Due to Presidents’ Day, this post will be longer than usual. This will allow me to discuss subjects I have wanted to cover, but have not had the time.


For the week, March corn closed $.10 higher. The commitment of traders report, which is tabulated on Tuesday and released Friday showed that in the managed money category, they added 2,232 contracts to their long positions, and added 1,827 to their short positions. Commercial interests added 17,828 contracts to their long positions and added 7,906 contracts to their short positions.


For the week, March soybeans closed 38 1/2 cents higher. The commitment of traders report showed that in the managed money category, 10,214 longs were added to their long positions and 6,478 were liquidated from their short positions. Commercial interests added 911 contracts to their long positions and added 14,263 contracts to their short positions.

Sugar #11:

For the week, March sugar closed 5 points lower. The commitment of traders report showed that in the managed money category, they added 6,084 contracts to their long positions, and added 1,604 to their short positions. Commercial interests liquidated 2,052 contracts of their long positions and added 9,895 contracts to their short positions.

Crude oil:

For the week, March crude oil closed $4.57 higher and closed at 103.24, which was the highest close since January 4, 2012. Additionally, the market made a new high of 104.14 that broke above the old high of 103.88 made on January 4. The commitment of traders report showed that in the managed money category, they added 24,881 contracts to their long positions, and liquidated 3,872 of their short positions. Commercial interests liquidated 12,501 contracts of their long positions, and liquidated 9,215 of their short positions.


For the week, March gasoline closed 4.07 per gallon cents higher. The commitment of traders report showed that in the managed money category, they added 1,864 contracts to their long positions and added 1,059 to their short positions. Commercial interests added 9,755 to their long positions, and added 11,123 contracts to their short positions. Starting with Tuesday’s report, which will be written Wednesday morning, we will begin reporting on market action for the April contract. I bring this up because for the week, the April contract closed 6.52 cents higher and reached a high of 3.2135 per gallon and closed at 3.1876 per gallon. On Friday, the March contract closed at 3.0156 per gallon. The differential of 17.20 cents between the March and April contract means the market is already pricing in higher prices throughout the spring and summer.

In last week’s wrap, I compared changes from year to year  for the price of crude oil and gasoline. This week, I am going to compare the price of crude oil, heating oil and gasoline on January 4, 2012 to February 17, 2012 using closing prices

January 4, 2012 (February contract)    February 17, 2012 (March contract)
Crude oil: 103.22                                                     Crude oil: 103.24
Heating oil: 3.0899                                                 Heating oil: 3.1889
Gasoline: 2.7852                                                      Gasoline: 3.0156

As you can see, the price of crude on January 4 and the February 17 is virtually the same. However, product prices are vastly different. For example, heating oil is $.10 higher on February 17 that it was on January 4. What makes this interesting is that heating demand has been significantly lower this winter season, which is the warmest winter nationally since 1950. Gasoline is $.23 higher on February 17 than it was on January 4, despite the fact that this is the slowest part of the driving season. As I said in last week’s wrap, it is apparent that domestic supply/demand considerations of heating oil and gasoline are less correlated to the price of crude than they used to be. This is important because there are enormous inflationary implications in this. I will be discussing this further in other sections of the weekend wrap.


For the week, April gold closed $1.30 per ounce higher. The commitment of traders report showed that in the managed money category, they liquidated 4,581 contracts of their long positions, and added 2,039 contracts to their short positions. Commercial interests liquidated 8 contracts of their long positions, and liquidated 8,369 contracts of their short positions.


For the week, March silver lost $.39 per ounce. The commitment of traders report showed that in the money managed category, they added 550 contracts to their long positions, and liquidated 253 contracts of their short positions. Commercial interests liquidated 524 contracts of their long positions and added 882 contracts to their short positions.


For the week, the March euro closed by 13 points. Leveraged funds liquidated 7,941 contracts of their long positions and added 3,074 to their short positions.

S&P 500 E mini:

For the week, the March S&P e mini closed 19.01 points higher. The market closed at 1359.75, on February 17 which is the highest close since April 29, 2011 when the June S&P 500 E mini closed at 1359.70. The April 29, 2011 high of 1359.70 was the high print for all of 2011. From that close on April 29, the June S&P 500 E mini retreated to a low of 1259.00 on June 16, 2011 and closed at 1269. The move from April 29’s close of 1359.70 to the closing low made on June 16 of 1269.00 was a correction of 6.69% and took approximately 6 weeks. The following table shows the performance of the S&P 500 E mini in the January 1 through February 17 time frame that equaled or exceeded the January 1 through February 17, 2012 performance of 8.53%. There were only three other years going back to 1985 that equaled or exceeded the performance of 2012. I am including the January 1 through February 17 performance for 2011, which was a respectable 6.75%.

January 1 — February 17 best performance: 1985 through 2012 (March contract)
1987  +16.23%
1991  +12.96%
1997   +9.03%
2012   +8.53%
2011   +6.75%

I then took the best performing years for the S&P 500 e mini listed above and analyzed how they performed in the following 30 days, (February 18 through March 17 ). The results are as follows:

February 18– March 17
1987  +2.24%
1991  +0.79%
1997  -1.90%
2011  -4.83%

Based upon the above numbers, the best that the S&P 500 is likely to do in the next 30 days is to advance approximately 30 points, and the worst is to lose approximately 65 points. It is interesting to note that in the 30 day time frame of February 18 through March 17, the S&P 500 topped out on February 19 in 1997 and in 2011 on February 18. During the February 18 through March 17 time frame for 1991, the market topped out on March 6 and in 1987 the market peaked on March 17. Remember, I am just evaluating market performance during a 30 day timeframe and nothing beyond that. This provides context about what may happen during the next 30 days. I am taking factual data and presenting a scenario of what is more likely to happen than not. The fact that the S&P 500 E mini closed at nearly the high close of 2011 tells me that the rally is likely on last legs, and that a correction, or something worse is imminent. In my view, the four major risk factors to the market are: (1) an increase in inflation expectations as perceived by the American consumer. (2) A fear of increasing interest rates, whether real or imagined. (3) The continuing Greek and Euroland crisis. (4) A major outbreak of hostilities with Iran.

The commitment of traders report showed that leveraged funds liquidated 19,553 contracts of their long positions and added 45,182 contracts of their short positions. Institutional and asset managers added 56 512 contracts to their long positions and liquidated 10,591 contracts of their short positions.

The American Association of Individual Investors survey showed that the percentage of bulls declined from the previous week. The numbers are as follows:
Bulls 42.7% -8.9% from previous week.
Bears 26.6% +6.4%
Neutral 30.7% +2.5%

10 Year Treasury Notes:

At the bottom of my February 7 post titled Final Note, I wrote,”I am not including commentary on the 10 year treasury note, and copper because the good money has been made on these trades.” “I had suggested that positions be taken at significantly lower prices, but there is much higher risk at these levels. Stand aside until further notice.” Prior to writing the final note, I had been telling readers that they should take profits. As a result, I decided  not write about markets in which there was no position to be taken. Since that time, copper has pulled back about $.20 and Treasury Notes have fallen from their highs. Although, I may not write about a particular market, I still follow it in the event there is a new opportunity. I am re-examing the T-note market because the market trend may be changing.

From February 1, through the present, the price and open interest action in notes has been particularly bearish. Since the market topped out at 132-11 on January 31 through February 16 when it closed at 130-315, open interest has increased by 121,947 contracts. Of particular interest, were certain days when price and open interest indicated that a change in trend may be underway in the 10 year note market. On February 15, the market only managed to close 1 1/2 points higher, but open interest increased by a whopping 40,389 contracts on average volume of 1,034,632. The market never got higher than seven points from the previous day’s close. This tells me there are some very aggressive sellers on the rally and that buyers could not move the market higher. However, this was not the only indication that the market may be in a topping formation. On the previous day, February 14, the market rallied 13 points, yet open interest increased only 707 contracts. On February 10, the March T-note rallied 19 1/2 points on average volume of 1,029, 902, but open interest declined 16,781 contracts. On February 7, notes declined 16 1/2 points and open interest increased by 9,564 contracts. On February 6, notes increased by 11 points on extremely low volume of 723, 269 contracts, but open interest only increased 1,182 contracts. On February 3, notes declined 27 points on heavy volume of 1,355,097 and open interest increased 2,135 contracts. The point of this is to bring to your attention that notes are experiencing open interest increases on price declines, or minuscule increases in open interest on rallies. This is bearish. Also, rallies that experience open interest declines is bearish. Since February 1, I am seeing a pattern of open interest action that in combination with price is signaling a possible change in trend.  I’m not suggesting that any position be taken at this juncture. The market would have to penetrate the following key pivot points before I would recommend a short position: 130-07, 129-30, and 129-19.

Inflation Expectations:

While discussing the S&P 500 in today’s post, I mentioned that inflation and the perception of inflation was one of my main concerns. The government keeps telling people that inflation is low and that they are more concerned about deflation. While this may be true with regard to wages and salaries, the fact is anyone who consumes food, uses petroleum products, pays for healthcare and sends their children to college is being hit with massive inflation. When the consumer goes to the gas station and grocery store, they are constantly reminded that prices are going up. Recently, there has been talk of high gasoline prices, but the consumer hasn’t seen the worst of it yet. The next headline is going to the about skyrocketing meat prices. On Friday, live cattle prices closed at the highest price in history and will probably move even higher. What I believe we are seeing for the first time is that commodities, which used rely almost exclusively upon the domestic market for their consumption are now now being aggressively exported. For example, hog exports have increased dramatically in the last 10 years as has cattle. According to Andrew Lipow of  Lipow Oil Associates, the United States exported 848 million barrels of all refined petroleum products and imported 750 million barrels for the first 10 months of 2011. Although government records only go back to 1973, Mr. Lipow believes this is the highest level of exports of refined petroleum products in the post-World War II era.

Due to the ever-increasing export of commodities that used to be consumed domestically, we may experience ever-increasing prices that will plateau at a much higher level. Once the zeitgeist changes to one of rising prices, consumers will be forced to cut back their spending across the board. Once it is generally accepted that inflation is increasing, despite what the government says, yields on fixed income instruments could begin to rise.

Bob Janjuah of Nomura International, whose opinion I respect immensely, wrote a piece today about the manipulation of markets by central banks. You can find the entire article posted on zerohedge.com. I have selected a couple of pertinent paragraphs from that article, which reflect my views as well.

First, I am simply stunned that our policymakers seem so one-dimensional, so short-termist, and so utterly bereft of courage or ideas.” “It now seems obvious that in response to the financial crisis that has been with us for five years and counting, we are being  “told” to double up on the same policy decisions. The crisis was caused by central bankers mispricing the cost of capital, which forced a misallocation of capital, driven by debt/leverage, which was ultimately exposed as a hideous asset bubble, which then collapsed, destroying the lives and livelihoods of tens of millions relatively innocent people. Well now, if you listen to the latest from Bernanke and Draghi, it seems that the only solution they offer up is to yet again  misprice the cost of capital, in the hope that, yet again, through increased leverage/debt, we are yet again “greedy” enough to misallocate capital, which in turn will lead to yet another round of asset bubbles. Such asset bubbles are meant to delude us into believing that we are now “richer.” When-as they do by definition-these bubbles burst, those who have been suckered in will realize that their “wealth” is instead an illusion, which in turn will be replaced by default risk.”

“Secondly, I have clearly underestimated the market’s willingness, nay desperation, to go along with this ultimately ruinous policy path.” “Personally, I think this is extremely worrying -the number of clients who tell me that they know they are being forced into playing the game that will end in disaster, but who feel they have to play along and hope they will get out before it turns, is a depressingly familiar old tale. Some such folks hang on to the idea that Draghi/LTRO changed the asymmetry of risk from deeply negative to positive. Yet even these folks know that printing more money/more liquidity/more debt/more leverage is not a viable solution to our ills, and in fact will mean true supply-side reform in the search for true competitiveness and sustainable growth will be further cast aside, as the focus will be on the “easy gains” to be made in the markets.

Assuming that we are in another liquidity fueled rally courtesy of Bernanke and Draghi, then there are some key things to remember. First, such rallies can last days, weeks, months, perhaps we could even extend into 2013.” “And-to give a proxy guide-the S&P could end up in the high 1500s again if this current binge lasts into 2013. The problem with such liquidity fueled set-ups is that they can last longer and bigger than any reasonable logic would dictate. The issue here is not what central bankers say – it now seems clear that Bernanke and Draghi will say whatever it takes to keep the market supplied with ample liquidity – but what can they do. In this respect one either believes that central bankers can do whatever they like when ever they like, or one believes there are limits. I think there are limits to what Bernanke and Draghi can do, and once we hit those limits these bubbles will burst, with increasingly greater consequences the longer we are forced to wait. Do I know when we may hit these limits? I hope that it is sooner rather than later, but I have no real conviction.

Secondly, when looking for where the bubbles maybe, realize this: in this current cycle, where central bank balance sheets are at the core, the bubble is everywhere – in stocks, in bonds, in growth expectation, in credit spreads, in currencies, in commodity prices, and in most real asset prices – you name it! This is why I think that this current bubble, if it is allowed to fester and develop into 2013, will have such widespread consequences when it bursts that it will make 2008 feel, relatively speaking, like a bull market.”