Commodities, Crude oil, Gold, Copper, Silver
The ongoing rhetoric emanating from the global media and the various national administrations remains optimistic even against a plethora of information to the contrary. One glaring example, and the latest in a list of debt crisis victims, is Spain where the unemployment rate is 25% and where austerity programs are causing protests. It was recently announced that Great Britain has fallen back into recession. We have not heard anything lately on Greece, Italy or Portugal, where problems will soon re-appear in the media headlines. The International Monetary Fund and the European Central Bank cannot possibly finance the ongoing debt crisis and a global recession is unavoidable.
The continuing exclusion from the U.S. media of the disparity between the jobs created and jobs lost is a source of consternation. A creation of 120,000 jobs in a month, where the quality of those jobs is in question, against the weekly loss of 350,000 jobs continues to elude recognition. An unemployed worker applying for first time benefit must have, in my opinion, lost a job so we have a monthly job "creation" of 120,000 against a monthly loss of 1.4 million based on a four-week month where each week 350,000 or more applications for unemployment are made. What is wrong with this picture?
Four more U.S. bank failures were reported last week, bringing the total to 21 so far this year. The current mortgage situation is another problem that we feel is being ignored. Potential home buyers are reluctant to purchase as long as they feel there is an overhanging default and foreclosure condition. The inability or reluctance of banks to foreclose is apparent because mortgages, whether being serviced or not, are carried on their books as an asset and to foreclose would mean the move from the plus column to the minus column would mean the necessary addition of reserve funds. Something they do not want to do on a large basis so they are only foreclosing on a small amount of their bad loans in order to avoid the haircut required by the Federal Banking regulations. The only answer I see is the immediate foreclosure on all bad loans to form a base from which to finally start a new housing boom. Yes, prices will decline but they will decline to an actual bottom and then we can expect to see buyers flowing into the housing market.
How long can the recognition of an economic crisis in the U.S. be disguised as prosperity or economic improvement? We continue to urge investors to maintain a conservative approach to their investment analysis bearing in mind that an economic contraction could result in severe market reaction and impact their financial health.
Now for some actual information to hopefully assist our readers with their ability to make financial decisions…
Interest Rates: June U.S. Treasury bonds closed at 142 23/32nds, up 14/32nds on continuing concern over U.S. economic data such as the weaker than expected first quarter GDP. A veto threat by President Obama of a federal loan doubling for college students along with women’s issues and his health care overhaul was also a consideration. Both political parties agree that student loan interest payments should not increase but Republicans want spending cuts and Democrats want higher revenues. Republics would keep interest rates for subsidized Stafford loans at 3.4% for another year rather than an automatic increase to 6.8% on July 1st as would occur under a law enacted five years ago by a Democratic Congress. So another stalemate exists which in most cases provides for gains in treasury prices and resulting lower yields. A credit rating downgrade by Standard & Poors for Spain and additional easing measures by the Japanese Central Bank also led to demand for U.S. Treasuries. Another report that Democrats voted earlier this year to take money from the preventive health fund to help keep doctors Medicare reimbursements from dropping also led to partisonship in the Congress leading institutions to wonder if an agreement would ever be reached on the budget. The confusion led to addition influx into the U.S. treasury market from other avenues of investment. We continue to view the Treasury market as within a range between 135 and 145 and at nearly 143, we are fast approaching the higher end of our projected range. We favor the strategy is employing "strangle spreads".
Stock Indices: The Dow Jones industrials closed at 13,228.31, up 23.69 and for the week gained 1.53%. The S&P 500 closed at 1,403.36, up 3.38 and for the week managed a gain of 1.8%. The tech heavy Nasdaq closed at 3,069.20, up 18.59 and gained 2.29% for the week. Better than expect earnings reports and an improved consumer sentiment report offset the disappointing U.S. GDP data and the downgrade of Spain’s credit rating. We would caution our readers against expectation of continued market gains predicated on earnings from corporations while labor conditions remain in flux. As we have indicated in previous commentaries, "an unemployed consumer does not consume" and sales figures are not as good as resulting net earnings would imply. We strongly urge the implementation of strategic hedging programs which we have developed and provide to clients.
Currencies: The June U.S. dollar index closed at 78.77 down 23.1 points against most major currencies including the Canadian dollar on economic gains and an expected increase in its key lending rate. The June Canadian dollar climbed 27 points to close at $1.0184. The June Euro closed at $1.3262, up 21 points. Other gains were posted for the Swiss Franc 24 points to $1.1045, the Japanese yen 86 points to .12445, the British pound 72 points to $1.6264, and the Australian dollar 73 points to $1.0416. We continue to favor the U.S. dollar not on a U.S. economy but relative to the deteriorating Euro zone debt situation.
Next page: Energies, metals and ags
Energies: June crude oil closed at $104.93 per barrel, up 38c on pre weekend shortcovering and its highest settlement since April 2nd. The weaker than expected GDP reported by the U.S. Cmmerce Department of 2.2% was weaker than the expected 2.6% by economists but failed to offset the Energy Information Administration report showing better than expected February U.S. oil demand. Demand for energy products increased in spite of higher prices. We continue to view prices as too high to be sustainable against our expectation for a continued recessionary environment globally. Buy put options on crude but allow for increased time expirations.
Copper: July copper closed at $3.83 per pound, up 6c or 1.59% tied to reports of reduced inventories and continued low interest rates which are expected to provide for increased manufacturing and demand. Japanese copper cathode exports to China were down 5% in March from the prior year and increased stockpiles in China had provided for recent weakness. Shortcovering on concerns over mine production was also a factor in the buying as a production disruption at Freeport-McMoran’s Grasberg mine in Indonesia and lower grade copper at the Rio Tinto Kennecott mine in Utah were also positive factors for the renewed buying. We have been negative on copper and trailing buy stops would have been touched off but new selling or buying of put options can now be instituted on a scale tied to our expectations of increased concern over global economies. Most of our trade recommendations in futures require the use of stop protection.
Precious Metals: June gold closed at $1,664.80, up $4.30 against the weak dollar and slower than expected U.S. economic growth in the first quarter of the year. Another factor in the demand for precious metals was the concern over the downgrade of Spain’s credit rating by Standard & Poors Ratings Services late Thursday. July silver traded at $31.285, up 90 points in late trading while the white metals, platinum and palladium also gained. July platinum closed at $1,575.70, up $5.50 or 0.4% while June palladium fared better than platinum closing at $681.50 per ounce, up $8.85 or 1.3%. Our recommended spread long palladium, short platinum improved once again for our readers.
Grains and Oilseeds: July corn closed at $6.25 ½ per bushel, up 18c on shortcovering after recent weakness and on talks of China possibly buying to replenish reserves. Corn and wheat rallied on reports that an order for U.S. corn was the biggest one sale in 20 years and traders assumed China was back in the market. The weak dollar also provided support. We prefer the sidelines in corn. July wheat closed at $6.50 per bushel, up 14 1/2c also on shortcovering after weakness and against the weak dollar. We are on the sidelines in wheat. July soybeans closed at $14.93 ½ per bushel, up 13 1/4c and continues to rally on report by the USDA of orders for 216,000 tonnes of soybeans with half going to China. A day after releasing weekly sales figures exceeding market expectations. A disappointing South American harvest and downgrades following the frost in Argentina has provided the impetus for soybean demand forward. We have favored the long side of soybeans for some time and have not changed our opinion.
Meats: June cattle closed at $1.1285 per pound, up 47.5 points but failed to recover previous losses. A concern by Russia and South Korea after the discovery of a case of mad cow disease in California had some effect on prices but U.S. officials at the USDA said the infected cow was "never presented for slaughter for consumption, so at no time presented a risk to the food supply chain or human health". Taiwan was also closely monitoring the situation and would closely inspect all documentation to ensure public safety. The psychological impact however prompted immediate long liquidation but on Friday shorts covered. We had been bullish for some time and are now cautiously optimistic. Hold current positions. July hogs closed at 87.525 per pound, down .95c With no fundamental news to prompt position taking we continue to favor the sidelines in hogs.
Coffee, Cocoa and Sugar: July coffee closed at $1.762 per pound, up 35 points tied to the dollar weakness and interest in Brazilian beans. Roasters sought Brazilian beans as Colombian demand dwindled with reduced output tied to bad weather, and plant fungus. March exports were also sharply lower from Colombia. We continue to favor the long side of coffee from here but use stop protection on any new longs and raise trailing stops on existing positions. July cocoa closed at $2,300 per tonne, up another 28 dollars and briefly traded at the session high of $2,316. We have been bullish for cocoa and still look for prices to move higher possibly breaching the $2,500 technical resistance level. Hold longs, add on setbacks and use stops. July sugar closed at 21.33c per pound, up 8 points on the weak U.S. dollar but moreso on technicals as sugar is "attempting" a bottom after recent prices around the 25c level. We had been bullish but recent selling without positive fundamentals led us to the sidelines. Hedging pressure from the Brazilian harvest might add to weakness and provide an opportunity to buy.
Cotton: July cotton closed at 91.23c per pound, down 88 points mostly on profittaking after recent sharp price gains. After the July contract traded as low as 86.15c on April 16th due to heavy long liquidation by funds, cotton has moved sharply higher on shortcovering and new buying. The precipitive move from the late March high of 93.73c to the April 16th low of .8655 represented a "washout" of long positions and the addition of heavy short positions by technically oriented trading programs. The buying from those lows appear to be heavy shortcovering by funds. We saw that as a "golden opportunity" to buy but also indicated stop protection was a necessity due to the extreme price differentials. We continue to favor the long side but bring up those trailing stops. The current price level is nearly a 50% correction from that recent high to the lows.
