March corn closed limit up 20¢ per bushel at $3.96-1/2 after the USDA reports showed lower than expected 2006 production and lower ending stocks.
The big news on Friday was in the U.S. grain market and the weather gripping much of the U.S. during the last week. We also heard from the government on retail sales, which surprised many traders and analysts. With the continuing layoffs, weak housing industry and auto sales and the first-time unemployment rate still hovering around 300,000, it seems highly suspect that sales figures could continue to show gains. We await the revisions next reporting period.
Grains and oilseeds
March corn closed limit up 20¢ per bushel at $3.96-1/2 due to reports showing lower than expected 2006 production. Demand for corn due to drought conditions in the U.S. corn belt, along with increased demand for ethanol, prompted short covering and new buying. Unfortunately, shorts got caught in a limit move and were unable to cover their short positions. Approximately 25,000 contracts to buy on the Chicago Board of Trade (CBOT) and 67,000 contracts to buy on e-cbot were left unfilled indicating a sharply higher opening on Tuesday. No point in trying to get in now because this kind of rally will no doubt carry to the wheat and soybean pits. March wheat closed at $4.79-1/2 per bushel, up 23¢. The limit in wheat is 30¢ and the market failed to achieve limit-up. Traders caught short in corn were led to the other pits on the basis they also would follow corn, and the losses in the short-corn positions could be somewhat offset by the gains in the other pits. We continue to prefer soybeans.
March soybeans closed at $7.16-1/2 per bushel, up 42-1/4¢, which did not quite hit its upside limit of 50¢. But with the demand for corn, there is not much doubt that farmers will plant corn on soybean acreage and that could create shortages in soybeans. Also, the USDA cut U.S. soybean production and that also factored into the heavy buying in soybeans. We continue to like soybeans from here.
Interest rates
March Treasury bonds closed at 110-26, down 12/32 after the December retail sales showed the biggest gain since July leaving many of us wondering how this could be. Retail sales, excluding autos, also posted better gains that analysts and economists had expected rising one percentage point. The concern is simply that good news is bad news for Treasuries because it implies that the Federal Reserve would not cut rates and even take another look at another increase. I do not think it is likely or wise because the number of consumers is dwindling each day according to the weekly employment number on first-time unemployed. I would watch for revisions before assuming what the Fed might or might not do.
Stock indexes
The Dow Jones industrials closed up 41.10 points to 12,556.08, which was another record high close — its 24th since October. The S&P 500 closed at 1,430.73, up 6.91 points and the tech heavy Nasdaq gained 17.97 points to close at 2,502.82, which was about halfway back since its all-time high in 2001. Higher oil prices along with the gain in December retail sales indicated continued economic growth. We would avoid the exuberance because recent corporate earnings figures have been tied to cutting expenses, i.e. employees rather than sales growth. Implementation of hedging strategies in large equity portfolios remains warranted.
Currencies
The March U.S. Dollar Index closed at 8482, down 27 points on preholiday-weekend profit taking after recent gains. The early strength was tied to the positive reaction to the December U.S. retail sales figures, but profit taking set in later in the session. The March Swiss franc closed at 8054, up six ticks with the March yen gaining one point to 8378. The March British pound closed at 19568 up 122 points and the March euro gained 32 points to close at 12960. Interest rates must come down to avoid a recession and on that basis would either short the dollar or add to long positions in the Swiss franc.
Energies
February crude oil closed at $52.99 per barrel, up $1.11 on short covering after hitting 19-month lows earlier in the week. February heating oil gained 2.32¢ to $1.5036 per gallon and February unleaded gasoline gained 4.15¢ to $1.4320 per gallon. The recent warm weather was replaced by extreme cold and that condition is expected to continue. February natural gas gained 30.9¢ per mBtu to $6.6010 and we could see continue gains due to the change in weather. I would continue to avoid the complex.
Copper
March copper closed at $2.6030 per pound down 5.6¢ on continued selling pressure from gains in various warehouses around the world. Demand has declined with the slackening demand from the housing and auto industries. Add to put positions on any rally attempt. My goal for copper prices is to eventually go below $2.00.
Precious metals
February gold closed at $626.90 per ounce, up $13 on short covering, which then ran into commission house buy stops. March silver closed at $12.88 per ounce, up 42¢. The selling in the dollar was factor in the buying on Friday. Funds were also seen as buyers on the rally. Funds are technically driven and in markets with wide price swings, they tend to “zig” when they should “zag.” That makes for a whipsaw equity. April platinum closed at $1,152.10 per ounce, up $7.30, and March palladium gained $2.10 to $334.95 per ounce. We once again suggest charting the dollar or interest rates rather than the metals market.
Coffee, cocoa and sugar
March coffee closed at $1.2030 per pound, down 35 points and did not participate in the rally in the other food pits or against the weaker U.S. dollar. Stand aside. March cocoa closed at $1,631 per ton, up $3, which was mostly tied to the weak dollar. March sugar closed at 10.93¢ per pound, down 9 points and remains on our “no interest” list. On Friday the USDA reduced its U.S. 2006-07 sugar beet and cane crop and reduced its projected ending stocks, but the information failed to garner interest in the market. Stay out.
Cotton
March cotton closed at 54.70¢ per pound, up 66 points with May gaining 78 points to 55.56¢. Spec and fund buying along with commercials provided the buying and could now prompt additional buying by technicians. We could see further gains early in the week after the Monday holiday in honor of Dr. Martin Luther King Jr. Any buying should be accompanied by sell stops.
