Overview and Observation: The escalating crisis in Egypt is materially affecting the psychology of the global energy situation as well as the lack of influence of the U.S., the biggest provider of funds to the country. The unfortunate expectation of the United States that all countries must have democratically elected leadership has come "home to roost." The majority in some Middle East countries is Muslim extremist controlled and in my opinion, dictatorship is preferable to "majority rule." The removal of dictators does not always work to the general interests of the international community. Ghaddafi was removed and resulted in "Benghazi" and an unsettled Libya. Saddam Hussein was removed and resulted in the loss of thousands of American lives in Iraq as well as the Afghanistan situation where "Russia learned its lesson" and left. After the initial "destruction" of the Hussein control in the area, I saw no reason to remove him since he still maintained full control over his people and learned his "lesson" about invading his neighbors, i.e. Kuwait. The fact that some of these dictators as well as certain country politics such as with China, is not "preferable" to the U.S. democratic intentions is irrelevant since it maintains a level of continuity and peace. The "arrogance" of the U.S. for instance trying to "dictate human rights" to the Russians and Chinese who have a history of dealing with its people can only lead, in my opinion, to the return of the "cold war" mentality. The U.S. allowing its "friend," the Shah of Iran, to be toppled by the Muslim extremist Kohmeini, left us with the current Iran situation. Removing Battista of Cuba left us with Castro. At some point the U.S. must recognize it cannot impose its "will" on others and in some situations, the "status quo" is preferable. It is difficult enough for analysts like myself to try to determine the effect of "normal" supply/demand factors in approaching the markets with some form of normalcy without trying to include in our thinking the ramifications of international geopolitical concerns. The current "fear factor" premium for energy for instance, is the possible closure of the Suez Canal shipping route. Other concerns of course can be mitigated such as the U.S. and international trading partners’ economic consideration as well as the impact of "Obamacare" on corporations. I will try to navigate through all the global news and economic data that could have an impact on the markets we follow. Now for some actual information…
Interest Rates: The December Treasury bond (CBOT:ZBZ13) closed Friday at 129 and 20/32nds, down 1 full point or 32/32nds on concern over monetary policy where the expectation that the Federal Reserve would "taper" off its quantitative easing program based on their view of economic improvement. We of course disagree with that assessment and see a continuation of weak to lower economic condition in the U.S. The University of Michigan/Thomson Reuters consumer-sentiment index was 80 in early August readings against 85.1 in July. Corporations are hiring four times as many part-time workers as full-time workers in order to avoid the ramifications of U.S. healthcare (Obamacare) requirements under the new law. Reducing the workweek from 40 to 30 hours by the U.S. Administration is only causing companies to hire on a 28-hour per week basis. On Friday reports that President Obama is favoring Larry Summers as Mr. Bernanke’s replacement as Fed Chairman was also a negative since Summers was instrumental in the repeal of Glass/Steagal which allowed banks to securitize mortgages and market them through their global brokerage firms. The resulting global "credit meltdown" was the basis for the worst recession in the U.S. since the 1930s. Summers was a major supporter of the President and it seems the President is paying his "debt" not necessarily in the best interests of the U.S. In other news the Labor Department reported non-farm productivity rose 0.9% for the second quarter of the year, above economist forecasts for a 0.7% increase. "Good" economic news is not good for bond prices and our recent preference for bonds was set aside for now. However, with the expectation that the U.S. economy is not in "recovery" but "stagnant" and more inclined to the resumption of a recessionary trend tied to the labor situation, we would look to a minimum purchase of bond calls.
Stock Indexes: The Dow Jones industrials closed Friday at 15,081.47, down 30.72 points and posted its worst week for the year losing 344 points or 2.2%. The S&P 500 (CME:SPU13) closed at 1,655.83, down 5.49 points and for the week lost 36 points or 2.10% for the week. The tech heavy Nasdaq closed at 3,602.78, down 3.34 points and for the week lost 1.6%. Our recent admonition for holders of large equity portfolios to implement hedging strategies is paying off for our readers and remains intact. Geopolitical concerns as well as the impending taper of the U.S. Federal Reserve’s quantitative easing program based on their "assessment" of an improving economy is materially damaging to investors and corporate interests. The lower first time unemployment numbers on Thursday as well as the upbeat housing news had little effect on the weakening psychology of the investing public. Light volumes also exaggerated the market action and could continue to carry in the coming week.
We once again warn of a "black hole" under the equity markets and suggest strongly the implementation of strategic hedging programs such as those developed over our 40-plus years’ experience.
Currencies: The December U.S. Dollar Index (NYBOT:DXZ13) closed Friday at 81.675, up 21.8 points on expectations that the U.S. Federal Reserve will "taper" off its monetary stimulus program based on their "assumption" of a strengthening U.S. economy. The higher yields produced are beneficial to U.S. dollar investment attraction and while we disagree with the U.S. Fed’s view we have to consider the impact of its policy on currencies. We prefer the sidelines for now after having been bullish for some time for the dollar but recent changes in our opinion and recommendation for profit-taking leaves us out for now. Resulting losses of other currencies were the Euro 13 points to $1.3340, the Swiss Franc 6 ticks to 41.0809, the Japanese yen 16 points to 0.010259, the British Pound 10 points to $1.5618, and the Canadian Dollar 34 points to 96.46c. the Australian dollar managed a gain of 45 points to 91.14c after recent heavy selling.
Energies: September crude oil closed at $107.46 per barrel, up 13c and for the week gained 5% tied to the violence in Egypt and concern of possible interruption of shipping through the Suez Canal. We continue to feel supplies are adequate but the "fear" of disruption is keeping upward pressure on prices. We prefer the sidelines for now.
Copper: December copper closed Friday at $3.3670, up 2.55c on improved economic conditions in China, the world’s largest user of industrial commodities. Also, the Friday morning report of new home construction in the U.S. and increased apartment building provided short-covering in copper after its extended weakness. Our long term negativity was changed in favor of profit-taking of short positions and we are now on the sidelines.
Precious Metals: October gold closed Friday at $1,372.00 per ounce, up $10.90 for a gain of 4.5%. for the week. December silver, our favorite of the two, closed Friday at $23.20 per ounce, up 21.5c for a weekly gain of 14%. As we suggested recently, for those who must have a precious metal in their portfolio, we prefer silver on the basis of percentage improvement. The psychology of the "transfer" of funds from equities to the usual safe haven of precious metals returned this past week after having been neglected in recent months in favor the treasury market. This week however saw the transition from the treasury market "safe have" back to precious metals. The relationships that had been forgone of late have now seemingly returned to historic "normalcy". We prefer the sidelines but as mentioned earlier, for those that "must have a precious metal," we prefer silver to gold. October platinum closed at $1,527.60 per ounce, down $4.70 but up 1.8% for the week. September palladium gained $6.20 per ounce to close at $763.05 and for the week gained 3%. Our long term preference of palladium over platinum continues intact.
Grains and Oilseeds: December corn closed Friday at $4.63 per bushel, down 9 1/4c on profit-taking after the 4% gain Thursday tied to USDA reduced crop expectations tied to weather impacting plantings on reduced acreage. We prefer the sidelines. December wheat closed at $6.42 ½ per bushel down 6c also on profit-taking after Thursdays gains. We prefer the sidelines here as well. November soybeans closed at $12.58 ½ per bushel, down 7c after gains tied to "abandoned acreage sowings on 1.62M acres. We still like the idea of buying calls on soybeans.
Meats: October cattle closed at $1.27875, down 22.5 points after the recent rally prompted by the Tyson ban on cattle using Zilmax. Doubts that the ban would impact demand prompted Friday’s profit-taking after the recent price gains tied to supply concerns over reduced availability of beef tied to that ban. We prefer the sidelines October hogs closed at 86.625c per pound, down 67.5 points on disappointing demand even as China’s economic situation improved and was expected to improve demand. We prefer the sidelines here as well.
Coffee, Cocoa and Sugar: December coffee closed at $1.2330 per pound, down 1.4c after recent short-term rally attempts appear to have failed. Crop development in Central America appears good as well as harvest conditions in Brazil so we prefer the sidelines. December cocoa closed at $2,489, up $4.00 per tonne on continued strength but some proft-taking is in order as weather appears to be improving in Western Africa. Beneficial rains are expected in Ghana and Ivory Coast after recent dry weather prompted reduced production. We could see further price gains and would hold any longs or calls in cocoa. October sugar closed at 16.95c per pound down 24 points and remains on our "no interest" list for now. Improved ethanol demand failed to offset the overwhelming supplies so we prefer the sidelines.
Cotton: October cotton (NYBOT:CTV13) closed Friday at 93.30c per pound, up 1.66c on continued talk of production problems in the U.S. Southeast as well as in Texas. Weather problems continue to provide short-covering and new buying but improved weather in India could provide corrective pressure. We could see further price gains tied to U.S. weather concerns.