While it is anyone’s guess as to how the Fed will react to economic data in the next few weeks, my guess is, regardless of the euphoria from lower gasoline and heating oil prices, the data will show the U.S. economic condition is weakening and that the economy is not yet feeling the last Fed rate increase. I am absolutely convinced that the Fed cannot raise rates; a pause, or even a quarter-point cutback, would be a feeble attempt to halt the deterioration of the U.S. industrial machine. We doubt the Fed’s willingness to depart from the policies set forth by the previous Chairman.
Stock indexes: After trading briefly at 11,741.99, short of the all time high of 11,750.28 posted on Jan. 14 of 2000, the Dow lost 39.38 points to close at 11,679.07. The S&P 500 closed at 1,335.85, down 3.30 and the Nasdaq lost 11.59 points to close at 2,258.43. After four days of rallies, traders took profits in front of the weekend. On Friday, the National Association of Purchasing Managements Chicago reported business activity rose in September. The University of Michigan's final reading on consumer sentiment in September also rose, tied to lower energy prices. The U.S. economy is faltering, and while we expect the Fed will lower rates in the near term and prompt further short-term rallies, the equity markets are overbought and will soon fill the black hole developing under the market. The continuing layoffs in the industrial sector shows that overall sales will continue to decline and we suggest implementing hedging strategies for large equity positions.
Interest rates: December Treasury bonds closed at 11213 on Friday, unchanged. June Eurodollars closed at 949850, down 1 point and the December 10-year note closed at 10802, down 3 ticks. Consumer confidence was up, but the Philadelphia area manufacturing index fell for the first time in more than three years. With the current decline in auto and home sales, we continue to look for the Fed to lower rates in the near term. Stay with the bonds and Eurodollars.
Currencies: The U.S. dollar index closed at 8568 on Friday, up 26 points against losses in the Euro of 27 points to 12739, the Swiss franc 30 points to 8060 and the yen 21 points to 8559. The stronger than expected economic data gave traders ideas that the U.S. Fed will not lower rates. Traders who expected, as I still do, that the declines in housing and auto sales in the U. S. would prompt a slowing U.S. economy were caught short the dollar and scramble to cover in front of the weekend. I would look for a reversal early in the week and favor the Swiss franc from here.
Energies: November crude oil closed at $62.91 per barrel, up 15¢ as reports of production cutbacks by Nigeria and Venezuela circulated. As I mentioned last week, President Chavez of Venezuela is lined up Iran and Cuba and would like to bring the U.S. to its knees. Despite the U.S. industrial machine slowing down, I do not think he will accomplish his stated mission. After recent tirade at the United Nations, I would not be surprised to hear he “died in his sleep from normal causes.” Unless coerced, the people of Venezuela cannot possibly support that madman. Stay out of energy products until after his funeral.
Copper: December copper closed at $3.4605 per pound, up 3.25¢ on end-of-month and quarter-book squaring. The Chinese holiday this coming week should prompt quiet trading, but the news that Cominco’s Highland Valley Copper mine was closing after the miners union served the company with a strike notice. We continue to favor the short side of copper based solely on our expectation that demand will decline with the declines in housing and autos in the U.S. Stay short or buy puts on any further rallies.
Precious metals: December gold closed at $604.20 per ounce, down $6.70 against the gains in the U.S. dollar. December silver closed at $11.54 per ounce, down 19.5¢ following gold. October platinum lost $4.80 to close at $1,141.20 per ounce with January losing $9.80 to $1,150.20. December palladium lost $7.70 to close at $316.40 per ounce. Stay out of metals.
Grains and oilseeds: December corn closed at $2.62 ½ per bushel, down 1 ¾¢ on profit taking for the end of the month and quarter. Funds like to close the books on potentially vulnerable positions at the end of a quarter. On Friday, the USDA reported that fourth quarter corn stocks were slightly above the average analyst estimate, and traders and funds took off some longs. Stay out of corn for now. December wheat closed at $4.43 per bushel, up 2 ½¢ after early selling pressure from a slightly bearish crop report. Funds did some end-of-quarter “window dressing” and brought prices up from the lows after a week that had wheat gaining 24¢ per bushel. We prefer the sidelines. November soybeans closed at $5.47 ½, down 5 ¼¢ and remains in a range. December soybean meal closed at $163.50 per ton, up 30¢ with December bean oil losing 13 points to close at 24.24¢ per pound. Spec selling in the complex after failing to capitalize on a stronger opening tied to the latest revision downward to the 2005 soybean crop. A possible record setting 2006 however prompted the selling when beans failed to break through interim resistance. We favor the long side of beans.
Coffee, cocoa and sugar: December coffee closed at $1.0765 per pound, up 15 points on fund and speculator buying. Short covering in front of the weekend and for the end of the quarter the main feature. While some concern developed over the typhoon heading for Vietnam, it is estimated that Vietnam’s harvest may be much larger than last year’s drought reduced crop. World coffee stocks are at the lowest ever, around 35-million bags, said the International Coffee Organization Director (ICO) on Friday at the ICO meeting in London. Any sign of a crop problem could prompt heavy short covering. We like coffee from here basis the March or May contracts. December cocoa closed at $1,472 per tonne, up $5 on end-of-month, and end-of-quarter short covering. The gains came even as the U.S. dollar rallied and we could see further gains early in the new week. We still prefer the sidelines. March sugar closed at 11.75¢ per pound, up 20 points on trade house buying after early selling. Later in the session, some Brazilian producer selling stemmed the rally and prices closed with moderate gains. We may see some buying early in the week as longs liquidated for the end of the month and quarter are re-established. We like the long side from here but with trailing stops basis the March contract.
Cotton: December cotton closed at 50.45¢ per pound, down 96 points but on heavy spec selling that ran into commission house sell stops. The market is now within our predetermined buying range, but I prefer to wait until after Monday mid-day to see if new buying comes in.
John L. Caiazzo
futures@acuvest.com
(951) 693-9600
(951) 693-3170 faxwww.acuvest.com
Information provided is from sources deemed reliable but 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 experience in investments. His opinions are his own and not those of the Futures Commission Merchant to whom he introduces his clients.
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