The markets last week, as has been the case of late, concentrated on the global financial concerns related to the debt crisis of specific countries. The Group of 20 Finance Ministers meetings to try to resolve the Greek debt crisis and avoid default along with potential problems with Italy, Spain, Ireland, Portugal and others is, in my opinion, an exercise in futility.
To increase the debt to a country that cannot meet current obligations makes little sense and as I stated incessantly that the concept of one currency for 17 countries, each with its own economy, also made no sense to me. I fully expect that some members of the euro will soon have to be excluded and that Greece will in fact default. Meanwhile, the effect of the crisis impedes my ability to comment on the markets while the question of a possible euro meltdown exists. On Wednesday, the Federal Open Market Committee stated the U.S. economy faces significant downside risks and that prompted the heavy selling across the board on Thursday. The Group of 20 Ministers are in Washington for meetings of the International Monetary Fund and the World Bank. My comments therefore will be tempered.
Interest Rates: December treasury bonds closed at 14423, down 1 11/32nds on profittaking after recent heavy buying tied to "transfer of funds" from equities to the safety of the U.S. treasury market. The buying had pushed yields sharply lower with the ten year paper below 2% and the 30 year below 3%. While lower yields attract buying on credit such as for the housing industry and the auto industry, both of which need new borrowing and purchases, failed to halt the decline in home prices. Fewer buyers are qualified to borrow under the new stringent bank requirements after the debacle related to "easy money" that put the economy in it’s current mess. I continue to view the treasury market as a trading affair but favor the short side of Treasury bonds on rallies through the purchase of put options.
Stock Indices: The Dow Jones industrials closed at 10771.48, up 37.65 on short covering after the extreme selling of Thursday. Concerns that some European banks may be extremely exposed to a Greek default, which I believe is unavoidable, and which could prompt other Eurozone countries to experience a similar crisis. Spain, Italy, Portugal and Ireland are other economies that are currently under scrutiny by the ECB and the weekend meeting of the G20 finance ministers, in my opinion, can only attempt to strike an "optimistic" view without any real solution. The equity markets, in my opinion, are extremely vulnerable to not only the U.S. economic situation, which I expect will worsen, but to the European debt crisis. The S&P 500 closed at 1136.43, up 6.87 while the tech heavy Nasdaq closed at 2483.23, up 27.56. For the week the Dow lost 6.41%, the s&P 500 6.54%, and the Nasdaq 5.3%. We continue to "insist" that investors review their positions, "trim" some equity positions, and implement hedging strategies. We can provide strategies for holders of large equity positions.
Currencies: The U.S. dollar index closed Friday at 7896, down 14 points on pre-weekend profittaking after the recent sharp run-up. Most European currencies are under pressure tied to the potential impact of a Greek default and concerns that a "domino" effect may emerge. Switzerland had implemented a policy to prevent further gains in its currency but with the current crisis, the Swiss Franc fell along with others. The December Euro closed at $1.3455, down 9 points, the Swiss Franc closed up 12 points to 11047 but sharply below its high in the 122 area. The British pound gained 70 points to 15412 but the Canadian dollar lost 17 points to 9669. The December Japanese yen closed at 13049, down 54 points and the Australian dollar gained 20 points to 9835. Countries with less exposure to a Greek default fared better in recent trading. We cannot conceive of anything coming from the G20 meetings that will mitigate the current crisis. Watch from the sidelines for now but we continued pressure on the Euro.
Energies: November crude oil closed at $80.51 per barrel, down $5.41 on Friday to a six week low as investors sold whatever they could to offset the heavy losses of Thursday and to meet margin calls. The Federal Reserves decision to extend debt maturities was considered unlikely to help the U.S. economy and reduced demand tied to our perceived recessionary trend also impacted energy prices. The gains in the dollar also a factor. We expect further price declines. Our previous goal, when crude was in the $95-97 area of $75-80 was achieved and we now expect prices to decline further to the $70 level.
Copper: December copper closed at $3.31 per pound, down 17 points in late trading after heavy long liquidation. Chinese manufacturing has slowed and as a major consumer of energy and copper, concern of reduced overall demand pressured prices of various commodities. We had been extremely bearish on copper for some time and last week suggested taking profits off the table. We were a bit early but anyone still holding short positions could now follow our advice to take profits.
Next page: What to expect for gold
Precious Metals: December gold closed at $1,639.80 per ounce, down $101.90, for the worst one day percentage loss, 5.9%, since June of 2006. We noticed fewer TV ads from "gold bugs", recommending the purchase of gold this week. We could see some shortcovering and possible new buying but as we have reminded investors of 1980, when gold first high $875 per ounce, it took those investors 25 years to break even. Hold any small positions of physical gold but throw away your gold charts and chart the U.S. dollar and interest rates for potential "future" price movement. December silver closed at $31.02 per ounce, down $5.5580. Silver has lost nearly $20 per ounce from its high. January platinum closed at $1,617.40, down $98.20 while December palladium lost $28.30 per ounce to close at $635.75. As we have been suggesting, stay on the sidelines.
Grains and Oilseeds: November soybeans closed at $12.58 per bushel, down 25c on general commodity selling tied to the strong dollar and the necessity to meet the margin calls generated by the heavy selling of Thursday. December corn lost 11 1/2c per bushel to close at $6.38 ½ in conjunction with other commodities. However, we favor the long side of corn based on fundamentals and potential reduced supplies. December wheat closed at $6.40 ¾, up 7c on shortcovering and potential increased demand. We prefer the sidelines in all but the corn.
Cattle & Hog report: December cattle closed at $1.16725 per pound, up 85 points on shortcovering in front of the weekend and after recent selling from the $1.19 area. We continue to favor the long side of cattle. December lean hogs closed at 83.725c per pound, up 1.725c on shortcovering and new technical buying. We prefer the short side of hogs but would not add to short positions at the current time.
Coffee, Cocoa and Sugar: December coffee closed at $2.3485 per pound, down 4.4c on long liquidation and margin call selling prompted by severe losses in other commodities. We prefer the sidelines but on any further selling would take on a few longs. December cocoa closed at $2624 per tonne, down $58 on long liquidation and continued technical and supply pressure. We favor the short side of cocoa on any rallies. October sugar closed at 25.01c, down 66 points on continued heavy selling from the trade. Technicals also a factor to the selling. We could see still lower prices and would avoid sugar.
Cotton: December cotton closed at $1.0124 per pound, up 1.95c on shortcovering after recent sharp price declines. We see good support at the $1.00 level but any breach of support could take prices down to the 85-90c level. The potential for reduced demand from Asia could be the determining factor even against product losses tied to the extreme Texas growing areas.
John L. Caiazzo