For February 18th- February 22nd 2008

By: Matthew Bradbard

It is apparent to me that commodities are becoming more mainstream as 4 of the 14 headlines on the front page of the WSJ last Thursday were about rising commodity prices. Yes, perhaps the easy money has been made going long a variety of commodities that are now at record highs, but we still maintain the trend is up until the overall global economics shift, which we do not see happening anytime soon.  This means that investors need to be more selective and do their homework with picking entry and exit points.  I’ll tell you a quick story from my personal experience on why I believe no one is capable of picking tops or bottoms in markets. 5 years ago when I traded copper for customers, when prices moved 2 cents in a session it was a big deal, as prices were trading under 80 cents/lb and are currently 4 ½ times that. Why I bring this up is at that time copper prices had never traded above $1.65. The two previous instances in 1989 and 1995 when prices got close to that level a dramatic sell off occurred in copper. So in 2004 and again in 2005 when copper prices were approaching $1.65, I thought it was sensible to pick a top in copper and go short, boy was I wrong! Copper prices have exploded and have consistently been above $2.50 since trading north of $4.00/lb on several occasions. The moral of the story is suspend your disbelief as commodity prices are high but may continue to get higher. Remember the cure for high prices is higher prices. 

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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The U.S. Department of Energy said that underground supplies of natural gas were down 120 billion cubic feet last week to 1.942 trillion cubic feet. Supplies are now down 9% from a year ago. March natural gas finished 25 cents higher on the week near levels not seen since the beginning of November.  Although cold weather and power in the oil market has contributed to recent strength we still believe prices are due for a set back, even if it’s a profit taking led correction followed by more buying we would not be establishing longs for customers here. Ideally we are looking for a pullback and for an entry to get long June natural gas futures for clients next week. Buying June natural gas on February 25 and holding until April 15 has been profitable 15 of the last 15 years for an average profit of $3,140 per contract. We are looking for an entry between $8.10-8.25 but are prepared to adjust our entry depending on market conditions. This is not a gimme trade as price swings could be sizeable; as the best equity in the last 15 years has been $11,960 per contract with the worst equity at ($7,460) so tread lightly. Furthermore it appears an energy hedge fund may be caught short so be prepared for further volatility and potential short covering.

April crude found support last week and was able to break through some critical technical levels buoyed by support of ongoing talk that OPEC may reduce oil production at their next meeting on March 5th. By the end of the week April crude oil had advanced $3.81 or just over 4%.  As we predicted last week April crude got thru the $94 level and we will echo our advice to continue trailing stops on longs and take what the market will give you. Prices on April are currently trading above $95 a barrel and we could see prices going $2-3 dollars in either direction so we will not advise entry of new positions and continue to maintain that prices will look for direction from the stock market. Support lies at 93.75 while resistance is found just below 98.

With yet to advise an outright long in the distillates, we maintain a spread position for clients, long June gasoline and short June heating oil looking for the spread to widen. As of last week the spread traded as low as 3 cents and is now approximately double that at 6 cents so depending on your entry new entries should have a nice lead.  As expressed last week our target remains at 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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After the close Friday, the USDA estimated last week's beef production at 482.3 million pounds, up 1.7% from a year ago. Pork production was estimated at 455.3 million pounds, up 12.5% from a year ago.  Although prices in April lean hogs lost ground last week we have yet to fill the gap at 63.65, maybe this week. Pork bellies retreated south as we had projected loosing over 5 cents in March ending the week between the 50% and 61.8% Fibonacci retracement levels. Last week we advised clients to re-establish longs in April live cattle still looking for prices to make their way back to the high 90’s in coming weeks.  Resistance on March feeder cattle held and it appears for now prices should trade lower, next support is 103.70 followed by more significant support at 102.00.

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Stocks: The University of Michigan's consumer sentiment index fell from 78.4 to 69.6 in February, much lower than expected and the lowest in 15 years. Roger Clemens was not the only one attesting in front of Congress last week, as did Ben Bernanke.  In his testament before Congress the message we got from gentle Ben “the outlook for the economy has worsened…and the downside risks to growth have increased.”  He went on to say that the Fed will act in a timely manner as needed to support growth with very little talk about inflation which we feel is a blunder. The FOMC minutes will be released on Wednesday so we will try to investigate what exactly has led them to cut rates 1.25% in recent weeks paying close attention to the rationale behind not only cutting rates at a scheduled meeting but an additional inter-meeting cut. For the week, the Dow advanced 166, or 1.4%.  The S&P gained just 19 points but has climbed 3 of the last 4 weeks. The NASDAQ closed 17 points higher on the week adding just less than 1.0%. 

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 equity futures 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 1371 with support at 1343.  As far as the March Dow resistance is found just below 12470 while support is just below 12160.

Bonds:   The debt market generally is extremely sensitive to talk on rates but this past week the trade seemed to be more focused on the availability of credit. Mortgage defaults and the ripple effects of bond insurers’ woes have been contributing to tighter lending standards. Not only is credit becoming more expensive but it is also becoming less available and is increasingly becoming a source of restraint on the economy. Current pricing in the futures market expects the Fed to lower interest rates ½ point on March 18 with traders putting one-in-three odds of a ¾ point cut. 

Without any surprises with the CPI or jobless claims March bonds should remain range bound between the 100 day moving average of 115’24 and 118’03; the 50% Fibonacci retracement level from December’s low and January’s high. Resistance on March notes is at 116’26 with support at 115’10. The Euro-dollars spread from previous weeks 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 when this spread turns it will find it’s way back to levels seen August through November. Both stochastics and MACD should support a move once this spread finds a bottom.

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Real GDP in the Euro area (13) was up .4% in the fourth quarter and up 2.3% from a year ago. For all of 2007, real GDP was up 2.7%. The March Euro closed higher on the week gaining just over 1 ½ cents.  Although we expected the Euro decline to continue last week we also cautioned that with US dollar weakness the Euro may rally and that is exactly what happened. Trichet has indicated that the ECB isn’t ready to cut rates anytime soon although there has not been any indication of rates moving higher either.  Although momentum could take the Euro a little higher we are starting to investigate an entry for shorts for our clients expecting prices to find their way back to 1.4450 in the next few weeks.

The Bank of Japan met and kept the interest rate unchanged at .50%, as expected. Real GDP in Japan was up .9% in the fourth quarter, much stronger than expected. For all of 2007, real GDP was up 1.8% and nominal GDP was up .6%. The inverse relationship with the yen and the stock market should carry on. Seasonality supports a move higher in March yen futures as do the technicals; the 61.8% retracement and lower Bollinger band come in at .9240/.9260 and should serve as support. On a move higher we would expect prices to get back to the consolidation area around .9450.

Australia's economy continues to look strong. The unemployment rate improved from 4.3% to 4.1% in January, the lowest in 33 years. The Reserve Bank of Australia is likely to continue raising rates to restrain surging demand and to combat inflation, some say as soon as March 4.  If rates were to rise to 7.25% from the current 7.0% this would be the highest rates since 94’.  We still maintain prices will reach parity here and are awaiting a setback for better positioning but may be forced to get long on a breach of .9100 on March as that should take prices back to at least .9350.

Canada's exports were down 3.1% in December to C$36.7 billion while imports were up .7% to C$34.3 billion. The result was Canada’s trade surplus shrunk to a 9 year low. The March Canadian dollar appears to be making its way back to the bottom of the range around .9800. If given the opportunity we would recommend selling the March Loonie at 1.0050 with a stop above 1.0130. Continue to play the range.

If you got long from our recommendation from last week around .9000 in the Swissie, rail a stop and look for a move to .9200 before taking a profit. We will look to reverse for clients or outright get short from those levels if reached. 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.

As we anticipated we saw a bounce in the Cable last week as prices moved 3 cents higher before reversing on Friday. We were looking for a bounce to at least 1.9600 and prices actually got to 1.9700. Sell rallies in the pound as we are bearish and expect the pound to weaken longer term looking for new lows to be made. Resistance lies at 1.9670 with support just above 1.9500.

The US 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. Right now RSI and stochastics indicate a move to the downside with support at 75.80 followed by 75.50, with resistance at 76.65.  Without any inter-meeting cuts the dollar should chop around these levels as future rate cuts have been factored in.

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Corn:  The USDA said that, as of last week, US exports of corn remained up 15% from a year ago.Weekly export sales showed 932 t.m.t. of corn was sold last week. This number is lower than previous weeks, most likely due to lack of Asian buying due to the New Year Holiday. Corn continues to be influenced from outside forces as advances in crude oil and other energies and a lower dollar index helped to hold gains last week. The question remains if these most recent narrow corrections will be enough before an advance begins ahead of the planting intention report or will there be another washout like we witnessed in January? We are certainly poised for further profit taking if the large trading funds see fit to further take bonuses by taking profits, but it’s also possible their simply too bullish for March report possibilities that recent corrections are enough. The most recent Commitment of Traders report still shows a heavy net long position with Index traders and Non-Commercials combined 6:1 net long. Watch out for this Friday as March grain options expire and traditionally we dip just ahead of expiration. We will continue to advise buying dips and once long look to parlay longs in December 08’. Support lies at the trend line just above 5.20 with resistance coming in at 5.40.

Beans:   The USDA said that, as of last week, U.S. exports of soybeans fell from down 5% to down 6% from a year ago. Weekly export sales showed 328 t.m.t. of beans were sold last week. Like corn soybean sales too were good considering Asian market closings with China absent. Although we expect a noteworthy rally in November beans into the March 31st planting intentions report on fear we will run out of beans in 09’, be prepared to take advantage of any pullbacks that hold 12.50 in November or the 20 day moving average, which is currently 12.57. Aggressive traders looking to get in for the long haul; parlaying longs much like in the corn, buy November futures in the 12.75 area, just above the 61.8% retracement. On top of playing beans we are also advising clients to get long May Soybean meal looking for new contract highs. Prices bounced off the 9 day moving average last Friday and we are looking for a further advancement. Buying May Soybean meal on 2/7 and holding through March has been profitable 12 of the last 15 years for an average move of $1044 per contract. 

Wheat: Weekly U.S. wheat export sales were weak, with cancellations and buybacks seen as heavy. The USDA said total export sales for the week ended Feb. 7 and were 158 t.m.t., below analysts' estimates of 250-800 t.m.t. Total new sales for delivery in 2007-08 were 289 t.m.t. but cancellations/buybacks of 206 t.m.t left net old-crop sales at 83 t.m.t. It is clear last week's historic high prices chased importers to the sidelines.   This week's price breaks seems to have some importing countries back in nibbling again. Expect better sales on next week's report. Near term, May CBOT wheat has support at 9.90 as prices pulled back from 11.70 to bounce off the 38.2% Fibonacci retracement level. Longer term traders, if patient and lucky enough to get another price correction, we suggest buying the KCBT May futures at 10.20 to 10.40 area and if filled, sell the May 9.50 puts for premium. 

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 approximately 40 cents premium to KCBT and for the immediate future looks to be narrowing and will give traders that are not in another chance as we see this widening substantially in coming weeks to months.

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If you have not read our report on cotton and sugar you need to:

http://mbwealth.com/articles/cottonandsugar.pdf

According to Dow Jones Newswires, Brazil's coffee crop should be getting some rain very soon and that in combination with fund position squaring/profit taking most likely contributed to the fall off in prices on Friday as prices closed 7.65 cents off their highs. The setback we spoke of last week appears to be under way as prices rolled over from overbought levels. May coffee should find its way back to 143/146.

Dow Jones Newswires reported that a private firm; Datagro, estimated Brazil's 2008-2009 sugar cane crop at 532 million tons, up nearly 10% from a year ago. May sugar closed up 78 ticks on the week at 13.79, the highest close in 16 months, supported by rising energy prices. Although we are repetitive 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’.

Reuters news said that a lack of rain in the Ivory Coast for the past two months will likely delay this year's mid-crop harvest which typically runs from April to September. May cocoa closed up $109 at another new contract high of $2,519. Additionally more and more money is finding its way into soft commodities as a viable way to play the rising price of commodities. Although we will not advise a short, prices may have reached an interim top and we would not rule out a retraction. As most of our clients participated in a bullish option spread last week we will most likely try a similar play on a retreat in prices as we still feel the overall trend should remain up and expect at some future date a print of $3,000 for cocoa.

Central Florida remains safely warm for orange growers. May orange juice closed down 5.90 cents at $1.2550 the lowest close in five months and is approaching the $1.2000 level where we will start to have an interest in establishing longs for clients. Buying May FCOJ on 2/26 and selling on 3/17 has been profitable 13 of the last 15 years for an average profit of $545 per contract.

December 08’ cotton certainly didn’t lack volatility last week as 3 days experienced trading ranges wider than 2 ½ cents but after everything was said and done prices only lost 79 ticks from Monday’s open to Friday’s close.  We are currently friendly to cotton and will advise buying Dec08’ cotton as close to 75 cents on pullbacks looking to parlay this position and play the run in acreage. After reading an article in Barron’s a few weeks ago it made us really think of the impending increase in demand if in emerging markets consumers buy just one pair of trousers or a few t-shirts and how that could equate to a significant demand increase. Resistance lies at 78.40 if that level is breached we should make out way to the contract highs at 80.61.

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Last week gold stayed contained within a $30 range. As we alluded to in the preceding commentary we have lightly worked our way back long gold for our customers. 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.

We are currently advising clients to sell March futures between 17.20/17.50 expecting prices to make their way back to 16.40 or lower in coming weeks. Since 1985, March silver futures have declined a total of 189.3 cents/ounce during the latter half of February. We are long term extremely bullish and will use pullbacks as buying opportunities fully expecting to see $20 plus in 08’.

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.