and potential reward, we would do the trade again if a similar opportunity arose in the future. The Swiss franc was not the only currency to hit an all-time high, as the Euro approached 155.00, it too hit it’s highest mark in history. After leaving rates unchanged at 4.0%, the ECB voiced concerns about inflation, which could lead to rates moving higher, as opposed to lower, like across the pond here in the states.  Recognize it is not that things are so rosy in the Euro-zone, it is that things are so bad elsewhere. Look for the Euro to continue higher until the dollar can find a bottom. If playing this from the long side, we would stress the use of stop-loss orders, or some type of risk management measure, because when prices reverse it most likely will be violent.

We misreported last week that the bank of Australia, on an increase of 25 basis points, would take rates to 7.50%, when in fact the recent move took rates to 7.25%. Either way, they are one of the few central banks that are raising rates, that, in combination with an economy that will continue to benefit from commodity exposure, we will continue to play from the long side, looking for an ultimate move to par this year.  Look for an entry long June closer to .9050/.9100.

The Bank of England left rates unchanged at 5.25%, but the pound still rallied with increased dollar selling. If you took our recent advice, most likely you were stopped out at a loss which is frustrating, but as we reminded existing clients that were short the pound, loosing trades are a part of the business. If you cannot deal with losers, trading is not for you. Over the years I have lost money for clients at one time or another in nearly every commodity. We will continue to advise selling on rallies as we view the Cable as one of the most over-valued currencies.  On June, next resistance lies just above 2.0100 followed by 2.0250.

The dollar demise continued as the selling intensified, taking the dollar to record lows against multiple currencies and the dollar index to its lowest close ever, with a new recorded low of 72.455 in March. We will refrain from attempting to pick a low here, as that has not been profitable for our clients of late, but we think we are getting close to a bounce, not a reversal but rather a dead cat bounce.

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Corn:  Weekly export sales showed 648 t.m.t. of corn was sold last week, up 8% from the week prior.  This is the second week in a row with light export numbers, which gave traders some reason to lighten up on longs ahead of Tuesday’s USDA crop report. Last week new corn crop made fresh highs, trading as high as 5.85. First significant support lies at 5.52 on December, with next support for December, if we trade lower into Monday, at 5.43.  I expect this pullback to be bought and the above levels to be defended, as shorts have the risk of seeing lower ending stocks on Tuesday. Expectations are at 1.438 b.b., unchanged from the month prior, but under December of 1.797 b.b. If lower ending stocks are going to occur, it will come on a higher export projection, which most likely will come with increased ethanol usage. Albeit brave to catch a falling knife, as this recent correction has been vicious, we would rather risk being long and wrong with clients into Tuesdays’ report, than be on the sidelines looking for an entry after a bullish USDA report.  You must ask yourself if you are comfortable with this strategy, because with a bearish report we could have a lot more downside.

Beans:   Weekly export sales showed 202 t.m.t. of beans were sold last week, off 65% from the week prior and almost 70% under our four week average. After making new contract highs to start the week, we saw profit taking pull beans down, November loosing $1.12 by week’s end. It appears that large trading funds decided to unwind profitable spreads. They took their long soy oil, short soy meal, spreads off and we saw the unwinding of the long May short November bean spread as well. Remember, March is the last month of old crop, and futures are trying to reach a high enough price to buy acres for the March 31st planting intentions report. The new crop November futures is bearing all the risk into the planting and growing season, and will be the contract we continue to recommend playing from the long side. Coming into Tuesday’s USDA production report, prior estimates show ending stocks at February 160 million bushels, with earlier months ranging from 175-215 m.b. Although extremely aggressive, we are recommending using this fall back in prices as an opportunity to get long soy meal and soybeans. We bought clients 380 May soy meal calls on Friday for $550, looking to re-position long July futures this week. July soybeans have gained in 16 of the last 25 years, adding a total of 327 1/4 cents/bushel in the month of March. We expect a rally into March, to buy acres followed by profit taking, and repositioning in new crop contracts for the spring through summer growing season. Our biggest rallies may be yet to come if weather problems crop up. November support first comes in at 12.70, and then 12.14, with first resistance between 12.90-12.95.

Wheat:  Weekly export sales showed 431 t.m.t. of wheat was sold last week, up 40% from the week prior. May CBOT held support at 10.90, but a close under there and 10.20, should be the next stop.  Prices start the week almost $2.70 off the highs reached just 2 weeks ago. Going along with the same theme as previous commentaries, May KCBT wheat tends to gain relative to May CBOT wheat, but for now we would be on the sidelines looking to re-enter this spread as it appears it could set back 15-35 cents in the short term. On a move back to a 30 cent premium to KCBT, we would advise re-entering this spread, which we previously have played for clients, thinking it could get back to the current highs around 75 cents. On any sizeable rally, we would look to buy July CBOT wheat puts, but the premiums are exorbitant and currently will just keep this on our radar. With over 3 months of time, we are looking at buying our clients out-of-the-money out rights, or 50 bear put spreads, but with a lower entry than current pricing allows.

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May coffee fell 13.80 cents last week to close at $1.5145, with many concerned that prices got too high ahead of Brazil's upcoming harvest. Technical chart linked selling may have contributed as prices fell from overbought levels. Prices should be supported around the $1.4500 level, which served as resistance back in October and where we previously broke out to the upside from. We will start pricing out bull call spreads for clients this week, but feel we have a little time before they need to jump in long.

Energy prices are still high, but some are having second thoughts about a further increase in world production of sugar this year, and how that will work through the market. July sugar closed down 109 points on the week, finding mild support around 13 cents. We are currently buying 2 cent bull call spreads for clients, looking for an entry long July and October futures. The strategy with this spread is to buy back the top leg on a further set back, while holding the other for a price increase in weeks and months to come. If the commodity correction continues, you should be able to get long July and October closer to 12.50.

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. Last weeks sellers came in near 2845 on May and took prices $12 lower on the week, which served as the first down week in the previous seven.  Both weekly and daily charts support a move lower, with first significant support at 2560.

When a commodity wide correction occurs generally the markets with weak fundamentals fall the hardest.  May FCOJ lost 5.45 cents on the week loosing just over 4% on the week. Looking at the charts there appears to be a little more downside and we would be cautious approaching this market from either side as volatile movements are to be expected.

We advised clients to book a profit on their long December cotton, and are now holding shorts in May for them, leftover from the spread recommended in previous commentaries.  It is too early to say for sure, but it’s conceivable that clients could make money on the December longs and May shorts, as the recent volatility in cotton allowed us to play both sides. Believe it or not, prices in the last 2 weeks moved up 16 cents and then reversed and moved down 16 cents; talk about instability. These are market conditions where, if you don’t know what you are doing, you can get hurt, 16 cents in cotton represents $8000/contract and with frequent limit moves stuck the wrong way you cannot get out. Looking at the charts prices, they appear to have more downside, but we are exploring re-entering longs ahead of month end’s planting intentions, as we expect a significant shift in acreage.

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The losses in metals, particularly platinum and palladium, were due in part to news that South Africa said it intends to deliver 95% of the electricity needs to its mines, up from 90% last week. As of Monday morning June palladium prices have come off $135 or 22%. April platinum is $368 off its record highs and gave up 16%.

Last week, we published a specialty article where we issued an option recommendation in gold (which you can find under our “special reports” then “published articles” section on our website). It should have been filled close to $700 and is currently trading at approximately $1150 (buying the April 950 put while simultaneously selling the April 1050 call). With only 16 days and gold starting to come off, start to look for an exit, we would recommend taking both legs off at the same time. Prices are below the 9 day moving average and with increased profit taking we expect to see a further retreat to the 20 and 40 day moving average closer to $929. The 61.8% Fibonacci retracement level reads 916, and that should be the line in the sand on a pullback in June futures. For a position trade, we would advise $50 bull call spreads in June, or to start accumulating futures looking to add at both lower and higher levels starting at about $930.  Bear in mind an account needs to be well funded to trade metal futures because of the massive swings.

Even with silver at 27 year highs, we feel we need to remind traders that one never goes broke by taking a profit. Prices have moved from just over $15 an ounce at the onset of the year, to recent highs over $21, representing a 40% surge in less than 3 months. Silver, which has been dubbed the poor man’s gold and has outperformed gold of late, may have much more to go as prices are far from historical highs, above $40/ounce. Many traders whom feel gold is too expensive, may continue to move money into silver looking to take advantage of a sinking dollar, hedge against inflation, or simply to park money in these uncertain times. Prices are below the 9 day moving average and looked destined to challenge the 20 day at 18.67 on March. Stochastics support a move lower as prices retreat from extremely overbought levels.  We would advise clients to play May $1.00 call spreads or look to start dipping your toes in on longs, about $1 from current levels; this is around $18.50, prepared for further selling.

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. Calculations of profit and loss have not factored in commissions and fees.