"What’s wrong with this picture?" The Congressional impasse continues where the Republicans and some Democrats want all the Bush tax cuts to be extended and the President and the remaining Democrats want to limit the extension to those earning less than $250,000. The rhetoric from the White House that "millionaires and billionaires" should not get tax cuts is something I agree with.
What I do not agree with, however, is that millionaires and billionaires earn much more than the $250,000 the President keeps repeating to the general public to garner support. Small business owners, the people that do the most hiring in the country, probably all make more than $250,000 and are reluctant to hire without knowing if they will be taxed come Jan. 1, 2011. If the President would change the limit from $250,000 to $1 million, I feel certain that the Republicans and those Democrats agreeing with them would vote to finally get the economy growing again.
The other deterrent to small businesses hiring is the "Obamacare" health plan. Business owners, in many cases, cannot afford to put workers on a health plan but are probably willing to pay workers enough so that they can pay their own way. Congress gets both, good pay, and great benefits. The U.S. economy, in my opinion, is not going anywhere as long as each week over 400,000 people apply for first time unemployment benefits. That’s nearly 2 million a month and the rhetoric surrounding the "glee" of creating 93,000 jobs eludes me.
How many more mortgages, car payments, and credit card defaults are in the pipeline that keeps potential home buyers from purchasing a home when they know that thousands of homes are being withheld by banks and will eventually be for sale pushing prices even lower? The so called "recovery" is, in my not so humble opinion, a "pipe-dream" and much of the American public is not fooled by the "optimism" spewing from the Administration. Now for some actual information...
Interest Rates: March Treasury bonds closed at 12404, down 13 ticks tied to the various data reported Friday which tended to offset the buying after the weaker than expected jobs report. The report showed that only 93,000 jobs were created in November against expectations of economists of a gain of 155,000. The unemployment rate rise to 9.8% from 9.6% had also been an early stimulus to bonds. The sharp decline in the U.S. dollar prompted general commodity buying which led to the biggest weekly gain since October of 2009. Global shortfalls of wheat and cotton led the gains and the weak dollar prompted the additional buying in commodities. We would stand aside in treasuries although at some point when the economy finally shows real determination to recover, the Fed will no doubt start to sound like "hawks" and suggest rate hikes. That event pushing yields higher will no doubt prompt heavy bond selling and we would be willing to "jump on the bandwagon" at that time. For now stand aside or do some intraday trading.
Stock Indices: The Dow Jones Industrials closed at 11,382.09, up 19.68 and rose 2.6% for the week. The S&P 500 closed at 1224.71, up 3.18 and gained 3% for the week. The tech heavy Nasdaq closed at 2591.46, up 12.11 and was up 2.2% for the week. The Institute for Supply Management reported its index rose from 54.3 in October to 55.0 in November, better than the increase to 54.5 that economists expected. A reading over 50 indicates growth in the economy and the jobs report showing an increase of 93,000 jobs in November offset the negative Commerce Department report of U.S. factory orders declining 0.9% in October after a gain of 3.0% for September. We remain unconvinced that the U.S. economy is growing and rather it is being "propped up" by the rhetoric from the Administration. We continue to suggest implementing hedging strategies for large portfolios and fully expect another "shock" in the form of a market collapse of at least 10% or more.
Currencies: The March U.S. dollar index closed sharply lower to 7955.5, down 117.6 tied to the slower than expected job growth and on speculation that the Fed would expand its quantitative easing program. Lower interest rates preclude dollar investment and the dollar declined after recent gains. We continue to feel the U.S. economy is not growing but contracting further and the prospect of higher interest rates at this time is not "in the cards". The March Euro closed at 1.3369, up 175 points while the March Swiss Franc gained 163 points to close at $1.0238. Others include the March British pound gaining 163 points to 15730, the March Japanese yen gaining 147 points to 12074, and the Australian dollar gaining 144 points to close at 9785. The March Canadian dollar lost 8 ticks and closed at 9933, just short of parity with the U.S. currency. Stay out for now.
Energies: January crude oil closed at $89.19 per barrel, up $1.19, its highest close since October of 2008. The early weakness was tied to the disappointing unemployment rate of 9.8% against the previous rate of 9.6%. However, the Institute of Supply Management report indicated economic growth and prompted shortcovering and new buying of energy products, with the noted exception of Natural gas. We prefer the sidelines however, with our expectation of a continued global stagnancy, we could see prices resume their decline. Our price goal for crude remains in the $75 range for now.
Copper: March copper closed at $3.9990 per pound, up 2c tied to the weaker dollar and continued demand growth for the metal. A report indicating that a single entity had accumulated the most copper was unconfirmed by we believe it may be a Far East entity expecting the Chinese demand to continue. We have our doubts but will await confirmation before reporting any "cornering" attempt. Inventories at the London Metal Exchange warehouses rose by 1,200 metric tons on Friday to 353,625. The most recent Comex inventory report released on Thursday showed a decline of 385 short tons to 70,831. The weekly Shanghai Futures Exchange report showed a decline of 5,815 metric tons to 116,797, hence our speculation of a Far East entity possibly "hoarding" copper in anticipation of future demand. While our tendency is to remain bearish, we would not recommend any addition to short positions or long put positions at this time.
Precious Metals: February gold closed at $1416.00 per ounce, up $16.90 tied to concern that the economic recovery has faltered based on the negative U.S. employment data. Gold is considered a hedge against inflation but also as a safe haven during economic uncertainty. March silver closed at $29.425 per ounce up 85.3c tied to the same concerns. January platinum gained $15.40 per ounce to $1,728.50 while March palladium gained $6.40, to $770.10 per ounce. We once again suggest tracking the U.S. dollar rather than charting metals. We repeat our previous admonition, "dollar up, gold down, dollar down, gold up". We could see wide price swings tied to the global economic news, U.S. interest rates, and the dollar.
Grains and Oilseeds: March corn closed at $5.73 ½, up 18c tied to both the weak dollar and the strength in wheat. Argentina dryness added to the sharp gains in wheat. March wheat closed at $7.79 per bushel, up 30 1/2c. Excessive dryness and reduced supplies along with the weak dollar prompted the sharp rise in wheat which carried to the other commodity pits. March soybeans also benefited from the uncertainty of the South American crop and excessive dryness in parts of Brazil as well. March closed at $13.07 per bushel, up 19 1/4c. Our favorite in the group continues to be soybeans but at current levels we would only look to buy on declines since any correction or strength in the dollar could prompt a sharp correction.
Coffee, Cocoa, Sugar: March coffee closed at $2.0380, per pound, down 10c after recent strength tied to the weak dollar. March cocoa closed at $2912 per tonne, down $23 as farmers are delivering more cocoa to the market in Nigeria. We prefer the sidelines. March sugar closed at 29.58c per pound, up 8 points tied to the weak dollar but also tied to concerns that La Nina weather pattern could bring heavy rains in India delaying the cane harvest. We prefer the sidelines.
Cotton: March cotton closed at $1.3234 per pound, up the daily permissible limit of 6c as did May and July. Cotton is at its highest level in nearly 40 years on increasing concern than exports will be limited from India, the world’s second largest producer. U.S. inventories have declined by 74% this year, the largest supply decline since at least 2003. We do not have an opinion under these extreme circumstances.
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.