The Acuvest Letter
Market Commentary Week ending April 9 2010
Overview and Opinion: “It’s the economy stupid”…..An appropriate phrase when considering the U.S. administration emphasis on “affordable health care” when 15 million people are out of work and will not be able to “afford” affordable health care. The rush to pass health care rather than the jobs program makes no sense to us since the necessity to afford “food” pre-empts health care, which, by the way, will not be refused to anyone entering the emergency room at a hospital. The U.S. economy remains mired in joblessness and as I suggested last week, the disparity between creating 162,000 jobs in a month and the weekly loss of 450,000 jobs by virtue of the first time unemployed should create a greater urgency than any other consideration. The unemployment problem will persist for at least another year or more and that translates to additional foreclosures, declines in property values, a declining “income” to the federal government by virtue of reduced income taxes and continued rampant spending. That can only lead to increased taxes not only on the “rich” but by all Americans lucky enough to have jobs. The rhetorical statement that the U.S. economy is in recovery cannot be substantiated by facts. We look for continued job losses on balance and that means a continued weak U.S. economy. Now for some actual facts.
Interest Rates: June treasury bonds closed at 115-21, up 8 ticks thanks to the demand for the $21 billion of debt sold. Federal Reserve chairman Bernanke made the statement that “joblessness, foreclosures and weak lending are dragging on the recovery”. That more or less confirms our assessment of the U.S. economy and we continue suggest that bonds will remain in a trading range without much change of interest rate hikes by the Fed for the intermediate future
Stock Indices: The Dow Jones industrials closed at 10,997.35, up 70.28, after finally breaking through the 11,000 psychological barrier to 11,000.98 before settling back under it. The rally was prompted by energy stocks after a rosy profit forecast by Chevron. Technical selling took the Dow back under the “magic” number after an analyst downgraded Alcoa. The market, suffering from low volume doldrums, has had trouble maintaining a trend and that could indicate a “topping” trend which could lead to a sharp downward correction. We have been negative on equities for some time thanks to our associating equity values to a continued economic decline and we see no change in our opinion warranted. We do continue to suggest implementing hedging strategies.
Currencies: The June U.S. dollar index closed at 8103, down 67.1 points against gains in the Euro tied to expectations of a Greece bailout package. The European Union and the International Monetary Fund have reached an agreement for a Greek support package and that prompted a correction in the U.S. dollar after its recent strength. June Swiss Francs closed at .9364, up 45 points, the Euro up 105 points to 1.3456, the British pound gained 97 points to 1.5363, the June Japanese yen up 17 points to 1.0727 and the Aussie dollar up 32 points to .9254. The Canadian dollar, in line with the U.S. currency, lost 19 points to close at .9949. It remains to be seen exactly what kind of bailout package was orchestrated to support Greece but it only “prolongs the agony” of severe debt problems in Greece and others prompted by the global recession. Stay out but with an eye the long side of Swiss francs.
Energies: May crude oil lost 55¢ to close at $84.92 per barrel on concerns over the continued global recession and declining enthusiasm over an economic recovery. We prefer the sidelines. We continue to view Natural gas, however, as having bottomed and look for continued price gains after the 29% decline since the beginning of the year. Technically we see natural gas as having bottomed and recommend light purchases. May closed at $4.07 per mmbtu, up 16.1¢.
Copper: July copper closed at $3.6095 per pound, up 30 points tied to the expectation of a bailout for Greece and a possible secession of concerns over the European Union. The dollar weakness also contributed to the slight point gain in copper but we continue to feel copper prices are overdone based on our expectation for a “double dip recession” in the U.S.
Precious Metals: June gold closed at $1,161.90 per ounce, up $9.00 tied to investor return to “risk” assets on easing concerns over Greek finance problems. The move from the relative safety of the U.S. dollar to riskier assets with greater potential prompted the renewed attraction to gold and silver. We disagree with the assessment that “all is forgiven” as relates to the Greek financial difficulties and would not rush to “join the crowd” and buy gold. We do, however, prefer silver anywhere from $17 per ounce and lower. July silver closed at $18.381 per ounce, up 22.5¢. July platinum closed at $1,727.40 per ounce, up $10.30 while June palladium gained $10.10 per ounce to close at $513.60. Stay with the short platinum, long palladium spread.
Grains and Oilseeds: May corn closed at $3.4575¢ per bushel, down 2.5¢ tied to favorable planting weather forecasts and the decline in the price of crude oil. Stay out for now. May wheat closed at $4.6575 per bushel, down 3.5¢ but gained 11¢ for the week. Large supplies and weakness in corn prompted the profit taking on Friday. The USDA’s supply/demand report cut ending stocks for 2009-10 by 51 million bushels to 950 million which was in contrast to an analyst projecting ending stocks to remain excessively large. We prefer the sidelines. May soybeans closed at $9.5225, up 5.75¢ as the USDA reaffirmed its outlook for tight old crop stocks. We continue to favor the long side of soybeans.
Coffee, Cocoa and Sugar: May coffee closed at $1.3270 per pound, down 2¢ after it touched five-month highs on Monday. Speculative funds were noted sellers taking profits after the recent run-up but one analyst suggested that arabica supplies are “very tight”. We could see further gains in coffee as ICE warehouse stocks decreased by 27,683 60 kilo bags on Thursday to 2.44 million bags. Fundamentally coffee remains bullish and we would join the crowd but with stops. May cocoa closed at 42,856 per ton, down $5.00 on long liquidation in quiet trading. We prefer the sidelines in cocoa. May sugar closed at 16.39c per pound, up 47 points on spec fund buying and position rolling. Sugar remains in a range and we prefer to await the “breakout” either way before making a trading decision.
Cotton: May cotton closed at 78.07¢ per pound, down 53 points tied to positive expectation for next fall’s supply. Rising cotton stocks the main reason for the selling pressure. We prefer the sidelines.
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.