Friday, February 4, 2011

Survivor Trading System - Trades of 3 February

I trades di Survivor System del 3 February. I risultati real-time sono a disposizione al seguente link: http://www.box.net/shared/5vajnzc4cp



Trades of Survivor System on 3 February. Real-time results are available at the following link: http://www.box.net/shared/5vajnzc4cp

ES TF
GC CL
NG RB

Everyone loves commodities!

By Frank Holmes

The essence of natural resources and commodity investing can be boiled down to one key point: As the earth’s population swells to 7 billion, the migration to cities accelerates, incomes rise, and people desire things the things that improve their lives, thus increasing global demand for commodities and natural resources.

A larger, wealthier class of people in the emerging world are demanding more goods as they raise their standard of living and the supply of these goods is impacted by geopolitics, diminishing mature sources and even weather.

The story begins in emerging markets where economies are growing at stable, healthy rates. Current growth rates for countries such as China, India, Malaysia and others are in the 6-10 percent range, manageable levels that are not characteristic of overheating economies. Many forecasters are expecting a slight slowdown in growth for emerging countries but a few (South Africa, Indonesia and Russia) should see GDP growth rates surpass last year’s levels.

Many point to China’s bank lending, which was roughly $1.2 trillion last year, as a negative because it is such a large amount for a $5 trillion economy, but we don’t see it that way. We think what’s taking place is more of a normalization of liquidity and interest rates. Growth will still be in the upper single digits, which is very constructive for commodity demand going forward.

Economic growth is just the tip of the iceberg. Many of these emerging markets are just discovering credit. India, China, Brazil and Russia all have consumer debt levels growth below 20 percent. Other burgeoning countries like Saudi Arabia and South Africa have less than 5 percent. As credit expands to this hungry consumer base, the consumption of refrigerators, furniture, air conditioners and other luxuries we consider necessities here in the U.S. should follow suit.

We’ve already seen the impact rising income levels can have on consumption in Chinese car sales. From 2003 to 2010, China’s car sales have increased over 300 percent. In fact, car sales jumped 45 percent last year alone in China. This increase has made China the global leader in car sales. China isn’t alone however, estimates show that 72 million cars were produced globally last year and expectations are that it will jump to 79 million in 2011.

This auto boom has shifted the dynamics of energy consumption in the developing world. The transportation sector has historically consumed about 35 percent of all energy used in the developing world. But over the next 15 years or so, it’s expected to reach about 60 percent—comparable levels to that of the developed countries of North America and Western Europe.

Emerging market demand is largely the reason global oil demand levels are at record highs despite a sluggish economic recovery in the U.S. and Western Europe. Much of this demand comes from China and India, whose combined share of global oil demand has increased from 9 percent in 2002 to roughly 15 percent last year.

But it’s not just oil emerging markets have been gobbling up. It takes a lot of base metals such as copper, tin, nickel and others to expand a nation’s power grid, sewer system and transportation lines. China’s most recent Five-Year Plan calls for $50 billion to be spent on upgrading the country’s power grid and an another $110 billion on building 13,000 kilometers of high-speed railways.

This is a reason why we’ve seen the price of copper, lead, tin, nickel and zinc jump more than 100 percent during the past two years.

The market isn’t expecting prices for these metals to turn around any time soon. Take copper for example. Current prices are north of $4 a pound but the futures market remains bullish with prices set around $5.43 a pound.

Copper’s supply/demand fundamentals are very supportive of higher prices. Mine production has been declining since the early 1990s but the metal’s versatility has kept copper demand on the rise.

For instance, you may not think that air conditioning demand would have much to do with copper prices but each central air conditioning unit contains roughly 50 pounds of copper. The monthly output of air conditioners in China has increased since the beginning of 2009, coinciding with a 217 percent increase in copper prices.

Copper isn’t alone. We’re bullish on many industrial commodities for similar reasons. As the rebound in global economic growth continues, we should see increased demand for other commodities like metallurgical coal, which is used to make steel.

The biggest threat to commodity prices is the possibility that the Federal Reserve may begin to raise interest rates, which would weigh on commodity prices. More than likely however, the Federal Reserve will maintain historically low interest rates and the U.S. economic recovery will remain on course through the year.  [..]

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ARE YOU READY FOR A 60% SURGE IN VOLATILITY?

by Cullen Roche

Steven Sears had a good piece in Barrons over the weekend disussing the low level of the VIX.  As the market has continued to melt higher we’ve seen increasing levels of complacency as investors become increasingly comfortable with the market and their belief that it simply cannot decline.  While the economic fundamentals certainly back this outlook it’s always nice to have an insurance contract in your back pocket just in case.  In this case, it might be a bit of covered call writing or some outright VIX purchases.
Sears notes that MKM analysts believe the VIX could jump 60%+ in the coming months.   Not a bad insurance contract to have just in case.  Better yet, it doesn’t keep you out of the game entirely.  Remember, you can’t hit a pitch you don’t swing at.  But now isn’t the time to be swinging for the fences.  Via Barrons:
“ONE SELDOM-DISCUSSED REALITY of the modern options market is that the computers that control pricing models sometimes get out of tune with market reality. As stocks grind higher, as occurred in the fourth quarter, the models anticipate lower implied volatility because stock prices have advanced in the past. The past few days saw institutional investors buying bearish puts to protect against a decline, but the action wasn’t significant enough to cause a rapid increase in implied volatility.
A lesson of the past year is that wise investors buy volatility when it seems too low, and sell when it is too high. The volatility metronome also works for timing stock trades.
Risk premiums, as measured by the Chicago Board Options Exchange Volatility Index, are too low now, given the cross-currents roiling the surface of the stock market. This typically marks a good time to buy defensive index options to hedge against broad-market declines and volatility spikes.
With VIX around 18, Jim Strugger, MKM Partners’ derivatives strategist, is telling clients to buy VIX Feb. 21 calls and sell VIX Feb. 30 calls to protect against an earnings-season volatility spike that could temporarily interrupt the bull advance.
“After being bullish on equities since late August, and riding this volatility wave lower, we’re saying, ‘get ready for a VIX spike to 30,’ ” Strugger says.” [..]

Largest Two Month Decline In Unemployment Rate Since 1958

by Bespoke Investment Group

Today's non-farm payrolls report had little for the bulls to sink their teeth into.  After a stronger than expected ADP Employment Report, multi-year highs in the employment component of the ISM Manufacturing and Non-Manufacturing reports, and the largest monthly drop on record in mass layoffs for the month of January, Non-Farm Payrolls for the month came in well short of expectations (+36K vs +140K).
The only bright spot in today's employment report was a surprising drop in the unemployment rate which fell from 9.4% to 9.0% for its second straight monthly decline of 0.4%.  In fact, over the last two months the unemployment rate has declined by 0.8%, which is the largest two-month decline since 1958.  While part of this decline is attributable to the fact that people are dropping out of the work force (bad thing), unlike the payroll survey -- which has shown anemic growth in jobs -- the household survey (which the unemployment rate is based on) has been showing much stronger growth.  
While both sides will spend the day and weekend arguing over the merits of each survey, the bottom line is that an unemployment rate of 9.0% sound a lot better than the 9.8% level two months ago or the 10.1% rate we saw in October of 2009.


















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Wheat prices at risk of 'spike', BarCap says

by Agrimoney.com

Wheat prices face a "spike" if the concerns over global supplies prompt export bans or accelerated stockpiling, Barclays Capital said, as Bangladesh unveiled plans to speed up its imports.
The investment bank said it was optimistic over prospects for prices of all three main Chicago-traded crops, given tight supply and demand fundamentals for soybeans and, in particular, corn, its "preferred exposure" across the agricultural commodities sector.
However, it singled out wheat as possessing the potential dynamics for a leap in prices, given the grain's dietary importance at a time when many importing countries, in the face of civil unrest, are attempting to limit food price inflation.
United Nations data on Thursday showed world food prices at a record high last month, with cereals 3% more expensive than in December.
"The rise in wheat prices and tighter supplies has led to heightened concerns in key importing countries in the Middle East and North Africa to secure supplies," BarCap said.
'Further price rises'
 Jitters have been further enhanced by fears that Russia may extend its ban on grain shipments beyond this year, or that curbs by other exporters, or panic buying by importers, could further sap available supplies.
"We expect prices to climb further in the near term of these supply concerns," the bank said.
"Spikes cannot be ruled out if countries enact export bans or importers pre-empt export restrictions and make sizeable purchases."
While large exporters, bar Ukraine, have not follow Russia in trade curbs, some smaller shippers, such as Romania, have warned of depleted stocks, and Moldova earlier this week unveiled plans for a ban.
'Frantic efforts'
The comments came as Bangladesh's state grains buyer, the Directorate General of Food, said it would increase the size of rice and wheat tenders to accelerate purchases.
"If possible, for wheat tenders we may ask for 100,000 tonnes instead of the earlier 50,000 tonnes," a directorate source told Reuters, the news agency.
Ahmed Hossain Khan, the head of the department, said that Bangladesh authorities were "making frantic efforts to import rice and wheat to ensure food security".
The move follows a similar move by Algeria, which bought at least 1.75m tonnes of wheat last month, with countries including Iraq and Jordan also busy in the import market.
'Dire situation' 
BarCap said it was particularly bullish over prices of higher quality wheat, in part because of the particular desire for food rather than feed grain, but also the poor start to America's high protein, hard red winter wheat crop.
Although overall US winter wheat seedings, for harvest this year, rose by 10%, "the bulk of the increased plantings were for soft red winter wheat, with seeded area up 47%, rather than the higher quality hard red winter wheat, where seeded area rose just 4%."
Hard red winter wheat, traded in Kansas, is furthermore deemed in poor condition following a dry start and, most lately, freezing temperatures which have provoked concerns of elevated rates of winterkill.
A lack of moisture has also dogged winter grains in China, the top wheat producing country.
"The situation has been dire in Shandong, the country's second largest wheat producing area," the bank said.
"A significant cut in China's winter wheat productions could propel international prices strongly higher." [..]
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China corn imports 'could jump' to rebuild stocks

by Agrimoney.com

China's corn imports could quadruple this year, to way above previous forecasts, to replenish stocks which have fallen way below official targets, US industry officials said.
The US Grains Council, which in October pegged China's 2011 corn imports at 2m-3m tonnes, said that the figure could reach 3m-9m tonnes, questioning estimates from some other analysts that a bumper autumn harvest had curtailed the country's needs.
"Estimates given to us were that China is short 10m-15m tonnes in stocks and will need to purchase corn this year," Terry Vinduska, the USGC chairman, said, following a council visit to China.
"We learned the government normally keeps stocks at 30% but they are currently a little over 5%, which may lead to imports of 3m-9m tonnes."
Top rank?
Imports at this level could see China vie with South Korea for the title of world's top corn importer, after historically importing very little of the grain, further squeezing supplies of the grain which are already at their tightest since the 1990s.
Demand is being boosted by China's rocketing economic growth, running at an annual pace of 8-10%, the USGC said. Corn is processed into chemicals from ethanol to sweeteners to lysine, a dietary supplement, besides being used as an animal feed in a country with an increasingly carnivorous diet.
Nonetheless, corn futures moved little in Chicago on the USGC estimate, standing 0.3% higher at $6.64 ¼ a bushel at 12:15 GMT, if outperforming peers soybeans and wheat, which showed small declines.
Forecasts by the USGC, whose role is to promote America's grain exports, are often treated with some caution by investors.
The US Department of Agriculture estimates China's corn imports for 2010-11 at 1.0m tonnes, compared with a 14-year high of  1.3m tonnes the previous season.
'Too conservative'
However, separately, Barclays Capital dismissed the USDA estimate as "too conservative", given plentiful signals of tightness in Chinese supplies.
"Tightness in the domestic Chinese corn market has been reflected in myriad ways: high domestic prices; a pick-up in imports; weekly corn auctions; and China releasing corn from strategic reserves," the bank said.
"For 2010 as a whole, China stayed a net corn importer for seven consecutive months while corn imports for 2010 as a whole posted a 1781% year-on-year increase. [..]

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SPX Index Secular Markets (1900-2010)

By Barry Ritholtz

We’ve taken many longer term looks at the markets but the following chart from UBS Technical Analyst Peter Lee really tickled my fancy:
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click for larger graphic

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Source:
2011 Technical Market Outlook
Peter Lee – Chief Technical Strategist
Wealth Management Research
December 2010
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The Divergence to Keep on Your Radar

By macroman

Just looking at the the Dow, which was up 0.72 percent,  it wasn’t a bad week.   Look again!
Mr. Market inflicted some heavy pain this shortened trading week and we’re feeling some of it.  We’ll discuss  in more detail what took place during the past few days in our upcoming Week in Review post.
Check out these charts, which illustrate  the huge divergence this week between the small caps and the Dow.   The Russell 2000 began its 4.26 percent swan dive at the open on Wednesday to close at its lows on Friday.  Meanwhile,  the Dow Jones Industrial Average closed up 0.72 percent for the week led by big gains in GE, IBM, Hewlett Packard, and Exxon.
We suspect this just may be profit taking from the Russell’s huge run-up in 2010 as many of the stocks that were up big over the past year also got whacked during the week.    The size of the divergence does raise a red flag, however.
Only twice in the past seven years has the Dow and Russell experienced close to a 5.0 percent performance divergence in just four trading days and those occurred in 4Q 2008, during the height of financial collapse.   The Russell 2000 is a favorite hedging and shorting vehicle for the fast money crowd and the divergence may be a false signal as the shorts rush to cover,  but it’s worth keeping on your radar.
The last chart also shows that the two bull markets of the new millennium,  reflected in the S&P500, have been confirmed by the Russell 2000 outperforming the Dow.   The converse is true during bear markets.    The S&P500 can continue to rally even as the Russell:Dow ratio turns down,  but it’s clear the ratio is a  leading indicator of major trend reversals and deeper corrections.


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Why Newton was wrong


by PRINT EDITION

Theory says that the past performance of share prices is no guide to the future. Practice says otherwise


WHAT goes up must come down. It is natural to assume that the law of gravity should also apply in financial markets. After all, isn’t the oldest piece of investment advice to buy low and sell high? But in 2010 European investors would have prospered by following a different rule. Anyone who bought the best-performing stocks of the previous year would have enjoyed returns more than 12 percentage points higher than someone who bought 2009’s worst performers. 

This was not unusual. Since the 1980s academic studies have repeatedly shown that, on average, shares that have performed well in the recent past continue to do so for some time. Longer-term studies have confirmed that this “momentum” effect has been observable for much of the past century. Nor is the phenomenon confined to the stockmarket. Commodity prices and currencies are remarkably persistent, rising or falling for long periods.

The momentum effect drives a juggernaut through one of the tenets of finance theory, the efficient-market hypothesis. In its strongest form this states that past price movements should give no useful information about the future. Investors should have no logical reason to have preferred the winners of 2009 to the losers; both should be fairly priced already.
Markets do throw up occasional anomalies—for instance, the outperformance of shares in January or their poor performance in the summer months—that may be too small or unreliable to exploit. But the momentum effect is huge. Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School (LBS) looked at the largest 100 stocks in the British market since 1900. They calculated the return from buying the 20 best performers over the past 12 months and then holding them, rebalancing the portfolio every month.
This produced an annual average of 10.3 percentage points more than a strategy of buying the previous 12 months’ worst performers. An investment of £1 in 1900 would have grown into £2.3m by the end of 2009; the same sum invested in the losers would have turned into just £49 (see chart 1).

Messrs Dimson, Marsh and Staunton applied a similar approach to 19 markets across the world and found a significant momentum effect in 18 of them, dating back to 1926 in America and 1975 in larger European markets. A study by AQR Capital Management, a hedge fund, found that the American stocks with the best momentum outperformed those with the worst by more than ten percentage points a year between 1927 and 2010 (see chart 2). AQR has set up a series of funds that attempt to exploit the momentum anomaly.

Too costly, too risky?


Even the high priests of efficient-market theory have acknowledged the momentum effect. Well-paid fund managers have spent decades trying to find ways to beat the market. But you have to wonder why they bother devoting so much money and effort to researching the fortunes of individual companies when the momentum approach appears to be easy to exploit and has been around for a long time.

Logic suggests that the effect should be arbitraged away. If the best performers of the past 12 months continue to do well, smart investors will buy them after 11 months have elapsed, reducing the returns on offer to those who wait the extra month. In turn, others will buy after ten months, then nine, eight and so on until the effect disappears.

When efficient-market theorists come across a market anomaly, they tend to dismiss it in one of three ways. The first argument is that the anomaly is a statistical quirk obtained by torturing the data; it will not persist. But the momentum effect was noticed in 1985 (by Werner de Bondt, a Belgian economist now at DePaul University in Chicago, and Richard Thaler, of the University of Chicago Booth School of Business) and has not gone away.

The second is that any gains from the strategy will be dissipated in higher trading costs. Clearly, the LBS team’s strategy of rebalancing a portfolio every month would be expensive but Mr Marsh says these would not offset an annual performance gap of over ten percentage points.

The third is that higher returns simply reflect the higher risks of the strategy. This has been used to explain away two other notable anomalies: the size and value effects. Small companies tend to do better than bigger ones in the long term, but they tend to be less diversified and therefore more risky. And shares that look cheap on conventional measures (asset value, dividend yield, price-earnings ratio) also tend to deliver above-average returns, but belong to firms that are likelier to go bust.

According to a paper by Cliff Asness, who co-founded AQR, the better performance of momentum stocks is not merely a reflection of higher risk. He finds that the momentum effect persisted even when the data were controlled for company size and value (defined as price-to-book) criteria. Another explanation is needed.
One possibility relates to timing. The efficient-market hypothesis assumes that new developments are instantly assimilated into asset prices. However, investors may be slow to adjust their opinions to fresh information. If they view a company unfavourably, they may dismiss an improvement in quarterly profits as a blip, rather than a change in trend. So momentum may simply represent the lag between beliefs and the new reality.

Once a trend is established, a share may benefit from a bandwagon effect. Professional fund managers have to prepare regular reports for clients on the progress of their portfolios. They will naturally want to demonstrate their skills by owning shares that have been rising in price and selling those that have been falling. This “window-dressing” may add to momentum. Paul Woolley of the London School of Economics has suggested that momentum might result from an agency problem. Investors reward fund managers who have recently beaten the market; such fund managers will inevitably own the most popular shares. As they get more money from clients, such managers will put more money into their favoured stocks, giving momentum an extra boost.

It is hardly a surprise that the momentum effect has been exploited by some professionals for decades. Commodity trading advisers (CTAs), also known as managed futures funds, exist to exploit the phenomenon. They take advantage of trends across a wide range of asset classes, including equities and currencies as well as raw materials. Martin Lueck was one of the three founders of AHL, one of the more successful CTAs, and now works for another trend-follower, Aspect Capital. “Trends occur because there is a disequilibrium between supply and demand,” he says. “The asset is trying to get from equilibrium price A to equilibrium price B.” 

Many of the trend-following models were developed in the late 1970s and early 1980s. They were exploited by investors such as John Henry, best known outside the financial world for owning a baseball team, the Boston Red Sox, and a football club, Liverpool (which is on a downward trend of its own). One of the simplest was to buy an asset when the 20-day moving average of its price rose above its 200-day average. In a recent study Joƫlle Miffre and Georgios Rallis of the Cass Business School in London found 13 profitable momentum strategies in commodity markets with an average annual return of 9.4% between 1979 and 2004.

Modern CTAs like Aspect and Winton (run by David Harding, another founder of AHL) devote a lot of effort to researching new ways of exploiting momentum. That has sometimes meant trading faster and faster, with a time horizon of milliseconds rather than months. However, not all market movements are part of a trend. Some are merely random fluctuations. “As you trade faster, it is easier to get misled by the noise,” says Mr Lueck. Trend-followers can get “whipsawed” in volatile markets, buying at the top of a short-term trend and then selling at a loss shortly afterwards.

That may be one reason why the momentum effect has not been arbitraged away: it can go horribly wrong. Just as trees do not grow to the sky, share prices do not rise for ever. The effect tends to work for the best performers over the past 12 months, but not for those that have shone for longer periods, say three or five years.

The value of value

That may be because of another anomaly, the value effect. Investors eventually get too pessimistic about struggling firms, and price their shares too cheaply. That turns them into bargains. Broadly, whereas momentum works over the short term, value is successful over longer periods. The result can be sharp reversals in markets—and nasty surprises for momentum traders. One such turning-point occurred in 2009. Investors who used a short-term momentum strategy, buying the winners of the previous six months, would have lost 46% in the British market and 53% in America, according to the LBS team. Similarly bad years were 1975, 2000 and 2003.

The momentum effect allows investors to get rich slowly. But many fund managers are impatient and thus use leverage (borrowed money) to enhance returns. Such an approach would lose so much money in bad years that clients might lose faith. “To exploit momentum, you need investors who understand the portfolio is going to be subject to a very high level of volatility,” says Mr Marsh of the LBS.

Momentum is so significant in stockmarkets that academics are starting to analyse what role it plays in professional fund managers’ returns. This is all part of the long process of removing the “magic” from financial performance. In the early days of fund management, in the 19th century, there were no stockmarket indices. Fund managers could thus claim that a positive return was down to their own brilliance, rather than a general rise of the market, and clients could not tell the difference.

After the development of benchmarks like the S&P 500, clients began to demand that fund managers proved their skill by outperforming an index. Many failed; but even some who succeeded may have done so by holding concentrated portfolios of only a few stocks. Such portfolios were more risky than the overall market. So the next step was to measure the managers’ performance after adjusting for risk. Even those managers may have done well because their investment style (value, for instance) was in fashion. So academics started to allow for that, too.

In effect, the portion of the investment return that was purely a result of fund managers’ skill was being reduced at every stage. Now, says Mr Marsh, academics are looking to see whether some outperformance is really all down to momentum. 

All this analysis matters because these factors can be replicated. These days investors can not only match a benchmark through simple index-tracking funds; they can also own portfolios that exploit the value and momentum effects without paying hefty fund-management fees. The investment-management industry may become even more commoditised.

The momentum effect raises a further important issue. If markets are rational, as the efficient-market hypothesis assumed, then they will allocate capital to its most productive uses. But the momentum effect suggests that an irrationality might be at work; investors could be buying shares (and commodities) just because they have risen in price.

That would help explain why bubbles are created and why professional investors ended up allocating capital to dotcom companies with no earnings and business plans written on the back of a cigarette packet. Momentum can carry whole economies off track. [..]

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Jim Rogers: Invest in commodities now

by Commodity Online


Should you invest in commodities if there is war between South and North Korea? Will your commodities investment pay rich dividends if there is no war between the Korean countries? Global commodities guru and ace investment expert Jim Rogers says commodities are the best place you should put your money, even if there is a war or not in Korea.

In an interview with ET Now, an Indian business television channel, Rogers, who is presently the chairman of Rogers Holdings, said: “In my view, the thing to invest in is commodities because if there is going to be war, it is always good for commodities and if there is no war, then commodities will rally like everything else.”

According to Rogers, who is the author of famous books like Hot Commodities and A Bull in China, global markets are in a mood for corrections these days.

“First of all, global markets should be correcting about this time because they have been pretty strong recently and there is always some reason to correct. This time, it looks like it might be Korea. Whenever you have threat of war, usually everything goes down at first, then you have to figure out what to invest in after the initial collapse,” Jim Rogers said.

He holds commodities as the best bet to invest in even if North Korea and South Korea go for war or not.

He said that it is not at all the right thing that America is continuing to print more and more money.

“America is going to continue to print money. Unfortunately that is all America knows to do, it is not the right thing to do, it is not good for the world, but that is all America knows to do.”

“If there is war, they are going to print money. If there is not war, they are going to print money and so whenever there has been money printing, the result has been that you should have your money in real assets. It has been a pretty clear thing throughout history. The real assets are the only way to protect yourself. Real assets are basically the only way to protect yourself in time of war,” Rogers told ET Now. [..]

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COMMODITY PRICES – THE GROTESQUE IN THE ATTIC

by By Rohan Clarke

Global industrial production is set to climb again – as it waddles after those cardigan wearing purchasing managers:
The US has been leading the way – from the JP Morgan Global PMI Report report
The US PMI rose to an eighty-month high in January, while its counterpart in the Eurozone hit a nine-month peak. The UK PMI rose to its highest level since (UK) data were first collected in 1992. Meanwhile, the China and India PMIs crept higher from December’s three-month lows and an expansion was signaled in Japan, albeit only slight, for the first time since last August.

Only Australia and Greece were on the contracting side of the ledger. On the face of it, this ‘fundamental’ demand should throw a supportive bid behind commodities – and may help explain why the major miners have caught an updraft over the last couple of days. (Chart from Investment Postcards from Cape Town.
Yet it’s reasonable to ask whether it is only fundamentals driving commodity prices.  While it might well be argued that base metals have at least paid some attention to the ebbs and flows in industrial production, the relative strength in gold suggests that there may be more to the story.
Similarly, supply constraints cannot explain the entirety of the recent rise in foodstuffs:
Bernanke (at the National Press Club) claims that higher commodity prices are the result of emerging world demand and supply constraints. This is true – at least in part.  Certainly, weather patterns over recent times have not been conducive to agricultural production nor for the supply of some industrial commodities. And yes, emerging world demand has been strong since early 2009.

But this is too simplistic an explanation as it ignores the role of government and speculation in driving commodities prices.
Without exception, ‘fundamental’ demand has been strong due to government stimulus efforts. Most particulary, the rise in emerging world demand was intimately tied to the launch of China’s huge monetary stimulus in 2009. This trend has reached its end.  China is tightening money – and other emerging economies have been applying their own capital constraint measures. The fall in the Baltic Dry Index may be partly inspired by oversupply, but fading ‘fundamental’ demand is also at play. It is no coincidence that Chinese equities have also caught a cold.

The reversal of stimulus policies reflects a need to slow price rises.  For example, food prices are said to comprise 35% to 40% of disposable income in China, and are higher in other emerging economies. Higher food prices will inevitably squeeze demand, and more ominously, lead to unrest. It’s notable that at the same time Bernanke was making his speech, UNCTAD was hosting a conference on Global Commodities with the explicit aim of “calling for attention to climbing, volatile prices”.

The point is that there is a limit to the price that emerging markets can pay for commodities – and the evidence suggests we are close to that point.
So if China is tightening money, we might reasonably expect commodity prices to start easing – in anticipation of declining demand from emerging economies. Yet copper tops US$10,000/t, Brent breaks US$100/bbl and cotton makes new record highs. This raises a question as to who is buying – and increasingly over the last decade, the answer has been investors.

Investment demand for commodities is something that we have looked at before so we won’t labour the point. Suffice to say, the current run-up in the prices of some commodities has all the hallmarks of classic price distortion away from fundamental demand (aka ‘bubble’ behaviour).  As seasoned traders will oft be heard to say – the prices have gone parabolic – meaning that speculative fervor has taken over. With the herd increasingly headed in the same direction, it will take progressively less and less to tip the balance in the other direction.

Conclusion – Just like the grotesque in Dorian Gray’s closet, high commodity prices are the non-to-hidden price we must pay for a forever young global economy. With QE2 itself passing into its twilight age, the risk/reward of being long commodities doesn’t look too flash – with diminishing upside and plenty of room on the downside. Emerging markets are already signalling weakness and the commodity currencies are showing all the signs of exhaustion. While we may not have called for the last rites just yet, the priest is in the parlour. [..]

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Should Investors Continue to Buy Gold?

by Avery Goodman

Recently, UBS analyst, Larry Hatheway, issued a bearish forecast for the price of gold. He thinks that continuing economic recovery will cause lower demand, and that this will cause the price to drop. He is naive. Economic recovery, in the United States and the rest of the world, is being driven by the printing of money and the monetization of government debt.

Newly printed money that has not been earned by the work of society is illegitimate and it is a long run destabilizing factor in the economy. The fact that much of it is being "given away" in near-zero interest in the form of endlessly renewable "loans" to favored financial institutions closely connected to the Federal Reserve and other central banks, increases resentment among the rest of the population and makes matters worse. In the case of the United States, the primary dealers have been using this funny-money to monetize deficits while preserving plausible deniability for the Federal Reserve, which has managed to avoid direct purchases from the U.S. Treasury.


The U.S. fiscal deficit, for example, will run about $1.5 trillion this year, for example. The Federal Reserve is going to print about that number of dollars in the process of buying U.S. Government bonds from its dealers, supposedly in the "open market". Short-term interest rates are being kept artificially low in order to make this trade profitable for banks during the period in which they are expected to hold onto the treasury securities.

The reason deficits have soared so high is that private demand is being temporarily replaced by government demand. The economy is being levitated by an artificial and unsustainable stimulus produced by the less than reputable practice of currency debasement. With a majority of market participants seemingly blind to this, momentum buyers, hedge funds and chart followers are buying in at stock and bond prices that are not justified by the fundamentals, and the intense probability of an eventual crash. ... [..]


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It's All Good for Gold

by Robert Kientz

Gold began the New Year tumble and the bears came out in force to discuss the end of the gold rush. Gold was back up again Thursday, offering us the perfect chance to discuss why fundamentals are still strong. Gold's Pullback Quite a few reasons have been cited for Gold's recent pullback. The first was a change in COMEX margin requirements that showered cold water on traders opening new long positions due to higher cash requirements. Secondly, the Federal Reserve announced an accounting change, saving it from potential bankruptcy. If the Federal Reserve cannot technically go bankrupt, then a major reason for holding gold and silver, the currency crisis, loses some steam in the eyes of some investors. I don't think the accounting gimmick will ultimately eliminate the currency crisis trade, but it buys the Fed some time with the public before they lose confidence in the central bank. A quote from Reuters:
The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability...
"Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.
And, recently, the Wall Street Journal found a hedge fund that had liquidated a massive spread of contracts. These positions resulted in a net 100% loss to the hedge fund manager, and he just decided it was time to cut his losses. The selling appeared to panic jittery longs, cascading into more selling.
So is this the end of the great gold bull? I don't think so.
Fundamentals Haven't Changed
The fundamentals of the gold bull have not changed. For example, we still have massive public debt.
click to enlarge

Data From Treasury Direct
Paper money has also continued to surge. A look at M2 from the Federal Reserve.

A look at Shadowstats money supply charts shows that we had a temporary slight pullback in M3, but that the number has bounced higher so far in 2011.
What about demand? The World Gold Council's Q4 report sheds some light on jewelry and industrial demand for gold.


Overall, gold demand is rising faster than supply due to increased jewelry and industrial demand, and net inflow of gold to the official sector (central banks). For the first time in two decades, central banks experienced a net inflow of gold.
Who is Buying Gold?
Russia continues to be a gold bull by moving past Japan for 8th in the world on the reserves list.

In the first ten months of 2010, Russia added 131 tons of gold, about 16% of the country's total gold holdings. Russia has recently announced they will increase their reserves by 100 tons per year, with no end date specified in the buying program.
Marketwatch reports that China is buying gold due to holiday and investment demand. China's high rate of inflation has prompted investment by a citizenry that saves 30% of their income, which is in line with historical patterns.
“The Chinese will buy more and more gold just as every other civilization has in inflationary times and with their high savings rates, they have the money to do it,” Pinkowski said.
To wit: China has increased private demand for gold by 22% since 2005, according to BullionVault.
Precious metals traders in London and Hong Kong are “stunned” by gold orders from China, which increased gold holdings by 209 tons in the first 10 months of 2010. According to Goldcore, the physical gold market is becoming less liquid, indicating the selloff is over.
Gold ETFs are also booming.

Another interesting note about China from the World Gold Council report is that while Westerners have increased their gold recovery from scrap, much of it from the retail sector selling gold, Asia has reduced their scrap recovery. Are Westerners in effect selling their gold jewelry to China?
But Gold is Volatile
Well, that depends on how you look at volatility. Returning to the World Gold Council Study, we see that compared to other commodity investments, gold is much less volatile.


And when compared to other asset classes, gold delivers more return for its daily volatility than other asset classes do.

And straight up versus other asset classes, gold is all good.


So, is gold going to be a good investment in 2011? I dunno. But so far, so good. [..]

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The battle of ‘copper versus wheat’ Inflation’s a key risk for the industrial metals market

By Myra P. Saefong

Prices for aluminum and nickel have both gained in recent weeks. On the London Metal Exchange, aluminum prices rose 11% and nickel was up 31% last year.
Copper prices /quotes/comstock/21e!f1:hg\h11 (HGH11 454.80, +0.35, +0.08%)  on Tuesday touched their highest level ever recorded on Comex in New York after ending 2010 with a 33% gain. Read about copper’s recent record high.
Much of those gains came as data supported the idea that consumption from emerging market economies will continue to grow at a strong pace. 

And as “emerging market demand has been the big driver behind industrial metals, these metals would also seem the most susceptible to any slowdown,” said Chris Mayer, a managing editor for Agora Financial and contributor to the Daily Reckoning.
“There is too much hitting these countries too fast,” he said, pointing out that emerging economies are getting hit by rising prices for food, oil and industrial metals, and the central banks of several big countries, including Brazil and China, are raising interest rates.
“The industrial metals as a group are unattractive simply because I believe that emerging market demand will slow,” he said.
The HSBC Emerging Markets Index, which tracks purchasing managers’ indexes in 16 emerging markets countries, accelerated in the final quarter of 2010 as manufacturing rebounded. The index rose to 55.7 from a five-quarter low of 54.2 in the preceding quarter. Read earlier Emerging Reports report on HSBC index. 

But inflationary pressures are a key risk to future growth, HSBC said in a press release dated Jan. 10, with input cost inflation quickening in the fourth quarter to the fastest level since the second quarter of 2008.
That, in turn, clouds the outlook for industrial metals.
“We are concerned about the possibility of some overheating in growth economies,” said David Coffin, editor of HRAAdvisory.com, which publishes newsletters dealing with the mining market. “China, but also India and a number of others, are seeing inflation start to become a factor.”
“If moves to deal with this continue, it could slow growth enough to impact raw material prices,” he said. “This will be all the more true if food prices also continue to rise since, obviously, funds go to that sector first.”
That may have already started happening.
World food prices jumped to a new historic peak in January for a seventh-straight month, according to the Food and Agriculture Organization of the United Nations. Read the details on the food price surge.

Inflation ‘fire storm’

A new middle class, with more disposable income to spend, has been developing in emerging market economies — adding to assumptions that commodity demand is set to rise. 

As people’s “tastes” change and savings increase, the world will need more primary inputs, or “grass-roots commodities,” to satisfy consumer demand for food and infrastructure needs, said Jonathan Barratt, managing director at Commodity Broking Services in Australia.[..]

Why Food Prices Must Go Up

by The Mogambo Guru

Since, being as melodramatic as I can be, all is lost, there is nothing that can be done, except for the government(s) to come up with plans for some new Big Screw Jobs (BSJs) with which to forestall the Big Ugly Inevitable (BUI).

This is the take I get on a Bloomberg article that starts off with, “Speculation and price swings in agricultural markets may threaten food security, 48 farm ministers meeting in Berlin said a month after a United Nations gauge of global costs reached a record.”

There was, alas, nothing in the report about how The Courageous Mogambo (TCM) was there, and who cried out, in his outrage and his grief, “That’s because you morons are all printing money and deficit-spending like it is some kind of freaking virtue or something! Milton Friedman said, and history has proved, that inflation is always and everywhere a monetary phenomenon, which, if you don’t understand English, means you must have somebody who does savvy the lingo translate it into whatever indecipherable gibberish you people call a language so that maybe you morons will learn something and stop saying such stupid things! Now, open this door so I can come in there and REALLY tell you all what a bunch of lowlife socialist halfwits you are!”

Instantly, there were, of course, quizzical looks at my concluding reference to “socialists” since, up to that point, the whole conversation was merely about how the prices of food are rising ominously, although nobody mentioned the rises in the prices of energy and taxes, which are as bad or worse!

And although nobody actually said anything to me, I knew what they were thinking. I always know what they are thinking.

They were thinking to themselves, “Nobody said anything about anything socialist! This raving lunatic Mogambo is always ragging on socialists and communists and aliens from outer space and invisible helicopters full of invisible government goons always hovering over his house, shooting some kind of thought-control waves into his stupid head, explaining why he wears that stupid tinfoil hat, but not explaining why he has crumpled the aforesaid tinfoil into what appears to be a snazzy Viking helmet, replete with horns!”

I was intending to make a snotty remark about how I noticed that none of THEM was wearing a tinfoil hat and how none of THEM was buying gold, silver and oil as protection against the raging inflation in prices that is caused by the Federal Reserve creating So Freaking Much Money (SFMM), even when the horror of the latter proves the wisdom of the former.

And Doubly Especially So (DES) when the torrent of new money is borrowed by the government and used for new, obscenely high-and-getting-higher deficit-spending, a pathetic tragedy made “necessary” by the fact that, nowadays, half – half! – of all spending in the Whole Freaking Country (WFC) is government spending, as gigantic wads of money are spent on a long and growing list of things and people that are getting more expensive to maintain because the Federal Reserve is creating So Freaking Much Money (SFFM) that the prices of everything, including supporting them, are going up, and how everyone who can’t see that obvious fact is a Big Fat Moron (BFM)

So, there I was, marshaling my forces for a Legendary Mogambo Onslaught (LMO) against such socialist monetary stupidity when, fortunately, it did not come to that, and I was completely vindicated by French Agriculture Minister Bruno Le Maire saying, “There is a risk of more food riots unless the surge in prices is contained, including through trading regulations”!!!

Those concluding three exclamation points were added by me as both indicating that this, indeed, was pure socialist crap (and with a vicious police-state undertone to boot!) and to say, “Up yours!” to those who thought I was wrong! Containing prices! Trading regulations!

The German Agriculture Minister Ilse Aigner piped up to say that “Food markets may not be the object of gamblers,” which is a huge, industrial-sized load of hoo-hah (and which I think is translated into German as “Grosseloadacrap,” but I am not sure) because Every Freaking Thing (EFT) that I can think of is, somewhere, by somebody, a leveraged bet of some kind, thus literally defining Every Freaking Thing (EFT) as “the object of gamblers”!

Hell, somebody ought to tell this Aigner character that the sheer, monstrous size of the derivatives market – alone! – is at least four times bigger than global GDP, for crying out loud, and which are all (theoretically) bets, which makes a complete mockery of whining about betting on the prices of commodities!

So, commodities, out of all things, should not be the object of gamblers? Hahahaha!

The rationale is, of course, that “Food and agricultural commodities are not like anything else. Sometimes it’s about pure survival,” meaning that people starve to death when they can’t afford to buy any real food, even to augment their grubs-and-roots diet, because the price of food has gone up so high, which it does because prices Always, Always, Always (AAA) go up when the money supply expands so much so fast, like it is now with the Federal Reserve creating so much money, so incredibly much money, so impossibly much money, so outrageously much money that prices Must, Must, Must (MMM) explode upward.

This is seemingly proved when you mystically combine Always, Always, Always (AAA) with Must, Must, Must (MMM) to get MAMAMA, the person for whom you will be crying out, begging her to take you back home to live at her house, perhaps live in her closet, or for her to somehow come back to life after being dead all these years, get a mortgage, buy a house and THEN let you live with her, all because you lost your stupid butt by foolishly ignoring The Mogambo’s advice, the lessons of the Austrian school of economics, Milton Friedman, and 4,500 years of history, which I helpfully distill down to its investment essence: Buy gold, silver, and oil stocks, pronto! [..]

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