Sector analysis for week of Jan. 11

The Acuvest Letter

Market Commentary Week ending January 8, 2010

Overview and Opinion: Cracks are starting to appear in the "Great Wall" as China reportedly moves to curtail lending. Indications that the "economic growth" reported by the Chinese may not be quite as expansive as they would have the World believe. That would bode ill for the United States since the Administration’s spending programs rely on the ability to sell debt and China has been the most prolific buyer of U.S. debt. So much so that Americans are now paying "rent" to China vis-à-vis interest payments on burgeoning debt. The problem is that while the GDP remains a bit higher than the national debt, that picture is clouded by the fact that the U.S. income is tied to taxes collected and reduced by the increasing unemployment level.

The Government cannot continue to basically "print money" to pay for the expanded spending and bailout programs without incurring some detriment. This "scenario" could easily develop into an inflationary trend and that could prompt the Federal Reserve to take action to raise rates. One of the Fed Governors made the statement during the week that he suggests the Fed should raise rates "sooner rather than later". The implication of course, would strengthen the dollar, create havoc in the global marketplace, and negatively impact most commodity prices. With the fragility of the U.S. economy such a move would be financial disaster. The latest economic data, however, showed a loss of 85,000 jobs which was more than analyst expectations and that, hopefully, would preclude any further talk of rate increases for the near term. Now for some actual information with my usual spin.

Interest Rates: March Treasury bonds closed at 115-15, up six ticks tied to the worse than expected jobs data. Nonfarm payrolls declined by 85,000 in December against a revised 4,000 increase for November according to the U.S. Labor Department Friday. Economists had expected a decline of only 10,000 jobs. The unemployment rate nationally remained at 10% but some areas of the country reported much higher rates. The U.S. economy remains entrenched in recession and talk of a recovery is premature. Once again, as I have stated before, "an unemployed consumer does not consume non-essentials and the producers of those products will be next to lay off people". Another fact to consider is that any lower first time unemployment numbers only reflect the fact that there are fewer people left to lay off and still remain viable. I am sure a lower number will be touted as positive, when in fact, it would be a result as I stated above.

Stock Indices: The Dow Jones Industrial average closed at 10,618.19, up 11.33 on late short covering ending the first week of 2010 with a gain of 1.8%. The S&P 500 closed at 1,144.98, up 3.29 and gained 2.7% for the week. The Nasdaq closed at 2,317.17, up 17.12 points for a weekly gain of 2.1%. The investing public apparently disregarded the disappointing jobs data in expectation of increased company earnings. As I indicated earlier, those "profits" are tied to cost cuts such as labor and benefits and not increased sales. Any increase in productivity can be tied to remaining employees doing the work of two or more laid off workers. That trend can only continue for so long until the reality that companies are in trouble and net earnings gains are "fictitious". We remain convinced that at some point, the real picture in U.S. corporations will emerge and that the future is "bleak" without improving the labor situation. Implement strategic hedging programs to protect assets. The "strategy" of buy and hold is a fallacy. My question is simply, when will Enron come back.

Currencies: March U.S. dollar index closed at 7768, down 42.5 points as any concern that the U.S. Federal Reserve would raise rates in the face of the disappointing jobs data was discounted. The March Euro gained 90 points to close at 14415, the March Swiss Franc gained 85 points to 9771, the March British Pound gained 92 points to 1.6027, the Japanese Yen gained 61 points to 1.0801, the March Canadian Dollar gained 20 points to .9691, and the Aussie Dollar gained 56 points to .9179. We continue favor the Swiss Franc.

Energies: February crude oil closed at $82.75, up 9¢ against the weakness in the dollar and continued concern over the possibility of geopolitical events. We remain uncommitted in energy products other than to consider the possibility that weather conditions may prompt increased usage. February heating oil gained 1.67¢ per gallon to $2.20.03.

Copper: March copper closed at $3.4005, down 2.65¢ on a correction after recent gains. Negative economic data provided the impetus for the long liquidation. Increases in inventories also a factor in the selling. The LME reported warehouse stock increased by 3,150 metric tons Friday to 510,625. The Weekly Data from the Shanghai Futures Exchange showed a weekly increase of 3,499 metric tonnes to 98,814. Comex inventory data released on Thursday were unchanged at 99,368 short tons.

The extreme weather across the U.S. and Europe are a factor. Severe weather conditions in a major copper buyer, China, also impacted demand.

Precious Metals: April gold closed at $1140.30, up $5.20 tied to the weakness in the U.S. dollar. Low interest rates weigh on the U.S. currency in which commodities such as precious metals are denominated. The weaker than expected U.S. jobs data pressured the dollar and prompted corresponding gains in precious metals. March silver gained 12.5¢ per ounce to close at $18.47. April platinum, which has an industrial application in automobile catalytic converters, closed at $1,570.60, up $11.20 while the other white metal, March palladium, gained 60¢ to $425.15. We once again suggest "throwing away your gold chart and chart the dollar and U.S. interest rates".

Grains and Oilseeds: March corn closed at $4.23 per bushel, up 5.5¢ on late fund buying which some estimates suggest totaled 15,000 contracts. Technicals also played a part in the buying. We prefer the sidelines in corn until after the USDA 2009 production forecasts on Tuesday. March wheat closed at $5.685 per bushel, up 10.75¢ again as in corn, tied to index fund rebalancing of positions and heavy late session buying. We prefer the sidelines in wheat as well until after the USDA report Tuesday. March soybeans closed at $10.22 per bushel, down 4¢ on bearish supply outlooks and demand concerns. South American crop progress as well as reduced Chinese soy demand also a factor in the weakness. We suggest moving to the sidelines after having been bullish.

Coffee, Cocoa and Sugar: March coffee closed $1.4535 per pound, up 3.45¢ on tight physicals and the weakness in the dollar in which it is denominated. Technicals remain bullish. We could see prices approach the $1.50 level basis the March before meeting with substantial resistance. Concern that the Vietnamese robusta crop may not come in as high as expected along with an International Coffee Organization expectation of reduced production by both Brazil and Colombia prompted the buying. March cocoa closed at $3,296, per metric tonne, down $13, tied to weaker consumer demand and the bearish U.S. jobs data. Cocoa remains in a range that has been established over the past few weeks. We like the sidelines. March sugar closed at 0.2753¢ per pound, down 47 points on fund selling and technicals after recent strength. Sugar is technically overbought and additional long liquidation can be expected. Any strength in the U.S. dollar could accelerate the correction and could push prices down below 0.25¢ where support could be found between 0.22¢ and 0.23¢. We prefer the sidelines.

Cotton: March cotton closed at 72.44¢ per pound, down 45 points after recent buying pushed prices to 16-month highs. Cotton was pushed to those highs by over-enthusiastic bulls that did not want to "miss the boat". While fundamentals and technicals remain positive the correction was healthy and brought prices back towards trailing support. We would await Tuesday’s USDA production report before considering the long side of cotton once again but assuming the report is positive, would only buy on dips and not chase it.

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.

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