GAFNN.com Blog

Overview and Observation;

During this election season it is difficult to "score" who is winning and losing. The rhetoric from both sides emphasising the "negatives" as opposed to the "positives" leaves us with the question.....What will be the resulting economic changes if one or the other wins? Will the winner of the White House have the support of Congress? Will the winning party of the Senate support the White House? What about the winning party of the House of Representatives? Will the country have one party controlling both houses of Congress and the White House as was the case for the first two years of the current administration? How will the winning party change the current recessionary trend and get Americans back to work. I reiterate "an unemployed consumer does not consume and the manufacturers of those unconsumed products are next to lay off workers". Another statement one should ponder is that "should the weekly first time unemployment number decline, it does not mean an improvement in the labor situation, it merely suggests that there are fewer workers available for layoff with shutting the corporate doors". Since these are questions that cannot be answered until after the election, we have to temper our comments for now. Meanwhile here are the current facts as we see them with our usual spin.......

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Overview and Observation;

The statement by the head of the European Central Bank Mario Draghi speaking at an investor conference in London said that he was prepared to do "whatever it takes to preserve the Euro". I believe that statement represents an "exercise in futility. The markets however, took this "to the bank" and rallied on Thursday and Friday. The euphoria wont last, in my opinion, as the reality that the European debt crisis is far from over and the decline in Euro economies as well as that of the U.S. remains recessionary. The U.S. Gross Domestic Product, the value of all goods and services produced in the U.S. rose at only 1.5%, with most sectors lower in the second quarter of 2012. In the first quarter of the year the GDP was 2.0% after 4.1% in the last quarter of 2011. Expectation that the U.S. Federal Reserve would necessarily consider a third "stimulus" to reverse the downtrend also prompted the "investor euphoria". We remain skeptical of any resolution of the European debt crisis since we cannot be made to "drink the kool-aid" offered by Mario Draghi and Germany's Merkel that there is enough money to resolve the problems of imminent, in our opinion, default by some of the Euro member countries. Now for some actual information..............

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Overview and Observation;

Friday the 13th came and went and unlike previous "Friday the 13ths" provided a respite for investors buffeted by previous market sessions and economic reports. Our skepticism at the U.S. Administrations claims of an economic recovery continues to be supported by the less than enthusiastic response to government data especially that associated with the labor situation. We continue to question how a weekly first time unemployment number exceeding 350,000 can be ignored in favor of the monthly number of around 80,000 jobs "created". The unemployment rate of 8.2% is not a true reflection of the labor situation since the "underemployed" people who accepted jobs well below their recent salaries just to put "food on the table" are not being considered as an integral part in the calculation. It also fails to include those that left the workforce entirely and those that retired prematurely. That more realistic figure, in our opinion, would be closer to 19%. The unfortunate revelation of yet another brokerage firm caught up in fraud and mishandling of client funds reflects the inability of the regulatory factions to properly control these firms and their activities. The call for "more regulations" makes no sense to me. The enforcement of existing regulations should be the order of the day. Now for some actual information that hopefully will enable our clients and subscribers to trade successfully......

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Market Commentary Week ending July 6, 2012

Overview and Observation;

Once again I am at a loss to understand why the Friday jobs data of 80,000 jobs "created" did not coincide with Thursdays first time unemployment figure of 374,000 jobs lost. The Thursday figure surely must imply that those applying for unemployment benefits must have lost a job but the media again failed to associate one with the other. Either way the jobs data reveals an ongoing severe labor problem and can only result in a continued recessionary trend. As we have stated in numerous prior commentaries, "an unemployed consumer does not consume and the producers of those "unconsumed" products will be next to lay off workers". The only possible explanation for an eventual lower first time unemployment number will be that there are fewer workers available for companies to lay off without "shutting their doors" so we would not get too excited when the number comes down on some Thursday in the future. The Institute for Supply Management reported the manufacturing sector contracted in June for the first time since July of 2009. Consumer confidence has been declining with household spending falling slightly in May, the first drop in almost a year. Meanwhile the impact of the European debt crisis continues to be felt even as the Euro zone members are coordinating their efforts to support Spain, Italy, Greece and others in order to solidify the Euro. We continue to doubt any additional financial assistance will keep one or more Euro zone members from defaulting and possibly leaving the Euro. The members recognize that any "departure" of one or more members could bring the entire "house of cards" crumbling down. We see no "cure" for the debt "disease" and Great Britain, not a Euro member, has already slipped into recession with we are sure, others to follow including the U.S. Now for some actual information......

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Overview and Observation;

This past week saw commodities suffering the longest weekly losing streak in 11 years. Mr. Bernanke's failure to specify options for further easing and the ongoing economic deterioration in the U.S. and China, the Worlds two largest economies, continues to "mystify" the investment public. At a time when investors and traders are seeking direction from the elements of power that could mean the difference between profit and loss, Mr. Bernanke, the Chairman of the Federal Reserve left us without a "clue" in his recent appearance. His ambiguous statements failed to address the specific problems and how the Federal Reserve could or would address them. Mr. Bernanke declined to specify whether further easing was appropriate or how to deal with the impact on the U.S. economy from the ongoing European financial crisis. We believe it is because neither he nor the U.S. administration has any clue as to how to handle either. We would suggest applying a variation of the "Monroe Doctrine" approach to dealing with the situation by concentrating on the U.S. economy and let the Europeans deal with their problems. To suggest that as one of the larger financial backers of the IMF, that the U.S. should consider adding billions to the Fund to help countries that are without the ability to repay existing loans makes no sense to me. The economic viability of Greece or Spain and their GDP situations are such that over 100% of their GDP is owed out. That does not encourage assistance in my opinion. The funding suggested for the U.S. would better be served by helping U.S. homeowners and the unemployed through our own financial crisis. Now for some actual information that may provide some "enlightenment" as to how to position our readers to deal with the ongoing U.S. economic crisis..... .

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Overview and Observation;

The Eurozone continues to be the dominant factor in most market activity. This week after the Moodys previously announced downgrade of Spanish Banks, Standard & Poors announced additional Spanish bank credit downgrades. The ongoing credit crisis in Europe is accelerating rather than abating and the ramifications of a Greece expulsion or voluntary withdrawal from the Euro is of great concern. The removal of Greece could affect the overwhelming debt already incurred by Greece and which cannot be serviced by the Greek economy. It will also raise additional concerns that Spain and Italy may be next in the "limelight" affecting investor psychology. As I stated in earlier commentaries providing additional bailout funds to Greece in order to keep them in the Euro is tantamount to "throwing money down a well". Adjusting the total debt or reducing interest has no real value to the International community since Greece cannot, based on is current economy, pay it back. I do not believe in artificially supporting a situation that cannot have positive results in any "stretch of the imagination". Stop "putting lipstick on a PIGG". Commodities closed the week with the biggest weekly loss in five months tied to the Eurozone concerns and slowing global economic growth. Now for some actual information ...even though without clarification of the Eurozone situation markets will continue to move "aimlessly" eluding reality or the possibility of intelligent market analysis........

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Overview:
China’s influence on global markets was readily apparent this past week as signs of their economic slowdown weighed heavily on markets. Everything from food to industrial materials was impacted negatively. The People’s Bank of China announced it had reduced reserve requirements again for the third time in six months in order to support lending after data showed the slowdown in economic growth is deepening. As the "consumer" of the world Chinese expansion had provided the impetus for global economic growth in the past and without the Chinese, global economies are expected to suffer. We suggest getting your financial house in order and reviewing investments to determine strategies for "weathering" the financial "storm" we see developing. Now for some actual information….

Interest Rates: June Treasury bonds closed at 145 and 4/32nds, up 25/32nds as once again funds shifted from equities to the relative safety of the U.S. treasury market. The usual move of money from one sector, equities, to the relative safe sector, U.S. treasuries, became more of a "stampede" this week rather than a "move". The news of the J.P. Morgan 2.5 billion dollar trading loss accentuated the overall equity weakness as rumors of the loss permeated the market place all week. Other factors for the "rush to safety" was the reports of a Chinese economic slowdown. China has been, moreso than the U.S., the "consumer of the world" and any concerns that the ‘buying frenzy" has subsided prompted immediate ramifications for global industry. We could see further gains in treasury prices pushing yields still lower so rolling over of short calls and puts (strangle positions) remains a possibility. We will advise clients as to which strike prices are appropriate. Treat treasury bonds outright as a trading affair.

Stock Indices
: The Dow Jones industrials closed at 12,820.60, down 34.44 on Friday but for the week lost 1.6%. the S&P 500 closed at 1,353.39, down 4.60 and for the week lost 1.15%. The tech heavy Nasdaq closed at 2,933.82, up 0.18 and for the week lost 0.76%. The reports of Chinese "intervention" in the banking system along with the rumors and finally the report that J.P. Morgan Chase lost 2.5 Billion trading with possible additional loss as they unwind those responsible positions increasing that preliminary loss weighed on the financial sector and carried across the board to other sectors. We once again strongly urge investors with large equity portfolios to avail themselves of our expertise in developing hedging strategies unique to their situation.

Currencies: The June U.S. dollar index closed at 8043.5, up 17.8 against all European currencies with the Euro, (27 nations mostly in Europe) losing 29 points to close at $1.2924, the Swiss Franc, 25 points to $1.0761, the British Pound 84 points to $1.6067, and the Australian dollar 70 points to .9990. The June Japanese yen gained 5 ticks to close at 12523 and the June Canadian dollar gained 11 points to .9990. The Greece situation that has now been joined by problems expanding for Ireland, Italy, Spain, Portugal and most recently France with deepening debt could prompt one or more countries to leave the Euro. We have been suggesting that Greece would be forced out of the Euro and the austerity programs "promised" in order to secure bailout funds are in question. The recent report that Great Britain has fallen into recession is an indication of additional problems developing. Once again we suggest staying long the dollar even though the U.S. economic situation is not much better but at least "localized" and somewhat controllable.

Energies:
June crude oil closed in late trading at $95.57 per barrel, down $1.51 and closing in on our projected price level of $80-85 per barrel. The news of J.P. Morgan’s huge trading loss along with Chinese growth slowing, led to concern of reduced demand for energy products. The dollar strength, in which crude is denominated as well as other commodities, was also a factor in the selling. We continue to expect further "damage" to chart structure and would hold put positions.

Copper:
July copper closed at $3.62 per pound, down 6 points and their lowest level in two weeks. Concern over slowing growth in China along with Europe’s debt problems pressuring prices of copper and other industrial metals. One bright spot was the higher than expected passenger car sales in April by a Chinese auto maker trade group up 12.5% on the year. Expectations of increased vehicle sales of approximately 8% for 2012 was also supportive for prices. We continue to expect global economies to offset any good news for copper and prompt still lower prices going forward. Hold put positions but bear in mind support exists at $3.50 so you may wish to take profits before then.

Precious Metals:
June gold closed at $1,579.90 per ounce on Friday, down another $15.60 against the strong dollar and reduced demand for precious metals. Gold demand has dwindled of late as a "saturation" point of sorts has been reached through the aggressive sales practices in the media has prompted huge buying by the public fearing inflation and listening to the "pundits" claiming they must own gold. We take no view on how much percentage of portfolio an individual should own, but we suggest a minor position only. We like "cash" in the mattress as opposed to some investments at this time. July silver closed at $28.885 per ounce, down 29.3c following gold. If ‘forced" to make a buying decision, it would be silver over gold based on past performance percentage wise. July platinum closed at $1,485.30 ,down $28.50 per ounce, with June palladium losing $12.20 per ounce to $603.15. Aside from our long palladium, short platinum spread and preference of silver over gold, we prefer the sidelines in the group.

Grains and Oilseeds:
The latest U.S. Department of Agriculture report prompted heavy long liquidation in soybeans, corn and wheat with July corn losing 6 1/2c to close at $5.81 per bushel, July wheat losing 4 1/4c to $5.97 per bushel and July soybeans losing 49 1/4c per bushel to close at $14.06. The U.S.D.A’s Thursday forecast is the first of the beginning of the growing season and could be affected by the outcome and certainly the weather. The affect on soybeans which had been our favorite in the group was to trade right through sell stops early in the week and prompted our move to the sidelines until the "smoke clears". However if the U.S.D.A is correct forecasting higher yields more than offsetting lower harvested acres, additional long liquidation could be in the offing. Soybean supplies are projected up 4% from 2011-2012. For now stay on the sidelines.

Meats:
June cattle closed at $1.1515 per pound, down 70 points on continued long liquidation. Additions to feed lots and farmer intentions to increase herds weighing on prices. We could see further price moves to the $1.10 area but our expectation that herds will take longer to increase supplies, could support prices from here. Stay with call positions but do not suggest adding for now. Cattle have recovered since trading down to $1.11 area late April. July hogs closed at 85.15c per pound, up 3.75c on shortcovering after trading down to 83.75c during the week. We continue to favor the sidelines in hogs even as "barbecue" season is at hand.

Coffee, Cocoa and Sugar:
July coffee closed at $1.7675 per pound, down 1.9c as prices remain in a tight range. The Brazilian 2012-2013 harvest is now starting and according to one source could reach 55.3 million 60- kilo bags, an increase over previous estimates. We like coffee but would only consider call purchases, not outrights. July cocoa closed at $2,308 per tonne, down $30 but for the week managed a 1.3% gain. Expectation of Ivory Coast farmers for a drop in output this year due to a lack of maintenance on plantations along with poor weather prompting new buying. Improved quality reported as the mid-crop harvest progresses could prompt some selling pressure. Stay long through call purchases. July sugar closed at 20.20c per pund down 25 points tied to large supplies and the dollar strength. Stay out for now.

Cotton:
July cotton closed at 78.97c per pound, down 2.85c after touching the exchange limit down. U.S. farm officials forecast prices potentially falling to 65c per pound caused by the biggest inventories in history. However, expectations that world cotton output may decline by 7.7million bales in 2012-13 and lower harvest could challenge that forecast. China, the world’s biggest harvest, according to the U.S.D.A could drop substantially and provide support at current prices. The selloff from last years $2.27c per pound was overdone in our opinion, and result of the "rubber band" type reaction to those high prices. With expectation of increased world consumption by 3.3% we could see renewed interest by commodity funds. We continue to favor the long side of cotton.

　

Overview:

"Clueless in Seattle" was a comedic movie but the current "episode" of "Clueless in Washington" is not so funny. Once again, as I have stated in the past, the concept of a "jobless recovery" is a "bad joke". "Unemployed consumers do not consume" and the manufacturers of those unconsumed products will be next to lay off workers. On Thursday and every week in recent times over 350,000 workers once again applied for unemployment benefits. The obvious reason is a "lost job". On Friday it was announced that 115,000 jobs were created in a month. Does anyone do the math? We are in a recession no matter what Washington says regardless of the "dictionary description". The idea that jobs are being "created" is in question. You cannot "create" a job, you can only "recovery" jobs lost through failed policies. The creation of a job can only be accomplished by creating a new industry. The recovery of jobs should be the dominant phrase in the Washington rhetoric and the primary goal. Jobs lost because of company's moving offshore to obtain better tax advantage should be a primary goal. Companies are owned by their stockholders and that means millions of Americans expecting "their" company to perform since the interest rates are so low, their only way of increasing their income is through investment. Should anyone be surprised that companies are doing their best for their stockholders without regard to employees? The only way out of this mess is to attract those companies back. Another problem I indicated last week was the mortgage default and foreclosure problem. New buyers are reluctant to purchase homes when the huge inventory is overhanging the market. If the banks would concern themselves less with their "balance sheet" and take the necessary action, they would foreclose on those homes where the mortgages have not been paid for months and longer. While the initial reaction would be another home value collapse, they would provide a foundation from which to emerge from this mess. Buyers would then step "up to the plate" and buy causing the manufacturing sector in this country to start the recovery in earnest.

Interest Rates: June Treasury bonds closed at 143 22/32nds on Friday up 27/32nds as money once again made the "trip" from equities to the relative safety of treasuries. This coming week we should hear from Federal Reserve officials as to plans after the disappointing U.S. employment report. We are getting close to my suggested range high of 145 and for that reason had suggested shorting bonds or calls or buying puts. Also since with Fed rates at zero, there is not much the Fed can do to lower rates other than buy bonds which would push yields lower. So I would use caution here but hold positions. Short call positions may need to be rolled over if the bonds rally another point from here. Short put positions would necessarily be rolled forward in that event. With short "strangle" spreads, one side can only go to zero while the other can continually gain. We will advise our clients on how to make adjustments.

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Overview:
We finally hear some semblance of "reality" from the U.S. Federal Reserve Chairman, Mr. Bernanke, who this week stated "The economy is still very challenging. Unemployment is still high, and that creates problems for everybody, obviously". Once again, if I am not repeating myself too often for this publication, "an unemployed consumer does not consume and the producers of those (unconsumed) products will be next to lay off workers". The creation of 227,000 jobs in a month, does not correlate mathematically with 350,000 jobs lost weekly. The international monetary organizations, in my opinion, are going through the "motions" of trying to calm the fears of the investing public as well as the public in general, that solutions to the overall problems are at hand. I do not believe the European debt crisis, the U.S. jobless situation, or the geopolitical concerns related to North Korea and Iran are anywhere near resolution. For that reason I would once again warn my readers that a reassessment of their financial condition and investments is warranted due to the various factors which could materially affect them. Now for some actual information with my usual rhetoric....

Interest Rates:
June treasury bonds closed at 137 26/32nds up 24/32nds on concerns over global growth. The late February high of 143 to the March 19th low of 135 established the trading range for treasuries. As you know I had indicated such a range in my recent commentaries and that bonds were a trading affair. We continue to believe news and economic data will direct the pricing and yields of treasuries. Stay with options. We currently have option spreads in treasuries for clients.

Stock Indices:
The Dow Jones industrials closed at 13080.73, up 34.59 or 0.27% higher but posted the worst weekly performance of the year so far losing 1.15%. The S&P 500 closed at 1397.11, up 4.33 or 0.31% but as with the Dow posted its worst weekly performance losing 0.5%. The Nasdaq, thanks to the tech stocks, closed at 3067.92, up 4.80 or 0.15% and for the week gained 0.41%. We continue to expect a sharp decline in equities based on our overall expectation of continued angst related to geopolitical and economic conditions globally. Implement hedging strategies to avoid the kind of "meltdown" witnessed last August which wiped out many investors. Sidelined money by those following our recommendation at the time to hedge risk, enabled the markets to form a base which allowed for the rally since that fateful period in August.

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