For February 4th- February 8th 2008

By: Matthew Bradbard

The smart money continues to flow into commodities as prices are expected to maintain their steady rise higher. By no means do we feel prices will go up in a straight line and in fact we’ll place bets on some prices moving lower for clients, but needless to say we’re still convinced the secular bull market in commodities will strive for years. Continue to use setbacks in pricing as buying opportunities. Markets in China, South Korea, Taiwan, and Vietnam will close the latter part of the week in celebration of the New Year. Maybe this will open up the door for some much needed pullbacks in various commodities that are on our shopping list. Additionally you have the Royal Bank of Australia, the ECB, and Bank of England meeting on rates so pay attention to how central banks around the globe react to the current market and more importantly, if they diverge from how our central bank has reacted. Do not overlook shifts in policy, if any, at the G-7 meeting scheduled for Saturday February 9th.  We suggest you contact us directly to speak about positioning a portion of your portfolio into commodities to take advantage of further commodity appreciation. Additionally, I will be writing a research article on February 13th on sugar and cotton that I suggest you read.

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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Members of OPEC met in Vienna Friday and agreed to keep production levels unchanged, as expected. Looking ahead, members voiced concerns that oil production will need to be reduced to accommodate a softer global economy. For now however, OPEC hopes the US Federal Reserve’s rate cuts will bring the US economy in for a soft landing. This is significant because the Unites States is the world’s largest oil consumer and a stronger economy would contribute to more demand while an extended recession would crimp consumption. March crude oil fell $1.66 on the week to finish at $88.96. Resistance lies at last weeks high of $92.71 and support at $85.42, the low on January 22nd.  Look for Crude to follow the direction of the stock market. We expect to recommend a buy in coming weeks from lower levels but are content advising allocations elsewhere currently. Those of you who are already long, trail stops as prices could track higher if equities rise.

March natural gas dropped 37 cents to $7.74 on Friday which is a classic case of  buy the rumor sell the fact, being that the day prior showed the biggest one week draw in inventories ever of  -274(BCF). Natural gas continues to cooperate as we have navigated this market for customers from the long and short side 3 times in recent weeks. Be quick to take profit as this market has a tendency to turn on a dime. Presently, we would advise to be on the sidelines. For larger traders there is a strong seasonal tendency for June natural gas to trade higher from late January into early March; 13 of the last 15 years.

We wanted to reiterate some material for unleaded as we expect a big trade in coming weeks. As winter begins to wind down, the petroleum industry begins to prepare for the driving season. As driving conditions improve, gasoline consumption will rise. But even as it does so, distributors will begin to accumulate inventories in anticipation of the traditional opening of the summer driving and vacation season at the end of May. This accelerated demand usually drives gasoline prices higher from February into May. That, in combination with looking at the charts, we are looking for long entries in gasoline, once a bottom is found, a 15-20 cent advance will come in a hurry. Depending on your time frame you may want to look as far out as May or June contracts as this could become a position trade. With yet to advise an outright long, we’re in a spread for clients, long June gasoline and short June heating oil looking for the spread to widen, as of Friday’s close 5.55 cents.

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After the close Friday, the USDA estimated last week's beef production at 472.8 million pounds, down 3.9% from a year ago. Pork production was estimated at 467.2 million pounds, up 12.7% from a year ago. April hogs exploded higher, closing 4 ½ cents up on the week. Hog slaughter normally peaks in December and begins its seasonal decline into May/June. As it does, prices for hogs marketable in the future tend to enjoy a seasonal uptrend, not only because production declines but also because the industry accumulates inventories of pork for peak consumption - in July/August.

After the close the USDA said that, as of January 1st, there were 96.669 million head of cattle and calves in U.S. inventory, down 0.3% from a year ago, as expected. April cattle were down .22 at 94.05 ahead of the afternoon's report. April live cattle was choppy last week and we used this sideways action to accumulate longs for our customers. We feel it just a matter of time before prices are back in the high 90’s and maintain that the low on January 17th should hold; buy dips. Prices in feeder cattle are slightly overbought and should pullback this week allowing for a long entry. Although we are content being long for clients from lower levels, we prefer live to feeder cattle if we had to choose one. 

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Stocks:   The U.S. Labor Department said that the unemployment rate improved from 5.0% to 4.9%, but non-farm payrolls showed a net loss of 17,000, weaker than expected. It was the first monthly net loss of jobs in over four years. Fresh signs of weakness - a sharp rise in unemployment and a slowdown in consumer spending have renewed fears about the economy. Additionally, Q4 GDP slowed to 0.6% down sharply from the third quarter’s 4.9% expansion. The Dow finished the week up 536 points, or 4.4%, to 12,743 for its best one week performance since March 03’. The S&P racked up its biggest weekly percentage gain in nearly 5 years climbing 65, or 4.9%, to 1395. The NASDAQ snapped a 5 week loosing streak, adding 87, or 3.7%, to 2413.  Last week’s advance helped soothe the pain of a dreadful January but the Dow still ended 4.6% lower on the month, the S&P 6.1% and the NASDAQ 9.9%.  The January barometer, popularized by the Stock Trader’s Almanac, holds that as January goes so does the S&P 500. Presently all indices appear to be moving higher although we view this as temporary, we will use this bounce as a short entry for our clients and would advise you to do the same.  Do not buy this rally, sell it, and stay defensive as we feel this down move is no where near over and expect lower lows to follow. Call to inquire how you can protect your stock portfolio with index futures and options.

Bonds:   Over the course of the last 2 weeks rates have been cut by 1.25% and now stand at 3.00%. The impact of the Fed’s actions were confined primarily to the short end of the curve as the yield on the ten- year Treasury note was virtually unchanged on the week at 3.392%. The yield on the two-year note fell to 2.073%, down about 12 basis points on the week. This instrument is probably most sensitive to expectations of monetary policy and this move implies that even after the Fed’s rapid pace of cuts in the past two weeks, it is still pegging the fund rates above the current market. Currently the April fed-funds futures market is fully discounting another 25 basis point cut at the March 18 FOMC meeting taking rates to 2.75%, and putting a 70% probability on a 2.50% target. If the market is right with its assessment, the fed is just playing catch up and is yet to be ahead of the curve even with its aggressive easing of late.  As we voiced last week we advised rallies in March bonds that are contained by 121’14 to be sold and rallies in March notes that are contained by 118’06.5 to be sold as well. Additionally our clients entered the spread we mentioned last week in Euro-dollars (Long September 09/ Short September 08) thinking this spread has turned and will find it’s way back to levels seen August through November.

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We will continue to advise clients to short the March Swiss franc on rallies.  Even with the March contract making new all time highs, we feel that was an aberration off the NFP # and traders that were long were just running stops. We’re looking for prices to pullback to .8900, just above the 38.2% Fibonacci retracement and the lower Bollinger band. Selling the Swiss franc on January 23 and buying it back on February 12 has been profitable 14 of the last 15 years for an average of $1612 per contract before commissions and fees.

For the short term it appears an interim top has been made and prices appear to be heading lower in the Japanese yen, this of course will largely depend on if the stock market continues to move higher as we expect in the short-term. If prices do move down to .9100/.9150 we will most likely start directing clients to get long as we think a bounce in equities and a pullback in the yen are both short term moves. If short March, we would take a loss above .9514 on a closing basis.

The Bank of England meets next on February 7th and many are expecting a quarter-percent rate cut taking rates to 5.25%. We would advise being short March British pounds with a stop loss above last weeks high looking for an acceleration of the move lower that started on Friday expecting a move below 1.9300. The only reason we would abandon this strategy is if the BOE did nothing with rates.

For the Loonie we expect prices to remain range bound between .9700 and 1.0200 and will most likely look for guidance from outside markets like energies and metals. Play the range.

The Reserve Bank of Australia meets on February 5th and is expected to raise the interest rate by a quarter-percent to 7.0% on inflation concerns. The March Australian dollar closed up 2 ½ cents on the week at .9014, the highest close in over two months. Yes, we missed a great trade but we do not feel we have missed the bigger move and will use any setback as a long entry for clients as we expect to see parity in 08’.

The ECB meets on Thursday and is largely expected to keep rates steady.  As for their next move, policy makers remain torn between growth and inflation expectation.  Slowing growth is evident and inflation in the countries that share the Euro rose unexpectedly to 3.2% last month, the highest since measurements for the bloc began in January 97’. Unlike the Fed, which is responsible both for supporting growth and for controlling inflation, the ECB has a single mandate: keeping euro-zone prices steady. Although the Euro is within spitting distance of its all-time high we would rather be contrarian and play this from the short side for our customers expecting resistance to hold and looking for a choppy trade lower; 145.50/146.00 in coming weeks and then an eventual slide below 140 in coming months.

We maintain that the dollar will continue to be the world’s reserve currency and if the volatility and uncertainty persist in global equity markets, the dollar should not loose too much ground even with falling rates. The dollar has been resilient of late all things considered; with weak economic numbers and the fact that the fed just lowered rates 125 basis points the buck has only lost 3.2% H/L in the last 2 weeks. We are not issuing a buy recommendation on US dollars but we are fairly confident that the November low should hold for now. 

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Corn:   Weekly export sales showed 1.88 m.m.t. of corn was sold last week which was 35% over pre-report estimates. The worst snow storm in 50 years in China and the destruction of winter crops is yet to be determined but there is potential China may have to enter as a near term importer especially if the adverse weather moves north. This could be bullish from a U.S. demand view point as the last time China imported corn was in 95/96 when we saw record high prices.  After some profit taking last week and unwinding of bull spreads, traders moved in buying the bullish 2008 theme of demand will outstrip supply again. Even though we had the largest crop planted since 1944, don’t forget that if the demand out paces supply prices will move higher. Feed grains should continue higher until we fully price our grain into the world market and the market believes corn has bought enough acreage. Expect new contract highs for old and new crop with another correction to come after the next USDA supply/demand report on February 8th. Corrections may continue to be very minor and any weakness should be bought as prices gain into the March 31st planting intentions report. We would advise getting long December 08’ on pullbacks, buying new crop against old crop, or selling December 08’ calls against long futures to mitigate the volatility and margin requirement expecting a substantial move higher in coming months.

Beans:   Weekly export sales showed 488 t.m.t. of beans were sold last week. March beans continue to trade up following lead from Minneapolis spring wheat futures which have grown accustomed to daily limit moves higher.  March Minneapolis pushed through $14/bushel last week on fear that lower prices could mean a loss of acres to beans come May planting. Beans look to continue their strength before the release of the March 31st planting acreage report. Stay long trailing stops behind your position. March has support at 12.65 which is the 50% retracement of recent H/L and the middle of Bollinger bands on the daily chart. Resistance lies at 13.00 and then 13.41. We are not convinced we have seen the highs and if wheat and corn prices remain at these levels beans will still need to buy acres. We previously recommended a back spread in May selling the $13 call and buying double the amount of $14 calls and added to that position last week for clients between 5-7 cents.  Furthermore we would not rule out a move to $15 in November beans between now and April Fools; no joke seriously! We are searching for long entries for our clientele in May soybean meal and July soybean oil as well.

Wheat:  Weekly export sales showed 509 t.m.t. of wheat was sold last week. This was a neutral report on demand, coming in line with pre-report estimates.  It is all about the Minneapolis spring wheat futures and 30 year low ending stocks, keeping futures on its historic rally in hopes not to lose acres to beans this planting season. March Minneapolis futures are about $1 over March beans while the new crop September Minneapolis wheat is at a $2.75 discount to new crop November beans. The big thing to watch for in February is at what point will the trade, pre-occupied with Minneapolis spring wheat futures, re-focus on the Kansas City winter wheat futures, that now lie dormant.  Index funds could increase long bets on Kansas City buying in February before dormancy breaks. With U.S. and world stocks at historic lows, our winter crop is our next chance to build inventory. We favor buying KCBT against CBOT wheat. Since 1988 May KCBT has gained relative to CBOT wheat 15 of the 19 years (78.9%) from February through April for an average gain of 9 ½ cents/bushel, but we are looking for a much greater margin this year. The current spread of Friday’s close was 39’6 cents premium to KCBT.

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According to Dow Jones Newswires, last week's high cocoa prices brought out a lot of local sellers, but the cocoa beans arriving at port were poor quality (10% mold) because they had been stored too long. March cocoa advanced $100 on the week to close at 2317. Currently prices are overbought and we expect a profit taking pullback to at least 2150 on March.

March coffee closed up over 8 cents on the week finishing  at $1.3910, the highest close in over three months while the market waits to see how Brazil's coffee crop develops this year. Our clients are in and out of the 135/145 May bull call spreads at a tidy profit and will reposition clients in coming pullbacks.

Florida orange harvest begins in December and continues into mid June or even July but with a break in late February/early March. Thus, prices tend to decline through late February and then stage a recovery rally into late March. March FCOJ is starting to look more attractive on the charts but as we have previously stated we’re not interested in recommending longs unless prices trade closer to 120.00. 

Cotton will continue to follow grains until we get deeper in the calendar. The National Cotton Council's informal plantings estimate will be released Feb. 8, and the U.S. Department of Agriculture projection will be released March 31. The market will likely move sideways to lower with few exports expected during the Chinese New Year that runs from Feb. 7-21. Trading will continue to trail grains prices and feel influence from the US stock market. This will likely translate to lower prices which are going to set up a tremendous buy in July and December futures that we expect to see trading significantly higher in coming months in order to compete for acreage. July should be able to be bought closer to 68 and December 08’ closer to 72 cents.

Even though prices could go either way, we are not nearly as bullish short term as we are longer term. Prices could come down short-term but the greater risk we feel is not being positioned and to see the market begin its next leg up. Front month sugar seems to be running into resistance just above the 12.50 area and we would not rule out a pullback, especially being that February historically is a weak month for sugar. Even if prices come off a full penny that is only $1,120 per contract and if you look at the potential profit of 3-5 cents ($3,360-5,600) longer term we think it’s worth the risk.  Ideally we get a break in the short term, if we are so lucky BUY sugar and hold it. For traders who still believe in buy and hold apply it here and we think you will be handsomely rewarded. 

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Is the correction finally here, we think so. After making a new all time high of $942.20 on April gold early in the week, gold by Friday had traded off almost $30 from the highs by closing. The charts support a move lower as we are now trading below the 9 day moving average, we expect this pullback to be violent and find support quickly, most likely between $845 and $860. There was a significant jump in volume on Friday which is evident of longs booking a profit. Expect these and others to re-establish longs in gold looking for the gravy train to continue. Even though we missed this last leg up we will make an attempt to position our customers long both futures and options looking for the uptrend in gold to take prices through $1,000 later in the year. We will advise longs in futures closer to $870 in April and will start pricing out $50 bull call spreads at that price point as well for June. We believe even at these levels gold will continue to find its way into more mainstream portfolios.

Silver much like gold is a market that we want to position clients long in but preferably from lower prices as it too is extremely overbought and in our judgment, due for a major washout before trading to new highs. March silver traded as high as $17.345 last week but is currently trading approximately 60 cents off that level and a correction appears to be underway. We are looking for a dip down to $15.40 to $15.80 before significant buying re-emerges. During the first 2 weeks of February, March silver has posted gains consistently trading higher 12 of the last 16 years gaining a total of 233 cents/ounce since 92’.  However, traders should not overstay their welcome as the futures approach FND prices tend to reverse, and we shall recommend using the latter part of February and this expected pullback to establish longs.

Aggressive trader’s albeit bucking the trend could play gold and silver from the short side, selling rallies and buying dips. It will be considerable work to manage the trade and you would be bucking the trend but if a washout occurs the risks may be worth it.

Some may wonder how copper prices have been able to hold despite a slowing economy. Copper ytd is up almost 8.0% even though it is substantially lower than last year’s highs. The real story here is how US demand has shrunk; our consumption of global production is at 12.4% vs. 21.5% in 2000, and how China’s consumption has grown. China consumes 22.7% of global production vs. 12.8% eight years ago.  This is really the story why commodity prices will continue to appreciate, demand may slip domestically but emerging markets demand will continue to grow for the foreseeable future. This most recent weather disturbance in China may also disrupt copper production at smelters and refiners and cause a jump in prices. Resistance lies just below 340.00 and support at 305.00 for March.

Palladium and platinum trends are still up and we are looking for long entries for our customers but only on pullbacks as prices are currently overbought.

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.