The “good news, bad news” this past week. The good news was the U.S. durable goods orders and new home sales with upward revisions. The bad news was the Thursday report on first time unemployment increase by 12,000 to 450,000. Once again I have to ask the question, how many mortgage defaults and foreclosures and car and credit card loan defaults are in the “pipeline” and how many more will be added? As I stated in prior commentaries, “an unemployed consumer does not consume and the producers of those (un-consumed) products will be next for the pink slips. The euphoria this past week reminds me of former Fed Chairman Greespan’s infamous phrase, “irrational exuberance” and the word “irrational” certainly applies in my opinion. Any expectation of an economic recovery as to take into consideration the 12-15 million unemployed “consumers”. Now for some actual information.
Interest Rates: December treasury bonds closed at 13124, down 100 points as once again money shifted from the relative safety of U.S. Treasury instruments back to the equity market. On Friday positive U.S. and German economic data showed improvement with the U.S. reporting higher than expected durable goods orders and sales of new homes. Revisions for the July data was also improved over original reports. Capital spending by businesses was also higher and provided a feeling of economic stability. We, of course, find no such comfort in the data that somehow contradicts the continued labor and credit default underpinnings. We suggested moving to the sidelines recently after having achieved our long term goals in bonds. Stay out for now as at current yield levels, we could see prices move either way depending on new data and the need by the U.S. administration to seek new funding.
Stock Indices: The Dow Jones Industrials closed at 10,860.26, up 197.84 and posted a 2.38% gain for the week and is up 8.44% for the month. The S&P 500 closed at 1148.67, up 23.84 with the Nasdaq closing at 2381.22, up 54.14. The U.S. report on durable goods orders as well as the increase in new home sales was seen as evidence of economic stability and prompted heavy shortcovering and new buying. Those August results showing gains in machinery, computer and computer technology as well as fabricated metal products and business capital spending all lent to ideas of an economic recovery but the continued decline in the labor situation keeps us in the bearish camp. Implement hedging strategies before the reality that the consumer sector remains in flux thanks to continued first time unemployment numbers. Once again, we see no possibility of any continued economic gains without improvements in labor.
Currencies: The December U.S. dollar index closed at 7948, down 76.7 points with most of the loss tied to the strength in the yen. Doubts persisted during the session on rumors that Japanese authorities had sold yen and bought dollars and the markets corrected. Also concern that talk of quantitative easing in the U.S. would negatively impact the dollar further which is usually the case as rates recede. December Euro gained 136 points to 13467 while the Swiss Franc was unchanged at 10155, a premium to the U.S. dollar which we had forecast some months ago would occur. December British pounds gained 124 points to 15809 while the Canadian dollar gained 52 points to 9723, and the Australian dollar gained 65 points to 9494. The December Japanese yen lost 2 ticks to 11862. We would limit currency positioning until a more definitive determination can be made as to whether the U.S. Federal Reserve will engage in a new asset buying program before the end of the year. A weak economy is what could be the reasoning for that concern.
Energies: November crude oil closed at $76.49 per barrel, up $1.31 tied to the strength in equities and the weak dollar. Demand has strengthened and any continued positive showing for the U.S. economy should prompt further buying in crude. We prefer the sidelines since we do not believe the U.S. economy is in fact out of recession and further positive economic data is in doubt.
Copper: December copper closed at $3.6180 per pound, up 2.75c tied to the positive U.S. economic data and the perception of a strengthening U.S. economy and the weak dollar. Copper consumption by China has been strong and the weak dollar remains a positive. Lower U.S. interest rates are expected to prompt gains in industrial production were copper is a necessity. However, with U.S. rates at current low levels without any real improvement in new homes sales, we continue to view copper as overbought.
Precious Metals: December gold closed at $1,298.10, up $1.80 per ounce and spot traded above $1,300 for the first time ever. Profittaking kept prices from gaining further as the U.S. dollar weakened. The dollar reacted negatively on expectations and speculation that the U.S. Federal Reserve to try to stimulate the sluggish economy by implementing quantitative rate easing. That would put further pressure on the dollar and could prompt another round of precious metals buying. December silver closed at $21.3990, up 18.6c and its highest level since 1980. October platinum lost $6.10 to close at $1,639.80 while December palladium closed at $560.50 per ounce, up $3.65. We would look to take profits in gold and silver and stand aside for now pending new fundamental data.
Grains and Oilseeds: December corn closed at $5.21 per bushel, up 22 1/2c and its highest level in two years on technicals as well as disappointing yields for U.S. crops. We prefer the sidelines since a correction is to be expected after recent sharp price gains. We then would expect a resumption of the bull market but prefer Soybeans in this group as we have for some time. December wheat closed at $7.20 per bushel, up 22 3/4c on estimates of production downgrades tied to record breaking heat and dry weather in Russia that has decimated their wheat production. Importers who usually purchase from Russia continue to buy from other sources pushing prices higher. We could see additional price gains but would avoid getting buying current levels. November soybeans closed at $11.26 per bushel, up 32 1/2c and remains our favorite in the group. Global supplies and strong export demand along with technicals are providing the impetus for soybeans. We have suggested the long side of beans for some time and while we could take some profits here, hold a basic position for further gains possibly to the $12.00 per bushel level.
Coffee, Cocoa and Sugar: December coffee closed at 180.60, down 85 points on reports of beneficial rain in the Brazilian growing areas after a long period of drought. We prefer the sidelines since a further correction after recent gains is expected. December cocoa closed at 2794, up 17 points in a sideways session and after recent weakness. The upcoming election in Ivory coast could prompt turmoil and shut ports and that would put upward pressure on prices. We prefer not to engage in speculation of election or any other potential civil unrest affecting a market. Stay out for now. March sugar closed at 24.40, up 81 points on continued dry weather and the lower cane crush in Brazil’s center south region according to Datagro, and consulting firm monitoring estimates. They expect a crush of 578.8 million metric tons of sugar cane against the July estimate of 585 million tons. Rain needed in future months in order to improve the crop and avoid problems with the next season. As the worlds largest sugar producer, any change in Brazilian numbers affects prices. We could see further price gains on technicals but would take any profits and move to the sidelines for now.
Cotton: December cotton closed at 99.93, up 2.76c on concerns that global demand will outstrip supplies. Early selling on Friday after India’s announcement that it did not plan to completely ban cotton exports was followed by buying on continued concerns of global shortages. We could see further gains to the $1.03 to $1.05 level but technical resistance could prompt profittaking.
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.