Thursday, March 15, 2012

How Commodities Predict Market Movement

Copper is more than the main ingredient in wire and gold is more than what we wear on our fingers and around our necks. These commodities, along with others like oil and grains, are used by investors to gauge the health and short-term direction of the market, but how does it work? What do commodity prices tell us that we can use as traders?

Gold is the best-known commodity because it appeals to investors and non-investors alike. Consumers may not think of gold as an investible product, but the story of gold is actually complicated. Not only does it serve as a commodity, but also as a currency. In the latter part of 2011 and into 2012, it has taken on the behavior of a stock often mirroring the overall market.

Traditionally, gold tends to move in the direction opposite the market. Investors use gold as a market hedge, dumping money into the commodity when the market is trending lower. In times when it is acting like a commodity, investors watch gold closely. When they see money pouring into GLD, the ETF that tracks the performance of gold or gold futures markets, they believe that a market downturn may close at hand.

Copper doesn't have the allure of gold since it's a base metal used largely for industrial purposes, but that doesn't change the fact that investors watch it closely for hints of the overall market sentiment. Because Copper is an industrial metal, investors use it as a way to gauge the health of the manufacturing and housing sectors of the world's economies.

Investors also use Copper as a way to gauge trader sentiment. When copper is rising, some see that as investors having an appetite for risky assets, since Copper is known as a volatile commodity. When copper loses value, it may indicate that investors are selling risky assets and a market correction may be imminent.

If gold is the best-known commodity, oil isn't far behind. Oil, and the way it is priced and traded, become talking points around water coolers and on the news, particularly when the price of gas is rising; but savvy investors know that oil has a big effect on the stock market.

Since somebody's win is always somebody else's loss, oil can only go up so much before stocks begin to feel the pinch. The Wall Street Journal reports that the recent oil rally has caused transportation stocks to come under pressure and this will cause consumers to stop spending, if the rally continues. As oil rallies, those not invested in oil and energy stocks quickly become defensive.

Not That Simple
If investors could look at the performance of these commodities and gauge the movement of the market, then everybody would be rich, so it must not be that simple. In fact, many experts believe that other factors, such as ETFs, have an artificial impact on the price of commodities. The SPDR Gold ETF has a market cap of $60 billion and holds gold in its London vault equal to the value of the fund. With this amount of gold out of circulation, that may drive the price of gold up.

In 2008, oil speculators were blamed en masse for the run-up of oil prices, but others claim that with the massive amounts of money pouring into commodity markets, such as oil, a few large investors making predictions about the future direction of a commodity could artificially move the price. All of these factors combine to make analyzing moves in commodities an educated guess that can only be used in combination with other factors.

The Bottom Line
Although commodities may not move based strictly on supply and demand, investors use their price movements to gauge the overall sentiment of the market and make short-term decisions of where the market may go. Start watching these commodities and see if they predict the market corrections that are sure to come.

Foreclosures Hit Record High – Up 28%

from WealthCycles:

The housing market comprises the asset base of the banking and financial system. When home prices fall, the loss is not marked-to-market price, as the hit to lenders is taken when the foreclosure process is completed.

With the new year comes the annual promises of a housing recovery. As we reported on the 2012 outlook here, prices have continued falling. Institutions had better be ready to take some of the hit from their mélange of non-performing loans or continue to extend and pretend, delaying final write-down of loss.

Banks had better be ready, because according to the latest from Lender Processing Services, foreclosures have risen to an all-time high for the month of January, up 28%!

Read More @

Oil, Alternatives, and Nuclear Weapons – An Interview with Marc Faber

by James Stafford,

[...] A number of our readers have been inquiring about the recent oil price increases, where a few weeks ago we saw them rise to a ten month high. Where do you see oil prices going from here, and what do you see as the main reasons for the rapid increase?

Marc Faber: I think there is a risk that oil prices will go much higher. At the same time, the bullish consensus on oil is now at one of the most elevated levels it’s ever been. In other words, from a contrarian point of view, you shouldn’t buy oil right now.
I think it may go down somewhat. In general, if trouble breaks out in the Middle East, or if there is a war, I think the price of oil could go much higher. What are your 3-5 year projections for oil prices?

Read More @

3 Stocks for a Housing Bottom: Z, SPF, DHI

The US Government filed a $25 billion settlement with the five largest mortgage lenders today. Could this be the bottom for the housing market?

If you think so, we like 3 these Housing related stocks: Zillow (Z), Standard Pacific (SPF), and D.R. Horton (DHI).
Here's the deal: The 5 largest lenders in America will be writing down their outstanding loan balances to what their property is worth. This means that consumers who have been sitting tight, waiting for their home prices to come back above water just got instant gratification. It's not going to happen overnight, but we think that this should lead to more Americans buying homes.

Now if only you could get your money back when a stock goes underwater, am I right?

The banks will also pay $5 billion in cash to the federal and state governments. About a third of that money will go into a fund to be used for sending $2,000 checks to about 750,000 Americans who were improperly foreclosed upon from 2008 through 2011. This should be a pretty good stimulus to the economy to boot.

Now back to the stocks. Zillow is definitely looking the sexiest of the bunch here. Once housing picks up, you can bet Zillow will start blowing out earnings estimates to the upside.

Standard Pacific (SPF) D.R. Horton (DHI) are the home builders that we like - even though they have both posted some decent gains this year (50% and 25% respectively) we think they have more room to run.


McAlvany Weekly Commentary

New Twists on the Bond Market

About This Week’s Show:
-Chinese and Japanese trade surpluses turn to deficits
-US creditors may now also compete with us for loans
-Shift in global trade may jeopardize treasury market. . . will oil rich countries fund our needs?

Buy the Banks?

Richard Ross, Auerbach Grayson, explains what the KBW Bank Index says about the banking industry right now.

Richard Russell: More QE After 40 Year Monster Bubble

from King World News:

With gold trading near the $1,700 level, today the Godfather of newsletter writers, Richard Russell, had this to say in his latest commentaries: “I have been writing my ‘stuff’ for about 54 years. They say that you can’t teach old dogs new tricks, but I’m an old dog and I’m still learning. Many people in this line of work ask me how in the world I stay in business. I tell them, I really don’t know, I write about what’s on my mind, and most subscribers evidently like it.”

Richard Russell continues: Read More @

Platinum regains its premium to Gold

Dan Norcini,
For the last six months or so, platinum has been trading at a discount to gold. This is a rare occurrence as one can see from a glance at the monthly chart going back to 1990. Only in 1991 did platinum trade at a discount to the price of gold. Late last year and early into this year, an ounce of the white metal was over $200 cheaper than an ounce of gold!

This came about due to fears that the global economy would slow down as European sovereign debt woes sent out a type of contagion rippling across the planet. Auto sales especially would be hit and since platinum is heavily used in catalytic converters, ideas spread that demand for the metal would falter.

If you notice however, platinum has been steadily gaining ground against gold as investors began anticipating Central Bank liquidity injections to deal with the pesky debt issues plaguing Europe, not to mention an ultra low interest rate environment which was intended to spur both borrowing and lending and by consequence, growth.

It also did not hurt that a major strike in an important platinum mine popped up cutting off supply from the world market.

This is another one of those combination indicators that can be used to gauge investor sentiment towards the global economy in general. As long as traders feel that there is little to fear as impediements to growth, they will bid this spread higher in favor of platinum.

Spain Has ‘Worse Problems Than Greece’: Analyst

Spain’s eye-wateringly high unemployment and the collapse of its real estate market mean that Spain has significantly worse problems than Greece and could threaten the euro zone’s new-found, albeit fragile stability, an analyst told Tuesday.

“Spain has very large downside risks and it needs to tread very carefully – Spain is in a very fragile situation. Its problems are significantly worse than Greece’s,” Sony Kapoor, managing director at international think tank Re-Define said.

He added that a “huge danger” was posed to the macroeoconomic situation and the social fabric of the country by the current austerity program and an expected 5 percent deficit adjustment.

“The financial panic is temporarily over but 2012 will be the year of austerity across Europe and Spain is a microcosm for the euro zone as a whole,” he said.

Earlier this month the Spanish premier Mariano Rajoy, publicly defied Brussels-imposed targets, which were 4.4 percent of gross domestic product, saying that the targets were based on forecasts of economic growth when in fact the government expects the Spanish economy to contract this year.

The country has the euro zones highest rate of unemployment - now over 22 percent.

Euro zone finance ministers rebuked the country – the euro zone’s fourth largest economy - at the ECOFIN meeting Monday urging it to make new cuts to its 2012 budget to reduce its deficit by a further 0.5 percent, agreeing a new target of 5.3 percent.

Wolfgang Schaeuble, German finance minister, speaking at the meeting dismissed any comparisons with Greece describing it as a “completely unique case” adding that Spain “had made great progress but we’re all still on a tough path.”

Ben May, European economist at Capital Economics, told that underlying issues in Spain could derail any attempts to curb the budget deficit.

“There are some reports that suggest that public debt might be higher than the official statistics show and there’s a concern that it might end up worryingly high over the next couple of years. The banking system is also fragile and the fact that there’s a housing overhang means we could see a situation like that in Ireland,” May told

He added that talk of bailouts and defaults would then be ramped up but with far worse consequences than Greece.

“Spain is so much larger than Greece, so even if there is a small risk of a default or a bailout then it has much bigger implications for the euro zone than Greece had,” May added.

A VIX of 15!?! Meet the New Reality

When the VIX recently slid below 20.00 for an extended period, I sensed a noticeable unease about the state of the market in many traders and investors. Clearly a sub-20 VIX was underestimating the risks in the current and future market environment, they thought. When the VIX dipped below 18.00 that unease intensified and now with the VIX hovering around the 15.00 range and I can sense that quite a few are ready to grab the nearest pitchfork and riot about the inhumanity of the wayward VIX.

I will be the first to admit that there are a number of perplexing geopolitical, macroeconomic and other factors that pose real threats to the economy and to stocks, but I also believe that investors have become so fixated on some of the past problems that availability bias and disaster imprinting has clouded their judgment to the extent that they cannot separate the current market environment from the ghosts of markets past.

With this in mind, I created a chart to show what happened the last time we had a sharp market selloff and a subsequent bounce that lasted three years. The graphic below shows the percentage change in the SPX as well as the absolute VIX level in the three years following the October 2002 lows in the SPX as well as the three years following the March 2009 lows. Note that from 2002-2005, the SPX rallied about 53%; the current rally in the SPX from the March 2009 close is over 100%.

Turning to the VIX, it starts the sequence in the 42s in 2002 and in the 49s in 2009. Note that in both instances, the VIX had made it into the teens within one year of the beginning of the bull move. As the 2002 bull bounce continued, however, the VIX plummeted, spending a great deal of time in the 10-13 range, with a median value of 15.30 in the first three years of that bull market. The rally off of the 2009 bottom has been a different animal altogether, however, with forays down to the 15s being extremely rare (though it did happen on occasion in 2010 and 2011) and a median VIX of 22.84 during that same initial three years of the bull market.

Of course not all bull markets are the same (and there are many that will not concede that the current rally is a bone fide bull market) and every wall of worry is made of different types of stones, but at some point investors need to come to terms with the reality of a VIX of 15, particularly when we are looking at realized volatility that has been sub-10 for the last two months.