Overview and Opinion: “The calm before the storm” is a phrase that could exemplify the current economic and investing climate. While the rhetoric spewing from Washington continues to insist the recession is over and a recovery has commenced, the 12 million or so unemployed must surely disagree. The number of defaults in the “pipeline” is staggering and once a family misses three or four payments, the possibility of “catching up” is unlikely. They will become foreclosures. The President announced $1.5 billion to aid homeowners, but I do not understand how those funds will be applied. Will the government make up their back payments? Will the funds be handed directly to homeowners or will deals be made with lenders? I have no idea but the amount in the context of the burgeoning defaults and foreclosures seem totally inadequate to me. Another problem is the continuing collapse of U.S. banks. The latest victim is the La Jolla Bank which will reopen on Monday with a different name. So far 20 banks have failed and there are no doubt many more on the brink thanks to the recession and the subprime mortgage debacle. As I stated in many of my previous commentaries, “an unemployed consumer does not consume and the producers of those products are next to succumb to the recession”. There is no recovery, in my opinion, only a slowing of the lay off cycle as companies move to maintain “skeleton crews” to keep their businesses alive. The stimulus programs are a “Band-Aid” on what I see as “open heart surgery”. Now for some actual information.
Interest Rates: March Treasury bonds closed at 11625, up 19 ticks even as the Fed raised the discount lending rate, a move that could mean an increase in the Fed Funds rate soon. The rate increase could signal the Fed seeing an economic recovery taking hold. However, with jobless claims up 31,000 for the week and a weak 0.2% increase in the consumer price index, we see no such recovery. Bonds should remain in a trading range as we have been forecasting for some time.
Stock Indices: The Dow Jones industrials closed at 10,402.35, up 9.45 on Friday as investors responded to the Fed discount rate cut as a sign the economy is recovering. The S&P 500 closed at 1,078.47, up 10.234 with the Nasdaq gaining 2.16 points to close at 2,243.87. For the week the Dow gained 3%, the S&P 500 3.1% and the Nasdaq 2.8%. We do not believe any rally can be sustained with the unemployment situation worsening and the prospect of additional job cuts in the offing. My standard phrase relating to an “unemployed consumer not consuming” remains in effect. Implement hedging strategies.
Currencies: The March U.S. dollar index continued its climb against the Euro and other currencies as the U.S. economic picture, vis-à-vis the Fed rate increase create a positive picture for the U.S. and the dollar. The March Euro lost another 21 points to 13595 but had traded as low as 13442 during the session. The March Swiss Franc, our favorite in the group gained 1 tick to 9283 while losses were recorded in the March British pound of 161 points to 15463, the March Japanese yen 50 points to 10901, the March Canadian dollar 4 points to 9611, and the Australian dollar 42 points to 8962. Concern over the euro zone sovereign debt initiated by the Greece problems and carried through to Spain, Portugal, Italy, and others prompted the flight to the dollar. We could see further dollar strength but any change would present a buying opportunity for the Swiss Franc in our opinion.
Energies: March crude oil closed at $79.81, up 75c per barrel after trading as high as $80.10 during the session. Severe winter weather prompted shortcovering in energy products but gains were blunted by the dollar gains. With geopolitical events involving Israel’s possible involvement in the Hamas leader killing, Iran’s arrogance in declaring continue progress with uranium enrichment which could involve further action by Israel, a “tempest in a teapot” could be brewing. We would avoid these markets.
Copper: March copper closed at $3.3570 per pound, up 7.15c on shortcovering in front of the weekend and tied to the view that the U.S. Federal Reserve rate increase could mean an economic recovery which would benefit copper. Continued dollar gains however, would hurt copper prices. We prefer the sidelines for now but still maintain a bearish bias.
Precious Metals: April gold closed at $1,122.1 per ounce on short covering after early losses tied to the U.S. Fed’s discount rate increase and dollar strength. The early loss gave way to shortcovering when the reality of a 0.2% discount rate increase really had no impact since it applied to the rate the Fed charges banks for emergency loans. March silver closed at $16.413 per ounce, up 35.3c with Aril platinum gaining $24 per ounce to close at $1,543.60, and March palladium gaining $7.10 to close at $442.35 per ounce. We once again view precious metal action a result of changes in the U.S. interest rates and the dollar. Occasionally a disparity occurs where metal prices move, for a short time, in tandem with the dollar. We prefer the sidelines but favor the long side of silver once the dollar stabilizes or declines.
Grains and Oilseeds: March corn closed at $3.60 per bushel, up 2 3/4c on shortcovering and tied to strength in crude oil and precious metals. Most commodity fund accounts maintain positions across the commodity spectrum and in cases of one group of commodities making a significant price move, there is an effect in other commodities regardless of underlying fundamentals. Such movement takes place when a particular commodity group declines precipitously causing margin calls which are then met with liquidation in other commodities where profits still exist. Even commodity funds professionaly managed are hesitant to close out a margin call loss without an offsetting profit on the books. We prefer the sidelines in corn. March wheat closed at $4.89 ¾ per bushel, up 4 3/4c on shortcovering and technicals. We prefer the sidelines. March soybeans closed at $9.45 per bushel, down 3c tied to bearish South American crop outlooks. Speculative funds were sellers of beans and bean oil but buyers of soymeal. The dollar rally was also a factor in the long liquidation. With good underlying support and demand we continue to prefer the long side of beans but only on dips.
Coffee, Cocoa and Sugar: March coffee closed at $1.3475 per pound, up 65 points and off early lows prompted by the dollar rally. With major holidays in Brazil and Vietnam fundamentals are lacking and while we favor the long side of coffee, we prefer the sidelines until after the holidays. March cocoa closed at $3,109 per metric tonne, up $18 as equities and other commodities rallied after the dollar retreated from early highs. We prefer the sidelines in cocoa. March sugar closed at 25.96c per pound, up 16 points on carryover from overnight gains. We like sugar from here with support at 24.85 to 25c. Also, expectations that India may be in line for additional imports prompts our view of higher prices.
Cotton: March cotton closed at 78.98c per pound, up 85 points and up 5.43% for the week. Tight supplies with uncovered hedges by textile mills tied to good demand a leading factor for higher prices. We like cotton from here but would only add to existing positions on dips.
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.