Shifting sentiment will affect markets this week

It never ends for former Fed Chairman Allen Greenspan. On Friday he offered advice to Congress to allow the Bush tax cuts to expire. His attention was directed to the burgeoning budget deficit completely ignoring the potential impact on the investing public.

The tax on dividends, where many investors rely on income, i.e., retirees, seniors and the rest of the 95% of Americans who own dividend paying stocks, would go from the current 15%, back up to 39%. His focus on concern for the tremendous debt being incurred by the current U.S. administration led to his “monumental” potentially disastrous conclusion and advice, and is consistent with his past, in our opinion, blunder of repealing Glass Steagall.

Glass Steagall was “an act passed by Congress in 1933 that prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities.” That single action, signed by then President Clinton is, in our opinion, the most damaging action we feel is responsible for the entire current global financial “meltdown.” Banks were permitted to combine good and bad debt, securitize them through their brokerage operations, and market them internationally.

Now he offers advice to Congress to completely ignore the ramifications of allowing the Bush tax cuts to expire. In my opinion, his advice should be totally ignored by Congress and I hope they have the foresight to do just that….Now for some actual advice.

Interest Rates: September Treasury bonds closed Friday at 12803, up 14 ticks as money once again flowed from equities to the relative safety of U.S. treasuries. Declining consumer sentiment as well as disappointing earnings from a few major companies prompted the sharp decline in equities and the subsequent rally in treasuries. The Federal reserve reduced its economic as well as inflation outlook and expectation is for rates to remain at record lows into next year to prevent any further economic downturn. We continue to view treasuries as a trading affair but recognize that prices are at their recent highs with yields at all time lows.

Stock Indices: The Dow Jones industrials closed at 10097.90, down 261.41 on disappoint earnings as well as concern over the stalled economic recovery. The Dow closed the week down 0.98%. The S&P 500 closed at 1064.88, down 31.60 points and lost 1.2% for the week with Fridays loss alone at 2.9%. The Nasdaq lost 70.03 points on Friday to close at 2179.05 down 3.1% and lost 0.8% for the week. Last wee we suggested implementing hedging strategies on any rally and this past week provided the opportunity to do just that. Unfortunately Fridays selloff precluded implementing any strategies at current level and another rally is need before doing so. We cannot stress enough the need, on any rally, to establish hedging strategies. We see a huge decline coming which could take the Dow, for instance, down below 9,500, the S&P to between 1000 and 950, and the Nasdaq to between 1850 and 1900. We can provide assistance for holders of large equity portfolios.

Currencies: The September U.S. dollar index closed at 8274, down 3 ticks as the Euro traded above 130 for the first time in two months closing at 12943, up 48 points. The September Swiss Franc, our favorite in the group, closed at 9527, down 62 points after trading as high as 9622 during the session. The September British poind lost 108 points to close at 15301 and the Canadian dollar lost 147 points to 9481. The Australian dollar lost 113 points to close at 8654 but the Japanese yen managed a gain of 101 points to close at 11542. Disappointing U.S. corporate earnings as well as poor economic data put the so called U.S. recovery in doubt. We have been in doubt of any recovery as long as the U.S. housing and labor situation remains fragile, to say the least. Successful Eurozone auctions this past week of Portuguese and Spanish government debt was a solidifying factor for the Euro. However, we feel the worst is not yet over and would now look to the short side of the Euro against long Swiss Francs as a spread.

Energies: August crude oil closed at $76.01 per barrel, down 61c tied to the decline in U.S. consumer sentiment and disappointing corporate earnings that prompted the selloff in equities. August natural gas closed at $4.52 per MBTU, down 7c after gaining 7% on Thursday. We continue to favor the long side of Natural Gas.

Copper: September copper closed at $2.9295 per pound, down 8.25c tied to the U.S. economic and corporate data and weaker than expected Chinese growth data. Inventories at LME warehouses fell by 1,300 metric tonnes on Friday to 426,425 but the weekly data from the Shanghai Futures Exchange showed an increase of 2,779 metric tons to 120,238. The Shanghai data was the result of concern over Chinese economic growth data. China had been a major buyer of copper in recent months tied to its expansive economy. We remain bearish on copper.

Precious Metals: August gold closed at $1,188.20 per ounce, its lowest closing price since May 21st as the Euro strengthened and with weakening economic sentiment. Gold has been an “alternative” asset class and has benefitted by global economic concerns as well as recent dollar weakness, in which it is denominated. We have felt for some time that gold has gotten ahead of itself and proposed the sidelines. The recent Euro zone debt crisis has prompted the new highs in gold and with concerns subsiding to some extent, profittaking became the “trade of the day”. We continue to suggest the sidelines except for astute precious metals traders. September silver closed at $17.788 per ounce, down 57.4c and is approaching our suggested buying range of $17-16 per ounce. October platinum lost $21.60 per ounce, closing at $1,512.10 while September palladium lost more on a percentage basis to close at $448.60 per ounce. Platinum lost 1.4% while Palladium lost 4%. Our suggestion recently to take profits on my previously suggested long palladium, short platinum spread was correct. Stay out for now.

Grains and Oilseeds: September corn closed at $3.94 ¾ per bushel, up 2 1/4c on technicals after early session losses. Prices closed above the technically key moving average. We prefer the sidelines. September wheat closed at $5.87 ¼ per bushel, down 9c after strong gains early in the week. Profittaking in front of the weekend the main feature to Fridays trading. Concern over possible supply restrictions in Russia and Europe prompted the buying over the past few weeks and a correction was to be expected. We prefer the sidelines in wheat. November soybeans, the most active contract, closed at $9.85 per bushel, down 3c as speculative funds sold approximately 4,000 lots on Friday consolidating Thursdays 2% price gains. Pre weekend profittaking the main feature. We turned bullish in soybeans a couple of weeks ago and continue to feel prices could gain further possibly to the $10.50 area and beyond basis the November contract. Use stops on any new purchases.

Coffee, Cocoa and Sugar: September coffee closed at $1.6705, down 5 points on technical selling after trading close to three week highs. The weak U.S. consumer sentiment index the main factor even as prices had traded higher tied to tight supplies of high grade arabica beans from Central America and Colombia. Weather was a factor in the reduced output. We could see coffee prices move higher early in the weak and would put on a few longs but with stops. September cocoa closed at $3,165 per tonne, up $21 on increased demand. Trading house taking large deliveries on tight West Africa harvest expectation for this coming fall a factor in the buying as well as technical considerations. Increased cocoa grindings reflect demand by consumers up from the prior year with the North American grind up by 12.07%. With a lack of any real selling pressure, we could see further price gains but we prefer the sidelines in cocoa. October sugar closed at 17.11c per pound, down 28 points after trading as high as 17.61, the highest since April 20th. Positive technicals had taken prices higher but when prices stalled, traders took profits. Concern over the negative U.S. economic data and consumer confidence also a factor in the selling pressure. The delay in shipments from Brazil along with expectations that the demand from Middle Eastern and Asian sources in front of their Ramadan festivals in August when additional sugar is need for the preparation of some of their special holiday foods. We prefer the sidelines.

Cotton: December cotton closed at 73.96c per pound, up 49 points on shortcovering even as negative U.S. economic data affected other commodity markets. Selling appears to be overdone and prices found good support after selling that has pressured prices since June 30th when the USDA estimated U.S. acres planted to cotton up 20% higher than last year and production 50% higher. We could see additional selling pressure and would avoid cotton for now.

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.

About the Author
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.

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