Gold, Silver, Crude oil, Copper
Friday the 13th came and went and unlike previous instances provided a respite for investors buffeted by previous market sessions and economic reports. Our skepticism at the U.S. Administration's claims of an economic recovery continues to be supported by the less-than-enthusiastic response to government data, especially that associated with the labor situation.
We continue to question how a weekly first time unemployment number exceeding 350,000 can be ignored in favor of the monthly number of around 80,000 jobs created. The unemployment rate of 8.2% is not a true reflection of the labor situation because the underemployed people who accepted jobs well below their recent salaries just to put food on the table are not being considered as an integral part in the calculation. It also fails to include those that left the workforce entirely and those that retired prematurely.
That more realistic figure, in our opinion, would be closer to 19%. The unfortunate revelation of yet another brokerage firm caught up in fraud and mishandling of client funds reflects the inability of the regulatory factions to properly control these firms and their activities. The call for more regulations makes no sense. The enforcement of existing regulations should be the order of the day. Now for some actual information that hopefully will enable our clients and subscribers to trade successfully…
Interest Rates: September Treasury bonds closed at 151 and 6/32nds down 14/32nds as the transition from the relative safety of treasuries to the riskier assets such as equities and precious metals resumed. Expectation of additional stimulus measures after China reporting slowing economic expansion China is the world’s largest consumer of raw materials and second largest economy. Treasury prices declined after the U.S. reported an increase in wholesale prices for June, the first time in four months. The better than expected report from J.P.Morgan prompted buying in equities which prompted the sale of the "safe haven" Treasury market. The weak dollar also spurred new buying in commodities. We continue to believe the U.S. economy is in or headed toward another recession and that could drive the U.S. Federal Reserve to consider additional remedial action. We do not feel the Fed has any more "arrows in its quiver" and the economy will have to run its course as will other International economies. We continue to view treasuries as in a trading range with yields remaining at or near all time lows.
Stock Indices: The Dow Jones Industrials closed at 12,777.09, up 203.82 for the first gain in seven trading sessions. Earnings reported by JP Morgan Chase and Wells Fargo were better than expected and gave rise to speculation that financials were improving. The rally in bank stocks prompted the overall market strength as well as China’s second quarter GDP data. The S&P 500 closed at 1356.78, up 22.02 and the Nasdaq gained 42.28 points to close at 2908.47. For the week the Dow managed a gain of 0.2%, the S&P 500 which showed a weekly loss coming into Friday managed a slight weekly gain of 0.1%. The Nasdaq gain on Friday was not enough to offset the weeks loss and finished the week with a 1% loss. Next week will provide insight into the "future" as a number of companies will be reporting earnings. Fridays strength was also prompted by China’s slowing growth which could put pressure on the Chinese Premier to boost stimulus to try to recover the economy in the second half of the year. We do not believe anything will help the slowing global economies and suggest strongly that investors with large equity portfolios implement those hedging strategies we have been emphasising for some time. We can assist with strategic hedging programs specific to large investor needs.
Currencies: The September U.S. dollar index closed at 8347.4 on Friday, down 33.5 points on profittaking after recent strength and in conjunction with the dollar most commodities and the equity market gained. Economic data along with better than expected reports from JP Morgan implied a potential for the U.S. Federal Reserve as well the China to provide additional economic stimulus to prevent "economic" erosion. Our overall view of global economies remains unchanged in as much as labor strife will continue to impact industrial economies. While we view the U.S. economy as weakening, relative to our trading partners in Europe and the Far East, the U.S. is in better shape and the dollar should benefit. Stay long the dollar.
Energies: August crude closed at $87.10 per barrel, up $1.02 tied to speculation that China’s government will provide for additional stimulus measures. China reported a slowing GDP but not has bad as expected and as China is the world’s second largest consumer of energy products, any change in consumption or supply impacts the oil market. Sanctions on Iran also provided for the support for crude as well as the weak dollar in which it is denominated. We remain on the sidelines but our overall view of negative global economies could continue to pressure prices and demand wanes.
Copper: September copper closed at $3.504 per pound, up 8c and the most in two weeks on the weak dollar, and speculation of additional stimulus measures both for the U.S. and China where economic data for China showed a slowing. We continue to believe a weakening global economy will continue to reduce overall demand for building materials such as copper and prices could decline further. We remain bearish for copper.
Precious Metals: August gold closed at $1,592 per ounce, up over $25 on the weak dollar and as with copper, the expectation that the weak Chinese GDP will prompt policy makers to add stimulus measures. Increased demand from India, the worlds largest precious metals consumer was also a factor in the strength on Friday. The recent decline from the mid $1600 level and the gain from the lows of May around $1530 keeps gold in a range and we see no reason to expect further gains. Should the reality that the U.S. is in better shape than its trading partners on a relative basis prompt continued dollar strength, we could see further price declines in precious metals. Stay out. September silver closed at $27.369 per ounce, up 20c following gold. October platinum closed at $1,433 per ounce, up $20.5 with Septem ber palladium gaining $11.20 to close at $586.00. As relates to our recommended long palladium, short platinum spread, palladium gained 1.95% while platinum gained 1.45%. Stay with that spread.
Next page: Ags and softs
Grains and Oilseeds: September corn closed at $7.40 ½ per bushel, up 9 1/4c on continued hot dry weather impacting crops. We could see additional crop damage and yet higher prices. Corn is used for both food and for fuel such as ethanol where 40% of the U.S. crop goes to ethanol production. Brazil where sugar is used to produce ethanol is also having problems due to weather concerns. We would hold long corn positions but any new purchase should be limited to call options where the risk can be controlled to a greater degree than with futures even with stop protection. September wheat closed at $8.47 ¾ per bushel up a penny but has rallied over $2.00 from the $6.25 low of mid June. Each dollar is equivalent to $5,000 in grains as the contract is for 5,000 bushels for corn, wheat and soybeans. We look for higher prices across the board but with substantial dollar wise corrections along the way. Use options. November soybeans closed at $15.52 ½ per bushel, up 23 1/2c and up from early June’s $12.50 prices. We expect, barring any weather improvement, for soybeans to continue higher. We have favored the long side of soybeans for some time and while recommending taking profits along the way, getting back on the long side using stop protection. Stay with the soybeans.
Meats: August cattle closed at $1.1720 per pound, up 1.75c along with other commodities and tied to dollar weakness on Friday. However, with higher feed prices, farmers are likely to continue moving cattle to market adding to supply so we would hold off any new purchases. August hogs closed at 90.4c per pound, down 1.875c per pound tied to some degree to high temperatures reducing demand for outdoor grilling. Demand decline along with some farmer movement to market also a factor. We have not favored the long side of hogs but would not consider shorting "food". Stay out.
Coffee, Cocoa and Sugar: September coffee closed at $1.8610 per pound, up 4.05c on shortcovering and technical buying by funds. Coffee prices have rallied from the mid June lows around $1.50 on concerns over Brazilian weather and potential cold front moving through the coffee growing areas. The weak dollar on Friday was also a factor and while we had favored coffee, we would now look to take profits and stand aside for now. September cocoa closed at $2,216 per tonne, up $27 tied to the weak dollar and continued Asian buying. We could see further prices to the $2,300-2,350 area which we consider resistance. Add to current long positions but use stop protection. The U.S. second quarter grind reflecting demand will be released July 19th. October sugar closed at 22.73c per pound, up 27 points tied to the weak dollar and concern that Brazilian rains could reduce output. We like sugar for a move to the $23.50-24c level but use stop protection in the event the dollar regains its "footing" and rallies from here.
Cotton: December cotton closed at 72.66c per pound, up 2.73c and the highest closing price in over three weeks. The gains attributed to the dollar weakness but moreso by the report of China’s GDP growth in the second quarter. China is the world’s largest consumer of cotton. We continue to favor the long side of cotton from here.
