Link summary from my other blog

I had begun a new blog a few weeks ago while Globaltrader.blogspot.com was still unavailable for posting.  I plan to continue posting only on this blog now that it is restored but if it is removed by Google again I will return to that one.

Posts over the last few weeks had been:

• A look at some of the causes of the financial crisis and some thoughts on where the new regulations should focus.  This speech noted recently by Mark Thoma is also a good summary.  It is a bit odd that the US regulators still do not seem to acknowledge their role in the crisis.  
• China's position on the yuan.  The story is changing a bit with China's economy apparently shifting to domestic consumption without any currency adjustment but my conclusion is still the same.
• A news summary for the last full week in March. 
• Another summary focusing on mortgage delinquencies.  The note on yields possibly reaching a peak still holds with bonds trading strong last week and likely to benefit from continued Goldman / financial regulation fall out in equities.
• I celebrated the reappearance of Global Trader's Diary by looking up an old discussion on Fed policy and whether it was leading to distortions in the markets and underlying economy.  While not exactly predicting the crisis, it was fair to say many people saw the highly leveraged environment as ripe for catastrophe.  Naming GM, AIG, and FNM in 2005 as trouble spots, was a reflection of consensus among financial professionals and not due to any personal insight.  How were these problems allowed to fester until 2008?  I would give myself poor marks in estimating the timing of debt problems but I think the Fed failed in its dual mandate to maintain maximum employment.   A less leveraged economy in 2005 would almost certainly have led to an earlier adjustment of US saving rates and consumption patterns leading to a smaller shock to employment.
• Another update on mortgage delinquencies as Equifax data contradicted the city by city delinquency rates from CoreLogic. 

Steel: Oh, How the Mighty have Fallen

From the FT:

The world's biggest steelmaker tried to calm markets on Tuesday as falling prices and profit warnings fuelled fears that the steel cycle had taken a turn for the worse.

Lakshmi Mittal, chief executive of Mittal Steel, blamed recent industry weakness on short-term factors such as the persistence of excess stocks that built up last year when customers were worried about shortages. "It's all about sentiment and an overhang of inventory," he told industry leaders in New York. "The long-term prospects remain strong."

His comments came as figures on global production suggest excess capacity may play a bigger part dragging the industry back to its old pattern of boom and bust.

Data on Tuesday from the International Iron and Steel Institute confirmed signs of a rise in Chinese production, in spite of attempts to control new investment. China was again the largest crude-steel producer, with output of 29.7m tonnes in May, up 37.5 per cent over this time last year.

Andy Mohinta, a commodities analyst with JP Morgan in London, said: "I don't think you can ignore the supply side. There now seems a real danger that increased Chinese production will slow their demand for imports and they may even start exporting back to Europe."

Steel is definitely weighing in on the bearish side of the market/economy lately. Particularly when - like this morning - it appears to be leading a general rout in both industrial and precious metals. The precious metals did alright (probably reacting to the yen) by the close but despite some attempts the industrials couldn't manage the same trick.

Commodity Spotlight

Prudent Investor explores the recent gold rally while Econbrowser takes apart Saudi Arabia's production rhetoric.

Marc Faber on Currencies, Commodities

From the Bloomberg:

Once the US economy deteriorates, the Fed "will go back to the old medicine, which is essentially to print money and the dollar will weaken again," Faber said in an interview with Bloomberg News yesterday. "Compared with the euro, the Asian currencies are very, very inexpensive."
...
``The foreign exchange market will anticipate this easing beforehand'' resulting in a drop in the dollar, said Faber, adding that he was a ``reluctant'' holder of dollars.

Some investors and traders disagree. Fifty-nine percent of the 54 strategists, investors and traders surveyed globally on May 20 said the dollar is poised for its longest winning streak against the euro since 2000 on expectations the U.S. currency's three-year bear market has ended.
...
Faber is also betting on gold because it has become cheaper compared with commodities such as crude oil.

Today, one ounce of gold, trading at $417.60, is worth about eight barrels of oil, according to Faber. In 1998, when oil fell to less than $11 per barrel, gold was trading at about $285 an ounce. That's equal to about 26 barrels of oil per ounce of gold.

``You should be long gold and short oil,'' Faber said. Commodity markets ``aren't particularly attractive.''

Hard to disagree with any of that. I would not hold dollars right now - even "reluctantly".

The EUR/JPY chart I put up just before the strong U.S. retail sales numbers still seems very relevant.

Oil Futures Trade Contango

From the FT:

The crude oil futures market has produced plenty of hot news in the past 18 months. However, one of the more recent - and striking - developments has been the widening gap between nearby prices and the longer-dated prices, which has encouraged US refiners to buy oil and store it in the hope of selling it for a higher price later in the year.

This price pattern, known as "contango" - the industry term for when future delivery prices are higher than more immediate transactions - has reversed the normal price behaviour of crude futures markets. Usually nearby prices trade higher than longer-dated deliverable prices because oil markets have seen tight balance between supply and demand, which in turn pushes up nearby prices.
...
"Investors will have to hope that oil prices will have to rise strongly in absolute terms for them to hold on to their investments, because if the price were to remain flat and the steep contango persists, the losses will continue and their overall returns from crude futures will reduce," said Mr Lewis.

A while back I mentioned the spot market's focus on projected future shortages rather than current inventory levels. The market has now worked that out.

Summing Up the Week

We end the week weighing the auto downgrades and steepening yield curve (new 30-yr) against an unexpectedly positive jobs report and Kerkorian's bold bottom fishing maneuver in General Motors (GM).

On the auto downgrades it seems very likely that the bond market had already anticipated the downgrade. Its arrival shifts the focus off of the auto bonds and towards the wider bond market. I would not be surprised if GM and F bonds bottom here or shortly while junk spreads continue to widen. A best case would be junk widening while investment grade tightens but I would guess such a trend would be short lived. I am not really sure where Kerkorian's bid fits into this picture other than to muddy the waters. It is not clear what his motivations are and I am not sure that GM's equity is the best risk / reward trade in here.

I said any investment grade tightening might be short lived because the jobs report and new 30-yr created a lot of uncertainty in the long end of the yield curve. On Tuesday I thought the market would start to anticipate an end to the hiking cycle but this jobs report brings us back to considering 50 bp hikes. Easy to see why it was important for the Fed to reinsert a benign long-term inflation outlook. Anyway, the jobs report is just one data point and it needs confirmation in the rest of the data this month as well as next month's report. People were all about the "soft patch" at the beginning of the week so this report should cause a serious reexamination.

At some point between now and August the market will probably have serious doubts as to whether the 30-yr actually comes back. There are also supply constraints until the new bond is a sure thing so if the shorts get too heavy while it is only an idea that could set up quite a squeeze. A decision in August seems to put the new 30's issuance in Nov or Feb.

All this U.S. news has managed to crowd the yuan revaluation out of the news. Asian currencies are still trading strong though. Even though China does not want to reward speculators, the pressure internally are only going to get worse until they revalue. I thought they were coming to grips with that but maybe it takes another couple of months. They would need some help from Japan or Korea to scare the speculators at this point and I don't see much of a cause for that. The dollar also rallied nicely on the back of the jobs data but the theme to me is still European weakness. Gold and silver are focused on USD/EUR rather than JPY/USD. I am not sure why that is.

European Gold Sales?

The Prudent Investor mentions an interesting change in the gold accounts of Eurosystem:

Gold bugs won't like this piece of news. Two Central banks of the Euro system took advantage of the high gold price and sold about 54 tons of gold last week, based on an assumed gold price of 435 dollars per ounce. According to the latest consolidated weekly financial statement of the Eurosystem, the position "gold and gold receivables" shrank 528 million Euros or 0.41 percent to 127,431 billion Euros. This contradicts a former ECB statement that had claimed the central bank would abstain from further gold sales until September 26, 2005.
In a press release from March 31 the ECB had said it "has completed a programme of gold sales amounting to 47 tons of gold. These sales are in full conformity with the Central Banks' Gold Agreement, dated 27 September 2004, of which the ECB is a signatory. It is not the ECB's intention to sell more gold for the first year of the agreement, starting on 27 September 2004 and ending on 26 September 2005."

I am not sure if I am a "goldbug" but I am long. I thought this news was alright. Afterall, If gold can hold up in the face of government selling while the dollar stages its best rally in a year then why sell it?

Following Up on Gold Spreads

From CBS Marketwatch:

What has happened recently in gold shares is a microcosm of this. Gold is up 8% since the November 2004 peak in the HUI - yet the index is 30% lower.
Reading the company results, the reasons are obvious: explosions in oil and steel costs, and a surge in commodity currencies, indirectly a comment on the curious way gold has lagged overall price changes recently.
In other words, gold shares may have detached from their normal tracking of the gold price for legitimate, if unpleasant, reasons of their own.
Some feel this has gone too far. James Turk has a chart showing that the Gold/XAU ratio has only been lower - slightly - in the last couple of desperate bear markets.
Taking the view that extreme unhealthiness in the gold mining industry signifies a bottom, Turk thinks this could be encouraging.
Others might prefer to follow the Gartman Letter's example and shelter in the new Bullion ETFs, GLD (GLD: news, chart, profile) or IAV (IAV: news, chart, profile) .

So if gold prices stay strong while steel and oil prices fall, the spread should close again right?

Gold vs. Gold Miners

I have been looking at the following chart quite a bit lately.

Click on the chart to see a larger image!!
Posted by Hello
A few interpretations I can think of are: Gold stocks are leading the price of gold down just like they led them on the way up. The gold ETF (GLD) has taken the bid away for mining stocks as a proxy. And, mining stock prices relative to gold are being skewed by the recent negative preformance in equity indices.

I lean towards the last option with the second as my next guess. Anyway this can be played by rotating out of the metal and into stocks, rotating shorts to the metal rather than the stocks, or by creating a dollar weighted pairs trade. I am mixing the pairs trade with outright equity longs for myself.

CPI and Chinese GDP are Lagging Indicators

Lots of comments on the CPI setting a 5 month record yesterday but my thoughts are that it is a lagging indicator. Last week Wednesday the markets decided the growth phase was over. I would attribute it to the unrest in China the weakness in the copper and steel sectors. Not sure to what extent one led to the other but they certainly got a reaction in the Nikkei and global markets, eventually even causing interest rate markets to consider an end to Fed hikes. Oil is well off recent highs (some see that market as a double top) which fits nicely with a view that Asian growth has already peaked. The deterioration of U.S. export growth also added some fuel for those that wanted to see an international slowdown underway.

Long story short the world changed last week and if that change is correct the CPI, record or not, is meaningless. It is a lagging indicator plain and simple.

Chinese GDP which also came in stronger than expect has the same problem. Demand in the commodity sector is a much better indicator of what future expectations are for Chinese growth.

Bond yields peaked yesterday around 8:45 AM and I am guessing it is the "lagging indicator" logic that caused it. The beige book came in weak but that was much later in the day, after the market had made up its mind.

On these data points I am not expecting any impact beyond what we saw immediately after the release. I disagree 100% with the view that these inflation number force the Fed's hand and need to be reflected by higher bond yields. Even if I did see the CPI (or Chinese GDP) as a reason to adjust growth expectations, I would prefer to go long copper or oil futures. For bonds to run into trouble here I think we need to see the dollar slip further.

I will try to put up several posts today to round out my views on where the economy is going and my interpretation of recent market moves.

Stocks get Whacked on Bond Selloff

Didn't really see that coming. It is hard for me to understand the weakness in stocks given the FOMC statement. Since they hit my "bullish" case (along with expectations), I hate to think what would have happened had they not.

My feeling is that bonds got caught very wrong footed following this AM's PPI. The sharp reversal easily broke new lows in 5s and 10s which left them little chance to recover. Stocks in all sectors got sold , being led lower by Citibank (C) and AIG (AIG). I still think there is a chance for an equity rally tomorrow but am generally surprised at the way the stock market fell apart today.

I am particularly surprised that gold, silver, and copper stocks all came off with the market. I realize the dollar rallied but there is a disconnect between inflation fears and commodity weakness.

Oil Bet

Two weeks ago today, I offered to a bet to a friend that Exxon Mobile (XOM) would make a high in the next two weeks that would not be eclipsed for two months. My friend did not take the bet. I am not sure at this point whether that is good or bad. I did not think the rally would last until Friday so obviously we have a good shot at knocking out the high in the very near term. It still feels more like a top than an entry point though.

Maybe not so for oil prices themselves as the stocks rallied well in front of the underlying commodity.

Trains can't catch you...

Tried to go through the charts and not read too much into them on a slow day. The only thing that stood out to me was that lots of communication and communication equipment stocks showed up in bullish scans. Makes a lot of sense because the mergers in the sector show that big players have money and also that consolidation (and a return to profitability) is under way.

In the semi sector PMC Sierra stands out by being in a good position to rally.

Commodities look like they are in for a bit of pain as the dollar and bond rally could lead to a deflation scare. Gold and silver are already in the dumps while other sectors like the oil stocks are making highs. Alcoa (AA) looks like it may have put in a bottom so maybe the markets are just sorting out the commidities a bit. Until the dollar and bonds can make tops the space is probably pretty risky.

Banner Day

Taking stops on some oil and natural gas longs too.

This rally is impressive and feels well timed to avoid a pullback. I guess the market is willing to ignore higher interest rates and bad retail sales (auto sales too!) if we get stimulation via falling oil prices. While I like trading momentum patterns in individual stocks I am horrific at trading momentum in the market indices. Not sure if it is a short coming or a good defense mechanism but I find it very difficult to buy with higher prices as my only catalyst and a large crowd of people lined up the same way.

The metal equities seem pretty weak here compared to both the underlying metals and the dollar. I am guessing it is due to the arrival of the gold ETF (GLD) which essentially targets investors who don't trade metals or futures. Some people are pointing to the way metal equities led the metal declines earlier this year but I think this time will be different. We shall see.

Chart Catch up

All charts posted with Hello



The story of the week is the breakout in all the major U.S. equity indices. While I do think that over time the economic numbers will justify the equity advance, I would expect the uptrend to look a lot like the downtrend we just went through. The SPX made new lows three times this year and each proved to be a short-term buying opportunity. I would expect some short-term consolidation here that eventually gives way to weakness. From here it looks like the 200 day moving average will be a buying point.



I mentioned the TLT chart on Thursday and Friday's unemployment data did indeed lead to a trendline break. I prefer betting on economic strength in the near-term by shorting treasuries. The move in yields is near its beginning while the stock market has probably overshot in the short-term. I have a position in TLT puts.



I have decided to stick to my guns on a dollar bounce. I think the sell off on Friday on good economic news is really the equivalent of the patient being pronounced dead. As I once heard Art Cashin say "Just when the patient is declared dead, he jumps up off the table." Those deeply oversold stochastics flatlining across the bottom should provide a powerful snapback in the event of a rally. Hopefully we will get an inside day (or a couple) to create some short-term stop loss points and allow an entry.

Part of my opinion on the dollar stems from the following commodity charts:








I believe oil makes up 15% of the CRB index but even so I think it says something that the equities and their underlying commodities all seem to be showing flagging momentum. No doubt about it that oil was the talk of the town a couple of weeks back and highs made in such circumstances are usually meaningful. I am , however, a bit surprised to see what looks like weakness in the entire CRB and particularly the metal stocks. Gold stocks in particular appear to be anticipating some metal weakness by not following the yellow metal to new highs. In this sector shorting oil and oil stocks makes the most sense but a dollar rally could be surprisingly painful for metal longs.

Where we came from

This is an email I sent to a friend on August 26 of 2004.
----
Hey ###,

Just wanted to pass along that a lot of people are beginning to see the possibility for a long countertrend rally in the dollar. The main premise is that something will squeeze the large build up of dollar shorts out there. My personal guess is some version of Chinese economic softness which leads them to push back the Yuan revaluation. All that needs to happen though is anything to spook the dollar shorts and there will be a substantial and largely self perpetuating rally. In here I am generally feeling like the trends from 03 are about to resume, with the exception of the dollar of course. That means gold and commodities up, yields down, and stocks up.

I can reconcile most of it with current low corporate borrowing rates generating a spending spurt similar to early 2003, generating growth and putting more pressure on commodities like steel. Oil prices have probably topped and if they revert to the mid 30's then tsy yields can stay low as people perceive the fed as having done its work. Most of thesis based on taking what the market feels like it wants to do and then trying to come up with some themes to fit. I have most confidence in the idea that either corporate yields need to rise or stocks need to rise.

And check out that VIX here. An alternate scenario would to continue this whippy grind lower in stocks for another 6 months as all the liquidity simply sloshes around the system while the economy deflates. I can't reconcile this with the low corporate yields though and lots of technical bears out there now because of the new yearly lows made in August. Just wanted to ping this to you as it is a bit different than what we talked about when I was there.

mike
---

The dollar rally never materialized but you did not need to be short until last week. I would say the markets have clearly selected the positive option with stock prices vaulting higher. Economic growth should accelerate for the next 6 months and 10 year yields will move higher, probably slowly. It seems like oil prices are contained and may head lower. I am not sure in here whether other commodities will be up with the growth or down and providing fuel for the growth.

My reason for posting this is to highlight just how similar this juncture is to the Spring of 2003. The easy borrowing for companies should lead to stronger growth than people are anticipating. I would then expect rates to move higher putting the brakes on again. In moments of doubt I will be expecting all the trends we saw then to emerge.

Weekly Game plan

This week I expect some generic weakness on Monday and Tuesday and a bounce when the election reaches resolution. The DXY (Dollar Index) is near multiyear lows which should hold the first test and bounce 2 points from 85 to 87. This rally, if it materializes, will bring with it some metal weakness. I believe that oil has topped so next week we will see general commodity weakness. I would stay away from oil for a few months but there could be some good purchases in the metals.

For the stock market it feels like the semiconductors and NASDAQ are a bit overheated and may underperform. The cyclicals maybe a good place to look for the outperformance. Near the end the week it could be a good time to start putting out shorts in the financials. I think it makes sense to leg into a long term trade buying semis and cyclicals on weakness against finance sector shorts. FNM (Fannie Mae) in particular should begin a multimonth downtrend as it adjusts its business to new capital requirements and new legislation circulates in congress.

I see interest rates as a bit low in here but it I am not sure they are topping out yet. The commodity weakness could be perceived as a sign of the economy slowing or falling oil prices could be interpreted as stimulus.

Vols will probably take a sharp dip on Tuesday as the fears of terrorism pass.

Synchronicity

I can almost here frat boys chanting "Frank the tank! Frank the tank" as I watch HAL (Haliburton) trade today. Clearly, my morning thoughts were a bit out of synch with the market.

The oddest thing here is that while the dollar has been willing to give up its gains from Tuesday, stocks have been well bid. Not sure I get it with the overhead resistance, sharp nature of the move, and of course looming election. Why buy vols but hold your stocks? Mine is not to question why I suppose.

I am still looking for a dollar rally and some metal weakness post election. Should stocks be down substantially on Monday I will make some selective purchases.

Oil, bonds, the economy ... again

Last night I mentioned that the apparent relationship between oil and bonds would not hold and today you are seeing this with oil off 2% while bonds are unchanged. This is happening because of the Chinese rate hike. China is perceived as the marginal buyer of oil and so any slowing in their econ lowers oil prices. China also accounts for a large portion of current economic growth so any weakness reduces global growth estimates. So in today's action oil is weakening because of the slack economy while bonds are acting like they anticipated the weakness. Oil appears to have been mispriced rather than bonds in this case and it is probably going to see a large adjustment compared to the move in yields.

Expecting the Chinese to eventually hike rates was a no-brainer given their need to slow their economy. I will consider the mass selling of base metals that came out of China last week as insider selling and be on the look out for it as a future indicator.

Metal Madness - Silver, Gold

Posted by Hello

Lots of people watching silver here but probably needs to consolidate a bit. I would guess it goes below the most recently low back to 6.50-6.70. The long-term uptrend will be kept intact and I think it would take some major policy changes (fiscal or monetary), to challenge that.



Posted by Hello

Ah the mysticism of the channel. It also appears capped in the short run as these two sisters trade together. They also both trade with the dollar and I would guess the first test of the summer DXY (dollar index) lows will hold and we will get a dollar bounce during the next week.

No positions in anything mentioned.