Commitment of Traders

Silver is going to blow SKY HIGH!!

Walls-of-worry; Short-squeezes; money-on-the-sidelines; Everyone's Bearish, right? Well, instead of just listening to the drone of the mainstream media and talking heads, who appear once any rally appears in the hope of garnering some more AUM and taking commissions, we thought it worth a few minutes to look at actual data, positions, and sentiment across equity, debt, and FX asset classes. Sure enough - here are ten charts that show investors are anything but bearish and that the ammunition for the next leg from here can only come from central-banks (and we are concerned that disappointment is due).

All throughout the epic surge in corn prices, the big Kahoona, Goldman Sachs, where buy means sell, and sell means Goldman's traders are buying everything its clients have to dump, was quiet. That is no longer the case: "we recommend a short May-13 CBOT wheat position vs. a long May-13 CBOT corn position." In other words, Goldman will now be selling May 13 corn. We all know how these recommendations end.

While analogs for periods past have been shown time and time again, the striking similarity of the last four months of this year and the same period last year is becoming extremely worrisome. The rips and dips are of almost perfectly equal size and duration and retail and professional participation is also very similar. July 21st marked the top last year after failing to break the highs of a July 4th week peak (which occurred on low average trade size). It would appear the bulls are hoping that it's different this time - or else it is very scary with S&P 500 set for the magic 1200 Bernanke Put strike very soon.

It appears that when it comes to mocking consensus groupthink emanating from lazy career 'financiers' who seek protection from their lack of imagination and original thought, 'creation' of negative alpha and general underperformance (not to mention reliance on rating agencies, only to jump at the first opportunity to demonize the clueless raters), in the sheer herds of other D-grade asset "managers" (for much more read Jeremy Grantham explaining this and much more here), David Rosenberg enjoys even more linguistic flexibility than even us. Case in point, his just released trashing of the latest Barron's permabull groupthink effort titled "Outlook: Mostly Sunny." And just as it so often happens, no sooner did those words hit the cover of that particular rag, that it started raining, generously providing material for the latest "Roasting with Rosie."

The latest CFTC Commitment of Traders report is out, and what a difference two months makes for a currency. After everyone was uber bullish on the Yen two short months ago with nearly record high bullish bias in the form of 57K net long non-commercial spec contracts, the Yen has become the most loathed, and despised currency, as the net short interest has slid to -66K, nearly the largest net short in 5 years, and the most gross short exposure since June 2007. And while the Euro is still vastly detested, the Yen is en route to becoming the one currency with the most net shorts. Which begs the question: is the Yen preparing to once again become the funding currency, and is Andy Xie's analysis about an upcoming JPY devaluation about to be proven prescient once again? Finally, anyone who thinks that the central planners west of Nippon will stand for this aggression, you have another thing coming.

Tomorrow will bring the end of a two-day policy meeting at the Bank of Japan which SocGen expects will result in the announcement of additional easing measures. Whether medium-term macro-economic issues or short-term risk tolerance fading weighs heavier on their minds as their efforts from the previous easing announced on Feb 14 are rapidly losing their effectiveness - especially evident in their recent inability to restrain JPY appreciation (which notably JPM believes will continue on the back of a disconnect between Commitment of Traders positioning and the JPY carry divergence - via Bloomberg's chart-of-the-day). Critically the exchange rate is a cornerstone of BoJ policy and while risk-off will drive JPY appreciation via carry unwinds (in a purely technical world) the political, currency, and economic factors that SocGen lays out suggests strongly that the BoJ (under increasing attack from politicians for its failure to reflate the economy) will bring out yet another bazooka to show its worth - and prove this time is different even as we noted here with inflationary concerns rising. Lastly, will JPY lose its carry-trade attractiveness and implicitly its impact on US equities even if they do ease dramatically or when will the market/politicians lose patience with a drip-drip-drip approach and side with China's view of a rising devaluation risk as we noted here recently.

Just in time for the latest headfake out of Europe where sentiment at least on thus Sunday afternoon is that Greece is somehow saved (on a rehash of an old story, namely that the ECB welcomes the combination of the EFSF and the ESM - something that Germany has previously expressly refused to comply with, and something which is utterly meaningless - where will the money come from - Italy and Spain? Or will China invest more than the single digit billions in EFSF bonds raised to date?), we look at the CFTC Commitment of Traders for an update on speculative sentiment. There we see that just as the general public was starting to comprehend that Germany may let Greece fail after all, a fact confirmed by Tom Stolper's most recent flip flopping on the EURUSD, which caused the Goldman catalyst to end his call for a rise in the EUR currency (and for ZH to take the opposite side as usual, a trade which is now 160 pips in the money-  recall "Needless to say, we are now closing our short reco at a profit 9 out of 9 times in a row, and doing the opposite - i.e., going long."), speculators ended the two consecutive weeks in reducing net short exposure, and the week ended February 14 saw net short interest rise again from -140.6k to -148.6k. So if one is wondering what the weak hands are doing that just got burned shorting the pair in the past 10 days, the 100 pip move higher (which has sent the ES over 1370 and the DJIA futures over 13K) this afternoon explains it. For those wishing to bet on a contrarian outcome, which in Europe is pretty much a given, our advice is to wait for Tom Stolper to issue his latest EUR bullish forecast, which will likely be forthcoming any minute, and which will cement the FX strategist's place in the FX anti recommendation hall of fame.

A few days ago, Eric Sprott decided to take advantage of the record premium over NAV of his physical silver fund PSLV (or for some other arbitrary reason) and to issue a $300MM follow-on offering, whose proceeds would be used to buy up silver to add to PSLV's existing physical holdings. Naturally, as soon as the news broke, the premium dropped to about 10%, making PSLV holders unhappy. This is not the first time that Sprott has done this: as a reminder after his April 2011 follow on offering in PHYS, we were fully expecting a comparable physical sequestration to occur via PSLV, to wit: "It appears to have already had an impact on silver, which jumped by $20 cents to another 31 year high on the news, as the market now likely expects a follow on offering in PSLV as well imminently." About 10 months later, it finally happened. As was to be expected, any short-term gains focused investors obviously became angry that by collapsing the premium, which we speculated was shortage driven, they have suffered a hit to their P&L (expressed in dollars of course, which as a reminder to the holders, should be largely irrelevant, especially to those who believe a PM-based barter system is imminent). Yet they forget the flip side to the equation: the money taken out of the premium, would be promptly used to take silver out of (hyper hypothecated) circulation, in other words, in the closed system, the drop in Premium would translate in a rising price in the underlying. Which according to UBS is precisely what has happened, and why silver moved as much as it did. Quoting from FMX Connect: "Today’s incredible move was the culmination of a comment made by UBS analyst Edel Tully. He stated that hedge fund manager Eric Sprott may be in the market buying spot futures in a private letter to his clients." And even as the premium dropped, the price of spot silver increased by over 5%, on the speculation of silver being taken out of the market and delivered to Sprott.

Presented with little but incredulous comment as the net short-interest speculative commitment of traders in EUR futures breaks to yet another record with no squeeze in sight yet...

The trend of relentless shorting of the Euro currency in the form of non-commercial spec contracts, and as reported by the Commitment of Traders, continues for one more week. As of January 3, EUR shorts rose by another 9%, hitting an unprecedented 138,909 net contracts short - a fresh all time record. What is curious that unlike previously, when an increase in EUR bearishness implicitly meant a increase in USD bullishness, this time that is no longer the case as net spec USD contracts actually declined, and are trading at relatively subdued levels. Overall, this means that FX specs are not playing relative currencies off each other, but are piling into a global European short. Which leads us to the following precautionary observation: just like when a price collapse in gold is required, usually enacted by the reflexive relationship between futures and the underlying, in the form of a margin hike, we wonder how long before Europe, or even the Fed which most certainly does not want a strong dollar, directs the CME to hike EC maintenance margins by some ungodly amount. Because whatever works to keep paper gold weak will most certainly help to keep the dollar even weaker. And with a net drawdown of nearly 250,000 contracts from EUR highs in April to current lows, a EUR margin hike may have as profound an impact as QE, considering the massive amount of shorts currently holed up and demanding the collapse of Europe.

As EURUSD leaks very gently lower into the new year (but stocks popped excitedly across quiet European markets that lacked a bond market supervisor to keep them honest), we thought it might be interesting to look at the relative strength of the Euro against six different measures. From FX option risk-reversals to ECB's European Bank Lending statistics, QE and sovereign risk relationships to Fed/ECB balance sheet dynamics, and finally from futures commitment of traders data to EUR-USD swap spread frameworks, the results are unsurprisingly mixed with a bias towards EUR weakness. Between the European auctions (and redemptions) of the next two weeks, and the FOMC meeting on the 24-25th January, we face quite a rude awakening from the low volume holiday week malaise.

All those who are looking for a handy free, web-based resource providing the weekly CFTC Commitment of Trader update, one focusing on disaggregated Managed Money positions (not the Non-Commercial Speculative positions which Zero Hedge has traditionally followed), can now do so at the following Reuters site. Since commodities will certainly be an ever more important part of daily investing life, we urge everyone to get familiar with the weekly data release for speculative (the guys who will be blamed for price hikes) and commercial (the banks who will be doing the blaming and urging exchange margin hikes) accounts from the CFTC.

Rosenberg looks for hints on how to navigate the market, and finds them in the CFTC COT report (which despite not reporting last week due to the Veterans' Day holiday, is regularly posted on Zero Hedge to glean precisely such clues). To wit: "The asset classes are merely unwinding the excess risk-on trades and pricing out the chances that QE3 will ever see the light of day. Yes, this is what the market was starting to think since Bernanke left the door open for more in the press statement, but we are finding out ex-post that the Fed chairman has less support around the table than was generally perceived. It may pay for the time being to avoid the areas of the market where net speculative long positions exist and is in the process of unwinding. Long covering is a critical source of selling pressure."

Today's CFTC Commitment of Trader data confirms that the dollar strengthening trend from last week continues: net spec commercial positions in the USD are now well off their lows from three weeks ago and are up to 5,850, after hitting a 2010 low of -1,580. At the same time, both JPY and EUR spec positions declined (by -2,727 and -6,243 positions, respectively) as the rotation into the dollar, as brief as it may end up being, accelerated. Whether this was merely momentum chasing or an expectation of a less efficient QE2 can be answered by looking at select commodity positions. A quick glance at wheat, soybeans, coffee, corn and oats shows that pretty much all 5 representative commodities saw their net long spec positions increase again. So QE2 is definitely going to manifest itself in more inflation, or so at least claim the speculators. Yet not is as it seems: a look at Treasury specs shows a combined drop across the 2, 5 and 10Y space of 123,835 contracts to 186,892, only the second largest drop in 2010, which occurred after the cumulative total hit a 2010 record of 310,727 the week prior! In other words, even as specs were discounting an increase in inflation and a potential increase in the value of the dollar, the bond bubble officially popped.