The ongoing rhetoric from various heads of state referring to their implied resolution of the European debt crisis continues to confound those of us who recognize that no amount of money can resolve this situation. While we await the latest meeting of the minds to take place this week in Jackson Hole, Wyo., we are continually bombarded with statements by U.S. Fed Chairman Bernanke and European Central Bank head, Mario Draghi, that they will do whatever it takes to support the Euro countries.
We must ask how is it possible to restore confidence when certain countries cannot service their current debt load and give them more money, ask the banks to support their action and take losses, and expect to resolve the gangrenous condition that has spread throughout the European community. When gangrene is detected in a limb, that limb must be removed. Such a condition, we believe, exists within the European community and as I have stated in prior commentaries, any currently discussed or claimed solution is tantamount to throwing money down a well.
Markets will determine the effectiveness of any proposed solution and the current climate shows that markets expect, although irrationally optimistic, in our opinion, a solution to all the Euro problems. We totally disagree and would suggest investors re-examine their positions to determine the survivability of individual investments and take the necessary action to protect capital.
Now for some actual information to hopefully assist our readers in making specific market decisions…
Interest Rates: September U.S. Treasury bonds closed at 148 and 12/32nds, down 4 ticks after ‘bouncing" from our expected low end of the trading range of 145 03/32nds on Monday and Tuesday of this past week. Expectations of a European Central Bank having to await a court ruling before unveiling the full details of their bond buying plan to help "resolve" the Euro zone debt crisis. That ruling is not expected until September 6th and we do not expect, with or without that ruling, any resolution to the debt crisis. Others, like us, are skeptical of any supposed resolution. Demand for U.S. capital goods fell the most in 8 months. On Wednesday the Beige Book on the U.S. economy and the Jackson Hole symposium will give us a clearer "picture" of intentions and we would hold current positions until after an assessment of the meeting can be determined. We continue to view treasury bonds as within the trading range we previously suggested.
Stock Indices: The Dow Jones industrials closed Friday at 13157.97, up 100.51 but for the week lost 0.7%. Friday’s action was mainly shortcovering in front of the weekend and the Wednesday Beige Book report along with the Jackson Hole Wyoming meeting. The S&P 500 closed aqt 1411.13, up 9.05 up 0.65% Friday but down 0.5% from the prior week. The Nasdaq closed at 3069.79, up 16.39 up 0.54% on Friday but for the week lost 0.2% for the week. Optimism from U.S. Fed Chairman Bernanke’s statement that the Fed has more "tools if needed" to stimulate the economy the main feature on Friday. We continue to suggest investors implement hedging strategies before the sharp downward move we expect takes place. Market rallies usually occur in an "orderly fashion" while selloffs are immediate, sharp and financially destructive.
Currencies: The December U.S. dollar index closed at 8189.3, on Friday, up 23.9 points on shortcovering after declining against other currencies from the 8300 level. We continue to favor the dollar as we do not expect a "meaningful" result from either the U.S. Federal Reserve nor the ECB to resolve the current U.S. economic "recession" nor the European debt crisis. The December Euro closed at $1.2536, down 47 on Friday, the Swiss Franc losing 37 points to $1.0450, the japanese Yen 41 points to .12718, the British pound 54 points to $1.5806, and the Australian dollar 34 points to $1.0302. Only the Canadian dollar managed a 23 points gain to $1.0063. Stay with the dollar.
Energies: October crude oil closed at $96.12 per barrel, down 15c but up for the fourth week in a row climbing steadily from late June $79 level. The latest move tied to concern than tropical storm Isaac may disrupt Caribbean production. The recent topping pressure prompted by the possible release from the U.S. strategic crude stockpile but as we all know, that release would only provide a limited supply for a short term relief and in our opinion, would be meaningless except to weaken the U.S. possible defense needs. We continue to feel current supplies are adequate during global recessionary times. Start to purchase put options on any further rally in crude.
Copper: December copper closed at $3.48 per pound, down one cent on Friday but up nearly 2% for the week on expectation of increased demand by China. Statement by Federal Reserve Chairman Bernanke indicating additional "tools" are available to stimulate the U.S. economy and positively construed statements by ECB head Draghi related to a resolution of the Euro debt crisis also supported copper prices. We totally disagree that any such "resultion" or U.S. economic stimulus will alter the current recessionary trend, in our view, will have any positive impact. Stay short copper or add to put positions.
Precious Metals: December gold closed at $1,672.90 per ounce, down 10c on Friday with trading volume over 30% below the 30 day average according to Reuters. Gold managed to break out of the $1,580 to $1,620 range but on light volume and on positively construed U.S. Federal Reserve statements. December silver, however, managed a gain of 30.3c per ounce, to close at $30.845 tied to expectations of increased industrial demand and providing investors with a less expensive alternative to owning precious metals. We have favored silver over gold for some time and continue to do so. October platinum closed at $1,551.5 per ounce, down $3.40 while December palladium closed at $654.50 per ounce, down $4.05. For the day platinum lost 0.22% while our favorite in the group on a spread basis, palladium, lost 0.61% for the day. We favor the sidelines in precious metals.
Next page: Ags and softs
Grains and Oilseeds: December corn closed at $8.08 ½ per bushel, down 6 1/4c after the longest rally since last year tied to the concern over crop damage from the drought. We prefer the sidelines in corn. December wheat also lost 6 1/4c per bushel to close at $8.88 ½ as concern over drought damage abated to some degree. Markets have a tendency to overdo reaction to news and revert to actual values after the "extreme" and technical "train" slows down. We prefer the sidelines in wheat as well since our work tells me the $9.00 level would provide heavy resistance on a technical basis. November soybeans closed at $17.31 ½ per bushel, up 16 1/2c and remains our favorite in the group. Our long standing suggestion to buy the "dips" remains intact but raise trailing stops.
Meats: December cattle closed at $1.27875 per pound, down 5.25c meeting resistance at the $1.28 level and forming a technical "pennant". We would move to the sidelines and await new fundamentals however, the current selling pressure is prompted by farmers moving animals to market as feed remains costly. Longer term we could see higher prices as it takes over a year to replenish herds once the market pressure abates. We would consider longs forward to June 2013. December hogs closed at 70.575 per pound, down 25 points and remain under pressure from rushing animals to slaughter on high feed prices. As with cattle, we could see a bottoming for prices around current levels but would only consider buying forwards as herds must be replenished at some point.
Coffee, Cocoa and Sugar: December coffee closed at $1.6310 per pound, up 1.25c on pre weekend shortcovering after the July highs around $1.90. We would take another look at the long side from here but support around the $1.50 level is a key factor. Increased surplus stocks a factor in the recent weakness. Use stop protection on any new buying between $1.60 and $1.55. December cocoa closed at $2,395 per tonne, up $10. Cocoa met selling at the $2,500 level but profittaking could bring prices down to the $2,325-$2,350 level. Weather a factor of concern and we like the long side from here but with stops. October sugar closed at 19.72c per pound, up 13 points on light volume. We prefer the sidelines in sugar pending new fundamentals.
Cotton: December cotton closed at 75.21c per pound, down 1.59c on an estimate increase for a global cotton surplus by Cotlook Ltd., the publisher of a benchmark cotton index. Some producers are attempting to lock in prices through the futures market and we could see additional long liquidation near term. We would stand aside for now.