Tuesday, March 1, 2011

Commodities Advance in Longest Winning Streak Since 2004

By Whitney Kisling and Jennifer A. Johnson

(Bloomberg) -- Metals, crops and fuel beat stocks, bonds and the dollar for a third straight month, the longest stretch since June 2008, as inflation lifted cotton and cocoa and investors speculated violence in the Middle East and northern Africa will restrain energy supplies.

The S&P GSCI Total Return Index of 24 commodities gained 3.8 percent in February and rose for a sixth consecutive month, the longest streak since 2004, data compiled by Bloomberg show. The MSCI All-Country World Index of equities in 45 nations returned 3 percent including dividends, while corporate and government bonds rose 0.21 percent, according to Bank of America Merrill Lynch’s Global Broad Market Index. The U.S. Dollar Index, a gauge of the currency against six counterparts such as the euro and yen, fell 1.1 percent.

Faster global growth pushed up raw-material prices since September and gains accelerated after riots toppled leaders in Egypt and Tunisia and threatened Libya’s Muammar Qaddafi. At the same time, central banks in emerging economies from China to Russia are raising interest rates and boosting reserve requirements at banks to fight inflation, holding back equities.

“These commodity price increases are staggering,” said Kevin Rendino, a money manager at New York-based BlackRock Inc., which oversees $3.45 trillion. “Each commodity is different, but there is a supply issue for oil. There has been real economic demand for these commodities since the economy began recovering.”

June 2008

The last time commodities beat stocks, bonds and the dollar for three straight months was June 2008, when the price of oil surged following violence in Iraq. Futures reached a record $147.27 a barrel the next month, and the average price for U.S. regular gasoline at the pump also climbed as high as $4.114.

The S&P GSCI index advanced 1.1 percent at 9:47 a.m. in New York today.

Metals gained in February after reports showed Chinese manufacturing expanded and U.S. factory output beat the most optimistic forecast of economists surveyed by Bloomberg. Silver rose 20 percent last month, the most of any metal in the S&P GSCI index. The Federal Reserve raised its forecast for growth in the U.S., the world’s biggest economy, to a range of 3.4 percent to 3.9 percent, from 3 percent to 3.6 percent.

Libyan Supplies

Oil climbed to the highest price since September 2008 in February. Oil rose after estimates showed exports from Libya, the third-largest producer in Africa at about 1.6 million barrels of oil a day, was cut. Barclays Plc said output was reduced by more than 1 million barrels a day, while the International Energy Agency said output was down 850,000 barrels. Clashes between Qaddafi and rebels intensified in the second half of February. Futures gained 5.2 percent to $96.97 a barrel in New York last month, reaching $103.41 on Feb. 24.

Cotton advanced 14 percent to a record $1.9123 a pound, leading gains in crop prices. Production in China, the world’s biggest importer, fell 6.3 percent to 5.97 million metric tons last year, the third consecutive drop, data from the National Bureau of Statistics in Beijing show. Futures have risen 32 percent in 2011 through February, the biggest gain to start a year, according to Bloomberg data starting in mid-1959.
Rising commodities are feeding inflation. Brazil’s price increased to 6.08 percent in the 12 months through mid-February, the fastest rate in more than two years. India’s benchmark wholesale inflation rate averaged 9.4 percent in the nine months through December, the most in the past decade, the finance ministry said in a report on Feb. 25.

‘Dominant Influence’

“The dominant influence with regard to strength in commodities is equally split by global demand and dollar weakness,” said Liam Dalton, president of Axiom Capital Management Inc. in New York, which oversees $1.4 billion. “In terms of traditional inflation in the U.S., we have a very tough time getting that going right now, whereas in some of the overseas markets like China, India and Brazil, there is potential for inflation because of tremendous organic demand.”

Equities returned 3 percent worldwide including dividends in February, led by energy companies. While all 10 industries in the MSCI All-Country index advanced, the energy group rose the most with a 6.4 percent gain, keeping it as the best-performing group since the market’s lows in July. Pride International Inc., a drilling contractor, climbed 28 percent, and Rowan Cos., the oil and natural-gas driller that also builds rigs, advanced 24 percent.

Corporate Bonds

Corporate bonds worldwide rose 0.67 percent last month, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The advance was the first after three straight monthly declines.
High-yield, high-risk, or junk, bonds returned 1.42 percent, following a gain of 2.17 percent in January, according to the Bank of America Merrill Lynch Global High Yield Index. Speculative-grade bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.

Treasuries, the benchmark for borrowing costs around the world, lost 0.05 percent. The drop was reduced by the biggest weekly gain since May as unrest in Libya drove investors to the safety of U.S. government debt and raised concern that surging oil prices may derail the economic recovery. Treasuries climbed 0.01 percent in January, lagging behind the 5.9 percent return in 2010.

Safety of Treasuries

“In the beginning of February, there was clearly a trend out of the relatively safe Treasuries market,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “But since then we’ve seen that trend reverse given the geopolitical uncertainties associated with the crisis in the Middle East.”

The Dollar Index dropped 1.1 percent, following a 1.6 percent loss in January. The South African rand was the best- performing currency in February, gaining 3.2 percent against the dollar. New Zealand’s dollar performed worst, losing 2.7 percent.

“The markets are sending us a message,” said Hugh Johnson, who oversees $1.92 billion as chairman of Albany, New York-based Hugh Johnson Advisors LLC. “The message is that oil prices are going to go higher. We’re talking about possible interruption of oil flows and possibly higher oil prices and that will have an impact on the economy.”

High sugar prices 'fuelling drift to corn syrup'

by Agrimoney.com

Czarnikow has tightened its forecast for world sugar supplies – the market's second downgrade in two days - despite highlighting the increased competition from corn syrup in the sweeteners market.
The sugar merchant cut by 3.8m tonnes to 165.0m tonnes its forecast for world production of the sweetener in 2010-11, meaning growth came in at half the level it had initially expected, following weather setbacks in producers from Brazil to Australia.
However, Czarnikow also trimmed by 1.2m tonnes its forecast for consumption, flagging "slowing physical offtake at higher prices", which last month hit a 30-year high of 36.08 cents a pound for New York futures.
"It is clear that there has been limited growth and rising substitution over the past few seasons in response to higher prices," the group added.
"Indications are that consumption growth has been constrained in part as a result of corn sweeteners capturing a greater share of sweetener demand."
Sugar vs corn syrup
Czarnikow highlighted "rising substitution" in markets such as China and Mexico, which "seems happy to accept cheaper fructose sweeteners as a replacement for the beverage industry".
The observation tallies with reports from corn processors such as Tate & Lyle of increased sales to Mexico of high fructose corn syrup, despite a price rise which the International Sugar Organization pegged on Monday at 22% since September.
"Even after the recent rise in spot values, the relative price of high fructose corn syrup remains 40% lower than sugar's," the ISO added.
The ISO added that production of corn syrup "is anticipated to increase in order to satisfy growing demand by Mexico's food and beverage industry", although the sweetener is expected to continue losing out to sugar in the US, where its popularity has been dented by alleged links to obesity.
Growing shortfall
Czarnikow's calculations increased the global deficit in world sugar supplies in 2010-11 to 3.7m tonnes, from 2.8m tonnes.
The shortfall took the total shortfall in three successive seasons of deficit to 28.2m tonnes.
On Monday, the ISO also downgraded its forecast for world production by 910,000 tonnes to 168.05m tonnes.
However, with consumption pegged at 167.85m tonnes, ISO the estimates kept the market with a small surplus.
The organisation, unlike some other observers, draws up its figures strictly to an October-to-September crop year.

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How American's Lost Control of Economy, Constitution and Civil Liberties

This essay is about three recent books that explain how we lost our economy, the Constitution and our civil liberties, and how peace lost out to war.

Matt Taibbi is the best--certainly the most entertaining--financial/political reporter in the country. There is no better book than Griftopia (2010) to which to turn to understand how stupidity, greed, and criminality, spread evenly among policymakers and Wall Street, created the financial crisis that has left Americans overburdened with both private and public debt. Taibbi walks the reader through the fraudulent financial instruments that littered the American, British, and European financial communities with toxic waste. He has figured it all out, and what in other hands might be an arcane account for MBAs is in Taibbi’s hands a highly readable and entertaining story.

For the first 65 pages Taibbi entertains the reader with the inability of the public and politicians to focus on any reality. The financial story begins on page 65 with Fed chairman Alan Greenspan undermining the Glass-Steagall Act leading to its repeal by three political stooges, Gramm-Leach-Bliley. This set the stage for the banksters to leverage debt upon debt until the house of cards collapsed. When Brooksley Born, head of the Commodity Futures Trading Commission, attempted to do her regulatory job and regulate derivatives, the Federal Reserve, Treasury, and Securities and Exchange Commission got her bounced out of office. To make certain that no other regulator could protect the financial system and its participants from what was coming, Congress deregulated the derivatives markets by passing the Commodity Futures Modernization Act.

As an Ayn Randian mentality of a self-regulating private sector crowded out prudence, the media cheered. Taibbi captures the era in a sentence: “In was in the immediate wake of all these historically disastrous moves--printing 1.7 trillion new dollars in the middle of a massive stock bubble, dismantling the Glass-Steagall Act, deregulating the derivatives market, blowing off his regulatory authority in the middle of an era of rampant fraud--that Greenspan was upheld by the mainstream financial and political press as a hero of almost Caesarian nature. In February 1999, Time magazine put him on the cover.”

Mortgage securitization allows lenders such as banks to issue mortgages that can be sold to third parties. Instead of making money from the interest from mortgages in its portfolio, the bank issues mortgages for a fee and sells the mortgages. The mortgages are then combined with mortgages sold by other lenders and resold to investors. This development resulted in lenders being less interested in the credit-worthiness of borrowers.

In order to assure investors about credit-worthiness and to appeal to risk-tolerant hedge funds, the next development was to take a pool of mortgages of varying credit-worthiness and to organize them into three tranches. The mortgages were separated into AAA, B grade, and high-risk stuff. The triple A tranche could be sold to pension funds and institutional investors. Hedge funds would take the high-risk tranche for the high-interest rate that they offered, intending to get rid of the mortgages before they had time to go bad. The middle tranche was the one hard to sell. The interest rate on the B grade tranche was not high enough to appeal to hedge funds, and pension funds were restricted to investment grade.

So what did the banks do? Well, they lumped together all the B grade tranches and started the process all over. The best of the lot were turned into--you guessed it--AAA, then came the B grade, and then the worst of the lot became the third tranche. And then the process was repeated.

This was bad enough, but even worse was happening. Many of the triple A and B grade mortgages had that rating only because of fraudulent credit scores and rating agencies assigning investment grade ratings to lower grade mortgages. Everyone was focused on short-term profits, from the lenders who churned out mortgages for fees to hedge funds that had no intention of holding the high-risk tranches beyond the short-run. You can see how toxic waste was spread throughout the financial system.

Then it became possible to “insure” the AAA mortgages (many of which were not AAA). Once this happened, financial institutions that were required to maintain reserves against deposits or to capitalize obligations, such as insurance policies, could now substitute higher-paying mortgage derivatives for U.S. Treasury notes and still meet their reserve requirements for a ready cash reserve. Treasury notes are so liquid that they are considered the equivalent of cash, and insured AAA securitized mortgages acquired similar status.

AIG became the big provider of “insurance” in an operation run by Joe Cassano. Cassano’s “insurance” product is called a credit default swap. It is not insurance, because AIG did not set aside capital to pay any claims. And claims there would be. Not only were the AAA mortgages that were being insured littered with toxic waste, investment banks and hedge funds could purchase swaps against mortgages that they did not even own. As Taibbi puts it, people were gambling in a casino in which gamblers did not have to cover their bets or own the financial instruments that they were insuring.

While Cassano was collecting fees for bets that he could not cover, Win Neuger on the other side of AIG was lending the insurance giant’s long-term portfolio of sound investments to short-sellers for a fee.

Short-selling works like this: A short-seller thinks a company’s stock price is going to fall in value. He borrows the stock from AIG by putting up collateral equal to its market price the day the stock is borrowed plus a small fee, sells the stock, pockets the money and waits for the stock to fall. If his hunch or inside information is correct, and the stock falls in value, he buys the stock and returns it to AIG, pocketing the difference in the two prices.

Normally, people who lend stock to short-sellers are content with the fee and with the interest on the collateral (cash) invested in safe instruments like Treasury bills. The lender of the stock cannot take any risk with the cash collateral, because the cash must be returned to the short-seller when he returns the borrowed stock.

Once, however, toxic waste got AAA ratings plus insurance from Cassano, higher-paying insured investment grade toxic waste could displace of US Treasuries as a place for Neuger to hold the short-sellers’ collateral. You can see the untenable position into which Cassano and Neuger put AIG.

Enter Goldman Sachs as a buyer of swaps from Cassano and a borrower of stocks from Neuger. Once the real estate bubble that the crazed Federal Reserve had caused popped, all the fraud that had been disguised by rising real estate prices appeared in its naked glory. AIG couldn’t cover Cassano’s swaps, and it could not return the collateral to short-sellers that Neuger had invested, unknowingly, in toxic waste.

This was the origin of the TARP bailout, which was perceived by Goldman Sachs (whose former executives, as Taibbi relates, controlled the U.S. Treasury, financial regulatory agencies, and the Federal Reserve) as an opportunity not merely to have U.S. taxpayers make good on its exploitation of AIG, but also to fund with free capital supplied by hapless taxpayers more money-making opportunities for “banks too big to fail.”
As Taibbi shows, Goldman Sachs had yet more ruin to bring to Americans. Goldman Sachs managed to get the position limits that regulation imposed on speculators in order to prevent speculation from taking over commodity markets (for example, grains, metals, and oil) secretly repealed. This allowed Goldman Sachs to create a new product, index speculation, which brought hundreds of billions into commodities markets and drove up the price of gasoline in 2008 to $4.50 per gallon despite the fact that there was no change in supply or consumer demand. It was entirely a profit rip-off from speculation in oil futures contracts.

From here on Taibbi’s book really rolls. If the U.S. had a media worthy of the name, instead of mere shills for private oligarchs and propagandists for government, Matt Taibbi would be the editor of an independent Wall Street Journal with a regiment of investigative reporters. Then Americans would have a prospect of reclaiming their country and their economy.

Charlie Savage is a summa ***** laude graduate of Harvard with a Master’s degree in law from Yale. As a Boston Globe reporter, he documented the Bush-Cheney-Yoo-Bybee-et.al. destruction of U.S. civil liberties and the constitutional separation of powers as they occurred during the reign of the 43rd president of the United States. Savage draws on this disillusioning experience to give us another important book, Takeover (2007). Savage documents completely how American civil liberty was destroyed by Dick Cheney and the traitors he was able to place in key positions in the Bush regime.

President George Bush, an inconsequential person, gloried in the increase in his power that the Cheney forces and the Federalist Society achieved by a fabricated doctrine of
“inherent power” that allegedly resides in the presidency. This power, its tyrannical advocates assert, places the President above Congress, the Judiciary, and the law itself during times of war. The advocates of this doctrine used war to advance their claims, but actually believe that the President, as long as he is a Republican, is, in fact, a Caesar who is unaccountable.

Savage is a clear, masterful writer. He shows that the Bush/Cheney traitors have left Americans with an executive branch that is unaccountable to statutory law, treaties, international law such as the Geneva Conventions, and Congress. What one reads in Takeover is not opinion but documented fact. There is no better way for gullible flag-waving Americans to sober up than to readTakeover.

Anyone who has any remaining faith in the U.S. government after reading the Taibbi and Savage books will lose it completely when they read James W. Douglass’ JFK And The Unspeakable (2008). Douglass’ book is more gripping than the best thriller or murder mystery; yet, it is based on hard evidence documented in 100 pages of footnotes. Douglass presents the solution to the greatest murder mystery of the 20th century--that of President John F. Kennedy.

Douglass is not the first to take on this task. Millions of people in the U.S. and abroad have been convinced by years of investigation by many competent researchers that President Kennedy was murdered by his own government. What differentiates Douglass book is that he proves it several times over with official government documents that have been declassified in the years that have passed, with personal and careful interviews with eye-witnesses whose testimony was excluded from the Warren Commission’s report and whose mouths where shut by threats that silenced them into old age when they had nothing left to lose, and with circumstantial evidence that is so overwhelming that it could not be a mere coincidence.

In brief, JFK who began political life as a cold warrior was brought face to face with reality in the Cuban missile crisis when the U.S. military insisted that the crisis be resolved by military attack on Cuba and a first-strike nuclear attack on the Soviet Union. Kennedy found his intelligence and humanity isolated within his own government and turned via back channels to Soviet leader Khrushchev for help.

Khrushchev sensed sincerity in JFK’s plea and withdrew the Soviet nuclear missiles from Cuba in exchange for Kennedy’s promise that the US would not invade Cuba.

Kennedy added the promise to remove U.S. strategic missiles from Turkey in six months but not as a public part of the deal.

The U.S. Joint Chiefs of Staff, the CIA, and even the Secret Service entrusted with the
protection of the president concluded that JFK was soft on communism and a national security threat.
Kennedy had not gone along with the Bay of Pigs invasion of Cuba, calling off the U.S. air support. He had nixed the Operation Northwoods project conceived by the Joint Chiefs of Staff to conduct black ops terrorist operations against American citizens in Miami and Washington D.C., to hijack and shoot down American airliners (“real and simulated”), to strafe and bomb Cuban refugee ships headed for Florida and to blame it all on Castro in order to create public support for “regime change” in Cuba.

When Kennedy signed the nuclear test ban treaty with Khrushchev, it brought him more condemnation from within his own government. In the eyes of the Joint Chiefs, the CIA, and the Secret Service, America had a national security risk in the White House who was selling out the country to Soviet deceptiveness.

The decision was made to eliminate the security risk. Douglass presents in fascinating detail every inch of the story. I can’t reproduce it here. Suffice it to say that Oswald was on both the CIA and FBI payrolls. He was set up as the patsy without realizing it until he was in the Dallas jail where he was shot by Jack Ruby, another CIA asset.

The FBI at headquarters level was not part of the plot, although local offices were infiltrated by the CIA. The CIA had set the assassination up so that the patsy, Oswald, was linked to a KGB assassin and to Castro. The goal was to use Kennedy’s murder to enrage the American public and to attack Cuba and the Soviet Union. I know, it sounds to naive Americans like a farfetched conspiracy theory, but I have never seen a better proven case.

After JFK’s assassination, J. Edgar Hoover clued in Lyndon Johnson that the linkages of Oswald to the KGB and Cuba were fabricated by the CIA.

The problem for President Johnson was that the CIA had assassinated Kennedy in a manner that was too transparent. The CIA had overdone its setup of Oswald, for example, to the point that it was transparently a CIA operation.

What to do? If Johnson ordered the arrest of the CIA operatives responsible, the responsibility rose high up into the ranks. What would be the effect on the American public during a difficult time of the cold war if they learned that they could not trust their own government not to murder their own president? In addition, liberals were concerned that if the truth came out, Americans’ trust in their government would evaporate. Heaven forbid!

Johnson made the decision to cover up the crime and that was the task assigned to the Warren Commission.
Edgar Hoover knew the truth, but went along with the coverup.

Johnson and Earl Warren were thinking short-run and did not understand the unintended consequences of the coverup. They thought that by blaming Oswald as a lone deranged assassin, that they had done service by eliminating the CIA plot to implicate Cuba and the Soviet Union. Johnson did not realize that he had handed the U.S. government over to the CIA, and that he would soon be involved in an escalating war in Vietnam--a war that JFK had ordered wound down--which would deny him a second term.

Evidence continues to pile up that the Warren Commission covered up JFK’s murder by a conspiracy within the U.S. government. In his multi-volume Inside The Assassination Records Review Board, Douglas P. 

Horne, Chief Analyst for Military Records, Assassination Records Review Board, provides voluminous incontrovertible evidence that fraud was introduced into the autopsy reports that served as the basis for the Warren Commission’s conclusion that JFK was shot from behind by a lone gunman.

Out of JFK’s assassination came Robert Kennedy’s assassination, the Oklahoma City bombing, Waco, and 9/11.

Niels Harrit, a professor of nano-chemistry at the University of Copenhagen, together with U.S. physicists and engineers published a paper in the Open Chemical Physics Journal in 2009 that proves that nano-thermite was used to bring down the World Trade Center towers.

In the U.S. this startling finding is unreported except on 9/11 truth sites. The researchers say that in the dust from the World Trade Towers destruction they found unreacted nano-thermite, some of which they tested to confirm their identification. They researchers say that they have enough of the unreacted nano-thermite left for others to examine.

There have been no takers in America. Not a single U.S. physics department, most of which are totally dependent on federal government grants, will touch the subject.

The campaign that has been organized against the finding of Harrit and his associates is that the dust has not been in certified custody, and the explosive material could have been added. This claim overlooks that nano-thermite is a material that is not available to anyone except the U.S. military.

In America today the financial press says we cannot believe Taibbi. Law professors hoping for elevation to the federal bench say we cannot believe Savage. The mainstream media and some leftwing Internet sites say we can’t believe Douglas.

It is in this disbelief of hard evidence that America is dissolving.

Paul Craig Roberts [ email him ] was Assistant Secretary of the Treasury during President Reagan's first term.  He was Associate Editor of the Wall Street Journal .  He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider's Account of Policymaking in Washington ; Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy , and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice . Click here for Peter Brimelow's Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.

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China's Five-Year Economic Plan Calls For Slower Growth

Don Miller writes: China will take steps to cool off its red-hot economy in the next five years largely by increasing domestic consumption and de-emphasizing exports, Premier Wen Jiabao announced in an online chat with the country's citizens on Sunday.

Wen, China's leading economic official, said the government's official target for average gross domestic product (GDP) growth over the next five years will be reduced to 7% annually, down from a target of 7.5% in the past half decade.

China needs to slow economic growth to curb soaring food and housing prices and to restructure its economy, even as most developed economies around the globe struggle to sustain expansion.

"We want to put the emphasis of our work on the quality and the benefits of economic growth," Wen said. "We want the fruits of development to benefit the people." 

Wen made his comments as the country prepares for the formal release of China's next five-year economic plan at the annual meeting of its National People's Congress that begins on March 5.

Even though Wen's message was straightforward, many analysts feel the lower growth target is more of a symbolic gesture because China has blown through its stated target of 7.5% GDP growth for the last six years in a row. Growth reached 10.3% in 2010, making China the fastest-growing major economy in the world. 

"No one will really have 7% as their target. Everyone's going to be higher than that. [But] the message is that they want growth to slow down," Kenneth Jarrett, head of APCO Worldwide's China consultancy, told The Telegraph. 

Wen also pledged to curtail consumer price increases by reducing lending, boosting agricultural production, and punishing hoarding and price manipulation. Earlier this month, China accelerated its campaign against surging inflation by raising interest rates for the third time since mid-October.

Inflation in China rose to 4.9% in January from 4.6% in December. But those numbers exclude food prices, which are increasing at the alarming rate of 10%, according to figures released in January. 

Wen acknowledged that China's official rate of inflation doesn't reflect the rising cost of food, which is making life difficult for hundreds of millions of Chinese people. 

"Rapid price rises have affected the public and even social stability," Wen said in the online forum that was broadcast across all state media in China. "The Party and Government have always made a priority of keeping prices at a generally stable level." 

Abundant foreign currency and grain reserves should be sufficient to curb inflation, he said. 

That may mean China is considering increasing imports of grain and other foodstuffs to protect against price gains, Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB, told Bloomberg.

The announcement fueled speculation among analysts that slower growth in China may put a damper on the recent surge in commodity prices, a sector that is largely being driven by demand from the country's strong growth. 

"It may cause some initial reaction that tempers some speculative demand for some commodities," Mark Kristoff, chief executive of Traxys Group, a New York-based commodities trading company, told The Journal.

But market participants are still skeptical that the Red Dragon can successfully curtail its GDP growth and consequently reduce the amount of raw materials it consumes every year. 

Demand for agricultural products in China continues to remain strong despite efforts to cool its economy, which may temper the market's reaction to the announcement. And even if China manages to achieve the desired 7% growth, the country is still likely to consume the equivalent of the steel production of Germany every year, Kristoff said.

"On balance, it will still be very significant annual consumption growth for raw materials. I don't anticipate that will be a longstanding, depressing statement as relates to the markets in general," he said.

China's Premier also decried the effects China's blistering economic growth has had on the environment.
While China was chalking up big economic growth numbers over the last two decades, it also became the world's biggest energy user and the largest emitter of greenhouse gases. 

"We absolutely must not any longer sacrifice the environment for the sake of rapid and reckless roll-outs," he said. "We'll never seek economic growth rate and big size at the price of environment." 

Lead fumes from an illegal battery factory poisoned more than 200 children in Anhui province, hospitalizing 23 in January, according to Xinhua. And a leak of acid-laced water into the Ting River in July killed enough fish to feed 72,000 residents for a year, Bloomberg reported.

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Are we running out of cocoa?

by Wolfgang Weinmann

The recent worrying news from Ivory Coast, the world's largest cocoa bean producer, threatening to temporarily suspend any export, has sent cocoa prices to a record high. UK accounts for an estimated 34% of global production, and cocoa prices are up by more than 20% since the start of the year. So, what does this high volatility mean for businesses and their supply chains?

When talking about sustainability in such a high-charged commodity environment, it's important for a business to take into account both sides of the equation – that of the producers' and the business. In the case of cocoa this means millions of smallholder growers, mainly in countries in sub-Saharan Africa, with unacceptable high levels of poverty. While the rise in market price of crops such as cocoa means the input costs at Cafédirect are going up significantly, as for all other cocoa purchasers, the producers are not necessarily feeling the benefit of this. The price spikes in other volatile commodities, particularly food and oil, means that both the cost of production and the cost of subsistence food has risen for the growers too.

Of course in a market economy one never can take out volatility and speculation completely, but by working in partnership both Cafédirect and the producers are better able to understand and more effectively manage risks in the supply chain. This collaborative working relationship is beneficial to the producer and offers distinct commercial advantages too. 

For example, when we were looking to create our new instant hot chocolate, we realised that it was important to source a new producer partner, as at that time we were only working with one cocoa smallholder cooperative. This posed obvious threats to our supply chain and we needed to reduce those commercial risks. 

However there was also the exciting prospect of being able to extend our social-economic impact and find a new emerging source of cocoa that we could bring to the world market. As a result of months of research and subsequent country visits we have now found a group of smallholders on the island state of São Tomé in west Africa, who grow the rare criollo bean which produces an incredible fine grade quality cocoa. São Tomé is one of the least-developed nations in the world with annual average income of US$ 1,875 per person1. 

Before being able to actually buy from this producer group, Cafédirect has spent 2 years investing heavily in infrastructure to add value at source (such as fermentation tanks and drying tables) and training courses for producers. A producer-owned and managed export cooperative was set up enabling them to trade directly on the international market with other buyers and to apply for Fairtrade certification, which they would have been unable to do without the governance systems in place. 

The end result has been an incredible 500% increase in the income from cocoa crops for smallholder producers in São Tomé. The way they trade has been transformed; from selling raw or "wet" cocoa on the side of the road to passing local traders, to bypassing the middlemen and processing the wet cocoa themselves into dried, fermented beans which they now sell on the international market. 

All this was done through an innovative collaborative public-private partnership approach with producers, the UN's International Fund for Agricultural Development (IFAD) and UK's Department for International Development (DfID), along with funding from Cafédirect. Instead of sourcing suppliers from the register of commodity traders, Cafédirect's approach to finding a new cocoa supplier has resulted in a new cocoa producer group brought into the market.

Such direct trading and long-term, personal relationships with producers offer clear benefits to all involved. For the producers it provides long term and secured market access, generates added value to the crop, ensures investment back into farms and producer organisations to improve yield and quality thus achieving economic, environmental and social impact where it counts most: in smallholder producer communities.

For a business like Cafédirect, it secures constant supply; lowers the default levels of contracts; ensures consistency of quality raw materials; opens a pipeline of information from the ground about yields and any potential issues and thus reduces overall risks to the business. Most importantly this contributes to our understanding of the impact that a business should have to a wider stakeholder community, not just its own shareholders.

The traditional, outdated trading model needs to change if we are going to secure a cocoa supply chain that respects people and planet and guarantees both, sustainable high quality products but, crucially, also the livelihoods of the producers and their communities.

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China Holdings of U.S. Treasuries Revised Up An Unsustainable 30%

Annual revisions released Monday show that China's holding of US treasuries is 30% greater than reported just weeks ago.

I am not surprised given that persistent rumors of China dumping treasuries made little mathematical sense from a balance of trade standpoint. Instead, I suggested China was accumulating treasuries via trading desks in the UK. We now see that is precisely the case.

China, the biggest buyer of U.S. Treasury securities, owns a lot more than previously estimated.

In an annual revision of the figures, the Treasury Department said Monday that China's holdings totaled $1.16 trillion at the end of December. That was an increase of 30 percent from an estimate the government made two weeks ago.

China was firmly in the top spot as the largest foreign holder of U.S. Treasury debt even before the revisions. But the big increase in Chinese holdings could ease fears that Chinese investors might begin dumping their U.S. holdings. Such a development could send U.S. interest rates rising. That would slow America's economic recovery and increase Washington's costs for financing the $14.3 trillion national debt.

China and Britain were the countries with the biggest revisions in the new report.

The amount of U.S. Treasury securities held by Britain fell to $272.1 billion in the new report. That's a drop of $269.2 billion from the last monthly report which put the Britain's holdings of U.S. debt at $541.3 billion. The holdings of the two countries often show big revisions when the annual report is released.

The reason for the change is that Chinese investors who purchase their Treasury securities in London are often counted as British investors. The more detailed annual report does a better job of tracking the countries in which investors reside as opposed to the location where investors make their purchases.

Even with the revision, Britain remained the third largest holder of U.S. Treasurys.

Japan had the second highest foreign holdings, totaling $882.3 billion at the end of December. The revision was only slightly below the original estimate.

The total foreign holdings of Treasury debt stood at $4.44 trillion at the end of December, according to the new report. That's up 1.5 percent from the estimate made two weeks ago. About two-thirds of U.S. Treasurys owned overseas are held by foreign governments and central banks.
Thoughts on Dumping Treasuries

Please note the comment in the article: "The big increase in Chinese holdings could ease fears that Chinese investors might begin dumping their U.S. holdings. Such a development could send U.S. interest rates rising. That would slow America's economic recovery and increase Washington's costs for financing the $14.3 trillion national debt."

The odds of China dumping US treasuries are tiny. The last thing China wants to do is put massive upward pressure on the Yuan, and dumping treasuries would likely do just that.

Moreover, please consider the basic math. The US runs a trade deficit, so other countries accumulate dollars. For more on the essential math, please see US Dollar About to Lose Reserve Currency Status - Fact or Fantasy?

Given that dollars held by foreign central banks earn no interest, governments buy other US assets instead, notably US treasuries. Last year China's bought massive amounts of US treasuries via UK banks or brokers.

Unsustainable Model

Although it is relatively easy to explain what is happening and why, it's also important to know the existing global currency hegemony will eventually collapse because the current model is unsustainable.

Countries cannot run massive deficits forever.

However, a global currency crisis does not necessarily start with the US dollar, nor does a crisis necessarily happen any time soon. A major crisis starting with the Euro, the Yen, the British Pound, or the Yuan is at least as likely, and the timeframe can be months or years away.

Whenever it happens, don't be caught without gold.
Continue reading this article >>

Population Reduction Through Designed Economic Collapse

John Galt writes: In case you haven’t noticed, the great culling of humanity is taking place right now. Unfortunately, preparation needs to begin for two gloomy scenarios: slow economic collapse, or catastrophic demolition.
According to the elite's own admission, Corporation Earth is bankrupt and bloated and must be downsized. In other words, that which mathematically cannot continue, will not continue; and it's time to cut the fat.

Banksters and the oil cartel appear to be taking the lead to bring about the final phase of a long-range plan. Wall Street is driving up prices for essentials like food and energy to the breaking point, which is shaking every nation on earth to its core. The effect of such manipulation seems destined to lead toward a severe reduction in numbers of the human population, and a tightening of control over those who remain.

Even strong developing nations with economic surpluses like China and India are faltering in the face of such manipulated increases. Regions ill-equipped to cope with food shortages, but are oil-rich, like Northern Africa and the Middle East are quickly destabilizing as a result. Meanwhile, America has a record amount of citizens on food assistance amidst worsening unemployment.

This economic wrecking ball is having a devastating global effect. 

The oil and Wall Street powers seem satisfied to allow the civil unrest to spread in order to feed their greed for higher oil prices and resulting control. Surely they recognize that higher oil prices will suck the remaining wealth out of the poor and middle classes around the world. This scenario will obviously cause starvation, illness, and other life-shortening effects, as increasing numbers join the ranks of the poor . . . and the poor have no where else to go.

It appears that there is no stopping this scenario unless the human tribe finds solidarity of purpose in defeating the very system that has offered only two horrible scenarios. Incidentally, the escalating global unrest is the fallout, which may have triggered such revolutionary times. The summer and autumn austerity revolts throughout Europe now have spread to oppressed Arab countries, and are being hinted at in the streets of Wisconsin and elsewhere in a formerly asleep America. 

We must assume, however, that the ruling class has contingency plans for dealing with organic protests resulting from their economic hitman schemes. The dilemma for those in the human tribe who understand the purpose of these manufactured events (culling and control) is to determine whether a slow economic destruction is actually any better than rapid collapse for creating a more just and free society. 

Many will say there may still be more than two ways forward if enough people wake up quickly enough, but the elite control the tap of resources (life) and they will simply turn off the switch if they are truly threatened by other possibilities. Incidentally, it's this very tap of money, oil, and food that is already being restricted to create this depression cycle. Thus, they are certainly capable of a complete switch-off that would result in a rapid collapse of resource delivery systems, while the world is becoming incrementally poorer due to their economic policy decisions. 

So what is the endgame?

Complete collapse might cause immediate solidarity in communities out of sheer necessity to cooperate, which appears to present an opportunity to start over and rebuild at the local level during the period when the centralized control system will be in crisis mode. Yet, a catastrophic collapse will indeed accomplish the controllers' goal of rapid depopulation through starvation and civil unrest, as vital goods will likely disappear almost immediately, especially from mega-cities. 

It seems that a slow demolition approach allows more time to educate, prepare, and propose a better way forward for society. In turn, it gives the controllers more time to situate their chess pieces and set up the high-tech control grid. 

Indeed, there will be pain and suffering in both inevitable scenarios. For those on the side of humanity, a slow demolition might be preferable, as truth will always win if given enough time to reach those who are open to it. And yet, nothing is more likely to wake people up en masse than a total shutdown.

Regardless, we should seize the opportunity today to prepare people for these inevitable realities, and join forces to propose a new way forward. 

Please tell us your thoughts on surviving the economic collapse and ideas for rebuilding a better society when the control system falls

Environmental Disaster Preparedness, Five Things Every American Should Do, But Won’t

Dennis Evers writes: We’ve all seen him on the news. The guy buying plywood, beer, chips and other survival essentials as the approaching hurricane can be seen over his shoulder in the distance.
Unfortunately, the majority of Americans aren’t much better when it comes to being prepared for emergencies. However, recent disasters have proven that the sheer magnitude of an event can overwhelm relief efforts, coupled with cutbacks in personnel, budgets and equipment, place the onus squarely on our shoulders.

Many citizens don’t see the need for preparedness, and that’s their prerogative, however a relatively small investment now for someone who is concerned about the possibility of a disruption due to a natural disaster, pandemic, terrorism, civil unrest or countless other possible scenarios, might mean the difference between a week or so of hungry terror or a week of edgy survival. Most people think of some wild eyed mountain man when the word “survival” is mentioned, but that’s no longer the case. When the Government strongly suggests preparing, there’s a reason behind it.

The ever increasing list of disasters and emergencies that can put you on your own is a long and often dangerous one. The violence and mayhem associated with black Friday will look like a minor scuffle when food shortages or any one of a hundred scenarios spark riots. Food flew off the shelf and stores were emptied in hours before the big snow hit the East coast this winter. With municipalities cutting essential services like law enforcement, the chances of having to “hunker down” increases exponentially.

Now the caveat. Being prepared doesn’t guarantee survivability, but it does greatly enhance your chances if the event is survivable. The following list is by no means inclusive as there are hundreds of variables, i.e., suburban vs. rural, gated community vs. projects, the type of disaster, number of persons being prepared for and on and on.

Given the countless variables, there are some basic necessities that are essential regardless of location or emergency. The following items are simply a starting point that will assist you in thinking about establishing some sort of basic preparedness. They will greatly improve not only your survivability, but your level of comfort in terribly uncertain times.

While FEMA recommends three days of emergency provisions, and it is a start, given the current climate, a week’s supply should be a good starting point, a one month stash would be better. Keep in mind that these items cannot be placed in order because of the countless variables. 

You’ve made your decision, so now you need to get down to the business of survival. 

1. Water. Absolutely essential for drinking, hygiene and cooking. Remember all of the people (who had ample warning) sitting on their roofs during Katrina? Imagine how much comfort a measly couple of bucks worth of bottled water would have done to reduce the misery factory. While one gallon per person per day is recommended, enough to drink would certainly be better than nothing at all. Even a few hours of thirst can cost you your edge. Several cases of bottled water would go a long way during an emergency and you can replace it as you use it.

2. Food. Another essential. You can go days or even weeks without food, but who wants to? Something you wouldn’t even consider eating under normal circumstances could look mighty good if you’re starved. Granola bars, canned food and crackers could mean the difference between a clear head or one thinking about a cheeseburger. Every time you go shopping, put in an extra few items that you normally eat. Check the expiration dates and get items with a long shelf life if possible. If something happens, you have food you’re used to and you can use it up as part of your regular food supply. Make sure you rotate it in and out to maintain freshness.

3. Shelter. You have to stay alive to ride out an event. For most of us, staying at home would be the ideal situation. However, any number of situations can require “bugging out” to a shelter or other safe location. Most of us have relatives within driving distance or know someone who might put up with us for awhile. If not, as a last resort the government or the Red Cross will usually provide emergency shelter. Have a plan nonetheless. If you have to stay and shelter in place at your home, business or apartment, or hit the road to get away from civil unrest, a chemical spill, fire or hurricane, you need to have a plan and be prepared to implement it.

4. Emergency Equipment. In addition to food, water and shelter, there are several essential items that will be required in the event you are on your own. Extra medicines are top of the list, particularly if they are required daily. A good first aid kit is another must have. An LED flashlight and lantern with extra batteries are essential. Warm clothes, sleeping gear, a camp stove and emergency sanitation gear are also essential. Last but certainly not least is some sort of self defense. You can easily find out what you need with a little online surfing of various websites, starting with ready.gov.

5. Time Killers. Even if the emergency is only a 48 or 72 hour event, you will want to have some playing cards, books, a Bible and board games on hand to help kill the time. You might even include some candies or other treats as well as coloring books and crayons for the younger ones. 

Factors preventing many people from preparing are the “it can’t happen here” mentality, and plain old fear or a sense of being overwhelmed. People with the former attitude won’t see a need to prepare, and that’s their choice. (Until something happens and they expect the government to take care of all of their needs.) As for the latter, there is nothing wrong with fear, particularly the “where does one start” quandary, if it is turned into positive action. Instead of worrying about the future, prepare for it and get on with life. We’re talking about simple and subtle changes in your lifestyle, mostly relating to shopping and food storage habits. No one is advocating that you become a mountain man and live off roots and bark. Simply realize the need for a minimal amount of preparation, formulate a plan and get started working toward your goal, and pray that you never need to use it.


by Cullen Roche

After reading his most recent Congressional testimony you might think that Ben Bernanke was not the same Fed official who steered us into and then (partly) out of the most recent crisis.  The reason I say that is because his commentary regarding commodities appears totally oblivious to the problems that surging commodity prices can cause (let us not forget the turmoil that $150 oil caused).  He states:
“Although overall inflation is low, since summer we have seen significant increases in some highly visible prices, including those of gasoline and other commodities. Notably, in the past few weeks, concerns about unrest in the Middle East and North Africa and the possible effects on global oil supplies have led oil and gasoline prices to rise further. More broadly, the increases in commodity prices in recent months have largely reflected rising global demand for raw materials, particularly in some fast-growing emerging market economies, coupled with constraints on global supply in some cases. Commodity prices have risen significantly in terms of all major currencies, suggesting that changes in the foreign exchange value of the dollar are unlikely to have been an important driver of the increases seen in recent months.
The rate of pass-through from commodity price increases to broad indexes of U.S. consumer prices has been quite low in recent decades, partly reflecting the relatively small weight of materials inputs in total production costs as well as the stability of longer-term inflation expectations. Currently, the cost pressures from higher commodity prices are also being offset by the stability in unit labor costs. Thus, the most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation–an outlook consistent with the projections of both FOMC participants and most private forecasters. That said, sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored. We will continue to monitor these developments closely and are prepared to respond as necessary to best support the ongoing recovery in a context of price stability.”
There are a few key points in there.  First, he notes that any additional money that is supposedly entering the system via QE is not the culprit for rising prices.  This is partly true.  While there is  no transmission mechanism via additional dollars or foreign exchange movements there is a speculative nature surrounding QE.  After all, he conveniently takes credit for rising equity prices in an earlier paragraph, however, he seems to believe that all market speculation ends there and that investors aren’t so fearful of his “money printing” that they are running into the hands of hard assets.  This is dishonest at best.

But more importantly, we must recognize that these price increases in commodities are simply not organic.  There is nothing normal about cotton prices rising 200% in 6 months.  I am sorry, but these sorts of moves cannot be entirely attributed to stronger global demand.  There are clearly other forces at work here.  And while it might not be incorrect to say US monetary policy is not directly impacting these prices through monetary or currency channels I think it is highly misleading to take credit for the speculative nature of the equity price increase while also ignoring the speculative ramp in commodity prices.

From a business perspective it is clear that Mr. Bernanke has no idea what rising prices mean for a business as we hear more and more concern about reduced margins.  In addition, I am surprised by his quickness to dismiss the dangers of rising prices and their impact on inflation.  Yes, we agree that they will not result in sustained inflation and certainly not hyperinflation, but these price increases significantly increase the odds that the US economy could sink back into recession.  And as I’ve said before, this would likely result in reinforced deflationary fears – the very thing Mr. Bernanke is attempting to defeat.

High food prices to provoke discontent in West too

by Agrimoney.com

Western countries are not immune from public discontent at rising food prices – although, unlike in North Africa, it is speculators and supermarkets which may end up feeling the heat.
It is a "myth that commodities matter to food prices" in industrialised nations – unlike in developing countries - UBS said, citing Western consumers' preference processed foods.
"Food is about labour costs, and not much else," he said, noting that labour costs accounted for about 70% of food price inflation in nations, such as France, the UK and US, included within the Organisation of Economic Co-operation and Development (OECD).
"An OECD farmer is quite unlikely to be the cause of significant increases in [retail] food price inflation," the investment bank said, adding that this was the reverse of the case in developing nations, where consumer were more likely to purchase their foods unprocessed direct from the grower.
Croissant vs television 
Even so, food prices "still have political resonance" in developed countries, thanks to the large number of poorer people for whom even small price changes matter, and to the dominance of food in consumers' shopping experience.
"The morning croissant is something that dominates the customer's image of inflation," UBS said.
"The fact that the flat-screen television purchased three months ago was discounted in price is not remembered.
"Consumer food price increases will unduly shape the perception of inflation, regardless of the reality of inflation."
'Politically fashionable' 
Such ideas meant that retail food prices, and by association commodity prices, were likely to matter to Western politicians too – and at a time when they had a growing tendency to act on them.
"Government involvement in the economy is politically fashionable in a way it was not three years ago," the report said.
The results were likely to be more moves, such as those implemented in France and the US, to increase regulation in commodity markets "because the myth that commodities matter to food prices is perpetuated in the popular consciousness".
Such clampdowns were, however, "likely to be largely ineffective" in stemming retail price inflation.
Supermarket squeeze 
Supermarkets were another likely target, if it appeared – as it does in the UK – that retail prices were rising faster than even increasing labour costs would imply.
Inflation in processed food in the UK is rising at about 6% a year, faster than the 3.5% that a UBS model justifies.
"At a time when food prices have heightened political importance, it seems unlikely that this position will continue to be ignored," the briefing said.
It was "noteworthy" that in Germany, antitrust authorities were already investigating the sector, in which four supermarket chains have an 85% market share.

Is Strong Economic Data the Reason Stocks are Up on the First of the Month?

by Bespoke Investment Group

While most people are aware of the fact that the S&P 500 has had a tendency to rise on the first trading day of the month, the reason for this trend is up for debate.  This morning's WSJ discussed the phenomenon and attributed the strength in the market to stronger than expected monthly ISM Manufacturing reports, which are always released on the first trading day of the month.  Although this argument sounds logical, the facts simply don't bear it out.

In the table below, we highlight the results of the monthly ISM Manufacturing report since the start of 2010.  As shown, the report has routinely exceeded forecasts, with only three negative surprises since the start of 2010.  At first glance, the argument that the equity market's strength is due to strong economic data seems to make sense.  

Digging a little deeper shows a disconnect, however.  On the right side of the table below, we highlight the S&P 500's performance on the first trading of the month broken out by pre-ISM returns and post-ISM returns.  Since the ISM Manufacturing report is typically released at 10:00 AM ET, we broke out the performance of the S&P 500 from the prior close to 9:59 AM and then from 9:59 AM through the close.  

As shown in the table, the S&P 500 has averaged a gain of 0.80% prior to the release of the monthly ISM Manufacturing report and then a return of 0.24% post ISM.  Furthermore, there have only been two ISM days since the start of 2010 that the S&P 500 did better from 10 AM through the close than it did during the opening half hour.  Based on these results, it's hard to argue that strong economic data is behind the equity market's strength when more than three quarters of the average gain on the first trading day of the month is coming before the release of the data!

Lack of biofuels use leaves wheat price vulnerable

by Agrimoney.com

Wheat is the most vulnerable of the major crop to price falls in 2011-12 - and thereafter -  thanks to its small use in making biofuels, Australian officials said.
Sowings of wheat, coarse grains and oilseeds will grow by 3-4% in the season, as high prices encourage farmers to bring less productive land into production, crop bureau Abares said.
However, while the extra production will work to depress prices of all three crop types, wheat will suffer most, with average values in 2011-12 falling 19% below those in the current season, with "increased supplies forecast to outweigh a rise in demand".
Prices of corn, the benchmark coarse grain, and oilseed bellwether soybeans will be supported by faster-rising demand, largely from the biofuels plants swallowing an ever-greater portion of output.
Both corn and soybean prices will average 10% less next season.
Industrial factor 
Already, the amount of US corn, the world's biggest crop, used in making bioethanol has risen sixfold to 125m tonnes over the last decade.
For vegetable oils, largely soyoil and palm oil, world industrial use has more than tripled to 33m tonnes over the same period, "increased markedly as a result of government policy in European Union countries, as well as Argentina, Brazil, Malaysia and the US", Abares said.
"The industrial use of vegetable oils is expected to continue to rise because of biodiesel mandates in these countries," the bureau added, forecasting a further increase in demand for corn by bioethanol plants too.
This will bring long-term support for prices too, with corn averaging some 18% less in 2015-16 than this season, and soybeans values falling by one-quarter.
Wheat prices will fall by one-third over the same period.
Deficit, or surplus?
Abares forecast a world wheat crop of 675m tonnes this season, thanks to increases in all major growing countries except the US, which enjoyed especially strong yields in 2010-11.
The estimate, which pegs output 5m tonnes higher than world consumption, is markedly more optimistic than a forecast from the Canadian Wheat Board on Monday of a 653.3m-tonne crop, insufficient to meet demand.
Abares placed the world coarse grains crop at 1.15m tonnes, a 6.1% rise, with oilseeds output expected to increase by 5.2% to 467m tonnes.
The bureau was more upbeat than US Department of Agriculture forecasts revealed last week on prospects for the American soybean crop, pegging it at 97m tonnes, or 3.56bn bushels, some 200m bushels higher than the USDA guess.
On corn, Abares forecast a US crop of 344m tonnes, or 13.15bn bushels, about 600m bushels less than the USDA is counting on.

Is The Stock Market Cheap?

Here's the latest update of my preferred market valuation method using the most recent Standard & Poor's "as reported" earnings and earnings estimates and the index monthly averages of daily closes for February 2011, which is 1321.12. The ratios in parentheses use the February monthly close of 1322.75 (which this month gives the same ratio to one decimal point as the monthly average). For the latest earnings, see the adjacent table from Standard & Poor's.

● TTM P/E ratio = 16.2 (16.2)
● P/E10 ratio = 23.5 (23.5)

The Valuation Thesis
A standard way to investigate market valuation is to study the historic Price-to-Earnings (P/E) ratio using reported earnings for the trailing twelve months (TTM). Proponents of this approach ignore forward estimates because they are often based on wishful thinking, erroneous assumptions, and analyst bias.

TTM P/E Ratio
The "price" part of the P/E calculation is available in real time on TV and the Internet. The "earnings" part, however, is more difficult to find. The authoritative source is the Standard & Poor's website, where the latest numbers are posted on the earnings page. Follow these steps:
  1. Click the S&P 500 link in the second column.
  2. Click the plus symbol to the left of the "Download Index Data" title.
  3. Click the Index Earnings link to download the Excel file. Once you've downloaded the spreadsheet, see the data in column D.
The table here shows the TTM earnings based on "as reported" earnings and a combination of "as reported" earnings and Standard & Poor's estimates for "as reported" earnings for the next few quarters. The values for the months between are linear interpolations from the quarterly numbers.

The average P/E ratio since the 1870's has been about 15. But the disconnect between price and TTM earnings during much of 2009 was so extreme that the P/E ratio was in triple digits — as high as the 120s — in the Spring of 2009. In 1999, a few months before the top of the Tech Bubble, the conventional P/E ratio hit 34. It peaked close to 47 two years after the market topped out.

As these examples illustrate, in times of critical importance, the conventional P/E ratio often lags the index to the point of being useless as a value indicator. "Why the lag?" you may wonder. "How can the P/E be at a record high after the price has fallen so far?" The explanation is simple. Earnings fell faster than price. In fact, the negative earnings of 2008 Q4 (-$23.25) is something that has never happened before in the history of the S&P 500.

Let's look at a chart to illustrate the unsuitability of the TTM P/E as a consistent indicator of market valuation.
The P/E10 Ratio
Legendary economist and value investor Benjamin Graham noticed the same bizarre P/E behavior during the Roaring Twenties and subsequent market crash. Graham collaborated with David Dodd to devise a more accurate way to calculate the market's value, which they discussed in their 1934 classic book, Security Analysis. They attributed the illogical P/E ratios to temporary and sometimes extreme fluctuations in the business cycle. Their solution was to divide the price by a multi-year average of earnings and suggested 5, 7 or 10-years. In recent years, Yale professor Robert Shiller, the author of Irrational Exuberance, has reintroduced the concept to a wider audience of investors and has selected 10 years as the earnings denominator. As the accompanying chart illustrates, this ratio closely tracks the real (inflation-adjusted) price of the S&P Composite. The historic average is 16.39. Shiller refers to this ratio as the Cyclically Adjusted Price Earnings Ratio, abbreviated as CAPE, or the more precise P/E10, which is my preferred abbreviation.

The Current P/E10
After dropping to 13.3 in March 2009, the P/E10 has rebounded above 23. The chart below gives us a historical context for these numbers. The ratio in this chart is doubly smoothed (10-year average of earnings and monthly averages of daily closing prices). Thus the fluctuations during the month aren't especially relevant (e.g., the difference between the monthly average and monthly close P/E10).
Of course, the historic P/E10 has never flat-lined on the average. On the contrary, over the long haul it swings dramatically between the over- and under-valued ranges. If we look at the major peaks and troughs in the P/E10, we see that the high during the Tech Bubble was the all-time high of 44 in December 1999. The 1929 high of 32 comes in at a distant second. The secular bottoms in 1921, 1932, 1942 and 1982 saw P/E10 ratios in the single digits.

Where does the current valuation put us?
For a more precise view of how today's P/E10 relates to the past, our chart includes horizontal bands to divide the monthly valuations into quintiles — five groups, each with 20% of the total. Ratios in the top 20% suggest a highly overvalued market, the bottom 20% a highly undervalued market. What can we learn from this analysis? The Financial Crisis of 2008 triggered an accelerated decline toward value territory, with the ratio dropping to the upper second quintile in March 2009. The price rebound since the 2009 low pushed the ratio back into the top quintile. By this historic measure, the market is expensive.

We can also use a percentile analysis to put today's market valuation in the historical context. As the chart below illustrates, latest P/E10 ratio is approximately at the 89th percentile.
A more cautionary observation is that every time the P/E10 has fallen from the top to the second quintile, it has ultimately declined to the first quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 540. Of course, a happier alternative would be for corporate earnings to make a strong and prolonged surge. When might we see the P/E10 bottom? These secular declines have ranged in length from over 19 years to as few as three. The current decline is now in its tenth year.

Or was March 2009 the beginning of a secular bull market? Perhaps, but the history of market valuations suggests a cautious perspective.

Additional Perspectives on the P/E10
In response to the occasional request I receive for a real P/E10 based on the ShadowStats Alternate CPI for the inflation adjustment, see this chart, which suggests that the current market is fairly priced. On a personal note, I find the Alternate CPI version of the P/E10 interesting, but I think it is unreliable for estimating market valuation. Government policy, interest rates, and business decisions in general have been fundamentally driven by the official BLS inflation data, not the alternate CPI.
Yet another approach, one which avoids the question of the "correct" inflation adjustment, is to use nominal values for calculating the cyclical P/E ratio. Thia is the method of analysis favored by Bob Bronson, a market historian whose research is occasionally featured at dshort.com. Bronson favors a 16-year earnings cycle, which corresponds to the duration of broader market cycles. For Bronson's rationale, see this post from May 5th. Thus I'm now including a monthly update of the nominal P/E16.
For a fascinating look as several additional indicators of market valuation, see this monthly update by Jacob Wolinsky, whose ValueWalk.com website in included in my favorites.

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