The current hostilities in the Middle East preclude ordinary fundamental or technical aspects of the various markets we follow. Crude has seen new all-time highs, closing at $77.03 per barrel last week. The continuing escalation is of great concern to commodity and equity traders and investors as markets are impacted by fear of shortages in basic products and the cost of energy. The momentum could carry into the new week with no prospect for solution in sight.
Energies: August crude oil closed at $77.03 per barrel, up another 33¢ and posted a record close on the New York Mercantile Exchange all due to the war between Israel and Muslim extremists in Lebanon. We prefer the sidelines.
Interest rates: September Treasury bonds closed unchanged on Friday but were trading higher recently because of the “usual” flight to safety. Stay long the bonds and Eurodollars.
Stock indexes: The September Dow Jones industrials contract closed at 10783, down 103 points with the S&P futures losing 530 points to 124220 and the September Nasdaq losing 1475 points to 1475. While I could not foresee the hostilities in the Middle East, which are also a cause for the sell off in equities, I did foresee the economic deterioration in the United States and have been insisting on investor strategic hedging of equity portfolios. The cost of energy tied to the “unknown” of possible supply disruptions due to the conflict in the Middle East has also weighed heavily on equities. We once again suggest applying hedging strategies for large equity positions. For those who have no idea how to accomplish this, we can help. I look for a further sell off in equities even as the pundits are suggesting that P/E ratios would provide buying opportunities. There are no opportunities on the backs of labor cutbacks, only in sales. And we see no improvement in the sales picture. Increasing the net bottom line with layoffs is no answer to improving P/E ratios. The “piper” will soon have to be paid.
Currencies: The September U.S. Dollar Index closed at 8578 on Friday, up 27 points on the flight to the U.S. currency due to the growing conflict in the Middle East. The North Korean testing of missiles against the U.N. sanctions shows a complete ineptitude on the part of the world organization to enforce its sanctions. The September euro lost 44 points to 12706, the Swiss franc 31 points to 8163 and the yen 61 points to 8690. We continue to favor the Swiss franc in the group but would wait until some selling pressure comes to the U.S. currency. At the moment it would appear that the U.S. dollar represents a safe haven as does the U.S. Treasury market.
Copper: September copper closed at $3.7125 per pound, up 3.6¢ mostly tied to the continuing strike in Chile. We prefer the short side through the use of put options.
Precious metals: August gold closed at $668 per ounce, up $13.60 on geopolitical concerns and the sharp rally in energy prices. September silver closed at $11.53 per ounce, up 4.5¢ following gold. The conflict in the Middle East, once again, is the basis for the buying in metals. October platinum closed at $1,267.50 per ounce, up $3.50 with September palladium gaining 45¢ per ounce to $334.50. We suggest the sidelines in metals. The wide price swings only offer the “coin flip” trading method which we do not sponsor for our clients.
Grains and oilseeds:
September corn closed at $2.60-3/4 per bushel, up a half-cent with our expectation of further price gains due to the weather forecasts for extreme heat in the corn belt. This would also apply to wheat and soybeans. September wheat closed at $3.97-1/2 per bushel, up 2¢ on speculative buying tied to weather forecasts. We prefer soybeans in the group. November soybeans closed at $6.25 per bushel, up 3¢ once again tied to the extremely high temperature forecasts in the Midwest. Stay long the beans.
Coffee, cocoa and sugar:
September coffee closed at 98.25¢ per pound, down 2.45¢ tied to August option expirations on Friday. While we had liked coffee in the past, we do not stand in the way of market trends. Stay out for now but look to buy September in the 93¢ to 95¢ range. September cocoa closed at $1,718 per tonne, up $22 as we had suggested last week but is now up against resistance on technicals. Fund buying along with some spec buying prompted the rally but trade showed up as light sellers. Stay out for now. October sugar closed at 15.97¢ per pound, down 45 points after London selling pressure took New York though underlying sell stops. The August contract expiration was also a factor as dealers unwound their futures positions as the options they were “protecting” expired worthless. I expect sugar to retrench around the 15.00¢ to 15.20¢ level and attempt another rally. but only in well-capitalized accounts.
Cotton: December cotton sold off on Friday tied to bearish option activity. Speculators were sellers with much of the action taking place in the first half hour of trading. December closed at 52.16¢ per pound, down 85 points. We prefer the sidelines but would look again at the long side basis the December contract at 50.00¢ to 50.15¢ per pound.
