While my commentaries for the past year or so suggested we were facing a global economic crisis, this past week surpassed even my most pessimistic expectations. Global recession and financial debt crisis concerns wrought havoc on international markets, and the ramifications of the financial damage are sure to be analyzed in depth into next week.
We are all familiar with the origins: the repeal of Glass-Steagall, the bank’s liberal lending procedures and requirements, and the cyclical decline in home values preceding the housing debacle. The ensuing labor situation caused by a weak economy and jobs moving overseas continues even after the administration’s so called stimulus programs that stimulated nothing.The ongoing jobs crisis where some joy emerges from the creation of a few thousand jobs against a weekly first time unemployment of around 400,000 has made no sense to us. I can only assume that if a worker applies for unemployment benefits it means a job is lost. This past week's number of 391,000 while taken as positive by the pundits can only be attributable to something I suggest some months ago.
When the weekly first time unemployment number declines, it is not a sign of labor improvement but merely an indication that "fewer workers are available for layoff without companies closing their doors." Even the optimistic analysis by the Administration of a sign of improvement could not allay investor concerns who all headed for a small exit door across the investment spectrum. The companies who left our shores for better tax treatment have to be seduced into returning and with them will be a return of the jobs. While the countries benefiting from better employment may be impacted, my feeling is that American workers are more important to not only the U.S. economy, but that of the world. Americans have always been the consumers of the world and an out of work consumer does not consume.
Now for some actual information...
Interest Rates: December Treasury bonds closed at 14220, up 17/32nds for the largest quarterly gain since the last financial crisis in 2008. Concern over the European sovereign debt turmoil and a weak U.S. economy that could exacerbate what we feel is a continuing recession the dominant factor. The near "collapse" of the U.S. equity markets on Friday prompted investor capital moving to the safety of the U.S. treasury market. The Federal Reserve announcement that it will purchase $44 billion of longer term securities and sell the same amount of shorter maturities also helped treasury prices and pushed yields lower. The yield on the 30 year paper stands under 3% at 2.921% while the shorter term ten year paper holds at 1.924%. We continue to feel a Global recession is unavoidable and that could prompt additional buying of treasury paper. We view bonds as a trading affair since the market is susceptible to any change in sentiment or data.
Stock Indices: The Dow Jones Industrials closed at 10,913.38, down 240.80 points or 2.16%. The S&P 500 closed at 1131.42, down 28.98 or 2.5% while the tech heavy Nasdaq lost 65.36 points or 2.63% to close at 2415.40. The S&P 500, the more closely watched index, has declined by nearly 18% since its April high. Our admonition to our readers for some time now has been to implement hedging strategies to protect proportionately part of their large equity portfolios. Those that heeded our warnings were able to temper equity losses. Those that did not were less fortunate. We view the U.S. economy as never having recovered from recession and that the recession is worsening. Whether or not this recession meets the dictionary criteria is irrelevant in my opinion and any question of consumer confidence should be measured by asking the questions of the people in the unemployment line as well as those leaving "Tiffany’s" with little blue bags. With Europe in financial turmoil and China reporting a slowdown, we see no reason for the kind of "enthusiasm" we hear from the U.S. Administration. Once again, as I quoted Abraham Lincoln before, "You can fool some of the people all of the time, and all of the people some of the time, you cannot fool all of the people all of the time". Monitor your investments carefully and try to mitigate the potential risks. We are available for email requests for advice related to specific investment problems.
Currencies: The December U.S. dollar index closed at 79295, up 69.2 points or 0.88% on the perception of "safer" currency against the current financial crisis engulfing Europe. The Euro lost 141 points to close at $1.3415, losing 1.04%. The December Swiss Franc, which is being held back by the Swiss Nation Bank, closed at $1.1061, down 81 points. The December Yen lost 62 points to 12987, the Canadian dollar 48 points to 9561, and the Aussie dollar 22 points to 9611. The British pound gained 30 points to close at $1.5609. We have been suggested the sidelines and continue to do so with the exception of traders willing to assume the risk inherent with sentiment and news changes.
Energies: November crude oil closed at $78.75 per barrel down $3.39 or 4.13% on Friday as the European debt crisis could impact demand as well as rising U.S. inventory levels. We remain bearish toward energy products.
Copper: December copper traded in after hours at $3.11 per pound, down another 1.3c or 4.14% on its biggest loss since the global recession prompted analyst forecasts to decline by 16% on declining demand and the Chinese economic cutbacks. China has been the major factor in the past price gains and demand and with China reducing its consumption causing increases in stockpiles. Inventories at the LME, New York and Shanghai have increased 15% since the beginning of the year reflecting a decline in demand. We have been bearish for copper for months and recently recommended our investors take "profits off the table". We may have been a little early, but a profit is a profit. Stay out for now.
Next page: Precious metals report
Precious Metals: December gold closed at $1,622.30 per ounce, up $5.00 on the attraction for precious metals after recent sharp declines. While the equity market declines have in the past led to transfer of funds to perceived safe havens such as treasuries and gold, the sharp gains in gold over the past few months did not attract the "safe haven" seekers as it has in the past because of those gains. The decline from the intra-day high of $1,900 to the low of around $1,609 attracted buyers on Friday but of no consequence to the loss. We have suggested the sidelines and continue to do so. Decemjber silver closed at $29.98 per ounce down 54.2c to its worst monthly performance in early 30 years. January platimum closed at $1525.10, down $7.80 while December palladium lost $10.00 to close at $613.60. Both white metals are considered quasi industrial commodities tied to Auto manufacturing and oil refining. With reduced demand in these areas, prices remain under pressure. We prefer the sidelines here as well.
Grains and Oilseeds: December corn closed down the permissible daily limit of 40c to $5.92 ½, losing 6.32%. The USDA reported a supply increase 20% higher than analysts projections and that prompted massive long liquidation in corn. Corn use declined 2.3% in the three months ending August 31st from the year earlier period. Expectation for decline in demand for corn use in animal feed, fuel through the conversion to ethanol, and food added to the negativity. We had suggested the long side of corn and are now reconsidering our position. We will keep our clients advised. December wheat fell by 45c per bushel to close at $6.09 ¼ in a general selling "spree" in grains in line also with the selloff in equities. Wheat has lost 23% in September, the sharpest monthly decline since March of 1974. November soybeans lost 51c per bushel, or 4.1% to $11.79 after trading as low as $11.75. Beans have declined 19% in September, it’s biggest monthly loss since September of 2008. Larger than expected corn and wheat supplies indicating much less grain was being fed to animals and that trend my continue. On October 12th a new USDA report will be released and until then we would limit positions.
Cattle & Hog report: December cattle closed at $1.2265 per pound, up 1.4c on shortcovering after recent price declines. December hogs closed at 87.8c per pound up 1.825c. We have not been watching these markets closely this week.
Coffee, Cocoa and Sugar: December coffee closed at $2.2895, at 2.2c on continued long liquidation. December cocoa closed at $2605 per tonne, down $89 on long liquidation tied to the U.S. market decline. October sugar closed at 26.34c per pound down 51 points. We have not watched these markets as our concentration was tied to financials and the global financial crisis.
Cotton: December cotton closed at $1.0019 per pound down 2.03c or 1.99%. We recently suggested buying cotton basis the December contract at or below $1.00 per pound after its recent sharp price declines. Our opinion remains unchanged.
John L. Caiazzo