During this election season, it is difficult to score which party is winning and which party is losing. The rhetoric from both sides emphasising the negatives as opposed to the positives leaves us with the question: What will be the resulting economic changes be if one or the other wins? Will the winner of the White House have the support of Congress? Will the winning party of the Senate support the White House? What about the winning party of the House of Representatives? Will the country have one party controlling both houses of Congress and the White House as was the case for the first two years of the current administration? How will the winning party change the current recessionary trend and get Americans back to work?
I reiterate, "an unemployed consumer does not consume and the manufacturers of those unconsumed products are next to lay off workers." Another question to ponder is if the weekly first-time unemployment number declines, does it mean an improvement in the labor situation, or does it merely suggests that there are fewer workers available for layoff with shutting the corporate doors?
Because these are questions that cannot be answered until after the election, we have to temper our comments for now. Meanwhile, here are the current facts as we see them.
Interest Rates: The September U.S. Treasury bond closed at 145 and 28/32nds, up 9/32nds and is bumping against our suggest low end of the range. The University of Michigan-Thomson Reuters consumer sentiment index was up from the 72.3 July number to 73.6 in August which was better than forecast. Also, the Conference Board’s leading economic index was up by 0.4% for July which was better than estimate of 0.3% growth. The better than expected economic numbers were responsible for the recent selloff in bonds and increase in yields. The market is anticipating U.S. Fed Chairman Bernanke’s annual speech in Jackson Hole Wyoming at the end of the month and the September 12th court ruling on the Euro zone rescue fund. Minutes from the Federal Open Market Committee meeting is expected on Wednesday. For the time being our estimate of the 145 low end of the price range should hold but even if the support is breached we would like at the long side of the treasury bond either by futures purchase or calls. The U.S. economy, in our opinion, is nowhere near "recovery". The term "jobless recovery" is a fallacy.
Stock Indices: The Dow Jones industrials closed at 13,275.20, up 25.09 and for the week managed a gain of 0.5%. With volume extremely light, it is difficult to get a handles on investor sentiment other than to say the "sidelines" are getting crowded. The S&P 500 closed at 1418.16, up 2.65 and for the week gained 0.9%. The tech heavy Nasdaq closed at 3076.59, up 14.20 on Friday thanks to the Cisco earnings and for the week gained 1.8%. The total volume on Friday on the NYSE was a mere 675 million shares compared with the mid June 1.5 billion share days. With light volume the market makes dramatic intraday moves directed by either earnings or economic data reported on a given day. The low volume cannot be exclusively attributable to "trade vacations" but to investor "trepidation". We continue to feel the market is being supported by "topical" data but the underlying U.S. economic condition is fragile at best and on the verge of a return to recession. At some point in the near future I expect a repetition of July/August 2008s nearly 20% decline. Implement hedging strategies immediately if only to provide for a "preservation of capital" should we be correct in our expectation.
Currencies: The U.S. dollar index basis the September contract closed at 8266.3 up 24.6 points on shortcovering after recent weakness and is in the middle of the recent 8424, 8139 range. The ongoing "discussions" related to support for the Euro has prompted the wide dollar value price swings,. We remain skeptical that any talk of support will be unfounded as to resources for providing that support. The debt incurred by the weaker European economies precludes any amount of money, in our opinion, to resolve the problems and avoid some defaults. Stay with the dollar.
Energies: September crude oil closed at $96.01 per barrel, up 41c on the New York Mercantile Exchange but traded at $96.21 up 61c in late trading. Crude has gained nearly 10% in August tied to concerns over the potential Israeli attack on Iran’s nuclear facilities. To offset some of the gains the U.S. Administration is considering the release from the u.S. strategic reserves some we consider a serious and "erroneous" response to high prices. That reserve should only, in our opinion, be used in "wartime" and not as a control mechanism for prices. Only supply/demand considerations should be the motivating factor in pricing and as supplies are under potential "threat" by Iran should it be attacked and implement the closure of the Straits of Hormuz, concern is prompting the buying of crude futures. We remain convinced that the global economic "recessionary trend" will reduce overall demand for energy products, our expectation is for lower prices. Some expectation of the European Central Bank to take steps to simulate the economy was also supportive of prices. We do not expect any action by the ECB will hold off the recessionary trend in Europe. Hold put positions. ins in oil prices the unrest in West Asia and hopes that European Central Bank may take some steps to stimulate the economy supported crude oil prices.
Copper: September copper closed at $3.41 per pound tied to the better than expected U.S. consumer confidence data and the German Chancellor’s comments on "fighting" the Euro Zone crisis. Demand for copper is tied to industrial expectations. With the recent reports of a contraction for Chinese growth, we do not expect demand to increase and our further expectation of a continuing recessionary trend in the U.S. prices could recede once again. Prices remain mired in a trading range between $3.50 to $3.30 and are mid-range at the moment. Hold put positions.
Precious Metals: October gold closed at $1,615.10 per ounce, down 20c in late trading on Friday and fulfils our expectation for "stagnation". The "sideways action" is conducive a lack of interest and conviction as to direction. We continue to suggest the sidelines for gold. September silver responded to the strong dollar on Friday and closed at $27.995 per ounce, down 21.7c. While our long time favorite of the two continue to be silver, the sidelines is preferable for now. October platinum closed at $1,472.70 per ounce, up $37.50 or 2.61% tied to the violence and expected supply disruption at a major South African mine. September palladium, our favorite in the group, closed at $607.45 per ounce, up $24.00 or 4.11% and our spread recommendation of long palladium/short platinum remains intact.
Next page: Ags and softs
Grains and Oilseeds: September corn closed at $7.98 ½ per bushel, up 3/4c and remains near alltime highs tied to the severe drought conditions in the growing areas. However, recent selling on profittaking and on soft demand prompted the decline from the $8.17 recent level. We are on the sidelines for corn since any improvement in weather could have a dramatic effect on prices even though the current damage to crops will not improve enough to alter recent estimates by the USDA. Stay out for now. September wheat closed at $8.74 ½ per bushel, up 12 3/4c on reports that the Ukraine and Russia may halt new grain sales due to lower production estimates in the Black Sea region. Expectation for light rains however, limited price gains and we could see sideways price action based on emerging reports. The U.S. drought situation persists and we could see further price gains early in the week. We prefer the sidelines in wheat. November soybeans closed at $16.45 ¾ per bushel up 20 1/2c on Friday but remains in the middle of the recent range between $16.90 and $15.36. Cash basis provided support after early week selling pressure. We remain bullish for soybeans and as we suggested in recent weeks, add to long positions on any setbacks. Use trailing stops.
Meats: December cattle closed at $1.2820 per pound, up 1.25c tied to better cash prices for beef. After the close the USDA released the monthly Cattle on Feed report showing the number of cattle on feed up 1% from last year. July placements however were down 10%. With farmers having pushed animals to slaughter tied to increasing feed costs, prices had declined to the $1.23 level in late June and early July. Shortcovering prompted the return to current levels and we could see continued sideways action for now. However, since it takes a couple of years to replenish herds, our longer term expectation is for higher prices. December hogs closed at 73.6c per pound, up 70 points tied to heavy hog slaughter estimates. We could see further increases in slaughter tied to the increase lack of feed and sharply higher feed prices. We now look for higher hog prices after having been on the sidelines for some time.
Coffee, Cocoa and Sugar: September coffee closed at $1.6030 per pound, up 1.45c on shortcovering but still lost 3.6% for the week. After trading as high $1.90 in July, prices have dropped considerably but recent rains keeping farmers from the fields may prompt continued shortcovering and new buying. We like coffee from here but use stop protection. September cocoa closed at $2,487 per tonne, up $63 on speculation the dry weather will reduce output in Ghana, the top grower behind Ivory Coast. We could see further price gains and like cocoa from here for a move through $2,500 to the $2,650-2,700 level. Use stop protection here as well. October sugar closed at 20.18c per pound, up 3 ticks on shortcovering after 14 losing sessions but we see no reason to jump in at the present time. The buying on Friday was shortcovering and in conjunction with strength in other commodities. Stay out for now.
Cotton: December cotton closed at 73.30c per pound, up 71 points on shortcovering but remains rangebound after recent world crop reports. We could see additional shortcovering and would buy a few calls to participate. Recent reports from India could suggest a production shortfall so we may have seen an interim bottom. Use stop protection on any new buying.