Sunday, January 30, 2011

Fed Days Become Non-Event Days

Weekend Reading from Bespoke »

While it barely made news, the Federal Open Market Committee (FOMC) last week held the first of its eight regularly scheduled meetings for the year.  On Wednesday -- the day that the Fed released its policy statement from the meeting -- the S&P 500 gained 0.42%. 
For those that have been following the markets for longer than a year or so, a change of 0.42% on a Fed Day seems pretty small.  Up until just recently, the market would move around like a jumping bean on Fed Days as investors reacted to policy changes and tried to interpret what Ben Bernanke and his predecessor Alan Greenspan had just done.  But it has now been 538 days since the Fed last changed the Fed Funds Rate, and the inactivity has become so telegraphed that traders are hardly aware of when the next Fed Day is, nor do they care.
At some point this will change, but for now Fed Days have basically become non-event days.  To quantify this, we looked at the average absolute change of the S&P 500 on Fed Days over the last 10 Fed Days and calculated this going back to 1994 when the Fed started announcing policy changes immediately following their meetings.  During the back half of the 90s and the first half of the 2000s, the S&P 500 was averaging a change of +/-0.80% to 1.20% on Fed Days.  The peak 10-day volatility reading came in the thick of the financial crisis when the S&P averaged a +/- move of 2.36% over the last 10 Fed Days.  As shown below, the average +/- move over the last 10 Fed Days has been 0.40%.  This is a tick above the prior reading which was +/-0.37% and also the lowest reading ever. [..]

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by Cullen Roche

Friday’s surge in oil prices due to the turmoil in Egypt and other parts of the Middle East was a wake-up call to the market that the economic ramifications could be wide reaching.  The protests in Egypt represent the people’s cries for a more democratic nation.  This is obviously a long-term positive and could have a wide ranging impact on the future of Middle Eastern politics and government, however, in the near-term this has the potential to disrupt a very fragile global economy.
The primary risk comes thru the potential for higher oil prices.  There is no telling how long the turmoil in Egypt will last and whether or not it will spread to other regions.  The risk here is that the uprisings will disrupt oil production and shipment in the Middle East.  The WSJ elaborates:
“In the short term, the biggest global economic worry remains oil prices. Egypt itself isn’t a big energy producer. But significant shipments of oil and petroleum products pass through Egypt each day on their way from the Mideast to European and U.S. markets.
About a million barrels a day of crude and refined products are shipped northward on the Suez Canal, according to estimates from the U.S. Department of Energy. A separate pipeline linking the Red Sea and the Mediterranean carries another 1.1 million barrels a day. Together, that is roughly 2% of global oil production.
If oil shipments through Egypt were disrupted, European supply—and global prices—would be “affected tremendously,” said Dalton Garis, an associate professor in petroleum-market behavior at the Petroleum Institute, an energy-research center in Abu Dhabi.
So far, oil flowing through both conduits appears unhindered. But a dusk-to-dawn curfew across the country had shippers operating in the canal warning customers over the weekend of potential delays and difficulty in contacting shipping agents and pilots and arranging for spare parts. Including the oil flows, about 8% of the world’s seaborne trade passes through the canal, according to Egyptian government figures.
“The protests have no effect on the shipping traffic,” Abdul Ghani Mohamed Mahmoud, a spokesman for the Suez Canal Authority, said Sunday. “Everything is going as usual,” he added. Officials at Arab Petroleum Pipeline Co., which owns the Suez-Mediterranean pipeline, couldn’t be reached to comment. [..]

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Global aluminum consumption to double by 2020 - Alcoa

By Steel Guru

Mr Klaus Kleinfeld CEO of Alcoa Inc said that it expects demand for the metal to double by 2020 driven by consumption in Asia, Brazil and the Middle East. According to Mr Kleinfeld, we see places like China continuing to lead with growth of 21% last [..]

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Future scramble for rice supply


Fresh demand for rice in two big Asian countries is sending a worrying signal the region’s main staple may join a surge in prices for other grains, worsening Asia’s spiralling food inflation.Asian rice traders say aggressive buying in heavily populated Indonesia and Bangladesh could spread, pushing up world rice prices even though bumper crops in Thailand and Vietnam should mean ample supplies.
“This is only the start of the panic buying,” said Ker Chung Yang, commodities analyst at Singapore-based Phillip Futures, referring to Bangladesh’s recent tripling of its rice import target and Indonesia’s purchase this week of 820,000 tons of Thai rice, nearly five times the volume initially sought. “I expect we’ll have more countries coming in and buying grain.”
Still, analysts see little risk of a 2008-like food crisis, when rice prices rose above $1,000 a ton, double their current level. Vietnam’s rising supply and lower imports from the Philippines, the world’s top importer last year, could mean rice continues to defy a broader trend of fast-rising global prices for wheat, soybeans and other foods.
Thailand’s benchmark 100 percent B grade white rice was offered at $540 per ton on Friday, unchanged so far this year after falling 13 percent last year. In comparison US wheat and corn futures have risen by more than half since the start of last year. A sustained rise in the price of rice, a staple in the diets of nearly half the world’s population, would squeeze the budgets of millions of Asians living near the poverty line, raising the risk of unrest in a reprise of the 2008 food security crisis.
The aggressive purchase by Indonesia seems aimed more at bringing down 20-month high inflation, a view reinforced after the country followed up Friday by scrapping import duties on rice, soybeans and wheat.
“The Indonesian buying is a classic example of countries doubling their imports of rice in a very short span of time,” said one Singapore-based trading manager with an international trading company. “The way Indonesia has bought smells of food security fears rather than genuine demand.” [..]
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Here’s Why The Financial Crisis Could Not Have Been Prevented

by Robert Lenzner

The multi-trillion dollar meltdown of financial markets in 2007-09 could not have been prevented.  It was absurd speculation on the part of the special Presidential Commission to even suggest this impossible nirvana. No way Jose!
Let me tell you why. As my esteemed friend Jim Stone, chairman of Plymouth Rock  Assurance, headquartered in Boston puts it so succinctly; “We have wagered our place in history on our relative strength in finance. Bad bet.”
The  financial markets crisis  could not have been prevented because Alan Greenspan, chairman of the Federal Reserve Bank,  for 18 long years the power center in the nation for monetary  policy, did not believe in reining in the animal spirits on Wall Street. He chose to ignore pleading from wise titans like Loews Corp. Laurence Tisch, and Wall Street great John Whitehead, who begged him to turn off the spigot of easy money and rock-bottom interest rates.
Yeah, it could have been prevented if Greenspan had actually  taken steps to dampen down “irrational exuberance,” his description of the craziness that began in the mid-1990s– and continued to accelerate until mid-2007. Regrettably, Greenspan’s utter and naive  faith in free market ideology, makes him look a fool– not the God-like figure we all created.
Yeah- this here “irrational exuberance” blinded Wall Street biggies like Citigroup, Lehman, Merrill Lynch, Baer Stearns,and others from employing the necessary risk controls required to remain in control of their  fortune. Risk control, they thought, what’s that in light of the money we foolishly think were making, when we’re losing.
Yeah, it could have been prevented if the Clinton administration led by Robert Rubin and Larry Summers had not blithely agreed to deep-six the discipline of the Glass-Steagall Act- which in 1933 wisely separated  the activities of the investment banks and the commercial banks– and had ensured  relative stability on Wall Street for over half a century. [..]

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China central bank says Fed easing ineffective and dangerous

Reporting by Zhou Xin and Michael Martina; Editing by Simon Rabinovitch

(Reuters) - Quantitative easing by the Federal Reserve and other central banks cannot address fundamental economic problems but may lead to excessive global liquidity and competitive currency depreciation, China's central bank said on Sunday.
In its monetary policy report for the final quarter of 2010, the People's Bank of China (PBOC) also confirmed that it would target 16 percent growth of the broad M2 measure of money supply this year, down from the 19.9 pct growth recorded at the end of 2010.

The central bank said the Fed's monetary easing was pushing up international commodity prices and asset prices in emerging markets, including China.

"Quantitative easing policy cannot fundamentally address economic problems, and it may cause excessive liquidity on a global scale as well as risks of competitive currency depreciation," the Chinese central bank said in its 59-page report.

"It is creating imported inflation and short-term capital inflows, pressuring emerging markets," it said.

As a result, China needed to work hard to soak up liquidity from foreign exchange inflows in order to minimize the impact on the domestic economy, it added.

The central bank reiterated that it would keep the yuan basically stable while making the exchange rate regime more flexible  [..]


by John Mauldin
The following is an excerpt of John Mauldin’s weekly letter (see his full letter here):

The Recent GDP Numbers – A Real Statistical Recovery

Now, before we get into our panel discussion (and the meeting afterward), let me comment on the GDP number that came in yesterday. This is what Moody’s Analytics told us:
“Real GDP grew 3.2% at an annualized pace in the fourth quarter of 2010. This was below the consensus estimate for 3.6% growth and was an improvement from the 2.6% pace in the third quarter. Private inventories were an enormous drag on growth, subtracting 3.7 percentage points; this bodes very well for the near-term outlook and means that current demand is very strong. Consumer spending, investment and trade were all positives for growth in the fourth quarter; government was a slight negative. The economy will see very strong growth in 2011 as the tax and spending deal passed in December stimulates demand and the labor market picks up, creating a self-sustaining expansion.”
This 3.2% followed a 1.7% in the second quarter and a 2.6% in the third quarter. The trend is your friend.
Well, maybe not so much. That inventory number seemed odd to me, and looking into it with Lacy Hunt, it turns out there is more than the headline number. For some of you, this is going to be a little like “inside baseball;” but the way they calculate the GDP number can have some odd effects every now and then. And this quarter the effect was way more than normal. This is going to be somewhat counterintuitive, but hang in there with me as I try to make it simple.
You remember our old friendly equation:
GDP = C + I + G + (Net Exports) or
Gross Domestic Product is the combination of domestic Consumption (both consumer and business) plus Investments plus Government Expenditure plus Net Exports (exports minus imports). This latter category has been negative for quite some time, as imports, especially oil, have been larger than exports.
Now to get Real GDP (actual GDP after inflation) you have to take away the effects of inflation/deflation. This is done by the use of a deflator built in for each category. But the deflator for exports/imports is a little tricky at times.
Moody’s correctly noted that “private inventories were an enormous drag on growth” and concluded that this was a good thing, in that they assumed that meant inventories went down and thus inventory rebuilding in future quarters will add to GDP growth. And that is where you have to look at the numbers, and there we find our anomaly. There really wasn’t that big a drop in inventories. It was in large part in the statistics, not in the warehouse.
Oil in the 4th quarter rose from roughly $81 to $89, or about 10%. On an annualized basis, this is 40%. Inventory investment is equal to the change in book value of the inventories, minus what is known as the IVA, or inventory valuation adjustment, which is used to correct for prices going up or down. Because the value of oil rose and thus cost more to acquire, the accounting requires that you reduce the value of the current inventories. Thus “real” imports fell at a 13% annual rate. Why? Because the deflator rose by 19%, largely because of the rise in the price of oil.
I know, I know, I just wrote that because the price of oil went up, the “real” value of imports went down, as well as inventories. Some of you are getting economic whiplash right about now.
If oil were to go back down this quarter by the same amount, that “growth” could be wiped out. There is no conspiracy here. It is just a statistical necessity, like hedonic measurements, and it is all very clear in the fine print; but when there are wide swings in oil prices over a quarter, and because our imports of oil are so large, you can get these odd accounting factoids. Which the gunslingers on TV (and elsewhere) miss in their urge to be the first to get out a bullish statement!
How much did it change things? Lacy thinks by anywhere from 0.5% to 1%. That means GDP is still a positive number, but there is not a “3” handle at the beginning of it. In the grand scheme of things, no big deal, as it will balance out over the coming quarters and years. But I just wanted to point out (once again) that you have to take some of the numbers we get from our government with a few grains of salt. That’s the key takeaway here. And they CERTAINLY should not be traded upon. (Anybody who trades on the employment numbers deserves what they get, which is usually a loss. But back to our story.)

Consumer Spending Rose? Where Was the Income?

The really surprising number you saw the talking heads on TV mention was the growth of consumer spending, at 4.4%. Is the US consumer back? After all, real final sales rose by 7.1%, a number not seen since 1984 and Ronald Reagan. But real income rose a paltry 1.7%. Where did the money that was spent come from? Savings dropped a rather large 0.5% for the quarter. That was part of it. And I can’t find the link, but there was an unusual drawdown of money market and investment accounts last quarter, somewhere around 1.5%, if I remember correctly. (David Walker remembered that article as well.) That would just about cover it. But that is not a good thing and is certainly not sustainable.
Let’s see what good friend David Rosenberg (more on Rosie below) has to say about those numbers:
“Even with the Q4 bounce, real final sales have managed to eke out a barely more than 2% annual gain since the recession ended, whereas what is normal at this stage of the cycle is a trend much closer to 4%. Welcome to the new normal [..]

Try A Long Trade On Euro Bund

Continuano le divergenze positive sull'Euro Bund, in questo caso accompagnata da una figura rialzista a livello di barra giornaliera. A queste condizioni si può provare un Long con rigido Stop Loss sotto il minimo di venerdì scorso. 

Even a positive divergence on Euro bund, in this case accompanied by a bullish daily bar. We can try a Buy Long trade with rigorous stop below the low of last Friday.

Try A Short Trade On Sugar

Continuano le divergenze negative sul Sugar scadenza Maggio, in questo caso accompagnata da una figura ribassista a livello di barra giornaliera. A queste condizioni si può provare uno Short con rigido Stop Loss sopra il massimo di venerdì scorso.

Even a negative divergence on May Sugar, in this case accompanied by a bearish daily bar. We can try a sell short trade with rigorous stop loss above the high of last Friday.

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