Tuesday, February 15, 2011

IT’S TIME TO REIN IN THE FED

By Scott Fullwiler and L. Randall Wray

The economic crisis that has gripped the US economy since 2007 has highlighted Congress’s limited oversight of the Federal Reserve, and the limited transparency of the Fed’s actions. And since a Fed promise is ultimately a Treasury promise that carries the full faith and credit of the US government, the question is, should the Fed be able to commit the public purse in times of national crisis?

In late 2008, after much discussion and debate, Congress approved a fiscal stimulus package of approximately $800 billion. While a much bigger and better-targeted intervention was desirable, we commend Congress for the transparency of its actions, and believe that the downturn would have been substantially worse without the stimulus.

By contrast, the Fed’s actions took place mostly behind closed doors. For example,while Congress openly debated the merits of bailing out the automobile companies, the Fed met in secret with Wall Street firms to devise a rescue of AIG.We found out only later (after Congress mandated an audit of the Fed’s books) that much of the funds provided to AIG were directly passed on to some of the biggest banks—and even to foreign banks—to cover their exposure to AIG dollar for dollar. And unlike the congressional response to the crisis, the Fed’s interventions have been ineffectual. The Fed committed as much as $20 trillion in the form of bailouts, loans, and guarantees, all in the name of saving financial institutions so that they would resume lending—supposedly a prerequisite of economic recovery. And yet, for all the trillions committed, there is very little evidence that the Fed’s actions have had much economic impact.

And now the Fed has announced a third round of interventions into financial markets, or QE2 (quantitative easing). In the first phase, called credit easing, the Fed provided liquidity through its discount window and open market operations, later supplemented by a number of extraordinary facilities created to provide reserves as well as guarantees. The main result was to cut the federal funds rate target close to zero (0–25 basis points). In the second round (QE1), the Fed bought $1.75 trillion in housing agency securities and longer-term US Treasuries. This was based on Chairman Bernanke’s thesis that once monetary policy has pushed the overnight interest rate toward the zero bound, it can still stimulate the economy by increasing excess reserves. Asset purchases under QE1 resulted in $1 trillion in excess reserves in the banking system. QE2, which is designed to purchase another $600 billion in longer-term Treasuries, will add even more.

All of this is based on a misconception. The theory is that, if banks have lots of excess reserves that pay very low interest rates, they will increase lending in order to earn higher rates. But banks do not and cannot lend reserves. Reserves are like a bank’s checking account at the Fed, and a bank can only lend them to another bank (in the fed funds market). Since there is already $1 trillion in excess reserves in the system, there is no demand by banks to borrow more.

The only other avenue through which QE might be expected to work is the interest rate channel: as the Fed buys long-term assets, it pushes up their price and lowers the long-term interest rate. A detailed study by the Federal Reserve Bank of New York estimates that QE1 lowered the long-term rate by about 50 basis points. Even using optimistic estimates of the responsiveness of borrowing and spending to interest rates, such a small reduction cannot have had much effect. Based on the New York Fed’s estimates, QE2 will lower rates by only 18 basis points—clearly not enough to stimulate spending even in the best of times.

Finally, it’s truly remarkable that, three years into the crisis, the Fed still has not learned that monetary policy is about price, not quantity. The Fed is buying $600 billion in long-term Treasuries in the hope of bringing down the long-term rate.Yet, if it really understood monetary operations, the Fed would instead announce that it is standing ready to buy as many treasuries as necessary in order to lower the long-term rate by a desired amount. For example, if it wished to lower the rate by 200 basis points, it would simply set the corresponding price it would pay for Treasuries. The Fed might end up buying more, or even less, than $600 billion worth, but it would quickly and with certainty achieve the interest rate it wanted, because the markets know that the Fed can spend as much as necessary to hit the target.

We conclude: the Fed’s crisis interventions have been ineffectual, largely executed in secret, and not subject to congressional approval. The massive, mostly off-budget support of Wall Street has proven a tremendous barrier to formulating another fiscal stimulus package for Main Street. Yet in terms of committing Uncle Sam, there is no difference between a guarantee for Wall Street and a guarantee for Main Street. It’s time to rein in the Fed.

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Gold, Silver or Copper; which metal will be the hot commodity?

By Adam Hamilton

Red-hot copper hit another new all-time high this week, extending its mighty upleg to a 66.6% gain since June! As always after any strong run, investors and speculators are pretty excited about this essential base metal these days. But this incredible bullishness, along with overbought technicals, actually suggests copper is on the verge of a major correction today.

Corrections are perfectly normal, necessary, and unavoidable within even the strongest bull markets. All prices flow and ebb, advancing two steps forward before retreating one step back. These ebbings are critical because they rebalance sentiment, bleeding away excess greed and complacency before it grows to upleg-ending or even bull-ending extremes. Corrections keep bull markets healthy. It always amazes me how much traders resist the very idea of corrections when markets near major highs. As investors and speculators, our mission is to buy low and sell high. The best opportunities to buy low within any ongoing bull market only occur after a major correction has run its course. Only then is sentiment poor enough to yield seriously beaten-down prices in the stock markets and commodities.

This innate resistance traders harbor against corrections just before one ignites is often buttressed by fundamental arguments. But while core supply-and-demand fundamentals do indeed drive the primary secular-bull trends, they are completely irrelevant for corrections. Corrections are sparked by extremely unbalanced sentiment and overbought technicals. Fundamentals have nothing to do with them.

In copper’s case, today you will often hear that copper is heading higher because of fundamental factors. China is buying, the emerging world is industrializing, existing mines are depleting, miners are striking, new mines are years away from production, et cetera. But realize these indeed-bullish supply-demand trends have been in force more or less continuously since late 2001 when this secular copper bull was stealthily born.

Despite the inherent bullishness of global demand growth outpacing global supply growth on balance, copper still had to weather many major corrections over this past decade. So don’t fall into the rookie trap of rationalizing away extreme sentiment and overbought technicals with fundamental arguments. All bulls correct from time to time no matter how awesome their underlying fundamentals happen to be.

Unfortunately copper doesn’t share the stock markets’ excellent array of sentiment indicators. But if you look around, it is readily apparent consensus opinion is pretty darned bullish on this base metal. Articles in the financial press advance endless fundamental arguments for why copper is heading higher. And professional money managers, traders, and analysts interviewed on financial television expect the same.

But even though copper doesn’t have some neat indicator like its own VIX, its technicals are clearly overbought today. Its price has risen too far too fast to be sustainable. How can we know? By comparing copper’s recent highs to this metal’s technical conditions just before its previous major corrections. We’ll start out by examining the blue copper line compared to its black 200-day moving-average line.

In order to define “too far too fast” for copper specifically, we need some kind of baseline.And its 200dma is a perfect one. It gradually rallies to reflect the higher prevailing copper levels as this secular bull marches on, but still moves slowly enough to distill out all the day-to-day volatility. Expressing any price as a multiple of its 200dma (dividing the price by its 200dma) is the basis of my Relativity trading system.

In copper’s case, earlier this week this metal was trading at 1.287x (times) its 200dma. Compare this to the Relative Copper readings before each of its previous several corrections. In November 2010 before a sharp 8.7% retreat, this metric stretched to 1.217x. In April 2010 before copper plunged 23.4%, it climbed to 1.218x its 200dma. And in January 2010 before this metal fell 18.7%, rCopper peaked at 1.334x.

So we have plenty of precedent over this past year alone showing that copper is very overextended and overbought once it stretches 20%+ beyond its trailing 200dma. Copper running 1.2x+ is the point where traders need to start being wary of an imminent correction. Copper has a tough time sustaining an advance that sees it rally far enough and fast enough to exceed this benchmark. And this week we were well beyond that warning sign and pushing the super-extreme 1.3x level!

Now this alone warrants a very cautious near-term outlook on copper. The odds overwhelmingly favor a major correction. Again this has nothing to do with fundamentals, which are utterly irrelevant to short-term price action when sentiment and technicals reach extremes. Personally I wouldn’t go long copper or copper stocks based on this rCopper indicator alone when it’s at these levels. The near-term downside risk is far too high.

But add in a couple of other major factors driving copper prices, and the odds for an imminent correction approach certainty. They are the state of the general stock markets today and the trends in the London Metal Exchange’s global copper stockpiles. Each alone is a very ominous near-term portent for copper, and considered together along with copper’s overbought technicals present a nearly-ironclad correction case.

Believe it or not, the major driver of copper price action in its current cyclical bull since early 2009 is the state of the US stock markets! It sounds crazy at first, shouldn’t copper be reacting to its own supply and demand and not stock-market action? Of course. But the stock markets’ fortunes have a massive impact on traders’ sentiment worldwide. When the stock markets are up, they feel good and are more likely to buy commodities including copper. When they are down, traders dump everything including copper.

While this link is purely psychological, sentiment is what drives most short-term price action in anything. And there is some logic underlying this relationship. Advancing stock markets lead traders to expect an improving world economy, which means higher copper demand. So they buy this metal and the stocks of its producers. Retreating stock markets make traders assume the economic outlook is deteriorating, implying lower copper demand. So they react accordingly by selling the copper complex.

The best way to measure the US stock markets’ performance is through the broad S&P 500 stock index (SPX). It contains the 500 biggest and best American companies that collectively represent the vast majority of the total market capitalization of the US stock markets. In the chart above, I superimposed the past couple years’ copper action on top of the SPX in red. Their correlation is visually-astounding!

On a hard statistical level, this critical copper-SPX correlation is rock-solid mathematically as well. Since those brutal post-panic SPX lows in March 2009, copper has had a correlation r-square with the SPX of 93.4%. Over 93% of all the daily price action in copper over the last couple years is directly explainable by the SPX’s own! For whatever reason, copper traders are buying and selling copper in sync with the SPX.

And realize this relationship does indeed flow in this causal direction, from the SPX into copper. Every trader in the world watches the stock markets like a hawk. Their behavior and resulting psychological spillover affects everything else including copper. Meanwhile, general stock traders are definitely not eagerly watching copper prices to guide their every decision on buying and selling equities. The SPX is definitely influencing copper psychology, as suggesting copper drives the stock markets is absurd.

Note that all three of copper’s latest corrections in this bull, and 5 of 6 in total, corresponded exactly with pullbacks (less than 10%) or corrections (greater than 10%) in the SPX. Last November copper sold off 8.7% in just 4 trading days over a span where the SPX retreated 2.9%. Between early April and early June, copper plunged 23.4% over a span where the SPX corrected 10.7%. The worst copper correction of this entire cyclical bull was directly driven by the only correction in the SPX’s own cyclical bull!

And a year ago in January and February, copper dropped 18.7% in less than 4 weeks while the SPX fell 7.0% in its biggest pullback of this bull. Other than that initial post-panic recovery in 2009, which was an anomalous situation, every copper correction has perfectly corresponded with a parallel pullback or correction in the general stock markets. A retreating SPX scares traders into reducing all their risky trades, including copper exposure.

This is super-relevant today because the stock markets, for their own internal reasons that have nothing to do with copper, are also due for an imminent correction. I wrote an essay several weeks ago that explains exactly what is going on in sentiment and technicals in the SPX and why a correction looms. When (not if) the SPX inevitably rolls over, copper is going to get sucked into the maelstrom of selling like usual.

Copper just can’t resist the overpowering bearish sentiment that floods out of the stock markets when they are correcting. Almost nothing can, other than the US dollar and Treasuries which act as temporary safe-haven destinations for capital in times of mushrooming anxiety and fears. And today’s coming SPX correction is likely to be major, so all investors and speculators need to take its risks very seriously.

If you compare copper’s declines in its half-dozen corrections in this cyclical bull to the SPX’s parallel ones, both shown above on the chart, it is crystal-clear that copper tends to amplify stock-market downside. It is much more speculative than the stock markets, usually at least doubling SPX selloffs. So a garden-variety 15% SPX correction, no big deal at all, would probably lead to a massive copper correction approaching a third. Copper equities would get utterly slaughtered.

Several other factors argue for a serious copper correction beyond its extreme technical overboughtness and SPX-correction risk. After just hitting new all-time highs, copper is ripe for a selloff. Corrections off of records tend to be more severe, as such highs attract in new traders who buy near the top. These weak hands are easily spooked into selling fast.

In addition, copper hasn’t seen a material correction (over 10%) since last spring. It has rallied in a tight uptrend mirroring the SPX ever since, leading to very unbalanced sentiment. The longer any bull advances without a rebalancing selloff, the greater the odds one is coming soon.

And there is one final factor to consider that will really weigh on copper once selling starts. And it is fundamental! While fundamentals don’t matter in corrections sparked by sentiment and technicals, any temporarily-negative fundamentals can still add to this selling pressure. They exacerbate the bearishness and worries sparked by selling-off stock markets. Today the LME’s copper stockpiles are climbing again!

The London Metal Exchange runs a global network of warehouses that act as a buffer between copper miners and copper consumers. While most copper mined is shipped directly from producers to consumers, occasionally a miner will have excess production or a consumer will need more copper than usual. So these physical players can directly sell to or buy from these LME warehouses. The LME publishes its aggregate global copper-stockpile data daily. And it greatly impacts copper-price trends.

Prior to that epic once-in-a-century stock panic in late 2008, copper prices trended inversely to LME stockpile levels. When these above-ground copper stockpiles were rising, copper prices would fall as traders sold it because supplies weren’t as tight. When stockpiles were falling, copper prices were bid higher to reflect the leaner buffer between supply and demand. There were actually times when LME stockpiles represented only days’ worth of global copper consumption! Copper challenged $4 then.

During the stock panic, copper plummeted with all other risky assets thanks to the immense psychological splash damage from the plunging stock markets. But there was actually something of a fundamental basis for some of copper’s freefall, as LME copper stockpiles rocketed up dramatically. Thanks to the stock panic, the great majority of the business world feared a new global depression. So copper consumers (factories making products using copper) slowed their production and bought less LME copper.

Then in early 2009 as those silly and irrational depression fears abated, LME stockpiles started falling again and copper rallied sharply. But these critical stockpiles soon stabilized at much higher levels than what existed before the stock panic. So traders wondered whether copper prices would stay lower (around $3) for a while to reflect the reduced scarcity and risks of a supply shock. And initially they did.

But as the stock markets recovered out of the panic and the SPX soared, speculators flooded into copper again to bet on the mending global economy. So between the middle of 2009 and early 2010, copper prices rallied despite LME stockpiles blasting back up above their same extremes seen in the heart of the panic. Copper was still recovering from its own ridiculously-low panic levels, which contributed to this particular disconnect from its usual inverse relationship with stockpiles.

Then after consolidating sideways in a volatile and choppy manner in the first half of last year, behavior driven by the pulling back and then correcting SPX, copper started surging again last summer. And there was some basis for this rally in the stockpile draws, until early December. At that point LME stockpiles bounced just under 349k metric tons and started rising. In the 8 weeks since, LME stockpiles have surged 14.2% higher at best while copper has rallied 24.6% at best (since mid-November). This is a big disconnect!

So for the copper fundamentalists out there, ever since this metal was trading around $3.90 in early December the copper gains haven’t been righteous. Copper should have fallen since then on rising LME stockpiles, but instead it was bid higher. Why? Because all the bullishness spilling out of the rallying stock markets bled into copper like usual! From its recent all-time record high of $4.60, copper would have to plunge almost 16% just to return to levels it should have started correcting from in early December!

The $0.70 run since then is all froth, pure speculation spurred on by the strong stock markets. While copper’s imminent correction is going to erupt for sentimental and technical reasons, these bearish near-term fundamentals could really exacerbate this selloff’s sharpness and depth. While this fundamental disconnect alone isn’t sufficient to call for a correction, considered in addition to everything else it is quite ominous.

So what to do? If you are an investor, relax and don’t worry about it. You are holding your copper stocks for many years so short-term corrections are ultimately meaningless. But gird yourself to weather the psychological storm corrections bring. Expect it and the copper selloff won’t worry you like it would if you had no idea it was coming. But if you are a speculator, this imminent copper correction is a huge deal.

You should realize gains in short-term copper-stock trades before copper starts sliding. Just like copper will amplify the SPX correction, copper stocks will leverage the metal’s own decline. So we could be looking at severe corrections in copper stocks, making locking in existing profits imperative. On the bright side, after this copper correction matures we’ll see some amazing buying opportunities in thrashed copper stocks. Selling before the correction ensures you will have a big cash war chest to buy the bargains left behind in the correction’s wake.

At Zeal, this is always our strategy trading commodities stocks. We relentlessly study the markets to gain the wisdom and knowledge necessary to identify high-probability toppings right before major corrections, and high-probability bottomings right after them. Then we can buy low after corrections and sell high right before the next one. It is a conceptually-simple yet wildly-profitable approach when properly applied.

Over the past decade our real-world trading results derived from our carefully-honed skillset have been outstanding. All 235 stock trades made in our flagship Zeal Intelligence monthly newsletter since 2001 have averaged annualized realized gains of +52.4%! You can’t imagine how fast your capital grows with these kinds of returns. Subscribe to our acclaimed monthly or weekly newsletters today and find out! We’ll be launching new high-probability-for-success copper-stock trades once this correction matures.

The bottom line is copper is due for a major correction. Sentiment in this metal is wildly bullish thanks to its recent massive upleg and new all-time highs. Copper is very overbought technically, it has rallied too far too fast by its own bull-to-date standards. And it has ignored a major trend change in its LME stockpiles in order to follow the stock markets higher. Together, all this is a recipe for a serious selloff.

Compounding these risks, copper has an incredibly-tight positive correlation with the US stock markets. And they are due for a major correction of their own. When they roll over, copper is going to get crushed like usual. On the bright side, a copper correction will drive serious carnage in copper stocks. If you can prudently amass cash before the slide, then after this correction runs its course you can buy some of the best copper-stock bargains seen within this ongoing bull.

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CONFIDENCE IN EQUITIES AT RECORD HIGHS

by Cullen Roche

The latest Merrill Lynch Fund Managers Survey showed the highest reading of bullishness ever.  They report that fund managers have a net 67% overweight position in equities.  This is the highest level they have ever recorded.  Gary Baker of Merrill writes:
“The February FMS is one of the most bullish in years. Institutions have record equity and commodity overweights, very low cash levels and the strongest risk appetite since Jan‘06. Surging inflation expectations show we are no longer in a Goldilocks environment and a meaningful tactical correction in risk assets could be caused by a jump in interest rates or weaker US growth.”
Allocations are currently excessively bullish and consistent with past corrections:
“Global investors’ average cash balance fallen by 20bps to 3.5%. On our backtesting work a level of 3.5% or below has in the past signalled an equity market correction on a four-week horizon.”
Merrill says investors are “all in” on equities with commodities a close second:
“Investors have moved to all-in on equities, at +67% O/W. This is the highest level in survey history. This puts the asset class into potentially overowned territory(more than +1SD above average), and makes it vulnerable to any macro disappointment, but could also be part of a structural re-alignment.   Commodities remain the second most popular asset class after equities, and have also reached a new to record allocation reading of net 28% O/W, upfrom a net 16% last month.”

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Obama's Revenue Estimates Are Either Fantasy Or Comedy

by Chris Martenson
Fantasy or comedy?  I couldn't decide which way to label the Obama budget, so I went with both.

The bottom line is that the Obama administration has brought forth the most unbelievable revenue increase that I have ever seen proposed in a budget, a whopping 65% increase in revenues in just four years, which will - miracle of miracles - drop the deficit as a percent of GDP from nearly 11% to just 3.2% over those same four years.

The only problem with this scenario is that it stands virtually no chance of actually happening. Revenue will be far lower than projected and the deficit correspondingly higher.

One of my abilities is spotting bogus numbers quickly, and another is to make reasonably accurate projections without a staff of hundreds. For example, in 2009 I called for the Social Security fund to soon begin dipping into negative territory when the CBO was clinging to the illusion that 2017 was the 'below zero' date. Turns out I was right, and it wasn't a terribly difficult call to make. A little trend projection here, some assumptions about early retirement there, a higher and more realistic assessment of peak unemployment, and - voila! - a reasonably accurate projection was made.

Let's look at the recently released Obama budget, which is so far off the mark that no special abilities are required beyond the ability to suppress the urge to chuckle:
chart
The green circles show the rosy deficit-reduction estimates, while the red arrows indicate the incredible 65% increase in federal revenues over a single four year period.  65%! How likely is that? Is it realistic?

Perhaps a little history is in order here. Let's start by asking a question: In any other four-year period, have federal revenues increased by 65% or more?
The answer is yes, but it’s a very qualified yes.

In the first chart below, the red bars show the proposed revenue increases on a rolling four-year basis. That is, each year is compared to the revenue period four years prior. The blue bars are the same, only they represent actual history, not projections while the red bars are the Obama team projections.
The second chart is a comparison to CPI to make a point.

Over the past 60 years, there have only been three other years with a similar or higher rate of revenue growth to the one estimated to occur in 2015: 1979, 1980, and 1981.

There are two things we might note about those prior three years ('79-'81) of rapid federal revenue growth. The first is that those same years represent the second, first, and fourth highest rates of yearly inflation in 50+ years of data, coming in at 11.3%, 13.5%, and 10.4%, respectively.

Does the Obama budget assume similar enormous rates of inflation? Nope. It assumes 2% or less inflation in every year of its projections out through 2015.  So it's not inflation that will be driving the enormous revenue growth.

Another reason we might anticipate extremely strong revenue growth is because of a rapid expansion of GDP.

Here again in 1979, 1980, and 1981, we saw something very unusual in the data: Those years clocked exceptionally robust GDP growth at 11.7%, 8.8%, and 12.1%, respectively.  Out of 65 years of data, those were the 4th, 5th and 17th fastest years of economic expansion.

Could that be the driver behind Obama's optimism? Is his team calling for double-digit GDP growth over the next few years?  Do they envision 'top ten' like performance for a couple of those years?

Not according to their published data.

So we can't really defend the projected increase in revenues on the assumption of massive economic expansion either. The Obama team does predict a pretty decent expansion - but on a relative basis, it's nothing spectacular and is less than half that which drove the revenue expansion in the 1979-81 period.

So the 65% revenue increase will not be driven by either inflation or GDP expansion.

What if we compare the projected increases historically on an inflation-adjusted basis - would that put them in a better and more believable light?

In this next chart, we simply chart each year's federal revenues after correcting for CPI (we used the Obama budget CPI assumptions for the years 2011 - 2015 to discount the future so everything is in 2010 dollars).

Are these numbers any less fuzzy? Nope. Even on this basis the proposed revenue increases are the largest on record, bar none.

Conclusion

There is almost no chance of the Obama revenue projections coming to pass, unless massive tax increases are part of the deal, and as far as we know, they aren't.

The only other alternative is that the United States might enjoy some pleasurable combination of quite rapid growth, a fall off in unemployment to match, tidy increases in wages, and a low CPI.  But the probability of all of these coming to pass is very, very low (although I will admit that they must be very appealing to an incumbent. Appealing? Yes. Likely? No.)

Here's my prediction; we'll have sub-par growth in 2011 and relatively weak growth in 2012, with a 50% chance of a double-dip appearing in one of those years. As such, revenue growth will be slightly below average between here and 2015.

Using these assumptions, and generously assuming that things more or less carry on as normal and even more generously that the economy magically grows to $19 trillion as the Obama team has assumed, the actual budget deficit will be no less than 8% of GDP each year between here and 2015.

My estimates translate into a roughly $1.5 trillion cash deficit each and every year -- give or take a little -- digging our national debt hole deeper by another $7.5 trillion by 2015.
This, however, is merely my starting bid. I can easily envision deficits that are far higher in both aggregate and percent-of-GDP terms, due to some combination of rising energy prices and debt overhang dragging the GDP figure downwards, and rising interest rates driving federal costs higher.

The bottom line is that either this budget is a fantasy, or I am completely wrong and we somehow set historical records for revenue growth during a time of low inflation and below average GDP growth.

It is against this backdrop that you should be especially dismissive of any and all partisan rhetoric that proposes to reduce the deficit by trimming this or that program by a few billion here and there. Until and unless you hear about cuts to the big four - Defense, Medicare, Medicaid, and Social Security - you can be certain you are merely listening to partisan talking points aimed at posturing for the next election, not credible plans for attacking the root of the problem.

The US is facing a deficit pattern (deficits higher than nominal GDP growth) that has ruined many a country before. A failure to legitimately address this condition before being forced to do so by global or market circumstances will lead to a far rougher period of adjustment than necessary.  Such a failure even risks it all: a sudden loss of reserve currency status for the US that leads to a sudden repatriation of some $7 trillion in US-dollar-denominated assets currently held off-shore.

Said simply: The risk is a massive inflationary event that forces the Fed to choose between defending the dollar (by raising interest rates) or defending the US economy. It can't do both at the same time.

Those interested in learning more about how events will likely play out from here can read our Guide to Navigating the Coming Crisis (free executive summary; enrollment required for full access).

Global Demand For Meat And Ethanol Are Contributing To The Grain Price Surge

by Frank Holmes

Bushels of corn reached their highest prices in nearly three years this week after the U.S. Department of Agriculture (USDA) reported that corn inventories will fall to levels not seen since 1996.

We’ve witnessed nearly a 100 percent surge in the price of corn over the past year as increased demand has been met with diminishing supply. Dry weather conditions due to La NiƱa in Argentina and other disruptions have shriveled supply despite a near record amount of acreage being planted.

Globally, corn consumption has increased 10 percent over the past five years to reach record levels and stock-to-use ratios for corn suggest we’re currently experiencing the tightest global corn market since the late 1970s, according to Macquarie.

This jump is due to increased corn consumption for ethanol and greater demand for feed grain. The USDA estimates that just under 40 percent of U.S. corn production will be consumed for ethanol, up from 31 percent in 2008-2009. China will likely need to import 5 million tons of corn in 2011 in order to meet the country’s booming need for feed grain. In the U.S., an additional 60 million bushels will be used for feed despite a reduction in livestock, according to the Des Moines Register.

Corn is just one part of the food pyramid that is rising. Around the world, prices for wheat, soybeans, cocoa and other grains have jumped in the last 18 months in conjunction with the global recovery. Prices have jumped because demand outstripped supply.
World Grain Production and Consumption
This chart from Potash Corp. shows that grain production has failed to meet consumption in seven of the past 11 years. This is despite producing a significantly larger amount of grain in 2009 than in 2000. Potash Corp. estimates world grain production declined more than 4 percent in 2010. An extreme drought in Russia chopped grain production in the country by 38 percent and 13 percent in neighboring Ukraine.

These tight supply/demand fundamentals reflect the impact of a growing global population and increasing economic strength in emerging markets, Potash says.

As per capita wealth has grown in other countries, there has been a huge jump in demand for grains. This chart shows the amount of bushels consumed as GDP per capita rises.
Grain Demand Just Beginning in China and India
Much of the rise is due to people consuming more meat as their fortunes rise. To meet this higher protein diet, more chickens, cows and hogs are fed grains and demand skyrockets. You can see that China and India are still in the very early stages of increased consumption.

We think the agricultural space is ripe with opportunity. With global grain inventories relative to demand at multi-year lows and the rising emerging market middle class showing a healthy appetite for more meat and dairy products, demand for increased crop yields should remain strong.

Inflation Warning: Should the Fed Raise Interest Rates?

By PETER COHAN

It's no surprise that prices are rising -- the question is whether the Fed will do something about it. As I pointed out in a Daily Finance article in October, prices of commodities -- including corn, wheat, and cotton -- have recently hit record levels. Demand from emerging markets is strong and increasing as China's 10% annual growth brings more of its 1.3 billion people from the countryside to the cities. And after a bad harvest, the volume of cotton to meet that demand is weak.

Now clothing prices are expected to rise in the U.S. by 10% thanks to those record cotton prices. Winter gasoline prices are higher than they've been in years, and they could rise as the summer driving season approaches. China has started hiking interest rates and forcing banks to raise capital in an effort to rein in inflation there. But the U.S. inflation rate was a mere 0.5% in December according to the Bureau of Labor Statistics.

The Fed surely sees the inflation wave roaring across the Pacific to our shores. The question is whether it will keep interest rates low to boost job growth, or whether it will wait until workers demand and get higher wages that bake inflation into the expectations cake.

According to The New York Times , prices of cotton, leather, polyester, copper, iron ore, corn, sugar, wheat, beef, pork and coffee are at or near record highs and are likely to soar. But the prices of household goods represent a mere 25% of Americans' household spending, so the pain of price increases will be annoying but not catastrophic. And the U.S. is both a consumer and supplier of the commodities whose prices are spiking.

Feeling the Pain at the Margins
Many companies that sell in the U.S. market use those commodities in their products. The business challenge they face is whether to pass those higher costs along to consumers, or hold prices steady in order to hang onto their market share.

According to The New York Times , many consumer products suppliers are taking the first choice -- passing along their higher costs. Among the items you should expect to pay more for soon:

  • Whirlpool ( WHR ) washing machines: up 8% to 10% starting Apr. 1;
  • Hanes Brands ( HBI ) underwear up 30% by the summer; and
  • Victoria's Secret ( LTD ) underwear up from $25 to $25.50.
Other companies are using a different technique to control costs -- giving consumers less for the same price. For example, restaurants are turning down their heat or air conditioning, and consumer product companies are taking such steps as putting fewer sheets in their rolls of toilet paper.

But companies are still scared of losing market share if they pass on the full weight of their cost increases, so their margins are likely to take a hit. According to The Wall Street Journal , Morgan Stanley ( MS ) estimates that about 25% of companies have reported lower margins in the latest quarter. And S&P notes that fourth quarter 2010 S&P 500 operating margins (8.69%) were lower than those in the third quarter (8.95%). Despite an expected 7.5% rise in 2011 revenues , about which I wrote on DailyFinance, those lower margins could crimp earnings growth.

Fear of Full Employment
The fundamental question is: What is inflation? More specifically, what kind of inflation will scare the Fed into action? The Fed tends to discount the significance of higher commodity prices because they are volatile, likely to go up and down erratically, and are thus not big contributors to long-term inflationary expectations. What the Fed does fear are rising wages, because wages are a big portion of corporate costs and when they rise, the higher costs get baked into companies' expenses through long-term contracts.

This puts the Fed in an awkward position. After all, Fed chair, Ben Bernanke, has been complaining about how it will take years for the job market to return to normal . But if the unemployment rate were to plunge to the 4% or 5% range, American workers would be in a stronger bargaining position to ask for higher pay.

And it's the threat of higher wages that really scares the Fed because when workers negotiate higher pay, companies have no choice but to pass those costs on to their customers. This leads me to consider an idea that might help out the U.S. economy : What if we created a futures market that employers could use to hedge wage increases like the markets for interest rate or commodity futures?

Until someone launches such a market, the statistic to watch closely as a harbinger of inflation is one of my personal favorites -- capacity utilization, the measure of how much slack the nation has in its factories. Capacity utilization is key because if it gets too high, companies will be pushing their workers beyond their limits, and they'll need to start paying people more to get them to work longer since there won't be as many extra people looking for jobs.

By that measure, the Fed is unlikely to raise interest rates any time soon: At 76% , capacity utilization in January 2011 was comfortably below the 1972-2009 average of 80.6%, according to the Federal Reserve. Of course, with inflation adjusted median family income down 8.1% between 2000 and 2009 , it's clear that companies have many tricks up their sleeves -- most notably outsourcing to lower-wage countries -- to keep high capacity utilization from forcing up U.S. wages.

So with inflation expected to be 1.3% for 2011 -- below the Fed's 2% target -- and workers still bent over the proverbial barrel, the Fed is likely to keep rates low even as higher commodity prices take a bigger bite out of Americans' declining incomes.


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Super Commodity Take Profit On Soybean Meal

Oggi Super Commodity ha chiuso con un ottimo guadagno il trade su Soybean Meal + $ 1460 / Contract, Risk / Reward 2.30. I risultati real-time di Super Commodity e di alcuni altri nostri trading systems sono a disposizione al seguente link: http://www.box.net/shared/5vajnzc4cp

Today Super Commodity closed with a great gain the trade on Soybean Meal + $ 1,460 / Contract, Risk / Reward 2.30. Real-time results of Super Commodity and our some other trading systems are available at the following link: http://www.box.net/shared/5vajnzc4cp

SM
Material in this post does not constitute investment advice or a recommendation and do not constitute solicitation to public savings. Operate with any financial instrument is safe, even higher if working on derivatives. Be sure to operate only with capital that you can lose. Past performance of the methods described on this blog do not constitute any guarantee for future earnings. The reader should be held responsible for the risks of their investments and for making use of the information contained in the pages of this blog. Trading Weeks should not be considered in any way responsible for any financial losses suffered by the user of the information contained on this blog.

Copper price a key battleground

By Andrea Hotter

IF participants in the base metals markets were looking to China for price direction clues, then the release yesterday of bullish import data for January is certainly providing them.

As China officially overtook Japan to become the world’s second largest economy, preliminary data provided by the General Administration of Customs showed China’s copper imports touched a four-month high in January, narrowing the country’s trade surplus and renewing confidence in the metal’s near-term price prospects.

Copper rose 1.7 per cent on the London Metal Exchange to $US10,131 a tonne, still shy of last week’s record high of $US10,160/tonne but setting the tone for teh US session. Yet while the data are positive, brokers and investors remain unconvinced that the rise in imports will be sustained because China’s trade figures are typically very volatile at the beginning of the year due to distortions caused by the variable timing of the Lunar New Year holiday.

The data showed that China imported 364,240 tonnes of copper, copper alloy and semifinished products in January, an increase of 5.7 per cent from December and a rise of 25 per cent from the same month a year earlier.

The data confounded expectations for much lower imports given anecdotal evidence that physical demand was weakening and that the arbitrage — or difference between LME and Shanghai prices — didn’t encourage trade.

“While the market has taken the import figure as a bullish sign, we remain cautious as the data are backwards looking and essentially reflect the market conditions, and expectations during the preceding couple of months, rather than the current picture,” said Standard Bank’s Leon Westgate.

Export data for last month haven’t yet been released, and merchants and brokers active in China said it’s possible the anticipated rise in exports will, at the very least, reduce the net import-export figure for copper, and could in actual fact lead to a lower net figure on the month.

The figure isn’t expected to be released until next week, when the detailed import data are revealed.

The rises in exports comes as the soaring price of copper and the lack of easy financing has forced many Chinese investors who bought and stockpiled metal to sell it to merchants active in the region.

Stocks in official exchange warehouses have also been steadily rising as material imported into China is now being re-exported to take advantage of the fact that LME cash prices are higher than future prices.

LME stocks are at six-month highs, with locations in the US, particularly St Louis and New Orleans, accounting for 68 per cent of metal on warrant. But its warehouses in South Korea, Malaysia and Singapore, which account for about 24 per cent of the metal, that have seen the biggest stock rises of late. Europe holds the rest of the metal.

Shanghai Futures Exchange and Comex exchange stocks are rising, while copper in bonded warehouses in China is rapidly increasing.

Opinions are divided over the outlook for copper and the other base metals. Barclays Capital said the base metals are now at a “crossroads,” with market participants expecting a big pick-up in buying, and buyers seeing lower prices. “Something will have to give,” Barclays added.

The bank — which expects copper to average over $US13,000/tonne by year-end — is anticipating a big increase in base metals demand amid a new found confidence in the sustainability of economic growth.

But others caution that copper is now due a correction.

Standard Bank’s Westgate said the metal is at “the centre of a battleground,” with last week seeing over 63,000 lots trade on the LME’s electronic trading system, for what resulted in only a $US100/tonne fall on the week.

“Assuming an average copper price of $US10,000/tonne, well over $US15 billion changed hands. A startling amount of ammunition has therefore been expended keeping copper above the $US10,000/tonne mark, suggesting a potentially violent reaction should positions start to be unwound,” he added.
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Jump in Chinese imports to revive sugar rally

by Agrimoney.com

It is too early to write off the rally in sugar futures, which fell for a third successive trading day on Tuesday, with China to trash beliefs that high prices have trashed demand for the sweetener.
Analysts at Sucden Financial, while noting talk that the physical sugar market had been "recently very quiet", also highlighted buyers' limited scope for holding off, given "low" inventories.
"It seems that many are waiting for sub-30 cents [a pound] prices," Sucden's Nick Penney said, adding that while New York's front, March contract may indeed touch these levels, such a decline "may be brief".
The contract stood at 30.66 cents a pound at 14:30 GMT on Tuesday, down 0.8% on the day, sparking speculation among some analysts, such as Ker Chung Yang at Phillip Futures, of an imminent correction.
Cane setbacks 
China, in particular, looked to have little room to hold out, facing a second successive season of output well below demand of 14m tonnes, Societe Generale said.
"Given that the sugar cane area was recently hit with frost, the Chinese production outlook is now closer to 11m tonnes," SocGen analyst Emmanuel Jayet said.
With Beijing having already run down stocks to meet last year's shortfall, blamed on drought, "we think that Chinese imports will likely soon increase dramatically and reach 3m tonnes on an annual basis", Mr Jayet said.
"It may even be higher as stocks will have to be built up."
As a potential signal of Beijing's imminent intent, futures prices in China had now built a premium of $0.20 a pound over their New York peers – a level which last year triggered imports.
'Overall trend bullish'
With supplies from Brazil, the top exporter, waning in its close season for processing, and significant shipments from India looking increasing unlikely, a move by China back into import markets could send sugar back towards the 30-year high of 36.08 cents hit at the start of the month.
"The second quarter [of 2010] could be as volatile as the first as uncertainty on whether Indian exports will be large and whether China, and the rest of the world, will step up its demand for imports," Mr Jayet said.
"We believe, however, that the overall trend will be bullish," seeing raw sugar futures average 34.3 cents a pound in the April-to-June quarter.
Production rebound 
However, prospects thereafter were dimmer, with Societe Generale forecasting that prices would decrease "more significantly" late in the year as better prospects for 2011-12 sugar production become apparent.
World output will rose by 10m tonnes to 174.8m tonnes, raising inventories for the first time in four seasons.
"This [production] increase is expected to come mainly from countries where this year's output has been impacted by detrimental weather conditions - namely Russia, the European Union, Thailand, Indonesia and China among others."
The improvement in supplies will depress New York futures to an average of 25 cents a pound in the last quarter of the year, and to an average of less than 20 cents a pound for 2012.

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Survivor Trading System - Trades of 14 February

I trades di Survivor System del 14 Febrraio. I risultati real-time di Survivor e di alcuni altri nostri trading systems sono a disposizione al seguente link: http://www.box.net/shared/5vajnzc4cp

Trades of Survivor System on 14 February. Real-time results of Survivor and our some other trading systemsare available at the following link: http://www.box.net/shared/5vajnzc4cp

GC EC NG
RB HO

China copper imports trigger demand-driven rally, metal hits record $10,170

by Balkans.com.

Copper rallied to a record high on Monday, after a surprise jump in Chinese imports reinforced prospects for robust global demand and raised hopes of extended restocking by the world's top consumer.

    Copper, often viewed as a barometer for the global economy due to its use in construction and power, posted its biggest daily gain in about two weeks, as the data suggested China's growth remained intact despite recent tightening measures.

    "It could very well be that the Chinese economy is running hotter than anyone thinks," said Bart Melek, vice president and director of commodities with TD Bank Financial Group.

    London Metal Exchange (LME) copper for three-month delivery extended gains to a record $10,170.25 per tonne in after-hours trade, having closed up $199 at $10,160, matching the previous high.

    COMEX copper for March delivery added 9.25 cents, or 2 percent, to settle at $4.6285 per lb. The session range ran from $4.5435 to $4.6345, with the high coming within a hair of last week's record at $4.6375.

    The bullishness spread to other metals, lifting tin to a record high of $32,460 a tonne. It ended up $675 at $32,450, as supply constraints in  Indonesia continued to support prices.

    Preliminary Chinese trade data showed imports of unwrought copper and semi-finished copper products rose to 364,420 tonnes in January.

    The volume, which was up 5.7 percent from December and 24.7 percent from January 2010, was the highest since September and marked the third successive month analysts had expected imports to be under pressure from relatively low Chinese prices.

    "The market's taken these numbers in a very bullish way," said Robin Bhar, an analyst at Credit Agricole. "China's appetite is insatiable."

    Investors will focus next on Chinese inflation data due on Tuesday amid   worries that any tougher stance by Beijing to rein in inflation could affect metals demand.

    Talk swirled around financial markets that China's consumer prices may have risen 4.9 percent in the year to January, well below the consensus forecast of 5.3 percent.

    "If we get a strong number ... say around 5.8 to 6, and the core moves up meaningfully above 2 percent, we are going to be worried about a significant tightening of Chinese monetary policy, and some of these base metals could be left wondering where do we go from here," TD Bank's Melek said.
    LME copper stocks increased 5,050 tonnes to a six-month high of 401,775 tonnes, continuing a recent climb that has kept optimism about demand in check.

    ETFS IN FOCUS

Aluminium ended at $2,514 a tonne from $2,496.

    LME warehouse stocks dipped 4,725 tonnes to 4,594,725 tonnes, although they remain within reach of a record high of 4,640,750 tonnes hit in January 2010. Market sources said expiring finance deals were boosting stock levels.

    Canceled warrants -- metal tagged for removal from warehouses -- rose by nearly 50,000 tonnes, having climbed by double that amount in Detroit since Thursday, pointing to a pick-up in demand from the auto sector.

    "Strong auto production growth is good news for many commodities, accounting for about 25 percent of aluminium (including secondary), 25 percent of zinc, 15 percent of steel and 10 percent of copper usage," Macquarie said in a note.

    Also grabbing investors' attention, Russia's United Company RUSAL Ltd, the world's largest aluminium producer, said an aluminium exchange-traded fund (ETF) could be launched soon in Britain.

    "The question is, will the ETF launch mop up that excess?" Bhar said of LME stocks.

    Rusal said it saw steady output growth in 2011, driven by strong demand from China and a rebound in North America.

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