The market this past week was reminiscent of my ride on the roller coaster at Coney Island in Brooklyn, N.Y., when I was a youngster. Markets are both anticipatory and responsive.
Any time a change, whether perceived or real, in either supply or demand is added to the formula, an imbalance occurs. That imbalance is what fundamentally moves markets. Of course, the ball is then picked up by the technicians who proceed to exacerbate the particular direction by adding an inordinate volume of trades on one side or the other. Contrarian traders tend to watch for such extremes and attempt to take advantage of them on a trading basis. How to identify extremes is a complicated procedure that weighs all the evidence as exemplified by current known data and directional momentum, adding probabilities, and making an educated determination of the next potential directional move.
One major factor, which has emerged of late, is the impact of the U.S. Federal Reserve on all aspects of human life on the planet. If in fact, the direction of a futures contract is determined by the underlying cash price for a commodity, and the direction of the cash price of that commodity is determined by the interest rate. It makes no sense to me to chart the futures contract. It would make more sense to chart the direction of the rate. In other words, the tail does not wag the dog. Since at this moment in time, and for the foreseeable future, the action of the Federal Reserve will determine the direction of rates as dictated by the condition of the economy. The direction of the U.S. as the most prominent consuming nation in the world also determines the economic activity of our trading partners. Currently, markets are directed to some extent to the ongoing debt crisis in Europe and the real possibility of a breakup of the Eurozone currency.
In recognizing the role the Federal Reserve plays in the overall picture of international industrial and economic health, one must try to analyze the probability of their next action. The impact of their actions on the U.S. dollar for instance, determines the competitiveness of U.S. products in the world marketplace. Consequently, their actions determine the earnings and spending capabilities of its citizenry, the people who buy products such as automobiles, appliances, hardware and everything else that is either manufactured domestically or imported and comprises the trade balance. Current improvements in the trade deficit figures, in my opinion, do not reflect an improvement in trade but rather a decline in overall activity. Percentages, I would offer, do not change with declines in overall activity so the reported trade deficit figures tend to incorrectly define such activity. Now for some actual information...
Interest Rates: June Treasury bonds closed at 141 31/32nds down 8/32nds as money made the "trip" back to equities on Friday. Traders took profits after recent gains in anticipation of next Federal Open Market Committee meeting. We have recently suggested a trading range between 135 and 145 and as we are approaching the higher end of the range we would look to sell futures or calls if the market posts additional gains. As prices moved higher yields declined. The yield on the 30 year bonds settled at 3.128%, which, due to the light selling in bond futures, was up 0.019%. We continue to view the bond market as a trading affair.
Stock Indices: The Dow Jones industrials closed at 13,029.26, up 65.16 tied to quarterly earnings reports fom Microsoft and General Electric. The Dow gained 1.4% for the week. The S&P 500 closed at 1378.53, up 1.61 and for the week gained 0.6%. The tech heavy Nasdaq, impacted by the decline in Apple shares which were down 2.46% closed at 3000.45, down 7.11. We are in the midst of earnings season and the markets tend to gyrate at each report. We continue to suggest implementing hedging strategies for holders of large equity positions. We have strategies tied to the weighting in each of the indices.
Currencies: The June U.S. dollar index closed at 79.313 down 39.4 points as the better than expected U.S. earnings reports prompted the shift from the relative safety of the dollar to equities. The beneficiaries of the "transfer" based on increased funds available for "bailouts" by the IMF, were the June Euro gaining 83 points to 13219, the Swiss Franc 76 points to 11007, the June british pound 52 points to 16103, the Canadian dollar 27 points to 10057, and the Austalian dollar 43 points to 10306.
The loser in the group was the Japanese yen closing at 12263, down 20 ticks. The IMF indications of additional funds available to problem Euro currency countries prompted the shortcovering and new buying in the Euro but as we have stated in prior commentaries, adding funds to the "bailout" capability is tantamount to "throwing money down a well". We continue to favor the dollar and would add to call positions or futures on any further declines.
Energies: May crude oil closed at $103.88 per barrel, up $1.61 and settled at $103.05, up 78c on the last day for the May contract. The June contract was up $1.58, or 1.5% to $104.30 per barrel. A better than expected German confidence report prompted the transfer of funds from the U.S. currency to those of Europe. We view crude oil pricing as a result of the "geopolitical premium" caused by the ongoing Iran nuclear concerns and the possibility of an attack on their facilities by Israel, something that has been circulating in the market for some time. Based on supply/demand considerations, we view crude oil as overpriced and expect prices to decline to the $80-85 level barring any "surprises". Once again, timing is the question.
Copper: July copper closed at $3.713 per pound, up 2.1% on Friday but still lost 4.9% for the month. Chinese demand remains the impetus for price movement in copper as China is one of the largest consumers of industrial metals. The German business confidence was a factor in Friday’s rally. We continue to favor the short side of copper based on our continued assumption of a global recession.
Precious Metals: June gold closed at $1,642.80 per ounce, up $1.40 tied to the weak dollar but for the week gold lost 1%. We continue to view metals as a trading affair and would avoid new positions. May silver closed at $31.65 per ounce down 13c and remains in a tight range. Barclays forecasts a continued supply from mines and a decline in jewelry demand. While we agree with the decline in expected demand from the jewelry industry, silver is an industrial commodity tied also to the electronics industry as well as other applications that make silver more appealing to us than gold for those that persist in maintaining a position in precious metals. July platinum closed at $1,584.20 per ounce up $6.20 but was 0.2% lower on the week. June palladium closed at $676.90 per ounce, up $13.60 or 2.1% and for the week gained 4.6%. We continue to favor our spread recommendation of long palladium/short platinum.
Next page: Ags and softs outlook
Grains and Oilseeds: July corn closed at $6.02 per bushel, down 9c on profittaking after recent strength tied to reports of Chinese purchases. We favor the sidelines in corn. July wheat closed at $6.23 per bushel, down 7c on favorable weather conditions in the U.S. Great Plains. We favor the sidelines for now in wheat pending fresh fundamentals. July soybeans closed at $14.49 ½, up 28 1/2c tied to expectations of smaller South American harvests and increased demand. The buying allowed soybeans to reduce its weekly loss to 1%. Recent weakness was tied to the price gains in soybeans which could prompt farmers to plant more this year. We have favored the long side of soybeans for some time since the mid $13 level. A one dollar move is equivalent to $5,000 on a one contract basis. Stay long but raise those trailing stops.
Meats: June cattle closed at $1.1545, down 4c on continued selling pressure on increasing feed lots and cattle. We have favored the long side of cattle but after achieving our goal of $1.25 prices have come under pressure taking out some trailing stops. Hold off any new buying for now. July hogs closed at 87.95c per pound, down 1.375c on continued long liquidation. We remain sidelined in hogs.
Coffee, Cocoa and Sugar: July coffee closed at $1.79 per pound, up 3.35c on expectations of reduced production in Columbia tied to rainstorms in the world’s second largest arabica bean grower. The Columbian harvest failed to recover from wet weather reduction of 32% from the 2009 calendar year. Production from Columbia may be less than 7 million bags this season from the 7.8 million the prior season. Stay long coffee and add to longs on any price declines. Use stops on the entire position. July cocoa closed at $2,260 per tonne, up $26 on shortcovering and new buying tied to continued concern of bug infestation. We continue to favor the long side of cocoa since it made a low of $2056 on April 9th. Stay long but raise stops. July sugar closed at 21.64c per pound, down 13 points and remains under pressure even against concerns over Brazilian cane production. We expect prices to stabilize in this area after having declined from the mid March highs. We would buy here but only with stop protection around the recent lows.
Cotton: Cotton is mid range between the recent low of 87c and high of 94c. We have liked cotton from its lows and continue to favor the long side but with stops. Chinese accumulation of cotton in the national reserve is a bullish factor but Chinese intentions are always of some concern. Stay long but use stop protection.