US farm prices may halve as rates rise, Fed warns

by Agrimoney.com

Farmland values could "plummet" in the US – potentially by one-half – if the market supports of low interest rates and high crop prices crumble, the US central bank has warned, heightening concerns over the market boom.

Record farmland prices, which in the Midwest increased at their fastest in 32-years in the first three months of 2011, appears rational as long as borrowing costs remain low, reducing investors' hurdle rates for returns, while elevated crop values keep actual profits high.

"Current farmland values reflect high farm revenues and low capitalisation rates," the US Federal Reserve system's Kansas bank said.

However, they "could fall sharply if crop prices sag or future interest rates rise", the bank added, warning of a "high risk" from interest rate moves.

'Values could plummet'

Indeed, higher interest rates are, besides making investors more demanding of returns from their purchases, likely to present the farmland market with a second blow of a stronger dollar which, in making US exports such as crops less competitive, would undermine agricultural commodity values.

"As the economy strengthens, interest rates could rise, which may lift capitalisation rates and lower farm revenues," the bank said in a report.

"Events such as these could become a recipe for falling land values and the erosion of farm wealth."

Indeed, the market could fare worse than in the early 1980s, when a jump in interest rates, coupled with lower US farm exports and weaker commodity prices, fuelled at 40% slide in US farmland values – even after taking inflation into account.

"If similar events occur in today's environment, farmland values could plummet," the briefing said, with this scenario implying as halving in Nebraska prices.

"Other regions face similar risks."

Market bubble?

Thomas Hoenig, the president of the Fed's Kansas City bank, has been for some while a sceptic of the rise in farmland prices, warning in February that ''history has taught us that it is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets".

Other observers who have voiced concerns include Robert Shiller, the Yale economist who warned in March that the farmland was a "dark horse" as the site of the next market bubble, while regulators at the Federal Deposit Insurance Corp have highlighted the sector's resilience at a time of weakness elsewhere in the economy.

"While we don't see a credit problem in agriculture at this time, the steep rise in farmland prices we have seen in recent years creates the potential for agriculture credit problems sometime down the road," Sheila Bair, FSIC chairman, said, also in March.

Alternative views

However, many other bankers are more sanguine about the market, with two-thirds of those surveyed by the Fed's Kansas City bank for a report two weeks ago believing prices would level off, rather than tumble, following growth of 20% in the first quarter.

A report from the system's Chicago bank last week showed more than half bankers expecting the market price growth to continue, while adding that farmers' borrowing, compared with deposits, remained comfortably below level triggering alarm bells.

See the original article >>

Will the U.S. default? Is it really possible?

by Martin D. Weiss Ph.D

What happens on the day Uncle Sam runs out of money?

Or equally drastic: What happens when he’s no longer able to borrow from Peter to pay Paul and misses payments to countless creditors around the world? 

Treasury Secretary Geithner sent a letter to Congress earlier this month with some of the answers. In it, Geithner describes a scenario in which …

A broad range of government payments are stopped, limited, or delayed, including military salaries, Social Security, and Medicare payments, interest on debt, unemployment benefits, and tax refunds.

Interest rates and borrowing costs move sharply higher, home values decline, and retirement savings for Americans are reduced.

Geithner even warns of “a financial crisis more severe than the crisis from which we are only now starting to recover.” (See my commentary in “Doomsday Scenario” and also Geithner’s actual letter.)

But if the United States truly missed interest and principal payments on its debts, the actual scenario would likely be far worse:

Instead of acting as ultimate protector and benefactor, the government is increasingly perceived as the ultimate deadbeat and even public enemy. Government agents and agencies fail to respond when desperately needed or, worse, overreact to perceived threats to their power, harming innocents financially and even physically.

Local governments shut down libraries, county jails, even courts. Garbage piles up on the streets. Crime rates soar. But police enforcement is so scarce that the wealthy must pay bribes for adequate protection, while middle-class communities are left largely defenseless.

State governments gut budgets, lay off teachers, and close schools. Classrooms are so crowded, children are allowed on campus strictly on a first-come, first-served basis. Truancy is rampant but ignored.

The federal government cuts current Social Security and Medicare payments across the board or, worse, sends recipients greatly devalued checks. Veterans hospitals shut down. Unemployment benefits are slashed.

Fannie Mae’s and Freddie Mac’s lending operations are phased out. Affordable FHA mortgages are scarcer than hen’s teeth. Washington’s many foreclosure prevention programs are themselves closed. Millions of homes are repossessed and dumped on the market.

What Will Actually Happen? 

Let’s consider all the facts — coldly, objectively, and without political bias. 

Fact #1. Everyone — including Mr. Geithner and the Republican leadership in Congress — knows that the debt ceiling debate is mostly political posturing.

Everyone also knows that to overcome this hurdle, all Congress has to do is pass a simple piece of legislation. Therefore, we do not expect the U.S. government to default directly on its debts. 

But the U.S. is already defaulting indirectly by devaluing the U.S. dollar … and it will continue to do so! 

Fact #2. No government can repeal the law of supply and demand. No army or police can enforce laws that might seek to control global financial markets. 

They cannot stop investors all over the world from selling U.S. dollars. 

They cannot stop those same investors from dumping U.S. Treasury notes or bonds. 

And ultimately, they cannot force foreign creditors to continue lending money to the United States. 

Fact #3. The U.S. has already reached its debt limit, and a fundamental shift in global attitudes toward Washington is already under way. 

Meanwhile, Mr. Geithner is postponing the ultimate judgment day with a series of money-shifting shell games at the Treasury Department. 

The true, drop-dead deadline, he says, is August 2. If Congress doesn’t raise the nation’s legal debt limit by then, that’s when the shift will truly hit the fan. 

This gives Congress some more time. But no one knows how much time America’s foreign creditors will give us …

Fact #4. Even as early as the year 2000, the U.S. began to depend massively on borrowing from overseas — a total of $1 trillion.

China, the UK, Germany, and OPEC countries loaned America large sums, with the single largest loans coming from Japan. In fact, at that time, the U.S. borrowed more from Japan than the sum total of the other four. 

But it wasn’t enough to sustain the debt-hungry, bubble economy in the United States. 

Giant Internet and technology companies crashed. The Nasdaq lost three-quarters of its value. The American economy sank into recession. Unemployment soared.

Fact #5. To save the economy from collapse, then-Fed Chairman Alan Greenspan artificially shoved interest rates down to the lowest levels in a half century … and kept them there for nearly two years.

In addition, the U.S. was forced to borrow massively from overseas AGAIN — this time mostly from China. 

But it STILL wasn’t enough! 

The housing bubble burst. The economy collapsed. America’s largest banks went broke or needed giant bailouts. All of Wall Street nearly melted down. 

Total debts to foreigners as of the latest reckoning: $4.47 trillion, or more than QUADRUPLE the level of 2000 — by far the largest of all time. 

Fact #6. If you think borrowing trillions from overseas is a warning sign of big trouble, wait till you see what happened next. 

When the lowest interest rates in a half century and the biggest-ever borrowing from overseas were STILL not enough to rescue failing banks and finance ballooning federal deficits, Fed Chairman Ben Bernanke resorted to the greatest money printing in U.S. history (as measured by aggregate reserves of banks and the monetary base).

Heck, even in the most extreme circumstances of recent history, the Federal Reserve had never pumped in anything close to the amounts Bernanke created.

For example, before the turn of the millennium, the Fed scrambled to provide liquidity to U.S. banks to ward off a feared Y2K catastrophe, bumping up the monetary base from $557 billion on October 6, 1999 to $630 billion by January 12, 2000. At the time, that sudden increase was considered extreme — $73 billion in just three months. 

Similarly, in the days following the 9/11 terrorist attacks, the Fed rushed to flood the banks with liquid funds, adding $40 billion through 9/19/01. 

But Mr. Bernanke’s money printing since September 2008 has been a whopping 22 times larger than during in the Y2K episode and 41 times larger than 9/11!

Moreover, in the Y2K and 9/11 episodes, soon after the immediate crises had passed, the Federal Reserve promptly reversed its money infusions and took the excess amounts back OUT of the economy, restoring a semblance of normalcy. 

But now, Mr. Bernanke has done precisely the opposite! He has continued his money-printing binge virtually nonstop — first under the rubric of “quantitative easing round one” (QE1) and now under “quantitative easing round two” (QE2).

Total amount printed by Bernanke so far? $1.634 trillion! (From 9/10/2008 through 5/4/2011.) 

And that’s on top of Bush and Obama economic stimulus packages — not to mention countless government bailouts and guarantees.

But It’s STILL Not Enough!

As Mike Larson explains in “The Forgotten Crisis,”

“The massive economic stimulus package from a few quarters back, plus the Federal Reserve’s unprecedented wave of money printing, didn’t buy us much. We printed, borrowed, and spent more than $2 trillion. And all it bought us was a few quarters of tepid GDP growth.

“Now the end of QE2 is looming in just six weeks. The federal government is tapped out, what with the debt ceiling pressure. So we’re left with an economy that has to stand on its own two feet … and it appears it just can’t!

“GDP growth already slowed from 3.1 percent in the fourth quarter of 2010 to 1.8 percent in the first quarter of this year. Now it looks like things could be even worse in the current quarter.”

Meanwhile, Mike points out that …

1. Housing starts have just plunged 10.6 percent, leaving the market stuck at a dismal level of about 500,000 to 600,000 starts for two-and-a-half years — DESPITE hundreds of billions of dollars in aid being thrown at the market by Washington.
2. Home prices are down again. They fell apart in the housing bust. Then they recovered a bit. Now, they’ve fallen back down and are dangerously near their lowest levels reached during the depth of the housing bust in early 2009!
3. Industrial production flatlined in April, confounding economists who were looking for a gain of 0.4 percent.
4. The Empire Manufacturing Index, which measures activity in the greater New York area, plunged to 11.9 in May from 21.7 a month earlier.

“Bottom line,” concludes Mike, “the American economic engine is starting to sputter again!”

Time Is Running Out! 

The U.S. dollar has already been plunging against nearly all major currencies of the world.

The cost of food, energy, and imports are already going through the roof.

Mr. Bernanke’s second big round of money printing is already about to end. 

Even if he embarks on a third round, he will have to step up the pace dramatically, risking even bigger price surges … or cut back the pace, risking an economic tailspin. 

Which will it be? Right now, Bernanke’s on track to ramp up the printing presses even further.

Our advice:

• Stay away from medium-term notes or long-term bonds of any kind, whether issued by local governments, the U.S. Treasury, or corporations. Remember: Even a moderate acceleration of inflation can significantly erode their value.
• To protect yourself against inflation, buy, hold, and accumulate gold and other hedges.
• The best defense is to go on the offense. And the best way to go for substantial profits is with ETFs that are most likely to rise as the dollar falls.

Prime example: ETFs tied to the most in-demand tangible assets, the strongest foreign currencies, and the most stable, fastest-growing economies.

See the original article >>

Corn demand tops the list of China's agriculture priorities

by Commodity Online

China, the world’s second-biggest consumer of corn, is all set to expand planting this year as the industrial use of corn is increasing rapidly and farmers seek to profit from strengthening prices.

China’s demand for corn is expected to grow faster than supply over the next 10 years. A dramatic increase in the industrial use of corn to produce ethanol would require increased output of the grain and will lead to higher prices.

Bloomberg has reported that China is limiting corn use by the biochemical and sweetener industry to ensure sufficient supplies for livestock feed. On the other hand, processors are barred from buying more corn than they consumed in 2009 since most of the large processors anticipated government policies and bought supplies quite early the industrial use of corn is not expected to drop significantly.

According to National Grain and Oil Information Center, total domestic corn consumption in China has been growing at 2.4 percent annually surpassing the 1.7 percent annual growth in production--trends that have sharply effected its stocks of corn.

The surging industrial demand have caused corn prices to rise sharply since the latter half of last year.

According to the official data, China's total corn consumption was over 180 million tons in 2010, increasing by over 5% over 2009. With the recovery of Chinese economy, the demand of China's feed and processing industry for corn will see a sharp increase in 2011-2012.

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Stock Market Wave Counts

By: WavePatternTraders

This week I want to spend some time on some long term views, as I have received some questions about my views to the long term trend. Whilst I am not really a fan of long wave term counts, we are following a couple of ideas.

I am sure there are readers asking themselves is this a bull or bear market?

By definition there can be no doubt that the past 2 years the markets have been a bull market in the sense that price has moved up, traders in my opinion should not be dazzled with the reasons why it's a bull market, but more interested in what price is doing.

However price is starting to show some cracks and whilst it started to look aggressively bullish a few weeks back, a lot has happened and there is some definite flaws with the aggressive bullish stance that many have adapted.

Price action is not lending itself to the aggressive nature you would expect if this was to be in what Elliotticians refer to as a "3rd of 3rd" in this case it would have been to the upside.

What we are seeing and especially since Feb 2011 is a bunch of noise and chop, which further supports the ideas I am showing here.

Now like everything in the markets, nothing is ever a definite, and we will adjust as necessary, but we are starting to see a clear image going on in the past few weeks, whilst this recent chop has been anything but friendly for traders, if you stand back and look at the big picture shown here, you can see the potential shape of wedge that could be signaling an impending reversal and one that could be ending the rally from March 2009.

An alternative bearish wave count

This is not the general coconscious in the Elliott world, I am sure many readers are familiar with the DOW 1000 wave count and the end of the world wave count that some bears are following. Personally I am not really in that camp, overall it wouldn't make much difference as this idea shown here is suggest a trip back to the March 2009 lows.

Now Elliotticans that are reading this article or even readers with a grasp of Elliott wave theory will note the obvious 3 wave move from the March 2009 lows, what most important is what's going on now with price action. If you look carefully you will note the wedge potential of price action recently, that's showing a real battle ground taking place, and is generally associated with the top of a trend in a market, hence the potentials I will show in this article.

The bear case is that the market is still ongoing in a bear market, and I am sure readers are fully aware of the money printing and debt that many countries have took on over the past few years, and most know that the reasons why the market is where it is, it's because of POMOs and suchlike, as the US government via the FED is supporting the stock market, that's pretty much common knowledge, but again regardless of the reasons, price is still moving higher, just like back in 1999, the market simply shrugged off any cracks that were showing up until one day it fell apart, and again like back in 2007, the same setup, cracks were beginning to show back then, its most likely the same now, the market is not listening to the fundamentals of the real world, hence you can't use the fundamentals when trading price, which is why traders rely on technical analysis, as if you based your decision on trading the fundamentals you would have been run over with the path the markets have been on over the past 2 years.

But now we are starting to see some cracks, you have seen that over the past few weeks from Feb 2011, when you look at a daily scale we notice the potential for this to start to wedge or a triangle, but we tend to think this has the makings of an ending diagonal taking shape. If price starts to wedge that's a bearish sign and the market is trying to signal the trend is coming to an end.

What traders need to be asking is, what is the shape that is going to take place here. Forget about the labels, they are only relevant to an experienced Elliottican. What's important is what price is doing, the past week has been one chop fest of whipsaw, and here is where it's important to look at what's going on in a larger time scale, if you look carefully, we have chopped around for a few weeks and no side is really getting the advantage.

What more important is what price is doing, it's not moving higher in an impulsive aggressive action as we saw before, that's a slight characteristic change, hence the aggressive bullish idea of seeing an imminent aggressive move higher is lacking in the right price action.

So the ideas that really standing out here, is a potential triangle or an ending diagonal (wedge).

The very fact we are seeing chop and whipsaw at the top of a trend is a characteristic of both those patterns, which further suggests, is that we are likely in a topping phase, as the bears and bulls are fighting it out, but the fact that's its gone from very aggressive upside to chop is a characteristic of one of those patterns and something that the bulls do need to be aware of.

Whilst we are still bullish here we are not as bullish as we was a few weeks back as we see the cracks here as the character has changed, so we are watching for which idea becomes favorite, both imply higher prices, but it's the chop and whipsaw that will become a problem for traders in the near term, we are already seeing 15 handle daily swings, you don't see that in aggressive bullish trends, you only have to look back to before the Feb 2011 high to see that day after day we saw straight up price action, that's the hallmark of an aggressive trend, not what we are seeing now.

As traders you can only trade what you see, but the predictability of using Elliott is its usefulness in patterns especially with patterns such as the ending diagonal or triangle.

The most recent example of an ending diagonal was on oil just a few week back before it literally fell apart.

If the market continues to overlap over the coming days and weeks, we suspect we have one of 2 patterns working, either a triangle which we rate at 35%, a potential ending diagonal, which we rate at 45% or the lows odds flat towards 1240SPX rated at 20%.

In order to really see an aggressive upside move here, it will need to do something special that is going to have to surprise traders, that means aggressive price action and buyers coming and buying with both hands, what we have seen recently is lack a luster performance, that's not something we wanted to see for an aggressive move, hence we are cautiously bullish and looking at one of the patterns above.

As shown above, here is what we think could be going on over the coming weeks, the clue is that price action continues chop around, and overlap, and more importantly starts to wedge, as that the key to the ending diagonal, lower volume, and less and less participation as the trend is coming to an end to reverse.

In order to get the trend back into the aggressive bull mode, it's going to need something far different than we have seen over the past few weeks, something like the back end of last year.

We still are bullish medium term, as it will need to do a lot more damage on the downside to suggest an aggressive bearish idea, but we are cautious and following one of 2 potential patterns as seen in this article.

FTSE & DAX

If you look at the recent price action of the DAX and FTSE, they both too have the potential for an ending diagonal, the aggressive idea of seeing a big move higher from here is looking weak, as the price action over the past few weeks is not something I would consider, is a characteristic of a "3rd of 3rd" it's more likely towards the end of a trend.

So we will be following price action over the coming days to see if they start to wedge to provide the clues we need to see if an ending diagonal setting up here over the coming weeks.

See the original article >>

Stocks Bear Market Rally and Market Manipulation

By: Tim_Wood

As I have stated all along, my research suggests to me that the rally out of the March 2009 low has been a bear market rally. Nothing has occurred to change that point of view. In light of that view, I have received a number of e-mails asking about manipulation and if “they” could prevent such an event from happening. 

All throughout the period between 2003 and 2007 I explained that we were seeing a stretched 4-year cycle. I also explained that the efforts by the powers that be to hold things together would ultimately only serve to make matters worse. There is no doubt that the manipulative efforts seen during this period contributed in a very negative way to the credit and banking crisis. In my eyes, this was largely accomplished through the unscrupulous lending practices and mass financial irresponsibility, resulting in the housing bubble, which Greenspan tried to tell us did not exist and which I called, in writing, in late 2005, before the top became apparent.

In October 2007 the equity markets peaked. My subscribers were informed of that fact as we knew what we were looking for and as it occurred we knew exactly what was happening. As the decline took root the manipulative efforts became even more drastic than what was seen into the 2002 low. But, cyclically, none of this mattered as the market continued lower until the cyclical events required to make the 4-year cycle low and the Phase I low were achieved. It was from that point that this bear market rally began. In the eyes of most people and the politicians, they believe that they have “saved” the market and that the economy has bottomed. This is not so. The market and the economy merely reached a temporary bottom in March 2009, in which the rally that should ultimately prove to separate Phase I from Phase II of the bear market began. This rally has served to give the public a false sense of security and hope that the economy is now on the road to recovery. This rally has also given the powers that be a false sense of power in that they think they have every thing under control as a result of their manipulative efforts. According to the historical bull/bear market relationships and the longer-term phasing of Dow theory, this is not likely the case. Once the proper setup occurs, the bear will have his opportunity to cap this advance. Unfortunately, in the meantime, the hope and hype of Wall street and Washington keeps the public blindly optimistic.

I have gone back to 1896 and have identified a very specific cyclical “DNA Marker” that has occurred at every major market top. If the Dow theory phasing is right about this being a bear market rally, this DNA Marker will appear in accordance with very specific statistics, which will set the stage for the suspected Phase II decline in this ongoing secular bear market to begin. These details are being covered in my monthly research letters. Once this DNA Marker is in place it won’t matter what the powers that be do or say because the bear will have his way. The bailouts were a waste of money and were only associated with a temporary low. The powers that be cannot manipulate the entire world out of the natural forces and cyclical events that have to play out. Their efforts only serve to make matters worse and to postpone the inevitable. Again, the most recent example of this occurred as a result of the efforts to keep things going between 2003 and 2007. Were things not worse in 2008 and early 2009 than they were in 2001 and 2002? Yes, they were. Did the efforts between 2003 and 2007 prevent the downturn into the 2009 low? Did “they” warn you of the downturn in 2000, or of the housing bubble, or of the 2007 top? Have the efforts in 2008, early 2009 and the time since not been more extreme than they were in the 2003 to 2007 period? Yes, they have been and I look for the fall out from those extreme efforts to be worse than the fallout of the 2003 to 2007 efforts. So, if we see this DNA Marker occur, then we will have the proper setup in place for a meaningful correction. Such correction should at least correspond with 4-year cycle top and the decline into the next 4-year cycle low. The greater risk to the market is that if the longer-term Dow theory phasing is correct, this should also correspond with the Phase II decline. Just as I warned of the 2000 top, the 2007 top, the top in housing in 2005 and of the top in commodities in 2008, I am now warning that another surprise is coming. It is the appearance of the proper setup that will set the wheels into motion and the manipulation is once again not going to matter.

The following text on Manipulation was taken from Robert Rhea’s book, The Dow Theory.

“Manipulation is possible in the day to day movement of the averages, and secondary reactions are subject to such an influence to a more limited degree, but, the primary trend can never be manipulated.

Hamilton frequently discussed the subject of stock market manipulation. There are many who will disagree with his belief that manipulation is a negligible factor in primary movements, but it should always be remembered that he had, as a background for his opinions, a most intimate acquaintance with the veterans of Wall Street, and the advantage of having spent his life in accumulating facts pertaining to financial matters.

The following comment, taken at random from his many editorials, affords convincing proof that his views on the subject of manipulation did not vary:

‘A limited number of stocks may be manipulated at one time, and may give an entirely false view of the situation. It is impossible, however, to manipulate the whole list so that the average price of 20 active stocks will show changes sufficiently important to draw market deductions from them.’ (Nov. 29, 1908)

‘Anybody will admit that while manipulation is possible in the day-to-day market movement, and the short swing is subject to such an influence in a more limited degree, the great market movement must be beyond the manipulation of the combined financial interests of the world.’ (Feb.26, 1909)

‘…the market itself is bigger than all the ‘pools’ and ‘insiders’ put together.’ (May 8, 1922)

‘One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive. The writer claims no more authority than may come from twenty-two years of stark intimacy with Wall Street, preceded by practical acquaintance with the London Stock Exchange, the Paris Bourse and even that wildly speculative market in gold shares, ‘Between the Chains,’ in Johannesburg in 1895. But in all that experience, for what it may be worth, it is impossible to recall a single instance of a major market movement which depended for its impetus, or even for its genesis, upon manipulation. These discussions have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much over-speculations or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing.’ (The Stock Market Barometer) ‘…no power, not the U. S. Treasury and the Federal Reserve System combined, could usefully manipulate forty active stocks or deflect their record to any but a negligible extent.’ (April 27, 1923)

‘The average amateur trader believes the stock market is guided in its trends by a certain mysterious ‘power,’ this belief being the one factor, next to impatience, most responsible for his losses. He reads tipster sheets avidly; he scans the newspapers industriously for news likely, in his opinion, to change the trend of the market. He does not seem to realize that by the time the news of real importance is printed, its effect, so far as the basic trend of the market is concerned, has long ago been discounted.’

‘It is true that a flurry in the price of wheat or cotton may influence the day to day movement of stock prices. Moreover, sometimes newspaper headlines contain news which is construed as bullish or bearish by market dabblers, who collectively rush in to buy or sell, thus influencing or ‘manipulating’ the market for a short period. The professional speculator is always ready to help the movement along by ‘placing his line’ while the little fellow timidly ‘lays out’ a few shares; then, when the little fellow decides to increase his commitments, the professional begins to unload and the reaction ends, and the primary movement is again resumed. It is doubtful if many of these reactions would ever be caused by newspaper headlines alone unless the market was either overbought or oversold at the time---the ‘technical situation’ so dear to the hearts of financial news reporters.’

‘Those who believe the primary trend can be manipulated could, no doubt, study the subject for a few days and be convinced that such a thing is impossible. For instance, on September 1, 1929, the total market value of all stocks listed on the New York Stock Exchange was reported to have amounted to more than $89,000,000,000. Imagine the money which would have been involved in depressing such a mass of values even 10 per cent!’

Today’s total market cap is some 50,000,000,000,000 and QE 2 was valued at 600,000,000,000, which is 1.2 percent of the estimated total US market cap. So again, the manipulation will not matter.

See the original article >>

Key Markets And Indicators Divergence: Stocks, Copper, Treasuries, Bonds, Investor Sentiment and Commodities

By: Tony_Pallotta

I posted a few charts this week showing some extreme levels and or divergences and wanted to combine them into one follow up post. The equity markets are at a very important juncture right now and confusion is rampant in every trader's mind.

The markets have fooled almost everyone over the past two years and with QE2 ending in six weeks the headlights draw near as the deer stand in the middle of the road unsure which way to run.

Copper: Copper has been a very good indicator of equity direction even during Fed QE when other correlations have broken down. We currently have a very large divergence with the SPX and the question becomes did copper put in a bottom based on last week's price action or was that a similar bounce as previously witnessed since the February 2011 high of 4.6495. 

I believe the answer to the above question regarding the future of copper was answered on Friday with the COT report (found here). Commercial accounts have positioned themselves for a major correction in copper. In fact the last time they were positioned as such was April 2010 when QE1 was ending and copper was trading at $3. These are not traders but rather producers and users of copper. They know what's going on in the market as they are the market.

The chart below shows the correlation between the SPX and Copper Commercial Net Positions.

Corporate Bond Spreads: Amazing how the spread between high yield and investment grade corporate debt bottomed in 2011 at 80 basis points (bp) while in 2007 it bottomed at 79 bp. They could trade lower as high yield catches even more of a bid but they are at multi year lows after an impressive move since 2009.

Treasury's: Using history as a guide bonds caught a bid in April of 2010 a full two months before QE1 ended and have begun to show a similar pattern in 2011.

AAII Investor Sentiment: The divergence is at an extreme and someone is clearly wrong. History would say it is sentiment as the lower the number of bulls the higher the market will move. The divergence is absolutely massive though and remains the one big thorn in the side of the bears.

Commodities (data as of May 18, 2011): Commodities have peaked. Why would they peak now other than to fade QE2 or as economic data weakens? 

Commodities peaked in the summer of 2008 on average two to three months before the markets began their correction. The other question is why did Glencore, the largest commodity trader go public now and why has the IPO price already be taken out to the downside as investors bring down their valuations?

Copper – Peaked on February 15 – down 11.8%

WTI Crude – Peaked on May 5 – down 12.9%

Corn – Peaked on April 11 – down 4.3%

Wheat – peaked on February 9 – down 8.2%

Soybeans – peaked on February 9 – down 37.2%

Cotton – peaked on March 7 – down 28.2%

Sugar – peaked on February 2 – down 36.2%

Cocoa – peaked on March 4 – down 20.6%

QE History: With the second round of QE coming to an end we now have three of four events to use as a historical guide. Two times are the beginning of QE and one is the end of QE. All three times markets faded the news. History would then say the end of QE2 will also be faded. It is quite possible 1,370 on the SPX was in fact the beginning of that fade.

See the original article >>