Market sentiment chain of events; chart updates July 9, 2009
Posted by Warren in Central Bank, Energy, FX, Government, Metals, Stocks.add a comment
Cyclical recovery and commodities have dominated the news since Q1, but prices have experienced a near collapse during the past month; this is a very drastic change in market sentiment. My take on the chain of events impacting market sentiment this year is as follows: (i) Fed/government props up market via historic stimulus/bailout, (ii) inflation fear prematurely turns into hyperinflation fear, fueling risk-taking, (iii) stocks recover and green shoots sprout everywhere, (iv) an optimistic and inflation-fearing Fed/government prematurely indicates plans to roll back historic stimulus/bailout, (v) hyperinflation fear turns into deflation fear, curbing risk-taking, (vi) stocks sell off and green shoots are put into doubt, (vii) ???. As for subsequent chain of events, I expect the Fed/government to realize its premature mistakes and eliminate any doubt of economic recovery (while at the same time implementing much needed additional fiscal/monetary stimulus). Consequently deflation fears will dampen and risk-taking will resume. As for timing, I expect the Fed/government to act before the current stock sell-off gains serious momentum (so pretty soon). It is interesting to note that despite the drastic sell-off in commodities during the past month, the dollar index has not moved all that much; the current currency devaluation trend is still very much in play.
Dollar index: 9-month (this chart gives me comfort that commodities prices are currently oversold)
Silver: 6-month (back to 12.80! BUY!)
Crude: 6-month (down $14 since last week’s scandal; could hit 55 but 60 seems to provide strong support)
Treasuries: 6-month (breaking out; rates have room to go lower while commodity prices (and inflation expectations) recover)
When all hope seems lost… March 30, 2009
Posted by Warren in Energy, FX, Metals.add a comment
…opportunities are abound. Indeed, most assets are at a critical juncture.
Gold spot: 7-month (consolidation over? seriously, is it really over?!)
Crude spot: 5-month (quick correction below 50?)
Dollar Index: 5-month (an evening doji star in the making?)
Reflation trades March 13, 2009
Posted by Warren in Energy, FX, Metals, Strategy.add a comment
The “reflation” theme has come undone during the past few months (though gold did take on a new role as a safe haven), as deflation has become a word widely used in mainstream media. I hate to sound contrarian, but I think the markets might experience some reflationary flashbacks over the intermediate term (same duration as potential bear market rally). Here are a few items that I’ve been juggling in my head:
1) Markets have been in a strong deflationary trend (stocks down, crude down, dollar up, treas up, gold up)…is it time for a breather? The U.S. government has already injected over $1 trillion in liquidity into the system and many other credit/liquidity facilities have been going into operation this year. Is it reasonable to say that there’s at least some level of risk appetite coming back into the system? An increase in risk appetite correlates with dollar depreciation because when you want to take risk in assets, you have to exchange your dollars for stocks, gold, crude, foreign currency etc.
2) The dollar has rallied against many foreign currencies due to deleveraging (liquidations, repatriations, etc.), but it has also rallied against the euro based on the hypothesis that Europe is in worse shape than the U.S. I think this Europe v. US debate is not as important to EUR/USD as many think. I’m not saying that Europe is in better shape than the U.S.; no one knows that for certain (also depends on whether one’s looking at the services or manufacturing sector). One thing for sure is that the U.S. government has committed far more capital funds in bailout/stimulus than Europe has.
3) If there’s a relief rally in equities, won’t there be a lot of capital pulling out of gold? As I’ve commented before, such “weak longs” have, for the most part, already exited the gold market since prices hit 1000. Gold has since been in a volatile range (890-940) without any correlation to other markets. Assuming there’s a recovery in risk appetite, I think there will be sufficient demand to support gold at current levels. Recent volatility is an indication that the gold market may be rotating away from its “safe haven” function and reverting back to its “reflation” function. The sooner gold completes this transition, the sooner gold prices will benefit from an environment of relflation/risk-taking.
Specifically, I think the reflation trades (long gold, long crude, long stocks and short treas) will last so long as the dollar is retesting/correcting to its JAN09 low.
Dollar Index: 6-month (retest of 83 possible)
I think a strong rally in crude is crucial for the reflation theme to work. Forget about OPEC productions cut related analysis…it has had no impact on crude prices since OPEC started pushing for cuts last year. I have no idea what the catalyst for a breakout above 50 would be (stock rally? euro rally? China?), but I do believe crude prices will break 50 eventually…the issue of course is timing. Crude has been range-bound (35-50) for quite some time (4 months), and it could very well remain sideways for much longer than I expect.
Crude: 6-month
A glimpse of the future… March 12, 2009
Posted by Warren in Energy, Metals, Strategy.add a comment
Almost everything went up today. I can’t really recall the last time I saw gold, crude and stocks rally simultaneously, but today was a foreshadow of what’s to come in the future – re/inflation of asset prices through government debt monetization. Thank you Switzerland! This bit of news today was completely off the radar screens of mainstream media; luckily I have a great source.
Let’s take a quick look at crude, gold and silver.
Crude APR09: 1-month (it’s possible that a retest of the 3/5-3/6 breakout is complete)
Gold APR09: 1-month (a second consecutive weekly close above 930 would be bullish)
Silver MAY09: 1-month (can silver rally more than 5% in two trading sessions to close the week above 13.5?)
Crude: failed breakout or bear trap? August 26, 2008
Posted by Warren in Energy, Strategy.add a comment
I’m building a long term position in crude, and I’d love to know the answer.
Financials bounce, crude corrects, gold holds steady… July 20, 2008
Posted by Warren in Energy, Metals, Stocks, Strategy.add a comment
We finally got a bounce in stocks, notably financials. The SEC’s attempt to scare (squeeze) bank shorts is just another sign of desperation…by the way, why didn’t the SEC include Wachovia or Wamu in their do-not-short list? Meanwhile crude is undergoing a correction (long overdue), which has put some pressure on precious metals, but not as severe as recent correlations suggest. Gold:Crude ratio has actually risen sharply this month, and I think it indicates a significant change in market sentiment in favor of gold.
Gold:Crude ratio YTD
Speaking of gold…what’s up with gold stocks? My favorite gold stock, YAMANA, got hammered this past week. Yamana had a spectacular breakout late June, but it has since erased all those gains. Indeed it’s pretty frustrating to see mining stocks underperform the physicals so drastically. There are no doubts about the strong fundamentals of Yamana (it’s the one stock that I’ve actually done my homework), so I’ll just keep buying the dips. I think Yamana’s sell-off last Friday provided such an opportunity, so I bought some Aug 16.0 calls…I figure I’ll cover if the lower range is broken, otherwise it should rally to at least 16 before mid-August.
Yamana (AUY) YTD
Update on 7/22/08: Yamana broke 14. Maybe some other time…
Violent shakeout continues June 16, 2008
Posted by Warren in Energy, Metals.add a comment
What a volatile day! Crude traded a couple cents from $140 before plunging $7, but still closed in the green…wow. Gold tested the upper boundary of the falling wedge, but failed to break out. Gold fell more than $10 from the day’s high, but still closed in the green. Silver took a peak above the water, and remained quite stable throughout the volatile action in crude and gold. With contract expirations around the corner, there’s a violent battle going on between commodities bulls and bears right now. We will see who emerges from the dust very soon.
Crude: 1-month
Gold: 1-month
Silver: 2-week
Gold : Crude Ratio May 23, 2008
Posted by Warren in Energy, Metals.add a comment
Today’s sell-off in crude dominated the headlines, as equities rebounded and precious metals got whacked. There was much talk about how a correction in crude will bring down the precious metals market, so I made a chart (normalized) comparing the performance of gold to crude. Note the dramatic reversal since Jan 2008.
If there is any merit to mean reversion and the historic correlation between gold and crude, we should see the gold:crude spread climb back up…but will this happen through a massive sell-off in crude or a strong rally in precious metals? With tightening oil fundamentals (peak oil!), soaring inflation, weakening fiat, and deteriorating market confidence, the latter scenario seems more likely.
Oil: Reality Check October 31, 2005
Posted by Warren in Energy.add a comment
We are very concerned about oil. After hurricane Katrina swept the gulf coast, mainstream America indeed shared our concern – albeit only momentarily. Since then, the mainstream has shifted its focus on the usual name-blame-game. Politicians at the Hill have stepped up their fight against evil price-fixing oil companies, and economists at the Fed have found a scapegoat for inflation and a slowing economy. Sure, prices at the pump have cooled down, but does that mean everything is going to be ok? Should we assume that the US government can successfully stabilize global oil prices? Perhaps as successful as it stabilized peace in the Middle East?
Here’s a reality check:
1) The US became oil-dependent in 1970, and today, the US imports 60% of its total oil consumption
2) The US has reached peak domestic oil production, while more than half of its oil refineries went offline post-Katrina
3) China’s oil consumption is rising extremely fast, and the US cannot simply tell China to curb its appetite
4) With a surge in non-US oil demand around the world, the ability for Wal-Mart type threats against oil exporters will no longer be an option for the US
5) MAJOR INSTABILITY in the three main oil producing regions: Middle East (DUH), Venezuela (Chavez), and Nigeria
6) It takes many years and costs billions of dollars for oil companies to explore and dig oil – with profit margins at less than 10% (Microsoft’s profit margin is 32%), where is the windfall profit politicians complain about?
7) It takes about seven years to build a refinery, and Congress has done nothing so far but to draft a helpless bill
8) After decades of pounding environmental regulations, many States require different blends of fuel – disabling them from assisting each other during supply shortages
9) THE TRUTH: FROM AN OIL INSIDER
10) In the short term, winter is already upon us and fat heating bills are waiting in the mail. During the past month, the energy sector had a downturn when hot money stopped pouring into oil stocks. We see this as temporary noise due to profit taking by large funds (a la, in part, Refco). We expect crude oil price to rise above $70/br by early next year and also expect oil stocks to resume their rally. We’re keeping our eyes on PBR, PCZ, and VLO.
