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.
The September U.S. Dollar Index (NYBOT:DXU13) closed at 8470, up 124.9 points on the U.S. jobs data as well as the ECB decision to use "low rates for an extended period," according to Mario Draghi. Losses included the euro (FOREX:EURUSD), giving up 1,85c to $1.2832, the Swiss franc (FOREX:CHFUSD) closing at $1.0387, down 1.85c, the Japanese yen (FOREX:USDJPY) .09887, down 1.07, the British pound (FOREX:GBPUSD) losing 3.75C to $1.4892, the Canadian dollar (FOREX:CADUSD) down half a cent to 94.40c and the Australian dollar (FOREX:AUDUSD) 24 points to 90.12c. The U.S. jobs data pushed yields higher and that attracts dollar investment. We had suggested taking some profits in our long standing bullish bias for the dollar but holding some dollar long positions. We now feel taking additional profits off the table on the basis of an expected correction in the Treasury and equity markets could impact the dollar. Move to the sidelines for now. I will be advising clients of any change during the week. We are awaiting the Federal Open Market Committee’s minutes on Wednesday.
August crude oil (NYMEX:CLQ13)closed at $103.22 per barrel on Friday, up $1.98, or 2.36% tied to the gains in U.S. equity markets, and concern over the potential for disruptions of Middle East oil through the Suez Canal because of the Egyptian crisis. We suggest the sidelines for now even though current supply/demand does not warrant these elevated price levels. Stay out.
September copper (COMEX:HGU13)) closed at $3.0710 per pound, down 10.35c reflecting reduced demand from China as well as the dollar strength in which it is denominated. We are long term bears for copper and see no need to change our opinion other than to suggest taking profits "off the table." The market action of late has produced what we feel were extreme reactions to economic and geopolitical reports and tantamount to pulling a "rubber band too far in one direction only to have it rebound too far in the other." The sidelines now is the prudent posture.
August gold (COMEX:GCQ13) closed at $1,212.70 per ounce, down $39.20 or 3.1% on Friday tied mostly to the larger than expected gain in U.S. jobs last month as well as the dollar strength in which it is denominated. Our sideline posture remains unchanged. Once again I have had to remind those that asked me about purchasing gold of the 1980 move when gold first trading at $875 per ounce. It took those investors more than 25 years to break even. I view that as a "poor" return on investment…and it could happen again. As I mentioned, I had a few one ounce gold Eagle coins in a drawer and sold them at $1,747 per ounce after gold retreated from over $1,900 per ounce and that resulted, in hindsight, (20/20) my best trade of 2012. For those that "must have" a precious metal in their portfolio, try silver (COMEX:SIU13),which has outperformed gold on a percentage basis. September silver closed at $18.815 per ounce, down 88.5c and may be ready for a "technical" bounce. October platinum (NYMEX:PLV13) closed at $1,3280 per ounce, down $18.80 while September palladium (NYMEX:PAU13) closed at $682.20, down $3.50. My spread suggestion of long palladium/short platinum continues to perform even in a down direction. Platinum lost 1.4% Friday while palladium lost 0.5%. For my retail clients I suggest the sidelines in precious metals. My professional clients can use Fridays weakness to put on long palladium/short platinum spreads. Bear in mind the contract size in palladium is 100 ounces while platinum is 50 ounces. The dollar move difference is the consideration, not the contract size.
Grains and Oilseeds:
September corn (CBOT:CU13) closed Friday at $5.26 ¾ per bushel, down 5 1/2c tied to a lack of fresh fundamentals and the strong dollar. With normal temperatures and rains we see no reason to enter this market. Exports remain as expected. Stay out for now. September wheat (CBOT:WU13) closed at $6.59 ¾ per bushel, down 5 1/4c also tied to the dollar with no change in basic fundamentals. Concern that the Egyptian crisis could keep Egypt out of the import market pressured wheat prices as well. Stay out for now. November soybeans (CBOT:SX13) closed at $12.27 ¾ bushel down 23c as export inspections reported in line with expectations. The tight old crop situation could continue to provide support even against the strong dollar. We like the long side of soybeans from here and would buy some calls.
August cattle (CME:LCQ13) closed at $1.22075 per pound, up 12.5 points on short-covering and for the week managed a gain of 3.2%, the largest gain since September of 2012. We may have seen the bottom since this action in the face of a strong dollar is, in our opinion, a positive sign. Buy some calls in the deferreds. August hogs (CME:HEQ13) closed at 97.725c per pound, up 87.5 points also on pre holiday weekend short covering even against the strong dollar. Good retail buying also a plus for both cattle and hogs this past week. We prefer the sidelines in hogs however.
Coffee, Cocoa and Sugar:
September coffee (NYBOT:KCU13) closed at $1.2070 per pound, down 70 points mostly against the strong dollar with a quiet cash market. Some roaster buying at the lows kept prices from declining further and some reluctance from Brazilian farmers awaiting higher prices before moving beans. We like the sidelines in coffee. September cocoa (NYBOT:CCU13) closed at $2,200 per tonne, down $30 tied to good harvest weather and movement of beans to ports in western Africa. Dollar strength also a factor. We prefer the sidelines here as well. October sugar (NYBOT:SBV13) closed at 16.24c per pound, down 18 points tied to the strong dollar against the Brazilian Real. Sugar remains on our "no interest" list. Technicians continue to talk about "support levels," which keep getting "adjusted" as selling pressure continues. Stay out for now.
October cotton (NYBOT:CTV13) closed at 86.37c per pound, down 77 points. The lack of any damage from the recent heavy rains in the Delta prompted long liquidation. We prefer the sidelines for now.