When the U.S. administration finally detects a problem in the economy, the answer is simple: Throw money at it. That was done this week when the President decided to bailout the auto industry with a $17.4 billion loan. Unfortunately there were strings attached to the money. The auto companies have three months to turn their businesses around or reorganize under the bankruptcy act. As my readers know, I see bankruptcy as the only answer to the current problem. There is no point in people working building a product that no one will be buying. The bailout was perceived as a last chance to save President Bush’s legacy. As I suggested a number of times, we have been in a recession for over a year and the disbelief of the American public prompted the abandonment of the Republican party, from the Oval office down to the local congressional districts. So now we have a President Elect promising 2.5 million new jobs. Is it possible for that many Burger King outlets to be created? I doubt it. That number is a joke. There is no comparison to President Franklin Delano Roosevelt program for building roads and infrastructure as some would suggest. The people who built the infrastructure were not laid off bankers, brokers, engineers or high tech people. I believe this recession will be deeper and longer than any previous recession.
This week the Fed lowered the fed funds rate to a range of zero to a quarter point in their expectation that this will help the U.S. economy. Another joke since most existing homeowners are underwater, where the value of the home is lower than the existing mortgage. The only buyers who might be qualified are those first time buyers with jobs, good credit and a substantial down payment. That will not reduce the number of new home inventories from the current 11 months supply. I fully expect the recession to run into 2010 and possible 2011.
Interest rates: March Treasury bonds closed at 140 25.5/64ths, down 19/64ths on profit taking after recent strength tied to a weakening U.S. economy and lower interest rates. The Fed lowered the Fed funds rate to a range between zero and 0.25% and there is no longer any recession fighting arrows in their quiver. The bailout of the auto companies amounted to nothing but what I consider a band-aid on open-heart surgery. The strings attached to the money is in my opinion overwhelming and unmanageable by the companies receiving the funds. I doubt very much if the auto companies can turn their business around and show a profit, which is one of the contingencies for the bailout announced by President Bush. I suggested taking profits on our year-long bullish stance on treasury bonds a couple of weeks ago and am now awaiting an opportunity to sell bonds short or purchase put options. With the lowest fund rates possible now in force I see no potential for continued upward momentum in price.
Stock indexes: The Dow Jones Industrials closed Friday at 8579.11, down 25.88 mostly due to the lower crude oil and energy stocks. The S&P 500 managed a gain of 2.60 points to close at 887.88 after the announced bailout of the Auto industry. The Nasdaq closed at 1,564.32, up 11.95 points. We remain in the bearish camp fully expecting the U.S. economy to continue its down economic spiral and the recent small gains in equity prices can only be considered a correction in a bear market. Implement hedging programs.
Currencies: The March U.S. dollar index closed at 8243.50, up 182 points, the largest single daily gain in nearly two months after recent selling was considered overdone and tied to the lowered U.S. interest rates. We continue to suggest the sidelines in currencies since the now lowest possible U.S. interest rate will detract from U.S. dollar investment and prompt long liquidation in our opinion. We continue to favor the Swiss franc, however, but would only add to long positions on setbacks. Our former suggest that the Swiss Franc would once again seek parity with the dollar remains intact but the timing is the big question. The March Swiss Franc closed at 9051, down 276 points while the March Canadian Dollar lost 160 points to 8175, the March British Pound 209 points to 14841, and the Australian dollar 118 points to 6771. The March Japanese yen managed a one tick gain to close at 11198. Stay on the sidelines.
Energies: February crude oil closed at $42.36 per barrel, up 69¢ tied mostly to expectations of an OPEC production cut already announced and scheduled to be implemented in February. We prefer the sidelines having achieved our long term goal of prices between $50 and $60 announced and suggested nearly a year ago when prices were climbing to the $140 per barrel level. Stay out for now even though demand for energy products has diminished greatly due to the global recession. The sell off came too quickly for our taste and may correct in the near term.
Copper: March copper closed at $1.3265, up 2.5¢ mostly on profit taking and against the usual action when the dollar gains against the basket of currencies. The bailout of the auto industry may also have been considered a factor but as I mentioned earlier, the bailout will not change the negative auto sales picture and any short-term gains will not be sustainable in our opinion. Inventories at the LME were up 215 metric tonnes to 324,300 with Comex data released Thursday showed an increase as well of 882 short tons to 25,369. The weekly data from the Shanghai futures exchange showed a gain for the week of 1,895 metric tones to 18,192. I expect further long liquidation in copper with prices approaching the $1.00 to $1.20 per pound level.
Precious Metals: February gold closed at $837.40 per ounce, down $23.20 tied to the strength in the U.S. dollar. As I have stated ad nauseum, dollar up gold down, dollar down gold up. March silver closed at $10.85 per ounce, down 27¢ following gold. The white metals also closed lower with April Platinum losing $12.00 to close at $856.10 and March palladium, losing 55¢ to close at $177.95. Our long term spread recommendation of long palladium/ short platinum worked out very well for my readers. We now suggest taking profits and standing aside.
Grains and Oilseeds: March corn closed at $3.80 ¾ down 8 ¾¢ in a correction after recent gains. Another factor was the decline in crude oil prices which negated the urgency of corn conversion to ethanol and longs liquidated. Some concern that Brazil and Argentina’s hot dry weather may have impacted the crop in South America and that plantings may have been cut back could prompt a new round of buying for corn. We would look to putting on a few longs but with stops on an intra-day basis. March wheat closed at $5.63 ¼, down 8 1/4¢ but managed a gain for the week. The variations in the U.S. dollar a factor in the trading in grains and we prefer the sidelines. March soybeans closed at $8.72 ½, down 2¢ tied to the strength of the U.S. dollar which determines competition with other growing countries. We prefer the sidelines but continue to favor the long side on setbacks.
Coffee, Cocoa and Sugar: March coffee closed at $1.1095 per pound, down 1.55¢ tied to the strong U.S. dollar and negative technicals. Stay out for now. March cocoa closed at $2,595 per tonne, down $77 also tied to the strength in the dollar and on profit taking. Stay out for now. March sugar closed 88 points lower at 10.95¢ per pound tied to both technicals and the strength in the dollar. With favorable weather conditions in Brazil we could see added pressure in sugar. We prefer the sidelines in sugar as well.
Cotton: March cotton closed at 45.23¢ per pound, down 5 points but mostly against the dollar strength. With some buying reported by China and the Indian price support programs, we could see renewed buying interest in the U.S. so we would put on a few longs but with stop protection.
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 those of the Futures Commission Merchant to whom he introduces his clients.
