Overview and Observation:
Positively construed U.S. economic data as well as the Federal Reserve’s decision to commence the tapering process for the stimulus program guided the equity markets to new all-time highs. The expansion of the third quarter Gross Domestic Product to a 4.1% annualized rate added to the euphoria created by the Fed taper action. Analysts see the action as a result of the Fed’s possible view of an improving economy. The median economists’ forecast was for a 3.3% to 3.6% increase after the 2.5% second quarter report. Stockpiled inventories contributed 1.67 percentage points to the last quarter GDP, relatively unchanged from the 1.68 percentage points in the prior report.
Markets had expected the Fed to hold off with any taper pending a reduction in the unemployment rate to below 6.5%, and the action surprised market participants. We remain skeptical of analysts’ views of an "improving" labor situation as the unemployed and underemployed rate in reality is around 17%. Should those employees who have opted out of the job market return, the unemployment rate would move higher.
The March U.S. Treasury 30-year bond futures (CBOT:ZBH14) closed Friday at 130 02/32nds up 28/32nds on position squaring in front of the Christmas holiday shortened week. The Federal Reserve announced on Wednesday that they would start "tapering" its stimulus program in January but leaving the base interest unchanged at zero to ¼%. Analysts had expected a "bump up" of rates in conjunction with the taper, but that did not materialize. There is an "offsetting" opinion as to whether or not the U.S. Fed sees an improving economy or if that improvement is enough to warrant changes in policy. We favor the "not enough improvement" side of the argument. We look for interest rates to remain low so as not to "stall" the minimal growth momentum. Our concern remains that of the labor situation and the fact that "credit" is being used for purchases rather than "hard cash." The problem generated by the "borrowing" on one credit card to pay the "minimum" on another will soon come to "roost" for the consuming public. I prefer the long side of Treasuries for now.
The Dow Jones industrials closed at 16,221.14, up 42.06 on Friday to a new record. The S&P 500 (CME:SPH14) closed at 1,818.32, up 8.72 also a new record. The Nasdaq (CME:NDH14) gained 46.61 points to close at 4,104.74, but not a new record. The U.S. Government report showing the economy grew at the fastest pace in two years last quarter with the GDP posting a 4.1% annualized rate as well as the Fed’s taper intention prompted heavy short-covering. Funds also participated as they had to get money off the sidelines before year end and not "miss the boat." Of course I see clearly the name of the boat, Titanic. The exuberance tied to the "glowing" economic data clearly overlooks the labor situation, the consumer credit expansion beyond the means of the consumer, and "subdued" corporate results. I continue to expect a sharp decline in equities
The U.S. Dollar Index (NYBOT:DXH14) closed at 80.745, down 43 points on profittaking after recent strength tied to the U.S. government economic data and Federal Reserve announced tapering of its stimulus program. The Fed, in announcing the taper, indicated that the economy is improving and can now reduce its bond purchase program. The revised GDP figure gave rise to ideas of increased dollar investment tied to expected higher interest rates as a result of the "positive" data. We of course disagree with the "analysis" but relative to its trading partners, the U.S. is in better shape. The March Euro (CME:E6H14) closed at $1.3873, up 18, the Swiss Franc (CME:SFH14) 27 points to $1.1165, the Japanese yen (CME:J6H14) up 7 ticks to 0.09612, the Canadian dollar 24 points to 93.82c and the Australian dollar (CME:A6H14) up 65 points to 88.7c. Only the British Pound (CME:B6H14) declined on Friday by 42 points to close at $1.6322. We view the Fed action as premature and will await further indications of "economic improvement" before "retiring" from our current sideline stance in currencies. My recent analysis of the "Bitcoin phenomena" remains intact having seen it decline by 40% during the week. I view any "virtual" currency as suspect since without real material backing I doubt it will survive the "test of time" such as exists with precious metals or any commodity for that matter. Since no Government is backing it, I see no intrinsic value and would warn investors against participating in any "illiquid" market.
February crude oil (NYMEX:CLG14) closed at $99.32 per barrel on Friday, up 28c and for the week managed a gain of nearly 3%. The upward revision of the U.S. third quarter economic growth of 4.1% prompted ideas of improved energy demand and short-covering in front of the holiday shortened week also provided the impetus for the gain.
The U.S. is the largest consumer of energy products and any sign of economic stability and improved growth is a positive for prices. We remain overall bearish, however, based on our assessment that the so-called economic growth is a short-lived phenomenon tied to the long-term unemployment data.
February gold (COMEX:GCG14) closed at $1,203.70 per ounce, up $10.10 on short-covering as well as the correction from the prior session’s 3% loss. The reported GDP 4.1% gain in the third quarter adds to the negativity for gold investment because gold usually thrives on economic weakness and angst. We remain on the sidelines in gold. March silver (COMEX:SIH14) closed at $19.45 per ounce on Friday, up 27c after losing 4.4% on Thursday. The GDP data tied with the U.S. Federal Reserves announced taper on Wednesday leading to the belief of a healthy U.S. economy is a negative for precious metals. Of the two, however, we prefer silver for those "who must" have a precious metal in their portfolio. January platinum (NYMEX:PLF14) closed at $1,332.20 per ounce, up $13.80 while March palladium (NYMEX:PAH14) gained $2.45 to close at $698.75 per ounce. Both white metals lost more than 2% for the week. We are on the sidelines for now but at some point may revisit the long palladium, short platinum spread.
Grains and Oilseeds:
March corn (CBOT:CH14) closed at $4.34 per bushel, up 3 1/2c on light pre-weekend short-covering. Forecasts for a record U.S. crop as well as better weather in other grower countries are keeping pressure on corn. Farmers storing corn to support prices is also a factor. We are on the sidelines. March wheat (CBOT:WH14) closed at $6.13 ½ per bushel, up 2 3/4c also on light short-covering, but remains mired at the lows after recent long liquidation. Improved forecasts from Argentina as well as global high supplies are keeping pressure on prices. This week Egypt continued to avoid U.S. wheat in favor of Russian and Romanian wheat. As the world’s largest importer of wheat, this was an added negative for prices. We are on the sidelines but wary of any weather or forecast changes. March soybeans (CBOT:SH14) closed at $13.30 ¼ per bushel, up 11 1/4c and for the week gained nearly 0.5%. Short-covering of this group during the week culminated in the slight gains but remain under selling pressure. We favor the sidelines until a meaningful reversal takes place.
Coffee, Cocoa and Sugar:
March coffee (NYBOT:KCH14) closed at $1.1515, up 1.4c tied to a possible short squeeze in the supply of robusta beans, which would prompt additional demand for the Arabica variety that is traded in New York. We could see further price gains in coffee but with reports that Vietnam has started selling coffee again that had been held back awaiting price gains we are on the sidelines. March cocoa (NYBOT:CCH14) closed at $2,820 per tonne, up $29 tied to concerns over production and supply deficits. We could see still higher prices approaching $3,000 to $3,100 per tonne and would buy calls or outright futures but with stops in the case of futures. March sugar (NYBOT:SBH14) closed at 16.42c per pound, up 27 points on projected supply deficits going forward. We prefer the sidelines in sugar.
March cotton (NYBOT:CTH14) closed at 83.17c per pound, down 16 points tied to increases in supplies forecast by the USDA. Reduced Chinese output tied to early snows in growing regions as well as the USDA lowering its estimate for the Chinese crop provided the impetus for short covering by commodity funds. However, with adequate supplies going forward we are on the sidelines for now.