Overview and Observation; The European agreement to infuse “cash” into the troubled Eurozone countries prompted a sharp selloff on Friday for the dollar and the resulting sharp rally in all dollar denominated commodities and equities. The EU leaders in Brussels agreed to use rescue funds to stabilize bond markets and troubled banks. The initial reaction prompted worldwide market euphoria pushing stock prices sharply higher and U.S. treasury bonds and the dollar sharply lower. Money moved from the relative safety of U.S. Treasuries and the U.S. dollar to the risk asset entities such as equities, precious metals and other dollar denominated commodities. We view the euphoria as a short lived phenomenon and warn against the assumption that “all is well in the world”. It is certainly not, in our opinion, well….We continue to feel global economies will slide once again, into recession. Great Britain, one of the “stronger” European economies, has already fallen into recession. Others are sure to follow and the ongoing debt crisis will exhibit the traditional “domino effect”.
Now for some actual information…
Interest Rates: September U.S. Treasury bonds closed at 147-31, down nearly two handles as money moved from the relative safety of the Treasury instruments and the U.S. dollar to the equity markets and European currencies. The agreement in Brussels by the EU ministers to bail out Spanish and Italian banks as necessary to avoid defaults was greeted as a sign that the euro would be stabilized by the stronger members of the Eurozone and thereby avoid defaults. We believe it is too little too late to avoid some defaults by Greece, Spain, possibly Portugal and Ireland where their GDP is not enough to offset financial commitments. Germany’s Merkel had previously balked at a Eurozone bond but it seems she has softened her stance. We will have to wait and see but our opinion remains unchanged. Hold dollars. Any floating of new bonds for the weak countries is tantamount to “throwing money down a well”.
Stock Indices: The Dow Jones industrials closed at 12,880.09, up 277.83 points and gained 1.9% for the week and for the month gained 3.9% for the quarter lost 2.5% but for the year is up 5.4%. The S&P 500 closed at 1,362.16, up 33.12 points and gained 2% for the week. For the month the index gain 4%. For the quarter the index lost 3.3% but year to date it is up 8.3%. The Nasdaq closed at 2,935.05 on Friday, up 85.56 points and for the week gained 1.5%. For June the index gained 3.8%, for the quarter lost 5.1% but for the year so far gained almost 13%. Four and a half billion shares traded on Friday, the best volume in a long time prompted by the Euro agreement to fund the ailing Eurozone banks, primarily Spanish banks. We would avoid perpetuating the optimistic view that “all is now well with the world” since the foundation, in our opinion, is built on “shifting sand”. The reality that the basic economies are in a recessionary trend where GDP is not keeping up with costs. The debt to GDP ratio is deteriorating in many of the Eurozone countries and periodic capital rescue programs cannot be construed as a solution to the basic problems. We once again strong suggest the implementation of strategic hedging programs, a function we can perform for holders of large equity positions.
Currencies: The September U.S. dollar index closed at 81.72, down 1.287 points as the mad rush to the Euro and other European currencies occurred after the EU decision in Brussels to provide emergency loans to Spanish banks. The temporary solution, in our opinion, will only serve to slow down the recessionary trend in Europe and other Eurozone countries will also be in need of funds. Whether or not the EU can provide the funds necessary to forestall defaults among some of the weaker countries is a question we believe will be answered negatively. The decision by leaders of the 17 euro area countries was to provide banks rather than the various governments and that could pose problems for those governments. The Prime Minister of Luxembourg stated that “short term measures are being considered to bring down borrowing costs for Spain and Italy.” The phrase “short term” is correct in our opinion since long term prospects are grave. We would use this dollar selloff as an opportunity to add to call or futures long positions. While the U.S. economy remains weak, in our opinion, relative to the Eurozone countries it remains the ‘better choice” for investment.
Energies: August crude oil closed at $84.96 per barrel, up $7.27 or 9.4% on Friday. The biggest one day percentage gain since March of 2009. For the week oil gained 6.5%. However for the month of June credit declined 1.8% and the March to June loss was 18%. Our previous goal, when crude was over $103 per barrel was for a decline to $75-80 per barrel. We consider our goal as achieved and recently suggested a correction to the $90 level was possible. However, regardless of attempts to solidify the Eurozone banks, any price gains to that level for crude would once again prompt us to sell or buy put options. The global economies are not, regardless of analyst or economic suggestion, out of danger of recession.
Copper: September copper closed at $3.50 per pound, up 17c tied to the weak dollar and in conjunction with the strong global equity markets. The gain, as in the case of others, is tied to the EC agreement to support the ailing Euro banks. We could see further gains in line with any continued equity improvements but regardless of the symmetry and even as some elements of the housing industry showed some improvement, copper prices, in our opinion, are too high. Our view that a global recession is still forthcoming will reduce demand for building materials and of course copper. Any further rally should be an opportunity to sell.
Precious Metals: August gold closed at $1,604.20, up $53.80 per ounce tied to the global “euphoria” as a result of the EU agreeing to provide bailout funds for the Spanish banks and others. Gold is dollar denominated and the heavy selling the dollar Friday provided the impetus for a price correction for gold, the Euro, and other dollar denominated commodities. September silver closed at $27.455 per ounce, up $1.164 on heavy shortcovering after recent weakness and tied with gold to dollar weakness. We do not feel this is a renewed interest in precious metals, and would not be inclined to buy precious metals. Our expectation is for continued concern over the Eurozone debt crisis and ultimately cause a continued disconnect with precious metals or other risk assets. October platinum closed at $1,452.10 per ounce, up $62.80 with September palladium gaining $18.30 per ounce to close at $58220. We prefer the sidelines.
Grains and Oilseeds: September corn closed at $6.28 ½, per bushel, up 2.25¢ with gains tied to concern for hot weather which could impact yields. The weak dollar provided the impetus for strength in dollar denominated commodities. We prefer the sidelines. September wheat closed at $7.57¼ per bushel, up 11.25¢ also tied to the weak dollar and also concern over weather. We prefer the sidelines in wheat as well.
August soybeans closed at $14.81¾ per bushel, up 35.5¢ while November soybeans gained 24.25¢ to close at $14.27¾ per bushel. Recent cuts in yield estimates continue to provide strength for bean prices and the selling in the dollar added to the strength for soybeans. We continue to recommend soybeans but after Friday’s gains would hold off until a short correction is completed.
Meats: August cattle closed at $1.2045 per pound, up 1.125¢ as buyers stepped in to bid at auction. However the strength prompted by the selling in the dollar against the Eurozone currencies could result in long liquidation as the extreme Midwest heat and dryness could push cattle to slaughter and prompt selling pressure on prices. We like cattle but would hold off new purchases pending the completion of a price correction early in the week. August hogs closed at 94.775¢ per pound, up 8.75¢ also tied to the dollar weakness and weather concerns as well as expensive feed that could lead to pushing animals to slaughter. We prefer the sidelines in hogs.
Coffee, Cocoa and Sugar: September coffee closed at $1.7070 per pound, up 7.65¢, their highest settlement since May22nd. However, for the quarter, coffee lost 7.7% and the buying on Friday could be attributed to dollar weakness as well as shortcovering. We prefer the sidelines from here. September cocoa closed at $2,291 per tonne, up $61 and the highest price since May 11 on heavy volume. The buying was prompted by the weakness in the U.S. dollar, but ongoing selling by Ivory Coast via its new auction system could halt forward price momentum. We prefer the sidelines for now until some clarity is forthcoming. October sugar closed at 41.01¢ per pound, up 48 points. The expiring spot at 21.81¢ was on good volume and for the second quarter lost 11.7%. For the month of June however, sugar gained 12% and was up 7.8% for the week. Sugar deliveries for the July contract was over 21,700 contracts or 1.11 million tonnes, which would be the highest since July of 2009, according to trade sources. We prefer the sidelines in sugar for now, awaiting fresh fundamentals from growing areas.
Cotton: October cotton closed at 71.57c per pound, up 2.06c while December gained 1.82c per pound to close at 71.33c. The market fluctuated in early trading as reports that China cancelled orders for 600,000 running bales of cotton and the U.S. reported net export sale cancellations of 602,100 bales for the 2011-12 crop as of last Thursday. Prices had been under pressure on June 20th and 21st when prices for the October contract high 67¢. The June 5th low of 65¢ was reached before recovering to 75¢ on June 20th just before the report came out. One June 21st cotton sold off to 67.06¢ before stabilizing. We continue to favor the long side of cotton but would raise trailing stops in the even the buying was exclusive to dollar weakness. Weather remains a factor in all growing areas of the U.S.