Market clues to watch for following big commodity losses

Should U.S. leaders focus on home or Europe?

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This past week saw commodities suffer their longest weekly losing streak in 11 years. Mr. Bernanke’s failure to specify options for further easing and the ongoing economic deterioration in the United States and China -- the world's two largest economies -- continues to mystify the investment public. At a time when investors and traders are seeking direction from the elements of power that could mean the difference between profit and loss, Mr. Bernanke, the chairman of the Federal Reserve left us without a clue in his recent appearance. His ambiguous statements failed to address the specific problems and how the Federal Reserve could or would address them.

We believe it is because neither he nor the U.S. administration has any clue as to how to handle the situation. We would suggest applying a variation of the Monroe Doctrine approach to dealing with the situation by concentrating on the U.S. economy and let the Europeans deal with their problems. To suggest that as one of the larger financial backers of the International Monetary Fund that the United States should consider adding billions to the fund to help countries that are without the ability to repay existing loans makes no sense.

The economic viability of Greece or Spain, and their GDP situations, are such that more than 100% of their GDP is owed out. That does not encourage assistance, in my opinion. The funding suggested for the U.S. would better be served by helping U.S. homeowners and the unemployed through our own financial crisis.

Now for some actual information that may provide some enlightenment as to how to position yourselves with the ongoing U.S. economic crisis...

Interest Rates: September U.S. Treasury bonds closed at 148 21/32nds up 6/32nds after trading as high as 150 10/32nds during the session. The U.S. trade deficit narrowed in April but was still over $50 billion. The markets were concerned that Spain, whose credit rating was reduced by Fitch, would have difficulty obtaining financial assistance. Some investors were pulling money from the banks in order to seek safer assets. The favorite of late has been the safety of the U.S. Treasury market even as the U.S. economic growth appears to be faltering. On a relative basis however, the U.S. appears more attractive and the treasury market has been the beneficiary of the "flight to safety", even moreso than the traditional safe haven, gold. We feel the market may be overdone as yields are at all time lows and without the benefit of demand for mortgages or the inability of the public to "qualify" in many instances, there is no point, in our opinion, for the U.S. Fed to consider even lower rates. The agreement by the Eurozone finance ministers to bailout Spanish Banks with a 100 billion Euro loan could pressure prices on Monday. We like the short side of Treasury bonds but only through options for which we have developed a strategy.

Stock Indices: The Dow Jones industrial average closed Friday at 12554.20, up 93.24 points ending the dramatic trading week with a 3.59% gain. The triple digit days left investors in a state of "wonder" as to how to deal with the huge equity value swings. The S&P 500 closed at 1325.66, up 10.67 points and for the week gained 3.72%. The Nasdaq closed at 2858.42, on Friday, up 27.40 points and for the week gained 4.04%. The surge in equities came after the ECB Vice President told Portugal’s Radio audience that Spain would formulate a request for aid exclusively to recapitalize its banks. The decision by Eurozone finance ministers to lend Spain another 100 billion Eurors will only tend to temporarily relieve the Spanish Bank situation and while it could support equity prices on Monday, we believe it will be shortlived. The downgrade by the Fitch agency of Spain’s debt was another impediment to the possibility of a solution to the European debt crisis and established the U.S. as the less risky asset location. We continue to favor the implementation of hedging strategies as while the U.S. is in less dire economic straits than the European countries, its economic condition does not warrant the "safe haven" status being implied this past week. Look for investor "optimism" on Monday following the new loan to Spain but we would use any rally to purchase put options on the S&P or sell calls on the Russell 2000 index on a scale up. We view any rally as a correction in what we view as a bear market in equities.

Currencies: The U.S. dollar index closed at 8300.2 up 54.6 points on a continuing flight to "perceived" safety of the U.S. China lowered their deposit rate by a quarter point to 3.25% lessening its attraction to foreign investment in favor of the U.S. China, the worlds largest consumer of commodities, has slowed its economic growth intentions and has negatively impacted global commodities. The September Euro contract closed at $1.2517, down 96 points with other losses posted in the Swiss Franc 77 points to $1.0439, the British Pound 94 points to $1.5452, the Canadian dollar 41 points to .9697, and the Australian dollar 40 points to .9820. The Japanese yen managed a gain of 36 points to $1.2599 tied to optimism that stimulus measures in the world’s largest economies may support regional exports for Asia. With the global economic slowdown, we could see continued dollar strength once the initial reaction to the new Spain bailout subsides.

Energies: July crude oil closed at $84.34 per barrel, down 48c and posted its longest weekly loss in over 13 years on concerns that the U.S. and China, the world’s largest consumer of fuels will slow and reduce demand. Prices are down nearly 5% for the month. We had long recommended the short side of crude from the $1.10 per barrel level and our goal of $85 per barrel was not only achieved but exceeded. We prefer the sidelines in expectation of a correction after the sharp price decline but would once again suggest the short side on any meaningful interim rally.

Copper: July copper closed at $3.31 per pound down 5c on concerns over Spain’s troubled banking system. However with the bailout of 100 billion Euros by the European Union, we could see a corrective rally in copper which we believe to be "artificial" since it will not increase demand by the two largest consumers of copper, the U.S. and China on a continuing basis. Therefore we would sell into the expected rally early in the week or purchase put options. The "temporary" solution to Spain’s banking problem in the face of a 25% unemployment rate and weak economic condition will not provide a permanent solution and while a level of optimism may develop in the near term, the overall picture for Europe remains "gloomy".

Precious Metals: August gold closed Friday at $1,591.40 per ounce, up $3.40 and in late trading was up $7.10 to $1,595.10. Gold lost 2% for the week but with the Spanish bank bailout we could see sporadic trading overnight and into Monday. We continue to suggest the sidelines in gold but with a bearish bias due to its recently established pessimism as to its viability as a "safe haven" as exemplified by its weakness during the recent global economic concerns. July silver closed at $28.455 per ounce, down 74 points on continued long liquidation and on technicals after recent weakness. We continue to prefer silver against gold for those that must own precious metals. July platinum closed at $1431.00 per ounce, down $9.90 while September palladium closed at $615.10 down $10.65. Our long palladium, short platinum spread lost this week but we continue to prefer that spread.

Next page: Ags and softs

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