The markets continue to be directed by geopolitical events, non-events, dreamt up events, and suppositions, but the real value of a market is the value of the underlying commodity, not the concern over geopolitical events, even though events move markets. Eventually the market in any given commodity or equity will be determined by the expectation of increased or decreased value, the value of the U.S. dollar and interest rates. Any price movement prompted by a particular event may be exacerbated by technicians but will eventually find its level based on fundamentals.
Meanwhile the Iran’s puppet president, who is “directed” by the religious leaders of the country, indicates a willingness to talk while he refuses to change course relating to uranium enrichment. So what is there to talk about? Another problem we face in trying to determine the next market price move is the media attention to the Middle East conflict. The public has a right to know. Unfortunately the public includes those who are trying to destroy the United States and learn our methods for locating them. The surveillance of those receiving phone calls from countries such as Iran, Iraq, Syria, Afghanistan and others, does not bother this writer one bit.
Interest RatesDecember Treasury bonds closed at 111 04/32nds up 2/32nds; the jobs report on Friday was disappointing for the economy but positive for bonds and equities since “bad news” is good for those expecting the Federal Reserve to pause once again. I have been saying the U.S. economy is in trouble and only recently have I seen other writers pointing to a possible recession. Unfortunately, Fed Chief Ben S. Bernanke has inherited an economy positioned for retreat by predecessor Alan Greenspan’s last two rate increases, which had yet to be felt in the economy. Bernanke’s pause may be too little too late. As I have stated in previously, the U.S. economy is in trouble and the possibility of a recession is real. Stay with the bonds. I expect sensible rate cuts by Bernanke and the Fed gang.
Stock indexes
The Dow Jones Industrials closed at 11,464.15, up 83 points with the S&P 500 gaining 7.19 to 1,311.01 and the Nasdaq gaining 9.41 to close at 2,193.16. The rally followed the jobs data, which showed a moderate increase in jobs with the average hourly earnings rising only 0.1% in August, leading investors to believe the Fed may not raise rates again at the meeting later this month. Unfortunately the upward revision of the gross domestic product (GDP) was an offsetting positive for the economy and that leaves analysts in a quandary as to which way the Fed will move. We fully expect the equity markets to decline sharply regardless of the interest rate implications because major employers in the auto and housing industries, and those associated with those industries, have continued to lay off people and shift operations to countries where labor is cheaper. That situation will soon become totally untenable and I expect the word “recession” to permeate the media and corporate boardrooms. On Wednesday we will get a better look at the economy through the Federal Reserve’s Beige Book. On Thursday we expect the wholesale inventories report for July and it should show an increase. Any increase in inventories can only mean one thing to me: no one is buying their products, inventories are rising and more layoffs could follow. Apply strategic hedge strategies now.
Currencies
The December U.S. dollar index closed at 8453 on Friday, down 13 points against gains in the Euro of 26 points to 12915, the December yen 18 points to 8665, but unchanged for the December Swiss Franc. The initial dollar gain against the slightly higher August payroll figure was later offset by profit taking in front of the long holiday weekend. We continue to feel the dollar will lose ground as interest rates decline. Stay with the Swiss Franc.
Energies
October crude oil closed at $69.19 per barrel, down $1.07 on a lack of change in fundamentals. The geopolitical situation for the moment remains stable and supplies in the group are at satisfactory levels especially since Hurricane Ernesto missed the vital Gulf of Mexico and Gulf coast oil facilities. We prefer the sidelines.
Copper
December copper closed Friday at $3.4610 per pound, up half of a cent on short covering in front of the holiday weekend. The settlement of the Escondida worker strike pushed prices lower but an eventual resolution had been already factored into the market. We feel the decline in demand by the U.S. auto and housing industries will play a role in a possible sharp sell off in copper. Hold onto those puts I suggested in previous commentaries.
Precious Metals
December gold closed at $632.60 per ounce, down $1.60 with December silver closed up 4¢ per ounce to $13.07 after trading as low as $12.825. Position squaring in front of the long weekend the main feature. October platinum gained $3.60 per ounce to close at $1,254.80 on short covering while December palladium gained 90¢ to $349.60. We prefer the sidelines since gold will reflect activity in the U.S. dollar and International interest rate changes and has no industrial use. Silver, on the other hand is used in many industrial applications and platinum, as a catalyst in the auto industry and oil refining can also go either way. Stay out of metals.
Grains and oilseeds
September corn closed at $2.30 per bushel, down 2c with December losing 2 1/4c to $2.45 ¾. No change in fundamentals and with weakness in wheat, longs sold in front of the weekend. We prefer the sidelines at this time. December wheat closed at $4.19 ½ per bushel, down 2 ¾¢ but December Kansas City wheat lost 7 ¼¢ to close at $4.85 after strong recent gains. Month end positioning and pre holiday weekend book squaring the main feature. Recent gains in wheat tied to demand from Iraq and India and potential production problems for the European Union and South America also a factor. We prefer the sidelines in wheat until the profit taking dissipates and then would take another look at the long side out to the March contract. November soybeans closed at $5.51 ½, down 4 ¼¢ with December soybean meal closing unchanged at $161.40 per ton and December soybean oil losing 42 points to close at 25.32¢ per pound. Favorable crop outlook and adequate world supplies put pressure on prices but private forecasters projecting normal production levels and moisture provided during August could mean improved crop yields. We like the long side but would only add to positions on dips otherwise just sit.
Coffee, Cocoa and Sugar
December coffee closed at $1.0760 per pound, down 40 points on speculator selling. Industry buying kept prices from declining further and anticipation of Brazilian rain level kept coffee in a tight range. We like coffee but would await reports of any potential water shortages in the southern Minas Gerais growing area. The current Brazilian harvest ends this month and tree flowering begins in October for the next crop. Stay out for now. December cocoa closed at $1,506 per tonne, up $21 as a key resistance level was breached. Failure to follow through however leaves us on the sidelines. Cocoa has been in a range for some time and we see no reason to apply the “coin flip” method of commodity trading. Stay out. October sugar closed at 11.39¢ per pound down 41 points with March losing 40 points to 12.30¢. Fund selling the main feature but net longs estimated at around 16,000 contracts by funds and small speculators creates a problem in the near term. Sugar remains on my “totally uninteresting” list. Stay out.
Cotton
December cotton closed at 53.90¢ per pound, down 1.18¢ on long liquidation in front of the holiday weekend. We like cotton as we stated in prior commentaries, but prefer to wait for possible dips to the 50-51¢ level. Failure of Hurricane Ernesto to cause any major flooding in the growing areas prompted the long liquidation. Some analysts thought that if the rains caused flooding in the Carolinas, some boll rotting and cracking could result. Stay out for now.
John L. Caiazzo
(951) 693-9600 phone
(951) 693-3170 fax
futures@acuvest.comwww.acuvest.com
Information provided is from sources deemed to be reliable but is not guaranteed. Futures and Options trading involve a high degree of risk and may not be suitable for everyone. John Caiazzo is a registered commodities broker with more than 40 years of experience in investments. His opinions are his own and not of the Futures Commission Merchant to whom he introduces his clients.
