Reality of economic condition weighs on markets

Finally, after 10 years of pursuit and intelligence gathering, the terrorist and murderer Osama bin Laden has been brought to justice. The markets celebrated the announcement momentarily but then the reality of global economic conditions replaced the joy. Commodities markets suffered one of the worst declines in recorded history. Commodity sector funds experienced huge monetary outflows just before and during the "crash" after weeks of inflows as the reality of the continued economic slowdown persists. Investors withdrew $1.47 billion from commodity funds during the week ending May 4. That was after the prior week when investments in those funds totalled $961 million.

We have been warning our readers and clients for some time now that the so called economic recovery is a figment of the imagination of the Administration and this past week, reality set in and the fragility of the entire global economic condition became painfully apparent. The old axiom of what goes up must come down had been long forgotten in the rally that had become over extended in recent months. We continue to suggest implementing hedge strategies as we have for some time. We are in the unique position of being able to develop individually tailored strategies after over 45 years experiencing "boom and bust" markets. Now for some actual information…

Interest Rates: June Treasury bonds closed at 12410, up 1/32nd and up 200 basis points from last week up nearly 400 basis since April 15th. The "handwriting was on the wall" as treasuries benefit as money moves to the relative safety of treasuries when markets appear overbought, which certainly was the case this past week. While the U.S. economy gained 244,000 in April, the largest gain in nearly a year, the unemployment rate rose to 9% and that did not bode well for the supposed "economic recovery". We have stated persistently that until the labor situation improves we will not see an "economic recovery". The Labor Department report on Friday showed that business establishments, in a survey, were revised upward by a combined 46,000, but a separate survey of U.S. households indicated the labor force declined by 190,000 in April to 139.7 million. That helped push the unemployment rate higher. While economic data could continue to show meager improvements and prompt support for treasuries, we like the short side of bonds from here through the purchase of put options or the sale of calls for better financed investors.

Stock Indices: The Dow Jones industrials closed at 12,638.74, up 54.57 but lost 1.3% for the week as commodity selling impacted shares of resource companies. The S&P 500 closed at 1,340.20, up 5.10 on Friday but for the week lost 1.7%. The Nasdaq closed at 2827.56, up 12.84 points but lost 1.6% for the week. The April jobs report was viewed as a positive and prompted the short covering on Friday. We continue to view equities as overbought and suggest implementing hedging strategies to prevent against a repeat of the May 2010 "flash crash" that saw the Dow plummet over 600 points in minutes and over 950 points during that session.

Currencies: The June U.S. dollar index closed at 7518, up 80.5 points after early reports showed that Greece was considering withdrawing from Euro Zone. The German paper Siegel Online aid that Greece was considering abandoning the Euro and that currency sold off sharply impacting other markets. The September Euro closed at 14278, down 185 points and down over 500 points from the 148 level in previous two sessions. The June Swiss franc lost 110 points to close at 11382, while the June British pound lost 12 points to 16358, and the June Japanese yen 39 points to 12429.

The Canadian dollar managed a 3 points gain to 10308 while the Aussie dollar gained 92 points to 10623. We had suggested "nibbling" at the long side of the U.S. dollar before the Trichet announcement of no change in the ECB rate which was the defining factor in the dollar rally. The failure of the ECB to raise rates, which had been widely anticipated, was a defacto gain for the U.S. rate relatively speaking and that prompted the shortcovering and new buying of dollars. We favor the sidelines for now until further clarification of global rate intentions emerges.

Energies: June crude oil closed at $97.18 per barrel, down $2.62 tied to concerns that the U.S. economic recovery may be faltering and the selloff in other commodities. Our long term expectation for a viable price level for crude remains between $80-85 per barrel.

Copper: July copper closed at $3.9755 per pound, down 2.25c and below the psychological $4 per pound level to a five month low. After it was reported that Greece could leave the Euro zone, the Euro and other currencies sold off along with copper as the dollar gained upward momentum. We have maintained our bearish stance on copper for some time and suggested buying put options. It might be appropriate to take some of the profits off the table. We remain bearish but any time a sharp move occurs, a correction of sorts usually follows. A conservative approach is always wise when dealing in highly leveraged investments.

Precious Metals: June gold closed at $1,491.60 per ounce, up $10.20 after its selloff with other commodities especially the silver price collapse that initially started with the CME raising margin requirements to $21,600 per contract. Any increase in margin requirements especially one as sharp as the CME increase, prompts liquidation since requirements are retroactive to all positions in that commodity.

July silver lost $2.63 per ounce or fully 1% to $35.29 and 27% loss recorded for the week. This was the single worst decline since 1980 when the Hunts tried to corner the silver market pushing prices to over $50 per ounce before the Comex took the unprecedented action of declaring "liquidation only". Silver, on that Friday prior to the announcement closed at $52.50 basis the current month. My wife and I took all the silver we had in the house, wedding gifts such as silver servers, silverware, and other silver that we never used, took it to a silver buyer in Garden City Long Island that was paying on the basis of spot, $50 per ounce, and on the following Monday, silver collapsed and never saw "daylight" again until recently. That was probably the best ‘trade" I made in my life.

July platinum traded at $1790.60, up $12.40 after the close recovering from the intra day low of 1768.70. June Palladium traded at $715.20 ,up $4.40 after hitting its intra-session low of $708.50. I have been suggesting, or actually warning, to ‘throw away your gold charts and chart the dollar". The gain in the dollar on Friday prompted by the report, later denied by Greece, that Greece was going to abandon the Euro in favor of developing its own currency. We don’t know what the truth is but it impacted all the major currencies with the exception of the dollar, which rallied sharply, and the Canadian and Australian currencies.

Until clarification of the currency situation is resolved or at least determined, we prefer the sidelines in metals. We do however like palladium from here with the recent sales gains in Autos. Both platinum and palladium are used in U.S. auto catalytic converters. The report that George Soros, the billionaire investor and trader had sold most of his gold and silver was also a determining factor in the psychology to sell the metals.

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