Trader Dan Grain Index at 5 Month Low

Today's USDA reports really did a number on this index that I have created for my own analysis purposes. The unexpected data showed supply outrunning current expected levels of demand and forced the market to adjust to the new set of fundamentals.

If you note the index, it is at a 5 month low!

A couple of things to note here that I was unable to get to this morning amidst the hustle and bustle of trading activity. First, corn demand has fallen off because feed demand is falling off. The reason is because we now know that there are less piggy mouths around to feed than previously expected. Also, cattle numbers are well off last year's levels as well. Less animals to feed means less corn demand.

Secondly, even though planted acreage estimates for corn are lower than last year, traders are expected the harvested crop to actually come in larger than last year. The reason is because we have thus far had nearly ideal growing conditions. The crop looks terrific at this point as it enters the key pollination stage and for now, forecasts look benign.

Wheat prices are low but global supplies are ample and US prices have had to respond to increased competition from other nation suppliers.

I do want to add another note here - today is both the end of the month and the end of the quarter. End of the month positioning is bad enough but throw in a good dose of end of the quarter book squaring, and all manner of strange price moves can be seen.

Dr. Copper Threatening an Upside Breakout

One look at the chart says it all - Copper is knocking on the door of overhead chart resistance and is threatening an upside breakout.

The catalyst has been continued improvement in recent Chinese manufacturing economic data. Traders are also optimistic that this evening's upcoming overnight release of China's monthly purchasing managers' index is going to be positive.

Also, today's US pending home sales data was a big mover of the market. Sales rose 6.1% in May compared to the previous month. The estimates were for a very modest 1.1% increase. The red metal leapt higher when the data hit the wires as it was much better than expected. Bears were caught off guard by the surprisingly strong number and wasted no time covering.

Copper bulls are banking on improved numbers coming from the two largest consumers of the red metal ( China and the US).

Also, there is behind the scenes talks occurring among banks and traders caught up in the double and triple counting metal schemes to split losses. That seems to have lessened the impact from any expected forced sales of copper in the event that the Chinese authorities force the loans to be called.

It's funny isn't it how one day the market is terrified of losses and then the next day it could care less. Such are the fleeting vagaries of sentiment. One never knows when it will change or what it will decide to focus on from day to day. Let's just say that for now, looking at the chart, Copper is convinced that economic data is going to be improving as we move forward into the summer months.

Let's keep a very close eye on this chart. It is one of the most accurate indicators of global economic activity that I know of.

USDA Report Unleashes Massacre in the Grain markets

Today was the big day we grain traders were all waiting for as it was USDA report day. The June Acreage numbers were going to be released along with the Quarterly Grain Stocks numbers. All I can say is "Great Googly Moogly! Look at what USDA hath wrought!".

To say that the report was bearish would be an understatement, especially when it came to the beans. The sheer size of the acreage number ( a stunning 84.8 million acres ) caused traders to gasp in astonishment. This is a record. We were expecting a big number but this was well above the pre-report average estimates. To put it into a bit of perspective - last year 76.53 million acres went to beans. Previous USDA estimates were at 81.49 million acres. No matter how one looks at this report, it is a shocker.

The combination of sky high soybean prices and unseasonably cool, wet weather in certain key corn growing areas, meant that the move to soybeans was strongly underway. Also, the weather in other key soybean growing areas was very good and led to the crop getting in early in some cases.

This report confirms that old but wonderfully time-proven adage; " The best cure for high prices is high prices". Simply put, the market sent the signal that more soybeans were needed and farmers responded accordingly.

If that was not bad enough for the bulls, USDA also came in with an ending stocks estimate that was above the pre-report guesses as well. Analysts were looking for 387 million bushels for carryover but got 405 million instead.

They also gave corn a swift kick in the rear by raising ending stocks estimates to 3.854 billion bushels, well above the 3.724 billion estimates. This is spite of the fact that the big move towards beans among farmers meant less acreage going to corn this year. The agency anticipates 91.64 million acres of corn compared to previous estimates of 91.69 million. To provide some comparison perspective - last year 95.37 million acres went to corn.

While the acreage number for corn, on the surface, seems friendly, ideal growing weather, a huge bean crop and reduced corn demand as evidenced by the 39% increase in ending stocks, gave the signal to the market to take the price lower yet.

This is excellent news for the livestock and poultry industries.

Expected wheat acreage also rose but out of the three categories, the wheat number looks the least negative. KC wheat is actually holding up fairly well given the weakness in SRW and the sharp downdraft in corn.

Farmers can still make money at these prices and hopefully some of them had secured some strategic option positions ahead of the report to give them some downside protection. This particular USDA report is notorious for producing very big and very wild swings in prices. It lived up to its reputation once more.

One side note - in speaking with a reporter over at Dow Jones today on the livestock markets and the reaction of the hogs to the Quarterly Hogs and Pigs report out last Friday, I commented that this USDA report is going to produce a very big shift in Farrowing Intentions for the rest of this year. Hog producer profits look to be outstanding due to these sharply lower feed costs. While most of the hog contracts are locked limit up today having opened that way in some months and remained there for the session at this point, next year should be considered optimistically by hog producers.

To the shell-shocked consumer who is watching gasoline prices moving higher, beef and pork prices soaring and seeing the number of grocery bags that they can bring home for the same price shrinking, at last we have a glimmer of good news on the food cost front. As I have said before, we are going to have to deal with high red meat prices for the entirety of this summer but some relief is still in sight later this year and certainly by next year. (* at least for now! Who knows if the weather will stay this cooperative for the remainder of the growing season!).

Here is a quick look at the November Soybeans Chart about 45 minutes after the USDA report release. Notice that the Head and Shoulders Pattern that was forming on the chart was violently confirmed by the breach of the neckline. Without getting too bogged down in details at the moment, given the time constraint and busy markets I am dealing with right now, the pattern target is down near $11.20 - $11.25. This of course assumes the weather remains friendly.

More later.....

100th Anniversary of the Beginning of "The Great War"

June 28, 1914 - Sarajevo - Archduke Franz Ferdinand and his wife Sophie are shot and killed by a Serbian nationalist. Our world will never be the same.

So might the title have been in the newspapers a century ago. That single act set in motion a profound series of events that culminated in one of the most horrific slaughters our world has ever witnessed.

For those of you who might be history buffs as I am, or for those who are merely curious about a War that forever altered the face of the world as it then existed, I highly recommend you read the following articles in the NY Times which is running with a marvelous series of writings on this human tragedy.

I am not normally a fan of the Times, as it is far too liberal leaning for my likes, but this series of articles is outstanding. They are superbly done!

Every time I read about the sacrifices, and the horrors that those who fought in wars experienced, but especially WWI, I  contemplate what it must have been like for those soldiers who fought, bled and died in muddy, wet, miserable trenches with artillery shells, sniper fire and machine gun volleys ripping ceaselessly through the air surrounding them. Far from home and loved ones, many in strange lands, with the shrieks and groans of agony surrounding them, how did they bear up and continue to do their duty? They charged over the top when commanded do to so, knowing full well that the odds favored their deaths shortly as a wall of lead and shrapnel were going to meet them.

It was less than three weeks ago when we were recalling the 70th anniversary of D-Day in WWII. It is humbling to consider that we are now 100 years removed from the tumultuous events of a bygone era.

Sometimes it is good to pause and reflect on such things.

http://www.nytimes.com/2014/06/27/world/europe/world-war-i-brought-fundamental-changes-to-the-world.html?action=click&contentCollection=Europe&module=RelatedCoverage&region=Marginalia&pgtype=article

Inflation Expectations Continue to Firm

I have mentioned in the past that I would keep the readers up to date on the TIPS spread action, especially as it compares to the gold price. I have the data through Thursday of this week ( the Federal Reserve is always a day behind in getting the fresh data) but it does continue to confirm the idea that the broader market is still continuing to see inflationary pressures increasing, albeit at a controlled rate. I believe that this is linked directly to the recently dovish attitudes of three Western Central Bank heads - ECB President Trichet, who got the ball rolling with a reduction in rates in the Eurozone as well as engaging in negative rates for bank reserve deposits, Fed Chair Yellen and BOE Head Carney.

The TIPS spread remains near the highest level in 6 months, a positive key that is keeping gold supported recently. We need to also keep in mind that another of the factors that goes into determining the gold price is also a premium due to the geopolitical factors that might or might not be present. At the current time, the chaotic events in Iraq are undergirding the price of the metal. Lurking around also, although much less of a factor, are events in Ukraine.

The point I want to make here is that inflationary expectations might actually be falling at some point as signaled by the TIPS spread, but geopolitical events could be dominating trader/investor sentiment and such concerns could supercede any signal from the TIPS spread. If figuring out which way markets are going to go, or what the sentiment might be at any given time, were as easy as just looking at one input, we would all be living on our own S. Pacific islands.

Here is the chart update through Thursday.

Along this line, here is the current chart of the Goldman Sachs Commodity Index. As of the close of trading this week, the index is up almost 8% on the year.

From a broader perspective, it continues range bound as noted by the shaded rectangular region on the chart.


That brings me to the US Dollar. It too is range bound. Notice that there exist two defined trading ranges on this longer-term weekly chart. The first and large range has been in effect for a year now. It extends up towards 84 on the top and down towards 78.60 on the bottom. Within this range, is a shorter and narrower one which extends towards 81.50 on the top and near 79 on the bottom. The latter range has kept the Dollar confined for the past 8 months or so.

The relationship between the US Dollar and the broader commodity complex remains fairly consistent which is why the chart pattern for the commodity index and the Dollar index are both showing range bound markets for the time being.

The stock indices did what they have done for so long now - every time they appear to be rolling over, back up they spring. Equity bulls are not going to give up without a fight. The benchmark Russell 2000, a good indicator of investor sentiment towards risk, was up nearly 0.75% today and managed to close higher on the week, after looking like it was finally going to show some downside follow through from weakness earlier in the week.

The index remains well above its 50 day moving average after dipping down into that level last month.

While one can make the case for bearish divergences showing up, this index has continued to shrug off one divergence after another for over a year now!

One last thing ( for now ) I believe it was last week when I mentioned the Gold Commitment of Traders report noted that there was a considerable amount of short covering that occurred in the drive higher coming off of Janet Yellen's dovish remarks back then. Hedgies were caught off guard by that ( as was nearly most everyone else!) and headed for the exits in a big way. They covered around 16,600 short positions against only adding around 1700 new long positions.

I remarked last week that if one is bullish gold, they want to see any move higher in the market accompanied by the infusion of new money from powerful speculative interests and not merely short covering, which while it can be impressive, tends to fizzle out as quickly as it starts.

This week was a welcome change therefore for the bulls in that department. The buying from the hedge funds became much more balanced this week. Short covering was still the dominant feature among that category to the tune of some 24,800 shorts being lifted but here is the noteworthy development - they added nearly 23,000 new long positions. Can you see the difference from the previous week?

Also, this new buying ( dip buyers ) are the reason that gold is currently hanging quite tough up here. It has been stymied at the $1320 level but it is not setting back much at all. This is what steady determined buying does. It keeps a market supported on dips in price. Bulls will want to see this pattern continue. The last thing that one wants to see if they are bullish is for the longs to STOP BUYING these dips. We will know it very quickly if they do just that by the price action.

The events in Iraq, the rising TIPS spread, the lack of strong bullish conviction in the US Dollar at the moment, are all providing some wind at the back of the bulls.

That being said, gold seems to be looking for a catalyst to power it up through $1320 and allow it to maintain its hold ABOVE this key level.  With today's momentum driven markets, any sign that the upward momentum has stalled will get touchy, jumpy short-term oriented longs very nervous. Gold bulls will therefore need to prove their meddle next week. Lacking a fresh catalyst, gold's inability to quickly put $1320 in its rearview mirror, is going to embolden the bears. While bulls are certainly digging in on these dips, bears are also digging in here at this level.

In spite of the strength being shown by gold, some of the big investment banks and their advisory services are still coming out with bearish second half of the year calls on gold. The reason - they expect the economy to continue to improve and interest rates to rise early next year. I am not sure about that prediction but it is basically the same expectation that stock market bulls are relying on. We'll see if it is correct or not.

Lastly, here is the current chart of the GLD holdings. The reported holdings at 785.02 tons has not changed since the beginning of this week. Maybe we will get something new over the weekend or early next week. I sure hope so - these guys are slower than molasses on a winter day in getting us new data to work with.

Compared to exactly one month ago, total reported tonnage is down .26 tons. For the year, holdings were at 798.22 at the start of 2014. Doing the math we get gold tonnage down 13.2 tons for the year thus far. Western-oriented gold bulls are going to need to do much better than this.

Quarterly Hogs and Pigs Report Day (* UPDATED )

I am currently going over this report but will lay out some thoughts on it after I get a bit more time to go through it more thoroughly.

My initial reaction is that it is quite friendly towards the nearby months and neutral to bearish towards the very distant 2015 months.

Some of the negativity towards those months may have already been priced in with the sharp move lower in those contract months throughout this week.

Hog producers, (and cattle ranchers) - please check in later on and I will get those comments up.

Also, for the grain guys out there, we have a big USDA report coming out Monday AM. I will be remarking on that as well.

*UPDATE:

In looking over today's Quarterly Hogs and Pigs Report, once again, the report lived up to its habit of being one of the most unpredictable, volatile reports that USDA publishes. Last Quarter (March) the report threw the entire trade an enormous curve ball as it was decidedly bearish on the surface when nearly the entire industry was looking for a bullish report.

This Quarter's report was the exact opposite - it was decidedly bullish when most in the trade were looking for a bearish report!

Translation - there will be fireworks come Monday morning in the hog pit. Based on the report, I would not be surprised to see the August and October contracts open limit up, and with the December's possibly there as well. The July should also be well bid.

The reason? the report showed fewer hogs around than the industry was expecting. This is the result of the PED virus which has been, and still remains a serious issue for hog producers.

Here is some of my analysis which was sent off to some of the newswire reporters:

The number of sows that actually farrowed during March-April was much lower than the number that farrowed the previous three months. It does look as if earlier this spring,  producers were very nervous after coming off those flare up in disease incidences being reported. Again, that should be friendly towards the August – September time frame and into October.

 One other thing -  based on the Monthly aspect and the weight breakdown data – late August, early September should see some significant tightness in the supply side of things. The pig crop for March was especially tight coming in nearly 7% lower than last year! April’s pig crop is at 94.5% of last year. By last month, May, we were back to 96% or a 4% reduction.

One wild card is though intentions are obviously very high for the Sep-Nov time period ( 4% above last year) we do not yet know what kind of impact the disease might have as the weather turns cooler and damper. If the expected recently approved vaccine is effective ( and we do not know yet how effective it might or might not be), the herd will be expanding significantly by next year.

Based on my preliminary reading of the report, it looks as if the front months should still continue to outperform the distant 2015 contracts.

 

The question is how much of this is already priced into the Board. With the big move lower in those 2015 contracts this week, the Board might have already effectively discounted the report with that very high intentions number for the Sep-Nov time frame.

 The USDA showed the expected mortality rate from the disease lessening or improving positively  as the spring has worn on. You can see the improvement in this years 2014 pigs per litter numbers as the spring progresses.

 

March            10.24              9.58

April               10.30              9.78

May                10.38              9.98

 

While the pigs per litter number is being impacted from the virus, USDA is looking at the numbers and telling us that the impact from the disease will lessen as the weather warms. That is consistent with what we saw last year.

 

 

Hog producers out there - keep an eye on the price action for those distant hog contracts in Q1 2015. If you got some downside hedge protection in the Feb's for example over the last couple of weeks, you should be okay on those, as the contract has dropped over 750 points the last two weeks.

While I do not see anything especially bullish about a 104% intentions number for the fall, the intentions are the most fickle number in the report as those are forward looking  ( estimates) and can easily ramp up or back down depending on the change in conditions when it comes to feed prices and hog prices or both. Those distant months might get dragged higher by the overall bullish tone to the report especially considering that the beating they took this past week ahead of the report pretty much factored in a sizeable bit of expansion for that time frame.

Then again, with a big USDA grains report due out Monday morning, the impact from that report on corn and meal prices could become a factor in the intentions. Frankly, if hog prices stay very high this summer, and there is no reason for them not to at this point based off of this report, and if this season's expected grain and bean harvests are large, I expect the intentions number to continue moving higher - there is just too much profit potential for hog producers at such lofty levels for them to pass it up.

Let's see what we get Monday by the close to get a better sense of how the industry is treating the overall report.

Tracking Gold Shares

The gold shares, as evidenced by the HUI, ended the week on bit of a lower note ( as I type these comments up ).  Sellers emerged up near the week's high but dip buying was also evident. There appears to be an uneasy truce between both camps with the index not making much progress in either direction.

In looking over the chart and trying to get a read on the sector from the chart, I have noticed what appears to be an attempt to form what we technical analysis geeks refer to as an "Inverse" Head and Shoulders Pattern. I tend to only put any faith in these patterns when they appear after a PROLONGED move lower ( the same goes for the opposite pattern  - the Head and Shoulders Pattern - on a prolonger move higher). Even at that, I much prefer to see these patterns validated by a breach of an overhead horizontal resistance level rather than a breach of the neckline. More often than not, the neckline breaches these days only lead to markets entering consolidation patterns, rather than extended trending moves. That is why I personally prefer to wait for a horizontal resistance level to be taken out before getting too dogmatic about things.

Take a look at the chart and you will see the pattern noted. I have drawn in the neckline, which comes in closer to the 250 level. That level could be bettered confirming the pattern but would not necessarily denote the beginning of a sustained, strong uptrending move. Note that there are THREE overhead horizontal resistance zones, the last of which, the gap region, should prove to be quite formidable.

For a sustained strong upside trending move to begin, the gap would have to be taken out. If not, the odds would favor a broad sideways pattern, or a trader's market, with the top of the range being confirmed depending on how the index responds when it nears the horizontal lines noted on the chart.

The bottom of the range would be first at the right hand shoulder which just so happens to be at the round number 200, which is both psychological and technical support.

Here's what we can say from an analysis of this particular chart - For the pattern to remain friendly, the 200 level needs to remain unbroken on any possible setbacks in price ( that is the Right Shoulder). That would keep the pattern moving sideways to slightly higher as it is currently doing.  If that 200 level were to give way, you would then have to say that the pattern has changed back to being slightly unfriendly with price movement sideways to slightly lower.

If the first level of horizontal chart resistance noted near 260 is taken out, the bulls should be able take this index up towards 280. Above that lies the gap region.

By the way, the chart picture and analysis for the juniors as evidenced by the GDXJ is very similar to the HUI. It has horizontal resistance near 45. Above that is also a gap starting near 52 and extending up to 55.

Given the situation in Iraq and recent rash of dovish comments by some heads of the various Western Central Banks, gold is continuing to draw decent buying support here in the West. Throw in a case of some shaky equity markets, and some traders/investors are buying the metal as a safe haven. I remarked yesterday how fascinating it was to see gold finding friends here in the West while losing a few friends in the East ( for now). Western oriented investment demand for gold is what had been missing for the yellow metal for the last number of years. Gold's friends will be happy to see it returning even if it is not at levels previously seen. At least it is there! Compared to being non-existent, anything is a big improvement!

China news roils Gold but dip buyers emerge

I was wondering when we were going to start seeing and hearing the various FOMC governors after Janet Yellen's now famous comments the other week; comments which launched the entire commodity sector, including gold, higher. You might recall she gave the impression, or at least the market interpreted it this way, that interest rate hikes were off the table anytime soon.

Enter Fed Governor Lacker from Stage Right - His comments during a Q&A noted that he expects the Fed will need to raise interest rates in 2015, although he did say that he ffelt "low interest rates are appropriate given current economic conditions". He also stated that the "precise timing of interest rate hikes will be tricky".

He noted that "stronger inflation data in recent months have not been entirely noise". He also stated that "inflation is firming more quickly than expected but remains below the Fed's 2.0% target".

The big line, at least in my view, was the one, " the Fed may need to raise rates even without a substantial acceleration in economic growth". That one seemed to garner the most attention.

He did note, by the way, that he expected the Q2 GDP to bounce back to 2.25%-2.50%. We will see about that.

Those comments seemed to add some pressure on the gold market when they surfaced on the newswires. (UPDATE - Fed Governor Bullard has just now come out and is speaking).

Gold was already seeing some light selling pressure from two other developments related to Asian physical demand.

The first of these was chatter about the Indian monsoon season which some are viewing as off to a weak start. The idea is that a early and strong monsoon season is necessary for good crop yields there. Since the bulk of Indian gold purchases are made from those engaged in small scale agriculture, any problems with the harvest tend to negatively impact overall Indian gold demand. While it is too early to state dogmatically that the harvest there will not be as strong as might normally be looked for, traders are watching for any sign of lull in demand from this key gold buying region.

Also, and this one seemed to be a bit more of a factor than the above, news out of China reached the market this morning that officials there had uncovered approximately $15.2 billion in loans that are tied to potentially illegal gold-financing deals. The report noted that banks in China have already begun more closely scrutinizing these gold-backed loans and have been cutting back on letters of credit to gold processors.

It is worthwhile to note that the article goes on to say that Goldman Sachs estimates that since 2010, metal-backed loans have been used to bring some $110 billion into China.

Think of these loans as a sort of carry trade - the borrower obtains a letter of credit by a Chinese bank which is secured by gold located in a bonded warehouse either on the mainland or in Hong Kong. The borrower then uses that letter of credit to secure a US Dollar loan from an offshore bank. That money is then converted to renminbi which is then used to invest in a higher-yielding financial instrument there on the mainland. The profit is made in the difference gained on the investment and the interest paid on the loan.

The concern here, not only for gold, but also for copper, is that any tightening of these letters of credit will crimp demand for the metal. If the banks are not going to provide letters of credit, then the ones using the gold as collateral are not going to need it, cutting into future demand. Also, while we are not there yet, some fear the possibility of these loans being called as a result of officials' actions to put an end to the double and triple counting of the same gold. If that were to happen, the spread trade would be unwound. The investment on the mainland would be sold, the money raised would be converted from renminbi to US Dollars, the US Dollar loan would be repaid, and conceivably, the gold which was purchased in the first place to secure these loans, would no longer be necessary and would thus be sold.

It is also interesting to learn that at current gold prices, the amount of gold is 11.5 million troy ounces, according to a report from Dow Jones. In a very interesting way of looking at the sum involved, their sources estimate that on a global scale, it would be the 11th largest gold reserve in the world, just behind Portugal's stash of 12. million ounces and just ahead of the UK's 9.975 million.

No wonder the gold market is noticing this!

The usual "we have never seen a story concerning gold that we could not spin to make it bullish" website somehow manages to contort this story as friendly! Just use common sense and do not get lost in the weeds with their "logic" and you will see what it is that has been lurking out there in the minds of metals traders. They are understandably nervous about this.

Recently the dovish statements by Yellen and by her counterpart Carney over at the BOE, have seemed to outweigh any concerns from these China developments, ( let's also not forget that horrific Q1 GDP reading ) but they are lurking in the background and should be closely watched. I should note here that most analysts, still expect Chinese gold demand to remain strong; however, if, and this is a big, "IF", Western-oriented investment demand were to lag for any reason, any curtailment in gold demand from China would become more significant.

Counterbalancing this bearish news for gold was the Fed's favorite inflation indicator - the Personal Consumer Expenditures index - reading. It rose to 1.8%, the highest reading in 19 months!

It's funny isn't it? - I was bewailing the lack of Western-origin gold demand when gold was moving lower, as evidenced by the reported GLD holdings, for the reason behind the lackluster gold performance. While this was occurring Asian demand was carrying the water in the gold market. Now we have the exact reverse! Western-oriented investment interest in gold is picking up somewhat while Asian demand is beginning to lag! This means that gold is now dependent on buying coming out of the West instead of the East to keep it supported!  One thing never changes- the fact that markets are always changing!

The Western-oriented demand is tied to both inflation concerns and uneasiness over the equity markets in the face of sluggish economic growth. Wouldn't it be something if we watched gold move higher at the Comex during the late European and New York trading sessions only to weaken during the Asian trading hours! Talk about a change of pace!

Shifting a bit to the technical side of things - gold continues to fail near key overhead resistance centered around $1320. I am posting the same chart as yesterday with the same notations - gold is stymied here at the resistance zone noted. Dip buyers are coming in however. Bulls need to take the price through this level rather soon however or the stale longs are going to bail out. Depending on whether or not they can hold the price above $1300, we could see another drop towards $1280. A strong, sustained push through $1320 should allow the market to make a run at $1340.

The mining shares remain well bid which is a comfort to the bullish cause in gold.

The yield on the Ten Year Treasury note is hovering just above the 2.5% level.

On the grain front, soybeans are back to worrying over the ending stocks once again. "She loves me; she loves me not". Strong weekly export sales were behind the move higher. We have a big report from USDA due out on Monday and that has once again shifted concerns over what USDA is going to give us in regards to the old crop carryover.

I am still eager to see whether some of the commercials are going to try to squeeze the shorts in that July contract when it enters its delivery period next week. We need to get that month off the Board and out of the way to get an actual decent reading on what the new crop is going to do. July, tied to these ending stocks, has been a real source of volatility and confusion in the beans for a long time now.

I am beginning to wonder if there is not a subtle shift occurring in bean market in regards to the pipeline needs. Old habits die hard but with S. American soybean production rising nearly year after year, I wonder if the importance of the carryover is as big a deal as it once was many years ago when I first started trading these things. Back then, we needed a big carryover to ensure that we would not run out of beans between the harvest of the previous year and the harvest of the current year. More and more however we are seeing S. American cargoes filling needs and with imports of beans from down below now becoming much more common, perhaps the market is going to re-evaluate whether or not the carryover is quite as critical as it once was. I am not saying it is not going to be closely watched - what I am saying is that the global grain trade is changing and S. America is becoming a bigger player with the passing of each year. Their crop is harvested during the spring up here and moving beans north is not as uncommon as it once was. If you can just as easily ( and sometimes more cheaply!) acquire beans from S. America during the spring and early summer  than up here in N. America, why do we need carryovers the size that we have historically come to look to here? Just asking....

Corn and wheat are moving higher as the selling down here has dried up some ahead of that above mentioned USDA report due Monday. Traders are going to want to see the numbers before getting too aggressive at this point, especially considering the extended downdrafts that we have been seeing in both markets. We are seeing some signs of demand picking up at these reduced price levels.

Also, I suspect some of the big locals and some others who manage some commodity money might be trying to pick off some of the small specs who are quite short both markets. Buy stop running is always a favorite pastime of that crowd.

Crude oil wasted no time surrendering its gains from yesterday. Perhaps it was the fact that equity bulls were suddenly now concerned that economic growth was not going to be as strong as they were thinking it would be for Q2 ( that did not seem to bother them yesterday now did it?). Where were these guys yesterday when they bid up both the price of crude oil and the price of stocks when we got one of the worst GDP readings I can recall in some time?

Take a look at the crude oil chart - today's move lower has put the market right smack on top of the upper edge of the support zone noted on the chart. You might notice that the $105 level was a tough overhead resistance level on the way up and had held this market in check for some three months or so. It is now serving as support.

Short term indicator is bearish. Bulls so far have held this market together but they are going to have to dig in here and start pushing back if they are going to prevent that massive speculative long position hanging over this market from becoming a bigger factor. They are so far holding things together but have been unable to extend the price higher. Bears are digging in as well.

Of course, as mentioned in yesterday's post, the weakness in crude and its products, along with natural gas which moved lower in a larger-than-expected inventory build, pulled the Goldman Sachs Commodity Index, rather rudely. This is in spite of another push to fresh record highs in the cattle complex and higher prices across the board in the grain complex. Cotton is heading lower and that bodes well for apparel costs although the higher priced crude will tend to push synthetic prices higher.

One last thing - I wish to thank all of those who have graciously donated. I am trying to make a point of personally thanking each and every one of you but time constraints make that difficult on occasion. I did not wish to not acknowledge your kindness lest you think me ungrateful. It is sincerely appreciated.

Volatile Crude Oil Impacting Commodity Indices

Hold onto your hat for the wild ride currently taking place in the WTI crude oil market. Yesterday afternoon, the front month soared nearly $1.50/barrel when news hit the wires of a Wall Street Journal "scoop" story that the Obama Administration was supposedly going to relax the export rules to allow two firms to export ultra-light crude. The firms are Pioneer Natural Resources and Enterprise Products Partners. This was regarded as a big deal because the US has not exported oil in nearly 40 years. We can export refined products just not the raw stuff.

Oil spread traders are having a field day on this news.

After being down for the previous two sessions, the price shot up, completely erasing those losses. However, and this is key, the market could not extend past the overhead chart resistance centered near the $107.50 level. It did manage to keep its footing near $107 but as more data hit, this time the storage or stocks number, the market began to slowly retreat.

The EIA showed crude oil stocks rose 1.7 million barrels to 388.09 million. The market was actually looking for a drop of 1.2 million barrels for that week. Both gasoline and distillate stocks rose.

The market however bounced higher mid-morning continuing its extreme volatility. What we are witnessing is the result of the massive speculative long side positioning with hedge fund longs in particular attempting to defend those positions.

The problem however in crude is what we were reminded of by both the EIA data and the bigger news, the incredible downward revision to Q1 GDP. To say that it was lousy, would be a disservice to the word, "lousy". It was abysmal! The number was revised to a nearly 3% shrinkage.

So here is the question - what in the world is crude oil doing up at these levels when the economy is seemingly going backward? Yes, I understand the Q1 number is backward looking and that markets are inherently forward looking, but given this sharp rate of contraction in the economy, we are going to have to have seen some quite rapid improvements in the economy during Q2 to get the number up near even 2.0 -  2.5% GDP growth. Even at a number like that, it is certainly not indicative of an economy roaring full spread ahead and it certainly is not one that would seem to be burning through crude oil at a rate to justify these rather lofty oil prices.

As I wrote previously, just how much of the crude oil price is due to geopolitical premium ( speculative demand ) and just how much is due to actual demand for the product itself? That is the mystery. This is why that big overhang of speculative long positions in this market makes me extremely nervous. At what point has the market fully factored in geopolitical unrest?

Another question - have these speculative players been buying crude as an inflation hedge? If so, how much of that buying is related to this?

I am raising questions that I have no answer for but am doing so to illustrate the complex factors going into the pricing of the black gold. But here is one big question - with an economy limping along, how can inflation pressures be a concern? Or are we witnessing the dreaded stagflation scenario? That the TIPS spread is increasing shows investors are worried about budding inflation pressures yet the economy is going nowhere fast it would seem. Food for thought is it not?

But let me come full circle and actually move towards the headline I chose. The commodity indices that we are now left with are too heavily weighted towards energy in my opinion but they are the only ones we have to work with. As such, energy prices have an unduly disproportional impact on the price levels of these various indices. Thus, I do not believe that they are truly indicative of what is happening across the broader commodity complex. Volatile crude oil prices can disproportionally drive the commodity indices higher when energy is moving higher and can also disproportionally sink the commodity indices lower when energy prices are falling.  

While these commodity indices are always helpful, one has to step back and consider some of the various sectors of the commodity markets, especially those with a lesser weighting in the various indices. Take a look at grains, such as corn and wheat for example. Corn prices, as well as wheat prices are both near a 4 month low. Soybean prices are near a three month low. Natural gas prices are essentially flat and have been for 4 months now. And while both cattle and hog prices have been soaring, they should be moderating later this year and especially into winter and spring of next year.

Then one has to consider whether or not rising energy prices are inflationary in this current economic climate, or deflationary.

The point I am making here is that there is still a great deal of uncertainty out there. Equities move sharply lower one day and then reverse course the next. Interest rates move higher only to retreat. The signals are all mixed up and that is what is leading to lack of clearly defined trends in many markets with the resultant sharp reversals in price from one day to the next.

It does sometimes feel as if we are living in some sort of weird parallel universe where everything is a mirror image of this one. In that universe, a near 3.0% contraction in the US economy for Q1 is greeted with equity buying and strength in crude oil making the stuff even more expensive and further dampening consumer disposable income.

What appears to be at work in equities, at least for today, is that some buyers are still considering that Q1 number an aberration and that growth is going to pick up for the remainder of this year. That may be the case; it may not be the case. No one really knows for sure. All it leads to each piece of economic data being scrutinized ever more closely to see how each piece of the pie comes together.

One brief point here - you hog producers out there - we have a Quarterly Hogs and Pigs Report coming up Friday so be careful. I hope some of you have secured some hedges in expected Q4 production and Q1 2015 production along with long side feed coverage.

More later as time permits.

Russell 2000 showing signs of Fatigue

The Russell 2000 is another one of those key indices that traders can use to gauge risk sentiment. By keeping tabs on it, one can hope to better understand overall market sentiment in general and thus, by consequence, money flows.

Last month, it appeared that the index was in real danger of breaking down as it flirted with the February low before it staged an impressive recovery. However, it has failed ( as of today) to go on to make a new all-time high. As a matter of fact, it has stopped short of reaching its previous peak and is currently down near 0.85% as I type up these comments. This is a warning from a technical analysis aspect that the market is showing some signs of fatigue.

I have noted a POTENTIAL ( and I am heavily emphasizing that this is a 'potential' ) Head and Shoulders pattern that could be emerging after a very long and protracted run higher. I am not one that jumps and shouts about the formation of everyone of these patterns as does seem to be the habit of too many novice analysts, but when one of these patterns arises after a very long trend, either higher or lower, it pays to monitor it closely.

I have noted the left shoulder, the head and a potential right shoulder. The pattern would however only be confirmed by two successive closes below then neckline noted. That is a good way's off just yet.

One of three things will happen -

1.) the pattern will be confirmed by two successive closes below the 1080 level which would generally indicate a more extended move lower.

2.) the market will move down and test the neckline and bounce higher setting up a potential consolidation pattern.

3.) the market will briefly set back before going on to make yet another all time high.

Notice, I am not making any predictions here - I am merely noting probabilities that we as traders need to be alert to.

The indicator I am using has not yet generated a sell signal in spite of today's move lower in the index itself but it is up near levels commensurate with previous downturns that have occurred over  the last 9 months.

I am also noting that the VIX is sharply higher today for some reason. Some nervousness is creeping back in! I wonder if it might have anything to do with the fact, that Yellen, Carney and Trichet are all on the record recently talking about the economy growing slower than anticipated? Who knows - but whatever the reason - equity bulls seem unwilling to drive stocks sharply higher right now.

It is going to be interesting to see the GDP numbers.

Average Hourly Wages

One of the factors that we are trying to closely watch here is anything that might result in the Velocity of Money beginning to rise.

From my armchair perspective, I am of the view that it is the slack in the labor market that has kept inflation pressures well at bay, in spite of how many years now of Federal Reserve Liquidity efforts, also known as Quantitative Easing. I have commented here many times that until that huge sum of "money" that has been created by the Fed, begins to make its way out of Wall Street and onto Main Street, inflation pressures are simply not going to build.

I think many of us who are regulars here view the current stock market rally into all-time highs, seemingly without ending, as a product of these QE programs and a ZIRP ( Zero Interest Rate Policy).

Simply put - if Yield is the name of the game, and it is, then the money flows to where the yield potential is the greatest. For the last several years now, that has been into the general equity markets and out of commodities in general.

Recently however, we have seen the Commodity indices all breaking higher, led primarily by sharply rising energy prices. We have also seen the TIPS spread hitting its highest level in 6 months. These are signs that inflation pressures are building, albeit rather slowly.

What the missing ingredient has been is rising wages. let's face it, the employment situation in this country is rotten. While some folks are indeed getting some long-sought for jobs, many of these are not high-paying. One of the few exceptions has been in the energy sector where things are on fire. There is a shortage of skilled labor there that is very real.

Today we say new home sales pick up so that is a good sign. Also, someone has to build these new homes so construction guys are staying busier than they have been for several years.

All of this is leading me to beginning focusing on another piece of economic data and that is the Average Hourly Wages numbers that we get from the government on a regular basis. For many years, employers have been in the driver's seat and have been able to choose and pick whom they want to hire and what they are willing to offer them in wages pretty much without any sort of hindrance. It has been, and to some extent, still remains an "Employer's Market".

We therefore might want to start watching more closely for any signs that this might be changing. If wages were to pick up, it should tend to see consumer spending rise and in terms of the Velocity of Money, perhaps begin to arrest that long downtrend. If that were to happen, the TIPS spread would widen out even more and the inflation genie would start pushing even harder against the cork that is presently in his bottle.

Here is a chart of the Wages data. I have taken the liberty to convert the data into PERCENTAGE CHANGES compared to the same period in the previous year. In other words, we can see what percentage wages are rising or falling from the previous year to gauge whether wages are beginning to ramp up.

Notice how wages ( again - on a percentage change basis) were falling throughout the height of the credit crisis. Layoffs, firings, hourly wage cuts, etc. all show up on the chart during that time frame. The Fed's QE programs finally seemed to kick in somewhat and arrest the downward trend but what I find really most interesting is the fact that since the decline ended in late 2009/early 2010, wages have essentially gone nowhere.

This is what I mean when I say wages are flat. It does not mean that they are not rising - it means that the rate of percentage change upward is not moving higher.

I believe this is the single most important factor in determining whether or not we see an outbreak of inflation from the Fed's monetary policies.

Remember they are bound and determined to generate inflation of at least 2%. To do so, they are going to need to see wages continuing to rise at a fast clip or at the very least, as fast as overall prices are rising in general.

When I look at the recent rate of increase in the cost of energy, and in the cost of meat for example, it does not take much in the way of math skills to realize that consumer wages are not keeping up with those.

Let's see how things shape up as we move forward. I see that there are several misguided efforts by politicians mandating higher minimum wages ( that is a self-defeating effort to buy votes anyway )  but they might just get some of that legislated into existence. I guess these economic nitwits think that business owners will just gladly surrender their profits and will not pass on higher labor costs to the general public. If we see a movement towards higher minimum wages, it just might be the catalyst to push everything higher for all of us.

Bank of England's Mark Carney Sounds Dovish Note - Up goes Gold

Wow! What is it about these Western Central Bankers all of a sudden? First it was Trichet of the ECB; then it was Yellen over at the Fed, and now it is Mark Carney over the Bank of England! They all sound as if they are using the same notes and passing them around for each other to read.

Commenting today about Britain's economy, Carney remarked that wage growth remains subdued allowing spare capacity to remain and that needs to be taken up before a tighter stance in monetary policy would be appropriate. Translation - higher interest rates are not in the immediate future. Does that not sound eerily familiar to what Janet Yellen said last week? And of course, lest you have forgotten, Trichet and company actually went the "other way" on rates, namely down!

The British Pound, which recently had set a 5 year high against the US Dollar, moved lower on the news and gold moved higher.

This is really getting interesting to say the least. We are back, it would seem, to which Central Banker can undermine his or her own currency the fastest! No wonder gold is moving higher!

It really is becoming a rather tragic state of affairs when consumers are trapped in a box of stagnant wages at the same time Central Bankers are talking down their own currencies and pushing the price of basic needs higher! I really wonder if any of these people have the least bit of realization what they are doing to the average Joe? That of course was completely a tongue-in-cheek comment as they do not care about Joe and Jane - they care about the monied class and rising stock markets.

At least with deflation pressures dominating, the stagnant wage thing was not as big of a deal ( not that it is any good at all) because the cost of food and energy was sinking lower. What these constantly meddling monetary lords and ladies are doing however is  ensuring that the consumer continues getting squeezed as they set about their quixotic task of "reaching a 2% inflation rate".

I sometimes wonder which is more dangerous to consumers - a foreign invading army or a host of Western Central Bankers.

A saving feature, at least for now, is that benign weather is creating excellent growing conditions for this year's major grain crops and prices in that sector are falling. The meats keep rising however meaning that while the cost of our favorite box of cereal might go down ( I am not holding my breath waiting for the makers to pass along the lower costs) my bar-b-q brisket and ribs are continuing to rise. Hey, if you ever were thinking of going Vegan, now is the time to do it ( at least until later this year)!

Beans decided to forget about "Chinese demand" because of a manufacturing purchasing managers index print yesterday and focused on the Crop Conditions report which shows over 70% of the crop in good/excellent condition. I mentioned yesterday how goofy I thought the idea of manufacturing = soybean demand was to me. Corn and Wheat are also moving lower.

I want to take yet another opportunity to remind hog producers to continue any scale in hedging program that they might have instituted for late Q4 and Q1 2015 expected production. We have a major Quarterly Report out for the hogs this Friday. With the Board at high levels, corn prices sinking and incredible profit potential for you as a producer, make sure you lock in some before Mr. Market decides to take them away from you. Again, you don't have to lock up 100% of expected production, but get SOME coverage. It is always better to be able to shrug your shoulders and think, " I could have made a bit more if I had gambled" instead of kicking yourself and thinking, " I cannot believe I left all that potential profit disappear". Don't take risky chances with your farm's income - lock in some profits and leave the risky chance taking to we wild-eyed speculative types.


Shifting back to gold - I am watching the tape and noticing that it is meeting up with some pretty good selling here near the $1320 level. That is a key chart area and it is showing by the price action. Dip buying is very evident as well however.

You can see the selling on the chart. I am closely watching how gold performs right at this level. The indicator below the price graph is well up into the previous regions that foretold a move lower. The ADX is showing the bulls in control but the market has not yet entered into a trending phase. One usually wants to see a breach of a horizontal resistance level alongside of an ADX above 30. It is currently at 22.81 with the resistance level yet unbroken. The price however is not setting back very much which is indicative of that strong dip buying that is still taking place.

There is some light technical downside support coming in near the $1300 level followed by much stronger support back at our old friend $1280.

I should note that there still remains a great deal of skepticism as to this current move in gold among some of the larger banks. The general thinking is that the Fed can easily get control of any inflation ramp up. That may or may not be true but based on that TIPS spread chart I have been maintaining and following, it sure seems as if they are getting well behind the curve when it comes to managing the expectations game. That being said, some of the bigger boys are still looking at the current move higher in gold as a selling opportunity. We definitely have a battle on now.

By the way, here is a freshly updated TIPS spread versus the gold price chart for you. Check out the big spike! Our monetary masters want inflation - they sure as hell are beginning to get it, at least insofar as the market expectations are concerned. 

Silver is working closer to resistance near the $21.50 - $21.65 level. Above that lies $22. That would be a big deal technically if it breached $22 and held its gains.

Copper Smiles at China Data; Soybeans Likewise

Today seemed to be a relatively quiet session ( by recent standards of comparison) in many markets. An exception might be noted in the Cattle markets where those moved higher on last Friday's friendly Cattle on Feed report and corn, which moved smartly lower as traders gauge the impact of the heavy rains that have fallen across many area of the Farm Belt.

There is some concern about excessive rainfall across a strip that includes parts of South Dakota, southern Minnesota and northern Iowa but I personally feel those concerns are way overrated. Yes, if one has crops in that area, it has been too wet but when you look at the total corn belt, this moisture is producing some very good stands of corn.

Under normal circumstances, these good rains would have produced selling pressure in the soybean market as well, but for some odd reason, that pit, which has taken on quite a schizophrenic nature for the last few weeks, decided to focus on news out of China that showed HSBC's manufacturing purchasing managers index activity at a seven month high at 50.8. This was up from 49.4 in May and the first time that the index has been above 50 this year. Recall that a reading above 50 is considered to be expansionary.

Traders decided that demand was the proper place to therefore focus on the bean equation believing that this will somehow generate more bean demand from China. I fail to see the connection between any of this and soybean demand but hey, bean traders are not the brightest bulbs on the planet. That being said, I have essentially given up on trying to guess which mood those guys in that pit are going to be in on any given day.

Copper definitely liked the reading however (which makes perfect sense given its use in manufacturing) and responded by moving higher today. There looks like there might have been some of those copper/silver bear spreads unwound on the news. The Red Metal has now gained $0.10 pound over the last seven trading sessions. For now, the metal seems to care less about the double and triple counting mess going on over in China. Yellen sparked a rally in the metal that began last week and the overnight Chinese news has done nothing to discourage those who want to be bullish copper.


I should note here that some flash estimate for June's Euro-Zone purchasing managers index are out. Those have come in at 52.8 but the data is still rather mediocre. The French reading has their PMI declining to 48. Germany also registered a bit of a decline to 54.2, which is positive but went in the wrong direction.

Interestingly enough, Markit's survey of that data showed the largest monthly increase in input costs since November. The biggest contributor however to this has been rising crude oil prices. This crude thing really needs to be watched closely, not only over there in the Euro-zone but globally, because at some point traders/investors are going to begin worrying about high crude oil prices choking off and restraining growth rather than contributing to inflationary pressures. I just do not know at which price level the shift will occur.

Let's shift back over to the grains however as we are getting the Monday afternoon Crop Condition ratings.

Corn is rated at 74% Good/Excellent with 21% Fair and 5% Poor. The Good/Excellent rating last week was 76%. The slight drop was due mainly to wetter than normal conditions mentioned above in Iowa, Minnesota, and South Dakota.

Illinois and Indiana corn crops got even better looking however offsetting the slight deterioration above. Last week Illinois was rated 75% Good/Excellent; this week it is rated 78%. Indiana, last week, was rated 72% Good/Excellent. This week it improved to 74% Good/Excellent. Looks to me like a toss up - if the heavy rains ever let up in those few problem areas, and we get some sun in there, that moisture will greatly benefit the crop should the conditions turn hot and dry into July for any reason. You have to consider nitrogen leaching in those excessively wet fields but traders should also be looking at the crop as a whole. That is what they did in today's session and that is the reason that the selling was so heavy. There is nothing on the horizon at this point to provide any evidence that the crop is in any kind of serious harm. Growing conditions thus far look good.

Soybeans are rated at 72% Good/Excellent with 23% Fair and 5% Poor. Last week the Bean crop was rated at 73% Good/Excellent. The slight bit of overall deterioration seen is in the same states noted above where the corn declined.

Soybean planting is 95% complete compared to last year's 91% and the five year average of 94%. Beans are 90% emerged, compared to last year's 79% and the five year average of 87%. The crop is certainly ahead.

The conditions ratings come as no surprise whatsoever to grain traders who have been noting the heavy rains in that one region for a while now. That being said, outside of that one area, it still looks like we are going to harvest a big crop. Now if we can just get through the July 4th holiday without any major heat scares. Beans have to be concerned about August more so than July, but it stands to reason that a benign July, with decent rainfall, is going to put the beans in good shape to enter August. As usual with the grains at this time of year, all eyes are on the weather forecast maps.

Also - briefly - wholesale beef prices just shot up today to being a wee-bit shy of the record set back in March this year. Wholesale pork prices are also knocking on the door of the record set in April. In other words, do not look for any relief in high meat prices this coming July 4th holiday! As mentioned many times here this year, it is going to be later in the 4th quarter and into Q1 2015 before we consumers see some relief from these sky high meat prices. I am watching for signs of "Fresh Fish" stands on the roadsides! If Forrest Gump and his pal Bubba, still had their shrimp fishing fleet, they would both be doing quite well right now as consumers look for alternatives/substitutes. My July 4th party is going to be definitely smaller this year with fewer friends being invited!

A quick look at the mining shares as evidenced by the HUI - Bulls, powered by Yellen's comments from last week (which feeds Dollar weakness and lower rates)  and continued nervousness over events in Iraq, have pushed the miners further away from that 200 level. There does not seem to be too much in the way of overhead resistance on the chart to this move until one nears 244-245, with heavier resistance coming in near round number 250. The mining shares continue to lead the metal higher, which is exactly what one wants to see when gold prices are moving up. Say what one wants to about those mining shares, they still, lead the gold price, whether it is up or it is down.

It should be pointed out that GDXJ chart, has shown a bit more hesitation than its cousin listed above over the last couple of trading sessions. Both indices registered strong gaps higher last Thursday but the junior's index actually has lagged the larger-cap HUI since then. The juniors are obviously more of an indication of risk sentiments towards the overall sector so bulls will want to see the latter index outrunning the HUI. Let's watch the gaps on BOTH of these charts.

Gold meanwhile continues to flirt with $1320 and while it has not been able to push convincingly past this level, it is also not retreating very much either. Some light profit taking by longs is occurring, as well as some shorting from some bigger players, but buyers are also stepping up as the price sets back. Dip buying is something that one wants to see if sentiment has indeed shifted from one of selling rallies to one of buying dips. We'll see how things go the remainde of this week.

Referring back to that Saturday post I put up detailing the very large spec long side exposure to crude oil, I am keeping a close eye on its price action. It has not yet been able to penetrate resistance near $107.50 but looks like it has stalled out here for the time being. I am not yet picking up any negative divergence signals but given the massive long positions in this market, it may not generate one before undergoing a downside correction in price. So much hinges on geopolitical developments and as we have said many times here, such things are very fickle and quite fluid by nature and as such, markets can react violently to changes, or even perceived changes, with little to no warning whatsoever. Sentiment towards this market is very lopsidedly bullish but the trend is still strong. It could very well be a market that is just resting before kicking off another pop higher. I do not know but am watching it very, very closely.

It is noteworthy that crude has been temporarily halted not far from the Fibonacci retracement level noted on the chart. That came in near $107. Today it fell back below there once again. The market has been able to breach the level but cannot maintain itself ABOVE the level. If you notice, it did pretty much the same thing with the 61.8% level in late May and into early June before it was able to keep its footing above that level. That is what I am watching for right now.

I should note however that the XLE stayed firm today, in spite of the lower crude oil price.

One final note - I again wish to thank every single one of my readers out there for your very helpful and constructive comments and kind words in response to my solicitation for your input in regards to this blog. It was so very encouraging.

I have decided to go with the Donate button as a result. Now, all I need to do is to figure out how to do this!