After 30 months above 8%, on Friday, a month before the U.S. election, the Labor Department reported that the jobless rate dipped to 7.8%. However, on Thursday the first-time unemployment number was reported as 373,000, an uptick from the prior week. That assumes the worker applying for unemployment lost his job. On Friday, the monthly jobs data reported jobs created of 114,000. Once again, the failure of the media to associate the weekly job loss with the monthly job gains is a mystery.
We will keep abreast of additional information as to the miraculous adjustment to the labor situation. With the election only a month away, we expect additional news emanating from both major parties addressing such news with their individual spin.
The ongoing Eurozone debt crisis will continue to impact market psychology. With 20,000 people in Madrid protesting the austerity programs in Spain, we cannot dismiss the possibility of a default that could exacerbate the situation.
Now for some actual information...
Interest Rates: The December U.S. Treasury 30 year bond closed at 147 and 16/32nds, down 1 and 10/32nds as the jobs report surprised the markets with the unemployment rate declining from 8.1% to 7.8%. Any "good news" on the jobs front or the economy portends a potential for a rate increase and as bonds are fixed coupon, as yields go up or expected to rise, prices decline. We remain skeptical that a month before the U.S. election the unemployment rate after remaining above 8% for 30 or more months, "suddenly" declines by 0.3 points. We will await any "revision" but for now bonds remain in the range I have suggested for some time, 145 to 155.
Stock Indices: The Dow Jones industrials closed at 13,610 up 34.79 and for the week gained 1.29%. The S&P 500 closed at 1,461, down 0.47 but for the week was up 1.41%. The Nasdaq closed at 3,136, down 13.27 and for the week was up 0.64%. Stocks benefited from the surprise drop in the U.S. unemployment rate early in the session but later lost ground to the skepticism over the sudden drop and pressure from the tech sector. We continue to warn that a serious threat to the U.S. equity markets persist due to the ongoing Euro zone debt crisis and the rhetorical "benefits" derived from speeches by Mario Draghi, the head of the ECB. We doubt very much, given the continuing protests against the austerity programs necessary to qualify for the bailouts, that a resolution is near. We suggest the implementation of hedging strategies for holders of large equity portfolios.
Currencies: The December U.S. Dollar index closed at 7946, up 2 points after declining early in the session but garnered strength after the U.S. jobs data came in better than expected. Any "improvement: in the U.S. labor situation or the economy could prompt the Federal Reserve to negate its "limitless" stimulus program and assume the prior stimulus programs were working. That would alleviate the need for additional stimulus and push rates higher. Higher U.S. rates would help seniors and those on fixed income such as retirees relying on interest for living expenses, a condition long forgotten since the onset of lower U.S. rates. Another factor for the dollar strength was when European Central Bank President mario Draghi said the ECB is "ready to start buying euro-block nations’ debt to stem the region’s debt crisis." I hope he figured out where to get all that money but I fear his rhetoric is "empty" like the "accounts" he thinks money exists in…..or can be "printed"…Stay with the dollar.
Energies: December crude oil closed at $90.26 per barrel, down $1.81 as refinery problems and shutdowns are increasing supplies. Meanwhile gasoline prices in California, thanks to those refinery shutdowns is costing the public over $5.00 a gallon for gasoline and almost crippling the retail industry as people are refusing to drive to stores until prices decline in line with actual supply/demand tied to crude. The U.S. refineries typically shut down in order to convert from summer blend to winter blend gasolines but this year the effect has been more dramatic than in the past. As far as crude is concerned, there is ample supply and reduced demand tied to recessionary trends globally so we remain bearish for crude.
Copper: December copper closed at $3.7580 per pound, down $2.8c and remains under pressure along with other dollar denominated commodities. A slowing global economy and especially China, the world’s largest metal user, could continue to pressure prices. Stay with the put positions.
Precious Metals:. December gold closed at $1,783.60 per ounce, down $12.90 tied to the better than expected (and questionable) jobs data showing a decline in the jobless rate after 30 months over 8% to 7.8% possibly leading to expectations of an economic recovery in the U.S. We of course doubt any such recovery as the weekly first time unemployment figure comes in over 370,000. The jobs created figure of 114,000 is "anemic" and does not signify an economic improvement. However, with only 30 days left before the U.S. election, number "manipulation" is a real possibility to keep the current administration in power. That goes for not only the President, but also for congress. We could see continued wide price swings for gold and if you must own precious metals, try silver for less downside risk and as a better percentage gainer than gold. December silver closed at 34.62c per ounce, down 48.1c also tied to selling pressure from the strong dollar and the possibility of higher U.S. interest rates. December palladium closed at $660 per ounce, down $14.75 or 2.2% against October platinum’s close of $1,705.00, loss of $18.20 per ounce or 0.9%. Palladium has outperformed platinum on a percentage basis of late and should revert to its premium position on a spread basis on any dollar decline. Platinum continues to benefit from South African mining strikes and any resolution will put platinum under pressure against palladium. Stay with that long palladium/short platinum spread.
Next page: Ags and softs
Grains and Oilseeds: December corn closed at $7.47 ½ per bushel, down 9 1/2c tied to harvest pressure. After trading as high as $8.49 in early August, prices have sold off to the mid July level on profittaking and disappointment over failed follow through. We remain on the sidelines in corn. December wheat closed at $8.57 ¼ per bushel, down 12c tied to poor demand but with Russia reporting its smallest crop since 2003, we could see prices recover to the July 23rd level of $9.50 or thereabouts assuming demand picks up. We are on the sidelines in wheat as well. November soybeans closed at $15.52 ½ per bushel and as we suggested may have bottomed out after the heavy long liquidation from the early September $17.90 level. We expect demand to improve especially in the U.S. which is the world’s second biggest consumer of soybeans. Farmers have reduced sales tied to the decline in price and that should tighten supplies and improve prices. We like soybeans once again and would now get back on the long side either through purchase of futures or calls.
Meats: December cattle closed at $1.2630 per pound, up 6c on shortcovering and better cash prices. Weekly sales were up 61% from the prior week and good demand prompted the buying. We are back on the long side of cattle after having been sidelined. December hogs closed at 76.75c per pound, up 7c tied to better carcus values and higher cash prices. However, the short covering could be shortlived as prices returned to the midway point of the recent move. We would await further fundamentals before adding to existing longs.
Coffee, Cocoa and Sugar: December coffee closed at $1.6775 per pound, down 7.3c on long liquidation and profittaking after the early week gain of 6.9. Early flowering in front of the 2013-14 crop took place on the southern part of Minas Gerais, the largest arabica producing state but concern dry weather would cause flowers to abort and reduce the size of the new crop had prompted the price gains before the profittaking emerged. We prefer the sidelines for now. December cocoa closed at $2,385 per tonne, down $10 on long liquidation from the early September highs around $2,700 and back to the late August levels. Price declines reflect the new posture in Ivory Coast, the world’s largest cocoa producer, where changes in its cocoa industry last year included a plan to sell most of the beans before the actual harvest and pay farmers a guaranteed minimum fixed rate for their beans. The change could confuse the market and for that reason we are on the sidelines. March Sugar closed at 21.54c per pound down 17 points on reduced demand with pressure on prices in India and failure to re-capture the 24c July highs. The market appears to have stabilized but we prefer the sidelines for now.
Cotton: December cotton closed at 71.5c per pound, down 59 points on continued selling pressure tied to the global economic slowdown. We prefer the sidelines although the positively construed U.S. labor data could prompt renewed buying interest.