Saturday, December 31, 2011

Quote Of The Day

"End of a matter is better than its beginning, and patience is better than pride" ~ Ecclesiastes 7:7-9, NIV

Chart Of The Day

Today's chart of the day shows speculator positioning on the Euro Dollar exchange rate by the CFTC Commitment of Traders report released yesterday. As we can see, the overall net short position has now hit a new record high of -127,879 net shorts. On top of that Small Trader position is also net short at -28,748, which means Commercial position total of 156,627 net longs - which is also a new record.
The outlook on Europe, Euro and PIIGS is so negative now, that every single man and his dog on CNBC or Bloomberg believe things will only get worse as of next year. Well, quite to the contrary, I took a bet with my best friend over a bottle of Dom Perignon, that the Euro will not go to parity like majority of clowns on CNBC believe and instead we will make a new high above $1.49 in the up and coming rally in 2012!

What do you say? Do I have a chance?

Friday, December 30, 2011

Chart Of The Day

Today's chart of the day focuses on Precious Metals sector, just like the previous post about Silver. The chart below shows that Gold Miners ETF is currently extremely oversold as Bullish Percent Index comes close to single digit readings not seen since late 2008 bottom.
Other breadth measure which shows extremely oversold levels is the Percentage of Stocks Above Moving Average indicator. Here is what Gold Miners sector breadth currently reads:
  • Gold Miners Breadth % Above 10MA @ 0%
  • Gold Miners Breadth % Above 50MA @ 0%
  • Gold Miners Breadth % Above 200MA @ 15%
Percentage of stocks above 200 day moving average actually got as low as 7% last night in US trade. On top of that, it looks as if Gold Miners are gearing up to start outperforming Gold on relative basis, which would signal a potentially strong rally ahead. It is worth pointing out that Miners have under-performed since December 2010, which has been over a year now!

Portfolio Update: Long Silver

Since the inception of the fund on 12th of December 2011, the first investment was made in Agriculture. The second investment has been made in Silver, as many fund partners request holding Silver for the long term as their form of "saving" instead of holding paper currencies. This investment was made through a physical holding via Eric Sprott's Canadian Custodian ETF. Once again I would like to say that these type of posts will not cover the fundamentals, because it is ones own job to understand long term prospects for different asset classes.
However, if there is one thing I can say, it is that central banks, which have no other option, have now started going completely mad with money printing and devaluing of global currencies. With Japan and the US crisis, just around the corner, any smart man sees no other alternative apart from more money printing, liquidity injections, bank bail outs and kicking cans down the road. All of this, obviously is super bullish for precious metals in the long term.
So with fundamentals still improving for Gold and Silver, smart money always welcomes bears markets as a great gift to buy low and later sell high. As of last nights American trading, Silver was down about 47.5% from its peak at $49.82 in late April. Apart from Cotton, this has been one of the worst performing commodities within the CRB Index in the last 12 months. As a matter of fact, Silver's correction is now in progress for over 170 trading days, which is becoming longer than the 2008 crash (chart above). Long term investors should note that assets correct in both price and time, not just price. On top of that, as Silver touched $26.12 in last nights US trade, Silver was more than 27% away from its 200 day moving average. That is very very extreme. Nonetheless, it is important to note that just because an asset class is down half price from its peak and extremely far away from the 200 MA, does not guarantee anyone they are buying a bottom. That is where timing tools, including sentiment come into play.
One of the best indicators I have ever found is to track what investors do, instead of what they say. The GLD fund flows indicator I developed does exactly that. Chart above shows a 4 week rate of change in fund flows. That means, it reads the difference between current value of the fund and the value 4 weeks ago (one month ago). In other words, this indicator measures sentiment in monthly intervals, posts on weekly basis, to see how much buying or selling investors as a group are doing. As we can see, these guys are currently as bearish as they can get over the last month. This indicator has above average probability of picking intermediate bottoms, so there is a strong chance that we should at least bounce from around $26 level we touched last night in European trade.
In recent months, sentiment on Silver has been extremely low without any ability of recovery. The conditions have been very bearish, price has been falling hard and majority traders saw lower prices. As of this Tuesday, SentimenTrader's Public Opinion readings dropped to the lowest level in at least 6 years or even more. In plain terms, Silver investors are now more bearish, than they were during the depths of the Financial Crisis in October as Lehman Brothers declared bankruptcy. Even more important fact to note is that sentiment readings were posted as of Tuesday's close around $28 to $29. On Wednesday and than again on Thursday, Silver entered free fall and dropped to as low as $26.12, before putting in a reversal. So it is safe to assume that sentiment most likely got even worse during the sell off in the last few days.
It is not only ETF fund flows or sentiment survey's that point to extreme panic, options traders are also negative... actually the most negative they have ever been. I haven't bean able to contact any of my friends who have access to Bloomberg Terminal, but according to Bloomberg Silver ETF puts reached level a record few days ago. I managed to get a screenshot from the ticker menu during TV. On top of that I do know for a fact that both Short Interest and Put / Call Ratio on the SLV (Silver ETF) is extremely high, resembling levels of previous major bottoms.
Finally, speculative positions through COMEX futures tracked by the CFTC Commitment of Traders reports, show that Silver positioning has been reduced to levels that are of the charts. Speculators aka Dumb Money, are actually so bearish, that we have to go back to 2002 to see this little exposure to Silver. Now, do keep in mind that the data is from last Fridays report, which means positioning is relevant up to Tuesday 22nd of December when Silver traded around $29. Once again, as noted above, since than Silver has dropped ay least another 10%, so chances are net long positions are even lower than in the chart above.

Summary
All in all, it is obvious that Silver is very much hated right now and there is above average chance of a rally around these levels. However, bear markets or crashes can go further than most of us think, despite extreme sentiment, so if Silver does not put in a permeant bottom here after bounce takes shape, I will most likely tighten the stop towards entry level to hopefully be stopped out around break even levels. Afterwards, it is a matter of letting further selling run its course again and try buying at lower price (if we actually do go lower)!

Thursday, December 29, 2011

Quote Of The Day

"Weak currency is evidence of a weak economy, which is evidence of a weak government." ~ Jim Rogers

Credit: European Situation In Charts

Note: Apologies for the lack of posts. It is holiday season and I have been taking some time of from the blog. But that does not mean posts will stop completely. Lets have a look at the European credit situation.

European bureaucrats recently left for end of year holidays, leaving the financial markets in turmoil during Christmas and New Year period. Credit markets are not improving at all, as funding for US Dollars becomes more and more expensive. This is creating a bid for the US Dollar on the market as well, as the Euro falls back below $1.30 once again. Lets have a look at the health of the credit markets right now:
Libor rates are a great measure of banks’ reluctance to lend to one another. The 3 month Euribor-OIS spread, the difference between the borrowing benchmark and overnight index swaps, is once again approaching 100 basis points. That is the highest level since January 2009. The US counterpart measure, 3 month Libor-OIS spread, is also rising steadily but nowhere as high as the European benchmark. In other words there is contagion, but it is not as bad in the US as it is in Europe.
The cost for European banks to borrow in dollars over 12 months (1 year) continues to rise, according to the 1 Yr Euro Dollar Swap Rate. The current reading is once again approaching over 100 basis points, which is no approaching panic type levels of 2008 Lehman Brothers crisis. The rate was 106.5 basis points under Euribor in middle of December, the most expensive since December 2008. Earlier this year, the bank rate for Dollar funding was at 49 basis points.
Swap rates for two main currencies are increasing for the banks, as already discussed above. While the 2 year US Swap Rate has increased to the levels last since during the "flash crash" panic of May 2010, the EU Swap Rate over the same time maturity has now increased to the levels not seen since the depths of the Lehman Crisis in October 2008. it is very clear that European banks are suffering.
This can also been seen by following increment in deposited capital in the overnight deposits facility at the European Central Bank. Depositors placed 347 billion euros ($452 billion) just recently, which is the most since June 2010. If you remember this date, you would also remember that negative sentiment become so extreme, it created a Euro bottom around $1.18 (last chart below).
Finally, Italian Government Bond Yields remain elevated at previous watershed highs, where other peripheral nations like Greece, Ireland and Portugal were forced to seek bailouts. This is despite a decently strong auction last night as the media pointed out. However, who is actually buying Italian debt? Real investors cashing yield or ECB? Italy auctions more bonds tonight, and I have a feeling the ECB will be the one and only buyer.

Summary
I guess it is quite obvious that the credit markets are very stressed at present. Banks to not trust each other so they keep using ECB facilities to survive through this turmoil, the US Dollar demand is very high and the cost of funding is even higher, while governments in Europe are struggling to fund themselves at respectable interest rates. All in all, it is not a pretty picture and reminds us of 2008.
However, we cannot pretend that the market has not already factored this in to a certain degree or at least knows the problems a lot better than what I wrote about here. Therefore, we can see that, accordingly majority of investors are extremely bearish on the Euro (record high short position) expecting a repeat of Lehman Crisis with a bank in Europe. In other words, this is the most overcrowded and super-obvious trade right now - and those never make you money unless you trade the intra day movements.

So what are the chances of Lehman Brothers 2.0 as everyone keeps saying? Well... it is definitely possible, but in my humble opinion, not very probable as of right now. Quite to the contrary to what majority believe, I have a feeling that EU, ECB, IMF and the rest of the clowns could announce some type of measures to kick the can down the road once again. It would calm the credit markets from extreme levels and in the same time force a super short squeeze in risk assets including the Euro. Put it this way... unless you are 100% sure Europe is about to fall apart today, I'd strongly advise against shorting Euros, buying Dollars or Treasury Bonds right here!

Tuesday, December 27, 2011

Quote Of The Day

"All men dream. But not equally. Those who dream by night in the dusty recesses of their minds, wake in the day to find that it was vanity.

But the dreamers of the day are dangerous men, for they may act upon their dream with open eyes to make it possible!" ~ Thomas Edward Lawrence better known as Lawrence of Arabia

Weekly Recap: December 2011, Week IV

Blog Summary

Market Summary
The week was very favourable towards risk assets, especially commodities. Crude Oil, Wheat, Corn, Palladium and Cattle all rose more than 5% on the week. Equities in the US also had a great run. On the other hand, safe havens like Treasuries, US Dollar and Japanese Yen did quite average, with the 30 Year Long Bond declining by over 2% for the week. Out of the currency majors, Canadian Dollar did the best with almost a 2% gain for the week.

Talk Of The Week
Surely Christmas was the talk of the week, and the New Years celebrations will be the talk of this week. But for those still focused on the financial markets, the talk of the week was probably not the huge cut in net long positions for all main Grains, Softs and Livestock commodities - and that is precisely why one should pay attention. Pretty much all the speculators have left the building... just like Elvis.
The same is also true for Silver, where speculators have cut their net long positions to the lowest level since 2002. With Silver down over 43% from the May peak, this surely represents a great buying opportunity and in years from now we will be raving at how low the price was as it traded in the high $20 level!

Sunday, December 25, 2011

Merry Christmas To All!

I tell you what... traders were glad to see Santa this week, after a rough couple of last quarters.

I hope both you and your family enjoy a very Merry Xmas!

~ Tiho

Saturday, December 24, 2011

Interview: Jim Rogers Talks Markets On NDTV

Stocks: Breadth Update

Note: This is probably the last major update on the markets until the new year. Posting will be a bit simpler for the next week or so. With the market entering the quite mode for the next week or two, we are watching these indecision triangles that are seen in many asset classes. Since S&P 500 is one of the most followed indices in the world, it is always a great barometer for the rest of the global equity markets. So lets get into the price action and breadth, starting with the positive developments and than covering the negative ones.

Positives
Since the August downgrade of the US debt, equity markets sold off hard and started a downtrend. Globally, equities have done much worse than the US equities, with almost all of the main countries from G7 to BRICs entering bear markets (20% declines). Therefore, do keep in mind that there aren't too many major positives to rave about in the last several months as the European Debt Crisis still remains unsolved.

However, with the price action of S&P 500 edging towards an upside breakout in its current triangle formation, we noticed that the at least one indicator of breadth has slowly edged towards the bullish argument. Consider the chart below, which shows that ratio between NYSE 52 Week New Highs & 52 Week New Lows. We can see that S&P 500 hit a high of 1292 in late October, closing above the 200 day moving average and at the same time NYSE managed to record 166 more highs than lows.
Comparing that to yesterdays price action, the S&P 500 closed above the 200 day moving average again at 1265, which is lower than the October high. However, despite the index still lower in price, the number of Net 52 Week New Highs was higher, showing a reading of 191. While the bears would say the volume was remarkably low to confirm anything, the bulls would say that 52 New Highs are expanding, which could be a signal of higher prices in the future.

Negatives
While the breadth is expanding when it comes to 52 Week New Highs, the same cannot be said about the percentage of stocks within the NYSE that are trading above their respective 50 day moving averages. While the price action of the S&P 500 is now breaking upwards above the 200 day MA as well as the upper resistance of the triangle formation, the overall breadth on NYSE is not confirming the move just yet. The bulls want to see a move in this indicator towards 80% level would confirm the breakout properly and remove the current bearish divergence.

Even if the price was to rise above the current triangle setup, it still wouldn't change much in the grand scheme of things. If we focus our attention on the longer term indicator, percentage of stocks above the 200 day moving average, we can use the basic rule that bull markets are in prime trend when the breadth readings are at 60% or higher - and should not fall below 40% reading during corrections. At the same time, bear markets are in prime trend when the breadth readings are at 40% or lower - and should not rise above 60% readings during sucker rallies.
According to this indicator, we are currently still in a downtrend or a bear market, which started officially in early August 2011, as the breadth collapsed below 40% threshold. The bears could remain in control even if this rally breaks out of the triangle properly and takes the breadth was to rise towards, but lower than 60% breadth readings. The bull market is officially confirmed whenever the breadth expands above 60% readings, just like we saw at the end of May 2009. Currently we are still very far away from that level, but do take note that this is not a timing indicator, just a confirming one.
Finally lets look at the breadth reading for 200 day MA indicators across all main sectors, keeping in mind the sector rotation and the stage of the economic cycle:
  • Discretionary % Above 200 MA @ 54%
  • Energy % Above 200 MA @ 38%
  • Financials % Above 200 MA @ 32%
  • Health Care % Above 200 MA @ 37%
  • Industrials % Above 200 MA @ 40%
  • Materials % Above 200 MA @ 44%
  • Staples % Above 200 MA @ 78%
  • Technology % Above 200 MA @ 34%
  • Utilities % Above 200 MA @ 89%
As we can see, only two major defensive sectors are currently in a bull market breadth readings - these being Consumer Staples and Utilities. It seems that even the Health Care sector is quite weak at the current time. Now, keeping that in mind, if we were to assume that October 04th low was the bear market bottom, for all of us to get bullish right now we should be seeing much stronger breadth expansion three months afterwards. As the market bottomed on 09th of March 2009, it only took until May to see super strong breadth expansion for cyclicals like Technology and Discretionary sectors.
In recent Chart Of The Day posts, I have shown quite a few different indicators that show investors remain in panic mode. However one indicator that has strong predictability is the Investor Intelligence Survey. What is worrying here is that, despite stocks making lower highs from late October until now, bullish advisor camp has been increasing. Now, this might not mean much to some, but having been through a few of cycles myself, I understand that bull markets are built on disbelief and not optimism. Back in March 2009, as the market started rising in super fast fashion, sentiment did not follow as quickly as many investors remained very sceptical. Today, it seems we have the opposite situation, where the market is failing to make convincing new highs, while the optimistic sentiment is growing by the week. If October 04th was the bear market low, it is pretty hard to find too much skepticism only a few months later.
"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." ~ Sir John Templeton
Summary
We can conclude that the breadth fell apart in early August 2011. The bull market from March 2009 ended and a new downtrend started. While S&P 500 has not been effected as badly as some other globally markets, there is still no signs that the downtrend is officially over. We should all understand that Treasuries remain extremely expensive, and eventually the money will come out of this asset and back into risk on mode helping stocks and commodities move higher, but for the time being there are no strong signals that this is the case right now. And while there are some early signs of bullish developments and extremely negative sentiment, the most prudent thing to do right now is to stay patient.

Chart Of The Day

Maybe this post should be named "Chart Of The Year", because hedge fund managers on average have not made a dollar this year! It is amazon to see Macro funds, which should be loving the current market environment, do so badly. Even the equity market neutrals (hedgers) did not hedge anything this year as the S&P 500 is up for 12 months and these funds are down. Absolutely awful!

Thursday, December 22, 2011

Chart Of The Day

The recent Chart Of The Day showed the Credit Suisse Risk Appetite indicator and a strong possibility that we are slowly, but surely approaching the end of the risk off environment, which has dominated the market environment since at least May 2011 (or even February 2011). Proving that sentiment is very negative, we also have global fund flows in the chart below.
Global investors remain negative on risk assets, including equities. The chart above is my own version of Nomura's equity fund flow indicator. I've added the S&P 500 in the background. Obviously, fund flows could get even more negative like during 2001 or early 2008, but it is safe to say majority of investors are now fleeing equities as we are far away from the euphoric outlook inflows which occurred in 2000, 2006 or even on a smaller scale in early 2011.

Commodities: It Is All About Demand & Supply

Emerging Markets are about to overtake Developed Markets in demand for just about everything. Consumers are awakening in the rest of the world and soon leading economists will stop being so US-centric or even West-centric. On top of that, this is one of the main reasons we are experiencing a huge multi decade secular bull market in commodities which started in 2000. No matter what crisis sells commodities off, like the Crude Oil crash of 2008 or Cotton crash in 2011, all of these these commodities recover quickly and majority of the time all make new record highs. This is because the underlying demand is extremely strong, while the supplies are boarding historical shortages.
It seems that every man and his dog blames the commodity rally on excess liquidity, speculation and money printing; and constantly calls it a bubble (because calling anything a bubble is so cool since 2007). While those points do play a role, this multi-decade commodity bull market is built on strong fundamentals. In other words two decade long neglected supplies mixed together with surging demand as the rest of the world (5 billion people) is slowly awakening into urbanisation and consumerism.
Emerging Market wages are growing slowly but surely, and unlike in the West, these boys and girls do not have any debts. Majority of the countries citizens have no credit cards or even bank accounts, let alone mortgage or car loans. All they want to do is live like us in the West and they are willing to work twice as hard and save much more than we do, to do so. It is only a matter of time until the Chinese start consuming as much Oil or Coffee as the US, or as much Cocoa or Natural Gas as the Europeans, or as much Sugar or Wheat as the Middle East. Chinese are already leaders in consumption for majority of other commodities and until the world starts producing much more raw materials than the 7 billion people are using, the commodity bull market is here to stay.

Deflationists can argue all they want, but the price of everything in this world is rising - apart from assets Helicopter Ben inflated into a bubble like TMT stocks in 2000 and Real Estate in 2006. I am pretty sure majority of the 7 billion people in the world do not have any exposure to US or EU real estate or TMT stocks in the year 2000, while their CPI or cost of living has been rising dramatically over the last 10 years. For majority of the people on this planet, the world is definitely not in deflation, and all one needs to look at is the chart below.
As we stand right now, the world is once again experiencing debt problems, similar to the episode played out in 2008. Both commodities and equities are in a downtrend or a cyclical bear market. When it comes to commodities, this is forced liquidation and fear by majority of investors, and has nothing to do with fundamentals. Therefore, once the recovery comes and it will come eventually, commodity prices will continue to make new highs while the stock market rally will once again be false.
In other words, for longer term investors, even when the market rallied 100% from March 09 lows, one would still not have made any returns since the year 2000. As a matter of fact one would be down 15% while the commodities are up 173%. Adjust that 15% return for inflation with phoney US CPI and you are down 30%. Adjust it by the CRB Index rise and you are down 60%. Adjust it for Gold and you are down 80% (the chart above is a bit out dated). You get the point... so as the bear market draws closer to the end sometime in 2012 and we approach the low, stick with commodities, because they are going places in the new upturn!

Chart Of The Day

Huge reversal in the Euro today, following the ECB release about bank lending. Almost 600 billion Euros was lend for 500 plus banks. It seems that yet another central bank is expanding its balance sheet!

Tuesday, December 20, 2011

Interview: Kyle Bass On CNBC Discussing European Crisis

Chart Of The Day

Credit Suisse Risk Appetite indicator showed in early December that we could be near a bottom. Not only that, but the fear seems to be so high now, that we have surpassed 1982 bottom, 1987 crash, 2002 bottom and 2008 crash when it comes to sentiment.
Bears beware... Euro shorts are at record highs, mutual fund outflows are very high and sentiment indicators like the one above are extremely negative.

Monday, December 19, 2011

Commodities: Agriculture Fundamentals Are Favourable


Over the last few weeks or even months, all I have been reading and hearing from the news wires is how bad the outlook is for Agricultural commodities. In my opinion, that is total non sense. First of all, despite recent increases in Corn, Wheat and Soybean stockpiles, supplies still remain at historical lows. That is quite a worry for the world, because any further shocks to inventories will create price spike with dramatic fashion from these levels. So how possible is this price shock? In my opinion, it is just a matter of time really.
As the world hit 7 billion people over the last few months, we can safely say that population has doubled over the last 30 years, the world GDP has gone up from $10 trillion to over $60 trillion, while arable land has not increased at all (chart above). There is only so much technology can do to improve harvest yield. On top of that, prices of all Agricultural commodities remain at pretty much the same prices as they did during 1970s. So, just imagine how much the Dollar has been devalued since those days and what farming margins look like when Corn is sold at $5 per bushel in the 70s and compared to today. Most people do not know this, but if we were to adjust Wheat for inflation, it is very very close 200 year lows!

So with prices depressed on historical factors, farmers do not have favourable conditions to plant and grow supplies to the point where the world has more than it needs. Furthermore, not only is arable land not expanding as we saw in the chart above, but we also have a shortage of farmers too. Agricultural industry has some of the highest suicide rates from India to UK, while farmers from Australia to Japan, and from India to the US have an average age of 55 plus. We are not only running empty on inventories, we are also running low on farmers.

Now take into account Asia and its opening up towards the world since the start of the millennium. At the start of the millennium, China was quite self sufficient in feeding itself, with plenty of Grains, Meats, Fruits and Vegetables to export. Surplus trade lasted for awhile, however since the last several years, things have started to change dramatically. China is becoming more and more hungry. The super bears keep hammering the point that deflation will take food prices to very low levels, but they need to understand that Agriculture is run by basic demand and supply, so even if the Chinese property market implodes into itself, the Chinese will not stop importing food.

Furthermore, not only are Emerging Markets like the BRICs hungry, but they also want to eat better food like we do in the West. That requires a higher protein diet, which in turn means more Grains to feed the Live Stock. Yes... you heard right, more Grains - the same ones that the world has been neglecting for decades and currently has very short supplies off. Please note that basic mathematics states that if China was to increase its Livestock by 10%, all of the US Corn supplies will be eaten up automatically and huge shortage crisis would unfold. This does not factor any other problems like weahther creating a bad harvest.

As already covered on this blog before, sentiment is extremely negative on Agriculture with futures positions at the lowest level since March 2009, while DSI survey's on individual commodities have all reached single digit bull readings in recent weeks. Looking at the chart above, Agriculture is very very oversold while the bearish momentum is slowly weaning off as we diverge. This is your typical run of the mill bear market which has declined for over 10 months and almost 30% from the peak in February 2011. If investors are meant to buy value at cheap prices, than Agriculture with its strong fundamentals and discounted price presents an amazing opportunity right now.
With the Euro sentiment extremely negative and US Dollar sentiment extremely positive, eventually over the coming days or weeks or months the US Dollar will top (do not ask me for a exact date). At that point all commodities, including Agriculture, should get a great boost. Finally, another boost might also come from global money printers, all of whom just cannot help themselves (chart above). It is a fact that we have literally printed trillions of Dollars, Euros, Yen and Pounds to "save" our economies, but historically whenever banks and governments printed money, price of food and energy always increases but economic prosperity never returned...

Chart Of The Day

Emerging Market demand for commodities is very strong, and it is not just China - but all BRIC countries plus many more - that requires large amount of commodities to proceed with their long term secular shift from Emerging Market economies towards increasing their GDP relative to Developed World.

It should also ben noted that most commodity bull markets have lasted between 15 to 20 years within the secular timeframe. Currently we are about 11 years into this bull market, so what we are currently experiencing is a cyclical downturn in a major secular upturn. Remember that all secular bull markets eventually end in a bubble mania phase, and this commodity bull market will also do so in due time...

Sunday, December 18, 2011

Weekly Recap: December 2011, Week III

Blog Summary
Large amount of updates this week. Lots of technical price patterns that e are all watching recently, with many triangles evident in many asset classes. These type of patterns usually develop with uncertainty. Currently, uncertainty arises from awful deterioration in credit markets which is bearish; and optimistic improvement in economic data which is... I guess bullish, at least for the time being.

Market Summary
Soybean complex surpsied on the upside this week, but apart from that it was the regular safe haven assets (I'll would call them anything but that) gaining this week. US Dollar and Treasury Bonds manage to record another week of gains. On the downside, the talk was all about the metals Gold, Silver, Platinum, Palladium and Copper were all totally destroyed this week, with each down more than 6%. As a matter of fact, at one point in time Silver was down almost 13% this week. Equities and Crude Oil were also major losers this week too!

Talk Of The Week
All eyes are on the Eurozone Debt Crisis week after week. The question now is, are we going to get some type of a relief soon? It seems that the market participants are now positioned for a total collapse of the Euro against the Dollar, which is much much worse than it was in June of later year. The chart above shows record net short exposure against the Euro, which means either a total crash from these levels or a more likely outcome of Eurocrats announcing some type of non sense that will make everyone cover and create a super short squeeze.

On that note, I hope everyone enjoys the rest of their weekend!!

Saturday, December 17, 2011

Credit: European Libor Spiking...

Instead of doing another credit market update, I thought I would just put forward one chart. It is the spread between London's Interbank Offered Rate (LIBOR) and the 3 Month European interest rate. Basically the higher the risk, the higher the spread. This is because LIBOR rises due to distrust in the credit markets and 3M European yield falls due to flight into safety assets.
Unless European bureaucrats do something asap, the s&%t is about to hit the fan - literally. Economy is one thing, and sentiment indicators for stock markets is another thing; but all bullish outlooks should be demised against credit risks like we have today, until of course credit markets start to improve. With Euro futures positions sitting at an all time high as the Euro hit the $1.29 handle (-116,000 net shorts), chances are the politicians will come up with some bandaid fix to kick the can down the road and create a super short squeeze.

However, if they don't... I'm afraid its crunch time. Our fund remains 91% in cash earning 6% interest in Australia - no need to take too much risk here just yet. At a first sign, hint or signal from central banks that balance sheet expansion will begin again (money printing), we will think about reinvesting our capital as that type of a move should ease credit risks automatically - similar to the late 2008.

Interview: Robert Prechter Talks Markets On CNBC

Friday, December 16, 2011

Stocks: Technical Update

I've been doing quite a few technical updates between Treasury Bonds (Article: Bonds: Is It Time To Short Treasuries?) and Silver (Article: Commodities: Silver Technicals), that I might as well do stocks. It seems that every single asset class these days has indecision triangles, similar to what Gold had only a week or two ago (Article: Commodities: Gold Technicals). Traders and investors do not know what will happen so the prices on the main indices are making a series of higher lows (bulls in control) and lower highs (bears in control).
The perfect example is the chart above, which shows the S&P 500 recently selling off from its resistance level of about 1,260 / 1,270 level. This was a previous support for the bull market prior to S&P downgrade in August. On top of that we have a series of lower highs as well as a 200 day moving average creating a cluster of resistance levels, which were too strong for bulls to break and so now we have another price sell off. This is also the third time 200 day moving average was not broken, so some analysts say that is a very bad sign.
These same analysts than point to the Shanghai Composite, and rightfully so, saying that Chinese stock market has recently broken down below July 2010 support. If the S&P 500 did the same thing, that would mean a break below 1,010. First, technically Chinese market is now extremely oversold (blue circles), so this is not the time to be a preacher more downside from here. Sometimes crashes occur from oversold levels, but crashes are not an everyday type of events so we might have a bounce here now, at least until the work off this oversold condition.

Second, Chinese equities have corrected much more than their US counterparts because Chinese Money Supply growth has collapsed to the lowest level in a decade, while the US Money Supply growth is at the highest level in at least 30 years. You see... Bernanke is much smarter than we think he is, or at least give him credit for. He is the true money printer, who relies on stupidity of retail investors, who mainly look at the nominal price of asset values. He understands that these investors have no chance again the printing press and "modified" CPI data, which always reads: "Core CPI stable".
I'm not so bearish on equities here, at least in the short term. If Shanghai does lead the world's stock markets, than it might start bottoming out in the coming days so I think the market could stage a rally for awhile. Having said that I wouldn't really buy equities or play this rally theme. On top of that, the chart above shows that recently NYSE Down Pressure got quite extreme again. Every time we had 80% of all points and volume move to the downside over the 3 days, we ended up staging at least a bit of a rally. Four time out of six, we actually put in an intermediate bottom using this indicator (red circle) and stage quite a decent rally of 5 to 10 percent. Maybe together with large mutual fund outflows in the last two weeks and large Put purchases as of yesterday, we might stage a bit of a rally here...

Thursday, December 15, 2011

Commodities: Silver Technicals

Quite a few charts have been focusing on the extreme price action from the markets in recent days. Today I have done two, with the first one being Gold's sharp decline below the 200 day moving average. So now I thought I would put forward none other than one of the worst performing asset class since the May 2011 top... Silver.
This precious metal, which seems to be more rare than Gold these days, is currently down over 13% for the week, over 18% for the month, almost 30% down for the quarter and almost 45% down since the peak in late April of this year. We now seem to be in another liquidation phase (chart above), which could be the third and final one. I would also like to add that Silver is now 3 standard deviations away from its 50 day moving average. This rare event only happened a handful of times in the last half a decade or even longer (second chart below). The dates circled in red include middle of 2006, middle of 2007, late 2008, early 2010, September 2011 and currently as of now.
Every single one of those events happened to be an intermediate bottom, apart from the famous Lehman Brothers crash in 2008. Three of the five signals were major bottoms, as huge gains followed afterwards. As already mentioned 2008 was a dud signal and would have cost you a high draw-down have you held the whole way down, but the bull market would have saved you in the end as the secular theme is still pointing here for precious metals. Finally, the recent signal in September would have made you a decent return for a trade or a break even as a worst case scenario. I assume that this current signal will be one of the more major ones, where one's investment will be followed by some serious gains in the future.
After all, this is now the second most oversold reading in over a decade! The question is how far lower will the price could go as investors overact in a panic? Judging by the last two phases (first chart above), which corrected by 30% to 40% from top to bottom, we could drop anywhere from another 10% to 20% from here... if we were to follow similar patterns. I am not so sure about that, so on the other hand, we could already be oversold and bottoming right around here. Having said that, I guess we will have to wait and see how things turn out in the up and coming trading sessions. The best thing is to wait for the panic and liquidation to end, before stepping in...

On a final note, it looks like majority who voted for Silver to reach $26 before year end might just get their prediction right if the price goes lower from here (Article: Poll: Up Or Down For Silver?). We are currently only $2 away from that outcome... Whenever the selling ends, I recommend to buy some Silver or add to your positions - I know I will!

Chart Of The Day

I've been predicting it for awhile, and we finally did it... Gold has broken its 200 day moving average. This is a great development for the bulls and a very healthy outcome for the Gold's secular bull market. On top of that, bears are back, especially when we look at Roubini's tweet yesterday:
“Gold at a 7 weeks low down to 1635. Where is 2000 gold dear gold bugs?”

Wednesday, December 14, 2011

Chart Of The Day

Today's chart of the day was just sent in by a friend. He thinks that we have now entered a capitulation phase on the Euro. In other words, what he is saying is we could be making a final sharp sell off before EU politicians come out and "fix the problem" by kicking the can down the road. Supporting evidence is that the markets position is extremely negative on the Euro and ripe for huge short squeeze. What do you say - Euro bottoming and further Dollar rally?

Stocks: Fund Flows Very Pessimistic

Equity fund flows are very very pessimistic at the current time. Globally, investors have been exiting the equity market and chasing defensive assets with yield, like government or corporate bonds. It seems that everyones favourite group of "experts", financial advisors, are now running around circles recommending mums and dads to take money out of the stock market and place it into a more "safe" bond investment.

According to Nomura's recent research (chart below), cross board equity fund flows for the US, Europe and Japan are now at the second lowest level in over two and half decades. The only time investors were more negative was during the once in a generation 2008 crash - and we haven't seen one of those since 1974 or 1932 prior to that. I actually found the whole thing so astounding after I noticed that outflows today are relatively worse than back in 1987, when the stock market globally crashed between 40% to 60%. Boy, are people scared to death of losing money in stocks!
On top of that, contrarian investors should note that every crisis brings about a buying opportunity, which is shown very well in the chart above. This is something mums and dads, and their financial advisors are yet to figure out. Be it the Gulf War in 91, Mexican currency devaluation of 95, Asian financial crisis of 97, Russian bankruptcy of 98, 9/11 terrorist attacks or the Enron & World.com scandals of early 2000s - all of these events create buying opportunities for strong returns going forward next 6 to 12 month. In other words, being a contrarian against the flow of funds and the flow of bad news usually pays returns. I guess I can say that is quite a smarter thing to do than herd into bonds and any other safe haven assets - which seems to be the most popular investment right now.

Fund flows to the ever popular Global Emerging Markets (GEM) have slowed down remarkably over the last 12 months as well. The BRIC fairy tale stories of strong economic growth are not working on investors right now as they are replaced by fear stories of high inflation rates and Chinese property crash. The chart above, once again thanks to Nomura research, shows relative equity returns vs Developed Markets and overlapped by mutual fund flows, which are than forwarded by 12 months to predicted future returns. The correlation between fund flows and forward returns stands at negative 71% since 1995.
In plain English these two indicators move in opposite directions, so the higher the inflows and optimism, the worse the performance and visa versa. The chart above shows that we are approaching an inflection point at which point GEMs should start outperforming the rest of the world. Funnily enough, just as we arrive at the point where investors should look for potential opportunities in this area, majority of global investors have been withdrawing money in an almost panic like fashion. While we are not yet at 12 month rolling average of outflows, we are definitely close to it. Keep an eye out on GEMs, because if they do fall hard one more time, do not hesitate to jump in with both feet. You will be a lot richer 12 months after!
Finally, lets look at the short to medium term picture in chart above. We are looking at domestic mutual fund flows. It is safe to conclude that mums and dads have been exiting the equity market in a hurry in the US, especially since the peak in early May 2011. As a matter of fact, we have seen 8 monthly outflows from the equity market this year, out of the possible 11 months. Even more importantly we have had some serious money leaving including a $30 billion outflow in August during the market crash.

I think it is safe to say that retail investors are completely scared the hell out of the equity market, mainly due to the insane volatility and also due to the consistently negative and fearful news flow that seems to bombard them on daily basis. I can now assume that it will be a long while until we actually see a proper monthly inflow, let alone two in the row - sounds like a wall of worry to me...