Fed Chairman Bernanke called the overall "economic growth" sluggish at the Boston Federal Reserve annual conference. Various Fed officials are calling for another stimulus and promoting "vigorous" easing in speeches I heard over the weekend. Is this another case of the "blind leading the blind"? There is, in my not so humble opinion, no point to ease credit, it only serves to damage the millions of people who rely on interest as a major part of their income. It serves no purpose since the qualified home buyers who took advantage of the tax credits already purchased homes.
Additionally the proposal to halt all foreclosures is, in my opinion, postponing the inevitable. That so called "shadow inventory" will eventually come out and create a real, as opposed to "shadow" inventory and further prompt price declines. The current economic climate in the U.S. and in some Euro-zone countries remains problematic and the Administration and Federal Reserve actions will only, in my opinion, exacerbate the problem. Any attempt to artificially control supply/demand is an exercise in futility.
My recent memo to the various members of the media and in an email to the White House stated my opinion for a resolution in many instances to the housing problem. In a nutshell; "Declare a 6 month moratorium on foreclosures allowing some current homeowners to find a job. Then allow them to start making monthly mortgage payments, not catching up on missed payments, and applying those missed payments to the back end of the mortgage. That might help has many as 30% of the current problematic properties and allow those people to return to normalcy."
The unlucky others will in fact lose their homes but once all the "hidden inventory" is in the public venue, prices can decline and form a base which should attract home buyers once they feel they will not be paying prices now for homes that might still decline in price. At that point, consideration by the Fed to raise interest rates and promote the beginning of a stabilizing economy which will attract the consuming public. It will also put money in the hands of those who rely on interest income. The U.S. Administration will also have to allow the extension of the so called Bush tax cuts across the board. The prospect of increasing taxes to those earning over $250,000 is a bad joke and in my opinion, stupid. The idea that the top 2% earners can restore a recessionary economy makes no sense at all. The Administration has to recognize who is responsible for hiring and that group should not be penalized by forced health care provisions of the recent legislation. That will only serve to limit the number of people that will be hired. Another factor is the incessant discussion of taxes that keeps potential employers from taking any expansive action with knowing the probable costs for personnel benefits and taxes.
Now that I have "stepped off the soap box" here is some actual information that can help my readers make informed trading decisions…..
Interest Rates: December treasury bonds closed at 13101, down 113 pushing yields up for the largest weekly gain since August of 2009. Expectation that a Fed attempt to quickstart the economy again could prove inflationary, something I have been warning about for weeks now. The previous discussions at the Fed centered around deflationary tendencies, a scenario I personally criticized in my commentary since with food and energy prices moving sharply higher, I was concerned with inflation not deflation. We could see further discussion on "quantitative easing" and another stimulus, but as I suggested in my overview and opinion, that would be a mistake throwing good money after bad. On Friday the Commerce Department reported retail sales increase by 0.6% in September and 0.4% excluding autos. Analysts had expected gains in both at 0.4%. The New York Fed reported a gain in manufacturing activity for October of 15.7 compared to 4.1 for September. Analysts had expected 6.5. When expectations are wrong, as in this case, markets move dramatically. I would stand aside in treasuries for now since the picture is too confusing to hedge a bet on direction of rates.
Stock Indices: The Dow Jones industrials closed at 11062.78, down 31.79 but still managed a weekly gain of 0.5%. The S&P 500 closed at 1176.19, up 2.38, and a gain of 1%. The Nasdaq, with the help from Google’s strong earnings report closed at 2468.77, up 33.39, and posted a weekly gain of 2.8%. The uncertainty surrounding the Federal Reserve Chairman’s statements prompted selling as well as the University of Michigans consumer sentiment reading for October of 67.9, down from 68.2 in September. Economists expected the index to move higher to 68.5 and the market was disappointed. We continue to strongly suggest implementing hedge strategies for investors with large portfolios.
Currencies: The December U.S. dollar index closed at 7719, up 30.9 after trading as low as 7633.5 during the session. Early losses were prompted by the Fed Chairman indicating an open mind to another round of economic stimulus and further credit easing. Low rates are a negative for the U.S. currency. Shortcovering pulled prices back from the lows. The December Euro closed at 13954, down 95 points after posting its intraday high of 14156. The December Swiss Franc lost 77 points to close at 10426 still holding onto its premium over the dollar. The British pound lost 3 ticks to 15977, the Japanese yen 3 ticks as well to 12284. The Canadian dollar lost 60 points to 9856 and the Australian dollar, after briefly trading at parity to the U.S. currency during the week lost 25 points on Friday to close at 9815. We continue to favor the sidelines for now after having recommended profittaking in the Swiss Franc.
Energies: November crude oil closed at $81.25 per barrel, down $1.44 on a correction after recent strength. The dollar gain on Friday contributed to the selling. We continue to suggest the sidelines in energy but view Natural gas as potentially oversold.
Copper: December copper closed at $3.8405 per pound, up 2.5c on continued supply shortage potential and demand from the Far East. We maintain our bearish posture but would not add to any positions in copper.
Precious Metals: December gold closed at $1372 per ounce, down $5.60 on better than expected retail sales and Fed Reserve comments. Gold traded as high as $1386.40 during the session but profittaking after its recent strength pushed prices lower. For the week gold gained 2%. December silver closed at $24.335, per ounce, down 10c after its recent strength tied to the weak dollar during the week. Economic data viewed as positive along with Fed Chairman Bernankes indication of additional economic stimulus prompted the long liquidation. We favor the sidelines. January platinum lost $17.20 to close at $1,695.40 per ounce with palladium for December delivery losing $12.35 per ounce to close at $589.20. We prefer the sidelines in metals since they are extremely susceptible to changes in rate climate and the dollar.
Grains and Oilseeds: December corn closed at $5.63 per bushel, down 4 1/4c on lower than expected weekly export sales and possible decline in demand tied to high prices. We like the sidelines in corn. December wheat gained 3 3/4c per bushel to close at $7.04 ½ but lost 14 3/4c for the week. Wheat profitted from the limit up in corn early in the week but fundamentals remain unchanged. The story on the severe drought in Russia is already factored into the market. We would avoid wheat for now. We would not short wheat or corn. November soybeans closed at $11.85 per bushel, down 3 1/2c as the dollar reversed and closed higher. Good support from China but improved soil conditions in South American providing opposing criteria. While we have recommended the long side of soybeans for some time, it is apparent that taking profits might be prudent at the current time.
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.