Overview and Observation;
With analysts and economists invariably incorrect in their reported expectations of important data, I must reiterate: "Better to keep ones mouth shut and be considered ignorant, than to open it and remove all doubt." The "incorrect expectations" prompt a market action, which, upon issuance of the actual report, prompts a "reaction." The resulting market moves can prove dramatic and with their "record" of performance one wonders why issue any expectation at all? This weeks "erroneous" expectation as well as those of recent weeks illustrates my assessment of their performance. Prior to the report on job creation, the expectation was for 190,000 to 200,000. When the actual number was issued at 8:30 ET of only 88,000 jobs created, the U.S. equity markets sold off sharply and the government bond yields declined dramatically pushing bond price sharply higher. All unnecessary in my opinion had no expectation been issued and the market was allowed to disseminate the actual figures. The analysts are paid handsomely……for consistently "bad" information. Even ADP, the U.S. payrolls company, on Wednesday estimated jobs created of 158,000 and was also out of line. 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. Consumer confidence index fell to 59.7% in March against 68.0% in February. Another potential "nail in the coffin" of the current "euphoria" in the equity marketplace.
Cause and effect….
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.
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 harm’s 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.
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…
The Dow 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 analyst 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.
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.
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.
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 see no reason to change our opinion.
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, short-covering 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 am 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.
Grains and Oilseeds:
May corn closed at $6.28 ¾ per bushel, down 1 1/4c on continued long liquidation even against a weak dollar. The recent USDA report was negative and we see no reason for expending change for now. We prefer the sidelines. May wheat closed at $6.99 ½ per bushel, up 5 1/2c mostly tied to short-covering and the weak dollar, but here again we see no reason to "jump in" at current levels. The last couple of session gains are not enough to move us to the long side. Stay out for now. May soybeans closed at $13.62 per bushel, down another 10c even against the weak dollar. Recent dollar strength has moved demand from the U.S. to Brazil and Argentina and concern over reduced demand from China tied to their "bird flu" issue pressuring prices for soybeans. We prefer the sidelines here as well.
June cattle closed at $1.21550, down 80 points after some sporadic cash steer buying tied to packer competition for slaughter inventory. The sharp selloff over the past months that took prices down from $1.33 per pound level made an interim bottom and prompted short-covering and some new buying. We like cattle but would only buy minimally and using stop protection. With the summer “barbecue season" not far off, we could see some buying to replenish some inventories. June hogs closed at 89.4c per pound, down 2.625c on long liquidation and new short positions tied to potential decline for pork by China. We continue to favor the sidelines in hogs.
Coffee, Cocoa and Sugar:
May coffee closed at $1.4045 per pound, up 95 points on recent buying from the $1.32 level. The recent strength was tied to concern of possible crop production cuts in Vietnam and Central America due to drought and rust problem. We like coffee from here after having been "absent" from this market for some time. Use stop protection. May cocoa closed at $2,130 per tonne, down $11.00 on long liquidation tied to the prospect of improved crop prospects in Ivory Coast, the world’s largest grower of cocoa beans, any production gains impacts prices. Stay out for now. May sugar closed at 17.73c per pound, up 8 ticks on light short-covering but prices remain near recent lows tied to surplus concerns. We prefer the sidelines until fundamentals improve.
May cotton closed at 86.65c per pound, down 1.68c on profit-taking after recent strength that saw prices gain almost 15% since the beginning of the year. Strong demand from China had been a major factor but with "bird flu" concerns impacting demand for commodities by China, we prefer the sidelines now after having been bullish for some time. The USDA report last week suggested U.S. farmers would be planting fewer acres had prompted the buying was not enough to offset the demand concerns.