Overview and Observation:
"Don’t walk too close to the tall buildings on Wall Street……" was part of my admonition after the Oct. 19, 1987 stock market "collapse" of 22.61% on "Black Monday." The next day the market rallied, but without many of the investors whose accounts were liquidated as they could not meet the intraday mark-to-the-market margin calls.
We are among the group that has called for a market correction for some time. The global markets reacted after the Chinese reports of contraction, which could impact many of its trading partners as well as emerging markets that rely on China for trade. Also of some concern is the massive U.S. debt carried by the Chinese. We are monitoring closely any impact that emerges from the Chinese economic condition and will report to clients directly.
Other factors governing the activity are the U.S. economy, corporate earnings, the labor situation, and of course the ongoing European debt crisis, which has been mostly ignored by the media of late. Another factor to consider is the recent letter from U.S. Treasury Secretary Lew to congressional leaders that "so called extraordinary measures to keep the government from hitting the debt ceiling would be exhausted by the end of February." The payment of Treasury bill instruments could be impacted by the inability to borrow funds beyond the debt ceiling. Once again, the U.S. government makes money "the old fashioned way"…..they print it…. If the U.S. Administration does not reign in its spending, the situation will only grow worse.
Another of my "famous" statements "an unemployed taxpayer does not pay taxes, which impacts the federal government’s income and exacerbates the budget deficit." We will be listening intently to the President’s State of the Union address without much hope of any significant new ideas for putting people back to work. Blaming the wealthy for getting richer and the poor and middle class for getting poorer does not solve the basic problems. We feel the elimination of certain taxes, as well as the reduction of corporate taxes to compete with foreign countries could bring jobs back to the U.S. and reverse the downward economic spiral for the American people. Now for some actual information to guide my clients through the maze of data and information……
The 30-year U.S. Treasury bond (CBOT:ZBH14) closed Friday at 132 30/32nds, up 20/32nds as investor fears over global economic growth prompted the "transfer" of funds from risk assets to the relative safety of the U.S. Treasury market. The yields on the 30 year bond declined to 3.644%, down 4 basis points. Yields move conversely to prices in fixed interest rate instruments. We are nearing the high of our projected range, 135, for the 30 year bond and may decide to sell calls or buy puts on any protracted gains since interest rates are already near the lows we projected in previous commentaries.
The Dow Jones Industrials closed at 15,879.11, down 318.24 points or 2% and for the week lost 3.5%. The S&P 500 (CME:SPH14) closed below the psychologically significant 1,800 for the first time since Dec. 17 closing at 1,790.29, down 38.17 points or 2.1%. For the week the S&P lost 2.6%. The Nasdaq closed at 4,128.17, down 90.76 points or 2.2% and for the week lost 1.7%. The main impetus for the massive high volume selling was the slowdown in China’s manufacturing. However, investors have been concerned, as we have, with the continuing gains in equities in the face of a "stagnant" U.S. economy and the ongoing labor situation where the actual rate of underemployment and unemployment nears 17%. As indicated earlier in my presentation are the statements of "an unemployed consumer does not consumer," and "an unemployed taxpayer does not pay taxes" reducing the income to the Federal government while there is no change in its spending will only further investor angst. Our admonition to holders of large equity positions to implement risk hedging strategies has now proved correct. We do not know if this is the beginning of our projected 10%-15% correction or just a "bump in the road" as our President likes to call problems. We fully expect the magnitude of our correction expectation to take place with "timing" the only question.
The U.S. dollar (NYBOT:DXH14) closed at 80.555 on Friday, up 3 ticks after recent losses tied to economic reports such as the slowdown in Chinese manufacturing, and U.S. manufacturing. For the week the dollar index as measured by 6 major currencies, lost 0.9%. The March Euro lost 20 points to $1.3676, the British pound lost 1.30 points to $1.6494, the Australian dollar 59 points to 86.72c while gains were posted in the Swiss Franc 34 points to $1.1182, the Japanese yen 85 points to 0.09780, and the Canadian dollar 37 points to 90.23c. Lower U.S. interest rates detract from dollar investment and as treasury prices gain, yields decline on fixed interest rate instruments. We continue to favor the dollar on any further declines since the current low interest rate climate cannot, in our opinion, be maintained without further economic ramifications.
The story this week has been the weather impact on Natural Gas supply concerns and prices. The freezing temperatures in nearly 75% of the U.S. increased demand for heating fuels specifically natural gas. The February (NYMEX:NGG14) contract was up 45c or 9.6% to settle at $5.182 per million British thermal units on the N.Y. Mercantile Exchange and was up 20% for the week. The U.S. energy Information Administration on Thursday reported supplies of natural gas in storage declined by 107 million cubic feet last week and a weekly record drop. With no change in sight for the extreme temperatures, demand could increase and prompt still higher prices. March crude oil closed at $96.83 per barrel, down 49c as traders analyze the weekly petroleum supply data released on Thursday and the activation of a portion of the Keystone XL pipeline earlier in the week. We remain bearish for crude and neutral to bullish for natural gas.
March copper (COMEX:HGH14) closed at $3.2625 per pound, down 2.3c and 0.7% losing 2.2% for the week. We have no fresh fundamental news for copper and expect it to move with equities as demand for copper is tied to manufacturing.
February gold (COMEX:GCG14) closed at $1,264.30 per ounce on Friday as money moved from the sell off in the equity market to what is perceived as a "safe haven" of gold. Silver however, departed from the usual "attachment to gold and declined by 11.5c to close at $19.895 per ounce basis the March contract.
Gold gained 1% for the week as silver declined by 2.7%. We remain sidelined in precious metals. We remain unimpressed with both gold and silver. April platinum closed at $1,428.60 per ounce, down $34.60 or 2.4% and lost 1.8% for the week. A labor strike in South Africa prompted a two day rally in the metal but we remain on the sidelines. March palladium closed at $734.80 per ounce, down $11.10 or 1.5% on Friday and for the week lost 1.8%. We are on the sidelines in the white metals as well.
Elsewhere in metals trading, March palladium (NYMEX:PAH14) -1.43% lost $11.10, or 1.5%, to $734.80 an ounce, down 1.8% on the week. High-grade copper for March delivery (NYMEX:HGH14) -0.64% shed more than a cent, or 0.4%, to $3.27 a pound, losing around 2.2% from a week ago.
Grains and Oilseeds:
March corn (CBOT:CH14) closed at $4.29 per bushel, unchanged and remains in a tight narrow range near its lows since its high mark in August of last year around $5.20. Expectation for increased demand for animal feed could prompt further price gains but we remain sidelined. March wheat (CBOT:WH14) closed at $5.66 per bushel, down 4c on profit-taking after recent declines as the freezing weather in the U.S. Great Plains could cause damage to the dormant winter crops according to the MDA Weather service. We prefer the sidelines here as well. March Soybeans (CBOT:SH14) closed at $12.86 per bushel up 9c on expectation that Argentine farmers will withhold supplies as an inflation hedge reducing available feed supplies. We like soybeans from here.
Coffee, Cocoa and Sugar:
March coffee (NYBOT:KCH14) closed at $1.1435, down 85 points tied to weak global demand and weak economic data from China. Some reports of Vietnamese coffee heading for Europe along with a lack of information from Latin America provided the impetus for trading in coffee. We are on the sidelines in coffee. March cocoa (NYBOT:CCH14) closed at $2,793 per tonne, up $2.00 but underestimated production from West Africa as well as increased supplies could weigh on prices. We are on the sidelines here as well. March sugar (NYBOT:SBH14) closed at 15.17c per pound, up 13 points on pre-weekend shortcovering but reports that Brazil has sugar to sell after the end of its harvest season and expectations for a large crop next year could continue to pressure prices. Sugar remains on our "no interest list".
March cotton (NYBOT:CTH14) closed at 87.01c per pound, down 32 points after recent gains may have an "overbought" condition. We are on the sidelines for now.