On Friday, markets received a wake up call as the job creation number was only 120,000 against analyst's expectations for a gain of more than 205,000. Yields on Treasuries dropped as Treasury bonds rallied sharply. An enigma persists in as much as regardless of the number of jobs created in a month, each Thursday the unemployment figure of more than 350,000 translates to more than a million jobs lost in that same month.
As I stated recently in my commentaries, a worker applying for unemployment is clearly the result of a lost job. The administration's dream of added jobs makes no sense given the circumstance of the numbers. As far as analyst expectations, I reiterate that it's better to keep one's mouth shut and be considered ignorant, than to open it and remove all doubt.
The damage done to markets by incorrect assumptions and expectations leads me to believe no expectation of numbers should emanate from these “geniuses” and just let the reports have their eventual effect.
Now for some actual information that my readers can hopefully apply profitably to their trading...
Interest Rates: Most markets were closed on Good Friday but some trading in equity futures and treasury bonds were open until 8:15AM Chicago time. During that time wide price swings and a sharp rally in treasuries tied to the disappointing jobs report occurred. The June treasury bond jumped by 1 29/32nds closing in the morning at 14008. Our option positions were dramatically impacted and rollover of short position became necessary incurring loss. It was necessary for us to rollover short May 140 calls to 141 calls and short 136 puts to 137 puts. We will have to see what Sunday evening brings to determine if additional adjustments are necessary. The government reported 120,000 net jobs were created while analysts were expecting in excess of 200,000 jobs. That prompted immediate response in the treasury market where thin trading allowed for the sharp rally in prices and decline in yields. The yield on the 30 year bond declined to 3.322% down 0.058% while the ten year declined 0.068% to 2.175%. We feel the move in a thinly traded early Friday morning market was overdone but will await the return of trading Sunday evening.
Stock Indices: An abbreviated Good Friday session saw the Dow Jones Industrials add to the weeks losses closing at 13060.14, down 14.61 after the 132 point loss Thursday. For the week the Dow lost 1.2%. The S&P 500 closed at 1398.08, down 0.88 but for the week lost 0.7%. The tech heavy Nasdaq closed at 3080.50, up 12.41 but for the week lost 0.4%. The selling on Thursday was long liquidation in front of the Friday jobs data and a three day holiday weekend. Additionally the news of Spain’s economic difficulties was also a factor. Friday mornings activity was prompted by the disappointing jobs data showing only 120,000 jobs created against expectations of over 200,000. The first time unemployment data on Thursday was also a factor in Thursdays selloff posting 359,000 first timers at the unemployment office. The 120,000 jobs "created" in a month against first time unemployed for that period of over 1.4 million questions the administrations optimism. We continue to feel the U.S. equity market as well as international markets are susceptible to any news from the Eurozone, Iran’s nuclear ambitions, and just as importantly, the U.S. economic situation. Implement hedging strategies.
Currencies: The June U.S. dollar index closed at 8008.5 on Friday, down 20.8 points on U.S. government data indicating that the U.S. economic recovery may be stalling as well as the disappointing U.S. jobs data. The sharp rally in treasuries with lower yields was the major factor in the dollar weakness. Lower U.S. interest rate precludes dollar investment. We continue to favor the dollar since the sharp moves on Friday were on reduced trader and investor participation.
Energies: May crude oiil closed at $103.31 per barrel, up $1.84 on shortcovering after recent weakness and reacting positively to Chinese inflation data and reports showing U.S. retail sales "gaining at the best pace in seven months." The weaker dollar also a factor in the short covering in crude. We continue to expect weakening U.S. and global economies and sufficient supplies will pressure prices for crude. Increased inventories for natural gas saw prices decline to the lowest in 10 years. Retail clients should either stay out of this market or use options.
Copper: May copper closed at $3.79 per pound down from $3.91 on Wednesday on indications of slower demand from China and weak global economic data. We continue feel copper prices will decline to the $3.25-$3.50 area based on our expectation of a continued global recessionary trend.
Precious Metals: June gold closed at $1,630.10 on Thursday, up $16.00 after the sharp $57.90 decline on Wednesday. The weak dollar prompted the shortcovering in front of the holiday weekend. Disappointment that the U.S. Federal Reserve is unlikely to introduce a third round of liquidity-boosting asset purchases prompted the long liquidation and new short selling. May silver closed at $31.73 per ounce, up 69c but not enough to offset the weekly loss of 2.3%. Gold lost 2.2% on the week. July platinum closed at $1.607.60, up $9.00 while June palladium closed at $644.80 per ounce, up $12.05. The percentage gain of platinum was 0.6% while palladium posted a gain of 1.9%. Our ongoing preference for palladium against platinum continues.
Next page: Grains and softs report
Grains and Oilseeds: May corn closed at $6.58 ¼, up 1 1/2c on continued strength from exports. China appears to be adequately supplied through May so some profittaking may be in order. However, U.S. farmers plan to plant more acres to corn in 2012 than any year since 1937 account to the USDA report released last week. That could produce the largest corn crop with resulting pressure on prices going forward. We prefer the sidelines in corn. May wheat closed at $6.38 ½, down 3/4c on pre holiday weekend profittaking. With winter wheat crop off to a good start, we could see additional pricing pressure and would avoid wheat for now. May soybeans closed at $14.34 per bushel, up 14 1/2c on continued buying attributable to the USDA report. With Brazils reduced expectation for the soybean harvest, prices have climbed steadily but are now up against technical resistance which could bring some profittaking. We have favored the long side of soybeans for some time and maybe taking some profits "off the table" is appropriate.
Meats: After "over-achieving" our price goal of $1.25 per pound peaking at $1.28 in late February, cattle have been under pressure tied to reduced demand expectations. June cattle closed at $1.15825, up .07 points on shortcovering after recent losses. We now see some support at current levels and would be inclined to get back in on the long side of cattle. June hogs closed at 93.3c per pound, up from 91.9 on Wednesday on shortcovering and up on the week. Traders considered the recent lows as a bottoming effect for hogs and retailers were expected to re-establish stocks for pork products. We favor the sidelines in hogs.
Coffee, Cocoa and Sugar: May coffee closed at $1.83 per pound, down 1.75c against the strong dollar Thursday but remains in a wide price range established recently. After reaching $2.20 level in early February, prices have declined sharply but have now appear to have established a double bottom around the $1.77 level. The We prefer the long side but only with stop protection. May cocoa closed at $2100 per tonne up $17 on shortcovering after recent selling pressure took prices down from the February highs around $2,450. We like cocoa from here but due to the volatility, stop protection is a must. May sugar closed at 24.54c per pound, up 12 points at around 50% of its recent range. As with cocoa, a short term base seems to have formed and we would buy sugar but with stops. Concern that the Brazilian cane may not produce from the center-south growing region and the flood damage to Thailand, the second ranked exporter after Brazil could prompt new buying. We like to "jump on the bandwagon" but using stop protection as usual.
Cotton: July cotton closed at 88.39c per pound, down 87 points after trading as high as 90.29c during the session. Recent losses tied to cancellations by China and Brazil could extend into this coming week so we would be cautious about holding long positions on any further declines. Let the stops work and if you get stopped out, look for another place to get back in after the "smoke clears" and new fundamentals emerge.