Overview: What part of “Implement hedging strategies immediately” do equity holders not understand? It is like watching lemmings going over a cliff. The “strategy” of buy and hold as recommended by stock brokerage firms for the most part is, in my not so humble opinion, “the wisdom of a fool.” Recently General Motors, an obviously widely held company in portfolios of the rich and famous as well as the individual investor in mutual funds, sold at the same level it sold at in 1954. This is the epitome of the “buy and hold” psychology, and a not so wise strategy, in my opinion. While pundits are claiming that the U.S. economy is not in the “dictionary” description of recession, it is, in my opinion and those of others such as Warren Buffet, in recession. As I stated in recent commentaries, the worst is yet to come. On Saturday two more banks failed and were taken over by the FDIC. First National Bank of Nevada and First Heritage Bank of Newport Beach, Calif., were sold to Mutual of Omaha Bank. The U.S. administration is offering rhetorical statements such as “keeping people in their homes,” which is an absolute impossibility as I have been explaining for some time. Those without jobs will lose their homes, period. Those with jobs seduced into believing they could own a home at below prevailing rates with little or no cash down can only be saved by a moratorium on rate adjustments on those ARMs. The current problem in the banking industry will also get worse before it gets better. Freddie Mac and Fannie May have been given the equivalent of a “blank check” which is supposed to handle the current problem with defaults and foreclosures. Unfortunately, with over a trillion dollars of outstanding mortgages where a majority are guaranteed by those two “private companies” that could face default in the near future, the 25 billion dollar figure bandied about will not suffice and the U.S. taxpayer will bear the burden of the “unknown” dollar figure losses. What I expect will occur is the “nationalization” of those two companies and the Federal Government “absorbing” what is yet to come in the way of defaults and foreclosures. We are not, as explained by media types, toward the end of the cycle. We are in the beginning of what could border on a depression basis the 400,000 plus first time unemployed weekly numbers. Now for some actual market information with my usual analysis and suggestions.
Interest Rates: The September Treasury bonds closed at 11326 down 1 and 6/64ths on Friday after “glowing” reports on durable goods and not as bad as expected new home sales. The improved consumer sentiment survey must have been derived from shoppers leaving Tiffany’s with little blue bags, certainly not from those in the unemployment line. We continue to expect rates to remain unchanged or even tick lower since any upward move in rates by the Fed would, in my opinion, prove financially ill-conceived. Add to long bond calls on any further declines.
Stock Indices: The Dow Jones Industrials closed Friday at 11,370.69, up 21.41 ending the week 1.1% lower. The S&P 500 closed at 1,257.76, down 5.22 and down 0.2% for the week. The recent slide in energy prices no doubt prompted the very slight rebound from the devastating sell off of Thursday in equities. The Nasdaq closed at 2,310.53, up 30.42 and up 1.2% for the week. For the year the Dow has lost 14.28%, the S&P 500 14.34% and the Nasdaq 12.89%. In dollar terms of losses to portfolios, hundreds of billions of dollars have “evaporated” since the beginning of the year. That money is not on the sidelines waiting to come back in. It is gone. New money will be required to stabilize the equity markets and anyone contemplating investing at this time should seek psychiatric help in my opinion. We are in a recession and with 400,000 first time unemployed weekly I see no chance of a recovery in the U.S. economy. The 400,000 represent the usual family’s breadwinner and considering that many families consist of a breadwinner, a significant other, and 2.5 offspring, we could see over a million consumers that will not be consuming. The number of mortgages represented by those numbers and car payments could considerably exacerbate the recessionary trend in the U.S. and “trickle” abroad to manufacturers of those products that used to be consumed. A downward spiral is in place for a long recessionary period globally and I would not be inclined to make any investment commitment for some time.
Currencies: The U.S. dollar index closed at 7307.50, down 5 ticks against gains in the Euro of 37 points to 156.53, and the Swiss Franc two little ticks to 96.48. The British Pound gained 54 points to close at 19820 but the September Japanese yen lost 49 points to close at 9293. The slight rebound in consumer sentiment came after reaching a 28 year low. Durable goods orders and new home sales were better than analyst expectations. Those figures contributed to the slight dollar recovery from the lows. We once again suggest that the low U.S. interest rates preclude any attraction to the U.S. dollar investments and would avoid trying to pick a bottom. The U.S. banking system is in disarray and could lead to stagflation in the U.S. Stay with the long side of the Swiss Franc or avoid currencies all together.
Energies: September crude oil closed at $123.26 per barrel, down another $2.23 after trading at a record high of $145.18 per barrel on July 14. A global economic slowdown could reduce oil consumption and demand and U.S. gasoline demand has declined by 2.4% from a year ago according to the Energy Information Administration. With a recession looming, the labor situation deteriorating, and defaults in housing and auto loans, the public is changing their driving habits. We look for the situation to continue but would watch for any geopolitical events that could change the picture. Therefore we prefer the sidelines but maintain our long term assessment that crude oil prices will decline to the $50-70 per barrel level. Timing remains in doubt. The U.S. dollar is also a factor.
Copper: September copper closed at $3.6050 on Friday, up 2.8c after heavy losses recently. Declines in demand from the housing and auto industries have affected prices and turned sentiment negative for copper. Inventories at major international warehouses were mixed with Comex showing a decline of 44 tons to 7,123, London Metal Exchange warehouses were up 2,600 tonnes t 133,475 and the most recent data from the Shanghai Futures Exchange showed a decline of 1,845 metric tonnes to 41,090. We continue to favor the short side of copper using put options.
Precious Metals: October gold closed at $931.80 on Friday, up $4.50 tied to weakness in U.S. equities although the slight strength in the dollar normally causes weakness in gold. The recent selling in gold prompted a shortcovering rally but we continue to believe gold will be priced basis the trend in the U.S. currency in which it is denominated. Chart the dollar not gold. The current credit crisis will also be a factor in the sentiment towards precious metals which are usually a hedge against anxiety in financial markets. We prefer the sidelines but could see a renewed interest in gold as U.S. banks come under increased scrutiny by the U.S. Federal Reserve and the FDIC. September silver closed at $17.375, up 7.7c with October platinum gaining $44.90 to close at $1,758.70 per ounce and September palladium losing $4.00 to close at $383 per ounce. We would once again look at the long palladium short platinum spread for a position trade.
Grains and Oilseeds: September corn closed at $5.77 ¼ per bushel, up 4 1/4c mostly tied to end user buying and technicals after the recent four week selloff from the highs. Shortcovering was a factor but there were no fundamentals to support the belief that a bottom had been reached. Weather forecasts remain positive for corn and could prompt additional selling. We prefer the sidelines. September wheat closed at $8.11 per bushel, up 23 1/4c on shortcovering in front of the weekend and on a technically oversold condition. Grains have suffered sharp losses after their meteorical gains over the past year. We prefer the sidelines in wheat as well. November soybeans closed at $13.86 ½ per bushel, up 13 1/2c on shortcovering and technically oversold conditions. With late plantings across the Midwest tied to recent flooding and expected damage to some crops, we could see renewed interest in soybeans but favorable weather conditions in other growing areas could keep pressure on prices. We would now look to buy soybeans on dips but once again, use stop protection in the event of another wave of long liquidation.
Coffee, Sugar and Cocoa: September coffee closed at $1.3730 per pound, up 2.1c on the weak dollar and shortcovering rallies in other agricultural commodities. Brazil will be unveiling a Pepro subsidy program for growers and lent support to prices. Roasters were also seen a buyers lowest ever carryover in Brazil could provide support at current levels. We would look to buy coffee basis the December contract on any weakness and use stop protection in case our timing is off. An upward trend could develop from here. September cocoa closed at $2,813 per tonne, up $69 on short covering late in the session as crude oil bounced off the intraday lows. Cocoa trades in league with other agricultural market so we see no need to put on cocoa positions. Growing conditions in Ivory Coast are ideal and fundamentals remain bearish. Stay out. October sugar closed at four day highs of 12.44c per pound, up 20 points in line with other agricultural commodities but lower oil prices translated to selling pressure in sugar. Shortcovering was a main feature to Friday’s trading as protective buy stops were touched off. We prefer the sidelines.
Cotton: October cotton closed at 71.68c per pound, up 64 cents in light trading. December closed at 74.50c per pound up 64 points. Rallies in light trade are inconsequential but with India’s summer crop plantings down a million acres compared with last year we could see renewed interest in cotton. We would look to buy at current levels but with stop protection due to the light volume.
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 over 45 years experience in investments and opinions are his own and not of the Futures Commission Merchant he introduces his clients to.
