No one was watching the store, and now investors are scratching their heads, wondering what happened to their riches. Bernard Madoff, the former chairman of the Nasdaq, was arrested and charged with fraud. $50 billion seems to have disappeared through what is being described by a monumental Ponzi scheme, named for the Italian immigrant who years ago defrauded people in a scheme paying old investors with funds invested by new investors. It appears that at least $15 billion, much of which was concentrated in Southern Florida and New York City, as gone to money Heaven; an appropriate explanation, and as good as any. The losses were incurred by not only wealthy individuals but by mutual funds and hedge funds where investors trust their money to ‘professionals.’ The ramifications are expected to reverberate throughout the financial community and in the expensive homes on Long Island, New York City and Palm Beach. It puts advisors on their toes as to where to place funds for investment and individual investors watching the cash register more carefully.
As to the markets, investors and professionals alike are awaiting any word from the White House on the possible bailout of GM and Chrysler. Ford appears to be solvent and not in need of funds but is seeking a credit line. The other two could be on the verge of bankruptcy if they do not get bailout funds. Unfortunately, I do not see what the bailout of $15 billion will do in the overall scheme of things and view any such number as a down payment. I head this week that 60% of each vehicle sold by GM and Chrysler is applied to labor, while less than 30% is the cost to the foreign makes built in this country. I fear the unions will have to make big concessions in order to become viable, but a bankruptcy could keep potential buyers away from showrooms fearing a lack of service and support for their purchase. However, a bailout of $15 billion will not accomplish anything.
It should be interesting to see how the auto industry and the Madoff episodes affect the markets, so I would caution investors as to any new purchases and once again suggest implementing hedge strategies for equity investors. Developing strategies for preservation of capital as well as for yield enhancement is what we attempt to do here at Acuvest.
Interest rates: March Treasury bonds closed at 134 26/64ths, up 12.5 64ths as retailers reported a decline in sales for a fifth straight month in November. That is the longest period of decline in more than 16 years as consumers, fearing loss of jobs, limited unnecessary purchases. We had recommended the long side of bonds for nearly a year and suggested taking profits just a week or so ago. We prefer the sidelines for now but our next suggestion will probably be on short side. I will keep my clients posted as to the timing.
Stock indexes: The Dow Jones Industrials closed at 8629.68, up 64.59 after opening sharply lower on reports that the Bush Administration would step in to bailout the big three auto manufacturers. That remains to be seen and the controversy continues as to whether a $15 billion bailout will do anything to curtail the losses and layoffs. There really is no point, in my opinion, to providing funds to keep people working building cars that will not be sold. My preference would be the bankruptcy reorganization route and double unemployment benefits to the laid off workers extending those benefits for at least six months to a year. I see no point to prolonging the agony. The S&P 500 closed at 879.73, up 6.14 while the Nasdaq closed at 1540.72, up 32.84. We will have to wait the results of any auto bailout one way or the other since that will determine the next move in equities. We continue to recommend implement risk hedging strategies.
Currencies: The March U.S. dollar closed at 8429, down 34 points recovering from sharper losses as the prospect of a White House ordered bailout was mentioned. The report turned the dollar around as well as the equity markets. Whether or not there is a bailout will determine the next move for the greenback. The March Euro closed at 13340, up 58 points while the Swiss Franc gained another 62 points to close at 8521. The March yen gained 81 points to 11004 but the Canadian dollar lost 58 points to close at 8047. The Australian dollar also suffered a decline of 94 points to close at 6569, all basis the March contracts. Stay out until a clarification of the auto bailout materializes. If not, look for further declines in the dollar.
Energies: January crude oil closed at $46.28 per barrel, down $1.70 tied to the Senate rejection of the auto industry bailout. A major broker, Goldman Sachs, had earlier this year projected $200 per barrel for crude “modified” their expectation down to $45 per barrel and possibly down to $30 per barrel. They also said an OPEC production cut of 2 million barrels per day would be needed to get prices up. We had suggested a year ago that prices should decline to the $50-60 per barrel when it was trading at $140 so our expectation was a lot more accurate than the major houses. We recently suggested the sidelines and staying there for now.
Copper: March copper closed at $1.4285, down 8.35¢ tied as in other commodities, to the failure of the U.S. Senate to bailout the auto industry. After the market closed it was announced that the White House was considering using funds from TARP to assist the autos and that could turn prices around if it occurs. We therefore suggest the sidelines since we do not apply the coin flip method to our client fund management.
Precious metals: February gold closed at $820.50 per ounce, down $6.10 after recent strength tied to the dollar weakness. However, with the prospect of a bailout for the auto industry, it is anyone’s guess how the dollar will be impacted and consequently the precious metals. March silver closed at $10.23 per ounce, down 19.5¢, following gold. January platinum closed at $822.10 down $23.40 and March palladium lost $9.20 to close at $175.00 per ounce. We prefer the sidelines.
Grains and oilseeds: March corn closed at $3.73 ½ per bushel, up 22¢ after an analytical firm, Informa Economics, predicted a sharp drop in corn plantings. We could see carryover buying but would caution against any position if the dollar continues its late Friday rally. March wheat closed at $5.13 per bushel, up 5 ½¢ tied to the strength in corn with basically no fundamental changes. We prefer the sidelines. March soybeans closed at $8.56 ¼ per bushel, down 4 ¼¢ after trading as high as $8.66 early in the session. Beans found support from the USDA announcement that export sales of U.S. soybeans for delivery to China totalled 116,000 metric tons in the 2008-09 marketing year. We like beans but any long position should include sell stop protection.
Coffee, Cocoa and Sugar: March coffee closed at $1.1215 per pound, down 55 points tied to the action in equities and the dollar. Brazil’s crop could be 20% smaller than the last harvest with trees resting during the biennial bearing cycle and that could lead to higher prices. We like coffee from here but with stops since a recession usually does not bode well for consumption. March cocoa closed at $2,396 per tonne, down $4.00 after trading as low as $2,340 with the late rally tied to supply concerns and the equity rally late in the day. We prefer the sidelines in cocoa since consumption could be impacted by the continuing global recession. March sugar closed at 11.64c per pound, down 25 points after trading as low as 11.51 with the late rally tied to the rally in equities. With sugar tied so closely to the equity market, and our basic negativity towards equities, we prefer the sidelines.
Cotton: March cotton closed at 43.43¢ per pound, down 1.03¢ with the association to crude oil prices and the U.S. equity market. Daily cotton stocks decreased to 883,072 bales, down 7,072 bales according the ICE data and while construed as positive, the influences of other markets weighed on prices. We prefer the sidelines.
John L. Caiazzo
www.acuvest.com
futures@acuvest.com
Information provided is from sources deemed to be 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.
