Overview and Observation;
The rhetoric from Washington continues to run rampant. The "glee" associated with the monthly jobs "created" figure ignoring the weekly first time unemployment number is a painfully obvious "exclusion" of reality. The jobs created number completely ignores the quality of those jobs. The "household survey" shows that "731,000 of the 953,000 jobs created in the U.S. so far in 2013 are part time." That survey is the basis for the national unemployment, which was reported Friday as having “declined” to 7.4% in July from 7.6% for June. The jobs created figure was 162,000, which was sharply lower than the "analyst" prediction of 195,000-200,000. The downward revision of the prior months jobs "created" is also of concern to us. The economic "strength" is misguiding the American public as the number of part time workers increased during the recession and is holding just under 20% after the "recovery" started in 2009 and continues at that level. The "exclusion" of the correlation between the weekly unemployed figure of over 320,000 against the monthly jobs created figure of under 200,000 makes the "labor and economic recovery" suspect. We will continue to report on economic "progress" in "either direction." Now for some information we hope will assist our readers in the determination of their investment analysis…
The September 30-Year Treasury bond (CBOT:ZBU13) closed Friday at 133 20/32nds, up 1 19/32nds and continues to be "directed" by the U.S. Federal Reserves "indications" of changes in the bond buying program expected later this year. The disappointing July non-farm payrolls number added to the wild price swings in the Treasury instrument prices and subsequent yields. The 30-year bond yield declined 7 basis points back to 3.687% after rising to over 3.7% during the week. We have been on either side of this market but with a positive bias toward prices. Our continued belief is that the U.S. economic recovery is being view through "rose colored glasses," and interest rates remain the concern for investors trying to assess their positions in bonds and equities. The question also of who will take the "helm" of the Federal Reserve once Chairman Bernanke leaves is also of concern. The question of whether Summers or Yellen will be appointed by the President leaves us with the problem of two different philosophical attitudes. Summers was instrumental with the repeal of Glass-Steagal which kept the banking and brokerage operations separate. The repeal prompted banks to package good and bad mortgage products, securitize them and market them through their brokerage entities globally. Our opinion has been that this was the basic cause of the global financial "meltdown" and recession in the U.S. and internationally. Obviously, for the sake of the country, we prefer Yellen but Summers is a staunch supporter of this President and he likes to "pay his bills"….. stay out for now but our preference is the long side of the 30-year bond.
The Dow Jones industrials closed Friday at 15,658.36, up 30.34 and for the week rose 0.64% to another all-time high as did the S&P 500 which closed at 1,709.67, up 2.80. For the week the S&P 500 (CME:SPU13) gained 1.07%. The tech heavy Nasdaq closed Friday at 3,689.59, up 13.84 and for the week rose by 2.12% still off the all-time high over 5,000. The weaker than expected non-farm payrolls data failed to diminish the enthusiasm that has prompted the bullish sentiment among investors. Earnings to some extent, have supported the "exuberance" toward equities but our view of increased net earnings on reduced overall sales is suspect. It leads us to believe that "improved" productivity, the practice of having a worker do the job of two or more laid off workers as well as the cost reductions tied to the hiring of part time workers to avoid the eventual implementation of "Obamacare" costs could be a contributing factor. We expect results to adjust themselves as our ongoing admonition that "an unemployed consumer does not consume and the producers of those products will be next to lay off workers. Another assumption of ours is that any reduction in the first time unemployment benefits applications will merely be a result of few workers available for lay off with a company "shutting its doors." The resulting reduction, while greeted with investor enthusiasm, will not be conducive to an improved labor and economic condition. We have been "joined" by other analysts as to the possibility of a severe equity market "correction." A stockbroker once told me that the "markets always come back" and I asked him when will Enron come back….No response but I do recognize through history markets have "eventually" recovered and moved higher. The question is why investors should "ride" the decline without some risk hedging strategy?
The September U.S. Dollar Index (NYBOT:DXU13) closed Friday at 8199.5, down 43.2 points after having gained on Thursday tied to the jump in manufacturing activity and the reduced first time unemployment claims which fell to the lowest level since early 2008. Expectations are that the U.S. Federal Reserve will slow its bond purchases later this year indicating their assessment of an economic improvement that would cause higher rates and improve dollar investment attraction. The Institute for Supply Management’s manufacturing index rose to 55.4% in July from 50.9% in June over expectations for a 52.0% reading by analysts. We have been positive toward the dollar for some time not based on U.S. economic improvement but only relative to the greater problems within the Eurozone community. Other currencies gaining against the dollar were the Euro up 68 points closing at $1.3284, the Swiss Franc 83 points to $1.0764, the Japanese yen 67 points to 0.010118, and the British Pound, 1.64c to $1.5279. Losses against the dollar were the Canadian dollar 41 points to .9614c, and the Australian dollar 33 points to .8878c. The dollar rally on Thursday was prompted by the ECB’s policy decision to hold the key lending rate at 0.5%. The Australian dollar has declined tied to the Chinese decline in manufacturing. China is Australia’s largest export market. We prefer the sidelines for now.
September crude oil (NYMEX:CLU13) closed Friday at $1.0679 per barrel, down $1.10 tied to the lower than expected growth in the July U.S. non-farm payrolls. The two day 4.7% rise in crude prices to a two week high on concerns over the Egyptian strife that threatens the Suez Canal through which most crude is transported prompted the recent rally in prices. The overall supply/demand situation however, remains stable and we continue to expect a correction to a price level more conducive to sustaining economic viability in the Western importing countries. I think put positions are in order.
September copper closed Friday at $3.1665 per pound, up 5 points but remains near recent lows after recent reports of reduced Chinese manufacturing. Friday’s U.S. jobs data was also a determining factor in the slight "bounce" even as concern over U.S. and China demand plays a defining role in future pricing. We had been extremely bearish for some time and recently suggested taking profits "off the table." We are on the sidelines here but expect a resumption of selling pressure as our expectation of weakening economic data from the U.S. and China continues to suggest a global recessionary trend.
October gold (COMEX:GCV13) closed Friday at $1,307.50 per ounce, down $3.30 after having traded over $25 per ounce lower early in the session. The U.S. July jobs report and the dollar decline prompted the recovery in gold before the weekend. Barricks, the world’s largest producer of gold posted an $8 billion loss after the recent sharp price declines in gold. We have been suggesting to investors the feasibility of trading in gold futures and bullion rather than in mining companies since whatever the price of gold does, is not necessarily translated into mining company stock prices. My report on precious metals relative to stocks was that if gold goes up, the logic of buying gold mining company stock is not necessarily reflected in stock prices. The companies’ performance, labor unrest such as strikes etc. could cause the stock to trade adversely against the actual metal so my report entitled "The tail does not wag the dog" could be helpful in understanding that relationship. It is available upon request. September silver closed at $19.7950 per ounce, up 17.1c on short-covering after its recent decline, which exceeded on a percentage basis against gold. Markets usually move in tandem but over time silver has outperformed gold on a percentage basis and would be our choice for those that "insist" on owning a precious metal in their portfolio. For the week gold lost 0.9% whereas silver gained 0.7%. October platinum closed Friday at $1,4470 per ounce, up $3.20 while September palladium lost $1.80 to close at $730.05 per ounce. Overall we prefer the sidelines in precious metals.
Grains and Oilseeds:
September corn (CBOT:CU13) closed Friday at $4.76 ¼ per bushel, down 11 1/4c tied to beneficial rains in the Midwest with prices down to 34 month lows tied to the expectation of a huge crop this fall. We continue to prefer the sidelines in this group as recent storms have so far failed to provide concerns. September wheat (CBOT:WU13) closed Friday at $6.60 ½ per bushel, up 2 1/2c on short-covering and better global demand. November soybeans closed at $11.81 ¼ per bushel, down 11 1/4c on technical selling that pushed prices through support levels and reduced concerns over tight supplies in the cash market. We prefer the sidelines but a few soybean calls may be in order for speculators. Otherwise stay out until fresh fundamentals emerge either from the U.S. or Brazil.
I was unable to monitor the activity in the livestock markets this past week and therefore cannot comment other than to provide closing prices. October cattle closed Friday at $1.2480, up 30 points while October hogs lost 5 points to close at 83.85c per pound. These markets remain uninteresting for now.
Coffee, Cocoa and Sugar:
September coffee (NYBOT:KCU13) closed at $1.1820 per pound, up 2.6c on reports that the Brazilian Agricultural Ministry would announce measures on Monday to improve prices after touching four year lows on Thursday. The strength in the Brazilian Real has kept farmers from selling their crops overseas since they receive less for their crops tied to the weak U.S. dollar. We will have to wait and see what particular action the Ministry announces. Stay out for now but a few calls may be in order for speculative clients. September cocoa closed at $2,291 per tonne, down $10. Recent reports that the West African output for 2012-13 was above that of last year as well as Ivory Coast port arrivals above the prior year could continue to pressure prices. We prefer the sidelines in cocoa. October sugar closed Friday at 16.74c per pound, down 9 points even after some concern emanated on the possibility of frost damage to the Brazilian sugar cane crop. We prefer the sidelines here as well.
October cotton (NYBOT:CTV13) closed Friday at 85.08c per pound, down 80 points tied to the International Cotton Advisory Committee indications of an increased estimate for world cotton stocks. The USDA expectation that China’s poor weather in the producing province of Xinjiang could reduce output from lower sowings was a positive factor in the light short-covering but prices remain mired in the middle of the 81.80 to 90.80c recent May/June range. We prefer the sidelines.