Economic conundrum breeds market confusion

I was reminded of my childhood this past week when I rode the roller coaster at Coney Island. The markets reinforced that memory as markets declined, rose, declined and then finally rose in the final hours on Friday. The global recession I have been warning about for some time appears imminent with the growing debt problems of the U.S. trading partners having a material effect on the U.S. economy. The rhetoric from Washington announcing an economic "recovery" albeit tepid was recognized as just that -- rhetoric -- unfounded by the evidence of the ongoing labor and housing situation.

The basics are relatively simple. To have a recovery, there must be a resolution of the housing debacle where defaults are being held open rather than foreclosed thanks to the economics of the condition. Banks are holding bad paper, meaning they are carrying mortgages that are not being serviced and are in default as receivables on their balance sheet. To foreclose on those mortgages moves the mortgages from the asset column to the debit column and requires banks to increase their reserves. That is the big problem. The second problem is the 400,000 weekly first time unemployed against the glowing reports of increases of 100,000 jobs monthly. The math does not compute.

As mentioned in numerous commentaries, and repeated here. "an unemployed consumer does not consume and the manufacturers of those unconsumed products are next to lay off people." The other statement I have made consistently is that any lowering of that weekly unemployment figure merely means that there are "fewer people left in manufacturing to lay off without closing the doors." As evidence of that phenomenon was the equity market rally when the first time unemployment number declined to under 400,000. Does anyone think that was a good number or that the problem is being solved? Try telling that to the 395,000 first time unemployed or to those who have accepted jobs paying much less than they were earning before they were laid off.

The Washington figure of 9.1% is unrealistic and the true figure of unemployed and underemployed is probably closer to 19%. We continue to suggest a conservative approach to managing your money -- or what’s left of it after this past week. Now for some actual information.

Interest Rates: December U.S. treasury bonds closed at 13519, up 1 23/32nds as continued poor economic data prompted the continued move to the relative safety of treasuries. The weaker than expected early August consumer sentiment index from the University of Michigan/Thomson Reuters was 54.9 from 63.7 in July and added to concerns of a continued economic slowdown. The Federal Reserve’s statement that interest rates will be a "near zero" until mid 2013 also prompted the short covering in bonds and new buying. The Standard and Poors lowering of its U.S. credit rating from triple A to double A plus was also a factor in the weak global equity markets and the move to treasuries and gold earlier in the week. Our expectation that the continued "recession" and Washington "spending" would prompt additional treasury sales and push yields higher and prices lower failed to offset the rush to safety from other risk assets such as equities. Friday’s Commerce Department report of the largest one month gain for retail sales since April also contributed to the activity in the U.S. markets. We would hold current positions but not add for now.

Stock Indices: The Dow Jones industrials closed at 11269.02 on Friday, up 125.71 points but after the tumultuous activity still lost 1.5% for the week. The S&P 500 closed at 1178.81, up 6.17 but for the week lost 1.5%. The Nasdaq closed at 2507.98, up 15.30 points but for the lost 1%. The triple digit gains and loss daily trading caused great angst for investors who it appeared "bought high, sold low", then "sold low and bought high" throughout the week. It was suggested that trillions of dollars were lost globally this past week and where the funds will be found to stage a "corrective" rally is a mystery to me. We continue to suggest implementing hedging strategies but for some holders of large equity portfolios it may be too little too late.

Currencies: The December U.S. dollar index closed at 7514.3, down 6.7 points as the Euro managed a short covering rally on Friday. The attempts to rescue certain of the Euro countries are being talked up but a major concern is the current debt crisis growing for Italy, one of the major countries in the Euro. The Swiss franc lost ground on Friday after weeks and months of gains against the dollar closing at $1.2928, down 2.18c tied to speculation that the Swiss central bank could take further action to weaken the Swiss currency. Investors were concerned that the Central bank action to stabilize the Euro/Swiss Franc relationship would further weaken the franc. We had long favored the Swiss franc from the low 60c level right through to the premium to the dollar and then suggested profittaking around the $1.10-1.15 level. We were early in our move to the sidelines suggesting our readers take "money off the table". We like the sidelines for now. The geopolitical picture is "cloudy" to say the least and while we had been long the dollar index, we moved to the sidelines. Low U.S. interest rates seen this past week are a negative for dollar investment attraction.

Energies: September crude oil closed at $85.38 per barrel down 34c after two days of gains from the lows of around $82. Our long time goal, from the $100 per barrel level to the $80-85 level has been attained and we moved to the sidelines. Consumer sentiment was a negative on Friday and overall economic conditions worked against energy products. We prefer the sidelines from here.

Copper: December copper closed at $4.02 per pound, down 1 tick in late trading and continued weak after the heavy selling during the week. We had been bearish on copper on the basis of our expectation of a return to the recessionary trend for the U.S. and global economies. Some shortcovering should be expected so we suggest taking profits off the table and waiting for additional economic data before re-entering this market from the short side.

Next page: Where gold is headed

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