For April 21st - April 25th 2008

By: Matthew Bradbard

Consumer confidence has fallen to a 26 year low, housing starts remain weak, unemployment is rising, food and energy prices remain off the charts, and volatility is now commonplace in the stock market.  Investors can take their coming rebate checks and buy commodities; whether it is corn and rice at the grocery store or gasoline at the closest 711.  The rebate is simply a band-aid on an open wound and most likely will be used to pay down swooning debt, cover a missed mortgage payment, and help to keep food on the table or gas in our SUV’s. It would be prudent for the government to worry more about inflation than an inadequate rebate. The last time that the real fed funds rate was negative for any length of time was in the 1970’s. Need I remind you what happen to commodity prices in the 70’s? We are in for more pain here domestically, but as we repeatedly remind commodity investors, prices will continue to remain at lofty levels and that the bubble in commodities is far from bursting because the demand is largely from emerging markets.

To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997.

____________________________________________________________________

Due to closures in Mexico's oil terminals because of bad weather, turmoil in Nigeria, and the unrelenting persistence of speculative dollars flowing into Crude oil, we closed at another record high at 116.69 on June and up $6.69 on the week. Crude was up 6% on the week and is now up 22% for the year. In order for this market to come off we need to see a steady dollar and to see refinery utilization rates closer to 90%. Now that we have traded through the double top we spoke of last week, the path of least resistance remains up and oil will most likely print new record highs this week. If you chose to trade here we would suggest being long and trailing a stop because when oil decides to correct it will have a “take no prisoners” attitude.

Since June RBOB has traded above $2.77/gallon there has been little in the way of resistance. As we predicted last week the upside momentum continued and we came close to $3.00 as the week’s high was $2.9822, up over 19 cents a gallon. There seems to be little relief in sight and as consumers we may need to prepare for $4 at the pump this summer unless we see a significant shift out of energies or growth abates in global emerging markets. Gas should continue to look for direction from Crude oil but we expect higher prices in the short term unless the domestic refineries can pump more fuel. We continue to price out put strategies in the heating oil market but would like to see a top confirmed before executing any orders for clients. Prices are overbought but may remain there unless we get a push lower in oil and the other distillates. 

Since December of last year a trend line has held in natural gas and if we approach it in the coming weeks we will advise a bullish strategy either via options or futures, but for now we would stand aside. Although the trend is up, we are not comfortable initiating a position at these levels for our clients. In the last 15 years the pattern for June natural gas prices have generally peaked into late March early April and come off into May. If this pattern holds true we will look to establish longs, as for now the support comes in at approximately 9.70.

______________________________________________________________________

Last week June lean hogs jumped up 3.10 to 74.35, the highest close in a month, helped by positive packer margins. There has been excitement that more pork may go to China this year, but that has not been officially confirmed. After the close Friday, the USDA estimated pork production at 472.0 million pounds, up 17.2% from a year ago. We expect prices to be moving lower in the near future. There are gaps that should be filled on the daily charts on a move lower and a potential island top could be formed on a gap lower Monday; wait and see. As the charts told us last week, prices are indicated higher in Pork bellies but we are content on the sidelines with clients. 

For the first time since October, South Korea agreed to accept US beef again, as long as the cows are 30 months or younger. As time goes on, the US will have a chance to ship older cattle, if they can show the South Koreans that the feed supply is safe. The first shipments are expected in mid-May. June cattle were down Friday, but up on the week gaining 2.675 and ending at 92.325. After the close Friday, the USDA said that, as of April 1st, there were 11.684 million head of cattle on feed, up .3% from a year ago and less than expected. March placements were down 11% from a year ago while marketings were nearly even. The USDA estimated last week's beef production at 520.6 million pounds, up 7.4% from a year ago. We are advising clients to stay short for now, even though they are under water as we still expect prices to move down in June live cattle.  For greater detail look at our Published Articles section ‘5 hot picks for 4-21-08.’  May feeder cattle should encounter resistance at 107.40 with 1st support just below 104.

____________________________________________________________________

Stocks:   The Dow was up 524 points or 4.3% for the week, lifting the Dow to the highest level since January 10; closing at 12849. The S&P 500 had its best week since early February, gaining 58 points or 4.3% to 1390. The NASDAQ has moved up four of the past five weeks and added 113 points or 4.9% to 2403. Watch this week if this leg higher in the S&P can push through the highs in the first week of February, a level that when reached on the last 2 occasions induced profit taking. If traders are able to push through these levels it will most likely continue higher, but without more evidence we are not convinced this is more than a 10% bounce in a bear market.  

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:    When you have one of the most respected bond fund managers (Bill Gross-Pimco) call Treasuries the most overvalued asset class in the world prices are probably moving lower.

Treasury yields surged last week amid a growing consensus that the worst of the credit crisis was behind us. That logic had the market take out the 2nd 25 basis point cut in rates that was expected at the end of the month. At the opening of the week the fed-funds futures market was just about evenly split between a quarter point trim or a half point at the upcoming FOMC meeting. By the week’s close the futures were barely predicting the 1st quarter and have fully priced out the 2nd quarter. The debt market fell of a cliff last week but the long end of the curve was hit a little harder than the short, so we were half right with our assessment last week. We were correct picking the direction, but we felt the short end of the curve was to feel the brunt. June bonds lost almost 3 ½ points and traded at their lowest level since February 28, support is just above 115 with resistance at 117’07 followed by 118’09. Ten year notes in June were down but only lost about 2 ½ points, ending the week at 116’04.5 after bouncing off the 100 day moving average which should serve as 1st support with resistance coming in at 116’26. We are advising clients to be on the sidelines here, but if investors start taking more risk the debt market could continue lower so have a sell rallies mentality if trading this sector.

____________________________________________________________________

The slowdown in housing has reached Canada as the Canadian Real Estate Association said that home sales totaled 75,476 units in the first quarter of 2008, down 13% from a year ago. The June Canadian dollar closed up 208 points at 99.39 after running into resistance at just above par mid-week. Bank of Canada is expected to cut rates by half a point at it’s meeting on Tuesday taking rates to 3%. We are about in the middle of the recent range we have discussed in previous commentaries and we expect the Loonie to find its way to either 97 or 1.02 depending on what action the BofC takes this week. We have a bearish bias.

Japan's Cabinet Office said that consumer sentiment index improved from 36.1 to 36.7 in March. The Office also kept it’s view that the "economic recovery appears to be pausing." The June yen fell 227 points to .9663, its lowest close since 2/29. The yen generally declines against major rivals during the periods of greater risk appetite as investors will borrow in yen and put that money to work either in other currencies or asset classes. Next support lies at .9500, we do not expect much upward movement until the stock market rally slows or reverses. We were forced to cut losses in our previous yen position at a loss of $250/contract for our clients.

Another record high was made last week in the Euro trading as high as 1.5946 in June. We may trade up to 1.60 just to grab the headlines, as one of my fellow traders says, but if that happens we will put in a top and the move south will follow. Once we start moving down we feel that a 10 cent move will happen quickly so if you have the staying power you can start lightly building a short position in June.  To confirm we would like to see a settlement below the 20 day moving average which has not happened since 2/18. 

The Swiss franc turned lower late last week and broke out of the narrow trading range it had been in for 6 sessions. The Swissie lost 115 last week and looks destined to make its way down to the 50 day moving average, at .9695 on June. We will be looking elsewhere for opportunity for our currency trading clients.

The Australian dollar is starting to look heavy and we have suggested clients to trail stops up after seeing last week’s activity. Recent minutes from the RBA indicate that rates may be on hold. For now prices appear to be supported around the .9200 level, but on continued weakness in commodities or if the Fed does not lower rates at the end of the month, it is entirely possible to see a moderate pullback. If already long in June we are not recommending an exit just yet, but trail stops and let the market take you out on a move lower. If we are able to make a new high above .9366 we would most likely add to longs and enter new longs for clients without exposure.

With continued housing issues and still tight credit markets we feel the BofE has further rate cutting ahead and therefore we like selling any strength. The fact that consumer-price inflation in March held steady at 2.5% annual rate, defying expectations of an up tick could help the argument of further rate cuts if the market feels inflation is contained. In terms of futures we will wait for a print above 2.00 to get short, but we started working long 1.95 June puts late last week for clients paying approximately $750.  This option was at-the-money early last week and with 46 days and a 25% delta we think we can double our premium in this trade.

Even with the dollar index closing lower on the week,  the mentality of traders, based on activity late last week, is that the dollar is putting in a bottom and ready for an advance. I agree to some extent, but am opposed to building a position long and will key off this move to position clients elsewhere and eventually use this rally to set up a terrific shorting opportunity. We should struggle a little getting through 73.58, eventually finding our way to 74.50, which in our opinion would be the peak of the advance over the next few weeks. Supportive comments out of the G-7 may also assist in a bounce.

____________________________________________________________________

Corn:  Weekly export sales showed 868 t.mt. of corn was sold last week, on the higher end of pre-report expectations. Corn traded to new contract highs last week as planting delays due to rain has traders fearful that some corn acres may switch to beans if not planted before May 10th. The later the crop goes in the ground the greater risk we have on yields being affected as corn could burn up in July with higher temperatures and less perceived rain than in June. Major support for December corn lies at 6.00 followed by 5.87 which is the 38.2% Fibonacci retracement level. A close below 6.00 most likely means that the clouds have parted and allowed farmers into the fields. Bottom line, corn needs to get in on time and yields need to be better or prices may have to move high enough to discourage over consumption. We are suggesting clients to be long December and short July unless we get a break lower and then we would just suggest being net long new crop.

Beans:   Weekly export sales showed 477 t.m.t. of beans were sold last week.  November beans closed 20 cents higher on the week but may be stalling after they rallied $2.71 off the lows from just 2 weeks ago.  Currently prices are sitting just below the 50 day moving average.  The trade is telling us that soybeans need to keep pace with the corn market so that corn doesn’t steal back any acres. Many farmers have yet to decide on what they will plant and the spread between corn and beans will surely influence their decision.  Due to recent weather patterns traders feel that farmers may plant less corn and more beans as corn planted after May 11th begins to loose growing days and yields. November beans have support at 12.45 then 12.08 with upside resistance at 13.10 followed by 13.62. Although we prefer trading the new crop, buying July soybeans on 4/17 and holding until 5/9 has been profitable 13 of the last 15 years for an average profit of $724. Past performance is not indicative of future results.

Wheat:   Weekly export sales showed 129 tm.t. of wheat was sold last week. Sales will most likely continue to be light as importers are waiting for new crop harvest of our winter wheat crop that usually starts the last week of May through June. Weather has been almost ideal for wheat of late so prices may continue south, but looking at the charts we are nearing a potential buy zone even if it may be a short covering bounce. We made an attempt at an outright short last week for clients on KCBT and got stopped for a loss, but we like the July KCBT over July CBOT in the 30’s looking for 80-$1 in coming weeks.    Support comes in on July CBOT wheat at 8.55 with resistance at 9.10, in July KCBT we see support at 9.12 and resistance at 9.50.

____________________________________________________________________

With terrible housing numbers lumber was still able to hold its own only loosing $4.20 on the week and bouncing off what now should be support at 238.20 on July. It may be too early to predict a reversal, but just looking for a trade and weighing risk vs. reward getting long July with a stop below the recent lows you could see a technical bounce of $15-25 taking prices to 265.

Although prices moved higher on the week by 3.35 cents, a move of nearly 5 cents lower on Friday was enough to convince us that we don’t want to be in coffee at the moment with clients. We lean towards a move to the downside which should become a reality as large crops are expected out of Brazil, Vietnam, and Indonesia. Ideally we get a break in the short term that will allow us to acquire call options on the cheap going into Brazil’s winter. This would be doable on a break to 120-125 in July. 

Cocoa prices advanced on the week and put in an impressive showing closing $108 higher at 2661 on July. This is a market that has shown tremendous volatility of late; during the commodity ‘de-leveraging’  in mid March prices lost 24% and then in the last 2 weeks we have seen a 23% increase and prices are now back within $320 of the highs. Friday alone we had a $220 trading range as prices bounce off the 38.2% Fibonacci retracement level with a vengeance. We expect cocoa to back off in coming sessions but will not issue a sell for our clients. If we are right, use this pullback as an opportunity to get positioned long.

Let me start by saying we are longer term friendly to new crop cotton but the immediate action looks like prices are moving lower. Cotton has been helped by the recent strength in grains and if things were to correct in grains we could easily see cotton a nickel lower. We continue to hold 10 cent bull call spreads for our customers on December and will advise new entries to buy the same positions our clients currently own, the 80/90 December call spread if it can be bought for 2.50/3 cents in coming sessions. If you are able to pick December futures up below 80 cents we feel it is a buy.

July FCOJ prices ran into resistance last week as it approached 123.00 which has served as the top of any attempted rally within the last 30 days. We have been back and forth in a 10 cent trading range for the better part of March and April and we do not expect much more for prices in the immediate future. 

October sugar currently sits just above the 50 day moving average at 13.88 cents/lb. While on the daily charts we are over bought, looking a little deeper at other indicators like RSI and MACD we are ok advising longs via calls or outright futures buying pullbacks, like we saw on Friday. Taking a broader look at the weekly charts you can see higher highs and higher lows for the last three weeks which is also encouraging. We maintain our conviction that sugar prices are moving higher and in terms of value should find its way into almost all commodity portfolios. Although, sugar has not appreciated as quickly as perhaps energies or grains of late, if you look back 2 years from now we believe sugar at 14 cents will seem extremely cheap.

____________________________________________________________________

As the dollar goes so does gold.  If the FOMC slows its pace in cutting interest rates we may get a bounce in the dollar which could contribute to a pullback in gold prices. What is interesting is if the Fed chose to cut rates only 25 points or to leave rates where they are, it would most likely be due to inflationary concerns and that should be beneficial to gold prices in the longer term, so we are now in a tug of war between if lower rates are bullish or bearish for gold. June gold lost its luster last week trading $9 lower on the week. If investors think the worst of the credit crunch is behind us and are willing to take more risks, the money that has been parked in gold as a flight to quality or safe haven may leave and find a home elsewhere. So for the time being we would suggest being on the sidelines looking to buy the coming correction. June gold has support at 910 followed by 888.

Silver poked its head above resistance but failed last week with July trading as high as 18.88 mid week.  As we pointed out last week we expect silver to remain range bound between 17 and 18.50 until the Fed meeting. We have clients positioned long in July and December bull call spreads that are holding their value, but before initiating new positions we would like to see a clearer picture as prices currently seem to have no direction. On the charts technical indicators are giving us mixed signals. What is encouraging is that April breaks in July silver are generally reversed in May; 8 of the last 12 times or 65% of the time.

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.

Back to Top

______________________________________________________________________
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.