Overview and Observation;
U.S. Federal Reserve Chairman Ben Bernanke, in his speech this week, intimated that quantitative easing through the purchase of Treasury instruments would come to an end possibly as soon as the end of the year. That statement sent global markets reeling and U.S. interest rates climbing. The resulting selloff in equities, Treasuries and global currencies as well as commodities was disconcerting to the marketplace. The only beneficiary of the "meltdown" was the U.S. dollar, where higher U.S. rates attract dollar investment. The margin calls generated by the declines in commodities and equities prompted the liquidation of many positions to meet those calls and the selloff "fed on itself." The "house of cards" I suggested in my weekly market letters has come to fruition and the loss in values will take some time to mitigate. My suggestion to clients in the past has always been to not meet margin calls with money, but with liquidation. A margin call is an indication that you are on "the wrong side of the market," and liquidation offers the opportunity to "get out and take another look." Now for some actual information to hopefully guide my readers through the maze of analyses...
September U.S. 30-year Treasury bonds closed at 134 21/32nds, down 1 15/32nds losing nearly 5 points since last week on expectations of the U.S. Federal Reserve announced scaling back of its bond purchase program later this year. The yield on the 30-year bond rose to 3.585% sending prices sharply lower and negatively impacting the long call positions we have for clients. We expect the markets to stabilize and the damage that could be done at these rates to the housing and mortgage markets would be severe, so we expect bond yields to recede over the coming days. On Friday, the St. Louis Federal Reserve Chief James Bullard issued a statement calling the Fed’s plan to outline its pullback of asset purchases "badly timed." He stated that the Central bank should have awaited more "tangible signs" of the economic recovery before considering such a move. We agree since we do not see a sustainable "economic recovery" that those with "rose colored glasses" see. Once again the "concept" of a jobless recovery is a fallacy in our opinion. Hold current call positions but do not add just yet.
The Dow Jones industrials closed Friday at 14,799.40, up 41.08 but after the over 330 point loss on Friday posted a weekly loss of 1.8%. The S&P 500 closed at 1,592.43, up 4.24 points but for the week lost 2.10%. The tech heavy Nasdaq closed at 3,357.25, down 0.22% and for the week lost 1.94%. Concern that the U.S. Fed would phase out its bond purchase program by the end of the year thereby prompting an increase in rates was the main reason for the Thursday selloff. Investors suffered the resulting margin calls and were forced to either put up more money or liquidate marginal positions thereby extending the Thursday loss. While our "crystal ball" offered no warning about the Fed action, our overall opinion, as my readers know, is for a sharp equity market selloff based on our thesis that there is no such thing as a "jobless recovery." We also indicated that the markets had gotten ahead of the basic economic evidence and was due for a major correction. We do not feel the "correction" is over and once again warn investors that the prudent avenue to preserve capital would be the implementation of strategic hedging programs.
The September U.S. dollar closed at 82.55, up 45.4 or 0.6% on Friday and was the only "green" commodity on a "sea of red" on my quote screen. Every commodity we watch was lower on Thursday and Friday thanks to the Bernanke statement. We believe that statement was unwarranted on the basis of our view that the U.S. economy is too fragile for the Fed to scale back its quantitative easing program, especially not this year. We have been bullish for the dollar for some time and see no reason to change our view but taking some profits "off the table" is never a bad idea. Once again we hear from Greece that its unstable governing coalition could "break down" and sent its yields on bonds sharply higher Friday. The 10-year Greek bond yield was up 49 basis points at 11.046% and remains a serious problem for the Euro currency. The "news" has overlooked the ongoing debt problems within the Eurozone, which we expect will re-emerge in the near future. Other currencies that lost against the dollar were the Euro at $1.3133, down 68 points, the Swiss Franc $1.0715, down 73 points, the Japanese yen $01024, down 45 points the British Pound $1.5419, down 50 points and the Canadian dollar .9546 down 55 points. The only other currency posting a gain Friday was the Australian dollar posting a 61 point gain to .9177. Stay with the dollar.
August crude oil closed Friday at $93.69 per barrel, down $1.45 or 1.5% adding to Thursday’s loss and ending a two week winning streak. July crude had dropped 2.9% on Thursday, the biggest one day loss in seven months tied to the gain in the U.S. dollar in which it is denominated. Adequate supplies and recent sales by Russia to China of 365 million tons of crude are also a factor in the weakness. The ongoing Middle East concerns where the U.S. is backing the Syrian rebels, a fact we disagree with, and Russia backing the Assad Government could gain momentum. While we maintain a bearish posture toward crude and products, we prefer the sidelines for now. Too many variables could cause extreme price movement. No reason for my clients to have to "wade through" news that could move the market in the near term. Stay out for now.
July copper closed at $3.0955 per pound on Friday, up 3.35c on short covering after recent heavy losses. Copper "bounced" off 20-month lows and investors took profits, and reduced margin requirements due to the losses in other commodities. We see no change in demand from either China or the U.S., the two major users of industrial commodities. Our expectation for reduced demand from China and our view of a weak U.S. economic recovery keeps our bearish view intact. Hold put positions but once again, taking profits "off the table" is not a bad idea.
August gold closed at $1,293.40, up $7.20 or 0.6% on Friday on short covering but still posted a loss of $95.60 per ounce for the week. During the session gold traded as low as $1,268.70, its lowest price since September of 2010. We continue to suggest the sidelines in gold. September silver closed at $20.03 per ounce, up 16.5c but broke below $20 during the session trading as low as $19.365 per ounce. We had expected that $20 would be an interim bottom for silver and had suggested purchases at that level in recent weeks. We would hold any longs in silver barring any break in price to $18.70 per ounce. At that point we would abandon the position and once again stay sidelined. October platinum closed at $1,379.20, up $11.50 per ounce while September palladium gained $10.35 per ounce making our long palladium/short platinum spread benefit our subscribers. Platinum gained 0.8% against palladium’s 1.6% gain. Hold that spread.
Grains and Oilseeds: September corn closed at $5.91 ¾ per bushel, down 6 1/2c on technical factors, the strong dollar and no negligible weather related threat to U.S. crops. Stay out for now even though a corrective "bounce" could occur early in the week. September wheat closed at $7.04 ½ per bushel, down 3 1/4c as traders and analysts await yield reports from the early harvesting of winter wheat in the Southern Plains. Stay out for now. November soybeans closed at $12.70 ¼ per bushel, down 14 3/4c on technical selling, the strong dollar, and the expectation of increased planted acreage of soybeans in the U.S. We have favored the long side of soybeans but would only hold long call positions and not add for now.
Coffee, Cocoa and Sugar:
September coffee closed Friday at $1.1945, up 1.10c on short covering after recent weakness tied to Brazilian deliveries against the New York contract even at a 9c discount. We continue to favor the sidelines in coffee with the weak Brazilian Real prompting additional origin selling. September cocoa closed at $2,156 per tonne, down $1.00 tied to the U.S. dollar strength but in anticipation of a U.S. economic slowdown caused by the Federal Reserve proposed action of reducing quantitative easing. Stay out for now. March sugar closed at 16.97c up 4 ticks but remains weak tied to reduced demand and sufficient supplies. Friday light short covering tied to increased Brazilian conversion to ethanol. Stay out.
October cotton closed at 85.71c per pound, down 21 points and remains under pressure from long liquidation and farm selling. Some concern over weather in the delta could prompt short covering but we prefer the sidelines for now until an assessment of any impact from the severe weather materializes.