Overview and Opinion: While the U.S. administration continues to "pronounce" the end of the recession and the start of an economic recovery, another nine banks failed on Friday bringing the total to 115 for 2009. This is the highest level since 1992 with expectations, due to bad loans, of more to come. The largest of the bank closings was Washington Mutual, which claimed $307 billion in assets at the time it was closed. I cannot understand the rhetoric in the face of continued mortgage defaults and foreclosures, some of which the banks are withholding from the home buying and bargain hunting public. That the administration can continue to try to "fool" the public. There is no recovery that I can see, nor is the current unprecedented recession over.
The 15 million out of work Americans will no doubt disagree with the administration and the number of defaults and auto repossessions in the "pipeline" is not diminishing. As I have been stating for over two years now, "an unemployed consumer does not consume and the producers of those goods will be next to lay off employees". I indicated in recent commentaries that a weekly reduction of first time unemployed is not indicative of a recovery, but merely indicates that there are fewer employees left to lay off.
Interest Rates: December Treasury bonds closed at 11814, up 7 after trading as high as 119-00 early in the session. The 190,000 jobs lost in October and the unemployment rate jump to 10.2% prompted the early buying. Analysts had projected job losses to total 175,000 with the unemployment rate of 9.9%. Once again, the analysts were "incorrect" as they have proven to be in numerous instances that affect the markets. With interest rates unchanged at 0% there is no room for lowering and raising rates in the current recession would be, in my opinion, financial suicide. We continue to suggest that bonds are in a trading range and would avoid positioning.
Stock Indices: The Dow Jones closed at 1069.30, up 17.46 and up 3.2% for the week. The S&P 500 closed at 1069.30, up 2.67 and for the week managed a gain of 3.2% as well. The Nasdaq gained 7.12 points to close at 2,112.44 for a weekly gain of 3.3%. Some revisions to the employment situation were viewed as positive and continued gains in earning estimates, albeit due to labor and other cost cuts, were also a factor in the weekly gains. We continue to suggest implementing hedging strategies as this market is completely oblivious to the actual condition of the U.S. economy and therefore future corporate results.
Currencies: The December U.S. dollar index closed at 7589.5, up 3 ticks as the G20 determined that global economic conditions had improved but commented on uneven policy support according to the end of meeting communiqué issued. The December Euro lost 32 points to close at 1.4835, with subsequent losses in the Swiss franc of 13 points to .9826, and the Canadian dollar of 1.07 points to .9285. Gains were posted in the British pound of 15 points to 1.6597, and the Japanese yen of 100 points to 1.1118. We remain on the sidelines but continue to suggest parity for the Swiss Franc against the U.S. currency.
Energies: Energy products sold off sharply after the U.S. labor Department reported job losses exceeding estimates and an unemployment rate of 10.2%. As the largest energy user, any detrimental economic data in the U.S. prompts declines in energy products. December crude oil closed at $77.43 per barrel, down $2.19, with December heating oil losing 5.41¢ to close at $2.0035 per gallon and unleaded gasoline losing 6.34¢ to close at $1.9243 per gallon. We prefer the sidelines but with a new storm in the Gulf of Mexico heading for the Gulf Coast states, refining may be curtailed and prices could move higher temporarily. We view energy products as a trading situation and only suitable for well financed clients.
Copper: December copper closed at $2.9550 per pound, down 20 points on the weaker than expected U.S. jobs data. Reports that China’s Reserve Board bought 235,000 tons of copper in 2009 helped send copper prices sharply higher. We continue to believe that with a continuing global recession and possibility that China may have accumulated enough copper to meet their needs, prices should decline.
Precious Metals: December gold closed at $1,095.70, up $6.40 tied to the weak U.S. labor data. Expectations that the U.S. Federal Reserve will be slow to raise rates relative to other central banks is also a factor in the dollar weakness and gold strength. December silver closed at $17.40 per ounce down a penny. January platinum losing $14.70 per ounce to close at $1,348.20. December Palladium lost $1.15 to close at $330.70 per ounce. We continue to suggest that precious metals will trade based on the U.S. dollar. If the dollar stabilizes or foreign central banks keep their rates unchanged, we could see a sharp correction in gold prices, perhaps back to the $925-950 per ounce level.
Grains and Oilseeds: December corn closed at $3.67 per bushel, down 9.5¢ pressured by declines in crude oil and soybeans. Weakness prompted by reports of improved harvest conditions. We prefer the sidelines. December wheat closed at $4.97 ¼ per bushel, down 15¢ on Friday but still managed a 3¢ gain for the week. Outside market declines spilled over to wheat and fundamentals remain weak. We prefer the sidelines here as well. November soybeans closed at $9.48 per bushel, down 19¢ tied to harvest pressure. A weak U.S. economic condition could continue to affect demand. We have favored the long side of soybeans in the past but with current fundamentals negative we would, as with wheat and corn, stay out for now.
Coffee, Cocoa and Sugar: December coffee closed at $1.3890 per pound, down 3.2¢ tied to selling in most commodities. While Colombia’s National Federation of Coffee Growers lowered its forecast for 2009 production and are harvesting one of the smallest crops in over 30 years, the selling on Friday could provide a buying opportunity. We would go long coffee from here but with stops. December cocoa closed at $3,186 per tonne, down $32 on speculative selling and a weak U.S. unemployment report which could mean lower demand. We prefer the sidelines in cocoa. March sugar closed at 22.43¢ per pound, down 33 points and lost 1.66% for the week. The U.S. jobs report, as in the case of selling in other commodities, was the main factor in the selling. Weakness in crude oil also a factor. Stand aside for now.
Cotton: December cotton closed at 66.54¢ per pound, down 87 points as pressure from the ongoing harvest as well as general commodity weakness prompted weakness. We could use the decline in cotton as an opportunity to buy based solely on the slow pace of the harvest. The U.S. cotton crop was 28% harvested according to the most recent data from the USDA, down from the 50% average.
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.