Monday, January 31, 2011

Natural Gas Requires Discpline and Patience

Exercising discipline in a market that requires none is easy. It's a lot harder doing so in market that demands it. Natural gas requires discipline and patience. The increasing in the number of bullish setups could reflect a market in transition.

Natural Gas (UNG) and Natural Gas Diffusion Index (DI):


This commentary sums up the domestic natural gas fundamentals.

Headline: Natural gas: the commodity world’s ‘ugly duckling’

Natural gas has played the part of an outcast, wallowing in a supply surplus, even as most other commodities managed to turn heads with their impressive gains over the past several months.

“Natural gas is the ugly duckling of the commodities,” said Ben Smith, president of First Enercast Financial, an information vendor serving energy markets.

But just like the beloved Hans Christian Andersen fairy tale, the natural-gas story has the potential to transform — if investors are patient enough to wait.


Source: marketwatch.com

Kick The Can Down The Economic Road

Earning (sigh - as this heavily massaged and adjusted number is not what it seems) and spending more and save less philosophy has transitioned from economic choice to necessity for Americans. America’s reliance on personal consumption, more commonly known as "spending", kicks the can down the road.

The belief that economic problems are defined by weakness real estate is misguided. Real estate continues to be only a minor contributor to gross domestic product (GDP). It’s contribution to GDP was only 6% at height of the real estate bubble.

Residential Fixed Investment (RFI) As A %GDP and Residential Fixed Investment (RFI) As A %GDP Average from 1947:


Real estate’s importance since 2000, a point often missed by the headlines, resided in its ability to support and enhance leveraged consumption. Many Americans considered their homes as piggy banks for extra consumption prior to the collapse in 2006.

The reliance on consumption to support GDP, however, did not fade with the decline of the real estate market. In fact, yesterday’s personal consumption expenditures as a percentage of GDP nearly eclipsed the all-time highs achieved in 2009 (see chart below). In other words, spend more and save less, or the driving forced behind ongoing consumption bubble and economic imbalances within U.S., is live and well.

Personal Consumption Expenditures (PCE) As A %GDP and Personal Consumption Expenditures As A %GDP Average from 1947


How’s the consumption bubble maintained as real estate fades? The public sector through a combination of infinite quantitative easing (currency devaluation) and stimulus has replaced real estate as the boot that kicks the can down the economic road. The public sector spending which represented 17% of GDP in 2000 has surpassed 20% in 2010. Federal spending at 8.3% of GDP has jumped 43% during this period.

Government Consumption Expenditures and Gross Investment (GCEI) As A %GDP Average from 1947:


Federal Consumption Expenditures and Gross Investment (FED) As A %GDP Average from 1947:


Investment and savings are the foundation of any sustainable economic recovery or economy. Investment in the US continues to flounder at levels not seen since the Great Depression. Unadjusted savings, heavily influenced by statistical assumptions and adjustments, thus, making historical comparisons meaningless, have turned but remain challenged despite the economic collapse.

Gross Domestic Private Investment (GDPI) As A %GDP and Gross Domestic Private Investment (GDPI) As A %GDP Average from 1947


America is known for spending more and save less. The trends clearly reveal that is changed despite the rhetoric. Kick the can down the road until it's someone else’s problem.

Savings (SAV) As A %GDP Average from 1947:


Headline: Americans earn and spend more, save less

As incomes slowly creep back up, Americans are spending more freely and saving less. Personal income rose 0.4% in December, following a 0.4% increase in November, according to data released Monday by the Commerce Department.

Spending by individuals ticked up 0.7%, compared to a revised 0.3% spike the prior month.

Both measures beat expectations. Income was expected to increase by 0.5% in the month, according to a consensus estimate of economists from Briefing.com. The economists expected spending by individuals to rise 0.6% in December.

Source: finance.yahoo.com

Sunday, January 30, 2011

Rising Lumber Prices Interpretated As Bullish For Real Estate

While the rally from the lows has been impressive, it still does not suggest an inflection in the trend. The pattern of lower highs and lows remains undisturbed since 2006. Despite some bullish prediction for housing, intense outflows by connected money as the price surges warrant skepticism, if not caution, until the setup changes.

Lumber (CC) And Lumber Diffusion Index (DI):


Headline: Time for timber to shine?

Looking for a sector that could benefit from a potential rebound in the housing market south of the border?

Wood products may just fit that bill, and Desjardins Securities Inc. analyst Pierre Lacroix Thursday upgraded a handful of names to reflect his view that profitability will get better heading into 2012.

"We believe that the investment outlook for wood products over the next two to three years is very compelling," he wrote in a note.

A number of these stocks have already seen a strong run-up. But Mr. Lacroix believes that lumber prices may encounter some softness in the near term, creating a buying opportunity further down the road.

Source: theglobeandmail.com

Saturday, January 29, 2011

Agenda: With George Friedman on Egypt


Source: Agenda: With George Friedman on Egypt STRATFOR

Mass Exodus of Specs & Retail Traders

On Friday we found out the the supply on the Comex and hammering of gold was primarily the product of an undisciplined hedge fund trader who got caught in an outrageously large spread under-financed. We also learned of the problem in Egypt that few thought as serious as it has become. Gold had two drivers Friday. The clear fact that the supply in gold was an aberration that drew the chart. Yes, Egypt but not fully appreciated. Egypt is "Iran and the Shah revisited." That is extremely SERIOUS.

Jim

Spreading activity and open interest have collapsed. This tends to reflect the mass exodus of the noncommercial (specs) and nonreportable (retail) traders.

Gold London P.M Fixed And Stochastic Weighted Average of Spreading As A % of Open Interest:


Gold London P.M Fixed and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest:


Headline: Small Gold Trader Makes Big Splash

Thanks to the nature of futures trading, Daniel Shak's $10 million hedge fund held gold contracts valued at more than $850 million, more than 10% of the main U.S. futures market, and the equivalent of South Africa's annual gold production.

But as gold prices started falling this year, the trade, which was a combination of being long and short gold contracts—bets that prices will both rise and fall—started going bad. Monday, he liquidated his position, and is returning money to clients.

As a result, the number of gold contracts on CME Group Inc.'s Comex division plunged more than 81,000, to about 500,000, the biggest single reduction ever. While his trade didn't account for all of the contracts, an average daily move is about 3,000 to 5,000 contracts.

Source: online.wsj.com

Headline: The Egyptian Unrest: A Special Report
January 29, 2011 2207 GMT

Egyptian President Hosni Mubarak remains the lifeblood of the demonstrators, who still number in the tens of thousands in downtown Cairo and in other major cities, albeit on a lesser scale. After being overwhelmed in the Jan. 28 Day of Rage protests, Egypt’s internal security forces — with the anti-riot paramilitaries of the Central Security Forces (CSF) at the forefront — were glaringly absent from the streets Jan. 29. They were replaced with rows of tanks and armored personnel carriers carrying regular army soldiers. Unlike their CSF counterparts, the demonstrators demanding Mubarak’s exit from the political scene largely welcomed the soldiers. Despite Mubarak’s refusal to step down Jan. 28, the public’s positive perception of the military, seen as the only real gateway to a post-Mubarak Egypt, remained. It is unclear how long this perception will hold, especially as Egyptians are growing frustrated with the rising level of insecurity in the country and the army’s limits in patrolling the streets.

There is more to these demonstrations than meets the eye. The media will focus on the concept of reformers staging a revolution in the name of democracy and human rights. These may well have brought numerous demonstrators into the streets, but revolutions, including this one, are made up of many more actors than the liberal voices on Facebook and Twitter.

After three decades of Mubarak rule, a window of opportunity has opened for various political forces — from the moderate to the extreme — that preferred to keep the spotlight on the liberal face of the demonstrations while they maneuver from behind. As the Iranian Revolution of 1979 taught, the ideology and composition of protesters can wind up having very little to do with the political forces that end up in power. Egypt’s Muslim Brotherhood (MB) understands well the concerns the United States, Israel and others share over a political vacuum in Cairo being filled by Islamists. The MB so far is proceeding cautiously, taking care to help sustain the demonstrations by relying on the MB’s well-established social services to provide food and aid to the protesters. It simultaneously is calling for elections that would politically enable the MB. With Egypt in a state of crisis and the armed forces stepping in to manage that crisis, however, elections are nowhere near assured. What is now in question is what groups like the Muslim Brotherhood and others are considering should they fear that their historic opportunity could be slipping.

One thing that has become clear in the past several hours is a trend that STRATFOR has been following for some time in Egypt, namely, the military’s growing clout in the political affairs of the state. Former air force chief and outgoing civil aviation minister Ahmed Shafiq, who worked under Mubarak’s command in the air force (the most privileged military branch in Egypt), has been appointed prime minister and tasked with forming the new government. Outgoing Intelligence Chief Omar Suleiman, who has long stood by Mubarak, is now vice president, a spot that has been vacant for the past 30 years. Meanwhile, Defense Minister Field Marshal Mohammed Hussein Tantawi (who oversees the Republican Guard) and Egypt’s chief of staff of the armed forces, Lt. Gen. Sami Annan — who returned to Cairo Jan. 29 after a week of intense discussions with senior U.S. officials — are likely managing the political process behind the scenes. More political shuffles are expected, and the military appears willing for now to give Mubarak the time to arrange his political exit. Until Mubarak finally does leave, the unrest in the streets is unlikely to subside, raising the question of just how much more delay from Mubarak the armed forces will tolerate.

The important thing to remember is that the Egyptian military, since the founding of the modern republic in 1952, has been the guarantor of regime stability. Over the past several decades, the military has allowed former military commanders to form civilian institutions to take the lead in matters of political governance but never has relinquished its rights to the state.

Now that the political structure of the state is crumbling, the army must directly shoulder the responsibility of security and contain the unrest on the streets. This will not be easy, especially given the historical animosity between the military and the police in Egypt. For now, the demonstrators view the military as an ally, and therefore (whether consciously or not) are facilitating a de facto military takeover of the state. But one misfire in the demonstrations, and a bloodbath in the streets could quickly foil the military’s plans and give way to a scenario that groups like the MB quickly could exploit. Here again, we question the military’s tolerance for Mubarak as long as he is the source fueling the demonstrations.

Considerable strain is building on the only force within the country that stands between order and chaos as radical forces rise. The standing theory is that the military, as the guarantor of the state, will manage the current crisis. But the military is not a monolithic entity. It cannot shake its history, and thus cannot dismiss the threat of a colonel’s coup in this shaky transition.

The current regime is a continuation of the political order, which was established when midranking officers and commanders under the leadership of Gamal Abdel Nasser, a mere colonel in the armed forces, overthrew the British-backed monarchy in 1952. Islamist sympathizers in the junior ranks of the military assassinated his successor, Anwar Sadat, in 1981, an event that led to Mubarak’s presidency.

The history of the modern Egyptian republic haunts Egypt’s generals today. Though long suppressed, an Islamist strand exists amongst the junior ranks of Egypt’s modern military. The Egyptian military is, after all, a subset of the wider society, where there is a significant cross- section that is religiously conservative and/or Islamist. These elements are not politically active, otherwise those at the top would have purged them.

But there remains a deep-seated fear among the military elite that the historic opening could well include a cabal of colonels looking to address a long-subdued grievance against the state, particularly its foreign policy vis-à-vis the United States and Israel. The midranking officers have the benefit of having the most direct interaction — and thus the strongest links — with their military subordinates, unlike the generals who command and observe from a politically dangerous distance. With enough support behind them, midranking officers could see their superiors as one and the same as Mubarak and his regime, and could use the current state of turmoil to steer Egypt’s future.

Signs of such a coup scenario have not yet surfaced. The army is still a disciplined institution with chain of command, and many likely fear the utter chaos that would ensue should the military establishment rupture. Still, those trying to manage the crisis from the top cannot forget that they are presiding over a country with a strong precedent of junior officers leading successful coups. That precedent becomes all the more worrying when the regime itself is in a state of collapse following three decades of iron-fisted rule.

The United States, Israel and others will thus be doing what they can behind the scenes to shape the new order in Cairo, but they face limitations in trying to preserve a regional stability that has existed since 1978. The fate of Egypt lies in the ability of the military to not only manage the streets and the politicians, but also itself.

Source: stratfor.com

Growing Worry Spook Financial Markets

Secular-driven change often creates a power vacuum for non-secular groups to exploit. The financial markets have reacted not only to the possibility of change not only in Egypt but also other more sensitive countries within the Middle East.

The Equity Diffusion Index (DI), residing in netural territory, doesn't offer much insight.

S&P 500 and COT Futures and Options Equity Diffusion Index (DI)


Headline: Fitch downgrades Egypt outlook to negative

Fitch Rating on Friday revised down its outlook for Egypt, dropping it to "negative" as mass protests in the country turned violent, engulfing the capital and other cities in a serious challenge to President Hosni Mubarak's 30-year rule.

Fitch said it was holding steady Egypt's other ratings, including its long-term foreign currency issuer default rating, which was held at the investment grade BB+.

Source: finance.yahoo.com

Friday, January 28, 2011

Munis In Transition?

States will go broke, Jim

'Broke' comes in all shapes and sizes

Eric

The technical setup in muni bonds, despite the assurances from various experts, suggests a market in transition. Do you recall similar setups and assurances for Enron, Fannie Mae, sub-prime and Alt-A mortgages, credit swaps, PIIG debt, etc? While history rarely repeats, it almost always rhymes. The technical structure of the "bounce(s)" after the initial crash often reveals depth of the damage. Munis warrant a space within the data feed in the coming months.

iShares National Muni Index ETF:


Headline: Moody’s to Include Unfunded State Pension Liabilities, NYT Says

By James Kraus - Jan 27, 2011 1:17 AM ETinShareMorePrintEmailMoody’s Investgors Service plans to include unfunded pension liabilities into its credit rating for U.S. states’ debt, the New York Times reported, citing Robert Kurtter, managing director for public finance at Moody’s.

States haven’t included those liabilities until now, prompting growing unease among investors in municipal bonds, the newspaper said.

The new system will be comparable to the way Moody’s now rates corporate and sovereign debt, the newspaper said. States with the highest total indebtedness include Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island, as well as Puerto Rico, the Times reported.

Source: bloomberg.com

Gold, Consumer Expectations, and Cycles

Secular trends and cycles suggest the following:

(1) The negative correlation between gold and consumer expectations, a proxy for consumer spending – a large contributor to economic growth in the United States, is strong. This correlation tightens during periods of aggressive currency devaluation and economic stress.
(2) Any temporary up tick in consumer expectations, regardless of explanation (i.e. extension of tax cuts, extra stimulus, or hope fostered by unrelenting media hype) only provide ‘fuel’ for gold next advance when it inevitable falters within a slow growth, debt-laden economic environment.
(3) The major cycle date is not due until 2015-2016.

University of Michigan Consumer Expectations (CE) and Gold: A Correlation Study:


Headline: Consumer Sentiment Improves Slightly During Late January

U.S. consumer sentiment improved in late January, as hopes of a stronger economy and more jobs overcame worries about rising costs for food and gasoline, a survey released on Friday showed.

Expectations of more cash to spend due to federal tax cut extensions and a temporary reduction on payroll taxes also brightened consumers' mood, according to the latest consumer survey from Thomson Reuters and the University of Michigan.

"The tax cuts, nonetheless, helped to improve overall prospects for the national economy, including job prospects," said Richard Curtin, director of the Thomson Reuters and University of Michigan survey.


Source: cnbc.com

Thursday, January 27, 2011

Talk is Cheap

Interpretations originating from short-term 'talk' are often misleading. This point is not missed by the paper operators. That's why talk is cheap and (following the) money is dear.

Headline: Gold Loses Safe-Haven Appeal

Spot gold prices were suffering Thursday on lackluster physical buying as gold's appeal as a safe haven deteriorated.

Gold for February delivery was adding 10 cents to $1,333.10 an ounce at the Comex division of the New York Mercantile Exchange. But the futures market wasn't where gold was getting killed. The spot gold price was sinking more than $10, according to Kitco's gold index. The gold price on the Comex was still stuck in a tight range trading as high as $1,347.50 and as low as $1,330.30.

Source: finance.yahoo.com

Downgrade of Japanese Debt, Is the US Next?

Can the US rating agencies ever focus on the 'US debt problem' (see Dan's comments below) without jeopardizing its umbrella of protection? Unlikely.

Dear friends;

This morning news came down the wires that the rating agency S&P had downgraded Japan’s sovereign debt from ‘AA’ to ‘AA-‘. This is no small development. The reality is that Japan’s finances are in even worse shape than those of the US when its overall indebtedness is compared as a percentage of GDP. Japan is approaching a debt to GDP ratio of nearly 200%! Yes, you read that correctly. The only nation in the entire world that is higher is Zimbabwe. IN effect, the Japanese government spends 2 yen for even one yen of overall economic activity.

What this means is that the rating agencies, who are watching these sovereign debt woes which have struck various countries in the EU, are concerned about the same problem beginning to surface in other quarters around the globe. Quite simply they are looking at the huge deficits being run by many nations in the West (and Japan). In other words – TOO MUCH DEBT!

That led to selling in the long end of the US yield curve this morning as bond traders are starting to be more than a bit fearful that the same thing is going to happen to the US’s ‘AAA’ rating at some point in the future if the US does not get its financial house in order. They are watching massive amounts of QE2 and another ballooning of the federal budget deficit and are selling even as the Fed attempts to jam the market higher with its purchases. AT this point, the only thing holding the long end of the curve is the Fed. How long can that last especially without affecting the Dollar?

More and more we see the integrity of sovereign debt being brought into doubt which leads to the question among many investors; “what is a safe haven that is actually safe?” Who wants to take the chance of holding a nation’s bonds if overnight they face the real risk of being downgraded?

The real world impact of this is that nations whose debt gets downgraded will have to offer potential investors a higher rate of return to compensate them for the increased risk of holding their debt. For nations already hopelessly in debt, that means borrowing costs begin to rise forcing them to borrow even more money just to keep their heads above water. The whole thing becomes a vicious cycle with rising interest rates compounding the problem.

The US has been able to sneak by and thus far avoid a rating agency’s downgrade partly because its borrowing costs are so low. Should these agencies begin to train their sights on the US and give closer scrutiny to its miserable financial condition, there is a chance that a downgrade could follow. Such a development, were it to indeed occur, would force the US to offer higher rates of return on its debt. That of course would raise its borrowing costs at a time when it can least afford it not to mention short circuiting the QE policy which is deliberately designed to lower borrowing costs.

This is why the take down in gold, after yesterday’s nice performance, is so remarkable for its perverseness and why long term oriented holders of the metal should not be the least bit concerned as to the antics taking place in the paper market. Sovereign debt woes are not behind us – the problem lies squarely ahead of us and no amount of wishful thinking is going to change that hard reality.

This being said, one of the things we now want to monitor will be the performance of gold when priced in terms of the Yen.

Respectfully,
Trader Dan

Headline: FOREX-Yen slides on S&P downgrade of Japan long-term debt

The yen slid against both the dollar and the euro on Thursday after Standard & Poor's cut Japan's long-term debt rating, a move that raised questions about the risks of downgrades for other developed economies.

Although Japan's fiscal troubles are well known, analysts said the downgrade called into question the yen's status as a safe-haven currency, boosting the appeal of the dollar and the likes of the Swiss franc.

Source: reuters.com

New Home Sales And Real Estate Slump

New home sales are notoriously volatile due to seasonality factors. Seasonality adjustments can cause unexpected strength in one month, only to be followed by unexpected weakness in the next. While new home sales unexpectedly surge, loan demand and various permutation of real estate credit generation fail to support it.

Total Bank Credit Table for All US Commercial Bank:


Follow the trends (money), not headlines influenced by statistical quirks. If the following trends can be interpreted into headline strength, I’d hate to see weakness.

New home sales, despite the unexpected monthly strength, continue contract year-over-year.

New Home Sales And Change YOY, SA:


There’s a lot of home supply to work through over the next few decades.

Months Supply And Change YOY:


Real median home prices continue to be confined within the sharp downtrend of 2005.

Median Home Price to Gold Ratio (MHPGOLDR) And YOY Change:


Headline: US new home sales at 8-month high, loan demand down

* New-home sales jump 17.5 pct in December

* Median home price highest since April 2008

* Home loans index slumps to lowest since mid-October (Updates with Fed statement)

Sales of U.S. new homes raced to their highest level in eight months in December, but gains were driven by a surge in the West that economists were reluctant to call a sign of the market's recovery.

Single-family home sales jumped 17.5 percent to a seasonally adjusted 329,000-unit annual rate, the Commerce Department said on Wednesday. Economists had expected an increase to only a 300,000-unit pace.

Even with last month's gain, new-home sales are down 75 percent from their peak of 1.283 million-unit pace in 2005.

December's new-home sales were boosted by a 71.9 percent surge in the West that confounded economists, who viewed the strength as fleeting.

And in a sign that the housing recovery was still a long way off, an industry group on Wednesday reported an 8.7 percent drop in applications for new home loans last week.

Source: reuters.com

Wednesday, January 26, 2011

In The News

Kicking the can down the road with a bridge out ahead requires more business as usual. That is, until business as usual has no effect.

Headline: Obama's Spending Freeze Just 'Spare Change': Roubini

The White House plan to partially freeze government spending is just "spare change" compared to a budget deficit of more than $1 trillion and eventually the US will have to raise taxes, economist Nouriel Roubini of Roubini Global Economics told CNBC Wednesday.

President Barack Obama proposed a five-year freeze on non-discretionary defense spending for five year to lower the deficit by about $400 billion.

Source: cnbc.com

Headline: Tax cut deal pushes deficit to $1.5 trillion, CBO says

The federal deficit for 2011 will hit $1.5 trillion, driven higher by the "slow and tentative" economic recovery and the bipartisan tax cut deal passed late last year, the Congressional Budget Office said Wednesday.

The deficit forecast would equal to almost 10% of the economy.

And if lawmakers extend many of today's current policies otherwise set to expire soon, the national debt would likely rise by $12 trillion over the decade from 2012 to 2021. That is about $5 trillion more than would be the case otherwise and would bring total debt to $23 trillion, the CBO said.

Source: finance.yahoo.com

Definable Bottoms In Gold

Hi Eric,

I have read recently that solid bottoms in gold tend to be associated with commercial traders are aggressively buying rather than just covering short positions. What's your take?

Thank you,

Ron

Hello Ron,

My take is that there are no absolutes in precious metals markets. “Strong bottoms,” and I use that term loosely, tend to be associated with not only aggressive short covering but also buying by connected money. The chart below parses commercial futures and options into long and short money flows. The green shaded boxes represent the presence of both aggressive short covering and buying by commercial traders. That is, the perfect storm of money flowing into paper gold. A cursory examination of the chart, however, reveals that green shaded boxes failed “paint” every buying opportunity. Definable bottom, which could also be characterized as strong, have occurred during periods of aggressive short covering without buying en mass. These bottoms are shaded purple. In addition, definable bottoms have been created during periods of aggressive buying without much short covering. These bottoms are shaded blue.

Gold London P.M Fixed and the Commercial Traders COT Futures and Options ZScore Weighted Average of Long & Short As A % of Open Interest:


The study of money flows in precious metals requires detailed analysis of long, short, and net long positions within the context of cycles. As yesterday’s commentary and analysis suggested, the net long transfer which has yet to include further selling after 1/18 is already the fourth strongest since 2001. This implies a powerful redistribution (transfer from weak to strong hands) is already underway. This powerful redistribution will setup the next leg up. Perhaps the 1/25 data will illustrate the development of another perfect storm in money flows. That is, the presence of both aggressive short covering and buying by connected players as cycle dates approach.

One in Six Seniors Lives in Poverty, New Analysis Finds

Currency devaluation (inflation) tends to hit the lower and middle classes fairly hard. It also hits anyone heavily dependent on fixed income. This tends to be elderly, retired, or anyone else that has yet to learn that gold is money.

One in six older Americans lives below the federal poverty line, according to a new government analysis which almost doubles the number of very poor seniors compared to the standard estimate.

At 16%, the proportion of seniors living in poverty is also higher than the proportion of all Americans in poverty. The plight of poor women is particularly striking: 43% of Hispanic women who live alone, and 34% of black women who live alone, live in poverty, according to Supplemental Poverty Measure Research, an alternative calculation from the U.S. Census Bureau. The Supplemental Poverty Measure is a U.S. Census research tool that considers previously overlooked costs like out-of-pocket medical expenses and taxes that can create economic stress for seniors on fixed incomes.


Source: www.ncoa.org

From Bob

Tuesday, January 25, 2011

Fly- By-Sight Or Instruments?

When rhetoric inevitably deceives your mind, it's always your ability to fly by instruments, i.e. your discipline, that prevents a panic crash. While rhetoric hypes gold, ultimate safe haven, as no longer needed in a recovering economy, it affects only those that lack the ability to fly on instruments.

It's a secular bear market in stocks price in ounces of gold (constant currency). Cumulative momentum readings above zero, circled in the chart below, tend to highlight inflections within the downtrend. Capital will rotate en mass once the setup is right.

NYSE Composite to Gold Ratio:

It's The Economy Again, Same Problem As Last Year

The consumption bubble, consumption at the expense of savings, investment and future production arises from them, will be difficult to "fix" as long as short-term tools are chosen to solve a long-term problems. Easy money, liquidity, and the illusion of the endless plateau of prosperity based on debt fostered America’s propensity to consume in excess. How ironic that easy money and liquidity, two main drivers of America’s consumption problem, have been chosen to solve it.

While stimulus, bailouts, and infinite QE have helped to maintain the era of consumption (1982-2000), it is beginning to show signs of strain. Ultimately, this up trend, regardless of the size and number of policies designed to kick the can down the economic road, will succumb to the laws of practical economics. They simply state that the trees of economic growth, watered by debt, do not grow to the sky.

Personal Consumption Expenditures (PCE) As A %GDP and Personal Consumption Expenditures As A %GDP Average from 1947


Headline: State of the Union: It's the economy, again

Addressing a demand for economic answers, President Barack Obama will try to convince the American people and a divided Congress that he has a vision for speeding up job creation, promoting spending on the core of his agenda but promising to rein in a growing, staggering debt. His State of the Union address will reflect reality: The economy trumps all.

To a nationwide television audience Tuesday night, Obama will home in on jobs, the issue of most importance to the public and to his hopes for a second term.

Source: news.yahoo.com

What's Not Bullish About This Long-term Chart?

Let's not confuse the message of thus post with technical jargon and fancy analysis.

What's not bullish about this chart?

S&P Gold (Formerly Precious Metals Mining)*
*S&P Gold from 1945, Barron's Gold Stock Index from 1939-1945, 1922-1939 Homestake Mining:


Harry S Truman, known for his plain talk, said it best,

If you can't stand the heat, get out of the kitchen.

Some might be tempted to add some profanity for emphasis.

While you search for the right word, I'll throw this chart to help pass the time.

S&P Gold (Formerly Precious Metals Mining)* to Gold Ratio:
* S&P Gold from 1945, Barron's Gold Stock Index from 1939-1945, 1922-1939 Homestake Mining:

Taking Candy From A Baby

How many have noticed the technical damage in the U.S. Dollar market recently?

U.S. Dollar ETF


The unfolding of yet another massive weak to strong hands paper transfer in the precious metals markets suggests no many. Selective media coverage, intensive, repetitive focus on obvious areas while important areas receive total blackout, reinforces the importance of the money flows and technical setups discussed below.

The break of the down trend in early 2011 suggested a change in trend for the U.S. dollar.

U.S. Dollar Index and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest


The paper transfer in gold can only be characterized as “taking candy from a baby” - it’s simply too easy. This paper blitz by connected money is already the fourth largest since the bull market started in 2001. Moreover, the panic liquidation that ensued after 1/18/11 has yet to be recognized in the chart below. The ‘control’ still displayed in precious metals while a tidal wave of liquidity extends to every corner of the economic globe is truly amazing.

Gold London P.M Fixed and the Commercial Traders COT Futures and Options ZScore Weighted Average of Net Long As A % of Open Interest:


Paper control, however, has it limits. As James Turk recently pointed out in a commentary entitled “Silver in Backwardation, Set to Explode”, that spot price is higher than the futures price in silver (backwardation). It’s not only higher relative to the short-term but also twelve months forward.

Turk goes on to make the following observations,
Backwardation happens regularly in most commodities, but it is rare in the precious metals. The last time this happened Eric was in January of 2009. Over the next few weeks silver rose from about $10.50 to $14.50, a roughly a 40% move higher. The key to understanding backwardation is that the price must rise to entice holders of physical metal to sell and accept a national currency in return. I think we can expect a similar event to repeat over the next few weeks.

Turk's observation about the growing strain in the silver market is confirmed by extreme reading in London PM fixed (physical price) and silver ETF (paper silver) ratio. The last two extreme readings, an indication of extreme strain between physical and paper markets, were March and September of 2008.

Silver London PM Fixed to Silver ETF ratio:


In other words, what the markets are trying to say is that there’s a limit to paper control. The sheeple will always be slaughtered, but the market forces that drive price cannot. This implies that paper price, despite the best efforts of the sheeple to comply into fear, cannot be pushed beyond the limits of credibility as a reasonable price marker for physical it’s suppose to represent. If that happens, there will be no market left to control.

Monday, January 24, 2011

Follow The Money In Natural Gas

When Jim suggested a few days ago that The Mini Ice Age has begun - at least here, perhaps some readers thought an icicle from his porch dropped on his head. Jim’s comments, though seemingly far-fetched, are scientifically based.

The Sun’s output cycle has been well documented over the years. Researchers have found that the Sun cycles between an active (lots of sunspots) and inactive (few sunspots) states. In recent years, researchers began to analyze these cycles in relationship to the earth’s climate and temperature. Their empirically supported conclusions are likely to surprise many.

The natural gas market is highly influenced by climate-driven energy demands. A minor reduction in seasonal temperatures, driven by reduced solar output, will increase weather-related demand while overall demand continues to grow over the course of decades. Persistent inflows since 2010 could be capital adapting while the public resides in yesterday's paradigm.

Natural Gas and the Commercial Traders COT Futures and Options ZScore Weighted Average of Net Long As A % of Open Interest:


Headline: US GAS: Futures Retreat Despite Cold Weather Forecasts

Natural gas futures slid Monday after hitting five-month highs as traders cashed out of the market to profit from its recent advance, despite continued forecasts for cold weather in the coming weeks.

Natural gas for February delivery settled 15.6 cents lower, or 3.3%, at $4.580 a million British thermal units on the New York Mercantile Exchange.

Natural gas prices climbed by 5.7% last week, rising for three consecutive sessions as meteorologists said the frigid weather seen this month in much of the eastern U.S. will likely stretch into February, extending winter's chill and increasing demand for the heating fuel.

But some traders were likely cashing out Monday to profit from the market's strength, analysts said.

"We could see a pullback here," said Kyle Cooper, director of research at IAF Advisors in Houston. "As long as it stays cold, it's probably not coming down significantly."


Source: online.wsj.com

S&P warns of more muni bond downgrades

The rating agencies are fully aware of the risks within the global financial system. Some entities can be downgraded, while others cannot.

Just as fears about a heavy sell off in the municipal bond market seemed to be easing, Standard & Poor's issued a warning that this year could bring a potential surge in the number of downgrades of bonds issued by state and local governments.

States including California, Illinois and New York are strapped for cash and dealing with deep budget deficits, sparking fears that states and cities could fall short in payment obligations to muni bond holders.

Source: finance.yahoo.com

McDonald's likely to raise prices in 2011

If it looks, talks, and smells like inflation, it probably is. Perhaps McDonald’s could advise the BLS, whom views food and energy as too volatile to include in the core consumer price calculation, as to the importance of food and energy and the role of long-term commodity movements within economic cycles. Don’t think for a minute that McDonald’s is unaware of long-term commodity cycles.

McDonald's Corp (NYSE:MCD - News) said it would selectively increase menu prices this year to help offset an expected rise in its own grocery bill for the 10 commodities that account for around 75 percent of its food preparation costs.

Food prices are climbing around the globe and the world's biggest restaurant chain said its costs are expected to rise this year 2 percent to 2.5 percent in the United States and 3.5 percent to 4.5 percent in Europe.

Source: finance.yahoo.com

Texas balanced budget with stimulus money from Washington

The bailout of State finances, despite the suggestion that "they're on their own" from Federal sources, will be either direct (stimulus money or programs) or indirect (mortgage bond purchases). Here's an example of direct.

Headline: Texas balanced budget with stimulus money from Washington

Texas Gov. Rick Perry likes to tell Washington to stop meddling in state affairs. He vocally opposed the Obama administration's 2009 stimulus program to spur the economy and assist cash-strapped states.

Perry also likes to trumpet that his state balanced its budget in 2009, while keeping billions in its rainy day fund.

But he couldn't have done that without a lot of help from ... guess where? Washington.

Source: finance.yahoo.com

Follow The Money In Crude Oil

A second wave of heavy outflows in November 2010 materialized well before any supply increase hint(s). See chart below. Interesting how outflows and rhetoric have become a bit more 'focused' as price has moved above an important swing high in 2011.

Crude Oil (WTI) and the Commercial Traders COT Futures and Options ZScore Weighted Average of Net Long As A % of Open Interest:


Headline: Oil prices fall as Saudis hint at raising supplies

The price of oil fell on Monday after the Saudi oil minister hinted that his country, the world's biggest oil producer, may raise supplies to put the brakes on higher oil prices.

Benchmark crude for March delivery lost $1.36 at $87.75 per barrel in afternoon trading on the New York Mercantile Exchange. The price of oil has fallen more than 3 percent since Thursday, when it was close to $92 a barrel.

Source: finance.yahoo.com

Sunday, January 23, 2011

Tidal Waves of Liquidity Since 2002 Were No Accidents

The tidal waves of progressively stronger liquidity injections since 2002 were no accidents. The warning signs presented in the present and past in plain sight for everyone to see remain largely unrecognized as the all-important 2012-2015 timeframe approaches. Money, unlike historians, does not have the luxury of retrospect analysis. What could very well prove to be one of the more economically and socially challenging periods in American history will likely unfold faster than the public will be able to process it.

Headline: Cuomo Weighs More Than 10,000 Layoffs

Gov. Andrew Cuomo is weighing plans to lay off more than 10,000 government workers, rivaling the number of pink slips handed out by his father a generation ago, according to individuals familiar with budget discussions.

While Mr. Cuomo has not settled on a figure, the governor in recent days has told lawmakers and other officials that he is looking at dismissing 10,000 to 12,000 workers, or more than 5% of the state's public work force, the individuals say.

Source: online.wsj.com

From Bob

Saturday, January 22, 2011

The Difference Between Methodology And Crystal Ball When Anticipating Direction In Stocks

Many experts, citing factors such as stretched fundamentals to relatively high investor sentiment, suggest that the time is right for a substantial stock market decline. The suggestion that the market remains on the cusp of a major decline denies that capital, seeking protection against further currency devaluation, has begun its secular transfer from the public to private sector. This transfer includes the movement from sovereign debt to global equities.

In addition, substantial stock market declines usually materialize a major cycle dates with clear evidence of a deteriorating long-term technical setup. This deterioration can include significant trend line breaks, the clustering of various sell signals, and various negative divergences within the trend. Interpreting anything shorter than the long-term fundamental and technical setup is better suited for crystal ball gazing.

Kennedy Gammage said it best,

“Those of us who make a living looking into a crystal ball will end up learning how to eat lots of broken glass.”

The following chart illustrates one of several long-term technical perspectives (setups) for the NYSE.

NYSE Composite:


Headline: Time For A Correction

Since January 1871, whenever the price-dividend ratio has spiked in a given month, stock prices passed through a trough (a short term bottom) 24.1% of the time during the same month as the spike, 59.4% of the time within one month of the spike and 81.4% of the time within two months of a spike.

Because there is no trough in average monthly stock prices in the months leading up to December 2010, that correlation suggests that there is a very high likelihood of one occurring by the end of February 2011.

Meanwhile, we don't see any significant deterioration in the fundamentals underlying today's stock price valuations, which indicates to us that the market will soon go through a short term correction, with stock prices rebounding quickly afterward.

Consequently, we view today's upward movement in stock prices as a selling opportunity. We would expect a buying opportunity to follow in the near future.

Source: businessinsider.com

Headline: Clouds Among Stocks' Blue Skies

In the stock market, another tune from that era, "Blue Skies," seems to capture the mood of the moment. "Never saw the sun shining so bright, never saw things going so right," Irving Berlin wrote back in the late 1920s. And that's the sentiment pervading the market these days.

Investors Intelligence's latest readings of advisers' opinions show the bulls have backed down a bit, to 54.5% from 55.6% the previous and their three-year high of 58.8% the week before that. Those calling for a correction moved up to 25.0% from 24.4% in the preceding week and 20.6% two weeks ago. But bears remain around the 20% mark, leaving a wide spread of 35 percentage points between bulls and bears -- a level of exuberance that's been associated with the market sitting on a precarious perch.

Source: online.barrons.com

American Association of Individual Investors Sentiment Survey:


Source: aaii.com

Friday, January 21, 2011

Lenders See Little Choice: Layoffs

Couple of observations:
(1) Slower revenue growth due to lower loan demand suggests the economic recovery and stock market rally is more a product of infinite liquidity and accounting flexibility than increased private investment and aggregate demand.
(2) The public sector following the private sector’s instinct to survive will announce even greater layoffs without 'creative' Federal assistance.

Headline: Lenders See Little Choice: Layoffs

The banking industry, racked by the financial crisis and facing slower revenue growth, is starting to cut costs increasingly at the expense of jobs.

Wells Fargo & Co. (NYSE: WFC - News) and American Express Co. (NYSE: AXP - News) said Wednesday that they would take action to reduce expenses and lay off employees to become leaner. PNC Financial Services Group Inc. (NYSE: PNC - News) and Fifth Third Bancorp (NYSE: FITB - News) said Thursday they too want to become more efficient.

For Synovus Financial Corp. (NYSE: SNV - News), that means cutting jobs. The bank said last week it would eliminate 850 jobs, 13% of its staff, and close 39 branches to save $100 million in expenses a year.

State Street Corp. (NYSE: STT - News) reiterated Wednesday that it is on track to save as much as $625 million in expenses through 1,400 job cuts to be completed this year. Barclays Capital laid off 600 employees world-wide earlier this year.

Source: finance.yahoo.com

Don't Let The Paper Shenanigans In Gold Obscure Reality

A big reduction in benefits for the public sector is inevitable. States lack the ability to print or devalue their currency to meet their obligations. States either receive federal assistance to meet their obligations or reorganize in bankruptcy, similar to GM, as a means of reducing past and present obligations. The two options, the former indirect through currency devaluation and the later direct through reduction and elimination of benefits and employment, imply a substantial reduction in standard of living within the public and to a lesser degree private sector. The secular uptrend in gold, despite the short-term paper shenanigans driven by fear and doubt, continues to reflect this growing reality.

Headline: A Path Is Sought for States to Escape Their Debt Burdens

Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.

Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.

But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.

Source: nytimes.com

From Bob

Thursday, January 20, 2011

The Movement of Leverage Capital in Precious Metals

Analysis of COT data through 1/11/01 suggests that connected money has been quietly buying weakness through a combination of long purchases and short liquidation. Friday's data is expected to reveal a continuation of this trend. Recent weakness in precious metals represents yet another example of the transfer of control from weak to strong hands as open interest contracts. This pattern of control, increasingly showing signs of strain, can be viewed throughout the secular bull.

Silver London P.M Fixed and the COT Futures and Options Open Interest Stochastic Weighted Average:


There's always a daily reason. It rarely includes the movement of leveraged capital.

Headline: Gold Prices Slammed by Rate Hike Worries

Rate hike worries were pressuring gold prices Thursday as Brazil led the charge to control inflation. The selloff was accelerated by solid economic data from the U.S. and technical trading.

Gold for February delivery was lost $23.70 to $1,346.50 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,370.90 and as low as $1,342.40 during Thursday's session. The spot gold price was down more than $18, according to Kitco's gold index.

Source: thestreet.com

Vallejo proposes paying some creditors only 5% to 20%

Paying creditors a fraction of money owed or suspending payments altogether were tactics used by municipalities of all sizes in the Great Depression.

Vallejo, which filed for bankruptcy in 2008, has proposed paying its unsecured creditors, who are mostly current and former employees, as little as 5% to 20% of the amount they say they are owed in a bid to return the economically shaky Bay Area bedroom community to fiscal health.

John Knox, a San Francisco lawyer representing Vallejo, said the proposal to not repay all debts is "probably rare" for a municipal bankruptcy. But he said it would save the city "tens of millions of dollars," including claims for unpaid sick leave and vacation.

Source: latimes.com

From Bob

Wednesday, January 19, 2011

Shocking Trends Revealed By TIC

While media focuses on the export deal between the US and China, worth $45 billion, they miss the Chinese quietly reducing their treasury security holdings by $11.2 from October to November. This reduction marks yet another monthly reduction that has reduced the Chinese’s treasury exposure by a whopping $44.3 billion since July 2009. This largely ignored and 'shocking' trend is not alone. United Kingdom’s (labeled United) ascension from a minor holder in 2009 to third largest, nearly 12%, in 2010 is equally shocking.

Major Holders of US Treasury Securities:


Headline: U.S. and China reach $45 billion in export deals

The United States and China reached agreement on export deals worth $45 billion, a senior U.S. official said on Wednesday at the formal start of Chinese President Hu Jintao's state visit.

The agreements included China's final approval of a $19 billion contract to buy 200 Boeing (NYSE:BA - News) aircraft for delivery between 2011 and 2013, which U.S. officials estimated would support 100,000 American jobs.

Source: finance.yahoo.com

Headline: China cuts Treasury holdings in November

China cut its holding of U.S. Treasurys in November by $23 billion, though its overall holdings remained the largest of any foreign nation at $895.6 billion, according to data released Tuesday by the Treasury Department. The decline followed net purchases by China of more than $23 billion in October, which lifted its holdings $906.8 billion, the highest level since November 2009, according to data contained in the monthly Treasury International Capital report

Source: marketwatch.com

QE1 and QE2 Not Helping Real Estate

2010 was not only the second worst year for home construction in half a century, it also occurred during an aggressively-hyped economic recovery. What does extreme weakness despite the economic recovery reveal about the state of real estate?

It suggests that real estate is weak and the liquidity-driven recovery of QE1 and QE is not helping.

Housing starts and building permits saw their upside momentum broken in 2009 and 2010, respectively.

Housing Starts And Change YOY:


Building Permits And Change YOY:


New home sales, while show signs of bottom bouncing recently, establish new all-time lows in 2010.

New Home Sales And Change YOY, SA:


Falling “real” or constant currency prices, continues to be the real shocker to household net worth. Real median home prices continue to decline and remain firmly entrenched within the aggressive downtrend established 2005.

Median Home Price to Gold Ratio (MHPGOLDR) And YOY Change:


A quick review of the credit and loan creation suggests why real estate continues to struggle. The number correspond to labels within the table enclosed below,

(1) Total loan and lease creation as a percentage of total credit peaked in December 2008. This represents the point from which derivatives, securitization, and leverage, i.e. the great credit machine emanating from New York began its great decay.

(2) Real estate loans are not only contracting but also encompassing an increasingly smaller percentage of total credit created since late 2009. Real estate loan as a percentage of total credit has fallen to 39% in December 2010. This is the second lowest percentage reading since the onset of the crisis in 2008; the lowest reading was recorded in November 2010.

(3) Home equity loans, a loan sold on the plateau of prosperity in real estate, began to roll over in early 2010 as a combination of declining access to credit, rising unemployment, and illiquidity strangled household finances. The rate of deterioration began to accelerate as 2010 progressed.

(4) Residential loans (closed-end mortgages), once a steady and consistent sub sector, began to chop and waffle 2010. This sub sector ‘wants’ roll over, but there’s a lot officially-sponsored liquidity propping it up. This is a politically sensitive loan series.

(5) The forces pushing residential closed-end loans can be seen in commercial real estate sub sector. These loans, as large and influential to credit creation as residential, began their aggressive deterioration in late 2009. The increased rate of deterioration into year’s end suggests that this could be a problem spot in 2011.

(6) Consumer loans, while not as influential as business or real estate loans in terms influence on total credit creation; nevertheless, provide a glimpse to the state of the US consumer. While consumer loans continue to expand after a record year in 2010, they have begun a slow decay since the spring of 2010. This subtle weakness bares close attention in 2011. The mantra of “never underestimate the strength of the US consumer” over the years has trained many to assume that spending and borrowing have no limits. History suggests that this is a false assumption.

Total Bank Credit Table for All US Commercial Bank:


Headline: 2010 ends as 2nd worst year for home construction

Builders began work last year on the second fewest number of homes in more than half a century, as the weak economy kept people from buying houses.

Builders broke ground on a total of 587,600 homes in 2010, just barely better than the 554,000 started in 2009. Those are the two worst years on records dating back to 1959.

And the pace is getting worse. The Commerce Department says builders started work at a seasonally adjusted annual rate of 529,000 new homes and apartments last month, a drop of 4.3 percent from November.

Source: finance.yahoo.com

Tuesday, January 18, 2011

States Warned of $2 Trillion Pensions Shortfall

Is anyone listening?

Headline: States Warned of $2 Trillion Pensions Shortfall

US public pensions face a shortfall of $2,500 billion that will force state and local governments to sell assets and make deep cuts to services, according to the former chairman of New Jersey’s pension fund.

The severe US economic recession has cast a spotlight on years of fiscal mismanagement, including chronic underfunding of retirement promises.

“States face cost pressure, most prominently from retirement benefits and Medicaid [the health programme for the poor],” Orin Kramer told the Financial Times.

“One consequence is that asset sales and privatisation will pick up. The very unfortunate consequence is that various safety nets for the most vulnerable citizens will be cut back.”

Source: cnbc.com

Gold Sold in Tokyo Vending Machines Competes with Drinks, Sweets, Lingerie

Convenience and ease of purchase of public purchase is slowly increasing. This trend illustrates the importance of comments made by Jim Rogers in a recent interview.

"He said jewelry shop windows have signs that say “We buy gold” and that most money managers still do not have gold holdings in their portfolio. When jewelry stores have signs up saying “we sell gold” and have lines outside to buy, when everyone owns gold that will be the sign of a top."

Makishi Rokugawa says he’s installing the first gold vending machines in central Tokyo so Japanese consumers can invest in “something real.”

Space International Ltd., a company started by Rokugawa with funds from selling novelty USB flash drives, is offering gold or silver to the world’s biggest vending machine market, where consumers can buy anything from drinks and candy to lingerie and fortune-telling printouts.

Source: bloomberg.com

Central Bank steps up its cash support to Irish banks financed by institution printing own money

What's new here other than a rare public omission?

Headline: Central Bank steps up its cash support to Irish banks financed by institution printing own money

EMERGENCY lending from the ECB to banks in Ireland fell in December, the first decline since January 2010, but only because the Irish Central Bank stepped up its help to banks.

The Irish Independent learnt last night that the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money.

Source: independent.ie

From Bob

Monday, January 17, 2011

Rising Food Prices

Don't forget currency devaluation as another big reason. Inflation is everywhere despite headlines suggesting otherwise. CRB foodstuffs relative to all spot commodities remains well below the 2001 and 2008 “hot money” extremes. 2011 could very well be a year of rising grocery bills.

Gold and CRBFood to CRBSpot Ratio:


Headline: "Nowhere to Hide" from Rising Food Prices

Don't look now, but inflation is expected to hit food hard this year.

"Corn is a big one" in the higher prices department, Bloomberg Businessweek Assistant Managing Editor Sheelah Kolhatkar told "Early Show on Saturday Morning" co-anchor Betty Nguyen. "The Agriculture Department released a report a couple of days ago about crop forecasts for the year and predicted corn production is going to go down very significantly, which led to a spike in prices."

Source: cbsnews.com

Illinois Tax Hikes Will Hurt Companies

Federal stimulus counter balanced by increased State deterrence.

Headline: Illinois tax hikes will hurt companies

The major tax hikes passed by Illinois lawmakers early Wednesday will hit businesses hard.

Faced with a daunting $13 billion budget deficit, state legislators opted to raise personal and corporate income taxes. Companies will now have to pay a 7% corporate tax rate for the next four years, up from the previous 4.8%. And Illinois businesses are already subject to a 2.5% surcharge.

Pat Quinn said that putting the state on a sound financial footing will improve economic growth. But at a time when sales are still suffering from the economic malaise, the hike may prompt some companies to relocate or deter them from investing.

Source: money.cnn.com

The Gold Market Is 'Tight'

Controlled markets in which price does not equilibrate supply and demand are often characterized by shortages. When this happens in gold market, it’s called “tightness” rather than shortages. It sounds better.

The tightness in gold is revealed by the growing spread between physical and paper gold. This is revealed in the chart below. The tightness becomes statistically significant when spread exceeds two deviations. The spread currently stands at 1.73. Physical relentless push since October 2010 and the spread’s stickiness during the paper operation have to be raising some eyebrows.

Gold London PM Fixed and Gold ETF (GLD) Ratio:


Headline: PRECIOUS METALS: Gold Rises In Asia; Physical Market Tight

Gold and silver were both up in Asia Tuesday as sentiment started to firm after repeated tests of technical support in recent sessions.

Indications from the physical market in Asia point to continued strong demand, while gold is likely to benefit from any intensification of the euro-zone sovereign debt crisis.
Mitsui Global Precious Metals said the "physical market will be tight for a while," sentiment echoed by the Perth Mint, which told Dow Jones Newswires that physical gold demand from Asia exceeded its current ability to supply.

"There are signs that buyers are entering the frame once again," Triland said in a note.

Source: online.wsj.com

Hu Highlights Need for U.S.-China Cooperation, Questions Dollar

Jim said it best,

"MOPE is all that will be produced at the upcoming Hu / US Administration meeting. That and of course the ever present photo op."

Headline: Hu Highlights Need for U.S.-China Cooperation, Questions Dollar

Chinese President Hu Jintao emphasized the need for cooperation with the U.S. in areas from new energy to space ahead of his visit to Washington this week, but he called the present U.S. dollar-dominated currency system a "product of the past" and highlighted moves to turn the yuan into a global currency.

"We both stand to gain from a sound China-U.S. relationship, and lose from confrontation," Mr. Hu said in written answers to questions from The Wall Street Journal and the Washington Post.

Source: online.wsj.com

States Scramble While Another Big Flush Is Executed

The manner in which California ‘solves’ its fiscal problems will likely be the template for other cash strapped States. If California (and other States) can’t agree on meaningful spending cuts, a move that carries consequences in terms of consumer spending at the national level, screams for additional Federal fund will only get louder as the year progresses.

Headline: State Budget Deficits Force Painful Choices

The nation's governors are facing budgets that are trillions of dollars in the red. A new CBS News poll shows nearly three out of four Americans think their state budget is in bad shape. An overwhelming majority is not willing to cut spending for public safety. Of all the states, California is in the tightest squeeze.

CBS News correspondent Terry McCarthy reports California's new governor, Jerry Brown, inherited one of the worst state financial messes in the country. Brown began announcing cuts from day one. His first target: the cell phone.

Forty-eight thousand state workers with taxpayer funded cell phones must turn them in by next June and that includes the governor himself.

"I have [the cell phone] in my desk ready to turn in," said Brown.

With a deficit of $28 billion, eliminating cell phones will only save the state $20 million.

Source: cbsnews.com

Nothing has changed. Weakness in gold reflects another "Big Flush" setup before the next advance. The "rethink long gold trade" in 2011 will be pushed as long as TIME permits.

Gold London P.M Fixed and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest


Thanks Bob

Sunday, January 16, 2011

Deficits Carry Consequences

When spending exceeds revenue collected, layoffs within the public sector are inevitable. These are the consequences of the well-established vicious cycle in the US Federal Budget Deficit - The Formula.

The public has been told for years that deficits do not matter. They do, unfortunately. Even when the printing press, through timulus and special programs, maintains and protects public employment and services, it devalues the curreny and generates inflation.

US Federal Budget (Surplus or Deficit As A % of GDP, 12 Month Moving Average) and Gold London P.M. Fixed:


Gold adjusted or real revenues continues to contract at a faster rater than real spending. This places greater pressure on centralize funding, i.e. the printing press, to fill the spending void to maintain the standard of living within the public sector.

Real or Gold Adjusted Federal Total Receipts 12-Month Moving Average (TR12MA) AND Federal Total Receipts 12-Month Moving Average Year-over-Year Change (TW12MA12LN)


Real or Gold Adjusted Federal Total Outlays 12-Month Moving Average (TO12MA) AND Federal Total Outlays 12-Month Moving Average Year-over-Year Change (TW12MA12LN)


Headline: Camden, NJ braces for deep police, fire cuts

Yet another crisis is upon this burdened city, among the most impoverished and crime-ridden in the country.

Deep layoffs of city workers go into effect on Tuesday -- cutting up to 383 jobs, or one-fourth of the city's employees.

The exact number depends on whether public workers' unions make last-minute concessions. In any case, the cuts are likely to be deep -- and could be a blow to the quality of life in a city where more than half the 80,000 residents, mostly black and Hispanic, live in poverty.
Source: finance.yahoo.com
Source: fms.treas.gov

John Williams Eyes Gold as Insurance Against Armageddon

A very good way of looking at gold and its historical performance.

Let me start by saying that although I have a number of gold bugs as clients and I love gold bugs, I'm not one myself. As I've indicated, I'm just an economist looking at the broad picture. From that perspective, gold is probably the single best asset to help people ride out the storm, based on what we're facing, and I would contend that there's been an increasing view from that perspective in the global investment community over the last decade.

I hadn't realized it until I was putting together some year-end numbers and noticed that every year since 2004, gold has outperformed the Dow Jones Industrial Average in each year. I'm not talking a cumulative number, but year-to-year. We've certainly seen a lot of volatility in gold prices, but gold hasn't had a negative year, while the Dow was down 33% in 2008. Wall Street pooh-poohs gold as a fringe investment, but its performance suggests quite the contrary. It's one of the historical world-class assets, and over the millennia has been fairly consistent in terms of preserving purchasing power.


JW: It is. Insurance against a financial Armageddon. Gold's over $1,400 an ounce as we speak. When it gets up to $5,000 people will say, "Oh my goodness. I bought it at $1,400. I can sell it at $5,000 and make a lot of money." That profit may be there, but the way to look at gold is that it anticipates the inflation ahead and preserves the purchasing power of your paper assets. Even if gold gets to $100,000, it's not that you've made $98,600 profit, it's just that you still have the purchasing power you did with your $1,400 gold.

Source: 24hgold.com