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?
Precious Metals: August gold closed at $1,482.60 per ounce, down $20.20 as expectations for a solution to Greece’s debt situation and gains in global stock markets reduced demand for relative safe havens such as bonds and precious metals. September silver lost $1.127 per ounce to close at $33.705. The white metals, which are used in automobile catalytic converters, fared no better with October platinum losing $9.30 to close at $1,716.80 and September palladium losing $3.30 per ounce to close at $757.45. Once again we would avoid precious metals. The "exuberance" in the media over gold ownership continues to attract public buying of coins and I would suggest a "history lesson" I have used at times. In 1980 when gold first hit $875 per ounce, the same media attention prompted heavy buying by the public. Unfortunately it took those buyers 25 years to break even on that "investment". Could it happen again? Possibly, if the global economies improve in fact rather than analyst optimistic reporting. We could see renewed interest if the equity markets do what I expect, mainly experience sharp declines and if economic growth proves to be a "myth" and a safe haven is once again sought. Otherwise we prefer the sidelines on a "wait and see" basis.
Grains and Oilseeds: September corn closed at $6.06 ¾ per bushel, down 41 1/4c after closing limit down 30c the previous day on USDA revised planted acres report showing an increase of 1.6 million acres. The USDA also raised its harvested acre estimate by 1.7 million acres from its June estimate. The report prompted heavy long liquidation for two days but on Friday corn managed to recover from the intra day low of 603. The December contract traded as low as $5.75 ½ before recovering to $5.96 ¾ .We continue to favor the long side of December corn based on our expectations for increased global demand for "food" by people as well as animals. Hold long positions in December corn. December wheat closed at $6.60 per bushel, up 2 1/2c but lost nearly 50c per bushel for the week. The USDA report was viewed as bearish for wheat. We favor the sidelines. November soybeans closed at $13.12 ½ per bushel, up 18 1/2c as recent low prices made U.S. soybeans attractive against Brazil. We favor the sidelines.
Cattle & Hog report: August live cattle closed at $1.1285 per pound, up 1.975c correcting from Thursdays losses and tied to firm cash markets. We could see further price gains with cattle remaining in a bullish trend both technically and fundamentally. August lean hogs closed at 93.15c per pound, up 1.475c also recovering from Thursdays selling. The discount to cash hog prices could further support futures. We like hogs from here due to the summer "barbecue" season but would use stop protection.
Coffee, Cocoa and Sugar: September coffee closed at $2.6365, per pound, down 1.95c on long liquidation after recent gains. Prices are working back from lows but a long way from recovering to the $3.00 level we saw in May. We like coffee from here but with stops below $2.50 basis the September contract. September cocoa closed at $3,155 per tonne, up $4.00 and continuing to recover from the recent $2850 level. We could see additional shortcovering early in the week but would raise trailing stops on any price gains. October sugar closed at 27.25c per pound, up 91 points on shortcovering. We have no opinion for sugar but could see further attempts at the 30c level. Adequate global supplies could halt any improvement in prices.
Cotton: October cotton closed at $1.2181 per pound, down 1.88c tied to the USDA report. We could see further long liquidation. We have been bearish for cotton for some time and now suggest taking some profits off the table. Move to the sidelines for now.
John L. Caiazzo