The ongoing rhetoric from Washington continues to permeate the “hallowed halls” of Wall Street for both the brokerage sector and the banking sector. Brokerage firms and banking firms are being criticized for huge bonus payouts and President Obama issued an edict to impose special fees on those firms until the bailout funds are repaid to the U.S. taxpayer. While the concept is understandable, the need for special fees eludes me. Why not just order the payments to be made as soon as possible and not “take over” corporate management roles. The recession, in contradiction to many analysts and the U.S. administration……..is not over. It is like the “blind leading the blind”, when the continuing mortgage defaults, the inability to correctly assess the value of the securitized paper, and the ongoing job losses. I will say it again, for the pundits, “an unemployed consumer does not consume and the producers of those unconsumed (a newly created word) products are next to reduce employees”. The expectations for corporate earnings continue to be based on increased productivity and cost reduction rather than actual sales. Earnings season, in my opinion, will substantiate our statements. Another fallacy is the proposed health care plan where President Obama intends to make health care “more affordable”. What good is that for the 15 million unemployed who will have to decide between health care and food…On top of that ridiculous solution is the proposed “penalty” for those who do not obtain health insurance. If the unemployed cannot afford mortgage and car payments, how can they afford either health care or a penalty for not buying it? I fear that small business will lay off people if forced to provide extensive health care. Small business is the only hope, in my opinion, for hiring people. Once they do hire, then those employees can buy big ticket items and get the economy on the road to recovery. Washington’s plans are absolutely, in my opinion, a formula for disaster. Now for some actual information
Interest Rates: March Treasury bonds closed at 11712, up 19 ticks and remains stuck in the range I projected some time ago. It should be a simple matter to figure out that U.S. interest rates cannot go lower than 0-.25% but relative to interest rates of its trading partners, defacto changes occur. The Treasury auctions of $84 billion of notes, bonds and Treasury inflation protected securities this week went better than expected. Concern over the progress of the U.S. economic recovery was also a factor in the renewed buying of treasuries. We continue to suggest that bonds will remain in a trading range between 115 and 123.
Stock Indices: The Dow Jones industrials closed at 10,609.65, down 100.90 or 0.94%. The S&P 500 closed at 1,145.68, down 9.46, or 0.83%. The Nasdaq closed at 2,287.99, down 28.75 or 1.24%. Disappoint earnings from Alcoa and J.P. Morgan, even though the latter beat estimates. Credit losses and credit charge offs along with commercial credit defaults continue to concern investors. A situation I warned about some time ago in our commentary. People are using their new credit card to make minimum payments on older cards and the “piper will have to be paid” at some point. Also, the unemployed appear to be using credit cards in order to buy essentials to survive. That condition cannot persist and we have yet to feel the brunt of credit abuse. Implement hedging strategies immediately. We feel the equity markets are approaching an “abyss”.
Currencies: The March U.S. dollar index closed at 7736, up 47.5 points as concerns over the pace of the supposed U.S. recovery prompted the shortcovering and new buying of dollars. The Yen also benefited by U.S. economy concerns closing at 11005, up 10 points. The other majors included the Euro, losing 146 points to 14355, the March swiss Franc losing 86 points to 9738, the march British pound losing 71 points to close at 16253, the Canadian dollar losing 71 points to close at 9706, and the Australian dollar losing 93 points to 9166. We do not expect the dollar strength to continues since the spectre of economic weakness will keep interest rates low. Higher interest rates usually attract dollar investment. Stay out for now but we continue to favor the long side of the Swiss Franc.
Energies: February crude oil closed at $78 a barrel, down $1.39 on reduced expectations for fuel consumption due to mild weather this past week. That condition will probably not continue and for that reason we could see crude prices rally during the new week. February heating oil closed at $2.046 per gallon, down 3.69c while unleaded gasoline lost 2.73c to close at $2.0590 per gallon. We continue to suggest the sidelines in energy for all but the professional trader.
Copper: March copper closed at $3.3660, down 2.15c tied mostly to the dollar strength and persistent rumors that the Chinese expansive construction and auto industries may slow. Also reports of Chinese monetary tightening and increased inventories a negative for prices. Inventories at the LME increased by 1,500 metric tonnes Friday to 525,475. Comex inventories were up 276 short tons to 99,917 and the weekly report from the Shanghai Futures Exchange showed an increase of 1,774 metric tonnes to 100,588. We prefer the short side of copper but only for trading accounts.
Precious Metals: April gold closed at $1,131.80, down $12.50 tied to the dollar strength and concerns over whether there is a global economic recovery. March silver closed at $18.427 per ounce, down 22.8c following gold. April platinum closed at $1,596.10 per ounce, down $8.70 while March palladium gained $4.70 to close at $447.75. Our long term spread strategy has been to sell platinum and buy palladium. We continue to favor that strategy.
Grains and Oilseeds: March corn closed at $3.71 ½, down 9 1/2c tied to the bearish crop report issued by the USDA last Tuesday. The dollar strength also contributed to the weakness. We suggest the sidelines for now. March wheat closed at $5.10 per bushel, down 17 3/4c tied to large supplies and lost 58 1/2c for the week or $2,950 per contract. Stay out for now. March soybeans closed at $9.74 per bushel, down 10c on fund selling and supply outlooks. Selling in the neighboring grain pits also prompted selling on margin concerns. We prefer the long side of beans but with stops.
Coffee, Cocoa and Sugar: March coffee closed at $1.4075 per pound, down 3.6c tied to the strong dollar and influenced by the selling in the grains and metals. Global production is expected to show 3.4% lower could prompt buying early in the week if the dollar stabilizes or declines. March cocoa closed at $3,400 per tonne, up $8.00 even against the strong U.S. dollar. For the week March gained $104 per tonne mostly on fund buying. Strong demand reported during the week along with 4th quarter 2009 European grind up 1.9% also a factor in the buying. We could see additional buying and some shortcovering this shortened week but we prefer the sidelines since there are no additional fundamentals on the horizon and a correction is in order. March sugar closed at 27.62c per pound, down 14 points tied to the strengthening dollar and general commodity selling. Wait for the “smoke to clear” before taking another look at the long side.
Cotton: March cotton closed at 72.08 cents per pound, down 83/100s of a penny tied to the dollar strength and general commodity weakness. Fundamentals such as Mill buying on lows and good demand also a factor in our analysis. We view cotton as oversold technically and could be bought here but with stops.
John L. Caiazzo
Information provided is from sources deemed to be reliable but not guaranteed. Futures and Options trading involve a high degree of risk and may not be suitable for everyone. John Caiazzo is a registered commodities broker with over 40 years experience in investments and opinions are his own and not of the Futures Commission Merchant he introduces his clients to.