The talk of a new economic stimulus plan offered by President elect Barack Obama and members of Congress is another futile attempt at closing an open wound with a band-aid. To offer an unemployed worker a $1,000 to $2,000 tax credit is a joke. Firstly, a tax credit to an unemployed worker who does not pay taxes is of no consequence. A tax credit or even a payment as indicated above probably represents a single mortgage payment, which of course when the homeowner is behind three or more payments will not be accepted by the lender, is also no help. Assuming the working public gets a stimulus check, the chances are he will catch up on credit card bills or car payments and perhaps spend it in a retail establishment. Once it is gone, the benefit of the stimulus is also gone and the economic recession marches on.
Recent loan modifications have reportedly gone into default again with foreclosure at the end of the line. Lenders who offer such modifications are not taking any losses, merely stretching out the payments and tacking on the loss to the back end of the mortgage. Does that really help the homeowner being dragged into more debt? I doubt it.
We have yet to hear or read about the burgeoning credit card debt where consumers use a new credit card while their credit is still okay in order to make the minimum payments on the other. This is the new road to financial disaster for the public and the unemployed will soon come to the end of their ability to do this.
Interest rates: March U.S. treasury bonds sold off sharply on Friday closing at 13515 down 2.1850 points even against weakening economic data. The Institute of Supply Management reported Friday that its manufacturing index dropped from 36.2 in November to 32.4 in December. The lowest reading in 28 years. Analysts, of course incorrectly, estimated a reading of 35.5. Any number below 50 reflects a contraction. We had suggested the sidelines two weeks ago after having correctly called the huge rally in prices and the decline in interest rates. We continue to favor the sidelines since there is, in our opinion, no further room on the downside for rates, however, traders willing to assume some risk, could short bonds on any attempt at a rally using stop protection.
Stock indexes: The Dow Jones Industrials closed at 9034.69, up 258.30 on light volume and consequently indecisive as to whether or not we have seen the bottom of the long decline in equities. Our feeling, of course, remains negative since the economic recession and the labor situation remain unchanged. The S&P 500 closed at 931.80, up 28.55 with the Nasdaq gaining 55.18 points to close at 1632.21. For the week the Dow gained 6.1%, the S&P 500 6.8% and the Nasdaq 6.7%. We doubt the year-end rally will continue since mutual funds had to commit cash for the year-end and final quarter of 2008. Our feeling is that moves to cash will occur as Funds continue to assess the damage to their results. We look at Fridays rally as another opportunity to implement hedging strategies.
Currencies: The March U.S. dollar index closed at 8280.5 up 68.5 points and a three-week high against the Japanese yen, which closed at 10858, down 171 points. The March Euro closed at 13823, down 98 points while the Swissie lost 87 points to 9277 and the British pound 87 points to 9277. The March Canadian Dollar managed a gain of 13 points to 8237 as well as the March Aussie dollar, which gained 66 points to close at 7063. The perception that U.S. rates cannot go any lower, which had been the reason for the sharp decline in the U.S. currency, has now provided the stimulus for the dollar base and rally. We could see further gains for the dollar unless one of its trading partners in the euro follows suit and lowers rates further changing its relationship with the dollar. The U.S. recession, which we called nearly two years ago, has spread throughout the world.
Energies; February crude oil closed at $46.34 per barrel, up another $1.74 after its dollar decline from last weeks highs. OPEC production cuts along with the equity market rally prompted further short covering. February heating oil closed at $1.4803 per gallon up 3.82c while unleaded gasoline gained 4.85c per gallon to close at $1.1105. We once again suggest the sidelines after having correctly forecast the decline from over $1.30 to the $40-50 per barrel level. At current prices, demand is returning and the conservation experienced late last year has dissipated to some extent. The energy hungry U.S. consumer apparently has returned to his nonconservation habits as related at least to gasoline and heating oil. Heating oil is used as diesel fuel for the trucking industry. Stay out for now.
Copper: March copper closed at $1.4610 up 5.10¢ in a technical correction after the sharp late year declines tied to the reduced demand from the housing and auto industries. Our recommendation to take profits on long put positions a couple of weeks ago after the sharp price declines was correct and we continue to suggest the sidelines in copper. Any further rallies could once again prompt us to recommend put purchases.
Precious Metals: February gold closed at $879.50 per ounce, down $4.80 tied to profit taking and prompted by the strength in the U.S. dollar. Volume was light as traders extended their holiday vacation time. March silver however, managed a gain of 19.5¢ to close at $11.49 on position squaring after recent long liquidation and short sales. We prefer the sidelines in metals but could expect further long liquidation if the dollar continues to firm. April platinum closed at $946.70, up $5.20 while March palladium closed at $192.30, up $3.60. Our long time recommendation of short platinum/long palladium has worked out very well for our readers. We could see further spread contraction but taking profits is always a good idea. There will be other opportunities.
Grains and Oilseeds: March corn closed at $4.12 ¼ per bushel, up 5 ¼¢ tied to the gains in crude oil where corn is associated with energy products through its conversion to ethanol. We prefer the sidelines. March wheat closed at $6.11 per bushel, up 1/4c on light volume with profit taking at year-end a feature against technical buying. Again, we prefer the sidelines. March soybeans closed at $9.77 per bushel, down 3c after achieving a three-month high on speculative profit taking. We could see further gains tied to weather concerns and buying by China where the government has been keeping domestic prices above import prices. Artificial price supports rarely work for any period of time, so we could see profit taking on further rallies. Only traders closing watching the market should participate on either side.
Coffee, Cocoa and Sugar: March coffee closed at $1.1090, down 1.15¢ on profit taking after gains on Wednesday. Exports from Honduras were reportedly down 2.9% and that had prompted the Wednesday rally on light volume. We prefer the sidelines but could expect some buying in the New Year. Use stops for any new long positions however. March cocoa closed at $2.540 per tonne, down $125 but lost only $86 week on week during the holidays. The incoming crop in Ivory Coast was reportedly delayed and resulted in higher prices. We could see buying this coming week but our lack of confidence in this market prompts sell stop recommendations. March sugar closed at 11.85¢ per pound up 4 little points with Kenyan sugarcane production declining by 23.1% in the last quarter of 2008. Short covering and new longs by some commodity funds and speculators could push prices higher early in the week but once again, as in the other softs, use stops.
Cotton: March cotton closed at 48.91¢ per pound, down 11 points after nearly touching limit down. Prices had increased to seven-week highs and the sharp sell off on light volume was to be expected during the holiday week. Sentiment has changed to bullish from neutral and we would look to buy cotton early in the week using stop protection of course.
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.
