Various elements are coming into play with a supposedly improving U.S. economy offset by the continued unemployment and credit problems. The concern of a "heating" inflationary picture as indicated by the latest "beige book" report pointing out the increasing energy, food, and raw material costs could put a damper on any expectation of a recovery. We are also concerned that the current April 18 deadline for American taxpayers to file their returns will produce a lower than expected "income" to the Federal Government creating a defacto increase in the budget deficit. We maintain our opinion that the U.S. economy is not recovering and the riskier investments should be modified accordingly. Now for some actual information…
Interest Rates: June treasury bonds closed at 12026, up 104 points pushing yields down for the first time in four weeks. Concern over the debt crisis in Europe prompted the flight to the relative safety of U.S. treasuries. Inflation concerns were moderated by the economic data reported this week even as consumer prices were reported higher but not as high as analyst expectations. We could see further price gains in treasuries if equity markets start to reflect the overall economic and inflation concerns but we would add to put positions that being the case. Consumer prices have jumped by 2.7% just in the last 12 months, the largest increase since December of 2009. In November the annualized inflation rate was only 1.1% so our concern is not without merit. Interest rates, in our opinion, and based on our assumption of renewed inflation concerns at the Fed, must move higher and that would mean a decline in treasury prices.
Stock Indices: The Dow Jones industrials closed at 12341.83, up 56.68, but lost 0.3% for the week. The S&P 500 closed at 1319.68, up 5.16 on Friday but lost 0.6% for the week as did the Nasdaq which closed at 2764.65, on Friday, up 4.43 points. Much of the gains were due to the Reuters/University of Michigan consumer sentiment index reported at 69.6 in April, up from the 67.5 reported in March. It makes me wonder if the consumer sentiment was gained from people emerging from "Tiffany’s" with little blue bags and certainly not asked of people in the growing unemployment lines. Implement hedging strategies. I continue to believe the equity markets have yet to respond to the reality of a continued recession in the U.S. and globally.
Currencies: The June U.S. dollar index closed at 7502.5, up 13.7 on Friday on reports from a German official that Germany would support a voluntary restructuring of Greece’s debt. Better than expected U.S. economic data also was supportive of the greenback since the potential for inflation could prompt the Fed to raise rates sooner than expected and that would attract dollar investment once again. It like the short side of the Euro based on the foregoing.
Energies: May crude oil closed at $109.66 per barrel, up $1.55 on Friday on the "misguided", in my opinion, opinion of a continued global recovery. The U.S. reported industrial production was up 0.8% in March after an upwardly revised 0.1% gain in February. That would indicate an increase in production for the fifth month in a row and led to shortcovering in crude. The other factor of course is the ongoing tension in the Middle East and the Libyan conflict as well as protests in Yemen and Syria, which are being met with violence. My question remains, why are we concerned with removing Qaddafi in Libya due to his violence against civilians and not concerned with the same situation in Yemen and Syria. I am not suggesting we take action in those countries, simply indicating my displeasure with our actions and those of Nato in signalling out Libya. I personally do not believe we should be involved in the overthrow of any government no matter how hostile for civilians. It seems to me that we did not interfere when Russia was crushing revolts in the former Soviet block mainly Hungary, or when the Chinese were "crushing" their revolts. Why are in the business of policing the world? I believe it is for the oil and that is not the right answer….
Copper: May copper closed at $4.2575 per pound, down 2.65c as demand from China may decline on their attempts to curb runaway inflation. We continue to prefer the short side of copper but only through the use of put options for small to medium investors and traders.
Precious Metals: June gold closed at $1,486 per ounce, up $13.60 on inflation fears and investment demand nurtured by the media. We would once again remind the investing public that those who purchase gold at $875 an ounce in 1980 had to wait 25 years or so to break even. May silver closed at $42.57 per ounce, up another 91c. The "feeding frenzy" in metals concerns me but I would not get in the way of a moving "freight train". Investors should watch the U.S. interest rate action carefully and the resulting dollar movement for a hint of when to take "profits" in gold and silver. June Palladium closed at $768.10 per ounce, down $6.15 while July platinum lost only 80c per ounce to close at $1,792.50. We prefer the sidelines for now since platinum and palladium are used in automobiles and the crisis in Japan has reduced auto production since many of the parts, even at U.S. factories for Japanese automobiles, still come from Japan and factories have been closed and parts will be scarce.
Grains and Oilseeds: May corn closed at $7.42 per bushel on Friday, down 12 1/4c while July lost 11 1/2c to close at $7.49 ½. Profittaking the main feature as no fresh news emerged. We like the long side of corn but would awaiting physical news before taking any action. July wheat closed at $7.80 per bushel, up 3 3/4c on spread trading against corn, which managed to go to a premium to wheat for the first time 15 years. We like the sidelines since estimates are for an improved winter wheat crop. July soybeans closed at $13.43 ¼ per bushel, up a half cent on shortcovering after recent losses. Delays in corn seedings could prompt additional acreage assigned to soybeans and that could prompt further long liquidation. Stay out for now.
Coffee, Cocoa and Sugar: July coffee closed at $2.9120 per pound, up 6.05c tied to tight near term supplies and increased coffee consumption. We prefer the sidelines. July cocoa closed at $3170 per tonne, up $43 even after the former Ivory Coast President was arrested and the new President, Quattara, has been installed in the office. The political conflict has impacted cocoa production from Ivory Coast and expectations are that the next main crop will be "very disappointing". Nigerian Cocoa exporters reportedly bought and hoarded Cocoa in expectation of higher prices due to the Ivory Coast situation. We could see some of that cocoa come out and that could add to last months declines. Stay out for now. July sugar closed at 22.9c per pound, down 16 points. Reports that India and Thailand have produced larger than expected Sugar crops in the 2010-2011 season prompted profittaking and new short positions. Stay out for now.
Cotton: July cotton closed at $1.7740 per pound, down 60 points on expectations of bumper crops from Argentina, Australia, and Brazil. Also planned increases in Cotton in the Northern Hemisphere could also add to supplies. We continue to favor 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.