Thursday, June 30, 2011

Investors brace for 'explosive' US crop reports


Investors braced for the risk of grain prices moving their daily limit in Chicago, after the release of reports billed variously as "potentially very explosive" and "the biggest of the year" so far.
US Department of Agriculture data is expected to say that domestic corn inventories dropped by 3.2bn bushels between the beginning of March and the start of this month.
This would leave stocks at a seven-month low, for June, of 3.3bn bushels.
Separately, the USDA is also expected to peg American corn sowings this year at 90.7m acres, well below initial hopes of 92.1m acres after a wet spring hampered farmers, if in line with an initial estimate revision made earlier this month.
However, the tightness of US corn stocks, which are expected to close 2010-11 at among their tightest since World War II, has raised concerns that even a small miss from the estimates could have large implications for supplies, and therefore on prices.
On futures markets, grains pared on early gains for fears of a surprise in the data, with Chicago wheat for July falling back from gains above 1% to stand only 0.6% higher at 12:00 GMT, and corn suffering a similar pullback.
'Very explosive'
At an average yield and crop abandonment rate, every change of 100,000 acres in sowings represents more than 14m bushels in harvest potential.
Forecasts for corn in USDA reports, previous USDA estimate, (yr ago)
June 1 stocks: 3.302bn bushels, 6.523bn bushels as of March 1, (4.310bn bushels)
Plantings: 90.767m acres, 90.70m acres, (88.192m acres)
Source: ThomsonReuters poll
"Anything [on plantings] below 89m acres are we open limit-up," said Tim Hannagan, a reference to the cap of $0.30 a bushel Chicago places on daily movements in corn futures.
A figure of "88m acres or lower is a shocker with two or three limit days", he added, terming the data "potentially very explosive".
Similarly, inventory data pegged too far from consensus could spark a "spike" in prices, Mike Mawdsley at Market 1 said.
"Either way, I would expect to see a limit move up or down," he said.
'Market mover'
Not that this is the end of the story on stocks and acres.
Market forecasts for wheat data, previous USDA estimate, (year ago)
June 1 stocks: 826m bushels, 1.425bn bushels as of March 1, (973m bushels)
Plantings of hard red spring: 13.349m acres, 14.427m acres, (13.698m acres)
Plantings of durum: 2.034m acres, 2.365m acres, (2.570m acres)
All wheat plantings: 56.671m acres, 57.7m acres, (53.603m acres)
Source: ThomsonReuters poll
US Commodities - while agreeing that the data would prove "a market mover", terming them "the biggest of the year thus far" –highlighted that official estimates for US corn sowings typically prove too low in the June acres report.
"Two-thirds of the time, the government raised corn acres after the June report into the July [Wasde] report," a monthly briefing on world crop supply and demand, the broker said.
"This has been the case since the 1990s."
Late surge in plantings?
Additional uncertainty has been caused this time by the lateness of the planting season, which has led some analysts to believe that Thursday's corn acreage estimate will prove too high, with farmers being unable to sow all the land they aimed to.
Market forecasts for soybeans, previous USDA estimate, (yr ago)
June 1 stocks: 596m bushels, 1.249bn bushels as of March 1, (571m bushels)
Plantings: 76.53m acres, 76.609m acres, (77.404m acres)
Source: ThomsonReuters poll
Other believe in a "late surge in corn seeding", as high prices earlier in June encouraged farmers to plant well beyond ideal sowing windows, Mr Hannagan said.
Benson Quinn Commodities said: "Due to the timing of the survey used for the report, the acreage estimates will likely be disputed by many in the trade."
Indeed, it is likely that the USDA will have undertaken a mid-month snap survey to update its June 1 number - or will order a follow-up report to be released in August, as it has done previously – Jerry Gidel at North America Risk Management Services said.
And even if the sowing number does prove to have been updated, that may not help too much in narrowing down what the eventual crop will be.
"Ultimately, it is the acres harvested that count, and who knows what that will be after so many acres were flooded out," he said, a reference to the swollen US rivers which have inundated huge areas.

More Pain Ahead

We passed the Greek Vote. Great news, but is the future all bright now? The Greek quick fix, is just a short term solution, so the country can survive and pay interest on it’s debt, for some months to come. The Greek mess, both Economics and Politics, is not solved at all. The total lack of growth, and the monstrous debt of Greece, will ultimately force the country to default on it’s debt. Expect some lucrative bargains in this autumn’s fire sale.

With the SPX reaching our short term target, 1305/1310, we expect a pause in this 4 day rally we have seen. As thetrader argued last week, Spx rally squeezes out the last bears? and Charts That Matter, we had reached good support levels in the markets, and “had” to bounce, especially with the Dumb Money Indicator showing a too pessimistic bias in the market.

Don’t forget though, Greece is not our biggest problem…..

The chart below shows OECD calculations of what it would take governments to reduce gross debt to 60% of GDP by 2026. This is around the level considered healthy and is also the ratio set by the widely ignored Maastricht agreement, which is meant to govern debt in the European Union. It is not pretty.

Small Companies Feel the Pain in China

By Michael Pettis

Much of last week’s newsletter was on the data that was released on inflation, new loans, investment, etc. One thing worth noting in the current environment is that small and medium enterprises (SMEs) are hurting, and last week’s minimum reserve hike – which came out the same day as the CPI number – will undoubtedly make things worse since any withdrawal of credit is unlikely to affect the top customers (SOEs and local governments) and will fall disproportionately on marginal borrowers.

In early May I wrote that the very uneven process of rebalancing in China was likely to have adverse consequences on the SME sector.

Rebalancing in the context of China means, for the most part, a significant increase in the consumption share of GDP from its astonishingly low level of 35% in 2009 (and perhaps lower last year). As regular readers know, I do not believe that China’s high savings and low consumption rates are a function of any remarkable preference on the part of Chinese households for savings over consumption.

They are simply the automatic consequence of a system in which increases in GDP growth are subsidized by transfers from the household sector, which effectively constrains the relative growth of household income and, with it, household consumption. In that case the only way for China to rebalance would be for Chinese household income to grow faster than GDP.

This requires three things above all. It requires that wages grow faster than productivity, that the currency appreciates, and that real interest rates rise. This does not seem to be happening in China, as I discussed in a blog entry last month. Wages have been rising quickly in the past year, but the currency is barely appreciating in real terms against the dollar (and is probably depreciating on a trade weighted basis), and of course real interest rates are declining sharply.

In the aggregate the impact on the growth of the household income share of GDP is probably negative, at least if the World Bank is correct in saying that consumption growth has been actually declining since early last year (and as Tuesday’s retail sales data seem to confirm). But this uneven rebalancing has another impact, I argued. If wages are rising and the cost of capital is declining, we should be seeing a shift internally in favor of capital-intensive industries, the SOE sector, for example, and away from labor-intensive industries, which includes SMEs for the most part.

I had anecdotal evidence corroborating the theory. Since last year several of my students who come from manufacturing families had told me that their parents were finding it increasingly difficult to retain workers and were getting squeezed out of business. Two months ago my central-bank-seminar student Huang Haidong, who comes form a prominent Wenzhou family (Wenzhou is often considered the cradle of the SME industry in China), sent me an email saying that according to his research a very large number of Wenzhou SMEs were facing bankruptcy.

Wages and Capital

The evidence has since become more than just anecdotal. Last week I saw the following article in the current issue of Caixing:

China’s small- and medium-sized enterprises are looking at an increasingly difficult business environment amid financing difficulties and rising production and labor costs, the Ministry of Industry and Information Technology (MIIT) said in a report released on June 2.

To rein in excess liquidity, the central government has tightened its monetary policy and raised interest rates twice so far this year, but the measures also add to the difficulty for SMEs to obtain bank lending and have driven up financing costs, according to the report, which was jointly conducted by MIIT and the Chinese Academy of Social Sciences.

…The official Xinhua News Agency reported on June 2 that three “relatively big” private companies went bankrupt in Wenzhou of Zhejiang Province. Wenzhou is known as one of the largest centers of private enterprise growth in China. But a local official responded by saying they are isolated cases.
The article argued that high wages and rising borrowing costs are the key challenges facing SMEs. The latter may seem surprising given what I said about the declining real cost of capital, but remember that SMEs get little of their financing from the banking sector and have to pay very high borrowing costs for off-balance sheet and informal lending. As cheap capital has been sucked up by SOEs, real estate developers (those who can access bank lending), infrastructure investors and local and municipal governments, little has been left for less-favored entities and the result has been that their cost of capital has risen even as wages have too.

The point was picked up Friday in a very interesting article in the Financial Times. According to the article:

Small Chinese businesses are feeling the effects the government’s monetary tightening and face a cash squeeze that may be worse than during the global financial crisis in 2008, according to an official warning.

From tile manufacturers in Shanghai to shoe factories near Hong Kong, smaller businesses have driven Chinese growth over the past two decades, accounting for about 60 per cent of gross domestic product. So, a sharp slowdown in their activity would weigh heavily on the Chinese, and by extension, world economy.
The article goes on the make comparisons with the last squeeze of SMEs:

In late 2008, during the financial crisis, a collapse in global export markets and aggressive monetary tightening drove the Chinese economy to a near standstill. Beijing estimated that 20m migrant workers, many of whom were employed by the same kinds of small firms that are now short on cash, lost their jobs.

Dong Tao, a Credit Suisse economist, said China could now face trouble again, as companies delay bill payments and factory owners abscond without paying wages.

“If this continues, and these smaller companies start to fail in large numbers, then the economy will slow more than the market anticipated and the government bargained for,” he said.
Most of the focus in the press has been on the effect of rising borrowing costs for SMEs, although many of these are not heavily leveraged and in my discussions with friends who own, or who are related to owners of, SMEs, wages has been at least as much of a problem. But the attempts by the PBoC to tighten credit (relative to the enormous demand from credit from infrastructure and real estate developers and local governments) have certainly made conditions tougher for those SMEs who do rely on credit. The FT article goes on to say:

The cash crunch has come despite repeated prodding by the government to help private businesses. Chinese banks have traditionally preferred to lend to state-owned groups, judging that they pose negligible credit risk due to their government backing.

This bias is especially pronounced when the government restricts credit, as it has done over the past year. China has raised benchmark lending rates by 100 basis points to 6.31 per cent, but small businesses have seen much steeper increases.

Monthly lending rates at credit unions and informal lending institutions in the entrepreneurial cities of Wenzhou and Xiamen have reached 5 per cent in the past few weeks, up from 1.5 per cent just nine months ago, according to Credit Suisse.

Earlier this week, in an effort to boost access credit, the Chinese banking regulator said it would ease tough capital rules on bank lending to smaller businesses. In one measure, loans of less than Rmb5m ($770,000) need not be counted towards banks’ loan-to-deposit ratios.
Credit Quantity

This last point is interesting. Last week a CBRC circular went out that suggested a different way of accounting for small loans to SMEs which should, in principle, increase banking incentives to fund SMEs by reducing the capital requirement.

This seems to me a very complicated way of alleviating the cash crunch among SMEs. The proper way would be to reduce the demand for credit from real estate developers and infrastructure investors, but of course Beijing loves its administrative measures. Anyway the only efficient way of reducing demand from real estate developers and infrastructure investors would be to have them pay a fair cost for their capital – and remove the implicit credit support. This however would threaten to throw a huge number of essentially insolvent projects and companies into bankruptcy, so the preferred solution is to keep the cost of capital low and to keep their borrowings growing.

Will the attempt to on increase incentives to lend to SMEs work? I am not sure. It would depend on too many factors and squeezing out liquidity through hikes in the minimum reserve ratio will almost certainly fall disproportionately on SMEs. Of course if the regulators simply imposed a formal or informal quota on the banks (e.g. by the end of the year a minimum of X% of your loan portfolio must be in the form of small loans to SMEs),

I suspect that they will comply, but then we run into the automobile loans problem of a few years ago. When the regulators demanded that Chinese banks increase the number of auto loans, they duly did, and within a very short time a remarkable share of those loans went non-performing. It turns out that it is very easy to meet aggressive loan target numbers, but it is a lot less easy to make good loans.

Moreover in China credit is not controlled through price, but rather through quantity. In other words we don’t use the cost of capital to decide the quantity of credit since the cost of capital is artificially set at extremely low levels – at which level the demand for loans is almost infinite.

Instead we use loan quotas. This means that if banks lend materially more to SMEs either they will also be forced to lend less to other borrowers or they will have to allow credit growth to exceed whatever target they would have otherwise set. Already there is some concern about the flow of capital into low-income housing projects. Last week‘s Beijing-based Global Times had this article:

At least 40 percent of public housing projects may not start as scheduled this year, with the loan bottleneck resulting from monetary tightening policy mainly to blame for the delay, analysts said on Monday. Construction of affordable housing in cities nationwide is far behind schedule, according to data cited in a Xinhua report.

In Shanghai, only 25 percent of scheduled affordable housing projects had started by the end of May, Xinhua reported. In Jiangsu Province, work on about 30 percent of a total of 450,000 affordable housing projects had started, while in Zhejiang Province, work on about 61,600 affordable housing units, 33.2 percent of the total, was underway.

The government plans to build 10 million units of affordable housing this year as alternatives for homebuyers in cities where average property prices have almost doubled during the past two years. Under the plan, construction of all these affordable housing projects must begin by the end of October.

Hui Jianqiang, a senior analyst with the E-House R&D Institute, said work on at least 40 percent of affordable housing projects will not begin this year unless the central government links local officials’ performance to public housing construction. “Housing activity is anemic partly due to stricter approval procedures but mainly because of tight lending standards under current monetary tightening policy,” Hui said.
More lending to SME is undoubtedly a good thing, but if it is achieved by diverting loans from local governments, for example, it will come at the cost of lower growth and rising financial distress in the short term. And as we have seen in the past, short-term growth concerns always trump long-term sustainability issues.

Whatever the outcome I think we need to keep a close eye on the behavior of SMEs. They are by far the most efficient part of the Chinese economy and the only part creating real value. My experience in other developing countries suggest that SME owners tend to be the most sensitive to and aware of changes in risk, and if we start to see rising bankruptcies among SMEs, coupled with disinvestment and increasing capital outflows, that is almost always a very worrying sign. When SME owners start to worry, so should we.

MIT on Environmental Degradation

To turn to a completely different issue, lat week a friend sent me an interesting article that came out in one of the MIT magazines. According to MIT News:

A recent study released by the MIT Joint Program on the Science and Policy of Global Change quantifies the damage to the Chinese economy caused by a lack of air-quality control measures between 1975 and 2005. Not surprisingly, the MIT researchers found that air pollutants produced a substantial socio-economic cost to China over the past three decades.

…To observe how changes in pollutants, and their associated health impacts, have historically affected the Chinese economy, the MIT researchers modeled the number of cases of health incidences caused by air pollution — such as restricted-activity days, respiratory hospital admissions and asthma attacks, to name a few examples — given a pollution level and the number of people exposed. Then the model calculated the summed costs of these incidences — i.e., payments for health services and medicine, loss of labor and productivity from time off work, loss of leisure time needed for healing — to estimate the total change in available labor supply.

Similar studies conducted by the World Bank have found that air pollution in China caused damages equal to 4-5 percent of the Chinese GDP between 1995 and 2005. However, these estimates are based on static measurements that do not measure the cumulative, long-term impacts of health damages. The MIT study found a significantly higher level of damage, equaling 6-9 percent of the Chinese GDP. The dynamic, cumulative method used in the MIT study may be particularly applicable to developing countries that are experiencing rapid growth.
I mention this because I have often argued that Chinese GDP growth has been substantially overstated during much of the past thirty years. Part of the reason for the overstatement is that the future costs of environmental degradation should in principle be included as a deduction to current growth.

After all if environmental degradation reduces future economic output because of health problems, not to mention because destroying rivers, farm land, and so on is the economic equivalent of selling assets and calling the proceeds income, then the growth in economic value it generates today should be reduced by the destruction in economic value.

So What Is China’s Real GDP?

This is hard to do, of course, but it eventually gets accounted for in the form of lower growth in the future. If farmers produce less tomorrow because water is polluted, then future economic value added is lower. If workers spend additional money on health care tomorrow, this money is transferred from other, more productive spending.

This happens everywhere, of course, but I would argue that in many countries, where environmental degradation has been less and has occurred over a much longer period, it is already showing up in lower GDP growth today, so it probably results in a much lower overstatement of growth. In fact in rich countries where environmental degradation has slowed sharply, or even reversed, it may be causing GDP growth to be understated.

The other source of GDP overstatement in China is misallocated investment. One way of thinking about it is that if NPLs were correctly identified, the annual accumulation of the non-collectible portion of NPLs should be deducted from current GDP growth numbers to arrive at a more accurate estimate of GDP. After all growth “created” by wasting money is not really growth, and NPLs represent the amount of money that has been wasted.

In order correctly to identify NPLs we would need to include loans that might not technically be NPLs at current interest rates, but would be if interest rates were raised (by at least 400-600 basis points) to their “correct” level. Why? Because these loans are benefitting from the implicit annual debt forgiveness granted to them by household depositors – and the fact that they can pretend to be performing with the help of massive debt forgiveness should not change the fact that they are nonetheless un-repayable.

The combination of these two sources of GDP overstatement – uncounted environmental degradation and ignored NPLs – is pretty substantial. To show how substantial, assume that GDP has been overstated by anywhere from 2 to 4 percentage points over the past ten to fifteen years. This would imply that China’s GDP today is actually about 55% to 85% of its stated size – or to put it another way, that China’s economy is anywhere from 15% to 45% smaller than we think.

This is a pretty big haircut. I have no idea what the correct deduction is (none of my numbers seem especially implausible), but even very rough ballpark numbers suggest that China’s GDP may be sharply overstated. At the very least they also suggest that all those breathless predictions about when China will have the world’s largest GDP may turn out to be as simple-minded as the same predictions made about the USSR in the 1960s or, perhaps a little more plausibly, about Japan in the 1980s.

And for the same reasons: in each case we start from the assumption that the country’s real GDP, inflated as it is by misallocated environmental costs and overstated investment numbers, is much larger than it really is. Much, much larger.

By the way notice that if we discount GDP by 20-40%, the astonishingly low household consumption share of China’s GDP – 35% in 2009 – rises to 44-59% – still very low by global standards, but not quite as surreal. Could it be that much of China’s GDP really is overstated, and with it total savings too?

About The Author - Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University. He received an MBA in Finance, and an MIA in Development Economics, both from Columbia University. Michael's blog - china financial markets.

Too Big to Fail: Inside America’s Economic Downfall Credit Loan


Who Started It?

TooBigToFail Dan 062411 FINAL economy

Possible Bottom as Key Sectors Breaking Out

By Chris Vermeulen

The past month we have seen stocks pick up momentum to the down side after an already very weak month prior (May – Sell in May and go away). This second wave of high volume selling in June was enough to spook the masses out of the market shifting the sentiment from bullish to bearish. But just recently we are starting to see big money accumulate stocks down at these oversold prices, which has me thinking we just may be headed higher sooner than later.

During market reversals we typically see the more sensitive stocks move first, which are the small cap and tech stocks. Then a couple days later we see the brand name stocks (big cap, energy and banking) follow. It’s these large sectors which provide the power in trends.

Taking a look at the graph below you can see on the far right both tech and small caps are leading the market higher and as of today the power sectors (energy and financials) started to move higher also. So if things play out I expect the SP500 which is a basket of the 500 largest companies to follow the small caps higher over the next 1-3 weeks. My trading buddy David Banister over at focuses mainly on small cap stock trading combining crowd psychology and fundamental analysis. his focus is finding stocks ready to explode during bull market advances which may just be starting…

If we take a look at the charts to see how each of these sectors have been performing you will notice that the small caps (IWM) and tech stocks (XLK) broke out one day before the energy and financials did. This is very typical to see and it also works for playing gold. I have seen gold stocks lead the price of gold bullion up to 7 days before gold bullion started to move. It’s these little golden nuggets of info which can not only save you money but make you even more when put to work.

Mid-Week Trading Conclusion:
In short, I feel the market has been forming a base for almost 3 weeks. Just last week we saw the big sectors (financials and energy) reach their key support levels from several months back and that should trigger a sizable bounce and with any luck the start of another leg higher in the market.

Barclays: Brazilian soybean exports may come down

by Commodity Online

Brazil is the world’s second largest producer of soybeans after the US, and its production and exports account for close to 30% of the global market. Domestic consumption of soy products has been on a strong growth trend over the past decade sparked by rising per capita meat consumption and biodiesel production. Total meat consumption per capita (poultry, red meat and swine) has increased 23% over the past decade, reaching 98 kg per capita by 2010.

This level, however, remains below that typical of advanced economies, suggesting further scope for healthy increases as the country undergoes a period of economic expansion. Meanwhile, biodiesel production has also expanded rapidly over the past decade, increasing from 13kb/d in 2005 to 41kb/d by 2010, with three quarters of biodiesel in 2010 coming from soybean oil.

The launch of the Biodiesel Production and Use Program (PNPB) at the end of 2004 helped spearhead the growth. With Brazil a net diesel importer, environmental concerns on the rise, and the expansion of the biodiesel industry helping fulfill important social imperatives as well, biodiesel production is well positioned to keep expanding robustly over the next decade.

Overall, we expect soybean meal and Soybean Oil demand to increase at rates similar to those recorded during the past decade throughout 2020.

By contrast, we think soybean production will struggle to match the extraordinary rate of growth of the past twenty years. During the 1990s, fast expansion in soybean output (circa 9% p.a.) was primarily driven by significant technical improvements and the associated steep rise in yields. Between 1990 and 2000 productivity jumped by almost 40%, while expansion of harvested area was a more modest 19%.

These trends changed abruptly during the past decade, however, when yields flattened sharply and the ongoing production boom became primarily a function of a jump in planted acreage. Between 2000 and 2009 soybean harvested land rose by an extraordinary 60%, climbing from 13.6mn Ha in 2000 to 21.7mn Ha in 2009.

Importantly, the expansion was not uniformly spread across regions. While in 1997 the South region was responsible for almost 50% of Brazil’s total area of soybeans, by 2005 the Center- West region of Mato Grosso had surpassed the South as a key soy producing area. Increased land use in the boundaries of the Amazon has heightened public focus over the sustainability of the expansion and its environmental implications.

In our view, these trends suggest the potential for a slower pace of expansion in Brazil’s soy output over the medium term. The cultivated soy area is unlikely to keep expanding at recent rates, due to both environmental reasons and rising production costs.

This implies that in the absence of a quick resumption in productivity gains, soy production will follow a gentler path over the next decade. Long-term estimates vary sharply. A recent paper by Masuda and Goldsmith from the Department of Agriculture from the University of Illinois, pegs the rate of growth in Brazil’s soy production over the next decade at a low 2.7% (compared with the 6.6% recorded between 2000 and 2010). Using our demand assumptions presented earlier, such a low-growth scenario would basically cap soybean exports at current levels.

Other long-term estimates are more optimistic, with the USDA for example projecting a continued gradual increase in soybean exports through 2020. Yet, even the USDA projections envision a significant slowdown in the pace of export growth, from a cumulative 108% during the past decade to 53% over the next. Overall the data above suggest the risk for an increasing share of soybean output to be crushed for domestic use and thus for a lower proportion of the crop to be available for exports.

Corn Stocks Report Has Rough History

Get ready for a big move in corn prices. USDA's June Grain Stocks report comes out tomorrow morning, and it tends to swing the market. 

The past six releases of the Grain Stocks report have provided the biggest shocks to the grain market of any USDA reports, analyst Randy Mittelstaedt told a CME Group discussion this week.
July corn futures made limit moves the day of the June stocks report in each of the past three years, said Mittelstaedt, research director at the independent brokerage firm R.J. O'Brien in Chicago.
USDA is scheduled to release both its quarterly Grain Stocks and annual Acreage reports June 30, providing the department's best estimates of June 1 grain and soybean supplies and planted acreage of major crops.
Analysts' estimates vary considerably, but on average they expect USDA to report June 1 corn stocks just over 3.3 billion bushels, down for 4.31 billion last year. They also expect modest declines in stocks of soybeans, to 590 million bushels, and wheat, to 825 million bushels.
Corn planting estimates range from 89.5 million to 91.5 million acres and average nearly 90.8 million, compared with the March Prospective Plantings estimate of 92.178 million acres. Analysts expect soybean plantings on about 76.5 million acres, little changed from Prospective Plantings at 76.6 million, and all wheat acreage at 56.6 million, off from the March projection of 58 million acres.
Corn stocks key
Corn numbers will be the center of attention because of the tight stocks, high prices, past surprises in stocks data, long planting delays, and flood damage. Soybean stocks are more predictable thanks to reliable crush data, and trade expectations for acreage historically have been close to official estimates.
For corn stocks, average pre-report trade estimates have missed the USDA number by an average of 217 million bushels in recent reports, Mittelstaedt said. In each of the past three years, the June stocks report sparked a limit move in July and December futures, and the day's move usually set the tone for market direction in the following week and month.
Even ahead of the report, “The volatility of these markets is absolutely phenomenal these days,” said Mittelstaedt. In 2005-06, the average daily range for corn prices was 2 to 4 cents. “In the past four months it's been 18 to 20 cents daily range, high to low,” he said.
Focus on weather
Big as the stocks report is for the market, weather will be even more critical.
“For the next six weeks, the main focus is going to be on the weather here in the United States and what it may mean for yield potential and crop potential,” said Mittelstaedt.
About 17 million acres of corn went into the ground after the typical planting time. Pollination on late plantings will be pushed into a normally hotter time of summer. If the crop doesn't hit hot weather, it will still face added risks of damage from early frost.
“We've come out of the cold phase of La Nina,” said Larry Heitkemper, vice president of weather services at MDA EarthSat Cropcast Ag Services. “The models show neutral conditions will probably dominate this summer.”
However, neutral conditions don't necessarily translate to a summer of great growing conditions.
“We are concerned a little bit that dryness will build across the western belt in mid July and reduce moisture for corn and soybeans,” he said in the CME Group discussion. However, he expects heat moving up into the Corn Belt during July likely will last only few days at a time. He expects additional dryness in northern areas during July, while the southern Delta likely will get moist, tropical weather. “The big heat source in the South will not go away by August,” he said.
Bigger risks for the Corn Belt may arrive in September, said Heitkemper.
“We end up with increased chances of frost in the northern Plains and northwest Midwest,” he said. That prospect is “something they do not need right now with slowness in development and planting.”
If summer weather takes a different course, said Heitkemper, the next most likely prospect would be cooler, wetter weather in the eastern half of the country, including all of Iowa. That, he said, would “open the eastern United States to more reliable rainfall but mess up the growing degree days.”
Acreage impact overrated
Mittelstaedt said USDA's Acreage report gets more attention than it deserves.
“It gets a lot of media, but what it all boils down to is the yield will be the determining factor on balance sheets,” he said.
In the most recent two years of very wet springs – 2008 and 2002 – USDA reported corn acreage substantially higher than trade estimates.
Given average yields, a change of 1 million acres equals a change of about 150 million bushels in the year's crop. But in the past five years, the U.S. average yield has covered a range of 15.5 bu. per acre. The impact of only 2 bu. per acre is 180 million bushels of corn.
“So a very narrow yield change can outweigh or overshadow acreage loss very quickly,” said Mittelstaedt. “Acreage is a very small impact on the overall production situation. That is why weather is so critical in the next six to eight weeks.”

Asset when Fibonacci ...

by Kimble Charting Solutions

Major Index Correction Retracement Levels

by Bespoke Investment Group

The Nasdaq and Russell 2000 became the first two major US indices to retrace 50% of their declines from the May highs to the June lows. Below we highlight the various levels each index has to reach to surpass some of the more widely followed retracement levels. Green shading indicates levels which have already been surpassed.

See the original article >>

A Short Covering Rally?

by Bespoke Investment Group

We've been hearing from a lot of talking heads over the past few days that this has been nothing but a short covering rally. But has it really been? We broke the S&P 500 into deciles (10 group with 50 stocks each) based on a stock's short interest as a percentage of float and then calculated the average performance of the stocks in each decile over the last three days. Below is a chart highlighting the average performance of the stocks in each decile. 

The average S&P 500 stock is up 2.96% over the last three days. As shown below, the 50 stocks in the S&P 500 that are the most heavily shorted are up an average of 3.1% over this time period, while the 50 stocks that are the least heavily shorted are up an average of 2.8%. So while the most heavily shorted stocks have outperformed the least heavily shorted stocks, the difference has been minimal. The performance across deciles has been very scattered, with deciles 4, 6, and 8 doing the best, and deciles 2, 5 and 7 doing the worst. This has hardly been a short covering rally.

So which stock characteristics have been driving the market higher this week? Over at Bespoke Premium, we just released a B.I.G. Tips report where we ran our decile analysis on a number of stock characteristics including market cap, P/E ratios, dividend yield, institutional ownership, revenue exposure, analyst ratings, and more. Some of these characteristics have indeed impacted performance this week, while some (like short interest) have not. Bespoke Premium members can view the report here. If you're not a Premium member and would like to become one, subscribe today!

Why Europe Can’t Afford a Greek Haircut

By Global Macro Monitor

If a picture is worth a thousand words, the following chart from the IMF encapsulates all the analysis one needs to understand why Mr. Trichet and the rest of the Eurozone bureaucracy are so adamant about not letting Greece restructure its debt. The leverage ratios of some of Europe’s country banking systems are nothing less than stunning. At the end of the day, it was Lehman’s leverage coupled with its overexposure to a declining asset class that brought it down. Once the markets sniffed this Lehman’s liquidity was cut off and rest is history.

A Greek sovereign restructuring followed by, say Ireland and Portugal, and market speculation that Spain and Italy may be next, could bring down many of Europe’s thinly capitalized country banking systems. Fed Chairman, Ben Bernanke, believes the Great Depression was not caused by 1929 stock market crash, but by the the 1931 failure of Austria’s Creditanstalt. In a 2009 conversation with the Council of the Foreign Relations, the Chairman reflects,
I learned basically two lessons from my studies of the depression. The first is that monetary policy needs to be supportive, not contractionary…The second lesson is that — to reiterate what I said before, is that when the financial system breaks down, becomes highly unstable, then that has very severe adverse effects on the economy… The Federal Reserve did not intervene to stop the failure of about a third of all the banks in the United States. Globally, there were massive bank failures. I think perhaps the most critical, in May of 1931, the Creditanstalt, which was one of the largest banks in Europe, failed, which generated a wave of financial crisis around the world. Up till early 1931, arguably the 1929 downturn was just a ordinary — severe but ordinary downturn. It was the financial crises and the collapse of banks and other institutions in late 1930 and early 1931 that made the Great Depression great.
Does anyone hear the rhyme of history? These European banks can either raise new capital or shrink their balance sheets by reducing loans, for example, which, if done in mass, creates a credit crunch and an adverse impact on economic growth Hopefully, European policymakers are twisting the arms of these banks to reserve every single Euro of bailout money against loan losses as their Greek, Irish, and Portuguese sovereign bonds mature. This will require taking a hit to profits and pushback from the banks. Then, let the haircuts begin. That is, if the European political structure can endure for that long.

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Exclusive: U.S. small business borrowing surges

(Reuters) - Borrowing by small U.S. businesses rose at a record pace in May, data released by PayNet Inc on Thursday showed, a sign that economic growth is poised to pick up in coming months.

The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, rose 26 percent in May from a year earlier, PayNet said.

The index is now at its highest since July 2008, two months before the collapse of Lehman Brothers and the near derailment of the world financial system.

Borrowing by small businesses is seen as a harbinger for the broader economy because they account for as much as 80 percent of new hiring. The loans PayNet tracks are typically used to buy or update plants and equipment.

The Federal Reserve has kept rates near zero since December 2008 to try to pull the economy from the worst downturn since the 1930s.

Last week Fed officials reiterated their promise to keep rates low for an extended period, but predicted a slower-than-expected Spring would give way to faster growth later this year.

Dallas Fed President Richard Fisher on Tuesday said he expects 4 percent growth in the second half, more than twice the 1.9 percent pace in the first quarter.

Thursday's data on small business borrowing bears up that optimistic view. Changes in the index typically signal developments in the overall economy two to five months in advance.

"If small businesses are taking these kind of chances, taking risks, making long term investments, they are seeing some long-term opportunities on the horizon," PayNet founder Bill Phelan said in an interview. "That's got to be a big positive sign for the economy."

Separate data also released on Thursday showed small business loan defaults at their lowest in five years, tying records set in April and May 2006.

Accounts in moderate delinquency, or those behind by 30 days or more, fell in May to 1.95 percent from 2.06 percent in April, PayNet said on Thursday.

Accounts 90 days or more behind in payment, or in severe delinquency, fell to 0.59 percent in May from 0.63 percent in April.

Banks with improving asset quality outnumbered banks with deteriorating asset quality by four to one, Phelan said.

Accounts behind 180 days or more, or in default and unlikely to ever get paid, fell to 0.75 percent of total receivables in May, from 0.77 percent in April, according to PayNet, which provides risk-management tools to the commercial lending industry.

Chinese Homebuyers Throw a Life Raft to the U.S. Housing Market

By Jason Simpkins

From New York to Honolulu, Chinese homebuyers are swooping in to help salvage the U.S. housing market.

Indeed, California, Florida, New York, and even Hawaii have seen a marked up-tick in home sales to Chinese buyers who are exporting their country's real estate boom to the United States, according to Bloomberg News.

Increased regulation at home and education and investment opportunities are chief among the reasons real estate in the United States - as well as the United Kingdom, Australia, and Canada - has piqued Chinese interest.

According to a survey by the National Association of Realtors, Chinese buyers accounted for 9% of foreign home purchases in the 12 months ended in March of both 2010 and 2011. That's up from 5% in 2009.

"The purchase restrictions in China drove them overseas, while they look for investments to counter the inflation," Mo Tianquan, founder and chairman of Beijing-based SouFun Holdings Ltd. - a company that runs China's biggest real estate Website and organizes buying excursions abroad - told Bloomberg. "Some of them will buy homes considering better education opportunities for their kids, while others look for immigration options."

Take Cupertino, Calif., for example. Sales of existing single-family homes in Cupertino rose 21% in the first quarter from a year earlier, largely due to an influx of Chinese shoppers who are making huge cash purchases.

"We're seeing a huge number of all-cash transactions, and most of those are from mainland China," Nina Yamaguchi, managing broker at Coldwell Banker's residential office in Cupertino, told Bloomberg. "The thing that draws the Asians here is the schools are so highly touted. Cupertino is certainly not beautiful. It doesn't have wonderful architecture." 

Of course, education isn't the only reason many Chinese people are seeking abodes abroad. They're mainly concerned with the high prices and increasingly strict regulations they're finding at home, and looking for better investment opportunities.

Bailing on the Bubble

China's housing market certainly seems to have gotten ahead of itself.

Goldman Sachs Group Inc. (NYSE: GS) said in a recent report that housing price increases have outpaced wage hikes by 30% in Shanghai and 80% in Beijing in recent years.

The value of homes sold in the first quarter of 2011 increased to $132 billion (860.7 billion yuan), driving overall property transactions 27% higher to $157 billion(1.02 trillion yuan), according to the Statistics Bureau.

Overall investment in China's real estate market rose 34% to $136.4 billion (885 billion yuan) in the first quarter.

Furthermore, UBS AG (NYSE: UBS) economist Jonathan Anderson estimates that property construction alone accounted for 13% of gross domestic product (GDP) in 2010, twice the share of the 1990s. That means China's economy has grown increasingly vulnerable to a real estate bubble.

As a result, China's government over the past year has sought to cool the housing market by increasing regulation.

In January, Beijing raised the minimum down payment for mortgages on second homes to 60% from 50%. The government has also increased down payment requirements on homes that cost more than $770,000 (HK$6 million) and enacted China's first property tax.

However, the measures have had only a modest effect. Annual property inflation eased to of 4.2% in May - its slowest pace this year, but down only slightly from April's 4.3%.

And the value of home sales climbed 16% in the January-May period, as property investment rose 35%.

An Investment Opportunity

Higher prices and tougher regulations at home may be the biggest reason many Chinese homebuyers have sought shelter overseas, but it's not the only reason. There's also an investment aspect.

"The majority of these buyers are not buying trophy properties, but cash flow as they understand fundamentals," Andrew Waite, publisher of Personal Real Estate Investor Magazine. "They are buying managed turn key rental properties. One of my clients is selling about 25 homes a month to Asian buyers at an average price point of $60,000 with positive cash flow. They understand that rental real estate offers one of the few inflation indexed assets available with inflation-indexed income."

Indeed, one of the most popular properties among Chinese buyers is the Trump SoHo in New York. The Trump SoHo is a condominium hotel where the apartments are rented out as hotel rooms for more than half the year and owners share the revenue.

"Chinese love the Trump," Asher Alcobi, president and co-founder of Peter Ashe Real Estate, told Bloomberg. "Anything that has the Trump name is good."

Given the huge mark-up in Chinese real estate, even luxury properties in New York look like a bargain.

"From a price perspective, New York is actually cheap," Wei Min Tan, founder of Castle Avenue Partners, a group within New York's Rutenberg Realty that assists buyers from overseas, told Bloomberg. "Hong Kong is 50% more expensive than Manhattan on a square-foot basis."

Other pricey assets in Las Vegas and Honolulu have garnered a lot of attention as well, helping to stabilize home prices across the country.

And that help is desperately needed.

Sales of previously owned U.S. homes fell 3.8% month-over-month in May to an annual rate of 4.81 million units - the lowest level since November. Home resales were down 15.3% in the 12 months through May.

Meanwhile, the median price for a home fell 4.6% year-over-year to $166,500. That compared with a 6.6% decline in April.

Three Ways to Slash Your Risk Despite the Negative Investing Outlook

By Keith Fitz-Gerald

With everything from the Greek debt crisis to worries about China's growth roiling the markets these days, the investing outlook seems to get shakier by the minute. And that means the same old tricks won't work any longer.

It's not going to be enough, for example, to simply pick stocks or spread your risk among large-cap, small-cap and a blend of domestic and international stocks and bonds thrown in for good measure.

Those things don't work when everything goes down at the same time - a painful reality that investors experienced during the financial crises of 2000-2003 and 2007-2009.

If we've all learned one thing from those crises, it's that stability matters when it comes to producing higher, more consistent returns - especially in a world in which the investing outlook is clouded by uncertainty.

But there are three strategies that can bolster your personal investing outlook and help you even out the rough sailing I see ahead.

Let me show you what I mean.

Three Strategies You Can't Ignore

The three strategies I'm talking about represent a break with the so-called "tried-and-true" approaches that were once in every investor's playbook, but don't seem to work so well in today's markets. So I'm recommending that you replace those old tactics with these three new ones, which will have you:

  • Build your own "hedge fund."
  • Adopt a "long/short" bond strategy.
  • And consider a solid "alternative" to alternative investments.
Let's take a look at each one - starting with the personal hedge fund.
Creating your own hedge fund is actually much simpler than you'd think. To illustrate, let's take a look at how a portfolio that was evenly apportioned in large caps, small caps, growth, value, domestic and international stocks (in other words, a portfolio allocation that's fairly standard fare among investors) would have performed from 2007 to 2009, a period in which the Standard & Poor's 500 Index declined "only" 50%, according to Kiplinger's Personal Finance Magazine.

This portfolio - diversified in a way that's supposed to diffuse risk - would actually have plunged a full 57% during that same stretch.

The message is clear. In a world in which entire countries are leveraged to the hilt, in which out-of-control financial institutions are calling the shots, and in which clueless regulators are playing a constant game of catch-up, that diversification strategy is no safe harbor.

What you really need to do is seek out investments that move in opposite directions when the investing outlook turns negative.

Hedge funds do this all the time by combining investments that are in favor with those that aren't - pairing those things they like against those things they don't in what's called a classic "long-short" strategy. This helps them generate higher, more-consistent profits - regardless of whether the markets want to run higher or fall lower. And it's a strategy that doesn't force you to try and "time" the markets, or take excessive risk.
You can do the same thing using two investments that are among my personal favorites:

  • The Vanguard Wellington (VWELX).
  • And the Rydex Inverse S&P 500 Strategy Fund (RYURX).
Vanguard Wellington is one of the world's best-run mutual funds and has a remarkable track record of stability, solid returns and high income that dates back to 1929 - making it one of the longest-established mutual funds in existence today. At a time in which exchange-traded funds (ETFs) are all the rage, many folks scoff at old-fashioned mutual funds. But with an expense ratio of only 0.30%, the Vanguard Wellington is one of a very few funds I believe to be worth it.

The Rydex Inverse S&P 500 Fund is one of a specialized class of so-called "inverse" investments, and is truly "negatively correlated" to the markets, which means that it rises when the S&P 500 falls. Its expense ratio is 1.44%.

For the sake of discussion, let's say you put $50,000 in each on Jan. 1, 2000, and then let the funds ride undisturbed until June 24 of this year. Combined, you'd have an expense ratio of 1.74%.

But even more important, you'd have a 4.18% return over the last 11 years - compared to the S&P 500, which suffered a 12% decline (see accompanying chart).

In other words, had you split your money between these two negatively correlated choices on Jan. 1, 2000 - and just walked away - you'd have trounced the S&P 500 by nearly 16.2% over the last 11 years. That's a much simpler - and more effective - strategy than anything most folks were employing at the time, which was to diversify their money across the key asset classes and then just hold on.

In fact, this "personal-hedge-fund" (long/short) strategy would even have outpaced "indexing." Indexing was another investing strategy that was in vogue a decade ago, but has lost a lot of its following due to the currently uncertain investing outlook.

The classic "long/short" strategy as I've described it is a great choice for investors who are really worried about what may happen next. And it doesn't just work for stocks - you can use it for bonds, too.

In fact, let me show you how.

The Investing Outlook for Fixed Income

Many investors, particularly those who are closer to their sunset years, are loath to get back into the stock market in any way, shape or form - especially given the current investing outlook. It doesn't help that many of these same investors saw their stock-market holdings get "halved" twice in the past 10 years.

So these folks have turned to bonds and the income they provide as a means of sustaining themselves.

The problem with this strategy is that our nation is literally drowning in debt and the bond market is every bit as suspect as the stock market - and maybe even more so, given that Team Bernanke at the U.S. Federal Reserve seems hell-bent on keeping interest rates artificially low as part of its well-intentioned but badly flawed "all gain - no pain" bailout plan.

The good news is that bond investors, like their stock-investing brethren, have alternatives. That's especially true if they want to use a bond-only variation on the classic "long/short" strategy we've just discussed.

My favorite choice here is the Forward Long/Short Credit Analysis Fund (FLSRX), which takes both long and short positions in municipal bonds, corporate bonds and U.S. Treasuries. It can also invest in interest-rate swaps, credit default swaps, futures, options and even sovereign debt.

It's net annual expense ratio is a high 3.22%, according to YahooFinance, but the 4.41% yield and beta of 0.09 help make up for that when it comes to stability.

In fact, since its inception in 2008, the fund has demonstrated very little, if any, correlation with the bond markets - which is exactly what we want and is just why I'm suggesting it.

The Forward Long/Short Credit Analysis Fund is best-suited to investors who want to hold bonds, or must hold bonds, but who are concerned by the risks associated with potential bond defaults, or the rising interest rates and inflation ahead.

One Last "Alternative"

With one eye on the recovery and one eye on the monster that may surface from under their beds, investors have gotten a lot more interested in alternative investments.

That's good because most investors have historically ignored alternative investments. But it's also bad because investors often have an overly narrow view of what an alternative investment can be. Too many investors view commodities as the only type of alternative investment, and commodities can be every bit as volatile as the overall markets - and sometimes even more so.

That's why I think making a slight refinement to include an "alternative alternative" makes sense.

Take the Calamos Market Neutral Income A (CVSRX), for instance. As the name implies, the fund's goal is to provide a neutral approach to markets that is considerably less volatile than traditional asset-class-based alternative choices. Instead, the fund diversifies itself by investment methods that include covered calls and convertible arbitrage.

This fund offers the best of both worlds for investors interested in bond-like income and steadier returns.

The beta is an ultra-low 0.39 versus the broader market (which carries a beta of 1.0), so I'd say the fund's strategy is paying off. The fees are 1.39% a year, but it seems to me the Calamos investors are definitely getting what they're paying for.

There is a bit of a wrinkle with this investment, however: If you're interested, you're going to have to put the Calamos fund on your "wish list." The fund closed to new investors on Jan. 28, and remains so, while management waits for the investing outlook to change - for interest rates to rise and U.S. companies to resume issuing new convertible debt in earnest.

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