Overview and Observation
This past week we watched as markets "ignored" the "handwriting on the wall", and proceeded unhampered by news. The President of the San Francisco Federal Reserve said Friday that the U.S. economy will "remain halting and relatively gradual" indicating his opinion that the easy monetary policy of the Fed would remain in place longer than expected. The markets were "relieved" to some extent ignoring an important factor, the data showed that the U.S. economy contracted by 1% during the first quarter of the year. Consumer spending declined in April, the first decline in a year even though disposable income rose. The overall economic picture remains bleak, and with inflation rising, 0.2% in April to its highest annualized rate since late 2012, we remain concerned and suggest a conservative approach to investment programs. Now for some actual information.
Interest Rates: September Treasury bonds(CBOT:USU14) closed Friday at 137-08, down 14/32nds after posting the largest gain since January. Consumer spending declined by 0.1% seasonally adjusted. The University of Michigan/Thomson Reuters index showed a decline in consumer sentiment in May and contributed to the recent decline in yields and increase in prices. Its consumer sentiment declined to 81.9 in May from the April reading of 84.1. On Friday the market gave back some of its gains when the report that the Chicago area Purchasing Managers Index rose to 65.5 in May from 63.0 in April, better than Wall Street expectation of a 62.1 rate. We continue to view the Treasury market as range bound with price action tied directly to economic reports.
Stock Indexes: The Dow Jones industrials closed at 16,717.17(CBOT:DJIA), up 18.4 points and gained 0.7% for the week and 0.8% for the month. The S&P 500 closed at 1,923.57, up 3.5 points and was up 1.2% for the week and 2.1% for the month. The Nasdaq closed at 4,242.62, down 5.3 points but for the week gained 1.4% and was up 3.1% for the month. The Dow and the S&P posted their biggest monthly gains since February and the Dow and Nasdaq both turned positive for the year. I view the market action as reminiscent of the former Fed Chairman, Greenspan, statement of "irrational exuberance" and once again suggest that the U.S. economy while better than its trading partners, is in an economic contraction and unless the labor situation improves, there can be no meaningful recovery. Reiteration my prior suggestions, "implement risk hedging strategies for investors with large equity portfolios".
Currencies: The September U.S. dollar index(NYBOT:DXU14) closed Friday at 80.53, down 12.8 points and declined against the Euro(CME:ECU14) and British Pound(CME:BPU14). However, the dollar gained against both currencies in May. The September Euro closed at $1.3634, up 32 points while the British Pound closed at $1.6747, up 40 points. Other currencies gaining against the dollar were the Australian dollar closing at 92.42, up 21 points and for the month gained 0.3% against the U.S. currency. The September Swiss Franc(CME:SFU14) closed at $1.1180, up 28 points, the Canadian dolla(CME:CDU14)r 91.99, down 2 points and the Japanese Yen 0.09832, down 4 points. We continue to favor the dollar not on the basis of an improving U.S. economy, but relative to the problems inherent with the Eurozone.
Energies: July crude(NYMEX:CLN14) closed at $102.71 per barrel, down 87¢ and lost 1.6% for the week. For the month however, crude gained 3% tied to geopolitical concerns and a weaker than expected economic picture in the U.S. Consumer spending declined in April and the U.S. economic data decline of 1% also led to belief that demand for energy could decline. We remain bearish for crude oil but bullish for natural gas(NYMEX:NGN14) on less than expected increase in stockpiles for this time of year. July natural gas closed at $4.54 per mmBtu, down 3¢ but for the week up 3.2%. For the month Nat gas lost 5.6%. At current prices we favor the long side of nat gas.
Precious Metals: August gold(COMEX:GCQ14) closed at $1,246 per ounce, down $11.10 or 0.9% and its worst monthly decline for the year. Gold lost 3.5% for the week and for the month lost 3.9% even against promotional ads on TV and Radio. I feel vindicated having sold my last one ounce coin at $1,747 and recommended staying out of precious metals in recent months. While gold is pretty, you cannot eat it nor earn interest on holdings. The equity market gain has curtailed interest in gold and the "safe haven" of U.S. Treasuries has replaced gold as a hedge against geopolitical and economic concerns. We prefer the sidelines. July silver closed at $18.68 per ounce, down 33¢ or 1.8% but we prefer silver to gold for those that "must have" a precious metal in their portfolio. We like silver from here on its own merits and of our view of limited downside risk. July platinum closed at $1,4540 per ounce, down $6.10 or 0.4% while September palladium gained $2.25 to close at $836.75 per ounce, up 0.3%. We continue to favor palladium over platinum since their applications are similar. Palladium gained 0.6% for the week and almost 3% for the month.
Grains and Oilseeds: July corn(CBOT:ZCN14) closed at $4.65 ¼ per bushel, down 4.25¢ on continued selling pressure after recent gains tied to reduced acreage and strong exports. We prefer the sidelines. July wheat(CBOT:ZWN14) closed at $6.28 per bushel, down 4.5¢ but rainfall in Central Kansas the Texas below normal we could see renewed interest in wheat. We prefer the sidelines. July soybeans(CBOT:ZSN14) closed at $14.91 ¼ down 7.75¢ on profit taking but demand improvement from China could provide the impetus for new buying in beans. We like soybeans from here.
Coffee, Cocoa, Sugar: July coffee(NYBOT:KCN14) closed at $1.7750, down 4.45¢ on continued selling pressure and exacerbated by improved expectation for Vietnam production and favorable weather in Brazil. We prefer the sidelines. July cocoa closed at $3,059, per ton, up another $13 tied to the International Cocoa Organization reducing its estimate for world cocoa output. We could see higher prices but any purchase should be accompanied by stop protection. July sugar closed at 17.37¢ per pound, down 11 points on continued reports of a Brazilian cane harvest picking up. Sugar remains on our no interest list.
Cotton: July cotton(NYBOT:CTN14) closed at 85.96¢ per pound, down 19 points but we may see improved pricing based on forecasts of reduced production and the El Nino effect. Reduced demand recently by China has weighed on prices as well as expectation of improved production. We prefer the sidelines in cotton.