Continuing talk of alternative energy prompted a sharp sell off in crude oil prices this past week and affected many of the markets we follow. A well received TV commercial by T. Boone Pickens on the search for alternative fuels and the application of wind and air to offset much of the utility uses of energy products provided a corner stone for building confidence in switching from the dependence on oil producing countries especially those unfriendly to the U.S. We believe a movement is afoot to move expeditiously towards that end; and while there will be no immediate substitution of sources of energy, just the intention of moving towards energy alternatives could eliminate the anxiety factor from crude oil pricing. Unfortunately, the United States is so dependent on foreign sources of energy, even the movement to developing fossil fuels on U.S. lands and in offshore exploration will be years away from actual production. We continue to believe the United States is in a recession that will extend through 2009 and possibly through 2010 as well. Please review our previous commentaries for specifics.
Interest Rates: September Treasury bonds closed at 114 10.5/64ths down 10 /64ths and down for the week after Minneapolis Federal Reserve Bank President Gary Stern, a voting member on monetary policy, told Bloomberg News that the Fed “can’t wait too long before raising rates.” Selling emerged early in the week as yields increased tied to mortgage originators sold treasuries to hedge their mortgage portfolios. Another factor was the rally in equities tied to a sharp sell off in crude oil. We continue to feel a declining U.S. economy precludes any near-term increase in rates. While stops were touched off early in the week, we now suggest reentering the long side of Treasuries. But once again, use stop protection.
Stock Indices: The Dow Jones Industrial Average closed at 11,496.57, up 49.91 as bank stocks rallied after Citigroup reported a smaller than expected loss. The rally in bank stocks was a respite after sharp declines tied to bank failures and fears of additional failures emerged. The S&P 500 closed at 1,260.68, up 36, while the Nasdaq lost 29.52 points to close at 2,282.78. For the week the Dow gained 3.57%, the S&P 500 1.71%, and the Nasdaq gained 1.95%. The sharp sell off in crude oil helped the equity markets and money moved from the relative safety of Treasuries back into equities. We feel the rally in equities will be short lived and is basically a correction in an established bear market. Implement hedging strategies.
Currencies: The September U.S. dollar index closed at 7242.50, down 7 points against gains in the Euro of 26 points to 15796, and the Swiss Franc 10 points to 9789. The September Japanese Yen closed at 9384, down 19 points and the British pound lost 7 points to close at 19896. The rally in the dollar towards the end of the week was prompted by the less than expected loss reported by Citigroup, which eased some concern about the U.S. financial market. Positive earnings from Wells Fargo was also a fact in the recovery of the U.S. currency. We remain unconvinced that the financial sector is improving and we look for additional bank failures tied to the ongoing credit crisis. We favor the long side of the Swiss Franc.
Energies: September crude oil closed at $129.49 per barrel, down 71¢ after trading as high as $132.86 early in the session. Some positive reaction from U.S. attendance at the talks with Iran had raised expectations that Iran might be willing to stop expanding its enrichment activities in exchange for the six major powers, including five permanent UN Security Council members, would hold off passing any new sanctions against them. Unfortunately Tehran ruled out freezing its enrichment program on Saturday so once again, an impasse is in effect and we may see crude prices rally early in the week. We continue to favor the sidelines since the energy markets are directed by unforeseen events and stimuli. Stay out. The fanatical religious government is not to be trusted, in my opinion.
Copper: September copper closed at $3.6690 per pound on Friday, down 4.6¢ as investors are moving from traditional commodities to the financial sector. Inventory gains at the LME warehouses up 650 metric tons to 128,550 was a factor in the selling from London early on. The Comex inventory data that had been released late Thursday showed a decline of 112 short tons to 7,857. The weekly report from Shanghai Futures Exchange warehouses should a gain of 4,785 metric tons to 42,935. Any increase in inventories portends a decline in demand and consequently in prices. We continue favor the short side of copper through the purchase of put options.
Precious Metals: August gold closed at $958 per ounce, down $12.70 tied to better than expected earnings from a couple of U.S. banks, the less than expected loss from Citigroup and the positive earnings from Wells Fargo Bank. The late rally in the dollar also a factor in the selling in precious metals. September silver closed at $18.20 per ounce down 53.50¢ following gold. An improved view of the U.S. financial system and the bailout of Freddie Mac and Fannie Mae also a factor in the reduced anxiety. October platinum lost $45.10 per ounce to close at $1,855.30 with September palladium losing $9.75 per ounce to close at $416.60. We once again suggest following the U.S. interest rate and the U.S. dollar to determine trading activity in precious metals.
Grains and Oilseeds: September corn lost 21 3/4¢ per bushel to close at $6.09 ½ tied to good crop weather and the breach of the technical support levels. Prices has declined after making a new contract high $7.99 ¼ in late June and the momentum could carry prices lower. We prefer the sidelines as we have for some time. September wheat closed at $8.04 per bushel, down 5 1/2¢ in mixed trade on Friday tied mostly to the heavy selling in corn and beans. We continue to prefer the sidelines in wheat as well. November soybeans closed sharply lower on Friday losing 50¢ per bushel to close at $14.48. Favorable weather forecasts and projected increases in global supplies tied to a change in the Argentina sliding scale export tax program which was revoked. Expectations for timely rain also a factor as well as technical considerations after various supports where breached leading to Fund selling. We have favored beans in the group for some time but always emphasized the need for stop protection after the stratespheric price rise in the group. For now we suggest the sidelines.
Coffee, Sugar and Cocoa: September coffee closed at $1.3775 up 10 points after slipping to five week lows. Expectation for dryness in the Brazilian groves lent support late in the session on Friday. We prefer the sidelines but would now watch for any changes in harvest progress from Brazil. September cocoa closed at $2799 per tonne, down $127 on Fund selling after trading through support levels and trading at six week lows. We look for continued long liquidation tied to other commodities which has enjoyed recent strength. Stay out or sell into any rallies but with stops. October sugar closed at 12.49¢ per pound down 22 points tied to the weakness in grains and crude oil. We prefer the sidelines but if support at 11.75 to 12¢ holds early in the week, we could expect a rally later on. Weather in the Caribbean could become a factor early next week but with demand declining, we see no reason to trade sugar.
Cotton: October cotton closed at 70.35¢ per pound up 6 points in choppy sideways trading within the recent range but reacted well considering the weakness in other agricultural commodities. We would buy cotton but with stop protection. We were impressed with the action considering reports of domestic oversupply. This market could be getting ready for a decent rally.
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 45 years experience in investments and opinions are his own and not of the Futures Commission Merchant he introduces his clients to.
