By Robert Denner
Well it came one day later than I was expecting, but it seems to be upon us now. I said last Thursday that we’d end the week up 75 or so (turned out to be 65) and that this week we would enter a period of possibly severe weakness in the markets.
It seems to be gathering steam this afternoon. I will hit the highlights as they are getting alarming, but still far from panic time.
Gasoline futures were pointing to a huge increase overnight. I didn’t comment because the last time I commented on gasoline futures, by the time the market opened it dropped 20 cents and I looked like an alarmist fool.
Well this time it stuck and then some. RYOB Gasoline prices have broken the 290 level and it is NOT STOPPING… Pencil YET ANOTHER 20 to 30 cent increase in the pipeline on top of the 20 cent increase that should be arriving at your pumps in the next day or so… What this means is that in Ohio we will move from 3.39 a gallon as of today and we will move quickly to 3.59 in the next day or so. If the price holds at the 2.90 level or goes up, we will be looking at close to 4.00 a gallon by late this week or early next week.
WTI oil is within a sneeze of 100 again on tensions in the Middle East. So it seems the MSM was once again WRONG and the ME problems are just getting started. Iran is cracking down on protestors and now we have 2 major oil producing countries sitting on the precipice of a full break down in civil society. Libya is over the edge at this point and if they don’t pull themselves back from the brink, they will look like Bagdad in a very short amount of time.
The people that could have pulled Libya out of the economic collapse have already likely left the country (the skilled oil rig workers and the engineers) and it will take a lot to convince them to return. This means that for the foreseeable future, Libyan oil production will be greatly reduced.
Now add the possibility of another 2 ½ to 3 million barrels of oil production (and Natural Gas) being removed from the markets and you can understand why Oil prices are quickly rising. Remember what I said about the 2 to 4 million barrel cushion in global oil supplies. The markets will react chaotically if that number goes below 1 million barrels and if you start adding up the supply disruption already, we are getting dangerously close to that level if Iranian supplies are disrupted.
As I am typing this sentence, RYOB gasoline futures are standing at 294 and rising and WTI is actually down a few cents at 98.90 or so.
THE DOLLAR/CURRENCY MARKETS
What really tipped me off last week was the US Dollar weakness and the sudden rise in the Euro/USD spread. Right now the Euro is nearing the 1.40 level to the USD and the Yen has broken through resistance and is at 81.65 yen to the US Dollar.
But what really caught my attention was the sudden drop of the US Dollar index which is currently sitting in the 76.93 level, having hit as low as 76.80 this morning… We are ready to break the one year low, under which the next down side resistance level is around the 73/74 level.
At current oil price levels (and gold and silver) a drop from current US Dollar levels to the 73 level would likely add another 2 to 4 dollars onto the price of oil (and similar % for gold/silver).
I don’t know what has changed in the dynamic, but during times of global unrest it is considered a slam dunk that the US Dollar index (and US Dollar to foreign currency spreads) would move in favor of a stronger dollar. This is because as people exit more volatile emerging markets (like Egypt/Iran/Pakistan/Saudi) that the money will flow back to the US markets and either be parked in US Treasuries(strengthening the US Dollar) or into the US Equities markets(driving up the DOW and S & P). Neither is happening at this point, but could reverse quickly if Iran goes over the edge.
BUT IF IT DOESN’T, then something has fundamentally changed out there in the global markets. During the worst of the 2008/2009 global economic meltdown the US Dollar strengthened from an all time low of 70.89 in the summer of 2008(something I and others were screaming about at the time) and topped out in the summer of 2009 at a high of nearly 89. I benefitted greatly from this move as I had cashed everything out in the fall of 2008 and moved it all to money markets and treasuries and avoided the collapse.
THIS IS WHAT THE SMART MONEY DOES. The inside players bid up the DOW and the other markets and as a top is formed they slowly start selling into the weak hands and move to the relative safety of the US Dollar through money market accounts and US Treasuries.
So for this has not happened, the US Dollar continues to weaken into the global instability and the Yen and Euro continue to rise. Also the Australian dollar and Canadian loony (spelling?) continue to gain against the US Dollar.
I think the US Dollar is the key number to watch at this point to figure out if this is a run of the mill market correction or something much worse. If the US Dollar continues to weaken into this growing global chaos, then I would get very worried. But if we see a re-run of the events of July 2008 to May of 2009, meaning a quick reversal of the US Dollar as money floods home to the US to seek out safety in US treasuries, then it would signal a re-play of the collapse of 2008 and another deflationary bout.
This is what I am betting on at this point, but am open to the possibility of this being different and that this may be the disconnect that we have all been waiting for and expecting. History says this is NOT it and the dollar will hold together, but at some point it will break and then everything changes for the US and the world…. I do not think we are there yet. I expect a further drop in the US Dollar to test the lowest levels around the 70.89 market, possibly going into the high 60’s and then reversing. I think this happens in a matter of months/weeks NOT months/years.
I will just shut up about gold and eat crow. I keep waiting for the eventual collapse of gold prices and yet it never happens. Every pullback is quickly reversed as smart money realizes it is a buying opportunity and not a gold collapse. I will say that I have been and continue to be SPOT ON with silver.
I said years ago that silver was the better play and that has proven to be correct. Unfortunately I did not benefit, as I could not risk my meager savings on something as volatile as commodities. Now that I finally have some spare change, the price of Silver is sitting at a price that just makes me too nervous to jump in, and yet I said that at 27 an ounce and it rose another 6 dollars to its current level of 33.89 34.01 34.44(moved that fast while I was writing this and getting ready to publish).
On the other commodities I am being somewhat vindicated, but nearly as much as I inferred or expected. Most soft commodities are selling off at the moment, but not in any meaningful way.
For now on, I will place my market update WHERE IT BELONGS, at the bottom of the heap. The markets are so rigged and manipulated that they are a farce and a complete waste of time for the serious economy watches. It is only good to watch on days like today where you get these stomach churning drops and you see the MSM boys and girls on CNBC squirm like little children. Currently US Markets are down on the order of 1 to 1 ½%.
I do believe that there is some benefit in watching DOW and market LEVELS as opposed to any particular direction (up or down). I said that we would likely try and break UP one more time and fail and that we would reverse this week and break well below the 12K mark(11200 was my prediction). These are not arbitrary numbers, but rather points that the trading algorithms seem to gather around.
And this leads me to today’s learning moment. It is a term that is thrown around a lot called PROGRAM TRADING… And it is at the center of my market watching philosophy. Most trades on the US and global markets are no longer completed by human’s, rather they are done by computer. And I mean the trades are DONE BY THE COMPUTERS with little or no human intervention.
Obviously all trades are entered using computers in these modern markets, but what many would be surprised to learn is that even the trading STRATEGY is being run by vast computer networks created by companies like JP Morgan or Wells Fargo or Goldman Sachs. These trading algorithms are closely held company secrets as they give an edge to these major players. They can eke out a profit on a mere FRACTION OF A PENNY move on any stock or commodity. These computers are scouring the markets thousands of times a second looking for arbitrage. And what tends to happen is that the computers all start to converge around certain market prices and await a breakout in one direction or another before committing their reserves.
That is why barriers like 12K are so important, the computers have already factored in the possibility of tens of thousands of 401k owners calling in if the DOW breaks below 12K and demanding that they get out of a certain fund.
So if the 12k barrier is broken all the computers begin to sell and this is how a 1000 point drop in the DOW can happen in a matter of 10 minutes. When all the computers independently converge around certain market price points, it sets up a big move, either to the upside or down. But it is the downside that is the most concerning as the computers move so fast that sometimes they fly ahead of their human masters and cause a market panic.
So that is PROGRAM TRADING and it is a big factor in my predictions around certain DOW numbers (and the US Dollar Index and Oil/Gasoline).
We are nearing the 12K point again and the DOW is off by 105 112 129(falling by the minute).. If we have a 200 point drop today we will be standing at the edge of 12k again. I don’t think we break it today, but likely by Wednesday.
Got to go, the sun is shining at it is actually kind of warm today. Greenhouse temperature is already over 70 degrees and today is MARCH 1st. Time to get the seeds in the ground….
Have a good day, will likely have another update sometime around 1 or 2am this morning.