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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.

 

 

The Next Two Weekly Jobless Figures Are Crucial

All eyes will be focused on the weekly jobless claims to be released by the Department of Labor at 8:30 AM EST on Thursday.

You may recall that investors did not exactly run the last two weekly reports up the flagpole and salute them, which showed sharp increases in unemployment claims. At this point the bulls are being comfortably complacent, blaming the bad numbers on? ?random noise? and short term statistical anomalies. This was the final data series to turn negative, and the last of a recent plethora of downshifting economic reports.

Get two more high or higher jobless numbers, and the four week moving average will turn up. That will be enough to set the cat among the equity holding pigeons, and turn a modest 5% correction into a much scarier one that is 15% or greater. All of a sudden it is d?j? vu all over again, with 2012 turning into a carbon copy of 2011, 2010, and 2009, and a big summer sell off in the cards.

I have been warning about the likelihood of such a development all year. After every company in the US hired one person, they again slammed on the brakes and quit returning e-mails. Corporate management these days are playing defense, and don?t see any increase in consumer spending as sustainable. Why add overhead in front of the next slowdown? There are also not a lot of companies that want to expand the workforce going into the summer, which normally sees a seasonal slowdown.

This sudden downgrade of one of the most important data streams is occurring just as a whole flock of black swans are getting clearance for landing. The French elections are signaling that we have at least two more weeks of ?RISK OFF? on the table until the run off on May 6, and possibly much more. Last night, the HSBC Chinese purchasing managers index came in at 49.1 for April, below the crucial boom/bust level of 50 for a sixth month. That means a Chinese hard landing is still on the table, although I think that it is unlikely.

The timing of all this couldn?t be worse, or better, if you happen to be short, as I am. The charts for virtually every risk asset, from Apple (AAPL), to the (SPX), (IWM), (USO), (CU), (FXY), (FXE), (GLD), and (SLV), are either showing textbook head and shoulder tops, or are already in clear down trends. I include an ample sampling below.

Anyone who believes that the ?RISK ON/RISK OFF? model is dead works in a profession where they can be consistently wrong and still stay in business, like in journalism. Give it two more weeks, and expect the media to start wringing hands about ?double dip? or ?triple dip? recession. Last year risk assets peaked on April 29. This year, April 29 came early, on April 2.

 

 

 

 

The Black Swans Have Been Cleared for Landing

US Headed Towards Energy Independence

My inbox was clogged with responses to my ?Golden Age? for the 2020?s piece yesterday, particularly my forecast that the US was moving towards complete energy independence. This will be the most important change to the global economy for the next 20 years. So I shall go into more depth.

The energy research house, Raymond James, put out an estimate this morning that domestic American oil production (USO) would rise from 5.6 million barrels a day to 9.1 million by 2015. That means its share of total consumption will leap from 28% to 46% of our total 20 million barrels a day habit. These are game changing numbers.

Names like the Eagle Ford, Haynesville, and the Bakken Shale, once obscure references on geological maps, are now a major force in the country?s energy picture. Ten years ago North Dakota was suffering from depopulation. Now, itinerate oil workers must brave -40 degree winter temperatures in their recreational vehicles pursuing their $150,000 a year jobs.

The value of this extra 3.5 million barrels/day works out to $134 billion a year at current prices (3.5 million X 365 X $105). That will drop America?s trade deficit by nearly 25% over the next three years, and almost wipe out our current account surplus. Needless to say, this is a hugely dollar positive development.

This 3.5 million barrels will also offset much of the growth in China?s oil demand for the next three years. Fewer oil exports to the US also vastly expand the standby production capacity of Saudi Arabia.

If you want proof of the impact this will have on the economy, look no further that the coal (KOL) and rail stocks (UNP) which have been falling in a rising market. Power plant conversion from coal to natural gas (UNG) is accelerating at a dramatic pace. That leaves China as the remaining buyer, and their economy is slowing.

It all makes the current price of oil at $105 look a little rich. As with the last oil spike three years ago, this one is occurring in the face of a supply glut. Cushing, Oklahoma is awash in Texas tea, and the Strategic Petroleum Reserve stashed away in salt domes in Texas and Louisiana is at its maximum capacity of 727 barrels. It is concerns about war with Iran, fanned by elections in both countries that have taken prices up from $75 in the fall.

My oil industry friends tell me this fear premium has added $30-$40 to the price of crude. This is why I have been advising readers to sell short oil price spikes to $110. The current run up isn?t going to take us to the $150 high that we saw in the last cycle. It is also why I am keeping oil companies with major onshore domestic assets, like Exxon Mobile (XOM) and Occidental Petroleum (OXY), in my long term model portfolio.

 

 

 

 

 

 

Take a Look at Cheniere Energy (LNG)

I am constantly asked if there are any ways investors can take advantage of the collapse of the natural gas market, where at $2.34/MBTU prices are plumbing decade lows. I have recently made good money buying puts on the ETF (UNG), but these are not for the faint of heart. They call this contract the ?widow maker? for a good reason.

You don?t want to touch the gas producing companies, like Chesapeake (CHK) and Devon (DVN), because prices are probably going to stay down for years. Good firms that benefit from the increased volume of gas pumped are few and far between. Unless you are a large consumer of this despised molecule, such as an electric power company or a petrochemical plant, it is tough to find a profitable niche.

However, there is one company that delivers a narrow rifle shot that could do extremely well in coming years, and that is Cheniere Energy (LNG). I first started following (LNG) a decade ago when I was still wildcatting for CH4 in the Texas Barnet Shale.

Back when natural gas was trading at a loft $5/MBTU, Qatar invested $50 billion in in developing its own substantial gas resources. The plan was to liquefy the gas at -256 degrees Fahrenheit in the Middle East, ship it to the US in a fleet of specialized LNG carriers, and have Cheniere convert it back into gas at its Sabine River plant for distribution to an energy hungry US market through the Creole Trail pipeline. It all looked like a great plan, and (LNG) shares traded up to $45.

Then ?fracking? technology came along and blew up the entire model. The discovery of a new 100 year supply of gas under our feet caused gas prices to crash from a post Amaranth peak of $17/MBTU down to $2/MBTU. Any plans to import LNG from the other side of the world were rendered utterly worthless. Chenier?s billion dollar investment in a gasification plant was now worth only so much scrap metal. (LNG) shares plumbed low single digits as the firm flirted with bankruptcy.

Enter China. The Middle Kingdom?s voracious demand for energy in this recovery has caused the price of oil to soar from a 2008 low of $30 to $110. Despite accounting for an overwhelming share of the world?s new energy purchases, Chinese cities are suffering from brown outs due to power shortages. This is why China is resisting immense American pressure to quit buying Texas tea from Iran.

Enter the arbitrage. While oil has been spiking, gas has been crashing. Gas is now selling at 15% of the cost of oil on an adjusted BTU basis. Another way of saying this is that you can buy oil for $16 a barrel instead of $110. It only takes a second with an abacus to understand the appeal of such a disparity.

Gas also has the additional benefits in that it is much cleaner burning than crude, lacks the sulfur and nitrogen dioxides, and produces half the carbon dioxide. That?s a big deal in Beijing where the air is so thick you can cut it with a knife on a bad day.

Enter the long term contracts. During the 1960?s and 1970?s Japan entered into huge long term contracts to buy LNG from Australia and Indonesia to feed their own economic miracle of the day. Because very expensive, hard to get or offshore supplies were tapped, the price was set at $16/MBTU. Those contacts are now expiring. Do you think they?ll renew at the old price, or go to Cheniere for the $2 stuff. Gee, let me think about that one for a bit.

Enter Fukushima. The nuclear meltdown last March prompted Japan to shut down 49 of 54 nuclear power plants that accounted for 25% of the country?s electric power generation. The brownouts that followed forced a sweltering summer on millions as the government urged consumers to shut off air conditioners to save juice. Power companies there have been scrambling to obtain conventional energy supplies, and have been a major factor in driving oil up from $75 to $100 since the fall. Cheap gas supplies from the US would meet this demand nicely.

The trigger. Last May, Cheniere got US government permission to export 2.2 billion cubic feet a day for 20 years. That would require it to convert the existing gasification plant to a liquifaction plant, something that can be done with some expensive re-engineering. It has already found several large international buyers to take delivery of the new end product. All that was missing was the money to finish the plant. My hedge fund buddies have been accumulating this stock since October, when it bottomed at $3, expecting an angel investor to appear. But it was one of those ?someday, it might happen? kind of stories better lead to long term players.

Then last week, Blackstone jumped in with a beefy $2 billion investment in Cheniere. That will enable them to obtain an additional $3 billion in debt financing needed to finish the first of two export facilities. They are now expected to come online in 2016.

How does Cheniere stack up as an investment? Frankly, it is kind of scary. The market cap is only $2 billion, and it pays no dividend. When the current spate of deals are done, it will have $5 billion in debt. The Stock has just run up from $3 to $17. And these facilities are dangerous to operate. One blew up in Texas in 1937 and killed 300 schoolchildren. As a result, local permits for these are very hard to come by.

But as you can see, a whole host of geopolitical, technology and economic strands tie together in this one company, all of which are positive for the share price. If the story comes true, as Blackstone hopes, then there could be a double or triple in the shares for the patient. To learn more about Cheniere Energy, please click here for their website at http://www.cheniere.com/default.shtml.

 

 

 

 

Did Somebody Light a Match?

It?s All About the Euro

Wednesday will be all about the Euro. That is the day that the European Central Bank announces the result of the next tranche of its quantitative easing program, the LTRO, or Long Term Financial Reorganization policy.

This is the program that allows European banks to borrow unlimited funds at 1% with no questions asked. This is very important for all asset prices worldwide, since the cash pouring out of the continent has been the primary driver of asset prices skyward since December.

It is safe to say that ?500 billion is in the price. That is what the beleaguered currency?s rally from $1.26 to $1.35 has been all about. The unwind of Euro shorts in the sterling and yen crosses have also been a factor. If the ECB delivers ?1 trillion instead, the Euro will pop to $1.37 and risk assets everywhere will rally. If they don?t, expect a low volume bleed off in prices, and the long awaited correction to begin. It is a coin toss which way it will go, so I shall watch from the sidelines.

Anticipation of more sugar infusions from the government has sparked the monster rally in the sovereign debt markets that I predicted last month. Spanish ten year bonds have fallen from 5.8% to 5.5%, while similar Italian yields have made it all the way down from 6.0% to 5.4%. That is quite a long way from the 8.0% peak we saw as recently as December.

Oil has been another new assist juicing the Euro. If the Euro falls, then the local cost of fuel in Europe would rise sharply, as oil is prices in dollars. This would exacerbate the recession already in progress on the continent. These concerns could prompt ECB president Mario Draghi to delay further interest rates cuts, generating more Euro strength.

If we do get the move to $1.37, that should clean out a big chunk of the remaining shorts, which have dropped recently, but are still huge. Since January 24, total shorts have fallen to 142,000 contracts, down from the all-time high of 171,000 contracts. That works out to $17 billion of underlying remaining on the short side.

Get the Euro back up to $1.37 and it might become an attractive short again. It?s just a matter of time before the market refocuses on Europe?s underlying fundamentals, and those are dramatically worsening by the day.

 

 

 

?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.