Once again, it's curious that the Friday jobs data of 80,000 jobs "created" did not coincide with Thursday's first-time unemployment figure of 374,000 jobs lost. The Thursday figure surely must imply that those applying for unemployment benefits lost a job, but the media again failed to associate one with the other.
Regardless, the jobs situation reveals an ongoing severe labor problem and can only result in a continued recessionary trend. As we have stated in numerous prior commentaries, "an unemployed consumer does not consume, and the producers of those unconsumed products will be next to lay off workers." The only possible explanation for an eventual lower first-time unemployment number will be that there are fewer workers available for companies to lay off without shutting their doors, so we would not get too excited when the number comes down on some Thursday in the future.
The Institute for Supply Management reported the manufacturing sector contracted in June for the first time since July 2009. Consumer confidence has been declining with household spending falling slightly in May, the first drop in almost a year. Meanwhile the impact of the European debt crisis continues to be felt even as Eurozone members are coordinating efforts to support Spain, Italy, Greece and others to solidify the euro. We continue to doubt any additional financial assistance will keep one or more Eurozone members from defaulting and possibly leaving the euro. The members recognize that any departure of one or more members could bring the entire house of cards crumbling down. We see no cure for the debt disease and Great Britain, not a euro member, has already slipped into recession with, we are sure, others to follow, including the U.S.
Interest Rates: September Treasury bonds closed at 149 28/32nds on Friday, up 31/32nds tied to government reports of slowing growth both Internationally and in the U.S. The U.S. jobs picture remains bleak with no sign that an improvement is forthcoming. While the numbers were disappointing, speculation that they were not bad enough to spur Federal Reserve action and that was also a positive for the relative safety of the U.S. treasury market. The yield on the ten year note declined to 1.544% while the 30 year bond yield slipped to 2.664%. We see no sign of any economic recovery in the U.S. or China, the major consumers of the "globe" and a continuing slide back into recession is our best guess. Hold bond positions. With over 2 million homes in the foreclosure process in the U.S., home inventories are growing and our previous recommendation to banks to "bite the bullet" and complete those foreclosures would collapse the home market and form a base from which to "build". The current method of foreclosing a few homes and feeding out only a few at a time is the "Chinese water torture" for potential home buyers. Knowing the huge overhanging inventory buyers will remain reluctant to buy in a "declining price" market. We continue to prefer bond option spreads.
Stock Indices: The Dow Jones industrials closed Friday at 12,772.47, down 124.20 after a disappointing jobs report with only 80,000 jobs created and the rate unchanged at 8.2%. The real rate including the "under-employed" is closer to 19%. For the week the Dow lost 0.8% but much of the loss, 1.3% occurred Thursday and Friday. Up to Wednesday the averages were up for the week. The S&P 500 closed at 1,354.68, down 12.90 and for the week lost 0.6%. The loss of 1.4% was on Thursday and Friday. The Nasdaq closed at 2,937.33 down 38.79 and lost 1.3% on Friday. The rhetoric from Washington notwithstanding, the U.S. economy continues in a recessionary trend in our opinion. Implement hedging strategies before "history repeats itself"…..
Currencies: The September U.S. dollar index closed at 8349.5, up 55.3 as the ongoing Euro crisis continues unabated even with so called bailout expectations. The U.S. jobs report was also disappointing and led to the flight to the safe haven of treasuries and the U.S. dollar. We continue to favor the dollar if only on a relative basis against the European currencies and ongoing concern of a Chinese economic slowdown. The Euro closed at 12283, down 118, the Swiss Franc 10235, down 97 points the British Pound 15472, down 50, the Canadian dollar 9786, down 65 points and the Australian dollar 10124, down 100, or one full penny. Hold long dollars.
Energies: August crude oil closed at $84.45 per barrel, down $2.77 on heavy selling after recent price gains thanks to the weaker than expected U.S. jobs data. The dollar gain also a factor in the energy price declines. August heating oil closed at $2.7032 per gallon down 6.52c with unleaded gasoline losing 4.98c to close at $2.7150 per gallon. We remain negative for energy products but a cautious eye towards recent threats by Iran to shut the Strait of Hormuz could change everything. Stay out for now.
Copper: September copper closed at $3.41 per pound down 7c tied to the dollar strength, a weakening U.S. and China economy as well as the ongoing European debt crisis. We remain bearish for copper.
Precious Metals: August gold closed at $1,578.90 per ounce, down $30.50 tied to the dollar strength, the weak U.S. jobs report, ongoing debt crisis in Europe and concern that China, one of the largest consuming nations has reduced expenditures due to a declining economy. However, even after recent price declines in precious metals, the spectre of inflation may be returning to the globe as the severe weather conditions are affecting the U.S. feed grain production and resulting in sharply higher prices. We remain on the sidelines in precious metals. September silver closed at $27.04 per ounce, down 63.2c. October platinum lost $32.6 per ounce closing at $1,445.10, while September palladium lost $8.40 per ounce to close at $577.35. We would only consider the long palladium/short platinum spread in this group.
Grains and Oilseeds: September corn closed at $6.95 ¼ per bushel, down 13 1/2c after trading as high as $7.08 early in the session. The jobs data prompted the flight to the treasury market and dollars and pressured grain prices. We continue to feel the ongoing devastating weather will impact grains and would not be short "anything that grows" for the time being. We prefer the long side of corn but with stops. September wheat closed at $8.06 ¼ per bushel, down 31 3/4c after trading as high as $8.37 early in the session. Long liquidation and the strong dollar prompted the profittaking after recent strength tied to the weather problems. November soybeans closed at $15.05 ¾ per bushel, down 20 3/4c after the early high of $15.26 was reached. The U.S. jobs data as well as ongoing weather problems in the growing areas will continue to impact prices. We would hold long positions in soybeans and add on any further declines.
Meats: August cattle closed at $1.1920 per pound, up 50 points as prices have recovered from the mid June lows around $1.15 but off the June 29th highs near $1.21. Prices remain in a trading range and while weather is a factor as well as feed prices, we could see higher prices and would hold long positions but with stop protection. August hogs closed at 93.30c per pound up 42.5 points on shortcovering after failing to break through the 96.30 July 2nd resistance level. Prices declined to 92.72 and now appears ready for another move higher tied to weather difficulty in moving hogs to market. We had long preferred the sidelines but could see some renewed interest in hogs so we would buy a few calls on any setbacks.
Coffee, Cocoa and Sugar: September coffee closed at $1.7645, down 3.9c per pound on profittaking after recent strength tied to tight supplies according to the International Coffee Organization. The strong dollar also a factor. We continue to favor the long side of coffee but with stops. September cocoa closed at $2,252 per tonne, down $76 on profittaking after failing at the days high of $2325. The strong dollar also a factor. We could see another push over $2400 and would hold long positions or add on any further setbacks. October sugar closed at 22.25c per pound, up 33 points on continued buying tied to a cut in production surplus anticipated by Brazilian concerns over its sugar cane crop. We could see higher prices and would buy calls for a possible move to the 24-25c level.
Cotton: October cotton closed at 70.53c per pound, down 24 points while the December contract gained 4 ticks to close at 70.62c. Concern that China’s imports may drop by 50% has prompted the sideways action in cotton. The plus of course is weather concerns but the market may continue sideways for a time so we would hold current positions but raise any trailing stops.