Category Archives: Uncategorized

Soybean Reversal on Technical Target and Commercial Selling

Soybean farmers are now the most short they’ve been since October of 2012. This means that U.S. farmers who are able to take advantage of South American misfortune stand to have their best year in quite awhile. There’s no question that South American production is not going to pass muster. However, in an interesting twist of fate, the same weather that kept us out of the fields this spring is going to be a boon to late planted soybeans heading into a La Nina fall growing season. Therefore, we view this last leg up in the soybean market as a selling opportunity rather than the emergence of a new trend.

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Unsustainable Yen Rally Out of Gas

The Japanese Yen’s rally since their move to negative interest rates has been an economic phenomenon that I simply can’t get my head around. Perhaps a case of the government not taking more is akin to losing a foot rather than the entire leg? I suppose my lack of understanding is one of the reasons I follow the collective actions of the commercial traders in the commodity markets. While any individual can be wrong at any given moment, the commercial traders, as a group, have a knack for having the right position on at the right moments. Whether by research or algorithm by hook or by crook, there is little question in our minds which group we should be following. Today, we’ll update you on their most bearish position in the Japanese Yen in more than six years.

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Commitment of Traders Resistance Caps S&P 500 Rally

The commercial traders have been on fire when comes to predicting the stock market in 2014. I suppose this makes sense since they’re the ones with access to the best information and modeling available. This explains the huge moves we’ve seen in their net positions based on the Commitment of Traders reports. Somehow their neural and social networks have put them in the right position for nearly every trade this year as you can see on the chart below.

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Outside Bar Key Reversal in Bonds

Last Monday, we discussed our forecast for lower US Treasury yields ahead in, “Bonds CReeping Towards Lower Yields” for TraderPlanet. Unfortunately, we were early and the market stopped us out with a manageable loss prior to Friday’s key reversal higher. We expect this to continue as the world prepares slower growth and a strengthening U.S. Dollar. Therefore, we will re-enter this trade with a new protective stop placed at Friday’s low of 140^08.

We’ve updated the chart below to reflect our current outlook in the 30-year U.S. Treasury Bond futures.

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Iranian Sanctions do More Harm than Good

The Iranian petroleum industry has been crippled by the economic sanctions we have imposed on Iran along with the European Union and other countries in July. Iran is exporting less than 1 million barrels per day and that’s a 20-year low. This knocks them from third place on the global exports list down towards India and Brazil at 23rd. It also makes for good press and sound bites by the President on September 11th. Unfortunately, his actions on this embargo are actually separating us from global trade with the very partners we need to pull our economy out of the doldrums. Furthermore, it is galvanizing the Iranian citizens’ resolve against us.

The restrictions the U.S. has placed on the Iranian banking system has forced Iran to conduct business in the local currency of its export destination targets. This has created new insurance of shipments as well as leasing or, ownership of the oil tankers themselves.  Previously, most of this business was done in U.S. Dollars. Now, we see countries like India, China and Japan trading rice, medical supplies and steel for Iranian oil and conducting this business in the destination countries’ local currencies, the Rupee, Yuan and Yen.

The economies of India and China have slowed but they are still growing and continue to hold the greatest potential for future growth. Growth requires petroleum and the relationship they are forging with Iran to meet their needs is problematic to say the least. These countries are using the same tactics that Russia used in the Cuban Missile Crisis to facilitate good will among a trapped nation by providing economic and human relief from their perceived oppressors. This is also exactly what we did during the Berlin airlift immediately following World War Two. The strategy continues to be replicated because it works.

The countries that are continuing to do business with Iran may not be entirely altruistic in their trade of base human needs for oil. The banking restrictions the U.S. has put into effect along with the E.U. oil embargo has caused Iran’s currency, the Rial to plummet. Officially, the Iranian Rial is fixed at 12,259 Rials per U.S. Dollar. Unofficially, the real exchange rate has fallen to 26,000 Rials per U.S. Dollar. The devaluation of their currency provides them with a smaller return on the oil they trade with their partners but more importantly it creates a spiral of misery for Iranian citizens.

Iranian citizens find that their expenses have more than doubled. To put this in perspective, if $1 bought a loaf of bread in June, it now costs $2.12. Your daily expenses are now twice as much as they were two months ago and your personal employment outlook is bleak, at best. The Iranian citizen unable to provide for his family will buy right into the governmentally censored media and blame his child’s hunger on America and the European Union. That same citizen will be more than grateful for the bag of rice labeled in Hindi.

Iran’s supreme leader, Ayatollah Khameni has vowed to form, “an economy of resistance.” Therefore, President Ahmadinejad will continue to work with the oil industry to ensure that enough is sold to keep the economy moving while simultaneously ensuring that the average Iranian citizen remains miserable enough to despise us. Iran is the 18th largest global economy with plenty of reserves to plod their way through these sanctions. Therefore, the leaders can afford to keep their citizens miserable while still providing enough nourishment to make them strong enough to fight. We will continue to be held up as the scapegoat for their misery as long as these restrictions are in place. This strengthens the cultural divide between east and west and separates us from the, “understanding countries” like India, China and Japan.

Economically, the United States can’t afford an isolationist policy that restricts trade with some of the fastest growing countries. The cause may be the believed infraction of the Non-Proliferation of Nuclear Weapons Treaty but the effect will be the loss of international trade and good will. Iran has been growing as the sole mega-power within their geographical area, in large part thanks to our actions in Iraq and Afghanistan. Iran will not witness an Arab spring. Perhaps, we should question their desire to pull the trigger on a nuclear winter.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

U.S. Dollar Super Rally

Now that the sunshine of Easter has passed, it’s time for some doom and gloom. We live in a society that rushes towards the end game, whatever the end may be. People as individuals can employ critical thinking. People as a group tend to migrate as a herd. The behavioral side of economics has just begun to gain traction. We are going to look at a small slice of it through the examination of market cycles and why the recent sell off in the stock market may be a clue of bigger things to follow.

There are two storm clouds on the horizon the Euro crisis and the U.S. equity markets. These two episodes could combine to force global equity markets lower, sharply hike interest rates on sovereign debt and create a super rally in the U.S. Dollar.

The European debt crisis started with Ireland. They had been the model child for development within the European Union. Prior to the debt bubble collapsing, their unemployment rate was at an all time low of 4%. Home ownership had sky rocketed and they were quickly emerging as a force in the financial services sector. However, their banks and the Irish people had assumed the continuation of their upward trajectory was a given and based tomorrow’s payments on today’s earnings. When the crisis hit in November of 2010, they transferred privately owned bank debt to the people through government issuance of new debt at a higher interest rate to attract buyers. However, it was quickly realized their paper was simply junk and they were bailed out by the European Union and the International Monetary Fund as well as other independent sovereign nations.

Greece was in a similar situation and is now receiving bailout terms better than those that were offered to Ireland. This has led the Irish people to decide whether they intend to repay the ECB at all. Furthermore, the issue of Spain’s debt is now on the front burner. The interest rates Spain is paying on the open market to finance their debts are unsustainable. The Spanish debt is distributed among its citizens through over extended mortgages, much like our own. However, Spanish law does not allow easy outs to greedy individuals the way we do. Therefore, Spain will need a bailout and due to the size of its debt ($2.4 Trillion) will want better terms than Greece ($550 Billion). Finally, now that the bailout procedure is established, they’ll be able to push for similar treatment.

Ireland, November 2010. Greece, February 2012 (2nd bailout). Spain, ? 2012.

The cycle is shortening and speeding up as the players of the game learn the bailout rules. The simple rule is that it’s first come, first served. The race to the rescue funds has begun.

Abruptly changing gears to look at the U.S. equity market and starting with the tech bubble of the late 90’s we can see that investors were willing to pay for tomorrow’s earnings today. The herd then paid for next week’s earnings, next month’s, next quarter’s and so on until all valuations were skewed.

The 2007 rally saw a test of the 2000 highs. However, company earnings were far less than they were through the tech rally. Much of 07’s rally was based on easy monetary policy and cash out refinancing. Finally, out of the financial crisis of 2009 we have gotten most of our money back on WEAKER earnings still. A market flooded with Dollars fueled the ‘09 rally. The price to earnings ratio of the S&P 500 has been in a steady downward trend for the last 10 years. A fall in share price from these levels would be expected. A solid rally will see the P/E ratio increase with share price but the time is not yet. This is simply the third wave of weaker highs.

Finally, there is a real possibility that a declining stock market may coincide with the needs for further bailouts. Further sovereign bailouts will deeply erode investor confidence. This will force higher sovereign yields across the board as investors demand higher payment for holding risky paper assets (could sovereign yields outpace corporate yields?). The rise in yields will crack the 30-year bull market in bonds, further reducing investors’ willingness to buy. This leaves the U.S. Dollar as the only currency liquid enough to absorb a tidal wave of safe haven money looking for a home. Ending on a brighter note, this will make it far cheaper to vacation overseas with your family in 2013.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Precious Metals Ready to Soar

The turn of the calendar leads to reflections and predictions for the coming year. Economists and investment advisors typically use this as an opportunity for shock and awe to gain media attention and increase their capital base through the selling of fear and greed. Fortunately, there are some fairly impartial and anonymous surveys that take place within our industry and this year, there appears to be some merit as well as some action supporting the general thesis of higher precious metal prices through 2012.

We all know about the European Union fears and general deficit issues both domestically and abroad. We’ve written about it extensively and the general actions and conclusions suggest that much of the debt that has been taken on will be repaid with freshly minted currency and each currency unit printed will be worth slightly less than the preceding one. The global race to devalue domestic currencies to repay sovereign debt has renewed the purchases of precious metals as a store of monetary value.

A recent Bloomberg survey of 143 analysts forecasts an average gain of 27% in precious metals for 2012. The Professional Numismatists Guild (PNG) survey is far more bullish. Numismatists are coin collectors who trade the bulk metal as bullion. The average of their range of predictions forecasts a 2012 ending price of $48 per ounce for silver and $1,976 for gold.

Market internals heading into the New Year are also supportive of higher prices in the near term. The Commitment of Traders (COT) report shows some significant imbalances and actions being taken in both the gold and silver futures markets. The quantifiable actions of the reported positions and the adjustments they’ve made to start the year carry far more weight than the conjecture of the talking heads on TV. Commercial traders have set a new bull record in silver futures and central bank purchases of gold have soared.

Commercial trader purchases of silver futures totaled 32,950,000 ounces since mid-December. Meanwhile, the recently published report by the World Gold Council shows that the world’s central banks have been buying gold hand over fist. Their gold purchases totaled 148.4 metric tons, which equals 5.234 million ounces of gold. This is more than the combined annual production of the world’s top five gold mining companies. Total purchases of commercial traders and central banks equals a mind-boggling investment of $8.37 billion dollars worth of gold by central banks and just shy of $100 million worth of silver by commercial traders.

These purchases reflect diversification away from the U.S. Dollar and U.S. Treasuries and tie in directly with the shift towards precious metals in 2012 as a hard store of value. The political wild cards in play make it nearly impossible to trade such volatile markets on an annual time horizon. However, some statistical analysis backs up the projected near-term strength. Returning to the COT report, we can see that both large and small traders have taken the short side of both the gold and silver trades. The recent and decisive shift towards a bullish stance by the commercial hedgers has most likely, set the springs on a bear trap as projections point to higher gold and silver prices by approximately 5% by the end of January. This would certainly be enough to force small traders out of their positions and most large traders, as well. Their short covering may provide the lift to get these markets off the ground and out of the sideways channels they’ve been trading in since mid-September.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

The American Consumer is Throwing in the Towel

The November Unemployment Report showed a decline in the unemployment rate to 8.6% as well as 140,000 jobs added in the private sector, which was partially offset by a decline in government payrolls of 20,000. Sounds good at first blush, private payrolls are adding jobs and the size of the government is declining. While it is encouraging, there are two major problems with accepting this at face value. First, employment is up, but not enough relative to where we should be more than two years into the economic recovery(?). Secondly, consumer spending indicates desperate behavior that is further weakening the underpinnings of this recovery.We’ve discussed before that the economy needs to add approximately 125,000 jobs per month just to keep up with population growth. This month’s net number of 120,000 still leaves more people unemployed in the long run. The reason the official unemployment rate dropped to 8.6% is primarily due to the 317,000 people who haven’t actively looked for a job in the last four weeks and have therefore, fallen off of the unemployment report. Had those people sought employment, the continuing claims number would have been negative by nearly 200,000 and created a significantly different headline picture.

I question the impact of this recovery and have concerns about its ability to continue to gain traction due to the historical perspective of the jobs situation and our population’s spending habits. The Federal Reserve Economic Database is accessible by anyone. Looking at their employment graphs we can see that since 2007, the number of people not in the workforce has grown by more than 10 million. Conversely, when we look at the total employment level in the United States it shows that we are at the same level of employment as we were eight years ago. This ties in well with the thesis that American businesses and American workers are more productive than ever. This has led to healthy corporate profits while the domestic demographic spread continues to widen.

The American public on the other hand, is a bit of a concern. CNBC released a survey detailing the economic expectations of the American population versus our expected spending habits this holiday season. Retail sales have surged to all time highs, surpassing even 2007’s high, which was fueled by credit. This year, CNBC’s survey is expecting holiday spending to be 22% higher at the individual level. This would represent a 4.6% gain in total holiday spending over 2010. This makes no sense when 61% of American’s polled believe that the economy is in poor condition with equally dismal expectations for 2012. This is the worst reading in the five-year history of a poll that includes the euphoric ’07 highs as well as the desperate ’08 lows.

My fear for 2012 is not the Mayan end of the world. My fear is that Americans are dipping into the minimal savings they’ve built up in the last two years on one last party of a holiday season. According to CNBC, 74% of this year’s holiday purchases will be made with cash. This will leave most people skating on thin ice. The idea that we are spending more while expecting less just doesn’t jibe with the narrow cushion we stereotypically hold. When we combine this with the fragility of the European Union situation and its ability to quickly throw us back in recession, I’m afraid that this holiday’s spending habits may simply be the average American giving up and throwing ourselves a party while we still can.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Tradeable Data

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst,commodity broker and asset manager. Therefore, Andy Waldock may have positions for himself,his family, or, his clients in any market discussed. The blog is meant for edu-cational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and maynot be suitable for all investors. There is substantial risk in investing in futures.The talking heads on the financial networks are more interested in arguing andhearing their own voices on tv than they are with examining the data that we at our disposal to make rational decisions. Currently, the debate rages between “double diprecession vs. Dow 10,000,” the ever popular “inflation vs. deflation” and finally, “stimulus vs. private growth.” These debates do nothing to help individual traders andinvestors find the facts before them based on data that is readily available.In 30 seconds or less,the data tells us that deflation should be our major concern. 1) there is no inflationary pressure in the three keystones of economics. a) land. pick your place and make an offer. b) labor. the unemployment numbers speak for themselves. c) capital. government stimulus and 0% interest is available to anyone who can wade through the paperwork. 2) The stock market has been overinflated by the surviving financial companies that have been allowed to borrow at 0% from the government and lend at whatever rate they can charge. Earnings are on the tail end of the short term tag team spike that has been provided buy government stimulus and cost cutting. 3) The dollar is likely to put in a bottom near these levels. The metals are set to decline. Copper failed to make new highs on this run up, in spite of the Chinese stock piling. Speculative positions in the metal markets are at their peak leaving little money on the sideline. Now, let’s put this in tradeable language. 1) The Commitment of Trader Reports show that the Dollar has shown a tremendous build up of commercial net long positions – moving from net short over 30,000 contracts last October to currently, net long 12,000 contracts. The lows around 76 should be defended. 2) Copper’s failure to make new highs provides solid resistance $2.85 – $2.95 to sell rallies against. London’s stock piles are high and the Chinese stimulus is petering out. 3) Gold has seen a huge build in speculative long positions above $990. The rally to $1025 hasn’t left a lot of room to take profits. Under $990 could see substantial stop loss selling by weakly financed speculators.