Market Commentary
We are fast approaching the time to pay the piper. The increasing number of people feeling the effects of higher food and energy prices is prompting them to borrow on credit cards. Using high interest credit cards to make either a mortgage payment or car payment is financial suicide. Using a new credit card to make a minimum payment on an older credit card is also occurring and with the number of first time unemployed over 350,000 regularly there is not much question in my mind that the recession I predicted months ago is now in full swing. The prospect of an early bottom to this recession and a recovery is months, if not years, away. Those millions who have lost their homes and credit ratings cannot purchase new homes for years and that leaves the first time home buyer as the only hope for a real estate recovery. Inventories are increasing and buyers are reluctant to purchase with the specter of yet lower prices. Once again, the only hope for those with jobs who have been able to make the minimum mortgage payment at the fictitious interest rate should be allowed a moratorium on rate increases. Those without jobs will lose their homes and there is nothing the federal government can do about it regardless of the rhetoric emanating from the Presidential candidates and their respective party promoters.
Interest Rates: September Treasury bonds closed at 115 21/64ths up 21/64ths after trading up over 100-basis points during the session thanks to the sharp sell off this week in equities. Treasuries are viewed as a safe haven for money until the smoke clears for equities. Unfortunately we see no such clearing and continue to prefer the relatively safe haven of Treasuries. Periodic short-covering in equities will prompt some long liquidation in Treasuries but we view corrections as an opportunity to add to long bond positions.
Stock Indices: Don’t walk too close to the tall buildings on Wall Street. I suggest you re-introduce yourselves with the causes of the 1929 and 1987 stock market crashes. The Dow Jones Industrial Average closed at 11,346.51, down another 106.91 added to the over 300 point loss on Thursday and lost 4.19% for the week. The S&P 500 closed at 1,278.38, down 4.77 and also lost around 3.35% for the week. The Nasdaq closed at 2.315.63 down 5.74 on Friday and lost 3.76% for the week. We have been warning that economic news, corporate earnings forecasts and reports, and, more importantly, the burgeoning layoffs and payroll losses would exacerbate the recession we have forecast for nearly a year. The U.S. consumer is faced with a choice, high food prices or high energy prices. They probably cannot afford both. This coming week will provide us with additional data culminating with the jobs report on Thursday. Once again, I implore equity holders to implement hedging strategies. The worst is not over.
Currencies: The September U.S. dollar index closed at 7267, down 12 points against gains in the September Euro of 16 points to 15712, the September Swiss Franc (our personal favorite) 38 points to 9820, the September Japanese yen 35 points to 9452, and the British Pound 54 points to 19814. The negative U.S. economic data, lower interest rates, declining equity market, and burgeoning energy costs the basis for the weakening dollar. Stay out.
Energies: August crude oil closed at $140.21 per barrel, up 57¢ after trading a yet another record high during the session of $142.99. A number of new factors prompted the buying in crude oil: Libya studying a possible production cut in response to saber rattling against OPEC producers by the United States, increasing demand by China and India, the U.S. House of Representatives legislation directing the Commodity Futures Trading Commission to use its authority to curb speculation in energy futures markets. Unfortunately, the CFTC is a paper tiger since the U.S. agency cannot control a world market or the speculation therein. We continue to believe that crude oil prices will eventually decline to a more workable price level of between $50 to $60 per barrel, but that prospect is a question of timing and I have no idea when that will occur. Stay out of this market unless you like to trade using the coin flip method of determining price direction. I do not employ that method for my clients.
Copper: September copper closed at $3.8780 per pound, up 5.3¢ tied to strength in crude oil and other commodities as investors scramble to find alternative investments. A decline in inventories at the London Metal Exchange warehouses of 150 metric tonnes Friday to 122,900 and a weekly decline at the Shanghai Futures Exchange of 1,016 metric tonnes to 32,401 among the various reasons for price gains. The Comex inventory data released late Thursday shows a steady inventory at 11,040 short tons. We expect a sharp sell off in tied to continuing demand declines by the U.S. housing and auto industries, even though the demand from China remains a concern. Add to put positions on further rallies.
Precious metals: August gold closed at $931.30 per ounce, up $16.20 with September silver gaining 49¢ per ounce to close at $17.71. October platinum lost $7.40 per ounce to $2062.40 and September palladium lost 5¢ to close at $471.20 per ounce. Investors scramble to find alternative investments and precious metals have long been a haven to anxiety and as a hedge against the dollar in which they are denominated. Technically, we could see gold advance to test the all time high of $1,034 per ounce but we prefer the sidelines since any corrective rally in the dollar or talk of a U.S. rate increase would prompt a sharp sell off in metals. Corrections in food and energy would also prompt long liquidation in metals. Stay out.
Grains and Oilseeds: September corn closed at $7.67 ¾ down ½¢ and await Mondays USDA report.
September wheat closed at $9.12 per bushel losing 30 ¾¢ due to harvest pressure and profit taking after recent gains. We prefer the sidelines until after the harvest progress report on Monday from the USDA.
August soybeans closed at $15.79 per bushel, up 4 ¾¢ while November beans lost 2¢ to close at $15.59 ½. Activity was sideways and mixed awaiting Monday’s government planting acreage report. We would hold current long positions but would not take any further action until the report has been analyzed.
Coffee, sugar and cocoa: September coffee closed at $1.5255, down 1.1¢ tied to accelerated Brazilian harvest and profit taking by speculators. With weather expected to be moderate next week we could see growers picking the expected large crop. Stay out for now. September cocoa closed at $3.178 per tonne, up $11 tied to spec buying and the weak U.S. dollar. Buying of commodities against the weak dollar has prompted new buying in dollar denominated commodities. We prefer the sidelines in cocoa since technically it is overbought and that usually leads to profit taking and new selling. Stay out. October sugar closed at 12.74¢ per pound, down 21 points on profit taking after recent gains. The strength in sugar was tied to higher crude oil prices and the weak dollar. We could see additional buying tied to ethanol production and expectations of India's sugar production around 21 million to 24 million tons against 26.5 million the previous year. We prefer the sidelines in sugar as well since any long liquidation of crude oil will impact sugar prices.
Cotton: October cotton closed at 78.11¢ per pound down 28 points on light volume awaiting Monday’s acreage report. Wait until after the report before taking another look at cotton from the long side.
John L. Caiazzo
futures@acuvest.com
www.acuvest.com
