MB Wealth's Weekly Commentary 1-888-920-9997
Energies Livestock Financials Currencies Grains Softs Metals
For September 22nd– September 26th 2008
By: Matthew Bradbard Sentiment has shifted, the fundamentals have not changed! The US financial panic dominated the markets last week. If the moves by the US government succeed in breaking the cycle of selling and stop the scramble for liquidity, commodities in general, should benefit. We are not suggesting that the pace of appreciation that we had previously experienced is back, but we should at least get a relief rally from oversold levels. Look at our recent article as we predicted this 2 weeks ago. Is the bloodbath in Commodities coming to an end? The difficulty in this environment is that the fundamentals and technicals are inconsequential, as the moves are largely being influenced by outside forces as the global deleveraging continues. The good news is that the demand, although it may slow, will not vanish and the supply side is still relatively contained for a range 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. ____________________________________________________________________ November crude oil closed $1.45 higher last week, but the trading range was approaching $13 from high to low. Interest in commodities has emerged again as investors are jittery about the stock market, with oil closing back above $100/barrel, $12 off the week’s low. Early last week we traded just above $90 which was the lowest levels seen since February. If we stay above $100 for the next few sessions, the argument can be made that an interim low has been established and we could see a recovery after we have seen prices come off almost $60 from their highs just over 2 months ago. Currently we are cautiously optimistic on the prospect of higher prices, with support at $90 and resistance at $103 followed by $106. We would not expect any significant movement higher until we regain the $122 level in November. RBOB in November was down 5 ½ cents, but closed 28 cents off the lows on the week ending at 2.5443. After 3 positive consecutive days we should start to see the momentum shift as long as oil can maintain at least these levels. Last week’s inventory report put US gasoline supplies at their lowest level since 1990, which was largely ignored because of other events. A rally back to 2.75 or the 200 day moving average is expected. November heating oil was only down 1 ½ cents last week to close at 2.9173. Prices should be able to move back to the 20 day moving average at 3.0279 in coming sessions. We see a double bottom just below 2.69 and would expect prices to find their way back to 3.20/3.25 in coming weeks. For both distillates, traders could be buying dips with stops below the recent lows. November natural gas closed above the 9 day moving average, but is still below the 20 day moving average. Prices were up 14 cents on the week and we registered the second positive week in the previous eleven last week. $7.50 remains as support and if we take out last week’s high at $8.59 we should see a further advance. As we have been saying for the past few weeks we are looking for a move back to $9.50/10.00 on the December contract and we own $10 calls for clients to try to take advantage of that move. We are looking to liquidate for approximately $7000 and we have accumulated them over the last 2 weeks for roughly $2000. ___________________________________________________________________ The USDA's Livestock Outlook said last week that "beef cow slaughter continues at a level higher than would be expected with July 1 cow inventories and more typical slaughter patterns." They added that this in addition to higher costs for energy and feed warns of the likelihood of higher cattle prices in 2009. After the close Friday, the USDA said that there were 9.997 million head of cattle on feed as of September 1st, down 3.0% from a year ago and less than expected. Placements in August were down 2.6% while marketings were down 8.8% from a year ago. The USDA estimated this week's beef production at 537.0 million pounds, up 5.4% from a year ago. After six losing weeks October live cattle was able to register a small victory with a 10 tick advance on the week closing at 101.55. Volatility is typical before a market turns direction and we experienced a 400 point trading range on the week so this could be an early signal of a reversal in trend. We have been expecting a mover higher to begin soon; when it does prices should advance to 106/108 swiftly. October feeder cattle printed a new contract low and closed down just over 200 points lower on the week at 105.85. If we can hold 105.00 on a closing basis this week we could start to see a bottom form. The USDA also said that "for the first 7 months of 2008, total pork exports were 2.9 billion pounds, almost 71% above the same period last year." Pork production was estimated at 458.0 million pounds, up 2.4% from a year ago. October hogs finished up 175 ticks at 68.20. We are still holding call options for clients looking for the over head gaps to be filled within the next 2 weeks. On a move back above 73, sooner rather than later, we should be able to exit at a profit. We will be putting limits at 220-270 points on the 72 cent calls this week. ____________________________________________________________________ Stocks: Those who previously were living in denial saying this financial sh#@ storm was not serious are now aware that current problems are serious and will most likely get worse before they get better. The government is working on creating something like the Resolution Trust Corporation to take up bad loans, the SEC banned the short selling of financial stocks through October 2nd and the U.S. Treasury said that it will insure eligible money market funds for a year, saying that the move is key to protecting the integrity of the global financial system. The indexes finished the week relatively flat, but this week was the most volatile week I can remember in my 7 year career. The Dow closed down 34 points, or 0.3% to 11388, with an 1120 point range. The S&P 500 added 3 points or 0.3% to 1255, with a 155 point range. While the NASDAQ rose 13 points or 0.6% to 2274. Although we are convinced that last week will serve as an interim bottom, we got the capitulation low we had been calling for we do not believe the worst is over. Continue to use rallies as opportunities to exit longs as we expect new lows after the current relief rally. The government has taken unprecedented steps hoping to aid in the market, but only because this is the most severe financial crises we have faced since the Great Depression. If you will not let go of stocks for whatever reason we suggest you use index options to hedge your portfolio against down side risk. For most their stock portfolio is their biggest asset and by failing to use put protection you fail to insure your largest asset. Do you insure your homes, car, life insurance…exactly! Bonds: The Fed opted to keep rates unchanged at 2.0% as we expected, but there were some that projected as much as 50 basis points in response to the recent financial calamity. Still the Fed is torn between the prospects of inflation and further economic developments that effect growth and has not completely shut the door on lower rates. There decision was justified being that they took other actions by injecting billions of dollars in to the system along side other central banks and also the $85 billion loan to AIG. These actions may help address the liquidity crises but the crux of the problem remains and the sooner the general public comes to terms with the fact that Uncle Sam may not be able to find any quick fix the better. December 30-yr bonds were down 1’22 and should make their way to 115’24. Use put options as the $6000 trading range last week is not the market to be trading futures. December 10-yr notes were also down 1’22 and should make their way to 114’00. The 10-yr yield fluctuated between 3.250% and 3.824%, this week we expect the yield back over 4.0%. The path of least resistance is down, but to give support and resistance would be useless. I thought my eyes were deceiving me; as a typical range in the Euro-dollar instrument has been $400 in a day and within 5 minutes on Friday we saw a move of almost $4000 per contract. ____________________________________________________________________ The December Euro was 233 ticks higher last week and the seasonal trade we advised as of 2 weeks ago has already reached its objective, trail stops and don’t let a winner turn into a loser. We would expect prices to find their way back to 1.46/1.48 in coming sessions and potential to make a run at the 50 day moving average at 1.4880. The December Swissie was 177 ticks higher last week and continues to move in the same direction of the euro, but just at a smaller scale. As we predicted last week prices should find their way to .9100 and from here we would imagine the advance to continue to .9250/.9350. The 20 day moving average at .9000 should serve as support, but expect some instability as last week there were 2 days with over 230 tick trading ranges. After 8 losing weeks the December Australian dollar put in an impressive showing gaining 155 ticks last week. On the weekly chart one should notice the bullish engulfing candle as we have a target now of .8400/.8500 in coming weeks. On pullbacks .8100 should support. The December Japanese yen reacted viciously to the equities market and the flow of investor’s funds as risk aversion ebbed and flowed like a violent tide. The yen was down 90 ticks last week and gave back about ½ of the previous 4 week’s gains. Assuming the recent high and low Friday’s low serves as a 61.8% Fibonacci retracement. We have clients positioned long by purchasing the December 94.50/97.00 bull call spreads for approximately $1000. On a break of .9300 in December we will most likely buy out right calls, get long the futures, and buy back the .9700 calls on the spread as we expect prices over the next 1-2 months make their way to .9700/1.0000 level. The last 3 weeks buying has emerged between .9250./9300 as investors are determined to defend that level. Last week was no different as the Loonie gained 101 ticks to close back above .9500 which was the first time this level has been re-visited in the month of September. If prices are able to get above the .9600 level we should get to .9725; the 100 day moving average this week. Much of that will be dependant on what type of movement we get from the metals and energies. The December British pound had its second consecutive positive week following seven losers as prices were 411 ticks higher. After a 25 cent fall prices have regained 8 1/2 cents in the past 2 weeks which has taken us to resistance levels at the 38.2% Fibonacci retracement level. For now support comes in at 1.7850, if we take out last week’s high at 1.8302 we should get back above 1.8500 this week. The December dollar index was 111 ticks lower and is now 3 full cents off the recent highs. After multiple failed rally attempts traders that had been seeking shelter in the dollar found the exit doors and went back into securities and metals. What was resistance just weeks ago now serves as support at 77.50, but on a trade through that level we should find next support at 76.50. 79.50 should contain any rallies and we would continue to sell rallies as we had voiced in previous commentaries. We never trusted this rally and although it is entirely possible to see a 2 sided trade in the short term we expect the lows to be re-visited down the road. If we do see the dollar trade fall apart commodities should benefit. ____________________________________________________________________ Corn: Until harvest begins October 1st, grains will continue to follow outside markets. It appears a base is forming, but we may get one more leg down before we turn up for an October harvest rally and short covering ahead of the October 10th USDA crop report. Index funds have been noted sellers and have not shown us they’re done liquidating longs yet. We would suggest buying with both hands on a break lower and whether it be the August low or a lower low made this week we would expect those levels will hold through harvest. We need a close over 5.60 or the 20 day moving average to turn the charts bullish on December 08’. For new entries we would suggest buying May calls or getting long contracts in 2009 as we may want to stay with these longs for an extended period. For traders already positioned in December 08’ stay there as we have a target of $6.50 to $7.00 by year’s end. Beans: Now that South American sales are winding down, the US looks to become the primary port of origin for beans in the world from October 1st into early 2009, when buying shifts back to South America. November beans were $1.08 ½ lower last week closing below $11.50 for the lowest close in 26 weeks. We could see a bit more downside earlier in the week depending on outside markets, but we would expect buying to emerge by mid-week and prices to make there way back above $12. We favor being long into the October 10th USDA crop report expecting a further reduction in yield and crop size. We have yet to fill a gap at $13.16 ¾ on the November contract; keep that as a target. If in fact an interim low is in on crude we should see the recent lows in December bean oil hold and prices should bounce to at least 50.00 in coming weeks. $3.11 served as support in August for December soy meal and we would expect it to hold currently as well. Look to get long with stops below or buy calls into the USDA report. Wheat: With both winter and spring harvest over, wheat supply has already peaked and will only decline for the next eight to nine months. The wheat market is in its primary export season with demand at the forefront even as the new crop is planted during September/October. We are going to try getting long again after being stopped out of longs a few weeks back at a loss. We are expecting the lows from last week to hold and now we’re advising clients to take advantage of this by buying either CBOT or KCBOT December calls or to get long KCBOT futures and play defense with CBOT looking to get short CBOT on adverse moves. We are looking for a move to $8.00 on KCBOT and $7.70 on CBOT. ____________________________________________________________________ After the close Friday, the USDA's Citrus Inventory Report showed that Florida had 496,518 acres of commercial orange groves, the second lowest since records began in 1966. November orange juice was down 6.35 cents to 89.90 near the lowest levels we have seen since August of 2005. Could prices go lower? Absolutely, prices were at 55 cents/lb in 2004 but as we have formerly said, although we would not suggest futures yet or allocating loads of money, we do like buying inexpensive January calls for the “what if” scenario. December coca was $132 higher last week and if you managed not to get stopped longs should be satisfied and start looking for an exit. The new main cocoa crop, which accounts for about 80% of annual production, begins in October. Thus, new-crop December futures have usually declined steadily throughout October as large new supplies become available to the market. Prices could gain in the short term because their inverse relationship to the dollar, but the seasonal tendencies in our opinion are too powerful to stay long as we will start to explore short strategies for clients. March 2009 sugar was down 51 ticks and has now registered 4 consecutive losing weeks. We still like sugar and if forced to have exposure we would suggest buying the 15, 16, and 17 cent March calls, but for now prefer the sidelines. The last 2 weeks selling has been rejected and longer term there is a compelling argument to be long and we do expect much higher prices to come, but would like to see a little more evidence that an interim bottom is in. We have explored the idea of a bullish calendar option strategy and also getting long futures with options protection, stay tuned for exact details. Traders that were short coffee, based on our recommendation from 2 weeks ago, should be out after meeting their profit objectives. Last week December coffee was down just over 6 cents and was within 35 ticks of reaching our 130 price point. As we said last week, we are interested in getting long coffee, but only under 130 or at least waiting until October to see where prices are. If we get below 130 we will start to shop bullish option strategies. 136.50/137 should act as resistance in December. December cotton was down 198 ticks last week and this contract has shed just over 10% in value over the last month, but that could be coming to an end. Prices traded down to as low as 59.45 approaching the contract lows where good volume emerged. The supply side is friendly, but the demand has been lacking, with exports last week finally showing signs of recovery we could get cotton moving higher. We have seen little liquidation out of cotton like we have seen in other commodity markets. We would expect a momentum shift is underway and in terms of the risk/reward dynamic at current pricing we view cotton as a fantastic opportunity to get long calls and lightly start building a long futures position in 2009 contracts. ____________________________________________________________________ Looking at the weekly silver chart we see a higher low and higher high as prices regained the previous week’s losses. December silver was $1.45 higher on the week closing at $12.48 just above the 20 day moving average. Assuming the recent lows hold we are expecting prices to track higher with a first objective of $13.73 or the 38.2% Fibonacci retracement followed by $14.73, which would be the 50% Fibonacci retracement level. As we have said in previous commentaries we have client’s positioned long in December and March mini-futures looking to add on strength as well as $1.50/2.00 March bull call spreads. We have also started to price deeper out of the money out right calls in March 09’ and will be looking for an entry on a day when silver experiences a decent pullback. December gold shined last week as prices experienced their largest 1day rally in history and the largest % gain in 9 years with December on the week gaining over $91 with a weekly trading range of almost $160. Gold experienced a significant jump in volume as well as we traded over 300,000 contracts daily to end the week which was twice the volume we have been doing in previous weeks. We can assume that the recent lows should serve as solid support and it is unlikely we will re-visit those levels in the short run. Prices should stay contained between $825-925 as we expect to see prices take a breather and consolidate after the recent jump in prices. Look for direction from outside markets; i.e. dollar, oil, and largely the direction of the stock market as much of the recent advance is attributed to a flight to quality by investors as the financial system has been distressed of late.
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