Is there anyone left to bail out? The government has bailed out insurance companies, brokerage firms, banks, lenders and even global banking institutions. I think the only ones left to bail out are the homeowners seduced into believing they could own homes with little or no money down at mortgage interest rates far below prevailing rates. Unfortunately, the only bailout offered certain homeowners is a reduction of mortgage principal and interest. One more time for any politicians reading my commentaries, the unemployed can only be helped by increasing the unemployment benefit amounts and extending the time for the benefits. There is no other way to help them other than to put them to work. The government will not buy their homes for them, so those out of work are out of their homes. The only help for those employed homeowners seduced into low interest rate mortgages is to declare a moratorium on rate adjustments for three to five years if they have been religiously paying those low interest rate mortgages. All the rhetoric coming out of the mouths of politicians about keeping people in their homes is just that, political rhetoric with no substance. President Bush, in my opinion, is getting a bum rap for what was put in place during the Clinton administration, when the banks, at the direction of then Federal Reserve Bank Chairman Alan Greenspan, were allowed, or even instructed, to reduce reserves and increase lending while reducing credit requirements. That was to allow lower income people to buy homes and the economy flourished. Of course it was a balloon economy waiting to burst and now it has.
Interest Rates: December Treasury bonds closed at 116 30.5 down 100 basis points as the usual flight to safety from equities proved inadequate. The usual tendency of the markets to sell equities and move “money” to the relative safety of treasuries failed since the sale of such equities left very little to move to safety. Heavy margin calls resulted in some cases to total losses of equity investment and the balances if any, were moved to the “proverbial mattress”. Even treasury investments such as bonds and notes were sold to try to regain some capital in client accounts. We fear the worst is not yet over and we no longer in a position to recommend hedging risk with treasuries. Former Fed Chairman Greenspan was taken “over the coals” during Congressional hearings this week and claimed a “flaw in the model that defines how the world works”. No kidding Chairman. What gave it away? I have been warning for months that the Fed was on the “wrong track” and that warning has now come to fruition.
Stock indexes: For those readers who have followed my advice and hedged their equity investment risk, congratulations. For those who didn’t, you’re too late and now either get out or ride it out for the long term and ignore the 40-50% reductions of your investments. That money is gone. Now consolidate your positions and trim your losses. Wait for a bottom, which is nowhere in sight.
The Dow Jones closed at 8378.95, down 312.30. The S&P 500 lost 31.34 points to 876.77 and the Nasdaq lost 51.88 points to close at 1,552.03. Equity markets sold off sharply internationally as the recession could linger on for years. We have warned of the coming recession and the fact that there is no answer to turning the U.S. economy and therefore the economies of the world until which time as the situation runs its course. This recession is different from any in the past since there has never been a recession caused by a housing debacle of this magnitude. Once again, if you have any equity left, reduce stock positions by eliminating all but the companies that provide rudimentary necessities, i.e. drugs, food, energy, etc. Those companies will survive at either current price levels or somewhat lower but they will survive. Dot com, computer manufacturers and services, technicals, some manufacturing such as autos and construction suppliers may dwindle down to a precious few and there is no way currently to determine what ones will survive.
Currencies: The December U.S. dollar index climbed to 0.8695 on Friday up 116 points against losses in the euro of 229 points to 12604, the Swiss Franc 47 points to 8588, and the British Pound 244 points to 15844. The Japanese yen gained against all currencies including the dollar closing at 10624, up 178 points. The Eurozone suffered since the way the U.S. economy goes, so go the economies of their Western trading partners. We continue to prefer the sidelines.
Energies: December crude oil closed at $64.15 per barrel, down $3.69 and is close to our long-term price goal of the $50 to 60 level we have suggested for almost a year based on our view of a declining U.S. economy and energy demand. Even OPEC’s agreement to cut output has no effect on the selling in crude from over ambitious longs expecting that magic $100 number to re-emerge. Conservation as well as conversion talk to other forms of energy have had a material effect on energy prices. While we may see some forays into higher ground in corrective rallies, we continue to expect our range of $50 to $60 to be met and sustained. December heating oil closed at $1.9701 per gallon, down 8.56¢ while December gasoline lost 10.07¢ to close at $1.4497. Stay out of this market. Participation should be limited to the users and producers for now.
Copper: December copper closed at $1.6865 per pound, down 11.8¢ and continues its downward slide. Our recommendation to take profits on put positions after prices came down from nearly $4.00 per pound was issued this week and we now prefer the sidelines. Any rally however, should prompt new put positions since the recession we forecast is nowhere near resolution. Inventories at the LME were up 2,725 metric tonnes on Friday to 211,975. The Comex data released Thursday showed steady at 8,578 short tons and the weekly release of the Shanghai Futures Exchange inventory data should a decline of 3,737 metric tons to 31,053.
Precious metals: December gold closed at $730.30 on Friday, up $15.60 after heavy losses recently and tied to the decline in equities. Margin call selling has decimated many commodities totally disregarding fundamentals and historical relationships. In the past, a decline in equities and other assets prompted a move to precious metals but recently selling spilled over into all asset classes as investors were called to put up more money to finance their margined positions. We had suggested the sideline in metals and while a correction rally is to be expected, we cannot foresee a continuation of Fridays buying now. Margin long liquidation continues to be a concern. December silver lost 20.5¢ per ounce to close at $9.2950. January platinum lost 10.30 per ounce to close at $802.30 while December palladium gained $1.30 to close at $173.95. Some time ago, we had suggested the only trade in metals we would consider was the short platinum/long palladium spread. We recently suggested taking profits and moving to the sidelines. Stay there.
Grains and oilseeds: December corn closed at $3.72 ¾ per bushel on Friday down 17 1/2¢ tied to the selling in other commodities and equities and concern over the global recessionary trend. We have no opinion. December wheat closed at $5.16 ¼ per bushel, down 6 3/4¢ also tied to recession fears and general margin call selling. November soybeans lost 20 ¾¢ per bushel to close at $8.63 ¾ also tied to general selling in commodities and other markets. We cannot offer an opinion other than to indicate that at current prices, fundamentals would support a rally from here in beans. Unfortunately when panic selling occurs across the board, no fundamentals or technical considerations matter. Stay on the sidelines for now.
Coffee, cocoa and sugar: December coffee closed at $1.0865 per pound, down 145 points after touching new contract lows early in the session. Short covering towards the close brought prices back to closing levels. Trading in softs is often tied to crude oil prices and other general market action. We prefer the sidelines. December cocoa closed at $1,977 per tonne, down $13 after bouncing off 11-month lows in early trading. Softs are considered oversold but outside influences are keeping pressure on prices. We would stand aside here as well. March sugar closed at 10.82¢ per pound, down two ticks after touching a one-year low during the session. Short covering toward the close brought prices back from the session low of 10.73¢ but not enough to consider having bottomed.
Until which time as some consolidation is achieved in equities, crude oil and other commodities, we would avoid taking positions. Intraday trading of course is still an option during periods over extreme market movement but that should be left to the professionals. As a former pit trader in New York, such trading was bread and butter of my day, but working from upstairs and not being able to read the faces of the other traders and trade people, I would not venture to scalp to try to make money. Stay out until volatility subsides and fundamentals become dominant feature to these markets.
Cotton: The same applies to cotton where December lost 285 points to close at 46.23¢ per pound. 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 over 40 years experience in investments. His opinions are his own and not those of the Futures Commission Merchant to whom he introduces his clients.
