MB Wealth Corp. Weekly Commentary
Energies Livestock Financials Currencies Grains Softs Metals
For April 28th - May 2nd 2008
By: Matthew Bradbard It’s always darkest before dawn. You cannot read a newspaper or watch television without talk of high energy and food prices, as a new term has been coined “gag” inflation, which stands for gas and agriculture led inflation. The sooner consumers and commodity traders can come to terms with these high prices, the easier our lives will be as we expect prices to stay at elevated levels for some time. Yes we will have dramatic volatility and occasional price correction, but as the CFTC expressed at a recent conference with concerned parties who thought speculators were inflating prices, there was no evidence found to support that. The insatiable demand from emerging markets, tight supplies and a weakening US dollar are the likely culprits. Unless you think emerging markets will stop consuming commodities, appropriate supply will be found overnight, or that we will get a significant shift in the trend of the dollar, prices of commodities will remain high. Look at the big picture, and if the same dynamics that have inflated prices still exist, then I guess we should expect the same outcome. To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ Although prices remain overbought in Crude oil, which alone is not a reason for prices to retreat. Last week June oil gained just under $2 and prices have closed higher 9 out of the last 11 sessions. After trading as high as 119.55 we ended the week at 118.52. First support emerges at the 9 day moving average that’s currently at 116.89. Strikes at refiners in Europe, further pipeline disruptions in Nigeria, and unrest in the Persian Gulf should keep the trend up as we move towards 125, 130 or above. As we instructed last week, if you are playing oil from the long side, which in our estimation is the only side to play, currently make sure stops are in place because if oil reverses it will do so with a vengeance as all weak longs will abandon their positions swiftly. Last week June RBOB hit our target of $3 a gallon but prices did not stop there as they traded as high as 3.0735. We wanted to reiterate our warning of higher prices from last week, thinking that the more we hear it the easier it will be to accept. 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. Heating oil prices are starting to look heavy at these levels. Looking at the 328/312 June heating oil bear put spread we may advise a buy for clients if we can pick this spread up for less than $2,500. You would have approximately one month to see prices back off picking up about 15% of the move in the futures based on the current delta. When prices come off we expect to see a rapid 20-30 cent correction. If you were able to get this bought for the right price we recommend putting a GTC sell order at 950 points or $4,000 to exit. Apparently, you cannot hold a good thing down as natural gas holds no regard for gravity and continues to surge higher. June natural gas made a new contract high as it traded 36 cents higher on the week closing above $11 for the first time since January 06’. We have been waiting for a correction to advise a bullish option or futures play, but that has not happened, so we will investigate strategies for our clientele this week as how to play this market. If we do not get in, prices may continue to wander north without any exposure. This may involve calendar spreads or a combination of futures and options; as we figure out a strategy we will elaborate most likely next week. ______________________________________________________________________ Apparently, strong demand is overcoming the market's concern about having too many hogs available for slaughter. June lean hogs closed up 2.15 at 76.35, the highest close in nine weeks. We had expected prices to roll-over but it appears that we were either early or wrong. First support comes in at 75.50 with resistance on June just above 77.00. One way to play this without getting short just one month, would be to play a spread. If you were to go that way we like long August and short June; the spread is at 1.85 premium to August and we could see this getting back to 4.50-5.00, which would be a gain of about $1,100 risking $500. Pork bellies could go either way so we would suggest standing aside. After the close Friday, the USDA estimated the week's beef production at 534.7 million pounds, up 6.4% from a year ago. On the week, June cattle closed up .87 at 93.37, the highest close in over a month. We remain short with our clients, but this trade is against us and on any action that takes prices higher we will be forced to cut losses as the gag inflation may be moving to the livestock sector. Our target remains 90 or below if prices break and allow us to stay with the trade. April strength in June live cattle reversed on May 7 of the last 10 times. Friday’s close of 107.75 in May feeder cattle was a close above resistance and on a weekly chart there appears to be more upside, although we are not interested in getting clients in and will look elsewhere. ____________________________________________________________________ Stocks: The vix reached its lowest point of the year last week. This is significant because the vix tends to move inversely to the stock market, which implies investors are more positive and have a healthier outlook than in previous weeks. Even with signs of a lackluster economy and sky high energy prices, the transportation stocks within the Dow have had a perplexing move higher. These stocks have moved 20% higher off their January lows, which is baffling since transportation companies generally are sensitive to economic turmoil and rising energy prices. With housing woes nowhere near done and consumer spending expected to soften, this move is not justified so we would expect prices to factor in the true economy and back off. The Dow has traded within a 200 point range and we would not expect too much movement until Wednesday afternoon’s Fed decision. The S&P traded back and forth between 1370 and 1400 and is attempting to get above those levels which it has been unable to do on recent attempts. Look for guidance from the Fed and momentum buyers on a breach of 1400. 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 consumer sentiment index fell from 69.5 to 62.6 in April, the lowest in 26 years. Interest rate futures as of Friday indicated a quarter point rate cut is still expected by the markets but the odds of such a reduction were 74% down from 100% a week ago. As we discussed last week, if investors emerge and are comfortable adding risk to their portfolio expect more selling in Treasuries and that is exactly what happened. June bonds lost just over 1 basis point and look like they could shave off a few more ultimately moving down to 113 in coming weeks. June notes lost just over 1 point as well ending the week at 115’02 and moving closer to our target of 113’15. We would advise to continue selling rallies unless there is a significant change in Fed policy. ____________________________________________________________________ Economic growth slowed to its weakest rate in 3 years in the UK’s first quarter as the economy grew at 0.4%. Numbers like this make the case stronger for further rate cuts by the Bank of England which would bolster well for our current holding of 195 June puts for our clients. We bought these for approximately $700 and are looking to unload them for around $1400 in coming weeks. The June British pound was down 136 ticks on the week closing just above the 100 day moving average at 1.9749. Support at 1.9600 with resistance at 1.9880. Japan's Statistics Bureau said that consumer prices were up 1.2% in March from a year ago, the biggest annual gain in ten years. The June yen ended down 70 ticks at .9599 on the week back at levels seen in late February. We may find support at the 100 day moving average, .9525, but we would not issue a buy until stocks fall out of favor. The Bank of Japan meets and is expected to hold interest rates steady at 0.5%. As we predicted the Euro printed 160 last week only to fail immediately after ending the week at 1.5562, down 4 cents off the highs in June for the lowest close since March 25th. We got the confirmation we were looking for as prices closed below the 20 day moving average which currently sits at 1.5731 and should now serve as resistance. Next support comes in at the 38.2% Fibonacci retracement at 1.5335. We will be selling rallies for our clients this week and recommend you do the same. Believe it or not Marc Chandler with Brown Brothers Harriman is calling for 140 this year. The Bank of Canada cut rates 50 points as expected bringing them to 3.0%. On the week the Loonie lost 101 ticks closing at .9838. For now prices could go either way, so would suggest staying out and looking for a better entry short closer to 1.02 or long closer to .9700. The Swiss franc moved through the 50 day moving average as it continued lower this past week as predicted loosing 162 ticks by week’s end. Although the selling may slow, we expect prices to reach .9450 before consolidating. Rallies can be sold utilizing stops above the 50 day moving average; what was support should now serve as resistance. If you had followed our recommendation you should have made some money long the Australian dollar and got stopped out last week as we recommended tightening your stop loss as the Aussie appeared heavy. After the ensuing correction takes place we will look to re-position our clients long around the .9050/.9100 area on June. Expanding upon last week, the dollar looks destined for a bounce though it may be short lived. The June dollar advanced 80 ticks last week closing at 73.03 after reaching a new low on the June contract intra-day Tuesday. Resistance, as we pointed out last week, should come in at 73.58 followed by 74.50. We should get a further advance if the Fed only does 25 points, as weeks back the market had all but assured us we were getting at least 50. The problem is the Fed’s key short-term interest rate is so low it doesn’t compensate investors for expected inflation concerns so although the selling may slow there may not be too much dollar buying. ____________________________________________________________________ Corn: Weekly export sales showed 775 t.m.t. of corn was sold last week. Demand remains good even with corn prices at record levels. Since only 4% of our projected corn crop is planted, weather’s impact is on planting progress vs. weather’s impact on plant emergence. Planting progress is up from 2% last week, but well below the average of 17% according to the USDA. Once 1/3 of the corn crop is in the ground price volatility will pick up as the current stock to usage ratio leaves little room for loss in acreage or yield. With more wet weather in the forecast we could continue to see planting delays and corn will most likely make new highs in coming weeks. Currently all models point to continued rain in the ECB and WCB with 2 rain events in the forecast. Until we see the skies lift and a window open for planting we suggest having a buy breaks mentality. Our recommendation from last Monday http://www.mbwealth.com/articles/theweekahead4-21-08.pdf seems to be working and we will continue to recommend buying December on any signs of weakness unless that weakness is caused by major planting progress. Support comers in at 5.92 followed by 5.87 with resistance at 6.29. Beans: Weekly export sales showed 376 t.m.t. sold last week. Planting delays for corn and continued wet patterns appear to be contributing to a pullback in bean prices and if we get delays in corn more acres will go to beans. Over the next 2 weeks farmers will need to decide on what they will plant, either corn or beans, and that decision will largely be influenced by weather and price. Beans are generally planted May 1st to no later than June 10th. November beans find support at 12.00 and resistance up at 12.45. Until we get a clearer picture, we would recommend a position on the sidelines in beans. The only interest we have in this sector is long July Soy meal on pullbacks, looking for prices to get back to 370. We would not recommend getting too long though as prices will be influenced by soybeans. Put a stop loss at 332 and look for an entry close to 340. Wheat: Weekly export sales showed 158 t.m.t. sold last week. Recent rains in the western grain belt have helped the quality of wheat but keep in mind that 90% of the quality and yield is made from May 1st to May 30th. If we turn hot and dry, a supply side concern rally could occur. Prices in CBOT and KBOT are nearing oversold levels so we could get a technical bounce or short covering on month’s end as prices have been on a slippery slope down in recent weeks. KCBT July wheat has dropped over $4 in recent weeks and now sits around the 50% Fibonacci retracement level looking for a reason to move higher. We may have a little more downside as gaps have yet to be filled from January. July could go back to 9.50 on a significant change in crop condition or fund buying. CBOT July wheat has support at 8.00 with resistance at 8.55 to 8.60. ____________________________________________________________________ The news has not been good from the housing market lately, but July lumber closed up $2.10 on the week, much of that came Thursday and Friday after bouncing from oversold levels. We discussed a possible long trade in lumber last week and depending on how tight you ran your stop you may still be long. We are looking for a bounce to around the 265 area. July coffee lost 6 cents last week and with further momentum we would not be surprised to see prices approach the 125 level this week. We will start to explore some call options if we do get down to those levels, we will look for some freeze premium to be built into the market in coming weeks since the Southern hemisphere’s winter is almost upon us. The fact that cocoa was able to advance $116 last week even in the face of a dollar rally was impressive. For now buyers are emerging around the 2725 level in July. Prices appear to be overbought and we would suggest waiting for a pullback before getting long again. Any noteworthy moving average is considerably lower than current prices as we still expect prices to come back 100-300 dollars before another leg higher. The only thing that would change this viewpoint is significant dollar selling or British pound strength; neither is likely in the immediate future. July orange juice was virtually unchanged on the week closing 5 ticks lower, however there was plenty of volatility as the average range was nearly 6 cents per day. The forecast for central Florida is mostly warm and dry for the upcoming week. As we have made clear in recent commentaries there is no direction in orange juice therefore no reason to trade until a direction is determined. As we voiced last week in the longer term we are bullish cotton but as for the immediate action the path of least resistance is down. Last week December cotton lost 3.30 cents and closed below 80 for the first time since March 31st. We are approaching oversold levels and do not see much more downside as the 100 day moving average comes in just below Friday’s close. We continue to hold 10 cent bull call spreads for our customers on December. The 80/90 cent bull call spread that we touched on last week settled at 311 points or $1555 Friday, which should be bought if at these levels or below this week. Getting long December futures below 80 cents we feel is a buy as well. Although the 50 day moving average did not support the 100 day moving average for now, it may hold as prices have remained above this average on a closing basis since October 18, 07’. Get long October sugar if you are not already, as we see the prices of sugar advancing considerably in weeks ahead. Even though sugar prices lost 7% last week, in dollar terms you lost only $1041.60 per contract, to put that in perspective, a 7% move in gold is over $6,000 while a 7% move in oil at current levels is nearly $8,500. We all know that past performance is not indicative of future results, but looking at the seasonal tendency sugar has bottomed in March/April and trended higher into late summer. Will this year be different? ____________________________________________________________________ Even if we may not be in full agreement, it appears the investing public is feeling more comfortable about the economy and are willing to take a bit more risk, so money is flowing back into securities and money is fleeing the metals sector. June gold traded just over $30 lower on the week closing at its lowest level in 16 weeks. June gold closed at 889.70 which is just $1-2 above the 61.8% Fibonacci retracement from November’s low and the record high in March. This week’s activity will largely depend on what the Federal Reserve does with rates, how the dollar reacts, and what indication they give above further interest rate maneuvers, as the tug of war between growth in the economy and inflation intensifies. Support for June comes in at 880 with resistance around the 910 area. We would suggest waiting until the FOMC meeting before taking a position. One thing we would like to point out in gold is that it has historically and will remain a great barometer of inflation and as we expect inflation to be a major problem in the second part of the year do not be fearful of a price retraction. Rather welcome it with open arms and use it as a window to get long with options if you cannot bear the swings in the futures. July silver lost just over $1 last week and made its way back to the bottom of the recent trading range. Since March 20 we have been trading between $17 and $18.50 so if this pattern holds we should make our way back to higher ground in coming sessions. On daily charts the MACD and stochastic are not screaming buy, but they support a move higher as prices appear over sold. We continue to hold $2 bull call spreads for customers in July and December. If prices can hold $17 and look to start heading higher we would most likely look for a long entry in futures for clients putting a stop below the recent lows. This will almost certainly be determined by what the Federal Reserve does this week. Much like gold we are not eager to commit until we see what the Fed does. 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. ______________________________________________________________________ |
