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Friday Job Number Made Bonds “Affordable”

As I searched through the headlines this morning, I made an extra effort to find good news to provide you with an upbeat, optimistic WrapUp today. The more I continued to dig for information, the more depressing it became. I guess the most positive development I see is that the Bank of Japan has evidently not given up on their support of the U.S. dollar. We need all the help we can get. According to Masajuro Shiokawa, a former Japanese finance minister, Japan has not abandoned its efforts to weaken the yen to protect the economic recovery and he suggested they should sell yen “aggressively” whenever trading becomes “volatile.” I suppose they were just kidding when they said they were planning to discontinue the interventions at the close of their fiscal year ended March 31^st. The good we can take from Mr. Shiokawa is simply the fact that Japan will work to slow the dollar’s decline.

According to Daniel Pfaendler, a senior bond strategist at Dresdner Kleinwort Wasserstein, “The Japanese are still buying Treasuries.” This becomes particularly interesting to me since the huge blow-out number we got on Friday from the jobs report. Admittedly, I was very wrong in my prediction of a soft number, but even the consensus forecast from the most brilliant economists in the country was wrong by more than 100%. Go figure. Needless to say, it bothered me, so I continued to search for the reason everyone could have been so wrong.

The most plausible explanation I could find came from the same senior bond strategist I just mentioned. In a Bloomberg article yesterday he said, “Following the drop” in bond prices “the yield looks rather attractive before the auction.” That was it! The BOJ was willing to buy our bonds, however, they wanted a better price. Bonds got BLASTED on Friday just ahead of the Treasury auctions that took place yesterday and today. Secondarily, the huge jobs number helped to support President Bushes’ bid for re-election. It also gave the financial commentators another positive spin the economy is headed for blue skies and greener pastures.

The Problem to Defend

The big problem with a growing economy and people going back to work is that normal market response should be higher interest rates. Last week I suggested we should get a soft number because the economy is so fragile, we can’t afford to have higher interest rates. Now all the spin-masters have to do is prove there is no inflation to justify artificially low interest rates. They must be on damage control in the bond market because this week the Mortgage Bankers Association reports 30-year fixed rates have jumped a quarter-point from 5.5% last week to 5.75% today. Additionally, the re-financing index fell 15% from last week and the application index fell 7.2%, the third consecutive weekly decline. The Fed is walking on pins and needles and they better hope one of those needles doesn’t find the housing bubble anytime soon!

Most Americans are already finding it difficult to make ends meet. How much tougher will things get if mortgage rates continue to move higher? A Reuter’s headline today reads, “Americans to Spend Tax Refunds on the Basics.” The article goes on to say, “Americans plan to spend more of their tax refund money this year than last year on basic necessities like groceries and gasoline. The upcoming tax refunds are going to be welcome in some households more than others because, for many consumers, the refund money is needed to pay for basic expenses.” The same article said a new study by Cambridge Credit Counseling reported nearly seven out of ten Americans will spend their refund checks versus 59% a year ago.

The trend is clearly going in the wrong direction. Remember also that last year we had increased stimulus from cash-out refinancing, but based on the statistics it appears to have run its course. To top it off, the Investors Business Daily consumer confidence index fell to 52.8 in April for a third consecutive monthly decline. Consumer’s expectations declined for the overall economic outlook and in the personal financial outlook. Not a good development.

Today’s Market

Most of the day stocks have been floundering in negative territory, so it’s time to check in on the closing numbers. The Dow Industrial Index shed 90 points today to close at 10,480, the NASDAQ Composite dropped nine points to close at 2,050 and the S&P 500 fell seven points to close at 1,140. Now that the Treasury auctions are out of the way, let’s watch and see if the bulls can push stocks to a new high for the year. I expect most of the earnings reports due out in the next few weeks will do the “Puplava thing” and as usual, beat the reduced “Street” estimates by a penny.

Treasury debt paper (a.k.a. bonds) barely stayed above the line today by squeezing out gains of .03%, virtually unchanged. The U.S. Dollar Index fell 0.53 to close at 88.55 with the biggest gainer being the Swiss Franc with a close of .7845 followed by the euro at 1.2155 and the Australian dollar closing at .7598.

Back to the Headlines

It is most disappointing today to hear of the deteriorating conditions in Iraq. A few of the headlines read, “U.S. Helicopter Crashes North of Baghdad,” “U.S. forces Bomb, Rocket Iraq Mosque Wall” and “Twelve U.S. Marines Killed as Iraq Violence Worsens.” I get that horrible sinking feeling in my stomach. I’m not going into war politics, but I must say my heart goes out to the injured and dead Iraqis, and to our brave soldiers along with their families here at home that are anxious and grieving over the situation. I sure wish there was a better way.

From an economic standpoint, the war is causing us to go deeper into debt. Yesterday the federal government borrowed $16 billion by selling five-year Treasury notes and today they sold $9 billion of 10-year inflation indexed notes. It’s interesting to see the Europeans taking some heat in the press with the headline that reads, “EU Trims Forecast, Says Six States Break Deficit Limits.” (Bloomberg) “The European Commission trimmed its economic growth forecast, said risks to the recovery are mounting and warned that six of the 12 countries using the euro will break budget-deficit rules in 2004. Germany, France, Italy, the Netherlands, Portugal and Greece – representing 80% of the $8.5 trillion euro economy – will surpass the deficit limit of 3% of gross domestic product.” The way I see it, at least they have a goal of keeping their deficits below 3% of GDP while the U.S. is currently running a deficit of approximately 5% of GDP. The Bush Administration estimates the shortfall will reach a record $521 billion in the fiscal year ending September 30. The Treasury plans to borrow $75 billion from April through June. That’s a-lot-a dough!

Talk Inflation Down

Considering the pressure from the Treasury auctions, Gold and Silver held up quite well. After some selling pressure at the open both metals stabilized and got a nice pop higher in the middle of the trading session. Spot gold held support just above $417 and moved up according to the $6 rule to $423 and change with a close near the high at $422.60. Silver once again held above the psychological $8 mark with a similar pop in mid-session to close with a two cent loss from yesterday at $8.18. It was very nice to see silver hang in there with the COMEX authorities’ decision to raise margin requirements again for the third time in less than six months. The money wants in even though they are making it more expensive to play the game.

Classic Disinformation

Another headline that caught my eye was, “Copper Futures Fall as Mining Companies Prepare to Boost Supply.” (Bloomberg) “Copper fell close to a one-month low in New York on concern that producers…are boosting supplies…” They tried to paint a negative picture for the unsuspecting reader, but not so fast! “Global supply lagged demand last year for the first time since 2000, sending prices up 79% in the past year.” If they think that is a supply deficit problem, they ought to take a hard look at silver inventories which are almost non-existent as well as the deficit from mine supply to industrial demand that has come up short for nearly TWO DECADES.

The commercial bullion banks that are short silver will need the COMEX to change the rules many more times if they ever hope to cover their monumental short positions. It will take far too long for mining capacity to catch up with industrial demand. As investment demand begins to increase, I’m hoping (and expecting) the industrial users to panic at the thought they will not have enough silver to meet manufacturing demand. The price should really fly when they all jump in to buy.

Back to the copper article, you have to read all the way to the last paragraph where they finally say the additional supply from the world’s biggest copper mine will come “in the second half of 2006,” two and a half years down the road! In the meantime, you can expect higher prices. The silver supply situation is even worse as it can take five years to bring new mines into production. This will continue to be a fun ride!

Don’t Believe There is No Inflation

U.S. import prices jumped more than expected in March led by expensive oil. Import prices were up 0.9%, the largest gain since April 1995. According to Reuters, the Reuters/CRB Index of 17 commodities futures, a widely watched benchmark for raw material prices, sits near a 23-year high reached two weeks ago. You ain’t seen nothin’ yet! Combine increased demand with a dollar that is losing value and you have a perfect combination for a long-term commodity bull market. Today oil closed a whopping 3.5% higher at $36.18 per barrel and unleaded gasoline jumped 3.6%.

We have been pounding the table at FSO to invest in precious metals, energy, and resource stocks in general. We still have a long way to go as the dollar needs to decline significantly over the next few years to offset our current account deficit. It will be volatile, but well worth the ups and downs.

My last good news for the day: I got tickets for second row seats to see Mr. Tracy Byrd in concert! It’s good to have a healthy diversion from all this money stuff!

Have a great evening.

Mike Hartman

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