"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 9, 2014

Draghi Wreaks Havoc on the Euro

I might add to the title the following words, " By Design".

ECB President Mario Draghi, apparently was feeling the heat from Eurozone manufacturing interests, exporters and some politicians, all of whom have been complaining and moaning about the relative strength of the Euro.

It was apparent that his remarks yesterday were designed to try to do something about that and judging from subsequent market price action, it worked!

The Euro fell from up near 1.40 ( a key level in my view that they will not tolerate ) all the way to down below 1.375. That is a drop of nearly 2% in the currency in two days' time. Not bad for a few minutes of speaking! 

I honestly could not handle power like that. I would run around my yard commanding it to mow itself and my flowerbeds to weed themselves if I had that kind of control over stuff! I would also command the tires of the cars that keep speeding through my neighborhood to go flat.

Seriously, look at the chart and the damage that Draghi was able to inflict on the Euro. He flipped the ADX indicator into a bearish mode and while not yet able to get the currency to trend lower, he managed to turn the ADX line higher. That will need to be watched because, IF THE EURO CANNOT HOLD CHART SUPPORT, and this is a big if, we might have just seen the high in this currency for some time. Again, I am not sure but am certainly watching this closely mainly because of the heavy weighting of the Euro in the USDX index.

COT Report for Gold

This week's Commitment of Traders report from the CFTC for gold, shows that last Friday's plunge resulting from the surprisingly strong payrolls number, which was promptly erased within a minute when news about a downed helicopter in Ukraine hit the wires, was the result of a rash of hedge fund buying. They added around 12,500 new long positions and only covered a bit less than 400 existing shorts. I suspected we would see more short covering on their part but that did not occur, at least not through Tuesday of this week.

What did occur however was that the spreaders had a field day piling on nearly 15,000 new spreads as I suspected these guys were up to something with that bizarre price action last Friday.

What has also caught my eye is the rather rapid build in new short positions being established by the commercials and swap dealer category. They have wasted no time using the geopolitically-induced bounce in the metal to sell it as it approached $1310 and slightly above that level.

It has been fascinating for me to watch has been the stubborn bullishness of the speculative community in the face of a deteriorating chart pattern. Specs refuse to give up the ghost on the near-permanent bullish sentiment which has characterized this gold market for some time now. This is what concerns me as gold drifts ever lower to that $1280 support level.

The events in Ukraine continue to engender speculative buying in the market but the fact that we have so many in the spec camp remaining bullish with a market that continues to flirt with major chart support is rather unnerving.

I want to emphasize that the POTENTIAL, for a sharp sell off exists in gold if that level gives way. I am not forecasting anything but merely examining the sentiment in this market. Bulls have all their hopes pinned on the ability of gold to hold above $1280 on a closing basis. Ukraine continues to bail them out but with the ETF, GLD, continuing to bleed out gold, I have to wonder how long Ukranian events are going to be able to prevent a breach of chart support. That plus the fact that the HUI ( mining shares ) show very little if any buying enthusiasm at the moment makes me nervous when it comes to the ability of this market to remain above that chart support level. If I could see either a sharp jump in the ETF reported holdings and/or a sharper rise in the HUI breaking out of its range to the upside, I would have a different view. So far we are not seeing either of those occurrences.

For the last seven weeks, the HUI has essentially gone nowhere. It is stuck in a range with the top up near 235 or so and the bottom near 215. The ADX shows a trendless market ( ranging ) with the bears having a slight edge due mainly to this week's poor showing in the mining sector.

"So far, so good",  has thus been the message coming from the gold bulls but that can also be said of the guy plunging off of a 100 story building as he passes each new floor on the way down, " So far, so good", until he reaches the bottom and we all know what happens then.

In spite of all this, I want to continue to emphasize that while this COT report is making for some interesting reading, it has very little value as far as anything predictive at this point because gold is almost totally at the mercy of Ukranian events and no one knows how those things are going to develop or what form such a development might even take. We simply do not know and thus the reason for the very nervous gold trade right now. Until we get some sort of resolution to that crisis, gold should continue to garner some buying support. But just as that is true, so is it also true that many large traders are looking at rallies in gold as selling opportunities. Their focus is here on the US and that means they are looking at the withdrawal of the QE and eventually rising interest rates are bearish headwinds for gold. The market is thus stalemated between those two forces for the moment.

As to which force will gain the upper hand, it is unclear. I have no idea and truth be told, no one else does either. Anyone who claims that they do is full of BS unless of course they have a private line straight to the heavens and can discern the future before the rest of we mere mortals can. That means we sit and wait and watch the price action and go from there. Ukraine flares up = gold goes up. Ukraine abates - gold goes down.

Pick a flower petal or roll the dice - the end result is the same - you are just guessing, not trading.

Ignore the price predictions and the dipsticks which feel compelled to constantly make them. Listen to the market and you will be just fine.

By the way, old crop May beans managed to end the session above the $15 level. Traders are focused on that 130 million bushel carryover number. However, beans at these levels have heretofore managed to crimp demand so we will see just how long they can stay up here. With May in its delivery process, we'll see how many beans show up for tendering and who stops them.

Both corn and wheat stayed sharply lower and closed down sharply lower as well. Some of the pressure on wheat was tied to the weather forecasts for some rain in the parched Plains. The corn number was a shockers and has cast a bearish pall over that market for the time being. It should be kept in mind however that we do not yet even have the crop in the ground yet so a lot can happen between now and the final harvest that could drastically alter the supply scenario for corn.

Suffice it to say, good weather this growing season is going to act as a real damper on corn prices and that is a good thing for livestock producers and poultry guys. Unfortunately the ethanol lobby will still be around to gobble up way too much corn as far as I am concerned. I know my corn-growing farmer buddies love that stuff but I also have friends in the cattle/hog business and they hate it. At least we get DDG's so it is not a total loss but still, the idea of burning our food in a gas tank to appease a bunch of global warming alarmists is nauseating to me.

Spurs are up 2- 0 in the Portland series... way to go San Antonio!

USDA Report Day

It finally arrived. USDA gave us their Supply/Demand numbers this morning as well as the Planted/Harvested estimates. The grains and beans wasted no time careening wildly as soon as the numbers hit.

Old crop beans were the beneficiaries of another cut in ending stocks to 130 million bushels. However, new crop carryover was raised to a whopping 330 million bushels. USDA raised expected global production from 283.79 million metric tons for 2013-2014 to 299.82 million metric tons for the 14-15 production period. They are penciling in another huge Brazilian crop. Between expected bean production both here in the US and in S. America, the tightness in soybean supplies looks to be winding down. The higher prices have worked their magic by increasing acreage heading to beans.

Total bean production for this coming year is expected to be 3.635 billion bushels - that is just huge. USDA is projecting a yield of 45.2 bushels per acre compared to last year's 43.3.

Crush is to be raised to 1.72 billion bushels from 1.695 billion. Exports are anticipated to increase to 1.625 billion bushels from 1.600 billion.

The big increase in expected acreage and decent yields will leave carryover at plentiful levels.

Corn carryover for 2014-2015 is expected to come in a 1.726 billion bushels, up from 1.146 billion for 13-14. USDA is projecting a yield of 165.3 bushels/acre up from last year's 158.8. The end result is another record corn crop of some 13.935 billion bushels compared to last year's 13.925 billion. That number caught a lot of traders by surprise.

USDA cut exports from 1.9 billion bushels to 1.7 billion bushels Feed usage was cut from 5.3 billion bushels to 5.25 billion.

Global corn production is not expected to increase much as USDA sees 2014-2015 coming in at 979.08 million metric tons, up from 979.02 million metric tons in the 2013-2014 period.

US corn acreage is expected at 91.69 million acres, down from 95.36 million last year. Bean acreage is expected to jump to 81.49 million acres from last year's 76.53 million. That could change even more yet if corn planting is delayed. That does not look to be the case however as the weather forecasts are showing a decent planting window next week for now.

That nearly 5 million acre increase in beans from last year is what the USDA is focusing on and counting on to ramp up the carryover. Traders are aware of the current tight stocks situation but that looks like it is going to fade in importance as S. American cargoes make their way here, not to mention Canadian shipments. Everything now depends on the growing weather for this upcoming season. Hopefully farmers will get some good weather and some nice crop yields.

Wheat planted acreage is expected slightly higher this year at 56.16 million acres compared to last year's 55.82 million.

USDA did cut wheat carryover for 14-15 down to 540 million bushels from the current 583 million bushels. They lowered expected global production to 697 million metric tons, which is down rather significantly from the 2013-2014 season's 714 million metric tons. The bulk of that cut is coming from Canada with Australia's expected production also contributing somewhat to the smaller number as that was lowered by 1.5 million metric tons. I am not quite sure what is behind the sharp drop in expected Canadian wheat production of some 9 million metric tons at this point. I will see what I can find out.

I want to see how the dust settles in the grains before reading too much into the market price movement right now. These USDA reports are notorious for engendering wild swings in price during the session but the key to me will be how they close today. Right now corn is getting beaten with an ugly stick, especially new crop. There are a boat load of hedge funds sitting on the long side of the corn market so this reaction in price needs to be closely monitored.

Hog producers - keep a close eye on this corn move because you might be able to start securing some feed coverage in addition to some hedge coverage of expected 4th quarter production. I keep saying this but you have incredible, once in a lifetime type profits with 4th quarter hogs and now that corn is moving lower, the opportunity is increasing. Be careful not to let your emotions guide you but do your math, check your margins and secure at least some partial coverage.

Shifting over to gold for the moment -

Once again gold bulls dodged a bullet as that market shifted focus back onto the events in Ukraine. Russian President Putin seemed to make an effort to ease tensions there yesterday but some elements of the Pro-Russian ( Separatists ) apparently are intent on holding that election later this month. Just today, Ukranian police and security forces announced that they had killed 20 separatists in some fairly severe fighting in the eastern provinces. That obviously does nothing to de-escalate the situation.

It is almost as if the gold bulls have some "friends" over in the Ukraine who fire off some bullets whenever the market begins to sink into an important chart support level. It seems to spook traders just enough to keep them from pressing it on the downside and back up it floats. I am obviously being facetious here but the main point is that this Ukraine mess is muddying the waters when it comes to gold for the time being and is a wild card that needs to be accounted for when ascertaining what is behind the various swings in price. Personally I hate trading geopolitically motivated market movements because they creating way too much uncertainty and confusion. Most of us traders prefer more well-behaved markets ( those can at times be hard to find ).

Either way, traders are once again covering some shorts ahead of the weekend, just in case. That seems to be the pattern that is developing now on Fridays. As long as the market is unsure of how things over there are going to play out, gold is continuing to hold above chart support levels.

That being said, the gold miners, based on the HUI chart, are acting heavy. That index is perched right above a key chart support level between 215 - 218. They are not collapsing but neither can they seem to hold rallies. With the giant ETF, GLD,  continuing to report holdings near 5 year lows, it is evident that investment demand for gold and gold-related things is waning. Traders/investors are looking past current events in Ukraine and focusing more and more it seems on the POTENTIAL for eventual rising interest rates.

That is not the case however for the bond market at the moment which has levitated higher up to around the 136 level. A combination of shaky equity market action of late, in conjunction with some safe haven related purchases, has put a surprisingly firm bid into the market. The yield on the Ten Year is sitting near 2.60%  ( 2.618) as I type these comments. That is well off the peak near 3.0% that occurred at the beginning of the year. That tells me that the market is not the least bit worried about inflation for the moment. If anything, the opposite seems true. I find that odd considering all the talk about an improving economy.

Some of this can be attributed to the Fed's forward guidance of no interest rate hikes until sometime in 2015-2016. The market is generally interpreting that to mean around a year or so from now, around the summer of next year. Subsequent economic data releases are going to be very closely scrutinized to say the least, especially the payrolls numbers each month.

Along this line, the Fed announced today that it was going to be ramping up the testing of what is called its, "deposit facility". Each Monday, beginning May 19, it is going to be running tests. According to Dow Jones, the first four tests will see it accept $10 billion in 7-day deposits from banks at interest rates of 0.26%. It will then increase the rate it pays on these deposits gradually to 0.30%.

This facility is one of the means it intends to use to drain excess liquidity from the system.

I mention this because once this process occurs, gold is going to encounter more resistance in the form of headwinds. While some can argue that the economy is too weak for the Fed to be actually draining liquidity ( in contrast to the current lessening of liquidity injections ), thus far the Fed has been rather clear about their intentions and have been making good on those. Fighting the Central Bank is not a winning proposition for investors/traders. We'll continue to monitor these developments. I do wish to repeat that DRAINING liquidity, is at this point, a way's off. We have not yet done with QE; when we do, then we can talk about the actual draining process.

I threw up a quick post of the Euro in yesterday's comments after ECB head Mario Draghi came out to "talk it down". Traders whacked it pretty hard yesterday and continued spanking it on today's session thumping it right through the first level of chart support near 1.38. Thus far it is holding near secondary support in the vicinity of 1.375, but even that looks shaky. That has sent the Dollar soaring back towards the 80 level basis USDX, which makes gold's reluctance to drop further even more interesting as it is fairly evident that Ukraine tensions are holding it up.

Currently old crop beans are being supported, new crop beans are lower, with both old crop and new crop corn lower. I am a bit leery about the strength in old crop beans given today's numbers for the upcoming season. Traders seem to be focused on that cut in old crop carryover but are apparently not taking into account further potential cuts in usage as these sky high bean prices are beginning to crimp demand.

Wheat is slightly lower but KC is holding better than Chicago. Traders are watching rain forecasts for the plains but are still hesistant to become aggressive sellers as no one is sure quite how widespread expected rainfall might be.

I will get some charts up later... it is a very busy day over here right now.