Monday, July 22, 2013

The Detroit Syndrome

by Sanjeev Sanyal

SINGAPORE – When the city of Detroit filed for bankruptcy last week, it became the largest such filing in United States history. Detroit’s population has dropped from 1.8 million in 1950, when it was America’s fifth-largest city, to less than 700,000 today. Its industrial base lies shattered.

This illustration is by Jim Meehan and comes from <a href="http://www.newsart.com">NewsArt.com</a>, and is the property of the NewsArt organization and of its artist. Reproducing this image is a violation of copyright law.

Illustration by Jim Meehan

And yet we live in a world where cities have never had it so good. More than half of the world’s population is urban, for the first time in history, and urban hubs generate an estimated 80% of global GDP. These proportions will rise even higher as emerging-market countries urbanize rapidly. So, what can the world learn from Detroit’s plight?

As recently as the 1990’s, many experts were suggesting that technology would make cities irrelevant. It was believed that the Internet and mobile communications, then infant technologies, would make it unnecessary for people to live in crowded and expensive urban hubs. Instead, cities like New York and London have experienced sharp increases in population since 1990, after decades of decline.

One factor that has helped cities is the nature of twenty-first century life. Previously, life in developed countries was based on daily routines: people went to work in offices and factories, returned home to eat dinner with their families, watched their favorite television programs, went to sleep, and repeated the cycle when they awoke.

Such regular cycles no longer apply to most peoples’ lives. In the course of a work day, people mix and match many activities – they may work at a desk, but they may also meet a friend for lunch, go to the gym, do chores, travel on business, shop online, and so on.

Similarly, time at home is no longer clearly demarcated, with people working online or participating in conference calls even as they manage their family life. We have discovered that this multi-tasking life is best done in cities, which concentrate a multiplicity of hard amenities – airports, shops, schools, parks, and sports facilities – as well as soft amenities like clubs, bars, and restaurants.

Another factor is that cities have increased in importance as hubs for innovation and creativity. Until the nineteenth century, innovation was carried out mostly by generalists and tinkerers, which meant that the accumulation of new knowledge was slow, but that its diffusion across different fields was rapid. In the twentieth century, knowledge creation became the job of specialists, which accelerated knowledge creation but retarded inter-disciplinary application.

But recent studies have shown that this source of innovation is rapidly decelerating (the productivity of an American research worker may now be less than 15% of a similar researcher in 1950). Instead, innovation is increasingly based on mixing and matching knowledge from different specializations. Certain cities are ideally suited for this, because they concentrate different kinds of human capital and encourage random interactions between people with different knowledge and skills.

The problem with this post-industrial urban model is that it strongly favors generalist cities that can cluster different kinds of soft and hard amenities and human capital. Indeed, the growth dynamic can be so strong for some successful cities that they can hollow out smaller rivals (for example, London vis-à-vis the cities of northern England).

Some specialist cities could also do well in this world. But, as Detroit, with its long dependence on the automotive industry, demonstrates, cities that are dependent on a single industry or on a temporary location advantage may fare extremely poorly.

All of this has important implications for emerging economies. As it transformed itself into the “factory of the world,” the share of China’s urban population jumped from 26.4% in 1990 to around 53% today. The big, cosmopolitan cities of Beijing and Shanghai have grown dramatically, but the bulk of the urban migration has been to cookie-cutter small and medium-size industrial towns that have mushroomed over the last decade. By clustering industrial infrastructure and using the hukou system of city-specific residency permits, the authorities have been able to control the process surprisingly well.

This process of urban growth, however, is about to unravel. As China shifts its economic model away from heavy infrastructure investment and bulk manufacturing, many of these small industrial cities will lose their core industry. This will happen at a time when the country’s skewed demographics causes the workforce to shrink and the flow of migration from rural areas to cities to slow (the rural population now disproportionately comprises the elderly).

Meanwhile, the post-industrial attractions of cities like Shanghai and Beijing will attract the more talented and better-educated children of today’s industrial workers. Unlike rural migrants heading for industrial jobs, it will be much more difficult to guide educated and creative professionals using the hukou system. The boom in the successful cities, therefore, will hollow out human capital from less attractive industrial hubs, which will then fall into a vicious cycle of decay and falling productivity.

Stories like Detroit’s have played out several times in developed countries during the last half-century. And, as the fate of Mexico’s northern towns suggests, emerging economies are not immune from this process.

That is why China needs to prepare for this moment. Rather than building ever more cookie-cutter industrial towns, China needs to refit and upgrade its existing cities. As its population begins to shrink, it may even be worthwhile to shut down unviable cities and consolidate. Detroit’s fate should serve as a warning, not only for China, but for the next generation of urbanizing countries (for example, India) as well.

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Ahead Of Tomorrow's Hearing On Goldman And JPM's Commodity Cartel

by Tyler Durden

Back in June 2011 we first reported how "Goldman, JP Morgan Have Now Become A Commodity Cartel As They Slowly Recreate De Beers' Diamond Monopoly" in an article that explained, with great detail, how Goldman et al engage in artificial commodity traffic bottlenecking (thanks to owning all the key choke points in the commodity logistics chain) in order to generate higher end prices, rental income and numerous additional top and bottom-line externalities and have become the defacto commodity warehouse monopolists. Specifically, we compared this activity to similar cartelling practices used by other vertically integrated commodity cartels such as De Beers: "While the obvious purpose of "warehousing" is nothing short of artificially bottlenecking primary supply, these same warehouses have no problem with acquiring all the product created by primary producers in real time, and not releasing it into general circulation: once again, a tactic used by De Beers for decades to keep the price of diamonds artificially high."

Over the weekend, with a 25 month delay, the NYT "discovered" just this, reporting that the abovementioned practice was nothing but "pure gold" to the banks. It sure is, and will continue to be. And while we are happy that the mainstream media finally woke up to this practice which had been known to our readers for over two years, the question is why now? The answer is simple - tomorrow, July 23, the Senate Committee on Banking will hold a hearing titled "Should Banks Control Power Plants, Warehouses, And Oil Refiners."

While congratulations are also due to the Senate for finally waking up to this monopolistic travesty conducted by the big banks, we can only assume that this is due to various key non-bank industry participants (such as MillerCoors) crying foul so much that even the Fed is now involved and is supposedly reviewing its own decision from 2003 that allowed this activity in the first place.

Bloomberg explains:

When the Federal Reserve gave JPMorgan (JPM) Chase & Co. approval in 2005 for hands-on involvement in commodity markets, it prohibited the bank from expanding into the storage business because of the risk.  Five years later, JPMorgan bought one of the world’s biggest metal warehouse companies.

While the Fed has never explained why it let that happen, the central bank announced July 19 that it’s reviewing a 2003 precedent that let deposit-taking banks trade physical commodities. Reversing that policy would mark the Fed’s biggest ejection of banks from a market since Congress lifted the Depression-era law against them running securities firms in 1999.

“The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” said Barbara Hagenbaugh, a Fed spokeswoman. She declined to elaborate.

“When Wall Street banks control the supply of both commodities and financial products, there’s a potential for anti-competitive behavior and manipulation,” Brown said in an e-mailed statement. Goldman Sachs, Morgan Stanley and JPMorgan are the biggest Wall Street players in physical commodities.

Of course, when one is a monopoly, the revenues follow easily. The trick, of course, is to keep Congress very much unaware of said monopoly and let the good times roll.

The 10 largest banks generated about $6 billion in revenue from commodities, including dealings in physical materials as well as related financial products, according to a Feb. 15 report from analytics company Coalition. Goldman Sachs ranked No. 1, followed by JPMorgan.

While banks generally don’t specify their earnings from physical materials, Goldman Sachs wrote in a quarterly financial report that it held $7.7 billion of commodities at fair value as of March 31. Morgan Stanley had $6.7 billion.

On June 27, four Democratic members of Congress wrote a letter asking Fed Chairman Ben S. Bernanke, among other things, how Fed examiners would account for possible bank runs caused by a bank-owned tanker spilling oil, and how the Fed would resolve a systemically important financial institution’s commodities activities if it were to collapse.

Just because questions like these finally had to be asked, one has to laugh. One person not laughing, tough, is Ben Bernanke - the man whose Fed allowed bank commodity cartellization to take place originally. He is certainly not laughing now that he may be forced to undo this permission, in the process impairing banks to the tune of billions in revenue: as a reminder, the Fed works purely to benefit America's banks and to provide them with whatever top-line amenities they need and are confident they can pass by under the noses of dumb congressmen. But at least the Fed promises it can "supervise" all these TBTF banks. Or can it?

Now, “it is virtually impossible to glean even a broad overall picture of Goldman Sachs’s, Morgan Stanley’s, or JPMorgan’s physical commodities and energy activities from their public filings with the Securities and Exchange Commission and federal bank regulators,” Saule T. Omarova, a University of North Carolina-Chapel Hill law professor, wrote in a November 2012 academic paper, “Merchants of Wall Street: Banking, Commerce and Commodities.”

The added complexity makes the financial system less stable and more difficult to supervise, she said in an interview.

“It stretches regulatory capacity beyond its limits,” said Omarova, who is slated to be a witness at the Senate hearing. “No regulator in the financial world can realistically, effectively manage all the risks of an enterprise of financial activities, but also the marketing of gas, oil, electricity and metals. How can one banking regulator develop the expertise to know what’s going on?”

Now that the entire world is looking, and not just a select subset of Zero Hedge readers, the full extend of Goldman's monopoly becomes apparent:

Goldman Sachs owns coal mines in Colombia, a stake in the railroad that transports the coal to port, part of an oil field off the coast of Angola and one of the largest metals warehouse networks in the world, among other investments. Morgan Stanley’s involvement includes Denver-based TransMontaigne Inc. (TLP), a petroleum and chemical transportation and storage company, and Heidmar Inc., based in Norwalk, Connecticut, which manages more than 100 oil tankers, according to its website.

Mark Lake, a spokesman for New York-based Morgan Stanley, referred to company regulatory filings that said the bank didn’t expect to have to divest any of its activities after the grace period ends. He declined to elaborate or to comment on the Fed’s announced rule review.

Brian Marchiony, a spokesman for JPMorgan, also declined to comment on the review, as did Michael DuVally, a Goldman Sachs spokesman.

...

In February 2010, Goldman Sachs bought Romulus, Michigan-based Metro International Trade Services LLC, which as of July 11 operates 34 out of 39 storage facilities licensed by the London Metal Exchange in the Detroit area, according to LME data. Since then, aluminum stockpiles in Detroit-area warehouses surged 66 percent and now account for 80 percent of U.S. aluminum inventory monitored by the LME and 27 percent of total LME aluminum stockpiles, exchange data from July 18 show.

Traders employed by the bank can steer metal owned by others into Metro facilities, creating a stockpile, said Robert Bernstein, an attorney with Eaton & Van Winkle LLC in New York. He represents consumers who have complained to the LME about what they call artificial shortages of the metal.

“The warehouse companies, which store both LME and non-LME metals, do not own metal in their facilities, but merely store it on behalf of the ultimate owners,” said DuVally, the Goldman Sachs spokesman. “In fact, LME warehouses are actually prohibited from trading all LME products.”

Right - Goldman is doing humanity a favor and what not, just like when it was shorting RMBS, when Goldman was merely "making markets." Or unmarkets as the case may be. In the meantime, aluminum prices are surging, as we said would happen back in June 2011:

Buyers have to pay premiums over the LME benchmark prices even with a glut of aluminum being produced. Premiums in the U.S. surged to a record 12 cents to 13 cents a pound in June, almost doubling from 6.5 cents in summer 2010, according to the most recent data available from Austin, Texas-based researcher Harbor Intelligence.

Warehouses are creating logjams, said Chris Thorne, a Beer Institute spokesman.

Naturally, the Vampire Squid is not alone: JPM, whose commodity group is headed by Blythe Masters currently under investigation by FERC with a slap on the wrist settlement pending, is most certainly involved as well.

JPMorgan, the biggest U.S. bank, inherited electricity sales arrangements in California and the Midwestern U.S. in 2008 when it bought failing investment bank Bear Stearns Cos. Its February 2010 purchase of RBS Sempra Commodities LLP’s worldwide oil and metal investments and European power and gas assets was also a distressed transaction. The European Union ordered Royal Bank of Scotland Group Plc to sell its controlling stake in the firm after a taxpayer bailout.

In short: just like the repeal of Glass Steagall allowed banks to mix deposit collecting and risk-taking divisions, so the Fed's landmark 2003 decision allowed banks to commingle financial and physical commodities. And while the US government, and broader public, seem largely ignorant and without a care if they end up overpaying billions more to Goldman's and JPM's employees, one country where commodities are exceptionally fragmented in their use as both a financial (i.e. paper) and physical commodity is China - maybe if the Fed will not move, then it will be up to China to punish the three firms which are set to unleash the same scheme described above with copper as they have with aluminum. Because one (or three in this case: Goldman, JPM and BlackRock) doesn't amass 80% of the world's copper "on behalf of investors" for non-profit reasons.

While we don't expect anything new to develop here, nor anywhere else, until the entire system comes crashing down and forces a fundamental overhaul of modern finance at the grassroots level, tomorrow's hearing will be webcast live on Zero Hedge and will have the following witnesses.

Ms. Saule Omarova
Associate Professor of Law
University of North Carolina at Chapel Hill School of Law

Mr. Joshua Rosner
Managing Director
Graham Fisher & Company

Mr. Timothy Weiner
Global Risk Manager
Commodities/Metals, MillerCoors LLC

Mr. Randall D. Guynn
Head of Financial Institutions Group

We look forward to seeing how the Chairman, or his successor, will deflect this one.

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Gold attempting to jump 9-year resistance line!

by Chris Kimble

CLICK ON CHART TO ENLARGE

Gold broke below a 9-year support line of late and is now attempting to jump back above this key line as well as another falling resistance line at the same time at (3) in the above chart.

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A Crossover to "Value"

by MarktAntropology

After going on sale for a third and final time at the end of June, the precious metals miners appear to be making a major crossover today, both the literal and figurative sort - to value. After languishing for the better part of two years in the performance basement, the previously described "value traps" (see Here) have opened above their 50 day SMA - a major accomplishment considering the last time was at the end of last October. 

Click to enlarge image

All things considered (see Here) - we continue to like the sector going forward.

See the original article >>

Bull market confirmed through 2013 by 23 years of rallies

By Whitney Kisling and Alex Barinka

The broadest rally in U.S. stocks since at least 1990 has lifted shares of everything from the smallest companies to the biggest banks, signaling the bull market for America’s largest corporations will last at least until the end of the year, if history is a guide.

The Standard & Poor’s 500 Index’s advance to a record last week coincided with highs in the Russell 2000 Index of smaller companies, the Dow Jones Transportation Index, the S&P 500 Financials Index and a gauge of economically sensitive equities overseen by Morgan Stanley. Since 1990, the S&P 500 has gained for six months on average after those measures peaked, according to data compiled by Bloomberg.

While bears say the breadth shows indiscriminate buying just as profit growth slows and the Federal Reserve prepares to curtail stimulus, gains across stock measures have proved an accurate forecaster of performance. In four market tops during the last 23 years, small-cap stocks and the cyclical gauge never peaked after the S&P 500.

“It is pretty broad slice of America you are looking at,” John Manley, who helps oversee $222.7 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a July 17 phone interview. “What that is saying is that you have an economy that is improving somewhat, but the market has not been hyper-extended and the Fed is still accommodative. What’s not to like about that?”

Rising Streak

U.S. stocks rose for a fourth week, pushing the S&P 500 up 0.7 percent to 1,692.09 and bringing this year’s gains to 19 percent, after Fed Chairman Ben S. Bernanke said there was no fixed schedule for ending the program of bond purchases known as quantitative easing. Delta Air Lines Inc. and Morgan Stanley led transport and financial shares, climbing at least 5 percent. The S&P 500 gained 0.1 percent to 1,693.51 at 9:39 a.m. New York time today.

More than $1 trillion has been restored to share values as markets recovered after Bernanke’s warning that stimulus may slow sent the S&P 500 down as much as 5.8 percent between May 21 and June 24. The index is up 150 percent since March 2009 amid a doubling of corporate earnings.

Gains in small-caps, banks, transportation companies and cyclical stocks suggest the rally isn’t over, according to Doug Ramsey, the Minneapolis-based chief investment officer of Leuthold Group LLC, whose firm oversees $1.7 billion and recommended buying equities in March 2009.

Biggest Bulls

During the four biggest bull markets of the last quarter century, peaks in those indexes have come before the S&P 500 reached its highest level almost 90 percent of the time, data compiled by Bloomberg show. The benchmark gauge has rallied another 7 percent after they began declines, on average.

“We just have to respect the uniformity of the market’s action,” Ramsey said in a July 16 phone interview. “Until it gets more disjointed, the odds are for even higher highs.”

The S&P 500’s rally from January to June was the best first half since 1998. A total of 460 stocks in the index are up this year, the most since at least 1990, and more than 90 percent traded above their 200-day rolling averages last week, data compiled by Bloomberg show. That compares with 62 percent over the past 23 years.

That’s a reason for caution, said Leo Grohowski, chief investment officer of New York-based BNY Mellon Wealth Management, which oversees $188 billion. Increases in stock market breadth will work against bulls should earnings growth slow and investors become convinced all at once that Bernanke will curtail stimulus as the economy improves.

Profit Growth

“I would be careful about assuming the past as a reliable indicator for the future mainly because the interest rate support for the market is not going to be as strong,” he said in a July 17 telephone interview. “Actual news of economic improvement will increase concern about the Fed removing the punchbowl of liquidity.”

Reports showing U.S. economic growth is picking up while it slows elsewhere have given American equities the third-best returns in the developed world this year, behind Japan and Ireland. American employers added an average of 196,000 jobs in each of the last three months, topping economists’ forecasts. At the same time, China’s gross domestic product grew 7.5 percent in the second quarter from a year earlier and is at risk of the weakest expansion in 23 years.

Profits for the S&P 500 probably rose 2.4 percent in the second quarter from a year ago, according to more than 11,000 analyst estimates compiled by Bloomberg. That compares with an average of 4.3 percent in the last five earnings periods and 28 percent in 2010 and 2011. About 73 percent of companies have exceeded forecasts this month, matching last quarter.

Equity Valuation

Average U.S. price-earnings ratios have expanded by 15 percent this year. At 16.3, the S&P 500 multiple is near the highest since the middle of 2010 and compares to 17.5 when the last bull market ended in October 2007.

The simultaneous rallies are “coincidence” and valuations suggest past patterns are unlikely to be repeated, Uri Landesman, president of New York-based hedge fund Platinum Partners, who helps manage about $1.2 billion, said by phone July 18. “The market is priced for perfection and there is hardly perfection in the world,” he said.

The Russell 2000 Index of companies with an average market value of $901 million set records this month, extending its gain from March 2009 to 206 percent, according to data compiled by Bloomberg. Banks in the S&P 500 have risen 27 percent this year to the highest levels since 2008. The Morgan Stanley Cyclical Index of 30 companies, including Whirlpool Corp. and Hewlett- Packard Co., reached a record on July 19.

Sharing Services

The broadest rally in U.S. stocks since at least 1990 has lifted shares of everything from the smallest companies to the biggest banks, signaling the bull market for America’s largest corporations will last at least until the end of the year, if history is a guide.

The Standard & Poor’s 500 Index’s advance to a record last week coincided with highs in the Russell 2000 Index of smaller companies, the Dow Jones Transportation Index, the S&P 500 Financials Index and a gauge of economically sensitive equities overseen by Morgan Stanley. Since 1990, the S&P 500 has gained for six months on average after those measures peaked, according to data compiled by Bloomberg.

While bears say the breadth shows indiscriminate buying just as profit growth slows and the Federal Reserve prepares to curtail stimulus, gains across stock measures have proved an accurate forecaster of performance. In four market tops during the last 23 years, small-cap stocks and the cyclical gauge never peaked after the S&P 500.

“It is pretty broad slice of America you are looking at,” John Manley, who helps oversee $222.7 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a July 17 phone interview. “What that is saying is that you have an economy that is improving somewhat, but the market has not been hyper-extended and the Fed is still accommodative. What’s not to like about that?”

Rising Streak

U.S. stocks rose for a fourth week, pushing the S&P 500 up 0.7 percent to 1,692.09 and bringing this year’s gains to 19 percent, after Fed Chairman Ben S. Bernanke said there was no fixed schedule for ending the program of bond purchases known as quantitative easing. Delta Air Lines Inc. and Morgan Stanley led transport and financial shares, climbing at least 5 percent. The S&P 500 gained 0.1 percent to 1,693.51 at 9:39 a.m. New York time today.

More than $1 trillion has been restored to share values as markets recovered after Bernanke’s warning that stimulus may slow sent the S&P 500 down as much as 5.8 percent between May 21 and June 24. The index is up 150 percent since March 2009 amid a doubling of corporate earnings.

Gains in small-caps, banks, transportation companies and cyclical stocks suggest the rally isn’t over, according to Doug Ramsey, the Minneapolis-based chief investment officer of Leuthold Group LLC, whose firm oversees $1.7 billion and recommended buying equities in March 2009.

Biggest Bulls

During the four biggest bull markets of the last quarter century, peaks in those indexes have come before the S&P 500 reached its highest level almost 90 percent of the time, data compiled by Bloomberg show. The benchmark gauge has rallied another 7 percent after they began declines, on average.

“We just have to respect the uniformity of the market’s action,” Ramsey said in a July 16 phone interview. “Until it gets more disjointed, the odds are for even higher highs.”

The S&P 500’s rally from January to June was the best first half since 1998. A total of 460 stocks in the index are up this year, the most since at least 1990, and more than 90 percent traded above their 200-day rolling averages last week, data compiled by Bloomberg show. That compares with 62 percent over the past 23 years.

That’s a reason for caution, said Leo Grohowski, chief investment officer of New York-based BNY Mellon Wealth Management, which oversees $188 billion. Increases in stock market breadth will work against bulls should earnings growth slow and investors become convinced all at once that Bernanke will curtail stimulus as the economy improves.

Profit Growth

“I would be careful about assuming the past as a reliable indicator for the future mainly because the interest rate support for the market is not going to be as strong,” he said in a July 17 telephone interview. “Actual news of economic improvement will increase concern about the Fed removing the punchbowl of liquidity.”

Reports showing U.S. economic growth is picking up while it slows elsewhere have given American equities the third-best returns in the developed world this year, behind Japan and Ireland. American employers added an average of 196,000 jobs in each of the last three months, topping economists’ forecasts. At the same time, China’s gross domestic product grew 7.5 percent in the second quarter from a year earlier and is at risk of the weakest expansion in 23 years.

Profits for the S&P 500 probably rose 2.4 percent in the second quarter from a year ago, according to more than 11,000 analyst estimates compiled by Bloomberg. That compares with an average of 4.3 percent in the last five earnings periods and 28 percent in 2010 and 2011. About 73 percent of companies have exceeded forecasts this month, matching last quarter.

Equity Valuation

Average U.S. price-earnings ratios have expanded by 15 percent this year. At 16.3, the S&P 500 multiple is near the highest since the middle of 2010 and compares to 17.5 when the last bull market ended in October 2007.

The simultaneous rallies are “coincidence” and valuations suggest past patterns are unlikely to be repeated, Uri Landesman, president of New York-based hedge fund Platinum Partners, who helps manage about $1.2 billion, said by phone July 18. “The market is priced for perfection and there is hardly perfection in the world,” he said.

The Russell 2000 Index of companies with an average market value of $901 million set records this month, extending its gain from March 2009 to 206 percent, according to data compiled by Bloomberg. Banks in the S&P 500 have risen 27 percent this year to the highest levels since 2008. The Morgan Stanley Cyclical Index of 30 companies, including Whirlpool Corp. and Hewlett- Packard Co., reached a record on July 19.

Indexes Peak

All three indexes and transports peaked within 35 days of each other in 1989. The S&P 500 went on to gain about 7 percent in the next 10 months. In July 2007, the four groups were already beginning to slump and the S&P 500 rallied the next three months to hit an all-time high 1,565.15 on Oct. 9.

In 1999, the benchmark gauge advanced about 15 percent in the 11 months after cyclicals, banks and the measure of shipping companies reached a high.

Increases by the measures have foretold economic expansion in the past. Small-caps surged 39 percent from April to October 1997 and went on to set a record in April 1998. U.S. GDP grew 4.5 percent in 1997, the fastest since 1984, and climbed 4.8 percent by 1999, data compiled by Bloomberg show.

Wharton Learning

“It is very typical, almost prototypical, of a classic early-stage recovery,” Rich Weiss, the Mountain View, California-based senior money manager for American Century Investment who helps oversee $130 billion, said in a July 17 phone interview. “It is what I learned at Wharton 30-something years ago, and it still holds true today. Those are the classic early-cycle sectors and indicators.”

Earnings for financial firms, the second-biggest group in the S&P 500 after technology shares, increased 26 percent last quarter, more than any other industry, analyst estimates show. Profits are expected to climb 14 percent for cyclicals in 2014, about 3 percentage points more than the full market.

The median stock in the Russell 2000 is up 8 percent in the last 30 days, according to data compiled by Bloomberg. Alliance Fiber Optic Products Inc., the maker of communications parts, gained 141 percent this year. After beating earnings estimates for four consecutive quarters, the Sunnyvale, California-based company will report that profits more than doubled last quarter, according to research firm B. Riley & Co.

Delta Earnings

Transportation stocks, projected to boost profits more than three times as much as the S&P 500 in 2013, climbed 24 percent so far this year and reached a record July 19. Delta, the second-largest carrier by passenger traffic, rose 71 percent as the Atlanta-based company beat profit estimates. Delta should increase earnings 46 percent for the full year, according to analyst forecasts.

Union Pacific Corp., the largest U.S. railroad, rose 30 percent this year, 11 percentage points more than the S&P 500. The Omaha, Nebraska-based company has posted 14 consecutive quarters of earnings growth. Annual per-share earnings should rise 15 percent a year in 2013 and 2014, estimates show.

“All of these things tie in together,” Phil Orlando, New York-based chief equity strategist at Federated Investors who helps manage $380 billion, said in a July 17 phone interview. “Because the market is a forward-looking discounting mechanism looking out a couple to three quarters, this tells us that this economic and stock-market rally would improve.”

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Developing Gold Bottom: A Closer Look At a Short Term Excess of Power

by Jesse

"The banks have essentially been told by the Federal Reserve they're allowed a certain number of sins. Just not as many as there used to be."
Brad Hintz, Wall Street Reshapes Commodities Market to Fend Off Regulation
"The severity of the Russian winter has been greatly exaggerated."
Napoleon Bonaparte

Here is a closer look at the gold bottom that everyone and their brother was rushing to call last week, so they could claim prescience. 
As a reminder this is an option expiration week for the precious metals on the COMEX, and next week begins the August delivery period.
I have also included an update to the weekly silver chart, for inquiring minds who wish to know.   Silver is following gold on this upsurge.  A confirmation of the rally by silver is important.  If silver confirms the breakout, it will most likely gather significant momentum as its volatility engages the short squeeze.  But the physical silver supply situation is not as compelling as gold has been, although the seeds were sown when the pricing started to curtail mining activity more significantly.
Banks who take funds and guarantees from the Fed at a subsidy have absolutely no business trading the markets for their own profit without significant restraints and transparency, if at all.   The reasons for the prohibitions of Glass-Steagall should be apparent, once again, to all but the most craven servants of big money and the excesses of power.
As I have said several times over the last several weeks, every time that the COMEX dealer inventory has fallen to record lows like this, it has marked an intermediate trend change that in retrospect proved to be significant.
The drawing down of physical inventory available for delivery is one of the surest signs of a price manipulation gone too far.
And for the first time in this waterfall decline since the German people had the temerity to ask for the return of their national gold from the NY Fed, we see a legitimate chart formation that could mark a significant bottom in price.
Note the 'slanting W' which is a term I coined some years ago for a certain type of bottom in a price decline.  The most important feature was the successful retest of support at 1280, and the subsequent breakout above the top of the W today.
We could see a retest of support or two, and there is the more difficult resistance to be encountered from 1340 to 1360, which also includes gold's 50 day moving average.  This is an area of prior support where a potential double bottom failed in the face of a relentless paper selling attack some time ago. I suspect that while it achieved it's purpose, it was 'a bridge too far.'
To put it more simply, taking gold below 1340 was a terrible strategic error, most likely done with nothing but short term greed in mind.   
It may even mark the beginning of the decline and fall of the famed mistress of Wall Street derivatives and commodities manipulation, one way or another.
Sometimes there is no greater justice than when the powerful get their own way. They tend to do foolish things like engaging in a protracted winter war without arranging for adequate supplies, assuming that by their actions the supplies will become available.
The measuring objective of this particular chart formation is about 1450 or so.  There will be additional macro formations to look at on the chart which we will discuss as they develop further.
There is little doubt that the market mischief makers may have another go or two at this down the road.  It will be interesting to see how far their arrogance takes them.   
Of paramount importance is the physical supply.  The damage done to the real market structure for gold by this paper exercise should not be underestimated.   There are great things occurring, in quiet and largely unmarked, in the global markets. 

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What Ben Bernanke Is Really Saying

By: Raul_I_Meijer

Ever wonder what Bernanke is saying? Well, it boils down to this: at the same time that Jimmy Carter says the US doesn't have a functioning democracy, Ben Bernanke says the US doesn't have a functioning economy.

Unfortunately, people understand what Carter says, though they may not agree with him, but they do not understand what Bernanke says, and that has nothing to do with agreeing with him or not. Moe likely it has something to do with the illusionary oracle qualities once attributed to his predecessor Alan Greenspan, whenever no-one had a clue what he was saying. In reality, Ben Bernanke will turn out to be the biggest scourge on American society since the same Alan Greenspan, but that's not how he's seen; instead, just like Greenspan, he's idolized. What's wrong with this picture is that Bernanke's words and actions are interpreted in the press exclusively by people who live in the part of society that stands to profit from them, let's call it "the financial world". That they are but a very small part of society easily gets lost in translation.

Greenspan was and still is mostly regarded as a miracle worker of super-human intelligence, even though he ran the US straight into the recession/depression/crisis we've now been witnessing since about the day when Bernanke took over the Fed, February 1 2006. Greenspan set the American economy firmly on the road to ruin through his support of the Glass-Steagall repeal and various tax-cuts, as well as his insistence that the newly blossoming derivatives trade needed little or no regulation. Certainly in hindsight, it should be obvious that Alan Greenspan served the interests of Wall Street, not Main Street.

All Ben Bernanke has done since succeeding the Oracle is continue where the former left off. Not that you would know it from the picture the media paint of him. Or the president, for that matter. Just about everyone agrees that he saved the US from something like a Great Recession II. In reality, what Bernanke has done over the past 6.5 years is being a prominent player in aiding and abetting Wall Street banks in hiding their losses through the violation of accounting standards, declaring them Too-Big-To-Fail, and then handing them trillions of dollars in public funds, most recently through QE programs, thus enabling them, the very same banks that would no longer exist without public funds, to once again play the casinos and come up with near record profits and bonuses.

This is the great little scheme that is presented to you through the media as "saving the US economy". It has done no such thing. It has been, and still is, enormously harmful to the economy. But as long as you continue to believe that what's good for Wall Street is also good for Main Street, the trick will continue to be played on you; Ben Bernanke is giving free money (well, actually, credit) away to those whose interests he represents, the banks, and taking it from those he doesn't, you. What Bernanke has saved is bankers' bonuses, not the economy. And if there is a direct correlation between the two, it's not the one you're being tempted to think it is. Which is how you should interpret Bernanke's insistence before Congress on July 17 that "We're very focused on Main Street": it may be true, but not in the way he wants you to believe it is.

Here's how Bernanke said the US doesn't have a functioning economy: by choosing to continue QE, he would reveal how weak the US financial system is. He already has, obviously, first by starting up QE in the first place, and again by his recent backpedaling on the conditions for tapering. The worst wet dream of the big banks is that they wouldn't get their black jack chips for free anymore, and they manage to convince everyone that the real economy would go down if they can no longer play. Regardless of the details: if it needs free money, the financial system can't stand on its own two legs.

By choosing to halt QE, on the other hand, Bernanke would reveal how weak the financial system is just as much. The slight rise in available credit that has allowed Americans to add yet more debt towards home and automobile purchases, giving the economy a fleetingly rosy glow in the process, would be over in a heartbeat. The banks would sit on their QE free excess reserve giveaways parked at the Fed even more than they already do. And then use it as security for more leveraged high-risk wagers. That's where the money is, not in consumer loans. Don't worry, says Ben, we'll keep interest rates low for the foreseeable future. Hossanah, sings the entire choir. But interest rates for whom? Only the big banks, that's for whom. Rates on the street, not so much: he has no control over those.

Here's an example of Bernanke's effect on Main Street: debt has been rising, not falling, since debt plunged the markets into that deep dark pit. A graph I picked up here at Zero Hedge:

The US may not look like the worst horse in the slaughterhouse, but in absolute numbers it probably is. Debt has risen by some 40% of GDP, and that does not yet include financial corporations and the Fed.

Is the new and additional debt at least put to good use for American society? The answer is a resounding "no". Just take a look at the diminishing productivity of debt in the US. Which, as is evident from these two graphs, will soon turn into negative territory, if it isn't already there.

The huge amounts of debt the Fed (and government) policies are adding will result in hardly any GDP growth. What does seem to be there in growth or recovery, moreover, comes from individuals taking on additional debt for home and automobile purchases. Bernanke, even if he would be trying to help Main Street, would be pushing on a string regardless. And I have no qualms about suggesting that he knows all this, which leads to one possible conclusion only: he is not trying. If he were, he'd adopt totally different policies. QE is not helping Main Street; it's killing it. Not today perhaps, but we should broaden our view beyond today, and consider what happens tomorrow.

Here's another example of how Bernanke is killing Main Street, courtesy of Chris Turner at Zero Hedge:

Savers And The 'Real' $10.8 Trillion Cost Of ZIRP

The good news behind the bottom 85% of close-to-retiree status Baby Boomers that participate in the “markets” via sub $50,000 retirement money is that at some point, the voters might actually get smart and get mad at how much money has been siphoned from them.  Consult the chart below to see a historical relationship between total savings and amount of interest income earned on the savings.

Note that prior to 2001, as savings increased (blue line), interest income received increased (red line) proportionally.  However, after 2001, the interest earned stopped increasing.  The green line shows the effective interest paid on interest bearing accounts.

Scaling into the shaded area representing 1986 to present, the following chart depicts the actual Fed Funds rate determined by FOMC.

As savings increased when Fed Funds rate remained around 5%, interest income continued to rise.  However, post 2001, the interest income received stopped growing at the same rate.  With the exception of 2005 to 2008 when rates went back to “normal” in the 5% range – the interest income earned has remained stable at just under 1 trillion (Ben Bernanke is so smart).

Let’s apply some thought experiments and make a couple calculations – what would happen if the FOMC were removed and the Fed Funds rate “floated?”  Using average historical rates from the 1920’s for the 10 year note– the mean rate would sit around 5.82%.  With a floating Fed Funds rate, banks would be competing for money and providing responsible savers with some interest income.  Voila, a calculation is borne:

By calculating the estimated interest income from historical ratios (orange shaded area), we can see that as of July 2013, approximate interest income would be just over 3 trillion (1/5th of GDP) on savings of 6.8 trillion (using the left scale).  Whereas the actual interest income reported by NIPA remained at 1.1 Trillion, the difference in interest received and lost interest equals roughly 2 Trillion.  Remember, this is interest income to SAVERS forever lost since 2001.  By aggregating the entire shaded orange area, SAVERS have missed out on a whopping 10.8 Trillion in earned interest usage.

The final chart above makes a loud and clear statement toward the beneficiaries of the low interest rate environment.

"Very focused on Main Street" indeed. It's where (through QE) newly found and fangled bank profits come from. As per the very first - Change in Debt - graph, household debt has gone down (though that's largely due to falling real estate prices, in other words, a double edged coin), but so have savings. And not a little bit either. Americans lost $10.8 trillion. And counting.

So how does the Oracle 2.0 explain it all? From Bloomberg, July 10:

Bernanke Supports Continuing Stimulus Amid Debate Over QE

"Highly accommodative monetary policy for the foreseeable future is what's needed in the U.S. economy," Bernanke said yesterday in response to a question after a speech in Cambridge, Massachusetts.

The numbers don't add up to that. If it's what's needed for the economy, that economy is in very bad shape, and has been for a long time despite the same highly accommodative monetary policy. If the economy is the goal, it makes no sense to keep going or even double down. What Bernanke's saying he's aiming for is not what's needed for the economy, but for the financial system.

........ the minutes showed many Fed officials wanted to see more signs employment is improving before backing a trim to bond purchases known as quantitative easing.

The fear of course is that the very moment they ease bond purchases, stock markets plummet and, with a short lag, unemployment will start rising again. Any positive effect of QE on employment is not backed up by numbers, other than people believing the illusion that it makes the economy better. But that's a fleeting illusion which depends on both their belief and continuing QE. Take either of the two away and you're holding an empty bag.

Bernanke said the central bank is trying to communicate its plans for two different policy tools. With bond purchases, the Fed is "trying to achieve a substantial improvement in the outlook for the labor market in the context of price stability. We’ve made progress on that but we still have further to go," he said.

The Fed wields another policy tool with its benchmark interest rate, which it reduced to close to zero in December 2008. Officials have said they won’t consider raising the main interest rate until the unemployment rate falls to 6.5 percent, as long as long-term inflation expectations don’t exceed 2.5 percent.

We're approaching nonsense territory here. We've already seen that years of low interest rates and bond purchases have not raised the velocity of money in the US economy. For the US economy and labor market, QE has been a total and unmitigated disaster, and a hugely expensive one to boot. For the financial system, though, it's been an unbelievable behemoth of a windfall.

Sure, unemployment has fallen a little, because most people still believe that a higher stock market is positive for the economy. But if it rises only if and when promises are issued for more and continuing free giveaways for the banking sector, that can then remain in accounts with the Fed and not get into the real economy, then a higher stock market is perhaps a symptom of an increasingly sick economy, not a healing one. It's like banks announcing great profits, that directly reflect nothing but those same giveaways. A profit would seem to indicate something has been sold for more than was paid for it, because of added value. That is obviously not the case here. Without free credit, there would be no "profits" in the banking sector.

"It may well be sometime after we hit 6.5 percent before rates reach any significant level," Bernanke said. "So again, the overall message is accommodation."

Well, no. If and when only, at best, one in every 7 dollars in QE has any influence on the real economy at all (the estimate is 86% is in banks' reserve accounts with the Fed), then QE is a failed policy. From the perspective of the economy, at least. For the banking sector, it's an entirely different story. People keep on thinking that what is good for the banking sector is good for the economy as a whole, but the recent graphs prove that this is not true. That should be end of story for QE, but Bernanke's oracle talk apparently still is too convincing; the general optimism bias trumps reality. Bernanke claims he's accommodating the economy, but he's not, he accommodates Wall Street.

The 59-year-old Fed chief said the FOMC may opt to hold interest rates near zero even after unemployment reaches 6.5 percent due to the possibility of low inflation.

And, apparently, he'll keep on accomodating Wall Street, even if enough waitressing, greeting and flipping jobs that don't pay enough to feed yourself let alone your family, but still count towards official jobs numbers, can be created to lower the unemployment rate to 6.5%. Why? Deflation. Or as he euphemistically calls it: low inflation. Bernanke paves the way for endless QE (breaking his own former promises, but he's leaving anyway). Why endless QE? Because without it, the US banking sector AND economy would collapse in a heartbeat. That's what it means when markets rise as fast as they do just because Bearded Ben announced what he did. It means there are no other prospects for profits. Or that the banks don't have to go looking for other prospects as long as the free stuff keeps flowing in.

Now, whatever powers one may think they do have, it should be clear that Bernanke and the Fed have no control over : 1) Treasury yields and 2) Velocity of money. As for the first, Ambrose Evans-Pritchard has some numbers:

Can the world cope with a trigger-happy Fed?

After weeks of utter confusion, the result of Fed taper talk is clear enough. Long-term borrowing rates are much higher across the world regardless whether the underlying economies are in any fit condition to absorb this shock. The rise in 10-year sovereign yields by basis points has been: Japan (25), Germany (35), France (62), UK (63), Norway (63), Australia (66), Korea (66), Spain (70), US (70), Italy (74), Poland (120), Mexico (122), Turkey (131), Brazil (135), and Indonesia (170).

As you can see, the emerging market bloc has suffered the worst hit, especially those countries caught when the tide went out with big current account deficits – the CADs as they are called in the trade. Basically, the whole world has just suffered a credit shock, even as the global economy weakens and the IMF downgrades its forecasts. What a mess.

A rate rise of 70 basis points or more is nothing short of catastrophic for Italy, Spain, Portugal, all in the grip of nominal GDP contraction, and all at risk of surging debt ratios as the denominator effect does its worst. The ECB must take action immediately to offset this "passive" tightening.

Can the US deal with higher yields on 10-year Treasuries? Well, better than Spain and Italy, obviously, but when yields are higher than real GDP (nominal+inflation, perhaps some 2.5% combined today), debt continues to rise. Yields are there already. Add a little deflation and what will the Fed do? QE on steroids probably, a.k.a. more debt. As Ambrose put it:

What struck me about Bernanke's testimony was his comment that the Fed would have to monitor the risk of "outright deflation" closely. "If needed, the Committee would be prepared to employ all of its tools, including an increase the pace of purchases for a time", he said.

The US will be the least worst horse in the glue factory, but only by the grace of Europe, Japan and China doing even worse. That will not save it from a combination of rising yields and falling inflation and GDP growth, however. And that is a lethal combination.

No risk of deflation, you think? Ben Bernanke does:

Bernanke Says Fed Bond Purchases Not on 'Preset Course'

Some sources of declining inflation "are likely to be transitory" and expectations for future price increases "have generally remained stable," he said in his prepared remarks. At the same time, "very low inflation poses risks to economic performance - for example, by raising the real cost of capital investment - and increases the risk of outright deflation." [..]

[..] Bernanke said in his testimony the Fed could keep buying bonds for longer if "financial conditions - which have tightened recently - were judged to be insufficiently accommodative to allow us to attain our mandated objectives." Responding to a question, he said the policy makers have succeeded in reducing market volatility that has greeted the Fed’s discussion of tapering. "Markets are beginning to understand our message, and the volatility has obviously moderated," he said.

Well, no. Volatility fell because of the promise of more free money. And that's all she wrote.

Policy makers have tried to assure investors that the Fed will hold down the benchmark interest rate after ending bond buying.

Well, no again. Chances are very real that when the Fed ends its bond buying, yields will rise so fast the Fed will lose control of the benchmark rate.

As for No. 2 above, the Velocity of Money, here's once again my favorite graph so far this year. It's so important in understanding the American economy today, one can't repeat it often enough:

Money isn't going anywhere in America. The banks sit pretty on their QE excess reserves, and the little that consumers do spend is what they can borrow. The velocity of money is a crucial element in any true understanding of what inflation really is, and this graph screams deflation. To which Bernanke (or his successor) will react with QE on steroids, but as we can see, that won't help Main Street one bit. It’ll help Wall Street, though .....

Everyone in America who doesn't work on Wall Street should be very worried when stock markets go up as soon as Ben Bernanke suggests more free credit is available for the world's biggest banks, because everyone who doesn't work on Wall Street will end up paying for it. Instead, everybody's celebrating it. Still, all it is, is a clear and simple sign that the markets are not well. At all.

Americans should demand that Bernanke discuss how he intends to speed up the velocity of money. This should be his no. 1 priority, because without it there will be no recovery, but he doesn't even mention it.

Wall Street banks post huge profits again, and pay huge bonuses. Does that mean they're healthy? No, it doesn't. It only means that they can use excess reserves provided by Bernanke's QE to increase high-risk wagers. Take away QE and then you'll see how healthy they are. And it goes, of course, one step further: Banks can (and will if there's a profit in it) take the advantages provided by the QE excess reserves and use them to bet against exactly what Bernanke purports to aspire to for the real economy. And he'll play innocent, like he never could have seen that coming.

I'm not saying that Bernanke wouldn't like to help out Main Street as well, I'm just saying that it's not his priority, and that he'll gladly help out Wall Street at the cost of Main Street. And will gladly lie about it too.

Ben Bernanke has spent 6 years and change dragging America deeper into the debt swamp, and just about everyone thinks he's brilliant. He must be quite the magician indeed. But as Chris Turner says above: The good news [..] is that at some point, the voters might actually get smart and get mad at how much money has been siphoned from them.

- See more at: http://theautomaticearth.com/Finance/what-ben-bernanke-is-really-saying.html#sthash.ZZAHABxF.dpuf

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Russia wheat export caution, despite strong July

by Agrimoney.com

US farm officials cautioned over the revival in Kazakh wheat crop hopes and warned on expectations of huge Russian grain exports, even as leading analysts raised hopes for a strong start for shipments.

The US Department of Agriculture's Astana bureau said that while soil moisture were "very good" when the Kazakh wheat crop, which is essentially all spring sown, was planted, conditions have deteriorated since.

"The weather since planting has been very dry in key growing areas, and this has largely depleted the soil moisture," the bureau said.

"Timely rains in July and August are critical for the 2013 crop."

The bureau estimated the Kazakh crop at 14.0m tonnes, below the USDA's official forecast, which was downgraded to 14.5m tonnes two weeks ago because of a "lower planted area" estimate.

'Yields have been decreasing'

Meanwhile, the USDA's Moscow staff cautioned against being overoptimistic on prospects for Russian wheat exports, despite a strong start to the harvest, which had reached 20.7m tonnes as of July 16, a rise of 7.7% year on year, with 75% of area yet to be reaped.

The yield had averaged 3.23 tonnes per hectare, up from 2.55 tonnes per hectare a year before, and from an area largely focused on the southern region which is a major export area.

"So far the harvest is ahead of the typical schedule, and the yields are higher than last year," the USDA staff said.

"However, some industry analysts already expressed concerns that as the harvest progressed and moved to the Volga Valley and Urals, average grain yields have been decreasing much faster than in 2011."

Besides dryness, commentators have also cautioned over damage from locusts in the south of the Volga Valley area, and "from other pests and diseases", the office said, pegging the crop at 53m tonnes, 1m tonnes below the official USDA estimate, if above figures from some other analysts.

Quality factor

Furthermore, some analysts are "sceptical" over ideas of bumper Russian exports in 2013-14, despite the good crop in the South, and the area's easy access to Black Sea ports.

"One of the main concerns is potential purchases from Egypt, Russia's key customer, and which accounts typically for half of all of Russia's grain exports in the September-November period," the Moscow office said.

Stronger competition from neighbouring Ukraine has also been seen as a dent to Russia's harvest hopes, while quality may be a factor too.

"Industry analysts are also anxious because, despite quite abundant crop in southern European Russia, the gluten content of wheat is lower than last year.

"Thus, it will be more difficult to find top grade food quality wheat for exports compared to last year."

July upgrades

However, the comments came as influential forecasters within Russia raised hopes for exports for July, the first month of 2013-14, citing robust demand from North Africa and the Middle East.

SovEcon lifted its wheat export forecast from 700,000-800,000 tonnes to up to 1.0m tonnes.

Separately, Ikar raised its forecast for July shipments to 1.2m tonnes from a little over 1m tonnes, saying that 700,000 tonnes had already been exported.

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Treasuries Haven’t Reached Bottom…Yet. Weekend Update July 19, 2013

By TonyC

VIX

– VIX extended its Master Cycle low an extra week. This falls within normal parameters of a cycle bottom, but extensions can frustrate at times. Once the reversal is made, VIX may quickly vault to its Cycle Top at 34.11, and possibly much higher.

SPX reaches its Diagonal trendline.

SPX

– SPX may have completed its final thrust in a Primary Wave (C) to the upper trendline of its massive Ending Diagonal. In doing so, it closed above its May 22 high. The Ending Diagonal trendline is at 1702.00. Within the Ending Diagonal is a smaller Broadening Wedge. In crossing the lower blue trendline of the Broadening Wedge, SPX will also lose the support of the 13-year Top and the 1987 trendlines, which would be very bearish.

(ZeroHedge) Between Detroit’s bankruptcy, Microsoft’s miss and worst drop in over 13 years, and GOOG’s miss (latter gobbled back by the BTFD’ers), it is no surprise that stocks rallied (thanks to GE’s explosion higher and Trannies surging). Mixed bag overall in stocks with the Nasdaq -1.4% on the week and TRAN +2.2% (with the S&P and Dow around 0.6%).

NDX is repelled by the Cycle Top and its Diagonal trendline.

NSX

–The NDX was repelled at its weekly Cycle Top resistance and Ending Diagonal trendline this week. This may indicate completion of the multi-year rally at multiple degrees of trend. A decline beneath the lower trendline of the Ending Diagonal may prompt a swift follow-through decline beneath Cycle Bottom support at 2101.65.

(ZeroHedge) Microsoft’s collapse last night is extending this morning as the stock holds at its 100DMA, down 10% from yesterday’s close. The drop is knocking 24 points off the Dow and along with GOOG’s damage is weighing heavily on the Tech sector overall (which was more evident in last night’s Nikkei dump than in the US for now). The drop for Balmer’s baby means a $30 billion loss of market cap – or one Schwab or Aflac or Freeport-McMoRan (or 2 Mattels).

The Euro extended its retracement rally.

XEU

– The Euro completed a 63.84% retracement of its most recent decline this week, falling short of its weekly mid-Cycle resistance at 132.14. Cycle support is just below at 130.37 to 130.75. Once beneath it, the decline may be swift and deep.

(ZeroHedge) Europe has denigrated into a strange place where fantasy replaces reality as necessitated by their governments and the Union that governs them. It is a world where anything but direct liabilities are not counted, where securitizations worth 50 cents on the Dollar are held at par and where both data and numbers are manipulated for the preservation of the State.

Dreams are born of imagination, fed upon illusions, and put to death by reality. The guillotine returns after September 22, 2013. Maybe sooner.

The Yen loses support at Cycle Bottom.

XJY

–The Yen appears to have lost all shortr-term support as it broke through its Cycle Bottom at 99.71. The minor retracement appears over and a resumption of the decline may be expected. The struggle to keep the Yen at or above the 100.00 level has failed.

(ZeroHedge) When it comes to changing the “measurement” rules in the middle of the game, nobody does it quite like Japan: in the aftermath of the Fukushima nuclear explosion, when radiation was soaring (and still is with Tritium levels just hitting a record high but who cares – Goldman partners have to earn record bonuses on the back of the irradiated island) Japan’s solution was simple: double the maximum safe irradiation dosage. Done and done. Now, it is time to do the same to that other just as pesky, if somewhat less lethal indicator: inflation. Reuters reports that the Japanese government plans to adopt a different measure of inflation to the central bank’s.

The US Dollar poised for a new breakout.

US Dollar

– USD closed just beneath Short-term and Intermediate term support/resistance at 82.88. The Cyclical low appears to have been completed on Wednesday and the rally in the Dollar is expected to continue through mid-August. The Head & Shoulders formation appears to be offering the next target in the US Dollar at 95.50. The trading community has been overwhelmingly bearish on the dollar, so a confirmation of the breakout may force the unwinding of the dollar shorts.

Gold may be failing on its bounce.

Gold

– Gold struggled to attain higher ground, but failed to regain any of its Cycle supports. The stall at the top of wave 4 of the previous decline suggests more downside is ahead. The multiple bearish formations on the chart suggest that gold has further to decline, as well.

(ZeroHedge) Starting yesterday, JPM reported that just under 12,000 ounces of Eligible gold (the same Registered gold that two days earlier saw its warrants detached and convert to eligible) were withdrawn from its warehouse 100 feet below CMP 1. But it was today’s move that was the kicker, as a whopping 90,311 ounces of eligible gold were withdrawn, accounting for a massive 66% of the firm’s entire inventory of non-Registered gold, and leaving a token 46K ounces, or a little over 1 tonne in JPM’s possession.

Treasuries haven’t reached bottom…yet.

USB– USB had a two-week pullback from its July 5 Master cycle low, but both the Cycle Model and the chart suggest more decline to come. The record bond fund redemptions may resume until USB completes its journey to the Cycle Bottom. The unfilled gap that remains at 127.04 is also an attractor as the index retraces its rise since 2011.

(Bawerk.net) Something peculiar has been going on the treasury market during the latest round of quantitative easing (QE). If we study the chart provided below we find that treasury rates increased as soon as a QE-program was enacted, and fell immediately after its termination. Take the TSY 10 year for example; as soon as QE1 was implemented rates rose rapidly from a low of 2.08 per cent to a high of 4.01 per cent. What is striking about this is the fact that the low was set three days into the program, while the high was set three days after the program. A similar development occurred under the QE2 program. Rates reversed their sharp downtrend from the peak set around the end of QE1.

Crude may have trouble in its rarified atmosphere.

WTIC

– Crude may be having difficulty at this level, since it has extended its Primary Cycle high by a full week. The parabolic rally may lead to a very vicious unwind as it declines into its Master Cycle low in August. The attempt to reflate the price of crude will end badly.

(ZeroHedge) For the first time since QE2 was announced (August 2010), the price of WTI Crude oil is now more expensive that Brent crude. The Brent-WTI spread has collapsed from over $23 in Feb 2013 and is now negative and notably below the long-run average level of around $0.98. At $109, WTI is the highest since March 2012. Gas prices – at the pump – continue to rise significantly reaching the highest since March, but given the lag to production, are set to reach well over $4.00 per gallon on average.

China decline resumes.

Shanghai Index

–The Shanghai Index failed its attempt to reach weekly short-term resistance at 2117.08 and appears to be resuming its decline. The influence of the Cup with Handle formation is similar to the Head & Shoulders formation and offers a particular target for this decline. The probabilitiy of meeting its target is 90%.

(ZeroHedge) The Shanghai Composite Index has underperformed global peers in the past year. The pace of expansion may fall below the government’s goal of 7.5 percent and that may prompt a rate cut and/or an accelerated pace of infrastructure project approvals (unleashing the inflation monster). Policy makers need to prove they remain in control, meaning GDP growth must finish the year at or above the target, but for now, the following four charts suggest all is not well with the ‘soft-landing’…

The India Nifty may have reached a pivot high.

CNX Nifty

– India Nifty has stretched its retracement of its decline into June to 75%. This oversize bounce may be one of the residual effects of the Orthodox Broadening Top which is stalling in mid-formation. The decline may resume shortly as CNXN appears to be in sync with the world markets.

The Bank Index challenges its upper trendline.

BKX

– BKX continued to challenge the upper trendline of its year-old trading channel this week. The Cycles Model suggests that the rally may have run out of time.

(ZeroHedge) Earlier today, Bank of America surprised the market with its n-th consecutive profit beat in many quarters. Ironically that same profit, of $4,012 MM to be precise, should have been a loss of $221 MM.

As we reported in late June, what happened in Q2 was an absolute devastation to bank balance sheets courtesy of the surge in interest rates, and the result would be a huge impact on bank AFS holdings, which as we said would soon exude major losses. Or rather “would exude losses” had Mark-To-Market still been around (and which at least initially was supposed to be offline until the recovery arrives, which begs the question: where is this recovery that so many have said already took place since MTM is nowhere to be found?). Instead we get Mark-To-Unicorn.

(ZeroHedge) Moments ago (Wednesday) Bank of America was the last TBTF bank to report earnings, which came in at $4 billion or $0.32 per diluted share compared to expectations of a $0.26 print. Revenue was $22.9 billion net of interest expense which was just a fraction above the $22.7 billion expected. The immediate reason for the beat: the usual accounting fudge to net interest losses which came in at $1.2 thanks to yet another $900 Million (well above the $804MM in Q1 and the same as Q4 2012) loan loss reserve reduction to the total net charge off number of $2.1 billion. And with $21.2 billion in credit loss “buffer” allowance still left on the books from those torrid days of 2008, expect the accounting fudges to continue for a long time.

(ZeroHedge) In the US, our regulators have publicly embraced a “too big to prosecute” doctrine. We are restraining, underfunding and dismantling regulatory oversight in the interests of short-term stability for the status quo. Which as a criminologist, Black knows with certainty creates an environment where bad actors will act in their self-interest with assumed (and likely real, at this point) impunity.

Consider the prior two articles and tell me Bill Black hasn’t hit the nail on the head.

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Brazil frost threatens hedge funds with big losses

by Agrimoney.com

Hedge funds could face hefty losses on coffee and sugar bets if frost in Brazil turns out more severe than expected - although some brokers said it is more likely that producer selling will spare speculators a drubbing.

Managed money, a proxy for speculators, raised its net short position in New York-traded raw sugar futures and options by 18,500 contracts to more than 77,000 lots as of last Tuesday, according to data from the Commodity Futures Trading Commission, the US regulator.

That was not far from the record net short – the extent to which short bets, which profit when prices fall outnumber long positions, which benefit when values rise – of 88,140 lots for sugar set last month.

And, indeed, the gross short position, of 234,499 lots, was less than 100 from the record high, a reflection of the extent to which hedge funds saw prospects of a large world production surplus depressing values.

'Frost remains a concern'

For New York arabica coffee futures and options, while hedge funds covered some of their short positions over the week, the net short, at 21,460 lots, remained historically high.

However, hedge funds have been left at risk of being wrong-footed on their bearish bets by forecasts for frost and rain in parts of Brazil, threatening coffee and cane harvests, and potentially causing some crop damage too.

"Frost remains a concern" for Tuesday and Wednesday in areas including Parana, a coffee producing state, and parts of Sao Paulo, a major grower of cane too, weather service MDA said.

Luke Mathews at Commonwealth Bank of Australia said: "Up to 5 inches of rain is slated this week, and temperatures may drop below freezing according to some forecasters."

Macquarie said: "The last time Brazil's coffee regions faced frosts were in 2011, when we saw a sharp rally," with frosts further back causing price spikes too.

It was a frost which drove New York arabica coffee futures to their record high of 337.5 cents a pound in 1977.

Cane downgrades ahead?

On the sugar markets, Nick Penney, senior trader at Sucden Financial, said that "reports of rain and frost over the cane areas of Centre South Brazil have spurred speculators into covering some shorts".

Chart levels as high as 16.74 cents a pound, up 2% from Monday's levels, looked immediately attainable if "weather forecasts continue to show expectations of rain and cold weather which will further reduce potential output and put in doubt original estimates for the crop year", he said.

Already there is talk that Unica, the Brazilian cane industry group, is mulling cuts to its estimates for the cane crop in the Centre South, responsible for some 90% of the country's output, and for the proportion of cane turned into sugar, rather than ethanol.

Macquarie said that its own estimate of a 590m-tonne Centre South cane crop looked "optimistic" given the potential for rain delays to harvest.

CBA's Mr Mathews said that "the undesirable weather could result in further downgrades to Brazilian sugarcane production prospects".

'Selling opportunities'

However, Macquarie said that coffee and sugar price rises faced limits to their progress from the extent of selling by producers they were likely to encourage.

"The risk here is that producers will view these as selling opportunities, in an otherwise bearish market," Macquarie analyst Kona Haque said.

"This will serve to cap both the extent of the rally as well as the duration of it."

In coffee, some 9% of Brazil's arabica coffee crop from last year remains to be sold, with only 13% of 2013 output hedged so far.

"We think that Brazilian growers will take advantage of any ensuing rally by selling some of their new crop," Ms Haque said.

'Step up hedging'

In sugar, Mr Penney said that "we have seen a marked increase in hedging activity whenever a speculative rally takes place.

"With the continued weakness of the real, we feel producers in Brazil will step up hedging towards the 17 cents-a-pound level."

Raw sugar for October closed up 0.7% at 16.40 cents a pound in New York on Monday.

Arabica coffee for September was 1.9% higher at 125.5 cents a pound in late deals.

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CFNAI: Headline Disguises The Supply/Demand Imbalance

by Lance Roberts

At the beginning of June I wrote an article titled "The Most Important Economic Number" in which I discussed an article that had been written by Russ Koesterich, CFA, who is the iShares Global Chief Investment Strategist. The point of that article is that the Chicago Fed National Activity Index, which is a composite index made up of 85 subcomponents that gives a broad overview of overall economic activity in the U.S, is often ignored by the mainstream media which could be a mistake.  The reason is that unlike backward-looking statistics like GDP, the CFNAI is a forward looking metric that gives some indication of how the economy is likely to look in the coming months.

The overall index is broken down into four major sub-categories which cover:

  • Production & Income
  • Employment, Unemployment & Hours
  • Personal Consumption & Housing
  • Sales, Orders & Inventories

To get a better grasp of these four major sub-components I have constructed a 4-panel chart showing each of the individual subcomponents as compared to a major economic indicator.   As you can see there are historically some very close comparisons between the major economic indicators and the underlying sub-index of the CFNAI.

CFNAI-4panel-chart-072213-2

While all four subcomponents clearly show the sharp post-recession rebound; it appears that each have also reached the mature stage of the current economic cycle.  However, the lower-left quadrant showing housing starts as compared to personal consumption and housing really stood out.  One of the primary arguments for the continuation of the "economic recovery" story has been the support derived from residential housing.  However, within that housing component, the most critical is housing starts.   Existing home sales and permits have little economic impact with respect to the amount of activity generated by the construction of a new home.  From architects, to engineering, to construction and completion the building of a new home has the biggest economic multiplier of them all.   The problem, as shown in the chart above it appears that housing starts may have peaked for the current economic cycle.

Furthermore, in regards to economic impact, Personal Consumption Expenditures (PCE) is by far the most important as it comprises roughly 70% of the GDP calculation.  It is clear that PCE peaked in 2011 and has been reflected in continued sub-par economic growth.  This has been the story of the last few years, which has continued to confound and baffle the Federal Reserve, as to why successive rounds of monetary interventions has done little to spur real economic growth.  However, the CFNAI has been clearly showing a "struggle through" economy which is shown in the chart below which compares the CFNAI with its 6-month average.

CFNAI-Index-vs-6mo-072213

Supply/Demand Imbalance

However, to really understand this conundrum a bit better let's look at the CFNAI a little differently.  If we break up the sub-components into two different categories, "supply" and "demand", we can get a better look at what is likely to drive future decisions by business owners.  As a business owner myself; I can tell you that businesses will only increase production, and employment, when they feel confident about future customer demand to support the higher related costs associated with any expansion.

In this regard we can look at the CFNAI as customer "demand" and business "supply."  The subcomponents of "Consumption & Housing" and "Sales, Orders and Inventories" most adequately reflect customer demand while business supply is represented by "Production & Income" and "Employment, Unemployment and Hours."  The chart below shows the 3-month average of the "business supply" and "customer demand" indexes.   Do you see the problem here?

CFNAI-Supply-Demand-072213

It is important to notice that historically the demand side of the CFNAI has always led the supply side.  This is exactly as it should be as demand drives production.  However, unlike every previous cycle, the demand structure is not only lagging the supply since the end of the last recession - it is still at levels that is normally consistent WITH recessionary lows.  It is highly unlikely that if consumption, sales and orders are not sufficiently rising that businesses will be able to sustain higher levels of production and employment for very long.  It is most logical that the current divergence will be filled at some point by either a sharp resurgence in consumer demand or a slowdown in economic activity.  Historical evidence currently suggests the latter.

What we have seen over the past few years have been repeated "soft patches" in economic activity that have led to short term bursts of "restocking" activity.  However, the overall trend of the economic data post the recessionary trough has been negative with each bounce in activity hitting lower highs and setting lower lows.  After a very sluggish economic environment in the last half of 2012 we are currently seeing, once again, a bounce in economic activity.  However, these upticks in the economic data in the past have been mistakenly reported as a return to economic growth.  Given the weakness in the "new orders" component of virtually every manufacturing report as of late it is unlikely that this time will be different.  The chart below, which is the Economic Output Composite Index, shows this declining trend of "soft patches" and "recoveries" since the end of the last recession. (For a description of the underlying construction of the index click here)

STA-EOCI-GDP-072213

The divergence between the supply and demand sides of the economy clearly explain the broader issues.  For businesses it will be very difficult to continue to commit capital to expansion, production or employment without demand being substantially increasing.  Furthermore, the overhang of higher tax rates, reduced government spending and the impact of higher costs from the "Affordable Care Act" all weigh on business investment and spending decisions.

With profit margins under attack as revenue growth slows as cost cutting has reached its effective limits; companies are having to resort to "labor hoarding" and temporary employment to maintain current production levels and profitability as costs continue to rise.  The NFIB recently summed up the current sentiment of business owners in their latest survey stating:

"It's a bad situation in Washington, scandals, no budget deals, no dealing with the big problems, our own government agencies taking advantage of us, Congressional law being suspended by the President, a flood of executive orders, the threat of higher energy costs (the attack on coal). Not a good time to bet on the future by hiring lots of workers with uncertain cost...Economic growth was revised down for the first quarter of the year and the outlook for the second quarter is not looking good. Nothing cheers up a small-business owner more than a customer, and they remain scarce and cautious while consumer spending remains weak and more owners are reporting negative sales trends than positive ones. It certainly doesn't help that the endless stream of delays and capitulations of certain provisions of the healthcare law adds to the uncertainty felt by owners. Until growth returns to the small-business half of the economy, it will be hard to generate meaningful economic growth and job creation."

The gap between demand and supply in the latest CNFAI report goes to the heart of what the NFIB has been stating repeatedly since the last recession ended.  Despite government reported economic data and artificially inflated asset prices - "Main Street" is still operating as if they are in a recession.

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