Overview and Observation;
The ongoing rhetoric from Washington along with the "spin doctors" in the media are "painting a picture" of economic recovery. Unfortunately that picture is reminiscent of "Dorian Gray" where the "portrait" is the actual "recovery." Sooner or later the actual "picture" will be unveiled to show what the global recovery really looks like. The two major industries in the U.S. are the housing industry, which encompasses a myriad of sub-industries right down to the "doorbell," and the auto industry. While auto sales are apparently improving in some areas, the increase in existing home sales does not alter the jobs picture. Much of those purchases are by investors for the purpose of renting to homeowners who lost their homes.
The unemployment and "underemployment" rate which we estimate at around 17%-19% remains problematic. The sharp decline in new home sales does however indicate an underlying problem and cannot be dismissed. New home sales declined by 13.4% according to the U.S. Commerce Department in their report Friday. The recent increase in mortgage rates is also of great concern and the on-again/off-again talk by the various Federal Reserve regional Presidents of the "tapering" of its quantitative easing adds to that concern.
Also, the continuing speculation as to who will replace Fed Chairman Bernanke also provides for the angst prevalent in the market place. Larry Summers who was instrumental in the repeal of the Glass/Steagall act allowing banks to operate brokerage divisions, securitize good and bad mortgages, and market the securities globally was a major source of the "credit crisis" in my opinion. He is apparently favored by President Obama as a "reward" for his past support. We prefer Janet Yellen, an economist and professor and current Vice-Chairwoman of the Board of Governors of the Federal Reserve.
In addition to the foregoing, the lack of restrictions on mortgage requirements was also a factor promoted by the Real Estate and Mortgage bank industries as well as the "generous" appraisals allowing buyers of homes the ability to purchase homes without equity. With the "shadow inventory" dominant in this country and the tighter restrictions on credit, I see no improvement in an important basic industry forthcoming in the near future. As banks are "foreclosing" on a few homes at a time while thousands remain in default, the resulting "shortage" of available properties can be tied to the reluctance of banks to foreclose even as mortgages are not being serviced. Those defaulting mortgages remain on the "asset" side of the balance sheet and once foreclosed, are moved to the other column requiring the banks to increase reserves. For that reason, and the problematic "mystery" tied to Obamacare costs to companies I must temper my recommendations as relates to the markets I follow. The hiring of part time workers at the rate of four to one over full timers is an ongoing concern. Now for some actual information to help guide my readers through the "maze" of reports and data……….
The December U.S. Treasury bond (CBOT:ZBZ13) closed Friday at 130 13/32nds, up 1 and 8/32nds tied to the sharp decline in new home sales easing concern that the U.S. Federal Reserve would "taper" or cut off completely the quantitative stimulus program next month. Fed officials met at a conference in Jackson Hole Wyoming but without the two notable participants, U.S. Fed Chairman Bernanke and the ECB head Mr.Draghi, I could not understand its purpose. Three of the U.S. Fed regional bank Presidents interviewed commented on the timing for reducing the Fed’s $85 billion of monthly bond buying with differing opinions. We continue to see bonds trading in a range depending on "who says what" comments from the Federal Reserve.
The Dow Jones industrials closed Friday at 15,010.51, up 45.77 points but for the week lost 0.47%. The S&P 500 (CME:ESV13) closed at 1,663.50, up 6.54 and for the week managed a gain of 0.46%. The Tech heavy Nasdaq closed Friday at 3,658, up 19 points and gained 1.53% for the week. Market participants are watching for any changes in the U.S. Federal Reserve quantitative easing policy and the markets react accordingly. One of the major features on Friday was the announced retirement of Microsoft CEO Steve Ballmer, which produced a rally in Microsoft stock of 7.3%. Rising U.S. interest rates are received by investors as a sign of U.S. economic improvement, however, we of course disagree and once again advise investors with large equity holdings to implement strategic hedging programs. We have developed such programs over the years and are ready and willing to provide such assistance in determining the structure of such programs.
The U.S. Dollar Index (NYBOT:DXZ13) closed Friday at 81.64, down 14.9 points or 0.2%. The decline in July new home sales and in government bond yields prompted the dollar selling. High interest rates promote dollar investment attraction and lower rates detract. The gains in currencies against the dollar included the euro up 32 points to $1.3390, the Swiss franc 37 points to $1.0871, the Canadian dollar 25 points to .95c, and the Australian dollar 36 points to 89.69c. The Japanese yen lost 11 ticks to 0.010139, and the British pound lost 4c to $1.5567. Some support for the continuing QE policy by the President of the Atlanta Fed against the San Francisco Fed Bank President for a pullback left participants with no clear direction. We have favored the dollar for some time and recently suggested taking profits "off the table." We are on the sidelines for now since the wide price swings are not conducive to trading by our retail clients.
October Crude oil (NYMEX:CLV13) closed Friday at $106.24 per barrel, up $1.21 but were still off 0.8% from the prior week. The sharp decline in July new U.S. home sales expected to delay any "tapering" of the Federal Reserve monetary stimulus and helped energy prices recovery from early week losses. The ongoing concern, however, of the Egyptian crisis of possible disruptions of the transportation of crude through the Suez Canal is providing a "fear factor premium" to crude prices so we are on the sidelines for now. Our overall view is that crude prices are too high in relation to our view of a continuing global economic slowdown.
December copper closed Friday at $3.3560 per pound, up 2.15c on short-covering in front of the weekend tied to Fridays gain in equities. However, for the week copper lost 0.4% as questions remained over the U.S. housing market and demand for industrial metals by the U.S. and China. We are on the sidelines but overall bearish toward copper.
October gold (COMEX:GCV13) closed at $1,396 per ounce, up $25.30 or nearly 2% tied to the possibility the U.S. Federal Reserve would delay any slowdown in its monetary stimulus policy. Gold had traded as high as $1,399.40 during the session posting its highest level since early June. Heavy short-covering is the main feature to trading. December silver closed at $24.035 per ounce on Friday, up 95.5c and remains our favorite of the two. Gold gained 1.8% of Friday against silvers gain of 4.1%. For those that "must have" a precious metal in their portfolio, we continue to favor silver over gold. Otherwise we question the validity of a continuing rally in precious metals as our overall expectation of any inflationary pressure, the usual stimulus for precious metals, remains in question. October platinum closed at $1,541.60 per ounce, up $1.50 and for the week gained 0.9%. September palladium closed at $750.85 per ounce, down $4.20 or 0.6% and for the week lost 1.6%. We favor the sidelines for now.
Grains and Oilseeds:
December corn closed at $4.69 ½ per bushel, up 5c tied to reduced yield expectations and rain delays in crop development for both soybeans and corn. December wheat closed at $6.45 ¼ per bushel, up 4 3/4c also tied to crop concerns prompted by weather. November soybeans closed at $13.25 ¾ per bushel, up 39c and is our favorite in the group. Reduced yields also played a part in the short-covering and new buying of soybeans. Add to call positions on any setbacks.
October cattle closed Friday at $1.2690 per pound, down 30 points tied to higher feed prices and remain range-bound. We continue to prefer the sidelines. October hogs closed at 85.075 per pound, up 67.5 points on short-covering after recent selling tied to lower cash hogs and wholesale pork prices. We prefer the sidelines
Coffee, Cocoa and Sugar:
December coffee closed at $1.1720, up 15 ticks on Friday but weakness persists tied to slow purchasers by roasters. We prefer the sidelines. December cocoa closed at $2,465 per tonne, up $11.00 on short-covering on improved demand but remains sideways after recent gains. We prefer the sidelines. October sugar closed at 16.44c per pound, up 16 ticks on shortcovering but remains under pressure from good harvest weather in Brazil. Sugar remains on our no interest list for now.
October cotton closed Friday at 85.22c per pound, up 1.27c on shortcovering after recent sharp declines tied to production estimates from India. We prefer the sidelines in cotton pending further fundamental developments. We will keep our clients informed as to any changes in opinion.