Saturday, May 21, 2011

Why it’s Time to Bail Out Now

Those looking for guidance on the medium term trend in the market better take a look at the best of breed, benchmark stocks for the leading sectors; the companies traders call “the generals”. I am talking about Goldman Sacks (GS), Apple (AAPL), Freeport McMoRan (FCX), and Google (GOOG). They are all telling us that the market peaked last February, not on April 29, as the indexes are suggesting.

When the charts for the stock prices of the best run companies in the most profitable industries are rolling over like the Bismarck, you know that it is time to bail out. That is why I have been a seller of rallies, not a buyer of dips for the past three months.

If you are one of those cynical, glass is half full, tough to convince investors, then take a look at the chart of the financials ETF (XLF). It also peaked in February and has been in a clear downtrend since. There is no way the S&P 500 can make progress when one of its heaviest sectors is suffering from Montezuma’s revenge.

Still unconvinced? Check out the bottom chart of trend lines for the S&P 500, when I lifted from my friend, Dennis Gartman of The Gartman Letter. It indicates that we broke a steep trend line in February and are imminently about to break a much more shallow trend line this week.

The bottom line? The best case is that we are nearly three weeks into a 10% correction that will take us to the 200 day moving average for the (SPX) at 1,234; the worst case is that a new bear market has started. Look out below!

Goldman Sachs

Apple Inc

Google Inc


By. Mad Hedge Fund Trader

The Gold-Silver Ratio – Another Look

The gold-silver ratio (GSR) measures how many ounces of silver one can purchase for an ounce of gold, on a certain date.

Reference to the ratio has a long history. One of the first mentions was that upon the death of Alexander the Great, the ratio was 12.5 to 1. During the Roman Empire, the ratio was set at 12. By the late 19th century, the ratio had risen to 15.

Interestingly, these historical ratios roughly reflect geologists’ estimates that silver is 17 times more abundant than gold in the earth’s crust. This gives many investors a reason to believe that 17 is the natural balance between these elements, and that eventually the GSR will return to it.

Monitoring the GSR is quite popular among gold and silver investors. It seems that whenever it makes a big move, many start drawing conclusions about the direction of the prices of its underlying metals.

Here at Casey Research, we stick to the dictum that the GSR “suggests a lot but proves nothing.” Indeed, the GSR is determined by the price action of gold and silver; the price action of gold and silver is not determined by the GSR. Rather, each metal’s price is influenced by various fundamental factors. What complicates any analysis of interactions between gold and silver prices is that the two metals have different markets, each with peculiar supply and demand structures.

Briefly reviewed, the gold market is characterized by a large above-ground supply as the vast majority of gold ever mined still exists in refined form, and annual mine supply represents only a small fraction of that volume. Demand is mostly for jewelry and investment. Gold is not widely used for industrial purposes.

Silver demand, by contrast, is mainly for industrial fabrication of things like electronics and batteries. The metal is consumed during the process and removed from above-ground stocks. The other major areas of demand are jewelry, investment, photography, coins and household silver, in that order. Supply comes mainly from mining and scrap recycling.

From this picture comes one conclusion: over time, supply and demand for the two metals has been fluctuating in response to industrial and technological advancements, shifts in monetary systems and market turbulence. Today, as investment and jewelry are the primary sources of gold demand and most of the silver goes into industrial and related applications, it is no surprise that the gold-silver ratio is different than the historical average of 17. The following chart shows how the ratio has fluctuated since 1968.

The GSR was extremely volatile over the past five decades and averaged 53.5 from 1968 to April 2011; during the last ten years (since April 2, 2001), the ratio averaged 61.8.

The ratio has been falling for several months, however, as shown on the chart above. Counterintuitively, however, rumors that a low GSR signals undervalued silver started spreading. We say counterintuitively here since it is unclear why a falling GSR should signal undervaluation after silver gained over 80% within a year. Appeals to the mega-long-term GSR of 17 alone do not seem to provide enough basis to think that silver will continue to soar indefinitely.

As of April 1, the GSR stands at 37.7. We, however, do not think that it is going to fall to 20 or 15 from this point: history shows that high volatility is the ratio’s essence. After a plunge, there usually follows a rapid surge. That happened in 1980 when gold reached its inflation-adjusted peak, and in 1987 and 1997. We don’t know how steep the current plunge in the ratio will be, of course, but using history as a guide, we do not expect the ratio to continue its decline for much longer.

Uncertainty about the economic recovery in the Western world and the growth of developing countries can result in slowing industrial output and hence falling demand for silver that would hinder the price. These conditions also create a favorable environment for gold driven by safe-haven demand. In such circumstances, the ratio may climb.

History shows that the GSR tends to rise significantly during a recession and create an interim peak on the way. See the chart below.

We believe that the measures taken by the current administration to battle the recession are largely counterproductive, temporary, and will be unable to prevent the onset of another major economic decline. It is difficult to judge when the turmoil might start, but the odds of it happening soon get higher as the levels of government debt increase and the dollar is debased. When push comes to shove, the GSR can react quickly and create a fluctuation of an unpredictable magnitude.

In times of recession, as we discussed above, gold and silver behave in a quite different manner. Have a look at the following charts.

Note that it is not quite statistically sound to plot a ratio against one of its components, but for the purpose of illustration we find it quite useful.

As you can see, in 1980 gold and silver both peaked on a historically low GSR. This may imply that a low ratio can take place not only when silver appreciates faster than gold (as it did in 2010 and so far in 2011), but also when fundamental and speculative conditions influence both metals. Of course, the 1980 silver peak happened while the infamous Hunt brothers were massively accumulating the metal.

Conventional opinion attributes silver’s rise to the Hunts, but we are skeptical. It cannot be determined to what degree the metal would have otherwise risen absent the Hunts in the market. In any case, attempts to influence markets are nothing new – today, major investment banks are accused of manipulating the silver market by holding huge short positions that cause artificial price suppression.

Returning to the charts and how gold and silver behaved in the last recession, we can see that silver moved counter to the GSR while gold moved in a mixed, sideways pattern. Because of this, many see a lot of upside potential for silver, but we should not forget that silver is the denominator in the ratio. So absent strong fluctuations in gold – and gold was on an ascent since the beginning of 2009 – the GSR would to some extent simply mirror silver price movements.

The silver price was also influenced by hopes that the global economy is reviving and that industrial demand is going to last. In 2010, silver gained more than 80% while gold added less than 30%. The difference resulted in the GSR falling throughout 2010. Will that performance be repeated? We cannot say. Speculators should remember that the GSR is merely a ratio of two prices often driven by different forces. It has limited, if any, predictive power.

With that in mind, we will finish by juxtaposing the ratio against the Toronto Venture Exchange (TSX-V) index, and it reveals an interesting picture: it seems that the TSX-V has been negatively correlated with the ratio for the last ten years. Again, statistically it’s arguable if a ratio should be compared to an index, but looking at various combinations of time series, and the stunning correlation, we couldn’t help ourselves.

It would be easy to conclude that there is a strong – and negative – correlation between the index and the ratio. However, this correlation does not provide any sort of guidance on whether the metals themselves look expensive or not, or where mining stocks are headed. An interesting image, that’s all it is.


The gold-silver ratio attracts a lot of attention nowadays, but it is not a reliable tool in an investor’s toolbox, and we don’t think it can predict future price movements. But the reality is that nothing does. Those who look at GSR charts, including ours above, should not forget to analyze all the fundamentals behind the price movements of both gold and silver. We advise you to be extremely cautious and not get caught in the trap of believing that a single number or ratio, or a set of them, can provide you with a crystal ball.

Identifying an opportunity for future profit based on facts and a reasonable amount of risk is another thing. This is what we do day in and day out – just not based on the GSR.


By Jordan Roy-Byrne, CMT

Most mainstream pundits and reporters have assumed that it was speculative buying that caused Silver to go parabolic. After all, its always the dumb money or the public that gets in at the very end. However, in futures markets, parabolic moves are often the result of short squeezes. This is exactly what happened in Silver.

Credit the great work of, which is a fantastic service. The chart is below.

As you can see, both open interest and the speculative long position had been trending down. Both continued to decline during the parabolic move. When open interest falls but price rises, its a short squeeze. The same thing happened with Cotton just a few months earlier. I don’t place much time or emphasis on speculating about market manipulation or intervention but the COT tells us that the commercial traders (which includes JP Morgan) were covering. Typically, the commercials buy into weakness and sell/short into strength.

The low speculative long position is one reason why Silver looks healthy in terms of sentiment. Going forward Silver needs to define and establish support and then build a base before working its way higher.

Corn, wheat prices ride torrent of weather shocks

Torrential rains, flooding, droughts and searing heat sound like an apocalypse in the making, but they’re all part of the normal risks facing agricultural commodities each crop season and lately, every day.

“Farmers have been dodging bullets with Mother Nature these last few years,” said Kevin Kerr, editor of Kerr Commodities Watch. “It’s inevitable that we will eventually get a growing season of severe heat and drought or disease — that year may be here.”

The risks to U.S. crops this year have helped futures surge recently.

Corn futures (CHICAGO:CN11) have scored a year-to-date climb of 19% on the Chicago Board of Trade, ending at $7.48 Thursday after a roller coaster ride in prices that rose to highs above $7.70 in April.

Year to date, wheat futures (CHICAGO:WN11) have climbed 2.3%, closing at $8.12 Thursday, though down from a peak of over $8.80 in February. Soybeans (CHICAGO:SN11) have fallen 1.6% since the end of last year, finishing Thursday at $13.80 but it rose in February to a high atop $14.50.

And, after declines in recent weeks on a broad pullback in commodities, corn, wheat and soybeans are poised to finish this week sharply higher, with wheat trading up by over 10% as of Thursday.

Corn and wheat prices had suffered last week after the U.S. Department of Agriculture came out with larger-than-expected ending stocks estimates for 2011-2012, said Todd Hultman, president of “Since then, it seems more likely that those estimates ignored obvious weather problems for both grains that are not going away easily.”

Flooding along the Mississippi River is the first weather-related problem that comes to mind. But there has also been Delta flooding and wet conditions in the Ohio Valley and a drought in Texas, Oklahoma and Kansas.

Floodscould hit oyster harvest

The Louisiana oyster business has been good in recent months, but local fishermen are worried. The waters here are rising from spillover from Mississippi flood waters, and that could hurt this year's harvest. WSJ's Mike Esterl reports from Houma.

“The Mississippi concern is just the latest in a series of variables with upside price shock potential,” said Alan Knuckman, managing editor of the Resource Trader Alert.

The high river levels and the opening of the Morganza Spillway for flood control may impact nearly 300,000 crop acres, which could translate into $200 million in damages, according to Louisiana State University AgCenter Economist Kurt Guidry.

”Areas that were flooded before they were planted may have to look at alternative crops if the ground ever dries out,” said Darin Newsom, a senior analyst at Telvent DTN.

And “areas that saw early planting now have newly emerged crops standing under water,” he said. “These acres will likely drown, and will either need to be replanted if and when the ground dries out sufficiently, replanted to an alternative crop or abandoned.”

This comes at a key time for corn, soybean, cotton and spring wheat, said Newsom.

“Planting progress has been slowed by rains and flooding over much of the Northern Plains, Midwest Corn Belt and Delta, he said, and the winter wheat crops in the Southern Plains have been irreparably damaged by a drought that started last fall.

“With the world needing the U.S. to have large crops this year, the biggest challenges are coming early,” he said. A “critically” dry situation that’s emerging in parts of Europe where wheat is grown has contributed to a “tough” world situation, so world supplies will not be rebuilt, as expected, by the U.S. crop.

Weather woes

The chain reaction in agricultural commodities isn’t likely to end anytime soon, as past and current weather woes slow crop progress ahead of the summer heat and winter frost. Read about NOAA’s Atlantic hurricane forecast.

“Corn, bean and spring wheat crops are all behind normal in planting,” said Jeff Coglianese, senior broker at Daniels Trading in Chicago, pointing out that flooding along the Mississippi along with the wet conditions in Ohio, Indiana and the Red River Valley caused the bulk of these delays.

In Ohio, for example, USDA data show that 7% of corn has been planted in the state as of the week ending May 15, compared to 83% at this time a year ago.

The amount of corn crops planted that have actually emerged is also strikingly low. In Ohio, only 1% has emerged as of the week ended May 15, compared to 57% a year ago. In Wisconsin, none have emerged, compared to 28% a year earlier.

In some areas, planting is behind by about 20%, said Kerr, noting that many farmers may have gotten corn seed in the ground, but they’re not emerging and that means the crops will be delayed.

If the corn doesn’t have a mature root system when summer rolls around, it will not be able to handle the heat, he said, and wheat and soybeans have similar problems.

Immature corn fields are seen laid to waste by the encroaching flood waters from the Mississippi River along Highway 61 near Yazoo City, Mississippi May 12, 2011.

“If we see continued wet weather and come up significantly short of the USDA projected 92.2 million acres of [planted] corn, we have the potential to make new all-time highs,” Coglianese said. “Right now, the corn and bean markets appear headed for a test of their March highs.”

Among the big challenges for crops this year, corn and wheat will need “near perfect” growing conditions since they have little or no margin for error in production this year, Newsom said. But “given the lateness of planting, an early frost, particularly in the northern tier of Midwestern states where corn acreage was expected to increase the most, becomes a stronger possibility.”

And as the summer approaches, “we are overdue for a drought,” said Kerr, noting that farmers have been very lucky the last several years.”

Looking further out, the multi-year impacts of the Mississippi River flooding is unknown.

“There is some concern of sediment deposits impacting the usefulness of land for agricultural production in future years,” said LSU AgCenter’s Guidry, in a recent report. “The exact nature of this issue will not be known until flood waters recede.”

Risk levels

The risk levels for each of the agricultural crops vary under these challenging weather circumstances.

“All of the agricultural markets have a bullish undertone because the harvest is a long, long way with many hurdles to overcome,” said Resource Trader Alert’s Knuckman. “The constant weather pressures of too wet/dry or too hot/cold create a bullish undercurrent that will only be voided by substantial production to rebuild stockpiles.” Read his articles on commodities.

The drought in the southern Great Plains has hurt wheat, and crops most affected by the rains are corn and rice, said Jack Scoville, vice president at Price Futures Group in Chicago. Arkansas has seen a lot of rain and flooding, and the No. 1 rice state is running out of time to plant rice, he said.

So rice is among the agricultural commodities likely to see the best performance.

Rough rice futures (CHICAGO:RRN11) trade around $15 per hundredweight. A hundredweight is equal to around 100 pounds. Prices stand about 10% below the highs seen earlier this year, but have also gained about 10% in the past week.

RRN11 15.10, +0.08, +0.53%
July rough rice

“Tornados and Mississippi River Valley flooding [has done or is doing] lots of damage to U.S. rice production,” said Ned Schmidt, editor of the Agri-Food Value View report. Thailand has announced plans to reduce rice crops and Japan’s has lost production due to the tsunami and radiation fears “real and imagined.”

Corn is another commodity likely destined for higher prices.

Scott Capinegro, president of Barrington Commodity Brokers, said corn could lose 1.1 million acres or more as flooding in the Eastern Corn Belt and Mississippi River slow down the planting progress for the crop.

Late planted corn will pollinate long after the fourth of July and “into the heat of the summer,” he said — then the corn crop will need to worry about early frost.

The market won’t even know for sure how many corn acres get planted until June 30, said Hultman, though that “doesn’t keep us all from guessing in the meantime.”

“Just about everything [will] have to go well from this point forward for spot corn prices to stay below $8” a bushel, he said.

Meanwhile, planting delays for corn and rice in the U.S. will “lead to more soybeans getting planted as soybeans have a longer planting window by far than the other two,” Scoville said.

Global supplies of soybeans have been increased because of large South American production, according to Newsom, but given that global demand is expected to grow, the U.S. crop still needs to be big.

So right now, it's all about guessing what Mother Nature will do next.

Around June 30th would be a good time for traders to “tread lightly,” according to Hultman. That’s the day the USDA releases its annual acreage report.

“That USDA report has a history of surprising shocks that were hard to guess before hand,” he said.

USD Short Covering, EUR Capitulation Ending, Silver Spec Longs At Two Year Lows

As we expected, the recent rout in the EUR and the spike in the USD have largely kicked out all marginal speculative elements. As the first chart below indicates, as of May 17 net non-commercial spec EUR contracts dropped by 19.8k from 61.4k to 41.6k, nearly a third of the current bullish bet. And as that was happening, USD shorts were covering rapidly, confirmed by the weekly change from 4,563 contracts short to just 1,270, the most bullish position in the USD since January 2011, and roughly where it was back in October 2010.

And probably more important, now that speculative fervor is all the talk, the silver net long positioning by non-commercials, contrary to conventional wisdom, is not only at an all time high, nor was it recently, but instead in the last week plunged to a level last seen back in April 2009. Net silver exposure has dropped by almost 60% since its recent peak in February (40,937 contracts), and at this point it seems all speculators have left the party. The new base is now being rebuilt based on much firmer hands.

NYT: Nearly 50% of 2009 College Graduates are Either Jobless, or Working in Jobs That Don't Require a College Degree

As U.S. student debt has now passed the amount of credit card debt, and the intellectual returns of U.S. college are coming under fire [Jan 18, 2011: Report - First Two Years of College Show Small Academic Gains], grads are also being pressured on the job front. Some quite startlingdata in this New York Times story as 22.4% of 2009 college grads are not working, and (more troubling from this set of eyes) 22.0% are in jobs that don't require a college degree. It's no wonder student debt default rates are at record highs. The issue of jobs is not just U.S. centric - many (high cost) developed countries are facing the same situation; Spain's youth unemployment is near 40% for example. [Feb 7, 2011: BW - The Youth Unemployment Bomb] However what makes the U.S. unique is the enormous cost of secondary education - which is now garnering a poor ROI (return on investment) for an increasing amount of graduates. While Wall Street is focused on the number of jobs, they have missed the forest for the trees - the quality of jobs gained versus what has been lost is putrid. [Feb 3, 2011: CNNMoney - Jobs Coming Back, but the Pay Stinks!]

Anyhow, I've been told not to worry for years by those who live in ivory towers and speak dogma - once we outsource a big chunk of jobs, it will make other countries middle class well off.... whom will one day have more disposable income to buy U.S. goods. That are built in the foreign countries. Which somehow will lead to U.S. jobs. For example....McDonald's burgers (staffed by locals), and Apple iPhones (assembled in China). [Oct 4, 2010: WSJ - Americans Souring on Free Trade as Losing Their Jobs Overpowers Lower Prices] Don't ask questions, just believe it will all work out in the end.

I am not sure when the tipping point will be reached but as I said in 2008 we are approaching a point where for many (not all!) going to college, incurring massive debts, and then entering a job market where many of the jobs they once had have been outsourced (and continue to be) or eliminated via automation/productivity improvements, will simply be a losing proposition even accounting for the 'higher pay' in the long run. I don't know when the college bubble bursts but eventually it will face the same end as all bubbles.

From the story....

  • The individual stories are familiar. The chemistry major tending bar. The classics major answering phones. The Italian studies major sweeping aisles at Wal-Mart.
  • Employment rates for new college graduates have fallen sharply in the last two years, as have starting salaries for those who can find work.
  • What’s more, only half of the jobs landed by these new graduates even require a college degree, reviving debates about whether higher education is “worth it” after all.
  • The median starting salary for students graduating from four-year colleges in 2009 and 2010 was $27,000, down from $30,000 for those who entered the work force in 2006 to 2008, according to a study released on Wednesday by the John J. Heldrich Center for Workforce Development at Rutgers University. That is a decline of 10 percent, even before taking inflation into account.
  • Of course, these are the lucky ones — the graduates who found a job. Among the members of the class of 2010, just 56 percent had held at least one job by this spring, when the survey was conducted.
  • Even these figures understate the damage done to these workers’ careers. Many have taken jobs that do not make use of their skills; about only half of recent college graduates said that their first job required a college degree.
  • An analysis by The New York Times of Labor Department data about college graduates aged 25 to 34 found that the number of these workers employed in food service, restaurants and bars had risen 17 percent in 2009 from 2008..
  • There were similar or bigger employment increases at gas stations and fuel dealers, food and alcohol stores, and taxi and limousine services.
And when college majors are busy waiting tables, being baristas, or selling liquor and gas - it has a cascading effect.
  • This may be a waste of a college degree, but it also displaces the less-educated workers who would normally take these jobs. “The less schooling you had, the more likely you were to get thrown out of the labor market altogether,” said Mr. Sum, noting that unemployment rates for high school graduates and dropouts are always much higher than those for college graduates. “There is complete displacement all the way down.”

And about those loans the federal government is just dying to hand out so that the massive Ponzi scheme called the college tuition bubble can escalate?
  • Meanwhile, college graduates are having trouble paying off student loan debt, which is at a median of $20,000 for graduates of classes 2006 to 2010.
  • Many graduates will probably take on more student debt. More than 60 percent of those who graduated in the last five years say they will need more formal education to be successful.