Overview and Observation: And the budgetary standoff saga continues….The rhetoric coming from both sides in Washington seems unending in their continuity of demands. I fully expect a deal to be struck before the deadline but that depends on two things…. The Republicans must re-consider the tax structure for the wealthy and the Democrats must consider that $250,000 does not constitute “millionaires and billionaires.” A compromise could be the elimination of certain tax loopholes for those earning more than $1,000,000 and a rate increase of 10% over and above their current rate. That compromise makes sense to me and perhaps could culminate in a deal….finally. Both sides maintain that the failure to come to an agreement could impact the middle class. I concur with an added caveat…the U.S. will sink into recession. In 2007 in a roundtable discussion that was published in a magazine, I was quoted as stating, in a response to a question as to why I thought the Dow should be sold, “we are going into recession, how’s that for a reason?” I see the same scenario taking place today with or without a “tax deal.” To reiterate my oft repeated comment, “An unemployed consumer does not consume anything and the producers of those un-consumed products will be next to lay off workers.” I also indicated that any reduction in the weekly first time unemployed number issued each Thursday would not be a sign of improvement in the labor situation, but merely the reality of “fewer people available to lay off without a company having to close its doors.” Now for some actual information…
A full week with the March Treasury bond closing at 149 20/32nds, only 7/32nds lower and down 28/32nds from Thursday. A report that the U.S. economy added more jobs than expected last month and concern over Superstorm Sandy’s effect on the U.S. economy abated prompting the selling on Friday. The Treasury market remains mired in a narrow range pending an eventual resolution of the current “fiscal cliff” concerns and ongoing negotiations. We suggest the two parties come to an agreement as I indicated in my overview before market participants find some other avenue of investment…like setting up “lemonade stands” or selling used cars…
Stock Indexes: The Dow Jones Industrials closed at 13,155.13, up 81.09 points on Friday after the better than expected November jobs report showed a drop in the jobless rate from 7.9% to 7.7% completely ignoring the December consumer sentiment decline. For the week the Dow gained 1%. The S&P 500 closed at 1,418.07, up 4.13 points and for the week gained 0.1%. The tech heavy Nasdaq lost 11.23 points to close at 2,978.04, and for the week lost 1.1% mostly tied to the decline in Apple computer company stock. We continue to await a disposition of the ongoing budget controversy to establish a determination of what the results will mean going forward for the U.S. economy and the equity markets. Our ongoing suggestion that holders of large equity positions consider the implementation of hedging strategies.
Next page: Currencies, energies, metals
Currencies: The March U.S. Dollar Index closed at 80.60 up 17.2 points on shortcovering and on the better than expected U.S. jobs data. While the U.S. economic concerns persist, on a relative basis against the Euro currencies, the dollar fared better. The 17 nation euro declined on reports that the majority of European Central Bank members favor an interest rate cut if the “economy doesn’t pick up” along with a downgrade of the German economic outlook. Germany is a major contributor to the European backed bailout proposals for Greece, Spain and other weak economies. We continue to favor the U.S. dollar on that basis. On Friday the euro closed at $1.2940, down 36 points, the Swiss franc 17 points to $1.0721, the Japanese yen 15 points to 0.12138, the British pound 13 points to $1.6030. However, the Canadian dollar managed a gain of 32 points to $1.0093, and the Aussie dollar 16 points to $1.0409. Stay with the U.S. currency.
Energies: January crude oil closed at $85.93 per barrel, down $0.33 against a stronger dollar even against Mideast concerns. We continue to view crude oil as bearish based on reduced global demand tied to ongoing economic recessionary concerns. Hold put positions.
Copper: March copper closed at $3.6665 per pound, up $0.022 tied to better than expected U.S. payroll numbers and an expected increase in copper demand from the U.S. as well as China. We continue to believe global recessionary trends will continue to reduce overall demand for industrialized metals and would hold put positions for now.
Precious Metals: February gold closed at $1,705.50 per ounce, up $3.70 on the Comex division of the New York Mercantile Exchange after trading as low as $1,684.10 early in the session and as high as $1,706.90 towards the close. March silver closed at $33.13 per ounce, up $0.02 following gold. Of the two we prefer silver for those who “must” own a precious metal. January platinum closed at $1,607 per ounce, up $6.30 while March palladium gained $0.95 to close at $698 per ounce, Our favored spread of long palladium against short platinum worked well this week as palladium gained 1.4% against platinum’s gain of only 0.2%. Hold the spread.
Next page: Grains, meats and softs
Grains and Oilseeds: March corn closed at $7.36 ¼ per bushel, down $0.1525 on expectation that planting delays have ended in Argentina and rain improving crop conditions in Brazil. Stay out of corn. March wheat closed at $8.59 ½ per bushel, down $0.025 and for the week lost 0.3% on long liquidation. We prefer the sidelines in wheat as well. March soybeans closed at $14.72 per bushel, down $0.14 also tied to resumption of planting in Brazil. We are awaiting fresh fundamentals before entering the long side of soybeans again.
Meats: February cattle closed at $1.3045 per pound, down 57.5 points on choppy trading and remains centered in the 133 and 128 price level. We could see further price gains tied to the recent aggressive herd marketings as feed prices gained. However, we would look to buy calls on any price decline tied to the dollar. February hogs closed at $0.8355c per pound down 90 points and lost 0.4% for the week. Weak demand for ham as retailers had already completed their Christmas holiday purchases. Stay out for now.
Coffee, Cocoa and Sugar: March coffee closed at $1.5280 per pound, up $0.0185 on short-covering after trading at a 2 ½ year low earlier in the week. We like coffee from here but only on call purchases. March cocoa closed at $2,409 per tonne, down $11 tied to expectation for a large global surplus in 2012/13. We prefer the sidelines in cocoa for now but with a watchful “eye” on African producers. March sugar closed at $0.1918 per pound, down 18 points on heavy volume and concern over excess supplies. Higher Brazilian output, the world’s top producer is expected to add to the global surplus. We prefer the sidelines but would hold long call positions for now.
Cotton: After trading as low as $0.6979 recently, short-covering has brought prices up to $0.7380 per pound with Friday’s gain of 25 points. According to the International Cotton Advisory Committee in its first forecasts for the 2013-14 year which starts next August, estimates for world cotton production could fall by 11%. After trading as high as $0.78 per pound in August and retreating the $0.71 level in early October, prices have seen a bounce to $0.76 and another drop to the recent $0.6979 low before basing and starting up again. With the technical support as well as positive production estimates we could see further price gains and would purchase calls on any weakness.