July 2011

July 5, 2011 - Time for Platinum to Play Catch Up

Featured Trades: (PLATINUM), (PPLT), (GOLD)

3) Time for Platinum to Play Catch Up. For those of you who have been romancing gold, you should check out platinum (PPLT), her younger, racier, and better looking sister who wears the low riders. The white metal usually outperforms gold in bull markets for precious metals, but this year has fallen 3.4%, compared to a 4.7% gain for the barbaric relic. No doubt the 'double dip' threat to the economy is having an impact.

While gold is just shy of its all-time high, Platinum has to rise a further 30% from here just to match its 2008 high of $2,200 an ounce, suggesting that some catch up play is in order. I have always been puzzled by the fact that platinum is 30 times more rare than gold, but at $1,720 an ounce, trades at a mere 15% premium to the yellow metal. And unlike gold, platinum has a wide array of actual industrial uses.

You have to refine a staggering 10 tons of ore to come up with a single ounce of platinum. The bulk of the world's 210 tons in annual production comes from only four large mines, 80% of it in South Africa, and another 10% in the old Soviet Union. All of these mines peaked in the seventies and eighties, and have been on a downward slide since then.

That overdependence could lead to sudden and dramatic price spikes if any of these are taken out by unexpected floods, strikes, nationalizations, or political unrest. While no gold is consumed, 50% of platinum production is soaked up by industrial demand, mostly by the auto industry for catalytic converters.

The Japanese earthquake and tsunami knocked out a good portion of the world's car production, hence the unexpected weakness this year. But Japanese recent industrial production data show that we are now witnessing the second leg of the 'V', the up one, and that should lead to a sudden lurch upward in platinum demand. That could take US car production alone from 13 million units a year to 16 million by 2015. That's a lot of catalytic converters. That assumes that 14.5 million American cars a year are scrapped, requiring almost no new net demand. Surprises will be to the upside.

Jewelry demand for platinum, 95% of which comes from Japan, is also strong, as the global pandemic of gold fever spreads to other precious metals. You can trade Platinum futures on the New York Mercantile Exchange, where one contract gets you exposure to 50 ounces of platinum worth $86,000.

For those who like to get physical, the US mint issued Platinum eagles from 1997-2008 in nominal denominations of $100 (one ounce), $50 (? ounce), $25 (1/4 ounce) and $10 (1/10th ounce) denominations. Stock traders should look at picking up the ETF (PPLT) on the next substantial dip.

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Check Out Gold's Racier Sister

July 5, 2011 - Quote of the Day

Diary

'Money goes where money is treated best,' said hedge fund legend Leon Cooperman of Omega advisors.

July 1, 2011 - The Great Grain Market Massacre

Diary

Featured Trades: (THE GREAT GRAIN MASSACRE), (CORN), (WHEAT), (JJG), (DBA)

2) The Great Grain Market Massacre. Grain prices were slaughtered today in the wake of a bombshell of a report from the US Department of Agricultural showing that plantings were much larger than expected. Corn and wheat were limit down, and the associated fertilizer and equipment stocks were a shambles.

Corn took the biggest hit, with the government seeing acreage rising from an expected 90.76 million acres to a stunning 92.28 million acres. Of the open interest of 500,000 contracts in December corn futures contracts, 200,000 were for sale at market down 10%. Synthetic instruments were trading at levels indicating at least a further 5% decline tomorrow.

The ags have been regular earners for me over the years. I caught a double a year ago in wheat, just as the Russian fires were getting started. Except for a few long plays in January, I have been largely absent from the space this year.

However, the long term fundamentals in favor of a bull market are still in force. The world is making people faster than the food to feed them, with the global population expected to rise by 2 billion to 9 billion by 2050. That works out to 175,000 new consumers of food a day.

While today's crash certainly makes the grains more attractive, we are not there yet. Wait for the dust to settle from this current move before contemplating a buy.

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Do I hear a Bid?

July 1, 2011 - Equities-Watch Out for the Chop

Diary

Featured Trades: (EQUITIES-WATCH OUT FOR THE CHOP), (SPX), (VIX)

3) Equities-Watch Out for the Chop. One day back from vacation and I am faced with the mother of all window dressing efforts. Not only is it month end, but quarter end and half end as well. That was enough to cause a 58 point melt up, recovering half the loss since the 'RISK OFF' trade started at the end of April. In an instant, the glass has gone from half empty to half full, with the operational word being 'half'.

Suddenly, the Glass Has Gone from Half Empty to Half Full

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Never mind that the volume is low. With retail investors scared out of the market long ago, only hedge funds and high frequency traders remain. Do you feel like taking them on? I think not.

In fact, we got a textbook correction in a longer term secular bull market. Look at the chart of the S&P 500 below, and after we pierced the 50 day moving average, we tickled to 200 day moving average three times and then bounced hard. The biggest drawdown amounted to just 8.3% from the top. Also helping is that the Q2 earning period starts on June 11 and is expected to deliver decent results, although not as good as in quarters past.

With QE2 ending today, sucking some $5 billion a day of Federal Reserve bond buying a day out of the market, many were expecting worse. But the massive liquidity creating by QE 1 & 2 is still sloshing around the system. Interest rates are at zero. The multiple for the S&P 500 is 13, compared to an historic average of 15 X, and 17X the last time interest rates were this low.

A big 2008 style collapse was never in the cards. This is what the volatility index has been screaming at you trading in the lowly teens, and peaking out at only $24.

I don't think that we have entered a great new bull market. The confidence is just not there. Nor has there been any improvement in the economic data. Only this morning, weekly jobless claims dropped a mere 1,000 to 428,000, its eighth week in a rising trend.

What has happened is that we have defined the summer trading range for the market of 1,250-1,350. Expect continued minimal volume, instant reversals, and no clear trends. This will continue until the economic data says otherwise. It will be enough to make you tear your hair out. Think of it as a summer of chop. Trade this market, but only if you dare.

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Watch Out for the Chop