PIIGS : Commodity Style

June 28, 2010
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.

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.