SP 500 and NDX December Futures Daily Charts

The ISM Services Index came in at 53.2 versus an expected 51.8 and it was off to the races with a day long short squeeze in US equities.

Tomorrow is the ADP report, with expectations of 18-20,000 jobs added in the private sector, a possible peek ahead at the big non-Farm Payrolls Report for September which carries expectations of flat jobs growth.

Personally I think the markets are starting to price in a QE2 stimulus and a whiff of inflation to go with it, with additional inspiration from the example of Japan, which is approaching a level of debt to GDP that generally begins to approach the threshold of hyperinflation to come.

However it develops, I doubt this will end well and remain very cautious of equities, leaving the day with a new small short position. We all have to be mindful of the Fed's ability to blow another asset bubble, more generally in equities. Difficult times to be an investor or a saver indeed.

Gold and Silver Daily Charts

SP 500 and NDX December Futures Daily Charts

Gold Daily Chart and a Comparison of the 2009 and 2010 Gold Rallies

If the 2010 gold rally lasts 98 calendar days, or approximately three months, that targets October 31.

If the 2010 gold rally results in a price increase of 27% that projects a target of $1,480.

St. Crispin's Day is 25 October.



The Battle of Agincourt

SP 500 and NDX December Futures Daily Charts

US Dollar Weekly Chart

The dollar appears to be headed lower to test the next level of support on the weekly chart. A target for the euro might be closer to the 150 level but probably not much higher, as foreign central banks continue to shift reserve from the dollar into other stores of wealth.

Gold Daily Chart

Another range day in which the Comex tested the limits of the large open interest in holders of October futures coming into the delivery process. The speculative shorts who got excited and jumped on at the bottom of the range got stuffed on the snapback rally later in the day.

Learning to wait for the moment when the odds are in your favor is the great lesson of trading. Life truly is a school of probability.

SP 500 and NDX December Futures Daily Chart

End of quarter. Book it, Dano.

Net Asset Value of Certain Precious Metal Trusts and Funds and the Odd Performance of PHYS

I am finding this contraction in the premiums of the gold-only trusts GTU and PHYS to be extremely interesting. Both followed an expansion of the fund's units and large sales of overallocations to the underwriters, providing liquidity not only to expand the trust but also to game the shares.

This expansion facilitates an arbitrage on the premium in which one sells the trust and buys GLD for example. And the holding of units by the underwriters assures a ready supply of shares for shorting, if one assumes that the big punters even bother with the nicety of borrowing shares.

While the premiums remain uniform it does not matter since the NAV will track the bullion holdings, but it does create a sort of retrograde phenomenon in which the funds will briefly underperform bullion due to the contraction of their premium, especially in the case of PHYS, from the lofty 8% to the lowly 2%. It will be interesting to see if this holds, or if the range of premium reasserts on a new leg up in bullion, and the 'kick' of a possible short squeeze.

In the past a contraction of the premiums was often a signal of bearish sentiment, that the speculators were not willing to pay a premium because they felt that the move was nearing a top. One also has to wonder if this is the case once again.

Who can say? As Robbie Burns once observed:

But, Mousie, thou art no thy lane,
In proving foresight may be vain;
The best-laid schemes o' mice an 'men
Gang aft agley,
An' lea'e us nought but grief an' pain,
For promis'd joy!

Still thou art blest, compar'd wi' me
The present only toucheth thee:
But, Och! I backward cast my e'e.
On prospects drear!
An' forward, tho' I canna see,
I guess an' fear!

If you are trading for the shorter term, one needs to be aware of things like premiums and arbitrage. If you are buying and holding as an investor short term fluctuations become much less of an issue as other things increase in importance. You have to understand why you are buying something and what your own objectives are with it, and then be guided by them.

As in the case of the trusts, there are 'premiums' on stocks and options for example, that are not so readily determined because the exact valuations are not so simple and explicit.

This is why trading for the shorter term is a highly specialized craft and is not suitable for any but a few who have the time and knowledge to attempt it. I have been at it for many years, and still learn new things almost every day, all too often the hard way.

You may wish to keep this in mind if and when Mr. Sprott introduces his Physical Silver Trust.

Here is what the NAVs looked like in early September 2010. One 'benefit' of the added liquidity is that the spreads on the Buy - Ask for these trusts has narrowed significantly.

For US Corporations the Whole of the Law Shall Be 'Do What Thou Wilt'

"So long as they incorporate, businesses will now be free to trade in or exploit slaves, employ mercenary armies to do dirty work for despots, perform genocides or operate torture prisons for a despot’s political opponents, or engage in piracy—all without civil liability to victims."

US Second Circuit Judge Pierre Leval

Is this some notorious decision in the manner of Dred Scott from an ugly and unenlightened past of robber barons and organized tyranny?  Yes, and no.

I have not yet read a contrary or comprehensive legal interpretation of this decision, or the actual majority court opinion, and will allow that the opinion from Judge Leval could be overstated in its reach and implications. And or course the corporations might still be subject to criminal prosecution, such as that administered occasionally by the federal government, almost always settled for cursory fines without admission of guilt. (Later: here is a decent description of opinion in support of the court).

“The principle of individual liability for violations of international law has been limited to natural persons — not ‘juridical’ persons such as corporations — because the moral responsibility for a crime so heinous and unbounded as to rise to the level of an ‘international crime’ has rested solely with the individual men and women who have perpetrated it,” Judge Jose Cabranes wrote on behalf of the majority."

The US court system has discovered that 'organizations' are incapable of committing misdeed heninous enough to rise to the level of international crimes.  You know, like crimes against humanity.  This does fit with a disturbing trend in the US whereby more power and wealth is being concentrated in corporations who can act with increasing advantage and anonymity vis-à-vis the individual. Barry Ritholz has framed it quite well in his piece: The Left Right Paradigm Is Over. 

The decision in the US to grant corporations the rights of individuals does have deep roots. From the Supreme Court case of Santa Clara County v. Southern Pacific Railroad in 1886, the US Supreme Court ruled that a private corporation is a natural person under the US Constitution.

"The court does not wish to hear argument on the question whether the provision in the 14th Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does." US Supreme Court Chief Justice Morrison Waite

Justice William O Douglas wrote in 1949, "the Santa Clara case becomes one of the most momentous of all our decisions...Corporations were now armed with constitutional prerogatives."

How can the courts find that judicial constructs like corporations have the protections and privileges of the Bill of Right, but become strict constructionalistic and literal in allowing that they can engage policies and actions supporting and provoking the commission of heinous crimes such as murder and torture without any collective liability?  This was not the decision of some rogue sadist, but the cold and calculated corporate business decision in the pursuit of profit. Corporations implement policy decisions collectively all the time, often of a magnitude to engage the power of the entire organization, even if the actual decision to proceed rested within a small circle of decision makers. In principle they act as officers for the corporation.

And when it comes time for the prosecutions and investigations, managers from the CEO's on down don't know anything about the business, and have apparently been accepting their enormous paychecks for what seems to be benignly vacuous inertia in la dolce vita in absentia, on a pile of wiped emails and shredded documents.  Someone was obviously paying attention during the last international war crimes trials.

Maybe it will be good for the business recovery. I would imagine quite a few European, South American, and Asian companies seeking to reincorporate themselves in Delaware to achieve carte blanche against civil liabilities for increasingly uncivil acts.  It seems to have worked for Royal Dutch Shell.   After all, quite a few credit card companies relocated key operations to western states that encouraged the practice of interstate usury.  Debasement of the currency is not the only thing that the US seems to have underway and well in hand.

I wonder if the European Union will grant the same privilege to their own corporations, to advantage themselves at will on the American Public in acts of violence and torture? Would the US judiciary extend professional courtesy and acknowledge the EU's sovereign right to suspend the protections of the individual as long as the crimes were corporate?

Is BP incorporated in England or the States? Perhaps Mr. Clegg has a card to play here in adopting the US precedent of corporate sovereignty as long as they are inflicting sufficiently heinous damage on foreigners. There does seem to be some historical precedent for this approach with the East India company, for example. Destroying the vitality of the Gulf of Mexico seems heinous enough so that only an individual or two could possibly be liable.  And they are liable to be someone rather low on the corporate ladder, and very liable to be thrown under a bus for the corporate good.  I can imagine Tony Hayward playing the hapless and barely involved imbecile effectively on the witness stand.  And if the Skilling amnesia gambit fails, there is always the Kenny boy castle-to-save-the-king.

Is the United States the equivalent of a corporation?  Some executives from the former and even current US administrations might wish to keep this line of defense in mind.  That last sentence from Judge Leval's quote seems tailor made.

"...employ mercenary armies to do dirty work for despots, perform genocides or operate torture prisons for a despot’s political opponents, or engage in piracy—all without civil liability to victims."

As the saying from the 1930's goes, corporatism is fascism, and fascism is great for business. But Mussolini should have incorporated, and learned to delegate more effectively.

Court Exempts Corporations from Alien Tort Law

A federal appeals court has ruled US corporations can no longer be sued for human rights violations abroad under the longstanding Alien Tort Statute. Earlier this month, the Second US Circuit Court of Appeals ruled that Alien tort claims can only be brought against individuals, not corporations. The ruling dismissed a lawsuit accusing the oil giant Royal Dutch Shell of complicity in the murder and torture of Nigerian activists including Ken Saro-Wiwa.

In a separate opinion, Second Circuit Judge Pierre Leval criticized the ruling, writing, "The majority opinion deals a substantial blow to international law and its undertaking to protect fundamental human rights… So long as they incorporate, businesses will now be free to trade in or exploit slaves, employ mercenary armies to do dirty work for despots, perform genocides or operate torture prisons for a despot’s political opponents, or engage in piracy—all without civil liability to victims."

Democracy Now

Gold Daily and Silver Weekly Charts

The Gartman Letter Called a Top Last Night

"It is not just over-extended to the upside; it is hyper-extended. It is not just overbought; it is hyper-overbought. We cannot strongly enough urge everyone to avoid buying gold here and we shall go so far as to suggest that those who are long begin the process of quietly heading for the exits and to reduce their positions to the most minimal "insurance" positions possible."

SP 500 and NDX December Futures Daily Charts

The end of quarter is almost here, and the levitation continues. The bulls will have to break this out on thin volumes, or give up the propping effort and let prices find their level fairly soon. The outflow from retail investors continues and hedge funds are challenged by redemption requests.

US Dollar Index Still Up For the Year, But Not By Much

The Dollar has tested key support and broken down lower. The next levels of support are obvious. It appears to be renewing its long term downtrend after the short squeeze in the eurodollar that drove it higher.

The dollar is short term oversold and could find some support around this level.

At some point the DX index needs to be reconstituted as the SDR will eventually be. The weighting to Europe and Japan are much too heavy for the current volumes of world trade and reserves.

SP 500 and NDX December Futures Daily Charts

Nice stick save on the indices for the end of quarter.

Gold Daily Chart - Cup and Handle Formation

Remarkable action today as the wiseguys 'ran the stops' down to 1285, the top of the support from the cup and handle breakout, on the new holders of October futures contracts from the holders of in-the-money calls in yesterday's options expiration.

The bears 'got stuffed' badly as their raid met heavy physical buying and strong hands who held their positions in the futures markets. The raid fizzled, and turned sharply around with gold running almost the entire range of the trend channel, finishing at yet another new high.

Is the Gold Rally Strictly a US Dollar Phenomenon?

One sometimes hears that 'gold is only rallying in US dollars.'

One can always point out that since the US dollar is still the world's reserve currency, it affects everything and everyone that hold it in their reserves or their assets on deposit. A good part of the recent crisis in Europe was caused by the severe deterioration in dollar denominated financial assets held on deposit in commercial banks by private customers, who started to demand their money, in dollars. This precipitated a dollar squeeze and a liquidity crisis.

There is clearly a safe haven trade in gold denominated in US dollars.

But the US dollar is not alone, not the only fiat currency in a bit of a crisis. Since one picture is worth a thousand words, here is the price of gold over the last five years in six of the world's major currencies of the developed nations. Granted, the price of gold may be different in select currencies. One has to make their own investment decisions to suit their own particular circumstances.

But there is an obvious message in these charts for those who care to listen.

The twenty year charts are more impressive, because they almost uniformly show the long bear market coming to an end, with a remarkable bull market in gold bullion underway. Something has clearly changed, something obviously has occurred that is the mark of a sea-change in the structure of the major global currencies, starting slowly at first and then gaining momentum with the most recent financial crisis.

Charts Courtesy of Galmarley via my friend Nick at Sharelynx.

SP 500 and NDX December Futures

AAPL is driving the NDX and CAT is the bulk of the Dow Industrial rally. When stock markets become this narrowly driven on thin volumes it is generally a sign of window dressing, or tape painting, and a decline to come since the foundations are not based on sound investment but mere speculation and price manipulation. This week is the end of month and quarter for the hedge funds.

Gold Daily Chart - Bullion Pauses for Option Expiration

Relatively modest attempt to take gold and silver down for October option expiration. Physical bullion buying is gaining resilience against paper market antics.

Net Asset Value of Certain Precious Metal Funds and Trusts

Timmins Gold Proposes Takeover / Merger with Capital Gold

Consolidation, acquisitions and mergers, particularly of the junior miners by the larger, well capitalized but lower growth majors, will be a recurring theme as bullion prices rise higher.

Timmins Gold proposes Capital Gold takeover
Monday September 27 2010 - News Release

 

TIMMINS GOLD CORP. MAKES PROPOSAL TO MERGE WITH CAPITAL GOLD CORPORATION

 

Timmins Gold Corp C:TMM)

Capital Gold Corp(C:CGC)

 

Timmins Gold Corp. made, on Aug. 31, 2010, a non-binding proposal to the directors of Capital Gold Corp. to merge on a negotiated basis with Capital Gold based on a value of $4.50 per common share of Capital Gold, which, at the time of the proposal and based on closing prices as of that date, equated to a share exchange ratio of 2.27 Timmins Gold shares issued for every one Capital Gold share. The proposal represented a premium of 26 per cent to the 20-day volume-weighted average price of Capital Gold shares on the Toronto Stock Exchange for the period ended Aug. 31, 2010. Timmins Gold believes that the transaction, if completed, would result in a merger of two equal-sized companies with regional and operational synergies that would benefit both companies' shareholders by creating a mid-tier, low-cost, Mexico-focused gold producer. These benefits include:

 

• Complementary operating teams and exploration assets;
• Management team with proven ability to access capital markets and create shareholder value;
• Stronger market presence;
• Creation of a company with a larger market capitalization that would be attractive to certain institutional investors.

 

Ratio of XAU Mining Index to Spot Gold

 Despite repeated requests, Capital Gold's board of directors has not been receptive to Timmins Gold's proposal.

 

Capital Gold shareholders representing approximately 17 per cent of the outstanding Capital Gold shares have confirmed to Timmins Gold that they would support the proposal (subject to customary conditions).



Bruce Bragagnolo, chief executive officer and director of Timmins Gold, comments: "Our proposed merger with Capital Gold presents a great opportunity for the shareholders of both companies. In putting it forward, we are responding to the expressed wishes of Capital Gold shareholders, including the 17 per cent who have signed support agreements, that this merger take place. The absence of meaningful dialogue with the directors of Capital Gold has driven us to bring this process into the public arena.

 

"We are prepared to move quickly to arrive at a mutually agreeable transaction. Given our familiarity with Capital Gold's operations and management team, we believe that due diligence will move very quickly."



Gold and Silver Charts

Gold Daily

Silver Weekly

Go with the flow, it's said,
If you can't groove with this then you're probably dead.

Hammer time.

Can't touch this.

SP 500 and NDX December Futures

See what I mean about not shorting this market until there is a confirmed break in the uptrend?

SP 500

NDX

Gold Daily Chart

Can't touch this.

SP 500 and NDX December Futures Daily Charts

Stocks fell back to test support at the top of the trading range on weaker than expected US data.

SP 500

NDX

Net Asset Value of Certain Precious Metal Trusts and Funds

It will be interesting to see if the NAV premium on PHYS expands again to the 8 to 10 percent range or stays closer to the modest premium on the GTU fund. CEF is holding its richer premium because of the higher beta silver content in its portfolio.

SP 500 and NDX Futures Daily Charts

SP 500

Except for perhaps some hedging or a daily 'skin' this is not a market to be shorted until the uptrend is broken. It is drifting higher on a steady short squeeze and light volumes in the kind of artificial action that is reminiscent of the 2004-2006 reflationary stock market rally fueled by Fed easy money.

An event can bring it down and quickly. But one can burn a lot of cash trying to pick a top ahead of the market signal that it has gone far enough. I do think that the two gaps will be filled, and that this market will retest its lows again. The timing is problematic, especially given the upcoming November elections. No president or Congress wishes to go into an important general election on the heels of a stock market crash. But this could serve the desires of those on Wall Street. So a continued rally is hardly a 'sure thing' despite the statistical profile of the SP 500 in the second year of a presidential term.

The SP 500 is up against resistance but the NDX has broken out cleanly. With relatively few risk-comparable productive outlets the excess of the easy money being fed to the Wall Street banks by the Fed is flowing into the higher yielding 'risk trades' like junk bonds and equities. In the absence of a strongly directive fiscal policy and honest price discovery this is what happens when monetary stimulus is applied without a broader policy support. It is hard for real economic proposals to compete with a Ponzi scheme that insiders control and that has a de facto sanction and subsidy from the governing authority. And this then is the basis for Obama's failure most likely sourced in his Wall Street friendly advisors, Summers and Geithner, and his own natural tendency to 'go along to get along' and sacrifice principle to expediency. This potential strength, the ability to find and form a consensus, can become a tragic flaw when carried to excess.

The NDX is a more obvious example of this reflationary risk trade.



NDX