For March 16th– March 20th 2009

By: Matthew Bradbard

“Is Diversification key in preserving wealth?”

The Federal Reserve reported that the net worth of US households was down 18% in 08’, the biggest drop in 57 years of record-keeping. You can no longer expect to gain 10% a year on your real estate, buy and hold no longer works in the stock market and 3% on long term Treasuries is not the answer. So where do investors go? We think an acceptable alternative is commodities. Whether it is a speculative account trading agriculture, exposure to precious metals, hedging your stock portfolio or an allocation to managed futures we believe investors should have 5-20% of their portfolios exposed to commodities. We are not advocating to blindly allocating a portion of your portfolio or replacing a stock portfolio with commodities, but rather to inform yourself because we expect inflation in the months and years to come. Although past performance is not indicative of future results, commodities have tended to outperform other asset classes in times of inflation. Bottom-line, with a growing population and a finite supply of commodities we expect the price curve to trend higher.

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 700,000, supplies of gasoline were down 3.0 million barrels while heating oil supplies were up 1.3 million barrels. May crude oil finished down 69 cents closing just above $47. Support is eyed between $44/44.50 with resistance at $50. The next leg will be determined by how the market reacts to OPEC maintaining current production quotas, for now we suggest buying dips. The EIA reported US gasoline demand was 1.6% stronger in the past 4 weeks than the same period last year. May RBOB finished last week 92 ticks higher, again we suggest being a buyer on dips. Depending on your time frame, we like 20 cent bull call spreads in June-August. We would like to have some exposure and then add to it on a breakout above the 1.40 level in May, that to date has failed to materialize. An 8-12 cent pullback this week should be viewed as a buying opportunity. May heating oil was lower by 3.91 cents last week staying inside the 1.13/1.29 trading range now for 4 weeks. Buy near 1.15 with stops below 1.12; currently we have no client exposure.

The US Department of Energy said that underground supplies of natural gas were down 112 billion cubic feet last week to 1.681 trillion cubic feet. Supplies are now up 19% from a year ago and up 13% from the five-year average. May natural gas finished up 3 cents last week after making a fresh 6-yr low. However, we did experience a reversal on good volume on Thursday closing 19 cents higher or 5% on the day. Could this be the bottom? A close above the 20 day moving average at 4.17 may signal a move to $5. We own the $4.25/5.00 spreads for clients and will be shopping June $1 call spreads and mini-futures.

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After the close Friday, the USDA estimated the week's beef production at 491.5 million pounds, down .4% from a year ago. The USDA said that 09’ US beef production will be down .7% from a year ago and they expect choice steer prices to average 86.5 cents per pound, down from last month's estimate of 89. April cattle ended higher by 1.975 after trading to a new contract low. The week ended on a positive note with the daily candle forming a bullish engulfing candle. Support should be at last week’s low at 81.95 with resistance at 85.00 followed by the 50 day moving average at 85.90. April feeder cattle were higher by 90 ticks. Support comes in at 89.50 with resistance at 93.30; the 50% Fibonacci level followed by 94.30; the 61.8% Fibonacci level.

Pork production was estimated at 439.8 million pounds, down 4.9% from a year ago. The USDA said that 09’ pork production will be down 1.4% and they expect barrows and gilts to average 46.5 cents per pound (or 63 cents lean). April lean hogs were higher by 70 ticks ending on a strong note closing just below the 50 day moving average. Support is seen at 60.00 with resistance at 64.00 followed by 66.50. We are still advising clients to roll the long April contracts into June. We will be issuing a special hog report over the next few days.

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Stocks: Equities were higher last week and the rally that we’d been forecasting is now in play. Traders who held onto their longs have gotten their money back and recent buys are now enjoying the move and making money. The June ES 775 calls we recommend closed Friday at $2438; our recommendation was to buy between $1000-1300. Last week the Dow advanced just under 600 points bouncing back 12%. The S&P ended the week up nearly 75 points regaining 750 nearly 11% higher on the week. The NASDAQ rallied 138 points or 10.6% to get back above 1425. We are advising traders to lighten up on call options and to trail stops on futures. The four prior rallies during this bear market have generated an average gain of 17%, putting prices on the Dow at 7560 and the S&P at 780. We do expect another leg down with lower lows after this rally. The next leg down, which we expect to take prices to 6000 and 600 respectively, will most likely be when the general public throws in the towel and the market ultimately bottoms. 

Bonds: June 30-yr bonds were lower by 15.5 ticks last week. Support is seen at 125’00 with resistance seen at the 20 day moving average at 126’28. This level has acted as a ceiling in recent weeks and we expect this to continue. If this level is penetrated, on a surprise from the FOMC meeting this week or for any other reason, look for the ceiling to become the floor. June 10-yr notes were higher by 13 ticks last week. Support is seen at 120’16.0 with resistance at 122’16.0. We could see a bounce in both of these instruments, being that the Fed will most likely try to talk down longer rates and may even be a buyer of longer dated Treasuries at their meeting this week. The March 10’ Euro-dollar contract is in the middle of a trading range between 98.20 and 98.50 that has contained prices for the better part of the last 2 months. We continue to sell rallies and would suggest building a short position and being patient. Talk from China on concerns holding US Treasuries is a viable threat. The solution to this quandary is the US may be forced to raise interest rates….the premise on why being short the Euro-dollar should work.
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The June Euro was higher by 238 ticks last week and has now gained for the last 2 weeks. Support comes in at 1.2750/75 with resistance at 1.3050. We are anticipating a move to 1.32/1.35 in coming weeks and would be a buyer on dips.

The Aussie picked up 156 ticks last week trading above but closing just below the 50 day moving average. Support is seen at .6400 followed by .6300 with resistance at .6650. We are becoming increasingly friendly here, namely because of the interest differential, but have yet to commit funds.

The SNB reduced interest rates from .50% to .25% and said that they will be buying corporate bonds to help the economy as a form of quantitative easing. The SNB is the first major central bank to openly intervene in 6 years. The Swissie lost 235 ticks or 2.7% on the week, most of this came immediately after the rate reduction. Support comes in between .8350 and .8400 with resistance at .8525. We advised clients to buy on what we view as an over reaction; buying the June 90 calls for 75 points or $937.50. This option has 81 days, a delta of 47% and we are looking to be a seller at approximately $2000.

The Loonie gained 80 ticks last week allowing us to book a profit on the recent purchases of options and futures for clients. We see strong support at .7700/.7750 with resistance at .7900 followed by .8000. We will be recommending getting long on a setback this week as we still expect the .8200/.8400 levels to be achieved in coming weeks.

The yen was higher by 38 ticks last week and based on the chart alone prices appear poised for a pop higher. Nevertheless with the recent volatility it seems too big of a gamble so we would recommend the sidelines for now. Support is seen at 1.0150 with resistance at 1.0325.

The June Pound gave back 149 ticks last week closing lower now 4 of the last 5 weeks. It has not been a straight line down as last week’s close was 300 ticks off the lows. Support is at 1.3700 with resistance at 1.4150/1.4200. We anticipate a bounce but would stand aside. If you are confident a bottom is near, buy the June 1.35/1.45 call spread for $3000. This is a $6250 spread with a 32% delta and based on the current pricing has an intrinsic value of just under $3000 which is the cost of the trade.

The Kiwi gained 203 ticks or 4% last week. It appears a bottom is in and we would suggest buying dips, the closer to the .5000 level the better. The next upside target is .5350.

The June US dollar index was lower by 103 ticks last week. Resistance comes in between 88.75/89.25 with support at .8700. An interim top has most likely formed in the last few weeks with the short-term trend pointing lower. The FOMC meeting this week may help stabilize the recent slide or perhaps reverse the direction so be on your toes. The next downside projection is 86.00/85.25.

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The USDA's 08-09 US ending stocks estimate for corn was reduced from 1.79 to 1.74 billion bushels. May corn was higher by 24 ¾ cents closing higher for the third consecutive week. Corn has traded higher 7 out of the last 9 sessions. Support is seen between 3.60/3.65 with resistance at 3.85 followed by 4.00. News that USDA Secretary Vilsack wants a higher blend of ethanol in gasoline may be contributing to the recent strength. We currently have no exposure with clients but will be looking to buy on setbacks wanting to have light exposure ahead of the plating intentions report at month’s end.

The USDA's 08-09 US ending stocks estimate for soybeans was reduced from 210 to 185 million bushels. May soybeans gained 6 ½ cents last week. Support is seen at the 9 day moving average at 8.67 ½ with resistance between 8.85 and 8.95. Selling pressure is present around those level as prices have been unable to close back above $9 since they came crashing through that level in mid-February. We have client’s positioned long SX9/short SK9 and will stay with the trade even though it came back close to our entry point last week. For new entries, we would be a buyer at -600 still looking for -350. Additionally we found a trade that is agreeable in a newsletter we subscribe to, long SMK9/short BOK9. Contact us for exact pricing.

The USDA's 08-09 US ending stocks estimate for wheat was increased from 655 to 712 million bushels. May CBOT wheat lost 13 ½ cents last week and has now closed lower 7 out of the last 9 weeks. Support is seen at 5.00 with resistance at 5.28 followed by 5.35. May KCBOT wheat was lower by 4 cents last week and continues to gain on CBOT wheat. Support is seen at 5.50 with resistance at 5.80. We will have advice on entry in May and July KCBOT/CBOT spreads in our blog this week. We are in a wheat/corn spread with clients and will be looking to cut losses this week; long WK9/short CK9 at 149’0.

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The USDA's 08-09 US ending stocks estimate for sugar was reduced from 1.066 to .981 million tons. May sugar was higher by 8 ticks last week but the trading range was 78 ticks. Buy on a pullback to 12.50 in May. The extent of the move is still being aided by movement in the dollar and oil. Continue to accumulate October 15 and 17 cent call options.

The USDA's 08-09 US ending stocks estimate for cotton was reduced from 7.7 to 7.3 million bales. May cotton traded higher by exactly 1 penny last week and after 4 consecutive losing weeks cotton finally managed a gain. We are still eager to get long futures under 40 cents but have started to price out July calls being that we expect smaller acreage again this year. Farmers are expected to plant the fewest acres of cotton since 83’. The July 48 call for $875 has a 35% delta and 89 days time. As long as prices in May stay above 41 we think it’s reasonable owning this strike.

In its February report, the International Coffee Organization reduced its estimate of 08-09 world coffee production from 133.4 to 127.8 million bags, with smaller figures coming from Colombia, Vietnam, and India. The movement last week may have been influenced by this but we hear that it was just running of stops by some big houses. May coffee was higher by 2.85 cents and as we had forecast the previous week 1.05 held on a closing basis. We see resistance at 1.13 followed by 1.1550. We are still expecting a move up to 1.20 plus and own outright calls in May and 20 cent call spreads in July for clients. We could start to see a frost premium built into prices.

May cocoa jumped $115 supported by predictions that world production will fall short of consumption this year, weakness in the US dollar and a technical bounce off the charts. Support is seen at 2300 followed by 2250 with resistance at 2450/75. Look for a further advance if the dollar continues south. Be careful getting too long, being that seasonal weakness persists. Selling on March 14 and holding until April 16 has been a winner 28 of the last 36 years. Past performance is not indicative of futures results.

The USDA kept its estimate of the 08-09 Florida orange crop at 158 million boxes, down from 170 million boxes the previous year. May orange juice was up 1.45 cents and has been higher for the last 3 weeks, which has not happened since last August. Support is seen at 71/72 cents with resistance at 75 followed by 80. Look for consecutive closes above the 40 day moving average at 73.10 to confirm a bottom. Prices could close the gap at 87 from Mid-November over the next few weeks. We have our clients lightly long May futures.

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May silver lost 12 cents last week starting the week by trading 80 cents lower only to reverse and move 64 cent higher the second part of the week. The mid-week bounce off the 50 day moving average at 12.50 came on dollar weakness, whispers of coming inflation and perhaps some confidence from a rally in equities. We are still anticipating a trade under the $12 level to add to our clients existing long positions and for new entries. We are tracking $3-5 call spreads in July and December but have yet to commit any sizeable funds. We would advise traders to scale into futures being that the charts are oversold and on increased dollar weakness we may get a move north and miss the $11.50./12 buy zone we have patiently been waiting for. On a continued rally in stocks we would think it would be logical for some of the funds to exit metals and find their way to equities helping us achieve our buy point but that has yet to happen.

April gold was lower by $11.10 and like silver starting the week lower giving up $46 only to reverse and trade $34 higher. Prices were briefly below the trend line from November but by week’s end prices recaptured that line. We are advising clients to be buyers of the August 950/1050 call spreads. We are recommending buying gold in 3 traunches; 1/3 between 890-900, 1/3 at approximately 855 and 1/3 at approximately 825. The daily chart is oversold so we may get an advance from these levels but are still only lightly long, looking for more evidence. Another trade idea would be to sell calls and get long futures simultaneously.

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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.