"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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So much for stock market complacency.. the VIX - Volatility Index - or as I prefer to call it, the Complacency Index, hit a 10 month high today. The bulls have pretty much had a one way market for as long as we can seemingly remember. Looks like that has changed some! We have gone from confidence to uncertainty to concern. We have not reached fear however.
By the way, further confirmation that those who have been preaching hyperinflation and currency induced cost push and whatever for so many years have been utterly confounded. The yield on the Ten Year Treasury hit a 16 MONTH LOW today!
The US Dollar managed to bounce right off of chart support near 85 and ended the week just below 86. It is essentially halfway between resistance at 87 on the top and support at 85 on the bottom. A push through 87 sets it up for a run to near 89. Should it fall below 85, there is a band of support near 84 and with better support near the Fibonacci retracement level just below 83.
I have some further bad news for gold bulls unfortunately - GLD, that big gold ETF has been disgorging gold all week long even as the price has moved up from below the $1200 level. Simply put - investors/traders are moving money out of GLD and out of equities and putting that into bonds during this risk aversion period. Rallies in GLD are thus being viewed as selling opportunities. This is NOT what gold bulls want to see.
For this year, 2014, reported gold holdings are down over 38 tons from the start of the year ( 38.78 to be exact ) to 759.44 tons. This is the lowest level in GLD since December 2008! That is NEARLY SIX YEARS AGO. Western-origin gold investment demand continues to disappoint.
As promised - though admittedly quite late - here are some observations on today's (Friday) USDA grain reports, which resulted in some very big moves across the complex.
Let's start with the corn first -
The trade was expecting a reduction in the ACREAGE PLANTED and that is what it received. Specifically, the number was lowered to 90.9 million acres from last month's 91.6 million. Harvested acreage was also reduced slightly to 83.1 million from last month's 83.8 million.
What the trade seemed focused on however was the increase in yield from 171.7 bushels to 174.2. They also boosted beginning stocks to 1.236 billion bushels from last month's 1.181 billion. Total production for this year came in at 14.475 billion bushels up from the September estimate at 14.395 billion.
USDA found another 50 million bushels for feed usage from the September estimate mainly because the WASDE report showed an increase in beef, pork, and poultry production next year from the previous month. Those critters need to be fed.
By the time they did the numbers, they gave us a carryover of 2.081 billion bushels compared to what they estimated last month would be a 2.002 billion bushel carryover.
To provide a bit of perspective, the 2013-2014 marketing year carryover ended at 1.236 billion. We are essentially going to end up with nearly 70% more corn left over next year.
It is interesting to see how the trade responded to the number when it first hit. Expectations were that USDA would kick the yield number higher than they did and some came in to buy on that, but most of us who have followed these reports for many years know that USDA tends to be very conservative preferring to err on the low side and then come in the following month with an upward revision during big crop years.
With private analytical firms generally reaching a yield consensus higher than today's number, traders used the short rally to sell as expectations are that USDA will give us that higher number next month. Besides, with a carryover of this size and with a record, bin-busting crop, buying a market to take it higher on data like this was rather ill-advised to say the least.
One thing I also noticed was the extent to which those corn/wheat spreads were battered today. Yesterday, the wheat market sharp drop lower on rotten export numbers fueled some big selling in wheat. Harvest delays in corn were used to bull up the market ( strangely I might add ahead of a major USDA report ). The spread shot up in favor of corn by some 16 cents or so. Today, with the lowered than expected wheat number, that entire gain was wiped out in a single day with the spread dropping 16 cents. Talk about whipsawing! And to think that spread trading is supposed to be less risky and less volatile. HA! You have got to be kidding me. When one leg of a spread goes one way and other goes the other way, and both of them are going the wrong way as far as someone in the spread is concerned, you end up LOSING EVEN MORE MONEY than a plain old outright position would have cost you. That HURTS, BIG TIME!
What I am going to be very interested in seeing now is how this spread performs as we move forward. The reason is simple - the large specs have been and remain net longs in the corn market even though the primary trend has been down for many weeks. They have been able to do this because they have been in those spreads mentioned and short wheat while maintaining a long corn leg.
My concern has been what happens if those big specs decide to unwind those spreads or even reverse them? Corn could get clobbered as they exit the long side of that trade.
I am saying that this is going to happen and I certainly cannot advise anyone who does not know what they are doing in the grains to become a spread trader ( remember if you are a novice you could end up losing money on both sides and get hurt even more badly than an outright futures position ) but I will say that the potential exists for wheat to gain on corn.
Then again, from what I can see, there is not exactly a shortage of wheat out there either. Exports completely shut off last week when wheat was above $5.00 and here we see the trade push the price right back up over $5.00 today on the USDA numbers although it did settle below that level by the time the closing bell rang.
With the Dollar bouncing back off of support near 85, US origin commodities become less competitive on the global market meaning a rally in wheat, along with a rallying Dollar is not going to make it any cheaper for our export customers and they have LOTS of options to choose from out there as the US is not the only wheat game in town.
Briefly on the beans ( it has been a very long day ) - USDA cut the planted acreage to 84.2 million from last month's 84.8. They also dropped harvested acreage to 83.4 million from 84.1. Apparently there were some additional acres that were washed out earlier this year and not planted plus some that were planted and then washed out and not replanted.
They did however raise the yield to 47.1 bushels from 46.6. I and others believe that they are too low on this number and that it will be revised higher next month and in December as well.
They did cut the old carryover number even further to 92 million bushels from last month's 130 million reflecting the rather strong demand from end users as they waited for new crop supplies to hit the pipeline.
Total production for this year was bumped up to 3.927 billion bushels from last month's 3.913. The resultant carryover for the new crop came in at 450 million bushels, down from last month's estimate of 475 million but obviously nearly 5X the amount of the 2103-2014 crop year.
Traders looking at the numbers were inclined to view that reduction in the carryover as a reason to buy and that is what happened initially. My view is that there were some big guns itching to flush the small spec stops on the upside. However, they could not reach them as these mysterious buyers had already run prices up on Monday this week and proceeded to gun them even higher ahead of the report day. Simply put, there was no reason to chase beans at those levels because in spite of the slight reduction in carryover, we are still looking at a record crop.
Traders also felt that USDA yield numbers were too conservative ( so do I based on what I am seeing from the private firms ) and used the rally, just like they did with corn, to sell.
The result is that both corn and beans go into Sunday night with some potential to see additional selling take hold, especially if the weather window next week for harvesting looks favorable.
I will try to get some charts up tomorrow.
I should also note that the Goldman Sachs Commodity Index closed at a 49 month low today!
Yesterday I was able to post a chart of the Russell 2000 noting that today's close was going to be a big deal in regards to its overall technical condition. Would the index be able to find enough willing and able buyers near the support zone that has served to hold it for over a year now or would the bears finally be able to break the back of the bulls.
I guess that questioned was answered today.
Take a look at the extremely poor WEEKLY close on the chart. Note that it fell well below the support zone and in the process confirmed a DOUBLE TOP on the chart.
The question is now what? Here is my read on this. The bulls must immediately, before the end of trading next Friday recapture the broken support zone near and just above 1080 or the bears will have them.
Downside - there is some light support near 1040 that might spark some short covering but stronger support does not show up on this chart until closer to the 1000 mark, which I might add is a big psychological number. It also happens to correspond to the 25% Fibonacci retracement level of the entire move off the 2009 low and a band of horizontal support that comes in closer to 1012-1008.
Suffice it to say that the close today does not bode well for early next week. The mantra of buying the dip in equities looks like it is going to be tested.
One quick thing and I am done for just now as this has been one of the busiest days I have experienced in some time what with a MAJOR USDA Supply and Demand report for the Grains, ( and the livestock markets I might add), as well as some wild swings in wheat, etc. I will get some stuff up about these later on as my schedule permits.
For now, I am also noting that once again, gold was saved by its safe haven status as the metal began recovering from its worst levels by the swooning equity markets and the bonds which once again SOARED higher as money went rushing into US Treasuries. Also, right on time, as if clockwork, the Yen scooted higher as more of the risk trades were taken off and that particular carry trade was unwound.
The Euro however did not fare so well as once again it was "let's beat the snot out of the Euro" trade resumed. As said yesterday, FOMC (Central Banks) can only talk up currencies so much or talk them down before fundamentals take over. All the Fed did was give those who were looking for a lower level at which to buy the Dollar or a higher level at which to sell the Euro a huge gift to do just that.
Sadly for the bullish cause for gold however, the HUI and the GDXJ continue to go "Kerplunk!" along with the rest of the equity markets. The latter actually held up a bit better than the HUI did as it was down only 1.22% today compared to a loss of 2.44% in the HUI. Both charts are not especially promising; however, at least they remain above the lows made on the FOMC day this week ( Wednesday). Bulls might take some consolation in that but a mere 5 points off a multi-year low is not exactly a lot to crow about right now. That level is going to take on a lot of significance as we move forward. If it fails, another leg lower is coming. Let's hope for the long-suffering bulls that is not the case but with deflationary concerns rapidly rising, it is certainly possible that those lows will not hold.
Also, while crude oil was able to bounce somewhat off its overnight lows, near 83.50, it still looks iffy. Gasoline was trounced and beaten with an ugly stick today as it made yet another fresh 4 year low in price. I am quite happy with that to be honest.
Cattle rebounded when news of firm cash hit the market which saved the complex from the beating it took earlier but USDA also showed an increase in red meat production for next year and for poultry, something which I have been saying for some time now.
What that tells me is that red meat prices are coming down for sure. I had expected beef prices to start coming down by the 4th quarter as well as pork. Beef is holding better than I expected thus far but pork looks like it is beginning to weaken. There is going to be too much competition from pork and poultry in 2015 for it to stay up here in the stratosphere.
With the combination of cheaper gasoline and falling red meat prices, it looks like more Bar-b-Q is on the menu at my household once more. Then again, the way things are looking with this cursed Ebola virus, maybe all of us will be scared to death to even venture out of the door so cheap gasoline will not matter much!
I will get the grain stuff up later as there is a lot to cover....\
