Concerns over European debt continues to accelerate with the latest government credit downgrade by Moodys Investors Services on Friday of Belgium. On Thursday, the first time unemployment number declined to 363,000, and the market briefly approved.
The reality is that as the number of first time unemployed declines, it only means there are fewer people available to lay off by corporations without closing their doors. It is not a function of an improving labor condition. The current Eurozone debt crisis will not, in our opinion, improve based on promises by the various debtor countries to institute austerity programs especially with the populace revolting and protesting any changes in their individual life styles. Increases in retirement age the foremost complaint but layoffs, reduction in benefits and other stipulations in order to obtain additional funding also add fuel to the fire on dissatisfaction.
I doubt adding to debt of countries not able to service their current debt makes any sense whatsoever. Default would force those countries to keep spending within their means. An economic slowdown in the Eurozone economy will only exacerbate the situation. Now for some actual information.
Interest Rates: March Treasury bonds continued their rally this week with yields declining. Capital once again as in times of economic angst moved from risk capital such as equities and precious metals to the relative safe haven of treasuries. March bonds closed at 14509, up 1 and 4/32nds on Friday adding to previous gains. The shift of capital prompted by the negativity posed by the ongoing European debt crisis and Friday gain attributable to Moodys Investor Services downgrading of yet another of the Euro Countries, in this case Belgium. We continue to suggest Treasury bonds are a trading affair and can move decisively on any news.
Stock Indices: The Dow Jones Industrials closed at 11866.39, down 2.42 points ending the week down 2.6%. The slide began in earnest on Monday and continued with only a single up day tied to the improved employment numbers. We have been warning our readers that the ongoing European debt crisis is not contained regardless of the rhetorical comments emanating from various factions. The downgrade of Belgium’s debt by Moody’s Investor Services emphasized the fact that there is no resolution albeit attempted by Germany and France and the IMF and European Central Bank. I view any attempt to resolve this issue is tantamount to "throwing money down a bottomless pit". The S&P 500 closed at 1219.766, up 3.91 but for the week lost 2.8%. The Nasdaq closed at 2555.33, up 14.32 points but for the week lost 3.5%. We continue to aggressively caution investors with large portfolios to implement hedging strategies. We continue to see a "black hole" under the global equity markets.
Currencies: The March U.S. dollar index closed at 80.66.5 on Friday, down 32.7 points but managed a gain on the week as the perception that the U.S. dollar is a "safe haven" for European investors. We have favored the dollar for a while now and continue to feel the dollar, with all its problems tied to the U.S. economy, is still the better value going forward. The March Euro managed a slight gain of 12 ticks to 13037, The Swiss franc 36 ticks to 10691, the Yen 3 ticks to 12870 and the Australian dollar 43 points to 9858. Losers included the British pound 4 points to 15485 and the March Canadian dollar 23 points to 9612.
Energies: January crude oil closed at $93.33 per barrel, down another 34 cents and for the week lost nearly 6%. A perceived anemic global recovery primarily responsible with anticipated demand decline. We continue to favor the short side of crude through the purchase of put options rather than outright sales of futures due to the potential volatility and geopolitical concerns.
Copper: March copper closed at $3.35 per pound, up 8c for a gain on Friday of 1.9%. However for the week, following equities, copper lost 6.4%. We remain bearish for copper and most industrial commodities based on our assumption of an ongoing global recession. The weakening demand from China has caused copper prices to decline 27% on an annual basis.
Precious Metals: February gold closed at $1,597.90 per ounce, up $20.70 on Friday but for the week plunged 7.3%. Long liquidation tied to the strength in the dollar against other currencies a major reason for the selling. Equity margin calls also left investors with no where to turn but to liquidate hard asset classes in order to be able to hold other positions. Gold has been regarded as a "safe haven" in times of stress or anxiety but with the ongoing European debt crisis, the transfer of assets was to the U.S. dollar rather than precious metals. March silver closed at $29.73 per ounce, up 45.65c but sharply lower for the week. January platinum closed at $1,421.90, up $14.9 while March palladium gained $2.80 to close at $623.45 per ounce. We could see shortcovering coming into the new week but we continue to prefer the sidelines in metals.
Next page: What's up with grains?
Grains and Oilseeds: March corn closed at $5.83 per bushel, up 4c on concerns that poor weather may reduce production. For the week however, corn lost 1.9%. We continue to favor the long side of corn but only on a scale down basis. March wheat closed at $5.83 ¾ per bushel, up 4 1/2c also tied to hot dry conditions as well as the weak dollar on Friday. We prefer the sidelines in wheat. March soybeans closed at $11.39 ½ per bushel, up 18 1/4c also tied to concerns that adverse weather could reduce yields in Brazil and Argentina and create new demand for U.S. supplies. We continue to favor the long side of soybeans.
Meats: February cattle closed at $1.1850 per pound, down 65 points on shortcovering after recent weakness and tied to the weak dollar on Friday. Demand declines also a factor on the weakness with cattle futures losing 0.2% for the week after losing 3.9% the prior week. We had liked the long side of cattle but would not add to existing positions until fundamentals improve. February hogs closed at 83.15c per pound, down 2.275c also tied to pre holiday slack demand. We prefer the sidelines.
Coffee, Sugar and Cocoa: March coffee closed at $2.1520 per pound, down 2.55c and settled at the one year low tied to inventory gains. We prefer the sidelines but with an eye to the long side on any further weakness. March cocoa closed at $2,100 per tonne, down $81 on profittaking but managed a 1.6% gain for the week. We could see further buying and like cocoa for a move, basis the March contract, to the $2,300 $2,350 level. March sugar closed at 23.09c per pound, up 34 points or 1.5% for the week. However sugar prices have lost 28% for 2011. Selling was met with light trade buying at the days lows. Brazilian Sugar production was reduced by poor weather but other growing areas made up for it. China had sold much of its sugar at its auction during the week but may have to import sugar to maintain price controls. We could see renewed interest in sugar tied to light domestic supplies but we prefer the sidelines. Hold put positions.
Cotton: March cotton closed at 86.29c per pound, unchanged but disappointing export sales reported by the USDA could bring selling pressure during the week. Bad weather forecast for the U.S. along with India offering cotton at lower prices could continue to pressure prices. We prefer the sidelines after having recommended the short side for some time.
John L. Caiazzo