January 24, 2011

When comparing other asset classes we do not think that commodities are superior, though we do like the non-correlation to other asset classes. The performance of most commodities is independent to the performance in the stock market, bond market or real estate market. The U.S. stock market has just clawed back to levels seen before the financial crises, while the jury is still out on whether the housing markets have bottomed yet? With yields at near record lows in the Treasury complex we doubt a sizeable allocation here is the answer for investors either. Because we are clearly in a bull market in commodities, with a number of them reaching record if not multi-decade highs, we suggest getting on board. Many investors I speak to feel they have missed the boat. I disagree, while I feel the train has left the station we think there is much more upside in the quarters and years to come. Additionally most commodity investors are not long only so there will be opportunities to speculate on price depreciation as well.

Find below a brief overview broken down by sector as to what we feel 2011 has to offer commodity investors.

To keep up to speed with our ideas we encourage investors to follow our weekly commentary or daily blog. http://commodityblog.mbwealth.com

Agriculture: If the first month of trading in the grain market is any indication of what is to come, expect your grocery bill to increase this year. Since the October USDA crop report we’ve seen a bullish sentiment in the grain complex. Ending stocks in corn have been reduced to their lowest level since 1996/1997 pushing the stocks to usage ratio to under 7%; the second lowest in history. The increased usage from China and abroad should mean exports ramp up in the United States again this year. Weather is the wildcard currently in the South American crop and then in the United States in the spring and summer. It is not just the United States that is dealing with tight stocks as the world stocks/usage ratio is just 14.5%, the second tightest setup since 1973. Ethanol usage is perhaps even a bigger wildcard as the demand outlook is unclear. My belief is that corn prices still need to move higher to curb demand and to attract more acreage.

Wheat was the first major agricultural market to surge to record highs in 2008/2009 but of late the price action has taken a back seat to soybeans and corn. The end result was because prices reached such extremes, we’ve seen production increases globally that have tempered prices. Wheat will continue to react to movement in the dollar and on growing concerns of food inflation. The two biggest countries that could affect movements in wheat are Egypt and India. Egypt, being one of the largest wheat exporters, has been forced to build reserves because of the drought in the Black Sea region. While India has harvested a bumper crop in 2010, they still maintained a ban on wheat exports. The underlying quandary abroad is increased food insecurity. United States farmers have done a good job of taking advantage of higher pricing as ending stocks in 2010/2011 are projected to be the second highest in history. Assuming normal weather we believe the wheat market will see increased supplies and we could see prices trade back near the $6 range.

Like many commodities China has been the driving force in the soybean market. For many producers they can say 2010/2011 will be their most profitable years ever. You have not seen a more significant jump in acreage because the margins at the moment are even better for corn. Case in point is the soybean/corn ratio, which at 2.1 is near the lower end of the 30-year range. Given the current fears of a possible drought in South America and a late start to plantings, coupled with the surge in demand from China, we think 2011 will be another bullish year in the soybean complex, albeit particularly volatile. Demand is undeniable but there may have been too much weather premium built into the market, so on ideal weather expect that premium to be stripped out of the market. As it stands now the world’s balance sheets are showing a production surplus but the recent reductions are far from bearish. There may be more upside in the months to come but with record net longs in place we think there is more potential downside surprise than upside in the immediate future.

Softs: Volatility was the name of the game in sugar in 2010, as prices more than doubled reaching multi-decade highs by Q4. As we enter 2011, if we see continued weather issues in Brazil it could set the stage for an additional price surge as we’ve been unable to truly rebuild supplies with growing demand after the previous deficit. World sugar stocks remain near 17-year lows and the stocks/usage ratio is dangerously narrow. Weather was the problem last year with a drought in Brazil, the Black Sea region and Russia contributing as well were floods in Europe and Thailand. Major weather events shifted what was expected to be a 4-6 million tonne build to potentially no surplus or another deficit. China’s output is expected to recover but the problem may be that their usage may grow at a faster pace. It’s feasible that China could become a major importer in 2011. In our view, it would not take much to see the tight supply imbalance to make sugar a good candidate to buy and hold after we get a 10-15% correction in the next few months.

For the first part of 2010, coffee traded sideways and then from June on, prices appreciated 70% lifting coffee to over $2/lb. for the first time in nearly 15 years. Beginning stocks were tight to begin with and much like sugar, adverse weather in South America helped propel prices higher. We go into 2011 with coffee too pricey and it would take a healthy correction for us to get interested in longs. In fact, aggressive traders could gain bearish exposure to play a 10-20% depreciation in Q1 and Q2. The fundamental picture is mixed with very tight ending stocks, but we should have ample supply as across the globe is expected to have record production.

Cotton futures surged to all-time highs in 2010 and currently look poised to challenge those levels once again. Exports have continued to increase in the face of the market making new highs, so until we see that let up expect the trend line near $1.30 to act as solid support. Because high prices to date have yet to ration out demand, we will likely see fresh highs. If demand continues to expand into 2011 this could pose a major problem even with the domestic crop getting off to a good start because if the Asian demand is growing at a faster pace we still need to rebuild US stocks. Cotton will need to capture 2-3 million additional acres in 2011 but the challenge is other crops i.e. corn and soybeans may be more profitable. We do however feel that in time, likely several months when we start to experience a slowdown, a trade back under $1 is not out of the question. The fact that the December 2011 is trading at a 37% discount to the front month is an indication that these levels are not sustainable.

OJ was sideways for the first part of 2010 before trending higher from mid-year trading to $1.80; levels not seen since early 2007. We start 2011 with a positive outlook on OJ but like coffee we expect to experience a correction early this year that could drag prices closer to $1.50. A drought in Brazil could take some supply off the world market. That may be able to be offset by larger crops domestically in California and Florida. The problem with that scenario is OJ prices may be more susceptible to price spikes on a freeze in the United States or increased hurricane activity. We would be a buyer between $1.40/1.50 and a seller closer to $2.00.

An attempt at cornering the cocoa market last year was the major headline as grindings in Europe and North America were showing their first gains in over a year. Those actions caused a price spike on both the LIFFE and ICE exchanges during Q2. Once delivery had passed prices quickly turned around dropping 15-20% depending on the contract month. From there we’ve seen a rebound lifting prices back to the upper end of the trading range. The forecast in 2011 is for cocoa supplies to exceed demand, reversing a 2010 production deficit. Major cocoa producers including Ghana, the Ivory Coast and African nations are all expected to have production increases year over year. We expect that if the economy globally remains stable and we experience a resumption of the downtrend in the US dollar we can see prices approach $3500/3600 by Q3.

Metals: A record high in 2010 and the 10th positive year in a row…yes folks gold. This market has attracted gold bugs, safe haven investors, those looking to diversify and perhaps the most influential the ETF crowd. Gold undeniably has become the quintessential flight to quality instrument. From currency issues to the sovereign debt debacle, even uncertainty in the Treasury market, gold remains a popular diversification play in most investors’ portfolios. We suspect we could get a major shake out in gold sometime in Q1 or Q2, somewhere in the neighborhood of 5-8%. In fact it may already be underway. Central banks are far from the best market timers and because they recently shifted from being net sellers of gold to being net buyers, the timing would be appropriate. We continue to suggest being net buyers on setbacks but typically will trade options against futures or incorporate a strategy with both gold and silver for our clients. We do not see a trade below $1250/ounce this year and on the upside we suspect we could approach $1500/ounce.

Gold made the headlines but silver had performance that far outpaced gold last year and we suspect that to be the case in 2011 as well. Prices have retraced off a 30-year high above $31/ounce, and just in a few short weeks we’ve traded nearly 13% off those levels. In January alone, we’ve witnessed a 50% Fibonacci retracement taking prices near $27/ounce for the first time in two months. We view solid support approaching the 100 day MA at $25.50. Silver has been far more volatile (i.e. risky to trade) than gold in the years past but those with the stomach are advised to scale into longs on set backs, as we have a target of $40/ounce by late 2011 or early 2012.

As the recovery took hold and industrial demand re-emerged, copper prices have soared gaining nearly 250% off their lows in late 2008. As there were rampant fears of a double-dip recession, a number of copper producers reduced their production and even eased back on their exploration/mining efforts. So it was a double whammy when supplies were slack and demand came back into the market. As LME copper stocks and Shanghai copper stocks declined throughout 2010 that added fuel to the fire. If we were to see a bump in copper stocks on either exchange we could easily see a trade back to $3.00/lb. which is approximately the median price for copper over the last five years. At $4.30/4.40 we feel prices are over inflated and in the weeks and months to come we anticipate a trade back near $3.45/3.60. While we rarely trade copper for clients we do follow the price action as it is one of the best barometers for gauging the health in the economy.

Energies: A day rarely passes when I don’t hear someone say oil prices are too high, but it’s all relative and I do not share that opinion. Several years ago one of my managers told me as a trader “to dispend my disbelief.” Translation: We’re in uncharted waters and prices will move substantially higher…six years later I accept that statement as truth. I get the argument that based on supply, prices should be lower but more and more oil is treated as an investment vehicle and in some instances even a currency, so fundamentals in my opinion do not play as large a role as they did in past years. Above ground world supplies are near record highs but current demand, and more importantly, future demand expectations are escalating. Refinery interruptions and violence in oil producing regions around the world have in the past and will continue to cause price volatility.  2011 will likely be a bullish year for oil once again as we assume a buy dips mentality expecting prices to see $110/115 by Q3 with solid support between $75/80. One must remember it is not always about oil either, sometimes the tail can wag the dog; as RBOB and heating oil may determine price direction in oil.

With refinery rates as low as they have been it has been an anomaly for RBOB stocks to stay at elevated levels but that has been the case now for several quarters. Ethanol production continued throughout 2010 to post record highs. This may become a larger factor in 2011 as the government has paved the way for increased usage. Weighing first the supply situation in RBOB the current US operating rate is extremely low and it would not take much to cause price instability. Domestically the demand side has shown signs of life, as travel and usage have started to bounce back. To really see demand eat into the exorbitant supply we will need to consistently consume in excess of 9.0 million bpd. That in itself could get prices moving north or continued refinery glitches. We see a range between $2.00 and $3.00/gallon in 2011.

Heating oil was range bound for much of 2010 for the most part wandering in a 50 cent range. A colder winter across much of the country has started to boost demand and will start to eat into the burdensome inventories. It will take a significant jump to put a dent though as we’re coming off record distillate stocks of nearly 176 million barrels in August 2010. The pivot point into 2011 should be if demand can exceed 4.5 million barrels per day. In recent quarters supplies have exceeded demand but exceptionally cold temperatures can change the scope in the coming months. The US refinery operating capacity is also at lower levels so fundamentally we have a bullish set up. Expect increased volatility on weather and refinery issues much like RBOB. We see a range between $2.25 and $3.25/gallon in 2011.

Natural gas was one of the worst performers in 2010 and remains one of the cheapest physical commodities. There is one reason why natural gas has remained at discounted levels relatively close to the cost of production, an overabundance of supply. New all-time highs were reached last year in regards to inventories. A bottoming process has occurred in the last several months, as the market appears to have found equilibrium. We see natural gas as more of a trading range market in 2011 and we will be trading both sides with clients; likely buying near $4 and selling above $5. For this market to gain any significant traction we would need to see either a further cut in rig production, higher oil prices forcing increased usage in natural gas as an alternative or a policy shift from Washington to encourage greater usage. Short covering may also be a potential catalyst being we have a significant short interest with speculative dollars.

Currencies: The currency market is largely guided by direction in the U.S. dollar, which in 2010 was all over the place, gaining 15% in the first half of the year and then falling 10%. The two main questions in determining the direction of the dollar in 2011 will be the impact of a quantitative easing measure taken by the Federal Reserve and if the Fed starts to raise interest rates this year. In recent years the weakness in the dollar has been a key catalyst for a surge of capital into emerging markets and commodities. We expect this scenario to resurface the second part of 2011 but to kick off the year we could see a strengthening in the greenback. Solid support is eyed around the 75.00 level and stiff resistance comes in at 84.00.

The Euro is caught in a tug of war between the perceived strength in Germany and France and troubles in Greece, Portugal and Ireland. The direction in the Euro will largely be impacted by whether the ECB will need to resume monetary easing and how the markets deal with Trichet’s exit.  The same trading range that has contained prices in the last six months should maintain the restrictions between 1.2600 and 1.4200.

The Yen was supported due to safe-haven buying and implications due to the carry trade in 2010. This strength has caused severe problems in their economy predominantly with their exports. Expect a series of interventions by the BOJ in 2011 in an attempt to cap further upside. Do not expect the same near 20% appreciation in 2011 that we witnessed last year. In fact, a trade over 1.2500 is not in our forecast and we think a dollar rally could take prices back near 1.1500.

The Swiss franc also found investors interest when looking for a flight to quality taking prices to near record highs for much of 2010. As fears ease around the globe and on a continued set back in gold expect the franc to trade down to the mid .9000’s.

The new government austerity measures in the UK may ease the pain in the Pound momentarily but the quantitative easing should outweigh the positives, so we anticipate further downside. We suggest using the rally we’ve seen in the first part of January to gain bearish exposure. Stiff resistance is eyed between 1.6300 and 1.6500 and we feel we’ll get a steady slide closer to 1.5000 in the quarters to come.

Given that the dollar has such a grave impact on the price of commodities it would only make sense for the commodity-driven economies which include Australia, New Zealand and Canada and their respective currencies, to be impacted by the underlying fluctuations in commodity prices. That being said, further strength should support these three crosses so our suggestion would be for most of 2011 to trade from the long side. Additionally, in New Zealand and Australia the positive interest rate differential should serve as a supporting factor.

Financials: The U.S. equity market far exceeded my expectations last year advancing from mid-year on gaining 10-20% depending on the index tracked. It would appear there is little to no fear from the sub-prime crisis or at least the powers that be have swept these concerns under the proverbial carpet for the time being. While in some sectors we did see top-line revenue gains for the most part the bottom lines appear better because of aggressive cost cutting measures. In order for the trend higher in stocks to continue into 2011, we need to see increased positive corporate earnings, real job growth, a bottom in the real estate market and for consumer spending to truly re-emerge. Low interest rates and the quantitative easing that has taken place could aid in an extended recovery in the short run but we do not feel appropriate for an improvement longer term as we’re kicking the can down the road. All the good news, in my opinion, is factored in and if and when additional shoes drop we may see a 10-15% plus correction. We’ve been thinking this for the last two months and obviously have been premature. We do not expect to see the Dow trade above 13000 and see the upper band in the S&P at 1400 this year. As for downside in 2011, we see 10000 and 1000 respectively.

The rally in the Treasury market in 2010 was largely a reaction to the sovereign debt issues abroad and the threat of a double-dip recession. The rally that took place in the first half of the year was erased in the second half as prices ended the year only marginally higher in price and lower in yield in the long end of the curve. In the short end, prices remained at elevated levels due to the Fed’s desire to focus on the short to middle part of the curve. The sporadic back and forth between the US and China and their pace of debt purchases also contributed to volatility throughout 2010 and will likely persist into 2011. Pay very close attention this year to the monthly capital flow report.  If the price of commodities continues to increase the Fed’s hand may be forced resulting in raising interest rates which would have a direct impact across the curve. Continue to monitor the monthly PPI and CPI figure for signs of inflation increasing or abating. We have a sell rallies mentality in this complex in both the short end and long end of the curve.

Livestock: The cattle market saw a major recovery during much of 2010 as improving demand in the U.S., a strong recovery in exports, lower imports and declining production all contributed to an aggressive climb higher in prices lifting cattle to record highs. After the decline in pricing in 2008/2009 cattle reached low enough levels that producers reduced their herds. To complicate the situation a surge in corn prices left the market without an incentive to encourage herd expansion. Beef production is expected to increase Q1 and Q2 of 2011 but the increase is expected to be one of the smallest in the last decade. Exports have started to pick up and as demand increases domestically we see prices trading to new record highs in the coming months.

After a rough few years of major losses in the hog industry a decline in hog supply and demand coming back on line has helped improve margins and cause a major rally in recent months. Nearby futures put in a major low in August of 2009 and have not looked back since more than doubling in value in that time frame. Margins are improving as hog producers are making money again but the surge in inputs will undoubtedly prevent a large increase in herds. Exports have also slowed so we will need to work off some production into the spring of 2011 but then we expect another surge higher. The game changer this year is how large the increase will be in US pork exports.

Conclusion: What an investor should obtain from this report is that commodities should be a portion of your portfolio; a conservative investor should have an allocation of approximately 5% and an aggressive investor is advised to have approximately 20% of their portfolio in commodity futures and options. This can be through a commodity account with a brokerage firm or an allocation to a managed futures fund. In our opinion, there will be ample opportunities across all seven sectors to be both long and short.  However one must respect the trend as we see more upside to come, so get involved because investors that ignore the price action in commodities do so at their own peril.

For specific strategies contact us via e-mail http://www.mbwealth.com or telephone at (888) 920-9997 / 954-929-9898. For the most part investors reading this analysis want to be more hands on, however we suggest taking a look at our managed futures section and consider diversifying further via CTA’s with proven track records.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

By: Matthew Bradbard

Find attached the 2010 high, low, open and close data for the major commodities.

Maybe I have a bias since I run a Commodity brokerage and recently set up a CTA but I believe commodities are currently the best game in town. Please do not misinterpret me that does not mean commodities should be perceived as a get rich quick scheme or commodity trading is even appropriate for every investor. Trading commodity futures and options is extremely risky and not for the faint of heart. In my eyes commodity investors must posses two things, first the financial wherewithal and second the intestinal fortitude. We suggest conservative investors have 5% of their portfolio exposed to commodities and aggressive investors have no more than 20% of their portfolio exposed to commodities.

Reviewing what happened last year in commodities: Metals traded higher for much of 2010, standouts include copper and gold reaching record highs while silver appreciated nearly 85%. As did more obscure markets like pork bellies and cotton trading at record highs. Sugar and cocoa hit their highest level in three decades. And while oil is well off its 2008 peak near $145 trading at current level prices are higher than before the collapse of Lehman Brothers. It has been a good two years for commodities as a whole; the Dow Jones-UBS Commodity index was higher by 16.8% in 2010 after an appreciation of 19% in 2009. The run higher in commodities is largely due to unquenchable demand from China and other emerging markets. We see no let up on demand in the immediate future and identify further complications by the slackening growth in drilling, exploration, mining and farming. More money chasing fewer opportunities could also be a contributing factor. Capital is finding its way into this asset class via hedge funds, pension funds and institutional investing. According to Barclays Capital as much as $136 billion of new money may have found this space in the last two years.

There is no question bulls were in the driver’s seat in the metals complex in 2010. Gold continued to shine last year marking its 10^th straight positive return. Economic instability and fear of inflation were contributing factors but perhaps increased investor demand may have been the major catalyst for gold performance. Platinum and palladium were along for the ride jumping on the back of a global recovery in the automobile industry. Resurgence in industrial demand helped lift copper to record highs and aided in a near 85% appreciation in silver as well.

Last year in agriculture we started out seemingly with a supply/demand balance but circumstances quickly changed. A drought in Russia sent wheat prices soaring with corn and soybeans along for the ride. Corn ended the year up gaining over 50%, soybeans just under 35% while wheat racked up a respectable 58% appreciation. Floods in Pakistan cut the cotton harvest short and Chinese imports soared resulting in record high prices in cotton. Coffee gained nearly 80% due to some weather issues in South America, so Mother Nature played her role in 2010 increasing price instability in a number of commodities.  We are not out of the woods yet as dry weather in South America currently could threaten the size of the harvest once again causing price spikes in agriculture markets in 2011. A further game changer is what decision farmers make domestically when choosing what crop to plant and how much acreage to allot.

The energy complex had its moments in 2010 but for the most part the headlines in commodities were elsewhere. Robust demand globally was tempered by record-high stockpiles. The stock market and oil for most of the year were heavily correlated so large economic forces were a bigger factor in 2010 than in years past. Prices of WTI oil remained within a $30 band in 2010 ending the year higher by just 15%. According to the IEA global oil demand was at an all-time high in 2010 and expected to expand in 2011 so it would not take much to see the price spikes in oil that we’ve grown accustomed to in recent years. On the supply side a number of producers have curtailed their spending due to the financial crises and have yet to come fully back on line. The distillates (HO and RBOB) followed suit tracking oil for most of the year and that should remain the case in 2011. Natural gas was among the worst performing commodities in 2010, down 20%. Prices were weighed down by increased supplies and weak demand.

Find above the major happenings in the commodities market and below the major events that shaped 2010 as a whole:

Major happenings in 2010, in no particular order:

Ø  GM predicted they would make money in 2010, a bold prediction for a business that exited bankruptcy in the summer of 2009.

Ø  The CBO predicted that the nation’s jobless rate will not return to 5% until the middle of the decade.

Ø  Ben Bernanke won Senate confirmation for a second term as Federal Reserve chairman.

Ø  The Dow finished down 3.5% in January, its weakest month since February 2009.

Ø  The New Orleans Saints won the Super Bowl, suggesting an up year for stocks for believers of the Super Bowl Predictor theory.

Ø  European leaders refused to let Greece succumb to a credit crisis.

Ø  Iraqi elections opened to violence and fraud claims.

Ø  The Federal Reserve announced they will end their purchase of $1.25 trillion of mortgage-backed securities. One of its main supports for the economy.

Ø  The House approved a historic healthcare overhaul.

Ø  President Obama signed the healthcare overhaul into law.

Ø  Greece won support for a deal that could lead to a bailout, as leaders of the 16-nation euro zone backed an accord that the IMF would serve as a back drop should the nation’s debt intensify.

Ø  President Obama proposed more oil drilling in the Gulf of Mexico.

Ø  Q1 ended on a positive note with the Dow gaining 4.1%, in a volatile three months.

Ø  Alan Greenspan came under criticism as the former Fed chairman for his role in the financial crises.

Ø  President Obama and Russian President Dmitry Medvedev signed an arms-control pact, dubbed New Start.

Ø  World leaders pledged to secure nuclear fuel by 2014.

Ø  Ash from an eruption of a volcano in Iceland drifted across Europe causing the largest airspace shutdown in years.

Ø  The Dow closed above 11000 for the first time since September 26, 2008.

Ø  A BP operated oil rig in the Gulf of Mexico exploded and sank spewing oil for months.

Ø  Greece’s credit crises spreads to Portugal.

Ø  New York’s Time Square was evacuated as a car-bomb plot was evaded.

Ø  “Flash Crash” Dow closed down 3.2% after an apparent trading glitch sent the index down nearly 1,000 points intra-day.

Ø  President Obama picked Elena Kagan as his Supreme Court nominee.

Ø  The European Union agreed upon a $955 billion bailout plan for the euro-zone.

Ø  Goldman Sachs reported they did not have one single daily trading loss in the Q1.

Ø  David Cameron took over as Britain’s prime minister.

Ø  General motors reported its first quarterly profit in three years.

Ø  Germany banned some types of naked short-selling in an attempt to avoid “excessive price movement.”

Ø  BP came out reporting that the oil leak was far bigger than originally estimated.

Ø  The Dow dropped 7.9% in May, its weakest May since 1940.

Ø  BP began its “top kill” operation to stanch the oil flow.

Ø  The SEC signed off on new “circuit breaker” rules designed to tame volatility in individual stocks.

Ø  The UK government unveiled a shake-up of its financial regulatory system that will consolidate power within the Bank of England and dissolve the FSA.

Ø  China’s decision to make its exchange rate more flexible showed a desire by the government to set its economic diplomacy on more sustainable footing.

Ø  President Obama relieved Gen. Stanley McChrystal of his Afghanistan command.

Ø  House and Senate Democrats took a decisive step toward a historic remapping of financial regulation, reaching a legislative compromise that will put the banks and financial institutions under tighter government control.

Ø  Russian and US officials completed a spy swap.

Ø  The US issued a new ban on deep water drilling until November 30th.

Ø  Congress approved an overhaul of financial regulation, its biggest expansion of government power since the Depression.

Ø  China passed the US to become the world’s largest consumer of energy.

Ø  European banks passed a round of government stress tests.

Ø  US bank failures topped 100 for the second consecutive year.

Ø  July became the deadliest month ever for US troops in Afghanistan.

Ø  Wheat prices surged 8% after Russia announced a ban on grain exports.

Ø  Japan’s Nikkei slipped into bear market territory.

Ø  Dow fell 4.7% in August; it’s worst August in nearly a decade.

Ø  Five year anniversary of Hurricane Katrina.

Ø  Central banks around the world laid out Basel III; intended to ratchet up capital requirements.

Ø  US poverty rate hits 14.3%; a 16 year high.

Ø  Silver traded to levels not seen since 1980.

Ø  Gold closed above $1300/ounce for the first time ever.

Ø  BP’s Gulf of Mexico well was declared as permanently sealed.

Ø  The Dow had its best September since 1939; ending Q3 up 10.4%.

Ø  The White House lifted its ban on deep-water drilling in the Gulf of Mexico.

Ø  The GOP took back the House and the Democrats held the Senate.

Ø  The US military began accepting openly gay recruits for the first time ever.

Ø  The Fed announced it will buy $600 billion of Treasury’s over the next eight months in a bid, known as quantitative easing hoping to stimulate the economy.

Ø  A key gauge of US inflation date fell to its lowest level since 1957; when record keeping began??

Ø  Gold topped $1400/ounce for the first time ever.

Ø  General Motors went public.

Ø  Europe issued a $90 billion bailout of Ireland and crafted a blueprint for its rescue.

Ø  Silver traded to a 30-year high approaching $30/ounce.

Ø  The Treasury sold the last of its Citigroup common shares.

Ø  President Obama announced a tax deal that would extend the Bush cuts, reduce payroll taxes, extend jobless benefits and set the estate tax at 35%.

Ø  Moody’s warned about Spain’s ability to service its debt.

Ø  Congress approved the new tax legislation.

Ø  All the major US indices finished the year in the green; the Dow higher by 11%, the S&P ending higher by 13% and the NASDAQ jumping 17%.
Many other important events took place during the year, but a generation from now, as we read the history books we will see these as the highlights.

Find attached the 2010 high, low, open and close data for the major commodities.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

December 22, 2010

By: Matthew Bradbard

As most followers recognize, I break the commodity markets into seven sectors: financials which include the indices and debt markets, energies, currencies, livestock, metals, grains and finally the softs.  So let’s examine sector by sector what should be on your radar as we conclude one trading year and a fresh year of opportunity is upon us.

Financials While the first part of the year brought uncertainty and perhaps too much pessimism after a bottom formed in the summer indices have appreciated lifting the Dow and S&P approximately 25%. From here, we think prices have gotten ahead of themselves and expect a 5% depreciation from their current levels. Aggressive clients have started to purchase March ES bear put spreads. Reflecting back on the year, Treasuries have had an inverse relationship to the indices enjoying trade higher in the first half of the year reaching an interim top in the summer and falling off since. The greatest loss has been in Q4, as yields have increased and 30-yr bonds and 10-yr notes have lost considerably. We expect to see a bounce into the new year and have advised aggressive clients to buy dips in 30-yr bonds, 10-yr notes or to position themselves in NOB spreads with their directional bias in the direction of bonds.

Energies There has been a powerful force lifting prices higher in crude oil and the distillates virtually all year and we see no reason for that to change. Continue to use price retracements as buying opportunities as we see $110/115 in Crude by mid 2011. Assuming we are correct with this assumption, both heating oil and RBOB would likely be 20-25% higher as well. Natural gas remains a dog unable to make any significant headway all year. There have been fits and starts but the range bound action for the last six months has been discouraging and lost my clients money on several attempts. From here we may opt to scale into long futures but we would not allocate too many funds and see better opportunities elsewhere.

Currencies From its peak in mid-June the dollar lost 15% followed by a 7% appreciation since early September. From here, there is likely an additional 2-3% upside potential before a slide south resumes sometime in Q1…only my opinion.  We rarely trade the dollar but study it to help navigate other trades. Circumstances in Europe have improved but we’re far from being out of the woods, so we think there could be more downside in all the European crosses in the coming weeks. If and when we get a correction in commodities, which is long overdue we will look for opportunities to gain bearish exposure in the Loonie, Aussie and Kiwi. As for what’s on our radar at the moment, I see nothing pressing in this sector.

Livestock Lean hogs at their current price are in no man’s land which essentially means we could go either way from here so we have no long or short interest. Both live cattle and feeder cattle have been trading higher for several months and we expect that pronounced trend to continue. We generally do not trade feeder cattle but we will be advising clients to re-establish longs in live cattle thinking we may see record high pricing in Q1. With rising grain prices and with a number of international markets that had been absent as buyers for several years coming back on line, we feel live cattle could be a great long candidate.

Metals We rarely trade copper but do track its pricing as it serves as one of the best barometers of the health of the overall economy. That being said, at a two-year high and having appreciated over 50% in the last six months I guess the international markets are getting back on their feet. Any significant price change higher or lower in copper should not be ignored. As for the two metals that we are most actively trading for clients in this sector: gold and silver we remain bullish longer term but we do expect some type of price consolidation in the immediate future. Year-to-date gold has appreciated roughly 25% while silver is higher by almost 90%. We expect this tendency to continue with silver continuing to outperform gold for the weeks and months to come. The problem with that is when you’re wrong on your trade, silver will prove to be much more volatile, so recognize that when choosing your allocations. Another interesting trade clients have been involved in of late is trading silver against gold at a3:2 ratio. Pick a direction up or down that you expect in the metals and buy or sell silver and then go the opposite direction in gold. We would suggest using a trade back near $1,300 in gold and $27 in silver as buying opportunities.

Grains The trend in corn and soybeans has been higher since the summer lows, while wheat has been sideways for several months. Prices will need to trade higher to entice farmers to allocate more acres to next years crops but we would like to see a break in pricing  sometime in the next 30 days to use as a long entry as clients have no exposure currently. We would explore a 30-40 cent correction in ’11 corn and would like to see 50-80 cents in ‘11 soybeans. Until CBOT wheat breaks above $8 or below $6 we have little interest in trading anything but that range for clients. One trade idea to consider is if you think we could get a temporary price setback in either soybeans and/or crude oil aggressive traders may opt to gain bearish exposure in soybean oil. We could see a 5-8% correction over the next several months…again only my opinion.

Softs This sector never gets enough attention from traders but let’s look at the scorecard. Both cocoa and sugar reached multi-decade highs this year, coffee is currently trading near a 15-year high, lumber has appreciated 35% off its summer lows and cotton this week traded at a record high. As for current positioning, we’re suggesting fading rallies in cocoa thinking we could see 10% depreciation in the coming months. Sugar has very little upside resistance on a trade above 33/34 cents and some traders are calling for 40 cents this year. I am not one of them but this should be on your radar. Cotton is at a record high having gained nearly 45% in the last 30 days. Longs should be looking for an exit door as we’ve advised clients to start gaining bearish exposure thinking we will see a trade under a $1 in the coming months.

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Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

By: Matthew Bradbard

MB Wealth Corp. is not responsible and does not endorse anything outside of the content of this article authored by Matthew Bradbard; President of MB Wealth.

In the current Wild West trading environment, where 5% price swings have become commonplace, avoiding margin calls is a bigger challenge now than what I’ve ever seen in my career. Traders can take all the necessary steps and still there is still no assurance that a margin call can be avoided, here are some suggestions that may aid in deterring future margin calls when trading commodities.

Let me start by explaining exactly what a margin call is; a call from a clearinghouse to a clearing member, or from a broker or firm to a customer, to bring margin deposits up to a required minimum level. When the balance of the account drops below the maintenance margin level a margin call is issued. Once a margin call is issued the party receiving the call generally has 48-72 hours to bring their account balance back above the initial maintenance amount. If you wish not to satisfy the margin call the alternative is liquidating the position and taking the loss.

Moving onto margin; the amount of money deposited by both buyers and sellers of futures contracts and by sellers of options contracts to ensure performance of the terms of the contract. The margin in commodities is not a down payment, as in securities, but rather a performance bond. For every commodity there is an initial margin and a maintenance margin determined by the exchange that the underlying commodity trades on. For example, when trading 30-yr bond futures, margins are set by the CME Group, while when trading cotton futures margins are set by ICE.

The leverage involved when trading commodities can at times be massive; by definition leverage is the ability to control large dollar amounts of a commodity with a comparatively small amount of capital. Leverage is a double-edged sword working as your best friend when properly positioned and your worst enemy when positioned incorrectly. Because the leverage at times can appear excessive, a possible solution would be to not over leverage one’s trading account. For example if the initial margin amount for one Crude oil futures contract is $5,000 then in your mind you should allocate $10,000 to mitigate extreme swings in you trading account. When trading commodities be selective and don’t think that all the money in your trading account needs to be allocated at all times. I try to trade a very aggressive asset class conservatively…which is easier said then done.

Other possible solutions include, but are not limited to: trading mini-futures contracts, decreasing one’s trading size, purchasing options, or a trading strategy that utilizes a combination of options and futures. Stop loss orders should also be incorporated whether they are entered when establishing a position or as a trader using mental stop loss orders, my suggestion is to always have some sort of exit strategy in case the trade goes awry. Stop orders are defined as an order that becomes a market order when the futures contract reaches a particular price level. A sell stop is placed below the market; a buy stop is placed above the market. Though stop loss orders can mitigate loss, there is no guarantee that the precise stop levels will be the price executed at as occasionally the market conditions do not allow. For example, if a market were to gap higher or lower or a lock limit move in the underlying commodity occurs. One such example several years ago that I clearly remember was a “mad cow” scare had cattle futures lock limit for several sessions. What this means is parties in the trade cannot get out of their positions regardless of whether they are short or long.

Greed and emotions are involved in any facet of trading and while trying to remove these conditions is nearly impossible, a large amount of successful traders do their best by exhibiting discipline. By that I mean not getting married to any position, cutting losses and not looking for homeruns on every transaction. The key in the long run is to be consistent and treat trading like a career as opposed to a “hobby.” Margin calls are a part of trading commodities, however to avoid this asset class all together as opposed to taking cautionary steps before initiating positions in hopes of avoiding a margin call would not be my suggestion. Remember we are human and make mistakes; the key is learning from these mishaps and to not repeat them. The current commodity market, albeit volatile, provides some of the best opportunities that I believe we may see in our lifetime.

The hope in this article was not to deter novice commodity traders but rather to inform them on what margin calls are and to be cognizant that while it is not always pleasant trading, understand that because you get a margin call it is not the end of the world. Best of luck trading!!

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

MB Wealth Corp. is not responsible and does not endorse anything outside of the content of this article authored by Matthew Bradbard; President of MB Wealth.

While the media circus is focusing on Portugal, Italy, Ireland, Greece and Spain, commodity traders should be more concerned about Petroleum, Indices, Interest rates, Gold and Silver. First let me touch on what has transpired in the past with these markets, briefly touch on the current market dynamics and then where do we go from there?

Petroleum:

Over the past two years Crude oil has traded near $40/barrel and near $140/barrel; a $100 range equates to $100,000 on one standard futures contract, so this market is not for the faint of heart. In our opinion, the only scenario that would get prices back below $50 is another global meltdown. That is not to say there will not be opportunities to trade oil from the short side, but more often than not our trading recommendations will be bullish on Crude and it’s by products. Currently prices are near the median of the range trading at approximately $80/barrel. As long as Crude maintains the $70 level we would maintain a buy dips mentality thinking we could see prices trade above $90 and potentially a test of $100 late this year or early 2011.

Indices:

Prices in indexes are well of their highs seen in 07/08 and we do not expect those levels to be re-visited in the foreseeable future. All told the S&P is 33% off its highs, the Dow 30% and the NASDAQ 19%. Massive global de-leveraging has had its effect and in order for a bull market to exist in equity markets again we feel a great deal needs to happen. For starters, the sovereign debt issues across the globe need to be resolved, the housing markets needs to bottom, unemployment needs to abate and investor confidence needs to return. Though these scenarios will happen in time we do not see the light at the end of the tunnel in 2010. For speculators we’re advising selling rallies in the S&P as we see 950 by years end; an 11% depreciation from current levels. For those still carrying a large stock portfolio one word…HEDGE.

Interest rates:

Depending on if you’re looking at the long end or short end of the yield curve there are two distinct stories being told in the Treasury complex. Let us first examine the short end of the curve; Euro-dollars. Two years ago interest rates were 4-5% higher than the current record low rate and the market reflected that in 2008 when prices in Euro-dollar futures were closer to 95.00-96.00. As rates have declined, the price of Euro-dollars has climbed to record highs trading closer to 98.50-99.50. To understand this instrument all one must understand is interest rates. As rates fluctuate up and down, Euro-dollar futures move in the opposite direction. We remain convinced that WHEN the Fed raises rates which at this juncture we think will be in 2011, a bearish trade will develop and last for 24-36 months. To date we’ve been early but bearish exposure in Euro-dollars should be on your radar. 30-yr bonds and 10-yr note futures spiked to decade high levels in the midst of the 2008 global meltdown as US debt served as the primary flight to quality. One will notice that in early 2009 prices came down as quickly as they ran up in late 2008. What we take away from the action here is that investors worldwide still view US debt as the “best house in the worst neighborhood.” Bottom line when investors are willing to take risk Treasuries trend lower and when investors are taking risk off Treasuries trade higher. There will come a time to get short Treasuries but in our estimation investors who are short currently are early to the party.

Gold:

From its lows in 2008, near $700/ounce, gold has traded virtually one way with prices making a record high as recent as last week. Over this time frame gold has appreciated over 70% in US dollars, if calculated in select foreign currencies the move is even more staggering. Though prices will likely see $1300/ounce and beyond in 2010 we would expect prices to correct before reaching much higher prices. In fact being that this trade is so crowded and a correction was to ensue, weak longs could exaggerate the down move and take prices $150-200 lower with very little longer term chart damage. Though we trade principally gold futures and options for clients, we suggest investors should have a portion of their portfolio exposed to gold by some means whether its etf’s, stocks, commodity futures and options or physical bullion or coins. We will likely be buying dips in gold for the coming years as we see $1500/ounce in the next 24 months.

Silver:

Gold makes the headlines but the move in silver has been even more remarkable. As gold appreciated over 70% from its 2008 lows, silver has gained almost 110%. The problem with silver is that the moves are more erratic and being commodities utilize leverage this volatility serves as a double edged sword. It has been and we feel will continue to be unlikely that gold moves one way and silver moves in the opposite direction for an extended period. Why trading the two metals could be different is also that gold is viewed largely as a precious metal while silver is viewed as an industrial and precious metal. Another caveat is while gold is near its record high silver is well of its record highs and has yet to reach the levels obtained in 2008 near $21/ounce. Ultimately by the conclusion of 2010 we expect to see a print above $20/ounce and we anticipate $24-25 in 2011.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

The latest mid-month discussion from the International Research Institute (IRI) for Climate and Society indicates that there is a 90% chance, according to both dynamical and statistical models, that El-Niño conditions will continue through March, April, and May, which are prime planting time frames for key commodities such as corn, cotton, and wheat.

The latest ENSO Diagnostic Discussion, released monthly by the Climate Prediction Center/National Center for Environmental Production/National Weather Service (CPC/NCEP/NWS), also indicate that El-Niño impacts will gradually fade throughout the remainder of the U.S. Spring season and shift into ENSO neutral conditions, particularly by the beginning of summer.   Some of the effects that will continue to be observed include the following:

• Higher than average precipitation in the Southwest
• Higher than average precipitation in the South-central States
• Higher than average precipitation in Florida
• Below average precipitation in the Pacific Northwest
• Below average Precipitation in the Great Lakes region
• Above average temperatures across the northern U.S.
• Below average temperatures across the south-central and southeastern states

The National Agricultural Statistics Service (NASS) and United States Department of Agriculture (USDA) released a report in 1997 titled, “The Usual Planting and Harvesting Dates for U.S. Field Crops” which specify how the states compare to each other in regards to commodity production, as well as most active planting and harvesting dates. 

Cotton, which is grown on the 36^th degree parallel,  can be found growing all the way from Northern Florida to the Carolinas, and as far west as California.  Texas, one of the leading producers of U.S. cotton, depends on dry tropical to subtropical climates for a productive cotton crop.  Initial soil conditions necessitate ample moisture.  Since cotton uptakes an abundance of soil nutrients and moisture, careful crop rotation planning can allow for year round use of field acreage.  The forecasted increase in precipitation in most of the cotton growing regions is good news to farms that tend to depend on Mother Nature to assist in their crop needs.  Colder than average temperatures across the Southern central and southeastern states could be a problem as planting season is nearing halfway over.  Most of the U.S. cotton growing regions have seen a long winter this year so far, which will probably result in a decreased cotton crop output or possible further delays in planting in the more northern cotton growing states such as Tennessee.

Corn, found primarily grown in Midwest, especially in Iowa and Illinois, consists of about 30% of the world production.  Large amounts of water, either through crop irrigation, or natural rain is needed for fruitful crops.  Predicted wetter conditions in the southeast and western portions of the Midwest will aid farmers this upcoming season.  Precipitation amounts will be coupled with ideal temperature conditions which should yield on time productive corn crops this growing season.

Kansas, a key player in the U.S. winter wheat supply, won’t be addressing planting conditions until its growing season which runs between mid-august through mid-September.  North Dakota, which is said to produce more than half of the U.S. Spring Wheat supply, is forecasted to receive drier and warmer conditions this upcoming growing season which should be good news for farmers.  Wheat is sensitive and has little resistance to temperatures outside of its normal growing range.  A late start in spring growth would be ideal as there would be a less likelihood of a late “frost” bringing destruction to already-growing crops. 

The expectations for the USDA’s planting intentions report next week are as follows:

Wheat: Projected Acres 53.376 Million / Average estimate 51.9-55.0 / Last Year 59.133 Million

Cotton: Projected Acres 10.09 Million/ Average estimate 9.50-11.0 Million / Last Year 9.15 Million

Corn: Projected Acres 89.189 Million/ Average estimate 87.0-91.0 Million / Last Year 86.5 Million 

Our current positions for clients in these markets are as follows:

Wheat: We have no outright positions but have positioned some clients long December KCBOT wheat against a short in December CBOT wheat expecting KCBOT to be at a premium to CBOT. This should work as long as the trend remains down.

Cotton: Clients are advised to have short exposure in cotton as we feel prices should come under pressure eventually taking prices back to the mid 60’s on the December contract. Analyzing the daily chart we see stiff resistance just above 75 cents.

Corn: December corn has been range bound for the better part of the last month wondering between $3.85 and $4.15; we sit at the lower end of that range as of this post. We are advising clients to have long exposure via July call options and December futures anticipating a trade up to $4.50 in the coming months.  

 CBOT Wheat:

Cotton:

Corn:

While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial.  Past performance is no guarantee of future trading results.

click on chart

Why corn and why now? Since the January USDA report prices of corn have come down approximately 15% but failed on two occasions, most recently this week and early February, to get much lower than the current levels. On both the daily and weekly charts we are at oversold levels and as one can see from the chart above we are very near a trend line that has been able to act as a floor for the past three years. On average over the last four decades corn prices have been a gainer in the first five months of the year. Past performance is not indicative of future results. Digging deeper month over month within the same time frame we’ve had 116 positive months and 84 negative months. (2010 not included) Two weeks from now we have the most influential USDA crop report of the year; Planting Intentions report. Being we need to buy an additional 3-4 Million acres of corn, we feel prices need to be higher to entice farmers to allocate more acreage to corn. Not to mention that with less than ideal weather we are anticipating planting delays. All things considered we have a first target of $4.50 and see it possible to trade up to $5 the later part of 2010. We are suggesting clients to have option exposure in July and futures exposure in December.

Keep up to date on our daily blogs and weekly commentaries to see what commodities we are recommending selling and what commodities we are recommending buying. For detailed strategies contact us via e-mail www.mbwealth.com or telephone at (888) 920-9997 / 954-929-9898.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

There has been so much fuss of late on the great performance in equities over the past year so we thought it would be interesting to put the indices head to head with the major commodities that we trade. Find the table below that shows the closing price on March 9, 2009 compared to the closing price of March 9, 2010. We use this date because that is the date the major US indices bottomed.

I find it comical that so many investors are ignoring the multiple long/short opportunities in commodities. I’ve seen commodities in my 10-yr career gain respect from the common investor but still too many traders fail to implement commodities into their portfolios.  

Keep up to date on our daily blogs and weekly commentaries to see what commodities we are recommending selling and what commodities we are recommending buying.

To view the chart click here once you click scroll down

For detailed strategies contact us via e-mail www.mbwealth.com or telephone at (888) 920-9997 / 954-929-9898. For the most part investors reading this analysis want to be more hands on, however we suggest taking a look at our managed futures section and consider diversifying further via CTA’s with proven track records:   MB Wealth Managed Futures

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial.  Past performance is no guarantee of future trading results.

by:  Matthew Bradbard

Find two charts below; the top chart is March S&P futures and the second chart is April gold futures. As long as 1100 acts as support in gold we suggest being lightly long gold futures and have positioned clients in August call spreads. As for the S&P 1100 should act as resistance and as long as prices do not close above that level we suggest being short. Our favored play here with clients is to buy June 1000 ES puts and sit on them expecting these options to go intrinsic between now and Memorial day.

S&P, please click to enlarge

Gold, please click to enlarge

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

10’ Outlook

January 20, 2010

By: Matthew Bradbard

Much like 2009 we expect 2010 to be more of a traders’ market as opposed to sitting in positions for extended periods. A successful trader will need to apply fundamental research and technical research by paying attention to seasonal tendencies, examining correlations commodity to commodity, monitoring the weather and most importantly being flexible with their positions. By this I mean to perhaps scale back your position size because of the volatility, trade both futures and options, and use hedging strategies. The two principal conditions to look out for this year are who wins the argument on inflation vs. no inflation and decoupling relationships between asset classes. To keep up to speed with our ideas we encourage investors to follow in our weekly commentary or daily blog.

The substantial swings we expect to see in 2010 commodity wide will force investors to be more attentive with their portfolios. Speculators, hedgers, and producers need to recognize that with this comes excellent opportunity but much more risk. While it is unlikely that we will encounter the same type of swings this year as the previous two, one will need to bring their best game to be successful at marketing, hedging, or speculating this calendar year. The good news is that more investors are trading commodities which are quickly becoming a critical component of the global economic system and a necessary asset in your portfolio. 

We are looking forward to 2010 and see many opportunities that we’ll outline here. For further explanation and to keep up on an evolving basis follow our Weekly commentaries and on our blog’s Daily thought at www.mbwealth.com. Feel free to visit and give us feedback, we are always eager to see what other traders and investors are doing.

Agriculture: Corn is a global market so one needs to pay attention to the global picture and with world ending stocks projected near four decade lows, even with a massive US crop, supplies are tight and it will not take much for corn to get moving higher again. In 09’ US farmers planted an estimated 86.5 million acres and early projections are for 90/91 million acres to be planted in 10’ we may need to see higher prices to buy acres. Perhaps the biggest wildcard will be the dollar which has a grave impact on exports. After about a 10-15% correction from the most recent USDA report we suggest buying and looking for prices to get back to at least the previous resistance levels. Currently, clients are being advised to buy May and July call options or December futures. Soybeans are transitioning from 2 straight years of tight ending stocks, but with a large jump in crop size domestically, even with a late harvest and prospects of a sizeable crop in South America, we expect to see a jump in world ending stocks. The wildcard is the growing appetite for soybeans from China and if their domestic usage continues to grow, will it out strip the jump in ending stocks? Assuming the near record yields forecasted by the USDA are accurate and South America does there part, the world stocks/usage ratio should make its way back to 06/07, levels when beans were 30-45% cheaper. So many variables could lay the groundwork for wild swings in the soybean complex in 2010. A trade down to $8/bushel is not out of the question while we expect the lows to be made in Q1 and then a grind higher with a high range forecast of $13/bushel. For the time being the price of soybean meal may move somewhat lower, but with the dramatic increase year over year in consumption levels we will be looking for long opportunities once a low is established early this year. We see no reason not to see a trade back over $375/400 in 2010. To help navigate soybean oil, traders should pay attention not only to soybeans but also Crude oil, as we’ve noticed a correlation over the years. What makes this market interesting is the increased participation of index funds in this market. Once this trend gets moving north again a trade back near 50 is probable, which is a 33% appreciation from the front month contract currently. The world wheat market experienced scattered weather problems in 2009 but this paled in comparison to the global issues we encountered the previous year that helped lift prices to record highs. While we expect nothing of the sort in 2010 a weakening dollar the second half of 2010 could have a serious impact on exports and help the wheat market find a solid base; we cannot see prices getting below $4.25-4.50. Wheat may be one of the most sensitive agriculture markets to food inflation so on increased fears make sure you are playing from the long side. Recent action in wheat has not really allowed us to trade on behalf of clients either direction so we’ve been trading KCBOT against CBOT. We may continue to suggest buying KCBOT against CBOT wheat whenever it is trading at a discounted price. We do expect prices to trade back over $7/bushel in KCBOT and CBOT wheat but at this time I’m not sure if it will be late 2010 or 2011.

Softs: 2010 like 2009 we want to suggest that ignoring this sector will not benefit one financially. We again suggest you start paying attention as these 5 markets offer profound opportunities. Sugar was one of the standouts last year as a world deficit helped contribute to prices trading to multi-decade highs. With both India and Brazil the two top producing countries in the world having supply issues this move may have legs. A stock to usage ratio is projected at just under 16%; which would be the lowest in 26 years. Prices may seem high but those who study history recognize that prices in the 80’s reached 45 cents and in the 70’s prices traded near 60 cents. We have clients positioned in May call spreads anticipating a trade over 31 cents/lb and possibly higher and also have positions in calendar spreads trying to capitalize on the deeply backward dated conditions. Coffee experienced two sided trades last year and looking back was for the most part in a 20/25 cent range. The trend line dating back to last summer comes in just above $1.35 which we expect to hold and on the upside could see prices trade above $1.50 and potentially make their way to $1.70. We start the year with relatively tight stocks, but perhaps bigger factors will be weather in South America, global demand and the direction of the dollar. Cocoa like sugar was a top performer last year carrying prices to 28 year highs on weather concerns, problems in growing areas, increasing demand for chocolate, increased fund activity and lastly dollar weakness. To start the year we feel this market may be a good candidate for a short and have started to price our bearish plays for May and July. We do not expect prices to exceed $3500 and if so by a very negligible amount, if we get even a 38.2% Fibonacci retracement of last year’s move that takes prices back below $3000. Cotton looks to expand upon the 50% appreciation we saw in 09’ but the wildcard in 2010 will be to see an improvement in demand. In 09’ smaller supplies were the driving force and that can only carry prices so far. The USDA’s total cotton usage projection is at a 24-yr low so cotton will be guided not by consumption domestically but globally. We would like to buy a dip in this market but do not know how deep it could be. At this point we would most likely start testing the waters in longs for clients closer to 65 cents. There seems to be formidable resistance at the 76 cent level but on a trade above that level we cannot rule out 80 cents. Looking at historic monthly charts back 20 years prices have traded above 90 cents in 6 different years so who knows?  After a near freeze in Florida lifted prices to 2–yr highs this could just be the beginning of what OJ has to offer in 2010. Per capita OJ consumption is close to multi-decade lows and when you throw into the mix a smaller than previously expected citrus crop it may not take much to get a bullish environment. Prices have doubled in the last 12 months so we may be a bit ahead of ourselves but after the correction that is currently under way that should take prices down near $1.05/1.15 we may look to re-gain long exposure. If able to get long near those levels we would use upside targets of $1.30, $1.50 and then $1.70.

Metals: Copper is not a market you can put a position on and forget about as swings have just become too large. Prices in the last 4 years have been under $1 and over $4. Off their lows which were established in late 08’ early 09’, prices have rocketed higher by almost 270%.  At this point we say prices are too high and we would expect a set back; a trade back to $2.40- 2.60 is not out of the question. The demand out of China was one of the main driving factors in 09’ and if we were to see that pace slow one would expect a correction to ensue so pay close attention to copper earmarked to China this year. Copper continues to act as a very accurate barometer on global economic sentiment and if prices are either extreme or moving higher or lower at a swift pace do not ignore the warning signs. Gold saw record highs last year trading over $1220/ounce but after a wash out early this year we would expect new record highs. Before we would expect that to really develop we would anticipate the masses to get out of the trade and for this trade to be far less crowded. As we hinted at last year, when the markets are leaning only one way the ensuing move is generally in the opposite direction. Though we feel gold has and will continue to serve as a store for value, we expect the move higher in 2010 largely to be driven by more investors realizing that we have inflation around the corner. The 50 day moving average comes in just below $1000/ounce and at about that level serves as a 38.2% Fibonacci retracement level so that would make sense for a back off point. The closer we get to that level or if we even get below that the level, the lower one is able to buy gold and the more bullish we are. On the upside we are expecting to see a print very close to $1400/ounce this year. Silver outperformed gold in 09’ and we expect the same outcome in this calendar year. Silver failed to get back to its highs reached in early 08’ while gold hit fresh record highs, so in my eyes silver has some catching up to do. Furthermore, the gold/silver ratio that you need to be aware of as a metals trader we view to be way too wide. This spread has decreased from the wide level we saw in late 08’ of 85:1, but at the current level the spread is still at 61:1 when historically it has been closer to 30:1. The 50 day moving average in silver comes in just above $15 and though we think a loss of 18% from the current level may be a stretch, we would maintain a buy the dips mentality in silver with a price objective on the upside of $22-24 in 2010. In both gold and silver we would suggest buying the dips we see the first part of the year because if things go as planned we may not see those levels again this year. Additionally we would suggest scaling into the trades and utilizing a combination of futures and options as we expect volatility to persist.

Energies: We expect a significantly smaller trading range in 2010 than we experienced in 2009 with prices trading at a high over $80/barrel and a low just above $30/barrel. In 2010 we do not expect a humdrum market and oil traders must be prepared for volatility, we anticipate more sideways action as opposed to the solid up trend we saw last year. On the low end we expect the band to come in between $60-65/barrel and on the upper end a band between $90-95/barrel. We cannot rule out a triple digit trade but it would take either a brutally cold winter, active hurricane season, serious Middle –East conflict or a collapsing US dollar. Energy traders cannot ignore how low the refinery utilization rates have been for the last several months. US refiners have cut back their operations to trim back oversupply thus allowing crude stocks to rebuild. We will continue to navigate this market from both sides feeling there will be enough movement to make money both long and short oil in 2010. Additionally, we would suggest using spread strategies and a combination of futures and options to trade oil as out right plays in futures and options can be pricey and too risky in our eyes. With RBOB prices collapsing last year the refineries made a few decisions that will impact prices in 2010. As daily production declines were noted, what went largely ignored was that demand started to begin drawing down gasoline stocks causing prices to move higher. Off their 2009 lows RBOB prices appreciated over 150%. I guess this was expected BUT prices have yet to make their way back to their highs that we saw at the pump and we feel it may just be a matter of time. A trade back to $1.50- 1.60 would be a gift for those looking to get long though we think a trade below $1.75 is unlikely; on the upside we see $2.35- 2.50.  In the energy complex in 2009 heating oil was the straggler and though we did experience wild swings, the bullishness in Crude oil and RBOB largely overshadowed this market. It could be a different story this year as we did fall to multi-decade lows on heating oil stocks and so far this winter has been chilly. Much like RBOB the price will be influenced by how long the refinery operating rates stay at depressed levels. You really cannot blame refiners either as margins have not been favorable so why ramp up production if it is not cost effective. On the low end we feel $1.65–1.75 should support and see that on an upside extension prices could make their way to $2.55- 2.65. To review on these three markets pay attention to weather, driving habits, refinery utilization rates, consecutive weekly draws or builds in inventory and finally the direction of the dollar. In 2009 it was oil that led the distillates higher or lower but what could make 2010 a bit different is that the products could have a larger influence on the overall path of oil. Natural gas may have reached an extreme low late last year trading near $2.50; the lowest level in 7 years. Clearly any commodity trading below the cost of production prices do not stay there for lengthy periods regardless of their circumstances. Looking at the big picture, seeing the rig count down with the expected policy shift towards using more natural gas in the national supply chain, we think the path of least resistance should be up. That is not to say we are buyers here, in fact we expect prices to re-visit $5 and then we would be looking for long opportunities for clients. We see an absolute bottom in 2010 at $4.50 and could expect a trade back near $7 if industrial demand was to resurface.

Currencies: The media has painted a picture that the dollar is doomed but their timing may be off saying the dollar’s status as the reserve currency is in question being we only experienced 5% depreciation last year. The trend is down and this is undeniable, but unless the US is the only country that keeps rates low and ALL the Central banks globally raise interest rates the dollar will be here…well at least through 2010. We do expect the lows around 72 to be challenged and we could see a new low but an entire meltdown to us is not likely. Let’s get one thing straight, the US preaching a strong dollar policy is lucrative and as we’ve voiced for years, action speaks louder than words. Like in 2009 currency action in 2010 will all be relative. In other words rates should start moving higher in most of the developed countries with currency traders paying attention to the spreads. Increased government support is not out of the question though it is not likely. Let me restate it would not be prudent! As for predictions on other crosses we expect the commodity currencies to come off in Q1 as we get a temporary dollar appreciation and commodity correction and then for the Kiwi, Loonie and Aussie to be a buy and make their way to fresh highs. We see the trading ranges as follows: the Kiwi .6500-.8000, the Loonie.9000-1.03 and the Aussie .8400 – .9600. We do not see the Euro trading above $1.50 and think it’s likely to see a test of $1.25 either late 2010 if not early 2011.  The Swissie should follow the Euro lower and although we may get a temporary lift above $1.00 early this year, we feel a move back to the mid .80’s is likely. The Japanese yen should continue to gain if equities fall apart though rates are effectively at 0% in Japan low interest rates could continue to fuel the carry trade. If excessive risk taking was to reappear, which we think is likely, the unwinding of this spread could lift prices to multi-year highs. The yen is a tough call and it could see massive moves either way because if investors draw in their horns and refrain from taking risks we could see a collapse back to levels not seen since 2008. The dog of the group we feel is the Cable and much like the second half of 09’ we will continue to have a sell rallies mentality with clients in the British Pound. We feel $1.7000 will serve as solid resistance and expect to see prices make their way back near $1.4000 by year’s end.

Financials:  While there are consequences if a large institution tries to move the Equity market and it is frowned upon when Central banks intervene in the currency market, I presume that when the government manipulates the bond markets we are supposed to turn a blind eye. That is what the story was in 2009 as we feel that the government controlled the flow and moved the Treasury market higher and lower as it saw fit. What should be the driving force in this market this year, is the perceived direction of interest rates and the eventual tightening which we expect to start around mid-year. The Fed may want to leave rates low for an extended period but when countries around the globe raise their rates the US cannot let the spreads widen significantly or it will suffer dreadful consequences. If we are right on stocks moving lower the flow of money may keep prices of Treasuries afloat temporally early in the year, but we suggest a short bias in Treasuries in 2010 as we expect more downside than upside potential. We see a trading range in 30-yr bonds of 124’00 to 108’00 and in 10-yr notes of 123’00 to 110’00. More than likely most of our trade recommendations in the Treasury complex will be the short end of the curve as opposed to the long end as we will be positioning clients in long dated put options and short futures in Euro-dollars to take advantage of the coming interest rate tightening. We made a similar prediction last year and hindsight tells us we were early but we continue to think risk/reward this is one of the best trades one may see in a lifetime. Let’s get real where can interest rates go from here? The key is to scale into positions and not add any substantial size until the market proves you right. We think once the Fed starts raising rates this trade could last 2-3 years. The key will be to stay with the trade, recognize this trade is not glamorous but if rates move to 7.5%-10% in the coming years this trade should reap hefty rewards. I should have known as the S&P bottomed in March 09’ at “666” that there was an uncharacteristic move to follow. The 50% appreciation got many investors back some money that was well deserved but what we should take away from a move like no other is we may be facing a crisis like no other. This should serve as a warning much like a loud horn before a devastating crash. By no stretch of the imagination do we think we’ve seen the worst; with growing unemployment, another leg down in real estate, the lack of consumer spending, mounting US debt, the rising cost of commodities and a rise in interest rates to come we Do NOT see the light at the end of the tunnel. Early this year we could see an attempt at 1175/1200 in the S&P, 11000/11250 in the Dow and 1950/2000 in the NASDAQ but we expect a sizeable correction to follow. Are we calling for a double dip, not at this point, but our downside targets are as follows: 825/875 in the S&P and 8000/8500 in the Dow, and 1400 in the NASDAQ. This market will continue be a stock pickers market and the days of buying and holding are dead. With still so many unanswered questions it is extremely difficult to predict what the right move may be. As investors we are in unchartered waters and making up the rules as we go. 

Livestock: I guess when people are losing their jobs and homes their desire to eat beef diminishes, as the economy ballooned last year the demand for beef vanished. That was the story in 09’ which we expect to be the contrary in 10’ as inventories of cattle have shrank and though the per capita beef consumption is way down what if we see an increase in demand with the slack supplies, this could mean a monumental shift in the trend. The USDA shows a decline in production from the 2^nd to the 3^rd quarter for the first time since 1996. Off their lows in 96’ cattle prices appreciated 37% higher and being that we think the recent lows in live cattle made in late 09’ should be the low, a similar move could carry prices well over $1.00. Past performance is not indicative of future results. We currently have clients positioned long June futures with put option protection but as for longer term position traders a play in August may be more suitable. Most commodity markets bottomed early in the spring last year but hogs still felt considerable pain and did not bottom until August when prices traded near 43 cents. This was two fold with a total collapse in demand due to the strains on the economy and then the market had to deal with the “H1N1” outbreak. While there was no correlation between the disease and lean hogs the psychological impacts were felt in pricing. Since then prices have reversed and catapulted higher recently trading to near 70 cents and 8 month highs. On the weekly chart you can see a gap was filled from last April and being we never got the customary end of the year give back we have clients positioned short April expecting prices to come down slightly. After a moderate correction we suggest using the corrective break as a buying opportunity as long as the trend line holds which currently comes in around 64/65 cents on the continuation chart.

Conclusion: We have out lined a number of opportunities that we expect to see in commodities within the next few months to quarters. Even when times are dire, significant opportunities will present themselves where the risk to reward dynamic makes sense. The key will be identifying the inherent risk that you are comfortable taking. This market does not lend itself to simply buying and holding but will be more of a traders market.

The test of time has shown that commodities have tended to be one of the best performing asset classes during times of inflation. We have given a variety of trade ideas and I am imagining some may agree but many may disagree with our assessments; but this is what makes a market. Swim against the tide. Do things differently than others because remember most people lose money and if you do the same as most you will lose money too.

It’s too early to determine if the current decoupling of crude oil and the greenback and their overall influence on the other markets is just temporary. However, it is likely that the very strong correlation between crude oil and the value of the US dollar that occurred over the last two years has at least diminished, and that such a strong correlation will not play out in 2010. To take it a step further as a rising tide lifted all boats (i.e. asset classes) last year we do not expect this to be the case this year. Therefore equities should trade on their own, treasuries will be influenced by investor’s appetite for risk, foreign debt demand and on interest rates, the currency market will be impacted on interest rate fluctuations, and lastly we expect commodities to trade on supply and demand. Perhaps a bias because commodities are what we trade we think that as more investors figure out inflation is all but inevitable, money will pour into commodities from agriculture to metals from livestock to energies.

We’re suggesting that the individual commodity markets could finally start to focus more on their own supply-and-demand fundamentals, instead of mostly ignoring them and just looking to crude oil and the US dollar for the lead. Though 2009 was a very impressive year for commodities I think too many investors are discounting the potential of 2010. Commodities are quickly becoming a sustainable asset class as we see it moving forward while tough acts to follow a number of commodities still have significant upside potential. Years from now we will know but there is a good chance that the lows we made in late 2008 and into 2009 may serve as a turning point in some markets and it will take many years to revisit those levels. That is not to say all commodities will move higher and that it will be like shooting fish in a barrel. In fact we think the opposite; traders need to be even more selective when choosing their exposure. I’m certain some commodity charts will look like sharks teeth where there will be a number of corrections but as a whole we find more reasons to be bullish on most commodities as opposed to bearish.

Never in history have we had a global concerted effort to rescue the world financial systems and because of the course of action taken we sense markets are on the precipous of major inflation. Commodities are not a market that have turned bullish over night and not simply by government action but rather the years of underinvestment and the phenomenal growth in population. It all boils down to ECONOMICS 101 and supply and demand. Trade accordingly!

For specific strategies contact us via e-mail http://www.mbwealth.com or telephone at (888) 920-9997 / 954-929-9898. For the most part investors reading this analysis want to be more hands on, however we suggest taking a look at our managed futures section and consider diversifying further via CTA’s with proven track records.   

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.