Monday, June 27, 2011

Retreats in cotton and sugar to set trend - BarCap


Reversals in prices of cotton, which fell the exchange limit, and sugar on Monday are a taste of things to come, given the ability of India to fill needs of both crops, Barclays Capital warned.
Both crops have defied the reversal in grains, with July cotton closing higher every day last week to gain nearly 14% in New York, where sugar added more than 4%.
However, such strength looks unlikely to last given favourable monsoon outlooks for India, the biggest producer of both crops.
"The recent pick-up in India's monsoon rains, coupled with a surge in plantings, bodes well for production prospects," said BarCap analyst Sudakshina Unnikrishnan, who correctly called the run-up in cotton prices, which hit a record in February.
Furthermore, data from the Indian government, which earlier this month added 1m bales to its cotton export quota of 5.5m bales, had shown farmers having a "strong preference" for planting the fibre.
'Prices to ease'
For sugar too, whose price rise has been accompanied by a rebound in speculative interest, Indian acreage is expected to expand year on year, a revival which helped persuade the government last week to permit a further 500,000 tonnes of exports of the sweetener.
"With India moving further into the export side of the equation and the global market moving further into a surplus, we see significant gains in sugar prices through the second half of 2011 as being capped," Ms Unnikrishnan said.
Many observers have forecast a return by sugar in 2011-12 to a large production surplus, estimated on Friday at 7.8m tonnes by ABN Amro.
"Despite the recent move up, we continue to expect front-month prices for both cotton and sugar to ease through the second half of this year on higher supply prospects," Ms Unnikrishnan said.
Chart signal?
The comments came as prices of both commodities eased on Monday, on a decline blamed in part on broader farm commodity market weakness, with grains suffering another sell-off, which sent corn and wheat down a further 3% in Chicago.
However, cotton's slide was also attributed to a cut from 12% to 6% in Chinese import duties on some cotton products, a move which sent prices on the Zhengzhou exchange down 4.6% for the January lot, which hit a contract low of 22,200 remninbi a tonne at one stage.
Meanwhile, New York sugar fell 0.2% to 27.35 cents a pound for the July contract, which expires on Thursday, while the second-in October lot dropped 1.9% to 25.50 cents a pound, with a potential chart sell sign not helping.
"It may be the case that the inability of the October contract to breach a double top in the charts at 26.31 cents a pound causes a rethink by the speculative community eventually, especially if this level remains inviolate at the July expiry," Thomas Kujawa at Sucden Financial said.

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Some patterns ...

by Kimble Charting Solutions

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Finally Some Positive News in the Manufacturing Sector

by Bespoke Investment Group

After a couple of months of what seems like never ending bad news in the US manufacturing sector, today there was a small bright spot from the Chicago Fed Midwest Manufacturing Index (CFMMI). According to the Chicago Fed's description, the CFMMI is a "monthly estimate by major industry of manufacturing output in the Seventh Federal Reserve District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin. It is a composite index of 15 manufacturing industries that uses hours worked data to measure monthly changes in regional activity."

After a modest decline in April, the CFMMI rebounded in May to an overall level of 84, which is the second highest reading in more than two years. As shown in the charts below, along with the overall index, the subcompnents of Autos, Steel, and Machinery all saw increases in the month. Granted, the CFMMI is not the most widely followed indicator out there, but at this point, economic bulls will take what they can get.

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Moody's Warns Of "Severe Greek Bank Cash Shortage" Due To Accelerating Deposit Flight

by Tyler Durden

We have long been warning that by fat the biggest risk to the Greek banking system is not whether or not its retains its access to the ECB funding window (it will, probably even in the case of a Greek bankruptcy through covert pathways), but domestic confidence in the financial institutions as expressed by deposits, or rather, the lack thereof. Today, as part of its Weekly Credit Outlook, Moody's issued for the first time a very stark warning that should the rate of attrition in domestic deposits (and to see where these are going merely look at the daily EURCHF chart) persist, or accelerate, the results would be disastrous. To wit: "a sustained decline of deposits by more than 35% (roughly equal to the consolidated banking system’s liquid assets and ECB funding availability) within a short period of time, would cause a severe shortage of cash among banks." Bottom line, it is unclear if even the existing deterioration in the deposit base can ever be undone due to the banks unprecedented reliance on the ECB for day to day funding, now that the bulk of domestic Greek capital is stashed away, safely, somewhere in the Swiss Alps: "With the decline in customer deposits, we expect Greek banks to find it increasingly challenging to reduce their ECB funding dependence, which is their primary objective based on their funding plans committed to the Central Bank of Greece."

From Moody's:

Our discussions with rated Greek banks last week and public information lead us to estimate that private-sector customer deposit outflows in the banking system amount to around 8% since the beginning of 2011, which is a key credit negative for Greek banks. The potential for further deposit outflows constitutes a major liquidity risk for banks as depositor sentiment is affected by negative political developments and Greece’s capability for timely repayment of its debt obligations. We expect Greek banks to find it increasingly challenging to lower their dependence on ECB repo funding as deposit balances continue to decline.

Private-sector deposits have been declining since late 2009, while outflows in May and June accelerated, as shown in the exhibit below. Greece’s heated political tensions (government reshuffling and resistance to the new austerity package) and the uncertainties regarding the Troika’s (European Union, European Central Bank, and International Monetary Fund) commitment to continue funding support to Greece are driving deposits elsewhere.

However, the roughly 8% deposit decline so far in 2011 also reflects the “cash-burn” effect of the country’s recession, with the economy expected to decline by 3.8% this year. We estimate that more than half of the year-to-date deposits decline is due to a steady draw-down of deposits to compensate for lower income by individuals and companies.

Based on recent media reports, confidence-sensitive depositors concerned about local banks’ financial health have also been transferring funds abroad and converting their deposits into gold coins, while others have been placing their cash into bank safety-boxes. The increasing liquidity risk for the banks is compounded by the volatile nature of government deposits, which are not incorporated in the exhibit above, and account for 6.7% of total deposits in April 2011 and are utilised to repay maturing government securities.

An acceleration of deposit outflows is one of the key risks for Greek banks and something that is beyond the control of either local or European authorities. A sustained decline of deposits by more than 35% (roughly equal to the consolidated banking system’s liquid assets and ECB funding availability) within a short period of time, would cause a severe shortage of cash among banks. This estimate takes into account the imminent availability of an additional €30 billion of government guarantees that can also be used for ECB funding, providing an extra buffer to any future deposit outflows, although these funds are yet to be dispersed. The availability of ECB funding through repo transactions would mitigate liquidity pressures, provided this method of funding remains available in the event of a sovereign default.

ECB funding has increased significantly since January 2010, as capital markets and the inter-bank market are still closed to Greek banks. The latest available data show that at the end of April 2011, overall ECB funding stood at €87 billion, comprising more than 21% of the banks’ total liabilities, compared to 59.4% for deposits. With the decline in customer deposits, we expect Greek banks to find it increasingly challenging to reduce their ECB funding dependence, which is their primary objective based on their funding plans committed to the Central Bank of Greece.

Large, young farmers at risk if land prices tumble


A rise in borrowings for buying tractors has raised the threat of agriculture insolvencies if the farmland market collapses, with large operations, and younger farmers, at greatest risk, America's central bank has warned.
The debt-to-asset ratio on farms run by bosses aged less than 35 has already reached nearly 40%, "a level that has signalled significant insolvency risk in the past", thanks to their greater willingness to run up debts, the Federal Reserve said.
The ratio could reach "dangerously high" levels if the farmland market suffers the kind of collapse today that did in the 1980s, the last major correction, when values halved during the decade.
With big enterprises also notable leveraged, "the number of large farmers facing insolvency could more than double, and the number of young operators [facing insolvency] could quadruple", the Fed's Kansas City bank said.
'Risks could intensify'
The bank said that the nature of debt was also behind them categorising large operations, or those with a youthful boss, as higher risk, with non-land loans - for buying items such as tractors, combines and silos - forming a bigger proportion of total borrowings.
"History has demonstrated that high debt levels are a concern, but high non-real estate debt levels can be devastating," the bank said.
And loans for farm equipment and machinery had been on the rise, up 73% in the January-to-March quarter, compared with the year before, according to official data.
"The industry's experience from the 1980s farm bust suggests that if the current run-up in non-real estate debt accelerates, the risks for farm bankruptcies could intensify should farmland values turn down abruptly."
'Air exiting bubble'
The comments come a month after the bank warned that US farmland prices "could fall sharply if crop prices sag or future interest rates rise".
Thomas Hoenig, the bank's president, has been for some while a sceptic of the rise in farmland prices, warning in February that ''history has taught us that it is nearly impossible to determine how much of the farmland boom may be an unsustainable bubble driven by financial markets".
Earlier this month, a much-watched survey from Nebraska's Creighton University showed a deceleration in price gains, concluding that "we are beginning to see some of the air exiting the farmland price bubble".
However, many observers have been critical of Mr Hoenig's comparisons of the current situation with that of the 1980s, which was accompanied by rises in US interest rates to levels in the high-teens.
The bank's report acknowledged that, in the last decade, the sector's "more modest debt accumulation has allowed the debt-to-asset ratio of less than 10%".

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Does Europe Have a Death Wish?

BERLIN – From the start of the Greek debt crisis in 2010, the major European players should have understood the risks and consequences that it posed for the European Union. They certainly don’t give that impression to onlookers.

The crisis was always about much more than Greece: a disorderly insolvency there would threaten to pull other economies on the EU’s southern periphery, including some very big ones, into the fiscal abyss, along with major European banks and insurers. That could plunge the global economy into another financial crisis, delivering a shock equivalent to the autumn of 2008. It would also mean a eurozone failure that would not leave the Common Market unharmed.

For the first time in its history, the very continuance of the European project is at stake. And yet the behavior of the EU and its most important member states has been irresolute and dithering, owing to national egotism and a breathtaking absence of leadership.

States can go bust just like companies, but, unlike companies, they don’t disappear when that happens. That is why states should not be punished, and why their ongoing interests should not be underestimated. Insolvent states need help with restructuring, both in the financial sector and well beyond it, so that they can work their way out of crisis.

This is certainly true of Greece, whose structural problems are much more sweeping than even its financial difficulties. Thus far, the EU and the Greek government have failed to address Greece’s structural problems. But they need to develop (and fund) an appropriate strategy for economic reconstruction, in order to make clear to the Greeks – and to skittish financial markets – that there is light at the end of the tunnel.

Everyone knows that Greece will be unable to work its way out of crisis without massive debt relief. The only question is whether the country’s debt restructuring will be orderly and controlled or chaotic and contagious.

Either way, Germany’s internal debate about whether to pay for the Greek debt is risible. Refusing to pay is not a viable option, because Germany and all other eurozone members are in the same boat. A Greek default would threaten to sink them, too, for it would raise immediate concerns about the solvency of Europe’s systemically important banks and insurance companies.

So what are the eurozone’s heads of government waiting for? Are they reluctant to come clean with their people out of fear for their own political futures?

The European financial crisis is really a political crisis, because EU leaders are unable to decide on the necessary measures. Instead, time is lost on secondary issues largely rooted in domestic policy concerns.
It is certainly right, in principle, to argue that the banks should participate in financing the resolution of the debt crisis. But it makes little sense to insist on it as long as losses by banks that remain “too big to fail” could trigger a renewed financial crisis. Any chance to make this work would have required overhauling the financial system early in 2009, but that opportunity was largely wasted.

As long as the EU’s life-threatening political crisis continues, its financial crisis will continue to destabilize it. At the heart of resolving the crisis lies the certainty that the euro – and with it the EU as a whole – will not survive without greater European political unification.

If Europeans want to keep the euro, we must forge ahead with political union now; otherwise, like it or not, the euro and European integration will be undone. Europe would then lose nearly everything it has gained over a half-century from transcending nationalism. In the light of the emerging new world order, this would be a tragedy for Europeans.

Unfortunately, when the outgoing president of the European Central Bank, Jean-Claude Trichet, proposed a step in this direction by suggesting that a “European Secretary of the Treasury” be created, heads of state and government dismissed the idea out of hand. Hardly anyone on the European Council seems willing even to acknowledge the depth of the EU crisis.

Resolving this crisis requires more Europe and more integration, not less. And yes: the rich economies – first and foremost Germany – will have to pay for the way out.

Germany and France, the two crucial players in this crisis, will have to devise a joint strategy, because only they, working together, can push through a solution. The problem is that the French referendum on the EU constitution in 2005 vetoed further political integration, while further economic integration may now fail because of Germany.

What is required, therefore, is an open bilateral French-German dialogue about a comprehensive realignment of the monetary union. Treaty changes are impossible; therefore, different methods will need to be found, which makes the Franco-German partnership all the more important.

Regardless of the EU’s political crisis and paralysis, Europeans should not forget how important its existence is and will continue to be. One has only to look back to the first half of the twentieth century to understand why.

Joschka Fischer, Germany’s foreign minister and vice-chancellor from 1998 to 2005, was a leader in the German Green Party for almost 20 years.

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The Twin Spiral USD And EUR Collapse

The basic problem of the Eurozone-17 nation group using the euro dates from long before the euro's creation and its proven unworkability was well known in advance. There is no excuse for this. From the often crisis-wracked EMU system (European Monetary Union) starting with the 1980s Ecu system and becoming the EMU in 1992, the creation of the ECB central bank from the central banks of Eurozone member countries, closely linked with non-members like the UK, only intensified political playacting and meddling in the economy. The excuse for this was supposedly to foster federal-type political integration of the European Union and achieve the goals of mostly forgotten treaties (except to Eurocrats) such as the coal and steel community and Euratom. 

The risk that, in crisis conditions, any so-called rigour and accountability would be thrown out the window and the money printing presses put in motion was and is endemic. In no way is it a surprise. Supposedly ironically, but also by design the current permanent crisis in European governmental financing and debt servicing, most intensely concentrated at this time in Greece, Portugal, Ireland, Italy and Spain but also menacing many other countries such as Belgium, Hungary, the Baltic States, Romania and Bulgaria, will in theory weaken the euro and bolster the US dollar. A straight majority of Eurozone political leaders want a weaker euro, that is a stronger dollar. In this way and in a certain and real sense, both of these cuckoo moneys profit from each others weakness: when one is traded down by FX traders the other can strengthen, and vice versa. In that way, the party can be kept alive another day, disguising the extreme fragility of both these reserve moneys. 

Americans can claim the dollar has the benefit of being the world’s most important or "single" reserve currency with a home economy that is claimed as still the largest in the world, depending on purchasing power parity and other corrections for gauging the true size of the Chinese economy. The Europeans have a considerably larger total GDP for their 27-nation Union, but do not have the USA's federal institutions. One semi-exception, or outrider of federal Europe is in fact the ECB pursuing its hopeless task of printing enough money to weld and unite Europe's disparate national economies, most with desperate debts and deficits, exactly like the US Fed or federal reserve bank wrestling US federal debt and deficits, and many large State governments in the US running massive debts and deficits. 

This debt-based system - both US and European and similar in Japan - arose with the best of liberal intentions, such as balanced trade and full employment, but in fact transforms all participating countries, states and territories into profligate entities, addicted to blank check spending and faced with a very few final solutions. Political labels do not count for much at this late stage. Federal and socialist may be contrasted with capitalist and sovereign, but the game plan stays the same: print and spend. All the super-debt entities, the USA, EU-27 and Japan have corporate-capitalist ruling elites aiming for a vague notion of "global governance", that is power and domination in what they also recognize as an emerging multi-polar world geopolitical scene they neither own nor control. 


The ideology and strategy of deficit spending can be called Keynesian. This approach seeks a boost to spending and investment, spurring growth, raising state taxes and revenues, able to quite quickly liquidate the new state debt taken on. The strategy therefore has a certain life expectancy, but very ironically today, this Keynesian-type raising of national debt is accompanied by austerity programmes - reducing consumer spending and business investment. Consequently this neo-Keynesianism can only be recessionary and in theory deflationary, but while it certainly is recessionary and surely slows economic growth, it is not deflationary because of the vast mass of new money pumped into the system. 

Inflation lurks very close to the surface, making it all the more important to maintain unrealistic high values for the money units in circulation until the moment they are suddenly devalued, and to channel inflation into "socially acceptable" assets, especially housing and real estate where inflation can rip at 10 - 15 percent a year but not show in any official data. Classic solutions also exist for the inflation threat: create new moneys with artificial parities and equivalencies at the time of their forced introduction. To be sure, this brings us straight back to the introduction of the euro, and before that the 1985 Plaza Accord devaluing and depreciating US debt relative to Japan in particular, by raising the Yen's value by about 40 percent relative to the USD. In both cases this action produced sharp monetary inflation but economic deflation, well dissimulated by fake official inflation data and figures. 

In today's context of hyper-debt underlined by Greece's untreatable crisis and, at a much larger scale the extreme mass of US debt needing daily and weekly placing and servicing, the only solutions are debt default and devaluation - or the introduction of new moneys. Since the first is politically unacceptable, except for politicians who resign straight after defaulting and devaluing, the creation of at least one new world money is almost certain. Any number of engaging theories and notions are available for this, at one stage concerning a "new carbon mony" as fragile and unrealistic as the junk-science that for a short while underpinned the now abandoned global warming promotion of Western ruling elites. 

To be sure, there is a supposed alternate or accompanying strategy: war. Several well-known global finance experts like Marc Faber highlight this default option, saying: "I think we had the collapse of the financial system in 2008; the failed institutions and failed system were bailed out by government. Ultimately governments will fail. The US and Europe will print money, and when everything fails, they'll go to war and then we have the complete collapse" Late-for-the-Dollar-and-Why-Emerging-Markets-Look-Good. 

The neocolonial wars in Afghanistan, Iraq and Libya can be seen in this light: war spending is vastly higher than any possible pillage or war booty and theft of resources - even oil - can bring in, but colonial-type war is carried out for elite morale-boosting, and perhaps the pleasure of destroying other peoples lives and proudly exhibiting Doomsday weapons like Depleted Uranium munitions. In the case of these three current neocolonial wars, additional spinoff for the elites includes heightened security consciousness and the easier introduction of police state control of the domestic mass of consumer citizens inside their home territories, of course "to protect the middle classes". 


Probably not perceived this way by the ruling elites, the return to interwar and postwar Keynesian-type economic and monetary policies, never applied in the 1930s and not needed in the 1950s and 1960s, is a simple return to the war origins of this survivalist economic doctrine. The only difference is real war has not yet started, against powers able to hit back using any or all of the military strategies and technology used by the so-called defenders of Western democracy.

In this pre-war but war-hungry context the logical next step, of debt default, devaluation and the introduction of new reserve moneys massively depreciating existing debts of the USA, EU-27 countries and Japan, may in all liklihood trigger "real" war, of the type the ruling elites pretend they want, can manage, and win. The world's present and few creditor nations and blocs, to be sure, include the Arab petro-states only able to fight among themselves with an unsure and uncertain ability to understand, handle and use modern weapons, but also include China, Russia, India, Brazil, Argentina and Turkey. 

Certainly the first three of these global powers are able to strike back against the kleptocratic and neolcolonial-minded elites of the Western states seeking to shrug off their debts by introducing new reserve currencies and-or suddenly devaluing their present moneys. When or if we move to the last stage of financial, monetary and economic briknmanship, the result for the Western ruling elites may entirely surpass their weak ability to manage even wars of the size of their Libyan "adventure". The time horizon for this is hard to set, but on current trends and under present constraints, this final solution could be launched in the near-term future.

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Macro Tides

By Guest Author

Balancing Global Imbalances

In some respects, the global economy is in a more precarious position than it was in early 2009. Two years ago, governments around the world were still capable of unleashing trillions of dollars in fiscal stimulus. Central banks were able to slash interest rates, and in the case of the European Central Bank and Federal Reserve, force feed additional trillions of dollars of liquidity into their respective banking systems. The initial goal was to stabilize the global financial system, and subsequently engineer a self sustaining economic recovery in each of their country’s economy.

The results have been uneven. In the United States, GDP growth has been roughly half the average of post World War II recoveries, so the question of whether a self sustaining recovery has taken hold is debatable. Although Germany and France have fared relatively well, the same cannot be said for Greece and Ireland, whose economies are still contracting. Spain, Portugal, and Italy are barely growing, with Spain sporting an unemployment rate of 21%. In order to right its fiscal house, Britain has adopted a stiff austerity program that proposes to cut government spending by more than 20%. In the short run, the decline in government spending will weigh on growth. Japan will rebound from the earthquake/tsunami plunge in GDP, but the rebound will fade into the moribund growth that has plagued the Japanese economy for two decades. On the flip side are China, Brazil, and India, where the combination of fiscal and monetary stimulus succeeded too well, and has led to a bout of real inflation.

The United States, European Union, Japan, and Great Britain account for 62% of global GDP. To varying degrees, these developed economies share a number of common traits that will retard growth for the foreseeable future. Demographically, they have aging populations, which will increasingly stress the social safety nets in each country. Most have a relatively to high debt to GDP ratio, that will slow economic growth in coming years. Slower growth means weaker income growth, so interest payments on their debt will absorb a greater share of total income and leave less for spending and saving. Not the best prescription for long term economic growth.

China, Brazil, and India comprise 15% of world GDP. While each of these countries will continue to enjoy above average growth relative to the developed economies, they are now confronting rising inflation with tighter monetary policy. This will surely lead to a slowdown in their economies in the second half of 2011. Since monetary policy is conducted by looking in the rear view mirror of economic statistics, there is the risk that each central bank may tighten a bit too much, resulting in a deeper slowdown than desired.

Balance is a state in which an object or opposing forces remain steady, while resting on a base that is narrow relative to its other dimensions. Visualize an upside down pyramid, whose tip is balanced on a narrow beam. The object is debt, and the narrow beam is global GDP growth. Given the uncertainty and challenges facing the global economy, the narrow beam may be suspended over an abyss. The pyramid will tip, if global growth isn’t strong enough to support the debt burdens of the developed counties, or if tighter monetary policy slows China, Brazil, or India’s economy too much. If another tipping point is reached, it could prove more devastating than the financial crisis of 2008, since the fiscal and monetary wells are dry. The odds are not comforting, since policy makers in the U.S. and Europe are still operating with the same playbook that got us into this mess in the first place. The banks that were too big to fail in 2008 are even larger today, and the opacity of derivatives remains impenetrable. The business cycle will never be repealed by spendthrift politicians or accommodating central bankers.

The U.S.

Between 1985 and 2008, household debt as a percent of disposable personal income more than doubled, rising from 62% to 135%. At the end of 2010, the ratio was 120%, still well above the 89% it averaged in the 1990’s. The average household would need to cut $26,172 of debt to get back to 1990’s levels. More than half of the $500 billion decline in household debt since 2008 has been the result of defaults on mortgages, credit cards, and auto loans. This ‘improvement’ has come at the expense of lenders, rather than from consumers paying off debt from income gains. It would have been far healthier if the ratio was declining due to solid gains in disposable income. 

Unfortunately, just the opposite has occurred. According to the Commerce Department, real private sector wages have increased just 4.2% over the last decade. The last 10 years have been the weakest period by far since 1940. For most of the past 35 years, the 10 year gain in real wages has averaged more than 25%. This is the first recovery since World War II that there has been no gain in wages and salaries during the seven quarters after a recessions end.

According to the Federal Reserve, homeowners took out a total of $2.69 trillion of equity in their homes between 2004 and 2006. Coupled with the weak growth in incomes since 2001, this extraction of home equity is the primary reason why household debt as a percent of disposable income soared between 2002 and 2007. As consumers spent most of the $2.69 trillion of equity they pulled out of their homes, GDP growth was stronger in those years than it otherwise would have been. Going forward, the debt induced growth in GDP during the housing bubble years will not only be missing, but now consumers have to service and pay down that debt, which will prove an additional drag on their spending and GDP growth.

Over the last year, average weekly wages have increased 2.4%. However, the overall consumer price index has risen 3.6%, so real after inflation wages actually dropped -1.2%. In order for the ratio of household debt to disposable income to decline from its current level of 120% to the 89% it averaged in the 1990’s, disposable income must grow by 33%, debt levels must be reduced by 25%, or a combination of both must take place. Given the sorry state of income growth during the last decade and past year, this imbalance is going to take many years to correct. Once debt has been pared, the next long term economic expansion that can last for a decade or longer will take hold. Of course, an increase in defaults would speed up the process, but at the expense of more impairment to bank balance sheets. That would likely force the banks to be even more careful and tight fisted with their lending, and potentially require the banks to beef up their capital.

In May, only 54,000 private sector jobs were added, and the unemployment rate ticked up to 9.1%. Every month we have highlighted how weak job creation has been in this recovery, when compared to every other post World War II recovery. Half of the private sector workers in the United States are employed by small businesses, and more than 60% of all new jobs are created by small businesses. For the first time since last September, more small businesses planned to shrink their work force than increase it. This suggests job growth will remain muted in coming months. However, the meager gain in jobs during May likely overstated how weak the labor market really is, just as the three prior months, which averaged more than 200,000 new jobs, overstated its strength. Our guess is that job growth will bounce back to over 120,000 in coming months. This should provide some comfort to those worried about an immediate double dip in the economy.

According to the Case-Shiller Home Price Index, home prices are off 31.6% from the 2006 peak, and down 3.5% from a year ago. In 2006, home owner equity was 57% of the median homes value. It is now down to 38%, as of March 31. In April, 37% of all sales were distressed sales, according to the National Association of Realtors. estimated that at the end of the first quarter, 28.4% of home owners with mortgages were underwater. Future demand will be far weaker, with so many homeowners effectively trapped in their home. Although housing activity will pick up during the summer, we continue to expect home prices to fall further in most areas of the country.

Home-equity loans account for 10% of the mortgage market. According to CoreLogic, 38% of homeowners, who withdrew home equity via a home-equity loan, are underwater. CoreLogic also found that borrowers with a home-equity loan averaged $83,000 of negative equity, versus $52,000 for those with no second mortgage. According to the Federal Reserve, nearly 75% of the $950 billion in home equity loans were held by commercial banks. More than 40% of the total is held by Wells Fargo, Bank of America, JP Morgan, and Chase. If home prices fall as we expect, one or more of these banks will eventually be forced to increase their loan loss reserves.

According to LPS Applied Analytics, 4.2 million homeowners are either seriously delinquent, or in the foreclosure pipeline. Incredibly, two-thirds have made no payments for at least a year, and 30% have gone for more than two years. As these 4.2 million homes are dumped on the market during the next two years, home prices are likely to weaken further, which will increase the number of existing homeowners that are underwater going forward. This is a vicious cycle that will take another one to two years to work through.

We continue to believe economic growth will not rebound as smartly in the second half, as the majority of economists and strategists are forecasting. Yes, Japan will bounce back, but there are far greater forces at work, and imbalances that must be addressed which will keep growth near 2.0%, and well below the historical average well into 2012.


In the 1972 movie “The Godfather”, Don Corleone tells his godson that he will get a part in a movie his godson wants to act in, even though he has already been rejected for the part by the head of the studio. When asked by the godson how Don Corleone can be so sure, the Don tells him “I’m gonna make him an offer he can’t refuse.” In the tragicomedy the Greek debt crisis has become, this famous line seems appropriate. The rating agencies have determined that any extension of maturities of Greek debt or involuntary rollover of current holdings of Greek debt would constitute a default. In recent days, discussions have suggested that current debt holders would be able to roll existing Greek debt as it matures on a ‘voluntary’ basis. With existing Greek debt selling at a very deep discount (10 year yields are above 18% and 2 year yields above 28%), no institution would roll over a bond at par, when it could be purchased in the open market for $.50 on the dollar. But these are desperate times and everyone involved wants Greece to receive more funding in a manner that avoids triggering a default now, even though everyone knows Greece will never repay the loans they have already received. Our suspicion is that behind closed doors current holders of Greek debt will be made an offer they can’t refuse. We doubt the financial markets will be so willing.

As we have noted previously, Greece is merely the tip of the debt iceberg the European banking system is on course to collide with, irrespective of any last ditch maneuverings. The fundamental problem is that Greece, Ireland, Portugal and Spain have too much debt, and too little economic growth to service their debt loads. Germany and France have $541 billion of exposure to these weak countries. We continue to believe it is merely a question of when Greece defaults, not if. And when that happens, banks in Portugal and Spain will be severely impacted. According to the Bank of International Settlements, French banks own $57 billion of Greek debt. On June 15, Moody’s warned it may downgrade three French banks, due to their exposure to Greece. In an example of how interconnected the global financial system is, Fitch ratings reported that as of May, almost 50% of the assets in the ten largest prime money market funds were invested in short-term loans to European banks. Fitch noted these funds have sold much of their holdings of Spanish, Portuguese, and Irish debt, and have never held Greek bank debt. In another example of how interconnected the global financial system is today, U.S. banks and insurance companies have issued default insurance on Greece, Ireland, and Portugal debt through credit default swaps purchased by German and French institutions. The French and German institutions will receive payments from the U.S. banks and insurance companies issuing the credit default swaps, for the amount of the insurance coverage upon a default by Greece. Even though U.S. institutions hold only 5% of Greek debt, their exposure to a Greek default will likely be larger than their actual holdings of Greek debt, since they will have to pay for the amount of debt they insured to the German and French institutions. Since credit default swaps are not traded on an exchange or through a clearing house, no one knows precisely the total value of credit default swaps on Greek debt, and more importantly, the exposure for U.S. banks and insurance companies. And, if one of these institutions just happens to be too big to fail, the exposure for the American taxpayer.

One of the contributing factors that fed the financial crisis in 2008 is that no institution will blindly trust every counter party, as long as no one knows what each institution’s exposure really is with certainty. When Greece defaults, confidence and trust will plunge right along with the value of Greek bonds, and it will spread globally within 24 hours, even though a Greek debt default is widely expected. It will be the uncertainty created by the default that will cause liquidity to dry up. Sadly, this lesson from the 2008 crisis has not been addressed, so the murky world of derivatives remains a financial black hole.

What cannot be overlooked is the social displacement and resulting anger the necessary austerity programs will continue to have within many countries. We have seen the riots in Greece, which are likely to become larger and more violent as Greece makes further budget cuts. With unemployment over 20%, the problem of unemployment for those under 25 is an epidemic within the European Union. Millions of young people out of work and losing faith in the current political system and hope for the future are a combustible mix for revolution. Historically, it is rare for revolutions to start at the top of any society, since the ‘establishment’ is more interested in maintaining the status quo. In Spain, the unemployment rate for those with a college degree is over 30%, and without a college degree exceeds 40%. On June 30, hundreds of thousands of British public sector workers are set to strike over jobs, pensions and pay cuts. Britain has instituted a four year plan that is expected to lead the elimination of 300,000 public sector jobs. The imbalances that are now being addressed throughout Europe took decades to build up. What must be appreciated is that we are only at the beginning of this process, which will last several more years. Sooner or later, the anger and frustration will reach a boiling point. Greece or Ireland will choose to leave the European Union, while other governments topple.


Two weeks ago, the Reserve Bank of Brazil increased it’s Selicrate to 12.25%, the highest rate in the world. Inflation continues to edge higher, 6.5% in May, and up more than 1% from last year. More importantly, food staples such as beans and rice have almost doubled in the last three years, far out pacing the increase in the average worker’s pay. The unemployment rate is 6.5%, about half the level it averaged between 2000 and 2004, so the unemployment plague affecting many developed countries is not as issue. GDP growth is expected to slow to 3.5%, about half of last year’s growth.

The Brazilian National Development Bank was established in 1952 to support the large infrastructure projects needed to lift Brazil into the developed world. Up until recent years, annual lending was less than $10 billion. Since 2005, lending has exploded, rising from $20 billion to $98 billion last year, which amounts to 5% of Brazil’s annual GDP. This surge in lending certainly works against the tightening of monetary policy by Brazil’s central. To say that lending by the Development Bank is politically driven would be an understatement. Comforting to know that politicians are pretty much the same anywhere.

On June 13, China reported that its consumer price index rose 5.5% in May from a year ago. It’s the largest increase in inflation since July 2008, just before the financial crisis broke in September causing a collapse in oil and commodities in general. On June 15, the Peoples Bank of China increased the bank reserve rate to 21.5%, the sixth increase this year, and eleventh since January 2010. The Chinese government has also attempted to curb real estate speculation by boosting down payment requirements from 40% to 60% for second homes. In 2006, the average apartment in Beijing sold for $100,000, the equivalent of 32 years of the average workers’ disposable income. Average annual wages have increased since 2006 to near $4,000, but the average apartment now sells for $250,000, or 57 years of income. Government policies and high prices have caused property prices in nine major Chinese cities to fall -4.36% since last year. It’s the first decline since the height of the crisis in late 2008 and early 2009, after a large run up in prices.

At the behest of the Chinese government, the state run banks in China lent $3 trillion to stimulate growth and create jobs. This is an extraordinary amount of lending and represents almost 60% of China’s annual GDP. With so much money being thrown around, it’s no surprise that real estate speculation was rampant, and investment in new cities, mass transit, and export production capacity soared. We believe excess capacity problems will emerge, as global growth slows, particularly in developed nations. With average annual income of just $4,000, China does not have a broad middle class to absorb the excess capacity that could develop, if exports to Europe, Japan, and the U.S. slow. Over the next couple of years, as much as 25% of the lending done in 2009 and 2010 could prove problematic and non-recoverable. Much like their U.S. counterparts, the Chinese government will allow the state run banks to ignore the problem. As we are learning almost daily, big financial problems only become bigger when they are ignored.

In India, the producer price index climbed to 9.06% in May from a year ago. On June 16, the Reserve Bank of India increased its repo rate to 7.5%, the tenth increase since March 2010. Tighter monetary policy is beginning to have an impact on India’s economy. In May, car sales slowed to the lowest rate in two years, according to the Society of Automobile Manufacturers. As in other developing countries, food inflation is particularly painful, since food often consumes 40% to 60% of the average workers’ income. India’s food distribution is also a problem, as almost 40% of India’s farm output rots before it reaches a local market.
As we have forecast, Brazil, China, and India are all showing signs of slowing in response to tighter monetary policy and higher interest rates. The slowdown in each of these countries will become more obvious and pronounced in the second half of 2011.


We continue to believe that the yield on the 10-year Treasury bond will remain range bound between 2.6% and 3.65%. With the yield currently resting near 3.0%, it is in the middle of the range.

If the economy grows as slowly as we expect in the second half, and the risk of a European debt crisis remains visible on the horizon, there is no compelling reason to sell Treasury bonds. In addition, there is a possibility that Congress may make meaningful progress on paring the multi-trillion dollar deficit forecast for the next 10 years. We were heartened that AARP last week softened its stance on Social Security, and will at least be open to modest changes. In the past, they have been steadfast in their opposition to any changes in benefits or increase in the retirement age. If we are to make any serious headway on true deficit reduction, this is the type of compromise all parties involved must make, including tax increases. Dogmatic adherence to ideology has played a significant role in the lack of progress on most of the important issues facing America for far too long. In the past, most threats to our country came from forces outside our borders, so it was far easier to rally public support. We created the current fiscal crisis ourselves. The solutions will require sacrifices by the majority of Americans, with some bearing more of the brunt than others. That won’t be ‘fair’, and for some, it will be a divisive issue. WE must overcome every issue that divides US.


There are a number of reasons why the dollar has either made a significant low, or will soon. Sentiment towards the Dollar remains uniformly negative, which has resulted in a huge short position against the Dollar. The brewing sovereign debt crisis in Europe will eventually make the dollar look like the least ugly girl at the dance. If real progress is made on deficit reduction, it will surprise almost everyone (including us). It will also help to make the U.S. look like less of a basket case, when compared to Europe, and certainly Japan. Any spark that results in Dollar buying will ignite a sharp short covering rally. Technically, the Dollar appears to be ‘turning the corner’, as downside momentum wanes. Last month we recommended buying the Dollar ETF UUP at $21.56. Hold the position.


Strangely, it would be more bearish for gold to make a new high above $1,578.00, than if it declined from current levels. Here’s why. A new high in Gold would not be confirmed by a new high in silver, and the gold stocks. Gold is less than 2% from a new high, but silver is more than 25% below its prior peak, and the gold stocks, as measured by HUI and the XAU, are 14.4% and 13.9% off their respective peaks. It appears that Gold may be finishing a diagonal fifth wave, if it pushes to a new high. Aggressive traders can establish a small short position at $1,550, and add if gold climbs to $1,587.00. If Gold does make a new high, we may send out a special update.


In our June 12 Special Update, we suggested that the S&P was within 1% to 2% of a trading low. We noted that various measures of sentiment had very quickly shifted from extreme optimism in early April, to a far more cautious attitude toward the market. The market was also fairly oversold, and the S&P was just above the 200 day simple and exponential moving averages. Since the close of 1270.98 on June 10, the S&P has traded down to 1258.07, and up to 1298.61. We expect the choppy trading will continue for awhile. The market sold off today, after the Federal Reserve lowered its estimate for 2011 GDP growth to 2.7% – 2.9% from April’s estimate of 3.1% – 3.3%. We have been expecting the economy to slow, so this change was not a surprise. However, most economists have forecast that the economy will rebound in the second half, so the Fed’s downgrade was a dampener.

We think the odds favor another run in the market to above the April high at 1,370. For this to happen, these are the fundamental factors that must fall into place. Greece must receive additional funding in a way that does not trigger a default, according to the rating agencies. All bets are off, if Greece is deemed in default. It is unlikely Greece will ever be able to repay the loans it has already received, and providing Greece with more money is simply throwing good money after bad. But, human nature being what it is, (as best exemplified by politicians), Greece will get more funding. Hoping everything will work out is easier than dealing with another crisis in the short run. It would also be helpful if the June employment report shows that more than 120,000 jobs were created, when it is announced on July 1. (The jobs report is normally announced on the first Friday of the month.) This would allay fears that a double dip is right around the corner.

In the June 12 Update, we recommended taking a half position in the S&P 500 ETF SPY, which opened at $127.89 on June 13. For now, keep the stop at 1,230 on the S&P, which should translate to roughly $123.00 on SPY. We will send out a Special Update when it’s time to add to this position. The market conveniently bounced off the S&P’s 200 day averages, maybe too conveniently. A quick sharp drop below these averages may be necessary, before a sustainable advance takes hold.

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What the Future Holds for U.S. Stocks in Light of the Fed’s Failings

By Jon D. Markman

Major U.S. stocks were under pressure during most of the past week as new worries about Eurozone sovereign debt and a disastrous press conference by U.S. Federal Reserve Chairman Ben Bernanke corroded confidence.

This time, it was not just Greece that was pushing sellers' hot button, but also Italy, as the Mediterranean nation's banks are believed to have excessive exposure to troubled loans in the region. But at the center of the troubles was Bernanke, who looked helpless as an Econ 101 student in a master's class when asked by the media to explain why the economy was not improving as fast as expected.

On the plus side of the ledger this was a stronger-than-forecast increase in U.S. durable goods orders, some very upbeat inflation comments from China, and an improvement in German business confidence.

So where are we now?

Well, my premise at the start of the year was that you would not have to get too fancy to beat the broad market indexes, which are weighed down by troubles at the banks. The idea was you would not even have to get as fancy as picking the right world regions or sectors, like last year. Instead, you could put a large part of your portfolio in something as prosaic as the growth half of the S&P 400 Midcap Index - the iShares Midcap Growth Fund ETF(NYSE: IJK) fund - and let it ride.

That worked for my through mid-May, then it stopped out for a fat gain. Now it looks good to go again, as long as bulls man up and make a stand right here, right now.

I have recommended keeping portfolios a lot lighter than usual during the European sovereign debt crisis, just in case the market - acting as the collective unconscious - is giving us a signal that there is something really wrong on the road ahead.

But if we ever get an all-clear sign in the form of one or two high-volume, high-intensity up days heading into earnings season, investors can go back full tilt boogie on mid-cap growth stocks.

Now mind you, we may never get that all-clear sign. And we may need to recognize that there could be a slide into the fall culminating with an epic wipeout that would lead us to try to buy another fantastic bottom like March 2009.

But for now, let's just be happy that mid-cap growth is still up 7% for the year. Add on 5.5% gain from our high-yield mortgage bond fund positions, like DoubleLine Total Return (MUTF: DBLTX), and you're up 12% in half a year. That's excellent. Now is time to preserve that, and add on.

us stocks

Keeping Your Cane Close

Now what if the all-clear sign never appears?

The riskier sector funds are probably going to act more like trading vehicles than long-term investments over the next few months. Active investors will need to prepare to sell at resistance and buy at support until we can get past this rocky stretch and go back to long-term holds.

My strongest hope is if the market is super-choppy through early fall, we will end up with enough winnings set aside that we can buy into a distinct low in October.

Of course, that's easier said than done. But with any luck, we will have the opportunity to get out our canes in the fashion of the great Henry Clews -- the Civil War and Gilded Age era financier who wrote about his experiences in the 1887 classicTwenty Eight Years in Wall Street.

Clews wrote:

''But few gain sufficient experience in Wall Street to command success until they reach that period of life in which they have one foot in the grave. When this time comes, these old veterans of the Street usually spend long intervals of repose at their comfortable homes, and in times of panic, which recur sometimes oftener than once a year, these old fellows will be seen in Wall Street, hobbling down on their canes to their brokers; offices.

"Then they always buy good stocks to the extent of their bank balances, which they have been permitted to accumulate for just such an emergency. The panic usually rages until enough of these cash purchases of stock is made to afford a big "rake in." When the panic has spent its force, these old fellows, who have been resting judiciously on their oars in expectation of the inevitable event, which usually returns with the regularity of the seasons, quickly realize, deposit their profits with their bankers, or the overplus thereof, after purchasing more real estate that is on the upgrade, for permanent investment, and retire for another season to the quietude of their splendid homes and the bosoms of their happy families."

So now if I say in October "get out the canes" you will know what I am referring to.

The Fed's Failings

The Federal Reserve's statement after its rate-setting committee meeting acknowledged the recent weakening in the economy and in employment but tied them to temporary factors, arguing that the recovery is ''continuing at a moderate pace.''

The key wrinkle that emerged was the notion that the Fed did not intervene last year to help the economyper sebut to stave off deflation. This notion has always been a part of the Fed's communications, but it has not been given the primary role that it is being accorded now.

Bernanke said in his press conference that the Fed only acted last year because the falling rate of inflation last summer suggested that deflation was becoming a serious threat. The subsequent rebound in core inflation suggests that threat has eased, he argued, at least for now.

Strip away the niceties, and here's what you have: He has decided to declare victory and go home.

Paraphrasing again, in my view Bernanke is saying: "QE2 solved the problem of the threat of deflation. Oh, you thought it was supposed to help the economy? You are mistaken."

The Fed can deflect blame for the idea that QE2 did not boost the economy by claiming it was not supposed to. This is new, and I do not think it is market-friendly.

The Bottom Line:
The Fed is likely to stay on the sidelines the rest of this year. If core inflation is falling next year, and lower government spending means that economic growth will be muted, we can still expect the Fed to loosen rather than tighten monetary policy somehow - most likely with something akin to QE3. In short, don't expect another round of large-scale asset purchases of the type that have supported the market for the past nine months.

It's hard to see how any of this is going to be a positive for stocks, but I would love to be surprised to learn that this scenario has already been discounted.

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China's Move Away from the U.S. Dollar Means You Need to Invest in the Yuan

By Kerri Shannon

China has started diversifying away from the U.S. dollar, yet another sign that it's time to invest in the yuan.

A report from Standard Chartered Bank last week showed China's foreign exchange reserves expanded by $196 billion in the first four months of this year. About 75% of that investment was in non-U.S. dollar assets.

This is the biggest gap between accumulated reserves and purchased U.S. debt by China in at least five years.

As the dollar's value weakens, China has taken steps to distance itself from the currency, and attempted to strengthen its own by investing more in gold and other assets.

Money Morning Chief Investment Strategist Keith Fitz-Gerald said China's diversification means the yuan is backed by better assets than other countries' currencies.

"That is why the yuan is likely to emerge as a new reserve currency, and yet another argument for owning the yuan as an investment," said Fitz-Gerald. "This is the full circle nobody expects and one of the reasons I frequently refer to China's yuan as the only currency on the planet with adult supervision."

Distancing from the Dollar

It's no secret China has been concerned about the value of the U.S. dollar since the U.S. Federal Reserve adopted a loose monetary policy in the wake of the financial crisis.

Chinese Premier Wen Jiabao noted these worries in 2009.

"We have lent a huge amount of money to the United States," Wen said. "Of course, we are concerned about the safety of our assets. To be honest, I am definitely a little bit worried."

China remains the largest holder of U.S. debt, although its holdings have dipped since the start of the year to $1.152 trillion from $1.154 trillion.

Standard Chartered compared China's inflow of new foreign exchange reserves from January to April to purchases of U.S. government debt by China, Hong Kong and London buyers. Net purchases plunged to $46 billion.

Now China is after higher yielding assets because it's increasingly uncomfortable with having such a large percentage of its holdings in the dollar. China's so eager to diversify away from the U.S. dollar it's willing to be exposed to the struggling Eurozone.

Standard Chartered estimates that China bought about $3.6 billion worth of AAA-rated bonds issued by the European Financial Stability Facility, which is backed by members of the European Union and the European Financial Stability Mechanism.

China also is investing more in gold and silver.

"China admits to buying small quantities of gold - about $50 billion in the last year. But it may be buying a lot more gold - and silver, as Imperial China was on a silver standard, not a gold standard," said Money Morning Contributing Editor Martin Hutchinson.

Fitz-Gerald said China's moves aren't surprising as the U.S. dollar continues to weaken, and the outlook for metals like gold and silver remains bullish.

"As the dollar and other assets fail, this is entirely expected because China wants to diversify into hard assets that may serve to better preserve their wealth," said Fitz-Gerald. "At the same time, they are simply bringing underweighted allocations in these holdings up to speed; this too is expected in accordance with modern portfolio theory and asset allocation models China uses to manage its holdings."

China's nerves no doubt have been rattled by Standard & Poor's threat to downgrade the United States' credit rating. The rating agency in April lowered the outlook for U.S. debt to "negative" from "stable." Washington, despite this warning, has still failed to make much progress on reducing the country's debt as the United States nears default.

Bigger Role for Yuan

The U.S. failure to preserve the dollar's value has prompted countries like emerging economies China and Russia to challenge the currency's role as the sole global benchmark.

Zhou Xiaochuan, Governor of the People's Bank of China, said in 2009 the dollar's unique status as the world's primary currency reserve has resulted in increasingly frequent financial crises ever since the collapse of the Bretton Woods system in 1971. Zhou in March 2009 released an essay entitled "Reform of the International Monetary System" on the PBOC Website, calling for the "re-establishment of a new and widely accepted reserve currency with a stable valuation" to replace the U.S. dollar.

That "reestablishment" could mean a push for the yuan as a major reserve currency. Beijing for years has had its eye on expanding the yuan's role in global trade, especially now that China is the world's second-largest economy.

The country has started making it easier to use and invest in the yuan. State-owned Bank of China Ltd. announced in January that it would allow U.S. customers to open yuan accounts to buy and sell China's currency.

"Prior to July 2010 such trading had been confined within China," said Fitz-Gerald. "Then, the government allowed limited yuan trading in Hong Kong, which has surpassed all expectations by blossoming literally from zero to more than $400 million a day. Against that baseline, here they come and here the yuan comes."

Beijing last week said it created new rules to allow foreign firms to use yuan raised overseas for investment in China. This marks the first time China has set a specific policy for yuan-denominated foreign direct investment in the country.

"This policy on yuan-denominated foreign direct investment is a significant stride towards making the yuan an international currency," Deutsche Bank AS (NYSE: DB) economist Ma Jun told the AFP.

Invest in the Yuan

Fitz-Gerald says that as the yuan becomes more accessible to foreign investors, it should become a greater part of everyone's China investing portfolio. The yuan is increasingly becoming the strongest currency option.

"Whether the Chinese intend it or not, the large alternative asset purchases make it ‘backed' by hard assets at least in part," said Fitz-Gerald. "And this is something no other currency on the planet offers at the moment despite the fact that people are talking about a partially asset-backed reserve currency (which is essentially what the Chinese are doing here)."

So how can investors cash in? Fitz-Gerald said investors should get their hands on the yuan itself.

"You can either use direct deposit through WisdomTree Chinese Yuan Fund," said Fitz-Gerald. "Or, if you are in Los Angeles or New York City where the branches are, go down to the Agricultural Bank of China and open a yuan-denominated account."

Analysts Exist to Make Economists Look Respectable

By Barry Ritholtz
“The only function of economic forecasting is to make astrology look respectable.” -John Kenneth Galbraith
Regular readers know that I do not hold the economics profession in particularly high regard. These sociologists too often have an unfortunate unfamiliarity with how Human Beings behave in the wild. Forget forecasting — economic theories fail to adequately describe what has already happened.

As JKG observed, Economists may give astrology respectability, but there is another group who exists solely to make Economists look respectable: Wall Street Analysts.

As we have discussed about a year ago (McKinsey: Equity Analysts Are Still Too Bullish), most of the time, Wall St analysts are excessively optimistic forecasts, looking for nearly 2X actual earnings growth. The exception is near earnings bottoms, where they are excessively pessimistic.

Today’s WSJ points put that the recent shift in market activity, coming after a 2 year, 100% market rally, has done nothing to dampen their enthusiasm. Analysts ardor for equities is as upbeat as ever. As a whole, the group is looking for S&P500 earnings of $99.86 a share for 2011. That’s up 2.3% from April, and reflects a 16% rise from Q2 2010.

Wall Street Strategists — not exactly a bearish group themselves — expect $95.24 in SPX earnings this year. John Butters, an earnings analyst at FactSet, notes that the gap between earnings estimates of Analysts vs Strategists is 5.6%, the biggest disparity in three years.

Here is the Journal:
“The U.S. economy has slowed noticeably in recent weeks, prompting economists to ratchet down their estimates for growth and investors to drive stocks down 7% since late April. Market strategists started reducing their year-end forecasts for the Standard & Poor’s 500-stock index.
But individual stock analysts have remained noticeably upbeat.
As a group, they have not only kept their estimates for corporate earnings for the current quarter intact, but they have raised them.
Skeptics warn that analysts have set the bar too high, increasing the chances companies may disappoint, triggering more market turmoil.
The disconnect between analysts on the one hand and strategists and economists on the other comes largely because analysts are largely focused on their individual companies and industries. That gives them a deeper but narrower view than those who look broadly at macroeconomic factors. As both camps look to the end of 2011, they are seeing very different outcomes.”
Analysts have a latency problem: They mostly produce bottoms up analyses, highly dependent upon quarterly earnings. But by the time changes in broad macro conditions are seen in earnings, it already deep in cyclical turn down. They almost never see the storm coming until it is too late.

My experience with the best of the fundie analysts is that they integrate something beyond quarterly earnings to act as an early warning device. Paul Sagawa, who covered Cisco and Nortel for Sanford Bernstein in the 1990s, was able to forecast a sharp deceleration by surveying carriers spending on telecom equipment. He sidestepped the entire 2000 telecom collapse.

Most analysts do not seem to be able to integrate this sort of additional earnings forecasting capability, to the detriment of their accuracy– and their clients.

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Investment Grade Molybdenum

Commodities are physical substances like grains, food and metals. An investment is the purchase of a financial product or other item of value with the expectation of favorable returns in the future.

Well, I prefer metals for preservation of my wealth. The question is what metal would you pick to preserve your wealth? Now the next thing to keep in mind is not to be biased in any way. That is, to buy a certain metal because someone tells you to, or to buy a certain metal because it is on an upward price trend or buy a metal because you read an interesting article on it.

#1 on my shopping list I look at is a the ability of a metal to actually promote or enable life of plants and animals on this planet. This means that you can actually grow food with it or grow trees. You can actually use the metal by sprinkling the powderized form on your soil and let the microbes in the soil slowly break down the metal and make it available for the plants to consume. Hydroponic or Aeroponic growing of food uses about 17 life giving elements that are added to the water to give complete nutritional support for plants.

Unfortunately, there are only 7 elements of the 17 needed for plants that are an actual "metal". These are called transition metals. Transition metals are known for their ability to conduct electricity, their hardness, high density, malleability (a material that can be worked with or hammered into flat sheets), ductility (able to be produced into a thin wire).

These 7 investment grade metals are Molybdenum, Cobalt, Copper, Zinc, Manganese, Iron, Nickel. Nickel is documented as a essential nutrient in some plants. Nickel is not used in some high-end hydroponic formulas.

#2 on my shopping list. I now have 7 transition metals that are used in growing food and are capable of being in my metal portfolio. But, I only want one metal. I will now consider the amount of this metal available on Earth. The next step would be the abundance of the metal or scarcity of it. Here is a list of these 7 metals and the amount in parts per million in the Earth's crust.

Molybdenum 1 ppm Molybdenum is most valuable here because of scarcity

Cobalt 25 ppm
Copper 60 ppm
Zinc 70 ppm
Nickel 84 ppm
Manganese 950 ppm
Iron 56300 ppm

#3 on my shopping list is the melting point. I want a metal that can withstand high working temperatures. There is something called metal "creep" and that is the expansion or deformation of metals when they start reaching temperatures near the melting point. I like metals that don't creep or change shape in high temperature conditions eg: Jet engines, Furnaces or anywhere where safety is priority.

Molybdenum has the highest melting point of any life giving metals. Molybdenum has the sixth highest melting point of any element on Earth, which is incredible!

Molybdenum 4753 Degrees Fahrenheit Melting Point
Iron 2800 Degrees Fahrenheit M.P.
Cobalt 2723 Degrees Fahrenheit M.P.
Nickel 2651 Degrees Fahrenheit M.P.
Manganese 2275 Degrees Fahrenheit M.P.
Copper 1984 Degrees Fahrenheit M.P.
Zinc 787 Degrees Fahrenheit M.P.

#4 on my shopping list. The metal is an investment so I Do Not want it to rust, oxidize or corrode. If this happens you can surely say goodbye to your investment. Molybdenum does not react with water or air at room temperature and will not corrode. Molybdenum will keep a beautiful lustre (silvery blue). Copper and iron are definitely OFF my shopping list in this category.

Research this incredible metal for yourself, it has many uses.

Now I will bring in some arguments, for example, when I called around to purchase some molybdenum, people usually asked what it was for. I told them I was investing and collecting it. I had one person laugh, no kidding. One person told me I should go buy some silver if I was investing. On the other hand, back in 2008 Eric Sprott opened up a molybdenum stock that actually had physical holdings of molybdenum in its portfolio. I think it is not silly to invest in physical moly metal as well as moly stocks. If you just chuckled you probably own silver or gold. All metals usually gain value over time, but which metal will prevail?

Molybdenum can be bought in many forms. It is commonly mined from molybdenite ore which is MoS2. MoS2 can be purified and is used as a dry lubricant, desulfurization in petroleum refineries, etc... MoS2 concentrate is 85-99% pure. If you roast or heat up MoS2 to between 500-650 degrees celsius you produce moly trioxide concentrate or tech oxide, which is a yellow powder. MoO3 is used in pigments, flame retardants, fertilizers, catalysts, alloying steels, etc... You can process or treat MoO3 even further to get molybdic oxides, etc.. Purity ranges from 50-99.9%.

Ferromolybdenum (FeMo) is another type of molybdenum mixture, it is added to molten steel to alloy it and is preferred over the moly oxides in alloys with over 1% molybdenum since it avoids having to add oxygen to the heat. FeMo is not pure (60-75%) and is produced when MoO3 oxide is mixed with iron oxide and aluminium and is reduced in the an aluminothermic reaction to molybdenum and iron. This is made in a smelter.

The London Metal Exchange (LME) sells Roasted Molybdenum Concentrates (RMC) which is under contract to be 57-63% pure and it sells for about $36000 U.S.D a tonne ($18 a pound), with a 440 pound minimum purchase. Molybdenum comes in many other forms and can be quite confusing.

MoO3 + hydrogen under high heats produces molybdenum in metal form, which I prefer to buy. I have been quoted $40-$200 a pound for 99.9% pure moly metal. And yes I do purchase moly for investing. Remember that the Earth's crust has molybdenum at 1 ppm in abundance. This means that 1 million pounds of rock would only contain 1 pound of molybdenum and at $40 that is cheap. Please do your own research.

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