Monday, February 27, 2012

Housing, the Bottom Is In

Economic news this week had its moments of drama, but it was otherwise basically sedate. The markets cheered at least a temporary resolution to the Greek debt crisis. Even more importantly, a reduction in Chinese bank reserve requirements showed that the Chinese government is willing to do whatever it takes to prevent its economy from slowing too much.

Otherwise, there wasn't a lot of economic news this week except a batch of housing data that showed continued improvement. I believe the bottom in the housing market is definitely in. The main question from here is the pace of that improvement, not if there will be a recovery at all.

Corporate earnings news this week was not good. Retailers had decent quarterly sales but many of those sales came in at highly discounted prices. Target(TGT) and Kohl's(KSS) were a bit disappointing on the earnings line. On the tech side, Hewlett-Packard(HPQ) and Dell(DELL) were below expectations, but most of the damage there was self-inflicted or related to Thai flooding problems and not macro demand. That said, the disconnect between corporate earnings growth and U.S. economic growth continues to widen. Year-over-year GDP growth has been relatively stable over the past year, and actually may be accelerating. Meanwhile, S&P 500 year-over-year earnings growth decelerated throughout 2011 from double-digit levels to a mere 5%-6% in the fourth quarter.

Housing Numbers Continue Climb This Week
This week, there was a lot of housing data, all of it good. Both new- and existing-home sales looked in better shape, as did pricing data from the Federal Housing Finance Administration (lagged and averaged Case Shiller data is due next week). Not only did the January data look great, but also there were massive upward revisions to December's statistics. Last month I was puzzled when some of the originally reported housing data looked incredibly weak, especially given the positive buzz that our homebuilding analysts were hearing from the field. (more)

This little-owned commodity could be starting its first major bull market in 31 years

Sugar has not experienced a rip roaring bull market in 31 years. That is about to change.

The vast overwhelming majority of traders have no clue what a for-real bull market in Sugar is like. I have lived (and traded successfully) through the big bull moves in Sugar — and I will tell you that there nothing like them.

A bull market in Sugar is the most explosive event in the commodity markets. Whereas traders today talk about the dream of catching a big Silver move, traders in the 1980s talked about the Sugar bull markets.

Sugar bull markets have a singular characteristic. When traders who want to buy a dip finally get a big enough dip to buy, they will not like what they get. There are two ways to get aboard a Sugar bull — at the market and on huge white-knuckle breaks.

Sugar bull markets are comprised of week after week of going up every day or huge breaks that run the stops of most speculators. If you get cute with a bull market in Sugar you will find yourself up to your neck in hardening syrup.

I believe we are in the early stages of the bull market to end all bull markets in Sugar. Let’s look at previous bull markets (as well as the current bull trend that started in 2007) for guidance.

First, let me make a point to you young guns who dismiss the signficance of market behavior from your grandfather’s generation. Those that understand market behavior best are part hisotorians, part psychologists and part economists. History has much to tell us about the future in all aspects of life. Dismiss history at your own peril.

1973 through 1974 bull move

During this bull trend prices seven fold in less than a year. When prices were not going up day after day, prices were undergoing huge breaks.

The breaks were as follows:

  • 24.46 to 15.90 or 856 points
  • 26.05 to 19.70 or 635 points
  • 37.35 to 26.70 or 1,066 points

Who among you could have withstood these breaks?

I want to focus on the last leg up in the 1974 bull run because this period is, in my opinion, the analog to our current Sugar market. That last leg up was defined by the following:

  • 26.70 to 66.00, or 3,930 points
  • 45 trading days
  • Average gain per day = 87 points
  • Only four days with a lower close
  • Not a single close above the low of the high day of the move

1979 through 1980 bull market

During this bull trend prices more than five fold in about 14 months. When prices were not going up day after day, prices were undergoing huge breaks.

The breaks were as follows:

  • 28.14 to 17.45 or 1,069 points
  • 37.35 to 29.50 or 785 points
  • 37.70 to 26.05 or 1,165 points

Who among you could have withstood these breaks?

Again I want to focus on the final leg of this bull move because I believe it is the analog to our current market.

There was one big break of 583 points in the middle of the run

Counting the big break in price but not time, the market advanced 2508 points in 11 weeks, for an average per day gain of 46 ponts.

2004 (or 2007) through ???? bull move

One reason I am as bullish as I am is that the up market that started in 2004 (or 2007) has not experienced a blow-off top. In fact, I believe we could be on the verge of entering this period.

The breaks that the market has experienced so far are as follows:

  • 19.75 to 8.36 or 1,139 points
  • 30.33 to 13.00 or 1,733 points
  • 36.08 to 20.40 or 1,568 points
  • 31.85 to 22.62 or 923 points

If I am correct in my analysis of Sugar, the mareket is done having big breaks — for now anyway. We should be entering the sweet spot of the bull run. As was the case in the bull moves in 1974 and 1980 as well as the blow off in Silver in early 2011, this final leg should not last long — maybe 13 to 16 weeks.

I am hearing a singular message from folks by email: “Sugar is overbought…what kind of a break can we get?” Wrong question for a Sugar bull market.

John Williams: Warning – Monetary Base Spikes to Historic Level

John Williams just issued a warning regarding the Monetary Base vaulting to a historic high. Williams, who founded ShadowStats, also stated the reason for the expansion is directly related to a deepening systemic solvency crisis. Here is what Williams had to say about the situation: The seasonally-adjusted St. Louis Fed Adjusted Monetary Base just jumped to an historic high level in the two-week period ended February 22nd, as shown in the (above graph). The movement here largely is under direct control of the Fed’s Federal Open Mark Committee (FOMC) and is suggestive of a deepening systemic solvency crisis.”

John Williams continues:

“Adding liquidity to the system usually is contrary to the action that would be taken if the Fed were trying to reduce inflation. Indeed, the Fed is not trying to reduce inflation—despite inflation running significantly above its 2.0% inflation target—instead, the U.S. central bank continues its efforts to provide liquidity to a still severely-impaired U.S. banking system.


Dan Norcini: Strong weekly close in Gold

Gold was able to close the week out on a very strong note, although some traders did decide to cash in some profits ahead of the weekend, after getting a nice run of some $65 off of last week's close as of Thursday's peak price. Even in spite of the light round of profit taking, gold still managed to put in a very solid WEEKLY close surrendering only about $15 off its best level of the week and closing within striking range of $1800, the top of the heavy resistance zone noted on the price chart.

Take a look at the weekly chart shown below for an intermediate term view of the market. Note how the chart resistance near the $1800 level can clearly be seen. Gold did not challenge this level this week but from a technical standpoint, it does stand a very good chance of so doing next week.

If you notice the pattern I have marked as a "bullish pennant" or a "bullish flag" you will see the flagpole and the pennant or actual flag. These patterns occur often enough that they should be noted as they generally portend a strong move in the direction of the flagpole which can be used as a gauge of where price might be expected to run in the near future. The length of this flagpole which extends from the bottom near $1535 to the top of the pole coming in near 1765 is $230.

Once you get a brief period of consolidation, which is exactly what we have had the last three weeks prior to this one just completed, a fresh upside move which takes out the HIGH OF THE FLAGPOLE then gives us the potential for a move of some $230 higher. Some technicians will add this to the top of the flagpole giving a projection of $1995. Others whom are a bit more conservative (put me in that category) will add the length of the flagpole to the BREAKOUT POINT of the downtrending line forming the top of the flag. That price point came in near $1725 which yields a projection of $1955. Either way it gives us gold at a brand new all time high.

An ideal technical price action will be, in the event of any subsequent price reaction lower, to see gold find buying coming in along the line that marks the top of the flag which then causes the price to rebound and begin moving higher. It is just another way of demonstrating that buyers are eager to buy dips and see value at this new, higher level. They are not willing to risk sitting on the sidelines in the hope of purchasing the metal even lower. If you do break below the bottom of the flag itself, the formation will generally be void although that does not mean that price has peaked. It merely means that the bullish flag formation projection is not going to be reliable.

For a bit of a longer-term perspective, I am including a monthly chart of the metal. Note carefully the clearly defined uptrending channel that can be seen going back into the bottom in gold in late 2008, when the Quantitative Easing programs were first announced. Gold has tracked within this channel very closely with the brief one month exception when it got a bit overheated and frothy later last year. That sharp parabolic rise was met with selling that corrected the overbought reading and took price back within the channel.

Here is the significant point to make -this month's price action has thus far taken the price to the top of this channel once again. I think it is no coincidence that we did see some selling therefore arise late Thursday and into Friday's session particularly as gold approached the $1800 level which just so happens to be very close to the top of this channel. It is both a logical and a technical chart selling point.

If, and this is a big "IF", the metal pushes through the top of this channel and closes the month above it, odds would then favor an acceleration of the trend higher and perhaps a new and steeper uptrending price channel being formed. I would especially want to see a second consecutive monthly close ABOVE this old channel coming at the end of March to confirm this however to avoid another one month wonder.
If we were to get that, I do not think it would be very long before we revisit the all time highs above $1900.

What this would be telling us fundamentally is that gold is now convinced beyond all shadow of a doubt that the near world-wide currency debauchment by the Central Banks is not going unnoticed.
That environment, which is simply another way of stating NEAR-ZERO interest rate policy, is generating genuine fears of currency debasement and the subsequent strong inflationary impact that inevitably arises from such a policy.

We would also get a confirmation by a strongly rising Continuous Commodity Index.

Why Uranium Could Go To $200 And Beyond

As I noted in my previous article entitled, "6 Ideas for Where the Next Bubble Will Be," I believe uranium prices are ripe to go much higher. There is an imminent supply demand imbalance due to the coming end of the Megatons to Megawatts program, as well as an abundance of new nuclear reactors set to come on board over the next 15 years, that I think will drive this market.

So the question: How high can uranium prices go? In that regard, I think it helps to first observe historical prices. See the chart below.

I think a re-test of previous all-time highs - more than double current uranium prices - is likely. The fundamental factors (i.e. supply/demand imbalance) are even stronger now, and central bank monetary policy is even more inflationary which will likely make markets as a whole more volatile and more prone to bubbles. Because I expect uranium prices to more double, I expect the same - even more so - for most uranium mining companies. Purchasing Cameco (CCJ), the largest North American uranium miner, or the uranium ETF (URA) are easy ways to play this. (more)

UK has run out of money

In a stark warning ahead of next month’s Budget, the Chancellor said there was little the Coalition could do to stimulate the economy.

Mr Osborne made it clear that due to the parlous state of the public finances the best hope for economic growth was to encourage businesses to flourish and hire more workers.

“The British Government has run out of money because all the money was spent in the good years,” the Chancellor said. “The money and the investment and the jobs need to come from the private sector.”

Mr Osborne’s bleak assessment echoes that of Liam Byrne, the former chief secretary to the Treasury, who bluntly joked that Labour had left Britain broke when he exited the Government in 2010.

He left David Laws, his successor, a one-line note saying: “Dear Chief Secretary, I’m afraid to tell you there’s no money left”.

Mr Osborne is under severe pressure to boost growth, amid signs the economy is slipping back into a recession.

The Institute of Fiscal Studies has urged him to consider emergency tax cuts in the Budget to reduce the risk of a prolonged economic slump.

But the Chancellor yesterday said he would stand firm on his effort to balance the books by refusing to borrow money. “Any tax cut would have to be paid for,” Mr Osborne told Sky News. “In other words there would have to be a tax rise somewhere else or a spending reduction.

“In other words what we are not going to do in this Budget is borrow more money to either increase spending or cut taxes.”

The strongest suggestion of help for squeezed family budgets came from the Chancellor’s claim that he was “very seriously and carefully” considering plans to help lower earners by raising the personal allowance for income tax, a proposal that has been championed by Nick Clegg, the Deputy Prime Minister.

But he implied there would be no more help for motorists struggling with record petrol prices this spring. “I have taken action already this year to avoid increases in fuel duty which were planned by the last Labour government,” he said.

The Chancellor’s tough words were echoed by Liberal Democrat Jeremy Browne, the foreign minister, who warned that Britain faced “accelerated decline” without measures to tackle its debt and increase competitiveness.

In an article published today in The Daily Telegraph, he writes that Britain’s market share in the world used to be “dominant” but was now “in freefall” compared with the soaring economies of Asia and South America. “This situation has been becoming more acute for years,” he adds. “It is now staring us in the face. So we need to take action.”

Mr Browne writes that reform of pensions, welfare and defence is essential to stop the departments “collapsing under the weight of their own debt”. “Just because the spending was sometimes on worthy causes does not in itself mean it was affordable,” he says.

“Doing nothing when your prospects are at risk of declining is not the safe option. More of the same may be superficially more popular in the short-term but that does not make it right.”

Amid warnings that Britain urgently needed to adopt a more pro-business outlook, senior Conservatives have urged the Government to get rid of the 50 pence top rate of tax.

Figures from the Treasury last week suggested the policy was not raising the expected amount of revenue and was threatening to drive leading business people and entrepreneurs away from Britain. Dr Liam Fox, the former Conservative Defence Secretary, yesterday argued for the top tax rate to be scrapped, but added that cutting taxes on employment was even more important.

“I would have thought the priority was getting the costs of employers down and therefore I would rather have seen any reductions in taxation on employers’ taxation rather than personal taxation,” he told the BBC’s Sunday Politics show.

Any efforts to scrap the rate this parliament would face severe opposition from within the Coalition.

Simon Hughes, Liberal Democrat deputy leader, said yesterday that keeping the current 50p rate was “the right thing to do”. He told the BBC: “I represent people in a pretty solid working-class community. What they’re concerned about is what happens to ordinary people out of work and where they get jobs.”

Last night, Labour argued Mr Osborne needed to take a more proactive stance on boosting growth by increasing public spending.

Chris Leslie MP, the shadow Treasury minister, said it was wrong of the Chancellor to argue that Britain was broke and to rely on business alone to create economic growth.

“George Osborne can’t complacently wash his hands and claim the lack of jobs and growth in the economy is nothing to do with him,” he said.

“He needs to realise that government has a vital role to play in creating an environment where the private sector can grow and create jobs.”

Harriet Harman, Labour’s deputy leader, urged Mr Osborne to cut VAT.

Meanwhile, the Chancellor made it clear he was resisting pressure to hand over up to another £17.5billion in taxpayers’ money to help bail out struggling European Union countries.

He said Europe had not “shown the colour of its money” by taking measures to help itself tackle its debt problems.

Until that happens, Britain will not give any extra funds to the International Monetary Fund.

The Chancellor was speaking as finance ministers from the world’s 20 most powerful economies met in Mexico.

Mr Osborne said: “While at this G20 conference there are a lot of things to discuss; I don’t think you’re going to see any extra resources committed (to the IMF) here because eurozone countries have not committed additional resources themselves, and I think that quid pro quo will be clearly established here in Mexico City.”


There has long been a strong correlation between the Nikkei and the US Dollar/Yen. A similar version of this correlation is that of the Nikkei and US interest rates. The thinking is rather simple. As a trade surplus nation the rising Yen puts downward pressure on profits and Japanese equities. Unfortunately, the calls for a bottom in the USD/Yen have been made for years on end. But Credit Agricole thinks the time could be now and that that’s bullish for Japanese equities, This argument would be reinforced if one believes interest rates in the USA are bottoming (which, if you take the Fed’s 2014 forecast seriously means Credit Agricole might be right in the short-term, but is wrong in the longer-term):

“Our argument is different. If the story of the rebalancing of growth – with an inflationary bias – within the global US$ area is as powerful as we suspect then the greatest potential beneficiaries should be ultimately the most distressed parts of the
world equity landscape. The world’s cheapest major equity zone is the euro area – and Japan.

It is time to reassess Japan, once again. The Bank of Japan has just announced an unexpected supplement of quantitative easing of a rather more authentic kind than that practised by the ECB. But nobody seems excited, because it’s Japan, and
everybody thinks that it has all been attempted before without success.* However, the context has become more favourable to the Japanese stock market: policy relaxation in the emerging world, a more stable US$ and improved expectations for global growth.

The point is that there is a tangible catalyst for the revival of Japanese equities: the exchange rate. If the “end of reflation” in America really does imply a more stable US currency then, sooner or later, the downward trend in US$/Yen will reverse. We suspect that this is what we are witnessing. We will have the confirmation when the US$ trades above Yen 81/82.”

US Weekly Economic Calendar

time (et) report period Actual forecast previous
10 am Pending home sales index Jan. -- -3.5%
10:30 am Texas manufacturing index Feb. -- 15.3
Tuesday, FEB. 28
8:30 am Durable goods orders Jan. -0.8% 3.0%
9 am Case-Shiller home prices Dec. -- -1.3%
10 am Consumer confidence Feb. 64.0 61.1
10 am Richmond Fed index Feb. -- 12
Wednesday, FEB. 29
8:30 am GDP 4Q
2.7% 2.8%
9:45 am Chicago PMI Feb. 60.0% 60.2%
2 pm Beige Book
Thursday, MARCH 1
8:30 a.m. Jobless claims 2-25
348,000 351,000
8:30 am Personal incomes Jan. 0.4% 0.5%
8:30 am Consumer spending Jan. 0.4% 0.0%
8:30 am Core PCE price index Jan. 0.2% 0.2%
10 am ISM Feb. 54.5% 54.1%
10 am Construction spending Jan. 0.6% 1.5%
TBA Motor vehicle sales Feb.
14.0 mln 14.2 mln
None scheduled