The "Last Hurrah?" Possibly. The markets this past week confused and confounded traders who were expecting the end of the stimulus program would lead to more diminutive end of the quarter and the half year. Obviously, not so, as interest rates soared at the same time as equities.
Many of the markets we follow were impacted by the rising rates and the ongoing Greece debt situation. While expectations are for a solution to the debt crisis in Greece, some concern emanated as to whether or not the billions pumped into Greece would be enough to forestall what some believe is the inevitable default.
Another factor gaining prominence in the market place is the U.S. budget where the two rival parties are in conflict as to what came first, "the chicken or the egg" inas much as the debt ceiling conflict. Does the U.S. raise the debt ceiling first, then cut spending, or the other way around before an agreement can be reached. Truthfully, I don’t have a clue, but I am not alone since neither does Washington.
Anyway, this coming first week of the second half of 2011 should give us some insight as to how to proceed with trading of course. Now for some actual information…
Interest Rates: September Treasury bonds closed at 12222, down 11/32nds down from last weeks 12619, nearly 400 basis points on the 30 year instrument. The expected resolution to the Greek debt crisis detracted from the usual safe havens of bonds and precious metals. The Friday report on U.S. manufacturing from the Institute for Supply Management improved surprisingly reducing the necessity for fixed income securities as a hedge against an economic decline. The increase to 55.3% from the May reported 53.5% was in contrast to anal-ists forecast for a decline to 52.3%. However U.S. GDP increased at a 1.9% annualized pace for the first quarter against economist expectations for a 2.3% growth rate in the April/June quarter. Many economists including Fed Chairman Bernanke voiced their opinion of a revival in the second half of this year against our expectations for a continued decline and possibly a second recession. Their assumption is based on an improved labor situation, contrary to our belief that the labor situation, with this weeks first time unemployed at 425,000, will not improve for at least the next two to four years. The new-orders index sub-component of the ISM’s report was only 51.6% up from 51.0% in May and much of the increase in the overall ISM report was tied to the gain in inventories which was up to 54.1% in June from 48.7% in May. Whether or not inventory gains are positive or negative remains questionable. We feel the short side of bonds, which we had favored, has run its course and we now look for a corrective rally. Our concern over whether or not Greece can "mend" its economy should provide the impetus for activity in treasuries.
Stock Indices: The Dow Jones industrials climbed to 12,582.77 on Friday, gaining 168.43 points and for the week 5.4%. The S&P 500 closed at 1339.87, up 19.03 and for the week gained 5.6%. The tech heavy Nasdaq closed at 2816.03, up 42.51 and for the week posted a 6.1% gain. The Friday release of the Institute for Supply Management confirmed the earlier equity gains and capped a week of shortcovering and added to an already strong showing for equities. Friday was the last day for the so called "window dressing" by mutual funds in order to move from cash to equities for the last day of both the quarter and the half year. We would use the rally as an opportunity to reduce overall positions or implement hedging strategies.
Currencies: The September U.S. dollar index closed at 7467.4, up 3.9 points tied to stronger than expected U.S. manufacturing data on Friday after earlier long liquidation. The Euro found support on expectations that the Greek debt crisis has been resolved. A condition we do not agree with since the riots against the austerity program may garner expanding support and nullify some of the program elements. We continue to favor the U.S. dollar and would add to long positions
Energies: August crude oil closed at $94.75 per barrel, down 67c tied to disappointing manufacturing data from China although the positive U.S. economic data kept prices from declining again and prompted the recovery from the $93.75 daily low. Demand expectations by China has been a dominant factor in the recent trading that saw crude breach the $90 per barrel level recently. We continue to feel crude will decline, based on our expectations for a renewed global recession, to the $80-85 per barrel level.
Copper: September copper closed at $4.3025 per pound, up 2c to a two month high prompted by the ISM purchasing managers index gain to 55.3 in June from 53.5 in May reversing a downward global trend and caught analysts and traders by surprise. Expectations had been for a decline to the 52.3 level. We continue to favor the short side of copper based on our negative expectations for the U.S. and global economies. Add to put positions.
Next page: What's up with gold?