The downward economic spiral we forecast some months ago has accelerated, leaving no doubt that the U.S. economy is going into recession. As one economic suggested, "The question appears no longer to be are we going into recession but how long and deep it will be.” The most we hear from Washington is that "an economic slowdown has begun;” that from President Bush. The stimulus program that I indicated last month was a cruel joke perpetuated on the American people is just that. Any checks going out to the public will generate that famous sucking sound that Ross Perot said would be heard with the implementation of Nafta and jobs leaving the United States for Mexico and the other countries so designated in that agreement. The money will probably be used to pay some of the debt incurred by consumers, such as a mortgage payment or a couple of car payments or even credit card payments. Unfortunately, it was it was too little, too late to be meaningful against the declining economy. Perhaps the only bright spot, if we can call it that, will be the Fed continuing to lower rates; but again, as I have been saying, it will do no good since creditworthiness has become a problem among the consuming public.
Interest ratesMarch Treasury bonds closed at 118 13.5/64ths, up 1 50/64ths thanks to the surprisingly bad U.S. labor report on Friday where analysts expected job gains of 25,000 when in fact 63,000 nonfarm jobs were lost in February. The loss was the largest for any single month since 2003 when 212,000 jobs were lost in March. The Fed also issued a report that consumers continued to borrow heavily and spending in January with consumer credit outstanding climbing by $6.9 billion, almost double the $3.7 billion in December. Soon it will be time to pay the piper, as debtors are borrowing on one credit card to merely pay the minimum on others, a recipe for financial disaster. The idea that a stimulant check of $600 per person will accomplish anything is, as stated before, is nothing more than a cruel joke. Buy bonds on any dips since the Fed has no choice but to lower rates, even though I don’t believe it will make any difference.
Stock indexesThe Dow Jones industrials closed at 11,893.69, down another 146.70 points with the S&P 500 losing 10.97 points to close at 1,293.37, the lowest close since August 2006 and below what was considered major technical support and believed by analysts to indicate a bear market. We feel that threshold has already been breached and that we are in fact in a bear market for equities. The Nasdaq lost 8.01 points to close at 2,212.49. For the week, the Dow lost 3.04%, the S&P 500 lost 2.8% and the Nasdaq 2.6%. The jobs data before the opening prompted the sell off right from the opening bell and added to the miscalculation by analysts of a 25,000 job increase was a 63,000 job loss. Further bad news was the Fed reporting the jobs added in December was cut in half. The ongoing mortgage disaster continues unabated by any materially deficient promise of help for homeowners. As I have stated in prior commentaries there is no hope for those without jobs. They will, in fact, lose their homes. The only help for those with jobs, who were seduced into believing they could own a home with little or no money down and at fictitious lower-than-prevailing rates, would be for lenders to declare a moratorium on rate adjustments for three to five years. Otherwise, all the rhetoric emanating from Congress cannot help anyone. Implement those strategic equity hedges now. Don’t listen to brokers who tell you that equities always come back and you have to ride out the economic valleys. Some of those valleys will turn into precipices. Contact us for specific strategies.
CurrenciesThe June U.S. dollar index finally rallied on Friday due to a technically-oversold condition closing at 7347, up 7.5 points. The June Euro lost 20 points to 15281, but the June Swiss Franc gained 7 points to 9766, the June yen gained 29 points to 9796, and the June British pound gained 54 points to 19996. The dollar sold off sharply on the economic news from the U.S. labor department and was considered overdone on the downside. Profit taking brought prices back to close slightly higher on the day. We prefer the sidelines but fully expect further declines in the U.S. dollar as rates come down.
EnergiesApril crude oil closed at $1.0515 per barrel, down 32¢ after making a new all-time high of $1.0654 during the session. Traders were puzzled at the continued buying of crude considering the current supply situation, but shorts cover on any sign of buying as the pit is extremely nervous. Without real changes in fundamentals, we should see prices decline to the mid $90 level and our ultimate goal is for price declines into the $55-60 area. The surprise severe storms in the Midwest and areas that normally do not experience freezing conditions have prompted heavy buying in the Heating oil and natural gas markets, which also adds to buying of crude. The eccentricities of the energy market keeps out from making any recommendations.
CopperMay copper closed at $3.9215 per pound, up 1.8¢ on short covering after early selling tied to the weaker than expected U.S. payroll numbers. Inventories at LME warehouses fell by 1,525 tonnes on Friday and technically the bull market in copper is intact. While we would hold long put positions, we would not suggest adding until the market pullback is significant enough to touch off sell stops.
Precious metalsApril gold closed at $974.20, down $2.90 after trading as high as $990.70 early in the session on fears of U.S. recession after the biggest drop in nonfarm payrolls in five years was announced by the Labor Department. Selling in commodities on Friday was the culmination of a recent strong run-up and was to be expected. The volatile trading session in metals was tied to concerns that the sell off in commodities in general might prompt liquidation of gold in order to meet margin calls. We continue to prefer the sidelines in gold, but with the U.S. dollar expected to weaken further on lower interest rates, we could see gold run through the magic $1,000 per ounce level. After that, we have no idea which direction the dollar or gold will take on a short term basis. Stay out. May silver closed at $10.250 per ounce up 2.5¢ April platinum lost $159.10 per ounce to close at $2,041.70 after South African mining companies reported they will receive an additional allocation of power to run the mines. The loss of power was responsible for the sharp run-up of platinum as shortages of the white metal were expected. June palladium lost $34.20 per ounce to close at $495.00 per ounce following platinum. We once again, have to disappoint our readers by suggesting the sidelines, but rather the sidelines than a coin toss recommendation.
Grains and oilseedsJuly corn closed limit down 20¢ on Friday following the limit down move in soybeans of 50¢. July corn closed at $5.59 per bushel with July soybeans closing at $14.21 per bushel. July wheat lost 6 ½¢ per bushel to close at $10.68 ½. The long liquidation, and of course profit taking in grains was tied to the selling in equities which was expected to generate margin calls and investors prefer to close out profits rather than losses as sustained in equities. We view the selling in corn and beans as a normal correction after the sharp run-up in prices tied to supply/demand fundamentals. Foreign demand for U.S. agricultural products tied to increased demand and to a great extent to the weak U.S. dollar. We could see additional carryover selling on Monday but at some point early in the week expect renewed buying to come into wheat and beans.
Coffee, sugar and cocoaMay coffee closed at $1.5040 per pound, down 4.35¢. Coffee lost nearly 19¢ from Thursdays high to Fridays low and the trading was extremely volatile. The Brazilian harvest starts in June, and from time to time we should be getting news on crop conditions. Brazil’s frost season begins in late May and runs through July. We prefer the sidelines but would look to buy coffee on any dips basis the May to the $1.35-1.40 level. May cocoa closed at $2,738 per tonne, down $9 mostly on fund profit taking after recent highs. With the selling in grains and equities, we could see further depreciation in softs as margin calls are generated early in the week. Stay out for now. These markets have, in our opinion, been overdone. May sugar closed at 13.13¢ per pound, down 47 points as funds sold and ran into commission house sell stops. Producers also were noted sellers on the decline. The International Sugar Organization reported that world raw supplies would be ample through the late September end of the current season. That prompted long liquidation and further weakness is expected early in the week. Support around 12¢ basis the May should hold but barring that we could see a re-visit of the 10¢ to 11¢ range. Stay out.
CottonMay cotton closed limit down 4¢ to 81.28¢ per pound on a technical correction that prompted fund selling and spec profit taking. Recent price gains were considered overdone based on current fundamentals and even light commercial buying along the way failed to halt the decline. We could see further downside pressure early in the week and would take no action on Monday.
John L. Caiazzo
futures@acuvest.com
www.acuvest.com
