Friday, February 5, 2010
Unemployment Drops to 9.7%, Dollar Strong
It is 5:41 AM. Have a strong cup of that delicious Raine's Red Label TGIF coffee, we've earned it this week. Let's set the record straight, the Colonel made a bad call on Tuesday:
"There is a sense by some that the dollar rally needs some rest which is supportive of gold price in February. I've picked $1,120 as a nominal price for this month and would be surprised to see any dramatic moves as gold comes back to its 1-year trend-line." (The Eureka Miner's Market Report, 2/2/2010)
The no "dramatic moves" part turned out to be a big blooper as we've watched the dollar strengthen and gold head down the mineshaft on increasing concerns about the euro-zone's fiscal health and monetary tightening policy in China. I underestimated the former when it appeared the Greek problem was contained given reassuring statements from the European Union chiefs early in the week. Don't believe everything you hear and only half of what you read, buckaroos!
The market damage has been substantial on fears that other countries in the euro-zone are at risk. As reported by the Wall Street Journal yesterday:
"Behind the turmoil are worries that a collection of European countries including Portugal, Ireland, Greece and Spain, known derisively as PIGS, won't be able to finance budget deficits that have ballooned to around 10% of gross domestic product. That has sparked fears that Europe's decade-old monetary union could unravel." (WSJ, 2/4/2010)
How bad was yesterday? The Eureka Miner's Grubstake portfolio has shed nearly a quarter of a million dollars since mid-January when metals and miners were on roll. The S&P 500 dropped 7.6% from its January 19th high, fear has returned to the marketplace (the VIX is up 50% from 1/19) and gold stumbled to 3-month lows. With the U.S. Dollar Index above $80, there is talk that commodity reflation, which has been very strong since last April, is now in jeopardy. As a caution I've switched on the YELLOW light for this vital sign on our Eureka Outlook Dashboard to your right.
I just watched CNN report on the Labor Department's monthly employment report. Non-farm payrolls dropped 20,000 folks but the new unemployment number is 9.7% down from last month's 10% and quite a bit better than economists expected rate of 10.1%. Manufacturing job growth has turned positive while construction related work is still in the red. The markets are digesting this news and it looks like the dollar is strengthening, gold is falling (but not precipitously) and the broader markets are mixed.
Let's have a little more Raine's coffee and regroup. If you remember how far we've come from the dark days of last March a pullback in the markets is not the end of the world and some consolidation is healthy. The Report supports a strong dollar and thankfully the world still respects it as a safe haven when dark clouds appear on the global horizon. As long as gold remains above $1000/oz, gold miners will still make a lot of money. Although copper has fallen to the bottom of the expected range we reported Tuesday, companies like Freeport McMoRan (FCX) can continue to profit at these levels (thankfully Freeport, Barrick, Newmont and Thompson Creek are trading up this morning). There is also buzz coming from Europe that moly prices are positioning for a rise in anticipation of the LME introduction this month, a position taken by this Report.
The Colonel is no fan of panic and we should remember that markets typically overact to scary news. The question before us is whether the debt concerns in Europe are aftershocks from the global credit crisis or a new earthquake. Nobody knows for sure and time will tell. At this point it seems to me that 2010 may turn out to be a scaled down 2009 with a market low in the first quarter followed by commodity reflation, and less likely a repeat of 2008 with all kinds of skeletons falling out of the financial closet.
Yesterday, I heard an interesting take on recent events. The world has swapped personal and corporate debt for sovereign debt and that will take a long time to unwind. At least the large developed countries (e.g., United States, Japan and the U.K) can still print money so their default is not in question. The currency devaluation in these countries and related inflation is a concern but not in the near term. If we can demonstrate some fiscal discipline and keep our recovery intact, the U.S. should do just fine. If the consequence of a stronger dollar (i.e. weaker commodities, pressure on U.S. exporters) is the price to pay for now, that's not all bad. I enjoy seeing a little respect return for Uncle Sam's greenback. Stand proud, pardner.
Enough talk, let's walk the walk:
4-WD is ON - the VIX or "fear index" is above 25 again, rougher markets are expected (what is this?)
Yellow light is ON for concerns about commodity reflation given a strengthening dollar (U.S. Dollar Index DXY above 80).
Yellow light is ON for cautionary investor confidence in the metal and mining sectors.
Yellow light is ON for possible adverse regulation/legislation: Cortez Hills & mercury emissions
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
Oil is up $0.18 in early trading to $73.32 (March contract, most active); Gold is down $5.7 to $1057.3 (April contract, most active); Silver is down $0.195 to $15.155 (March contract); Copper is down $0.0295 to $2.8495 (March contract); Molybdenum steady at $15.00
The DOW is down 7.18 points to 9995.00; the S&P 500 is up 0.37 points to 1063.48. The miners are mixed:
Barrick (ABX) $34.52 up 1.54%
Newmont (NEM) $44.19 up 1.49%%
US Gold UXG) $2.07 down 2.62%
General Moly (Eureka Moly, LLC) (GMO) $2.25 down 1.75%
Thompson Creek (TC) $11.11.51 up 2.22%
Freeport McMoRan (FCX) $68.32 up 2.37% (a bellwether mining stock spanning gold, copper & molybdenum)
The Steels are down, (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $37.77 down 1.56% - global steel producer
POSCO (PKX) $111.06 down 1.09% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is down 0.13% to $1,151,401.93 (what is this?).
Headline Photograph by Mariana Titus