The Acuvest Letter
Market Commentary Week ending March 5 2010
Overview and Opinion: While the U.S. administration is heralding the end of the recession and the commencement of an economic recovery, regulators continue to close banks in the U.S. The number of bank failures so far this year is now 26 and we are only in the third month. Pending home Sales were down 7.6% and keeps banks from foreclosing on homes and adding to inventories. However, home mortgage defaults are turning into foreclosures at an alarming rate but it would appear that banks are withholding properties from the market. The reason could be quite simple: A bank carries a mortgage (regardless of condition) as an asset. The foreclosure and write off of a mortgage moves it from the asset column on their balance sheet to the liability or loss column. Banks are doing whatever they can to avoid changes in their income analysis. When the properties are foreclosed on eventually, the added inventory will further exacerbate the recessionary trend. As banks slowly add to inventories and write off loans both in the home mortgage and credit areas, they are creating a "Chinese water torture" condition in the U.S. It would be better to "clear the books" of all bad loans and create a base upon which to build. Additionally the non-partisan Congressional Budget Office reported Friday that "based on the Obama administrations budget proposal, deficits over the next decade would be $1.2 trillion higher than the White House estimate". This would far exceed the so-called "inherited" budget deficit and with a reduced federal income from taxes caused by the burgeoning labor problem.
The U.S. is on an almost irreversible course of a "double dip" recession. Weekly first time unemployment claims were down 29,000 and that prompted further "belief" by investors of an improvement in the labor situation and confirmation of an economic recovery. Their failure to understand that a reduction in first time unemployment claims is not tied to signs of an economic turnaround, but points to the fact that "companies may have finally reached the point at which there are no more people to lay off without shutting the company doors". The equity market reaction to the "great news" was heavy short covering and new buying across the board. That euphoria will be short lived. According to a professor at New York University, this may be "the worst employment situation since the great depression". I totally agree. Many of the unemployed will soon see their benefits end and having exhausted their job searches in an economy that "has no jobs available.
Now for some actual information.
Interest Rates: Treasury bonds closed at 116-22, down 104 tied to the "better than expected" U.S. jobs report showing a decline of 29,000 first time unemployed. U.S. employers reportedly cut 36,000 jobs in February after cutting 26,000 jobs in January. Since the forecast by economists was for much deep cuts between 75,000 and 100,000, the number was viewed as a "positive" to investors and bonds sold off. The resulting "optimism" on the U.S. economy prompted the shift from the relative safety of treasury paper to the equity markets. A condition that exemplifies the fragility of the financial markets. The expected auctions next week of $74 billion in government notes and bonds also a factor in the long liquidation. Based on our analysis of the U.S. economy, the possibility of any rate increases is moot so we could see a rally in bonds early in the week. We once again view the Treasury markets as in a trading range and would limit trading to professionals.
Stock Indices: The Dow Jones industrials closed at 10,566.20, up 122.06 tied to the better than expected job loss numbers in the U.S. and prompted the sharpest one day gain in over two weeks. The S&P 500 closed at 1,138.70, up 15.73, while the Nasdaq gained 34.04 points to close at 2,326.35. For the week the Dow gained 2.3%, the S&P 500 3.1% and the Nasdaq 3.9%. Another factor under consideration was the ongoing problems for Greece and the potential impact on the Eurozone countries. We continue to view the U.S. equity markets as overbought and strongly suggest implementing hedging strategies.
Currencies: The U.S. dollar index closed at 8077, down 11 points against gains in the June Euro of 46 points to 1.3621, the Swiss Franc 28 points to 9316, the British pound 128 points to 15148, the Canadian dollar 12 points to 9712, and the Australian dollar 75 points to 8981. The dollar did manage a slight gain against the June Japanese yen which lost 155 points to close at 1.1074. The weak dollar on Friday also added to gains in dollar denominated commodities but the selling was no doubt tied to its recent strength. The dollar has been regarded, thanks to the financial problems in Greece, as a safe haven for the "world", and unless there is a resolution in the Eurozone as to how to deal with the Greece financial problems, we could see further dollar gains. We still favor the Swiss Franc on any further declines.
Energies: May crude oil closed at $81.92 per barrel, up $1.29 tied to the weak dollar on Friday but also tied to geopolitical conditions. Nigerian terrorists have threatened to attack pipelines and any disruption in supply affects the price of crude. We prefer the sidelines. May heating oil closed at $2.1104 per gallon, up 2.9¢ while unleaded gasoline gained 3.74¢ per gallon to $2.2734. The severe winter in the heavy usage areas prompting buying in energy products and crude. We prefer the sidelines since there is no way "technically" to analyze these markets.
Copper: July copper closed at $3.4315 per pound, up 4.2¢ tied to the "positive" U.S. employment data. Any potential for improvement in the U.S. economy translates to increased demand for copper. A decline in the LME inventory of copper showed a decline of 1,075 metric tonnes to 543,150. The weekly data from the Shanghai Futures Exchange also showed a decline of 858 metric tonnes to 148,620. The Thursday Comex warehouse inventory showed a decline of 63 short tons to 102,192. We remain bearish on copper tied to our overall expectation of a continued U.S. economic recession.
Precious Metals: April gold closed at $1,135.20 per ounce, up $2.10 with May silver gaining 20.6¢ to close at $17.382. Funds were notable buyers of gold and silver Friday. The better than expected jobs data prompted selling in the dollar and buying of dollar denominated commodities. June palladium closed at $476.70 per ounce, up $13.50 against July Platinum’s loss of $4.30 to close at $1,583.50. Our recommended spread of short platinum, long palladium continues to work in our readers favor. We once again suggest the discarding of metals charts in favor of dollar charts. For determined metals buyers, we suggest silver rather than gold due to the potential for percentage gains and lower risk in silver as opposed to the "lofty" gold prices. Otherwise stay out and disregard the pundits on TV. Bear in mind that investors in gold in 1980 at $875 per ounce had to wait 26 years to break even. Could the situation repeat itself? I don’t know but why risk it.
Grains and Oilseeds: May corn closed at $4.935, down 7.5¢ tied to technicals after early buying deteriorated. Fundamentally support at the week’s lows could hold prices from declining further but we prefer the sidelines. Expectation of large crops also a negative. The failure of corn to maintain early gains tied to the weak dollar leaves us unimpressed. May wheat closed at $4.935 per bushel, down 8.75¢ on weak export demand and adequate global supplies. Stay out. May soybeans closed at $9.4275¢, up slightly but only as a correction after Thursday’s losses. While we like soybeans overall, we prefer to stay with current positions and not add for the time being. Fresh fundamentals are needed to get this market moving again. Underlying support should keep prices from declining further so holding current longs is suggested.
Coffee, Cocoa and Sugar: May coffee closed at $1.3040 per pound, up 20 points on short covering in front of the weekend but on light volume. We prefer the sidelines. May cocoa closed at $2,865 per tonne, up $36 mostly tied to speculative buying in what is perceived as an oversold condition. We prefer the sidelines here as well. May sugar closed at 22.19¢ per pound, up 52 points on short covering after recent losses. Sugar prices have lost over 20% in the past five or so weeks but lower Brazilian production could support prices from here and we would consider light buying early in the week with stops of course.
Cotton: May cotton closed at 82.43¢ per pound, up 61 points tied to the positively construed economic data. Prices have risen sharply the past month on lower than expected production from the major producers and with the positive expectations for the U.S. economy. Further gains in demand are expected. However, since we do not agree with the "glowing" economic expectations, we would take some profits here and look to get back in on any meaningful declines of 2-5¢ per pound.
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.