Is this the lull before the storm? This past week replicated the prior week in its lack of definitive news with which to take meaningful positions in the markets. The street is waiting for a market correction that is long overdue. The Middle East caldron continues to perk. The U.S. economy struggles to maintain a semblance of recovery. Threats to the U.S. Administration from Benghazi continue. And now the IRS revelations further cast doubt on the validity of our own administration. The world is watching and never rewards weakness.
Earnings from corporations are meeting skepticism as productivity based on reduced costs (labor layoffs) permeates the marketplace. The sharp increase in first-time unemployment applications reported Thursday was treated as a non-event by the equity markets while we maintain there can be no jobless recovery. We have been stating ad nauseum, "an unemployed consumer does not consume, and the producers of those (unconsumed) products will be next to lay off workers." We are vigilant in our view of the markets and continue to suggest a conservative approach to financial management. Now for some actual information…
Interest Rates: The June U.S. Treasury 30 year bond closed Friday at 143 31/32nds, down 1 15/32nds. Talk of reduced "quantitative easing", i.e. the purchase of bonds, and the new highs posted for equities saw the "transfer" of funds from the relative safety of treasuries to the riskier asset classes continued. New highs were posted in some of the indices and we are now at the bottom of our suggested trading range for treasury bonds. Another positive factor that weighed on bond prices and boosted yields was the release on Friday of the University of Michigan/Thomson Reuters consumer sentiment index gain to 83.7 in May from the April 76.4 figure. This was much larger than economists had expected. The release also of the Conference Board’s leading economic index also rose a stronger than expected 0.6 points to 95 in April. We look for continued sporadic forays for bond trading but do not believe higher rates are in order by the U.S. Federal Reserve without ‘substantial" confirmation of an economic recovery. For now look to buy calls on treasuries where risk is limited to premiums paid. No aggressive positioning is recommended at this time.
Stock Indices: The Dow Jones Industrial average closed Friday at 15,354.40, up 121.18, or 0.8% and for the week gained 1.56%. The S&P 500 closed at 1,667.47, up 17.00 or 1.03% and for the week gained 1.98%. The tech heavy Nasdaq closed at 3,498.97, up 33.72 or 0.97% and for the week gained 1.82%. The gains were led by the Consumer Cyclical sector and reports released showing Consumer confidence gaining as well as the Conference board’s leading economic index gain promoting ideas of a U.S. economic recovery. We do not believe these reports are convincing for a recovery while the labor situation remains critical. Gains also in Asian markets as well as gains in Great Britain and France also led credence to those ideas of recovery. Ongoing concern within the Euro zone countries of financial debt should soon re-emerge and foment angst within global markets offsetting the "joy" associated with recent market strength in the U.S. New highs in U.S. indices persist while the economic "picture" contradicts the euphoria. We once again "insist" holders of large equity positions implement hedging strategies. The use of hedge instruments can be considered "insurance" against what many market participants feel will be an imminent sharp correction. We have programs that could prove effective in achieving desired protection against market risk.
Currencies: The June U.S. dollar index closed at 8441, up 68.8 or 0.8% and close to a 3 year high. Comments by the San Francisco Federal reserve President John Williams that the Fed could reduce its $85 billion per month bond buying program pressured bonds but support the dollar since higher rates resulting from that reduction would be positive for dollar investment. The dollar gained against most other currencies with the Euro losing 79 points to $1.2830, the Swiss Franc 1.26c to $1.0279, the Japanese yen 0.116 to .9683, the British Pound 1.44c to $1.5159, the Canadian dollar 1.17c to 97.10c and the Australian dollar 1.09c to 97.04c. We continue to favor the dollar as we have for some time.
Energies: June crude oil closed at $96.02 per barrel, up 86c with trading in a range from the overnight low of $94.79 to its session high of $96.45 per barrel. The gains in U.S. equities prompted ideas of improved demand for energy but as we are bearish towards equities and global economies, we expect prices to decline once again and would hold short positions.
Copper: July copper closed at $3.3125, up 1.8c tied to the gains in U.S. equities and the perceived "improvement" in global economic conditions. We have been bearish for some time for copper and with our expectation of a sharp decline in U.S. equities, another round of selling in copper is expected. Hold put positions or outright short positions in futures contracts.
Precious Metals: June gold closed at $1,356.10, down another $30.80 for a seventh session in a row. The strong dollar tied to increased optimism towards an economic recovery as well as a lack of any inflationary trend the main factors. The outflow of gold from gold backed exchange traded funds and reduced physical demand globally have weighed on prices of late. The drop in U.S. consumer prices and technical considerations have prompted long liquidation across the board for metals and we continue to suggest avoiding these markets. July silver closed at $22.12 per ounce, down 53.9c. July platinum closed at $1,454.80 down $30.80 per ounce and June palladium lost $3.40 per ounce to close at $737.35. Once again we suggest the sidelines in metals although a correction after the sharp losses could materialize and provide for short term price gains.
Next page: Ags and softs
Grains and Oilseeds: July corn closed at $6.53 ¼ per bushel, up 11 3/4c on shortcovering and reported tight supplies. We could see further price gains but use stop protection for these wide ranging commodities. July wheat closed at $6.82 ¾ per bushel, down 5c tied to adequate global supplies. Stay out for now. July soybeans closed at $14.48 ¾ per bushel, up 21 1/4c also tied to tight supplies as with corn. We could see further shortcovering but once again, the wide price swings require stop protection.
Meats: June cattle closed at $1.1955 per pound down 35 points after the USDA monthly cattle on feed report was released and considered neutral. We would hold call position but not add for now until supply/demand factors improve. June hogs closed at 92.125 per pound, down 75 points on concern that pig virus could reduce demand by processors. Speculative selling along with fund long liquidation have pressured prices. We prefer the sidelines.
Coffee, Cocoa and Sugar: July coffee closed at $1.3705 per pound, down 2.8c on profittaking and an increase in stockpiles at London warehouses. Recent price range from the April lows around $1.35 to the May highs around $1.48 make coffee too risky to trade for retail clients. Stay out for now. July cocoa closed at $2.308 per tonne, up $14 on better than average volume. Cocoa may be ready for a price breakout but we prefer the sidelines. We need fresh fundamentals to make a trading determination. July sugar closed at 16.89c per pound, up 6 ticks on light shortcovering after recent heavy price losses. Reports that Brazil, the world’s largest sugar producer and exporter, is forecasting a record cane harvest and should continue to weigh on prices. Stay out.
Cotton: July cotton closed at 86.37c per pound, up 34 points on light shortcovering. The USDA report on Monday had indicated the U.S. cotton crop was 23% planted against 17% for the prior week. We prefer the sidelines for now.