“Throwing out the baby with the bath water” is what investors did this past week. While equities were selling off, investors, to meet margin calls, started selling anything that had even a slight profit in it to “cushion the blow” of the sharp equity selloff. Then they sold other commodities to “avoid biting the bullet” and liquidating their equity positions. Unfortunately it was too little. too late and the entire spectrum of markets was sold on Thursday. Friday saw a recovery as sideline money was applied on purported bargain hunting. Overall our opinion remains the same: The U.S. and it’s trading partners remain mired in recession…. Now for some actual information.
Interest Rates: June Treasury bonds closed at 12428, up another 27 points as concern over the euro zone debt crisis affecting global economies. Investors sought the relative safety of U.S. Treasuries and pushed prices beyond our previously estimated trading range. The 30 year bond yield fell below 4% for the first time since last October as prices rose. We are on the sidelines but look for a correction as or if demand for treasuries wanes.
Stock Indices: The Dow Jones Industrials closed at 10,193.39, up 125.38 on a correction after the 376 point decline on Friday. Late buying on shortcovering and bargain hunting provided the gain. Our warning of a “black hole” under equity markets came to fruition this week as global concerns accelerated. China and Europe are experiencing growth “doubts” as is the U.S. The 80% gain in equity prices since the sharp selloff in March of 2009 seems to have run its course. The U.S. labor situation is not improving with increased first time unemployment reported on Thursday that prompted the wide spread selling. As we have been stating for months “an unemployed consumer does not consume”. The prospect of earnings gains as reported by corporations with fewer employees leaves us in a quandary to understand how earnings can improve with few employees. Could it be that those employees were “cannon fodder” and unnecessary? We do not think so and the “glowing” earnings will soon make way for “reality”. The U.S., as consumer of the world, is impacting the global economies and we do not see any “ pot of gold at the end of the rainbow”. That “rainbow” is the result of “rhetorical rain” and will soon dissipate in our opinion. The Dow is down 9% from the years high and lost 4% this past week alone. The S&P 500 closed at 1087.69, up 16.10 on Friday losing 4.2% for the week. The Nasdaq closed at 2229.04, up 25.03 but off 5% for the week. We continue to “warn” investors to get their investment house in order and implement hedging strategies before the next down wave which we feel is imminent.
Currencies: The June U.S. dollar index closed at 8554, down 16.6 points against gains in the June Euro of 19 points to 12587, the June Swiss Franc one tick to 8722, the June British pound 55 points to 14472, the June japanese yen 35 points to 11141, and the June Canadian dollar 20 points to 9410. Friday’s dollar loss was a correction after recent strength tied to the flurry of news related to global concerns. The German lower house of Parliament’s approval of a 750 billion Euro contribution to the Greece bailout plan prompted the correction. We continue to suggest the sidelines since any positioning during these trying economic times could prompt wide price swings and keeps currencies as a trading affair in our opinion. We would “accumulate” Swiss francs on declines since Switzerland is least affected by euro zone problems.
Energies: July crude oil closed at $70.55 on Friday, down 25c but up from the June expiration on Thursday at $68.01 per barrel, down $1.86. Bearish fundamentals regardless of the psychological impact of the Gulf of Mexico oil spill and concern over offshore drilling continued to impact prices. We favor the sidelines as global economies remain in, what we view as decline. The rhetoric of “slowing economic growth” is a fallacy. We see economic decline not “slowing recovery”. Stay out for now.
Copper: July copper closed at $3.0450 per pound, up 10.05c tied to the rally in equities and the reaction to the German approval of its contribution to the euro zone bailout of Greece. There had been concern that Germany would not go along with the contribution and that prompted selling in copper. We, however, continue to feel that the “bailout” is not as significant as what we see as global economic decline and remain bearish for copper.
Precious Metals: June gold closed at $1,176.10, down $12.50 after trading as high as $1,188 and as low as $1,166 during the session. Margin call selling across the board in commodities prompted the selling after touching its early high. A late correction brought prices back to closing levels. We are concerned that media promotion of precious metals is prompting investors to throw money at metals as they once did in 1980 which took gold to over $875 per ounce. It then took 26 years for those gold buyers to break even. We could see history repeat itself and we would caution against overly enthusiastic investment in gold although owning a small, meaningless amount is not a problem to overall investments. July silver closed at $17.651 per ounce, down 6.4c. July platinum closed at $1,501.20, up $5.40 while June palladium, our favorite of the two white metals, gained $30.50 closing at $439.45. It would appear that we were premature in suggesting taking profits off the table of our spread recommendation long palladium, short platinum. However our readers should have been able to secure decent profits on that recommendation. We recommend the sidelines since we view precious metals as a trading affair based primarily on up to the minute news on global economics.
Grains and Oilseeds: July corn closed at $3.69 per bushel, up 7c on shortcovering and technicals. Strong demand for U.S. corn by China also a factor in the new buying. We could see additional strength as demand continues. July wheat closed at $4.72 per bushel, up 2 1/4c tied to the buying in corn and technicals. We prefer the sidelines in wheat. July soybeans closed at $9.41 per bushel, up 3c on shortcovering in front of the weekend and general bullishness in the group. We like beans but only on dips since the severity of the recent decline in the equity markets and currencies could prompt liquidation to meet margin calls.
Coffee, Cocoa and Sugar: July coffee closed at $1.3240 per pound, up 75 points mostly tied to Friday’s weakness in the dollar. With Brazilian harvesting progressing and the possibility of beans hitting the market prompting producer selling we would avoid coffee for now. July cocoa closed at $2,895 per tonne, up $56 on shortcovering in front of the weekend and potential tightening of supplies globally. Stay out for now. July sugar closed at 15.56c per pound, up 66 points on shortcovering and new demand. Recent renewed strength in sugar prompted by demand and renewal of 100,000 to 200,000 tons of sugar for export that was delayed due to a slowdown in the issuance of Thailand’s export licenses after the civil unrest. We could see further price gains but resistance at around 17-18c could prompt long liquidation. We regard sugar as a trading affair limited to those clients with substantial excesses and ability to assume potential inordinate risk.
Cotton: July cotton closed at 82.97c per pound, up 88 points on shortcovering. With the eurozone countries experiencing economic problems stemming from the Greece debt crisis, demand could decline. However world cotton consumption is forecast 11% higher than production for the year ending July 31st according to the USDA, additional price gains could be achieved for those willing to pay current prices or slightly lower. Use stops on any new purchases.
John L. Caiazzo
Website: www.acuvest.com
E-mail: futures@acuvest.com
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.
