Probably the most important element in dealing with the current recession, in my opinion, could be the extension of the so-called “Bush Tax cuts”. By allowing those tax cuts to expire one of the “ingredients” of the tax cuts, i.e. the dividend tax reverting to 39% from 20% will hamper the resolution of the current recession and negatively impact the U.S. equity market. Many investors, especially holders of equities relying on dividend income, and retirees and seniors on fixed income, will be impacted by the de-facto increase in taxes.
Other elements such as the ridiculous, again in my opinion, so called death tax and marriage tax to somehow offset the rampant spending by the U.S. Administration, make no sense during a severe economic contraction.
During his Congressional testimony, Fed Chairman Bernanke was viewed as “downbeat” as to the U.S. economic condition even as corporations reported better than expected earnings and is less “enthusiastic” about the economy than was reported in February. We continue to view the meager job creation and expanding unemployment as our basic reasoning behind our expected double-dip recession. With interest rates near zero, the only action left in the Fed’s “tool box” would be the “printing” of money, but that would not help create jobs, only inflation. Now for some actual information.
Interest Rates: September treasury bonds closed at 12705, down 30 points as money moved from the relative safety of treasuries back to the equity markets. The reduced concern of European bank stress tests as reported Friday prompted the transition and equity markets rallied sharply. The better than expected corporate earnings results also added to the move from treasuries to equities. We could expect some additional money movement but if so would consider buying treasuries since our overall expectation is for a weak U.S. economy with little of no chance of rate increases.
Stock Indices: The Dow Jones industrials closed at 10424.62, up 102.32 and managed a 3.2% gain for the week. Positive earnings results from companies like Verizon and American Express and the dividend increase of 2c per share by General Electric prompted the return of money from treasuries to equities. The S&P 500 closed at 1102.66, up 8.99 and posted a 3.6% for the week. The Nasdaq closed at 2269.47, up 23.58 and up 4.2% for the week. The lessened concern of the Eurozone countries and the better than expected results of the 91 bank stress tests where only 7 banks failed was also viewed as a positive for equity markets globally. We view the rally as a correction in a bear market and the positive earnings results that company’s posted with the use of fewer employees is a “mystery” to me and should be resolved soon. We once again, as suggested some weeks ago, use the rally in equities as a “golden opportunity” to implement hedging strategies.
Currencies: The September U.S. dollar index closed at 8262.9, down 15.3 points on Friday against gains in the September Euro of 27 points to 12920, the British pound 156 points to 15419, and the Australian dollar 26 points to 8907. The Canadian dollar closed unchanged at 9640 but the Swiss Franc gave back 80 points to 9514, and the Japanese Yen 51 points to 11447. We once again suggest the long side of Swiss Franc but would hold off any additions to the long position pending further fundamental developments.
Energies: September crude oil closed at $78.98 per barrel, down 32c even as equities gained. Energy prices had rallied early in the week and Fridays action appeared to be profittaking. We prefer the sidelines in energy products after having achieved an intra-week high of $80 per barrel for crude which we had suggested would occur in recent commentaries. September heating oil closed at $2.0786, per gallon, down 1.09c with Unleaded gasoline losing 2.17c per gallon to close at $2.1192
Copper: September copper closed at $3.1850 up 2.05c following the positively viewed Committee of European Banking supervisors testing of 91 Euro-zone banks as well as the gains in equities. The dollar decline also a factor in the shortcovering of copper after recent selling that pushed prices below the $3.00 level. Inventories at the LME increased by 3,125 metric tonnes on Friday to 419,650. The weekly report by the Shanghai Futures Exchanged showed a decline of 6,316 metric tonns to 113,922 reflecting buying by Asian sources. The Comex inventory data reported Thursday showed an unchanged level of 101,185 short tons. While we remain bearish for copper, we would not add to short positions or long put positions at this time pending a resumption of expected selling.
Precious Metals: August gold closed at $1,187.80 per ounce, down $7.80 tied to the buying in equities and the transfer from the supposed safety of this asset class back to stocks. The positive results of the Eurozone banking tests and the strength in equities the main feature to precious metals trading on Friday. The weak dollar, which usually promotes the buying of dollar denominated commodities, had little effect on the long liquidation of precious metals in favor of equities after their positive earnings results. September silver closed at $18.101 per ounce, down 1.9c. Our recommendation to purchase silver at or below $17 per ounce remains intact and is now a support level for silver basis the September contract. October platinum closed at $1,542.80, up $13.40 while September palladium gained $9.85 per ounce to close at $466.75. Both white metals benefited by the Ford Motors Co earnings and sales report since they are a necessity for automobiles as they are used in catalytic converters. We prefer the sidelines.
Grains and Oilseeds: September corn closed at $3.71 ¼ per bushel, down 5 1/4c tied to technicals and the lack of any weather or crop concerns. We prefer the sidelines. September wheat closed at $5.96 ¼ per bushel, down 1/4c on profittaking but still managed a weekly gain of 9c per bushel. Commodity fund selling a feature on Friday but concern over production losses at the Black Sea viewed as positive for U.S. wheat since the U.S. competes with the Black Sea for export business. We could see further gains depending on continued drought concerns for the Black Sea growing region. We prefer the sidelines in wheat favoring the long side of soybeans instead. November soybeans closed at $9.81 ½, up 2c but lost 3 1/2c for the week. Trading was “sideways” during the session as traders awaited next weeks weather reports with soybeans at a critical development stage. We would hold long positions but await weather reports before taking further action.
Coffee, Cocoa and Sugar: September coffee closed at $1.66 per pound, up 4.3c on tight physical supplies and bullish technicals. Coffee prices have gained over 5% since July 21st and poor harvest from Colombia and Central America could prompt further buying across the board in coffee. We would add to longs but raise trailing stops. September cocoa closed at $2,966 per tonne, up $50 on shortcovering after heavy selling during the week which cost cocoa prices almost 6%. The previous session heaving buying was attributed to a speculator as opposed to the more “positive” buying by commercials. Such speculative purchases could easily reverse and that concern prompted the selling in cocoa. A “false” supply scare in Europe also prompted the price swings and we would avoid cocoa for now. October sugar closed at 18.26c per pound, down 4 points after hitting a high of 18.66 during the session, the highest price since March 22nd. Profittaking taking the main feature to Fridays action. We could see another attempt to get prices over 20c per pound before seeing any real resistance. We would consider a few longs from here but use stops.
Cotton: December cotton closed at 75.34c per pound, up 63 points and a three week high as supplies contracted and demand increased over last year. Expectations that the U.S. fall harvest is already hedged or sold could prompt additional gains. We would consider buying but only with stop protection.
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.