Weekly Outlook: Commodities May Be the Last Refuge

The Federal Reserve reported that the net worth of US households was down 18% in '08, the biggest drop in 57 years of record-keeping. You can no longer expect to gain 10% a year on your real estate, buy and hold no longer works in the stock market and 3% on long term Treasuries is not the answer. So where do investors go? We think an acceptable alternative is commodities. Whether it is a speculative account trading agriculture, exposure to precious metals, hedging your stock portfolio or an allocation to managed futures we believe investors should have 5-20% of their portfolios exposed to commodities. We are not advocating blindly allocating a portion of your portfolio or replacing a stock portfolio with commodities, but rather to inform yourself because we expect inflation in the months and years to come. Although past performance is not indicative of future results, commodities have tended to outperform other asset classes in times of inflation. Bottom-line, with a growing population and a finite supply of commodities we expect the price curve to trend higher.

Energies

The US Department of Energy said crude oil supplies were up 700,000, supplies of gasoline were down 3.0 million barrels while heating oil supplies were up 1.3 million barrels. May crude oil finished down 69 cents closing just above $47. Support is eyed between $44/44.50 with resistance at $50. The next leg will be determined by how the market reacts to OPEC maintaining current production quotas, for now we suggest buying dips. The EIA reported US gasoline demand was 1.6% stronger in the past 4 weeks than the same period last year. May RBOB finished last week 92 ticks higher, again we suggest being a buyer on dips. Depending on your time frame, we like 20 cent bull call spreads in June-August. We would like to have some exposure and then add to it on a breakout above the 1.40 level in May, that to date has failed to materialize. An 8-12 cent pullback this week should be viewed as a buying opportunity. May heating oil was lower by 3.91 cents last week staying inside the 1.13/1.29 trading range now for 4 weeks. Buy near 1.15 with stops below 1.12; currently we have no client exposure.

The US Department of Energy said that underground supplies of natural gas were down 112 billion cubic feet last week to 1.681 trillion cubic feet. Supplies are now up 19% from a year ago and up 13% from the five-year average. May natural gas finished up 3 cents last week after making a fresh 6-yr low. However, we did experience a reversal on good volume on Thursday closing 19 cents higher or 5% on the day. Could this be the bottom? A close above the 20 day moving average at 4.17 may signal a move to $5. We own the $4.25/5.00 spreads for clients and will be shopping June $1 call spreads and mini-futures.

Currencies

The June Euro was higher by 238 ticks last week and has now gained for the last 2 weeks. Support comes in at 1.2750/75 with resistance at 1.3050. We are anticipating a move to 1.32/1.35 in coming weeks and would be a buyer on dips.

The Aussie picked up 156 ticks last week trading above but closing just below the 50 day moving average. Support is seen at .6400 followed by .6300 with resistance at .6650. We are becoming increasingly friendly here, namely because of the interest differential, but have yet to commit funds.

The SNB reduced interest rates from .50% to .25% and said that they will be buying corporate bonds to help the economy as a form of quantitative easing. The SNB is the first major central bank to openly intervene in 6 years. The Swissie lost 235 ticks or 2.7% on the week, most of this came immediately after the rate reduction. Support comes in between .8350 and .8400 with resistance at .8525. We advised clients to buy on what we view as an over reaction; buying the June 90 calls for 75 points or $937.50. This option has 81 days, a delta of 47% and we are looking to be a seller at approximately $2000.

The Loonie gained 80 ticks last week allowing us to book a profit on the recent purchases of options and futures for clients. We see strong support at .7700/.7750 with resistance at .7900 followed by .8000. We will be recommending getting long on a setback this week as we still expect the .8200/.8400 levels to be achieved in coming weeks.

The yen was higher by 38 ticks last week and based on the chart alone prices appear poised for a pop higher. Nevertheless with the recent volatility it seems too big of a gamble so we would recommend the sidelines for now. Support is seen at 1.0150 with resistance at 1.0325.

The June Pound gave back 149 ticks last week closing lower now 4 of the last 5 weeks. It has not been a straight line down as last week’s close was 300 ticks off the lows. Support is at 1.3700 with resistance at 1.4150/1.4200. We anticipate a bounce but would stand aside. If you are confident a bottom is near, buy the June 1.35/1.45 call spread for $3000. This is a $6250 spread with a 32% delta and based on the current pricing has an intrinsic value of just under $3000 which is the cost of the trade.

The Kiwi gained 203 ticks or 4% last week. It appears a bottom is in and we would suggest buying dips, the closer to the .5000 level the better. The next upside target is .5350.

The June US dollar index was lower by 103 ticks last week. Resistance comes in between 88.75/89.25 with support at .8700. An interim top has most likely formed in the last few weeks with the short-term trend pointing lower. The FOMC meeting this week may help stabilize the recent slide or perhaps reverse the direction so be on your toes. The next downside projection is 86.00/85.25.

Softs

The USDA's 08-09 US ending stocks estimate for sugar was reduced from 1.066 to .981 million tons. May sugar was higher by 8 ticks last week but the trading range was 78 ticks. Buy on a pullback to 12.50 in May. The extent of the move is still being aided by movement in the dollar and oil. Continue to accumulate October 15 and 17 cent call options.

The USDA's 08-09 US ending stocks estimate for cotton was reduced from 7.7 to 7.3 million bales. May cotton traded higher by exactly 1 penny last week and after 4 consecutive losing weeks cotton finally managed a gain. We are still eager to get long futures under 40 cents but have started to price out July calls being that we expect smaller acreage again this year. Farmers are expected to plant the fewest acres of cotton since '83. The July 48 call for $875 has a 35% delta and 89 days time. As long as prices in May stay above 41 we think it’s reasonable owning this strike.

In its February report, the International Coffee Organization reduced its estimate of 08-09 world coffee production from 133.4 to 127.8 million bags, with smaller figures coming from Colombia, Vietnam, and India. The movement last week may have been influenced by this but we hear that it was just running off stops by some big houses. May coffee was higher by 2.85 cents and as we had forecast the previous week 1.05 held on a closing basis. We see resistance at 1.13 followed by 1.1550. We are still expecting a move up to 1.20 plus and own outright calls in May and 20 cent call spreads in July for clients. We could start to see a frost premium built into prices.

May cocoa jumped $115 supported by predictions that world production will fall short of consumption this year, weakness in the US dollar and a technical bounce off the charts. Support is seen at 2300 followed by 2250 with resistance at 2450/75. Look for a further advance if the dollar continues south. Be careful getting too long, being that seasonal weakness persists. Selling on March 14 and holding until April 16 has been a winner 28 of the last 36 years. Past performance is not indicative of futures results.

The USDA kept its estimate of the 08-09 Florida orange crop at 158 million boxes, down from 170 million boxes the previous year. May orange juice was up 1.45 cents and has been higher for the last 3 weeks, which has not happened since last August. Support is seen at 71/72 cents with resistance at 75 followed by 80. Look for consecutive closes above the 40 day moving average at 73.10 to confirm a bottom. Prices could close the gap at 87 from Mid-November over the next few weeks. We have our clients lightly long May futures.

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.

Comments

[yellowhoard:]

Couldn't agree more. But, it's easier to play these through DAG, MOO, DYY.

Mar 16 11:56 AM

[Mayer Amsch...:]

Sadly, I think you make a good point. I imagine that commodities will sop up a lot of the present and future liquidity and it doesn't make me feel good for what will happen to the "man on the street" and his purchasing power. One of my accounts is mostly in commodities and it feels odd knowing that the more its dollar value changes, the more its real value stays the same.

Mar 16 12:35 PM

[Drew Arnold:]

Agreed, but be careful on the energy front. While oil has seemingly put in a bottom, natural gas is still very much in a downtrend. A single up-day (last Thursday) obviously doesn't signal a bottom, and it would make sense to wait for a confirmed bottom instead of trying to call it. People have tried to call the bottom in natural gas all the way down, and a lot of bright people have gotten burned on it.

Mar 16 12:39 PM

[ValueInvestor:]

To the author:

You should have a look at aluminum. Its trading near its all-time inflation adjusted low. There isn't a miner in the world making money at these prices. There's no doubt it'll be higher a year from now. Long dated call options should pay off handsomely.

Mar 16 04:57 PM

[ValueInvestor:]

I gotta laugh at whoever put a negative for my above comment. Here's a tip:

When ever anything, and I mean anything, trades at an all-time extreme, whether on the upside or downside it won't last for long. Economic forces will always revert it to its mean, so go long aluminum and you'll be happy. It might not happen immediately, but it will happen.

Mar 16 06:25 PM

[kelm:]

I completely agree that commodities are something investors need to be looking at hard right now as we are at an extreme low in their value and the economic contraction combined with reduced credit is resulting in supply being taken away as upgrades are not performed in producing operations, mines and smelters are closed, production is curtailed and new exploration and development is tabled. When we do start getting any uptick in economic activity we will see comodity prices climb substantally.

Having said that this article is of really little use to a reader. Rather than painting any strategic case the author simply provides a very short term set of trading recommendations which is of no general use or interest.

Mar 17 10:07 AM

[fran:]

it depends upon the definition/extent of your world of commodities. eg. rogers RICI? fewer commodities than RICI? include coal, uranium, steel, moly, rare earths?

first understand the commodities universe before dabbling or investing. then decide what form you wish buy--stocks, actual metal, futures, etc. it's a big world out there.


On Mar 16 04:57 PM ValueInvestor wrote:

> To the author:
>
> You should have a look at aluminum. Its trading near its all-time
> inflation adjusted low. There isn't a miner in the world making money
> at these prices. There's no doubt it'll be higher a year from now.
> Long dated call options should pay off handsomely.

Mar 17 11:01 AM

[ValueInvestor:]

My world is any exchange traded futures or option. OTC items like coal, uranium, steel, etc aren't available so I stay away from them. Basically anything on the Chicago, NY and LME exchanges are fair game.


On Mar 17 11:01 AM fran wrote:

> it depends upon the definition/extent of your world of commodities.
> eg. rogers RICI? fewer commodities than RICI? include coal, uranium,
> steel, moly, rare earths?
>
> first understand the commodities universe before dabbling or investing.
> then decide what form you wish buy--stocks, actual metal, futures,
> etc. it's a big world out there.

Mar 17 02:22 PM

[Andy Abraham:]

Regardless of inflation or deflation trend followers made money.. this is really the point...to be a Trend follower...not just say a segment of the market will be were the profits will be... Many people lost a tremendous amount of money on long only commodity index funds... and to the contrary...many investors & CTAs made a tremendous amount of money...trendfollowing... no opinion..long short...regardless... this is the way to think..

Mar 18 04:03 AM

[ValueInvestor:]

I agree with the long/short strategy. Any fund or portfolio thats long only or short only is destined to perform badly in a bull or bear market based on their stance. The long and short option is the only way to take advantage of either type of market.


On Mar 18 04:03 AM Andy Abraham wrote:

> Regardless of inflation or deflation trend followers made money..
> this is really the point...to be a Trend follower...not just say
> a segment of the market will be were the profits will be... Many
> people lost a tremendous amount of money on long only commodity index
> funds... and to the contrary...many investors & CTAs made a tremendous
> amount of money...trendfollowing... no opinion..long short...regardless...
> this is the way to think..

Mar 18 05:33 PM