For September 8th– September 12th 2008

By: Matthew Bradbard

U.S. federal regulators seized control of Fannie Mae and Freddie Mac on Sunday; a historic intervention aimed at stabilizing the mortgage market at home and credit markets worldwide. Expect this decision will cause ripples in a variety of the markets this week, if Sunday night is any indication with most markets gaping higher or lower. As hard as it is to believe, we also will experience the seventh anniversary of the terrorist attacks on the World Trade Center and Pentagon this week. There will be opportunities that present themselves this week, but don’t be afraid to have a larger cash position in your commodity accounts as we may see further downside before we start the next leg up. The key is to have money when a great trade opportunity arises. Additionally, learn how to go short and utilize puts, as it is only a bet on direction.

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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October crude oil was down $10.42 last week and is below the 200 day moving average for the first time since August of 07’, when oil was trading near $70/barrel. The trend remains down, but we are nearing oversold levels and with an OPEC meeting this week and a very active hurricane season we would expect the slide to slow if not reverse soon. We may in fact test the $100 level, but a trade much below that level is not likely in our opinion. Support for now comes in just below last week’s low at $105 with resistance at $113 to $115. We may start shopping calls with 2-3 months time if comments from OPEC support. It is fascinating in how a couple weeks things can change so dramatically. Lower energy prices were perceived as a positive as consumers would have more money to spend and then just weeks later a break in energy prices is perceived as a negative signaling a waning economy globally.

The trend remains down in heating oil as we have closed lower 7 of the last 8 weeks with October losing 29 cents last week filling the gap from April, that we had mentioned most recently. We find mild support just under $3 with first resistance at $3.10 followed by $3.17. We would stay away from heating oil for now, but keep it on your radar to potentially get long from lower levels. Last week October RBOB lost 23 cents to finish below $2.70 for the first time since April. Similar to Crude closing below the 200 day moving average and with an increase in demand bleak prices should remain under pressure. Expect wild swings with support on October at $2.64 and resistance at $2.85.

The slippery slope south in natural gas continues as prices closed lower last week by 64 cents, but failed on an attempt to get below $7 in October. We advised clients to cover longs in October and roll out to December. We also suggested getting out of futures as the volatility is too great and we may run out of money before a move higher happens. We are accumulating December $10 calls looking to hold for a move up to $10 in the futures to make the money back October took. For new entries we bought these positions for under $2000 last week, two weeks ago this same option was $8000 and 2 months ago a single option was valued at over $40,000. August through October is the best 3 months for natural gas historically. Past performance is not indicative of future results.

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After the close Friday, the USDA estimated the week's beef production at 460.8 million pounds, down 3.6% from a year ago. October live cattle were lower by 1.325 cents on the week closing at there lowest levels in 4 ½ months. We own October and December calls for clients and will most likely be getting long in October futures this week looking for a trade back to $1.07 in coming weeks. Where prices will turn is anybody’s guess, but we feel we are getting close to turning higher again. If already long from last week use a stop loss at 102. October feeder cattle were mostly sideways last week losing .825 cents. For the moment the 61.8% Fibonacci line looks to support at 109.75 with resistance coming in at 111.50. Stay on the sidelines for now.

The USDA reported pork production at 400.1 million pounds, up 4.3% from a year ago. If you have been reading our commentary for the last few weeks then you know we are friendly to hogs from these levels. Prices were range bound last week, not really wondering far from 69 cents. We are expecting over the course of the next few weeks for both overhead gaps to be filled taking price back to 73.50 cents or the 40 day moving average. This should realize our clients a profit on their options and on further evidence of a reversal we may play the futures. Ideal circumstances would be a gap open higher forming an island bottom which would be extremely bullish.

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Stocks: With a jump in the unemployment rate to 6.1%, the highest in nearly five years and a sluggish job's number it is evident that further weakness is ahead. Rumors of recent hedge fund troubles are also discouraging as these managers are supposed to be the smartest guys in the room. Last week the Dow lost 456 points or 4.0% to finish at 11227, the S&P was off 41 points or 3.2% to close at 1241; the lowest closes since late July. The tech heavy NASDAQ closed nearly 5% lower at 2256. As history would have it, the first week of September started off weak as this month has traditionally been a humdrum month for the stock market and this year seems to be no different. We cautioned investors last week not to believe the hype and to remain defensive. If that did fall on deaf ears we would repeat it, use rallies as exit doors as we expect more trouble. 

Bonds: The immediate move in treasuries should be down, as of Sunday night prices in December 30-year bonds are down over 1 point and now 2 ½ points off Friday’s high, with 10-yr notes we are also 1 point lower as of Sunday night and just over 2 points below Friday’s highs. This may be an overreaction to the Fannie and Freddie news, but regardless of the reasoning we should see bonds find there way to 115’16 and notes to 114’00. This has turned into a sell rallies market as opposed to buy dips, at least this week. Look for some position squaring this week ahead of next week’s FOMC meeting where we expect no change in rates.

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The bank of Canada left rates unchanged last week at 3.0%. The September Canadian dollar dropped .25 cents last week, but managed to defend the .9300 level as we forecasted. Prices could go either way this week and will continue to look for guidance from energies and metals. Support just above .9300 should hold unless we see another leg lower in commodities, on the upside .9475 serves as resistance followed by .9600.

The ECB did not do anything with rates last week leaving them at 4.25% suggesting that even with a slowing economy on the brink of recession they are still concerned with inflation. The September Euro fell 444 ticks to $1.4236, the lowest close in almost 11 months. As we voiced last week we do not have the stomach for the day to day movement and would expect to see a bounce in the short term into the Fed meeting next week. Buying the December Euro on September 10th and selling on October 2nd has been profitable 8 of the last 9 years for an average of $2162. Past performance is not indicative of futures results.

Last week, outside of the dollar, the yen was the only currency to trade higher with September gaining 138 ticks to close at .9338 trading as high as .9480; the highest levels since late July. The weekly Japanese yen chart remains a buy, but the daily chart is overbought, on a move higher in stocks we should be given another window for a long entry. The carry trade lives on as investors need to buy back there borrowed yen to offset other positions in this environment. If commodities continue to falter and turmoil persists in the equity market both of these scenarios would be supportive to the yen.

The RBA cut interest rates ¼ point for the first time in almost 7 years and the Aussie currency felt it as prices lost 470 ticks or 5.5% on the week. The losses were attributed to their cut and most likely some large unwinding of the jy/ad cross trades. We expected the .8200 level to hold but as of Sunday night we had already seen a trade as low as .8020 in September. If we see some sideways action early this week we will start to shop some long entries, but we would suggest starting small and let the market prove you right.

The September Swiss franc broke out to the downside as did most currencies last week losing 141 ticks to close at levels not seen since the first of the year. The trend remains down, but if the other European currencies are able to stage a rally, albeit a small bounce after the massive downdraft, look for a bounce back up to previous resistance over the next few weeks at .9200.

For trend followers this trade has continued to pay off as the British pound closed 551 ticks lower and has now been lower 7 weeks in a row. It may be too early to call a reversal, but it appears we are getting a bounce from over sold levels as of Sunday night. We would look for last week’s low to hold at 1.7524 with the first resistance being the 9 day moving average at 1.7969. If we do get some dollar weakness or any positive news out of the UK we could see a bounce to 1.8450 before serious resistance comes into play. If that was to happen we would look for a short entry and would not suggest trying to time the bottom for a long as data continues to support a recession in the UK and rates, although were left constant last week, should move lower.

The dollar was up 167 ticks last week and has registered a positive week 8 of the last 9 weeks. Why? Because the environment is not as bad in the US as it is abroad. That to me is a weak argument and although I am a little embarrassed my clients did not make money on the recent advance in the dollar, I think investors need to choose their battles and believe in their trades and I don’t believe that the dollar should be appreciating. We don’t expect the Fed to do anything with rates next week or this calendar year for that matter, based on the current circumstances. We think it is feasible to see the dollar give back most of the recent gains in the coming weeks. Current resistance should be 79.50 with support around 77.50. Continue to monitor the dollar for other trades as it has served as a guide. 

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USDA crop report out 8:30 am est. 9/12

Corn: December corn was down 27 ½ cent last week to close just under $5.50. We expect corn to trade lower early in the week on weather, as hurricanes have delivered some rain, but we feel this is more emotional because the rain is too little too late and should have very little impact on the crop condition. We would expect buying to emerge ahead of the crop report by mid-week by end users and speculators if outside markets do not influence it even earlier. Ideally a trade down to $5.25 should be bought with a stop just below $5.00. Traders expect Friday’s crop report to come in with a lower yield and lower production which could start another leg higher. We feel there is still a remote chance to see this contract make one more run for $7 before everything is said and done.

Beans: November beans were down $1.25 last week to close below $12 for the first time in 4 weeks on beneficial rains and weakness in outside markets. As we said last week on a breach of $12.85 look for prices to make their way to $12 and then we would be interested. We would suggest getting long lightly via futures looking to add on strength expecting a friendly USDA crop report with a reduction in yield in an already tight market. The last 2 times we have traded around this level, most recently last month and then before that in early May, we have seen buying emerge and prices respond by advancing $2 and $4.50 respectively. We like the $12/13 November call spread for $1500. Furthermore, we also are friendly to the December soy meal looking for prices to track higher. On the weekly chart the 50 day moving average has acted as support for all of 07 and 08; it is currently at 319. Lightly get long the futures or look to buy the 350/400 call spread for $1000 or the 400 call outright for $550.

Wheat: We are still looking for both KCBOT and CBOT to gain in the coming weeks, but the lows we were looking to serve as support were penetrated last week so there may be more down side in the short run. We would need to see a trade back over $8.10 in KCBOT and $7.65 in CBOT to entertain establishing fresh longs. We are oversold on both contracts, but to a larger extent wheat is in a follower’s role to corn and beans. The current conundrum is with the cash at such a steep discount to the futures it is acting like a weight dragging prices down on the board. We do not have support for another 50 cents under the market so if you’re long understand the risk and if looking to get long implement some protection with options or selling other contract months. On a continuation of the uptrend we expect $8.70 in CBOT and $9.00 in KCBOT..

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With a strong showing in the dollar December cocoa suffered losing $189 on the week closing at 2636.  There is solid support about $75 below that level, but depending on action overnight in the dollar we may not get to those levels. If we get an opportunity to get long at 2550 this week we will take that signal with stops below 2515. Treat it as a trade just looking for a quick profit as rallies in cocoa in the month of September are rare and should be used to establish short positions.

The cotton market shocked us last week as prices broke lower largely influenced by weakness in outside markets. Although the exports were light, we feel the market has overreacted and being that we most likely will get some crop damage from the recent weather and have the smallest crop in 20 years, we will add to longs. The difference now is we would suggest splitting your position; going 1/2 in December 08 and 1/2 in March 09. We like the December 08’ 70 calls for approximately $1000 and the March 09’ 80 calls for $1250.

March sugar was down 30 ticks last week, but the 100 day moving average has continued to support at 14.13 cents. On the daily charts we are approaching the 50% Fibonacci retracement level in addition to oversold levels so we will start to explore the long side.  On a break of 14 although not expected next support should be 13.75. We like the 15, 16 and 17 cent calls depending on what you are looking to spend.

November fcoj has started to move in response to the active hurricane season and the potential for crop damage over the next few weeks as activity continues in the Atlantic. Any damage to a crop that is already expected to be 12% smaller than last year’s would be extremely bullish. We have seen prices move 15 cents off the recent lows and we feel we could see an additional 15-25 in the coming weeks. We prefer to play with options as opposed to futures here and have current client’s positioned in the January 160 calls.

December coffee was down 2.35 cents last week and remains on our no interest list. If you heeded our advice last week selling rallies over 150 you should be in a profit and we suggest you trail down a stop-loss ultimately looking for a trade below 140 but it would not surprise me to see one more gasp up. Regardless, trail a stop to protect your profit. On a trade back to the mid 130’s by month’s end we may have an interest from the long side. Selling December coffee on September 6th and buying back on October 2nd has been profitable for 13 of the last 15 years for an average of $2322. Past performance is not indicative of future results.

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December gold was $39 lower last week, but stayed contained within the recent $50 range between 800 and 850 we have seen in the last 3 weeks. Buyers have defended the 795 level and for now prices appear to remain range bound. We would have a change of opinion on a settlement below $790 or above $850.  September and October rallies signal strong year end rallies, so we will be monitoring the activity very closely. We recommend the sidelines now looking for more direction. If you want long exposure we would suggest call options as opposed to futures, being that we could get a violent move to $700 to shake out the last of the weak longs. 

December silver was down $1.55 last week to close at $12.33; the lowest close since mid-October of 07’. We are convinced that this move was caused by fund liquidation and for those looking to gain long exposure provided silver on sale because there has been no significant change in fundamentals that would suggest a 45% reduction in prices is justified. We are positioning clients long in December call spreads and have started to price our March 09 bullish plays in futures and options as well.  December silver has a strong seasonal tendency to move higher in the second half of September. Past performance is not indicative of future results.

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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.