Stock market, commodities moving in tune with global factors

China and Europe play a role

Dollars, gold, compass Dollars, gold, compass

The global economic uncertainty played a role this past week, as it has for months now. Concern over individual Euro countries, weakening data from China, and a potential return to global recession re-emerged as primary concerns.

The United States as the consumer of the world and second place China are both experiencing economic stagnation and remission (a better term than recession). The recessionary trend we have been warning against is manifesting itself in weakening global demand for energy products, manufactured goods and industrial commodities. The downtick in Thursday's U.S. first-time unemployment data, as I suggested would occur when fewer workers were available for layoff, occurred and does not foretell of an improving labor situation.

On Friday, the Thomson, Reuters-Jeffries CRB index was down a full percent, indicating a broad decline in the 19 commodity markets within its index. We continue to believe a global recessionary trend will cause a financial and economic deterioration and strongly suggest a review of all investments to ensure a preservation of capital during troubled times.

With a U.S. election forthcoming, we expect the current government to try to "put lipstick on the economic pig" but in our opinion, efforts will fail to provide a return to economic prosperity. With the ongoing labor situation, credit market defaults, and home mortgage and foreclosures, we see no hope and change in the immediate future.

Now for some actual information... 

Interest Rates: September treasury bonds closed at 148 and 27/32nds, up 19/32nds on pre-weekend shortcovering Friday after the sharp losses during the week that saw prices decline from the 153 level to 147. Money made the move from the relative safety of treasuries back to equity markets on expectation that the Euro debt crisis could be resolved and the ECB posture of willingness to provide whatever support was needed to ensure Euro survival and stability. Our expectation of a price range of 145 to 155 remains intact and the current low end of that range could provide for a meaningful rally in bonds.

Stock Indices: The Dow Jones industrials closed at 13,207.95, up 42.76 on a rally from an earlier low of 13,094.96. For the week the Dow managed a gain of 0.85%. The S&P 500 closed at 1405.87, up 3.07 and for the week gained 1%. The Nasdaq performed better on the week posting a 1.78% gain closing Friday at 3,020.86, up 2.22 on the day. Expectation that the U.S. Federal Reserve might provide additional economic stimulus and continued rhetoric from Europe on determination to support the Euro and avoid individual country defaults played a role in the positive reaction in the markets. We, however, remain concerned that certain Euro members will in fact default on their obligations, and the possibility of a Euro "contraction" remains. We once again warn investors that there is no solution to the Euro debt crisis that we can see and that there is not enough money in the coffers of the ECB to prevent defaults in some cases. We continue to look for sharp declines in global markets and suggest the implementation of hedging strategies.

Currencies: The September U.S. dollar index closed at 8263.5, down 7.5 points on continued weakness from the 8400 level as the ECB President Mario Draghi continued to reinforce the strategy of supporting the Euro by planning to buy the debt of troubled countries to avoid defaults. We see this "strategy’ as faulty given the reduced "income" of the stronger European economies due to the ongoing recessionary trend and find his "words" to hold empty promises. The September Euro closed on Friday at $1.2297 after trading as high as $1.2759 during the week. The September Swiss Franc closed at $1.0245, up 1 tick, the Japanese yen .12785, up 55 points, the British Pound up 38 points to 15871, the Canadian dollar $1.0073, down 1 and the Australian dollar $1.0532, down 10. We prefer the dollar even though we feel a U.S. recessionary trend continues but relative to Europe and China, the dollar is our best "bet". Stay with the dollar and add to long dollar positions either through futures or call options.

Energies: September crude oil closed at $93.39 per barrel, down 3c after trading at a 12 week high on Tuesday of 9472 but managed a 1.6% gain for the week. The International Energy Agency lowered its 2013 global oil demand forecast by 0.2 million barrels a day and China’s July crude imports slipped to its lowest level since December. With our expectation of a continuing global recessionary trend we expect demand to decline and prices to follow. We like put options on crude.

Copper: September copper closed at $3.40 per pound down 1 cent after trading between $3.42 and $3.36 during the session. China’s export of goods rose by only 1% in July from the prior year and was below expectations. With global industrial expectations in decline we expect copper prices to decline further reflecting reduced demand from the U.S. and China. Buy puts.

Precious Metals: December gold closed at $1,622.80 per ounce, up $2.60 in quiet trading on Friday. Hopes for added economic stimulus by the U.S. Federal Reserve and statements by the ECB President Mario Draghi in support of the Euro community seemed to offset the general malaise associated with inflation hedges such as gold. We prefer the sidelines. September silver lost 4c to close at $28.06 per ounce as prices remain rangebound. We continue to prefer silver over gold for those that must have precious metals in their portfolio as a hedge against currency degradation. October platinum closed at $1,399.90 per ounce, down $12.90 or 0.9% while septem ber palladium closed at $582.20 per ounce, down $4.50 or 0.8%. For the week palladium rose 0.7% against platinum’s loss of 1%. Our long palladium, short platinum spread remains in favor.

Next page: Ags and softs

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