Sat April 23, 2011
The Pot Calls the Kettle Black
After the price spikes of 2008 the FTC issued new rules to prevent oil market manipulation including the power to levy fines of up to $1 million per violation per day for market players who make misleading statements or intentionally omit information that could effect prices.
The CFTC is rolling out rules that limit how many futures contracts companies can trade at a time.
Eric Holder sent a memo to this week to agencies involved in the working group, it will look into ‘ evidence of manipulation of oil and gas prices, collusion, fraud or misrepresentations at the retail or wholesale levels’ that may be harmful to buyers.
Houston Chronicle, 4/22/2011
We realize the government lies to us regularly but this is just over the top. We suggest Attorney General Holder call Geithner and Bernanke about how their weak dollar policy has lifted oil prices, as well as cotton, sugar, and coffee. There are photos on Business Insider of a trucks parked on the road in China protesting high fuel prices. It is truly absurd for the government to pretend that anyone other than the government is responsible for the flood of money and cheap currency that has lifted stocks, gold and oil. We suggest fining the Federal for every day of QE I and QE II, the truck drivers in China would appreciate that anyway
Note our references are to the weekend WSJ April 23 unless otherwise specified, which can be easily accessed by readers.
The New Civil War
Here is a link to John Fund’s column today April 22 in the WSJ, California Dreamin’ of Jobs in Texas. Incredibly California legislators visited our Governor Rick Perry as to why companies are leaving CA for Texas, as if they did not know. As they visited here the CA legislature passed a law that schools there now are required to teach the history of gay and disabled Americans. As Dave Barry says, you can’t make this stuff up. Unemployment is 12% in CA and 8% in Texas. What do you suppose unemployment will be there at the next bear market bottom? My estimate is over 20%.
CA legislators visit Texas, why is business leaving CA
Here is a look at 24 signs of decline. Note that Americans now receive more money from the government than the government receives in income. I strongly suspect that the overall take of governments, local, state and federal, now is more than half of GDP. This of course means it is impossible to grow the economy.
24 Signs of Decline
Computers are picking the indices now. This is one of the things causing the kind of volatility we saw this week, down Monday up Wednesday. The quants now reign supreme, all chasing the same things. This is why OPEN CRM PCLN sport such high price earnings ratios, never mind the profits, everyone else is buying pile in! The demise of stock picking and what was once the industry showcase is described in this article about Fidelity Magellan. This is also some insight as to how all the funds that are buying now will surely all be selling at the same time.
Whatever happened to the Peter Lynch method?
Energy
Gasoline prices are over $4 in ten states and over $5 in the District of Columbia. Recall that our metric for predicting a top or at least A top in oil prices is Patterson Energy PTEN. PTEN closed over $30 this week, let’s remind ourselves of how long it took for PTEN to top at at $35 in 2008.
It was a mere seven weeks after PTEN closed over $30 before it topped out. Then notice that there was one outside reversal day to the down side as trading opened in July and that was it. Interestingly seven weeks from now will coincide with the end of QE II, how fitting. Isn’t it amazing how quickly the market figured this out? Let’s stay focused on a June high for crude oil and energy service stocks. That makes sense as it coincides with our expected high in stocks.
Unleaded Gasoline versus Crude Oil
The solid black line is crude oil, the red black bars are unleaded gasoline. In 2008 both were in lockstep rising together. Now gasoline is well speeding ahead of crude oil. Note that the 200 week moving average shown in blue contained both prices for some time. Once price broke above the high for 2010, the race to higher levels was on.
Why is this happening? While there will be lots of finger pointing at big oil I suspect that the difficulty of refining various state mandated gasoline formulas is the problem. Gasoline for CA is not gasoline for Texas, thanks to Federally encouraged state mandates. As with our other charts one can see that we get ever closer to the 2008 top, again looks like about seven weeks to go.
Nat Gas
we commented last week that the energy of the future is here already-various forms on natural gas. Nat Gas bottomed about the same time emerging markets appear to have topped, last November. Since then we have two higher lows shown by the blue arrows. Admittedly it is still below the pink downtrend line but did close over the 50 day MA. And there are three levels of resistance above the price. Slope has flattened out at bottom.
This makes sense. Obama has shut down exploration and production in the Gulf of Mexico. The Mid East as always is on boil. There has been an explosion of on shore production of natural gas .It burns cleaner than gasoline.
Now admittedly the ETF UNGF has been in contango. This means each subsequent month has been more expensive. So the fund is forever buying less gas in the next month. Still the charts are similar, we will be patient. It is not hard to imagine widespread public dissatisfaction -
With high gasoline prices on display from the US and as we mention elsewhere, with Chinese truck drivers.
Silver
This is what is means when a chart goes vertical. In retrospect, it is clear that once silver closed over the previous high at $20+, it was off to the races. Will silver top in seven weeks along with PTEN and oil? That seems a logical conclusion to this observer. Note that the 200 week MA is at 17.50. By June it will be two years since price last visited that long term 200 week average. At bottom the Slope indicator has also gone vertical. RSI at top is well, over the top. I read that Goldman recommended clients exit on the theory that once the reversal sets it it will be hard to get out fast enough. That is always the case.
Jason Zweig reports in today’s WSJ that the Sprott Physical Silver Trust is trading for a 22% premium over net value. Investors now pay $1.22 for every dollar of silver in the fund. This sort of premium in closed end funds occurs near tops. We can only speculate what the discount might have been if there had been such funds in 2000. By year 2000 exclusive silver funds had closed, the last I remember was the Lexington Silver Fund. Central Fund CEF did offer both gold and silver investments. The creation of new investment vehicles of course is another sign of a top or at least an increase in the mania. In 2000 everyone was buying the dot.coms, no one wanted silver at $3.50. Now at 12x that value and near the Hunt Silver Panic Highs of 1980, new silver funds are being created every week. We are not calling an end to the silver gold rally but suspect a pause is in order. The public is only now getting interested. UT Endowment took delivery of its gold purchase, gold is front page news in the popular press, usually a precursor to some sort of high.
Stock Market Sentiment
Options Report WSJ 4/23/11 page B5
THE CBOE VIX made its first close beneath 15 since July 2007 on Thursday hitting as low as 14.30. Everyone is long stocks even the opportunistic volatility players. The VIX can definitely go lower said Stephen Solaka, as long as the markets keep rising in spite of various global crises.
Well Stephen presumably it cannot go below zero but then let’s not discount the creativity of Wall Street Quants. I am not aware of a North Africa quantitative VIX but it is surely on display in print and youtube videos. If there were such an index it is surely at the other end of the spectrum pages A 8-9 and front page of WSJ).
Update on that last paragraph. I try to write the weekend update over at least two days to better reflect on what is happening. It occurs to me that the exact opposite of the new low in the VIX is evident in the Middle East. While traders on Wall Street cannot buy stocks fast enough, one recalls that the Stock Exchange in Egypt closed amid the riots. Recent investors were furious that stock prices had fallen, demanding the government restore stock prices. This then would be the exact polar opposite of what we see in New York today. In New York there is a bidding war between D Banka and NASD to buy NYSE Euronext. Overseas exchanges have closed. Anyone interested in buying the Egyptian Stock Exchange? (Okay it is not for sale but if it were, that would be the bargain, that Rothschild buy when blood is in the streets idea).
Despite the Syrian government literally shooting protestors, they are on the march. In China . on page A10 as we remarked yesterday, Shanghai truckers park rigs, it is cheaper to park than work at current fuel costs. There is of course denial that this will be a problem, a ludicrous statement. Shanghai is the world’s busiest container port. Now read the editorial at the bottom of page A 14.
What the present crackdown shows is that those who doubted the Communist Party’s sincerity were right all along. Beijing bestowed these freedoms as favors but reserved the right to take them back as it is doing now.
This is a replay of the failed Gorbachev effort to open a closed society in 1989, remember glasnost? Returning from a trip to the Soviet Union, one of my clients remarked in 1990 that the Soviet people found out how the rest of the world lived and were not going to put up with their low standards any more. This same thing is on display across North Africa and in China.
While I may seem to be stating the obvious here, the low VIX is misplaced confidence, it is complacency pure and simple. Declaring that an index which has dropped from 90 to 14 can only go lower is bold indeed. In fact the percentage drops now are much larger than from 90 to 85, see log chart. The world wide protests are occurring against entrenched dictators, none of whom have ever won a popular election. This will end badly. The change in mood there is a polar opposite from what is happening on Wall Street.
This has been a consistent theme of ours recently. We are in the transition phase to a new world bear market. The article on page C2 on Social Networks offers this observation. Moods are contagious. Precisely, and the socionomic view is that this mood change is happening world wide. These viral emotions can even spread via online networks such as Facebook and Twitter. Indeed Facebook and Twitter are McLuhan’s Global Village up close and personal. The Berlin Wall fell as information spread using VCRs, Twitter just speeds up the process.
The endogenous emotion of the vegetable vendor who set himself on fire in Tunisia last year is catching on, big time. The traders on Wall Street are going the other way. That too will end badly.
More Tipping Points
We cannot know the exact Tipping Point which will turn the social mood negative on Wall Street. As we report to you there are numerous examples of cracks in the eggshell of complacency.
Anarchists attack Chase Bank in Seattle
San Antonio has weathered the recession better than most cities. The robust Texas economy coupled with former military bases luring Boeing, Lockheed, and such to re build engines and now entire airplanes, a booming bio medical high tech area in concert with the UT Medical School, but…
Increasing foreclosures will lower property tax income
Bexar County rather than experiencing an increase in property tax will have an expected 1.6% loss. As with all bear markets the initial reaction is denial. Local school superintendents still make $250,000+ while they lay off first year teachers. And so previous areas which thought they were impervious to Nevada and AZ type real estate collapse now have it front and center. The fact that this has spread to San Antonio indicates we are that much closer to a national tipping point.