If you drop a stone in a still pool of water, the ripple will carry far beyond the actual drop area. That is what is occurring with the Greek debt crisis. The ripple effect is reverberating not only in Europe but globally. For the United States, where part of the blame for the global debt concerns emanated with the repeal of Glass/Steagle where banks were allowed to compete with brokerage firms and where the consolidation of good and bad mortgages were securitized and sold globally. There is no question that the bad paper, which was impossible to evaluate for purposes of financial statements and where even the good, serviced mortgages started to default continues to cause havoc in financial circles.
The growing unemployment condition compounded the problem when those supposedly good mortgages defaulted due to mortgage holders losing jobs. That in conjunction with the false and misleading evaluations by some brokerage firms (which have been under investigations and where some participants have already been indicted) caused a veritable collapse of some banks and financial firms.
The current global situation could easily deteriorate further causing financial markets and investors to lose money and that could exacerbate the current global "recession" that we see.
The improvement in the first time unemployment figure reported on Thursday is, as I had warned in prior commentaries, the result of companies unable to lay off more workers without closing their doors. The reported increase in productivity is clearly a result of workers having to pick up the slack and do the jobs of one or more laid off workers. The reduction in the work force is assisting companies in reporting better earnings.The true nature of the unemployment figure may be affected by workers dropping out of the labor force, making the unemployment rate look slower. That anomaly could indicate a true unemployment rate of 9.5% rather than the reported 8.3%.
Another serious concern is the expansion of companies going overseas to reap the benefit of lower taxes. My suggestion in prior commentaries is that the U.S. has to compete with the lower tax bases offered U.S. corporations and entice them through lower tax rates to return to the U.S. and thereby return those lost jobs. The continued talk of creating jobs is a fallacy. You cannot create a job without creating a new industry. The U.S. needs to restore jobs not offer rhetorical statements meant to appease the public psyche. Global unrest is accelerating and could cause governmental problems with some countries. We will try, given the complexity of overall geopolitical and financial concerns, to offer our readers and clients some semblance of the ability to make viable trading decisions. Now for some actual information...
Interest Rates: June treasury bonds closed at 141 and 11/32nds, up 1 and 8/32nds tied, as are most markets, to the ongoing Greek debt crisis. European leaders indicated there would be no bailout without additional austerity programs put in place. The public in Greece are protesting against the various requirements such as pension reduction, salary cuts etc. We are not convinced of the ability of Greece to meet the requirements but Greece is not the only problem. Other countries of the Eurozone are also experiencing financial difficulties and once again we suggest that the Euro was a bad idea from the beginning. The idea of incorporating 17 countries each with its own economy and GDP into one currency made no sense to us. We wonder when Germany and France will decide that their participation in the bailouts will exceed their own abilities. We could see further "flight" to the relative safety of U.S. treasury bonds but any talk of resolution of the Greek debt crisis will prompt selling of treasuries and money moving back to higher risk equities. We view treasuries as a trading affair.
Stock Indices: The Dow Jones industrials closed at 12,801.23, down 89.23 points losing .69% on Friday and 0.5% for the week. The S&P 500 closed at 1342.64, down 9.31 or 0.69% Friday and for the week lost 0.2%. The Nasdaq closed at 2,903.88, down 9.31 points for a 0.7% Friday and for the week lost 0.1%. Fridays loss was tied directly to the euro zone finance ministers failure to approve an additional bailout for Greece and their dissatisfaction with the planned austerity programs. The people of Greece protested the cuts to salaries, jobs and pensions and raised doubts as to whether or not Greece could implement the austerity program to comply with euro ministers demands. A drop in the Reuters/University of Michigans consumer confidence index to 72.5 in February from the final January reading of 75 also a factor in the equity market decline. We once again, as we have stated "ad nauseum" in past commentaries, recommend strategic hedging programs for holders of large equity positions.
Next page: Currencies and metals
Currencies: The June U.S. dollar index rallied on Friday on shortcovering and new buying after the euro zone finance ministers rejected the latest offer by Greece for austerity programs. After recent losses tied to the possibility of the proposed bailout, Fridays refusal to grant the bailout prompted the move from other currencies back to the dollar. We continue to favor the long side of the dollar on the basis that the austerity programs demanded by the euro ministers may be too excessive for Greece to comply with. The Greek people reject the demands and are protesting the cuts in pensions, salaries and jobs. The June Euro closed at $1.3178, down 1.17c, The June Swiss Franc lost 72 points to $1.0919. The June British Pound lost 87 points to $1.5722, the Canadian 75 points to 9949, and the Australian dollar 1.24c to $1.0514. The June Japanese yen managed a gain of 13 points to 12906. Stay with the dollar or buy puts on the Euro.
Energies: May crude oil closed at $99.63 per barrel, down $1.24 tied to the strong dollar but moreso to reports that China imports declined by 15.3% in January. China is the world’s second largest consumer of energy. Additionally China’s deficit grew from $16.5 billion in December to $27.3 billion in January. A reduction in demand could prompt even further price declines. We have been suggesting our preference for the short side of crude oil and now suggest prices could decline to our former goal, which had been achieved, of $75-80 per barrel. May natural gas gained 32 points to $2.795 per MBTU while May heating oil lost 2.23c to $3.1359 per gallon and Unleaded gasoline lost 2.66c to close at $3.1107 per gallon. Our preference remains the short side of crude.
Copper: March copper closed at $3.862 per pound, down 11.65c tied to the Chinese reports of declines in imports. China is a large importer of industrial metals such as copper that have been used for electronics but moreso for construction projects. We have long suggested the short side of copper based on our own expectation that recessionary trends exist globally and demand for copper should decline. Copper inventories at the Shanghai Futures Exchange increased to approximately 180,000 tons, the highers level since mid 2010. Sell copper or buy put options.
Precious Metals: April gold closed at $1,725.30 an ounce, down $15.90 and for the week lost 0.9%. The strong U.S. dollar and doubts that the European finance ministers will approve financial aid without addition austerity by Greece. A strike against those austerity measures by the Greek people and protests in Athens taking place in the streets as Greeks clashed with police. A vote is expected on Sunday. We doubt if the two sides can get together and would stand aside on precious metals for now. The CME cut margin requirements on Friday which ordinarily would prompt traders to add to long positions. Not the case on Friday. March silver closed at $33.60 per ounce, down 31c and for the week lost 0.4%. April platinum closed at $1,659.80 per ounce, down $7.80 while March palladium lost $8.25 to $703.05 per ounce. We prefer the sidelines until further fundamentals emerge from Europe.
Next page: Ags and softs
Grains and Oilseeds: May corn closed at $6.35 ½ per bushel, down 6c tied to the dollar strength and reports of reduced ethanol export demand and production. We prefer the sidelines in corn. May wheat closed at $6.38 per bushel, down 17 ¼ also tied to the dollar strength but also the USDA Thursday report of an increase in the estimate for world wheat stocks to a record. Adequate global supplies also a factor in the decline. We moved to the sidelines. May soybeans managed a 1 1/2c gain to $12.37 ½ per bushel on a correction after recent weakness. Imports of soybeans by China declined 15% and that was responsible for recent heavy long liquidation. We like soybeans but would not add to current long positions for now.
Meats: April cattle closed at $1.2680 per pound, down 1.4 c against the strong dollar but also tied to consumers reluctant to pay high prices. We prefer the long side of cattle but our preference is based on reduction to herd sizes reported by the USDA indicating possible shortages in the future. For now we would not add to current long positions however. April hogs closed at 88.30c per pound, down 1.35c also tied to slowing demand. The strong dollar offset declining inventories for pork by 2.7% month on month. We prefer the sidelines in hogs.
Coffee, Sugar and Cocoa: May coffee closed at $2.1855 per pound, up 30 points but fell from the high of $2.2025 intraday tied to the dollar strength. Reports of production increases could pressure coffee prices. We are on the sidelines now after having been bullish. May cocoa closed at $2,152 per tonne, down $92 on long liquidation and the strong dollar. We are on the sidelines in cocoa after having been bullish tied to fundamentals for some time. May sugar closed at 23.77c per pound, up 6 little points but failure to breach either technical support or resistance levels moves us to the sidelines.
OJ: July OJ closed at $1.7640 per pound, down 3.1c and has met our downside objective after recent strength tied to reports of pesticide in foreign imports took prices to recent highs over $2.00 per pound. We no longer have an interest in OJ and will discontinue its reporting for now.
Cotton: July cotton closed at 93.57c per pound, up 12 points even against the strong dollar and reports that China, a major importer, was reducing imports tied to economic concerns. We continue to favor the long side of cotton.
John L. Caiazzo