Market sector analysis for week of Dec. 14

The Acuvest Letter

Overview and Opinion: Coming to any kind of decision as to market direction or the application of fundamental or technical analysis given the rampant spending by Congress is nearly impossible. The impact of the programs and especially the bill increasing the debt ceiling by a trillion dollars or more will in fact have repercussions in the marketplace. Where those repercussions will manifest themselves is yet unknown but the financial sector will, of course, experience concern and confusion and could, since interest rates are the “main ingredient” in dollar action, create tumultuous activity globally. Now for some actual information.

Interest Rates: March Treasury bonds closed at 117-27, down 18 ticks after the release of stronger than expected U.S. economic data. Concern that the improved economic data might prompt the Federal Reserve to change its accommodative monetary policy and start to raise rates. That would be a critical error in judgement since the current recession is not over and we have not embarked on economic recovery. Retail sales for November rose almost twice as much as analysts expected. Another negative was the University of Michigan/Reuters consumer sentiment index which increased to 73.4 in December from 67.4 in November. Analysts were expecting a number of 68.8. As I stated last week a “jobless recovery” is fallacy. Unemployed workers do not purchase non essentials and the manufacturers of those non essentials have probably completed their layoffs. The lower first time unemployment number s merely a results of few people left to lay off without “closing their doors”. I continue to view Treasuries as in a range we could see prices rally early in the week as “reality” sets in.

Stock Indices: The Dow Jones industrials closed at 10,471.50, up 65.67 points and up 0.8% for the week. The S&P 500 closed at 1,106.41, up 4.06 and closed the week almost unchanged. The Nasdaq closed at 2,190.31 down 0.55 and lost 0.2% for the week. The assumption, after the economic data on Thursday and Friday, is that the U.S. economy has bottomed and a recovery is ensuing. Of course, I do not agree and would warn investors against complacency. Implement hedging strategies.

Currencies: The March U.S. dollar index closed at 7688.5, up 47.5 points tied to the stronger U.S. economic data, which is expected to prompt the Federal Reserve to change its current accommodative policy and possibly indicate rate increases are being considered. We do not feel the Fed under Chairman Bernanke will make any moves in the intermediate future nor indicate any policy change until early in the new year assuming the labor situation improves.

Energies: January crude oil closed at $69.87, down 67¢ tied to the dollar strength. The shift from the tangible assets such as gold and oil back to dollars could continue if economic data remains positive. We do not feel the economy has bottomed nor that any recovery has commenced. Look for crude to move back to the $75 per barrel level but with the EIA report that a delivery hub in Oklahoma reported stocks increased from 2.5 to 33.4 million barrels, we could see carryover selling first.

Copper: March copper closed at $3.1330, up 3¢ tied to the stronger than expected retail sales and other economic data on Friday. With the retail sales figure nearly twice what was forecast short scrambled to cover. The report that China’s industrial demand grew by a better than expected 19.2% in November was also a factor in the rally. Inventories at the Shanghai Futures Exchange declined by 9,034 metric tonnes to 95,676 and was tied directly to Chinese demand. Overall demand for physical copper however, is weak and could prompt long liquidation early in the week. Inventories at the LME rose by 4,450 metric tonnes on Friday to 466,075 with the most recent Comex data showed an increase of 194 short tons to 91,307. Based on our expectation that the U.S. economy has not bottomed, we would continue to suggest lower prices for copper.

Precious Metals: April gold continued it’s slide on Friday lowing another $6.20 per ounce to $1,121.20 putting it at nearly $100 per ounce below its recent high. I have been warning that one should “ignore their gold charts and chart the dollar”. The logic is simply that commodities that are denominated in dollars move contrary to the dollar and the recent dollar weakness that fomented “gold fever” subsided recently and the dollar “found legs”. We continue to suggest applying dollar analysis to gold trading. March silver closed at $17.09, down 9.8¢ per ounce following gold. January platinum closed at $1,422.70, down $1.80 with March palladium closing at $362.15, down $2.95. We prefer the sidelines for all but astute intraday traders.

Grains and Oilseeds: March corn closed at $4.045per bushel, up 11.5¢ in technical buying tied to snow in the Midwest. Usually a strong dollar would negatively impact commodity prices but the concern over unharvested western corn belt crops prompted fundamental buying. We could see further buying until damage if any could be assessed. March wheat closed at $5.375, up 0.5¢ tied to the strength in the corn pit. With supply/demand factors weak we prefer the sidelines. March soybeans closed at $10.43 per bushel, up 7.25¢ mostly on correction after previous weeks losses. Strong demand could prompt further short covering and new buying. On Monday the National Oilseed Processors Association will report its monthly crush report for November. We like beans from here but would wait until after the crush report before adding to current longs.

Coffee, Cocoa and Sugar: March coffee closed at $1.43 per pound, up 35 points on concern over tight supplies and tied somewhat to options expiration. We would stand aside but favor the long side for traders considering the fact that prices gained even against a strong dollar. March cocoa closed at $3,407, up $13 per tonne after almost setting new 30-year highs early in the session. Stronger than expected U.S. economic data provided the impetus for cocoa buying since it is a beneficiary of an improved U.S. economy even against the strong dollar. We prefer the sidelines. March sugar closed at 24.00 up 74 points after making a seven-week high of 24.10¢ per pound earlier in the session. Tight supplies in consuming countries like India and Indonesia as well as lower Chinese production also a factor in the buying. We could see prices gain further and would buy on any dip.

Cotton: March cotton closed at 74.31¢ per pound, up 59 points tied to Thursdays USDA supply/demand report. The report showed an increase in exports and higher global consumption with a drop in ending stocks. We could see further gains as short move to cover early in the week.

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 Future Commission Merchants he introduces his clients to.

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