Overview and Opinion: The continued assessment of an "inherently strong economy" cost the Republicans the election last year. Now we hear the same "fantasy" promoted by the current administration proclaiming an end to the recession and an economic recovery. Try telling that to the 500,000 or more first time unemployed each week. A "hint" to the economy for those pundits is the University of Michigan/Reuters’ preliminary index which showed consumer confidence fell from 70.6 in October to 66 in November. Analyst expectations were for the index to be 71. Two thirds of U.S. economic activity is consumer spending and when you have 15 million people out of work, it should have been obvious to those calling the recession over and recovery started that they are "incorrect" in their evaluation. Now for some actual information.
Interest Rates: December Treasury bonds closed at 119-14, up 17 ticks but not much changed from last weeks commentary. For Treasuries good news is bad and bad news (on the U.S. economy) is good. We maintain our opinion that bonds are in trading range and should be approached as us for traders. Those who like to trade trends, don’t bother, there is none. With a rising trade deficit of 18.2% in September to $36.5 billion imports continue to be the nemesis of the American worker. We suggest the sidelines in treasuries.
Stock Indices: Once again positive corporate earnings paved the way for another weekly gain for equity prices. Unfortunately, much of the increases in earnings are based on cost cuts, namely labor costs. We once again find it hard to believe that the 15 plus million unemployed contributed nothing to corporate bottom lines. The Dow Jones industrials closed at 10270.47, up 73 while the S&P 500 gained 6.24 points to 1093.48 and the tech heavy Nasdaq gained 18.86 points to 2167.88. The Dow closed the week with a 2.5% gain. The poor consumer confidence index was offset by the "better than expected" earnings gains but as I mentioned earlier, those gains were a result of cost cuts rather than improved sales. Productivity gains are a result of remaining employed workers doing the work of two or more of their laid off peers. We again suggest implementing hedging strategies.
Currencies: The December U.S. dollar index continued its recent decline losing 30.5 points on Friday. The December Euro gained 30 points to 14893 while the Swiss Franc gained 22 points to 9866 after trading as high as 9904 early in the session. Profit taking sent prices to closing levels. We are fast approaching parity with the dollar for the Swiss Franc, a prediction offered some time ago in our commentaries. Gains were also seen in the British pound of 104 points to 16671, the Japanese Yen 79 points to 11152, the Canadian dollar 28 points to 9508 and the Aussie dollar 96 points to 9294. Declining consumer confidence as well as the widening trade gap the main features to the selling of dollars. The trend for the dollar remains down but at some point given the rhetoric by Treasury Secretary Geithner that "a strong dollar is in the U.S. interest", which actual means nothing in today’s market place, the dollar could have a corrective rally so trading should be limited to professionals or well capitalized accounts.
Energies: December crude oil closed at $76.34 per barrel, down 59¢ as U.S. inventories continue to exceed expectations. We would avoid trading this market for all those that do not actually "use the stuff". December heating oil closed at $1.9661 per gallon, down 2.49¢ and Unleaded gasoline for December delivery closed at $1.9162, down 2.43¢. With winter approaching, we would be cautious positioning heating oil. Stay on the sidelines.
Copper: December copper closed at $2.9725 per pound, up 2.5¢ with continued Chinese participation in this market. However, with inventories climbing, our opinion remains bearish. Inventories at the LME were up 1,500 metric tonnes on Friday to 403,625. Comex inventories were up 1,368 tons to 69,354 and the weekly report from the Shanghai futures exchange showed in increase of 664 metric tonnes to 104,939.
Precious Metals: December gold closed at $1116.70, on Friday, up $10.10 with December silver gaining 11.5¢ to close at $17.38 per ounce. January platinum rose $2.55 to $1,388.70 while December Palladium gained 5.85¢ to $356.75. With the dollar continuing its slide metals continued their gains. We suggest taking some profits in gold while silver, as an industrial as well as precious metal could be in a basing condition. We prefer the long side of silver on any dips for a move to the $20-22 level. Platinum and palladium will continue to move contrary to the dollar as well as gold but the white metals are used in catalytic converters in automobiles and any gains in auto sales could further provide impetus to further price gains.
Grains and Oilseeds: December corn closed at $2.625 unchanged but gained 23.5¢ for the week mostly tied to crop concerns as well as the weak dollar. We could see further strength but prefer the sidelines in corn. December wheat closed at $5.39, up 7.25¢ and for the week gained 41.75¢. To some extent much of the activity in wheat is tied the corn and soybean activity but fundamentals are called weak so we prefer the sidelines in wheat. January soybeans closed at $9.87 per bushel, down 3¢ mostly of pre weekend profit taking. With the USDA reporting weekly soybean export sales of 1,272,500 metric tons for the week ended Nov. 5 against analyst expectations of between 500,000 and 700,000 tons the market fundamentals are bullish. The USDA will report on export and harvest progress this week with analysts expecting the report to show harvest progress over 90%. Any deviation could provide the impetus for market activity. We like soybeans from here but would use stops.
Coffee, Cocoa and Sugar: December coffee closed at $1,3110, up 45 points but for the week lost 7.8¢ per pound on fund and speculative long liquidation. Columbian coffee production reported for October fell 42% and that could provide the impetus for heavy short covering early in the week. We would buy coffee as close to unchanged as possible but use stops. Don’t’ chase it on a gap up opening. December cocoa closed at $3073 per tonne unchanged but down $113 for the week. The weak dollar stemmed the selling in cocoa. First notice day for the December contract is Monday and rollovers to March a main feature in Fridays trading. We prefer the sidelines in cocoa. March sugar closed at 22.72¢ per pound, up 3 ticks with traders awaiting fresh fundamentals in order to guide their trading. We prefer the sidelines.
Cotton: December cotton closed at 67.10¢ per pound, up 68 points tied to technicals support with Dec/March spreading a main feature. December short call sales of 13,239 lots could represent potential buying while offset by only 5,908 call purchases. We could see early week buying but would stay on the sidelines until options settle.
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 his clients to.