The U.S. Federal Reserve is obsessed with controlling inflation rather than concerning itself with the “plunge” toward recession. More analysts are observing the last two rate increases by the Fed have only now been factored into the economy, which raises talk of recession. We have been warning our readers of the direct relationship to a slowing in what we view as the two major elements of the U.S. economy: housing and autos, and their related industries.
The weekly first-time unemployed data of 300,000+ warrants repeating that each of those newly unemployed consumers has a family, and those family members will also not be consuming anything unnecessary. The number of foreclosures on homes and repossessions of automobiles is increasing. I recently pulled over to ask a driver of a car carrier who was having lunch what those eight to 10 cars with license plates were, and he told me they were repossessions going back to the finance companies. What could be worse than leaving your home in the morning to look for work and finding out your car has been repossessed? If the Fed opens its eyes to what is going on outside the beltway, it would quickly look to reduce U.S. interest rates and feed more money into the system. Otherwise there’s a chance of a protracted recessionary period.
Energies
November crude oil closed at $60.55 per barrel, down $1.04 on Friday after an attempt to rally failed late in the session. Eventual stability will come at the $40 to $45 per barrel range barring any surprises from Venezuela and Iran. Stay out.
Interest rates
December Treasury bonds closed at 112-19, up another 18/32 and in line with my recent recommendations. The December Eurodollars gained 1.5 points to 0.946850 with the June gaining 4 points to 0.950150. The coming week will provide more information on the direction of the economy with the existing and new home sales for August on Monday, and the final reading on the second quarter GDP on Friday. Personal income and personal consumption is also due this coming week. We would hold longs but only add to positions on setbacks. Our intermediate term view is for lower rates or at least negative economic data to “provoke” the Fed into cutting rates.
Stock indexes
The Dow Jones Industrials closed at 11,508.10, down 25.13 points with the S&P 500 losing 3.25 points to close at 1,314.78. The Nasdaq lost 18.82 points to close at 2,218.93. Volume on Friday was light in front of the Jewish holiday Rosh Hashanah. For the week, the Dow lost 0.5%, the S&P 500 lost 0.4% and the Nasdaq lost 0.8%. Concerns about the economy have been raised after the Philadelphia Federal Reserves Bank report on Thursday showed a surprisingly weak mid-Atlantic region factory activity. We would once again strongly suggest implementing hedging strategies to any large equity positions.
Currencies
The December U.S. Dollar Index closed at 8487 up four little ticks against the basket of currencies but lower against the Swiss franc, which closed up 49 points to 8161 basis the December contract. The December euro lost four little ticks to 12843 with the Japanese yen losing 11 ticks to 8685. The weakening U.S. dollar has been affected by recent weak economic data, which could prompt the U.S. Fed to lower rates early next year. But it may be “too little, too late” to save the U.S. economy from slipping into recession. We expect the Fed to review the upcoming data, and if warranted, cut the rate back by the last ¼-point it raised it by. We continue to favor the Swiss franc.
Copper
December copper closed at $3.4435 per pound, up 1.2¢ after trading as high as $3.4850 during the session. Higher prices in London forced some short covering in front of the weekend but declines in demand from the U.S. housing and auto industries will lead to lower prices.
Precious metals
December gold closed at $595.40 per ounce, up $7.10 on short covering in front of the weekend and the Jewish Rosh Hashanah holiday. Traders are watching the important technical resistance level of $600, which if breached, is expect gold to carry further. If gold breaks through $600 but the dollar rallies, gold won’t go far before settling back. But the dollar will weaken tied exclusively to a weakening U.S. economy and the potential for interest rate “backtracking” by the Fed. My favorite quote of “dollar up, gold down; dollar down, gold up,” still applies. Chart the U.S. interest rate, then the U.S. dollar and then dollar denominated commodities. Another of my favorites is “the tail does not wag the dog.”
December silver closed at $11.31 per ounce, up 6.5¢. October platinum gained $8.60 to $1,148.10 per ounce, while December palladium gained $12.65 per ounce to close at $321.65. We would trade metals based on the price movement of the U.S. dollar. Otherwise stay out.
Grains and oilseeds
December corn closed at $2.55-1/4 per bushel, down 2¢ on profit taking after the strong rally on Thursday. There was light fund buying, but trade sources indicated that Informa Economics, a private analytical firm, predicted the 2007 U.S. corn acreage at 83.1 million acres, against the USDA estimate in June of 79.366 million acres for the 2006 U.S. corn crop. We prefer the sidelines.
December wheat closed at $4.19 per bushel, down 2-1/2¢ on profit taking in front of the weekend. An improvement in weather in Australia and Argentina was also a factor in the retracement. We prefer the sidelines here as well. November soybeans closed at $5.49-1/4 per bushel, down 8-3/4¢ with December soybean meal losing $2.80 per ton to $165.30 and December bean oil losing 48 points to 24.22¢ per pound. Profit taking in front of the weekend after Thursday’s gains ran into trailing sell stops and that exacerbated the decline. We still like beans and would add to longs on any further selling. Beneficial harvesting weather forecasted for next week was also a factor in the selling.
Coffee, cocoa and sugar
December coffee closed at $1.0445 per pound, up 90 points with March gaining 90 points as well to close at $1.0830. Early buying met with heavy origin selling and prices fell back from those early gains. We like the sidelines. December cocoa closed at $1,499 per tonne, down $30 after trading in a range between $1,485 and $1,534. This kind of price action is not conducive to trading or taking on positions. Stay out. October sugar closed at 10.46¢ per pound, down 1.1¢ with March losing 97 points to 11.38¢. After opening lower, the October contract broke technical support and traded down to 10.40 per pound, the lowest level in nearly a year. We could see some recovery early in the week, but with heavy fund and spec long liquidation on Friday we could see some carryover selling on Monday. Stay out.
Cotton
December cotton closed at 52.10¢ per pound, up 12 points and traded in a range between 51.50¢ and 52.39¢. We are not in favor of trading markets with wide price swings. China’s cotton production was reportedly expected to reach 6.3 million metric tonnes in 2006 according to the National Development and Reform Commission Friday, against 5.7 million tons in 2005 according to the National Statistics Bureau. We would stay out for now but would take another look if the December contract reaches our projected 50¢ level, or if March reaches 52¢ or 53¢.
