Tuesday, February 22, 2011

Why 'Dr. Copper' is the master metal

Workers use a hoist to stack copper ingots at the Norddeutsche Affinerie works in Hamburg, Germany. Roland Magunia/Bloomberg News

Peter Koven, Financial Post · Friday, Feb. 18, 2011

With copper trading at unprecedented highs, the question is being asked: isn’t there anything cheaper we can replace this stuff with?

The answer, according to experts, is not much, and not easily.

Since bottoming out in early 2009, the price of copper has nearly quadrupled, driven by strong demand from emerging markets, shrinking inventories and lack of new supply. The metal, which traded around US70¢ a pound through the 1990s, is now worth about US$4.50 and hit a new record earlier this week. When priced in tonnes, it recently passed the landmark level of US$10,000.

The gains in the copper price have dramatically outpaced the other base metals, leading to more talk about substitution. It echoes the debate in the energy sector, where people want to replace expensive oil with cheap natural gas.

“We would say there’s about half a million tonnes of copper substitution going on a year now at these elevated prices,” said Tom Albanese, the chief executive of Rio Tinto Ltd., in a recent interview.

That is not a heck of a lot in a market where demand is nearing 20 million tonnes a year. And experts said that while more substitution is likely, it will be tough to do.

The one metal that is regularly substituted for copper is aluminum. According to Desjardins Securities analyst John Hughes, a large part of that replacement has already been done. To do more will be expensive and challenging.

“It’s just a very difficult thing to re-tool for aluminum, whether you’re a wire producer or a pipe producer or whatever,” he said.

To take one example, copper is more conductive than other base metals, which makes it hard to replace in electrical applications.

Even aluminum is almost useless as a replacement for copper wire because of fire hazard risks. When the United States made a big push towards using aluminum wire in the 1960s, the result was an outbreak of fires, according to Barclays Capital. Don’t look for that to happen again.

Copper has earned the nickname “Dr. Copper” because its many applications make it a solid economic bellwether — it shows up in everything from construction materials to electricity transfer to consumer products.

Other metals do not have as many practical uses. For example, the vast majority of nickel goes into one product: stainless steel.

Most analysts still have a very healthy outlook for copper prices. They do not think that demand destruction is imminent, even at such elevated prices.

“If you think of copper, whether it be in an automobile or a house, there’s not many pure applications for it. It’s generally a smaller cost of a large cost unit. We’re not going to stop making cars because we go to US$6.00 copper,” Mr. Hughes said.

Mr. Albanese said that rather than demand destruction, the big risk is that these prices will encourage a wave of new production, which could create an oversupply situation in the future. But that is certainly not imminent.

The other thing that could sink the copper market would be an economic downturn, much like the one in 2008. During that collapse, copper fell all the way down to about US$1.20 a pound. There is a legitimate risk that it could happen again. But for now, the red metal rules.

Financial Post

Silver Default Looms?!

by Jason Hommel, Feb 20th, 2011

I apologize in advance that this essay is entirely without humor, completely sober, and deadly serious.

As I write on Sunday evening, Feb. 20th, silver prices are up another 40 cents to $33.10, another 30 year high, going back to the previous high of $50 from Jan. 1980. In the last two trading days, last Thursday and Friday, silver prices increased about a dollar per day.

What's going on?

As I read on the blogs, about 53,000 silver contracts for 5000 oz. each are nearing the first delivery day on Feb. 28th. At that time, each contract must be fully funded to await delivery in the following 30 days, or sold before then. By the way, 53k x 5k = 265 million oz.


The crazy thing is that the four COMEX approved warehouses have only about 100 million oz. of silver in them. So, in essence, a default looms.

Will this be it? If so, what will happen?

Usually, all but a very few contracts roll over to the next months. The futures contract holders rarely stand for delivery, as in their view it is too difficult, and too costly; they are in this game for the leverage. They usually only put down 10% of the money, so that if silver gains another 10% in price, they double their investment quickly. And if silver moves down 10%, they lose everything!

But here's the kicker. COMEX just raised margin requirements 50% on Friday, meaning that the longs had to put up something probably like 15% instead of the usual 10%. (I have no idea of the real figures, as I have never traded futures, I have never had a futures broker, and don't know where to go for that data.) This means that the longs were not scared out of their positions, as the silver price went up, not down, as the manipulators had intended.

What I do know is that usually, the majority of futures contracts stand about 3 months away from delivery. But not now.

Tonight, 53,000 contracts are looming for either close out, or they will stand for delivery. Out of about 150,000 to 200,000 contracts!

Harvey says 150,000 contracts in open interest.

321gold.com says 200,000 contracts in open interest.

The current situation will be resolved in 8 days, and again, in another 30 days after that. Both deadlines are worth watching closely.

Either way, this situation presents several problems.

Clearly, if the longs stand for delivery of 265 million oz., when there are only 100 million oz. in the warehouses, there will be a short squeeze, and the price can go ballistic to the upside, perhaps prices could go up by 5 times higher in a few days. (more)


By Econgrapher

After a brief (overseas holiday related) absence, the top 5 graphs of the week are back! This week we look at China’s inflation numbers, as well as its international trade figures. Then we also review the inflation numbers from the US and UK, before checking out some of the monetary policy decisions out over the past week.

1. China Inflation
China recorded inflation of 4.9% year on year in January (4.6% in December), at least we think… The National Bureau of Statistics did make some adjustments to the way they calculate inflation e.g. changes to the basket of goods that make up the CPI, but it’s not clear what the impact is. Anyway one thing’s for sure, inflation is still chugging away thanks to short-term food price spikes, as well as rising energy commodity prices… and of course a generally booming economy (and property market – in spite of measures to lift supply and curb prices). This is a key risk area for China – both policy makers and investors – this year, so keep watching this space.

2. China International Trade
China chalked up about a US$6 billion trade surplus in January (usually about 15-20 billion), mostly thanks to a record imports number (that’s good…). Of course the lunar new year holiday will be having a distorting effect, but look at the numbers, China is seeing a pretty strong rebound in trade volumes. The surge in imports is good for China suppliers, and the strong exports show that somewhere out there people are still buying stuff from the Chinese – so it’s a relatively positive sign for the global economy. There’s also likely some domestic demand impact on imports – and that will be something to watch over the medium term.

3. US Inflation
Meanwhile in the US, the patient showed signs of life. Core inflation came in at 1%, while headline was about 1.6%. So inflation is still relatively subdued, but the slight increase in core inflation is interesting; sure the numbers are liable to be choppy, but is this the all clear for those worried about deflation? Think about exceedingly loose monetary and fiscal policy (which will likely stay so for an extended period), think also about imported emerging market inflation, think also about rising commodity prices, think also about fake spare capacity, and also spare a couple of thoughts to a rebounding economy (sooner or later)… is high US inflation an emerging theme? maybe not yet, but something to think about!

4. UK Inflation
Over in the UK, the inflation spike is already there, up to an emerging market-like 4% now. Albeit some of the surge in inflation is related to one-offs like tax increases, etc; but there is a rising risk that these things flow through into real price expectations and negotiations. Indeed, the spike in inflation has stoked sentiment for rate expectations, with a few punters suggesting 3 rate hikes by the Bank of England in 2011; and with the market already pricing in some tightening. Will the Bank of England make a move? would it touch the interest rate first or wind back the asset purchase program? Not sure, but if I had to guess I would call a rate hike sometime in the medium term.

5. Monetary Policy Review
Over the past week Turkey held at 6.25%, Japan at 0.10%, and Ghana at 13.50%. Meanwhile the ones to move were Sweden +25bps to 1.50%, Vietnam +200bps to 11.00%, and Chile +25bps to 3.50%. Oh and the People’s Bank of China hiked the reserve ratio another 50bps to 19.5% for large banks (on average), and 16% for the smaller banks. So what’s the takeaway? Emerging markets inflation basically; and of course emerging market monetary policy tightening – it’s a major theme for this year, especially with the spike in commodity prices (esp. food prices due to a range of factors including a few supply issues) and generally stronger economic growth in emerging markets. It’s likely we’ll see more such activity through the rest of the year.


So we saw China with relatively high inflation, in spite of the People’s Bank of China’s best efforts so far; it’s likely we’ll continue seeing high inflation figures in the near term. China also chalked up some interesting trade numbers, which say good things for China – but also for those that are doing business with them. Meanwhile in the US, inflation showed signs of life – perhaps even a harbinger of things to come. While the UK inflation situation continued to provide headache material for the Bank of England, with a spike in the CPI numbers. In monetary policy the theme continued to center on emerging market inflation and policy tightening.

Energy Investors: 2 New Ways to Profit From the Middle East Uprising : NXY / SU

Demonstrations continue in Middle Eastern countries including Libya and Yemen. Both have followed different courses to arrive at where they are today.

Libya, a former colony of Italy, was made an independent country by the United Nations in December 1951. The form of government put in place was a hereditary monarchy, a feudal state. Major oil reserves were discovered in 1959 and wealth started to concentrate in the hands of an elite few.

In 1969 a young 28-year old army officer led a bloodless coup; the king was exiled to Egypt and a young Qadhafi pledged to put in place a fairer form of government with social justice and a redistribution of wealth. What has occurred is a state of authoritarian rule. Protests by youth are now spreading against the no longer young Qadhafi. The goal of social justice remains the same, and the path to that goal is seen in free elections. Hopefully the transition in Egypt will not last 40 years and elections will occur in Libya in a transition that is as bloodless as the 1969 overthrow of the former king.

Yemen’s path has been different. The current President, Ali Abdulla Saleh, was a former corporal who was elected president of North Yemen at the young age of 32, in 1978. This occurred after the then president was assassinated by an envoy from South Yemen, at that time a separate state. (more)

Trade of the Week: I'm Betting on a Big Fall in This Hugely Popular Commodity

By Jeff Clark, editor, S&A Short Report
It seems almost silly at this point to continue warning against the risk of a broad stock market correction.

The negative technical indicators flashing warning signs have been going off for so long, even the most stubborn bear has to question his validity. However, it is usually at this point of maximum frustration that the natural ebb and flow finally returns to the market.

The situation in the market today is quite similar to the action we saw last April. Stocks continued to make broad gains despite many technical indicators warning of an impending decline.

The uptrend was so persistent, it forced a lot of bearish traders out of their positions before the market finally reversed and headed lower -- dropping 18% from May to July.

I expect we'll see something equally severe this time around. So I'm holding a few underwater put positions in my S&A Short Report portfolio. I'm even adding more short exposure -- this time in the copper market.

Copper is considered a leading indicator for stock prices.

Copper prices peaked in mid-April last year (the blue circle), just two weeks before the stock market entered its correction phase. And by the look of the following chart, copper could be close to a top now, as well...

You can see the rising wedge pattern on the chart, with the negative divergence on the MACD momentum indicator.

This pattern usually breaks to the downside. In this case, a breakdown below the support line of the rising wedge projects a move all the way down to at least 380. That's a drop of about 20%.

I like this chart setup so much, I'm currently recommending a bearish position on one of the big copper mining companies to S&A Short Report readers. If copper declines 20%, the whole copper complex will get crushed. And as we saw last April, a big decline in copper tells us stocks will likely follow.

Jeff Clark
Editor, S&A Short Report

The King World News Weekly Metals Wrap

We have added new segments to the KWN Weekly Metals Wrap covering gold, silver, trading and a plethora of other factors affecting the precious metals markets. I am giving King World News listeners globally access to what has long been my secret weapons in researching where gold and silver are headed directionally along with the COT Report. We Cover the Commitment of Traders Report in detail as well as a number of other factors which can influence the gold and silver market price action.

click here for audio

Technically Precious with Merv

For week ending 18 February 2011

Well, it was up, up all week long for gold. However, there seemed not to be any enthusiasm behind the move and trends do not last long without enthusiasm. Maybe it will enter this coming week.



Over the past few weeks I had mentioned that my long term P&F chart gave a bear signal BUT that there was still one more support level on the chart that needed to be breached for that bear signal to have meaning. Well, as we have seen, that support has held and we have been in a rally for the past three weeks. The big question now is, is this only a rally or are we in for a new bull move? I’m not very good at predicting the future. It’s enough effort just to understand where we are right now least of all where we will be next week or month. So, where are we right now?

From a long term perspective, although it does appear as if gold has been in a several month topping and turning mode it remains above its positive sloping moving average line. The long term momentum indicator has been moving lower and lower since October but is in one of its upward turns. It is still in its positive zone and now above its long term trigger line. The trigger line has also turned upwards which is a very positive sign. The volume indicator has been moving sideways since December and is very close to breaching into new high ground. During this sideways period its trigger line has moved right up to the indicator and has flattened out but still is in a very, very slight up slope. Everything is still looking okay for the long term. The rating remains BULLISH.


The intermediate term perspective is also okay. Gold has crossed above its intermediate term moving average line during the week and the line itself has turned to the up side. The intermediate term momentum indicator was in its negative zone for a few days but has once again crossed into its positive zone. It is also above its positive sloping trigger line. The volume indicator is slightly positive and above is positive trigger line. All in all the intermediate term rating remains BULLISH. This rating is confirmed by the short term moving average line crossing above the intermediate term line.

There are many, many technical indicators one can look at to assess where we are but these simple indicators tell us the trend, strength of the trend and interest by speculators in the trend. What more do we need? We wouldn’t be right all the time but I hope we are right most of the time. More importantly, we should not be wrong for any length of time to cause major financial losses. We do not blindly hold as the trend goes against us. That is the sign of an amateur.


The short term has been great for the past few weeks but could be coming to an end. We are inside an upward trending wedge pattern. These patterns unfortunately are most likely to be broken on the down side. The strongest move would come when the price is two thirds along its way towards its apex point. As it continues closer and closer to the apex the strength of any break becomes less and less. So, we are not yet at the strongest location should the price break below the lower support line. That would still take a couple more weeks of steady up trend within the confines of the wedge. From here, that does not look probable, so, we should get a break soon but not one that is of any great strength (or longevity).

For now the short term position of gold remains basically positive. Gold has been above its short term moving average line for over two weeks and remains above. Its moving average line remains sloping in an upward direction. As for its short term momentum indicator, well that is comfortably in its positive zone and above its positive trigger line. Only the daily volume action leaves a lot to be desired. During its entire few weeks of price rally the daily volume has remained relatively low. It had remained below its 15 day average value throughout the advance. This does not bode well for longevity of the rally. However, despite the poor volume showing the short term rating remains BULLISH with the very short term moving average line confirming by remaining above the short term line.

With events as volatile as they are in global politics I wouldn’t even try to guess the immediate direction for gold. The direction of least resistance, however, seems to be getting closer and closer to the down side. The Stochastic Oscillator remains in its overbought zone and can’t stay there for much longer. The next turn to the down side by the SO should also see gold turn lower.


Silver continues to put in a great performance versus gold. This past week gold advanced by 2.1% while silver advanced 7.7%, almost 4 times the weekly performance. The chart shows that silver has entered new bull market highs and is heading towards its all time high in the low $40s way back in January of 1980. Depending upon the chart one uses the all time high in silver was about $41.50.

A few weeks back silver gave a P&F bear signal, however, I had mentioned a support just below the break that needed to be breached before really going bearish. That support held and silver quickly moved higher. We need to go back to the P&F chart of 17 Dec 2010 where I still had projections to $32.50 and $34.00 that were not met at that time. Well, the recent sharp rally has met the $32.50 projection. Now, on to $34.00. However, with the latest move a new projection can be calculated, to the $42.00 level, just $0.50 above silver’s all time high. One thing all these projections seem to say is that there is still more upside potential for silver.

Without going into details, one can guess that the ratings for silver in all three time periods is BULLISH.

For a cautionary note it is interesting that silver price is now butting up against the previous support up trend line, which can now be considered as a resistance line. Couple this along with weakness in both the momentum and volume indicators and we have the prospect of a reaction very soon. I would suspect that any reaction off that resistance line would not stop at the very narrow up trending channel lower support but break below it also. Just something to be aware of.


All precious metal stock indices had a good week, some better than others. The silver stocks were, of course, the better weekly performers as is noted by the Indices that have silver stocks as their major components. Although the Indices had a good week ONLY the Merv’s Penny Arcade Index made it into new all time high territory. Go pennies GO. This is one of my best indicators that the major long term bull market in precious metal stocks is not yet over and still has more to go. During the last bull market top when the major Indices (and gold and silver stocks) topped out in early 2008 this Penny Arcade Index topped out a year before the majors. I don’t expect the same year’s notice but I do expect that the pennies will top out before the universe of precious metal stocks top out and therefore we should have this advance warning.

The Penny Arcade IS weakening as far as the momentum (strength) of the recent move is concerned. Although the Index has made new highs the momentum indicator is still below its previous recent high. This is not yet a serious concern as the indicator is very strong, above the 80% level so a slight weakness is not a big deal, but it is so far a weakness in the latest move. Something to watch.

Merv’s Precious Metals Indices Table

Oil soars on Libya violence, WTI shorts cover

Brent crude oil prices hit $108 a barrel for the first time since 2008 on Monday on fears that spiraling violence in Libya could lead to wider supply disruptions from the OPEC member.

U.S. oil prices led the rally to jump by more than $5, the most in over two years, as traders also rushed to cover short positions in the key Brent/WTI spread, which had blown out to a record $16 a barrel. The April spread narrowed to $10 during the day, but widened to over $12 in after-hours trade.

The focus was on deadly clashes in Libya, where one oil firm was shutting down some 100,000 barrels per day (bpd) of production and others evacuated staff. The leader of the Al-Zuwayya tribe threatened oil exports to the West would be cut off unless authorities stopped violence.

"The market is on edge about the potential for Middle East and North Africa supply disruptions," said Mike Wittner, head of commodities research, Americas, at Societe Generale.

"If you've got reports that actual disruptions are starting to occur, it's going to have a supportive impact. A lot of it is high-quality crude and that is important as well."

The increasingly violent protests that appeared to put Muammar Gaddafi's four decades of rule in jeopardy were the realization of weeks of mounting concerns that Egypt-inspired unrest would seep into nearby oil producers.

Brent oil futures, which have climbed more than $10 this year largely due to the increasing geopolitical risk premium, jumped $3.22 a barrel, or 3.2 percent, to settle at $105.74 a barrel. They jumped another $2 to trade as high as $108 in after-hours dealing, the highest since September 4, 2008.

The March U.S. crude oil contract, which expires on Tuesday, surged $5.22 a barrel to trade at $91.42 a barrel in late-afternoon activity -- the highest in two weeks.

Overall trading volume was less than one-third the 30-day average due to the U.S. Presidents Day holiday, and the U.S. market won't issue an official settlement until Tuesday.

The more-active April contract jumped as much as $5.75 to a high of $95.47 a barrel, at one point narrowing the Brent/WTI contract by nearly $3 to $10 a barrel as traders covered short positions built up as the spread ballooned from about $3 in January to a low of $16 last week.

Brent's after-hours rally forced the spread back out to $12.40 a barrel. (more)

Silver Bankers May Be Sitting on Big Derivatives Losses and the Fed May Be Funding Them

My question is simple. What are bankers like J.P. Morgan and HSBC doing playing in such size in this market? What is the economic and productive benefit? Perhaps there is a good answer. The taxpaying public certainly deserves to know. The CFTC says they have looked into this, but the detailed results of their findings remain less than forthcoming.

IF this is legitimate hedging for producers then all well and good, but then there is no justification for secrecy. If these are trading positions held by the bank, or by the bank as agent for speculators, then there may be a greater reason for secrecy, but the magnitude of the shorts is far out of bounds in size. Ten years of production is not a short position, but the entire market and then some.

The CFTC certainly appears to be acting poorly as the market regulator for the people. Given the regulatory failures of the past ten years that lead to the financial crisis, it would be useful if the Congress were to make very pointed inquiries regarding this situation. But given the performance of the Congress, and their affinity for the deep pockets and big contributions of the financial sector, that may be too much to hope for.

I think it is worth noting that the BIS data, which I use myself, is very good, but normally six months in arrears or more. I tend to use it to track the float in eurodollars which the Fed stopped publishing when it also halted the production of M3 data. But this is not Harvey's fault, but merely another sign of the opaque nature of the US markets. There is no reason not to demand monthly disclosure. Investors and depositors are always expected to make informed decisions, and then they are denied the information from large market participants using their positional advantage.

The comment and analysis below is from Harvey Organ's most recent commentary.
"The huge rise in silver price has caught the silver bankers totally offside on the silver banking. The BIS data released in November (www.goldexsextant.com) shows that the G 10 bankers have collectively sold forwards and swaps to the tune of 4 billion oz and short naked calls for another 3 billion oz. The total, 7 billion oz represents 10 years of production. If you just do the forwards, then it is 7 years of annual silver production.

Let us say the average cost of acquiring these derivatives and forwards equate to $15.00 for silver. Thus collectively the entire G10 bankers are feeling massive pain (losses) to the tune of:

7 billion oz of silver( 32.30-15.00) = 7 billion x $17.30 = 121.1 billion dollars of losses.
This is in a market of only 14 billion dollars. It begs the question to what economic need was this done.This is still off balance sheet.

If you include only the forwards or swaps (the lending of actual metal to which nothing has come back yet) then the losses are:
4 billion x 17.30 or 69 billion dollars.
Regardless how you look at it, the bankers are in serious trouble with this huge rise in silver prices. I hope you understand the severity of the situation."
This situation merely highlights Obama's failure as a reformer, and the general failure of both parties to act in positions of trust for the American people, rather than the special interests that provide them money and sincecures after they leave office.

As I noted on my own silver chart, I am no longer will to forecast anything but intermediate targets for silver, given what appears to be widespread imbalances and crisis-inducing leverage in the market, especially given the strong demands on the bullion market from the sovereign and individual buyers in the BRIC countries.

It is never pretty when a fraud collapses, and this one in particular is difficult because it seems to encompass those stewards of the market upon whom one generally relies for information and some measure of confidence in the data.

The market will clear when it clears, and seems to be defying 50% margin requirements increases and well placed disinformation campaigns in the process.

Shorting Eurodollars Before the Liquidity Bubble Pops

Below is the long term chart of the eurodollar (ED) yield, showing the effects of a decade of money printing and bubble blowing. In the last two years this has created what I have called the central bank or Wizard of Oz bubble. This bubble and all its correlated bubbles were caused by the willingness of central bankers to purchase, lend against and then hold trillions of dollars of overvalued securities. This bill of goods was sold as 'emergency measures,' and investors remain convinced that the mere 33 basis point interest rate reflected in the eurodollar market will and can be supported by a continuation of the emergency.

Conventional thinking is that purchases of inflated securities and money printing that goes with it are just business-as-usual instead of a freak show. In addition, it's assumed that trillions in kick-the-can-down-the-road private debt maturities, for sure trillions more of debt sovereign debt offerings, and maturities are on the way. Oz has a heavy burden to carry indeed.

The blowback to all this activity should be apparent to any thinking person: a bagunca (mess) of destabilizing global inflation starving returns of prudent savers down to nothing; real, defacto or implied bailouts of too-many-to-count toxic basketcases; and an incredible return of moral hazard behavior and speculation. Of course you are going to see artificial maladjusted economic activity from this, at least for a short while. It is all a trap.

The logical end of the line for horrific 'temporary emergency' policies will be a chain reaction of sovereign defaults, insolvencies, debt restructuring, and losses for bond holders . Although this hasn't happened formally, bondholders who bought 10-year Treasuries in Portugal eighteen month ago now have a 24% loss on principal. These are not reflected on bank balance sheets. Simply put, the yields on PIGGS sovereign debt (and elsewhere) are not about liquidity and confidence - they are about debt trapped insolvency.

Blow ups will come when players at various points along the daisy chain take big losses that can't be supported by the Wizard of Oz or governments. In fact Oz itself will suffer big losses once the Ponzi chain breaks. The uninitiated can start here (If Only PIGGS Could Fly) for an understanding of just some of the various candidates for sovereign defaults. Historically, because of the linkages, these will come in bunches.


Ever since QE2 began I have been eying a short of the ED. True, there is a carry cost to shorting them. But with the implied yield at about 33 basis points (bp), that carry is now reduced to less than .275 bp per month (about $275 on a million contract). It is important to understand that this is a financial future, not a currency - you are not shorting the euro.

Eurodollars are foreign dollar deposits outside the U.S. banking system in foreign banks. Despite the name, these are not just European banks, although those would constitute the majority. Some are in the Middle East in places such as Bahrain (Forces Fire on Protesters). So in essence, eurodollars are dollar deposits in non-U.S. banks.

One contract tracks the 3-month London Interbank Offer Rate (LIBOR) on million-dollar offshore deposits. LIBOR is the rate that the commercial banks charge each other for overnight lending in the international market and is considered to be a global benchmark for short term interest rates. Contract specifications are laid out here. For risk management purchases, I would collaborate about $2,000 as the loss per contract, which would put the ED yield at 15 BP, and cover a month's carry.

So what would make this trade work? Traditionally it has traded as a Fed policy instrument; now it seems monopolized by it . When the Fed eases or is active, traders bid up EDs. Therefore if Oz is forced by the howls of inflation to climb off the cliff, or waffles on QE3, this market will sell off. If Oz (the Fed) actually moved to tighten, it will sell off even more so. Although I assign a higher probability of this happening than conventional wisdom, I am not counting on this element. As far as being inflation fighters, Oz has an incredible capacity to call inflation such as the MIT billion price survey 'temporary' or irrelevant just like their emergency measures were temporary. Regardless, once the party ends, Oz will permanently lose what little creditability it never should of had. That is another reason I don't see any market downturn as temporary.

But I digress, as the real appeal to this trade is not Fed-watching but elsewhere. How much lower can the ED yield go? Stranger things are happening, but will deposits stay in foreign banks if yields are 25 bp, or 20 bp? Bizzarro world at this stage is a manageable risk - it is not like we are dealing with 400 bp of downside to zero. Of course the trade might just sit there for a while, like watching paint dry.

However, in the short term I would point out a two day spike in emergency borrowings from the ECB, an event which in normal times with fewer Oz-induced comatose market participants would get more attention. More importantly though, are corporate CFOs and Treasurers sitting at their terminals with hair triggers ready to blow this popsicle stand (a bank run) once the wheels come off these European or Middle Eastern banks. It could just as easily be a state or local U.S. blowup that triggers it.

Who in their right mind accepts 33 basis points - Oz-backed returns in an insolvent banking system dependent on expensive government interventions? Numb to the risk, markets are counting on more bailouts and money printing in Europe, with estimates of 400-500 billion euros for the next round. In reality a lot could hit the fan over the next month. There is an election in Ireland on Feb. 25, and likely winners aren't bank friendly.

We believe that Ireland may be left with no option, in the absence of a renegotiated deal, but to write down the value of the bonds in the Irish banks or face the prospect of a hugely damaging sovereign default”- Fine Gael, Irish Opposition Party, February 2, 2011

There are four German regional elections over the next month, and anti-bailout political sentiment is high. The last European meeting failed to reach consensus on a resolution mechanism. In the midst of it all a special eurozone debt crisis summit is scheduled for March 11th. And finally a boatload of debt is maturing in Europe over the next month.

Disclosure: I am short March eurodollars

Editor's note: Investors may want to consider the following international interest-rate ETFs as a proxy for eurodollars: IGOV, ISHG, BWX, BWZ

US Economic Calendar for the Week

DateTime (ET)StatisticForActualBriefing ForecastMarket ExpectsPriorRevised From
Feb 229:00 AMCase-Shiller 20-city IndexDec--2.2%-2.4%-1.59%-
Feb 2210:00 AMConsumer ConfidenceFeb-
Feb 237:00 AMMBA Mortgage Index02/18-NANA-9.5%-
Feb 237:00 AMMBA Mortgage Purchase Index02/18-NANA-9.5%-
Feb 2310:00 AMExisting Home SalesJan-5.40M5.23M5.28M-
Feb 248:30 AMInitial Claims02/19-410K410K410K-
Feb 248:30 AMContinuing Claims02/12-3900K3900K3911K-
Feb 248:30 AMDurable OrdersJan-3.6%3.0%-2.3%-2.5%
Feb 248:30 AMDurable Orders ex TransporationJan--0.2%0.6%0.8%0.5%
Feb 2410:00 AMFHFA Housing Price IndexDec-NANA0.0%-
Feb 2410:00 AMNew Home SalesJan-335K310K329K-
Feb 2411:00 AMCrude Inventories02/19-NANA0.86M-
Feb 258:30 AMGDP - Second EstimateQ4-3.4%3.3%3.2%-
Feb 258:30 AMGDP Deflator - Second EstimateQ4-0.3%0.3%0.3%-
Feb 259:55 AMMichigan Sentiment - FinalFeb-75.575.175.1-