June gold closed at $663.50 per ounce, down $7.00 after the unexpected rise in U.S. existing home sales. The strength in the U.S. dollar was a factor in the decline because commodities denominated in dollars usually trade opposite from the dollar. Also, there’s a lot of activity moving grains.
In the period from Feb. 27, 2007 through March 5, 2007 the market value of U.S. stocks lost $900 billion and recovered almost 80% of the loss during the past week. Unfortunately, the losers of the bulk of the capital were probably not the winners of the past week. As it were, the winners were most probably those who were on the sidelines with money to invest, and the losers, unfortunately, are usually not able to recover because the bulk of their capital investment was probably lost and they could not continue to trade.
The Federal Reserve left the U.S. interest rate at 5.25% and left out its previous indication of “additional firming,” and that prompted the “new investors,” — the ones with money — to take advantage of the oversold condition from the previous period. We remain skeptical as to the “economic strength” of the U.S. economy, and the dovish statement by the Fed reinforces our opinion that we are in the throes of a recessionary trend.
Precious metals
June gold closed at $663.50 per ounce, down $7.00 after the unexpected rise in U.S. existing home sales. We prefer the sidelines due to the wide price swings prompted by changes in the U.S. economy, interest rates and currency ramifications. May silver lost 25.3¢ per ounce to $13.227 while July platinum lost $7.10 to $1242.80, but June palladium gained $1.75 to $359.50 per ounce. We prefer the sidelines.
Grains and oilseeds
May corn closed at $4.03-1/4 per bushel, down 6-1/4¢ tied to bear market spreading pressure on old crop contracts. July lost 5-3/4¢ to close at $4.15-1/4, but forward December gained 1/4¢ to close at $4.09-3/4. Concern that old crop ending stocks will be larger than expected and USDA reports on new crop acreage were viewed as supportive. We like the sidelines in corn. Indications that the use of corn for ethanol production may not be an economic viable alternative to fossil fuels could weigh on prices once acreage is transferred from soybeans and cotton. May wheat closed at $4.61-1/2 per bushel, down 5-1/4¢ in thin and choppy trading with fund selling and a lack of new fundamentals being the main feature. Stay out.
May soybeans closed at $7.69-1/2 per bushel, down 2-1/4¢ on profit-taking after early week gains and pre-weekend position squaring. The DTN Meteorlogix Weather Service forecast for a wet weekend is good for soil but in the eastern Midwest the continuing wetness could delay field work and may cause local flooding. Other areas such as the Southeast and Delta regions remain warm and dry and could increase planting activity. However, with acreage transferred to corn, we continue to like soybeans and would add to longs on any further setbacks.
Coffee, cocoa and sugar
May coffee closed at $1.1335 per pound, up 1.6¢ after reports that Brazil decided to offer growers option puts to help them hold back beans once the harvest starts. The cyclical Brazilian harvest is smaller and runs from June to September. Technicals also favored higher prices. We are now in the bull camp in coffee and could see a new “run for the roses” to $1.50 basis the nearby. Get long but use stops.
May cocoa closed at $1,920 per metric tonne, up $19 and has now also led us to the bull camp having broken out. Technicals also point to higher prices now, and lower expectations for midcrop cocoa production from Ivory Coast and Ghana could impact supplies. Reports the French military, which had been a peacekeeping force in Ivory Coast after the recent accord between rebels and the government, will be reduced could prompt concern over the fragile peace. You may get long cocoa but use stops.
May sugar closed at 10.20¢ per pound, down 2 points and remains on our “no interest” list. Recent reports that Brazil uses sugar to produce ethanol failed to have any effect on prices.
Interest rates
June Treasury bonds closed at 111-27, down 7/32 after a stronger than expected home sales report. The 10-year note lost 6/32 while yields rose to 4.613% from 4.589% on Thursday. The supposedly good news on existing home sales reported by the National Association of Realtors could easily reflect the foreclosures dominating the housing scene and we would prefer to see the report on new home sales, which we fully expect will show continued declines. Stay with the bonds.
Stock indexes
The Dow Industrial Average closed at 12,481.01, up 19.87 points and was up 3% for the week, and is +0.1% higher for the year. The weekly performance of the Dow is the best on a percentage basis since July 2006. The S&P 500 closed at 1,436.11 on Friday, up 1.57 and now up 1.3% for the year. The Nasdaq Composite lost 2.81 points to close at 2,448.93 but was up 3.2% for the week and 1.4% for the year. The euphoric feeling after the dovish Fed statement linked to the holding of rates at 5.25% was the main feature affecting the various markets. We continue to expect another decline in equities once the euphoria of the Fed’s statement is related to the fact that even the Fed is uncomfortable with the economic situation in the United States. Implement hedging strategies once again.
Currencies
The June U.S. Dollar Index closed at 8300, up 19 points on Friday tied to the better than expected increase in U.S. existing home sales. That would portend rates remaining high and the continued attraction to the U.S. currency. The June euro lost 43 points to 13334; the Swiss franc lost 29 points to 8266; and the June British pound lost 36 points to 19607. The June Japanese yen closed at 8563, up 7 points. Japanese land prices gained for the first time in 16 years, which led investors to speculate that the Japanese economy is improving. The report that 15 British sailors were kidnapped by the Iranian navy also was supportive of the U.S. currency. We are waiting to hear what Britain will do to obtain their release. Iran, in our opinion, has continued to deteriorate under the fanatical religious regime since the days of the Shah and their current direction related to nuclear ambition is a roadmap to disaster. They are apparently numb to any sanctions and there may be only one other way to deal with the religious extremists that obviously run the country with the president as their puppet; not a popular alternative.
Energies
May crude oil closed at $62.28 per barrel, up 59¢ after the reported seizure of 15 British sailors by Iran. The Iranians claim the sailors were in Iranian waters when it would appear from other reports that the sailors were making a routine inspection of a ship in Iraqi waters when attacked.
Copper
May copper closed at $3.0690 per pound, down 40 points after trading at its highest level in more than three months. Buying dried up late in the session and profit-taking took over in front of the weekend. A large drawdown of stocks in London warehouses tied to strong Chinese demand was the main feature dominating the session. Stockpiles fell 4,125 tonnes to 183,650 tonnes. Comex stocks were reportedly down 64 short tons to 36,501 tons. The once-a-week data from Shangai showed an increase of 143 metric tonnes to 56,252 tons. We continue to expect the potential gains from Chinese imports to be partially, if not totally, offset by the lack of demand from the U.S. housing and auto industries. We suggest small put positions in copper.
Cotton
May cotton closed at 53.27¢ per pound, up 5 points, mostly tied to light speculator buying with spread activity accounting for most of the volume. While cotton acreage may be transferred to corn, we would await the USDA scheduled report of Prospective Plantings due next Friday before getting involved.
