Weekly Market Commentary: May 19th - May 23rd

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 |  Includes: AGG, DBC, DBO, DBP, FXB, FXE, FXF, GSG, OIL, SLV, USO, XLF
by: Matthew Bradbard

Diversification is key. We recommend that investors who understand commodities and can bear the speculative nature or risk in their portfolios use dips as entry points, as food and energy prices are to remain at lofty levels in the foreseeable future.

Who is goldilocks anyway? Over the last 12 months the S&P is down 7% with the Dow registering a loss of 4%, over the last 3 years the S&P is up 19% with the Dow gaining 24%.
This is not terrible, but what have some commodities done just ytd? Oil is up over 30%, silver is up 13%, corn 30%, soybeans 19%...the list goes on, but I am sure you see the point. Make commodities a piece of your portfolio. We think investors who ignore commodities do so at their own peril. We suggest a 10% allocation. With current market conditions it has become necessary to be a selective stock picker as opposed to buy and hold; the same exists in commodities, so let us help you and inform you what we expect to be the next market movers.

Energy

June crude oil closed up $0.45 for the week at another new high of $126.29 after the market learned that President Bush failed to convince Saudi Arabia to increase its oil production any further. This, in combination with relentless demand from emerging markets and the ever-increasing presence of speculators, leads us to believe price appreciation could persist. Goldman Sachs also raised its forecast for the second half of the year for prices to average $141 a barrel.

Although this market remains overbought we would remain cautious before jumping in front of this train and continue to advise buying dips until this approach stops working. This market can be dangerous so approach crude vigilantly as you may be right with your assessment but get taken out of the market by fear or the sheer volatility; Thursday of last week we registered a $5,890 trading range per contract.

The U.S. Department of Energy [DOE] said that underground supplies of natural gas were up 93 billion cubic feet last week to 1.529 trillion cubic feet. Supplies are down 16% from a year ago and slightly above the five-year average. June natural gas closed down 55 cents on the week at $11.09, 70 cents off the intra-week contract high. Prices have started to come off, which is what we have been looking for, over the last several weeks with support coming in between $10.30-70. Support and the trend line from January’s low is at $10.50 and we will look for an entry for clients as we get closer to that level. We have started pricing out 50 cent bull spreads in July looking to pay approximately $1500; currently the $11.50/12 is just around $1700.

US refineries should be moving full throttle to ramp up gasoline production in advance of the summer driving season, but instead they are trying to maximize output of the more profitable diesel. Both prices have traded higher in recent weeks, but the move by diesel has been much more impressive with prices 56% higher than prices this time last year with gas 20% over last years prices. Heating oil continues to push higher advancing 7 of the last 8 weeks. June was range bound last week between 3.54 and 3.72 registering a 6 cent advance on the week closing just above 3.70. XRBOB managed to stay just above the 9 day moving average closing 2.30 cents higher on the week, trading between 3.15 and 3.23 finishing at 3.22. Both prices appear to have more movement to the upside but we would prefer to trade in crude oil.

Livestock

After the close, the USDA said that there were 11.135 million head of cattle on feed as of May 1st, down 1.4% from a year ago, as expected. Placements in April were down 2% and marketings were up 11% from a year ago. After the close Friday, the USDA estimated the week's beef production at 546.9 million pounds, up 3.7% from a year ago. June live cattle were down just over 50 ticks on the week closing on the 200 day moving average. Clients still have some short futures on, although we have lightened up considerably. With the board still holding a hefty premium to cash we still feel you could see prices back off from over bought levels. On a break lower, June could find support between 90.50 and 91.50. August feeder cattle advanced just over 300 points on the week but failed to take out the levels seen back in February and if we fail to make a higher high early this week, prices should back off, first support is seen at 111.00.

Pork production was estimated at 415.7 million pounds, up 5.6% from a year ago. July hogs ended down .55 at 76.25 on the week. Prices could go either way, so currently we would recommend a position on the sidelines in lean hogs. Pork bellies broke the latter part of the week and we would expect that to spillover into this week with the downward momentum to take July to at least 74 in coming sessions.

Financials

Stocks: Surprisingly the vix (volatility index) which is a measure of risk in the markets has traded down in recent weeks and currently stands at a level not seen since October, when stocks last peaked. The rally was back with the Dow up 241 points or 1.9% to 12987. The S&P climbed to its highest close since January 3 as it rose 37 or 2.7% to 1425. The NASDAQ jumped 83 points or 3.4% to 2529. We expected a sell off and still do, but last week we rallied up to the recent high which in our estimation sets up a better selling opportunity. The June S&P looks weighty and we expect to see a loss in momentum this week, look for a trade back below 1400, if we are unable to get above the 200 day moving average just above Friday’s close. The June Dow could trade above 13000 but we do not see much more than that as the high from 2 weeks ago at 13132 should act as resistance. On a move down, 12700 should be first support.

Bonds: The University of Michigan said that its consumer sentiment index fell from 62.6 to 59.5 in May, weaker than expected. The June U.S. T-bonds ended down 25/32nd at 116’14.5. The CPI last week did not correlate with what the market bears, will the PPI give a different signal? The Fed minutes come out from April’s meeting mid week and the market will try to identify if there is any indication of what is next to come. Being that the next interest rate decision is not schedule for another month we feel that the happenings between now and then will have a grave impact on what’s to come. Sell rallies in debt as we feel that bonds and notes will encounter resistance; we do not see June 10-yr notes trading above 117 unless a mass exodus in stocks happen and the flow is to treasuries, along the same lines 30-yr bonds should not see a print above 118 this week.

Currencies

Japan's Cabinet Office said that real GDP was up .8% in the January to March quarter, more than expected. Real GDP for fiscal year 2007-2008, which ends on March 31st, was up 1.5%. The June Japanese yen closed down 118 ticks, but it was a buy at .9500 and we expect to see a bounce this week as long as the lows from the last 2 weeks hold. The MACD is screaming buy and the RSI and stochastic is supportive for now. The BOJ meets on Tuesday and is expected to keep rates at 0.50%. We expect a move up to .9850 to 1.0000 before month’s end.

Statistics Canada said that retail sales among large retailers totaled C$8.33 billion in March, up 9.4% on the month. The June Canadian dollar was up .33 at 99.91 on the week climbing to an 8 week high. We traded above par and may get back to 1.02 which had served as the previous resistance. We will be advising clients on an entry point to sell when we start to see weakness this week.

The June Australian dollar closed up 1.31 at a new contract high of 95.02, supported by a 7.25% interest rate in Australia while the U.S. is at 2.00%. We were ideally looking for a lower entry to get clients long, but this one got away from us for the time being. We are overall friendly because of the large interest rate differential and that Australia’s economy is being bolstered by high commodities prices. We would wait for a retracement for now; pullbacks should be supported at 92.50.

Eurostat said that real GDP in the Euro area 15 was up .7% in the first quarter of 2008 and up 2.2% from a year ago, better than expected. Also, consumer prices were up 3.3% in April from a year ago, down from a 3.6% gain in March. The June Euro closed up 118 ticks at 1.5580, the highest close in the month of May. Resistance comes in at 1.5640 with support at 1.5450; the consolidation area over the last 2 weeks. We will continue to sell rallies for clients, although a rally could take prices up to 1.5700 so don’t be too anxious.

The U.K.'s Office for National Statistics said that housing starts totaled 32,100 units in the first quarter of 2008, down 24% from a year ago. The June Pound closed 44 ticks higher on the week, but this was after registering the lowest trade in the last 13 weeks. Much like the Euro, we have a sell rallies mentality as we feel the Pound, longer term, is destined for lower prices. Shorter term we will look for a rally to perhaps 1.9900 before getting customers short again.

The Swiss franc remained largely range bound as we had forecasted and we see no difference in what this week will bring. Support should hold at last week’s low around .9440 with resistance at the previous week’s high at .9715. We expect an advance to the .9700 area which if penetrated on good volume could take prices back to .9900. For a trade you could get long from current levels with a stop just below last weeks lows around .9430.

We may have been looking for too much as we had previously advised initiating shorts on the June dollar index at 74.50 but we only saw 74.00 last week before prices retreated. The index only lost about 25 ticks, but the sentiment was less bullish with the dollar bulls as is not 100% clear if the Fed is done cutting rates. It appears the dollar could suffer more if the Fed chooses to reduce rates further, which we will access as the next meeting nears in late June. Support comes in at 72.70 with resistance at 73.70. Again we would like to sell a rally up to 74.50. Although we may not get short the dollar, we will closely monitor its movement to trade other markets for customers.

Grains

Corn: Weekly export sales showed 547 t.m.t. of corn was sold last week. With the reduced rain in this week’s forecast, we should see Monday’s crop progress report show around 75% of the crop is now planted, up from 51% as of May 12th. In the near future we will start to see weather’s impact on early emergence and crop conditions as opposed to planting progress. Support on December lies at 6.00, so for new entries, the closer we get to that level we would recommend scaling into longs looking to add length when the market proves you right. Although it may be tough holding onto longs near record highs, we are convinced that prices in new crop have not seen their highs. A story in Barron’s this past weekend mentioned the idea of 7% below trend-line yields, which would be extremely bullish. This premise is based on the ideas that bad weather is delaying planting and farmers are planting less corn. Following up on previous newsletters, the December/July corn spread has widened to 26 cents premium to December. Additionally we have advised more aggressive clients to take some profits on their July short and hold the December longs looking for prices to move higher.

Beans: Weekly export sales showed 201 t.m.t. of beans sold last week after a marketing year low the week prior. Any news out of Argentina with the status of the on again off again strike will move beans 30-50 cents. Prices are overbought and we expect November to pullback 50-80 cents before fund buying emerges and takes prices higher. For now, support comes in at 12.88 but we would not rule out an attempt to fill a gap at 12.57 from May 9th. Resistance comes in at 13.60 followed by 14.00 on November. We would expect November to be supported around 12.50 and ultimately see prices back near 15.00 down the road. We feel that if oil was to correct 5-10%, beans would be one of the hardest hit commodities on spillover weakness, so it will be important to pay attention to outside markets. If we do get significant field work on corn, it will be perceived that less beans will be planted so pay attention to crop progress over the next 2 weeks.

Wheat: Weekly export sales showed 563 t.m.t. of wheat sold last week between old and new crop. Fundamentals and technicals reamin bearish for both CBOT and KCBOT. Acres are up globally as growers have expanded plantings to take advantage of high prices. Even so, world stocks are at 40 year lows with US stocks for 2008 at 60 year lows. Supply side pricing will govern the movement short term with demand taking the driver’s seat come harvest. Prices for July CBOT are now below the 200 day moving average and for now we are content selling rallies. KCBOT has too fallen off a cliff and last week closed lower on the 200 day moving average. Although we are oversold, we are not position buyers here and prefer trading in corn and beans for customers.

Softs

The U.S. Census Bureau said that housing starts were at an annual rate of 1.032 million units in April, up 8.2% from March's pace and much stronger than expected. This is the first bit of good news for the housing industry in a long time. July lumber was down on the week but ended higher Thursday and Friday closing at 245.90 in July just below the 50 day moving average. As long as the recent lows hold, we are advising clients to hold longs looking to establish a position.

December cotton closed up 65 ticks on the week at 80.65, the highest close in three weeks, attributed to fund buying. The USDA is expecting 25% less cotton production in the U.S. this year. We have clients positioned long in futures and options and are looking for higher prices in coming weeks. We expect the 200 day moving average to hold and would recommend a portion of your commodity allocation long cotton looking for 90 cents plus by mid summer.

One of the features of the U.S. farm bill is that it recommends that the government buy surplus sugar to sell to ethanol producers. This is only talk at this point, but this would be supportive. Sugar held support last week, but we were down on the week with October 08’ losing just under ½ cent. We don’t think there is too much more downside and we are adding longs and recommending clients that are underwater to hold their positions looking for a rebound. Albeit that past performance is not indicative of future results, but for the last 27 years sugar has tended to make a seasonal low in late April and early May and rally into July, will this year be different?

July FCOJ prices made a new contract low, trading down 13 cents or 11% to close below 110. Prices are starting to look attractive but at this point you are catching a falling knife. We have started to price out bullish option strategies and will keep you abreast in coming commentaries. The government issues its 2008 hurricane season forecast on Thursday.

Last week’s low was 2592 on July which was within $9 of the previous week’s low, we could have a potential double bottom developing but we need further evidence. Cocoa will continue to have an inverse relationship to the dollar, so key off movement in the dollar index for entry and exit points. First support comes in at 2600 with resistance at 2750.

July coffee traded 145 ticks higher on the week ending at 138 just below 140, which serves as stiff resistance. We are potentially looking to sell against that resistance for clients expecting a pullback to the low 130’s level if not lower. We are also pricing out put options in September; selling September coffee on 5/22 and holding until 6/26 has been profitable 15/15 years for an average gain of just over $5,000. Past performance is not indicative of future results.

Metals

U.S. economy, and weak dollar. As we said last week, on a move above $920 we should see more investment money flow into gold with next resistance at $943. It is always wise to pay attention to the connection between different markets. There have only been 3 instances since 1986 when oil has rallied 10% or more over a two month time period while gold fell by double digit percentages. In the 2 months following such divergences, oil has declined 2 out of 3 times for an average loss of 22.5%. Gold on the other hand has rallied in each instance for an average gain of 5.9%; from these prices that is approximately $54. We are advising clients to be long in options out till December and will most likely look for a futures entry in coming sessions.

July Silver has been unable to register a close above $17.25 in recent weeks after multiple assaults including 2 attempts last week. It is a positive development to see prices back above the 9 and 20 day moving averages, but a close above $17.25 is critical. As we voiced last week this should be followed by a move back above $18 which would allow us to roll clients out of July Longs into December. Support comes in at $16.50 which on a failure we would recommend clients to abandon 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.

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.