“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput






Thursday, June 30, 2011

USDA Shocker

The widely anticipated USDA Crop report came out this AM and stunned the grain world with its much larger than expected corn acreage number. Widespread flooding in combination with much cooler than normal weather across the northern tier of the country had resulted in major planting delays due to excessive ponding and water-logged soils. Farmers simply could not get into their fields to plant in numerous regions.

That is what makes the number given to us by the USDA this morning so incredulous. Either way, the corn market was absolutely devastated as it was swamped with orders from panicked longs trying to get out. The front month July contract, which is in its delivery period is trading without price limits and is currently down over $0.70/bushel while the most active December contract (the new crop) has more than 200K orders to sell at the limit price.

This massive sell off in corn has taken down wheat (over $0.50 as I write this) and soybeans and led to sharply lower prices across the cattle and hog markets.

The result has been to take the CCI (Continuous Commodity Index) lower in spite of the fact that the RISK TRADES are back on again today with the Dollar moving lower. Were it not for the USDA shock numbers, I believe we would have seen strength across the entire commodity complex. As it is, the selling in the grains is leading to margin related selling across some of the other commodity markets this morning which is putting pressure on the entire sector as a whole. This is coming in spite of the fact that the long bond market continues its recent collapse as trader euphoria over the Greek bailout continues to produce what can only be described as more "irrational exuberance" among the equity market bulls. Traders are acting as if inflation is back in the cards and are jettisoning bonds after stampeding into them for the last two months. ( I might note here that the bonds are moving off their worst levels of the session as I write this so perhaps the selling in there is beginning to dry up somewhat - we will have to see how they close today).

Personally I think the rally in stocks borders on insanity but the shorts are all being systematically squeezed out (AGAIN). The short term effect of the political release of oil from the SPR has totally evaporated with the crude oil market higher in price than when the news was released. GAsoline prices have jumped nearly $0.30/gallon off the recent low and are back above $3.00 at the wholesale level on the NYMEX. Clearly energy prices are stubbornly refusing to stay down for long.

If that were not enough, Jobless claims numbers came in at 428,000 for the week, well over analyst expectations of 420,000. That makes 12 straight weeks of reading above 400K, not exactly the thing that signals the economy is improving. Consumer confidence readings continue to weaken. Yet, we get a huge rally from off the critical technical chart support level of 1250 in the S&P, which has gone straight up for 4 days in a row based on what? Greece?  It is now trading above the 50 day moving average after having fallen down below that important average only a short month ago. Try as I can I do not see anything of note on the data front that suggests anything has improved to the point of pushing a 50+ point rally in the S&P. Must be a national security issue to keep the stock market levitated. Then again, what else would Goldman and Morgan be doing with their spare time if not propping up the US equity markets.

Either way, the big rally in equities is having the effect of pushing money back into the mining sector shares as those ratio spread trades have seen some unwinding at the expense of the actual metals. I am therefore very hesitant to read too much into the action of the miners since they are currently joined at the hip with the broader equity markets. The downtrending 50 day moving average has been the lid on both the HUI and the XAU since late April of this year. Only if the bulls can push both indices solidly above this level will we be able to conclusively say that the miners have a shot at beginning a trend higher. For the HUI that comes in near 533 and for the XAU the level is near 203. The XAU looks the firmer of the two as the large cap miners are holding better than the juniors in general.

The indices have a bottom in near 490 on the HUI and 190 on the XAU which continues to hold firm but that is a far cry from meaning we are going to see an uptrend develop. That will take more conclusive technical price action.

Gold ran into selling near $1515 as it was unable to get back above $1520. As long as it is unable to climb over its 50 day moving average, rallies will be sold. Lingering worries about sovereign debt issues in the Euro zone coupled with concerns over the US Dollar's fortunes are keeping safe haven flows into the metal but not of sufficient size at this point to flip the technicals to a bit more friendly posture. As was the case yesterday, for starters, gold needs a solid pit session close over $1520 to turn the chart picture more friendly. Downside support in the market remains near this week's low of $1490.




The US Dollar continues to play Yo-Yo with its 50 day moving average, first popping over it back last month, then dropping below it, then moving back above it the middle of this month, and now caving in and losing that level day. Trying to read where it is going next is hopeless for the immediate time being. Basically it is the "picture worth 1000 words" to demonstrate the fickle nature of the hedge fund community and the boy wonders who manage them. I cannot even imagine what some of those guys would come up with were they forced to take one of those ink blot tests.

Oh, one last thing - the Peoples Republic of California just managed to run Amazon out of its borders as the leftists in charge of that place just decided to tax internet sales. Yep - that should really help create some more jobs out there. I am waiting for the day when they begin regulating what color socks and underwear are permitted.




 

10 comments:

  1. Dan,
    Except Goldman Sachs and Morgan trading with insider information -which the last time I checked is unlawful !!- who can make money trading this market? I heard that more and more investors are mainly on the sideline with a pile of cash...and the fact that trading volume is very low... This would explain why the market's manipulation is going full blast with the manipulators being the "only" players. Do you feel it's the case?

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  2. Dan,

    A lot of great info thanks for sharing it. I remain curious about the corn numbers and how the USDA arrived at them when all the negative weather news went against it.

    But I have a question about the Amazon issue. I think this is huge and know that we can expect more state governments to attempt to find ways to tax Internet sales, my question is, how can we avoid this snowballing to other states?

    With a large number of states coming up short I don't see how this can be stopped. To me, it's a lot like the red light cameras that are popping up all over the place now just because other municipalities are doing them and are tantalized by the possibility of greater income. It certainly has nothing to do with keeping people safe.

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  3. Dan....another good posting....I actually understand what you are talking about.

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  4. goldtracker....Ohio asks you to report your internet purchases so you can pay sales tax on them....I'm sure there are others!

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  5. Hubert....good question....I have the same feeling!

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  6. I was just in Tx area last week. We did about 1000 miles of driving in 7 days (Austin to Corpus Christi and back).
    In the southern part of this trip I saw lots of farm fields and what looked like dead brown corn about 3 ft tall. Do the numbers account for corn that was planted then died due to the regional drought?

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  7. Hubert - a lot of guys are indeed moving to the sidelines as the volatility and erratic trading moves have left a path of shell-shocked victims.
    That lowers the liquidity even more and worsens the volatility.

    Paul Breed - the acreage numbers will reflect the number reported as planted but will not pick up those that have dead corn on them. That will begin to show up as surveys are done and we get a better sense of the overall size of the crop. I happen to think the acreage number will be the high point and will move lower from here.

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  8. Are the miners going up as the hedgecover their shorts in response to gold dropping?

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  9. c'mon people, the corn report is just another fabrication from whole cloth

    they are determined to take down the commodities because there is no inflation

    okay?

    let's not make this too complicated

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  10. RE: jake the snake - LOL yeah. The simple answer is typically the best.

    RE: RWSmith13 - I had no idea about Ohio. I'm sure there are other states doing things similar. CA just stands out the most because of the size or their economy. But you make a good point. They aren't the first, apparently.

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