Overview and Observation;
Once again external events play a major role in the international marketplace. We have a difficult enough time analyzing markets using the normal elements of supply/demand, economic data and corporate reports without having to try to determine what effect geopolitical events play. The latest "departure" from the determination of the U.S. in dealing with the use of chemical weapons came in a speech by President Obama claiming now to require Congressional approval before dealing with that threat to the people of Syria. The U.S. is now viewed as weak in responding to threats and can only strengthen the Syrian government’s resolve to crush the rebellion. On the other hand there is little or no support for any aggressive position by friend and foe alike for attacking a regime trying to suppress a revolution. The big question of "who did it" remains unanswered as the speech by the UN representative refused to address that question. He insisted that the "mandate" only includes the fact of whether chemical weapons were used, not as to who is responsible for its use. An email claiming that the Associated Press indicates that the rebels themselves launched the gas attack on its own people in order to garner support for their cause is circulating. We just don’t know and that confuses everyone, especially market participants. The U.S. economic data is barely positive and confirms our position that the so-called recovery is in fact a "figment of the Administration’s imagination" and does not deal with the problems of lower new home sales and labor conditions. We will try to offer suggestions to hopefully "guide" our readers through the "maze" of information. Now for some actual information…
The December Treasury bonds (CBOT:ZBZ13) closed Friday at 131 and 23/32nds, up 1 tick but 32/32nds higher on the week after yields had risen tied to the possibility that the Federal Reserve would reduce monetary stimulus. The Consumer Confidence Index declined to the final August reading of 82.1 from the prior months reading of 85.1 and that prompted the rally in bond prices and the decline in yields. Another indicator of economic health was the report from the U.S. Commerce Department that spending and personal income rose 0.1% in July against economist expectations of a 0.3% gain in spending and a 0.1% in new income. Any disappointment no matter how marginal has an almost immediate effect on interest rate instruments, which then affect yields. We continue to view the Treasury market as in a range dictated by the Federal Reserve statement and expectations. We do, however, feel that the U.S. economy is not in recovery and for that reason we see continued Federal Reserve "hesitation" to change policy and would hold bond calls for now. My program of selling puts and/or calls in this market based on the tight trading range should be considered by well capitalized account holders.
The Dow Jones industrials closed Friday at 14,810.31, down 30.64 or 0.2%. For the week the Dow lost 1.3%, for the month 4.5%. The S&P 500 (CME:SPV13) closed at 1,632.97, down 5.20 and for the week lost 1.8%. The tech heavy Nasdaq closed at 3,589.87, down 30.43 and lost 1,9% for the week. The markets reacted to the on again off again possibilities of a U.S. attack on Syria after evidence that chemical weapons were used on civilians. We question the validity of claims as to who is responsible, but the fact remains those weapons, against international law, were used. The U.S. President’s intention to strike at Syrian positions was expected but contrary to that expectation and confusing to his own cabinet was the "eleventh hour" change of heart and now considers consulting with Congress. This retraction of intention apparently sent a message of "weakness" to Syria that he is not in control of the situation being unable to garner support from the U.S. closest ally, Great Britain, and criticism from many other factions not the least of which was Putin of Russia. Economic data also provided for the pre-holiday selling in equities. We continue to implore holders of large equity positions to "purchase insurance" in the form of strategic hedging programs which we can "design" specific to their requirements.
The December U.S. Dollar Index (NYBOT:DXZ13) closed at 82.375 on Friday, up 13.2 points tied to concerns over the Syria situation and the possibility of a U.S. strike against various positions. The introduction of chemical weapons used on civilians lead to the possibility of a U.S. attack. However, late Friday, President Obama changed "his mind" and decided to place the responsibility on Congress as to the determination of any strike against Syria. This entire matter has developed into a sign of weakness for the U.S. by friends and foes alike. The President had "jumped the gun" in declaring he would give the order to attack Syrian government elements before the evidence of who is responsible for the use of those weapons could be determined. Now the "urgency" no longer exists but has left not only his cabinet members but the entire world wondering if, as Teddy Roosevelt once said, "Speak softly and carry a big stick" has changed to "speak loudly, and don’t carry any stick". A bad situation made worse by the "rhetoric" and change of direction. The Syrian situation supersedes any concern in the marketplace over the possibility that Greece may need another bailout, or of the debt crisis in Europe nor of the U.S. economic situation. Other currencies affected by the geopolitical implications were the Euro, which lost 33 points to $1.3215, the Swiss Franc which gained 7 ticks to $1.0760, the Japanese yen up 15 ticks to 0.010198, and the Canadian dollar up 6 ticks to 94.77c.
The British Pound lost 5 points to $1.5481, and the Australian lost 30 points to 88.42c. We prefer the sidelines for now.
October crude oil (NYMEX:CLV13) closed at $107.65 per barrel, down $1.15 on Friday on profittaking after its recent rise tied to concerns over Egypt and Syria. The market responded negatively to the British decision not to back the U.S. in any attack on Syrian government positions. An attack could have expanded in the region and cut supplies of crude from the area. With the added change in U.S. Presidential policy as to whether Congressional approval would be given, the market remains in flux and we remain on the sidelines.
December copper closed at $3.2350, down 2.55c and remains rangebound tied to any changes in U.S. economic data and corporate results. Producer concerns also was a factor in recent strength. We prefer the sidelines after having been bearish for some time.
December gold (COMEX:GCZ13) closed Friday at $1,396.10 per ounce, down $16.80 or 1.2% but managed a gain of 6.3% for the month. Increased physical demand recently as well as concerns over the Egyptian and Syria situation prompted the return to golds attraction. Shortcovering in front of the holiday weekend also a factor in Fridays action. We remain unconvinced as to the viability of gold as an "investment". Any inclination to own a precious metal should be directed, in our opinion, to silver, which has proven to provide a more attractive percentage gain I any upward price movement. December silver closed at $23.51 per ounce, down 63c on pre weekend profittaking after recent gains. We prefer silver to gold only for those who "must have" a precious metal in their portfolio. Otherwise we prefer the sidelines. The wide price swings tied to any economic or geopolitical data is not suggested for retail clients. October platinum closed at $1,527.10 per ounce, up $4.70 while December palladium closed at $723.85 per ounce, down $16.25. We are on the sidelines here as well.
Grains and Oilseeds:
December corn (CBOT:CZ13) closed at $4.83 per bushel, up 1 1/2c on light shortcovering and for the week posted a gain of 2.6%. Drought concerns prompted the shortcovering. We could see further price gains but with the prospect of rains moving into the area, some profittaking could be forthcoming. We prefer the sidelines. December wheat (CBOT:WZ13) closed at $6.54 ½ per bushel up 1/4c but the International Grain Council increase of its forecast for world wheat production of up 0.6% from its month ago could prompt selling early in the week. We prefer the sidelines. November soybeans closed at $13.56 ½ per bushel, down 12c after recent strength on increased possibility for beneficial rains. We continue to favor the long side of soybeans through the additional purchase of calls.
October cattle closed at $1.2680 per pound, down 17 points on lack of packer demand. We prefer the sidelines. October hogs closed at 87.60c per pound, up 27.5 points tied to demand and seasonal increase in hog slaughter to meet demand. We prefer the sidelines here as well for now. The recent price range remains stable in these markets.
Coffee, Cocoa and Sugar:
December coffee (NYBOT:KCZ13) closed at $1.1640, down 1.25c on lack of fresh fundamentals. Brazilian coffee producers’ plans to move coffee into its support programs in order to garner higher prices as reduced offers. We could see some shortcovering after the recent sharp price decline since any attempt to shore up prices seems ill fated for now. High stocks a deterrent to higher prices.Stay out. December cocoa closed Friday at $2,424 per tonne, down $55 tied to rains in West Africa and improving conditions. We continue to favor the sidelines in cocoa. October sugar closed at 16.33c per pound, down 4 ticks tied mostly to the strong dollar. The weak Brazilian Real could lead to additional offers of sugar. Stay out.
October cotton (NYBOT:CTV13) closed at 83.88c per pound, up 28 points on light shortcovering in front of the three day holiday. After the recent ten cent collapse in prices we could see a technical bottom forming for those chart watchers as well as weather conditions. For now the trend remains negative but buying a few calls here could prove profitable.