Sector analysis for week of Oct. 12

It was a nice surprise to hear that our President received the Nobel Peace prize but when advised in an early morning phone call from the committee, a staff member asked “what for?” That sentiment was echoed in the media both liberal and conservative but the question remains, especially on the “eve” of a proposed escalation of the war in Afghanistan. The General that President Obama assigned to determine what must be done to achieve success in Afghanistan, General McChrystal, reportedly told the President that an additional 40,000 men would be required in Afghanistan to assure a victory rather than a defeat. We are in at a sensitive crossroads globally and a dramatic effect on World markets could result on any confrontation in the Middle East where the industrial nations’ “life blood”, oil, is located. While we prefer to offer suggestions to our readers based on supply/demand, one cannot overlook what could happen in the event of a geopolitical event. A more pressing problem that is in fact reality, is the ongoing recession. We hear continued rhetoric of an economic recovery that is supposed to have started a few months ago but try telling them to the half million or more first time unemployed each week. The stimulus program is, in my opinion and others, a total failure. The administration has failed to determine exactly where to put the stimulus money. Should it go directly to the unemployed? Probably but not likely. Should it go to bail out manufacturing companies? It might help a little. Unfortunately the basis for any recovery has to be a return of jobs that apparently have been lost…..permanently. Any talk of a recovery is premature without establishing a jobs program. The Chief Economist of Moddy’s, Mark Zandl, made the statement on Sunday that a 25% unemployment rate is possible. That compares to the “Great depression”. Over 35,000 people showed up last Wednesday for stimulus money to pay for mortgages, car payments, utility bills etc with only enough for 3,500. That will not work. The U.S. economy is in crisis mode and I do not have the answer. It would appear that neither does the U.S. administration. Now for some actual information that help my readers, who can afford to take advantage of it in the markets…..

Interest Rates: December treasury bonds closed at 11931, down 124 or 1.44% as money flowed back into equities tied somewhat to Fed Chairman Bernankes indication that “the Fed will eventually have to start tightening its monetary policy as the economy heals.” That led to some long liquidation and also negatively effected equities early in the session. Later the reality of an “assumed healing economy” prompted the rally in equities along with some better than expected earnings estimates. We continue to feel the treasury market is in a range and would only trade in accounts able to assume a higher level of risk.

Stock Indices: The Dow Jones Industrials closed at 9864.94, up 78.07 while the S&P 500 closed at 1071.49, up 6.01 and the Nasdaq gained 15.35 points to close at 2139.28. Expectation of an economic recovery which was assumed after Fed Chairman Bernanke’s statement that the Fed may have to raise rates as the economy “heals”. Once again, as I stated last week, Mr. Bernanke and others, are, in my opinion, misleading the public into believing the recovery has started. Next week corporations are expected to report better earnings but again, as I have been stating ad nauseum, increased earnings by cutting expenses especially employees, is not indicative of a healthy economy. Implement hedging strategies.

Currencies: December U.S. dollar index closed at 7662, up 49 points on “positive economic signals” such as the statement by Fed Chairman Bernanke about the need to tighten monetary policy and “shrink the Fed’s bloated balance sheet once the economy shows signs of sustained improvement”. Of course I doubt very much that the Fed will be able to justify any monetary policy tightening in this ongoing recession which is still, in my opinion, deepening each week as the unemployment numbers are issued. The December Swiss Franc closed at 9693, down 46 points, the Euro lost 68 points to 14707, the British Pound lost 230 points to 15832, and the Japanese yen lost 167 points to 11134. We continue to suggest the long side of the Swiss Franc on any setbacks.

Energies: November crude oil closed at $71.77, up $8 on a positive demand forecast from the International Energy Agency even as the U.S. dollar managed a slight recovery on Friday. The normal reaction to dollar strength would be a weak crude oil. We suggest the sidelines bearing in mind the potential for geopolitical events in the Middle East. The risk is too great either way.

Copper: December copper closed at $2.8380, down 6.05c against the strength in the dollar but also as a correction against recent strength. A drawdown of inventories prompted the recent strength as the LME reported a decline of 250 metric tons to 346,600. The Comex data on Thursday showed an increase of 544 short tons to 55,027. However, the more important data from the Shanghai Futures Exchange showed a decline of 6,897 metric tons to 89,822, and is indicative of renewed demand from the Middle and Far East. We continue to view copper as overpriced simply because of the ongoing recession in the U.S. and the decimated housing and auto industries.

Precious Metals: December gold closed at $1,048.60, down $7.70 per ounce against the rally in the dollar Friday as well as the reported return to work of South African mine workers. December silver lost 12.5c to close at $17.69 per ounce following gold. January platinum closed at $1339.40, down $13.80 and December palladium closed up $1.15 to close at $323.75. We prefer the sidelines but with our expectation that the U.S. Federal Reserve cannot raise rates as implied by Fed chairman Bernanke, the dollar should continue weak and that could prompt new gold and silver buying.

Grains and Oilseeds: December corn closed at $3.62 ¼ per bushel in a correction after recent gains. A production estimate increase by the USDA was also a negative. We prefer the sidelines. December wheat lost 6c per bushel to close at $4.68 on Friday but managed a weekly gain of 26 3/4c. We prefer the sidelines here as well since fundamentals remain bearish and grain prices are affected by the dollar action. November soybeans closed at $9.64 per bushel, up 28c after recent losses and tied to lower than expected crop outlooks and weather concerns even after the USDA projected record crops. We continue to favor the long side of beans but only on setbacks and certainly with the use of stops.

Coffee, Cocoa and Sugar: December coffee closed at $1.3565, down 2.25c on profit taking in front of the weekend. The Friday dollar strength prompted the profittaking after recent gains. With little in the way of fundamentals, we prefer the sidelines. December cocoa closed at $3,243 per metric tonne, down $1.00 after recent gains which could be attributed to incorrect cocoa demand data. We would avoid positions but would trade from the short side with stop protection. March sugar closed at 21.24c per pound, down 1.3c tied to the Friday dollar strength and a weak energy market. Stay out for now.

Cotton: December cotton closed at 63.65c per pound, up 1.15c tied to concern over a USDA production and supply/demand report. Since some analysts suggest slower demand going forward, we would stand aside for now.

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.

About the Author
John L. Caiazzo



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 which he introduces his clients.

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