With 11th hour drama, the two major U.S. political parties finally agreed to pass a bill that kept the government from shutting down. It is hard to believe that so much time effort went into agreeing on a billion dollar budget when looming in the not too distant future is a trillion dollar budget that must be addressed. On the one hand we have the "tax and spend party" and on the other hand we have the party of "no." It is hard to imagine what will transpire in the hallowed halls of Congress to come to that agreement. The lobbyists get rich and the taxpayer gets fleeced. The U.S. economy, in our opinion, remains mired in recession regardless of how well corporations are doing, an anomaly at best, considering the continued unemployment situation.
I repeat, "an unemployment consumer does not consume non essentials, and the producers of those non essentials will be next to lay off workers." Also, "an unemployed taxpayer does not pay taxes but draws benefits instead against the general fund." The euphoria associated with a lower weekly unemployment figure is entirely based on fewer employees available to lay off, not necessarily a sign of an improving labor situation. Now for some actual information to help my clients "muddle" through the facts and make a viable trading decision.
Interest Rates: June treasury bonds closed at 11817, down 4 ticks after trading as low as 11728 during the session. Concerns over a possible government shutdown prompted long liquidation in front of the weekend and possible shutdown. We continue to feel interest rates have only one way to do, up. The ECB raised rates on Thursday and the expectation is that the U.S. could be next in order to halt the dollar decline. We had suggested short positions in treasury bonds through purchases of put options for retail clients and hold to that view for now.
Stock Indices: The Dow Jones industrials closed at 12380.05, down 29.44 but still managed a slight gain for the week. The S&P 500 closed at 1328.17, down 5.34 while the tech heavy Nasdaq lost 15.72 points to close at 2780.42. Both averages lost 0.3% for the week. The continued price escalation of crude oil to a point that could hamper any economic recovery and the potential government shutdown weighed on equities. While we may see a rally in the short term after Congress avoided a shutdown, our view remains unchanged that the equity markets are due for a sharp decline. The continued rhetoric of an economic recovery is, in our opinion, a government attempt to calm jittery nerves of investors. We do not feel it will continue to work and our expectation is for evidentiary signs of economic decline which will impact corporate earnings and expectations. Implement hedging strategies.
Currencies: The U.S. dollar index closed at 7507, down another 74 points and continues under pressure especially after the European Central Bank increased interest rates on Thursday prompting a Euro rally and adding pressure on the dollar. The June Euro gained 138 points on Friday to close at 14414, while other currencies also managed gains. The Swiss Franc gained 75 points to 10993, the British pound 35 points to 16336, the June Yen 14 points to 11793, the Canadian dollar 16 points to 10428, and the Australian dollar 70 points to 10437. Most dollar denominated commodities also posted gains. We prefer the sidelines but our expectation is for the Fed to take a closer look at the effect of dollar pressure on the U.S. economy and perhaps rethink their stance of easing in favor of tightening before the end of the year. On that basis we could consider looking at the buy side of the dollar index.
Energies: May crude oil closed at $112.79 per barrel, up another $2.49 on trader concerns over the ongoing Libyan conflict as well as the possible U.S. government shutdown. Political unrest in Nigeria, Yemen, and Syria also created concern over possible impact on production and deliveries from the region. We once again prefer the sidelines with an eye to buying put options once some stability returns to the area. Otherwise stay out. The U.S. Energy Department reported a smaller than expect drop in natural gas supplies and that weighed on prices for that commodity. We had favored the long side of natural gas futures and would hold positions a while longer but would not add at the present time.
Copper: May copper closed at $4.5015 per pound, up 8.5c tied to the weakness in the dollar in which most commodities are denominated. Anticipated global demand was also a factor however China’s efforts to slow their burgeoning economic growth could slow demand from the world’s largest copper consumer. We continue to favor a bearish stance for copper and any positive change in the dollar could prompt heavy long liquidation once again. Hold put positions but do not add since the potential for demand from Japan rebuilding after the devastation caused by the earthquake and tsunami remains a factor.
Precious Metals: June gold closed at $1,474.10 per ounce on Friday, up $14.80 on dollar weakness and a continued "hunger" for "safe haven" investment. Silver has actually rallied much further than gold on a percentage basis and has been our favorite in the precious metals group. July silver closed at $40.95 per ounce, up $1.3690 and it’s highest price since 1980 when the Hunt family tried to corner the market as I described in previous commentaries. Silver has gained 100% since last August while gold is only up 20% during the same period. In the past three months alone, silver gained 50% against an 11% gain for gold yet the "gold bugs" continue to advertise gold purchase plans in the media. If the dollar stabilizes we may finally get a price correction in metals so we would not add to any positions and may even consider taking some profits "off the table". July platinum closed at $1,812.10 per ounce, up $21.50 while June palladium closed at $795.50, up $15.25 per ounce. We prefer the sidelines for now due to the potential for sharp corrections in the group.
Grains and Oilseeds: July corn closed at $7.74 per bushel, up 7 3/4c while July soybeans gained 28 1/4c per bushel to $14.03 ¾ . The monthly USDA crop report showed corn and soybean inventories unchanged from March but the weakness in dollar helped prices. July wheat closed at $8.32 ¼ per bushel, up 23 1/4c also tied to dollar weakness. The USDA also reduced its forecast for end of season wheat supplies and that along with the weak dollar prompted heavy shortcovering and new buying. We could see further price gains across the board based on continued dollar weakness. However, any dollar strength could prompt severe price corrections so caution should be observed. July oats closed at $4.02 per bushel, up the permissible daily limit of 20c. Our bullish stance on oats has been based on the relative minor annual price gains against the others in this group. We would take profits.
Coffee, Cocoa and Sugar: July coffee closed at $2.7660, per pound, down 1.25c even against the dollar weakness on the ICO’s report for February global coffee export increases. We prefer the sidelines in coffee. July cocoa closed at $3008 per tonne, up $23 on shortcovering and the weak dollar, however with the European Union lifting sanctions on Ivory Coast’s main ports we could see thousands of tons of cocoa hit the market. Trading in cocoa was suspended in Nigeria on Saturday as parliamentary elections would be held and cocoa grading centers, commercial banks, and gas stations would be closed. Stay out. July sugar closed at 24.78c per pound, down 10 points and remains on our no interest list.
Cotton: May cotton closed at $2.0297, down 5.25c per pound but remains near all time highs even against the weak dollar. India’s farm minister said it may allow additional cotton exports and output could climb to a record this year. We continue to prefer the short side of cotton through the purchase of put options.
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.