The Acuvest Letter
Market Commentary Week ending February 26 2010
Overview and Opinion: Watching the health care summit during the week was like watching an old Abbot and Costello segment, "Who’s on first? I dunno. Third base". The Democrats want to push through anything and the Republicans don’t want to push through anything. Both sides attempted to make their point, but neither struck a "winning blow" in the televised battle. Whatever results will no doubt be along party lines with the Dems holding the winning card, a strategy called "reconciliation".
In either case the American public will probably be the loser in this battle. The beneficiaries will be either the health care industry, the pharmaceutical industry, or the brokerage industry. The latter based on commissions and fees tied to the heavy trading. We await the outcome with complacent anticipation. The current global economic situation is more interesting and we have not heard the end of the potential repercussions tied to the problems in Greece and the impact on the economies of the Eurozone countries. The Greek sovereign debt problem could affect many of the Eurozone countries where talk of a "bailout" seems to have subsided for now. The continuing rhetoric from the powers that be of an economic recovery in the U.S. permeates the air waves but does not fool anyone with the ability to read, the signs that are everywhere, not the least of which is the U.S. labor situation. Hoping to avoid boring my readers, I reiterate, "an unemployed consumer does not consume anything and the producers of those (non-consumed) products will be next to receive the dreaded pink slip." At some point the weekly first time unemployed number will decline and promote "euphoria" on Wall Street. Unfortunately we feel any such decline in the weekly number will only mean there are no more people to lay off without firms having to "shut the doors". Now for some actual information.
Interest Rates: Treasury bonds closed at 117-22, up 24 ticks tied due to the drop in existing home sales of 7.2% in January against analyst and economist expectations of an increase. The gain of 5.9% in the GDP failed to dissuade investors from moving from risk to the relative safety of treasuries. Consumer spending rose at a 1.7% annual rate against the prior estimate of a 2% gain. Our overall view of the U.S. economy remains negative and the basis is simply the huge number of unemployed. We continue to expect treasuries to remain range bound and should only be traded by professionals.
Stock Indices: The Dow Jones Industrials closed at 10,325.26, up 4.23 points and up 2.6% in February. The S&P 500 closed at 1,104.49 Friday, up 1.55, up 2.9% for the month. The Nasdaq closed at 2,238.26, up 4.04 points and up 4.2% for the month. All three are down around 1% so far this year. We continue to view equity markets are extremely vulnerable to sharp downward moves tied to our expectation of continued labor strife and consumer credit problems. Mortgage defaults persist and foreclosures remain extremely high as well as other consumer debt such as with autos and credit cards. The picture as we see it, remains dismal and the any additional bank failures could represent the straw that broke the camel’s back and prompt wide spread equity long liquidation. Remain vigilant and implement hedging strategies.
Currencies: The June Dollar index closed at 8075.5, down 42 points on pre-weekend profit taking after recent run-up. The British pound had traded at a nine month low against the dollar and a six week low against the euro closing at 15236, up 1 tick on Friday. Other currencies also managed gains on Friday with the Swiss Franc up 51 points to 9314, the Japanese yen 34 points to 11259, the Canadian dollar up 95 points to 9506, and the Australian dollar up 1.05 points to 8870, all basis the June contract. Concerns over high deficit countries tied to the financial problems for Greece prompted the recent move to dollars but hopes of financial assistance relieved investor concerns. We could see further ramifications tied to Greece so we would avoid positions other than to buy Swiss Francs on any meaningful decline.
Energies: May crude oil closed at $80.01 per barrel, up $1.48 closing the month with a 9% gain tied to supply /demand concerns and the late week dollar weakness. We could see further short covering and new buying as supply concerns persist. May heating oil closed at $2.0488, per gallon, up 3.59¢ with Unleaded gasoline gaining 3.98¢ to close at $2.1942 per gallon. April natural gas futures closed at $4.813 per million BTUs, up 4.6c but lost 5.4% for the week and 6.2% for the month. We prefer the sidelines for all but professional energy traders and end users.
Copper: July copper closed at $3.2985 per pound, up 7.45c tied to possible production delays caused by a major 8.8 earthquake hitting major producer Chile. The Escondida facility, however, was operating normally on Saturday after the quake and could prompt some long liquidation. The weak dollar Friday was also a factor. We remain bearish for copper as our opinion of the continuing global economic weakness could stifle demand.
Precious Metals: April gold closed at $1,118.90 per ounce, up $10.40 as the dollar weakened Friday on a possible German government backed plan to help Greece through its financial difficulties. We think the problems with Greece may spread to other Eurozone countries. That being the case, we could see the dollar strength renewed and pressure put on precious metals. July silver closed at $16.543, up 39.1¢ per ounce tied to dollar weakness and following gold. April platinum gained $8.70 per ounce to close at $1,539.90 and June palladium gained $8.25 per ounce to close at $433.75. We continue to prefer the short platinum/long palladium spread.
Grains and Oilseeds: May corn closed at $3.89 per bushel, up 5.75¢ on possible planting delays and technical momentum. We prefer the sidelines but expect new buying interest to emerge tied to those possible delays. May wheat closed at $5.1925, up 15.5¢ on end of month positioning and short covering as well as associated buying from other markets. Seasonal buying in March prompted short covering as well. We prefer the sidelines in wheat. May soybeans closed at $9.61 per bushel, up 11¢ on evening up of positions at month end and positive influences from other markets as well as from the weak dollar Friday. Short covering by traders the main feature tied to news of China purchases of U.S. soybeans. Speculative futures funds reportedly bought 6,000 contracts of soybeans, 1,000 soybean meals and 3,000 soybean oil. We continue to favor the long side of soybeans.
Coffee, Cocoa and Sugar: May coffee closed at $1.312 per pound, up 1.4¢ tied to the weak dollar and technically oversold condition. We could see further gains in coffee but expectations of a bumper crop from Brazil against the International coffee Organization’s indication that world coffee stocks held by producing countries are "almost exhausted". However with data from India, Asia’s third largest coffee producer exports rose 43.5% for the January-February period against a year earlier. Additionally, an increase in global demand could support coffee prices from here. July cocoa closed at $2,941 per tonne down $8.00 after trading as high as $2,977 during the session. The recent grind data, an indication of demand, was weak and cocoa remains in a trading range. We have no interest either way. May sugar closed at 23.60¢ per pound, down 10 points but for the weak lost 10%. The high for sugar, basis the March contract took place on February 1 at 30.40¢ per pound, a 29-year high and has slipped back ever since. The rally had been prompted by weather in Brazil that had cut production. Sugar production reports since then showed out rose by 11% in the two weeks to Feb.15 in the area that accounts for 90% of output. We see no reason to trade sugar from here.
Cotton: May cotton closed at 82.46¢ per pound, up 1.29¢ on reports that China’s 2009 cotton crop dropped by 15% from a year ago. China is the world largest cotton producer and also importer. The USDA may lower its current forecast according to an analyst in Arizona. We favor the sidelines in cotton pending additional supply/demand information.
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.