By John Caiazzo
Overview and Observation;
"Grasping at straws." Investors spent market session hours searching frantically for a reason to buy or sell equities, Treasury bonds, currencies and other dollar and interest rate based criteria on which to develop a trade. Technicians got "whipsawed" as they had to quickly maneuver to expand their projected "range" and determine where their "stops" should be. The "program" of "buy high, sell low, or sell low then buy back high" apparently did not work well for account valuations. Without definitive direction by the U.S. Federal Reserve, frequent "comments" by some of the Fed area Presidents move markets and until which time as Fed Chairman Bernanke makes that "definitive" statement on his economic projection and subsequent rate decision we will continue to experience wide price swings. Now for some actual information to help my readers "navigate" through the "jungle" of news and reports…
Interest Rates:
September 30-Year Treasury bonds closed at 140 07/32nds up 16/32nds on Friday as the money made the "trip" from equities back to the "safe haven" of Treasuries. The University of Michigan/Thomson Reuters index showed a decline to 82.7 from the May 84.5. Once again analyst expectations were incorrect as they projected a reading of 84.7. That, as well as the flat May U.S. industrial production lent concern about the so called "economic recovery" and prompted the selloff in equities and the rally in Treasuries with the corresponding decline in yields. The U.S. Federal Open market Committee scheduled for June 18 and 19 should emphasize a "calming effect" but with the expected reduction in the bond buying program could produce additional market activity. Fed Chairman Bernanke is expected to indicate that any reduction in bond buying would not necessarily mean the Fed is ending the quantitative easing program. We expect the weak U.S. economy to impact yields and produce further price gains in bonds. Hold those calls we recommended recently and add on any further price decline.
Stock Indexes:
The Dow Jones industrial average closed at 14,070.18, down 105.90 down 0.7% and for the week lost 1.16% even against the triple digit gain on Thursday. The S&P 500 closed at 1,626.73, down 9.63 or 0.59% and for the week lost 1.01%. The tech heavy Nasdaq closed at 3,423.56, down 21.81 and for the week lost 1.32%. The Thursday rally was prompted by the better than expected first time unemployment number but at over 330,000 still remains a problem. Once again the concept of a "jobless recovery" is a fallacy in my opinion since an unemployed "consumer does not consume." The producers of those "unconsumed products" will be next to lay off workers. As I have been stating for some time, any reduction in the first time unemployment number is not a sign of recovery, but merely an indication that companies have no more employees to lay off without "shutting their doors." I would not take solace in any reduction in the weekly number on that basis. I reiterate, implement hedging strategies for holders of large equity positions. The use of futures and options can provide some protection against what I see as a 2008 type decline. Don’t get "caught again."
Currencies:
The September U.S. Dollar Index basket of currencies closed at 8082.5, down 13.7 points tied to the weaker than expected University of Michigan/Thomson Reuters index of 82.7 against expectation of 84.5. The dollar lost 3.4% against the Japanese yen for the week as the yen recovered from its weakness over prior sessions. The Bank of Japan’s massive stimulus program provided some recovery for the dollar but the yen still managed a gain of 53 points to close at 0.10601. Other currencies posted gains with the euro 4 points to $1.3356, the Swiss franc 2 points to $1.0861, the British pound 10 points to $1.5697, and the Canadian dollar 11 points to .9809. The Australian dollar closed at .9528c down 13 points. We have been in favor of the dollar and continue to feel that relative to its trading partners, the U.S. will fare better. Stay with the dollar
Energies:
July crude oil closed at $97.85 per barrel, up $1.16 tied to Middle East tensions with the U.S. As far as crude prices, we may see further price gains tied to geopolitical events but our overall view remains unchanged that supplies are adequate, and demand is declining. Stay with the puts but do not add for now.
Copper:
July copper finally staged an "anemic" correction of 1.3c per pound on Friday closing at $3.1980. Copper remains under pressure from adequate supplies at warehouses and the recent decline in demand by China. We have been bearish on copper for some time and have suggested taking some profits off the table from short positions. Hold put positions for now.
Precious Metals:
August gold closed at $1,387.60, up $9.80 for a gain of 0.92% and a weekly gain of a mere 0.3%. The short-covering in front of the weekend after recent heaving long liquidation from the December 2012 $1,700 level was feeble and not a sign of "recovery." The "collapse" mid-April from $1,570 to $1,390 in two sessions appeared to be a "washout" of weak longs but indicative of a bear market. We have been on the sidelines in metals for some time and while some "bargain hunting" can be expected, any rally should provide for an opportunity to move, with us, to the sidelines. July silver closed at $22.00 per ounce, up 41.70c following the gold bounce and remains our favorite if investors must have a precious metal in their portfolio. Otherwise I see no reason to expect a major recovery for metals at this time. July platinum closed at $1,450, down $2.10 while September palladium gained 95c to close at $732.00. Our long time preference of palladium over platinum remains unchanged.
Grains and Oilseeds: July corn closed at $6.54 ¼ per bushel, up 10 3/4c on short-covering after recent weakness tied to an expected record U.S. crop. We prefer the sidelines. July wheat closed at $6.81 per bushel, down 4 1/2c tied to hedging pressure but with the storms in the growing areas, I would not want to be short wheat even though I see no definitive export demand and increased production from Russia. Stay out for now. July soybeans closed at $15.16 per bushel, up 5 3/4c on continued reports of farmers withholding supplies from the market and weather providing ideal growing conditions. We have preferred soybeans in this group but with no new fundamentals we are on the sidelines for now.
Coffee, Cocoa and Sugar:
July coffee closed at $1.2215 per pound, down 1.55c on continued speculative selling and tied also to the weak Brazilian Real. Large supplies from producers such as Vietnam as well as good growing condition in Colombia and Central America should continue to pressure prices. We are on the sidelines. July cocoa closed at $2,240 per tonne, down $68 on long liquidation and a lack of fresh fundamentals from West Africa. Weak demand also a factor as a global recession is evident. We favor the sidelines here as well. July sugar closed at 16.75c per pound, up 51 points on short-covering but remains mired at the lows. We are on the sidelines here as well.
Cotton:
July cotton closed at 90.21c per pound, down 1.51c on profit-taking after recent sharp gains from early June lows around 79c. Poor weather in the Delta and Southeast have impacted production and reduced estimates. We think cotton may have further gains but would take some profits off the table here.
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