Nov. 6, 2006 - Friday’s economic and labor data should be called the Harry Houdini Report. The way the unemployment rate fell to 4.4% and the prior jobs data were revised upward was absolutely magical. A healthy economy is the one thing that could possibly offset the electorate’s displeasure over the Iraqi war; and lo and behold, on Friday, it showed up. Of course it’s not because the administration is on the ropes and could lose control of the House of Representatives and the Senate to the Democrats, but I would expect substantial revisions in the next report, and by then, mid-term elections will be a memory. I profess to be a conservative and I regret the possibility that the data was manipulated, and if that proves to be the case, I may have to rethink my political affiliation and become an independent.
Interest rates
Treasuries fell sharply after the “glowing” economic report on labor, with the December treasury bond losing 106 to 111 20/32nds, the December Eurodollar losing 3 points to 9461 but the June 07 Eurodollar losing 17 points to 9482.5. The strength in the jobs data at 4.4% unemployment was a surprise and prompted selling in treasuries. The October non farm payroll gain of 92,000 jobs was less than the 125,000 expected, after the smaller than expected September increase of 51,000 was revised upward to 148,000. A revision of the August data from 188,000 jobs to 230,000 also exacerbated the selling in treasuries and equities. These surprise upward revisions of payrolls tied to the decline in the unemployment rate to 4.4% led investors to believe that there would be no cut in the Fed Funds rate as earlier expected by the prior negative economic data and led some to believe a further rate increase might me in order. That played havoc with the treasury and equity markets as well as other interest rate related commodities such as the currency market. We continue to believe that the U.S. economy is faltering and that the jobs data anomaly will soon be corrected. Stay long the bonds and Eurodollars and use any further declines to add to long positions of either futures or call options.
Currencies
The December U.S. Dollar Index traded higher after the jobs data closing at 8554, up 36 points against declines in the December euro of 65 points to 12745, the December Swiss franc 59 points to 8011, and the December Japanese yen 63 points to 8525. The gain in the U.S. dollar was the highest in two weeks against the basket of major currencies. We continue to associate the dollar with the perception of changes in the U.S. interest rate. We like the Swiss franc from the long side on any changes in that perception of rates and on any change in the U.S. economic data, which we fully expect will be negative.
Stock indexes
The Dow Jones industrials closed at 11,986.04, down 32.50 adding to its longest losing streak in more than a year after the jobs data report showed a strong economy and concerns that the Fed may resume its rate increases. The S&P 500 lost 3.04 to 1,364.30 while the tech heavy Nasdaq lost 3.23 to 2,330.79. For the week, the Dow lost 0.9%, the S&P 500 almost 1%, and the Nasdaq lost 0.8%. We continue to believe the U.S. economy is faltering and that could mean continued losses in equities. Implement those hedging strategies before it is too late.
Energies
December crude oil closed at $59.14 per barrel, up $1.26 after warnings by the U.S. that militant groups threatened attacks against Nigerian oil facilities. In addition, British Petroleum said it received a bomb threat against its Indiana refinery, the fifth largest in the U.S. December heating oil gained 3.78¢ per gallon to close at $1.6775 and December unleaded gasoline gained 5.38¢ to close at $1.5069 per gallon. December natural gas gained 7¢ to $7.884. We have been warning that prices fluctuate on any news of either surpluses or threats and would avoid the energy markets altogether.
Copper
December copper closed at $3.3225 per pound, up 3.10¢ on short covering in front of the weekend. The U.S. employment data provided some impetus to the market as it pointed to a strong economy, which would favor the demand for copper. Of course, we do not believe that to be the case and would use any rally as a selling opportunity. Some traders voiced concerns relating to the decline in Chinese inventories. However, increases in the U.S. Comex warehouses of 72 tons to 23,174 tons and the London Metals Exchange warehouse increase of 1,925 tonnes to 141,400 metric tonnes, offsets that theory. Stay short or add to put positions.
Precious Metals
December gold closed at $629.20 per ounce, up $1.40 after touching a new eight week high of $631.30 intraday. December silver closed at $12.635 per ounce, up 1.5¢ but also down from an eight-week high at $12.68. The rally in metals was tied, to some extent, to the strength in Platinum and not to the dollar, which would have prompted a decline in dollar denominated metals. January platinum gained $45.20 per ounce to close at $1,209.40 tied to rumors of the creation of an exchanged traded fund. That would allow more small investors to participate in this market and add new buyers. December palladium gained $8.35 per ounce to close at $335.10 in conjunction with the buying in the other metals. We would not participate in the current “frenzy” even as the buying may be carried over to Monday’s session. The Securities and Exchange Commission could find no evidence of a filing for a Platinum Exchange traded fund. I would once again suggest avoiding getting caught up in the buying frenzy. If the dollar continues higher early in the week, look for a sell-off in metals. I prefer the sidelines.
Grains and oilseeds
December corn closed at $3.42 ¼ per bushel, down 2 ½¢ in quiet trading after Thursdays record volume. Trading appeared to be lacklustre in front of the weekend with profit taking and switching the main feature. We would stand aside but the trend is clearly bullish for grains. December wheat closed at $4.92 ½ per bushel, up one penny on pre-weekend position squaring and no fresh fundamentals. We would avoid wheat, which has been following the strength in corn and soybeans. November soybeans closed at $6.49, up ¾¢ but January gained 1 ½¢ to close at $6.62 ¾. December beanmeal gained 20¢ to close at $195.50 per ton and December bean oil gained 18 points to 27.68c per pound. While the activity was quiet, scale down buying was evident and the trend followers are buying the dips. Technicals are bullish as well as fundamentals such as the price relationship between soybeans and corn. Stay long the beans and buy the dips.
Coffee, Cocoa and Sugar
December coffee closed at $1.1245 per pound, up 1.9¢ on fund buying pushing prices to a two-month high. Buy stops were touched off but origins sold into the rally. We prefer the sidelines but technicians look for a move basis the December to the $1.25 area. On Nov. 20, we will start to see notices against the December contract so the action will move to the March contract, which also gained 1.9¢ to close at $1.1655. December cocoa closed at $1,484 per tonne, down $6 and continues in a range, which keeps it on our no-interest list. Stay out unless fundamentals dictate. Technicals will follow. March sugar closed at 11.31¢ per pound, down 22 points in late trading on producer and trade selling and local and spec long liquidation. The market continues to fail to garner support and is also on our no-interest list.
Cotton
December cotton closed at 49.21¢ per pound, up 3 points with March gaining 8 little points to close at 53.35¢. Light volume and a lack of fresh fundamentals keeps us on the sidelines but a breakout through 51¢ would put us in the bull camp basis the December contract. March needs a move through 57.58 for me to turn positive. Look for switching over the next couple of weeks as positions roll from December to March and forward. Otherwise stay out, there are better opportunities.
John L. Caiazzo
(951) 693-9600
(951) 693-3170 fax
futures@acuvest.com
www.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. His opinions are his own and not of the Futures Commission Merchant to whom he introduces his clients.
