M3 Expanding Dramatically

One measure of the size of monetary stimulus is the expansion of M3, a broad measure of the money supply that includes institutional money funds. Capital Economics calculates that M3 is up 15% from a year ago, the biggest increase in 37 years.

Having embarked on this course, Bernanke has no way to head off the next boom-bust cycle.

Source: Businessweek, "The Fed's Revolution," March 20, 2008

Grains Decline Despite Strong Global Demand

News reports indicate that global grain demand remains very strong. However, due to continued hedge fund liquidation and the credit crisis, futures prices continue weak. Ironically, this is likely to encourage purchases, and artificially-created price weakness will certainly stimulate renewed buying vigor at some point. To me, this suggests that once the hedge fund panic selling reaches equilibrium with global buying demand, prices may rebound quickly, and the bull trend is likely to resume. Reports at this week's exporter conference were particularly bullish about soybean prices, which paradoxically locked limit down again today in Chinese futures trading.

Did Fed Violate the Act That Created It?

Interesting article in Bloomberg that suggests the Fed likely overstepped the law:

Fed Bypasses Emergency-Loan Policy on Rate for Securities Firms

This has ominous potential ramifications when we consider that the Fed has probably expanded its own regulatory powers beyond those enumerated in the Act that created it. If we allow government (or quasi-government, as the Fed is) to expand its powers without check based upon the idea that a panic or crisis validates it, freedom will progressively wane and America will one day awaken, only to find out that it, like Rip Van Winkle, has awakened in a different world than it thought -- one of tyranny, but in the "land of the free".

Rick Santelli, one of CNBC's most experienced and market-savvy reporters, correctly perceived this emerging trend when he said that the Fed shouldn't be empowered to become the ultimate owner/financier of all the real estate in the United States unless we wish to add the hammer and sickle to the flag. If the Fed, under the guise of crisis, can simply broaden its own powers, we are headed down an ever more slippery slope, greased by the ever-growing powers it has usurped -- and that were slowly, imperceptibly lost by the American people through their own numbed torpor and apathy.

No New Trading Due to Limit Down

Since corn and soybeans were both limit down overnight, I didn't take any additional trades today. I remain short soybeans, having reduced my position for the three-day Easter weekend.

The CME increased the limit on wheat again from $.90 to $1.35, and it was the only grain that traded throughout the day. Continued margin calls on leveraged funds has put considerable downward price pressure on all the grains. Just wait until this all shakes out. It will be great fun!

The grain futures markets are closed tomorrow for Good Friday.

Happy Easter!

Was That Gold Falling... Or a Rock?

Today was the largest distribution of gold in years, due largely to disappointment in the Fed's reduction of interest rates and distribution by large funds. Wow! The price of gold is down more than $85 from its most recent high just two days ago. What a great day to own the DZZ ETF. Unfortunately for me, I wasn't among them. Fortunately, some traders are predicting that the USD will rise, and gold will continue to sell off, perhaps to as low as $800/ounce. If so, I'll take advantage of the turmoil.

They Waited Til Now to Liquidate?

Today's heavy sell-off across the board in commodities, and especially soybeans, was due largely to liquidations by hedge funds, who are being forced to sell because their banks are making margin calls. I find it hard to believe that anyone waited until today to sell their soybeans and other grains. I have been short the soybean market since March 6th.

This underscores the fact that small individual traders like me have distinct advantages over large funds. They have the disadvantage of the Law of Large Numbers. I am much more nimble and able to enter and exit the markets quickly.

Soybean Bear Out of Hibernation

Perhaps it's appropriate that the soybean bear has come out of hibernation in the springtime. This is a good time to be short. However, weather and crop conditions, including planned acreage, can change everything from one day to the next.

Now Wheat Reaches Lock Limit Down

Corn Locks Limit Too

Gold Plunges, Breaks Trend Line

Gold has broken through the light blue lower trend line in the upper panel. If it closes below the lower trend line, a bear market is confirmed by prices continuing below the low of today. Still, since gold is in a 5-year bull market, I don't count on the gold bugs to stay out for long. I plan to buy gold again soon. The fundamental conditions haven't dissipated that have caused the US Dollar to be the favorite financial instrument world-wide to beat up on. They'll be back!

Wheat Goes Flat Too

Soybeans Lock Down Again

This time, I think we'll stay down for the rest of the day. The number of ask positions has risen rapidly until there is little possibility that enough buyers will enter the market to complete the available ask orders.

Soybean Buyers Rush In

Look at the green line in the bottom left quadrant that indicates that buyers are coming into the market. This suggests that we haven't seen the end of upward price movement today.

Corn: Done Gone Flat!

Soybeans Lock Down

Gold Sell-Off

Gold has sold off strongly, revealing its true character as one of the most volatile of all commodities. Gold's unique status as inflation hedge, protection against uncertainty, and hiding place from fear, make it unique. Apparently, faith in equities has been restored somewhat by the Fed's most recent actions. How interesting that it took three Fed interventions into the financial markets in as many days to accomplish the task. What will happen when the Fed interventions stop?

Note also the powerful selling indicated by the Klinger Volume indicator on this daily chart. There was also a bearish divergence at the most recent high around $1033/ounce. The two primary signals for a short entry have been achieved on this chart:

1. Price close below the 8-period EMA, and
2. The Klinger Volume indicator is red and below its yellow Moving Average

Prices must also confirm the short entry by continuing below the low price of the candle that closed below the EMA. If it doesn't, it will be an opportunity to enter and go long again at a better price point.

I am not short gold. I am also no gold bug. Gold has been in a bull trend too long for me to feel comfortable shorting Midas' friend (and nemesis). The US Dollar has weakened again overnight against most currencies, so I am more likely to look for an opportunity to go long again, especially when the next bad news hits the stock market. Many investors will once again flee to gold.

By the way, Deutsche Bank has some new ETNs that permit traders to go both ultra long and ultra short the price of gold. The ticker symbols are DZZ (short) and DGP (long).

Lehman, Goldman Tap Fed Window

Just one day following better-than-expected earnings reports from Lehman Bros. and Goldman Sachs, both companies have tapped the Fed's discount window.

US Dollar and Stocks Not Linked? Think Again!

Think that the fate of the US Dollar and the stock market aren't linked? Think again! Thanks to Jack Crooks at Black Swan Capital for this chart. It shows the decline of the US Dollar and how closely related it has been to the stock market decline. The chart doesn't lie! The only question now is, "Which one is the chicken, and which one is the egg? Stocks or the Dollar?"

Here is a link to Jack's daily currency newsletter:

Currency Currents

Great News Sites For Agriculture, Commodities

Here are two web sites for excellent news. The first is a general news site, but I have the link set up to automatically search for commodity-related news. This British website constantly crawls the Internet checking thousands of news sites for developing news on many topics. I frequently check this website for news related to my preferred futures trading instruments.

News Now

This second website is for the magazine Farm Futures. It has agriculture-related updates several times each day, and registration for the website is free.

Farm Futures

Check out the great update today on this website for corn and soybean plantings, as well as long-term forecasts for the upcoming harvest season, current weather for the farm belt, and prospects for continued price strength for both corn and soybeans. Interesting article!

Taking Time Off

I am developing some new record-keeping and goal spreadsheets, so I will limit posting today. Trading will continue normally. Happy trading to all!

What If There Was a Run on a Bank, and Nobody Came?

Except the Fed, of course!

What does it say about us that there was a run on Bear Stearns over the past few days, and the stock market shot higher? Do the words, "irrational exuberance" come to mind?

"We're All Keynesians Now"

Richard Nixon declared the above headline, and I suppose he was right. Consider these facts:

• Economic stimulus of $160 billion to be sent to Main Street around May 1. Has anyone ever even talked about how this is to be paid for? No. The answer is that we'll borrow it.
• Fed economic rescues for Wall Street -- $800 billion, of which $400 billion has already been spent. Never mind that most of the Wall Street firms being assisted aren't even members of the Federal Reserve Bank system, nor have they paid FDIC deposit insurance. It doesn't matter any more, now that the Fed can create money "electronically" (Ben Bernanke's word). Even more remarkable considering that many of these Wall Street executives were paid more than $250 million each last year while their investors lost money!
  

I guess those two figures tell us a lot about where our government's priorities lie. Nearly $1 trillion of new debt and new money created since August 2007, which doesn't even include the deficits already anticipated prior to that date. More than 80% of it will go into Wall Street's pockets. This $1 trillion figure is just the new debt intended to spend America out of an economic slump; it doesn't include the deficit spending that was already budgeted for this fiscal year. That's a lot of profit for Wall Street that the don't even have to work for!

Fed Fund futures are pricing in a 100 basis point interest rate cut this afternoon when the FOMC meets.

Question: How many times in the 95 year history of the Fed has the FOMC cut by 100 basis points?

Answer: Zero. We'll see if the Fed makes economic history this afternoon. It would be the first time. But former Fed Governor Laurence Meyers this morning said that the Fed mustn't "disappoint" Wall Street today. The former Fed hawk said that the Fed must ignore inflation so as not to disappoint Wall Street and the stock market.

"It is a wise rule and should be fundamental in a government disposed to cherish its credit, and at the same time to restrain the use of it within the limits of its faculties" -- Thomas Jefferson (letter to John Wayles Eppes, 24 June 1813) Reference: Jefferson Writings, Peterson, ed., 1280)

PPI and Inflation

The PPI year-over-year inflation rate released this morning was 6.4%, more than triple the Fed's target rate. Even the core rate was much higher than expected, by more than double! I couldn't help but notice that the CNBC crew hardly discussed it, quickly glossing over it and moving on. They preferred to keep a steady drum beat of their group think cousins demanding further Fed rate cuts. I also couldn't help but notice that their guests were also "all keynesians" now! Couldn't they find a divergent voice? There are plenty of them out there! The Dollar be damned! Inflation ignored! Full speed ahead. Never mind that we're headed "full speed ahead" for the edge of an cliff!

This soybean chart seems to say it all. It is symbolic of the expectations for the future of commodity prices. The financial markets are pricing in higher inflation to come. After reaching lock limit down 6 times in the past 11 days, including last night, soybean prices are shooting skyward like fireworks this morning.

Wall Street is happy this morning, with the Dow up by more than 250 points. Wouldn't you be happy with the Fed injecting $800 billion into your pocket that you didn't have to earn?

Soybeans - Down Again!

Soybeans futures are already limit down tonight! Here we go again!

Wheat Locks Limit Down Too! Commodity Rout!

Wheat, although trading freely throughout the day, also locked limit down shortly before the close of the session, almost certainly in a sympathy move with other weak commodity prices. Sugar, cotton, copper, coffee, nickel, crude oil, cocoa, and even gold (to a lesser degree) are also all down dramatically today. Today was a commodity price rout!

However, I am hearing traders say that they will buy the dips in commodities. After such a dramatic rise in commodity prices over the past two months, I anticipate more of a consolidation than a bear market. Historically, prices following a strong bull market tend to consolidate in the near term rather than reverse. Following a consolidation period, either a bull or bear market can occur, although I believe a new bull (following an earlier bull) has a higher statistical frequency, from my experience.

Commodities Sell-Off!

Reuters is reporting today that there is an across-the-board sell-off under way in commodities. I already knew this because the charts have been telling me so for several days. Here is the article:

Investors Flee Commodities

Soybeans: Lock Limit Down!

There is a sustained liquidation in commodities today, and it is almost across the board. Crude oil seems to have triggered the sell-off, with grains following at the open this morning. Corn is close to lock limit, and soybeans is lock limit down almost from the opening bell. The upper chart is this morning's trading, and the lower chart is the daily chart. The bearish trend in soybeans is now firmly established! Soybeans have now reached their lock limit down price five times in the past 10 trading days!

Intra-day Soybean Chart
Daily Soybean Chart

Soybean Prices Straddle Settlement Line on Solid Volume

Soybean prices have been the most active of the grains overnight, with soybean trading volume matching that of corn. This is remarkable, given than corn Open Interest is nearly twice that of soybeans. If soybean meal and soybean oil are also counted, the Open Interest of the entire soybean complex would roughly equal that of corn, and the volume would probably be greater.

Soybean futures appear to be the favorite grain of traders for the time being, even though prices overnight have straddled the flat line of Friday's settlement price. Trading this chart could be very profitable, given the smooth, sine wave pattern that is seen on these charts. However, taking the trade overnight also carries higher risks because the bid/ask spread is significantly wider. I usually don't trade overnight, because the risk is higher, volume tends to be lower, and profits are more spotty.

The Chicago Mercantile Exchange reports this morning pre-market that much of the activity is due to the Bear Sterns saga and net fund long liquidation, so further softening of soybean prices may be in the offing during the day session. This would be especially true if oil and gold prices continue to soften.

In a fascinating science article related to the health benefits of soybeans, a recent study is indicating that eating soybeans may impede the growth of prostate cancer. Eat your soybeans, men!
Here is the article:

Soybean, Male Sex and Cancer

Volume for wheat has been weak overnight, with the price moving modestly higher.

Crude Oil Plunges

After reaching a new all-time high price of nearly $112/barrel overnight, the price of crude oil is now plunging as well.

Dow Dips Up to 250 Points

The Federal Reserve has stepped in to take over troubled Bear Stearns, and the Dow futures have sunk to a new low below March 10, but have still yet to reach the lows reached on January 22nd. Bear Stearns is being sold by the Fed to JP Morgan Chase for only $2/share. What a stunning development, given that Bear Stearns isn't even a member of the Federal Reserve system.

This entire development has created a sense of uncertainty that has dropped the Dow Index futures by as much as 250+ points. However, the Dow has recovered from deeper dips than this before, so anything could happen in the day session.

The typical "flight-to-safety" phenomenon of buying treasuries is also evident this morning. This is also remarkable given the extremely poor return (lower than inflation) of treasuries. Gold also has now sunk well off its overnight record high of $1033/ounce to close to its Friday futures settlement price.

Gold Glitters, Too!

Gold has also hit a new high tonight, rocketing more than $24 higher to a new record of $1033.50 tonight. Inflation baked into the cake, and we can thank the Fed! The blue line is Friday's closing price for gold.

Costly Crude, Dumpy Dollar

US Dollar Chart, evening of Sunday, March 16, 2008

Crude Oil Chart, evening of Sunday, March 16, 2008

Crude oil has once again hit another all-time high price tonight of $111.40, while the US Dollar Index has set a new all-time low at $71.30. The closing price of crude oil on Friday is so far off this chart (I marked it with a blue line, just as the price of gold was marked on my next posting), it literally doesn't even show up on this chart! All three of the following articles indicate that the US Dollar and the price of crude oil are directly and inversely related (as if we need to be told -- just look at the above charts for the two Sunday evening). This should be no surprise, since crude oil futures contracts globally are linked to the US Dollar. The lower the US Dollar goes, the more of them it will require to buy one barrel of crude oil. Time to write the Congressmen, America! The Fed is trying to inflate its way out of a sinking economic crisis!

Oil Prices Hit All-Time High

Oil Rises to New Record As Dollar Drops

Oil Rises to Record As Investors Buy Commodities on Dollar Drop

Here is another very interesting article that suggests that higher inflation and the tanking stock market in the United States are directly linked. The author makes a good argument that the companies whose earnings are being hurt by Fed rate cuts are the ones that are being delivered a knock-out blow by the tanking US Dollar and rocketing commodity prices, which, or course, are the direct result of the Fed's rate cuts. In other words, the Fed rate cuts are literally feeding a downward spiral. Interesting analysis!

Will Further Fed Cuts Exacerbate the Problem?