Basic Materials Hits a Double Top (PYZ)

It looks like the run-up in Basic Materials could be nearing the end. The PowerShares Dynamic Basic Material (ETF) (NYSE:PYZ) is showing a "Double Top" in it's chart pattern.

Scott Rubin over at Benzinga, thinks this could lead to a new recession:

The energy and basic materials sector have been absolutely crushed again on Wednesday, and the recent routs could be signaling that the U.S. economy is on the verge of going back into recession. Growth has been extremely disappointing, culminating in a GDP reading of 1.8% growth for the first quarter compared to 3.1% in the fourth quarter of 2010. This is causing considerable concern on Wall Street. Simply put, the recovery has been lackluster despite the rally in the stock market.

The Federal Reserve, while saying that it will end QE2 on time in June, but saying that it anticipates keeping a very accommodative stance on interest rates for the foreseeable future. The dislocations in the commodity markets, against this backdrop, appear to be premature and extreme. The price drops are not reflective of an outlook where the Fed stays with ZIRP and the global economy continues to grow at a healthy pace. In fact, it may be signaling that the market is becoming increasingly concerned about the prospects of another recession.

The PowerShares Dynamic Basic Material (ETF) (NYSE:PYZ) closed trading today up 2.3% at $39.13 a share.

China's Holdings of U.S. Treasuries

U.S. Dollar Index Components & Swings

Today’s NYT has an article that on a possible greenback rally, Some See Rise Ahead for Dollar:

“Could the long dollar slide be over?

For the better part of the past decade, and particularly in the last few months, the American dollar has been the 98-pound weakling of the foreign exchange world. It has lost value against almost every other global currency — not just the euro, pound and yen but even the Romanian new leu and the Latvian lats.

Driven largely by the Federal Reserve’s policy of printing dollars to help spur a healthy economic recovery that remains stubbornly elusive, the dollar, weighed against a basket of other currencies, hit a 40-year low this month.

But betting against the dollar may no longer be such a safe play — not necessarily because of any sudden macroeconomic shifts but because of a sense that the long dollar sell-off may have finally gone too far. Since May 4, the dollar is up 4 percent against the euro and 2 percent against the pound, while rallying against the Romanian and Latvian currencies as well.

In light of the article, let’s take another look at a few Dollar charts:

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US Dollar Swings

click for larger charts

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Dollar vs Major Currencies

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Global Systemic Crisis - Confirmation of a Major Alert for the second half of 2011 – Explosive fusion of world geopolitical dislocation and the global

Almost a year ago LEAP/E2020 identified the second half of 2011 as a new critical point in time in the development of the global systemic crisis. Just like our February 2008 anticipation highlighted a major shock affecting the US economy in September 2008, our team confirms in this GEAB issue that all the conditions have now been met for the second half of 2011 to be the stage for the explosive fusion of two fundamental trends underlying the global systemic crisis, namely world geopolitical dislocation on the one hand and the global economic and financial crisis on the other.

In fact, for several months the world has experienced an almost unbroken succession of geopolitical, economic and financial shocks which, according to LEAP/E2020, constitute the warning signs of a major traumatic event that we analyze in this issue.

At the same time the international system has now passed the stage of structural weakening to enter a phase of complete decay where old alliances are breaking down, whilst new communities of interest are emerging very quickly.

Finally, any hope for significant and lasting global economic recovery has now evaporated (1) whilst the Western pillar’s indebtedness, especially the US, has reached a critical level unparalleled in modern history (2).

Comparative progression of the United States and China’s share of world GNP (2001-2016) (in purchasing power parity) - Source: IMF / MarketWatch, 04/2011

The catalyst for this explosive fusion will obviously be the international monetary system, or rather international monetary chaos which has been further exacerbated since the disaster that struck Japan last March and in front of the inability of the United States to face the requirement for an immediate and significant reduction of its huge deficits.

The end of QE2, the symbol of and factor in the explosive fusion now underway, represents the end of an era, that where the "US Dollar was the currency of the United States and the rest of the world’s problem": from July 2011, the US Dollar will openly become the main threat weighing on the rest of the world and the United States’ crucial problem (3).

Summer 2011 will confirm that the US Federal Reserve has lost its bet: the U.S. economy has, in fact, never left the "Very Great Depression" (4) which it entered in 2008 despite the trillions of dollars injected (5), as the vast majority of Americans are perfectly aware of (6). Unable to launch a QE3 (even unofficially through its Primary Dealers as it used to do until the world became too closely interested in the US Treasury Bond market), the Fed will helplessly watch interest rates rise, US government deficit costs explode, the world dive into an intensified economic recession, stock exchange collapse and the US dollar show erratic behavior, making short-term saw-tooth movements, depending on the influence of these events, before suddenly losing 30% of its value as we anticipated in the last issue (7).

At the same time Euroland, the BRICS and commodity producers will rapidly strengthen their cooperation while launching a final attempt to salvage the international institutions created by Bretton Woods and the world dominated by the US /UK duo. This will be the last since it is unrealistic to imagine Barack Obama, who has shown no major international stature so far, proving himself to be a statesman and thus take major political risks in a presidential election year.

Progression of the Shiller index of standard existing house prices in the USA (1890-2011) (in red: projection) - Source: R.J. Schiller / Steve Barry / Big Picture / New York Times, 01/2011

Barriers, security, export embargos, diversification of reserves, frenzy over commodities, widespread rising inflation ... the world is preparing for a new economic, social and geopolitical shock

China has just announced that it is halting all diesel exports to try and stop a rise in fuel prices that recently caused a series of strikes by road hauliers (8). May the Asian countries that depended on these Chinese exports manage, just like Japan has done in the aftermath of last March’s disaster!

Russia has also stopped exporting certain oil products to limit domestic shortages and price increases (9), an export halt added to that on cereals imposed several months ago.

Across the Arab world, instability continues to prevail against the backdrop of the rising cost of basic food commodities (10), whilst questions over the extent of Saudi Arabia’s oil reserves and production capacity have resurfaced (11).

In the United States, any weather event out of the ordinary immediately causes the risk of shortages due to the lack of a security "buffer" in the US distribution system, except to call upon strategic stockpiles (12). Meanwhile, the population reduces its spending on food in order to fill the tanks of their cars at more than 4 dollars a gallon (13).

In Europe, the decline in social security and extreme austerity measures implemented in the United Kingdom, Greece, Portugal, Spain and Ireland, ... will cause an explosion in the number of poor.

Percentage of the male population employed within the seven major Western economies (1970-2009) - Source: The Economist / OECD, 04/2011

The EU has more or less surreptitiously just reinforced its customs arsenal to withstand Asian imports in particular. First, it has reviewed its whole paraphernalia of preferential tariffs to eliminate all emerging nations, China, India and Brazil first of all. Second, at the end of 2010, it discreetly passed legislation to facilitate the implementation of anti-dumping and safeguard measures, because now a simple majority is sufficient to pass such a proposal with the Commission, whilst previously a qualified majority was needed, often difficult to marshal (14).

Meanwhile, central banks continue to buy gold (15), announcing more or less clearly that they are diversifying their reserves (16) whilst they are taking increasingly inconsistent and dangerous steps, increasing interest rates to counter inflation in a context of weak economies or in recession to counter the influx of liquidity generated by the US Federal Reserve’s policies (17). To paraphrase the title of an article by Andy Xie, published in Caixin of 04/22/2011, "Rising inflation makes central bankers mad" (18).

And the US side is completely in dreamland: whilst the country has reached unsustainable levels of debt, the leaders in Washington have made this topic an election issue, as illustrated by the question of the Federal debt ceiling which will be reached on May 16 (19). Comparisons abound in the US and international financial press with the Clinton years where a similar problem had arisen without major consequences. Obviously a sizeable part of the US elite and financiers haven’t yet taken on board the fact that, unlike the 90s, the United States today is seen as the “sick man of the world” (20), in which any sign of weakness or serious inconsistency can trigger uncontrolled panic.

Crazy central bankers, world leaders without a roadmap, economies at risk, inflation rising, currencies in trouble, frenzied commodities, uncontrolled Western debt, unemployment at its highest, stressed societies ... there’s no doubt, the explosive fusion of all these events will really be the memorable event of the second half of 2011!

Chinese pay rises (2011/2010) - Source: Standard Chartered Bank / Getty, 05

The Right Time and Price to Get Back Into Silver?

Trading in silver has been extremely volatile, with the metal currently hugging the 100-day moving average at around $35/ounce. With such a steep selloff but still bullish fundamentals, the question of when to get back in on the long side is looming large in many commodity investors’ minds. We believe the time may be nearing for a number of reasons.

The following chart shows the price of silver on top with the aggregate open interest on silver futures on bottom.

[Click all to enlarge]

The aggregate open interest on silver futures is an interesting metric because it tracks the general interest level in the market, as well as shows the type of buying and selling occurring. For example, if open interest takes a big dive as price declines, this means that longs are liquidating their positions. On the contrary side, if open interest increases as price declines, this could mean that short sellers are driving the price down.

As can be seen, the notable valleys in open interest for silver over the past year coincide well with major bottoms. The first occurred in July 2010, almost exactly as silver began its historic run and broke $20/ounce. The next major bottom in open interest occurred during the January precious metals selloff. The last bottom in open interest is currently occurring, with open interest down 21% since the peak of silver’s run. Of course with open interest still at 120,000 contracts, it could always go lower, but it does appear that a bottom may be forming.

Such a finding would seem to be supported by the Managed Money net long position. Managed Money net longs on silver are in the 32nd percentile of readings going back to 2007. Such a low net long position would seem to indicate that sentiment has taken a bearish turn, and could see renewed strength with only a small recommitment of Managed Money longs.

The below chart shows the price of silver with the blue dashed line connecting the August 2010 low with the January 2011 low.

The long-term uptrend in the price of silver has not been broken. Rather than a “bubble bursting” scenario, this indicates a reversion to mean, as silver had obviously gotten way ahead of itself. The bullish fundamentals driving the precious metals rally are still in place, and are only going to become louder as time goes on. However, volatility in silver is probably here to stay, as the market has received an outsized amount of attention compared to its size, and will most likely be in the spotlight for some time to come.

Trade Recommendation

As silver appears to be bottoming, we recommend a bullish position in silver in a number of ways. The most aggressive position would be to purchase silver futures in the $30-32/ounce range. While the recent volatility may be over, we suspect that we may see a retest of the $30 level before this correction runs its course. However, in case the worst is already behind us, a more conservative stance taken simultaneously could also be profitable.

We would also recommend selling the September 30 put for 1.672. Such a position would be profitable as long as silver is above 28.328 on August 25, 2011. We view the $30/ounce mark as a hard floor on silver prices going forward due to the ongoing bullish fundamentals for precious metals, as well as the presence of the 200-day moving average around the $30 mark. While selling this put option would not be as profitable in a silver rally as an outright long position, it does offer a significant downside margin before incurring losses.

Disclosure: I am long SLW.

Additional disclosure: Long silver futures

McAlvany Weekly Commentary

Warm and Contented in a Cocoon of Untruth

Posted on 18 May 2011.

- Goldman Sachs helped Greece hide it’s dirty laundry in 2001 – now the ECB moves to block disclosure.
- Are gold and silver having their last seasonal correction before the rise to new highs?
- Machiavellian Economics – or, how to control a crises by controlling the press.

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The Future of Oil and the End of the Dollar

Today, I bring our discussion of peak oil and the coming breakdown of the petrodollar system to a close.

The threat posed by peak oil to the United States is real and will be devastating without immediate intervention. However, the threat posed by our second issue, the coming breakdown of the petrodollar system, is just as real and is probably more imminent. My basic thesis is that the U.S. is an empire in decline. In the past, it has made some brilliant moves that secured its place as the supreme economic, political, and military leader of the globe. But in its twilight years, America has fallen prey to the common trappings of empire: military overreach, an entitlement mindset, and currency depreciation.

Because America has built its entire financial house atop a massive debt-based system, made possible by the ability to print the world’s reserve currency, it is in America’s national interest to protect the international position of the dollar. And if that means war, so be it. But regardless of your views on the motives behind our recent military incursions, one thing is for certain: The U.S. dollar is in a massive decline and this is severely threatening the existence of the petrodollar system.

A Potential Endgame on the Petrodollar Sytem

So what will happen if the petrodollar system were to break down? Here are a few likely scenarios.

• Because America’s fiat monetary system is debt-based, it requires perpetual growth. The petrodollar system creates a constant source of global demand. Therefore, without this constant and growing global demand for the U.S. dollar, America’s debt-based financial system will break down.

• Without the constant global dollar demand created by the petrodollar system, foreign central banks would lose virtually every reason to view the U.S. dollar as a safe haven. Consequently, dollars held by global central banks, which currently runs in the trillions, could come flooding back to America’s shores causing massive inflation.

• In an effort to control the rampant inflation created by this flood of dollars, the Federal Reserve would be forced to sop up the excess liquidity by drastically increasing interest rates – quite possibly to double digits.

• Higher interest rates would destroy the fragile U.S. economy, perpetuate the ongoing housing crisis, and bring U.S. consumption to a standstill.

• In the end, the U.S. dollar would lose its position as the key reserve currency which would bring our debt-based monetary system to a final day of reckoning.

But some may object: “How is this even possible? The dollar is irreplaceable on the global markets, isn’t it?” It is true that the dollar has reigned supreme as the world’s reserve currency for decades, and that it has gained the trust of central banks around the world. However, unlike decades past, the dollar is no longer the only possible currency that could hold the title as the key reserve currency. But what other currency could possibly challenge the power of the almighty U.S. dollar? After all, Europe is on the rocks, and China is not ready to carry the torch.

Since 1971, the globe has been experimenting with its first completely fiat paper monetary system. The result? Many are now losing faith in paper currencies. In order to restore trust and confidence in the global financial system, it is highly likely that the monetary authorities will need to return to some form of commodity-backed currency system. The most likely candidate for this backing would be gold, as it has been perceived and used as money for millenia.

Is it possible that the petrodollar system can be salvaged so that a massive dollar crisis can be averted? Here the answer is a clear no. As a fiat debt-based monetary system, the U.S. dollar is doomed to the dust bin of history just like every fiat currency before it. Because the dollar is debt-based, it simply cannot survive in a period of declining production and limited growth. This fatal flaw in America’s economy will be examined and exposed in the next section. Topics will include America’s addiction to consumer debt, the sub-prime mortgage crisis, America’s recent bailout efforts, and finally, how the creation of the Federal Reserve has led to the demise of the American experiment.

A Final Word on Peak Oil

Can peak oil be averted? Yes… and no.

Let me explain.

The first answer is no, because peak oil is an inevitable phenomenon due to the finite supply of petroleum within the earth.

However, the answer is also yes, because the effects of peak oil can be averted if America, and the world, can develop a viable energy strategy to systematically wean the public off of petroleum-based energy supplies.

The hard reality is that America has built an extremely advanced economy that requires cheap and plentiful petroleum supplies. The problem remains that, as global oil supplies continue to decline, these supplies will neither be cheap, nor plentiful. Instead, global oil supplies will become increasingly expensive and in limited supply.

Faced with the threat, many have sought an easy answer by pointing to America’s continental shelf, ANWR, and even oil shale and oil sands. While all of these are good ideas, the real problem lies in the required costs and lead time that is needed to make these strategies viable long-term strategies.

Likewise, alternative energy sources, like natural gas, offer a step in the right direction but would require a massive overhaul of the entire infrastructure.

In the end, no one can really know for a certainty when any of these things will occur. While the basic laws of economics and science tell us that these events are nearly certain, when they will happen is the million-dollar question. And quite frankly, my hope is that it happens decades from now. The calamity that peak oil and the breakdown of the petrodollar system will bring to America is not something that any sane person would desire. However, the data is clear and, as I have said before, facts are stubborn things. Wishing that these facts will go away will not make them disappear.

Ultimately, my goal for you is that you would be forewarned and prepared.

Is the Gold/Copper Ratio Predicting A Drop In the S&P?

People are always talking about the silver/gold ratio—but the copper/gold ratio seems to be much more predictive of market trends.

My friend Michael Hampton has this very interesting chart—check it out:

The top chart is a ratio of copper-to-gold prices. The bottom chart is of the S&P index. If you notice the timeline, you’ll see the chart covers the last three years.

The red circle 1 is when the copper/gold ratio turned down—followed shortly by a turn down in the S&P index which [sarcasm alert] we all have such fond memories of. The subsequent green circle in the ratio—the bottom of the ratio—came shortly before the uptick in the S&P from its bottom of 666.37.

Similarly, red circle 2—the downturn in the copper/gold ratio—signaled the top of the market in the S&P. However, the subsequent green circle anticipated the bottom of the S&P by about six weeks.

Now, at red circle 3, there is a clear break down in the ratio.

Does this signal a break down in the S&P?

Michael seems to think so—and so do I. From the ratio, one could make the reasonable claim that equities are set to take a tumble in the near-term: Say within the next couple of weeks. How severe a tumble? Between 7% and 10% seems reasonable, within a three-week period. Furthermore, it would make sense for the equities markets to turn severely bearish, now that Quantitative Easing-2 (QE-2) is supposed to end. The lack of Federal Reserve-supplied liquidity will definitely squeeze allasset classes—not just commodities.

So expect the S&P to break down between now and the first of June at the latest—and from this break down, expect the Federal Reserve to become more aggressive in its talk about extending QE-2 into QE-∞. Individual FOMC board members are already making noises about extending QE-2, as are some prominent investment bank economists, especially at Goldman Sachs. A jolt down in the equities markets would put further pressure on the Fed to just keep on printin’.

Why Gold and Silver May Have Bottomed

[Have Gold and Silver seen their lows for this correction? Were encouraged to think so, for two reasons. First, downtrends in both Comex June Gold and July Silver reversed on Tuesday fromprecisely where they should have if the long-term uptrend is to be judged healthy. Second, our astute friend and mining stock consultant Chuck Cohen, who turned cautious on bullion just before the correction began, thinks the selling may have run its course. In the guest commentary below, he explains why. RA]

Like Freddy Krueger, it’s back. The infallible New York Times contrary indicator has returned for another testing. If you remember last August at the market bottom, amidst the palpable gloom on Wall Street, the Times was moved to interview superbear Bob Prechter on the dire market situation, not coincidentally within a week of the bottom. At the time, I mentioned the Times contrarian indicator in a lengthy essay published atLeMetropole Café, 22 Things to Look for When Gold Finally Makes Its Top.

For some amazing coincidence, since the Times rarely takes sides at the markets, when it does it is usually right on the money — on the wrong side. Lo, last Sunday, one of the Times‘ savvy financial reporters wrote about the seemingly endless gold bubble and the danger of getting caught in it. Read it and see what I mean. In particular, note the clear logic that gold has had a major correction of 4% after doubling from its bottom in 2008. The size of the correction is definitely proof that what goes up must always come down — except for the thousands of positive articles the Times put out on housing through the mania several years ago.

If the Times barometer continues to hold, we should be ready for something very special for the anxious gold community. For the first time in months, my own reticence has receded and I believe we are at, or nearly at, another terrific buying point for the gold shares. You know I have been cautious for several months especially as the spike of silver was in full bloom, and as the bank stocks continued to deeply underperform the markets, both definite warning signals. But with the drop in silver, gold and other commodities as the dollar rallied, the speculative air has seeped out of these markets. And it feels good to be positive again. Whether or not this will be the start of THE move in the shares, I don’t know, as it has appeared to be so on other occasions, only to result in disappointments.

When to Bail Out…

You can be certain that a major top in gold will not come until the Times has a major interview with a true gold bull like Jim Sinclair or Turk as it did back in May 2005, at the top or when you have a major front page article with a large price chart of the yellow metal.

But besides the Times article I have some other strong reasons for believing the worst is over. In brief, here are some of them:

1. The sharp drop in sentiment in silver and in the Hulbert Gold survey, which fell from 74 to 7 in 4 days. Who says gold buyers don’t panic?

2. The heavy volume and gaps in the HUI shares over the past 10 days. Interestingly, this week the shares are beginning to outperform the metal.

3. The incredibly low level of the Rydex Precious Metals Assets–now back to the point in 2008 when gold was almost 50% lower.

4. The bold, confident talk of the end of the commodity bubbles in the media.

5. The mushrooming number of correction callers in Kitco.

6. The report that George Soros has sold out his gold (apparently about $100 lower.) George Soros is no Jim Sinclair when it come to gold. He was a nouveau bull.

My chief point is that if you have been in cash anticipating a decline in the shares, now is the time to start to nibble or even buy on weakness. Once a bottom occurs, many of the smaller companies could scoot up 50% before you can ever get in. It is uncomfortable to buy stocks only to see them fall more, but it is also wiser to buy on weakness when many of the signs are turning so positive. I’m here for some suggestions and help.

Stocks Try Another Leg Up A low-volume day brings out the momentum-chasers

Stocks bounced back on Wednesday as life returned to the prices of energy and other commodities, but one would have to forgive a skeptic for an unwillingness to budge from their point of view.

The main reason is volume, or as today would have it, the lack thereof. Trading seemed to be an afterthought for investors on Wednesday, and it’s useful to keep in mind that a two-day rally on May 9-10 — on extremely low volume — ended up doing nothing more than stalling an eventual selloff of more than 2.5% this month.

Naturally, index-fund investors will take it. The Dow Jones Industrial Average gained 81 points to 12,560, the Nasdaq added 32 points to 2815 and the S&P 500 rose 12 points to 1341.

Because of the earlier headfake, however, which did nothing but create a technical downtrend line from the 2011 highs set on April 29, it will likely take a move above 1358 or so on the S&P 500 (the high point before the recent 7-day correction) before investors significantly change their mood for the better.

Why Wednesday was the day for low volume and/or a melt-up in stock and commodity prices is anybody’s guess. The volatility in commodities (as well as the dollar) we’ve come to expect recently, as a bit of a reality check has sneaked back into asset prices.

Oil wound up rising 3.3% to above $100 for the first time since May 11, while gold gained 1.1% and silver jumped more than 5%.

Not surprisingly, the action in stocks was similar. May has brought a worldwide selloff and Wednesday could’ve been just one of those days where enough was enough. Gains were essentially uniform across the world on Wednesday. The U.S. market’s tug-of-war, which wound up bringing about a flat finish — on much higher trading volume – certainly suggests that oversold technical factors could have as much to do with it as anything.

Pity, then, the poor shareholders of airline stocks, which took a hit on crude’s rise, as well as investors holding office supply names, due to a glum profit report from Staples (NASDAQ:SPLS) which tumbled more than 15%, taking rivals OfficeMax (NYSE:OMX) and Office Depot(NYSE:ODP) along for the ride.

On Wednesday, the market was giving just about everything a pass — unless you made it to difficult to ignore.