The market’s attention will be drawn to next weeks annual Federal Reserve meeting in Jackson Hole, Wyoming as they analyse the economy and try to determine what is the more important factor to control: inflation or concern over recession. Our feeling is the current recessionary trend should take precedent over their obsession with inflation. Unfortunately, they sometimes disagree with me. Imagine that. Our emphasis on making market suggestions will be based herein on expectation that the gang at the Fed will come to the realization that the economy is in fact in recession and that expediency in applying recession fighting tactics should be paramount in their thinking.
Interest Rates: September Treasury bonds closed at 117 15.5/64ths, up 18.5/64ths tied to lower commodity prices, which could alleviate concerns over inflation and prompt the Federal Reserve to discount the need for higher rates. Lower prices for crude oil, a stronger U.S. dollar and pressure on equity prices of late could translate to movement of money to the relative safety of U.S. Treasuries. The Fed meeting in Wyoming next week could determine activity in the Treasury, equity and the currency market. We continue to feel with the recessionary trend in place, the Fed cannot contemplate increasing rates and may be forced to reduce rates in the face of the burgeoning credit crisis. Add to long positions on any setbacks in Treasury bonds.
Stock Indexes: The Dow Jones Industrials closed at 11,659.90 on Friday, up 43.97 points but down 0.6% for the week. The S&P 500 closed at 1,298.20 on Friday, up 5.27 points and barely 0.1% higher for the week. The Nasdaq closed at 2,452.52, down 1.15 points but managed a gain for the week of 1.6%. Lower crude oil and commodity prices and some upward earnings and forecasts in retails such as Kohl’s and earnings exceeding expectations for another retailer, JC Penney, prompted short covering and new buying. We continue to feel the overall economy is in a recessionary trend and will spread to the U.S.’s international trading partners. The U.S. is the consumer of the world and the way the U.S. economy goes, so go the global economies. Implement hedging strategies in large equity portfolios.
Currencies: The September U.S. dollar index continued its rally closing at 7735, up 51.5 points extending its gain to a fifth week against the Euro. The drop in crude oil prices and the growing expectation that an economic slowdown may be bottoming also a factor in the price gains. Unfortunately, we continue to feel that based on the U.S. labor situation along with the continued credit crisis, there is no end to the downward economic spiral in sight. We also feel that the U.S. recessionary trend has no precedent since prior to the onset of designer mortgages in the United States, whereas home buyers could purchase a home with little of no money down, at below prevailing rates, we have never experienced what is occurring today. Don’t assume the dollar debacle of the past few years is over. Stay out for now.
We would avoid any dollar denominated markets for the time being.
Energies: September crude oil dropped below $114 per barrel on Friday closing at $113.77 after trading as low as $111.34, the lowest level since early May. The continuing global economic decline is reducing demand for energy products and supplies are considered ample. OPEC reduced its estimate for 2008 demand on Friday and inventories are growing. We continue to feel price declines to the $50 to $60 per barrel will eventually return, but timing is the big question.
Copper: September copper closed at $3.3225 per pound, up 1.75¢ even as the U.S. dollar gained in the currency market. The decline in the Shanghai Futures Exchange warehouses was 6,684 metric tons to 24,825 and prompted short covering. Inventories of copper at the LME warehouses rose by only 100 metric tons on Friday to 154,050 while the most recent Comex data was unchanged at 5,563 short tons. We continue to expect copper prices to decline as demand from U.S. housing and auto industries diminishes. Some Far East demand prompted the short covering and decline at the Shanghai warehouses.
Precious Metals: October gold closed at $788.40 per ounce, down another $22.30 per ounce following a 5% sell off in early European trading Friday. The strengthening U.S. dollar, in which precious metals are denominated the main factor along with the sell off in other commodities and slower global economic growth. As I have said in prior commentaries, throw away your gold charts and chart the dollar. September Silver closed at $12.8150 per ounce down $1.4150 following gold. October platinum closed at $1,38820, down $100.90 per ounce as expectations for auto sales declines. Platinum is used in catalytic converters and with pressure on the auto industry, demand declined. September palladium losing $23.20 per ounce to close at $284.80. The dollar traded at a six month high this week and took the wind out of the sails of precious metals. We could see a rally in precious metals early in the week but only if the dollar levels off. We would still prefer the sidelines in metals.
Grains and oilseeds: September corn closed at $5.29 ¾ per bushel, down 28¢ tied to economic concerns and the strong dollar. That also applies to September wheat, which lost 40 ¼¢ to close at $8.24 ¼ and November soybeans, which lost 55ٕ¢ to close at $12.19 per bushel. The recent rally tied to the USDA report was short lived and considered overdone and the effect of the strengthening dollar and sell off in crude oil added to the negativity. We prefer the sidelines.
Coffee, sugar and cocoa: September coffee closed at $1.3285 per pound, down 2.3¢ to a nearly five-month low. The strong dollar and the end of the truckers strike in Colombia added selling pressure. We prefer the sidelines. September cocoa closed at $2,597 per tonne, down $60 with December losing $91 per tonne to close at $2,587. The strong dollar once again the reason for the decline in cocoa prices, pushing prices down to the May levels. Stay out until which time the U.S. dollar levels off. October sugar falls into the same category as the other commodities affected by the strength in the dollar. October sugar closed at 13.12¢ per pound down 27 points. The same applies to sugar.
Cotton: October cotton closed at 65.07¢ per pound down 2.02¢ and once again tied to the strength in the dollar. There really is no point trying to analyze the general cotton market since most of the pressure was dollar related. Cotton prices rallied after the USDA report, which was construed as friendly, but favorable growing weather in West Texas was also a negative for cotton. Stay out for now.
John L. Caiazzo
www.acuvest.com
futures@acuvest.com
Information provided is from sources deemed 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. His opinions are his own and not of the futures commission merchant to whom he introduces his clients.
