The last trading day of the year went out with a whimper. Most brokers and traders had started leaving for the holiday weekend early in the day leaving young brokers to clean up whatever needed to close out a lack-lustre year. The markets we watch spent the last day of 2011 in a holding pattern with minor corrections and position squaring. We had anticipated heavy buying and window dressing by the funds both commodity and equity, but none materialized of any significance. I personally am glad to kiss 2011 goodbye and hope for a better 2012 for everyone.
Unfortunately, we are starting to see the winds of war developing with Iran threatening to close the Straits of Hormuz where 20% of the world’s oil flow through. The new leader of North Korea remains an unknown, but expect him to carry on in the tradition of his father. Another carry forward concern is the global recession and debt crisis where we see no immediate solution to the problems of Europe and ultimately what will carryover globally.
Concern over the slowing Chinese economy and the global debt crisis was a main factor during the year and will continue into the new year.We will have to see what develops but in the meantime we wish everyone a peaceful but exciting year. Now for some actual information…
Interest Rates: March Treasury bonds closed at 14426, up 10/32nds closing out the best year since 2008 when another financial crisis prompted the flight to the safety of treasuries. In 2010 Treasury bonds posted at 5.8% price gain with 2011 now showing a closing gain for the year of 9.66%. The ongoing global debt crisis, and in our view recession could easily continue into 2012. We view the treasure market as a trading affair with a bullish bias. However, after the sharp price gains and ten year yields below 2%, we should see a correction. We would await the Federal Reserves next statement before doing anything but an expectation of continued buying of long dated bonds to stimulate the economy is not out of the question.
Stock Indices: For the year the Dow managed a gain of 5.53%, the S&P 500 closed flat, unchanged for the year, the Nasdaq lost 1.8%, and the Russell 2000 index lost 5.45%. On Friday the Dow closed at 12217.56, down 69.48 while the S&P 500 lost 5.42 points to close at 1257.60. The Nasdaq closed at 2605.15, down 8.59. I was surprised by the "inaction" by the funds considering the expected "window dressing" for the final quarter of the year and the year end never materialized. Funds usually try to "beef" up prices to show a good statement to investors but failed to do so in the final hours of the year. We suspect they had already used up their "mad money" excesses and didn’t want to drain their cash reserves totally. We remain negative for equities and again, as usual for us, we suggest strongly the implementation of hedging strategies which we can assist with developing for holders of large equity positions.
Currencies: March U.S. dollar index closed at 8052.2 down 38.9 points on a year end correction after recent strength. For 2011 the dollar index gained against a basket of six currencies 1.6% and for 2010 it gained 1.5%. The debt crisis engulfing Europe prompted the move to the dollar. We expect similar performance until a resolution of the Eurozone debt crisis can emerge in perpetuity. We continue to expect some countries will be forced out of the Euro if in fact the Euro can survive at all.
Energies: February crude oil closed at $98.83 per barrel, down 82c but for the year gained 8%. Global demand along with supply concerns continue to influence the energy markets. We feel crude oil is overpriced at anywhere near $100 per barrel and would institute new put positions for a move, once again, down to the $75 level for crude.
Copper: March copper closed at $3.43 per pound, up 6c on end of year shortcovering and tied to positively construed economic data. Construction and autos the main source of copper demand and recent weakness was tied to lower than expected Chinese economic growth reported by the Organization for economic Cooperation and Development projection in late November of a contraction in manufacturing. We feel copper is overpriced but due to the high margin requirements would only entertain option purchases for retail clients. Our overall expectation is for lower prices somewhere around $2.75-3.00. Global economic development our main source of contention.
Precious Metals: February gold closed at $1,566.80 on Friday, up 1.7% and for the year gained 10%. However from its September high gold has declined 20% and remains unstable as relates to demand. Supply is a known factor but demand fluctuates with global economic news where currencies play a major role in pricing. We would avoid new purchases. March silver closed at $27.87 per ounce, up 55.5c but for the year lost 9.8%. We would prefer silver to gold at whatever point we see a change in sentiment towards precious metals. July platinum closed at $1,409.40 per ounce, up 3.81 while March palladium gained $32.05 per ounce to close at $655.80 per ounce. Once again platinum gained 2.78% while palladium managed a gain of 5.14%. Our ongoing preference of palladium over platinum on a spread basis remains intact.
Next page: Grans, meats and softs
Grains and Oilseeds: March corn closed at $6.46 ½, per bushel, up 8 1/2c on concerns that dry weather in the South American growing areas could damage crops. Even with the strong dollar, preference for U.S. grain prevails due to the detrimental weather patterns in other growing countries. Stay long corn. March wheat closed at $6.52 ¾ per bushel, up 7 1/2c for the same basic reasons as for corn. We like wheat from here basis the spread between corn and wheat where wheat should, I repeat, should demand a premium to corn. March soybans closed at $12.07 ¾ per bushel, up 10 3/4c on concern of supply shortages but slower economic growth could keep pressure on beans. However, we favor the long side of soybeans from here but would use stop protection for futures or purchase call options for the March delivery.
Meats: February cattle closed at $1.21450 per pound, down 9c on long liquidation after cattle have rallied nearly 12% on reported herd shrinkage. We like cattle but would use stop protection for any new purchases. February hogs closed at 84.3c per pound, up 32 points on shortcovering and new buying pushing prices to the highest level since December 14th. Cash trade quiet with higher than normal weights having put pressure on prices recently. Some terminal prices gained with packer margins positive. We still do not like hogs but would avoid any short positions due to the volatility. according to industry estimates.
Coffee, Sugar and Cocoa: March coffee closed at $2.2685 per pound, up 2.6c on shortcovering on expected increase in demand and supply concerns. We like coffee but new purchases should include stop protection. March cocoa closed at $2109 per tonne, down $21 on long liquidation and profittaking. We like cocoa from here for a potential move to the $2300-2350 level tied to output concerns from Ivory Coast after reports of increased supply from Ivory Coast earlier. March sugar closed at 23.3c per pound, down 21 points on profittaking in a narrow range. Output from Brazil has declined steadily and that prompted short covering earlier but prices remain in a narrow range with our expectation of a breakout to the upper end of the range. We like sugar for a move to the 24.50 to 25c level. Use stop protection.
Cotton: March cotton closed at 91.8c per pound up 17 points on shortcovering after heavy selling in previous months. Cotton has lost 37% during 2011 and we could see support between 85-90c per pound. We would buy cotton in that range without stop protection. Otherwise buy call options.
John L. Caiazzo