Dow is Infested With Sharks

by Greg Harmon

Dow Chemical, $DOW, has been living with sharks all year. The Harmonic type of sharks. Since late January the chart below shows the Bearish Shark playing out. In mid May it went above the Potential Reversal ZONE (PRZ) and came back down through by the end of the month. The reversal has been playing out and it is now at a inflection point. Last week it hit a 61.8% retracement of the range of the Shark and held. This is a stall at the target for the reversal. The Relative Strength Index (RSI) continues to look lower, while the Moving Average Convergence Divergence indicator (MACD) That is the key.

So what is next? A bounce here over the 50% retracement and 100 day Simple Moving Average (SMA) at 32.58 triggers a long entry looking for move higher to resistance at 34.30. And then the previous high. But a breakdown below the 31.86 level at the 61.8% retracement has a target lower at 29.52, a full retracement and the Measured Move at 29.50 coincides with it. Two signals, two plays. Take what it gives you.

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Goldman Sachs To The Fed: Taper But Don’t Tighten

by Wolf Richter

New York Fed President William Dudley has spoken. He represents Goldman Sachs, where he was a partner and managing director until 2007. Goldman owns part of the NY Fed and is one of the 21 “primary dealers” – TBTF banks and security dealers from around the world, many of them bailed out by the NY Fed – to which the NY Fed hands the money that it prints on orders from the FMOC, in exchange for Treasuries and mortgage-backed securities, currently $85 billion a month. If it sounds incestuous, so be it.

Goldman et al. want free money for as long as possible no matter what that does to the real economy, savers, or pension funds. Creating bubbles? No problem. They’ll make money off them. “We at the Fed have been working hard to help homeowners and the overall housing market recover,” Dudley said, hence Housing Bubble II, with home prices jumping 26% in Nevada year over year in May, and 12.2% nationwide,  according to CoreLogic, the bubbliest rise since 2006, just before Housing Bubble I blew up.

And that’s good. But Goldman doesn’t want the financial system to blow up again, of which it is one of the largest beneficiaries. You can milk a cow many times, but you can bleed it only once. Hence, a modicum of prudence.

That’s exactly what Dudley proffered in his speech at the Business Council of Fairfield County, Stamford, Connecticut. Concerning the national economy, he served up the usual fare of how it was muddling through, with some things getting better, such as employment. And then he drew the line in the sand – dotted with some ifs.

If this pattern continues, the FMOC would “begin to moderate the pace of purchases later this year,” he said. Whether it would be “in, say, September,” as Federal Reserve Board member Jeremy Stein had pointed out last Friday, Dudley didn’t say. But he did agree with Stein: unless a major fiasco mucked up the scenario, the Fed would taper its money-printing and bond-buying binge this year.

Goldman said so. CEO Lloyd Blankfein had made it public a couple of weeks ago when he said that “eventually interest rates have to normalize,” that it wasn’t “normal to have 2% rates.” They’re all worried about the same thing: that asset bubbles caused by the money-printing and bond-buying binge would eventually pop and take down the financial system [my take...  Controlling The Implosion Of The Biggest Bond Bubble In History].

While Stein had put the beginning of the Big Taper on the calendar – September – Dudley penciled in the completion date. After starting this year, the Big Taper would proceed “in measured steps” and be complete by “around mid-2014. A year from now. Participants expect one heck of a ride, judging from the clicks of seatbelts being buckled around the world.

He assumed that by then, the unemployment rate would hover near 7%, with the economy’s momentum allowing for “further robust job gains in the future.” But he kept an eraser handy. Policy decisions would depend on the economic outlook “rather than the calendar.” So the scenario he’d described was just “one possible outcome.” If economic conditions were to “diverge significantly” – not just a little – the drunken binge could go on.

He then explained to all partiers what that would mean for the punch bowl. It would remain on the table, and it would be refilled, but in such a manner that it would be watered down little by little. The continued asset purchases, though at a lesser rate, would be “adding monetary policy accommodation, not tightening monetary policy,” he said. Based on this logic, bubbles should remain inflated, or deflate gradually, as the asset purchases would “put downward pressure on longer-term interest rates.” To keep them from blowing through the roof. Until mid-2014.

Ah yes, and the Fed would be “likely to keep most of these assets on its balance sheet for a long time.” Selling the mortgage-backed securities? Forget it: A “strong majority” no longer favored that. And raising short-term rates? “A long way off.” So, even if the unemployment rate dropped below the 6.5% threshold, the FMOC might “wait considerably longer.” He mentioned 2015, a mirage that keeps moving further into the future.

A glorious admission that the money-printing and bond-buying binge glued to a zero-interest-rate-policy has permanently screwed up the normal functioning of the markets, that the Fed could not return them to their prior state, that it might never be able to do so, and that Goldman et al., after having grown immensely fat under this regime, don’t want to give it up. But they don’t want the financial system to blow up either. Hence the Big Taper.

Selling bonds and raising short-term rates would be the actual tightening, but “it’s always: yes, in the long term we need to stop with the policy of cheap money and just piling on debt, but please not right now; now the economy must first get back on its feet,” said William White, one of the few central-bank economists who’d predicted the Financial Crisis. Read.... “For 25 Years, It’s Never Been The Right Moment” To Tighten

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How to Take Advantage of the Inevitable Rise in Interest Rates

By Sasha Cekerevac

Many people are only just now coming to understand something I’ve been warning about for several months: interest rates are set to rise.

In the month of June, there was a record amount of money pulled out of bond mutual funds and bond exchange-traded funds (ETFs).

According to TrimTabs, a total of $70.8 billion exited bond mutual funds, with an additional $9.0 billion of assets being pulled out of bonds ETFs. That $80.0 billion in total assets being pulled out of the fixed-income asset class was almost twice as large as the pullout that occurred in the fall of 2008, the previous record of monthly outflows. (Source: “Unprecedented $80 Billion Pulled from Bond Funds,” CNBC, July 1, 2013.)

Obviously, long-time readers of mine won’t be surprised, since I’ve been recommending adjusting one’s investment strategy to incorporate higher interest rates for several months now.

Even just over a month ago, when 10-year interest rates crossed the two percent barrier, I wrote in the Investment Contrarians article “Why U.S. Treasuries Are Still the Worst Investment” that my analysis had led me to conclude that interest rates were set to continue rising. Even at that time, I was urging readers to incorporate this into their investment strategy.

At the time, many so-called “market experts” thought that interest rates would begin to fall and test the lows of the year. My argument has been that we’ve seen the lows of this cycle, and interest rates for the next few years will begin to rise significantly, especially on the long end of the curve.

Clearly, we are not Japan, because there are already signs of our economy improving. In addition, the Federal Reserve has been much more aggressive over the past few years in trying to promote economic growth. Only now, after decades of inactivity, has the Bank of Japan embarked on an ultra-aggressive monetary policy similar to what the Federal Reserve has been doing over the past few years.

Chart courtesy of www.StockCharts.com

The above long-term chart of interest rates for the 10-year U.S. Treasury shows that even though the move has been substantial, interest rates are still historically very low.

It is important to note that interest rates will adjust in different measures along the fixed-income curve, so investors need to be careful in their investment strategy allocation. The Federal Reserve will stop its asset purchase program over the next year; however, they will keep the Fed funds rate, which is for extremely short-term overnight lending, at very low levels likely until 2015.

That means short-term interest rates won’t move as much as the long-term end of the curve. Personally, as an investment strategy, I have been recommending investors move out of very long-term interest rates, such as the 10-year note or 30-year bond, and to essentially keep cash on hand in short-term investments for when interest rates rise. Over the next few years when rates begin to rise, investors should then reallocate an investment strategy to lock in higher interest rates.

The recent up-tick in interest rates could be used by fixed-income investors to allocate funds in relatively short-term paper, such as a two-year note—and when this investment matures, we would have an environment of much higher interest rates to roll these funds into a long-term fixed-income asset.

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The Stock Bull Market Top

By: Ed_Carlson

It looks increasingly likely that the high in the Dow on 5/22/13 was the top of the bull market. Let’s go through the process used by George Lindsay to discover why.
It is true that the window for the top (as defined by the 15year interval from October 1997) is open until the end of September, as is the time span of a short basic advance (630-718 days) from the low of the basic cycle on 10/4/11.

A final high on 5/22/13 would make the basic advance 596 calendar days. This count fits the time span of a sub-normal basic advance (414-615) but the occurrence of sub-normal advances has been very rare.
A Middle Section count, taken from the major cycle, points to a high within five days of the May top.
All the above (by itself) does not rule out the possibility of a higher high before the end of September. The likely elimination of any higher high during that time frame is inferred from the following observations.
The next Middle Section forecast for a high comes on 7/5/13. A top then would make the basic advance 640 days and fit the time span of a short basic advance (630-718 days). Despite new-month bullish seasonality, it seems unlikely that the Dow can gain enough in the next two trading days to see a new high. Of course, it is possible…
The bigger challenge is the existence of a 12year interval which points to a tradable low (not bear market low) between 7/21/13 and 9/4/13. The 12year interval should be expected to pull the Dow down into a low sometime during this period.
If a new high is not printed in the days surrounding 7/5/13, and a decline is seen into the late July/ early September time frame, that leaves only three weeks before the window closes for a final high to the bull market in the Dow.  It wouldn’t be unusual to see the 12year interval expand to include most of September, and not just the first four days. Given September’s track record, an advance during this time of year seems unlikely.

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Inflation’s Shot Across the Bow, Deflationary Pressure is Expected to Resurface

By: Clif_Droke

On May 3, the bond market fired the proverbial “shot heard ‘round the world.” Treasury yields began a two-month climb to levels not seen in almost two years. Many analysts proclaimed the end of the 30+ year interest rate decline. The true significance in the yield rally isn’t that the long-wave deflationary trend in interest rates is over, however. Rather, it’s that the commencement of long-term inflation is within sight.

While the rally in Treasury yields does have longer-term significance, it’s still far too early to assume the downtrend in yields is over. As we’re still some 15 months away from the bottom of the 120-year cycle of inflation/deflation we can only assume the downward trend in interest rates remains intact. Additionally, as real estate analyst Robert Campbell has pointed out, “until the actions of the Fed speak otherwise, Fed policy is currently working to push mortgage rates down.”
The rally in Treasury yields, while impressive, should be put into context with the longer-term yield trend. Here’s what the Treasury Yield Index (TNX) looks like from the vantage point of a 2-year chart. In this relative short-term chart you can clearly see the attempt yields have made in establishing a new rising trend in relation to the steep drop in 2011-2012.

It’s only when we examine the long-term monthly chart of TNX that the true long-term trend becomes clear. The downtrend line that can be drawn by connecting the yield peaks from 1996 through 2011 hasn’t even been broken yet. The interest rate downtrend is therefore presumed to be still in force. It likely won’t be until after October 2014, when the Kress mega cycle bottoms, that we’ll finally see this downtrend broken.

What then is the ultimate significance of the sharp rally in bond yields? The spike in yields can only be appreciated by making historical comparisons with markets that behaved in a similar fashion. For instance, gold was in a similar long-term downtrend from 1981 through 1999 when, in the autumn of ’99, the yellow metal unexpectedly launched a vigorous rally from its long-term low of nearly $250/oz. to a high of over $330/oz. in just a few short weeks (see chart below). This wasn’t the official beginning of gold’s long-term bull market, which would actually begin less than two years later. It was, however, an advance warning that a major change of gold’s long-term trend was in the making.

Comparing gold with bonds isn’t as dissimilar as some may think, for both are excellent barometers of longer-term global liquidity and inflation/deflation expectations. Of the two, interest rates are a more important indicator of inflation and deflation, so it will be especially important to monitory the interest rate trend in the coming months as we draw closer to the 120-year cycle bottom.
The ultimate meaning behind the short-term rally in Treasury yields can only be known with certainty after the facts have become clear. It’s still far too early to discern what those facts may be. Based on historical examples, however, it’s probable that the yield rally is a “shot across the bow” preliminary to the beginning of a new long-term inflationary trend starting in late 2014/early 2015.
U.S. Economy
The selling pressure which hit stocks and bonds in June left the U.S. retail economy unscathed.
Among the individual corporate stock components of the New Economy Index (NEI), which measures the real-time strength of the economy, only Wal-Mart (WMT) took a sizable tumble in June. Monster Worldwide (MWW), the jobs component of the NEI, also plunged last month but its stock price accounts for only a small amount of the index.
Meanwhile Amazon (AMZN), EBay (EBAY) and FedEx (FDX) – the other important components of the index – are in varying degrees of health or recovery. The signals reflected in the stock price performance of these three stocks alone are worth a hundred conventional economic indicators of the type relied on by mainstream economists.
The NEI reading for last week was in line with the reading of recent weeks, viz. the NEI is still holding on above its 12-week and 20-week moving averages. The interim uptrend for the index remains intact (below), therefore we still have a confirmed “buy” signal for the U.S. economy.

Deflationary pressure is expected to resurface as we head closer to the final “hard down” phase of the long-term Kress cycle in 2014, but for now those pressures are confined mainly to Europe and Asia and haven’t yet appeared in the U.S. The domestic retail economy, along with the consumer spending that supports it, is still firm.

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Oil cracks $100 as Egypt violence adds to risks

By Phil Flynn

I have been telling my clients that for WTI crude oil to get above $100 a barrel we would need an event. Yesterday we got two. Not only did Egypt's President act defiant against military demands to meet the protestors demand, then we had a big drop in American Petroleum Institute's supply report. The API showed-U.S. weekly crude stocks off 9.4 mln bbls -U.S. weekly gasoline stocks off 183,000 bbls weekly distillate stocks off 2.3 mln bbls . Obviously the flooding and pipeline closures impacted supply. We also had the restart of the big BP Whiting Indiana plant, a factor that will change Cushing supply.

In Egypt the situation is adding to the risk. Violence overnight is adding to the tension as Morsi says heck no, I won't go.  The Suez Canal is now on high alert and there are increased risks that there may be sabotage of oil pipelines mainly the SUMED pipeline. The Energy Information Administration reminds us why oil cares. According to the EIA the Suez Canal/SUMED Pipeline strategic routes for Persian Gulf oil shipments to Europe. Closure of the Suez Canal and SUMED Pipeline would add an estimated 6,000 miles of transit around the continent of Africa.

The Suez Canal is located in Egypt, and connects the Red Sea and Gulf of Suez with the Mediterranean Sea, spanning 120 miles. In 2011, petroleum (both crude oil and refined products) and liquefied natural gas (LNG) accounted for 15 and 6 percent of Suez cargoes, measured by cargo tonnage, respectively. In 2011, 17,799 ships transited the Suez Canal from both directions, of which 20 percent were petroleum tankers and 6 percent were LNG tankers. Only 1,000 feet wide at its narrowest point, the Canal is unable to handle Ultra Large Crude Carriers (ULCC) and most fully laden Very Large Crude Carriers (VLCC) class crude oil tankers. The Suezmax was the largest ship capable of navigating through the Canal until 2010 when the Suez Canal Authority extended the depth to 66 feet to allow over 60 percent of all tankers to use the Canal, including ships that are 220,000 of dead weight tons in size.

SUMED Pipeline The 200-mile long SUMED Pipeline, or Suez-Mediterranean Pipeline, provides an alternative to the Suez Canal for those cargos too large to transit through the Canal (laden VLCCs and larger). The crude oil flows through two parallel pipelines that are 42-inches in diameter, with a total pipeline capacity of around 2.4 million bbl/d. Oil flows north through Egypt, and is carried from the Ain Sukhna onshore terminal on the Red Sea coast to its end point at the Sidi Kerir terminal on the Mediterranean. The SUMED is owned by Arab Petroleum Pipeline Co., a joint venture between the Egyptian General Petroleum Corporation (EGPC), Saudi Aramco, Abu Dhabi's National Oil Company (ADNOC), and Kuwaiti companies.

The SUMED Pipeline is the only alternative route to transport crude oil from the Red Sea to the Mediterranean if ships were unable to navigate through the Suez Canal. Closure of the Suez Canal and the SUMED Pipeline would divert oil tankers around the southern tip of Africa, the Cape of Good Hope, adding approximately 6,000 miles to transit, increasing both costs and shipping time. According to the International Energy Agency (IEA), shipping around Africa would add 15 days of transit to Europe and 8-10 days to the United States.

Fully laden VLCCs transiting toward the Suez Canal also use the SUMED Pipeline for lightering. Lightering occurs when a vessel needs to reduce its weight and draft by offloading cargo in order to enter a restrictive waterway, such as a canal. The Suez Canal is not deep enough to withstand a fully laden VLCC and, therefore, a portion of the crude is offloaded at the SUMED Pipeline at the Ain Sukhna terminal. The now partially laden VLCC then goes through the Suez Canal and picks up the portion of its crude at the other end of the pipeline, which is the Sidi Kerir terminal.

The majority of crude oil transiting the Suez Canal travels northbound, toward markets in the Mediterranean and North America. Northbound canal flows averaged approximately 535,000 bbl/d of crude oil in 2011. The SUMED Pipeline accounted for about 1.7 million bbl/d of crude oil flows from the Red Sea to the Mediterranean over that same period. Combined, these two transit points were responsible for nearly 2.2 million bbl/d of crude oil flows into the Mediterranean. Northbound crude transit has declined by almost half since its level in 2008 when 943,000 bbl/d of crude transited northbound through the Canal and an additional 2.1 million bbl/d of crude travelled through the SUMED to the Mediterranean. Contrarily, crude oil shipments travelling southbound through the Canal toward the Red Sea, primarily destined for Asian markets, increased from 2008 through 2010, but fell slightly in 2011. Total oil flows from the Suez Canal declined steeply by more than one-third in 2009 to about 1.8 million bbl/d, down from 2008 levels of over 2.4 million bbl/d. Crude oil flows through the SUMED experienced a much steeper drop to1.2 million bbl/d from approximately 2.1 million bbl/d over the same period. The year-over-year difference reflects the collapse in world oil market demand that began in the fourth quarter of 2008, followed by OPEC production cuts (primarily from the Persian Gulf), which caused a sharp fall in regional oil trade starting in January 2009. Drops in transit also illustrate the changing dynamics of international oil markets where Asian demand is increasing at a higher rate than European and U.S. markets, and West African crude production is meeting a greater share of the latter's demand. At the same time, piracy and security concerns around the Horn of Africa have led some exporters to travel the extra distance around South Africa to reach West African markets. Total oil flows through the Suez Canal increased year-over year to almost 2.2 million bbl/d in 2011, but still remain below previous levels prior to the global economic downturn.

Unlike oil, LNG transit through the Suez Canal has been on the rise since 2008, with the total number of laden tankers increasing from approximately 210 to over 500, and volumes of LNG traveling northbound (laden tankers) increasing nearly six-fold. Southbound LNG transit originates in Algeria and Egypt, destined for Asian markets while northbound transit is mostly from Qatar and Oman, destined for European and North American markets. The rapid growth in LNG flows over the period represents the startup of five LNG trains in Qatar in 2009-2010. The only alternate route for LNG tankers would be around Africa as there is no pipeline infrastructure to offset any Suez Canal disruptions. Countries such as the United Kingdom, Belgium, and Italy received over 80 percent their total LNG imports via the Suez Canal in 2010, while Turkey, France, and the United States had about a quarter of their LNG imports transited through the Canal.

We also have Portugal bond yields rising, a factor that could signal more rough times for Europe. Reports a plenty today could also make for some wild swings.

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