What part of "weak dollar/strong dollar denominated commodities" do the pundits not understand? I see a plethora of excuses and reasons for the price gains in many of the commodities we follow, but the fact remains: pricing of commodities is inexorably tied to the fortunes of the U.S. dollar, and relationships between U.S. interest rates and those of its global trading partners. If, and that is a big two letter word, U.S. interest rates hold current levels or uptick based on the Fed’s assessment of inflation, then the dollar will in fact rally and the sharp gains in dollar denominated commodities will erode rather quickly. Could I be any clearer? I doubt it, but there are those who maintain their own individual analysis of market direction in the commodities they profess to be experts in and that will prove unfortunate for their clients. I was so impressed with Warren Buffet’s assessment of the U.S. economy. Buffet says the United States is "already in recession, though not in the sense of having two consecutive quarters of negative growth.
Interest rates: June Treasury bonds closed at 11627.5/64ths, up 101.5 as the equity markets declined. In my January 18 commentary, I concluded that the so called stimulus program would not in any way halt the economic decline or stimulate the U.S. economy. Recently a Merrill Lynch economist stated that the "U.S. economy is in a recession and stimulus from a government tax rebate later this quarter will only temporarily stem a fall in consumer spending." The existing home sales for April was down from March for the eighth decline out of the last nine months. With the first time unemployment numbers of between 350,000 and 400,000 on a weekly basis, and the "glowing" anticipatory earnings forecasts by some corporations, one can only conclude that all the unemployed contributed nothing to the bottom line of those companies. I personally do not believe it and look for a shortfall in those earnings forecasts which will further exacerbate an economic decline. Stay with the bonds and add on declines instigated by so called "positive economic data".
Stock indexes: The Dow Jones industrial average lost 145.99 points on Friday in front of the holiday weekend, closing at 12,479.63. The S&P 500 closed at 1,375.93, down 18.42, and the Nasdaq lost 19.91 points to close at 2,444.67. The ongoing price gains in crude oil and energy products continues to baffle those that feel supply/demand factors are being ignored. Another factor to consider is continuing decline in the housing sector with more and more homes going into default and ultimately foreclosure. With the U.S. economy in recession, all sectors of the economy will be impacted. Airlines, housing, corporate earnings will all be negatively effected and we could see continued selling pressure across the board in equities. We once more and adamantly suggest implementing hedging strategies immediately. The exit door in equities in getting smaller.
Currencies: The June U.S. dollar index lost 43 points to close at 7197 against gains in the Euro of 92 points to 1577.30, the Swiss Franc 115 points to 9788, the June Japanese yen 120 points to 9712, and the June British Pound 29 points to 19778. The U.S. report showing existing home sales declined for the 8th month out of the last nine was a negative for the dollar. The weak U.S. stock market also saw "withdrawals" and repatriation of foreign currencies. Low interest rates couple with high energy costs also a factor in the continuing weakness of the U.S. economy. We once again prefer the sidelines or adding to long positions in Swiss francs on dips.
Energies: July crude oil closed at $132.19 per barrel, up $1.38 as long term supply concerns permeated the energy pits. Many dollar denominated commodities were strong as the weak dollar and prospects of a continuing U.S. economic decline adds to the benefit of hedging with commodities. We continue to believe that ongoing emphasis on development of energy resources within the U.S. borders and conservation efforts will impact energy prices at some point, which unfortunately is an unknown. We expect prices to decline in crude to a more manageable price level of $60 to $70 per barrel. Current speculation against dollar weakness will subside over time and the "black hole" under the "black gold" market will be filled in….Stay out or buy puts on crude but not natural gas. July Natural gas closed at $11.981, up 150 on Friday and could return to previous high levels around $15 per MBTUs.
Copper: July copper closed at $3.7360 per pound, up 2.35¢ mostly against declines in the dollar. With home and auto sales in decline, the demand for copper has diminished in the U.S. and while Asian demand could continue we feel not enough to offset the declining U.S. demand. Inventories at the LME were up 175 metric tonnes on Friday at 125,375 with the most recent Comex inventory data released on Thursday showed an increase of 198 tons to 10,819. The weekly report for the Shanghai Futures Exchange where demand continues for copper, showed a decline of 5,921 metric tons to 45,586. Hold put positions and add on any rallies.
Precious metals: June gold closed at $925.80 on Friday, up $7.50 per ounce with July silver gaining 26.5c to close at $18.29 per ounce. Again, as I have stated ad nauseum, “Dollar up/gold down, dollar down/gold up.” I refuse to listen to the pundits calling for buying gold without referencing the U.S. dollar. Any stabilization in the dollar will prompt a wave of selling in precious metals. We would avoid "investments" in gold. The last time gold traded at the old high of $860 per ounce someone paid that price and waited over 25 years just to get even. History could repeat itself. Chart the dollar not gold. July platinum closed at $2176.30, down $7.50 per ounce with June palladium gaining $3.50 to close at $457.30 per ounce. We prefer the sidelines but once again like the long palladium, short platinum spread. Bear in mind that the platinum contract is for 50 ounces while palladium is a 100 ounce contract.
Grains and oilseeds: July corn closed at $5.99 ¾ per bushel, up 4¢ mostly tied to other markets and the weak U.S. dollar. Spillover from the soybean pit where gains where also tied to Argentine strife also added to the bullishness in corn. The ongoing factor of demand for ethanol produced from corn continues to provide some strength. Additionally the wet weather is hampering seeding in parts of the corn belt. We prefer the sidelines in corn but expect higher prices. Our preference remains the soybean market. July wheat closed at $7.52 ½ per bushel, up 7 1/2¢ in choppy pre holiday weekend trading. Shortcovering the main feature to wheat but trading activity was two sided but favorable weather conditions for wheat could prompt long liquidation. Stay out of wheat. July soybeans closed at $13.68 per bushel, up 43 1/4¢ mostly tied to other commodities and the weak U.S. dollar. Continued disputes between farmers and the Government in Argentina is raising concerns over possible supply problems and continuing strong demand for U.S. soybeans. We are hesitant to add to longs in beans and would bring up those trailing sell stops in the event a the current problems in Argentine are resolved which would prompt heavy long liquidation in the U.S. bean market. Any bounce in the U.S. dollar would also prompt selling in dollar denominated commodities across the board.
Coffee, sugar and cocoa: July coffee closed at $1.34 per pound, down 20 points tied to position squaring in front of the three day U.S. holiday. Strong support at the $1.30 level for the July contract kept prices from declining further but any breach of that support could prompt additional long liquidation from technicians. We prefer the sidelines. July cocoa closed at $2,577 per tonne, up $3 tied to the weak U.S. dollar and higher energy prices. We prefer the sidelines. July sugar closed at 10.01c per pound, down 42 points on technical and spec selling as the July contract broke support at 10c and traded at 9.99¢ during the session. Technicians are very predictable and we could see additional selling if the July closes below 10c. Too close for us to get involved either way. out of sugar. World sugar surplus at 11.34 million tons for the 2007-08 projected against prior forecast of 9.1 million tons by Swiss analysts Societe J. Kingsman also a factor in the weak showing Friday. We prefer the sidelines.
Cotton: July cotton closed at 69.21¢ per pound, down 78 points after sell stops were touched off as July traded below Thursday’s low of 69.76. We could see cotton locked in a trading range and we have no interest until either support or resistance are breached decisively.
John L. Caiazzo
www.acuvest.com
futures@acuvest.com
