"When it rains it pours." It's a slogan that certainly applies lately as the U.S. economic data contradicts the positive-leaning rhetoric from the federal government. The message has shifted to suggest that the economy "continues to improve but slower than we would like." Unfortunately, the reality of the current economic condition came home to roost on Friday as the data reinforced our opinion that not only is there no economic improvement, but we see a continuing flow of poor results emanating from Washington that reinforces our recession opinion.
Indeed, while Congress could "get to work," it would accomplish little to return the jobs lost to foreign countries. The current economic environment for companies is not conducive to U.S. manufacturing since the tax situation in the U.S. denies corporations the ability to compete effectively. We have long stated our opinion that the tax rate to corporations, the ones that do the hiring, must be competitive. Congressional greed in taxing more to allow for expanded spending makes no sense.
Our expectation that not only a return to recession is at hand, but more disconcerting is that the prospect of a downward spiral resulting in a depression is a distinct possibility. On Friday, the jobs creation figure of 69,000 was disappointing against estimates of up to 150,000 jobs. Also, the downward revision of the prior month added to the concern. The reality of an increase on Thursday of the first time unemployment number of 383,000 illustrated the real disposition of the labor situation.
Once again, a monthly gain of 69,000 against a weekly job loss of 383,000 shows no sign of any improvement, and the failure of the media to compare numbers is an illusion perpetuated on the U.S. public. More bad news for the unemployed is that benefits are ending in some 24 states. The reduction of the number of weeks left for the chronically unemployed will only serve to aggravate an already untenable financial condition for hundreds of thousands of families.
The ongoing European debt crisis, which we have continually noted as fatalistic and a waste of money in trying to artificially support the unsupportable position of containing the crisis, will in our opinion ultimately lead to either the departure of Greece and possibly Spain from the euro. That would exacerbate the global economic decline and the confusion generated will only lead to accelerated investor angst. Data from Europe and China also proved problematic, and added to the negativity pushing investors to the relative safety of the U.S. dollar and Treasuries in recent weeks. We once again strongly recommend investors re-examine their financial positions and make adjustments that could mitigate serious problems in their personal financial situation. Now for some actual information…
Interest Rates: U.S. Treasuries continue to be the preferred "safe haven" for investors but with interest rates at all time lows prompted by the sharp price increases in treasuries, investors have re-introduced precious metals as a potential safe haven. The June U.S. treasury bond closed at 152 and 20/32nds, up 2 and 11/32nds with the dollar giving back some of its recent gains on profittaking in front of the weekend. The rush to the safety of treasuries left the equity markets in nearly "free-fall". The 30 year bond yield declined to 2.54% while the 10 year note yield declined to 1.467%. The weaker than expected jobs data was a "wake up call" to economists and the administration that the current economic and labor situation is simply not improving but headed for another severe recession. With only 69,000 jobs (doubtful as to quality) were "created", the weekly loss increased to 383,000 jobs by virtue of the first time unemployed. I cannot comprehend the logic in assuming "improvement" when each first time unemployed most certainly is on the "line" because of a lost job. We hear very little if anything related to this sharp "disparity" by the media and the administration and to call the economy as "improving albeit modestly" is to perpetuate a fallacy. We could see price correction in treasuries as the psychology of record low rates may prompt a resurgence of interest in precious metals, which have suffered of late. If the Federal Reserve decides to "intervene" their only choice would probably be to purchase various expiration and denomination paper which could further exacerbate the decline in yields for fixed income people. These low interest rates are hurting the public, including seniors, and unless they are willing to assume some risk with our programs, they will continue to tap into the "principal".
Stock Indices: The Dow Jones industrials closed at 12,118.57, down 274.88 on Friday posting a one day loss of 2.22%. The S&P 500 closed at 1278.04, down 32.29, for a one day loss of 2.46%. The tech heavy Nasdaq closed at 2747.48, down 79.86 for a one day loss of 2.82%. This weeks action has totally wiped out the years gains. The Nasdaq has now lost 12% from its March high with the Russell 2000 index of small-capitalization stocks lost 3.2% of Friday and down 13% from its March high. We view this selling as a precursor of "things to come". Markets have not truly reflected the Global economic condition or the U.S. labor situation and we once again suggest strongly the implementation of hedging strategies for holders of large equity positions. Recent weakness is in no way a "capitulation" which would require much higher volume numbers. Adjust portfolios or contact us for strategic applications.
Currencies: The June U.S. dollar index closed at 8290, down 22.9 points on pre-weekend profittaking. Corrections were posted in the Euro which recovered slightly from a two year low closing at $1.2413, up 45 points, the Swiss Franc $1.0337, up 37 points, and the Japanese Yen 39 points to .12806. Continued weakness in the British pound tied to the impending Eurozone crisis, led to a 39 point loss to $1.5372, the Canadian dollar 84 points to 9613, and the Australian dollar 56 points to 9671. We continue to favor the dollar even as the U.S. economic situation deteriorates since relative to the Eurozone, the U.S. is better off, albeit not much better…..
Energies: July crude oil closed at $83.23 per barrel, down another $3.30 and exceed our intermediate goal of $85 per barrel when crude was over $105. Our view at that time, which has not changed, was for a decline in demand with adequate supply. The only caveat we imposed was for the unseen possibility of a geopolitical event, which has not occurred. We would suggest taking profits for those readers who followed our recommendations. Global economies remain under pressure and I see no "light at the end of the tunnel except for the oncoming headlight of a locomotive"…..
Copper: July copper closed at $3.31 per pound in late trading, down 4c following equities and based on the general global economic malaise. Our long term view of short copper remains intact but bring down those trailing buy stops.
Precious Metals: August gold closed at $1,622.10 per ounce, up $57.90 or 3.7% on Friday. Recent losses tried to the investor "preference" of treasuries as the safe haven against economic and market declines. The price gains in treasuries have caused low yields since treasury bonds and notes are fixed rate securities meaning that when prices gain due to the rush to safety, yields decline and that decline concerns investors who turned back to precious metals as a safe haven on Friday. The weak dollar Friday was also an opportunity to cover short positions in gold and silver but opinion remains unchanged. The negative economic and jobs data Friday also prompted price gains in Treasuries and precious metals. Precious metals do not provide protection against dramatic market moves in other asset classes and while prices ‘corrected" on Friday after recent sharp declines, we would not be anxious to get back into precious metals. July silver closed in late trading at $28.66 per ounce, up 90.3c. July platinum gained $28 per ounce closing at $1,445.60 while September palladium lost 90c to close at $613.00 per ounce. Our long term spread favorite of long palladium/short platinum gave back some of its recent gains. Hold positions.
Next page: Ags and softs
Grains and Oilseeds: July corn closed at $5.51 ½ per bushel, down 3 3/4c on continued pressure from market condition and supply/demand factors. We continue to prefer the sidelines in corn. July wheat closed at $612.1/4 per bushel, down 31 1/2c on continued selling pressure from the recent USDA report. While exports were increased, the improvement in harvests kept prices under pressure. Stay out for now. July soybeans closed at $13.44 ¼ per bushel, up 4 1/4c on shortcovering after recent selling. Our recent bullish stance has been mitigated and we now would only hold long call positions. Selling across the board by commodity funds tied to offsetting some of their losses in equity index holdings and margin calls are putting pressure on commodities.
Meats: August cattle closed at $1.1960, up 70 points on shortcovering after recent losses. The drop in prices for fattened cattle along with packer losses had prompted long liquidation. We continue to favor the long side but with nominal positions only and preferably the purchase of call options. August hogs closed at 91.30c per pound, up 350 points on shortcovering and new fund buying tied to seasonal adjustments. We could see further cash price increases as "barbecue" season progresses. We prefer the sidelines in hogs.
Coffee, Cocoa and Sugar: July coffee closed at $1.5750 per pound, down 3.15c on long liquidation and spreading of the arabicas against the robustas. Arabica coffee futures are down 27% for the year aainst robusta futures gain of 25%. Large arabica inventories were more than enough to offset recent demand gains and the European "taste" has declined due to economic conditions. We prefer the sidelines for now. July cocoa, closed at $2,063 per tonne, down $20 on continued price erosion. Stay out for now. July sugar closed at 19.09c per pound, down 33 points on long liquidation and disappointing fundamentals. We are on the sidelines for now. Overall global economic conditions are pressure many consumer commodities.
Cotton: July cotton closed at 68.59c per pound, down 2.96c tied to some extent to a change of opinion by Standard Chartered, a major player in the commodities market. The USDA data had shown a "good" or "Excellent" crop condition. We are on the sidelines.