The continuing media and U.S. Administration reporting of the “weak economic recovery” and emphasising “less bad economic data” permeates the airwaves. The intention of course is to allay investor fears of the ongoing recession and entice consumers into spending, something that is needed to curb the recession and get people back to work. The increase in U.S. wholesalers’ inventories is the largest in two years and portends to indicate that demand has prompted companies to add to inventories. The 1.3% gain in the value of inventories was higher than expectations after the prior month showed a 0.3% increase. Sales reported by distributors were up 0.6% against a decline of 0.5%. The decline in first time unemployment of 27,000 to 451,000, may be encouraging, but the number of total unemployed at around 12 million or more depending on the criteria used is no where near encouraging.
Those unemployed consumers are not expected to “consume” anything other than food and energy needs. Unless we can see a sharp reduction in both the weekly unemployed number and the total unemployment figure, there is no recovery. The unemployment rate moved slightly from 9.5% to 9.6% last week and the method of determining the rate remains “suspect” in my opinion. We believe the independent analyst calculations of perhaps as high as 16% total unemployed. While the rhetoric continues in front of the mid-term elections, we will withhold intermediate trading decisions until after November. We maintain our negative opinion on the U.S. economy. Now for some actual information.
Interest Rates: December treasury bonds closed at 13004, down 14 ticks and our recent suggestion to short bonds by purchasing puts worked out well for our readers. Since our recommendation last month the treasury market has lost 1.3% based on data from Barclays. The Dow Jones industrial index gained 4% for the same period. Money moved from safe havens such as treasuries and gold to equities as the positively construed economic data from Washington prompted new found optimism on the economy. The reported stronger than expected China import data was regarded as globally positive and lent credence to the argument of an improving international economic picture. We, however, remain convinced that the U.S. economy remains in recession based on our view of the U.S. labor and housing situation. Take profits in bonds now but be prepared to short again on any change in investor sentiment prompted by negative economic or global data as investors seek the safe havens once again.
Stock Indices: The Dow Jones industrial average closed at 10,462.77, up 47.53 points for a weekly gain of 0.14%. For the year the Dow is now up 0.33%. The S&P 500 closed at 1,109.55, up 5.37 and gained 0.46% for the week but remains down 0.5% for the year so far. The Nasdaq closed at 2,242.48, up 6.28 points and up 0.39% for the week. However, for the year the Nasdaq is down 0.5%. The gains in the energy companies added to the positive economic data to provide for investor enthusiasm. We remain negative on the U.S. economy and continue to strongly suggest implementing hedge stategies on large investor portfolios.
Currencies: The December U.S. dollar index closed at 8310, up 10 points. The December Euro gained 18 points to close at 12713. Both the dollar and Euro were strong against the Japanese yen and the Swiss Franc tied to strong China trade data. The demand for safe havens shifted to riskier assets as optimism developed on a global economic recovery. We remain uncommitted as to any economic recovery but continue to favor the long side of Swiss Francs.
Energies: October crude oil closed at $76.45, up $2.20 as global oil demand was revised upward and the positive Chinese trade data. A temporary closure of a major pipeline between the U.S. and Canada was also a factor. We continue to feel the sporadic price behavior of energy products keep us on the sidelines. Our only exception is our view that natural gas as bottomed and we would slowly put on long positions on a scale down.
Copper: December copper closed at $3.4065, down 3.7% even against the positive economic and China data. Copper has gained in recent months on expectation of an end to the U.S. and global recession, an expectation we do not subscribe to. The reality, in our opinion, is that the housing inventory precludes a move to expanded construction and that negatively impacts copper demand. Profittaking in front of a report to be released by China of key August inflation data may be higher than expected and reduce demand for industrial commodities. The decline in inventories remains a supporting factor however. The LME reported a decline in inventories of 1,975 metric tonnes Friday to 391,400. The Comex inventory data showed a decline of 281 short tons to 94,068. The weekly report from the Shanghai Futures Exchange which reflects Far East demand, declined by 7,892 metric tonnes to 98,025. We remain overall bearish towards copper and look for price declines to the $3.00-3.10 level.
Precious Metals: December gold closed at $1,246.50 per ounce on Friday, down $4.40 as money once again moved from the safe havens of treasuries and gold to the equity markets tied to positively construed economic data. December silver closed at $1,542.50, down a penny while October platinum lost $10.80 per ounce and December palladium lost $1.95 per ounce to $519.85. We remain on the sidelines but our long standing buy recommendation of silver at or below $17 per ounce remains intact. We saw silver briefly around $17 in May of this year and came close enough to our buy point to prompt longs.
Grains and Oilseeds: December corn closed at $4.78 ¼ per bushel, up 7 1/2c and remains near two year highs. The USDA crop projection report indicated shrinkage of supplies and slippage of ending stocks. We could see further gains but our preference remains soybeans in this group. The historic ratio or relationship between beans, wheat, and corn is the basis for favoring soybeans in the group. December wheat closed at $7.36 ¾ per bushel, down 1 1/4c and the panic buying tied to the disastrous Russian crop has waned a bit and we could see additional profittaking. However, under no condition should wheat be shorted since the restoration of the Russian crop may take at least a year, long after current contracts have expired. Stay out of wheat for now even as prices could gain much more. The risk of sharp price fluctuation is too high for speculators. November soybeans closed at $10.31 per bushel, down 15c on profittaking and a lack of any dramatic change in the USDA crop report. Supplies remain stable and at “confortable levels” according to the USDA and additional data is necessary before new purchases can be made by speculators. We continue to favor the long side of soybeans and would add to long positions on any setbacks. Fridays closing price could be, in my opinion, a temporary bottom tied to the dollar strength. Hold longs.
Coffee, Cocoa and Sugar: December coffee closed at $1.898 per pound, down 9 points on profittaking after recent gains. We could see sideways trading and would take profits and stand aside for now. December cocoa closed at $2,647 per tonne, down $47 and remains on our “stand aside” list. Ivory Coast, the major cocoa producer, has adequate moisture for developing pods and could increase production. Weak technicals also a factor in our negative opinion of cocoa. October sugar closed at 22.73c per pound after trading at a six month high of 23.30c. Speculative buying and lack of trade selling along with dry conditions in Brazil and production losses in Pakistan due to the flood damage prompted the price gains. We could see further gains to around 24-25c per pound but that would surely attract heavy long liquidation and profittaking. Stay out.
Cotton: December cotton closed at 91.29c per pound, up 83 points after trading as high as 92.25c. the USDA increase reported for domestic consumption and exports prompted the continued price gains. We could see further price gains but would only buy on dips with protective stops following closely.
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.