Friday, May 6, 2011

Potash Prices Headed to $750? : AAA, AGU, POT, MOS, IPI, KRN, PPI, AGR

The Energy Report: Are we at the beginning of a global bull market in food, Richard?

Richard Kelertas: Yes. We believe the upward price pressure started after the economic crisis in 2009, and it could remain a substantial bull market until stocks:use ratios (carryover:total use) in most major food stocks—grains, corn, soy beans—can be brought back up to 10-year averages. Currently, the ratios are well below those averages. There doesn't seem to be any reprieve in sight, unless we have two to three years of bumper harvests in all grains around the world.

TER: Rising food prices usually mean increased demand for fertilizer, but that hasn't necessarily been the case this time around. Do you believe the share prices of potash equities have exceeded potential growth rates?

RK: No, not at all. In retrospect, 2009 was a tough year for a lot of fertilizer producers. Farmers had to delay applications, even though they started to see crop shortages followed by slowly rising crop prices. We didn't really see fertilizer-price recovery until 2010. Around March/April, or mid 2010, we started to see a pickup in fertilizer stock prices. It was slow at first and, in some cases, it has been muted; but at the beginning of 2011, it started to surge dramatically. Now it's come off again on the expectation that all commodity prices, including that of oil, will come off as the global economy slows down (especially in China). But our view is that this is just temporary, and that these stock prices don't really reflect anywhere near the fertilizer prices we are looking at in 18–24 months. So, these current stock prices are only reflecting mid-cycle, but nothing near peak, prices.

TER: What is the real driver for fertilizer stocks? China, India?

RK: It's global, definitely global. China kick-started the demand increase by buying corn on a large scale, but it suffered a significant drought in the southern part of the country. That was followed by several crop failures, droughts, weather—you name it—throughout the world in different locations. However, the main driver, going 5–10 years out, is population growth and the increase of the middle class' diet requirements. That's the big driver.

TER: What about phosphates versus potash? Will phosphates catch up in the foreseeable future?

RK: Yes, eventually. Not much phosphate supply is coming out over the next 18 months, so it's going to catch up. There's no doubt about it.

TER: What about global potash and phosphates prices? They are not consistent across the world. Do you see them evening out in time?

RK: Well, it all depends. You could look at history and assume that they will, but governments' export/import restrictions can have a dramatic effect on regional prices. So, it all depends. I suspect that small regional differences will start to coincide at some point. Prices are lower in China, India, Indonesia and the United States. In another six to nine months, we could see increases in all regions.

TER: Is there an arbitrage opportunity for investors there?

RK: Oh, yes, but not really in stock prices. You'd have to play the futures markets and the actual commodity.

TER: Do you have a price forecast for potash? And, will we ever see $1,000/ton again?

RK: No, we won't see $1,000/ton. I don't expect the type of hoarding experienced back in 2007 and 2008 will happen again to the same degree. We certainly will get speculation; but, typically, the amount of cash that's available, the lending requirements and margin calls are more stringent than they were three years ago. You will probably see one-half of the speculative run-up in potash that we saw back in 2007. This time it is coming from actual supply/demand dynamics, not speculative investors gobbling up contracts. So, $1,000/ton?—I'll never say never, but I think the next peak we'll see is probably more in the $700–$750/ton range.

TER: Do you have a timeframe for that?

RK: Yes, about 24 months.

TER: How do you start your due-diligence process on something like a potash stock?

RK: Well, there are two different types of companies—the junior exploration plays, which are predevelopment, and the established producers. The established producers are companies like Agrium Inc. (NYSE:AGU), PotashCorp (TSX:POT; NYSE:POT), The Mosaic Company (NYSE:MOS) and Intrepid Potash, Inc. (NYSE:IPI). The due diligence you have to do on those is pretty basic, and a lot of information is available from published sources on the Internet. So, the amount of research is directly related to the amount of information available—and there's really not much you can't find. We sit down with management to go through the numbers, and then tour one or two of the operations. We consider the overall picture on different types of fertilizers to determine if this stock is positioned well and rank it next to its peers.

For junior developers, which are either in pre-exploration or exploration phase, it's more difficult. We spend a lot of time with the management team, going onsite, talking to the geologist and making sure the resource is there. We also ensure that there are no outside risks—no native land claims or land lease difficulties. We want to make sure a company can secure land and exploration leases over a contiguous area, so it will be smooth sailing when drilling starts.

After that, it depends on how well the company is financed, the quality of its management team and the level of its compliance and its experience in the field. Finally, you have to ask: "What are the barriers to entry for these particular players?" It could be country, infrastructure or any of a whole list of risks. The amount of due diligence you do on the smaller companies is a lot more than you would do on the larger ones.

TER: Do you like to see smaller companies being managed, especially in the field, by people who have come from larger companies?

RK: No, not necessarily. It depends on their experience level. They may have worked and been successful at smaller companies in the past. A lot of the guys who work for larger companies haven't had to go through the exploration phase—they've just gone through the production phase. So, the smaller companies don't really need an expert in production quite yet—they need exploration experts. That's where the difference lies.

TER: Do you consider these junior exploration companies you're following value stories or growth stories?

RK: Well, it's a combination; but sometimes you don't have the value yet. Some might be growth stories only because they haven't yet established the resource. Even if a company hasn't started drilling yet, we look at the historical holes done 15–20 years ago. And if it shows some good concentrations of potassium chloride (KCL) or phosphorus, we're happy to follow it along and look at the company as a growth story even though the value hasn't been established.

TER: How long do you typically follow a company before you initiate coverage?

RK: Well, I spend a lot of time with management and going through the numbers. So, we probably spend two to three months with a company before we initiate coverage.

TER: Where are you finding your desired characteristics now?

RK: Right now, the ones that we spend a lot of time on are Allana Potash (TSX.V:AAA) andKarnalyte Resources Inc. (TSX:KRN). These two companies have tremendous potential for resource expansion, as they've done drilling on only a fraction of their properties. Allana is in Ethiopia, and Karnalyte is in Saskatchewan.

Another one that we're looking at is Passport Potash Inc. (TSX.V:PPI, OTCQX:PPRTF) in Arizona near Holbrook. It has a lot of potential based on exploration work conducted there about 25 years ago. Passport's management team has done a lot of advance work, and drilling is just starting now. But the history indicates, to us, that there will be some fairly large deposits.

We're looking at another one called Aguia Resources Ltd. (ASX:AGR), which is a Brazilian phosphorus and potash play—a combination play which is fairly unique. We're doing more work on it, but we think it's going to an interesting value-and-growth story there also.

TER: The first two you mentioned, Allana and Karnalyte, seem to have a tremendous sense of urgency. Drilling is faster than expected.

RK: Right.

TER: Allana has 105 million tons (Mt.) potassium chloride in the inferred category. Ultimately, how large could this resource be?

RK: The company is looking at the first 11 drill holes and some of the 3-D seismic data, but it has not made anything public yet. The NI 43-101 will be out in mid May. From our experience, we believe that we could be looking at 500 million to 1 billion tons of potash—mineable potash.

TER: Let's just take the low end of that, 500 Mt. of mineable potash. You've got a target price of $2.50 here, which represents 50% upside from where Allana is right now. But, at 1 billion tons of mineable potash, where could that take this stock?

RK: Well, if you put the sensitivity on the mineable potash, it could take AAA's price well over $10–$12/share quite easily. It depends on the grade; so, there are a lot of 'ifs.' That's why we make a sensitivity table, just to get an idea. If the grade is about 35%, which seems to be the case with the last four or five drill holes, it could be a 25% average grade. That would take us north of $10/share.

TER: Well, grades seem to be high, so far, from what I've seen.

RK: Very, very high—and Allana can do open-pit mining.

TER: There are some near-term catalysts; do you believe these catalysts are priced in or discounted to the stock?

RK: No, not at all. But I would say that many unanswered questions remain. There are still some risks and issues having to do with the country, location, infrastructure and things of that nature. There's also a continuing view that commodity prices, potentially, have topped off here for the short term. We'll probably see other commodities pull back; but, essentially, the farmer is sitting with lots of money in his pocket and is starting to apply more fertilizer.

TER: Karnalyte was the second company you mentioned, I noted that it was up just 2% over the last three months while Allana was up 79%. Does that give an investor something of a relative-value play here in Karnalyte?

RK: Yes; but, you also have to remember that Karnalyte surged from $8–$13 very quickly after its IPO. So, it put on a lot of its capital appreciation early in the process. Right now, the resource is based on just 7% of its total land holdings. The CEO thinks that the potash deposit is extremely contiguous, very deep and very large. So, if you extrapolate to 100% of Karnalyte's property and add its newly added exploration rights, you'll start to see the stock catch up.

TER: Ok, you have a $20 target price on Karnalyte. That's an implied 60% upside from where KRN is now.

RK: Correct.

TER: And, the next catalyst could move it to there?

RK: Well, I don't know if it'll move it to there. It may take a couple more catalysts to get it there. But that's my 12-month target, and I have no doubt that KRN will blow through that number.

TER: What is your target on Passport Potash?

RK: I don't have a target yet. The company hasn't made any resource information public, at least not to the extent that we can infer a net asset value (NAV); but that information will be out shortly. Passport is working on its NI 43-101 now, which will be ready by June. The company's drilling as we speak and will release its first drill results in the next couple of weeks. Then, after two or three holes, we'll be able to come out with a valuation.

TER: You mentioned Aguia. Is it formally under your coverage?

RK: Not yet. Like Passport, it's an item of interest. We will be getting drill results from the company over the next couple of months.

TER: Richard, thank you and best wishes.

RK: Best wishes. Thank you very much.

Ponzi Financing Involving Copper Trade Gone Wild In China

As I have repeated numerous times, those looking for massive inflation can find it in China, not the United States. Demand for credit is so insane in China, that businesses will go to any length to get it.

Courtesy of Michael Pettis at China Financial Markets, please check out the insane way some companies in China obtain credit. Via Email, Pettis writes ...

In this week’s newsletter I will argue that in spite of the rising wages, appreciating currency, and interest rate hikes we’ve seen in recent months, China is not actually rebalancing.  Instead it is creating a change in the structure of the industrial base that may, unfortunately, be the opposite of what Beijing says it is aiming for.

But before getting into why, I want to bring up once again the goings-on in the commodity markets.  Since January I’ve been writing about – and trying to figure out – the strange happenings in the Chinese copper market.  The issue has been a regular topic of conversation in my central banking seminar at Peking University, where much of the most imaginative analysis I’ve seen has been done. 

China had been importing for many months far more copper than was needed for real use – and this in spite of a huge surge in domestic infrastructure and real estate development which has boosted the demand for copper.  Imports continued even when London prices exceeded Shanghai prices by more than the equivalent of China’s value-added tax.

Instead of being shipped to end users, it seems that copper was being stockpiled in warehouses.  Why?  One possibility of course was pure speculation.  If you think domestic Chinese copper use is going to soar, and with it prices too, then it might make sense to buy copper and hoard it. But there seemed to be a lot more hoarding than normal, and anyway with London prices often above the tax-adjusted Shanghai prices, why would anyone want to speculate on foreign copper when it could be bought more cheaply domestically?

It turns out, that the copper purchases were not entirely, or even mainly, speculative.  They were part of a financing scheme for companies that, in spite of the avalanche of new lending occurring both within and outside normal RMB lending, were having trouble accessing bank credit. 

credit-starved companies were importing copper because they could obtain trade finance or some other sort of foreign financing, and then used the physical copper (or warehouse receipts, I guess) as collateral for domestic borrowing.  The financing was continually rolled over.  Buying copper was just a way to borrow for companies that needed loans and were otherwise unable to get them.

As I mentioned two weeks ago, when I discussed this in February with a senior executive in a major commodities company, he responded by saying that he thought the same thing might also be happening in soya.  Borrowers are resorting to some fairly convoluted and expensive ways of obtaining short-term credit largely because they cannot obtain financing from the local banks.

Here’s how it works.  Even when London prices are above Shanghai prices, companies eager for loans are importing copper in order to get back-door financing, whereas local traders, noticing that domestic demand isn’t strong enough to justify those import quantities, and perhaps eager to arbitrage the prices, are selling copper abroad.  The weird distortions in the banking system, where credit isn’t rationed by price but by quantity and hierarchy, has turned China, at least temporarily, into a revolving door for copper imports and exports.  This is great for copper traders, of course, but perhaps not so good for the overall economy since someone has to pay for those outsized trading profits.

I still need to find out more about this.  I am only speculating and I don’t have real data to support me, but it does fit together nicely into a pretty consistent narrative on everything we are hearing in China, both about copper and about credit.

China’s share of total global demand for a selected list of non-food commodities:

China’s share of total global demand for a selected list of food commodities:

What is most noteworthy about these tables, of course, is the disproportion between China’s share of global GDP and China’s commodity consumption. 

The tables give a very good sense of what might happen to global demand for various commodities as China rebalances. 

Take iron, for example.  If Chinese demand declines by 10%, this would represent a reduction in global demand of nearly 5%.  I am not an expert in the commodity markets, but I guess that supply and demand considerations are fairly finely balanced, and a 5% reduction in demand should have significant price repercussions – especially if a material part of Chinese demand represents stockpiling and this stockpiling is reversed.
Copper Weekly Chart

click on chart for sharper image

Note that those companies holding copper, especially those new to this wild financing scheme, are very vulnerable to a decline in the price of copper. Alternatively, those companies taking out loans based on copper collateral then selling the copper back to the exchanges have managed to get loans with no collateral.

Interestingly, Pettis insists that credit cannot really be considered tight in China, rather demand for credit has gone through the roof.

In my model, rapidly expanding credit is a sign of a huge inflation problem. For comparison purposes, many forms of credit are still stagnant or declining in the US.

This is supposed to end well? For who?

There is much more in Pettis' email including a more detailed discussion of China's rebalancing that is not happening, who pays for the adjustment, and currency valuations.

Under terms of agreement with Pettis I cannot print the entire email so I picked the section on commodities to excerpt. Pettis will post more on his website later.

Mike "Mish" Shedlock

Gerald Celente: Bigger than Bin Laden – America’s New Public Enemy No.1

From the fans at Citizens Bank Park in Philadelphia to the mobs at the White House gates, “USA! USA!” was the chant heard across the nation. Jubilant Americans celebrated the breaking news that Public Enemy No.1, terrorist mastermind Osama bin Laden was dead.

Ten years have passed since the Twin Towers toppled and the Pentagon was whacked. After two failing wars and billions of dollars spent on the global manhunt to bring in Bin Laden “Dead or Alive,” America has now claimed victory. “
This is bigger than the moon landing, this is huge,” exclaimed Fox News’ Geraldo Rivera.

“Justice has been done,” intoned President Barack Obama announcing Bin Laden’s death. He not only called it “a good day for America,” but also declared that “The world is safer. It is a better place because of the death of Osama Bin Laden."

While Secretary of State Hillary Clinton echoed the sentiment that “justice has been served,” she evidently took issue with the Presidential vision of a “safer” world, warning that terror “won’t stop with the death of Bin Laden, we must redouble our efforts.”

If it’s a “safer” world, why the need to “redouble our efforts”? These were but two of the contradictions coming from the White House in the early hours of the breaking story, and many discrepancies would follow. Some of them would be noted and debated, but totally absent from the 24/7 news coverage, political “high-fives” and patriotic triumphalism was the simple question: Why did Osama Bin Laden, former mujahedin ally of the United States, turn against it to become Public Enemy No.1?

Was it that he and his Al Qaeda fighters suddenly decided to hate America’s “freedom and liberties” as George W. Bush maintained? Or was it remotely possible that the attacks were motivated by US foreign policy – with its unconditional support of Israel and concomitant support of the same Middle East monarchs, autocrats and dictators now being toppled in the wave of revolution?

Also absent from America’s non-stop exultation and self-congratulation, absent from the acres of newsprint and the countless hours of air time, was any discussion of the practical consequences of the death of Bin Laden who, before making it back into the headlines, had been both a fading memory and a non-issue.

Osama Bin Who?

So irrelevant had Bin Laden and his jihad rhetoric become that, in the months preceding his assassination, every one of the uprisings occurring throughout the Middle East and North Africa was secular and in direct opposition to Bin Laden’s militant pan-Islamic vision.

In a sentence: There were no practical consequences whatsoever attending the death of Osama Bin Laden. It would do nothing to:

  • Help America win losing wars in Afghanistan and Iraq.
  • Lower the unemployment rate.
  • Stop the US or European nations from sinking deeper into recessions and depression.
  • Revive failing real estate markets or solve the debt and deficit crises.
  • Lower oil and food prices.
  • Reverse the damage or stop the radioactive fallout from Fukushima.
What Osama’s death did do was boost the President’s sagging poll numbers and deflect public attention from the news that really mattered.

On Wednesday, April 27th, just four days before Bin Laden was killed, a new Public Enemy No.1 held his organization’s first ever press conference. Federal Reserve Chairman Ben Bernanke told the world that the United States would continue its low interest rate polices and, in effect, continue to flood the world with cheap money.

The global equity markets immediately responded to the predictably destructive consequences. Before Bernanke ended the press conference, gold prices shot up $20 an ounce, silver $2, and the dollar fell to a 3 year low against a trade-weighted basket of currencies. Despite the Chairman’s claims to the contrary, the US dollar would continue to devalue and subsequently dollar based commodity prices would soar.

Needing neither a mountain lair nor sequestration behind closed Fed doors, the new Public Enemy No.1, “Osama” Ben Bernanke committed, in broad daylight, an act of financial terrorism that would have far reaching and long lasting implications for the American public. As the value of the dollar went down, the cost of nearly everything would go up…excepting the cost of “risk.”

This meant that financiers could continue to speculate and exploit the equity markets, with the profits going only to the 10 percent of Americans that owned 90 percent of the stocks, bonds and mutual funds. Moreover, the Fed reasoned the cheap dollar would also give a competitive edge to big US exporters. But as exports rose, so did the price of imports, putting further strains on average consumers whose real wages fell ever further behind the pace of inflation.

Bombs Away

What Osama Bin Laden’s death also did was to deflect attention from the US/NATO “humanitarian” mission in Libya, which, just two days earlier, had delivered several humanitarian bombs upon the home of Muammar Qaddafi’s son, killing him and three of his children.

The bungled attempt to assassinate Qaddafi (who had been visiting his son) was condemned by Russia, brought recriminations against NATO from other UN members for overstepping the UN mandate, and called into question the legality of the air strike. With a groundswell of public sympathy building around the world for Qaddafi’s murdered grandchildren, the very purpose and future of the entire mission was being called into question.

Trend Forecast: With the death of Osama Bin Laden, the restored, rebuilt, new and improved terror bandwagon rolls again…and it will keep rolling until Election Day 2012. Whether a real terror attack happens or not, Barack Obama, as he has done before, will take a page from the G.W. Bush playbook and keep the American public in a state of fear and hysteria.

And should terror strike the US, UK, France or other NATO ally, their governments, media “presstitutes,” pundits, and the public at large will debate and deplore the “cowardly act” and demand “swift justice.” They will blame Bin Laden sympathizers, Al Qaeda cells, Muammar Qaddafi, radical Islamists…but never will they blame themselves. They will refuse to acknowledge that what they called “terror” was nothing more than “revenge”; reprisal for foreign meddling in the domestic affairs of other nations, or retaliation for military invasions launched by the US, UK, France or other NATO ally upon a sovereign nation.

Meanwhile, back in DC, the Chairman of the Fed, Public Enemy No.1, “Osama” Ben Bernanke, will mastermind the destruction of the American dollar, the US economy and the purchasing power of the American people.

As we have been forecasting for years, gold, despite its recent pull back, is on-trend to reach $2000 per ounce (and possibly higher). And while Ben Bernanke claims that inflation is merely “transitory,” considering his penchant for printing trillions of digital dollars not worth the paper it’s not printed on, we see inflation as both entrenched and rising.

Note: The Trends Journal has often been right when the rest were wrong, and consistently ahead of the curve. If you are not getting the Trends Journal
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Gerald Celente

A Replay of The Great Escape?

Chris Kimble has an interesting post on blog this morning with a troubling question as the title: Is A Great Escape Taking Placeabout To Take Place In A Wide Variety Of Assets? Here are the two chart four-packs that illustrate his view. Check out his website for further explanation.

World Food Prices Rise to Near-Record High as Inflation Speeds Up, UN Says

World food prices rose to near a record in April as grain costs advanced, adding pressure to inflation that is accelerating from Beijing to Brasilia and spurring central banks to raise interest rates.

An index of 55 commodities rose to 232.1 points from 231 points in March, the United Nations’ Rome-based Food and Agriculture Organization said in a report on its website today. The gauge climbed to an all-time high of 237.2 in February before dropping 2.6 percent in March.

The cost of living in the U.S. rose at its fastest pace since December 2009 in the 12 months ended in March, the same month in which Chinese consumer prices rose by the most since 2008. The European Central Bank raised interest rates on April 7, joining China, India, Poland and Sweden in a bid to control inflation partly blamed on food costs. Costlier food also contributed to riots across northern Africa and the Middle East that toppled leaders in Egypt and Tunisia this year.

“There seems to be some easing for a lot of commodities, but whether this is demand rationing, we have to wait and see,” Abdolreza Abbassian, a senior economist at the FAO, said before the report. “If the weather is good, if plantings expand, I think we could see some relief in food prices.”

Sugar prices slumped 18 percent in New York last month, while milk futures fell 1.8 percent inChicago, U.S. wholesale beef prices dropped 3.4 percent and pork declined 2.2 percent. Wheat prices rose 5 percent in Chicago after falling the previous two months and corn jumped 9.1 percent.

Corn Planting

Corn has almost doubled in the past 12 months on speculation that more planting in the U.S., the world’s largest grower, won’t be sufficient to rebuild global stocks. Wheat surged 57 percent over the same period and soybeans gained 39 percent as flooding ruined crops in Canada and Australia and drought reduced harvests in Russia and Europe.

Of the grains, corn “is the most worrisome,” Abbassian said in a statement. “We would need above-average, if not record, yields in the U.S.,” however, “plantings so far have been delayed considerably due to cool and wet conditions on the ground,” he said.

The FAO’s gauge of grain prices, which account for 27 percent of the overall index, jumped to its highest level since June 2008, advancing to 265.1 points in April from 251.2 the previous month.

Dry Weather

World grain stocks will probably slide for a second year in the 12 months through June 2012 as corn consumption outpaces production and dry weather hurts wheat prospects in the U.S. and the European Union, the International Grains Council said in a report April 20.

“With demand continuing strongly, prospects for a return to more normal prices hinge largely on how much production will increase and how much grain reserves are replenished in the new season,” David Hallam, the director of FAO’s Trade and Market division, said in a statement.

The FAO’s food-price index fell for eight months in a row after reaching its previous peak in June 2008, a situation that probably won’t be repeated this year, Concepcion Calpe, an economist at the UN agency, said last month. “Very strong” demand for food, feed and biofuel may mean prices will climb in coming months, she said.

Meat Prices

The index of meat prices, which make up 35 percent of the overall index, was little changed at 172.8, up 0.5 percentage point from the March level.

The FAO index of sugar prices fell to 347.8 points, the lowest level in seven months, from 372.3 in March. Cooking-oil prices slipped to 259.1 points in April from 259.9, while the dairy index fell to 228.7 from 234.4 in March.

Food output will have to climb by 70 percent from 2010 to 2050 as the world population swells to 9 billion and rising incomes boost meat and dairy consumption, the FAO forecasts. Producing 1 kilogram (2.2 pounds) of pork can take 3.5 kilograms of feed, U.S. Department of Agriculturedata shows.

About 44 million people have been pushed into poverty since June by the “dangerous levels” of food prices, World Bank President Robert Zoellick said in February. Another 10 million may join them should the UN food index rise another 10 percent, the World Bank said April 16. The number of hungry people in the world globally declined last year to 925 million from more than 1 billion in 2009, according to the FAO.

“A sliding dollar and increased oil prices are contributing to high food-commodity prices,” Hallam said.

Eric Sprott Interview

Eric Sprott: Chairman, CEO & Portfolio Manager of Sprott Asset Management - Eric has over 40 years of experience in the investment industry and manages over $9 billion. He has been stunningly accurate in his writings for over a decade, and is one of the most respected industry professionals who accurately foresaw the current crisis. Eric chronicled the dangers of excessive leverage as well as the bubbles the Fed was creating, while correctly forecasting the tragic collapse. Sprott Asset Management is one of the top firms in the world. The firm has become well known not only for its performance, but also for creating a gold and now silver trust.

Parabolic Moves are Only Temporary for Silver and Gold

The past few weeks we have been seeing the US Dollar slide to new lows at an increasing rate. The strong devaluation of the dollar has sent precious metals like silver and gold rocketing higher out of control sending them parabolic!

During the past 6 weeks both silver and gold have been rising in a parabolic formation. Meaning the price is going straight up with strong volume as everyone gets greedy and buys into the commodities at the same time. Most of you who follow my work already know that if the general public is piling into an investment rocketing prices higher, you better start focusing on tightening your protective stops and or taking some profits off the table before the price collapses.

Take a look at the weekly chart of Silver below:
Silver was grinding its way higher from July into March of this year. Only in the past 6-7 weeks did we start to see silver open up and run with expanding candles growing at an accelerated rate. This virtually straight up rally is a signature pattern and tells me that price action is now VERY unpredictable and anyone getting involved should be tightening their stops and or taking partial profits on price surges.

Parabolic moves can provide some big gains but most traders end of giving it all back and then some because the price can drop very abruptly as seen on this chart.

The weekly chart of gold below shows much of the same thing but without the extreme volatility that silver has.

Now, if you take a look at the US Dollar chart it’s starting to look very bullish in my opinion. The chart shows a falling wedge which typically means the selling pressure should be coming to an end soon. I’m not sure how large the bounce/rally will be. I do think a quick move to the 75 level is very likely in the near future though.

I find that metals tend to turn just before the dollar does. So I’m very cautious here on buying any stocks or commodities at the moment. The past 2 years we have seen stocks and commodities have an inverse relationship with the dollar so a rising dollar means a market pullback will take place. Sell in May and Go Away…?

Mid-Week Trading Conclusion:
In short, we exited our SP500 position this week for a nice 6% gain in a couple weeks making that our third profitable back to back index play. At this time I’m not ready to buy or short the market until all the charts line up for another low risk entry point. Things are 50/50 odds here and that’s not good enough for me.

Is the USD Bottoming?

A few months ago we wrote an article talking about how gold could rise to a price level that would represent inflation, and if it was high enough it would pressure the economy (represent that cost pressure). Oil prices rising to $5 gas in the US are in effect, and indeed both high oil and high gold prices have converged and the US economy is pressed.

At this same time, the USD appears to be testing multiyear lows on the USDX, which I peg at about 70 on that index. That index is heavily Euro weighted by the way, with the Yen a distant second.

In any case the USD appears possibly close to bottoming near this level, or perhaps 72. If so, it would be a continuation of a multiyear low range for the USD at about 70 on the USDX. What could this mean for commodities and gold and silver? Take a look:

gold may 4 2011

Because we believed the USD may be bottoming, we alerted subscribers that Silver was a sell to us:

Here was the alert sent April 25, 2011 :

25 Apr 2011 (11:39 am Central)
PrudentSquirrel alert - USD GOLD YEN OIL DOW
The Dow appears to be driving market sentiments, I know people have other more 'relevant' indexes but I like to use the Dow. It’s testing that range 12200 and 12500 now.
The USD should find a bottom here somewhere above the critical 70 level on the USDX particularly if US markets weaken.
Gold is priced pretty near where I believe it should be and Silver worries me as a bubble. Problem with bubbles is they gain the most at the very end making it almost impossible to get out mentally.
I do not feel gold is in any kind of bubble but is presently fairly valued. Several years ago I told readers to buy gold at anything under $1000.... That looks right on now. We actually were the first that I know of to talk of the Gold $1000 USD floor several years ago.
I don’t like this silver bubble and who knows how high it will go. Silver is a classic speculator market by the way, in case you feel it’s so -safe-
Just be warned of the silver hype. I personally, now would sell it. That’s me and don’t yell at me if silver rises to $100 then crashes!
The Yen has been weakened and that is market friendly in general but this is probably only temporary. Oil is in chaos with the ME in a new mess every week. This is totally unprecedented. Do not speculate in chaotic markets…”

Needless to say that was one timely call!

We do all our own research and I am not aware of any other specific call like that on this silver bubble. We reiterated this view to subscribers several times before this large silver correction. We also have calls on silver’s real price today (where it should settle, or bottom).

As to the USD let’s take a look:

usd may 4 2011

If the USD were to find its usual multiyear bottom at around 70, this can combine with market sentiments to pressure some commodities and precious metals. Gold is much more reasonably priced, and should resist hard corrections, we have new levels for a gold bottom, as well as silver bottom.

Once again we have made an incredible call, two weeks before this latest big market change in the USD and in precious metals and commodities.

It is possible Silver can correct to a new much higher base, which formerly was in the teens for a long time. Silver should keep a good chuck of its gains but will find a new lower base.

Silver has other issues with its market, it’s supposed to be smaller and much more speculative than gold, while gold kind of meanders along steadily around $1500 for the moment. Again, gold is steady and silver is very hyper or volatile.

In case you think this call might be a fluke, we have made incredible calls on the USD now for years, usually several weeks in advance of major changes. So, this is not a fluke for us.

Crestmont Market Valuation Update

The recent series of articles by guest contributor Ed Easterling triggered a great deal of interest in the Crestmont P/E ratio. Accordingly I am adding the Crestmont data to my monthly market valuation posts. The articles were written shortly before the April month-end numbers were available, so let's have a look at a pair of charts with the April monthly averages of daily closes for the S&P 500 and the April Crestmont earnings-per-share.

The first is the Crestmont equivalent of the cyclical P/E10 ratio chart I've been updating monthly for the past few years.

The Crestmont P/E of 20.1 is 47% above its average (arithmetic mean) of 13.7. This valuation level is almost identical what we saw in my latest S&P Composite regression to trend update and somewhat higher than the 41% above mean for the P/E10 (more here).

The P/E ratio of 20.1 puts the current valuation at the 91st percentile of this 140-year series.

The next chart is an update of one included in the second part of Ed's P/E: So Many Choicesguest article. Because inflation is a key driver for direction of P/E multiples, I'll update this chart twice a month: at month-end with the most current P/E and mid-month when the Consumer Price Index is released.

For a better understanding of these charts, please see Ed's two-part commentary here:

And this article provides an overview of Ed's method for determining where the market is headed.

Crude Drops Below $100, Down Almost 10% On The Day

by Tyler Durden The anti-speculator witchhunt is bearing fruit: following the wipe out in precious metals, the next, and key, target of this commodity take down, crude, just went from triple to double digits, hitting a low of $99.70, with the $100 limit orders resulting in a surge in the USD and accelerating the drop in EUR. Stocks continue to be completely disconnected from this massive liquidation across all commodities, as every mutual fund knows all too well that Ben will always step in and make sure that the Russell 2000 never has a downtick. Yet this complete isolation of equities from other products merely confirms that not even the HFTs correlate stocks to other asset classes. It also means that HFTs are no longer present in stocks, which means that even the fake liquidity provided by HFTs is no longer there, and we will likely have a far worse flash crash the second Brian Sack loses control of the stock market.

Yet the move in USD-priced crude is nothing compared to what is happening to Euro-priced Brent. In a word: "total wipeout"

Jobless claims jump points to slowing recovery

The number of Americans filing for jobless aid rose to an eight-month high last week and productivity growth slowed in the first quarter, clouding the outlook for an economy that is struggling to gain speed.

While the surprise jump in initial claims for unemployment benefits was blamed on factors ranging from spring break layoffs to the introduction of an emergency benefits program, economists said it corroborated reports this week indicating a loss of momentum in job creation.

New claims for state jobless benefits rose 43,000 to 474,000, the highest since mid-August, the Labor Department said on Thursday. Economists had expected claims to fall.

One factor that likely helped push claims up and that could prove lingering were auto layoffs brought about by supply disruptions from Japan's earthquake and tsunami.

A second report showed nonfarm productivity increased at a 1.6 percent annual rate in the first three months of the year, braking from a 2.9 percent pace in the fourth quarter.

"We do not think that the entire rise in claims over the last month can be explained by special factors alone," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York. "It seems instead as if the improvement in the labor market slowed a bit."

The data, a day before the U.S. government's comprehensive employment report for April, was the latest to suggest a softening in the jobs market.

Other reports this week showed weaker employment growth in the manufacturing and services sectors in April and a step back in private hiring, suggesting Friday's closely watched data could prove weaker than economists have been expecting.

An industry survey released on Thursday found hiring by U.S. small businesses almost ground to a halt in April.


Boosting employment is critical to reinvigorating a recovery weighed down by high food and energy prices. Growth slowed to a 1.8 percent annual rate in the first quarter after a 3.1 percent expansion in the final three months of 2010.

Economists anticipate a pick-up in growth but the prediction could be in jeopardy if the stream of weak data persists.

"The data is not consistent with the type of growth numbers that are anticipated for the economy over the balance of the year," said Steven Ricchiuto, chief economist at Mizuho Securities in New York.

The claims data fell outside the survey period for the April employment report, which is expected to show the jobless rate holding at a two-year low of 8.8 percent.

A Reuters survey found economists expect that report to show an increase of 186,000 in nonfarm payrolls, which rose by 216,000 in March -- the most in 10 months. However, that forecast was made before this week's run of soft data.


U.S. stocks fell for the fourth day in a row. They were pressured by the claims report and a drop in energy shares as oil prices fell. Government debt prices rose for a sixth straight session. The dollar gained against the euro after the European Central Bank offered few clues on the timing of future interest rate increases.

Reports from retailers showed a late Easter boosted sales of clothing and other holiday-related items in April, but stores warned rising costs and a weak labor market would dampen purchases over the next several months.

A Labor Department official said spring break layoffs in New York added about 25,000 to the jobless benefit rolls last week. He said the start of an emergency benefits program in Oregon also helped lift the number of claims.

Many states in the Northeast allow for non-teaching staff to file for unemployment benefits when schools close for spring and summer breaks. The department tries to adjust its figures to take into account these seasonal fluctuations but New York's spring break occurred at an unusual time this year.

Tornadoes that struck parts of the country could also have accounted for a small number of claims.

"We are hesitant to take too strong of a signal from the recent increase in claims data and will look to upcoming reports before suggesting that the upturn in claims is a sign that the labor market has lost momentum," said Michael Gapen, a senior economist at Barclays Capital in New York.

The slowdown in productivity in the first quarter reflected the softening in growth, but also suggested businesses may soon need to step up hiring.

"It's not unusual at this stage of the cycle to see productivity slowing. We're seeing hiring, it's not very rapid, but companies cannot squeeze more out of their workers anymore," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

The data showed a slight gain in wage-related price pressures, which nevertheless were muted. Unit labor costs, which gauge the cost of labor for any given unit of output, rose at a 1 percent rate after dropping 1 percent in the fourth quarter.