The Acuvest Letter
Market Commentary Week ending Dec. 18, 2009
Overview and Opinion: The blizzard hitting the Northeast could curtail Christmas holiday shopping and impact the retail sector. Travel could also be a negative for the numbers on the last weekend before Christmas. We concentrated however on the news Friday that seven more U.S. banks were closed by regulators bringing the total for the year to 140. The credit crisis is not over and that implies that the so-called economic recovery is merely propaganda in an attempt to shore up consumer confidence. I cannot believe that 15 million unemployed consumers could possibly be confident and any positive figures can only be a result of polling consumers at local malls with full shopping bags. The U.S. labor situation is not improving and Thursday’s report of an increase in first time unemployment proves our theory that the recession continues. Now for some actual information.
Interest Rates: March U.S. Treasury bonds closed at 118-08, down 22 ticks with yields rising. Traders booked short term profits after recent gains but prices remain in our previous discussed ranges. Wednesday’s policy statement by the Federal Reserve was a non-event and removed concern of a potential rate increase. Another factor negatively impacting the equity markets was the poor results of the Citigroup $20.5 billion stock offer and subsequent price action. We continue to favor the sidelines for all but astute treasury traders.
Stock Indices: The Dow Jones Industrials closed at 10,328.89, up 20.63 on Friday but lost 1.3% for the week. The S&P 500 closed at 1,102.47, up 6.39 but lost 0.4% for the week. The tech heavy Nasdaq closed at 2,211.69, up 31.64 and posted a gain of 1% for the week. Much of the action was tied to the "triple-witching" expirations on Friday and changes in companies of the major indices which produced the biggest volume day at the New York Stock Exchange exceeding the prior record of three billion shares set in September of 2008. Positive earnings also a factor in Friday’s price action. On Monday the Dow Jones Industrials made a 14-month high but slowly lost ground during the week. We continue to warn of an unsettled U.S. economy and while equity markets usually project eight to 12 months forward, we do not see the current default and foreclosure housing problem resolving itself during that period. The equity markets are ahead of themselves and as stated in prior commentaries, unless corporations can actually make money aside from cutting expenses (employees and their benefit packages) and start to rehire laid off workers, we see no sign of any recovery. There remains a "black hole" under equities. Implement hedging strategies. We have programs that may be able to assist large investors in determining which strategies could offer protection against what we expect will be a sharp downturn in equities.
Currencies: March U.S. dollar index closed at 7809.5 up 0.5 but well off the intra-day high of 7850 as traders took profits after recent strength. The March Euro closed at 14319, down 28 points but our former favorite in the group, the Swiss Franc gained 34 points to 9594. We had projected, some months ago, that the Swiss Franc would achieve parity with the dollar, and it had. We then opted for the sidelines. Hopefully our readers followed our advice. On Thursday the dollar rallied to its highest price level in over three months. The problems reported on Greece’s debt payments as well as the recent problems with the Dubai World Corporation also played a roll in the move to the U.S. dollar. With some clarity as to those problems we could expect the dollar to move lower and once again look to the long side of the Swiss Franc. Other currencies were mixed with the British Pound losing 35 points to 16111, and the March Japanese yen losing 59 points to 11064. The March Canadian dollar gained 38 points to 9382 and the Australian dollar gained 28 points to 8820. U.S. economic data continues to be a factor affecting the dollar and we would, with the exception of the Swiss Franc, remain on the sidelines.
Energies: February crude oil closed at $74.42 per barrel, up 34¢ on reports that Iranian military took over an Iraqi oil well in Southern Iraq in a disputed region. Prices rallied sharply but fell back to closing levels tied to U.S. dollar strength. We continue to feel crude prices will remain in a range between $70 and $80 per barrel notwithstanding further geopolitical events. Our suggestion is the sidelines for all but professional energy product traders. We do feel, however, that with the prospect of a severe winter both in the U.S. and abroad, natural gas prices could improve substantially. January natural gas closed at $5.78 per million BTUs on Friday up 2¢. We like the long side from here.
Copper: March copper closed at $3.1435, up 1.55¢ on Friday. Technically copper is forming a base near $3.10 per pound but we continue to feel any change in China’s "appetite" for copper will produce a sharp decline in the red metal. Friday’s rally was in conjunction with the rally in precious metals which we viewed as a correction after recent sharp declines tied to the strengthening dollar. Inventories at the Comex rose by 1,616 short tons to 96,105 on Thursday with LME inventories rose by 1,775 tonnes to an eight month high of 476,350 tonnes. The weekly report from the Shanghai Futures Exchange showed a 9% gain from 95,676 tonnes last week to 104,377 metric tonnes. We would now look to buy puts on copper once again.
Precious Metals: February gold closed at $1,111.50 per ounce, up $4.10 mostly tied to a technical correction after recent heavy losses of around $100 per ounce. The dollar strength limited the correction. March silver closed at $17.325 per ounce, up 13¢ following gold. Short covering a factor in the rally but gains were limited by the strength in the dollar. January platinum closed at $1,430.70, up $4.80 while March palladium fell $2.10 to $367.90 per ounce. We prefer the sidelines as once again, as stated on numerous prior occasions, use the dollar technicals to determine price direction for precious metals. Gold trades inverse to the U.S. currency in which it is denominated.
Grains and Oilseeds: March corn closed at $3.97¾ up ¾ of a penny. The "tug of war" between strength in wheat and weakness in the nearby soybean pit prompted the sideways action in corn. U.S. dollar strength also a deterrent to corn. We prefer the sidelines. March wheat closed at $5.28 per bushel, up 9.5¢ on a correction from Thursday’s losses and short covering. Technicals also a factor as wheat appears oversold. Heavy buying by commodity funds also helped wheat. We prefer the sidelines but private estimates of crops viewed as mildly bullish. March soybeans closed at $10.20 per bushel, down ten cents on possible strong South American production. While we favor the long side of soybeans, we would suggest holding longs but not adding for the time being. The strong demand from China along with concerns over supplies could support beans but until we hear more from South America, we prefer to hold positions without adding.
Coffee, Cocoa and Sugar: March coffee closed at $1.4525 per pound, down 95 points mostly tied to the strong dollar. Support from expected lower coffee production for current Latin American harvests a supporting factor for coffee. We like coffee from here but would stops against any new purchases. March cocoa closed at $3,251 per tonne, down $173 and made a three week low Friday. The strong dollar also a factor as well as increased arrivals at Ivory Coast. We prefer the sidelines. March sugar closed at 26.34c per pound, down 9 points after achieving 28 year highs tied to tight supply outlook and bullish technicals. The supplies from the current Brazilian harvest is expected to be at record levels, but lower than previous expectations. Lower Indian 2009-10 production also a factor in recent strength. We could see prices continue higher but the 30c per pound level would provide formidable technical resistance, we would stand and abandon our previously bullish stance for the time being. Any correction of 3-5c per pound, however, could provide another buying opportunity.
Cotton: March cotton closed at 75.28c per pound, down 46 points tied to the weakness in soybeans and dollar strength. However, fundamentals remain bullish with world cotton production expected to fall short of demand according to the USDA. Any decline to the 72-73c level could provide a buying opportunity.
John L. Caiazzo
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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.