Oct. 30, 2006 - December corn closed at $3.32-1/2 per bushel, up 5-1/2¢, just off new life of contract highs reached during the session.
The so called “irrational exuberance” phrase coined by the previous Federal Reserve Board Chairman Alan Greenspan has finally materialized in the form of “throwing money” at some of the markets we follow. I refer to the equity markets, of course, where the technicians have been having a field day generating enough sideline money to keep the markets on track for continually making new highs. Unfortunately, no attention is being paid to the increasing number of unemployed consumers, now consistently around 300,000 weekly. The on-again, off-again expectation that the Fed will lower rates in the near future to stem a possible recession has been fuelling the exuberance towards the equity markets without consideration to the rumblings in the corporate boardrooms of earnings warnings.
Grains and oilseeds
December corn closed at $3.32-1/2 per bushel, but we prefer the sidelines in corn. Export sales were notable and buying also was tied to the strength in soybeans, which has been our favorite for some time in the group. December wheat closed at $5.08-1/2 per bushel, up 1¢ in choppy trading with pre weekend profit taking as the main feature. Australian production continues to be a supportive factor for U.S. wheat but we prefer the sidelines at this time. Other countries may be able to make up some of the shortfall in Australian production. January soybeans closed at $6.49 per bushel, up 7-1/4¢ tied to increasingly strong technicals and a weak U.S. dollar, which makes our products less expensive to buyers. December soybean meal closed at $187.70 per ton, up $1.60 with December soy oil gaining 46 points to 27.50¢ per pound. We would add to longs in beans on any dip. We could see the beginning of a major up move for soybeans.
Interest rates
December Treasury bonds closed at 111-27, up 16/32, after the report that the U.S. third quarter GDP was the weakest in more than three years. Investors moved into Treasuries as a possible “flight to safety” as the equity markets suffered losses across the board Friday. A major brokerage firm urged its clients to get out of some semiconductor company stocks including Intel Corp. We continue to favor the long side of treasuries on expectation that the Fed will look to lower rates to curb the threat of recession. The only caveat is their overly enthusiastic concern about possible inflation. This coming week will provide more information with the release of the September personal income and consumption data. Also, the National Association of Purchasing Management Chicago’s index of Midwest business activity will be released Tuesday along with the Conference Board consumer confidence index. Wednesday the Institute for Supply Management’s manufacturing survey will be released and on Friday the ISM’s survey on the services, or non manufacturing sector, comes out. Also on Friday, the U.S. Labor Department will report on non farm payrolls. Most traders and economists look to this figure for signs of whether or not the economy is healthy. I don’t see the data this coming week showing anything but a declining U.S. economy. Avoiding recession is more important than fighting inflation at this time. I hope the Fed agrees. Stay long the bonds and Eurodollars.
Stock Indexes
The “bubble” is about to burst. The Dow Jones Industrials lost 73.40 points on Friday to close at 12,090.26, just slightly above the so called “magic” 12,000 number. The U.S. GDP for the third quarter was the weakest in more than three years and prompted a flight to the sidelines in many of the recent high flyers. Goldman Sachs, a major U.S. brokerage firm, urged investors to sell some of their Intel Corp. holdings along with the stocks of other semiconductor companies. Among the big losers were Caterpillar and Wal-Mart. The S&P 500 lost 11.74 points to 1,377.34 and the Nasdaq lost 28.48 points to close at 2,350.62. For the week the three major indices still managed slight gains with the Dow up 0.7%, the S&P 500 0.6% and the Nasdaq up 0.4%. We in turn, continue to urge the implementation of hedging strategies for large portfolios before it becomes irrelevant. The black hole I have been warning about for some time may be fast approaching.
Currencies
The December U.S. Dollar Index closed at 8534, down 37 points as the U.S. third quarter GDP data indicated a slowing economy. The December euro gained 43 points to close at 12768, the December Swiss franc was up 32 points to 8049 and the December Japanese yen gained 56 points to 8562. We continue to favor the Swiss franc.
Energies
The December crude oil contract on the New York Mercantile Exchange closed at $60.75 per barrel, up 39¢ with the December heating oil contract losing 15 points to $1.7385 per gallon, but the December unleaded gasoline managed a gain of 1.69¢ per gallon to $1.5581. With the continuing confusion relating to OPEC production cuts and the rhetoric emanating from Iran and Venezuela, it’s prudent to avoid these markets.
Copper
December copper closed at $3.4050 per pound, up a half a penny, and remains range bound. The small gain was no doubt tied to the weak U.S. dollar, in which it is denominated. The fundamentals remain confusing as relates to supply and demand. Strength in London for zinc and nickel contributed to some of the recent strength in copper, but we feel the demand for copper will deteriorate as U.S. housing and auto sales decline. Stay short.
Precious metals
December gold closed at $601 per ounce, up $1.20 tied to the weak U.S. dollar. A weak U.S. economy is negative for the U.S. currency as it portends a lower U.S. interest rate and less attractive U.S. investment. There are times when both move in tandem but that usually is caused by geopolitical or economic developments in other countries. Otherwise, keep in mind: dollar up, gold down; dollar down, gold up. We could see new demand for gold and silver if in fact the dollar starts to decline sharply based on what we expect will be lower U.S. interest rates. December silver closed at $12.08 per ounce, down 16¢. January platinum lost $3.60 per ounce to close at $1,079.70 and December palladium lost $3.50 per ounce to close at $323.00. We regard the metals as a trading affair and would avoid the group for our clients.
Coffee, cocoa and sugar
December coffee closed at $1.08 per pound, up 40 points with March gaining 45 points to close at $1.12. Short covering by speculators and locals in front of the weekend was the main feature but origins sold into the rally. We would stand aside for now. December cocoa closed at $1,470 per tonne, down $19 on speculator profit taking after Thursday’s gains. March sugar closed at 11.79¢ per pound. We prefer the sidelines as we await results of the Brazilian election, which at this writing was not yet available. President Lula da Silva is said to have a huge lead over his opponent. Administration officials in Brazil are expected to announce whether the 20% ethanol mix in gasoline with be increased to 25%. We would avoid sugar for now.
Cotton
December cotton closed at 50.79¢ per pound on Friday, up 19 points and as we suggested last week, any break through the 51¢ level would put us in the bullish camp. Fundamentals, however, are lacking so we would await some news before committing to the long side. The technicians may have jumped the gun with their buying on Friday.
