The markets were jubilant on Friday as the Italian Senate approved a budget bill with new austerity measures and Greece announced a new government. Neither of these two situations is likely to stem the red tape for these governments. The massive debt of these two countries and the required funding to avoid their defaulting on their debt and the ramifications of such defaults is incomprehensible. While various numbers are bandied about between billions and trillions, that these countries and possibly others are unable to service their existing debt, why would adding to it help?
Any default especially for Italy, the third largest economy in the Eurozone behind Germany and France, would be disastrous and could prompt a domino effect globally. Even extending to the U.S. where the U.S. banks holding some of that debt are expected to take a 50% haircut. That would prompt a sharp cut in the income of the international banking sector reducing share prices exponentially. We are reluctant to try to analyze the actual negative effects of such a financial hit, but we can develop specific strategies to deal with any eventuality. Now for some actual information...
Interest Rates: The December Treasury bond closed at 14014, down 28/32nds on the expectation that the recent pronouncements by Italy and Greece will "miraculously" improve the current debt situation. We believe it is unlikely to change the fact that the combined debt of these two countries exceeds their national GDP and to either forgive 50% of that debt or provide funding will affect the eventual outcome…default or in the case of Greece…exclusion from the Euro. For the reasons indicated we continue to view the treasury market as a trading affair.
Stock Indices: The Dow Jones Industrials closed at 12,153.68, up 259.89 points tied directly to the reports of the new Greek government and the Italian senate vote to implement dramatic austerity programs. For the week the Dow gained 1.4%. The S&P 500 closed at 1263.85, up 24.15 on Friday posting a weekly gain of 0.9%. The tech heavy Nasdaq closed at 2678.75, up 53.60 for a weekly gain of 1%. The euphoria tied directly to the easing of the Euro zone debt crisis prompted by the two pronouncements by Italy and Greece has been responsible for the extremely volatile trading of late. We do not feel the efforts by Greece and Italy will have a prolonged positive effect on the Global financial crisis. We expect the citizenry of those two countries will protest the severe changes announced in order for those countries to secure debt accommodation. For that reason we continue to suggest strongly the implementation of hedging strategies for those investors with large equity portfolios.
Currencies: The U.S. dollar index closed at 7713.10, down 84.2 points tied almost exclusively to the reported changes by Greece and Italy. The December Euro closed at $1.3748, up 1.66c while other currencies also benefited from the above changes. The December Swiss Franc gained 78 points to $1.1102, the Japanese yen 78 points to 12964, the British Pound 156 points to 16056, the Canadian dollar 66 points to 9869, and the Australian dollar 159 points to 10244. We continue to look for wide price swings with no sign of stability returning to these markets. We favor the dollar but for well capitalized accounts only or through the purchase of calls.
Energies: December crude closed at $99.22 per barrel, up 1.44c tied to a bullishly construed inventory report by Energy Information Administration (EIA) indicating a reduction of 1.4 million barrel stockpile. December heating oil closed at 3.1905c per gallon up 3.94c but December gasoline closed 3c lower at $2.6087 per gallon after trading as high as $2.6590 during the session. Profittaking in front of the weekend was instrumental in Friday’s energy trading. Light trading volume on Veterans Day was also a factor in wide price swings. We continue to view crude oil as bearish but would not add to put positions until expected carryover buying on Monday is out of the way. We could see an attempt at the $100 per barrel "magic" number.
Copper: December copper closed at $3.46 per pound, up 9c on Friday but for the week was down 2.8%. Copper is being affected by both Chinese economic conditions and labor concerns in the producing countries. We have been negative for copper prices but now would stand aside.
Precious Metals: December gold closed at $1,788.10 per ounce, up $28.50 as gold once again reverts to the dollar/gold relationship of "strong dollar, weak gold, weak dollar,strong gold" an historic relationship sometimes abandoned when opposing criteria is in place. For the week gold advanced 1.8%. The recent weakness has prompted the re-emergence of buyers for the precious metal. Concern also was voiced over the reports of Iran’s possible expansion of its nuclear program to include weapons. December silver closed at $34.68 per ounce, up 58c and rose 1.8% for the week. Our choice, based on percentage possibilities, continues to favor silver over gold. January platinum closed at $1,646.70, up $19.40 gaining 1.1% for the week tied to the weak dollar. December palladium gained $15 per ounce to close at $662.80 also gaining 1.1% for the week. Our preference is palladium over platinum whereas the daily gains in palladium in an up market usually exceed that of platinum. On Friday Palladium gained 2.3% against the 1.2% gain for platinum.
Next page: A look at grains