The Acuvest Letter

 Overview and Opinion: Concern that Dubai may default on loans prompted the flight to safety on Friday as investors dumped riskier commodities and equities and moved to the U.S. Treasury market. Dubai was asking for a moratorium on payments until March or April which didn’t seem inordinate but concern over the impact of default on the global financial systems prompted the quasi panic liquidation of riskier assets. We could see assistance from other Emirates in the area so the Dubai problem could be mitigated. However, the response by markets reflects concern over the continuing global recession that, as my readers know, has been downplayed by the U.S. administration and the Federal Reserve Chairman as well as the Treasury Secretary. We continue to suggest selective reduction of positions in equities and commodities where the fundamentals do not support current prices. Now for some actual information.

Interest Rates: December Treasury bonds closed at 123-06, significantly higher after investors moved from equities to the relative safety of U.S. Treasuries. Concern that the potential default of Dubai debt prompted massive moves from equities and other riskier investments to treasuries. With the potential for other Gulf Emirates to come to the aid of Dubai in one form or another, we could see a reversal of Friday panic liquidation of equities and other commodities. Another factor was the investor enthusiasm over the $118 billion in sales of two-, five-, and seven-year notes, which were auctioned and that could curtail some of the concern over the U.S. government budget shortfalls. Bonds could be a sale here as they are at the outer perimeter of our suggested trading range.

Stock Indices: The Dow Jones Industrials closed at 10,309.92, down 154.48 points with the S&P 500 losing 19.14 points to close at 1,091.49. The tech heavy Nasdaq lost 37.61 points to 2,138.44. The market managed a comeback from early session lows which saw the Dow down over 200 points coming in. For the week, thanks to the heavy late week selling, the Dow lost 0.1%, the S&P 500 managed a weekly gain of 0.01% but the Nasdaq lost 0.4% for the week. Once again, the vulnerability of the equity markets showed that any disruption or perception of disruption to the global financial system could cause immediate and financially devastating effects. We continue to suggest implementing hedging strategies.

Currencies: The December U.S. dollar index gained 15.5 points to close at 7504, slightly above our recently suggested 7500 support level, which had been breached earlier. The dramatic move in financials caused by the potential for a default of Dubai’s debt impacted most markets both equities and commodities. The liquidation of the riskier assets subsided later in the session but clearly illustrates the vulnerability of the global financial system to any related monetary or system disruption.

Energies: January crude oil closed at $76.05, down $1.91 under pressure of long liquidation in the face of the possible default by Dubai which should be mitigated on Monday after the market rallied toward the close. Oil producers are said to "need" $80 per barrel for crude but with the current supply considered adequate, the dollar would have to re-establish its downward trend before any gains can be expected for commodities in general and specifically for crude. We would avoid positions.

Copper: December copper closed at $3.0935 per pound, down 7.15¢ tied to the general selling in dollar denominated commodities. We continue to feel that without the recovery that the U.S. administration is relying on to improve the housing and auto industries, prices should decline. The only unknown is the possibility that China may once again try to increase their inventories. Otherwise we see lower prices for copper over the intermediate term. Inventories at the LME warehouses were up 3,000 metric tons on Friday to 435,075. The weekly report from the Shanghai Futures Exchange indicated a decline of 6,128 metric tonnes to 101,277. Comex inventory was up 2,147 tons to 82,696 short tons as reported late Wednesday.

Precious Metals: December gold traded as low as $1,130.10 early in the session but managed to rally to its closing level of $1,174.20 down $12.80. The heavy selling came from dollar strength tied to the Dubai World credit problems. With the possibility of intervention by other Middle East Emirates, we could see the dollar slip and gold moving back to prior highs. We feel that gold may be overbought and we could see further corrections down to our estimated support level between $925 and $950 per ounce. December silver closed at $18.302 per ounce, down 46.6¢ after trading as low as $17.70 early in the session. We favor the long side of silver on any further dollar declines. January platinum closed at $1445 per ounce, down $34.50 while December palladium lost $8.30 to close at $362.65 per ounce.

Grains and Oilseeds: December corn closed at $3.97 ¼ per ounce, up 5.25¢ tied to strong weekly export sales. We prefer the sidelines considering the pressure put on commodities tied to the dollar strength. December wheat closed at $5.48 ¾ down 1.5¢ after trading as low as $5.305 tied to general commodity selling. We prefer the sidelines. January soybeans closed at $10.53 per bushel, down 1.5¢ again tied to the dollar strength but with strong fundamentals we would buy early in the week but with stops.

Coffee, Cocoa and Sugar: March coffee closed at $1.3805 per pound, down 85 points after having traded as low as $1.34 during the session as commodities were sold off tied to the Dubai concerns. The National Federation of Coffee Growers is calling a crop pest broca, the worst infestation in its history. We could see prices gain but would only trade with stops. December cocoa closed at $3,232 per tonne, down $46 after trading as low as $3,166 during the heavy commodity selling early in the session. A reported problem called "swollen shoot" moving into some areas of Ivory Coast may offset the amount of cocoa beans coming to market through the harvest. We prefer the sidelines. March sugar closed at 22.77¢ per pound, up 45 points after trading lower tied to the Dubai problem. We prefer the sidelines until it is determined whether Dubai will be granted extensions for debt payments.

Cotton: December cotton closed at 69.74c per pound, down 1.33¢ also tied to the heavy liquidation of commodities in general. We prefer the sidelines.