Inflation prospects cast shadow over futures markets

The prospect of inflation is being completely overlooked in the media. The collapse of the U.S. dollar has spawned heavy buying in dollar denominated commodities which, at some point, will “trickle” down to the consumer in the form of higher end product prices. We continue to favor a conservative approach to trading using a combination of fundamentals and technicals to avoid the pitfalls of ignoring either. Now for some actual information.

Interest Rates: Treasuries lost ground on Friday after economic data tended to show an “economic recovery”, a conclusion that eludes us since the health of the U.S. economy is dependent upon an improvement in the labor sector. December treasury bonds closed at 13312, down 11 points but up for the week with yields touching all time lows. On Friday the August consumer data showed increased spending by 0.4% in August after a similar increase for July. The University of Michigan final index of consumer confidence was revised upward to 68.2 in September from the previously reported 66.6 and was higher than the economist estimates of 67.0. Federal government stimulus projects accounted for the gains. The increase in American’s incomes by 0.5% in August after the 0.2% in July was also a factor in the move from the relative safety of treasuries back to equities. We continue to favor the sidelines based on expectations for diverse economic data.

Stock Indices: The Dow Jones Index closed at 10829.68, up 41.63, but lost 0.3% for the week. The S&P 500 closed at 1146.24, up 5.04 but for the week lost 0.2%. The Nasdaq closed Friday at 2370.75, up 2.13, but lost 0.4% for the week. The gains were prompted by what was perceived as positive U.S. economic data including an increase in consumer spending and income better than expected. On the negative side was the ISM index of activity in the manufacturing sector which fell to 54.4 in September against 56.3 for August. Still, any reading over 50 purports to be viewed as positive and money flowed from the relative safety of treasuries to equities on Friday. We continue to view equities as overpriced based on our view that without an improved labor situation, the U.S. corporations cannot continue to improve earnings at the cost of labor. One more time for the pundits, “an unemployed consumer does not consume and those that produce those “unconsumed” products will be next to lose their jobs”. The current efforts by the U.S. administration prompting the banks and other lenders to curtail foreclosures is an exercise in futility. The “piper” will have to be paid at some point. Implement hedging strategies immediately. We view the “bubble” as about to burst.

Currencies: The U.S. dollar index continued its’ “freefall” on Friday against most trading partners losing 71.8 points by the close. The Euro gained 138 points to 13772, the Swiss Franc 66 points to 10261, the British Pound 119 points to 15826, the Japanese yen 6 points to 12007, the Canadian dollar 85 points to 9798, and the Australian dollar 50 points to 9636. The persistent talk of the U.S. Federal Reserve considering “quantitative easing” weighed on the dollar this past week. One top Fed official said that the central bank would probably offer fresh support to halt any further tepid economic growth for accelerating. We do not feel there is anything at the moment that can help the U.S. economy with the exception of mandating a continued Bush tax cut program to allow small businesses, the source of any hiring, to be able to plan for their future. Without the extension of the Bush tax cuts across the board, we feel the U.S. economy will not only continue to be weak but slide back into the serious recession we first announced in February of 2007. (See the front page of our website Round table discussion, last page). Those with large equity portfolios should contact us for specific recommendations.

Energies:
November crude oil closed at $81.58 per barrel, up $1.61 tied to better than expected U.S. economic data as well as the increase in manufacturing reported by China, a major consuming country. Consumer spending gains and well as income along with the weak dollar prompted the buying in energy products. We prefer the sidelines.

Copper: December copper closed at $3.6905 per pound, up 3.9c on the positive U.S. economic data as well as the manufacturing data from China. The continued weakness in the U.S. dollar also provided the impetus for the buying. Our bearish opinion has obviously been faulty but without confirming economic data and an improvement in the U.S. labor and mortgage situation, we see no reason to turn positive for copper. Timing will be an important factor going forward.

Precious Metals: December gold closed at $1,320.00, up $10.40 per ounce and closed out the week at all time highs. Continued pressure on the U.S. dollar and continued concern over worker dissatisfaction in some of the European countries has added to the upward pressure on gold and silver prices. December silver closed at $22.06 per ounce, up 23.9c following gold and against the dollar. January platinum gained $23.50 per ounce to close at $1,682.10 while December palladium gained $3.65 to close at $574.90. We could see further gains but we are expecting a correction if the dollar stabilization. For that reason we suggest the sidelines for now.

Grains and Oilseeds: December corn closed limit down 30c per bushel at $4.65 ¾ tied to the Thursday quarterly grain stocks report from the USDA. They showed supplies 20% higher than analysts had expected and eased concerns of crop tightness. Stay out for now. December wheat also traded at limit down 30c but managed a shortcovering rally to close at $6.55 down 19c. Recent strength tied to the Russian crop devastation had prompted heavy global buying on concern of supplies but with the heavy selling in corn and beans carrying over the wheat pit created the pressure. Stay out of wheat as well.
November soybeans closed at $10.57 per bushel, down 49.75c and had touched off trailing sell stops early in the session. The dry weather allowed U.S. farmers to accelerate the harvest and that along with beneficial rains in Brazil and Argentina prompted the long liquidation. We continue to favor soybeans in the group but would wait for further information on the harvest and on whether or not the rains in the South American growing areas did in fact have a positive effect on crops. Weather remains a factor for soybeans.

Coffee, Cocoa and Sugar: December coffee closed at $1.8375 per pound, up 7 points and at current levels we prefer the sidelines. December cocoa closed at $2,783 per tonne, down $31 in light trade Friday even as political turmoil continued in Ecuador. Since only 4% of the worlds production is from Ecuador, no real attention was paid by traders. We don’t expect much in the way of activity pending results of West African harvests. Stay out. March sugar closed at 23.32c per pound, down 1.72c on profittaking after recent gains. Beneficial rains in Brazil offset earlier concerns of drought and prompted the selling. We prefer the sidelines in sugar.

Cotton: December cotton closed at 98.02c per pound, down 3.9c. Cotton has benefited by the flood damage in Pakistan and China in August causing concern of global shortages. Cotton had traded as high as $1.0519 per pound on September 28th and after reports of above average harvest expected in the U.S. and concern over that could show above average harvesting. Also, India had indicated that a ministerial panel declared “exporters could begin taking registrations as scheduled” lessened the concern over previous indications that India would ban exports until domestic mills were satisfied. We prefer the sidelines but any drop in price to the 90-92c level in cotton would be our signal to turn bullish again.

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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