Saturday, May 5, 2012
Trader Dan on King World News Metals Wrap
Please click on the following link to listen in to my regular weekly radio interview on the KWN Weekly Metals Wrap.
Friday, May 4, 2012
S&P 500 Back Below its 50 Day Moving Average
The S&P 500 continues to act like a market wants to break down much more sharply than it has hitherto done before. Its trip back to the 1400 level this week did not last very long as it met up with some rather heavy selling; selling that appears to be of a nature of one that is now looking to sell rallies rather than buy dips.
To confirm at least some sort of short term top in this market, I would need to see this thing close stronlgy below the 1350 level. That level held it in check back in February of this year so a good close below it would tell us that even the longs are getting tired of holding this market higher.
Notice how the MACD indicator shows a market that has been basically GRINDING higher rather than one that has been moving strongly higher on good momentum. It is almost as if no one believes this thing should be where it is and yet it has kept pushing up.
Upside Momentum has now declined notably with the indicator barely registering above the ZERO level before it is now threatening to roll back over again.
If the Fed and the boyz are going to act to prop it up, they had better hurry because it has all the makings of a market that could make a very sharp downside move.
Keep in mind that the level of the US equity markets have now become "national security" issues as far as the monetary authorities are concerned. While they are high-fiving themselves over what they have managed to pull off in the commodity sector and in the Treasury markets where interest rates continue to plummet (GOOD - the US government can borrow even more money and pay next to nothing to the chumps that lend money to it), they no doubt are keenly watching the equity market charts.
Take a look at the weekly chart where the indicator is generating its first sell signal since early last year.
To confirm at least some sort of short term top in this market, I would need to see this thing close stronlgy below the 1350 level. That level held it in check back in February of this year so a good close below it would tell us that even the longs are getting tired of holding this market higher.
Notice how the MACD indicator shows a market that has been basically GRINDING higher rather than one that has been moving strongly higher on good momentum. It is almost as if no one believes this thing should be where it is and yet it has kept pushing up.
Upside Momentum has now declined notably with the indicator barely registering above the ZERO level before it is now threatening to roll back over again.
If the Fed and the boyz are going to act to prop it up, they had better hurry because it has all the makings of a market that could make a very sharp downside move.
Keep in mind that the level of the US equity markets have now become "national security" issues as far as the monetary authorities are concerned. While they are high-fiving themselves over what they have managed to pull off in the commodity sector and in the Treasury markets where interest rates continue to plummet (GOOD - the US government can borrow even more money and pay next to nothing to the chumps that lend money to it), they no doubt are keenly watching the equity market charts.
Take a look at the weekly chart where the indicator is generating its first sell signal since early last year.
Commodity Sector Continues to Reel
Today's pathetic payrolls number brought on more of the risk aversion or "slowing growth" trades with the result that it has now sent the commodity sector down to levels last seen in September 2010.
The 50 week moving average is coming perilously close to crossing down below the 100 week, further confirming the downward trend. If the Fed indeed was hoping to see commodity prices weaken to avoid the fallout from their little episode of money creation, so far they have gotten their wish.
The problem they have however is if stock prices continue to swoon lower, which they DO NOT WANT. If they are required to resuscitate equities by engaging in another round of QE, they certainly have room do so once again as far as the price of hard assets go.
The 50 week moving average is coming perilously close to crossing down below the 100 week, further confirming the downward trend. If the Fed indeed was hoping to see commodity prices weaken to avoid the fallout from their little episode of money creation, so far they have gotten their wish.
The problem they have however is if stock prices continue to swoon lower, which they DO NOT WANT. If they are required to resuscitate equities by engaging in another round of QE, they certainly have room do so once again as far as the price of hard assets go.
On the longer term monthly chart the index has now decidedly fallen below both median lines as well as violated the 38.2% Fibonacci retracement level of the rally off the 2008 bottom, a bottom formed when the first round of QE came our way. From a purely technical chart perspective, there is no chart support until until the 50% or halfway point of the entire rally from that same 2008 low to the early 2011 high. That level does not come in until close to the 507 level.
Note even in spite of the current weak technical posture of the sector, the index still remains in a decided uptrend as the chart pattern is a series of higher highs and higher lows as you move from left to right.
While wholesale prices of the commodity sector as a whole are moving lower, they are still much higher than they were a mere 4 years ago; something to keep in mind whenever the Fed and the feds parrot the nonsense to us that inflation pressures are tame.
Gold Chart and Comments
Today's payrolls number was just as rotten, if not more so, than most traders and analysts had been expecting. The numbers coming out of the private firms were indicating this and they were very accurate. The problem is that the jobs number was even worse than nearly anyone had anticipated so we did get a very strong reaction in the equity markets with bulls running to the hills sending up smoke signals (this one is for that famous native American running for the Senate in Mass.) for Mr. Bernanke and company to come and save them. Alas, Mr. Bernanke must have been over sipping some latte at Starbucks as he was no where to be found.
Gold reacted very well to all this partly because the news has traders convinced that this is another notch in the pole adding up to pushing the Fed into another round of bond purchases, aka, QE, and partly because of uncertainty over the upcoming elections in France. How that turns out could impact monetary policy over there.
Also, when one considers the fact that the CCI (Continuous Commodity Index) plummeted lower today with crude oil and gasoline getting whacked, to see gold and silver for that matter, moving higher is encouraging.
It looks to me like they are trying to drive down the price of gasoline to prop up Mr. Obama's pathetic poll numbers. Gasoline futures tend to peak in May anyway but I do find it noteworthy that the entire commodity sector as a whole is pushing relentlessly lower. This gives the doves at the FOMC plenty of ammunition in advocating more stimulus.
The HUI managed to claw its way back above technical chart support at the 420 level as it is bucking the trend of lower equities today. I would feel more confident about a final bottom being forged in these shares if the index could get back above 440, particularly after such a spike lower and sharp rebound as it has so far done today. See yesterday's post as a reminder of just how undervalued these gold shares are in relation to bullion...
More later as time permits...
Gold reacted very well to all this partly because the news has traders convinced that this is another notch in the pole adding up to pushing the Fed into another round of bond purchases, aka, QE, and partly because of uncertainty over the upcoming elections in France. How that turns out could impact monetary policy over there.
Also, when one considers the fact that the CCI (Continuous Commodity Index) plummeted lower today with crude oil and gasoline getting whacked, to see gold and silver for that matter, moving higher is encouraging.
It looks to me like they are trying to drive down the price of gasoline to prop up Mr. Obama's pathetic poll numbers. Gasoline futures tend to peak in May anyway but I do find it noteworthy that the entire commodity sector as a whole is pushing relentlessly lower. This gives the doves at the FOMC plenty of ammunition in advocating more stimulus.
The HUI managed to claw its way back above technical chart support at the 420 level as it is bucking the trend of lower equities today. I would feel more confident about a final bottom being forged in these shares if the index could get back above 440, particularly after such a spike lower and sharp rebound as it has so far done today. See yesterday's post as a reminder of just how undervalued these gold shares are in relation to bullion...
More later as time permits...
Thursday, May 3, 2012
Mining Shares Continue being Pummeled
No matter which way you measure it, the mining shares are systematically being destroyed as the HUI just made a new 52 week low in today's session.
What else can be said about these shares that has not already been said - their performance against the price of gold bullion has been atrocious while they have seriously underperformed the broader market since September of last year.
Management needs to get out in front of this and where possible, cash profits should be returned in a much larger percentage to the shareholders in the form of a stronger and higher dividend. They have to give the owners of these shares some incentive to continue to hold them and with zero to mere meager dividends, there simply is not enough to keep the longsuffering holders hanging in there.
In an interest rate environment as low as this one, a 2% dividend is a joke considering the fact that there has been a huge capital loss in so many of the shares. That sort of dividend does little to compensate the holders for these paper losses that so many are accruing. Only those who for the most part bought into the shares at the end of 2008 or into the first part of 2009 have some cushion to work with.
Note the HUI-Gold ratio chart using the closing monthly prices only. It is now at levels last seen at the end of 2001! We are talking more than a decade ago as far as valuation against an ounce of gold.
Here is one more look (as if to add insult to injury at this point) the HUI in a monthly chart all by itself.
Note that unless it can recover the 420 level very quickly and move back above 440 so as to indicate a bottom has been put in, there seems to be little chart support until one gets to the 400 - 390 level. That is both a horizontal support level as well as the 50% retracement of the entire rally from the bottom formed after the first round of QE was announced way back in 2008.
If the index does not hold at that point, the shares could then be technically vulnerable to a final washout all the way back to 350. At that point, one would expect to see the final end to this mauling. After all, the discounted value to gold bullion would make it irresistible to sovereign wealth funds not to mention a huge wave of buyouts and takeovers by majors of juniors and exploration companies.
One thing to note here - the S&P 500 is once again flirting dangerously with its 50 day moving average which is a mere 6 points below it current level as I write this. If tomorrow's employment numbers are the stinker that many expect them to be, it will probably initially fall through this level. if it then rebounds, it will do so on hopes or expectations that the Fed will not be able to avoid another round of QE. After all, they have managed to smash the commodity sector down and even gotten gasoline to move lower. They have plenty of room now to play if they want to.
The big question is, will Bernanke save his boss Obama or will he let the stock market implode by standing by if the economic data has traders selling equities during an election year? I doubt it because he is out of his job as Master of the Universe if Romney wins and believe me, he damn well knows it.
What else can be said about these shares that has not already been said - their performance against the price of gold bullion has been atrocious while they have seriously underperformed the broader market since September of last year.
Management needs to get out in front of this and where possible, cash profits should be returned in a much larger percentage to the shareholders in the form of a stronger and higher dividend. They have to give the owners of these shares some incentive to continue to hold them and with zero to mere meager dividends, there simply is not enough to keep the longsuffering holders hanging in there.
In an interest rate environment as low as this one, a 2% dividend is a joke considering the fact that there has been a huge capital loss in so many of the shares. That sort of dividend does little to compensate the holders for these paper losses that so many are accruing. Only those who for the most part bought into the shares at the end of 2008 or into the first part of 2009 have some cushion to work with.
Note the HUI-Gold ratio chart using the closing monthly prices only. It is now at levels last seen at the end of 2001! We are talking more than a decade ago as far as valuation against an ounce of gold.
Here is one more look (as if to add insult to injury at this point) the HUI in a monthly chart all by itself.
Note that unless it can recover the 420 level very quickly and move back above 440 so as to indicate a bottom has been put in, there seems to be little chart support until one gets to the 400 - 390 level. That is both a horizontal support level as well as the 50% retracement of the entire rally from the bottom formed after the first round of QE was announced way back in 2008.
If the index does not hold at that point, the shares could then be technically vulnerable to a final washout all the way back to 350. At that point, one would expect to see the final end to this mauling. After all, the discounted value to gold bullion would make it irresistible to sovereign wealth funds not to mention a huge wave of buyouts and takeovers by majors of juniors and exploration companies.
One thing to note here - the S&P 500 is once again flirting dangerously with its 50 day moving average which is a mere 6 points below it current level as I write this. If tomorrow's employment numbers are the stinker that many expect them to be, it will probably initially fall through this level. if it then rebounds, it will do so on hopes or expectations that the Fed will not be able to avoid another round of QE. After all, they have managed to smash the commodity sector down and even gotten gasoline to move lower. They have plenty of room now to play if they want to.
The big question is, will Bernanke save his boss Obama or will he let the stock market implode by standing by if the economic data has traders selling equities during an election year? I doubt it because he is out of his job as Master of the Universe if Romney wins and believe me, he damn well knows it.
Draghi Derails Gold
Apparently ECB President Draghi believes things are going so well over in Euroland that traders are "correct" in their perceptions that no near term stimulus is needed. Down went gold, and silver, and copper, etc. as money flowed out of those markets and elsewhere into I have no idea what based on the fact that the equity markets are lower and are the bonds. Let's call it mattress money flows.
Meanwhile data coming out ahead of tomorrow's payroll numbers are indicating that the report will not be particularly strong here in the US. It will be interesting to see if we get a weak number how gold reacts to it. Normally we would expect to see it lower on the risk aversion trades but if it actually moves higher on a weak number, it will be additional fodder for the notion that the weaker the economic numbers are in the US, the better the chances are of the Fed engaging in a third round of QE (at least as far as a growing number of traders believe).
Anyway, for whatever reason, once again gold could not make it past the $1680 level as it was not even able to make it any higher than $1672 before the buyers stepped aside. Having fallen back below $1650 is short term negative however and now we will need to see whether or not it will fall as deeply as the $1620 level or lower where previously buyers have made their presence known.
The mining shares are lower today (Gee what a surprise - do these things ever go higher anymore) but remain above 420 in the HUI. Perhaps we will get a bounce from that level and confirm it as a bottom. We simply have to wait and see.
Meanwhile data coming out ahead of tomorrow's payroll numbers are indicating that the report will not be particularly strong here in the US. It will be interesting to see if we get a weak number how gold reacts to it. Normally we would expect to see it lower on the risk aversion trades but if it actually moves higher on a weak number, it will be additional fodder for the notion that the weaker the economic numbers are in the US, the better the chances are of the Fed engaging in a third round of QE (at least as far as a growing number of traders believe).
Anyway, for whatever reason, once again gold could not make it past the $1680 level as it was not even able to make it any higher than $1672 before the buyers stepped aside. Having fallen back below $1650 is short term negative however and now we will need to see whether or not it will fall as deeply as the $1620 level or lower where previously buyers have made their presence known.
The mining shares are lower today (Gee what a surprise - do these things ever go higher anymore) but remain above 420 in the HUI. Perhaps we will get a bounce from that level and confirm it as a bottom. We simply have to wait and see.
Wednesday, May 2, 2012
CME issues Clarification on Performance Bond Requirements
This afternoon, the CME Group issued a clarification on their communique detailing the increase in performance bond requirements for it clearing member customer accounts with non-hedged positions. Evidently there was a great deal of confusion regarding the wording of the original release.
The Dow Jones wire service interpreted the original communique in the same manner as I did. I am not sure about Reuters but either way, the wording was so poor, that it forced another release to clarify it!
Here is the Dow Jones report:
3:03 (Dow Jones) CME notifies members of its clearinghouse that starting
Monday, members will need to effectively double the initial margin collected
for non-hedge trading positions, with no exception for members' customer
accounts. The move is required by CFTC as part of Dodd-Frank, While market
participants have known about it for some time, CME apologized Wednesday for
the "short notice" of the change. As per CFTC rules, hedges must reduce risk
for commercial users of derivatives markets, linked to such a company's assets
or liabilities. (jacob.bunge@dowjones.com)
In speaking with a rep from the CME, the change will affect a relatively small subset of traders and not have the drastic impact, that many traders, myself included, originally believed based on the initial news release.
Following is the complete news release:
DATE: May 2, 2012
TO: Clearing Member Firms
FROM: CME Clearing
SUBJECT:
Important Clarification
Note: the original version of this advisory was misleading regarding the applicability of the new rule and the manner in which "initial to maintenance ratios" work.
12-187 Performance Bond Requirements for Member Accounts: Effective this Monday, May 7, new CFTC Regulation 39.13(g)(ii) mandates each DCO to require its clearing members to apply "initial to maintenance ratios" for customer accounts with non-hedged positions. There is no exception for speculative customer accounts of exchange members that fall within the Regulation. The Regulation applies equally to positions that are regulated as futures and to positions regulated as swaps.
Note that the requirement only applies to non-hedged member accounts. Member accounts containing hedged portfolios are always assessed only at the maintenance requirement level. Most CME Group members engage in hedging activity on a routine basis -- for example, they make a market in one set of our products and lay off their risk in another set of products at CME Group or other markets. Such positions are still subject to hedge treatment. Note, however, that if you are a member and you have only outright positions you will be subject to the new rule.
For example, suppose you are a member and you qualify for hedge treatment. You have a portfolio with a maintenance requirement level of $100. The sole requirement you have is that $100 level.
On the other hand, suppose you do not qualify for hedge treatment, and your portfolio has a maintenance requirement level of $100 and an initial requirement level of $110. As long as you have $100 worth of value in your account, no margin call is issued. But Page 2 #12-187/May 2, 2012 if your collateral value falls below $100, then a margin call is issued to bring you back up to $110.
Previously, for futures, the use of "initial to maintenance ratios" applied only to accounts that were neither hedge nor member. Accounts are coded by FCMs as member, hedge or spec, and only accounts coded as spec had an "initial" requirement level that was higher than the "maintenance" level.
Note also that even for non-hedged member accounts, the higher "initial" requirement level only applies if (a) the account had no positions on the prior day, or (b) the value of collateral on deposit has fallen below the lower "maintenance" requirement. On all other days, it is the lower "maintenance requirement" which applies – which is the same level that the FCM is assessed – and so long as the account maintains a cushion of collateral value over the maintenance requirement, there is no margin call.
We believe that FCMs will be able to accomplish this change for member accounts which do not qualify for hedge treatment, simply by changing the account type that drives the margin calculation in books, from member to spec.
We apologize for the short notice about this change. See also Clearing Advisory 12-136, published March 28, about the use of initial to maintenance ratios for non-hedged positions in swaps, at:
http://www.cmegroup.com/tools-information/lookups/advisories/clearing/files/Chadv12-136.pdf
The Dow Jones wire service interpreted the original communique in the same manner as I did. I am not sure about Reuters but either way, the wording was so poor, that it forced another release to clarify it!
Here is the Dow Jones report:
3:03 (Dow Jones) CME notifies members of its clearinghouse that starting
Monday, members will need to effectively double the initial margin collected
for non-hedge trading positions, with no exception for members' customer
accounts. The move is required by CFTC as part of Dodd-Frank, While market
participants have known about it for some time, CME apologized Wednesday for
the "short notice" of the change. As per CFTC rules, hedges must reduce risk
for commercial users of derivatives markets, linked to such a company's assets
or liabilities. (jacob.bunge@dowjones.com)
In speaking with a rep from the CME, the change will affect a relatively small subset of traders and not have the drastic impact, that many traders, myself included, originally believed based on the initial news release.
Following is the complete news release:
DATE: May 2, 2012
TO: Clearing Member Firms
FROM: CME Clearing
SUBJECT:
Important Clarification
Note: the original version of this advisory was misleading regarding the applicability of the new rule and the manner in which "initial to maintenance ratios" work.
Note that the requirement only applies to non-hedged member accounts. Member accounts containing hedged portfolios are always assessed only at the maintenance requirement level. Most CME Group members engage in hedging activity on a routine basis -- for example, they make a market in one set of our products and lay off their risk in another set of products at CME Group or other markets. Such positions are still subject to hedge treatment. Note, however, that if you are a member and you have only outright positions you will be subject to the new rule.
For example, suppose you are a member and you qualify for hedge treatment. You have a portfolio with a maintenance requirement level of $100. The sole requirement you have is that $100 level.
On the other hand, suppose you do not qualify for hedge treatment, and your portfolio has a maintenance requirement level of $100 and an initial requirement level of $110. As long as you have $100 worth of value in your account, no margin call is issued. But Page 2 #12-187/May 2, 2012 if your collateral value falls below $100, then a margin call is issued to bring you back up to $110.
Previously, for futures, the use of "initial to maintenance ratios" applied only to accounts that were neither hedge nor member. Accounts are coded by FCMs as member, hedge or spec, and only accounts coded as spec had an "initial" requirement level that was higher than the "maintenance" level.
Note also that even for non-hedged member accounts, the higher "initial" requirement level only applies if (a) the account had no positions on the prior day, or (b) the value of collateral on deposit has fallen below the lower "maintenance" requirement. On all other days, it is the lower "maintenance requirement" which applies – which is the same level that the FCM is assessed – and so long as the account maintains a cushion of collateral value over the maintenance requirement, there is no margin call.
We believe that FCMs will be able to accomplish this change for member accounts which do not qualify for hedge treatment, simply by changing the account type that drives the margin calculation in books, from member to spec.
We apologize for the short notice about this change. See also Clearing Advisory 12-136, published March 28, about the use of initial to maintenance ratios for non-hedged positions in swaps, at:
http://www.cmegroup.com/tools-information/lookups/advisories/clearing/files/Chadv12-136.pdf
Dodd-Frank Strikes the Commodity Markets
I will try to write more on this later as I am still working the session but news came out last evening that CME was requiring all member firms to comply with regulations arising from Dodd-Frank which basically is forcing margin requirements for all "Non-Hedges" to effectively double as of this coming Monday.
Talk about short notice!
The ramifications of this are obviously huge and no doubt are adding to an already volatile mix of madness. Those traders with losing positions are going to be impacted even more since the new requirements may well push them over the line as far as margin calls and force them to either liquidate or come up with more cash, immediately.
I think some of what we saw in the markets today is traders already anticipating this with the result that we had a significant amount of position squaring.
more later... hopefully....
Here is a chart showing the carnage in the commodity sector. Of course not all of this was caused by Dodd-Frank but it certainly did not help the case of those who are generally LONG COMMODITIES to have such lousy economic data coming out of the US in today's session which generated risk off trades. Combine that with the fact that their margins are going to be doubled soon and it does not take a rocket scientist to understand why we are seeing such strong selling across the commodity sector today.
Like I heard elsewhere - there are two main things wrong with Dodd-Frank; Dodd and Frank. One is out of the Senate (thank heaven) and the other is retiring from the House (a double thanks).
Talk about short notice!
The ramifications of this are obviously huge and no doubt are adding to an already volatile mix of madness. Those traders with losing positions are going to be impacted even more since the new requirements may well push them over the line as far as margin calls and force them to either liquidate or come up with more cash, immediately.
I think some of what we saw in the markets today is traders already anticipating this with the result that we had a significant amount of position squaring.
more later... hopefully....
Here is a chart showing the carnage in the commodity sector. Of course not all of this was caused by Dodd-Frank but it certainly did not help the case of those who are generally LONG COMMODITIES to have such lousy economic data coming out of the US in today's session which generated risk off trades. Combine that with the fact that their margins are going to be doubled soon and it does not take a rocket scientist to understand why we are seeing such strong selling across the commodity sector today.
Like I heard elsewhere - there are two main things wrong with Dodd-Frank; Dodd and Frank. One is out of the Senate (thank heaven) and the other is retiring from the House (a double thanks).
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