The G Manifesto

2010 Outlook for Commodities
By: Matthew Bradbard

A Gift to My Children: A Father’s Lessons for Life and Investing

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.

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.

A Gift to My Children: A Father’s Lessons for Life and Investing

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.

A Gift to My Children: A Father’s Lessons for Life and Investing

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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.