Overview and Observation:
As I indicated recently, markets are "influenced" by the U.S. Federal Reserve as well as geopolitical events. On Friday the jobs data prompted a "flight" from the relative safety of Treasuries and precious metals, to the risk asset of equities. Most commodities suffered losses tied to the "rush" to avoid missing the "equity boat." Our view, of course, is that the name on the side of the "boat" is Titanic and we warn once again about the "irrational exuberance" resulting from the "positively construed" jobs and "confidence" data. That data ignores the relevance of the weekly "jobs lost" figures of more than 340,000 or more as indicated by the first time unemployed applications. The jobless rate of 7.6% also ignores the "underemployed," those that have taken positions paying much less than the jobs they had lost, and the workers who left the job force in search of part time jobs or who tried to start their own home businesses. The "joy" associated with the jobs data ignores a number of factors that we feel will come into play as time goes on. Not the least of these factors are higher taxes, concern over the fiscal impact of "Obamacare" on businesses, a reduction in U.S. federal spending and the weakening global economies. Market extremes, in our 45 years of experience, dictate an equally dramatic correction will occur and we suggest our readers review their financial positions and make adjustments accordingly. Now for some actual information…
September Treasury bonds (CBOT:ZBU13) closed Friday at 132 15/32nds, down 3 and 3/32nds pushing yields to their highest level in nearly two years. Better than expected jobs data and the interpretation of the recent statements by Fed Chairman Bernanke prompted the sharp increase in yields. The Fed Chairman intimated that the bond purchase program might "taper off" later this year prompting ideas that the Fed views the economy as strengthening and reduced the need for additional easing. That, however, is not the case in our opinion. While the jobs "created" number of 195,000 for June exceeded estimates of around 165,000, the ongoing labor situation remains in flux. The unemployment rate remains at 7.6% and the Fed has already indicated the QE program would only be reduced when the rate declines to 6.5% or less. The broader unemployment rate, including those who have taken part time work and those who have given up looking for work increased in June to over 14%. The reported 4.3 million American workers who have been out of work for more than six months equates to more than a third of the overall unemployed. The U.S. GDP expanded a 1.8% annualized through March, down from the earlier estimate of 2.4% according to the Commerce Department. Also the economy is now expected to grow by 1.9% in 2013, down from last year’s 2.2%. Treasury prices have lost 3.2% in May and June, the worst two-month performance since the first two months of 2009 when they lost 3.6%. The yield on the 10-year notes (CBOT:ZNU13) increased 18 basis points to 2.68% and is the basis for mortgage loans. The 30-year bond yield rose to 3.71% from earlier 3.49% and is also of concern for expansion through borrowings for mortgages, car loans and general credit. We continue to feel the reaction to the jobs data on Friday was overdone and we look for a return to a more normal assessment of the current situation and a correction from Friday’s overdone condition as relates to Treasuries and equities.
The Dow Jones Industrial Average (CBOT:DJU13) closed at 15,135.84, up 147.29 points on Friday or 0.98% tied to the better than expected nonfarm payrolls data. The S&P 500 (CME:SPU13) closed at 1,631.89, up 16.48 points or 1.02% while the Nasdaq (CME:NDU13) closed at 3.479.38, up 35.71 or 1.04% higher. With earnings season approaching we look for a return to normalcy with equities priced closer to values tied to price/earnings ratios and our expectation is for subdued numbers and the resulting selloff in equities we have been suggesting for some time. Our overall view of equity markets is negative and of late our projections have been joined by some influential market analysts. We once again suggest implementing strategic hedging programs for holders of large equity positions.