The Eurozone continues to be the dominant factor in most market activity. This week after Moody's previously announced downgrade of Spanish Banks, Standard & Poors announced additional Spanish bank credit downgrades. The ongoing credit crisis in Europe is accelerating rather than abating, and the ramifications of a Greece expulsion or voluntary withdrawal from the euro is of great concern. The removal of Greece could affect the overwhelming debt already incurred by Greece and which cannot be serviced by the Greek economy. It will also raise additional concerns that Spain and Italy may be next in the limelight affecting investor psychology.
As I stated in earlier commentaries, providing additional bailout funds to Greece to keep them in the euro is tantamount to throwing money down a well. Adjusting the total debt or reducing interest has no real value to the international community because Greece cannot, based on is current economy, pay it back. I do not believe in artificially supporting a situation that cannot have positive results in any stretch of the imagination. Stop putting lipstick on a PIGG.
Commodities closed the week with the biggest weekly loss in five months tied to the Eurozone concerns and slowing global economic growth. Now for some actual information (even though without clarification of the Eurozone situation markets will continue to move aimlessly eluding the reality or the possibility of intelligent market analysis)...
Interest Rates: June Treasury bonds closed at 147 23/32nds, up 7/32nds as treasuries remain the "safe haven" for investors globally. Concern that the Euro could be "dismantled" with the removal of Greece and the growing problems Spain and Italy. We have been warning investors of the potential ramifications of a Greece withdrawal from the Euro and what it could mean to global banking systems when, not if, they default. Bonds have breached what I expected would be the higher end of a 135-145 range and have traded as high as 148 before settling back to closing levels. The yields on the 10 year and 30 year paper have declined substantially to 1.746% and 2.846% respectively and are at record lows. Unfortunately, even with low rates, the U.S. economy is slowing as the availability of "qualified borrowers" is also at a low given the concern that the U.S. housing industry may have to absorb a million or more mortgage defaults and foreclosure threatened homes. I continue to view treasuries as a trading affair and would not take any net positions for now with the exception only of options.
Stock Indices: The Dow Jones industrials closed at 12,454.83, down 74.92 but thanks to an intra-week gain managed to close 0.69% higher for the week. The S&P 500 closed at 1,317.82, down 2.86, but for the week managed a gain of 1.74%. The tech heavy Nasdaq closed at 2,837.53, down 1.85 but for the week gained 2.11%. The negativity following the FaceBook IPO last Friday and this past weeks controversy over the handling and pricing of the IPO caused some consternation among investors who feel they were "duped" into taking FaceBook stock at the $38 per share issue price. We continue to suggest, even more strongly than before, the implementation of hedging strategies to avoid another August type market decline. We can provide investors with large equity portfolios certain strategies utilizing futures and options as a form of "insurance" against major market moves.
Currencies: The June U.S. dollar index continued in favor as a safe haven this past week gaining an additional 3.8 points on Friday to close at 82.525 against the basket of currencies. Losses were posted for the Euro of 8 points to $1.2518, the Swiss Franc 3 ticks to $1.0425, the British Pound 7 ticks to $1.5642, the Canadian dollar 10 ticks to 97.09c. Other losses were for the Japanese yen 12 points to 12559, but the Australian dollar managed a gain of 50 points to 97.54c. The dollar and treasury bonds continue to benefit from the Euro debt crisis concerns and our continuing bullish view of the dollar remains intact. The critical nature of the Greece possible pullout from the Euro and ongoing Spanish bank credit downgrades will continue to affect global commodity prices. Stay with the dollar.
Energies: After recent weakness tied to global demand concerns crude oil gained 20c to close at $90.86 per barrel. Our goal of $85 per barrel remains intact and crude traded below $90 per barrel during the week on its way to our expected price level. Heating oil managed a 0.69c gain to $2.8288 per gallon with unleaded gasoline gaining 1.64c to $2.8929 after recent long liquidation tied to demand expectations. We would take some profits off the table by covering short crude oil positions and liquidating some crude oil puts. Otherwise we see no reason to expect any price gains in energy products but always on the lookout for geopolitical events that may change the current supply/demand picture.
Copper: July copper closed at $3.448 per pound, up 1.95c on shortcovering after recent weakness. A report by the Commodity Futures Trading Commission that showed managed commodity funds sales of nearly $667 million worth of copper achieving a net short position of nearly $245 millions worth of copper at the close of May 22nd weighed on prices with Friday’s action shortcovering in front of the long U.S. Memorial day holiday weekend. We have favored the short side of copper for some time and would now look to take some profits off the table while maintaining a nominal short position in futures or holding long put positions.
Precious Metals: June gold closed at $1,573.10 per ounce, up $15.60 on shortcovering in front of the long U.S. holiday weekend. July silver closed at $28.386 per ounce, up 22.9c also on shortcovering after recent weakness across the board in precious metals. July platinum gained $4.10 per ounce to close at $1,426.50 while June palladium gained $2.50 to close at $590 per ounce. We would hold long palladium/short platinum spread positions otherwise avoid precious metals which have not performed as the usual "safe haven" hedge they are noted for. The choice has recently been for dollars and treasuries to replace precious metals in that respect.
Next page: Ags and softs
Grains and Oilseeds: July corn closed at $5.78 ¾ per bushel, up 1/4c but down from the $6.44 per bushel achieved recently. Better than expected crop conditions affecting corn and soybeans recently. We could see some shortcovering but prefer the sidelines in corn. July wheat closed at $6.75 per bushel tied to the recent dryness reported in Kansas and the growing areas of Russia. Crop reduction reported was not as severe as previously expected and that could curtail any further price gains. We prefer the sidelines in wheat as well as supplies appear adequate going forward. July soybeans closed at $13.83 ½ per bushel, up 7 1/2c on a correction after recent weakness took prices down from recent highs around $15.00. Crop reports as well as plantings prompted fund long liquidation and new trader short positions. We now once again favor putting on some long positions but as before, use stop protection which proved effective during the recent price declines.
Meats: August cattle closed at $1.19100 per pound, down 70 points and have lost over 10% from early March prices. Packers benefit from lower prices since they are for the most part not passed along to consumers according to the USDA. We have been bullish for cattle since herd reduction prompted shortcovering but stagnant pricing recently have caused us to temper our bullish stance. Hold call positions. August hogs closed at 86.625c per pound up 52.5 points on shortcovering after recent weakness. Hog producers have increased herd replenishment rates which are continuing to weigh on prices and limiting any recovery.We prefer the sidelines in hogs.
Coffee, Cocoa and Sugar: July coffee closed at $1.6780, up 90 points on shortcovering and reflecting the new China preference for coffee over tea in some areas. We like coffee from here after the recent price declines have bottomed and could prompt and based from which prices can now start to regain some of the losses from recent highs near $2.00 per pound. July cocoa closed at $2110 per tonne, up $5.00 tied to expectations that China may begin to seek commodities after recent purchase curbs mandated by the Government. We like cocoa from here and with renewed interest from China shortcovering could push prices back to the $2300-2400 level on an interim basis. July sugar closed at 19.62c per pound, up 4 ticks on light shortcovering into the long U.S. holiday weekend. Weakness in sugar has been tied to global surpluses but recent increases in demand could offset some of the pressure. We favor the sidelines in sugar but would hold any call positions.
Cotton: July cotton closed at 73.62c per pound, down 32 points on continued pressure from production even as China import projections have improved. We had been bullish for cotton but now would just hold call positions without adding for now.