The Acuvest Letter
Market Commentary Week ending June 12 2009
Overview
Good news; the U.S. recession, according to many analysts and economists, is scheduled to end at the end of 2009. Now for the bad news; as a “famous” person once said, “forgive them for they know not what they do”. In this case, they know not what they say. The decision to extend the time period for foreclosing on homes will only, in my opinion, perpetuate the problem. There are two conditions existing today which negate any possibility of an end to this recession. Firstly, there is no precedent in history for the current recession. Pundits claim certain time periods for recession and cite historical recessions. Secondly, no where in history has a home buyer been able to purchase a home at below prevailing interest rates on ARMs and for 100% to 125% of the homes value. That situation was put in motion by the Clinton administration and the then Chairman of the Federal Reserve, Greenspan. It seems to be easy to forget that Barney Frank, current President Obama, and certain others in congress, played an important role in getting people into homes they could not afford. Exacerbating the problem was the levelling off and subsequent decline in home values and the unprecedented corporate layoffs leading to over 600,000 first time unemployed every week for months. Does anyone even ponder the effect of the mortgages and car payments for those individuals which are going become defaults and foreclosures? They are in the so called “pipeline” and as I indicated in prior commentaries, there is only one answer to resolving the current situation. Increase or double the current unemployment benefits in order to allow the unemployed to make their home and car payments, and even provide some spendable income so that consumers can start to buy products and put people back to work. All the rhetoric coming out of Washington will not “change” anything. The only “change” promised will be from “bad to worse” for the intermediate term and certainly beyond 2009. Now for some actual information.
Interest Rates: September Treasury bonds closed at 114-10, up 24 points as the reality that high yields will exacerbate the problem and cause potential home buyers to avoid new purchases. A condition that is unacceptable in today’s economy. Bankruptcy for General Motors will allow the firm to negate all “bloated” union contracts and start to emulate the Japanese car makers contracts with unions. At least it will level the playing field for U.S. carmakers. Chrysler is expected to emerge from bankruptcy thanks to the orchestrated “merger” with Italian carmaker, Fiat. While the current fiscal problems will be with us for some time what with the aggressive spending programs from Washington, rates, in my opinion will come down and therefore we now look to the long side of Treasury bonds. Buy bonds on any further setback or buy call options.
Stock Indices: The Dow Jones industrials closed at 8,799.26, up 28.34 points and gained 0.4% for the week. The S&P 500 closed at 946.21, up 1.32 points and up 0.7% for the week. The Nasdaq closed at 1,858.80, down 3.57 points but up 0.5% for the week. With the Government “interference” with the private sector and corporations, I see the situation as “the blind leading the blind”. The U.S. President and or Congress have no experience related to the industries they are trying and succeeding in controlling. The term “socialism” has been bandied about and it would seem to me to be the direction the U.S. is headed for. As far as the equity markets are concerned, “a fool and his money will soon be parted”, is the way I feel about investors “throwing money” and companies that may or may not succeed. As I stated once before, the assumption that the 600,000 or more weekly unemployed had absolutely no participation in providing the “bottom line” for corporations is false, and unless we see them being called back to work, there is no end to this recession. There is only a “transfer of power” from the management of corporations to congress where all the representatives and senators have their individual constituency in mind. Get out of stocks that do not relate directly to consumer necessity and/or implement hedging strategies immediately.
Currencies: The September U.S. dollar closed at 8059, up 76 points for a slight bounce after recent heavy selling. The September Euro closed at 1.3998, down 117, the September Swiss Franc lost 88 points to 9275, the British pound lost 137 points to 1.6448, and losses in the Canadian dollar of 172 points to .8944, the aussie dollar 92 points to .8074, where all, in my opinion, a correction in a dollar bear market. If I am correct about the U.S. interest rates declining in order to provide impetus to home and auto buying, then the dollar will resume its downward trend. We continue to prefer the Swiss Franc.
Energies: August crude oil closed at $72.75 per barrel, down 73¢ as the dollar rally weighed on commodity prices since they are all dollar denominated and when the dollar rises, commodity prices usually decline with the exception of inordinate news or technicals. Incorrect, in my opinion, expectations of a U.S. economic turnaround, kept prices from declining further since the U.S. is the largest consumer of energy. We continue to suggest this market for well capitalized accounts where could see further price gains for crude.
Copper: July copper closed at $2.3830 per pound, down 7.1¢ against the dollar rally Friday. Inventories at the LME fell by 2,900 metric tonnes to 290,275. The recent Comex inventory released on Thursday showed an increase of 39 short tons to 58,523 while the weekly data from the Shanghai Futures Exchange showed an increase of 15,167 metric tons to 60,647. Those inventory figures are closely watched since they give an indication of demand for copper. That in conjunction with the action in the dollar provide the basis for copper pricing. We continue to suggest holding put options, but would refrain from any additions at this time.
Precious Metals: August gold closed at $940.70, down $21.30 per ounce tied to the strong dollar and the weak overseas trading where gold had been expected to open in New York around $15 lower. Additional selling emerged as the dollar gained strength during the session. Once again, “throw away your gold charts and chart the dollar”. September silver closed at $14.91 per ounce, down 62¢ following gold. July platinum lost $14.40 per ounce to $1,258.70 while September palladium lost $1.90 to $254.10. We suggest the sidelines for all but the professional metals trader.
Grains and Oilseeds: July corn lost 15.5¢ to close at $4.255 per bushel tied to the dollar rally and the selling through support levels. Technicals have turned bearish and with no fresh fundamentals, we prefer the sidelines. July wheat closed at $5.8475 per bushel, down 10¢ and lost 38¢ for the week. The USDA reported world carryout for the 2009-2010 season at 183 million tons, up 800,000 from the May estimate. Carryout was also a negative at 647 million bushels, up 41 million from the May estimate. Stay out. July soybeans closed at $12.455 per bushel, down 21.5¢ tied to both the dollar rally and technicals. The short term rally in the dollar had speculators liquidating on the basis that U.S. exports would be more expensive for world importers. However, since we view the dollar rally as short lived based on our expectation that U.S. rates will decline in order to improve the potential for consumer purchases of homes and autos, we would buy soybeans on any further declines or rallies in the dollar.
Coffee, Cocoa and Sugar: July coffee closed at $1.2955 per pound, down 2.05¢ tied to the gain Friday of the U.S. dollar. The cool weather forecast for Brazil’s growing areas will not be cold enough to damage the crop so we suggest the sidelines in coffee. September cocoa closed at $2,798 per tonne, down $45 tied to general commodity weakness and the dollar strength. We suggest the sidelines but could see an early week reversal if the dollar declines. July sugar closed at 15.20c per pound, down 15 points and remains on our no interest list. In June the tendency for sugar prices is to remain stagnant during the Brazilian sugar harvest unless weather becomes a factor. We have no interest.
Cotton: July cotton closed at 56.10¢ per pound down 20 points but the most active trading month, December lost only 3 ticks to 61.22. For the week July cotton managed a nearly one cent per pound gain. We prefer the sidelines since cotton will probably emulate other commodities and we see no reason to “spread the margin” too thin. Stay out for now.
John L. Caiazzo
Tel: (951) 693-9600 Fax: (951) 693-3170
Website: www.acuvest.com
E-mail: 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 he introduces his clients to.
