The continuing angst related to the euro with Italy now in the forefront of concerns along with the failure of the U.S. Congress’ Super committee to come to an agreement was also a negative for markets this week. Investors had nothing to be thankful for coming into the Thanksgiving holiday and the quiet trading on Friday as traders headed for the hills to get away.
We had no expectation of a resolution to the debt crisis in the U.S. and continue to warn our subscribers of a potential collapse of the euro. While Greece debt has been at the forefront of concerns in the media, Italy, the third largest economy after Germany and France in the Euro is more problematic witness the high yield necessary to borrow funds. We have persisted in our warning that the basis for the euro was faulty since we could not, in our own minds, find the justification for a single currency for 17 countries with varying economies. That concern has now manifested itself in the over 7.2% yield necessary for Italian bond offerings.
Some analysts, other than myself, feel that an Italian debt default could mean the end of the euro with member countries opting to re-establish their own currency. Expectations that China would participate in the bailout were dampened when economic data from China was disappointing. We continue to believe that a global meltdown cannot be avoided and the ongoing debt crisis in the U.S. and abroad will continue to escalate. The global labor situation is fomenting frustration and prompting protests internationally. We cannot emphasize enough the necessity to develop hedging strategies for asset preservation. Now for some actual information...
Interest Rates: December Treasury Bonds closed at 14327, down 1 16/32nds on profittaking in front of the weekend and on light holiday volume. Recent strength prompted by a shift from equities to the relative safety of U.S. treasuries on continuing concern over the spreading European debt crisis. We continue to view treasuries as a trading affair.
Stock Indices: The Dow Jones index closed at11,231.78, down 25.77 and for the week lost 4.8%. The S&P 500 closed at 1158.67, down 3.12 and for the week posted a 4.7% loss. The tech heavy Nasdaq closed at 2441.51, down 18.57 and for the week lost 5.1%. We have been suggesting for some time that the U.S. labor situation coupled with the European debt crisis and our own deficit problem would exacerbate the deteriorating U.S. economic situation and push the U.S. back into recession. The persistent pundit view that good corporate earnings are reflecting a "strong economy" cannot be justified with the ongoing labor situation. Any improvement of the weekly unemployment figure is NOT reflective of an improved labor situation, it merely indicates that fewer workers are available to lay off with "shutting the corporate doors", a warning I have reiterated often. The global debt crisis is expanding to include additional countries and I doubt that France and Germany can "cover those debts" to avoid defaults by some of the Euro members. I look for a total collapse of the Euro with individual countries starting to print their own currency once again. Implement hedging strategies for those with large equity portfolios.
Currencies: The December U.S. dollar index closed at 7983.10, up 48 points and continues to gain on the Euro currencies. The December Euro lost 89 points to close at $1.3239 with the March losing 87 points to close at $1.3299. March Swiss Franc lost 107 points to close at 10780, British pound for March lost 72 points to close at 15419, Canadian dollar lost 12 points to 9508 and the Japanese yen for march closed at 12911, down 59 points. Only the Australian dollar managed a 24 point gain to close at 9585. Recent meetings of Europes three largest economies offered no short term solution to the increasingly worsening European debt crisis. Stay with the dollar for now but currency trading should be limited to well capitalized accounts.
Energies: January crude oil closed at $96.77 per barrel, up 60c staying positive even as U.S. equities, a barometer for crude oil based on expectations of increased demand continues to decline. We continue to feel a "failing" attempt to resolve the U.S. deficit situation will weigh on crude oil as well as equities. We remain bearish for energy products.
Copper: December copper closed at $3.27 per pound on light pre-weekend trading. Copper remains under pressure tied to the U.S. and global economic concerns. We are on the sidelines after having been bearish for some time. Stay out for now.
Precious Metals: December gold closed at $1,685.70, down $10.20 against the strong dollar in which it is denominated. A return to normalcy as the relationship between gold and dollars returns. "dollar up, gold down, dollar down, gold up". Gold and silver remain under pressure as concerns over the Euro debt crisis pushes investors to the dollar. We see no change in sentiment for the near term and expect a worsening EuroZone situation with a possible "collapse" of the Euro. December silver closed at $31.014 per ounce, down 87c. January platinum lost $25.20 per ounce to close at $1,533.10 while December palladium lost $19.75 per ounce to close at $570.10. Our recent spread recommendation long palladium, short platinum remains intact but would not add to those spreads for now.
Grains and Oilseeds: March corn closed at $5.90 per bushel, down 5 1/2c and continues under pressure with no fresh fundamentals and margin call selling caused by other commodities. An expected record corn crop also a main factor in the recent weakness. March wheat closed at $5.89 per bushel, down 5 1/4c on weak demand and adequate supplies as well as concern that European countries debt crisis will curtail demand further. Another factor is the buying by China which has dissipated due to their own economic problems. March Soybeans broke technical supports and lost 15 3/4c per bushel to close at $11.15 ¾. With no support or new fundamentals, adequate supplies, favorable weather condition in various growing areas we would hold current longs but not add to losing positions.
Meats: February cattle closed at $1.2230 per pound, down 45 points after the recent runup which was prompted by a major U.S. broker, Goldman Sachs, raising it’s forecast for grain futures and cattle. They indicated a slowdown in number of animals for slaughter but with an increase in demand. We continue to favor the long side of cattle. February hogs closed at 91.8c per pound up 35 points tied to lower feed costs and higher pork prices. We favor the short side of hogs but would not add to short positions for now.
Next page: What's up with softs?
Coffee, Sugar and Cocoa: March coffee closed at $2.3255 per pound, down 2.85c after recent strength prompted by Colombia downgrading output estimates and on concern over La Nina weather patterns. We prefer the sidelines for now. March cocoa closed at $2380 per tonne, down $24 in sideways trading. Reports of an Ivory Coast state controlled cocoa body which had prompted selling may have been an extreme reaction. We continue to favor the sidelines however. Our preference would be for the long side but only for well capitalized accounts. March sugar clowsed at 22.9c per pound, down 19 points and remains on our "bearish sentiment" list.
Cotton: March cotton closed at 90.06c per pound, down 85 points on continued selling pressure tied to possible economic problems in China, a usual buyer. We prefer the sidelines until some further clarification of supplies, demand, and the global economic situation.
John L. Caiazzo