In communications with my broker this evening he suggested that this might be a way for the CME to let some of the firms accepting accounts from MF Global off the hook from attempting to make one margin call after another and attempt to complete a huge number of bank wire transactions in such a short period of time.
What struck both of us as extremely odd was the fact that the communique stating that maintenance margin levels were going to be raised to a 1:1 ratio with initial margin requirements was sent later in the evening, AFTER the close of regular business hours with the change in margins being made effective AS OF THE CLOSE OF TRADING NOVEMBER 4, 2011. That means there was no advance notice given as is the usual norm (we generally have a day or two to prepare for the hikes). Actually the notice hit my box TWO HOURS AFTER the close of business on Friday. Anyone whose account is underfunded is on call immediately based on the timing of the raise in the requirement meaning that they go into the opening of trading Sunday evening already all call.
That gives the brokerage firm the RIGHT, but not the obligation or necessity to immediately liquidate all exisiting positions of customers whose accounts are underfunded ( it could be aimed at some of these new transferred accounts which, if accounts are accurate, have received no more than 75% of their original account balances, some having received only 60% of the original balance).
I am not trying to be sensational here; rather I am attempting to work through the implications of all this especially seeing that it is coming in on the heels of a $630 million shortfall with MF Global. Some 15,000 accounts or so have been transferred thus far. I cannot even imagine the efforts involved by brokerage firms attempting to sort through all these new positions on their books because of the transfers and gauge margin requirements against what is left of their remaining account balances. Some of these firms might be thinking it is just easier to liquidate everything that these newly transferred accounts have and then start with a clean slate. A maintenance margin hike to initial margin requirement levels will make it very easy to justify such an approach.
Those who trade commodities sign an agreement stating that the brokerage firm can liquidate existing customer positions in the event of financial hardship. We may be seeing that taking place.
If I can get some more information on this, I will get it posted as soon as I can but we are headed into the weekend so I would think news is going to be very scarce until we get around to market reopenings Sunday evening and into Monday morning. We could be in for a very wild and unsettling round of price volatility starting Sunday evening. This is unprecedented in my own personal trading career so I am not certain what exactly we are going to get as a result of all this.
Maybe we will get lucky and learn that the CME Clearing House issued the communique by accident or something. Boy howdy do I hope that is the case, but I fear it is not.
One last thing - it should be kept in mind that if the markets open strongly to the upside in general on a round of RISK ON trades, it is the SHORTS who are going to be hurt by the margin change. That would force additional short covering. The flip side to all this is that a great number of the transferred MF Global accounts are mainly on the long side of the market and the RISK OFF trades are what come on Sunday evening. Then the longs are in trouble... What a stinking mess caused by these ***&&$$ at MF Global.
Friday, November 4, 2011
CME Group hiking margins across the Board
If I am reading the communique from the exchange correctly, the margin requirements for ALL CME products is being raised by hiking the MAINTENANCE MARGIN requirements to the SAME LEVEL as INITIAL MARGIN requirements, effective as of the opening of trading Sunday evening/Monday morning, November7. The changes were implemented as of the close of trading Friday, November 4th.
If this is correct, and I think I am reading it correctly, this is the first time that I can recall seeing something like this occuring. It will also precipitate some very volatile trading conditions.
I suspect this is tied directly to the fallout from the MF Global debacle. Apparently CME group and its clearinghouse want to make sure there is sufficient liquidity present to cover all its obligations.
This might throw my previous assessment of silver and gold technical action out of the window. Stay tuned as this is going to get even more wild than I previously imagined.
Traders who are not margined up to their teeth and have a sufficient cushion in their accounts, will be okay. Those who are not are going to get hurt on any adverse price action. What I mean by this is simple - if a trader is long and the market sells off, his paper losses or loss of profits will cut into his account balance perhaps bringing the total margin requirements of his active positions below his account balance. He is going to get a margin call that day if not Monday morning or even Sunday evening. Once "called", the money is going to have to be wired that day or the positions will be liquidated.
Quite frankly, seeing this occuring is very unnerving as I wonder if there is more stress out there from the MF Global debacle than meets the eye. The Clearinghouses obviously want to make certain that they are well capitalized.
My guess is that many of the accounts from MF Global that were transferred and have not gotten the ENTIRETY of their former account balances reinstated, are going to be forced into liquidating unless they have adequate capital on hand elsewhere that is easily accessible and very liquid.
If this is correct, and I think I am reading it correctly, this is the first time that I can recall seeing something like this occuring. It will also precipitate some very volatile trading conditions.
I suspect this is tied directly to the fallout from the MF Global debacle. Apparently CME group and its clearinghouse want to make sure there is sufficient liquidity present to cover all its obligations.
This might throw my previous assessment of silver and gold technical action out of the window. Stay tuned as this is going to get even more wild than I previously imagined.
Traders who are not margined up to their teeth and have a sufficient cushion in their accounts, will be okay. Those who are not are going to get hurt on any adverse price action. What I mean by this is simple - if a trader is long and the market sells off, his paper losses or loss of profits will cut into his account balance perhaps bringing the total margin requirements of his active positions below his account balance. He is going to get a margin call that day if not Monday morning or even Sunday evening. Once "called", the money is going to have to be wired that day or the positions will be liquidated.
Quite frankly, seeing this occuring is very unnerving as I wonder if there is more stress out there from the MF Global debacle than meets the eye. The Clearinghouses obviously want to make certain that they are well capitalized.
My guess is that many of the accounts from MF Global that were transferred and have not gotten the ENTIRETY of their former account balances reinstated, are going to be forced into liquidating unless they have adequate capital on hand elsewhere that is easily accessible and very liquid.
HUI pushing into Chart Resistance
The HUI had a strong showing this week as the return of the risk trades drew money into the sector. Along with that, many investors have come to view the sector as generally undervalued based on the good numbers being reported by several miners and the fact some were raising dividends.
The result was a move back into the large gap region formed in September when gold and silver were both taken down quite hard. Last week the index mounted its first push into the gap and managed to hold the level going into the weekend. This week after some initial weakness, it found willing buyers who came in and took it further into the gap closing above the 590 level. The index now has the potential to mount a push towards 600. If it can do that successfully, it should be able to close the gap completely. That would be a major victory for the bulls.
Note that the market found buyers on the last two days of this week when it fell back towards the BOTTOM of the previous gap near the 580 region. That is good technical action.
Let's see what we get next week with the risk trades. If they are back on, the HUI is going to hit 600.
The result was a move back into the large gap region formed in September when gold and silver were both taken down quite hard. Last week the index mounted its first push into the gap and managed to hold the level going into the weekend. This week after some initial weakness, it found willing buyers who came in and took it further into the gap closing above the 590 level. The index now has the potential to mount a push towards 600. If it can do that successfully, it should be able to close the gap completely. That would be a major victory for the bulls.
Note that the market found buyers on the last two days of this week when it fell back towards the BOTTOM of the previous gap near the 580 region. That is good technical action.
Let's see what we get next week with the risk trades. If they are back on, the HUI is going to hit 600.
Silver Chart improving but still bearish
Let's start by examining the weekly chart for a bit longer perspective. For starters, silver remains held under the 50 week moving average so strictly speaking it is still bearish. Once it climbs above this level, funds generally become more involved in the market so that will be the first achievement which the bulls will have to pull off to get the speculators more interested in the market. Note that the over the last two weeks, this level has effectively capped any upward progress although the bulls are working on securing a breach of this important technical level.
You might also notice that there are two sets of Fibonacci levels drawn on the chart. The first, in red, uses the peak near $50 and the subsequent spike bottom near the $26 level. The second set, in blue, uses the failed rally attempt culminating near $44.27 and the same spike low to project some potential resistance levels. The market has rallied back to exactly the 38.2% retracement level of the former and the 50% retracement level of the latter.
You can see that there is a confluence of THREE key resistance levels near the high made by silver this week. Until the bulls can better this level, the stronger-handed bears are not going to run.
What has been happening with silver is that the risk on, or risk-off trades continue to jerk the metal up or down depending on which trade happens to be in vogue on any given day. If we move into next week and market interprets any events in Europe in a negative fashion, silver is going to get sold down along with copper. If the converse is true, silver will move higher alongside of copper.
As has been the axiom of recent weeks, we will know what will happen only AFTER it happens. There is no predicting any of this madness. The bulls are very close to seizing the initiative but close only counts in horse shoes and hand grenades.
You might also notice that there are two sets of Fibonacci levels drawn on the chart. The first, in red, uses the peak near $50 and the subsequent spike bottom near the $26 level. The second set, in blue, uses the failed rally attempt culminating near $44.27 and the same spike low to project some potential resistance levels. The market has rallied back to exactly the 38.2% retracement level of the former and the 50% retracement level of the latter.
You can see that there is a confluence of THREE key resistance levels near the high made by silver this week. Until the bulls can better this level, the stronger-handed bears are not going to run.
What has been happening with silver is that the risk on, or risk-off trades continue to jerk the metal up or down depending on which trade happens to be in vogue on any given day. If we move into next week and market interprets any events in Europe in a negative fashion, silver is going to get sold down along with copper. If the converse is true, silver will move higher alongside of copper.
As has been the axiom of recent weeks, we will know what will happen only AFTER it happens. There is no predicting any of this madness. The bulls are very close to seizing the initiative but close only counts in horse shoes and hand grenades.
Thursday, November 3, 2011
CME Group attempting to clean up the MF Global mess
Dow Jones is reporting this morning that a total of TEN firms have agreed to accept portions of MF Global's clientele.
The firms are as follow:
Dorman Trading LLC
BNP Paribas
RJ O'Brien & Associates
Mizuho Securities USA
Newedge
FC Stone
Rosenthal Collins Group
Penson Financial Services
ADM Investor Services
Macquarie Futures USA
The firms are as follow:
Dorman Trading LLC
BNP Paribas
RJ O'Brien & Associates
Mizuho Securities USA
Newedge
FC Stone
Rosenthal Collins Group
Penson Financial Services
ADM Investor Services
Macquarie Futures USA
HUI is continuing to outperform the broader equity markets
The lower interest rate environment (the ECB cut rates and the Reserve Bank of Australia did likewise) is proving to be a boon for gold. That is helping pull silver higher even as it waffles back and forth between risk on and risk off trades. The end result is that a fairly good stream of buying is coming into the gold shares, many of which remain undervalued in the eyes of prospective buyers.
The gains in the mining sector are outpacing the gains in the broader equity markets while on downside trips they are holding better. It would be a pleasant change if there were a growing group of investors who were viewing gold and silver shares as defensive holdings in the current economic climate.
The gains in the mining sector are outpacing the gains in the broader equity markets while on downside trips they are holding better. It would be a pleasant change if there were a growing group of investors who were viewing gold and silver shares as defensive holdings in the current economic climate.
Wednesday, November 2, 2011
Fallout from QE - Rising Meat Prices
The talk today is of the subtle but significant shift in the FOMC in regards to another round of Quantitative Easing or QE. It appears the formerly hawkish dissenters from this madness have been brought in to heel with the Fed perhaps ramping up expecatations that they will act in some form as conditions worsen in Europe.
Signals are still unclear and there is a lot of conflicting information swirling in the financial air which is leading to further instability and volatility in our financial markets.
I find it less than honest that those advocating another dose of financial morphine into the system are pointing to the lack of inflation as a signal that the Fed could engage in further money creation without unduly impacting prices in general. My response to this is "Bullsh_t".
Take a look at the following charts of the two basic meat sources, cattle and hogs. The first is of April 2012 cattle. Look at what has happened to the price of cattle. While this is obviously terrific news for cattle ranchers, it is a signficant foreteller of what is going to happen to the price of beef next year. As a matter of fact it has already happened with wholesale beef prices rising to very lofty levels.
The latter is of April 2012 Lean Hogs. That is a reflection of where pork prices are headed next year.
Can anyone with an unbiased mind look at either of these charts and tell me that the markets are not expecting meat prices to rise next year?
Some may suggest that consumers will not feel the impact because they could switch to chicken. A substitution is no doubt realistic but the problem is that the rising price of both beef and pork will lead to increasing demand for chicken which will pull it higher as well (and this does not take into account any fall off in broiler production due to the previous impact of rising feed prices).
In summary - the Fed created QE1 and QE2 and in the process helped to shove feed prices higher. That sent the WRONG signal to cattle and hog producers who then cut back their herds or did not actively seek to increase their size. This occured at the same time that the US Dollar was falling and creating a type of fire sale on US produced beef and pork which led to a surge in export-related demand. The result - US consumers are the ones who will feel the impact of this in the form of higher protein prices in the upcoming year. While I am happy for my friends in the cattle and hog business who work long and hard hours, I am extremely displeased to sit here and watch my protein sources move inexorably higher realizing that some of these cost increases did not have to occur but were rather man-made.
And this my friend is how the Federal Reserve and its money creation programs impacts every segment of society even down to the most basic needs of food. Remember this when you hear more chatter about further QE coming. By the time they finish with us, a porkchop will be $9.99/pound. But what will that matter - the stock market will be moving higher so everyone will feel wealthy and will not mind paying up, will they?
Signals are still unclear and there is a lot of conflicting information swirling in the financial air which is leading to further instability and volatility in our financial markets.
I find it less than honest that those advocating another dose of financial morphine into the system are pointing to the lack of inflation as a signal that the Fed could engage in further money creation without unduly impacting prices in general. My response to this is "Bullsh_t".
Take a look at the following charts of the two basic meat sources, cattle and hogs. The first is of April 2012 cattle. Look at what has happened to the price of cattle. While this is obviously terrific news for cattle ranchers, it is a signficant foreteller of what is going to happen to the price of beef next year. As a matter of fact it has already happened with wholesale beef prices rising to very lofty levels.
The latter is of April 2012 Lean Hogs. That is a reflection of where pork prices are headed next year.
Can anyone with an unbiased mind look at either of these charts and tell me that the markets are not expecting meat prices to rise next year?
Some may suggest that consumers will not feel the impact because they could switch to chicken. A substitution is no doubt realistic but the problem is that the rising price of both beef and pork will lead to increasing demand for chicken which will pull it higher as well (and this does not take into account any fall off in broiler production due to the previous impact of rising feed prices).
Let me attempt to explain some of this and its connection to the Fed's QE. One of the major fallouts from this ill-conceived attempt at money creation was soaring food and energy prices. QE1 put a floor in the Corn market back in late 2008 taking it from near $3.00/bushel to $4.50 before it established a price range. Later in 2010, as talk surfaced in September about the Jackson Hole Summit that another round of QE was coming, corn prices began moving higher alongside the entirety of the commodity complex. When the actual implementation of the program began, corn shot up to $8.00 bushel.
Another way of stating this is that the primary feed grain for both cattle and hogs experienced an increase of 167% in a two and one half year period. Now I will admit that the entire price rise was not directly due to both QE's as there were weather factors, etc., that came into play as well, but it is undeniable that easy money policies of the Fed were a major contributing factor to the overall price rise in the feed grains.
Why is this important? The answer is because hog and cattle producers have to make decisions whether or not to increase the size of their herds by breeding either their heifers or sows. When they sit down and put a pencil to it, they look at the cost of their feed and the expected selling cost of the animals they are going to raise which will be ready further down the road (it obviously takes time for gestation and growth to slaughter weights).
Many cattle and hog producers were initially experiencing substantial losses on each head of cattle or hog that they were raising and bringing to market because of the sharp rise in their costs so they did what a rational person could be expected to do under such circumstances - they cut back production. The result is that the overall supply of both cattle and hogs has now fallen to levels that are not keeping up with demand and that is causing prices to rise and rise rapidly. (a side note is the severe drought we had this year in the Plains which led to substantial cattle losses further crimping supply).
The other factor is that the QE programs effectively undercut the value of the US Dollar making the beef and pork produced here in the US very cheap on the world export markets when compared to competitor nations. That has sent foreign buyers to the US to source both beef and pork further exacerbating the supply/demand imbalance and pushing prices yet higher.
In summary - the Fed created QE1 and QE2 and in the process helped to shove feed prices higher. That sent the WRONG signal to cattle and hog producers who then cut back their herds or did not actively seek to increase their size. This occured at the same time that the US Dollar was falling and creating a type of fire sale on US produced beef and pork which led to a surge in export-related demand. The result - US consumers are the ones who will feel the impact of this in the form of higher protein prices in the upcoming year. While I am happy for my friends in the cattle and hog business who work long and hard hours, I am extremely displeased to sit here and watch my protein sources move inexorably higher realizing that some of these cost increases did not have to occur but were rather man-made.
And this my friend is how the Federal Reserve and its money creation programs impacts every segment of society even down to the most basic needs of food. Remember this when you hear more chatter about further QE coming. By the time they finish with us, a porkchop will be $9.99/pound. But what will that matter - the stock market will be moving higher so everyone will feel wealthy and will not mind paying up, will they?
Monday, October 31, 2011
Monthly Gold Charts - October 2011
I have to keep my comments brief today as it is time for Halloween!
Looks like precious metals owners got a back of tricks today instead of treats. The culprit was the intervention by the Japanese monetary authorities who hit the Yen with a barrage of selling and sent the markets into a tizzy. The subsequent rally in the US Dollar then had the mindless hedgies dumping everything they bought late last week as equities were trashed along with the commodity sector in general.
Copper and silver were both sold off and gold went along for the ride to the downside.
If some of you might have noticed the Treasury bond had a gargantuan 3 point rally after just suffering a three point sell off last Thursday. How's that for ridiculously insane price action. The entire business cycle, just completely changed over the course of the last 4 days. Tomorrow it could merely take 24 hours to re-reverse the business cycle again. This is what computerized trading algorithms have created. And to think this is somehow supposed to be the "smoothly functioning price discovery mechanism".
What happened in the Treasury markets is that the Japanese came into the Forex markets and bought a boatload and then some of US Dollars and had to do something with all those worthless slips of paper so they turned around and bought up the equivalent amount of intervention's worth of worthless Treasuries.
No doubt the officials at the Federal Reserve are glad to see the Japanese doing their Operation Twist for them but I suspect that they are not particularly happy about seeing the Dollar moving higher!
We'll see where the dips buyers surface once again, particularly as Asia moves further into its session.
Happy Halloween to all!
Looks like precious metals owners got a back of tricks today instead of treats. The culprit was the intervention by the Japanese monetary authorities who hit the Yen with a barrage of selling and sent the markets into a tizzy. The subsequent rally in the US Dollar then had the mindless hedgies dumping everything they bought late last week as equities were trashed along with the commodity sector in general.
Copper and silver were both sold off and gold went along for the ride to the downside.
If some of you might have noticed the Treasury bond had a gargantuan 3 point rally after just suffering a three point sell off last Thursday. How's that for ridiculously insane price action. The entire business cycle, just completely changed over the course of the last 4 days. Tomorrow it could merely take 24 hours to re-reverse the business cycle again. This is what computerized trading algorithms have created. And to think this is somehow supposed to be the "smoothly functioning price discovery mechanism".
What happened in the Treasury markets is that the Japanese came into the Forex markets and bought a boatload and then some of US Dollars and had to do something with all those worthless slips of paper so they turned around and bought up the equivalent amount of intervention's worth of worthless Treasuries.
No doubt the officials at the Federal Reserve are glad to see the Japanese doing their Operation Twist for them but I suspect that they are not particularly happy about seeing the Dollar moving higher!
We'll see where the dips buyers surface once again, particularly as Asia moves further into its session.
Happy Halloween to all!
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