"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


Tuesday, October 7, 2014

Safe Haven Day ( Again!)

It sure is reminiscent of the movie "Groundhog Day" is it not? Stocks move lower, money rushes into bonds, up goes the Japanese Yen and up goes gold as a corollary.

Methinks however someone forgot to tell the  mining shares that this is supposed to be a Safe Have day and thus they are not supposed to be going down. Whoops!

After yesterday's bizarro-world day of trading, in which the markets reversed practically everything they did last Friday, I was not sure exactly what we were going to get. Oddly enough, we are seeing some more upside in the majors against the Dollar ( which is not functioning today like the usual safe haven it is ) as the Euro bounces higher away from the 1.250 level. Tomorrow should be the tell for if the pattern holds true, we should see the Dollar reverse course and move higher tomorrow ( by the close ). If so, the Euro will of course be resuming its downtrend. Maybe something changed but as of yet, I cannot see it.

I wonder what percentage of these trades that we now see on these wild days is due to carry trades being unwound. My guess is that it is a larger number than many of us suspect.

That is one of the reasons that the Yen always seems to rally on a "safe haven" day. as a funding currency, it is sold and the proceeds used to finance leveraged trades. When those trades are reversed, the Yen is bought back.

Once upon a time the carry trade was behind the move higher in BOTH commodities and stocks. More recently, there has been no carry trade involving commodities in general, unless of course it is to take SHORT positions, which is one of the reasons that gold has been able to move a bit higher during these unwinds. When those trades were implemented originally way back when, gold was bought along with every other commodity market out there. When those trades were then lifted or unwound for any reason, the commodity markets would sell off along with equities while the Yen, the carry currency, was bought and the trade closed.

I have no way yet of verifying whether or even how much might be involved in SHORTING commodities as part of a leveraged carry trade, but if that is the case, it would explain somewhat why we got a huge rally in the entire commodity sector yesterday for no apparent reason. Perhaps an unwind of a leveraged carry trade was occurring where the participants had been using borrowed money to SHORT commodities.

Again, I do not know but am merely trying to explain some of the bizarre price action from yesterday - some of which seems to have continued into today's session.

This might be partly responsible for the big rally in the wheat market which has run up some $0.40/bushel in less than two weeks' time. The chatter is that wheat might have fallen far enough to attract some decent export buying but at this point we have no confirmation of that. What we do have, ( or at least did have ) was a very large short hedge fund position in this market. They are now covering and driving prices higher. That being said, unless we get some solid evidence of good export news, it is hard for me to see wheat having too much more upside from these levels.

It would take two consecutive closes above the $5.20 level to change my view at this point that this is merely a corrective bounce in an ongoing bear during which a market is consolidating for a time.

Here is a quick look at the wheat chart ( note that this is Chicago) and not KC.

Soybeans continued on their unexpected tear higher from yesterday ( they put on 30 cents for some reason ) early in the session before aggressive selling showed up just shy of the small chart gap on the November bean chart.

Look, we all know about wet weather delaying harvest but to run the price of beans on the Board up over $0.42/bushel on that account was goofy to say the least. The beans are not going anywhere. They are still sitting in the field dialing their cell phones and calling their owners to come and reap them as it is getting cool out there and they are looking for warm homes beneath the presses in some processor's factory.

By the way, corn got sucked up higher by the big wheat rally today. SAme as the beans - the corn is not going anywhere. From what I am seeing in the weather forecasts, there are going to be good windows of opportunity for harvest progress this week and again next week for a good portion of the belt.

We'll see if the corn runs out of buyers tomorrow. yesterday and today appear to have been "Stop hunting " days.

One last thing for right now - the gold mining sector is just imploding today.
Look at the HUI / Gold ratio. It is now near levels not seen in FOURTEEN YEARS. One has to go all the way back to the very inception of the once great bull market in gold to see the ratio at this level.

For gold, it does not bode well.

In regards to actual performance today, the HUI is currently down some 3.3% with the GDXJ down even harder at 4.46%. OUCH! Truly that sector has proven to have been a nightmare, even for the most resolute of gold bulls.

Here is the most recent chart of the TIPS spread. Coming on the heels of the IMF downward revision to global growth, it sure makes sense. Inflation is not on the radar screen of most investors and is the last thing that they are concerned about. Right now it is deflation or slow growth that has them nervous.

I should also note here that the spread has now matched its lowest level of this year and is threatening to move to levels last seen THREE YEARS ago near the end of 2011. Here is the same chart broadened out to give a longer term view.

Sadly - there are still guys out there in the perma gold and silver bull camp - who keep talking up silver and attempting to rationalize it falling in price. They have all manner of elaborate reasons why the "paper silver market" is controlling the price of the metal which they assure us should rise were it not for the baddies at the Comex. Among the current novelties is that "something is up with silver because it has such large open interest". Yes, it sure does, and that is because a lot of people want to sell the metal. As a matter of fact, the short interest of the managed money or hedge funds as a % of the total open interest is near a 8 year high. The peak was in early June of this same year when the metal was near $19.00.

The only reason I do not know if there has been a greater number is because my data does not go back that far. So much for another goofy theory. Geesh - these guys never end do they?

Let's just say it this way - when the market begins to worry about inflation and not deflation, then some of these pitiful souls will have their day. Until it does, silver is doing what one could expect it do during a time of falling prices in general and oversupply based on current levels of demand, namely, it is moving lower to attempt to find a level at which supply and demand will be balanced. When it does the chart will reflect it - not one moment sooner or later in spite of all the convoluted, baseless theories being propounded.

Look at the VIX or Volatility Index ( or as I prefer to call it, the Complacency Index). Things do not look so complacent right now do they? The index is at its highest level since March of this year. Clearly there is some unrest in the markets and traders are not quite so confident as they have been for a large part of this year.


One last thing -the yield on the Ten Year Treasury note feel to 2.35% today. It is amazing how the appetite for Treasuries has not dimmed one bit and they continue to be the place to park money during times in which safe havens are in demand. Maybe this will change at some point but not for now!

It sure does make the lie out of the notion being sold by the current administration ( in the hopes of avoiding an electoral blowout next month) that the economy is doing great but you just don't feel it argument BS.