The downward global economic spiral continued this week with the U.S. GDP falling at a 3.8% annual rate for the fourth quarter. Business equipment and software spending fell 27.8% and exports dropped 19.7%. The downward economic spiral is gaining momentum, and as we had warned there is no end in sight.
Interest rates: March Treasury bonds closed at 126 22.5 down 14 ticks even as the economic data showed the U.S. GDP falling at a 3.8% annual rate in the fourth quarter. Profit taking in front of the weekend turned a rally into a slight decline. One concern voiced repeatedly Friday was the burgeoning government debt tied to the various proposed application of a new economic stimulus. As I stated once before, the Government makes money the old-fashioned way, they print it. While there isn’t any room for cutting the Fed funds rate from zero, the usual stability created by low rates could be offset by other countries lowering their rates and acting as a de facto increase of the U.S. rate. I continue to suggest the sidelines for now.
Stock indexes: The Dow Jones industrials closed at 8000.86, down 148.15 with the S&P losing 19.26 points to close at 825.88 and the Nasdaq 31.42 points to close at 1,476.42. For the week, the Dow lost 0.95%, the S&P 0.73%, and the Nasdaq 0.06%. All in all the worst January ever after the U.S. data showed the U.S. economy declined the most in nearly 27 years in the fourth quarter. We maintain our opinion that there is a black hole under the current equity price level and another 15-20% decline is certainly a viable prospect. Implement hedging strategies.
Currencies: The March U.S. dollar index closed at 8646, up 70.5 points as economists expected a sharper decline in the real GDP, which contracted at an annual rate of 3.8% during the last quarter of 2008. The March Swiss Franc closed at 8607, down 78 points with the Japanese yen losing 4 ticks to 11138, the March Canadian dollar 45 points to 8134 and the Australian dollar 179 points to 6336. The March British pound managed a gain of 134 points to 14443 mostly on a correction and short covering after recent sharp declines. The dollar usually reacts to economic data and changes in interest rates and since the economic data was not as bad as analysts forecast, and the Fed Funds rate cannot go any lower, the dollar rebounded. We look now to the long side of the Swiss Franc on any further declines.
Energies: March crude oil closed at $41.75 per barrel, up 31¢ after trading as high as $43.44. Selling came in after the Energy Information Administration reported that U.S. oil demand was 305,000 barrels per day less in November that analysts had earlier estimated and was down 1.577 million barrels per day from same period last year. We prefer the sidelines.
Copper: March copper closed at $1.4685 per pound, up 1.10¢ even as inventories continue to rise. Production cuts are not enough to offset reduced demand from the housing and auto industries. Inventories at the LME were up 13,850 metric tonnes at 491,525 while Comex inventory late on Thursday was reported steady at around 40,240 short tones. We continue to believe continued pressure from rising inventories and reduced demand could push the price of copper to between $1.00 and $1.20 per pound. Buy puts on any rally.
Precious Metals: April gold closed at $928.40 per ounce, up $21.90, as inventors scurried to the relative safety of precious metals since Treasuries were a concern as outlined in my comments above. Inflation thanks to the rambunctious Washington promoters of a huge economic stimulus package is starting to concern inventors. We, however, see no particular value to shifting from one risky investment vis-à-vis equities, to precious metals. I prefer the proverbial mattress. March silver closed at $12.565 per ounce, up 42¢ while gains were also pronounced in the white metals. April Platinum gained $16.40 to close at $991.30 per ounce and March palladium gained $2.40 to close at $193.30 per ounce. We prefer the sidelines and view precious metals as a trading affair dominated by action in the U.S. economic picture, international interest rate changes and of course, currencies. Grains and Oilseeds: March corn closed at $3.79 per bushel on Friday, down 2 3/4¢ in a sideways session with no real feature other than the usual influence from the other pits most notably, soybeans. We prefer the sidelines with underlying support from demand. March wheat closed at $5.68 per bushel, down 10¢ on disappointing export demand after an early rally tied to the strength in beans. End of month book squaring also a factor in Friday’s trade. We see no reason to trade wheat either way at current levels. March soybeans closed at $9.80 per bushel, up 9 1/2 tied to end of month short covering and concern over Argentina weather conditions. We like beans from here but use trailing stops.
Coffee, Cocoa and Sugar: March coffee closed at $1.1890 per pound, down 2.6¢ on profit taking which ran into underlying sell stops. With ICE certified stocks declining as is seasonally normal, we could see further buying in the early part of the week. We would buy on the opening, put stops in place and raise them if the market moves higher. I don’t see enough of a rally to warrant anything but minimal long positions. March cocoa closed at $2,771 per tonne, down $30 on profit taking after touching five-month highs. The dollar is a factor and the rally in the dollar put pressure on dollar denominated commodities to some extent. With reports that manufacturers may be low on supplies, we could see cocoa rally on any dollar weakness. Buy a couple on the opening Monday and use stops. March sugar closed at 12.67¢ per pound, up 8 little points and we have no interest at current prices, either way. Stay out.
Cotton: March cotton closed at 49.41¢ per pound, down 66 points mostly tied to weak demand and the strength in the dollar. Stay out for now. With reports due on production and supply from the USDA on February 10 and planting expectations from the National Cotton Council due on the 13th, we prefer the sidelines.
John L. Caiazzo(951) 693-9600
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 more than 40 years experience in investments. His opinions are his own and not of the Futures Commission Merchant to whom he introduces his clients.
