For May 12th - May 16th 2008

By: Matthew Bradbard

If you are in the majority that thinks the worst is over please help me understand a few things: deflation in home prices is not getting better but rather on the rise, the dollar is not in a free fall but it is still extremely weak, the Fed has cut interest rates 7 times and taken rates from 5.25% to 2.0%, banks have tightened up their lending, even with an aggressive easing in fed funds; mortgage rates have not budged, unemployment is still above 5.0%, our trade deficit is still above $58 B, and oh yeah, many commodities are at record high prices. I hate to be a pessimist, but the truth hurts, things are not great and the sooner you realize that and make your investment decisions accordingly, the better off you will be. Don’t buy into the media hype! Ask yourself one question, regardless of what the government reports say, do you feel we have inflation when you go to the grocery store or gas station? Great…. we have inflation. I suggest you take commodities more seriously. We feel that inflationary pressures will only intensify in the coming months and that an informed investor able to incorporate commodities into his/her portfolio can be rewarded. We suggest that serious investors put 10% of their portfolio in commodities and stop playing games with $10-20,000 looking for a quick buck. That is right if you have a $1,000,000 portfolio we suggest you have $100,000 in commodities. We are not implying it should all be in the market or in one trade, but positioned throughout with various strategies.

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 now the only way to play the energy sector is from the long side; continue to buy dips until the market proves you wrong. Crude oil had its largest weekly dollar increase as prices traded $9.46 or 8% higher on the week and trading as high as $126.27 in June. This was largely fueled by a weaker dollar, speculative cash still moving into this sector, and increased fears that the world’s supply might not be adequate for the rising demand. Talk is starting to circulate of a potential spike in prices to $150-200 in the next 6-24 months. This may seem far fetched, but when the same analysts predicted $100 in crude just months ago, that too brought many naysayers’. In perspective, if we were to see prices of crude reach $200 that puts gasoline at roughly $6.00 a gallon.

Refiners and distributors accumulate inventories of gasoline during spring in order to prepare for the traditional opening of vacation and driving season in late May. That accumulation usually peaks sometime in May, when inventories are deemed sufficient and refiners are operating at capacity. As supply anxiety peaks, so does prices for immediate delivery because consumption often remains on a plateau until July. This is the norm, but will it be the case this year?  So much for the correction we were looking for, gas prices advanced 38 cents or 13% in the last 7 days and are now up almost 25% ytd. The upward momentum still exists and it appears we are destined for higher prices. So a good position can turn bad quickly. Two weeks ago we issued a short option play in heating oil and just last week we were looking good, but since then the market has reversed and raced to new highs. We are convinced that until the energy sector shows signs of a top, you must be a buyer not a seller. Both heating oil and gasoline appear overbought but we will not call a top, where they peak will largely depend on oil’s direction and if higher prices affect demand.

June natural gas prices made a new contract high last week and now are approaching the $12 level. This may be one of the trades we miss with clients, which is unfortunate, but unless we get a break it would be tough to justify a new entry at these levels. We still maintain that prices will move higher but ideally would like to get an entry long closer to the $10.50 level for June.  It may take a warm spell or a build on the weekly AGA inventory report, but we are advising a position on the sidelines until we get a pullback. One will need to be nimble if we are fortunate enough to get a break, since ideally we want to get clients long before hurricane season.

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The USDA raised its estimate of the average price of choice steers in 2008 from 90 to 91 cents per pound with a projected 1.1% increase in production. June live cattle trade higher on the week. We recommended that on a close above the 200 day moving average, which happened on Friday, that clients short cattle to cut losses. For now it appears prices are moving higher and we feel that enough money was lost. Feeder cattle too were higher on the week, however, our clients held no positions. Although prices may chop higher in both feeder and live cattle, we would expect more movement in the deferred months than the front. 

The USDA increased its estimate of the average price of barrows and gilts in 2008 from 41 to 44 cents per pound (59.5 cents lean), helped by expectations for a 15% increase in pork exports this year. Pork production is expected to increase 7.0% in 2008. June hogs traded just over 4 ½ cents higher on the week closing at 76.875, which has served as resistance since mid February. We have no exposure and have no trade recommendations until we get a clearer picture. 

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Stocks:  Stocks took a break last week after 3 impressive weeks of gains that in our mind were not entirely justified. The Dow lost just over 300 points or 2.4% ending at 12,476. The S&P 500 index lost 26 points, or 1.8% to come in at 1388. The NASDAQ was a loser, but continued to outperform the other indexes only losing 31 points, or 1.3% to 2446. As we predicted last week, we were looking for this pullback in equities, we should build on this decline this week looking for the Dow to make its way back to 12,500 and the S&P to 1368; the bottom of the channel we have been in since March’s low. We would suggest selling rallies as the CPI and PPI reports due out should confirm that inflation is becoming a problem.

Bonds:  The flow of money is evident as stocks weaken bonds should rally and vice versa; that being said if the stock market loses value this week as we anticipate, the debt market may stair step higher. We will use this as an entry point to get clients short. Look for June bonds to encounter resistance just above 118 which serves as the trend resistance line off the March highs. Additionally, we believe that June 10-year notes should come under pressure between 117 and 117-15. The 50 day moving average comes in at 117-07.

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Canada's unemployment rate increased from 6.0% to 6.1% in April with a net gain of 19,000 jobs, more than expected. Over the past year, 348,000 new jobs have been added to the economy. The June Canadian dollar stayed within the recent range gaining 131 ticks on the week. We would continue to advise selling near 1.00 and buying June near .9700.

The Reserve Bank of Australia said that it expects consumer prices to have an annual increase of 4.5% by the end of 2008, but then lessen to 3.25% sometime in 2009. The June Australian dollar was 80 ticks higher on the week but has been restricted by resistance at .9450 while supported by the 20 day moving average at .9340. We are still looking to buy a break for customers ultimately looking for higher prices, but in the immediate future the Aussie looks weighty.

The ECB as expected kept rates unchanged at 4.0% as growing inflation concerns trumped the slowing growth. On a daily chart the Euro is oversold, but we have yet to see a close above the 9 day moving average after penetrating it just days ago. We will continue to suggest clients to sell rallies with first support coming in at 1.5335 followed by 1.5150.

The Bank of England too kept rates constant at 5.0%, but the trade is forecasting future rate cuts at upcoming meetings. This expectation helped contribute to a loss of just over 2 cents on the week. We traded out of the majority of our clients June puts after reaching our target late in the week with only a few stragglers holding on looking for more. Options are decaying assets so it may behoove you not to overstay your welcome. We are bearish the pound for the next few months and will use rallies to get short for clients via futures and options, but with only 3 weeks time we thought it was wise to book a profit on this position. (Look at previous commentaries; we advised the purchase of 195 June puts for $650-700 looking to sell for $1400.)

We were looking for the Swissie to stay around these levels as it did closing at .9609 up about 1 ½ cents on the week. Based on action late last week it looks like prices may move higher, initially running into resistance just above .9700. This would put prices back around the 20 day moving average and just below the 61.8% Fibonacci retracement level. We would not recommend a trade here for clients unless we get a close above .9725 on decent volume. We envision trade back to .9900 on that scenario.

The pivot point was able to hold last week in the June yen, most likely aided by a move south in the stock market. By the end of the week, the yen had traded above the trend resistance line and should continue to move higher unless the equity market stages a come back, which we aren’t betting on. Prices advanced 243 ticks off the lows and 204 ticks higher on the week. We see the next resistance around .9870 and would expect prices to get back to par in the coming sessions. 

The US dollar index remained largely range bound trading between 72.90 and 74.07, losing 38 ticks on the week. Although we have been above the 50 day moving average for 7 days now, we do see this as sustainable. The argument can be made that the Fed is done cutting rates, but the damage has been done. Looking around the globe, rates in the US are lower than many countries that may attract capital just on the spread differential. We are not getting clients short just yet, but on a move to 74.50 on the June contract we will start recommending clients a light short looking for the 71 level to be seen again.

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Corn:  Weekly export sales showed 337 t.m.t. of corn was sold last week. It seems recent high prices have importers scaling back with their purchases. Friday’s monthly USDA crop report put ending stocks for 2008 at 1.383 billion bushels, and 2009 ending stocks at 763 million bushels. That puts the 2009 ending stocks to use ratio at 6%, the lowest in 14 years. On the world scene, the USDA is looking for 2008-2009 ending stocks to fall from 110 to 99 million tons, or 13% of annual use. This is dangerously low for 2009 and without ideal growing conditions, trend line yield or a loss in demand we will most likely need to see some price rationing. It may not be much of a distant memory but remember what happened to wheat prices just months ago when price rationing occurred. $6 corn may seem like a good deal!  With the USDA report now at our back, it will be about weather and crop progress. As June approaches it will be more and more critical to get the crop in the ground or we will see the yield be affected. December corn has support at 6.38 followed by 6.27 with the next significant resistance at the 7.00 level. Although it may be tough, we will continue to advise buying breaks in December and to hold July shorts against your December longs if nervous about a correction as opposed to getting out of the trade.

Beans:   Weekly export sales showed 41 t.m.t. of beans were sold last week, down significantly from prior weeks. Friday’s USDA crop report put ending stocks for 2008 at 145 m.b. and pegged our 2009 ending stocks at 185 m.b. The resulting 2009 ending stocks to use ratio is 6%. Worldwide, the USDA estimated that 2007-2008 ending stocks will drop from 63 to 49 million tons or 21% of annual use. Brazil and Argentina's soybean crops are being harvested now and are only expected to increase slightly from last year. Even though we will plant an additional 11 m.a. domestically this year, growing demand and increased usage will exploit most of this new acreage, leaving stocks dangerously low. Weather will be critical in June and August. November new crop beans have support at 12.59 which is the 50% Fibonacci retracement level. Resistance comes in at 13.10 and we feel that last week’s advance of nearly 90 cents may not have been justified. If the wet weather persists and the perception re-emerges of less corn and more beans we could see prices back below $12 relatively quickly. 

Wheat:  Weekly export sales showed 490 t.m.t. of wheat was sold last week. Friday’s USDA crop report came in line with expectations putting 2008 ending stocks at a 60 year low at 239 m.b. with 2009 ending stocks at 483 m.b. This is in part largely to countries around the world taking advantage of higher prices and planting more wheat, which was expected. The end result is a U.S. ending stocks to use ratio at 21%, more in line with previous years. Worldwide, the USDA is expecting 2008-2009 ending stocks to increase from 110 to 124 million tons, or 19% of annual use. Much like corn and beans, it is now all about weather. CBOT July wheat remains above the 200 day moving average but the recent attempted rally ran out of gas as we ran into resistance around the 8.45 level. For now it appears you can sell rallies. As for KCBT July wheat, a failed rally last week was also the case as prices traded 20 cents higher early in the week only to close 19 cents lower after everything was said and done. The spread of KCBT against CBOT wheat has remained around 40 cents and we have not participated in a trade of late, but it is still on our radar and on a move back into the thirties, we will explore this for clients.

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Because the Northern Hemisphere is by far the larger consumer of coffee, consumption declines into summer there. But that consumption decline coincides with Brazil's harvest. The combination of both supply and demand pressures has regularly driven prices lower from late May through June and into first deliveries against July futures. The wildcard is a possibility of a freeze in S. America. July coffee closed above the 40 day moving average and up 7 cents on the week but ran into resistance at the 140 level. We do not expect prices to move much higher and are still looking for a long entry closer to 120 for clients. 

For the 2008-2009 ending stocks the USDA has sugar at 1.336 million tons, down from 1.757 million tons in 2007-2008. This in addition to record high energy prices helped sugar last week with October gaining 41 ticks and closing 66 off its recent lows. It again may be premature but it appears the stochastic and MACD are bouncing off oversold levels. As we have voiced, we are getting long sugar for our customers with futures and options. Hind sight being 20/20 we may have been a bit early but we see value in being long if you are patient as we expect to see price gain significantly in coming months.

For the 2008-2009 ending stocks the USDA has cotton at 5.60 million bales, down from 9.90 million bales in 2007-2008. That puts the 2009 ending stocks to use ratio at 30%. Globally the 2009 ending stocks estimate is expected to fall from 62.0 to 56.0 million bales, or 44% of annual use. Last week we got long December futures and instituted long options strategies for clients looking for the 200 day moving average just above 76 to hold and prices to move higher. The fight for acreage should be felt in cotton in coming months as farmers most likely will choose to plant more profitable crops.

Much like sugar lumber may be a market that tests your patience, but if looking for a longer term position trade, as we have said in previous commentaries, lumber appears to be basing out for a potential move higher. We are not implying that the housing market has turned, but as long as July lumber holds it recent lows we are ok holding longs for clients. Prices last week gained $6 and closed above the 50 day moving average, our initial target remains a revisit of the 270 level.

The USDA kept its estimate of the 2007-2008 Florida orange crop at 169 million boxes, but increased the projected juice yield from 1.63 to 1.65 gallons per box. July orange juice ended up 1/4 cent higher at $1.2150. We still see no viable trade here for clients.

Cocoa is looking for direction and for now we would stay clear. We were looking for a further setback which appeared to be starting, but buyers came in around the 2575 level and we aren’t interested in getting long unless prices get closer to 2550 on July. For now support emerges at 2600 with resistance at 2800.

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Indecision is still present in gold but needless to say prices moved north last week with June gaining $26.60, ending the week just below the 20 day moving average at $885.80.  Prices have moved nearly 5% off the recent lows, but we are not yet convinced that those levels will hold. Expanding upon our comments from last week we are lightly advising long option strategies out till December but before getting any significant length we would let the market confirm that a push higher in prices has resumed. If our first target on June of $920 is achieved in coming sessions we will probably advise adding to the longs. Many have tried to pick a top in energies and although we will not join that crowd if prices in energy back off gold may experience some panic selling, so be alert.

July silver is dancing around the support trend line dating back to August of last year. On a daily basis a 50 cent range has become commonplace, but we have not closed above $17 since April 28th and without a convincing assault above that level early this week, prices may turn southward. Longer term we expect prices to re-visit the $20 plus level but shorter term it is a coin toss as we expect silver to look for leadership from outside markets like gold, oil, and the dollar. If we do get a move back above the $17.25 recent consolidation level, we would expect that to be followed by a move back to $18 where we would look to roll out of our July position for clients and go out to December.

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.