Friday, March 11, 2011


by Cullen Roche

I’ve spent quite a bit of time here discussing the excesses in China and the extraordinarily flawed monetary policy that China has maintained over the last few years.  In a recent piece, Barry Eichengren of UC Berkeley succinctly expanded on this theme and concluded that a Chinese slow-down is “imminent”.  Eichengren says there are three primary reasons why we should expect a slow-down:
1)  “Slowdowns are also more likely in countries where the manufacturing sector’s share of employment exceeds 20%, since it then becomes necessary to shift workers into services, where productivity growth is slower. This, too, is now China’s situation, reflecting past success in expanding its manufacturing base.”
2)  “Most strikingly, slowdowns come earlier in economies with undervalued currencies. One reason is that countries relying on undervalued exchange rates are more vulnerable to external shocks. Moreover, while currency undervaluation may work well as a mechanism for boosting growth in the early stages of development, when a country relies on shifting its labor force from agriculture to assembly-based manufacturing, it may work less well later, when growth becomes more innovation-intensive.”
3) “Finally, maintenance of an undervalued currency may cause imbalances and excesses in export-oriented manufacturing to build up, as happened in Korea in the 1990’s, and through that channel make a growth deceleration more likely.”
I think this is pretty accurate.  China’s inflation issue are largely a direct result of their high growth and flawed fiscal and monetary policies.  Their western textbooks have taught them that rates hikes or other measures will contain the inflation, but history is not on their side.  The primary cause of lower inflation is recession.  As Eichengren says, it’s not a matter of if, but when:
“For all these reasons, a significant slowdown in Chinese growth is imminent. The question is whether the world is ready, and whether other countries following in China’s footsteps will step up and provide the world with the economic dynamism for which we have come to depend on the People’s Republic.”

Japan's Stock Market Post Kobe Earthquake in 1995

by Bespoke Investment Group

Following today's massive earthquake that hit Japan, a number of clients have asked us how the Japanese stock market performed following the destructive Kobe earthquake that hit the country on January 17th, 1995.  While the impact on Japan from the two quakes will surely be different, the Nikkei-225 got hit pretty hard in the weeks and months following Kobe. 

Below is a chart of the index from six months before to a year and a half after the earthquake hit.  In the initial week following Kobe, the Nikkei fell 6.6%.  Over the next month the index was down 5.26%, and over the next three months the index had fallen 15%.  The low point in the chart below came just under six months after Kobe hit, and at that point the Nikkei had fallen 25%.  By the end of 1995, however, the index had regained all of its post-earthquake losses.

See the original article >>

What's ahead for the U.S. economy?

By: Scott Stewart

The economic forecasting business is a risky one. Thus, my intention here is not to predict what will happen down the road. Rather, this is a look at the very real potential for dramatic events, how you might be affected by them, and what you can do to protect yourself.

On any given day, you can find some economist or expert forecasting that economic calamity is just around the corner, and just as easily you can find an expert saying that the bottom is in, the trends are up and that better days are immediately ahead. For certain, we live in an uncertain world. The economic leading indicators that I follow indicate that we are on fairly solid footing, and that at least for the next couple years, we should see improvement. In the big picture, though, my fear is if the federal government doesn't learn to spend less, economic calamity does lie ahead. It may be 10 years off, it may be 25 years off, yet for sure, overspending will catch up with us and lead to high inflation and high interest rates that ultimately are only cured by a severe economic downturn. The only fix for this that I can see is stopping runaway federal spending.

What is highly likely for the next decade or so is a slow recovery with more dips than we’ve typically seen. Some will be deeper than they would have otherwise been had we not had such a devastating blow in 2008. There is evidence that supports the likeliness of this new “roller coaster-like” economy: Unemployment levels are likely to remain high because employers have found that they can do more with less people, and that people are more expensive
than equipment.

For example, Caterpillar hired 15,000 people in 2010, half of them overseas. A friend of mine who owns a manufacturing business with 6,000 employees had to lay off 2,500 during the recession and has only rehired at overseas, lower-cost production facilities. The jobs lost were high-paying union jobs. Those who lost their jobs will be hard-pressed to find jobs that pay half as much. These trends in the way companies hire and compensate employees point to less disposable income for American workers than we’ve seen in previous, prosperous decades.

When you combine the most recent economic collapse and the money spent to come out of it, the sluggish recovery, and all the other new spending, one thing seems clear: The U.S. economy is slowly headed toward insolvency.

Our nation's interest costs are going to consume such a large part of our annual income that, for all practical purposes, we will go broke. The evidence for this is right in front of us: Greece, Ireland, and a long list of other countries that are in the same situation. Under this scenario, it is hard to predict anything other than extremely higher interest rates and potential hyperinflation. I hope these trends change and this forecast proves wrong. Rates may not go up, or may do so only moderately for two or three years, as long as the Fed continues to stimulate the economy. (In fact, rates could go down to almost zero before the bottom is in.) However, once they start to climb, more than likely, the increase in rates will be geometric rather than arithmetic, as was the case in countries such as Brazil, Argentina and Nicaragua. Ten years from now, I suspect rates will be up to 7 or 8 percent. In the window of 10 to 20 years, rates could easily be into the teens, and I wouldn’t rule out rates over 20 percent like we saw in the 1970s. Some extremists would predict much, much higher rates. I’m not taking that extreme of a view. Yet.

Escalating interest rates and inflation ultimately lead to economic collapses. The Institute for Trend Research is predicting an economic collapse that could occur 20 years from now. Most likely that downturn would be deeper than the one we most recently suffered through, and hopefully not as severe as 1929. Admittedly, that is more than just a little scary.

Wild price volatility for commodities, followed by economic collapse—if this occurs, your approach to everything you do may have to change dramatically. My belief is that, in this environment, preservation of wealth will become more important than trying to accumulate wealth. If you have a large asset base in a substantial economic downturn, that asset base can be wiped out and become a small percentage of its previous self. More importantly, if you have debt when interest rates spiral substantially higher, you can be destroyed by that debt.

As a result, one of the most important things Americans need to do in the decade ahead is to get out of debt. I don’t mean reduce it; I mean eliminate it. Borrowing money at 20 percent or 30 percent is insane. Admittedly, if there is 20 percent inflation at the same time, it is like you are borrowing the money for free; however, it's risky. First, even if your assets are increasing, can you cash-flow the payments? Second, when everything falls apart, you end up owing a lot of money on assets that are nearly worthless. That’s when the banks and the financiers end up with all of the assets.

Other ramifications of this inflationary environment would be a substantially weaker U.S. dollar. However, “weaker” is a term that is relative to other currencies in the world. The European economies are likely to continue to be weaker than the U.S. economy under almost every scenario. More importantly, the U.S. dollar will likely be weak against key trading partners such as China and India, and possibly emerging South American and Asian economies.

Remember, though, a forecast is not necessarily our destiny. Hopefully, clearer heads and smarter minds will prevail and change our government spending to derail the disastrous path we are on. We need to remember that the principles of individual liberty and capitalism are what made America strong, and will continue to provide strength.

What do you think about the path our country is on, and do you ever wonder how you could be affected? I welcome your comments.
See the original article >>

As China grows bigger, implicit risk for commodities goes up

Jan Kaska writes: This may sound counterintuitive, but we believe that as China grows bigger, it poses the biggest risk to commodities. No doubt, over the long term, commodities should remain structurally well bid as emerging Asia and developing countries will continuously have to tackle the infrastructure gaps. For example, countries like India and Indonesia have a lot of catch-up to do. Or recall Africa, where the Chinese have to build roads and ports first in order to obtain access to untapped reserves of valuable minerals. And China itself is not done with infrastructure in its homeland by any means as the Western provinces are still stuck deep in poverty.

Yet now comes the heretic thought. We believe bigger China does not imply riskless bet on commodities at all. Let us present couple of charts that prove our point.

On the first chart, you can see that China is running extremely high investment ratios to its GDP. As a matter of fact, almost half of China’s GDP is investment based. That means a lot of excess housing, factories, roads, etc. For sure, the capital stock is still very low in comparison to developed countries, yet in terms the actual phase of development in China, as measured by GDP per capita, the urban China is already experiencing some kind of excessiveness to the tune of 20-30%. The result is China has to slow down its investments otherwise it will run into trouble in a not too distant future. Especially given interest rates are on the way up. 

Secondly, and probably more importantly, we have given a thought to the matter What is true role of China in the global investment boom? In order to respond to this question, one has to come up with some kind of methodology. The most obvious approach is to compute the share of Chinese investment to the global investment. We could simply call it a market share of China in commodities as fixed asset investments are the main commodity driver. However, we went a step further. What we are really interested in is the nature of the investment environment, how broad and diverse it is. We want to know whether the investment boom is driven by China itself or whether it is more broad-based? In order to measure this monopoly power, we employed the Herfindahl–Hirschman Index (HHI). HHI is a measure of the size of individual players in relation to the industry and an indicator of the amount of competition among them. As such, it can range from 0 to 1.0, moving from a huge number of very small players to a single monopolistic power. What we found is that as China rises, its monopoly power is also increasing. As the relevant market, we chose a universe comprised of developing countries, for we know that bulk of new investment and thus commodity demand will come from the emerging world. The HHI index rose to 16% which shows that investments are still broad-based, yet well less so than in 1991. 

Global investment reached USD 13trn in 2009, China alone was responsible for adding 2.3trn, or roughly 18%. If we look only at investments stemming from the emerging world, we are talking about almost 40% share.

Now assume China gets forced by market forces (probably a collapse in the banking sector) to adjust its investment rate back to where it should be (with capital-output ratio at 2.5x and new structural growth rate of 8%, the implied investment rate is 34%). A 10% drop in investment rate would mean a loss of 25% of investments in absolute term or probably 25% drop in demand for commodities from China if you wish.

With a lot of emerging world dependent on Chinese vendor financing, and demand for commodities fueling domestic growth, we see little probability of these countries being able to step up, withstand the shock and increase investment spending.

Over 3-5 years, the internal growth of emerging markets (just as a response to population growth) would close this gap and that is why we think commodities will stay well bid structurally. Yet in terms shocks, make sure you get China right!

See the original article >>

China 2011-12 soybean imports seen at 58 million tons

by Commodity Online

World’s largest soybean consumer China’s import of the commodity is projected to grow by nearly 6 percent during 2011-12, according to USDA.

China will buy in 58.0m tones of the oilseed in 2011-12, some 5.5% more than in the current season, reports Agrimoney quoting Beijing office of US Department of Agriculture said in a report.

Falling domestic crop and growing needs for animal feed will keep up China’s import of the commodity continued to spur up demand, the report said.

While representing a slowdown on the pace of growth in 2010-11, the figure would set a record, and keep the pressure on supplies from America, the top soybean exporter.

China's soybean imports from America would reach 27.0m tones (992m bushels) next season, a rise of 2.0m tones (73.5m bushels) – more than the US is currently expecting its production to rise by.

As an extra sign of the pressure facing US stocks, it is estimated that China would import 25.0m tones of American soybeans in 2010-11, a figure 1.0m tones higher than the official USDA estimate.

The upbeat estimates to the strong demand for both soybean products – soy oil, for which consumption is being directly boosted by Chinese consumers' growing wealth, and soybean meal, which is feeling the demand indirectly, through a growing appetite for meat.

The growing demand for meat is spurring the consolidation of livestock producers into industrial enterprises keener to buy soy meal than small-time farmers.

However, domestic farmers were to put less ground to soybeans this season, preferring grains, which attract greater levels of government support, and higher value horticultural crops.

In eastern Chinese provinces, such as Hebei and Shandong, "soybean planting areas is expected to lose ground to cotton and corn", and to fall 10% in neighboring Henan.

The report added that soybean growers' "competitiveness continues to be undercut by low yields and poor efficiency", with a lack of crop rotation believed to be keeping yields at a little over half US levels of 3 tons per hectare.

The report also proposed that China would not imminently lower tariffs on soybeans and soyoil from 9% to 3% - speculation over which lifted Chicago prices of both commodities last week – despite the help such a reduction might be in the battle against food price inflation.

See the original article >>

Stock Charts, First Thrust Down, Snapback Rally, Bombs Away

One of the best change in trend patterns is the First Thrust Down short-sell pattern. The saying goes:

“First Thrust Down, Snapback Rally, Bombs Away” 

Let’s look at some examples:


Classic first thrust down, puts in a bear channel, snapback rally call it what you will in pink, breaks it and it’s bombs away. One catch, the bombs away was earnings related. BUT that’s the pattern we want to see on the short side with names.


Same here. The blue box is the first thrust down, the pink lines represent the snap back rally, and then bombs away.

In both cases, the short sell trade is initiated on a break to the downside out of the pink channel.

Now let’s look at the indexes:

You can see a break of the Pink Snapback rally (bear channel) that we’ve been highlighting. So could we keep going down here? Yes, as we got the break.

We’ve laid out a dark blue line in the daily charts here as they are prior support levels to be aware of. Should we get there in a hurry? It’s where our paying subscribers will lock in their short-sell gains!

Il Giappone trema

Japan earthquake - central tokyo sky clowded over with smoke
stopped    Big Earthquake
More evacuation a few minutes after the first big earthquake today
March 11.2011 earthquake @japan_my room    after the 1st earthquake
Major #earthqauke in Japan. Fortunately no one was sitting under the locker. 二度目の余震で倒壊した、オレの職場のロッカー。幸い、この下には誰も座っていなかった。 #JPquake

Il terremoto di magnitudo 8.9 che ha colpito oggi la costa nordorientale del Giappone, il più forte in 140 anni, ha innescato un’onda anomala di 10 metri che ha trascinato via tutto quello che ha trovato sulla sua strada, compresi edifici, imbarcazioni e auto.Yahoo! Notizie

Kobe Earthquake’s Impact on the Nikkei and $/Yen

By macroman

First, our thoughts and prayers are with the Japanese.   They are a great nation and a good people.  Watching this happen unfold in  real time is stunning and we are hoping for a miracle that the loss of life is limited.  We were living in and lost a house in a powerful L.A. quake and understand the fear when the earth shakes.

Though it is too early to assess the full damage of this quake, the following chart illustrates how the January 17, 1995 Kobe Earthquake, which measured 7.3 and killed 6,434 people, impacted the Nikkei and $/Yen.   The Nikkei fell 24.6 percent before bottoming at the end of June.

The Yen actually strengthened 18 percent before the dollar hit the famous “Rubin bottom” in April 1995.   The dollar was already in downtrend and further weakened by the U.S. bailout of the Mexico when the Kobe quake hit, so it is difficult to fully extract its true impact on the exchange rate.  (click here if chart is not observable)

See the original article >>

Pimco Dumps All U.S. Treasury Bonds, Six Reasons Why They Got it Wrong

Pimco's Bill Gross has been dumping US government debt in favor of other alternatives including emerging-market opportunities. Looking ahead, I think it's more likely to be a bullish setup for treasuries than not.

First, please consider the news.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.

Pimco’s $237 billion Total Return Fund last held zero government-related debt in January 2009. Gross had cut the holdings to 12 percent of assets in January, according to the Newport Beach, California-based company’s website. The fund’s net cash-and-equivalent position surged from 5 percent to 23 percent in February, the highest since May 2008.

Yields on Treasuries may be too low to sustain demand for U.S. government debt as the Federal Reserve approaches the end of its second round of quantitative easing, Gross wrote in a monthly investment outlook posted on Pimco’s website on March 2. Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to attractive levels.

Treasury yields are about 150 basis points too low when viewed on a historical context and when compared with expected nominal gross domestic product growth of 5 percent, he wrote in the commentary. The Fed is scheduled to complete purchases of $600 billion of Treasuries in June.

Gross in his February commentary urged investors to reduce holdings of Treasuries and U.K. gilts and buy higher-returning securities such as debt from emerging-market nations. “Old- fashioned gilts and Treasury bonds may need to be ‘exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint,” Gross wrote.

Gross last month increased holdings of emerging-market debt to 10 percent, the highest since October, from 9 percent in January. He cut holdings of mortgage securities to 34 percent from 42 percent in January.
Six Reasons to Fade Pimco

I view this setup as favorable for US Government bonds. For starters there is no Pimco selling pressure, only potential buying pressure when Gross changes his mind.

Second, everyone seems to think the end of QE II will be the death of treasuries. While that could be the case, sentiment is so one-sided that I rather doubt it, especially is the global recovery stalls.

Third, the US dollar is towards the bottom of a broad range and any bounce could easily wipe out gains in higher yielding emerging-market debt.

Fourth, the global macro picture is weakening considerably with overheating in China, state government austerity measures in the US, and a renewed sovereign debt crisis in Europe on top of a supply shock in oil. Emerging markets are unlikely the place to be in such a setup.

Fifth, chasing yield means chasing risk, and that is on top of currency risk. Chasing risk is highly likely to fail again at some point, the only question is when.

Sixth, several interest rate hikes are priced in by the the ECB this year. Will all those hikes come? I rather doubt it, and if the ECB doesn't hike, look for the US dollar to rally, perhaps significantly.

Relative Value Traps

The alleged "relative value" of emerging markets may turn out to be nothing but an "absolute value" trap. Admittedly there is not much to like on a long-term basis about US treasuries either.

Should treasuries continue to sell off, it may very well be the case there are no hiding places at all, except for the universally despised US dollar.

See the original article >>

You Have To Believe China Has A Significant Corn Problem

By: Kevin Van Trump

This weekend Chinese officials came out with news that they have ample supplies of wheat, supposedly 40 million metric tons more than we had thought.  I think we need to dive a little deeper into their rhetoric.  Look at it like this: they claim they have 100 million tons of wheat on hand, more than one year's worth of supplies.  Yet they follow that comment up with their overall grain reserves at around 40% of their annual national consumption.  You have to believe this insinuates they have much lower inventories in crops other than wheat.  Remember, China typically includes corn, wheat, rice and soybeans into their "grain" comments.  To even further confirm my thoughts you now have several senior grain executives in China calling for curbs to be placed on corn exports and all industrial use of the corn crop.  They continue to stress that corn should no longer be used for ethanol and should now only be used for animal feed.  Those in charge are also desperately trying to make a shift to more corn acres.  For me it all ads up to one thing...China knows they are short corn in a big kind of way.  I am sure they will try and plant their way out of it, but if they encounter any type of weather problems they could be in a huge pinch.  You have to believe they tipped their hand last year when they were forced to import corn from the US for the first time in several years.  Now they can't get farmers to sell their stored inventory and inflation is surging higher, all adding up to big problems for China if any type of production glitch occurs.  

Ivorian cocoa prices fall, planters abandon farms

By Loucoumane Coulibaly

(Reuters) - Cocoa beans are piling in east Ivory Coast because of an embargo, while plummeting farmgate prices has pushed planters to abandon farms as Ghana reinforced security at its border to end smuggling, farmers said on Friday. "The amount of smuggling is down. There are a lot of beans just sitting in the hands of the farmers," said farmer Joseph Amani, who farms in the eastern region of Abengourou. "For several weeks, the Ghanaian government has reinforced security at the border. It is very difficult to get the cocoa out. 

Everyone is depressed because we can't sell," he said. A dispute over a November election has plunged the world's top cocoa producer into violent turmoil, after leader Laurent Gbagbo refused to step down despite results showing he lost. His rival Alassane Ouattara is recognised by world leaders and Western countries have imposed sanctions on Gbagbo and institutions supporting him, such as the ports and cocoa authority.

Ouattara has imposed a ban on exports until March 15. Both aim to starve Gbagbo's regime of funds. Ivory Coast has severed ties with the central bank, sparking a huge liquidity crisis. International banks have closed shop. In the western region of Gagnoa, farmers and cooperative managers said prices had fallen to between 375 CFA francs to 400 francs per kg as the result of a lack of liquidity, compared with prices of 500 to 700 francs per kg before the crisis. As the dispute gets more violent, many farmers in the west and other parts of the country have fled, fearing attacks. "The price has gone down a lot. The farmers are having to sell at a cut price. There are Lebanese buying as low as 375 CFA francs per kg," said cooperative manager Francois Badiel. "The plantations are no longer being tended for lack of money. The workers are not turning up. The social situation is dire," Badiel said. 

In the centre-western region of Daloa, which produce a quarter of Ivory Coast's national cocoa output, farmers said several farmers were desperate to sell to buyers paying between 300 CFA and 400 CFA francs per kg.

"We don't live anymore. Life has effectively stopped for us, because we can't sell our cocoa," said farmer Attoungbre Kouame, adding that even at the low price, not enough middlemen were buying. In the western region of Soubre, at the heart of the cocoa belt, farmers said supply in the bush could be damaged by farmers moving away from growing as rains became abundant and as few buyers were paying around 400 francs per kg.

"We are making major losses this year. There is a lot of cocoa in the bush and it has started to rain. There is a risk the beans will rot," said farmer Lazare Ake who farms in the outskirts of Soubre.

Fortify your portfolio with some iron ore

Anybody who still has any lingering doubts that Canada is the next big player in iron ore should have taken a walk down down the aisles of the 2011 Prospectors & Developers Association of Canada mining convention in Toronto this week.

Frank Condon, director of Quebec operations with Adriana Resources Inc., said there were easily three times as many people stopping by the iron exploration company’s booth this year compared with last.

“It’s the most interest we’ve ever seen,” he said. “When the mom and pop investors stop by and they see 4 billion tonnes indicated, there’s a lot of people saying ‘Gee whiz, that’s a lot.’ It certainly is an eyecatcher.”

Investors may also want to bulk out their portfolio with a little iron ore, one of the primary components of steel.

Mr. Condon, who has more than 40 years experience working in the resource industry, was referring to Adriana’s Lac Otelnuk project in the Labrador Trough in northern Quebec. The company secured a $120-million deal with China’s Wuhan Iron and Steel Co. Ltd. in January to co-develop the massive deposit, which would have been much too expensive for the junior miner to do on its own.

And on Monday, New Millenium Capital Corp. worked out a financing deal with India’s Tata Steel to develop its own project in the region.

Iron ore has hit historically high prices of US$200 a tonne on intense construction demand from China, India and other developing countries.

All the attention the world is now paying to Canada’s previously dormant iron sector has created an excellent buying opportunity for speculative investors, John Stephenson, portfolio manager with First Asset Funds, said in an interview.

“The huge development wave in China is going to continue for at least the next three or four years. Both price and demand will remain high,” he said. “I’d say we’re on the cusp of another buying wave. It’s a sector that China wants to consolidate, it’s a hot sector that’s going to get hotter and you’ll see more IPO and M&A action.”

However, none of these upstarts are close to production and remain risky buys on the TSX Venture Exchange.

Arnold Zwaig, senior wealth manager with ScotiaMcLeod, said investors are better off sticking with the big three producers — BHP Billiton PLC, Vale SA and Rio Tinto.

“How much of the M&A premium is already priced into those upstarts?” he said. “It will take so many years for these projects to give China what it needs, it will still need to go to the big producers.”

While there’s no specific ETF focused on iron as the mineral is sold on contract and by the tonne, there are natural resources ETFs that hold either the big three or even coal producers such as Teck Resources Ltd. (coking coal is a key part of the steel smelting process).

One option is the Market Vectors Steel ETF from Van Eck Global, which counts Vale and Rio Tinto as its top two holdings along with major U.S. iron producer Cliffs Natural Resources Inc. in its top 10. The ETF, started in 2006 on the New York Stock Exchange, holds assets under management of about US$242-million and an expense ratio of 0.56%.

Another is the Invesco PowerShares Global Steel Portfolio ETF, which is traded on the Nasdaq and carries a market value of US$11.7-million. The MER is 0.75% and top holdings include Vale and steel producer ArcelorMittal as well as several international iron producers.

China copper imports drop again in February

by Commodity Online

World’s largest copper user China’s import of the commodity dipped by 19 percent in February compared to same period last year.

According to statistics released by the General Administration of Customs, China imported 235,469 metric tons of unwrought copper and copper products in February this year.

It said February imports were 35% less than the 364,240 metric tons recorded in January.

The country's imports of copper scrap were 250,000 metric tons last month, and its imports of alumina products were 220,000 metric tons, while it imported 32,589 metric tons of unwrought aluminum.

In the first two months of this year, the country's imports of copper scrap were 610,000 metric tons, down 0.6% year on year, and that of alumina products decreased 47.7% year on year to 570,000 metric tons.

China imported 156,544 metric tons of unwrought aluminum and aluminum products in the period, down 3.3% year on year.

Drought hit China expects bumper grain harvest

by Commodity Online

World’s largest grain consumer China said it expects a record grain harvest this year despite a drought that has hit its wheat-growing regions.

According to Chinese agriculture minister Han Changfu the country aimed to get the eighth successive record harvest.

It would come amid international concerns that the drought could hit China's harvest, causing it to import more, pushing global prices higher at a time when prices already are on the rise, he added.

Han said current wheat harvest benefited from recent rain and from massive drought-relief efforts. China's 2010 grain harvest totaled 546 million tons.

Han said the government will regulate grain prices but not keep it too low which would hurt farmers. China's main imports include corn and soybeans.

Concerns have been raised about the country's wheat supply this year due to a prolonged drought that affected production and a sharp drawdown of national and provincial reserves through a program of auctions designed to contain inflation.

A combination of increasing prices in the international market, high domestic inflation expectations, rising production costs and strong demand has pushed grain prices higher, but further increases will be restrained, Han said on the sidelines of the annual legislative meetings of the National People's Congress.

China consumed about 40 million tons of corn for production of starch and alcohol last year, accounting for about 25% of total output, industry analysts estimated.

China's grain output rose 2.9% to 546.4 million tons last year, marking the seventh consecutive year of growth.

Goldman warns of 'downside risk' to crop prices


Agricultural commodity prices face "downside risk" – for now - Goldman Sachs analysts warned, while Rabobank said record corn values could still be on the agenda, as analysts reacted to an end to ever-tighter forecasts for crop supplies.
Goldman Sachs urged investors to sell out – at a profit - of the cotton contract it recommended for purchase four months ago, having let a buy rating on Chicago corn for March lapse with the contract.
The shift reflected the "inventory stabilisation" evident in the US Department of Agriculture's influential monthly Wasde report into world crop dynamics, which ended a long run of declining forecasts for world  agricultural commodity stocks.
The USDA's unchanged estimate for US corn inventories at the close of 2011-12 followed nine successive months of downgrades.
 "We believe that this stabilisation will put a lid on crop prices in the near-term," Goldman analyst Damien Courvalin said.
"We actually see downside risk to crop prices in the near term," he added, singling out corn and cotton, for which a March plantings intentions report due at the end of the month is expected to show particular gains in US farmers' sowing plans.
'Supplies are not short'
The report also provoked a downbeat response from other observers, including AWB, the Australian grain handler, which said the data "provided further negative direction to markets", while Commerzbank said they showed that the "upside potential for wheat is largely exhausted".
At Commonwealth Bank of Australia, Luke Mathews said that a "sizeable" 4m-tonne upgrade to world wheat inventories had left the global stock-to-use ratio at 27.4%, showing that "old-crop wheat supplies are not short".
However, analysts stopped short of writing obituaries for the agricultural commodities rally, with Goldman Sachs warning that, overall, "average weather conditions in 2011 will not be sufficient to significantly rebuild critically low inventories, and will keep crop prices elevated".
"Any weather disappointment in either the planting or growing months in the northern hemisphere would likely push crop prices above their current highs," the bank said, maintaining a recommendation for investors to hang on to November soybean exposure.
"Strong competition from both the corn and cotton crops in the US will limit the expansion of soybean acreage."
$8 a bushel corn?
Commerzbank was upbeat over corn prices, saying that Thursday's fall of more 2% was an "exaggerated" reaction to the Wasde estimates.
"At 17m tonnes, [US] corn inventories remain at a 15-year low," the bank said.
And Rabobank analysts pointed out the incentive for ethanol producers provided by high oil prices at a time of declining corn costs.
"The economics of blending ethanol have increased significantly, as ethanol prices have risen more than 5% year to date gasoline has increased more than 20%," the bank said.
"This gives a further incentive for ethanol production to persist above USDA's forecast.
"As gasoline prices approach $3 a gallon, we estimate corn must trade at $8 a bushel in order to reduce corn demand for ethanol."

Wheat prices fall after US lifts hopes for stocks


Grain prices fell on both sides of the Atlantic after US officials unexpectedly raised their estimates for world stocks of major agricultural commodities.
Investors had expected the US Department of Agriculture, in its much-watched Wasde report, to upgrade its forecast for global soybean inventories at the end of 2010-11, thanks to better prospects for Brazil's crop, the world's second biggest.
And, indeed, the USDA lifted its estimate for the Brazilian soybean harvest by 1.5m tonnes to a record 70.0m tonnes, reflecting "higher projected yields".
The revision, after some adjustments for last crop year too, fed through to a 120,000-tonne lift in the estimate for global soybean stocks, slightly less than the market had prepared for.
Prices tumble
However, USDA increases to forecasts for world corn and, in particular, wheat inventories came contrary to expectations.
Thursday's closing prices
Chicago wheat, May contract: $7.40 ½ a bushel, (-2.4%)
Chicago corn, May contract: $6.82 ¾ a bushel, (-2.6%)
Kansas wheat, May contract: $8.37 a bushel, (-1.9%)
Paris wheat, May contract: E226.25 a tonne, (-2.5%)
London wheat, May contract: £187.50 a tonne, (-2.2%)
"The global wheat numbers will be considered bearish by the wheat market," Macquarie Securities said, adding that the data were likely to "induce even further speculative selling pressure in the short-term" for a grain already down 12% since mid-February.
And investors' reaction was to send grain prices lower.
Paris wheat for May at one stage fell more than 5% to a three-month low of E220.00 a tonne, with Chicago wheat too recording its lowest prices since early December.
Chicago corn for May closed down 2.6%.
'Demand trimmed'
The forecast of higher wheat stocks reflected in part higher forecasts for crops in Argentina and Australia, the main southern hemisphere producers, which enjoyed bumper harvests.
Key Wasde estimates, change on Feb and (on market expectations)
US wheat exports: 1.28bn bushels, -250m bushels, (n/a)
US wheat year-end stocks: 843m bushels, +25m bushels, (+33m bushels)
Global wheat year-end stocks: 181.9m tonnes, +4.13m tonnes, (+4.33m tonnes)
Global corn year-end stocks: 123.1m tonnes, +630,000 tonnes, (+1.51m tonnes)
Australia's crop was estimated at a seven-year high 26.0m tonnes, thanks to better-than-expected yields in Western Australia, usually the country's top cereals growing state, "where wheat quality was not hurt by harvest rains as in the east", albeit being hit on quantity by drought.
However, the USDA also noted signs of rationing by users in response to prices which last month hit two-year highs in Chicago and Paris, and record highs in London.
The report flagged "reduced import prospects for a number of smaller markets as high prices trim demand". The estimate for Russian consumption was downgraded by 1.5m tonnes, thanks to a "reduction in expected wheat feeding".
Forecasts for wheat exports by both the US and European Union, the two biggest shippers, were downgraded.
Safrinha question
For corn, the USDA stuck by forecasts for domestic supply and demand.
However, it raised its forecast for world corn stocks, reflecting "high reported area and yields" for Brazil's summer crop, and prospects for the winter crop currently being sown.
The Wasde, raising by 2.0m tonnes to 53.0m tonnes the estimate for Brazil's corn production, highlighted "expectations for increased area for the winter crop, with government planting dates extended for crop insurance and loan programmes".
However, the observation is at odds with that of many private analysts who have warned of a knock-on effect on sowings of winter, or safrinha, corn from rain delays to the soybean harvest, which has kept land tied up.
Indeed, the Brazilian concessions on planting windows were implemented because of the extent of the delays.
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Cotton prices to 'stay high for the next season'


Cotton prices are to "remain high for next season", despite better prospects for production in Australia, where dismal winter weather has left growers a silver lining, US farm officials said.
The US Department of Agriculture upgraded by 500,000 bales to a record 4.5m bales its forecast for Australia's 2010-11 cotton crop despite the "excessive" rainfall and flooding that the country, the fourth-ranked exporter of the fibre, suffered from late November to early January.
"Although the floods had a devastating impacts in certain areas, field observations by [official US] crop-assessment specialists… indicate that most cotton growing areas actually experienced limited flood damage," the USDA said.
"The majority of cropping areas are not benefiting from the improved soil moisture profiles and abundant irrigation reserves" left by the weather which, in Cyclone Yasi, included what was billed as the most severe ever storm to hit Queensland, one of Australia's two main cotton growing states.
"Prospects are high for both yields and total harvested areas, and by all estimates the Australian cotton industry is on track for a record cotton harvest."
'Little buffer' 
Nonetheless, the USDA said that cotton prices "are likely to remain high for next season", given weaker prospects for demand in India and soaring demand in China, the top consumer and importer, and producer, of the fibre.
Wasde 2010-11 cotton changes. March estimate, (change on Feb)
Australian production: 4.0m bales, (+500,000 bales)
Brazilian production: 8.8m bales, (+600,000 bales)
Indian production: 25.0m bales, (-1.0m bales)
Chinese production: 29.5m bales, (-0.5m bales)
World year-end inventories: 42.33m bales, (-480,000 bales) 
"China's ending stocks have continued to tighten, indicating strong import demand going forward," the USDA said.
"With stocks already low, and the state reserves depleted, the gap between China's production and consumption will have to be filled by more imports."
Yet thin supplies left the world with "little buffer in case of either problems with production or increases in demand in major end use markets".
India downgrade
The USDA attributed its downgrade to India's production estimate to "drier-than-normal weather toward the end of the season", notably in Gujarat.
"Recent market arrivals indicate a smaller crop than previously projected," the department said, cutting its forecast for Indian output by 1.0m bales to 25.0m bales .
"The poor late-season weather has resulted in declining yield prospects."
The potential for continued export restrictions by India, which has clamped down on shipments in an effort to keep a lid on domestic prices, "raises concerns about the international availability of their stocks, which adds greater uncertainty to an already unsettled market," the USDA added. 
In New York, May cotton recovered early losses to stand at 205.58 cents a pound at 16:15 GMT, up 0.6% up on the day.

Energy Sector Crushed

by Bespoke Investment Group

The S&P 500 Energy sector had been propping up the S&P 500 as a whole this year, but today the sector finally made its impact felt on the negative side with a huge decline of more than 3.5%.  As shown in the chart of the sector below, the tight uptrend channel that had been in place since last December was broken today, and broken significantly.  

As Crossing Wall Street pointed out earlier today, it was so bad for the sector that Exxon Mobil (XOM), the sector's largest stock, lost more in market cap than most other company's are worth!

Which Way is Gold Going to Go?

by Bespoke Investment Group

After once again trading to a new all-time high last week, the price of gold has seen a notable pullback over the last few days and is now trading back below its highs from last year.  When the metal pulled back at the start of the year, a lot of chart watchers were calling it a triple-top.

The pullback was short-lived, however, and by last week it looked like gold bulls were going to have the last laugh when new highs were once again made.  No sooner than they could pop the champagne, though, gold has broken right through that former resistance line.  While the comparison isn't perfect, gold's pattern is beginning to look a lot like an arcane chart pattern referred to as three peaks and a domed house (see chart below).

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The SPX Stocks Index Dances Between Danger and Excitement

Many readers might remember that exactly two years ago the S&P 500 tagged the infamous 666 price level before putting on a monster 2 year rally that saw it surge over 100% to the February 2011 highs. Investors today are staring at a rising wall of risk while corporate credit spreads remain bullish, corporations have been able to expand margins and produce increasing profits, and Federal Reserve Chairman Ben Bernanke has declared that there are no inflationary concerns. Quite frankly I am going to leave Ben Bernanke alone simply because so many other people will do a better job of declaring him incompetent and the creator of massive bubbles in risk assets, but I digress.

Right now investors have to weigh rising oil prices, geopolitical conflict in the Middle East, the threat of higher interest rates and inflation against the bullish backdrop discussed above. The price action in the broader market place is talking, but we have to listen with an open mind currently. There are two key price levels that are obvious when we look at a daily chart of SPX. First of all, the SPX 1331-1332 price level is acting as major resistance and holding the bulls in check. Should this level be breached to the upside on a daily close, we could see prices extend higher to test recent highs. The chart below illustrates the key upside level around 1331-1332. 

However, it is important to note the bearish wedge forming on the SPX daily chart. If price can push below the recent lows around 1294, we should see an extension lower to the 1260-1280 area before support comes back into focus. If we were to test the 1260-1280 price level, it is hard to say where price action could go. We could see an extension higher which pushes to higher highs or we could rollover and test the 1250 price level below. I will wait until we get confirmation in either direction before making any major assessment, but for right now those are the key levels for traders to watch. The chart below illustrates the bearish wedge located on the SPX daily chart.

My bias remains to the downside due to what I am seeing in the Volatility Index (VIX) and what I refer to as the “usual suspects”. The usual suspects include small caps represented by IWM, transports represented by IYT, and the financials represented by XLF/KBX. I look at all of these metrics daily in order to facilitate my view of the marketplace and where I expect price action to be headed. Of course I take into consideration other analysis metrics such as market internals and chart formations, but the crux of my daily analysis is derived from the analysis of the VIX and the suspects.

Take for example the Volatility Index (VIX) daily chart and it is obviously trending higher and is well above key moving averages. I believe that in the future we will see the VIX test the 200 period moving average and potentially breakout. The test I am sure about, the breakout remains to be seen. The key levels on the VIX are shown below:
IWM has a similar trading pattern as the S&P 500 index but at current price levels it is well off of the recent highs. It is also building a bearish wedge and I will be watching it closely to see which way it breaks. If IWM breaks down ahead of the SPX it is likely that the SPX will follow suit. The transports (IYT) have gotten banged up the worst as the rise in oil price negatively impacts the entire sector. Transports are also trading well below recent highs and also have a bearish wedge formed on the daily chart.

The financials (XLF/BKX) exhibit a bearish wedge but they also have head and shoulders patterns forming on their daily charts. Should price break the neckline we could see heavy selling pressure set in on the financial complex. Most regular readers know that I put a lot of emphasis on the price action in the financials (XLF) and as such should they breakdown the broader indices will move in tandem. The daily chart of XLF is listed below:
Interestingly enough the U.S. Dollar Index futures appear to have formed a short/long term bottom on the daily chart. It is obviously unknown whether this is just a bounce to work off oversold conditions or the beginning of a longer term move higher. The primary point for traders to consider is that a rising dollar could place additional selling pressure on the S&P 500, crude oil, and precious metals.

By now I’m guessing most readers are starting to get the theme here. We have bearish wedges forming on key indices, however that does not mean that they will follow through to the downside. We could see a failure and a breakout higher just as easily as a bearish breakdown, thus the reason why the key levels are so important on the S&P 500. I am going to wait for a clear breakout/breakdown and will accept directional risk on the broad indices at that point. Until then, I am not going to get involved in the daily chop.

China Housing Market Bubble Bust Could be Dubai X1000


Markus Bergstrom writes: It's an eerily familiar story. Shortly before the American housing bubble burst, pundits across the globe argued that the world had reached a new plateau of economic growth, where the old rules of economics no longer applied — "this time it's different." The same has been said about the current boom in China, specifically with regards to its large degree of top-down state control over the economy, which somehow enables it to ignore the laws of economics.
Indeed, this notion seems plausible according to traditional Keynesian aggregates. After all, China's GDP growth recovered in record time and at record pace from the global slowdown in 2008, hitting a staggering 10.7 percent toward the end of 2010. While some of this growth certainly comes from true economic development, a substantial portion is driven by monetary expansion, government "stimulus," and a massive, unsustainable real-estate bubble.

In 2008, in order to get back to postcrisis growth levels, the Chinese government prescribed a favorite statist remedy for times of economic hardship: monetary expansion. This was "necessary" in order to increase domestic investment and consumption, as well as to compensate for the slowing down in exports. In November 2008 the government also announced $586 billion worth of "investment" with the very same purpose.

However, when governments claim to be "investing" in something, one should always substitute it for "spending" or "printing money." As governments rarely spend money with the hope of reaping a profit, there's no way of knowing whether it was put to productive use or not. Even when profit-and-loss calculations guide these "investments," the capital still comes from forced taxation or inflation rather than voluntary savings. Thus it's still impossible to determine whether the money could have been spent on something better.

Hello, Anybody Home?

Well-known Austrian investor Jim Rogers has long played down speculations about a major Chinese bubble. He argues that while real-estate prices in some coastal cities are overheated, a cool-down of these would leave a slight dent on Chinese growth rather than result in a major slump. The rest of the country, he says, is "hardly in a bubble."

Another well-known Austrian investor, Doug Casey, is a lot more pessimistic, arguing that China "is in an unbelievable real estate bubble," which will cause "millions of Chinese — and the banks that lent them money — [to] lose everything."

There is certainly good reason to be concerned about China. A study conducted last summer by the Beijing University of Technology reported that a typical Beijing flat costs a staggering 22 times the average income in the city, while The Telegraph reported in December that the same figure for the city of Shenzhen is 18. On a national level, the Chinese Academy of Social Sciences (CASS) concluded last year that a typical Chinese property costs 8.8 times the average income. Compare this to just 5.5 in the United Kingdom in 2007 and 4 in 2009. In the United States, home prices peaked at a little over 5 times average income during its housing bubble, according to the S&P Case-Shiller Index.

A housing development in Ordos

As in the United States, the Chinese real-estate market is plagued by overconstruction, and not just in megacities like Shanghai, Beijing, and Shenzhen. Brand-new ghost towns have sprung up all across China in recent years, the most famous of which is perhaps Kangbashi in Ordos, Inner Mongolia. That city's housing capacity can currently accomodate well over 300,000 residents, yet only one tenth of that number actually live there. Numerous other lesser-known cities also boast swaths of high-rise apartments and majestic public buildings while appearing to be entirely devoid of residents.

Jim Chanos of Kynikos Associates claims that the new office space currently being constructed in China is enough to provide a five square-foot cubicle for every single citizen in the country. And that's just corporate real estate. 
Finance Asia reports that some 64 million homes and apartments across China have sat empty for the past six months, enough to house 200 million people — 15 percent of the country's entire population. Along the same lines, a study conducted in 2007 by the Beijing Union University found that 27 percent of all newly sold apartments in over 50 different residential areas in Beijing remained unoccupied.

Why, then, is this mad overproduction continuing? After all, such massive discrepancies between units produced and units actually inhabited should result in falling prices. However, most new real-estate developments are actually snapped up before they're even built. The buyers are usually speculators who refrain from even renting out the properties, hoping instead that they will yield even higher profits once flipped in pristine condition in the future. Bill Powell of Fortune recalls a neighbor in Shanghai who has bought a staggering 43 homes in just three years for this exact reason.

This absurd demand is in turn enabled by the aforementioned credit expansion. Officially, Chinese M2 grew by 58 percent between November 2008 and December 2010, while total bank lending (including informal lending) is said to have doubled in 2009 compared to 2008.

Monetary Aggregates for China (measured in 100 million Yuan)
Source: The People's Bank of China (Central Bank of China)

A contributing factor to the real-estate mania is that, to most Chinese, real estate is the most lucrative and (seemingly) the safest investment option available compared to the alternatives; bank deposit rates are below CPI inflation, domestic stocks and other equity have performed poorly in recent years (to say the least), and capital controls still prevent citizens from investing overseas.[1]

More than Meets the Eye

Of course, overproduction and overpriced property weren't the only factors behind the American financial crash. Another major ingredient was the house of cards that made up the American mortgage market, which, at first glance, looks considerably different in China. For example, the down payment requirement for first homes is 25 percent, while the same figure for second homes is 60 percent (up from 50 percent in November last year) — third homes and everything beyond that require all-cash financing. Furthermore, reserve requirements for major Chinese banks were raised to 19.5 percent in January, following several increases in 2010.

Yet these factors pale in significance when viewed against China's huge informal economy. For example, recent estimates by Fitch Ratings suggest that China's banks lent out some 30 percent more credit (informally) than the government-regulated target of 7.5 trillion yuan ($1.1 trillion) in 2010. This comes despite the major curbing efforts by the government, as well as the fact that the four biggest banks in China are all — ironically enough — state-owned.

Rather than reducing the cash flow, the tighter regulations have simply encouraged banks to get creative about their credit pumping. By repackaging and selling off loans to state-owned trusts and asset-management companies, banks have been able to keep their true lending at about the same levels as before while simultaneously staying below their official quotas. At other times, the banks have turned loans into investment products and sold them to private investors, much as American investment banks did during the 2000s.

The situation is not made easier by China's lack of property rights in land, all of which is owned by the government and leased out to private and state-owned companies through so-called land-use rights. In turn, the sales of these rights constitute a vital revenue stream for local governments, providing powerful incentives for them to help spur the real-estate boom. This adds another explanation to the ghost towns all across China. Many local governments will find themselves in economic peril as revenue dries up.

Some may point out that China has both higher household savings and less private and public debt than the United States, which will help soften the blow from a real-estate slump. This is true to some extent, but things are not as simple as they first appear.

For example, Ernst & Young estimated as far back as 2005 that the total bad debt held by China's banks was then close to $1 trillion. The number today is probably several times that, given the fact that lending has exploded in the last two years. Mortgage levels are also increasing rapidly: almost half of all residential properties sold in 2009 were funded by bank loans; in 2007 it was only 20 percent.

Another example comes from Professor Victor Shih of Northwestern University's 2009 study of China's public debt. He concluded that it is more likely to be somewhere around 40 percent of GDP, rather than the official 20 percent. Even the director of one of China's state-owned research institutes put the public debt at an estimated 50 percent last summer.

Hence both public and private debt could equal a substantial portion of China's $5.7 trillion GDP.

China's $2.8 trillion foreign-currency reserves will be of little help to recapitalize banks or prop up local governments, as these reserves would mostly be good in an external debt crisis, not a domestic one (among other things, trading in these reserves for yuan would cause the currency to appreciate sharply, damaging China's exports). And, for the record, the United States of the late 1920s also held massive foreign-currency reserves, as did Japan in the late 1980s.

China's gold reserves will be of even less help, as they only amount to about 1.7 percent of the foreign-exchange reserves.

Inflation or Stagnation?

It's obvious the bust will have an impact on sectors beyond real estate and construction. Some analysts even believe that China's GDP growth will drop to around 5 percent, i.e., half of its current level. Fitch Ratings and Oxford Economics recently did a study on what might happen if this came true. Among the main conclusions was a major economic slowdown in both developed and emerging economies in Asia, with GDP levels almost halving across the continent. The sectors most likely to suffer in China and elsewhere included steel, energy, and heavy manufacturing.

The report also predicts a 20 percent plunge in industrial-commodity prices following such a scenario, which would have serious implications for countries like Australia and Canada, both of which are heavily reliant on mining exports. This is of particular importance to Austrian investors and anyone else looking to such commodities and mining stocks as a hedge against looming American and European inflation.

In China, too, price inflation is a growing concern. The official number in late 2010 was 5 percent — a 28-month high. In reality, though, this number is likely to be far higher, as food prices alone jumped by an estimated 50 percent in Shanghai last year, even doubling in other parts of the country. Li Wei of Standard Chartered expects official price inflation to reach 8 percent just in the first half of this year, while Yu Song of Goldman Sachs expects it to go north of 10 percent.

In December last year the Politburo announced it would move from a "relatively loose" monetary policy to a more "prudent" one in 2011. Apart from destabilizing the economy, the government knows that high inflation can also trigger civil unrest. This was, for example, a root cause of the Tiananmen Square protests, where the official CPI jumped from 7.3 percent in 1987 to 18.5 percent in 1988, and then to 28 percent in early 1989. Then as now, there is growing unrest in China over soaring consumer prices, yet many people reluctantly accept it — just as long as the economic boom carries on.


China may very well become "Dubai times 1000," as Jim Chanos puts it, though the jury is still out on what the actual magnitude of the crash will be.

While the economic systems of China and precrisis America are certainly different, below the surface China is plagued by staggering levels of credit expansion, speculation, malinvestment, and toxic loans — much like what we saw in America. The notion that the iron-fisted Chinese government is in control of this situation is a dangerous one. The laws of economics are omnipresent and cannot be overridden simply by force. Trying to apply top-down central planning to an economy that is more and more driven by bottom-up market forces will inevitably have grave consequences. Wild credit expansion always leads to the same things: price inflation, malinvestment, and bubbles.

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