The sign over the door of some brokerage firms should be taken from Dante Alighieri’s 14th century poem and read “Abandon hope all ye who enter here.” Investors may have been left Friday with the feeling they have entered the “inferno”…
The much awaited employment report expected to show job gains of around 600,000 came in quite a bit shy of that figure. The 431,000 jobs created included 411,000 census workers positions and clearly disappointed Wall Street. The decline of 2 tenths of one percent from 9.9% to 9.7% was read and understood to be a result of many people leaving the job search rolls and is clearly not indicative of the labor situation in the U.S.
We have, for some time, commented that the U.S. Administration’s assessment of an “economic recovery” was, in the words of former Fed Chairman Greenspan, “irrational exuberance.” The fact remains that job creation of 160,000 or thereabouts on a monthly basis does not at all reflect the job losses. Each week the first time unemployed figure released on Thursday has been around 450,000. That means the administration is “happy” about creating 150,000 jobs monthly without comparing it to the nearly two million employees out of work monthly. That kind of “logic” is reminiscent of the “snake oil salesmen” wandering the old West. People bought the snake oil and now they are buying the “economic recovery." In my not so humble opinion, the U.S. and the World is headed for a “second dip recession.”
Now for some actual information
Interest Rates: June Treasury bonds closed at 12429, up 213 or 1.96% on Friday as investors moved from equities to the relative safety of U.S. treasuries. The disappointing U.S. payrolls data and concern over the potential for Hungary to become the next Greece prompted the shift to treasuries and gold. We continue to suggest treasuries may remain at the higher end of our projected price range with corrections possible on any change in global economic news. The prospect of defaults in the eurozone remains a possibility.
Stock Indices: The Dow Jones industrials lost 323.31 points on Friday and ended below the “magic” 10,000 level. The weaker than expect jobs report coupled with sovereign debt crisis spreading across Europe prompted the shift from equities to the relative safety of U.S. treasuries. The Dow lost 3.2% on Friday leading to a weekly decline of over 4%. The S&P 500 closed at 1064.88, down 37.95 or 3.44% for a weekly loss of 2.3% offsetting the strong rally on Wednesday and the slight gain on Thursday. The Nasdaq closed at 2,219.17, down 83.86, or 3.64% on Friday with a weekly loss of 1.7%. We have been warning for some time that the administrations “misguided perception” of an economic recovery was done with the use of “mirrors” and with no substantiation by facts. Once again, until the labor situation improves, and I do not mean the weekly first time employment numbers, since I expect those to decline as the number of employees available for layoff declines, we will see no such economic recovery. Email me directly for hedging strategies on the next corrective rally in equities, which could provide the opportunity to implement those strategies.
Currencies: The September U.S. dollar index closed at 8879.5, up 121.1, or 1.38% on Friday against losses in the Euro of 212 points to 11977, the Swiss Franc 49 points to 8632, the British Pound 178 points to 14461, the Canadian dollar 164 points to 9430, and the Australian dollar 215 points to 8118. The September Japanese yen gained 150 points to 10955 since it is not included in the European debt crisis “strangling” the European economies. Hungary has been added to the list of countries facing possible default and may well become the next Greece. The possibility of bailouts for all the problematic countries is, in our opinion, is non-existent. Stay out but as we have been suggesting, Swiss Franc longs on further selling would be our only choice in the group. Be prepared though, to sustain additional declines.
Energies: July crude oil closed at $71.51 per barrel, down $2.46 or 4.2% on Friday and down 3.3% for the week. Energy products suffered as the equity markets fell sharply. The weak payrolls data prompted ideas that the so-called U.S. economic recovery would be in doubt and that could lead to demand declines by the industrialized countries. The strong dollar also a factor in the selling of dollar denominated commodities. We prefer the sidelines but our next idea would be the long side if only on the basis of a technical correction in what could be considered an oversold condition.
Copper: July copper lost 8.05c per pound to close at $2.8660 after trading as low as $2.8505 during the session. Concern tied to the U.S. jobs data could impede construction in housing and the manufacture of automobiles and lead to the decline in demand we have been projecting for some time. Inventories at the LME fell 1,300 metric tonnes on Friday to 473,000 while the weekly release of inventory data by the Shanghai futures exchange showed a decline of 4,974 metric tons to 152,724. The Comex inventory data released on Thursday showed an increase of 89 short tons to 102,087 tons. Those drawdowns could keep copper prices from declining further and we would consider taking some profits off the table. The trend, however, is for lower prices, and our bearish view remains intact.
Precious Metals: August gold closed at $1,217.70, up $7.70 tied to the sell off in equities, and the newly developed concern that Hungary may be going the way of Greece. The Greecian bailout by France and Germany not likely to be repeated for Hungary and that leaves investors in a quandary to try to compute potential global economic damage. The situation between South and North Korea remains problematic and also provides the impetus for buying in both gold and the U.S. dollar. July silver closed at $17.299 per ounce, down 63.2c while July platinum lost $17.60 to $1,525.30 and September palladium lost $19.80 to close at $431.00. Only gold traded against the dollar while the other metals traded in accordance with our “dollar up, dollar denominated commodities down”. Stay out for now but I look for a place to buy silver on any added long liquidation prompted by margin calls, which I expect will be dealt with on Monday.
Grains and Oilseeds: July corn closed at $3.40 per bushel, down 9 1/2c tied to selling in other markets and the strong dollar. Without new fundamentals and weak exports we prefer the sidelines. July wheat made a new low at $4.35 per bushel and closed at $4.35 ¾, down 6c. We prefer the sidelines here as well. July soybeans closed at $9.35 per bushel, down 20c and broke technical supports. However, since the selling was tied to outside markets and the strong dollar, soybeans could see additional pressure early Monday but any decline to the $9.00 support level could attract new buying. Of the group, I favor soybeans but would not step in until the dollar corrects and pressure on commodities vis-à-vis margin call liquidation subsides.
Coffee, Cocoa and Sugar: July coffee closed at $1.3375 per pound, down 1.85c on the disappointing U.S. employment data, the eurozone debt crisis, and the strong dollar. Stand aside for now and await stability in the dollar and other commodities. Potential for a Brazilian frost could provide the impetus for renewed buying in coffee. Trade from the long side after what we expect will be a weak opening but use stops. I suggest waiting for late Monday or early Tuesday before taking another look. July cocoa closed at $2,919 per tonne, down $129 tied to the strong dollar and weak U.S. jobs data. The eurozone debt concerns also a factor. Weak economies weigh on cocoa. Stay out. July sugar closed at 14.52c per pound, up 53 points on speculative fund and possible commercial buying according to analysts. Large supplies coming from Brazil and an improved Indian crop prompted the recent weakness in sugar. We prefer the sidelines here as well but could see some additional buying. Traders could put on a few longs but use stops.
Cotton: July cotton closed at 77.06 down 1.15c tied to the selling in other commodities and equities. We prefer the sidelines.
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 to which he introduces his clients.