An important key element in trying to assess both volatility and market analysis will be whether or not a decision on taxes will be forthcoming from the U.S. administration. The conservative approach is to extend all the so-called Bush Tax cuts or the Administrations efforts to penalize high-end earners.
Unfortunately I do not believe that $250,000 represents "rich" as the Administration would have the public believe. Since the delay in a decision is based on just 2% of the public it makes no sense to keep small business owners in suspense as to what their tax liability will be and hold up any job creation. Since small businesses account for most of the potential hirings and the owners of small businesses no doubt earn more than $250,000, the administration is prolonging the recession in my opinion by continuing the suspense.
Another point I cannot resist making is that during a recession, especially one that due to the level of overall unemployment borders on depression, the idea of any resumption of higher taxes is, in my opinion, without using "nice words", is stupid. Now for some actual information albeit tempered by the fact of a short holiday week and various economic data being squeezed into three days early in the week.
Interest Rates: December Treasure bonds closed at 12707, up 22 ticks as a direct result of Fed Chairman Bernanke’s persistence that his bond buying program is needed to continue quantitative easing. This flys in the face of the Chinese who he blames for just about everything for our financial mess. The "creation" of $600 billion proposed by Bernanke will, in the opinion of many economists, do nothing to create a single job. It will only exacerbate an already "flimsy" addressing of the global economic problems.
With the report on the jump of over a quarter point in mortgage rates, applications to refinance declined 16.5%. Applications for home purchases also dropped but only by 5% after months of increases. As I stated emphatically in the last few commentaries, no one in their right mind is going to purchase a home when there could be, and will be, thousands if not millions of foreclosed homes eventually dumped on the market which will push prices even lower.
Better to "bite the bullet", foreclose and offer those homes immediately for sale, cause the prices to decline sharply, and form a price basis. That, and only that, will prompt potential home buyers to enter the market in my opinion. If you have a different opinion, keep it to yourself, I’m not interested. Once again, as I have stated before, the "Government makes money the old fashioned way…they print it.
Stock Indices: The Dow Jones industrials closed at 11,203.55, up 22.32, and basically flat for the week. The S&P 500 closed at 1199.73, up 3.04 and up 0.04% for the week. The Nasdaq closed at 2518.12, up 3.72, and for the week lost 0.004% for the week. All basically unchanged awaiting a decision on the U.S. tax structure and whether or not the Bush tax cuts will be extended before the end of the year. China, as the "customer of the world" decided to curb its runaway economic growth and inflationary trend and that did not bode well for the producing countries like the U.S. and others.
China’s announced increase of banks reserve requirements means less money available to spend on our products and commodity prices suffered. Even agricultural products suffered with Soybeans, Wheat and Corn being impacted by the prospect of tightened spending by China. Fed chairman Bernanke defended his quantitative easing policies at a European Central Bank conference in Germany while criticizing China for keeping its currency inordinately low.
In our opinion he is "biting the hand that feeds him" since China holds billions of U.S. and European debt and given the possibility of their liquidating some of the debt would cause serious problems I would suggest to Mr. Bernanke that he tempers his criticism of our "landlord". The week economic data will determine price direction for our markets so my opinion of "implementing hedging strategies" remains appropriate.
Currencies: The December U.S. dollar index closed at 7850, down 22.9 points tied to Fed chairman Bernanke’s defending of his quantitative easing program. Any buying of treasury instruments will cause yields to decline and commensurate "displeasure" with dollar investment. The December Euro closed at 13671, up 41 points, the Swiss Franc gained 16 points to 10052 after hitting recent highs over 103 to the dollar. The British Pund lost 70 points to 15971, and the Japanese yen lost 6 points to 11979. The Canadian dollar gained 32 points to 9817, but the Australian dollar lost 36 points to 9830. We once again suggest the sidelines until we can assess any change in the Feds actions or results of those actions.
Energies: December crude closed at $81.51 per barrel, down 34c tied to the Chinese announced tightening of bank reserve requirements. I continue to feel that with what we perceive as a continuing recession in the U.S., the largest user of energy products and the Chinese, the second largest oil market could depress prices further possibly to the $75 per barrel level or lower. Supply/demand criteria is being kept in a secondary analytical position.
Copper: December copper closed at $3.8335, up only 25c tied to the China decision to cool its inflationary economy. We remain negative if only due to our basic opinion on the U.S. labor and housing situation. Hold put positions.
Precious Metals: December gold closed at $1,352.30 per ounce, down 70c even against the weak U.S. dollar and the Chinese credit tightening announcement. The expected financial rescue package for Ireland also had little effect on gold prices. We prefer the sidelines. December silver closed at $27.315 per ounce, up 48.10c on a correction after recent long liquidation. December palladium rallied on reports of a possible depletion in Russian stockpiles closing at $703.70, up $8.20. January platinum closed at $1,671.10 per ounce, up $7.20. We now reinstate our former trading suggestion of long palladium/short platinum.
Grains and Oilseeds: December corn closed at $5.20 ¾ per bushel, down 21c on concerns over possible cuts in Chinese demand. Stay out until the supply/demand picture is clarified. After solid price gains during the year, heavy selling emerged tied mostly to the Chinese situation. December wheat closed at $6.84 per bushel, down 1/2c but held up better than corn and soybeans tied to a positive export outlook. Until the Chinese situation is clarified as to where exactly demand will be cut, we prefer the sidelines in the complex.
Same reasoning applies to soybeans where the March contract lost 40 1/4c to close at $12.09 per bushel.
Coffee, Cocoa, Sugar: December coffee closed at $1.1010 per pound, up 1.45c on declining stockpiles. We could see prices rally further assuming no surprises tied to demand. December cocoa closed at $2826 per tonne, down 70 points on possible declines in demand and on concern over China’s credit tightening policy and the global effect on producing countries. Stay out for now. March sugar closed at $26.2,c per pound, down 1.95c on less concern that rains would damage India’s harvest enough to reduce exports. We could see a resumption of buying but with the Chinese situation overhanging most markets, we prefer the sidelines.
Cotton: December cotton closed at $1.2790 per pound, limit down 6c after Thursdays sharp gains. China once again played a roll in the heavy selling Friday and could continue unless clarification of their intentions towards cotton is reported. Stay out.