For November 10th– November 14th 2008

By: Matthew Bradbard

If you haven't heard by now, the results are in and Barack Obama was elected the 44th President of the United States and the markets are still trying to figure out if this is good or bad. Without talking politics my overall feeling is that change is good and necessary; we will need to see a lot of transformations to see brighter days ahead. Regardless of the outcome, whoever is at the helm will face colossal challenges ahead to deal with the current slumping economy. The first step will be to instill confidence the markets have been lacking. If we in fact dodge a depression and just experience a recession, we could see money flow back into the system , anxiety of investors diminish, volatility die down and see equities, bonds, and commodities actually trade on their own fundamentals.

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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The US Department of Energy said that crude oil supplies were unchanged at 311.9 million barrels. December crude was $6.33 lower closing just above $61/barrel after briefly trading below $60 for the first time since March 07’. Looking at the weekly charts there is a bearish engulfing candle so I would not rule out lower pricing. Current support comes in at 59.50 followed by 56.00 with resistance at 65.00 followed by 67.50.  An analyst recently stated that “the only support for the oil market is that we’ve gotten awfully cheap, awfully quick” which seems elementary, but the point is nothing goes down in a straight line indefinitely.

Supplies of gasoline were up 1.1 million barrels while heating oil supplies were up 1.7 million barrels. Over the past four weeks, gasoline demand was down 2.3% from a year ago and distillate demand was down 4.8% from a year ago. December heating oil lost 10.58 cents last week, but on a closing basis remained above the lows from the previous 2 weeks. Buying has come in between 1.90/1.95 for the last 3 weeks. We may see a trade back to the top of the recent trading range at 2.15/2.20, but first we must see a close above the 20 day moving average at 2.0876 to confirm an interim bottom. December RBOB gave up 14.64 cents and much like Crude there is a bearish engulfing candle evident on the weekly chart.  Last week we printed a new contract low, the trend remains down until we get a close back above 1.60/gallon.

The U.S. Department of Energy said that underground supplies of natural gas were up 12 billion cubic feet last week to 3.405 trillion cubic feet. Supplies are now down 4% from a year ago and up 2% from the 5 year average. December natural gas had a positive week gaining 7 cents, adding onto the 37 cent advance the prior week. We had not seen 2 consecutive positive weeks since late June when prices peaked above $14. Resistance on December is seen at 7.44 followed by 7.82 and then 8.20. Support comes in between 6.40 and 6.45. We are still looking for a move up to 8.00 in the coming weeks.

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After the close Friday, the USDA estimated the week's beef production at 488.9 million pounds, down 3.6% from a year ago. December live cattle lost 35 ticks last week which is a little disappointing after the previous week’s 430 point increase. We are thinking the lows have been established and will be looking for the gap at 97.47 to be filled in coming weeks. Support is seen at 91.41 with resistance at 94.25.  January feeder cattle were 73 ticks higher, but we were expecting a more impressive showing looking for more follow through after the previous weeks 475 point advance. Again we feel the lows have been established and remain long via options with clients and the 110 calls; paying approximately 100 points with an objective of 230 points. We would suggest buying futures on dips. Support is at 98.00 followed by 97.40, the 20 day moving average. Resistance is seen at last week’s high at 101.00.

Pork production was estimated at 463.8 million pounds, down 3.4% from a year ago. December hogs gained 20 ticks on the week while new contract lows were rejected. We see support at 53.90 with resistance coming in at 55.90 followed by 56.50/57.00. We have started to buy April 09’ 90 cent calls for 50 points or $200 looking for an eventual move to $800.

In their weekly reports, Glenn Grimes and Ron Plain from the University of Missouri noted that beef demand at the consumer level was down 4.1% in the first three quarters of 2008 from a year ago while pork demand was down 3.8%. This is really the story and we will need to see demand pick up to see a sustainable move to higher territory for pork and beef prices.

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Stocks: The Dow ended last week down 381 points or 4.1% at 8944 after it had closed 11.3% higher the previous week. Volatility was the name of the game as the Dow experienced its largest ever election day rally only to fall the next day by the largest percentage margin ever.  The two day route last week on Wednesday and Thursday is the worst 2 day performance since 87’.  The S&P gave back 38 points or 3.9% to 931. The NASDAQ retreated 74 points or 4.3% to 1647. The recent rally and subsequent sell off suggests investors are hoping that the worst is behind us, but are aware of the many economic challenges ahead. We would continue to stay defensive hoping for the best but prepared for the worse. There are strong seasonal tendencies that support a further advancement in equities but there may be two much working against that in the current environment.

Bonds: The US Labor Department said that the unemployment rate increased from 6.1% to 6.5% in October, the highest in fourteen years. Non-farm payrolls declined 240,000 in October. So far in 2008, there has been a net loss of 1.18 million jobs. This is just the latest sign that the economy is far from out of the woods. What makes this more of a challenge is the directionless volatile movement. Over the last 4 weeks 30-yr bonds have moved down 3’18 points, up 3’30.5 points, down 4’07 points, and then last week up 3’07 points. We have seen back and forth action between 112’15 and 117’00 now for the last 4 weeks and if this pattern holds true we should get a move 3 ½ points lower this week. We are on the sidelines with clients. Similar patterns are apparent in 10-yr notes but to a lesser extreme as we are on the sidelines here as well.  The short end of the curve in the Euro-dollar is approaching the contract highs seen in March when interest rates were at 2.25% so being that we feel rates are going below 1.0% the trend should remain up. With further interest rate cuts we expect a tremendous selling opportunity to emerge short futures and/or long puts.

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The Bank of England surprised analysts cutting their interest rate from 4.50% to 3.00%, the biggest cut since 1992 to the lowest rate since 1955. The Pound lost 363 ticks last week and looks like we are moving lower once again. Last week prices were unable to maintain levels above 1.6100 and we are expecting prices to make their way back to 1.5250, the lows from the 2 previous weeks.

The European Central Bank cut its rate from 3.75% to 3.25%, as expected. The December contract picked up just 17 ticks last week with just over a 3 ½ cent trading range. Selling is present on trades above 130.  On a break of the double bottom at 1.2325 from 2 weeks ago look for a trade down to 117/120. 

As support on the December Swissie gave way at .8500 prices moved lower. We are on the sidelines with a bearish bias and now what was support should become resistance. December lost 149 ticks last week after printing a new contract low on a spike lower on Thursday.  

The Reserve Bank of Australia reduced its interest rate from 6.00% to 5.25%, lower than expected in an effort to keep the economy going. It was the third reduction this year. The December Australian dollar closed up 63 ticks and has been higher for the last 2 weeks. As long as the .6520 level holds we would expect a trade up to .7220 which would be the 50% Fibonacci retracement off the last 2 month’s high and low.
The December yen was 56 ticks higher last week as the trend line has held for the last 4 weeks. Prices on the week closed just above the 9 day moving average and with a close above 1.0280 this week we should see a further advance to 1.05. On a futures play we would suggest scaling into longs around 1.0050. We have recommended to clients as of last week to be a buyer of the December 08’ 1.00/1.03 for $1270 with a $2500 objective and the 1.02/1.05 for $1000 with an objective of $2250.

The Loonie finished last week 124 ticks higher and we reached our objective from the previous week at .8700. The commodity currencies including the Loonie, Kiwi, and Aussie have been positive the last 2 weeks and we would expect these currencies to continue to trade with one another. We are on the sidelines with clients and see support at.8260 followed by .8150 with resistance at .8550 followed by .8700.
The US dollar was 11 ticks higher last week, however for the last 3 weeks we have been unable to break above 88.00 or below 85.00 on a closing basis. It appears the recent 18% advance is running out of gas, but do not discount that the flight to the dollar still remains a popular trade. We would advise playing the 300 point trading range buying near 85.00 and selling near 88.00 until we see a break of those levels.  We continue to have a bearish bias especially on the fundamentals in the US dollar alone. With further rate cuts expected here domestically in December we are still expecting the dollar to lose some of its luster.

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Corn: December corn lost 22 ¼ cents last week. Looking at the daily charts for the last 4 weeks we have largely stayed contained between 3.75 and 4.25 on a closing basis. On a trade below 3.64 look for a trade down to 3.40 and we would be a buyer with both hands. We would need to see a trade above 4.25 to gain enough momentum to take prices back to 5.00 which we do feel is a foregone conclusion, but “when” is the question. On Monday the USDA will release its monthly crop report. The average estimate for the corn crop is 12.066 b.b. that is up from the October estimate of 12.033. The corn carryout is expected to be 1.16 b.b. vs. a previous estimate of 1.088. This should keep the stocks to use ratio below 10%. Outside of recent strategies we have mentioned in corn, we also like this idea; long 3 May 5.00 calls and short the futures. On a move lower cover the futures and hold onto the options. On a move higher you should be almost neutral as the delta on the options should be approximately 100%. 

Beans: January soybeans were 8 ¾ cent slower last week. Sellers have come in between 9.30 and 9.60 for the last 4 weeks. We cannot rule out a trade down to 8.70, but are convinced that the low at 8.38 ½ will hold.  Monday’s USDA crop report is expected to be friendly with an average guess of production at 2.916 b.b.  off 22 m.b. from the last report. Some think the ending stocks figure could be a bullish surprise as they increased demand due to China’s buying recently to help them build their soybean reserves. We are friendly to beans and have options and futures strategies in January and May 09’ beans, inquire for specific details.

Wheat: December CBOT wheat gave up 17 ¾ last week, although we could be forming a bottom as the last 2 weeks we have seen higher highs and higher lows. 5.00 should serve as support with resistance coming in between 5.55 and 5.60. KCBOT wheat only lost 7 ¾ cents on the week as the spread we have been advising for the past several weeks continues to inch higher and is getting closer to our 50 cent target.  Support comes in between 5.45 and 5.50 with resistance at 5.85 followed by 6.05. Much like CBOT wheat you can also see higher highs and higher lows over the last 2 weeks in KCBOT. More than just the USDA, we are paying closer attention to reports on crop size and conditions across the globe. Most recently Australia's Bureau of Agricultural and Resources Economics reduced its latest estimate of the wheat crop from 22.5 to 19.9 million tons, due to dry weather.

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March cotton fell 3.40 cents last week to a fresh 4 year low, hurt by the slowing outlook for global demand. We have now shed 40% in the last 3 months and still see no signs of a low. We could see some help from the USDA report on Monday, but the fact that we are so far below the cost of production and prices still have been unable to hold tells a lot about the lack of demand. Exports have been non-existent and it is entirely possible that the US may price themselves out of the cotton market if something doesn’t give.
Hurricane Paloma, the most recent hurricane has awakened the orange juice market and may have attributed to last week’s 6.05 cent advance. We are still expecting a trade back to $1 and on a close above 90 cents we could get there in quick fashion. On January, 80 cents should remain as support and this commodity ought to remain on your radar because it is one of the few that has been able to hold up in recent weeks.
December coffee closed down 1.90 cents at $112.10 hurt by fears of slow global demand ahead. Support exists at 110.75 followed by 109.00 with resistance at 117.40 followed by 121.25. Our clients currently own March 135 calls and have positions in a fence strategy short the 95 puts and long the 125 calls looking to trade out of both strategies on a move to 125/130 in the coming weeks.
Is the Ivory Coast's cocoa crop in trouble? Reuter’s news reported that exporters are telling them that damp conditions and black pod disease have reduced the harvest estimate by more than 8% and hurt the quality of the beans that do get harvested. December cocoa lost $129 last week and has been down 5 of the last 6 weeks. We have no trade recommendation for now and see support at 1900 with resistance at 2050.
March 09’ sugar lost 11 ticks last week but that was after gaining 127 the previous week. We ran into resistance early in the week at the 50 day moving average. Support for now comes in at 11.71 followed by 11.41. We see resistance just above 13.00. Last week we traded out of the 14 cent sbk9 calls and we will look to re-enter these for clients if the price is right this week. We are still holding the March 09’ 11/14 and 12/15 back spreads and for new entries looking for futures exposure we have 2 suggestions: get long March 09’ with put protection or buy 3 13.50 March 09’ calls and go short the futures. Contact us for clarification.

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December silver gained 12 cents last week closing just below $10/ounce. Over the last 2 weeks prices have reached $10.60, however we have been incapable of maintaining that level. Silver still looks like a buy on the weekly charts and we are looking at the big picture over the next few months wanting to have long exposure with clients. It appears for the last 3 weeks silver is building a base and as we have previously suggested, we are accumulating mini-futures in addition to $5 bull call spreads in December 09’. For a further explanation please read our most recent special report on silver by visiting our website. In the short term, we are expecting a trade back to the 50 day moving average at $11.20 followed by an advance to $12.70 by year’s end. We cannot entirely rule out a retest of the lows so tread lightly.

December gold was $7.20 higher last week supported from cuts in interest rates from several central banks, but gains were restricted by a strong US dollar and overall poor economic expectations. Volumes have been light and moves have been exaggerated. Prices remained within the 680-780 trading range we had spoken to last week. At this point we have no interest in being long or short and prefer silver for our clients. On a break of 714 in December look for lower pricing. We would need to see a close above 770 to assume a trade back over 800/ounce.

Palladium should remain on your radar and should be bought on dips. December gained $22.50 last week and $49.55 in the last 2 weeks gaining just over 29%. We are still expecting to see prices make there way to 280/300 in coming weeks. Remember there are no options so if in palladium you are in futures.

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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.