Oil Prices Vs. Production: See the “Elephant” Almost Everyone Ignores

By Elliott Wave International

If production drives prices, how does oil rise 14x when production trends sideways for 10 years?

There’s a widespread assumption that supply and demand drive oil prices. Almost all economists base their oil forecasts entirely on this premise, and so do many speculators.

If the oil industry ramps up production and increases supply, economists expect a drop in oil prices. If production decreases, or some other factors hint at supply constraints, they anticipate a rise in oil’s price.

A case in point is this March 23 CNBC headline:

Trump security pick John Bolton likely to turn up heat on Iran and boost oil prices

As you may know, Bolton is considered to be “hawkish” toward Iran, so the thinking goes that a ramping up of U.S. sanctions against the nation could hamper Iranian oil production or Iran’s ability to sell oil on the open market.

It may very well turn out that oil prices do move higher, but, according to our research, production is not everything.

Consider this graph and commentary from EWI founder Robert Prechter’s 2017 book, The Socionomic Theory of Finance:

Continue reading Oil Prices Vs. Production: See the “Elephant” Almost Everyone Ignores

Backwardation, the Bank of England and Falling Prices

By Keith Weiner

In commodity markets backwardation is an indicator of physical shortages. Shortages result in buyers bidding up the cash price of the commodity above the future prices. This creates a profitable trade (called decarry) for those holding the physical commodity – they can sell it now and buy a futures contract at a lower price, locking in a profit.

Backwardation should therefore be associated with rising prices. However, in a recent Macro Voice podcast, guest Jeffrey Snider noted the anomalous situation in the gold market between 2013 and 2016 where negative gold forward rates (GOFO) indicated backwardation while the gold price was falling. Jeffery’s chart below shows periods where the LBMA GOFO rate was below zero, along with the Bank of England’s custody holdings (gold held on behalf of central banks and bullion banks).

Jeffery sees this unusual situation being related to the Eurodollar market:

Continue reading Backwardation, the Bank of England and Falling Prices

Rosey Grier Says Relax About the TED Spread

By Kevin Muir

Did I miss the memo that we should all become STIR traders? Over the past month, the financial pundits’ infatuation seems to have moved from VIX to LIBOR, with everyone keenly aware of each tick in the TED spread.

Here is the scary chart of the TED spread (the difference between US dollar eurodollar funding and American government treasury bills) that is being passed around.

A sudden widening of 30 basis points sure seems worrisome. After all, the TED spread represents the willingness of overseas banks to lend USD to one another. A quick move might represent stress in the financial system.

Continue reading Rosey Grier Says Relax About the TED Spread

Holy Bullish Thursday!

By Rob Hanna

Stock market performance leading up to and around many holidays has often been bullish. This is something I have written about several times over the years. Holy Thursday is one such day that has done quite well. I have shown Holy Thursday stats a few times in the past. The chart and statistics below are all updated through last year.


Despite the last 2 years losing some ground, the stats remain impressive, and so does the overall curve.  Perhaps the most impressive stat to me is that the up days have been 2.3x the size of the down days.  This suggests people will often go into the long Easter weekend with enthusiasm. It will be interesting to see if Holy Thursday bullishness starts to reassert itself in 2018.

You can see many more seasonal studies like this by clicking on the “Seasonality” category on the blog. Another great source of seasonal ideas is @JayKaeppel‘s book, “Seasonal Stock Market Trends”.Want research like this delivered di

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Trade Surplus and Budget Deficit? Ouch.

By Michael Ashton

The market gyrations of late are interesting, especially during the NCAA Basketball tourney. Normally, volatility declines when these games are on during the week, as traders watch their brackets as much as they do the market (I’ve seen quantitative analysis that says this isn’t actually true, but I’m skeptical since I’ve been there and I can promise you – the televisions on the trading floor are tuned to the NCAA, not the CNBC, on those days). Higher volatility not only implies that lower prices are appropriate in theory but it also tends to happen in practice: higher actual volatility tends to force leveraged traders to reduce position size because their calculation of “value at risk” or VAR generally uses trailing volatility; moreover, these days we also need to be cognizant of the small, but still relevant, risk-parity community which will tend to trim the relative allocation to equities when equity vol rises relative to other asset classes.

My guess is that the risk-parity guys probably respond as much to changes in implied volatility as to realized volatility, so some of that move has already happened (and it’s not terribly large). But the VAR effect is entirely a lagging effect, and it’s proportional to the change in volatility as well as to the length of time the volatility persists (since one day’s sharp move doesn’t change the realized volatility calculation very much). Moreover, it doesn’t need to be very large per trader in order to add up to a very large effect since there are many, many traders who use some form of VAR in their risk control.

Continue reading Trade Surplus and Budget Deficit? Ouch.

Global Equities Bargain Bin

By Callum Thomas

With the correction in global stock markets still running its course, it’s worth surveying some valuation statistics across Developed Market equities.  Indeed, the current correction could easily go further, purely on sentiment and in the process cheapen valuations across the board. But in the mean time this article takes a snapshot of the bottom end of DM equity valuations.

The table below comes from a broader discussion on Developed Market Equity Valuations in the latest Weekly Macro Themes report.

The table below shows the lay of the land in the bottom 10 ranked countries within DM.

Continue reading Global Equities Bargain Bin

Experts as Contrary Indicators (Bonds Edition)


I want to begin this post by again noting publicly that feel like I clowned myself yesterday in my own trading and in my lack of attention to the market at a critical point (couldn’t really be helped, but it’s the results that matter). Despite a market doing generally as expected, I was not really prepared. My macro views often prove right on while my own execution can shall we say, vary. It’s why I tell NFTRH subscribers or anyone considering the service it is best to follow the analysis, not what some faulty trader is doing at any given time.

The reason for the paragraph above is balance for the paragraphs below, in which we drive home once again the folly of listening to experts (at least the experts the media shove in your face at ill-timed junctures). I had a subscriber leave NFTRH in mid-2016 (he’s back and we’ve had a friendly review of that situation) in part because I was doggedly bearish gold and bullish the Semiconductors, which was exactly opposite to the stance of a technology expert, whose service he also subscribed to. It made me sad (for both of us) to have stuck to my convictions, but lost a subscriber while turning out to be right in my view.

So that was a personal anecdote in which an expert was involved. More generalized exceptions taken with experts have been noted here on many occasions, but none have been more glaring than with the “Bond King” Bill Gross over the years. I first became aware of Gross the media promoted contrary indicator as inflation alarm bells were going off in Q1 2011. That was when silver was blowing off, commodities were topping out and inflationary hysteria was maxed. The media put forth the ‘Bill Gross is short the long bond story’ for we non-expert peons to get emotional over.

I simply held up the Continuum and its (red dashed) monthly EMA 100 “limiter” and said err, I don’t think so. Bill Gross has been a long time resident of this chart. Ray Dalio and Paul Tudor Jones recently moved in.

tyx Continue reading Experts as Contrary Indicators (Bonds Edition)

TreasFest! $30 Billion Treasury 2Y Note Auction Draws Yield Of 2.31%, Highest Since 2008

By Anthony B. Sanders

Treasury’s $30 billion two-year U.S. note sale drew a yield of 2.31 percent, the highest since 2008, with a bid-to-cover ratio of 2.91, in line with the average over the past 10 auctions. Indirect bidders, a class of investors that includes foreign central banks and mutual funds, bought 44.5 percent, down from the 49.7 percent average. Direct bidders purchased 14.1 percent.


That left primary dealers, which are obligated to bid at auctions, with 41.3 percent, the largest share since December.

Continue reading TreasFest! $30 Billion Treasury 2Y Note Auction Draws Yield Of 2.31%, Highest Since 2008

How Do Changes in Real Interest Rates Affect Gold?

By Charlie Bilello

We often hear that Gold prices are driven by real interest rates. Rising real interest rates are said to be bad for Gold because it increases the opportunity cost of holding the yellow metal. This makes sense intuitively as Gold pays no interest or dividend, and will therefore be less attractive as compared to risk-free bonds when real interest rates are higher.

But Gold is a complex animal, influenced by a multitude of factors, only one of which is real interest rates. How much do changes in real interest rates alone impact the the price of Gold? And is it only the change in real interest rates that’s important or the absolute level as well? Let’s take a look…

Since 1975 (when Gold futures began trading), there has been an inverse relationship between Gold and real interest rates. Gold has generated positive returns during periods of falling real interest rates and negative returns during periods of rising real interest rates.  This is true whether we look at monthly changes (+13.9%/-3.9% during falling/rising periods) in real interest rates or year-over-year changes (+11.0%/-0.3% during falling/rising periods).

Continue reading How Do Changes in Real Interest Rates Affect Gold?

Tariffs May Not Slow Profit Momentum

By Chris Ciovacco


U.S. Treasury Secretary Steven Mnuchin indicated Sunday the U.S. is hopeful to strike a deal with China, which means the tariffs would never go into effect.  However, if a deal cannot be reached, how significant are the tariffs relative to the big picture?  From CNBC:

Jeremy Zirin, head of investment strategy at UBS Wealth Management Research, told CNBC that President Trump’s announcement Thursday on tariffs on up to $60 billion in Chinese imports didn’t seem that bad.

“The economic impact of [the tariffs] is less than one-tenth of 1 percent,” Zirin told “Squawk Box.”

“It’s actually pretty bullish what we heard yesterday,” he added. “If you look at the steel and aluminum tariffs as a template, things got watered down and then scaled back. So, if you look at the whole economic backdrop, still a very good profit momentum.”


From a bigger picture perspective, the economy does not appear to be on the brink of a recession and the 20-year breakout in the Value Line Geometric Index is still in play.

Continue reading Tariffs May Not Slow Profit Momentum

Sentiment Snapshot: Technically Bearish

By Callum Thomas

As a reminder, the weekly survey on Twitter asks respondents their views/positioning on equities and bonds based on whether their view is primarily driven by the “fundamentals” vs “technicals”.  It’s important to keep that fact in mind as we go through the latest results.

Indeed, the latest results showed “technicals” net-sentiment dropping to the lowest point on record, and yet “fundamentals” sentiment was little changed on the week.  My first impression is that this is entirely consistent with the idea that this is a sentiment/technicals driven correction against a still decent earnings/macro backdrop.

Of course the glass-half-empty folk will say that the fundamentals sentiment will be the next shoe to drop as that crowd capitulates.  It brings the equity vs bond fundamental sentiment chart into focus, and the course of that chart could well dictate how this correction ends up playing out…

Continue reading Sentiment Snapshot: Technically Bearish