The enormity of the current U.S. budgetary standoff is in the forefront of strategic thinking by the global financial community and our various comments will have to be tempered until which time as a resolution is achieved.
Overview and Observation: “No laughing matter”…..When the proposed budget “deal” was offered this week by the Democratic Party and their point man, Treasury Secretary Timothy Geithner, Senate Republican Mitch McConnell laughed in disbelief. The offer for 1.3 trillion dollars of new taxes against 450 billion of spending cuts is really no laughing matter. It shows a further “chasm” between the two major U.S. political parties. The markets showed their “disdain” by wavering back and forth in all sectors and we are once again left with no clear direction for which to base our opinions. However, on the basis that we feel a deal will be cut before the Dec. 31 deadline, we will try to offer viable suggestions for each of the markets we follow while bearing in mind, our “feeling” of a deal compromise is not “cut in stone”.
We continue to believe that if President Obama abandons his stipulation that earners of $250,000 are “millionaires and billionaires” and reverts to a more realistic $500,000 or even $1,000,000 a deal can be achieved. However, 1.3 trillion of new taxes hopefully will not fly during a recessionary trend, which we believe is accelerating in conjunction with an already accepted “recession” condition in Europe. Now for some actual information.
Interest Rates: We have switched to the March contract for U.S. Treasury bond futures. Even so our trading range assumption remains the same at 145 to 155.
March Treasury bonds closed at 149-27, down two ticks as the market is awaiting definitive finality to the current budget negotiations currently progressing in slow motion between the two rival political parties. Until which time as an agreement is or is not achieved before the Dec. 31 deadline it is almost impossible to predict the direction of interest rates and therefore the direction of Treasury bond prices. For now we maintain our expectation that prices will remain in that projected range of 145 and 155. Trading within that range can be simply stated as “buy between 150 and 145 and sell between 150 and 155”. That, of course, is for well capitalized traders.
Stock Indices: The Dow Jones Industrials closed at 13,025.58, up 3.76 points and managed a weekly gain of 0.1%. For the month however, the Dow lost 0.5%. The S&P 500 closed at 1,416.18, up 0.23 points and for the week managed a meager 0.5%. The tech heavy Nasdaq closed at 3,010.24, down 1.79 points and for the week gained 1.5%. For the month the Nasdaq managed a gain of 1.1%. We continue to view the markets as in a state of flux with businesses awaiting a definitive decision on the budget so as to determine strategies for going forward. Failure to come to a decision could prompt a return to recession, which, in our opinion, is unavoidable. The party of “Robin Hood”, i.e. “take from the rich and give to the poor” overlooks the plight of the middle class which includes small business, the “hirers” of the middle class worker. Factors such as “Obamacare” and the extension of the Bush Tax cuts remain in question but in the case of Obamacare, fining families having difficulty meeting expenses for not purchasing health care represents the transfer of responsibility of basic health care services from the Government to individual families. The ongoing failure of responsibilities of both parties is putting the economy on the “road to perdition” in my opinion. Washington is engaging in a game of Chess which the American public as”expendable” pawns. Once again I suggest strongly the implementation of hedging strategies which we have developed over the years for investors with large equity portfolios.
Next page: Currencies, energies, metals
Currencies: The March U.S. dollar index closed at 8034.5, down 5.9 points against the basket of European currencies but fared better against the Japanese yen which closed at 0.12145, down 45 points. The March Euro closed at $1.3019, up 30 points with the Swiss Franc gaining 8 points to close at $1.0803. Others were mixed with the British Pound losing 17 points to $1.6017, the Canadian dollar losing 7 ticks to $1.0047, and the Australian dollar gaining 8 points to $1.0354. The inability of the U.S. government to resolve its budgetary problem continues to play havoc in the international market place. We continue to favor the dollar but would hold current positions and not add pending a determination on the U.S. budget and tax situation.
Energies: January crude oil closed at $88.91 per barrel, up 84¢ as traders kept a watchful eye on Washington as well as concern over supply risk in the Middle East what with ongoing tensions between Israel and the Palestinians. The UN announced its acceptance of a Palestinian state and that did not bode well with Israel as Palestine is now accepted with the UN as a State. We remain concerned that the fragile peace between Israel and the Muslim Brotherhood which controls Egypt and to some extent Gaza may not be permanent and could erupt in War in the all-important energy area of the Middle East. Our overall opinion remains negative for crude based on supply/demand and the recession in Europe but could change at any time. Our clients will be informed on a timely basis of any change in any of our market opinions.
Copper: March copper closed at $3.6425 on Friday, up 3.7¢ and its highest price since Oct. 22. Reports of improved growth prospects in China, the world’s largest user of industrial metals prompted heavy short covering and new speculative buying. We had been bearish for some time based on our overall negativity towards global economies as well as the contraction of industrial activity in China, but that situation appears to have changed so we are on the sidelines for now. Aside from the China situation the U.S. industrial complex could be affected by any decision on the U.S. budget which could have a material effect on demand for industrial metals. Any failure to come to an agreement to extend the Bush tax cuts could impact corporate and small business expansion and hiring plans.
Precious Metals: February gold closed at $1,712.70 per ounce, down $16.80 or fully 1% on Friday as stalled negotiations in Washington on the so called fiscal cliff continued to concern investors. We prefer the sidelines since the resulting compromise, if achieved before the year-end deadline, could materially affect global economies and investor psychology. March silver closed at $33.28 per ounce, down $1.15 or 3.4%. January platinum closed at $1,604.60 per ounce, down $14.90 while March palladium closed at $688.20 per ounce, up 75¢. Our favored spread of short platinum long palladium reasserted itself as platinum lost 0.9% while palladium gained 0.1%. Otherwise we prefer the sidelines awaiting any results from the Washington budgetary stand-off.
Next page: Grains, meats and softs
Grains and Oilseeds: March corn closed at $7.53 ¾, down 5¢ on reduced demand and adequate supplies. March wheat closed at $8.63 ¼ per bushel, down 22.25¢ on profit taking after having gained 1.7% in November and on concerns over U.S. government budget stalemate. March Soybeans followed the other pits losing 6.25¢ per bushel to close at $14.34 ¾. The recent rally prompted the U.S. increased value of exports pushed prices higher but profit taking emerged on ideas of an overbought condition. We are on the sidelines for now pending further fundamental news.
Meats: February cattle closed at $1.30525, down 1.575¢ per pound on speculation a weaker U.S. economy could result in lower demand. February hogs closed at 87.125¢ per pound on reduced demand for pork which could be attributed to economic concerns. We could see additional profit taking after the recent rally and would only hold existing option positions for now.
Coffee, Cocoa and Sugar: March coffee closed at $1.4985, down 6.55¢ on higher production from Brazil, the world’s largest producer as well as from Colombia, the second largest producer. Stay out but do not short since fundamentals could change “on a dime”. March cocoa closed at $2,486 per tonne, down $5.00 on continued sideways trading in a narrow range. We prefer the sidelines since the questionable U.S. budgetary impasse could result in lower global demand. March sugar closed at 19.33¢ per pound down one $11.20 tick and is “stuck” at recent lows. A few calls may be in order if only due to the low price relative to recent market action.
Cotton: March cotton closed at 73.8¢ per pound, up 45 points as an interest has developed for cotton tied to reduced sowings in Australia. Farmers have cut sowings for 2012-13 by 30% in excess of previous planting ideas. In the non-irrigated areas the decline in sowings could be as much as 50% and that could bode well for prices. We like cotton from here.