China Manufacturing Prices Decline 18th Month; China Hoping to Avoid Hard Landing

China Manufacturing Prices Decline 18th Month; China Hoping to Avoid Hard Landing

China’s manufacturing extended its long slump according to the Caixin China General Manufacturing PMI.

Chinese manufacturers signaled a modest deterioration in operating conditions at the start of 2016,  with  both  output  and  employment  declining  at  slightly  faster  rates than in December. Total new business meanwhile fell at the weakest rate in seven months, and despite a faster decline  in  new  export  work.  Nonetheless,  lower  production  requirements  led  companies  to cut back on their purchasing activity and inventories of inputs. On the prices front, both input costs and output charges fell again in January, though at the weakest rates in seven months.

Weaker client demand led manufacturers to discount their prices charged again in January, thereby extending the current sequence of deflation to 18 months (although the rate of reduction was the slowest seen since June 2015). Lower selling prices were supported by a further fall in average input costs at the start of the year. In line with the trend for charges, the rate of decline eased to the weakest in seven months. Lower cost burdens were generally linked to reduced raw material prices.

China PMI

China Hoping to Avoid Hard Landing

Commenting on the China General Manufacturing PMI™ data, Dr. He Fan, Chief Economist at Caixin Insight Group said:

“The Caixin China General Manufacturing PMI for January is 48.4, up 0.2 points from December. Sub-indexes show a softer fall in new orders, which contributed the most to the improvement in the overall figure. Recent macroeconomic indicators show the economy is still in the process of bottoming out and efforts to trim excess capacity are just starting to show results. The pressure on economic growth remains intense in light of continued global volatility. The government needs to watch economic trends closely and proactively make fine adjustments to prevent a hard landing. It also needs to push ahead with existing reform measures to strengthen market confidence and to signal its intentions clearly.”

Hard Landing Definition

If China is beginning to “show results”, those results aren’t pretty. 

Depending on how one defines “hard landing”, China is doomed. A couple years ago a “hard landing” was believed to be 6% growth. By that definition, a hard landing is baked in the cake.

3% or 2% growth, or even lower is highly likely.

Perhaps a couple years from now, 3% won’t seem any harder than 6% did two years ago.

Mike “Mish” Shedlock

Profit-Taking Friday

Profit-Taking Friday

Profit-Taking Friday

April 15, 2016

Investors were in a more sober mood at week’s end.

  • The dollar fell back 1.0% against the kiwi, 0.7% relative to the won, 0.5% versus the yen, 0.3% vis-a-vis the Aussie dollar and sterling, and 0.2% against the euro.  The loonie and yuan are unchanged.
  • Share prices in Europe are down 0.8% in Switzerland, 0.6% in Italy, France, and Germany, 0.5% in the U.K., and 0.4% in Spain.
  • Japan’s Nikkei also lost 0.4% overnight.  The Shanghai Composite edged down 0.1% despite a slew of reassuring Chinese data. Equities climbed 0.8% in Australia and 0.4% in New Zealand and Taiwan.  Indian markets were closed for a holiday.
  • Most ten-year sovereign debt yields fell overnight.  For instance, the Japanese JGB pushed deeper into the red, dropping 3 basis points to -0.13%.
  • West Texas Intermediate crude oil dropped 2.5% to $40.47 per barrel ahead of the Duha summit of producers.
  • Gold edged up 0.2% to $1,231 per ounce, but many industrial metals are lower.

Chinese GDP, retail sales, industrial production, fixed asset investment, and money and bank lending were reported. 

  • Real GDP recorded on-year growth of 6.7% last quarter, matching expectations but down from 6.8% in 4Q and 7.0% in the first quarter of 2015.
  • On-year retail sales growth accelerated more than expected to 10.5% in March from 10.2% in January-February and 10.2% in March 2015.
  • Industrial output beat street estimates by even more than retail sales, with a 12-month increase in March of 6.8% after 5.9% in January-February and 5.6% in March 2015.
  • Fixed asset investment, which had risen 10.0% in 2015 following 15.7% in 2014, recorded a 10.7% on-year increase in the first quarter of 2016.
  • New bank loans in March of CNY 1.37 trillion was almost twice the gain in February and above street forecasts although less than in January.
  • On-year growth of 13.4% in M2, 22.1% in M1 and 4.4% in M0 money was greater than the February results and beat analyst forecasts.

The weekend seems fraught with things that can go wrong.  Maybe oil suppliers fail to find common ground on a production freeze in Duha.  The IMF/World Bank meetings in Washington are bound to produce rhetoric stressing the fragile state of the world economy.  In Brazil, a vote on Sunday to impeach President Rousseff is expected.  Tuesday’s New York Primary shapes up as a pivotal event in the U.S. Democratic and Republican primaries.  The Democrats have conducted a more issue-oriented and civil contest than the Republicans until now, but that was less in evidence in Thursday night’s debate between Sanders and Clinton in Brooklyn.  Just over two months remain before the potentially catastrophic British referendum vote on whether to stay in the EU.

Revised Japanese industrial production scaled back the size of February’s drop from 6.2% reported initially to a still alarming 5.2%.  Output in January-February was 1.4% below the 4Q15 average, and February’s level was 1.2% less than a year earlier.  Inventories as a percent of shipments leaped 5.7% in February, and capacity usage tumbled 5.4%.

Euroland’s seasonally adjusted trade surplus in February of EUR 20.2 billion was the smallest since October.  Export growth of 0.7% on month was dwarfed by a 2.6% rise in imports.  The combined EUR 27.1 billion unadjusted January-February surplus was almost identical to the year-earlier amount and reflected drops of 0.3% on year in both exports and imports.

Car sales in the European Union recorded on-year growth of 6.0% in March, less than half as much as in February and below the 1Q pace of 8.2%.

Construction output in the U.K. recorded a second straight on-month decline in February, a dip of 0.3%.  Construction was just 0.3% higher than in March 2015.

Italy’s trade surplus of EUR 3.9 billion in February was 11% wider than a year earlier.

Icelandic CPI inflation dropped to a mere 0.3% in March from 0.9% the month before.

Turkish unemployment dipped 0.2 percentage points (ppts) in seasonally adjusted terms to 10.1%, but the unadjusted 11.1% was only 0.2 ppts less than in January 2015. South Korean joblessness slipped to 3.8% last month from 4.1% in February.

Retail sales in Singapore swung from a 7.6% on-year rise in January to a 3.2% drop in February. 

U.S. data releases today feature industrial production, the U. Michigan consumer sentiment index, the Empire State manufacturing index, and Treasury-compiled capital flows.  Canada’s monthly survey of manufacturing sales, orders and inventories also arrive.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

Tags: Chinese GDP, eurozone trade surplus, Japanese industrial production


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How to Use the COT Report to Spot Tops in Gold

How to Use the COT Report to Spot Tops in Gold

This week, we’re going to take a step back and look at the big picture in the gold futures market through the eyes of the Commitments of Traders report. We’ll discuss how to use it to spot tops in the gold market, specifically but note that the fundamental thesis behind this piece holds just the same for every commodity market we trade. Finally, we’ll look at the current projections for the commercial traders’ most bearish net position since December of 2012 when gold was trading at $1,700 per ounce.

Our trading is based on the analysis of the Commodity Futures Trading Commission’s (CFTC) weekly Commitments of Traders (COT) reports. This report separates the market’s largest players into four primary groups – Producer/Merchant, Swap Dealers, Managed Money and Other Reportables. These categories are pretty self-explanatory. The Producer/Merchant category is made up of gold miners’ and refiners’ production against end line industrial and jewelry production for consumption. These are the people who pull it from the ground or need it to fuel their business model. Swap Dealers exchange physicals for futures. Managed Money is exactly what it sounds like. It’s made up of CTA’s and RIA’s and all the rest. Other Reportables are the large individual and family office positions, endowments, etc. Most of our research focuses on the relationship between the Producer/Merchant and the Managed Money categories. Although this week, we’ll also look at the impact of the Swaps Dealers on the underlying futures markets.

cot_banner EQ Curve Tease

Let’s begin with a look at the CFTC’s weekly COT report. Notice the column headings are exactly as we discussed. Moving onto the data, you’ll see that they report total long and total short positions for each category along with the corresponding net change from the previous week. The Commercial/Merchant category stands at 24,190 long positions and 150,685 short positions. Gold producers are six times more likely to sell their forward production at $1,225 per ounce than end line gold users are willing to purchase gold at the same price. This is a large disparity even after it has drawn a bit closer over the last week as evidenced by the 4,332 long positions added as opposed to only 560 new short positions added. Finally, note the Swap Dealer action. Swap dealers are the hedge intermediaries. Physical gold bought by a swap dealers on the open market is then sold in the futures market. The swap dealer hopes to keep the physical metal advantageously priced against the futures. For this purpose, notice that swap dealers took on 8,604 contract’s worth of physical gold over the last week and that their total position shows they’re executing short hedges at nearly a 2.5 to 1 pace.

The Commitments of Traders report allows us to track the actions of the gold miners as well as its end users.
The Commitments of Traders report allows us to track the actions of the gold miners as well as its end users.

Let’s look at how this action plays out in the underlying market. Remember, we’re tracking the collective actions of the gold miners and their counterparts, the end users. Their actions are based on the business decisions, pricing models and consultations of the biggest brains in each of their respective markets. Their livelihoods are tied directly to the accuracy of their forecasts without the ability to broaden the portfolio or simply side step a choppy or irrational market. You can see profit and loss from their gold trading and other markets in this equity curve as well as constructing your own to meet your individual investment needs.

The collective selling pressure of gold miners, as viewed through the Commitments of Traders reports is a useful data stream in predicting intermediate-term tops within the gold futures.
The collective selling pressure of gold miners, as viewed through the Commitments of Traders reports is a useful data stream in predicting intermediate-term tops within the gold futures.

Each vertical red line represents a selling climax in a given move by the gold miners. Many of these tops represented multi-week highs even on the way up towards $2,000 per ounce. Obviously, on the way down, general market momentum acted in their favor with January’s rally being the first significant new high in more than two years. This rally pushed the market above the sideways channel that had been the market’s dominant feature.  The action that has taken place since breaching the channel in February is the determining factor of whether gold has reversed and will find support to trend higher or, if this is a sucker’s play.

COT column bannerWe’re betting on the sucker’s play…and so is the most bearish net commercial position since December of 2012 when gold was trading at more than $1,700 per ounce. Perhaps, even more telling is the notion that the commercial traders tried their best to support the market, having set their most bullish position since December of 2001 just this past November. Very rarely do we see the commercial trader population switch sides that quickly and that forcefully. Additionally, their currently bearish net position becomes even stronger when deeper analysis reveals they’re also carrying the largest total position in 18 months.

All of this points to the current rally above the channel as being an important price level. I’d add that the market could come back to long-term moving average support near $1,185. We also expect to see small speculators come back on the buy side upon a return to the $1,150 – $1,185 area. We’ll track the commercial traders’ actions and publish our Commitment of Traders’ signals, accordingly Finally, we’ll determine if the market is settling for new, structurally lower prices as producer selling pressure continues to push their totals through the upward trend of their net position in the bottom pane of the included chart.

This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that

Commodity & Derivative Advisors believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

How to Insure Your Portfolio as Fed Second Guesses Its Monetary Policy

How to Insure Your Portfolio as Fed Second Guesses Its Monetary Policy

By Investment Contrarians Editor for Investment Contrarians |

Fed Second Guesses Its Monetary PolicyOne of the most interesting ideas that came out of the last Federal Reserve meeting at the end of October is a serious issue for everyone, including the Federal Reserve and the eventual impact of monetary policy. And that idea is that slow productivity growth might actually be the new norm. (Source: “Minutes of the Federal Open Market Committee,”, November 20, 2013.)

Since the Great Recession, worker productivity has been running at roughly half the rate that the U.S. experienced over the 25 years prior. The problem is that potential gross domestic product (GDP) growth comes from a combination of productivity and the labor force.

If productivity stalls and the Federal Reserve continues with its monetary policy, at some point, this excess cash will begin to seep into the economy and cause inflation.

The reason we aren’t seeing inflation in the official data despite record levels of monetary policy is that the velocity of money has been low. This basically means that money is sitting in bank reserves or is being funneled into assets, such as stocks, instead of being channeled into the actual U.S. economy. There is asset inflation, but the official measures don’t track items like the stock market.

However, at some point, this begins to shift, especially when worker productivity remains low. The last time productivity hit such low levels was during the 1970s, and we all know what happened to the U.S. economy during that time.

Clearly, the monetary policy program run by the Federal Reserve is not having a positive impact on the real economy, as unemployment remains stubbornly high.

While the Federal Reserve continues to pump billions of dollars into the economy each month through the most aggressive monetary policy in its history, the U.S. economy is barely growing at all.

But let’s get to the more important question: how does this impact your investments?

The biggest problem for investors is that we, as humans, tend to have a short memory span. Most people only look back over the past year or two and make their investment decisions based on what worked then.

If we consider the weakness of the economy, the high levels of unemployment, a lack of growth in worker productivity, and the most aggressive monetary policy ever by the Federal Reserve, there are several possible risks that I think are quite likely to crop up.

The first is that holding long-term U.S. bonds is a very risky and poor investment. Even though the official data show no signs of inflation, considering the amount of money the Federal Reserve is pumping out through its monetary policy program, there’s no doubt in my mind that it will have negative implications over the next decade for bondholders.

The second is that market complacency is very dangerous. People seem extremely confident that stocks will keep going up and precious metals, like gold, will keep going down in price. While stocks might continue to benefit from the monetary policy program initiated by the Federal Reserve, I believe precious metals like gold and silver are looking more attractive.

Can anyone truly predict what will happen over the next decade? No one has a crystal ball, but when I see the Federal Reserve still pumping out money through an aggressive monetary policy that’s just not working, this worries me.

I would certainly feel far more comfortable over the next decade to have some gold and silver as a hedge against any side effects that could come as a result of this unprecedented level of monetary policy by the Federal Reserve.

If the Federal Reserve can’t predict what will happen next year, can you really trust that they’re able to keep printing money and not negatively impact your wealth?

This is why having some insurance in the form of precious metals can help, since it wouldn’t be the first time that monetary policy has caused more problems than benefits.

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Tags: Federal Reserve, GDP, gold, inflation, monetary policy, precious metals, Recession, silver, stock market, U.S. bonds, U.S. economy

A High Growth Bank That Gathers Deposits More Cheaply and Makes More Money Per Dollar Lent

A High Growth Bank That Gathers Deposits More Cheaply and Makes More Money Per Dollar Lent

A High Growth Bank That Gathers Deposits More Cheaply and Makes More Money Per Dollar Lent

PB Cover.png


This month’s Singular Diligence report covers one of the largest banks in Texas.

The bank has lower operating expenses than other banks, a higher efficiency ratio, high gross yields on its loans and low net charge offs. It is able to gather each dollar of deposits more cheaply than other banks. And then it makes more money per dollar of loans it makes because it receives a high yield for these loans while simultaneously charging off a lower than normal amount of each loan each year for its losses.

As a result, it has grown deposits per share 12 percent annually over the last 17 years while maintaining 20-25 percent dividend payout rate

Click here to learn more

Central Bank of Chile

Central Bank of Chile

Central Bank of Chile

April 12, 2016

There were two 25-basis point Chilean interest rate hikes in the final quarter of 2015.  They were the first tightenings in several years, but there has been no further change in the 3.5% range since December.  A statement released after the latest policy meeting kept that level but promises further rate normalization.  Inflation of 4.5% “is expected to remain over 4% for some months. Inflation expectations two years out remain at 3%,” which is the medium-term target.  There have not been significant surprises regarding growth.  “In line with the Monetary Policy Report released in March, the Board estimates that to ensure the convergence of inflation to the target, monetary policy will need to continue with its normalization, at a pace that will depend on incoming information and its implications on inflation projections.”

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

Tags: Central Bank of Chile


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