We finally hear some semblance of reality from the U.S. Federal Reserve Chairman, Mr. Bernanke, who this week stated "The economy is still very challenging. Unemployment is still high, and that creates problems for everybody, obviously." Once again, "an unemployed consumer does not consume, and the producers of those (unconsumed) products will be next to lay off workers."
The creation of 227,000 jobs in a month, does not correlate mathematically with 350,000 jobs lost weekly. The international monetary organizations, in my opinion, are going through the "motions" of trying to calm the fears of the investing public, as well as the public in general, that solutions to the overall problems are at hand. I do not believe the European debt crisis, the U.S. jobless situation, or the geopolitical concerns related to North Korea and Iran are anywhere near resolution. For that reason, I would once again warn my readers that a reassessment of their financial condition and investments is warranted due to the various factors that could materially affect them.
Now for some actual information...
Interest Rates: June treasury bonds closed at 137 26/32nds up 24/32nds on concerns over global growth. The late February high of 143 to the March 19th low of 135 established the trading range for treasuries. As you know I had indicated such a range in my recent commentaries and that bonds were a trading affair. We continue to believe news and economic data will direct the pricing and yields of treasuries. Stay with options. We currently have option spreads in treasuries for clients.
Stock Indices: The Dow Jones industrials closed at 13080.73, up 34.59 or 0.27% higher but posted the worst weekly performance of the year so far losing 1.15%. The S&P 500 closed at 1397.11, up 4.33 or 0.31% but as with the Dow posted its worst weekly performance losing 0.5%. The Nasdaq, thanks to the tech stocks, closed at 3067.92, up 4.80 or 0.15% and for the week gained 0.41%. We continue to expect a sharp decline in equities based on our overall expectation of continued angst related to geopolitical and economic conditions globally. Implement hedging strategies to avoid the kind of "meltdown" witnessed last August which wiped out many investors. Sidelined money by those following our recommendation at the time to hedge risk, enabled the markets to form a base which allowed for the rally since that fateful period in August.
Currencies: The June U.S. dollar index slipped by 42.2 points to 7967.6 on Friday as Treasury yields declined. Lower interest rates reduce attraction to dollar investment. While the yields on treasuries remain in a range, the volatility of the dollar index is tied almost directly to the changes in yields. We continue to favor the dollar against other currencies as we have for some time. The lack of fresh news from the Eurozone prompted the rallies in other currencies. The June Euro closed at 13270, up 82 points, the Swiss Franc 72 points to 11018, the Japanese yen 13 points to 12132, the June British pound 61 points to 15860, the Canadian dollar 20 points to 9997, and the Australian dollar 85 points to 10361. We continue to feel a failure to stem defaults by certain of the Eurozone countries will continue to wreak havoc in the currency market and we suggest a cautious stance by traders.
Energies: May crude oil closed at $106.87 per barrel on Friday, up $1.52 but still lost 19c for the week. Fridays action was caused by a Reuters report that Iranian oil exports will decline by 300,000 per day this month due to tight sanctions imposed. The sanctions are tied to Iran’s nuclear ambitions. April gasoline gained 4.56c per gallon and were up 0.8% for the week making the seventh consecutive weekly gain and its longest winning streak since April of 2007. April natural gas closed at $2.275 per million BTUs, up 0.6c or 0.3% but has fallen by 24% this year and 2.2% for the week. We remain cautious since any change in the Iran situation, or other geopolitical events, could cause wide price swings. Our overall opinion is for a decline in crude prices to the $80 per barrel level only based on supply/demand factors notwithstanding the so called "Iran premium" built into prices.
Copper: May copper closed at $3.8085 per pound, up 4.3c or 1.1% on expectation that higher energy costs would limit production of various raw materials including metals. The weaker dollar on Friday was also a factor in the price gain for copper as it is denominated in dollars. We continue to feel that an overall decline in economic growth internationally will continue to pressure copper prices as it reduces demand for the metal. Other factors include the demand from China, which in recent weeks has been questionable. Increases in stocks at Shanghai Futures Exchange warehouses had caused concern of weak Chinese demand which accounts for approximately 40% of global copper consumption. LME warehouses reported a decline to its lowest since late 2008 at 255,175 tonnes and could be supportive for prices. We would hold put positions but would not add for now.
Precious Metals: April gold closed at $1,661.10, up $18.60 per ounce on Friday tied to the weak dollar on Friday but also on shortcovering after recent weakness. We continue to caution investors against "believing" everything they hear in the media. I remind investors, when asked if they should add to gold positions, that in 1980 when gold high $875 per ounce, it took those investors over 25 years just to break even. While demand, based on global concerns and the possibility that energy prices will cause inflationary pressure, which is good for precious metals, gold produces no income from interest, you cannot "eat it", and in general is just "pretty", small investment is acceptable to me. July silver closed at $32.24 per ounce, up 84.5c also tied to the dollar weakness. Our preference, for those who must have precious metals in their portfolio, is silver. On Friday for instance, gold gained 1.13% while silver gained 2.89%. By check your charts you can readily see that silver has increased in value at a much greater rate percentagewise than gold over the past year or more. July platinum closed at $1,630.60 per ounce, up $14 or 0.87% while April palladium closed at $659.60 per ounce, up $8.85 or 1.36%. As I indicated in prior commentaries my preference for a trade is short platinum/long palladium. Otherwise I like the sidelines for now.
Next page: Grains and softs report
Grains and Oilseeds: May corn closed at $646 ½ per bushel, up 2c tied to reports of dry weather and the expectation of demand by China. We prefer the sidelines in corn. May wheat closed at $654 ¼, per bushel, up 8c and increased its premium to corn, which in my opinion, is as it should be. Historically wheat has always held a premium to corn but recent "adjustments" in supply/demand tied to some extent by the introduction of ethanol, has changed that historic relationship. I like wheat against corn on spreads but otherwise continue to prefer soybeans to both. May soybeans closed at $13.65 ¾ per bushel, up 16 1/4c on the weak dollar and concern over production declines in Argentina. For the week, however, soybeans saw a first decline in five weeks losing 0.6%. We continue to favor the long side but would only add to long positions on setbacks.
Meats: April cattle closed at $1.2450 down 75 points on profittaking after recent gains. Reports of discontinued hamburger lunches was viewed by some trades as a reason for the long liquidation but cold storage figures up 1.6% over last year and 6.1% over the 5 year average was probably the real factor in Friday’s selling. We continue to favor the long side of cattle but would not add to existing longs for now. Prices achieved our previous goal of $1.25 per pound and technical resistance was to be expected. April lean hogs closed at 85.025c per pound, down 37.5 points on reduced demand and to some extent is tied to higher transportation costs and high energy prices. Cold storage report showed 624.7 million pounds of pork against analyst estimates of 615 million pounds. We continue to favor the sidelines in hogs.
Coffee, Cocoa and Sugar: May coffee closed at $1.7875 per pound, up 1.8c on shortcovering after recent selling and tied to the weak dollar on Friday. Potential crop damage due to cold weather in Brazil could prompt additional shortcovering and new buying in coffee. After the heavy selling of late, we would look to buy coffee for a bounce, but only for traders willing to assume the risk considering technical weakness. May cocoa closed at $2307 per tonne, up $22 against the weak dollar but remains in a range between our previous goal of $2,500 per tonne and the low end of the range around $2,200 per tonne. Since, without fresh fundamentals from Ivory Coast or Ghana, we prefer the sidelines from here. May sugar closed at 25.63c per pound, down 28 points but had exceeded our goal of 25c per pound and could gain further tied to expected slow production output from Brazil extending to the end of 2012. Another factor has been the flooding in Thailand, the second largest exporter behind Brazil. Reports of Malaysia and Pakistan in the market for raws also a factor in the buying. We continue to favor the long side but only on dips for a possible more to the 28-30c area.
Cotton: July cotton closed at 90.27c per pound, up 4 points. The decline from February high around 99c per pound to the recent low of 88c seems to have run its course. Export demand at the low end of the range and buying by China and others could provide the impetus for additionalbuying. With large short positions held by merchants and speculators, shortcovering could push prices even higher. We continue to favor the long side of cotton.