The European Central Bank head Mario Draghi’s words continue to reverberate through the investing community, even though no specific action to stave off defaults in certain countries emerged. While the euphoria persists, economic data from the U.S. was mixed. The payroll increase of 163,000 jobs in July, according to the U.S. Labor Department, was offset by the uptick in the unemployment rate to 8.3%. The Institute of Supply Management index, a gauge of activity, increased to 52.6 from 52.1 in June. A reading above 50 indicates expansion. The Federal Reserve on Aug. 1 indicated no policy change and that it would "closely monitor the economy and act as needed to spur the recovery."
My question would be, What recovery? The real unemployment and underemployment rate is closer to 19% with many leaving the work force. As stated in prior commentaries, one cannot create a job without creating a new industry. The goal should be to recover jobs lost to other countries where the corporate tax rate attracts U.S. companies to move their manufacturing overseas. Nothing has been done to address that problem as the U.S. Administration concentrates on increasing taxes. The subterfuge statements of taxing the 1% richest people continues to avoid the real problem: You do not increase taxes during a recession or an economic contraction. The idea that earners of $250,000 are somehow linked to millionaires and billionaires plays to the middle to lower classes who somehow resent the success that has eluded them.
I continue to suggest that if the administration were to revise its earnings number to those making $1 million or more, the other side of the aisle might accept that compromise. Unfortunately, the idiocy exhibited by Washington, in my opinion, in order to secure votes for the upcoming election will continue to dominate the airwaves and influence the masses. The ongoing mysteries of the new national healthcare program are keeping employers from making the plans necessary to determine hiring practices. You cannot budget your small business if you do not know the actual costs involved.
Now for some actual information…
Interest Rates: September treasury bonds closed at 149 and 17/32nds, down 1 31/32nds tied to the ongoing "euphoria" instituted by the "possibility" of a European debt crisis resolution. In my opinion, a "pipe dream" and I wonder where Mr. Draghi of the ECB intends to get the money to support his statements. The U.S. jobs data showing an increase of 163,000 jobs was also a determining factor in the assumption that the U.S. labor situation is improving even though the unemployment rate ticked up to 8.3%. The increase in the ISM non-manufacturing index was also a factor in the assumption of U.S. economic improvement. We continue to view treasuries as in a range between 145 and 155 with price action determined by economic news.
Stock Indices: The Dow Jones Industrial average closed at 13096.17, up 217.29 on shortcovering and new buying after four losing sessions on a better than expected jobs report. The U.S. Labor Department reported 163,000 jobs "created" in July but the unemployment upticked to 8.3% from 8.2%. The disparity was largely ignored by investors who breathed a sigh of relief after four losing sessions. For the week the Dow gained 0.2% thanks to Friday action. The S&P 500 closed at 1390.99, up 25.99 and for the week gained 0.4%. The Nasdaq closed at 2967.90, up 58.13, up 2% on Friday but for the week gained 0.3%. The continuing expectation from ECB Chairman Draghi that a resolution to the Euro debt crisis was in the works helped European markets and U.S. markets on Friday. We, however, remain skeptical that there is "enough money in the world" to keep all the troubled countries out of default on their debt. We encourage investors to review the exposure to European concerns as well as U.S. economic conditions which we view as headed back into recession. Implement hedging strategies immediately. We see a huge "black hole" under the equity market.
Currencies: The U.S. dollar index for September closed at 8244.6, down 100.5 points after the U.S. Labor Department reported an increase of 163,000 jobs in July. The recent dollar strength gave way also to reports that ECB Chairman Draghi’s statement that he will do "whatever it takes to support the Euro", something we do not believe he will be able to do. The U.S. Federal Reserve statement that they are going to "monitor the economy and act as needed to spur the recovery" led credence to ideas of continued easing which was also a negative for the dollar. We continue to favor the dollar on the basis that relative to the European economic condition, the U.S. economy performs better going forward.
Energies: September crude oil closed at $91.40 per barrel, up $4.27 on Friday, the highest close since July 20th and up 1.4% for the week. For the year so far crude had lost 7.5%. The U.S. jobs data along with an "optimistic" statement by ECB Draghi mostly responsible. The jobs data led to expectation that an improved U.S. economy would increase demand for energy products. We or course disagree with any idea of economic improvement and fully expect a deteriorating global economy to impact demand overall. Barring any geopolitical event tied to Iran or Israel, we expect price declines for crude and energy products.
Copper: September copper closed at $3.3675 per pound, up 7.7c or 2.3% on Friday. As with other markets the U.S. payrolls data the main feature as well as the sharply lower U.S. dollar in which it is denominated. We remain bearish on copper and other industrial commodities tied to our ongoing expectation of declining global economies.
Precious Metals: December gold closed at $1,609.30, up $18.60 or 1.2% on Friday tied to the U.S. jobs data as well as the dollar decline. For the week gold lost 0.5% however. September silver closed at $27.810 per ounce up over 7c or 3% gaining more than gold on a percentage basis. Our preference remains silver over gold. October platinum closed at $1,406.40, up $18.60 per ounce or 1.34% while September palladium gained 2.16% to $580.10 per ounce, up $12.25. We remain on the sidelines in precious metals but for those who must participate in precious metals, we prefer silver over gold and palladium over platinum. Our white metals preference is the long palladium, short platinum spread. For the week platinum rose 0.4% but palladium gained 1.1%.
Next page: Ags and softs...
Grains and Oilseeds: September corn closed at $8.10 per bushel, up 16c on continuing concerns of crop damage due to the extreme heat and dry weather in the growing areas. We could see additional reports of damage and supply concerns in the future but sharp corrections could wipe out profits for those whose "timing" is out of line. September wheat closed at $8.91 ¼ per bushel, up 26 1/4c tied to weather and concern that the lightest Indian monsoon in three years could reduce global production. That is a factor in addition to dry weather in the U.S. Take some profits if available, the markets may have gone too far too soon and are set for a correction. November soybeans closed at $16.28 ¾ per bushel, up 12 1/4c and in the middle of the recent $16.91 high and $15.48 low. We remain cautious after having been bullish for soybeans for months. While additional price gains could take price higher, use stop protection on new purchases and raise trailing stops on existing positions.
Meats: December cattle closed at $1.27275 per pound, down 4.25c and remains rangebound. The U.S. drought is prompting farmers to sell more animals to avoid feed price losses and that provides additional supply. Stay out for now but bear in mind the long period of time necessary to rebuild herds once the current feed cost concerns and weather returns to normal. December hogs closed at 73.95c per pound, down another 1.975c on continued long liquidation from recent highs around 80c. As with cattle, high feed prices have farmers pushing animals to slaughter increasing supply with slackening demand.Stay out for now.
Coffee, Cocoa and Sugar: September coffee closed at $1.7380 per pound, up 2.15c as growers are keeping product off the cash market and hedging in the futures market instead. The weak dollar also a factor in support for coffee after recent weakness from the $1.90 level. We prefer the sidelines as a global economic contraction could reduce overall demand. September cocoa closed at $2,398 per tonne, up $29 on good buying tied to strong sterling and the weak dollar. Cocoa appears to have broken out of its recent range and could challenge the next resistance level of $2,500 on a technical basis. However, shrinking global economies could factor into the strength. Any new buying should be accompanied by stop protection. October sugar closed at 22.00c per pound, down 4 ticks on profittaking after briefly touching 24c in late July. Concerns that the Indian sugar cane crop was hurt by the worst monsoon in three years that could restrict exports. We prefer the sidelines in sugar for now until some clarity emerges as to basic supply/demand factors.
Cotton: December cotton closed at 73.94c per pound, up 2.97c tied to tightening U.S. supplies and increased demand. We like cotton from here after recent sideways price action.