Overview and Observation; A fragile cease fire between Hamas and Israel was orchestrated by the United States and Egypt this week and was celebrated by the International financial community. A concern that the involvement into the “fray” by oil producing countries in the region could interrupt the flow of crude oil had caused widespread angst. While the “euphoria” extended into the marketplace on Friday we must concern ourselves with the fact that apparently Iran had provided the rockets and other weaponry to the Palestinians and that situation may have to be addressed. While we hope peace will return to the region, we are skeptical about the participation by Iran and how the West will have to eventually deal with their nuclear ambitions. For now we will try to develop strategies to deal with alternative scenarios. Another fact that must be considered when determining strategies is the ongoing U.S. budget “confrontation.” The expiration of the Bush tax cuts, if permitted, would cause financial havoc in the U.S. and internationally because during recession or times of economic contraction, an increase in taxes would be financial suicide. We will have to wait to see if the President or the House of Representatives “blinks” in favor of the U.S. public. I would suggest that both entities compromise. We feel the President should adjust his so called “millionaires and billionaires” rhetoric that earners of $250,000 must pay higher taxes. An adjustment to his thinking to include those earning $500,000 or $1,000,000 would be the cut-off might solve that “half” of the problem. The House of Representatives should conclude that some tax increases or loophole closures must be considered as well. That compromise suggestion would make for a transition to normal market action and the application of normal technicals and fundamentals could then be applied to investor strategies. We will have to wait and see but we feel confident a compromise and an extension of the Bush tax cuts will emerge before Dec. 31 and after the “dramatics” are set aside. Now for some actual information……….
Interest Rates: December Treasury bonds closed at 150 10/32nds, down 2/32nds on light holiday shortened volume as money flowed to the higher risk equity markets. The yield on the 30-year bond was unchanged at 2.83%. A basis point in Treasuries is 1/100th of a percentage point. As bonds were little changed, equity markets responded favorably to the higher than expected German business sentiment survey as well as a positive outlook for “Black Friday” retail sales in the U.S. bond prices remain centered in our anticipated range of 145 to 155.
Stock Indexes: The Dow Jones industrials closed at 13,009.70, up 172.790, and for the week posted a gain of 3.4%. The S&P 500 closed at 1,409.15, up 18.12, or 1.29% and for the week gained 3.6%. The tech heavy Nasdaq closed at 2,966.85, up 40.30, or 1.36% on Friday for a weekly gain of 4%. The so called “Black Friday” shopping “spree” was in full swing and expectations are for record sales. That, combined with the increase in German Business Sentiment reported provided the backdrop for shortcovering and new equity buying. The expectation that an agreement would be forthcoming between President Obama and House of Representatives Boehner would alleviate the possibility of massive tax increases Jan. 1 if that agreement is not reached by Dec. 31. We agree with the assessment of a deal but that does not alter the basics that the U.S. economy is in the throes of another recession and Europe has already discounted their recessionary tend. Once again we suggest strongly the implementation of strategic hedging programs for holders of large equity positions. Currencies: The U.S. dollar index suffered its biggest recent loss closing at 8024, down 72.6 points against most major currencies on Friday following the report showing Germany’s business sentiment improved in November. The currencies posting gains against the dollar were the euro gaining 1.54c closing at $1.2982, the Swiss franc 128 points to $1.0783, the Japanese yen 15 points to $0.1214, the British pound 87 points to $1.6035, the Canadian dollar 46 points to $1.0076, and the Australian dollar 1c to $1.0443. Because the German Business sentiment may be a gain relative to recent reports, we do not feel it will continue to have a material effect and consider the dollar, even with its recessionary trend, in our opinion, the better choice on a relative basis. While we remain negative on the U.S. economy based on the ongoing labor situation, on a relative basis against Europe, we prefer the dollar. We expect the current stalemate in Congress over the extension of the Bush tax cuts to be resolved before the critical Dec. 31 cut-off, a euphoria will probably pressure the dollar on a short-term basis and in my opinion provide another buying opportunity for the dollar. Stay with the dollar.
Energies: January crude oil closed at $88.28 per barrel, up 90c tied to the weak dollar and the support from the equity markets and the better than expected German business sentiment. We feel the rally will be short-lived because the economic contraction globally will affect demand for energy products. Hold put positions and take a cautionary approach to energy products because of the potential for geopolitical events involving Iran and Israel.
Copper: March copper closed at $3.5280 per pound, up 3.2c on the expectation European leaders will move forward toward a deal addressing Greece’s fiscal crisis. The report of German business confidence rose unexpectedly in November also providing price support for copper. We believe such enthusiasm will be short-lived and would expand put buying programs.
Precious Metals: December gold closed at $1,752.60 per ounce, up $24.40 against the weak dollar in which it is denominated. The sharp selloff in the dollar prompted by data showing German business confidence rose set off the selling in dollars and the new buying in gold and silver. December silver closed at $34.125 per ounce, up 77.5c for its highest price in six weeks. With the wide price swings in precious metals, we would avoid these markets for all but long-term investors and professional traders. January platinum closed at $1,622.70, up $38.80 while December palladium gained $15.80 per ounce to close at $667.10. We favor palladium to platinum because both possess similar characteristics and application.
Next page: Grains and softs report
Grains and Oilseeds: December corn closed at $7.45 ¼ per bushel, up 4 1/4c tied to a government report showing improved export demand. December wheat closed at $8.47 ¼ per bushel, up 2c tied also to the USDA report. March soybeans closed at $14.004 per bushel, up 6 3/4c after a government report showed increased demand for exports. We like “food” but would be inclined to limit purchases to call options for now bearing in mind recent wide price swings.
Meats: February cattle closed at $1.32725 per pound after touching an intra-session high of $1.32925, an all-time high for the most active contract. We favor the long side of cattle from here. December hogs closed at 82.475c per pound, up 72.5 points also on shortcovering and against the weak U.S. dollar. We prefer the sidelines until fresh fundamentals emerge but would hold long call positions in meats.
Coffee, Cocoa and Sugar: December coffee closed at $1.42 per pound, down 2.8c while March closed at 19.14c per pound. The pressure in coffee was from reports of rising supplies in Brazil, the world’s biggest grower. Stay out for now. December cocoa closed at $2,574 per tonne, up $43 on continued shortcovering and new buying as well as the weak dollar. We could see continued buying against Barclays Capital expectations for a world cocoa production deficit and “firm demand.” March sugar closed at 19.19c per pound, down 45 points tied to producer selling. We prefer the sidelines until some sort of reversal or correction emerges and better fundamentals. Higher margin requirements set by the exchange also a factor in the selling pressure as the new margins are retroactive and must be met to hold positions.
Cotton: December cotton closed at 69.72c per pound, down 2.66c on continued long liquidation and waning Chinese demand. Selling pressure even against reduced expectation for planting acreage in favor of soybeans. We prefer the sidelines for now.