SEC Ban on Naked Short Selling Now Permanent

The AP writes:

Federal regulators are making permanent an emergency rule aimed at reducing abusive short-selling, put in at the height of last fall’s market turmoil.

The Securities and Exchange Commission announced Monday that it took the action on the rule targeting so-called “naked” short-selling, which was due to expire Friday.

Short-sellers bet against a stock. They generally borrow a company’s shares, sell them, and then buy them when the stock falls and return them to the lender — pocketing the difference in price.

“Naked” short-selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions sometime after the sale.

The SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.

Peter Schiff said a little while ago that the ban on short selling will potentially send stocks much lower than if it was in place, due weaker bear market rallys which result from people covering their shorts. He may have a point.

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Commodities Poised to Crash Again Soon?

Recently there have been quite a few indications that commodities may be headed south. The recent rise in virtually all soft commodities and non-gold commodities has been fueled by utterly misplaced inflation expectations.

Bloomberg writes in Verleger Sees $20 Oil This Year on ‘Devastating’ Glut:

Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger.

A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.

“The economic situation is not getting better,” Verleger, 64, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a telephone interview yesterday. “Global refinery runs are going to be much lower in the fall. If the recession continues and it’s a warm winter, it’s going to be devastating.”

Crude oil last traded at $20 a barrel in February 2002. Futures were at $61.18 today in New York, having recovered 89 percent from a four-year low reached last December. The Organization of Petroleum Exporting Countries is implementing record supply cuts announced last year in response to plunging consumption.

“OPEC don’t realize the magnitude of the cuts they need to make,” which would total about a further 2 million barrels a day, Verleger added. “Storage is going to become tight. It’s not clear if there’s going to be enough storage available.”

China, Inflation

Oil will average $63.91 in the fourth quarter, according to the median of analyst forecasts compiled by Bloomberg. Crude for December delivery traded at $65.61 today in New York. Prices have rebounded on expectations of a demand recovery, led by China and other developing economies, and concern expansionary monetary policy would stoke inflation and weaken the dollar.

At the other end of the spectrum from Verleger, Goldman Sachs Group Inc. predicted in a report yesterday oil will rally to $85 a barrel by the end of the year, and recommended that clients buy futures contracts for delivery in December 2011.

“China is in a real desperate situation,” said Verleger, who publishes the Petroleum Economics Monthly. “We’re in a situation where U.S. consumers aren’t consuming and Chinese manufacturers get hurt. Economists are looking for growth in all the wrong places.”

Forward contracts for oil have been higher than prices for immediate delivery this year, a situation known as contango, creating incentives to buy crude now and store it. That may end as growing stockpiles make storage more expensive.

“Prices would be much lower today, but for the very large incentive to build inventories,” Verleger said. “You need forward buyers, which we had when people were fearing inflation, but as concerns turn toward deflation” that will no longer be the case.

I fully agree with Verleger, especially with the last sentence.

Mish recently wrote Technically and Fundamentally Oil Looks Weak:

$WTIC Light Sweet Crude – Weekly Chart

click on chart for sharper image

While the rebound looks impressive on a log chart, Fibonacci retrace levels show the real story. Crude oil price did not even muster the strength to get to the 38.2% retrace level.

Moreover, technicals are now pointing down as evidenced by the moving average convergence/divergence (MACD) and and commodity channel index (CCI) in the above chart. A pullback to $50 or even $40 is certainly not out of the equation. And if that happens, expect to see media concerns over deflation.

The truth is the rebound in oil prices proved nothing in regards to the inflation/deflation debate, nor will a retest of the December lows prove anything should it happen.

Inflation is a monetary event not a price event. And even if inflation was regarded as a price event Speculation In China Does Not Constitute Inflation In The US.

Oil is subject to peak oil concerns, increasing demand from China, and speculative pressures. As such, in isolation, the price of oil is a poor measure for inflation regardless of what ones view of inflation and deflation is.

For traders, the technicals and the fundamentals both look weak.

Green shoots are withering on the vine, fuel supplies are rising, Crude oil supply far outstrips motorist demand, tankers at sea act as floating storage, and the technicals look awful. For now, that is what matters. Peak oil be damned.

And last but not least, the recent EWI newsletter had the following to say on sugar:

If I had a nickel for every time I heard the mainstream experts say that sugar prices are attached to crude oil’s hip, I wouldn’t just have a sizable nest Egg. I’d have the whole darn chicken.
Here, the following news items exemplify the point:
  • “Soaring oil a blessing for sugar industry… When oil climbs in price so does sugar as you realize there is a global shift towards cleaner fuels.” (AllAfrica.com)
  • “US world sugar prices fell, following the bulk of commodities lower as crude-oil prices eased.” (Wall Street Journal)
  • “After topping out on June 30, the nearby October contract has fallen amid profit taking in crude oil.” (Barrons)
PROBLEM: As the final piece of data reports — sugar prices hit their recent high on June 30, three weeks AFTER the rally in crude reversed. During that time, oil prices were getting clobbered, while sugar soared to its loftiest level in three years.
(The Next Focus of FreeWeek: Sugar The July 16 Daily Futures Junctures includes five labeled price charts, detailed insight, and live, video analysis on the near-term trend emerging in sugar. See the complete story at absolutely no cost.)
As for an alternative view, the July 16 Daily Futures Junctures stands alone. In that publication, Elliott Wave International’s chief commodity analyst Jeffrey Kennedypresents five labeled price charts showing exactly what’s behind the strong run-up in sugar: A Double Zigzag. This pattern occurs whenever a single zigzag (simple a-b-c shape in which the top of wave b is noticeably lower than the start of wave a) falls short of a normal target and must be repeated in sequence.
To see the “double z” in real-time, check out the second of Jeffrey’s sugar snapshots below:

As Jeffrey illustrates on the chart, the most common relationship for double zigzags is that of “Equality.” Meaning: The second zigzag travels the same distance as the first. In the case of Sugar, this scenario has been fulfilled, indicating the start of a turn DOWN.
But, as Jeffrey likes to say: “A wave count is only a wave count until it is confirmed by price action.” He then reveals exactly what sugar price must do to confirm his bearish labeling.

There are two commodities I feel good about, gold and maybe silver. Other than that, I recommend that commodity bulls be cautious, they might lose their shirts by betting on inflation, full steam in the wrong direction.

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Most Violent Bear Market Wave Around the Corner?

From the recent EWI newsletter:

Is the most powerful of all waves right around the corner?

The short answer is “YES.”

The long answer will help you anticipate where and when …

First, let’s describe wave 3.

If wave 3 was a superhero, he’d probably be The Flash (though he could be The Hulk).

Like The Flash, there’s no mistaking wave 3’s characteristics:

* It gets to where it’s going in a hurry.
* It usually catches everyone by surprise, and
* You’ll know it when you see it.

Robert Prechter describes third waves in his seminal book with A.J. Frost, The Elliott Wave Principle:

“Third waves are wonders to behold. They are strong and broad, and the trend at this point is unmistakable. … Third waves usually generate the greatest volume and price movement and are most often the extended wave in a series.”

But to truly appreciate the power and lightening-speed of third waves – and be prepared to anticipate one – you must first know how to identify the waves that precede it, namely wave 2.

Here’s what Prechter writes about wave 2 in The Elliott Wave Principle (two words have been reversed to apply to bear markets):
“At this point, investors are thoroughly convinced that the (bull) market is back to stay. Second waves often end on very low volume and volatility, indicating a drying up of (buying) pressure.”
If you’re thinking the description of wave 2 seems eerily similar to today’s environment, you’re right.
On February 23, Robert Prechter’s Elliott Wave Theorist recommended aggressive speculators close their short positions to avoid being caught in a “sharp and scary” rally. Just a few trading days later, the market began a multi-month rebound – wave 2.
BUT … Volume has steadily decreased since that rally began in early March. Volatility is on the rise. And perhaps most noteworthy of all: The investment herd – more specifically, the financial media – has jumped to proclaim the “worst is over.”
All the classic characteristics of bear-market rallies are there. Even a quick online search turns up headlines like:
“Worst of the recession is over” ~ July 7
“Econ Crisis Not Over, But Worst Has Passed” ~ July 8
“June job bounce could mean worst is over” ~ July 7
“Wall St’s fear gauge suggests the worst is over” ~ June 28
Recognizing the personality of wave 2 allows you to prepare for what’s next, a move you really want to look out for, wave 3 – The Flash.
Third waves move far and fast. They make good opportunities for aggressive speculators, but they can become a death knell for longer-term investors’ portfolios.

I certainly agree that the current bear market rally has all the characteristics of a wave 2. How much longer it will last, only time will tell.

This chart, also from EWI, nicely displays the unrelenting optimism that we tend to fall prey to time and again during bear markets:

Bank Index

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Gold, Silver, Treasurys – A Snapshot

Gold & Silver

In December 2008 I called for a bottom in Silver. From then through June it has risen from $10 to almost $16 Dollar per ounce, a 60% gain. Then, on June 7th I advised caution on Silver and recommended to cash in and buy at new lows. Since then it has dropped from near $16 to around $12.50.

Below you can see a summary of my predictions in the chart:

Silver Chart
Click on image to enlarge.

I also said in that post from June 7th that gold should do fine. Gold has remained comparatively stable since then. While silver dropped by about 15%, and the S&P500 by about 6% gold fell by only 4%:

gold-vs-silver-07-10-2009
Click on image to enlarge.

Monetary commodities, such as gold and silver should act well during a deflation. Why? Because during deflation cash is king. And gold is the king of all cash.

The problem with silver is that it acts like a hybrid between a monetary and an industrial commodity. It is hard to discern how many people are invested in it for the wrong reason, namely inflation. (Yes, I am talking to you Peter Schiff :) ) But in cases when it is so obvious, when false inflation fears scream at you, it is pretty easy to figure it out.

Once those are washed out and people are back in reality mode, silver should continue to act well along with gold. Silver may be an attractive addition to portfolios again at this level. But I would advise caution. For the time being gold remains preferable. In fact, gold has outperformed both the market and silver since October 2007.

As far as gold/silver mining stocks are concerend, the ^HUI index continues to hold the line and another upward wave may be due now:

hui-as-of-july-10-20091

Treasurys

Treasury Notes and Bonds are the ultimate deflation investment. Why? Because during deflation cash is king. And Treasury securities are the safest possible claim to cash at interest. Why? Because the government can always (and will) tax and loot the people to the hill to pay off its debts if it needs to.

(Remark: Contrary to what some people tell us, the US government can NOT print money to pay off its debts. True, the Fed can print money to buy NEWLY ISSUED government debt that may or may be used to pay off older debts. But that doesn’t make the debt go away. It merely refinances old debt. It is the exact opposite of printing money to pay off debts which is, for example, what happened in Weimar Germany and in Zimbabwe and precipitated hyperinflation. It is crucial to understand this causality. Again, to those who don’t fully understand this yet, I can only recommend reading my post Inflation & Deflation Revisited.)

Back in November 08 I called for significantly lower Treasury Yields between 2% amd 2.5%. They then fell from 3.09% to just below 2.5% in January 09. I then expected for technical reasons that they will move higher to the upper end of the range which would be around 3.3%. They actually overshot and went as high as 3.99%. I then said that Treasurys are a good call again. Yields have since then fallen to around 3.30%:

10-year-treasury-2009-july-10

Click on image to enlarge.

I think Treasurys will continue to act well. There maybe some upward pushes here and there so long as inflation expectations pop up once in a while, but the mid-term trend remains unchanged: It is likely that yields are headed for new lows.

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