The Acuvest Letter
Market Commentary Week ending October 23 2009
Overview and Opinion: Economic data emanating from various Administration agencies is leading us to believe that a recovery has begun. Demand for previously owned homes increased in September but we see that as a result of the "generous" tax credit which will expire in November. It is reminiscent of the short lived "Cash for clunker" program. As this credit winds down, I look for further declines in home buying as the public holds onto its cash. Many homeowners who were either in default and walked away from their high mortgages, and those who were foreclosed on are seeking apartments or other housing. With 550,000 first time unemployed reported each week is the U.S. administration "glossing over" the fact that each of those unemployed could represent a mortgage and a car payment that in the near future will become a foreclosure and repossession?
It is commendable that they do not want to create a panic but it is too little too late for that. The main reason for the Republican party losing the election in 2008 was, in my opinion, President Bush and Nominee McCain both claiming the "U.S. economy is inherently strong". That was a fatal mistake for that party. They failed to open their eyes to the deepening recession which even the "blind" could see. The American public is not that stupid to have believed them and that was the problem. This recession, in my opinion and that of many others who do not have "blinders" on, is in full swing and there is no real sign of recovery. Throwing money at the problem, which is what the current administration is doing only leads to greater deficits and at some point in the future, the "piper will have to be paid". We are awaiting the next "shoe to drop" which could well be continued credit card deficits, foreclosures from the growing defaults, commercial properties being foreclosed on and a general malaise in the public sector. Home buyers thinking that prices will continue lower are reluctant to step up "to the plate". There is no "magic bullet" and recessions must run their course. Until which time as consumers start setting aside their concerns about their own job loss, and companies start to re-hire, there is no recovery.
Now a look at the markets
Interest Rates: December treasury bonds closed Friday at 119-01, down 19 ticks and remains in the range I have been suggesting would occur over the past few weeks. With another $123 billion in auctions the usual pressure on prices due to the potential for having to pay higher rates to entice buyers we could see further price swings. With the lower tax revenue we suggested would result from the unemployment situation, the projected budget based on revenue expectations is wishful thinking. I look for a huge increase in the budget deficit. We would avoid positions and only implement short term trading.
Stock Indices: The Dow Jones Industrials closed at 9972.18, down 109.13 and lost 0.2% for the week. The S&P 500 closed at 1079.60, down 13.31 and lost 0.7% for the week. The Nasdaq closed at 2154.47, down 10.82, and thanks to early week gains only lost 0.1% for the week. The dollar rally caused selling in dollar denominated commodities hitting the energy and materials sectors and one analyst’s negative comments on a major railroads stock caused the decline in the transportation average. We continue to suggest implementing hedging strategies and would "ignore" the enthusiastic comments about a U.S. economic recovery. As I have been stating in my commentaries, "an unemployed consumer does not consume and the producers of the goods that are not consumed will be next to lay off people". That does not bode well for any prospects of a recovery. The UK reported this week that their recession continues unabated.
Currencies: The U.S. dollar index closed at .7558, up 34 points against losses in the British pound of 312 points with the pound closing at 1.6306. The UK announced that it’s economy was still in recession and that prompted heavy selling in the pound. The December Swiss Franc, our favorite in the group, closed at 9915, down 41 points but still headed to parity with the dollar. Other currencies losing ground against the dollar were the euro losing 24 points to $1.50 even, the Japanese yen 99 points to 1.0858, the Canadian dollar 39 points to 95¢ and the Aussie dollar 52 points to 9169. We view the dollar rally as a correction in a bear market. With no prospect of an increase in U.S. interest rates, I see no reason to buy dollars unless other trading partners lower their rates which would be a defacto U.S. rate increase relative to theirs and that would be favorable for the dollar against the particular trading partner.
Energies: December crude oil closed at $80.50, down 69¢ mostly due to the Friday gains in the U.S. dollar. We continue to suggest the sidelines for energy products even though a much more severe winter season is expected for the U.S. Midwest, Northeast and much of Europe.
Copper: December copper closed at $3.0345 per pound, up 3.65¢ tied to "rosy" projections for the U.S. housing market. Unfortunately we continue to believe that copper prices will decline when the reality of a protracted U.S. recession emerges. Inventories at the LME were up 3,000 metric tons on Friday to 367,075 while the Comex reported on Thursday an increase of 289 short tons to 58,374. Increases in inventories indicate reduced demand. However, the weekly data from the Shanghai Futures Exchange offset those inventory figures with a report of a weekly decline of 4,241 metric tonnes to 95,976.
Precious Metals: December gold closed at $1,056.40, down $2.20 on reports that the Euro Zone grew at its fastest pace in nearly two years. Fed Chairman Bernanke commented that "financial turmoil is abating" and my readers know my feelings about Mr. Bernanke’s "glowing economic reports". We expect a correction in gold and would avoid new positions until the correction is completed possibly taking prices down to the mid $900 level. Comex gold warehouse stocks were up 3,743 ounces at 9,406,694 and that does not translate to increased demand. Silver warehouse stocks were down 524,833 ounces to 114,685,437 and that is a positive for silver prices. We could see further buying in silver after December gained 17.8¢ per ounce on Friday to $17.723. January platinum closed at $1,369.50, down 40¢ while December palladium lost 30¢ to close at $339.45. We prefer the sidelines for all but traders able to keep in touch with the markets constantly.
Grains and Oilseeds: December corn closed at $3.97 ¾ per bushel tied to the dollar strength and ignoring the harvest delays. Early buying took prices to $4.13 per bushel and that attracted cash sellers. One analyst suggested that a 13 billion bushel corn crop may not find the necessary demand to support a $4.00 per bushel price. Stand aside. December wheat closed at $5.47 ¾ per bushel, down 4¢ on profit taking in front of the weekend. During the session December wheat made a high of $5.74 ¾ before meeting profit taking. The possibility of weather related planting delays is a positive for wheat assuming no changes in fundamentals. We prefer the sidelines for now. November soybeans closed at $10.06 per bushel, up a half a cent after trading as high as $10.28, during the session. Electronic trading was responsible for setting prices back to the closing level as well as profit taking in front of the weekend. Underlying support however, could push prices higher but with the USDA expected to issue a harvest update on Monday in its weekly crop progress report, we would wait to see what the effect is on Tuesday before making any trading decisions. We have favored the long side of soybeans in the past and continue to favor beans against corn and wheat.
Coffee, Cocoa and Sugar: December coffee closed at $1.3715 per pound, down 6.5¢ on technical selling which ran into sell stops. Without fresh fundamentals to base our expectations on, we suggest the sidelines. December cocoa closed at $3,365 per tonne, down $27 on a correction after recent sharp gains. With no fresh fundamentals, we would avoid cocoa. March sugar closed at 23.12¢ per pound, down 4 points after early session gains. As with coffee and cocoa without fresh fundamentals, and relying solely on technicals, we would avoid sugar.
Cotton: December cotton closed at 67.38¢, down 1.17¢ as drier weather forecasts set aside crop concerns. The strength in the dollar was also a factor in the price decline. We prefer the sidelines.
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 he introduces clients to.