The severe drought in the Midwest grain belt is causing consternation with higher prices for corn, wheat and soybeans -- soon to be felt at the local retail food store level. The fragile U.S. economy is already reeling from unemployment, while the home mortgage default and foreclosure condition is causing it to slip further into recession. The first time unemployed more than overshadow the poor job creation figures by more than four to one. With weekly job losses as exemplified by the Thursday first-time unemployed number of 383,000 against the meager job creation number of 80,000 monthly, only the blind can believe claims of an economic and jobs recovery.
Great Britain is already in recession with other European countries headed in that direction. Spain is the latest in the forefront of banking concerns, following recent debt crisis problems in Greece, Italy, Portugal and Ireland. The Chinese economy is also experiencing difficulty and as the second largest economy could add to the global problem. The real unemployment and underemployment number in the U.S. is closer to 19% and any reduction in first-time unemployment merely reflects that there will be fewer workers to lay off without shutting the company doors.
An increase in productivity merely means a worker must now perform the job functions of two or more laid-off workers, a condition not conducive to job security. The concern of workers with jobs is that they may be next and their spending on consumer goods is kept under tight control. The could easily extend to a further staff reduction as products are not consumed and the manufacturers of those products will consider additional staff cuts. Earnings reports showing better bottom lines is a reflection of cuts in expenses and that equates to labor cost cuts.
Interest Rates: September U.S. treasury bonds closed at 151 25/32nds up 1 and 6/32nds as once again money made the "trip" from risk assets such as equities back to the relative safe haven of U.S. treasuries. Spain has once again become what global investors have focused on as the main financial concern as its 10 year debt yield soared to 7.22% on Friday. The recent expectation was for the European finance minister to keep that rate at or below 7% and the ‘breach" has sparked new fears for the banking industry and the Spanish recession. Other factors include a declining economic growth for China, The U.S. economic slowdown coupled with China as the two largest "consuming" nations is fomenting expectations for a global recession, something we have been warning about for some time. Treasuries continue in a wide trading range and astute traders can take advantage of the price swings.
Stock Indices: The Dow Jones industrials closed at 12,822.57, down 120.79 points and lost 0.93% Friday while earlier gains afforded the Dow a weekly gain of 0.36%. The S&P 500 closed Friday at 1,362.66, down 13.85, or 1.01% but for the week managed a gain of 0.43%. The tech heavy Nasdaq closed at 2,925.30, down 40.60 points or 1.37% but gained 0.57% for the week. The wide swings in the equity indices appears to us to have formed "topping" action and is line with our expectation of a swift decline in values. While corporate earnings are coming in as or better than expected, improved productivity and reduced expenses by virtue of layoffs and savings attributed to salaries and benefits cuts have been factored into the results. We once again recommend equity investors implement hedging strategies.
Currencies: The September U.S. dollar index closed at 8357.3, up 59.3 or 0.71% on Friday as investors "scrambled" to move money to what they perceived were "safe havens". While the U.S. economy is slowing, relative to the European debt crisis, U.S. investment vis-à-vis the dollar and treasuries appear the better choice to "park" their money. The September Euro closed at $1.2168, down 1.19c or 0.97% on Friday. Other losses include the Swiss Franc 0.97% or 99 points to $1.0137, the British Pound 106 points to $1.5614, the Canadian dollar 49 points to 98.66c, and the Australia dollar 57 points to $1.0320. The September Japanese yen managed a gain of 19 ticks to close at 12752. We have favored the dollar for some time and see no reason to change our opinion. Stay with the dollar. The European economic situation, on a relative basis, is worse the weakening economic condition in the U.S.
Energies: August crude oil closed at $91.44 per barrel, down $1.22 on pre-weekend profittaking after seven sessions of price gains. Middle East concerns remain a factor but took "second place" to the economic concerns plaguing the international financial community. On Thursday crude had advanced by 3.1% tied to geopolitical concerns surrounding Iran and Syria. At the $80 level we had suggested prices would recover back to the $90 level and that had been achieved. We now suggest the sidelines for all but those in the "trade".
Copper: September copper closed at $3.448 per pound on Friday losing their most in a month, 2.4%. In late trading copper traded at $3.44 per pound, down 8c or 2.53%. The world’s largest metal consuming country, China, said it "won’t ease restrictions on home purchases, dimming demand prospects" for copper. With our expectation of a continuing recessionary trend globally, we remain bearish towards copper.
Precious Metals: August gold closed at $1,582.80 per ounce, up $2.40 or 0.2% on Friday as the continuing rally in grains and soybeans is expected to produce inflationary pressures. However, our view of a global recession is keeping pressure on precious metals and we would avoid adding to current physical gold positions for those who "must have it". Our preference in this group has always been silver which outperformed gold over the past couple of years. September silver closed at $27.30 per ounce, up 8c but for the week lost 0.3%. October platinum closed at $1,414.50 per ounce, down $8.60 while September palladium lost $8.75 to close at $576.10 per ounce. We prefer the sidelines in metals.
Next page: Ags and softs...
Grains and Oilseeds: September corn closed at $8.24 ½ per bushel, up another 16 3/4c on Friday posting a one day 2.07% gain. The ongoing hot dry weather is creating crop damage and there is no way of forecasting a "top" so whomever is not in this market, we suggest the sidelines. September wheat closed at $9.43 ¼ per bushel, up 8 1/4c or 0.88% and is reaping the benefit from the adjoining corn and soybean pits. Traders use other commodities in a group to hopefully mitigate any losses from being on the wrong side and this could be one of those instances. Stay out of wheat for now. August soybeans closed at $17.57 ½ per bushel, up 23 3/4c but our recommendation over the past months has been the November contract which gained 34c to close at $16.86 ¼. The continuing drought with no sign of relief is "cooking: the U.S. grain belt and could cause additional crop damage pushing prices even higher. We now suggest, to those who have followed our recommendation of long soybeans, to take some profits "off the table". We co not suggest adding to positions since sharp corrections can occur at any time. On setbacks for the November contract of 30 to 50C, we would look once again to the long side. We see no letup to the current drought.
Meats: August cattle closed at $1.17950 per pound, down a penny as animals are moved to market due to heavy feed costs prompted by the drought in the growing areas. We prefer the sidelines but should herds decline further than the decline in demand would allow, we could see prices stabilize at some point. For now keep a watchful eye on inventories and feedlots. August hogs closed at 93.7c per pound, up 650 on shortcovering after hitting a low of 88.65c on July 18th. We prefer the sidelines in hogs even as "barbecue season’ usually means added demand. With the extreme heat around the country, that reasoning may not produce bullish results.
Coffee, Cocoa and Sugar: September coffee closed at $1.8695 per pound, down 2c on concerns that the unseasonable rains in Brazil prevented farmers from harvesting their beans and raised concern over the crop’s quality. We had liked coffee from the $1.75- $1.78 level but would now move to the sidelines. September cocoa closed at $2,229 per tonne, down $1.00 and remains rangebound between $2,100 and $2,300 per tonne. We prefer the sidelines. October sugar closed at 23.92c per pound, up 67 points or 2.88%, its highest settlement since April 12th. The gains can be attributed to the delays in shipping from Brazil. We could see further price gains but any new purchases should have stop protection applied.
Cotton: October cotton closed at 72.08c per pound, up 27 points but has failed to participate in the concerns prevalent with the grains or soybeans. With China cutting back on purchases of raw materials, cotton is one of the "victims" of their austerity. We prefer the sidelines.