Overview and Observation;
Investors persist in their blind "belief" in the equivocation from Washington of an economic recovery. The equity markets as well as the continuing messages from various Federal Reserve regional Presidents seem to indicate that quantitative easing through the purchase of Treasury instruments will be ending soon. The basis for that "termination" is the belief as well, that the labor situation is improving and that the need for continued low rates through "easing" is becoming unnecessary. That could not be further from the truth. As I have been "explaining" rather vigorously, the prospect of a "jobless recovery" is in fact, a frivolous ploy intended to placate the public into "spending" rather than "saving for the rainy day" that I personally expect is forthcoming. Not all consumers believe that rhetoric from Washington and are in fact withholding their spending plans to a great extent as evidenced by "consumer spending" data.
Once again, for the blind or oblivious, you cannot consistently lose over 330,000 jobs a week against a monthly gain of fewer than 200,000 "questionable" jobs created without some negative impact on the economy and ultimately the markets. Also the fact that employers are unwilling to hire full time staff and the increase in jobs to a great extent is the hiring of part time workers. The government change from a 40-hour week to a 30-hour week basis is going to impact the job market even further in my opinion.
That will translate to further contraction in consumer spending as well as lead to a growing skepticism and ultimately a stock market "meltdown." One respected analyst is anticipating a "1987 type market crash" where the Dow lost over 22.6% in just three days, Thursday, Oct. 15, Friday the 16th, and finally Monday the 19th. I was around then and witnessed the "tears" from the Ph.Ds. in the board rooms where the margin department professionals had to come out of the back rooms to liquidate positions because the salesmen were frozen in panic.
The markets are in "loftier" heights after the recent rally promulgated on the rhetoric from Washington. While I don’t expect the selloff to compare to the magnitude of 1987, I do expect a 2008-09 style selloff once the investing public has had a chance to look more closely at the "real unemployment and underemployment" situation in the U.S.
Europe is in the throes of recession and the austerity programs developed by central banks are drawing extreme criticism and protests from the public. I do not see it improving any time soon since some of the Eurozone countries have no way to service their outstanding debt burden and the prospect of additional "lending" is tantamount to "throwing money down a well" in my opinion. Now for some actual information…
The September Treasury bond (CBOT:ZBU13) closed Friday at 134 15/32nds, up 6/32nds as money "made the trip" from equities to the safety of the U.S. treasury market. The yield on the 30-year bond fell 2 basis points to 3.629% while the yield on the ten year fell 1.5 basis points to 2.577%. The market did not have much in the way of economic data this past week on which to base movement other than the "anticipation" of what the U.S. Federal Reserve may do in the future. Wholesale inventories declined by 0.2% in June, less than the economist forecasts of a 0.4% gain. While we will have to "wait and see" what the Fed will say next, we expect the "easing" program to continue in the face of what we see as a flat to declining labor situation. Hold bond calls.
The Dow Jones Industrial Average closed Friday at 15,425.51, down 72.81 and for the week lost 1.49%. The S&P 500 (CME:SPU13) closed at 1,691.42, down 6.06 and for the week lost 1.07%. The tech heavy Nasdaq closed Friday at 3,660.11, down 9.02 and lost 0.8% for the week. In the S&P 500 utilities led the losses while consumer cyclicals also declined by 0.25% for the day. Basic materials were 1.58% higher after gaining 3% on Thursday tied to the better than expected economic data from China, the largest user of industrial materials and metals.
The September U.S. Dollar Index (NYBOT:DXU13) closed Friday at 81.15, up 12.3 related to U.S. Treasury yields. Lower U.S. interest rates detract from dollar investment attraction and for the week declined by around 1%. Friday’s action was short covering in front of the weekend. We had suggested recently taking profits after our long term bullish stance on the dollar. Currency losses included the Euro losing 48 points to close at $1.3343, the Swiss Franc 33 points to $1.0847, and the British Pound 38 points to $1.5506. Gains were posted by the Japanese yen 31 points to .010393, the Canadian Dollar 29 points to .9713, and the Australian dollar 74 points to .9172. These markets will continue to be directed by U.S. and Eurozone interest rates, and economic data. We prefer the sidelines for now.
The September crude contract (NYMEX:CLU13) closed Friday at $105.97 per barrel, up $2.57 tied to the gains in Chinese industrial production and the increase in the International Energy Agency’s global demand forecast. Friday’s gain offset the five-day losses in price. While we have been negative toward crude based on adequate supply expectations we also offered the caveat of concerns that the Egyptian "crisis" could result in closure of the Suez Canal through which much of the world’s oil is shipped. We prefer the sidelines for now.
September copper closed Friday at $3.3080 per pound, up 3.75c tied to China’s economic data which showed factory production grew 9.7% in July from the prior year. Expectation had been for an 8.9% increase. China is the largest buyer of industrial metals and the recent recessionary trend had provided pressure on prices in line with our bearish expectations. Our suggestion of "taking profits off the table" in recent commentaries was prudent and we are now on the sidelines in copper.
December gold (COMEX:GCZ13) closed Friday at $1,312.20 per ounce, up $2.30 tied to the better than expected economic data from China, a major consumer of industrial and precious metals. We could see further buying but our overall position has been to remain on the sidelines. The wide price swings in metals are not conducive to investment by retail clients and the sharp decline from the loft levels of $1,900 per ounce to $1,200 per ounce is evidence of our sideline position. Investors who insist on having a precious metal in their portfolio should consider silver on the basis of long term percentage gains over gold. Otherwise stay out. On Friday September silver closed at $20.41 per ounce, up 22c or 1.57% against the gold gain of 0.27%. October platinum closed Friday at $1,500.60 per ounce, up $9.00 while September palladium gained $2.45 to close at $741 per ounce. We consider these markets as trading vehicles for professionals.
Grains and Oilseeds:
September corn (CBOT:CU13) closed Friday at $4.64 ¾ per bushel, down 8 3/4c tied to expectation of U.S. farmers about to produce the largest corn crop ever along with increasing global stockpiles the largest in 13 years. Hedge funds as well as speculators are betting on continued price pressure for corn. We are on the sidelines. September wheat (CBOT:WU13) closed at $6.33 ½ per bushel, down 7 ¾c on continued pressure from the recent USDA report, which also impacted soybeans. November soybeans (CBOT:SX13) closed Friday at $11.83 per bushel, down 1 1/4c and as with others in this segment we are on the sidelines. Our recent suggestion of putting on a few calls remains intact but would not add to existing positions for now. Weather in the U.S. growing areas as well as Brazil will determine future price action. For now our "crystal ball" is "cloudy" and offers no clue.
October cattle closed Friday at $1.26925, down 1.5c after having traded limit up 3c on Thursday. The feeder cattle market tied to the Tyson ban on cattle using Zilmax feed prompted an immediate shortage of marketings and pushed prices higher. We have been on the sidelines but now would consider purchases of December contract using stop protection. October hogs closed at 85.15c per pound, down 1c after gaining on the switch from beef tied to pricing but we do not see any reason to buy hogs. The "barbecue" season has not seen any increase in demand for pork products. Stay out for now but watch for gains in demand by China, whose recent improvement economics have provided some support based on the purchasing ability.
Coffee, Cocoa and Sugar:
September coffee closed Friday at $1.2240 per pound, up 35 points tied to reports of Brazilian farmers increasing the amount of arabica beans in blends thanks to the premium over the less favorable robusta beans. We could see further price gains and would look to buy the dips using stop protection of course. September cocoa closed Friday at $2,452 per tonne, down $14 after recent gains tied to the dry weather in West Africa especially Ghana and the Ivory Coast. With increased offerings on Ivory Coast beans, we could see some delays at the ports which would reduce availability. We like the long side of cocoa but use stop protection here as well. October sugar closed at 17.01c per pound on Friday, up 19 ticks on technicals after having bounced off recent lows. We could see momentum traders adding to long positions but we prefer the sidelines in sugar even as some assessment of frost damage in Brazil is being assessed. Stay out for now.
October cotton closed Friday at 88.95c per pound, down 43 points after recent sharp gains tied to weather concerns in Oklahoma and Texas that could result in a smaller than expected harvest. The USDA report should give better indications so we would wait until after the report before issuing recommendations or comments. Technically we should see continued price gains.