Now that the election is out of the way and the American public has granted President Obama another four years to try to fix things, we can offer our usual comments, recommendations and rhetoric. The disastrous storms that rocked the Northeast will continue to plague residents and retailers for some time to come. The devastation caused by Hurricane Sandy has caused widespread anguish, and the 600,000 or more still without power are going through what can only be termed hell on Earth. We continue to suggest donating what you can to the efforts of the Red Cross and the Salvation Army.
The recent election returning President Obama to the White House has a significant impact on the U.S. and international business communities. The president and the speaker of the House have both issued statements and any concession on either part seems improbable but absolutely necessary to avoid the fiscal cliff. From the president’s point of view, people earning more than $250,000 are considered "millionaires and billionaires" even though most small business owners fall into that category. From the standpoint of the speaker, taxing those earnings will cause additional layoffs as small business owners are reluctant to hire with the added expense. A modification by the president to tax only those earning $1 million or more at the higher rate, with many of the deductions and loopholes eliminated, might solve the problem and get the budget passed.
We will have to wait and see who blinks first because to allow the Bush tax cuts to expire for all would be devastating to the U.S. economy and exacerbate an already serious labor situation. Small businesses need to be able to evaluate their costs to determine hiring practices.
Now for some actual information to help with your trading...
Interest Rates: December U.S. Treasury bonds closed at 151 21/32nds, up 15/32nds with the yields declining 1 basis point to 2.75%, the lowest in two months. The major selloff in equities prompted the shift to the relative safety of the U.S. treasury market and the dollar. We continue to view treasury bond prices as in a range between 145 and 155.
Stock Indices: The Dow Jones Industrial Average closed at 12,815.39, up 4.07 after losing over 400 points in the prior two sessions. The S&P 500 closed at 1,379.85, up 2.34 points but for the week lost 2.4%. The tech heavy Nasdaq closed at 2,904.87, up 9.29 points but for the week lost 2.6%. The positively construed reading from the University of Michigan/Thomson Reuters consumer sentiment index prompted the slight rally in equities as well as shortcovering in front of the weekend. The reading was the highest since July of 2007. Investors apparently rejected the status quo of the election returning the same Senate, House of Representatives, and the President who have presided over the deteriorating U.S. economic condition. Other factors included a rise in inventories at U.S. wholesalers of 1.1% in September increasing the ratio of how long it would take a company to sell off its current inventory to 0.8%. Corporate earnings disappointment also a factor in the week’s losses. We expect a common ground will be determined between the President and the House of representatives to resolve the "fiscal cliff" concern and the markets should "applaud" the deal with an interim rally. However, the overall economic picture we see developing is that of a return to "recession" and we would use any such rally as an opportunity to either get out of higher risk securities or implement hedging strategies. We can assist investors of large equity holdings in developing such strategies based on the "construction" of their portfolios. One significant comparison to consider is the one below between the current S&P 500 chart and that of 1987 which John Markman, a contributor to MarketWatch offered here. (You will need to open the attached copy in order to view the comparison charts)
I remember distinctly the Thursday and Friday equity market declines which led to the Monday, October 19th 22% decline in the Dow. "Those who cannot remember the past are destined to repeat it", a quotation attributed to George Santayana, a philosopher and poet. I am available to discuss strategies with investors holding large equity positions. My 45 years experience on Wall Street attests to my qualifications. My background can be found on the website at the "Profiles link". I look forward to hearing from concerned investors.
Currencies: The December U.S. dollar index closed at 8110, up 22.4 points as the sharp decline in equities late in the week prompted the shift to treasury bonds, the dollar and even precious metals. The so called "fiscal cliff" created by the failure of the U.S. Congress to come to a budget agreement as described in the Overview would have a severely damaging effect on the U.S. as well as international economies. We have been bullish for the dollar for some time and maintain our opinion. The December Euro closed at $1.2715, down 37 points, the Swiss Franc lost 32 points to $1.0546, the Japanese Yen 16 points to 00.12585, the British Pund 81 points to $1.5896, the Canadian Dollar 15 points to .9980c the australian dollar 25 points to $1.0356, and the New Zealand dollar 8 ticks to .8125. Stay with the dollar but place stops in ancitipation of a U.S. "budget deal
Energies: December crude oil closed at $86.07 per barrel, up 98c on shortcovering and for the week managed a retracement of 1%. The strong dollar had prompted the recent selloff in crude as well as reduced demand tied to declining economies globally. Concern that higher taxes in the U.S. in the event of the expiration of the Bush tax cuts would lead to reduced overall demand. Increases in inventories also cited as reason for the recent selling. We have been bearish for crude for some time and still feel regardless of any budget agreement, a short term rally should be sold. Our overall view is of continued recessionary pressure not that the same "old government" in the U.S. has been restored by the recent election. The "status quo" does not produce different results.
Copper: December closed at $3.4435, down 2.6c on continued long liquidation tied to the U.S. economic expectations and the weak equity market. For the week copper prices declined another 1.9% and we maintain our bearish posture. We see no developing improvement in demand from any industrialized country including China. Take some profits on some put positions but add on any rally tied to an expected U.S. budget agreement.
Precious Metals: December gold closed at $1.730.90 per ounce, up $4.90 and for the week gained 3.3%. Increased demand for precious metals from both China and India and expectation that the "status quo" resulting from the U.S. elections prompted shortcovering as well. December silver closed at $32.60 per ounce, up 36c following gold. The positive U.S. consumer sentiment index by the University of Michigan/Thomson Reuters release prompted expectation of increased purchasing by consumers which could be considered inflationary, a condition conducive to purchase of precious metals. January platinum closed at $1,559.40 per ounce, up $16.90 tied to recent labor strife in South Africa and positive reports on China’s auto market. Platinum is used in catalytic converters on automobiles and any improvement in sales prompts demand for the white metal. Platinum is preferred for auto application to palladium which has similar properties but December palladium closed at $611.05 per ounce, down $3.30. It became time to unwind platinum/palladium spreads during the week and we are now on the sidelines.
Next page: Ags and softs
Grains and Oilseeds: December corn closed at $7.39 ¼ per bushel, down 2c. December wheat closed at $8.86 ¾ per bushel, down 15 3/4c and March soybeans closed at $14.36 ¼ per bushel, down 40 1/4c. Grain and soybean futures sold off after the USDA projected larger than expected domestic supplies for all three. We are now on the sidelines and awaiting fresh fundamentals such as supply and weather.
Meats: December cattle closed at $1.25675 per pound, up 250 points and remains rangebound and basically stagnant. One can make the argument that higher feed prices led to the accelerated marketing of animals but the fact remains that current prices are more or less in line with supply/demand factors. We prefer the sidelines for now. December lean hogs closed at .8090c per pound, up 70 points on the basis that the recent slaughter of breeding sows added to short term supply, but for the longer term could impact supply and lead to higher prices. Any purchases should be call options going out to April or even July.
Coffee, Cocoa and Sugar: Every time coffee looks to have formed a bottom, a new surprise prompts additional long liquidation and new short positions. The International Coffee Organization indicated a record harvest will return the market to surplus for the first time in over five years. Stay out for now but remain vigilant for any weather or crop problems which could prompt a sharp corrective rally. Otherwise just think about a few calls "hoping" for problems especially at current low prices. That’s the former pit trader in me talking though. December cocoa closed at $2367 per tonne, up $30 on forecasts for lower production tied to adverse weather conditions in West Africa. Production may have been hampered by the weather and a new forecast for a 98,000 tonne deficit by Barclays prompted the renewed interest. I like cocoa from here but with stop protection. March sugar closed at 19.17c per pound, up 33 points on light shortcovering in front of the weekend. After posting a two year low on data showing production in Brazil’s key Center South region was ahead of the previous year for the first time, with ouput expected to be up 73% against the same period last year. We are on the sidelines until further fundamentals emerge.
Cotton: December cotton closed at 69.75c per pound, up 49 points on shortcovering after recent heavy selling tied to forecasts for increased global cotton inventories. Larger than expected output from the United States, the world’s third largest producer and reduced demand from China, the world’s largest consumer prompted the recent 10c per pound decline. We could expect a corrective rally on any change in fundamentals but for now the sidelines appear the prudent choice.