Sell off reveals stock market's fragile state

Last week I indicated that the "fat lady was clearing her throat" and would soon break out in song. Well, this past week, she sang and the equity market sold off sharply. Is it really "over"? Probably not, but the sharp selloff indicated the fragility of the markets and their susceptibility to news. The ongoing protests threatening to topple governments in the middle east, and the rising price of the global "lifes-blood", energy, is impacting the tenuous basis for most markets. On Friday we had a shortcovering rally in equities but one basic fact remains, the severe unemployment and mortgage foreclosure situations will persist into the "future". Now for some actual information...

Interest Rates: June treasury bonds closed at 12005, up 6 ticks on a less than enthusiastic economic report showing the economy grew at a slower rate than was previously reported at the end of 2010. The U.S. Commerce Department reported the GDP rose at an inflation adjusted annual rate of just 2.8% in the fourth quarter of 2010, down from then 3.2% original estimate and that prompted some buying of treasuries and a decline in yields. The decline in first time unemployment on Thursday, however, offset concerns caused by higher food and energy prices. The Thomson reuters/University of Michigan final index of consumer sentiment for January was 77.5, higher than economist estimates of 74.2.

Stock Indices: The Dow Jones industrials closed at 12130.45, up 61.95 on shortcovering after three days of steep losses. For the week the down lost 2.1%. The S&P 500 closed at 1319.88, up 13.78, or 1.06%, but lost 1.7% for the week. The Nasdaq closed at 2781.05, up 43.15, up 1.58% but for the week lost 1.9%. Boeing was the winner of the $30 billion contract for Air Force tankers over AirBus and that helped the averages on Friday. In the tech sector Intel gained 2.7% after Citigroup analysts indicated that sales of personal computers could advance in March. That helped the Nasdaq recover some of its previous losses. Fridays energy news that Saudi Arabia would replace any shortfalls caused by the civil unrest in other key oil producers was also a positive factor in Fridays rally. We cannot emphasize more strongly the need to examine portfolios and implement hedging strategies. While we do not comment on individual securities, we can assist in developing hedge strategies specific to individual portfolios.

Currencies: The June U.S. dollar index closed at 7760.5, up 18.9 points tied to the flight to the relative safety of the U.S. currency, treasuries, and the rally in securities Friday. The June Euro lost 64 points to 13723 as Europe is more susceptible to the Libyan situation deriving much of its oil from that conflict torn country. Other currency losses include the swiss Franc 45 points to 10781, even after its meteorical rise against the dollar, and the British pound 41 points to 16079. The June Japanese yen closed at 12250, up 8 points, the June Canadian dollar gained 57 points to 10200 and the Australian dollar gained 80 points to 10043. We remain cautious towards currency trading for small investors and traders. The risk of spontaneous reaction to middle east and energy news could create substantial loss.

Energies: April crude oil closed at $99.77 per barrel, up $1.89 down from its high of $103.41 on February 24th, the highest level since September of 2008. Africa’s third largest oil producer, Libya, is experiencing a severe government crisis and production could be impacted, however, Saudi Arabia and International Energy Agency said that they can compensate for "any disruption to crude supplies caused b the turmoil in Libya". Notwithstanding that announcement, crude prices gained on Friday and we suggest the sidelines for small investors, but for those willing to assume risk and have large enough risk capital, we suggest the purchase of put options since globally, the recession we continue to feel persists, should impact demand. Our estimate is for a price decline to the $70-75 level for crude once a resolution to the various middle east protest is achieved. The timing, of course, is the big question.

Copper: March copper closed at $4.4360 per pound, up 10.95c on shortcovering after the recent selloff. Expectations that higher oil prices will not dissuade activity or demand for copper prompted the buying Friday. The selloff that pushed prices down to a one month low of $4.2755 early in the week as the crisis in Libya heightened has mitigated and supplies remain low with analysts forecasting a copper deficit of up to 825,000 tons this year. Inventories and the LME warehouses rose by 4,150 metric tonnes on Friday to 416,825. The Comex inventory data reported late Thursday showed an increase of 1,103 short tons to 82,256. The weekly Shanghai Futures Exchange data showed a decline of 2,961 metric tonnes to 158,101. We continue to believe that the global recession we feel is ongoing will impact demand and we remain bearish, but cautious.

Precious Metals: April gold closed at $1,409.30 per ounce, down $6.50 as stabilizing oil prices after the recent runup calmed jittery nerves. Gold prices had gained as various middle east oil producer governments have come under pressure by protests and concern of shortfalls dominated the precious metal and currency markets. With the announced Saudi indication that shortfalls would be met with increased production, the fears were offset and markets stabilized. March silver lost 26.8c per ounce to $32.898 but remains near 25 year highs. In 1980 when the Hunt family decided they could control the above ground supply of silver based on a report by Henry Jarecki, then Chairman of Mocatta Metals, they failed to read the "fine print" that indicated the period of time for which such control would be limited before the metal "came out of the woodwork". When the Comex directors, under threat by financial parents to pull support, declared "liquidation only", the silver market, after closing on Friday at $52.50 per ounce, collapsed on Monday and after a brief bounce, never saw "daylight" again until recently. As I mentioned at a conference/seminar in Las Vegas a couple of years ago, investors who bought gold in 1980 at $875 per ounce, and silver at $52.50 per ounce waited 25 years to get even, a pretty poor return on investment in my opinion. We could see "history repeat itself", but one never knows given the change in financial environment. April platinum gained $16.60 to close at $1,803.40 with March palladium gaining $7.70 per ounce to close at 4785.45.