MB Wealth's Weekly Commentary 1-888-920-9997
Energies Livestock Financials Currencies Grains Softs Metals
For October 27th– October 31st 2008
By: Matthew Bradbard The most recent pressure in the commodities market is attributed to the fear of a severe global recession. Even China is slowing, as China's Bureau of Statistics said that real GDP was up an annual rate of 9.0% in Q3, down from an annual rate of 10.1% in Q2. Furthermore, as long as the forced liquidation continues we will continue to get erratic movement, so be cautious picking your points. There is no telling where exactly we are in this ongoing liquidation process, but what we do know is that it is a finite event. When the selling finally stops, we will be left with a US dollar that is substantially overvalued due to all the repatriation of assets, while many commodity prices will be severely undervalued. The market should react to these circumstances with a pronounced countertrend move, during which a falling dollar is likely to boost nominal prices of commodities, in spite of their fundamentals. To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ December Crude closed $8.55 lower on the week and at levels not seen since February 07’. Prices have now plunged $84 off the record highs or 56% in just over 3 months. Even with OPEC cutting 1.5 million barrels, the path of least resistance remains down with prices potentially reaching the $50 level, unless we see a break in the US dollar. We said last week that we expected $65 to hold, but after further research we expect $65 to be an equilibrium level in the weeks ahead, we cannot currently rule out a quick probe lower. We don’t think lower levels will be sustainable and would be a buyer on a further break. December heating oil reached a new contract low trading 19.91 cents lower last week, closing below $2/gallon. If energy prices turn higher, which we do expect as demands picks up for the winter, heating oil could bounce significantly. For now, we are content on the sidelines watching prices move south. RBOB for December was 21.03 cents lower last week closing below $1.50/gallon for the first time in 08’. Prices have lost $1.12 in the last 4 weeks, but the frustrating thing is consumers are not seeing a similar beak in prices at the pump. Although prices have come off at the wholesale level on many foods and energies, the consumer is still feeling the pinch. Much like heating oil we are content on the sidelines on RBOB for the time being. After a breach of the 9 day moving average, the flood gates opened and sell orders hit the natural gas market. On the weekly chart a bearish engulfing candle is evident, so we may not have seen an interim low as of yet. December natural gas was 69 cents lower closing at $6.46 on the week. With warmer weather projected and a build in inventories prices are currently below the cost of production with many of the newer projects that have come on line. We expect these prices to be short lived and are suggesting that we will get a quick bounce to at least $8 relatively soon. On this bounce we would look to trade out of the December calls, most likely at a small loss for those who averaged in as we suggested in past commentaries. We like the idea of being long, but right now you are not trading natural gas you are trading the lack of confidence, so until we see more stabilization we will be sidelined here as well. ___________________________________________________________________ After the close Friday, the USDA estimated the week's beef production at 511.0 million pounds, down 3.5% from a year ago. December cattle closed down 5.35 at a new contract low of 87.55. Prices have now been down 9 weeks in a row and have lost 24% in the last 4 months. The good news is the cash market is starting to stabilize according to the people I am speaking to. Last week January feeder cattle were 4.70 lower and now have dropped 21% in the last 2 months. The only viable play we see is purchasing the January 110 calls for $350 o/b looking to liquidate for $1000-1200, but you may be there for a while. Do not buy aggressively because a bottom is yet to be determined. Last week pork production was estimated at 459.4 million pounds, down 1.8% from a year ago. Additionally, the USDA said that there were 21.4 million pounds of frozen pork bellies in storage on September 30th, up 26% from a year ago. Frozen pork totaled 507.3 million pounds, up 5% from a year ago. December hogs ended the week 1.80 higher with current support at 56.00 and resistance at 60.00. Historically December hogs are moving lower at the tail end of October so we are not expecting much. ____________________________________________________________________ Stocks: The VIX or fear gauge is now at record levels and has moved 400% higher since the beginning of September. We are experiencing forced selling as lower prices lead to more selling since the equities globally got trampled last week. The Dow ended the week 5.4% lower at 8379, below the October 10th low and over 40% down from its October peak. The S&P fell 6.8% to close at 877, its lowest close since April 03’. The NASDAQ fell 9.3% on the week to 1552, down almost 46% from its multi-year high last year. As bad as things are here domestically, markets around the globe have been hit harder. I don’t know how comforting that is to those of you who have lost a good chunk of your 401(k) and retirement. I will not say I told you so, but I again will beat the drum and advise stock investors to use options to hedge their portfolios as the pain may not be over. The good news is that in the short term, November into the beginning of 09’, we expect a significant rally. I have spoken to many stock traders that are citing lunar cycles, technical waves, old wives tales, etc. that are looking for an additional 20-30% decline thereafter. We suggest looking at managed futures as a way to diversify one’s portfolio, suggesting 5-20% of their portfolio becomes allocated between 2-4 different CTA’s. For further details or for us to suggest a customized allocation contact us. http://mbwealth.com/cta/risk.html Bonds: Based on the futures market the FOMC is certain to cut rates 25 basis points to 1.25%, while there is a 92% probability of a 50 basis point cut to 1.0% when the Fed meets on Wednesday. As the distress level amplify in global markets the likelihood of further rate cuts increase. From the short end to the long end the debt market could go either way and we will wait for a clearer picture before making any recommendation and are flat in this complex for our clients currently. ____________________________________________________________________ Caution is warranted as a recent currency strategists pointed out last week “what we see in just a few hours of trading is typically what we see in a quarter.” After breaking below the 1.33 level that we thought would hold as support, the December Euro fell precipitously to close the week down 7.93 cents and has now fallen 20 cents in the last 4 weeks. Further interest rate cuts are most likely in the not too distant future. While the Euro may continue lower, potentially to 120, we would suggest looking for opportunities elsewhere. The Bank of Canada reduced its interest rate from 2.50% to 2.25% in an effort to help its slowing economy last week. The Loonie has been down 18 of the last 20 days and as long as difficulty exists with metals and energies there may not be much hope of a sustained recovery. The 6 cent loss last week has put this currency in extremely over sold territory. If you bough the 88 calls we had suggested last week we would advise using a bounce to .8100/.8200 in the futures to cut losses. Australia's economy is in pretty good shape compared to the rest of the world, but you wouldn't know that by looking at its currency. The December Australian dollar fell over 7 cents to a new contract low of .6199 last week. Our previous bullish sentiment was incorrect and although down the road we expect brighter days, as long as commodities are weak and the carry trade unwind persists the Aussie may be under pressure. Bank of England governor Mervyn King told business leaders in a speech last week that the financial system came as close to collapse 2 weeks ago as it had in 90 years. He also led commentators to believe that cuts in the interest rate are on the way. Much of this may already be priced into the Pound as it has depreciated considerably; losing 13.90 cents or 8.0% last week alone. At one point last Friday prices were off 10 cents. We may get a bounce from here, but rallies should be sold. Resistance is 7 cents higher on the December contract with support 6 cents lower, so tread lightly. The December Swiss franc was 2.32 cents lower last week and may make an attempt at the contract low at .8373. We expect longer term that the Swiss currency will start to act more as a flight to quality and are not nearly as bearish on our outlook as compared to other European currencies. Similar to how we have seen a flow of money to the dollar and the yen, we should start to see monies flow into the Swiss franc. We are not calling a bottom, but at a minimum we should see less pressure here as long as the anxiety carries on in global economies. The weekly trading range on the December yen was over 12 cents which in dollar terms is $15,000 per contract. Since the end of August we have seen this contract appreciate 15 ½ cents, as the carry trade unwind is starting to accelerate taking the yen to a 13 year high. Down the road we expect a revisit of the110 level and ultimately a trade up to 120 +, but if we get a bounce in equities in the immediate future look for a correction near term. We have hit our objective on all our recent longs and have recommended clients to move to the sidelines, wait for a pullback to get long again. The yen has been extremely volatile, so before putting on a position have risk parameters and a profit objective. See prior commentaries. The BOJ may cut rates from 0.50% this week as difficult as that is to believe. The US dollar soared to new contract highs trading 4 cents higher last week to levels not seen since April 06’. With a likely cut in rates this week by the Fed it may take the wind out of the sails temporarily, however the dollar does look like it has enough momentum to see 90 cents in coming weeks. As long as the repatriation of money into dollars continues, the path of least resistance is up. Don’t fight this trend as it has been relentless. Yes, we think it has been too much too quick, but markets are far from rationale in the current environment. Continue to monitor the dollar to guide you on other transactions. ____________________________________________________________________ Corn: We posted an inside week on December 08’ corn last week which essentially means a lower high and a higher high. Prices were 31 ¼ cents lower on the week as prices have traded down for 6 consecutive weeks. We are still partial to May call spreads and for those who believe a bottom is near you could buy May outright calls. We are incapable of calling an exact bottom, but based on the surge in recent weeks on exports we feel it is near and therefore a good bet to start accumulating these positions. We are currently at 3.89 on the weekly stochastic, which we interpret as too oversold so expect a bounce. Current support comes in on the December 08’contract between $3.60/3.70 with resistance at $4. On a breach of $3.60 a trade to $3.25 is possible, so recognize if getting long here one may endure some pain, although we feel it will be temporary. We still suggest looking for guidance from outside forces. Beans: Much like corn soybeans also had an inside week. January soybeans were 35 ¾ cents lower closing at $8.67. The low from 2 weeks ago at $8.38 ¼ should serve as support with resistance between $9.35/50. We have been recommending May calls spreads in soybeans and similar to corn if one believes we are close to a bottom at these levels you can buy May outright. We have also suggested that if May calls spreads were bought within the last 3 weeks and you are up over 60-70% on the top leg, to buy back the higher strikes and hold onto the lower strikes looking to trade out on a move back above $11 in the coming months. Recent export data has suggested foreign demand remains strong. Although early, we still like the play of buying January and March call options on soy meal as well. Soybeans have tended to enjoy a post-harvest rally into the New Year as producer marketing slows even as processors crush at capacity for soy meal. Believe it or not December soy meal actually traded higher by $10 last week and we expect to see a move of $50+ in the coming weeks. The Minneapolis Grain exchange will close its trading floor and go completely electronic starting December 19. Wheat: December CBOT wheat was 48 ¾ cents lower last week with support now at $4.90 and resistance at $5.50. December KCBOT wheat was 48 cents lower with next support is $5.15 with resistance at $6. We have no suggestion on a directional trade either higher or lower, but still like the KCBOT/CBOT spread if it can be bought in the high 20’s still with an objective of 50 cent premium to KCBOT. ____________________________________________________________________ December coffee was 8.35 cents lower last week to a new contract low. Besides the concern for demand, there has been little market moving news in this market. The weather conditions have been near ideal as the Brazilian crop is currently going through its flowering period. Stocks in certified warehouses have also been increasing. We have light exposure for customers long March 09’ call options on a seasonal trade, but until we get a trade back over 122.00 in December you are catching a falling knife. ____________________________________________________________________ December silver only lost 5 cents last week, but traded as high as $10.18 and as low as $8.65 which was a $1.53 trading range or a 16% swing from high to low based on Friday’s closing price. We would caution investors trading futures with this level of volatility and to date have only been suggesting clients to trade mini- futures which have 20% of the leverage of the normal contract, leveraging 1,000 ounces as opposed to 5,000 ounces. We have started to build a position for clients in a trade that we view as one of the best opportunities we have seen in several years. We are accumulating $5 call spreads in December 09’ silver looking for a sizeable move over the next several months. If the trade goes exactly as planed we will look to half our position on a move back to $14 and have a risk free trade for much of 09’ looking for a larger move north in silver prices. Contact us for exact details. As we wrote last week we expected for the $740-770 level to hold, but on a break of $739.80 look out below. It appeared that our assumption was correct until all hell broke loose in global stock markets and the dollar surged to new highs. As soon as the September 11th low was breached the market acted like a vacuum taking prices as low as $681 before prices bounced $50 and closed back above $730 to end the week. Risk aversion has sent investors fleeing from all asset classes and it is a challenge to even view gold as a safe haven with the recent volatility, as an ill-timed trade by even minutes can be extremely costly. Last week price were down $54.30; if we see follow through to begin this week we may get a bounce back to $800, but with too much uncertainty we prefer building a long position on silver and will wait to see more confirmation of a direction in gold.
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