The U.S. administration's characterization of a U.S. economic recovery is, in my not so humble opinion, a fallacy. As I have stated in the past, there is no such thing as a "jobless recovery." An unemployed consumer does not consume, and the producers of those unconsumed products will be next to lay off people. I continue to warn, however, that should the weekly first time unemployment number show a decline, it will no doubt be the result of corporations having no one else to lay off without closing their doors; it will not be a sign of labor improvement.
The jobs supposedly created last month of 54,000 or so against the weekly first time unemployment number of 400,000 plus and called "an improvement" by the administration makes no sense to anyone, certainly not me. Analysts had expected job gains of 170,000 and, once again, were wrong. The jobless rate ticked up to 9.1%. That rate is not truly reflective of the actual jobs picture as many people have had to accept jobs paying much less than the jobs they lost. Another group has left the jobs market entirely and the real unemployment rate is probably closer to 20%. I repeat my "suggestion" to analysts of some time ago, "better to keep ones mouth shut and be considered ignorant than to open it and remove all doubt."
Investors should beware of additional economic shocks from overseas and the U.S. as well. I have long felt any positive reports and assessments emanating from the U.S. administration were created to appease the investing…and voting public. Remember the old statement by President Abraham Lincoln that "you can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time." Another of my favorites is by P.T. Barnum who once stated, "there is a sucker born every minute." Bear that in mind when assessing your investment choices or listening to the "voice on the phone" recommending a hot stock to buy. You will never get a prospect call from a broker with a great stock to short.
Now for some actual information…
Interest Rates: September treasury bonds closed at 12508, up 12 points as the negatively construed U.S. economic data prompted the usual rush from equities to the relative safety of treasuries. Factory orders were reportedly the lowest in years. The net gains in jobs of only 54,000 against estimates of 170,000 was also disconcerting. The U.S. President continues to suggest the economy and the job situation is recovering. A flow of positive statements cannot be verified by the actual data but is what the public wants to hear. Unfortunately not all members of the public are ignorant enough to believe him. The fact remains, the U.S. economy has faltered, never saw the "daylight" of an actual recovery, and remains a grave concern to us. The U.S. Federal Reserve has to make the decision as to whether to retain the "monetary easing policy" or the reality that rates cannot go lower and the next step will be a rate increase if only to stabilize the deteriorating dollar. See my currency comment. We like buying puts on treasuries since the "direction of least resistance" for yields is up and the prices down. Selling calls can be useful but only to well capitalized accounts.
Stock Indices: The Dow Jones industrials closed at 12,151.26, down 97.29 or 0.79%, but had traded as low as 12,104.03 on a composite basis. The S&P 500 closed at 1,300.18, down 12.78, or 0.97%, and just barely above the technically important 1,300 level. The Nasdaq closed at 2,732.78, down 40.53 or 1.46%. For the week the major averages closed at their worst levels in over two months, all closing at over 2.3% for the week. We continue to believe the U.S. economy is faltering and that prices for corporate entities, which has been gaining in recent weeks, will continue to decline if not simply by virtue of the weak jobs market which impacts consumer spending. Global economies are also a dominant factor in investor psychology and with dramatic problems within the Eurozone countries, specifically Greece, Portugal, Spain and Italy, the impact will continue to be felt in the marketplace. I once again strongly recommend the implementation of hedging strategies for those with large equity portfolios.
Currencies: The June U.S. dollar index closed at 7375, down 62.5 points and to an all time low against my favorite in the group, the Swiss Franc. The September Euro closed at 14582, up 141 tied to resurgence of the expectation that the European Central Bank will "bail out" Greece as soon as July. Once again my disapproval with the establishment of a single European currency when the countries involved each have their independent economic structure and GDP bears consideration by investors. The September Swiss franc closed at $1.1967, up another 86c to a record high against the dollar. Pressure on the U.S. currency came after the negative non farm payrolls which were, to market participants, a shock. The September British pound closed at 16394, up 55 points with the Japanese yen gaining 93 points to close at 12466. The Canadian dollar lost 13 points to 10206 but the Australian dollar gained 60 points to close at 10585. I suggest the sidelines for now but any continued talk of rate increases by the "Hawks" at the Fed could stabilize the dollar prompt a correction in other currencies.
Energies: July crude oil closed at $100.57, up 17 and barely above the $100 per barrel level. Early in the session crude sold off after the negative U.S. jobs data showing the unemployment rate moved up a tick to 9.1% and fewer jobs were created than expected. The low on Friday was $98.12 for the July contract before shortcovering and the dollar weakness enabled shortcovering to take the crude back over $100. We continue to believe the price of crude should decline to the $80 per barrel level but as stated previously, timing is the only question.
Copper: July copper closed at $4.1270 per pound, up 4.25c tied to the better than expected ISM reading and the continued pressure on the U.S. dollar. The weaker than expected unemployment failed to curtail the shortcovering correction for copper after recent weakness. Copper also reacted positively to the report that the European Central Bank would be completing its bailout of Greece by July. Unfortunately any bailout of Greece could be a temporary solution in our opinion, and the basic problems with some of the Euro zone countries debt concerns remain. We continue to be overall negative for copper prices although demand in the short run tied to reconstruction of some Japanese cities remains favorable for copper.
Precious Metals: August gold closed at $1,542.40 per ounce, up $9.70 tied to the negative U.S. jobs data and selling in U.S. equities and the dollar in which it is denominated. We continue to remind our clients that in 1980 when gold first traded at $870 per ounce, it took those investors over 25 years to break even, a poor "return on investment". With renewed interest in precious metals and the U.S. dollar new media "frenzy" pushing gold emerged and while I don’t believe we will see the dramatic selloff following the 1980 push in prices could occur, a correction is certainly in the mindset of those that remember. While we like the idea of having some gold in physical form, we would not recommend purchases of gold mining stocks where the companies performance is also a factor. If you must have some money in a hedge against inflation, a weak dollar, or geopolitical events, I suggest I small portion of the portfolio in precious metals. July silver closed at $36.1910 per ounce, down 1.1c with July platinum up $5.90 per ounce to $1,823.70. September palladium, which we favor against platinum, closed at $785.40, up $15.00. Our long term preference for the long palladium, short platinum spread continues to work with platinum gaining only 0.8% on Friday against Palladium’s gain of $1.87%. Small investors should avoid these markets altogether however and the risk outweighs any reward in our opinion.
Grains and Oilseeds: July corn closed at $7.54 per bushel, down 12 1/2c on concerns that livestock producers will reduce purchases in favor of lower cost wheat for animal feed. However, with corn supplies considered tight, we could see renewed interest in corn. We prefer the sidelines. July wheat closed at $7.73 ¾ per bushel, up 4c tied to the switch by livestock producers from corn. Prices rallied slightly on Friday after the heavy selloff early in the week. Shortcovering in front of the weekend and the weak dollar was another factor. We prefer the sidelines. July soybeans closed at $14.14 12 per bushel, up 7 1/2c on planting delays due to wet weather. We could see additional buying early in the week and prefer the long side of soybeans but with stop protection.
Cattle & Hog report: August cattle closed at $1.051 per pound, up 1.425c tied to strong cash prices and the weak dollar. Packer profit margins and higher cash prices despite the negative U.S. economic data that normally would reduce demand for the red meat failed to materialize. We like cattle from here but with stop protection. July lean hogs closed at 87.85c per pound, down 0.125c in mixed trade but cash prices remained firm even against the negative U.S. economic data. The weak dollar also a factor. We prefer the sidelines in hogs.
Coffee, Cocoa and Sugar: July coffee closed at $2.7075 per pound, down 20 points on a correction after recent price gains. The weak dollar failed to garner support for coffee as the ongoing Brazilian harvest is being watched carefully for any signs of shifts in supply/demand expectations. We prefer the sidelines. July cocoa closed at $2,870 per tonne, down $8.00. Expectations that the 2010.11 global cocoa production will increase by over 10% playing a factor in the trading. We prefer the sidelines but with a negative bias. July sugar closed at 23.77c per pound, down 18 points after trading at a five week high. Increased expectation for global consumption and India’s food minister possibly reducing exports until after the harvest could prompt additional buying. We like sugar from here but as with our other recommendation, the use of stop protection on any new long positions must be a consideration.
Cotton: July cotton closed at $1.6163, down 3.01c after making a five week high. Concerns over the drought in China and the talk of a U.S. output curb prompting recent gains. We favor the short side of cotton tied to reported cancellations of U.S. exports and exported reduction in China demand.
John L. Caiazzo