Oil Market Manipulation Reaches Absurd Levels

By EconMatters

Markets & Manipulation: A long History

Most markets these days are manipulated to some extent, and this is nothing new if we look back through the history of financial markets. But there are some strange things happening right now in the oil market worth mentioning.

Brent-WTI Spread/Scam

Another scam in the Oil market is the Brent-WTI spread this has been one of the biggest scams over the years in the Oil market. Just to provide some data to the absurdity which is this much hyped about nonsensical spread Cushing Oklahoma has 49.7 million barrels in storage, it had 45.1 million barrels in storage a year ago. Cushing had 50 million barrels in storage at the start of the year. Moreover, in June Cushing will be adding additional supplies to storage due to current pipeline capacity going offline. So for all this talk about pipelines finally unlocking all the glut of oil supplies from the Cushing hub, and this being the reason for the impressive reduction in the Brent-WTI spread it is just a bunch of nonsense.

Cushing Oklahoma Supply Glut

So there is basically more oil trapped in Cushing Oklahoma then there has ever been when the spread was 25! So regardless if the spread is 25 or 8 it has very little to do with supplies residing in Cushing Oklahoma that is quite evident. Now there are a bunch of factors contributing to the nuances of the spread which I will not go into detail here but the takeaway is just to point out the absurdity which is the false and misleading rhetoric that encompasses this spread and Cushing Inventory levels.

400 Million Barrels & Climbing

While we are talking about inventory levels it is funny that WTI sits at $97 a barrel when the entire year we have had basically 3 minuscule draws in inventory supplies which stand at a record breaking 395 Million Barrels in storage. So the Dow keeps hitting new highs every week, and the US keeps setting new modern records for Oil in storage each week.

Weak Demand in an Artificial Economy

But it is not just the supply issues in an obviously oversupplied oil market with the US domestic production being the biggest culprit. The demand side of the equation has been equally bearish for the fundamentals with China`s actual economy slowing over the past 2 years, Europe being stuck in a perpetual recession, and the US being a mature market with higher fuel standards and a stagnant economy that requires $85 Billion of stimulus each month to keep from cratering. The demand side had been very underwhelming from the products side of the equation. For example, Gasoline supplies in the northeast are 10% higher than normal for this time of year.

Strong Dollar Bearish for Dollar Denominated Commodities

Finally the strong dollar is supposed to be bearish for commodities and oil, and with the US Dollar Index hovering around 84 and threatening to strengthen from these levels it is a wonder that the Oil market has barely noticed this strange occurrence in Dollar strength, unlike the Gold and Silver Markets.

Fundamentals: Are we talking about the Fundamentals Again?

The takeaway is that none of the actual fundamentals ever matter in the Oil markets. When you have a house style advantage that would make any Las Vegas Casino envious the fundamentals play little part in a manipulated Oil market. It is all about protecting the huge supply chain that is the oil market and everybody`s livelihood. When in doubt follow the money trail, and money is the biggest reason oil prices are where they are currently despite the bearish fundamentals of the commodity. Oil prices wouldn`t be at these levels if the powerful manipulators of the commodity were not making a whole lot of money as a result.

Oil Analysts Clueless

So the next time some Oil analyst tells you some hard studied reason why Oil prices are up it is all nonsense. Oil prices are up or down depending upon what the powerful players want oil to do, one week it can be at $86, the next $97, or $77, it is all about the money to these players, and they will do whatever it takes to make the money. And if it means being very creative with their methods then so be it, it is not like this is a regulated market!

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The Macro Story as Told by Gold, Copper and Oil

By EconMatters

Gold’s been on a wild ride.  After reaching a peak of $1,920 an ounce in September 2011, gold has tumbled 28% to the current ~$1,380 level forcing John Paulson to take a 47% loss in his gold fund during the first four months of this year, according to Bloomberg.

Unlike Paulson who maintained his positions in gold, other big players like George Soros and  BlackRock cut their gold ETF holdings, while Goldman Sachs issued a sell recommendation on gold right before the yellow metal plunged 13% through April 15, the biggest drop in three decades.  And by looking at the futures curve (chart below), market does not seem to expect gold to come back roaring any time soon.

Chart Source: S&P Capital IQ

QEs Not Hitting the Real Economy

Historically, gold is regarded as a good inflation hedge and store of value, typically thriving in an environment of high inflation, and/or weak U.S. dollar (currency debasement).  With U.S. Federal Reserve’s three rounds of QE, the never-ending debt crisis in the Eurozone, hyperinflation and dollar debasement seem inevitable and supportive of gold for the long run, right?   

Theoretically, Fed’s QE and near zero fed funds rate is supposed to encourage borrowing and spending from the private sector thus injecting money into the real economy.  However, theory and reality don’t always see eye to eye. 

Since the 2008 financial crisis, banks have significantly tightened the credit standard and are reluctant to lend.  On the other hand, corporations are making money mostly from “streamlined” headcount and structure, but instead of the intended wealth distribution effect expected by the Fed such as investing back to the economy, or increase employee pay which would in turn increase consumer spending, most corporations are hoarding cash or use profits for dividend, share buybacks, or mergers & acquisitions with limited impact on the real economy.    

Copper & Oil Indicating Weak Demand

The weak demand is also reflected in part of the commodity market fundamental.  WTI crude oil inventory climbed to 82-year high and copper inventory at LME hit a 10-year high in April, while Goldman Sachs cut its “near-term” outlook for commodities. 

Although some have argued oil and copper have lost their significance primarily due to increasing domestic oil production, and “temporary” excess copper supply.  While the abundance of domestic shale oil production may have distorted the historical supply and demand relationship, but with the U.S. becoming the world’s largest fuel exporter, the fast and furious oil inventory build is nevertheless still an indication of a weak world economy.  And I can’t imagine how the “temporary” buildup of copper inventory is not a sign of weak global economic condition?

Further Reading - Oil Market Manipulation Reaches Absurd Levels

Massive QEs, Limited Inflation?

On top of the overall weak spending and demand in the private sector, most of the developed countries are undergoing some shape or form of austerity with reduced government spending.  China, the growth engine of the world, is having some problems of its own.  The old-fashioned massive infrastructure building QE program got China through the 2008 financial crisis, and was the main driver behind commodity prices.  But Beijing can’t afford another QE due to inflation concern (plus China has probably run out of things to build).  Low wage levels means China consumers can’t really pick up the spending slack, coupled with bad credit problem (i.e., NPL: Non-Performing Loans), and recent capital flight, had many analysts worried enough to downgrade China’s growth prospect. 

The simultaneous pullback from both the private and government sectors in U.S. Europe, and China is a major factor why Fed's massive QEs have resulted in only limited inflationary pressure and increasing signs of deflation. 

Dollar and Carry Trade Kills Gold

Nonetheless, when compared with Europe, China or any other regions in the world, the U.S. seems relatively more stable, and has been able to retain the “safe haven” status despite its own debt problem.  With investors pouring money into U.S. equity and bond propping up the dollar, and weak demand suppressing inflation, two of the main conditions for a strong gold price -- high inflation and a weak US dollar -- are basically non-existent in the current macro environment.
Furthermore, there was already a bit of disconnect between gold and the other commodity prices such as copper, and oil.  So eventually, gold had to come to grip with the macro reality.    

Chart Source: Stockcharts.com

Another major factor against gold right now is that gold has no yield and is out of favor with the huge yield-seeking yen carry trade crowd (borrowing yen to invest in higher yield options) since bond and equity now are offering much better returns.  Unless there's a shock to the system such as a war breaking out in the Middle East, or an eventual debt crisis in Japan when people start seeking safety, there's not much upside momentum for gold.

Gold's Volatility Game

For now, the prevalent view is that the Fed will slow or exit QE3, and gold is out of favor under the the current macro trend.  For example, Lim Chow Kiat, the chief investment officer of the Government of Singapore Investment Corp (GIC), thinks gold still looks overpriced as the usage of gold for industrial or consumer products doesn't quite justify the prices.  GIC is one of the world's largest sovereign wealth funds.
As long as dollar maintain its strength and inflation remains tame, gold prices most likely will see considerable volatility swinging between rumors and speculation (e.g., some central banks may need to unload some of their holdings due to debt crisis), and Asia retail buying on the dip (South China Morning Post reported that many shops in Hong Kong were running out of the precious metal for the first time in decades.)
Technically speaking, gold's next support level should be $1,330 range with $1,320 as the major support when most physical retail buyers would rush in.  If gold breaks below $1,300 hard, expect a major liquidation when even Paulson could be forced to sell and everybody piles in.

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Economic And Employment Composites Indicate Further Weakness

by Lance Roberts

"The economy is amazing right now - employment is recovering, innovation is going and housing is reviving.  What's not to love?" This was a statement I heard in the media to justify the recent rise in the stock market.  In this past weekend's newsletter I went into significant detail in dismantling the bullish arguments with one point being the consistent weakness in the economic data.

The most recent release of the Chicago Fed National Activity Index (CFNAI) is the last of the components released each month that comprises the Economic and Employment Composite indexes.  The April data for the CFNAI was not good with the manufacturing component confirming what we had already seen in most of the regional Federal Reserve manufacturing surveys.  The overall CFNAI index plunged from to a negative 0.53 from a negative 0.23 in March.  In both months, manufacturing production fell, down 0.4 percent in April following a 0.3 percent decline in March.

However, as opposed to recent media headlines boasting of the strength of consumer spending and housing, the consumer & housing sector was the second largest drag on national activity in April dropping from negative 0.15 in March to negative 0.17 in April.  Employment also did not confirm the recent BLS report, which we suspected would be the case, as the employment component has fallen from a positive 0.35 in February to a positive 0.1 in March to ZERO in April.  This is certainly not a trend that supports the much hoped for job growth in the near future.

Let's take a look at the two composite indexes to see what they are telling us about the economy and the most likely direction of the data in the months ahead.   Both indexes are weighted average of the CFNAI, ISM, several Federal Reserve manufacturing surveys, the NFIB Small Business survey, Chicago ISM and the Leading Economic Indicators.  The only difference between the two indices is that the employment composite is comprised of the employment components of the above as opposed to the overall activity components.

STA Economic Output Composite Index (EOCI)

The EOCI index fell sharply to 26.08 in April from 30.35 in March as the brief surge in activity from "Hurricane Sandy" finished working its way through the system.  The chart below compares the EOCI index to real, inflation adjusted, GDP on a quarterly basis.

There are a couple of important takeaways with this index.  The first is that both positive and negative trends in the EOCI index track very closely to the ebb and flow of GDP.  The second is that historically when the EOCI index was below 30 the economy was either in, or about to be in, a recession.  Currently, the economy is not running in recessionary territory, as of yet, but the trend of weakness in the macro economic data is somewhat concerning.

The chart below shows these corollary trends a bit better with the EOCI index, smoothed with a 3-month average, compared to the annual rate of change in nominal GDP.

What is most concerning is that while the asset prices are inflated with artificial interventions that trend of economic data has clearly peaked for the current cycle.  Either the mainstream economists and analysts are correct and the economy is about to turn substantially stronger and play catch up with asset prices or asset prices will revert to catch up with the fundamentals of the economy.  The latter is much more likely the case from a historical perspective.

STA Employment Composite

If you strip the employment components out of the EOCI index and weight them into their own composite index we find that the hiring intentions of employers is clearly weakening.  The chart below shows the Employment Index smoothed with a 4-month average and compared to the annual rate of change in Total Non-Farm Employees.

As with the EOCI index above - employment activity clearly peaked in early 2012 and has begun to wane.  The recent uptick in the employment index, remember this is a 4-month moving average, is due to the effects from the uptick in economic activity from "Hurricane Sandy."  This index will turn down in the next couple of months as the recently monthly data points have declined.

What is clear from the two composite indexes is that the broad economy, and by extension underlying employment, has clearly peaked and has began to weaken.  This is well within the context of historical trends and time frames.  While the mainstream analysts and economists continue to have optimistic views for a resurgence in economic activity by years end the current data trends, both globally and domestically, suggest otherwise.

by Lance Roberts

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Stock Market No Confirming Signal for a Top, Yet

By: Michael_Noonan

There is a reason why the trend is the most important consideration when positioning in any market. The number of profitable shorts, as of last week, can still be counted on one hand, at least those who remain amongst the ranks of the devastated ones still trying to pick a top. The most money is lost picking tops and bottoms, but top-pickers are always at odds with that fact. Richard Dennis lost more money trying to buy sugar under 5 cents than he did buying at higher prices on previous occasions. He ranks as a poster child for money lost in bottom-picking, and he was a highly regarded professional player.

No matter. Top-picking egos have been clamoring for a top over the past several months. Like a stopped clock, one day they will be right. We prefer to let the markets reveal their message and respond to it, rather than front-run it.

What will be evident in viewing charts from over three time frames, monthly, weekly, and daily, is that the trend is unequivocally up, and that is a strong statement from the market.

Where many may have anticipated the possibility of a triple top, the Fed-driven market sailed right through what would normally be resistance. One has to remember that the anticipated resistance was just potential, and it had to be confirmed by market activity showing signs of weakness and reversal behavior. It never happened.

The failure of a triple top is a great example of why one should follow the message from developing market activity and not front-run and get run over in the process. The channel shows that there is still room to rally without being in an overbought condition. What may provide valuable information will be the location of the close by the end of the week. A strong close will mean continuation. A weak close could signal a possible turn, but it takes time to turn a trend, so one does not have to be the first one in.

The dashed portion of the channel represents future support/resistance, once the first three points are established, the two swing lows in 2009 and 2011, forming the bottom support line, and a line parallel to it using the swing high between those points, 2010.

What has many bears-in-waiting salivating is the weekly Outside Key Reversal [OKR]. Just like one swallow does not a summer make, nor does a single bar necessarily reverse a trend. It may lead to a trend reversal, but further proof of confirming market activity is required.

What is interesting about the weekly chart is the location of current price activity within the channel. It is not reaching the top of the channel. The OKR is occurring at the mid- point of the channel, generally a sign of a weakening trend. An important issue with that observation is the fact that price also failed at a similar mid-point back in September of 2012 and was still able to keep the trend intact.

It is simply a piece of information of which to be aware.

An OKR also developed on the daily chart, last Wednesday, 3rd bar from the right. The volume was exceptionally strong. Volume was also strong the next day, with a lower high, lower low, and lower close, but note the location of the close. It was at the upper end of the bar, and that is the market telling us that despite the increased volume and effort to drive price lower, buyers were in control by the end of the day.

If an OKR at a [potential] high is a sign of weakness, more weakness should follow. The exact opposite happened, as noted on Thursday. This reflects the power of a trend and how it takes a lot of effort to reverse it.

Friday’s close showed a drop in volume, and that equates to a lack of follow-through selling pressure. The upper end close shows buyers still in control. Unless and until weakness enters the picture, one has to respect the trend. If long, one would want to be moving up stops on all stock positions for protection, in case a turn does develop.

As for being short, it may be appropriate for individual stocks that have been under- performing the current market rally, but there is no reason for shorting the market at current levels. What can never be known in advance is how future price activity will develop. The trend, [and Fed effort], may not be over, and based upon how the market has been up, up, and still up since September 2011, it is a message not to be ignored.

If more weakness enters the market next week, or sometime soon after, there will be ample time to take a short position when a turn in trend says it makes sense, to then make dollars from that side of the market.

One interesting piece of factual information is the last two times the S&P traded at an all-time new high and reversed downward to close more than 1% below the high were at the March 2000 and October 2007 highs. Will the same hold true this time around? If it does, we will see market weakness to substantiate it.

Let the market be your guide. It never disappoints, unless its message is disregarded.

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Which Asset Class Is The Most Sensitive To a Fed "Taper"?

by Tyler Durden

Markets are starting to price the removal of the unprecedented policy stimulus provided by the Fed. Investors have faced this situation several times in recent years, but as Barclays notes, these prior episodes lacked broad consensus and proved short-lived as further risks to the global recovery quickly re-appeared. The edginess of markets to ebbs and flows in the data and Fed communications in recent months suggests this time is different. Market movements are saying the Fed’s exit is now more ‘when’ than ‘if’. Fed actions have led to some of the most extraordinary market moves on record. Nominal US bond yields are at historically low levels, and real yields have been negative for a prolonged time. Risky assets, by contrast, have rallied sharply, supported by central bank policy even in the face of poor economic data. If the Fed is preparing for an exit, these market moves may need to go in reverse...

Via Barclays,

Which asset classes are more vulnerable to Fed tapering?

We begin to tackle this question by constructing two indicators that seek to capture the sensitivity of various asset prices to Fed easing and the extent to which asset prices have responded to such easing. The explicit assumption here is that asset classes that have been most sensitive to Fed policy and appear most dislocated from historical norms are likely the asset classes at greatest risk.

Our first indicator calculates the beta of various asset classes to the Fed balance sheet expansion. In particular, we calculate the elasticity of asset prices to changes in the Fed balance sheet...

Our second indicator shows the (normalised) deviations of current asset prices from historical averages (z-scores). The idea is to gauge how Fed easing has affected prices relative to historical norms...

Investors who are concerned about the reversal of Fed easing should consider short positions in assets with high elasticities to the Fed and expensive valuations versus history. [ZH - European staples to the S&P 500 and US High Yield and US Healthcare stocks] appear vulnerable. Short positions on the latter make sense to protect risk portfolios.

The re-pricing has already started in safe havens

An earlier-than-expected Fed tapering has already been priced in to some markets, even before the events of this past week unfolded. Safe havens assets that benefited greatly from elevated global tail risks and central bank easing, such as gold, the Swiss franc and even the AUD, have suffered...

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Eyes On Income

by Tom Aspray

I have been following the bond market since 1982, which was just a year after the yield on the 30-year bond peaked at 15.20%. In the early 1990s, I was pleased to be noted by the Wall Street Journal as “one of the top bond market technicians.”

The decline in yields and the rise in bond prices over the past 32 years have been dramatic, but there have been other long-term trends in rates. In fact, the decline in yields was equal in time and price to the rise in bond yields and decline in their prices that took place from the early 1950s until 1981.

It has been my view since earlier in the year that the next two years are likely to be pivotal for the bond markets. Therefore, it will be increasingly important for income investors to keep an eye on rates as they will need to be a bit more active in the management of their income portfolio.

The outlook for both the 30-year T-bond and 10-Year T-note yields has reached an interesting juncture, so now I believe is a good time to formally introduce an income-only portfolio.

In the past, I have recommended high-yielding stocks for the Charts In Play portfolio that also had growth potential. However I have recommended selling them when nice profits were attained or if the technical outlook changed.

For the Eyes on Income portfolio, I will only sell the income holdings if there is a significant change in my outlook for rates. Let’s look at the key levels to watch.

Click to Enlarge

Key Yields to Watch: Though the yield on the 10-year T-note is more relevant for consumers, I still find that the 30-year T-bond yield (TYX) can provide valuable insight into where rates are headed.

• The weekly chart of T-bond yields shows that in late 2011, yields declined to the 2.855% level before rallying to just over 3.47% in March 2012.
• Then yields plunged over the next four months to a low of 2.517% in July, which is labeled as the head of a reverse head and shoulders bottom formation.
• The rally from last summer’s low hit a high of 3.284% in early March before yields again dropped back to the 2.855% level at the end of April.
• Over the past three weeks, yields have closed higher and as of May 23 look ready to close higher for the fourth week in a row.
• The neckline of the reverse H&S bottom is just above this week’s high at 3.241% and a weekly close above 3.284% will complete the formation.
• The upside target from the H&S formation is in the 4% area.

The chart of T-note yields (TNX) also reveals an apparent reverse H&S formation but the neckline level is less clear. The left shoulder (LS) was formed in September 2011 at 1.696%.

• The initial rally hit a high of 2.407% before yields again dropped to the 1.800% level in early 2012.
• The secondary high in March was at 2.363% before yields dropped to a low of 1.394% in July 2012, forming the head of the H&S formation.
• The TNX yield reached a high of 2.064% the week ending March 12 before turning lower.
• The decline in yields broke the uptrend but held above the November lows at 1.556%.
• Last week, yields again rose above 2.00% and a weekly close above the March high (2.064%) will signal a rally to the major resistance at 2.390%.
• This connects the prior twin peaks at 2.407% and 2.363%.

Click to Enlarge

The potential bottoming formation in the weekly charts of both the T-bond and 10-year yields must be viewed in the context of the longer-term trends. The daily and weekly trend in yields is currently up, but the monthly charts tell a different story.

• The monthly chart goes back to 1990, and since 2000, the downtrend in yields, line a, is well established.

• On the monthly chart, there is next major resistance in the 3.525-3.3563% area. This corresponds to the declining 20-month EMA and the lows from August 2010.

• This long-term downtrend is now at 4.181%, which is just above the upside target from the reverse H&S formation on the weekly chart.

• The monthly charts make it clear that yields have to move significantly higher before it is clear that the long-term trend has changed.

Featured Investment: For part of one’s income portfolio, I like a bond fund that holds income instruments with shorter duration (one-eight years) as it will provide more flexibility if rates move higher and also if they stay in a broad range.

DoubleLine Total Return Fund (DLTNX) has a current yield of 5.22%, which is paid on a monthly basis.

The fund details (from eTrade.com) show that it has $40.7 billion in assets with an expense ratio of 0.76% and a minimal investment of $2,000. The expense ratio is a bit higher than some of the high-yield ETFs, but it is below average for the class of funds.

The weekly chart of DLTNX shows that it is likely to close the week below the 20-week EMA at $11.38 as it closed Thursday May 23 at $11.36.

The major price support is in the $11.25 to $11.34 area. In 2012, DLTNX had a low of $11.02 while it hit a low of $10.80 in 2011.

Income Strategy: The weekly OBV on two of the largest junk bond ETFs, SPDR Barclays Barclays High Yield Bond (JNK) and iShares iBoxx $ High Yield Corporate Bond (HYG) turned negative this week.

This action is consistent with my short-term view that rates will move higher as we start the summer. If the reverse H&S bottom formations are completed in either T-bond or T-note yields, then a new report will be released.

Portfolio Recommendation: Based on a $100,000 portfolio, invest $1,000 in DLTNX on May 28 and then $1,000 on the next three Mondays. If the fund has a daily close at $11.34 or lower, invest another $3,000. Then, if the fund closes at $11.30 or lower, add another $3,000 in the fund. The goal is to eventually invest $10,000 or 10% of your income portfolio.

Future investments for the Eyes on Income portfolio will be primarily focused on individual stocks or other income-producing instruments, including ETFs.

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