CFTC's March 25th Hearings on the Metals Markets

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The CFTC (Commodities Future Trading Commission) held hearings on March 25th on whether to set controls on metal's trading in the U.S. futures markets. A representative from CME (Chicago Mercantile Exchange) testified that the CFTC's attempt to put hard limits on speculative activity in the U.S. metals markets is an attempt by the government oversight agency to overstep its bounds. A spokesman for HSBC claimed that limits on metal trading were simply unnecessary. The CFTC itself said it continues to look into allegations of market manipulation in the silver market in the summer of 2008.

The CFTC has previously held hearings on setting trading limits in energy and agricultural commodities. One of the reasons that the CFTC claims it needs to set position limits in trading is because of the finite supply of any commodity. The limits are supposedly protecting the market (from itself apparently) and the CFTC claims that government bureaucrats know more about how trading should be done than market participants. While there are actual glaring examples of how the gold and silver markets are manipulated by the big players, these are rarely on the CFTC's agenda. Like the other major market regulatory body, the SEC, the CFTC just doesn't seem to notice the behavior from the big money insiders that really distorts the market. For instance, CFTC hearings last summer on energy focused on ETF UNG, which held 20% of natural gas futures contracts. Even though this was an investment vehicle heavily used by small investors, the CFTC decided it was a danger to the integrity of the markets, as opposed to the trading activities of the big banks and hedge funds. The SEC took the same approach by paying limited attention to Bernie Madoff's $65 billion investment scam for almost two decades, but during the same period was very likely to use its resources to investigate some dentist in New Jersey who suspiciously bought a 1000 option contracts and made a couple of bucks.

The CFTC's concerns with energy and agricultural trading are obviously politically motivated. Politicians want to keep the prices of these commodities down since they are necessities and the source of destabilizing inflation. The UK prime minister and French president actually wrote a widely circulated article about how energy prices need to be determined by the big government's of the world just before the CFTC's energy hearings last summer. The U.S. had price controls on energy commodities in the early 1970s and the results were long lines at gas stations and fuel shortages. Under pricing in the markets always leads to trouble down the road.

The excuse for the CFTC considering limits on metal trading is even less justified than for energy or agriculture. As the HSBC representative pointed out, metals are not wasting assets that are consumed and then no longer available as is the case for oil and food commodities. Metals get recycled. Almost all of the gold that has ever been mined is still thought to be in existence. Higher prices increase the recycling rate and bring more supply to market, so the markets for gold and silver are self-correcting. While 50% of silver is used for industrial purposes, only 13% of gold is employed for manufacturing practical items. Most gold is used to make jewelry. Does the gold market need to be controlled, so the rich can be assured of getting good prices on holiday presents?

The CFTC is also not looking at where the actual manipulation is taking place in the gold market. This is done through central bank leasing to the large banks and hedge funds. They lease the gold for a small price and then can sell it on the market to raise some quick cash. This activity held down the price of gold in the 1990s and the early 2000s. The price of gold rose as leasing activity diminished. Artificially lowering the price of a commodity doesn't seem to come under the definition of market manipulation as far as the CFTC is concerned. Central banks, large international banks and big hedge funds also seem to be citizens above suspicion as Madoff was for the SEC.

While the CFTC is looking into manipulation into the silver markets, it may not mean that much. This is probably happening because silver investor Ted Butler has worked tirelessly to bring the situation to the public's attention, thereby putting some heat on the agency. How much the CFTC actually looks this time has yet to be determined. The SEC investigated Madoff many times, but just couldn't discover his blatantly obvious crooked activities. For some time, two big banks have frequently had huge short positions in silver futures -seemingly bigger than the Hunt Brother's who were convicted on federal charges on manipulating the silver prices in the 1980s. The CFTC has already investigated silver twice before in the 2000s and didn't find any irregularities. The SEC investigated Madoff more than two times.

Steve Sherrod, acting director of surveillance at the CFTC’s division of market oversight noted in today's hearings that when Comex silver prices fell sharply in the summer of 2008 that there was no significant change in the total long or short positions in the commitment of traders’ positions in the agency’s weekly data. Nor was there a significant change in open interest during the period of July and August 2008. Sherrod tried to explain away this seeming impossibility by stating, “One could explain a change in short open interest on the BPR (bank participation report) by a change within the classification system; if the usage code changed from non-bank to bank for a trader with a short position, then an increase in the short open interest would appear on the BPR, without any change in the COT (commitment of traders) Report. Another explanation would be a merger or acquisition where a bank assumes the position of a non-bank entity, both of whom were under the same commercial classification. That may not result in a change in open interest and may not result in a change in aggregate position within a COT classification. But it may result in an increase in the reported position on the BPR.”  Readers should carefully note Sherrod's wording (and language that seems more geared to hide what is going on than to clearly explain it). While this may have been what happened, Sherrod indicates that it also may not have been what happened. So how does this enlighten us?

The small investor shouldn't expect much, if anything, from the CFTC. It is realistically a government body that uses its powers to protect the big money interests, although it will claim that whatever it does is to benefit the public. Markets can also not be controlled without serious negative consequences. Government's have attempted to do so hundreds of times throughout the ages and it has never worked. Most commodity trading is international as well (natural gas is an exception), so restrictions in trading in the U.S. means that business will just move overseas. In this doesn't happen quickly enough, shortages will appear. You will have the CFTC to thank for them when they do.

Disclosure: None

NEXT: Euro Zone Support Package Doesn't Solve the Problem

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

A Snapshot of the Energy Markets

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Oil is entering a seasonally bullish period that generally lasts from March to August. Natural gas on the other hand tends to trade in the opposite pattern, being weak during those months and stronger during the winter. Other possible areas of interest to investors such as coal and alternatives such as solar, wind and nuclear don't exhibit the same strong seasonal trading patterns. All are affected by greater supply demand factors or government action and these can occasionally be more important than seasonal trends.

Light sweet crude (the champagne of oil) had already reached the $73 level by last June. The price just rose above $80 in the beginning of March. It has been stuck in a trading range from $70 to $83 for eight months however. The usual fall/winter sell off did not take place this year and this indicates strong underlying fundamental support in the market. Supply coming from existing fields is declining rapidly and supply from new discoveries is not even remotely making up for the loss. Only the global recession that has lowered demand has prevented a major oil price spike from already occurring again. The technical patterns on the charts of oil ETFs DBO, USO, USL and the ETN OIL don't indicate that a sustainable rally is in the offing just yet. Investors need to watch for a break above $83 in the futures markets. The first attempt may fail with the price falling back into the range however. The second break above $83 is more likely to stick and offer a profitable trading opportunity.

While the market for oil is global, the market for natural gas tends to be regional because it is usually moved from source to destination through pipelines. Transporting natural gas in a liquefied state by ship is a relatively recent development, is the more expensive alternative, and still only represents a small part of the market. The price of natural gas in the U.S. market went to incredibly low levels last August and September - the spot price at Henry Hub (the basis for futures trading) was as low as $2.25. This was well below estimated costs of production. The CFTC (Commodity Futures Trading Commission) investigations and new supply coming online were two factors that explain this economically bizarre and unsustainable behavior (commodities must trade above production costs, just like a business must sell its products for a profit). The U.S. only has 4% of global natural gas reserves though, so oversupply conditions will disappear eventually. Cold winters and hurricanes in the Gulf of Mexico are bullish for prices. There appears to be little that would be bullish for natural gas in the next several months though. The natural gas ETF GAZ hit a new yearly low on March 2nd.

As for coal, there are really two distinct markets - one for metallurgical coal, which is used for steel production and one for steam coal, used mostly for generating electricity. Metallurgical coal prices are obviously strongly dependent on the global economy, with Chinese demand being particularly important. Lower steel production because of a faltering recovery would be extremely bearish for this type of coal. Most coal though, 62% globally and 93% in the U.S., is used for producing electricity. Coal and natural gas can be used interchangeably in a large number of U.S. generating plants. So high prices for natural gas are bullish for coal and vice a versa. There is no danger in the U.S. running out of coal in the next many decades, since the U.S. has the largest coal reserves in the world. The ETF KOL has rallied since March 2009 and its chart looks very similar to the charts for the major U.S. stock indices. Expect coal to continue to trade like the overall stock market.

In the alternative energy space, solar stocks had a strong rally at the beginning of the year and than sank when the problems in Europe hit the overall market. Germany reduced subsidies for solar power and China reduced bank lending twice. The market is still dependent on government subsidies and China is a key player, so both actions were bearish. The technical picture on the charts turned from very bullish to bearish almost overnight. Solar stock ETF KWT looks like it has put in a bottom in the last few weeks, this doesn't mean a sustainable rally will necessarily follow immediately.  Some relief from a severally oversold condition should be taking place soon.

Nuclear power is even more dependent on government action than solar, wind or other alternatives. Nuclear plants take years to build and require government approval. There is a nuclear renaissance going on globally. The U.S is not part of it and it remains hidden from most Americans, as well as the fact that 20% of U.S. electricity is generated from nuclear power. There are approximately 52 new nuclear power plants being built globally - China and India are leading the way - and more are on the drawing board. This of course is bullish for uranium in the long-term. However, nuclear energy ETF NLR is currently in a bearish trading pattern. A key event that investors should watch for is the 50-day moving average going up and crossing the 200-day.

Oil is the leader in the energy markets. Rising oil prices are bullish for all the other operators in the space, although there can be a considerable time lag between the rise in oil prices and other energy commodities. Investors should keep in mind that oil is priced in U.S. dollars and a rising dollar lowers its price and a falling dollar raises its price, everything else being equal. The alternatives become increasingly desirable as energy sources with each increase in the price of oil. Investors in energy need to watch developments in the oil market closely and then add the specific supply demand picture in the other markets. The large number of ETFs now available makes it easy to move in and out of any of the energy sectors or sub-sectors and to lessen the risk of owning individual stocks.

Disclosure: No positions

NEXT: Feds Probe Hedge Funds in Euro Collusion Plot

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Toothless CFTC Tries to Bite Gold and Silver

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The U.S. CFTC (Commodity Futures Trading Commission) announced on January 14th that it was going to investigate trading in the gold and silver markets. This follows the commission's high profile hearings on speculation in the oil and natural gas markets held in the summer of 2009. Those led to the demise of the popular ETF, DXO and caused the natural gas ETF UNG to trade so irregularly that it no longer behaved like an ETF.  Both of these were investment vehicles for the small investor. Big-time speculators went on their merry way untouched and unscathed by the CFTC's action that was supposedly aimed at protecting the public. Anyone who was the least bit cynical might conclude that the CFTC's actual purpose was to protect the profits of the large commercial users of the commodities it regulates.

The CFTC efforts in investing oil and natural gas were in reality a thinly veiled attempt at price controls. Governments almost without exception resort to price controls when inflation becomes a threat. Price controls are of course extremely effective - not in controlling prices, but in creating shortages and driving prices much higher than they would have been if controls hadn't been implemented. Governments never learn however. In the short-term, the CFTC managed to drive natural gas prices to the low levels that were common in the 1990s. Natural gas was already trading at multi-year lows before the CFTC investigations and half of all natural gas rigs in the U.S. had already been shut down. The impact on natural gas was only collateral damage though from the CFTC's real target, which was oil.

Nothing has a greater impact on consumer prices than does oil and governments know that controlling its price is one of the keys to controlling inflation. Around the same time that the U.S. CFTC announced its hearings, the prime minister of England, Gordon Brown, and the president of France, Nicolas Sarkozy made a joint proposal that an international body of government bureaucrats should set the price of oil instead of the free markets. They suggested the price should be kept in the $70 to $80 range. For those who don't recall, Gordon Brown was the British government bureaucrat that sold half the UK's gold for under $300 in 1999 and the early 2000s. Gold has since quadrupled from the price where he sold it, so the UK didn't get that profit. The U.S. dollars that Brown bought from the gold sale then subsequently lost at least 30% of their value. This is the type of market 'genius' that government brings to the table. Would you like to let a government bureaucrat make investing decisions for your 401K?

The CFTC has more ability to impact oil and natural gas than it does gold and silver. ETFs that deal with energy commodities have to do so through some type of futures trading. Oil and natural gas cannot be easily stored as is the case with gold and silver. While there are ETFs for both gold and silver that only trade futures, there are 11 ETFs globally that buy physical gold. None of them store that gold in the United States. They are beyond the reach of the CFTC and the claws of the U.S. government, which for those who don't remember confiscated all of its citizens gold in 1933 and silver in 1934. In aggregate, the gold ETFs have become the sixth largest holder of gold worldwide since the first one was created in March 2003. They hold more gold than China, but less gold than France. In several more years, they could easily have more gold in storage than any central bank.  

Both oil and gold are completely international commodities (natural gas trades in regional markets). If regulation becomes too onerous in the United States, trading can and will shift elsewhere, just as trading in ETFs will shift from those that invest with futures to those that hold physical metal. When the CFTC made its announcement that it would be investigating gold and silver trading, the London Metal Exchange said it would offer clearing for gold over-the-counter (OTC) contracts in London by the second half of 2010. Hong Kong, Singapore, Zurich, Sydney, Tokyo, and Mumbai would probably like to have the trading business too if it leaves the U.S. commodity markets. The CFTC's action is just another government- motivated attempt to prop up the U.S. dollar by trying to hold the price of gold down. It won't work. The CFTC doesn't have the power to make it happen. Prices will eventually have to move to the point that the market dictates, just as they always do. 

Disclosure: Long gold and silver

NEXT: Lessons for Investors from the U.S. Senate Race

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Energy Investing Guide for 2010

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

As has been the case for many years now, oil was once again one of the best investments in 2009. While oil has a leadership position in energy, it is only one part of a very large and complex sector that includes natural gas, coal, nuclear power, biofuels and renewables. Ultimately, the price of everything else in the sector will be influenced by the price of oil. All sources also have an easy to determine cost per unit of energy generated and these at least in theory should be somewhat similar across the sector. In reality, that price can become significantly different from one energy commodity to another and this can indicate severe over or under pricing. Price moves in oil and the other commodities in the sector don't necesarily take place at the same time, but can be considerably lagged.

While oil and coal (both the commodity and their stocks) and wind energy and natural gas stocks had significant rallies from their respective price bottoms in February and March 2009 , the natural gas commodity, uranium and nuclear-related stocks, and many solar stocks remained depressed throughout the year. While almost every commodity rallied strongly in 2009, natural gas and uranium were the two glaring exceptions. Natural gas prices literally collapsed and at the low were trading at price levels that were seen earlier in the decade and in the later 1990s. Natural gas futures fell to around $2.40 and spot prices were even lower. Uranium had a strong rally from 2003 to 2007 when it rose from around $10 to over $130. It fell to around $40 at its low in 2009 and hovered just above that price throughout the rest of the year. The solar industry is a more complex story. It is only an economically viable source of energy when oil prices are high. At lower oil prices, government subsidies are key. While a few solar stocks have rallied nicely from their lows, most had not gone up much by the end of the year.

In 2009, prices for both natural gas and uranium fell below estimates for their production costs. No commodity can trade in that range for long since production closes down to bring supply and demand back into balance. By the spring, 50% of natural gas rigs in the U.S. had already closed down. In must be kept in mind that prices in both the natural gas and nuclear industries are influenced by the government. The CFTC (Commodities Futures Trading Commission) held hearings this summer about trading in the oil and natural gas markets. Along with the SEC, the CFTC interfered with access to trading vehicles in these markets that were used by the small investor. Natural gas ETF, UNG was effectively turned into a closed-end fund because of the actions of these two government bodies. Leveraged oil ETF, DXO, closed down as a consequence of their interference. As for the nuclear market, the U.S. Department of Energy has a stockpile of 158 million pounds of uranium and it occasionally sells some of this on the open market and depresses prices, just as central bank selling of gold occasionally depresses gold prices.

While prices were down for natural gas and uranium, they are not likely to go lower in 2010, at least for any extended period of time. They will be supported because they are too close to their production cost levels. This does not mean a major rally is imminent however. Prices can get low and stay low for a long time, as was the case in the 1990s. A number of commentators claim that this will be the what happens now because oil, natural gas, uranium and solar stocks were in a bubble that lasted into the 2007 and 2008 period and once the price goes down it will not recover again for many years. Similar arguments were made in 1974 when oil hit $12 a barrel. It's ultimate high was still several years off and several times higher. Energy was in a bullish period back then just as it is now.

Oil looks like it will be strong again in 2010, based on its price behavior in the fall of 2009. Oil prices, like many commodities, have a strong seasonal component. For oil, the bottom tends to be in the winter between January and March and the yearly peak between June and September. Light sweet crude rallied 9% in October 2009, at a time of the year when it should have been selling off. This indicated unusual strength. Crude ended the year near its yearly high, which was somewhat above $80. While seasonal selling pressure will exist for the first couple of months of 2010, buying pressure will then cause the price of oil to rise. It would not be unreasonable to assume that it will get above $100 a barrel during the year. It is not likely however that price will go up enough in 2010 to break the old high of $147. That will have to wait until the following year. Oil and many oil stocks should continue to be good investments in 2010.

ETFs/ETNs, exchange traded funds and exchange traded notes, are the easiest way for investors to get oil and oil stock exposure in their portfolios. The ETF/ETNs: OIL, DBO, USO and USL can be used to invest in oil as a commodity. For those who are more aggressive and want as much as 200% long exposure through leverage, UCO, HOU or LOIL, which trade in the U.S., Canada, and the UK respectively, can be bought. For ETFs that hold stocks of oil and gas companies, XLE, IYE, and IXC are possible choices. Investors bullish on oil stocks can get leverage on them by purchasing DIG and ERX.

While oil should be doing well in 2010, natural gas does not look as promising. There is an incredible glut in the market and new supplies are coming online through the global shipping of compressed natural gas. Still the price of natural gas is relatively low compared to oil on a historical basis. It will take some time to work out the excesses however and fully restore balance between these two commodities. Natural gas tends to have sharp price rises every four to five years and the last peak was 2008, so another really big move up shouldn't be expected until around 2012. Trading opportunities will of course exist in 2010 and low prices will be available for those who want to slowly accumulate and hold their positions for a while. A good ETF for the natural gas commodity is GAZ. Leveraged natural gas ETFs HNU and LNGA trade in Canada and the UK. The leveraged ETFs are a better choice for shorter-term investors.

The supply demand picture of uranium is bullish in the intermediate term. A number of new reactors will be coming online in Asia over the next several years. Growth in the use of uranium usage is expected to be over 2% a year until 2030 according to the World Nuclear Association. The market is thought to be in deficit of 60 million pounds a year. It is estimated that uranium prices would have to move up to around $75/$80 to improve supply. Miners in particular will benefit when this happens. ETFs for nuclear power include NLR, NUCL and PKN. Only NLR has any significant trading volume however.

As for solar power, a few of the leaders had good rallies in the second half of 2009. This is an indication the whole sector is in the beginning stages of a market recovery. Investors should keep in mind though that this is a new industry and there will be a period of consolidation. Some companies will not last. Longer-term investors should avoid stocks with bad financials. The two solar ETFs are TAN and KWT, but these have partially rallied already in 2009 because the leaders in the sector started moving up. Individual stocks which have not rallied too much yet and which investors might want to consider are ENER, JASO, SPWRA, and WFR.

Commodities have been in a longer-term secular bull market since around 2000. This type of bull market tends to last around 20 years. So, there is still a lot of time left and good investments to be made. Buying stocks and commodities on intermediate term drops is the correct strategy in such markets. Buying oil in the spring of 2009 produced quick and substantial profits. Prices in other parts of the energy sector haven't moved as fast as oil did in 2009 and this is giving investors another chance to profit in 2010.

Disclosure: Long ENER, WFR, natural gas.

NEXT: Conmodities Versus Stocks: A Decade Performance Review

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Market Sells Off as Dollar Rallies...As Usual

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The U.S. dollar is rallying today for a change. Yesterday DXY, the ETF that represents it, fell as low as 75.83, below key support at 76.00. As of this moment DXY is 76.73. There is strong resistance at 78.00. The key breakdown level is 78.33, which was the multi year low made during the dollar sell off in the late 1980s and early 1990s. For the last two years the U.S. dollar has usually illogically rallied the day after the Fed meeting. There is also danger that some statement will come out of today's G20 meeting about the desire for a stronger dollar. If this happens, the talk is unlikely to be met with any action.

Gold was strong first thing in the morning, but sank to below a $1000 as trading progressed. Silver was selling off even more and may have resolved its overbought condition. The key breakout level for gold is $1003.50. It has closed above this level eight days in a row. So far, it doesn't look like today will be the ninth.

A number of gold and silver stocks have gaps made approximately ten trading days ago. These gaps may have to be filled. Nova Gold (NG) filled this gap four days ago. It was trying to test it today. It is not unusual for a stock's price to fall somewhat below the bottom of a gap. This is frequently a very profitable buy point. Nova Gold has made a cup and looks like it is making a handle. Many gold and silver miners' charts have similar patterns.

About the only thing up in today's market is UNG. The Natural Gas report seemed bearish this morning. GAZ is down. Both UNG and GAZ should move together, but they don't. HZBBF, introduced in this blog 2 weeks ago now trades under another ticker symbol: HNUZF (special thanks to New York Investing member Joyce K. for first reporting the change). The new trading symbol can't be found on Big Charts yet. The symbol changed after a 5 to 1 reverse split. This split and the symbol change make no sense whatsoever. Both have made it much harder for the individual investor to trade natural gas. Perhaps that the idea.

NEXT: So Much for That Recovery

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Quadruple Witching Today; Market Update

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Once every three months there is a quadruple witching day. This is when market index futures, market index options, stock options, and stock futures all expire on the same day. Volatility can result, but that is more likely to take place a few days before. In general, prices will move to minimize the profits of the buyers of most outstanding options. Reversals of price movements can take place the following week or two and you need to watch out for these.

The trade-weighted U.S. dollar is the key to many market movements currently. It has been selling off as U.S. stocks have rallied since March. A dollar rally should cause market weakness at this point. This dollar/stock relationship is abnormal and would make much more sense for gold. The dollar/gold relationship has actually been much weaker than might be expected. The trade-weighted dollar ETF DXY traded as low as 76.01 yesterday. There is chart support at this level, since there is a sharp low at 75.89 that was made almost exactly one year ago from today. Any break of last years low could cause the dollar to test its all time low of 71.50. A short term rally might be in the offering first however because the dollar is well below its falling 50-day moving average and it tends to move back toward that line when it gets too extended.

A dollar rise could affect both stocks and gold. Spot gold closed at $1013.30 yesterday, its fifth day above the key breakout point of $1004. Gold has made three all time closing highs in the last 5 trading days and this is very bullish. It still needs to break the $1033 intraday high before a longer term rise to the $1200/$1300 area is possible. Gold stocks have been selling off the last two days and may be volatile for several more. Large drops should be considered buying opportunities. Look for gaps to be touched or filled. The most profitable buying is done either on major breakouts or at bottoms (buying after a long run up is a good way to lose your money). Gold is at the cusp of a major breakout.

The current bottoms in the inflation trade are in natural gas, food commodities and possibly long-term interest rates. Buying natural gas on any day with a big drop looks like a good strategy. Food commodities have been trading around their lows since last December, which is a long time. The chart for RJA is quite bullish and it looks like it wants to rally soon. I have started buying it. The food related ETFs are generally much less volatile than precious metal and energy ETFs, so you are not likely to make money as quickly from them. Long term interest rates bottomed last December,with the 10-year bond hitting 2%. The 10-year rate was around 4% in June. Since then, long-term rates have declined. TBT, the leveraged short ETF for bonds of 20+ years duration has sold off a third since June. I have started slowly accumulating it. Long-term rates may not have bottomed just yet, but they are likely to be going much, much higher in the future.

NEXT: IMF Selling Gold to Dampen Rally

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Gas Takes Gas

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Natural gas, the commodity, is having one of the most spectacular rallies of all times. It was up 11% yesterday alone. The near term contract hit a low of $2.40 and seems to be heading toward $4.00 (a low estimate of production costs). Even after the spectacular rally of the last few days, Natural gas futures are still in extreme contango. The October contract closed at 3.297 yesterday, while the February contract closed at 5.324. Actions of the commodities regulatory body, the CFTC, and its attempts to limit trading in the natural gas and oil markets have been responsible for natural gas's economically impossible behavior.

The CFTC drove oil ETF DXO out of business and is essentially trying to do the same with natural gas ETF UNG. UNG's price was artificially suppressed by actions of the CFTC and it has ceased to function according to any normal trading rules since this has taken place. An announcement from UNG that it would begin to issue shares on a restricted bases starting September 28th helped stoke yesterday's rally. By the beginning of the summer UNG owned 20% of futures contracts in the natural gas market and the big market players wanted the CFTC to crack down on it. Driving natural gas prices way down is also beneficial to the economy, so the government had a double motivation for interfering in the market.

An alternative ETF, GAZ, has been left alone by the CFTC and more closely reflects price action in the natural gas market. It's price movements are by no means ideal however. GAZ was up 4.5% yesterday, while UNG was up only 2.5%. Neither was up anywhere near 11%. The best performing Natural gas ETF was HZBBF (special thanks to New York Investing meetup member Kim L. for finding this obscure stock). It was up 19% yesterday. HZBBF seems to be the same as Canadian ETF HNU which represents two times natural gas (just as DXO did for oil), but it trades in the U.S. markets.

Natural gas is more subject to manipulation than other commodities because it is sold in regional markets. Unlike oil, it is hard to ship. Historically prices for natural gas are twice as much in Europe and Asia as in the U.S. Government attempts to control prices - and this is what the CFTC action represents - ALWAYS lead to shortages in the future. Natural gas will be no exception. Years from now we will look back and be amazed that natural gas was trading at $2.40 in 2009.

NEXT: Precious Metals Becoming More Precious

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Commodities, the Dollar and More Government Fantasy

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The Natural Gas storage report was released yesterday morning and storage was up 54 BCFs versus expectations of a rise of 51 BCFs. Within a few minutes the near term futures contract dropped at least to $2.705 (it may have gone lower). The about to expire contract closed at $2.843 down 6.7 cents from the previous day. The oil storage report was mixed on Wednesday and Nymex oil dropped below $70 a barrel subsequently, but has poked above $73 this morning. The oil/natural gas price ratio has gotten as high as 26 (if they were completely interchangeable, the ratio would be 6, it has averaged 8+ over the long term), well above the last peak of 22 in 1990. Oil is about to enter its seasonally weak period and natural gas its seasonally strong period. Regression to the mean should start taking place this fall.

The calendar should be creating a bullish environment for gold and silver as well. They tend to be strong between August and February. Gold was trading around $960 this morning on Comex and silver around $14.75. Gold has been hoovering just under the key breakout level of $1000 for some time now. Watch it closely. Once this breakout takes place, the short term target price is somewhere between $1200 and $1300.

Gold historically trades counter to the U.S. dollar, but they can become decoupled. In a global inflationary environment, decoupling will eventually occur. For the moment, the U.S. dollar is weak . For the last 6 days, the dollar has traded at least part of the day below its key breakdown level of 78.33. This is the second time so far that the dollar has stayed below this level for several days. When the stock market rallies, the dollar has been selling off and this has been going on since last March (it's not a normal pattern). If stocks rally further, it should kill the dollar. The dollar may tank regardless since the technical picture is weak. The powers that be will want to save it however. So we will have to wait to see what happens.

The stock rally has been explained as taking place because the U.S. economy is recovering. At least in some cases, valuations are as ridiculous as they were at the top of the tech bubble in 2000. Take a look at the Dow's PE for instance. This morning, the government released more 'good news' that seems to fall into the 'that can't possibly happen' category. Personal spending was up 0.2% last month, but incomes were unchanged. Even though incomes were unchanged, total wage income went up (during a time of increasing unemployment). Spending has supposedly been rising for the last three months, well ahead of income, even though the savings rate is 4.2%. Separate reports indicate that available consumer credit has been cut drastically. So even though U.S. consumers don't have the income and don't have access to credit, they are somehow spending more. I really think the U.S. government should release its statistical reports on stationary that has pictures of pigs flying in the background. That way the public would know how much credibility the numbers have.

NEXT: A Break in the Bull and China Stops Shopping

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Natural Gas Deconstructed

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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If you think logically, what is happening in the natural gas market will be difficult for you to understand. Markets actually always act rationally however, if you have all the facts available. When they don't seem to be doing so, it is because there is additional information that needs to be considered in order to fully understand what is taking place. In these circumstances you need to think about what could be taking place behind the scenes that could explain what is going on.

The natural gas storage report was released yesterday and it was bullish. Storage went up 52 BCFs and expectations were they would go up 55 BCFs. Natural gas has been declining for the last 11 days and is a heavily shorted market. So did it go up on bullish news? No, it sold off! The near term futures contract closed at $2.95. This in and of itself makes absolutely no sense and defies all rules in how markets operate. Even more surprising is that the cost of production for natural gas in the U.S. is somewhere around $4 to $5 depending on the source. It was already noted two months ago that 50% of U.S. gas wells had already been shut down because of low prices. Production should be close to collapse at this point.

The natural gas futures market is also in extreme contango (distant future prices much higher than the current futures contract), certainly the most extreme of any market in recent history. And the contango is getting even worse. The average price for natural gas futures between November and March is $5.32. Moreover, the oil/natural gas price ratio went over 24 yesterday. It peaked around 22 in 1990. This is also an historical extreme. When something gets way above (or below) its long term average, it invariably reverts back to the mean over time.

So who's making money off of this? This statement, which I found in an article for futures traders explains it all: "Traders on the future market are able to lock in the difference of over $2 per MMBTUs and cover their risk exposure by storing supplies until next winter." This is a particular boon to the large users of natural gas and these are the people profiting handsomely from the seemingly irrational behavior in the market. Furthermore, all of this has been made possible because of the CFTC (Commodity Futures Trading Commission), the government regulatory body which is supposed to be keeping the markets honest (and is doing as good a job as the proverbial fox guarding the hen house).

The CFTC announced in June they were planning on reigning in speculation in the market and have been holding hearings this summer. They specifically targeted the UNG ETF as a major source of speculation, even though it is a passive investment vehicle that only buys more natural gas futures in response to investor demand. UNG is also an investment vehicle used by small investors. Along with the SEC, which prevented UNG from issuing news shares for awhile and functioning as an ETF should, the CFTC has tried to cripple UNG's operations. This has allowed the big users of the commodity to drive near term natural gas prices to theoretically impossible levels - and make a killing. Like the SEC and its handling of $65 billion Ponzi Schemer Bernie Madoff (who was investigated several times over a many year period, but no dishonest behavior was ever found), the CFTC hears no evil and sees no evil when it comes to the big players.

As mentioned in yesterday's blog, there is an alternative to UNG. The ETN GAZ also represents the price of natural gas. While UNG lost 50 cents yesterday, GAZ was up 81 cents at one point, although it closed up only 16 cents. The trading volume on GAZ yesterday was enormous reaching almost 17 times the 200-day average. It looked like investors were dumping UNG to buy GAZ, which as an ETN is not affected by the CFTC's investigations. In theory, an ETF and ETN investing in the same commodity should move not only with the commodity, but by the same percentage amount. GAZ actually went up (and by a lot at one point) when natural gas futures were selling off and UNG was down. Just another indication that all rules of reality have temporarily been suspended in the natural gas market.

NEXT: U.S. Dollar, Stocks, Bernanke and Natural Gas

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Oil Up; Retail, Economy and Deficit Down

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Oil had a huge rally yesterday, going up more than 4% on a bullish storage report. It is still over $72 this morning. The oil/natural gas ratio is over 20 and is at the same high that it was in 1990 when it last peaked. There is about a 20 year cycle to this ratio and it should be falling for the next 10 years or so. We shall see. In the shorter term the natural gas storage report is out at 10:30 this morning (New York time). Natural gas can be bought either with the ETF UNG (which is being harassed by the regulatory authorities) or with the ETN GAZ. Natural gas futures are in extreme contango.

The stock market is trying to maintain its rally, which is supposedly dependent on the coming economic recovery. Sears Holdings, which released its Q2 earnings this morning, is going to be a drag on the rally today. The company lost 17 cents last quarter. Analysts expected a gain of 35 cents. Revenue fell 10.3% and was also below expectations. The company's credit rating, which was already in junk territory, was lowered further today by Moody's. Although the financial picture of this major retailer is nothing short of disastrous, the stock has risen 80% this year as of yesterday. At least it is down this morning. This company typifies the market rally - a huge rise in the midst of really bad fundamentals. Who would buy under such circumstances and why?

Weekly job claims also rose this morning to 576,000. This is still deep in recession territory. The rule of thumb for years has been weekly claims at or above 400,000 indicates the U.S. economy is in recession. A healthy economy has weekly claims around 300,000. The market had a good rally a couple of weeks ago when claims fell to 550,000. The "better numbers" were heralded in the press and claimed to be an indication of the waning recession. The press should have waited until claims fall and stay below 400,000 before publishing that story (but that would be responsible reporting, so of course that didn't happen). The press also never mentions that a large percentage of the U.S. workforce isn't eligible to collect unemployment, so when these people become unemployed they don't show up in the weekly claims figures.

The "good news" out this morning is that the Obama administration is predicting the federal budget deficit will be only $1.58 trillion this year. This is still almost 4 times bigger than the previous record budget deficit. Some contingency bailout funds for the big banks won't have to be spent (at least by September 30th of this year). Before you trust any numbers from the White House, consider that their argument for the current stimulus package was it would keep the unemployment rate at 8% or lower. Without it they claimed that unemployment could rise as high as 9%! So the stimulus package was passed early this year and so far unemployment has gotten as high as 9.5% - and that is with a lot of manipulation of the numbers to make them look better. You should assume that all the other numbers coming from the administration are just as reliable.

NEXT: Natural Gas Deconstructed

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Dollar Break Downs

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The trade-weighted dollar closed below its break down point of 78.33 yesterday. Intraday the dollar traded as low as 77.45 and it closed at 77.57. As has been the pattern for months now, everything else rallied as the dollar sold off. While stocks continued their long move up and the S&P 500 reached 1000 (a major resistance point), commodities were the star players in the rally. The CRB index, a broad basket of commodities, was up 3.48%. The ISM manufacturing Report supposedly set off the rally.

According to the media, the promise of economic revival was responsible for the big commodity rally. So what commodity is doing best recently? Sugar! - which was trading at a three year high yesterday. Sugar is not economically sensitive at all (people don't go into sugar eating frenzies when a recession ends), but is instead a strong mover in the early stages of inflation. The biggest winner on the day was natural gas (the chart is very bullish and UNG closed above the 50-day moving average), with the near term futures contract up 10%. Copper, which is perhaps the most economically sensitive of all commodities was up 4.4%. Copper, zinc, lead and nickle are all trading at 10-month highs. Aluminum is at an 8-month high.

The rallies in gold and silver, which are the commodities most sensitive to movements in the U.S. dollar, were somewhat muted. Gold was as high as $963 intraday. A report released yesterday stated that net sales of gold by central banks fell to 39 metric tons during the first half of this year. This was down 73% from last year. If total sales for the year come in under 140 metric tons (highly likely), they will be the lowest in decades. Central bank gold selling was a major factor keeping gold prices low in the 1980s and 1990s and it looks like it is now completely exhausted.

As for the ISM report PMI came in at 48.9 (under 50 means contraction). This was above expectations and a few components were up decently, including production, new orders, and prices paid -which is an indication of inflation. Inventories were the most negative component of the report and they have been contracting for 39 months so far. According to the ISM, six industries are now expanding - Nonmetallic Mineral Products; Paper Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; Transportation Equipment; and Chemical Products.

As I have stated many times in this blog, economic revival is going to mean a lot of inflation.
The dollar break down is an indication of this and the powers that be are going to have to do something soon to try to hold up the dollar. My guess is that this will happen when gold hits the $1000 area. This is the inflation marquee for the economically savvy. The Fed can deny that inflation exists all it wants, but if gold soars past 1000, only the naive and gullible will listen. Since there is usually a lot of buying pressure for gold in August, the next few weeks should be interesting.

NEXT: Gold Shining, Silver Lustrous

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Is It 1998 All Over Again?

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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In some ways the market reminds me of 1998. Energy prices had hit a low in the spring and rebounded, but then dropped off again in the summer. Stocks were deteriorating into the summer, but rallied strongly in July for no really good reason. Low prices caused energy production to be curtailed and this eventually led to higher prices for the next 10 years. That scenario is quite likely to repeat itself. Whether or not the stock market collapses in August as it did in 1998 remains to be seen. Is there a contemporary version of Long-Term Capital out there?

The future of oil and natural gas prices is clearly laid out in Schlumberger's earnings report today. Like Halliburton earlier this week, Schlumberger said a sharp drop in natural-gas drilling in North America caused an earnings decline. Drilling in the U.S. and Canada reached a five-year low in recent months and no rebound is likely to take place in the foreseeable future. The reduction in drilling activity has also effected oil and has done so globally. While energy companies have scaled back oilfield activities worldwide, the number of rigs operating in the U.S. oil patch is off roughly 55 percent from last summer. If you also consider that a number of large-scale multi-year projects to increase productivity from declining fields (many of the world's biggest producers) were cancelled when oil prices were at lows in the winter, the future becomes easy to predict. There will be shortages of oil in a year or two. The U.S. is particularly vulnerable to these shortages because our energy production is dropping precipitously. The authorities will be surprised when this happens and they will blame greedy speculators and scheming by foreign producers for causing energy prices to skyrocket when these shortages appear.

As for the stock market, it has been going up no matter what. There has been a 10-day rally as of yesterday - a long time for an uninterupted rally. There was a big move up yesterday on fairly heavy volume. The Nasdaq has also just closed a gap on the weekly charts made last September. On the daily charts the RSI is about to hit the max. According to the mainstream media all of this is taking place because of good earnings. Even a cursory analysis of the earnings reports indicates that earnings are actually in very bad shape however. The earnings news out last night was uniformly bearish, but the European markets still rallied and U.S. stock futures were up this morning. So, it looks like the market goes up no matter what. This only happens when large amounts of liquidity are being poured into the financial system by the authorities. Why are they doing this now is a good question.

Reports have started to appear about how the Credit Crisis is over and the U.S. housing market is recovering. The worst of the Credit Crisis is indeed over, but this however doesn't mean recovery is taking place, nor that the economy is getting better - it isn't. As for housing recovering, this really strains credulity. Once a bubble collapses, it needs to have a long and severe drop to correct the excesses and housing has not gotten anywhere near that point yet. British GDP statistics were out overnight and the economy there shrank 5.6 percent year over year, the biggest drop since quarterly records began. Yeah, things are getting better all right.

NEXT:

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Bernanke and Natural Gas

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Fed Chair Ben Bernanke was on Capital Hill for a second day of hearings yesterday. This time he appeared before the Senate. As he did in his testimony before the House, Bernanke spent a great deal of time assuring the Senate that the Fed could "exit" the policy moves of the Fed (including increasing its balance sheet by over a $1 trillion and massive increases in bank reserves) he has made before inflation pressures mount. This is like saying Pandora's Box can be closed again after it was opened. I do not know if our elected representatives burst into hysterical laughter or chuckled in an amused manner when Bernanke made these statements. This was not recorded in the hearing transcripts.

Once again Bernanke also emphasized that "monetary policy remains focused on fostering economic recovery". Apparently the focus isn't working. A number of senators complained that businesses in their states reported that banks were refusing to lend funds because of the crisis. Since nothing in U.S. government policy requires them to do so and the Fed and U.S. Treasury have made it possible for banks to earn riskless money, why should they lend? Bernanke at least admitted that reducing unemployment was "difficult and challenging". So his policies aren't working for anything that they are supposedly 'focused' on fixing. Maybe that's because they are focused on creating inflation instead.

In one of the great hypocritical moments in contemporary American politics, Senator Chris Dodd asked Bernanke, "When can the American people expect the recovery that they have funded?" Dodd himself publicly demanded the policies Bernanke has followed and supported the programs the Treasury has implemented. He also has a history of questionable dealings with Fannie Mae and was an enthusiastic supporter of government policies that led to the Credit Crisis. Now of course he's complaining the Fed and Treasury haven't cleaned up the mess he helped create. For his part, Bernanke said that Congress should try to reign in its spending. This of course would cause the economy to contract and make Bernanke's policies even less effective than they already are.

But the American public can rest assured that the Fed's no interest rate policy will continue no matter what. Bernanke made it clear that interest rates would not be raised any time soon. My guess is that the Fed is also pumping huge amounts of liquidity into the financial system currently (so there would be no complaints from congress about the stock market falling apart). This would explain both the stock rally and the weak dollar (trading just above its breakdown level for the third day in a row). Gold closed at $953 an ounce yesterday, a six-week high.

In presumably unrelated news, the weekly Natural Gas storage report was out this morning. Storage was up 66 bcfs versus an estimate for a rise of 67 bcfs. Stocks are 458 bcfs above the 5-year average. Natural gas futures fell 0.6% after the report was released.


NEXT: Is It 1998 All Over Again?

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21



This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Dollar Watch; Bad Earnings are Good; Natural Gas

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

While no one was watching, the U.S. dollar got awfully close to its break down point yesterday. The low for the trade-weighted dollar index ETF DXY was 78.58. A drop below 78.33 would be technically negative. Meanwhile, earnings season will be winding down soon and so far the picture is dismal overall and even worse for the financials. You would never know it though, from the mainstream media reports which have been glowing and gushing with good earnings news. Many commodities have started to rally again, with natural gas still being very under priced.

Almost without exception, the large financial companies have had dismal earnings in their banking business, which continues to erode. Trading and accounting gimmicks have made the top line numbers look rosy however. Massive money gifts from the federal government don't hurt either. Imagine if someone deposited $45 billion into your bank account. You would look a lot more financially sound as well. Wells Fargo is out with earnings this morning, with quarterly profit up 47%! Looks good on the surface, although acquiring the giant albatross Wachovia was responsible for much of this. Within the report was the statement, "the bank expects credit losses and nonperforming assets to increase". It is also generally acknowledged that Wells Fargo needs to raise more capital. Even the 'see no evil' government stress test found that it had a $13.7 billion capital shortfall. But hey, earnings are great, except in the bank's banking business of course. For some reason, I think this doesn't make any sense.

Natural gas has been getting a lot of press in the last few days. UNG the natural gas ETF is awaiting approval from the SEC to issue more shares. They already made 300 million additional shares available on May 6th. The CFTC is trying to limit UNG's role in the natural gas market based on excessive speculation driving up prices even though natural gas is trading at a multi-year low. Seems to be rather contradictory. Media reports are filled with commentary from traders and 'experts' about how you should stay away from this market. They rarely if ever point out that natural gas tends to hit some type of low in July. I have yet to see any discussion of the production costs for natural gas and whether the price has fallen below this level. There is every reason to believe this is the case. The number of active U.S. rigs pumping natural gas has fallen to a seven year low of 665 from a peak of 1606 last September 12th. When the market cost gets too close to the production cost for a commodity, production shuts down and this is clearly happening with natural gas.

The dollar will either bounce soon or fall below its break down point and the powers that be will try to then save it. Note that once again that the stock market has been rallying when the dollar has been dropping. Will a government induced dollar rally cause the opposite? We will have to wait and see.

NEXT: Bernanke and Natural Gas

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Energy, Commodities and the U.S. Dollar

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Light sweet crude fell below 60 this morning in European trading. It has traded as low as 58.86 pre market. Brent seems to be trading higher, which is unusual since it is a poorer quality oil . This type of price inversion was common in February when oil hit its bottom. While a number of commentators claim 60 is strong support for light sweet crude, there is a Fibonacci retracement around 58 and this is a place where the price could hold. We will have to see. There has been too much selling too fast in the oil market and it is has been based on attempts at government manipulation of the market through the CFTC, not because there is an oversupply of oil as the press continually and inaccurately reports (oil in U.S. storage is actually dropping at a precipitous rate).

While the CFTC has regulatory power over all commodity trading in the U.S., it specifically singled out the energy markets for potential trading restrictions. Even though the alleged reason was speculators were causing high prices, it is planning on investigating the natural gas market even though natural gas is trading at a multi-year low (obviously those speculators are incompetent). The real motivation behind the CFTC's action is that the EFT UNG owns 20% of the futures contracts in the market and this is making the big Wall Street players uncomfortable. Issuance of new shares of UNG were suspended on July 7th because regulatory approval wasn't forthcoming. Without the ability to issue new shares with increasing investor demand, an ETF turns into a de facto closed-end fund. Expect this to eventually happen to every ETF. The vested interests are not going to let small investors hone in on their turf.

Every commodity has had a big sell off during July trading and it can all be traced to the CFTC. Fundamentals have nothing to do with it in the case of oil, gold and silver, so you should assume a reversal back to previous values will take place once this is over. While commodities usually trade inversely to the dollar, there has been no dollar rally. The trade-weighted dollar bottomed in early June at 78.40 and has only gotten about 3 cents above the level at its best since then. It closed under 80 again yesterday. Even this morning though the media was reporting 'oil and gold selling off on higher dollar'. They have reported this same story over and over again. One of the news reports today didn't even have any price quote for the dollar, a violation of basic reporting rules. They know their whole story falls apart if people actually have the facts in front of them.

As for the CFTC, will it be investigating manipulation of the silver market by the two big banks with huge short positions? They have been made aware of this, but like the SEC with Bernie Madoff the CFTC is a hear no evil, see no evil operation when it comes to large Wall Street interests manipulating the commodity markets. That is as long as that manipulation supports the government's desire to help prop up the dollar and the economy with lower gold, silver, and oil prices. Short term manipulation eventually leads to long term problems however. Commodity producers just stop producing when the price gets too low and then shortages result if the price is held down too long. Natural gas is probably priced around that level right now.

NEXT: The Non-Stimulating Economic Stimulus Plan

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Commodity Shortage Disaster in the Making

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The government is planning on doing something about those pesky speculators that keep driving up the price of commodities. Even though this has been tried thousands of times previously and has NEVER worked - and even though we have the example of the complete economic collapse in Eastern Europe that this behavior caused - and even though last falls ban on short selling of financial stocks didn't prevent their prices from falling off a cliff - this will not discourage the U.S government from creating a new mess in the commodities markets. It is true that some people never learn and it appears that many of them get elected to political office or work as regulators.

The CFTC (Commodity Futures Trading Commission) announced yesterday that it will hold hearings this month and next to explore the need for government-imposed restrictions on speculative trading in oil, gas and other energy markets (even though natural gas is at a multi-year low and oil is 60% off the high it reached one year ago). The CFTC can also set restrictions for other commodities as well and can change margin requirements for trading (and this is also being bandied about). ETFs, which are used as investing vehicles by small investors, were especially singled out for restrictions.

It has been pointed out that insiders like the floor traders and commodity trading firms in Chicago are unlikely to be impacted by the CFTC proposals that are supposed to be protecting the public and not the industry. For those not paying attention, commodity prices nose-dived before this news was released, not after. Probably just an amazing coincidence and not the insiders getting the word before the public (if you believe that, I have a bridge in Brooklyn that I'd like to sell you). It is quite clear that if anyone gets disadvantaged from changes in CFTC policy, it is meant to be the small investor who relies on ETFs and not the big players.

Political pressure is being put on the CFTC by senators Bernie Sanders, who is a Socialist even though the media describes him as an independent and Bryon Dorgan, the biggest economic ignoramus in congress -and that's really saying something, and congressman Bart Stupak from Michigan who wants lower oil and gas prices to protect the state's auto industry (or what's left of it). Attempts to control oil and gas prices were last tried in the U.S. in the early 1970s when Nixon imposed wage and price controls. Oil producer profits were cut to such an extent that U.S. oil production dropped substantially. The U.S. which had been self-sufficient in oil up to 1969, then became extremely dependent on foreign sources. OPEC was then blamed for the shortages and big price hikes that followed, but it was U.S. policy that made it all possible. Did the government blame itself? Of course not! It was those rapacious speculators and evil foreign forces that made it happen. Historical analysis of past inflations shows very clearly that without exception speculators and foreigners are blamed for inflationary price rises that originate with government printing too much currency and then attempting to limit the mess it engendered with price controls. This scenario has played out hundreds, if not thousands, of times. This time will be no different.

The forces of economics can no more be banned by government action than gravity can be outlawed. So what is likely to happen? Since commodity trading is not limited to the U.S, but large active markets exist in London, Tokyo, Hong Kong, Singapore and up and coming Dubai, expect trading to increasingly move to those places. Dubai in fact wants to capture more commodity trading business. When U.S. policy hands this to them on a silver platter, except to hear how those scheming Arabs stole this activity from the U.S. ETFs also exist in the English, Canadian and Australian markets (and some others), that American small investors can get access to. Investment money will simply move out of the U.S. - at least until the government tries to impose capital flow restrictions to prevent this (expect this at some point in the future).

If prices of oil are held down temporarily (and it will only be temporarily) by CFTC restrictions or other government action (yes, this will be coming) you can expect shortages in gasoline, heating oil and diesel. There were long gas lines in the 1970s for good reason. While people had to wait a long time and sometimes could only gets a limited quantity of gas, they still got some gas. Heating oil was in danger of running out in certain places - like Minnesota - as well. Things could get much worse this time, since shortages are the only thing you can rely on from price controls. Even worse, prices always wind up higher than they would have been if the price controls had never been imposed in the first place.

One more piece of advice. In case the U.S. government does decide to outlaw gravity and some politician tells you it's safe to jump off the capital building. Make sure you reply, "You first".

NEXT: Government Price Controls in the Making

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

First Four Trading Days Review

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The message from the markets has been quite clear in the last four trading days. The big money is negative and taking its money out. All indices had significant drops today, leaving the first of the quarter indicator highly negative. Technicals deteriorated even further. About the only thing that was up today was the U.S. dollar, although bonds rallied after today's auction was over. The dollar and bonds should be tanking big time. Oil went down even more and the reason for its decline, natural gas and other commodities has now become clear.

The Dow closed down 161 points today, even further below its 50-day and 200-day moving averages. The 50-day is below the 200-day and both are declining, a typical bear pattern. Nasdaq, the strongest of the averages pierced its 50-day today, closing down 41 points. The S&P fell 18 points and broke and closed below its 200-day today after breaking below its 50-day last Thursday. The Russell 2000 fell 10 points and managed to hold just above its 200-day. All and all, a pretty ugly situation.

Light Sweet crude closed at 62.93, but was even lower during the day. Oil has dropped 12% since last Wednesday. While the media is claiming its because it was overpriced and the economy is bad, this is not the reason (as usual, if the press reports it, you should first assume the explanation is wrong). What has happened is CFTC (Commodity Futures Trading Commission) says it wants to crack down on rampant speculation in the energy markets, by imposing position limits for commodities of finite supply (which is every commodity). The commission is planning hearings and is also considering raising margin requirements. One of the major implications of this proposal is that ETFs will have quotas imposed on them. The big money players presumably had the news before the public and shorted into it. Will the CTFC investigate this? Don't hold your breath. The people who are supposed to be stopped from speculating are the small investors like yourself, not the big insiders.

A quote from the CFTC news, "The government's use of free markets via auctions to help find prices for hard-to-sell assets in the financial sector shows how adept supply and demand are at setting values. But when it comes to commodities that people, industries, economies and nations depend on, the susceptibility of free markets to manipulation can prove dangerous". Free markets are indeed dangerous to a government that doesn't like the prices they set because it continually overinflates its currency. So we must save the free markets by destroying them! Huh???

It is interesting that this attempt to control rampant speculation in oil is taking place one year exactly after oil peaked at $147 a barrel and while it is now trading in the 60s. Something doesn't seem to make sense with this picture. This move is effectively an attempt to create price controls on commodities (by a government that is constantly telling us that there is deflation and a big risk of prices falling). The only things price controls are effective in creating is big shortages and black markets. They ultimately cause prices to go higher than they would have. When you can't get any gas for your car two years from now you'll at least know why.

NEXT: Commodity Shortage Disaster in the Making

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.