Overview and Observation:
A deal was finally struck within just hours of the deadline for a U.S. budget meltdown and removed the possibility, for now, of a U.S. credit downgrade. Unfortunately it represents a short-term "fix" and the problem, as described by the media ad nauseum of "kicking the can down the road" applies. In January we will once again be faced with the dilemma of how Congress will deal with the same problem. It is difficult for me to conclude a resolution has been truly "achieved," therefore once again, my comments and recommendations must be tempered. Now for some actual information…
The December 30-year Treasury bond futures (CBOT:ZBZ13) contract closed Friday at 134 03/32nds, down 2/32nds after recent surges in price and declines in yields. The "stand-off" in Congress is now sidelined in the minds of investors and traders, and concentration has shifted to concerns over a weakening U.S. economy. Some analysts project economic growth at 2% down from the earlier 2.3%. Some blame for the lower estimate was attributable to the "shutdown" but we feel the economic condition of the U.S. already showed signs of weakening. The appointment of Janet Yellen as the new Federal Reserve Chairman expected to produce continued economic stimulus and pushes the possibility of a "tapering" into late-2014. She is viewed as "dovish" and while consistent with the policy of current Chairman Bernanke, relieves some of the concern of quick "change" in policy. We continue to view treasuries as in a trading range and now analyzing new "strangle" spreads for our clients.
The Dow Jones Industrials closed at 15,399.70 up 28 points on continued euphoria over the resolution of the government shutdown. The reality of the impending repetition of the problem in January and February of next year eluded consideration and the indexes made some new highs. For the week the Dow gained 1.07% with sharp gains after the "decision." The S&P 500 (CME:SPZ13) closed at 1,744.50, up 11.35 and for the week gained 2.41%. The Nasdaq closed at 3,914.28, up 51.13 and for the week gained 3.23%. The current "euphoria" is in our opinion "irrational exuberance" and soon to be met with the "reality" that the U.S. economy is supported by "frivolous" expectation. The next focus will be the third quarter earnings reports. Our expectation is that the current 21 p/e ratio will decline to the more "realistic" 12.5 to 15 ratio through market action. On that basis we once again strongly recommend the implementation of strategic hedging programs.
The December U.S. Dollar Index (NYBOT:DXZ13) closed at 79.705, down 13 points continuing its decline from Thursday after Congress reached a deal before default and ended the 16-day partial government shutdown. Analysts are expecting another "crisis" in the works coming into the new showdown in January. With the reduction of the U.S. Federal Reserve’s bond purchases delayed until 2014 and the appointment of the "dovish" Janet Yellen as new Fed Chairman, no change in policy is expected. We prefer the sidelines for now. The improved economic data from China could produce higher commodity prices and improve the dollar, which is considered the "global currency."
November crude (NYMEX:CLX13) closed at $100.81 per barrel, up 14c on improved Chinese economic growth. The support from the China news kept prices from declining further, but crude still posted a loss of 1.2% for the week and the lowest close in more than three months. We have maintained our bearish posture toward crude based on our expectation of a global economic slowdown, and continued concern over individual Eurozone members’ debt crises. Hold long term put positions for crude.
December copper closed at $3.2905, down 65 points but for the week gained 0.9% tied to the increased outlook for demand by China, the world’s largest consumer of copper. We maintain our bearish view for copper, but based on the Chinese growth development, would hold current put positions but not add for now.
December gold (COMEX:GCZ13) closed at $1,314.60 per ounce, down $8.40 after Thursday’s 3.2% gain in prices. Gold has been in a range, but this week managed to "break out" in both directions and managed a gain of 3.7% for the week. The U.S. government’s 16-day "shutdown" and temporary solution created some economic concern and prompted shortcovering in gold. We remain unconvinced and prefer the sidelines in gold. The news of China growth had little effect on one of the largest consumer of gold. December silver (COMEX:SIZ13) closed at $21.91 per ounce, down 3c but up 2.7% on Thursday contributed to the 3.1% gain for the week. Once again, for those that "must have" a precious metal in their portfolio, we prefer silver, otherwise stay out. January platinum closed at $1,437.80 per ounce, up $2.90 or 0.2% and for the week gained 4.5%. December palladium closed at $740.65 per ounce, up $2.85 or 0.4% and for the week gained 3.8%. We continue to prefer the long palladium/short platinum spread.
Grains and Oilseeds:
December corn (CBOT:CZ13) closed at $4.41 ½ per bushel, down 1 1/2c and remains near lows. The only positive for corn is the shift from some corn acreage to soybeans of 1 million acres. We could see some bottoming of corn prices and would consider looking at the March contract. December wheat (CBOT:WZ13) closed at $705 per bushel, up 19c tied to dry weather in the southern Plains. With increased sowings forecast by Informa, some selling pressure may emerge so we prefer the sidelines in wheat. November soybeans (NYBOT:SX13) closed at $12.91 ¼ per bushel, down 2c tied to increases in acreage plantings with prices centered in the middle of recent chart ranges. A shift of some corn acreage to soy could prompt new pressure on prices. We had preferred soybeans in this group but for now remain sidelined.
December cattle (CME:LCZ13) closed at $1.32025 per pound, up 25 points on better than expected cash basis and less available cattle. We could see further price gains but any new purchases should be accompanied by stop protection. December hogs closed at 87.9c per pound, down 55 points tied to lower cash prices. We prefer the sidelines in hogs.
Coffee, Cocoa and Sugar:
December coffee (NYBOT:KCZ13) closed at $1.1425 per pound, down 45 points on expectation of plentiful supplies and forecasts for Colombian crops to the highest level in 20 years. We remain on the sidelines. December cocoa (NYBOT:CCZ13) closed at $2,714 per tonne, down $53 on profittaking after recent price gains on Thursday to two year highs. After the close on Thursday North American data showed an increase of 8.25% which was in line with expectations. Dealers had expected a correction after the recent strength. We are on the sidelines in cocoa after having been positive earlier. March sugar (NYBOT:SBH14) closed at 19.48c per pound, up 48 points to a one year high tied to a fire which engulfed four warehouses in Brazil’s Santos port reducing fully one fifth of the monthly exports from this top producer’s main terminal. We could see addition buying pressure from shortcovering along with concern that rains had impacted what previously had been the expectation for a record harvest in Brazil. We remain sidelined in sugar.
December cotton (NYBOT:CTZ13) closed at 83c per pound, down 82 points but with new information from China we could see renewed buying interest from one of the largest consumers of cotton. Also, a commencement for another season of the cotton support program offering 20,400 yuan a tonne to growers should prompt a further increase in their already large inventories. We would buy some cotton for December or March using stop protection and any profits on the December contract should be rolled into the March contract. No need for stop protection at current prices but on any rallies add trailing stops.