Major International Market Returns

by Bespoke Investment Group

Although US equities have been under near constant selling pressure since the beginning of May, they have been holding up relatively well compared to the rest of the world. The table to the right shows the change in major international benchmark indices on a YTD basis. In local currency terms, US stocks have outperformed every other G-7 country besides Germany as well as all four BRIC countries. 

These numbers are somewhat misleading, however, as they do not take into account the decline in the US Dollar so far this year. After adjusting for the dollar's slide, US equities lose a bit of their luster. While US stocks are still outperforming all of the BRIC countries, they are underperforming every other G7 country except Canada and the UK.

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Philly Fed: Worst Three Month Decline Ever

by Bespoke Investment Group

Today's Philadelphia Fed Business Outlook came in weaker than expected and showed the largest three month decline in the history of the index (-51.1). To the right, we highlight the three-month change of the overall index as well as each subcomponent of the main index. Strangely enough, even though the headline index for current and future conditions showed its largest ever three-month decline, most of the subcomponents did not. 

In the chart below, we highlight the two other periods where the Philadelphia Fed headline index declined more than 40 points over a three-month period. In 1974, the index dropped 50.5 points in three months, and in November 1981, the index dropped 43.4 points. While the three month decline in the Philly Fed survey should not be dismissed, we would note that it is probably more than a coincidence that the index peaked in March, just when the major earthquake and nuclear meltdown occurred in Japan. Other factors have surely contributed to the slowdown, but we think it's hard to argue that some or much of the slowdown we have seen in the last three months is not related to Japan.

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More Thoughts On Feed Wheat Being Substituted For Corn

By: Kevin Van Trump

I know many US analyst and traders will be quick to point out that producers here in the US rarely like substituting "feed wheat" for corn. The problem is feed wheat's widening discount to corn is starting to push up demand for wheat in many Asian countries. They understand that while corn is a source of starch, wheat does provide them with ample protein in their animal feed. Right now there are rumors flying everywhere that many animal feed manufacturers have started covering their import requirements for the October-December quarter, and they are seriously considering a much larger switch to less expensive feed wheat varieties. Currently Australia feed wheat is penciling about $95 cheaper than US corn to the Asia countries. Some are reporting that further down the line this trend will reverse. I am not sure when though, as US new crop corn shipments scheduled from October onwards are still running close to $65 per ton more expensive that Australian feed wheat, and about $40 per tone more than Ukraine's feed wheat. Maybe here in the US, producers aren't making the switch, but with no major corn purchases reported in East Asia for the last two weeks, you have to imagine Asian producers and end users have a different way of thinking. From what I hear, most insiders are looking for a 5-10% shift in feed millers' usage towards wheat and other ingredients and away from corn this year. Some traders are thinking this might already be taking place however, because corn has been selling at a premium to wheat in the cash market over in Asia for sometime now. With the US lowering their corn production estimates and being the world's largest exporter, some Asian nations are starting to worry that wheat may soon be their most viable option. In late April, South Korean buyers purchased 275,000 tons of feed wheat in the span of just two days, mostly from Canada and Europe for shipment in the third quarter. They are now seeking more feed wheat cargoes for September-December shipment. In Japan, similar events are taking place. In Vietnam, the preference is clearly for feed wheat over corn. The Philippines has covered its feed grain import needs through the next few months with purchases of Australian feed wheat earlier this year. All I am trying to say is be careful listening to all of those who want to say no one will really make the switch from corn to wheat...some already have and more will follow should corn prices continue to push higher and availability becomes scarce.

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Gold, Commodities, Stocks and Dollar, What's Coming Next!

By: Anthony_J_Stills

Every act you have ever performed since the day you were born was performed because you wanted something. ~ Andrew Carnegie

The media is asking a series of ignorant and self-serving questions that will only confuse the investor and I would like to shed some light on this. Yesterday the stock market rallied and the press immediately anointed the event as the precise moment when things started to get better. They're of course wrong. 

In order for things to actually get better, you have to have an intelligent plan and that plan needs to be implemented by willing and capable people. Washington has no plan and there are no willing and capable people in Washington, only carpetbaggers. Then of course we have this infernal debate about the coming inflation when in fact inflation descended down upon us ten years ago and has probably run its course. Take a look at the chart twelve-year chart of the CRB Index and you'll see what I mean:

We had inflation but the government forgot to send you the memo! Some years saw prices jump as much as 50% and from trough to peak is surged almost fourfold. Now I think it more than likely has run its course and the CRB Index is making a lower high on its way to a serious decline.

The media knows its way behind the curve so it's now beginning to float the idea that we're in for what's called stagflation. Stagflation occurs when you have a combination of rising prices with declining growth. The declining growth in the US is now so obvious that a blind man could see it, but I think they're late to the party as far as rising prices are concerned. I think this is the case for a number of reasons. As I pointed out to you a couple of weeks ago, numerous commodities topped out back in January and February, and with the exception of corn nothing has changed to date. On Monday morning I told you that I had taken an initial short position in corn, wheat, oil and cotton: Take a look at what happened to the July corn futures contract since then:

This morning it broke strong support at 7.34 and looks like it wants to fall off of a cliff. The same is true with wheat, oil and cotton. All of these are subject to worldwide demand and that demand appears to be fading. Now look at the behavior of gold:

Gold has stubbed its toe of late and I have to wonder if it's because it is announcing the beginning of a major deflationary spiral. My best guess is that that's the case!

Now let's turn our attention to the US dollar. The dollar has been the world's whipping boy for a decade and it is now assumed that it must fall almost on a daily bases. I might add that is a dangerous mindset for any speculator to use. If I have learned anything in the markets, it's that nothing is written in stone. Also, when all the lemmings go one way, you had best go the other way. With that in mind let's take a look at this one-year daily chart for the US Dollar Index:

One possible way to look at this chart is to say that the dollar made a significant low in early May and recently made a higher low. Today the dollar is up 1.09 and that is a higher high and a break our above obvious resistance at 75.88. What would cause such a turn around? Simply put, deflation! Everyone is looking for inflation, or stagflation, so they are either short dollars or they borrowed dollars to speculate with Francs, Euros or whatever. Aside from that the world economy is slowing down and it is swimming in US dollar denominated debt. The dollar senses that and begins to rise and that puts a real squeeze on everyone since they all moved to one (wrong) side or the boat. I've also learned that markets are exceedingly ruthless and will always do what you can least afford when you can least afford it. I think there is a real chance that the dollar could move higher for one, three, or even six months, and the effect will be devastating.

All of this of course is taking place in a pre-QE3 world. If the Fed announces QE3 tomorrow then we'll go back to the way it was two months ago. Rising stocks, rising gold and rising commodities prices, but it won't last for long. Right now gold, commodities, stocks and the dollar are all acting as if QE3 will not come to pass, and that's all that matters. Now take a look at the daily chart of the S & P 500:

Yesterday we saw a double-digit rally on light volume and today we see a 21-point decline (so far) on heavier volume and that has been the pattern. Also, today's decline was a 92% down day and that is the third such event in three weeks. Today has produced a lower low (1,261.90) so yesterday was nothing more than a counter trend reaction up to good resistance at 1,286.00, and now the decline will continue until we see a test of the March closing low at 1,251.00. I believe that we'll see a close below the March closing low and a test of strong support at 1,233.00 before we see any kind of decent reaction. That reaction will be the key to the future.

Now you are looking at a twelve-year chart of the S & P and it is telling quite a story assuming anyone is paying attention. You can see how the S & P continued to move sideways out of trading ranges until it finally seemed to exhaust its upward momentum and has turned down. You can see that I've drawn a slightly upward sloping line that connects two significant highs and that will support the market at 1,231.00. This correlates nicely with the 50-dma and the previously mentioned Fibonacci support at 1,233.50 and should provide a bounce. The shorter and weaker the bounce, the more trouble we're in! I would expect a reaction to last no more than twelve days and recover no more than 61% of the initial decline. Time will tell if I am right. Meanwhile the Fed needs to pay very close attention here because once deflation grabs hold no amount of printing will stop it. They fell asleep at the switch back in early 2007 when there were clear signs that real problems existed. Now the Fed is taking a "wait and see" attitude when it should be acting. The money spigot should be wide open and it's not.

We are at a crucial time right now. Everything is signaling deflation although gold and silver did manage gains today. What happens now will define what happens in the stock market over the next year and maybe even the next decade. The Fed can only print and yet QE1 And QE2 have proven that printing is no solution. The next round of quantitative easing, assuming there is one, will have a very short life span. Every one should know that by now and it only serve to kick the can a little further down the road. There are certain factions in Congress that want to force the issue and if they succeed in stopping further increases in the debt ceiling, we'll fall into an immediate a deep depression. None of this would even be an issue if Sir Alan Greenspan had simply left the markets to its own devices fifteen years ago, but he didn't and here we are. I actually hope the US defaults and reality sinks in. Maybe they'll kick all the bastards responsible for this out of Washington and we'll see a real government and a return to real values. We'll know soon enough.

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Euro/Dolar spread ...

by Kimble Charting Solutions

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Fibonacci/Repeating patterns calling for a sizable decline in the CRB

by Kimble Charting Solutions

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