They named a saloon in the Old West the Last Chance, and that’s what I think is being offered to holders of equities after Friday’s rally. That rally was based on the announced addition to President Elect Obama’s cabinet of Timothy Geithner, the President of the New York Federal Reserve and a former Treasury official as Secretary of the Treasury. I have bad news for investors. The current global economic crisis cannot be fixed with a wave of a magic wand. The U.S., as I have indicated for months now, is the consumer of the World and as goes the U.S. economy, so go the economies of the world. The current crisis is based in the housing industry as people were permitted to buy homes with little of no equity and at lower than prevailing interest rates. That is fact. Also the fact remains that the permissive and aggressive lending practices created during the Clinton Administration that allowed less-than-credit-worthy buyers to purchase homes led to the current housing debacle. I have stated in commentaries going back at least a year, that the only hope for the unemployed homeowner is for the Federal Government to increase unemployment benefits and extend them for at least one year.
The current attempt to lend billions to the auto industry is a grave mistake. There is no point to extending credit to the auto companies in order to avoid bankruptcy of the big three and of the multitude of companies associated with the industry. Keeping people employed building a product that will sit on a shelf, or in this case on some dock, and adding to inventory, which leads to lower prices, only perpetuates the problem. It’s time to start the healing process while protecting workers by extending unemployment benefits.
While my suggestion is certainly unpopular, I see no explanation for throwing money down a well, which would be the case for extending credit to auto companies. If we have reached the point of saturation in the auto industry, why keep people employed producing more of a product that is not being sold?
Interest rates: Our recommendation to stay with the bonds paid off but now it’s time to take profits. December Treasury bonds closed at 126 09.5/32nds on Friday up 16.5 points and has achieved our price goal. It is time to leave the party with your gifts. The bonds have provided the only safe haven for capital as the U.S. and global equity markets collapsed. We are now on the sidelines.
Stock indexes: The Dow Jones industrials closed at 8,046.42 on Friday, up 494.13 points tied mostly to the proposed Obama cabinet appointment of Timothy Geithner as Treasury Secretary. It offers investors a golden opportunity to cut their losses and put their money either in CDs or in the proverbial mattress. Our interim goal of 7500 for the Dow was achieved on Thursday and we now suggest the sidelines while the honeymoon with the Treasury Department possible appointment is allowed to run its course. There is no question in my mind that no high level appointee can deter the current downward economic spiral. Once the smoke clears, look for the Dow to resume its downtrend to my new goal of between 7,000 and 7,200. The S&P 500 closed at 800.03, up 47.59 while the Nasdaq gained 68.23 points to close at 1,384.35. For the week the Dow lost 5.3%, the S&P 500 lost 8.4% and the Nasdaq lost 8.8%. With the big three auto company executives flying into Washington on their private jets begging and the problems at CitiGroup causing the stock to collapse this week, we see no solace in Friday’s rally. Take your marbles and go home. Call me for hedging strategies as an alternative to liquidating stocks.
Currencies: The December euro closed down 4 points to 12496 against the dollar while the December Swiss lost 6 points to close at 8175. The December British pound lost 36 points to 14775 and the December Japanese yen lost 59 points to close at 10502. The Aussie dollar actually closed higher by 55 points to close at 6168 but the Canadian dollar closed 13 lower at 7769. Financial anxiety in the global markets is actually helping the dollar’s upward momentum as funds gyrate to the relative safe haven of the U.S. treasury market. We nonetheless see additional turbulence and would avoid trying to position any of the currencies until which time a clear determination can be made concerning the U.S. Federal Reserve various bailout alternatives for the auto industry, housing, and even the lowly U.S. taxpayer. Stay out unless you actually need to convert dollars for overseas purchases.
Energies: December crude oil closed at $49.62 per barrel, down $4.00 and lost 13% for the week based on continuing slackening demand. We were adamant for more than a year about oil prices receding to the $50 to $60 per barrel level while other thought us wrong. While we are entitled now to gloat over our correct prediction, we now are reluctant to predict further price moves at current levels. No doubt OPEC and non OPEC producers are conjuring up ways to enhance prices, we prefer the sidelines.
Copper: December copper closed at $1.5790 per pound on Friday and in after market trading rose to $1.61 per pound. With trading on a global scale, it has become more and more difficult to quote a closing price so we will probably be relegated to giving the latest available pricing. At any rate, copper remains under pressure due to the complete breakdown of the U.S. auto industry, which uses enormous amounts of copper under normal circumstances. Demand may, from time to time, emanate from the Middle and Far East so that actual supply/demand has become elusive. For now, we see continued pressure and would buy puts on any rally of substance.
Precious metals: December gold closed at $791.80, up $43.10 on the Comex division of the New York Mercantile Exchange. Gold has, over the years, become a safe haven during times of strife in the financial markets but during the last few months has been neglected to the point where prices have been under pressure of liquidation to meet margin calls in other commodities. We prefer the sidelines. March silver closed at $9.505 per ounce, up 45.6¢ following gold. January platinum closed at $825.70 per ounce, up $35.60 and March palladium closed at $180.25 per ounce losing 80¢. We prefer the sidelines in metals. Platinum and palladium have uses in oil refining and catalytic converters for automobiles.
Grains and oilseeds: December corn closed at $3.38 ½ per bushel, down 25 1/4¢ on bearish fundamentals prompting long liquidation by speculators. Improved weather conditions and ethanol related problems also contributed to the weakness in corn. We continue to avoid this market. December wheat closed at $4.99 per bushel, down 12 ¾¢ mostly tied to a lack of fresh fundamentals and in sympathy with the selling in the corn pit. We prefer the sidelines. March soybeans closed at $8.47 ¼ per bushel, down 15 ½¢ on general weakness from equities and crude oil. Soybean closed before the huge rally in equities prompted by the possible appointment to President Elect Obama’s cabinet of Timothy Geithner, a possible plus in the U.S. economic debacle. We expect a rally early on Monday but would not participate since it may be short lived if equities fail to carry through from Fridays gains.
Coffee, cocoa and sugar: December coffee traded at $1.0895, on Friday after the regular close, and up 65 points from the close. Origin selling early in the session tied to the inability of producing countries to gain access to credit was a notable deterrent to coffee pricing. We prefer the sidelines but see continued pressure on prices from exports. December cocoa closed at $2,170 per tonne, down $9 and remains on our no interest list while it is in a narrow trading range with no particular news to push prices either way. March sugar traded at 11.32¢ per pound after a 20¢ rise early in the session. Prices breached overhead resistance but failed to carry through. This coming week is shortened by the U.S. Thanksgiving holiday and book squaring in the softs will probably negate any substantial price moves. We prefer the sidelines.
Cotton: December cotton closed at 40.99¢ per pound, up 1.35¢ mostly tied to a lack of selling and a large stopper of the December deliveries. December trading lightly with the most active March contract gaining 189 points to close at 41.80¢ per pound. While cotton has been a victim of global recession, prices at current levels appear attractive to us and we would now consider putting on a light March position with the intention of rolling into July depending of course on spread pricing toward the middle of February. For the short term traders, we would buy with stops and if successful, raise the trailing stops. My goal for cotton prices is somewhere in the vicinity of 55 to 60¢ per pound basis the March.
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 his clients.
