More and more information supporting our claim that the U.S. is heading for, if not already in, recession emerged this past week. As mentioned in previous commentaries, as the consumer of the World, if the United States is in recession, it will no doubt spread internationally. U.S. home sales hit a ten year low and what is overlooked in the media is the number of industries and jobs tied to the housing industry. When home prices decline to a point where the mortgage owed is higher than the value of the home, the tendency is to buy a less expensive, albeit similar home, get a lower mortgage, and walk away from the higher monthly payment home. That assumes credit worthiness of course. The overlooked condition is simply that the Federal Government cannot “fix” the problem because those without jobs, and their ranks are growing, cannot be helped since the Government cannot buy their home for them.
Those with jobs, the lucky ones, can be helped by a moratorium on rate increases. That is a simplistic view of the current situation in housing. More and more homes are going into default, which will no doubt lead to foreclosure. That adds to inventories where homebuilders are reluctant to build leaving more and more people tied to the construction industry out of work. As mentioned before, an “unemployed consumer does not consume” anything that is not an absolute necessity, such as food and energy. And prices for basic staples have increased thanks to the weak dollar and burgeoning demand tied to bio-diesel fuels, ethanol and strong third world, Far East, and India growing demand. There are world wide shortages of wheat for instance and commodities are simply guided by supply/demand. The 350,000 plus first time unemployed are not 350,000 out of the market consumers. Each of those unemployed has a family that will also not consume, and the producers of those products that will not be “consumed” will be laying off workers as well. The downward spiral is no here near being complete, and I fear the worst is yet to come, not a mid 2008 recovery some pundits are declaring.
Interest Rates
Bad news for the U.S. economy usually leads investors to the relative safety of Treasury instruments prompting price gains and yield declines. March Treasury bonds closed at 11922, up 1 31/32nds and in line with our recent recommendations. March Eurodollars gained 100 points to close at 971900 and March Ten year notes gained 1 17.5 points to close at 118220. The bad news included an $11 billion charge at American International Group, the drop in profits at Dell Computer, and an ongoing credit crisis leading Union Bank of Switzerland to seek $12 billion in new capital. The weak U.S. economic data led to more speculation that the U.S. was headed for recession and that prompted a flight from equity to the relatively safe haven of U.S. Treasuries. Foreigners were among the holders of U.S. debt in growing numbers. The Treasury International Capital annual report showed that foreign holdings of U.S. Treasuries in December were $400 million more than previously reported. Our recent recommendation of buying Treasuries on any dips holds and we could see additional buying should the U.S. equity markets continue their recent decline.
Stock IndexesIn the vernacular, “It has hit the fan”. The Dow Jones Industrials lost 315.79 points on Friday, closing at 12,266.39 with the S&P 500 losing 37.05 points to close at 1,330.63 and the Nasdaq lost 60.09 points to close at 2,271.48. This was a loss for the month of more than 2% and was the fourth straight monthly loss. A weakening U.S. economy and continued losses at financial institutions over liberal lending policies has spread to the international financial community and on the basis of our observations as stated in the overview, there is no “silver lining” in the near future.
Consumer confidence, which is an indicator of economic growth, was the lowest since 1992. J.P. Morgan Chase reported first quarter losses could reach $450 million tied to home equity and bad debts could double from that level by the fourth quarter. For the month the Dow Jones industrials lost fully 3% with the S&P 500 losing 3.5% totalling around 15% since October of 2007. The Nasdaq posted a loss for the month of 5%. Homebuilders as well as financial institutions were the heavy losers but losses carried into the broad economy. On Friday the National Association of Purchasing Managers, Chicago, reported that U.S. Midwest business activity contracted in February. The University of Michigan Survey of Consumers reported that consumer sentiment declined to a 16 year low in February, another indication of an economic recession. The so called “experts” had predicted a limited impact from the sub-prime mortgage problems on the general economy but we have been warning that there is no way to keep the losses segregated due to the securitization of the mortgage paper. We continued to warn that the worst is not over and strategic hedges should be implemented.
Currencies
The U.S. dollar declined to a record low against the Euro and the basket of currencies in the index for a fourth day in a row as U.S. economic data has been weak, which is expected to lead to another round of aggressive rate cuts by the Federal Reserve. Lower U.S. interest rates detract from dollar investment and could lead to further steep dollar declines. The only positive of course, is the demand for U.S. goods and services, but the negative is higher food and energy prices and will lead to inflationary pressure. We prefer the sidelines with our usual exception, the long Swiss Franc.
EnergiesAfter trading as high as $103.05 on Friday, April crude sold off on profit taking and on reports that Turkey withdrew its troops from Northern Iraq, the major oil production area of Iraq. Earlier Venezuelan President Hugo Chavez predicted oil prices would continue to rise and prices rallied. OPEC will meet next week and will be under pressure from consuming nations to increase output to help reduce prices but the main impact of course has been based on the weakening U.S. dollar. We once again prefer the sidelines since there are too many obstacles to a proper assessment of supply and demand. Stay out even though we fully expect prices, at some point in time, to decline to the $50 to $60 level.
CopperMay copper closed at $3.8550 per pound, down 2.3c on profit taking and tied to a weakening U.S. economy. Copper prices usually trade inversely to the U.S. dollar, in which it is denominated, but recent declines reported at LME warehouses prompted the buying and supply disruptions after recent stores in China also provided the strength in copper. We remain firm in our conviction that declining world economies will lead to lower demand and increased supplies. That, of course, presupposes no labor strife in producing countries. Stay with put positions.
Precious metalsAfter trading at a new high above $975 basis spot gold on Friday, futures prices sold off slightly on profit taking. April gold traded as high as $978.50 and closed at $975.00 gaining $7.50 on Friday. May silver gained 20.5¢ per ounce at $19.915 while April platinum gained $25.90 to close at $2,180.70 per ounce tied to the power crisis in South Africa. June palladium lost $13.60 to close at $576.65 per ounce. The impact on dollar denominated commodities from the weakening U.S. dollar and lower interest rates along with the usual impact from inflation prompted buying of gold. A persisting expectation of lower U.S. interest rates tied to economic weakness a determining factor in buying of precious metals, especially gold. We prefer the sidelines but recognize gold can continue to gain on the weakening U.S. dollar. However, any change in the dollar could prompt heavy long liquidation and on that basis we suggest our clients avoid precious metals.
Grains and oilseedsMarch corn closed at $5.46 per bushel, up 2 ¾¢ in a narrow trading range with no fresh fundamentals. Corn is taking its direction from the other pits with wheat putting pressure on corn and soybeans providing support. We prefer the sidelines during this respite waiting for news to direct the trading. May wheat closed at $10.86 per bushel, down 79¢ as traders felt the market was overbought and technicals came into play. Minneapolis May spring wheat lost 10 ¾¢ to close at $16.19 ¾ and May Kansas City hard red lost 66¢ to close at $11.60 per bushel. At current levels we prefer the sidelines although fundamentals are unchanged with worldwide demand still strong. May soybeans closed at $15.36 ½ per bushel reaching new record highs with support from demand for soybean oil and bullish fundamentals for the complex. With no technical “top” in sight we could see still higher prices for soybeans. Buy the pullbacks.
Coffee, sugar and cocoaMay coffee closed at $1.6680 per pound, down 70 points or 7/10 of a penny on profit taking after fund buying pushed prices to new 10 year highs. Much of the action was directed by the funds. Reports that the Brazilian coffee industry was having difficulty meeting margin calls on hedge positions led to early short covering but profit taking in New York pushed prices lower. Also, reports that Vietnamese grows are withholding up to 400,000 tons of the recent Robusta harvest hoping for higher prices also a factor in the recent gains. We prefer the sidelines since any artificially supported market usually corrects with a vengeance. Stay out. May cocoa closed at $2,777 per tonne, down $25 on profit taking as technicals point to an overbought condition. The International Cocoa Organization forecast of the 2007-08 world cocoa production was up 10% year on year according to a press release on Friday but grindings were projected up 2.4% from the 2006-07 crop. World 2007-08 ending stocks were forecast down 3.2% on the year. With a higher global deficit forecast by the Organization we could see wide price swings in the intermediate term and prefer the sidelines. March sugar closed at 14.27c per pound, up 19 points against May, gaining only one point to 14.62¢. Short covering in the Marches the main feature coming into March expiration on the close. Friday the coffee pit shut down in favor of the electronic platform and floor brokers could be seen filling up the local bars. China’s sugar imports in January were down 48.4% on the year with South Korea and India picking up the slack.
U.S. Fed Chairman Bernanke has said on Thursday that lower tariffs on ethanol imports would “benefit the U.S. economy.” Growers in central South Brazil where cane ethanol is made applauded his comments. Brazilian officials have lobbied for several years to cut duties on cane-ethanol. Sugar production from Central American mills slowing down after peaking earlier in the month. We have no idea what the absence of the pit brokers and the visibility of the action will mean for prices so we prefer the sidelines and will have to rely totally on fundamentals in the future. Locals in the pits have always provided the necessary volatility and volume and as a former pit trader myself, I would find it difficult to trade actively in any commodity with the edge of being able to “read the pit”. I look for lower volatility and basically a “boring” market in sugar.
CottonMarch cotton closed at 79.66¢ per pound, up 1.53¢ touching new contract highs on Friday on short covering and tied to gains in soybeans. May gained 2.53¢ per pound at 81.86¢ per pound. Without fresh fundamentals for cotton, traders relied on the heavy buying in soybeans for direction. We had liked cotton in the past but prices have gotten into overbought condition without new fundamentals tied directly to cotton. Stay out for now.
John L. Caiazzo
futures@acuvest.com
www.acuvest.com
Information provided is from sources deemed to be 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 over 40 years experience in investments and opinions are his own and not of the Futures Commission Merchant he introduces his clients to.
