Sector analysis for week of May 17

Let me see if I have this correct. Each state has a projected budget deficit, as does the entire country. However, each state is currently experiencing reduced income from taxes from unemployed workers, as well as paying out benefits to those workers, reduced home values that also reduces taxes to be paid so that each state's projected deficit will no doubt be much larger. That must also mean the country’s budget deficit will also be impacted so that any estimate given by the U.S. Administration as to the budget deficit is necessarily flawed.

The answer is probably going to be increased taxes. I see no other solution, and the talk of an economic recovery is surely premature, in my opinion. The public is being “soothed” into believing all is well, but I believe if you were to ask the 15 million unemployed how they feel, you would get a significantly different response. In my opinion, the world remains in recession, and even Mr. Volker, the former Fed chairman, indicated Friday that there is the possibility of the “euro disintegration risk from Greece.” Others feel the euro could “breakup” and put each country back on its own.

We have felt that the creation of the euro was an error in judgement from its beginnings. How a common currency can be derived from substantially different economies has always confused me. Each of the countries has its own economy, GDP, etc. and to combine them into one common currency, was a mistake. The debt problems in Greece along with the riots only serve to support the contention that the “rotten apple in the barrel could ruin the others.” What is causing concern is that the public in other countries is reluctant to come to Greece’s aid with their money when they do not believe the “austerity” program instituted by Greece will avoid default regardless of any bailout.

We concur and see no solution to the problem and the revolt by the people in Greece rioting in the streets could impact the government’s ability to restore order and financial stability. Once again, I suggest a total investment portfolio review and adjustments to take into consideration continued global economic weakness.

Now for some actual news.

Interest Rates: June Treasury bonds closed at 12201, up 116 and during the week experienced wide price swings tied to various data. While consumer sentiment rose, based on the latest Reuters/University of Michigan index the investing public reacted rather to the meager increase in U.S. retail sales of 0.2% for April. The deteriorating situation in Greece has now spread, as I have been suggesting in recent commentaries, to other struggling countries and threatens the very basis for the Euro currency. We expect treasuries to remain in a range governed by ongoing data and news. I regard the market as a trading affair

Stock Indices: The Dow Jones industrials closed at 10,620.16, down 162.79 on Friday but still managed a weekly gain of 2% as did the other major indices. The S&P 500 closed at 1135.68, down 21.78 while the Nasdaq lost 47.51 points to close at 2346.85. Concern over the Euro zone countries as well as the continued high unemployment rate weighing on investor confidence. We continue to suggest implementing hedging strategies and are willing to entertain questions as to how to do so to protect large equity positions.

Currencies: The U.S. dollar index closed at 8623.10, up 88.9 basis the June contract as the “flight to the relative safety” of the dollar continued this week. However, the strong dollar poses a threat to dollar denominated commodities with the exception of precious metals, which also offer a relative modicum of safety. We favor the Swiss Franc in the currency group but would only add on dips. Otherwise stay out for now until some stability develops in Europe.

Energies: June crude oil closed at $71.61 per barrel, down another $2.79 tied to the dollar strength and the current Euro zone problems which traders feel could impact energy demand. We prefer the sidelines. Our suggestion some weeks ago that crude would decline from the high $80s to between $70-75 per barrel has occurred and we now suggest the sidelines awaiting further fundamental developments.

Copper: July copper closed at $3.1340 per pound, down 9.75c tied to concerns over the stagnating global economies and the move to the relative safety of the U.S. currency. We remain bearish for copper.

Precious Metals: June gold closed at $1,227.80, down $1.40 on Friday on pre-weekend profittaking. Gold provides investors with a relative safe haven and of late has departed from the usual counter trading with the dollar. The “dollar up gold down and dollar down gold up” scenario has been converted by the current problems in Europe causing investors to view both the dollar and gold as relative safety places for funds. We expect the situation to change with gold bearing the brunt of the conversion back to normal relationship with the dollar so we would recommend taking profits on any further price gains. I reminded traders that in 1980 when gold hit the new high of $875 per ounce, it took nearly 26 years for them to break even. I suggest the same will occur at some point at these new highs. Remain cautious and take some profits off the table before it is too late. The TV pundits are once again coming “out of the closet” as they did in 1980 recommending immediate purchase of gold. We disagree. July silver closed at $19.225, down 27.4c following gold but had exceeded the decline of gold since percentage wise it had better price gains. July platinum closed at $1,715.40, down $24 per ounce while June palladium lost $15.40 to close at $527.90 per ounce. We suggest the sidelines. We recently suggested taking profits on our previously recommended spread of long palladium, short platinum.

Grains and Oilseeds: July corn closed at $3.63 per bushel, down 10c tied to the selling in other commodities and favorable weather forecasts for the developing crops. Stay out for now. July wheat closed at $4.91 per bushel, down 5 3/4c tied to bearish supply reports and selling in other markets. We prefer the sidelines since wheat prices have declined to the lowest prices in over a month and the trend remains negative. July soybeans closed at $9.53 ½ per bushel, down 11c tied to outside market influences and favorable weather for Midwest crops. We would hold current longs but not add for now.

Coffee, Cocoa and Sugar: July coffee closed at $1.3430 per pound, down 2.8c tied to dollar strengh and the weak equity markets. The situation in Greece remains a concern as the debt crisis spreads to other Euro zone countries and could impact overall demand for coffee. We prefer the sidelines. July cocoa closed at $2,812 per tonne, down $101 tied also to European debt crisis concerns. The International Cocoa Organization indicated recently that global grindings, a way of determining demand and consumption, could rise by over 5% in the first half of the year compared to the same period last year. Global grindings increased by 7.5% in the first quarter of the year and could be a reflection of demand. However, the global economic recession could impact further positive analysis. We prefer the sidelines. July sugar closed at 14.13c per pound, down .53c tied to the European debt problems and from heavy selling in other agricultural commodities. We prefer the sidelines but would put on a few long position on the basis of our view of an oversold condition fundamentally.

Cotton: July cotton closed at 80.72c per pound, down 0.04c tied to widespread selling in commodities. For the week the July contract managed a gain of one cent and is a positive for cotton. Fundamentals remain bullish and we would add to longs on any dip.

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 to which he introduces his clients.

About the Author
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 to which he introduces his clients.

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