Tuesday, June 14, 2011

Euro pattern playing out...dollar confirming bullish

I am currently travelling so, I do not have time to put up a lot of charts...but here are my thoughts. I think that there is a very good possibility that today's run is a flash in the pan short squeeze and will get little if any follow through. We need to get used to those by the way...especially since everyone likes to be calling bottoms. I am watching the euro like a hawk and the dollar which confirmed a high probability bullish setup today. The reality is that the currencies are going to dictate what happens here...even though rates spiked big today in the 30 year I do not view that as significant to the equity markets perse. I think currency action will dictate market action at this time. I think that Silver and Oil as well as quite a few other commodities retested today and have patterns setup with probabilities for failure. Its also my view that the new shorts that some of my systems started building near today's close may turn out to be prescient. As I indicated in earlier posts, I closed the majority of my shorts on the indexes which were initiated near this years highs a few days ago. I did find significantly better risk reward trades in other instruments like the euro and the dollar which will also likely dictate the action in the markets over the near-term.

As a side note, I do think that it is entirely realistic for shorter term treasuries to trade at negative yield and though I am not trading the interest rates directionally at this time as I view the trade could go either way depending on whether or not fear of risk assets hits more powerfully than fear of debt instruments or vice versa. Personally, from several months ago, I was partial to rates continuing to decline for a while which they have done...and I think that there is still a good probability of that continuing into the future for US debt. Certainly, as I indicated in a post about that same time, I guess about a month ago, that the 30 year treasury looked possibly A-B-C-ish and somewhat countertrend which could mean that it could be done on the upside soon.

A Euro pattern to watch

Monday, June 13, 2011

Oil is power...but power is not Oil

These charts reinforce that the dollar rally is NOT a bounce in a bear market move but potentially the start of a powerful and sustained rally. There are clear reasons that the Saudi chart looks like it does and there are clear reasons that the implications of the implied move in the markets and oil should be expected and understood. Its not going to be pretty...but to me this scenario is going to play out and while I have tremendous respect for Jim Rogers, I believe that the exponential curve is going to take care of commodities and that the expungement of hidden and obfuscated insolvency especially in the derivatives markets and banking system will curtail pricing power and inflation in all asset markets. I do not believe that holding your purchasing power via commodities is the most optimal way to play out what has been occurring in the commodities markets...but please remember Goldman Tax is promoting long oil and other commodities to their clients, which likely means that they are bad trades as we can see by their horrible oil and copper trade so far...and its going to get MUCH worse.


Initially, when I started watching these charts, I was struck by the clear patterns that also coincided with my systems consistently biasing short for the last 7 months for swing trades. The reality is that during that time the systems have won nearly every trade they have taken and have had an abundance of double digit return months. However, I was left wondering about the curious setups and discordant behavior I have been watch that suggests cataclysmic price movements ahead. Curiously, the charts below support two observations...a very strong and persistent rally in the dollar and that the next version of the 2008 catastrophe will not be banks but centered around energy and sovereign nations. Another irony is that the impending energy market blow up has been christened with the catastrophe at Fukushima.

Bubble Mechanics, tall buildings and ski slopes in the desert

In the late 1990's Saudi Arabia had a break-even of less than $10 per barrel, in 2003 it increased to the low $30 range, by 2009 to 2010, break-even rose to the $50's and the 2011 break-even now is over $90 per barrel. Additionally, the 2011 break-even for Bahrain, Oman, U.A.E, Qatar and Kuwait has more than doubled on average, from 2003 levels.

I think we can all remember the Dotcom phenomenon...a time in which people from all levels kept seeing and forecasting higher and higher prices while at the same time similarly increasing their spending and personal and corporate break-even's. The reality is that in the middle east they have built the tallest buildings, temporary man made islands and temporary indoor ski slopes...not satsified with mania such as that, they have been working very hard to monetize and leverage nearly the entire margin possible from their only real asset "oil" so that they can support on-going and rapidly expanding government spending and malinvestment.

Rising costs for oil producers is widely credited as being the reason that prices will not drop. However, I believe that one could use that same logic in the recent Silver bubble that is currently bursting and the dotcom, technology and housing bubbles.

We are now left with the weary and tired commodity and energy bubble. Quite simply, the argument that large investors can leverage themselves to the teeth and somehow collude to keep prices up, thereby propping up their bubble ad infinitum, is ridiculous. Long-term capital management, Soros and the pound the banks and their CDO's, CDS and structured products all have become targets of scarce liquitity and well funded adversaries who can easily blow apart a widely known trade or financial weakness or incongruity. The financial anomaly in sovereign oil producing nations does not stand much chance either.

Anyone stupid enough to push their break-even to $90 (let alone has the gaul to predict break-even next year at $110) with oil prices currently at $95...deserves what they get...in this case total financial annihilation. Moreover, the sovereign's have another problem, they mistakenly believed that oil passing the peak of the exponential bell curve meant scarcity of supply could drive infinite price appreciation. They are clearly wrong, just as the silver bugs preached a similar peak silver story...it was misguided and is being proved wrong. There are some differences, however, to normal debacles in that oil producing nations will attempt to further curtail supply to prop up prices...this approach will likely fail due to their and everyone else's pending insolvency...the dollar will make it impossible for their scarcity and peak oil argument to work...there surely will be other influences like other producers who can actually get oil out of the ground for less than 90 dollars a barrel...but, regarless of losses, the sovereign's will need to continue to sell oil at those huge losses in order to obfuscate their financial insolvency for as long as conceivably possible. In the end, there will be a competition for who can sell the most oil first as the rush for cash spreads. Their plans will not work terribly well and by the looks of things the indoor desert ski slope.

So, the result of all this is that regardless of a dollar move to the upside, the sovereign oil producing nations are in deep trouble and insolvent. With the dollar rally, prices for the many commodities including oil are in for a very significant decline. These markets will be driven a similar issue - the need to covert a non-cash asset into cash.

Sunday, June 12, 2011

Some charts...

I can see no reason to expect a pullback in the dollar. I see every indication that this chart wants to rally hard - much harder and longer than almost anyone expects...if this is to occur, expect a very challanging environment for risk-on and inflationary trades.
Please refer to the chart below for a shorter-term target on the EURO:

A look back and forward with Douglass Lodmell...

Another in the series of interviews with Douglass Lodmell...you can visit his site at http://lodmell.com and his blog at http://www.themindofmoney.com/blog/.

Below is a detailled analysis of the realities associated with sustained exponential growth and natures brutal resolutions of these perversions.
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