Overview and Observation;
The ramifications of Fed Chairman Bernanke’s speech last week are still resonating in the marketplace. Far too much attention, in our opinion, was paid to subject matters that are of no significance to global economics. The riots of millions in Egypt where the U.S. President had "supported" the removal of its President Hosni Mubarak, and "congratulated" the Muslim Brotherhood controlled government there with billions of taxpayer dollars of what I consider "tribute" to Islam. The "perpetual’ controversy over the immigration problem in the U.S. where millions of illegals remain in flux since the vote in the Senate will be challenged in the House of Representatives. The concept of asking illegals to come forward, identify themselves, wait 10 or more years to become naturalized, pay taxes or fines, and the "promise" of them going to the back "of the line" makes no sense to me or probably to them either. It is truly a problem of humanitarianism where those that "sneaked" into the country illegally, had children (who are now Americans) may be separated from them if they are caught not submitting to the new law and I see no viable solution. Another "favorite" subject of the media is the concentration on the $100 million being spent on the President’s trip to Africa with his family, which we see as having no financial or economic benefit to U.S. taxpayers at a time when the economy is "slipping back" into recession. While it is incumbent upon those of us who try to analyze the markets to make sense of the plethora of news, it is almost impossible to "throw" all of the "bits and pieces" of information into a "pot," "cook it" a while, and somehow come up with an "economically applicable and justifiable" mixture. For now I will use my 45 years of experience to "weed out" what I consider to be the "insignificant" and concentrate on what may be important to my readers and clients. Now for some actual information to accomplish that…
September Treasury bonds closed Friday at 135 24/32nds, up 5/32nds with a yield of 3.5% after it rose to over 3.6% in the aftermath of the Fed Chairman’s speech last week. Concern that the Fed may consider winding down its bond buying program later this year prompted the decline in bond prices. We do not feel the current rate of growth in the U.S. as exemplified by the less than "optimistic" GDP increase of 1.8% in the January to March period, down from the prior estimate of 2.4% is indicative an "economic recovery". The slower increase in consumer spending, the main element of the U.S. economy rose by only 2.6% against the prior estimate of 3.4% and does not support the thesis of a strong economy. Some selling of bonds resulted from the Thomson Reuters/University of Michigan’s consumer sentiment index for June coming in at 84.1 against consensus of 82.8. We wonder if the "consumers" polled were those exiting Tiffany’s with little blue bags. Since we do not agree with the assessment that the Fed will curtail quantitative easing any time soon, we favor the long side of Treasury bonds or the purchase of calls.
The Dow Jones Industrials closed Friday at 14,909.60, down 114.89 or 0.76% but for the week managed a gain of 0.74%. The S&P 500 closed at 1,606.28, down 6.92 or 0.61% but rose 0.87% for the week. The tech heavy Nasdaq closed at 3,403.25, up 1.38 or 0.04% and for the week gained 1.37%. The major impetus for the week’s trading centered around the U.S. Federal Reserve possibility of tapering of the bond buying program with the market moving back and forth in conjunction with reports by various Fed Presidents. We continue to feel the U.S. equity markets had moved far in advance of the "real" economic condition and that a continued "correction" will be forthcoming. We once again strongly suggest holders of large equity positions implement hedging strategies.
The September U.S. dollar closed Friday at 83.41, up 25.8 points against most of its trading partners. The prospect of the U.S. Federal Reserve tapering off its quantitative easing by the end of the year would be based on its assessment of an improving U.S. economy and that prompted the dollar strength. Higher U.S. interest rates attract dollar investment. The currencies that sold off were the Euro, which lost 33 points on Friday to close at $1.3019, the Swiss Franc lost 2 ticks to close at $1.0590, the Japanese yen 83 points to .010085, the British Pound 56 points to $1.5197, the Canadian dollar 27 points to 94.96c and the Australian dollar 1.34c to 9091c. We have favored the dollar for some time but some profit-taking may be in order because unlike the Fed, we do not see the economy improving so fast. However, since their opinion carries much more weight than mine, we could see further dollar gains. Hold some dollar positions but take some profits.
August crude closed at $96.56 per barrel on Friday, down 49c but for the month gained 4.7%. For the second quarter however, crude lost around 1%. Commodities sold off in June tied to the dollar strength with the news from the U.S. Federal Reserve the dominant factor in market action. We continue to feel the weak global economic situation will weigh on demand for energy and look for continued weakness for crude barring any geopolitical events, especially from the Middle East. We prefer the sidelines for our retail clients
September copper closed at $3.0620, up 25 points on light short-covering after recent heavy long liquidation. Copper lost 1.35% for the week and for the quarter lost 11.5% with much of the impetus tied to the dollar strength and the U.S. Fed’s possible tapering off of its quantitative easing programs. Weakening demand from China, the second largest user of industrial metals also a factor of late. We have preferred the short side of copper and once again, taking some profits is always recommended. Hold some put positions.
August gold closed at $1,229.10, up $17.50 or 1.5% on Friday tied to short-covering in front of the weekend. However, gold lost over 23% in the second quarter, the biggest quarterly loss since trading commenced in futures in 1970. I was there during the inception of gold trading at the Comex in New York. Gold suffered from a lack of buyers, the strong dollar, and the general selloff in commodities the main feature, however the weakening Chinese economic condition over the quarter and half year was a contributing factor. The usual "safe haven" during times of economic concern and geopolitical upheaval was "abandoned" by investors who saw demand from Europe and the Far East decline in favor of dollar investment and U.S. Treasury instruments. The media perpetuated the long term rally in gold as it "insisted" on a daily inundation of media advertising that all investors should own gold. The public agreed and prompted the long term rally in prices. That condition ended this year as gold and silver along with other industrial metals suffered from the "rush" to participate. We have been on the sidelines in precious metals for some time and are only now "thinking" of putting on some silver calls from here down to the $15 level. Otherwise stay out. September silver closed at $19.5150 per ounce, up 96.2c or 5.2% against gold’s gain Friday of only 1.5%. We had preferred silver over gold for a long time and are now once again looking at silver. October platinum closed at $1,340.40, up $11.30 or 0.9% while September palladium gained $8.70 per ounce of 1.3% closing at $659.40. Our preference of palladium or platinum also remains in effect.
Grains and Oilseeds: September corn closed at $5.47 ¼ per bushel, down 25c tied to larger than expected USDA estimates on acreage. Stay out for now. Corn lost 4.4% on Friday. September wheat closed at $6.56 ¾ per bushel as growers planned to plant more crop than analysts originally expected. Stay out of wheat as well. November soybeans closed at $12.50 ¾ per bushel, down 24 1/2c tied to growers sowing record acreage according to the USDA. We had preferred soybeans over corn and wheat since the increased corn acreage would have been taken from soybeans but now would stand aside awaiting fresh fundamentals. A few soybean calls might be considered however.
August cattle closed at $1.22225 per pound, down 70 points tied to profit-taking and lower corn prices would allow farmers to feed cattle a bit longer before marketings. We prefer the sidelines in cattle. August hogs closed at 97.7c per pound, down 1.7c also tied to reduced costs for corn feed. We prefer the sidelines here as well.
Coffee, Cocoa and Sugar:
September coffee closed at $1.2050, down 1.4c or 1.1% tied to better than expected weather in Brazil and an expected record crop. Stay out for now. We look for additional pressure and professional trades could consider short positions. September cocoa closed at $2,162 per tonne up $14 on a lack of fresh fundamentals from West African growers and global economic conditions. We prefer the sidelines in cocoa. October sugar closed at 16.9c per pound, down 11 ticks and remains on our "no interest" list.
October cotton closed at 85.23c per pound, down 90 points tied to reduced demand from users such as China even as this year’s acreage is 13% less than last year. We prefer the sidelines for now. We had expected reports of weather problems in the U.S. delta but did not materialize.