A reported "bright spot" developed on Friday with the Labor Department reporting an unemployment rate of 8.4% against the previous 9%. Unfortunately, when reviewing the numbers it would appear that this reduction in the rate was tied directly to fewer people seeking jobs having given up the search. There was no indication of how this was resolved or what income producing venture they embarked on.
The jobs report also showed job creation of 120,000, less than forecast by analysts and certainly no indication that the labor situation is recovering. It was also the result of hiring by retailers and temporary help agencies thanks to the holiday season. As stated in many of our previous commentaries, "an unemployed consumer does not consume and the producers of the products that are not consumed are next to lay off workers."
Another point missed with the celebration of the jobs rate was that the true unemployment and under-employment rate is closer to 16-18%. Another consideration is the recent earnings gains from credit card issuers. Any improvement in retailer’s earnings gains during the holiday season could be attributed to credit card purchases. Bear in mind banks pay around 1% for deposits but charge upwards of 18% to credit card borrowers. I fear the situation will worsen as people default on not only mortgage and car loans but now on credit card debt.
The euphoria developed during the week was initially prompted by meetings wherein a resolution to the European debt crisis was offered and that started the ball rolling on market rallies. We expect the celebration this past week will be shortlived. Now for some actual information...
Interest Rates: March Treasury bonds closed at 141 26/32nds up 1 16/32nds after trading in a range of 14202 and 13924. The late selloff in equities prompted the pre-weekend shift to the safety of treasuries. The "good" early news from Europe related to possible resolution to the debt crisis prompted the "joy" early in the week but we do not believe a "resolution" to the severe debt crises will be forthcoming. Other news from the U.S. Labor department of the 8.4% unemployment rate was later discounted as the analysis of the overall jobs picture did not justify the euphoria in equities. With a wide price range and sporadic reports from Europe, I continue to view treasury bonds as a trading affair.
Stock Indices: The Dow Jones industrials closed at 12,018.42, down .61 after early trading saw the Dow over 100 points higher at 12,148.68. Pre-weekend profittaking after the sharp early week gains was to be expected. For the week the Dow gained 7%. The S&P 500 closed at 1244.28, down 0.30 after trading as high as 1260.08 early in the season. The S&P has gained 13% from its October 3rd low and for the week gained 7.4%. The Nasdaq closed at 2626.93, up 0.73 points or 0.03% higher on the day. The U.S. Labor Department report of a decline in the jobless rate from 9% to 8.4% and the creating of 120,000 jobs in November the main catalyst in the early euphoria. Analysis of the overall jobs picture, however, was less than positive when taken in proper context. The early strength in equity markets was prompted by statements by European government officials of loans being made available by the IMF and ECB but the amounts indicated are, in our opinion, nowhere near what will be necessary for some countries to avoid defaults. We once again suggest holders of large equity positions re-assess their portfolios, make adjustments, and implement hedging strategies. We can provide assistance in that respect
Currencies: The March U.S. dollar index closed at 79.18, up 31.7 points on pre-weekend shortcovering after recent weakness tied to expectations of a "solution" offered by various central banks and the U.S. Federal reserve to the Euro debt crisis. The dollar gained against most currencies on Friday as the Euro lost 51 points to 13414 basis the March contract. Others included the Swiss Franc also losing 51 points to close at 10882, the Japanese yen 36 points to 12846, the British Pound 91 points to 15579, the Canadian dollar 32 points to 9800 and the Australian dollar 7 ticks to 10112. During the week the dollar had come under pressure as the reports of a concerted effort to stave off defaults by some Eurozone members emerged. We continue to expect defaults based on the inadequacy of the current efforts and an abandonment of the Euro as a single currency for 17 countries. We never expected the Euro to "survive" and initially thought it was a bad idea for a single currency for 17 countries each with its own economy and GDP. Watch from the sidelines for now but our favorite position is the short Euro position through either the selling of futures contracts for well capitalized investors, or the purchase of put options.
Energies: January crude oil closed at $101.13 per barrel, up 93c in sideways trading as traders were awaiting the results of a Euro zone summit next week. Shortcovering and some new buying tied to the better than expected U.S. jobs rate. The meeting scheduled for Monday by French President Nicolas Sarkozy and German Chancellor Angela Merkel in Paris to discuss the various solutions to the burgeoning European debt crisis. We do not believe the meeting will bear "fruit" and look for a decline in the Euro against the dollar and some selling in crude and other energy products.
Copper: March copper closed at $3.58 per pound, up 5c after trading as high as $3.63 early in the session tied to the sharp early rally in equities. The better than expected U.S. Labor department report adding 120,000 jobs and the unemployment rate reduction to 8.4% from 9%. Copper continues to trade with equity markets on the basis that a better U.S. economy would produce additional demand for copper through home building and auto production. We remain on the sidelines but with an overall bearish view.
Precious Metals: February gold closed at $1,749.10, up $9.30 as renewed interest emerged in precious metals tied to a better than expected U.S. jobs report giving expectation for the potential return of inflationary pressures. We do not believe that is the case and would avoid new positions in gold and silver. March silver closed at $32.69 per ounce, down 6.9c on profittaking after recent strength. January platinum closed at $1550.20 per ounce, down 70c while March palladium gained $15.65 per ounce to close at $645.85. Reports of reduced stockpiles in Russia could prompt additional shortcovering and new buying of Palladium. Our previously stated preference for a short platinum, long palladium spread remains intact. We also suggest outright purchases of palladium futures or call options tied to expected short supplies and increased demand from improved auto sales. Palladium as well as platinum are used in automobile catalytic converters and oil refining.
Grains and Oilseeds: March corn closed at $$5.95 ¼ per bushel, down 6 1/4c tied to slow export sales With China largely out of the picture recently, we could see further price declines but view any selling as an opportunity to add to long call positions. March wheat closed at $6.25 ¼, up 11 1/4c on shortcovering and new buying tied to the better than expected U.S. jobs picture and demand for animal feed. A Saudi Arabian tender for U.S. wheat also added to the strength. We would stand aside in wheat. March soybeans closed at $11.46 ¼, up 7 3/4c on shortcovering and new buying. Recent selling was due to cancelled purchases but recent indications of new China purchases prompted the buying. We continue to favor the long side of soybeans.
Meats: February cattle closed at $1.2325 per pound, down 4.75c on profittaking in front of the weekend. The stronger U.S. dollar was also a factor. Snow expected in the central and southern plains could be a factor in getting animals to market. We would have to see what effect weather has on deliveries but remain basically bullish towards cattle. Selling in the hog market was also a factor in weak prices Friday. February hogs closed at 89.225c per pound, down 1.05c on long liquidation and profittaking after recent strength. China had been expected to purchase additional U.S. pork in front of the Lunar Holiday at the end of January. We prefer the sidelines but remain overall bearish for hogs. The long cattle, short hogs position we had suggested in recent commentaries remains in effect.
Next page: Softs report
Coffee, Sugar and Cocoa: March coffee closed at $2.2950, down 6.2c on long liquidation in front of the weekend and the strong dollar in which it is denominated. We could see price gains tied to Colombia downgrading its output estimate for the third time in four months and in front of the revival for La Nina weather patterns. I like the long side of coffee from here. March cocoa closed at $2,229 per tonne, down $58 as traders moved to the sidelines tied to concern over West Africa’s increased production estimates. With Ivory Coast and Ghana the largest producers we would await reports from those countries and Brazil and Indonesia before committing to purchases but we remain friendly towards cocoa. March sugar closed at 23.53c per pound, down 6 points and remains rangebound. We have been negative for sugar and see no reason to change our opinion unless some new fundamentals emerge.
Cotton: March cotton closed at 91.84c per pound, up 54 points on pre-weekend shortcovering after recent selling that took prices down from the $2.20 area. Reduced consumption expectations along with increase global stockpiles, the most since 2005, and prompted the 58% decline from the March high of $2.197 per pound. Gains in output from Australia, India, and China offset the decline in U.S. production caused by the worst conditions since the "dust bowl" of the 1930’s. We think the selling may be overdone and would look to buy some call options on the chance that a correction after the heavy selling is in order. I don’t usually suggest trading corrections but the severity of the decline prompts me to look at the long side through the purchase of call options.
John L. Caiazzo