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
Grains and Oilseeds: December corn closed at $6.38 ½, per bushel, down 7c with many commodities under pressure from the ongoing global economic uncertainty which has weighed on Corn, Wheat and soybeans of late. December wheat closed at $6.16 ¾, per bushel down 3 1/4c while soybeans managed a gain of 8 1/2c on short covering after recent losses tied to USDA reports to close at $11,856 per bushel. We continue to favor "food" with long positions in corn and soybeans.
Meats: December cattle closed at $1.2055 per pound, down 1.05c tied to weak beef demand outlook. The holiday season usually emphasis traditional items such as turkey and ham. We still like cattle but would not add to long positions for now. December hogs closed at 86.45c per pound, up 7c on Friday following gains on Thursday. Strong export demand even against increased supplies prompted the shortcovering and new buying Thursday and Friday. We continue to view hogs as bearish although the holiday season usually increases demand for ham. We would hold off any new positions in hogs.
Coffee, Sugar and Cocoa: December coffee closed at $2.3395 per pound, up 3.95c for the first weekly gain in three. The International Coffee Organization reduced its outlook for world output in the season that commenced in October to 127.4 million bags from their previous forecast of 129.5 million bags in September. Rains were damaging to crops in Latin america and Indonesia. We could see additional buying but any purchases of the March contract should be followed with stops. December cocoa closed at $2489 per tonne, down $15 and made new 2 ½ year lows on Friday as stops were run. Technicals accounting for the selling even against a weak dollar which is usually supportive of prices. We prefer the sidelines. March sugar closed at 25c per pound, down 39 points to a one month low on long liquidation until some clarification of Indian exports and Russian weather can be determined. Reports that India may allow the export of between 500,000 and a million tons of sugar but no confirmation has been received so we would stand aside and just hold current short positions.
Cotton: December cotton remains under pressure with the December contract losing another 26 points to close at 99.24c per pound. Profittaking after Thursdays gains the main feature on Friday. The ongoing global economic outlook weighs on many consumer commodities and the huge Chinese exports reported late Thursday also a factor in the ongoing weakness. We like cotton but would not add to current long positions for now.
John L. Caiazzo