It was evident very little could be done at the G-7 meeting to help the global slowdown. The G-20 summit in April could be more of a pivotal event. More than comments from the G-7, we would look for the passing of Stimulus Deux, the bank rescue and moratorium on mortgages, to be the big events this week that drive trading. The markets have been searching for any bit of positive news and if these most recent maneuvers deliver any confidence, we would expect for monies on the sidelines to be committed to various asset classes. The key will be following the flow of funds and to play the longer term trends. I am currently reading a book entitled “The Professional Commodity Trader” about Stanley Kroll a commodity broker in the 60’s and 70’s. In the first 5 chapters the theme is to play the major trend with your positions and use the minor trends; i.e. setbacks or advances for your entry. He stresses how critical money management is to be successful and I wanted to echo that to all regardless of the asset class you trade.
Livestock
Cattle on feed out Friday 2/20
After the close Friday, the USDA estimated the week’s beef production at 480.8 million pounds, down 0.4% from a year ago. For 09′ the USDA reduced its estimate of beef production from 26.54 to 26.11 million pounds and reduced the price estimate of choice steers from 94.0 to 89.0 cents per pound. April live cattle were unchanged on the week but did have a 240 tick trading range. We see support at 86.10 followed by 85.10 with resistance at 88.00 followed by 89.00. March feeder cattle were higher by 40 ticks but failed to hold a rally, closing 240 ticks off their weekly highs. Support comes in at the 20 day moving average at 93.50 with resistance at 96.00. We continue to hold the August live cattle/March feeder cattle spreads for clients. Currently just under-900 and we are looking for the spread to narrow to at least -600 in coming weeks.
Pork production was estimated at 456.3 million pounds, up 1.2% from a year ago. For 09′ the USDA reduced its estimate of pork production from 23.035 to 22.980 million pounds and reduced the price estimate of barrows and gilts from 49.0 to 47.5 cents per pound. April hogs closed up 3.55 cents or 6% last week just as we had predicted. Did you listen? The contract lows at 59.80 should serve as the low for all of 09′ that’s right you heard it here first. On a close above the 20 day moving average at 64.90 a bottom should be set. We are advising clients to buy April 65 and 70 cent calls or to get long the futures in either April or June and sell calls against your position, contact us for exact pricing. If this is the bottom we should see a grind to 70 cents in April in the next 2-4 weeks.
Financials
Stocks: US Treasury Secretary Geithner announced his plans to help the country’s credit problems last week to much disarray with markets showing obvious disappointment that the plan fails to remove troubled assets from banks’ balance sheets. Virtually all of the previous week’s gains were given back as the Dow fell 430 points or 5.2% to 7850. The S&P fell over 40 points just under 5% to 827 with the NASDAQ shedding 57 points or 3.6% to 1534. Last week’s % decline was the largest since the mid-November selloff just before the most recent bounce. Will history repeat itself? We are still expecting a rally, call it the Obama honeymoon or a policy inspired bounce; whatever the case we would not get long but rather use this bounce as an exit to get out of remaining longs and to get short for another leg down and new lows. The bad news is that although we feel the stock market has already discounted a normal recession what if this recession is more severe than normal which seems to be the case.
Bonds: March 30-yr bonds were 13 ticks higher last week. We expect to see prices remain range bound this week between 125’16 and 129’16. March 10-yr notes were higher by 29 ticks last week. Support is seen at 121’16 with resistance at 124’16. March 10′ Euro-dollars were lower by 4 ticks which is $100 per contract. We are advising clients to buy puts in September 09′; current recommendation is 98.75 puts for approximately $825. This option has 209 days, a 56% delta at these levels and is intrinsic as of this posting. Additionally, we are advising clients to build short positions in March 10′ contracts. We would not dive in head first but rather start selling at these levels and look to add when the trade has moved in your favor by 20-30 ticks. Looking at the weekly charts it appears we are making an interim top. See our special report issued last week for more info: EuroDollar.
Metals
April gold gained $28.80 last week to trade at levels not seen since July. Clearly flight to quality buying has shifted from the US dollar, yen and Treasuries into metals. Prices are approaching the upper end of the trading channel; prices have been in this $100 channel since mid-October. With a close above $955 we could take a run to $1000 but we would expect a correction prior. We say that because everyone is now onboard the gold train and everyone is generally wrong. As we have voiced and to date been wrong we expect a steep correction to $860 in the near future. First support comes in at the 9 day moving average at $924. We are positioned in 900/1000 June call spreads with clients and also hold March 900 puts. These puts expire on 2/24 so without a correction very soon they will lose most of their value on time decay. The total cost of this trade as of last week was $4700 before fees.
March silver gained 63 cents or 5% last week but unless prices punch through the triple top at $13.70 early this week prices could back off. On a trade above those levels look for the next stop to be $13.90/14.40. We have advised clients to lighten up on their $15/20 December call spreads being that we do expect a short-term retraction. We are eager to re-establish longs after the setback. We have also advised clients that if their objectives have been hit in their long July positions not to be greedy. We have clients currently long March and May mini-contracts and have been trailing stops up under the market and recommend you do the same. From mid-January to today, basically in the last 30 days we have seen a $3.30 or 32% advance so a correction of 15% taking prices to $11/12 is not out of the question. We cannot stress how important it will be to buy this correction because if we are right prices will pop back up almost as quickly as they sell off. Be ready!
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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.
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