With analysts and economists invariably incorrect in their reported expectations of important data, I must reiterate how it's better to keep your mouth shut and be considered ignorant, than to open it and remove all doubt. The incorrect expectations of the employment numbers prompted a market action that, upon issuance of the actual report, caused a reaction.
Prior to last week's report on job creation, the expectation was for 190,000 to 200,000. When the actual number was issued for only 88,000 jobs, the U.S. equity markets sold off sharply and the government bond yields declined dramatically, pushing bond prices sharply higher. This was all unnecessary had no expectation been issued and the market was allowed to disseminate the actual figures.
The U.S. labor participation rate is the lowest since 1979 and formed the basis for the reduction in the U.S. labor rate of 7.6% from 7.7%. The Friday jobs created figure of 88,000 was a disappointment to market watchers and was not conducive to an economic recovery or labor improvement. Half a million unemployed workers stopped looking for jobs in March, allowing for the cut in the jobless rate. The consumer confidence index fell to 59.7% in March against 68.0% in February.
Cause and effect….
Cause: Consumers are spending "someone else’s money" at an alarming rate. Consumer debt in February increased by a seasonally adjusted $18.1 billion, the biggest since last August according to the U.S. Federal Reserve. That compares with January’s $12.7 billion gain. Monthly debt increased at the rate of 7.8% in February after the 5.5% in January. The gain was unexpected by economists. The gain in consumer credit for February was prompted by non-revolving debt such as auto loans, personal loans and student loans. That gain was up by $17.6 billion or 10.9%, the biggest since July of 2011.
Effect: The "usual suspect" of using one new credit card to pay the minimum on an old credit card is a program that spells "financial suicide" but prompted by both the unemployed and the "under-employed", those that took jobs paying substantially less than the job they lost. The time to "pay the piper" is fast approaching.
Meanwhile the "sabre rattling" from North Korea continues as they prepare to "test" another rocket with questionable capabilities. The U.S. has 28,000 troops in harms way in South Korea within range of the North Korean missiles. We can only hope that the "fools" in the North recognized the futility of attacking the South and the U.S. I can only hope that should they make that "mistake" that the U.S. military delivers a "crushing blow" should retaliation be necessary.
Interest Rates: The June U.S. treasury bond closed at 147 26/32nds, up 1 and 15/32nds with yields posting the lowest rate in nearly four months. The weaker than expected jobs created report lent credence to our expectation of a slowing economy in the U.S. Once again the figure on Thursday of first time unemployment applications was up 28,000 to 385,000, an indication of "jobs lost" which the media fails to correlate with the "jobs created".
The significance of a weekly jobs lost figure against the monthly jobs created figure is completely overlooked by the media trying, in my opinion, to allay the fears of the investing public. It is not working…..
Stock Indices: The Jones Industrials closed at 14,585.25, down 40,.86 but immediately after the jobs report the Dow sold off 175 points. The S&P 500 closed at 1,553.00 down 7.00 and the tech heavy Nasdaq closed at 3,204, down 21.00. The disappointment at the jobs created data showing 88,000 jobs in March against anal-yst expectations of 190,000 prompted the sharp negative reaction in equities. Discouraged workers left the workforce in record numbers and prompted the unemployment rate downtick from 7.7% to 7.6%, a number I feel is "meaningless". We continue to expect a sharp correction in the markets with a potential decline of 15-20% and corresponding trillion dollar value loss. We strongly urge the implementation of hedging strategies for holders of large equity portfolios. Call or email for specific program information.
Currencies: The June U.S. dollar index closed at 82.65, down 14.5 points tied to the disappointing U.S. economic data. The sharp rally in treasuries prompted the decline in yields which detracts from dollar investment. However, even as we believe the U.S. economy is ‘faltering", relative to the problems we see in Europe and with our other trading partners, the U.S. economy is in better condition. Stay with the dollar. Other currencies gaining included the Euro, up 59 points to $1.3003, the Swiss Franc 63 points to $1.0714, and the British pound 98 points to $1.5328. Losses were posted for the Japanese yen against the dollar, closing at .10245, down 161, points, the Canadian dollar 46 points to .9821, and the Australian dollar 32 points to $1.0338. The Canadian dollar lost against the U.S. currency after it unexpectedly lost jobs by the most since the last recession four years ago. The Asian currencies fell the most since January as their policy makers proposed measures intended to weaken their exchange rates to improve their export picture. We continue to favor the U.S. dollar.
Energies: May crude oil closed at $93.05 per barrel, down 21c tied to the weaker than expected U.S. March employment data showing jobs grew by only 88,000 against expectations for average estimates of 190,000 to 200,000 jobs. Crude oil as well as Heating oil and Gasoline declined since reduced jobs are not conducive to increased demand for energy products. We hold to our bearish expectations with an "eye" to the potential for hostilities from North Korea and the continuing concern over Iranian nuclear ambitions and the possible Israeli attack on those facilities.
Copper: May copper closed at $3.3425 per pound, down 90 points tied to the weak U.S. economic data, concerns over China’s growth, and the reduced exports for one of the largest copper producers, Chile. The port strike in Chile which started March 16th is curtailing Chilean exports by 60%. Even so global demand is not improving as well so our feeling is for still lower prices for copper. We have been bearish for copper for some time and no reason to change our opinion.
Precious Metals: June gold closed at $1,579.20 per ounce, up $26.80 on the disappointing U.S. jobs report, the selloff in equities, the U.S. dollar weakness, shortcovering after recent sharp declines and the flight to "safety" of risk adverse assets. Gold still managed a loss of 1.2% for the week. We continue to prefer the sidelines. I sold my one ounce gold Eagles at $1,747 and not buying them back….yet. May silver closed at $27.345 per ounce, up 47.8c for the same reasons as gold. A weakening U.S. economy would prompt the U.S. Federal Reserve to continue to implement QE bond buying which pushes rates lower and negates dollar attraction. While we favor the dollar against its trading partners we view the global economic condition as weak and void of any inflationary concerns which normally would assist gold and other precious metals. Stay out for now. June palladium closed at $727.85, up $2.40 an ounce while July platinum gained $20.80 per ounce to close at $1,538.60. We are abandoning our long palladium short platinum spread for now.
Next page: Ags and softs report