MF Global, European crisis driving market volatility
The potential demise of MF Global, thanks to the efforts of Jon Corzine, who tried to model the company after his former firm Goldman Sachs, continues to reverberate through the international marketplace. It's an abysmal failure and at the cost of many jobs, at a time when the overall economy continues in recession, in our opinion. It takes a back seat, however, to the ongoing European credit crisis, which could impact markets globally.
The Friday jobs report showed a decline in the unemployment rate to 9% from 9.1%. The actual level of unemployment in the U.S., factoring in those that are underemployed could be as high as 20% and nothing we see or hear from Washington can alter the economic stagnation in our opinion. The so-called stimulus programs were a failure in as much as the number of jobs created against the amount of dollars used. Once again, as I have stated in earlier commentaries, the only answer to the jobs situation is the seduction of companies that moved their operations overseas by competing with the tax benefits offered by those countries.
Interest Rates: The ongoing credit crisis continues to plague markets and this past week exemplified the impact of global economics on markets. The December treasury bonds closed at 14100, up 10/32nds pushing the yield on the 30 year paper down 38 basis points for the week to 3.09%. The rescue package for Greece is critical and nothwithstanding the coordinated effort by the G20 officials another problem is emerging with Italy’s debt. We continue to view treasuries as a trading affair since the wide price swings is not conducive to positioning either way.
Stock Indices: The Dow Jones industrials closed at 11983.24, down 61.23 points due to uncertainty over whether there will be a resolution to the Euro zone debt crisis and impacted investor sentiment. For the week the Dow lost 2%. The disappointing U.S. jobs report showing the economy only added 80,000 jobs in October against expectations of over 105,000 jobs created. While the unemployment rate declined by one tick from 9.1% to 9%, the disappointment with the kind of jobs created added to the pressure on equities. The S&P 500 closed at 1,253.23, down 7.92 and lost 2.5% for the week, while the Nasdaq lost 11.82 points to close at 2686.15 giving up 1.9% for the week. We would caution against holding positions without implementing hedging strategies for those with large equity portfolios.
Currencies: The December U.S. dollar index closed at 77.105 up 24.9 points as concern grew about the Euro Zone ability to resolve the Greece debt crisis given the fact that the austerity program required for the "bailout" is being protested against by the public. The loss of jobs, reduction of salaries, adding to the retirement age etc are vehemently opposed by the public. The Greek government is undergoing a possible transition and that prove problematic for the agreements required for assistance. Some banks are also balking about the 50% "haircut" of the debt which could cause investor angst and actually cut income but without it, they could lose 100% of the loan values. We are on the sidelines for now but would consider "jumping in" if the G20 either succeeds or fails Sunday evening.
Energies: December crude oil closed at $94.26 per barrel, up 19c tied to the U.S. jobs data would prompt fuel demand. We do not agree with the figures on Friday were enough to increase demand. The nearly 400,000 first time unemployed weekly would be a deterrent to additional demand for fuel however an early winter weather forecast could be the real reason for the enthusiasm towards energy products. We continue to believe prices could retreat to the $75-80 per barrel level but would only sell with stop protection or through the purchase of put options. The labor situation remains problematic and cannot be expected to improve the demand picture for energy.
Copper: December copper closed at $3.56 per pound, down 2c and for the week lost 4% tied to the action in equities but also in expectation that the G20 could help keep the Euro zone intact. Reports that China may rescind its aggressive tightening policies that had put pressure on copper of late. However an increase of 10,000 tons of copper stocks at the Shanghai Futures exchange warehouses offset that idea. LME warehouses stocks were down only 4,275 tonnes to 417,850. Other than that we would avoid new positions in copper but our overall view remains bearish.
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