"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, February 7, 2014

Weak Payrolls Number spurs Commodity Buying

Traders were holding their breath to see whether or not today's expected Payrolls number was going to confirm last month's number as a one-off or whether we would get yet another abysmal reading. We got the latter.

Immediately talk of the Fed going on hold for any further tapering emerged and with it, down went the US Dollar along with Treasury yields. The result - hot money poured into equities and strangely enough, into commodities.

Watching crude oil shoot over $100 barrel ( basis WTI) was rather entertaining to say the least given the general weakness across the global economy, not to mention that lackluster US jobs reading. Apparently that is a good reason to take the price higher for what else does a struggling economy need to mend its woes if not more expensive energy costs for all involved? Yes sir - makes perfect sense to me. Hell, they even pushed copper prices higher. Go figure!

Gasoline prices shot up over $0.07/ gallon at one point.

It seems to me, and I am at a loss to explain it to be perfectly honest, hedgies are in the process of covering shorts across a large number of commodity markets and going long. While I do not attribute all of these price rises in the sector to the Tapering issue as some of this is due to hot, dry weather in a certain area of Brazil, I do not understand the thinking behind this stampede into the sector. This looks like the usual lemming-like reaction to the idea that the Fed will be reluctant to taper thus providing more downside pressure on the US Dollar which in turn will feed through in higher prices for commodities due to currency weakness.

We have been down this road before and have seen that Fed bond buying programs have not resulted in that liquidity making its way into the broader economy but I suppose old habits die hard. For now, any talk of a cease or a halt in Fed bond buying is translating into higher commodity prices as it serves to undercut the Dollar.

Equities? they are back to loving BAD NEWS as being good news for higher stock prices. Just look at the S&P 500 which completely erased this week's early losses when emerging market concerns took front and center. Another rotten jobs number and presto! - off go stocks to the races once again. More and more we see this disconnect between Wall Street and Main Street.

Why just this week the CBO served notice that the grossly named, Affordable Care Act ( sounds like something out of Orwell's works), is going to end up costing at a bare minimum another 2.5 million American jobs. Yet somehow this is greeted with applause by stocks! One does not know whether to laugh at such madness or weep.

We are back to living in an upside down world in which the worse the news get, the better stock prices do and the higher commodity prices go. I come from a world in which the last thing needed by struggling consumers with stagnant wages is a rise in the cost of necessary items such as food and energy. And yet that is precisely what we are getting once again. At least the past year we saw gasoline prices drop lower giving some much needed relief at the pump for battered consumers. Now, thanks to hedge fund activity, gasoline prices are moving higher again as crude pushes past $100 barrel.

Hopefully some of this is tied to the spell of severely cold weather which is boosting demand for heating oil and drawing down crude stocks, but rising gasoline prices are not the least bit stimulative in nature if you are hoping to see an economic recovery occur.

From a technical analysis standpoint, the hedge fund computers are now back to buying across the sector again and those guys will buy and buy and buy until the market stops going higher. Then they will sell and sell and sell until the market stops going lower at which time they will reverse and go back to buying and buying and buying. Get the picture yet? There is no thinking - there is just computers reacting to movements in price. That is why trying to come up with explanations at times as to why prices are doing what they are doing is an enormous waste of time and mental energy. The machines are driving the market around - that is all one needs to know. Sometimes there is a underpinning fundamental reality to the movement in price caused by these distorting computers. Many times there is not.

This brings me to the US Dollar. You can see on the chart that it declined from last summer and continued into late fall when it rebounded higher and broke its downtrending pattern. It ran towards 81.40 where it was unable to move any higher and subsequently retreated lower. It did however make a higher low and thus began to undergo a gradual increase in price  which can be seen delineated by the price channel that has formed.

It is effectively unchanged since its start-of-the-year levels but has been declining for most of this month of February this month. As it has weakened, commodity prices have strengthened and so too has gold. Gold has not been able to mount a clear, sustained breach of upside resistance in the same fashion that the Dollar has not managed a clear, sustained breach of downside support.

Where this goes is anyone's guess right now but suffice it to say that many commodity markets are now entering those kind of patterns that are notorious for whipsawing traders mercilessly. Trending markets are bread and butter for traders - sideways markets can be notorious. That is what we are now getting in quite a few commodity markets. Downtrends have been halted with large bouts of short-covering but many of these markets do not possess bullish enough fundamentals to drive them into strong uptrending bull moves. The result is wild swings in price which can completely erase the previous day's move in price and then some only to reverse again on the third day.

Those of you who might doubt this need only look at Coffee and Natural Gas. One either needs to be particularly brave (or really stupid) to take large positions in markets behaving in such ruthless fashion. Truth be told markets moving into those sorts of patterns are graveyards for would-be professional traders. STay out of them or trade them very small in size! Forget about how much you can make - worry more about how much you are going to lose.

As far as gold and silver both go - they are being supported by this weaker Dollar/hold in Tapering stuff. Emerging market concerns are also aiding gold while serving to undercut silver strength. There was some chatter that the return of Chinese traders from the Lunar New Year celebration would bring back copper demand ( and silver ) but Chinese economic data has been relatively weak and that, so far, is muting any buying.

Silver has managed to stick its head up again above the $20 level after holding down near $19 ( once again). We'll see if can do anything next week or if it just drops lower and goes back to the bottom of the range.

Gold too remains rangebound as it nears the upper boundary of that pattern. The HUI cannot clear 225 and thus is not contributing much, if any, support to the metal.

I wonder if the famed February Break is yet to occur this year or if it came last month in January. It tends to be pretty reliable but getting the timing down can be tricky.  If it has yet to occur, we can expect to see selling pressure re-emerge across the commodity sector later this month.