The elusive “brass ring” is actively pursued by those looking through “rose colored glasses.” The recent economic data is being viewed by analysts as a sign the deepest U.S. recession since the Depression is nearly over. The Gross Domestic Product index fell at an annual rate of 1% after falling 6.4 in the quarter January to March. Analysts had expected a decline in the second quarter GDP of 1.5% and viewed the report as a sign the recession was almost over. Unfortunately they fail to take into consideration basic mathematics. When the GDP declines by as much as it had recently, one can make the assumption it can only decline so much during any given period before it reaches what might be considered a “saturation point” of sorts. For instance, a decline in numbers of 100 to 50 would indicate a 50% decline. However, once the number gets to 10 and declines to 9, the decline is only 10%. Is that really good news? The economics of a recession would dictate quite simply, as I have stated before, unless the labor situation improves dramatically there can be no end to the recession. I have been explaining for some time, that one must consider that the 600,000 first time unemployed each week for months now must have contributed something to corporations’ bottom lines. Net income being reported lately showing “profits” must be correctly analyzed as due to labor and cost cuts, and not the result of increased sales and growth. Otherwise it must be concluded that none of those unemployed contributed anything to their respective companies, something I cannot agree with, as mentioned in previous commentaries. The optimism being “fed” to the public will soon turn those “rose colored glasses” into very dark glasses…….Now for some information that may help my readers in assessing “future” market direction.
Interest Rates: September Treasury bonds closed at 119, up 1.305 as investors sought a “safe haven” and bought treasuries pushing yields lower. As I suggested in recent commentaries, the Federal Reserve is in no position to raise rates in view of the absence of any sign of inflation and in order to promote purchases of homes. The current recession can only be reversed by improved home and auto sales which would put people back to work. The current programs for both home and auto buyers can only increase the budget deficit and will not, in my opinion, represent a solution to the current unemployment problem. The sharp drop in consumer spending which accounts for around 66% of U.S. economic activity fell at a 1.2% rate in the second quarter. While we favored the long side of treasury bonds, we would hold off any new purchases. We expect wide price swings based on changes in sentiment and based on economic data.
Stock Indices: The Dow Jones Industrials closed at 9171.61, up 17.15 and closed the month up 8.6%, posting its best July performance since 1989. The S&P 500 closed at 987.48, up 0.73 points while the Nasdaq closed at 1978.50, down 5.80 points. The “cash for clinkers” program allowed people to buy new cars by turning in their gas guzzlers but that program cost $1 billion which was quickly “consumed”. An additional $2 billion was quickly endorsed by Congress and could also provide the buying stimulus needed for car purchases. Sales for the few days were high and manufacturers and car dealerships were very pleased with the results. Unfortunately, as usual, there is a downside… The program costs money and the U.S. government can ill afford to increase the budget deficit. We view the program as a stop-gap measure which will soon deplete the second program and leave the situation exactly where it was before the implementation of that program. The sharp drop in consumer spending which accounts for around 66% of U.S. economic activity fell at a 1.2% rate in the second quarter. We continue to suggest strongly, the implementation of hedging strategies. Those will large equity portfolios should contact me personally. All communications are held in the strictest confidence.
Currencies: The September U.S. dollar index closed sharply lower at 7835, down 105.5 points. The September Euro closed at 14254, up 177 points. The September Swiss Franc gained 168 points to 9362, the September British pound 198 points to 16687, the September Japanese yen 91 points to 10553, The Canadian Dollar 34 points to 927, and the Aussie Dollar 75 points to 8321. The early strength in the dollar was tied to the GDP report but as the equity markets improved the dollar declined. The volatility in currencies keeps us from making any recommendations other than maintaining our bullish posture for Swiss Francs.
Energies: September crude oil closed at $69.45 per barrel, up $2.51 and 3.75% on Friday as the U.S. dollar sold off sharply. Most dollar denominated commodities showed improvement. September heating oil closed at $1.8325 per gallon, up 4.26c while September unleaded gasoline gained 6.12c to close at $2.0126. Optimism that the U.S. economy is recovering from the worst recession in nearly 70 years prompted buying in industrial commodities and energy products. We do not believe any recovery can be sustained as explained in our previous comments.
Copper: September copper closed at $2.6235, up 5.95c on optimism that the U.S. recession is abating and that prompted the sharp decline in the dollar which translates to higher prices for dollar denominated commodities. The “improvement” in new home sales along with the “cash for clunker” program translated to copper demand. Inventories at the LME rose by 2,825 metric tonnes Friday to 280,874. The Comex data released late Thursday showed a decline of 476 short tons to 55,196 while the weekly data from the Shanghai Futures Exchange showed an increase of 1,787 metric tonnes to 51,135. We continue to suggest the holding of put positions but again, as stated in previous commentaries, do not add to positions.
Precious Metals: August gold closed at $953.70, per ounce, up $18.80 tied to the sharp decline in the dollar. September silver closed at $13.94, up 45.50c per ounce. October platinum closed at $1214.20 per ounce, up $25.20 while September Palladium closed at $264.80, up $5.25 per ounce. Comex gold warehouse stocks declined by 2,506 ounces to 9,141,713, while silver inventories were down 587,759 ounces to 118,309,732 ounces. We prefer the sidelines since the wide price swings are too dangerous for retail clients and trading should be limited to professionals who can move swiftly.
Grains and Oilseeds: December corn closed at $3.49 ½, up 7 1/4c tied to the weak dollar and the strength in crude oil. Shortcovering also a factor in Fridays session. We prefer the sidelines. September wheat closed at $5.28 ¼ per bushel, up 12c tied to general strength in commodities. The weak dollar and strength in corn and soybeans also contributed to the strength in Wheat. We prefer the sidelines since domestic supplies are viewed as adequate. Upside momentum could be sustained if export sales improve. November soybeans closed at $9.82 per bushel, up 11c in choppy sideways action. The weak U.S. dollar the main feature to the buying but strong demand and crop production concerns could provide the impetus for further strength. We like soybeans from here.
Coffee, Cocoa and Sugar: September coffee closed at $1.2785 per pound, up 2.9c tied to the implied strength in the U.S. economy and the weak dollar. Coffee appears to be rangebound so we would avoid any positions other than day trading on overbought or oversold intraday action. Otherwise stay out. September cocoa closed at $2,892 per tonne, down $6 on profittaking after recent gains. End of month position squaring also a factor but with the dollar weak, the performance was disappointing to some locals and specs. Stay out. October sugar closed at 18.61dc per pound on profittaking and end of month position squaring after recent gains. The recent concern over Indian monsoons appears to be abating. We prefer the sidelines here as well.
Cotton: December cotton closed at 60.02c per pound, down 9 points tied to favorable growing conditions in West Texas and other growing areas. The failure to react to the weak dollar also a negative for cotton. We prefer the sidelines.