“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Thursday, June 5, 2014

One Down; One to Go

The big day ( One Down) that we have been waiting for this week has finally arrived with the ECB taking some steps to provide a sort of monetary stimulus to the flagging Eurozone economy. They lowered rates from 0.25% to 0.15% and actually pushed the deposit rate into negative territory, the first time it has ever done so. The idea of the latter is of course to "penalize" banks for NOT lending or perhaps more accurately, to incentivize them to do so.

They are in effect, conducting an experiment to see how much pain banks are willing to endure before they decide that it is more feasible to lend to consumers or business. One has to wonder however if banks are capable of forcing people, whether in business or the consumer, to borrow against their will. In other words, if potential borrowers are not inclined to go into debt because of their particular set of circumstances, they are not going to rush out and initiate loans merely because "we feel your pain big banks".

The Euro is wobbling all over the place as a result of the action, which really came as no surprise since the Central Bank has been pretty good at telegraphing their intentions going into the meeting. The market was led to expect something and that is what it got. The question now becomes how effective it will or will not be in accomplishing their goal to generate that same magical number, when it comes to inflation, of 2%.

The Euro dive bombed on the news but then worked its way up nearly a full point as the session has worn out. It is currently a wee bit lower as I type this. The price action is one of those "sell the rumor, but the fact" sort of things. I will say however that the ECB must certainly not be happy to see the Euro moving higher at this point. They DO NOT WANT a stronger Euro.

I should note here that for the moment, German bunds are the losers while riskier Italian and Spanish bonds seem to be the winners. This is probably welcomed by the ECB as it is a sign that investors are inclined to take on more risk. It will be interesting to watch the future progress of some of the regions stock markets as we move ahead.

Traders took the Euro currency down into a strong level of chart support but apparently are of the opinion that the action by the ECB is not sufficient to justify taking it into a sharper move lower. Note the support level. Of course the rebound higher in the Euro forced the US Dollar to fail at its overhead resistance level.


And the Dollar chart - notice how it broke through its resistance level only to fall back below it as the Euro rebounded higher. I guess traders are not going to get too aggressive either way ahead of that big payrolls number tomorrow morning. Tomorrow? That is going to be an entirely different matter. The "One to Go" day will have come and gone and traders are going to revel in that.

The Dollar has been trending higher however although that trending move is a rather slow and steady one. To accelerate it, the Euro would have had to lose its support at the 1.35 level. That would allow the Dollar to move on up towards 81.50 - 81.60 which is a stronger level of resistance. I would be very concerned for gold were the Dollar to breach this level.




Gold was essentially tracking the Euro moving up with it and backing off with it. So far it is holding $1240 but the rebound looks to be coming mainly from short covering and not from a huge throng of eager new buyers. To become any more than a bounce in a larger ongoing bear market, the price would have to recapture $1280 at a bare minimum. There are traders who are caught on the long side of this market who want to lighten up and have been looking for a rebound in order to do so. I suspect we will see them beginning to lighten up if this market can make it back to $1270. Again, tomorrow will be a very big day. That is why anyone making predictions as to whether gold has bottomed is simply rolling the dice. They might get it right; they might get it wrong. I personally am wanting to see the data before figuring out what to do with the metal for a short term play. Longer term, I think it is headed lower barring any surprises on the currency front - at least that is what the charts are currently saying and we need to respect those.



Something will have to change on the inflation-expectations front to get gold going.

Here is that TIPS spread chart I have been maintaining detailing the movement in that spread and the gold price. As you can see, the spread is moving in a steady to lower pattern, exactly as is gold for the moment.




Copper did not get much of a bump out of the news, unlike silver, which seemed to like the new policy. Copper is still fearing Chinese authorities investigating copper-backed loans and that practice of possibly double or triple counting the metal for use in additional loans. The idea behind the move lower in the red metal is that traders are worried about excess supply hitting the market if the authorities find irregularities. It also would confirm suspicions that demand behind copper is not for actual industrial use but has rather been for speculative purposes in order to secure loans used for other purposes. If they were to move to put an end to this practice, that copper would be sold as the loans are closed out. Again, as I noted yesterday, we will have to watch this closely to see if the authorities shift their focus to gold for any reason. So far I have seen nothing along this line but this is not something to be ignored in my opinion. Remember, Chinese demand for copper, and for gold, and for any metal has been significant as far as traders gauging the strength of the overall demand.

While the focus of many of the markets  has rightfully been on the actions and statements of the ECB today, it is all going to pale by comparison to what we get in the US payrolls data tomorrow. Some are already banking on a disappointing number based off of the ADP numbers were got yesterday. I have not done any research to see how closely the numbers from ADP might or might not track the actual US numbers so I am unable to comment as to whether or not that is a good bet. It seems a bit risky to me however as one never knows we are going to get with these employment numbers.

Suffice it to say, by tomorrow morning, no one is going to be uttering a word about the ECB as it will have been forgotten and consigned to that huge abyss where all market moving data is destined to end up after the obligatory 24 hours focus. Gold, and the Dollar, are going to be moving totally off of that number that the magicians provide for us. Traders are going to also be on the look out for any backward revisions to previous months.

I am noting that crude oil fell through support on its chart near the $102 level but it has managed to pop back above that level again. Once again the $105 region has been a hill too high to climb. Traders are citing the huge supplies as the culprit but all of us have been citing those for some time now. It has not seemed to matter as hedge funds have been drinking up all of the black gold that their computers will let them. There is a growing concern over all that speculative length piled into this market which has been stymied in its upward progress. Stale longs + huge exposure generally makes for some nervous traders. As many years that I have been at this I am still amazed at the sheer size of positions that these gigantic hedge funds can accumulate. Talk about a bottomless pit of buying ( or selling for that matter). I have watched this group defend their holdings time and time again, even when fundamentals become iffy. Doesn't matter - they are the market - don't forget that.

It looks to me like there is some additional chart support near the 100.80 - 100.90 region for the WTI should $102 fail.  Below that is 100.25 on down to $100. Unleaded gasoline has chart support near the 2.90 region. So far it is holding above that level.

The grain markets continue to weaken which is good news for consumers but especially for livestock and poultry producers. So far there does not appear to be any weather threats on the horizon. Old crop beans have once again run into selling near the $15.00 level. They are retreating lower but are still not breaking down on the charts. I would need to see them fall through and remain below $1440 to feel that we have finally gotten this tight carryover story off of the front burner. I still am concerned that the commercials might try to squeeze the shorts in that month as we head into the July delivery process but that is a way off for now.

New crop beans are flirting with the $12.00 level. They have not traded below that level for two months.

Just today Informa raised their Brazil/Argentina Corn Production forecast. Also, El Nino chatter is resulting in sentiment shifting in favor of larger S. American bean production later this year as well as good growing weather here in the US.

The overall commodity sector is moving a bit lower today. The GSCI has broken a short term line of support on the chart, further evidence that at least as far as the sector is concerned, there is no apparent inflationary pressures evident at the moment. Just today alone, both wheat and corn prices hit three month lows.



Looking over at the world of equities -  the Dow made yet another all time high ( as did the S&P 500). The Dow looks like it might make a try at 17,000 believe it or not. The S&P? Who knows how high that is going to go. The Russell 2000 is lagging however and thus far is not confirming those moves. Does that matter? I used to think it did at one time. Now? I do not know. What I do know is that investors continue to chase equities higher as that is where the gains are to be made. Central Banks are undoubtedly quite happy as they observe this.

The lesson to be learned is very simple - In a near zero interest rate environment, one in which there is little to no apparent inflation as far as investors are concerned, the place to be is in stocks. Write this one down for your children and grandchildren as an axiom.


21 comments:

  1. Dan, The big news out of the ECB this morning wasn't the interest rate cuts, as that was expected, but the suspension of sterilization, and the preparation for QE. It now looks like Draghi will pull the trigger on QE in the near future, probably at their next meeting. Thus the rise in gold and the general stock markets, as the Dow is now up over 100 points. As you said we still have the NFP tomorrow. I think we will have a much better idea on all markets sometime next week after the dust has settled. As of now the most interesting aspect of the market is the euro, and dollar. The euro as completely turned around from early this morning is now at 1.3640 vs the dollar, and the Dollar index is down .23.

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  2. I wonder what the ministry of truth (BLS) will come up with tomorrow in its NFP report. As reported today, Challenger job cuts soared by 45.5% year-over-year in May, the biggest annual rise in 9 months. However, what is perhaps even more worrisome is the actual number of layoffs, around 53,000, was the highest since February 2013. The layoffs in the South are a disaster, aside from the BP oil spill in Sept 2011, this is the most job cuts since Jan 2010. What no seasonal adjustments. I wonder if it snowed in May NLOL.

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  3. 10 year yields down across eurozone, especially southern europe.,IMO direct result of ECB suspension of sterilization, and preparation for QE., not interest rates being lowered.

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  4. Hi Dan,

    Thanks for the response to my comments a couple of weeks back. I believed you used a word "Normalcy", it is complete madness. You bring about a great point today about the banks being forced into making loans. If the people cannot take on more debt, how can you force the banks to jam loans. It really should be interesting to watch, quite scary if you really think about it. Even with the payroll number due in the morning, your charts may paint a not such a pretty picture for the dollar by the end of this trading day.

    I cannot believe how low the volatility has been with all these markets. I have been having a tough time trading bonds, the 10 and 30 year- my goodness! No lack of movement there over the past couple of weeks, ha. I just peeked at the markets, wow!

    I think after what we are seeing today, hopefully the volatility in the metals and currencies comes back. Not impressed with the bounce in the metals today at all, nor do I care at the moment. Shouldn't say I don't care, I am just not involved just yet in those metal markets. Just need to see some 2 sided action.

    Dan, just want you to know, you are the only person I still read on the internet. I don't even read Sinclair the way I used to anymore, I hope you are still friendly with him. Much respect for the time you put into these posts! I have been wanting to write but my days have been kind of hectic, I'm trading and staying home with my new addition! He just turned 3 months today.

    Huge surprise for my entire mature family! Thank you again for your work!

    TraderMartin

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    1. Martin;

      Thanks for the email... congrats on the new kiddo! They are the best!

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  6. It is a big bull trap. We will see the Dow at the 17000 level and then it will come down in July followed by a low volume rise in August (another trap) and then as in 87 September/October is when the you know what will hit the fan and all hell will break loose. Potentially up to a 50% drop in equities and a big rise in gold.

    I know that we are all chasing yields, but in the end as Dan has said many times, sometimes it is better to be on the sidelines waiting to see what happens!

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  7. Great post Dan, thank you. I also found your comments about the demand (or lack of) for loans as the ECB "encourages" banks to lend, lend , lend interesting. I think we tend to assume that the problem is that banks are unwilling to extend credit but perhaps businesses and individuals are learning to get by on less and are reluctant to assume new debt. How will consumption based economies that rely on debt to function work without demand for loans?

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  8. You can go here to see a history of ADP reports as well as comparison to BLS NFP. http://www.adpemploymentreport.com/2014/May/NER/NER-May-2014.aspx ......... Sometimes they are widely different. Last month they were off by ~70K with ADP at 215K and NFP at 288K. In Dec, BLS NFP predicted ~75K while ADP predicted 191K. So, they tend to match if you use long term moving averages, but in NO way can one be used to predict the other on a given month. I personally think ADP is more accurate and less volatile. It is a measure from a private sector company - so no surprise if true.

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    1. Go here for the history on BLS NFP. Puts things in better perspective. http://www.data360.org/graph_group.aspx?Graph_Group_Id=25

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  9. Hi Dan, How are you able to tell when a rise in gold is due to short covering? Is that info available somewhere other than the outdated COT?

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  10. Hi Dan, I find it amusing to read the rhetoric explaining that negative bank deposit rates will encourage banks to lend money to business and consumers. Hell, they aren't going to do that. Instead, they'll be encouraged to use this money to speculate on the bond and equity markets.

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  11. Today was "proof positive" that "Infinite Fiat" is truly infinite and limitless.

    Draghi announces LTRO, tells banks to create new mortgage backed securities, and the ECB will buy and and all of that new paper.

    And how did the Euro react? It staged a huge reversal and closed green.

    Yet another example of how printing more money makes currencies even stronger. And inflation less of a problem.

    Just look at gold and DBC today, basically went nowhere, as if they had a anchor tied around their necks.

    The faster that Bernanke and Draghi start printing, the faster commodity prices will fall and same with interest rates.

    We are living in "Nirvana".

    Learn to enjoy it and Stay in the System.

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  12. "Yet to listen to the gold promoters, you would think the entire world is somehow in conspiracy against a market that is such a tiny fraction of the world economy estimated at about $85 trillion annually. Yet the entire world is wrong – they are right. According to them the entire world is manipulated to ensure gold declines despite the fact that gold is only .00000235294% of the world economy. I’m sorry. I like gold. I give $20 gold coins as gift to children for birthdays. But the truth is the truth. Gold will rally when everything is lined up.

    With the economy turning down, jewelry demand declines sharply. It is only natural for the price to decline as the demand for gold declines. Despite all the protests, by no means is gold only for investment. Gold has its place and its role within the global economy. It is a hedge for individuals against government – not inflation nor is it suitable for institutional beyond a capital play since it yields no income. Those who hate my guts claiming the decline in gold is all manipulation are just to biased. They remain blind to the big picture and refuse to see gold and its place within the world economy. Gold will rise – for nothing goes down forever nor does it rise forever."
    - Martin Armstrong.

    Nicely put, Martin :)

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  14. Copper fell so fast that I took another 20% profit just above 303.
    I think it should bounce a bit and I can short more from higher prices. We'll see.

    Mark, I'm watching SP500 very carefully...the series of consecutive highs (except one) on the daily timeframe is starting to be impressive...11 or 12 if you forget the one day pause. Plus we are very close to the beginnning of my resistance level long term at 1950, so I've just started to short SP with a first short at 1944 right now with a micro line which I intend to build up to 2000.
    I put no stop loss at the top yet, as it is above 2000, and the position of my line is of course taking into account the big gap here between 1940 and 2000.
    The line short is really very small for now, but I'll double it if SP reaches 1970, especially if we keep seeing those continual daily new highs.
    I'm betting on a short term correction here especially because of this Sakata series upwards without a break for 12 days now.
    Let's see.

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    1. http://i60.tinypic.com/2luuwhw.jpg

      If I don't take into account the one day "pause" 3 days ago, today will be the 11th consecutive high on the daily timeframe.
      Of course, I already saw sometimes 13 or 14...but the longer, the rarer.
      Does 11 consecutive higher highs for gold on a yearly time scale ring a bell?
      This plus we are attacking both sup bollinger daily, weekly.
      Plus MACD is now hitting its propagation axis.
      Plus Both Cdurs are at the high of their cycle already.
      Plus 1950 is a report of range of SP500 : 773-1165-1558---1950.

      So come on, give a poor bear a break and sell your long positions, Mark :) You don't want to make me miss that short-term trade, do you? I promise, it's only short term.

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  15. Well its official.

    SPY now going into "blowoff mode".

    Anyone here could have loaded up big at the March 2009 lows and walked away.

    Maybe add using margin during the severe corrections, and then close margin positions after a few months after the market recovered.

    All of us could have been retired and set for life by now and walked away.

    Done.

    Finished.

    We all could have sold right here and put the money into an apartment building or income property and would have income the rest of our lives, never have to look at a computer screen ever again.

    Instead, most here were reading Kitco, jsmineset, USA Watchdog, KWN, waiting for the world to end.

    And meanwhile, a once in a lifetime opportunity to get rich and retire slipped by.

    Never to occur again in our lifetimes.

    In fact, many loaded up on gold and PM stocks and lost everything.

    While watching every other "dumb investor" who listened to Larry Kudlow on CNBC get rich.

    Lesson learned is never fight the Fed.

    Never.

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  16. We make fun of the "veterans" at KWN here, but somehow quote shady characters and ex-cons like MA as he is some god-given prophet. When he wrote from the prison cell, it was nothing but gold, gold, gold, and he backed it up with his knowledge of history of the Roman Empire. All of a sudden, he gets released and he is the new-found Rubini, or Jon Nadler. I don't know, man.

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    1. Abraxas, I also can not get a handle on Spellcheck Armstrong. A lot of ideas seem to make sense, but at the same time, he comes off as being arrogant and FOS. Best to just take him with a grain of salt.

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