On Tuesday President Obama will be reporting on the "State of the Union." As is usually the case with government, he will no doubt spin a tale of recovery albeit slower than desirable. Unfortunately, as millions of Americans probably see it, having been unemployed for over a year in many cases, the "spin" wont allay fears of a prolonged period of unemployment, mortgage defaults and foreclosures, and automobile repossessions. The decline in first time unemployment of 37,000 to "only" 404,000 was cause for "celebration". Another 404,000 first time unemployed, which equates to nearly two million each month for over a year or more is just not good news no matter how it is spun by Washington. How many more mortgages and car payments are in jeopardy?
One commentator last week noted that even by creating 125,000 new jobs a month, (a number I see as overly optimistic), it will take years to get back to the 4.0 unemployment number we had some years ago. The homes that are in default but are not foreclosed on because the banks do not want to dump those homes on the market and further depress home prices are, regardless of intention, going to be put out for sale at some point. Potential buyers should be reluctant to purchase at current prices knowing the economics of supply/demand. Those potential foreclosures will, in fact, eventually increase inventory, i.e. supply, and will force still lower prices.
The only answer, in my opinion, is to "bite the bullet", foreclose on those homes, get the prices down to where they belong based on supply/demand, and form a price base which will attract buyers. The current policy only perpetuates the problem and the advantage to banks of not foreclosing by having unserviced loans on the asset side of the balance sheet wont last. Eventually those bad loans will have to be foreclosed on and moved from the receivable (asset column) side to the liability side forcing banks to increase reserves. That is not "speculation" but fact. With unemployment at a 9.7% rate and the combination of the unemployed and under employed rate over 17%, the euphoria demonstrated in the equity markets is, in my not so humble opinion, and in the words of a former Fed chairman, "irrational exuberance". Now for some actual information...
Interest Rates: March treasury bonds closed at 12003, up 20/32nds even against better than expected unemployment figures and GE earnings. Bank of Americas negative report helped bonds after an early selloff prompted by the GE earnings. We continue to view treasuries as in a trading range with no expectation for any rate changes for the foreseeable future. We do not expect any surprises in the President’s State of the Union address on Tuesday with the exception of the usual "pumping up" of optimism. A condition we find "insulting" in view of the growing number of unemployed and underemployed as well as a disastrous mortgage situation.
Stock Indices: The Dow Jones Industrials closed at 11871.84, up 49.04 points tied to the positive GE earnings and the Thursday reduction of first time unemployed. The S&P 500 closed at 1283.35, up 3.09 while the Tech heavy Nasdaq lost 14.75 points to close at 2689.54. For the week the Dow gained 0.7%, the S&P 500 lost 0.8% and the Nasdaq lost 2.4%. Bank of America reported a fourth quarter loss of $1.6 billion and for the year a loss of $3.6 billion. Most of the losses occurred in the credit card division where even though rates are being charged between 18 and 20%, the defaults on credit care loans was problematic. We expect other credit card agencies, due to the high unemployment and the public borrowing from one card to pay the minimum on another, to continue to be problematic. Once again, since much of the economic condition globally continues to be tied to debt, we would urge those with large equity positions to implement hedging strategies or contact us.
Currencies: The March U.S. dollar index closed at 7812, down 86.4 points tied to an ECB Council member making positive comments on the European economic outlook and increasing inflation risks. That would prompt interest rate increases and stronger Euro demand. A larger than expected increase in the January German ZEW economic sentiment to a 6 month high and reduced safe haven demand for the dollar all prompted dollar selling. We do not expect the European community to be able to offset severe debt problems so our attitude would be supportive of the dollar. We view the dollar selling as a correction but would stand aside for now.
Energies: March crude oil closed at $89.11 per barrel, down 48c after trading on both sides of the line. The High was $90.22 while the low was $88.87. Concerns that demand from China may dissipate in their intention to slow their economy and curb the current inflationary trend. March heating oil closed at $2.6645, up 3.8c tied to the severe weather in the heavy usage areas. March Natural gas benefited from the latest U.S. Energy Department’s weekly inventory data showing a larger than expected drop in supplies. We would avoid crude but feel natural gas has posted its technical bottom and would buy on any dips. Demand from the expected severe weather should increase and reduce supplies further in the near term. Any change in weather patterns would prompt us to reduce positions. Use stops.
Copper: March copper closed at $4.3125, up 4.05c in a correction after recent selling. Chinese imports had declined recently and that prompted the selloff. Buying on Friday was a correction as well as tied to positive economic sentiment, but we remain bearish towards copper based on our overall negative opinion on global economies.
Precious Metals: February gold closed at $1,341 per ounce, down $5.50 even though the dollar sold off. A condition that usually see gold trade conversely to the U.S. currency in which it is denominated. Gains in U.S. equities was also a factor in the selling of gold. To repeat my previous comment that in 1980, gold traded for the first time at $875 per ounce. It took investors who paid that price 25 years just to break even. Could the same occur today at current levels? Absolutely if the dollar strengthens and the global economies stabilize, a condition I do not see for the foreseeable future, but it bears watching. March silver closed at $27.427, down 4.6c while the white metals also gained with April platinum closing at $1,822.30, up $3.70 per ounce and March palladium gaining 90c to close at $816.75. We prefer the sidelines for now although intra day trading by professionals could prove beneficial due to the price swings.
Grains and Oilseeds: March corn closed at $6.57 ¼ up 3 1/4c on good export demand. Strength in the wheat pit also helped. We prefer the sidelines for now. March wheat closed at $8.24 ½, up 21c on strong business from foreign governments concerned about potential protests tied to high food prices. Tunisia’s President was removed tied to those food price protests. We prefer the sidelines in wheat even as grain prices remain in an uptrend. March soybeans closed at $14.12 ¼, down 2c in quiet lackluster trading. With the potential for lower 2011-2012 carry over and offsetting crop acreage planted we could continue to see sideways trading. The only question would be how large a trading range before some data causes as push through either support or resistance. For now recent highs that had been tied to concern over a poor Argentinian crop has dissipated and the recent strong demand from China also has levelled off. We are on the sidelines for now.
Coffee, Cocoa and Sugar: March coffee closed at $2.4035 per pound, down 5 points after touching 13 year highs. The International Coffee Organization expecting Brazilian Arabica bean output to fall also a factor in the recent strength. We prefer the sidelines but expect the bullish trend to continue. The downside potential is too risky for retail clients. March cocoa closed at $3211 per tonne, up $27 tied to the European Community sanctions on the Ivory Coast which may cut available supplies. Civil unrest may also cut production and add to upward price pressure. We prefer not to get involved in geopolitically affected commodities. March sugar closed at 32.36c per pound, up 3 little points after recent price gains to 30 year highs. The 80% year on year decline in output in Brazil’s Center South, the world’s largest producing region and flooding in Australia, the third largest sugar exporter, may also cut sugar output and prompt still higher prices. However, with China’s steps to curb inflation, demand for commodities could be cut and that would impact sugar, which is heavily used in China. We prefer the sidelines.
Cotton: March cotton closed at $1.5694 per pound, up 4c on Chinese demand and Australian floods which decimated cotton crops. However, India’s CAB indicated that cotton output could be higher than recent estimates. With recent USDA estimates cutting global carryover to a 15 year low, we could see further strength. We prefer the long side but only with stop protection.
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.