The Acuvest Letter
Market Commentary Week ending April 4 2008
A ‘conundrum’ is fitting a square peg into a round hole. Another example can be found in an analysis of the U.S. economy. How can the economy recover from recession when each week approximately 400,000 workers apply for unemployment benefits for the first time. My math tells me that a million workers a month are seeking assistance to pay their bills. Let’s take one step at a time. A worker who paid an arbitrary $1.00 in taxes now expects to take $1.00 in unemployment benefits, leaving the U.S. government $2.00 short in its earnings expectation. Let us also accept the fact that the economic stimulus package provides each working family (or non working family) with $1,200. Does anyone imagine that the family will run out and spend that "generous" check, or will they apply it against a late mortgage or car payment? As I have writen in prior commentaries, the economic stimulus package is a bad joke perpetrated on the American public and the investing public. The current dilemma is simply that the value of homes today, thanks to the lending and appraisal industries, has left homeowners with a home that is worth less than the mortgage owed. There is no equity from which to draw and prices of homes can only continue their downward path in my opinion. Can the U.S. government help those who are losing their homes? My simple answer has been that those without jobs with lose their homes, and those with jobs who were seduced into believing they could own a home at lower than prevailing rates and with no down payment can only hold their homes through a moratorium on upward rate adjustments. We are in a recession, in my opinion, and it will not end with either the "economic stimulus package", or as one presidential candidate is offering, a $30 billion dollar assistance package. That is a drop in the proverbial bucket. Recessions run their course and lower rates expected from the Federal Reserve are of no consequence for unqualified borrowers.
Interest ratesJune Treasury bonds closed at 11903.5, up 1.18/64s as the economic data continues to worsen. First time unemployed climbed 38,000 to over 400,000 reported on Thursday and on Friday the Labor Department reported the U.S. economy lost 80,000 jobs against economist expectations for a 50,000 job loss. Manufacturing jobs declined by 48,000, the largest since mid 2003. Construction jobs declined by 51,000 with a small increase in services of 13,000. Retail jobs fell by 12,000 and the number of temporary workers declined by 42,000 in March. The United auto workers strike against American Axle and Manufacturing Holdings Inc, a supplier to General Motors caused GM to shut plants and that added to the problem in labor. An admission, finally, by Fed Chairman Bernanke that a recession was possible in his testimony before Congress but he added that the economy is expected to turn around some time this summer. I think he has been smoking funny cigarettes. I doubt very much that the recession will recover this summer and in fact expect it to extend beyond the end of this year and into the next. Stay with the bonds and add on setbacks. Even though the lower of long-term rates would portend new and used home buying, the level of inventory is expected to continue to increase and the supply of home buyers can only diminish as employment problems continue.
Stock IndicesThe Dow Jones industrials closed at 12,609.42 on Friday, down 16.61, but managed a weekly gain of 3.2% thanks to a 400 point gain in the index on Tuesday. The S&P 500 closed at 1,370.40, up 1.09 and posted a weekly gain of 4.2%. The Nasdaq closed at 2,370.98, up 7.68 points and a weekly gain of 4.9%. The Friday market action was mixed with investors basically ignoring the negative employment data that showed unemployment was the highest since 2005. The rally was based on investor expectation that the Federal Reserve would reduce interest rates again at their next meeting later in the month. As we stated earlier, we expect no material affect on the current recessionary trend and would implement hedging strategies immediately.
Currencies
The June U.S. dollar index comprised of a basket of currencies, fell by 23.5 points to 7225 on Friday as the Friday report indicated the U.S. economy lost jobs for a third month in a row leading to the belief that the country is already in recession. The June Euro gained 44 points to close at 15672 with the June Swiss Franc gaining 14 points to 9924, the June yen 58 points to 9867, but the June British pound lost 32 points to 19811. The continued expectation that a recession would lead the U.S. Federal Reserve would continue lowering rates and preclude attraction to dollar investment prompting the continuing decline in the dollar. We see no hope for a recovery in the intermediate term and that pressure on the U.S. dollar would continue. We continue to favor the long side of Swiss Franc as we have for over a year. Roll longs into new positions on any sporadic dollar bounces.
Energies
May crude oil closed at $106.23 per barrel, up $2.40 on continued dollar weakness with May heating oil gaining 6.93¢ per gallon to $2.9921 and May unleaded gasoline gaining 3.24¢ per gallon to $2.7567. The weakening U.S. economy, which was outlined by Fed Chairman Bernanke in his testimony before Congress lead to the belief that lower U.S. rates and therefore a continuing dollar decline will lead to yet higher energy prices. We prefer the sidelines but expect energy prices to decline on reduced demand from a weakening U.S. economy. Our long term goal is for crude oil to trade between $50 to $60 per barrel.
Copper
May copper closed at $3.9545 per pound, up 5.3¢ trading at a four-week high thanks to the weak dollar and the expectation that lower U.S. interest rates would turn the economy around. Since we do not subscribe to that scenario, we would hold put positions.
Precious Metals
June gold closed at $913.20, up $3.60 in a choppy session Friday failing to recover from the recent sell off from its highs. After trading as low as $903 the weak dollar Friday spurred a slight rally. May silver closed at $17.755 per ounce, up 27.5c with July platinum gaining $17.60 to close at $2030.50. June palladium lost 30c to close at $444.40 per ounce. We prefer the sidelines in metals.
Grains and Oilseeds
July corn closed at $6.11 ¼ per bushel, down 2 ¼¢ after recent gains with technicals showing an overbought condition. We still like corn as mentioned in last weeks commentary but would not add to positions. July wheat closed at $9.91 ½ per bushel, up 39¢ on short covering and new technical buying. Wheat is in a technical oversold condition after last months sharp sell off. We prefer the sidelines however. July soybeans closed at $12.94 per bushel, up 18¢ on short covering and new technical buying after last weeks sharp sell off. We continue to like soybeans even after recent switches from other commodities to soybean acreage. Demand will be reported on Wednesday so we would hold off any new buying until after the report.
Coffee, Sugar and Cocoa
May coffee closed at $1.3210, up 80 points as the dollar declined and in line with London. Speculator buying the main feature with volume from spreads and rollovers. We prefer the sidelines. May cocoa closed at $2,269, up $22 on the weak U.S. dollar with spread trading featured. Lower industry demand and traders watching the West African mid crop progress. We prefer the sidelines. May sugar closed at 11.6¢ per pound, down 21 points and is on our no interest list. Our attention this past week has been pre-occupied with the U.S. economy.
Cotton: May cotton closed at 70.86¢ per pound, up 45 points but 105 points lower on the week. The upcoming USDA reports along with option expiration will detract from spec interest and we also are paying little attention to this market. Stay out for now even though on a technical basis, we should see a bounce.
John L. Caiazzo
futures@acuvest.com
www.acuvest.com
