The phrase “It’s the economy stupid” continues to pervade the hallowed halls of Congress and Wall Street but a new phrase bears invoking, “it’s the labor situation stupid”. The situation that I believe must be corrected before any semblance of an economic recovery can be established. Another phrase, or rather the title of a not so recent movie, “Dumb and dumber”, could apply to the way Congress handled the AIG situation, specifically the approval of the congressional bill confirming bonus payments of the newly revised amount of $218 million. The Republicans in Congress voted against the bill but the Democrats, in their fervor to approve anything submitted by President Obama and his “dysfunctional” (my opinion) team, blindly approved the payments and are now scrambling through the courts to get the money back. What a joke……If I were hired to perform a function and guaranteed by contract a certain bonus, it would be a “cold day in hell” before I would give it back after Congressional approval. The answer is simple….send Congressmen to school to take a course in reading and comprehension. Since the election we have experienced a number of “errors in judgment” and this was the latest. Another I believe is the expansion of the budget deficit to what could be as much as four Trillion dollars and as I indicated in a prior commentary, when President Obama promised to halve the deficit in four years, which deficit was he referring to, the one trillion he inherited? Or the four or more trillion he is creating? We shall have to wait and see but the impact on financial markets, which is the main purpose of the above exercise in futility, needed to be stated in my overview since it will impact the markets. Now for some current facts.
Interest Rates: June Treasury bonds closed at 12908, down 7 ticks on profit taking after the massive run up on Wednesday when the Federal Reserve announced it would buy up to $300 billion government debt over the next few months. However, trades do not feel the impact of the Fed’s decision may not be long lasting and on Thursday traders took profits. Fridays action was in a narrow price range in front of the weekend. We would continue to avoid taking positions in any markets that are “artificially” moved by instantaneous actions. Stand aside.
Stock Indices: The Dow Jones Industrials closed at 7278.38, down 122.42 points on Friday on profit taking in a week that saw the Dow gain 0.75%. The S&P 500 fared better for the week gaining 1.58% but gave back 15.50 points on Friday to close at 768.54. The Nasdaq gained 1.8% for the week but lost 26.21 points on Friday to close at 1457.27. I few any rallies in equities as a correction in a bear market and I continue to feel the “black hole” I have been predicting for over a year remains “unfilled”. Implement hedging techniques.
Currencies: June U.S. dollar index closed at 8434, up 70 points on Friday but was the worst weekly performance since 1985. The Fed’s plans to buy up long term government debt created concern that the program would erode the U.S. currencies value relative to its trading partners. The June Euro closed at 13552, down 108 points while the June Swiss Franc lost 38 points to 8870, the June British Pound lost 75 points to 14440, the June Japanese Yen 160 points to 10433, and the June Canadian dollar lost 12 points to 8073. The Fed, in their action, effectively “printed” more dollars and that, in my opinion, is inflationary. We still favor the long side of the Swiss Franc on any decline. I expect, and of course timing is the question, the Swiss franc to trade at near parity with the dollar
Energies: May crude oil closed at $52.07 per barrel, up 3c tied to the weakness in the Euro and the slight gain Friday for the U.S. dollar. With the U.S., the largest user of energy on the planet, in recession, traders do not feel crude can manage any breakout to the upside. However, we feel that crude prices have stabilized in a range between $40 and $50 and cannot perceive of anything that would prompt yet lower prices. On the other hand any substantial cuts in production tied to the possibility of a bottoming later this year to the U.S. recession as projected by the Obama administration, we could see anticipatory buying of crude for forward delivery. We would not want to be short and may even “nibble” at December 2009 or 2010 forwards.
Copper: July copper closed at $1.8045, down 1.15c after recent rallies tied to inventory drawdowns at the three major warehouses of Comex, LME, and Shanghai exchanges. The weakness in the U.S. dollar during the week prompted the buying in copper but as we have indicated for some time, with the “World” in recession, we cannot perceive any strong gains in copper demand or pricing so we would add to put positions on any further rallies. Inventories at the LME were up 10,500 metric tonnes Friday to 503,950 with Comex data showing steady at 44,441 short tons. The weekly data from the Shanghai Futures Exchange which had shown drawdowns in past weeks reported an decrease of 3,327 metric tonnes.
Precious Metals: Before offering any comments or information on gold, I would like to remind pundits that the last time gold touched $1,000 was in 1982 and was touted as a buy in the media by the “gold bugs”. It took over 25 years for those buyers to break even and I do not regard the “investment” as offering a great rate of return…..Now for some comments. June gold closed at $958.50, down 2.50 while July silver closed at $13.868, up 32.10c. Traders and dealers took profits after the recent run-up from under $900 per ounce tied mostly to the weak U.S. currency and the “flight to safety” of the precious metal. Selling of physical gold came in from Southeast Asia and China on Friday according to a Hong Kong based trader and as some currency needs were met by gold sales. We continue to view gold as a trading affair and while I may have a few “coins” myself, it certainly does not represent any particular percentage of net worth. I just happen to like “shiny” things….. April platinum closed at $1,114.20 per ounce, down $7.60 and June palladium gained $4.90 per ounce to close at $210.90. I have been recommending the long palladium, short platinum spread for some time and would look to take profits here.
Grains and Oilseeds: May corn closed unchanged at $3.96 ½ per bushel, with July also closing flat at $4.07. Trading was on both sides of the line in lackluster activity. Stay out until after the March 31st planting intentions. May wheat closed at $5.50 ¼ per bushel, down 5c with July losing 5 1/4c to close at $5.62 ½. While the dry conditions in the U.S. southern plains may be of concern, and export demand week, the market will probably remain directionless until new fundamentals emerge. Stay out for now. July soybeans closed at $9.49 per bushel, up 9c following the May contract which gained 11 1/2c on concern over tight old crop supplies and strike fears in Argentina over taxes. Some Chinese forward buying was supportive and we could see further gains early in the week. We are now “off the sidelines” and looking to buy soybeans at current prices.
Coffee, Cocoa and Sugar: May coffee closed at $1.1620 per pound, up 5 points with July gaining 15 points to close at $1.1820 tied to speculative buying. The weak dollar was also a factor but the buying came in against the U.S. Federal Reserves decision to buy $300 billion in long term U.S. debt which is viewed as inflationary. We could see further gains in coffee if the dollar continues to weaken early in the week. The slight correction for the U.S. dollar on Friday prompted selling in Cocoa with may losing $6.00 per metric ton to close at $2,585. July lost $7 to close at $2.587 but for the week, thanks to the weakness in the dollar, May gained $204.00. We are not particularly favorable towards cocoa but with warehouse stocks decreased at the ICE by 11,723 145 pound bags on Thursday, we could see further buying early in the week. We would go along with the trade. May sugar closed at 13.54c per pound down 8 points and remains on our no interest list. Stay out for now.
Cotton: May cotton closed at 44.08c per pound, up 1.25c on inflation expectations tied to the Fed’s announced purchase of $300 billion of U.S. treasury debt. We prefer the sidelines in cotton. The USDA will announce prospective plantings estimates on March 31st and we would postpone any ideas of positioning until then.