The expectation that Fed Chairman Ben Bernanke would implement further quantitative easing once again directed the week's market action. The addition of only 96,000 jobs in August reported Friday and the first-time unemployment figure of 365,000 reported on Thursday is not reflective of statements of jobs growth. The Administration is having problems with math and continues to report job gains. It would seem to me to contradict the actual numbers. If 365,000 workers apply for unemployment benefits, one can only deduce that those workers lost their jobs. Even the media neglects to correlate those numbers and come up with a net job loss.
The Friday number of jobs growth is for a month while the first time unemployment number is for a week. Any third-grade math student can see that a monthly gain of 96,000 against a monthly loss of 1,460,000 is not an improvement in the jobs picture. Couple that with the 368,000 who left the labor force, as also reported by the Labor Department, and you can understand how the jobless rate of 8.1% came in below the prior month's 8.3% rate.
Once again, I implore my readers to evaluate their investment portfolios to determine the level of damage that could be sustained should the reality of an ongoing recessionary trend be recognized and reported in the media. Now for some actual information...
Interest Rates: The December U.S. Treasury bond closed Friday at 149 and 6/32nds down 6/32nds but recovered from the low of 148 10/32nds after the U.S. jobs report. That report led additional credence to market participants expectation that the Federal Reserve would implement yet another quantitative stimulus. The Fed’s buying of bonds would necessarily reduce yields and increase prices but we are not convinced that Fed action can do anything to stem the ongoing jobs crisis. As stated in prior commentaries, an "unemployed consumer does not consume and the product manufacturers of those "unconsumed" products would be next to lay off workers". Another consideration is the "productivity improvement" which really only means the remaining workers in a company are doing "double or triple duty" and not the result of increased product demand. Our recent price range expectation for treasuries remains intact at 145 to 155. Traders can move on that range but retail clients should limit their trading to option purchases.
Stock Indices: The Dow Jones Industrials closed at 13,306.64, up 14.64 points and for the week gained 2.08%. The S&P 500 closed at 1,437.92, up 5.80 points and for the week gained 2.35%. The tech heavy Nasdaq closed at 3,136.42, up .61 and for the week gained 2%. The continuing expectation of Fed intervention prompted the "optimism" along with the European Central Bank’s announcement on Thursday to start a new bond buying program to contain the Eurozone debt crisis added "fuel" to the equity market rally. The better than expected U.S. first time unemployment data, while still around 370,000 also an addition to the speculation of further U.S. Fed action.Does the phrase "precipitous decline" ring a bell?? That is what we expect when the failure of the Federal Reserve to improve the jobs situation and the failure of the ECB to "find the money" to support their claims to save the Euro is recognized by the investing community. Buy puts on the S&P 500 or the small cap index, the Russell 2000.
Currencies: The December U.S. dollar index closed at 80.39, down 91.3 points as expectation that the U.S. Federal reserve would reinstitute quantitative easing pushing rates lower and reducing the attraction to dollar investment. The ECB statement that it would buy government debt obligations to secure the Euro also a factor in the dollar selling. Since were are not convinced that the U.S. Fed has any "ammunition" to improve the jobs situation any "stimulation" would have no effect on the current condition of the U.S. economy. My question for the Fed is "who gets the money? And how does it help the unemployed consumer? My question for the ECB is "show me the money" that is necessary to support countries that cannot meet their current debt obligations. Why throw "money down a well", which is what I see as any support for failing economies. Add to long dollar positions or buy calls.
Energies: December crude oil closed at $96.95 per barrel, up 79c after a "whipsaw" market that saw price trade between $94.73 and $97.35 tied to various news reports. The poor U.S. jobs report on Thursday and the Friday jobs data were construed as negative but offset by the ECB statement that unlimited bond purchases would be instituted to support the Euro Zone countries and keep the Euro from "breaking apart". We do not feel there is enough money to support that program and while it would lend credence and support to ideas of increased demand for energy products, that situation could easily change. We continue to feel that a global economic decline remains a possibility and that would preclude demand for industrial commodities and for energy products. Add to put positions on crude.
Copper: December copper befitted from the reports of ECB bond purchases and U.S. Federal Reserve expected stimulus program and closed at $3.6445 per pound, up 12.8c. Shortcovering in front of the weekend after recent weakness also a factor. We continue to favor the short side of copper on the basis of our expectation of a continued weak global economy. Add to put positions.
Precious Metals: December gold closed at $1,740.50 per ounce, up $34.90, it’s highest closing since late February. The optimistic statements by both the ECB and the U.S. Federal Reserve on addressing the current economic problems a factor in the short covering and new buying. We would treat the gains as an opportunity to take some profits on any long positions either futures or calls since we do not believe any action will forestall the ongoing recessionary trend. Precious metals also react to dollar movement and the selling in the dollar increases values for dollar denominated commodities, especially precious metals. Decemjber silver closed at $33.69 per ounce, up $1.02 and remains our favorite of the two. Gold gained 1.9% on Friday but silver posted a 3.1% gain. October platinum closed at $1,596.30, up $9.90 while December palladium closed at $654.75 per ounce, up $7.00. Our spread of long palladium, short platinum improved yet again with platinum gaining only 0.4% while palladium managed a 1.1% gain. For the week platinum gained 4% with palladium gaining slightly more that 4%. Stay with the spread.
Next page: Ags and softs
Grains and Oilseeds: December corn closed at $7.98 per bushel, down 1/2c and having difficulty holding the $8.00 level. The recent strong rally from June lows tied to weather was a factor in the rallies for this group but new information needed for further price action. Stay out of corn. December wheat closed at $9.06 ¼ per bushel, up 13 1/2c on hopes for greater export demand and continued dryness in the Great Plains. November soybeans closed at $17.33 per bushel, down 14c on profittaking after recent strength but remains our favorite in the group. A factor in the selling also due to possible yield improvement due to rains. We continue to favor soybeans but would not add to current positions at this time pending further information from the growing areas.
Meats: December cattle closed at $1.2910, down 10 points on slight profittaking after recent strength. Beef production was reported as down 23% over a year ago and weekly slaughter down 2.6% to down 3.3% from last year. We continue to favor cattle but technically resistance is around $1.33. The June and July lows were a direct result of herd reduction tied to high feed prices. The reality of time necessary to restock herds could lead to higher prices for December and February contracts. Hold call positions for now and add on any declines. December hogs closed at 70.65c per pound down 2.5c on profittaking after the recent runup to the 73c level which was mostly shortcovering after the June 82c level. We could see further price gains on a short term basis.
Coffee, Cocoa and Sugar: December coffee closed at $1.6370 per pound, up 5.5c on shortcovering and against the dollar weakness but for the week lost 1%. With ICE certified stocks up by 11,749 bags to 1,994,417 on September 6 the highest since August of 2010, we could see renewed selling interest in coffee if it returns to the $1.70 level. Hold long positions but don’t add for now. Any change in the dollar could prompt sharp price action. Raise stops. December cocoa closed at $2,677 per tonne, down $14 but for the week gained 2.5%. Concern that management reform by top grower Ivory Coast could cause "chaotic" activity in its exports but beneficial rains resulting in higher output next season could offset any export problems.The market has gained from the June $2,100 lows and we could expect, given any improvement in exports and production, a sharp price decline. Stay out for now. October sugar closed at 19.39c per pound, up 52 points or 2.7% after Thursdays two year low of 18.81c. The weak U.S. dollar a major factor along with the Brazilian holiday and mills not selling into the rally to any great degree. An increase in supply tied to better weather could result in another wave of selling but at these prices we would consider light long positions for a move to the 21c level.
Cotton: December cotton closed at 76.35c per pound, up 36 points tied to the weak U.S. dollar and China support for farmers. We like cotton from here. Support at the June 64c lows and the continued price rise could continue to the 80-82c level.