TRADING COMMODITY DEFLATION Finding the New Normal in a Safehaven!

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1 GordonTLong.com TRADING COMMODITY DEFLATION Finding the New Normal in a Safehaven! ANALYTIC INSIGHTS DRIVER$ Gordon T Long 4/21/2016

2 Q1 EARNINGS ARE A DISASTER It is now expected that 2016 Q1 earnings will be the biggest quarterly drop in US corporate profits since A 9.8% drop is expected with major banks stocks such as Citigroup's earnings being down 28% Y-o-Y with a double digit drop in revenue. It is pretty well the same for the Bank of America, JP Morgan Chase, and Wells Fargo. When banks are reporting bad earnings it never portends well for the markets, especially as the financial sector has come to dominate US markets. Investors are rightly nervous and market exits are being reported by BoAML client activities. TRADING COMMODITY DEFLATION Finding the New Normal in a Safehaven! "Smart Money" Clients Sell Stocks For 12 Consecutive Weeks persistent sales suggest to us that clients continue to doubt the market rally." Institutional clients continued to lead the selling, while private clients have the longest selling streak (ten consecutive weeks). At a more granular level, the one sector where net buying remains is ETFs. On the selling side, BofA gives the following color: "Net selling: Tech since late Jan.; Staples since early Feb.; Industrials since mid-feb.; Energy and Financials since late Feb; Telecom, Materials and Health Care since mid- March; Consumer Discretionary since late March, Utilities since early April."

3 As bad as this is, it is old news for those who have been investors in the commodity sector. Since mid 2014 it has been what can only be described as a bloodbath! It really got seriously underway in the commodity sector when QE was seen to be truly ending. So what could possibly come out of all this bad news? Opportunity! We sense that institutions are now seeing the trashed commodity sector as a Safehaven from a highly overvalued equity market. Prices and valuations have been so beaten in the commodity complex that up that it is hard to see more significant downside. The risk reward has shifted. Unadjusted for inflation, commodities have hit lows not seen since the early 30 s in the last century!

4 The technicals for the commodities show a classic Head and Shoulders pattern which has now been completed. MARGIN OF SAFETY IS APPEALING. What institutions see is that commodities are likely to stay low for a period of time but not necessarily at quite this low a level. Commodities need to establish a new normal. To get to that, markets normally overshoot significantly then decay over time to a new trading range. Institutions who have little choice but to be fully invested, are beginning to see that this would be a safe place to hide out from what is now regarded as possibly an ugly time going forward in equities. The logic is, if the Central Banks policies are successful we will see Inflation and Commodities will rise. If Central Bankers aren t successful we can be assured of another version of QE to emerge. This would also be good for commodities. This is not to say they head back to the good old days. Rather, we would see the oscillations be less dragged out and therefore more profitable. STRANGE BEHAVIOUR BEING REPORTED IN COMMODITY PITS One Commodity Trader Writes: "What Is Happening Has Absolutely No "Reasonable" Explanation" One commodity trader writes with some very unique observations. * * * The insanity has now fully spilled into the commodity markets a market which I professionally made a transition to after the 2008 crisis from the financial markets, simply because I believed it was a market that would still function according to true fundamentals

5 I guess that only lasted so long The commodity markets have been prone to excessive speculation for years, but at the end, the thought of specializing in something tangible that EVENTUALLY would have to revert back to true supply and demand fundamentals made all the sense in the world. Specially with the true circus that the financial markets have become since 2008 * * * From: XXXXXXXXXX To: "Peter" Sent: Wednesday, April 20, :35 PM Subject: volume totals today 774K of soybeans traded today and that would be a record by nearly 160K contracts as yesterday set the record at 615K. Over 88K July/Nov traded today and 97K May/July traded. Unheard of non-roll numbers. Meal volume was 270K and we have to think that was a record as well but not 100% on that one.... the stupid FED and other Central Bankers around the world acting in unison to artificially raise inflation so that they can hopefully get out of the F ing mess they got themselves into with this low/negative rate BS. Call me crazy, and I am not a conspiracy theorist but what is happening has absolutely no reasonable explanation. So I have to think outside the box The FED and other Central Banks have already destroyed the equity and other macro-financial markets it is now turn for the commodities markets So is it so crazy to think that Central Bankers all got together in early 2016 and came up with the following equation??? ARTIFICIALLY RAISE COMMODITY VALUATIONS = HIGHER ARTIFICIAL INFLATION = CLAMORING FOR RATES TO BE RAISED = CENTRAL BANKS HAVING A SUCCESSFUL END TO THE CLUSTERFCK THEY GOT THEMSELVES AND THE REST OF ALL OF US INTO WITH THEIR ZIRP AND NIRP EXPERIMENTS WHAT WE DO KNOW The falling monetary base is hurting liquidity, flows and market momentum. The total US Monetary Base has begun shrinking and the correlation with weakness in the S&P 500 index is evident.

6 Either the Central Bankers increase liquidity (which pushes up commodities), or it does it the stealth manor suggested above. It sounds like a relatively safe place to hide no? Gordon T Long Publisher & Editor general@gordontlong.com

7 Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments. Copyright 2016 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or suggestions you receive from him.