Market Commentary Week ending June 6 2008
It’s the economy stupid. Unfortunately there are additional elements affecting the United States and global markets besides the recessionary economic trend. As the U.S. economy goes, so go the economies of its trading partners globally. The United States is the consumer of the world and if the U.S. consumer does not buy, its trading partners do not sell. It is as simple as that. I have been almost annoying in my admonition for the past year that the U.S. economy was headed for recession; now it has arrived with a vengeance. I am no longer the lone voice in the wilderness as others are crying wolf as relates to the U.S. economy. The impact of a worsening labor situation, higher food and especially energy prices, Israeli threats against Iran, which could halt shipments from the Gulf, a credit crisis as exemplified in mortgage defaults and foreclosures and failed attempts to re-start the U.S. economy will linger on for months to come. The program, which pays a paltry sum to taxpayers, will be used to pay off some consumer debt and will not come close to halting the economic decline. As I mentioned last week, there is no immediate solution and the recession will have to run its course until the last foreclosure is recorded and oil prices decline.
Interest rates: Treasury bonds closed at 114 14/64ths, up 1 and 54/64ths as money flowed from equities to the relative safety of Treasuries. The unemployment rate jumped to 5.5% against analyst expectations of a move from 5% to only 5.1%. That triggered the selling in equities and the buying in Treasuries. The jobs lost was in line with expectations showing 58,000 jobs were lost in May with losses for the first three months of 2008 at 83,000 monthly average. Losses in the construction industries were 34,000, in manufacturing 26,000 jobs lost and 39,000 in providers of professional services. The only positive was in the education and health services industries were a gain of 54,000 jobs was posted for May and 61,000 for April. Otherwise the labor situation is worth than the geniuses with calculators anticipated. We have been suggesting holding long bond positions and adding on dips. With high energy prices, one would have expected to Fed to respond to the inflationary trend but no words of wisdom emanated from the Federal Reserve aside from some hawkish statements from a couple of former members. We retain that opinion.
Stock indexes: The Dow Jones industrials closed at 12,209.81, down 394.64 on Friday as Wall Street’s worst fears were realized. The Israeli Transportation Minister suggested that an attack on Iran was "unavoidable" to halt their nuclear ambitions. That sent the crude oil and other energy markets in a panic and took the price of crude up more than $10 per barrel to a record high. Then the Labor Department issued a jobs report showing 58,000 jobs lost, but that was not the big surprise. The unemployment rate jumped unexpectedly to 5.5% even against expectations of a 0.1% percent move to 5.1%. That was the straw that broke the camel’s back, sending the U.S. equity markets into a near freefall. The S&P 500 lost 43.37 points to close at 1,360.68 with the Nasdaq losing 75.38 points to 2,474.56. The Dow loss was the worst loss in more than 15 months. We have been warning of a black hole under the equity markets and it would seem we have entered the outer rim of that hole. Implement hedging strategies or contact us for advice.
Currencies: The September U.S. dollar index lost 67 points on Friday to close at 7281 on the report of the U.S. jobless rate jumping to 5.5%. That could be the prelude to another rate cut and that is negative for the dollar unless accompanied by rate cuts by the European community. Unfortunately the European Central Bank officials are talking of rate hikes not cuts. The Euro gained 176 points to close at 15684 with gains in the Swiss franc of 158 points to 9807, the Japanese yen 53 points to 9568 and the British pound 118 points to 19564. Our favorite against the dollar remains the Swiss Franc, which I feel will exceed parity with the dollar some time in the not so distant future.
Energies: July crude oil shot up $10.75 per barrel to $138.54, a 9% gain, and at the high of $139, a new record. The two day gain of $16 was tied to the weakening dollar but also to a Morgan Stanley claim that the strong demand from Asia would cause a slowdown in shipments to the United States and prompt the price of crude to exceed $150 per barrel by July 4, U.S. Independence Day. An Israeli official stated that an attack on Iran was "unavoidable" if Iran persists in its nuclear development. That added to the buying frenzy even though no confirmation comments were offered by the United States. Unfortunately there was no denial either. The fear in that possibility would be the response from Iran where exports from the Gulf could be halted by Iranian attacks on shipping. As we have stated before, two many factors influence the prices of energy products, so we prefer the sidelines. Fortunately, or unfortunately, the United States is in recession and demand for energy has diminished somewhat. We fully expect, at some point in the future, a sharp selloff in crude and would start to nibble at put purchases.
Copper: July copper closed at $3.6230 per pound, up 8¢ after trading as high as $3.67 during the session. The rally in metals against the decline in the dollar the main factor for the gains. We continue to be bearish on copper as demand from the U.S. housing and auto industries remain in decline. Hold puts and add on any rallies.
Precious metals: August gold closed at $899 per ounce, up $23.50 after trading as high as $905.60 during the session. Understandably as the dollar sold off, dollar denominated commodities rallied. There is no special reason for gold other than its relationship with the dollar. July silver gained 26¢ per ounce to close at $17.43 for the same reason as gold. July platinum closed at $2081.30, up $68.80 per ounce while September palladium gained $6.40 per ounce to close at $433.80. Precious metals have historically been perceived as an alternate asset class and hedge but susceptible to dollar price movement. We prefer the sidelines in metals.
Grains and oilseeds: July corn closed at $6.50 ¾ per bushel, up 7 1/2¢ tied to fears of reduced crop production and record high crude oil prices. We prefer the sidelines. July wheat closed at $8.11 per bushel, up 25 1/2¢ for the second straight day of gains. Short covering and the weakness in the U.S. dollar provided the impetus for the rally. The USDA will be reporting on crop production on Monday so traders decided to cover shorts. The strength in commodities overall another factor in the buying. We prefer the sidelines in wheat. July soybeans closed at $14.57 ½ per bushel, up 5 1/2¢ mostly tied to sharply higher crude oil prices and better demand outlook. Weather was also a factor in the underlying strength in beans. We like soybeans but prices may have gotten a little ahead of themselves tied to demand for U.S. beans against Argentinean beans thanks to the weakness in the dollar. The USDA Monday report also expected to show declines in supplies.
Coffee, sugar and cocoa: July coffee closed at $1.3585 per pound, up 5 points on September rolling in front of Brazilian weather forecasts due for the coming week. With the severe weakness in the dollar, the small gain was totally unimpressive and we would continue on the sidelines in coffee. July cocoa closed at $2,878 per tonne, up $86 on the weak dollar and general strength in commodities. With prices approaching contract highs, we would wait for a breakout through resistance before making any trading decisions. We could see a setback on any dollar reversal and that might give us an opportunity to once again visit the long side of cocoa. July sugar closed at 9.74¢ per pound, up 18 points mostly on the gains in other commodities and to the strength in crude. The potential for increased sugar conversion to ethanol could also be a factor as the economic viability increases, thanks to the high energy prices. We prefer the sidelines in sugar. Also, conversion to ethanol requires increased energy, which means crude oil.
Cotton: July cotton closed at 66.52¢ per pound, up 1.87¢ tied to technically oversold condition and the general strength in commodities. The weak dollar is again to blame for the rally. The USDA crop production report for cotton will be issued on Tuesday and we don’t suggest "fading" that report until its impact has been in the market. Stay out for now.
John L. Caiazzo
futures@acuvest.com
www.acuvest.com
