Four years ago, in a magazine article in February 2007, which remains on our website, I proclaimed we were going into recession. Now, four years later I am making the same prediction. In the last two months alone, on the basis of economic data, some economists have reduced their expectations for GDP growth from 3.9% on average, to around 2%.
Even the prestigious financial firm Goldman Sachs, according to The New York Times, had only two months ago projected "that the economy would grow at a 4% annual rate in the quarter ending in June." Now the company expects the government to report no more than 2% growth in the second quarter when reporting in a few weeks. Factory sales, weak hiring is mentioned in the article but it doesn’t take a "genius" to look around and see that each week the first time unemployment figure remains over 400,000. Those former employees will be collecting unemployment benefits rather than contributing tax income to the Federal government. The budget deficit therefore, is a myth, and can only be exacerbated by the ongoing labor situation.
The Federal Reserve, which had forecast in the beginning of the year, a 3.9% annual growth rate, has now downgraded its forecast to under 3% for the full year. If you believe there is an economic recovery, then you probably still believe in Santa Claus. Now for some actual information on which to base "future" trading...
Interest Rates: Treasury bonds remained in a range this week with the September contract closing at 12619, up 5 points. A flight to safety once again the dominant feature as confusion mounted on the Greece debt situation and U.S. economic data. We continue to prefer the short side of treasury bonds while maintaining short call, short put positions.
Stock Indices: The Dow Jones closed at 11934.58, down 115.42 on Friday as fears on the U.S. and global economies persist. Cisco Systems, one of the companies in the Dow lost 3.5% dragging the Dow lower. Other company reports similarly disappointed investors. For the week the Dow lost 0.6%. The S&P 500 closed at 1268.45, down 15.05 points and lost 0.2% for the week. The tech heavy Nasdaq closed at 2652.89, down 33.86 points but managed a 1.4% on the week thanks to a technical correction after recent selling. We continue to suggest, and strongly, the implementation of hedging strategies for which we have programs for holders of large equity positions.
Currencies: The September U.S. dollar index closed at 7611, up 20.6 points on continued concerns of whether or not any assistance by other EuroZone members can effectively stave off a Greece default. We are of the opinion nothing will. Stay with the dollar and add on any weakness. The September Euro lost 44 points to close at 14138, but the Swiss Franc managed a 10 point gain to close at 11946. The September British pound lost 24 points to 15958, and the Canadian dollar gained 19 points to 12437.
The Canadian dollar lost 88 points to 10097 but the Aussie dollar gained 2 little ticks to close at 10383. We reiterate our doubt that countries with varied GDP and economic conditions can maintain a single currency.
Energies: August crude closed at $90.93 per barrel, down another 9c and on its way to our interim goal of $80-85 per barrel, barring any geopolitical situations. Our analysis of the recent IEA release of crude oil from strategic reserves provided only psychological impetus and means nothing in the scope of supply/demand. The release by the U.S. of 30 million barrels from its strategic reserve was, in our opinion, a big mistake since it comprises only about a day and a half of usage. The psychology enabled a slight additional decline in a market that was already pressured by reduced anticipated global demand. It was, in my opinion, a stupid gesture.
Copper: July copper closed at $4.0985 per pound, up 5.95c on better than expected U.S. manufacturing Our overall bearish opinion remains unchanged as China is expected to implement additional austerity and anti inflationary programs leading to reduced demand for copper. A decline in copper warehouse stocks at the Shanghai Futures Exchange prompted short covering. The reported decline of 6,500 metric tons to a 22 month los of 80,800 metric tonnes the main feature to the short covering. Stay with the put positions.
Precious Metals: August gold closed at $1,500.90 per ounce, down $19.60 tied to margin call liquidation prompted by sharp declines in other commodities. The surprise release of strategic oil reserves that prompted the selling in crude oil and equities also prompted long liquidation in precious metals. We favor the sidelines in gold. July silver closed at $34.638, down 36.4c following gold. The white metals used in catalytic converters and for crude refining also declined with July platinum lost $16.90 per ounce to close at $1,677.60, and September palladium losing $11.85 per ounce to close at $732.50. Stay out for now but our old favorite spread of long palladium/short platinum warrants revisiting.
Grains and Oilseeds: Heavy long liquidation of grains by commodity funds was a main feature to Friday’s action. September corn closed at $6.57 per bushel as long liquidation tied to margin calls dominated the session. We continue to favor the long side of corn. September wheat closed at $7.05 ½, down 8 3/4c in line with other grains. Stay out for now. November soybeans closed at $13.09 ½, per bushel, down 8c but was able to hold support on a technical basis. We like soybeans from here but with stop protection. Weather in the mid-west continues to threaten growing areas. Do not be short "anything that grows" for now.
Cattle & Hog report: August cattle closed at $1.1350 per pound on Friday gaining another 7.75c as the "bull" remains the dominant "animal". Packer margins are strong and driving demand. We could see further price gains but it appears to be time to take some profits "off the table". Hold some longs. August lean hogs closed at 95.2c per pound, up 0.7c with the December contract gaining 0.875c per pound to close at 85.55c. the late Hogs and Pigs report late Friday was unavailable at this writing for this market. We will have to wait and see the results of that report early Monday before drawing any conclusions.
Coffee, Cocoa and Sugar: September coffee closed at $2.5190 per pound, up 1.4c on short covering. We remain uncommitted on this market at current "lofty" levels. New fundamentals are necessary for us to make any trading recommendations. September cocoa closed at $2974, per tonne, up $10 and remains rangebound. Stay out for now but the trend remains mildly bullish. October sugar closed at 25.85c per pound, down 15 points on profittaking. We have no opinion for now but prices seem to be stagnant at current levels.
Cotton: October cotton closed at $1.2692 per pound on Friday on shortcovering in front of the weekend. We have not monitored price action this week but the trend remains bearish.
John L. Caiazzo