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The
Acuvest Letter
by: John Caiazzo
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Overview: “It’s all done with
mirrors”. I refer to the supposedly
good news on the U.S. economy that
is being “promoted” by the U.S.
Administration and others not
wanting to “frighten” the investing
public with the obvious truth. That
is, of course, the truth according
to me…..that we are in a recession
and that the recession will be long
lasting and deep. I have been told
that based on historical evidence
the recession will be short lived,
assuming we are in one. My response
is that no where in “history” have
home buyers been able to buy a home
with little or no money down at
substantially lower than prevailing
rates. The burgeoning unemployment
picture, the decimated housing and
auto industries, and the prospect of
still more foreclosures and
repossessions can only lead to a
prolonged recession. The failures of
the pundits to recognize that when
home construction slows down the
various industries that supply and
deliver the numerous components to
construct those homes suffer. The
employees of those industries also
suffer and the downward spiral of
defaults continues with no end in
sight. Added to that are the weak
dollar, the high cost of food and
energy, and you have a condition
that could border on depression. A
rude awakening is in store for those
that ignore the signs I mentioned.
Now for some actual information with
my usual spin of course.
Interest Rates: June treasury
bonds closed at 11708, up 15 and
5/64ths as money moved from equities
to treasuries thanks to signs that
the U.S. economy is “struggling”
with the high cost of energy and a
weak financial sector. This coming
week reports on retail sales and the
consumer price index will no doubt
exemplify a weak economy thanks to
the increasing cost of food and
energy. We have suggested staying
with the bonds and see no reason to
change our opinion. The only thing
the Federal Reserve can do is
continue to reduce rates albeit
futile in our opinion. The recession
we see will continue unabated.
Stock Indices: The Dow Jones
industrials closed at 12,745.88 on
Friday, down 120.90 points with the
S&P 500 losing 9.40 points to close
at 1,388.28 and the Nasdaq 5.72
points closing at 2,445.52. For the
week the major indices lost over 1%.
The sell off started when American
International Group reported a loss
of $7.8 billion dollars and the
Citigroup plan to liquidate around
$500 billion of assets. The
financial sector prompted the
selling in equities and consumers
reportedly added substantial credit
card debits as they are unable to
keep up with higher food and energy
costs through their payrolls. And
speaking of payrolls, the weekly
first time unemployment numbers of
between 370,000 and 400,000 adds to
the bleak picture of the immediate
future and beyond. There will be a
time for the “Piper” to be paid and
that will exacerbate the decline in
the economy and consequently in
equity prices as earnings decline.
The gains in earnings have been, in
our opinion, tied to cost cutting in
labor not in sales gains. Implement
those hedging strategies that I have
been recommending for some time now.
Currencies: The June U.S.
dollar index resumed its downward
spiral losing 44 points on Friday to
close at 7322.50 with the gains made
in the June Euro of 77 points to
154520, the June Swiss Franc 102
points to 9609, and the June
Japanese yen 99 points to 9733. The
British pound declined by 11 points
to close at $1.9467. The surprise
loss at American International
Group, the world’s biggest insurer
and its plan to raise $12.5 billion
in fresh capital prompted the
selling in the dollar index. We
continue to favor the sidelines
since our overall expectation is for
lower U.S. interest rates prompted
by a weakening economy. We now would
resume purchases of Swiss Francs for
another move to parity with the
dollar.
Energies: June crude oil
closed at $125.96 per barrel, up
$2.27 after making a new high at
$126.27 during the session. While
some disruptions to crude supplies
in the North Sea and Nigeria were
blamed for the surge in speculative
activity, the reality is that there
is plenty of oil around with
problems in refining capabilities,
not a serious supply situation. The
demand for distillates and
geopolitical fears continues to
create speculative buying and
shortcovering by traders who
continue to press prices expecting a
sharp selloff in crude. Selling in
stocks of oil companies confused
some investors but as I have been
suggesting for years that the price
of a commodity does not necessarily
carry to the companies that produce
the commodity since corporate events
sometimes overshadow the gains in
the underlying commodity. My long
term suggestion as been, “if you
feel a commodity will gain in price,
buy the commodity, not the stock in
a company that may suffer various
negatives such as production and
shipping delays, or labor problems”.
I think that is pretty clear and
certainly applied this week as crude
prices made new highs and stocks in
oil companies declined in price.
Meanwhile with the various factors
which can change the overall picture
in energy, not the least of which is
declining usage by slowing world
economies, and conservation methods
imposed by end users trying to
reduce costs. We still feel that the
current price of energy precludes
economic stability worldwide and
have to come down to a more
reasonable level of between $60-70
per barrel for crude. The impetus on
alternative energy could also impede
price gains in energy products. Stay
out or buy put options in what I
feel is a totally overbought
situation.
Copper: July copper closed at
$3.7165 per pound, down 7.10c after
trading as low as $3.6775 during the
early hours of trading in New York.
A large increase of 11,150 metric
tonnes in London Metal Exchange
inventories to 121,275 tonnes
prompted the long liquidation and
new selling in copper. The weekly
report by the Shanghai Futures
Exchange showed an increase of 4,646
metric tonnes to 561,119. The usual
reaction to the weak U.S. dollar in
which it is denominated would be for
higher prices. Had the dollar held
its ground the losses in copper
would have been substantially
greater. Our recommendation in prior
commentaries to buy and hold put
positions remains intact.
Precious Metals: June gold
closed at $885.80 per ounce, up
$3.70 after trading as high as
$890.80 during the session and as
low as $871.00. The surge in crude
oil prices along with the weakness
in the U.S. dollar prompted the
rally but it was rather feeble in my
opinion based on the impetus
mentioned. Since the weakness in the
dollar and the sell off in equities
normally prompts a stronger reaction
in gold, we find the activity
disappointing even though analysts I
spoke with are expecting another
move over $900 per ounce. I prefer
the sidelines and any weakness in
crude or strength in the dollar
could prompt heavy long liquidation
in precious metals. Stay out for
now. July platinum closed at
$2,101.80 per ounce up $59.50 per
ounce based on the introduction of
two exchange traded notes giving
investors long and short “exposure”
to the platinum market at the New
York Stock Exchange were stock
traders could participate in the
price movement of platinum. Since
the demand would only be for “paper”
in our opinion and not change the
overall supply/demand picture for
platinum, we would expect some
selling to emerge in the near term.
June palladium closed at $443.85 per
ounce, up $7.956 as the “other white
metal” with similar characteristics
and a much cheaper price, i.e. the
“poor man’s platinum”.
Grains and Oilseeds: July
corn closed at $6.29 ¼ per bushel,
down a penny tied to weather,
profittaking, and the USDA supply
demand report. Traders could not
decide whether the report was
bullish or bearish since recent
gains in corn could be tied to
ethanol production and supply
projections. We prefer the sidelines
in corn even though further gains
are possible. July wheat closed at
$8.04 ½ per bushel, down 17 1/2c as
the USDA report estimated an 8.2%
rise in world production for the
2008-09 crop year. Strong export
expectations were mostly neglected.
We prefer the sidelines in wheat.
July soybeans closed at $13.58 per
bushel, up 48c with November new
crop gaining 58c to close at $13.03
¾ per bushel. Bullish ending stock
data from the USDA the dominant
feature to Fridays trading. July
soybeanmeal closed at $338.50 per
ton, up $3.30 while July bean oil
gained 2.45c per pound at 62.00c.
The overall picture in soybeans is
positive as products are “assigned”
to bio-diesel fuels and demand could
prompt yet higher prices. We
continue to like the long side of
beans and prefer the November
contract.
Coffee, Sugar and Cocoa: July
coffee closed at $1.3655 per pound,
up 2c tied to gains in other
commodities and specifically crude
oil which made new highs. With
harvesting in Brazil of a large
Arabica crop beginning, we could see
origin hedging pressure and would
avoid coffee for now. July cocoa
closed at $2,741 per tonne, up $32
in choppy trading Friday. Speculator
buying in midday tied to the weak
U.S. dollar in which it is
denominated could mean a new push
toward overhead resistance at the
$2,800 level. Gains in other
commodities were also a factor in
the buying. We like cocoa from here
but would use stops and on any gains
would bring up the trailing stops
since conditions could change and
prompt profittaking. July sugar
closed at 11.61c per pound, up 15
points as traders returned from the
annual Sugar Week in New York and
took a fresh look at the market. We
see no interest in sugar at this
time even though traders were
talking about the ethanol use and
strength in other commodities. Stay
out for now.
Cotton: July cotton closed at
71.55c per pound, up 70 points after
trading as high as 72.25c during the
session. Cotton is in a range and
needs fresh fundamentals before
“forming” a direction. The USDA
report was mixed with old crop
cotton bearish but new crop
projections for the 2008-09
considered bullish. While cotton
could be considered as oversold
technically, we prefer the
sidelines.
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.
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