The "fat lady is clearing her throat". The recent price gains in equities and commodities may soon have run their course on the psychological influences of rhetorical expectations of a global economic recovery. I fully expect her to break out into "song" in the near future and that could spell the end of the meteorical rise in prices for equities and commodities. One must assess the ramifications of inflationary price gains on the consuming public and widespread protests are reflecting that emotional discontent. One of the major considerations for our negativity remains the burgeoning unemployment situation, the home mortgage foreclosure problem and prospect of further bank failures. We strongly urge investors to implement hedging strategies. Now for some actual information.
Interest Rates: March treasury bonds closed at 11907, down 7 ticks as money moved from the relative safe haven of treasuries to equities. The financial recovery tied to the Bernanke quantitative easing program and the Federal Reserves $600 billion bond buying program had injected new optimism into the equity markets as well as positive corporate earnings results. We continue to suggest the sidelines in treasuries although some bond straddles may be worthwhile examining.
Stock Indices: The Dow Jones industrials closed at 12391.25, up 73.11, and its highest close since June of 2008 and up 0.96% for the week. The S&P 500 closed at 1343.01, up 2.58, doubling in price since its March 2009 low. The Nasdaq gained 2.37 points to close at 2833.95. The equity market gains were notwithstanding another round of tightening by China and the unrest in the Middle East. China increased its key reserve requirements for banks by another 50 basis points in order to try to control inflation. Earnings gains by software companies and others prompted the new round of buying on the assumption that the U.S. economic recovery was progressing albeit slower than the U.S. administration would like. We do not buy into that assumption and suggest strongly the implementation of hedging strategies.
Currencies: The March U.S. dollar index closed at 7766, down 40.5 points against sharp gains in the Euro of 80 points to 13681, the March swiss Franc 45 points to 10579, the March British pound 73 points to 16243, and the Japanese yen 32 points to 12032. The Canadian dollar tracked the U.S. currency losing 21 points to 10130 basis the March contract. The G20 are meeting in Paris to assess the financial crisis and try to establish goals. Fed Chairman Bernanke, in Paris Friday, continued to imply that China and other countries with large trade surpluses allow their currencies to climb to avert another financial crisis. We do not believe anything productive will emerge from the talks over the weekend and suggest the sidelines for now.
Energies: March crude oil closed at $87.14 per barrel, up 78c tied to the weakness in the U.S. dollar along with concerns over the Middle East unrest. Brent crude closed at $101.95 per barrel, down 64c on the ICE futures exchange tied to further monetary tightening by China. March heating oil closed at $2.7150, down 1.75c per gallon while March unleaded gasoline gained 2.65c to close at $2.5542 per gallon. We prefer the sidelines.
Copper: March copper closed at $4.4770, down 70 points but managed a new 2 ½ year intra-day high. The early decline tied to the news of China’s central bank raising banks reserve requirements ratio by 0.5%, copper continued its upward trend on strength in equities and the weak U.S. dollar in which it is denominated. We continue in our belief that once the true disposition of the U.S. economy emerges, copper prices as well as equities, will decline sharply. Timing of course, is the only question. Stay out for now but be prepared to either sell futures, or purchase put options.
Precious Metals: April gold closed at $1,388.60 per ounce, up $3.50 tied to the dollar weakness and ignoring the Chinese monetary tightening. March silver, the biggest percentage gainer in precious metals, closed at $32.296 per ounce, up 72.6c. Continued demand for silver as the "poor man’s gold" and its industrial application prompted the price gains. We could see silver attempting to achieve its 1980 high of $52.50 per ounce but any correction could be swift and sharp so small investors should refrain from over extending themselves. Call options would be the way to go for those investors. April platinum closed at $1,843.30, down 70c while March palladium gained $14.70 per ounce to close at 4857.70. We suggest caution in trading metals as well as the use of stop protection.
Grains and Oilseeds: March corn closed at $7.09 ¾ per bushel, down 3c tied to China’s tightening of its bank reserve requirements which could reduce demand for commodities and caused heavy selling in soybeans and wheat which spillover to corn. We prefer the long side of corn but only with stop protection. March Wheat closed at $8.22 ¼ per bushel, down 28 1/2c and near a five week low on profittaking in front of the holiday weekend. We could see renewed buying on Tuesday as the reality that people "must heat" and shortages persist takes hold once again. However, caution should prevail and stop protection should be implemented on any new purchases. March soybeans closed at $13.68 per bushel, down 36 1/2c tied to the Chinese tightening even as the U.S. dollar sold off. Reports that the Brazilian harvest may produce its largest soybeans crop ever and favorable weather condition in Argentina could prompt heavy supply increases. We prefer the sidelines for now. Most commodity prices have benefited from the "buying spree" by investors and funds and as I indicated in the Overview, that situation may be overdone. Watch from the sidelines for now.
Coffee, Cocoa and Sugar: March coffee closed at $2.7165 per pound, up 4.3c on Friday after notices where issued on Thursday with no deliveries made which is an indication of supply tightness. Reduced supplies from Columbia due to the truckers strike but halfway into the session the Columbian President hinted that a resolution to the strike was near. We could see further buying but we opt for the sidelines due to the sharp gains which could attract profittaking. March cocoa closed at $3546 per tonne, up $64 to a 14 month high. A lack of exports from Ivory Coast, the worlds biggest producer and a statement by its President elect of an extension of the export ban could prompt another round of buying. European grinds fell by 4% year on year, the first decline in a year against an increase in global cocoa surplus for the 2010/11 season could prompt sideways action with wide price swings. While fundamentals tied to the Ivory Coast situation are bullish, we prefer the sidelines. Conditions could change and we do not want our clients to get caught up in geopolitical implications. March sugar closed at 31.02c per pound down 24 points after reaching a 30 year high. China once again is responsible for concerns of demand declines. We prefer the sidelines.
Cotton: March cotton closed at $1.9702, down the 7c limit after recent multi limit up gains. We may have seen an interim top would buy a few cotton puts but the hoarding by Chinese farmers as shown on TV news could continue. The recent gains could have completed the shortcovering by funds and traders so the purchase of puts could be appropriate.
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.