Copper and the Market...

I've been having some discussions with different members this morning and I should probably just get it all out there in the open for everyone. This is speculation and speculation is not something I care to engage in, I prefer hard facts. However, I think somethings that I've noticed should be pointed out.

The essence of the Bernanke Chinese finger trap has been the rising input costs or inflation. Clearly his language during the last FOMC policy statement and Q&A after showed some concern about inflation, although he considers it to be transitory.  Fed policy actions could be taken to curb or try to curb inflation, but that would generally require that they raise rates, which has been floated since the FOMC meeting. However that would have profound consequences on the economic "recovery". As you saw by the chart I posted, most consumer credit is coming straight from the government while banks have turned their backs on the traditional business models in this environment of free money. Whether Bernanke actually intended or believed zero to .25% interest rates would spur consumer lending by the banks, I don't know, but the banks smartly took that cheap money and rather then invest it in consumer lending which has obvious downside risks and limited upside potential in the economic environment we are in, decided rather to send that cheap money to their trading desks. Of three major banks combined, Goldman, JP Morgan and Bank of America, they only had 1 day in which their trading desks took a loss over an entire quarter.

Obviously a large bulk of the near free money went to the areas in which thy could get the most bang for their buck, which would be FX and commodities. This has turned around and bit Bernanke and many US companies in the rear end through rising input costs.

In my experience in the market, I can't recall a time in which we saw so many margin hikes so quickly. I also don't see highly convincing evidence that Wall Street knew these hikes were coming. So at this point it seems like Bernanke has found an unofficial policy tool to effect his predicament. The fact that some very big players lost some very big money over the last week or so also points to the probability that they were not aware of margin hikes, as unbelievable as that may sound. The one thing Wall Street hates is uncertainty and if they are highly leveraged in the commodity complex and seeing these ruthless margin hikes (it was nearly every other day in silver and a huge one time hike across a large part of the energy sector) they are in a state of uncertainty and would probably reduce their leverage rather then chase gains and risk losing their fund. This is still a speculative idea, but once again, the fact that so many big players were hit so hard seems to indicate they didn't know this was coming and just in case they are thinking about riding it out, they can look back to the silver hikes which came at the pace of about 1 every two days with each one increasing the margin amount. That may have been their warning and they may be thinking if they don't take action as the Fed would like to see, that the hikes will continue.

So one member I talk with often asked me to look at the relationship between copper and the market with the idea that copper leads the market (stock market). I couldn't find an index long enough for copper quickly, but the one I did compare s below.

 The Dow Jones Copper Total Return Index is in green, the S&P-500 is in red. Note the copper index bottomed out nearly 4 months before the market did (December 2008 vs. March 2009). There's an obvious relationship between the two and again in 2010, copper topped several weeks before the market.

Here's a closer view of recent activity in which copper has broken a top 4 days ago, so does the S&P follow?

This is an interesting question. Before the FOMC meeting,  said two things, 1) that the initial knee jerk reaction is almost always reversed within days, I showed you last week that was the case this time as usual. The other thing I said was I think we are about to see something very big happen, that very big thing didn't appear in the official FOMC policy statement, although there were a few interesting nuggets, but since then these margin hikes have been a pretty big deal.

My questions are the following: Are we going to see mass deleveraging in the commodity complex? Did this catch Wall Street by surprise? And, what is the Fed's objective? If the Fed really doesn't care about banks returning to more traditional business models (i.e.-lending), then they won't mind if the banks continue to use the cheap money to make obscene trading profits, just not in commodities. So where would they go? Equities are not known to cause inflation and we've seen no hikes in equity margins. In fact Bernanke likes to point to the stock market as a barometer for the wider economy, his words I believe were the stock market's "wealth effect". So this "may" be a game changer. I have a lot of asset classes to watch and see if any of this speculation is close to true.