Sunday, May 8, 2011

Itz Week End Review 5-7-11

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Well, last week finally witnessed silver's parabolic move implode declining nearly 27% for the week! Crude oil right behind with a 13% decline, gold managed to sneak by with only a 4.53% drop. Several events led to the decline in commodities. The first major geopolitical event was the Navy SEALs killing of America's Most wanted Osama Bin Laden, which sparked a rally early Monday morning. The most watched economic event being the Non-Farm Payrolls which showed a gain of +244,000 jobs compared to a gain of +221,000 in March. The private sector created 268,000 jobs but that was offset by a -24,000 decline in government positions. February and March numbers were upgraded by another 55,000 jobs. To put the April report even more into perspective you have to realize that the labor force expanded by 235,000. That means if you just look at the +244,000 non-farm additions and the increase in workforce additions of +235,000 unemployment only decreased by -9,000 jobs.
The big news last week was of course the commodity implosion caused by the silver crash.The CME raised the margin requirement for silver five times in two weeks or roughly every 48 hours. Every margin hike created thousands of margin calls that had to be covered immediately either by selling silver or some other commodity position.
To complicate this problem the dollar reversed its decline and rallied , while the Euro imploded. Since QE2 was announced we have seen nearly every hedge fund and speculative trader shorting the dollar to buy commodities and equities. Made sense, if the Fed is printing money that is the trade to be in?! The dollar declined to nearly three year lows with traders leveraging up on every down tick and every Fed speech saying QE2 would continue.
Then the surprise of the week came from Trichet.... ECB failed to raise interest rates on Thursday and that sent the Euro into free fall and the dollar rocketed. Throw in the rumor that Greece would leave the Eurozone and now everyone short the dollar and long commodities had another reason to panic sell. The Perfect Storm! 
Currency traders are normally leveraged between 10 & 100 times more than commodity traders. That accelerated the margin call problem significantly as they tried to cover the growing back hole in their accounts. ITZ doubts we would have seen anything close to the correction we got in oil without the margin panic from the silver crash. It's not a normal cycle move when oil falls nearly 10% in one day. We basically saw a mini flash crash in commodities where the interrelationships among certain types of trades and traders removed the fundamentals from consideration.
Itz called back in April that oil was set to pullback towards the $100 level, based on the gold 4 month lag chart, which has appeared on this blog several times over the last year or so. Itz Stock Chartz 'Itz Pix' portfolio in the past has traded in & out of the ProShares long & short oil etf's SCO & UCO, last week ITZ suggest shorting oil via SCO and Thursday was stopped out intraday, making 16%, could've made more but for 3 days not bad. Currently ITZ has suggested a 1/2 position long oil via Proshares UCO. Here's what some of the other large brokerages alerted investors to do....

  Goldman, who had been recommending selling oil just three weeks ago said oil should make new highs after the correction is over. They said prices will surpass recent highs by 2012 because of shrinking capacity and increasing demand. "It is important to emphasize that even as oil prices are pulling back from their recent highs, we expect them to return to or surpass the recent highs by next year." Also, "We continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan oil supplies remain off the market. The sell-off yesterday (May 5th) has likely removed a large portion of the risk premium that we believe has been embedded in oil prices, which could suggest further downside may be limited from here." They did not rule out a further short-term decline but suggested this was a buying opportunity.
Barclays said the current levels represented a good buying opportunity."While further downside weakness cannot be ruled out, the general trend should be higher rather than lower. Fundamentals have not changed. We have diminishing spare capacity, global demand increasing and supply side issues so the factors pushing prices higher are still there."
JP Morgan actually raised its estimates on Friday saying Brent crude will rise to $130 in the third quarter and that would restrain demand in the fall. JPM said, "While financial bushfires or perhaps a rapid resolution to the Libyan civil war could radically alter market dynamics, the balance of both risks and fundamentals still points to a supply-constrained world."
JPM said its current supply and demand projections show a supply shortfall of 600,000 bpd in Q3, even assuming OPEC increases output by 1.2 million barrels per day in the coming months. They believe that shortfall could narrow to 300,000 bpd in Q4 if Saudi can raise production to 9.5 mbpd, Angola 1.7 mbpd and Iraq 3.0 mbpd. Not likely.

The silver ETF (SLV) saw inflows of $726 million from January until last week. Prices rose from $26 to $48 over that period. Last week the ETF saw outflows of $1.2 billion. On Thursday the ETF closed -9% below its net asset value. Since this is the favorite silver vehicle for retail traders it is a clear example of how involved the retail investor was with silver speculation.

So where does the market go from here? Will the old adage -"Sell in May"- hold true? Most likely we may see in the near term at least a bounce in the commodities once the dust settles. But if economies are slowing down globally, ITZ believes that even though Bernanke insists QE2 will end in June. Most likely we'll see QE2.5. Itz continues to see the dollar eventually heading lower, the ECB will raise rates in July. The geopolitical problems in Libya, Syria & surrounding nations are far from over. Expect retaliation from al-Qaeda over Bin Ladens death. Most likely we'll have a consolidation period in equities for several weeks.
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