Corn, cotton to lead rise in spring sowings - USDA

by Agrimoney.com

Corn, cotton to lead rise in spring sowings - USDA

Corn and cotton are to win this spring's battle for acres on US farms, enjoying hefty increases in sowings, US officials said in a report forecasting crop prices would stay "historically high" for at least a decade. Cotton seedings will jump by 2m acres to a five-year high 12.8m acres this year, as farmers scramble to exploit record prices, the US Department of Agriculture said. Corn sowings will rise by 3.8m acres to 92.0m acres, the highest since the last price spike fostered a leap in area in 2007. The increases will overshadow those of soybeans, whose planting area will expand by 600,000 acres, when compared with updated statistics for 2010, and of spring wheat. Indeed, a total wheat area of 57.0m acres for the 2011 harvest implies a 250,000-acre decline in spring wheat sowings, given the steep increase in area that growers have already planted with winter wheat. Seedings of oats and rice are also forecast to decrease, with other area coming from the likes of back-to-back crops and returning of marginal land to production, increasing overall area planted with major crops by 10m acres to 255.3m acres. 'Improved foundation' The increases were revealed in the so-called baseline report giving long-term forecasts for US crops, and viewed as giving a good pointer of what to expect when the USDA next week unveils more focused sowings estimates for this year. USDA initial sowings estimates, US crops 2011-12 (yr-on-yr change) Corn: 92.0m acres, +3.8m acres Soybeans: 78.0m acres, +600,000 acres Wheat: 57.0m acres, +3.4m acres Sorghum: 6.0m acres, +600,000 acres Rice: 3.3m acres, -300,000 acres Barley: 3.2m acres, -300,000 acres Oats: 3.0m acres, -100,000 acres Comparisons with February Wasde data The briefing added that prices of many US crops, while falling from current ranges, would remain at historically high levels" throughout a period of forecasts lasting to 2020. "Over the longer run, global economic recovery with steady growth provides an improved foundation for crop demand," the USDA said. Corn prices to US growers, which averaged $3.55 a bushel in 2009-10, would not average less than $4 a bushel for any year in the decade, supported by demand from ethanol plants, starch processors and livestock farms, which will return to expansion. Indeed, "strong producer returns keep corn acreage in a range of 90m-92m acres over the projection period", compared with 88m acres last year. Wheat decline  A revival in US meat production will also spur demand for soymeal and with it the soybeans the feed source is processed from, helping prices of the oilseed stay over $10 a bushel, and encouraging sowings to show some further expansion. In exports, "continued competition from South America, particularly Brazil, leads to a reduction in the US share of global soybean trade", from 44% to about 37%. Wheat, however, will see a decline in acreage, to 51.0m acres, a figure which would be the lowest since 1970, as prices static at around $5.50 a bushel fail to attract growers. "With relatively weak overall demand growth for wheat and continuing large stocks, producer returns fall… leading to a decline in wheat plantings," the USDA said. Indeed, on wheat exports, the US will lose market share to Russia and, nearer term, India, whose exports will "reach as high as 3m tonnes in 2013-14 before dropping off to negligible levels towards [22020]

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US and State Default Risk

by Bespoke Investment Group

The US stock market has been on a tear lately, but default risk for the country has remained stubbornly high.  Granted, default risk for the US is very low compared to most countries, but it is currently near 1-year highs.  Below is a chart highlighting US default risk using 5-year CDS (credit default swaps) price in Euros.  While risk is nowhere near as high as it got during the financial crisis in late 2008 and early 2009, it is more than 100% higher than where it was in late 2009.  So while stocks have been doing well here in the US, some investors are still bidding up US CDS prices with the belief that debt problems will get worse for the country.

While default risk for the entire country has remained high, default risk for the 4 "riskiest" states (based on CDS prices) has declined in recent months.  As shown below, 5-year CDS for California, Illinois, New Jersey, and New York are all down significantly from recent highs and breaking to new lows on a weekly basis.

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Commodities Undperforming Stocks

by Bespoke Investment Group

For all the talk of surging commodities, did you know that the CRB Commodity Index has actually underperformed the S&P 500 off its lows in early 2009?  While the S&P 500 is currently within one percent of doubling off its intraday low from March 2009, the CRB Index is only up 69%.  As shown in the chart below, the CRB index is currently off more than 28% from its 2008 peak, and it has yet to surpass its peak from 2006.  So while most investors are aware of the 'lost decade' in equities, commodities, as gauged by the CRB index, have had a 'lost half-decade' of their own.

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NY FED: CONSUMER DE-LEVERAGING CONTINUED IN Q4

by Cullen Roche

This is a backwards looking report, but the recently initiated quarterly report on household debt and credit has become a nice overview of the debt situation. According to the latest report, de-leveraging continued in Q4:

Aggregate consumer debt continued to decline in the fourth quarter, continuing its trend of the previous two years. As of December 31, 2010, total consumer indebtedness was $11.4 trillion, a reduction of $1.08 trillion (8.6%) from its peak level at the close of 2008Q3, and $155 billion (1.3%) below its September 30, 2010 level. Household mortgage indebtedness has declined 9.1%, and home equity lines of credit (HELOCs) have fallen 6.5% since their respective peaks in 2008Q3 and 2009Q1. For the first time since 2008Q4, consumer indebtedness excluding mortgage and HELOC balances did not fall, but rose slightly ($7.3 billion or 0.3%) in the quarter. Consumers’ non-real estate indebtedness now stands at $2.31 trillion, the same level as in2010Q2, 8.4% below its 2008Q4 peak.”

Unfortunately, this report is largely irrelevant as recent consumer credit reports appear to show that the consumer is re-leveraging. That’s likely good in the short-term, however, as I’ve previously discussed, the debt imbalance in the US economy remains and a re-leveraging will only contribute to future economic disequilibrium. This is a good sign for near-term economic growth, but likely a very bad sign in the long-term. These trends are simply unsustainable and without a booming economy in the coming years we could be putting ourselves right back where we were in the run-up to this crisis….

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Berlusconi refuses to resign, dismisses protest

by Thomson Reuters

Prime Minister Silvio Berlusconi said on Monday he had no intention of stepping down and dismissed a weekend demonstration by thousands of women across Italy over his involvement in a sex scandal.

Hundreds of thousands of women took part in rallies on Sunday to defend their dignity and protest over the underage prostitution scandal that has rocked the 74 year-old prime minister's centre-right government.

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REUTERS
Protesters gather in Rome's Piazza del Popolo to demonstrate against Italian Prime Minister Silvio Berlusconi

The billionaire media entrepreneur told his Canale 5 network the protests were the work of his political opponents and denied that he disrespects women.

"I saw the usual factional forces mobilised against me by a certain section of the left which uses any pretext to beat an adversary whom they can't manage to beat at the polls," he told a morning programme.

"All women who have had the opportunity to get to know me, know how much I respect them. I have always behaved and I always behave with great care and great respect, both in my companies and in my government."

"I have always tried to act in such a way that every woman feels special," he said.

Sunday's protests included several leading figures from the opposition centre-left and many conservative middle-aged women, a group which has traditionally supported him.

Berlusconi said the government would not resign over the affair, potentially opening the way for new elections.

"There is a lot of confusion but I have very clear ideas. The interest of the country is to have a stable government which carries on with its programme with determination," he said.

Milan prosecutors have requested that Berlusconi face trial over accusations that he paid for sex with a girl below the age of 18 -- an offence in Italy -- and that he improperly pressured police to release her from custody over theft allegations.

A decision on whether to accept the request is expected early this week.

Using material obtained from investigators' wiretaps, newspapers have splashed lurid accounts of "bunga bunga" sex parties involving dozens of young women at Berlusconi's private villa near Milan.

Berlusconi has never hidden his fondness for the company of young women but denies doing anything illegal and his lawyers have produced witness statements saying that the events at his villa were no more than convivial dinner parties.

"The Milan prosecutors' office and the media in contrast has trampled on the dignity of my guests, exposing them to public scorn without any reason or regard for them and trampling on the truth," Berlusconi said.

"It's really a disgrace, a big disgrace."

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Is A 10% Correction Imminent?

by Wallace Forbes

Forbes Investment Roundtable:

On January 31, 2011 Wallace Forbes, CFA, president of Forbes Investors Advisory Institute, hosted a Forbes Investment Roundtable discussion among several leading investment authorities. Each investor’s commentary, along with their interchange with the other participants, will appear individually on Intelligent Investing. Today we highlight the commentary of Vahan Janjigian.

Participants:

Vahan Janjigian, Ph.D, CFA, Chief Investment Officer of Greenwich of Wealth Management and Editor of the Forbes Special Situation Service

David N. Dreman, Founder and President of Dreman Value Management

Barry Ritholtz, CEO and Director of Equity Research of Fusion IQ

Michael Holland, Chairman of Holland Balanced Fund

Vahan Janjigian: As always, there are things that concern me. In the past decade or so, we’ve had a couple of major sell-offs in the stock market. In the 1990s, we had a big bull run and then, starting in 2000 to 2002, we had a huge sell-off in stocks because of the dotcom bubble and bust. In 2008, we had the financial crisis and we had a major sell-off that followed soon after. Then the stock market bottomed in March of 2009 as we saw the Dow go all the way down to 6,500.

Then, of course, stocks recovered. If you look from July’s bottom to the close of the market on Thursday January 27th, we saw that the S&P 500 had rallied 27%, which is a great return for a full year, let alone for six months. We’ve had a great run recently, but my concern is that it’s not really sustainable.

Because we’ve gone through several severe sell-offs in the past decade, I think investors are more wary than usual, and more prepared to sell on a moment’s notice when they see any type of bad news. That’s exactly what happened Friday, January 21st. I don’t know if it was because of the rioting in Egypt, or if it was because the GDP report, which was strong, was not as good as expected, or if it was because Amazon.com gave some disappointing guidance. Whatever the reason, people started selling heavily on the 21^st and I think they’re prepared to do so again.

Right now, we have a number of things going on in Egypt. Egypt itself does not have any serious consequences for U.S. most investors. I think investors, for the large part, ignored the Jasmine Revolution that took place in Tunisia prior to Egypt, but they started getting spooked by what was happening in Egypt.

Again, this was not because it has any consequences for them directly. But there is a real fear that what happens in Egypt could spread to other Islamic countries, especially the ones that produce a significant amount of oil. A rise in the price of oil would certainly have consequences for U.S. consumers and U.S. investors. So I think people are on edge right now because of that.

There are other things happening on the international stage that I think also worry U.S. investors. China, India and Brazil all have very strong growth. But recently, we’ve started to see that they all have very high inflation, too. I think that’s something that’s really starting to worry American investors. Portugal, Ireland, Italy, Greece, and Spain — the so-called “PIIGS” of the European Union — are plagued with all kinds of problems, especially high debt and high unemployment. They eventually will probably have to be bailed out. The United Kingdom has implemented austerity measures, and we have seen that their last GDP report showed contraction, not growth. So that’s another concern.

The U.S. has a lot of serious problems, too. We have a tremendous amount of debt on the federal level. The federal government can’t seem to get its spending under control. I think that’s a big concern. State and municipal governments are drowning in pension obligations. In general, there is too much debt, too much unemployment and too many houses available for sale in the U.S. right now. These are concerns that I think will worry investors and cause them to sell at a moment’s notice when really bad news comes out.

For the most part, investors have known about these problems and have chosen to ignore them. They’ve chosen to focus on corporate profits. And corporate profits, of course, have been very good. Profits have been growing on a year-over-year basis, and they have also been coming in ahead of expectations.

As investors say, “The bottom line is the bottom line.” In other words, in the final analysis, what really matters is profits. Investors have been pretty pleased with profits so they have bid up stock prices. To a certain degree, I think they were right to do so. I think a run-up in stocks was certainly justified.

In my opinion, however, the recent rally has gone too far. Corporate profits are strong, but they have been coming primarily from cost cutting. Not that there’s anything wrong with that — generating profits by cutting costs is a good thing. The problem is that it can only go so far. Eventually, businesses reach a point where they can generate more profits only by generating more sales. And I think many businesses have now reached that point. So we’re going to have to see more sales in order to see more profit growth.

Now, of course, all this does not mean that we’re going to see another severe sell-off like we saw in 2000 to 2002, or the one that followed the financial crisis. But it does mean that we could see about a 10% correction in stocks. So I think stocks could fall perhaps 10% and then remain flat for the rest of the year.

In the longer run, in order for the stock market to go significantly higher, I think that the economy has to get much healthier. This means that the government needs to cut spending and it needs to pay down the debt. In other words, we have to have some short-term pain for the sake of long-term gain. I think one good piece of news is that, in the State of the Union address, we heard President Obama move a little bit closer to the center. That is a positive sign. If he’s willing to work with Republicans, then perhaps in the long term we can address the serious problems of Medicaid, Medicare, Social Security, and a much too complex tax system.

Wallace Forbes: Thank you, Vahan. I have a question. You said that you thought the correction might only be 10%. Over what period of time do you think that might evidence itself?

Janjigian: I think we could have a 10% correction fairly suddenly, over the course of just a couple of weeks.

Forbes: Soon?

Janjigian: Soon, yes. I’m not expecting any more than that, because I think it’s difficult to argue that the stock market is overvalued, like it was during the dotcom bubble. I think we could have a rather quick correction and then remain relatively flat for the rest of the year.

Forbes: What does this lead to in the way of suggestions for purchase or sale of stocks?

Janjigian: Well, of course, I’m in the business of picking stocks. Even in what I think might be a weak market, I’m going to continue to identify stocks that I think are special situations that could do well. One stock I like a lot is a very large cap healthcare company, Johnson & Johnson. I think it is tremendously undervalued. It also pays a very good dividend. They’ve had some very severe problems recently with product recalls and the shutdown of a plant in Pennsylvania. Their consumer segment, in particular, has been really hurt by that. But I think production will eventually come back on line. You’ll see Tylenol sales picking up again once it does. I think Johnson & Johnson could be a good long-term investment.

Another one I really like is a company called Corinthian Colleges. This is a very small cap company. They are in the for-profit education business, a business that’s taken tremendous hits recently because politicians are coming down on it. It’s true that many of these kinds of companies have been too aggressive in going after students who were unable to either graduate, did graduate but couldn’t find jobs, or found jobs that did not pay enough to help them pay back their loans. Taxpayers have been left on the hook.

Yet the same can be said for many of the traditional nonprofit educational institutions, too. Corinthian Colleges — like all the other for-profit colleges — will be less profitable in the future, but it will remain profitable. And the stock has been beaten down way too far.

Forbes: Does Corinthian have a physical location? Or is it an online college only? Or both?

Janjigian: It’s primarily online, but they do have a few physical locations as well.

Barry Ritholtz: There was an op-ed, I don’t remember if it was in the Times or the Journal or FT — that’s the problem with consuming a lot of media, it’s a flush — but the article was about the actually very poor graduation rate that most colleges have in the United States. And the for-profits are the bottom of the list.

Part of the discussion was about how a lot of money goes from the Department of Education to various colleges, both for-profit and not-for-profit. Perhaps what would make more sense — in light of Obama saying, “Let’s look at regulations that don’t make sense and get rid of any payments that could be cleaned up” — to focus on the graduation rate not just the enrollment. What does that do? I honestly don’t know. But I thought it was interesting you mentioned for-profit colleges in light of all the bad news. What would a policy change like that do to that sort of investment?

Janjigian: I think you might be referring — I’m not sure — to an op-ed written in The Wall Street Journal by Donald Graham, CEO of The Washington Post. The Washington Post, of course, owns Kaplan.

Ritholtz: Right.

Janjigian: He was defending these for-profit institutions, and arguing that — for the most part — they deliver a high-quality education at a much lower cost than the nonprofits do. There’s a very important place for them.

They’re also not giving the same kind of education that the nonprofits do; they’re really providing training to help people find employment quickly in a healthy economy.

Ritholtz: Would you say these for-profit institutions are vocational?

Janjigian: Yes, it’s primarly vocational It’s more training rather than education. And for the most part, they have done a pretty good job.

But focusing on the graduation rates, I think is important, not just for the for-profits, but also for the nonprofits. In nonprofit institutions these days, a smaller and smaller number of students people are actually graduating within four years. That time is being extended to five years and six years. So that’s a serious problem everywhere.

Ritholtz: So I was ahead of the curve 20 years ago?

Janjigian: That’s right, yeah.

Ritholtz: Five-year plan? Good to know.

Janjigian: I have no objection to the government saying, “We need to examine these schools carefully, because taxpayer money is being used here.” But if you’re going to come down on the for-profits, you need to come down on the nonprofits as well.

Forbes: Vahan, thank you very much.

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HOW WORRISOME ARE SURGING FOOD PRICES?

by Cullen Roche

How worrisome are soaring food prices? Wells Fargo says it depends and I think they’re right. This recent report succinctly summarized the fears over food prices and why the price increases are likely to cause far more trouble in the emerging markets than in the developed world. This is not to say that rising food prices won’t prove problematic in the developed world, however, the developed world is far less dependent on food costs as a percentage of total income than the emerging world. Therefore, I wouldn’t expect developed world central banks to react too negatively to rising food prices. Emerging market central banks, on the other hand, have a different battle on their hands and are now grappling to control what look like overheating economic conditions. (via Wells Fargo):

“Prices of grains, which are internationally traded commodities, have been rising sharply lately. As shown on the front page, corn prices are now within spitting distance of their 2008 highs. Wheat prices are further off of their previous peaks, but they too have moved up markedly in recent months. A combination of strong economic growth in some large developing countries, which has significantly increased the demand for foodstuffs, and poor harvests in some important food-producing nations, such as Australia, Russia and the Ukraine, seem to be behind the recent increase in food prices.

Do recent increases in food prices have implications for overall inflation rates and, in turn, central bank policy rates? The answer seems to be “it depends.” In our view, the increase in food prices has more inflationary pressures for developing economies than for advanced economies. Take the Eurozone, for example. Food accounts for only 15 percent of the consumer price index (CPI) in the Eurozone. Although the overall rate of CPI inflation has risen to 2.4 percent, which is above the European Central Bank’s (ECB) implicit target rate of around two percent, the core rate of inflation, which excludes food as well as energy prices, remains benign (top chart).”

“Our sense is that the ECB will hold fire as long as the core rate of inflation does not start to trend higher. In order for core prices to accelerate, workers would need to demand higher wages to compensate them for the recent rise in food prices. With the Eurozone unemployment rate at 10 percent, which is a 13-year high, workers probably don’t have much bargaining power at present. With overall labor costs in the Eurozone up only 0.8 percent over the past 12 months, it is difficult to envision a significant increase in wage inflation anytime soon.

In contrast, we believe that the rise in food prices has more inflationary implications for developing countries, because food accounts for a higher proportion of the consumption basket in those countries. For example, food accounts for one-third of the CPI in China. Moreover, strong economic growth in many developing countries over the past year or so gives workers in some of those economies more bargaining power. Data on Chinese wages are not very current, but wage growth in China started to edge up in the second half of last year. The large wage concessions that workers were able to wrestle last year from Japanese auto manufacturers operating in China is consistent with the uptick in wage growth that is evident in the “hard” data. The run-up in food prices has lifted the overall rate of Chinese CPI inflation to five percent (middle chart).”

“More disturbingly, however, non-food price inflation has trended up to its highest rate since 2008 (middle chart). In response, the Chinese central bank has been tightening policy. Since October, the central bank has hiked its benchmark lending rate by 75 bps (bottom chart).”

“It has also raised the required reserve ratio by 200 bps since November in an attempt to drain some of the liquidity out of the banking system. Although Chinese authorities tend to change economic policies in a gradual fashion, the risk is growing that rising inflationary pressures will lead the central bank to tighten aggressively. This risk also applies to other important developing economies such as India. In our view, rising food prices represent a significant downside risk to economic growth in the developing world.”

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Buy Oil, Sell Gold A Growing Mantra

by Robert Lenzner

The growing mantra to see your gold and replace it with oil is being promoted by the Bank Credit Analysts, an advisory service in Montreal often followed by conservative, prudent investment managers in the US. Crude oil futures in the US are selling at $85 a barrel, $16 less than Brent crude futures in London, a peculiar differential that could offer a unique investment opportunity.

On the side of oil going higher are growing unrest in the Middle East, 3 gas explosions in Iran and safety problems with the Alaska pipeline. With the dollar stronger last week, and Mubarak’s departure, gold did not streak upward as a haven against political unrest.

James Joslin ,CEO of TFC Financial Management in Boston, signs on with the Bank Credit Analysts that gold is for speculators, central banks like India, and only some investors. “Today, gold($1400 an ounce) as the basis for jewelry production, is losing its allure.” Instead, TFC prefers the Van Eck Hard Assets Fund,(GHAAX) which is very heavily weighted in energy shares such as Schlumberger,(SLB) Halliburton and Weatherford Intl, Anadarko, Freeport McMoran.

As well, Stephen Leeb’s Complete Investor, underscores that “peak economic oil is clearly at hand,” and suggests Chevron,(CVX) ConocoPhillips(COP) and Occidental Petroleum(OXY) as best ways to play the probable rise in the value of oil reserves already discovered and in process of development. CNOOC, the Chinese oil producer, is planning to spend 20% more than Exxon in seeking further offshore and overseas assets. It is a major play in deepwater offshore fields of Brazil along with Petrobras.

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Oil waiting for next revolution

by PHIL FLYNN

Is love in the air this Valentine’s Day? It might not be love but it certainly is change. On this Valentine's Day we know that the world is very different than it was a year ago. Now, in the aftermath of the joyous celebration in Egypt, the oil market is trying to guess what regime is going to fall next.

In a matter of months popular uprisings have ousted two governments and the momentum and confidence from the people and their success is spreading throughout the region. We have seen demonstrations in Yemen and protesters defied the government on OPEC member Algeria as they marched in a downtown square.

Revolution is in the air and dictators and leaders throughout the Middle East had better be on guard because the people have had enough. They are tired of being repressed. They are tired of the way their country's wealth is siphoned off so that a few at the top are insanely rich and the masses of citizenry suffer in ghettos. They demand freedom of information as it is harder to restrain free speech with the power of the internet and the rise of the social network. The power to keep the people ignorant is diminishing; yet of course don't think that will stop some leaders from trying.

Take for example Libyan leader Muammar Gaddafi, who, according the Reuters News, said that Palestinian refugees should capitalize on the wave of popular revolts in the Middle East by massing peacefully on the borders of Israel until it gives in to their demands. This is classic bait and switch and Mr. Gaddafi is desperately trying to align with the people's discontent and redirect it towards what he sees as a common foe. Hopefully that will redirect the anger of his own people that hold Mr. Gaddafi in less than kindly regard than the Egyptians do for Mr. Mubarak.

Oil prices overnight hit the lowest level since November 30th while Brent crude is still hanging tough on revolution contagion risk and ongoing problems with North Sea production.

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Sorry For Technical Problems

We apologize to readers if our posts in recent days have been duplicated so annoying. It was not our intention, now we have fixed the technical problems that were the cause.

Ferrari FF

By Barry Ritholtz

Just in time for Valentine’s Day, Classic Driver brings us these photos of the new AWD Red Ferrari FF (Ferrari Four).

The FF has four seats and four-wheel drive, a 6.3-liter direct-injection 651 horsepower engine with 504 pound-feet of torque. C/Net notes the FF time from zero to 62 mph is 3.7 seconds.

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Now Is Your Chance To Buy The World's Largest Farm

by Gus Lubin

You always wanted to be a farmer, and you noticed recently that anyone with food to sell has been making a killing on record high prices.

Well now's your chance to invest in farmland in a huge way.

A Russian farming conglomerate, Ivolga is selling the world's largest farm for around $1 billion. The 1.5 million hectare of farmland are spread across Russia and Kazakhstan and contains mostly fields of wheat.

Ivolga is looking to sell after getting buried in debt from the global crash. A London hedge fund, which is declining to invest in the land, tells the Telegraph: "[Ivolga] got caught by that perfect storm in 2008 and 2009. They bought all their fertilisers at the top of the market and then sold all that crop into a very deflated market and made massive losses."

Of course there are some risks involved with this farmland. Food prices could collapse, or drought could cause another summer of wildfires in Russia.

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Going short in Base Metals is a good option in current scenario

by Commodity Online

This week opened with extra caution for Base Metal traders as its prices traded at higher levels. But the tight situation is likely to loose its upside momentum and may fall on profit booking. Traders are advised to go short at higher levels with proper stop loss.

Base metals traded steady to higher on Friday of last week. However, on weekly basis, metals ended lower previous week. Metals rose from intraday low on Friday following strength in Global equity markets on the back of resignation by Egyptian president Hosni Mubarak.

The metal is likely to decide its direction in this week from economic indicators from US and China.

Copper last traded at LME was USD 10080 a tonne. While Lead and Nickel on LME traded at USD 2592 per tonne and USD 28630 per tonne respectively. At LME, Aluminium last traded at 2513 a tonne.

The U.S. Dollar went up recently which affected demand of dollar-denominated commodities adversely by making it more expensive for the other currency holders.

Metals are likely to continue cues from the USD and other major currencies movements and global equity markets.

China is the major consumer of metal and market is wanting strong demand from China to give a thrust to base metal and lift further.

China’s liquidity tightening move to curb inflation may adversely affect the metal’s demand while copper may affect severely as copper is a metal widely used in building construction, power generation and electronic products. If inflation rises further, the more tightening measures are likely from the China in the coming few months.

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Is The Divergence Between Emerging And Developed Markets Flashing A HUGE Warning Sign?

by Joe Weisenthal

Major Asian markets had a monster start to the week, but the story this year has been the big collapse in emerging markets, and the (still) excellent performance of developed markets.

Can this divergence last?

This chart from Doug Short takes a medium-term look at emerging markets vs. developed ones, and notes that the last time the line crossed below the 200 day moving average like this, developed ones began to tank. Granted, that's just one data point, so as Short argues it's just something to watch at this point.

Click to enlarge.

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Michael Covel on Trend Following

by Michael Covel

Accepting the inevitability of change is the first step to understanding trend following philosophy. One trend follower described it:

“But what won’t change? Change. When a period of difficult performance continues, however, most investors’ natural conclusion is that something must be done to fix the problem. Having been through these draw downs before, we know that they are unpleasant, but they do not signal that something is necessarily wrong with the future. During these periods, almost everyone asks the same question in these exact words: ‘Have the markets changed?’ I always tell them the truth: ‘Yes.’ Not only have they changed, but they will continue to change as they have throughout history and certainly throughout our 19 years. Trend following presupposes change. It is based on change.”

Markets go up, down, and sideways. They trend. They flow. They surprise. No one can forecast a trend’s beginning or end until it becomes a matter of record, just like the weather. However, if your trading strategy is designed to adapt to change, you can take advantage of the changes to make money.

Don’t try to guess how far a trend will go. You can’t. Peter Borish, former second-in-command with Paul Tudor Jones, lays bare the only concern a trader must have:

“Price makes news, not the other way around. A market is going to go where a market is going to go.”

However, the concept of price as the trading cue is just too darn simple for people to accept. This is seen in the mainstream press that always emphasizes the wrong numbers. Bill Griffith, an anchor at CNBC, once pondered:

“At some point, investing is an act of faith. If you can’t believe the numbers, annual reports, etc., what numbers can you believe?”

Griffith misses the point when he asks what numbers you can believe if you can’t believe a company’s annual report. It doesn’t matter whether you can or cannot believe the earnings statement. All of these numbers can be doctored, fixed, or cooked. The traded market price can’t be fixed. It’s the only number to believe. You can see it every day in the paper or online. However, this simple fact does not diminish the confusion. Alan Sloan, by all accounts a fine finance reporter, searches for numbers to trust without ever understanding how futile his search will be:

“If some of the smartest people on Wall Street can’t trust the numbers, you wonder who can trust the numbers.”

What numbers is Sloan talking about? Balance sheets? Price-earnings ratios? You can’t ever trust those numbers. Someone can always alter them. Beyond that, even if you knew accurate balance sheet numbers, how can they can help you determine when or how much to buy or sell? A critical lesson from a great trend trader:

“…Political uncertainty is one reason why investment decisions are not driven by discretionary judgments. How, for example, do you measure the impact of statements from [government leaders]? Even if [we] knew all the linkages between fundamentals and prices, unclear policy comments would limit our ability to generate returns…trying to interpret the tea leaves in Humphreys-Hawkins testimony or the minds of Japanese policy authorities does not lend itself to disciplined systematic investing. Instead of trying to play a loser’s game of handicapping policy statements, our models let market prices do the talking. Prices may be volatile, but they do not cloud the truth in market reactions. Our job is to systematically sift price data to find trends and act on them and not let the latest news flashes sway our market opinions.”

You can’t read tea leaves. Nobody can. William Eckhardt, a longtime trend follower and former partner of trend follower Richard Dennis (the father of the ‘Turtles’), builds off that wisdom by describing how price is what traders live and die by:

“An important feature of our approach is that we work almost exclusively with price, past and current…Price is definitely the variable traders live and die by, so it is the obvious candidate for investigation…Pure price systems are close enough to the North Pole that any departure tends to bring you farther south.”

How does a trend follower implement that philosophy? Trend trader Ed Seykota told me a story about trading sugar. He had been buying sugar—thousands of sugar contracts [futures]. Every day, the market was closing limit up. Every day, the market was going higher and higher. He just kept buying more and more sugar each day limit up. A broker was watching all this. One day, the broker called Seykota after the market was closed, because he had extra contracts of sugar that were not balanced out, and he said to Seykota, “I bet you want to buy these other 5,000 contracts of sugar.” Seykota replied, “Sold.”

Think about that: After the market has closed limit up for days in a row, Seykota says, “Sure, I’ll buy more sugar contracts at the absolute top of the market.” Why is this an important lesson?

Everybody instinctively wants to buy sugar on the dip. Let it come down low. Get a bargain. Trend following works by doing the opposite: by buying higher prices.

October 2008 is a great illustration of that trend trading view. Stock markets crashed. Millions of people lost trillions of dollars when their long-held buy and hold strategies imploded. The Dow, S&P, and Nasdaq fell like stones with the carnage carrying over into November 2008. Most everyone has felt the ramifications: jobs lost, firms going under, and fear all around. No one made money during this time. Everyone lost. Hold on, is that really true? It is not true. There were winners during October 2008, and they made fortunes ranging from +5 percent to +40 percent in that single month.

Who were the winners? Trend followers. How did they do it? First, let me state how they did not do it:

1. Trend followers did not know stock markets would crash in October 2008.
2. Trend followers did not make all of their money from shorting stocks in October 2008.

What did they do? Trend followers made money from many different markets from oil to bonds to currencies to stocks to commodities:

• One fund run by John W. Henry & Co., founded by Boston Red Sox baseball-team owner John W. Henry, was up 72.4 percent through October 2008.
• TransTrend, a Dutch-based trend following trader managing more than $1 billion in assets, saw one of its funds go up +71.75 percent from January 2008 through November 2008.
• Clarke Capital Management Inc., led by Michael Clarke, saw its $72.2 million fund gain 82.2 percent through October 2008. Clarke, as but one example of his winning bets, shorted crude oil when it was around $140, and then stayed with the trade down to $80 before exiting, thereby collecting the bulk of the trend.
• Trend follower Bernard Drury started selling short S&P 500 index futures in November 2007. The index is down about 36 percent since and the largest Drury fund was up 56.9 percent through October 2008.10
• Paul Mulvaney, another trend following trader who has used a much longer timeframe in his trading (weekly bars), saw his fund post a 45.49 percent return for the month of October 2008—yes, in one month.

Answer the following five questions and you have the core components of a trend following trading system to potentially make that kind of money:

1. How does the system determine what market to buy or sell at any time?
2. How does the system determine how much of a market to buy or sell at any time?
3. How does the system determine when you buy or sell a market?
4. How does the system determine when you get out of a losing position?
5. How does the system determine when you get out of a winning position?

It comes down to putting your rules into an automated system that answers all 5 of those questions at all time. This style is all about a reactive form of technical analysis – coupled with a certain discipline and psychological grounding.

Let me conclude with a story about luck and skill. The firm Altegris has placed over $1 billion of client assets with assorted trend trading managers. The president of Altegris, Jon Sundt, postulated:

“Can a great trader have great skill and no opportunity to make money? Can a bad trader have no skill and tons of opportunity to make money? The answer is yes to both questions. Luck is at play in the short-term for most traders. There will always be ‘some guy’ with a great one-year return, but the sustained edge appears only over time.”

What’s Sundt’s big picture point? He wants you to think about what happens when the bad trader with no skills finally finds himself with no opportunity. If you don’t want to embrace his wisdom, you will eventually feel massive pain in your trading account.

There will always be critics, and there will always be cheerleaders. I, however, find solace in performance numbers and trend following’s massive performance numbers are the real story, the truth if you will.

Bottom line, no matter how many people agree or disagree with the content of this book, and I know there are big fans and big critics, positive performance numbers from trend followers, especially from historic months like October 2008, paint a picture you either accept or reject—it’s your choice.

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China Syndrome Debt Bubbleomics And Crude Oil

By: Andrew_Butter

Along with the emergence of the much heralded “Green Shoots” that must by now be turning into roses (?), has come the sinking realization that (a) just piling debt on debt is not a long-term solution to anything, and that (b) perhaps there might have been more “wrong” under the blanket of mark to market (when markets were in a bubble), and mark to fantasy when they crashed, than can be swept under the carpet forever; like perhaps something structural?


Q4-2008 was the first time in the history of America that over 40% of “recorded” imports of “goods” (“recorded” as in excluding recreational drugs), came from just (a) imports of “Petroleum and related products” (oil), plus (b) imports from China.

The wiggly black line at the bottom of that chart is the combination of Section M412 “Home entertainment equipment” (mainly televisions), plus section M400 “Apparel, footwear & (soft) household goods” (mainly clothes), plus section M411 “Recreational equipment & materials ” which includes as a sub-section M4112 “Toys, shooting & sporting goods, and bicycles”.

Added together those illustrate the main driver of the seasonality of US imports from China, as in “Christmas”.

Sub-section M4112 is interesting. Evidently in USA “shooting goods” (guns) are considered to be a “recreational” product like toys; naturally no mention is made of  “recreational drugs” which could easily be $35 billion a quarter, although no one knows because either (a) that’s a matter of National Security or (b) no one wants to know.

If you think all of that sounds mildly insane, wait until I tell you how America finances its addiction to (a) Oil, (b) Chinese Christmas Presents, (c) “Recreational” Guns, and (d) Imported Recreational Drugs.

 

The blue line on that chart is Line 55 from the BEA publication “U.S. International Transactions Accounts Data”; “technically” that’s called “Foreign-owned assets in the United States, excluding financial derivatives (increase/financial inflow ()” . In Plain-English that’s how much further America got into debt to foreigners, every quarter.

The Big Picture is (a) that all of the foreign debt America piled on since 2000 and before, was to pay for its trade deficit (well everyone knows that but no one wants to talk about that either), and (b) a large part of that came from sales of “Toxic Assets” (the green line).

Q2-2007 was a record quarter; back then America managed to persuade foreigners to hand over $700 billion to help finance their “China Syndrome”, which makes TARP look like chicken-feed (remember that was in one quarter). They did of course promise to pay the money back, (with interest); or more to the point, they promised that their grandchildren would pay it back, which is the sort of promise that crack-heads make all the time.

That was also the peak in sales of “U.S. securities other than U.S. Treasury securities” , you can find those on Line 66 which covers what some people call “Troubled Assets”; as in “Toxic”.

Note: Any connection with “Route 66” which is where Bob Dylan once said, “You can get your kicks”, is completely co-incidental. There again, selling some “Toxic” is a good way to finance the process of “getting your kicks”.

Notice how the red squiggly line (the trade deficit) is pretty much mirrored by the blue squiggly line (how much new debt gets piled on).

In technical terms, over that period 87% of the changes in “piling on the debt” can be explained by changes in the trade deficit in that quarter (i.e. plot one against another and you get an 87% R-Squared).

The difference (i.e. the 13% residual) is explained by (a) investments by Americans outside USA (for example in Special Economic Zones in China) and (b) imports of recreational drugs, which as explained above, are not recorded (obviously).

The problem of course with regression analysis is that it does not prove cause. No one knows whether the process is that (a) Americans borrow money from foreigners so they can blow it on wasting imported energy and buying guns for recreation, or (b) they blow the money first and then borrow later.

It is also possible that the two processes are completely independent, although with an 87% R-squared, that sound quite unlikely.

Cause and Effect

This chart is a little complicated to figure out, the lines are (a) the imports of oil (in dollars) compared with (b) Line 55 (basically new foreign debt), expressed as a percentage of the average from Q-1 2000 up to Q4 2003.

The idea is that perhaps that represented a “normal”; then there was something “abnormal” which happened starting in 2004; so the chart is a way of looking at that:

Two things jump out of that chart, the first is that perhaps the spike in oil prices was somehow “caused” by the preceding spike in USA borrowing from foreigners?

That makes sense intuitively, although of course that’s not proof. But if that’s what  happened it would be a nice example of how bubbles are sort of “infectious”.

How about this for a story-line:

A:  The housing bubble encouraged people to use their homes as an ATM.

B:  Then they felt “rich”, so they went out and bought a lot of toys; and guns, and SUV’s to burn up imported oil (with gun-racks); and perhaps even recreational drugs, it was “party-time” after all.

C: So imports went up.

D: But money “needed” to be borrowed to buy the foreign exchange and to keep the “mighty dollar”, well…mighty.

E: So Goldman Sachs and the other “God’s Workers” packaged up all the loans that American home-owners had taken out using their houses as collateral and sold the loans to Norwegian pension funds, RBS, and other not-very-smart foreigners.

F: Then the housing bubble collapsed, and so it got harder and harder to find any not-very-smart foreigners who were inclined to lend any more money.

G: So anyway, the “God’s Workers” were hanging around wondering what to do for an encore, and there was still plenty of money sloshing around looking for a home, so they got in the act and placed big bets on oil prices going up, so oil prices went up.

H: Then because no one could persuade the not-very-smart foreigners to buy any more “Toxic”, imports went right down because there was no money to pay for them.

J: Then luckily the Fed intervened, and everything is just wonderful again! The best of all beautiful worlds, America can still borrow money from foreigners to pay for its trade deficit.

I can’t prove that’s what happened, but it’s a nice story; but perhaps I missed something, like perhaps there is a cunning PLAN?

Bubbleomics

What’s interesting now; is what’s going to happen next?

Notice the symmetry of the blue line around the average from 2000 to 2003 (i.e. 100% by definition on the chart). That’s typical “bubbleomics”, like every action, has a reaction.

Think of a market like a flat pond, then someone throws a stone in, or there is a wind; then there are waves.

The amplitude of the crest of the waves compared to the “natural” level of the pond is exactly equal to the amplitude of the trough that follows the crest, and the distance in time or in space between one trough and the next, is exactly equal to the distance between one crest and the next.

Bubbles are typically caused by market distortions, typically thanks to manipulation of the market by one group of people for their own personal gain, typically the manipulators are either the government, or the banks; and the reason for that is because to play that “Great Game” and win you have to have access to cheap money.

If that “debt splurge” was a bubble it lasted from Q2-2004 and crossed the “fundamental” on the way down in Q2-2008 (four years), so things ought to get back to normal on that front in Q2-2012, but it’s got there one year too early.

Debt, like drugs, is all about the dosage:

I had a friend when I was growing up called David; I ended up as a boring-old-fart, that’s what my daughter says anyway. He grew up to be a part-time saturation diver and a part-time heroin addict; both of which activities, are much more exciting than anything I ever did. The money he made living for months at a time in a steel tube sitting on the deck of an offshore oil rig, paid for the heroin and for his Ferrari.

I never noticed that he suffered any particular harm from the heroin. He was super-fit; you need to be fit to be a diver and he could run for hours, and he was a really nice guy, whether he was stoned or straight.

One day he explained to me that the most important thing about being a heroin addict is to get the dose right; that’s if that’s what you want to do with your life. Too little and well it’s a bit of a waste, too much and well you are dead; and in fact that’s sadly what happened to him.

The point of that story is that although debt is useful, particularly if you used it wisely like to do a money-making project now that you wouldn’t otherwise be able to, too much can make you do stupid things. Just like heroin is useful, it’s still by far the cleanest painkiller with the least side-effects ever found. But all drugs can be dangerous, particularly when you start using them for recreation.

This analysis suggests that America can safely borrow (net) about $200 billion a quarter from foreigners to finance (mainly) it’s trade deficit (that’s a trillion a year), and not suffer any big consequences; and that number will go up in line with nominal GDP. That’s the maximum “safe” dose.

2008/09 was a scare and the addict had to be revived by artificial resuscitation. But now it looks like the addict is heading back to its old ways, look at the first chart; imports from China in Q3 2010 were more than ever before in the history of America.

Tell-tale signs of suicide attempts

This article is not about “What’s Good for America”, it’s about how to make not to end up in the same neighbourhood the next time America has a suicide attempt.

In that regard it’s worth watching “Line 55”, and the trade deficit.

The two “headline” pieces of data are Chinese imports and oil prices; unless America starts to get serious about making an environment that is as friendly to enterprise as Special economic Zones in China, and about its dependency on oil, at least until it can figure out a way to pay for oil and toys without borrowing money from foreigners to pay for it, that is always a danger. And price of oil isn’t going down.

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