The big story this past week has been the back and forth debate over whether to extend tax cuts for two months or for one full year. The Democrats wanted to extend for two months while the Republicans tried to hold out for a full year, which to us made more sense. However, to avoid a defacto tax increase for 160 million Americans on Jan. 1, Republicans gave in. Obviously the Democrats were willing to allow the tax cuts to expire and then blame the Republicans for the increase. Politics remains a dirty game, but the extension of the tax cuts will allow a two month reprieve for American taxpayers. However, the game will continue after the two months is up, and we once again will have to worry about its effect on market action. In a recession, which I believe we are in, you cannot raise taxes on anyone, not the middle class nor the wealthy who are a mere 1% of the population.
The U.S. administration has a few choices to fix the labor situation and subsequently the overall economic situation. First, get the jobs back from overseas by competing with the tax benefits offered companies by non-U.S. governments. Second, impose duties commensurate to the earnings disparity of overseas workers against the U.S. workers. The U.S. worker can, if allowed to, manufacture anything that any non-U.S. worker can. Reduce foreign aid to countries that subsidise their workers and do not enforce copyright laws. Eliminate foreign aid to countries that protect terrorists because of so-called religious beliefs. The U.S. administration has to identify the dangers of complacency and take action, whether popular among certain groups or not.
Politics ruled the day this past week with economic data adding to the confusion as to how to deal with investments. Durable goods orders rose 3.8% as reported by the U.S. Commerce department. The prior week was revised to unchanged from a decline in orders. Sales of new homes rose in November to a seven-month high but that housing was to some extent multi family apartment buildings. The gain in such structures was to accommodate home owners who lost their homes and who now must look for rentals. Single family residential properties did increase 1.6%, though.
The first time unemployment figure showed claims declined by 4,000 to 364,000 on Thursday; however, as I have stated in past commentaries, the reduction in first time unemployment can be attributed to fewer people available for layoff with shutting the factory doors. I see no celebration in nearly 2 million a month on the unemployment line for the first time. That condition can only exacerbate the home price decline through mortgage defaults and foreclosures. We continue to view the overall U.S. economy as in recession regardless of whether it complies with the dictionary description.
Now for some actual information...
Interest Rates: March Treasury bonds closed at 141 31/32nds, down 1 and 16/32nds on better than expected U.S. economic data and the extending of the tax cuts albeit for only two months. Durable goods orders gained 3.8% while first time unemployment declined by 4,000 to 364,000. No news from Europe on Friday but we continue the Debt crisis a serious impediment to economic growth globally. While we continue to consider treasury bonds as a trading affair, we could expect a correction pushing prices back over 143 basis the March contract if only on a trading basis. Otherwise continue to follow the U.S. and European news for indications of direction for equities and bonds. The sharp equity gains on Friday prompted the shift once again from the relative safety of treasuries back to equities. We would not consider the Friday rally in equities as a sign of a bull market.
Stock Indices: The Dow Jones industrials closed at 12,294.00 on Friday gaining 124.35 points and for the week gained 3.6%. the S&P 500 closed at 1265.33, up 11.33 and for the week gained 3.7%. The tech heavy Nasdaq closed at 2618.64, up 19.19, and for the week gained 2.5%. While the U.S. economic data was better than expected the ongoing unemployment situation precludes consumer spending by the unemployed and for that reason we would avoid holding positions in stocks that are not consumer oriented. Once again, and possibly ad nauseum, we suggest implementing hedging strategies so as not to repeat the mid-August financial "meltdown" in equities. We fully expect another such "episode" in the future.
Currencies: The March U.S. dollar index closed at 80236 on Friday, down 7 points against gains in the Euro currencies on persistent expectation of an inevitable resolution to the debt crisis. We do not expect any such resolution and would warn our readers of what we feel is a "pending" meltdown in global economies through loan defaults. The March Euro closed at 13071, up 13 ticks mostly on shortcovering after the recent heavy losses tied to the debt crisis. The March swiss franc lost 1 tick to close at 10701 and the British pound lost 52 points to close at $1.5616. Others fared better with the Japanese yen gaining 21 points to 12838, the March Canadian dollar 29 points to 9802 and the Australian dollar 35 points to 10075. We could see continued choppy trading this coming shortened week and would stand aside until "next year".
Energies: February crude oil closed at $99.86 per barrel, up 33c after trading as high as $100.23 during the session. U.S. crude oil inventories fell by 10.6 million barrels last week representing the largest decline since February 2001 according to the Energy Department. Expectations for a continued acceleration of the global economic situation by analysts recedes we could expect pressure on prices and an increase in supplies. We would suggest put purchases on any further price gains.
Copper: March copper closed at $3.46 per pound, up 5 points on shortcovering and new buying tied to better than expected economic data. However, recent selling was tied to whether China’s plan to maintain property price restrictions having a potential impact on demand for copper. We could see continued wide price swings as various fundamentals emerge affecting supply/demand. We had been bearish for some time and have suggested taking "profits off the table" for now.
Precious Metals: February gold closed at $1,609 per ounce, down $1.60 on light trading in front of the holiday weekend. Reports of possible buying by the People’s Bank of China added psychological incentive to the buying. We prefer the sidelines for now. March silver closed at $29.105 per ounce, up 5.8c but sharply below recent highs. We prefer the sidelines here as well until the New Year activity has been established. July platinum closed at $1438.30, up $3.10 while March palladium gained $5.15 to close at $659.55. We would also wait before instituting trades until next year.
Grains and Oilseeds: March corn closed at $6.19 ½ up 2c while March wheat gained 1/4c to close at $6.22 per bushel, March soybeans closed at $11.72 ½, up 3/4c. Trading was light with buying tied to potential weather problems in South America.
John L. Caiazzo