The Acuvest Letter
Overview: Economic data continues to result in wide price moves in commodities. Traders and investors that rely on data appear to be trying to determine trend direction without much success. Price changes based on potential changes in interest rates which affect the U.S. dollar in which most commodities are denominated have a material effect on prices. Market direction on a short term basis tied to economic data tends to affect technicals which then can exacerbate a directional price move. Our goal in assessing data and the resulting potential for subsequent price movement is to enable us to make buy/sell suggestions in the markets we cover. However there are times, my readers point out, that due to the price swings tied to short term influences, we cannot make a definitive determination and therefore indicate “stay out”, or “stand aside”. We do not subscribe to the “coin flip” analysis method of “heads I buy, tails I sell”. Therefore unless we feel confident in assessing conditions in a given market or in the criteria that can move the market, we prefer the conservative approach for our readers and clients. Now for some actual information.
Interest Rates: September Treasury bonds closed at 116-08.5, down 30.5 points after the Commerce Department reported that housing starts rose by 3.6% to the highest level since November of last year. Building permits also jumped with an increase the most in a year. That prompted the shift from the relative safety of Treasuries back to equities. A problem that some investors overlook is the importance of the possibility of CIT Group going into bankruptcy. A Government bailout as it was for AIG has been ruled out for CIT. Why? CIT is not as big as AIG but overlooked is the fact the CIT finances most small and medium size businesses in the U.S. Another fact apparently overlooked is the local shopping mall where vendors agree to contracts with an important exception. If enough of the mall shops close or go bankrupt, the others can opt to void their contracts and leave. That would put thousands out of work in an important retail sector. We would look for an opportunity to get back into bonds on the long side on any further declines to the 115-00 to 114-00 level. Interest rates must, in order to attract home buyers whether new or foreclosed vacant homes, stay low.
Stock Indices: The Dow Jones industrials closed at 8743.94, up 32.12 and up 7.3% for the week. The S&P 500 closed at 940.38, down 0.36 points but up 7% for the week. The tech heavy Nasdaq closed at 1886.61, up 1.58 and up 7.4% for the week. Strong earnings from IBM, the world’s largest technology provider prompted the buying but Friday’s gains were tempered by increasing credit losses at Bank of America and General Electric’s unexpected decline in revenue. Better than expected earnings results from Intel, Google, and Goldman Sachs also provided the impetus for buying equities in their groups. Not all earnings reports forthcoming will show gains since the continued job losses can only mean reduced gross income. Any increases in net income can only, in my opinion, come from reduced costs, primarily labor. We continue to warn investors about jumping back into stocks fearing they could “miss the boat”, but from where I stand, the name on the side of the boat is Titanic— Implement hedging strategies now. The housing industry continues to show defaults in the “pipeline” and they will no doubt lead to additional foreclosures and yet lower home values.
Currencies: The September U.S. dollar index closed at 7960.5, up 10 points against losses in the Euro of 8 points to 141.4, the Swissie 12 points to .9312, the British pound 74 points to 163.78, and the Aussie dollar 20 points to .8001. The September Japanese yen also closed lower at 106.15, down 59 points. According to the Commodity Futures Trading Commission data released Friday, the value of the U.S. dollar’s net short position rose to 9.4 billion in the week ending July 7 making it the largest since July of last year. Short covering could occur on any cut in the ECB interest rate or the Swiss National Bank since it would be a defacto increase in the U.S. interest rate relatively speaking. We continue to favor the Swiss Franc on any declines of 2-3c.
Energies: September crude oil closed at $64.58 per barrel, up $1.52, or 2.41% Friday, for the first weekly gain in about a month. U.S. housing data showing gains in new home building and permits may have prompted the rally, as it suggested an economic recovery, along with the dollar weakness. Something I doubt as my readers know. September heating oil closed at $1.6758 per gallon, up 4.1c or 2.51% and September unleaded gasoline gained 5.52c to close at $1.7614 per gallon or 3.24% for the day. Since we expect wide price swings anchored by any news either economic or geopolitical, we would avoid these markets for our clients.
Copper: September copper closed at $2.4230, per pound, up 3.35¢ tied to the U.S. housing data. Inventories of copper at the Comex were steady at 59,251 short tons while the LME warehouses reported an increase of 3,275 metric tons on Friday to 264,150. The weekly Shanghai Futures Exchange data showed inventories fell by 884 metric tonnes to 53,283. We once again suggest holding put options but not adding.
Precious Metals: August gold closed at $937.50 per ounce, up $2.10 on the home building data since any economic recover could mean renewed inflation fears. We disagree that there is any potential for inflation in the near to intermediate term in the U.S. so we would avoid purchases of gold unless some major unrest develops in the Mid-East. September silver closed at $13.403 per ounce up 16.8¢ following gold. October platinum closed at 1176.10, up $6.80 while September palladium lost 65¢ to close at $249.60. We continue to prefer the sidelines in metals for all but astute and well capitalized traders.
Grains and Oilseeds: September corn closed at $3.22 ¼ per bushel, up 5.5¢ mostly on gains in crude and short covering. We prefer the sidelines since these agricultural markets have developed into wide priced trading markets not tied to basic fundamentals. The recent sharp selloffs in grains has prompted farmers to withhold crop from market and that is a supporting factor, but the wide price swings keeps me on the sidelines. Weather is also a factor that must be considered for these markets. September wheat closed at $5.41 ¾ per bushel up 8.5¢ mostly tied to short covering and in conjunction with other commodity markets. We look for continued range-bound trading and prefer the sidelines. November soybeans closed at $9.23 ½ per bushel, up 33.5¢ and gained 6.5¢ for the week. Soybeans continues to be our favorite as a food staple internationally but the wide price swings recently could be too costly for trading event with the use of stops. The problem could be buying high and selling low for that simple reason. Stay out for now but any sharp decline of 30¢ or more over a two to three day period would signal a buying opportunity in my opinion.
Coffee, Cocoa and Sugar: September coffee closed at $1.1835, down 3.5¢ after trading up nearly 3¢ earlier in the session. Brazilian government efforts to keep prices up a bullish factor but the U.S. green Coffee Association reported Friday that June stocks were up 99,670 bags to 5.487 million bags and that could put a cap on prices. According to analysts Safras & Mercado, the arabica coffee harvest for 2009-10 was 46% complete as of July 15 ahead of the 42% reported on July 8 and the 40% completion figure from a year ago. We would take profits on any long coffee positions and stand aside. September cocoa closed at $2,762, up $85 but later session settled at $2,765 per metric tonne, up another $3.00. Better than expected North American grind data for the second quarter prompted the heavy short covering and new buying. We continue to favor the sidelines however. October sugar closed at 17.31c¢ per pound up one tick on light technical selling. Sugar remains on our “no interest list”. Stay out.
Cotton: December cotton settled at 64.06¢ per pound, up 60 points and in the later session closed unchanged. Speculative buying continues with the weekly gain in the December contract 1.61¢. Bullish technicals the main reason for the buying. Physical sales of U.S. cotton could preclude any new buying this week. We prefer the sidelines.
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.
