Overview and Observation: U.S. President Franklin Delano Roosevelt once made the statement that “you have nothing to fear but fear itself.” That may have applied to that time in history, but investors are finding that “fear” may be appropriate now. Their worst fears are coming to fruition as U.S. interest rates rose this week creating the potential for “stalling” what has been an “economic improvement” albeit slow, in the housing and mortgage markets. With better than forecast data on business activity, consumer confidence and expectation for a U.S. Federal Reserve scaling back of its stimulus programs, a real “fear” has developed. The Thomson Reuters/University of Michigan final index of consumer sentiment rose to 84.5, the highest since July of 2007, from 76.4 the prior month leading to expectation of the Federal Reserve scaling back of monetary stimulus.
We can only assume that the “question” of confidence was posed to “shoppers” leaving the mall with packages. The rest of the public, especially the 350,000 first time unemployed reported on Thursday are probably “not so confident.” This coming Friday we will see the all important jobs data issued by the Labor Department and it will be a defining factor in the marketplace going forward. The “fragility” of not only the U.S. economy but the global economies as well is being “muted” by the continuing rhetoric pronouncements of “recovery.” We do not see real evidence of a recovery but rather a “house of cards” ready to implode at any time. Now for some actual information…
Interest Rates: September U.S. Treasury bonds closed Friday at 140 8/32nds, down 8/32nds for the biggest monthly decline since 2009 as indications that the Federal Reserve may cutback on its monetary stimulus program. The improvement in U.S. economic data appears sustainable by the investment community and that could prompt higher rates. That being the case it would negatively impact an already fragile U.S. economic recovery and lead to sharp corrections in the U.S. equity markets. This Friday we will get the jobs report, which is expected to show the U.S. added 165,000 jobs in May and that the unemployment rate stayed at the four year low of 7.5%. However, with the weekly jobs lost (by virtue of first time unemployment applications) of 350,000 against that expectation, we do not see any improvement in the all important labor situation in the U.S. European unemployment data is mixed with some ranging as high as 12% in some quarters. Our overall view of global economies continues to reflect our assessment of recessionary trends and cannot be simplified by “optimistic” rhetoric. I would suggest hedging your positions by adding a few bond calls to your portfolio.
Stock Indexes: In Dante’s “Inferno” the inscription at the gates of Hell “Abandon hope all ye who enter here” could easily apply to an imaginary “plaque” over the entrance of some brokerage firms. If our assessment of a severe market correction comes to fruition, investors may once again suffer the consequences of not preparing for what we feel is an “eventuality.” On Friday the Dow Jones industrials closed at 15,115.57, down 208.96 points or 1.4%. Over 7.5 billion shares traded on Friday. When I first entered the brokerage business as a clerk on the floor of the New York Stock Exchange in 1959, the volume was around one million shares and not many households owned stock. Today nearly every household owns stock in one form or another, either money market, mutual funds, or outright ownership of individual securities. If another sharp correction were to occur, the loss in dollar could once again be in the trillion with a “T” category and further exacerbate an already, in our opinion, fragile economy with reduced spending and higher unemployment. For the week the Dow lost 1.23%. The S&P 500 closed at 1,630.74, down 1.4% and for the week lost 1.13%. The tech heavy Nasdaq closed at 3,455.91, down 1.01%. For the month, however, the Dow posted a gain of 1.86%, the S&P 500 2.08% and the Nadaq 3.81%. We view those monthly gains as a potential “last hurrah” and once again suggest strongly the implementation of hedging strategies.
Currencies: The September U.S. Dollar Index closed Friday at 8357, up 24.3 points tied to the strongest U.S. consumer sentiment index in almost six years. U.S. economic data gave indication of a U.S. Federal Reserve scaling back its monetary stimulus program earlier than previously expected giving rise to interest rates and support for the dollar. We have favored the dollar for some time and see no reason to change our opinion other than that a market that has gained precipitously usually corrects to some extent. The euro lost 44 points to close at $1.3009, the Swiss franc 92 points to $1.0404, the British pound 22 points to $1.5188, the Canadian dollar 52 points to 9632, and the Australian dollar 96 points to .9502. The Japanese yen staged a “recovery” gaining 47 points to close at .09958.
Energies: July crude oil closed at $91.69 per barrel, down $1.92 or 2.1% on Friday tied to reduced energy demand outlook. The Organization of the Petroleum Exporting Countries (OPEC) decided to keep oil production targets unchanged even against concern related to demand and the rising U.S. output. For the week crude lost 2.3% and for the month 1.8%. We have been bearish for crude for some time and see no reason to alter our overall opinion. Hold put positions and add on any rallies, which we feel will be short-lived.
Copper: July copper closed at $3.2690 per pound, down 4.65c or 1.4% on Friday on continued pressure from reduced demand by China and other industrial metal users. The weak U.S. equity market also provided for the negative impetus for copper. We continue to favor the short side of copper.
Precious Metals: August gold closed at $1,384.60 per ounce on Friday, down $27.40 or 1.9% tied to higher than expected U.S. consumer confidence, which supported the U.S. dollar in which it is denominated. The Thomson Reuters/University of Michigan final index of consumer sentiment rose to 84.5, the highest since July of 2007, from 76.4 the prior month leading to expectation of the Federal Reserve scaling back of monetary stimulus. We have suggested avoiding precious metals for some time and retain that opinion. July silver closed at $22.145 per ounce, down 54.5c or 2.4% following gold. Our only suggestion for purchasing precious metals would be silver at or under $20 per ounce for those “insisting” on holding a precious metal. July platinum closed at $1,454.90, down $27.80 or 1.9% per ounce while September palladium closed at $750.80 per ounce, down $9.75 or 1.3%. We prefer the sidelines even though the white metals are used in catalytic converters for automobiles and in oil refining.
Grains and Oilseeds: July corn closed at $6.63¾ per bushel, up 9-1/2c on weather concerns in the Midwest that could reduce crop sizes. We like corn but use stop protection on any new purchases. July wheat closed at 47.06 ¾ per bushel, up 8c on light shortcovering in front of the weekend. We prefer the sidelines in wheat even as weather in the Midwest could provide for additional concerns. July soybeans closed at $15.09½ per bushel, up 13 3/4c tied to the rains in the corn and soybean growing areas which could impact plantings. We like soybeans and would add to longs on any setbacks. Use stops.
Meats: August cattle closed at $1.2040 per pound, up 1.35c on shortcovering and new fund buying. Better cash prices also provided support to futures. We could see further price gains but any purchases should be accompanied by stop protection. August hogs closed at 94.075c per pound tied to fund buying even against weak cash prices. We like the sidelines in hogs.
Coffee, Cocoa and Sugar: July coffee closed at $1.2695, up 1.10c on shortcovering in front of the weekend. Expectation that Brazilian growers will harvest a record crop and that global supplies will surpass demand for the second year in a row have pressured prices. We are on the sidelines. July cocoa closed at $2,191 per tonne, down $20 and remains on our “no interest” list for now pending further fundamentals from Ivory Coast. July sugar closed at 16.56c per pound, down 9 ticks and remains under selling pressure tied to Brazilian farmers accelerating harvesting. July sugar declined to a two year low on May 23rd. We prefer the sidelines.
Cotton: July cotton closed at 79.35c per pound, down 78 points against the strong dollar and the USDA report that 59% of U.S. cotton crop had been planted up from 39% the prior week. We are watching for weather patterns which may change the fundamental picture for cotton. Buy a few calls around current levels.