For April 14th - April 18th 2008
By: Matthew Bradbard
Inflation...what inflation? Prices of food and energy continue to stay at elevated prices and no immediate relief looks to be in sight. When you have riots around the globe on higher food prices people start to take notice, but prices have been moving higher now for years and we expect that prices will continue to rise. There has not been one incident that caused a spike in prices, but rather a growing world population and demand outpacing the growth in supply. There’s no need to give an economics lesson, but the prices in commodities are dictated by supply and demand. We will continue to suggest buying on dips being that we expect grains, energies, and metals to continue to benefit from new money flows, growing demand, and tight supplies for years. Recognize that as prices move higher and volatility increases, investors will need to commit more funds to accomplish the same as margins increase and option premiums grow it will become more costly to invest in commodities.
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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Last week crude oil gained $4 and traded above $112 a barrel for the first time in history. Once again an unexpected drop in inventories helped drive prices higher. The trend is certainly up, but with the market over bought and with a potential double top at $112.20, we would not be surprised to see a slight set back. The 9 day moving average comes in at $108.15 and should serve as first support. A real tug of war exists for the direction in oil prices. New money flows into oil as an alternative with the current unattractive risk/reward dynamic in equities and with a weakening dollar prices may continue their march higher, conversely according to the International Energy Agency reducing consumption on oil; the foundation of supply and demand should dictate lower prices. We are suggesting for our clients to wait for a pullback and look for a long entry.
As weather improves, so do driving conditions. As driving conditions improve, daily consumption of gasoline rises. When rising consumption competes with inventory accumulation, demand is accelerated and prices should rise. In years past this has been the trend, but will high prices effect the consumption and with a slowing US economy will drivers cut back? Our feelings were confirmed last week with June unleaded making a new contract high and breaking above previous highs; the path of least resistance remains up. What was resistance now should be support as prices may make an attempt at $3.00. Heating oil prices are high and with signs of warmer weather around the corner we expect prices to move south, but an outright short may be out of the question as a 10 cent move higher at anytime is entirely possible. We are currently pricing out put strategies seeing that when prices turn we expect to see a 40 cent move down.
Natural gas prices have been on the rise lately, prices have risen nearly 10% in the last 3 weeks, most recently on news that a large production facility in the Gulf of Mexico was shut down following the discovery of a pipeline leak. For the time being $10.40 should serve as solid resistance and natural gas prices seem to be retracing, we expect a pullback to $9.20-50 on June. $9.17 serves as the 61.8% Fibonacci retracement assuming December’s lows and the recent highs. We have an interest in getting long via futures and options for clients but only from lower levels.
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The U.S. and South Korea are meeting to discuss the possibility of resuming beef trade. So far, the U.S. has not been able to deliver a consistent product that meets South Korean quality requirements. After the close Friday, the USDA estimated the week's beef production at 498.0 million pounds, up 8.0% from a year ago. May feeder cattle prices seem to be searching for a bottom as prices have bounced from over sold levels, we aren’t yet convinced so we’ll recommend staying on the sidelines. In terms of live cattle we are short with customers in June looking for new lows. We do not expect prices to get much higher than current levels before heading lower again. Selling June live cattle on April 9 and holding to April 25 has been profitable 13 of the last 15 years for an average of $601. Past performance is not indicative of future results. Fundamentally cattle slaughter normally remains tight through March as animals in feedlots gain weight slowly during the cold of winter. By no later than mid April, marketings tend to surge, thus cattle prices have usually began to decline by the beginning of deliveries against April futures.
June hogs closed slightly lower on the week, but with hope that strong export demand will help to save U.S. producers from too much production, we could see a change in direction. Pork production was estimated at 456.7 million pounds, up 14.7% from a year ago. We would prefer to not be positioned long or short and will wait for a better entry point in lean hogs. Both daily and weekly charts indicate a move higher in May pork bellies, but we are spectators for clients here as lack of open interest and volume makes this too risky.
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Stocks: The weakening US economy has further to fall according to the majority of economists in the latest WSJ forecasting survey. By a ratio of 3:1, respondents said the economy is in a recession and we have not bottomed yet. If it wasn’t for Friday’s 257 point decline, the Dow wouldn’t have done too bad last week, closing 284 points or 2.3% lower at 12325. The S&P pulled back 38 points or 2.7% to end the week at 1333. The NASDAQ did not fair much better, loosing 81 points or 3.4% at 2290. We believe stock investors are starting to accept we have entered a recession. This week’s earnings should help solidify the case. The good news is the market is bracing for the worst and any positive news will be greeted with open arms. Trading volume has been thin of late as many are sidelined waiting for a clearer signal of what is to come. The next leg will depend largely on earnings and what the CPI and PPI indicate in terms of inflation expectations. Current support for the S&P is 1320 with 1336 serving as resistance. Support for the Dow exists at 12200 with resistance at 12467; the bottom of the gap formed on Friday’s gap lower open. There is a seasonal buy on the June Dow that has worked 10 of the last 10 years from April 15 to April 22 for an average of $1848.
We cannot stress enough how vital it is to hedge your portfolios and protect against further selling. Think of it as insurance on one of your largest assets. We have refrained from recommending intraday trading on equity futures, as we would equate that to gambling, but will continue to recommend hedges for all stock investors. Call to inquire how you can protect your stock portfolio with index futures and options.
Bonds: The University of Michigan's index of consumer sentiment fell from 69.5 to 63.2 in April, much weaker than expected and the lowest since 1982. According to the most recent Fed minutes officials are worried about a “prolonged and severe” economic downturn. Based on recent data we would expect a further cut in rates at the end of the month. Currently the market is split between a 25 to 50 basis point cut on April 30. Last week the long end of the curve gained on the shorter with June bonds moving over 1 point and 10 yr notes gaining only ½ point. We expect bonds to build on this strength from last week and make their way to 120-15 to 121-00 this week, 119-00 should serve as support. We need to see a trade above 118-17 to see notes higher, on that expect 119-00 to 119-15 with support at 117-16.
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The Bank of Japan said that producer prices were up 3.9% in March from a year ago, the biggest increase in 27 years. Until recently, Japan had been struggling with deflation. The June yen moved higher on the week after basing out and bouncing off what will now serve as support around .9750. We have client’s positioned long futures and short out of the money calls as opposed to using a stop to weather the volatility. Buying the yen on April 8 and holding to April 18 has been profitable 13 of the last 15 years for an average of $1258. Past performance is not indicative of future results.
ECB kept rates at 4.0% for the 10th consecutive month faced with record inflation. The market doesn’t expect the ECB to start cutting rates until September. Although it’s too early to say as of this writing, it appears that we have a potential bullish engulfing candle forming on the daily chart for today, if we get a close above 1.5786 this will be confirmed. Buying the Euro on April 15 and selling on May 5 has been profitable 8 of the last 9 years for an average of $1557. Past performance is not indicative of future results.
The Bank of England lowered rates to 5.0% from 5.25% last week. Housing data in the UK sent the pound lower as house prices dropped 2.5% in March alone, marking the heaviest monthly fall since September 92’. The pound could be furthered damaged if the weak housing spills over into other areas of the economy forcing the BofE to cut interest rates more sharply. On the charts it appears the pound will bounce from oversold levels but we would use this bounce as an entry to get short. We will start selling the June contract at around the 2.000 level and may chose to advise the 1.95 June puts again for clients if the price is right.
The Swiss franc was able to register a small gain last week picking up 77 ticks on June. Current support comes in at .9850 with resistance at 1.0150, we would expect the Swissie to remain within those parameters this week and will wait for further developments to issue a trade recommendation.
On the daily chart for June the Aussie appears overbought, so for new longs we suggest waiting for a pullback to .9050 to .9100 for an entry. We are okay holding longs as long as you have enough margin to weather the moves, as we do expect prices to challenge the .9350 level in coming weeks.
We feel the Loonie is closer to a buy point than a sell point as we will continue to operate under the idea that the recent .9700 and 1.0200 trading range will hold. Prices will most likely continue to look for guidance from outside markets and we are on the sidelines for clients here. If we get a trade down to .9700 we will explore longs for clients.
Just when you think the dollar is finding a bottom selling ensues, while too early to say at the moment, we may have a bearish engulfing candle on the dollar index with a close below 72.065 in June today. We expect the selling to slow but do not expect a significant bottom until the Fed is done shaving rates. Although we rarely will trade the dollar index, we monitor it closely as many commodity markets seem to key off moves here, so we suggest to always keep tabs on the US dollar. The Federal Reserve, which has cut its short-term target three percentage points since August, are expected to cut rates by at least another 25 basis points at month’s end, which we interpret as the low in the dollar has yet to be made.
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Corn: Last week’s USDA crop report put ending stocks at 1.238 billion bushels vs. 1.438 the month prior and under the average pre-report guess of 1.303 b.b. Assuming current assumptions, we will consume more corn than we will produce this year based on 86 m.a. being planted. Over the next few weeks something will need to give. Prices will most likely need to trade higher to encourage farmers to plant more acres. Weekly export sales report showed 473 t.m.t. of corn was sold last week, down 32% from the week prior and below pre-report estimates. The trade will pay close attention to the weather looking for dry weather to allow farmers into the fields. After massive rains last week, we will not look for any field work to surface until we can see a couple successive dry days. We remain bullish on corn and will use breaks in price as opportunities to get long new crop. We currently have clients positioned, expecting a pullback in the short term anticipating prices to reverse and move to new highs in coming weeks. We are currently positioned short July and long December for clients in futures and options. We would not rule out an additional 20 cent reduction in new crop, taking prices down to the low 580’s. If this was to play out, we would be seeking longs aggressively for our clients from that level. Being out right long at current pricing is aggressive and we recommend holding puts or spreading off some market risk by selling other months against December longs.
Beans: Last week’s USDA crop report put ending stocks at 160 million bushels, up 20 m.b. from the month prior and 3 m.b. over the average pre-report trade guess. On the surface it looks negative because numbers were up, but remember 160 m.b. is a bullish number. In the February USDA report they lowered ending stocks down to 160 m.b. and beans rallied from just above $13 to over $15. This market is torn between bullish and bearish sentiment; the current wet weather means delayed corn planting could lead to more bean planting, but traders feel beans need to trade alongside corn to ensure that corn does not steal acres away from beans. Weekly export sales report showed 583 t.m.t. of beans were sold last week, which was in the range of pre-report estimates. The forecast for warmer and drier weather looks to have beans start off lower, but with more precipitation in the forecast we would suggest, much like in corn, to buy a break in prices. Even though starting to look overbought on the charts, we feel soybeans will need to trade higher following corn to compete for acreage. November should be supported at $12.40 with resistance at $12.80 followed by $13.10.
It is soy meal which really drives old-crop soybeans higher, despite a seasonal decline in domestic consumption. Soy meal is non-storable, so inventories cannot be accumulated in large amounts. When in March/April US processors begin to slow their rate of crush, (due to slower consumption and the increase in competition from South America), underlying demand for tight and tightening supply supports a seasonal uptrend until the new crop is assured, often in July. The seasonal trend for July soy meal is up for the next few months. We are looking for an entry closer to 340.0 for clients.
Wheat: Last week’s USDA crop report put ending stocks at 242 m.b., unchanged from the month prior and under the average pre-report trade guess of 261. It is a historically low number, but much like the other row crops it’s all about weather and its impact on emerging wheat crop. The weekly export sale’s report showed 454 t.m.t. of wheat was sold last week. Sales have been decent of late but we are more concerned with weather and its impact on emerging winter wheat crops. CBOT July wheat is a buy below $9 but we would like to see a confirmed buy signal before committing too heavily. Additionally, KCBT can be bought against CBOT in July, if you can pick it up in the 30’s, looking for it to pick up 50 cents risking 15-20 depending on your fill.
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Cocoa prices picking up nearly 12% last week as a perfect set up on the charts, convinced us that prices had corrected too much in recent weeks. It’s always nice when the stochastic and MACD indicate a move and at that same time the charts support a buy or sell. Prices appear to still have enough momentum to move higher, but we suggest paying close attention to the US dollar and if we do start to see a move north make sure you have stops below the market as prices could quickly find their way back to 2350 on July. If already long look for 2620 followed by 2700.
Sugar prices advanced 8/10th of a cent last week and sliced through the 20 day moving average, but ran into resistance at the 38.2% Fibonacci retracement level at 13.25 on July. We expect this market to take a breath and consolidate, not wandering too far from the 13 cent level this week. This would be supported by historic tendencies as April is typically a mixed month for sugar. We continue to hold call options and futures in October for clients.
We are bullish cotton longer term, but prices appear overbought currently and we are looking for a pullback in December to re-establish longs for clients. Anytime we worry about a recession that could affect consumer demand, cotton tends to get hit. Cotton will continue to look for guidance from the grains in addition to paying attention to the weather as we progress thru planting. We are likely to find support on a setback at 82.50 which serves as the 50 day moving average. We are holding 10 cent bull call spreads in new crop and will advise long futures on the expected retraction.
FCOJ prices are again starting to look attractive as May nears contract lows. We will look to see if current support holds and any sign of a bottom to position long thinking that sooner or later the funds will come here looking for value positioning in a commodity that appears relatively cheap. Right now there is no fundamental interest that justifies a long so we will wait for further developments. Without any new bullish developments lower pricing could potentially spark demand.
Coffee tried to garner a move to the upside but failed last week and looks destined for a move lower. Open interest is around 150,000 lots with funds holding almost 1/3 of these positions, so if they were to liquidate, the market could come under pressure. We expect prices to remain range bound between 125-135 for May and currently have no trade recommendations.
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Although it takes more money with increased margins and more volatility, it makes sense to have a portion of your commodity exposure long silver. We feel the recent lows should serve as good support and when the market figures out how truly bad inflation will be, prices will start their ascent higher quickly and if you aren’t already positioned, you will be forced to jump on a moving train. In order for July silver to see the recent highs we will need to see prices get thru the highs from 3 weeks ago, which would put us above the 40 day moving average and trigger more buying. We expect prices to be back and forth between $17 and $18.50 looking for a catalyst to take prices higher or lower. This weeks CPI, PPI, and FOMC rate decision at the end of the month should give us a clearer picture of inflation, which should assist in getting prices moving higher once again. We currently hold $2 call spreads for clients in July and December and advise lightly buying futures looking to add length on signs of strengths.
June gold is currently above the 9 day moving average after notching a $10 gain last week. MACD and RSI are indicating that traders should be long but I would like to see some further evidence before getting too long. We expect gold to look for guidance from the dollar and oil this week. Additionally, as we voiced above the CPI and PPI should give a clearer picture of the future outlook for inflation. Gold will be one of the primary benefactors of higher inflation expectations. Overhead resistance at 938 followed by 957, support should be solid around the 910 level.
If a portion of your portfolio is not already in gold or silver we highly suggest you diversify into these metals as we expect to see much higher prices in coming months due to inflationary concerns.
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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. |
