Overview and Opinion: The U.S. Administration’s policies are creating havoc in the financial markets as five more banks in Florida, Missouri, New Mexico, Oregon and Washington State bring the total so far this month and for the new year nine failed banks. The ongoing loan defaults in mortgages, autos, and credit cards are emerging almost daily and threaten the basic fibre of the financial sector. We have been warning for over two years that the level of credit outstanding exceeds by far the ability for borrowers to pay back and the ongoing rhetoric the administration is offering “demanding” that the banks “lend” more is only going to exacerbate the problem in our opinion. The “search” for credit worthy borrowers goes on but for the administration insisting that lending increases will only contributes to further defaults, foreclosures, and auto repossessions. A disheartening sight in my own “middle class” area shows a constant arrival of car carriers loading up on repossessed cars and the prospect of further such sights is to be expected. “An unemployed consumer cannot consume and the producers of those products will also be laying off people.” A condition we watch weekly as the first time unemployed number this past week increased against expectations of a decline. One cannot take solace in any reduction in those weekly numbers since it only goes to show that employers have no one left to lay off without shutting their doors. A condition I have been warning about for over a year. The proposal by President Obama to “limit the size” of financial institutions is, in my opinion, an act of desperation which cannot be tolerated in a capitalist society. That kind of rhetoric is typical of a socialist state where entrepreneurs are penalized and such stated limitations as to growth can only lead to investment contraction as we saw this past week after the President’s statement. The continuing lack of support being promoted by some members of Congress to the reappointment of Fed Chairman Bernanke clearly indicates a lack of confidence in the Administration for Mr. Bernanke and his policies. “Stashing some cash in the proverbial mattress” rather than “obeying” the Administration request to spend makes sense to me. The surprise Republican victory in the solidly “blue state” of Massachusetts clearly indicates the public is crossing the “aisle” in their thinking and is worrisome to Democrats but if they do not “reign in” the Administration’s spending and talk of tax increases, we could expect more such election results.……..Now for some actual information.
Interest Rates: March Treasury bonds closed at 11827, up 7 ticks tied to concern over whether Fed Chairman Bernanke will be reconfirmed. Any question of change in the Federal Reserve or the overall financial system causes consternation. Another concern is the recent statement by President Obama relating to tightening controls over the banking system. We continue to feel treasuries will remain in a range.
Stock Indices: The Dow Jones industrials closed at 10,172.98, down 216.90 points on analyst downgrades and the uncertainty over the Federal Reserve Chairman’s reconfirmation. Another factor was the statement by President Obama relating to controlling the size of financial institutions and imposing tougher limits on speculative activity at major banks. Any mention of controlling trading evokes fear and prompts action. The markets do not like any intervention in the capitalist system of growth and both financials and technology shares fell dramatically. Citigroup cut its ratings on some semiconductor equipment stocks. We had suggested last week that equity markets were approaching an “abyss”. A 500 point decline in three days qualifies as a correct analysis. We see further long liquidation after a possible correction early in the week and strongly suggest implementing hedging strategies.
Currencies: The March U.S. dollar closed unchanged at 7851.5 but sharply lower against the Yen which closed at 11132, up 67 points. Other currency changes include the March Euro which gained 31 points to close at 14134, the March Swiss Franc which lost 4 ticks lower at 9600, the March British Pound which lost 91 points to 16112 tied to comments on financial firm employee payment taxes. The March Canadian dollar closed at 9444, down 75 points and the Australian dollar lost 21 points to 8971. We once again suggest the sidelines in all but the Swiss Franc which we feel can be bought on any further dips. Concern over whether a global economic recovery is actually in effect was also a factor in the trading.
Energies: March crude oil closed at $74.54 per barrel, down $1.54 tied to doubt of a global economic recovery. The cold weather in the U.S. Midwest and Northeast recently prompted buying in Natural gas which gained 20.4c per MMBTU to close at $5.819 basis the February contract. We prefer the sidelines for all but end users.
Copper: March copper closed at $3.3470, up 5.2c in a correction after recent selling tied China tightening its monetary policy. With inventories declining at the LME, 450 metric tonnes and the Shanghai Futures Exchange warehouses of 3,280 metric tonnes continues to lead us to suggest lower prices for copper. Of course timing is again the big question but with no sign of demand from the U.S. housing and auto industries and expected defaults and foreclosures on mortgages we see no reason for prices to remain positive.
Precious Metals: February gold closed at $1,089.70 per ounce, down $13.50 as inventors abandoned riskier assets in favor of U.S. treasuries. We prefer the sidelines until the confusion relating to the Federal Reserve, economic activity, corporate earnings and the labor situation are clarified. A possible interest rate increase by China was also a factor in the trading activity Friday. March silver lost 57.8c per ounce to close at $16.932. April platinum closed at $1,544.50 per ounce, down $47.60 as technical resistance prompted long liquidation. March palladium lost $13.85 to close at $440.10 per ounce. We prefer the sidelines but silver is starting to look attractive and we would suggest buying a few contracts between $16.50 and $15.50 with stops at $14.90. Our other strategy involves the sale of platinum against the purchase of palladium. That strategy offered weeks ago is paying off for followers of our commentary.
Grains and Oilseeds: March corn closed at $3.64 ¾ per bushel, down 7 1/4c on expectations that farmers will plant more corn this year. Selling from outside markets tied to President Obama’s statements relating to curtailing certain banking operations and spilled over to corn. We prefer the sidelines. March wheat closed at $4.98 ½, down a penny per bushel in a correction after recent sharp selling. We prefer the sidelines here as well. Once again selling was tied to the Presidents statements as well as the question of Mr. Bernanke’s reconfirmation as Fed chairman. March soybeans closed at $9.51 ½, down 2 1/2c on speculative fund selling tied to talk of tougher regulations on U.S. banks and bearish supply fundamentals. We would stand aside even as beans are a usual favorite of ours.
Coffee, Cocoa and Sugar: March coffee closed at $1.3960, up 90 points as supplies of Arabica beans declines. We could see renewed buying and would buy a few contracts here and on any dip early in the week. A quick move to the $1.41 level would prompt us to raise stops up against purchase prices. March cocoa closed at $3,425 per tonne, down $6.00 tied to general commodity selling and especially from fund selling. We could see a bounce early in the week tied to Ivory Coast cocoa producers concern over the midcrop dryness, but we prefer the sidelines. March sugar closed at 28.78c per pound, down 48 points on speculative fund selling of commodities in general. March still managed a weekly gain of 1.16c per pound and remains in a bullish configuration. We would buy on any dips but with stops.
Cotton: March cotton closed at 71.07c per pound, down 78 points on concern over tightening banking regulation statements made by President Obama. We suggest the sidelines for now.
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.