Bear Descending Triangle

By Tothetick Education

 

The Descending Triangle as a price pattern is fairly common as it presents frequently in all markets, time frames, & price ranges and tends to provide a great reward-to-risk ratio. Their versatility has made Descending Triangles available as either a bullish or bearish trend continuation pattern or a reversal pattern depending on the trading environment in the background.

Visually Descending Triangles are characterized by a series of lower highs but the same lows. The horizontal lower trendline will experience multiple efforts as price support. The shape of the Descending Triangle is altered by the slope of the descending resistance line which ‘converges’ or; is inclined toward, the lower support line.

Descending Triangles vary in their duration, but will have at least two swing highs and two swing lows in price. Traders should be prepared to adjust the trendlines as needed with additional swings. Volume usually diminishes as the pattern develops. Buyers & sellers create this range-bound price action and eventually prices squeeze to an Apex. The closer to the apex price gets the odds for a breakdown of the immediate price range becomes more likely.

Traders can look to trade the Descending Triangle in numerous similar methods regardless of market environment but with several nuances can ‘stack the deck’ which increases the risk-to-reward ratio for profits. One of the best Descending Triangle performers statistically is the bearish continuation pattern seen in a downtrend.

The bearish continuation pattern has 3 phases:

1) Background: A Strong impulsive, thrusting action with a surge in volume & price establishes a clear picture of the controlling bearish trend direction. In our descending triangle price pattern it is represented visually by a Pole. Deeper and more drama the better as the Pole is the Key to recognizing the potential for the continuation of the pattern. The Pole represents trend direction as well as its strength & often this pattern is initiated as a new breakdown in price from an established area & sellers are in control.

2) The second phase is a pause for consolidation of the action both in volume & price and is represented by the descending triangle. As traders we like to see this phase short in duration with only 2 or 3 swings while our price action is range bound maintaining the lower highs but the same lows shape and the volume is ‘resting’. The best breakouts occur at 50-75% of the triangle completion. Caution if the breakout is delayed until prices crowd into the apex as it is an indication of ‘balance’ or indecision between buyers & sellers.

3) The pattern confirms as a bearish continuation pattern if the action creates a new bearish breakdown with a surge again from the bears in both volume & price. The immediate lower support outlined by the descending triangle is the area traders look to see confirm the breakdown. Typically the action will mimic the volatility & energy experienced with the Pole creation. Volume considerations aid in recognizing further potential for the pattern.

Options for Trading the Descending Triangle as a bearish continuation pattern:

There are two methods of trading this pattern & it depends on your trading style.

Aggressive traders will enter short trades right around the upper resistance trendline once sufficient resistance has confirmed. The concept is that the trend is on your side & the bears are maintaining a ‘wall of resistance’ that continues to drop lower in price squeezing prices to the horizontal level of support.

This is a very accurate trade that usually has a great risk:reward ratio. Stop placement can be fairly tight right above resistance & can be adjusted downward accordingly. Note there is a ‘mid-line’ created using the apex as the measurement & traders can gauge success of the immediate swing based on this incremental value. When price approaches the lower horizontal support line you should gauge the momentum: if you see that the momentum is strong stick to the position. However, if you see that support prevails, close the trade & take your profits to maximize the reward.

The aggressive trading method can highly increase the profit potential of any triangle, as you can trade the same pattern several times & profit from the ranging swing movements inside the pattern. However, remember that as a trend continuation pattern traders want this consolidation triangle formation to be relatively brief. Two or 3 swings may turn into more with this triangle but the 50-75% formation concept aids trade consideration.

Conservative traders will enter a trade once the lower horizontal support line has been broken &/or the new breakdown has confirmed.

False breakouts do happen & confirmation needed is always a traders’ choice. Several methods that apply here for either intrabar &/or close bar options offered in sequence: breakdown below support price, retrace holds line, price clears breakdown swing low price, larger chart combination.

Stop placement considerations can be aggressively lowered after the breakdown of the price.

Measured Move Targets based on structure of Pole & the Bear Descending Triangle

Aggressive with Momentum & Volume: duplication of the original move or trader choice measurement of the Pole:

• Apex or BreakDown price (minus) Pole measure = target
• Pole measure = ((Pole Base price (minus) Pole Tip price))

Conservative:

• Apex or BreakDown price (minus) Descending Triangle measure = target
• Descending Triangle measure = (swing high price of triangle (minus) swing low price of triangle)

Examples: Descending Triangle as a bearish continuation pattern:

See the original article >>

What Is A "Liquidity Trap" And Why Is Bernanke Caught In It?

by Lance Roberts

I have spoken, and written, much lately about the fact that the Federal Reserve is beginning to realize that they are caught in a "liquidity trap."  However, what exactly is a "liquidity trap?"  The following is one definition:

"A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels."

Let's take a moment to analyze that definition by breaking it down into its overriding assumptions.   First, is the Fed pushing cash into the private banking system?  The chart below shows that that answer is "yes".    In September of 2008 the excess reserves of major banks was just $9 billion.  After the Lehman failure excess reserves have now skyrocketed to $2.07 trillion.  That is roughly an increase of $400 billion in excess reserves annually.

However, has the increase in liquidity into the private banking system lowered interest rates?  That answer is also "yes."   The chart below shows the increase in the Federal Reserves balance sheet, since they are the "buyer" of bonds which in turn increases the excess reserve accounts of the major banks, as compared to the 10-year treasury rate.

While, in the Fed's defense, it may be clear that since the beginning of the Fed's monetary interventions that interest rates have declined this has not really been the case.  I would venture to argue that, in fact, the Fed's liquidity driven inducements have done little to effect the direction of interest rates.  I say this because interest rates have not been falling just since the monetary interventions began - it is a phenomenon that began three decades ago as the economy began a shift to consumer credit leveraged service society.  The chart below shows the correlation between the decline of GDP, Interest Rates and Inflation.

The ongoing decline in economic activity has continued to be the driving force behind falling inflationary pressures and lower interest rates.  It is hard to attribute much of the recent decline in interest rates to monetary/accomodative policies when the long term trend was clearly intact before these programs began.  The real culprits behind the declines in economic growth rates, interest rates and inflation is more directly attributable to increases in productivity, globalization, outsourcing and leverage (debt service erodes economic activity).

However, the real question is whether, or not, all of this excess liquidity and artificially low interest rates is spurring economic activity?  To answer that question let's take a look at a 4-panel chart of the most common measures of economic activity - Real GDP, Industrial Production, Employment and Real Consumption.

While an argument could be made that the early initial rounds of QE contributed to the bounce in economic activity it is important to also remember several things about that particular period.  First, if you refer to the long term chart of GDP above you will see that economic growth has ALWAYS surged post recessionary weakness.  This is due to the pent up demand the was built up during the recession that is unleashed back into the economy.   Secondly, during 2009 there were multiple bailouts going on from "cash for houses", "cash for clunkers", direct bailouts of the banking system and the economy, etc.  However, the real test for the success of the Fed's interventions actually began in 2010 as the Fed became "the only game in town".   As shown above, at best, we can assume that the increases in liquidity have been responsible in keeping the economy from slipping into a secondary recession.  With most economic indicators showing signs of weakness it is clear that the Federal Reserve is currently experiencing a diminishing rate of return from their montary policies.

Lack Of Velocity

The definition of a "liquidity trap" also states that people begin hoarding cash in expectation of deflation, lack of aggregrate demand or war.  The 4-panel chart below shows that both individuals, and corporations, have been stock piling cash since the beginning of this century.  As the "tech bubble" eroded confidence in the financial system, followed by a bust in the credit/housing market, cash has become a "sacred cow."   In turn this has pushed monetary velocity to the lowest levels on record as the economy continues to weaken as deflationary pressures persist, the demand for credit remains weak and consumption remains constrained by stagnant wage growth.

The issue of montary velocity is the key to the definition of a "liquidity trap."  As stated above:

"The signature characteristic of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels." 

The chart below shows that, in fact, the Fed has actually been trapped for a very long time.

The problem for the Fed has been that for the last three decades everytime they have tightend monetary policy it has led to an economic slowdown or worse (as shown by the vertical dashed lines).  The onset of economic weakness then forced the Federal Reserve to once again resort to lowering interest rates to stabilize the economy.

The issue is that with each economic cycle rates continued to decrease to ever lower levels.  In the short term it appeared that such accomodative policies did in fact aid in economic stabilzation as lower interest rates increased the use of leverage.  However, the dark side of those monetary policies was the continued increase in leverage which led to the erosion of economic growth, and increased deflationary pressures, as dollars were diverted from productive investment into debt service.  Today, with interest rates at zero, the Fed has had to resort to more dramatic forms of stimulus hoping to encourage a return of economic growth and controllable inflation.

No Escape From The Trap

For the Federal Reserve they are now caught in the same "liquidity trap" that has been the history of Japan for the last three decades.  With an aging demographic, which will continue to strain the financial system, increasing levels of indebtedness and poor fiscal policy to combat the issues restraining economic growth it is unlikely that continued monetary interventions will do anything other than simply foster the next boom/bust cycle in financial assets.   The chart below shows the 1-year Japanese Government Bond yield as compared to their quarterly economic growth rates.  Low interest rates have failed to spur sustainable economic activity over the last 20 years.

As I stated recently in "What Inflaton Says About Bonds & The Fed:"

"The real concern for investors, and individuals, is the actual economy. We are likely experiencing more than just a 'soft patch' currently despite the mainstream analysts' rhetoric to the contrary. There is clearly something amiss within the economic landscape and the ongoing decline of inflationary pressures longer term is likely telling us just that. The big question for the Fed is how to get themselves out of the 'liquidity trap' they have gotten themselves into without cratering the economy, and the financial markets, in the process. As we said recently this is the same question that Japan is trying to figure out as well."

Should we have an expectation that the same monetary policies employed by Japan will have a different outcome in the U.S?  More importantly, this is no longer a domestic question - but rather a global one since every major central bank is now engaged in a coordinated infusion of liquidity.  The problem is that the despite the inflation of asset prices, and suppression of interest rates, on a global scale there is scant evidence that the massive infusions are doing anything other that fueling the next asset bubbles in real estate and financial markets.  The Federal Reserve is currently betting on a "one trick pony" which is that by increasing the "wealth effect" it will ultimately lead to a return of consumer confidence and a fostering of economic growth?  Currently, there is little real evidence of success. 

Are we in a "liquidity trap?"  Maybe.   Of course, no one recognized Japan's problems either until it was far too late.

See the original article >>

Meridian Market Update

by Marketanthropology

"Two possibilities given the interest rate backdrop and equity market structure, should the SPX fail at finding traction for a third time since making all time highs at the end of May. Certainly, we would consider the scale of the 1994 equity market cascade the more likely outcome. With that said, long-term support from the Meridian is now found ~ 1560 which was initially tested and held in June." Meridian Market Update 7/3/13

Considering the equity markets have not only found traction over the past two weeks but took out the May closing high in yesterday's session, we updated the series to provided further perspective of how the market has reacted with the Meridian in the past - both the rejections (1987,1994,2011) and the breakouts (1995,2013). 

Click to enlarge charts

1994/2013                                                                 1987/2013

2011/2013                                                                   1995/2013

Whether it was Bernanke's primary intention or not, talk of the taper in May deflated animal spirits and took what we perceived to be an unhealthy market trajectory off trend.

Although the spike in interest rates echos of 94', the equity markets have so far absorbed the credit shock in stride with just a mild correction. Moreover, when it comes to the markets dynamics with the Meridian, the rejection in 2011 and eventual breakout this year is akin to the stretch between 1994-1995.

Similar to the 95' breakout, the banks have led the charge higher in the equity markets through their respective long-term resistance.

For further context of why we look for perspective with the Meridian  - here is a quick video from last year:  The Maker.

See the original article >>

Bull Pennant

By Tothetick Education

The Bull Pennant as a price action pattern typically presents immediately following an impulsive move in the market & represents a short consolidation before the continuation of the bullish trend. In general Pennants are found frequently in all markets, time frames, & price ranges. A fairly common price pattern that tends to provide a great risk:reward ratio when traded with a clear trend bias. They also tend to be easy to identify, very reliable and therefore, a trader favorite.

Visually Bull Pennants are a 2 part structure: a Pole with a base & a tip and then a pennant which looks very much like a small ‘stubby’ symmetrical triangle attached to the Pole and pointing to the right.

Bull Pennants are characterized with a series of higher lows & lower highs with trend lines drawn to represent the immediate support & resistance. The shape is altered by the slope of the descending resistance line & the slope of the ascending support line which is ‘converging’ or; inclining toward each other. The range-bound price action is balanced between buyers & sellers exhibiting similar strength/weakness & the pattern highlights this ‘mid-line’ price while squeezing to form an Apex.

The bullish continuation pattern has 3 phases:

1) Background: A Strong impulsive, thrusting action with a surge in volume & price establishes a clear picture of the controlling bullish trend direction. This action is represented visually by a Pole with tip pointing up. Higher & more drama the better as the Pole is the Key to recognizing the potential for the continuation of the pattern. The Pole represents trend direction as well as its strength & often this pattern is initiated as a new breakout in price from an established base of support & buyers are in control. This pattern has ‘1 rule: all Pennants must have a pole.’

2) The second phase is a pause for consolidation of the action both in volume & price and is represented by the Pennant. As traders we like to see this phase very short in duration with only 2 or 3 swings while our price action is range bound maintaining the higher lows & lower highs shape & the volume is ‘resting’.

• regardless of trend direction a Pennant will have higher lows & lower highs
• typically the difference between a Pennant & a Symmetrical Triangle is the size or duration of the consolidation phase. Pennants are usually shorter in duration & therefore ‘stubby’ in appearance.

3) The pattern confirms as a bullish continuation pattern if the action creates a new bullish breakout with a surge again from the bulls in both volume & price. The immediate upper resistance outlined by the Pennant is the area traders look to see confirm the breakout. Typically the action will mimic the volatility & energy experienced with the Pole creation.

Aggressive traders may trade long:

• failed swing low efforts on support once confirmed
• once the ‘mid-line’ price or Apex has broken out
• Traders can gauge success of the immediate swing based on this incremental value & when price approaches the upper resistance line should gauge the momentum.
• Stop placement can be fairly tight right below support & can be adjusted upward accordingly.

Conservative traders will enter a trade long:

• once the upper resistance line has been broken
• once the new breakout has confirmed

False breakouts do happen & confirmation needed is always a traders’ choice. Several methods that apply here for either intrabar &/or close bar options offered in sequence: breakout above resistance price, line holds retrace as new support, price clears breakout swing high price, price clears swing high of pennant/ Pole tip, or larger chart combination.

Stop placement considerations can be aggressively raised after the breakout of the price.

Measured Move Targets based on structure of Pole & the Bull Pennant

Aggressive with Momentum & Volume: duplication of the original move or trader choice measurement of the Pole:

• Pole measure (added to) Apex or BreakOut price = target
• Pole measure = (Pole Tip price (minus) Pole Base price)

Conservative:

• Pennant measure (added to) Apex or BreakOut price = target
• Pennant measure = (swing high price of pennant (minus)  swing low price of pennant)

Example Bull Pennant as a bullish continuation pattern:

See the original article >>

Bear Pennant

By Tothetick Education

The Bear Pennant as a price action pattern typically presents immediately following an impulsive move in the market & represents a short consolidation before the continuation of the bearish trend. In general Pennants are found frequently in all markets, time frames, & price ranges. A fairly common price pattern that tends to provide a great reward-to-risk ratio when traded with a clear trend bias. They also tend to be easy to identify, very reliable & therefore, a trader favorite.

Visually Bear Pennants are a 2 part structure: a Pole with a base & a tip & then a pennant which looks very much like a small ‘stubby’ symmetrical triangle attached to the Pole facing right. In the case of a Bear Pennant the Pole looks like it is up-side-down with the tip at the bottom.

Bear Pennants are characterized with a series of higher lows & lower highs with trend lines drawn to represent the immediate support & resistance. The shape is altered by the slope of the descending resistance line & the slope of the ascending support line which is ‘converging’ or; inclining toward each other. The range-bound price action is balanced between buyers & sellers exhibiting similar strength/weakness & the pattern highlights this ‘mid-line’ price while squeezing to form an Apex.

The bearish continuation pattern has 3 phases:

1) Background: A Strong impulsive, thrusting action with a surge in volume & price establishes a clear picture of the controlling bearish trend direction. This action is represented visually by a Pole with tip pointing down. Deeper & more drama the better as the Pole is the Key to recognizing the potential for the continuation of the pattern. The Pole represents trend direction as well as its strength & often this pattern is initiated as a new breakdown in price from an established area & sellers are in control. This pattern has ‘1 rule: all Pennants must have a pole.’

2) The second phase is a pause for consolidation of the action both in volume & price and is represented by the Pennant. As traders we like to see this phase very short in duration with only 2 or 3 swings while our price action is range bound maintaining the higher lows & lower highs shape & the volume is ‘resting’.

3) The pattern confirms as a bearish continuation pattern if the action creates a new bearish breakdown with a surge again from the bears in both volume & price. The immediate lower support outlined by the Pennant is the area traders look to see confirm the breakdown. Typically the action will mimic the volatility & energy experienced with the Pole creation.

Aggressive traders may trade short:

• failed swing high efforts on resistance once confirmed
• once the ‘mid-line’ price or Apex has broken down
• Traders can gauge success of the immediate swing based on this incremental value & when price approaches the lower support line should gauge the momentum.
• Stop placement can be fairly tight right above resistance & can be adjusted downward accordingly.

Conservative traders will enter a trade short:

• once the lower support line has been broken
• once the new breakdown has confirmed

False breakouts do happen & confirmation needed is always a traders’ choice. Several methods that apply here for either intrabar &/or close bar options offered in sequence: breakdown below support price, line holds retrace as new resistance, price clears breakdown swing low price, price clears swing low of pennant/ Pole tip, or larger chart combination.

Stop placement considerations can be aggressively tightened after the breakdown.

Measured Move Targets based on structure of Pole & the Bear Pennant

Aggressive with Momentum & Volume: duplication of the original move or trader choice measurement of the Pole:

• Apex or BreakDown price (minus)  Pole measure = target
• Pole measure = ((Pole Base price (minus) Pole Tip price))

Conservative:

• Apex or BreakDown price (minus)  Pennant measure = target
• Pennant measure = (swing high price of pennant (minus) swing low price of pennant)

Example Bear Pennant as a bearish continuation pattern:

See the original article >>

'Bearish adjustment' for cotton - Rabobank

by Agrimoney.com

Cotton futures have seen a light relief rally into the end of the week, however sentiment remains negative follow the latest "bearish adjustment" by the US Department of Agriculture.

"Global ending stock expectations were revised upwards 2% to a record 94.34 million bales, "noted Rabobank.

The USDA raised its world cotton stocks projection for both 2012/13 and 2013/14 due to a combination of "higher production and lower consumption".

"It is possible that futures can work lower again as demand has turned soft, but production and weather might be more important in the short term," suggests Jack Scoville of PRICE Futures Group.

Mixed China view

"The USDA were muted on China's balance sheet," suggests Rabobank.

China continues to hold record levels of cotton inventories, helping provide a floor to price.

Yet despite record stocks imports are expected to remain close to current levels in the coming season.

View have become more mixed however.

"Whilst it is still too early to anticipate the Chinese Governments import appetite in 2013/14, we maintain a conservative forecast of China's import demand in 2013/14 of 7 million bales," suggest Rabobank.

Steady supplies

Improving weather conditions are supportive for stronger production in the 2013/14 harvest.

"Weather for Cotton appears good in India, Pakistan, and China, noted Jack Scoville

The latest USDA estimates place US production for 2013/14 season unchanged 13.5 million bales.

"We maintain our view on US cotton production at 14 million bales, 500,000 bales above the USDA, and expect the southwest abandonment rate to decline on improving crop conditions," noted Rabobank.

Cotton planting in India, the second-ranked producer and exporter, "continues to gain momentum, given favourable weather and adequate rain over major growing regions", reported the USDA New Delhi bureau this week.

Nonetheless, the bureau stood by a forecast of Indian cotton output up only 500,000 bales year on year at 27.0m bales in 2013-14, citing the appeal to growers of using the better rains to diversify from cotton, one of the more drought tolerant crops.

Weather conditions have also been favourable elsewhere. Cotton planting in India "continues to gain momentum, given favourable weather and adequate rain over major growing regions", reported the USDA New Delhi bureau this week.

See the original article >>

Dow hasn’t really made any money in 13-years!

by Chris Kimble

CLICK ON CHART TO ENLARGE

The above great chart was created and shared by Globalfinancialdata.com.  This chart reflects the Dow back to 1885 and adjusts it for inflation.  We all own investments with a goal to make money and beat the cost of living.

This chart reflects that if you adjust the Dow for inflation it is lower now, than it was 13-years ago. I added a small bit of Technical analysis to the chart, reflecting that the Dow seems to be struggling with this inflation adjusted resistance level!

See the original article >>

Did Gold Start to Trade Along With the Stock Market?

By: P_Radomski_CFA

It seems that everybody’s hanging on the Fed’s every word. Yesterday the S&P 500 index climbed above the closing record of 1,669.16 reached May 21 and closed at its record high (1,675.02) as Ben Bernanke backed sustained monetary stimulus.

The index has advanced for six straight days, the longest winning streak since March 11, and is heading toward its biggest weekly gain since Jan. 4. In this way, the S&P 500 erased losses since Bernanke first suggested the Fed might curb stimulus this year.

Without a doubt, the U.S. Federal Reserve stimulus has helped fuel a rally in financial markets which spread across stocks and bonds to oil and metals. Many investors have jumped to rallying stocks and dumped holdings in gold-linked exchange traded funds.
“The story in stocks for this year is about confidence replacing uncertainty and anxiety,” Hank Smith, a chief investment officer at Radnor, said. “It’s really more about an improvement in sentiment. That’s being a big driver for equity returns and we are still a long ways away from worrying about there being too much optimism or exuberance.”

Could these events trigger another rally? Will the S&P 500 index climb decisively above the May 21 top? Before we answer these questions, let's find out what happened during the last several days and check the current situation in stocks. At the beginning, let’s take a look at the long-term S&P 500 chart (charts courtesy by http://stockcharts.com).

On the above chart we see that stocks moved back above the rising support line, which means that the breakdown below this line was invalidated. The recent decline was likely nothing more than another correction and the outlook is still bullish.

Now, let’s check if the short-time outlook is also bullish.

During the past week, the S&P 500 Index has continued its rally. On Monday, we finally had a breakout above the declining resistance line based on the May and June tops. The following days brought further rallies. Another bullish factor was the breakout above the November-May upward trend line. The price climbed up over the area of the June 18 local top, and as we had previously mentioned, the S&P 500 index reached the May 21 closing record of 1,669.16 and closed at its record high yesterday. The next resistance level is at the May 22 high.

Let us move on to the financial sector, which often leads the general stock market, for more clues regarding the future moves of the S&P500 - we'll use the Broker-Dealer Index as a proxy here.

In this week’s Broker-Dealer index chart we see that the financials broke above the resistance level at 130. This could fuel further gains in the stock market. Please keep in mind that the financial sector used to lead the general stock market lower and higher so the bullish sign here is also a bullish confirmation for other stocks. However, the breakout has not been confirmed so far, so the situation improved just slightly.

Summing up, the situation for stocks in the long and short term is quite bullish, and it seems that we could see further gains in the stock market. If you’re interested in short-term commentary on the stock market, please note that we have started publishing such in our Articles section.

Once we know the current situation in the stock market and the financial sector, let’s take a look at the Correlation Matrix. This is a tool, which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector (namely: gold correlations and silver correlations). 

The correlations between gold and the general stock market reminded us of a question regarding whether we felt gold was starting to trade along with the stock market. This may seem to be true this week, but we doubt this will last. The very short-term coefficients are basically non-existent, the short-term are positive but weak, and the medium-term ones are negative and stronger than the short-term positive ones. The situation overall is mixed, but the negative correlations prevail in our view. It seems that if stocks rally in the medium term (which is likely), this will probably have a negative impact on precious metals, not only on gold but also on silver and the mining stocks (note an analogous situation in the Silver / S&P and HUI / S&P rows).

Summing up, the situation in the general stock market improved this week. The short and long term outlook is quite bullish, and it seems that we could see further gains in the stock market. For those looking for bullish implications, it might seem that gold started to trade along with the stock market last week, but we doubt this will last. It seems that the impact that the stock market has on gold, silver and mining stocks is still bearish.

See the original article >>

Bull Ascending Triangle

By Tothetick Education

The Ascending Triangle as a price pattern is fairly common as it presents frequently in all markets, time frames, & price ranges and tends to provide a great reward-to-risk ratio. Their versatility has made Ascending Triangles available as either a bullish or bearish trend continuation pattern or a reversal pattern depending on the trading environment in the background.

Visually Ascending Triangles are characterized by a series of higher lows but the same highs. The horizontal upper trendline will experience multiple efforts as price resistance. The shape of the Ascending Triangle is altered by the slope of the ascending support line which ‘converges’ or; is inclined toward, the upper resistance line.

Ascending Triangles vary in their duration, but will have at least two swing highs and two swing lows in price. Traders should be prepared to adjust the trendlines as needed with additional swings. Volume usually diminishes as the pattern develops. Buyers & sellers create this range-bound price action and eventually prices squeeze to an Apex. The closer to the apex price gets the odds for a breakout of the immediate price range become more likely.

Traders can look to trade the Ascending Triangle in numerous similar methods regardless of market environment but with several nuances can ‘stack the deck’ which increases the risk-to-reward ratio for profits. One of the best Ascending Triangle performers statistically is the bullish continuation pattern seen in an uptrend.

The bullish continuation pattern has 3 phases:

1) Background: A Strong impulsive, thrusting action with a surge in volume & price establishes a clear picture of the controlling bullish trend direction. In our ascending triangle price pattern it is represented visually by a Pole. Higher and more drama the better as the Pole is the Key to recognizing the potential for the continuation of the pattern. The Pole represents trend direction as well as its strength & often this pattern is initiated as a new breakout in price from an established bullish base of support.

2) The second phase is a pause for consolidation of the action both in volume & price and is represented by the ascending triangle. As traders we like to see this phase very short in duration with only 2 or 3 swings while our price action is range bound maintaining the higher lows but the same highs shape and the volume is ‘resting’. The best breakouts occur at 50-75% of the triangle completion. Caution if the breakout is delayed until prices crowd into the apex as it is an indication of ‘balance’ or indecision between buyers & sellers.

3) The pattern confirms as a bullish continuation pattern if the action creates a new bullish breakout with a surge again from the bulls in both volume & price. The immediate upper resistance outlined by the ascending triangle is the area traders look to see confirm the breakout. Typically the action will mimic the volatility & energy experienced with the Pole creation. Volume considerations aid in recognizing further potential for the pattern.

Options for Trading the Ascending Triangle as a bullish continuation pattern:

There are two methods of trading this pattern and it depends on your trading style.

Aggressive traders will enter long trades right around the ascending trendline once sufficient support has confirmed. The concept is that the trend is on your side and the bulls are maintaining and pushing a higher level of support as evidenced by the slope of the immediate support line of the triangle.

This is a very accurate trade that usually has a great risk:reward ratio. Stop placement can be fairly tight right below support & can be adjusted upward accordingly. Note there is a ‘mid-line’ created using the apex as the measurement & traders can gauge success of the immediate swing based on this incremental value. When price approaches the upper horizontal resistance line you should gauge the momentum: if you see that the momentum is strong stick to the position. However, if you see that resistance prevails, close the trade & take your profits to maximize the reward.

The aggressive trading method can highly increase the profit potential of any triangle, as you can trade the same pattern several times & profit from the ranging swing movements inside the pattern. However, remember that as a trend continuation pattern traders want this consolidation triangle formation to be relatively brief. Two or 3 swings may turn into more with this triangle but the 50-75% formation concept aids trade consideration.

Conservative traders will enter a trade once the upper horizontal resistance line has been broken &/or the new breakout has confirmed.

False breakouts do happen and confirmation needed is always a traders’ choice. Several methods that apply here for either intrabar &/or close bar options offered in sequence: breakout above resistance price, retrace holds line, price clears breakout swing high price, larger chart combination.

Stop placement considerations can be aggressively raised after the breakout of the price.

Measured Move Targets based on structure of Pole & the Bull Ascending Triangle

Aggressive with Momentum & Volume: duplication of the original move or trader choice measurement of the Pole:

• Pole measure (added to) Apex or BreakOut price = target
• Pole measure = (Pole Tip price (minus) Pole Base price)

Conservative:

• Ascending Triangle measure (added to) BreakOut price = target
• Ascending Triangle measure = (swing high price of triangle (minus) swing low price of triangle)

Example Ascending Triangle as a bullish continuation pattern:

See the original article >>

Joe Friday…Strongest resistance in 13-years for the Nasdaq at hand!

by Chris Kimble

CLICK ON CHART TO ENLARGE

Nasdaq Composite's rally off the 2002 lows has finally reached its 61% Fibonacci retracement level 11 years later after the dot.com crash, where an 80% decline took place.

At the same time the Nasdaq Composite index is hitting its 61% Fib level several resistance lines come into play, tied to key "Emotipoints" dating all the back to the 1990's Nasdaq lows.

Joe Friday....Nasdaq Composite is facing its biggest test of resistance in 13-years at (1) above. 

Should the Nasdaq break this resistance.....it would be a big plus for tech stocks.

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Gold market looks forward to a far better tone

By Alasdair Macleod

This week bullion prices began to rise in quiet conditions, with gold rising more than 6% and silver by slightly more. Trading patterns have changed, with much of the rise coming during U.S. trading hours, confirming that the short positions on Comex are being squeezed.

These shorts are at record levels, as shown in the chart below of Managed Money shorts.

And it is not just Managed Money: The Swaps are now nearly in balance, as are ”Other Reported Positions” (i.e. large speculators) courtesy of their near-record shorts . And as we know, the bullion banks are now prepared for a price rise, having gone net long. But the most interesting development this week is Gold Forward rates (GOFO) turned negative.

When GOFO goes negative it indicates that the cost of leasing gold is greater than Libor. The normal condition is for gold leasing rates to be less than dollar Libor, giving a positive GOFO figure. Admittedly, one could argue that with Libor reflecting the Fed’s zero interest rate policy this is no big deal. However, it does reflect a shortage of gold liquidity.

We have to consider this in context. I have managed to establish beyond doubt that central banks have been supplying the market with physical gold for the price to remain near current levels in the face of high global physical demand. The link to the relevant article is here. Therefore, GOFO turning negative is a sign that central banks are at least reducing the pace of their gold leasing, and might even be withdrawing from the market altogether.

It is against this background we need to also consider the very low levels of liquidity indicated by the dealers’ bullion held in Comex-registered vaults, which has fallen to less than 31 tonnes (representing settlement for only 10,000 contracts).  Interestingly, few days pass without an exchange-for-physical settlement in the active August contract, totaling 45,305 contracts this week alone. Furthermore, not all of the expired May contract appear to have been settled.

Therefore we must conclude that liquidity in both physical and paper markets from all sources has dried up.

The lack of supply, including liquidity provided by central bank leasing, tells us gold is simply priced at the wrong level, and needs to adjust upwards at least to the $1,550-$1,575 level established before the market was driven lower in early April.

A move of this magnitude is completely unexpected in the market, except perhaps by the bullion banks that have transferred their shorts to hapless hedge fund managers, reflected in the chart above. But this is what bear squeezes are all about: The last seller has sold, the stock has disappeared and there is none now available. Prices in these conditions usually rise very rapidly.

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Live cattle futures best bet in livestock - SocGen

by Agrimoney.com

The switch to cheaper meats will dampen beef prices - but live cattle futures may offer a better bet for livestock investors than lean hogs, suggests Societe General, citing the shrinking US bovine herd.

"In light of higher beef prices consumers have switched to cheaper poultry and pork items," said Christopher Narayanan, analyst with Societe General.

Nonetheless, SocGen said that the drop in US herd levels in recent years to their lowest in almost five decades, owing to persistent drought conditions, will provide longer-term support to beef prices.

"Tight supplies will continue to be a large factor in supporting live cattle prices, especially in the long-term, until herds have time to expand."

"Although we are seeing demand shifts away from beef and are expecting strong grain production, tight supplies of feeder cattle will ultimately lead to an increase in the price of live cattle".

Live vs feeder cattle

SocGen, beginning coverage of the livestock sector, forecast that futures in live cattle – animals fattened for slaughter - would average nearly 125 cents a pound in the July-to-September quarter and close to 130 cents a pound in the last three months of 2013 .

There are levels some 3-5% above the levels that futures currently suggest.

However, prices of feeder cattle – animals yet to be fattened - will be "more heavily affected" by weaker beef demand, and with weaker grain prices lowering the floor of production costs, will see less buoyant pricing.

Futures will track some 5% below levels the market is suggesting for the second half of 2013, with a deeper decline expected in the first half of next year.

Cattle vs hogs

On lean hogs, SocGen noted pork prices had been undervalued relative beef prices earlier in the year, causing a shift amongst retailers towards cheaper-pork products.

The price ratio of choice beef to lean pork, as measured by "cutout" wholesale values, has fallen to some 1.85 from early-2013 levels of 2.54m, Mr Narayanan said.

This decline signals that "pork is no longer cheap relative to beef and that the increasing pork demand should start slowing".

The impact will be to "see lower lean hog prices for the remainder of 2013 and into 2014", with futures particularly weak in the October-to-December quarter when they will fall below 76 cents a pound.

Caveat

SocGen did, however, note the threat posed by porcine epidemic diarrhea virus (PEDv) as potentially bullish for pork prices.

"If the spread of PEDv is not contained, we would expect to see lean hog prices rise".

The virus, which causes severe diarrhoea, vomiting and severe dehydration in pigs, and can be fatal, was officially identified in the US in May and has spread to 16 states, according to the American Association of Swine Veterinarians.

* The US Department of Agriculture on Thursday, in its benchmark Wasde report, trimmed to $124-134 per hundredweight, from $126-136 per hundredweight, its forecast for steer prices in 2013, with a $2 cut to estimates for 2014 too, noting that market values"have weakened recently".

The USDA lifted to $60-64 per hundredweight, from $58-62 per hundredweight, its forecast for barrow and gilt prices in 2013 citing "demand strength", but said that price gains "will be limited by higher production".  

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Brazil economic activity drops the most since December 2008

By Matthew Malinowski,

Brazil’s economic activity in May fell the most since December 2008, as accelerating inflation slows consumption in the world’s second-largest emerging market. Swap rates fell.

The seasonally adjusted economic activity index, a proxy for gross domestic product, fell 1.40% in May after rising a revised 0.96% in April, the central bank said today in a report posted on its website. It was the largest decline since growth dropped 4.27% in December 2008. Analysts expected a 1.15% contraction, according to the median estimate of 22 economists surveyed by Bloomberg.

President Dilma Rousseff’s administration is working to combat inflation that has undercut economic growth by curbing business sentiment and consumption. Industrial production in May fell by 2%, while retail sales remained flat in the same month. The central bank this week raised the benchmark interest rate by 50 basis points for the second straight meeting, after warning last month that the outlook for inflation remains unfavorable.

The economic activity number “reinforces the idea that Brazil’s economy is not growing,” Flavio Serrano, senior economist at Banco Espirito Santo de Investimento, said by phone from Sao Paulo. “The market follows this number closely. It was a weaker number than expected, and the swaps market is reacting to that.”

Swap rates on the contract maturing in January 2015 fell three basis points, or 0.03 percentage point, to 9.56% at 9:24 a.m. local time. The real weakened 0.3% to 2.2621 per U.S. dollar.

Annual inflation in June quickened to 6.7%, the fastest since October 2011, exceeding the ceiling of the bank’s target range of 2.5% to 6.5%.

The non-seasonally adjusted economic activity index rose 2.28% from a year ago, compared with a median estimate of a 2.80% gain, the central bank report said.

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China can endure growth slowdown to 6.5%, finance chief says

By Bloomberg News

Chinese Finance Minister Lou Jiwei signaled the world’s second-biggest economy may expand less than the government’s target this year and that growth as low as 6.5% may be tolerable in the future.

While the government in March set a 2013 growth goal of 7.5%, Lou said he’s confident 7% can be achieved this year. He spoke yesterday at the U.S.-China Strategic and Economic Dialogue in Washington. The nation’s broadest measure of credit fell to a 14-month low in June during an interbank cash squeeze, central bank data showed today.

Lou’s comments suggest China is prepared to allow a further slowdown from a rate that’s already at risk of falling to a 23-year low this year as Premier Li Keqiang focuses on policy changes to create more sustainable expansion. Li said this week that the government should keep restructuring the economy as long as growth, employment and inflation stay within limits he didn’t specify.

“We don’t think 6.5% or 7% will be a big problem,” Lou said at a press briefing in response to a question on whether there’s a limit on slower growth that officials will tolerate. “It’s difficult to give you a limit. But from the data we have, we have the confidence.”

He said, “please don’t forget that our expected GDP growth rate this year is 7%.” adding that “there won’t be much of a problem to meet our expectations this year.”

Growth Targets

Lou’s remarks may add to confusion over the government’s growth targets and tolerance levels. Li said in May that the nation seeks 7% annual expansion this decade. He said at a March 17 press conference, his first after becoming premier, that China must average 7.5% growth through 2020. State- media transcripts of the briefing that day said Li gave a 7% figure.

China’s current economic growth is within a “reasonable range” of 7 to 8%, the official Xinhua News Agency said today in a report posted on the State Council’s website. The job market will not be significantly affected if growth does not fall below 7%, Xinhua said, citing unidentified analysts.

China hasn’t changed the official 7.5% expansion target for this year, Market News International reported today, citing government sources it didn’t identify.

The news office at the Ministry of Finance in Beijing didn’t immediately respond to faxed questions on Lou’s remarks.

The nation’s stocks had their biggest two-day rally in 18 months through yesterday, amid speculation that authorities will take measures to bolster growth after Li’s comments on economic restructuring and parameters. The Shanghai Composite Index closed 1.6% lower today.

False Rally

“To have said 6.5% seems like a new line in the sand,” said Tim Condon, head of Asia research at ING Groep NV in Singapore, who formerly worked at the World Bank. “It may well be that they don’t want people to be suckered into a false stock-market rally.”

The comment “reinforces the reform credibility of the new administration,” Condon said.

M2 money supply rose 14% in June, the People’s Bank of China said today in Beijing, down from a 15.8% pace in May, the biggest slowdown in more than two years. A cash squeeze designed to stamp out speculation sent interbank borrowing costs to the highest in at least a decade.

Aggregate financing, the government’s broadest measure of credit, was 1.04 trillion yuan ($169 billion), down from 1.78 trillion yuan in June 2012. New yuan loans were 860.5 billion yuan, accounting for the largest share of aggregate financing since September 2011.

Yi Gang, deputy governor of China’s central bank, said the nation’s money market has recovered to normal levels and the financial market is stable. “At the moment, the tension has been relieved,” Yi said at a separate press briefing in Washington.

GDP Report

The statistics bureau reports second-quarter gross domestic product on July 15, with the median estimate of analysts for a 7.5% increase from last year. First-half expansion was probably below 7.7% “but not too far from it,” Lou said.

Lou ruled out the possibility of widening the budget deficit to stimulate the economy. Instead, policy makers have decided to cut the spending of central government agencies by 5%, and may use the savings to reduce taxes or increase spending on measures to support jobs and growth, he said.

“I want to emphasize that the structural economic adjustment is a painful process,” Lou said. “It won’t be possible to enjoy a comfortable life and a rapid growth rate with the structural adjustment.”

Lou said China shared its plan for further reforms with U.S. officials during the meetings, Lou said.

Shipyard Aid

China Rongsheng Heavy Industries Group Holdings Ltd., the nation’s biggest shipyard outside state control, said this month it’s seeking financial help from the government, as the nation’s shipowners association forecast a slump in vessel orders will run through next year.

Macquarie Group Ltd. today lowered its 2013 China growth forecast to 7.3% from 7.8%, and to 6.9% in 2014 from 7.5%. The median projection of 56 analysts in a Bloomberg News survey last month was for 7.7% expansion this year.

China’s economy expanded less than 8% last year for the first time since 1999.

The slowdown is “necessary” to achieve a structural transition, Lou said, adding that the government is deepening reforms in areas including public financing and financial services to achieve more sustainable growth.

Approval Requirement

Zhang Zhiwei, chief China economist at Nomura Holdings Inc., said Lou’s comments spurred investor inquiries over whether the 2013 growth target has been cut to 7%. That’s unlikely because the goal was approved four months ago and Li has failed to mention any revision, which may require approval from the National People’s Congress, Zhang said in a note today.

Lou said the job market is stable as preliminary data for the second quarter show employment outgrew job seekers. While college graduates have difficulty finding jobs, skilled technicians are in short supply, reflecting the structural problems, he said.

Chen Xingdong, chief China economist at BNP Paribas SA in Beijing, said Lou’s comments indicate that the “bottom for the year to come might be 6.5 percent” and that the finance minister was probably referring to medium and long-term growth.

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Bear Ascending Triangle

By Tothetick Education

The Ascending Triangle as a price pattern is fairly common as it presents frequently in all markets, time frames, & price ranges and tends to provide a great reward-to-risk ratio. Their versatility has made Ascending Triangles available as either a bullish or bearish trend continuation pattern or a reversal pattern depending on the trading environment in the background.

Visually Ascending Triangles are characterized by a series of higher lows but the same highs. The horizontal upper trendline will experience multiple efforts as price resistance. The shape of the Ascending Triangle is altered by the slope of the ascending support line which ‘converges’ or; is inclined toward, the upper resistance line.

Ascending Triangles vary in their duration, but will have at least two swing highs and two swing lows in price. Traders should be prepared to adjust the trendlines as needed with additional swings. Volume usually diminishes as the pattern develops. Buyers & sellers create this range-bound price action and eventually prices squeeze to an Apex. The closer to the apex price gets the odds for a breakdown of the immediate price range become more likely.

Traders can look to trade the Ascending Triangle in numerous similar methods regardless of market environment but with several nuances can ‘stack the deck’ which increases the risk-to-reward ratio for profits. One of the best Ascending Triangle performers statistically is the bearish continuation pattern seen in a downtrend.

The bearish continuation pattern has 3 phases:

1) Background: A Strong impulsive, thrusting action with a surge in volume & price establishes a clear picture of the controlling bearish trend direction. In our ascending triangle price pattern it is represented visually by a Pole. Deeper and more drama the better as the Pole is the Key to recognizing the potential for the continuation of the pattern. The Pole represents trend direction as well as its strength & often this pattern is initiated as a new breakdown in price from an established area & sellers are in control.

2) The second phase is a pause for consolidation of the action both in volume & price and is represented by the ascending triangle. As traders we like to see this phase very short in duration with only 2 or 3 swings while our price action is range bound maintaining the higher lows but the same highs shape and the volume is ‘resting’. The best breakouts occur at 50-75% of the triangle completion. Caution if the breakout is delayed until prices crowd into the apex as it is an indication of ‘balance’ or indecision between buyers & sellers.

3) The pattern confirms as a bearish continuation pattern if the action creates a new bearish breakdown with a surge again from the bears in both volume & price. The immediate lower support outlined by the ascending triangle is the area traders look to see confirm the breakdown. Typically the action will mimic the volatility & energy experienced with the Pole creation. Volume considerations aid in recognizing further potential for the pattern.

Options for Trading the Ascending Triangle as a bearish continuation pattern:

There are two methods of trading this pattern and it depends on your trading style.

Aggressive traders will enter short trades right around the upper resistance trendline once sufficient resistance has confirmed. The concept is that the trend is on your side & the bears are maintaining a ‘wall of resistance’ and squeezing prices with a higher level of support as evidenced by the slope of the ascending line.

This is a very accurate trade that usually has a great risk:reward ratio. Stop placement can be fairly tight right above resistance & can be adjusted downward accordingly. Note there is a ‘mid-line’ created using the apex as the measurement & traders can gauge success of the immediate swing based on this incremental value. When price approaches the lower horizontal support line you should gauge the momentum: if you see that the momentum is strong stick to the position. However, if you see that support prevails, close the trade & take your profits to maximize the reward.

The aggressive trading method can highly increase the profit potential of any triangle, as you can trade the same pattern several times & profit from the ranging swing movements inside the pattern. However, remember that as a trend continuation pattern traders want this consolidation triangle formation to be relatively brief. Two or 3 swings may turn into more with this triangle but the 50-75% formation concept aids trade consideration.

Conservative traders will enter a trade once the lower ascending support line has been broken &/or the new breakdown has confirmed.

False breakouts do happen and confirmation needed is always a traders’ choice. Several methods that apply here for either intrabar &/or close bar options offered in sequence: breakdown below support price, retrace to BD holds line, price clears breakdown swing low price, larger chart combination.

Stop placement considerations can be aggressively lowered after the breakdown of the price.

Measured Move Targets based on structure of Pole & the Bear Ascending Triangle

Aggressive with Momentum & Volume: duplication of the original move or trader choice measurement of the Pole:

• Apex or BreakDown price (minus) Pole measure = target
• Pole measure = (Pole Base price (minus) Pole Tip price)

Conservative:

• Apex or BreakDown price (minus) Ascending Triangle measure = target
• Ascending Triangle measure = (swing high price of triangle (minus) swing low price of triangle)

Examples Ascending Triangle as a bearish continuation pattern:

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Portugal Uncorks Bottle of EU Crisis Genie

by Mike "Mish" Shedlock

The Financial Times reports Portugal president’s call for national unity backfires

[President] Aníbal Cavaco Silva’s call for a “national salvation” agreement between the ruling coalition and the main opposition party, leading to early elections in June 2014, was intended to restore calm following a government crisis triggered by the resignation of two senior ministers.
But the president’s appeal for a cross-party deal in support of the country’s €78bn bailout programme prompted a fresh increase in bond yields on Thursday and hit share prices that had only just recovered from last week’s political turmoil.
“Portugal is in a deeper crisis than it was a week ago,” said Ricardo Santos, an analyst with BNP Paribas. “The president sought to ease volatility, but he has almost certainly increased it.”
Silva ruled out holding an immediate snap election, saying this would significantly increase the risk of Portugal needing a second bailout. But he called on the three parties to agree on holding an early ballot next June, a year ahead of schedule.
Agreeing to Mr Cavaco Silva’s proposal would require António José Seguro, the opposition PS leader, to support €4.7bn in planned spending cuts and the potential laying off of tens of thousands of state workers, measures that he vehemently rejected until now.
“It’s difficult to see how the president’s proposal can work given that the concessions involved could end the political careers of both the opposition leader and the prime minister,” said Mr Santos.
Portugal was plunged into crisis last week after Paulo Portas, leader of the junior coalition party, resigned as foreign minister less than 24 hours after Vítor Gaspar also quit as finance minister amid tensions caused by government austerity policies.

Portugal 10-Year Bond Yield

Multiple Crisis Genies Unleashed
The coalition in Portugal cannot last and Portugal is 100% certain to need another bailout.
With German elections coming up in September, politicians everywhere are scrambling to contain the "Crisis Genie" until after the election.
Financial Times writer Peter Wise says Last week’s protests in Portugal show it will not take much to uncork the botle of the ECB’s crisis genie.
I suggest more than one genie is already out of the bottle: the spy genie, the Italy genie, the Portugal genie, the EU Banking Proposal genie, etc.
Some genies are more powerful than others, but all will help AfD bring an end to the regime of chancellor Merkel in September. For related discussion, please see Germany Election Update: AfD Soars in Online Poll; Is Merkel Toast?

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JPM Beats Thanks To $1.4 Billion Reserve Release; Net Interest Margin Drops To Record Low; Mortgage Production Slides

by Tyler Durden

Cutting through the noise of JPM's earnings, here are the salient facts: the company beat the bottom line expectation of $1.45 with an $1.60 ex-DVA print. However, this number included the now traditional "puffery" benefit from loan loss reserve releases, specifically $950MM pretax ($0.15 EPS) from mortgage loan loss reserves and $550MM pretax ($0.09) from credit cards. Additionally, the company reserved a whopping $600 million for litigation, or about $0.09, and according to the firm this should be backed out from the bottom line. Of course, that assumes the litigation against JPM will not be an ongoing, non-onetime event. In other words, ex-releases, JPM misses, however it was right in line if one assumes the litigation reserve was indeed one-time. In summary, the firm had a total of $19.4 billion in loan loss reserves and the release of $1.4 billion was the biggest since Q3 2012.

The bottom line adjustment highlights are reflected below:

What is worse going forward was the slide in Mortgage Production pretax income which was $582mm, down a whopping $349mm YoY, "reflecting lower margins and higher expense, partially offset by higher volumes and lower repurchase losses." For those curious how the rate spike has impacted JPM, here it is: mortgage originations down 7% Q/Q, and firmwide it dropped to $52 billion.

But perhaps the worst news is that despite the dramatic spike up in yields at the end of the quarter, JPM reported a Net Interest Margin that in Q2 was the lowest ever! Dropping to just 1.05% on a market-based basis, the firm's defined NIM slid to 2.20%. One can see why the Fed is desperate to push the long end higher, however without the offseting bear flattening and without a collapse in stock prices: Jamie Dimon is making the least amount of cash on the curve arb ever. The firm's outlook: "Expect NIM relatively stable in the second half of 2013." So record low rates will continue?

Then looking at the firm's beating heart: it's trading desk, we find that Fixed Income Markets and Equity Markets revenue tumbled by $674MM and $44MM in Q2 from the previous quarter on plunging volumes, although trading revenues did rise by $0.8 billion from a year ago. Expenses rose by 8% to $5.7 billion "driven by higher compensation expense." At least someone is paying their bankers more.

Also notable in the slide above: average VaR plunged to $40MM from $75MM a year ago and just $62MM last quarter. It is unclear if this is due to the n-th consecutive firm revision of how it defines its VaR.

Finally, JPM's European exposure rose modestly from $12.3bn in Q1 to $14.1 bn, driven by a rise in Spanish exposure from $3.4bn to $5.2, offset by a drop in Italy exposure from $7.1bn to $5.8bn, and the balance of the PIIGS increasing from $1.8bn to $3.1bn. In the firm's words, net exposure increased due to roll-off of tranched index positions, resulting in a $4 billion increase in exposure.

Full presentation slidedeck:

JPM Earnings Q2

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Crumbling BRICs undermining sugar price prospects

by James Moore

Crumbling in some BRIC economies bodes ill for the outlook for sugar prices, posing "serious problems" to demand, yet underpinning Brazilian production prospects, a leading soft commodities commentator cautioned.

The swing in investor sentiment back towards Western countries from developing markets is a "particularly tough" pill for sugar markets to swallow, given that it is the likes of Asia which have supported consumption growth and therefore prices, leading soft commodities commentator Judith Ganes-Chase said.

"For years, consumption growth in sugar has come from developing nations rather than industrialised nations, where demand has been staid," Ms Ganes-Chase said.

However, "as investment in emerging markets is being reduced, more countries are at risk for a downturn after enjoying robust growth", she said, flagging in particular the importance of Brazil and China – two of the important "BRIC" developing market economics, with Russia and India.

"One only has to look at the headlines to see where sugar can run into some serious problems with Brazil, China, and others expecting demand to be cooled."

The comments follow disappointing trade data from China earlier this week, and ahead of GDP data due on Monday.

China has historically been a large sugar importer, although strong domestic beet and cane harvests have also questioned the extent to which it will tap markets, pushing up 2012-13 output by 13.5% to 13.07m tonnes, according to National Development and Reform Commission data on Friday.

'Could be a game changer'

For Brazil, the top sugar producer and exporter as well as a major consumer, for which economic growth is seen by some analysts falling below 2% in both 2013 and 2014, slower expansion bodes a particular threat to sugar demand given the country's reliance on cane-based ethanol for fuel.

"Previously, it would have been safe to assume that as the market dropped a greater portion of the Brazilian harvest would be utilised for ethanol," a switch which has been reflected in industry data.

"A downturn in the Brazil economy… could be a game changer as it implies that Brazilians will be driving their cars less and reducing their fuel use," and boosting the incentive to turn cane into sugar rather than ethanol.

Dollar vs real appeal

Leaner economic times may present a further inducement to making sugar, in their impact on weakening the real, which stands among its lowest levels against the dollar since 2009.

"Sugar gains an edge because of the increased attractiveness to get dollars for sugar exported versus payment for ethanol in the domestic market."

While the harvesting of the crop in the key Centre South region "is fairly advanced, there is still ample room for the remainder of the harvest to see an increase in the percentage share of sugar over ethanol", Ms Ganes-Chase, at J Ganes Consulting, said.

Surplus upgrades ahead?

The fresh market dynamics had reduced the chance of downgrades to estimates for the world production surplus in 2013-14, which Kingsman has pegged at 3.927m tonnes, and Rabobank at 3.77m tonnes.

"The sugar market should see a fourth consecutive season of production surpluses in 2013-14, but the size of the expected surplus was expected to be trimmed if consumption perked up from lower prices," Ms Ganes-Chase said.

"I don't see this happening now and therefore the actual surplus for the season ahead could be greater than currently priced into the market."

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New Look at US-China Trade

by Marc to Market

The US and China held the fifth round of the bilateral Strategic and Economic Dialogue talks this week.  While there are many issues that were discussed, trade, reportedly, figured prominently.  Yet both countries are likely using an antiquated framework. 

Specifically, with a new OECD-WTO data base, officials do not have to be satisfied any longer with just looking that the value of goods that cross national frontiers.  What is more important, given the increasingly globalized production, is the value-added.  Traditional trade figures are based on total value of the goods (services).  This made sense when production was generally national and finished goods were exported to meet foreign demand. 

We can be more discerning now.  Value-added is a key concept to truly understand trade flows.  Value-added can be calculated by adjusting the gross value at any stage of the production process for the value of the inputs. 

In a recent Economic Letter, the Dallas Fed drew on the new data base to shed fresh light on the US-China trade patterns.   In some ways, the research confirms what has long been suspected.  China engages in low value-added work at the latter stages of the production process.  The US does higher valued added work at earlier stages of the production process. The most recent data for this is 2005.  Then the value-added in China's gross output was 34% compared with 53% in the US and the OECD average (excluding the US and China) was 47%. 

What is true for overall output is reflected in the composition of trade flows.  More than three quarters of China's imports are intermediate goods.  About half US imports are intermediate goods and OECD average is near 60%.   Final goods account for only a quarter of China's imports and nearly 50% of US imports. 

This is also evident on the export side of the ledger.  Intermediate goods account for about 40% of China's exports compared with 55% in the US.  Final goods account for 60% of China's exports and 45% of US exports. 

The composition of the bilateral trade between the US-China is consistent with these broad themes.  Intermediate goods account for 70% of US exports to China,. while 75% of China's exports to the US are final goods.

It is in this context that the OECD/WTO data base on value-added should be understood.  On a value-added basis, the trade imbalance between the two largest economies in the world seems considerably smaller than conventional figures, which record the total value of a good at the last stage in the production process.  In 2009, the most recent data available, US imports from China were $89 bln small smaller in value-added terms than by the conventional measure.  US exports to China for about $26 bln smaller in value-added terms than by the conventional metric. 

This means that the value-added trade deficit was $63 bln less than the gross measures.  That would reduce the bilateral trade deficit by about a third to $126 bln from $189 bln.    That translates into 0.9% of US GDP rather than 1.4% using the conventional measures.     Moreover, the Dallas Fed notes that the gap between the conventional and value-added metric is growing as the value-added being done in China has fallen faster than in the US and most other countries.

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