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Currency

Euro rally: point, counterpoint and guesses


Posted by Jack Crooks: Black Swan Capital

on Monday, 27 February 2012 09:09

It is said that markets discount the stuff we do know and run on the stuff we don’t.  Let’s take a look at what we do know, might know, and some best guesses about the future (called forecasts by “serious” analysts), as it relates to the rally in EUR/USD:  

1. Euro short rates relative to the US have turned higher again, i.e. the yield differential in favor of euro is improving.

Question: Will this continue?

Best Guess: I don’t think so because euro supply may begin to overwhelm demand (see #2 below).  And if US growth is for real, and a the 10 nation Eurozone recession is for real, one would expect US 3-month benchmark rates to drift higher relative to the euro.  

2. European Central Bank expected to flood banks with more credit next week; euro seemed to rally sharply on the last round of Long-term Refinancing Operations (LTRO) by the European Central Bank, i.e. three-year term loans to the European banking system.

Question:  Will we see the same type of rally in the periphery debt this time around?

Best Guess: Unlikely, in fact it might be a good time for those who bought last time to sell into the next round of ECB Long-term Refinancing Operations.  If so, if the EUR/USD rally shows signs of stalling next week, it could be time to start looking the other way.  

3. There is a lot of Fed jawboning about the potential for QE3.

Question: Is QE3 baked in the cake?

Best Guess: I don’t think so.  Two points here: 1) If the US recovery is for real, it doesn’t make sense that Fed Governors are so boisterous about the potential for QE3; and 2) Even Ben Bernanke (going out on limb here) has to understand that monetary policy stimulus has limits that become counterproductive at some stage and many, including me, think we are into the counterproductive territory.  Plus, how will QE3 that sits on US banks' balance sheets help any more than the pledge to hold Fed Funds rates low into 2014, in and of itself an incredible act by a central bank chief? It is what a rational person, assuming Ben is rationale, may ask himself.

Bottom line: Though the recent move in EUR/USD is powerful, I think it is a relatively near-term event. Here’s why:  1) If the US is really growing, the dollar at some point wins on growth and yield relative to euro.  Growth and yield are the intermediate-term drivers for currencies, and 2) if the US goes back into recession, a case we made in our latest Global Investor monthly issue; Europe goes into an even deeper one and China is in trouble too.  This means the US dollar, for all its warts, gets a big risk bid.  

We watch and see how reality plays out against our best guesses ... 

022412 eur

Captain of our fairy band,

Helena is here at hand,

And the youth, mistook by me,

Pleading for a lover's fee.

Shall we their fond pageant see?

Lord, what fools these mortals be!

        - A Midsummer Nights Dream Act 3, scene 2



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Gold & Precious Metals

Take Advantage ofl Metals and Mining Paradigm Shift - Exiting Easy And Economica


Posted by Richard Mills: Ahead of the Herd

on Monday, 27 February 2012 06:11

"Markets are reasonably efficient, most of the time, at setting prices. Where they are most likely to fail, though, is in correctly anticipating and pricing big, revolutionary, ‘paradigm’ shifts — whether a rise of disruptive technologies or revolutionary changes in geopolitics. We are living through one now." - Crispin Odey

Ed Note: Be sure to read through to the conclusion at the bottom of this article:

Metals and Mining Paradigm Shift, Exiting Easy And Cheap

 

The massive growth of global prosperity over the last five centuries has been driven by easy and cheap access to critical materials:

  • Food
  • Fibre
  • Energy
  • Minerals

However since October 2001 the CRB BLS Spot Index has reached record levels.

commodities-25-1

The Spot Market Price Index is a measure of price movements of 22 basic commodities. The spot price is the price at which a commodity is selling for immediate delivery.

Commodity price rises could be caused by:

  • Raw materials shortages
  • Resource nationalism
  • Emerging market demand
  • Speculation
  • Intense weather pattern changes
  • War
  • Inflation
  • Hoarding
  • Low interest rates

Many people might assume that out of all the reasons given these three would be the main drivers:

  • War
  • Inflation
  • Emerging market demand

Inflation & War

Because central banks can increase the supply of money virtually at will, and do so, the value of all existing money decreases. The amount of goods and services remains the same, but now the amount of money chasing them has increased, this increased competition - more money (inflation) for the same amount of goods and services - causes prices to rise.

commodities-25-2

Governments and Central Banks want slowly rising prices. They pour money into the market to encourage growth so prices increase rather than decrease. Price decreases, or deflation (less money growth), slows economic activity - if people think prices are going to be lower next week they will not buy today, they will wait, this leads to a contraction in economic activity, something all governments fear.

Low interest rates play their part as well. When governments lower interest rates to stimulate borrowing businesses expand and consumers borrow to buy homes, cars and other goods. Demand for goods and services increase and so to do prices of commodities used in manufacturing.

Nations in Europe, and the U.S. will inflate (print more of) their currencies rather than cutting back spending or raising taxes. In a global race to worthless Asian economies will also have to print massive amounts of their currencies so they stay weaker then the US dollar. Asian exports have to be cheap for American consumers and American exports have to be more expensive then locally produced goods.

The buildup to war, and the actual running of a war is expensive. Governments will typically devalue their currencies by printing the money needed - very few people would ever consent to go to war if they were made to pay for it out of their pockets. How many Americans would consent to the trillions of dollars necessary for America's endless wars and vast military complex if the money required came directly off their paycheques? Government control over the money supply makes the business of war easy to finance because the financial support of its citizens is not needed.

Actual war does not seem to be one of the main causes of the decade long commodities price increase, rather it's the creation of the money necessary to go to war - government created inflation. In regards to recent wars, we haven't had a global conflict, and the resultant massive global destruction and rebuilding, since World War II. Wars today are localized affairs and do not bring about the massive use of commodities for rebuilding as a global conflict would.

Throughout history periods of rising money supply growth has coincided with rising commodity prices, and falling money supply growth coincided with periods of falling commodity prices.

A key driver of higher commodity prices, global government sponsored inflation (and quite likely continuing war inflation) are locked in place for years to come.

Developing Country Demand

China's plus nine percent annual growth, and other developing nations growth (averaging much less), are usually named as the biggest cause of price rises in the commodities markets. China has been growing at plus nine percent annually for well over two decades. Compounded that's a lot of growth, add in other developing countries growth then realize a considerable period of this growth was spent in the commodity bear market. The growth story is suddenly an overnight sensation, inflations effects start to percolate, wars are started and speculators play.

A mismatch between demand and supply is not a new problem in commodity markets. It can and does take years to find and develop new resources and bring the commodities to market. If war and emerging country demand cause prices to rise - shortage caused price spikes - an increase in production (after a war or ramping up for developing country demand) would satisfy increased demand. But it hasn't happened yet and it's been over a decade since commodity prices have gone on their spectacular run.

So far inflation would seem to be the driver for commodity price increases, everything else seems temporary or if permanent, such as developing country demand, fixed with an increase in production.

But

There is a major paradigm shift taking place in the mining industry and it concerns the supply, not the demand side we hear so much about.

Supply

Supply shortages always lead to high enough metal prices for further increases in production, thus supply will eventually exceed demand and prices will drop...right? Well maybe, maybe not. Margins (not price) motivates investment and if the cost of metal production is increasing margins might not be sustainable.

Lets state the obvious:

  • For over the last ten years supply has struggled to keep pace with demand
  • Metal supply is finite and subject to compounding demand from developing nations
  • Metal production is highly cyclical, with intermittent peaks and troughs which are closely linked to economic cycles - declining production has historically been driven by falling demand and prices, not by scarcity
  • Rates of production and amounts of reserves continually change in response to movements in markets and technological advances
  • Most mineral resources will not be exhausted in the near future
  • If energy was cheap and unlimited then recoverable resources would be unlimited

But

  • Discovery and development is increasingly becoming more challenging and expensive
  • Average ore grades are in decline for most minerals, yet production has increased dramatically
  • Our most important metals are suffering from declining ore quality and rising extraction (ore is a different and inferior chemical or structural composition) costs
  • Our prosperity has always been based on the fact that producing resources yielded more resources than it cost. However the cost of *energy is climbing, the amount used is climbing but the returns from energy expended is declining. Eventually the quantity of resources used in the extraction process will be 100% of what is produced
  • Most older existing mines, the foundation of our supply, have increasing costs with production rates stagnating or even declining
  • The rate of discovery is not keeping pace with the rate of depletion, let alone being higher

*Energy can be thought of as a proxy for labor, materials, energy and externalities - environmental, community impact etc.

Copper and Gold as Proxies

The metal content of copper ore has been falling since the mid 1990s. A miner now has to dig up an extra 50 percent of ore to get the same amount of copper. As grade drops the amount of rock that must be moved and processed per tonne of produced copper rises dramatically - all the while using more energy that costs several times more than it use to. With the lower grades of ores now being mined energy becomes more and more of a factor when considering economics.

commodities-25-3

commodities-25-4

Conclusion
Complicated more expensive extraction of metals from increasingly harder to find, lower grade ore bodies in almost inaccessible and hostile parts of the world is going to affect our lifestyles.

What changes are we going to have to make as nature - the finite supply of materials and energy constraints - dictates lifestyles and aspirations?

"We took the nice, simple, easy stuff first from Australia, we took it from the U.S., we went to South America. Now we have to go to the more remote places." Glencore CEO, Ivan Glasenberg in the Financial Times describing why his firm operates in the Congo and Zambia

We are experiencing a paradigm shift. If nothing else, right now at this point in history, we all have to realize that the mining industry is exiting "easy & cheap" and is starting the upward slope of chronic lower supply, permanently higher prices and higher risk.

We all have to agree that the planet's booming population and rising standards of living are going to put unprecedented demands on supply.

This should be on everyone's radar screen. Is it on yours?

If not, maybe it should be.

By Richard (Rick) Mills

www.aheadoftheherd.com

rick@aheadoftheherd.com

If you're interested in learning more about specific lithium juniors and the junior resource market in general please come and visit us at www.aheadoftheherd.com. Membership is free, no credit card or personal information is asked for.

Copyright © 2012 Richard (Rick) Mills - All Rights Reserved

Legal Notice / Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.


© 2005-2012 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.



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Stocks & Equities

On the Cusp: Historically Profitable Seasonality moves for US & CDN Markets Imminent


Posted by Don Vialoux: Timing the Market

on Monday, 27 February 2012 05:45

Ed Note: Dodging Overbought status, Don Vialoux's seasonality studies aim at profiting through Historically reliable patterns (detailed definition HERE). Right now EquityClock says  "Seasonal influences on equity markets turn positive in March. They tend to strength as the month progresses." The TSE tracks the S&P 500 well. All the World's Major indices charts and commentary are below:

seasonSP500

Screen shot 2012-02-27 at 3.10.45 AM

Macro events will continue to influence equity markets this week. The G20 Meeting of Finance Ministers was held in Mexico over the weekend. The focus is on European sovereign debt. Germany’s Parliament discusses the Greek bailout program on Monday. The European consumer confidence and industrial confidence indices are released on Tuesday. Federal Reserve Chairman Ben Bernanke delivers the Semi-annual Monetary Report on Wednesday. China and Euro announce their February Purchasing Managers indices on Thursday. Europe’s unemployment rate is released on Thursday. Russia’s Presidential election is held next Sunday.

Economic news this week is expected to be mixed to slightly negative, breaking a string of economic reports that have encouraged investor confidence. Click HERE for Economic & Earnings News Schedule for this coming week.

The earnings focus this week is on Canada’s banks (scroll down HERE  for the Schedule). Fourth quarter reports from the U.S. are winding down. A total of 463 S&P 500 companies have reported to date. 59% have exceeded consensus versus an average of 62% in recent quarters. A total of 104 S&P 500 companies have offered first quarter guidance with 31 companies guiding higher and 64 companies guiding lower.
Short and intermediate technical indicators remain overbought in a wide variety of equity markets and sectors. Fewer sectors are leading the advance.
Cash on the sidelines remains substantial and is unlikely to trend lower until equity markets determine who the next U.S. President will be.

Equity Trends

The S&P 500 Index gained 4.51 points (0.33%) last week. Intermediate trend is up. The Index remains well above its 50 and 200 day moving averages. Short term momentum indicators are overbought and showing early signs of peaking. Short term momentum indicators are not useful until the short term trend line is broken.

sp500227

Percent of S&P 500 stocks trading above their 50 day moving average slipped last week from 86.60% to 83.20%. Percent is intermediate overbought and peaked three weeks ago.

clip image002 thumb7

The TSX Composite Index gained 267.47 points (2.15%) last week. Intermediate trend is up. The Index broke above resistance at 12,623.98. Support is at 11,420.78. The Index remains above its 50 day moving average and broke above its 200 day moving average last week. Short term momentum indicators are overbought, but have yet to show signs of peaking. Strength relative to the S&P 500 Index is turning positive. ‘Tis the season for the TSX to outperform the S&P 500 Index!

tse227

Percent of TSX Composite stocks trading above their 50 day moving average increased last week from 60.08% to 68.38%. Percent remains intermediate overbought.

clip image007 thumb4

The Shanghai Composite Index gained 66.45 points (2.82%) last week. Intermediate trend is down. Support is at 2,132.63 and resistance is at 2,536.78. The Index trades above its 50 day moving average, but remains below its 200 day moving average. Short term momentum indicators are overbought, but continue to trend higher. Strength relative to the S&P 500 Index remains positive. ‘Tis the season for the Index to move higher!

Shanghai

The Dow Jones Industrial Average added 33.08 points (0.26%) last week. Intermediate trend is up. The Average trades well above its 50 and 200 day moving averages. Short term momentum indicators are overbought and showing early signs of peaking. However, short term momentum indicators are not meaningful until short term uptrend in the Average is broken. Strength relative to the S&P 500 Index remains negative.

DJIU

The Dow Jones Transportation Average fell 100.38 points (1.92%) last week. Intermediate trend is up. Support is at 4,531.79 and resistance has formed at 5,384.15. The Average has broken below a rising wedge pattern. The Average trades above its 200 day moving average, but fell below its 50 day moving average on Friday. Short term momentum indicators continue to trend down. Strength relative to the S&P 500 Index remains negative.

DJIT

The NASDAQ Composite Index added 11.97 points (0.41%) last week. Intermediate trend is up. Support is at 2,441.48. The Index trades well above its 50 and 200 day moving averages. Short term momentum indicators are overbought and showing early signs of peaking. Significant momentum sell signals will occur when short term uptrend of the Index is broken. Strength relative to the S&P 500 Index remains positive.

Nasd

The London FT Index added 30.06 points (0.51%), the Frankfurt DAX improved 16.40 points (0.24%) and the Paris CAC Index gained 27.41 points (0.80%) last week.

london

dax

cac

The Athens Index plunged 74.57 points (9.05%) last week. Investors are skeptical that the agreement on sovereign debt will last. Resistance is forming at 843.64. Short term momentum indicators are trending down. Strength relative to the S&P 500 Index has returned negative.

greece

The Nikkei Average gained 263.21 points (2.80%) last week. Intermediate trend is up. The Average trades well above its 50 and 200 day moving averages. Short term momentum indicators are overbought, but continue to trend higher. Strength relative to the S&P 500 Index remains positive. ‘Tis the season for the Nikkei Average to move higher!

Nikkei

The Australia All Ordinaries Composite Index added 115.74 points (2.71%) last week. Intermediate trend is up. Support is at 3,905.20 and resistance is at 4,472.20. The Index recently bounced from its 50 day moving average and broke above its 200 day moving average last week. Short term momentum indicators continue to trend higher. Strength relative to the S&P 500 Index remains negative.

aust

Other Factors

The VIX Index slipped 0.47 (2.64%) last week. Once again, it is testing long term support near 15.00.

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.....to view 30 more Charts for Currencies, Commodities and Interest Rates go HERE. Don & Jon Vialoux's Equityclock.com is offering free access to a data base showing seasonal studies on individual stocks and sectors. The data base holds seasonality studies on over 1000 big and moderate cap securities and indices.
To login, simply go to http://www.equityclock.com/charts/



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Stocks & Equities

Economic & Earnings News Schedule for week beginning Feb 27th/2012


Posted by Tech Talk

on Monday, 27 February 2012 04:27

Economic News This Week

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Earnings Reports This Week

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Stocks & Equities

David Rosenberg Presents The Six Pins That Can Pop The Complacency Bubble


Posted by David Rosenberg via ZeroHedge

on Friday, 24 February 2012 14:46

The record volatility, and 400 point up and down days in the DJIA of last summer seem like a lifetime ago, having been replaced by a smooth, unperturbed, 45 degree-inclined see of stock market appreciation, rising purely on the $2 trillion or so in liquidity pumped into global markets by the central printers, ever since Italy threatened to blow up the Ponzi last fall. In short – we have once again hit peak complacency. Yet with crude now matching every liquidity injection tick for tick, there is absolutely no more space for the world central banks to inject any more stock appreciation without blowing up Obama’s reelection chances (and you can be sure they know it). Suddenly the market finds itself without an explicit backstop. So what are some of the “realizations” that can pop the complacency bubble leading to a stock market plunge, and filling the liquidity-filled gap? Here are, courtesy of David Rosenberg, six distinct hurdles that loom ever closer on the horizon, and having been ignored for too long, courtesy of Bernanke et cie, will almost certainly become the market’s preoccupation all too soon. 

1. The nascent task market place improvement was small a lot more than a reflection of deteriorating productiveness growth. As this kind of, businesses will reply in the spring by curbing their hiring ideas. This is exactly what happened a calendar year ago when non-public payroll gains averaged 207k from January to April and the most significant blunder the emboldened bulls did at the time was extrapolate that performance into the future. No quicker did we mention the most likely renewed corporate target on reviving productiveness growth than we noticed Proctor &amp Gamble announce a five,700 occupation cut or 10% of its manufacturing work power — and the stock price tag was rewarded with a $ two advance.

2. The ballyhooed housing recovery represented a climate report. January was the fourth warmest on report, skewing the data, and February seems to be to be a record for balmy temperature ranges. As this sort of, we could be in for a setback in the housing knowledge, and the most recent weekly info on house loan programs for new purchases could presently be signaling a renewed downturn in profits activity. The volume index for new purchases was down 2.9% in the week of February 17th on leading of an 8.4% slide in the prior week and it has been trending down for four of the past 5 weeks.

3. The European economic downturn is just getting started (See Recession Looms for ten Nations on webpage 2 of the FT) and the effect on Asian trade flows is previously evident in the knowledge — with Chinese export growth fully vanishing in January and producing diffusion indices flashing modest contraction in February. We are possibly one particular to two quarters absent from seeing a significant shock to the U.S. GDP data from an eroding internet international trade overall performance. To catch a glimpse of just how much reaching the Eurozone economic downturn is, have a look at Austerity in Europe Puts Stress on Drug Prices on page B6 of the NYT.

4. What upset the apple cart this time very last yr was the operate-up in oil rates, followed by a lag with a surge in fuel costs at the pump. So instead of acquiring the four.% very first quarter GDP progress number in 2011 that several pundits anticipated, we got .four% rather — correct digits but in the wrong place. The issue was electricity expenses and what that did to the GDP value deflator — it crushed genuine financial expansion (this time it is not the Arab Spring but heightened Israel-Iran tensions at perform). In 24 hours of the release of that GDP report in late April, the stock industry peaked for the yr.

Once yet again, oil costs have ratcheted up and with a lag, we can most likely count on a return to $ four for every gallon for normal gasoline at the pumps by the time spring rolls all around. The front webpage of the USA Right now can make the scenario for why $ 5 for each gallon is probably coming … that would symbolize a lot more than a $ 200 billion drag out of home funds flows. As it stands, consumers have responded by cutting again on energy usage at a pace we have not observed in fifteen years. Notice that motorists in California are currently spending north of $ four for every gallon. And Brent crude charges have strike file highs in the U.K. in sterling phrases and back to 2008 ranges in euro terms for the previously economic downturn-gripped euro location.

Not only have been January retail revenue previously weak, but we just saw two bellwethers —Gap and Kohl’s — all article reduce Q4 earnings. Kohl’s really posted its first income decline in a few years. And we have not even noticed the entire brunt of the energy value influence hit property however.

The transportation shares see what is coming, obtaining peaked on February third, and since then this group has suffered nine losses out of the past thirteen sessions, representing a 4% decline from the nearby peak. This is a bit of a problem for the bulls because the transports in no way did validate the new highs that the Dow and S&ampP five hundred manufactured — and the index is now at a vital juncture as it kisses the 50-day going regular on the downslope.

5. This hurdle will most likely only grow to be apparent in the 2nd fifty percent of the 12 months and it relates to tax uncertainties and the implications for growing personal and company cost savings prices.

First, the top rated marginal individual tax fee rises to 39.6% from 35% as the Bush tax cuts expire at the stop of 2012. A reduce on itemized deductions will include a even more one.two percentage details to the top rate. Second, a new .9% Medicare tax on incomes more than $ two hundred,000 will get imposed ($ 250,000 for joint filers). Moreover, the best fifteen% price on extended-term funds gains rises to twenty%. And dividends will after yet again be taxed at normal prices — 39.six% for the leading earnings earners. A new 3.eight% tax on investment income also will get launched for incomes over $ 200,000 ($ 250,000 for joint filers). The top estate tax rate goes from 35% to 55% (sixty% in some instances). The estate tax exemption falls to $ one million from $ 5 million (the present-tax exemption also drops to $ 1 million and the charge adjusts hither to 55%). In all, 41 independent tax provisions expire this yr.

6. Fiscal contagion. Just as there is a deep-seated look at of economic re-acceleration in the United States, so too is there a widespread consensus that Europe will muddle via. The ECB’s substantial liquidity infusion previous November and the forthcoming move on February 29th for what pretty much everyone hopes will be a massive LTRO (For a longer time-term Refinancing Operation) just take-up has the masses convinced that Europe is out of the woods.

Markets have dealt with Greece’s default with a shrug. But what if a CDS celebration does get activated? It is feasible. And what if Portugal decides that it desires its bail-out phrases renegotiated, as the FT hints at? Spain is undertaking furthermore as properly — see Spain Pushes Brussels to Reduce Deficit Target as Growth Hopes are Dashed on the front webpage of the FT and also have a seem at Spain Counts Social Fees of Austerity Drive on page 2 of the FT.

The lack of self-assurance is so palpable that some corporates in Portugal, like Portugal Telecom, trade at a 600 basis level price reduction to equivalent federal government bonds. Even Italy is far from out of the woods (allow on your own Spain) — the ECB’s intervention efforts may have helped drag ten-year yields down to 5.4% from the latest peak of more than seven%, but personal debt and debt-program dynamics are this kind of that fiscal sustainability can only be achieved, barring an economic boom (which is not in the cards), if yields can break decisively underneath four% and remain there.

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