(Bull) Market June 2021

[Smurf1976]

What other catalyst remains for DXY?

Well nothing. The huge move is probably: (a) short covering, (b) algos chasing short term moves. Of course we cannot discount fully (c) DXY is entering a new uptrend. Time will reveal all. I remain short and bearish DXY.

Wondering if you have any thoughts on the AUD?

I don't trade forex but I note the sharp down move in the AUD and it's at a point that would seem somewhat critical. 75 cents so a nice round sort of number and one which has been support through 2021 thus far.

I don't trade it, just something that stood out and came to my attention so wondering if you have any thoughts looking at it from that perspective, AUD specifically, rather than the USD versus other currencies in general?

 

[ducati916]

Wondering if you have any thoughts on the AUD?

I don't trade forex but I note the sharp down move in the AUD and it's at a point that would seem somewhat critical. 75 cents so a nice round sort of number and one which has been support through 2021 thus far.

I don't trade it, just something that stood out and came to my attention so wondering if you have any thoughts looking at it from that perspective, AUD specifically, rather than the USD versus other currencies in general?

Mr Smurf,

So AUD is considered a commodity backed currency as are Brazilian Real, Russian Rouble, CAD, EUR. With the sell-off in commodities, you will also see the sell-off in commodity based currencies.

I would expect all to reverse once the fallacy of the Fed. position is really thought through. However, how you might play this is obviously important as while I would expect DXY to continue its trend lower, that (a) could take some time + increased vol. or (b) it doesn't reverse.

AUD will move with commodities. Therefore whatever your position is on commodities, will be your position on AUD. The story with commodities would seem to be twofold: (a) DXY weakness + speculation and (b) longer term constrained supply issues. Over time (b) will dominate, but short term (a). ATM AUD is experiencing (a). Over time it will correlate to (b).

Is (a) over? Probably not. I can see DXY moving higher in the shorter term and AUD lower. Eventually, economic reality will prevail. As you know, as you yourself have explained it, commodity supply issues are not overnight fixes. They take time, assuming that they are even being tried to be fixed. POO is the big one. I do not believe that the Arabs/Russians are going to open the taps to alleviate supply shortfalls. Venezuela is a basket case currently, so its reserves although significant, are probably unavailable.

We have a whole host of drivers for other commodities: infrastructure build-outs, transitioning to green technologies, etc. All are commodity intensive. Therefore I would be bullish commodities longer term. Also, commodities have been in a pretty severe bear market and look to be breaking out of that bear market.

Therefore unless DXY can move higher, a lot higher and enter its own bull market, inflationary pressures (PPI) will continue to build. These could be countered by higher rates, but, that's not happening until 2023 at the earliest and 25 basis points. So increased demand, constrained supply will drive commodities higher. That means AUD higher over time.

DXY will in my opinion move lower. By a lot. The US is on the verge of MMT. They are trying to hold off with essentially monetising fiscal spending debt via the Fed. That may not be enough as the debt ratios to GDP etc are now truly out of control with no end in sight. I don't know if they go the full monty and implement MMT, but you never know.

AUD remains a fiat money, but at least it is linked to commodities (as are other commodity backed currencies) however tenuously and will fare better than DXY unless DXY collapses, in which case all fiats die.

With regard to PMs: if you don't hold it, you don't own it.

I am short DXY OTM PUTS. Fixed risk. Therefore, big moves against the position do not alter my risk profile.

So a rather long winded answer.

jog on
duc

 

[qldfrog]

a rather long winded answer.

That is clear and most welcome

 

[ducati916]

Roundup:

So someone bullish on DXY:

A take on Benjamin Graham's voting and weighing machine:

Which is pretty much where we are with DXY.

Some history:

Longer term, US liabilities:

Obviously these have risen since 2018. At current levels, if interest rates were to climb to slightly over 3%, that would consume 30% of US GDP just to service interest payments. That is equivalent to what has been spent on COVID since it hit just over 1 year ago. That is simply not sustainable.

Further:

These liabilities are not priced in dollars. These are fixed in services to be provided. Thus, they cannot be inflated away. They remain. Of course as people die, so those liabilities reduce. Who dies first? Patients or DXY?

Inflation:

The inference being that the 'Cover' is wrong. Maybe. Early days yet. But that essentially says you believe the Fed. and Government.

Sectors:

Not sure what this coin was...gone.

And Gold:

The OI continues to shrink, rather inferring that the BB are gradually leaving the market in anticipation of Basel III. We'll see.


jog on
duc

 

[ducati916]

Closing out the week:

Nothing to get excited about:

Sectors for the week:

DXY:

VIX:

NYMO:

NYSI:

Inflation:

Fiscal spending (potentially) continues.

Mr flippe-floppe-flye:

The interplay between growth, value, inflation, yields and the Fed's intentions 18mths hence took centre stage and risk assets rotated wildly from Wednesday and the Fed. announcement.

The Bond market is so manipulated that it is really difficult to ascertain any real information from prices. Currently we have the 2yr spread with the 10yr contracting. Not great for financials and they are broadly selling off (XLF). The 2yr yield rising and 10yr falling:

Commodities have stabilised today after just the mere mention of a 25 basis point hike, which if the 2yr continues higher will actually need to be a cut.

Which leaves DXY. This really has to become the chart of choice for price discovery as it really cannot be manipulated by the Fed. alone. It would require all the Central Banks to be onboard and coordinated, which even then probably wouldn't be sufficient. Needless to say, they aren't. DXY has shot higher, but already its momentum is starting to fade. With more spending proposed and likely to eventuate from Congress, the continued Fed. purchases of Treasuries and MBS to the tune of $120B/month, the expansion of M2 will not slow anytime soon.

The stock market looks ready to test its 50EMA, which has held solid on the last 6 occasions that it has been tested. Does it hold next week, which is another (long weekend) shortened trading week with Martin Luther King day? At the moment I'm thinking no. I think we break the 50EMA which will certainly set the cat amongst the pidgeons and engender some small measure of panic. I'm thinking circa 400 on SPY. So my stock exposure is now 100% hedged.

Commodities will fare as DXY moves. If DXY rallies higher, commodities come under further selling pressure. If DXY falls, commodities will resume their upward trajectory. I would be bearish DXY and bullish commodities. We'll see. In this space I am short DXY, long silver via PSLV and actual physical (if you don't hold it, you don't own it). I also hold a hedged derivative trade in silver via SLV options.

My yield model has 1.54%. Yields were sitting at 1.52%. About right. I am expecting that model to adjust lower.


jog on
duc

 

[qldfrog]

Could this be influencing today:
https://finance.yahoo.com/news/quadruple-witching-friday-see-818-171011439.html

 

[ducati916]

Week's roundup:

Oil news:

Friday, June 18th, 2021

The months-long oil price rally hit the pause button this week, following a shift in outlook from the U.S. Federal Reserve. “Inflation is your friend until it isn’t,” Louise Dickson of Rystad Energy said in a statement. “The oil market is re-learning this lesson in the past two trading days after the US central bank hinted at potential interest rate hikes in 2023, which would make oil more expensive in non-dollar denominated economies and could damper demand.”

$100 oil looking more likely. Many oil traders see oil remaining above $70 per barrel for the foreseeable future, with $100 oil no longer an impossibility.

Court shoots down Biden’s public lands freeze. A federal court said that the Biden administration’s pause on new leases for drilling on public lands was illegal. But the administration still has leverage to slow walk or delay leasing.

GM to ramp up EV spending by 30%. GM (NYSE: GM) will increase EV spending to $35 billion through 2025, a 30% increase over its previous guidance. It will also build two new battery plants in the U.S., although the locations are to be determined. The decision comes a few weeks after Ford (NYSE: F) said it would spend $30 billion on EVs through 2030.

It’s too late to avoid supply crisis. The level of drilling and by extension capital investment is insufficient and has been for a number of years to sustain oil production at current levels. The lack of new drilling will start to show in a decline in production as early as next year.

Renewables boom has barely impacted fossil fuels. Oil, gas, and coal still represent over 80 percent of final energy consumption, not much different from a decade ago, despite the rising share of renewable energy in the world’s total energy consumption.

India’s oil demand rebounds. India’s oil demand rebounded in the first half of June, offering bullish momentum to the oil market.

Oilfield services prices are on the rise. The steady and substantial climb in oil prices has led to more business for oilfield service providers and higher prices. “We are already beginning to see a positive increase in activity and an upturn in service pricing will hopefully be reflected in the coming months,” Packers Plus Energy Services’ chief executive Stuart Wilson told Reuters.

OPEC urges members to continue oil investments. The energy transition should not crowd out any source of energy as all energy sources of today will be required for the foreseeable future, OPEC Secretary-General Mohammad Barkindo said.

Iraq to boost West Qurna 1 by 40%. Iraq plans to boost the production capacity of West Qurna 1 by 40% to more than 700,000 b/d over the next five years.

OPEC sees little shale growth this year, more in 2022. OPEC officials heard from industry experts that U.S. oil output growth will likely remain limited in 2021 despite rising prices, OPEC sources told Reuters. “The general sentiment regarding shale was it will come back as prices go up but not super fast,” said a source. “It looks like the shale oil genie is going to stay in the bottle for now,” said the source, adding: “OPEC and Saudi Arabia have a lot of power at this time.”

Shell’s Permian exit a “litmus test.” The potential sale of Royal Dutch Shell’s (NYSE: RDS.A) Permian assets will offer a “litmus test” for how the industry values the prospects of U.S. shale. Shell is hoping to raise $7 to $10 billion, which would value its acreage at $40,000 per acre. Most Permian deals this year have closed between $7,000 and $12,000 per acre, according to Reuters.

China to release metals from reserve. China announced plans on Wednesday to release industrial metals from its national reserves to curb commodity prices

Booming first quarter for solar and wind. The U.S. added 3.3 GW of new wind in the first quarter, and 5 GW of solar. For wind, it was a 75% year-on-year increase in new capacity.

Siemens overwhelmed by wind demand. Siemens (ETR: SIE) is being overwhelmed with requests to build turbines in countries tapping wind resources. “The challenge we have is how many countries are saying, ‘Hey, you need to build a factory here,’” Chief Executive Officer Christian Bruch told reporters.

Oil traders transition to both oil and renewables. Vitol said that it aims to have 50% of its investments in renewables, gas and power, and the other 50% in oil within five years. Other traders are viewing a similar transition. “We will keep oil trading activities as we see strong demand for oil in the next 10 years,” said Torbjorn Tornqvist, CEO at Gunvor. “We are also increasing our power trading, investing in technologies to decarbonize, and looking at existing solar and wind assets.”

Sumitomo withdraws from new oil development. Sumitomo Corp. (TYO: 8053) has decided to no longer develop new oil reserves and transition its fossil fuel business to renewables over time.

Australian LNG industry pivots in support of carbon price. Australia’s liquefied natural gas (LNG) sector is changing from an industry that was vociferously opposed to any form of carbon taxes or trading to one that views a price on emissions as vital to its future.

China may crackdown on private refiners. In April, officials from China’s economic planning agency began probing teapots for suspected violations of tax and environmental rules. “Recent moves by the Chinese government indicate a change in the wind against the smaller independents,” an analyst told Bloomberg. “This is likely to hand power back to the majors.”


Petrol prices:

The expectation is lower.

The internals continue to weaken.

Nowhere near enough breadth to push the market higher on these numbers. Unless there is a pretty dramatic shift, the indices are headed lower. There is a pretty major divergence between NASDAQ and S&P/Dow indices currently (reflecting the Tech. strength).


DXY Bull.

Shorter term, definitely possible.

Certainly that is what the Fed. needs.

Related to yields and their spreads.


BTC.

continued.....

 

[ducati916]

Part deux:

Mr flippe-floppe-flye:

Year 2 markets:

Bubbles:

David Rosenberg on inflation:



jog on
duc

 

[peter2]

@ducati Helpful round up there. If the US weakness in financials and materials spreads to the ASX then were in for a dip very soon. The potential size of the dip is incalculable. We'll have to wear it whatever it is.

The strong DXY is my main concern because of its downward pressure on most commodity prices. I must admit that most commodity prices have rallied too fast and got too high. There had to be a correction. If this correction is due to the rising DXY then so be it but I can't see the DXY rallying too high either. The swift commodity selloff is a concern as it'll take longer to stabilise and then build demand for the next inevitable rally. We'll have to be a little patient before we get into the next commod rally. I've started a position in copper but I may be much too early.

Oil price is not a factor atm. It can just sit where it is and everyone will be happy for a while.

The FED will mention the word "taper" again soon and the market will have another fit. They have to taper and then raise rates eventually. It'll be needed sooner than they think. The FED's biggest problem is convincing the market that the economy is healthy enough to stand on its own without assistance.

Unleaded gas seasonality, heh? Interesting, I'll keep an eye on the gasoline chart. It's normally highly correlated to oil. Maybe a spread opportunity, sell gas, buy oil for the next month.

I enjoy the humour and emotional ups and down of FFFly. He keep me informed of the "stocks du jour". They're always good to monitor for a trade.

 

[Smurf1976]

Oil price is not a factor atm. It can just sit where it is and everyone will be happy for a while.

One thing I note is that looking back there's a high correlation between oil price run ups and market tops.

It's not perfect but there's been plenty of instances where the oil price runs up then a few months later there's either a recession underway or the market has topped (or both).

Oil's worth watching even for those who don't trade it and who don't own oil stocks for that reason. It has often been and early warning.

 

[ducati916]

The data supporting secular inflation from Double Line and Gundlach:

China providing an increased proportion of finished goods to imports (US). Obviously (shown later) a significant impact on trade deficits and DXY.

Consumer sentiment in an 'inflation' is actually very important. If the consumers spending habits modify, that can have a significant impact. The data suggests that this is from a sentiment case, happening.

Certainly commodity markets for food based items are bullish to higher prices.

PPI moving higher. Has come off the boil recently. Can easily heat up again.

Inventories are as low as they have ever been. Lower. This correlates to an extent with the container ships (inflationary freight charges) sitting offshore waiting to unload. After it all shakes out, this may improve somewhat.

This is a great chart and one for @peter2 . The correlation twixt DXY and deficits is a strong one. This chart only suggests DXY has one direction to go.

House prices on fire. No inventory. Unlikely to be any coming down the pike, builders are just not building.

Real Estate agents must be hurting.

Certainly contributing to housing issues.

Consumer spending set to continue. Job openings at all time highs. Many simply better off not working.

All of the above evidence that inflation is unlikely to be as transitory as the Fed. are spinning. If we take the deficit spending combined with the imports from China/exports from US, this just looks set to continue while the unemployment benefits persist.

How is that financed? By monetising increased debt via the Fed. DXY follows the deficit spending, which means an increasingly weak DXY, which means higher commodity prices, which flow through to CPI data, which can change spending habits.

Can the US increase interest rates? No. The level of debt is so high that 3.5% yields would consume 30% of GDP. Not possible. Thus interest rates stay low or lower, further preventing any hikes into the future.

Soon I think the US contemplates going the full monty: 100% MMT. Forget issuing debt to monetise, just print cash. It happens if/when we see a digital dollar.

Stocks are simply unstable at these levels. That does not mean they cannot go higher, what it means is the higher they go, the less stable they become with less and less required to cause a major decline. They become increasingly fragile to anything and everything.

Portfolio:

Stocks: 100% hedged. I'm giving up a certain amount of upside to protect the downside (Collar at credit).
Commodities: increased exposure significantly, mostly in agricultural commodities (Wheat, Coffee, Cocoa, Sugar).
PMs: increased exposure: Silver via PSLV (physical silver) + actual physical.
DXY: short.

jog on
duc

 

[ducati916]

Part deux:

Retail (the tail) wagging the dog.

Weak DXY, strong commodities. Strong correlation.

Interest rates, broken. Hardly surprising given the level of manipulation in the market:

Mr flippe-floppe-flye:

jog on
duc

 

[qldfrog]

PMs: increased exposure: Silver via PSLV (physical silver) + actual physical

Mr Ducati, from reading your posts, it is clear that you always invest in an agile way, ready to jump in or out of an etf (usually) weekly if not daily .
If i read you well above, you purchased some actual silver coins/ bars..that you stored in a safe or buried under the lemon tree in the garden.
With the time and hassle it takes to buy the real thing, not forgetting the costs involved, i assume you take here with silver a multi months if not year bull position.
Do i read you well?

 

[ducati916]

Mr Ducati, from reading your posts, it is clear that you always invest in an agile way, ready to jump in or out of an etf (usually) weekly if not daily .
If i read you well above, you purchased some actual silver coins/ bars..that you stored in a safe or buried under the lemon tree in the garden.
With the time and hassle it takes to buy the real thing, not forgetting the costs involved, i assume you take here with silver a multi months if not year bull position.
Do i read you well?

Yes.

So I am in the camp of persistent inflation. While I have a lot of respect for Mr Rosenberg, I think on this he is incorrect. If the US moves to a 100% MMT rather than simply QE etc, DXY is really running a risk of a collapse or a hyper-inflation and it will take most fiats with it, given that it is the premiere reserve currency. If they stick with QE, then the debt load continues to accumulate and deficit spending becomes ongoing (tax revenues fall far short) as does continued monetary policy to cover interest payments. Then you have the BoP issue. Currently the US does not produce anywhere near enough 'stuff'. Those BoP continue to increase, driving DXY lower.

All add up to a weak DXY. A weak DXY means higher commodity prices = +PPI = +CPI = higher inflation, which cannot be fought with higher yields....hence it becomes pernicious.

So I do not think that for the remainder of the year that stocks have significant upside. They may continue to rise slightly, but conversely the downside risk is potentially enormous.

So essentially I have 100% hedged stocks with a collar. If a collapse comes, all fine. If the market rises significantly I'll miss out on some, but can always roll higher.

If DXY continues weakness, then commodities will run. ATM I like those listed. I'm hoping for a deeper pullback in copper, I'll BTD. This is where I'll make up for the weakness in stocks (I think).

PMs.

So we have Basel III at the end of June, which (ignoring inflation for the moment) is a catalyst for higher prices. Silver due to greater leverage (ratio currently to gold) if they run, will run further. So here I have PSLV which is the Sprott ETF backed with physical and actual physical, in my SDB. Essentially these are just hold largely as an insurance policy.

I have a large derivative position in SLV, which is more of a trading exposure. SLV is essentially unallocated silver to retail, only the BB can access the physical silver held by the ETF (same with GLD). There will be the usual fun and games in these for some time. Goldman Sachs just purchased the Australian Mint's ETF for gold. They have already re-written the contracts. No longer is that backed with physical.

Cash. I still hold cash against a deflationary bust, which could so easily eventuate.

So a bull for commodities, DXY bear, stocks neutral, cash neutral.

The trading positions disclosed on the other thread will be/are hedged, so market neutral. Trading the spread.


jog on
duc

 

[qldfrog]

Goldman Sachs just purchased the Australian Mint's ETF for gold. They have already re-written the contracts. No longer is that backed with physical.

My understanding is that this only affects nyse listing.
And asx pmgold remain unaffected and redeemable for bullions here in oz
Do you know otherwise?
Disclaimer: pmgold is my goto etf for physical gold on the asx, so i have some pretty heavy interest in this matter

 

[ducati916]

My understanding is that this only affects nyse listing.
And asx pmgold remain unaffected and redeemable for bullions here in oz
Do you know otherwise?
Disclaimer: pmgold is my goto etf for physical gold on the asx, so i have some pretty heavy interest in this matter

Not sure about ASX version. In the US retail are stuffed. This Basel III reset is really causing all manner of machinations.

jog on
duc

 

[qldfrog]

Thanks will try to investigate asx: pmgold

 

[qldfrog]

https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02276769-2A1247783?access_token=83ff96335c2d45a094df02a206a39ff4

Last release of product statement document on 03/09/2020
It clearly states

So we have a backing of 1/100th of troy ounce physical gold
Seems we are safe with asx listed pmgold.
Sorry for the diversion but it might be useful information to others

 

[Smurf1976]

The expectation is lower.

The internals continue to weaken.

First I must thank you for your excellent ongoing analysis.

I was however hoping that you'd be wrong on this occasion but it seems not, quite a few of my trades were sold due to hitting stops today.

The good news is at least they were mostly in profit at the sold price. But I'd still rather they went up than down.

 

[ducati916]

The start of a new week:

Everything higher. Nice bounce after last week. On EOD data I'll be interested to see how breadth is doing.

Cryptos:

Not so good.

The Fed. and transitory inflation:

Stocks (asset price inflation) fuelled almost (one would think) via the Fed. Balance Sheet and perpetual QE. Which is why when the 'Taper' word is uttered, even 2 yrs away, stocks puke.

So the Fed. is pretty much handcuffed to stocks/bonds and additionally has taken on Fiscal spending. How this inflation, which is leaking out of asset price inflation into CPI/PPI inflation isn't transitory is a challenge to prove.

continued....