The relentless pursuit of a resolution to the European debt crisis saw the leaders of the Eurozone agree to provide up to $164 billion to try to improve the waning Spanish economy. Spain decided to move relief funds to its ailing banks to avoid the government having to increase its debt load.
Meanwhile, economic data in the U.S. continues to be disappointing and any discussion of an improving economy appears to be a last ditch effort to quell the talk of recession. The U.S. Federal Open Market Committee stated it would continue to "maintain a highly accommodative stance for monetary policy," indicating it also sees signs of an ongoing economic weakness.
Unemployment claims on Thursday of 387,000, down only 2,000 from the prior week are no indication of recovery, in our opinion, and we continue to warn the investing public of a coming re-emergence of the worst recession since the Great Depression of the 1930s. My analysis is predicated on the ongoing labor situation where the administration boasts of job creation (doubtful quality jobs) of around 100,000 for a month while the jobs lost by virtue of the weekly first time unemployment figures amount to 350,000 jobs lost. As I stated in prior commentaries, a weekly job loss of over 370,000 translates mathematically to 1.5 million for the same month the administration is touting 100,000 created. There also is no such thing as job creation without the introduction of a new industry. Until the U.S. administration seduces, by virtue of competitive tax treatment, the companies that moved their facilities off shore, there will be no job recovery, and the current recessionary trend will continue unimpeded.
The overwhelming burden to homeowners falling behind on their mortgage payments and the lack of attraction to new buyers will continue to confound the housing industry analysts. A home buyer, while understanding that the shadow inventory of homes currently in default and soon to be foreclosed on, will necessarily pressure home prices and there is no reason to buy under those circumstances. The answer, unfortunately, is for the banks to foreclose and flood the market with homes. That will drive prices to the bottom and allow for new buyers to start bidding up prices on the foreclosed homes. While the price base will be lower, it will in fact be a solid base from which to orchestrate a real estate recovery.
Now for some actual information...
Interest Rates: September U.S. Treasury bonds closed at 148 and 3/32nds down 1 and 04/32nds as money once again made the "trip" from the relative safety of treasuries to equities. The rally in equities on Friday did not nearly offset the sharp losses of Thursday and investors thought the sell off was overdone and moved monies back to equities from bonds. We remain unconvinced the rally in equities will continue and that the treasury market will remain in a trading range, moving with each economic report. Hold option positions.
Stock Indices: The Dow Jones industrial average closed at 12640.78, up 67.21 points on a "corrective bounce" after Thursdays 251 point loss. For the week the Dow lost nearly 1%. The S&P 500 closed at 1,335.02, up 9.51 points and for the week lost 0.58%. The Nasdaq closed at 2892.42, up 33.33 and managed a weekly gain of 0.68%. The week started off on optimism as Greek voters supported the pro-bailout parties in the Sunday election. However that optimism soon dissipated when Spain had to pay a euro-era high borrowing rate of 7%. Italy also was forced to pay high borrowing costs as the ongoing Euro debt crisis seemed to center on Spain and Italy with the "good news" of Greece relegated to the background. While various U.S. corporate earnings reports continue to indicate some progress, it will not, in my opinion, enough to negate the poor economic data and we once again warn investors to implement hedging strategies. Our programs could prove beneficial.
Currencies: The September U.S. index closed at 8240 down 8.8 points as the Euro zone added $163 billion to its availability and both Spain and Italy were able to borrow at less than the previous high rates. The dollar has been strong against the Euro as the U.S. economic data, while weak, was viewed as relatively positive against Europe and China. On Friday the Euro managed a gain of 9 points to close at $1.2572 after having traded as low as $1.2298 on the first of June. Other currency changes included the Swiss Franc a gain of 9 ticks to 10483, the Canadian dollar 30 points to 9739, the Australian dollar 29 points to 9996, the Japanese yen a loss of 21 points to 12444, and the British Pound a loss of 9 ticks to 15582. We continue to favor the dollar.
Energies: August crude closed at $80.15 per barrel, up $1.95 on shortcovering but for the week lost 5.1% on expectation for reduced demand tied to the global economic weakness. We have been bearish on crude for some time and see no reason to change our opinion.
Copper: July copper closed at $3.306 per pound up 8 on shortcovering and in line with the rally in equities after the European Central Bank move to boost lending to the critical countries of Greece and Spain. We continue to view copper as bearish with our price goal of $3.10-3.15. For the week copper prices declined by 2.3% in line with our expectations.
Precious Metals: August gold closed at $1,572.10, on Friday, up $7.60 on shortcovering after Thursdays loss of 2.5% and a weekly loss of almost 4%. Deflation worries and a lack of any material stimulus by the U.S. Federal Reserve in their decision to extend "Operation Twist" aiming at lowering long term interest rates rather than a new outright bond purchase program. Gold has historically benefited by inflation fears and that had triggered its multi-year price gains. The Moody’s rating downgrades of major international banks also a factor in the shortcovering. We continue to view gold as a "dinosaur" but maintains demand by the public fearing currency deterioration and economic concerns. India’s decision to increase import duties also a factor in the long liquidation. We are on the sidelines in gold. September silver closed at $26.88 per ounce, down 20 points on continued selling pressure. October platinum closed at $1,435.70, down $7.90 and September palladium lost $13.50 to close at $607.20. In the metals our favorite remains the long palladium, short platinum spread. Otherwise stay out of these ultra sensitive to news markets.
Next page: Ags and softs
Grains and Oilseeds: September corn closed at $5.51 ¼ per bushel, up a penny on continued shortcovering and new buying tied to dry weather that has reduced yields for corn and soybean crops in the Midwest. We could see renewed interest in corn and would be long from here. September wheat closed at $6.87 ½ per bushel, up 9c on increased export sales. We could see additional gains early in the week but we prefer the sidelines in wheat. November soybeans closed at $13.75 ½ per bushel, up 4 1/4c also tied to the weather and we continue to favor the long side of soybeans for a potential move back to the mid $14 range. Use stops on any new buying.
Meats: August cattle had fallen on expectation of reduced demand but managed a gain on Friday on shortcovering closing at $1.1690, up 35 points. We like cattle from here after having been stopped out on earlier purchases. August hogs closed at 91.375 per pound, down 75 points on profittaking after recent strength. We favor the sidelines in hogs but demand prompted by "barbecue season" and packer demand might prompt new buying in both cattle and hogs.
Coffee, Cocoa and Sugar: September coffee closed at $1.5580 per pound, down 3c on concern that global economic weakness will reduce demand for "non essentials" even though I could not live with the second or third cup in the morning….. Stay on the sidelines but Brazilian frost season could prompt new buying should it materialize. September cocoa closed at $2112 per tonne, down 35 points and remains on our "no interest at current prices" list. Improved weather in the major producer, Ivory coast, and global economic concerns kept prices under pressure. We continue to favor the sidelines or light short positions. October sugar closed at 19.9c per pound down 89 points on continued selling pressure tied to a global surplus expected to continue through 2012/13. India’s monsoon rains could change the picture for sugar but we prefer waiting actual results rather then try to "guess". Stay out for now.
Cotton: December cotton closed at 69.12c per pound, up 1.41c on demand in front of this year’s harvest. Delivery intentions could change the picture for cotton but we would hold long call positions for now. Tomorrows intentions may change our mind.