Various reports, governmental data and statements by dignitaries are having a profound impact on global markets. The U.S. report on Gross Domestic Production, for instance, provided an insight into possible future economic development. The report showed GDP growing at a 2.8% pace in the fourth quarter, which was up from the 1.8% in the third quarter according to the Commerce Department on Friday. However, economists had predicted an increase of 3.0% and that was a negative for markets.
On the other hand, the January reading by the University of Michigan Thomson Reuters gauge of consumer sentiment was 75.0 against the preliminary reading of 74.0 and against the December 69.9 reading. Economists in that case had expected a final reading of 74.3. I will repeat what I had said in an earlier commentary: "Better to keep ones mouth shut and be considered ignorant that to open it and remove all doubt." We see no immediate improvement in the European debt crisis even as comments by various government heads continue to suggest a resolution is at hand.
I cannot conceive of a solution to a problem where debt cannot be serviced in its current form so additional funds and accommodations are considered. That formula cannot possibly, in my not so humble opinion, work. Now for some actual information to assist my readers in making market determinations and trades…
Interest Rates: March U.S. treasury bonds closed at 143 14/32nds, up 19/32nds as funds continually find their way from equities to the relative safety of treasuries. The Federal Reserve Chairman’s announcement that interest rates would remain low through the end of 2014 was, in my opinion, a big mistake. The negative impact on the U.S. dollar may in some cases provide an attraction for foreigners to purchase U.S. goods and services, but in the overall scheme of things, could hurt the U.S. in the long run. The lower U.S. interest rates "allows" the government to increase borrowing, replacing the retiring long term high interest debt with low interest debt and opening up the "borrowing" to increase the deficit thereby "hiding" the true intention of the government i.e. continued rampant spending. Can no one see what this could mean for the future? I continue to view the Treasury bond market as a trading affair but the current low yields and high prices is providing an opportunity I will pursue for my clients.
Stock Indices: The Dow Jones Industrials closed at 12,660.46, down 74.17 on Friday as investors looked to the Treasury market and precious metals as a hedge against riskier equities. For the week the Dow lost 0.5%, its first weekly loss in four weeks. The S&P 500 closed at 1316.33, down 2.10 and for the week held onto a 0.1% gain. The Nasdaq closed at 2816.55, up 11.27 and for the week, with the help of earnings from tech companies, gained 1.1%. We continue to warn that current economic data as well as global news remains questionable and markets do not like "mystery". We would once again recommend the implementation of strategic hedging programs to offset what we see is an inevitable "meltdown" similar to that of last August. We can help develop such programs for holders of large equity positions.
Currencies: The U.S. dollar index of a basket of currencies closed at 7893.5 on Friday basis the March contract, down 57.8 points as the Fed Chairman announced extremely low interest rates through 2014, a negative for dollar investment. The report by the U.S. commerce department of a slower pace of economic growth was also a negative for the dollar. A statement by a top European Union official that Greece and private creditors are "near an agreement on voluntary write-downs on Greek government debt" was near also was a negative for the dollar and positive for Euro currencies. The March Euro gained 97 points to $1.3207, the Swiss Franc 83 points to $1.0959, the March Japanese yen 132 points to 13044, the March British Pound 27 points to $1.5716, the Canadian dollar 2 points to 9976 and the Aussie dollar 28 points to $1.0593. This trend and the incorrect assumption, in my opinion, of a resolution to not only the Greek debt problem but others within the EuroZone who are also experiencing a crisis, cannot be sustained. On Friday, Fitch, the analytic survey, downgraded the sovereign credit of Italy, Spain, Belgium, Cyprus and Slovenia, and further downgrades are possible in the next two years. I like the dollar from here and on any further declines, since there will be an "upset" in the EuroZone whether provided by participating countries leaving the Euro, or by defaults within the Euro.
Energies: March crude oil closed at $99.56 per barrel, down 14c tied to disappointing U.S. GDP data and concern that demand for energy products could decline. However, gasoline managed to close at its highest settlement price since August with the March contract gaining 7.55c at $2.9263 per gallon. The weak dollar also provided support to energy products as well as continued talk of an Iranian oil embargo. We continue to prefer the short side of crude through the purchase of put options due to the "explosive" nature of the market and the question of geopolitical pronouncements.
Copper: March copper closed at $3.89 per pound on Friday, down 2c but gained for the week tied to the weak dollar and continued reports of Chinese buying. LME copper stocks declined overnight by 2,450 tons to 335,425 tons. We continue to favor the sidelines but our long term view remains negative since we do not expect the U.S. economy to improve without a complete reversal in the labor situation, a condition we do not see occurring for some time. The announcement by Fed Chairman Bernanke of interest rates remaining low through 2014 would seem to indicate he also does not see economic growth due to the labor and housing situations. Copper gained 4% for the week and we feel it is overdone but the dollar remains the basis for price moves as well as supply/demand fundamentals. We favor the short side of copper but for retail clients, only through the purchase of put options.
Precious Metals: February gold closed at $1737.60 per ounce up $10.90 thanks to the surprise announcement by Fed Chairman Bernanke that interest rates will remain extremely low through 2014. The pressured the U.S. dollar and provided the impetus for buying of dollar denominated commodities such as precious metals. Unfortunately, due to supply pressures soybeans and wheat failed to participate in the commodity rally. March silver closed at $33.965 per ounce, up $2.22 and remains our favorite of the two metals. Once again we suggest "throwing away" your gold charts and chart the U.S. dollar for direction of precious metals. Interest rates of course, the source of dollar directional moves. April platinum closed at $1,623 per ounce, up $6.20 while March palladium closed at $690.15 per ounce, down $4.30. For the week platinum gained 5.9% against a 2.1% gain for palladium. We would use this as an opportunity to add to long palladium/short platinum spreads.
Grains and Oilseeds: March soybeans closed at $12.19 per bushel, down 3 3/4c tied to beneficial rains in Brazil and Argentina. However with rains close to the start of the harvest the wet fields could be viewed as bullish for beans. We would "nibble" on the long side or buy some calls in soybeans but for the November contract. March wheat closed at $6.47 ¼ per bushel, down 6 1/4c tied to lower sales reported. We continue to favor the long wheat/short corn spread. March corn closed at $6.41 ¾ per bushel, up 7 1/4c on a South Korean tend for 250,000 metric tons for May or June delivery. We think corn is overdone and prefer the short corn/long wheat spread as indicated above.
Next page: Livestock and softs analysis
Meats: February cattle closed at $1.2470 per pound, up 15 points and the highest closing price since early November. Indications that packers will have to pay up in the cash markets and tightening supplies of available feedlot cattle a positive factor for cattle. The weak dollar also a factor. We continue to favor the long side of cattle even as our recently stated goal of $1.25 is close to fruition. The trend remains positive for cattle. February hogs closed at 86.675 per pound, up 72.5 points to their highest price since early December but lower loin prices could pressure prices once the U.S. dollar stabilizes. We prefer the sidelines in hogs.
Coffee, Sugar and Cocoa: March coffee closed at $1.1760 per pound, down 2.10c on long liquidation even against the weak dollar. Higher expections for world coffee output and higher than expected production from Ethiopia pressured prices. We prefer the sidelines in coffee. March cocoa closed at $2176 per tonne, down $21.00 on long liquidation tied to slower European consumption figures. We are on the sidelines after having been bullish for cocoa. March sugar closed at 24.21c per pound, down 52 points on profittaking. Recent reports that E.D. & F. Man, a major factor in sugar had hired Continental Farmers Group to grow Ukrainian beet against other operators cutting production on concerns that prices are too high and looking for a correction. We could see continued pressure on sugar but any decline back to the 21-22c level could be a buying opportunity.
OJ: March orange juice closed at $2.1185 per pound of concentrate, up 5.25c and into new high ground. The ongoing concern that certain imported oranges contain pesticide may prompt shortages that cannot be made up by Florida prompting short covering and new buying. We continue to feel that the FDA, in assessing the lower levels of pesticide, may allow the continued importation of oranges but psychologically buyers of juice may continue to prefer only Florida origins. We do not expect the "hysteria" to continue and would look to buy put options on OJ.
Cotton: March cotton closed at 96c per pound, up 41 points and remains in a narrow range at recent lows. Recently reported slowing of cotton deliveries from India and possible hoarding by farmers could prompt new buying. We like the long side but only through call option purchases.
John L. Caiazzo