Market commentary
Happy days are here again? Hardly. The U.S. Congress passing of the bailout bill is not the end of the economic crisis but only a first step – a very small first step. I view the $700 billion bill as too little, too late. The U.S. is in recession and it is spreading globally. When I first warned of an impending recession early in 2007, I based my assessment of the economy on the growing labor problems. I had alerted my subscribers to the fact that the increasing number of first time unemployed represented the thesis that none of these workers contributed to the bottom lines of their respective companies, an opinion I vehemently opposed. We are now seeing a weekly unemployment line that has expanded to more than 495,000 workers. That incorrectly presupposes 495,000 consumers. I expanded my reasoning to the fact that most of those unemployed represent the wage earner of a family of a significant other and 2.5 offspring. That means, in the case of a family of five, that 2.45 million consumers will not be consuming nonessentials and the producing companies of those nonessentials would be the next to lay off workers. I made those assumptions early last year.
Before you vote on Nov. 4, you had better familiarize yourself with the root causes of the current U.S. economic crisis, what was done, who did it, and what could have been done to prevent it but wasn’t, and respond accordingly.
Interest Rates: December treasury bonds closed at 119 20/32nds up 8/32nds after it was announced by the U.S. Labor Department that 159,000 jobs were lost in September, making it the worst level since the first quarter of 2003. The U.S. economy has now lost 760,000 jobs this year and while not the dictionary definition of recession, we are in it and have been for some time. The current financial crisis created years ago by Fannie May and Freddie Mac and promulgated by former Fed Chief Alan Greenspan and former President Bill Clinton in an aggressive effort to put low-income people in homes is, in my opinion, the root source of the current problem. The recent Fox TV documentary detailing the entire history of the problem was an interesting history lesson that obviously had not been learned. Once again, I quote from the movie Wall Street, where Gordon Gecko, claims, “Greed, for lack of a better word, is good.” Our Congress since early 1990’s must have tried to emulate Gecko, buy treasuries on any decline. This recession will be long lasting and could border on depression. The $700 billion bailout against a possible four trillion dollar problem is like putting a bandage on open-heart surgery.
Stock indexes: The Dow Jones Industrials closed at 10,325.38, down 157.47 points and down 7.35% for the week. The S&P 500 closed at 1,099.23, down 15.05 points and lost 9.38% for the week. The Nasdaq closed at 1,947.39, down 29.33 points and down 10.81% for the week. I have been warning about a black hole under the equity markets and have been strongly suggesting the implementation of hedging strategies for nearly a year and we are fast approaching the point of no return. The bottom of the equity markets is nowhere in sight in my opinion, and any rally could provide an opportunity to either liquidate weak equity positions or implement strategic hedges.
Currencies: The U.S. dollar index closed at 8077, up 13 points on the euphoria tied to the passage of the $700 billion rescue package (bailout) by Congress. The December Euro lost 40 points to close at 138290 and the Japanese yen lost 15 pints to close at 9563. The December Swiss Franc gained 78 points to close at 8905 after recent weakness and the December British Pound gained 108 points to 17741. The expectation that the bailout would allow banks to start to lend again, which could improve the housing situation the main reason for the dollar strength. Unfortunately, it is too little too late in my opinion, and the reality of the massive defaults and foreclosures will permeate the financial community for some time to come. I would look to buy Swiss Francs on a scale down if necessary as I expect the U.S. interest rate to be cut further by the Fed in an effort (futile in my opinion) to restart the economy.
Energies: Crude oil closed at $93.88 per barrel, down 9¢ after losing $4.56 on Thursday tied to slowing demand. Consumer conservation measures along with slowing demand from housing and auto manufacturing also a factor. The optimism on the U.S. economy after the $700 billion bailout failed to garner interest and was offset by reduced demand. We have been suggesting that at some point in the future, crude prices would decline to the $50 to 60 level and we have been joined by some major firms in our expectations. With wide price swings possible and high margins, the energy market does not provide the kind of potential I look for my clients. Stay out.
Copper: December copper closed at $2.69 per pound, up 6.25ٕ¢ but my recommendation to buy put options is paying off for my subscribers. While we may see some further technical retrenchment based on perceived oversold condition of copper, I continue to expect further price declines based on reduced demand from the housing and auto industries. Inventories at the London Metal Exchange warehouses fell by 575 metric tonnes on Friday to 198,500. The Comex data released on Thursday showed unchanged levels at 9,921 short tons and the Shanghai Futures Exchange was on National Holiday. No report was issued on their warehouse stocks.
Precious Metals: December gold closed at $833.20 per ounce down $11.10 on selling pressure after the House of Representatives finally approved the revised version of the $700 billion bailout. Investor expectations of a stability associated with the bailout prompted further long liquidation of gold. Unfortunately, as I indicate in earlier commentaries, I see no benefit in the bailout since the overall risk to the U.S. economy could be in the 4 trillion dollar area. This might be a good time to look at gold from the long side but use stops. December silver closed at $11.3250 per ounce, up 20.5¢ on a departure from gold but since silver had sold off more sharply recently relative to gold; this correction was to be expected on a technical basis. With no fundamentals to speak of silver could rally further early in the week but I see no reason to trade either way. January platinum closed at $965.80, down $20.80 on Friday with December palladium losing $1.35 per ounce to close at $201.85. My only suggest in metals some time ago was for the sale of platinum against purchase of palladium as a spread. Otherwise I would treat metals as a trading market only.
Grains and Oilseeds: December corn closed unchanged at $4.54 per bushel early strength as traders took profits in front of the weekend. Our emphasis has been on the financials and with weather forecasts positive for crops, we could see further price declines. Stay out. December wheat closed at $6.40 ¼ per bushel, up 4 1/4¢ mostly on profit taking by shorts after recent weakness. Wheat lost 75 3/4¢ per bushel for the week and we once again suggest the sidelines. November soybeans closed at $9.92 per bushel, down another 12c to almost a one low. Speculative and hedge related selling continues to affect soybeans and products. A lack of any positive fundamentals could continue to pressure the bean complex and we continue to suggest the sidelines. We would not consider shorting anything that grows whether or not there is profit potential in the short term.
Coffee, Cocoa and Sugar: December coffee closed at $1.2205 per pound, down 3.4¢ to a one and a half year low. Speculative long liquidation pushed prices through technical supports and the technicians added to the selling pressure. We prefer the sidelines but could expect a bounce early in the week. Whether it can be sustained is another question. An early buy on the New York opening could produce a profitable trade during the session but use stops. December cocoa closed at $2,469 per tonne, up $18 in a range tied to the U.S. dollar trading. We prefer the sidelines since due to the narrow range, a breakout either way would add technicians to the fray. March sugar closed at 12.61¢ per pound down 47 points after touching a four-month low. Fund and speculative long liquidation pressured prices as the dollar moved higher. Many of the commodities we follow that are dollar denominated will move with the dollar in the absence of fundamentals. We prefer the sidelines in sugar.
Cotton: December cotton closed at 57.41¢ per pound down 1.03¢ tied mostly to economic uncertainty in the financial markets. The market seems torn between bullish expectations such as reduced cotton stocks and bearish technicals. We will get a better picture after the Oct. 10 supply demand report from the USDA. Stay on the sidelines for now. Cotton will probably remain in a trading range.
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 40 years experience in investments and opinions are his own and not of the Futures Commission Merchant to whom he introduces clients.
