Correlation Trades Breaking Down: Decoupling, Distress or Distribution?; Kodak Prepares for Bankruptcy

There have been, for many months, certainties in global markets from which investors and speculators could readily rely upon and profit from. The most obvious of these is the straightforward relationship of the Euro and US stocks.

Whenever the Euro was positive against the US Dollar, stocks would post gains as well. Euro down, stocks down. A simple trade for those speculators adroit enough to move money quickly in and out of currencies and stocks. It also created a very nice hedge for monied investors with a keen sense for geo-politics and the movement of money.

Another of these correlation trades has been in effect for years, even decades. when the Dollar Index (^DXY) moved higher, the price of a barrel of oil would go lower, since oil and almost all other major commodities are priced in dollars. A stronger dollar would thus buy more oil, or wheat, or soybeans, for instance.

Today, however, these two stalwarts of the inner, holistic trade deviated from their seemingly-predetermined paths. The Euro was off sharply, but stocks finished with modest gains or were flat, nonetheless. And the Dollar Index was up nicely, (80.097 +0.434 0.54%), but oil marched higher despite the obvious overpricing and general lack of demand over the past two weeks.

The oil moves could be partially blamed on the Iranians and Europeans. Europe has set the parameters for a complete embargo of Iranian oil. For its part, Iran says it doesn't need to sell oil to europe as it has many other trading partners, China being the largest. The Iranians also say they can effectively shut down shipments of oil from other countries by blocking the Strait of Hormuz, disrupting the free flow of energy from the region to Western nations.

While that's all well and not-so-good, it still doesn't explain the dislocation of the Dollars-for-oil trade and is entirely based upon speculation.

As for the Euro and US stocks, it wasn't a large move away from the direct correlation, but notable. Then there's silver and gold, the two precious metals that should always move in tandem, as they have for maybe thousands of years. Gold was up, silver down on the day, making silver, already a cheap cousin, even cheaper and wildly undervalued compared to gold, where the standard gold-silver ratio has traditionally been somewhere between 12:1 and 16:1, now stands at a stunning 55:1. It has been higher over recent years as gold shot up much faster than silver, but, if global tensions are accelerating, both metals should become good bets short term, though it stands to reason that silver would appreciate at a much faster rate, as it did in the first four months of 2011.

All of that implies that both the gold and silver (and not to mention stocks, commodities and currencies) markets aren't rigged, a condition that reams of evidence over many years say is so.

OK, then what's up with these markets if correlation trades, usually among the most reliable and steady, continue to break down? Is it decoupling for Europe, global distress or some technical distribution which the markets haven't anticipated from a zero interest rate policy and massive money printing (in shady but effective forms) by central banks around the globe? If oil goes up as the Dollar Index improves, so will stocks, and the precious metals will do whatever the manipulators deem necessary. It's not yet a trend, but bears watching, because decoupling often is a harbinger of even more fractured conditions in markets, which would make perfect sense in this mad world.

Something else bearing watching is the anticipated disappearance of the Kodak moment. The film maker has been on the ropes for years as the company failed to develop a strategy shifting from film cameras to digital photography, and the stock has suffered badly, losing almost all value over the past decade. A Wall Street Journal report today that the company was preparing to file a chapter 11 bankruptcy either this month or by early February should they not find buyers for their digital patents - valued, dubiously, at over $1 billion - sent shares plummeting.

Shares of Eastman Kodak (EK) finished the day down 0.18, to 0.47, a 28% decline. The company has also received a delisting notice from the NYSE, as the price of the stock has traded below $1 for more than a month, in violation of exchange rules.

That the company would eventually commit corporate hari-kari should come as no surprise. The stock traded as high as the low 80s in the late 1990s, and dropped permanently below 60 when the dotcom boom went bust in 2000-2001. Since then, the losses have mounted and the share price decline has been precipitous. This is a dead company without a product or strategy, which has wiped out its dividend, shareholders, and soon, pensioners, sure to be shuffled off to the Pension Benefit Guaranty Corporation, another backhanded bailout by the US taxpayer.

Dow 12,418.42, +21.04 (0.17%)
NASDAQ 2,648.36, -0.36 (0.01%)
S&P 500 1,277.30, +0.24 (0.02%)
NYSE Composite 7,612.15, -12.17 (0.16%)
NASDAQ Volume 1,654,986,250
NYSE Volume 3,553,585,250
Combined NYSE & NASDAQ Advance - Decline: 2475-3130
Combined NYSE & NASDAQ New highs - New lows: 102-34
WTI crude oil: 103.22, +0.26
Gold: 1,612.70, +12.20
Silver: 29.10, -0.48

New Year, Same Dull Market Rally

How an a rally be dull?

When it's a staged annual event designed only to enhance confidence in the markets, lasts only one day and the bulk of the gains occur in the first fifteen minutes of trading, that qualifies as dull and that's what we had today.

Last year, stocks showed the same kind of activity on the first trading day of the new year. Did it help? Maybe, for the first four months, but markets topped out in late April and ended the year nearly flat and about 5-7% below the 2011 highs.

Today's opening bell ramp job also featured low volume, now a trademark of a market where individual investors are uncomfortable and have been pulling out money since the 2008 collapse, but especially since the flash crash of 2010.

The reasons for today's jump at the open were rather obvious. europe didn't implode over the holidays and the Euro was up against the US Dollar. That's all the traders and fund and portfolio managers needed to know to give the thumbs up for a "risk on" session as has been the pattern for the past 18-24 months.

Tomorrow or next week or next month, there will be more volatility from a failing Euro, a political flap or shoddy earnings reports and this rally will be forgotten, as all others have been. It's just the "new normal" of a market dominated by a few, well-heeled, major players.

Just as last week was dull for the absence of volume and price swings, this week promises a new kind of dullness, as stocks rally for no good reasons other than everybody wants to feel good about stocks.

Besides, the real money today was made in oil futures - up 4.18% thanks to Iran's sabre-rattling - and silver - up 5.94%.

Dow 12,397.38, +179.82 (1.47%)
NASDAQ 2,648.72, +43.57 (1.67%)
S&P 500 1,277.06, +19.46 (1.55%)
NYSE Composite 7,624.33, +147.30 (1.97%)
NASDAQ Volume 1,656,354,375
NYSE Volume 3,901,734,250
Combined NYSE & NASDAQ Advance - Decline: 4326-1409
Combined NYSE & NASDAQ New highs - New lows: 277-35
WTI crude oil: 102.96, +4.13
Gold: 1,600.50, +33.70
Silver: 29.57, +1.66

Rush for the Exits as 2011 Ends on Sour Note; Markets Flat for 2011; Predictions for 2012

Stocks traded in their usual tight ranges on the final day of trading for 2011, and just about every trader, investor and pundit seems to be in agreement that they year was a difficult one. At the end of the session, a rash of selling sent the major indices near their lows of the day. Volume was insignificant, but the late-day selling was an eye-opener, though possibly not materially a precursor to January, 2012.

Today's Closing Numbers:

Dow 12,217.56, -69.48 (0.57%)
NASDAQ 2,605.15, -8.59 (0.33%)
S&P 500 1,257.60, -5.42 (0.43%)
NYSE Composite 7,477.03, -8.60 (0.11%)
NASDAQ Volume 1,008,177,750
NYSE Volume 2,225,404,500
Combined NYSE & NASDAQ Advance - Decline: 2647-3004
Combined NYSE & NASDAQ New highs - New lows: 178-47
WTI Crude oil: 98.83, 0.82
Gold: 1,566.80, +25.90
Silver: 27.92, +0.60


Of the four major indices, only two - the Dow and S&P 500 - returned positive results for the year.

Here's how 2011 stacked up:

Index	Close 12/31/10	Close 12/30/11	Change
Dow	11577.51	12217.56	+640.05
NASDAQ	2652.87	2605.15	-47.72
S&P 500	1257.64	1,257.60	-0.04
NYSE Comp.	7964.02	7477.03	-486.99

Now, checking back on Money Daily's 2011 predictions, here, here and here, we can summarize the results.

We said the overriding theme would be VALUE. With the emphasis now on dividend-paying stocks, we can give ourselves a half thumbs-up, though the real word for the year, especially the second half, was VOLATILITY.

We mentioned that "US employment situation is not going to get materially better in 2011..." A+ on that call.

Housing: "The expectation is for residential housing prices to drop another 6-10% during the year, with larger decreases in the NorthEast and MidWest." Bingo.

FOREX: "The US dollar will fare well against almost all other competing currencies. Destruction of the world's reserve currency takes time, and a year is just a small part of the breaking tableau." Another spot on analysis.

COMMODITIES

Eventually, price will meet demand, or lack thereof, and some equilibrium found before riots and starvation become the norm. Your best bets for 2011 are still gold and silver, with the latter being the favored instrument as it seeks to re-establish the 15-1 gold-silver ratio. Both should appreciate well in excess of 15%, so $1500 gold should be an easy target and silver may bust right through $40 per ounce in rapid manner.

As far as oil is concerned, apart from the rigged and artificial aspects of how it is traded, crude prices cannot exceed $100 for very long, if they even reach them. Absolute price inflation will crimp demand, and, thus, set the wheel back to "go" again, so don't expect oil prices to skyrocket or decline much at all. Stable prices would be best for all parties (except those selling the stuff, short term), and that's what we may get. There's about a 30% chance oil prices actually fall on slack demand, back under $75, but not much further, though a price around $60 per barrel would go a long way toward global growth, though the supply/demand numbers simply don't add up well for that to be much more than a wing and many prayers.

Despite a serious decline in the latter months of 2011, gold and silver held up well, despite blatant price manipulation by central banks. The call on oil was pretty much correct.

STOCKS:

The following are the predicted trading ranges for the major indices in 2011:
Dow: 9250-12000
NASDAQ: 2100-2750
S&P 500: 875-1300
NYSE Comp: 5650-8100

Not a bad showing, though the predicted lows were never met.

Money Daily also made some comments regarding the bond market, inflation, social trends and politics which were generally in the right direction. They can be found here.

Now, on to predictions for 2012 (very briefly):

Stocks: At the end of 2012, after a protracted decline though to the elections, the markets should get a bounce and end somewhere around:
Dow: 10,700
NASDAQ: 2350
S&P: 1050
NYSE Composite: 6780

Overall, it's going to be another challenging year for stocks, with high unemployment, the collapsing Euro and high tensions in the Middle East among the factors that will keep investor confidence low.

Commodities: Since gold and silver fell off the cliff at the end of 2011, they should rebound smartly and be among the best investments of the year. Oil will continue to fluctuate between $75 and $100, though passage of a bill allowing the Keystone pipeline to be built or a war with Iran (very high probability) could push prices out of that range; lower in the former instance, much higher in the latter.

Bonds are going to remain in their tight ranges, since the Fed has already announced they'd keep the federal funds rate unchanged though 2013.

FOREX: Short the Euro, Long US dollar, Aussie and Canada.

Politics will keep the economy from gaining very much traction until the election. The plan by the schemers behind the candidates is to keep the economy stumbling along in order to usher in a new Republican era. Whether or not they succeed will depend on a vast sea of changing factors, though the most pressing will still be the economy, followed by Iran, Obama-care and voting right. The Republicans can't win with Newt Gingrich or Mitt Romney. A Ron Paul candidacy could make life a little too interesting for the incumbent and Paul would be a great president, exactly what's needed in the US at this time of perpetual crisis. Paul would change the nature of US foreign policy, reform entitlements and get back to the rule of law.

While it's a near certainty that the Republican party chiefs will do everything in their power to keep him from winning the nomination, he could do it. Otherwise, a third party candidacy by Dr. Paul would ensure an Obama landslide.

Unless Ron Paul is in the race, Obama will win a second term.

That's it. See you in 2012. Happy New Year!