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.