The old axiom, “The way GM goes, so goes the country” was hopefully ignored as it now appears inevitable that the mighty auto giant will be declaring bankruptcy. It is improbable that a company that cannot sell its products due to a severe global recession should be “lent” taxpayer money rather than just shut its doors for six months or so while inventories wind down. The senseless, in my opinion, throwing money at the problem, another four billion this week, to keep a company open, boggles the mind. While Mr. Bernanke, our Federal Reserve chairman, was telling law school graduates Friday that the U.S. economy would recover and to remain optimistic about their job prospects, he offered that a year ago while speaking to a graduating class that was also attended by Harry Potter author J.K. Rowling, they were introduced as “two of the great masters of children’s fantasy fiction.” I wholly concur with that assessment of Mr. Bernanke’s continuing forecasts of an end to the recession this year. I had stated emphatically over two years ago that the U.S. was headed for recession (see my website on the link “Roundtable discussion, last page”)and that it would impact the international industrial community. Now, in view of the rhetoric from Washington forecasting an end to the recession this year, I can only say, they are the “masters of fiction”…..and, in my opinion, “deception”. The home defaults in the “pipeline” alone will keep foreclosures on the scene for at least the end of this year and halfway into the next. Then comes the auto industry which has been decimated. These two industries are the basis for the U.S. economy and until there is improvement and reduced foreclosures in housing, and repossessions in the auto industry, there is no end to this recession. Every week over 600,000 workers stand in the unemployment line for the first time. That is 600,000 “breadwinners” and if you consider that each is responsible for the buying practices of themselves, a significant other, and 2.5 offspring, the number of consumers not consuming is at least tripled. The producers of the products that they will not be buying will be next on the “line.” Pay no attention to the Washington pundits. There is no immediate end in sight for this recession since it in no way can be compared to past recessions where people had to put up 20% to buy a home and at prevailing rates, not the fictitious 100% equity loan at rates far below current rates which then increase. There is no precedent and those who would offer their “estimates” based on the longevity of past recessions are performing “mental masturbation”. Now for some actual information.
Interest Rates: June Treasury bonds closed at 11910, down 100.5 points and in line with previous commentaries. The U.S. government is making money the “old fashioned way….they print it”. The continuing bailouts and “loans”, (loans that probably will not be repaid) is prompting new loans on an almost daily basis. That translates to the U.S. government “selling more of the country” in the form of treasury paper to foreign governments, most notably China. To convince buyers of that paper to purchase U.S. debt, rates have to be attractive ergo higher rates, lower prices. The “tug of war” between the government wanting to make mortgages and rates attractive to potential home buyers, and the necessity to sell treasury paper causing yields to increase will probably go on for some time. We like the sidelines with the only except being sharp declines in equity prices which normal prompt transfer of funds from equities to bonds. That would prompt short term rallies in treasuries.
Stock Indices: The Dow Jones Industrials closed at 8,277.32, down 14.81 points with the S&P 500 closing at 887.00, down 1.33. The Nasdaq closed at 1,692.01, down 3.24 points. For the week the indices lost 0.18%, 0.15%, and 0.19% respectively. Concern over the burgeoning U.S. budget deficit as well as the declining U.S. dollar is prompting investment “repatriating” their money or putting it into something “reliable”, commodities and precious metals. We once again, and in no uncertain terms, recommend implementing hedging strategies.
Currencies: The June U.S. dollar index closed at 8018, down 46 points against gains in the Euro of 125 points to 14013, the Swissie 81 points to 9227, the British Pound 80 points to 15917, and Canadian Dollar, 137 points to 8907, and the Aussie dollar 93 points to 7833. The Japanese yen lost 22 points to 10593. We recommended the purchase of Swiss Francs and our price objective of parity, 100, against the U.S. currency remains on track. Add only on setbacks which could occur on further increases in U.S. interest rates. Any rally in U.S. treasuries due to the move from equities to the relative safety of treasuries could prompt declines in U.S. rates and a correction in international currencies. The addition of Swiss Franc longs therefore should only occur on setbacks.
Energies: July crude oil closed at $61.67 per barrel, up 62c in front of the three day Memorial Day holiday and shorts covered and with reports of increased Chinese demand. The weak dollar in which crude is denominated was also a factor. Prices had achieved our goal of $60 per barrel when crude was trading in the low 50’s so we now prefer the sidelines. Geopolitical events along with the continued global recessionary trend could prompt wide price swings and therefore crude contracts may not suitable for all investors.
Copper: July copper closed at $2.0975 per pound, up 4.65c tied to the weakening U.S. dollar and declines in warehouse inventories. The LME reported inventories at its warehouses declined by 2,700 metric tonnes on Friday to 333,375. The Comex data released late Thursday showed an increase of 790 short tons to 52,501 but the weekly data from the shanghai Futures Exchange showed a decline of 1,591 metric tonnes to 33,798. We continued to suggest holding puts but not adding.
Precious Metals: June gold closed at $9.5890, up $7.70 after trading as high as $963.10, a two month high. The weak U.S. dollar along with technicals prompted shortcovering and new buying of gold and subsequently silver and Platinum. July silver closed at $14.695, up 25c while July platinum gained $5.30 to $1,160. June palladium lost $1.85 to close at $233.65 in a correction after recent gains. We suggest the sidelines in metals since its “fortunes” are tied to outside elements such as currencies and U.S. interest rates. Another factor was the decline in Comex gold warehouse stocks of 215,185 ounces to 8,297,906 reported late Thursday.
Grains and Oilseeds: July corn closed at $4.30 ¼ per bushel, up 6 1/4c on concerns over crops and tied to the weakening dollar making U.S. grain more attractive than competitors. Funds reportedly bought an estimated 6,000 contracts. We prefer the sidelines. July wheat closed at $6.12 ½ per bushel, up 19c, the highest price since late January. Commodity funds the major buyers tied to the weak U.S. dollar. Commodity funds bought an estimated 4,000 contracts on the Chicago Board of trade. We continue to favor soybeans in this group. July soybeans closed at $11.66 per bushel down 9c against gains in the November contract of 8c to $10.31 ½. Demand for July soyoil pushed that price up 12 points to 38.10c per pound while Meal lost $4.20 to $375 per ton. The demand for one product usually translates for lack of demand for the other. The crush spread is the difference between the soybeans and the products and when a disparity exists between the basis and the products, traders on the floor move precipitously to take advantage of the disparity. I had traded crush spreads extensively in the late 1960s. We continue to favor the long side of soybeans but as mentioned in prior commentaries, we would add to longs on dips with stops to follow.
Coffee, Cocoa and Sugar: July coffee closed at $1.35 per pound, down 80 points on profittaking after touching 8 month highs. Corrections usually take place when prices move out of line with fundamentals. We view the correction as constructive and would add to longs on any further price declines assuming the dollar continues under pressure. July cocoa closed at $2,420 per metric tonne, up $40 and to 10 day highs on Friday in front of the holiday weekend in the U.S. The weak dollar and buying of other commodities lent strength to cocoa. We prefer the sidelines until cocoa breaks out of its $2,300 to $2,500 range. July sugar closed at 15.70c per pound, up 8 little points mostly tied to the weak dollar but more so to the buying in other commodities where funds “scrambled” to get on the long side. We continue to prefer the sidelines.
Cotton: July cotton closed at 57.11c per pound, up 33 points tied to the weak dollar. Trading was mixed and remains in a range. We prefer the sidelines after having leaned towards the long side in earlier commentaries.
