MB Wealth Corp. Weekly Commentary
For January 21st - January 25th 2008
By: Matthew Bradbard The CCI (Continuous Commodity Index) nearly reached 500 this past week trading over 498 on Monday and Tuesday. This is quite an accomplishment as prices were near 380 just one year ago; which means prices advanced in excess of 30% year over year. It appears we have reached an interim peak and we should see a slight pullback in the short term. The stock market is not the only place we saw lower pricing last week as several commodities pulled back from their lofty levels. Commodity markets fell on concerns that the economic slowdown could translate into weakening demand for raw materials. We do not think a top is in place and would highly suggest using this retrenchment as a buying opportunity in commodities like gold, oil, cotton, and corn just to name a few. The global growth that has been fueling higher prices is just taking a breath and the secular bull market in commodities will live on for years. Do not read too much into the movement on Monday as it’s a holiday and low volume should increase the volatility and exaggerate the movement. If you have the risk capital you should consider if, a portion of your portfolio should be allocated to commodities; if you have not read our most recent special report click on this link http://www.mbwealth.com/articles/agsandsofts.pdf To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997. ____________________________________________________________________ Our second target of $91.10 was reached and prices for February traded as low as $89.26 before closing the week out at $90.57. We are advising clients who took advantage of the slide lower in oil prices to cover their shorts as we see a reversal in pricing or at least a bounce in the immediate future for crude oil. On March with a daily stochastic reading of just above 11.00 the technicals indicate an overbought market that could be supported by a double bottom as long as last week’s low of $88.94 holds. Conversely, with a slowing economy and looking at weekly charts, a further reduction of prices is not out of the question. We still expect short term prices to bounce $2-$3 unless bigger stock market fears cause increased weakness. As we voiced last week we were looking for a temporary top which was established on Monday at just below $8.50 on February. We forecasted a pullback and it was delivered by the end of the week, prices closed at $7.99 or about 50 cents off the high. Current prices may be supported by the 61.8% retracement, but more than likely we should get through and find better support just above $7.50, potentially filling a gap from 12/31/07 at $7.54. We will advise clients on a lower entry and are content being spectators for now. Until Crude confirms that it has put in a definite bottom and turns north we will not be playing unleaded or heating oil with the exception of day trades. It would be nice to get long either March heating oil or gasoline as both are oversold on the charts and tend to trade up into and through February. We would not rule out a recommendation on playing a spread either, but we see no spread where risk to reward makes sense at current levels. ______________________________________________________________________ After the close Friday, the USDA estimated last week's beef production at 505.6 million pounds, up 4.8% from a year ago. Pork production was estimated at 493.5 million pounds, up 17.9% from a year ago. April cattle were up .42 at 94.25. It is too early to say for certain but you could have a key reversal in live cattle as Thursday’s trade down to 92.30 was rejected. We started working into longs for clients last week in April live cattle thinking that if the low wasn’t in we are close. April live cattle futures have gained in January 19 times (76.0%) and in the first quarter 16 times (64.0%) between 1983 and 2007. Given these strong historical tendencies, once a bottom is in place we expect 500 points. Like live cattle, feeder cattle also seem to carving out a bottom. Although we do expect the gap in January to be filled at 99.30 before expiration, we are not advising customers to get long just yet. April hogs closed down 12 ticks at 62.42 on Friday and marginally higher on the week while brutally cold temperatures moved into the Midwest from Canada. We expect to see continued sideways to choppy action here, not worthy of any trade recommendation. Resistance here lies at 63.75 with short term support at 61.75 for April. ____________________________________________________________________ Stocks: Renewed worries about the sub-prime crises and fears of a consumer slowdown led to a nasty week for the equity markets. The Dow finished the week 507 points lower or 4.0%; the NASDAQ gave up 100 points, and is 18% off its October high, while the S&P ended the week down 76 points, or 5.4% to 1325. This is setting January up to be the worst 1st month of the year in history with a month end Fed meeting possibly being the only possible rescue. The proposed economic stimulus plan has yet to be fully digested by the market. By month’s end we have the state of the union address by Bush, and Bernanke’s Fed which most likely will slash rates another 50 basis points; we would recommend staying defensive. We may get a rally from oversold levels, this should be sold and we strongly advise using options and futures to hedge further losses in the stock market. If you have not listened to us for the last couple months hopefully you have learned, we may only be half way done. Call to inquire how you can protect your stock portfolio with index futures and options. Bonds: Figure this out? The Fed’s current funds rate target is 4.25% and investors are sacrificing nearly 200 points of yield today in order to lock in 2.35% for two years. This implies that the central bank will continue to drop rates hard and fast; futures have fully discounted the Fed cutting 50 points to 3.75% and further reflect a 72% probability that the Fed could bring its target rate down 75 points to 3.50% on its Jan 29-30 meeting. That being said bonds and notes will most likely continue climbing higher. Currently prices appear lofty and we would warn to keep on the sidelines for a setback. 117 would be a good entry long March bonds, and 115 on March notes and these levels could easily be obtained with a dead cat bounce in the stock market. ____________________________________________________________________ Statistics Canada reported that manufacturing sales were up 1.1% in November, stronger than expected. The Bank of Canada is seen cutting interest rates by another quarter point, to 4.0% on concerns about the effect of the US economy deterioration and global credit market problems. The March Canadian dollar closed down 65 ticks on the week slowly grinding lower towards our target of .9400. Last week’s low of .9696 serves as minor support and we may see a bounce with oil but the trend is still down. If short, tighten stops to protect profit. The U.K.'s Office for National Statistics said that retail sales were down .4% in December, weaker than expected. The pounds short term trend remains negative with new lows expected. The recent up activity is viewed as nothing more than short covering. Although we do not think the lows are in we believe a low is soon to come and will start to explore the prospect of a reversal once we get signals of a low; current prices should be supported at 1.9400 on March. Japan's Cabinet Office said that its index of consumer confidence dropped from 39.8 to 38.0 in December, the lowest in over four years. Do not forget the inverse relationship that exists between equities. The March yen ended up 1.41 cents last week closing Friday at .9394. Longer term we are bullish the yen but right now we are looking for prices to back off ideally to .9200 on March, but the lower the better. The dollar traded through the triple top from last week Sunday evening, but will that hold going into Monday? What was resistance, 76.64, should now serve as support. We expect to see pricing challenge the 100 day moving average of 77.15 and the dollar to attempt a recovery up to the December highs just below 78.00. Previous prices have factored in the worst case scenario and have already discounted the fed rate cuts so the dollar should continue to benefit from the flight to quality out of the stock market. It is still apparently the world’s reserve currency, so with increasing fear and liquidation of equities the dollar should be supported. The Australian dollar lost 1.15 cents last week and is nearing a buy point. We are currently trading just below the 100 day moving average of .8735 and will start advising clients to get long near .8600 looking to establish a position in March futures. We would expect support to hold at .8500 and once prices start appreciating in commodities again we anticipate the Aussie to benefit, by finding its way to higher ground. The Swiss franc remains on our no interest list but we favor a move to the downside as long as .9229 holds for March. An interim top was put in on January 16th at .9254. A pullback to .8900 is what we expect but we will not direct any play here as it could go either way. We continue to advise clients to sell the Euro on strength as the seasonal tendency for a down January exists; 8 of the last 9 years the Euro has retreated on an average of 2 plus cents. The ECB may revise down its 2% growth forecast for this year, which means talk of an impending rate increase which boosted the Euro 2 weeks ago could be removed from the market. As of Sunday, prices are supported by the 61.8% Fibonacci retracement of 1.4545, which if it gives way should accelerate a move to 1.4400. Stay short, sell rallies that are contained by 1.4625. ____________________________________________________________________ Corn: Weekly export sales showed 2.369 m.m.t. of corn was sold last week, a new marketing year high. High prices don't seem to be slowing down export sales for corn. Last week started with a continuation of the bullish mindset from Friday's USDA monthly crop report, showing us a lower ending stocks number for 2008 as we continue to consume more corn than we can produce. In the next few months corn will need to find a price high enough to sustain farmer’s intention to plant equal or more acres than 2007. Quite a surmountable task, as soybeans and spring wheat futures continue to seek their price to assure wheat and bean acres are sufficient enough to keep us from running out. The trade is talking about a larger correction in corn, charts support a further reduction in pricing taking March down to 4.65/476. Near term March corn has support at 4.95; a close under there should lead to 50.0% retracement from the contract high and the breakout point of 4.33 to 4.76. The wildcard here is if fund buying returns new highs will be seen and we may not get the much anticipated pullback. We will continue to recommend buying breaks in December 08’ as we feel 6.00 will occur on the board perhaps before planting intentions in late March. Beans: Weekly export sales showed 965 t.m.t. of beans were sold last week. Last week brought historic highs as prices reached 13.41 on Monday, after Friday's USDA crop report. Profit taking brought March down to 12.63 by week’s end. Support is at 12.44 and rallies should be contained at 13.00. The ranges of the rallies and breaks intra-day are large enough to day trade but be careful as volatility is a double edged sword. Prices need to trade high enough to assure we do not run out of beans in 2009. It is our opinion that highs are not yet in and we would recommend buying breaks in November 08’ beans; we would not rule out a washout to 11.25 so do not be impatient and jump in immediately. Disappointing action in soybeans and meal may be a signal that the uptrend in soybeans is nearing an exhaustion point. For smaller accounts we can suggest some option plays if you contact us via e-mail or telephone. Wheat: Weekly export sales showed 404 t.m.t. of wheat was sold last week. Wheat continues to show relative strength in comparison to corn and soybeans, and we would expect this to continue in the short term. Additionally we are looking to reposition in the Kansas City new crop against Chicago as our target was reached in old crop; riding the March Kansas City over Chicago from 15 to 40 cents and advising an exit last week. Traders like the KC futures on concerns over weather near term to exposed dormant wheat and concerns longer term on what future weather may bring. Minneapolis strength comes on fear that its price needs to be high enough to assure that beans do not steal too many acres as they go to seed at the same time. March CBOT wheat has support at 9.25 then 9.00 with 9.66 serving as resistance. A close over 9.66 and new contract highs should follow potentially attempting a move to 11.00. For KC a new contract high should be made this week with a trade above 10.19, support 9.78 and then 9.50. The current spread on KC over CBOT for July is 88 1/2 cents and we would not even look at this until we get closer to 50 cents. ____________________________________________________________________ Workers at the Ivory Coast's cocoa marketing office went on strike again, but some are saying that it should not last long. March cocoa closed down $43 at $2,126 last week. We expect price to trade down to 2080 before finding support. Although we are looking to re-establish longs for clients, it may not be immediately as we expect the US dollar to gain and the pound to weaken which could pressure cocoa prices short term. Funds could support cocoa or decide to book profits so for now we will observe from the sidelines. While much of the U.S. is in the deep freeze, the weather forecast for Central Florida remains safely warm over the next ten days. March orange juice ended up just over 1 cent on the week at $1.3568. We will recommend getting long at around $1.2500 on March and not before. Look for existing home sales to slip 1.0% to an annual rate of 4.95 million units in December. Bad news should already be factored into the lumber market and we expect a bounce up for a short entry on May in coming weeks closer to 260.0. Sugar prices exploded higher last week trading above 13 cents for the first time since September 06’. Speculative funds and trade houses bought in record volume after ICE Futures curbed trading activities by Brazilian sugar-ethanol producer Fluxo-Cane Overseas Ltd. We feel current prices are a bit ahead of themselves but this should serve as wakeup call and show traders the power of the commodities markets when markets get moving momentum can really kick in. Prices advanced 6.0% on the week and had trading ranges on Thursday and Friday of nearly 10% on an intra-day basis. We will continue to advise accumulation of sugar futures and options on setbacks as 15.50 is our target in 08’ and 20 cents/lb in 09’. Cotton prices appear to have put in an interim top last week and one should use this setback to buy July options or December futures. We are advising July 80 cent call options and an entry in December between 75/77 cents. Do not forget that cotton should benefit from the loss in acreage to other row crops and fund money should also find its way into cotton causing prices to move into the mid 80’s in coming months. Consider buying breaks in May coffee. Uptrend channel support lies at 134.50 with additional support at 133.50 with 146.25; the contract high as our longer-term upside objective. As we said last week with impending drought fears and strong consumption we are looking to buy coffee for our customers on this pullback in prices. Seasonal strength is also aiding in our conviction and we will start pricing out 10-15 cent bull call spreads for May; the 135/145 is currently trading at $1368.75 and the 140/150 at $1001.25 before commissions. We are looking to position our clients for an impending move higher in the next 30 days looking to pay $1000 and liquidate for $2000-$2500 per spread. ____________________________________________________________________ Rising Chinese inflation, high commodity prices, potential for U.S. stagflation paint very bullish medium-term outlook for gold, says Macquarie Research. Chinese demand for commodities will continue to boom, pressuring commodity prices higher both within China and globally, while China likely to start exporting manufactured goods-inflation. Always follow the global flow of money; on January 9th Chinese investors jumped into the bullion market when the country’s first gold futures contract was launched. Prices backed off last week with a H/L trading range of nearly $50 for April. We expect prices to stay contained by the 9 day moving average of $895.9 for April and make its way down to $855.60 which serves as a 50.0 % retracement from the January highs and November/December lows. On a break to these levels we will be recommending getting rather aggressive in buying as we have raised our 08’ target to 4 digits; $1000. Even though silver prices traded down last week, it was relatively minor in comparison to gold loosing almost 5%, silver only lost 16.5 cents or less than 1.0% from its high. As industrial metals tend to outperform precious metals this time of year we are more eager to get back in silver than gold. Because of the volatility we will take it day to day but we are looking for an entry to re-establish longs. Traders could consider buying May silver against April gold to take advantage of this deviation. As this spread, which is recognized by the exchange, has worked 13 of the last 15 years for an average of $1833 per spread entering in mid-January and holding through March.
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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