The last trading day of the first quarter saw a lot of position squaring and the usual window dressing by institutions wanting to show the right investments on their books. The only fly in the ointment was the possibility of China cutting back on commodity purchases, a warning that came from two of China’s most influential government think tanks. As the world’s number two economy, any such cutback would not bode well for producing countries, especially producers of construction materials and consumer goods. With China’s growth rate revised downward, some pressure on product demand ranging from energy, metals, food, cotton and other could be impacted.
We continue to suggest that a global recessionary trend prompted by a continuing U.S. labor condition as well as so called austerity programs instituted by some Eurozone countries and the ongoing debt crisis will hamper forward growth prospects. The season of preservation of wealth is upon us.
Now for some actual information…
Interest Rates: June Treasury bonds closed at 137 24/32nds, down 1 and 4/32nds or 0.81% pushing the yield on the 30 year bond up to 3.345%, up from the February 3.09%. The "improvement" in the economic outlook offset concerns for the European debt crisis. Less demand from Europe for the relative safety of U.S. treasuries another factor in the selloff Friday. We are close to our suggested low end of the 135-143 trading range and would await additional economic data before taking any action. Hold strangle spreads suggested last week. I added the June Treasury bond futures chart here.
Stock Indices: The Dow Jones industrials closed at 13212.04, up 66.22 posting the best first quarter gain in ten years. For the quarter the Dow managed a gain of 8%. The S&P 500 closed at 1408.47, up 5.19, for a gain of 12% for the quarter. The best performance was posted by the Nasdaq closing at 3091.57, down 3.79 on Friday but up 19% for the quarter. We attribute much of the gains to "window dressing" by the institutions where performance had been lacking in previous quarters. Weaker earnings not withstanding along with tepid economic data could result in a sharp correction early in the second quarter. Reports on U.S. manufacturing data for March on Monday and on Tuesday U.S. car sales, February factory orders, and the Federal Open Market Committee minutes could direct the trading until the Friday employment report. We suggest the implementation of hedging strategies once again to avoid "unwelcome" surprises that could affect portfolios. The June S&P contract chart follows.
Currencies: The June U.S. dollar index closed at 7911.5, down 24.2 on weakness after the Euro zone finance ministers agreed to raise their financial firewall to 700 billion euros ($934 billion) in order to try to contain the current debt crisis. We remain unconvinced of any resolution to the debt crisis without some defaults adding to the angst of investors and the public. The severe austerity programs that need to be instituted in order to comply by Greece and others, are not palatable to the public and cause additional rioting in some of the countries where the imposition of those programs are necessary. Currencies benefiting from the expectation of resolution are the Swiss Franc, 52 points to 11088, the Euro 47 points to 13339, the British Pound 64 points to 15988, the Canadian dollar 11 points to 10010, and the Australian dollar 1 tick to 10269. The Japanese yen lost 67 points to close at 12078. We continue to prefer the U.S. dollar.
Energies: May crude oil closed at $103.02 per barrel, up 24c on shortcovering after recent heavy losses but for the quarter gained 4.2%. For 2011 crude prices posted an 8.2% gain. A report in the Financial Times by Saudi Arabia’s oil minister indicating that the kingdom could increase production to offset high prices also added to recent selling pressure. We continue to feel adequate supplies will counter the "Iran" premium and prices could decline to our interim goal of $80 per barrel. Once again, timing is the big question as well as geopolitical concerns such as Iran’s nuclear ambitions leading to a possible Israeli attack on their facilities. May heating oil closed at $3.1723 per gallon, up 25 points. May gasoline closed at $3.3255 per gallon, down 1.42c. The big loser continues to be Natural gas with the May futures losing 29 points to close at $2.12 per MBTU. We remain cautious.
Copper: May copper closed at $3.83 per pound, up 3c and for the first quarter gained 11%. For all of 2011 however, copper lost 23%. We have been negative for copper for some time and with the possibility of reduced demand from China, we expect additional declines to around the $3.25-3.50 level.
Precious Metals: June gold closed at $1,671.90, up $17 per ounce on shortcovering in front of the weekend and tied to the Euro zone increase of the firewall meant to curb further debt crisis spreading. The weak dollar also a factor. We do not believe the increase in available bailout funds will have anything to do with solving the problem. I view it as tantamount to "throwing money down a well". Countries that cannot support current debt should not, in my opinion, be granted addition funding, nor should the banks be required to reduce indebtedness of those countries. Default, in my opinion, is the only remedy on which to form a base for countries to resolve their spending/earnings disparity. Gold managed to end the quarter up 6.7% after declining in the fourth quarter of 2011 by 3.4%. May silver closed at $32.48 per ounce, up 50c and for the quarter gained 16%. The full year 2011 posted a loss for silver of 9.8%. For the month of March silver lost 6%. We still prefer silver to gold for those who "insist" on owning precious metals. July platinum gained $15.80 to close at $1,644.10 while June palladium gained $9.55 to close at $654.10 per ounce.
Next page: Ag report
Grains and Oilseeds: May corn closed up 40c per bushel, to close at $6.44 as farm products all benefited from the USDA forecast that farmers would plant few acres for soybeans and lower than expected corn inventories. We prefer the sidelines in corn still preferring soybeans in this group. May wheat closed at $6.60 ¾ per bushel, up 48 1/4c on USDA report that farmers would plant a smaller than expected crop. May soybeans closed at $14.03 per bushel, up 47 1/2c also on that USDA report of a drop in U.S. soybean plantings. The USDA report caught shorts by surprise and prompted heavy shortcovering and new fund buying. We continue to prefer the long side of soybeans. We have preferred the long side of soybeans for some time and as you can see from the accompanying chart, our recommendations were correct and would have produced profits for our readers. Three dollars per bushel gain from January would have produced a $15,000 per contract profit for our readers.
Meats: June cattle closed at $1.1615 per pound, down 2.325c on profittaking after recent strength. Our goal of $1.25 per pound had been achieved and our suggestion to take profits was appropriate. Larger feedlots were a surprise to analysts and prompted long liquidation. We now look for further fundamentals but would hold long positions for now. "Barbecue season" fast approaching and demand usually increases around the Memorial day holiday weekend. In 2011 prices for cattle set a record high as retail demand rose.. This year increases in feedlot population could cause pressure as our expectation of a continued recessionary trend may reduce demand. July hogs closed at 91.65c per pound, up 1.10c Shortcovery in front of the weekend along with concern over commodity purchase demand from China. We prefer the sidelines in hogs.
Coffee, Cocoa and Sugar: May coffee closed at $1.8225 per pound, up 5.8c tied to concerns over Brazilian weather. Coffee prices sold off recently but on a technical basis the selling may be overdone. Expectations for surplus reductions and a continuing supply deficit from last year could prompt new buying in coffee. We like the long side from here but use stops. May cocoa closed at $2,221 per tonne, down $2.00 on profittaking after recent buying tied to a projected shortfall for the 2011-2012 supply. Expected demand could prompt new buying in cocoa. We like cocoa from here but use stops. May sugar closed at 24.68c per pound, up 8 ticks. One forecaster suggests a downgrade for the Brazilian cane crop and could prompt additional buying in the near term. We like sugar from here but as with other softs, use stop protection. I included the sugar chart here for reference purposes.
Cotton: July cotton closed at 93.92c per pound, up 19 points as cotton prices continue to improve even against the possibility of lower demand from a major importer, China. We prefer the long side based on a "continuation" chart and production concerns. Use stop protection and for those who have already established long positions based on our recommendation, bring up those trailing stops.