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03142011 March 14, 2011

Posted by easterntiger in economy, financial, gold, markets, oil, silver, stocks.
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Weather Report  03142011

Current Positions  (Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) – exit ; F(bonds) up to 40%  G(money market) – remainder

Weekly Momentum Indicator (WMI***) – last 4 weeks, thru 3/11   +26.55, –7.89, –2.84,  -16.53

(3wks ago/2wks ago/1 wk ago/last week)

A mix  of political instability, particularly in the Middle East, combined with calamity in natural disasters have finally stalled the best of what the central bank puppet masters could accomplish, in their dismissal of the stark reality of a number of unfavorable, global underlying fundamentals.

I deliberately delayed my usual end of month posting schedule to allow several events to play themselves out.  At that time, I saw one of two scenarios.  At this point, the scenario is clear and the alternative does not matter.
Dow 12,000 and S&P 1300 have been ‘in play’ since mid-January. In spite of care and feeding of over $2.5 billion dollars per day from the Fed,  it appears that this battle is in danger of being lost due to factors beyond the Fed’s control.

It is appearing that the highs so far for the year of February 18th and March 3rd will represent points that are unlikely to be reached anytime in the near term.  Several measures, already extended further than normal,  have now crossed from barely positive to moderately negative.  One particular measure of ‘smart money’ activity that I use  now tells me that those who continue to ‘buy the dips’ are at much greater risk now than they have since about the time of the mini-crash in May of last year.
It was exactly two-years ago, when the Federal Reserve began its hallucinogenic “Quantitative Easing” (QE) experiment, which began with cash injections of $1.45-billion into mortgage backed securities, (MBS’s), and an extra $300-billion in Treasury bonds, over a 12-month period. The Fed’s QE-1 experiment was designed to stop the horrific slide in the stock market, which had just been bludgeoned by the worst bear market since the 1930’s.
And so it was before last week that Congress agreed to $4 billion in spending cuts that averted a government shutdown for all of two weeks. Now what? The next deadline for a budget agreement to avoid a government shutdown will now come up March 18.  The unsettling continues.  Meanwhile, the expiration of QE2 is rapidly approaching, bringing about it’s own set of uncertainties, and impacts to date.

However unintentional, much of the spillover from the Fed’s $600-billion QE-2 scheme started seeping into the commodity markets, pushing global food prices to all-time highs, and increasing the price of unleaded gasoline in New York by $1.25 /gallon, over the ensuing six months following since it’s initiation. The Continuous Commodity Index (CCI) soared to all-time highs, led by explosive rallies in cotton, cattle, copper, corn, sugar, silver and gold. In Shanghai, the price of steel, iron ore, and rubber jumped into the stratosphere. Most recently, North Sea Brent crude oil, the benchmark used for pricing two-thirds of the world’s oil, jumped sharply higher towards $120 /barrel, and dramatically increased energy and transportation costs around the world. Unleaded gasoline prices jumped by 60-cents a gallon in the last two-weeks alone. The latter is an unfortunate combination of reaction to Fed-feeding, overreaction to Mid-east political tensions, temporary supply issues and pure speculation by traders.

Crude oil and gasoline have been on a tear for the past two weeks! It’s not new. On February 15, Crude Oil bottomed at less than $84/barrel. Even as equity markets the world over have bounced sharply up and down, crude oil and precious metals soared to new multi-year highs. Crude oil has tested $105/barrel for the first time since October 2008.  Silver tested $36.00/ounce for the first time in 31 years. And Gold soared to a new all-time high above $1440/ounce a little over a week ago. They still could go higher before showing significant signs of weakness later.  The “Asset Inflation Express” keeps roaring onwards, and the uncertainty about the U.S. deficit being brought under control simply continues to fuel this engine of speculation.  But on the day of the favorable payroll reports, the DJIA gave back nearly all of its 191-point gain from the prior day, before a late-day rally cut those losses in half.

“A long period of high oil prices would sink the world’s economies and plunge the fragile global economy back into recession,”said Nobuo Tanaka, chief of the International Energy Agency, a policy adviser to Western countries. “If $100 continues through 2011, this will create the same level of crisis as in 2008,” Mr. Tanaka added. Ironically, the part of the world where investors normally expect to see rising stock markets, due to the windfall from sharply higher oil prices, – the Arab oil kingdoms, just the opposite is happening. Since the start of the year, Saudi Arabia’s Tadawul share index has fallen -18%, even though the kingdom’s main revenue earner – crude oil – has risen sharply higher in price.

The soaring costs of food is raising havoc across North Africa, where half the population earns about $2 per day or less, and more than half of the household budget is spent of the daily staples of life. The World Bank’s Food Price Watch reported that record high prices for food, is increasing the number of people in extreme poverty (under $1.25 a day), which is associated with higher malnutrition, as poorer people eat less and are forced to buy food that is both less expensive and less nutritious. Deutsche Bank’s agricultural commodity index, including corn, cattle, soybeans, wheat, coffee, cocoa, cotton, and sugar, is +40% higher than a year ago.

The 3 month topping of interest rates appears to be complete.  I am moving a heavier share into the F fund, in anticipation of lower yields, which would correspond to a weak equity market.  Higher yields are often used to attract the capital that is attracted otherwise to the equity markets when conditions are favorable there.  Without that attraction to equities, lower yields are a natural decompression against that competition.

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