I have good news and bad news for my readers. First the good news, many economists feel the worst of the recession is over and that the economy has bottomed. Economists expect retail sales to recover and the recent University of Michigan consumer sentiment index was slightly improved. I always considered Michigan as the auto production state and not sure where the University analysts are conducting their survey. Certainly not at the auto factories that GM is closing, certainly not at the unemployment lines. I can only surmise that they are standing outside high end department stores like Tiffany asking people carrying little blue bags from the store asking the shoppers what they think…..That, believe it or not, is the good news. Now for the real, or bad, news. Another 539,000 jobs were lost in April. The unemployment numbers remain over 600,000 weekly and over 12 million people are now out of work with the unemployment number up again to 8.9% from 8.5%. The auto industry which does not only include the actual manufacture of cars and trucks, but the support industries such as the copper wire companies, the glass companies, the leather and plastic industries, the metal industries, and all other industries that supply parts and materials to the auto companies. Now for some additional bad news. One homebuilder decided to level and bulldoze a complete housing tract which to him was cheaper than completing the homes and having them sit there vacant while taxes pile up and vandalism reduces any hope of profit or even breaking even. The housing industry is decimated with much of the reported sales comprised of bargain hunters buying homes for 25c on the dollar, or less. The expectation that any stimulus plan will immediately change the situation is pure wishful thinking and unfeasible. In addition to that “bad news” is the spectre of burgeoning credit card debt, which will curtail further consumer spending and create further defaults at the banks, which by the way are in need of additional cash from the Government. The current recession is unprecedented in history as it was built on rampant credit. The industrial output is the lowest since the end of World War II. The first quarter for 2009 output fell at an annual rate of 20% and there is no reason to expect a change in this year and I would expect, most of 2010.
The “bottom line” is simply that I feel the “glowing” expectations from economists and analysts is a cruel joke being played on the public so as not to create panic and cause consumers with jobs and money to keep it in the “mattress” and not spend. That, of course, is a great concern to the administration who is trying to convince the public that the “various stimulus programs” are working. I sincerely doubt it and would maintain a conservative posture as to spending and investing.
Interest Rates: June Treasury bonds closed at 12010.5 on Friday down 3.5 points pushing long rates up slightly but short term rates declined slightly. With the economic data on both sides of the status quo line, investors use treasuries for the relative safety, but move to equities on any change in expectations of an end to the current recession as exemplified by analyst comments. We continue to feel the U.S. economic decline is intact and with the rhetoric from both the U.S. administration and analytical sectors promoting calm we could see prices go either way in dramatic price and yield swings. Avoid positions but the treasury bonds could be traded intraday. I recommend no overnight positions."
Stock Indices: The Dow Jones industrials closed at 8574.65, up 164.80 and gained 4.4% for the week. The S&P 500 closed at 929.23, up 21.84 points and a 5.5% gain for the week. The Nasdaq gained 22.76 points to close at 1,739.00 Friday for a weekly gain of 1.2%. The “propoganda” by the U.S. administration and various economists that the bottom has been reached for the U.S. economy prompted the flow of capital to the equity markets. The failure of the investing public to recognize that a $75 billion bank capital shortfall and the loss of another 539,000 jobs is not indicative of a “bottom” will, in my opinion, result in another major selloff in equities. I continue to suggest implementing hedging strategies.
Currencies: The June U.S. dollar index closed at 8255, down 155.5 points as the economic data was not as bad as expected and investors were willing to sell dollars in favor of the currencies with more volatility and profit potential. The gains in short term treasuries resulting in the decline in yields and there the attraction to the dollar prompted the buying in other currencies. The June Euro gained 248 points to close at 13618, while the June Swiss Franc, (our favorite in the group), gained 195 points to 9041. The June British pound gained 222 points to close at 15215, and the June Japanese yen gained 64 points to 10168. The June Canadian dollar gained 168 points to 8687, while the June Australian dollar gained 171 points to 7675. We recommend the sidelines and would take some profits on the long Swiss Franc position. Any decline thereafter for Swiss Francs would put us back on the long side. Long term traders could however, hold long Swiss Franc positions for a potential move to the 93-95c area.
Energies: June crude oil closed at $58.63 per barrel, very close to our intermediate objective of $60 mentioned in our last few commentaries. The better than expected U.S. jobs report and analyst expectations that the U.S. recession has bottomed prompted expectations that demand for energy would increase. We, of course, do not agree and would take some profits in crude pending a correction, before getting back on the long side for the move to $60 or higher.
Copper: July copper closed at $2.1455 per pound, down 1.9c after recent strength prompted by expectations that a bottom in the U.S. and subsequently, global recession has been reached. We believe the recession is intact and would continue to expect demand for copper to decline. For now, as I suggested last week, I would hold put positions but would not add at the current time. Inventories at the LME fell 4,900 metric tonnes on Friday to 389,000. The latest Comex data should inventories steady at 48,056 short tons, and the weekly report from the Shanghai Futures Exchange showed an increase of 8,626 metric tonnes to 27,690 tonnes. Hold put positions.
Precious Metals: June gold closed at $914.90, per ounce, down 60c with July silver losing 7.5c to close at $13.955 per ounce. The expectation that the U.S. recession has subsided and a job loss of fewer jobs than analysts expected prompted the move from precious metals to the equity market. July platinum lost $10.20 per ounce to $1,147.10 while June palladium rose 60c to $242.30 per ounce. We once again suggest the sidelines since precious metal price movement is determined by other market action.
Grains and Oilseeds: July corn closed at $4.21 per bushel, up 9c tied to planting delays with fund buying the main feature. We remain on the sidelines. July wheat closed at $5.91 per bushel, up 20 3/4c on lower winter wheat production expectations, and bullish technicals. We prefer soybeans and would not position more than one commodity in this group even though wheat fundamentals remain bullish. July soybeans closed at $11.11 1/2c per bushel, up 9 1/2c due to tight old crop inventories and technicals after Thursdays decline. The only negative is the possible cancelling of contracts by China. Lower production expectations for Southern Brazil and Argentina, however, provided the bullish fundamentals for soybeans. We continue to like the long side of soybeans but would hold current positions and not add for now.
Coffee, Cocoa and Sugar: July coffee closed at $1.2670 per pound, up 2.1c as commodity buyers added coffee to their “shopping list”. Gains in equities and grains prompted some of the buying but light supplies of Columbian Arabica beans and a smaller Brazilian crop were bullish factors and we expect buying to continue. Add to long positions suggested last week and bring up those trailing stops. July cocoa closed at $2,507 per tonne, up $45 tied to speculative buying tied to gains in other commodities. We liked cocoa for continued buying last week, but would take profits and stand aside for now. July sugar closed at 15.27c per pound, down 22 points tied to profit taking after recent gains and the breakout we suggested last week would carry through the 15c resistance level. Stay out for now.
Cotton: July cotton closed at 59.85c per pound, up 97 points on spec buying of other commodities and on dollar weakness. A lack of trade selling was also a feature to the weeks buying. We had suggested the long side of cotton and we continue to feel the market atmosphere remains positive.
