Budget process casts shadow over all markets

The Congressional Budget Office claims that if "President Obama’s February budget submission is enacted into law it would produce deficits totaling $9.5 trillion over 10 years, an average of almost $1 trillion a year". The President’s own budget projection was for deficits totaling "only" $7.2 trillion over the same period. The difference is probably in the estimate for tax revenue income. The Administration also claims over $300 billion in savings by cutting Medicare payments to Doctors without specifying where it would come from. With the ongoing unemployment problem, any estimate of tax revenue income is overly optimistic to say the least. An unemployed taxpayer pays little or no tax on the reduced income gained from unemployment benefits and rather draws those benefits from the general fund. To "plan" on income that is in doubt is like you and I "planning" on how to spend our lottery winnings before we buy a ticket. Now for some actual information...

Interest Rates: June Treasury bonds closed at 12124, down 6/32nds as money moved from the relative safe haven of Treasuries back to equities after a Libyan official said Qadafi’s forces would "halt all military operations.". Unfortunately it turned out that Qadafi has stepped up rhetoric threatening "no mercy" to those opposing him. That could prompt a return to treasuries on Monday and another re-think of equities. Also after manufacturing in the Philadelphia region expanded early in the month and consumer price increases could prompt new ideas of rate increases. First time unemployment reported Thursday, declined, and that also provides investors with expectations of an economic recovery, something we do not agree with. Another factor as yet unknown, is the impact on global economies due to the disastrous earthquake and tsunami that hit Japan. We prefer the sidelines but our overall opinion is that due to the rampant spending by the current U.S. administration, higher interest rates may be forthcoming and we would buy put options on treasury bonds.

Stock Indices: The Dow Jones Industrials closed at 11858.52, up 83.93 on Friday but lost 1.5% for the week. The S&P 500 closed at 1,279.21, up 5.49 points but lost 1.9% for the week. The Nasdaq closed at 2,643.67, up 7.62 points but lost 2.6% for the week. Positive economic data accounted for the gains on Friday along with the report that Qadafi had cancelled all hostile military action against protesters. With the latter comment proved untrue, we could see a return to angst among investors and renewed long liquidation of some equity positions. Some market relief was generated by the G7 meeting where assistance was provided to helping the Japanese deal with the disaster caused by the earthquake and tsunami and controlling the runaway yen. We continue to strongly suggest implementing hedging strategies.

Currencies: The June U.S. dollar index closed at 7583, down 51 points but was up against the Japanese yen, which closed down 299 points to 12356 basis the June contract. The G7 met to take steps to curb the Japanese currency’s post-earthquake jump. The dollar has lost 2.5% since the Japanese earthquake against other currencies where the Euro gained 149 points to close at 14137, the British pound 79 points to 16199, the Canadian dollar 12 points to 10123, and the Aussie dollar 154 points to 9856. The June Swiss Frank lost 17 points to 11096 on a correction after recent sharp gains. We prefer the sidelines until global economic information moves us off the middle.

Energies: April crude closed at $101.07 down 35c but rallied after Libya’s foreign minister said the government had declared a cease fire. Unfortunately it did not and we could see a return to new buying and shortcovering on Monday as hostilities escalated. (See my soap box comments sent earlier).

Copper: May copper closed at $4.3390 down 5c after news of Chinese credit tightening was reported but managed a recovery when the Libyan cease fire was announced. As it turns out, hostilities and the no fly policy by the West and some Arab countries continued and that could provide wide price swings in copper early in the week. We prefer the sidelines after having favored the short side of copper previously

Precious Metals: April gold closed at $1,416.10 per ounce, up $11.90 on renewed investor demand for a safe haven until some normalcy would return to the middle east conflicts, especially that of Libya. The G7 invention to weaken the Japanese yen also was a factor in the gold and silver rally. We prefer the sidelines for now but could see further price gains in precious metals. May silver gained 8c to close at $35.058 while April platinum gained $16.50 per ounce to $1,723.40 and June palladium gained $14.40 per ounce to $731.20. We view metals as a trading affair with the risk for retail accounts prohibitive. Institutions and large investors could hold and add to silver positions in our opinion.

Grains and Oilseeds: May corn gained 37c to close at $6.83 ½ per bushel after touching limit up 45c on expectations that China would start to add to low supplies. Informa Economics, a private enalytical firm projected U.S. corn plantings would be below the USDA’s recent forecast. We like corn from here but only on setbacks. May wheat closed at $7.23 per bushel, up 12 3/4c following corn and beans. May soybeans closed at $13.62 ½ per bushel, up 27 1/4c also tied to Informa pegging soybean plantings below the USDA forecast. We like soybeans from here. July rice also benefited from Informa’s projected plantings which they estimate will be down 431,000 acres from last year but up from their January estimate. We like rice from here.

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