The Acuvest Letter: Market Commentary Week ending August 19, 2011
Overview: This past week it was nearly impossible to “hide behind the Bushes” as the U.S. economy headed toward recession, something I have been predicting for months. An upturn on Thursday of first time unemployed to 409,000 dismayed economists and market analysts as well as the poor Philly Fed manufacturing index decline. Another obvious sign of desperation on the part of the U.S. Federal Reserve was Chairman Bernanke’s statement of continued low rates into 2013. That was a clear indication to me that the Fed has no clue as to how to halt the economic stagnation and decline. In my opinion they cannot see past their noses and are missing the big picture. While it is the “economy stupid”, the basis for all of the current concern remains the jobs situation.
The continued talk of creating jobs is starting to really annoy me. You cannot “create” a job unless you “create an industry”. The Administration should concentrate on restoring jobs, the jobs that have moved overseas. In a 60 minute segment this past week one of the guests pointed out the fact that jobs moved to countries where the corporate tax rate is less than half the U.S. rate. U.S. companies have moved to Ireland and Switzerland and needless to say, those countries are enjoying the benefits of jobs for their citizenry.
Interest Rates: December U.S. Treasury bonds closed at 13900, up 21/32nds as the flight to the relative safety of Treasuries and Gold continues with money, or what’s left of it, moving from equities. The ridiculous, in my opinion, announcement by the U.S. Federal Reserve Chairman that rates will remain low to 2013 allows potential borrowers to wait before purchasing homes or automobiles. What was he thinking? Did he think that by keeping rates low it would prompt new purchases? Wrong again…As a matter of fact Fed Bank of Dallas President Fisher said that the central Bank’s “pledge to keep the benchmark U.S. interest rate near zero through at least mid 2013 may lead to unintended consequences and hurt growth”. The Dallas Fed President was joined in the criticism by Philadelphia President Plosser and Minneapolis President Kocherlakota. This appears to us to be an act of desperation and I cannot perceive of any benefit for the U.S. economy. We would look closer at the short side of Treasuries by either buying puts on the December Bonds contract or for those with more risk capital, selling out of the money call options.
Stock Indices: The Dow Jones Industrials closed at 10,817.65, down 172.93 or 1.57%. The S&P 500 closed at 1123.53, down 1712, or 1.5% while the Nasdaq closed at 2341.84, down 38.59 or 1.62%. For the week the Dow lost 4% is for the past four weeks lost 15%. For the year the Dow is down 6.6%. The S&P 500 has lost 16% for that four week period and the Nasdaq lost 18% during that period. Political gridlock related to economic plans for the future and the European banking problems are paramount in the minds of the investing public. We continue to urge implementation of hedging strategies to retain equity. We view any “bounce” as an opportunity to sell indices or purchase put options on the various indices where the majority of issues in the individual portfolios reside.
Currencies: The December U.S. dollar index closed at 7440 on Friday, down 29.5 points as the Federal Reserve indicated a long period of low U.S. interest rates. High rates attract dollar investment. The December Euro gained 64 points to 14369 on short covering after recent weakness tied to concerns over various Eurozone country debt concerns. The December Swiss Franc gained 72 points to 12769 even against the Central Banks intention to weaken the Swiss Franc in order to improve exports. The December British Pound lost 21 points to 16462 tied to rioting. The Japanese yen gained 4 ticks to 13093, the Canadian Dollar gained 7 ticks to 10082 and the Australian dollar closed at 10249, up 18 points. We would take another look at the long dollar contracts and/or shorting the Euro. We do not feel any attempts to control the debt crisis in certain of the Euro countries will succeed. I do not believe extending credit or terms of loans will help any country whose economic condition and GDP does not substantiate the risk. The reduced “income” for those countries will not enable servicing of the current debt much less any future debt increase. I expect negative financial reports from the Euro Banks which could easily spill over to their U.S. counterparts. I continue to expect an accelerated global recession.
Energies: September crude oil closed at $82.26 per barrel tied to expectations of a further global economic slowdown. Our previous goal of the $80-85 per barrel offered in commentaries when crude was above $95 per barrel was achieved and we now see a sideways market for some time barring any geopolitical event. Stay out for now.
Copper: December copper closed at $3.99 per pound, up 1 tick in late trading after touching $3.94 during the session. We remain bearish for copper having first suggesting shorting it around $4.75 per pound level. With inventories at the LME up 650 tons to 463,625 indicating reduced European demand and Shanghai Exchange stocks down 8,805 tons to 112,014, indicating possible increased Chinese demand we could see sporadic wide price swings and would stay out for now. Copper prices are down 0.7% for the week.
Precious Metals: December gold closed at $1,852.20 per ounce, up $30.20 as money moved from equities to the safe havens of Gold and Treasuries. We are concerned that while gold may continue higher and exceed $1900 per ounce, any correction could be quick and severe. Our suggestion to holders of gold would be to buy put options to protect their positions. I personally like the $1,500 or $1,600 December puts as “insurance”. The precious metal has come “too far, too fast”. September silver closed at $42.43 per ounce, up $1.74 and its highest settlement since May 3rd on the way down from near the $50 level. We prefer the sidelines. October platinum closed at $1,874.90 per ounce, up $27.20 and December palladium lost $3.20 to close at $755.55. We would avoid these markets as the risk at current levels is too great for our clients.
Grains and Oilseeds: December corn closed at $7.255 per bushel, up 12.5¢ tied to weather and the U.S. dollar decline. Corn yields are of concern and anticipated precipitation is needed. We like the long side of corn since production delays could reduce yields. December wheat closed at $7.61 ½, up 22c on short covering and dollar weakness. Tight supplies and later than normal plantings also a factor. We prefer corn to wheat. November soybeans closed at $13.68 ½ per bushel, up 7 1/2c tied also to the weak dollar and concern over yields. We like soybeans from here also but with stop protection.
Cattle & Hog report: October cattle closed at $!.1550 per pound, up 1 cent in sideways trading with a high of 1.1610 and a low of 1.1487. We continue to favor the long side of cattle as herds were culled due to high feed prices and it will take time to recover. October lean hogs closed at 88.375c per pound up 15.5c tied to higher cash prices and expected additional purchases by South Korea and China. While we had favored the short side of hogs and the long side of cattle, we would hold off any new sales of hog futures.
Coffee, Cocoa and Sugar: December coffee closed at $2.6690 per pound, down 1.5c on profit taking after recent gains. Sales withhold by Brazil and Colombia and Central America only selling new crop as the old crop is sold out could support prices further. We like coffee from here for a potential price move basis the December to the $2.70 to $2.75 area. December cocoa closed at $3.010 per tonne, up $25 on short covering after recent weakness. Selling pressure from Ivory Coast and other western African countries could keep prices in line but we could see weather affecting cocoa and would hold long positions. October sugar closed at $3080c per pound, up 1.68c tied to the U.S. dollar weakness and loss of sugar production by Brazil due to poor weather. We could see sugar prices move to the 31c level before bumping into overhead resistance.
Cotton: October cotton closed at $1.0676, per pound, down 79 points tied to the global economic situation which would curtail demand. However poor production in the U.S. and Pakistan could prompt a new round of buying. The current drought in the cotton areas of Texas persists as problematic. We had been bearish from the $1.50 per pound level and now would cover shorts and add a few longs.
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 and opinions are his own and not of the Futures Commission Merc