Overview and Observation;
Surprise, Surprise. U.S. Fed Chairman Bernanke "shocked" the markets on Wednesday announcing the Fed is maintaining the stimulus program when the investing world was expecting a taper. Expectations were for the Fed to reduce the $85 billion monthly bond program by $10 billion. Obviously the Fed did not see in the U.S. data, the recovery the administration has been seeing. We concur since the all-important jobs data is not reflective of a strong economy. The unemployed and just as importantly the "underemployed" data are problematic for various reasons. For one, the tax base is reduced and that implies reduced income to the U.S. government while spending continues unabated. Also, the underemployed are also paying "less tax" since they took jobs paying less than the jobs they lost. Another factor to consider is the lower participation index which distorts the final jobs numbers. The possibility of a government shutdown looms as the two parties and the President are stubbornly maintaining their respective positions. The head of the AFL-CIO recently met with the White House to get its membership "exempted" but were turned down. It is hard to believe that the major supporters of the Democratic Party have now turned. We will have to wait and see how many of the Obamacare elements are delayed, exempted and for whom. Now for some actual information.
December Treasury bonds (CBOT:ZBZ13) closed at 131 19/32nds up 12/32nds spurred by the Wednesday Fed statement maintaining the stimulus program. The investment community was taken by surprise having already decided which segment of the stimulus program would be reduced. Now the expectation is for the tapering to occur in October, assuming the Fed views the economic data in a more positive way. We see continued economic stagnation and with the budget battle brewing, we prefer a neutral stance.
The Dow Jones Industrials closed Friday at 15,451.09, down 185.46 or 1.19% but for the week managed a gain of 0.49%. The S&P 500 (CME:SPZ13) closed at 1,709.91, down 12.43 or 0.72% lower but for the week gained 1.30%. The Nasdaq closed at 3,774.73, down 14.66 or 0.39% but for the week gained 1.41%. Much of the gains took place prior to the Wednesday announcement by the U.S. Federal Reserve of maintaining the stimulus program against expectations of tapering. The Fed maintaining the stimulus program was evidence that they did not see the reason for the U.S. Administration’s optimism. Neither do I for that matter.
The December U.S. Dollar Index (NYBOT:DXZ13) closed Friday at 80.555, up 7.5 points but posted its second consecutive weekly loss. The Federal Reserve’s decision to maintain its bond buying indicated their view of a sedentary economy, not a recovery style recovery the U.S. administration is promoting. The Fed clearly views as problematic some elements of the economic data and maintaining low interest rates is negative for dollar investment. Expectation now is for the Fed to "taper" in October and that, if it occurs would bode well for the dollar since it would be a de-facto increase in U.S. rates. We would now look to get back on the long side of the dollar on a scale down using call options. Contact us for what we believe are the appropriate strike prices and expiration. The December euro lost 4 ticks on Friday closing at $1.3526. Other losses include the Swiss franc 3 ticks to $1.0986, the Japanese yen 1 tick to 0.010072, the British pound 18 points to $1.6006, the Canadian dollar 37 ticks to 96.88c and the Australian dollar 30 ticks to 93.57c.
October crude oil (NYMEX:CLV13) closed at $104.67 per barrel, down $1.72 on reduced concern over Middle East supplies as Libya’s oil production increased. For the week crude declined 3.3%. Our overall view remains bearish tied to supply/demand but the continued concern tied to Egypt and Syria and increased terrorist activities in the region could change the overall picture. The growing threat of instability as witnessed by the horrendous mall attack in Kenya is of concern so we would avoid this market.
December copper closed at $3.3055 per pound, down 4.15c tied to the decline in equities and based on the assumption that the U.S. Federal Reserve sees economic weakness enough to warrant sustaining their stimulus program. We remain bearish on copper but will watch for any changes in the U.S. or China economic data.
December gold (COMEX:GCZ13) closed Friday at $1,332.50 per ounce, down $36.80 or 2.7% but for the week managed a gain of 1.8%. The selloff on Friday was in response to the inordinate gain on Wednesday following the U.S. Federal Reserve’s Open Market Committee decision to maintain its bond buying program. We see gold in a trading range and would avoid any positioning here. Gold has lost nearly 20% for the year and is not conducive to investment by retail clients. After surging 8% on Thursday after the Fed announcement silver lost 5.9% on Friday closing at $21.927 per ounce. October platinum lost 2.7% to close at $1,432.60 on Friday and for the week lost 0.8%. December palladium closed at $717.60 per ounce, down $20.60 per ounce or 2.8%. We are avoiding precious metals markets. Their exaggerated response to data precludes participation by our clients.
Grains and Oilseeds:
December corn (CBOT:CZ13) closed at $4.51 ¼ per bushel, down 8 1/4c tied to seasonal pressure from the beginning of the U.S. harvest. We prefer the sidelines. December wheat (CBOT:WZ13) closed at $6.46 per bushel, down 11c tied to favorable planting weather in the U.S. plains. We prefer the sidelines here as well. November soybeans (CBOT:SX13) closed at $13.16 per bushel, down 23 1/2c and as with corn selling tied to seasonal pressure at the start of the U.S. harvest. Soybeans sold off on speculation of increased U.S. yield potential. We view these markets as a trading affair and based on harvest or planting progress. We are on the sidelines.
No comment this week. October cattle (CME:LCV13) closed at $1.2640 per pound, up 47.5 points while October hogs closed at 90c per pound, down 1.15c.
Coffee, Cocoa and Sugar:
December coffee (NYBOT:KCZ13) closed at $1.1475, down another 1.05c and its lowest price in over four years. U.S. inventory increases to levels of 2009, large inventories and expected large global crops continue to weigh on prices. Beneficial rains in Brazil, the world’s largest coffee producer are benefiting production. We are on the sidelines. December cocoa (NYBOT:CCZ13) closed at $2,608 per tonne, down $22 on profit taking after recent price gains. Potential shortages of cocoa by years end holiday demand prompted recent buying. We prefer the sidelines. October sugar (NYBOT:SBV13) closed at 17.17c per pound and remains on our no interest list.
October cotton (NYBOT:CCV13) closed at 83.24c per pound, down 2.10c tied to demand concerns and increased global supplies. Weather in India is beneficial. We prefer the sidelines.