Tuesday, June 7, 2011


by Cullen Roche

Back in February I posted a story about the CitiGroup Economic Surprise Index. The market was nearing its short-term highs at the time and I said that the optimism displayed in the index was a sign that the market was fully pricing in the positive news at the time. We sold off 7.5% over the next few weeks as investors began to panic over downside surprises following the Japanese earthquake.

This is how the markets work – in ebbs and flows. Like much of life, economics and markets are cyclical. Remember, the markets are a reflection of our economic reality compared to perceptions. They are not merely a reflection of our economic reality. That’s where indices like my Expectations Ratio and the CESI come in handy. They not only measure our economic reality, but compare that reality to perceptions. In doing so we can gauge the current sentiment compared to reality and help us to navigate the investment mine field.

Today, the CESI has moved to the opposite extreme from where it was in February. The analysts are becoming increasingly pessimistic. The following chart from Tim Backshall shows just how extreme this move has been in recent weeks:
Barrons ran a slightly different version of the same chart over the weekend:
Again, it’s obvious that perceptions tend to reach extremes at major market pivot points. In the last 5 years the CESI has breached the -50 level just four different times. The following data shows the CESI pivot points:
At a current reading of -113 we are well below the average lows for this index and just 28 points shy of its all-time low set during one of the most traumatic investment environments ever. I think it’s safe to argue that we’re closer to a pivot point than most might believe. And that means the analysts are excessively pessimistic in the near-term. If my data mining holds true then the market could find its legs in the near-term. Gauging from 3 month performance, however, is obviously less reliable.
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China's corn potential makes imports 'improbable'

by Agrimoney.com

Expectations that China will become a major corn importer are as misguided now as they were a decade ago, thanks to the potential to lift its own output, the head of the country's grain think tank said.
Weilu Yang, deputy director of the National Grain and Oils Information Centre, termed "improbable" the idea that the country will become ever-more dependent on imports to feed its growing demand for corn.
China's potential to meet its own needs was evident in comparing its own productivity with that of the US, the top corn producer.
"Our corn area is the same as the US. Yield is only half as big as the US," he told global grain leaders.
"This suggests there is great potential to lift yield," and output.
Indeed, the country's corn production was already increasing "substantially", meaning "China's demand does not require large imports".
'Rise of several times'
The prospect of China, the world's second ranked corn consumer, turning permanently to imports has been a subject of considerable interest on grain markets, fuelling jumps in Chicago futures prices.
And Mr Weilu's comments clash with thinking from many international analysts, and some private observers in China, that the need for feed to grow livestock production, and meet the demand of an expanding and wealthier population, will force China to turn to foreign supplies.
A week ago, Rabobank analyst Pan Chenjun, who is based in Beijing, said that China's corn imports may in 2011 "be several times larger than last year", when the country's corn imports hit 1.6m tonnes, their biggest since the 1990s.
"The [demand] pressure on corn is coming from large hog farms that are entering the industry, while small farms are exiting the industry," Ms Pan said, forecasting China's hog population rising 1% this year to 453m head.
However, the United Nations Food and Agriculture Organization on Tuesday supported the idea of limited Chinese imports of coarse grains ahead, given bumper crop prospects.
"In China, with a record [corn] crop in 2010 and expectation of another bumper crop in 2011, imports are estimated to decline to 1 million tonnes in [2011-12] from an estimated 2m tonnes in 2010-11," the FAO said.

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Macro Factors and their impact on Monetary Policy, the Economy, and Financial Markets

By Guest Author

Coming into 2011 we suggested there were three major themes that would play out in the course of this year. We thought the U.S. economy would slow, particularly around mid-year. Most states would have to tighten their budgets by cutting spending and jobs, and raising taxes, before their 2012 fiscal year began on July 1. 
On June 30, the end of the Federal Reserve’s second round of quantitative easing would create some uncertainty since it represents a de facto tightening of monetary policy. The U.S. economy has not achieved a self sustaining level of growth in our opinion, and these headwinds were expected to weigh on growth in the second half of 2011.

Internationally there were two issues of concern. We felt the tightening of monetary policy by Brazil, China, and India would continue, and lead to a second half slowing in these high growth economies. The slowdown in these countries would likely dampen export growth from the developed countries in Europe and the U.S., which had previously been a source of strength. The recognition of the coming slowdown in the high growth economies would cause a sharp break in commodity prices, especially since China is a huge source of demand for ‘stuff’.

The second international issue was the sovereign debt crisis in Europe. Our view has been that it is ongoing and likely to intensify in 2011. We have felt it was not a question of if, but when the crisis would reach critical mass.

So far, each of these themes has developed as expected, and we see nothing on the horizon to suggest the current trends will not continue.

Consumer spending represents 70% of GDP, so anything that affects consumer’s income and balance sheet is important. The earnings for the 131 million working Americans have increased by just 1.9% over the last year, which is definitely less than the increase in the cost of living. This means even most of those with a job are falling behind. There are 8.6 million workers who are working part-time, but want a full-time job. Obviously, part time work does not pay as well as a full time job, so these folks are also falling further behind. Of the 13.8 million people out of work, 42% or 5.8 million have been unemployed for more than six months. As of March, almost 5.5 million of those unemployed had exhausted their unemployment benefits, up from 1.4 million in March 2010. In coming months, hundreds of thousands of the unemployed will lose their unemployment benefits each month.

Every month we show this chart from Calculated Risk Blog.com. This chart depicts the percent of the labor force that remains unemployed and compares the current recovery to the prior 10 recoveries since 1948. Forty months after the recession began in December 2007, 5% of the labor force is undergoing a personal financial disaster. As noted in March, the combination of weak income growth, part-time employment, and the loss of millions of jobs has caused disposable income to fall by 4.7% since December 2007. This has been offset by almost $1 trillion in borrowing by the federal government to fund unemployment benefits, food stamps for more than 44 million people who are having trouble making ends meet, and other assistance programs. This support has helped many of the unemployed and underemployed keep their heads above water, and provide a lift to GDP growth. As unemployment benefits diminish for millions of unemployed workers in coming months, so will consumer spending.

In the seven quarters after the deep 1981-1982 recession ended, GDP growth averaged 6.6% per quarter. In the first seven quarters of the current recovery, GDP has grown by an average 2.8%. This recovery has been weak, and if one factors in the amount of fiscal and monetary stimulus that has been employed, it has been an exceptionally weak ‘recovery’. During the brief 2001 recession, the University of Michigan’s consumer sentiment index never dropped below 80, and then held above that level during the expansion that followed. It plunged below 80 in early 2008 as the recession took hold. In the current recovery, it has never been above 80, not even for a single month.

In the January 2009 newsletter, we suggested that a ‘less is more’ perspective would replace the ‘more is more’ spending that has characterized consumer spending since at least the early 1980’s. Even when incomes were insufficient to support all the trips to the shopping mall, Americans borrowed from their home ATM or pulled out the plastic and proclaimed “Charge It!” For a majority of consumers, those days are gone. Their home has lost at least 20% of its value, credit card companies have curbed available credit lines, incomes are stagnant, and millions are either out of work or working fewer hours than they need. For the majority of Americans, adopting the less is more perspective has not been a choice, but a necessity. But for affluent Americans, the notion of less is more is a choice. That is why a recent survey by the Harrison Group and American Express Publishing caught our attention. More affluent Americans are using coupons, waiting for items to go on sale, and are less willing to pay up for designer brands. History shows that affluent Americans are affected by changes in the stock market. They cut spending dramatically in late 2008 and early 2009 as the stock market was testing its lows, and resumed spending once the market recovery was established. Since this survey was taken in early 2011, and after the market had almost doubled from its March 2009 low, the results represent a real commentary on social change. If it persists, it will act as a drag on GDP, since affluent Americans represent a disproportionate amount of total discretionary spending.

We have felt home prices would continue to decline primarily because there is more supply than demand. In April, the National Association of Realtors reported that existing home sales fell to an annual rate of 5.05 million, a drop of .8% from March. The median sales price declined to $163,700, off 8.2%% from April 2010, according to Zillow.com. The inventory of homes for sale climbed to 3.97 million, and represents 9.2 months of supply. We expect the supply of existing homes for sale to increase during the summer.

Unfortunately, this doesn’t begin to tell the whole story. The nation’s largest banks own 872,000 homes as a result of foreclosures, according to RealtyTrac. There are another 1.4 million homes in the foreclosure process, based on an analysis by the Mortgage Bankers Association. At current sales rates, it will take banks more than three years to unload their inventory. Selling all of these homes will put downward pressure on home prices. In Q1 of 2011, RealtyTrac reports the average foreclosure sold at a 27% discount to surrounding homes. According to Zillow.com, 27% of home owners are already underwater. If prices fall further, as we expect, even more homeowners will find themselves underwater. Since the seller pays the 5% to 6% sales commission, the sales price is actually 5% to 6% less, which reduces homeowners’ cash out equity even more. As discussed previously, unless home prices defy the laws of supply and demand and begin rising, underwater homeowners are effectively removed from future demand. In addition, higher lending standards will continue to crimp demand for the foreseeable future, while baby boomers wishing to downsize will further add to supply in coming years. Trepp, a real estate research firm, estimates banks may have to absorb another $40 billion in losses, as they unload houses at a discount just to get them off their books. Of course, that assumes the regulators will actually force the banks to book the losses. Fannie Mae and Freddie Mac will dutifully book their losses, and present the bill to taxpayers (us).

The Federal Reserve will end QE2 on June 30, which does amount to a tightening of monetary policy. However, until the Fed allows its balance sheet to shrink, we believe the negative impact of the end of QE2 may be less than anticipated. We don’t expect any material change in the Fed’s accommodative monetary policy. Last week, William Dudley, President of the New York Federal Reserve, said the U.S. has a considerable way to go to meet the Fed’s mandate of full employment and price stability. He also said that raising rates too soon would have “bad consequences”. The Federal Reserve wants time to see how the markets and economy handle the end of QE2. They must also be closely watching the developments in Europe. If a dislocation develops in Europe, it will take a full nanosecond for it to reach our shores. We suspect the Federal Reserve is communicating frequently with their counterparts at the European Central Bank.

We expect the U.S. economy to plod along growing about 2%, and remain vulnerable to negative surprises.

In the January letter, we discussed the tightening of monetary policy in Brazil, China, and India which would raise doubts about second half growth in those countries, and cause a sharp shake out in commodities. After reviewing the rate increases initiated by the central banks in these countries in the February letter, we noted, “At some point in this year’s first half, it is going to dawn on investors that the cumulative impact of all these rate increases in the countries that have been growing the fastest will cause a second half slowdown in each of these countries.”

The Reserve Bank of Brazil’s central bank increased its Selicrate to 12.0% on April 20, making it the highest in the world. Overnight on May 2, India hiked their repo rate from 6.75% to 7.25%, a larger than expected increase. The rate increase was the ninth since March 2010. On May 12, the People’s Bank of China increased its reserve ratio for the 15th time in the last eighteen months to 21%. In early 2010, the reserve ratio was 15%. The Chinese Central Bank is attempting to curb lending by forcing banks to set aside $.21 of each $1.00 lent. In the U.S., the reserve ratio is about 10%.

Silver has been the poster child of the surge in commodity prices and for good reason. Shortly after the Federal Reserve announced its intentions to launch QE2 in November on August 10, silver soared from $18.00 an ounce to a closing high of $48.60 on Friday, April 29. On Monday, May 2, silver dropped to $42.20. Four days later silver traded down to $33.04 (July contract). Silver was not the only commodity to be hit hard. Crude oil fell from $114.83 on May 2 to $94.63 on May 6. Gold dropped to $1462.50 on May 5, from a high of $1577.40 on May 2. There is no question that a significant increase in margin requirements for these commodities played a large role in contributing to the wave of liquidation that swept through commodities in the first week of May. We think the targeted increase in margins was a stroke of genius, since it dampened speculation. The cumulative rate increases in Brazil, China, and India also diminished the notion that demand from these countries for raw materials is infinite, which has been a big part of the fundamental story supporting the run up in commodities in general.

Inflation is likely to remain a concern for each of these countries. Brazil’s Central Bank has an inflation target of 4.8%. In mid-May, consumer prices were up 6.51% from last year. This suggests the Brazilian Central Bank won’t be lowering rates soon, and may tack on one or two .25% rate increases in coming months.
In China, inflation dipped to 5.3% in April from March’s 5.4% rate, but is still above the official inflation target of 4%. Signs of slowing are beginning to emerge. Industrial output, retail sales, and money supply growth have all slowed in recent months. M2 money supply growth of 15.3% was the slowest in 29 months, and a clear indication that the increase in reserve requirements is having an impact on lending. If these trends persist through the summer, China may lower rates before the end of 2011.

India faces a more challenging environment than Brazil or China. The wholesale price index was up 8.66% in April from a year ago. India has cut fuel subsidies, which will boost energy inflation, and industrial production was up 7.3% in March from last year. Commercial credit has grown by 22% over the last year. This suggests the Reserve Bank of India may nudge rates higher in coming months.

All central banks are forced to drive monetary policy looking through the rear view mirror. This usually means they tighten, or hold policy too tight, until economic growth slows more than expected. This is possible in China as household spending as a percent of GDP has fallen to 35%, while fixed investment has climbed to 45% of GDP. This is the ideal prescription for an excess capacity problem, which could be significant. During the last two years, bank lending has amounted to 40% of China’s $5 trillion in GDP.

In a letter 50 years ago to President John Kennedy, economist John Galbreath wrote, “Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable”. This certainly applies to the sovereign debt problems plaguing the European Union. The fundamental problem is that Greece, Ireland, Portugal, and Spain have too much debt, and too little economic growth to service their debt loads. The European banking system could collapse if their banks were forced to acknowledge this reality. German and French banks have $541 billion of exposure to these weak countries. If the ECB allows any restructuring of Greece’s debt, banks in Portugal and Spain will wobble. This event will spill over into Italy, and from there move on to Paris and Berlin.

We are witnessing an example of the classic paradox, “What happens when an unstoppable force meets an immovable object?” The ECB would like to think of itself as an immovable object. Unfortunately, the real world is far less malleable than the ECB needs it to be. In 2010, Greece’s economy shrank 6.6%, so its ratio of debt to GDP rose, and is expected to reach the unsustainable level of 159% of GDP in 2012. Last spring, Greece received a $158 billion bailout package from the EU and IMF. In March, the IMF estimated that Greece would be able to roll over $20 billion in debt coming due on March 20, 2012 at 5.6%. On Monday, May 23rd, Greece’s 10-year bond was yielding 17.23%. This represents the unstoppable force of a Greek debt restructuring which is unpalatable, or worse, a default that would be disastrous.

The rippling effect since the end of 2010 is plainly evident, as the yield on 10-year Italian bonds has jumped from 3.75% to 4.81%, and Spain’s 10-year yield has soared from 4.0% to 5.54%.

Greece announced on May 23rd that it would accelerate plans to sell state-owned assets over the next five years it says are worth $70 billion. This is not going to be easy. First, it assumes the credit market will exhibit a level of patience that will be sorely tested by Greek labor unions. The largest Greek union represents 1.5 million private sector workers and strongly opposes privatization of state companies of strategic significance. It says privatization will lead to higher prices for power and water, and lost jobs. We expect there will be work stoppages that will bring the Greek economy to its knees. A poll last week found that 62% of Greeks believe the austerity program, imposed by the EU and IMF as conditions for the bailout last year, were hurting the Greek economy, rather than helping. This suggests union strikers may receive broader public support, even if strikes prove inconvenient.

Greek banks are not able to borrow money in the credit market, so in March they borrowed $125 billion from the ECB. The ECB accepts Greek government debt as collateral, even though all three rating agencies rate it as junk. The ECB has threatened to stop accepting this junk, which would precipitate an immediate collapse of the Greek banking system. Since this would tip the first domino of a broader crisis, we expect the immovable object the ECB fancies itself to be, to move however reluctantly.

However, even if the ECB displays a measure of flexibility, it does not change the magnitude of the underlying problem. European banks are under-capitalized, and the sovereign debt problem is only going to get worse. The ECB and the IMF will do everything possible to postpone the day of reckoning. We doubt they will be able to hold it together until March 20, 2012 when Greece needs to roll $20 billion of its debt. And we haven’t even mentioned Spain!

During the last 110 years, the stock market has alternated between periods of extended advances and declines. Swinging like a pendulum, each secular bull market or bear market lasts between 15 to 25 years. The recent secular bull market lasted from 1982 until 2000, or possibly until 2007, since the broad market averages made higher highs in 2007. A conventional 15-year secular bear market from the peak in 2000 targets an end in 2015-2016, or 2022-2023 if the high in 2007 is used. Historically, economic contractions accompanied by financial crisis’ have lowered annual GDP by -1.0% for a decade or longer. In 2008, we experienced the largest global financial crisis in history, and the echoes of that event continue to reverberate in the global economy. If economic activity grows more slowly, as we have expected since the current recovery began in 2009, a decline in the S&P’s P/E ratio to below its long term average would be rational. If valuations are to approach those seen in 1942 or 1982, the stock market could easily experience another decline of 30% or more by 2015-2016.

Within this context, we believe the stock market has been in a cyclical bull market since the low in March 2009. Our goal is to identify when this cyclical bull market will give way to the next leg of the secular bear market. The Major Trend Indicator is still in the bull market camp, but since it is designed to identify the major trend, it will never pick the top or bottom with precision. A quick read of the S&P 500 chart shows that since the low on July 1, 2010, every low and high has been higher. This is the classic definition of an uptrend. A decline below 1294 on the S&P will be a warning that the intermediate trend is weakening, and with a drop below 1249, a confirmation that the intermediate trend has turned down. Short term, the decline from the high on May 2 at 1370 looks choppy, and suggests the market will rally again to at least test 1370, as long as the S&P does not drop below 1249.

In last month’s letter, we thought the S&P might make a run at 1400, after breaking out above 1332. We suspected that investors would sell into this rally, since most expect the market to decline after the Fed ends QE2 on June 30 and wouldn’t wait until July 1 to see what happens. “Our guess is that the market will top before mid May and then decline into July.” The S&P topped on May 2. In early April, bullish sentiment was rampant. The Investors Intelligence survey showed 57.3% bulls and only 15.7% bears, while the American Association of Individual Investors registered 43.6% bulls and just 28.9% bears. In anticipation of the decline most expect once QE2 ends, sentiment has become far less bullish, with the AAII survey showing 14.6% more bears than bulls last week. This is constructive and supports our view that a test of 1370 is likely, before the market becomes vulnerable to a larger decline.

In a Special Update that was sent to subscribers of MACRO TIDES on March 29, we recommended the purchase of four ETFs. Here are the opening prices for the recommended ETFs on March 30, and the prices they were sold: Brazil (EWZ) $76.04, stopped May 3 at $76.18, Korea (EWY) $63.68, stopped out on May 17 at $63.95, Australia (EWA) $26.44, half sold on April 27 at $28.25 and half stopped on May 4 at $26.90, S&P Small Cap 600 (IJR) $72.61, half sold at $74.70 on April 26, and half stopped on May 24 at $71.39.

The stock market has not rewarded equity investors over the last decade, with the S&P returning a scant average annual return of 1.4%. Many investors have become gun-shy, especially after 2008 and the failure of traditional asset allocation to protect and preserve their capital. Many baby boomers simply cannot afford to lose any more money, since the value of their 401(k)’s and homes are not worth what they expected or planned, as they get nearer to retirement. The miniscule return offered by most money market funds of .25% or less has left investors frustrated, and looking at alternatives to the stock market or a money market fund. Many investors have chosen to move some of their savings into bond funds, just to get a modest return.

The bond market also experiences secular bear and bull markets, with the last secular bull market beginning in 1981, when the 10-year Treasury yield peaked near 15%. Yields are now near a multi-generational low, so the risk of a secular bear market in bonds is higher than most investors realize. If bonds do enter a secular bear market in the next few years, bond yields will rise, and bond fund investments will lose value. Without realizing it, frightened stock market investors, if they increased their allocation to bonds, may have jumped from the frying pan into the fire.

We believe the 10-year Treasury yield will remain range bound, between 2.7% and 4.0% for months, since the economy will prove weaker than expected, and the prospect of a European debt crisis attracts safe haven money. Any weekly close above 4.0% will be very negative. With the 10-year Treasury bond yield near 3.1%, we expect it to drift up toward 3.3%.

As noted last month, “Sentiment is obviously at an extreme, and suggests that when momentum does turn up, the Dollar will have a multi-week rally, maybe longer.” We think the Dollar has made an intermediate low, and recommend buying the Dollar’s ETF UUP at $21.56.

As discussed last month, “Gold is now tagging the trend line (top blue line) that connects prior highs in May 2006, March 2008, and November 2010. We’ve been watching this trend line for some time, but didn’t think gold would run up to it so soon. Looks like a good place to lighten up. A decline below $1,450 and this trend line would confirm a top.” Gold dropped to $1462.50 on May 5, after spiking to a high of $1577.40 on May 2. We think Gold will fall short of its May 2 high, and then decline and test $1462.50, and eventually dip to $1400.00.

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Strong Futures and Euro, but Likely a 7 Day Bounce Only

By Barry Ritholtz

I have a ton of errands to do before heading to the airport, but I wanted to get a few thoughts out beforehand:

On the back of ECB chief Jean-Claude Trichet’s comment about Greek debt rollovers, markets around the globe have turned positive rallied. The euro hit a one-month high versus the US dollar.

Stocks in Europe gained about 0.2%, while US SPX futures climbed 0.6 %. The 10-year Treasury is a mere 3 bips above 3% mark at 3.03%

Last week’s big sell off was a 90/90 day, meaning 90% of the trading breadth and 90% of the share volume were to the downside. The playbook favors a 5 -7 day bounce, and then a resumption of the move downwards.

Here is what Lowry’s Paul Desmond, the creator of the 90/90 indicator, has said about these days:
With the evidence currently available from our measures of Supply and Demand, the probabilities favor a limited recovery rally. The 74 year history of the Lowry Analysis shows that such rallies are usually best used to sell into strength and build defensive positions. However, it is important to recognize that exceptions to the probabilities are always possible.”
We are off the recent peak by less than 6%. My best guess as to the extent of the pullback is a 7-12% move lover from the highs. As we get more data, I’ll try to update that projection.
Be back shortly . . .

SPX Breaks its 1 year Up Channel

Chart courtesy of FusionIQ

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Morning markets: wheat prices slip as harvest pressure tells

by Agrimoney.com

If Chicago lore has it right, agricultural commodity prices should be heading for gains, it being a Tuesday after a strong trend (downward) in the last session.
But if today is to be a Turnaround Tuesday, it was in disguise in early deals. Chicago grains had barely woken by 07:20 GMT (08:20 UK time), standing near opening levels – except for Minneapolis spring wheat which turned from market favourite to dunce.
The July lot stood at $10.34 a bushel, down 0.8% from last night's closing level, and even further below Monday's intraday, two-year high of $11.20 a bushel.
That said, it was not the most promising day to stage a rebound.
The signals from external markets were mixed. Sure, the dollar was lower, a help to dollar-denominated assets by making them more competitive as exports. And Asian shares showed modest gains.
But many other commodities, including copper and oil, were in negative territory. And Chinese food commodity markets returned from a one-day holiday in poor mood, showing losses across the board.
Beans behind
And the overnight US Department of Agriculture crop report was picky in its favours.
It was bullish for soybeans, stating that 68% of the US crop had been sown as of Sunday, up 17 points on the week but below the average of 82%, and behind market expectations too.
That helped the oilseed overcome disappointment at Monday's export inspection data showing only 3.4m bushels soybeans checked, half analysts' estimates and down from 10.3m bushels a week before.
Chicago's July soybean lot added 0.4% to $13.88 ½ a bushel, with the new crop November contract gaining 0.4% to $13.78 ½ a bushel.
'Giving up hope'
But for corn, sowings, at 94% finished, were a little better than the market had expected, if still way behind average. And the condition of the crop improved too, by four points to 67% in the "good" or "excellent" categories (if below the 76% a year ago).
Corn gained, but not so fast, adding 0.2% to $7.33 ¼ a bushel for July.
And wheat dipped 0.1% to $7.43 a bushel even in Chicago, despite the continued slow pace of US spring crop sowings – at 79% versus 98% normally by now.
Canada is still behind too, at 80% complete for all spring crops compared with an average of 93%, the Canadian Wheat Board said.
That the year ago figure was 78%, behind the current pace, is little comfort given what an awful time growers had in 2010 with abandonment.
"Wet areas in south-western Manitoba and eastern Saskatchewan are less than 25% done, with many farmers giving up hope of planting before the June 20 crop-insurance deadline," the CWB said.
Harvest pressure
But then, seasonal weakness might be expected given the US harvest has begun, adding supply pressure to prices.
"The hard red winter wheat harvest is progressing rapidly as warm temperatures have dried down a less-than-spectacular crop rather quickly," Brian Henry at Benson Quinn Commodities said.
Sure, analysts are still totting up estimates for how many acres have been lost to the late sowing season and US flooding, with Benson Quinn seeing 3m corn, soybean, cotton, and rice acres lost in the Mississippi Delta and 1m acres of corn and soybean acres along the Missouri, in South Dakota, Nebraska and Iowa.
However, as Mike Mawdsley at Iowa-based Market 1 said, "late plantings are old news", with the market moving on to how well what is in the ground will prove to be.
"My windshield survey showed corn probably tripled in growth over the weekend," he said
Things here look great. Now if we can just stay away from any heavy rains for a few weeks..."
Weather outlook
In fact, states from Wyoming and Utah through to the Upper Plains and "all of the Midwest" look like getting above-normal rainfall in the six-to-10 day outlook, according to WxRisk.com.
And large parts of the Midwest look damp in the eight-to-14 day timespan too.
And, undoubtedly welcomed by farmers, more rain is expected in Europe too, including this weekend when a front "produces significant rain for western and central Germany, with amounts over 1 inch and the coverage of a least 60% if not higher for all of Germany".
'Defensive market'
Elsewhere, cotton, which closed the last session the maximum allowed in New York, continued its decline, easing 0.5% to 154.80 cents a pound for July delivery.
"The cotton market remains defensive in light of continued lacklustre demand," Luke Mathews at Commonwealth Bank of Australia said.
Besides, US sowings, at 87% complete, have caught up with the average.
In Tokyo, rubber edged 0.2% higher to 392.70 yen a kilogramme for the benchmark November contract.
Ker Chung Yang at Singapore's Phillip Futures highlighted the "disruption of tapping by rains in parts of southern Thailand", the top exporter, as supporting prices.
However, bulls are not getting it all their own way, "with an uncertain economic outlook in Japan and tightening measures in China weighing".

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China data doubts threaten world farming deal

by Agrimoney.com

Chinese reluctance over data transparency are threatening an international deal aimed at stabilising farm commodity markets, French farm minister Bruno Le Maire said, as he renewed an attack on speculators.
The G20 group of leading economic powers, currently under French chairmanship, is "not far from a consensus" on a deal on measures to encourage measures such as improving productivity, curbing speculation and improving information sharing to underpin long-term farm commodity supplies.
However, with less than three weeks to go before a critical meeting to agree on the so-called "action plan", China remained a stumbling block over its reluctance to open up on the data it would be obliged to release, and on any potential loosening of powers over market prices.
"China needs some reassurance on the data," Mr Le Maire told grain industry leaders.
"We want to give China some agreements around transparency."
Many analysts have long been sceptical of Chinese data, believing they are massaged in an attempt to throw international markets offguard, besides being exaggerated, in production terms, by a system which rewards provinces by harvest size.
Doubts came to a head in 2009 when a Chinese corn crop pegged by officials at more than 160m tonnes was viewed by some in-country analysts as coming in below 140m tonnes.
'No speculators'
Mr Le Maire also sought to reassure the UK, viewed as one of Europe's biggest champions of free markets, over measures to curb speculation, saying that markets were vital to agriculture.
"The idea is not to go against markets, it is to help commodity markets to operate better," he said.
This meant, in particular, curbing the "excessive volatility" which was hampering investment in the sector and which he blamed on speculators.
"We need investors. We do not need speculators," Mr Le Maire told the International Grain Council's annual conference.
"We do not need people who come and make excessive profits in a few days on agricultural world markets."

Await the golden age of the natural gas: IEA

by Commodity Online

Several factors would push natural gas to the center stage by 2035 and it would account for more than a quarter of global energy demand, according to International Energy Agency (IEA).

In a special report titled,'Are We Entering a Golden Age of Gas?, IEA presents a secenario in which global use of gas rises by more than 50% from 2010 levels and accounts for more than a quarter of global energy demand by 2035. However, the report also strikes a cautious note on the climate benefits of such an expansion, noting that an increased share of gas in the global energy mix is far from enough on its own to put the world on a carbon emissions path consistent with a global temperature rise of no more than 2 degrees Celsius.

Speaking at the launch of the report in London, IEA Executive Director Nobuo Tanaka said, "We have seen remarkable developments in natural gas markets in recent months. There is a strong potential for gas to take on a larger role, but also for the global gas market to become more diversified and therefore improve energy security.”

Mr. Tanaka added that “while natural gas is the ‘cleanest’ fossil fuel, it is still a fossil fuel. Its increased use could muscle out low-carbon fuels, such as renewables and nuclear – particularly in the wake of the incident at Fukushima and the likelihood of a reduced role for nuclear in some countries. An expansion of gas use alone is no panacea for climate change," he said.

Recent developments have created considerable opportunities for greater future use of natural gas globally, depending on the interaction between economic and environmental factors and policy interventions in the market. This report presents an illustrative “high gas scenario” – the Golden Age of Gas Scenario – which incorporates a combination of new factors that could support a more positive future outlook for gas. These include ample availability of gas (much of it unconventional), which lowers average gas prices, implementation by China of an ambitious policy for gas use, lower growth of nuclear power and more use of natural gas in road-transport.

In the scenario, China’s natural gas demand alone rises from about the level of Germany in 2010 to match that of the entire EU in 2035. To meet the growth in demand, by 2035 annual gas production must increase by 1.8 tcm, about three times the current production of Russia. Conventional natural gas will continue to make up the greater part of global production, but unconventional gas becomes increasingly important, meeting more than 40% of the increase in demand.

Global natural gas resources are vast, widely dispersed geographically and can help improve energy security. All major geographical regions have recoverable natural gas resources equal to at least 75 years of current consumption. However, timely and successful development of these resources depends on a complex set of factors, including government policy choices, technological capability and market conditions.

Supply, demand and climate change

Unconventional gas resources are now estimated to be as large as conventional resources, but their production outlook is uncertain as the use of hydraulic fracturing to produce unconventional gas has raised environmental concerns and tested existing regulatory regimes. Adhering to best practices in production can mitigate potential environmental risks, such as excessive water use, contamination and disposal. Based on available data, the report estimates that shale gas, produced to proper standards of environmental responsibility, has 3.5% higher “well-to-burner” emissions than conventional gas.

Natural gas is a particularly attractive fuel for countries and regions that are urbanising and seeking to satisfy rapid growth in energy demand, such as China, India and the Middle East. These countries and regions will largely determine the extent to which natural gas use expands over the next 25 years. When replacing other fossil fuels, natural gas can lead to lower emissions of greenhouse gases and local pollutants. However, the high gas scenario shows carbon emissions consistent with a long-term temperature rise of over 3.5°C. A path towards 2°C would still require a greater shift to low-carbon energy sources, increased energy efficiency and deployment of new technologies including carbon capture and storage (CCS), which could reduce emissions from gas-fired plants.

Mr. Tanaka noted that the report indicates that the future of natural gas seems bright. “If the policy and market drivers of the GAS Scenario develop as projected, then gas would grow to more than a quarter of global energy demand by 2035,” he said. “Surely that would qualify as a golden age.”

The special report "Are We Entering a Golden Age of Gas?" can be downloaded free of charge on the World Energy Outlook website: http://www.worldenergyoutlook.org.The World Energy Outlook is the IEA’s flagship publication. The complete World Energy Outlook 2011 will be released on 9 November 2011

S&P500 Numerology

By Global Macro Monitor

U.S. equities continued their downtrend with the S&P500 closing off 1.08 percent on Monday. The chart below illustrates how the mid-day hard sell-off in Apple took the S&P500 with it (see here for Apple’s leadership role). The market was not impressed, at least for today, with the company’s new product introduction at the annual developer conference and sold the stock down $5.40 or 1.57 percent.

All three of the S&P500 short-term support levels we mentioned in earlier posts have now been taken out. The current sell-off feels a lot worse than the 5.7 percent as detailed in the table below. A large driver of volatility is the dynamic between perception and reality and it kind of feels to us the market perceives stock prices should be lower.

We now view the 200-day moving average, currently sitting at 1249.09 (moving averages are dynamic), or about 3 percent lower, as critical and very important support. The 200-day also, interestingly, coincides with the March 16th low of 1249.05. If you believe in lucky numbers, a move to and bounce off the 200-day at 1249-ish would result in an 8.88 percent correction from the May 2nd intraday high of 1370.58. How Feng shui!

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Speculators' bets on Minneapolis wheat hit record

by Agrimoney.com

Speculators' bets on rises in prices of Minneapolis wheat have risen to an all-time high, lifted by the prospect of the wet planting season cutting US, and Canadian, spring wheat production well below initial forecasts.
Speculators' net long position in Minneapolis wheat – that is, the advantage in positions which gain when prices rise over those that profit when prices dip – rose 8% to more than 27,000 contracts as of the end of May, Australia & New Zealand Bank said, following analysis of regulatory data.
Prospects for the North American harvest of the high-protein spring wheat that is traded in Minneapolis have dimmed with wet weather which, as of a week ago, had seen 68% of the crop planted, compared with an average of 95% by now.
In Canada, 73% of spring crops had been sown compared with the average of 87%.
Spring wheat sowings typically finish in mid-to-late May for most US states, and by June 3 for North Dakota, the top grower, leaving many analysts believing that seedings will not rise the 5% to 14.4m acres that farmers had planned, according to the US Department of Agriculture.
Minneapolis vs Chicago vs Kansas
The rise in speculative interest helped a rise in Minneapolis wheat to contract tops on May 26, a performance the spot July contract has since built on, hitting $10.90 a bushel on Monday, the highest since July 2008.
The record for a spot Minneapolis contract was set in February 2008, at $24.25 a bushel.
Speculators also raised their long interest in Chicago, soft red winter, wheat in the latest period, bit cut their expectations of rising prices of the hard red winter variety traded in Kansas.
"The lower total in Kansas may be the result of substantial selling of inter-market length held against the Chicago contract," Brian Henry at Benson Quinn Commodities said.
Furthermore, rains have stabilised prospects for much of the crop, which has suffered a dearth of moisture since late 2010.
Oil rush
Speculators also raised net long in Chicago corn, while remaining below record levels reached in autumn last year.
"Overall, speculators are still bullish on the grain market, with net longs in wheat and corn still elevated despite the volatility of recent months," ANZ said.
Speculators have also doubled their net long in soybean oil in two weeks, to 72,000 on ANZ calculations, and continued revivals in interest in cotton and sugar too.
ANZ has a broader definition of speculative interest than some other observers, calculating its data from "managed money", "other" and "non-reportable positions" criteria of reports published by the Commodity Futures Trading Commission, the US futures market watchdog.

Did resistance dating back to 1987 reverse the NYSE's trend?

by Kimble Charting Solutions

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Strategist Year-End S&P 500 Price Targets

by Bespoke Investment Group

Below we highlight the most recent year-end S&P 500 price targets for the major Wall Street equity strategists. As shown below, just two strategists currently have year-end targets that are below the actual level of the S&P 500 at the moment. Morgan Stanley is looking for a year-end S&P 500 level of 1,238, while Credit Suisse is looking for 1,275. On the bullish side, Deutsche Bank remains above and beyond any other firm with its price target of 1,550. 

Below is a chart of the S&P 500 along with the average year-end strategist price target as the year has gone on. As shown, while the market has really taken a downturn in recent weeks, strategists have yet to lower their targets. Eventually the targets will drop if the market continues to perform poorly, but for now, strategists as a whole are holding tight with their bullish year-end prognostications. 

The Stock Market Fly Trap

June 3, 2011. The Dow Jones Industrial Average has just lost over 400 points in the last 3 days. A lot of investors are wondering what has happened. The bulls have started to wonder why the bears have started up their grills. Why did the markets suddenly take a dive? I have the answer. Come close so you can read this information accurately. Closer. Please, come on in real close. Use a magnifying glass if you need to. Ready? Hear it is. It’s a scam!

There you go. The stock market is a scam run by the government to keep the population fooled into thinking the economy is swell. The stock market is a scam propped up by the Federal Reserve to make the idiots of the world think that the Fed has a clue. It is the distraction to make the idiots of the world think that the Fed has a benevolent purpose rather than one of a sinister goal of big banker wealth confiscation. The stock market is nothing more than a big fly trap. And, investors are the flies.

Here in the Piedmont of North Carolina, the month of June has begun as it usually does. It is hot and humid. Flies and gnats are swarming as the humidity draws them like a ‘Steve Jobs is still alive‘ alert draws investors to Apple Computer stock. The best way to combat the pesky flies is to hang a fly strip in the garage. Yes, it is low technology but it works better than anything. The strips have been around forever. They are a piece of plastic that is coated with a gooey substance. You pull the plastic out of a canister and leave it hanging from the ceiling. The flies cannot resist the strip as they come in for a landing and then find themselves stuck. Death soon follows. On my first strip, there had to be several hundred of the pests taken out of commission. There were so many flies stuck on this one strip of plastic that I could hardly see the strip anymore. I even watched as one fly buzzed around a few times, landed on the string securing the strip to the ceiling, and then hopped on to the strip joining the multitudes of deceased that lay before him. He struggled momentarily and then went still. Didn’t this fly see the hundreds of other flies trapped and expired on the sticky plastic strip? Why did the fly think his experience would be any different? 

The stock market is the fly strip that investors cannot resist. Surely the stock market will rise to infinity. The floor of the exchange might be strewn with carcasses of broken investors but they are there because they didn’t have the proper skill. We all think we are different. We all think we have the skill. We all think we have teflon on each of our six feet. We cannot resist. It looks like such easy money. We fly in for a look. We noodle around. Everyone looks happy. The nice folks on the teevee set keep egging us on. There is a daily parade of well dressed men and women appearing on our favorite financial channels and all have the same story. Everything is great! There is no way to lose money. It’s easy. The bull market is eternal. Come on in! We fly in for a closer look. We never see failure - only success. All the other flies aren’t really stuck. They are probably just counting their profits while they rest on the exchange floor. We have to join them. We make our move and put our money to work. Damn!!! We’re stuck!!!

I tried to tell the flies that the stock market had become a scam. But no one wants to hear it. That doesn’t play well on the teevee. The last week of May was wondrous. Every day was a positive day in the face of increasingly dour economic news. Yes, the ECB was giving Greece another bailout. Pow! Up went the Dow. Yes, the Fed would no doubt supply another stimulus with a QE3 if needed. Pow! Up went the Dow. Yes, the US Congress met to forge a deal on the debt ceiling. Pow! Up went the Dow. Yes, Steve Jobs is still alive. Pow! Up went Apple and the Nasdaq. Yes, housing prices had made a new low. Pow! Up went the Dow. Yes, the Dow was rising in the face of depressing economic news. Pow! We closed out May with a triple digit rally! We turned the calendar to June. P...P...P...phew! Down went the Dow. 400 points-plus in three days. What happened to the ebullient rally? Did I mention the market was a scam? 

Oh yeah, we covered that. We are now living in the era of the ‘calendarization‘ of the stock market. Readers may use that term but upon doing so need to send me a payment of $10 dollars as I have unofficially copyrighted its use. The way the scam works is this. May was a bad month. Lower highs and lower lows had turned the Dow into a down trend and un-arrested, threatened to leave the Dow with something close to a quadruple digit loss for the month. And you know what happens at the end of the month? Investment statements are tabulated and issued to investors. Surely the Fed would not want investors to begin to worry about the incompetence of their government. They might begin to question the economic recovery. An ugly monthly statement will do that. So, the solution was to engineer a wondrous end of the month rally that muted the monthly losses incurred in May. In other words, the Fed just thumped a bunch of flies off of the fly strip and acted like there wasn’t a problem of infestation. Investors should have been ready because when the calendar flipped to the month of June, the Fed would stand down from manipulating the market as investors would not receive another statement for 30 days. Down went the markets in the first three days of June. Me? I just took down the old fly strip and put up a new one. The remaining flies will no doubt find themselves irresistibly drawn to the fresh strip and suffer the same fate as their fellow witless associates. In other words, I shorted the infestation. 

To further the nature of the stock market scam, I would like to turn the reader’s attention to the chart below. It is a two-month chart of the Dow Jones Greece Stock Index. I have circled in green the gains made on Wednesday (June 1, 2011) and Friday (June 3, 2011). That’s right - I said, ‘Gains’. Yes, that’s right - I said ‘Greece’. For perspective, the Dow Jones Industrial Average lost over 250 points on Wednesday and 97 points on Friday. Yet with the Dow down .8% on Friday, the Greece Index was up over 5%. Yes, that’s right - up over 5%. Now, don’t we all feel stupid because we weren’t invested in Greece? Any yes, I am talking about the same sovereign state that is insolvent. Greece cannot pay its debts nor can it repay the first installments of the original ECB bailout package imposed upon her a year ago. The solution was the same solution that ‘fixes‘ everything today. The ECB gave them more loans in another bailout. No, Greece will not be able to repay those loans either but did I mention that the stock market was a scam? Reality does not matter. All that matters today is who is getting a bailout or a stimulus. Greece is getting another bailout. Yippee!! Up go their stock markets. The US central bank is winding down its QE2 bailout. Uh-oh! Down go their markets. 

What do we take from all this? One, investing money in the stock market is participation in the biggest scam ever perpetrated. Of course, this is fine as long as the participants realize it is indeed nothing more than a scam. Two, the markets are a function of bailouts and stimulus from the hands of the central banks. The central banks will decide who gets cash, when, and how much. Three, the markets are now ‘calendarized’. When investing, pay close attention to where we are in the calendar. Come Monday, we might as well put our money on ‘red - 42’. Wait a minute, there aren’t that many pockets on a roulette wheel. Make that ‘black - 21’! 

Psst! I saw Bernanke holding his finger on the spinning wheel at about black - 21! As you put your money down, don’t mind that gooey stuff. Besides, it smells so good!

Past 2 months: Dow Jones Greece Stock Index
Chart courtesy StockCharts.com

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Stock Market Bears Now In Total Control.....

You need to recognize a real change when it occurs. Hopefully, all of you can now realize that the market characteristics have changed from bullish to more bearish for the short-term. Once the bears were able to take out 1320/1315, or the critical trend line in play, it has been lights out for the bulls. It took three full attempts by the bears to get the job done, but they did it. They defended resistance over and over and kept pounding away at 1315/1320 and finally got the job done. To that you say it's about time, and it's good for this market. The bears have been bowing down to the bulls for quite some time now. Every time the bulls needed to make a move higher through resistance it seems they got the job done without too much trouble. Day after day and week after week this trend remained in place. The bears unable to put up a fight.

The pattern was clear. A bull market clearly in place. But then we saw a change in the pattern at the last top, which was the massive negative divergences on those index weekly charts. You put a 41.6% spread more bulls to bears and those combinations are where the top occurred. We've been slowly heading down the prior four weeks, and then last week, the fifth week in the down trend off the top, the selling accelerated. This is where we finally lost that trend line of support at 1315/1320. The bulls unable to come right back and take this level back. That's why you now see a real change of trend. What was once easy for the bulls to accomplish is no longer easy at all. Too much time now below 1315/1320, and thus, you should not expect the market to be able to come back any time soon. The down trend is now established short-term. We'll discover in time just how long we can expect it to last. The longer the better, but for now, the market has made a turn from up to down in the trend. Respect this reality.
What is still troubling from a sentiment point of view is how slow the move up in the bearish percent is. We've seen a decent drop in the bullish percent, but we have yet to see a real move higher in the number of bears. That is lagging, and as I reported a few times already, remains a sore spot for this market. We need to see the bears soar above the current 20.4% level. A move up towards 30% would be best for the bulls if they want this market to try and move up appreciably once again. 20.4% means more bulls are turning neutral and those who were neutral are staying that way. We need to see folks start to hate this market and get totally bearish. That would be the best thing for the bull market we're still in for now. As long as the bear number remains near 20% you can forget about another leg higher. Not going to happen. A few weeks below 1315/1320, I believe, will get the job done. Get those bears rocking and get that percent up to 30%. Still not enough bears is the bottom line. With last weeks bad market action I'd have to think we're getting a higher number this week. We'll find out Wednesday if the market action of last week ramped a more bearish mentality.

What led us in to this bear market is now leading once again after pausing for some weeks. Those horrific financial stocks are leading things lower again. Goldman Sachs (GS), JPMorgan Chase & Co. (JPM), Citigroup, Inc. (C) , Bank of America Corporation (BAC), American International Group, Inc. (AIG) , and the list goes on. They can not find a sustained bid. We even saw a downgrade today by a key financial analyst, something you rarely see since these stocks have lagged for such a long time. The financials were just terrible today and are now on a new breakdown. Almost oversold, for sure, but they're breaking down. Oversold at some point will offer no more than a counter trend bounce that won't last very long. The banks are full of bad loans and are being held up purely by the good graces of fed Bernanke. Without him we'd be seeing many defaults all over the place. It's not good in the bigger picture, it is why we're holding up for now. It's best to stay away from the weakest places in the stock market. Don't catch the falling knife. If you need to go long, about the last place you should be looking at are these financial stocks. They are in a bear market. No argument about that. That part of the stock market is in a bear and should be avoided at all costs.

There is support at the 150-day exponential moving average at 1283. We hit 1284 on the lows today. Short-term charts are oversold. Daily charts are a bit oversold. We could see a small rally over the next few days of a percent or two but don't expect the world to the upside. The market is in a clear down trend with the wall of resistance at 1320. The 20-day and 50-day exponential moving averages are only 3 and 4 points away from 1320 as well. Not good for the bulls. This market is screaming for bullish behavior to be pulled in. Do not get caught up in small moves higher over the coming days. Unless we blow through 1320, the overall trend is down and I don't think we're getting through 1320 any time soon on the S&P 500. Cash is a wonderful position for the time being.

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