Recent data calm recession fears; markets react

The U.S. economic recovery, as suggested by economists, remains intact according to the dictionary description of a “recession.” However, the Labor Department reported payrolls declined in August by 54,000 but not as steep as the 105,000 predicted by economists. Health care and temporary staffing industries showed a 67,000 expansion in private sector employment. The report on Friday allayed fears of a double dip recession, however the unemployment rate was 9.6% in August, up from 9.5% in July.

Since the increase was expected by economists, no particular attention was paid by global markets. If the number of those former unemployed who have either taken jobs paying less than they were used to were included in the analysis, the unemployment rate could easily be increased to 12-14%. One analyst over the weekend suggested the “true” unemployment rate of those no longer looking for employment in conjunction with those having taken less paying jobs could be as high as 16%. That would be close to the “great depression” rate of nearly 25%. We continue to view any talk of an economic recovery as an “exercise in futility” and an attempt at pacifying the general public into “euphoria” and induce the public to get back to spending, something that could mediate the current economic climate. In our opinion the current recession remains intact and the time frame to resolve the housing and labor situation could extend to 3-5 years….at least. Now with some actual information.

Interest Rates: December treasury bonds closed at 13115, down 102 points as the Labor Dept reported a lower than expected non farm payroll jobs loss for August. The Institute of Supply Management reported a reading for August of 51.5% against a 54.3% reading in July. Economists had expected an August reading of 53.5%. Any reading above 50% indicates an expansion. Good news for the U.S. economic is bad news for treasury prices and higher yields. Prices and yields move against each other on fixed rate instruments. Early in the session the Labor Department revised July layoffs to 54,000 from the initially reported 131,000. The reports on Friday were viewed as positive for the economic recovery albeit slower than the U.S. administration would like. Our recommendation to purchase put options on treasuries is working well for our readers and clients. We could see a corrective bounce in treasury prices but would use such correction as an opportunity to add to put positions.

Stock Indices: The Dow Jones industrials closed at 10447.93, on Friday, up 127.83 and up 2.9% for the week. The S&P 500 closed at 1104.51, up 14.41 and up 3.7% for the week. The Nasdaq closed at 2233.75, up 33.74 and managed a gain of 3.7% for the week. It seemed that no one wanted to miss the boat on Friday not realizing that perhaps this particular “boat” may be named “Titanic”. In front of the three day holiday weekend shorts covered and money moved from the safe havens of treasuries and gold to equities. The “not as weak as expected” labor report early Friday prompted the move and the “avalanche” carried for the rest of the market session. We continue to view the U.S. economy as suffering from the longest recession since the Great Depression and no sign of an economic recovery, in our view, is in sight. Implement hedging strategies.

Currencies: The December U.S. dollar index closed at 8234, down 51.1 points even as the U.S. Labor Department reports were better than expected but not relative to the European economy. The December Euro gained 64 points to close at 12874, the Swiss Franc lost 36 points to 9831 in a correction against earlier gains. The December British pound gained 60 points to 15436, and the Canadian dollar gained 139 points to close at 9603. The Australian dollar gained 58 points to 9059 but the Japanese yen lost 32 points to 11854. The Labor Department reports on Friday were a mixed bag and accounted for the mixed price action. We continue to prefer the long side of Swiss Francs.

Energies: October crude oil closed at $74.60 per barrel, down 42c but above the worse prices of the session. The better than expected job report helped prices recover from the lows but not enough to post gains. We remain uncommitted in energy other than our prior recommendation on natural gas which did not meet our expectations. We would, however, hold long positions.

Copper: December copper closed at $3.50 per pound, up 45 points tied to the positive construed Labor report. We remain negative for copper on the basis of our overall expectation of a continued poor economic recovery and ongoing housing problems.

Precious Metals: December gold closed at $1,251.10, down $2.30 per ounce as money moved from the relative safe havens of treasuries and precious metals. The weak dollar failed to support precious metals as it usually does since a weak dollar is beneficial for dollar denominated commodities. The recent strength in gold made it susceptible for a correction in front of a three day holiday weekend. December silver gained 27.7c per ounce to close at $19.49 while October platinum gained $9.60 per ounce to close at $1,561.10. December palladium gained $6.20 per ounce to close at $531.45. As or if treasury yields increase by virtue of possible continued pressure on treasury prices, the dollar could gain and that would put pressure on precious metals and other dollar denominated commodities. Remain cautious and pay attention to news. As I have stated in prior commentaries, “fundamentals move a market but technicals exacerbate the directional move in prices.”

Grains and Oilseeds: December corn closed at $4.645 per bushel, up 17c based on a projection from Informa Economics, a Memphis based agricultural consultant and research firm that the final 2010 U.S. corn yield would be 158.5 bushels per acre. That is down from the USDA most recent estimate of 165 bushels per acre. Industry sources have been suggesting that the crop would be weaker than expected tied to a soggy summer that flooded out some of the fields and washed away critical nutrients such as nitrogen. We may see yet higher prices for corn but follow the thesis of “buy the rumor sell the news”. Stay out for now. December wheat closed at $7.41 ¼ per bushel, up 27 1/2c on major deals reported by the USDA. The report indicated that U.S. exporters sold 110,000 tons of hard red winter wheat to Egypt, the world’s biggest buyer and another 275,000 tons to undisclosed destinations. This, after a previously reported sale to Egypt this week of 225,000 tons of U.S. wheat. We could see shortcovering and new speculator and technical buying but would await a correction before “jumping in” on the long side. November soybeans closed at $10.35 per bushel, up 26c and gained a total of 9c for the week. The buying in corn and wheat carried over into the bean pit and the weak dollar added to the bullish sentiment. We continue to favor the long side of soybeans.

Coffee, Cocoa and Sugar: December coffee closed at $1.8695 per pound, up 2.10c but down from the session high of $1.8835. Reports of a fungus in Colombia’s coffee crop, and reduced production from wet conditions also played a part in the positive price action as well as the weak dollar. We like coffee but would only buy on setbacks and with stops. December cocoa closed at $2,772 per tonne, up $37 tied to technicals and what traders feel was an oversold condition. Shortcovering in front of the holiday weekend along with the weak dollar played a role in the buying. We prefer the sidelines in cocoa.

Cotton: December cotton closed at 89.45c per pound, down 4 points on profittaking in front of the three day weekend. Some buying towards the close was tied to the strong grains in Chicago and the weak dollar. Informa Economics estimates the 2010-2011 U.S. cotton crop up 290,000 bales from the USDA’s August projection and that added to the pressure on prices.

John L. Caiazzo
Website: www.acuvest.com

E-mail: futures@acuvest.com

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.

About the Author
John L. Caiazzo

Website: www.acuvest.com

E-mail: futures@acuvest.com

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.

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