The ongoing coordinated actions in Libya to remove Qaddafi if that is the actual purpose is adding to the nervousness prompting new buying in crude oil. Other producing areas experiencing turmoil include Yemen and Syria where protesters are being killed as well. The emphasis of the U.S. administration and NATO appears to be consolidated with Libya however, and that confuses those of us who prefer not to be involved with overthrowing governments no matter how violent. We would like to know where it will all end so that we can properly assess commodity prices, currencies, interest rates and their impact on global economies. At the moment I hesitate in making recommendations simply because too many factors impact the markets we follow. Now for some actual information…
Interest Rates: The June U.S. treasury bonds closed at 12101, up 1/32nd on Thursday with the latest economic data mixed. First time unemployment declined slightly but still remained above the 400,000 level. As I have been stating ad nauseum the only reduction we can expect is tied to fewer employees available for layoffs without "shutting the company doors" and that does not bode well for the U.S. economy. Economic data is showing slight improvement and corporate earnings are better than expected given the fact that fewer employees are managing increased production. It remains a mystery as to how much longer corporations can continue to provide "earnings gains" with fewer employees each week. Something is "rotten in Denmark" and other places. Spain, Portugal and Greece as well as Italy and others are experiencing serious budgetary problems and the U.S. "earnings" are substantially reduced by the unemployment situation. The "budget deficit" figures being bandied about are based on tax income from previous years and the expected shortfall for 2010 has not, in my opinion, been factored in. We could see low interest rates for the near term but I have no doubt the Fed will have to raise rates and somehow convince the U.S. administration to stop spending…..Add to put positions on bonds.
Stock Indices: The Dow Jones industrials closed at 12,505.99, up 52.45 points in a shortened holiday week and was up 1.3% for the week on corporate earnings and positively construed economic data. The S&P 500 closed at 1,337.38, up 7.02 points and gained 1.3% for the week also. The Nasdaq closed at 2,820.16 up 17.65 points and gained 2% for the week. Corporate earnings drove the market for the four days this past week even, as I suggested, with fewer employees. I feel the current price levels are over extended and expect a sharp correction very soon. I strongly recommend instituting hedging strategies for larger portfolios. We can help devise such strategies.
Currencies: The June U.S. dollar index closed a 16 month low against both the Euro and the British Pound at 7429.5, down 27.2 points while the Euro gained 58 points to 14555 and the British pound gained 141 points to 18538. Strong U.S. corporate earnings and the gain in equities this past week turned investors against the dollar. The June Australian dollar also gained closing at 10681, up 77 points. The June Swiss Frank closed at 11324, up 71 points while the Japanese yen gained 93 points to 12232. Continued low U.S. rates against increases by the European Central Bank with possibly another rate rise to curb their inflation the main factor in dollar weakness. At some point, in our opinion, the U.S. Federal Reserve will "wake up" to the fact that global inflation must be addressed in the U.S. as well as abroad. We look for the dollar, at some point, when the Fed tightens for the first time, to stabilize against all the other currencies. We would look to start nibbling at the long side of the dollar index.
Energies: June Crude oil closed at $112.29, up 84c tied to geopolitical events as well as the weak U.S. currency. We prefer the sidelines but fully expect, once the dollar stabilizes, some re-trenchment of crude to under $100 to start with, and eventually down to the $75-80 per barrel level. We cannot predict the timing however so any trading should be limited to well capitalized accounts. Our favored long position, Natural Gas, broke through overhead resistance this week closing at $4.4710, up 11.4c per MBTU. Stay with it.
Copper: July copper closed at $4.4040per pound, up 4.5c on Thursday against the week dollar and the strength in equities. Positive corporate earnings also a factor in the shortcovering Thursday. We continue to be bearish on copper on the basis that global economies are, in our opinion, not in recovery. For the week copper lost 2.2%. Hold put positions.
Precious Metals: While much of media attention is directed at gold, silver has consistently performed better gaining an average of 3 times the daily percentage gains of gold. On Friday for instance gold gained 0.40% while silver gained 4.83%. There is no comparison and why the media attention is on gold, we have suggested for some time that silver was a better investment during times of dollar weakness and inflation fears. Since July of 2010 gold has gained 18% from $1240 to $1503 per ounce. Silver however, has gone from $17.60 to $46 per ounce or over 150%. There is really no comparison and why the "gold bugs" are ignoring the better returns for silver is a question of priorities. There is probably a higher dollar commission for marketing gold than there is for silver. Unfortunate for the investing public, in my opinion. June gold closed at $1,504.90, up $6.00 on Thursday for a gain of 0.40% while July silver closed at $46.625 per ounce, up $$2.1480 for a gain of 4.83%. July platinum closed at $1817.60, up $14.80 while June palladium gained $11.85 to close at $770.75. Our favorite spread long palladium short platinum shoed palladium gaining 1.56% against platinum’s 0.82% gain. Stay with that spread. As far as gold and silver are concerned, we are expecting a correction on any dollar stability so avoid new positions.
Grains and Oilseeds: July corn closed at $7.44 ½ per bushel, up 4c on shortcovering following reports that wet weather in the growing areas of the U.S. could delay plantings. We prefer the sidelines in corn. July wheat closed at $8.34 ¾ per bushel, up 14c per bushel tied to poor weather threatening production. Extreme dryness in the winter wheat areas along with heavy rains delaying plantings of spring wheat prompted the buying across the board. We like the long side expecting the numbers to substantiate our bullish opinion. July soybeans closed at $13.89 ¾ per bushel, up 20 1/2c on better than expected export sales. We like soybeans from here as well.
Coffee, Cocoa and Sugar: July coffee closed at $2.9455 per pound, down 4.9c after recent concerns over supply shortages subsided. We prefer the sidelines in coffee. July cocoa closed at $3088 per tonne, down $18 as Ivory Coast political problems may be resolved and production is expected to increase. We are also on the sidelines in cocoa but could expect additional long liquidation. July sugar closed at 23.8c per pound, up 27 points tied to higher crude prices and the lower dollar. Brazil will start harvesting soon and expectations are that due to higher crude prices, additional sugar could be used to produce ethanol. We could see further price gains and suggest putting on a few longs for well capitalized clients.
Cotton: July cotton closed at $1.6751 per pound, up 45 points even against lighter than expected export sales due to continued drought in China and the weak dollar. We continue to favor the short side of cotton and would add to put positions on any rallies.
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.