Overview and Opinion: We continue to believe we are experiencing a precedent related to global economics. There has never been a situation that cannot be analyzed on the basis of precedent. The financial situation we are experiencing is without precedent since the purchase of “property” has never been without the establishment of “equity participation.”
I view the repeal of Glass Steagall as one of the root causes of the global recession and the pending financial crisis internationally. The origin of property purchases with little or no down payment prompted by the annual increase in values allowed financial institutions to lend 100% to 125% of the property value to entice buyers to purchase properties. The program worked as long as property values increased, but the handwriting was on the wall, that “nothing” goes up in price indefinitely. Not even gold, which traded at $875 per ounce in 1980, and “investors” who paid that price for their gold broke even after 26 years. A pretty lousy rate of return.
Getting back to home mortgages, if I may. Banks were able, through their brokerage entities (created by the repeal of Glass Steagall), to package mortgages, good or bad, and securitize them for sale globally. There was a problem with establishing values for these securitized mortgages but it did not seem to bother the investors or international financial institutions that offered them to their clients. Unfortunately, what should have been a “mild recession” such as past recessions with “life expectancy” of two to three years, the “snowball down the hill” became an avalanche as prices dropped and mortgages defaulted due to growing unemployment.
We are currently witnessing a global “meltdown” with eurozone countries experiencing a debt crisis causing concern that the Euro currency may fail in as much as each of the countries has a different economy and GDP. How or why the Euro was created has eluded me. The U.S. economy is in a “prolonged” recession that is without “precedent” so that any comparison to prior recessions is without merit. The U.S. administration “jaw-boning” the American public with glowing reports of job creation, is in my opinion, a bad joke. Job creation of 200,00 or so jobs when fully 80% of those are tied to the census, against the weekly job loss as exemplified by the first time unemployment number of over 450,000 or two million plus month cannot fool anyone into a euphoric state of wellness.
I will state emphatically, one more time, that an “unemployed consumer does not consume and the producers of those un-consumed products will be next to lay off workers.” Another fact remains that while “productivity” may show increases, it is merely the result of the remaining workers having to do the work of some of their co-workers who were laid off. Any reduction in the weekly number of first time unemployed can only be attributed to the fact that there are fewer workers available to lay off without “shutting the company doors.” So while the number may come down, it should not relate to an improved labor situation.
The current level of spending by the U.S. administration is putting the U.S. into a condition where the budget deficit is moving toward the entire GDP of the country. While income (income tax) for the Federal Government is reduced by virtue of the burgeoning unemployment situation, the spending is increasing and that condition is “financial suicide,” in my opinion. The U.S. could conceivably “owe more that its net worth” and equates to our “paying rent” to foreign governments. The U.S., in my opinion, is headed toward a “financial apocalypse.”
Now for some actual information.
Interest Rates: September Treasury bonds closed at 12407, up 121 after trading as low as 12229 during the early hours of the session. The rally Friday, after lower prices during the week, was prompted by the surprise drop in U.S. retail sales. The Commerce Department reported a decline in retail sales of 1.2% in May as consumption slowed. Consumer sentiment kept prices from rallying further with the Reuters/University of Michigan index increased to 75.5, higher that the analyst expectations of a 74 figure. The “offsetting” data leaves us with a question…..Which way for rates and treasury prices. Since we don’t have a definitive answer, we suggest the sidelines. However, our expectation of a “double dip recession” based almost exclusively on the labor situation leads us to believe yields will remain low, and prices for treasuries remain high. A trading range for treasuries remains our expected scenario.
Stock Indices: The Dow Jones industrials closed at 10211.07, up 38.54 points and gained 2.8% for the week. The S&P 500 closed at 1,091.60, up 4.76 points and gained 2.5% for the week. The Nasdaq closed at 2243.60, up 24.89 points and rose 1.1% for the week. Stocks managed a gain this week tied to improved consumer sentiment and reduced concern over the European debt crisis. However, we believe the rally is merely a correction after recent equity losses and we expect the “bear market” to reassert itself. The U.S. economy, which equities forecast 6-8 months in advance, is not likely to improve in that time and with the burgeoning unemployment and my remarks in the “Overview”, not likely to mean an improved equity market condition. The largely ignored decline in the U.S. retail sales data showing a 1.2% decline for May is an indication of what I stated in the Overview. We once again implore investors with large portfolios to implement hedging strategies, which we can assist with formulating.
Currencies: The September U.S. dollar index closed at 8774, up 9 points against losses in the September Euro of 21 points to 120.84, the Swiss Franc 40 points to 8710, the British pound 190 points to 14512, the Japanese yen 41 points to 10936, and the Canadian dollar 53 points to 9635. The September Australian dollar closed unchanged at 8395. The mixed U.S. economic data provided the backdrop for the price swings this past week and we expect future data to continue to confuse until an economic direction can be established. We would avoid this group with the exception of buying Swiss Francs on any further decline.
Energies: July crude oil closed at $73.78 per barrel, down $1.70 tied to the slowing of China’s pace of economic growth even though industrial production in China grew at a 16.5% rate in May. The rate was slower, however, than the 17.8% increase in April and that was also a factor in the price decline for crude. We prefer the sidelines in crude but could see a correction back to the $75-76 per barrel price level after the recent weakness.
Copper: July copper closed at $2.9040, up 4.15c per pound on a corrective rally after recent heavy long liquidation. The weaker than forecast data on U.S. retail sales kept prices for rallying further. Our expectation for a continued global economic slowdown keeps us on the bearish side but after the recent selling, we expected a correction if only on a technical basis. We recommended taking profits on short positions and would now stand aside waiting for the next rally to recommend shorting once again through the purchase of put options.
Precious Metals: August gold closed at $1,230.20 per ounce, up $8.009 as investors continued to move money to what they consider a safe haven during times of economic concerns. The surprising U.S. retail sales data the main feature to the continued strength in gold. July silver, however, did not follow gold and lost 12c per ounce to close at $18.2310. Gold and treasuries benefit when economic data disappoints investors. We prefer the sidelines. July Platinum closed at $1,535 per ounce, down $1.20 while September palladium lost 75c to close at $448.55 per ounce. We consider precious metals a trading affair and would avoid positions.
Grains and Oilseeds: July corn closed at $3.49 ½ per bushel, up 6 1/4c tied to expectations of renewed demand from China and the USDA’s projection of reduced ending stocks. Farmers are withholding corn at these lower prices expecting gains after recent weakness. Funds were buyers on balance. We prefer the sidelines. July wheat closed at $4.40 ¾ per bushel, up 7 1/2c on technicals and reported reduced Canadian production. The Canadian Wheat Board estimated western all-wheat plantings at 19.15 million acres, the smallest acreage since 1971 and a reduction of 18% from 2009-10. With some Commodity funds heavily short, we could see further price gains. Traders could consider buying on Monday but with stops. July soybeans closed at $9.46 ¼ per bushel, up 11 1/4c tied to strength in other Chicago pits and on fund buying. Technicals show a bottoming taking place in soybeans and we would now move off the sidelines and start putting on some long positions after Mondays National Oilseed Processors Association’s monthly crush report. Any drop in the crush for May would be a positive. The soybean crush reflects demand for meal and oil. However stop protection is always recommended.
Coffee, Cocoa and Sugar: July coffee closed at $1.4495 per pound, up 7.95c after prices breached resistance and traded up to its highest prices in almost five months. Tight world coffee supplies the main feature. July traded as high as $1.4850 during the session, the highest since early December of last year. Technically prices should move higher and buying is suggested but using stop around Fridays median price. The expected Brazilian bumper crop failed to halt the gains. July cocoa closed at $2,937 per tonne, down $4.00 but held tied to expected supply tightness. Shippers and processors in Ivory Coast declararations were down 13.5% from a year ago and that provided some support. We prefer the sidelines. July sugar closed at 15.83c per pound, up 47 points on expectation of higher import tenders from the Asian and MidEast countries. Sugar futures traded at 6 week highs on Friday and could have established an interim bottom technically. We could see further gains early in the week and would put on a few contracts but again, as in other recommendation for purchase, have stop protection in place and raise those stops as prices move higher.
Cotton: July cotton closed at 81.54c per pound, down nearly a penny, losing 97 points after the rally tied to reduced availability fizzled. We could see a renewed buying interest this week and would put on a few contracts early Monday but again, using stop protection. The recent selling commodities overall, tied to the perception of continued weak international economies weighed on commodity prices across the board.
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.