"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


Thursday, July 10, 2014

Foreign Central Bank Buying of Treasuries Rising

Much has been made at the usual sites about Foreign Central Banks supposedly not buying US Treasuries. One has to always take these claims with a good dose of skepticism.

Here is an updated chart of the Custodial Holdings of US Treasuries by Foreign Central Banks. As you can see, after plunging lower in March of this year  ( remember this was the result - so we were confidently told  of Russia selling its Treasuries which supposedly heralded the end of the Dollar), Treasury buying has picked back up considerably.

Treasury holdings at the beginning of this year were near $2.997 TRILLION. As of today, they are currently at 2.981 TRILLION. That is down $16 billion on the year thus far. Not much when all things are considered.

It is going to be most revealing when we finally get the updated Treasury International Capital flows data for the month of June ( we will get that in August, next month) so that we can get a look into how the  Treasury Department moves the allocation of Treasury holdings to the source nation instead of the intermediary nation.

Cattle Break Lower; Demand Fears

Regular readers of the site will recall that I have been commenting on the rise in the price of beef this spring and summer. The reason goes back to the back to back drought years of 2011 and 2012 during which times pastures burned up and died while corn prices shot to all time highs near $8.00/bushel.

Ranchers unable to locate reasonably priced feed, had no choice but to liquidate herds. We saw the impact from that herd culling in 2013 and it has continued into 2014 as heifers are retained for breeding purposes.

The shortage of cattle has pushed wholesale prices ( and by consequence retail prices ) to all time highs. Anyone who has picked up some beef lately at the grocery store knows all too well what I am speaking of.

The old adage however that the "best cure for high prices is high prices" seems to be kicking in when it comes to beef and then to cattle. Consumers are reacting to record high prices by cutting back on expensive cuts of beef, instead opting for cheaper cuts when possible. Substitutes such as pork and chicken remain very expensive as well.

Eventually the high prices begin to choke off demand. We are approaching points at the wholesale levels where many traders fear that we are now meaningfully impacting the demand side of the ledger.

Cattle prices have sold off sharply the last two days. The October contract has lost nearly 550 points during that time span.

In looking at the chart, the trend high has been interrupted as a result of the sharp selloff. The turn lower on the ADX tells us that. Also, the -DMI line has crossed over the +DMI line for the first time since late April of this year. Momentum is also pointed lower.

As you can see by looking at the sloping trendline on the price chart, cattle could fall another 500 points or so and technically remain in an uptrend so it is too early to count them out just yet. That being said, the bears have finally seized some short term control of the market. The onus is now firmly on the bulls to perform here to prove otherwise.

There is some good news in this for the consumer however. I have made a point of stating that I believe we will see some relief from record high beef and pork prices later this year and certainly by early next year. The market is looking ahead and is pricing in some of that discounting. Our next July 4th bar-b-q shin-dig will cost us a bit less for the meat, that is for sure.

Cattle producers, at least those who have cattle to sell, have had an incredible run this spring and summer. Record high prices, prices which quite frankly I never expected to ever see in cattle country, were paid for their finished animals. After suffering immensely in 2011 and 2012, cattle ranchers have gotten some long overdue and well deserved profits. Good for them!

Depending on what kind of numbers we get from the USDA, and what kind of weather we get for the rest of the growing season here in the corn belt, their feed costs will stay low for some time. Pastures remain in excellent condition. Good news for them and ultimately for the consumer.

Selling Hits Gold Late in Session; Miners hit hard

It did not take long for the longs in the gold mining sector to start a wave of profit taking. That came in when the mining indices could not extend their early-in-the-session gains. As a matter of fact, the opening print on many issues was the high for the day, or very near the high of the day. From that point forward, the shares drifted lower most of the session until they began to accelerate lower during the last hour of trading.

The result is a SHORT-TERM sell signal on the price chart although no major damage has been done to the uptrend at this point.

As long as this particular index holds near the 43 level, the retreat in price will be seen as a correction in an ongoing move higher. Just like this index did late last month, it could be merely pausing to gather its breath while it undergoes some consolidation of its recent gains. One would not want to see the index fall below 40 however if they are inclined to be bullish. That would shift the momentum back in favor of the bears.

The HUI on the other hand, just missed putting in what is termed a "Bearish Engulfing Pattern". It was only the appearance of some buying right near the closing bell that prevented the full formation from occurring. That being said, the near term price action is bearish.

I did not note it on the chart but there is a price gap coming in near and just below the 240 level. that might be a place to look for some buying support in the various shares that make up this index. Failing there, the index will look to try to hold above 232. If that fails, then we go to the gap region noted. Bulls will now need to extend prices past today's high to regain their advantage.

Economic Jitters out of Europe, Geopolitical events supporting gold

Iraq turmoil; Portugal turmoil; Israel turmoil; Ukraine turmoil - add them all together and you get a higher gold price. The flip side is lower equities. Translation - safe havens plays are in vogue. How do we know this? If you guessed the Japanese Yen is trading higher, go to the head of the class.

I will have to keep these comments brief as I have my hands full with the livestock markets today. For now, something that stands out to me is continued weakness across the commodity indices such as the Goldman Sachs Commodity Index.

Look at the plunge across the sector. The index is now at a three month low. Oddly enough, copper prices are firm today. I have no explanation for that one. This is spite of the fact that the dollar is benefitting from fears arising around the Portugal situation which has undercut the Euro.

My grain index hit a 31 month low today. By the way, both the October cattle and the October hog contract hit limit down today during the session although neither remained there.

I bring this up because based on the general fall in commodity prices that we are seeing, I remain somewhat cautious about the lasting ability of the current gold rally. The charts are very much improved on gold however and for now, that is all that matters.

Gold has managed to clear overhead resistance noted on the chart, a level which had successfully stymied it for almost three weeks now. The next level that it should have to contend with begins up near $1355 and extends just past the $1360 level. There is some light resistance showing up near $1340.

One of the indicators that I use reflects some negative or bearish divergence, suggesting upward momentum is waning but that is not unusual to see when a market has been trading sideways around a resistance zone as gold has been doing. I am monitoring it however as I would prefer to see it confirm the move higher by pushing to a fresh peak, or at the very least, reaching the previous peak reading.

The ADX continues to rise but remains below 30, a level that I generally look for when attempting to see whether markets have entered a trending phase. I get the distinct impression when watching the price action that this move is one being driven by shorts who are reluctantly exiting their positions ( buying them back). As of yet, based on the volume readings and general price action, there still looks like there remains a great number of skeptics about the current rally. The push through $1334 this morning nailed the overhead buy stops and fired them off generating a great deal of activity but since the time that those stops were taken out, volume has been lackluster.

Bulls have a good shot here at generating some further excitement if they can reach $1360 and surmount it. They might be able to pull this off if the notion that the shaky conditions existing in that bank in Portugal (Banco Espirito Santo) are going to spread further among other European-based banks and possibly precipitate some sort of bond buying program by the ECB.

Euro gold in particular seems very strong as a result of this thinking ( call it contagion fears). It is right into the resistance level noted on the chart near 985 and looks strong. Depending on how things go over in the Eurozone, it looks well-positioned for a try at 1000 Euro. That is a big psychological number.

I should also note here that the big gold ETF, GLD, reported holdings at 800 tons yesterday. That is very promising as one wants to see this key sentiment indicator moving upside along rising gold prices.

The junior miners as evidenced by the GDXJ look strong on the charts as they gapped above resistance this morning which is bullish but have encountered nothing but selling pressure since. If this index can close through 46, it would portend a push towards the next level of resistance near 48.

There is a type of flag formation on the chart ( It is not a classic one but similar) which suggests as a potential target a move all the way to the 52 level. Obviously bulls would need to clear 48 for a shot at that. The recent consolidation that occurred the last two weeks of June looks healthy in hindsight as the run higher was too far, too fast prior to that. Traders wanted to take a breather and survey the scene before getting too aggressive. Once again they are now into an area on the charts where it looks as if they want to pause once more. We'll see what we get to end the session today but especially to end the week tomorrow.

We have a big USDA report due out at 11:00AM CDT tomorrow which could send some further excitement into the grain markets. I will get some info on that report up sometime tomorrow. Grains have been anticipating a bearish report heading into the release. One thing I can tell you with certainty, livestock producers are very happy right now with these lower input costs. So too are the poultry guys, although rooster fertility issues are being noted through that industry.

Crude Oil, which succumbed to that long liquidation that some of us were concerned about, looks like it might be trying to find its footing down here. The jury is still out on that however but it is holding together pretty well after the recent beating it has taken.