While the Greece election is over, we still don't have definitive results. However, the results of the Greece election will require analysis as to what the new government plans to do about the austerity programs required by the ECB and IMF as to whether additional bailout funds would be made available. Should the Greek public vote for the party that succumbs to the will of the people and doesn't accept austerity and thereby relinquishing the bailout funds, we feel Greece would default and have to leave the euro and revert to the Drachma. We view that scenario as unacceptable and would cause global financial havoc. The markets would be left without a clue and result in wide price swings that could negatively affect investments internationally.
Interest Rates: September treasury bonds closed at 149 21/32nds, up 15/32nds on expectation that the lower than expected economic data would prompt additional Federal Reserve stimulus measures. The data reported by Washington showed industrial production in the U.S. declined in May for the second time in three months and was a surprise to analysts. Also a factor was the U.S. government auction of 30 year bonds at the lowest rate ever of 2.72%. Investors clambered for paper in expectation that the U.S. economy would prompt further action by the Fed and still lower rates in the future. Factory output, utilities, and mines decreased 0.1% after a revised gain of 1% in April. The Thomson Reuters/University of Michigan index of consumer sentiment declined to 74.1 from May’s 79.3, and was the lowest so far this year. The May reading was the highest since October 2007 and the new reading was a disappointment according to economists. We could see further buying but without a definitive response from the Fed against the poor economic data, bonds could decline with yields moving higher. We prefer the put/call option spread.
Stock Indices: The Dow Jones industrials closed at 12,787.17, up 115.26 on hopes the European Central banks will make a cooperative effort and take action to provide liquidity to the financial markets after Sundays Greek election. The expectation for Federal Reserve easing due to the negative U.S. economic data was also a factor in the buying of equities. For the week the Dow gained 1.7%. The S&P 500 closed at 1342.84, up 13.74 and for the week gained 1.3%, most of it on Friday with that gain of 1.03%. The Nasdaq closed at 2872.80, up 36.47 for a daily gain of 1.29% and for the week posted a gain of 0.5%. We continue to suggest that gains in equities are prompted by various indications of support such as potential Fed action, European intervention for assist Greece, depending on the election, and other optimistic factors. We remain negative since at some point the reality that the U.S. and global economies are sliding back into recession and will impact risk assets. Implement hedging strategies before it’s too late. October 1987 may be a distant memory, but history tends to repeat.
Currencies: The September U.S. dollar index sold off sharply on Friday as expectation of a positive Greek election would provide the additional funds from the European central banks to stave off any financial calamity and the necessity for Greece to leave the Euro Union. We do not expect a positive reaction however, based on public opinion in Greece against the severe austerity programs required by the EU for additional bailout funds. The Northern countries in the EU that are prosperous to some extent may balk at additional infusion of capital into the IMF and the U.S., one of the largest contributors to the IMF may also find some difficulty in providing additional funds to support a country like Greece or Spain where it would appear a "bottomless pit" has developed. Stay with the dollar even though the U.S. economy is faltering but relative to Europe, would appear to be the more stabile economy.
Energies: July crude oil closed at $84.03 per barrel, up 12c on Friday on expectation that the central banks will provide additional support for Greece to remain in the Euro. We will have to wait for the election results before further comment. However, after the recent selloff that exceeded our expectation for a decline from the $105 level to $85 per barrel, we would expect a correction and possibly a rally to the $85-87 per barrel level. Our overall opinion towards crude oil remains negative based on our expectation of a continued global recessionary trend.
Copper: July copper closed at $341 in late trading Friday, up 5c tied to the optimism that a resolution to the Greek problem would be found after the election and the rally in equities and the decline in the dollar. We do not believe, regardless of the election results, that the Greek or Spanish monetary debt problems will be solved and remain negative for copper.
Precious Metals: August gold closed at $1,628.30, up $8.70 on Friday in expectation that central banks would take the steps necessary to support Euro economies. We have no such optimism and would continue on the sidelines in precious metals. Holding some gold may be acceptable however. We would prefer silver to gold based on recent percentage gains over gold. July silver closed at $28.69 per ounce, up 28.3c on shortcovering after recent selling. July platinum lost 40c per ounce to close at $1,487.20 and September palladium lost 8.5c per ounce to close at $626.40. We prefer the sidelines with the exception of the long palladium/short platinum spread.
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