By John Caiazzo
Overview and Observation: The proclivity to “identify” the improvement in the jobs sector continues to challenge reality. There are two points to consider. The first of course is the disparity between the monthly jobs “created” number and the weekly jobs “lost” number. The second of course is the lack of identifying the “quality” of those so-called “created” jobs. One must consider the fact that a worker applying for first-time unemployment benefits has “lost” a job. By merely extending out that weekly number to a four-week month number we have over 1.2 million jobs lost in that month. Therefore a monthly jobs created number of 195,000 falls far short of even considering an improvement in the labor situation. The rhetoric from Washington would attempt to show an improving economy but not everyone “drinks the Kool-Aid.” The number of full time workers declined last month as the number of part time workers soared. That situation is not conducive to a labor situation improvement. The cost associated with “ObamaCare” is viewed as the main reason.
This week a major city declared bankruptcy. When I looked at the picture of the devastation in Detroit, I thought I was looking at Berlin after the bombing raids by the Allies. That scene could easily be repeated in other cities and once again, for the pundits, “an unemployed consumer does not consume and the producers of those un-consumed products are next to lay off workers.” The concept of a “jobless recovery” is a bad joke and the true unemployment and “underemployed” figure is closer to 17% not the more palatable 7.6%. The “house of cards” is going to collapse at some point and I suggest strongly the implementation of protective strategic hedging programs for those who rely on investment income to “survive.” Now for some actual information to hopefully guide my readers through the “maze” of “global” reports…
Interest Rates: September 30-Year Treasury bonds (CBOT:ZBU13) closed Friday at 135 23/32nds, up 1 and 02/32nds. Prices had declined on Thursday after the better than expected reports on jobless claims and manufacturing. On Wednesday prices rallied after Fed Chairman Bernanke indicated that the central bank would not push to taper its bond buying program. The reports from the Federal Reserve and the various statements by member of the committee continue to move the market and yields to a point where it is nearly impossible to determine which way the market will move. To that end we maintain our position that the U.S. economy, based on our assessment of the labor situation as stated in the overview, is not in any meaningful recovery mode. Hold long bond call positions.
Stock Indexes: The Dow Jones industrials closed Friday at 15,543.74, down 4.80 but for the week gained 0.51%. The S&P 500 (CME:SPU13) closed at 1,692.09, up 2.72 and for the week gained 0.71%. The tech heavy Nasdaq closed Friday at 3,587.62, down 22.67 and for the week lost 0.35%. The disappointing earnings of Google and Microsoft weighed on the markets Friday. Earnings reports of industrial, consumer good, and natural resources will be the focus in the coming weeks and we believe additional disappointments are in the offing. We continue to implore holders of large equity positions to institute strategic hedging programs.
Currencies: The September U.S. Dollar Index (NYBOT:DXU13) closed at 82.685 on Friday, down 27 points tied to lower yields in Treasuries. Interest rate declines detract from dollar investments. We had suggested recently taking profits on long dollar positions after having been bullish on the dollar for some time. We prefer the sidelines for now since the inconclusive determination of rates by the U.S. Federal Reserve continues to confound the markets. The September Euro (CME:E6U13) gained 38 points on Friday to close at $1.3143, the Swiss Franc gained 49 points to $1.0634. Other currencies gaining against the dollar on Friday included the Japanese yen 15 points to 0.9971, the British Pound 55 points to $1.5266, the Canadian dollar 15 points to 96.32c and the Australian dollar 24 points to .9155c. Stay out for now.
Energies: August crude oil (NYMEX:CLQ13) closed at $1.0835 per barrel on Friday, up a mere 31c after recent sharp gains. A decline in U.S. crude supplies along with the ongoing tensions in Egypt and Syria had prompted end users to add to stockpiles to avoid shortfalls should any interruption of shipping through the Suez Canal take place. We continue to prefer the sidelines but our expectation is that the “fear premium” is much too high and we expect prices to decline sharply once stability returns to the region. Stay out for now but consider some puts.
Copper: September copper closed Friday at $3.1460 per pound, up 1.45c against the weak dollar but continued reports from Peru indicating higher production could impede any further rallies. We have been bearish for some time based on our expectation of renewed recessionary trends throughout Europe and with a less than exemplary economic recovery in the U.S. and China, the world’s two largest users of industrial metals. Take profits and stay out for now.
Precious Metals: August gold (COMEX:GCQ13) closed at $1,292.90 per ounce, up $8.70 against the weak dollar on Friday. The sharp decline in gold to below $1,200 on an intraday basis was bound to find support amid bargain hunters and traders covering short positions. We see no reason to get “excited” about gold since the usual “suspects,” i.e. geopolitical concerns and inflation are subdued and the fact remains the heavy financial losses by gold “bugs” leaves investors in a quandary as to the pundit and media pushing of gold during the sharp decline. Buyers that pushed gold above $1,900 per ounce have suffered substantial financial loss and on such investor John Paulson has seen his gold fund lose more than 60%. We have been “reminding” our readers that in 1980 when gold first touched $875 per ounce, those buyers waited more than 25 years just to break even. A poor return to say the least. We suggested when gold touched $1,900 that we could see a repeat of that scenario and we have. We could see some additional buying of gold by bargain hunters but as an investment the benefit does not outweigh the risk. Stay out for now but with an “eye” toward the Middle East for any actions that could enhance the preference for gold. That being the case our preference would be silver based on its historic percentage benefits against gold. October platinum gained $16.40 per ounce to close at $1,431.20 while September palladium gained $2.25 to close at $749.75 per ounce.
Grains and Oilseeds: September corn closed at $5.43 per bushel on Friday, up 2c tied to concerns over damage from the hot dry weather. Some analyst estimates have been cut for U.S. production as well as the Societe Generale caution over a downgrade. We prefer the sidelines for now pending additional fundamentals. September wheat closed Friday at $6.63 ¾, up 3 1/4c against the weak dollar and on short covering after the recent weakness. Additionally the USDA reported a weekly export sale of 996.600 tonnes of wheat, higher than market expectations of 400,000-800,000 tonnes. China purchased 442,000 tonnes after a disappointing domestic harvest impacted by late rains. We prefer the sidelines in wheat as well. November Soybeans closed at $12.74 per bushel, up 8 1/4c tied to the weak dollar and shortcovering after recent sharp declines. We had been bullish for beans for some time but now prefer the sidelines. The wide price swings in grains and beans does not provide the kind of “potential’ I prefer for my clients.
Meats: August cattle closed at $1.22190 per pound, down 20 points even against the weak dollar but with expectations of a decline U.S. cow numbers we may be near an interim bottom. I like long calls from here. August hogs closed at 96.55c per pound, down 7.5 points staying near the center of the recent range. We prefer the sidelines as the expected demand from the summer “barbecue” season is not providing the demand expected.
Coffee, Cocoa and Sugar: September coffee closed at $1.2275 per pound on Friday, down 4.8c on long liquidation after recent gains. Prices had risen to $1.34 per pound Thursday tied to reports that temperatures in Brazil could drop to near freezing in its coffee growing states. Brazil produces over 30% of the world’s coffee and in the past freezes have affected global supplies and prompted buying. We could see further gains but that would depend on the weather. For now I prefer the sidelines. September cocoa closed Friday at $2,353 per tonne, up $6.00 after Thursday when the North American cocoa processing in the second quarter of the year showed a 12% gain. Reports that Ivory Coast had sold 750,000 tonnes of 2013-14 forward cocoa which was more than expected by the market prompted shortcovering and new buying. We could see further price gains so we would consider a few calls from here. October sugar closed at 16.28c per pound on Friday, up 10 ticks on light shortcovering on reports that output from Brazil might have been hurt by wet, cold weather. We are off the sidelines in sugar and would put on a few calls from here.
Cotton: October cotton closed Friday at 86.26c per pound, up 1.27c on shortcovering after the sharp selloff on Thursday of over 2%. A reduction of imports by China is a major concern as well as a forecast for higher world production. We prefer the sidelines in cotton.
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