Each week, a new situation emerges that could impact the trading activity in the markets we follow. This week, the anxiety prompted by the threat by North Korea of an attack on the U.S. and the cancellation of the Armistice signed in 1953 effectively providing for a cease fire and end to hostilities. With the latest announcement by North Korea and its threat, the U.S. has increased its anti-missile capabilities and left investors and traders concerned about what was not stated in Secretary of Defence Chuck Hagel’s statement in response. There is also concern that North Korea has nuclear capability and possibly the ability, after its recent missile tests, to launch an attack against the U.S. West Coast. We will monitor the situation closely and report to our clients any changes in our comments and suggestions herewith. This past week also provided important economic data that is a catalyst for investor motivation. Now for some actual information along with my usual interpretation to hopefully help my readers in their trading...
Interest Rates: June Treasury bonds closed at 141 30/32nds, up 20/32nds tied to the disappointing consumer sentiment data. Yields declined to the lowest level in over a week as the University of Michigan /Thomson Reuters index dropped to 71.8 from the February 77.6. Consumers appear to be “waking up” to the fact that the economy is not improving as “robustly” as it should given the fact that the current Administration has had over four years to get the country back to work. The weekly jobs figure of first time unemployed declined but the number 330,000 cannot be considered an improvement in the labor situation. The monthly number of 200,000 jobs created is a misnomer since jobs cannot be created without creating a new industry. Job recovery is the term that should be applied. However, the data I provided last week clearly shows the unemployed and underemployed figure is over 14%, not the 7.8% being touted by Washington. The weekly figure of over 300,000 is a clear indication, if math is applied to a four week month of 1.2 million jobs lost. As I indicated last week and have been for some time, a person applying for unemployment is an indication of a job “lost”. With the increase in the Consumer price Index we could be on the verge of “inflationary” talk which investors expect the U.S. Federal Reserve to respond to with higher rates. I do not believe that is the case since the higher CPI figure was a reflection of higher energy costs for gasoline coming into the driving season. The Labor Department reported a 0.7% increase in the CPI for February which was the largest increase since June of 2009. We see an ongoing recessionary trend and that precludes the Federal Reserve from even thinking about raising rates. Another major concern which has more or less been neglected by the markets, is the ongoing budget stalemate in the U.S. However, market psychology must be considered so caution is the watchword for trading treasury bonds.
Stock Indices: “Humpty Dumpty sat on a wall, Humpty Dumpty had a great fall. All the Kings horses and all the Kings men……had scrambled eggs for breakfast.” I use that analogy to reflect my opinion of the recent extended stock market rally. The “Kings men” of course refers to the U.S. Administration and its relentless promoting of an economic recovery and the sustained “euphoria” of the investing public. However, quietly and with less media coverage, is the “exodus” by institutions and the wealthy such as has been reported recently of Mr. Buffets reducing equity participation. We see the continuing rallies in equities and the investor clamouring to get “on board” the “ship” as tantamount to “stowing away” on the Titanic. The Dow Jones industrials closed at 14,514.11, down 25.03 points but for the week managed a gain of 0.81%. The S&P 500 closed at 1,560.70, down 2.53 points and for the week still managed a gain of 0.61%. The tech heavy Nasdaq closed at 3,249.07, down 9.86 points but for the week gained 0.14%. The argument for still higher prices is due to the low Price/Earnings ratio for the S&P 500 at 7.1% below the historic average of 14.8. That accepted ratio analysis by Thomson Reuters dates back to 1968. However the criteria for expectation has never been subjected to the current economic situation that was “created” by the unprecedented real estate and labor situation. We stand by our expectation for a sharp market decline regardless of what other analysts expect.
My recent and continual admonition to investors with large equity portfolios remains intact as “implement hedging strategies. We continue to believe the ongoing stock market rally is without merit given the circumstances we see of a stalling economy and global consideration and fully expect a sharp reversal in the near future. We can provide those investors with hedging strategies based on the “composition” of their portfolios. After 45 years on Wall Street I have seen a number of market “ups and downs” and due to the elements consistent with the recent upward trend, this is reminiscent of the 1987 collapse in values. The recent recession, unlike the previous recessions was based on, in my opinion, the repeal of Glass, Steagel, allowing Banks to “package” mortgages, good and bad, securitize them, and market them globally throughout the World. That, in my opinion, provided for homebuyers to purchase homes they could not afford, obtain mortgages on said homes without any equity participation, and then lose their homes as jobs were lost in the recession and home values declined. Those elements proved financially disabling to the American public as well as to the Global economic community. Contact us for “enlightened” advice.
Currencies: The June U.S. dollar index closed Friday at 8240, down 45.8 on profittaking after its recent runup against the major currencies. The dollar weakened as the Consumer Confidence Index declined and reduced the possibility of a Federal Reserve rate increase thereby causing the decline in yields and thereby the attraction to dollar investment. The decline in U.S. equity prices also a factor in Friday’s market correction. We have favored the long side of the dollar for some time and taking profits is never “a bad move”. We would await additional global economic and geopolitical news before re-establishing long dollar positions.
Energies: April crude oil closed at $93.45 per barrel, up 42c tied to better than expected U.S. economic data although tempered by the consumer confidence report. U.S. Industrial production rose by 0.7% in February, better than analyst expectation, and helped crude, as well as the selling in the dollar. We continue to expect supply/demand factors to weigh on crude by recent events including the threat by North Korea has prompted shortcovering and new buying in crude. We like the sidelines for now but remain overall bearish.
Copper: May copper closed at $3.5170 per pound, down 1.95c even as the dollar in which it is denominated, weakened. Reports that China, the worlds largest consumer of the metal as well as other industrial commodities, announced it was on “high alert” against inflation and “intensified its campaign to control the property market”. That allowed for new short selling and long liquidation. Another comment indicated the Chinese Cabinet ordered higher down payments and stricter enforcement of sales taxes on homes. We continue to feel that copper, in the face of our expectation of a continuing economic deterioration in the U.S. and overseas, is overpriced. Stockpiles for the LME, Comex and Shanghai Futures Exchanges amounted to more than four months of North American consumption and Barclays forecast that global supply will outpace demand also a factor for the price declines. Hold put positions.
Precious Metals: April gold closed at $1,590.50 per ounce, down 20c even against the dollar decline. Early strength was tied to the weak dollar and U.S. industrial production gains but the Consumer confidence report was a negative for precious metals. Expectation that the potential for inflation, a usual impetus for precious metals buying, created by the higher gasoline price could benefit gold and prompt shortcovering. We could see added activity in precious metals tied to the recent threat by North Korea to attack the U.S. so we would cover any short positions for now and stand aside. May silver closed at $28.71 per ounce, down 9.7c and remains under pressure with no real change in the supply/demand picture. We continue to favor the sidelines here as well. April platinum closed at $1,592.40 per ounce, up $2.60 and almost par with gold but down 0.7% from last week. June palladium closed at $775.65 per ounce up $4.90. Hold long palladium, short platinum spreads.
Next page: A look at the ag markets
Grains and Oilseeds: May corn closed at $7.17 ¾ per bushel, up 1 1/4c on improved export sales, and purchases by China. We could see higher prices for corn but at current levels in the middle of its recent range we prefer a “breakout” before entering this market. May wheat closed at $7.23 ½ per bushel, down 1 1/4c as rains in the U.S. plains may have improved crop development. We prefer the sidelines in wheat. May soybeans closed at $14.27 per bushel, down 8 1/2c on weak sales for both old and new crop beans. We are on the sidelines here as well.
Meats: April cattle closed at $1.2570, down 2.36c and we have lost interest for now. The continued pressure on prices has taken cattle to new intermediate lows. Stay out for now. April hogs closed at 79.625 per pound, down 1.25c and is also on our no interest list for now. We see no reason for prices to rally given the current fundamentals.
Coffee, Cocoa and Sugar: May coffee closed at $1.3740 per pound, down 2.5c and remains at recent lows. Stockpiles of beans are at the highest level since 2010 before the beginning of the harvest in Brazil. Stay out for now but any change in fundamentals could prompt shortcovering and new buying. May cocoa closed at $2,109 per tonne, down $21 on long liquidation and without fresh fundamentals from Ivory Coast, could remain at current levels. Stay out but look to buy on any changes in African growing areas or European and U.S. demand. May sugar closed at 18.81c per pound, down 3 ticks but with adequate global supplies, we see no reason to enter this market here. Stay out for now.
Cotton: May cotton closed at 92.57c per pound, up 1.71c on continued buying tied to strong export demand as reported in recent USDA data. Tight supplies for domestic and global cash markets also a factor. Cotton prices are up almost 14% since the beginning of the year and strong demand from China and concern over U.S. supplies could push prices further. We continue to favor the long side of cotton as we have of late and would add to positions but raise trailing stops.