The enthusiasm developing toward the U.S. economy and corporate earnings is tempered by the economic data released on Friday. Real gross domestic product, the seasonally adjusted value of goods and services produced by the U.S., rose at a disappointing 2.4% annualized rate in the second quarter, far below the past six months 4.4% average. The revised first quarter rate of 2.7% was revised to a 3.7% increase and perpetuates, what we feel, is an “ambitious” evaluation of the U.S. economy. We view the numbers as a possible “contraction” and remain cautious regarding the purported U.S. economic recovery. On the basis of the weekly first time unemployed numbers consistently over 450,000, we would expect that when the U.S. Labor Department reports the jobs data on Aug. 6, that corporations will have actually eliminated jobs. As we have stated in prior commentaries, “enthusiasm” on corporate earnings with fewer employees is what I view as “wishful thinking.” Now for some actual information so our readers can establish trading ideas.
Interest Rates: September Treasury bonds closed at 12823, up 127 points even against sales of $104 billion in 2, 5, and 7 year securities. According to the Commerce Department’s annual revisions, issued on Friday, the worst U.S. recession since the 1930s was “even deeper than previously estimated”. The U.S. economy reportedly shrank 4.1 from the final quarter of 2007 to the second quarter of 2009, against the previous 3.7% reported decline. While Fed Chairman Bernanke indicated last week, the Central bank is “prepared to take further policy actions” should the economy not improve. Since the benchmark interest rate is at an historic low range of zero to 0.25%, there seems little if anything the Fed can do to halt the economic decline. We remain convinced that a “double-dip recession is a definite possibility and with Treasury prices at or near all time highs with yields at or near all time lows, we do not recommend the purchase of treasuries at this time. Rather should our estimate of a renewed recessionary trend fail to materialize and the Fed lifts rates even by the minimum, we could see a considerable price correction in treasury prices. Stay out for now.
Stock Indices: The Dow Jones industrials closed at 10,465.94, down 1.22 on Friday with the S&P 500 gaining a mere 0.7 points to close at 1,101.60 and the Nasdaq gaining 3.01 points to close at 2,254.70.
While the U.S. equity markets posted sharp gains for July with the Dow up 7.1%, the S&P 500 6.9%, and the Nasdaq also up 6.9%, much of the gains were on extremely light volume and therefore suspect as to the potential for continued progress. The slowdown in second quarter growth as reported by the U.S. government and the continued unemployment situation could provide traders with a “golden opportunity” to adjust their equity portfolios. The July monthly gain was the first since April and the best monthly gain since a year ago. What could be a re-emergence of Euro zone debt problems along with reports of a slowing China economy could depress Global conditions and result in renewed dissatisfaction over U.S. economic progress. Investors, as stated in prior commentaries, should consider hedging risk by implementing strategies that could offset to some degree the “pain” associated with what we expect will be a sharp equity selloff. We once again strong suggest the implementation of hedging strategies.
Currencies: The September U.S. dollar index closed at 8170, down 5.4 points against gains in the September Swiss Franc of 25 points to 9620, the September British pound 78 points to 15693, the Japanese Yen 79 points to 11585, the Canadian dollar 79 points to 11585, and the Canadian dollar 62 points to 9711. Profittaking in the September Euro cost 22 points and closed at 13054 after making an intraday high of 13094. The mixed U.S. economic data growth and consumer confidence prompted the dollar weakness. Concerns that remarks by the St. Louis Federal Reserve Bank President James Bullard warning that the U.S. economy was in danger of emulating Japan’s deflationary “lost decade” was also a dollar negative. We continue to favor the long side of Swiss Francs.
Energies: September Crude oil closed at $78.95 per barrel, up 59c tied to positive manufacturing in the Chicago area and consumer confidence data. Early session weakness was tied to the disappointing GDP data but reversed after the positive manufacturing and consumer confidence report. September natural gas closed up 10dc to close at $4.92 per MBTU and as stated in prior commentaries could gain further. September heating oil closed at $2.0881 per gallon, up 1.85c while unleaded gasoline gained 2.14c to close at $2.1224. We continue to prefer the sidelines as our opinion remains negative on the U.S. economy.
Copper: September copper closed at $3.3115 per pound, up 2.15c tied to the positively construed Chicago manufacturing data and positive reports from the big Three auto companies. While we have been bearish for some time we are now on the sidelines pending further fundamentals. With copper basically ignoring the negative U.S. GDP data and ideas of continued demand from China, we would not add to current put or short positions. Inventories at the LME rose by 1,975 metric tons Friday to 413,500, but the weekly data from the Shanghai Futures Exchange showed a decrease of 9,415 metric tons to 104,507.
Precious Metals: December gold closed at $1,183.90 per ounce, up $12.70 but lost 0.7% for the week. Three month low of $1,160 on Wednesday formed a base for Friday’s move. We prefer the sidelines but investors bent on accumulating gold on a scale could go to our website and click on the “Accumulate Real gold” link. The U.S. economic data prompted shortcovering and gave credence to the possibility that global economic growth is still a concern. September silver closed at $18.003 per ounce, up 38.6c and remains our favorite in the group but only at or below $17 per ounce. October platinum closed at $1,576.80 per ounce, up $13.40 while September palladium closed at $500 per ounce, up $8.80. Palladium’s gain of 1.8% against platinum’s gain of only 0.9% shows that our previously recommended spread is still working even though we suggested taking profits some weeks ago. Stay out for now.
Grains and Oilseeds: September corn closed at $3.92 ¾, up 13 1/2c with the December contract gaining 13c to close at $4.06 ¾. Continued strength in wheat spilled over to corn and soybeans, the latter which we have recommended for some time. Concerns over reduced feed wheat prompted bullish speculation for corn but we would hold to the sidelines in corn. September wheat closed at $6.61 ½ per bushel, up 34c on concerns that former Soviet Union governments will impose limits on wheat exports and push buyers to the U.S. market. The devastating Russian drought prompting that protectionist move has pushed wheat prices to 13 month highs. Technically a move over the June 2009 high of $6.77 could take prices to a two year high. We would consider buying December wheat on any setback of 10-15c per bushel but would use stop protection. Nearby August soybeans gained 25 3/4c per bushel to close at $10.52 ½ on heavy shortcovering with the most active November contract gaining 17c per bushel to close at $10.05, our previously suggested price goal. Bullish technicals along with continued upward pressure on wheat could carry prices even higher and new purchases are recommended but accompanied by trailing stops on all long positions.
Coffee, Cocoa and Sugar: September coffee closed at $1.7630 per pound, up 3.25c on speculative fund buying. Two years of poor weather and reduced production of the higher quality arabica beans in Central America and Colombia prompted the buying. Brazilian production is making up some of the shortfall but some Brazilian producers are withholding supplies on hopes of higher prices. We prefer the sidelines since we do not “chase” markets that we missed. September cocoa closed at $3,091 per tonne, up $45 tied to general commodity market buying by speculators but with light trade, we prefer the sidelines. October sugar closed at 19.57c per pound, up 7 ticks, it’s highest level since March 12. Brazilian rains have hampered loading and delayed shipments. Sugar has gained 36% since its June low and harvest problems could see prices exceed previous highs. We would consider buying a few lots in anticipation of technical and momentum buying pushing prices to the 22-23c level before meeting any resistance. Keep an eye on Brazil and use stop protection.
Cotton: December cotton closed at 78.76c per pound, up 1.85c on shortcovering and tied to general commodity buying. With global supplies tightening and demand for textile increasing along with expectations of a global economic recovery, even an expected U.S. bumper crop in the fall, mills are taking positions early. We could see additional strength in the near term but any purchases should be accompanied by stops.
John L. Caiazzo
Website: www.acuvest.com
E-mail: futures@acuvest.com
Information provided is from sources deemed to be reliable but not guaranteed. Futures and Options trading involve a high degree of risk and may not be suitable for everyone. John Caiazzo is a registered commodities broker with over 40 years experience in investments and opinions are his own and not of the Futures Commission Merchant to which he introduces his clients.