"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, May 11, 2012

Silver Chart and Comments

Silver continues to be the poor poster child for the Deflation or Risk Aversion Trade. It's chart is abysmal at this point as it has steadily retreated since peaking near $50 in what seems a lifetime ago. About the only positive thing that can be said about it is that is had not been below the $26 level for some time now. That level still seems to be bringing in buyers.

Unless something changes rather drastically over the next week, it looks like it is going to once again test the resolve of those buyers that have been busy down there. If it holds, fine; if not, it would get rather ugly for silver.

One thing about it is that it has already seen a rather large exodus of speculative money from the long side of the market. It will take fresh short selling to break it down below $26 therefore. The key question is when will the market psychology shift away from deflation back to inflation? My view is that it will not UNLESS and UNTIL the monetary authorities give a credible hint that the QE punch bowl is going to be brought out soon.

Things are getting downright Dicey

Take a look at the following charts and you will perhaps see what is making me extremely nervous.

The first is the Continuous Commodity Index or CCI. It just today made a 19 month low and is back at levels last seen in October 2010. While the long term macro trend is decidedly higher, the intermediate term trend is extremely bearish. The market is basically signally deflation across a host of tangible assets.

Note that the index has crashed through the first level of Fibonacci support near the 550 level. It is now solidly beneath that level and looks like it is headed down to test the CRITICAL 50% or HALFWAY RETRACEMENT LEVEL near 506. If that cannot stop its descent, it is going to 450, the level last seen when QE I was winding down and there was not as of then, any clear conviction that QE II was in the works. It was only when market participants became convinced that QE II was a certainty, that this index bottomed out as the move into tangibles in association with the anticipation of a weaker US Dollar was then undertaken.

In the last two weeks alone we have seen crude oil prices drop $8.00 barrel. This week cotton prices dropped nearly $10.00. Perhaps even more stunning is the plunge in soybean prices, especially coming on the heels of a wildly bullish report out of the USDA yesterday. Those gains not only evaporated in today's session but the losses were so large that the market fell below its 50 day moving average for the first time since January of this year. Hedge funds seemed to be selling almost everything in sight, no matter what the particular fundamentals are for any individual market. They have been devastating sugar, which is now priced at levels last seen in that market all the way back into September 2010.

While this may be great news for the shopping consumer, I have to wonder if the Fed is getting increasingly nervous as this plunge across a host of risk or growth assets is taking place with the backdrop of plunging interest rates and a shaky stock market, which is only being propped up by official sector shenanigans originating out of the ESF.

Market reports are denoting large bullish option bets in the Ten Years Futures (rising note prices means lower interest rates) with the implied level of yield to hit 1.4% or lower this summer. In other words, DEFLATION SCARES ARE BACK AND IN A MAJOR WAY.

This is the nightmare that the monetary authorities dread and why I believe that the market is going to force their hand. No matter what they may fear about any political implications or backlash, they are going to have ZERO CHOICE and will be forced to act, that is unless they want to sit idly by while the equity markets implode on them.

As I scribble this commentary, I am noting that the ENGINEERED RALLY in the S&P 500 futures pit is fading as that index has now moved back into negative territory for the day. I get the distinct impression that while the Fed, Treasury and ESF are trying to prop this market up and get the computer algorithms to enter buy orders, traders are using the pops higher to unload. Keep in mind that this market has come a long way this year and is still loaded with a great deal of speculative longs. All of those longs are being guided by the technicals right now and if the monetary authorities cannot prop this thing up above the 1350 level by the time the closing bell rings, look out next week. Let's see what they can do with it. Welcome to the brave new world of managed markets.