Overview and Opinion: I have been wondering for some time now how the investing public could actually believe the rhetoric about an economic recovery. The facts do not substantiate the optimism. Even a blind analyst should recognize that with a decimated work force in the U.S. the decline in the consuming public would necessarily contradict the concept of an economic recovery.
The government assessment that an increase of 290,000 jobs in the month of April translates to recovery ignores that during the same period, 450,000 first time unemployed weekly mathematically translates to 1.8 million jobs lost. The unemployed now total 15.3 million workers and while the jobs created figure is nice, the rate has ticked up from 9.7% to 9.9%.
Who exactly is at the adding machine, Elmer Fudd? Could I be the only one who understands the math comparison? The fact remains that since December of 2007 nearly 8 million jobs have been lost. Additionally, the situation in Greece, as I suggested would happen some weeks ago, has impacted other euro zone countries and could spread further. My advice to investors is simply, analyze your risk tolerance, manage and adjust investments accordingly. Now for some real news.
Interest Rates: June Treasury bonds closed at 12200, down 111 after touching a high on Friday of 12404. This is beyond what I had estimated would be the top of the trading range. Momentum has carried it further thanks to the Thursday Dow collapse of nearly 1,000 points, (something that is being contested due to a computer glitch). The early buying in bonds was a result of the heavy equity selling as money, or what’s left of it, is moved to the relative safety of U.S. treasuries. We do not expect bond prices to move higher from here but one can never truly assess the volatility tied to investor concerns. We would either stand aside or buy some puts on the bonds just as a hedge.
Stock Indices: Dow Jones industrials closed at 10,380.43, down another 139.89 after the worst four day decline since 2008. The S&P 500 closed at 1110.88, down 17.27 and the Nasdaq lost 54 points to 2265.64. For the week the Dow lost 5.7%, and the S&P lost 6.4%. A computer glitch occurred on Thursday caused severe price moves that saw one company’s stock drop from $40 per share to one penny per share and back again. Such computer error is responsible for creating an artificial 1,000 drop in the Dow Industrial average. Such glitches do not occur often but with the Dow already down over 300 points at the time, ordinary circuit breakers failed to catch the glitch. The resulting drop saw the Dow decline rapidly to 1,000 points where the actual Dow should have bottomed, in my opinion, somewhere around a 500 point decline. However, since the “glitch” created those famous “lines on a chart”, the resulting heavy technical selling along with those “darn” computer programs exacerbated the decline. Concern over the debt crisis spreading through Europe and affecting the “supposed” global economic recovery pervades the investment community and offset the supposedly good news on the job growth for April reported by the U.S. Labor Department. I explained in the overview our opinion of that report and its relevance. I continue to suggest that the equity markets have formed a “black hole”, something I said would happen some weeks and months ago based on my assumption that there is no U.S. economic recovery considering the labor situation. One move point is my insistence that “an unemployed consumer does not consume anything and the producers of the products they do not consume are the next victims of the recession”. Implement hedging strategies to reduce risk to your capital or what’s left of it…..
Currencies: The June U.S. dollar index closed at 8445.5 down 59.2 points against gains in the June Euro of 127 points to 127.40, the June Swiss Franc 38 points to 9030, the June British Pound 27 points to 14808, and the June Canadian Dollar of 1.84c to 9591. The Australian dollar also improved by 56 points to 8844. The June Japanese yen lost 308 points to close at 10941. The Dollar gain was the best since late 2008 albeit with wide price swings on Friday. European sovereign debt continues to concern investors and funds were moved to the dollar and treasuries. We once again suggest the sidelines but favor the long side of Swiss Francs.
Energies: June crude oil closed at $75.11, down $2.00 on continuing fears that the European debt problems will spread and curtail the global “economic recovery”. Something we do not subscribe to. We had suggested crude oil prices, then in the $80s would decline to between $70-75 per barrel but we had no idea our price goals would be met so soon. Stay out.
Copper: July copper closed at $3.1445, up 2.75c tied to the recovery of the Euro and dollar decline Friday. We continue to be bearish on copper suggesting that while the U.S. administration is calling the “slight” job creation part of the U.S. economic recovery, the fact remains that 15 plus million people are out of work. That does not translate, in my opinion, to an economic recovery that would promote new demand for copper in the form of housing and autos. We suggest the sidelines and would buy puts on any rally.
Precious Metals: June gold closed at $1,210.40 per ounce, up $13.10 tied to the weak dollar but mostly on the devastating selloff in equities. Riots in Greece and concern that the debt problems would spread throughout the Euro Zone prompted the flight to precious metals. We prefer the sidelines in gold since any change in the dollar or correction in equities could prompt liquidation in gold. July silver closed at $18.4510 per ounce, up 93.6c following gold but gained more percentage wise, 5.34% than gold which gained only 1.09%. Of the two we have preferred silver over the past weeks and months and still do. We suggested buying of silver anywhere near or below $17 per ounce. The white metals did not fare as well with Platinum for July losing 70c to $1,665.80 and June platinum losing $3.90 to close at $510.20. Profittaking the main feature. We suggest the sidelines.
Grains and Oilseeds: July corn closed at $3.72 per bushel, up 3/4c with support coming from good demand and poor weather. Our emphasis has been on financials and we did not follow grains closely enough to make recommendations other than stand aside. The Tuesday supply/demand report will determine direction. July wheat closed at $5.10 ½ per bushel, up 2 1/4c on short covering and weather concerns. No opinion until after Tuesdays report. July soybeans closed at $9.51 ¼ per bushel, up 5 3/4c on a correction after recent declines. As we suggested last week, do not add to longs and now we would wait for the Tuesday report before commenting further.
Coffee, Cocoa and Sugar: July coffee closed at $1.3390 per pound, up 70 points on a technical correction after recent weakness and tied also to the dollar weakness Friday. Stand aside. July cocoa closed at $3,016 per tonne, down $187 as concerns over Europe affected potential demand. Our recent stand aside recommendation still applies. July sugar closed at 13.75c per pound, up 8 ticks mostly on a correction after recent weakness. We see no reason to trade this market. Stay out.
Cotton: July cotton closed at 80.71c per pound up 86 points on buying by textile mills after recent weakness. Tight supplies could prompt further corrective buying but would use stops against any purchases.
John L. Caiazzo
Information provided is from sources deemed to be reliable but not guaranteed. Futures and Options trading involve a high degree of risk and may not be suitable for everyone. John Caiazzo is a registered commodities broker with over 40 years experience in investments and opinions are his own and not of the Futures Commission Merchant he introduces his clients to.