The Acuvest Letter
Market Commentary Week ending April 16 2010
Overview and Opinion: Is there anyone else left to lay off without “tapping” into upper management? This past Thursday saw a jump in first time unemployment to 484,000. I wonder how many of those individuals have mortgages or car payments? "Creating 160,000 jobs a month" against losses of 2 million a month is once again, a mathematical impossibility and to call it a “recovery” and “job creation” is false and misleading. The U.S. Administration as well as financial gurus such as the Fed Chairman claiming the U.S. economy is “recovering” is a clear contradiction of fact. While some construction gains have been reported, the labor situation precludes any recovery if unemployed consumers do not consume. We now have over 12 million or more unemployed and I would estimate the number at much higher since many of the unemployed have run out of benefits and may not be included in the administration’s figures. Globally, with Greece the most prominently publicized for now, economic and financial disarray continues. What seemingly began in the U.S. initially with the repeal of Glass/Steagall allowing banks to become brokerage firms and vice-versa, mortgage packages were put together, securitized and sold globally. On Friday the Securities and Exchange Commission charged fraud against a major U.S. brokerage firm, Goldman Sachs, and we feel there are other firms that may be implicated in the plot to sell “worthless” products globally. We remain concerned that the global economic picture remains in flux and as we have stated in numerous commentaries going back three years to February of 2007, when I announced the U.S. was “going into recession” (see the roundtable on the front page of our website, last page when I made that statement in response to a question), there is no sign that the labor situation from which the recovery can begin in earnest, has improved. Now for some actual information.
Interest Rates: June treasury bonds closed at 116-28, up 27 points tied to the SEC charge of fraud against Goldman Sachs which prompted heavy selling in equities. The University of Michigan/Reuters consumer confidence index fell in early April to 69.5 from the final March reading of 73.6 and was an economic negative but a treasury positive. Analysts, wrong again, estimated a mid April index increase to 75. The other influence on Treasuries was the ongoing problem with Greece debt. Treasuries remain a relative safe haven against turmoil in equities and on occasion money moves back and forth between equities and the relative safety of Treasuries. We continue to view Treasury bonds as in a trading range since we expect no change in interest rates by the Federal Reserve aside from some accommodation for mortgage rates assumably to assist home buyers.
Stock Indices: The Dow Jones industrials closed at 11,018.66, down 125.91 tied to the SEC charge of fraud against a major U.S. brokerage firm, Goldman Sachs. That stock recorded the largest dollar decline in the stocks history and weighed heavily on financials. The S&P 500 closed at 1,192.13, down 19.54 while the Nasdaq lost 34.43 points to close at 2481.26. Volume was heavy as opposed to recent trading where volume has been light. We look for further equity losses which would be in line with our expectation that the U.S. economy remains in recession and the so called “recovery” reported by the U.S. administration and the Federal Reserve chairman is a “pipe dream” orchestrated to pacify the investing public. We once again urge investors to implement hedging strategies and with over 45 years experience, I believe I can provide assistance.
Currencies: The June U.S. dollar index closed at 8090.5, up 32 points against losses in the Euro of 78 points to 13498, the Swissie 46 points to 9426, the British pound 114 points to 10859, the Canadian dollar 124 points to 9653 and the Australian dollar 81 points to 9197. The only other currency to post a gain was the Japanese yen picking up 114 points to close at 10859. Equities are considered “risky assets” and the SEC fraud charges against a major brokerage firm prompted the flight to dollars and treasuries. We suggest the sidelines but still favor the long side of Swiss Francs once the dollar stabilizes.
Energies: June crude oil closed at $84.67 per barrel, down $2.08 tied to heavy selling in equities, the University of Michigan confidence index decline and the SEC charges against a major U.S. financial firm. We prefer the sidelines.
Copper: July copper closed at $3.5355 per pound down 8.55¢ tied to the weaker than expected University of Michigan consumer confidence index, the SEC fraud charges against a major financial firm, and the sharp selloff in equities. The weekly inventory report from the Shanghai Futures Exchange showing an increase of 16,357 metric tons to 185,895 indicated reduced demand from the Far East region, specifically China, and could further pressure copper prices. We continue to favor a bearish stance for copper based on our expectation of a continued global recession.
Precious Metals: June gold closed at $1,136.90 per ounce, down $23.40 tied to the sharp drop in confidence which would allay concern over any inflationary trend and the sharp selloff in equities. The liquidation of “risky assets” and the fraud charges against a major brokerage firm that is one of the world’s largest gold buyer. That could curtail their activities and lead to further long liquidation of precious metals. The usual expectation for gold during times of financial distress is for rising prices to hedge against such events but with general liquidation of equities and crude oil, two measures of inflation, investors sold. The mention of Paulson & Co., the largest institutional holder of the SPDR Gold Trust, the world’s largest physically backed gold exchange traded fund also concerned traders even though there have been no charges in the Paulson company participation in the development of the securitized products that are the subject of the charges against Goldman. July silver lost 76.1c per ounce to close at $17.702 following gold. July platinum lost $31 per ounce to close at $1,695.30 while June palladium fell $14.05 to $531.85 per ounce. We prefer the sidelines but continue to favor our long standing spread recommendation of long palladium, short platinum. Time, however, to take some of that profit off the table.
Grains and Oilseeds: July corn closed at $3.74 per bushel, down 1/4¢ holding up against favorable planting conditions and adequate world inventories. We prefer the sidelines. May wheat closed at $4.90 ½ per bushel, up 10.25¢ with July gaining 23.25¢ to close at $5.025. on short covering after recent weakness tied to bearish sentiment. Technically wheat could rally to the $5.20 area before meeting significant resistance. We could consider buying a few contracts on Monday on any selling but would use stops. May soybeans closed at $9.8525 per bushel with July closing at $9.95, up 2¢ per bushel. We continue to favor the long side but would take some profits off the table here based on adequate world production and stocks. Otherwise take your profits and stand aside looking for a correction on which to base new purchases. We prefer the November contract which gained 4.5¢ on Friday closing at $9.655.
Coffee, Cocoa and Sugar: July coffee closed at $1.3080 per pound, down 2.6¢ on profit taking by large speculators on concern the sharp losses in equities could spread to soft commodities. The strong dollar also a consideration in the liquidation Friday. We prefer the sidelines. July cocoa closed at $2,988 per tonne, up $98 on bullishly construed first quarter North American demand that prompted fund buying and short covering. Positive demand offset the selling of other commodities as the first quarter grindings were up 16.2% on the year after posting a decline of 1.54% for the fourth quarter of 2009. Cocoa grindings indicate demand for chocolate and actually considered an “economic” barometer. We could see further gains, but we prefer the sidelines. May sugar closed at 15.95c per pound, down 90 points with July also losing 90 points to close at 16.18 prompted by origin selling and Brazilian sugar harvest progress. We favor the sidelines.
Cotton: July cotton closed at 81.59¢ per pound, down 53 points on spec selling and profit taking. The weak equity markets plus the SEC charges against a major financial firm as well as lower consumer confidence prompted the selling. 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.