Once again the misinterpretation of mathematical relationships eludes me. Friday's labor department release of 243,000 jobs created in a month doesn’t quite offset the weekly first time unemployment figure of approximately 380,000. The effect on markets Friday demonstrates the importance of news and the impact it has on the ability of investors and traders to determine strategies. The expectation for jobs was around 130,000 and when the 243,000 figure was reported it had demonstrable effects on global markets.
One of our criticisms in the past relating to analyst and economist expectations has been "better to keep ones mouth shut and be considered ignorant, that to open it and remove all doubt." Friday's expectation and final figure disparity is a clear example. I will try to disseminate the information and come to a workable explanation and determination of strategies for my readers. Now for some actual information...
Interest Rates: March treasury bonds closed at 142 13/32nds on Friday down 2 6/32nds as money once again made the "trip" from the relative safety of treasuries to the equity markets. The better than expected U.S. jobs report created a euphoric rally in equities as the report signalled an improvement in the U.S. labor market and subsequently an improvement in the U.S. economic picture. As usual we do not believe any such overall improvement has occurred since the jobs created are in question as to their validity. It is the "quality" of jobs that I question. Fed Chairman Bernanke "reiterated his concern about the health of the U.S. economy on Thursday" in response to questions from the Chairman of the House Budget Committee. We have been suggesting that interest rates are nearly as low as can be expected and that any defacto increase in rates could cause a material sell off in treasury bonds. We did not expect that to occur so soon but again, it was caused by the unexpected employment report. The unemployment rate declined from 8.5 to 8.3 which in itself is no big deal other than it projects an improving job situation. We would hold off on any bond selling or put buying for now.
Stock Indices: The Dow Jones Industrials closed at 12862.23, up 156.82 points and for the week gained 1.6%. The S&P 500 closed at 1344.90, up 19.36 points and for the week gained 2.2%. The tech heavy Nasdaq closed at 2905.66, up 45.98 points to an eleven year high gaining 3.2% for the week. The surprise U.S. jobs report showing 243,000 jobs created against analyst and economist expectations of only 130,000 jobs sent the equity markets into a "buying spree". Early positive earnings reports also helped the bulls in their "glory". However, to analyze the jobs report, we expect to find that a large number of job seekers have left the jobs market and that would improve the jobs rate commensurably. Another factor to consider is the increase in productivity where one person is called upon to work longer hours and do the work of another. While that may improve the corporate earnings through a lower number of employees and reduced benefit costs, we do not see a sustainable advantage. Even Fed Chairman Bernanke in voicing his concern about the U.S. economic health must know there is more to the numbers than is evident in the reports. Overall, the economic picture remains "cloudy" at best and we once again suggest strongly the implementation of hedging strategies to avoid the kind of debacle that occurred last August.
Currencies: The March U.S. dollar index closed at 7905.7, down 5.3 points as the rally in equities attracted even risk averse investors. The March Euro closed at $1.3154, up 11 points as attention moved from the Eurozone debt crisis to the U.S. economic data. However, even with the rhetorical statements that a Greece default is unlikely by various finance ministers, we do not agree and suggest that Greece will either default, be "plunged" into increased debt which cannot be serviced, or asked to withdraw from the Euro. We see no other choice. Our other concern is the status of other of the Euro countries who debt servicing ability is hampered by the ongoing recession in those countries. I would ask the question, where does the income to support that debt emanate?. The March Swiss Franc lost 13 points to 10901, the March Yen 70 points to 13064 but gains were seen in the British pound of 28 points to 15825, the March Canadian dollar 60 points to 10057, and the Australian dollar 78 points to 10735. We continue to favor the U.S. Dollar index from the long side either through purchases of futures or call options.
Energies: March crude oil closed at $97.84 per barrel, up $1.48 as the U.S. economic data provided the expectation for increased demand. For the week crude prices lost 1.7% adding to the five session total of a 3.3% loss. We remain bearish for crude however the recent "sabre rattling" by Iran is of concern so any position in crude should be accompanied by stop protection. The purchase of put options where any loss due to a geopolitical event that may prompt a sharp rally is limited to the premium. March natural gas closed at $2.51 per MBTU, down 44 points while March heating oil gained 6.1c per gallon to $3.1139. March unleaded gasoline closed at $2.9191 per gallon up 5.02c. We like the sidelines in energy derivatives.
Copper: March copper closed at $3.90 per pound, up 12c tied to the weak U.S. dollar in which it is denominated and the positive U.S. economic data which promotes ideas of improved demand for industrial metals. On again off again Chinese participation keeps copper traders guessing. We continued to favor the short side but again, only through the purchase of put options.
Precious Metals: April gold closed at $1,740.30 per ounce after trading as low as $1,724.50 per ounce down $32.10 at worst. Latest price was $1,725.10, down $31.70. The U.S. jobs report caused the "trip" from the usual safe havens such as treasuries and precious metals to equities. We expect that situation to reverse but continue to feel the interest in gold is waning to some extent and prices could remain stagnant in a wide price range for some time. March silver closed at $33.75 per ounce, down 43c but had been over 54c lower during the session. We continue to prefer silver to gold as percentage gains and losses favor silver. On Friday for instance gold lost 1.8% while silver lost 1.59%. On days when metals are higher, silver far outpacing gold percentage wise. April platinum closed at $1,631.90 per ounce, up $2.00 while March Palladium closed at $708.85 per ounce, up $1.20 and for the week gained 2.7%. We continue to prefer palladium to platinum in the white metal category.
Grains and Oilseeds: March soybeans closed at $12.32 ½ per bushel, up 15 1/2c tied to the weak U.S. dollar, shortcovering after recent weakness, and South American dryness concerns. The potential for Russian export curbs and crop losses could provide the impetus for more shortcovering and new buying in soybeans. We like soybeans from here. March wheat closed at $6.60 ¾ per bushel, down 2c on reports of rainfall in Argentina. We prefer the long side of wheat against the short side of corn on a spread basis. March corn closed at $6.44 ½ per bushel, up 1 1/2c tied to weak dollar on position evening up in front of the USDA report on supply/demand due shortly.
Meats: February cattle closed at $1.23625 per pound, down 152.5 points on profittaking after recent strength tied to tightening supply and the switching of longs from February to April. We continue to prefer the long side of cattle but stop protection is a must for any new positions. February hogs closed at 87.525c per pound, down 50 points as switches from the February to April contract also evident during the session. We prefer the sidelines in hogs.
Next page: Softs report
Coffee, Sugar and Cocoa: March coffee closed at $1.2595 per pound, up 35 points against the weak U.S. dollar and expectations that an improving U.S. economy will improve consumption. The recently reported decline in Colombian coffee output is also a factor supporting coffee prices. We continue to like coffee from the long side but only with stop protection. March cocoa closed at $2,300 per tonne, up $75 on shortcovering. Flooding reported in Australia also supported cocoa prices. We like cocoa but as with most commodities during the time of dollar instability stops must be used. March sugar closed at 23.94c per pound, up 46 points which also can be attributable to Australian flooding but technical support at 22-23c also a factor. We like sugar for a move to the 25c level but use stop protection or the purchase of call options which limits risk to premium.
OJ: March frozen concentrated orange juice closed at $2.0145 per pound, down 2.55c on profittaking after the recent runup tied to concerns over pesticides in imported product. We favor the short side on any further rallies as the "pesticide" concerns may be totally overdone.
Cotton: March cotton closed at 96.34c per pound, up 2.13c tied to weak dollar but also on concerns that Australian flooding in the growing areas will be reducing production from this major producer. July cotton closed at 98.45c up 1.89c. We continue to feel the recent selling late last year and early this year has been overdone and we look for cotton prices to return to the $1.10-$1.20 level. We like the July contract from here.
John L. Caiazzo