To call this week's market action "business as usual" is like calling the Titanic disaster a "mishap." The confusion surrounding China’s decision to tighten monetary policy, the G20 meeting, various comments and reports that appear to contradict the press releases, and what effect it will have going forward for currencies, Treasury instruments, and the equity markets left questions unanswered. Obviously, any resulting agreements or failures to agree that can be confirmed will have a material effect on markets globally.
Another bank was closed by regulators on Friday, making the total to date this year of 146 bank failures. The latest casualty was the Copper Star bank of Scottsdale, Ariz. Our view is that whatever rhetoric emanates from Washington will not address the growing unemployment problem and its material effect on the overall U.S. economy.
As stated in prior commentaries, "unemployed consumers do not consume and the producers of those non-consumed products will be next to lay off people." One must understand that the current mortgage default and foreclosure problem will linger into the future and there is, with the exception of my last week’s suggestion (repeated below), no resolution that I see as forthcoming. While the Reuters and University of Michigan consumer sentiment index rose to 69.3 for early November economists had expected a reading of only 69 the market early strength was offset by the negativity of the failure to come to a monetary compromise at the G20 summit.
"My recent suggestion on how to save at least some homes was to declare a 6 month moratorium on all foreclosures to allow homeowners to find a job, and make a single mortgage payment with the missed payments tacked onto the back end of the mortgage. That might save as many as 10-20% from foreclosure. The others must be allowed to foreclose and put those homes on the market which, while it would temporarily cause further sharp price declines, it would open the market to a base where potential buyers would come into the market without fearing supply overhead."
Now for some actual information.
Interest Rates: December Treasury bonds closed at 12730, down 25 points with yields commensurately climbing to the highest basis the two year note in 10 months. U.S. government debt sales were disappointing even with the Fed beginning a second monetary stimulus program. We continue to feel that any stimulus program will fail to "stimulate" anything and the fallacy of expecting the economy to rebound based on the low interest rates will once again prove futile. Our recent opinion that treasury prices have topped out and any further rallies should be sold remains intact.
Stock Indices: The Dow Jones industrials closed at 11,192.58, down 90.52 points and lost 2.2% for the week. The S&P 500 closed at 1,199.21, down 14.33 points and also lost 2.2% for the week. The tech heavy Nasdaq closed at 2,518.21, down 37.31 and for the week lost 2.4%. The higher than expected U.S. consumer confidence index originally prompted some shortcovering but soon gave way under the weight of financial considerations and reports that China may be tightening monetary policy. The Chinese economic expansion prompted China to restrain further foreign corporate property holdings and proved negative for global economies relying on Chinese purchases of foreign debt, including that of the U.S. We continue to suggest implementing hedging strategies for holders of large equity portfolios and stand ready to assist in formulating such strategies.
Currencies: The December U.S. dollar index closed at 7827.5, down 8.1 points against gains on Friday of 41 points for the Euro which had been beaten down to 13690 from early week highs around 139. The dollar gained against all of the 16 members of the Euro on the week amid concerns that some of its members may have difficulty repaying bondholders. For the week the Euro lost 2.4%. The December Swiss Franc closed at 10231, down 6 ticks but still above parity against the U.S. dollar. The December British pound closed at 16142, up 38 points, the December Japanese yen gained 6 points to 12134, but the Canadian dollar lost 31 points to 9895, and the Australian dollar gave back 110 points to 9820. We prefer the sidelines in currencies since we have no way of establish trends with the sporadic news reports moving prices in either direction.
Energies: December crude oil closed at $84.88 per barrel, down $2.93 on speculation that Chinese inflation may prompt the Central bank to hike interest rates. Tightening measures could curtail energy demand by China. After a gain the prior week of 6.7% oil prices gave back 2.3% this past week. The International energy Agency revised upward its expectation for global oil demand and the Energy Information Administration reported a weekly drop in U.S. crude inventories. Neither was able to offset concerns over the possible Chinese demand decline. We continue to feel crude oil prices, given our negativity towards global economies, will decline to the $75 per barrel level. Timing is the only question in our minds.
Copper: December copper closed at $3.8935 per pound, down 12.9c on concerns that the Chinese efforts to fight inflation will include declines in demand for the red metal. We continue to view copper as overbought basis our negative view of global economies. We would now consider re-entering the market with put buying on any rallies.
Precious Metals: December gold closed at $1,365.50 per ounce, down $37.80 tied as with other markets to Chinese inflationary remedies. The recent push in gold prices tied to economic and currency concerns may have been overdone and we could see prices decline further on selling by disappointed late buyers. I have been warning enthusiastic prospects and clients that in 1980 when gold hit its high of $875 per ounce, it took those buyers over 25 years to break even. Not what I would consider a good "rate of return". We could see the same thing occur here at the $1,400 level. However, gold prices are still below that 1980 peak when its value was approximately $2,300 an ounce basis today’s dollars. In an attempt to offset what the U.S. Federal reserve’s policy of low to zero interest rates, investors have had to seek higher returns and those translated recently to higher stock prices and gold. That condition, unfortunately, may have seen its "best days" in the past and once again force investors to seek other instruments of returns. Gold lost 2.4% on Friday. We continue to prefer the sidelines. December silver closed at $25.942 per ounce, down $1.463 or 5.7% while January platinum lost $61.20 per ounce to close at $1,684.60 and December palladium lost $30.50 per ounce to close at $673.65. We prefer the sidelines.
Grains and Oilseeds: December corn closed at $5.34 per bushel, down its permissible limit of 30c tied also to concerns of Chinese tightening of their monetary policy. Stay out. December wheat closed at $6.69 ¼ per bushel, down 34 3/4c also on Chinese tightening of their monetary policy. Heavy long liquidation across the board tied to China could continue based on what could be reduced demand from one of the largest consumers and purchasers of U.S. commodities. Soy products and beans also fell to limit down prices with March soybeans losing 70c per bushel to close at $12.77. The dollar value of the decline is $3,500 per contract. We could see further selling on margin related liquidation. Stay out for now but be prepared to step in on the long side of soybeans should the Chinese situation change. Otherwise the sidelines remain the "best bet’ for now.
Coffee, Cocoa, Sugar: December coffee closed at $2.0045 per pound, down 6.20c on general commodity long liquidation all tied to China. December cocoa closed at $2,735 per tonne, down $99 and March sugar closed at 26.21, down 3.45c per pound. We cannot comment further since the Chinese situation has made any comments or technicals moot.
Cotton: December cotton closed at $1.4018 per pound, down 4.03c but up from the limit down nickel per pound seen earlier in the session. Once again, cannot comment on any market that is materially affected by a single situation like China’s monetary tightening. My best advice is to wait on the sidelines.
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.