Picking Up Freeport McMoRan

It is clear from the improving economic data from China that the hard landing scenario is off the table. This is great news for the producers of everything that the Middle Kingdom buys in bulk, especially copper.

If you like copper, you?ve got to love Freeport McMoRan, one of the world?s largest producers for the red metal. On top of these rapidly improving fundamentals, the stock yields a nice security blanket of a hefty 4% dividend. These factors explain the sizeable insider buying that has been taking place in the shares over the past month.

Finally, the technical picture is looking pretty positive. The chart is showing that an upside breakout is taking place, supported by a sharp turn up in the 50 day moving average. The 200 day moving average is not far above, settle up the possibility of a fabled ?golden cross.? This is universally positive for share prices.

This commodity is known in the investment industry as Dr. Copper, the only metal that has a PhD in economics. That?s because of its uncanny ability to predict the future of the global economy. Copper is now hinting of better things to come, along with the stock market, like a 3.5% GDP growth rate in the US next year.

The recent strength further is confirmed by longer-term charts for the Shanghai index ($SSEC), which is showing that a double bottom may well be in place. Will China permabear, Jim Chanos, finally get his comeuppance?

Copper was the first metal used by man in any quantity. The earliest workers in the red metal found that it could be easily hammered into sheets and worked into shapes, which became more complex and artistic as their skill increased. The ability to resist corrosion ensured that copper, bronze and brass remained as functional as well as decorative materials during the Middle Ages and through the Industrial Revolution to the present day.

Of the 16.7 million metric tonnes of copper produced in 2012, Chile was far and away the leader, with 5.4 million tonnes, followed by China at 1.5 million tonnes, Peru at 1.2 million tonnes, and the US at 1.1 million tonnes. This makes the Chile ETF (ECH) another great backdoor play in copper. As copper is a great electrical conductor, it is primarily used for electrical wiring, followed by the construction industry and shipbuilding, and the auto industry, especially in alternative vehicles.

It?s true that copper is no longer the dominant metal it once was. Because of the lack of a consumer banking system in the Middle Kingdom, individuals have been hoarding 100 pound copper bars and posting them as collateral for loans. Get any weakness of the kind we have seen this year, and lenders panic, dumping their collateral for cash.

The high frequency traders are now also in there in force, whipping around prices and creating unprecedented volatility. You can see this also in gold, silver, oil, coal, platinum, and palladium. Notice how they seem to be running the movie on fast forward everywhere these days? This summer, we probably got an overshoot on the downside in copper that finally flushed out the last of the weak holders.

This is why I am loading up with a bull call spread Freeport McMoRan. The gearing in the company is such that a 50% rise in the price of copper triggers a 100% rise in (FCX). More conservative ad less leveraged investors can buy the First Trust ISE Global Copper ETF (CU).

FCX 9-11-13

SSEC 9-6-13

COPPER 9-9-13

ECH 9-11-13

Map-Where to Find Copper

Where to Find Copper


The Great Copper Crash of 2013

When Dr. Copper (CU), the only commodity with a PhD in economics, suddenly collapses from a heart attack, risk takers everywhere have to sit up and take notice. Since the 2011 top, the red metal has collapsed a shocking 35%.

So called because of its uncanny ability to predict the future of the global economy, copper is warning of dire things to come. The price drop suggests that the great Chinese economic miracle is coming to an end, or is at least facing a substantial slowdown. This dark view is further confirmed by the weakness in the Shanghai index ($SSEC) which has been trading like grim death all year. Will China permabear, Jim Chanos, finally get his dream come true?

It?s a little more complicated than that. Copper is no longer the metal it once was. Because of the lack of a consumer banking system in the Middle Kingdom, individuals are now hoarding 100 pound copper bars and posting them as collateral for loans. Get any weakness of the kind we have seen this year, and lenders panic, dumping their collateral for cash.

The high frequency traders are now in there in force, whipping around prices and creating unprecedented volatility. You can see this also in gold, silver, oil, coal, platinum, and palladium. Notice how they seem to be running the movie on fast forward everywhere these days? Because of this, we could now be seeing an overshoot on the downside in copper which may never actually materialize to this extreme in equities or other asset classes.

Watch Dr. Copper closely. At the first sign of any sustained strength, you should load up on long dated calls for Freeport McMoRan (FCX), the world?s largest producer, which also has been similarly decimated. The gearing in the company is such that a 50% rise in the price of copper triggers a 100% rise in (FCX).

So what is copper telling us today? The longer term charts show a prolonged bottoming process. If this holds, we could be seeing the early days of a resurgence in the global economy. Just get Syria, Egypt, the debt ceiling crisis, and the taper out of the way, and we could be in for a major run. That is a tall order. But just to be safe, I am buying long dated calls in the next major dip in (FCX), which may have started today.

COPPER 8-26-13

CU 8-27-13

FCS 8-27-13

PenniesA Penny for Your Thoughts on Copper?

End of the Commodity Super Cycle

Traders have been watching in complete awe the rapid decent of the price of gold, which is emerging as the most despised asset class of 2013. But it is becoming increasingly apparent that the collapse of prices for the barbarous relic is part of a much larger, longer-term macro trend.

It isn?t just the yellow metal that is hurting. So are the rest of the precious and semi precious metals (SLV), (PPLT), (PALL), base metals (CU), (BHP), oil (USO), and food (CORN), (WEAT), (SOYB), (DBA).

Many senior hedge fund managers are now implementing strategies assuming that the commodity super cycle, which ran like a horse with the bit between its teeth for ten years, is over, done, and kaput. Former George Soros partner, hedge fund legend Paul Tudor Jones, has been leading the intellectual charge since last year for this concept. Many major funds have joined him.

Launching at the end of 2001, when gold, silver, copper, iron ore, and other base metals, hit bottom after a 21 year bear market, it is looking like the sector reached a multidecade peak in 2011.

Commodities have long been a leading source of profits for investors of every persuasion. During the 1970?s, when President Richard Nixon took the US off of the gold standard and inflation soared into double digits, commodities were everybody?s best friend. Then, Federal Reserve governor, Paul Volker, killed them off en masse by raising the federal funds rate up to a nosebleed 18.5%.

Commodities died a long slow, and painful death. I joined Morgan Stanley about that time with the mandate to build an international equities business from scratch. In those days, the most commonly traded foreign securities were gold stocks. For years, I watched long-suffering clients buy every dip until they no longer ceased to exist.

The managing director responsible for covering the copper industry was steadily moved to ever smaller offices, first near the elevators, then the men?s room, and finally out of the building completely. He retired early when the industry consolidated into just two companies, and there was no one left to cover. It was heartbreaking to watch. Warning: we could be in for a repeat.

After two decades of downsizing, rationalization, and bankruptcies, the supply of most commodities shrank to a shadow of its former self by 2000. Then, China suddenly showed up as a voracious consumer of everything. It was off to the races, and hedge fund managers were sent scurrying to look up long forgotten ticker symbols and futures contracts.

By then commodities promoters, especially the gold bugs, had become a pretty scruffy lot. They would show up at conferences with dirt under their finger nails, wearing threadbare shirts and suits that looked like they came from the Salvation Army. As prices steadily rose, the Brioni suits started making appearances, followed by Turnbull & Asser shirts and Gucci loafers.

There was a crucial aspect of the bull case for commodities that made it particularly compelling. While you can simply create more stocks and bonds by running a printing press, or these days, creating entries on excel spreadsheets, that is definitely not the case with commodities. To discover deposits, raise the capital, get permits and licenses, pay the bribes, build the infrastructure, and dig the mines and pits for most commodities, takes 5-15 years.

So while demand may soar, supply comes on at a snails pace. Because these markets were so illiquid, a 1% rise in demand would easily crease price hikes of 50%, 100%, and more. That is exactly what happened. Gold soared from $250 to $1,922. This is what a hedge fund manager will tell is the perfect asymmetric trade. Silver rocketed from $2 to $50. Copper leapt from 80 cents a pound to $4.50. Everyone instantly became commodities experts. An underweight position in the sector left most managers in the dust.

Some 12 years later, and now what are we seeing? Many of the gigantic projects that started showing up on drawing boards in 2001 are coming on stream. In the meantime, slowing economic growth in China means their appetite has become less than voracious. Supply and demand fell out of balance. The infinitesimal change in demand that delivered red-hot price gains in the 2000?s is now producing equally impressive price declines. And therein lies the problem. Click here for my piece on the mothballing of brand new Australian iron ore projects, ?BHP Cuts Bode Ill for the Global Economy?.

But this time it may be different. In my discussions with the senior Chinese leadership over the years, there has been one recurring theme. They would love to have America?s service economy. I always tell them that they have a real beef with their ancient ancestors. When they migrated out of Africa 50,000 years ago, that stopped moving the people exactly where the natural resources aren?t. If they had only continued a little farther across the Bering Straights to North America, they would be drowning in resources, as we are in the US.

By upgrading their economy from a manufacturing, to a services based economy, the Chinese will substantially change the makeup of their GDP growth. Added value will come in the form of intellectual capital, which creates patents, trademarks, copyrights, and brands. The raw material is brainpower, which China already has plenty of.

There will no longer be any need to import massive amounts of commodities from abroad. If I am right, this would explain why prices for many commodities have fallen further than a Middle Kingdom economy growing at a 7.7% annual rate would suggest. This is the heart of the argument that the commodities super cycle is over.

If so, the implications for global assets prices are huge. It is great news for equities, especially for big commodity importing countries like the US, Japan, and Europe. This may be why we are seeing such straight line, one way moves up in global equity markets this year.

It is very bad news for commodity exporting countries, like Australia, South America, and the Middle East. This is why a large short position in the Australian dollar is a core position in Tudor-Jones? portfolio. Take a look at the chart for Aussie against the US dollar (FXA), and it looks like it has come down with a severe case of Montezuma?s revenge.

Last week?s 0.25% cut in interest rates by the Reserve Bank of Australia took a fundamentally weak currency and sent it to intensive care. Aussie could hit 90 cents, and eventually 80 cents to the greenback before the crying ends. Australians better pay for their foreign vacations fast before prices go through the roof. It also explains why the route has carried on across such a broad, seemingly unconnected range of commodities.

In the end, my friend at Morgan Stanley had the last laugh. When the commodity super cycle began, there was almost no one around still working who knew the industry as he did. He was hired by a big hedge fund and earned a $25 million performance bonus in the first year. And he ended up with the biggest damn office in the whole company, a corner one with a spectacular view of midtown Manhattan. He is now retired for good, working on his short game at Pebble Beach. Good for you, John.

Fed Funds Rate

GOLD 5-17-13

COPPER 5-17-13

SPX 5-16-13

SPY DBC 5-17-13

SPY GLD 5-17-13

SPY TLT 5-17-13

XAD 5-15-13

Gold Coins Not as Shiny as it Once Was

Here Comes the Rolling Top

The S&P 500 is now at 1,564, and most strategist forecasts for the end of 2013 hover around 1,550-1,600, plus or minus some spare change. So the next nine months are going to be incredibly boring. Or they won?t.

Even in a bull market, one expects to see pullbacks of at least one third of the recent gain. Apply that logic towards the 224 points the (SPX) has tacked on since the November low, and that adds up to a 74 point, or a 4.7% correction down to 1,490.

SPX 3-25-13

There is massive liquidity in the system, many individuals and institutions are underweight, and interest rates are still at incredibly low levels. It also appears that every foreign financial disaster results in more money getting sent to the US for safety.

Usually, the (SPX) never rises more than 9% above the 200 day moving average without hitting a correction. This year is different. I can?t remember the last time the index spent this much time at that level without a pullback.

We are therefore likely to see a rolling type market top that unfolds over the next several months. That is in contrast to a spike top, which you can spot on a chart without your glasses from 20 feet away. These tops can be devilishly difficult to trade, with the limits defined more by time than price.

SPX a 3-25-13

If you want to see what such a rolling top looks like, take a peak at the chart for my old friend, Dr. Copper, that great prognosticator of future economic activity. He put in such a rolling top during the first eight months of 2011, and has been trying to recover ever since, to no avail.

This no doubt reflects the slowing economy and the building copper inventories in China, where the red metal is widely used as a monetary instrument. China, in effect, is on a copper standard. It is rare to see the (SPX) going up and copper dropping like, well, a bar of copper.

copper 3-22-13

While the broader indexes are likely to deliver a rolling top, that is not the case with individual sectors and stocks. That means you can use these individual spikes to assist in your timing of the overall market. You need to watch the market leaders like a hawk, such as the financials and the transports. If Bank of America (BAC) and United Continental Group (UAL), suddenly crash and burn, you can bet the rest of the market won?t be far behind. This is one of the reasons why I have these two names in my model-trading portfolio, on which you should maintain your laser focus.

The consumer discretionary and retail sectors are two additional pathfinder sectors that are the most economically sensitive in the market, which also make great canaries in the coalmine. As long as consumers are packing MacDonald?s (MCD), Home Depot (HD), and Target (TGT), or burning up their Comcast (CMCSA) broadband connections buying stuff from Amazon (AMZN), you won?t see appreciable market weakness. Earnings disappointments at these businesses, which could start in three weeks, are another great precursor of market trouble.

BAC 3-25-13

Finally, there is another class of stocks that may lead the charge on the downside, and that is small caps. Look at the chart below for the ETF for the Russell 2000 (IWM). Small companies are always hardest hit in any slowdown because they are more highly leveraged and have less access to external financing, like bank loans and equity floatations. I made a bundle last year shorting the (IWM) into the ?Sell in May? market meltdown, and plan to do so again this year.

IWM 3-25-13

Of course, timing is everything, and I?ll tell you what worries me the most. The overdependence of this bull market on the largess of the Federal Reserve cannot be underestimated. Any hint that quantitative easing is about to join the dustbin of history will take the market with it.

The conventional wisdom is that our esteemed central bank won?t embark on this path until year-end. What if it surprises us with a June tightening? The bull market would die of an instant heart attack. What would trigger this? A blowout monthly nonfarm payroll number approaching 300,000, which would quickly take the headline unemployment rate close to the Fed?s publicly announced 6.5% target. With the economy perhaps growing at a 3% rate this quarter, such a development might be only a handful of Friday?s away.

So how is the genius, aggressive hedge fund trader going to deal with these opaque markets? Bet that the market is going to stay in a broad range for a few more months. We aren?t going to the moon, nor are we going to crash. We are more likely to die of ice than fire. That?s what the volatility markets (VIX) are telling us.

There are several ways to play this kind of market. If you have a plain vanilla stock portfolio, you should be executing ?buy writes? against your existing holdings to take in extra premium income. With the bull move five months old, call options are trading at historically rich levels. This low risk, high return strategy involves selling short call options against existing stock positions. If your stock gets called away, you just say ?thank you very much? and buy it back on the way down.

For the more aggressive, you can add naked short sales of deep out of the money calls one month out. You don?t get rich with a strategy like this, but you earn a living.

You might also buy some deep out-of-the-money index puts for pennies. They are now trading near the cheapest prices in history. One market hiccup, and these things double very quickly.


Hmmm. Doesn?t Look Like Ben Bernanke

Here Comes the Next Peace Dividend.

When communications between intelligence agencies suddenly spike, as has recently been the case, I sit up and take note. Hey, you don’t think I talk to all of those generals because I like their snappy uniforms, do you?

The word is that the despotic, authoritarian regime in Syria is on the verge of collapse, and is unlikely to survive more than a few more months. The body count is mounting, and the only question now is whether Bashar al-Assad will flee to an undisclosed African country or get dragged out of a storm drain to take a bullet in his head a la Gaddafy. It couldn?t happen to a nicer guy.

The geopolitical implications for the U.S. are enormous.? With Syria gone, Iran will be the last rogue state hostile to the U.S. in the Middle East, and it is teetering. The next and final domino of the Arab spring falls squarely at the gates of Tehran.

Remember that the first real revolution in the region was the street uprising there in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards. The true death toll will never be known, but is thought to be in the thousands. The antigovernment sentiments that provided the spark never went away and they continue to percolate just under the surface.

At the end of the day, the majority of the Persian population wants to join the tide of globalization. They want to buy IPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all. Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have failed to cater to these desires

When Syria collapses, the Iranian ?street? will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite. The Obama administration is now pulling out all the stops to accelerate the process. Secretary of State Hillary Clinton has stiffened her rhetoric and worked tirelessly behind the scenes to bring about the collapse of the Iranian economy.

The oil embargo she organized is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain. Yes, Russia and China are doing what they can to slow the process, but conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 25%.? Iranian banks are about to get kicked out of the SWIFT international settlements system, which would be a deathblow to their trade.

Let?s see how docile these people remain when the air conditioning quits running this summer because of power shortages. Iran is a rotten piece of fruit ready to fall off its own accord and go splat. Hillary is doing everything she can to shake the tree. No military action of any kind is required on America?s part.

The geopolitical payoff of such an event for the U.S. would be almost incalculable. A successful revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.

Oil will lose its risk premium, now believed by the oil industry to be $30 a barrel. A looming supply could cause prices to drop to as low as $30 a barrel. This would amount to a gigantic $1.66 trillion tax cut for not just the U.S., but the entire global economy as well (87 million barrels a day X 365 days a year X $100 dollars a barrel X 50%). Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry?s worst nightmare.

At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.

The implications for the financial markets will be enormous. The U.S. will reap a peace dividend as large, or larger, than the one we enjoyed after the fall of the Soviet Union in 1992. As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom. A collapse in oil imports will cause the U.S. dollar to rocket.? An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse. With the U.S. government gone as a major new borrower, interest rates across the yield curve will fall further.

A peace dividend will also cause U.S. GDP growth to reaccelerate from 2% to 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, junk bonds, commodities, precious metals, and food. The Dow will soar to 20,000, the Euro collapses to parity, gold rockets to $2,300 an ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel. The 60-year bull market in bonds ends.

Some 1 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak these well-trained and motivated people right up. We will enter a new Golden Age, not just at home, but for civilization as a whole.

Wait, you ask, what if Iran develops an atomic bomb and holds the U.S. at bay? Don?t worry. There is no Iranian nuclear device. There is no real Iranian nuclear program. The entire concept is an invention of Israeli and American intelligence agencies as a means to put pressure on the regime. The head of the miniscule effort they have was assassinated by Israeli intelligence two weeks ago (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!).

If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago. There is no plan to close the Straits of Hormuz, either. The training exercises in small rubber boats we have seen are done for CNN?s benefit, and comprise no credible threat.

I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do. The Dow began a 25-year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.

If the collapse of Iran was going to lead to a global multi-decade economic boom and the end of history, how would the stock markets behave now? They would rise virtually every day, led by the technology sector, offering no substantial pullbacks for latecomers to get in. That is exactly what they have been doing since mid-December. If you think I?m ?Mad?, just check out Apple?s chart below.









Nonfarm Bombshell Sends Markets Scampering

Say goodbye to 2012. That was the harsh conclusion of the marketplace after the release of the devastating May nonfarm report that forced the Dow to give up its entire year to date performance.

The cat was really set among the pigeons this morning when the Department of Labor informed us that only 69,000 jobs were gained in the previous month. The unemployment rate ratcheted up to 8.2%. ?RISK OFF? returned with a vengeance, sending stocks, commodities and oil into a tailspin. Bonds roared, the ten year Treasury reaching the unimaginably low yield of 1.42%. Japanese style bond yields here we come.

The truly horrific numbers were the revisions, which saw the jobs figure for March cut by -11,000 and April by -38,000. The biggest gainers were in health care (+33,000), transportation and warehousing (+33,000), and manufacturing (+12,000). The losers were in construction (-28,000), government (-13,000), and leisure and hospitality (-9,000). The long term unemployment rate jumped from 5.1 million to 5.4 million. The inexorable trend of a shrinking government and a growing private sector continued.

Administration officials made every effort to put lipstick on this pig, and were at pains to point out that this was a seasonal slowdown that occurs every year. The operative word here is that jobs were ?added?. They argued that the real focus should be on the 4.3 million private sector jobs created in the last 27 months. The markets didn?t buy this glass half full interpretation for a nanosecond.

Of course, further talk of quantitative easing came to the fore once again, preventing an even bloodier sell off, forcing traders to keep a hair trigger on their shorts. From here on, the government is going to attempt to make life as uncomfortable as possible for short sellers who are seen to be restraining the grand design. As I always tell traders in these conditions, make the volatility work for you and run towards it, not against it.

Don?t expect the Federal Reserve to rise to the rescue of risk assets anytime soon. It has so little dry powder left that it is unlikely to move until market conditions dramatically worsen. My bet is that the Fed won?t take action until the S&P 500 hits 1,100. The problem is that we may get our wish.

Looking at the charts below, you can only conclude that there is more pain to come. Commodities, the first asset class to enter this selloff, look like they will be the first to hit bottom. Oil (USO) is at my downside target of $85, copper (CU) is rapidly approaching my $3.00/pound goal, and gold (GLD) keeps bouncing off of my $1,500 floor.

Since equities were the last to top, they may become the last to bottom. Therefore, I think we may be two thirds of the way through this downturn on a price basis, but only half way on a time basis. That analysis sees a new major rally postponed until August at the earliest. It also made 1,250 the next stop on the downside and 1,250 an obvious medium term target.

For those who took my advice to sell in May and go away, good for you. Go blow your profits on a vacation in the Hamptons this summer. And have a mojito for me.






My Tactical View of the Market

The easy money has been made on the short side this year for a whole range of asset classes. While we will probably see lower lows from here, the risk/reward ratio for taking short positions in (SPX), (IWM), (FXE), (FXY), (GLD), (SLV), (USO), and (CU) are less favorable than they were two months ago.

Of course, the ultimate arbiter will be the news play and the economic data releases. It they continue to worsen as they have done, you can expect a brief rally in the (SPX) up to the 1,340-1,360 range before the downtrend resumes. First, we will revisit the old low for the move at 1,290. Then 1,250 cries out for attention, which would leave us dead unchanged on the year. Lining up next in the sites is 1,200. But to get that low, probably by August, we would need to see something dramatic out of Europe, which we may well get. For the Russell 2000, look to sell it at the old support range of $78-80, which now becomes overhead resistance, to target $72 on the downside.

Don?t underestimate the devastating impact the Facebook (FB) debacle will have on the overall market. Retail investors lost $6 billion on the deal after institutional investors were given the heads up on the impending disaster and stayed away in droves. The media has plenty of blood on its hands on this one. The day before the pricing, one noted Cable TV network reported that the deal was oversubscribed in Asia by 30:1. Morgan Stanley reached for the extra dollars, increasing the size, and boosting the price by 15%. It all came to tears.

Expect investigations, subpoenas, congressional hearings, prosecutions, multi million out of court settlements, thousands of lawsuits, and many careers ended ?to spend more time with families.? Horrible thought of the day: Apply Apple?s (AAPL) 8X multiple, which is growing at 100% a year, to Facebook, which is not, and you get a (FB) share price of $5. None of this exactly inspires confidence in the stock market.




Notice that emerging markets have really been sucking hind teat this year, dragged down by falling commodity prices, a slowing China, and a general ?RISK OFF? mood. This is probably the first sector you want to go back in at the summer bottom to take advantages of their higher upside betas.



The Euro went through the old 2012 low at $1.260 like a hot knife through butter. On the breach, a lot of momentum programs automatically kicked in and doubled up their short positions. That is what has taken us all the way down to the high $124 handle in the cash. Let?s see how the market digests this breakdown. The commitment of traders report out on Friday should be exciting, as we already have all-time highs in short positions in the beleaguered European currency.

The problem is that any good news whispers or accidental tweets on the sovereign debt crisis could trigger ferocious short covering and gap openings which the continental traders will get a head start on. So again, this is not the low risk trade that it was months ago.

Still, the 2010 lows at $1.18 are now on the menu. I would sell all the ?good news? rallies from here two cents higher. Aggressive traders might consider selling penny rallies, like the one we got today. Notice that the Euro is rallying into the US close every day. This is caused by American traders covering shorts, not wishing to run them into any overnight surprises.

The Japanese yen seems to be stagnating here once again, now that the Bank of Japan has passed on another opportunity to exercise more much needed quantitative easing. Therefore, I will use the next dip to get out of my September put options at a small loss. There is a better use of capital and bigger fish to fry these days.

The Australian dollar has been far and away the world?s worst major currency this year, falling from $110 all the way down to $94 on a spike. It now languishes at $97. I long ago stopped singing ?Waltzing Matilda? in the shower. I hope all my Ausie friends took my advice at the beginning of the year and paid for their European and American vacations while their currency was still dear. We could see as low as $90 in the months to come.





Gold (GLD) and silver (SLV) still look week, as this week?s failed rally attests. The strength of the Indian rupee still has the barbarous relic high priced for the world?s largest buyer, and this will continue to weigh on dollar based owners. But we are also reaching the tag ends of this move down from $1,922. Speculative short positions are at a multi-year low. It would take something pretty dramatic to get me to sell short gold again. For the time being, I am targeting gold at $1,500 on the downside, $1,450 in an extreme case, and $25 in silver.




We are well into the move south for oil, which peaked just at the March 1 Iranian elections just short of $110/barrel. The market now seems to be targeting $87 for the short term. The global economic slowdown is the clear culprit here. But in the US, we are starting to see a clear drag on oil prices caused by the insanely low price of natural gas. You can see this clearly on the charts below where gas has been rising while Texas tea has been plunging. Utilities and industry are switching over to the cleaner burning ultra cheap fuel source as fast as they can. As a result, greenhouse gas emissions are falling faster in the US than any other developed country, according to the Paris based International Energy Agency. Sell any $4 rally in crude and keep a tight stop.




When China catches cold, copper gets pneumonia. So does Australia (FXA), (EWA), for that matter. The China slowdown will most likely continue on into the summer, knocking the wind out of the red metal. If copper manages to rally back up to $3.60, grab it with both hands and throw it out the window. Cover when you hear a loud splat. That works out to about $26.50 in the ETF (CU).





It all points to a highly choppy and volatile ?RISK ON? rally that could last a week or two. It will be a time when you wish you took your mother in law?s advice to get a real job by becoming a cardiologist or plastic surgeon. Do you want to know when I want to reestablish my shorts? If you get a modestly positive nonfarm payroll on at 8:30 am on Friday, June 1, that could deliver a nice two day rally that would be ideal to sell into.



Why Dr. Copper is Looking Ill

Traders like to refer to the red metal as Dr. Copper because it is the only one that has a PhD in economics. This year it has been proving its credentials as a great predictor of future economic activity once again.

Copper has been leading the downside charge for all risk assets since it peaked on February 10. After looking at the latest trade data for the red metal, it is clear that it has a lot more bleeding to do. This does not bode well for risk assets anywhere.

The harsh truth is that copper stockpiles in China, which accounts for 40% of global consumption, are the highest in history. Estimates for the size of current stockpiles in country run as high as 3 million tonnes, with a stunning 918,000 tonnes coming in during the last six months. Consumption totaled only 1 million tonnes in Q1, 2012, and could fall to as low as 1.7 million tonnes over the remaining three quarters. The mismatch is huge, and makes the current price of $3.64 a pound look pretty expensive.

This imbalance is occurring in the face of a slowing Chinese economy. Only yesterday, the Chinese purchasing managers index for April came in at 49.1, well below the boom/bust level. Residential real estate, the largest consumer of copper in the Middle Kingdom, has clearly been in a bear market since last year.

The grim outlook is expected to make a serious dent into the profits of major producers, BHP Billiton (BHP), Freeport McMoRan (FCX), Rio Tinto (RIO), and Anglo American (AAUKY.PK), and Xstrata (XTA.L).

If the risk off scenario continues through the summer, then a $3.25 downside target is a chip shot. Remember that the 2009 low was positively subterranean $1.25 a pound. Bring in a real summer slowdown, and lower prices are within reach. Professionals will be selling the futures on any decent rally. Individuals can sell (CU) on market, are buy near money puts.




Cross Asset Class Analysis Warned ?RISK OFF? Was Coming

Last week saw a dramatic deterioration in the economic data that has been the foundation of the Great Bull Market of 2012.

First, we read minutes from a Federal Reserve meeting suggesting that QE3 has been put on a back burner. Then the Department of Labor?s Friday nonfarm payroll report poured gasoline on the fire, coming in at 120,000, versus an expected 210,000. Until this week, the best you could say about the data flow was that it was mixed. Now it is decidedly negative.

Whenever we see sea change events like this bunch up over a short time period, I like to show readers my cross asset class review, which I conduct on a daily basis. This discipline is great at showing which securities are trading in line with the rest of the world, and which ones aren?t. And guess what is looking outrageously expensive right now?

The charts show that trouble has in fact brewing for a few months. Asset classes have been rolling over like a line of dominoes. This is the way bull markets always end, and this time should be no different.


The Australian dollar (FXA) saw the weakness coming first, which peaked on April 6.



The Australian stock market (EWA) followed, peaking on February 28.



Copper (CU) warned that trouble was coming, peaking on February 12.



Then Gold (GLD) faded on April 12.



And Silver (SLV) on February 28.


Bonds never bought the ?RISK ON? on scenario. The ten year Treasury ETF (IEF) is down less than three points from its 2011 peak, instead of the 15 points we should have gotten if the economy had truly entered a sustainable stage in the recovery.



Only equities (SPX) didn?t see ?RISK OFF? coming



Because it was all about Apple (AAPL), which added $225 billion in new market capitalization this year. That amounts to creating the third largest company from scratch, right after Exxon (XOM).

The final message of all of these charts is that equities alone have been powering up for months while every other asset class in the world has been dying a slow death. Experience shows that this only ends in tears for equity holders. I?ll let you adjust your own positions accordingly.

?RISK OFF? Strikes Again

You would think that this was going to be a good day. Weekly jobless claims fell to 388,000, a new six month low. New permits for home construction in October were up 10.2%. The October CPI even fell by 0.1%.

But the second that Spanish bond yields spiked, it was all over but the crying. The S&P 500 opened weak, and then proceeded to plunged 25 points, decisively breaking a triangle to the downside on the charts that has been narrowing for the past three weeks. Once again, improving fundamentals in the US were trumped by contagion fears in Europe. If you don?t bounce off the 50 day moving average on Friday, then we?ll be on the Lexington Avenue Downtown Express to 1,150 or worse.

The ?RISK OFF? nature of the move across all asset classes could not have been more clear. Oil skidded by $5, gold gave up $65, silver pared $2.20, copper gave back 15 cents. Ten year Treasuries, which never believed in this ?RISK ON? rally for two seconds, received a nice little boost, but not as much as you might expect. Perhaps we are near a top in this most bubblicious of asset classes? In the meantime, the (TBT) was beaten like a red headed stepchild.

One cannot underestimate the impact of the bankruptcy of MF Global, which has deprived the market of $600 million of trading capital. It is particularly serious in the metals and energies, where MF was particularly active. Hence the gut churning moves. The peripatetic CNBC commentator and Tea Party founder, Rick Santelli, is finding out that ?let the chips fall where they may? means that all his friends on the Chicago CME floor get fired.

Strangely, the Euro, the currency that everyone loves to hate, was one of the best performing assets of the day, down less than a penny. The headline risk here is huge. Will the European Central Bank continue buying enough bonds? Forex traders tell me this is because of a number of temporary, one off factors like European bank repatriation of funds back into Euros to shore up their balance sheets and Asian and Middle Eastern central bank purchases of high yield PIIGS bonds. The second shoe has yet to fall on this beleaguered means of exchange.