For November 17th– November 21st 2008

By: Matthew Bradbard

It’s tough to keep up with the day to day happenings, but the most important recent events as we see it are the re-structuring of the TARP, the announcement of a Chinese stimulus plan, the G-20 meeting, the November 15th hedge fund redemption deadline, and the presidential election. There is so much more than just these events that will have an impact, however these are the most pressing issues. We suggest taking a step back, assessing your current portfolio and seeing what has and hasn’t worked of late to help formulate better judgments on future decisions. We maintain that investors with a longer time frame should be handsomely rewarded by scaling into longs in a select number of commodities.

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 reported crude oil supplies were unchanged at 311.9 million barrels. The DOE said that refinery use was down from 85.3% to 84.6% of capacity last week. Over the past four weeks gasoline demand was down 1.9% from a year ago and distillate demand was down 4.6% from a year ago. The International Energy Agency lowered its forecast of 2009 world oil demand by 670,000 barrels per day to 86.5 million barrels per day. That is still more than the US Energy Department's forecast for 85.9 million barrels per day. December crude oil finished down $4.76 to close below $60/barrel for the first time in 22 months. From here, support is seen at $55 with resistance now at $60. Reuter’s news reported that OPEC officials will meet in Cairo on November 29th to talk about falling oil prices. We have no exposure with clients currently.

Supplies of gasoline were up 2.0 million barrels in spite of lower imports while heating oil supplies were up 600,000 thousand barrels. December RBOB closed 11.32 cents lower on the week. 1.38 should serve as resistance with support at last week’s low at 1.21. We expect a rally back to 1.60 when this market starts moving higher, but it may be in the next contract month. December heating oil lost virtually 15 cents closing at 1.8318. 1.97/2.00 should serve as resistance with support coming in at last week’s low at 1.7919. Both distillates have been down 6 of the last 7 weeks so the trend remains down.

The US Department of Energy said that underground supplies of natural gas were up 62 billion cubic feet to 3.467 trillion cubic feet. Supplies are now down 2.0% from a year ago, but up 3.5% from the five-year average. December natural gas was down 82 cents last week. The 11.5% drop last week was disappointing after 2 positive weeks, we felt we had turned the corner, I guess not yet. The $6 level should serve as strong support. We do still anticipate $8, but it may take a little longer as the market is torn between the rising levels of gas in storage, the economic downturn and colder weather forecasts moving into the Northeast and Midwest.

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After the close Friday, the USDA estimated the week's beef production at 482.8 million pounds, down 5.1% from a year ago. The US Meat Export Federation said that US beef plus variety meat exports were up 33% in the first nine months of 2008 from a year ago. December live cattle lost 3.25 cents last week trading lower all 5 sessions. The 90 cent level should hold, if not look for 87.50 this week. 91.75 will operate as resistance. We are positioned on the sidelines but will be looking for an entry to get long in the coming weeks, most likely in the February contract. December feeder cattle lost 3.825 cents last week after rolling over from over bought levels. Support comes in at 95.00 with resistance between 97.00/98.00. We expect sideways action as the market tries to determine what direction is right considering the current state of affairs. We own January 110 calls for clients that we purchased for 100 points and have orders in for 230 points.

Pork production was estimated at 465.3 million pounds, down 3.6% from a year ago. The US Meat Export Federation put pork plus variety meat exports up 70% in the first nine months from a year ago. December hogs ended the week up 47 ticks to register a positive showing for 2 consecutive weeks which had not happened since August. We have started to buy 90 cent April 09’ calls for clients looking for a move higher over the next few months. In the short-term, expect the gap that was made in late October to be filled in December at 57.40. The 9 day moving average at 55.15 should serve as support.

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Stocks: The Dow ended the week down 447 points or 5.0% at 8497. The S&P 500 lost 58 points or 6.2% to 873 while the NASDAQ fell 131 points or 7.9% to 1517. Although we did get a test of the recent lows, we would expect to see several more retests before we get any meaningful rally. The confidence needed is still severely lacking and the fact that Henry Paulsen last week changed the rules in the middle of the game does not help the situation. The government is now reassessing how the $700 billion should be allocated. Continue to be defensive, but predicting the direction is fruitless. We expect volatility and until the dust settles it will be common to see 5-10% swings on a daily and weekly basis. 

Bonds: The recent pattern we spoke to last week was busted last week as prices in the debt complex traded higher and as long as pressure is asserted in equities the path of least resistance for the 10-yr and 30-yr should be up. The US Commerce Department said that retail sales were down 2.8% in October, weaker than expected and the largest monthly drop on record. This reinforced fears about the depth of the economic slowdown. Being that the underlying economy remains challenged, the flight to Treasuries makes sense. The debt market also got a boost from comments from Federal Reserve Chairman Ben Bernanke who suggested that further rate cuts remain an option.

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The Bank of England said that the economy is already contracting and they now expect real GDP to be down 2.0% in the first half of 2009. King also suggested that the BOE will have to lower rates further. The December pound lost over 8 cents last week, the lowest spot close in over six years. Once the 1.5225 level gave way the flood gates opened and there is now talk of further losses to 1.40. Sell rallies that are contained by 1.50.

For the last 4 weeks trades below 1.25 have been bought in the December Euro. Support at the double bottom from 3 weeks ago at 1.2325 should continue to hold. After a 5 cent range last week the Euro only managed a gain of 4 ticks. 1.2925/2950 has served as resistance for the last 3 weeks and should continue moving forward. We favor a move lower, but will suggest watching from the sidelines.
The December Swissie was 50 ticks lower last week and has lost ground for the last 2 weeks. .8325 should act as support with resistance coming in at the 9 day moving average at .8489. 

The Aussie lost 179 ticks last week and even with multiple RBA interventions this currency has been at best treading water. With further rate cuts to come although we do think higher ground will be reached for now we could see a lower trade; stand aside. .6950 should act as resistance with first support at .6360 followed by .6300.
The December yen closed up 149 ticks at 1.0259, as the BOJ .30% interest rate looks closer to the rates of other central banks while the world's recession deepens. Prices are still holding the trend line from mid-September which currently comes in at 1.0150. Look for equities and the risk aversion trade to determine the direction here. Last week we hit and exceeded our objective at 1.05. We are currently holding the 3 cent call spreads we recommended last week for clients and will look for an exit this week on a trade up to 1.0625 and potentially 1.08. As long as .9950 holds on a closing basis we will remain friendly towards the yen.

The December Canadian dollar fell 265 ticks with talk that the BOC will probably cut interest rates again sometime soon. .8080 serves as the 61.8% Fibonacci retracement level from the recent H/L. If that level holds look for a trade up to .8330, on a break of that level expect .7900. Much of this move will be dictated by the direction of energies and metals.

The US dollar index closed 72 ticks higher last week, but pared gains by closing 1.85 cents off its weekly high. For the past 4 weeks prices have traded at or above 87.40, although have been unable to hold higher ground. As we suggested last week selling around the 88.00 level, so far so good. We are now looking for a move down to 83.75 in December, but would be mindful that we may run into some buying around 85.00 so stay alert. If not trading the dollar at least monitor its movement as nearly all commodities are looking for guidance from the almighty buck.

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Corn: New lows were rejected in December 08’ corn as last week ended only 3 cents lower at 3.80 ¼. We have a few different propositions in corn, all in the May contract, either buying calls, outrights or call spreads depending on your bullishness. Shorting the futures and buying 3 May 4.80 calls looking to cover the short on a down move to help finance the cost of the options. We are expecting by year’s end to see a move back to $5 and would expect to see a move back to 4.25 sometime in December. In the last 2 weeks we have seen short selling reduced with profit taking on breaks rather than the follow through selling we experienced in prior weeks. Although we cannot rule out one more attempt to the downside, we favor buying dips; buying as close to 3.60 as possible is how we would suggest playing.

Beans: January soybeans lost 39 ¼ cents last week to close at 8.96. We would be a buyer on dips here as well looking to get long between 8.70 and 8.80 via futures in January or buying call options in May. While 8.70 should serve as support we see resistance coming in at 9.25. As we have voiced in previous weeks we are looking for a move back to 10.50 in the near future; either late 08’or early 09’. Demand looks to remain good through January when China will get a clearer picture from South America. Like corn, soybeans too have one week left to make an exhaustion low before month’s end and profit taking sets in most likely taking prices higher. 

Wheat: December CBOT wheat picked up 26 cents last week and although it is yet to be determined this could be the beginning of the next leg higher in prices. We suggest being a buyer between 5.20 and 5.35 looking for a move back to 6.80 over the next several weeks, but one must be willing to risk a challenge of 5.00. December KCBOT gained 25 cents on the week. On KCBOT we would look to be a buyer between 5.50 and 5.65 and be willing to risk a challenge of 5.40 on an eventual move back to 7.00. The volume has also picked up which generally signals a turn in trend. The December KCBOT/CBOT spread traded to the high 40’s last week and we suggested an exit to clients. It appears we will get a trade back to 25-30 cent premium to KCBOT where we will re-visit the idea, but instead look at the March contracts.  

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December cocoa picked up $96 last week largely believed to be short covering. 2050 should serve as resistance with 1950 serving as support. Action will largely be governed by the short term direction of the US dollar, on further dollar selling look for cocoa to make its way to 2190.

March 09’ sugar lost 55 ticks last week to close back below 12 cents once again. We suggested clients to re-enter the May 09’ 14 cent calls that we just exited on the last advance above 13 cents. We were able to get these bought between $575-675 and if that opportunity still existed this week we would still be a buyer. If 11.29 holds as support we should see a relatively quick trade back to 12.50/13.00, but if it was to give way we would most likely find sugar back at 10.50 in March.  Talking to floor traders in the options pit, which I do on a daily basis, there is a lot of interest in and out of the money long dated calls as many big traders are looking for a large move higher in sugar, but are unclear on the timing.

March 09’ cotton gave up an additional 3 ½ cents last week to trade near 6 ½ year lows. Prices have now been lower 10 of the last 11 weeks and without a pick up in demand the low 30 cent level seems attainable. Cotton will be one hell of a buy when prices bottom, but who knows when that level will be determined. One suggestion if you want some cotton exposure is to short March futures while simultaneously buying 3 March 50 cent calls for approximately 180 points each. That would be an outlay of about $2700 and we would suggest covering the short futures on a 3 1/2 to 5 cent profit and holding the options looking for an eventual move back to 50 cents.

January orange juice lost 3.60 cents last week closing just under 83 cents. For the last 4 weeks 80 cents has been able to support on a closing basis. We would need to see a trade back above 87 cents to confirm prices are making there way back to 1.00; which is our near term target.

Coffee prices on the December contract lost 2 cents last week closing lower all 5 sessions. 109.00 should support while 115.00 has contained rallies. We are still trying to trade out of the 95/125 fence options we purchased for clients 2 weeks ago. We paid 4 cents and will be looking for an exit of 6-7 cents on a move back to the 116.50 area this week. Although price may remain range bound in the near term coffee has the potential to make a considerable move in 2009. We will re-visit this in future commentaries.

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For the last 5 weeks December 08’ silver has been trading between 8.50 and 10.50. Volatility has been present as the average weekly trading range over that same time frame has been $1.77 or $8,850 per 5,000 ounce futures contract. It appears silver is building a base and we continue to advise clients to acquire March mini-futures until a bottom is confirmed and then we will shift to the standard contract.  Additionally, we will continue to build a position in the December 09’ $5 bull call spreads we have been preaching about for the last 3 weeks. http://www.mbwealth.com/articles/hihosilver.pdf

After a $70 trading range on the December 08’ gold contract prices managed to close only $2.70 higher on the week. Over the last 3 weeks attempted moves to $770 have failed to hold so it appears buying interest has narrowed or traders are selling rallies. $700 should serve as solid support on pullbacks.  As we have made clear we prefer silver to gold, all things considered. There seems to be good open interest in the 740 puts so that level should serve as a magnet into expiration this Thursday.
 
It looks like Asian demand for copper is slowing dramatically. London inventories of copper were up 4,625 tons to 270,100 tons last week, the most in over four and a half years. December copper ended only 2 cents lower last week but prices have lost 55% in the last 4 months. If and when copper prices stabilize it should mean that the economy has factored in the worse as copper is typically used as a gauge of the overall economy. On another leg down in copper look for most commodities to lose ground.

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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.