“And the band played on.” The U.S. consumer confidence index finally reflects the overall confidence, even though as recently as last month, the U.S. administration was supporting the thesis that the economy was basically strong. Where they got that idea was probably from waiting outside “Tiffany’s” and asking exiting customers how they felt about the economy. They should have been asking the 350,000 plus first time unemployed how they felt, or homeowners on the precipice of losing their homes, thanks to overly aggressive lending practices, something we have been reporting for some time. The weak U.S. dollar has pushed commodity prices into “new high ground” and exacerbated the problems inherent in a weak economy. The public will be choosing between food and energy and there is no letup in sight. The economy will have to run its course and more “pain” is in the forecast for the public.
Interest rates: June Treasury bonds closed at 11614.5/64ths, up 1 tick after trading as high as 11713 during the session. Profit taking in front of the weekend and a late rally from the lows in stocks prompted the selling in bonds. The trading on Friday was mixed with Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, stating that inflation was a problem. That analysis usually indicates an unwillingness to continue lowering rates by the Fed. While previous interest rate cuts have failed to halt the economic decline in the U.S. and the weakness in the consumer confidence index, we see no change in Fed policy forthwith and would expect bond prices to remain firm with yields continuing to decline. At some point, the realization that something other than rate cuts has be done could mean a sidelines approach by the Fed while they await further indications on the economy. With housing starts for multiple occupant units gaining against losses in single family starts at lowest since 1991, it is apparent that homeowners are opting to walk away from high mortgage payments and renting instead. The University of Michigan's index of consumer confidence dropped to 59.5 for May, the lowest since 1980. Look for continued strength in treasuries but new long positions should include stop protection. We prefer the 30-year Treasury bond.
Stock indexes: The Dow Jones industrial average closed at 12,986.80, down 5.86 with the S&P tpp closing at 1,425.35, up 1.78 points. The Nasdaq lost 4.88 points to close at 2,528.85. For the week the Dow gained 1.9%, the S&P 2.7% and the Nasdaq 3.4%. Higher crude oil prices pushed prices for Exxon and Chevron up over 1% each helping the Dow and the S&P 500. Continued weakness in the U.S. dollar also adding to the strength in energy products but impacting other industries making the equity markets move sideways. With the overall U.S. economy negatively impacted by rising food and energy prices thanks to the continued weakness in the U.S. dollar, we expect the equity markets to suffer substantial losses as both earnings and sales decline, and the U.S. consumer stays home. With the U.S. viewed as the consumer of the World, any economic decline impacts global economies. Implement hedging strategies in equities.
Currencies: The June U.S. dollar index sold off sharply on Friday as the U.S. consumer index declined to a 28-year low. The gain in U.S. housing starts prompted some buying until it was determined that the gain in starts was with multi-unit construction. The June Euro gained 128 points to close at 15558, the June Swiss Franc was up 84 points to 9552, and remains our favorite in the group, the June yen gained 54 points to 9616, and the June British pound was up 1.09¢ to $1.9514. The continuing weakness in the U.S. economy and low interest rates pressuring the dollar and we see no reason to expect change. Stay with the Swiss Franc.
Energies: July crude closed at $126.29 up $2.17 after trading as high as $127.82 early in the session. A forecast by Goldman Sachs of $200 per barrel later in the year prompted heavy short covering and new buying. The already weakened U.S. economy is being further damaged by weakness in the U.S. dollar, which in turn results in higher food and energy prices and a recession could alter the expectations of Goldman Sachs as it has changed the overall economic picture in the U.S. We continue to expect, as some point, a sharp sell off in energy products as demand declines thanks to conservation programs, not the least of which are the various alternative energy methods being developed. Buy puts on crude and add on any rallies.
Copper: July copper closed at $3.8380, up 1.15¢ after gaining 5.75¢ on Thursday. Inventories at the Comex warehouses showed a decline of 67 short tons to 10,760 and the weekly Shanghai Futures Exchange stocks were up 388 tonnes to 51,507. The continued weakness in the U.S. dollar is prompting gains in dollar denominated commodities. We continue to feel the decline in demand for copper by the U.S. housing and auto industries will eventually prompt a sharp sell off in prices notwithstanding the demand from the Far East which is showing signs also of reduced demand.
Precious metals: June gold closed at $885.70 per ounce, up $5.70 with July silver gaining 11¢ to $17.07 per ounce. July platinum closed up $8.00 per ounce to $2140.00 with June palladium losing $1.30 to $452.00 per ounce. Trading in metals remains in a range with its fortunes tied to various elements not the least of which is the U.S. dollar and trading by speculators. With weakness in the U.S. economy expected to remain weak, we see no reason to venture into precious metals.
Grains and oilseeds: July corn closed at $5.91 per bushel, down 8¢ on pre weekend profit taking. Trading has been tied to crude oil as corn is used as an alternative energy source tied to ethanol production. We prefer the sidelines in corn. July wheat closed at $7.75 ½ per bushel, up 4¢ on short covering after recent weakness. Harvesting in the Northern Hemisphere is fast approaching and both hedgers and trades appear to be positioning themselves for results of the harvest as it progresses. We prefer the sidelines. July soybeans closed at $13.78 per bushel, up 30 1/2¢ tied to concerns over a potential Argentine strike which could switch demand to the U.S. and Brazil. The weak U.S. dollar adds expectation of improved demand for U.S. beans and we could see additional short covering this week. We still like beans but only on setbacks.
Coffee, Sugar and Cocoa: July coffee closed at $1.3845, up 45 points after gaining 120 points on Thursday. The weak U.S. dollar and strength in other commodities carried to the coffee pit even though the increase in U.S. April green stocks was viewed as bearish. We prefer the sidelines in coffee. July cocoa closed at $2,676 per tonne, up $47 on spec buying and against the continuing weakness in the U.S. dollar. Gains in other commodities also a factor in the buying. We continue to favor the long side of cocoa but stops were touched off after our recommendation last week. July lost $65 for the week but gains in crude and other commodities could carry to cocoa. Get long but keep using stops. July sugar closed at 11.13¢ per pound, up 13 points tied to sharp gains in crude oil. Sugar is used extensively by Brazil for ethanol and as prices for crude gain, attention is turned to alternative energy. We prefer the sidelines.
Cotton: July cotton closed at 71.96 per pound, up 183 points and as in other markets was prompted by higher crude oil prices, and gains in other agricultural commodities. Drier weather in the Delta expected next week will help plantings but farmers in Mississippi were stalled by rain that kept plantings below the five year pace. Other areas of Georgia and Alabama are getting beneficial rain and we could see prices range bound in the near term. We prefer the sidelines but with an eye to the long side on technicals.
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 more than 40 years experience in investments. His opinions are his own and not of the Futures Commission Merchant to whom he introduces his clients.
