For February 11th- February 15th 2008

By: Matthew Bradbard

The jury is still out about whether a recession is around the corner, but with or without a recession it appears the prices of raw materials will continue to rise. In the most recent survey of economists, the respondents put the odds of a recession at 49%, up from 40% in January and 23% in June. We expect price increases even if the US slips into a recession because the insatiable global demand for food and energy and the fact that emerging markets are building an infrastructure and the demand for resources should not subside to a great extent.  As we have frequently discussed in past commentaries; commodities move on supply and demand so look at the big picture. The days when America would sneeze and the world would catch a cold have come and gone. We expect things globally to slow moderately, the domestic recession will not go unnoticed but we are very doubtful of a global recession. We will continue to advise entries on pullbacks across the board, monitoring very closely fund activity and expecting volatile movement in the days to months ahead. 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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April crude oil closed up $3.47 at $91.77 on Friday and in just two short sessions moved 5.43 off its low, helped by notions that prices had fallen too far and increased talk that OPEC may cut production when they next meet in Vienna on March 5th. February is generally a weak month for energies so we would not suggest getting too long here but the technicals are supportive and we wouldn’t rule out a move back up above 94 this week. Continue trailing stops on longs but leave enough room for movement; a stop between the 61.8% retracement and the 20 day moving average is where we would suggest placement so between 90.06 and 90.42 on April. We are still expecting prices to look for guidance from the stock market and for now we are neutral as oil could go either way.  

April natural gas closed up all five days last week gaining 64 cents, the highest close in seven months, helped by a big jump in crude oil and sizeable draws on inventories in the last 2 weeks. 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. For now it appears April has got a bit ahead of itself and with RSI and stochastics showing overbought levels we would not rule out a setback to the consolidation area of 8.00.

As crude prices find a new trading range it appears for now the distillates will follow oil higher or lower.  March gasoline bounced from overbought levels last week and closed in on the 1st resistance at 2.3750, while the next resistance lies at 2.4200. As long as crude oil trades sideways to up, this market should find its way back to 2.4600. A reversal and move lower should find support at 2.2900 for March. Heating oil was also helped by a 6.0% move in oil last week and is presently trading back above the 40 day moving average for March. We expect March to wander between 2.52 and 2.60 on a closing basis this week, unless we see another sizeable move in oil. We were out of the office on Friday attending the World Money Show so we did miss a long entry in heating oil and gasoline for our clients but do expect to get another chance so be patient. With yet to advise an outright long, we maintain a spread position for clients, long June gasoline and short June heating oil looking for the spread to widen, currently at 3 cents.  This trade has moved against our clients but we will stay with this spread and will continue to advise this trade ultimately looking for 8-10 cents on the spread. This may in fact be a bumpy road but it is less volatile than outright being long or short and utilizes less margin so we will advise staying the course.

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The USDA's average price estimate for 2008 choice steers was reduced from 91.5 to 91.0 cents per pound. The price estimate for 2008 barrows and gilts was reduced from 42.5 to 42.0 cents per pound (or 56.7 cents lean). After the close Friday, the USDA estimated last week's beef production at 478.2 million pounds, up .5% from a year ago. Pork production was estimated at 452.5 million pounds, up 14.7% from a year ago.

April lean hogs lost ground last week trading off 2 cents ending the week at 64.875. We expect prices to fill the gap created at the end of January, which would take prices down to 63.650.  Not only would that fill the gap in charts, but it would put prices at their 61.8% retracement level and should serve as support. We will most likely advise lifting all remaining shorts and to reverse. Pork bellies have put in an impressive showing of late, moving 15 cents higher in the last 3 weeks alone which is much greater than we were expecting. If you took our long recommendation from previous weeks we would recommend stepping to the sidelines and booking a profit as prices are due for a pullback.

April live cattle was good enough for a trade as we have gotten in and out for clients and are now looking to re-establish longs on the current pullback. Prices appear to be trading back to the consolidation zone around 94 cents and we will try this trade again eventually looking for prices to make their way back to 1.0000. For now, March feeder cattle are supported by the 10 day moving average at 104.880, but we expect that to give way as prices make their approach back to 103.00 this week. Stiff resistance lies at last week’s high of 105.950.

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Stocks:   More bad news than good news is contributing to a sell rallies mentality. The NASDAQ briefly dipped into bear market territory before recovering, but all three major indexes were lower on the week.  Money flowing out of the tech sector aided in a 109 point down week for the NASDAQ or a loss of 4.5%, to 2305. It has fallen 6 of the last 7 weeks and although bargain hunters may keep it supported for now, we fully expect new lows to be made. The Dow ended the week down 561, or 4.4%, to 12182 giving back most of its late January rally. Talk about volatility; loosing 4.4% this week after having its best week in nearly five years last week. The S&P 500 fell 64, or 4.6%, to 1331 and is now 15% off its October record high. Although we would not rule out a dead cat bounce for equities, we cannot stress 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 been refraining from trading on intraday basis on equities as we would equate that to gambling, but will continue to recommend hedges for all stock investors. Use bounces as short entries and do not buy rallies, sell them, 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. Resistance on the March S&P is found at 1343 with support at 1310.  As far as the March Dow resistance is found just below 12340 while support is just below 12050.

Bonds:   Keeping the same theme we will continue to recommend selling into strength in 30-year bonds and 10-year notes. Rallies in March bonds that are contained by 121’14 should be sold and rallies in March notes that are contained by 118’06.5 should be sold as well. For a significant down move in bonds to be realized, last week’s low must be taken out of 117’01 which is also the 38.2% Fibonacci retracement level. We would recommend adding to shorts if this was to play out as prices could tumble to 115’00 in a hurry. The Euro-dollars spread from last week is back to its lows and could also be bought. We are recommending a spread trade 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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March Swissie seems to be finding support just above .9000 at the lower Bollinger band and appears destined to move higher this week. We do not expect prices to get above .9255 on a closing basis and if prices find their way to those levels this week we will advise being a seller. Right now you could have a light long position with stops just under last week’s low of .9010. 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.

The yen typically gains when stock and risk sentiment turn sour because investors take money out of higher-yielding currencies and move funds into safer, lower yielding counterparts. If stocks rally, prices for the yen should come off. 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 suggest taking a loss above .9514 on a closing basis. The Bank of Japan is expected to hold rates steady at 0.5% despite concerns of slowing economic growth.

The Bank of England lowered a ¼ point taking rates to 5.25% from 5.50%. Any trader taking our recommendation to be short should reverse and now get long. This is a classic case of buy the rumor sell the fact as future prices had factored in the rate cut. If you get long we don’t feel you need to risk much and would advise using a stop just below last week’s low of 1.9340 on March. We’re still bearish and expect the Pound to weaken longer term, but just view the current long as a trade looking for a bounce back to 1.9600 as the current down move was overdone.

The unemployment rate in Canada improved from 6.0% to 5.8%, the lowest in 33 years, with a net increase of 46,000 jobs, much stronger than expected. The March Canadian dollar closed up 1 cent higher on Friday and appears like it should move higher this week finding its way to resistance. We still 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. Continue to play the range.

The Australian dollar remains attractive because of the interest rate differential with rates at 7.0% as well as an economy that is largely dependant on raw materials when prices are booming. Pullbacks should be bought here but do not get over zealous because we still do expect a washout of 200-300 points at some point. We might suggest the need to sell some options against long futures as opposed to just throwing caution into the wind and getting long outright futures. Stay tuned as we will advise a strategy in coming commentaries as we do not wish to be on the sidelines watching the Aussie move closer to parity.

The ECB kept rates at 4.0% at their meeting last week but comments from Trichet indicated a shift in the bank’s stance: It is now focusing more on growth concerns than inflation worries. This is different than what the market had previously factored in thinking the focus was more on inflation which implies rate increases not cuts. The March Euro was hit loosing 333 points last week exceeding our expectation for shorts. Resistance now lies just above 1.4600 and we should find prices closer to 1.4300 by week’s end.  Not that it’s justified, but if the US dollar weakens the Euro could strengthen temporarily so we would advise staying on the sidelines for new entries. Any strength should be short-lived as a growing number of investors now believe the ECB is behind the curve with their reluctance to ease.

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. Current pricing on March is just below the 100 day moving average of 76.63. We would expect prices to remain range bound this week not wandering too far from current levels.

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Corn:  Weekly export sales showed 1.029 m.m.t. of corn was sold last week, which was on the lower end of estimates. US demand for corn in 2008 should continue to be strong as China may potentially shift from a net exporter to an importer of corn. Currently China is expanding feedlot populations and bio-fuel production which is consuming a great deal of their corn leaving the U.S. to supply their surrounding neighbors. Friday’s USDA monthly crop report showed ending stocks at 1.438 b.b. unchanged from the month prior. The trade had expected a 10 to 20 m.b. cut so if anything it could be viewed as slightly bearish. The USDA's estimate of 2007-2008 world ending stocks of corn was increased from 101.3 to 101.9 m.m.t. In the short term we would not rule out some position squaring/profit taking on new crop that could take Dec 08’ down to 4.85/5.00.  Longer term, corn remains bullish into the fall harvest with possibly the sharpest gains as harvest begins in September and ethanol plants and feeders build their cash inventory. The fight for acreage is on but corn for now will take a back seat to soybeans and spring wheat. We come in each day and look to crude oil, the dollar index, metals and stocks for outside direction lead. We had a price correction in January of 55 cents so it’s not ridiculous that in February we have the potential for a similar move that would take Dec 08’ down closer to 5.00 and the current trend line that lies at 5.04. Followed by a bullish move into the March 31st planting intentions report, May corn has support just above 5.00 with resistance at 5.30. New crop December support lies at 5.10 and resistance at the contract highs of 5.49 which we fully expect to get challenged after the current washout.

Beans:   Weekly export sales showed 1.037 m.m.t. of beans were sold last week, which is more than double the previous week. Soybean meal exports were off the charts coming in triple pre market estimates and 250% greater than the previous 10 week’s average. Much of this demand is from China which needs the beans to crush for the meal on expanding hog and chicken populations. Friday’s USDA monthly crop report put ending stocks at 160 m.b. down 15 m.b. from the month prior, and well under 2007 stocks of 574 m.b. The USDA's estimate of 2007-2008 world ending stocks of soybeans was reduced from 46.2 to 45.8 million tons. The USDA's estimate of Brazil's and Argentina's soybean crops were unchanged at 60.5 and 47.0 million tons respectively. The lower bean stocks came on a 10 m.b. increase in demand and a 5 m.b. crush increase.  Remember supply and demand, this is bullish; a lower supply and increasing demand. Beans will seek a high enough price to ensure farmers plant at least 6 m.a. or more so that current demand doesn’t leave us lacking beans come May 09’. Soybeans will need to find that price before the planting intentions report at the end of March. May beans have minor support at 13.21 and then at 13.00 with resistance at contract highs reached twice last week at 13.90. New crop November 08’ is the month we would advise playing on a position trade looking for a long entry closer to 12.20.

Wheat:   The daily price limits have been expanded from 30 cents to 60 cents.

Weekly export sales showed 312 t.m.t. of wheat was sold. The USDA's estimate of 2007-2008 world ending stocks of wheat was reduced from 110.9 to 109.7 million tons. Moreover, Friday’s USDA monthly crop report lowered ending stocks to 272 m.b., 2 m.b. under the average guess and 20 m.b. under last month. They increased exports 25 m.b. but decreased feed use 5 m.b. The U.S. ending stocks estimate, if it holds true, would be the lowest in 60 years. The world ending stocks estimate is predicting the lowest global supply in 30 years. As long as the U.S. and world ending stocks remain at multi-decade lows, any sales at these levels are bullish. If we were seeing cancellations and weekly sales were going negative, it would say prices have rationed demand but fresh exports are still surfacing at historic highs.  Additionally, as long as spring wheat acres to be planted remain uncertain and our winter wheat crop yields and quality are unknown, prices may head further north. The front months continue to be the leader as we need prices high enough to ensure spring wheat crop planters don’t switch to beans come May’s planting. At some point soon, the trade will decide if the price of Minneapolis spring wheat futures are high enough to have saved acres and demand will turn to the KCBT wheat and CBT wheat futures as dormancy breaks in March. The crop went dormant in poor condition and it’s the first crop to start growing and give us a chance to replenish inventory. New crop KCBT is July and CBT September futures. May CBT wheat has support at 10.80 just under Friday’s low. If you are not already long we would not advise joining the party this late as it could be extremely painful. Being that we are at all time highs there is no resistance, but taking the 161.8% Fibonacci retracement levels, May CBT should encounter some resistance at 11.66 and KCBT at 12.22.

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 is greater than 60 cents premium to KCBT which means this spread has advanced just over 20 cents in the past week.

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Housing starts in Canada were at an annual rate of 222,700 units in January, up 20.6% from a year ago and more than expected. March lumber closed up $1.90 on Friday at $229.70 after closing up its $10 daily limit Thursday. In weeks to come we will be looking for a short entry in May lumber.

The USDA reduced its estimate of the 2007-2008 Florida orange crop from 168 to 166 million boxes, but increased its estimate of the juice yield from 1.60 to 1.62 gallons per box. Orange juice was one of the few commodities that traded lower last week losing almost 6%. We are closing in on support for May although the technicals still support a move lower. As we have previously stated we have little interest until prices get closer to 120.00

March cocoa closed up at another new contract high of $2,378 with ongoing concerns about dry conditions in the Ivory Coast. Furthermore, more and more money is finding its way into soft commodities as a viable way to play the rising price of commodities. For now the trend remains up and even intra-day breaks are being bought up. We will wait for the roll from March to May before issuing any recommendations.

March coffee closed up 3.90 cents on Friday at a new contract high of $1.4720 advancing 6.0% on the week. Funds are in control of the market with most traders reluctant to get involved at these prices. Most of the action is on the switches as funds roll forward from the March contract into May. The market looks as if prices could still go higher but we are waiting for a setback before re-establishing longs for our clients.

May sugar closed up .53 at 13.12, the highest close in over a year, helped by a rise in gasoline prices and news of an explosion at a sugar refinery near Savannah, Georgia. The USDA increased ending stocks for sugar from 2.006 to 2.029 million tons. Although we are repetitive in advising the accumulation of sugar options and futures week after week, we view sugar as a buy and hold opportunity as prices comparative to other commodities is cheap, and we expect patience to be rewarded as we anticipate 15.50/16 in 08’ and 20 cents/lb in 09’.

The USDA increased domestic cotton ending stocks from 7.90 to 8.20 million bales. The USDA's estimate of 2007-2008 world ending stocks of cotton was increased from 54.75 to 57.33 million bales. The National Cotton Council's early season planting intentions survey expects 9.32 m.a of cotton to be planted. It looks like the NCC is expecting the state of Texas to account for more than 50% of all U.S. cotton plantings in 2008. Texas producers planted 4.9 million acres in 2007. It's still about 10 weeks until farmers start planting in the world's largest contiguous cotton patch, but the arid, windy conditions already have them fretting. While lack of rainfall isn't entirely unusual for the South Plains this time of year, the heavy winds don't usually come for another month or so. The wind robs moisture on the soil's surface, damaging the subsurface moisture that newly planted cottonseed needs to germinate and grow.  Buy dips in July and Dec 08’; we view this as a terrific buy and hold as well. July should be supported just above 70 cents with support coming in on December at 74.60. Look for guidance from outside markets as for now cotton remains a laggard not a leader.

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Although we have worked our way back long gold for our clients by buying lightly we think there are much better plays out there all things considered. We chose to enter $100 bull call spreads for clients in June buying the 900 calls and selling the 1000 calls. We elected to trade June because the length of time on the contract and the fact that we still have a sneaking suspicion of a major correction yet to come is why we are trading this spread. Our customers invested just over $3000 per spread and we will look to trade out of it between $5500-7000. We want to be long because of the current market dynamics but realize that April gold futures have declined in February 16 of the last 25 years (64.0%).  Most severe February breaks have followed January strength; 8 of the last 10 occasions since 83’. Famous last words are ‘this time could be different’ that is why we are recommending a light position and to carefully monitor it.

As of this writing March silver is making new contract highs but much like our current feeling on gold we do not trust this move. Although this market has regained what it lost last week on decent volume with the US dollar not having a clear direction and seasonal weakness to come we would not recommend getting married to longs.  Recent strength is impressive; traders should not overstay their welcome, as FND approaches typically silver reverses. Since 1985, March silver futures have declined a total of 189.3 cents/ounce during the latter half of February. On a break prices should find their way back to $16 followed by 15.50; the 40 day moving average. For now we are recommending customers to wait for a pullback to establish longs.

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.