Monday, October 11, 2010

Morning Update/ Market Thread 10/11

Good Morning,

Equity futures are slightly higher this Monday – the forecast is calling for a 90% chance of a morning HFT ramp! The dollar fell over the weekend but has recovered back to slightly positive, the Yen touched a new high but has pulled back, both oil and gold were higher but have pulled back to lower.

The most significant move on the board is found in the soft commodities – FOOD. Friday saw several of the grains go lock-limit up, and this morning corn again went lock-limit up. That is not trivial, it is the worst possible move on the board. Of course it’s a tragedy for the human condition, but it’s also very dangerous for the investors in that space and will likely cause some margin calls to occur. The problem with these circuit breakers is that they don’t give market participants a good chance to escape as they go lock-limit into a freeze and when the market opens again it only takes ONE TRADE for it to go lock-limit into the next price level leaving no exit for those who are trapped. This is the fallacy of circuit breakers, they are very dangerous and most participants remain unaware of the dangers.

In the past two days, corn has rocketed 17.6%, soybeans are up 11.8%, wheat has gained 10.6% and is up 70.5% since June, rice is up 13.7% in the past week, and oats are up 15.2% in the past two days and 102% since May, doubling in price in just 5 months.

This is obviously a monetary phenomena, what you are witnessing is not a drought, it’s not that the government is going to turn corn into ethanol, it’s the debasement of your money plain and simple. This debasement is occurring when the “Fed” exchanges worthless debt for new digits to the banks who turn around and speculate in all the markets with their hot money. This is the exact opposite of helpful to the economy, it is an economic disaster.

Take another look at the oil to SPX chart I made this weekend, it’s extremely important in that it clearly demonstrates how rising oil prices tax the economy and markets. The late ‘07/ early ’08 ramp in oil prices occurred at the same time that a large wave 2 was occurring in the market – that ramp led to wave 3 down. Look at the chart during this time frame and you see the same thing, a likely wave 2 with oil exceeding $80 a barrel. In fact, while the price of oil is almost exactly in the same place it was 3 years ago, the stock market is still down 26%!

Is oil going to ramp to $150 a barrel again? I highly doubt it, and I doubt that food stuff can continue its ridiculous ramp for too long. The dollar is getting pretty close to support in the 76 range – no, it doesn’t have to hold, but sentiment against the dollar is very negative again and so it would not be at all surprising to see the dollar catch a bid and to see the Euro and Yen reverse against the dollar at some point fairly soon.

My take is that the much ballyhooed coming QE is going to be a major league sell the news event. The markets have risen wildly against terrible and worsening economic data. I’m certain that there’s concerted effort to keep things propped up until the elections, but adding trillions more against skyrocketing food and oil prices would be economic suicide. Thus don’t be surprised when all the hype turns out to be largely lip service.

There is very little economic data this week until the very end of the week. We’ll see PPI, CPI, Consumer Sentiment, Retail Sales, and International Trade. Most of the data will come this Friday which is yet another Options Expiration on the 15th. I also noticed that if you extend the descent in the dollar out on the same slope, that it will run into the 76ish uptrend line at about the same day this Friday.

If the dollar breaks the 76 region, it will be headed to 71/72ish… that would be a very bad thing. If it happens I think that the “currency wars” could quickly turn into trade wars. Is it really worth it? Will the new set of politicians allow further debasement to continue or will they bridle in the insane central bankers? What… hey, a guy can dream!