Getting an early start on my post for tomorrow; I’ll actually be posting this sometime around 11:30pm Thursday night. So I’ll have to make some pretty soft predictions on the day to come.
First I’d like to thank everyone for the kind words and for coming to my site. Today marked the first time I have gotten over 400 visitors in one day since my record day back in early 2009 when I posted my Eye Wall article, when I was receiving close to 1500 visitors a day. It is very encouraging and is all the reason I need to keep posting. I was content to write to 40 or 50 a day, but having larger numbers of people reading helps keep me motivated.
MARKETS:
DOW closed down about 36 on the day after actually breaking through the 12k level for a mere 2 or 3 minutes during trading. At 2:00pm there was a shift in sentiment and the bulls rushed in to “buy on the dip”. This could be seen as a very bullish event if you are a chart watcher (which I am). We dipped below 12K (important barrier number) and immediately the trading programs jumped in and started to buy. This is significant to note as a hard break point on the markets. Any downward movement on the DOW will have to break 12k to get any traction.
At this point we are early in futures trading and there seems to be very little volatility at the moment. Libya is the big news item right now and the markets have absorbed the reality that Libyan oil shipments for the foreseeable future are off the market(like 75% of production). This is not a huge deal in the grand scheme. But the action last night around 2:00am to about 4:30am should shed a very clear light on the connection to Oil prices and the markets. At about 2am Dated Brent Oil surged past 120 a barrel and was quickly followed by WTI at 4am as it rose over 104 a barrel. Conversely the DOW plunged to nearly 100 points down on the futures markets and gold/silver surged as well.
I posted to Facebook all concerned at 4:30am about how fast things were swirling out of control. I went to bed at 6:00am and woke up at 1:00pm and it was like nothing happened. The futures markets can really mess with you when you are up all night. I forget how quickly things can change when the market opens at 9:30am. BUT SOMETHING happened last night that spooked the night investors. You had to see it happen in real time, the speed and depth of the movement was scary. WTI opened and within minutes was up over 9 bucks and RYOB gasoline futures were almost at 290. By the time I woke up, they had all settled back down to where they started the night.
What this should tell you is that the market is sitting on a hair trigger and the slightest scare from the energy producers is going to cause an immediate reaction.
Right now markets seem calm and I will stick to my original prediction that we go into this weekend on a strong note. I think the markets might actually pull out a green day tomorrow, but I will also stand by my assertion that we are at the end of the Bull Run and events will start to spiral even faster next week. Unemployment numbers are getting worse each week and the housing numbers continue to weaken. Combine all the negative economic numbers with Oil pushing past the 100 dollar level and you have the makings of “profit taking” on the equities markets.
12K will be breached to the downside going into next week in my opinion. And from there we will quickly retrace back to 11200 and pause. 11200 is another barrier number and it fought hard on that number the last time on the way down and more recently on the way up.
And just to be as CLEAR AS MUD. There is no support ABOVE 12K at this point. Should the markets get a head of steam behind them and the Middle East problems are laid to rest, we could see a HUGE move to the upside. Again I am not supporting this outcome as I think the Middle East situation is going to get worse not better. We have two MAJOR clouds hanging over the markets right now.
One is the Internet movement among the youth of Saudi Arabia. They are planning a “day of rage” for the first week of March.
Two is the showdown with House Republican’s and the President on the budget.
Either one is a potential game changer, but together it should be enough to freeze the Bulls out and start a short term selloff to the levels I indicated above.
ENERGY/COMMODITIES:
Looks like oil has settled down a little bit as I noted above; Libyan oil production has been taken out of the world markets and as expected Saudi Arabia has stepped in and said they will backstop any production loss from Libya and Egypt. This should ABSOLUTELY UNDERSCORE the importance of Saudi Arabia to the economic world.
Now personally I doubt that Saudi can actually backstop the loss of Libya and Egypt as I am of the belief that KSA (I will use that from now on when talking about the Kingdom of Saudi Arabia) is at or near their peak production capacity. But for now all it takes is a little pump rattling from KSA and the world energy markets will jump. That is why I am watching these protests in KSA so incredibly close. Even though the US of A imports very little oil from the Middle East anymore, it does not matter. If there is even a 5 or 10% loss of production from KSA, it would mean an immediate jump in global oil prices to the 150 to 200 dollar a barrel range. Just one major pipeline sabotage or refinery blocked by protesters and you could see that kind of loss.
The world is operating on a cushion of about 2 to 4 million barrels of spare capacity at any given time. That is why Libya/Egypt is not that incredibly important at this point (from a strictly energy point of view). The combined loss to markets is less than 1.5 million barrels a day. But the daily output of KSA is somewhere around 7.5 to 9 million barrels a day and 10% of that is around 1 to 1.5 million barrels a day. Once the cushion in the markets gets below 1.5 to 2 million barrels a day is when you start to see parabolic price increases like we saw in the run-up from 2007 to the top in early 2008 at $146 a barrel.
But for now we are sitting below the incredibly important physiological barrier of 100 a barrel for WTI(West Texas Intermediate).
And since I am going to be doing these updates more frequently, I think it’s important to understand the jargon that the markets throw around. West Texas Intermediate is a standard used to grade oil on the markets. WTI is a Sweet and Light grade of oil, meaning that it has very little Sulfur (sweet versus sour, meaning it burns cleaner and needs less refining) and that it is LIGHT. The later is the most important distinction. Light Crude is highly desirable and is why all oil is NOT CREATED EQUAL!!! Light Sweet crude is the mother’s milk of the oil industry as it is easy to refine and is very lucrative as you get the absolute most amount of distillates from refining. Oil runs from LIGHT/SWEET to SOUR/HEAVY and everything in between. On the Sour/Heavy side is Venezuelan oil. It is very hard to refine and is very messy and polluting. You don’t get the output you would get from Light Crude. So you have to refine MORE and the costs go UP the heavier and sourer the oil gets. And on the very worst end of the scale is the Heavy Tar sands of Alberta Canada (or their cousins in Colorado or Venezuela). They call it oil, but it is nothing of the sort. It is not even liquid. The amount of refining and excavating that this stuff needs to get it to market is incredibly energy intensive.
So I hope that helps a little in understanding how the energy markets view crude oil. Not all crude is created equal and is why WTI is the standard that all oil is held against.
So anyways, WTI is sitting at 97 a barrel and RYOB gasoline futures (just another standard like WTI) are sitting just above 273 a gallon. This will pencil out to about 3.65 a gallon in Ohio in a matter of days. We are already seeing 3.49 at places in the Toledo market.
I will touch lightly on the commodities markets in general at the end of my update in the conclusions section. There is some rather good tin foil brewing on the inter-webs regarding Ben Bernanke and QE2.
THE US DOLLAR:
Haven’t commented on the ole Green Back in quite awhile; but we are BACK TO THE ONE YEAR BREAK OUT NUMBER YET AGAIN!! We are ready to break under 77 on the US Dollar Index chart and have not broken this level since the bottom was reached in 2008(around the 70.85 level). We have twice come to this point and both times we reversed and saw a strong recovery, which in turn drove down oil prices and commodities prices. This is not talked about enough, but the correlation between a WEAK US DOLLAR and rising commodities prices is absolute. As the dollar weakens, it will take more US Dollars to buy a set amount of commodities, be it Silver/Gold or Grain/Rice.
The fall in the dollar does not explain the 100% price increases we have seen over the last year, but it is a contributing factor. If the US Dollar breaches the 76 level over the coming days/weeks it will be yet another incredibly bearish sign post.
So many things are retracing their path from the early parts of 2008 and late 2007, only the pace is exponentially faster this time. From late 2007 into the summer of 2008, saw the near collapse of the US Dollar as it plunged to a record low of 70.85(give or take a penny). This fuelled an already red hot oil price to a record 146 a barrel. It drove food prices and electric/NG prices up and set the stage for the 2008 banking/economic collapse.
The same confluence of events is coming into focus; the dollar is falling (currently at 77.10 or so) which is feeding into energy price increases (along with naturally occurring fear based price increases). Commodities across the board are rising along with gasoline prices(currently nearing 3.50 a gallon in Ohio) and this will eventually sap a large portion of consumer discretionary spending, just as business’ were starting to stretch themselves out a little bit in the hopes of a recovery.
Oil prices and the Dollar are absolutely linked at the hip and they both have their own gravity. Sometimes it is the US Dollar pushing on Oil and sometimes visa versa. But right now they are both under assault and I think they are both individually falling/rising for different reasons. The dollar is falling as there is growing resentment among our creditor nations (China/Japan/Etc) that we continue to rack up Trillion Dollar Plus Budget deficits and oil is rising out of fear of KSA falling into the hands of the Sunni majority and that they will likely not be amenable to western pressure to pump at all costs to hold down oil prices.
CONCLUSION:
Tomorrow is likely to be another quiet day barring any unrest in the Middle East or elsewhere. We will likely see the DOW down out of the gates and quickly rebound as we failed to take out 12K. This will set up program trading to come in and buy the dip and drive markets up. I predict a modest 75 point gain on the DOW. Oil is likely to stay put and gold/silver/commodities will continue its selloff as this is the undercurrent to be watching in the coming days. And is where I will leave this post, with a bit of Tin Foil I’ve been hearing about from places like Zerohedge and George Ure.
I give it credence as it ties in nicely with a macro prediction I have stood firm with, even as it has made me look incredibly foolish for over 2 years now. It is the basis of my continuing belief that a final deflationary collapse is in the works and it will come at the hands of the Federal Reserve itself.
The tin foil goes as THUS.. Bernanke instituted QE2 (2nd round of Monetizing the Federal Debt) around 5 or 6 months ago and this has had the very foreseeable (and probably incredibly disappointing to Ben) result of driving up global commodities prices. The Fed was hoping beyond hope to spur new loans and to prop up the US Housing market. Instead the money has bled into the very real area of global food commodities. This has had the effect of driving numerous countries into a state of Civil War and this movement of revolution is now standing on the door step of KSA (Saudi Arabia).
The Fed and the government understand what the loss of KSA to the United States means and they will not let that happen without a major fight (economic). This means that the US Fed is going to have to relent on QE2 and they will start to pull liquidity from the system in an attempt to drive down the price of global food and energy by starving investors of liquidity with which they are betting on global food/energy indexes.
If this happens it will start a chain reaction that will cause everything to drop in price in unison and it will be quick and severe. They will be forced to drive up interest rates in the United States to help draw in foreign money to cover the US Budget deficit and this will mean another round of housing price decreases and a new slate of foreclosures.
Watch the Feds language over the coming weeks to see if this has any merit. They will have to telegraph this move at least a little bit. They cannot raise interest rates without any warning, but even a warning may be enough to cause a global selloff in commodities and is the reason I feel that silver and gold will fall quite hard in the coming weeks/months….. We’ll see…
Have a Good Friday.
Robert
Thanks for the update. Always enjoy reading your insight. I am worried about stagflation.
You can only stockpile so much. Now trying to figure out other ways to cope with it.
E
Good update, they remind me of the 2006-2008 days at LATOC. Thanks for explaining the West Texas Intermediate.
Thanks for your insights. I disagree that the US government will reduce liquidity though as they cannot do so without further collapsing the housing market or denying themselves of operating funds. I think the USG will continue to monetize debt and the securities markets will therefore continue to rise, at least in nominal (not inflation adjusted) terms. Prices of some discretionary items (like big screen TVs and so forth) will continue to fall though as supply far exceeds demand.
That is the problem though Zac. With all this liquidity coming out of the US and into global commodities it is forcing Ben’s hand. No longer is he playing chicken with China and their appetite for US Debt, he is now playing chicken with the Middle East and probably Africa next. The money is chasing global food prices up to the moon and this cannot continue, period.
KSA is on the brink of an Egyptian style revolt and this is true of dozens of countries vitally important to the US. We are literally looking at a choice between American’s feeling some severe economic austerity and American’s loosing their access to foreign energy producers and the realization of a global economic meltdown in a matter of months not years..
Ben is going to be forced to relent and they will have to raise money to close the budget gap the old fashioned way. RAISING RATES and likely destroying what is left of the housing market.
7;40 AM Think the “good news” in Libbyville is going to be played up this coming week, to prop the dollar and stock markets, aand cover the Radiant news out of Japan..I’ll give you Nomday in the PM market, then silver and gold cutting loose, by Tuesday,,Major concern about the radiation effects starting there as well ,and the effects on the economy..As usual, the Nain Stream Media junkies will be either behind the ball,,or not getting it. So,get what you can done…noticed garden seeds are going well, some flowers, wonder if they are edible. You can grade this paper next friday in April