Overview and Opinion: The administration’s ongoing obsession with health care seemingly ignoring the more urgent problem of the U.S. economy and the unemployed American workers’ overwhelming anxiety as to how to keep their homes and cars and put “food on the table” is foremost in my mind. As I have stated going back at least a year, “an unemployed consumer does not consume anything, and the manufacturers of those products will soon be out of work as well”. The only solution to the current labor situation, in my opinion, is to impose sanctions on those imported goods that can be produced in America, albeit at higher costs, and address the illegal immigration problem, something neither political party will discuss for fear of losing votes. While health care is something that is important to the millions who cannot afford health insurance, those that do have insurance are concerned that price increases for that insurance will be necessary. The President insists that no increase in taxes would be necessary and that money could be saved with his program. Unfortunately the mathematics tied to his promise disagrees. One fact that is not mentioned in the media is that the unemployed that used to pay taxes, i.e. the only income the Federal Government can lay claim to, is being reduced by the unemployed who now collect unemployment checks rather than pay taxes on what was their much higher income. Estimates of the budget deficit are based on recent government revenues and to not include projected reductions in that income. I look for the deficit to increase, as well as the tax rates. The current rate of administration spending will no doubt lead to higher taxes on those that are employed even though they also are constrained against personal spending no matter what promises are being made of no new taxes…… This is not the time, during a severe recession, to even contemplate raising taxes……Now for some actual information.
Interest Rates: December treasury bonds closed at 12016, up 4 ticks as equities sold off for the first time in five sessions. The Reuters/University of Michigan Survey of Consumer sentiment rose more than expected in the first week of September, to the best level in three months failed to impact the more to treasuries from equities albeit a relatively small decline in equity indices. Treasuries provide, psychologically, a safe haven in times of economic angst but the past sessions have seen treasuries, gold, another safe haven, and equities all rally. An anomaly to be sure but I expect that to change, so once again, after having been bullish on treasuries, I would suggest standing aside. Any potential for inflation to rear its “ugly head” in response to the current rampant U.S. government spending program, could prompt higher rates, and consequently lower bond prices.
Stock Indices: The Dow Jones Industrials closed at 9605.41, down 22.07 but managed a gain of 1.7% for the week. The S&P 500 closed at 1042.73, down 1.41 but up 2.6% for the week. The Nasdaq closed at 2080.90, down 3.12 but gained 3.1% for the week. The five day winning streak ended on Friday as crude oil declined on a report of higher than expected inventory of refined fuels. The increase in consumer sentiment as reported by Reuters/University of Michigan’s survey managed to provide some support to equities but after five sessions of gains the resulting profittaking prompted the minor selloff. Declines in crude oil prices was also a factor in the decline. We continue to feel that the equity markets are in direct contradiction to what the U.S. economy is reflecting. The usual expectation that equity markets project the economy 6-8 months out, will not, in my opinion, detract from my analysis that the current recession will not be resolved or bottom out during that period. The ongoing increases in mortgage defaults and foreclosures cannot be resolved unless the employment situation changes. The weekly numbers of first time unemployed will no doubt decline, but not due to a recession bottoming, but to the fact that there may not be any further employee cuts from the “skeleton crews” at corporations. Those corporations reporting better net earnings are not doing so from increases in sales and growth, but by expense cuts of labor and employee benefits. Implement hedging strategies.
Currencies: The December U.S. dollar index closed Friday at 7697, down 11.5 points against gains across the board for other currencies. The December Euro gained 9 points to 14592, the Swissie 15 points to 9651, the British Pound 24 points to 16686, the Japanese yen 139 points to 11048, and Canadian Dollar 17 points to 9288, and the Aussie dollar 13 points to 8579. The dollar made new lows for 2009 against the Euro and expectations that the U.S. economy is recovering prompted investors to move cash to riskier assets in other currencies where yields are better. We continue to favor the Swiss Franc and without prospects of U.S. rate increases for the immediate future, the Swiss franc could move to parity with the dollar. Once achieved however, we would stand aside. At some point, as the U.S. economy does show real signs of recovery vis-à-vis the employment and foreclosure situation, we could see rates more higher based also on the expansive U.S. spending programs.
Energies: October crude oil closed at $69.29, down $2.65 tied to the higher than expected increase in refined fuel inventories. Once again we prefer the sidelines in this volatile market.
Copper: December copper closed at $2.8465 per pound, down 3c on equity weakness, increased foreclosures in the U.S., and increases in global inventories. The LME reported an increase of 750 metric tonnes on Friday to 318,325, while the Comes inventories showed a decline of 150 short tons to 52,604. The more important indicator, in my opinion, Shanghai Futures Exchange inventory increased by 10,288 metric tonnes to 97,396. Demand from China and other Mid East and Far East countries is more indicative, in my opinion, in the Shanghai inventory figures. Recent indications of construction cancellations in Dubai also an indication of decline in overall demand for copper. We continue to suggest holding put options but not adding.
Precious Metals: October gold closed at $1005.20, up $9.50 and managed to close over the “magic” $1,000 per ounce level. Earlier in the session prices moved slightly lower on profittaking with October trading at $995.20, but quickly changed direction on new fund and speculator buying. December palladium rose to new multi month highs closing at $294.50 while October platinum gained $31 per ounce to $1,320.70. Hedge funds were also noted buyers and the anomaly I mentioned earlier of recent gains in Gold, Treasuries, and equities simultaneously will soon be corrected in my opinion. Gold and Treasuries are perceived as safe havens against losses in equities and that scenario will probably correct itself. December silver gained 3c to close at $16.70. We prefer the sidelines since while a correction is in order, but momentum could carry prices further.
Grains and Oilseeds: December corn closed at $3.19 ¾ per bushel, up 4 1/2c after early weakness as corn followed wheat which recovered from recent weakness. Weather remains bearish for corn and soybeans which can share acreage. Corn managed a weekly gain of 13 1/2c. We prefer the sidelines. December wheat closed at $4.67 ¼ per bushel, up 4 1/4c Friday but down 4 1/2c for the week. Fridays action was shortcovering after the heavy selling that was prompted by the USDA estimate for world wheat increase in ending stocks for 2009-2010 to 186.61 million tons from the August estimate of 183.56 million. We prefer the sidelines. November soybeans closed at $9.03 per bushel, down 23 1/2c on estimates that the 2009 U.S. soybean crop would produce a larger crop than the USDA’s current record high projections. We had suggested the sidelines last week after previously having been bullish on soybeans. Stay out but look for a corrective bounce sometime during the week.
Coffee, Cocoa and Sugar: December coffee closed at $1.2655 per pound, up 1.9c and at a new three week high. The weak dollar was a supportive factor but the buying was mostly technical and to some extent due to reports of expanding Chinese buying to shore up its economy. Selling in crude oil and equities prompted selling off the highs in coffee which did see an intraday high of 12800. Technically coffee could “bump” against resistance of $1.30 basis the December. We suggest the long side for traders but the sidelines for trend investors. December cocoa closed at $3,075 per tonne, up $8.00 tied to the weak dollar. Cocoa is dominated by price action in outside markets for the time being.We prefer the sidelines. October sugar closed at 21.21c per pound, down 56 points and the recent rally seems to have run its course for now. Weakness in crude also a negative for sugar since sugar is used to produce ethanol, an energy alternative to crude. We prefer the sidelines since any upward movement would depend on fundamentals while the potential for decline would be considered a correction in the recent strong upward trend.
Cotton: December cotton closed at 61.24c per pound, up 32 points and up 161 points for the week. Cotton is viewed by traders as in a range and unless it can break out either up or down tied to fundamentals we prefer the sidelines.
