“Better to keep ones mouth shut and be considered ignorant, than open it and remove all doubt”. I used this phrase before years ago relating to either former Fed Chairmen Paul Volcker (rates up to 21%) or Alan Greenspan (repeal Glass Steagull). Not sure which specifically, probably for both, but occasionally someone else qualifies for that statement. Fed Chairman Ben Bernanke is my latest “subject” of that phrase. His speech on Friday left investors without a clue as to what the Fed could do to curb the current recession. Mr. Bernanke indicated that the Fed could “act forcefully but that it wasn’t yet necessary because economic growth looks likely to pick up next year.” I believe his “crystal ball” is cloudy and does not clearly “reflect” the current unemployment situation or the burgeoning housing default and foreclosure problem. His statement on Friday that “recently, inflation has declined to a level that is slightly below that which FOMC participants view as most conducive to a healthy economy in the long run.”
What exactly does that mean? How long is the “long run”? I don’t know, but what I do know is that words will not fix the current economic problem. Now for some actual information that may help my readers trade effectively.
Interest Rates: December treasury bonds closed sharply lower at 13322, down 210 as Fed Chairman Bernanke reiterated his commitment to reverse the slowing U.S. economy prompting a strong stock market rally where funds once again “crossed over” from the safe haven of treasuries to the equity markets. We continue feel that while the U.S. economy remains mired in recession that rates have gone as low as they can and our last weeks recommendation to buy puts on U.S. treasury bonds remains intact. Add to puts on any bond rally.
Stock Indices: The Dow Jones industrials closed at 10150.65, up 164.84, or 1.65% on Friday, but still lost 0.6% for the week. The S&P 500 closed at 1064.59, up 17.37, or 1.66% but lost 0.7% for the week. The Nasdaq closed at 2153.63, up 34.94, or 1.65% but still lost 1.2% for the week. Mr. Bernanke’s statements on Friday did little to change our minds that the U.S. economy remains mired in recession. Unless and until real jobs are created, the weekly number of first time unemployment declines from its current 475,000 or so and banks start “biting the bullet” and release all defaulted and foreclosed properties on the market there will be no “joy in Mudville”. This is all needed in order that a determined base can be found to support a true economic turnaround. The current round of speeches encouraging President Obama to further “stimulate” the economy with money is in my opinion, misguided, and previous stimulus programs have failed to add any real jobs. Once again, implement hedging strategies.
Currencies: The December U.S. dollar index closed at 8317, down 14.8 points tied to Fed Chairman Bernanke’s indication of further monetary policy easing which would be still lower rates and a negative for dollar investment. We do not feel there is any room for further easing and that the current low rates have not provided any impetus for consumer borrowings with the exception of using credit from one new credit card to pay the minimum on other credit cars in order to survive. When the Governments program of credit for home buyers expired, the housing market once again collapsed. Anyone who planned on purchasing a home did so during that period and now there are few if any qualified borrowers left to carry the “torch” for new home purchases. Look for the dollar to stablize and rally from here so take profits on the Swiss franc and get to the sidelines for now. The December Euro closed at 12729, up 30 points with losses in the Swiss Franc of 44 points to 9727, the British Pound 12 points to 15503, the Japanese yen 143 points to 11727. The Canadian dollar gained 51 points to close at 9485.
Energies: October crude oil closed at $75.17 per barrel, up $1.81. The gains in equities based on Fed Chairman Bernanke’s positive statements on potential action by the Fed prompted a rally in equities and subsequently an expectation of increased demand for energy products. Our goal of crude oil between $75 and $70 per barrel was achieved this past week and now we prefer the sidelines. September gasoline closed at $1.95 per gallon, up 2.1% and up 1% for the week after three weeks of losses. The September contract expires on Monday and the new front month October gained 5c per gallon to close at $1.91 per gallon. October natural gas closed Friday at $3.705 per mbtu, down 13.8c on reduced concern for hurricane activity. We would institute light purchases of Natural Gas at current levels.
Copper: December copper closed at $3.3845 per pound, up 5.9c on stronger than expected U.S. GDP and the rally in equities. Inventories at the LME fell by 1,150 metric tonnes on Friday to 400,100 tonnes. The Comex inventory data released after the close on Thursday showed a decline of 131 tons to 99,556. The weekly data from the Shanghai Futures Exchange showed an increase of 211 metric tonnes to 110,582. We remain bearish since we do not see the “economic recovery” envisioned by others.
Precious Metals: December gold closed at $1237.90, up 20c as buying of safe haven assets continues tied to doubts as to the validity of a global economic recovery. We offer various precious metals on our website tied to the Precious Metals division of PFGBest, our clearing firm. December Silver closed at $19.074 per ounce, up 5.2c following gold. October platinum closed at $1,537 per ounce, down $2.90 while December palladium gained 35c to close at $504.65. We continue to prefer the long side of silver futures at or below $17 per ounce.
Grains and Oilseeds: December corn closed at $4.36 per bushel, up 4c on strong export demand and concerns over yields. On Friday the USDA announced a sale of 180,000 metric tons to unknown destinations for the 2010-2011 marketing year tied possibly to the Russian drought concerns. We prefer the long side but with stop protection. December wheat closed at $6.95 per bushel, up 6 1/2c on expectations that importers will require more U.S. grain due to the heavy crop losses in drought stricken Russia. We could see additional strength but prefer the sidelines in wheat. November soybeans closed at $10.26 per bushel, up 11 1/2c on strong export demand and concerns over yields and production. On Friday the USDA announced private export sales to China of 120,000 tons of soybeans. We continue to prefer the long side of soybean but with protective stops.
Coffee, Cocoa and Sugar: December coffee closed at $1.7885 per pound, up 7.10c tied to the possible shortages of high quality arabica beans. Brazil, however, is expected to harvest a record crop this year but against strengthening global demand may be insufficient. Look for higher prices. We could see prices move up to the $2.00 per pound level. We would be long but with stops. December cocoa closed at $2,718 per tonne, down $22 tied to bearish technicals and potential large crop from Ivory Coast. Stay out. October sugar closed at 19.96c per pound, up 69 points on speculative fund buying after recent lows. Funds were also strong buyers generally of commodities tied to the sharp gain on Friday in equities. We prefer the sidelines in sugar.
Cotton: December cotton closed at 86.07c per pound, down 8 points after trading above previous two year highs early in the session. Profittaking and option related selling pushed prices down through protective sell stops. Strong export sales and the tightest ending stocks globally since 1996 and potential crop losses in Pakistan due to the floods could prompt further price gains. We like the long side of cotton from here for a potential move basis the December contract to the 92-95c level. 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.