In the January 6 Weekend Wrap, we finish the year end review.
Soybeans:
For the week, January soybeans lost 6.75 cents, March -11.25, May -9.25. The COT report showed that managed money liquidated 14,357 contracts of their long positions and added 1,083 contracts to their short positions. Commercial interests added 3,388 contracts to their long positions and liquidated 19,742 contracts of their short positions. As of the latest report, managed money is long soybeans by a ratio of 5.52:1, which is down from the previous week of 6.36:1 and the ratio of 2 weeks ago of 5.71:1.
Soybean meal:
For the week, January soybean meal lost $6.10, March -6.60, May -5.80. The COT report showed that managed money liquidated 6,873 contracts of their long positions and also liquidated 603 contracts of their short positions. Commercial interests liquidated 2,502 contracts of their long positions and also liquidated 12,280 contracts of their short positions. Note, that both managed money and commercial interests liquidated contracts across the board. As of the latest report, managed money is long soybean meal by a ratio of 4.57:1 which is down from the previous week of 4.89:1, but higher than the one ratio of 2 weeks ago of 3.91:1.
Corn:
For the week, March corn lost 8 cents, May -8, July -7.25. The COT report showed that managed money lost 29,955 contracts of their long positions and added 8,771 contracts to their short positions. Commercial interests added 18,246 contracts to their long positions and liquidated 34,656 contracts of their short positions. Note, that managed money and commercial interests were doing exactly the opposite. As of the latest report, managed money is long corn by a ratio of 3.43:1, which is down significantly from the previous week of 4.40:1, and the ratio of 2 weeks ago of 7.48:1. This is the lowest long to short ratio in several months.
Wheat:
For the week, March wheat lost 13.25 cents, May -13.50, July -13.75. The COT report showed that managed money liquidated 4,079 contracts of their long positions and added 3,331 contracts to their short positions. Commercial interests added to 8,691 contracts to their long positions and also added 2,721 contracts to their short positions. As of the latest report, managed money is short by a ratio of 1.20:1, which is up from the previous week of 1.10:1, and up dramatically from the ratio of 2 weeks ago, when managed money was long by a ratio of 1.10:1.
Crude oil:
For the week, February crude oil gained $2.14. The COT report showed that managed money added 1,210 contracts of their long positions and liquidated 13,248 contracts of their short positions. Commercial interests liquidated 8,206 contracts of their long positions and also liquidated 4,839 contracts of their short positions. As of the latest report, managed money is long crude oil by a ratio of 2.72:1 which is up from the previous week of 2.26:1 and the ratio of 2 weeks ago of 1.86:1.
In the December 23 Weekend Wrap, we discussed the increase of oil production in the United States and from this extrapolated that oil prices could be in a long-term decline. While we maintain there is a likelihood of this occurring, our approach at OIA is tactical, therefore we take great care to notify clients of a possible change in trends. On December 31, February crude oil made a high of $91.99, which is at the 200 day moving average of 91.95. On December 31, February crude oil closed at $91.82, which is $4.48 above its 50 day moving average of $87.34 on the continuation chart, and $3.76 above the 50 day moving average of 88.06 on the February crude oil chart. By any standard, crude oil is significantly overbought and a correction is due at any time. However, the impending correction in our view is likely to be a short-term pullback in a steadily rising uptrend. Keep in mind, that the 100 week moving average on the crude oil continuation chart is $94.94, and the 150 week moving average is 90.32. In short, crude oil is currently trading in its longer term value zone. Crude oil is getting close to generating a short-term buy signal, and with more work higher will generate an intermediate term buy signal. The only question that remains is whether the correction will occur before the short-term buy signal or after it. The stats below show performance for the month of December, the 4th quarter 2008-2012, and calendar year performance. Note that 2012 was the first year since 2008 that crude oil declined. Support should be found at the 50 day moving averages, 88.60, and 89.22.
Performance for crude oil in December 2008-2012 4th quarter 2008-2012 Calendar Year
2012 +2.46% -1.85% -7.33%
2011 -1.68% +24.08% +8.25%
2010 +7.88% +10.60% +14.87%
2009 -0.81% +10.58% +77.30%
2008 -20.21% -55.88% -51.04%
Natural gas:
For the week, February natural gas lost 1.3 cents. The COT report showed that managed money added 795 contracts to their long positions and added a massive 27,385 contracts to their short positions. Commercial interests added 7,642 contracts to their long positions and added 162 contracts to their short positions. As of the latest report, managed money is short natural gas by a ratio of 1.43:1, which is up from the previous week of 1.31:1 and the ratio of 2 weeks ago of 1.24:1.
Copper:
For the week, March copper gained 2.25 cents. The COT report showed that managed money liquidated 6,436 contracts of their long positions and added 3,107 contracts to their short positions. Commercial interests added 1,203 contracts to their long positions and liquidated 4,095 contracts of their short positions. As of the latest report, managed money is long copper by a ratio of 1.72:1 which is down significantly from the previous week of 2.39:1 and the ratio of 2 weeks ago of 2.29:1.
Gold:
For the week, February gold lost $4.20. The COT report showed that managed money liquidated 2,383 contracts of their long positions and added 6,754 contracts to their short positions. Commercial interests added 1,672 contracts to their long positions and liquidated 11,079 contracts of their short positions. Note, that managed money and commercial interests were doing exactly the opposite. As of the latest report, managed money is long gold by a ratio of 4.35:1 which is down significantly from the previous week of 5.75:1 and down dramatically from the ratio of 2 weeks ago of 9.20:1. This is the lowest long to short ratio in many months.
With the long to short ratio in gold at a significantly depressed level, we wanted to point out that gold in December of 2012 is acting in somewhat the same fashion as gold in December 2011 and 2010. For example, during December 2011, gold went from a high of $1767.10 on December 2 to a low of 1523.90 on December 29. Thus far, during December 2012, February gold made its high on December 3 at $1724.90, and made its low of 1636.00 on December 20. In short, the decline in gold during December 2012 has been far less severe than the decline in December 2011. During January 2012, February gold made its low on January 3 of 1566.80, and rallied to 1747.70 on January 31. Gold made its high for the move on February 28, 2012 when April gold reached 1792.70 and June gold made a high at 1795.10. Below, we performed the same exercise for silver as we did in gold. We are not suggesting that gold will repeat its January 2012 in January 2013. Rather, we are calling your attention to the possibility that gold could rally substantially in January. During December 2010, gold made its high on December 7 at 1434.10 and made its low for the month on December 16 at 1364.10. However, during January 2011, gold did not rally as it did in 2012, but declined from 1426.30 on January 3 to 1309.10 on January 28.
Performance-February gold in January 2006-2012
January 2012 +10.88%
January 2011 -6.21%
January 2010 -1.26%
January 2009 +4.79%
January 2008 +10.04%
January 2007 +2.10%
January 2006 +9.89%
Average return in January 2006-2012 = +4.31%
Average return in January 2000-2012 = +1.83%
Silver:
For the week, March silver lost 22.8 cents. The COT report showed that managed money liquidated 5,630 contracts of their long positions and added 890 contracts to their short positions. Commercial interests added 1,434 contracts to their long positions and liquidated 4,180 contracts of their short positions. As of the latest report, managed money is long silver by a ratio of 6.06:1, which is down dramatically from the previous week of 9.08:1 and the ratio of 2 weeks ago of 10.42:1. It is puzzling why the long to short ratio in silver is approximately 50% above the ratio for gold when during the COT tabulation period, silver dramatically underperformed gold. We pointed out this pattern last week when the disparity between the long to short ratio in silver to gold was even greater. Our conclusion: There are large numbers of managed money longs who undoubtedly have significant losses, and will be forced to liquidate at some point.
Performance COT Report December 19-December 24 (tabulation period) Released on December 28.
February gold – $10.40 -0.62%
March silver – $1.77 -5.57%
Although the silver market has been trading in a dismal fashion since its recent top made on November 29 of $34.49, it is important to remember that the silver market of December 2011 traded in the same fashion as silver has traded in December of 2012. For example, in December 2011, March silver made a high of $33.74 on December 2. On December 3, 2012 silver made its high of $33.93. During the month of December 2011, March silver moved from a high of 33.74 on December 2 to a low of 26.145 on December 29, or a loss of somewhat more than $7.50. During January 2012, March silver rallied from a low of 27.905 on January 3 to a high of 34.13 on January 31. During the next 3 months, silver continued to rise and made its contract high at $49.315 on April 28, 2012. We are not suggesting that silver in 2013 will have a move of the same magnitude of 2012, rather we are trying to show the current market could turn on a dime. During December 2010, silver made its low on December 8 at $28.01 and rallied to 30.975 on December 31. Contrary to January of 2012, silver in January 2011 peaked at 31.275 on January 3 and declined approximately $5.00 to 26.30 on January 28. It is important to note that support at the $26.00 level goes back to November 2010. Silver remains on a short and intermediate term sell signal. Stand aside.
Performance-March silver in January 2006-2012
January 2012 +19.11%
January 2011 -8.99%
January 2010 -4.22%
January 2009 +11.01%
January 2008 +14.13%
January 2007 + 4.45%
January 2006 +11.56%
Average return in January 2006-2012 = + 6.72%
Average return in January 2000-2012 = +1.93%
Canadian dollar:
For the week, the March Canadian dollar lost 19 points. The COT report showed that leveraged funds liquidated 9,131 contracts of their long positions and also liquidated 10,631 contracts of their short positions. As of the latest report, leveraged funds are long the Canadian dollar by a ratio of 6.30:1, which is up dramatically from the previous week of 3.46:1 and the ratio of 2 weeks ago of 2.01:1. The dramatic increase in the long to short ratio is due to heavy liquidation of short positions, which represented a significantly greater percentage of total outstanding short positions than did the liquidation of long positions to the number of outstanding long positions.
Australian dollar:
For the week, the March Australian dollar lost 29 points. The COT report showed that leveraged funds liquidated 28,136 contracts of their long positions and also liquidated 7,405 contracts of their short positions. As of the latest report, leveraged funds are long by a ratio of 3.16:1 which is down slightly from the previous week of 3.27:1, but up substantially from the ratio of 2 weeks ago of 2.34:1.
British pound:
For the week, the March British pound lost 9 points. The COT report showed that leveraged funds liquidated 8,183 contracts of their long positions and also liquidated 10,794 contracts of their short positions. As of the latest report, leveraged funds are long the British pound by a ratio of 2.98:1, which is up from the previous week of 2.46:1, and up slightly from the ratio of 2 weeks ago of 2.82:1.
Euro:
For the week, the March euro gained 44 points. The latest COT report showed that leveraged funds added 5,882 contracts to their long positions and liquidated 121 contracts of their short positions. For the first time in several months, leveraged funds are now long the euro by a ratio of 1.03:1, which is a reversal from the previous week when leveraged funds were short by a ratio of 1.08:1, and the ratio of 2 weeks ago when leveraged funds were short by a ratio of 1.82:1
Performance COT Report December 19-December 24 (tabulation period).
Euro/Usd -0.34% Eur/Aud +1.16%
Cad/Usd -0.53% Eur/Gbp +0.42%
Pound/Usd -0.69% Eur/Cad +0.38%
Aud/Usd -1.51%
Performance December 1-December 31, 2012 October 1-December 31, 2012
Euro/Usd +1.59% +2.66%
Pound/Usd +1.35% +0.65%
Cad/Usd +0.04% -1.02%
Aud/Usd -0.82% +0.21%
S&P 500 E mini:
For the week, the March S&P 500 E mini lost 41.90 points. The COT report showed that leveraged funds liquidated 271,460 contracts of their long positions and also liquidated 60,912 contracts of their short positions. As of the latest report, leveraged funds are short by a ratio of 1.85:1, which is up substantially from the previous week of 1.20:1, and the ratio of 2 weeks ago of 1.21:1.
American Association of Individual Investors
Recent wk 2 wks ago 3 wks ago
Bulls 44.4% 46.4% 43.2%
Bears 30.2% 24.8% 30.1%
Neutral 25.4% 28.8% 26.7%
On December 2, in the Weekend Wrap, we reported that the AAII survey showed that the number of investors who were bullish had broken above 40% for the first time in many months. Since that report, the number of bulls have increased, but the performance of the major equity indices as shown in the table below is not the reason.
Performance of major equity indices December 1-December 31, 2012
Russell 2000 +3.34%
Dow Industrial Average +0.60%
S&P 500 Emini +0.41%
NASDAQ 100 -0.60%
Another interesting fact is that the S&P 500 E mini’s performance of + 0.41% during December 2012 was the worst since December 2007 (-1.08%). This was 60% below the 1.00% average return in December from 2000-2011. The 4th quarter stats are nearly as bad with the E mini losing 1.13% for the period, which is the worst fourth-quarter performance since 2008, during the height of the financial crisis. Also, it is dramatically lower than the average return of 3.00% for the 4th quarter for years 2000-2011. The dismal performance in 4th quarter 2012 takes on more significance when considering the quantitative easing programs that were announced by the Federal Reserve in September and December. It is obvious that the government money printing machine has lost its ability to juice up the market.
Performance for the S&P 500 E mini December 4th Quarter Performance
2012 +0.41% -1.13%
2011 +0.99% +11.86%
2010 +6.65% +10.73%
2009 +1.89% + 5.92%
2008 +0.65% -23.05%
2007 -1.08% – 4.63%
Last week, Bloomberg news published an interesting piece on the lackluster IPO market titled “IPOs slump to the lowest level since financial crisis.” The article went on to say that global IPOs raised 112 billion, which was the lowest since 2008. According to the article, U.S. IPOs raised 41 billion, which was little changed from the previous year. It is startling to think that during the past 3 years when global equity markets have risen in tandem that IPOs would be in such short supply. Venture capitalists know, as do underwriters, that the best time to bring a company public is when stock markets are rising and bullish animal spirits are increasing, which makes new company offerings appealing to investors.
Venture capitalists want to be able to cash out of a portion of their holdings, and distribute returns to their investors. Company insiders certainly want to cash out a portion of their holdings and reap a bonanza. In short, in a positive equities environment, everyone from venture capitalists to founders and the underwriters want to take a company public. Additionally, they know the bull market in equities is not going to last, and going public in a bear market is far more difficult. This begs the question: Why are so few companies going public? Possibly, some of the reticence this year may be blamed on the Facebook public offering fiasco.
However, there may be a significant, and more ominous reason why companies are not going public: They are not profitable. Underwriters know that if a company is not a profit-making enterprise, they stand little chance of making it to the public market. Institutions and retail investors are not interested investing in companies that are losing money. Conceivably, the venture capital market as we have known it, may be undergoing a structural change. This may be driven by the inability of many companies to make profits and venture capitalists to cash out of privately funded ventures. If this continues, the cycle of generating returns, and raising new capital may dissapate. If the dismal pace of IPOs continues, many privately funded ventures will fold, and venture capitalists will become even more cautious about putting money into new companies. The lasting effect could be that small business job creation slows even further. If small companies cannot get funded, they can’t employ people, buy goods and services. Since small business is the biggest job creation engine in the United States, the breaking of the venture capital cycle may be a big story in 2013 due to its impact on employment.
Shanghai Composite Index:
During the past several months when news reports have been issued about of a turnaround of the Chinese economy, we at OIA have greeted these prognostications with a great deal of skepticism. The central thesis of our position has been that the Shanghai Composite Index needs to show that it is acting in a manner that is consistent with the narrative. Since December 4, when the Shanghai Composite Index made its low at 1949.46, the index has rallied 273.79 points, or approximately 15% in 18 trading sessions. On December 26, the index gapped higher and and the gap remains between between the high of 2170.79 made on December 24 of 2170.79 and the low of the past 3 trading sessions of 2204.00. On December 10, the index moved above its 50 day moving average for the first time since early November and on December 26, the index jumped above its 200 day moving average of 2195. This is the first time, the index has been above its 200 day moving average since early May 2012.
From Bloomberg News December 30: “China manufacturing Pickup Shows Rebound Gains Traction: Economy”
“China’s manufacturing unexpectedly expanded at the fastest pace in 19 months in December boosting optimism that a recovery in the world’s second-biggest economy is gaining traction.”
“China’s economy may have rebounded after a seven quarter slowdown as the government increases spending on infrastructure and accelerated investment project approvals. The pickup may smooth the ruling Communist Party’s once in a decade transition to a new generation of leaders headed by Xi Jinping who took office as general secretary in November.”
“Momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property market conditions stabilize,” Qu Hongbin, chief China economist at HSBC in Hong Kong, said in the statement. “Manufacturing output and purchasing accelerated this month, even as new export orders showed a slight fall on weak demand in Europe Japan and the U.S., HSBC said.
“Japan’s Komatsu, the world’s second-largest maker of construction equipment, sees a best case scenario for China demand to increase 20% in the fiscal year starting April 1, chief executive officer Kunio Noji said on December 18.”
“Today’s report further suggests the recovery is on track and that growth may remain strong in the first quarter, Zhang Zhiwei, chief China economist at Nomura Holdings in Hong Kong, said in a note. Nonetheless, we are concerned about the sustainability of the recovery in the second half given the central bank’s comments, which suggests regulators may tighten controls to contain financial risks, Zhang said
While the performance of the Shanghai Composite Index has been impressive during the past 3 weeks, we decided to dig further to see if the move had legs. Our conclusion is the rally is the real deal, and here is why: There are 6 Etfs that track Chinese companies involved in energy (CHIE), industrials (CHII), materials (CHIM) infrastructure (CHXX), financials (CHIX), consumer (CHIQ). These ETF’s are a good representative sample of the strength of the Chinese economy. All 6 ETFs have 50 day moving averages that are above their 200 day moving averages, even though the 50 day moving average of the Shanghai Composite Index is approximately 115 points below the 200 day moving average. The Chinese financial ETF (chix) is at the highest level since July of 2011. The Chinese infrastructure ETF (chxx) is at the highest level since August 2011. In short, it appears that the rally of the Shanghai Composite Index is beginning to catch up with the strength that has been demonstrated by the 6 ETF’s. The fact that all 6 ETF’s are showing strength with the 50 day moving average above the 200 day moving average indicates the Chinese economy has been improving since the beginning of the 4th quarter and the stats below confirm this. We are providing performance for the 6 ETF’s for the 3rd and 4th quarters. Additionally, on the far right hand column is the year to date performance of the components of the S&P 500 that correspond to the 4 Chinese ETF’s that are highlighted. See top of the paragraph for the symbols and that represent the China sectors
October 1-December 31 July 1-Sept 30 Year to Date Year To date S&P 500 sectors
Chii +21.11% -0.88% +18.87% XLF (Financial) +24.46%
Chix +20.56% -1.66% +27.58% XLI (Industrials) +10.28%
Chxx +20.31% -2.14% +26.28% XLB (Materials) +9.91%
Chim +14.75% +1.32% +0.92% XLE (Energy) +1.01%
Chie +11.04% +3.25% +11.30%
Chiq +9.41% +0.68% +6.22%
Another indication that the Chinese economy may be on the mend is the performance of the FXI. The FXI ETF is a basket of 25 companies that are the largest, most liquid companies in China. The ETF is weighted and financials account for 57.34%, energy 14.91%, telecommunications 17.65%, materials 8.10%, industrials 1.90%, other 0.10%. The performance of the FXI has been outpacing the S&P 500 cash index and through December 31, is trading 16.00% higher in 2012 versus the S&P 500 cash index trading +13.41%. Its 50 day moving average is trading approximately $2.00 above its 200 day moving average, and the FXI is at its highest level since March 2012. If the Chinese economy is recovering, as reflected by key etfs, then there are positive demand implications for energy, metals and basic materials.
