Thursday, June 13, 2013

While the Fed Parties, Gold & Oil Have Left the Building

by J.W. Jones

Risk assets and financial markets around the world have been supported by central bank action for several years. Performing financial alchemy on a scale larger than has been seen in the history of mankind, central banks have hijacked global financial markets. Mountains of liquidity, artificially low interest rates, and the creation of future asset bubbles has been their calling card for the past few years.

Unfortunately, time is starting to run out and these great Keynesian minds are on the verge of encountering a series of problems. While central banks can create fiat currency out of thin air, they cannot create real wealth. In fact, central banks cannot print jobs, earnings growth, or an increase in wages.

Furthermore, in a paper put out by the New York Federal Reserve in 2012 and covered by (“Fed Confused Reality Doesn’t Conform to Its Economic Models, Shocked Its Models Predict Explosive Inflation”) the Fed openly admits that forward outcomes cannot be predicted with accuracy by their economic models. Furthermore, one of the models known as the Smets and Wouters Model has predicted significant inflation if interest rates were held near zero for more than 8 quarters.

For inquiring minds, I would forward readers to the article for a more in depth explanation. Ultimately the Federal Reserve is performing a gigantic experiment in real time while admitting their economic models do not accurately portray outcomes in the future. Nowhere can this be seen more than in recent price action in U.S. Treasury prices.

Since mid-November of 2012, the 30 Year Treasury Bond has seen prices go down by roughly 9% in value. When Treasury prices are falling, interest rates are rising as there is an inverse relationship between bond prices and yields. When longer term Treasury bonds are demonstrating rising interest rates it is a signal that the bond market is expecting higher inflation levels out into the future. The weekly chart of the 30 Year Treasury Bond is shown below.


As can clearly be seen above, prices have been coming down for several months and we have initiated a price pattern with lower highs and lower lows. This is not a bullish pattern by any means and should the 30 Year Treasury bond take out key support around the 135 price level the Federal Reserve will be in an awkward position.

The Fed’s problem lies in the fact that the Federal Reserve is printing nearly $85 billion dollars of fiat currency to purchase U.S. Treasury and agency bonds and rates have still risen. It would only make sense that at some point, the Federal Reserve will have to ratchet up their program to defend Treasury prices.

If the printing presses fire up fast and furiously to help put a floor under Treasury bonds (cap rates), what is going to happen to commodity prices such as oil? As shown below, the oil futures daily chart illustrates a coiled price pattern that ultimately will lead to a strong move in price.


A move in oil prices above the $96 – $98 / barrel level will likely lead to a powerful move higher in oil prices toward the $100 – $112 / barrel range. Obviously a big move is coming and we could see a move lower just as easily. I have no idea where price is going, but what I do know is that oil prices are staged up for a fast, large move in price.

Interestingly enough, gold futures are also in a basing pattern after selling off sharply earlier this year. Similar to oil futures, gold futures prices are coiling up as well and could go either direction as shown below:


As can be seen above, gold futures are trading in a consolidation pattern which could lead to a strong breakout in either direction. While the upside seems more likely, it goes without saying that lower prices are always a possibility. However, the point I would make to readers is that a large move in the near future seems likely in both gold and oil futures.

Gold is simply a hedge for inflation and acts as a senior currency, however if inflation increases gold will protect owners from a reduction in purchasing power. From an economic standpoint, oil and energy prices are far more important than gold prices. If the Federal Reserve’s Smets and Wouters Model is accurate in its expectation of strong inflation pressure in the future, I would anticipate seeing a strong move higher in both oil and gold prices.

However, the real point is that the Federal Reserve will likely find itself in a precarious position in the future. On one hand, they have to print money to backstop Treasury bonds through additional quantitative easing machinations.  On the other hand, the additional liquidity may start pouring into commodities if inflationary pressures begin to mount.

Ultimately the Federal Reserve may attempt to hold down interest rates to help the economy but if their activities cause energy prices to spike the U.S. economy will begin to move toward recession quickly. In addition to that scenario, it should leave many readers unsettled that it would appear Treasury rates are rising while the Federal Reserve continues to print vast sums of fiat currency to buy more government debt.

Ultimately, the Federal Reserve does not have a great answer about the future since they publicly admit many of their models do a poor job of predicting future economic conditions based on actions that they are taking. At the end of the day, this is just one gigantic Keynesian experiment worldwide and the outcome will follow historical trends.

It does not take an economic genius to understand that the vast amounts of fiat currency created by the unprecedented recent actions of the Federal Reserve will have to find a home somewhere. This process will likely manifest as dramatically higher prices for a host of necessities in the future. In fact, the recent parabolic rise in stock market prices can be viewed not as higher prices for equities, but simply lower valued U.S. dollars.

Perhaps instead of concocting models with large names which simply do not work, why doesn’t the Federal Reserve open a few history books. Regardless of what central bankers believe or what their models produce, history’s version of the outcome is simply unpleasant. Ultimately the Federal Reserve should focus on the old adage that those who ignore history are doomed to repeat it.

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Bank Of Japan Machinations Crash Into Reality

by testosteronepit

The Japanese stock market has become a case study of central-bank manipulations, and of what happens eventually as reality cannot be eliminated forever.

On Thursday, the Nikkei, after a horrific 800-point or 6% dive on a staircase to hell, or to 12,416, whichever came first, recovered a few hundred points, then climbed back down that staircase and ended the day at 12,445, the lowest close since April 3, down 844 points for the day, the second largest swoon so far in 2013.

The largest swoon this year? May 23, a 1,460-point crash, or 9.2%, from its intraday peak (after a 300-point jump that morning) of 15,943 – the highest most euphoric point since December 2008. Now the Nikkei is down 21.9% from that peak, and in bear market territory. Both the Nikkei and the Topix dropped below the 100-day moving average during the day, which in itself triggered more selling, as these technical indicators, and the buy-sell behavior they engender, become self-fulfilling prophecies (for a while), not only on the way up, but also on the way down – their raison d’être; otherwise they’d be utterly useless.

It took the Nikkei 50 days – from April 3 to May 23 – to make it up that far, and just 20 days to come back down. Up by escalator, down by elevator (with ear-popping speed). 

This is what happens when a stock market gets inflated by a central bank: promises of boundless money-printing attract the hot money that causes values to balloon to ridiculous highs in the shortest time. Then something happens, some silly event, the recognition that enough money has been made, a rumor that some big hedge fund is bailing out, a disappointing statement by the Bank of Japan, something... and some of the hot money suddenly has had enough, tries to take profits, tries to bail out, just when there are not many euphoric buyers left, and what you hear is a giant hissing sound. And what you get is capital destruction and wealth transfer.

Thank goodness, for the Bank of Japan, there is nothing like a good stock-market crash to prop up the otherwise wilting market for Japanese Government bonds. They’ve been an awful investment recently: the 10-year JGB has been yielding below 1% even though the BOJ promised to create 2% inflation. The official plan is to hand JGB buyers a loss on an inflation-adjusted basis. So investors have been bailing out of JGBs while the BOJ has been gobbling them up through its massive bond-buying program. Yields have been jumping up and down in the most tumultuous manner, rising for the 10-year JGB from the freaky 0.315% low of April 5 to briefly kissing 1% on May 2, and panicky bondholders have been pulling out their hair along the way.

Since then, JGBs have “stabilized” somewhat, with yields retreating below 0.9%. But during yesterday’s stock market massacre, these despicable JGBs suddenly seemed like a pretty good deal again, given the choice between losing money fast in stocks and losing money more slowly in JGBs. In response, yields on the 10-year JGB briefly plunged from 0.88% to 0.80%, only to rise back to 0.86%.

In support of its machinations, the BOJ has stated repeatedly and explicitly that it is trying to inflate the stock market to create the "wealth effect" – that ephemeral and treacherous impetus for people to spend money they see on a computer screen but haven’t realized yet and haven’t paid their taxes on yet. But on average, they actually can’t spend the money they see on that screen because they’d have to sell to do so, and pull their money out of the market. It would cause a crash. And annihilate that beautiful wealth effect.

Instead, central banks use the wealth effect to lure consumers with a vision of wealth so that they’d spend their savings, or spend with their credit cards. And then, when the market does crash, consumers are left holding the bag: the vision of wealth has dematerialized, their savings have been decimated, and credit card bills have piled up. An insidious central-bank strategy.

But that’s secondary for the BOJ. Its primary concern is the enormous government bond market – and the banks, retirement funds, and other institutions that own a big portion of these crappy bonds. They're  the lifeblood of the Japanese economy. And when push comes to shove, the BOJ lets stocks plunge in order to support bonds – as it has done on numerous occasions.

It’s hard to blame the BOJ. There are no more good options available for Japan. The economy has become physically dependent on out-of-control government deficit spending – with half of the spending being borrowed money! The debt, now over 200% of GDP, is so huge and growing so rapidly that reasonable solutions no longer apply. But reality cannot be pushed out forever. Someone eventually MUST pay for it all: the bondholders, the taxpayers, or all Japanese (via run-away inflation).

The one thing we know from Abenomics, and from the policies of all prior governments: they’ll try to push the day of reckoning out as far as possible, hopefully beyond their time in politics, and hopefully with enough warning to allow the elite to protect itself from the fallout. The BOJ’s job is to make that possible.

Abenomics has its detractors – even in unexpected places – and Prime Minister Shinzo Abe must be experiencing some interesting pillow talk. His wife has attacked one of the major components of his economic policies, the formerly omnipotent nuclear power industry that he is trying to restore to its former glory. Read.... Akie Abe, His “Anti-Nuclear” Wife

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Goldman Sachs slashes corn and soy price forecasts


Corn and soybean futures offer among the most lucrative opportunities among commodities – for investors betting on falling prices, Goldman Sachs said, amid a rash of broker activity following a key US report.

The broker slashed by up to $1.75 a bushel its forecast for Chicago corn futures, and by up to $2.50 a bushel its estimates for soybean prices, citing the increasing confidence in a recovery in world inventories.

"It will require a significant weather shock to limit the rebuild in corn and soybean inventories given the record large realised South American harvests and current weak global consumption," the bank said.

Indeed, it cautioned that further downgrades to its forecasts may yet be forthcoming, to $4.25 a bushel for corn and $10.00 a bushel for soybeans, should its most likely scenario - of a 13.6bn-bushel corn harvest and 3.37bn-bushel soybean crop – materialise.

'The largest opportunity'

Indeed, Goldman said it viewed "the downside potential to agriculture prices as the largest opportunity across the commodity markets we cover", recommending investors to take out short positions in both corn and soybean futures.

"While we may be too early in entering this trade, we prefer that to being late given our belief that current prices embed a large weather premium and that prices could decline in the next six weeks," the bank said.

"While US corn and soybean production levels remain uncertain, we still expect that production will recover relative to last year's level under most weather outcomes."

Deutsche outlook

The downgrades came amid a rash of broker comment after the US Department of Agriculture on Wednesday cut its forecast for the US corn crop by 135m bushels to 14.0bn bushels, far less than analysts had expected.

The estimates sent new crop corn futures tumbling more than 2% on Wednesday, with the contract shedding a further 0.7% on Thursday in late deals, although the reliability of the USDA estimates was clouded by officials' failure to cut their forecast for corn acres, despite rain delays to sowings.

Deutsche Bank said that Wednesday's forecasts had, in theory, set the scene for corn prices in "the $3.60-a-bushel range", a level not seen in Chicago since July 2010, although it acknowledged the prospect of crop downgrades ahead, after a late-June planting survey gives the USDA a better handle on sowings.

The bank – forecasting US corn sowings at 94.8m acres, 2.4m acres below the USDA figure, and with the yield at 153.7 bushels per acre, below the official forecast of 156.5 bushels per acre – restated an expectation of new crop prices fall to $4.30 a bushel.

The bank was also downbeat on prospects for soybean prices, foreseeing them falling below $11 a bushel, a level falling through only briefly since 2010.

'Bearish on new crop corn'

Separately, Rabobank also voiced doubts over the degree to which Wednesday's USDA data should be relied upon, given the prospect of a corn acreage revision after the end of June plantings report.

"The June Wasde numbers will be perceived by the market as bearish, although possibly only for a brief time, with a truer reflection of production potential to be released by the June 28 Planted Acreage report," the bank said.

However, it echoed Deutsche and Goldman in saying it remained "bearish on new crop corn relative to the futures curve".

Separately, Goldman Sachs equity analysts warned that with weather variations likely to have a large say in agricultural commodity prices over the next months, "we expect the near-term trading path for fertilizer equities to remain volatile as the summer progresses".

The broker restated buy ratings on Mosaic and PotashCorp "as we prefer exposure to international potash markets and company-specific capital allocation catalysts".

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Thoughts on the Yen


Derivative of our GDX:GLD comparative with the BKX:SPX ratio, circa 2009 - the yen has taken to the streets with considerable reversionary vengeance. 
In the beginning of 2013 and very much along the lines of the downdrafts in Apple and the gold miners et al., the yen had cascaded with very little traction despite the sharp positive RSI divergence that we warned (with the BKX:SPX comparative) against being lured by. 

Despite taking its time in finding what we perceive to be the low in the yen this year, the comparatives next momentum trait appears to be taking shape as it springs out of the upside pivot.

Click to enlarge image

Although not yet present on the daily timeframe, momentum has reversed polarity to positive on the 60 and 120 minute series - as evident in the stochastic becoming entangled from the top rail. This is an early indication - and similar to the BKX comparative, that the condition will eventually replicate through to the daily and be supportive of a material change in trend higher. 

Click to enlarge image

Click to enlarge image

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Stocks, Gold and Crude Oil Markets Analysis and Trens Forecasts

By: Chris_Vermeulen

The two most popular investments a few years ago have been dormant and out of the spot light. But from looking at the price of both gold and oil charts their time to shine may be closer than one may thing.

Seasonal charts allow us to look at what the average price for an investment does during a specific time of the year. The gold and oil seasonal charts below clearly show that we are entering a time which price tends to drift higher.

While these chart help with the overall bias of the market keep in mind they are not great at timing moves and should always be coupled with the daily and weekly underlying commodity charts.

Now, let’s take a quick look at what the god father of technical/market analysis shows in terms of market cycles and where I feel we are trading… As I mentioned last week, a picture says a thousand words so why write when I can show it visually.

John Murphy’s Business Cycle:

Mature Stock Market:

Commodity Index Looks Bullish and Should Rise:

Gold & Silver Seasonality, Price Charts w/ Analysis:

Precious Metals like gold and silver are nearing a bounce and possible major rally in the second half of this year.

Crude Oil Seasonality, Price Chart w/ Analysis:

Crude oil has been a tough one to trade in the last year. The recent 15 candles have formed a bullish pattern and with the next few months on the seasonal chart favoring higher prices it has been leaning towards the bullish side.

Commodity, Gold & Oil Cycle and Seasonality Conclusion:

In short, I feel the equities market is nearing a significant top in the next couple weeks. If this is the case money will soon start flowing into commodities in general as more of the safe haven play. To support this outlook I am also factoring in a falling US dollar. Based on the weekly dollar index chart it looks as though a sharp drop in value is beginning. This will naturally lift the price of commodities especially gold and silver.

It is very important to remember that once a full blown bear market is in place stocks and commodities including gold and silver will fall together. I feel we are beginning to enter a time with precious metals will climb but it may not be as much as you think before selling takes control again.

Final thought, This could be VERY bullish for the Canadian Stock Market (Toronto Stock Exchange) as it is a commodity rich index. While the US may have a pullback or crash Canadian stocks may hold up better in terms of percentage points.

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Stock Markets In Dangerous Territory

By: Toby_Connor

As I alluded to in my previous report both stocks and gold are due to mean revert. Short-term the stock market is getting significantly oversold and if we get a down day tomorrow I would expect some kind of bounce off of the 1600 level. If that bounce fails and we break below last Thursday's low it should confirm that stocks have begun an intermediate degree correction.

Since I think there is significant risk that the cyclical bull market that started in 2009 is now topping I would take a break of the $1600 level as confirmation that an intermediate level decline has begun.

Based on how artificially far the Fed has driven this rally, this should be a quite significant decline, possibly even filling the gap from January 2.

If one has retirement funds invested in the general stock market I think after four years and a 153% gain it's probably time to say "close enough" and exit this Frankenstein monster of a market that the Fed has created.

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The end of the affair

by Economist

The prospect of less quantitative easing in America has rocked currency and bond markets in the emerging world

THERE are many reasons why a fund manager might want to sell the rand. South Africa’s economy is barely growing. Unemployment, at 25% of the workforce, is on a par with the grimmest parts of the euro zone. The mining industry is beset by labour unrest just as commodity prices are falling. The country’s large trade deficit is a sign that local producers are struggling in vain against foreign competition. The rand has fallen by 16% against the US dollar this year. Only the Syrian pound and Venezuelan bolívar have fared worse.

Yet these local difficulties are not the only reasons for the rand’s slump. South Africa has the financial markets of a rich country: it is easier to buy and sell bonds and stocks there than in most middle-income countries. So the rand is a convenient currency in which speculators can take a position on emerging markets more generally. As the fast-money crowd sense the beginning of the end of loose monetary policy in America, bonds and currencies in emerging markets are the assets they want to sell. The rand is merely the worst-hit in a long list of vulnerable currencies.

In the past month 19 of the 24 emerging-market currencies tracked by Bloomberg have fallen in value against the dollar. The trigger for this sell-off was a remark in May by the chairman of the Federal Reserve, Ben Bernanke, that the Fed’s purchases of bonds using central-bank money might soon tail off. The yield on America’s benchmark ten-year government bond has risen from a low of 1.6% to 2.2%. The prospect of a further rise in yields over time is likely to push up the dollar and draw money back to America from riskier parts of the world. The slump in emerging markets over the past month is in anticipation of such a trend.

It seems a violent response to what was an offhand comment. Mr Bernanke did not suggest an immediate change in policy. The Fed’s bond purchases will continue but perhaps not for long at the present rate of $85 billion a month. An increase by the Fed in short-term interest rates, currently near zero, may still be years away.

Even so, the prospect of a tapering in the Fed’s bond purchases probably marks the start of a long grind upwards in American bond yields to more normal levels. “It won’t be a straight-line affair,” says Kit Juckes of Société Générale. Interest rates will bobble around in search of the right price. The absence until recently of such volatility has made rich-world investors comfortable with exotic punts in emerging-market bonds. As the waters become choppier, they will be far less willing to take such gambles. Tougher capital requirements mean that trading desks of banks are now less keen to buy and hold assets dumped by investors: that will only make bond prices more volatile.

The most vulnerable countries are those that rely on foreign capital to bridge the gap between what they spend and what they earn (see chart 1). South Africa has a biggish current-account deficit relative to GDP: the rand has suffered accordingly. Its standing has also been hurt by weaker commodity prices, in part because of slower growth in China. A handful of other countries, from Chile and Brazil in the emerging world to Australia in the rich world, share the debilitating status of having a commodities bent, a biggish current-account deficit and a wilting currency.

The currencies of some commodity importers are also wobbling. India has a current-account deficit of 5.1% of GDP; the rupee fell to a record low against the dollar this week. Turkey relies on hot money to finance its deficit. The protests in Istanbul are just one more reason to sell the lira.

Is this a panic or something more serious? Emerging-market currencies have endured the occasional bad month only to bounce back. The Fed is likely to tread carefully. But even a slow, steady rise in Treasury yields and a shallow dollar rally would spell trouble. Around $4 trillion has washed into emerging markets since 2009, according to Stephen Jen of SLJ Macro Partners, a hedge fund. Much of that has been “pushed” abroad by the low yields on offer in the rich world rather than “pulled” by the prospect of superior returns, says Mr Jen. If only a fraction of that capital is yanked out by jittery investors it would turn a sell-off into a rout.

Past episodes of dollar strength and rising Treasury yields were followed by currency and debt crises—in Latin America in the early 1980s and Asia in the mid-1990s. Things are now different in one important regard, notes George Papamarkakis of North Asset Management, a hedge fund. In the past rich-world banks lent to poorer countries in dollars. When capital flows reversed, borrowers were left with debts that grew larger as the dollar strengthened. By contrast the recent flood of capital went into local-currency bonds. For a while investors enjoyed a virtuous circle of higher bond prices and stronger currencies. But they now face losses that are likely to grow.

So some of the pain of adjustment will be felt in the rich world. Central banks in emerging markets can even profit from it. They can sell the dollars that they added to reserves on the cheap while at the same time checking the fall in exchange rates. But emerging markets cannot escape the fallout. Even the shallowest of turns in America’s monetary cycle is amplified there: interest rates are rising in some countries as foreign buyers for local-currency bonds dry up (see chart 2).

Not so long ago there were complaints that the Fed’s loose policy was pushing up emerging-market currencies to the detriment of exporters there. Now they are falling. But the results won’t be painless. Export-led growth is not nearly as much fun as a consumer boom spurred by cheap foreign credit and a dear currency.

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Taking credit for nothing

by Economist

China’s credit boom has got people worried. Should they be?

IN HIS work on China’s economy, Zhang Zhiwei observes what he calls the “5:30 rule”. That is not the time he clocks off each day: he is a hard-working economist for Nomura, a Japanese bank. But the rule does refer to a time of reckoning of sorts. Mr Zhang points out that several economies have suffered financial crises after their stock of credit grew by about 30% of GDP in a span of five years or less. Japan fell foul of this rule in the latter half of the 1980s; America broke the limit in the years before 2007.

Now Mr Zhang is worried about China. At the end of 2008 total credit to firms and households (and to non-profit organisations) amounted to less than 118% of GDP, according to a new measure calculated by the Bank for International Settlements (BIS). By September 2012 the total stood at over 167%.

It is natural for credit to deepen over time in a developing country. But when credit departs too far from its underlying trend, trouble often ensues. Mathias Drehmann of the BIS calculates that when the deviation exceeds 10% of GDP, it serves as a reliable early warning of a crisis within the next three years. According to our calculations, China’s credit ratio now exceeds its trend by 14 percentage points (see left-hand chart).

Mr Zhang is hardly the only one perturbed by this gap. It was a big reason why Fitch, a ratings agency, downgraded China in April. China’s policymakers have also taken note. In March the bank regulator urged banks to tidy up their off-balance-sheet investments. Last month China’s foreign-exchange regulator cracked down on illicit capital inflows. And earlier this month China’s central bank stood by as interbank lending rates spiked in advance of the Dragon Boat holiday (reportedly prompting one mid-sized bank to default on another). The authorities seem keen to set a slower, steadier paddle-speed, hoping for less splash and froth. In May the central bank’s broad measure of “total social financing” (TSF) at last slowed a little (see right-hand chart).

The other side of China’s surging credit ratio is the surprisingly slow growth of nominal GDP. In the first quarter record amounts were added to total social financing, but growth was weak and inflation subdued. This wrongfooted both optimists (who thought lashings of credit would fuel a strong recovery) and pessimists (who expected it to fuel rapid inflation).

Ting Lu of Bank of America thinks this decoupling of credit, growth and prices is partly a statistical illusion. The official measure of financing, he argues, is marred by double counting. If a big firm borrows cheaply on the bond market, then lends less cheaply to another company, the same money will appear twice in the central bank’s measure of TSF (an eclectic mix of loans, bonds, bills and even some equity financing).

A deeper explanation, argues Richard Werner of Southampton University, lies in flawed theory, not bad measurement. He revisited the link between credit, growth and prices after moving to Tokyo in 1990, just as its bubble was bursting. The years of overborrowing had many ill consequences. High consumer-price inflation was not among them. Based partly on this experience, he advocates a narrower view of credit’s origins and a more discriminating view of its purposes. Only banks can lend money into existence, he emphasises: their loans create deposits that can then be used to pay for things. Other financial institutions and instruments just transfer existing purchasing power between parties. His definition of credit creation would exclude the non-bank loans that have contributed so much to growth in TSF.

Debt fret

Mr Werner’s second observation is that credit also serves different purposes. Some is spent on consumer goods; some on creating new factories, buildings and other physical assets; and some on assets that already exist. The first two kinds of spending contribute directly to GDP, which measures outlays on freshly produced output. But the third kind does not. Since these assets already exist, their purchase does not add directly to production or inflationary pressure. The economy does not grow or strain at its limits when an existing tower block changes hands.

In bubble-era Japan a lot of credit was of this third kind. It was ploughed into existing land and property, bidding up their prices to unsustainable heights. In China this kind of lending is not easy to distinguish in the data. But China does provide two different measures of investment. The first (gross fixed capital formation) measures investment in new physical assets, which contributes to GDP. The second (fixed-asset investment) adds in spending on already existing assets, including land. In 2008 both measures of investment were about equal. But spending on newly produced assets now amounts to only about 70% of fixed-asset investment, says M.K. Tang of Goldman Sachs. This suggests that existing assets are changing hands at a quickening pace and a rising price.

How big a worry is that? Japan’s bubble left a lasting legacy. Savers discovered they were not as wealthy as their overpriced assets suggested. Debtors found they were not as wealthy as their outstanding liabilities required them to be. Banks retreated; animal spirits flagged. But credit booms do not always end so badly, as China’s own history shows. From 2001 to early 2004 total credit rose swiftly, violating the 5:30 rule. Towards the end of this period the central government had to inject $45 billion into two of China’s biggest banks to help them weather their past lending mistakes. But no crisis ensued. On the contrary, growth averaged more than 12% over the next three years.

One difference between Japan and China’s earlier boom is that China’s state stood behind the banks and many of their borrowers, whereas Japan allowed bad debts to weigh on its banks and firms. China’s less developed economy also had more room to grow. Misguided loans and investments in the past did not inhibit fresh loans and investment in the future. China has changed radically in the past ten years. The hope is that even now it resembles Japan in the 1990s less than itself a decade ago.

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Fear Sneaking Back into the Stock Market

By: DailyGainsLetter

Moe Zulfiqar writes: In just a matter of a few months, the S&P 500 is up more than 14%. To say the very least, these gains are nothing short of amazing—much better than what investors can get with the long-term U.S. bonds that currently yield less than 3.5%.

Consider this: on average, in the first five months of this year, the S&P 500 went up by about 2.8% per month (14% divided by five months). Assuming the stock market keeps the same pace, the S&P 500 will gain way more than 30% this year (12 times 2.8%).

Now, one must ask the question: is this sustainable? Can the S&P 500 keep going at this pace?

Since at least 1968, the S&P 500 has gone up more than 30% only three times: in 1975, when it increased by 31.55%; in 1995, when it climbed 34.11%; and in 1997, when it climbed 31.01%. (Source: “History of The S&P 500 Index,” The Standard, last accessed June 11, 2013.) Even with a massive turnaround in the stock market in 2009, the S&P 500 only increased return to 28.04%. (Source: “SPDR S&P 500,” Morning Star, last accessed June 11, 2013.)

Just looking at the economic performance of the U.S. economy when the S&P 500 increased more than 30% in the past, it was exuberant. For example, between 1975 and 1976, the gross domestic product of the U.S. economy grew 5.3%. (Source: “Real Gross Domestic Product, 1 Decimal,” Federal Reserve Bank of St. Louis web site, last accessed June 11, 2013.)

Looking at the economic conditions now, they are not as great. The International Monetary Fund (IMF) expects the U.S. economy to grow at the pace of 1.9% this year and three percent in 2014. (Source, “Policy Actions Improve Prospects for Global Economy,” International Monetary Fund web site, April 16, 2013, last accessed June 12, 2013.)

On top of all this, the unemployment rate is still staggering above 7.5%. Millions of Americans are without a job, while many are working part-time because they are unable to find full-time work for themselves.

Adding to the worries, companies are warning about their earnings in the upcoming quarter. Ninety-three companies on the S&P 500 have provided negative guidance about their corporate earnings in the second quarter of this year, and only 14 expect them to be better—provided there is positive guidance. The ratio of negative to positive guidance for the second quarter is standing at 6.6 currently, the highest since the first quarter of 2001. (Source: Harrison, G., “Earnings Roundup: Second-quarter Earnings Guidance Among the Most Negative on Record,” Thomson Reuters Alpha Now, June 10, 2013.)

You must not forget the troubles from outside, as well. We have the eurozone, which is continuously struggling for growth, and other major emerging economies like China and India are also performing slower than their historical average.

To put all of this into perspective; the gains in the stock market since the beginning of the year are too much to digest. The S&P 500 has gone up too fast in a very short period of time, ahead of economic conditions.

Looking forward, investors may face volatility ahead. Take a look at the chart below of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX), often called the “fear index”:

Chart courtesy of

From mid-May until now, the fear index is up more than 30%. Investors shouldn’t lose sight of the volatility; as a matter of fact, they may be able to profit from it by looking at an exchange-traded note (ETN) like the iPath S&P 500 VIX Short-Term Futures (NYSEArca/VXX). This ETN gives investors exposure to the fear index and profits as volatility increases.

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The Two Charts That Have Central Bankers Terrified

by Graham Summers

Japan continues to implode. We’ve now taken out the trendline that supported this rally since November.

Not a pretty chart. Certainly not a pretty chart for Central Bankers, who believe QE can drive stocks only up. After all, Japan’s Nikkei is in a bear market only two months after the Bank of Japan announced a record QE.

Speaking of trendlines, the S&P 500 is on the ledge of a cliff. Bernanke bought six months’ of market gains with QE 4. Now he’s got a bubble on his hands. And if he even hints at tapering QE at next week’s Fed meeting, the markets could implode.

Investors take note, the markets are sending us MAJOR warning signals. Indeed, I don’t remember seeing this many signs of a major top since 2007/2008.

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"The Market Would Have Collapsed" Had The PBOC Drained: Chinese Liquidity Shortage Hits All Time High

by Tyler Durden

Those who have been following our coverage of the bipolar Chinese liquidity situation (most recently here and here) are well aware of the unique position the world's fastest (if only on paper) growing economy finds itself in: on one hand, it is the target of massive external hot money flows from both the Fed and the BOJ, which are pushing select inflation in the country higher, manifesting itself best in the real-estate market now higher for 12 consecutive months. On the other hand, the local banking system is in such dire need of liquidity, that not only have various short-term SHIBORs soared to multi-year highs but as Market News reported last week, China Everbright Bank failed to repay 6b yuan ($977m) borrowed from Industrial Bank on time yesterday because of tight liquidity, leading to “chain effect” borrowing in the market overnight and almost ushering in the first bank failure in China.

The unprecedented liquidity shortage in China is seen best on the overnight SHIBOR chart below which just hit an all time high. In a nutshell there is zero free liquidity in the system.

Which all culminated to last night's surprising move by the PBOC to step aside from draining funds from the financial system for the first time in three months as even the PBOC now realizes that in the battle against Bernanke and Kuroda's cash it is about to lose the fight.

Bloomberg summarizes:

China’s central bank refrained from draining funds from the financial system for the first time in three months after a cash squeeze pushed up the overnight money-market rate to an all-time high.

The People’s Bank of China hasn’t offered repurchase contracts or bills today, according to two traders required to bid at the auctions. Two calls by Bloomberg News to the PBOC’s media office went unanswered. The central bank has held repo operations every week since February to drain cash and resumed sales of bills in May for the first time since December 2011.

The overnight repo rate, which measures interbank funding availability, touched 9.78 percent on June 8, the highest since May 2006, when the National Interbank Funding Center started compiling the weighted average. China’s financial markets were shut in the first three days of the week for the Dragon Boat Festival holiday. The rate was at 6.32 percent as of 10:39 a.m. in Shanghai today, little changed from June 9. The seven-day repo rate dropped 34 basis points to 5.63 percent.

So what would have happened if the PBOC had continued on its merry way of withdrawing liquidity from the interbank market? Very bad things.

If the PBOC sold repos or bills today, the market would have collapsed,” said Liu Junyu, a bond analyst at China Merchants Bank Co., the nation’s sixth-biggest lender. “The cash shortage hasn’t eased and banks are still busy borrowing money.”

Which means one thing: any minute now the PBOC, which has moved from a tightening to neutral stance, will have to continue along the spectrum, and quite soon, proceed to once more inject liquidity, either via RRR or an outright Interest Rate cut.

Aside from the fact that this is just the catalyst that gold bugs have been waiting for (recall 2011), this means that the global inflation exporting game is about to go into overdrive as now the Chinese Central Bank is about to join the Fed, the BOJ, and soon the BOE in actively easing. At that point the countdown to the ECB's joining the race starts, because the real fun will begin only when all global central banks engage in actively injecting liquidity into the system.

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JPMorgan to Barclays usher bond shift to stocks

By Lisa Abramowicz

Wall Street’s biggest bond dealers are telling clients to shift from most fixed-income markets into U.S. stocks as deepening concern the Federal Reserve will pare unprecedented stimulus fuels the worst debt losses since 2011.

JPMorgan Chase & Co., the most-active underwriter of corporate bonds since 2007, last week joined Barclays Plc, Bank of America Corp., Morgan Stanley and Goldman Sachs Group Inc. in recommending stocks over most bonds as equity returns outpace company notes by the most since at least 1997. The Bank of America Merrill Lynch U.S. Corporate & High Yield Index’s 0.73% loss this year through June 11 compares with a 15.1% gain for the Standard & Poor’s 500 Index.

Securities from Treasuries to junk bonds are showing their vulnerability to a potential pullback from Fed actions that have pumped more than $2.5 trillion into the financial system since 2008. Debt “remains most tied up with the search for yield” and faces more volatility than equities as interest rates rise, JPMorgan strategists led by Jan Loeys said in a June 7 report.

“We’ve now seen a little bit of a rotation out of bond funds,” said Hans Mikkelsen, head of U.S. investment-grade credit strategy at Bank of America in New York. “You could see a very quick change in asset allocation on the retail side that the institutional side can’t keep up with it.”

Volatility Surge

Dollar-denominated bonds of companies from the most to least creditworthy plunged 2.2% through June 11 from May 22, when Fed Chairman Ben S. Bernanke told Congress the central bank could slow stimulus efforts during its next few meetings if the economy shows signs of sustained improvement. The S&P 500 lost 1.7% in the same period.

Volatility in Treasuries as measured by Bank of America Merrill Lynch’s MOVE Index has soared 68% to 82.3, from a 2013 low of 48.87 on May 9. The gauge is based on prices of over-the-counter options on Treasuries maturing in two to 30 years. In the equities market, the Chicago Board Options Exchange Volatility Index rose 40% in the period.

The market response to “mere talk” of the Fed slowing its bond purchases provides “an idea of where the vulnerabilities are to an actual reversal in monetary policy,” said the strategists at JPMorgan, which had the top-ranked fixed-income team by Institutional Investor magazine in 2012. “To be overweight equities to broad fixed income is the most obvious implication.”

Default Swaps

Elsewhere in credit markets, the cost of protecting corporate bonds from default in the U.S. fell. The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreased 2.3 basis points to a mid-price of 85.2 basis points as of 10:41 a.m. in New York, according to prices compiled by Bloomberg.

The index typically falls as investor confidence improves and rises as it deteriorates. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The U.S. two-year interest-rate swap spread, a measure of debt market stress, decreased 0.9 basis point to 16.1 basis points as of 10:42 a.m. in New York. The gauge narrows when investors favor assets such as company debentures and widens when they seek the perceived safety of government securities.

Citigroup Bonds

Bonds of Citigroup Inc. are the most actively traded dollar-denominated corporate securities by dealers today, accounting for 4% of the volume of dealer trades of $1 million or more as of 10:46 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The Bloomberg Global Investment Grade Corporate Bond index has gained 0.32% this month, paring the decline for the year to 1.45%.

Barclays asset-allocation strategists recommended investors be “overweight” U.S. and Japanese stocks “over the medium- term, as we anticipate a gradual migration out of expensive bonds,” according to a May 28 report. Overweight allocations mean investors hold more of the assets than their benchmarks.

Morgan Stanley said for the first time in March that it preferred stocks over debt in a March global strategy outlook.

BofA, Goldman

Bank of America generally favors equities over bonds and moved to “underweight” investment-grade corporate notes in their total-return asset allocation recommendations in February, Mikkelsen said in a telephone interview. Goldman Sachs favors stocks over both a three- and 12-month period, is bearish on government bonds and forecasts “close to zero” returns for corporate credit, its strategists said in a May 21 report.

“You can’t run away from bonds, but equities are cheaper,” said Andrew Feltus, a money manager who helps oversee $36.7 billion in U.S. fixed-income assets at Pioneer Investment Management Inc. in Boston.

Corporate bonds globally have gained an average 10.1% annually since 2008, when the Fed embarked on an unprecedented program of buying bonds and holding its interest rate target near zero to ignite economic growth. That compares with annual gains of 16.7% for the S&P 500.

Companies have since sold $5.7 trillion of notes as relative yields on dollar-denominated debt plunged 5.7 percentage points to 2.31 percentage points through June 11, Bank of America Merrill Lynch index and Bloomberg data show. JPMorgan, Bank of America, Goldman Sachs and Morgan Stanley are among the six most-active underwriters of the debt.

‘Fire Drill’

Speculation has mounted since Bernanke’s comments last month that the Fed will soon start scaling back its stimulus efforts.

San Francisco Fed President John Williams said last week that a “modest adjustment downward” in the asset purchases is possible as “early as this summer.”

“We do not see these warnings as simply loose talk that costs lives, but more a kind of fire drill for risk managers on what the end of easy money could do to financial markets,” JPMorgan credit strategists said June 7 of the talk by Fed officials. “In our model portfolios, we added to our overweight of equities, and have greatly reduced the credit overweight versus safe debt to a small position, focused on shorter- duration credit.”

The global economy is “in the early stages of the recovery of the equity culture and perhaps the end of a 30-year growing love affair” with bonds, said Jim O’Neill, former chairman of Goldman Sachs Asset Management in a June 11 interview on Bloomberg Television.

Investors yanked a record $4.8 billion from U.S. high-yield bond funds last week and pulled $850 million from investment- grade funds, the first weekly redemption since December, according to a Bank of America report on June 6.

U.S. private pension funds and insurance companies pushed their allocation to equities to 45% in the first quarter, the highest proportion since 2007, as they bought $13 billion of stocks while selling $10 billion of bonds, JPMorgan data show.

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Silver faithful taking $5 billion hit in crossfire

By Nicholas Larkin and Debarati Roy

Silver is punishing investors amid diminishing trust in precious metals as a store of wealth and concern that growth is weakening, with $5.2 billion erased from the value of their near-record holdings this year.

Investors expected silver to be one of the biggest gainers in 2013, with a 33% return, a Bloomberg survey in December showed. Instead it’s leading a retreat in commodities with a 28% plunge to $21.79 an ounce, on track for its worst performance since 1984. While the median prediction from 14 estimates compiled last week is for a rally to $23.50 by Dec. 31, that would still mean a 23% drop for the year.

Analysts expected silver to surge because either turmoil would boost demand for precious metals as protection against inflation and currency debasement or accelerating growth would spur more industrial buying for everything from solar panels to batteries. The collapse of gold into a bear market, steady consumer prices and mounting concern about the strength of economies means silver’s allure is instead diminishing.

“Silver has been caught in the crossfire between being a precious and industrial metal,” said John Stephenson, a senior vice president and fund manager who helps oversee about C$2.7 billion ($2.65 billion) at First Asset Investment Management Inc. in Toronto. “Since investors were selling gold, silver also lost luster. We need enough economic growth to happen before people can start considering it as an industrial metal.”

Gold Slump

This year’s plunge in silver exceeds the 17% drop in gold, which is poised for its first annual decline since 2000. The Standard & Poor’s GSCI gauge of 24 commodities fell 3.9%, extending its retreat from last year’s peak to 14%. The MSCI All-Country World Index of equities advanced 6.1% since the start of January and a Bank of America Corp. index shows Treasuries lost 1.6%.

Investors are maintaining their belief in silver even as they lose faith in gold. While the amount of silver held through exchange-traded products is little changed this year, and within 5% of the record reached in March, gold holdings dropped 19%, data compiled by Bloomberg show.

Silver investments stand at 18,918 metric tons, valued at $13.3 billion and enough to meet global demand for jewelry and silverware for almost three years. The value of gold ETP investments slumped 33% to $94.6 billion this year.

Investors for now are treating silver more like a precious metal than an industrial one, with its 30-week correlation coefficient to gold at 0.85, from 0.68 in 2011. A figure of 1 means the two move in lockstep. Silver also tumbled into a bear market in April and is now 56% below the record $49.8044 reached in April 2011.

Coin Sales

The slump spurred demand for physical metal, with the U.S. Mint predicting last week that its gold and silver coin sales may reach a record in 2013. The Austrian Mint sold about 2 million ounces of silver in April, compared with 8.8 million for all of 2012. Degussa Goldhandel GmbH, a precious-metal trading and investment company in Frankfurt, said silver sales last month were double the first-quarter average.

Hedge funds and other large speculators have turned bullish again after betting on lower prices as recently as mid-May, U.S. Commodity Futures Trading Commission data show. They are holding a net-long position of 1,230 futures and options, compared with a five-year average of 21,400 contracts.

Industrial demand may gain as the global economy improves, with the International Monetary Fund predicting growth of 3.3% this year and 4% in 2014, from 3.2% in 2012. About 50% of silver is used in industry, compared with 10% for gold, data from the Silver Institute and London-based World Gold Council show.

Mobile Phone

Consumption by industrial users will rise 1.7% to a three-year high of 14,625 tons this year and gain another 2.8% in 2014, Barclays Plc predicts. A car contains as much as 30 grams (1.1 ounces) and a mobile phone as much as 0.25 gram, according to Washington-based Silver Institute data.

Slowing investor demand means industry will have to absorb a bigger share of this year’s supply glut, which Barclays says will expand 8.9% to 5,512 tons. The cumulative surplus since 2009 will have reached 20,759 tons by the end of 2013, or almost 10 months of mine output, the bank predicts. Inventories monitored by Comex in New York rose 11% since the start of January, touching a 15-year high of 5,204.1 tons in April.

China, the biggest buyer after the U.S., imported the smallest amount of metal since at least 2008 in April, customs data show. The nation more than doubled mine output since 2000, according to CPM Group Inc., a New York-based research company.

Policy Makers

Signs the U.S. economy is strengthening boosted speculation the Federal Reserve will curb stimulus that helped silver jump 91% since 2008. Fed Chairman Ben S. Bernanke said in May that the pace of the $85 billion in monthly bond buying could be reduced if the jobless rate keeps dropping. Policy makers will trim purchases to $65 billion in October, the median of 59 economist estimates compiled by Bloomberg this month shows.

“As the Fed continues to talk down the market and trim down quantitative easing, it will hurt precious metals,” said Scott Gardner, who helps manage $400 million at Verdmont Capital SA in Panama City. “Now that the Fed is talking about slowing it, it makes the market nervous. Unless you see a sustained rise in gold you will not see any improvement in silver prices.”

Gold may drop to $1,100 an ounce in a year, from $1,382.98 now, Credit Suisse Group AG forecast last month. Goldman Sachs Group Inc. sees gold at $1,345 in 12 months.

Price Swings

The slump in silver, mostly a byproduct in the mining of other metals, is crimping profit for mining companies. Shares of Mexico City-based Fresnillo Plc, the largest primary silver producer, dropped 41% in London this year. Coeur Mining Inc., which gets about 61% of its revenue from the metal, slid 43% in New York trading.

Holdings of silver in ETPs rose 1.1 tons this year, compared with a 1,621-ton expansion in 2012, data compiled by Bloomberg show. Further gains may be curbed as silver’s widening price swings dissuade investors. The metal’s 60-day historical volatility reached an 11-month high in April as it entered a bear market, the 11th in nine years, and climbed further since. It is now at 37%, compared with 29% for gold.

“Investor sentiment will remain poor going forward, as with gold, and the real risk will come from further ETP liquidation,” said Jeremy Baker, a senior commodities strategist overseeing about $800 million at Harcourt Investment Consulting AG in Zurich. “You have some decent areas of industrial demand, but you need to see significant uptick in those areas to really see any kind of flow through, and you’re just not seeing that at the moment.”

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Debt Is Not America's Real Problem

By Sasha Cekerevac

There continues to be much speculation over when the Federal Reserve will begin to reduce its asset purchase program and lower the level of monetary stimulus. The biggest concern for both the Federal Reserve and the nation is the level of job creation.

Last week, the Bureau of Labor Statistics (BLS) released its monthly report on the level of non-farm job creation, which was as expected: neither too hot nor too cold, with a total of 175,000 new jobs created for the month of May. (Source: Bureau of Labor Statistics, June 7, 2013.)

With the unemployment rate at 7.6%, this level of job creation is still not good enough for the Federal Reserve to begin aggressively reducing its level of monetary stimulus. The truth is that gross domestic product (GDP) growth needs to be stronger for job creation to increase. The underlying fundamentals of the economy are much different than the headlines.

What will surprise many to learn is that one of the biggest drags on the economy is the lack of skilled workers. There are constant reports from companies that they simply can’t find enough skilled workers.

This matches up with the data, as the BLS reports that for those people with a bachelor’s degree or higher—approximately 50 million citizens in the labor force—the participation rate is almost 76%, with the unemployment rate at just 3.8%. Essentially, this part of the economy is at full employment.

Job creation has been extremely strong for those workers with a higher education. If you don’t believe government statistics, simply look at what companies are doing. This year alone, H1B visa applications, which are limited to 65,000 per year, filled up in five days. (Source: “The Visa System Not Working,” The Economist, April 6, 2013.)

Even during the depths of the recession, every year since 2003, the demand for business visas has been higher than the government-restricted ceiling. This means that demand for skilled workers is so high that companies are looking to other nations to try and fill this shortage.

While the Federal Reserve has done what it can to try and improve the economy, job creation ultimately stems from new companies being formed and existing firms expanding. The current restrictions on skilled workers is holding back our nation’s economy, slowing the level of job creation.

Many people have the misconception that America is an untouchable island, but in fact, we are competing with many nations around the world. Just north of us, Canada has embarked on an ambitious program to provide a visa to any foreigner with an investment of CDN$75,000 in starting a new business. This is the type of aggressive program that will lead to job creation and economic growth.

In addition, the Federal Reserve can do nothing about improving the education for many Americans.

Those who have dropped out of high school total just over 11 million in the civilian labor force, and have an unemployment rate of 11.1%, with a participation rate of just 45%. High school graduates with no college education total 36 million, with a participation rate of 58.9%, and an unemployment rate of 7.4%.

It is clear that the economy could operate at a much higher level if we had more people with higher skills and education. The Federal Reserve cannot run the education system, which is an extremely weak link that is leading to the current lack of job creation.

In addition, we should open the doors to anyone who wants to start businesses in America. If we don’t open those doors, other nations will. Not only are countries like Canada offering attractive incentives to start businesses, which ultimately results in job creation, but their taxes are far lower as well, with corporate taxes at just 15%.

We have major structural issues to fix, and the responsibility to fix these issues rests not on the Federal Reserve but on the politicians in Washington.

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Cotton moves higher in reaction to USDA estimates

By Jack Scoville


General Comments: Futures were higher in reaction to the USDA supply and demand estimates that showed more demand and less ending stocks. It also cut production estimates due to poor weather in the South. USDA anticipates more demand from China. World estimates continued to show big supplies,, but a big part of that is located in China and will not be generally available.. Traders also talk of reduced production potential due to the poor weather seen until recently in the Delta and Southeast and still reported in parts of Texas. Trends are up. Ideas of good weather for US crops are still around. Traders are worried about Chinese demand, but there is talk that overall demand increased in the last week. The weather has improved, but it is still too dry in Texas and drier weather is needed for the Delta and Southeast. Dry conditions are forecast for the Delta and Southeast, and dry and warm weather is expected in Texas. Weather for Cotton appears good in India, Pakistan, and China.

Overnight News: The Delta and Southeast will see dry conditions. Temperatures will average above normal. Texas will get dry weather. Temperatures will average above to much above normal. The USDA spot price is now 85.86 ct/lb. ICE said that certified Cotton stocks are now 0.536 million bales, from 0.533 million yesterday. USDA said that net Upland Cotton export sales were 101,100 bales this year and 97,300 bales next year. Net Pima sales were 1,800 bales this year and 1,700 bales next year.

Chart Trends: Trends in Cotton are up with objectives of 9140 and 9550 July. Support is at 88.40, 87.60, and 81.70 July, with resistance of 90.50, 91.15, and 91.60 July.


General Comments: Futures closed lower even though USDA showed another reduction in Oranges production in Florida. It seemed to be a buy the rumor and sell the fact situation as decreased production had been expected.. Traders are wrestling with more reports of losses from greening disease on the one side and beneficial rains that have hit the state on the other. Greening disease and what it might mean to production prospects continues to be a primary support item and will be for several years. Temperatures are warm in the state. The Valencia harvest is continuing. Brazil is seeing near to above normal temperatures and dry weather.

Overnight News: Florida weather forecasts call for light showers. Temperatures will average near to above normal.

Chart Trends: Trends in FCOJ are mixed. Support is at 148.00, 145.00, and 144.00 July, with resistance at 154.00, 156.00, and 159.00 July.


General Comments: Futures were lower in New York on speculative selling tied to reports of bigger production in Colombia and Brazil, and weakness continued in London due to ideas of big supplies from producers, mostly from Vietnam. Arabica cash markets remain quiet right now and roasters in the US are showing little interest in buying. There is talk of increasing offers of Robusta from producers as they apparently did not sell when prices were much higher. Most sellers, including Brazil, are quiet and are waiting for futures to move higher. Buyers are interested on cheap differentials. Brazil weather is forecast to show dry conditions, but no cold weather. Current crop development is still good this year in Brazil. Central America crops are seeing good rains now. Colombia is reported to have good conditions.

Overnight News: Certified stocks are unchanged today and are about 2.746 million bags. The ICO composite price is now 117.17 ct/lb. Brazil should get dry weather except for some showers in the southwest on Sunday. Temperatures will average near to above normal. Colombia should get scattered showers, and Central America and Mexico should get showers. Temperatures should average near to above normal.

Chart Trends: Trends in New York are down with objectives of 116.00 July. Support is at 119.00, 116.00, and 113.00 July, and resistance is at 125.00, 127.00, and 130.00 July. Trends in London are down with objectives of 1765 July. Support is at 1770, 1740, and 1710 July, and resistance is at 1810, 1845, and 1865 July. Trends in Sao Paulo are down with no objectives. Support is at 147.00, 144.00, and 140.00 September, and resistance is at 155.00, 159.00, and 161.50 September.


General Comments: Futures closed lower due to ideas of big world supplies. There was no other real news for the market besides the USDA data. The price action overall remains weak and implies that further losses are coming down the road due to coming Brazil supplies. Traders remain bearish on ideas of big supplies, especially from Brazil. Traders in Brazil expect big production as the weather is good. Demand is said to be strong from North Africa and the Middle East, but starting to fade now as needs are getting covered.

Overnight News: Showers are expected in Brazil. Temperatures should average near to above normal.

Chart Trends: Trends in New York are mixed to down with objectives of 1620, 1610, and 1570 July. Support is at 1620, 1600, and 1570 July, and resistance is at 1660, 1675, and 1700 July. Trends in London are mixed. Support is at 474.00, 470.00, and 467.00 August, and resistance is at 481.00, 486.00, and 487.00 August.


General Comments: Futures closed higher and showed potential to make a new leg up. There was not a lot of news for the market, and price action reflected this. It looks like the buying was based on the charts as New York futures could not move to new lows and in fact have held at an important área on the charts. But, ideas of weak demand after the recent big rally kept some selling interest around. The weather is good in West Africa, with more moderate temperatures and some rains. The mid crop harvest is moving to completion, and less than expected production along with smaller beans is reported. Malaysia and Indonesia crops appear to be in good condition and weather is called favorable.

Overnight News: Scattered showers are expected in West Africa. Temperatures will average near to above normal. Malaysia and Indonesia should see episodes of isolated showers. Temperatures should average near normal. Brazil will get mostly dry conditions and warm temperatures. ICE certified stocks are lower today at 5.113 million bags.

Chart Trends: Trends in New York are mixed to up with objectives of 2480 and 2520 July. Support is at 2340, 2325, and 2280 July, with resistance at 2400, 2420, and 2425 July. Trends in London are mixed. Support is at 1540, 1520, and 1505 July, with resistance at 1575, 1580, and 1600 July.

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Junk Bonds acting rather Junkie of late! Next key move is…

by Chris Kimble


The Power of the Pattern shared that Junk Bond ETF's were creating bearish rising wedges on 5/24, suggesting a two-thirds chance junk bonds would fall in price. (see post here)

The above 2-pack reflects a breakdown in price and a breakout in yields for a Junk bond ETF and a preferred Dividend ETF. Both are nearing short-term support, where a bounce is due!

The key to the bigger puzzle on junk is the inset chart, reflecting that effective yields on Junk are breaking higher (bullish for yields/bearish for price) from a bullish falling wedge and rates are still very low on a historical basis!

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Stock-Market Crashes Through the Ages – Part II – 19th Century

By tothetick

Stock-market crashes saw the light of day more and more as the world became industrialized. The 19th century saw a rapid increase in their numbers.

There’s money to be had at any time, whether the market is going up or down. But, it’s avoiding the downs and pulling out before the things start to go haywire that is important. Or, at least, investing in what’s good and what’s going to take a hike. But, how can you believe what people have to say? The only ones who are any good at selling a rise when in actually fact it’s a fall coming are the marketing gurus themselves. They are more common than we might think. It’s no modern invention either. We are past masters of selling what doesn’t exist. Selling make-believe is what makes people happy, until it takes a turn for the worse.

Some might say that predicting the downturn in the market can be done. You can develop algorithms and have sophisticated math, analyzing stock movements in multiple countries at the same time with split-second data churning out. You can use whacky ways to predict what’s happening if you can’t tot up the equations and come to a decision, like seeing how many toothbrushes are sold in the economy (as people tend to stop going to the dentist when there is a crisis). Although they are more likely to reveal what’s actually taking place, than what is going to happen just round the next corner.

Use as much economic forecasting as you like but the market won’t react always how you expect it to. We all know that. If it were an exact science, nobody would be poor. If it were a science at all, we would all be damn wealthy, wouldn’t we?

But, looking at what happened in the past sometimes helps us see what we are still doing today. We didn’t invent everything and we might think that we are high-flyers. But, somebody’s been there, done it and seen it all before. The 19th century was the industrialized world at its first beginnings. Trade, transport, better communication and money-making were high up on the agenda.

Here are the best (or the worst, depending on which side of the fence you are sitting) examples of stock-market crashes of the 19th century from the mammoth list that could be mentioned. The majority took place in the USA, which was at the heart of industrialized prowess at the time; a place where money could be made hand over fist, but where it could be lost twice as quickly. The John-Dos-Pasos world of disillusion and hope of classes in the race to become rich and somebody, a household name:

Panic of 1819

If you were told that the Panic of 1819 was due to the issuing of paper money and over-speculation of land, then you might have the impression that we are back in 2008-2012 and the financial crisis and the quantitative easing methods of today. But, no! The Panic of 1819 was due to the fact that Britain and France had been at war for decades, even centuries. They both had a need for US-produced goods and in particular agricultural products were very much in demand. Thanks to the warring between these two countries, the United States was able to become a major supplier and it prospered. However, when war ended things took a dive for the US. Europe was no longer in need and there was a bumper crop in 1817 in Europe leaving the USA in the lurch.

  • Americans had been buying up land at rates that had never been seen so as to produce in what looked like a booming industry.
  • In 1815, 1 million acres of land were sold off to the people.
  • By 1819 that had increased to 3.5 million acres.
  • All of it, of course, was purchased via loans. As things took a nose-dive, the people were unable to pay back their loans. Sounds like the credit crunch and the sub-prime crisis.

You would have thought that we would have learnt our lesson back then, wouldn’t you? But, no, we did the same thing: lending to people in times of economic boom, even to those that are going to be unable to pay it all back.  The banks ended up demanding immediate repayment so they didn’t end up losing out. Sound familiar?

  • Prices of agricultural products were plummeting while the plantation owners were over-producing due to having bought up too much land.
  • Land prices fell and brought the economy down as the banks called in those loans.
  • Bank credit was restricted, loans were cancelled and the Bank of the United States started printing money to deal with the lack of funds.

The printing presses went into action and the rest is history. Almost exactly what has happened today, isn’t it? Didn’t the people who decide study the Panic of 1819?

It was all down to a chain of events, the war between two countries, the reliance on another and suddenly when they are no longer at war they do a runner leaving the country that helped them out to do their own thing. But, isn’t all fair in love and war?

Perhaps the only good thing that came out of the panic was the understanding that there had to be some sort of poor relief for the people that were left destitute and the US education system was also created.

Panic of 1837

It was the USA’s trading relations with Great Britain that caused the panic of 1837 to take place in the US once again. Those Brits have a lot to answer for, I hear you say. They were economic leaders in the world (back then) and what they did had a great effect on what the rest of the world either did or what happened to others. Secondly, there were few trade barriers and that meant that the effects of liberal economics with little restraint based purely on supply and demand meant that changes were made almost immediately and put into effect.

The story goes like this.

  • Britain was suffering from a slump in its agricultural production and ended up relying heavily on the USA, especially in terms of cotton and crops.
  • The US agricultural industry was booming and so British investors placed their money where they were going to get the best returns.
  • However, they didn’t bank on the fact that the Bank of England would increase interest rates (from 3% to 5%), in an attempt to replenish their diminishing reserves.
  • The money that had been invested in the US by the British investors suddenly flowed back into the coffers of the Bank of England.
  • The US was left only with the choice to do exactly the self-same thing in a copy-cat scenario.

A bit like bailing out the banks in the financial crisis. You start one and then everybody has to do it, don’t they? Or if you start baling out one country suffering from financial instability and the consequences of rising debt, then you can never let up and you can’t say no to the others. Then you are really done. Isn’t that where we are at now?

Bank of England

Bank of England

The US raised interest rates and there were restrictive credit policies. Money was in short supply and printing presses started up again to inject money into the economy. Politicians and Bank of the United States’ officials refused to make public addresses and people buried their heads in the sand thinking it would blow over.

Cotton prices shot through the roof and so did land prices. The effect was almost the same as in the 1819 panic: land prices and inflation in general. The result was catastrophic for the USA and ended up going well into the mid-1840s.

Panic of 1857

The 1857 panic is commonly known as the world’s first global financial crisis. By the 1850s, travel had gone through great changes. Railroads were already at their height of use and transport in trade was faster and better than it had ever been before.

Once again, it started in Britain at the time. Looks like Britain was the USA of yesterday, the financial-crisis instigator of the world at the time. Tough to carry that burden on your shoulders, but one saving grace is that people forget who, why and when very quickly just as soon as the next crisis comes along. Otherwise we wouldn’t be repeating history over and over, would we?

  • The British government in 1857 did (and succeeded) everything in their power to get around the Peel Banking Act of 1844, requiring that gold and silver back up the money that was in circulation.
  • The panic that ensued in Great Britain spread rapidly to the US and it was the Ohio Life Insurance and Trust Company that caused the triggering of the panic in 1857 in the US.
  • It was all down to fraudulent activities of the bank’s executives that there was a bank-run in 1857.
  • The bank suspended activities after incurring losses of $7 million.
  • They had lent too much money to railroads in the conquest of the west.
  • However, it was in 1857 that the flow of people to the west had considerably slowed down.
  • They had over-lent to railroad companies and they didn’t have enough gold or silver to back it up, just like in Britain.
  • The value of land fell, the railroad securities disappeared.
  • The banks went into meltdown.

Once again, the banking system had lent too much in times of economic prosperity, and they didn’t have enough to back it up. The railroads also went into meltdown and so did the farmers. Land prices depreciated and crops became almost worthless (grain hit the floor at $0.80 a bushel, spiraling from the dizzy heights of $2.19).

Railroads in the USA

Railroads in the USA

It was the Panic of 1857 that partly resulted in the American Civil War a few years later. The north had suffered immensely from the drop in prices. The south had not suffered quite so much.  The south became stronger in the relationship between the two parts of the USA, but tensions grew to the widening disparity between the wealth and the problem of slavery that was central to their dispute.

Panic of 1873

This time it was another world recession that became the first one that was known as the ‘Great Depression’ until an even greater one came along in the 1929 and then it was relegated to the back-burner, forgotten. It was a depression that was triggered by Germany this time and their decision to get rid of the silver standard. It put an end to Great Britain’s hegemony in the world.

  • Bank reserves had been put under a great deal of strain from money that had been lost in the construction of railways as well as due to speculative investments and property-sector losses that hit hard. The railways were the dot com bubbles of the 1990s and 2000s. Massive investment, euphoria, then a pin prick, and it all deflated.
  • The German decision to stop using silver to mint coins resulted in a fall in prices in the USA, where most of the silver was exported from at the time. Due to the fall in demand, the Coinage Act was passed and meant that the US used the gold standard. Silver lost even more in price.

The Germans instigated the move away from liberal free-market policies towards ones that were more conservative.

Otto Von Bismarck

Otto Von Bismarck

Bismarck as Chancellor nationalized industries and even created the social security system to provide workers with pensions so that they state wouldn’t have to pay for them at retirement age (which was later exported all around the world, until it became too much for us to finance).


The panics happened every twenty years and then towards the end of the 19th century they accelerated closing the gap between each panic as we became more industrialized, more dependent on travel, transport and communication became faster and faster. There were other panics that occurred in 1884, then again in 1893 and 1896. Panic was synonymous with the world that the 19th century had wafted in on the railroads that they were building. But, it wasn’t a patch on what the 20th century had in store as the panics and crashes became more and more recurrent.

So, are there reasons why the stock markets created so many bubbles that bust in the faces of our 19th-century ancestors? That was probably because there was a major rise of the middle-class in the 19th century. It wasn’t just the select very few that were from the higher echelons of society that were going into business. Making money, rather than inheriting it was the order of the day for the first time in the 19th century. The Industrial Revolution had brought entrepreneurship into the living rooms of the middle classes on a steam train. It had opened doors in communication, transport and energy. There were opportunities to be had in every sector and there were at last more than just that select few who were ready to make a buck.  There was also reduced interference by the state and the beginnings of the forging of the system in which we live today. Risks were taken. Whether they were calculated risks or not is entirely another matter? But, it was the 19th century when industrialization meant opportunity and yet still at the same time a working class that was not adequately organized to defend itself or demand more than the entrepreneurs allowed them to.

Thomas Edison

Thomas Edison

The list of entrepreneurs that stands witness to the 19th century’s success is endless. The Edisons and the Carnegies, the Rockefellers and the Vanderbilts are still today almost as strong as household names, aren’t they?

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Hedge funds may be retreating from ag commodities


Hedge funds may be in retreat from agricultural commodity markets - with a "disastrous" bet on corn futures adding to the pressures on profitability raised, ironically, by their own success, a former Chicago Board of Trade director said.

Ann Berg, also the first recorded female grain exporter, said that the retreat in hedge funds' net long positions in major US-traded agricultural commodities in April to their lowest since 2006 may be a sign of waning interest in the sector.

In particular, she flagged that the drawdown – which has since reversed somewhat – came even as agricultural commodity prices rose, appearing a signal that "funds were sounding a retreat from the sector".

The position data "do illustrate a change in hedge fund behaviour", said Ms Berg, now an advisor on crop markets to governments and organisations such as the FAO, the UN food agency.

'Long bet turned disastrous'

A withdrawal would be consistent with hedge funds' declining profitability from crop positions.

Commodity hedge funds recorded negative performances in both 2011 and 2012, disappointing investors who withdrew about 20% of their cash last year, according to Newedge.

"By 2011, the performance of the commodity hedge funds declined and their positioning in agricultural futures no longer seemed to be predictive of market trends," Ms Berg said, with speculators appearing to have been caught out particularly this year in the Chicago corn market.

"Hedge funds enlarged their long position in corn in anticipation of a bullish US Department of Agriculture planting intentions report.

"The long bet turned disastrous when, in March, the USDA announced potential record corn production for 2013, causing a two-day sell-off of about $40 a tonne."

Volatility factor

Hedge funds have also been victim of their own success, in muffling the volatility which the exploited to great profit during the crop price boom and bust in 2008-09.

Hedge fund algorithms "might have been instrumental in reducing the level of price volatility… especially those specializing in arbitraging market anomalies," Ms Berg said.

"High volatility – peaking at 80 during the food crisis five years ago but declining to levels around 12–20 for most of the past year and a half – was most likely a significant factor in commodity hedge fund success in years past."

The comments came as the UN FAO itself forecast calmer grain markets ahead, thanks to the prospect of a rebuild in world cereals stocks to their highest in 11 years.

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Oil falters with rising inventories and falling demand projections

By Phil Flynn

The bonds are back and were going to be in trouble! Rising yields may yield to fear as the Japanese stock market starts to melt down. Japan's central bank just did not get the fact that it was the massive stimulus that was giving their markets some semblance of hope. Now with the Fed threatening to taper bond purchases, taking away an important flood of cash from emerging market and a scary World Bank forecast it is clear that Japan’s economic woes are clear for all to see.  That may force the dollar back down and yields higher as turmoil in global markets may force the Fed to reassess the timing of the taper.

The World Bank lowered the world growth forecast down to 2.2% down from 2.4%. That comes as it is being reported that the dollar is moving in the best lockstep position with stocks since the days of the financial crisis began.

Yesterday crude reacted to a bearish report by the Energy Information agency by trying to rally. Warnings that crude supply could tighten by the International Energy Agency also gave bulls reasons for hope, yet OPEC is warning of potential threats to the oil market's balance and reported an increase in its own output in May. North Sea problems and geopolitical risk has kept Brent Crude solid. The Wall Street Journal is also reporting on how important the Fed is to the price of oil. The WSJ says that "There is a shadow looming over oil prices in the shape of a big tank — and a big central bank. At around 394 million barrels, U.S. commercial stocks of crude oil, excluding the strategic petroleum reserve, are hovering around their highest levels since the early 1980s. In part, that reflects the shale-led surge in U.S. supply, with domestic production outpacing imports in late May for the first time since January 1997. In its latest monthly report, issued Wednesday, the International Energy Agency forecast U.S. output would top 10 million barrels a day on average this year, up 23% in just two years.

Meanwhile, domestic demand is sluggish. The IEA expects it to average slightly less than 18.6 million barrels a day this year, down for the third year in a row. The trend of Americans buying more fuel-efficient cars and driving less is holding down consumption. Back in 2005, Americans burned almost 21 million barrels a day. But another factor keeping inventories high has nothing to do with roughnecks or commuters. It emanates from Washington. Refiners and oil marketing and trading firms keep stocks on hand to ensure they can supply customers. Low interest rates, facilitated by the Federal Reserve's policy of quantitative easing, make it cheaper to finance those inventories. Indeed, those low rates can make it very profitable to buy oil, store it and lock in a margin by selling futures.

Energy economist Phil Verleger estimates that with short-term interest rates around 0.25% — roughly in line with Libor — the financing cost of holding stocks today is around two cents a barrel every month. Right now, three-month oil futures trade at about a 30 cents a barrel premium to the spot price. On that basis, assuming 90% leverage, an investor could buy oil and sell it three months forward, earning a 2.5% return after costs. That might not sound like much. But it is five times the yield on the three-month U.S. Treasury and a no-brainer for a trader at an oil firm with access to storage capacity. But the trade is getting squeezed over time. Back in February, the spread was around $1 a barrel, implying a return over three months of almost 10%. While spot prices have held pretty steady over the past few years, futures further forward have been slipping, likely reflecting rising expectations for U.S. supply and acceptance that the global economy's recovery will be a gradual, drawn-out affair. The upshot is that, with bond yields rising as the end of quantitative easing becomes a more realistic prospect, profits on the carry trade are likely to shrink further. The same trade described above at current spreads but with a 1% financing cost earns a return over three months of less than 0.7%. As this squeeze becomes more apparent, it can become self-fulfilling as those holding inventories sell them in the expectation that futures will decline further. That liquidation adds further pressure to prices as it increases available supply. Say 50 million barrels were liquidated over the second half of the year, which would simply bring U.S. inventories down to around their five-year average. That would amount to almost 274,000 barrels a day. To put that in perspective, it equates to about a third of the IEA's expectation for global oil-demand growth this year. The past few weeks have seen yields rise globally as bond investors raise their expectations of the Fed taking its foot off the gas. Oil investors won't be immune."

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