The euphoria that has gripped the capital markets is without precedent in times of a severe recession. The current U.S. administration is on a spending mission that will raise the current 10 year budget deficit projection from $7.108 trillion previously estimated to nearly $9 trillion in a report due this week, according to a senior administration official. With the current Federal income decline due to reduced tax revenue, and the added burden of unemployment benefits, I cannot see any hope that the current President can avoid raising taxes. The increase Thursday of first time unemployment illustrates the futility of the administrations efforts to increase spending without the added tax revenue. The U.S. economy will, in our opinion, remain mired in recession for some time and increasing taxes during this recession, which is evidently necessary to cope with the rampant spending programs, will reduce the possibility of an economic recovery. Now for some actual information that hopefully will help our readers
Interest Rates: September Treasury bonds closed at 11826, down 115.5 points on the “exuberant” words of U.S. Fed Chairman Bernanke. During a speech by the Chairman at an economic symposium sponsored by the Federal Reserve Bank of Kansas City, Mr. Bernanke said “the prospects for growth in the near term appear good” even though he cautioned that the U.S. economic recovery, “is likely to be relatively slow at first, with unemployment declining only gradually from high levels”. Data from Europe on Friday seemed to support his contention of a global economic recovery. Unfortunately, his expectation for an unemployment number “declining only gradually”, can be attributed to the fact that the corporations may now be operating with a “skeleton crew” as I stated recently. There may be an unemployment reduction only because there is no one else to lay off without “shutting the doors”, as I also stated recently. Unemployment is still expected to peak over 10% and that being the case, there can be no recovery for the foreseeable future. As I stated in early commentaries, “an unemployed consumer does not consume anything but the bare necessities”, and that would exclude new homes, cars, and durable goods. I look for the economic data to continue to deteriorate and the perception that corporations can earn money without sales growth and only on cuts in expenses, i.e. labor and related benefit costs, is a fallacy. After the current wave of “money raising” through the auction of Treasury instruments, an opportunity to buy bonds could emerge. We would look to buy treasury bonds on any further declines.
Stock Indices: The Dow Jones industrials closed at 9,505.96, up 155.91 points with the S&P 500 gaining 18.76 points to 1,026.13. The Nasdaq gained 31.68 points to close at 2,020.90. The closings represent 2009 highs. New home sales and Fed Chairman Bernanke’s comments of a global economic recovery, sparked the advance. For the week the Dow gained 2%, the S&P 500, 2.2%, and the Nasdaq 1.8%. We continue to warn that corporate earnings cannot be sustained with the revenue provided by the consumer, and the current unemployment level precludes such gains in revenue. As I stated in the Interest Rate comment, levels of first time unemployment may recede but only due to the fact that there may be fewer people available to be laid off. The recent “Cash for clunkers” program netted auto makers with a “bonus sales spurt”, but with the program ending, the decline in auto sales will no doubt continue. We strongly suggest liquidating those companies that do not provide products that are absolutely necessary as staples, and implement hedging strategies for the indices.
Currencies: The September U.S. dollar index closed at 7819.5, down 25.5 points against gains in the September Euro of 80 points to 14336, the Swiss Franc 51 points to 9462, Canadian Dollar 52 points to 9238, and the Aussie dollar 33 points to 8328. The September British Pound lost 26 points to close at 16480, while the Japanese yen lost 16 points to 10613. The better than expected U.S. housing data had no material impact on the dollar which ordinarily would have gained strength on the basis that the negative effect on U.S. treasuries, i.e. higher yields, should have attracted dollar investments. The fact that the relationship did not provide the necessary stimulus or impact could mean the investment community viewed the economic data as an anomaly rather than the trend. We continue to favor the long side of Swiss Francs but with stops.
Energies: September crude oil closed at $72.54, up 12c with heating oil gaining 1.97c to close at $1.9049, and unleaded gasoline gaining 1.34c to close at $1.9956. The positively construed U.S. economic data provided the basis for expectations that demand for energy products would increase. We, however, do not feel the positive data on Friday can be sustained and therefore continue to view energy products as a trading affair.
Copper: September copper closed at $2.8805 per pound, up 13.9c on heavy shortcovering tied to the positive U.S. economic data and expectations that demand for copper will continue as the global economies improve. We, of course, disagree with any global economic recovery. The U.S., as we have stated before many times, is the “consumer of the world”, and as the U.S. economy goes, so go the economies if its trading partners. Inventories at the LME fell by 125 metric tonnes on Friday to 293,125. The Comex inventory data released late Thursday showed a decline of 118 short tons to 52,467 tons. The weekly data from the Shanghai futures Exchange showed an increase of 5,543 metric tonnes to 81,650. Since much of the draw on inventories by the far East is against the Shangai Exchange, it should be noted the decline in inventory could portend a decline in demand. Once again, hold put positions but do not add.
Precious Metals: December gold closed at $954.70 per ounce, up $13 while December silver closed at $14.199, up 28.6c per ounce. The weak dollar was the main feature to precious metals trading while a supposedly strong U.S. economy could lead to inflation which is also a positive for precious metals. October platinum closed at $1,259.20 per ounce, up $17.20 while December palladium rose $9.65 to $286.25 per ounce. We continue to prefer the sidelines as metals will move contrary to the dollar and without a clear picture on dollar direction, we would not suggest positioning metals for any but the most astute metals traders.
Grains and Oilseeds: December corn closed at $3.26 ¼ per bushel, up 2 1/4c on light short covering after recent selling tied to higher acreage yields in the Midwest U.S. The gain can also be attributable to the weak dollar. We prefer the sidelines. December wheat closed at $4.87 ¼ per bushel, down 9 1/4c on low export demand and adequate global supplies. We prefer the sidelines here as well. November soybeans closed at $9.73 per bushel, up 16c after trading as high as $9.88 on shortcovering after recent weakness and tied to the weak U.S. dollar. Corn and soybean development are a few weeks behind normal after the wet spring weather delayed plantings. We like the long side of soybeans from here.
Coffee, Cocoa and Sugar: December coffee closed at $1.2505 per pound, down 75 points and lost over 7c for the week. First notice day for September prompted shortcovering and rollover shorts to forwards. We prefer the sidelines in coffee. December cocoa closed at $2,960 per metric tonne, up $45. Favorable economic data from the U.S. and Europe usually translates for increased demand for chocolate products and cocoa reaped the benefit of the expectations. The weak U.S. dollar was also a factor. Since we are not of the opinion that the Global economies have bottomed and will recover, we would avoid long positions in cocoa. October sugar closed at 21.84c per pound, down 13 points but remains technically bullish. Due to the two sided trading and signs that the monsoonal rains have retreat in India, we would take profits in sugar and stand aside.
Cotton: December cotton closed at 58.63c per pound, down 12 points and remains technically bearish after six consecutive losing sessions. We prefer the sidelines but could see shortcovering tied to concerns over Hurricane Bill’s potential impact. Previous hurricanes emanating in the Atlantic through Bermuda have caused damage to cotton.