For February 9th– February 13th 2009

By: Matthew Bradbard

“Is this Reflation?”

You can put lipstick on a pig but it’s still a pig. The stimulus may be necessary, but it will eventually cause inflation. No one knows what the full package price will be, however we are now approaching $770 billion in round 2 of the “economic stimulus” package. This massive government spending should lift growth, profits and create jobs, although throwing good money after bad never made sense to me. Something must be done to stimulate the economy and the most recent package looks more like an attempt by the new administration to expand government spending as opposed to get us out of this major funk we are experiencing. I am not claiming to be smart enough to have the solution, nevertheless all current solutions seem to lead to printing more money, issuing more debt, and currency devaluation which all lead to inflation. Commodities are fast becoming the asset class that investors ought to have in their portfolios. Bernanke, Obama and Geithner will be speaking this week hoping to clarify what steps need to be taken to improve conditions moving forward.

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 crude oil supplies were up 7.2 million barrels, supplies of gasoline were up 300,000 barrels while heating oil supplies were up 1.4 million barrels. The dilemma is that these numbers do not factor in all the “floating storage.” Any voids we have seen of late have been filled with tankers taking the oil to market keeping a lid on prices. March crude oil ended down $2.18. We are still advising to buy near $40 and sell near $50. We see resistance at the 20 day moving average at $42.72 with support at $39. March heating oil was 7.42 cents lower and has now lost ground for the last 5 weeks. Support is eyed at 1.30 with resistance at 1.43 followed by 1.45. March RBOB lost 2.9 cents but closed almost 15 cents off its lows. We see support between 1.15 and 1.17 with resistance at 1.29/1.30. On a close above those levels we would expect to see a trade up to 1.50. We are advising clients to purchase 20 cent bull call spreads in June; contact us for pricing.

 The US Department of Energy said that underground supplies of natural gas were down 195 billion cubic feet last week to 2.119 trillion cubic feet. Supplies are up 3% from a year ago and up slightly from the five-year average. March natural gas was up 52 cents gaining 12% last week after trading at the lowest levels in 2 years. The previous 4 week’s volume was averaging 150,000 and last week saw over 340,000 contracts. We see support at 4.60 followed by 4.35 with resistance at 5.00 followed by 5.20. We are advising clients to be long with trailing stops in addition to selling the $5 March calls while simultaneously buying the $5 April calls. On a trade to $5.50 this spread should be worth approximately $2300.

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April live cattle picked up 1.10 cents last week closing back above the 9 day moving average which should now act as support at 85.60. Resistance is seen at 87.50 followed by 88.50. March feeder cattle gained 1.825 cents closing at a 3 week high. Support is seen at 92.40 with resistance at 95.25 followed by 96.00. The USDA estimated the week's beef production at 484.9 million pounds, up 1.7% from a year ago. On the cattle spread, we have mentioned in recent weeks that we rolled the April short feeder cattle into March. The spread is at -9.275 and we are looking for it to narrow in coming weeks. (long August live cattle/short March feeder cattle)

April lean hogs continue to lose as prices gave up 2.20 cents last week closing down now for 5 consecutive weeks. We continue to hold calls for clients but are down on the position. It may sound like a broken record, but we expect the low to be near. Pork production was estimated at 454.3 million pounds, up 2.0% from a year ago. The US Meat Export Federation said last week that China and Hong Kong imported 4.2 billion pounds of US pork and pork products in 08, the most ever by a single country. If we could see demand pick up elsewhere we may see a bottom and higher trade ahead.

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Stocks: The Dow picked up nearly 300 points last week gaining 3.5% to 8281. The S&P gained for the first time in 5 weeks adding 43 points or 5.2% to 869 looking poised to trade back above the 50 day moving average. The NASDAQ had its best week since late November jumping 115 points or 7.8% to 1592. These moves were impressive, but we still need more evidence to see record monies on the sidelines come back into play. Take what the markets will give you; on a passing of the most recent stimulus this week and perhaps some more clarity, equities should move higher with the S&P making its way back above 900 and the Dow to 8625/8700. On a further move north, which is entirely possible on “irrational exuberance” we will be advising clients to lighten up on stock exposure.

Bonds:  The US Labor Department said that the unemployment rate increased from 7.2% to 7.6% in January, the highest rate in 16 years. NFP were down 598,000, the biggest monthly decline since 74’. The March 30-yr bonds closed down 27 ticks last week at the 50% Fibonacci line and at 2 month lows. We expect prices to remain between 130’00 and 123’00 as we remain negative on pricing and will be using rallies to sell. March 10-yr notes were off 29 ½ ticks’ also approaching lows from 2 months ago. We see resistance at 123’16 with support at 121’17; last week’s low. On a breach of that level we should see 119’16/120’00.  If the Treasury market truly operates on supply and demand, with record issuance coming, we should see more downward pressure. Based on the charts we should see a short-term rally in the Euro-dollar that we would advise clients to fade. We will be issuing a special report later this week on the Euro-dollar and why we think being short after this rally may be one of the best trading opportunities this year. 

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The RBA reduced its interest rate from 4.25% to 3.25%, the fifth cut in the past twelve months. The government also announced that it would spend (Australian) $42 billion in a new stimulus package. The Aussie liked what it heard gaining over 5 cents or 8% on the week. Prices were able to regain the 2 previous week’s losses and doing so formed a bullish engulfing candle on the weekly chart. Support is seen at .6550 with resistance at .6825 followed by .6950. It paid to hold onto the longs we had recommended as we have now pared losses and most should be at a profit.

Statistics Canada reported that the unemployment rate increased from 6.6% to 7.2% in January registering the most jobs lost in one month on record.  The Loonie was still able to pick up 18 ticks last week ending the week at the 9 day moving average. Metals and energies should guide this week with support at .8025 and resistance at .8200 followed by .8320. We are looking for a trade up to .8400 in the near future and have advised clients to be long futures against an 81 or 82 cent call depending on your entry.

The BoE reduced interest rate from 1.5% to a record low 1.0% in an effort to help the economy. The March Pound closed up 321 ticks. We have now advanced for 2 consecutive weeks and prices are almost 10% off the contract lows made 3 weeks ago. Support comes in at the 9 day moving average at 1.4410 with resistance at 1.50 followed by 1.5125.

The ECB met and kept its interest rate unchanged at 2.0% as forecasted, signaling a cut may happen in March. The March Euro picked up 167 ticks last week and appears we may get a rebound. Support for the last 3 weeks has held at 1.2725/1.2775 and should continue to hold, resistance is seen at 1.3040 followed by 1.3225.

After 5 losing weeks this currency barely squeaked out a positive week. The March Swissie was higher by 5 ticks but showed indecision with a 259 tick weekly range. Support is seen at .8520 with resistance at .8610 followed by .8675.

The March Japanese yen lost 260 ticks last week and has been down for 2 consecutive weeks now closing 5% off the contract high made just 3 weeks ago. Resistance is seen at 1.1040 with support at 1.0925. On further advances in equities and with investors willing to take more risks we may see a trade down to 1.06, levels not seen since the first week of January. We are currently positioned on the sidelines looking for a long entry.

The Kiwi picked up 263 ticks and formed a bullish engulfing candle on the weekly chart. Assuming the ytd high and low, the 61.8% Fibonacci retracement level would carry prices to .5590. Support comes in at .5150 with resistance at .5350 followed by .5450.

The US dollar was lower by 104 ticks last week experiencing its first losing week in the last six. Although we have no direct client exposure, we would monitor movement in the dollar very closely as outside markets continue to look for the dollar in determining direction. Between 86.75 and 87.25 should serve as resistance with support at 85.00 followed by the 100 day moving average at 84.38. We favor a move to 83.00 and will be keying off this likely move to help guide trades elsewhere.

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USDA crop report out 2/10

March corn was virtually unchanged closing ¾ cents lower, but paring losses closing 21 ½ cents off the lows. We see support at 3.67 followed by 3.56 with resistance at 3.82 followed by 3.92. On a move thru those level we would expect to see prices back above $4 and that is how we are positioning our clients. We are advising longs in May via options and futures. We will give our preliminary estimates for the USDA in Monday’s blog.

March soybeans were higher by 28 ½ cents last week recouping the previous 3 week’s losses. Assuming the December low and the ytd high, last week’s low held at the 38.2% Fibonacci retracement level.  Support is seen at 9.62 followed by 9.40 with resistance at 10.20 followed by 10.36. We still like the November/May bean spread; buy near -60 cents looking for -30 cents in the next few weeks. Last week the USDA estimated Argentina's soybean crop at 42.5 million tons, down from the January 12th estimate of 49.5 million tons. Without significant precipitation the crop in both Argentina and Brazil will be smaller than recent estimates. Like corn we will be giving estimates for the USDA in Monday’s blog.

March CBOT wheat lost 11 cents last week as we see support at 5.38 and resistance at 5.77. The trend remains down until prices can close back above the 100 day moving average; currently at 5.86 ½. March KCBOT lost 11 ½ cents last week with support coming in between 5.65/5.70 and resistance at 6.00. Much like CBOT wheat the trend remains down until we see a close above the 100 day moving average; currently at 6.15 ½. We still expect the March KCBOT/CBOT spread to make its way to 45/50 cents. In addition to concerns about S.America’s weather for corn and beans, there are also concerns about a dry wheat crop in China which too is experiencing a lack of rainfall. Look for a USDA guestimate in Monday’s blog.

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Recent cold temperatures in Florida caused very minimal damage to the citrus crop. March oj was lower by 3.55 cents last week. Support is eyed at the contract low at 67.10 with resistance at the 40 day moving average at 74.00. All bets are off if the USDA reduces the Florida crop estimate on damage from the recent cold weather.

March cocoa closed up $83, the highest close in over five months, on support from caterpillars in Liberia, harvest problems in the Ivory Coast, and a weaker US dollar. Support is seen at the 9 day moving average at 2766 with resistance at 2850 followed by 2900. 

March sugar closed up 50 ticks, the highest close in four months, helped by concerns about smaller production in India and expectations for a world production deficit. On the weekly charts a bullish engulfing candle formed. On this leg we should see prices make there way to at least 13.55/13.70. Support comes in at 12.50 followed by 12.25.  We are advising clients to buy 17 cent October calls in addition to buying October 14 cent calls against a sale of May 14 cent calls.

Brazil's Census Bureau predicted that the upcoming coffee crop will total 39.4 million bags, down from last year's 51 million bags. March coffee started the week lower, but finished up 65 ticks by week’s end back above the 100 day moving average at 1.1810. As long as last week’s lows hold we see prices first moving back to 1.23/1.25 and then to 1.35. We have clients positioned in 20 cent call spreads in May.

March cotton was higher by 54 ticks closing just below the 100 day moving average which should continue to act as resistance. Support is seen at 47.25 but we still expect to see prices find there way back to 44/46 area in coming weeks.

Did anyone take advantage of the recent 20% advance in lumber prices? We are in the process of forging a relationship with a floor trader in lumber hoping to take advantage of further volatility in lumber.

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March silver picked up 55 cents last week closing at the highest levels in over four months. Prices broke out of the recent trading channel and may now make their way to higher ground. What has me a little skeptical and leery of over committing is the weak seasonal tendency. Support is seen at 12.60 followed by 12.40 with resistance at 13.25 followed by 13.50. We could get a challenge of the highs in September at 13.93. We remain long with $3 spreads in July and $5 spreads in December for clients. We will look to gain more exposure on the next set back.

April gold was lower by $10.30 as prices failed to trade above the previous week’s high. Prices have remained over bought for the last week unable to make new highs, and if this doesn’t occur early this week we would expect to see a break. We are recommending clients to remain cautious as we expect a large retracement is eminent. We see support between 890/900 with resistance at 930 followed by 947.  We still like $100 call spreads in June for new entries. Additionally, we put on a trade that we think could yield a handsome profit in the next 2 weeks; Long April futures near 900 while simultaneously buying March 900 puts. We would hope to be out of the trade before 2/24 which is March option expiration.

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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.