The latest victim in the ongoing global debt crisis, Spain, has emerged as even more problematic than Greece or Portugal. Spain has finally requested a bailout for some of its banks. While Mario Draghi continues to assume in a highly vocal manner that the European Central Bank can fix the problem, he neglects the facts.
There is not enough money to bail out the various countries that are on the verge of default to prevent one or more from actual default. The ramifications of default on debt is what the ECB, the International Monetary Fund and the U.S. Federal Reserve are concerned about. The implications are global and would be devastating to the international financial structure. If lenders do not lend, growth not only stalls, but reverses and puts us back in the throes of recession. The term too big to fail should not be a consideration when assessing the status of international debt. The truth of the matter is simply that some countries do better than others and to bunch them all in a common currency has been a mistake from the beginning.
The ongoing debt crisis will impact the overall structure of the euro. The riots we are witnessing in countries that have implimented austerity are expanding as the people show no allegiance to their country but only to themselves. I expect France and Germany to balk at any bailout if those countries experiencing worker revolt do not comply with their austerity requirements.
The ongoing U.S. labor situation is mostly ignored. A weekly job loss of over 360,000, as exemplified by the Thursday first-time unemployment number, far outweighs the administration's claim of job creation. As I have stated in previous commentaries, the facts are being mutilated to a significant extent.
We will await the results of the first Presidential debate scheduled for Wednesday evening to draw some conclusion as to the direction of the United States politically. For now we are witnessing a hesitation by the investing public to commit to one or the other vision for the future.
Now for some actual information...
Interest Rates: December Treasury bonds closed at 149 and 12/32nds, down 4/32nds after trading as high as 150 09/32nds during the session. Volume was light as they awaited the results of the Spanish "stress test" which was as expected. Spanish banks required $76.3 billion to recapitalize and of the 14 banks analyzed, seven would not need additional capital, according to the Bank of Spain and the Economics Ministry. An expected downgrade by Moodys of Spanish debt remained a possibility. The early rally in Treasury bonds was attributed to the disappointing reading on Chicago area manufacturing which fell to the lowest level in three years. Consumer sentiment was revised lower than economists had forecast and that also contributed to the rally in Treasury bonds, long favored as a safe haven during time of economic strife or concern. Our estimate of the trading range between 145 and 155 held with the last sale at the mid point of the range. We continue to view treasury bonds as a trading vehicle within that range.
Stock Indices: The Dow Jones Industrials closed at 13,437 down 49 points and for the month managed a gain of 2.64%. the S&P 500 closed at 1,441, down 6 and for the month gained 2.41%. The tech heavy Nasdaq closed at 3,116, down 6 and for the month gained 6.16%. The equity market gains were attributed to the European Central Bank, the U.S. Federal Reserve, and the Bank of Japan announcing additional easing measures. The U.S. Fed Chairman announced the Federal Reserve would buy $40 billion in morggage backed debt every month until there is a "significant improvement in the labor market". We do not see how that would occur through Fed action. Our opinion remains constant that the only way to improve the U.S. Labor market is to "entice" U.S. Corporations, through tax relief, to bring back the manufacturing jobs that have been shipped overseas over the last few years. The Obama administration appointment of Jeffry Immelt, the Head of General Electic, right after the appointment by President Obama, shipped manufacturing to Ireland. That should have been a wakeup call but was not commonly announced in the liberal media. We continue to recommend the implementation of hedging strategies to holders of large equity position and we can assist in the development of those programs exclusive to individual holders. We feel there will be a sharp equity market selloff and warn against failure to prepare for it. We see no reason to "ride the tide" but prefer to lighten up positions and then re-establish them once the anticipated sharp decline has ebbed.
Currencies: The U.S. dollar closed at 80.025, on Friday, up 0.433 after Spain’s bank stress tests indicated it would need capital which was in line with expectations. The Euro closed at 1.28690, down 65 while the Swiss Franc lost 37 points to close at 1.0658. We continue to favor the U.S. dollar only on a relative basis since our view remains negative for the U.S. economy. Stay long the dollar.
Energies: The November crude oil closed at $92.19 per barrel, up 34c in a back and forth action and for the month lost 5%. The third quarter however, gained almost 7% as concern over mideast tension as well as the possible threat of closure by Iran of the Straits of Hormuz, where much of the mideast oil is transported. We remain on the sidelines but bearish towards energy products given the ongoing recessionary climate globally.
Copper: December copper closed at $3.7450 per pound, up 1.4c on expectation that China, the world’s largest user of the metal, would announce additional stimulus measures to spur economic growth and thereby increase demand for copper and other industrial materials. We continue to doubt any such suggestion as the West has reduced its demand for products manufactured by China and others and remains mired in economic decline. Stay short copper or add to put positions.
Precious Metals:. December gold closed at $1,773.90 per ounce, up $6.60 and for the third quarter gained 10.6%, its best showing on a percentage basis since the second quarter of 2010. December silver lost 8.9c to close at $34.577 per ounce, however the percentage gain in third quarter was 25% and remains our favorite over gold. October platinum closed at $1,655.30 per ounce, up $19.40 and nearly 15% for the quarter tied to labor unrest in the South African mines which caused supply disruptions. December palladium closed at $640.80 per ounce, up $5.40 and was up 9.6% in the quarter. Palladium still managed a better percentage gain over platinum for the year and remains our favorite of the two white metals.
Next page: Ags and softs
Grains and Oilseeds: December corn closed at $7.5625 per bushel, up 40c and for the third quarter gained 19%. The U.S. estimated supplies have hit their lowest level in nearly eight years and heavy shortcovering and new buying the main feature for corn. We prefer the sidelines even as corn may rally further. December wheat closed at $9.025 per bushel, up 47c and gained 19% in the third quarter. November soybeans closed at $16.01 per bushel, up 30.25c and for the quarter gained 12%. The lower U.S. soybean inventories on September first were reported as totalling 169 million bushels, down from 215 million the year earlier according to the USDA. Our favorite continue to be soybeans and our price estimate remains steady of $19-$20 per bushel.
Meats: December cattle closed at $1.2460, down 57.5 points and remains under marketing pressure. With lighter supplies of fattened cattle for slaughter late winter and early spring next year, we could see renewed buying interest. We continue to favor cattle but would not add to current long positions at this time. December hogs closed at 73.95c per pound, up 35 points on expectation of continued increased China pork purchases. We continue to favor the long side of hogs for a move to the 76-78c level.
Coffee, Cocoa and Sugar: December coffee closed at $1.735 on Friday, down 8 points tied to record high exports from Vietnam. We continue to favor the long side of the December contract tied to tight old crop supplies. Keep stop protection in place. December cocoa closed at $2,516 per tonne, up $34.00 on light shortcovering awaiting fresh fundamentals from West African main crops. Dealers have indicated a weak third quarter European cocoa grind figure and a reduction in consumption. We would hold current longs but not add. Keep protective stops in place. March sugar closed at 20.42c per pound, up 3 little ticks and selling pressure from reports of a large Chinese sugar output increase of 22% from the prior year could keep prices at or around current levels. We see no "future" for sugar at the moment.
Cotton: December cotton closed at 70.65c per pound, down 88 points tied to the dollar strength. The global economic uncertainty could prompt reduced demand and we could see further pressure should the dollar continue to gain momentum against the Euro. We prefer the sidelines for now unless the Euro zone financial situation improves.