Overview and Observation;
The market action this past week clearly demonstrates the extreme sensitivity to any news related to the U.S. Federal Reserve. The historic relationship between supply/demand factors continues to play a role in price action for many of the commodities we follow including equity indexes, Treasury securities and traditional commodities. However, any reference to changes in the economic condition of the country or the "pronouncements" of the various U.S. Federal Reserve regional Presidents as related to their perception of the economy causes sharp global reaction. The basis for most financial markets is the U.S. interest rate structure as related to that of its global trading partners individually or collectively. A defacto change in rate relationships generated by either the U.S. rate adjustment or that of its global trading partners has an immediate effect on currencies, which in turn translates to specific investment instrument values. One might suggest the analysis of the basic interest rate anticipation to determine strategy as opposed solely to the application of supply/demand factors of the markets they trade. For that reason we sometimes suggest the "sidelines" simply due to the inability to forecast "philosophical" changes within those institutions whose decisions could change market direction dramatically. Corporation concerns over the impact of the implementation of "Obamacare" are prompting the huge increase of hiring of part time workers as opposed to full time workers for that reason. The reduction in "taxable income" could also cause the reduction in consumer spending and that would not bode well for economic expansion. We will have to see how corporations react once full implementation of Obamacare takes effect. Now for some actual information along with my usual spin…..
The September U.S. Treasury bond closed Friday at 134 26/32nds, up 26/32nds slipping slightly off its intraday high of 134 31/32nds after the consumer sentiment report from the Thomson Reuters/University of Michigan showed a positive reading of 85.1 for July. That was a six year high and better than the expected 84 by economists. This coming week important information includes the Wednesday Fed Open Market Committee report as well as the Friday monthly labor report. One of our concerns is the bandying about of who might be considered by President Obama to head the Fed once Chairman Bernanke steps down. The President’s consideration of Larry Summers could be problematic in our opinion. Summers was instrumental in the repeal of the Glass-Steagall Act allowing Banks to establish Brokerage entities and market "mortgage" packages through its brokerage facilities globally. I feel the single most dramatic cause of the housing and mortgage debacle was the ability for those banks to package good and bad mortgages, securitize them, and market them globally. Needless to say I would prefer Yellen to Summers but perhaps other qualified people could be considered. Compared to Summers, I would prefer "Elmer Fudd"… With our expectation for continued "weakness" in the U.S. economy, I like the long side of bonds. However, without the foresight of what the Fed feels and the Friday labor report, I would opt for the sidelines until more definitive information is available.
The Dow Jones 30 Industrial average closed Friday at 15,558.83, up 3.22 and for the week gained 0.10%. The S&P 500 closed Friday at 1,691.65, up 1.40 losing 0.03%. The tech heavy Nasdaq closed at 3,613.16, up 7.98 and for the week gained 0.71%. The best performer in the Nasdaq was Activision Blizzard Inc. gaining 15.02% and the worst performer was Expedia Inc. losing 27.38%. the Thomson Reuters/University of Michigan’s consumer sentiment index of 85.1 was the highest level in six years and prompted the rally Friday. We continue to believe the U.S. economy is entering a new recessionary phase and implore holders of large equity portfolios to implement strategic hedging programs in order to offset to some extend the sharp market correction we see in the future. We can provide information to those investors as to establishing programs specific to their requirements.
The September U.S. dollar index closed Friday at 8173.5 down 31.8 points as investors stepped back pending the Federal Reserve’s monetary policy statement on Wednesday. Also on the calendar is the Friday key jobs report for July. We had suggested taking profits on the dollar and would now remain on the sidelines pending further clarification of the U.S. Federal Reserve statement. However, relative to the economies of the U.S. global trading partners, the U.S. economy is in better condition financially. That does not mean we favor the rhetorical statement from Washington pointing an "economic recovery". For now we like the sidelines. On Friday the Euro closed at $1.3283, up 37 points, the Swiss Franc $1.0776, up 39 points, the Japanese yen $.010182, up 136 points, the British pound $1.5383, up 28 points the Canadian dollar 97.23c up 13 pints and the Australian dollar 9240c up 58 points. Stay on the sidelines for now.
September crude oil closed Friday at $104.70 per barrel, down 79c after trading as low as $103.90 during the session. Over the past few weeks crude has gained approximately 15% tied to the concerns that the current strife in Egypt could result in the possible closure of the Suez canal. With the Syrian and Egypt situations we are on the sidelines but our overall view is negative tied to basic supply/demand criteria. The manufacturing sentiment for China is negative and as one of the largest users of energy, supplies are more than adequate giving us our bearish view.
September copper closed Friday at $3.1070, down 7.985c tied mostly to the lack of buying by China, the second larger user of industrial metals behind the U.S. Copper prices have dropped 15% this year and we have been bearish the entire time. We had suggested recently taking some profits "off the table" but maintaining some put positions. Our opinion remains negative.
October gold closed at $1,333.30 on Friday, up $4.20 and over the past three weeks "recovered" 8.8% from the heavy losses suffered since trading at $1,911 September of 2011. We had commented to investors asking about gold that in 1980 when gold first traded at $875 per ounce, it had taken 25 years for those buyers to just break even. The ROI was not very gratifying financially. Asked if it could happen again from the $1,800 level, I responded, "why not" and tried to talk them out of it. For now we prefer the sidelines in precious metals since the response to the geopolitical events in the Middle East has not provided any material influx of demand for gold. In the past such events would have met with an immediate positive response. We are on the sidelines in gold. September silver closed Friday at $20.02 per ounce, down 13.4c. For those that "must have" a precious metal in the portfolio, we prefer silver based on its past percentage performance against gold. October platinum closed at $1,432.80, down $15.10 per ounce or 1% while September palladium closed at $726.20 per ounce, down $14.55, or 2%. We prefer the sidelines here as well while preferring palladium over platinum.
Grains and Oilseeds:
September corn closed at $4.91 ¾ per bushel, down 4 1/4c tied to output expectations of a 23% increase. We prefer the sidelines in corn. September wheat closed unchanged Friday at $6.49 ¼ per bushel holding steady but the USDA report showing demand for U.S. wheat lower and projections for increase global supplies. We are on the sidelines here as well. November soybeans closed at $12.29 per bushel up 5c on pre-weekend shortcovering but recent expectations for a bumper crop barring any early frost, is negative for beans as well as corn. For the group we have to remain on the sidelines for now. However, in the case of soybeans, I like the idea of putting on a few out of the money calls to take advantage of any early frost conditions that may emanate. Brazilian weather also a consideration.
October live cattle closed Friday at $1.25975, up 47.5 points on speculation that mile U.S. weather could lead to higher demand for beef as "grilling season" progresses. Wholesale prices gained 0.4%, it largest increase in four weeks according to the USDA. We like cattle from here but use stop protection. October hogs closed at 84.85c per pound down 1.125c, or 0.8% on Friday. Reduced consumer demand the main reason. Expectations for increase Chinese pork imports might reverse the recent downtrend. However, we prefer the sidelines in hogs.
Coffee, Cocoa and Sugar
: September coffee closed Friday at $1.2260 per pound, down 2.2c tied to reduced concerns over Brazilian crop damage which was less than previously expected. We prefer the sidelines in coffee but a few puts may be in order. September cocoa closed Friday at $2,331 per tonne, down $16 on profittaking after recent figures put the cocoa grind at better than expected in the U.S. and Asia. We had suggested call purchases last week and now would just hold those calls and add on setbacks. Concern that the West Africa main crop might be impacted by poor weather hindering pod development and expectations for a smaller crop next season could prompt additional buying. October sugar closed at 16.47c per pound, up 8 points but anticipated reduction in demand could increase selling pressure on sugar prices. Stay out.
October cotton closed Friday at 85.20c per pound, down 99 points tied to expectation that China, the world’s largest user, will product more cotton that previously forecast. We prefer the sidelines for now.
Prices through yesterday were up 14 percent this year on signs of reduced output in the U.S., the world’s largest exporter.