Investors were encouraged by the data on Friday showing that the U.S. unemployment rate slipped slightly to 9.4% from 9.5% even as President Obama indicated that the rate could still climb to 10% before the recession is over. The Labor Department also reported that employers cut 247,000 jobs but that was viewed as a positive since the estimates were for a job loss of 320,000 jobs. The recent improvement in Auto sales was directly attributable to the “Cash for Clunkers” program which prompted buyers to move up their timetables for purchases thanks to the “generous” program. Unfortunately we feel the three billion dollar program only serves to add to the burgeoning budget deficit and will not sustain the momentum. We continue to feel that an “artificial” solution to the current recession which we had warned would spread globally over two years ago, is materially inadequate. While the U.S. administration, as well as various elements of the media, is “reporting” that the recession has bottomed, we disagree and can see no sign of bottoming until corporate earnings are based on sales and growth rather than on cuts in its labor force. The reduction of job losses can only be a result of reaching that point at which employers are at “skeleton” staffing. There may not be any employees left to “cut” without shutting doors. Now for some actual information.
Interest Rates: September Treasury bonds closed at 11510, down 105 on speculation that the U.S. economy may have bottomed. That was the result of investor speculation tied to the Labor Department jobs report. We disagree and feel the increase in yields as a result of treasury price declines will dissuade home buyers from new purchases. We think we will see bond prices rally and would look to buy treasury bonds from here but with stops in the event there is carryover selling.
Stock Indices: The Dow Jones Industrials closed at 9370.07, up 113.81 but off the session high on a composite basis of 9437.71. For the week the Dow gained 2.2%. The S&P 500 closed at 1010.48, up 13.40 and up 2.3% for the week. The Nasdaq closed at 2000.25, up 27.09 points and gained 1.1% for the week. The ongoing rhetoric from both the Administration and the media that the U.S. recession has bottomed prompted the recent gains in equities. Unfortunately, a closer look at the jobs data still showed a loss of over a quarter million jobs even as estimates were for a loss of 320,000 jobs. We continue to suggest implementing hedging strategies.
Currencies: The September U.S. dollar index closed at 7903, up 87.5 points on assumption of an end to the long running U.S. recession and the potential for inflation to prompt higher interest rates and consequently a strong U.S. currency. We disagree on all counts and suggest rates will necessarily decline in order to truly prompt a U.S. recovery. On Friday the September Euro closed at 14172, down 171. The Swiss Franc lost 150 points to 9236, the British pound 110 points to 16664, the Japanese Yen 231 points to 10250, the Canadian dollar 36 points to 9236, and the Australian dollar 14 points to 8344, all basis the September contracts. Stay with the Swiss Franc long positions.
Energies: September crude oil closed at $70.93, down $1.01 tied to dollar strength based on the better than expected U.S. jobs data. Some oil industry sources estimate that 70 million barrels of crude oil are being stored on ships at sea. Estimates vary between 60 million and 100 million barrels with the increase over the past two weeks of 10 million barrels. That plus the dollar strength prompted the selling in crude. We prefer the sidelines.
Copper: September copper closed at $2.7855 per pound, up 3.35c on continued demand from the Far East. Copper inventories at the LME were up 7,750 metric tonnes on Friday to 292,125. Inventories at Comex were up 137 short tons to 54,205 tons. The weekly Shanghai Futures Exchange data showed an increase of 12,299 metric metric tonnes to 63,434. We continue to suggest holding puts but not adding.
Precious Metals: December gold closed at $959.50, down $3.40 tied to the strength in the dollar. September silver closed at $14.668, up 2.3c on short covering. The U.S. labor data on Friday led traders to initially buy gold on inflationary concerns but later in the session the strength in the equity markets led speculators to switch positions from gold to equities. October platinum closed at $1268.50, up $5.10 while September palladium closed at $279.05, up $7.95. We continue to view metals as too “dependant” on outside factors which can change and materially impact trader psychology. Fundamentals of supply/demand are being ignored to some extent and for that reason we would avoid positioning metals for all but the sophisticated metals traders.
Grains and Oilseeds: December corn closed at $3.26 ½ per bushel, down 13 34c mostly tied to dollar strength an neutral weather considerations. We would avoid corn. September wheat closed at $4.89 ½ per bushel, down 10 3/4c on bearish world supply figures and the strength in the dollar making other producing country wheat more attractive. We would also avoid wheat. November soybeans closed at $10.38 ½ per bushel, up 8 1/2c. Fund buying and tightening old crop inventories along with strong domestic demand and good export demand prompted shortcovering as well. We continue to favor the long side of beans.
Coffee, Cocoa and Sugar: September coffee closed at $1.3790 per pound, up 3.2c after making new two month highs on Friday. Light origin selling and bullish reaction to the Labor Department jobs data prompted the buying. The Brazilian government will announce next week plans to increase coffee stocks in order to support prices according to Brazil’s agriculture minister. We could see additional speculative buying along with shortcovering early in the week but we prefer the sidelines for now. Any setbacks of 5-7c would tempt us to recommend the long side exclusively tied to supply/demand factors. September cocoa closed at $2,837 per tonne, up $27 on shortcovering and new spec buying tied to better U.S. economic data on Friday. We prefer the sidelines. October sugar closed at 20.81c per pound, up 1.01c and through overhead resistance levels. Technicals are bullish and lower production expected for India due to dry weather. Lower output from Brazil added to the bullish sentiment. We could see further buying and we are inclined to get off the sidelines and buy sugar. Fundamentals and technicals have turned decidedly bullish.
Cotton: December cotton closed at 62.43c per pound, up 1.57c and new two week highs. The July payroll data was considered bullish for cotton demand. Some reports that major U.S. cotton merchants Allenberg Cotton Co, and Dunavent Enterprises planned to merge even as two other major merchants planned to close operations. We still consider cotton as two sided and would avoid any positions for now.
