GAFNN.com Blog

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:

The ongoing rhetoric emanating from the Global media and the various Governmental Administrations remains optimistic even against a plethora of information to the contrary. One glaring example and the latest in a list of debt crisis victims is Spain where the unemployment rate is 25% and where austerity programs are causing protests. It was recently announced that Great Britain has fallen back into recession. We have not heard anything lately on Greece, Italy or Portugal where problems will soon re-appear in the media headlines. The IMF and the European Central Bank cannot possibly, in my opinion, finance the ongoing debt crisis and we feel that a Global recession is unavoidable. The continuing exclusion from the U.S. media of the disparity between the jobs created and jobs lost is a source of consternation to me. A creation of 120,000 jobs in a month, where the quality of those jobs is in question, against the weekly loss of 350,000 jobs continues to elude recognition by the Administration as well as the media. An unemployed worker applying for first time benefit must have, in my opinion, lost a job so we have a monthly job "creation" of 120,000 against a monthly loss of 1.4 million based on a four week month where each week 350,000 or more applications for unemployment are made. What is wrong with this picture? Four more U.S. bank failures were reported this week bringing the total to 21 so far this year. The current mortgage situation is another problem that we feel is being ignored. Potential home buyers are reluctant to purchase as long as they feel there is an overhanging default and foreclosure condition. The inability or reluctance of banks to foreclose is apparent since mortgages whether being serviced or not are carried on their books as an "asset" and to foreclose would mean the move from the "plus column" to the "minus column" would mean the necessary addition of reserve funds. Something they do not want to do on a large basis so they are only foreclosing on a small amount of their bad loans in order to avoid the "haircut" required by the Federal Banking regulations. The only answer I see is the immediate foreclosure on all bad loans in order to form a base from which to finally start a new housing "boom". Yes, prices will decline but they will decline to an actual "bottom" and then we can expect to see buyers flowing into the housing market. How long can the recognition of an economic crisis in the U.S. be disguised as "prosperity" or economic improvement? We continue to urge investors to maintain a conservative approach to their investment analysis bearing in mind that an economic contraction could result in severe market reaction and impact their financial health. We are available to discuss possible strategic programs to potentially offset the risks inherent in a global recession and its impact on overall economic stability. The debt crisis in Europe that began with Greece and then progressed to Italy, Ireland, Portugal and Spain has reduced projected economic growth in the Euro region. We see a continued economic deterioration in the future. Now for some actual information to hopefully assist our readers with their ability to make financial decisions.....

Interest Rates: June U.S. Treasury bonds closed at 142 23/32nds, up 14/32nds on continuing concern over U.S. economic data such as the weaker than expected first quarter GDP. A veto threat by President Obama of a federal loan doubling for college students along with women's issues and his health care overhaul was also a consideration. Both political parties agree that student loan interest payments should not increase but Republicans want spending cuts and Democrats want higher revenues. Republics would keep interest rates for subsidized Stafford loans at 3.4% for another year rather than an automatic increase to 6.8% on July 1st as would occur under a law enacted five years ago by a Democratic Congress. So another stalemate exists which in most cases provides for gains in treasury prices and resulting lower yields. A credit rating downgrade by Standard & Poors for Spain and additional easing measures by the Japanese Central Bank also led to demand for U.S. Treasuries. Another report that Democrats voted earlier this year to take money from the preventive health fund to help keep doctors Medicare reimbursements from dropping also led to partisonship in the Congress leading institutions to wonder if an agreement would ever be reached on the budget. The confusion led to addition influx into the U.S. treasury market from other avenues of investment. We continue to view the Treasury market as within a range between 135 and 145 and at nearly 143, we are fast approaching the higher end of our projected range. We favor the strategy is employing "strangle spreads".

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Monday 01/23/12 – Key Futures Trading Levels via CME Pit IQ

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Tuesday 01/10/12 – Key Futures Trading Levels via CME Pit IQ

Equity Futures:

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By watching Gold and Silver prices, we can see clearly the sharp decline achieved.