For June 30th–July 4th 2008

By: Matthew Bradbard

There is talk of government intervention, banning of institutional investors from commodities, and recently on the CFTC website they released “emergency authority” which has been only used four times in history and not since 1980. The Commission has exercised its emergency powers in response to extreme events, such as manipulation or a specific disturbance that caused a sudden shock to the markets. The CFTC has never exercised emergency powers based on price trends that have developed over months or years. As opposed to speculators causing the dramatic increases in commodities prices, is it not possible that demand from emerging markets and the lack of investment by suppliers has created a structural change in commodity markets fueling higher prices? For the government to get involved at this point they would essentially be manipulating prices, or doing the same thing that they blame speculators are doing, Isn’t that ironic? They should not interfere and let supply and demand determine price. If this media attention does anything, we hope it informs investors on how serious of an issue we have at hand and the fact that prices of commodities may be rising for years to come.

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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Late in the week, crude oil broke out of the sideways consolidation we have been in for the last 15 days.  On the week, August gained $4.36 and intra-day Friday we traded just below $143/ barrel. With continued weakness in the dollar, increased investor participation, and the lack of some type of intervention, $150 appears to be a self fulfilling prophecy. After 5 weeks of seeing draws in inventory we finally got a surprise build in oil inventories and even with that, prices were able to move higher. Generally when bearish news is ignored and prices trade higher it should tell you that prices are moving north. At this juncture we’re still content on the sidelines, but we do have a friendly bias being that prices have now broken out of the sideways consolidation. The 20 day moving average just above $134 should serve as support in August with the market now having its eyes on $150.

August RBOB traded 7 ¼ cents higher on the week ending at $3.1572. Although prices traded higher on the week, the move was only a 2% advance while crude and heating oil gained a more convincing 3%.  As we stated last week, as long as the 3.55/360 area serves as resistance, we see a move back to 3.10 in coming weeks. August heating oil gained 14 cents on the week ending at 3.9331 after making a failed attempt at the $4 level. If crude continues higher we should see a new high in diesel, but for now resistance comes in at the contract high just below $4.05. Like RBOB we think a move down is long overdo, but we’d be bucking the trend and we’ll wait for a move lower to develop before committing client funds. 

Some of you may have used the break last week to get positioned long August natural gas, if so we were advising the purchase of 13/13.50 call spreads for $1750 o/b and 13.50/14 call spreads for $1300 o/b. You should have been able to get those prices on Wednesday and maybe Thursday morning. By Friday settlement we closed at $2270 for the 13/13.50 and $1650 for the 13.50/14, so look for intraday breaks this week for pricing. The strategy would be to exit closer to expiration looking for either both or at least your lower leg to be intrinsic. The expiration is July 28 so from today you have 28 days. We do not expect a settlement below 12.50, which serves as the trend support line, but on a challenge of that level we may explore getting long futures with a relatively tight stop.

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After the close Friday, the USDA said that there were 67.661 million hogs and pigs in inventory on June 1st, up 5.8% from a year ago and more than expected. The March to May pig crop was up 4% from a year ago. Pork production was estimated at 425.8 million pounds, up 10.3% from a year ago. August hogs ended virtually unchanged on Friday ahead of the report, but on the week prices were off 6.2 cents or 8%.  Going into last week we felt we did not have enough longs on, but after the week any longs were too many. Prices backed off hard and if you thought you missed the move higher which we do think will happen you now have a better opportunity to get long. Do not get in too heavy as a gap lower from early April may get filled taking prices in August down to 70.40. The market priced in a bearish report and being that there were no surprises, we are okay buying, looking for prices to gain in coming weeks. We expect a move back to the 100 day moving average in coming weeks at 76.75. August bellies look supported if last week’s lows hold and we could see a trade back to 78 in coming weeks.

After the close Friday, the USDA estimated the week's beef production at 538.7 million pounds, up .6% from a year ago. August cattle closed up 15 ticks on the week at a new contract high of 105.10, helped by talk of good demand for cash beef. Prices appear to be moving higher with support coming in at the 9 day moving average at 104.28. August feeder cattle lost fewer than 3 cents on the week and seem to be supported at the 50 day moving average, as we were unable to go through that level on a closing basis. If we were to see a trade below 111, the trend line should be supported at 109.50 and the closer we get to that level the more aggressive buyers we would be. As we have voiced in previous weeks we are looking for higher prices in both live and feeder cattle so continue to buy dips.

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Stocks: What’s worse than panic selling? An orderly decline, you will generally see a capitulation that could hint at a bottom and that is not happening as stocks continue to slide. The Dow lost nearly 8% in the last 2 weeks alone and with one day of trading left we could have the worst June since 1930. We ended last week 496 points or 4.2% lower on the Dow to 11347.  The nearly 20% decline from its October peak puts us dangerously close to a bear market by definition. The S&P shed 40 points or 3% to 1278. The NASDAQ slipped 90 points or 3.8% to 2316. As we have been expressing, there will be more shoes to drop and we are not advising getting long yet. Again we ask, why are investors so loyal to their stocks? The time has come to start giving commodities more respect and making them a larger percentage of your portfolio. We may get a short covering bounce from oversold levels, but we are not convinced more selling will not pick up in this holiday shortened week. 

Bonds:  As money flowed out of securities it found its way into the debt market as prices from the short end to long end traded higher. We have been able to trade the short end with euro-dollars and the long end with 30 year bonds and will go back to the drawing board to devise another play. We chose to take the long September bond play off ahead of the Fed meeting. Although we did leave money on the table, we felt it better to take a profit for clients since unable to confirm with 100% certainty how the market would react.  The next market movers should be non-farm payrolls and the ECB, both on Thursday. Although we have a bullish bias for now, we expect treasuries to remain range bounds as investors continue the tug of war between inflation and growth. Support in September bonds is 114’30 with resistance at 116’17.  Support in September notes is 113’12 with resistance at 114’20.

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The U.K.'s Office for National Statistics said that real GDP was up 2.3% in the first quarter from a year ago, down from its 2.5% estimate a month ago and weaker than expected. The September British pound was up 129 ticks at $1.9760, the highest close in three months. We are still looking to get short, but as we expressed last week, perhaps from higher levels as the upside resistance gave way last week. We will be looking for an entry to get short future and the 195 September put is on our radar; settled at $1012.50 on Friday.

Japan's core rate of inflation was up 1.5% in May from a year ago, the biggest gain in ten years. The September yen closed up .90 ticks on the week at .9455. This move got us out of the long futures and short 94 calls at a decent profit around $550 per strategy. We will look to reposition long again this week on a setback. If the dollar continues to move lower and the stock market continues to sell off, money should flow into the yen and we could see a move back to .9700.  Investors will continue seeking shelter in the low yielding currencies as volatility in oil and stock markets continue. Look for the Tankan survey out this week to be a market mover.

Statistics Canada said that the industrial product price index was up .6% in May and up 2.4% from a year ago. The September Canadian dollar ended up .52 at 98.75. We have not changed our viewpoint that the Loonie should be sold around .9900 and bought around .9700 using stops just above and below your entries. We favor a move to the downside as prices above .9900 were rejected last week and on the daily chart the stochastic support a move south.

Looking at the interest rate differential alone, it is no wonder that the Australian dollar has been able to gain on the dollar recently. We have seen an advance of 300 points in the last 2 weeks and at this point it does not look tired. On Tuesday we will get a rate decision from the RBA and although we expect no action, we should get an indication of what their viewpoint is moving forward. We are now trading at .9500 on September and within 5% of our target of par, which we fully expect this year. Buy dips and stay long!

Last week the Swiss Franc gained 108 points to finish the week at .9782. First resistance is at .9850 followed by .9950. We should see prices supported at the 20 day moving average that comes in at .9650.  We’ll most likely start looking for short opportunities but from modestly higher levels, for now we see nothing.

We are truly at a pivot point here on the charts as we are anxiously waiting for an opportunity to get short, but being that the ECB has an interest rate decision this week and Trichet has hinted at an increase of 25 basis points, raising rates to 4.25% from 4.0%, we will stand aside for now. The last 2 occasions we have been at this price point; 1.5730, we sold off 4 cents relatively quickly but as you know, past performance is not indicative of future results. We will be looking for an entry to get short futures and the 150 September put is also on our radar, settled at $737.50 on Friday.

The dollar index was hit hard last week as the Fed indicated that they were not in a rush to raise interest rates as the market had previously anticipated, September was down 76 ticks and below our target from last week of 72.90 ending the week at 72.67. The fact that consumer confidence fell to a 28 yr. low also contributed to weakness. It looks as if the lows will be challenged in coming sessions which come in about 100 points from current levels. Continue to track action in the dollar index even if you are not trading it to guide you in entry and exit in other transactions as the direction of the dollar and oil seem to be influencing most commodities.

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On Monday morning, the USDA will release its annual acreage report, but the figures will not fully reflect the effects of recent flooding. The USDA plans to conduct additional surveys and release updated estimates on August 12th

Corn: Weekly export sales showed 231 t.m.t. of corn was sold last week. There has been talk of weaker export numbers because of high prices and the fact that less corn is being used for feed, but I am under the opinion that a larger effect should be attributed to the fact that flooding in the Midwest has corn’s main shipping channel to ports closed to barge movement for 2 weeks. Monday’s report is usually the final planting report of the year but with recent rains and flooding causing late plantings and reseedings it leaves this report only with rougher estimates as the government will come out with final numbers in a couple weeks. We have estimates coming in for acreage estimates between 87 and 79 m.a. Furthermore, the yield number could shift 2-4 b.a. which could be a market mover as well. Expect volatility and have a plan before entering the market. Understand that although this report is important, we are still in the growing period where precipitation and temperature still plays a roll in crop conditions. December has support at 7.44 and we feel it is just a matter of time before we print above 8.00 and we see another leg up.

Beans: Weekly export sales showed minus 268 t.m.t. of beans were sold. What this means is previous purchases for futures shipment were cancelled. This is in large part to Argentina starting to ship beans again. We have estimates coming in for acreage between 72 and 76 m.a. Monday is set up to be very volatile but, like I voiced in corn, we still have a lot of weather ahead of us so although this report is important it is not the end all be all. We like November to the upside and have clients positioned long in futures and options. The 9 day moving average should serve as first support at 15.29 and we expect a new contract high on a bullish report. We also found a spread that we think is worthy of taking a look at; long August 08/ short March 09. You should be able to get in relatively close to even money looking to risk 20 cents looking to make 50 plus cents.

Wheat: Weekly export sales showed 498 t.mt. was sold last week. Not a shocker as everyone wants every bushel after the US sold last year’s crop down to a sixty year low inventory this year. Monday’s USDA report doesn’t have the anticipation in wheat that corn and beans have as the growing cycles are off and the recent weather has had a much smaller effect on the wheat crop. The average guess for wheat acres planted is 63.8 m.a. unchanged from March 31st. We continue to favor the short side in wheat, but will be in cash waiting for the market to digest the report. Friday we failed on September CBOT wheat and prices were unable to hold the 100 day moving average. If that serves as an interim high, sell into rallies and look for 8.85 followed by 8.58 in coming sessions. KCBOT also had trouble holding the 100 day moving average as we expect prices to find their way to 9.26 followed by 9.01. Notice the significant volume jump on Thursday in both KCBOT and CBOT wheat which could mean a short-term top, but before reading too much into it, it could be traders rolling from July into September as FND is today.

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Although prices on September cocoa are extremely over bought, if the US dollar continues to trade down prices will stay at these levels. If long tighten up your stops or use some put protection against futures. We are on the sidelines looking to buy a break and think it feasible to get a $200-400 any day now with no damage to the longer term up trend. If you started to see a break we think fund selling could take prices down rapidly. On the daily chart stochastic and MACD would support a move lower, albeit only a retracement in a bull market.

September lumber closed up $4.20 on Friday at $258.00 after existing home sale figures showed a 2.0% gain in May. On the week, we were down $2.50 but as we have said in previous commentaries you can lightly buy September lumber as long as it holds $250, which it did last week.

Dow Jones Newswires reported that no damaging cold temperatures are expected for Brazil's coffee crop in the week ahead. Even with no weather threats we have seen September coffee really perk up of late gaining 20 cents in the last 2 weeks. Although open interest has been growing, the volume has not been too impressive and we are still not convinced prices can maintain these levels. On signs of weakness we may probe for short entries. For now the next resistance comes in at 158.50 with support about 10 cents lower at 148. 

We will stay long sugar for the next few years as we view sugar as the most undervalued commodity on the board. We have started to roll out of some of our October 08 futures into March 09 and will use the next leg up to liquidate our October calls and buy more time. We have seen an impressive move in sugar, gaining 15% in the last 3 weeks. It looks like we are taking a breath and we should see some sideways consolidation. If we do get a pullback we will use that as an entry to get long March 09. If you have a commodity account and are not positioned in sugar#11 call us!

Cotton like corn and beans has been affected by the recent weather.  The two top producing states are off to a slow start which could result in a significantly smaller 08 cotton crop.100 degree temperatures, high wind and blowing sand has cut a lot of cotton down and if this were to continue we could see a loss of 1-2 million acres in Texas alone.  We traded sideways for most of the week in December cotton as the market prepared itself for the USDA crop report. We managed to stay above the 100 day moving average and we are long futures and options for clients expecting 90 cents in December in coming months.  In an interview on CNBC last week a guest interviewed about opportunities in commodities spoke of cotton as being one of the “sleeper “ markets in commodities and we agree.

We are long January 09 fcoj in a back spread for clients as we sold calls and bought 4 times as many deeper out of the money, call us for specific details. September treaded water last week staying around the 113 level. As long as the lows for September and November hold we are ok being long futures but it may take a while to get going and that is why we are playing options out until January.

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The first part of solving a problem is admitting you have one, as the Fed voiced last week, inflation evidence is more evident. It is a shame it has taken record high food and energy prices for them to get their head out of their arse. Inflation equals higher gold prices; last week August gold gained $28 and we are back at the resistance levels from late May.  If we get a close above 940 we should see a push to 970 and potentially a revisit of 1000 an ounce. We will look to oil and the dollar for help in determining price action in gold. We have some clients that have stated to buy $50 call spread in gold out until October and December and although we are not in love with the position it is a good inflation play. We would like to buy the spread close to $1500 and look to liquidate for $3000 on a move back near the 1000 level in coming months.

September silver held the recent support line that has held on a closing basis since the first of May. After trading down in the beginning of the week pre-Fed, we advanced most impressively to end the week approaching $18 gaining over $1 between Thursday and Friday. The 50 day moving average comes in at 17.17 on September and should serve as first support with the upside resistance at 18.50 level we saw in late May. First we will need to clear 17.85, which we have been unable to do on recent attempts.  The volume was heavy Thursday and Friday as we traded over 30,000 contracts when we were previously doing around 10,000. That being said we should be able to trade up this week unless we get some type of dollar intervention or surprise from the ECB.

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. Calculations of profit and loss have not factored in commissions and fees.