Overview and Observation;
On Friday the jobs data provided the "snake oil" for equity investors but was received with mixed feelings going forward. A feeling of relief fell on Wall Street as 175,000 jobs were "created" somehow giving evidence of a continued economic recovery. Of course we do not agree with that assessment because completely overlooked was the Thursday first time unemployment data showing 346,000 jobs lost by virtue of workers first time unemployment applications. On Thursday after that figure the equity market sold off more than 200 Dow points and on Friday gained that much back posting the biggest one day gain since early January. The euphoria attached to the jobs data on Friday should be short-lived in my opinion because the global economic picture remains in question. Since the world is one "big happy family", the tribulations of one affect the others and the news emanating from the U.S. trading partners cannot possibly be construed as positive. I believe the U.S. administration is offering "Kool-Aid" to the public and unfortunately I see them "drinking it down" and requesting more. Now for some actual information to help my readers "navigate" through the "troubled waters" I see ahead…
September U.S. Treasury bonds closed at 139 17/32nds, down 1 20/32nds after the "joyful" jobs data showing 175,000 jobs created in May even against the slight bump up of the unemployment rate from 7.5% to 7.6%. Speculation that the U.S. Federal Reserve may consider halting bond purchases based on the "better than expected jobs data" led investors down the "garden path" from the relative safety of treasuries to the "riskier" asset class of equities. We had suggested last week the purchase of bond calls and that seemed to work coming into Friday morning as the U.S. equity market lost over 200 points on Thursday only to recover those 200 points in the Dow on Friday. Stay with the bond calls and add on any further declines in 30 year bonds.
The Dow Jones Industrial average closed Friday at 15,248.12, up 207.50 or 1.38% after the May payroll data rose more than expected. The increase in jobs of 175,000 was not too much to prompt the U.S. Federal Reserve to consider monetary tightening. That "border line" increase coupled with the slight gain in the unemployment rate from 7.5% to 7.6% allayed fears of elimination of quantitative easing by the Fed and helped the market recover the 200 plus points lost in the previous session. For the week the Dow gained 0.9%. The S&P 500 closed at 1,643.38, up 20.82 points or 1.28% and up 0.8% for the week. The tech heavy Nasdaq closed at 3,469.22, up 45.16 points or 1.3% and for the week gained 0.4%. Equity markets continue show signs of "exhaustion" at current levels and we continue to suggest the implementation of risk hedge strategies for holders of large equity positions. We can analyze portfolio "construction" as relates to which indices could be utilized in order to provide a level of protection against what we see as an impending stock market decline. The utilization of hedging programs reduces the necessity for "partial liquidation" of specific securities in specific industries that might suffer from such a market decline.
The September U.S. dollar index closed Friday at 8194.5, up 14.3 points on Friday tied to the slightly better than expected jobs data. The dollar has suffered losses during the week against other currencies especially against the Japanese Yen. For the week the dollar lost 3% against the Yen. However for the year the dollar is still up 12% and for the 12 months up 22% against the Japanese currency. The Yen closed Friday at .010257, down 34 points. Other currencies posting losses on Friday were the Euro 29 points to $1.3225, the Swiss Franc 79 points to $1.0688, the British pound 58 points to $1.5541, and the Australian dollar 103 points to .9441. The Canadian dollar managed a gain of 65 points to close at 97.84c. While our expectation for the U.S. economy to stagnate and revert to the previous recessionary trend, it is still better situated than the Eurozone which we expect will suffer further debt crisis situations among its members. Stay with the dollar
July crude oil closed at $96.11 per barrel on Friday, up $1.35 or 1.4% and for the week gained 4% as traders were optimistic after the slight improvement in the U.S. jobs data. The expectation that the U.S. Federal Reserve would continue its easing program after the uptick in the unemployment rate from 7.5% to 7.6% was viewed as positive for crude oil. A larger than expected drop in U.S. crude supplies coupled with Middle East tensions also provided the impetus for shortcovering in energy products. We do not feel price gains can be sustained but would not add to short positions or puts in crude for now.
July copper closed at $3.2690 per pound, down 5c or 1.5% tied to the ongoing global glut and concern that buying by China, one of the largest users of industrial metals would continue weak prompted further long liquidation. The recent mining disaster at an Indonesian mine reduced production for a time but stockpiles of copper at the LME were up by 0.4% and orders for copper declined at warehouses. We have suggested the short side of copper for some time and while it is always prudent to take some profits, we see no change in the supply/demand picture for now.
August gold closed at $1,378.20 per ounce, down another $37.60 or 2.7% on Friday after trading as low as $1,338 recently. Fridays selling was stop losses touched off as prices declined below $1,400 once again and traders decided to sell in front of the weekend. With our expectation that the equity market rally on Friday may be overdone, we could see sharp price gains coming into the new week for precious metals. Our overall feeling however, is to "stay out of the way" of this particular "train". July silver closed at $21.52 per ounce, down $1.1870 or 5.3% and set the stage for a correction to the $1.23-1.25 area. Our preference for some time as been silver over gold and we see no reason to change although our preferred stance is the sidelines for now. July platinum closed at $1,502.60 per ounce, down $26.70 or 1.8% but up 2.8% from the prior week as auto sales improved and platinum and palladium are used in catalytic converters necessary in autos. September palladium closed at $757.05 per ounce, down %5.25 or 0.7% performing "better" than platinum. Our old spread recommendation of long palladium short platinum may come into play once again. Otherwise retail clients should avoid precious metals altogether and leave the trading to the professionals.
Grains and Oilseeds: July corn closed at $6.66 per bushel, up 2 3/4c on shortcovering and new buying on analyst expectations of corn losing as much as 5 million acres. Ending stocks now forecast at 1.5 billion bushels against the USDA carryover expectation of 2 billion bushels in their last report. We continue to prefer the long side of corn but with trailing stops. July wheat closed at $6.96 per bushel, down 1 3/4c and in a sideways trend. We prefer the sidelines in wheat. July soybeans closed at $15.26 per bushel, down 1 1/4c on light long liquidation in front of the weekend. We have preferred the long side of soybeans for a while now and continue to do so after beans had traded as low as $13.40 in late April. The trend remains up. Raise trailing stops on long positions.
August cattle closed at $1.19275 per pound, down 75 points on continued pressure from cash prices and demand. We continue to favor the sidelines but a possible shortcovering rally could emerge as China is seen as possibly increasing demand per capita. July hogs closed at 96.55c per pound, up 72.5 points on short covering as demand during "summer barbecue season" catches on. We prefer the sidelines until some better fundamentals emerge.
Coffee, Cocoa and Sugar
: July coffee closed at $1.2640 per pound, down 3.05c tied to global supplies. We favor the sidelines in coffee. July cocoa closed at $2356 per tonne, down $7.00 tied to the dollar strength on Friday. Excellent weather in West Africa a factor in cocoa weakness. Stay out for now. July sugar closed at 16.43c per pound, down 5 ticks and remains on our "no interest" list. Stay out.
July cotton closed at 84.73c per pound, down 14 points tied to the possibility that China may be reviewing its stockpiling program which had been supportive of cotton. However expectation that purchases by China tied to its lackluster textile industry demand could prompt further long liquidation and sideways price action. Stay on the sidelines for now but with recent technical action, a few calls may be appropriate.