"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


Tuesday, October 28, 2014

Consumer Confidence Reading Cheers Equity Bulls

The Conference Board released their Consumer Confidence numbers today and surprised a lot of us. The reading for October came in a 94.5, which according to Dow Jones, was the highest reading since 2007. Truth be told I find that number odd given the polling taking place ahead of next week's elections which show voters in a surly mood, the vast majority believing the country is on the wrong track. Trying to square those fairly consistent poll numbers with the Conference's Board happy face, is a feat that I must admit I have not been able to master.

Maybe the Conference Board asked about falling gasoline prices instead of overall consumer confidence? who knows.

For whatever the reason, stocks liked the number.

However, ahead of the FOMC release tomorrow, the sentiment seems to be while the Fed is going to end the QE program, it is going to stand pat on the interest rate front, essentially leaving short term ( and long term by consequence) rates near zero for some time.

Equities love that environment because quite frankly it makes them the only game in town for anyone who wants to earn more than a pittance on invested monies.

As many of you who regularly read here know by now, I have long expressed my disgust at what the Fed has done to senior citizens, those on fixed incomes and those looking for SAFE, CONSERVATIVE investment options as they approach their older years. Kiss that mostly goodbye, compliments of the Fed, which lives to service its master known as Wall Street, but more particularly, the big banks.

I do not know about some of you but I am filled with disdain when I see elderly friends and family members trying to navigate this bogged-filled financial morass that the Fed has deliberately chosen to create. Oh yes, they will tell us how such things are necessary for the sake of the overall economy. Perhaps that is true, perhaps not, but that is no consolation whatsoever to those who have earned some rest, and some peace and quiet in their golden years who are now forced into spending their afternoons sitting in front of the damned television set staring at one of the cable business channels and wondering if their money will still be there tomorrow.

Enough of my mini-rant for now... I am not going to spend any time commenting on gold since quite frankly it is a gigantic bore right now. It is waiting for the magic words from the FOMC anyway.

What is much more interesting, and much more havoc wreaking is what continues to take place in the grain markets, particularly the soybeans, which are doing things I cannot remember seeing in my trading career. By that I mean soaring in price in the face of one of the largest harvests on record.

What is driving this continues to be the meal - something I have been noting for some time here now. It still comes back to the same old, same ol' at this point - namely historically tight carryover stocks from the 2013-2104 crop year have left many end users/processors scrambling to secure enough beans to crush to meet demand for meal. Toss on top of that the fact that even some of the commercials were caught flat-footed by this squeeze and you have a perfect money flow storm. Shorts have gotten annihilated.

What is being reported is that farmers seeing the rally are becoming bulled up ( big mistake in my view) and are holding beans back hoping to get even higher prices. NOTE - it has been my experience that Farmers - as good as they are at growing crops - historically, and with great regularity, are consistently bullish at market tops and bearish at market bottoms. This is exacerbating nearby supply constraints as export commitments clash with the need for meal.

However, with the Real sinking to a six year low against the US Dollar, US meal prices, and bean prices, are no longer competitive on the global markets. I suspect we are going to soon be seeing export cancellations as a result. One cannot drive prices higher and higher and higher due to a TEMPORARY supply situation and not expect to produce an expected result - namely, high prices will ration demand. The problem is we are still sitting with a huge crop out there that needs to be moved and the last thing we are going to need is higher prices to move it!

Cash flush farmers from back in 2011-2012 farm prices used that money to build lots of shiny new, on-the-farm silos. They can hold the crop while they wait for higher prices, or so they think.

Personally I think that any farmer that is not using this meal-driven rally to price some of their new crop is nuts. The meal is pulling the entire grain floor higher but when it finally does top, and top it will, I fear that the entirety of the fund contingent which has been furiously buying, either covering existing shorts or chasing prices with new longs, are all going to head to the exits at the same time with no one to support this market on the way down.

the reason I feel so strongly about this is that this temporary tightness in the meal is not going to last indefinitely. It is a short-term phenomenon brought about by the combination of a small crop in 2013-2014 and a delay in the harvest of the 2014-2015 marketing year crop. However, based on what USDA reported yesterday - 70% of the total soybean crop has already been harvested. No matter how you cut it, slice it, dice it or scramble it, that is already a huge amount of beans. There might some areas in parts of the Eastern belt that experience some harvest delays but from what I am seeing at the moment, progress is going to continue into the weekend in general. 

Remember, there is still a lot of corn that needs to come in and find a home somewhere as well. Farmers have opted to let the corn stand and go after the beans first figuring that the sunny, though cooler and dry weather, will let it dry down some more anyway. But they are going to bring it in eventually and will need to put it somewhere. While they wait, the corn market seems to be keeping a bit of weather related premium in the corn for the moment.

Also, soymeal is not a stand alone entity - it does compete with DDG's.

My point in this is that when the grains finally exhaust this fund buying binge ( small specs have been destroyed by margin calls as well) and the bids start getting taken and absorbed as commercially-tied hedge pressure begins to ramp up in earnest, we should see some pretty severe moves in the grains.

One wild card in all this is the Brazilian weather for their planting season down there. It has been dry in some areas but timely rains are coming and look pretty good overall. That should remove some concerns associated with Brazil.

Shifting just briefly to crude oil - the black gold looks like it has found support near $80. It has made two trips down below that level on the chart in the last two weeks, but both times, it rebounded and CLOSED above $80. If, for any reason, crude oil CLOSES below $80, then look out. You would then see a very good likelihood of it falling to $77 and possibly even $75.

I am not sure how to take that to be honest. I can make the case that it would actually be friendly for the overall economy as lower energy prices always benefit consumers and some business entities. However, it could also feed into the notion that the economic strength is so weak, that more sluggish growth lies ahead. That would be negative towards more of the key commodities such as copper, which by the way, seemed to like the consumer confidence numbers or something today!

It was just a short two weeks ago that copper actually managed to close below the pivotal $3.00 mark. It did however recover the next day and managed to claw its way higher. Today, it just missed hitting $3.10. Copper looks to me to be carving out a trading range as I think one would be hard pressed to come up with a reason, or to point to any concrete data at this time, to justify any sort of sharp rally in the price of the red metal. Economic growth globally is just not strong enough.

Remember that Palladium chart I posted last week? Well, that metal has been essentially mirroring the price action in the copper. It has closed higher the last 8 days in the row, after bouncing off of the region near $740-$730. This is an industrialized metal that is very sensitive towards any slowdown in growth, much like copper, so one can read it and see that for the short term, investors seem to have put "growth" concerns on the back burner.

I guess so seeing that the VIX or Volatility Index is sinking once more. Back to "What, me worry?". We went from total fear two weeks ago to " I could care less". Astonishing - the entire business cycle has just been completed in half a month! Tell me that our financial markets have not become a nest of idiocy.