Once again, the world is awaiting a definitive winner in the November Presidential election, as well as what Congress will look like in January. One side is hoping for a Romney win, while the other thinks another four years of Obama will cure their ills.
One unknown is the tax situation. Democrats want higher taxes for those earning more than $250,000. Even though in the vice presidential debate Vice President Biden referenced $1 million. I think he erred because the president and the senate want wage earners of $250,000 or more to pay that higher tax rate. However, I do believe the Republicans would agree to the $1 million figure and pass the budget, which is not going anywhere for now.
Most small business owners -- the people who do most of the hiring in this country -- do in fact earn more than $250,000, and they are reluctant to hire people not knowing what their tax burden will be going forward. In addition, small businesses do not yet know the true costs of health-care reform, which also detracts from hiring. The idea that Senator Pulosi instructed her members to "sign it and we will see what it is later" left the public to wonder why we are paying these people.
Now for some actual information...
Interest Rates: December Treasury bonds closed at 149 and 21/32nds, up 13/32nds as money this week sought the relative safety of treasury bonds from the "higher risk" equity markets. The S&P 500 has lost over 2% since making a five year on September 14. The equity market had "celebrated" the Federal Reserve’s announced plan to buy $40 billion of mortgage securities each month to promote economic growth. This week the S&P lost 2.2%, it’s biggest loss since early June. We continue in the expectation of a range between 145 and 155 for the U.S. Treasury bond.
Stock Indices: The Dow Jones industrials closed at 13,328.85, up 2.46, but lost 2.1% for the week. The S&P 500 closed at 1,428.59, down 4.25 points and for the week lost 2.2%. The tech heavy Nasdaq closed at 3,044.11, down 530 points also losing over 2.3% for the week. Stocks rallied early in the session after the Thomson, Reuters University of Michigan preliminary October consumer sentiment index rose to 83.1 from 78.3 in the previous month. Concern over the ongoing European debt crisis along with disappointing projections going forward for U.S. corporate earnings weighed on prices. We continue to suggest implementing hedging strategies for holders of large equity positions. I see no reason to "take the ride down" on our projected selloff in equities when one can liquidate portions now and purchase back after the market settles at lower prices. The old policy of "buy and hold" would not have worked well for a number of companies i.e. Enron, Solyndra, and others.
Currencies: The December U.S. dollar index closed at 7976, down 10 ticks against gains in the Euro of 17 ticks to $1.2955, the Swiss Franc 11 ticks to $1.0722, and the British pound 22 points to $1.6062. However the dollar managed gains against the Japanese yen which lost 13 points to .12759, the Canadian Dollar 9 points to $1.0190, the Australian dollar 34 points to $1.0174, and the New Zealand dollar 17 points to .8128. The dollar had shown strength against the Euro as the problems with Greece and Spain accelerated. However, the U.S. Federal Reserves asset purchase plans prompted dollar weakness as the use of funds to purchase $40 billion of assets each month until which time as the economic recovery is "well established" prompted selling of dollars. Any "easing" of rates precludes dollar investment and could continue for some time. Our bullish stance for the dollar remains intact if only on a relative basis against the problems with the Euro Zone which could over shadow the U.S. Fed action.
Energies: December Crude oil closed at $92.13 per barrel, down 37c after the international Energy Agency reduced its estimate for global demand indicating that slower economic growth may reduce consumption. Adequate supplies and slowing growth in China also a factor in the weakness. We remain bearish for crude and fully expect prices to decline back to our prior estimate of $80, which had been achieved. Add to put positions. December heating oil closed at $3.2008 per gallon down 3.15c whith gasoline losing 4.23c to close at $2.8165 per gallon. Profittaking in natural gas saw prices close at $3.865 per Million BTUs down 35 points but positive press could prompt a return to higher prices as demand shifts from other fuel sources to natural gas.
Copper: December copper closed at $3.6950 per pound, down 5.65c tied to slowing scrap metal purchases by China and expectation of reduced demand tied to a weakening global economy. We remain bearish for copper and look for prices to decline to the $3.25-3.30 level. Timing of course is the only question so our put purchases should be against the December or March contracts.
Precious Metals: December gold closed at $1,7560 per ounce, down $14.60 on reduced demand from China, the world’s second largest buyer. Concerns over U.S. inflation subsided when the U.S. Federal Reserve "signalled" its concern over the economy and instituted another round of asset purchases of $40 billion per month until it sees a sustained economic growth, something we do not see. However, the U.S. President election can change all perspective so wee are on the sidelines. December sil ver closed at $33.525 per ounce, down 55.7c following gold. Our preference in this area remains silver for those that "must have" precious metals in their portfolio. October platinum closed at $1,654.70 per ounce, down $33.10 per ounce, or 2% while December palladium, our favorite of the white metals closed at $634.55 per ounce, down $16.35, or 2.5%. For the week platinum lost 2.8% against palladium’s 1.8%. Stay with the long palladium, short platinum spread.
Next page: Ags and softs
Grains and Oilseeds: December corn closed at $7.52 per bushel, down 21 1/4c or 2.7%. Profittaking and disappointing export data the main factor. Export sales reported were 14,200 tonnes against trade expectations of 300,000-400,000 tonnes. However lower ending stocks and production numbers could support prices from here. We continue to prefer the sidelines in corn. December wheat closed at $8.57 per bushel, down 29c on profittaking reducing the week’s gain to 2.5%. We prefer the sidelines in wheat as well. November soybeans closed at $15.22 1/4 per bushel down 26 1/4c on the U.S. government report showing improving global supplies. We had been bullish for soybeans for some time but stops were touched off and we are now awaiting fresh fundamentals before re-establishing our bullish posture.
Meats: December cattle closed at $1.25425 per pound, down 50 points tied to poor export data but positive price optimism is keeping prices within the recent range of $1.30 and $1.22. Weak overseas demand tied to ongoing economy concerns providing pressure. We remain favorable towards cattle but would only use call options rather than direct futures purchases. December hogs closed at 78.425c per pound, up 92.5 points tied to stronger U.S. demand. We could see additional upward momentum after recent lows around 70c per pound. Resistance on a technical basis around 80-82c could halt the rally but shortcovering could emerge if resistance breached and U.S. demand continues.
Coffee, Cocoa and Sugar: December coffee closed at $1.6230 per pound, up 1.55c on shortcovering but with high Arabica stocks we could see momentum deteriorate. Prices remain near lows after the selloff from the July $1.94 highs. We prefer the sidelines for now tied to large speculator call positions. December cocoa closed at $2,363 per tonne, up $12 after initial weakness in front of next Tuesday’s third quarter grindings data for Europe. A weak economy could reduce the grind report which would prove negative as relates to demand. Cocoa remains mid-way between its June $2,000 low and September $2,700 high and could go either way as determined by the demand reflected in the grind figures. We like the sidelines for now. March sugar closed at 20.14c per pound, down 31 points for its biggest three day decline in a year tied to fund long liquidation which may have exceeded fundamentals. We could see shortcovering push prices back to the 22-23c level but would use stop protection for any new buying.
Cotton: December cotton closed at 71.42c per pound, up 71 points but remains rangebound between 65-75c. Recent USDA estimate for world inventories was raised and reduced forecast for use by China, the top consumer, could keep pressure on cotton going forward. With estimates for inventories to remain adequate for the next nine months, we prefer the sidelines for now.