“It’s the economy stupid” gave way to “It’s the labor situation stupid.” On Thursday it was announced that 479,000 first time unemployed joined the ranks of the 12 million or so unemployed in the U.S. up 17,000 from the prior week. The “good news” was that 71,000 non farm payrolls were gained in July, albeit lower than the 100,000 analysts were expecting. However, 131,000 nonfarm payrolls were lost last month mostly temporary jobs at the U.S. census. If that’s not confusing to you, it certainly was confusing to me that the U.S. administration is “gratified” by the increase without addressing the first time unemployed. Mathematics was always my strong point but how one can derive “gratification” at gaining 71,000 non farm jobs for the month and reporting over 450,000 first time unemployed weekly for a monthly total of nearly two million is confounding. Another mathematical anomaly is the unemployment rate with all those “big numbers” bandied around managed to remain at 9.5%. Now for some actual information and my specific analysis that will hopefully allow my readers to make profitable trading decisions.
Interest Rates: September Treasury bonds closed at 12917, up 105 as equities slid early in the day prompting the move to the relative safety of treasuries. After treasuries closed equities managed a rally to closing levels and that could indicate a lower opening for bonds on Monday. The Federal Open Market Committee will meet on Tuesday to discuss the current situation but not expected to do anything about rates that are already near zero. The phrase “quantitative easing” was mentioned in the media but can only mean keeping rates inordinately low. With the expiration of the home buying credit, there are few homebuyers chasing the historically high home inventory. Anyone able to purchase homes did so during the tax credit period and I expect there are fewer creditworthy borrowers ready to pick up the buying. We prefer the sidelines for now.
Stock Indices: The Dow Jones Industrials closed at10653.56, down 21.42, after opening sharply lower posting triple digit losses on the government’s monthly jobs data. Another negative for equities was the outstanding Consumer credit decline of 0.7% in June as American households hung on to their funds on concern over jobs. The national savings rate rose to 6.4% in June from the 6.3% reported for May. The S&P 500 closed at 1121.64, down 4.17 while the Nasdaq lost 4.59 points to 2288.47, both rallying with the Dow late in the day. For the week the Dow managed a gain of 1.8% but on light daily volume. Corporations continue to report better than expected earnings however much of the gains were attributed to cost cutting rather than actual sales gains. We had stated in prior commentaries that increased earnings based on fewer employees remains a question of whether or not those laid off employees contributed nothing to corporate bottom lines. A situation I absolutely refuse to believe. Once again I recommend implementing hedging strategies for what I expect is the coming equity market crash. I remember distinctly the collapse of October 1987 where many investors were “wiped out” and the bounce from those Monday lows formed the base for the rally albeit without those investors that had held onto their stocks. Those that kept cash became the basis for the ensuing rally. I was once told that stocks rally 75% of the time and that “buy and hold” was the way to successful investing and that stocks always came back. I asked the stock broker when Enron was coming back with no response…… Manage your portfolios or the markets will….
Currencies: The September U.S. dollar index closed at 8036, down another 57 points against the basket of six currencies. The government employment data on Friday was just one more negative pointing to the lack of confidence in a sustainable U.S. economic recovery. We of course see no recovery and suggest that the worst for the U.S. dollar is not over. The Euro closed at 13274, up 99 points. The September Swiss Franc gained 95 points to close at 9642 and remains our favorite in the group. The British Pound gained 86 points to close at 15963, the Japanese Yen 58 points to 11708, and the Australian dollar 38 points to 9145. The Canadian dollar lost 121 points to 9707.
Energies: September crude oil closed at $80.70, down $1.31 tied to concern over the U.S. economy after the disappointing U.S. jobs data. For the week crude managed a gain of 2.2% after a 4.4% for the month of July. Negative economic data prompts concern of reduced energy demand. September Natural gas closed at $4.467 per MBTU, down 1.31c, its lowest close in three weeks and lost 9.1% for the week. September heating oil closed at $2.1472 per gallon down 3.96c while unleaded gasoline lost 5.17c to close at $2.1127. We once again suggest the sidelines in energy products. Too many variables to make a determination of future price direction.
Copper: September copper closed at $3.3430 per pound, down 1.05c after trading in a range from $3.38 to $3.325 during the session and tied to the U.S. jobs data. With copper used widely in manufacturing and construction, something we continue to feel is in decline, our bearish stance remains intact but trading in copper must be limited to those investors with extensive risk capital. Inventories at the LME declined by 450 metric tonnes on Friday to 412,625. The Comex inventory declined by 392 short tons to 99,970 and the weekly data released Friday by the Shanghai Futures Exchange rose by 1,861 metric tons to 106,368. The mixed inventory data indicates to us that demand is declining from one of the major users of copper, the Far east and we retain our bearish posture.
Precious Metals: December gold closed at $1,205.30 per ounce, up $6.00 on concern over the U.S. economic recovery and the employment situation. Gold responds positively to negative economic data and we could see additional gains in the near term. We have recently been approved as agents for PFG’s Precious Metals division and a link to metals purchases can be found on our website. September silver closed at $18.472 per ounce, up 15.1c and our recommendation to buy silver at or below $17 per ounce remains in effect. October platinum closed at $1,570.80, down $1.70 while September palladium closed at $487.60 per ounce, down $8.45. We prefer the sidelines.
Grains and Oilseeds: September corn closed at $4.05 per bushel, up 1 1/2c even as wheat sold off sharply after its recent “monumental” 91% gain. Spread trading and unwinding of the wheat/corn spreads prompted the gain in corn even as wheat traded limit down 60c per bushel, Recent activity has been linked to the devastating drought in Russia where all export trade was cancelled prompting the heavy buying in wheat which carried to corn and beans but certainly not to the same extent as for wheat. We prefer the sidelines in corn as concern over the U.S. corn crop diminished after the crucial pollination period. September wheat closed at $7.25 ¾ per bushel, down the permissible 60c limit after its “monumental” 91% gain tied to the Russian grain export ban and the severe drought. However, markets have a tendency to overdo a particular condition and “stretch” like a rubber band beyond what normally could be expected pricewise. December wheat closed at $7.55 ¼ per bushel, limit down 60c after trading as high as $8.68 early in the session. Stay out for now. November soybeans closed at $10.33 ½ per bushel, up 4 1/2c on strong export demand and tight old crop supplies even as wheat sold off sharply. We continue to favor the long side of soybeans but would await the normal correction which could take prices basis the November back below $10 per bushel. Our goal for soybeans on an interim basis is $11-13 per bushel but with correction in between.
Coffee, Cocoa and Sugar: September coffee closed at $1.6740 per pound, down 2.45c tied to the weaker than expected U.S. economic data and better than expected growing conditions in Brazil, a major grower of coffee. Stay out for now. September cocoa closed at $3,006 per tonne, down $107 on increased output from the major West African growing region. Speculative selling against increased production estimates the main feature. Favorable weather also a factor. We prefer the sidelines. October sugar closed at 18.24c per pound, down 5 points also tied to the weaker than expected U.S. jobs data which could indicate a decline in demand. We prefer the sidelines.
Cotton: December cotton closed at 80.23c per pound, up 17 points tied to heat stress in the growing areas of the Southeast and tight warehouse supplies. We continue to like cotton from here but technical resistance between 82-83c could hamper further price gains. Use stops on existing positions and any new buying.
Orange Juice: September OJ closed at $1.44 per pound, down 1.95c on the lack of any threatening tropical weather. However, it is estimated that the 2010 should be an active hurricane season so that traders should be kept vigilant on any storm developments off the Atlantic. We view OJ as overbought technically and could short a few contracts here but with buy stop protection. The Florida orange juice industry preliminary estimates are for a 165 million boxes, up from 134 million in the 2009-2010 season.
Meats: October hogs closed at 74.07c per pound, down 1.95c on Friday after heavy selling on Thursday that took lean hogs to the 3c limit down level. We feel hog prices could decline further based on weak fundamentals but would use buy stop protection on any new short positions. October live cattle closed at 95.50c per pound, down 77 points on pre-weekend profittaking and on negative financial markets. The U.S. jobs data played a role in the long liquidation and touching off of sell stops. We prefer the sidelines but favor the short side.
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.