Wednesday Outlook: Commodities, Global Markets

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Okay, tomorrow we start earnings season off with Alcoa (AA) being first up as usual. Nothing much good is expected and the company always has a lot of unique items in their reports. But, it will give us an indication of economic conditions revealed in their statements, excluding Wall Street spin.

Biden was shooting his mouth off the past few days regarding Israel’s right to attack Iran and how the administration underestimated the depth of the current recession. So he argued for another stimulus package—yeah, more spending, that’s what we need! He’s no doubt in Cheney’s old secret hideout but bound and gagged. The longer this administration rolls out nonsensical programs, the less the American people like it. Don’t get me wrong, the Bush administration got a lot of things wrong domestically but these guys seem way in over their heads.

But the goofiness doesn’t stop with Biden. The new CFTC chairman ruined commodity markets today with a trial balloon arguing for position limits on commodity positions. You know, get the evil speculators! What will they meddle with next? This dumb idea is in part what put commodity markets on its okole (OH-Koh-Lay: Hawaiian for your posterior) today.

For us, we have small positions and roughly 80% cash in portfolios. Which way markets go next should prove interesting and earnings should tell the tale in that regard.

Now let’s hope Goldman finds its trading software so markets can return to their previous manipulative ways. The guy doing the best job with Goldman is Tyler Durden and his Zero Hedge blog. Goldman made the mistake of engaging with him which makes it even more fun.

Disclaimer: Among other issues the ETF Digest maintains positions in: MDY, IWM, QQQQ, GLD, DBC, USL, DBB, EFA, EEM and FXI.

The charts and comments are only the author’s view of market activity and aren’t recommendations to buy or sell any security. Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations aren’t predictive of any future market action rather they only demonstrate the author’s opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at www.etfdigest.com.

Comments

[Maxe Paul:]

We Aussie have officially won "The Biggest Loser" of the month award according to Bloomberg.

Please post me the prize!

Jul 08 03:55 AM

[Macro_Man:]

How does one short some of these ETFs, XLY, XRT, IYR for example. Or, EWZ..I know there are ultrashort ETFs for some of these...e.g. SRS, but if I dont want to mess with that puppy, is there a way to short IYR directly

Jul 08 05:48 AM

[jgbooker:]

You should be able to short IYR like an ordinary stock. Have you tried?


On Jul 08 05:48 AM Macro_Man wrote:

> How does one short some of these ETFs, XLY, XRT, IYR for example.
> Or, EWZ..I know there are ultrashort ETFs for some of these...e.g.
> SRS, but if I dont want to mess with that puppy, is there a way to
> short IYR directly

Jul 08 07:09 AM

[Free Mind:]

Thanks for your excellent and very nicely commented charts, David. I always look forward to finding them. :-)

Yesterday evening's trading was quite animated, with people grabbing puts for whatever price, on the close...

Fear is back, even though we might have a small bounce today. :)

I've been a bit mystified by the resilience of the small caps (IWM) in the face of the move down...

No real fundamental reason to keep holding the "junk".

Jul 08 07:19 AM

[frosty:]

All 4 of the major indexes - DJIA, DJTA, APX, RUT show the same head and shoulders breakthrough. They all have also broken down through the 50 day MA. I prefer to look at EMA's and of the 4, only the Russell 2000 broke above the 200 day EMA. For the other 3 the 200 day EMA was resistence and until the last few days, the 50 day EMA was support for all 4. This seems like consensus. Sell and sell short.

Jul 08 08:32 AM

[basehitz:]

So, if Sergey stole (alledgedly) GS brain, does that mean they are no longer “the smartest guys in the room”? If I hear one more jackass use that phrase to describe the 4th branch of government, I will nominate him next year to challenge Dennis Kneale for the biggest idiot in the room. BTW, if you Google “Dennis Kneale idiot” you get 35,000 page hits. Nice job, jackass.

Jul 08 08:40 AM

[frosty:]

To view the major indexes bear consensus, chart references to look at are:

bigcharts.marketwatch....

bigcharts.marketwatch....

bigcharts.marketwatch....

bigcharts.marketwatch....

Jul 08 09:03 AM

[frosty:]

Sorry - got the DJTA wrong - here's the correct one

bigcharts.marketwatch....

Jul 08 09:05 AM

[JGL:]

Could you comment on the implications for current owners of UNG of the decision to stop trading it?

Thanks

Jul 08 09:39 AM

[David Fry:]

Courtesy of Scott Larison Compass Point Research & Trading via Intelligence Press:

UNG Exhausts Supply of Units; Traders Mull Fund's Impact
The United States Natural Gas Fund (UNG) announced in an 8-K filing with the Securities and Exchange Commission (SEC) on Tuesday that as of Tuesday, July 7, it had issued all of its remaining limited partner units to the investing public. As a result, the fund "will temporarily suspend the issuance of additional creation baskets," or limited partner units, until the SEC approves UNG's recent shelf filing.

Last Sunday UNG registered for an additional 1 billion units with the SEC, which, if granted, would give it the ability to more than double its current units outstanding. Some analysts are concerned that if the fund is unable to issue more units, demand for current units could inflate UNG's market price above the value of its holdings. However, market pundits say arbitrage opportunities should prevent the value of the units from rising too far above the net asset value of the fund.

UNG further noted that the 32.1 million units it had left to issue under its current shelf registration as of last Monday were all issued the very next day. The fund had 281.4 million units outstanding at the end of trading on Monday, and that total could rise to more than 300 million, assuming there were no net redemptions against the 32.1 million new units issued Tuesday.

Much has been made over the last two months about the fund's rapid growth and alleged impacts on the natural gas futures market through its positions on the New York Mercantile Exchange (Nymex) and the IntercontinentalExchange. Late last month after sitting down with John Hyland, UNG's chief investment officer, a team of analysts with Citi Investment Research & Analysis said due to the fund's rapid growth and significant size, it could be "propping up" front month natural gas prices at the indirect expense of the back end of the natural gas 12-month strip (see Daily GPI, June 29).

Investor interest in UNG has soared the past few months, with outstanding units rising from 38.9 million at the end of February to 261.8 million as of June 30. To help put that in perspective, the Street.com noted that UNG attracted $1.7 billion in investor capital in June, or 14% of all new money that flowed into ETFs during the month.

UNG issues limited partnership units to the general public by issuing creation baskets, which are blocks of 100,000 limited partner shares that are first sold to a list of seven authorized purchasers. These authorized purchasers will then either hold the units for their own accounts, or disseminate them to the public in an underwriting capacity.

While the fund noted that the suspension of the issuance of creation baskets will have no impact on its ability to redeem existing units, not being able to issue new limited partnerships will certainly restrict its access to new capital. That, in turn, will impact its ability to purchase additional near month New York Mercantile Exchange (Nymex) futures contracts, along with related Henry Hub swap contracts. UNG had been building its relative stake in the August 2009 Nymex natural gas contract recently, with its percentage share of open interest in the August contract rising from 13.3% on June 26 to 18.3% on July 6.

Interestingly, UNG's announcement came on the same day the Commodity Futures Trading Commission (CFTC) revealed plans to host a series of meetings this month and in August to determine whether it should establish speculative limits on certain commodities, including natural gas (see related story).

A New York City trader noted the CFTC's decision could be swayed if UNG is awarded its 1 billion unit shelf registration before then, and if natural gas prices subsequently rise. "Nobody ever seems to care that much if speculative interest rises in the face of falling prices, like it has the last few weeks. But if (natural gas) prices rise after a lot of new money enters the ring, the CFTC will take notice," the trader said.

In a filing with the CFTC in early June, UNG management said that as a passively managed commodity index fund with a "neutral" investment strategy, the CFTC should free it and other exchange-traded commodity index funds from position limits and grant them "no-action" status with respect to their activities (see Daily GPI, June 23).

A Washington, DC-based broker said he believes the whole UNG "hoopla" is a case of "much ado about nothing" because the market is simply too big to be pushed around by one fund. "I think these things are much exaggerated. Traders have been looking for the boogey man since the concept of a boogey man was invented," the broker told NGI. "Some traders believe UNG's position is a bullish influence on the natural gas market, but if that was the case I would think we would be moving higher. Looking at the volume and open interest for natural gas, we're really in the tank. The open interest right now is about 731,000 contracts, which is small compared to what it used to be. It has been rising recently, but it has been rising on declining prices, which is a bearish sign.

"Everyone we talk to on the subject of UNG has told us that the fund is a house of cards. It does not really track the gas price and there are all kinds of issues with the roll that they go through," he said. "Now, it seems to me the roll would kill them if they were long only because the differential is several cents. When they roll forward, they sell the current month and buy the next month, but they are buying the next month at a higher price."

In general, the broker said he believes the markets are too big for any one factor to make that much of an impact. "These stories make for good press and that's about it," he said. "Of course there was Amaranth, but that was the market punking somebody -- and it did not last very long."

©Copyright 2009 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.

Jul 08 09:47 AM

[JGL:]

Thanks for the lightning quick reply. Very interesting article. This veent, and other comemnts you have made over the last months, make small investor wonder whether trading some of these ETFs is not closer to Las Vegas than to Wall Street!

Thaks again for the reply and for your daily comments.

Jul 08 10:07 AM

[robert.b.fe...:]

Thanks again Dave. Bang up job I always look forward to the comments. I'm still thinking DJIA at 8000 at the end of the week.

Jul 08 11:04 AM

[bobbobwhite:]

Market movements over the past year confirm the fact that it is now no more than a trader's market and will be for a long time, thanks to the rot caused by Wall Street corruption and greed. If it ever returns to what it was in the "old days", I hope I am not too old to partake. Until that time, forget it, as the cheats and crooks and manipulators will prevail until vast improvements in security are made, if ever. And with gov't regulators run by ex-Wall Streeters, when might that happen?

Jul 08 12:17 PM

[Alex Trias:]

I'm tempted to write all the reasons to be bullish, just to buck the consensus I'm reading here. The problem is I have no argument to support the bull case. Maybe Alcoa can pull off a miracle and beat expectations? That could help the bulls a bit, but it seems pretty unlikely. And if Alcoa messes up, Thursday could be, uh, well, how to put this politely... interesting. I see no reason to risk capital in this marketplace just yet.

Jul 08 02:32 PM

[Jon G:]

Just like clockwork - 3 pm stick save into the close

Jul 08 03:51 PM

[Krantz:]

Take a look at the inverted h/s on the _weekly_ graph for SPY as posted by Dave.

I'm not so sure about his theory about a regular h/s on the daily chart for SPY.

SPY as a proxy for the overall market could retrace another 6% to 8% from here before a fallout.

The weekly chart is better but I agree with watching if it closes below the 200MA for a few days.

Krantz

Jul 08 04:19 PM