Magnitude 7.1 Monday – Yet Another Quake Shakes Japan

This is getting to be a daily event!

Just last Friday Japan had a quake early in our morning of about a 7 and today, at about 4:50 am EST, they had a 7.1.  This one didn't even bother our futures traders and it came after the Nikkei was closed and just after the Japanese Government announced a 50% increase in the size of the evacuation zone, from 20Km to 30Km, but still well short of the US's warning of 50Km and even shorter of other nations who have expanded their evacuation zone to – JAPAN.  

The above chart from the WSJ gives us a daily reactor status at Fukushima and I asked Members this weekend how long they thought it would be before Japanese currency, the third most circulated currency in the World, began showing traces of radioactivity.  My biggest fear for the markets is that the Dollar will make a strong comeback and trash the relative value of stocks and commodities.  

Now that we have a budget deal (such as it is) – with Europe still in turmoil and Japan's currency going into melt-down – what is going to keep the Buck down?

U.S. Retail sales for March were strong – doesn't that mean there's a demand for the Dollar?  Oil prices are at record highs – oil trades in Dollars – doesn't that mean there is demand for Dollars?  The US stock market is enjoying the fastest rise in its history – US stocks are traded in Dollars – where is the demand? 

Clearly something is wrong somewhere in this chain.  Perhaps, as Barron's points out this weekend, it's the ulltra-low volume of the rally, volume levels that usually signal a pending market correction that instead have accompanied a 100% rise in the major indexes since March of 2009. According to Barron's: "Volume and other stats on the back of the market's bubblegum card are raising suspicion without yet handing up an indictment." 

Even as stock volume has ebbed, the business in options has been heavy. CBOE Holdings (ticker: CBOE) reported that last month that average daily volume across all products rose 3% versus the total a year earlier, including a 16% rise in index-options turnover and a 25% gain in options on exchange-traded funds. And instruments tied to the CBOE Volatility Index, or VIX, set a record, despite a steady drop in the market's observed volatility.

As Barrons notes, black-box, arbitrage-oriented "high frequency traders" are the marginal providers of volume on a daily basis.  Without the machines – would there be any volume at all?  Many of our own Members trade in quantities large enough to "move the markets" – or at least individual securities and often enough it does feel like the only counterparty to our trades is a robot trying to pick off our orders.  

It's yet another way that the market feels like it's in the low-volume, Fed-medicated, range-trading, easy-corporate-credit, buyout-happy days of the middle part of the last decade or, as I often say – we are partying like it's 1999.  But, is it early 1999, when the Nasdaq opened the year at 2,300 and topped out over 5,000 in March of 2000 or are we at that top now (with our current Nasdaq at 2,800)?  The Nasdaq peaked out at 5,050 on March 10th of 2000 on relief that Y2K worries never happened but by April 15th we had fallen back to 3,250 – down 35% in 35 days.  That's why I get so worried when I think things are "toppy" – like they are now…

That time was not "different" – we had a bubble in stocks based on unlimited future growth potential that have been proven to be utter BS in the subsequent decade.  Now we have a commodity bubble based on the same assumption that will burst the same was as demand fails to prove out AND we have a new dot com bubble for stocks like PCLN, NFLX, OPEN, Groupon, Facebook etc who have the common thread of not actually producing anything of their own but acting as middle-men in various transactions as if the ancient and inevitable phrase "cutting out the middle man" no longer is understood by US investors.  

Speaking of demand that fails to prove out.  Once again copper is rejected at the top of our range at $4.50 as imports to China are off 33% from last year.  That's right, all those articles you read about copper demand during the month of March and about copper being used to back loans in China and copper being the new silver were all Bullshit – but you fell for it, didn't you?  

“The fall in imports from a year ago reflects the negative arbitrage we’ve seen in the past few months,” Peng Bo, an analyst at Guosen Securities Co., said from Shenzhen. “While we think it’s still too early to say demand from China has dropped, it’s something to watch out for in the coming months.”    

Negative arbitrage for a few months?  That's not what CNBC told us, is it?  Gosh, I can't imagine how there could have been negative arbs on copper at the same time that retail investors were being told to buy it – I wonder how that could have happened?  [end sarcasm font]  Copper stockpiles monitored by the Shanghai Futures Exchange climbed to a 10-month high of 177,365 tons in the week ending March 18.   

Chinese buyers are now facing the double whammy of higher copper prices and the government's aggressive moves to tighten credit. Moreover, evidence has recently surfaced of previously unreported copper stockpiles, a sign that much of the purchased copper hasn't been put to use. The stash is estimated by people in China and several Western banks to be around one million tons, or about 15% of the country's annual consumption.  

Official commodity inventories aren't readily released by China's government, forcing industry watchers to resort to other means—either physically scouting warehouses themselves or finding government sources—to try to determine just how much copper has actually been used.  "The risks now appear, for the first time in quite a while, to be skewed to the downside," said Stephen Briggs, senior metals strategist of BNP Paribas.

In my note to Members last night we shorted silver futures off the $42 line and yes, we have been wrong on silver a lot but one day we won't be (and this morning we already got $41) and it will make a very nice correction.  So will copper, gold and oil – it's just a question of keeping yourself in the right place (short on the commodity) and waiting PATIENTLY for the right time.   With our option plays we accomplish this by rolling our short positions, just like the NYMEX traders roll their long positions out in time until they finally find a buyer for their jacked-up commodity.  

NYMEX futures expire on April 19th and delivery must be accepted at Cushing, OK, in May for any May contracts still open on the 20th of April.  There is nothing that the conga-line of tankers between here and OPEC would like to do more than unload an extra 277 Million barrels of crude at $112.79 per barrel (Friday's close on open contracts and price) but, unfortunately, as I mentioned last week, Cushing, OK is already packed to the gills with oil and can only handle 45M barrels if it started out empty so it is, very simply, physically impossible for those barrels to be delivered.  This did not, however,  stop 287M barrels worth of May contracts from trading on Friday and GAINING $2.49 on the day.  

Who is buying 287,494 contracts (1,000 barrels per contract) for May delivery that can't possibly be delivered for $2.49 more than they were priced the day before?  These are the kind of questions that you would think regulators would be asking – if we had any.  In fact, the last contract actually purchased in June was at $104.03 and the last contract purchased in July was at $91 and the last contract purchased in August was $95.70.  Why?  Because the price you pay at the pump is set by the FRONT-month contract only and it's not worth manipulating the forward contracts until they become the front month.  Again – if only there were regulators to look into these things…

The great thing about the NYMEX is that the traders don't have to take delivery on their contracts, they can simply pay to roll them over to the next settlement price, even if no one is actually buying the barrels.  That's how we have developed a massive glut of 677 Million barrels worth of contracts in the front four months on the NYMEX and, come rollover day – that will be the amount of barrels "on order" for the front 3 months unless a lot barrels get dumped at market prices fast.  

Keep in mind that the entire United States uses "just" 18M barrels of oil a day so 677M barrels is a 37-day supply of oil but we also make 9M barrels of our own oil and import "just" 9Mbd, and 5M barrels of that is from Canada and Mexico who, last I heard, aren't even having revolutions.  So, ignoring North Sea oil Brazil and Venezuela and lumping Africa in with OPEC, we are importing 3Mbd from unreliable sources and there is a 225-day supply under contract for delivery at the current price or cheaper plus we have a Strategic Petroleum Reserve that holds another 727 Million barrels (full) plus 370M barrels of commercial storage in the US (also full) which is another 365.6 days of marginal oil already here in storage in addition to the 225 days under contract for delivery.  

Wow, that is some long-term supply disruption that they are pricing in, isn't it?  It's a scam folks, it's nothing but a huge scam and it's destroying the US economy as well as the entire global economy but no one complains because they are "only" stealing about $1.50 per gallon from each individual person in the industrialized world.  

It's the top 0.01% robbing the next 39.99% – the bottom 60% can't afford cars anyway (they just starve quietly to death as food prices climb on fuel costs).  If someone breaks into your car and steals a $500 stereo, you go to the police but if someone charges you an extra $30 every time you fill up your tank 50 times a year ($1,500) you shut up and pay your bill.  Great system, right?

Despite the fact that we put up a new virtual portfolio this weekend aimed at producing a steady investment income – I am less than enthusiastic about jumping in and buying anything right now.  Perhaps because of that, my first post of options expiration week (plus tax day on Friday!) is a cautionary one and I haven't even gotten around to the mess that is Europe or Japan's smacked down economy or anticipated Q1 margin pressures yet.  

Needless to say – PLEASE – be careful out there!