Thursday, July 3, 2008

Her Name is Bertha

(click on the image to view the latest Accuweather map for Bertha)

Is Tropical Storm Bertha the big bad storm that could send crude oil soaring above the $150 mark? Stay tuned and watch this weekend. The storm path shown on this map suggests that she is not the storm that would endanger crude oil supplies in the Gulf of Mexico. Breathe a sigh of relief... but keep watching!

After the Rally, the Plunge

The stock market rally lasted only 30 minutes following the employment report. Now the stock indexes have reverted to the underlying downward trend. In his book "Trading Day By Day", Chick Goslin says that if an established trend exists, the fundamentals news will tend to have only a short-term impact. Perhaps this is because many traders, like with today's stock market index futures, will sell the rallies, seeking to establish better positions, reinforce existing ones, or enter new trades in a clear trend.

In perhaps the most surprising move today, the Dollar has strengthened appreciably, probably because the rate increase by Jean-Claude Trichet (the ECB) was already priced into the market, so there was no true surprise this morning. Crude oil, after approaching $146/barrel this morning, sold off on the strength of the Dollar's rise. This probably contributed to the stock market rally. However, as the price of oil has begun to rally again, stocks have also plunged.

What a wild ride today.

Headline Unemployment As Expected, But...

The internal data are even uglier than anticipated. While the unemployment rate is unchanged (5.5%), and the employment loss is about as expected (-62,000), some of the additional data is much worse. For example, private job losses, especially service sector jobs, are much higher than expected, and are partially offset by government job gains. The new unemployment filings are substantially higher.

Oddly enough, both the Dollar and stock indexes are rallying (at least temporarily), because all this bad news was apparently priced into the market. My gut instinct is that over the next few days, as this news is digested, and market participants realize that this is worse news than the headline, the Dollar and stock indexes will reverse off the immediate response. Perhaps this will happen today!

ECB Raises Rates to Fight Inflation

As anticipated, the European Central Bank today raised interest rates by .25% to fight inflation. Ironically, since the Dollar consequently fell against the Euro, this move may stoke the fires of inflation here in the United States. How? If the Dollar is weaker against the Euro because of the difference in interest rates, then dollar-denominated commodities like crude oil are likely to rise in price, thus fueling the fires of inflation. (For example, soybean prices also hit a fresh all-time high price overnight.) If the ECB continues on its path to raise interest rates even more in future months, the Fed may be forced to do the same to stem the fall of the Dollar and prevent the price of crude oil and other commodities from fanning inflation even more. This must be the Fed and Chairman Bernanke's worst nightmare!

The Dollar fell to a two-month low overnight (see chart).

$145 Oil -- On Hurricane Threat

Here come the hurricanes! Just the remote threat -- still in the eastern Atlantic -- of a hurricane has sent the price of crude oil over $145/barrel today. This was bound to happen! It the slight hint of a hurricane in the eastern Atlantic can send crude oil over $145/barrel, then what will a genuine threat entering the Caribbean do to the price of crude oil? Here come the hurricanes!

Wednesday, July 2, 2008

$144 Crude Price Swept Aside

As if with the flick of a wrist, the price of crude oil has quickly swept the $144 price handle aside this evening in after-hours trading.

New Soybean Record Price

Soybeans have set a new record high price today at $16.3475 in the closing minute of trading, as shown on this 3-minute chart. This may also be a new record closing high.

Corn Hits Limit Up in Last Moments of Trading!

Corn reached limit up at $7.8200/bushel in the last minute of trading today. Traders may want to check the CME website to determine whether the limit will be increased for tomorrow. Since the settlement price is not usually the last printed price, it is possible that the CME won't increase the limit from 30 cents to 45 cents when trading begins this evening. A few months ago, the CME altered their calculation methodology for the settlement price. Since it is somewhat more complicated now that it was previously, the settlement price needs to be closely monitored by traders. The price of soybeans also surged powerfully in the closing minutes of the session.

Soybean Prices Continue Higher

Soybean prices continue to move higher, reaching near record territory today at $16.23 per bushel. Corn and wheat prices, on the other hand, have stagnated over the past two weeks. This daily chart for soybeans shows an unabated demand for the little legume. Nice trend, huh?

More On Oil Speculation

In a forum that I frequent regarding investments, one reader posted an interesting question:

How do you explain the dollar being down 15-percent while crude has doubled in the past 16-months?

Here is my reply to him:

The answer is glaringly obvious. It is NOT to assume speculators drive prices higher.
All the data show just the opposite. Coincidence is NOT causality. In fact, the recent CFTC data indicate that the speculators were shorting the market, exiting the oil futures, and SUPPRESSING prices. Recent price surges occurred when the speculative shorts were squeezed OUT of the markets. We shouldn't be cursing those guys. We should be THANKING them.
In addition to the devaluation of the dollar, there are various other factors that have also driven the price higher. They amount to a near perfect storm for higher oil prices.
One cause is growing global demand. Just this week, China announced that their importation of one petroleum distillate had increased 34% in the past year. 34%! That's HUGE! India and much of the rest of the developing world also are increasing their thirst for oil. America doesn't have exclusive rights to it. Other countries' oil isn't a national birthright, especially when we refuse to develop our own (that IS our birthright) here at home.
Reduced energy production at home is also a major influence driving prices higher. It's amusing that Congress talks of suing OPEC to force OPEC to increase production, while at the same time Congress is banning more production at home. But NO ONE talks about holding Congress responsible! Why do you think Congress tries to point the finger of blame elsewhere? Because it deflect the place where true responsibility lies -- with THEM!
It's amusing to me that those who discourage more home production of oil claim that since it won't permanently satisfy the need, we may as well not even look for it. That's like saying that since next week we'll have to eat again, we may as well starve ourselves to death today! Every single barrel of home-produced oil helps!
Geopolitical concerns drive the price higher as well. It seems that 2-3 times each week, Nigeria's oil distribution network is attacked, and its workers are targeted for terrorism. Nigeria is one of America's key oil providers, and Nigeria's oil is the sweet variety that our refineries were designed for. Any risk to their oil send prices much higher. Also, the threats that Israel might attack Iran are a very serious risk to supply, and therefore send prices higher.
Gradual reduced global oil production is also sending prices higher. This is called the "peak oil" theory. Just today, Russia announced that its oil production will fall 10% in the next two years. Mexico's production is falling so rapidly that in 7 years, Mexico will have to begin to IMPORT crude oil! Often, anti-oil groups will claim that there is plenty of estimated reserves out there, and that the peak oil theory is overblown. These people always make their case based upon what MIGHT be oil reserves, not KNOWN reserves. Ironically, it is THEY who often block exploration for these supposed reserves with their lawsuits, so we can't know the reserves are there because these people are blocking us from verifying them. Their arguments are always pie-in-the-sky, not reality. Peak oil theory, on the other hand, is based upon KNOWN, SHRINKING oil reserves -- REALITY -- not pie-in-the-sky. Thus, known shrinking oil reserves trump in-the-cloud estimates every time!
Even weather sends oil prices higher. Every time the slightest risk of a hurricane is mentioned, oil prices will escalate immediately, because the risk of disruption is real.
To say that the devaluation of the currency is only X amount, and the rest must therefore ALL be speculation, is like saying that if you sleep in the garage, you must therefore be a car. The reasoning is just as silly!

Tuesday, July 1, 2008

Soybean Prices Approach New Record

While corn prices have retraced somewhat in recent days, soybean prices have continued higher. Soybean futures are approaching all-time record highs around $16.30/bushel, if my memory serves me adequately. Soybeans have closed above $16/bushel today.

Long Lines Coming to a Fuel Pump Near You

The surging populist sentiment to severely limit trading in crude oil futures is gaining momentum. (For the record: I don't trade crude oil futures. There is no ax to grind here.) There is an excellent article on the subject today by John Fount on Here is a link to his article:

Does No One Remember the Pain of the '70's?

It turns out that we have been down this road before, during which high gas prices encouraged a government -- one Republican, the other Democrat -- to try to limit fuel costs by intervening into the financial markets. Fuel shortages, long lines and much higher gas prices were the result.

As a teenager, one day I was driving home from an evening with my parents and grandparents in my grandfather's car. I don't recall the event. My grandfather was a doctor. He had turned the radio on, and the news came on. The news mentioned that because of tight fuel supplies and price controls, rationing was going to be imposed upon drivers at the gas pump. We all laughed and mocked at the idea that gasoline would be rationed. As we pulled off the highway exit near home, my grandfather pulled into a gas station. As we pulled up to the nearest pump, a service station attendant came out. He approached the car and told us that we would only be permitted to pump 8 gallons of gasoline. We were all shocked. Needless to say, the sentiment in the car changed in a moment as reality suddenly hit us all in the stomach. Fortunately, since my grandfather was an MD, after showing identification, he was permitted to fill his gas tank.

It seems that the only solution that we know will work to bring down oil prices is the only one that Congress is determined not to use -- exploring for oil. Instead, Congress yesterday passed a mandate upon the CFTC to restrict trading in oil futures. These disruptions always have unexpected consequences, and those consequences are almost always detrimental. The proposed supposed cure is even worse than the disease. This will certainly disrupt prices -- perhaps even temporarily lower them -- for a time. (Operative word -- temporarily.) As the futures market seeks to adjust, turmoil in the markets will be the result.

As this disruption in the financial markets occurs, gradually the adjustment will take place. It will punish the bad policies that sought to constrain the free flow of capital and resources, thus resulting in much higher oil prices, long lines at gas pumps (as oil flows to places where it is welcome at current market prices, and flows away from countries -- like the U.S. -- where it isn't welcome), capital flight away from the financial markets of the United States, and a substantially lower Dollar (capital flight devalues the currency of the country it is fleeing from).

This capital flight alone is tremendously significant, because it will ignite more inflation, and it has the potential to ignite hyperinflation. I remember seeing the consequences of capital flight while living in South American countries as a young man. Most Americans were blissfully enjoying the Martin Luther King holiday when a $50 billion liquidation of a rogue trader at Societe Generale caused the Dow stock index futures to drop 570 points. Fortunately, the markets recovered overnight, and Americans were largely oblivious to it. What would be the impact on the Dollar and our capital markets of capital flight of $2-3 trillion (with a "t"), as investors send their money to markets where it is more welcome?

Many similar types of policies have been imposed on the Venezuelan people by Marxist President Hugo Chavez, and food shortages of even basic commodities like eggs, bread, and milk, have been the result. The same policies being proposed now by both presidential candidates Obama and McCain will start this new round of calamitous consequences, if codified into policy.

These policies have been tried before during both Republican and Democrat administrations during the 1970's, but no one seems to be willing to learn the lessons of history. Our egotistical pride blinds us to the wisdom of times past.

There is another excellent article in the Wall Street Journal today by famed energy expert Martin Feldstein on how we can lower the price of oil almost immediately. It can be found here:

We Can Lower Oil Prices Now

Feldstein mentions two possible remedies that would help to lower oil prices immediately. Both would be better than one or the other. But the politicians don't appear to be growing any new spines in the near future.

Those who are unwilling to learn the lessons of history are doomed to repeat them. It seems that we are determined to learn our lessons form the school of hard knocks instead. It will be painful medicine. Very painful, indeed!

Prepare for long lines at the pump and very costly crude! It's soon coming to a gas pump near you!

Monday, June 30, 2008

Commodity Trader's Delight

I have posted today some information regarding some new commodity ETNs that are unique, for traders who are interested. Some of these ETNs track the soft commodities. I have been eagerly awaiting these ETNs for a very long time. Others track some industrial metals that I have never traded before, and I am unaware of futures for some of them.

There are also some new, unique currency ETNs as well. There is a link to my other blog and these posts at the right side of this page.

USD Grinds Modestly Higher

After a steady and almost-uninterrupted downtrend for nearly three weeks, the US Dollar is grinding slightly higher today. It is happening with some force, as the far right edge of this chart seems to demonstrate. This is hardly the sign of a reversal, but it is good news, and may have contributed to the broad selling of several major commodities today. Go Dollar!

Crude Oil Crushed and Stocks Rise

After striking a new all-time record high price of $143.67 in overnight trading, crude oil has sold off nearly $3/barrel. This is welcome relief for motorists, also $140 hardly seems like much relief at all.

For months, pundits have been predicting a collapse in crude oil prices as prices create demand decay (some call it demand destruction). However, geopolitical events continue to provide ever-higher support for energies.

Even this small relief has given the stock index futures reason -- along with technical support at the 20% sell-off level -- to lead a relief rally today. Relief indeed!

Fear Trumps Inflation Concerns

It may seem surprising that so many investors and futures traders would be buying treasuries at a time when inflation concerns are increasing, and especially with oil approaching $144/barrel. However, I have learned over time that when the stock market is so beaten up as we have seen in recent days and weeks, investors will flee to treasuries, even though returns are poor. This drive yields even lower. Treasury prices and the resulting yields are below inflation. However, investors are so worried for the safety of their capital, they are buying treasuries solely as a place to park their money while they look for safer yields elsewhere. Safety trumps return! Counterintuitive or not, it is a fact. This daily chart proves the phenomenon. I have also learned to ignore fundamentals-related gyrations in the financial markets. Someone else will always have either better or more current fundamentals data than I, and fundamentals-related news often misleads. However, the charts don't lie. I can trust them to always show me the truth of what is occurring in the markets, regardless of what today's news trumpets to the financial world. This daily chart shows that for the past few weeks, treasuries have been trending higher (yields, lower).

This daily chart for treasuries shows an uptrend at a time when inflation is becoming more and more unhinged. It seems counterintuitive that treasury yields, which move inversely to treasury prices, would move lower at a time that inflation concerns are growing. However, safety trumps yield in an environment of so much fear. Until investors feel comfortable buying stocks again, treasuries will remain the ultimate safe haven for capital.

USDA Crop Report Leads Corn to Limit Down

The USDA crop report issued this morning has surprised grain traders with a more rosey grain production forecast that was expected. See the corn chart and limit down price above. Traders are taking it somewhat with a grain of salt, however, because the survey was conducted and the results were tabulated before much of the recent corn yield destruction that occurred due to the recent flooding across the grain-growing regions of the United States. Consequently, the grains have opened lower across the board and the price of corn has touched limit down in early trading. I expect at least a partial rebound, depending upon how strong the sell-off is, especially since more rain and broken levees over the weekend are likely to provide some price support for grains. However, I am short for now.