Looking beneath the Misinformation and Hype and Spin at Key Fundamentals and Technical Signals (“Deepcasting”) is essential for Profit and Protection.
But actually acting as a contrarian in the face of the weight of highly publicized opinion, is not always easy, but is nonetheless necessary. Case in point, a few weeks ago we recommended putting on a long Energy play based on our somewhat contrarian forecast that Crude and the Energy complex would Rally, short-term. And we forecast they would Rally notwithstanding the deluge of data which told us that the three Economic Growth Engines, the USA, Eurozone, and China, are slowing. And Rally they did and when the Signals said take profit, we recommended liquidation at about a 30% profit in 54 days.
In recommending putting on the position we reasoned that slowing Economies do not mean that Demand for Crude necessarily decreases, just that it increases at a slower rate. Couple that with the Real Inflation data (e.g. threshold Hyperinflationary at 9.3% in the U.S. per shadowstats.com, and notwithstanding Economic Growth slowing), and one realizes that Fiat Currencies around the world are losing Purchase Power vis-à-vis Real Assets like Commodities. In other words, Prices of Real Assets are inflating rapidly.
Indeed, perhaps the most important fundamental number, the Continuous Commodities Price Index, has increased 15%/yr over the past decade, notwithstanding the Economic slowdown! Consider Adrian Douglas’ point:
“There are frequent claims that the U.S. economy has entered a period of “deflation.” These claims are totally unfounded and are false. Deflation can only be a persistent state of general price decline. In fact, in examining price trends, the U.S. is experiencing shocking price increases of over 15% per annum. To illustrate this, …the Continuous Commodities Index, CCI over the past ten years.”
“Deflation – Nowhere to be Seen”
Adrian Douglas, Market Force Analysis, 7/7/12
Consider, for example, Crude Oil Price determinants. Perhaps the most important is Monetary and Credit Inflation (courtesy of the Central Banks) which continues to drive Price Inflation of Essential Real Assets notwithstanding stagnating economies. While this is the most important factor determining the Crude Price (and the price of other Real Assets) there are four other factors which signal Crude Price moves.
- The Fear Gauge (aka Location Spreads): to the extent that Fear is relatively high (e.g. over the prospects of a wider Mideast War) the premium for Brent over WTI will widen (Brent mainly supplies Europe, WTI mainly the US).
- Processing Spreads: i.e. the spread between Crude Prices and the prices of oil products. Processing spreads reflect demand for oil products versus the capacity of refineries to produce. A high processing spread (such as in recent months) signals increasing product demand, notwithstanding economic stagnation.
- Forward Prices: to the extent that futures prices are higher than spot prices that usually means the “market” “expects” high prices.
- Open Interest (aka liquidity): the total number of long and short positions in the markets. Relatively large open interest typically indicates large speculative interest in the market.
While these five factors reflect the main determinants of Crude Prices, certain of them can, coupled with appropriate modifications, and considering other factors, be used to determine prices in the Energy (and other Real Assets) sector(s) in general (see Note 2 below).
Of course, in the broader markets other factors need to be accounted for.
Consider a few examples:
- Equities typically rise in the 24 hours before a Fed meeting.
- Historically, there is a much higher probability of problems in the Banking sector in the month of September than other months.
- Recent Dow Theory confirms we are in a Primary Bear Market. The Trannies have not confirmed the Dow’s recent surge up. Moreover, a confirmed and reconfirmed Hindenburg Omen indicates the probability of a market crash in the next six months is substantial – at least one in four.
And, realistically, were it not for Overt (and Covert) QE, and the prospect/hope for more, it is highly likely the Equities Markets would Crash, sooner rather than later.
We do not have a healthy Economy or Markets when Equities performance is reliant mainly on QE, or the prospect of it.
- As another example, consider the $US in light of Interventions (of which “Jawboning” is one) such as the Draghi comment, “The ECB will do whatever it takes… to support the Eurozone and Euro,” consequently, the $US, and long-dated U.S. Notes and Bonds took a tumble.
But short of actually Implementing a Solution to its woes (highly unlikely) it is unlikely Jawboning is going to drive the Euro or Eurozone debt much higher (i.e. drive yields lower).
Thus the $US is still(!) the least dirty shirt in the Fiat Currency Laundry; thus it remains strong vis-à-vis the Euro, for now.
Ongoing Euro Weakness (mid-term), due to Money printing (to pile more Debt on already unpayable Debt) will allow the US to avoid somewhat, for a very few months more, the consequences of its own Fiscal Cliff and over-indebtedness.
But ongoing Money Printing and Easy Credit also creates Price Inflation. Indeed, Prices of Essential Commodities that get used up do not lie about Inflation, over the mid and long term and they are already rising as the CCI reflects!
Longer term, the prospects for the $US look bleak because China is preparing for the Yuan to displace the $US as the World’s Reserve Currency by entering into bilateral Currency Deals with a variety of (soon to be former) U.S. Financial Allies, such as Japan and Australia. Longer term this will have catastrophic consequences for the U.S. Dollar, U.S. Economy, and Western Alliance by causing the $US to lose its Reserve Currency status. Understandably, the Chinese do not like the ongoing degradation of the Purchasing Power of the $US (i.e. Inflation) occasioned by the Fed’s excessive Money Printing and Easy Credit Policies. Thank you Mr. Private, for-Profit Fed (sarcasm intended!). (see Note 3 below)
In sum, the foregoing can be useful for signaling probabilities but not certainties.
Finally consider recent Signals regarding Gold and Silver. The Signals below are Bullish. But this does not preclude Gold and Silver being taken down a bit by a Cartel* (see Note 1 below) attack with Gold dropping perhaps to $1525 and Silver to $25-26ish; however, there is an increasingly robust floor under these Precious Metal Prices because:
- Cartel Takedowns of The Gold and Silver Price are regularly getting bought by Heavyweight Buyers (mainly from Asia) in the $1570s and above level for Gold and at the $26 to $27ish level for Silver. China and other Asian Buyers apparently have put a floor under this market (but N.B. this would not prevent The Cartel from temporarily running the Precious Metals down to say $1530s for Gold and $25 for Silver).
- Another Dose of QE is likely sometime this year – a Dose that would surely launch Gold and Silver Prices upward.
- For the first time in a long time, Swaps Dealers (Big Banks and Large Traders) are net long the Gold Markets. They have Strong Hands.
- The Cartel has increasingly been unable to sustain its Takedowns for very long.
- The month of August has historically been a good one for Miners’ share appreciation.
Appropriate weighting of these and related Fundamentals and Technical Signals allows one to generate a high probability forecast for Gold and Silver Moves.
Focusing on the foregoing, and tuning out the Misinformation, Hype, and Spin leads to far better Investing and Trading Outcomes.
August 2, 2012