Wednesday, April 2, 2014

Control your risk with simple and winning rules – Super Stocks trading signals for 3 April

   
Super Stocks Trading Signals Report

Latest Free Trading Alerts for 3 April Download Historical Results
Open position value at 2 April $ 15,806.60 2014 P/L   +4.57%
   

Mixed long/short open position
Today no new entry positions 
We take profit on CAT P/L + $ 7160.90 
4 Open Positions   
3 Long  
1 Short    
3 with Stop Loss at Breakeven

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I simulated 25% margining and modified initial  capital to $ 500K

 

1296672115_Stocks
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Material in this post does not constitute investment advice or a recommendation and do not constitute solicitation to public savings. Operate with any financial instrument is safe, even higher if working on derivatives. Be sure to operate only with capital that you can lose. Past performance of the methods described on this blog do not constitute any guarantee for future earnings. The reader should be held responsible for the risks of their investments and for making use of the information contained in the pages of this blog. Trading Weeks should not be considered in any way responsible for any financial losses suffered by the user of the information contained on this blog.

Gold and Silver Time for a Breather?

By: P_Radomski_CFA

Briefly: In our opinion short speculative positions in gold (half), silver (half) and mining stocks (full) are justified from the risk/reward perspective.

Generally, everything that we wrote in our previous alerts remains up-to-date - precious metals are likely to move lower in the coming weeks - and the thing that we would like to emphasize today is that even if we see an upward correction, it will likely not be anything more than just that - a correction. Let's take a look at the mining stocks chart (charts courtesy of http://stockcharts.com).

Market Vectors Gold Miners Daily Chart

Miners bounced after moving to the 61.8% Fibonacci retracement level and no wonder - the preceding decline had been quite sharp. We could have written that they paused, as the move higher was rather small. Tuesday's small upswing took place on very low volume, which suggests that we are right before a more significant move - the question is what direction miners will take.

The preceding short-term move was down, so based on the above chart it's more likely that the next move will be to the downside as well. However, even if we see a move to $25 or so in the coming days, it will still look like a correction.

Why could we see a temporary move higher here?

US Dollar Index Daily Chart

US Dollar Index Weekly Chart

The USD Index is about to reach its cyclical turning point. It's a tough call to determine the short-term action based on it, as the most recent move was horizontal - the USD Index has been consolidating in the second half of March.

The move that preceded the consolidation had been up, so the next move is also likely to be up, especially that we are after a long-term, medium-term, and short-term breakouts. However, on a very short-term basis, we can't rule out a dip based on the turning point alone.

As mentioned previously, the situation in the precious metals market and in the USD Index is just as it was in the previous days. The USD index is likely to move higher (even if it declines a bit in the first part of April) as it already paused after a short-term breakout and when it does rally, we will be likely to see another slide in the precious metals sector.

To summarize:

Trading capital (our opinion): Short positions: gold (half), silver (half) and (full) mining stocks.

Stop-loss details:

- Gold: $1,342 - Silver: $20.85 - GDX ETF: $25.6

Long-term capital (our opinion): No positions Insurance capital (our opinion): Full position

See the original article >>

«Qui sarà vedere con l'immaginazione» o dell'Italia da una moto

by Edoardo Varini

Tra le mille preoccupazioni riservate da questi tempi a un editore, due cose belle mi sono capitate. Una me l'ha regalata il destino, ed è il ritrovamento su una bancarella, dopo lunga cerca, di Naso bugiardo di Brera. È la storia del puglie Claudio Orsini, detto "Gügia",  66,7 kg e dunque welter.  "Gügia" in dialetto milanese, ma anche nel mio, che è il pavese, vuole dire "ago". Mia nonna Ernestina, detta Tina, mi diceva che ero un po' un "pisa güg", che si pronuncia con la "g" finale dolce, quella di "giri", e che vuole dire letteralmente "uno che affila gli aghi", che è al contempo una cosa futile, gratuita e, come tutte le cose gratuite, priva di finalità e dunque di tempo e dunque eterna e dunque grandiosa. Se la successione vi è parsa troppo rapida vi prego di rileggerla, perché non è distante dall'esattezza.

Gli alchimisti definivano la loro arte ludus puerorum per null'altra ragione che questa.  L'agio nel mondo. L'ago nel mondo. E affilerò la "i" che ne fuoriesce come un ago, e saprò vedere nella circonferenza del puntino sovrastante la perfezione divina. È un po' come – in realtà è precisamente quello – «la composizione vedendo il luogo» degli Esercizi spirituali di Ignazio di Loyola: «qui sarà vedere con l'immaginazione le sinagoghe, le città e i paesi attraverso i quali Cristo nostro Signore predicava», e ancora: «vedere la grande estensione ricurva del mondo» o «me stesso alla presenza di Dio».

Ma l'immaginazione mi sta portando lontano e vorrei dunque dirvi della seconda bella cosa terrena: questa me la sono fatta capitare io. Ho comprato una BMW 650 GS del '97 con cui mi sto divertendo come un matto, il che mi ha non poco ammorbidito. E sono anche diventato forse meno "pisa güg". No, per nulla, scherzavo: non mi sono ammorbidito affatto, perché prendere per buone le castronerie sesquipedali ancora non mi riesce. E allora, visto che ne ho la possibilità, ne scrivo, ben sapendo di suscitare spesso malumori e accuse di disfattismo che invece cascano male: se c'è un entusiasmo che ho è quello per la vita. Se c'è una fiducia che ho è quella nei miei simili. Malgrado tutto. Epperò, venendo, come mi tocca fare per mestiere, all'economia, alla politica e all'oggi, qualche precisazione mi andrebbe di farla.

alt

La prima precisazione è che ce la stiamo raccontando e – rimarchevole, interessante cosa – tutt'intorno c'è la gara ad aiutarci a farlo. Possiamo fare tutte le riforme del lavoro e fiscali che vogliamo – ammesso che le facciamo – ma se l'economia è ferma non servono a nulla. E l'economia italiana è ferma. L'inflazione è allo 0,4, praticamente zero. La crescita ha all'incirca lo stesso valore. Sappiamo che l'aumento delle tasse e il taglio delle spese fanno decrescere il Pil. Ci tocca un premier che va a dire in giro per l'Europa che rispetteremo gli impegni di riduzione del debito pubblico. Ma davvero? E nei tempi indicati? E l'Europa plaude alla follia. Mai si vide in Europa un siffatto entusiasmo intorno all'ambizione dai tempi di Napoleone. Che poi "ambizione" significa etimologicamente andar pirlando per cariche... Pensiamoci.

Ieri è stato il primo ministro britannico David Cameron ad elogiare e sostenere le renziane «misure ambiziose», l'altrieri fu il presidente USA Barack Obama, e il giorno prima ancora la Cancelliera Merkel.  I capitali affluiscono in Italia, mangiarsi un gelato è diventato più difficile di collocare i nostri titoli pubblici. Lo spread ha solo una direzione: la discesa. Però, frattanto, il tasso d'inflazione seguita a calare, e questo si chiama disinflazione. Cala perché diminuisce la domanda interna, da cui la nostra economia dipende al 65%, quella tedesca per il 40%. Però, per solito, la disinflazione antecede la deflazione, ovverosia la decrescita dei prezzi, che porta con sé la decrescita dei ricavi e ineluttabilmente la decrescita del Pil. La prima causa della disinflazione è stata la contrazione del credito, che ha smesso da tempo di sostenere la domanda interna. Immagino che tutti vogliano la ripresa del debitore Italia, ed immagino che ci verrà concesso molto credito. Immagino che la Bce ci verrà incontro: mi domando solo in cambio di che cosa. Nessuno stato sovrano è mai così giovane da meritare una tutela esterna.

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Lake Bled

US job market healing

by SoberLook.com

We are seeing signs of significant improvements in US labor markets. The ADP report today was certainly an indication of recovery from the winter slowdown.

ADP: - Mark Zandi, chief economist of Moody’s Analytics, said, "The job market is coming out from its deep winter slumber. Job gains are consistent with the pace prior to the brutal winter. The gains are broad based across industries and business size classes. Even better numbers are likely in coming months as the weather warms.”
One area to watch in the ADP report is construction (see post), as construction payrolls have consistently increased each month over the past year. With demand for rental units remaining high, this sector could pick up quickly.
But signs of improvement go beyond the ADP measures. Gallup's Job Creation Index for example rose to the highest level since 2008.

Source: Gallup

Gallup: - U.S. workers in the private sector are reporting a more positive jobs situation where they work than at any point in the past six years. Combine this with state workers' record-high job creation reports and the year-over-year improvement from federal workers, and March's promising Job Creation Index reading would appear to be a positive sign in the long recovery from the 2007-2009 economic recession.
Furthermore, the ISI's survey of permanent placement (recruiting) firms shows a surprisingly robust improvement in activity recently.

Source: ISI Group

Companies are paying more to find employees, which is consistent with the recent report showing that small businesses are complaining about labor quality - something they weren't doing much a year ago.

Source: Source: nfib.com/sbet

The markets are starting to recognize this change in labor markets, with the 10-year treasury yield rising nearly 12bp from a week ago. Another market example of this improvement is the recent spectacular rally in the shares of a large recruiting firm, Korn Ferry (KFY).

blue = Korn Ferry shares, orange = S&P500 (source: Ycharts)

Clearly we will see some volatility in the official payrolls numbers going forward, but the signs of US labor markets firming are unmistakable.

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Fed Funds, crude and gold in spotlight before Friday's jobs report

By Tory Enerson

The overnight market was relatively quiet leading into this morning’s ADP private payrolls data release. All eyes are on this data with the U.S. Government Jobs report due this Friday. The final days of March and early April have featured the third major speech by the new Fed Chairperson Janet Yellen, a decline in the price discovery of the metals and energy commodity sectors, the quarterly grain planting and stocks report and continued paring of the price of the fixed income markets.

ADP payroll data was released to the tune of 191,000 new jobs for the month just missing the forecasted 195,000 expectation. In addition, the world’s largest payroll service reported a 39,000 job increase revision to last month’s data taking the February headline number from 139,000 to 178,000 (us-usa-economy-employment-adp). While the ADP data represents a relatively small sample size when juxtaposed with the U.S. Jobs report and the correlation has proven to be suspect many times over in the past, it will have some influence on the price discovery heading into Friday’s event. Currently the consensus expectation for Friday’s data is 195,000 new jobs and an employment rate of 6.6 percent.

Yellen did deliver a speech that many pundits have since said was considerably more dovish (more leaning toward continued easy money) than the previous FOMC delivery from last month. She attempted to highlight some of the ongoing issues with the employment situation and the remaining difficulties still lingering. Her point was taken, I believe, a bit out of context as it seemed she was merely trying to temper any irrational exuberance that the market can tend to turn to. Her anecdotal instances highlighted in her speech while relevant, are certainly not the norm. What seems to have been missed in the diagnosis of her words was her continued commitment to the current paring of QE 3 and her reiteration of the possible increase of rates, should the data remain on track, as early as six months after the taper is complete (yelln-hilensrath).

The evidence of this can be found in the price discovery of the fixed income markets, particularly the 30-Day Fed Funds market which is tasked with attempting to be predictive of the Feds overnight lending rate at the time of the contract expiration. The December Fed Funds market sold off rather sharply (indicating potential of higher rates) following last months Fed decision to taper 10 billion and the ensuing press conference showing the Yellen’s commitment to transparency and the current course of action (see the chart below). Following her speech this week, the market did very little to ‘take back’ that move and currently is sitting on or about the recent lows, severely deteriorating the validity of those who claimed this to be such a dovish response from the Chairperson.

We have seen a sustained decline in the Metals and Energies markets. The precious metals (silver (COMEX:SIK14) and gold (COMEX:GCK14)) have been in a range for the past several weeks that the recent move to the downside threatens to breech. While a move to the downside in the wake of rising interest rate talk has been the recent norm, this decline has been decidedly more measured than downward price discovery in the past based on tightening monetary policy (tapering). The gold (more so than the silver) in my opinion is very difficult to label with a particular fundamental inclination. For example, sometimes gold can perform as a flight to quality/safe haven market in times of global strife, sometimes it performs as a fiat currency, sometimes and inflation hedge etc. There are examples where we have witnessed price discovery in both directions in the same scenarios therefore making its fundamental picture cloudy at times. With that being said, these levels appear to be supportive of the price discovery and seem to have weathered the selling storm.

The energies have, though more recently and more abruptly, also seen a decline. The WTI Crude has retreated below $100 per barrel (NYMEX:CLK14) while the RBOB has eclipsed the key 2.85 dollar price as well. Fundamentally the easing global tensions brought on by the Russia/Ukrainian situation seems to have taken the ‘fear bid’ out of the petroleum based energy prices. Yesterday’s API inventories data showed a decline in crude oil supplies of 5.8 million barrels vs. and expectation of a build of nearly 2 million barrels. The bullish nature of that report was tempered by the slightly bearish data on the RBOB contract that reported only a 15,000 barrel build in supplies vs. the expected 2 million barrel decline. The government's EIA is set to be released at 9:30 am CST today. UPDATE: EIA data released showing a draw in crude of 2.4 mb vs. an expected 1.0 mb build and RBOB a draw of 1.6 MB vs. expectation of 1.0 mb draw (eia.gov/wpsr/wpsrsummary). Again we are looking for value at these prices, particularly with the gasoline as we are on the cusp of emerging from one of the coldest winters on record that could produce a record driving season.

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What has been agreed on banking union risks reigniting, rather than resolving the crisis

By Iain Begg

In December 2013 EU finance ministers negotiated an agreement aimed at establishing a banking union, with further talks between the European Parliament and the Member States ending in an agreement last week. Iain Begg provides a detailed overview of the main objectives of banking union and what has been agreed so far. He argues that while European leaders have probably gone as far as they can over reaching a compromise, the measures agreed are still insufficient and could potentially exacerbate the risk of another Cyprus-style crisis taking place within the Eurozone.

A German 2 Euro coin. The word Freiheit (freedom) can be read on the edge lettering.

Among the many economic governance initiatives undertaken over the last few years, those intended to achieve deeper financial integration have been widely regarded as crucial and urgent. The financial crisis and the subsequent sovereign debt crisis had revealed a number of flaws in the governance of the euro, and the EU’s leaders have since tried hard to put in place a new framework for economic policy-making which deals with these flaws. However, progress has been slow and has exposed deep differences among the Member States.

After some very tough negotiations, the EU finance ministers came to an agreement just before Christmas on the second stage of what has come to be known as banking union and, after protracted negotiations about procedures, the proposals were agreed with the European Parliament on the 20th of March 2014. A single resolution mechanism (SRM) for dealing with failing banks will now be added to the single supervisory mechanism (SSM) which completed its legislative journey in October. A third element originally envisaged for banking union, common deposit insurance, continues to divide EU Member States and has made no tangible progress.

According to Michel Barnier, the Commissioner responsible for financial services, the December deal was ‘a momentous day for banking union. A memorable day for Europe’s financial sector’. But is it and will it prove to be enduring?

What were the objectives of banking union?

Banking union sought to address three problems. The first is to bolster financial stability and to prevent a recurrence of the systemic problems that arose in 2008, especially after the collapse of Lehman Brothers. Although central bankers recognise that financial stability is part of their mandate, it is a task often poorly specified. As former ECB President Jean-Claude Trichet observed in 2011:

central banks often have an explicit mandate in the area of financial stability. But typically this mandate is formulated in very general terms, and it would have been written before growing recognition of the key role of macro-prudential oversight

Trichet’s successor, Mario Draghi, has continued to develop the ECB’s role in what has become known as macro-prudential supervision, through the European Systemic Risk Board (ESRB) which has sought to identify the systemic risks to financial stability. Draghi has also been adept at calming markets, first with his famous ‘whatever it takes’ speech in London in July 2012, then with the announcement of Outright Monetary Transactions (OMT) – the promise to buy unlimited amounts of sovereign bonds from the markets, though not directly from governments. In what is sure to be a landmark decision, the German Constitutional Court found, by six to two votes, on February 7th that OMT was not compatible with the EU treaty unless used in a very restricted manner. However, in an unprecedented step, the Karlsruhe judges have referred the decision to the Court of Justice of the European Union for final decision. These legal manoeuvrings could add to the uncertainty around banking union.

Second, banking union was conceived of as a means of kick-starting a European financial system that had become fragmented across national borders because of fears about cross-border financial contagion, and was failing in one of its primary functions of providing finance to SMEs.

The third objective was to break what has been called the ‘doom-loop’ linking banks and governments. On one side, problems in the banking sector obliged governments to fund the rescues of banks deemed too big to fail, leading to stress on the public finances. In Ireland, Spain and the UK, and later in Cyprus, public debt soared for this reason. On the other side, the risk of sovereign default meant that banks which held substantial amounts of sovereign bonds on the asset side of their balance sheets could no longer regard these holdings as safe assets, imperilling the banks’ solvency.

An assessment of progress

What has been agreed falls a long way short of solving these problems. The SSM will see most of the largest banks in the Eurozone, plus the other Member States which have agreed to take part, supervised by the ECB in a new ‘federal-ish’ structure. The ECB is currently racing to set up an entirely new body for this purpose, led by a former senior official at the Banque de France, Daniele Nouy, and insulated as far as possible from its monetary policy function. Other banks will continue to be supervised by their respective national authorities, though with a common rule-book currently being elaborated.

In anticipation of the new SSM going live later in 2014, the ECB is conducting an asset quality review alongside a stress-test intended to reveal problems in the valuation of bank assets, notably non-performing loans. The European Banking Authority has now set out the broad principles for the forthcoming stress tests, but is only expected to reveal the detailed methodology by April this year. These exercises are delicate, because they have to be seen to be tough enough to be credible, but may reveal shortfalls which will call for recapitalisation, potentially putting renewed pressure on governments to help.

The upshot is that the move to the SSM may, in the short-term, add to financial instability and make it harder for banks (especially in the Member States worst affected by the crisis) to return to ‘normal’ lending. Although the ECB is undoubtedly correct to insist that banks be fundamentally sound, the process of assessing assets could aggravate rather than reduce financial instability in the short-term, and could prolong the credit crunch afflicting SMEs.

The new arrangements for resolving failing banks include a single resolution fund to which banks will be expected to contribute at an annual rate of roughly €5 billion, such that it will reach €55 billion by 2025. This is consistent with the principle that the costs of bank resolution should be borne by banks themselves and not tax-payers. A new Bank Recovery and Resolution Directive was also concluded in December 2013, key provisions of which determine the order in which shareholders, bond-holders and other bank creditors are ‘bailed-in’ (meaning lose money) when a bank fails, before the bank resolution fund steps-in.

The obvious flaw in what has been agreed is that until the new resolution fund reaches its optimal size, it will require a backstop for dealing with a shortfall of funding, and this will continue to be the individual Member State finances. Attempts to spread the risk across all Member States were strongly resisted by creditor countries, notably Germany. The outcome is that the doom-loop has not been broken, and this could presage a re-run of what happened in Cyprus in March 2013, when the need to resolve two banks which were large relative to the Cypriot economy, but small in EU terms, became a threat to the stability of the Eurozone as a whole.

The worrying conclusion is that although Europe’s leaders have probably gone as far as they could towards banking union, given their divergent interests and the domestic constraints they face, they have once more arrived at a compromise which is unsatisfactory and will almost certainly prove to be unsustainable. In effect, none of the underlying objectives of banking union set out above have been achieved and, in some respects, the risks may have been accentuated. It will not be long before the leaders have to try again.

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Thin Ice

by Marketanthropology

Hope springs eternal, as the mercury breached 50 this afternoon - luring a crocus or three into the early spring air. Heavens to betsy we may even feel 60 tomorrow. With our new Canadian skin now thickened and calloused from an extra serving of arctic, we have the tempered suspicion that 60 is the new 40 - or something along those lines. After this past winter we'll just consider it a rare silver lining. 
With that said, silver and the precious metals complex at large have continued their listless retracement decline, now in its third week. While silver especially is skating on very thin ice, we still like the sector's prospects as framed by the broader macro story.
Although silver may be standing with ginger footings, the ground beneath the US dollar as well as 10-year yields appear more fragile from our perspective. Moreover, the yen looks ripe to bounce. Considering these relationships and the fact that the VIX also appears on the precipice of another step higher in its long-term range, we still like the gilded hedge.
As in pond hockey, first one to fall through loses by default.

Click to enlarge images 

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What Happens After the Low-Hanging Fruit Has Been Picked?

by Charles Hugh Smith

Right now China is at the top of the S-Curve, and the problems of stagnation are still ahead.

What happens after all the low-hanging fruit has been picked? We can phrase the same question using a different analogy: what happens when all the oxygen in a room has been consumed?
One way to understand why the global financial meltdown occurred in 2008 and not in 2012 is all the oxygen in the room had been consumed. In the U.S. housing market, there was nobody left to buy an overpriced house with a no-document liar loan because everyone who was qualified to buy a McMansion in the middle of nowhere had already bought three and everyone who wasn't qualified had purchased a McMansion to flip with a liar loan.
Once the pool of credulous buyers evaporated, the dominoes fell, eventually circling the globe.
What happens after the low-hanging fruit has been picked? Here's an analogy: erect an enormous 13-story building on a thin slab foundation that is barely adequate for a 2-story house, and tie that flimsy foundation to the earth with fragile hollow pilings. What happens? Collapse.


Analysis of the Collapse Of 13-Story Building in China
Shanghai building collapse (Telegraph, UK)
Anyone tracking the global economy has an eye on China, for obvious reasons.China has led the world's growth for the better part of two decades, and now the growth story has entered a new phase. China is weakening its currency (renminbi/yuan), and trying to throttle its vast credit/shadow banking expansion even as Chinese officials claim China's economy is still expanding at a phenomenal clip (7+% annually).
I think we can shed some insightful analytic light by saying that the low-hanging fruit in China has all been plucked, and this creates an entirely new set of problems and challenges.
The first thing to note about nations experiencing rapid growth is the mathematical impossibility of continued break-neck growth: when China's economy (in purchasing power parity (PPP) or nominal dollars) GDP was $500 billion, an expansion of $50 billion equated to 10% a year.
Now that China's PPP gross domestic product is around $13 trillion, a 10% growth rate would require an expansion of $1.3 trillion--roughly the entire GDP of Spain or Canada.
Obviously, fast growth is easy when the low-hanging fruit are abundant, and it becomes progressively more difficult to maintain as the economy expands.
This pattern of rapid growth, maturity and stagnation can be seen in the S-Curve, a pattern that natural and human-made systems alike track.

When a country lacks infrastructure, or the infrastructure has been destroyed by war, then building infrastructure is the dominant activity in the low-hanging fruit/fast growth phase. Nations such as Japan and Germany experienced rapid growth after World War II for much the same reason China has boomed: infrastructure.
China has reached the maturity phase of the S-Curve in a mere 20 years: every major city has a subway system, thousands of miles of rail and highways have been laid, tens of millions of housing units have been built, and so on. As a result of this single-minded pursuit of building, China now sports nearly empty cities, train stations, malls and highrise residential towers.
In other words, all the low-hanging fruit of infrastructure have been picked.
Observers in Beijing see (well, not very far, due to the severe smog) endless growth of housing, due to strong demand. But this rosy view overlooks the fact that housing throughout China is out of reach not just of the millions of poorly paid migrant workers pouring into the cities but for college graduates--assuming they can even find a job (Chinese College Graduates Cannot Secure Jobs)
Even the cheapest condos cost well over $100,000 (in USD) in 3rd tier cities and much more in 1st and 2nd tier cities. The average starting salary for graduates is 2,000 to 3,000 yuan ($326) a month (roughly $4,000 to $6,000 a year), and salaries of around 50,000 yuan a year ($8,600) are considered good.
As a result, a double-income middle class household can only own a flat if the parents' savings are devoted to the down payment, which is usually 50% of the purchase price in China.
So all the stories of housing demand being permanent are misleading, because only a tiny sliver of the millions of people coming to cities can afford even the cheapest flat in the suburbs.
The other problem is that the low-hanging fruit have all been stripped via an unprecedented expansion of credit. Credit has a pernicious characteristic: it inevitably leads to diminishing returns as low-value, high-risk projects get funded in the rush to build anything and everything everywhere.
In other words, once the high-value low-hanging fruit has been picked, the sensible, high-value investment opportunities have all been taken and all that's left is marginal malinvestments.
In the U.S., this led to the famous McMansions in the middle of nowhere. In China, the general faith is that every building project, no matter how marginal, will soon be filled (and regardless of demand, the government will never let housing decline, even in ghost cities).
But as pointed out above, this presumes the millions of poorly educated rural migrants and the 7 million students graduating from college every year will soon be earning upper-middle-class incomes. Once the fast growth phase has ended, this becomes much more problematic. And indeed, reports of unemployed college graduates are now the norm (see below). As for migrants, most toil in very marginal jobs with low, insecure pay.
Another systemic problem arises when the low-hanging fruit have been picked:expectations of future prosperity have been pushed into the stratosphere, and these expectations will inevitably be disappointed as growth slows.
Rapid industrialization leads to rampant pollution. China has spent very little of its GDP on environmental investments, and now the bill is coming due. It is mathematically impossible for China to spend what needs to be spent (say, 5% of GDP for a decade) on cleaning up the environment and maintaining 7.5% annual growth. Promising people both will only set up a profound disappointment as neither goal can possibly be met.

Lastly, China lacks the cultural capital of maintaining infrastructure. In the 20 years of picking low-hanging fruit, buildings have been routinely torn down and replaced. The idea that a building will have to last 50 years, never mind 100 years, does not compute: if a building shows signs of aging, the solution for the past 20 years has been to tear it down and replace it with something grander.
This was possible in the fast-growth phase, but it is impossible in the stagnation phase for the same reason noted above: it's possible to tear down and replace 1,000 major buildings a year in the early years, but it becomes physically and financially impossible to replace millions of aging housing units.
Those familiar with construction and this lack of infrastructure to oversee and fund maintenance foresee tens of thousands of buildings that will slowly but surely become uninhabitable as elevators break down, pumps stop working, leaks cause concrete to spall, etc.
Anyone with even modest construction experience can see that the foundation beneath the toppled 13-story building is not even remotely adequate; the slightest temblor will destabilize all such buildings, and such feeble footings built directly on grade will lead to cracked pipes and a host of other impossible-to-fix problems.
Right now China is at the top of the S-Curve, and these problems of stagnation are still ahead. The most severe challenge in my view is not material or fiscal, it's psychological: when sky-high expectations crash to earth, social discord starts its own S-Curve of rapid growth.
Chinese College Graduates Cannot Secure Jobs: 28% Of Beijing's 2013 Graduates And 44% Of Shanghai's Have Found A Job:

This year a total of 6.99 million students graduated with a master's, bachelor's or technical college degree in China, an increase of 190,000 from 2012. In contrast, the number of jobs available decreased by 15 percent compared with 2012, according to China Youth, a state-run youth newspaper. Combined, these statistics mean a large portion of graduates will not have a job coming out of school.
Making matters worse for graduates, the "lucky" ones with jobs can expect an average salary of 3,000 yuan per month ($487.89). Netizens have calculated that at this rate, a 2013 graduate will have enough money to purchase a bathroom in the suburbs of Beijing in 10 years, if she doesn’t eat and chooses to live on the street.

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Key Gold Stock breaking out? I digging this if…

by Chris Kimble

CLICK ON CHART TO ENLARGE

A breakout from a bullish falling wedge after testing old resistance as support could be taking place in ABX today.

The Power of the Pattern is "digging" this action is ABX can create more space above support!

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6 reasons US M&A activity will see strong growth this year

by SoberLook.com

US M&A activity is picking up steam. Deal volume in the first quarter of this year was the highest since 2007 (in dollar terms). The total of $278bn of transactions includes high profile deals such as Time Warner, Forest Laboratories, and WhatsApp.

Moreover, M&A transaction volume growth for both large and middle market firms is poised to accelerate this year. Here are some reasons:

1. US corporations currently hold record amounts of cash (see story) and shareholders want to see action. While dividends and stock buybacks have been popular recently, many firms are looking toward growth strategies.

2. The market has recently rewarded companies that are doing deals by giving them higher valuations (Facebook was an exception), encouraging CEOs to be more aggressive with acquisitions.

3. Financing costs are still quite attractive. US high yield spreads for example hit another post-2007 low last week as fixed income investors (including "shadow" banking participants) look to buy corporate paper. This allows for more leveraged buyouts even at higher valuation multiples.

4. Private equity funds, particularly some of the larger ones are having a fairly impressive start this year with their fund raising efforts (see example). The first quarter has been the strongest since 2008 according to Preqin with some $95bn raised. This capital has to go somewhere.

5. A great deal of near-term fiscal and monetary policy uncertainty has been removed from the market (see post). The macroeconomic environment in the US should support M&A activity.

6. The US stock market strength, while making target companies more expensive, is providing more buying power for strategic acquisitions. Companies will be using their (sometimes overvalued) shares as "currency" to do deals.

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Do Soybeans Offer More Profit?

By: Chris Barron

For some time now, market analysts have been assuming that we might see a fairly large acreage shift from corn on corn back to more soybeans. This could be the case in general; however, be sure to stay focused on your individual numbers

The idea that producers will switch from corn to soybeans assumes there must be more profit potential in soybeans compared with corn, or that the cost of growing soybeans is significantly less and could reduce overall cash flow requirements. Don’t be so sure without running a number of different scena­rios. Planting more soybeans doesn’t neces­sarily equate to more profitability or less risk. Unless you have a compelling agronomic reason for planting more soybeans, it’s critical that you run the numbers, even up to the last minute.

Consider the following factors as you analyze your final or last-minute rotation and planting decisions: What are the realistic yield prospects between corn and soybeans; gross income differences; and current risk management/marketing tools?

Yield prospects for corn versus soybeans on an individual farm-by-farm basis can greatly vary. Assuming market prices stay at current levels, maximizing yield is the most effective way to improve profit potential. Look at your yield history and see which crop has been more consistent or provided the highest yields.

Has continuous corn or your previous crop rotation been effective in the past? If so, ask yourself the reason for changing a success­ful pattern. I’m not advoca­ting planting more corn neces­sarily, but I am encour­aging every producer to analyze every acre for maximum profitability.

Gross income is another consid­eration that affects produ­cers who rent land. High cash rents can make it virtually impossible to profitably grow soybeans without achieving maximum yield potential. For example, assuming a cash rent price of $350 per acre, it would take $6.36 per bushel at 55 bu. soybeans, or the first 31 bu. of production, just to cover land cost. Higher rent prices can easily account for 50% of production costs.

Equipment should be another focal point. Analyze your current equipment costs on corn versus soybeans. If planting more soybeans requires additional equipment investment, be sure to correctly evaluate the cost. Adding more soybean acres doesn’t necessarily guarantee a reduction in equipment cost.

Lack of Revenue Guarantee.

Risk-management decisions go hand in hand as we evaluate profit opportunities between corn and soybeans. The primary challenge for many producers considering more soybean acres is the lack of revenue guarantee compared with corn.

For example, many producers can purchase as much as $350 per acre more revenue coverage on corn than with soybeans. For most producers, the revenue coverage for private insurance and the agricultural risk coverage (ARC) through the farm program provide a substantially higher coverage level by planting corn. Actual production history (APH), county yield averages and the level of crop insurance coverage all have a direct impact on the best rotation for your farm.

Marketing opportunities between corn and soybeans could be anyone’s guess during the growing season. Regardless of your acreage mix, be sure to continuously monitor your cost of production in order to have a clear understanding of exactly where your profits begin and end. Profit oppor­tu­nities will likely be short-lived on rallies this year.

If you’d like a side-by-side comparison tool for corn versus soybeans, please let me know and I will email you a copy.

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Looking for a 5-wave rally in the S&P 500

By Gregor Horvat

&P 500 (CME:SPM14)

The S&P 500 broke above 1876 and is now approaching all time highs, so we adjusted the wave count and now looking for a five-wave rally in progress from 1833 swing low. At the moment leg still cannot be counted in three waves, so looks like price will stay bullish for the next few sessions and possibly hit 1890/1900 area.

Crude Oil (NYMEX:CLK14)

Crude oil fell sharply to the downside yesterday, in impulsive fashion through the lower support line of an upward channel. Rally to 102.20 has unfolded in three waves, thus it's consider as a corrective move, now completed so we expect a continuation to the downside. Ideally market will reach 97.00 again as long as 102.20 is not breached.

Gold (COMEX:GCK14)

Gold fell to new low in this week after a minor triangle placed in wave four. We know that triangles occur prior the final leg within a larger pattern. As such, latest move down should be wave five that will completed an impulsive decline from 1392. With that said, traders should be aware of a corrective rally in three legs; ideally back to 1320-1342 zone where we would turn bearish again.

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Thank Europe for the stock market’s next rally

By Matthew Lynn


Bloomberg

LONDON (MarketWatch) — The only questions left for the European Central Bank now are: How much? And how quickly?

The latest price data out of the euro-zone makes it painfully clear that much of the euro-zone is slipping into deflation. Even the hawks at the Bundesbank have come around to the view that some kind of monetary stimulus is now the only option left.

A blitz of quantitative easing from the ECB might or might not dig the euro-zone economy out of a hole. The evidence from elsewhere suggests that printing money stops things from getting worse while not actually making them much better. But one thing is certain. Full-throttle QE will lift asset prices around the world.

The global bull market is starting to look well past its sell-by date. But the ECB is about to give it another leg — and extend the run by at least a year before the next crash comes.

The evidence that deflation is taking a grip on the euro zone gets stronger with every week that passes. Last week we learned that Spain joined the list of countries in outright deflation, with prices dropping by 0.2% in March. In Germany, which is meant to be the motor of the euro-zone economy, inflation dropped to 0.9% in March from 1% a month earlier. On Monday, inflation across the euro-zone fell to an annual rate of just 0.5%, down from 0.7%.

This is coming against the backdrop of an extremely anemic recovery. Even though this is the upturn, both the Italian and Greek economies are still contracting. The French economy is a heartbeat away from another recession. Ireland was the poster boy for recovery within the straight-jacket of the single currency, but a 1.5% drop in retail sales in February suggests that is not going to be sustained. Nothing in any of those numbers suggests a sustained expansion — and with retail sales falling, companies are more likely to cut prices than to raise them.

Call to action

Even the hardliners on the Bundesbank are coming to the conclusion that the time to act has arrived.

Last week, the Bundesbank President Jens Weidmann argued that the ECB might soon have to start buying bank assets or government debt directly in the market. The widely held view that the ECB’s mandate prevented it from printing money was wrong, he argued. “This does not mean that a QE program is generally out of the question,” Weidmann told Market News International.

There’s nothing too surprising about that. Even the high-priest of monetary conservatism Friedrich Hayek warned that deflation could be as dangerous as inflation. Still, with the Bundesbank on board, the chances of the ECB launching a monetary blitz have increased dramatically.

Whether the ECB moves immediately or waits another month remains to be seen. The ingrained conservatism of Europe’s central bank suggests it may well sit on its hands for another month or perhaps two. But some form of QE is now a done deal. Once prices are falling across the continent, and now that the legal argument has been dismissed, what possible reason can there be for holding back? The arguments about how deflation can crucify highly indebted nations — such as all the peripheral euro-zone countries — are too familiar to need to be rehashed. The single currency won’t survive a sustained period of falling prices and everyone knows it. The ECB’s mandate is stability — not a collapse in prices.

How much QE will the ECB unleash? Germany’s DIW economics institute came up with the number of $60 billion a month. That is probably on the low side. At its peak, the Federal Reserve was pumping $85 billion into the American economy. Given that the euro-zone economy is about the same size, it will take at least as much QE to have any impact. You could argue for more — the euro-zone is in worse shape than the U.S. ever was. Whatever the final decision, it will have to be a lot to have any chance of working.

The one thing we know for sure about QE is that it boosts asset prices — and not just in the region where the money is being printed. It spills into markets around the world.

This bull market has been driven by central banks printing money, mainly in the U.S. but also in Japan and the U.K. The Fed is gradually winding down its program, and the U.K. is unlikely to roll out the presses again given the strength of its recovery this year.

But the ECB has so far stayed out of the game. If it starts its own QE blitz, that will inevitably give the markets a fresh boost. It will help stock markets in Europe, of course, since that is one of the main ways printing money boosts the economy. But it will flood into the emerging markets, the U.K. and U.S. just as much, in the same way the Fed’s program boosted other markets around the world. It might even boost world markets more than Europe’s. Investors will take the ECB’s money and put it into economies with stronger growth prospects than Germany, France or Italy.

The bull market will come to an end at some point — they all do. But the ECB is about to extend its life by another 12 to 18 months.

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Economy likely on verge of long awaited snapback

By Andrew Wilkinson

The ADP National Employment report showed the economy generated slightly more new positions in March than the average during the prior 12 months, indicating that the economy is likely on the verge of the long awaited snapback. Private employers added 191,000 new positions in March representing a 13,000 improvement on the February reading. That reading was also revised upwards by 39,000 from a previously recorded level of 139,000.

The chart below illustrates the improving fortunes for the construction sector, where March employment rose by 20,000 for its best performance since November and prior to the onset of the harsh winter weather. The split saw service providers contribute 164,000 to the headline reading as the goods sector added 28,000. Manufacturing companies boosted payrolls by 5,000. The distribution between small, medium and large-size companies was roughly equal. Professional and business positions grew by 53,000 while the trade and transport sector added 36,000 new positions.

Construction payrolls rose by 20,000, according to ADP.

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The Fed Goes Hunting For "Asset Price Bubbles"

by Tyler Durden

As the world's investors wait anxiously for the next piece of bad news from Japan, China, Europe, or US as a signal to buy, buy, buy on the back of a renewed "stimulus" of freshly printed money that has comforted them for 5 years, it seems the Fed is turning its attention elsewhere:

  • BULLARD SAYS MONITORING FOR ASSET BUBBLES `IMPORTANT CONCERN'
  • BULLARD SAYS ASSET PRICE BUBBLES MAY BECOME `BIG CONCERN'

The embarrasment continues:

  • BULLARD DOESN'T SEE PRICE BUBBLE LIKE IN PRE-CRISIS HOUSING

Because the Fed was accurate in spotting the "pre-crisis housing" bubble, right?

And the punchline:

  • BULLARD SAYS FED HAS BETTER `SYSTEMS' FOR `FLAGGING' BUBBLES

For now though, of course, the Fed's Bubble-o-Flagger (which can also be yours for four easy payments of $29.95) has no batteries. Pointing out the irony that the Fed creates the bubbles... and then when it becomes a "big concern" it promises to do something about it if it every sees one.  Finally, we are delighted that the schizhophrenia of the central planners continues to be exhibited for all to see: first Yellen tells everyone to buy stocks on Tuesday with an uber-dovish retracement of her "6 month" flub, and now Bullard is saying to watch out for bubbles. What can one say but... economists.

As a gentle reminder of just how these bubbles are formed...

Bubble Formation: start at the bottom left...

Bubble Bursting: ...and end with a 'debt crisis' and a 'rush for the exits'

Rinse and Repeat - Simple. QED

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The 10 Most Overbought Dow Stocks

by Tom Aspray

Tuesday’s new closing high in the S&P 500 completes the 16-day trading range and gives upside targets in the 1924-1930 area. The market was led by the Nasdaq Composite and Nasdaq 1000, which were up 1.64% and 1.74% respectively. One of the best groups, the SPDR S&P Regional Banking ETF (KRE), which was featured in yesterday’s column gained 1.86%.

The Dow Industrials closed at 16,532, which is just below the closing high of 16,576 from December 31. The daily relative performance analysis on the SPDR Dow Industrials (DIA) is positive for the first time since late 2013. This indicates that it has been stronger than the S&P 500 recently.

The DIA closed 7.5% below its monthly starc+ band last month and therefore still has significant upside potential. With the market at all-time highs, the monthly starc band scan can often give one additional insight. Oftentimes those stocks that are overbought (closest to their starc+ band) can alert one to stocks that are in the process of making important turns, as well as those stocks that are becoming more vulnerable.

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Two drug stocks, Merck & Co. (MRK) and Johnson and Johnson (JNJ) top the most overbought list this month as they are the Dow stocks, which are closest to their monthly starc+ bands.

The monthly chart analysis of each of the Dow stocks reveals one that may be losing upside momentum, as well as another that has recently overcome decade-long resistance. Two other Dow stocks appear to be completing monthly continuation patterns and could be market leaders later in the year. These are the Dow stocks you should be watching.

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Chart Analysis: The monthly chart of Walt Disney Co. (DIS) shows that it formed a doji last month, which is a sign of indecision as it closed the month where it opened.

  • The quarterly pivot is at $77.86 and an April close below $77.28 would trigger a low close doji sell signal.
  • The short-term monthly uptrend, line a, is now at $73.06 with the rising 20-week EMA at $63.92.
  • The monthly relative performance did confirm the recent highs but has now turned lower.
  • The weekly RS analysis (not shown) is positive while the daily is not.
  • The monthly OBV is holding well above its WMA and the weekly OBV has turned up from its WMA.
  • A close above the short-term resistance at $82.30 will signal a test of the all-time highs at $83.65.
  • The monthly projected pivot resistance is at $86.70.

Microsoft Corp. (MSFT) had a good 1st quarter as it gained over 11%. The monthly chart shows that the resistance going back to 2011, line c, was decisively overcome in March.

  • The 13-year trading range was $19 wide so the upside targets are in the $50-53 area.
  • MSFT made its all-time high of $43.82 in December of 1999, which is just below its monthly starc+ band at $44.10.
  • The five-year downtrend in the relative performance has been broken as it has been above its WMA for the past five months.
  • The weekly RS line completed its bottom two weeks ago signaling that MSFT was now a market leader.
  • The monthly OBV overcame major resistance, line e, in April of 2013.
  • Since then, the OBV has held above its rising WMA though it was tested last September.
  • The weekly OBV (not shown) has continued make new highs since last October.
  • There is first good support now in the $40-$40.40 area with the quarterly pivot at $38.95.

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Though McDonald’s Corp (MCD) was a star performer in 2011 when it gained 34%, it has disappointed investors over the past two years. It was down 9.22% in 2012 and up just 13.54% in 2013 as it lagged the S&P 500.

  • The monthly chart shows that a flag formation has formed since the January 2012 highs, lines a and b.
  • MCD has been testing its 20-month EMA over the past six months and is currently at $94.84.
  • On a close above $103.70, the flag formation has upside targets in the $123-$128 area.
  • The relative performance made a new high in early 2012 and dropped below it two months later.
  • The monthly RS line is still below its downtrend, line c, and its declining WMA.
  • The weekly and daily RS analysis (not shown) is closer to bottoming.
  • The monthly pivot is at $97.03 with the quarterly pivot at $96.18.
  • There is even stronger support in the $94-$95 area.

International Business Machines (IBM) has also lagged the overall market since 2011 when it was up 27.27%. It was up 5.97% in 2012 but was down 0.15% in 2013.

  • The monthly chart shows that the important support, line e, in the $171 area was tested in early February.
  • The upper boundary of the trading range is in the $206 to $211.52 area.
  • The monthly RS line is trying to turn up but is still well below its declining WMA.
  • The weekly relative performance (not shown) does appear to be completing its bottom formation.
  • The monthly OBV has just broken through resistance at line g.
  • The monthly Aspray’s OBV Trigger (AOT) triggered a buy signal at the end of February.
  • The monthly pivot and first good support is at $190.11 with the quarterly pivot at $186.46.
  • The minor 61.8% Fibonacci retracement support from the February lows is at $180.54.

What It Means: The large-cap Dow stocks, which often offer a high yield, have been out of favor for some time but this may be changing. Of these four stocks, McDonald’s Corp (MCD) offers the highest yield at 3.23%, followed by the 2.46% yield of Microsoft Corp. (MSFT). The current yield of International Business Machines (IBM) is 1.95%.

How to Profit: For Microsoft Corp. (MSFT), go 50% long at $40.08 and 50% at $38.66, with a stop at $37.09 (risk of approx. 5.8%).

For McDonald’s Corp (MCD), go 50% long at $96.64 and 50% at $95.34, with a stop at $91.25 (risk of approx. 4.9%).

For International Business Machines (IBM), go 50% long at $189.77 and 50% at $187.14 with a stop at $179.55 (risk of approx. 4.7%).

Portfolio Update: Was long Walt Disney Co. (DIS) from $70.84 as it was recommended last month. Sold 1/3 at $80.50 and was stopped out of the remaining position at $78.57.

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Easing tensions puts supply/demand back in drivers seat

By Phil Flynn

High Level Talks!

High level talks between Gazprom and the EU was the final straw that broke the oil market that was already weak against a backdrop of weak global manufacturing numbers and hopes that Libyan oil ports may reopen.

Fears that Russia's state-run gas giant OAO Gazprom would cut off natural gas supply to the Ukraine eased a bit.  Russia said it was ending its discount to Ukraine for natural gas due to non-payment. This would raise Ukraine’s gas prices by a whopping 44%. Yet a meeting between the Gazprom and the EU energy chief raised hopes that the gas would continue to flow. Gazprom Chief Executive Alexei Miller met the European Union's energy chief Gunther Oettinger and they said that Gazprom agreed on the importance of a reliable and secure gas supply from Russia. The comment is a reminder that both parties have a lot to lose if Russia pulls the plug on Europe. While it does not mean that Russia won’t cut off supply at some point it is likely that it won’t happen anytime soon.

Any reduction in the geopolitical risk premium allows the market to focus on ample supply and questionable demand. Reports that Libyan rebels claim that a deal to reopen Libyan oil ports added to the bearish sentiment. The leader of a rebel group in eastern Libya has agreed to end its seizure of several oil-exporting ports within days. While we have heard this before it is possible that Libyan oil may soon start to be exported.

Last night the American Petroleum Institute showed that the collision and oil spill in the Houston Shipping channel reduced the supply of crude oil(NYMEX:CLK14). The API reported that crude inventories fell by 5.8 million barrels almost five times than the average expectations.

Yet on the bearish side refinery runs increased leading to a surprising bearish increase of 18,000 barrels of gasoline supply. That may be one reason we saw RBOB futures take such a big hit!

Yet falling RBOB(NYMEX:RBJ14) prices may not mean that pump prices will fall as supply issues with ethanol are keeping prices high. In fact ethanol is more expensive than gasoline. The ethanol market that was created to reduce our dependence on foreign oil is being undermined by booming domestic oil production. Cold weather and the lack of space on rail cars as ethanol has to compete with oil are leading to shortages of supply. Bloomberg news reports that Ethanol climbed a record 81% in the quarter, surpassing the 65% gain during the third quarter of 2005 when the biofuel replaced methyl tertiary butyl ether as the primary source of octane for gasoline refiners.

Prices at the pump have been rising even as gasoline futures retreated 5% from a year-to-date peak on March 3. Congestion on the nation’s rail lines has delayed shipments from the Midwest, where about 89% of ethanol plants are located, to terminals in the Northeast where it’s blended with gasoline before delivery to filling stations. East Coast ethanol stockpiles are down 21% from a year ago to the lowest level since 2008. “The ethanol market has been screaming,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “But I think gasoline and ethanol are close to the peak and we should pull back over the next couple of weeks.” SBC says that Ethanol saw extreme volatility today April CU traded up $0.22 on the highs before selling after the corn close saw it trade only $0.05 cents higher on the day. Part of the initial run up was due to concerns that available barrels are in very tight supply and the EIA report is unlikely to indicate much relief. Importers are looking for any product available in Brazil for early to mid-April while offers began to retreat as they watched bids chase them up. We will see if supply falls even more in today’s Energy Information Administration supply report.

An 8.2 earthquake in Chile is shaking up the copper market. Chile is the world’s largest producer and worries about mine shutdowns gave prices a pop. Copper mining makes up 20% of Chilean GDP and 60% of exports The FT reported the price of copper traded in New York jumped as much as 6¢ a pound to $3.07 following the 8.2 magnitude earthquake, which struck at 9 p.m. local time. The quake also shook buildings in nearby Peru and in Bolivia’s capital, La Paz, 470km away.

Chile’s Collahuasi mine, a joint venture led by Anglo American and Xstrata close to the epicenter, reported it had suffered no problems. State-owned copper mining company Codelco and London-listed Antofagasta also said their mines were functioning normally, Reuters reported.

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Significant Divergence Between Copper Prices and Stock Market Not to Be Ignored

By Michael Lombardi

In the midst of all the optimism we see towards key stock indices these days, there are two leading indicators that are flashing warning signals. They say, “Be careful, and don’t get caught up in the euphoria.”

Let’s start with the amount of money investors are borrowing to buy stocks…

Margin debt, the amount of money borrowed to purchase stocks, is one of the leading indicators of where key stock market indices will go. Historically, the higher margin debt gets, the more risk for key stock indices. This indicator predicted the top of the stock market in 2007 and the Tech Boom top of 2000.

As it stands, margin debt on the New York Stock Exchange (NYSE) is at its highest point ever recorded—$451 billion. (Source: New York Stock Exchange web site, last accessed March 25, 2014.) Sadly, this fact continues to be ignored by stock advisors. Yes, investors have borrowed almost half a trillion dollars to buy NYSE-listed stocks!

Another key indicator that suggests key stock indices are stretched is copper prices.

Since the beginning of the year, copper prices have plunged lower. What’s interesting about this is that copper prices usually top before the key stock market indices do; they usually bottom before stocks as well. In the chart below, I have plotted copper prices (black line) over the S&P 500 and circled areas where copper has acted as a leading indicator of key stock indices.

SPX S&P 500 Large Cap Chart

Chart courtesy of www.StockCharts.com

Copper prices topped in 2007 before key stock indices did. Then in 2009, they bottomed out well before the S&P 500, about three months earlier. Then in 2011, copper prices led key stock indices higher.

But since the beginning of 2013, copper prices and key stock indices have been significantly diverging—this is something that shouldn’t go unnoticed.

My skepticism towards the key stock indices continues to grow as I look at the indicators that suggest their direction should be down, not up. Increasing stock market optimism is dangerous.

In 2009, key stock market indices were presenting the buying opportunity of a lifetime for investors. At present, the opposite is true. The fall from Dow Jones 16,000 will be a steep one.

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‘Hope-for-Growth Momentum Investing’

by AuthorWolf Richter

It has now become gospel that stock markets no longer depend on economic or business fundamentals, that they’ve finally been liberated from all those nagging and inconvenient details that in the past had held them down or smashed them into the ground. The gospel can no longer be denied. Andrew Lapthorne, Head of Quantitative Equity Research at Societe Generale, wrote in his Tuesday report:

Of course fundamentals have taken a backseat to cheap money and central bank largesse for some time now and the US Fed was once again reminding markets yesterday of its dovish tendencies. Weak fundamentals and cheap money provide the perfect recipe to drive ‘hope for growth’ momentum investing. Why worry if the price can only go up.

It shows up in every aspect of the markets. While stocks have soared last year, revenue and earnings growth have been measly. And so far this year, things have gotten tougher. Rather than just soaring, stocks have lumbered and stumbled from one new high to the next. But with earnings season about to kick off, corporate confession time has been in full swing – and there has been a lot of confessing.

So far, of the 111 companies in the S&P 500 that have issued earnings guidance, only 18 have guided above Wall Street’s consensus estimate for the first quarter, according to FactSet. That’s 16%; if that’s the final number, it will be the third-lowest for positive guidance in the data set’s history going back to 2006.

But 93 companies (84%) have issued earnings warnings – the second-highest in FactSet’s data series, and just one notch below the record 85%, the dubious achievement of the fourth quarter 2013.

Companies in the Consumer Discretionary sector got hit the hardest – I’m shocked, shocked, shocked, given America’s effervescent consumers who all have highly paid full-time jobs or something. Industrials were second in line. Both are on track to set a new record in negative EPS guidance.

FactSet’s chart shows the ever shrinking positive preannouncements (green bars) and the ballooning negative preannouncements (red bars).

But don’t worry: “hope-for-growth momentum investing” takes care of it.

As expected, the stock market reacted positively to the positive EPS announcements during Q1, well, those few companies that actually had them: the average stock price of the 18 companies that issued positive EPS guidance, as FactSet pointed out, rose 3.6% (measured 2 days before and after) and handily beat the five-year average of 3.0%.

And the losers? Over the last five years on average, stocks of companies with negative earnings preannouncements got whacked nearly 1% over the four-day period. But not during these crazy times of ours. Even when earnings projections were cut, the market reacted positively. The 93 sinners saw their stocks rise 0.2% on average.

Nothing rooted in reality can take down this stock market.

The game is working. Companies have issued record amounts of debt to buy back their own shares. In Q4 2013, buybacks by S&P 500 companies jumped 30.5% year over year to $129.4 billion. Borrowing money to buy back shares is the simplest way to boost EPS.

It’s not an investment in productive capacity, marketing, or expansion projects. It just blows a lot of cash on manipulating the one number that the entire world is focused on. To heck with the rest. And it piles risks and future interest expenses on the balance sheet. Meanwhile, growth in revenues and actual earnings is in the doldrums.

What has been soaring, however, is the “hope for growth.” Every quarter, analysts project dizzying revenue and earnings growth, and even more EPS growth, two or three or four quarters into the future, and they use these metrics of fabricated numbers to justify current stock prices, and every quarter, when realty sets in, they roll their hopes further into the future.

The game isn’t to produce growth in revenues and actual earnings but to create momentum and manipulate the stock price up. So, companies issue earnings warnings that will, during our crazy times, raise stock prices on average, and then they report EPS numbers that exceed these lowered expectations which will raise stock prices again. In the olden days of stock price manipulation, the first would hammer the stock, and the second would goose it. Now both goose it. A two-step way to ever higher stock prices on uninspiring performance.

That liberation of stocks from economic and business realities, and the concurrent official renunciation of gravity and of certain laws of physics, is the Fed’s greatest achievement in its illustrious 100-year history. And they’re right, because everyone believes that everyone believes that they’re right, and so they chase the momentum and it works wonderfully. Until, someday, it suddenly doesn’t.

Margin debt is a crummy predictor of a crash. But it has a bone-chilling habit of peaking right around the time stocks do crash. In the last fifteen years, it spiked three times: during the final throes of the bubbles that imploded in 2000 and 2007; and now.

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