Overview and Observation;
Once again the markets were held hostage by the U.S. Congress and the threat of a government shut-down on Monday night. Based on the rhetoric late last week and on Saturday, I do not see a resolution at this time. The Democrats want their version including funding for Obamacare included and the Republicans want an extension of one year before implementation and revision. The main concern should be the increase of the debt ceiling, which will allow the country to pay debts already incurred. My feeling of course is that the spending, over and above the budget current ceiling, should never have occurred. Spending more money than you have is never a good idea, not for me, not for you, not for the American taxpayer. However, those bills must be paid with or without the "pork" of the funding for Obamacare. Extending that implementation for one year does not seem to me to be an insurmountable concession but we will have to wait and see. Meanwhile the impact on the economy and on working Americans is "on the table" and the markets are anxiously awaiting the Monday congressional sessions. Now for some actual information…
The December U.S. Treasury bond (CBOT:ZBZ13) closed Friday at 133 09/32nds, up 5/32nds with the gain attributable to the "flight to safety" associated with economic and geopolitical concerns. The U.S. Congress, in failing to come to an agreement as yet to "pay its debts" by raising the debt ceiling with the inclusion of additional funding for Obamacare could cause a government "shutdown" and the ramifications of such an event are questionable. In U.S. economic news, the U.S. Commerce Department reported consumer spending rose by 0.3% in August but the final reading of the Thomson Reuters/University of Michigan consumer sentiment index for September was 77.5 against economists forecast of a reading of 78. The markets do not like questions. For now we remain committed to a neutral bias for treasuries.
The Dow Jones Industrial average closed Friday at 15,258.24, down 70.06 points and for the week lost 1.25%. The S&P 500 closed at 1,691.75, down 6.92 and for the week lost 1.06%. The Tech heavy Nasdaq closed at 3,781.60, down 5.84 but for the week managed a slight gain of 0.18%. Concern that the Congressional "debate" will not succeed in staving off a "Government shutdown" due to the "determination" of each political party to "win concession" from the other is playing havoc with the marketplace. While we remain convinced that the markets have exceeded their “intrinsic" valuations, we could see dramatic price movement in either direction and would therefore once again urge strongly the implementation of strategic hedging programs for holders of large equity positions. We can tailor such positions to suit those investors given the opportunity. Our programs are specifically designed to each individual investor’s needs.
The December U.S. Dollar Index (NYBOT:DXZ13) closed Friday at 80.35, down 28.8 points tied to concerns over the congressional impasse over the debt ceiling legislation that unfortunately includes funding for Obamacare. Both houses of Congress are basically in agreement to an increase in the debt ceiling to pay bills but the Republicans want Obamacare held over for a year and Democrats and the President do not agree. We will have to await the outcome before making any recommendations. Gains against the dollar were achieved by the Euro, up 36 points to $1.3526, the Swiss Franc up 54 points to $1.1047, the Japanese Yen up 61 points to $0.010187, the British Pound 1.05c to $1.6138, and the Canadian dollar 10 ticks to 96.89c. The Australian dollar lost 40 points to close at 92.70c. Until which time as we know the results of the current congressional stalemate, we are on the sidelines. Our overall opinion, however, is that higher U.S. interest rates will benefit the dollar and with interests at historic lows, the only way for rates to go is up. Timing of course is the only question. .
November crude oil (NYMEX:CLX13) closed at $102.87 per barrel, down 16c as traders are concerned over the possible impact of the U.S. budget impasse. Other concerns continue to be Syria and Iran but with recent developments such as the U.S. Presidents first communication with the Iranian President since the Shah’s overthrow in 1979 lessened some psychological concerns. We recognize however, that the Iranian President is only a "puppet" of the "Supreme religious ruler" and that nothing will be resolved as to Iran’s nuclear intentions without his approval. We remain overall bearish for crude based on our expectation of global economic weakness.
December copper closed at $3.3210 per pound, up 1.4c against the weak dollar. Demand by China, the largest importer of copper and iron ore, has declined recently as its economy appears to have slowed. We remain bearish toward copper consistent with our view of a global economic slowdown.
December gold (COMEX:GCZ13) closed Friday at $1,339.20 per ounce, up $15.10 on shortcovering in front of the weekend and on concern of a U.S. government shutdown if Congress cannot agree to increasing the debt ceiling to pay existing bills. The problem lies in the Obamacare inclusion in that all important bill. Also comments by a Federal Reserve official suggesting the bond buying stimulus program may be extended into next year was a positive factor for precious metals. For now we are on the sidelines. December silver (COMEX:SIZ13) closed at $21.775 per ounce, up 9 cents following gold. We prefer silver against gold for those that "must own" a precious metal in their portfolio. Otherwise stay out for now. January platinum closed at $1,421.50 per ounce, up $6.80 while December palladium gained $7.00 to close at $730.45.
Grains and Oilseeds:
December corn (CBOT:CZ13) closed at $4.53 ¾ per bushel, down 3c even against the weak dollar as reports that China will import less corn than previously expected. We prefer the sidelines. December wheat (CBOT:WZ13) closed at $6.81 ½ per bushel, up 3 1/4c on shortcovering and against the weak dollar. Recent International Grains Council estimate that global winter wheat area for the 2014 harvest is the highest for winter wheat sowings since 1997. We prefer the sidelines here as well. November soybeans (CBOT:SX13) closed at $13.20 ½ per bushel, up 3 3/4c against the weak dollar but also on a report by Deutsche Bank increasing its forecast for soybean prices and on tight U.S Supplies. Below normal rains in Brazil and Argentina prompted their estimate adjustments. We prefer the long side of soybeans through the purchase of call options.
Coffee, Cocoa and Sugar:
December coffee (NYBOT:KCZ13) closed Friday at $1.1355, down another 2.10c and remains under heavy selling pressure by speculators that tried to "pick a bottom" to the recent selling. Better than expected production from Vietnam as well as surplus availability in Central America weighing on prices. We prefer the sidelines. December cocoa (NYBOT:CCZ13) closed at $2,642 per tonne, up $45 against the weak dollar and on basic technicals. Yields due to drought and hot temperatures in West Africa earlier in the year have affected yields and cocoa bean sizes and prompted new buying. We could see additional buying but prefer the sidelines for now in anticipation that a correction may be due. October sugar (NYBOT:SBV13) closed at 16.81c per pound, down 70 points or 4% and remains on our "no interest" list for now.