Overview and Opinion: It just doesn’t get better. While the U.S. economy remains in recession according to the first time unemployed numbers, globally it’s no better. Talk of defaults within the Eurozone permeates the airwaves and while some pundits claim there will be no default, it would seem to me to be inevitable in some cases. The disaster in the Gulf of Mexico continues with only “lip service” and talk of “punishment” for BP the emphasis in the news. The U.S. administration, while “claiming” to be in charge from the “beginning” according to the President, failed to garner assistance from the various entities that had the deep water equipment to deal with the damaged well. I would have thought James Cameron, Robert Ballard who found the Titanic, and the U.S. Navy with the deep sea submersibles might have been able to help would have been asked. Also, having BP involved with the disaster without asking other major oil companies, who have experience with the drilling rigs to help with ideas and equipment makes no sense since I would guess BP’s priority would be to protect themselves. The $20 billion “garnered” from BP by the White House, in my opinion, will not be enough and since it will be paid over time, is not going to cover all the costs. The loss of jobs, businesses, income to the area, and environmental damage is without precedent and could take years for the area to recovery. The current project of cleaning the beaches is tantamount to mopping up the blood from an injury without treating the injury….The continued pouring out of crude from the well has to be the main priority with cleanup later. In my opinion, the entire matter is being mishandled and the economic impact to the Gulf states is irreparable. Now for some actual “financial” information.
Interest Rates: September Treasury bonds closed at 12330, down 15 ticks as traders await next week's $108 billion new debt sales by the U.S. The Federal Reserve’s interest rate policy meeting scheduled for next week was also a factor in the quiet Friday trading. We continue to view bonds as a trading affair and near the highs of our projected trading range. We do not expect any change in interest rate policy since we view the U.S. economy as in a continued recession. The rhetoric from Washington about an “economic recovery” is just that, rhetoric, tied to keeping the public in an optimistic state.
Stock Indices: The Dow Jones Industrial average closed at 10450.64, up 16.47 points and gained 2.4% on the week. The S&P 500 closed at 1117.51, up 1.47 and up 2.4% for the week. The Nasdaq managed a 3% gain for the week, closing Friday at 2309.80, up 2.64 points. The gains could be attributed to the Caterpillar Inc. statement of a strong Asian economy especially China. That is all well and good for Asia but the U.S. economy remains fully engaged in recession, in my opinion, and until the labor situation improves, there will be no recovery. The weekly first time unemployed number was up substantially to over 470,000 and I am sure many of those first time unemployed have both mortgages and car payments. Any improvement in the “numbers” reflects the substantial use of “mirrors” in my opinion. Implement hedging strategies on any large equity portfolios.
Currencies: The September U.S. dollar index closed at 8585.5, down 12.7 points even as the Euro gave up some of its gains established early in the week to close at 12371, down 16 points. Gains were booked in the Swiss Franc of 22 points, closing at 9026, the Japanese yen 8 points to 11037, the Canadian dollar 58 points to 9778, and the Australian Dollar 36 points to 8615. The September British poind lost 15 points to 14796 and that could be attributed to the devastating British Petroleum oil well leak in the Gulf of Mexico. That of course would be solely tied to psychological impact rather than any change in U.S. Great Britain relationships. Stay with the Swiss Franc, avoid the Euro for now. The Eurozone debt crisis is not over.
Energies: July crude oil closed at $77.18 per barrel, up 39c while the most actively traded August contract lost 2c to close at $78.01 per barrel. Our projected price of $80 per barrel for nearby crude is nearly reached. July natural gas closed at $4.997 per mbtu, down 16.5c tied to a supply glut and profittaking.
Copper: July copper closed at $2.8840, down 2.15c tied to concerns that the so called “global economic recovery” is in doubt. We continue to view copper as bearish based on our assumption that the U.S. economic recovery is tainted with overly optimistic data and the basic fact remains that the U.S. and global industrial countries are experiencing an economic slowdown as exemplified by the growing labor discontent and unrest. Copper inventories, however, on the LME were reported at 457,425 metric tonnes, down 2,750 while the Comex data reported Thursday showed no change at 101,925 short tons. The weekly report from the Shanghai Futures Exchange showed a decline of 3,388 metric tons to 135,944 and that could be attributed to Asian demand, which we assume is stockpiling for future manufacturing.
Precious Metals: August gold closed at $1,258.30 per ounce, up $9.60 after setting a new record high for the second day in a row. The perceived safe haven of the precious metal against concerns over global uncertainty prompted the new round of buying. We continue to view gold as overbought and remind investors that in 1980 when gold traded at $875 per ounce, it took those investors 26 years to break even. We visualize a similar situation occurring once again and would warn against any substantial gold positions as a percentage of total investment. July silver closed at $19.184 per ounce, up 40.8c following gold but performed better on a percentage basis. Our only consideration as indicated in prior commentaries would be silver rather than gold for anyone wishing to own precious metals. July platinum gained $15 per ounce to close at $1,587 per ounce while September palladium gained $10.15 to close at $491.40 per ounce. On a spread basis, which we had long approved, the gain in platinum was 0.9% against the gain in palladium which was 2.1% on Friday. Even though we had suggested taking profits in the spread we recommended, it is still working.
Grains and Oilseeds: July corn closed at $3.60 ¾ per bushel, up 3 1/4c on weather concerns and technicals. China’s corn growing areas remain dry and could translate to China having to import more than previously announced. We could see further gains but traders must monitor the China situation and the conditions in the U.S. growing areas. July wheat closed at $4.61 ¾ per bushel, down 1 cent after early gains tied to concern over Canada’s crop. We prefer the sidelines. July soybeans closed at $9.61 per bushel, up 9c with November soybeans gaining 5 1/2c to close at $9.30 ½. Funds bought beans on technical strength while weather concerns prompted the weeks activity on the buy side. We prefer the long side of beans now that the correction, in our opinion, has been completed. The market had been overbought and needed to set back in order to form a technical base. We believe that basing has been completed and the fundamentals favor the long side.
Coffee, Cocoa and Sugar: July coffee closed at $1.6025 per pound, up 3.9c on heavy roaster buying that offset producer sales. We could see additional buying early in the week as speculators follow the action on Friday and come in on the buy side. While Brazil is selling incoming crop, the buyers are more aggressive. Concern over Brazil’s production that is expected to produce only 10% of high quality coffee is additing to speculator and user buying. Use stops if you decide to follow the “pack”. July cocoa closed at $2,932 per ton, up $18 while the more active September contract gained $3.0 per ton to close at $2,957. Light trading on Friday and speculative fund buying prompted the gains. Buying in some other commodities also influenced the trading. We prefer the sidelines in cocoa. July sugar closed at 15.58c per pound, down 21 points while the more active October lost 22 points to close at 15.38c per pound. Sugar was technically considered overbought early in the week and the correction was to be expected. We remain sidelined in sugar.
Cotton: July cotton closed at 81.78c per pound, up 98 points but with open interest shifting to the December contract, we prefer the sidelines or look at the December for any new positions. December cotton closed at 78.95c per pound, down 47 points. Cotton has gained 50% from last year as demand for textile products improved dramatically. With expectations by the USDA for demand to “outpace” production, we could see further price gains to the 85-87c level basis the December contract. Use stops.
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.