Debt turmoil casts shadow over markets

The House of Representatives finally managed to pass the Boehner bill after numerous revisions and is on the way to the Senate where it is expected to be rejected in its current, or any, form. The Democratic controlled Senate wants to push its own Reid plan so at the moment the U.S. economic future is in flux and make many of our comments useless for now.

The current attempt at saving the U.S. Government’s triple-A rating is reminiscent of the situation that caused the housing debacle where rating agencies -- i.e. appraisers and banks allowed loans to borrowers who could ill afford the revisions when the ARMs were adjusted.

Once again our opinions are tempered by the inconclusive nature of the congressional actions relating to the potential U.S. default.

Interest Rates: September treasury bonds closed at 12804, up 202 basis points or 66/32nds as the U.S. government data showed a downward revision of the first quarter GDP to almost zero and 2nd quarter GDP growth at 1.3% against expectations of 1.8%. That sent treasury prices sharply higher and yields lower. The initial impact on equities was devastating but after the initial shock, equities managed a slight recovery but bonds closed sharply higher as the safe haven. We could see another wild trading session unless Congress can agree to a compromise and sign a bill into law before Tuesday. We remain on the bearish side of treasuries hoping for a resolution.

Stock Indices: The Dow Jones industrials closed at 12143.24, down 96.87 but off the early session low of 12,083.45. The Dow lost 4.2% for the week and for July lost 2.2%. The S&P 500 closed at 1292.28, down 8.39, but off the low of 1282.86 and posted a 3.9% loss for the week and for the month lost 2.2%. The Nasdaq closed at 2758.38, down 9.87, but off the session low of 2724.99 and lost 3.6% for the week and 0.6% for the month. We have stressed the importance of implementing a hedging strategy for some time and any rally tied to the resolution of the Congressional debt crisis should be used once again to implement those strategies. We have developed strategic hedging programs which large holders of equity positions might avail themselves of.

Currencies: The U.S. dollar index closed at 7389.5, down 49.6 basis the September contract tied to the concern over a possible U.S. default. The September Euro closed at 14348, up 56 points while our own favorite in the group, the Swiss franc gained 201 points to close at 12682. Don’t plan on any vacation trip to Switzerland unless you bring a "bucket" of dollars…..Other currencies also fared will against the dollar. The September British pound gained 87 points to 16423, the Japanes yen 123 points to 12982, and the Australian dollar 12 points to 10931. The Canadian dollar lost 53 points to close at 10456 since it is closely tied to the U.S. We continue to favor the long side of the dollar and are using the decline in the face of uncertainty over Congress as an opportunity to add to long positions. We expect a resolution to the crisis probably in the "eleventh hour".

Energies: September crude oil closed at $95.70 per barrel, down $1.74 in line with the weak U.S. economic data and the sharp decline in equity prices. Crude oil lost 4.2% for the week tied to expectations of reduced demand and adequate supplies. We continue to favor the short side of crude with our expectation for price declines to the $80-85 per barrel level.
Copper: September copper closed at $4.48 per pound, up 1c tied to concerns of the Chilean miners strike at Chile’s Escondida mine, the worlds largest copper mine. We continue to expect labor strife to support copper but our overall opinion tied to expectations of a continued global recession remains bearish.

Precious Metals: December gold closed at $1,631.20 per ounce, up $15.00 and gained 1.9% for the week and 8.5% for the month tied to the uncertainty of the U.S. debt crisis and as a safe haven against a global recession, which we believe never entered the recovery stage. We remain on the sidelines however since any correction based on a U.S. debt crisis resolution could result in a $20-30 decline in prices. September silver closed at $40.11 per ounce, up 31c. The "white" metals fared worse since they are used in auto catalytic converters and any continued economic decline would preclude increased auto manufacture. September palladium lost 40c to $827.70 per ounce while October platinum lost $7.10 to $1,785.30 per ounce. We prefer the sidelines here.

Grains and Oilseeds: Grains and soybeans closed sharply lower as long liquidation tied to weather reports that moderated over the past couple of days. September corn lost 16 3/4c per bushel to close at $6.65 ½ while December lost 17 1/2c per bushel to close at 6.68 ¾ per bushel. We continue to favor the long side of corn tied to potential yield loss and continued hot weather. December wheat closed at $7.15 ¾ per bushel, down 19 1/4c following corn and soybeans. We favor the sidelines in wheat. November soybeans closed at $13.57 ¼ per bushel, down 14 1/4c tied to poor export sales and congressional "inaction" in Washington. We need some resolution of the current U.S. debt and possible default situation before becoming more aggressive in our commodity trading suggestions.

Cattle & Hog report: October cattle closed at $1.17325 per pound, up 1.175c and posted a premium to cash on expectation of increased August and Labor Day business. Declines in feedlot supplies also a factor in the price gains since the hot weather had caused herd reductions. October lean hogs closed at 92.40c per pound, down a half cent and went to a discount to cash. Expected fall kill increases caused the selling in October while August posted higher prices tied to expected Labor Day demand. We continue to favor the long side of cattle and the short side of hogs.

Coffee, Cocoa and Sugar: September coffee closed at $2.3930 per pound, up 65 points tied to the sharply lower dollar. Stay out since our expectation for a dollar recovery could negatively impact prices. September cocoa closed at $2973 per tonne, down $1.00 and remains unconvincing and in a range. Selling pressure from Ivory Coast and western Africa impacting prices. Stay out. October Sugar closed at 29.7c per pound, down 22 points on long liquidation. We favor the sidelines but additional selling could bring in shortcovering.

Cotton: October cotton closed at $1.0208, down 73 points and after having recommended the short side of cotton for some time, we now suggest the sidelines even though some countries like India and China are reducing their selling prices after having been hoarding cotton for some time.

About the Author
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.

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