The Daily Trading Report

The recent behaviour of the CRB index (and commodity ETFs in general) has been about exciting as watching wet paint dry! There has been considerable bullish (and bearish) talk on commodities yet as a “group” they have not moved since June last year! Certainly the behaviour of the CRB suggests that commodities have gone nowhere.

But wait, in the “real world” the picture is very different. Take a look at the spot commodity market. The CRB Spot index has almost reclaimed all its 2008 losses.

We place more importance on the behaviour of the CRB Spot index rather than the CRB Futures index because the spot index is free from the effects of differences such as backwardation and contango and thereby reflects the real world price behaviour of commodities. And what is in the CRB Spot All Commodities index? Here is a basic listing:

We think that it is only a matter of time before commodity futures break to the upside and with that so too will the big commodity ETFs (DBC, RJI, GSG, DJP)

Cotton, lumber, platinum, and copper are trading more or less at multi-week highs. We are not so specifically interested in trading cotton, lumber, platinum, and copper; rather we are more interested in the “subliminal” messages of multi-week highs in key industrial commodities. Like it or not we are unable to get away from these industrial commodities in our daily lives. The multi-week highs to us is more evidence of the developing bullish build up in commodities and inflationary pressures. How can one argue against economic growth and or inflation given the behavior of the charts below? If this behavior is not inflationary then we are missing something big time!

Of course the behavior of the four charts above are represented by the CRB Continuious Commodity Index (the old CRB Index which is an equally weighted index of 17 commodities). The CCI continues to etch higher quietly and in a seemingly controlled fashion. But wait there is more………look at what the CCI is doing in AUDs! If this behavior is not a leading indicator of economic growth/inflation what is?

There is a new trend developing in world financial markets right now…..and that appears to be a breakdown in the faith of governments. The ultimate price of years of excess is about to be paid – inflation.

Our wealth creation portfolio is up around 22.61% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.

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If seems that every which way we look evidence continues to mount in support of global inflation and economic growth. We have our suspicions as to why this is happening but to be honest these suspicions are of little significance. What’s important is simply that it is happening.

Note how the US Treasury market is behaving. TIPs are on the verge of breaking out against non inflation protected treasuries and long dated US Treasuries (20 & 30 yrs) are trading at multi-week lows. All this suggests that inflationary expectations are rising!

Of course for some time the price of crude and gold has been suggesting that something is up on the inflation front…..but few took notice!

Since the start of October the cost of hiring dry bulk carriers has rocketed! Someone is hiring ships, and someone has an insatiable appetite for coal (which still accounts for about 70% of global electricity production). You cannot store electricity and it is expensive to store coal.

Given that the trends above are all confirming each other we think that there is considerable more upside to come in commodities and US Treasury yields. There are two trades that we like that would catch rising commodity prices and US Treasury yields – long DBC and TBT and there is nothing more to it than that.

Our wealth creation portfolio is up around 19.48% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.

Subscribers to our paid service are privy to our portfolio, sector weightings, and trade history.

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Another nail in the coffin for deflationists! Gold traded at multi-week highs against paper currencies last night. Perhaps the most significant move was gold’s close above $AUD1180. The charts below suggest that something powerful is building in gold……perhaps something that will rival what we witnessed in the late 1980s. The evidence is there as plain as daylight for all to see, of course whether you choose to believe it or not is entirely up to you.

Now we wait on Crude and the CRB to breakout in Aussie dollar terms…..But given what has just happened with Gold (and what is happening with Baltic Freight rates, TIPs vs. US 10yrs we think Crude and the CRB will follow! Watch the CRB and Crude in Aussie Dollar terms. A break above 3.20 and 0.90 in the charts below will be the final nail in the coffin for deflationists!

“In religion and politics people’s beliefs and convictions are in almost every case gotten at second-hand, and without examination, from authorities who have not themselves examined the questions at issue but have taken them at second-hand from other“

This quote from Mark Twain applies equally to investing and economics as well. We say believe not in what others tell you but in what the market is telling you.

Our wealth creation portfolio is up around 17% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.

Subscribers to our paid service are privy to our portfolio, sector weightings, and trade history.

We are not currently taking new subscribers. Please enter your email address if you would like to follow our commentary and be notified when we open our service for subscriptions.

Is this a pivot/tipping point in world markets where there will be a reversal of what we have witnessed over the last 6 months? We don’t know what the future holds but we do know that markets “themes” move in observable trends. Once in place a global theme tends to last for months if not years. For the last 10-11 months at least markets have embraced a “high yield” theme (call it what you will). What we will do now is look for evidence of “cracks” in this broad theme……for evidence that what we have observed over the last 6 months is about to come to tragic end!

We will approach this question from a number of different angles to try and form an objective conclusion. Now first things first – has the crowd’s appetite for risk changed? If the crowd was moving from a risk seeking to a risk averse condition we would see a stampede out of “risky” assets, namely:

• junk grade corporate bonds,
  
• emerging market bonds,
  
• junk grade relative to investment grade bonds,
  
• emerging market bonds relative to US Treasuries,
  
• emerging market and developed market small caps,
  
• high yield currencies,
  
• emerging market currencies,
  

From the 8 graphs below there is no evidence outside normal market “noise” that would suggest a turnaround in leading indicators of risk taking. Yes, if you are going to see a flight to “safety” you will pick it up first in these charts.

If money is coming out of risky assets it would have to find a home in “safe haven” assets namely:

• the USD
  
• the Yen
  
• US Treasuries
  
• Large cap equities at the expense of small caps
  

We did have a bounce in the USD Index yesterday and the day before, however that “bounce” was nothing out of the ordinary and perhaps more importantly did not occur at any support level. The next support level lies at the 72 level which is some way off. What relevance a weakening yen has got relative to the USD is open to debate and perhaps just a red herring. More important is the emerging breakout in US Treasuries, particularly the long dated. This behaviour is exciting (yes it is about time they fall over given the recent behaviour of commodity markets) and at the same time it is disturbing because goodness knows what will happen if the US 30 year really starts to crumble! Anyway all that being said there does not seem to be any evidence of a move to “traditional” safe haven markets/assets/securities.

And what about commodities? Is the deflationist camp about to get their day in the sun again anytime soon? Well before we could reasonably conclude that commodities are about to fall on their face/implode we would have to see evidence of the following:

• a breakdown in the CRB in both USD and non USD terms,
  
• Inflation linked bonds breaking down against non inflation linked,
  
• a breakdown in Baltic Freight Rates.
  

For now at least there does not seem to be any break of the recent trends. Everything seems to suggest that the next big move for commodities will be to the upside not downside and that the 1.6% fall in the CRB last night was merely “profit” taking.

So when it is all said and done………the only change in “trend” has been the breakdown in US Treasuries (although we need to see further downside before we get real excited).

The trade that seems to standout to us from all of this is long commodities and short US Treasuries. What about equities? We are not bearish (yet) but don’t know the implications of a falling US Treasury market, so perhaps long stocks with long dated out of the money puts (because vols are cheap) to hedge against Nouriel Roubini being right – yes stranger things have happened!

Our wealth creation portfolio is up 22.23% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.

Subscribers to our paid service are privy to our portfolio, sector weightings, and trade history.

We are not currently taking new subscribers. Please enter your email address if you would like to follow our commentary and be notified when we open our service for subscriptions.

The final nail in the coffin for US Treasuries or the final “good to go” for the commodity bull? Well you take your pick! Look at how close the CRB is to breaking to a multi-week high against long dated US Treasuries (TLT). The behaviour of the CRB relative to TLT suggests that a significant bull market in commodities is about to kick into gear! What more of a bullish signal can you ask for if commodities start outperforming US Treasuries! Perhaps this is the ultimate inflation confirmation indicator.

We don’t know what the futures holds but we do know that once a primary trend is established then it lasts for months if not years. We are confident that we are about to see confirmation of a primary bull trend in commodities over the coming days (as opposed to weeks).

Our wealth creation portfolio is up 22.23% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.

Subscribers to our paid service are privy to our portfolio, sector weightings, and trade history.

We are not currently taking new subscribers. Please enter your email address if you would like to follow our commentary and be notified when we open our service for subscriptions.

We are not so interested in commodities in USD terms we are perhaps more interested in commodities in non USD terms. Last week was key for commodities in breaking out against the USD, but we think that this was merely chapter one! Multi-week highs in commodity prices in USD, EUR, CHF, GBP, JPY, and CAD terms = global inflation! The behaviour of the US long bond (30yr) would have us all believe that inflation is not a problem, but the behaviour of the commodity market, in whatever currency takes your fancy, is telling something completely different!

It is looking increasingly likely that commodities are about to break higher in non USD terms and this is where the “meat” of the commodity story lies! The final nail in the coffin of the deflationists will be when commodities in AUD terms break higher. We think this occurrence will happen before year end!

When commodities break higher against the AUD watch out holders of TLT and IEF…..we think you will be better served by being long TBT!

Our wealth creation portfolio is up 20.94% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.

Subscribers to our paid service are privy to our portfolio, sector weightings, and trade history.

We are not currently taking new subscribers. Please enter your email address if you would like to follow our commentary and be notified when we open our service for subscriptions.

Yes the long awaited breech of the $75 level has finally occurred! The road is now open for a new high in Crude….i.e. above $150. We think that all the efforts by the Fed in rescue and bailout packages have only served to dramatically enhance the probability of crude making another multi-year high over the coming months! Of course only time will tell.

We think that the next big leg up in crude is now getting into gear and accordingly it is not too late to get exposure to oil. We say this because of confirmation of the breakout in crude in the broad commodity market (CRB), currency markets (Aussie Yen and USD Index), and fixed income (TIPS vs. US 10yr)

And where oil goes so too does the big CRB Index. Last night the CRB also closed at a multi-week high. This suggests that the rise in commodities is broad based. A number of individual commodity contracts also hit new multi-week highs.

Our favorite means of gaining exposure to the broad commodity group is via the ETF DBC. Now we have TIPs at a multi-week high vs. the US 10yr so the bond market is now confirming what we are seeing in the commodity market.

The USD Index closed last night well below its last line of support. Now the next level is at the 72 level – some 4.6% away from current levels! This is a sizeable fall for the USD Index but we think that it will probably get to the 72 level before year end!

So don’t be surprised to see the Aussie trade at parity before year end! Of course the Australian Reserve Bank Governor, Glenn Stevens, stating that “Australia cannot be too timid on rate rises” does not do much for bearish sentiment towards the Aussie dollar. And of course last but not least is the Aussie Yen cross which has been a proxy for the carry trade and a leading indicator for commodity prices. It broke to a multi-week high (above 82) last night.

The wheels of inflation are now in motion and those wheels to us appear somewhat bigger than what the average punter/economist can wildly imagine.

For the last four months trading commodities, commodity currencies vs. the Yen (such as the Aussie Yen), and TIPs vs. the 10 year is probably about as close as one gets to good old fashioned trench warfare. Just when the inflationists are about to break through the deflationists lines of defence they mount an intense counter attack. However, there is evidence that each time the deflationists mount an attack they make less ground each time, i.e. the bulls are gradually moving their defensive line forward. This suggests to us that the deflationists are slowly losing the ability to hold their line. Once (should we say if) the inflationists break through they are likely to move deep into deflationist territory…..i.e. on breaching $75, crude is likely to move quickly to $100!

Perhaps the two most important indicators we continue to watch for hints of a breakout in commodity prices (the CRB above 270) is the Aussie Yen and TIPs relative to the US 10 year. Breakouts in these two indicators will give a powerful confirmation of an impending breakout in commodity prices.

Sometimes the waiting is the hardest part!

Our wealth creation portfolio is up 16.32% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.

Subscribers to our paid service are privy to our portfolio, sector weightings, and trade history.

We are not currently taking new subscribers. Please enter your email address if you would like to keep in touch and be notified when we open our service for subscriptions.

Depending on how you look at it, Inflation premiums have either broken to multi-week highs or are very close to doing so! Note the how close the ETF TIP is from breaking out against the US 10 year. Also note that inflation protected bond funds have already broken out against the US 10 year. Which chart do we believe? Well take an eyeball average of both and it suggests that we have inflation premiums at multi-week highs.

This behavior suggests on should expect commodity prices to break to the upside over the coming days/weeks. We have found that the behavior within bond markets leads the behavior of commodity markets themselves for whatever reason, perhaps it relates to liquidity.

Our wealth creation portfolio is up 19.06% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.

Subscribers to our paid service are privy to our portfolio, sector weightings, and trade history.