Wednesday, May 11, 2011

Dollar Wins; Stocks, Commodities Whacked Again as Chaos Commences

Whatever one thinks about the policies of the Federal Reserve, one has to respect their inside job ability to influence and move markets, thus, it should surprise nobody that everything went down today as the dollar rallied past 75 on the Dollar Index.

The dollar gained nearly one per cent today, closing at 75.29, its best level since April 18. That surge brought down stocks and with them, most commodities. No doubt the Fed has responded to inflationary pressure and the stock junkies have expressed themselves by selling off riskier assets, such as stocks, though their commitment has been anything but binding.

A more cynical view might be expressing serious doubt about the trustworthiness of all markets, as rule changes, manipulation and front-running make price discovery more an abstract art than a defined science. The movement in stocks seems to be suggesting that "buying the dips" may have become out of favor in recent days, and a prolonged correction is at hand. With the Fed ending QE2 this would be an opportune time to begin shedding positions in many overpriced stocks.

That's the flavor of the day, and maybe of the month. Stocks finished well off their lows, but still took a significant drubbing, a scenario that seems to be repeating itself with increasng frequency.

Dow 12,630.03, -130.33 (1.02%)
NASDAQ 2,845.06, -26.83 (0.93%)
S&P 500 1,342.08, -15.08 (1.11%)
NYSE Composite 8,428.09, -122.40 (1.43%)

Declining issues hammered advancers, 4955-1719. New highs totaled 89 on the NASDAQ, offset by 46 new lows. On the NYSE, there were 133 new highs to just 22 new lows. Volume was up to decent levels, indicating that the selling, which began in earnest just over a week ago, has resumed.

NASDAQ Volume 2,229,573,750
NYSE Volume 4,265,927,000

Crude oil took another steep loss, dropping $5.67, to $98.21 at the close on oversupply issues and a dampening of China's economy. The Energy Information Administration reported that demand for gas has fallen for seven consecutive weeks and today reported a 2.4% decline in demand. This prompted the CME to halt trading in gas futures for five minutes as the price plummeted 25 cents, triggering the automatic trading suspension.

Additionally, OPEC reported that member nations were only 65% in compliance with production quotas, and 17 senators, led by Oregon's Ron Wyden, sent a letter to the CFTC, urging them to impose position limits on oil futures trading.

If anything is for certain, it's that the world's driving population has been taken over a barrel recently by the oil cartel and Wall Street traders. While it's encouraging to see a bi-partisan group of senators calling for change in how oil and gas are priced, one should not get too excited until we see oil back to some reasonable level - under $75/barrel - and gas back to $3.00 a gallon or lower. As usual, the price hikes at the pump had little to nothing to do with basic supply/demand fundamentals, but certainly, the demand destruction caused by gas rising to over $4/gallon in much of the United States should serve as ample evidence that high oil and gas prices are a major contributor to economic stagnation or even recession.

Elsewhere, gold dipped $15.90, to $1500.90 and silver took another beating, losing $3.34, to $35.11, after rising for three straight sessions. It certainly appears that the banking oligarchs are not yet through punishing those who would speculate in potentially competing forms of money, such as precious metals. Silver traders have been particularly whipsawed in recent days, though true believers, who buy, hold and do not sell, are looking at any drops with gleeful anticipation of more accumulation.

Strength in the dollar is almost certain to be - to use one of Chairman Bernanke's favorite terms - transitory, which means the collapse in silver and any declines in the price of gold will only lead to more enthusiastic buying.

The true measure of the strength of the decade-long precious metal bull market lies in the ability of gold and silver bugs to hold until the government gives up supression measures completely. That may turn out to be a long time frame, as the printing presses at the Fed will be turned on full throttle and efforts to manage or mangle gold and silver price advances will be well-funded.

Unusual movements and increased volatility in prices of all goods and services are signatures of an economy on its knees, with price discovery completely blown away and manipulation rampant. And while there are major camps of support on Wall Street and in Washington to keep money flows into bonds and equities, the battle may already have been lost. There is simply too much debt and more being piled on every day, to expect an orderly unwinding.

Chaos will become common.

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