This week Fed Chairman Bernanke declared the recession is over, but tempered it with the comment that the economy would most likely remain weak for some time. A great retort to his own statement. It seems amazing to me that with the “handwriting on the wall” of an unemployment rate of 9.4% is being downplayed by the U.S. Administration. What is also overlooked is the basic cause of the current economic debacle. When former President Clinton signed into law the ability for brokerage firms to become banks and signed the bill repealing Glass-Steagall it opened a Pandora’s box. In the book “Getting off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis,” John B. Taylor argued that the Federal Reserve kept interest rates too low in the period 2002-05 in order to promote home ownership, “together with the credit that was plentiful because of unduly low interest rates created the housing bubble.” Another aspect contributing to the current recession was the failure, during the last two years of the Bush Administration, of the Democratically controlled Congress to implement President Bush and Senator McCain’s proposals to create oversight for Fannie Mae and Freddy Mac. The securitization by the brokerage firms of mortgage packages added to the problem since there was no way to accurately assess the value of the underlying mortgages, many of which were for properties where homeowners could not service their debt. The subprime lending increased homeownership in the United States but at the risk of allowing individuals to purchase homes at “fictitious” rates far below prevailing rates and then the consequential “upward adjustment” forced people out of their homes. The homes they should not have been able to purchase. The unscrupulous lending practices allowing people to purchase home without either credit checks, jobs certifications, and determining their true ability to service their debt added to the problem. Until the real estate market is stabilized, and that does not mean increased sales of foreclosures, but of actual new home sales and return of construction workers and related industries, there will be no end to the current recession. Now for some actual information.
Interest Rates: December Treasury bonds closed at 11909, down 26 points as equity markets continued to gain momentum. The moderately strong economic data and Fed Chairman's pronouncement that the “recession is probably over” lent substance to the rally in equities and the movement from the relative safe haven of treasuries to equities. We had suggested standing aside last week and we continue to believe that is the prudent stance at the moment. Our clients will be advised of any changes during the week as results of the Fed open market committee are announced on Wednesday. Important economic data such as U.S. existing home sales, (which we feel will be heavily concentrated on foreclosures), new durable goods orders, and new home sales as well as the final reading for September consumer confidence.
Stock Indices: The Dow Jones industrials closed at 9820.20, up 36.28 and gained 2.2% for the week. The S&P 500 closed at 1,069.30, up 2.81 points to close the week up 2.5%. The Nasdaq Composite Index gained 6.11 points to close at 2,132.86, and gained 2.5% for the week. Once again we view continued enthusiasm for equities based on what we feel are “fictitious” earnings gains since the increases reported were mostly tied to additional expense and labor cost reductions, not improved sales and growth. Therefore we maintain our position that the equity market has a huge “black hole” under it and would immediately implement hedging strategies.
Currencies: The December U.S. dollar closed at 7680, up 37 points against losses in the Euro of 27 points to 14720, the Swiss Franc 7 points to 9726, the British Pound 176 points to 16271, the Japanese yen 26 points to 10950, the Canadian Dollar 45 points to 9349, and the Aussie dollar 34 points to 8628. The strength in equities prompted the dollar shortcovering rally in front of holidays in Singapore and Japan next week. Technically the dollar remains weak. We continue to favor the long side of the Swiss Franc as we have since the 72c level with our ultimate goal, parity against the dollar.
Energies: October crude oil lost 43c per barrel to close at $72.04 and remains rangebound awaiting specific fundamental changes in supply/demand. The only activity was prompted by the U.S. government report that refined fuel inventories and distillates are at their highest levels since 1983. We prefer the sidelines.
Copper: December copper closed at $2.7850, down 11.10c per pound tied to the slight increase Friday of the dollar but mostly from increased warehouse inventories. The LME reported an increase of 3,325 metric tonnes on Friday to 327,700 while the Comex inventory data released late Thursday showed an increase of 161 short tons to 53,099. The weekly data from the Shanghai Futures exchange showed an increase of 6,852 metric tons to 104,248. We remain convinced that barring any labor strife from the producing countries, copper prices will continue to decline and we suggest holding and rolling over copper put positions.
Precious Metals: December gold closed at $1,010.30 per ounce, down $3.20 mostly on profittaking in front of the weekend and next weeks holidays in Singapore and Japan. Lower demand from jewelry buyers and the short covering rally in the dollar Friday, prompted the selling. December silver closed at $17.065, down 20c per ounce following gold. October platinum closed at $1,338.20, down $3.30 with December palladium losing $1.25 to close at $304.50. We once again prefer the sidelines and as suggested some time ago, repeatedly I might add, throw away your gold charts and chart the dollar with a close eye on interest rate changes.
Grains and Oilseeds: December corn closed at $3.18 per bushel, down 11c mostly tied to bearish weather forecasts. We continue to prefer the sidelines. December wheat lost 4 1/2c on Friday to close at $4.57 ¼ following corn and soybeans and on a report that Brazil was inspecting all U.S. wheat imported into the country for vomitoxin. We could see continued selling pressure with fresh fundamentals. Stay out. November soybeans closed at $9.41 per bushel, down 12c on a lack of any news related to the potential freeze on crops in the Midwest. Technicals also bearish. After bumping against overhead resistance, beans failed to follow through and long liquidation by speculators pushed prices lower. We would stand aside for now.
Coffee, Cocoa and Sugar: December coffee closed unchanged at $1.3605 a pound on Friday. Some long liquidation tied to other commodity weakness was a factor after a weekly gain of 9 1/4c with light buying tied to strength in equities and expectations of a U.S. and global economic recovery. Unfortunately since we do not agree, we would stand aside. December cocoa closed at $3,112 per metric ton, up $38 on buying from speculative funds and the strength in equities. Without any fresh fundamentals prices will probably reflect the trading in equity markets so we would stand aside here as well. March sugar closed at 23.24c per pound, down 69 points on booksquaring after recent gains. We have no opinion in Sugar.
Cotton: December cotton closed at 64.60c per pound, up 42 points on spec buying and technicals. We had suggested cotton could trade up to 65c in earlier commentaries, but having achieved that level we would now stand aside until fresh fundamentals emerge. Cotton is dependent on U.S. economic data and recent positive reports especially Fed Chairman Bernanke’s pronouncement that the U.S. “recession is probably over”, was a factor in the bullish thinking. We do not agree with Mr. Bernanke so we prefer the sidelines in any commodity where that thinking prevails.