Wednesday, June 29, 2011

Stock Market Volatility Skew Still Shows Complacency

I continue to "obsess" about the volatility skew. For those new to the skew and what is means please read here first. After the May 2010 correction the skew and vix both converged and continued to correlate for the most part through August 2010. Since that time they have diverged as some investors began buying further out of the money options versus the masses who continue to sell volatility whether as a form of speculation (selling puts) or simply ignoring the need for portfolio insurance.

The divergence grew to an extreme in February 2011 which preceded the market correction and then markets moved higher yet unlike 2010 the skew and vix did not correlate but instead diverged again. When the current selloff began the skew would come down as the vix would rise yet each move lower in the skew is followed by a sharp move higher (first chart below).

This brings me to the second chart showing the skew and vix divergence versus the SPX. The correlation is unquestionable even in the presence of QE where other correlations have broken. What intrigues me now is the trend in the divergence how it continues to trend lower although from elevated levels. Until the trend reverses it appears the skew will continue to move higher each day the market bounces. In other words as the vix remains elevated and possibly breaking out, the skew continues to confirm the level of complacency still within the equity markets.

2011 Is Looking a Lot Like...

by Bespoke Investment Group

2011 has sure seen its ups and downs. Given the equity market's gyrations, we wanted to see which past years (if any) have had the most similar trading patterns to this year for the S&P 500. To do this we ran a correlation of the daily closing prices of the S&P 500 through June 29th of this year and every other year since 1928.

After running the analysis, we found that 2011 has been relatively unique in its pattern. Of the 83 years we analyzed, there were only two years (1965 and 1930) that had a correlation coefficient of more than +0.60. To put this in perspective, when we last did this comparison in late May, there were ten years with correlation coefficients of more than 0.70. 

Below we highlight the S&P 500's annual charts of 1930, 1965, and 2011. A shown, 1930 and 1965 saw divergent paths in the back half of the year (to put it mildly). In 1965 (which has a correlation coefficient of 0.69), the S&P 500 rebounded and finished the year up more than 9%. In 1930 (which had a correlation coefficient of 0.67), the S&P 500 continued to trade lower with a total loss on the year of 28%.

Greece is fixed, or?

by the trader

Greek vote went great. Now we just have to fix the Economy. Remember, the ship is still sinking. After Greece short term liquidity has been “fixed”, we expect the problems in Spain to regain attention. Kathimerini on the Vote;

The Greek Parliament has passed the government’s medium-term fiscal plan, seen as crucial for staving off bankruptcy, on a day of high tension both inside the house and in Syntagma Square outside.
Government fears of a rebellion within the ruling PASOK party did not materialize and several of the deputies who had indicated that they would oppose the new austerity measures changed their position at the last minute, which meant that 155 deputies voted in favor of the plan and 138 against.

Panayiotis Kouroublis was the only PASOK lawmaker who voted against the package but this was balanced by New Democracy deputy Elsa Papadimitriou supporting the midterm fiscal plan.

Prime Minister George Papandreou ousted Kouroublis from the party.

Papadimitriou made it known that she was also quitting the conservatives and would continue in Parliament as an independent.

Kozani MP Alexandros Athanasiadis, who had said he would vote against the bill because he opposed the privatization of Public Power Corporation, switched and cast his vote in favor of the government.

Democratic Alliance leader Dora Bakoyannis and her party’s four MPs voted “present”.

The government now has to pass the implementation law for the measures through Parliament on Thursday to secure Greece’s next loan installment, worth 12 billion euros, from the European Union and International Monetary Fund.

The passage of the legislation will also pave the way for the EU and IMF to finalize the details of a second bailout for Greece.

Meanwhile, clashes persisted outside Parliament between riot police and furious protesters. Police fired volleys of tear gas to push back demonstrators that were pelting them with bottles, trash and chunks of marble.

See the original article >>

Bernanke’s Losing Control Again

by Graham Summers

Bernanke has a real problem on his hands. QE 2 spent $600 billion and got him at best a few months’ worth of upticks in well-massaged economic data. In the process it blew up food and energy prices and made the Fed look even stupider than usual (Bill Dudley’s iPad comment comes to mind).

However, the US economy clearly took a nosedive starting in February of this year and we now have a confirmed double dip in housing. So Bernanke’s little brain is whirring with the prospect of printing even more money because… well, that’s all he does.

So, what can he do? He can’t just go and announced QE 3 without risking his own neck… but at the same time, he can’t just have stocks crater overnight by turning the printer off.

Solution: he continues to funnel money into Wall Street via less publicly offensive policies such as QE lite (see the story below):

While the $600 billion purchase program, known as QE2, winds down, the Fed said June 22 that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system. 

The only question is whether this will be enough juice for the markets until the inevitable QE 3 or some such additional liquidity measure is announced (Bill Gross has hinted it will be unveiled at the Fed’s August FOMC).

The Fed a similar stunt in 2010 when QE 1 ended. However, at that time the game consisted of pumping the system during options expiration weeks to the tune of $20-30 billion tops. This time around, the Fed could be funneling as much as $300 BILLION… and somehow the Fed’s in control of things?

I’ve said it before and I will say it again: Bernake is slowly losing control of the system. In 2007, he was putting $30 billion into the system here and there. In 2008-2010, he upped the ante to $50 billion PER MONTH. QE 2 pushed the amount up to $100 Billion per month. And here he is, hinting at giving ANOTHER $300 BILLION when QE 2 ends!?!?

Folks, there is a name for a financial game that requires larger and larger sums of money to continue. It’s called a Ponzi Scheme and the longer it lasts the more disastrous the collapse will be. Which is why if you haven’t already taken steps to prepare yourself and your portfolio for the coming disaster, you need to do so NOW.

When I say “coming disaster” I’m talking about bank holidays, food shortages, a market Crash, civil unrest and worse.

So if you’re not prepared already, you need to get moving.

I can show you how…

See the original article >>

The Screaming Fundamentals For Owning Gold And Silver

by cmartenson

This report lays out an investment thesis for gold and one for silver. Various factors lead me to conclude that gold is one investment that you can park for the next ten or twenty years, confident that it will perform well. My timing and logic for both entering and finally exiting gold (and silver) as investments are laid out in the full report.

The punch line is this: Gold and silver are not (yet) in bubble territory, and large gains remain, especially if monetary, fiscal, and fundamental supply-and-demand trends remain in play.


In 2001, as the painful end of the long stock bull market finally seeped into my consciousness, I began to grow quite concerned about my traditional stock and bond holdings. Other than a house with 27 years left on a 30 year mortgage, these holdings represented 100% of my investing portfolio. So I dug into the economic data to see what I could discover. What I found shocked me. It's all in the Crash Course in both video and book form, so I won't go into that data here.

By 2002, I had investigated enough about our monetary, economic, and political systems that I decided that holding gold and silver would be a very good idea, poured 50% of my liquid net worth into precious metals, and sat back and watched.

Since then, my appreciation for and understanding of the role of gold as a monetary asset and silver as an indispensable industrial metal have deepened considerably.

Investing in gold and silver is still a good idea. Here's why.

Why own gold and silver?

The reasons to hold gold and silver, and I mean physical gold and silver, are pretty straightforward. So let’s begin with the primary reasons to own gold.

  1. To protect against monetary recklessness
  2. As insulation against fiscal foolishness
  3. As insurance against the possibility of a major calamity in the banking/financial system
  4. For the embedded 'option value' that will pay out if and when gold is remonetized

By ‘monetary recklessness,’ I mean the creation of money out of thin air and the application of more liquidity than the productive economy actually needs. The central banks of the world have been doing this for decades, not just since the onset of the great financial crisis. In gold terms, the supply of above-ground gold is growing at roughly 3% per year, while money supply has been growing at nearly three times that yearly rate since 1980.
Now this is admittedly an unfair view, because the economy has been growing, too, but money and credit growth have handily outpaced even the upwardly distorted GDP measurements by a wide margin. As the economy stagnates under this too-large debt load while the credit system continues to operate as if perpetual expansion were possible, look for all the resulting extra dollars to show up in prices of goods and services. 

Real interest rates are deeply negative (meaning that the rate of inflation is higher than Treasury bond yields). This is a forced, manipulated outcome courtesy of central banks that are buying bonds with thin-air money. Historically, periods of negative real interest rates are nearly always associated with outsized returns for commodities, especially precious metals. If and when real interest rates turn positive, I will reconsider my holdings in gold and silver, but not until then. That is as close to an absolute requirement as I have in this business.

Monetary policies across the developed world remain as accommodating as they’ve ever been. Even Greenspan's 1% blow-out special in 2003 was not as steeply negative in real terms as what Bernanke has recently engineered. But it is the highly aggressive and ‘alternative’ use of the Federal Reserve balance sheet to prop up insolvent banks and to sop up extra Treasury debt that really has me worried. There seems to be no way to end these ever-expanding programs, and they seem to have become a permanent feature of the economic and financial landscape. In Europe, the equivalent would be the sovereign debt now found on the European Central Bank (ECB) balance sheet. 

Federal deficits are seemingly out of control and are now stuck in the -$1.5 trillion range. Massive deficit spending has always been inflationary, and inflation is usually gold/silver friendly. Although not always, mind you, as the correlation is not strong, especially during mild inflation (less than 5%). Note, for example, that gold fell from its high in 1980 all the way to its low in 1998, an 18 year period with plenty of mild inflation along the way. Sooner or later I expect extraordinary budget deficits to translate into extraordinary inflation.

Reason #3, insurance against a major calamity in the banking system, is an important part of my rationale for holding gold. I’m not referring to “paper gold” either, which includes the various tradable vehicles (like the "GLD" ETF) that you can buy like stocks through your broker. I’m talking about physical gold and silver because of their unusual ability to sit outside of the banking/monetary system and act as monetary assets.

Literally everything else financial, including your paper US money, is simultaneously somebody else’s liability, but gold and silver are not. They are simply, boringly, just assets. This is a highly desirable characteristic that is not easily replicated.

Should the banking system suffer a systemic breakdown, to which I ascribe a reasonably high probability of greater than 1-in-4 over the next 5 years, I expect banks to close for some period of time. Whether it's two weeks or six months is unimportant; no matter the length of time, I'd prefer to be holding gold than bank deposits.

During a banking holiday, your money will be frozen and left just sitting there, even as everything priced in money (especially imported items) rocket up in price. By the time your money is again available to you, you may find that a large portion of it has been looted by the effects of a collapsing currency. How do you avoid this? Easy; keep some ‘money’ out of the system to spend during an emergency. I always advocate three months of living expenses in cash, but you owe it to yourself to have gold and silver in your possession as well.

The final reason for holding gold, because it may be remonetized, is actually a very big draw for me. While the probability of this coming to pass may be low, the rewards would be very high.

Here are some numbers: The total amount of 'official gold,' or that held by central banks around the world, is 30,684 tonnes, or 987 million troy ounces (MOz). In 2008 the total amount of money stock in the world was roughly $60 trillion.

If the world wanted 100% gold backing of all existing money, then the implied price for an ounce of gold is ($60T/987MOz) = $60,790 per troy ounce.

Clearly that's a silly number (or is it?), but even a 10% partial backing of money yields $6,000 per ounce. The point here is not to bandy about outlandish numbers, but merely to point out that unless a great deal of the world's money stock is destroyed somehow, or a lot more official gold is bought from the market and placed into official hands, backing even a fraction of the world's money supply by gold will result in a far higher number than today's ~$1,500/Oz.

The Difference Between Silver and Gold

Often people ask me if I hold goldandsilver as if it were one word. I do own both, but for almost entirely different reasons. Gold, to me, is a monetary substance. It has money-like qualities and it has been used as money by diverse cultures throughout history. I expect that to continue.

There is a chance, growing by the week, that gold will be remonetized on the international stage due to a failure of the current all-fiat regime. If or when the fiat regime fails, there will have to be some form of replacement, and the only one that we know works for sure is a gold standard. Therefore, a renewed gold standard has the best chance of being the ‘new’ system selected during the next bout of difficulties.

Silver is an industrial metal with a host of enviable and irreplaceable attributes. It is the most conductive metal known, and therefore it is widely used in the electronics industry. It is used to plate critical bearings in jet engines and as an antimicrobial additive to everything from wall paints to clothing fibers. In nearly all of these uses, plus a thousand others, it is used in such vanishingly small quantities that it is hardly worth recovering at the end of the product life cycle -- and often isn’t.

Because of this dispersion effect, above-ground silver is actually at something of a historical low point. When silver was used primarily for monetary and ornamentation purposes, the amount of above-ground, refined silver grew with every passing year. After industrial uses cropped up, that trend reversed, and today there are perhaps 1 billion ounces above ground, when in 1980 there were roughly 4 billion ounces. 

Because of this consumption dynamic, it's entirely possible that over the next twenty years not one single net new ounce of above ground silver will be added to inventories, while in contrast, a few billion ounces of gold will be added.

I hold gold as a monetary metal. I own silver because of its residual monetary qualities, but more importantly because I believe it will continue to be in demand for industrial uses for a very long time, and it will become a scarce and rare item.


If we cast our minds forward ten years and think about a world with oil costing 2x to maybe 8x more than today, we have to ask how many of our currently-operating gold and silver mines, or the base metal mines from which gold and silver are by-products, will still be in operation, and how many will close because their energy costs will have exceeded their marginal economic benefits.

After just 100 years of modern, machine-powered mining, nearly all of the good ores are gone. By the time you are reading stories like this next one, you should be thinking, 'Why are they going to all that trouble unless that's the best option left?'

Feb 17, 2011
JOHANNESBURG—With few new gold strikes around the world that can be turned into profitable mines, South Africa's gold miners are planning to dig deeper than ever before to get access to rich veins.
The plans raise questions about how to safely and profitably mine several miles below the surface. Success would mean overcoming problems such as possible rock falls, flooding and ventilation challenges and designing technology to overcome the threats.
Mark Cutifani, chief executive officer of AngloGold Ashanti Ltd., has a picture in his office of himself at one of the deepest points in Africa, roughly 4,000 meters, or 13,200 feet, down in the company's Mponeng mine south of Johannesburg. Mr. Cutifani sees no reason why Mponeng, already the deepest mining complex in the world, shouldn't in time operate an additional 3,000-plus feet deeper.
"The most critical challenges for all of us in South Africa are depths and depletion of reserves," Mr. Cutifani said in an interview.

The above article is just a different version of the story that led to the Deepwater Horizon incident. By the time exceptional engineering challenges are being pondered to scrape a little deeper, it tells the alert observer everything they need to know about where we are in the depletion cycle. We are closer to the end than the beginning.

We are at a point in history where we can easily look forward and make the case for declining per-capita production of numerous important elements just on the basis of constantly falling ore purities, and gold and silver fit into that category rather handily. Depletion of reserves is a very real dynamic. It is not one that future generations will have to worry about; it is one with which people alive today will have to come to terms.

The issue of Peak Oil only exacerbates the reserve depletion dynamic by adding steadily rising energy input costs to mix. Should oil get to the point of actual scarcity, where we have to ration by something other than price, then we must ask where operating marginal mines fits into the priority list. Not very high, would be my guess.

Supply and Demand - Gold

Not surprisingly, the high prices for gold and silver have stimulated quite a bit of exploration and new mine production. With over a decade of steadily rising prices, there has been ample time to bring on new production. Which leads to a real surprise: In the case of gold, relatively little incremental mine production has occurred.

The analytical firm Standard Chartered has calculated a rather subdued 3.6% gold production growth over the next five years:

Most market commentary on gold centres on the direction of US dollar movements or inflation/deflation issues – we go beyond this to examine future mine supply, which we regard as an equally important driver. In our study of 375 global gold mines and projects, we note that after 10 years of a bull market, the gold mining industry has done little to bring on new supply. Our base-case scenario puts gold production growth at only 3.6% CAGR over the next five years.
(Source - Standard Chartered)

Of course, none of this is actually surprising to anyone who understands where we are in the depletion cycle, but it's probably quite a shock to many an economist. The quoted report goes on to calculate that existing projects just coming on-line need an average gold price of $1,400 to justify the capital costs, while greenfield, or brand-new, projects require a gold price of $2,000 an ounce.

This enormous increase in required gold prices to justify the investment is precisely the same dynamic that we are seeing with every other depleting resource: Energy costs run smack-dab into declining ore yields to produce an exponential increase in operating costs. And it's not as simple as the fuel that goes into the Caterpillar D-9s; it's the embodied energy in the steel and all the other energy-intensive mining components all along the entire supply chain.

Just as is the case with oil shales that always seem to need an oil price $10 higher than the current price to break even, the law of receding horizons (where rising input costs constantly place a resource just out of economic reach) will prevent many an interesting, but dilute, ore body from being developed. Given declining net energy, that's forever, as far as I am concerned.

The punch line of the Standard Chartered gold report is that they think $5,000 gold is a realistic target and go on to note the most important shift in gold accumulation of the past 30 years:

The limited new supply comes at a time when central banks have turned from being net sellers to significant net buyers of gold. The result, in our view, will be a gold market in deficit, even assuming flat growth in demand.
With the supply-demand balance so out of kilter, we see the gold price potentially going to US$5,000/oz.

The emergence of central banks being net acquirers of gold is actually a pretty big deal. Over the past few decades, central banks have been actively reducing their gold holdings, preferring paper assets over the 'barbarous relic.' 

Famously, Canada and Switzerland vastly reduced their official gold holdings during this period, a decision that many citizens of those countries have openly and actively questioned.

The World Gold Council out of the UK is the primary firm that aggregates and reports on gold supply-and-demand statistics. Here's the most recent data on official (i.e., central bank) gold holdings:

Note that the 2009 data is lowered by slightly more than 450 tonnes in this chart to remove the one-time announcement by China that it had secretly acquired 454 tonnes over the prior six years, so this data may differ from other representations you might see. I thought it best to remove that blip from the data. Also, the data for 2011 is for the first four months only, so we might expect 2011 to be a record-setter if the current pace continues.

Overall, world supply and demand are a bit out of alignment right now, with supply increasing by 2% last year and non-official demand increasing by 10%:
The summary of the fundamental analysis is that with mine production seriously lagging, the price increases for gold, and increased central bank and investment demand, we have set the stage for some hefty price increases irrespective of any fiscal or monetary shenanigans.

However, once we put those back into the mix, I forecast a quite volatile but upwardly sloping price for gold over the coming years. Possibly a very steep upward slope at points.

Supply and Demand - Silver

Silver demand is growing by double-digit percentages, being led primarily by industrial uses and investment demand. The Silver Institute does a fine job of tracking and reporting on these matters.

First, demand:

Total fabrication demand grew by 12.8 percent to a 10-year high of 878.8 Moz in 2010; this surge was led by the industrial demand category. Last year, silver’s use in industrial applications grew by 20.7 percent to 487.4 Moz, nearly recovering all the recession-induced losses in 2009, and is now seeing pronounced advances in 2011. 
Jewelry posted a gain of 5.1 percent, the first substantial rise since 2003, primarily due to strong GDP gains in emerging markets and the industrialized world’s improving economic picture. Photography fell by 6.6 Moz, realizing its smallest loss in nine years, as medical centers deferred conversion to digital systems. Silverware demand fell to 50.3 Moz from 58.2 Moz in 2009, essentially due to lower demand in India.

Now, supply:

Silver Production 2010
Silver mine production rose by 2.5 percent to 735.9 Moz in 2010 aided by new projects in Mexico and Argentina. Gains came from primary silver mines and as a by-product of lead/zinc mining activity, whereas silver volumes produced as a by-product of gold fell 4 percent last year.
Mexico eclipsed Peru as the world’s largest silver producing country in 2010, and Peru is followed by China, Australia and Chile. Global primary silver supply recorded a 5 percent increase to account for 30 percent of total mine production in 2010.

Again, we are comparing double-digit demand increases against low single-digit supply increases. After a decade of rather dramatic price increases for silver, the alert observer should be asking exactly why this is the case.

In table form, we can clearly see that the silver balance for the world requires both dishoarding from government stockpiles and the recycling of scrap silver. That is, shortfalls from mining have to be made up from above-ground stocks:

There's only so long that such an imbalance can continue before the shortfalls require much higher prices to cool off demand.

One of the precise reasons that I originally invested quite heavily in silver is that I came to the conclusion that the price was far too low, artificially so, and that it would therefore be a great investment. So far, so good.

Given the above fundamentals, I project that prices for the precious metals will be many multiples higher - in today's dollar terms - by the end of the decade.

Part II of this report: How to Play The Greatest Gold & Silver Bull Market Of Our Lifetime delves into the specifics of how much of your net worth to invest and in what forms, what price targets gold and silver are likely to reach, and what indicators to look for that will indicate that it's time to sell out of your precious metal investments.

PortfolioMatters: Stocks on a Losing Streak, Time To Panic?

U.S. stocks have been slumping, losing ground for almost seven consecutive weeks. This week remains up for grabs between the bulls and the bears, but the short-term losses are in the books.

On the surface, seven consecutive down weeks sounds bad. Okay, it sounds real bad. In percentage terms, however, the S&P 500 is down about 5%, which does not even qualify as a correction. In fact, it’s more of a normal fluctuation than anything else. The market is finicky, and on any given day it will offer you a different price for your securities than the day before or after.

Obviously, the bigger concern is whether the stock market is starting to adjust for a slower rate of economic growth. The number of jobs added last month was worse than the most pessimistic forecast tabulated by Econoday, which tracks economic information. Several other indicators are also pointing to slower growth, including the ISM manufacturing survey, the S&P/Case-Schiller home price index and the Conference Board’s leading indicator index.

Economists are acting as if the pace of growth has slowed, and many have cut their full-year consensus forecasts in response. Ahead of last week’s jobs report, the Blue Chip Economic Indicators survey showed the consensus forecast for U.S. GDP growth declining to 2.7%, from 2.9% in April. Ironically, stock analysts continue to be upbeat, with the Thomson Reuters’ consensus earnings estimate for the S&P 500 now projecting 16.9% growth, up from 14.6% at the start of April.

In his weekly commentary, Sam Stovall of Standard & Poor’s said he has found that
“stock investors act more on faith than fundamentals (and therefore remind me of Billy Graham more than Ben Graham) as they don’t wait for the reports to confirm their expectations.”
The recent pullback in stocks suggests that some investors have made a leap of faith that the economists are right and the analysts are wrong. That does not mean that the economy will actually slow enough to drag year-end stock prices down, however.

Traders may be quick to buy and sell, but that does not make their calls correct. Furthermore, acting IMF chief John Lipsky told Reuters earlier this week that current policies are “consistent with a return to moderate growth” and that he anticipates the current slowdown will prove to be temporary.

It is important to realize that we are in a seasonally weak period for stocks. As I noted two weeks ago, June is the second-worst month for the Dow Jones industrial average and the third-worst month for the S&P 500. It is no friend to small-cap stocks either, ranking as the fourth-worst month for the Russell 2000, according to the Stock Trader’s Almanac.

Despite this bad reputation, June tends to be essentially unchanged on average. (The Stock Trader’s Almanac does note, however, that pre-election-year Junes tend to have 1% to 2% gains, depending on the index—so like Chicago Cubs fans, we can have hope.)

Given that Washington has yet to agree on a resolution for dealing with the debt ceiling and the uneven pace of economic growth, it would not surprise me to see more choppiness in the market, especially as we approach the August deadline for raising the federal debt ceiling.

The volatility may be frustrating, but over the long term, stocks compensate you for putting up with the market’s finickiness. What’s important is to focus on the current valuation of your holdings, not whether they were priced somewhat higher or lower a few weeks ago. A fundamentally sound company with good prospects that is trading at an attractive valuation is a good bargain, regardless of the mood the market is in

Shoulder on S&P ...

by Kimble Charting Solutions

Ethanol Mandate Means Corn Demand Less Responsive to Price

By Steve Leer

Federal law that helped jump-start the ethanol industry in the United States also is shifting normal supply-and-demand forces within commodities markets, said a Purdue University agricultural economist.
Not quite four years after Congress passed the Energy Independence and Security Act in 2007, markets are struggling to meet both the law's renewable fuels standard and grain demands from the livestock, food and export sectors, said Wally Tyner, an energy policy specialist. About 27% of the nation's corn crop must be devoted to ethanol this year to meet the federal mandate, leaving other corn users to compete for the remaining 73%.
"The renewable fuels standard requires 15 billion gallons of ethanol be consumed per year by 2015, regardless of what the price of corn is and regardless of what the price of crude oil is," Tyner said. "Corn could be $2 a bushel or $10 a bushel, crude could be $50 a barrel or $100 a barrel and that 15 billion gallons has to be there. That means ethanol production is totally unresponsive to price. There's no flexibility."
This "inelasticity" has led to market volatility and wild swings in corn prices, which have topped $7 a bushel in recent months.
When markets are more inelastic, supply disruptions - known in economics as "shocks" - often push prices higher than they might be in a typical supply/demand system, he said.
A combination of shocks is placing greater pressure on corn supplies and raising questions about both the ethanol production mandate and the federal subsidy for ethanol, which stands at 45 cents per gallon. Those shocks include:
  • An extraordinarily wet spring across much of the Corn Belt, which delayed planting and could lower crop yields this fall.
  • A weaker U.S. dollar that is making it less expensive for many foreign buyers to purchase corn and helping maintain high foreign demand.
  • Political unrest in Middle East oil-producing nations that sent oil prices surging this spring and made ethanol production more economically viable.
  • Grain stocks at dangerously low levels, with the U.S. Department of Agriculture projecting about a three-week supply of U.S. corn by the end of August. Five weeks worth of supply is considered adequate.
"Then we can look at land availability," Tyner said. "In the U.S. we're about maxed out. There's little new land to grow corn. In 2008 when we needed more land for corn we got it from soybean acreage. When we needed more land for soybeans we got it from cotton acreage, and some from wheat. But now cotton prices are high, sugar is high, rice is high, corn is high, soybeans are high - everything's high. So there's no place to go within the U.S. for more land."
Since 2006 globally, 66 million new acres of land have come into production for major agricultural crops, Tyner said. Another 27 million acres have shifted from other crops to corn, soybeans and rapeseed.
"Even with these added acres, prices are high because global demand from all sources, including ethanol, has grown faster," Tyner said.
While the livestock industry has managed to pass along higher corn prices so far, some in the industry have called on Washington to temporarily waive the ethanol production mandate before prices climb even higher.
With pork prices up 13% since 2008 and beef prices up 11% since then, producers can afford to pay more for corn now than they could in 2008-09, Tyner said.
"The administrator of the Environmental Protection Agency has the right to waive the mandate if it is perceived that significant economic harm is occurring because of it," Tyner said. "The mandate has led to a capacity to produce ethanol that exceeds 14 billion gallons today. Are ethanol producers going to let their plants sit idle?
"As long as oil prices are high and it's profitable to produce ethanol, we're going to keep doing it with or without the mandate, at least in the near term."

See the original article >>

Year Bond Contagion As German Bobl Auction An Unsubscribed Failure

Following yesterday's very disappointing 5 Year $35 billion auction by the US Treasury, Germany followed up today with its own unsubscribed bond auction failure, after Germany sold just €4.825 billion in 5 year bonds at the 2011 low yield of 2.16%. The problem - the auction remained technically undersubscribed as the €6 billion offer only received €5.445 billion in bids. Even on a sugar coated basis, the BTC was just 1.1, a plunge from the 1.9s seen recently. But such is life without the backstop of Primary Dealers who buy up everything there is, until they themselves are no longer able to flip the shell game. From Dow Jones: "The Bundesbank said all bids at the lowest price were accepted and it satisfied all the non-competitive bids at the weighted average price. The amount retained for market-tending purposes was about EUR1.175 billion, bringing the total issue size to EUR6 billion, as previously announced." Bottom line, with the pristine economy of Germany unable to sell bonds, what does that mean for the US and the rest of the insolvent "developed" world?

Full details:
Issue five-year bobl
Coupon 2.75%
Maturity April 8, 2016
Amount on offer 6 bln
Bids received 5.445 bln
Bids accepted 4.825 bln
Bid-to-cover ratio 1.1 (1.9)
Average yield 2.16% (2.45%)
Average price 102.63 (101.35)
Minimum price 102.60 (101.34)
Settlement date July 1, 2011

And some expert responses to the auction per Reuters:


"It is not so great. In terms of bid-to-cover it was not successful. The five-year had outperformed the 2- and 10-year as the market started to reduce expectations of (European Central Bank interest rate hikes). Yesterday we had a great selloff in the five year because of comments from (ECB President Jean-Claude) Trichet."

"The fact that bid-to-cover was lower is mainly related to the change in sentiment on the periphery and expectations on the Greek vote and because the market starts to reprice interest rates after Trichet's comments."

"Nothing bad for Germany, but the market is starting to become bearish on the five-year."


"Obl auction technically uncovered with bids totalling 5.45 billion euros in a 6 billion euro issue. A large tail also. Of course this was difficult paper to sell in a bearish session, but this auction is worse than expected, as was last night's 5-year U.S. Treasury auction. With a longer term view, weak core 5-year auctions are a good indication that the rally in core paper has run its course."


"The auction is technically uncovered...(The bid/cover ratio) is in sharp contrast with the previous trend at the Obl auction, when cover ratio was on average 1.9 times. This might be due to the fact that the 5-year area on the German curve is trading very expensive, and also in absolute yields terms is not very attractive -- lowest yield since the January auction. Even after considering this fact I was still expecting a better result anyway, given that 24 billion euros of redemptions from Germany were also supporting the auction."

Strong Commodity Prices: My Four Favorite Ways to Profit From the Rebound

By Martin Hutchinson

If you're like me, you've been invested in mining companies or oil producers the last couple of months because you expected a return to the strong commodity prices of early 2011.

But if that's the case, like me, you're hurting. Commodity prices are well below the high levels we saw in early May - in fact, they've dropped more than the rest of the market.

The temptation to sell out before things get worse is very strong.

But don't do it ...

The preconditions for strong commodity prices are still in place. And at present levels, a number of commodity and energy-producing shares are stone-cold bargains.

Let me tell you why ...

Don't Be Fooled by the Price Declines

Against a backdrop of strong commodity prices, these companies had an excellent 2010.

I'm sure you were surprised to see that these same companies didn't do all that well in the first few months of the New Year - even though oil, gold, silver and copper prices were climbing and rare earth prices were going though the roof. The market seems to have believed that these strong commodity prices were actually peak commodity prices - and that producers wouldn't get much benefit from those peaks because they would receive the high revenue for only a short period.

Then when commodities prices dropped from their peaks - oil by about 20%, silver by about 35%, but gold by only 8%, even at the bottom - share prices of commodity producers fell even more. The investor sentiment was very clear: Commodity producers hadn't benefited all that much from peak prices, and now that prices were likely headed down, producers were looking at a stretch in which they would be much less profitable.

But here's what I want you to know: This bearish theory on commodity producers becomes flawed if, in fact, we have not yet seen the peaks that commodities will actually achieve. If that's the case, the benefit to producers from high prices would become much greater, as we would expect the prices to rise further and the high-price period to last longer.

And I would argue that this is precisely where we are today.

Monetary authorities around the world are still pursuing loose policies with very low interest rates. Chinese Premier Wen Jiabao recently declared that China had conquered inflation. However, since inflation is currently running at 5.5%, while the People's Bank of China deposit rate is only 3%, giving a minus 2.5% real return to depositors, one can only assume that he has been channeling U.S. Federal Reserve Chairman Ben S. Bernanke.

A Recipe for Strong Commodity Prices

All around the world, only the tiniest steps have been taken against inflation, yet inflation itself is rising quite rapidly, far more rapidly than interest rates are being increased. In the U.S. economy, consumer-price inflation in the last 12 months was 3.6% and producer price inflation 7.2%, yet interest rates are still zero. Not only is monetary policy extremely loose, it is getting looser, with U.S. Treasury bond yields declining in the last few weeks and the Federal Funds target rate of 0.00% to 0.25% falling further and further behind the inflation rate.

Since real interest rates worldwide are negative, hedge funds and other investors are actually being paid to invest in commodities. And those commodities can be expected to track inflation in the long run, with some upward pressure due to rising demand in high-population emerging markets. Thus with both fundamental and funds flow factors supporting commodity prices, they will inevitably end their current pause and rise further - which means it's a virtual certainty that we'll see strong commodity prices once again.

And don't worry about getting nicked by this "bubble," either: You will have plenty of warning before that bubble bursts.

At the earliest, this bubble in commodities prices will burst only when the first decisive steps are taken to raise interest rates - particularly here in the U.S. market.

That's not likely to happen yet. In fact, at last week's press conference, Fed Chairman Bernanke defined the "extended period" for which rates would be held at zero as "at least" two to three meetings of the policymaking Federal Open Market Committee (FOMC). In other words, we won't see even the smallest rate increase before October. And we actually probably won't see one before December.

That would not make me buy shares in general, because Bernanke's policies are damaging the U.S. economy and keeping unemployment higher than it needs to be. Nor would they make me buy bonds - rising inflation and huge deficits seem certain to cause cracks to appear in the bond market at some point soon.

But commodities remain an excellent bet. And given that strong commodity prices are coming, commodity-producing companies (which have been knocked down further than commodity prices themselves) seem an even better one.

See the original article >>

What to Look for in the June 30 Reports

By: Editors

On Thursday, June 30 at 7:30 a.m., USDA will release its planted acreage report and quarterly stocks estimates. These reports will provide vital market information, as they will detail the actual amount of crop acres planted following the widespread planting delays earlier this year.

On Thursday morning, AgWeb will highlight all of the important report data, as well as provide analysis about what the numbers mean for you.
What should you expect in the report? Here is some pre-report commentary to ponder.
Wild Week for Corn
As the first delivery date looms, speculators jump out of the July market, sending futures prices spiraling down.
The near completion of planting, except for double-cropped soybeans, and less threatening weather may reduce crop concerns for now, resulting in some modest price weakness. The June 30 USDA Acreage and Grain Stocks reports will provide additional price direction.
A large number of factors have contributed to the higher prices of corn and other commodities over the past year. The beginning of the price increase can be traced to the USDA's forecast of 2010 corn planted acreage and the estimate of June 1 corn stocks released on June 30, 2010, said University of Illinois agricultural economist Darrel Good.
After one of the slowest planting seasons on record, the U.S. corn crop is finally in the ground. The abnormal planting progress of the last few months has sent the corn market on a crazy roller coaster ride.
Corn futures dropped significantly as contract highs were reached last week and demand fears took over, says Jerry Gulke.
Prices of corn, soybeans and wheat continue to move erratically, reflecting both new information and the lack of some information, said a University of Illinois agricultural economist.

See the original article >>

Morning markets: corn regains $7 amid caution ahead of data


Welcome back, $7-a-bushel corn.
Actually, it was only a fleeting visit, with Chicago's July contract retreating from an early top of $7.05 ¼ a bushel to stand at $6.99 a bushel by 08:00 GMT (07:00 UK time), still up 2.3% on the day.
But such gains were symptomatic of a market in which, for the next day or so, may prove less fertile for bears, given the prospect on Thursday of reports on US grain stocks and spring sowings, data viewed in Chicago as among the most crucial of the year.
"All of a sudden people do care what the acreage and stocks data might say. What if they're bullish?" Mike Mawdsley at Market 1 said, noting that short investors in corn had become a "tad nervous".
There are, after all, widespread rumours of acreage losses above 6m acres in North Dakota alone. The state was struck by excessively wet spring planting conditions.
Greek vote
Nerves over the statistics were compounded by a greater appetite for riskier assets, as expectations grew that Greece's parliament will, later on Wednesday, approve austerity measures, collect a E12bn rescue package, and take the weight of its debt burden off its feet, at least for now.
Tokyo shares continued the round of rises on stock markets which saw the Dow Jones industrial average close up 1.2% last night. Tokyo's Nikkei index gained 1.5% to end at a seven-week high.
The dollar eased a touch, underpinning prices of dollar-denominated assets such as copper, which posted small gains, and New York crude, ditto.
And some crop fundamentals were going the way of bulls too, with cold weather in Brazil seen as a setback to safrinha, or second-crop, corn, much of which has already been beset by overly dry conditions.
Investors also continued to show some surprise at the deterioration in the condition of US corn, soybean and wheat crops, evident in official data out late on Monday.
In soybeans, for instance, "the trade has been slow to come to terms with the potential deterioration of the crop due to excessively wet conditions", Brian Henry at Benson Quinn Commodities said.
Better weather
OK, not everything was looking quite positive for prices.
Paris-based Agritel noted that "in Europe, the weather is expected to improve in the coming days, thus allowing harvesting to resume after the stormy episodes of the last days".
It added that harvest results had so far shown yields varying "greatly from one region to another, with positive surprises in some cases, but also severe damage in the most [spring drought] affected areas such as Picardy and Charentes" in France.
At Phillip Futures, Lynette Tan noted that the "northern US Plains are seen warming up over next few days, which are beneficial for crops.
"The southern Plains are also dry, which is beneficial for the ongoing harvest of hard red winter wheat."
'Little in the way of support'
And Rabobank waved a cautious word at investors, saying that, while it did not rule out a price spike following Thursday's US reports, "short-term momentum remains to the downside".
For wheat especially, the sell-off until Tuesday had caused a "lot of technical damage to the charts", and meant there "appears to be little in the way of support until prices fall to a level between $5.75-6.00 a bushel" in Chicago.
In fact, Chicago wheat for July was trading 1.6% higher at $6.50 ¼ bushel, with the better-traded September lot up 1.1% at $6.79 ¼ a bushel.
Soybeans, which suffered less of a sell-off earlier in the month, gained 0.4% to $13.36 ½ a bushel for July and 0.6% to $13.27 ¼ a bushel for the new crop November contract.
'Demand rising sharply'
The revival was echoed on many other markets too, with palm oil jumping 1.5% to 3,109 ringgit a tonne in Kuala Lumpur, for the benchmark September lot, putting a bit more distance between itself and an eight-month low of 3,045 ringgit a tonne hit on Tuesday.
Oil World helped with comment noting the boost to demand for the vegetable oil provided by lower prices.
"Demand for palm oil is currently increasing sharply, especially from buyers preparing for the Ramadan and other festivities," the analysis group said.
"In particular, palm oil import demand from India will rise pronouncedly in the near-to-medium term owning to depleted stocks and declining production."
Rubber bounces
In Tokyo, rubber added 3.1% to 357.90 yen a kilogramme for the benchmark December contract, helped by reports of a weak seasonal uptick in production.
"According to Association of Natural Rubber Producing Countries, the post-wintering supply situation could be due to rains, damage due to overtapping of trees to take advantage of abnormally higher prices earlier in the year and ageing trees," Ker Chung Yang at Phillip Futures said.

See the original article >>

Coffee and corn provoke doubts over Brazilian data


Are Brazilian crop data suspect too?
China's official agriculture commodity data have long been viewed with suspicion, misgivings borne out by huge revisions earlier this month to US government estimates for China's corn dynamics.
And doubts over Russian statistics, and that grain supplies were cut as low as had been reported by last year's drought, appear to have been borne out by the huge tonnages of wheat being reported at Black Sea ports ready for export. has heard trade estimates of 7m-8m tonnes of old crop grain alone needing to find a buyer.
Now Brazil's data is coming under the microscope after official statisticians pegged corn yields for the winter, second or so-called safrinha crop well above levels that farmers are reporting.
Farmers vs officials
Conab, Brazil's official crop bureau, has pegged yields of safrinha, or winter corn, in the top producing state of Mato Grosso as falling only 3.5% this year, leading a crop of 7.0m tonnes.
However, Mato Grosso farmers are pegging losses as far bigger, up to one-half, after a bet on a late onset of the dry season turned wrong.
Many Mato Grosso growers opted to plant safrinha corn late, well beyond the ideal sowing window, after a late soybean harvest kept fields tied up with st crop far longer than had been expected.
Farmers were encouraged by revisions to dates for which they were eligible to claim on insurance policies.
'Definite difference of opinion'
"There is a definite difference of opinion concerning how the early onset of dry weather has impacted the safrinha corn crop in Mato Grosso," Michael Cordonnier at Soybean and Corn Advisor said.
"The official institutions are much more optimistic concerning corn yields than are the farmers in the state."
Dr Cordonnier has pegged Brazil's 2010-11 corn crop, of which safrinha accounts for some 40%, at 53m tonnes, 3.7m tonnes lower than the Conab estimate.
The USDA has a 55m-tonne figure.
'Negative stocks'
Nor are these doubts over some Conab methodology a one-off.
In coffee, the bureau's has been consistently conservative – and perhaps overly so - on its coffee production data, to judge by comparisons with equivalents from USDA staff in the country.
"Historically, there has been a difference between our numbers and Conab's," an official US source told, saying the department's own in-country estimates were based on meetings with figures from throughout the industry.
Statistics from USDA attaches in Brazil "have been always consistent with the supply and demand spreadsheet - for example, ending stocks have never been negative in the end of the cycle", the source said.
"The same does not happen if you use Conab's number in a long-term data series."

See the original article >>

Brazil setbacks spur jump in coffee, sugar futures


Brazilian setbacks spurred jumps in prices of both sugar and coffee futures, which headed a better day for farm commodities after sell-offs of the last two weeks.
Crop futures were firm across the board on Tuesday, helped by improved appetite for risk assets which was also reflected in a decline in the dollar, which fell 0.5% against a basket of currencies.
Gains of 1% in Chicago grains were also spurred by a reluctance by investors to sell ahead of key reports on US grain inventories and sowings due on Thursday.
However, coffee added more than 2% in New York, on reports of frost in Brazil, where data showing surprisingly weal sugar output sent prices of the sweetener up 5% to a three-month high of 29.38 cents a pound at one point.
'Brazilian Clarence Beeks'
Unica, the cane industry group, said that sugar output in Brazil's Center South region - which produces some 90% of sugar in the top producing country – had fallen by 14% year on year in the second-half of June.
Crop prices as at 16:30 GMT
Sugar: 29.20 cents a pound, +5.0%, (New York)
Coffee: 256.75 cents a pound, +2.6%, (New York)
Corn: $6.68 a bushel, +1.1%, (Chicago)
Wheat: $6.31 ½ a bushel, +1.4%, (Chicago)
Prices for July contracts
Data two weeks ago had signalled that Brazilian output was recovering after a weak start blamed on wet weather.
The data confirmed market speculation of a bullish report, which prompted Nick Penney at Sucden Financial to note speculation of a "a Brazilian Clarence Beeks out there", a reference to the character in the film Trading Places who trades secret information on the orange juice market.
"There has been a great deal of short-covering. Telephone lines are buzzing with questions regarding delivery intentions against the July contract."
At Standard Chartered, Abah Ofon also noted, following a three-continents tour of investors, that sentiment was "particularly bullish" on sugar, in part because of the sweetener's use in making biofuels - and the prospect of the US removing tax perks on corn-based ethanol.
Cold talk
Coffee was spurred by reports of frosts in at least two parts of Parana.
Typically, frost damage hurts coffee plants by damaging leaves, so hindering trees ability to grow coffee cherries, meaning it is next year's harvest which would be most badly affected.
Indeed, coffee for July delivery next year rose 2.8% to 266.95 cents a pound, outpacing the 2.6% rise to 256.75 cents a pound in the soon-to-expire July 2011 lot.
Parana vs Minas
Brazilian frosts have a history of supporting coffee prices, notably after a 1975 freeze, which ultimately sent futures to a record high of 337.50 cents per pound. Prices rallied in 1979 too following frost.
However, many plantations have been moved to less frost-prone areas, such as Minas Gerais, since these events.
"It is when it gets cold in Minas that you start the real worrying," Jurgens Bauer at PitGuru said.
"They don't produce as much coffee in Parana, not like they used to."

See the original article >>

Follow Us