Market Commentary
To lower or not to lower the Fed funds rate, that is the question traders and investors are waiting for the Federal Reserve to answer this week. Unfortunately, as we have stated in prior commentaries, lowering the interest rate is of no consequence to those who are about to lose their homes to foreclosure, nor will it help those who were seduced into buying homes they could not afford at prevailing rates and face upward rate adjustment. It will also not convince qualified buyers that the bottom of home prices has been reached. So the rhetoric emanating from Washington, and the candidates for President, that they can somehow help people stay in their homes, is just rhetoric and pandering to the misfortunate to gain stature with the electorate. It simply is not true, and as stated before, those without jobs will in fact lose their homes, those with jobs who were seduced into buying homes they could not pay for at real-prevailing rates can only be helped by a moratorium on lender rate adjustments. There are no alternative preventative measures in our opinion.
Interest rates: June Treasury bonds closed at 11519, down 16.5/64ths on continued selling in favor of equities. The University of Michigan consumer sentiment index came in at a reading of 62.6 for April, down from 69.5 for March and the lowest since March of 1982. The initial reaction was a bounce in prices before the reading was dissected and showed an increase in inflation of 4.8%, up from 4.3% and the five year reading was 3.2%, up from 2.9%. That prompted the selling in Treasuries but once again the Fed is expected to lower the Fed Funds rate by another quarter point based on the continuing U.S. economic decline. I would hope the Fed concentrates more on the recessionary trend than any inflationary signs tied to higher basic commodity prices, specifically energy. We still favor the long side of bonds.
Stock indices: The Dow Jones industrials closed at 12,891.86, up 42.91 points with the S&P 500 gaining 9.02 to 1,397.84 and the Nasdaq losing 5.99 points to close at 2,422.93. The Nasdaq was impacted by Microsoft Corp’s weak profit forecast. For the week the Dow gained 0.3%, the S&P 0.5% and the Nasdaq gained 0.8%. Higher oil prices helped the oil service industry companies with crude oil gaining almost 2% after a reported incident in the Gulf where an armed U.S. cargo ship fired warning shots at two small Iranian boats. We continue to feel the U.S. economy is in decline and the recession we see will no doubt carry into the global economies and negatively impact equity markets. Implement hedging strategies as soon as practicable.
Currencies: June U.S. dollar index closed at 7288.50, up 11 points and its best monthly performance in over two years against the basket of currencies. The dollar responds to U.S. interest moves or perception of interest rate moves. The lowering of rates by the Fed has caused the extreme weakness in the U.S. currency and any sign of the Fed holding rates helped the dollar find an interim bottom. Should the Fed continue its rate cutting, the dollar will once again sell off. At some point the Fed will realize that lowering the Fed Funds rate will in no way halt the U.S. economic decline in our opinion. The specter of inflation is starting to permeate various Fed governor conversations and that also helped rally the dollar. We now prefer the sidelines in all currencies even the venerable Swiss franc that rallied nearly 25% since our first recommendation.
Energies: June crude oil closed at $118.52 per barrel, up $2.46 after trading as high as $119.55 after two Iranian boats appeared to threaten an armed U.S. cargo ship. Of course Iran claims no such confrontation, but who do we believe? Tensions have been escalating between the United States and Iran over the past year, and as a member of OPEC, Tehran’s not so subtle hostility could prompt oil shortages and have prompted the sharp rally in crude oil. A workers strike in Scotland and rebel attacks against refineries in Nigeria also prompted the buying in crude. While the technicals support the strength in crude prices, logic dictates that with adequate supplies, a Global economic slowdown and conservation methods, we continue to expect a sharp decline in crude prices down to the more acceptable $50 to $60 per barrel level with timing the only question.
Copper: July copper closed at $3.9110, up 3.6¢ on inventory declines at warehouses of the three major exchanges and the labor strike at Chile’s Codelco mine. On the other hand an economic slowdown and slowing demand from China should finally mean long liquidation for copper futures. We continue to feel copper prices have been supported by the Far East economic growth but that growth seems to have calmed and prices should start to decline. We would only trade copper through the purchase of put options.
Precious metals: June gold closed at $889.70, up 30¢ within a range from $899, down to $880 intraday. A decline in a gold backed exchange traded fund halted the early rally. Technically gold declined through its 100 day moving average but fundamentally money moved to equities from the "hedge" characteristic of gold. We look for continued long liquidation of gold. July silver closed at $16.9580 per ounce, up 19¢. July platinum lost $2.70 to $1968.00 per ounce while June palladium gained 2.50 to close at $448.95 per ounce.
Grains and oilseeds: July corn closed at $5.90 ¾, up 1 1/4¢ on bullish weather conditions in the U.S. corn belt. We prefer the sidelines in corn. July wheat closed at $8.15 ½, down 8 1/2¢ tied to expectations of increased global production and improved conditions for the U.S. crop. Wheat may be in an oversold condition and could warrant a short-term bounce, however we prefer the sidelines in wheat as well. July soybeans closed at $13.37 per bushel, down 24¢ tied to expanded plantings in the U.S. and profit taking after its gains during the past months. We continue to like soybeans on sell offs that are exacerbated by sell stops and with the possibility of Argentinean labor strife, we could see wide price swings as technicals fight it out with basic fundamentals.
Coffee, sugar and cocoa: July coffee closed at $1.3130 per pound, down 30 points after trading below $1.30 on profit taking. A slow start to the Colombian mid harvest that usually starts in mid March and the rally in the dollar was a factor in the support above the technically important $1.30 level. We prefer the sidelines. July cocoa closed at $2,788 per tonne, down $11 on profit taking and tied to the dollar rally. While technicals are bearish, fundamentals favor the upside in cocoa. We would buy July or September cocoa with stops around Friday’s lows. July sugar closed at 12.25¢ per pound, down 4 little points after trading down to the 12.07¢ level. Reports from Russia can be construed as bullish as the World Trade Organization may force Moscow to adjust its sugar duties in accordance with WTO policies. How it will impact sugar prices is a question I have no immediate answer for. Therefore, stay out for now.
Cotton: July cotton closed at 71.44¢ per pound and lost 3.23¢ for the week. Wide price swings put us on the sidelines.
John L. Caiazzo
futures@acuvest.com
www.acuvest.com
