"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


Friday, March 25, 2011

The Seeming Unstoppable Rally in US Equities

One of the things that has really struck me has been the comments of many of the analysts and guests on the financial TV this past week in regards to the rally in US stocks.

The common refrain seems to be something along these lines:

"Well Joe, this market has had TWO BLACK SWAN Events thrown at it in two week's time and it simply will not stay down. Whenever you see a market that does not respond to bad news and actually begins to shrug off that news and moves higher, you JUST HAVE TO BUY IT".

It is always fun listening to some of these analysts scratch around for reasons to explain this stock market strength especially when some of these same people will point to the poor labor markets and broken housing market as reasons for concern. Some go as far as expressing great hesitation over further strength given the sharp rise in crude oil and related energy prices. They sluff that off however and will point to the global growth factor as reasons for the rally in the US equity markets with that overiding everything else.

The simple truth is that the world is awash in liquidity and this liquidity is finding its way into both stocks and commodities. It is so massive that it just overpowers anything that gets in its way. In such an environment most traders are simply afraid of being short. What happens as a result of this unwillingness to aggressively sell is that it takes less and less volume to move stock prices higher because sellers are scarcer and price must move high enough to entice sufficient offers into the market to accomodate all the orders to buy.

Take a look at the following chart which I have posted previously here at the site but which I think needs frequent reference to remind us how important this liquidity has become to maintaining the rally in US stocks.

Note the sharp expansion in the Fed's Balance sheet near the beginning of this year and note how it just keeps on rising. It is that measure of liquidity that swallowed up the selling due to unrest in MENA and the tragedy surrounding Japan.

The Fed may be floating a trial balloon by talking about an end to QE to gauge how stock markets will actually react to such an event  but one has to wonder how shutting off the liquidity spigot, based on this chart, is going to affect the high flying equity markets.

Gold - weekly chart analysis

Silver Musings

Silver actually put in a good showing for the week closing up $2.00 higher while setting a new 31 year high in the process. It was unable to maintain its footing above $38 for long but did hold support near the $37 level.
Moving into next week if it can stay above the $37.00 - $36.80 level, it should be able to consolidate and set itself up for a run towards $38 once again. If that support level does not hold, it will drift down first towards $36.50 and then toward $36.

I would prefer to see it stay above $36 as that had been a major barrier to the upside and should now serve as a major support level to the downside if the market is going to press on to new highs relatively soon.

Deliveries for the March contract are picking up as expected since we are running out of days in the month. A total of 236 were issued for Monday with JP Morgan being the big kid on the sell side once again. I should note that there are almost evenly split between issuing silver for clients as well as for their own account. Barclays is once again the big stopper along with Prudential coming in second. Both of those firms apparently have clients who want to own the physical metal.

There has been a total of 1,383 contracts issued and stopped this month with 632 contracts remaining open in the March. I should also note here that the March contract remains at a one cent premium to the May. That is noteworthy.

Long Bond a Casualty of Fedspeak

A very slight upward revision to 4th quarter GDP along with "hawkish" talk by select FOMC governors may be pushing the Dollar higher but it is not helping the US bond market on the long end of the curve.

It has dropped back within the former trading range or congestion zone that was once in place dating as far back to December of last year. You will recall that the long bond had broken out of this range to the downside in early February only to rise, Phoenix-like, from the flames by the surge in crude oil prices as unrest spread across MENA as well as events in Japan.

Since that time however, the bonds have been steadily moving lower. Keep in mind that Bill Gross of PIMCO, who sold his Treasuries because he felt yield was way too low, is undoubtedly being copied by many others. There are also many commentators and analysts rightly asking the question - "once the Fed supposedly stops buying all these Treasuries at the end of June, just who is going to step up and buy all of this US debt especially at these low yields".

While the Fed mouths may be talking up the Dollar and talking down Gold, they also are risking a rise in yields on the long end of the curve. No doubt this is not good news for the beleagured real estate market.

Federal Reserve Officials talking the Dollar up - Gold down on Cue

It is no secret to those attuned to market action that the US Dollar's technical chart picture is horrendous. It had broken through a critical support level near 77 on the USDX last week and had further descended down towards the tremendously important 75 level. No matter what appeared to be happening in the world, the US Dollar could not get much if any of a safe haven bounce.

Currency traders had been moving to the Swiss Franc as their choice of a safe haven. The Aussie has been making new highs and the Canadian Dollar has been very strong as well.

Now, it is also obvious that the US would dearly love to see the Dollar stay weak to help it deal with its massive debt load but the ugly truth is that the Dollar was on course for a major crisis if it violated the 75 level.

Enter the Fed officials today and yesterday. Apparently the strategy was to get several of the FOMC governors to hit the airwaves talking about ending the QE program. Since it is QE that has been partly responsible for Dollar weakness - along with the abysmal fiscal condition of the nation - something had to be done to prevent a Dollar crash. This is the reason we are getting a sudden rash of Fed officials looking for microphones and venues to talk about ending QE.

Result? Up goes the Dollar and down goes the precious metals market. Coincidence? I hardly think so. If you understand what I wrote earlier this week explaining the antagonism of Western Central Bankers against gold, then you can easily understand that its rise to a new all time high is testifying against the steady debauchment of the US currency by the Federal Reserve.

As a kicker, they also manage to further knock down the Japanese Yen saving themselves and the rest of their pals at the G7 from having to actually pay to undergo another round of currency intervention.

You have just witnessed a shrewdly hidden round of verbal intervention camoflauged as normal policy discussions.

China will be Buying all Dips in Gold

From Dow Jones

1028 GMT [Dow Jones] Comments from the People's Bank of China, saying gold
prices are likely to remain high in 2011, are the most positive made by the
central bank in a long time, says UBS analyst Edel Tully. "PBoC [also] talks
down the prospects of the dollar and euro. So on the face of it, they appear to
feel limited by the available 'value preservation' options," Tully says. Says
this marks an attitude shift in favor of gold as an alternative currency, and
"signifies the most visible upward shift in sentiment by the PBoC in quite some
time, and in turn, a bullish flag for elevated gold prices this year."

DJ China PBOC: See Risk Of "Competitive Devaluation" By Developed Countries

Fri Mar 25 04:41:20 2011 EDT

BEIJING (Dow Jones)--China's central bank said Friday it sees a risk of
"competitive devaluations" by developed countries with high unemployment rates,
as well as a risk that the euro-zone debt crisis will spread further this year.

  At the same time, there are still relatively large risks of inflation and
asset bubbles in emerging markets, the People's Bank of China's Shanghai
headquarters said in its annual report on international financial markets.

  The U.S. dollar is likely to trend weaker overall this year, although
continued euro-zone sovereign debt risks and "regional political risks" may
result in periodic strength for the U.S. unit, the PBOC said.

  The PBOC said it expects global commodity prices to remain high in 2011,
especially oil and grain prices.

  Gold prices are also likely to remain high, although the downside risk to
gold prices can't be ignored, the PBOC said.

  -By China Bureau, Dow Jones Newswires;

Please pass the Kool-Aid

Yes sir - there is absolutely NO CONNECTION whatsoever between rising prices, a soaring stock market and Quantitative Easing. It's all the weather, those nasty protests and unrest across MENA and the terrific housing and labor markets.

Oh, and one more thing - there is no inflation as a result of QE - it is just the fact that there are rising commodity prices???????

I don't know which is worse - the outright distortion and spin or the fact that these guys get paid a salary for vomiting out this sort of repulsive nonsense.

Keep in mind that it was Bernanke himself who when announcing the justification behind the second round of QE stated that it was necessary to produce inflation in the economy and fend off deflation.

DJ Fed's Lockhart: Bond-Buying Program Not Boosting Inflation
By Alan Zibel


  FORT MYERS, Fla. (Dow Jones)-- Federal Reserve Bank of Atlanta President
Dennis Lockhart said Friday that the Federal Reserve's $600 billion bond-buying
program has not resulted in rising prices.

  Projections of inflation directly stemming from the Fed program that's due to
wrap up in June, "really haven't materialized." Instead, he said higher costs
for food and energy in recent months have been the result of turmoil in the
Middle East and rising commodity prices.

Consumers' expectations of higher prices are rising in the short term, he

  "When you see your money clicking away at the pump, it makes an impression,"
Lockhart said in response to a question at a business conference at Florida
Gulf Coast University. Long-term inflation expectations remain stable, he said.

  The Fed is currently embarked upon a second round of asset purchases that was
announced in early November and is set to be complete in June.