The global economies are mired in recession. A condition first identified as imminent in this letter and in a “Round table discussion” in early 2007. A downward economic spiral exists when supply exceeds demand due to a number of causes, not the least of which begins with the availability, use or misuse of credit. When supply exceeds demand, the producers of the supply, i.e. manufacturers have to cut production and unfortunately, employees. Those unemployed then seek unemployment benefits but those benefits are not enough to meet financial obligations created through the use of credit, i.e. mortgage loans, car loans, and credit card debt. Then, enter the Federal Government…….The government taxes the unemployment benefits further exacerbating the purchasing power of the unemployed. As further declines in demand develop, additional production cuts ensue leading to yet further labor cuts. The current recession is nowhere near the cycle completion and with 13 million Americans out of work, the downward spiral continues. As the “consumer of the world” the way the American economy goes, so go the global economies. The U.S. Administrations persistence in offering insignificant “economic stimulus” packages of around $1,000 per family will not slow the current recessionary progression in my opinion. The international community offering a one trillion dollar stimulus also seems inadequate and incorrectly directed. My response is a simple provision of offering $500,000 or even $1,000,000 to each American family. That should be nearly equivalent to the “misapplication” in my opinion, of the trillion dollar package. I believe that a package of that magnitude will get Americans to pay off existing debt and start spending which will then translate from less demand/more supply to more dollars chasing less goods and put people back to work. That kind of capital infusion will stop the recession in its tracks. Now for some actual information.
Interest Rates: June treasury bonds closed at 12631.5 down 2.05.5 as investors liquidated positions in front of the weekend. Fridays weakness pushed yields up on the 3 year to 30 year maturities by over 10 basis points. The Federal Reserves attempt to buy up to $300 billion of Treasuries over the next six months in order to lower mortgage rates and get homebuyers back in the market could be in doubt. We prefer the sidelines after having suggested the short side of treasuries in the last few commentaries.
Stock Indices: The Dow Jones industrials closed at 8,017.59, up 39.51 points and up 3.1% for the week. The S&P 500 closed at 842.50, up 8.12 points and gained 3.3% for the week. The Nasdaq gained 19.24 points on Friday to close at 1,621.87 or up 5% for the week. The S&P has gained 24.5% from the 12 year low on March 9th as investors appear to feel that the bottom of the equity markets has been posted. We, of course, disagree and the premise that the recession should end by the end of 2009 is also in doubt in our opinion. The monthly jobs report showing an increasing unemployment rate substantiates our opinion. “An unemployed consumer does not consume anything”. I look for a severe sell off in the not so distant future and this recent market gain can only be considered a correction in a bear market. Implement hedging strategies so that the next selloff won’t become and “unpleasant surprise”.
Currencies: The June U.S. dollar index closed at 8455.5, down 33.5 against gains in the June Euro of 45 points to 13488, the June Swiss Franc 43 points to 8852, and the June British Pound 113 points to 14825. The Japanese Yen lost 62 points to close at 9985. The U.S. economy lost 663,000 jobs in March and the report weighed on the U.S. currency. We continue to prefer the Swiss Franc from the long side on any declines.
Energies: May crude oil closed at $52.51 per barrel, down 13c in profittaking after Thursdays rally of $4.25. The rally in equities tied to expectations of an economic turnaround for the biggest user of energy, the U.S. prompted the rally Thursday. The geopolitical climate relating to the proposed launch of the North Korean missile along with concerns that technology might be available to Iran and Syria also prompted shortcovering in crude. We could see further gains as I suggest last week with my expectation for a move to the $60 per barrel level.
Copper: July copper followed equities and gained 11.2c per pound to close at $2.0095 and we would curtail further put purchases pending clarification of the U.S. economic situation. Inventories at the LME fell 4,825 metric tons on Friday to 502,150 while the most recent Comex data showed an increase of 247 short tons to 46,723. The weekly report from the Shanghai Futures Exchange showed a decline of 2,273 metric tons to 22,908 and those inventory declines also a factor in the buying on Friday. We continue to view the U.S. economy as in a deepening recession and the demand for copper from both housing and autos should decline. However, we do not fight the market and would stand aside with existing put positions.
Precious Metals: June gold closed at $897.30 per ounce, down $11.60 on long liquidation in front of the weekend with the selling tied to gains in equities. Gold is the perceived “safety haven” when concerns over the U.S. economy negatively affects stock prices but with the past weeks rally in stocks, money moved from that relative safe haven back to equities. We would once again suggest avoiding precious metals except in well capitalized trading accounts. May silver closed at $12.735 per ounce, down 29c following gold. July platinum closed at $1,166.30, up 50c tied to expectations that a “bailout” will help the auto industry. We of course, disagree that there is any hope for the time being for a turnaround in auto sales. June palladium closed at $224.95, up $2.15 and closed in against platinum on our spread recommendation of short platinum, long palladium. We had suggested taking those profits on our recommendation a couple of weeks ago.
Grains and Oilseeds: July corn closed at $4.14 ¾, up 2c tied to the gains in soybeans and wheat. We prefer the sidelines in corn. May wheat closed at $5.63 ½ per bushel, up 13c but gained 56 1/4c for the week. July closed at $5.75 ¾, per bushel, also gaining 13c. Reports of expected gold air closing in on the U.S. soft red winter wheat and hard red winter wheat areas next week prompted heavy short covering and new buying by funds. We like wheat but prefer soybeans from here. July soybeans closed at $9.95 ¼ per bushel, up 18 1/4c tied to bullish fundamentals and technical buying. We had suggested buying beans a couple of weeks ago but opted for the sidelines last week pending the outcome of the planting intentions report from the USDA. We now suggest the long side of beans once more using stops.
Coffee, Cocoa and Sugar: July coffee closed at $1.2040 per pound, up 1.65c on speculative buying and light industry buying. Expectations of tight arabica bean supply fundamentals lending support.
We like coffee but would only buy using stops. July cocoa closed at $2,790 per tonne, up $90 tied to the weak U.S. dollar and speculative buying as prices were the highest since early February according to our charts. We could see further buying unless there is a dollar reversal early in the week. Once again any purchases should be followed with stops. May sugar closed at 12.55c per pound, down 51 points and as I have been suggesting in recent commentaries, remains on our “no interest” list.
Cotton: May cotton closed at 47.60c per pound, up 145 points tied to gains in soybeans and positive fundamentals. We would look to add a couple of contracts but as with other agriculturals, follow with stops.
