Poor National Australia Bank [ASX: NAB]. Or I should say poor customers of National Australia Bank.

Another so-called “glitch” struck it again yesterday afternoon. Twice in the space of a couple of weeks. Dear oh dear.

If you’re an NAB customer I’d suggest twice is enough. It’s time to shift your savings account somewhere else.

But we’re not going to write about Australia’s insolvent banks today. We’ll leave that for tomorrow. It should be a corker so make sure you tune in…

Your editor nearly fell off the couch while watching CNBC this morning.

There isn’t much on that channel worth watching, but we watch it anyway. Usually while tucking into our three Weetbix®. We try to ignore the blathering hosts and their drone-ish guests by turning the sound down.

Instead we just follow the ticker at the top of the screen… Dow Jones… S&P500… AUDUSD… USDJPY… Gold… Silver… UST10YR… zoiks…

With all our focus on the Aussie banking system over the last couple of days, we’d taken our eyes off the yield on the 10-year US Treasury. What we saw nearly caused the couch-falling incident.

And we could see why Money Morning reader Jack had sent through this email yesterday afternoon:

“In your discussion toward the end of today’s MM, I’m surprised you did not pick up on the 10year & 30year USGovt bond prices falling (thus yields rising) during the time since they announced & implemented QE2.”

We had noticed the rising of the bond yield since early November. It was something that flew in the face of the supposed reason for the money printing – to keep interest rates low.

But what we hadn’t noticed was the price and yield action over the past few days. The chart below explains it all:

Source: Yahoo! Finance

It’s important to know that price action in any financial market is based just as much on what investors think will happen as on what has happened.

So you can argue that leading up to early November when the US Fed announced its money-printing programme, investors were positioning themselves for what they thought the Fed would do.

They thought the Fed would print a certain amount of new money (not actually printing it, but creating it electronically) and therefore bought or sold US Treasuries on that assumption.

When the Fed made its announcement some punters saw this as the time to get out. The price had risen (yield fallen) as far as they thought it could go. What were they to do next? Hold on to an investment yielding less than 3% for the next ten years? Or sell it and lock in the capital gain.

The latter obviously.

Especially if they were in leveraged positions… which they would be. Remember, even retail investors in the US can get 10:1 leverage on government bond. So goodness knows what leverage the institutions can get. That’s because they’re seen as safe investments.

In contrast, in the US, a retail investor can only get 1:1 leverage on stocks. If you know the Fed is going to print a whole bunch of fresh cash to buy up these bonds, why wouldn’t you front-run the Fed and look to profit.

Well, that’s exactly what they did. And now they’re getting out.

Even the prospect of further money-printing may not be enough to draw buyers back. And if it does there would still be a big bunch of sellers trying to cut their losses and get out.

It’s a problem the Fed has created for itself. If you think about it logically it makes sense. Unfortunately, logic is one of the things in short supply at any central bank.

The fact is, the more new money the Fed creates to push down bond yields, the more new money it will need to create in order to push them down the next time. The Fed is creating 600 billion new dollars to lower interest rates.

So far it has only spent about one-sixth the amount – this morning it bought another USD$1.63 billion of US Treasuries. The bond market is becoming desensitised to the Fed’s bond buying programme.

Bond yields will undoubtedly fluctuate, but will it push rates back down to the level the Fed wants? We doubt it.

So what next? That’s where QE3 and QE4 come into play. But the Fed can’t announce it’s going to just buy another $50 billion or $100 billion… that won’t cut it. The market won’t care. It won’t have enough of an impact on the market to attract bond buyers.

If the Fed really believes printing money is the solution to helping the US economy. And if it believes this involves keeping interest rates low the only action it can take is to really ramp things up… one trillion dollars, two trillion dollars… or more likely, just an open-ended buying spree.

But just as bond buyers have become unimpressed with the Fed’s bond buying so soon, can they be relied upon to maintain enthusiasm for an open-ended bond buying programme?

We doubt it. And that’s when it’ll get super exciting. Not only will the Fed become the main buyer for existing debt, but it will become the main buyer for new debt – bidding for bonds direct from the US Treasury.

In other words, skipping the middleman.

The way we see it is that all the elements for an inflationary super-spike are being created right now. The rotation of new money from the Fed to the market to the government is speeding up… then it’ll reach terminal velocity, and the economic ship won’t be able to take it anymore.

There will be so much worthless paper and electronic money flying around the US and global economies that consumer prices will soar and the economy will collapse. What will that mean for commodity prices?

Well, if you want an example of what to expect, look at the price action for bonds. What has happened with the 10-year US Treasury is a perfect example of how inflation doesn’t necessarily increase asset prices… or I should say it doesn’t necessarily keep asset prices high.

It’s all about expectation and anticipation. Bond buyers expected new money to be printed (inflation), so they bought an asset in advance. Now some of the new money has been created the bond buyers have lost interest. They’ve already priced it in.

And bond prices are falling. Yet there’s still more than USD$500 billion of new money waiting to be created at the tap of a button.

Why shouldn’t that happen for other asset prices?

There’s no reason it shouldn’t.

Commodity prices have already taken off. You can see that on the RBA Index of Commodity Prices:

And it’s a pretty good bet prices could go higher.

But when it comes down to it, a commodity bubble is like any other bubble. Investors and speculators bought US Treasuries because they are supposed to be safe, and also to front-run the Fed’s buying.

As for commodities, investors and speculators are buying commodities because they are seen as a hedge against inflation and because of the growth of emerging markets.

But when it comes down to it, commodities are produced to be used. Businesses buy copper, corn and sugar because they need to use it to produce goods. But in addition to that, there are investors and speculators buying and selling these commodities in order to make money.

But ultimately, the price investors and speculators will pay depends on what they believe the underlying supply and demand is for the commodity.

And also don’t forget that buying by end users, investors and speculators is done using leverage. When the credit taps dry up – as we saw in 2008 and 2009 – the ability for end users, investors and speculators to keep buying becomes much more limited.

So if the buying dries up, that’s right, it becomes a buyers’ market. Sellers jump over each other looking to be the first to the exit.

In other words users, investors and speculators are buying commodities based on certain expectations. A variety of expectations. Once those expectations change, the price correction can be savage.

And as you know, very rarely – if ever – is everyone right about the ultimate price of an asset.

The commodity bubble has already burst once. The chart above shows you that. There’s nothing to say it can’t burst again.

Just as front-runners helped push bond prices to an unreasonably high level based on certain expectations, the same is happening right now in commodity markets.

Staying on board to profit from this surge makes a lot of sense – as Dr. Alex Cowie has done in Diggers & Drillers. But assuming it will last forever and that inflation, China and India will provide a backstop to commodity prices is a risky game if you don’t know what you’re doing.

Cheers.

Kris Sayce
For Money Morning Australia

Will the US dollar recovery continue through 2010?

Will a second wave of US mortgage defaults cause a repeat of the sub-prime crisis?

Will direct government investment begin to unwind and will the “too big to fail” companies be allowed to exist?

Dubai unnerved investors – are more shocks in the pipeline?

Where are the Property Markets heading?

How will china fare in 2010 ?

Can we recapitalize our own loss after BBI recapitalises itself

Credit Suisse and Macquarie Capital have agreed in principle to serve as the underwriters for Babcock and Brown infrastrucure , but the final documentation will not be completed until it is clear there is adequate market support for the recapitalisation plan. Babcock & Brown Infrastructure appears likely to be in a position to update the market on its long-awaited recapitalisation deal by tomorrow or Wednesday.

The key component left to finalise is a $600 million institutional placement to be matched by a placement to the new cornerstone investor, Canada’s Brookfield Asset Management.

The group of hedge funds backed by RBS, which had proposed an alternative plan, is believed to be not taking part.

Interestingly, on Friday evening, Moody’s placed Dalrymple Bay’s Baa2 credit rating on review for a possible downgrade that would see it lose its investment-grade status. However, the downgrade is not expected to happen if the recapitalisation plan succeeds

As part of the $1.5 billion deal to erase all of BBI’s corporate-level debt, Brookfield will take a 50 per cent stake in BBI’s most prized asset, the Dalrymple Bay coal port in Queensland and will buy the debt-laden PD Ports asset in Britain. BBI, now advised byGresham, had tried to sell all or part of those assets before it decided the Brookfield recapitalisation plan was the best option.

The BBI boss’s Payrise

Jeff Kendrew was appointed chief executive officer of Babcock & Brown Infrastructure (BBI) in June 2007.

The basic wage of Babcock & Brown Infrastructure’s boss has risen by more than $300,000, despite the company’s shares losing 90 per cent of their value, according to a market analyst.

Market analysts Wise Owl’s director Sven Restel told News Limited that Mr Kendrew’s basic wage has risen from $365,000 to $700,000, while BBI shares have tanked from $2 in 2007 to less than one cent.

“It’s unbelievable what they think they can get away with,” Mr Restel said.

Chinese stocks helped drive the main index of Asia-Pacific stocks (excluding Japan) to an 11 month high, as two surveys showed accelerating Chinese factory output growth. Car and tyre makers were among the biggest winners, after the US Government announced increased funding for its "cash for clunkers" program to encourage households to trade up to more fuel efficient vehicles.

• In Tokyo, the Nikkei finished flat at 10,352.
• Hong Kong’s Hang Seng was up 1 per cent at 5:38pm (AEST).
• Mainland China’s Shanghai composite index gained 1.5 per cent to 3,463, its highest level since March last year.
• Singapore’s main share index was flat at 2,659.

Currency markets

The resurgence is due to increased optimism about a global economic recovery, and demand for currencies linked to commodities. At 5:53pm the Australian dollar was fetching:

• 83.60 US cents
• 79.41 Japanese yen
• 58.80 euro cents
• 49.96 British pence
• 1.2612 New Zealand dollars

Major movers in Australian market

The Australian share market has extended its rally, rising 0.5 per cent on the back of another strong showing by the banks.

At the close, the S&P/ASX 200 was 19.4 points higher, or by 0.5 per cent, at 4263.4 while the broader All Ordinaries rose 21 points, or 0.5 per cent, to 4270.5 points.

• ANZ and NAB led the charge of the big banks, with both up 2.5 per cent, and CBA and Westpac both up by just under 2 per cent. The banks have benefited from broker upgrades as the wave of economic optimism has led analysts to upgrade their profit forecasts. The ANZ also gained after sources told several media outlets that ANZ is close to a deal worth around $1 billion to purchase some of RBS’ Asian assets.
• Aquarius Platinum was amongst the best gaining miners, surging 8 per cent on a broker upgrade.
• Wheat exporter GrainCorp jumped 6.7 per cent to $8.00 after it raised its profit forecast for a second time. Competitor AWB also gained 4.2 per cent on the news.
• Sino Gold picked up 2.8 per cent on the discovery of gold mineralisation near its White Mountain mine in China.

Westpac slashes bank fees

Consumers have scored another victory in the battle against exorbitant bank charges when the Westpac group announcing plans to cut a range of penalty fees from as much as $40 to just $9.

The decision by Westpac and St George – the NSW-based bank it bought last year – follows a move last week by their big four rival, National Australia Bank, to axe the entire overdraft fee of $30 on accounts used by 700,000 personal customers from October 1

KUDOS to NAB FOR BEING THE FIRST BANK TO ACTUALLY CARE.. The rest will follow just to be competitive

Westpac said it would reduce "exception” fees across credit cards and personal and business accounts to $9 from current levels of up to $45. The move includes Westpac subsidiary St George Bank.

Major oil stocks were also mixed, with Oil Search losing one cent to $5.63, Santos up 18 cents at $14.70 and Woodside Petroleum dropping 80 cents, or 1.8 per cent, to $44.90.

Gold miners had mixed fortunes, with Lihir Gold easing 3 cents to $2.74, dual-listed Newmont Mining jumping 16 cents to $4.96 and Newcrest Mining steady at $30.00.

The result was not pretty, and luckily your editor Kris Sayce managed to slap me silly and point out that, ahem, perhaps if I toned it down a bit and used words and explanations that don’t require a degree in Technical Analysis he might actually be able to publish the darn thing without fear of lawsuits from the disgruntled readers whose brains have gone pop.

After sleeping for a few hours, I re-read the piece, and had to lie down again as I realised the truth of his words.

So I got back up off the floor, and attacked it again. This time with a little more tenderness. And with hope Kris won’t call my mum and get me sent back to my room with my crayons and charts, telling me not to come out again until I stop talking gibberish…

So, here goes…

Previously I’ve mentioned Divergence between Price and the MACD, and how it can be used on different timespans. This time I’ll look at the AUDUSD pair as a few things have happened to suggest we may have a ‘catcheable’ future drop.

First up I’m going to show you a Daily chart of the AUDUSD pair:

Divergence, in this case between price and the MACD histograms, is highlighted by the paired red lines. This is a pre-emptive signal and is not an indication that it’s time to go short.

The divergence is only on the histograms. What I look for now after the “first signal” is for divergence to occur on the MACD moving averages before getting ready to pounce for a serious (in this case downside) run.

The pair may continue to go up (have a look at the possible targets I mentioned in ‘Will the Aussie Dollar Plummet to Fifty Cents?‘) and if it does, I will be looking closely at these MACD moving averages to see if divergence between price and that sub indicator occurs during further rises.

But let’s forget about divergence for a bit and have a look at some more stuff on the MACD that could hint on further upside to come.

MACD Histogram clusters

I’ve zoomed in on the chart to highlight groups of histograms on the MACD.

The last set (cluster) of Negative MACD histograms on the right hand side of the chart has formed three troughs.

The formation of three peaks/troughs on histogram clusters often sees an opposite price and a quick observation of the histograms clusters in the above chart shows where this occurred.

A three trough negative cluster formed in January with a quick spurt up early February.

Three peaks in a positive cluster in March to mid April was followed by a quick spurt down.

Three peaks in a positive cluster from May to June, pre empted a quick spurt down…

You get the drift.

A break to the upside, and confirmation of the current three-trough negative cluster highlighted on the right of the chart could well pre-empt a nice tradeable opportunity.

Divergence Demonstration

And Finally, Another Grand Demonstration of How Divergence On Both MACD Histograms and MACD Moving Averages can predict some pearlers of moves:

On this Monthly chart I have done some very basic highlighting of divergence, that gave a good indication of upside initially on this time span, and then gave a good indication of the downside (note, these pre-emptive indicators took years to form).

If only I’d been more aware of this methodology when these moves occurred!

‘Til next time…

Joe Zolin
for Money Morning Australia