Commodities caught between financial facts and empty optimism

Europe, housing and employment weigh on markets

Commodities, Crude oil, Gold, Copper, Silver 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.

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