The European debt crisis continues to be the dominant factor in global financial markets. The ongoing attempt by Germany, France and others to find a way to keep Greece from defaulting on its debt seems to me to be an exercise in futility. If Greece is unable to service its current debt, how can an extended loan and additional debt be supported? We are in favor of allowing whatever will be to be, and if it involves default, so be it.
Other countries are also problematic such as Spain and Italy. I cannot conceive of the countries who are experiencing financial difficulties due to the global recession coming to the aid of the weaker members of the E.U. just to save a currency that never made sense. Since the 17 countries in the euro all have different economies, I could not understand the one currency fits all concept anyway. My suggestion would be to let the chips fall where they may and not incur the wrath of the public in unwarranted spending during this time of crisis.
The latest report from Poland indicated that tens of thousands of trade union activists from around Europe marched to protest low wages and layoffs. They have no clue nor concern for their country in my opinion and do not realize nor care of the fragility of their economy. I think they should realize they are lucky to have jobs and take advice from President John F. Kennedy who said, "Ask not what your country can do for you, ask what you can do for your country."
In the U.S., a proposed "Buffett" tax calling for a tax rate hike for millionaires will actually only affect 0.3% of the American taxpayers and to me is a joke. The U.S. administration is playing on the concerns of the middle class where millionaires have supposedly been coddled to. Warren Buffett, obviously a friend to the President, proposed charging higher rates to millionaires which will have absolutely no effect, in my opinion, on the U.S. budget deficit since it only affect a small sector. The entire proposal is more of a psychological play on the feelings of the unemployed and middle-to-lower income families.
We continue to believe any tax increases to offset the rampant spending is not the answer. The answer is to cut spending and to create a tax program that benefits the businesses that hire people so that they know what their costs would be. The other situation I mentioned recently would be to impose duties on imports and entice corporations through competitive tax rates to return to the U.S. from the countries that provide such tax incentives. U.S. jobs were lost and the idea of creating a job from nothing makes no sense to me. We need to get those jobs back. We also point out that the government cannot create jobs. Only business can create jobs and the reluctance, under the confusing administration proposals does not provide confidence necessary for businesses to expand and hire.
Now for some actual information that may enable my readers and clients to determine what market action to take this week.
Interest Rates: December treasury bonds closed at 13914, up 9/32nds in choppy trading Friday as investors were confused over the ongoing European debt crisis and U.S. economic reports. The Federal Reserve’s "flow of funds" report released Friday indicated that "American’s wealth declined this spring for the first time in a year as stocks and home values fell." It indicated also that families have less to spend and business are reluctant to expand, a condition that could exacerbate a recessionary trend. We believe that the Fed has run out of options and that yields and prices will remain trendless for now. This week a two day Fed Open Market Committee meeting ending Wednesday could give indications of either quantitative easing or replacing of short dated securities with longer maturity bonds. We view treasury bonds as a trading affair with no position suggestions for now.
Stock Indices: The Dow Jones industrials closed at 11509.09, up 75.91 and for the week gained 4.7%. The S&P 500 closed at 1216.01, up 6.90 and for the week gained 5.4%. The tech heavy Nasdaq closed at 2622.31, up 15.24 and for the week gained 6.3%. Investors appear to be oblivious to the ramifications of a Greek default or a possible downgrade of Italy’s debt rating. The "euphoria" of attempts to solve the debt crisis of EuroZone members and the expectation of a resolution was a driving force to global markets. We do not believe, given the problems with the "stronger" economies of the Euro that a complete bailout of the weak nations can be accomplished and once again warn of an impending return to the global recessionary trend. Implement hedging strategies. Contact me personally for suggestions based on larger equity portfolios.
Currencies: The December U.S. dollar index closed at 7703.5, up 25.8 points as the relative safety of the U.S. dollar against the concerns over the various Eurozone debt crisis and ongoing attempts to bailout out the weaker economies and whether self imposed austerity programs will work. The December Euro closed at 137.83, down 92 points and remains on our recommended shorting list. December Swiss Francs, under Government pressure to halt the gains closed at 11447, down 83 points. December British pound lost 19 points to 15774 while the Canadian dollar gained 45 points to 10188 and the Australian dollar gained 54 points to 10265. The December Japanese yen lost 37 points to close at 13026. The stronger dollar prompts declines in some dollar denominated commodities. We continue to prefer the short side of the Euro by either shorting futures for those financially able to do so, or purchase of put options.
Energies: October crude oil closed at $87.96 per barrel, down $1.44 after trading above $90 in hectic albeit light volume trading. November traded between $89.93 and $87.22 closing at $88.09 down $1.50 per barrel. Crude follows the equity market as an indication of future supply/demand. Since we expect U.S. equity prices to come under pressure, we could see lower prices for crude.
Copper: December copper closed at $3.93 per pound, down 2c on long liquidation in front of the weekend and in advance of any solution to the European debt crisis. Copper prices have been driven higher the worlds largest copper consumer, China, where demand had driven prices to the high of $4.6495. With the recent reported attempt by China to slow economic development to avoid inflation, demand had declined pushing prices lower. We had been bearish since the $4.50 per pound level and now would take any profits off the table and cover shorts or sell puts. Stay out for now.
Precious Metals: December gold closed at $1,814.90 per ounce, up $33.50 tied to Europe’s debt crisis even as the U.S. dollar rallied. Gold usually moves contrary to the dollar in which it is denominated but during periods of weak Euro currencies and foreign buying, they move in tandem as buying of dollars, treasuries and gold as "safe havens" occurs. We could continue to see wide price gyrations and view gold as a trading affair at current levels. Should a resolution occur in the Euro crisis, we could see sharp selloffs. Should Greece default and a downgrade of other Euro members debt occur, we could see continued strength in gold. We prefer the sidelines for now. December silver closed at $40.705 per ounce, up $1.2040 following gold on shortcovering after Thursdays decline and in front of the weekend. We prefer the sidelines here as well but of the two, we would prefer silver since the downside risk, percentage wise is preferable to that of gold. January platinum gained $31.10 per ounce to close at $1,818.30 while December palladium gained $8.75 per ounce to close at $732.25. We prefer the sidelines since the white metals are used in catalytic converters tied to the auto industry. A decline in auto sales reduces demand.
Grains and Oilseeds: December corn closed at $6.92 per bushel, down 9c on reduced concern over frost or freeze damage. We continue to favor the long side of corn on expectations of better exports and possible maturity problems in some areas. December wheat closed at $6.88 ¼ per bushel, down 7 3/4c on profittaking in front of the weekend. We prefer the sidelines in wheat. November closed at $13.55 ½ per bushel, down 3 1/4c on reduced frost concerns and fund long liquidation. The dollar strength was also a factor in the selling of this group. We like soybeans from here on possible detrimental weather forecasts.
Cattle & Hog report: December cattle closed at $1.18950 per pound, down 47.5 points on pre weekend profittaking after recent strength. Weakness in the grains and a stronger dollar a factor. We continue to favor the long side of cattle. December hogs closed at 82.7725c per pound, down 1.675c on profittaking after recent strength. Steady cash market prices a factor in recent strength. We favor the short side of hogs with our spread favorite long cattle, short hogs.
Coffee, Cocoa and Sugar: December coffee closed at $2.6040 per pound, down 15 points and remains under pressure after recent price gains. We prefer the sidelines. December cocoa closed at $2,789 per tonne, down $2.00 and remains under selling pressure. With no fresh fundamentals from Ivory coast or Nigeria, we would hold current long positions for now while our overall view remains bullish for a move back to the $3,000 per tonne level. October sugar closed at 27.52c per pound, down 1.98 points. While lower cane production is expected for Brazil due to bad weather, expectations remain high and could offset any concerns. We remain bearish for sugar. Any sales should be accompanied by stop protection.
Cotton: December cotton closed at $1.1099 per pound, down 63 points on concerns over global economic problems which could cut demand for cotton. While bad weather in the U.S. is still a factor with the possibility that the ongoing drought in Texas could impact crops further, demand concerns offset supply declines. We would stay out for now.
John L. Caiazzo