The announced closing of six more banks bringing the total bank failures so far this year to 157 illustrates the ongoing problem of defaults in mortgages, credit cards, car loans, etc. The U.S. Conference Board reported its index of leading economic indicators was up 1.1% for November. The Labor Department reported a decline in U.S. initial unemployment claims and the Philadelphia Fed reported manufacturing activity in the mid-Atlantic region rose in December surprising economists.
All the "good" news overshadows the basic problem of unemployment which will continue to weigh on the "recovery" for some time to come. As I indicated in prior commentaries, any reduction in the weekly first time unemployment numbers would merely be a result of fewer workers available to lay off without closing the doors of companies and not an indication of an improving labor situation.
Markets will react positively to such changes in first time unemployment but in our opinion, such optimism would be misguided and would prompt inappropriate price movement in equities and economic assessment. Now for some actual information.
Interest Rates: March Treasury bonds closed at 12112, up 127 on a correction after recent long liquidation pushed yields higher. The selloff was prompted by the Feds announced quantitative easing program and President Obama’s announced tax cuts which pushed treasury yields to seven month highs. Fixed coupon treasury yields move up when treasury instruments sell off and that was not conducive to attracting home buyers. The rally on Friday was a correction after the recent selling and our expectation is for wide price swings. However, any further rally basis the March contract to the 123-124 level should be viewed as an opportunity to buy puts again. Another factor in the buying was tied to concerns that the Eurozone debt crisis remains in effect as exemplified by Moody’s downgrade of Irelands credit rating. We do not expect lower rates to improve the economy since a major element for any recovery would be home purchases. Potential buyers are kept away by the failure of banks to implement foreclosures and the "shadow inventory" of homes which will eventually be offered for sale could push prices lower and buyers are reluctant to buy on the basis of eventual increases in supplies.
Stock Indices: The Dow Jones industrials closed at 11491.91, down 7.34 but managed a weekly gain of 0.7%. The S&P 500 closed at 1243.91, up 1.04 for a weekly gain of 0.3% and the Nasdaq closed at 2642.97, up 5.66 for a weekly gain of 0.2%. The so called "Santa Claus rally" failed to appear so far but we have four more days before Christmas. The positively construed economic data was responsible for the weekly gain but we are reluctant to abandon the bearish camp since we feel " it’s the jobs stupid" still applies. Without a labor improvement and a resolution to the mortgage and credit defaults, there will be no sustained economic recovery, nor for that matter, a sustainable stock market rally. Implement hedging strategies.
Currencies: The March U.S. dollar index closed at 8075.2, up 20.3 and gained against the euro for a second week as the dollar rallied as yields on treasuries touched a seven month high on better than expected economic data and worries related to Europe’s ongoing debt crisis. We prefer the sidelines but would look to buy Swiss Francs on any decline from the current $1.0341 closing price basis the March contract to under a dollar. The March Euro closed at $1.31730, down 370 points while the British pound lost 94 points to 15502, and the Canadian dollar lost 48 points to 9877. The March Japanese yen managed a gain of 36 points to 11932 and the Australian dollar gained 20 points to 9783. We prefer the sidelines in all but the Swiss Franc.
Energies: January crude oil closed at $88.06 per barrel, up 36c even as the dollar strengthened. Expectations for increased energy demand as winter sets in with a vengeance in parts of the U.S. and Europe. We prefer the sidelines but our ultimate goal is for prices to recede to the $75 per barrel level. Timing, of course, is the main element.
Copper: March copper closed at $4.1590 per pound, up 4.3c on a correction after recent selling. The gain in German business confidence for November, the highest since Germany’s reunification a feature to the buying as well as improved expectations for Chinese demand. However, inventories at the major warehouses showed gains and that could produce long liquidation and new selling early in the week. The LME reported an increase in inventories of 600 metric tonnes to 361,400. The weekly release by the Shanghai Futures Exchange showed a rise of 11,872 metric tonnes to 127,836. Our overall stance remains bearish once again tied to our negative expectations of any global economic recovery.
Precious Metals: December gold gained $8.20 per ounce to close at $1,378.60 on concerns over Irelands debt and the Moodys downgrade of their credit indicating the Eurozone crisis is not over. March silver closed at $29.22 per ounce, up 43.8c while January platinum lost $1.30 to $1697.30 and March palladium lost $2.90 to close at $739.65 per ounce. We prefer the sidelines in metals.
Grains and Oilseeds: March corn closed at $5.96 ½ per bushel, up 9c and nearly settled at a 28 month high. Strong ethanol demand and reduced forecast for next years plantings prompted fund shortcovering and new buying. We prefer the sidelines. March wheat closed at $7.56 ¾ per bushel, up 7c tied to expectations farmers will plant more profitable crops on wheat acreage. We prefer the sidelines. March soybeans closed at $13.10 ½ per bushel, up ten cents tied to short supplies and expectations. We like soybeans but with Chinese cancellations of some soybean bookings tied to completely full terminals, we would hold off any new buying for now.
Coffee, Cocoa, Sugar: March coffee closed at $2.2530 per pound, up 8.75c tied to global supply concerns and potential demand increases. The shortage of high quality arabica beans is a concern according to the International Coffee Organization. Demand also from commodity funds on technical consideration as coffee prices are at a 13 year high. With coffee prices having gained 66% this year, we would stand aside for now awaiting some sort of significant correction, assuming it materializes. March cocoa lost $52 per tonne to close at $2951 on concerns over Nigerian government ordering UN advisors out of the country. We prefer the sidelines. March sugar closed at 32.50c per pound, up 1.5c tied to freezing Florida weather and severely damaged cane crop. We could see higher prices but at current levels would await a correction.
Cotton: March cotton closed at $1.5012 per pound up the 400 points limit on tight supplies and improved demand. We have no opinion at current levels.
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.