PM Daily Market Commentary - 2/3/2016

davefairtex
By davefairtex on Thu, Feb 4, 2016 - 2:23am

Gold rose +13.40 to 1143.00 on very heavy volume, while silver shot up +0.38 to 14.69 on very heavy volume as well.  However, the move today was all about currency: today, the buck lost -1.56 [-1.58%], a massive one-day drop that threw the dollar into a clear downtrend.  This caused serious chaos in the market, with money fleeing first one way, then another.

From what I could tell, there was no catalyst that caused the massive losses in the dollar.  It was moving sideways until around 04:00 Eastern, and then it started to sell off.  And it sold off, and sold off some more, and the fall only stopped at 14:00 Eastern when it found support at the 200 MA, almost 2 points lower than when it started the day, after which it had a small bounce.  This kind of large move doesn't happen very often, and usually when it does, there is a clear catalyst.  Today, from what I could tell, traders just decided to bail out wholesale, for no reason I could see.

I scoured Bloomberg for any sort of possible explanation - there wasn't any.  They didn't even mention the move on the front page.  Euro was up +1.61%, CAD +2.00%, AUD +1.72%, GBP +1.26%, even JPY rose +1.66% completely wiping out the losses from the BOJ negative rate announcement.

On the daily chart, the buck made a new lower low today, clearly entering a downtrend.  If this continues, it will be supportive of gold, PM in general, and commodities too.

Gold was unaffected by the dollar move until after US market open, when gold simply took off at around 09:50, blasting through its 200 day MA and eventually closing near its high.  The weak non-mfg ISM report released at 10:00 may have lent some momentum too.  Volume today was heavy; probably a combination of traders buying the 200 MA breakout, and new shorts that had entered recently fleeing for cover. 

Silver finally broke out and made a new high today, impelled higher by the dropping dollar, a rally in oil and the overall rise in the rest of the commodities.  Silver first saw signs of life much earlier in the day, starting its move higher as the dollar started to fall.  It really took off after that non-mfg ISM report at 10:00, and managed to keep much of its gains into the close.  Its nice to see silver finally start to catch up to gold.

Miners very narrowly avoided a swing high yesterday; they made up for it today by ripping higher on massive volume, breaking out above the previous high set last month.  GDX shot up +7.34%, while the juniors lagged behind, climbing only +4.63% on moderately heavy volume.  GDX is a stone's throw away from its 200 MA; the last time GDX touched the 200 was back in May 2015.  Back then, the move lasted all of two days before turning into an ugly 3-month 40% drop.  Let's see what happens this time.

Platinum rose +2.80%, palladium was up +3.74%, and even copper rose +2.61%, moving back above its 50 MA.  It was a very good day for the metals.  I like it when gold lags the metals, rather than leads.  That's because that's a bullish pattern for PM overall.

Today's strong cross-currents first pulled SPX lower at market open with SPX losing almost 35 points at one point.  A strong oil rally at 10:30 stopped the SPX plunge, and a modest dollar recovery that started at 14:00 saw SPX climb into the close, leaving SPX to end the day up +9.50 at 1912.53.  SPX printed an optimistic-looking hammer candle, and the VIX fell -0.33 to 21.65 after being up almost 6 points earlier in the day.  It was a pretty wild day.  Oil equities looked fantastic, up +3.56%, while the banks were fortunate to just get back to even, with $BKX printing a doji and closing up just +0.21%.

JNK managed to close up +0.37%; it too bottomed out when oil started its big rally.

TLT made a dramatic new high in the first hour of trading, but topped out and plunged as the equity market bottomed along with oil at 10:30.  TLT ended the day down -0.83%, printing a bearish-looking inverted hammer candle, strongly suggesting risk on.

CRB shot higher, up +2.50% moving back above its 9 EMA.

WTIC staged a massive rally today, up +3.04 [+10.23%] to 32.75, the rally coming right after a bearish-looking Petroleum Status Report was released at 10:30.  The report showed a build of 7.8 million barrels, which to me looks pretty bearish, but the market didn't agree.  It reacted lower for all of six minutes, and then reversed and shot higher for the remainder of the day, closing right at the high.

If you look at all the charts together, you can see how the dramatic moves in oil and the buck ended up pulling the various markets in different directions.

Is this the end of the oil downturn?  It could be.  This is the second big rally on a bearish Petroleum Status Report in two weeks.  I have no idea what's going on behind the scenes, but that's a bullish sign in my book.  Today the 6-minute dip in oil was bought viciously.  Shorts have to be in major pain from all the whipsaws.

We can choose to gasp in horror that "oil isn't moving according to the fundamentals", but I strongly suspect things are happening behind the scenes - fundamental things - that we are not privy to.  Sometimes fundamentals change under the surface, and we (the great unwashed masses) only find out about the change long afterwards.  Meanwhile prices are moving to reflect the hidden, changing fundamentals.  That's why I watch prices and give them the benefit of the doubt.  I simply don't trust the "fundamental news" at all.  It always lags.

Gold has been moving steadily higher for reasons that aren't entirely clear, but you can't deny the trend.  Silver has finally joined the party.  Commodities are struggling, but may be rebounding now.   The dollar has entered as a surprise contributor, helping to push gold over its 200 MA.  Will the buck keep descending?  Why did it drop?  Will the gold rally finally get tired and retrace?  There are some major cross currents right now in the markets, but regardless of all that, it does seem like gold is continuing to catch a bid.

Gold is now across the 200 MA.  At some point, the rally in gold will stop and gold will correct.  If that 200 MA can act as support during gold's next correction, then thats when things will start to get exciting.  That will mean that traders have shifted focus from "selling rallies" to "buying dips" and it is that change in behavior by the traders which will cause the longer term trend to change.  Once the western buyers decide to come back, gold will simply take off.  It will still have cycles, but the dips will be bought, instead of the rallies being sold.

I can't say if that's now.  But it could be.  We'll only know for sure once we see how gold's next correction plays out.

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9 Comments

Penny551's picture
Penny551
Status: Silver Member (Offline)
Joined: Nov 8 2012
Posts: 149
a lot of wisdom and a great

a lot of wisdom and a great lesson in these couple'a sentences...

 

"We can choose to gasp in horror that "oil isn't moving according to the fundamentals", but I strongly suspect things are happening behind the scenes - fundamental things - that we are not privy to.  Sometimes fundamentals change under the surface, and we (the great unwashed masses) only find out about the change long afterwards.  Meanwhile prices are moving to reflect the hidden, changing fundamentals.  That's why I watch prices and give them the benefit of the doubt.  I simply don't trust the "fundamental news" at all.  It always lags."

 

I suspect that there may be internal trouble brewing w/ our "friends" in Saudi Arabia. It's noteworthy that the Ghawar and oil producing region is in Eastern Saudi Arabia where the majority is Shia...

 

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Something has just happened.

MM says the Fed has just liquidated 20Bn of their assets.

 

pinecarr's picture
pinecarr
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Posts: 2237
Thanks Arthur!

Really good/interesting MM post!

davefairtex's picture
davefairtex
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Posts: 5063
surplus capital

The "surplus capital" is an accounting entry on the Fed's balance sheet.

https://research.stlouisfed.org/fred2/release/tables?rid=20&eid=2216

Basically, "surplus capital" is the amount left over when you subtract liabilities from assets and paid in capital.  It isn't some pot of money sitting in a desk (or an account) waiting to be spent, but it is important.  When a normal bank runs out of capital, they get closed down by their regulator.

Surplus Capital = A - L - PIC

Surplus Capital: https://research.stlouisfed.org/fred2/series/WCSL

Assets: https://research.stlouisfed.org/fred2/series/WALCL

Liabilities: https://research.stlouisfed.org/fred2/series/WLTLECL

Paid-in Capital: https://research.stlouisfed.org/fred2/series/WCPIL

Now normally the Fed accrues billions of dollars of interest from their 4 trillion in bond (assets) that they hand to the Treasury each quarter - they gross about 30 billion per quarter.

When the Fed has a loss, they subtract it from the interest income; it appears on their income statement in the "Non-Interest Income" section in the area marked "System Open Market Account."  This is where they account for any losses from their foreign currency holdings, for instance.  So if we want to wait 3 months, and look at the Q4 income statement, we'll probably see something interesting - probably a 20 billion dollar something.

http://www.federalreserve.gov/monetarypolicy/quarterly-report-20150930.htm

Based on the timeseries, this loss happened somewhere between Dec 23, 2015 and Dec 30, 2015.

I've heard a whole lot of people say that the Fed doesn't worry about losses - they can always just print money.  That's not right.

Printing money is a balance sheet operation.  A deposit liability is incremented and an asset appears on the sheet - its a zero sum operation.  So is un-printing money.  A deposit liability is decremented, and an asset vanishes from the balance sheet.  That's also what happens when a bond gets paid off.

But when the Fed takes losses - assuming they are accounted for properly - they appear as a loss on the income statement, which flows through to the balance sheet as a loss against surplus capital (an asset got wiped out, but the deposit liability remained - that's how you get a loss).

Did 20 billion in Fed assets simply get written down to zero?  Remind me to check again when the Fed's 4Q 2015 income statement comes out.

cmartenson's picture
cmartenson
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Posts: 5569
Fantastic description Dave
davefairtex wrote:

(...)

I've heard a whole lot of people say that the Fed doesn't worry about losses - they can always just print money.  That's not right.

Printing money is a balance sheet operation.  A deposit liability is incremented and an asset appears on the sheet - its a zero sum operation.  So is un-printing money.  A deposit liability is decremented, and an asset vanishes from the balance sheet.  That's also what happens when a bond gets paid off.

But when the Fed takes losses - assuming they are accounted for properly - they appear as a loss on the income statement, which flows through to the balance sheet as a loss against surplus capital (an asset got wiped out, but the deposit liability remained - that's how you get a loss).

First, thank you for sussing that out and explaining the Surplus Capital so clearly.

Second, I am one of the people who has deep concerns about the Fed properly accounting for things.

To clarify, I am not at all concerned about how the Fed accounts for the Treasury portion of their BS.  But I am very concerned about how they are accounting for the MBS portion.  They bought $1.25 trillion of those suckers mainly at what had to be the worst moments/depths of the housing crisis at full value.

They were highly secretive about the purchase process, that being run by Blackrock.  Coincidentally, I met one of the purchase managers at a meeting and asked him directly about whether the Fed was buying only the best, or possibly the worst performing of the MBS paper, and he politely declined  to answer and quickly walked away from further conversation.

Seemed like I touched a nerve, but perhaps I was just violating the rules of polite conversation among the money insiders.

At any rate, if the Fed, as I suspect, bought a lot of crap, and a bunch of that was hinged to the ALT-A an Subprime portion of the story, then the Fed should have some decent losses in there.  But they've never accounted for any that I know of.

At any rate, I'm looking forward to the update on all this when more tea leaves are released for your scrutiny.

davefairtex's picture
davefairtex
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Posts: 5063
portfolio turnover

Chris-

So the Fed has abut 1.7 trillion in MBS right now.  I suspect as you do that they did buy a lot of crap well above market back in 2009-2010, but over time, the economic recovery (and the low rates, and the rising property values, and the inevitable sales and refinancings and interest payments) covered a multitude of sins and if I had to guess, most of their stuff has actually made them money.

They get about 200-250 billion in principal repayments every year for their 1.7 trillion portfolio.  Based on that number, I'd guess that the majority of MBS they bought back in 2009 has already shuffled off the balance sheet at this point, the likely losses mixed in with the interest payments.  And remember those bubble-year interest payments are a whole lot higher than payments are today, so it might have even been a moneymaker all things considered, since they managed to engineer a housing re-bounce as well as keep rates insanely low - which drove refinancing, which helped the Fed rotate that stuff off the balance sheet, etc.

I'm relatively sure its all good right now.  In 2010, I'm also relatively sure it was NOT all good.

Of course, if RE tips over here, its unlikely this miracle will work a second time.  There's no more space to engineer rates lower than 3.5%.  I'm not sure what happens when the Fed is shown to be insolvent during that hypothetical future crisis.  Its probably not great for the dollar, and it certainly will end up dropping the remit to the treasury.  How long could the Fed extend-and-pretend?  Audit-the-Fed might end up blowing up the buck.

davefairtex's picture
davefairtex
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Posts: 5063
NFP tomorrow

We have the nonfarm payrolls report tomorrow at 08:30 Eastern.  No doubt this will move markets.  I'm past trying to guess what will appear.  I've been wrong too many times now.

ohyikes's picture
ohyikes
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Posts: 1
missing 20 billion

this may account for some of the missing 20 billion from the Fed balance sheet....

http://www.latimes.com/business/la-fi-federal-reserve-profit-20160111-st...

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5063
nailed it

ohyikes-

You nailed it.  That's the missing 20 billion.  I guess Congress decided that a central bank doesn't need a capital buffer to operate.  Geniuses.  The Fed should probably change that accounting entry from "surplus capital" to "capital reserve" so it doesn't look like a piggy bank to be raided.

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