Sector analysis for week of Nov. 23

November 22, 2009 06:00 PM

The Acuvest Letter

Overview and Opinion: The markets continue to react to changes in the U.S. dollar, which in turn is directed by perception of either U.S. interest rate changes or those of its trading partners. The fact remains that the rhetoric from the U.S. administration that the unprecedented recession is over and a recovery has begun is unfounded in my opinion. The U.S. consumer with a job is hesitant to purchase non-essentials, and those without jobs, now numbering over 15 million, are unable to purchase nearly everything.

Interest Rates: December Treasury bonds closed at 120-28, up two ticks and at the high of our projected range. As I mentioned in earlier commentaries, with the Fed funds rate at zero, it certainly cannot go lower. However, changes relative to other industrialized countries where rates can change, the U.S. rate will either prove "relatively" higher or lower and that is what affects treasury prices. I continue to suggest that bonds will remain in a trading range and are currently at or near the high of that implied range. I view the market as a trading affair.

Stock Indices: The Dow Jones Industrials closed at 10,318.16, down 14.28 points but managed a half percent gain for the week. The S&P 500 closed at 1,091.38, down 3.52 points and lost 0.2% for the week. The tech heavy Nasdaq closed at 2,146.04, down 10.78 points and lost 1% for the week. The surprise decline in Dell’s earnings was a factor as its quarterly profit declined by 54%. Concern over declines in other tech company’s earnings also led to price declines. We cannot perceive of continued "positive" earning forecasts totally on the basis of cost cuts, such as labor, and therefore we expect negative surprises in the future. Once again, as suggested in prior commentaries, implement hedging strategies to avoid a financial debacle. We can provide strategic hedging programs for institutional investors or those with large equity positions.

Currencies: The U.S. dollar index closed at 7565, up 28 points and above our suggested support level of 7500. Investors took profits in foreign currencies and moved from the higher yield currencies to the perceived less risky dollar at current levels. The December Euro closed at 1.4856, down 62 points with the Swiss Franc losing 47 points to .9823, the British Pound 164 points to 1.6480, the Canadian dollar 78 points to .9334, and the Aussie dollar 46 points to .9121. The December Japanese yen managed a five point gain to close at 11242. We continue to favor the Swiss franc in the group but would only add on declines. Otherwise our prior stated goal of parity for the Swissie came with a few points of fruition recently. We would stand aside and take another look on Monday.

Energies: December crude oil expired on Friday at $76.72 per barrel, down 74¢. With our expectation of a continued U.S. recessionary trend, we could see further price declines in crude as demand declines. Stay out for now.

Copper: December copper closed at $3.1080, up 2.7¢ even as warehouse inventories increased at both the LME, 1,325 metric tonnes to 421,875 and the Shanghai Futures Exchange 2,466 tonnes to 107,405 in its weekly report. We continue to feel that a continued global recession will negatively impact demand for copper and prices should decline.

Precious Metals: December gold closed at $1,146.80, up $4.90 even with the rally in the dollar which, in most instances, trades contrary to each other, was mostly tied to technicals. The media, as it did over 25 years ago when gold first traded at $850 an ounce, is heavily promoting gold ownership as "a necessary investment". Unfortunately it took whomever purchased gold at $850 an ounce, 26 years to just get even. We look for gold prices to decline to the $925-975 once the "euphoria" ends. December silver closed at $18.44 per ounce, down 1.5¢ but of the two, we prefer silver which is used industrially as well as considered a precious metal and an inflation hedge. January platinum closed at $1,441.90, down $2.00 with December Palladium losing $5.55 to close at $364.35. Both the white metals have industrial application in automobile catalytic converts and in oil refining. Gold, on the other hand, is "pretty".

Grains and Oilseeds: December corn closed at $3.91 per bushel, down 4¢ with March losing 3.75¢ to close at $4.07. The dollar strength was a factor in pre-weekend profit taking. With good weather for harvesting and no other fundamentals other than a sale to Mexico, we would avoid corn for now. December wheat closed at $5.59 ¾ per bushel, down 2.75¢ tied to the rally in the dollar and selling by commodity funds. With global supplies viewed as "ample", we prefer the sidelines. January soybeans closed at $10.46, up 7¢, with the March contract gaining 5.5¢ to close at $10.50 ¼. For the week Soybeans gained 6%. Our recent preference for the long side of soybeans continues as demand from China is strong and even against the dollar rally and positive harvest reports, performed very well. While the USDA had reported expectations of an increase of 3.3% for exports, actual U.S. bean exports are up 59% from last year. Hold longs and add on declines.

Coffee, Cocoa and Sugar: March coffee closed at $1.3575 per pound, down 1.3¢ mostly tied to the gains in the dollar. Roaster, and consumer buying expected by one New York analyst, would have to decline an additional 4¢. He also indicated that origin sellers are "willing to wait for prices to rise to the $1.45 level before selling into the market". We prefer the sidelines. March cocoa gained $117 per tonne, to close at $3,314 after trading lower against the strong dollar. Short covering into the weekend even as cocoa was reportedly arriving at ports in producing countries. We see no other fundamentals which would cause prices to rally further so we prefer the sidelines. March sugar closed at 22.47¢ per pound, down 27 points after trading as low as 22.23¢ during the session. Sugar is on our "no interest list" for the time being and after recent gains failed to carry prices further.

Cotton: March cotton closed at 74.04¢ per pound, up 1.07¢ and close to our longer term goal of 75¢. We have suggested the sidelines recently but it would seem we were premature in "abandoning" our long term goal. For now the sidelines while we see if the projected smaller crop materializes.

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.

About the Author