Sector analysis for week of Oct. 5

The “shotgun approach” to a U. S. economic recovery is a fallacy when it fails to consider the global picture. That “picture” is clouded by systemic labor problems, war on two fronts, health care, a deteriorating housing and construction industry and the continuing loss of jobs. In the midst of this crisis, it was apparently necessary for our President to venture to Denmark to try to secure an Olympic position for his favorite city and state, Chicago Illinois. I had thought that the job of “marketting” was assigned to either a Mayor of a city or the Governor of the state. Never before has a sitting President taken such an action at high cost to the already burdened taxpayer. Another fact, obviously overlooked by the U.S. Administration is the budget deficit elements. Taxes represent the U.S. government’s income. To estimate the budget based on last years “earnings” is another mistake being made. Since the taxpayer of last year, is the unemployed worker of this year, the tax he used to pay, has now become a drain due to his unemployment benefits so in effect, the U.S. earnings of, let’s say $1.00, is now a cost of $1.00 negatively affecting the budget by $2.00. There is no immediate solution to this problem and the current President’s “obsession” with heath care instead of concentrating on the economy and jobs, is another in a long list of mistakes. Creating a health care program which in effect, is supposed to make health care “affordable” does not help the unemployed who still have to make the choice between the supposedly affordable health care and food, or rent. It remains to be seen exactly how much damage to the economy is being caused through the use of whatever credit is still available through credit cards for the unemployed. It will soon be necessary for the “piper to be paid” and that will create new problems for the unemployed and the banks that issued the cards. Talk of a “V” shaped recovery is also misleading the investing public. Some months ago I “declared” in a commentary that the recovery would be “U” shaped with the bottom line of the “U” extended for a long period of time as the economy forms a base from which to slowly advance.….Now for some actual information.

Interest Rates: December treasury bonds closed at 12209, down 12 ticks after rallying early in the session after the employment data was issued. September non farm payrolls dropped by 263,000, more than the 175,000 losses estimated by economists. August factory orders dropped by 0.8% against the forecast of a 0.6% decline. The U.S. unemployment rate came in at 9.8% from 9.7% and was a clear indication that the labor situation is anything resolved or in recovery. Once again, an “unemployed consumer does not consume anything and the workers that produce those products are next in line to be unemployed.” As I stated last week, there is no sign of inflation nor an increase in rates and any selling in treasuries could present a new buying opportunity. However, one must remember the enormous amount of U.S. debt currently carried by China and Japan and any sign of either their refusal to purchase more debt or selling of treasuries could change the overall picture and we would stand aside.

Stock Indices: The Dow Jones industrials closed at 9487.67, down 21.61 while the S&P 500 lost 4.64 points to close at 1,025.21. The Nasdaq lost 9.37 points to 2,048.11. The Dow’s weekly decline was the largest in three months in percentage terms. The employment situation continues to deteriorate and as I suggested over the last few weeks, any “improvement” or lower first time weekly unemployment number would, if it occurred, not represent an improvement but only reflects the fact that there are fewer employees that could be considered "expendable”. Implement hedging strategies.

Currencies: The December U.S. dollar index closed at 7720, down 21.5 points against gains in the December Euro of 53 points to 14587, the Swissie 63 points to 9671, the Japanese yen 17 points to 11163, and the Canadian dollar 11 points to 9235. The December British pound lost 32 points to 15914, and the Aussie dollar lost 53 points to 8602. The G7 finance officials are expected to issue a communique that would employ language similar to that used by the same officials after their April meeting. We once again suggest the long side of the Swiss franc on any selling.

Energies: November crude oil closed at $69.95, down 87c or 1.23% on Friday as U.S. equities and economic numbers weighed on prices. A weak U.S. economy precludes increases in demand for energy products and energies usually reflect that decline in demand. Even as the dollar declined which normally would prompt higher prices for dollar denominated commodities, energy prices fell leaving us to continue our recommendation of “stand aside”.

Copper: December copper closed at $2.6815, down 5.55c on technicals showing increased resistance. As I mentioned recently, the increases in some of the exchange warehouses indicates reduced demand. Inventories at the LME declined by only 625 metric tonnes on Friday at 345,425 with the most recent Comex data showing an increase of 121 short tons to 53,604 tons. We prefer the short side but only through the purchase of put positions and retaining existing positions.

Precious Metals: December gold closed at $1,004.30, up $3.60 tied to the decline in the U.S. dollar and on perceived “bargain hunting”. We are seeing a lot of advertising promoting gold purchases similar to what we saw the first time gold high the $900 level but it took over 25 years for those gold buyers to break even or show a small profit. Not a viable rate of return. December silver closed at $16.23 per ounce down 21c tied to the weaker than expected factory orders and some technical selling when silver failed to follow gold. We prefer the sidelines in both since charting metals is, in my mind, a misguided effort. Chart the dollar instead. January platinum declined by $5.90 per ounce to close at $1,283.40. December palladium closed at $298.20 per ounce, up $5.25. We still favor the short platinum, long palladium spread until which time we see any positive fundamentals tied to the U.S. auto industry. U.S. autos require platinum in their catalytic converts and obviously, demand has been declining albeit a shortlived “cash for clunkers” program.

Grains and Oilseeds: December corn closed at $3.33 ½ per bushel, down 7c following soybeans which sold off sharply as the potential for a record 2009 production and improved weather harvest outlook next prompted heavy selling. We prefer the sidelines. December wheat closed at $4.41 ¼ per bushel, down 8 1/2c also pressured by the heavy selling in soybeans and adequate world stocks. Weak export demand also added to the selling pressure. Stay out. November soybeans closed at $8.85 per bushel, through any sell stops associated with our previous buy recommendation where we suggested using stops against any purchases. Improved weather outlook for harvesting next week and prospects for a record production in 2009 also a factor in the long liquidation, speculator and fund selling. Stand aside for now.

Coffee, Cocoa and Sugar: December coffee closed at $1.2970 per pound, up 300 points with March gaining 305 points to close at $1.3265 per pound. Heavy speculative buying along with funds prompted the strength in coffee also helped by the weak dollar. We think we could see further buying in coffee but any new longs should be on corrections and with stop protection. December cocoa closed at $3,001 per metric tonne, down $91 after trading as low as $2,975, a 2 ½ week low, early in the session. Technically cocoa is overbought and without fundamental news its reliance on the U.S. economic recovery is not without risk since we firmly believe the U.S. economic recession will last longer than the U.S. administration suggests. Stay out. March sugar closed at 23.78c per pound, down 86 points after gaining on concerns of rains in the growing areas of Brazil is hampering harvest there. We prefer the sidelines but any sharp selloff could be met with buying. The weak U.S. economic data also a factor in the selling on Friday.

Cotton: December cotton closed at 60.66c per pound, down 68 points and lost 1.35c for the week. Weakness in other agricultural commodities also weighed on cotton. We prefer the sidelines since we expect cotton to remain rangebound between 55 and 65c per pound.