Overview and Opinion: "Non-performing assets." This is an interesting term. The banks holding mortgages that are not being serviced are reluctant to foreclose because those "non-performing assets" reside on the asset side of the balance sheet. By foreclosing, those "assets" would become liabilities and move over to the liability side of the balance sheet and probably “annoy” stockholders. This week we received a report that sales of new homes surged 27% in March and that could be the result of a soon to expire tax break and low mortgage rates. With the volume of foreclosed homes and defaults in the pipeline, we wonder if the banks are not trying to frighten potential home buyers into rushing in before it is too late.
With over 450,000 first time unemployed reported each week, the assumption of a recovery without taking into consideration how many of the unemployed have either a home mortgage or a car loan or both. On Friday, regulators shut down seven banks in Illinois including one owned by the family friend of Illinois Treasurer Alexi Giannoulias, a family friend of President Obama. So far this year, U.S. bank failures number 57 and the year is only 25% over. Recovery? Don’t bet your bottom dollar on it. Now for some actual information.
Interest Rates: Treasury bonds closed lower on Friday 15 11628 tied to the strong housing data and the report on durable goods orders that provided “good news” for the U.S. economy. As is usually the case when there is good economic data, money moves from the relative safety or “parking place” of treasuries back to equities. That was the case on Friday. We prefer the sidelines since we still view treasuries as in a trading range.
Stock Indices: The Dow Jones industrials closed at 11,204.28, up 69.99 points and up 1.7% for the, the eleventh weekly gain in 12 weeks. The S&P 500 closed at 1,217.28, up 8.61 or 2.1% for the week. The tech heavy Nasdaq gained 11.08 points to close at 2,530.15 or 2% for the week. The strong housing data offset the news on Greece and the mixed earnings reports. We are in severely overbought condition technically in my opinion and the “black hole” I see under the equity market will soon be filled with the “fortunes” of the “believers” of the Washington rhetoric. Implement hedging strategies immediately.
Currencies: The U.S. dollar index closed at $81.462, down 105 losing ground against the Euro which is benefiting by the proposed bailout of Greece. We continue to suggest the sidelines but favor the Swiss Franc on any further declines. The expectation of a global economic recovery prompted the dollar gains against the Japanese yen and the U.S. housing data also was a factor in front of next weeks Federal Reserve policy meeting.
Energies: July crude oil closed at $87.04 per barrel possibly tied to the Gulf of Mexico loss of a rig and the leaking of crude. The strong U.S. equity market and the positive economic data assumed an economic recovery which would continue to provide good demand for energy products. We feel that the “euphoria” tied to the U.S. data will be short lived and we could see energy prices decline near term. Stay out.
Copper: July copper closed at $3.5305 per pound in light trading in front of the weekend. We continue to view any strength in copper prices an opportunity to buy put options. The gains in copper are tied to the positive data on new home sales but with the magnitude of used homes on the market, we expect, as soon as the tax credit expire, demand will decline and copper prices should work lower. Inventories at the Shanghai Futures exchange were up 2,012 metric tonnes this week to 187,907.
Precious Metals: June gold closed at $1,153.70 per ounce, up $10.80 on the strong U.S. new home sales report and the request for financial assistance by Greece. July silver closed at $18.223 per ounce, up 18.4c following gold. Of the two metals, we prefer silver but only dips to below $17.00 per ounce. July platinum closed at $1,741.70, down $2.50 while June palladium lost $1.90 to close at $563.20 per ounce. As I suggested last week, it is time to take some profits “off the table” on the spread I recommended some time ago.
Grains and Oilseeds: July corn closed at $3.61 per bushel, down 10 1/2c on fund selling and profittaking in front of the weekend. The crop season is starting strong and we could see a record planting start in the Midwest. Stay out for now. July wheat closed at $5.05 ½ per bushel, down 5 1/2c on profittaking after recent gains. The rally to seven week highs on Thursday prompted profittaking. We continue to prefer the sidelines in wheat. July soybeans closed at $10.10 per bushel, down 5c on profittaking in front of the weekend but gained 15c for the week. We continue to favor the long side of soybeans. Weather forecasts for rain in the growing areas could impede planting. Buy the dips.
Coffee, Cocoa and Sugar: July coffee closed at $1.3195 per pound, up a half cent tied to strong technical support and on the late selling of dollars. We prefer the sidelines. July cocoa closed at $3,198 per tonne, up $59 on the positive U.S. economic data which usually provides support for cocoa. Technicals also a factor as cocoa broke above the technical downtrend line on Monday. We could see further strength in cocoa but we would need better fundamentals to coincide with the technicals before committing. July sugar closed at 15.75c per pound, down 39 points and remains on our “no interest list” after the recent declines from the highs. Stay out for now.
Cotton: July cotton closed at 86.20c per pound, up 1.38c tied to a tight supply condition. With global demand expected to rise and outpace supply, we could see further price gains possibly to the 90c per pound area basis the July contract. We prefer the sidelines since any correction could take prices back to the 78-80c level.
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.