A Long Term View of the Bond Market

Following is a 30 year chart of the US long bond with some markings to give you a sense of where we are standing from a technical perspective.

Today's Gold Chart and Commentary

Corn prices responded to the USDA’s supply/demand reports reaching a fresh 31 month high above the $7.00 level as they further reduced US ending stocks down to 675 million bushels from last month’s estimate of 745 million bushels. Part of the reason for the reduction in corn stocks was a 50 million bushel increase for Ethanol use. Yes, indeed, the government sponsored boondoggle continues running at warp speed. Nothing like burning in our gas tanks the main food source for livestock production and an irreplaceable human food, not to mention the pathetic fact that the taxpayers are being forced to facilitate this idiocy thanks to the government subsidy of $0.45 for every gallon of the stuff blended.

Wheat also was pulled higher trading on its own set of bullish fundamental and coming within 7 cents of reaching $9.00. Soybeans also went along for the ride as they pushed past $14.50 /bushel. Both markets set fresh 30 month highs.

Gasoline is quietly sneaking higher trading above $2.50/gallon at the wholesale level and trying to push into a fresh 29 month high. Weakness in crude is preventing it from pushing through this level for the time being.

Most of this seemed lost on gold today as it was almost as exciting as watching paint drying as it was watching the price action. It seemed that the metal did not really hear anything new from Fed Chairman Bernanke and thus did not know exactly what it wanted to do. Volume was practically non-existent compared to recent days with the price action indicative of a market pausing to digest its recent gains.

The improvement in its short term technical pattern continues with the 10 day moving average continuing its rise and moving closer to putting in a bullish crossover of the 20 day. Momentum is now positive as well. The key for the bulls will be to push price through both the 40 and 50 day moving averages which come in very near to an important horizontal resistance level  noted on the chart.

This region, centered around the $1370 level, had been acting as a good floor of support on several approaches by the market back in December of last year and again in January before it was finally breached convincingly in the middle of last month. The market has climbed right back up to that level which is now, according to what we term the “polarity principle”, acting as overhead resistance. Clearing this level therefore will be the key to the immediate fortunes of the metal for should it be able to muster enough force to take it out and hold those gains, a signal will be given that the bulls are regaining control of the market.

Pressure on the metal was supplied by the weakness in the HUI, which comes as no real surprise. It seems to have run into selling near the 50 day moving average. We’ll watch to see at what level it can attract some additional buying. Should it be unable to hold near the 526 level, a logical spot for it to garner some attention from buyers would be near the 521 – 520 level if it is going to stay on a good technical foundation.

Silver could not extend its gains from yesterday but more importantly has thus far been able to hold its gains above the $30 level. The longer it holds above $30, the better the chance the metal has to run on up to test the recent high and extend its rally. It has hit some selling resistance almost exactly at the $30.50 level and that will be the first thing we need to watch to see if it going to be able to make a run back above $31. First level of downside support lies near yesterday's low at $29.00.

Bonds were miraculously rescued after an abysmal auction yesterday by a surge in demand at the 10 year auction of today. Apparently the Central Banks of the world had a huge change of heart and were busy tripping over themselves to acquire more of our 10 year debt based on the percentage of indirect bidders who were active. I sincerely doubt this however and view it more as a matter of expediency.

Falling bond prices do not exactly help make Central Banks feel wealthier seeing that the bulk of most of their reserves are in these paper IOU's. When you look at the size of the trade deficits the US is running, especially with its larger trading partners, they have little choice but to continue recycling those Dollars back into Treasuries. Why? - because of the sheer size and depth of the US Treasuries market. The kinds of sums involved are so vast that there are very few markets, if any, that can provide the kind of liquidity necessary to absorb their buying. The Euro zone is the closest rival but Europe has its own share of problems as we all well know. Australian bonds are throwing off good yields but its market would be swamped if it was the main choice of other Central Banks around the globe. And Japan - oh well... don't forget that nation has the 2nd highest level of overall total debt to GDP than any other nation on the planet with the exception of Zimbabwe.

Instead of including the Central Banks in the "indirect bidders" category, I propose a new category termed, "CAPTIVE BIDDERS".

Oh, and don't forget, all those Dollars that many of these foreign Central Banks have acquired with their constant Foreign exchange interventions to prop up the Dollar at the expense of their own domestic currency to keep it weak so as to not lose export market share, they have to do something with those as well. So its back into Treasuries they go.

the more one looks at this setup, the more one realizes what a terrific deal it is for the US and why we can seemingly print money with reckless abandon, run wild deficits, swamp the nation with unpayble debt obligations and still manage to somehow peddle all of our debt to the rest of the globe. No wonder some are ticked off at us.

A short side note to all of this is that it is also a reason why gold will stay well supported on dips in price. It remains an increasingly viable option for Central Banks looking for somewhere to place a portion of their reserves or surplus trade dollars. As small a market it is by comparison to the Treasury market, it is easy to understand how much gold can be acquired and why when they do buy, it is difficult to disguise their actions or cover their tracks without greatly affecting the price.

We’ll have to see what kind of legs today’s move higher will end up having. If it turns out to be a one day wonder, that will not bode well for future bond prices.

The weekly bond chart’s breakdown last week must have seriously unnerved the central planners at the Fed as it has rolled over. That puts the market on a “sell the rally” footing. The battle appears to have been joined.

Equities moved lower today in what must obviously have been a malfunction at the exchange in the ticker display. I suspect that some clever hacker probably got into the source code that controls the display and mischievously rewrote the color line to display red instead of green. I am sure they will get that fixed by tomorrow as this sort of thing is simply unacceptable.

More on Ben Bernanke's Testimony

I particularly enjoyed this headline that originated out the hearings featuring Fed Chairman Ben Bernanke – being questioned about the overall policy of QE, the Chairman stated:

“all bond buys MAY (emphasis mine) have created up to 3 million jobs”.

Yes indeed they MAY have done just that – then again, they MAY NOT have done anything of the sort. I think I could also assert with the same sort of complete confidence, preparing a nice brisket on my backyard smoker MAY have also contributed to the creation of multiple jobs in the beef industry. My question to the Chairman would be:

“Can you assert with complete confidence that the enormous amounts of money expended under QE1 and now currently underway with QE2 did specifically create that number of jobs that you just asserted?”

If he answered in the affirmative, then we could produce the actual numbers.

Let’s see – under QE1 where the Fed was mopping up the alphabet soup derivatives and then Treasuries, the sum involved was in the general vicinity of $1.5 TRILLION  ($1.25 in MBS and $300 billion in Treasuries). Let’s do the math – that means each of those 3 million jobs took only $500,000 to create. Wow – is that a deal or what?

Perhaps we are being a bit too hard on the Chairman – let’s use the numbers associated with QE2 instead, $600 billion. If we can create another 3 million jobs each of those jobs will have cost a mere $200,000 to create. Leave it to the feds to come up with numbers like that and have the temerity to congratulate themselves.

For those of you who want to argue that these jobs will result in their holders paying taxes back to the government thus lowering the overall cost, I will grant you that but you are still left with the unfortunate fact that the amount in taxes paid will certainly not cover the overall costs incurred in creating the job thus still leaving the citizenry in a hole.

Perhaps the citizens would have gotten a better deal on their children and grandchildren’s money, if the Fed had just written a check to every single family in the nation for $34,711. They would have spent the same amount under both QE’s and I suspect we would have had a lot more consumer spending than we have gotten by purchasing rotten derivatives from the hairbrained banks who manufactured them and more government IOU’s.

This is the particular line that had me falling on the floor and pulling my hair out:

“We have been very careful not to distort the bond market”

Technically, true but the answer would be more accurate if he stated:

“we’ve been very careful not to distort the bond market but our primary dealers and same sharp hedge fund managers have had no such scruples. They were just front running our purchases for the last two months making obscene profits in the process. However, since last week, things are not going so well for us. Suddenly our game plan is in the toilet.”

Here is yet another one:

“The Dollar has been looking more attractive versus other currencies”

Factfinder:  US DOLLAR CHART

And then lastly:

“Fed policy does not add one more bushel of wheat to the world supply” (I am paraphrasing that one but it contains the basic premise that it is not the Fed’s fault that commodity prices are rising.

That is once again technically true but to deny that Fed policy has resulted in an enormous surge in SPECULATIVE DEMAND for hard assets is yet again, playing fast and loose with the facts. Take a chart of the CCI and overlay the implementation of both QE’s and one can easily see the connection between the two. I will grant the Chairman that there has been a strong weather element in the rising cost of food. That coupled with increasing demand from developing and emerged markets has indeed been a strong factor in the rise in price of the grains and other commodities in general, yet for the Fed Chairman to seemingly lay the entire blame for the rise in commodity prices on factors outside of his control is striking for its audacity. Note to Ben: SPECULATIVE DEMAND is real and cannot be overlooked when attempting to ascertain factors behind price rises and it is a FACT that demand from this quarter has been fanned by QE as investors have looked to tangible assets to shield their wealth from the accompanying currency debauchment that inevitably results from unlimited money printing.

Chairman Ben's Big Day

In watching the testimony and question and answer session involving Fed Chairman Ben Bernanke, (more on this later), I continue to marvel at his insistence that inflation is not a problem nor has it resulted from his Fed's QE policies. About the same time that his Da Niles were reaching Pinnochio levels, this story came down the Dow Jones newswire. Keep in mind that the commodity price charts, and the CCI in general, contradict his assertions and as I have said many times, the charts do not lie but are brutally realistic.

Please note the paragraph I have underlined for emphasis sake. Even though the story is out of London and is detailing what is transpiring across the Pond with those companies, the exact same thing is occuring over here.

I found it particularly interesting that the US firm, Kraft Foods, is dealing with the surge in commodity prices by shrinking the size of one of their products. That reminds me of what occured years ago - Remember those old 5 pound bags of sugar that went to 4 pound bags? I wonder if they are now going to go to 3.5 pounds or less?

That the Chairman continues to assert that inflation is not a problem is downright ludicrous and strikes me as being disingenous.


I will have more on all of this on my blog at:

http://www.traderdannorcini.blogspot.com/

DJ Consumer Goods Giants Forced To Act As Commodity Costs Rise

---

Wed Feb 09 11:27:56 2011 EST

  By Simon Zekaria

  Of DOW JONES NEWSWIRES


  LONDON (Dow Jones)--Major consumer goods companies are being forced to
reassess their business models in the face of soaring commodity costs as they
attempt to minimize damage to profit margins and scale back losses.

  Whether through raising prices, cutting costs, adjusting product size or
altering ingredient mix, companies such as Unilever PLC (ULVR.LN), Reckitt
Benckiser (RB.LN) and Kraft Foods Inc. (KFT) are all having to take action as
rising input costs show no sign of abating.

  As escalating costs have hit all categories of commodities, no single company
is better placed than another, so their differing strategies will be under
close scrutiny.

  "It is similar across the board. Looking at coffee, cocoa, the oil
price--everything has gone up significantly and most are back at 2008 levels.
On commodity prices, they all tend to drag on each other," Espirito Santo
Investment Bank analyst Martin Dolan said Wednesday.

  Dolan said that lack of clarity on strategic hedging makes it hard to clarify
the differing potential impact on individual companies and their ability to
respond to market fluctuations. "What we don't have a handle on is whether
anyone is hedged better than anyone else. Probably, they are covered in margin
terms for the first half, but after it is difficult to assess," he said.

  Unilever PLC (ULVR.LN), the Anglo-Dutch maker of Ben & Jerry's ice cream, and
Reckitt Benckiser (RB.LN), producer of Lysol disinfectants, are taking on
inflationary headwinds by innovating and streamlining packaging, ramping up
savings plans by paring logistical and purchasing costs, and selectively
increasing prices across favorite food, personal care and household product
brands.

    Unilever said last week that it has no plans to reduce the size of its
products, following reports that U.S. rival Kraft Foods Inc. (KFT) has chosen
to combat rising ingredient costs by cutting the size of its Cadbury Dairy Milk
chocolate bar rather than raising prices.

  Unilever predicted a 400 basis point hit to full-year margin due to
escalating commodity costs while U.S. rival Procter & Gamble (PG) said earlier
this month its commodities bill will total $1 billion for the year to the end
of June, more than double expectations.

  Analysts warned that Unilever should be mindful of worsening conditions to
come. "With Unilever struggling for margin in the face of what we think are
only the foothills of input cost inflation, we expect even bigger challenges
when it faces the peaks to come," said Martin Deboo of Investec Securities.

   Reckitt Benckiser's more limited exposure to costs related to food products
does not mean it has an easier ride as "its costs (are linked to) the oil price
and oil price derivatives," said Espirito Santo's Dolan.

  Earlier Wednesday, Reckitt Benckiser, the Slough, U.K.-based maker of Lysol
disinfectants, Clearasil spot cream and Finish dishwasher powder, as well as
French's Yellow Mustard, said its gross margins fell 80 basis points in the
fourth quarter on higher promotional spend and as cost inflation took effect.

  "(Costs) are a concern and a challenge for all companies in the industry. We
have key raw materials that are going up. (Costs) will not be eliminated, but
we have programs to neutralize the impact," Chief Executive Bart Becht said.
These include paring logistics, sourcing and purchasing costs.

  At 1543 GMT,  Unilever was flat at 1826 pence, while Reckitt Beckiser, which
underwhelmed investors with its fourth-quarter results, was down 172 pence, or
5%, at 3273 pence, the biggest faller on the FTSE 100.

  By Simon Zekaria, Dow Jones Newswires; +44 207 842-9410;
simon.zekaria@dowjones.com


  (END) Dow Jones Newswires

  02-09-11 1127ET

  Copyright (c) 2011 Dow Jones & Company, Inc.