Good news is bad (for markets), bad news is good. On Friday the U.S. reported fewer jobs added in September than analysts had expected and that prompted ideas that the Fed would re-institute “quantitative easing”. Both bonds and equities found “legs” and rallied on the expectation of Fed action to further stimulate the economy. Unfortunately we view the “narrow minded” expectation as hardly enough to offset the labor situation, the mortgage defaults and foreclosures, and the credit defaults. We have stated ad nauseum, “an unemployed consumer does not consume anything”. We continue to suggest a prudent approach to managing investments. Now for some actual information….
Interest Rates: December treasury bonds closed at 13410 down 4 ticks after trading as high as 13508 during the session. The poor jobs report was an indication that the Fed may re-institute a policy of quantitative easing and that sparked enthusiasm in the markets. With yields already at record lows, the further decline in yields as the Fed buys treasuries is of no consequence. The tax credits for first time home buyers expired and anyone who was able or willing to purchase a home already did so. There are no more buyers for the million or so foreclosed homes unless prices, not yields, decline further. We recommend the sidelines in treasuries for now since we do not feel the Fed will make the mistake, in our opinion, of implementing any further “easing”. The Fed, in my opinion, has run out of their options to “jump start” the U.S. economy. We feel that the only answer is to extend the Bush tax cuts across the board and repeal the so called “Obama care” program to give employers the confidence necessary to start hiring without the fear of hidden health benefit or tax costs.
Stock Indices: The Dow Jones Industrials closed at 11006.48, up 57.90 tied to the possibility of further Fed easing after the poor jobs report. We do see that prospect as a viable alternative to extending the Bush tax cuts. The S&P 500 closed at 1165.15, up 7.09 while the Nasdaq gained 18.24 points to close at 2401.91. For the week the Dow gained 1.6% as did the S&P 500. The Nasdaq gained 1.3% for the week. We strong suggest the implementation of hedging strategies for those holding large equity portfolios. We can “taylor make” a program for those individuals and entities.
Currencies: The U.S. dollar index closed at 7747.5, down 16.7 to a 15 year low against the yen Friday tied to the surprise decline in U.S. payrolls in September. The possibility of further easing by the Federal Reserve is a negative for the U.S. dollar as low interest rates precludes dollar investments. The December Euro, after recent gains, lost 18 points to close at $1.3904. Gains were made against the dollar by the Swiss Franc, 34 points to 10386, the British pound 71 points to 15942, the Japanese yen 42 points to 12194, the Canadian dollar 52 points to 9855, and the Australian dollar 51 points to 9787. We suggest the sidelines and after the meteorical rise for our recommended Swiss Franc, we would take profits on the entire position. The weekend meeting of Finance ministers is not expected to provide any solace, in my opinion, to the global economic situation.
Energies: November crude oil closed at $82.66 per barrel, up 99c tied to the weak dollar and after early weakness tied to the poor U.S. jobs data. After gaining 6.7% two weeks ago, this past week showed a price gain of 1.3%. We prefer the sidelines but any stabilization of the U.S. currency could produce profittaking.
Copper: December copper closed at $3.7745 per pound, up 9.5c, the highest settlement price in over two years. During the session copper traded at $3.8015 per pound basis the December contract. The expectation that based on the poor U.S. jobs data the Federal Reserve would implement another round of easing prompted the shortcovering and new enthusiasm for copper. Other factors in the positive bias towards copper is the expectation of an increase in demand over supply next year and the concern that Chile, the worlds largest copper producer, could experience difficulty in maintaining production output. While we have been bearish towards copper for some time, and I might add, incorrect, (I hate the word wrong), we would avoid any new short positions for the time being even as we expect prices to decline on continued global economic weakness.
Precious Metals: December gold closed at $1347.90, up $12.90 per ounce on the weaker than expected U.S. jobs data that prompted additional U.S. dollar weakness. Gold recently traded at a new all time high of over $1366 per ounce and we could be witnessing a “price bubble”. Any change in the dollar or the intentions of the Federal Reserve could prompt a sharp price correction. Also, the concern of the U.S. administration of deflation, as I mentioned last week, does not take into consideration the sharp gains in agricultural commodities which will “trickle” down to the consumer in the form of higher prices for food. That would be inflationary not deflationary. Once again they have it wrong and we would ignore the rhetoric from Washington and take control of our own financials. December silver closed at $23.105, up 52.1c following gold. While we had preferred the long side of silver rather than gold, we would take profits. If the Fed does not implement additional easing, the dollar could rally prompting long liquidation of precious metals. January platinum closed at $1,708.70, up $3.70 while December palladium gained only 50c per ounce to close at $587.60. We suggest the sidelines in precious metals for now.
Grains and Oilseeds: December corn closed at $5.28 ¼ per bushel, up the 30c limit on the bullish USDA report. Projected yield was cut by 4% to 155.8 bushel per acre and could lead to supply shortages against the expectation of increased global demand. We prefer the sidelines but fully expect additional buying. Our preference remains the soybean market. December wheat closed at its limit up of 60c per bushel at $7.19 ¼ tied to the surprise low forecast for U.S. corn and fear of tightening overall grain supplies. We suggest the sidelines in wheat. The USDA surprise soybean yield expectations prompted the limit move of 70c per bushel in soybeans. Tighter supplies while demand expected to increase globally prompted the major upward price movement across the board in corn, wheat and soybeans. Our bullish expectation for soybeans has been achieved, actually in excess of our expectations and we would lighten positions on Monday while maintaining the basic position.
Coffee, Cocoa and Sugar: March coffee closed at $1.8215 per pound, up 8.7c on Friday tied to the general agricultural buying tied to the USDA report on yields which prompted limit up moves in grains. We prefer the sidelines in coffee. December cocoa closed at $2,803 per tonne, up $63 on shortcovering and general commodity buying against the weak dollar. The USDA report sparked heavy buying across the board in agricultural commodities and in cocoa expected results of the African harvests could produce supply concerns. We prefer the sidelines in cocoa. March sugar closed at 26.32c per pound, up 1.16c and for the week gained 13%. Expectations that demand will exceed supplies after damage to Brazilian crops from bad weather. The USDA report and limit up for corn which is also used for ethanol as is sugar, also a factor in the buying. We could see continued buying in sugar but until definitive damage can be assessed we would stand aside.
Cotton: December cotton closed at 1.0717 per pound, up 3.42c after trading at limit up tied to the USDA crop report. The government reported Chinese consumption had increased by 500,000 bales from the prior month and with demand remaining strong even against current high prices. China expected to make up for the crop damage tied to the heavy rains earlier in the year. We could see higher prices but our concern is the prospect for sharp corrections once the actual numbers are reported and the near panic short covering subsides.
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.