Overview and Observation; We are starting to see some “cracks in the dike” and “Peter” is nowhere to be found.….The reports last week tended to show an improvement in such basics as the durable goods orders which were reportedly up 3.3% in April. That was against analyst expectations for a 1.3% increase. However analysts were correct if you take out the defense, aircraft and parts which were up 53.3%, and civilian aircraft, which was up 18.1%, leaving the actual order increase of 1.3%. So while I usually criticize analyst expectation as mostly wrong and affecting the markets until actual figures are released, I have to “compliment” them this time. Unfortunately the market reaction was muted and lent itself, across the board, to concern that the U.S. economic condition is far from “healed” after the devastating recession. Sporadic indications of a modest recovery have failed to garner the kind of support necessary after a recession and while some segment of the marketplace has shown what former Fed Chairman called “irrational exuberance,” our general view is that any semblance of a true economic recovery is not evident. Now for some actual information…….
Interest Rates: The September 30-year Treasury bond closed Friday at 142 12/32nds, up 10/32nds as funds made the “trip” from “riskier assets” to the relative safety of U.S. Treasuries. Some analysts were bandying about the idea of the “end of the Treasury bond market” with talk that the U.S. Fed would start to reduce its QE policy of buying up treasuries. Fed Chairman Bernanke, in his speech this week did not make any definitive statement to that effect. Other Fed Presidents were mixed in their assessment of the U.S. economic condition and whether or not further “assistance” was necessary. We remain convinced that recessionary overtones prevail and that Treasury bond prices will remain “range-bound” with a positive bias. We also feel that any rate increase would push the U.S. back into recession.
Stock Indexes: The Dow Jones Industrial Average closed Friday at 15,303.10 up 8.60 but for the week lost 3.3%. The S&P 500 closed at 1,649.60, down .91 and for the week lost 1.07%. The tech heavy Nasdaq closed at 3,459.14, down .27 and for the week lost 1.13%. Some shortcovering in front of the three day U.S. Memorial day holiday kept prices from continuing the downward slide. Some concern that the U.S. Federal Reserve would start winding down its bond buying program and the upward move in yields could curtail recovery expectations. Any increase in yields could negatively affect home sales and the construction industry related jobs. The Thursday jobs data showed a decrease in first time unemployment to 340,000 but bearing in mind that each benefit application means a job lost, the labor situation is not improving regardless of the “monthly” job “created” number. That number is nowhere near showing job gains when taken in context with the overall picture. Do not be lulled into complacency by the recent stock market strength. We once again warn that investors with large equity portfolios should implement risk hedging programs.
Currencies: The September U.S. Dollar Index closed at 8397 down 10.3 points on profittaking after recent gains. The Japanese yen finally staging a recovery after recent long liquidation as Japanese bonds were sold. Other currencies also reflected pre holiday weekend shortcovering with the Swiss Franc gaining 7 points to $1.0407, the Japanese yen 85 points to 9907, and the British Pound 20 points to $1.5114. The Euro lost 2 ticks to close at $1.2939, and the Canadian dollar lost 9 ticks to .9668, as well as the Australian dollar losing 80 points to .9580. We have favored the U.S. dollar not on the basis of a U.S. economic recovery, but in comparison to the economies of the Eurozone countries. Stay with the dollar.
Energies: July crude oil closed at $93.95 down 30c on Friday for the fourth loss in a row. Concern tied to demand declines and the weak Chinese manufacturing data contributed to the 2% price decline for the week. We have been bearish for some time and continue to expect lower prices tied to reduced global demand. Hold put positions.
Copper: July copper closed at $3.2970, down 70 points on profittaking after the recent rally from the $3.04 level. Longer term copper has declined from the February $3.81 level on concern that global demand especially that of China and the U.S. has declined. Recent strength can be attributed to some extent to the fatal collapse at the Freeport-McMoran Copper & Gold Grasberg project in Indonesia. Along with the mine collapse is the reduction of inventories at the Shanghai Futures Exchange warehouses. We could see some additional shortcovering and some technical buying from commodity funds. I had suggested taking some profits off the table after my long term bearish view for copper and now would recommend the sidelines unless you are a physical user.
Precious Metals: August gold closed at $1,387.50 down $5.30 on continued long liquidation in front of the three day holiday weekend in the U.S. Gold managed a gain for the week but has suffered of late as the U.S. dollar gained. Gold usually benefits from dollar weakness as it is denominated in dollars but on Friday even with the dollar closing lower, gold fared no better than it has now for some time. Some relief appeared as Fed Chairman Bernanke gave some indication of a possible cutting back on Treasury bond purchases and that could lead to higher U.S. interest rates and a corresponding improvement in dollar attraction. We have been sidelined in precious metals for some time and see no reason to change our opinion. Gold has lost 17% since the beginning of this year. July silver closed at $22.32 per ounce, down 18.8c while the white metals were also under pressure. July platinum closed at $1,451.40, down $5.80 and September palladium lost $12.95 to close at $727.70. We remain on the sidelines.
Grains and Oilseeds: July corn closed at $6.56 ½ per bushel on Friday, down 5 1/2c as corn remains under pressure tied to new crop plantings and increased production expectations. We prefer the sidelines. July wheat closed at $6.96 ¼ per bushel, down 7c on profittaking after good buying pushed prices back over $7.00. on export sales. However, we continue to prefer the sidelines in wheat. July soybeans closed at $14.76 per bushel, down 23 1/2c on pre holiday weekend profittaking after its recent $1.00 per bushel rally. We like soybeans and so do the Chinese having bought 531,000 metric tons of U.S. beans in the week ended May 16th for delivery before September 1. An additional 115,000 tons purchased per government reports should prompt additional buying. We would buy calls from here and on any further setbacks.
Meats: August cattle closed at $1.1960 per pound up 1.4c on speculation that summer season approaching will increase demand from the “barbecues”. We could see further buying but any purchases from here should be coupled with stop protection. Our initial goal is the $1.23-1.24 price area. July hogs closed at 93.35c per pound, up 3.25c on short covering after recent weakness. Some demand improvement is to be expected also on demand from grilling.
Coffee, Cocoa and Sugar: July coffee closed at $1.2715, down 2.9c or 2.2% on Friday tied to gains in inventories in Europe and the U.S. Stay out for now. July cocoa closed at $2,250 per tonne, down $33 on continued good weather in African growing areas and weak overall demand. Stay out of cocoa as well. July sugar closed at 16.87c down 11 points and remains under heaving long liquidation pressure. Aside from sporadic shortcovering we see no reason to expect sustained price gains even from current low levels.
Cotton: July cotton closed at 81.53c per pound, down 25 points on continue weak demand from China. Export sales reports were strong but not enough to offset the negative news from overseas. While planting conditions in the U.S. has improved renewed demand for U.S. cotton will be necessary before we see any change in sentiment. We are on the sidelines in cotton.