The European debt crisis continues to permeate the air waves and affect the various markets, with Spain deciding on whether or not to require a bailout. The other previously troubled countries -- Greece, Italy, Portugal and Ireland -- have taken a back seat to Spain’s problems for the moment.
The United States cannot abdicate it’s primary responsibility for the current global economic problems since it was the marketing of securitized debt that is believed to be the origin of today's global crisis. When Glass Stiegel was repealed by then Fed Chairman Alan Greenspan and signed into law by President Bill Clinton, it allowed banks to package loans, good and bad, and create securities. These were then marketed through their new brokerage facilities internationally. That paper flooded the financial markets and were the basis for the global recession that ensued when the housing market bubble burst.
The expectation was that property values in the United States would continue to hide that homeowners were using their homes as an ATM machine and drawing out all their equity. Once property values failed to continue higher and started to decline, the equity was gone and the homeowner was underwater, having depleted the equity in his home. As values continued to decline, mortgage defaults and eventual foreclosures decimated the housing market. That, in turn, spiralled the economy into a deep recession as the jobs market dried up and home mortgages went into default and foreclosure.
Today, unfortunately, the housing market remains in disrepair and while the used home market is improving through the bargain hunting of foreclosed homes, the overall market remains weak. The many industries tied to home construction, materials and transportation remain under pressure with the labor situation prompting a continuation of the economic downward spiral.
"An unemployed consumer does not consume," is a statement I have been including in my commentaries for the simple reason that product manufacturers continue to lay off record numbers of workers. This past week, the first-time unemployment figure was 382,000. That, while mostly ignored by the media and the administration, is a direct reflection of jobs lost each week. The emphasis on jobs created of around 100,000 monthly is an effort to confuse the public into thinking we are in an economic recovery.
Now for some actual information…
Interest Rates: The December U.S. treasury bond closed at 147 and 1/32nd on Friday, up 32/32nds tied to doubts that a global economic recovery is in evidence. The report that Spain, the fourth largest economy, was negotiating a bailout added to ongoing debt concerns. Failure to secure a bailout for Spain could derail any European economic recovery. That concern negated early week expectation that a bailout would be worked out and on Friday money found it’s way to the relative safety of the U.S. treasury market. We have, for some time, expressed our opinion that treasury bond prices would remain in a range between 145 and 155 and while treasuries "dipped" just below 145 recently, that level held and found its way back to the 147 level. Of course "buying low and selling high" is the goal of every trader, one must evaluate the economic conditions and effectiveness of the U.S. Federal Reserve action before committing to positions. We recommend a conservative approach to trading bonds using "mental" stop protection either way.
Stock Indices: The Dow Jones industrials closed at 13,579.47, down 17 points and for the week lost 0.10%. The S&P 500 closed at 1,460.15, basically unchanged, but for the week lost 0.38%. The tech heavy Nasdaq closed at 3,180, up 4.00 and for the week lost 0.13%. The earlier "optimism" that the EU would come to the aid of Spain remained mired in negotiation and on Friday, concern emerged as to what the terms, if any, would be for a potential bailout. The U.S. markets low volumes recently is indicative of "confusion" and "reluctance" to commit funds and concern that the "economic recovery" has stalled and possibly "reversed". We maintain that a ‘jobless recovery" as declared by the U.S. administration is a fallacy and once again strongly suggest implementation of strategic hedging programs by holders of large equity positions.
Currencies: The December U.S. dollar index closed at 7941, down 6.8 points on continued weakness tied to ongoing low U.S. interest rates and the recent statement by the U.S. Fed chairman that rates would remain low extending to 2015, a change from previous indications of 2014. Low rates reduce attraction to dollar investment. While the U.S. economy suggests continued weakness in our opinion, relative to the debt crisis engulfing Europe, the dollar is a better alternative to other currencies. Add to long dollar positions or calls.
Energies: November crude oil closed at $92.89 per barrel, up 47c on shortcovering after recent weakness and decline from the $100 level in earlier sessions. Talk of release from the U.S. strategic petroleum reserves, and comments from Saudi Arabian officials of rising inventories prompted the long liquidation. We remain convinced that a global recessionary trend will persist and reduce overall demand for energy products. Even the weak dollar failed to stem the $7 per barrel decline from recent highs. Stay short and add to put positions as we suggested last week.
Copper: December copper closed at $3.7780 per pound, up 1.9c on shortcovering Friday and tied to the weak dollar. However, our overall position remains unchanged. We continue to believe a global recession remains in effect and reduced industrial demand for copper should continue to pressure prices. Add to put positions.
Precious Metals:. December gold closed at $1,778 per ounce, up 47.80 on the weak U.S. dollar and expectation that Spain will seek a full bailout from the European Union. That, coupled with an ongoing debt crisis in other Euro zone countries, prompted the return to precious metal attraction. The Federal Reserves announcement of "unlimited" quantitative "easing" impacted the dollar and prompted buying in the "hedge" commodity of precious metals. The attraction of "tangible assets" as opposed to "paper" could lead to still higher prices for precious metals. Our choice continues to be "silver" over gold as silver has outperformed gold on a percentage basis for the last couple of years and should continue to do so. October platinum closed at $1,637.60 per ounce, up $13.70 tied to the strikes by South African miners. Decem ber palladium closed at $671.55 per ounce, up $10.45 and on a percentage basis exceed platinum’s gain. Platinum gained 0.8% against palladium’s 1.6% gain and our recommended spread, short platinum, long palladium continues to reap benefit for our readers who follow us. Stay with the spread.
Next page: Ags and softs
Grains and Oilseeds: December corn closed at $7.49 ¾ per bushel, up 3 3/4c on shortcovering and against the weak U.S. dollar. Recent heavy selling tied to increased sowings by farmers pressured prices and were higher than recent USDA expectations. We continue to prefer the sidelines in corn. December wheat closed at $8.99 per bushel, up 19 1/2c on shortcovering, the weak dollar, and on reports that Russia may curb exports. We prefer the sidelines in wheat but would hold existing long positions. November soybeans closed at $16.24 ¾ per bushel, up 6c on light shortcovering after recent heavy selling tied to the increased soybean sowings by farmers. We had preferred the long side of soybeans for some time expecting to add to long positions on further price declines but the volatility and extent of the selling pressure, kept us on the sidelines. We could now see support at current levels between the $15.50 and $17.50 chart points. We would look to buy calls from here.
Meats: October cattle closed at $1.2552 per pound, down 23 points on continued pressure from a weak cash market and slow exports. While prices remain rangebound, we could see shortcovering from here but any new purchases must be accompanied by stop protection. October hogs closed at 75.80c per pound, up 95c on continued shortcovering after prices had fallen from the 82c level in recent weeks tied to heavy slaughter numbers. We prefer the sidelines but existing long call positions should be maintained.
Coffee, Cocoa and Sugar: December coffee closed at $1.7320 per pound, up 4.6c but well below the $1.95 posted in mid July. Increased certified stocks and arbitrage selling had pressured prices and the recent recovery could be tied to the weak dollar and shortcovering. We could see prices move either way so we would be on the sidelines for now. December cocoa closed at $2,528 per tonne, up $9.00 on shortcovering and the weak dollar. Reports that the Ivory Coast marketing council had sold most of the 2012-2013 harvest and concern over short term supply could support prices from here. December cocoa is mid way between the $2400 and $2700 prices and any news could prompt a "breakout" of the range. We like the long side from here but with stop protection. October sugar closed at 19.4c per pound, up 19 ticks after trading as two year lows. A major sugar broker, Czarnikow, reduced its estimate for worle production surplus and prices appear to have stabilized at these lows. We would buy sugar or buy calls on sugar right here but the futures should be accompanied by stop protection. We like the March contract for both futures and calls.
Cotton: December cotton closed at 73.32c per pound, down 1.9c as India’s monsoon failed to provide estimated damage and reports that China may release some of its huge stockpile could depress prices further. After trading as high as 91c in early April, prices collapsed to the 65c level but have steadily and slowly regained some of that loss to current levels. Whether prices can hold here is in question but with some stability between 70c and 72c we would buy some calls in anticipation of further price recovery.