What the U.S. Dollar & the Euro Mean to the S&P 500

by J.W. Jones

The buzz around the blogosphere and in the media is that Quantitative Easing II is scheduled to end in around 3 weeks. Already pundits are asking about Quantitative Easing III as a matter of when, not if. In reality a QE III Lite version is already in the cards as the Federal Reserve has stated they will be buying Treasuries and Mortgage Backed Securities (MBS) with maturing issues. The Fed also plans on reinvesting the interest earned from the existing portfolio (Roughly $15 billion/monthly).

When it comes to the application of financial principles, doing the opposite of what everyone else does generally leads to an extreme variation in the overall results. While the results are not always better, they are at the very least significantly different from what most lemmings within the group experience. In every aspect of my financial life I try to do the opposite of what the herd is doing. It takes experience and a significant level of discipline, but buying from the herd when they are selling and being willing to sell into a crowd when they are buying is a great way to trade. It sounds easy, but for most people it is not, myself included.

Right now financial markets are uncertain. I would be remiss if I did not point out the recent strength in the U.S. Dollar Index and the potential higher low that it has carved out on the daily and weekly charts. The weekly chart of the U.S. Dollar Index is shown below:

The current pattern on the U.S. Dollar Weekly chart is bullish. We could see the U.S. Dollar Index trade significantly higher from here as it has been under severe selling pressure for an extended period of time. While I believe technical analysis is just one context through which to view financial markets, it is uncanny how often market cycles and headline events line up. Is it merely a coincidence that the U.S. Dollar is potentially bottoming around the same time the Federal Reserve is ending the QE II asset purchase program?

Regardless of what camp economists are in, we presently live in a strange time for financial markets and capitalism in general. One of the more interesting charts to study is the Euro currency, which in contrast to the U.S. Dollar Index appears to have a more bearish pattern. Could it be that the U.S. Dollar is setting up to rally because of the perceived weakness of the Eurozone? The daily chart of the Euro ETF is shown below:

The Dollar may be firming up here based on the Euro’s weakness and it may have absolutely nothing to do with QE II ending. I always refer to price action and never question Mr. Market’s directional bias. If the U.S. Dollar begins to work higher what impact will it have on equities?

A stronger U.S. Dollar would certainly put pressure on risk assets, specifically equity and commodity prices. As it turns out, we are at an interesting juncture in financial markets at this point in time.

The 4 year stock market cycle is nearing an end, a presidential election will take place in less than 18 months, the U.S. government has a massive debt crisis developing, and the European debt crisis continues to mature in what will likely be a microcosm of what we will face here in the United States. The Middle East remains tense at the very least and the recent OPEC announcement to maintain supply levels has helped support oil prices.

Higher oil prices have obviously slowed down the U.S. economy as the consumer is strapped with higher costs on nearly everything, specifically food and energy. In addition, the unemployment numbers are seemingly not improving and housing appears to be rolling over . . . again.

Almost everywhere we look the news is bleak. Mr. Market has shrugged off bad news time and time again since the March 2009 lows. The long term shorts remain frustrated to say the least and those who were actively shorting along the way have likely been stopped out multiple times. Everywhere I look market commentary is bearish and pundits are talking about additional weakness as they point to a rallying Dollar and multiple economic headwinds facing domestic markets.

Traders and investors should be focused on a few specific price levels on the S&P 500. With the Dollar rallying, the S&P 500 index has remained under extreme selling pressure for multiple weeks. The S&P 500 (SPX) is likely going to test its 200 period moving average. From there I am expecting a bounce higher, although the bounce may be nothing more than a Dead Cat Bounce.

As always, time and price will be the final arbiter but if the Dollar continues to trade higher we could see the S&P 500 lose its 200 period moving average and eventually test a major support level which needs to hold up for the bulls. If the March 16, 2011 pivot lows are taken out to the downside, the next leg of the secular bear market may be under way. The daily chart of the SPX illustrated below shows the key price levels and the potential price action that may lead up to a key test of the March 2011 pivot lows:

Very rarely does the first mouse get the cheese, so I would anticipate a bounce off of the 200 period moving average which currently coincides with the March pivot lows. With not only the pivot lows but the 200 period moving average offering support a breakdown lower will be a large tell about the health and future price action of the S&P 500.

Right now I am just going to focus on how the S&P 500 handles the key support zone illustrated above. The forthcoming price action will tell traders everything we need to know about the health of financial markets. I have no idea if we are about to enter a double dip recession nor do I know whether price action will even test the March pivot lows.

What I do know is that price action in coming days around key support areas is going to be critical. I am convinced that Mr. Market will tell us whether the bullish party will continue or come to an end in the next few weeks/months. A breakdown of the March pivot lows in the future will likely initiate the launch sequence for the next secular bear market. I would keep the S&P 500 1,250 price level on the radar going forward. Risk remains high.

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Chinese Rating Agency Says “The US Has Already Defaulted” … German Rating Agency Downgrades U.S. Debt

By Washingtons Blog

While Baghdad Bob Ben Bernanke says that everything is fine, China’s Dagong credit rating agency says the U.S has already defaulted. As AFP reports:

“‘In our opinion, the United States has already been defaulting….Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies – eroding the wealth of creditors including China, Mr Guan said.”

This follows on the heels of German credit rating agency Feri’s downgrade of U.S. bonds a full notch – from AAA to AA – saying:

“The U.S. government has fought the effects of the financial market crisis primarily by an increase in government debt. We do not see that there is sufficient attention being paid to other measures, “said Dr. Tobias Schmidt, CEO of Feri Rating & Research AG. “Our rating system shows a deterioration in economic health, so the downgrading of the credit ratings of U.S. is warranted.”

Which – in turn – follows American credit rating giant Standard & Poors’ warnings about a potential future downgrade to U.S. credit.

While the deficit hawks will take both announcements of proof that they were right, and the deficit doves will say that people are too concerned with debt and that we need more stimulus, neither are looking at the facts.

The government’s entire approach has been to prop up the lenders by giving trillions to the giant, insolvent banks.

But as economist Steve Keen proved years ago, giving money to the debtors is would have stimulated the economy much more than giving it to the lenders.

Indeed, top experts agree that too much inequality leads to economic crashes. Basically, if one poker player gets all of the chips, the game ends … and the government’s policies have caused more inequality than we’ve had in this country since 1917 — well before the Great Depression.

As Robert Reich put it yesterday

The problem isn’t on the supply side. It’s on the demand side. Businesses are reluctant to spend more and create more jobs because there aren’t enough consumers out there able and willing to buy what businesses have to sell.
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Consumers can’t and won’t buy more.
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How to get jobs back, then? By reigniting demand. Put more money in consumers’ pockets and help them renegotiate their mortgage loans.
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But we’re not hearing any of these sorts of demand-side solutions from the White House.

(Before you jump to the conclusion that this is a liberal perspective, remember that conservatives are also against rampant inequality, and that Reagan’s budget director called Bush’s tax cuts for the wealthy “The biggest fiscal mistake in history”, saying that extending them won’t stimulate the economy).

And while many people believe that war helps stimulate the economy, that is a myth. The facts show that war – especially prolonged wars like we’ve had in Afghanistan and Iraq – destroy economies.

(Again, before you fall into a false left-right split, remember that true conservatives are anti-war), and that the top security experts – conservative hawks and liberal doves alike – agree that waging war in the Middle East weakens national security and increases terrorism. See this, this, this, this, this and this.)

In fact, according to the non-partisan Center for Budget and Policy Priorities, the Bush-Obama tax cuts for the wealthy and the perpetual wars we’ve been waging for the last decade are by far the largest causes of our national debt:

Of course, while the Center for Budget and Policy Priorities downplays the role of the various bailouts in our debt situation, others might disagree. For example, I pointed out in December:

As I noted in December 2008, the big banks are the major reason why sovereign debt has become a crisis:

The Bank for International Settlements (BIS) is often called the “central banks’ central bank”, as it coordinates transactions between central banks.

BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:

The scope and magnitude of the bank rescue packages also meant that significant risks had been transferred onto government balance sheets. This was particularly apparent in the market for CDS referencing sovereigns involved either in large individual bank rescues or in broad-based support packages for the financial sector, including the United States. While such CDS were thinly traded prior to the announced rescue packages, spreads widened suddenly on increased demand for credit protection, while corresponding financial sector spreads tightened.

In other words, by assuming huge portions of the risk from banks trading in toxic derivatives, and by spending trillions that they don’t have, central banks have put their countries at risk from default.

A study of 124 banking crises by the International Monetary Fund found that propping banks which are only pretending to be solvent hurts the economy:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.

Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
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All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.

Now, Greece, Portugal, Spain and many other European countries – as well as the U.S. and Japan – are facing serious debt crises. We are no longer wealthy enough to keep bailing out the bloated banks. See this, this, this, this, this and this. [and this and this.]

Indeed, the top independent experts say that the biggest banks are insolvent (see this, for example), as they have been many times before. By failing to break up the giant banks, the government will keep taking emergency measures (see this and this) to try to cover up their insolvency. But those measures drain the life blood out of the real economy.

And by failing to break them up, the government is guaranteeing that they will take crazily risky bets again and again, and the government will wrack up more and more debt bailing them out in the future. (Anyone who thinks that Congress will use the current financial regulation – Dodd-Frank – to break up banks in the middle of an even bigger crisis is dreaming. If the giant banks aren’t broken up now – when they are threatening to take down the world economy – they won’t be broken up next time they become insolvent either. And see this. In other words, there is no better time than today to break them up).

The bottom line is that the issue is not whether liberal “Keynesian” or conservative “austerity” philosophies are right. (The war between liberals and conservatives is a false divide-and-conquer dog-and-pony show. See this, this, this, this, this, this, this, this, this and this.)

The issues are pilfering of our economy by the wealthiest .1% and the waging of imperial wars for reasons other than our national security (and see this).

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ZINCO - ANALISI DI BREVE E MEDIO

by Metalli Blog

Per il mercato dello zinco si prospetta una fase di ribassi nel breve periodo. Il calo della domanda da parte della Cina rischia di far cadere i prezzi soprattutto nel paese asiatico, dove le fonderie sono state costrette a ridurre la produzione già in aprile-maggio, nella speranza di non vedere crollare i listini. 

Gli effetti di una domanda fragile dovrebbero manifestarsi in particolare tra giugno e agosto: i produttori si attendono quotazioni attorno ai 17 mila yuan (2.623 dollari) per tonnellata per la vendita spot, mentre alL’LME il metallo è scambiato intorno a 2.260 dollari/tonn., in calo del 7% dall’inizio dell’anno. 

Secondo Li You, analista di Minmetals Futures a Shenzen City, lo zinco, dal punto di vista dei fondamentali, è il peggiore tra i metalli di base: le fonderie potrebbero tagliare la produzione e la domanda di minerale potrebbe ridursi. Già ora molte fonderie di zinco affermano di lavorare in perdita, visto che i prezzi del concentrato sfiorano i 13mila yuan per tonnellata. 

Con la produzione in calo, la conseguenza è che oggi le riserve di zinco, dopo essere salite più del 50% tra gennaio e aprile 2010, si sono rapidamente assottigliate e ora ammontano a 1,3-1,5 milioni di tonnellate. Molto basse e non mancano tra gli analisti, coloro che sono convinti che sia da mettere in conto una lenta ma sostanziosa ripresa degli ordinativi. 

Gli ottimisti – che sono convinti che lo zinco prenderà il posto del rame nelle mire degli investitori – ritengono infatti che la richiesta di metallo dovrebbe riprendere a partire da settembre quando scatterà l’imponente piano sviluppo immobiliare (da 10 milioni di nuove abitazione a basso prezzo) previsto dal Governo.

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Expect Market to Soften as Crop Conditions Improve

By: AgWeb.com Editors

This information is provided by Archer Financial Services, Inc. 800-933-3996.

The USDA Monthly Supply was the headline grabbing information this week in a week that saw corn values begin with a $.25 decline from last week only to end the week $.33 above last week’s close in July Corn.

What appeared to be a very mildly bullish report was met with limit gains on Thursday as the trade was surprised that the USDA chose its June S&D Report to make some most necessary changes. Anyone that is remotely acquainted with the grain markets and has only slightly followed Midwest weather conditions, has expected a downward adjustment in the planted acreage figures for corn. The only surprise was that the adjustment was made on June 9 and not June 30.

There may yet be another 500,000 acres shaved off of that figure in 2 ½ weeks. The real surprise may have been in the long overdue adjustment made in the world balance sheet as global corn carryover stocks declined by 17 MMT. Even this has been discussed in the marketplace and by national grain associations for the better part of 8 months. It appeared that the market was expecting a benign report and when surprise adjustments were made the reaction was an overreaction. 

The late-week rally provided a great opportunity for producers to hedge some new crop corn production above $7. As crop conditions improve, look for the market to soften and work back towards the middle of its recent trading range in preparation for what will most certainly be a critical and large price moving report in 20 days. Whether we are able to exceed this week’s highs and by how much will not be based on any information that we received this week, but by the data received in the June 30 Stocks and Acreage Report and how the weather plays out the rest of the summer. Make sure you are prepared for the volatility.

 

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Wheat needs to get used to playing second fiddle to corn

by Mike Verdin

Corn is making a better fist of keeping its premium over wheat in Chicago this time round. That looks a taster of their relationship for a while to come.

Sure, wheat made an effort on Friday to close its, unusual, discount over the rival grain, regaining some 10 cents per bushel of ground, July contract to July contract.

And its defence of its premium for further-ahead contracts looks pretty solid given the rewards for holding on to grain which were introduced last year by Chicago to close the gap between cash and futures prices.

But wheat had better get used to being overlooked for its apparently greater intrinsic value than corn, being considered, for instance, as a rule of thumb 15% better as a feed source.

Feed dynamics

Time is one factor on corn's side. The beginning of the winter wheat harvest in southern US states - and a better-than-expected start too – as well as in southern Europe will bring fresh supplies to the market, a depressant to prices, besides removing the need to price weather risks into harvested crop.

For corn, which in some US states is being harvested right up to Christmas, this cycle is later.

But demand is in the grain's favour too. Of course, corn's price should underperform wheat's if the grains' relative feed values were all that mattered.

They aren't. Domestic feed use of corn, while now expected by US officials to rise only by 10m bushels in 2010-11, is looking pretty resilient given that production of all major protein types has been cut back, compared with pre-recession levels. Many farmers are reluctant to give up on tried and tested corn-based feed formulas.

And recovery in cattle and hog prices from late-May lows will ease pressure for fresh herd reductions.

Ethanol hunger

Nor does it look safe to bet to assume exports will take all the rap.

The prospects of Chinese corn imports only appear enhanced now its inventories as of the close of 2010-11 have been pegged by the US Department of Agriculture at 53.7m tonnes – 5m tonnes less than previously thought.

And as for corn's use in making biofuels, it looks like requiring a significant drop in the oil market to throw bioethanol plants off course.

US ethanol production hit its highest since January at the start of the month, even with oil prices well below April highs.

Supply comparison

It is hard to argue with the USDA's assessment of both US and world corn stocks ending 2011-12 at historically tight levels.

That warrants quite some premium over normal prices. Certainly more than for wheat, for which supplies are distinctly more ample, and may prove even moreso if the benign early conditions for southern hemisphere producers follow through.

When corn rose above wheat in April, for the first time since 1996, the premium only lasted two days. This spell has already lasted twice as long.

Wheat may have to get used to more frequent, and lengthier, spells in second place.

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Homebuilders and Shanghai Index break down at the same time!

by Climbe Charting Solutions

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