A house of cards will be tumbling down soon; credit cards that is. Not much mention has been made of the burgeoning credit card defaults that will be in the news next. The current phenomenon of mortgage defaults and foreclosures, which as my readers know I blame on lenders and appraisers, is the highlight of the financial crisis. Unfortunately other areas of credit problems are being neglected in the media, i.e. auto loan defaults and repossessions, and of course the domino effect of credit card debt. That is where one new card is used to pay the minimum on older cards as long as credit remains intact. Once failure to pay even the minimum on cards hits the credit reporting companies, no new cards will be issued and the dominoes will all start to fall. The U.S. economy is in recession and any U.S. slowdown affects the economies of its trading partners. One such erroneously calculated bit of data is the trade deficit, which will start to show a decline. That does not necessarily bode well for the economy, since it only means the U.S. consumer is not consuming; and what he is not consuming, for the most part, are foreign products. So any so-called positive trend developing for the trade deficit is really bad news not to the contrary. What can the Federal Reserve do right now? In my opinion, nothing but watch and wait. The recession will have to take its course and the first sign that it is even close to bottoming is when we see jobs data improving, housing inventory declining. Nothing can be served by adjusting rates either way.
Interest Rates: I hope economists had a nice vacation in Wyoming and they got in a few rounds of golf. Unfortunately all the rhetoric about curbing inflation, discussing commodity prices, addressing the seriousness of the credit crisis and other important subjects with no resolution offered made for an interesting few hours of fill in for the news media. Aside from that, I saw no conclusions drawn or viable offerings of assistance for the global economic condition, which I see as worsening.
September U.S. Treasury bonds closed at 117 and 22/64ths, down 1.5/64th. Profit taking and some money movement to equities from the relative safety of treasuries the main feature. The month long rally was expected to correct at some point but we remain skeptical that any improvement in the overall U.S. economy is in the offing. Rather, the rally in equities and the decline on treasuries was, in our opinion, a normal correction after recent price moves. Markets tend to overdo a directional move, which we have always accepted as technical activity. My philosophy, as my readers know, has been for some time that fundamentals move markets and technicals exacerbate the directional move beyond any intrinsic relationship. Our expectation of a deepening recession remains unchanged. We suggest implementing hedging strategies for equity positions and adding to long Treasury positions on any further correction.
Stock Indexes: The Dow Jones Industrials closed at 11,628.06, up 197.85 tied mostly to the hopes that the current reports of a marriage (or takeover) of Lehman Brothers and the Korea development Bank will go through. Unfortunately, as I read the offer, Lehman Brothers will probably not accept the low bid by the Bank, and the Bank is not likely to raise their bid. So the euphoria in the equity markets may be a pipe dream and other financial institutions may be on the auction block in the near future. Their holdings of relatively worthless paper tied to ambitious marketing of mortgage products and extensive holdings could result in the demise of other banks and brokerage firms such as the debacle of the Bear Stearns collapse. We would avoid any new purchase of equities except in those companies whose products are bare necessities, such as food, soap and toilet paper. The S&P 500 closed at 1292.20, up 14.48, with the Nasdaq gaining 34.33 points to close at 2,414.71. For the week the Dow lost 0.3%, the S&P 500 0.5% and the Nasdaq 1.5%. Bernanke’s statements were also positive at the symposium in Wyoming, when he indicated that the sell off in crude oil and the firm dollar should curb inflation. Unfortunately, the strong dollar prompted the sell off in crude and other commodities. One should inform Bernanke that the tail does not wag the dog. Implement hedging strategies in any large equity portfolios.
Currencies: The September dollar index closed at 7689.50, up 56.50 against the Euro loss of 99 points to 14758, the Swiss franc loss of 86 points to 9107, the Japanese yen loss of 116 points to 9102, and of course, the British pound loss of 232, to 18489. The negative GDP data from Great British showed the British economy stalled in the second quarter suggesting the possibility of a recession in that country. The possibility of European Central Bank and Bank of England interest rate cuts boded well for the U.S. dollar since relatively speaking, changes in foreign trading partner rates is a de facto opposite effect on the U.S. rate. The implication created a strong sentiment for the U.S. dollar. Unfortunately since the United States, thanks to the mortgage and credit crisis, is in worse shape than its trading partners are, we expect the U.S. rate to decline and that would reverse the positive action for the dollar of late. We prefer the sidelines since our crystal ball is out for repairs.
Energies: October crude oil closed at $114.59 per barrel, down $6.59 in a roller coaster trading session. The buyers of Thursday were the sellers of Friday all against the ups and downs of the U.S. dollar. Technicians jumped in after the initial wave of selling and as mentioned in other comments exacerbated the direction move created by fundamentals. We continue to avoid this market but our long-term opinion remains unchanged that crude oil will eventually decline to the $50-60 level. The continuing emphasis on alternative fuels and technology along with the current global economic slowdown is psychologically damaging to price structure of energy products. Stay out for now.
Copper: September copper closed at $3.4725 per pound, down 7.35c after Thursday sharp gains. As in other commodity comments, the strong dollar played a part in the selling since commodities are denominated in dollars and move contrary to that currency. Inventories at the LME were up 7,275 metric tonnes on Friday to 163,800. The Comex data released Thursday was unchanged at 5,390 short tons and the weekly Shanghai Futures Exchange data showed a drawdown of 3,029 metric tonnes to 21,796. We continue to view copper as overpriced due to the decline in demand from housing and autos and would once again suggest buying puts on any further corrective rallies.
Precious metals: October gold closed at $829.50 per ounce on Friday losing $5.50 while September silver closed at $13.477 per ounce down 25c. October platinum closed at $1,441.20, down $17.60 while September palladium lost $1.50 to close at $289 per ounce. Declining oil prices as well as other commodities reduced inflationary pressure and the strong dollar was responsible since commodities are denominated in dollars. We would continue to avoid precious metals and reiterate our directive, throw away your gold charts and chart the dollar.
Grains and oilseeds: As was the case with other dollar denominated commodities, grains and oilseed prices declined across the board. September corn lost 11 ¼¢ to close at $5.86 ½ per bushel, September wheat lost 31 3/4c per bushel to close at $8.65 ½ and November soybeans lost 21¢ per bushel to close at $13.27. Other fundamentals such as weather and crop estimates played small roles in the trading on Friday. We continue to suggest the sidelines for now but any change or even decline in the dollar or crop damage due to weather etc will put us back in the bullish camp primarily for soybeans, an international food staple.
Coffee, sugar and cocoa: September coffee closed at $1.4025 per pound, up 40 points on speculator buying but on light volume Friday. Much of the activity in the commodity pits was centered on both crude oil and the U.S. dollar. We have no opinion for now. September cocoa closed at $2,790 per tonne, down $34 on profit taking and selling in other commodities. We could see positive implications for cocoa tied to cold weather in Ivory Coast, which is affecting main crop development and spreading black pod disease to other areas. We think cocoa prices could gain this week and would cautiously buy December cocoa early on Monday but using stop protection. October sugar closed unchanged on Friday but managed a gain for the week. With relatively little fundamental changes and light volume, we prefer the sidelines in sugar.
Cotton: October cotton closed at 67.42¢ per pound, down 11 points after the rally on Thursday. Trade were buyers on a scale down and kept prices from declining further. The U.S. dollar gains also affected cotton prices. With the current tropical storm watch in effect, we would avoid cotton since sentiment will move the market as determined by whether or not damage is reported.
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 over 45 years experience in investments. His opinions are his own and not of the Futures Commission Merchant to whom he introduces his clients.
