Who is the barbarian now? Nato strikes killed Qadhafi’s youngest son and three grandchildren in a strike against his home. I continue to discount the so called protective actions to protect protesting civilians rather than the blatant attempt to overthrow a government, no matter how abusive. Where is the concern for the Syrian protestors being shot and killed? The Yemeni protestors? Why didn’t we attack China for Tianamen Square? Or Russia for tanks rolling over Hungarians? This is a bad joke. The U.S. cannot be the policeman of the World and act to "change" Governments. What will replace Ghadafi? The same terrorist factions that replaced Saddam Hussein? Muslim extremists? Some countries just cannot handle democracy. The voting could change the balance of power between moderates and muslim extremists which dictators managed to control. The actions are affecting global finance and inevitably affect the ability to assess market direction. Now for some actual information……
Interest Rates: June Treasury bonds closed at 12212, up another 8/32nds this week tied to Fed Chairman Bernankes comments indicating "slow improvement in the unemployment situation" and continued declines in home prices. That led traders to believe there would be no rate increases and yields declined pushing fixed coupon bonds higher. We continue to feel the low interest rates and damaging the dollar further and QE2 not accomplishing anything as related to the U.S. labor situation. This past Thursday a surprising jump in first time unemployment. Mr. Bernanke held the Federal Reserves first regular press conference after a monetary policy meeting. The U.S. Commerce Department data showed GDP slowed to 1.8% annualized rate in the first quarter of 2011 from the 3.1% rate in the fourth quarter of 2010. The Institute for Supply Management, Chicago Inc. reported its business barometer declined from 70.6 in March to 67.6 in April. With the completion of the $600 billion Treasury purchases scheduled for June, we will continue to see price swings in bonds. The confusion as to whether to stabilize the dollar by raising rates or continue to relax rates to help the U.S. economic recovery is posing a dilemma for the Fed. We continue to favor the short side of treasuries.
Stock Indices: The Dow Jones industrials closed at 12,810.54, up 47.23 points and gained 2.4% on the week. The S&P 500 closed at 1,363.61, up 3.13 points and gained 2% for the week. The tech heavy Nasdaq closed at 2,873.54 points, up 1.01 points and gained 1.9% for the week. Earnings continue to provide the impetus for market action with Caterpillar Tractor earnings exceeded expectations. When you consider the profits made by farmers vis-à-vis higher grain prices, new purchases of farm equipment was to be expected. Such purchases are almost certainly tied to replacing old equipment and one cannot overlook the tax write-off benefit. We continue to expect a sharp market decline tied to our assessment of a U.S. economic situation that does not support the contention of an economic recovery. Once again, for the pundits, "an unemployed consumer does not consume and the manufacturers of those un-consumed products will be next to effect layoffs". However, at some point, as I have indicated in prior commentaries, there will be no one left to lay off without closing the doors at some companies. Any decline in first time unemployment will be the result of that condition. Implement hedging strategies or contact us for advice.
Currencies: The June U.S. dollar index closed at 7318, down 131 points tied to Fed Chairman Bernanke’s "ambiguous" statement that he was unsure "when monetary stimulus will end". Such wavering showed no intention to stabilize the dollar by raising rates to fight what we see as inflationary food and energy price trends. The June currencies all rallied against the weakening dollar with the Swiss Franc gaining 123 points to $1.1581, the Euro 18 points to 14820, the British Pound 68 points to 18701, the Japanese Yen 58 points to 12330, the Canadian Loonie 59 points to 10582, and the Aussid dollar 65 points to 10913. How much further can the dollar decline? Certainly an unknown but we feel light purchases could be initiated from here. Use stop protection.
Energies: June crude oil closed at $113.93 per barrel, up $1.07, it’s highest settlement price since September of 2008. Geopolitical events in the Middle East and North Africa could disrupt supplies and while current supplies are adequate, anticipatory actions could continue to push prices higher. We continue to favor the purchase of put options since selling futures outright is too risky. Option purchases provide some protection by virtue of loss limited to premiums paid.
Copper: July copper closed at $4.1790 per pound, down 8.25c. Concerns over Chinese and U.S. economic growth, something we have been indicating for some time, reduced demand for copper. We continue to favor the short side but through the purchase of put options.
Precious Metals: June gold closed at $1,556.40, up $25.20 while July silver closed at $48.60 per ounce, up $1.06. We are fast approaching the January 1980 all time high for spot silver of $50.35 per ounce
My last weeks comment bears repeating: "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. 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."
July platinum closed at $1,865.50 per ounce, up $25.60 with June palladium gaining $16.85 per ounce to close at $792.15. My long palladium/short platinum spread continues to work. Stay with it. However, we could be facing the possibility of a correction in gold and silver and I would suggest taking some profits "off the table". Any dollar stability or gain could produce a sharp correction and I see no reason to give back the substantial profits gained. In March of 1980, then Fed chairman Paul Volcker brought an end to gold’s rally by raising rates in March of 1980. It took the then holders of gold 25 years just to break even. Could it happen again? Any increase in rates by the Fed could easily prompt heavy long liquidation in precious metals. History can repeat itself…
Grains and Oilseeds: July corn closed at $7.56 ½ per bushel, up 27 1/4c erasing almost all of Thursdays heavy losses. Renewed concerns over poor weather prompted the heavy shortcovering and new buying. We look for continued buying early this week tied to concerns that saturated fields could hamper plantings. July wheat closed at $8.01 ¼ per bushel, up 23 3/4c also tied to weather concerns. We prefer the long side but only with stop protection. July soybeans closed at $13.94 per bushel, up 40 1/2c for basically the same reasons as corn and wheat and with buying spread across the board and continued weakness in the U.S. dollar, demand for U.S. agricultural products could continue to benefit. Do not short "anything that grows" for the time being. July rough rice, our previously recommended buy, closed up the 50c limit on Friday but we have moved to the sidelines so offer no recommendation.
Coffee, Cocoa and Sugar: July coffee closed at $2.9875 per pound, down 1.2c. July cocoa closed at $3340 per tonne, unchanged and July sugar closed at $22.2c per pound, down 5 ticks. London markets, which to some extent affect global pricing, were closed for the Royal Wedding, and the Easter Monday holiday prompting thin trading and wide price swings. We prefer the sidelines for this group
Cotton: July cotton closed at $1.5802 up 6c on heavy trading on short covering after recent heavy selling in front of the weekend and tied to the weak dollar. We continue to prefer the short side of cotton. Add to put positions on any further price gains.
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.