The Commodity Bubble
by ilene - February 16th, 2011 7:29 pm
Courtesy of SurlyTrader
In the future they might coin this the “Bernanke Effect” or maybe the great commodity bubble of 2011. The truth is that commodity prices are rising…dramatically. You might have started to notice this disconnect in your grocery store shopping or in gasoline prices, but if you were to ask our government they would tell you that a basket of goods consumed (CPI) is rising modestly. How modest do these numbers appear to you?
Sugar and Corn? Those are luxury goods.
If the basic ingredients to food are skyrocketing, then prices of food will eventually have to keep pace which will directly hurt consumers.
Of the 853 ETF’s that I looked at, which unleveraged funds do you think had the greatest return over that same time period? It is not a trick question:
Are you noticing a theme?
My conclusion is simple: this time is NOT different. Commodity prices cannot go up forever and China will not continue to support the market regardless of prices. What is this “Bernanke Effect” doing to farmland prices? Well, according to a survey by Farmer’s National Company:
“non-irrigated crop land in central Kansas averaged $3,000 an acre, up 50 percent since June…
Crop prices have seen an extraordinary run since early July. A bushel of wheat priced about $4 a bushel on July 4 is now more than $8.50. Other crops have experienced similar increases.
As the land generates more income, it puts more cash in the pockets of the most likely buyers, nearby farmers. It also provides an attractive return for investors who then rent it out to farmers.
The result: Auctions are drawing twice the number of bidders as before, said area agents.”
As with all hot speculation, the commodity run will surely come to an end and will probably have repercussions for all financial markets. We should have learned by now that large financial dislocations tend to not occur in isolation.
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DiggFickle Friday’s Jobs Report
by Phil - January 7th, 2011 8:29 am
I don’t know what the Jobs will be but I’m betting on disappointment.
I had said to Members yesterday that I liked the Jan QQQQ $56 puts at .77 and the Weekly (next week, not today) QQQQ $56 puts at .53 as good ways to play a jobs miss. My comment in Member Chat was that I felt the ADP figures pushed expectations up significantly higher and now we would be much more likely to disappoint with almost any number short of 250,000 jobs added.
The key is the seasonal adjustments but there was already some very disturbing jobs numbers in the Gallup Poll, which came out last night and showed unemployment RISING from 9.3 to 9.6% in December and, even worse, the number of Underemployed workers shot up from 18.5 to 19%, just 0.5% lower than we were in January of last year.
Gallups Job Creation index showed no improvement in December but it is holding +10, which is the best net level we’ve had since October of 2008. So we have ADP going one way, yesterday’s unemployment numbers were flat and Gallup says things are getting worse. 8:30 will be very interesting indeed.
While we wait for the number, let’s take a look at last week’s post to see how things are tracking. Monday morning I mentioned we liked FCX short at $120 (a trade that was reiterated Tuesday morning) as we felt the run in copper was overdone. It was a rough week but FCX is down at $116 now so we’re on track at the moment of course we took a spread in chat, which was the Feb $119/110 bear put spread at $3.60, selling the Jan $120 calls for $3.60. That spread is now $4.60 and the calls have dropped to $2.30 for a nice net $2.30 gain already.
I said that $90 was already ridiculous for oil and we shouldn’t go any higher. We picked up the USO Feb $40 puts on Tuesday morning in Member Chat at $2.10 and those are now $3.70 so a nice $1.60 gain there, which is about the same as if we had just shorted the stock as it dropped from $39 that morning to $37.68 now. That’s where puts are very useful, you don’t have to commit as much as a short on the stock, you limit…
Fake-Out Thursday – Oil Scam Continues Unabated
by Phil - December 16th, 2010 8:27 am
What a joke the oil market is!
First of all, the NYMEX contracts for January delivery close on Tuesday and there are still 132,168 open contracts or 1,000 barrels each (132M) scheduled for delivery to Cushing, OK, a facility that can handle at most, 45Mb of crude and is, at the moment, full. The price of those barrels surged from $86.82 all the way back to our shorting target of $89 yesterday, where we once again had a nice ride down. Now, in pre markets, it is back over $89 again and we’ll short it again so I’m not complaining about the action but I am upset that this blatant rip-off of the American consumer can go on right under our "leadership’s" noses.
Logic alone dictates that if 132M barrels are on order for delivery to a storage facility that can only handle 45M barrels that the orders are mostly bogus. You can track the open interest every day right here so don’t take my word for it, watch what happens over the next few days as the people who are currently pretending to demand oil in January, roll their contracts to pretend demand for February (already at a ridiculous 268M barrels), March (172Mb) and April (60Mb). Like the great Carnac, I will put the envelope to my head and predict that, by Tuesday, the January barrel count will fall to under 30,000 contracts, while the new front three months will rise by close to 100,000 contacts.
This is scam #1 in the energy market and it goes on every month since the "Commodity Futures Modernization Act" of 2000 made it possible for thieves to run the energy markets with virtually no regulations. I’ve been speaking out on this for years and just this weekend, the NYTimes picked up the ball I tossed up over a year ago (better late than never!), when I pointed out that the Global oil scam was costing us 50 times more than the Madoff scandal EVERY YEAR! We’re not going to go into all that again as I want to highlight scam #2 in the energy markets and that is the weekly manipulation of the oil inventory reports.
Yesterday, Criminal Narrators Boosting Crude were very excited to report…
Monday Market Movement – Pulling on Global Threads and the SEP
by Phil - December 6th, 2010 8:28 am
"We think the global (and overall European) outlook remains robust."
That’s the word from Goldman Sachs’ Erik Nielson this weekend, who also observes that he was "Possibly deluded by the wonderful vibrancy of California." Deluded indeed seems to be an excellent choice of words with a new report out showing that California leads the nation in a local government pension crisis that has a $3.5Tn hole to fill and will not be sufficient to pay benefits through 2020 along with 5 other states while another 20 states will run out of funding by 2025. Is Nielson just saying anything to herd more suckers into the market by telling the sidelined cash that it’s safe to go back in the water or is he cleverly employing an SEP Field to bamboozle the public?
An SEP (Somebody Else’s Problem) Field s an effect that causes people to ignore matters which are generally important to a group but may not seem specifically important to the individual. As Douglas Adams put it:
An SEP is something we can’t see, or don’t see, or our brain doesn’t let us see, because we think that it’s somebody else’s problem… The brain just edits it out, it’s like a blind spot. If you look at it directly you won’t see it unless you know precisely what it is. Your only hope is to catch it by surprise out of the corner of your eye. It relies on people’s natural predisposition not to see anything they don’t want to, were not expecting, or can’t explain.
SEP’s are commonly used by politicians to justify ridiculous policies like kicking crises down the road, ignoring pension and other unfunded obligations (that’s going to be your children’s problem), massive deficits (grandchildren’s problem), unemployment (lazy people’s problem), global warming (someone living south of you’s problem) and, of course unfair tax policies (poor people’s problem). They are also used by analysts, CEOs, their lobbyists and journalists (especially TV ones) to distract the "beautiful sheeple" from focusing on what’s really happening.
Not at all our problem is the price of vegetables in China and that’s a good thing for us because they have risen 20% in 30 days. Officially, China’s inflation rate was 4.4% in October but even that is expected to jump 14% to 5% in November. "Many see China’s monetary tightening as a pre-emptive tap on…
Testy Tuesday – Dollar 77 Edition
by Phil - November 9th, 2010 8:28 am
The Dollar fell from 77.515 at 3:15 yesterday to 76.835 at 7:30 this morning.
That, my friends, is the story of the markets. A 0.9% drop in the Dollar overnight is a huge move, something that once upon a time would have made headlines as America’s $100Tn worth of household wealth has $1,000,000,000,000 shaved off of it in some overnight catastrophe. But there was no overnight catastrophe, just the horribly normal, shockingly ordinary destruction of the US Dollar, which has now become the plaything of International Market manipulators who boost it to pump the Asian markets up overnight and then crash it to goose the US markets in the morning. It’s MADNESS but we are loving it because, at least it’s predictable madness.
In yesterday’s post I reminded you about our $87.50 short on oil futures and we hit it again this morning and that’s exactly what I said would happen in my 2:21 comment to Members when I predicted they would run oil back up into inventories. We LOVE ranges – they are so much fun to play. Gold is now 20% above our $1,150 line and at the top of that range ($920-$1,380) we’ve been watching since March of 2009 so I updated our "Spinning Straw Trades Into Gold" post with a whole new set of trade ideas to help protect our cash if the dollar keeps getting weaker and gold keeps heading higher.
As I said to Members in yesterday’s Morning Alert, it’s all a huge sham but it’s the only game in town so we just need to learn the silly rules and figure out how to win if we want to keep playing (although I am currently advocating mainly cash and playing just for fun as we test our upside). We did go for an ABX trade in Member Chat on Friday, a play that was also made available to Stock World Weekly readers over the weekend (last chance to subscribe before we’re out of Beta and the rates double!) and ABX is, of course, flying as gold broke through the $1,400 mark yesterday. So we like gold as a small hedge against inflation eating into our sidelined cash but, on the whole, I’d rather short it – I just want to be clear about that.
We can’t short gold with Benny and Timmy running the…
TGIF – The Tale of the Asian Tiger
by Phil - October 1st, 2010 8:10 am
What a morning already!
The Hang Seng rose 179 points in today’s trading and finished down 20 for the day – THAT’S how bad the open was! The Nikkei finished an up and down 100-point swing up 34 points at 9,404 but dove into the close along with the dollar (our 3am trade), which now can be bought with just 83 Yen. The Shanghai, on the other hand, was feeling hot, hot, hot and gained 1.7% just behind the BSE, which flew up 1.9% to take back the position of Global Leader.
Strong data boosted the Asian indexes overall with China’s PMI rising to 53.8 from 51.7 in August while India’s PMI pulled back slightly from 57.2 to 55.1 but that’s good as over 50 is expansion and 57.2 is running a little hot. Korean exports rose 17.2% in September, also a little too hot as their CPI topped 3.6% but mainly driven by food prices, which seems temporary. China’s upbeat PMI reading indicates that the negative impact of government measures to control the property market is probably waning, ING’s Mr. Condon said. This means China’s slowdown will probably be less abrupt than expected, especially in the fourth quarter.
The effect, he said, should be especially positive on North Asian economies closely tied to China’s demand, such as Korea and Taiwan. Fears of lower Chinese demand have had a particularly pronounced effect on Taiwan’s business outlook. The island’s September PMI ticked down to 49.0 from 49.2. "Sturdy domestic demand" should keep Taiwan’s economy on target to grow 7.3% this year, "provided employment conditions continue improving," said HSBC economist Donna Kwok.
![[YUAN_1]](http://si.wsj.net/public/resources/images/AI-BF617_YUAN_1_NS_20100930134401.jpg)
On our side of the planet, the US markets, especially commodities, got a huge boost as China’s government gave a muted response to House legislation aimed at forcing the Yuan to be valued higher. Aside from China knowing that they already own enough Senators to Filibuster any legislation aimed at protecting American jobs, the bill was watered down in that it PERMITS, but does not REQUIRE, the US to levy tariffs on goods produced by countries found to have undervalued currencies.
Sharp retaliation by China is unlikely in the short term, analysts said, since the bill hasn’t become law and wouldn’t immediately produce restrictions on Chinese goods even if it did. In an apparent gesture to U.S. concerns, China has pushed the yuan up steadily in recent weeks; it…
Market Commentary From David Rosenberg: Just Call It “Deflationary Growth”
by ilene - September 21st, 2010 11:12 am
Market Commentary From David Rosenberg: Just Call It "Deflationary Growth"
Courtesy of Tyler Durden
If the way to classify the September stock move as "a confounding ramp on disappointing economic news" gets you stumped, here is Rosenberg to provide some insight. Just call is "deflationary growth or something like that." And as for the NBER’s pronouncement of the recession being over, Rosie has a few words for that as well: "this recovery, with its sub 1% pace of real final sales, goes down as the weakest on record."
It’s a real commentary that the National Bureau of Economic Research (NBER) decision on the historical record mattered more than the actual economic data. The National Association of Home Builders’ (NAHB) housing market index is the latest data point in an array of September releases coming in below expected:
- Philly Fed index: actual -0.7 versus 0.5 expected
- Empire manufacturing index: actual 4.14 versus 8 expected
- NAHB: actual 13 versus 14 expected
- University of Michigan Consumer Sentiment: actual 66.6 versus 70 expected
It’s early days yet, and these are only surveys, but it would seem as though the economy remains very sluggish as we head towards the third-quarter finish line.
It is truly difficult to come up with an explanation for the breakout, which in turn makes it difficult to ascertain its veracity. If we are seeing a re-assessment or risk or a major asset allocation move, then why did Treasury yields rally 4bps (and led lower by the “real rate”, which is a bond market proxy for “real growth expectations”)?
If it was a pro-growth move, why did copper sell off and the CRB flatten? And where is the volume? Still lacking? So we have a breakout with little or no confirmation. All we can see is that many sentiment measures have swung violently to the upside in recent weeks and the VIX index is all the way back to 21x —- somewhat contrary negative signposts for the bulls.
But the price action is undeniable and the bulls are in fact winning the battle in September, a typically negative seasonal month, after a bloody August. The fact that bonds rallied yesterday is a tad bizarre and perhaps the explanation, if there is one, is that the equity market is enamoured with the cash leaving the corporate balance sheet in favour of dividend payouts and share buybacks and
…
Monday Morning – Basel Boosts Bourses
by Phil - September 13th, 2010 8:03 am
Nice pop in the futures this morning!
The big news, which we already discussed in the "Weekend Reading" post, is the historic remake of the World’s banking regulations, which was finalized in Basel, Switzerland by the G20 Finance Ministers over the weekend. You can click over there for the details, as well as discussions on gold, college costs and the jobs market – so I won’t get into all that here. Suffice to say, the rules are good and, like FinReg, they will take a long time to go into effect and the markets are relieved that the uncertainty is over (well, that particular uncertainty, at least).
Jean-Claude Trichet, President of the European Central Bank and Chairman of the Group of Governors and Heads of Supervision, said that "the agreements reached today are a fundamental strengthening of global capital standards." He added that "their contribution to long term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery." Nout Wellink, Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank, added that "the combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth."
All seems right with the World this morning as Oil touches our $77.50 goal in pre market trading and Gold stays below the $1,250 mark (no panics). Copper is in the upper end of our expected $3.40-$3.50 range and is likely to break over -even our poor Natural Gas is catching bids at the $3.80 mark, now $3.85 and TLT continues to fall (TBT continues to climb – see Dave’s chart) . This is all despite a strong dollar That held the 50 dma all last week – another week over the line and we begin to bend it up to match the rising 200 dma and then the fun can begin. Fortunately, we have had less of a run in the commodity sectors this time so, hopefully, the rising dollar won’t be the market-killer it usually is but we will be watching out for that.
Another chart we’ll be watching is the VIX, the volatility index, which is known as a "fear" indicator for the markets, hasn’t been below 20 since April and,…
Peak Everything
by ilene - September 12th, 2010 6:27 pm
Peak Everything: An Interactive Look At How Much Of Everything Is Left
Courtesy of Tyler Durden at Zero Hedge
Scientific American has done a great summary of peak commodity levels as well as depletion projections for some of the most critical resources in the world including oil, gold, silver, copper, not to mention renewable water, as well as estimating general food prices over the next half century. Generally speaking, regardless of whether one believes in peak oil or not, the facts are that stores of natural resources are disappearing at an increasingly alarming pace. And instead of the world’s (formerly) richest country sponsoring R&D and basic science to find alternatives, the US government continues to focus on funding a lost Keynesian cause, debasing the dollar and perpetuating a system that will do nothing to resolve any of these ever more pressing concerns. Furthermore, as by 2020, the US will have around $23 trillion in debt (per CBO estimates), the government will be far too focused on using anywhere between 50-100% of tax revenues to cover just interest expense, than funding science and research. Then again it is probably only fitting that future generations will be saddled with not just $100 trillion in total sovereign debt, but will be running out of water, will see sea levels rising ever faster, will have no flat screen TVs, and will be using Flintstonemobiles to go from point A to point B. All so a few bankers and ultra-wealthy individuals don’t have to recognize total losses on their balance sheets filled with trillions in toxic debt.
Some key highlights from Scientific American, as well as the year in which a given resource either peaks or runs out:
Oil – 2014 Peak
The most common answer to "how much oil is left" is "depends on how hard you want to look." As easy-to-reach fields run dry, new technologies allow oil companies to tap harder-to-reach places (such as 5,500 meters under the Gulf of Mexico). Traditional statistical models of oil supply do not account for these advances, but a new approach to production forecasting explicitly incorporates multiple waves of technological improvement. Though still controversial, this multi-cyclic approach predicts that global oil production is set to peak in four years and that by the 2050s we will have pulled all but 10% of the world’s oil from the ground.
In…
Tumultuous Tuesday – Waiting for the Fed
by Phil - August 10th, 2010 8:27 am
Wheeeee – this is going to be exciting!
Yesterday we knew that the move up was fake, Fake, FAKE and we acted accordingly in Member Chat. We had a nice QID cover play right in the Morning Alert that was an easy fill as the Nas went higher and higher all day. It was the Aug $16/17 bull call spread at .42, and the $16 puts sold for .29 for net .13 on the $1 spread with a nice 669% upside if the Nasdaq heads sharply down on us. Our stops on the play were a combination of Nas 2,300, Dow 10,700 and Russell 666 and we got the Nasdaq and the Dow over their marks but, once again, 666 proves to be an ominous barrier for the Russell.
We put on our Stock Market Parachutes and went bearish on our Mattress Plays as well. Not so much because we are long-term bearish but because the run-up ahead of the Fed decision seemed very overdone as pretty much EVERYONE is now predicting QE2 so what kind of market mover can it now be – even if the Fed does drop another Trillion or so on us this afternoon? Later in the day we added an SDS spread, similar to the logic of the QID but longer-term (January). As I said in my closing comment to Members: "We haven’t got 666 on the RUT yet so the risk/reward favors rolling up to the Dec $110 puts and staying naked through tomorrow. If we are over on 3 of our levels tomorrow, then we can cover."
When we are near the top of our ranges (see Charts from the Future: 5% Rule Update) we can assume there will be upside resistance so we have less risk shorting the indexes we think are over-extended compared to the potential reward of what happens if the news that had been pumping up the market on rumors turns out to be a big disappointment and causes us to retrace.
This is not contrarian investing nor is it trend following as we make our bets very much against the trend (ALWAYS sell into the initial excitement) – it’s simply our attempt to apply logic and statistics to a volatile situation. Also, keep in mind we are still long-term bullish and that’s where the bulk of our open trade ideas are aiming so we lean towards shorter-term bearish covers to keep us safe through…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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