The appearance of an improving global economy, expectation that Europe has reached tentative agreement for dealing with its debt crisis, and a positive fourth quarter GDP report from China provided the impetus for improved commodity activity. Trading late in the week was dominated by expectations that the weekend talks between Greece and the IMF would prove beneficial and OPEC’s increase of its 2012 forecast for global growth and oil demand also provided fodder for constructive market action.
Unfortunately, as in the case of Greece and other countries experiencing a severe debt crisis, we do not subscribe to the proposition that the global picture is brightening. As we have stated in numerous commentaries the original concept of a common currency for 17 countries each with its own economic composition made no sense in the beginning, and we fully expect the Euro to unravel in the future by either one or more countries being expelled.
On Friday U.S. regulators closed banks in Florida and Georgia, the first such closures in the near year. Ninety-two banks collapsed in 2011 but less than the comparable period in 2010 when 157 banks were closed. We remain concerned that the high U.S. unemployment figure will continue to be a drain on Federal government income and reserves through lower collected taxes. Any decline in the first time unemployment figures such as on Thursday only reflect the inability for companies to lay off workers without shutting their doors. A condition I have been commenting on for some time. The lower number therefore is not a sign of a recovery in the labor situation. Now for some actual information that might assist my readers in making the right choices...
Interest Rates: March U.S. Treasury bonds closed at $141 28/32nds down 30/32nds tied to various reports of economic gains in the U.S. and expectations of a Greek announcement of an agreement with its creditors on acceptance of losses. The U.S. data included sales of existing home sales rose 5% in December. However, there was no mention of price declines and we view the sales as ‘bargain hunting" for foreclosed homes, not a positive in our opinion. The gains in equity prices also a negative for bonds as money once gain "travelled" from the relative safety of treasury instruments to the more risky equity markets. "Money" has been making that trip back and forth now for some time and we could see, based on any failure to resolve the European debt crisis, another "trip" in the near future. We continue to view treasury markets as in a trading pattern and would not assume any new positions although we had suggested recently the purchase of put options on bonds. For now we are offering option spread trading suggestions to our clients.
Stock Indices: The Dow Jones industrials closed at 12,720.48, up 96.50 on positive earnings results from such major companies as Microsoft Corp. and IBM. For the week the Dow managed a gain of 2.4%. Disappointment over Google results were a drag on the Nasdaq Friday which closed at 2786.70, down 1.63 points. For the week however, it gained 2.8%. The S&P 500 closed at 1315.38, up only 0.88 points but for the week gained 2%. A positive start to earnings season, the expectation of a resolution to the Greek and others debt crisis, GDP news from China, and generally "good news" provided the backdrop for expectation of a global economic expansion and resulted in positive market action. However, the overall volume, which I regard as an indication that not all market "participants" are ready to "jump in" has to improve before I will concede "defeat" in my assumption of a continued global recession. My warnings that the equity markets are on the precipice of a "black hole" remains in effect and holders of large equity portfolios should seriously consider implementing hedging strategies either through the use of futures contracts or options to afford a level of protection against another financial meltdown. We can provide the necessary "formulae" to effect that result.
Currencies: The March U.S. dollar index closed at 8035.5, down 5 points on Friday after losing against the Euro during the week. The Euro, after rallying nearly 300 points during the week tied to ongoing discussions with the IMF and others to resolve the Greek debt crisis, gave back 12 ticks on Friday to close at $1.2925. Profittaking also saw the Swiss Franc loss 16 points to 10699, the March Canadian dollar 21 points to 9850 but gains were achieved in the Japanese yen of 31 oints to 12998, the British pound 72 points to 15532, and the Australian dollar 76 points to 10409. As we have indicated in prior commentaries we view the currency markets as susceptible to sporadic reports and not conducive to position taking although we still suggest holding put positions in the Euro and at current levels near $1.30 suggest adding to positions. The ongoing concern that Greece will not be able to manage its proposed austerity programs in order to comply with the bailout provision lends credibility to our negative opinion for the Euro.
Energies: February crude oil closed at $98.46 per barrel, down $1.93 on reports of slower Chinese manufacturing could extend to Europe resulting in a decline in demand for energy products. We continue to favor the purchase of put options for a potential price decline to the $75 per barrel level.
Copper: March copper closed at $3.7450 per pound, down 5.55c on Friday on profittaking after three days of higher prices. The weakening dollar and a resurgence of positive economic data from China. China is the world’s largest consumer of copper and when business reportedly slowed copper prices declined. China has all but frozen business activity on inflation concerns and that spectre could once again raise negativity towards copper. The better than expect U.S. data this week prompted the buying but our expectation of an ongoing recessionary trend remains in effect. Buy put options on any further price gains. Option purchases limit the risk of loss to the amount paid for premium. Outright short positions are not recommended at this time.
Next page: What's up with gold?
Precious Metals: February gold closed at $1,664 per ounce, up $9.50 on Friday on the weak dollar in which it is denominated and technicals where gold was considered oversold. The "positive" news on European debt and reports that a solution of sorts may be in the works also relieved the previous selling pressure on precious metals. The expectation of a resolution for the debt crisis of Greece and others in the Eurozone is premature in my opinion. The requirements for bailout such as austerity programs cannot, in my opinion, be enough to convince the IMF, Germany, France, and even the U.S. to accept losses on their bond holdings to the extent, during some talks, of an over 50% "haircut". A simple explanation is that if Greece and others cannot service their current debt and their debt is in excess of their GDP, what expectation could their be for the ability to service the "revised" debt and the addition of still new debt? March silver closed at $31.675 per ounce, up $1.17 and for the week gained 7.3%. Silver remains our only choice for those anxious to buy precious metals. I personally would limit purchases to small amounts or through the use of call options. However, we could still see reluctance to add to existing precious metals positions. The bottom line is simply, if the "salvation" of the Euro fails, the dollar will rally and all dollar denominated commodities, especially precious metals and foreign currencies, will decline precipitously. April platinum gained $14.30 per ounce to close at $1,532.30 while March palladium lost $2.70 per ounce to close at $675.70 per ounce. Our preference here is the purchase of palladium against the sale of platinum as a spread.
Grains and Oilseeds: March corn closed at $6.11 ½, per bushel, up 5 1/2c on shortcovering after recent decline. The International Grains Council said global productions would increase to a record. We prefer the sidelines in corn for now. March wheat managed a gain of 4 3/4c to close at $6.10 ½. I don’t ever recall wheat trading at the same price of corn in my over 45 years experience. My preference here, in order to "recapture" the traditional spread between wheat and corn would be the long wheat, short corn spread. Wheat lost 7.1% for the year and I like that spread suggestion. However, that would apply only to well capitalized accounts. March Soybeans closed at $11.87 per bushel, down 10c and has fallen below our expected support level. Stay out for now but hold any call positions.
Meats: February cattle closed at $1.2455 per pound, up 3.5c on improved U.S. and global economic news and to the highest level since early December. We continue to favor the long side of cattle as feedlot placements were reportedly down 6% in December from the prior year. The possibility of supply shortages going forward could continue to support prices. February hogs closed at 85.32.5c per pound, down 75 points tied to short term cash market fundamentals. We prefer the sidelines in hogs.
Coffee, Sugar and Cocoa: March coffee closed at $2.25 per pound, down 1.65c on profittaking after recent strength was tied to lower coffee inventories in Brazil, the world’s largest coffee producer. Expectations that coffee stocks at various Brazilian cooperatives could drop by at least 26 %, the lowest level since 2002, according to the President of the CNC. However, production is expected to be between 49 and 52 million bags this year, up from last years 43.5 million bags. We could expect wide price swings as additional supply/demand fundamentals emerge. Treat coffee as a trading affair with any new positions accompanied by stop protection. March cocoa closed at $2,278 per tonne, down $42 tied to lower North American grindings, an indication of reduced demand. We could see another attempt at the $24-2,500 resistance level but stops should accompany any new purchases. The use of options is recommended rather than outright futures. March sugar closed at 24.84c per pound, up 23 points and closer to our 25c per pound intermediate goal. We prefer taking some profits "off the table" here but any decline in price could bring in new buying. Sugar lost 27% in 2011 but recent expectations for production declines in Brazil and India could prompt higher prices. We would hold long call positions but hold off on any new purchases for now.
OJ: March Orange juice closed at $2.1065 per pound of frozen concentrate, up another 10c after recent disclosures that some Brazilian oranges included in the orange juice from Florida contained a fungicide and some producers have now precluded the Brazilian oranges creating somewhat of shortage. As recent as 2009 federally approved oranges containing the fungicide had been approved by the federal government as "safe" for consumption. Ships carrying the orange juice imports are being held up at U.S. ports while FDA officials test for traces of that fungicide. OJ prices have "skyrocketed" and the public is avoiding juice that is not limited to Florida oranges. We could see further price increases but at this point we could also see demand for juice at the retail level decline so we would purchase put options. Markets tend to be overdone in one direction or another after reports emerge affecting fundamentals.
Cotton: March cotton closed at 98.6c per pound, on Friday up 43 points on pre-weekend shortcovering after recent declines. China remains a major factor in the price direction for cotton and concern that the "slowdown" in economic growth could impact their buying of cotton has weighed heavily on prices. We like cotton at below $1.00 per pound for an eventual move, based on our expectation for improved demand to the $1.20-$1.25 level. However we would only participate in this market through the use of call options.
John L. Caiazzo