The Acuvest Letter
This will be our final commentary for 2009. Wishing all a Happy, Healthy and prosperous New Year
Overview and Opinion: Abraham Lincoln once said,” You can fool some of the people all of the time, and you can fool all of the people some of the time….but you cannot fool all of the people all of the time”. The prospect of an economic recovery, in our opinion, without an improved labor condition, is, in the words of former Fed Chairman Greenspan, “irrational exuberance”. We look for continued mortgage defaults and foreclosures as the weekly unemployment data which some see as improving, merely indications to us that there are fewer employees available for layoff. This past Thursday saw 450,000 first time unemployment and that translates, in our mind, to that many defaults in home mortgages, car loans, and credit cards. The concept being laid out by the administration of “creating new jobs” is a bad joke being perpetrated on the general public in order to get them to open their “wallets” and spend. I for one am holding back on any unnecessary purchases and I doubt that I am alone in my pessimistic analysis and approach. Now for some actual information.
Interest Rates: March treasury bonds closed at 115-07, down 23 points as money shifted once again to equities from the relative safety of U.S. government paper. We are now at the bottom of my anticipated trading range for bonds and we could see, based on our opinion of a continuing U.S. recession, some buying in the first week of 2010 after “Santa Claus” leaves the equity markets alone. While we try, sometimes failing, to avoid political rhetoric, with the U.S. administration ambitious spending programs of bailouts and “stimulus” we cannot avoid stating that the U.S. is on the verge of “bankruptcy” and we feel that we no longer “own” but are “renting” this country. The failure of the administration to realize that the budget deficit they are creating will far exceed estimates since they base their estimates on prior years “earnings”. The only income the U.S. government has is its tax base and with the burgeoning number of unemployed who will not be “contributing” to the tax income but are becoming a “drain” by virtue of their unemployment benefits, there is no question in my mind but that the U.S. budget deficit will exceed $12 trillion and may reach $13 to $15 trillion dollars. The situation as I see it is untenable and will result in financial disaster.
Stock Indexes: “Santa Claus” visited Wall Street on Thursday as institutions performed their annual ritual,”window dressing”. That’s where the institutions buy stocks that are already held in portfolios with excess funds to show a better than actual performance for year end statements to investors. They also purchase stocks that were in “vogue” in order to show holdings of those high flyers in their statements. The strategy is obvious to many but there are always investors who become impressed and invest more in those institutions….. See my first paragraph in the Overview and Opinion. The Dow Jones Industrials closed Thursday at 10,520.10, up 53.66 with the S&P 500 closing at 1126.48, up 5.89, and the Nasdaq closing at 2,285.69, up 16.05. The surprise drop by 28,000 of first time unemployed to 452,000 and the gain in durable goods orders prompted the rally in equities. We feel the current level of equity indexes is creating a “feel good” position for investors which will be short lived. We continue to suggest implementing hedging strategies as a form of limited “insurance” against the kind of selloff we are expecting in equities.
Currencies: The March U.S. dollar index closed at 7817.5 on Thursday, down 5.5 points against gains in the Euro of 19 points to 14353, the Swiss Franc 2 points to 9629, the Japanese yen 5 points to 10915 and the Australian dollar 41 points to 8770. Declines were posted in the March British pound of 6 points to 15938 and the Canadian dollar 15 points to 9528. The better than expected jobs data supported the dollar in light pre-holiday trading. We could expect, with any negative economic data, a resumption of dollar liquidation. We are reluctant to recommend any action until the first week of the New Year but would hold previously recommended long Swiss Franc positions.
Energies: February crude oil closed at $78.05, up $1.38 per barrel tied to the weak dollar but more importantly to geopolitical considerations. The Middle East remains problematic and the potential for some “event” offsets to some degree the current oversupply situation. We are on the sidelines.
Copper: March copper closed at $3.2925, up 8.90¢ on the weak dollar to some extent but mostly tied to the Chuquicamata union’s rejection on Tuesday of a 36-month contract. The Chilean state copper miner Codelco made its final offer to the unions prior to expiration of the current contracts on Thursday. Shorts scrambled to cover in front of the holiday weekend. The action in copper was tied to the potential for continued labor strife but inventories rose at both the LME and the Comex with the LME reporting an increase of 2,025 metric tons on Thursday to 484,800. The Comex data released on Wednesday showed an increase of 827 short tons to 98,021. If the strike fears diminish we could see a sharp selloff in copper. Again, as with other markets, we prefer to close out the year with cash and wait for the New Year before making any position commitments.
Precious Metals: February gold closed at $1,104.80 per ounce, up $10.80 on short covering after having lost $100 per ounce recently. March silver gained 25¢ per ounce to close at $17.44. As stated in many previous commentaries, the precious metals move inverse to the U.S. dollar in which they are denominated. January platinum closed at $1,467.90 per ounce, up $41.10 while March palladium closed at $389.65, up $32.30 per ounce. Platinum and palladium benefited from the Securities and Exchange Commission filings showing that exchange traded funds for these two metals was one step closer to fruition. We once again suggest the sidelines until after the beginning of the New Year.
Grains and Oilseeds: March corn closed at $4.085 per bushel, up 3.75¢ tied to better export sales and buying in other markets. We prefer the sidelines. March Wheat closed at $5.245 per bushel, down 4.5¢ on weak export demand in the weekly export sales report. We would stay out of wheat. March soybeans closed at $10.08 per bushel, down 1¢ on light technically motivated selling with fund selling the main feature. We like soybeans but would hold current long positions and not add until the New Year and only with positive fundamentals.
Coffee, Cocoa and Sugar: March coffee closed at $1.3930 per pound, down 3.35¢ on speculative selling and long liquidation in front of the holiday weekend. Small crop sizes reported by Colombia and Central America contributed to the long liquidation. We prefer the sidelines for now but could see renewed strength on positive fundamentals. March cocoa closed at $3,271 per tonne, up $20 mostly on technical support but on light pre holiday volume. We prefer the sidelines. March sugar closed at 27.08c per pound, up 58 points once again tied to expectations of tight global supplies. While we continue to favor the long side of sugar, we prefer the sidelines during the holiday season due to trader absence and light volume.
Cotton: March cotton closed at 73.65¢ per pound, down 25 points on light preholiday long liquidation after trading at a 15-month high from Dec. 16. We prefer the sidelines for now.
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.