In the wake of the monstrous storms that struck the Northeast, our thoughts and prayers are with our fellow Americans. Millions remain without power and more than 100 people were known to have been killed by the storms, so far. Any donations, no matter how small, should be made to the American Red Cross and the Salvation Army.
Only two days are left until Election Day, when we find out who will be running the country for the next four years. Because the result will have a profound effect on the future of the U.S. economy, global relationships and the markets we follow, our comments will be brief and void of definitive recommendations except where we deem appropriate.
The U.S. Labor Department reported nonfarm payrolls increased by 171,000 in October, higher than the economists' expectation of 120,000 jobs. However, each Thursday the first-time unemployed (obviously those who lost jobs) are more than 360,000. Somehow, this is overlooked by both the liberal and conservative media. We continue to view the U.S. economy as extremely sensitive to the labor situation. The term "jobless recovery" is a fallacy because those consumers without jobs restrict their consumption, and the producers of the products that are not consumed will be next to lay off workers.
The unemployment rate inched up from 7.8% to 7.9% as reported Friday. However, with the reduced participation in the workforce by those who could not find jobs and those that took positions paying far less that they had earned previously makes the rate ineffective for determining the real labor picture. Also, college graduates entering the workforce who cannot find jobs adds to the improbable labor statistics as reported.
I expect corporate earnings to continue to reflect the lack of consumers with jobs. I am also concerned that the mortgage default and foreclosure situation persists as well as the credit defaults as consumers use up whatever credit remains on their credit cards. The traditional borrow from Peter to pay Paul concept may soon deteriorate into new concerns and impede any economic recovery.
Now for some actual facts to help with trading decisions, with the caveat that election results could affect market action in many cases...
Interest Rates: December Treasury bonds closed at 148 18/32nds, down 1/32nd as traders in debt and equities are awaiting Tuesdays election results as to who and which political party will direct the country going forward. The phrase "it’s the economy stupid" could easily be the determining factor as the electorate decides on which party is in the best position to move the economy into recovery mode. We continue to expect prices to remain mired in a 145 to 155 range since we expect no definitive policy change from the U.S. Federal Reserve.
Stock Indices: The Dow Jones Industrials closed at 13,093.16, down 139.46 after trading higher earlier on the U.S. jobs data. Investors remain concerned that corporate earnings, the ongoing overall labor situation as the question of which political party will be victorious on Tuesday. A general malaise has overcome Wall Street over the past few weeks in anticipation of the election. For the week the Dow lost only 0.1%. The S&P 500 closed at 1414.20, down 13.39 and for the week gained 0.2%. The tech heavy Nasdaq closed at 2982.13, down 37.93 or 1.26% on Friday and for the week lost 0.2%. Early gains were wiped out as investors decided to liquidate in front of the weekend and on concerns over the Tuesday elections. We continue to suggest strongly the implementation of strategic hedging programs which we can assist holders of large equity portfolios with establishing.
Currencies: The December U.S. dollar index closed at 8066, up 52.4 points on continued strength against most currencies. The losers included the Euro closing at $1.2840, down 1.02c, the Swiss Franc $1.0646, down 89 points, the Japanese Yen .012435, down 41 points, the British Pound $1.6017, down 1.09c, the Australian dollar $1.0301, down 62 points and the New Zealand dollar .8224, down 27 points. The December Canadian Dollar managed a gain of 13 points to close at $1.0039. The U.S. jobs data was construed as favorable for the dollar since it could prompt ideas of Fed Action in relaxing its easing policy to some extent tied to the "favorable" economic views. Interest rate changes or assumption of change moves the dollar. Higher rates improve dollar investment while lower rates detract. There is no point, in my opinion, in charting dollar denominated commodities rather the basis on which the dollar reacts.
Energies: December crude oil closed at $84.79 per barrel, down another $2.30 against the strong dollar, as well as slowing manufacturing reports from Europe. Disruptions at refineries tied to Hurricane Sandy added to the crude weakness as inventories piled up. We continue to view crude oil as bearish and our interim goal of $75-80 per barrel remains intact. We have been negative for crude for some time tied to our overall expectation of global economic slowdowns, including that of China, and see no reason to change our position.
Copper: December copper closed at $3.4835, down 6.85c tied to the strong dollar and concern that China’s economic recovery failed to meet expectations. We continue to suggest lower demand and consequently lower prices for copper. Our overall view of a global recessionary economy will curtail demand for construction materials including copper.
Precious Metals: December gold closed at $1,675.20 per ounce, down $40.30 tied to the better than expected U.S. jobs data that helped support the U.S. currency. Gold and Silver, as well as other dollar denominated commodities move converse to the dollar and recent dollar strength prompted long liquidation and valuations for precious metals. As I stated in prior commentaries, "throw away your gold chart and chart the dollar and U.S. interest rates". For the week gold lost 2.1% and has declined for 4 straight weeks. December silver closed at $30.905 per ounce, down $1.3430 or 4.2% on Friday and declined further than golds decline of 2.1%. Our favorite in the past has been silver of the two metals and once the "smoke clears" and the election is over, we should see some return to normalcy for metals. January platinum closed at $1,546.40 per ounce, down $26.80, or 1.7% while December palladium lost 2% to close at $600.00 , down $12.45 per ounce. Our favorite of the white metals has been palladium and we expect the short platinum, long palladium spread to resume its positive status. Meanwhile as suggested in the overview, we refrain from any definitive recommendations until after the U.S. election.
Next page: Ags and softs
Grains and Oilseeds: December corn closed at $7.40 ¼ per bushel, down 10 3/4c tied to the strong dollar, Prices remain in a tight range awaiting additional fundamentals. We prefer the sidelines for now. December wheat closed at $8.66 ½ per bushel, down 2c after trding as low as $8.58 ¾ during the session. The strong dollar as well as weak export demand also a factor. Once again, we defer any commitment until after the elections. November soybeans closed at $15.26 ¼ per bushel, down 32 1/4c tied to the strong dollar but also an Informa Economics increase in its estimate for the U.S. soybean crop somewhat less than analyst expectations but still provided for selling pressure in front of the weekend. We had favored the long side of soybeans for some time as the slight rally from the $14.85 per bushel level was disappointing. We like the long side now of the March contract but use stop protection.
Meats: December cattle closed at $1.2530 per pound, down 25 points against the strong dollar but also tied to lower beef pricing. Delivery interruptions tied to hurricane Sandy could push retail prices higher on a short-term basis. Prices remain in the middle of the recent $1.31-$1.28 range and could go either way. December hogs closed at .7785c per pound down 25 points tied to the dollar and weak demand. We prefer taking some profits on the recent rally but would hold a basic long call position
Coffee, Cocoa and Sugar: December coffee closed at $1.5450 per pound, up 1.05c on shortcovering after recent heavy long liqiudation touching its lowest prices in over four months. We could see additional shortcovering tied to some water damage to the ICE warehouses in New Jersey from Hurricane Sandy but probably not enough to offset surpluses. December cocoa closed at $2,444 per tonne, up $24 but below September highs around $2700. Weak demand expected tied to poor economic conditions in European countries and a small increase in world production could add to surpluses. We prefer the sidelines but with a bullish posture. March sugar closed at 19.41c per pound, up 3 little ticks on light pre-weekend shortcovering after recent heavy long liquidation. Based only on the possibility of an oversold condition, we would put on a few calls in sugar. Extreme market action usually prompts a correction and that is basically all we would be looking for.
Cotton: December cotton closed at 70.30c per pound, up 9 ticks from a three month low based on signs of an improving demand. However with China’s inventories expected to increase to 9 million metric tons this season, we could see additional selling pressure from here. Recent highs around 79c were immediately met with long liquidation and new short positions. Any buying at these lows would necessarily be accompanied by stop protection.