Wednesday, March 5, 2014

Where are softs headed?

By Jack Scoville


Cotton Futures closed higher in sympathy with strong prices in Chicago and as the charts showed the possibility that a short term low had been made. Demand for export has turned soft on the export side, but domestic demand has been strong. The weak demand might continue as China has big supplies already and on the falling Chinese currency in recent weeks.  USDA projects tight ending stocks at the end of the current marketing year, and the cash market has been strong due to very limited offers. Brazil conditions are reported to be good in Bahia with warm temperatures, but the state needs rain and should get more this week and over the weekend.

Overnight News

Delta and Southeast áreas will get precipitation over the weekend. Temperatures will average near to below normal.  Texas will see dry weather. Temperatures will average near to below normal.  The USDA spot price is 84.16 ct/lb. today. ICE said that certified Cotton stocks are now 0.259 million bales, from 0.259 million yesterday.

Chart Trends

Trends in Cotton are mixed to up with objectgives of 90.00, 91.40, and 92.00 May. Support is at 88.00, 86.10, and 85.40 May, with resistance of 89.60, 90.40, and 91.00 May.


Futures closed higher and made new highs for the move as the weather stays good in Florida and the chances to freeze trees becomes less.  But, the Greening Disease is working hard to keep overall production down.  The dissease will affect produc tion for several more years.  Brazil has seen weather might that be stressing trees as reports indicate that many áreas still need rain.  Showrs are expected to continue in Brazil production áreas through the weekend.  More rain would be beneficial in Florida, but harvest conditions remain good.  Harvest is starting to come to a close for early and mid Oranges.  The Valencia harvest is expanding as the early harvest winds down.  Blooms are being reported in South Florida.

Overnight News

Florida weather forecasts call for mostly dry conditions today, showers on Thursday, then dry weather again.  Temperatures will average near to above normal.                                                                          

Chart Trends

Trends in FCOJ are up with objectives of 161.00 May.  Support is at 150.00, 148.00, and 144.00 May, with resistance at 156.00, 159.00, and 162.00 May.


Coffee Coffee Futures closed lower on what appeared to be speculative selling after a dramatic rally that pushed prices from just over $1.00 per pound to close to $2.00 per pound in a matter of weeks. Brazil is still on Carnaval for today, and other producers in other countries are not actively selling. Selling could pick up again tomorrow as offices reopen. Light rains are forecast through the weekend in Brazil but it is unclear if the showers will do much good.  Trends are up in all three markets. The main focus of the market is still on Brazil. The lack of rain in Coffee producing áreas over the last month has hurt Coffee production potential as the crop was forming cherries. Traders also keep waiting for more Coffee to appear from Vietnam.  Exports so far this year from Vietnam have been disappointing, although February exports were above the year ago pace.  Wire reports suggest that offers from Vietnam have been better to start this month as well. The market needs that Coffee to be exported to help fill the vacuum left by the poor production in Brazil.

Overnight News

Certified stocks are lower today and are about 2.600 million bags. The ICO composite price is now 161.53 ct/lb. Brazil will get showers. Temperatures will average near to below normal. Colombia should get scattered showers, and Central America and Mexico should get mostly dry weather, although some showers are expected in Eastern Mexico.  Temperatures should average near to above normal.

Chart Trends

Trends in New York are up with objectives of 204.00 May. Support is at 184.00, 180.00, and 177.00 May, and resistance is at 198.00, 201.00 and 204.00 May. Trends in London are up with objectives of 2150 and 2260 May. Support is at 2070, 2020, and 1990 May, and resistance is at 2140, 2165, and 2185 May. Trends in Sao Paulo are up with no objectives.  Support is at 207.50, 204.00, and 198.00 May, and resistance is at 212.00, 215.00, and 218.00 May.


Futures were a little lower in consolidation trading. Brazil is still on Carnaval today and not offering, but that could change as work will start again tomorrow. Weather has improved in Sugar áreas as some showers were seen this week and could continue into the weekend.  Rains now could help the crop recoup some of the losses if there is enough rain. Charts show that short term trends are mixed as the market is in a consolidation phase after the recent rally. Thai Raw Sugar differentials are steady. Weather conditions in key production áreas around the world are rated as mostly good except for the dry weather in Brazil. Traders are watching Ukraine and Russia as both are important Sugarbeet producers, although this production stays at home. Any losses in either country could increase world demand. The situation has calmed down a bit now.

Overnight News

Brazil could see showers and storms and near to above normal tempertures.

Chart Trends

Trends in New York are mixed.  Support is at 1730, 1700, and 1685 May, and resistance is at 1810, 1825, and 1845 May.  Trends in London are mixed.  Support is at 470.00, 464.00, and 462.50 May, and resistance is at 485.00, 488.00, and 493.00 May.


Futures closed higher in range trading. There is still not a lot of demand news around, but the demand has been solid and the main West Africa harvest is about over. Nigeria said its main crop harvest has come to an end in southern áreas, and other countries will start to wrap up very soon. Butter ratios remain strong on ideas of short supplies of Cocoa Butter in Europe and North America. Demand is strong, and processors they are looking at expanding capacity at an industry meeting in Florida this week. Asian demand has been strong and Indonesia is importing beans for processing. A very good midcrop production is possible from Africa, but producers say more rain is needed, especially in central and northern areas. Some showers are reported in southern áreas that will help.

Overnight News

Mostly dry expected in West Africa, but a few showers are expected in southern áreas. Temperatures will average near to above normal. Malaysia and Indonesia should see scattered showers. Temperatures should average near to above normal. Brazil will get dry conditions or light showers and near to above normal temperatures. ICE certified stocks are lower today at 4.121 million bags.

Chart Trends

Trends in New York are mixed. Support is at 2890, 2875, and 2830 May, with resistance at 2980, 3000, and 3020 May.  Trends in London are mixed. Support is at 1800, 1780, and 1765 May, with resistance at 1870, 1900, and 1930 May.

See the original article >>

A Technical Look At Margin Debt

by Lance Roberts

There has been much written as of late about the continued surges in margin debt.  This was particularly the case when margin debt increased in January even as the markets declined.  My friend Doug Short recently penned his monthly update on margin debt stating:

"The latest data puts margin debt at an all-time high, not only in nominal terms but also in real (inflation-adjusted) dollars.  Here's a slightly closer look at the data, starting with 1995. Also, I've inverted the S&P 500 monthly closes and used markers to pinpoint the monthly close values."


"As I pointed out above, the NYSE margin debt data is several weeks old when it is published. Thus, even though it may in theory be a leading indicator, a major shift in margin debt isn't immediately evident. Nevertheless, we see that the troughs in the monthly net credit balance preceded peaks in the monthly S&P 500 closes by six months in 2000 and four months in 2007. The most recent S&P 500 correction greater than 10% was the 19.39% selloff in 2011 from April 29th to October 3rd. Investor Credit hit a negative extreme in March 2011."

Doug also correctly comments that:

"There are too few peak/trough episodes in ithis overlay series to take the latest credit-balance trough as a definitive warning for U.S. equities. But we'll want to keep an eye on this metric in the months ahead."

I too have previously discussed the rising levels of margin debt from this perspective.  Therefore, in an attempt to answer these questions, we need to do two things:

1) Use a full set of margin data going back to 1959, and;

2) Apply technical analysis to the underlying data to determine if the momentum of increases in margin debt is reaching levels historically indicative of corrections in the markets.

For the second step, I will use two technical indicators:  Stochastic Oscillator and Relative Strength Index.  If you are unfamiliar with these indicators, here is a description of each via StockCharts:

"Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods.  According to an interview with Lane, the Stochastic Oscillator "doesn't follow price, it doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price." As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first, and most important, signal that Lane identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. Because the Stochastic Oscillator is range bound, is also useful for identifying overbought and oversold levels."

"Developed J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences, failure swings and centerline crossovers. RSI can also be used to identify the general trend."

In order to smooth the data of a 21-period Stochastic Oscillator, I have applied a 3-month moving average to the results.  The oscillator, which ranges from ZERO (extreme oversold) to 100 (extreme overbought), is then overlaid against the S&P 500 Index (log base 2) for clarity.  I have highlighted with the red bars whenever the oscillator hit the extreme of 100.


Historically, whenever this oscillator has reached extremes of 100, as it has currently, the markets have suffered either a mild correction or a sharp reversion.  Shallow corrections occurred during cyclical bull markets, but unfortunately there was no real "warning" sign prior to a major market peak.

The next chart is a relative strength index of the changes in margin debt.  The following is a 14-period (month) RSI with red bars indicating when levels reached extremes of 80 or above.


Once again, as with the stochastic oscillator above, when the RSI climbed to 80 or above, currently at 94.6, a correction in the markets generally followed soon thereafter.  Again, the depth of that correction depended on whether the markets were in a cyclical uptrend or not.  Also, as above, there is no identifier that denoted when a major market reversion had begun.

What both of these charts do suggest is that the current momentum of expansion in margin debt has reached historically important levels.  It is likely that the markets will experience a correction at some point in the near future.  What the data doesn't tell us is whether it will be a "buy the dip" opportunity or something much more significant.   However, given the length of current economic expansion and cyclical bull market, the fact that the Fed is extracting liquidity from the markets, and the current extension of the markets above their long term moving averages, there is cause for real concern.

The current levels of margin debt are indicative of an extremely optimistic view of the market.  What is important to remember is that margin debt "fuels" major market reversions as "margin calls" lead to increased selling pressure to meet required settlements.  Unfortunately, since margin debt is a function of portfolio collateral, when the collateral is reduced it requires more forced selling to meet margin requirements.  If the market declines further the problem becomes quickly exacerbated.  This is one of the main reasons why the market reversions in 2001 and 2008 were so steep.  The danger of high levels of margin debt, as we have currently, is that the right catalyst could ignite a selling panic.

The issue is not whether margin debt will matter, just "when."  Unfortunately, for many unwitting investors, when that time comes margin debt will matter "a lot."

See the original article >>

Stocks slough off ominous ISM number

By Andrew Wilkinson

ISM non-manufacturing

The stock market ignored the dour February ISM non-manufacturing reading, which included the first contraction in its employment gauge in more than two years (see chart).  The decline of 8.9-points to 47.5 is the largest since the end of 2008. However, the headline index remained in expansion territory at 51.6 although the magnitude of the latest change fooled economists who had predicted a mild increase in the overall level of business activity.

Chart – Employment contracts

While some respondents blamed the weather, the ISM noted that there was a tinge of caution regarding business conditions and the economy. Response from within the construction industry was clear: “Winter weather is slowing down our projects; it should only be until April.”

Respondents within wholesale trade noted that, “Cold winter weather has had a major effect on us when compared to year-over-year.” Employment losses were suffered in half of the industries surveyed by the ISM. Jobs were negatively impacted in mining, accommodation and food services, health care and social assistance, arts, entertainment and recreation, real estate rental and leasing, utilities, professional, scientific and technical services and within wholesale trade.

The overall downbeat tone to the report was accompanied by complaints over the sudden impact of the Affordable Care Act and a general tepid pace of economic growth. Public services did, however, note that the passage of the spending agreements in Washington had allowed the return of increased public spending. It’s certainly not a pretty picture overall, but as the market is currently prepared to do, we have to rely on the premise that the spring season will mark economic rebound.

However, it followed on the heals of a weaker than expected ADP report.

See the original article >>

The 46' Parallel

by Marketanthropology

With the debate continuing on whether the domestic equity markets are stretched at another historic extreme, we thought we would take a variant look at the fundamental metric many have voiced their opinion on recently - that being, Robert Shiller's cyclically-adjusted price-earnings (CAPE) ratio. While we would echo the esteemed Professor's remarks that the ratio shouldn't be used to market time crashes or make short-term trading decisions, we view the series with broad appraisal of form, flow and proportion - and then in comparative perspective with the current market environment to glean any potential insights.

As much as the 29' vintage or even the 37' tape scares up the most headlines and eyeballs these days, there is a historic analog (one that we are fairly certain no one references and few remember, sans Cashin), that does resemble traits of the current market environment from several different metrics and measures - e.g. yields, valuation, asset cycle, Fed policy and even post-war strategic posture.

However, what really brought us to the 46' parallel, was simply looking at the CAPE ratio on a longer-term horizon and with reference to the yield/rate cycle - which we would argue primarily drives the boat from a valuation and asset cycle perspective. 

Click to enlarge images

All data courtesy of

A few observations between the two series charted above:

  • The exhaustive highs in the yield cycle (21' & 82') corresponds to the valuation troughs in the ratio.
  • The valuation range of the ratio is proportional to the size of the long-term interest rate cycle. I.e., the greater yields were pulled (higher) - the higher the valuation range was subsequently extended. To this point, we note the congruences and timing between the two broader cycles - with the yield peaks made in 21' and 82' (Jan 1st data) and the lagged reflex and explosive drive higher of the ratio directly following the pivot lower in yields.  Yields rose for ~ 20 years leading up to the peak in 21' and the equity market subsequently exploded higher for ~ 8 years leading up to the 29' high. In the most recent cycle, yield rose for ~ 40 years leading up to the peak in 82' and the equity markets enjoyed the historic disinflationary open road for ~ 18 years leading up to the valuation peak in 00'.
  • One way to look at the kinetics, correlation and lag between the series is that the ratio correlates with the yield and rate cycle for a period until higher yields and inflation expectations put downward pressures on equity prices, thus creating the pressure differential described above that's eventually released with proportional inertia subsequent to the cycle high in yields.
  • Similar to what is found in other wide-angle asset panoramics (see Here), the relative range of Shiller's PE isn't static, but broadening with a rising lower and upper range. We would argue the drift higher in valuations is primarily a result of the expanded range of the current yield cycle.
  • As often the case with major crashes, the outlier effect to the broader cycle does muddle the interpretive tea-leaves forward. Having said that - and although they didn't occur at the same point or present with equal magnitude (33'>09'), we view the extended dislocations from the equity market crashes (29-33' & 08-09') as relative outliers with respect to the ratio calculation - but view them nonetheless with wide peripheral vision to the broader flow and bearings of equity valuations within the respective cycle. Moreover, it doesn't make much sense to us to compare absolute valuations between cycles - because of how the ratio is calculated based on a smoothed 10 year inflation-adjusted metric and the difference in size and magnitude between the respective yield/inflation cycles.

Why look at 46'?

Although the metric is very close to the valuation peak in 07', we would view a pivot lower this year as this cycle's equivalent to the ratio's historic trend through 46'.

This perspective is supported by similarities in:

  • The long-term yield backdrop - which is the mirror for the current downtrend in rates.
  • The monetary environment of the 1940's - which saw the Fed purchase and hold all available short-term U.S. treasuries and virtually all long-term U.S. Treasuries - a greater percentage of outstanding securities than what the Fed owns today.
  • The composite equity market performance since the previous ratio lows in 42' and 09'.
  • The pivot higher in the commodity markets this year, which was also dramatically evident when the Fed pivoted from its outright purchase of securities in the market at the end of 45' and which helped refresh inflation expectations and extended the commodity cycle to its cyclical high in 51'.

How Russia, the Ukraine or the new Twitter diplomacy fits into the equation is anyone's guess. But if you needed any more spurious evidence - the 46th parallel does run straight through Crimea...

See the original article >>

The Coming Bull Market in Gold Stocks Is Going to Be BIG

by Bill Bonner

Keeping the Empire on Schedule

Where is Dillon, South Carolina?

Surely, they have put up a monument to their hometown boy, Ben Shalom Bernanke. Or maybe it is in nearby Augusta, Georgia, where he was born? Bernanke is now an employee of policy think tank the Brookings Institute. Or a Distinguished Fellow in Residence in Economic Studies, to be precise.

He’ll no doubt have more time on his hands after his hectic days as “Rescuer-in-Chief” at the Fed. We should wander over to Dillon; perhaps we’ll run into him at a local strip club. We have a few questions we’d like to put to him.

But wait. Does he have bodyguards?

He probably doesn’t need them. No sparrow can fall anywhere in the world without setting off alarums at the NSA. Any plan to harm the former Fed chief would surely be foiled by the ever alert spooks.

Most empires were financed on the loot captured from their conquered opponents. But the US Empire depends not on generals, but on bankers. Bernanke – the “Hero of ’08” – kept the credit flowing at a crucial moment …

He kept the empire on schedule … and on target … for its rendezvous with disaster.

No Fever Like Gold Fever

On Thursday, the Dow registered a 74 point gain. Gold was up, too. No one asked us. But we gave our reply anyway. “Are we in a new bull market in gold” was the question. Our answer: We don’t know.

But our reply suggested it didn’t make any difference. Gold has survived hundreds of paper currencies and hundreds of empires. Although the dollar may have gained ground last year, gold will survive it, too.

Colleague Braden Copeland thinks gold stocks may have entered an explosive bull market. He notes that not only are prices rising, more important, so is trading volume.

“There’s no fever like gold fever,” says old-timer Richard Russell. And when gold fever takes hold… the results can be spectacular.”

But here at the Diary we are not speculators. We are observers. And what we observe is that gold is real money … ultimate money … the kind of money people turn to when the other kinds seem unreliable.

It is also what great empires tend to accumulate. Like trophy wives, gold goes to winners.

  • In the 16th century, Spain collected the world’s gold.

  • In the 17th century, the Netherlands was where the gold coins rolled.

  • In the 18th century, France was the world’s richest nation.

  • In the 19th century, Britain brought home the world’s gold.

  • And in the 20th century, the US was number one – with the largest gold hoard on the planet.

So, who are the biggest buyers of gold today? The Chinese. They are preparing to take their place on the world’s largest stage.

Empire of Debt

Recently, we were asked to update our book Empire of Debt, written with Addison Wiggin. Most observers, we pointed out, have concentrated their attention on the growing pile of US public debt, scheduled to reach 200% of GDP by 2020.

We preferred to focus on the empire itself. Debt has its lifecycle. So do empires. Both expand. Then both … without exception … contract.

An empire funded by debt is an especially ungainly, grotesque thing. It lurches from one disaster to another – going deeper and deeper into debt each time.

The Vietnam War pushed President Nixon – in what became known as the “Nixon Shock” – to end the dollar’s convertibility to gold. Recent wars in Iraq and Afghanistan have further weakened the empire’s finances … with costs approaching $5 trillion.

But it is not the debt that kills empires. Debt is just a razor conveniently left on the side of the tub. In the meantime, Mr. Market can do whatever he pleases. And it may please him to push the price of gold stocks considerably higher.

We will see …

GDXGold Miners ETF GDX over the past year – click to enlarge.

See the original article >>

Mapping the Conflict in the Ukraine

by Pater Tenebrarum

Russian Troops in the Crimea

John Kerry is appropriately aghast at the “incredible act of aggression” by Russia in the Ukraine:

“You just don't in the 21st century behave in 19th century fashion by invading another country on completely trumped up pre-text," Kerry told the CBS program "Face the Nation."

This new-found respect for the sovereignty of foreign nations represents a laudable 180 degree change in US foreign policy. You just don't do that in the 21st century! Like e.g. invading Iraq by making up tall stories about “weapons of mass destruction” hidden there. It's just not done. As an aside to this: in February, the civil war currently raging in Iraq has cost yet another 1,705 lives, with 2,045 wounded. The death toll is a considerable increase from January's 1,284 dead and 2,088 wounded. Perhaps you weren't aware there is a civil war raging in Iraq? If so, that is no surprise. The Western media have fallen almost completely silent on the topic. Yet, this is what the famous 'mission' has actually 'accomplished'.

As Jason Ditz reports regarding the recent escalation in the Crimea:

“While US politicians have also ratcheted up the rhetoric, US officials concede that Russia’s troops in Crimea are setting up defensive positions and are in a “self-defense posture only.”

Reports from Crimea’s government say they’ve got Russian troops helping them protect government buildings in anticipation of the referendum, and with a sense that will easily back secession and re-accession into the Russian federation, it seems that Russia doesn’t need to “invade” at all, but simply needs to keep the interim government at bay until Crimean voters affirm the switch.”

(emphasis added)

But we actually can't have a democratic referendum, can we? Especially one the outcome of which is very likely going to be one that doesn't conform to 'our' (the Western powers) wishes. So let's get this straight: removing a democratically elected government by violence is perfectly fine with our politicians. Please note in this context that Yanukovich, for all his faults, was actually offering one conciliatory gesture after another: he offered the opposition to join the government, he extended an amnesty to all imprisoned protesters, he twice offered a truce and agreed to early presidential elections. It is not entirely clear  which side broke the truce – if press reports are to be believed, the protesters sure had a hand in it (many of the most violent ones are supporters of the fascist 'Svoboda' party). Even CNN admitted as much, and CNN is usually well known for tailoring its reporting to the wishes of the powers-that-be (CNN's habit of faking reports is by now legendary). So, a violent revolution is fine, but a referendum over whether the Crimea wants to remain with the Ukraine is considered anathema. By the way, we are certainly not arguing that Yanukovich is anything but a major sleazeball;  there is evidently an endless supply of those in Ukrainian politics. There is also little doubt that Yanukovich in the end gave the green light to his security forces to use live ammunition. We certainly don't want to paint Yanukovich as a perfectly innocent party. We are merely pointing out a few facts that seem to be getting short shrift in the mainstream press.

“Territorial Integrity” Nonsense

The main point we want to make is though that it is absurd that everybody insists on keeping the 'territorial integrity' of the Ukraine intact, as if it had any special meaning or as if there were any reason to regard it as sacrosanct. The Ukraine as it exists today is largely a creation of Soviet communists, who deliberately added large Russian-dominated territories to the Ukraine precisely because they wanted to keep a lid on nationalist sentiments. In fact, the Ukrainian territory of today is – with the sole exception of a tiny piece of heartland -  almost entirely a Russian creation. What the communists didn't tack on, the Tzars did. Here is a historical map that shows what occurred. Note in this context also that the past 23 years since the implosion of the Soviet Bloc are the longest period of time in which the Ukraine has been independent in more than 300 years. That is of course not meant to imply that it shouldn't be independent. The importance of maintaining the 'territorial integrity' of a territory put together by a bunch of Soviet communists over the past 90 years eludes us however.

The tiny orange piece in the middle was the original Ukraine. Later additions to the then Russian province and later Soviet Republic were all the work of Russian tzars and Soviet communists. Not even Kiev was originally part of the Ukraine. And obviously, the Crimea was the most recent addition to its territory, courtesy of Nikita Khrushchev. That makes it a sacrosanct part of the Ukraine how exactly?

When Yugoslavia fell apart, keeping its 'territorial integrity' intact was the last thing on the mind of Western powers. They demanded the exact opposite: Serbia was to be dismantled. When Czechs and Slovaks parted ways amicably, the world somehow kept turning as well. The biggie is of course the Soviet empire itself: there was widespread delight at its 'loss of territorial integrity'. By contrast, when West and East Germany let it be known they wanted to reunify, the allied powers were initially against it. It took a lot of deft maneuvering by the West German government (including paying a big political and economic price by agreeing to the introduction of the euro) to finally convince all the former WW2 allies to give their placet to reunification.

It should be obvious that the demands regarding the Ukraine's territorial integrity are largely a result of the utterly pointless geopolitical contest between Washington and Moscow. What the citizens of the Ukraine want is way down on the list of priorities. Incidentally, now that Ukrainians have the government Victoria Nuland planned for them, they are already beginning to doubt it.

Protesters on the square universally tell tales of the wild riches that ordinary parliamentarians gain – one confidently talked of the "millions" a member of parliament can get for voting correctly during a debate. They reckon that the leaders of the opposition-turned government, such as acting President Oleksander Turchinov and Prime Minister Arseny Yatseniuk will enjoy such benefits.”

That is of course the main reason for entering politics in the Ukraine, so the protesters probably have it quite right. On the other hand, Yanukovich and Tymoshenko before him have apparently looted the state's coffers so thoroughly that the only way to get at fresh moolah in the near future is via the EU/IMF. 

Let us get back to the territorial integrity question though. In the meantime, just as we suspected would happen, other Eastern Ukrainian regions have joined the Crimea in reconsidering their status.

“Dozens of people were hurt in clashes on Saturday when pro-Russia activists stormed the regional government's headquarters in the eastern Ukrainian city of Kharkiv and raised the Russian flag, local media said. The UNIAN news agency said thousands of people had gathered outside the building during a protest against the country's new leaders who ousted President Viktor Yanukovich a week ago.

The violence signaled that Ukraine's new leaders could face a challenge in mainly Russian-speaking regions that oppose the largely pro-Western course charted by the newly installed government. The leaders of Crimea, a Black Sea peninsula with an ethnic Russian majority that is home to a Russian naval base, say they have joined forces with Russian servicemen to exert control over key buildings. Russian parliament has approved a proposal by President Vladimir Putin to deploy troops in Ukraine.

Protests against the new authorities also took place on Saturday in other cities, including Odessa, Dnipro and Donetsk, Yanukovich's home town and power base.

The Russian flag was raised over the regional government building in Donetsk by several thousand pro-Russia activists waving the Russian tricolour and chanting "Russia! Russia!, witnesses said. Donetsk authorities issued an appeal for a referendum to be called on the future status of the region.”

(emphasis added)


The Russian flag is hoisted in Kharkiv

(Photo via AFP / Getty Images)

This is precisely what we expected: as soon as the Crimea announced it would hold a referendum on its status, other regions with a predominantly Russian speaking population would follow suit. Again, why wouldn't they? The new government has just declared their mother tongue 'lingua non grata' again.

And why should some of the Eastern regions not be allowed to secede from the Ukraine? After all, it can be shown unequivocally that the constant eruption of violent conflict is not only the result of popular discontent with the corrupt political and economic elite. It is firmly rooted in an ethnic-linguistic conflict that could be resolved once and for all by a partition. The charts below are making all of this perfectly clear.

An Ethnic and Linguistic Conflict in Pictures

First let us take a detailed look at the linguistic situation. Ukrainian is spoken mainly in the Western Ukraine, while Russian predominates in the Eastern part of the country. What is interesting is that the percentage of citizens that support making Russian the second official language is quite a bit higher than the percentage naming it as their mother tongue. Obviously, most Ukrainians actually understand and speak Russian. The first three charts show survey results from 2003, which are a bit outdated by now, but nevertheless illustrate the basic situation.

Note that there is a historical reason for this East-West split: much of today's Western Ukraine used to be part of the late medieval Lithuanian Empire, and  later the Polish-Lithuanian Commonwealth, which became a Russian protectorate in 1768 and was subsequently partitioned several times. At the time of its largest territorial extent, the regions that are today considered part of the 'Eastern Ukraine' were actually Russian territory. A historical map of the Polish-Lithuanian Commonwealth can be seen here).

Russian language distributionA detailed overview of the Ukraine's language distribution – click to enlarge.

Ukraine Language-macroLanguage distribution by 'macro-region' – click to enlarge.

Support for making Russian the second official language. It is interesting that the idea has considerable support in several central/Western regions as well, in spite of the fact that most of the inhabitants declare Ukrainian to be their mother tongue – click to enlarge.

ukrain, languages-2011 surveyFinally, a 2011 survey by a Kiev based think-tank, showing the regions which have made Russian the second official language after Yanukovich signed a law making it possible to adopt it as a 'regional' official language. This was one of the first laws the new government reversed. Looking at the map above, is it any wonder Russian flags are hoisted in cities in Kharkiv, Donetsk and the Crimea? – click to enlarge.

As to why we feel so certain that the linguistic divide truly reflects the political conflict, nothing is easier to prove. The first map below shows the 2004 election results after the 'Orange Revolution' ousted the the first Yanukovich government in favor of the Yushchenko/Tymoshenko government. The election result reflected the linguistic divide to a 'T'.

Below that we see the results of the 2010 election, which took place long after Yushchenko had fallen from grace, toppled by his former ally, the 'gas princess' Yulia Tymoshenko. Apparently even a number of Western Ukrainians were so fed up with Tymoshenko that a number of them decided to support the no less tainted Yanukovich (Yanukovich has been a force in Ukrainian politics since the demise of the Kuchma regime. Kuchma's government was largely a Western Ukrainian kleptocracy, but both Yushchenko and Yanukovich actually served in it as prime minsters at some point).

ukraine-2004The 2004 election in the Ukraine, which former 'Orange Revolution' star Yushkenko won. In 2010, he would not even garner 10% of the vote. The degree of East-West polarization is astonishing.  Funny enough, both Yushchenko and Yanukovich once served as prime ministers in the Kuchma government – click to enlarge.

ukraine-2010-electionThe 2010 run-off election between Yanukovich and Tymoshenko. This map shows which of the regions were ultimately won by one or the other – click to enlarge.

2010 election detailsA more detailed map of the same election, which indicates that polarization was slightly less pronounced than in 2004, largely because Tymoshenko was no longer regarded as trustworthy by many of her former supporters after deserting Yushchenko and making deals with Yanukovich – not to mention her involvement in various financial scandals. Nevertheless, the result still strongly reflects the linguistic divide – click to enlarge.

Next is a detailed map of the 2007 parliamentary election (at the time, Tymoshenko still enjoyed more support than in 2010). By and large it reflects exactly the same phenomenon: people simply tended to vote for 'their' crook, regardless of how corrupt he or she was held to be:


The 2007 parliamentary election followed the same general pattern – click to enlarge.

Next, a map showing where exactly the protests against Yanukovich broke out last year and their status in 2014:

ukraine-protests-map-kWhere the protests took place. Note where precisely the 'government center was seized by protesters' as there is an interesting parallel with the next map – click to enlarge.

The next map shows the growing electoral success of the fascist 'Svoboda' party, formerly called the 'Social Nationalist Party'. Here is a video of a march organized by one of its leaders, Yuri Michalchyshyn. At the time the party still used the  "wolf's angel" heraldic cross as its symbol. Similarities with the Swastika are entirely coincidental of course.

These worthies have increasingly captured the imagination of Western Ukrainian voters, gaining 38 seats in the 2012 parliament. Compare the regions in which their support was the greatest in 2012 with the the regions where government buildings were forcefully occupied according to the map above. This tells us something about their willingness to employ violence.

Will Svoboda's influence wane now that the opposition has taken over? Perhaps, but we actually doubt it. We suspect for one thing that the party's alliance with the more moderate 'Fatherland Party' of Yatseniuk/Tymoshenko is largely an alliance of convenience.  It is doubtful that Svoboda really shares their eagerness for joining the EU – it is largely its virulent anti-Russian stance that informs its lip service on that point.


The rise of Ukraine's fascists – click to enlarge.

The new government will be forced to take many unpopular decisions due to the precarious financial and economic state the Ukraine finds itself in. Svoboda may well decide that it will be to its benefit to oppose these decisions. Hard economic times are typically when radical parties like Svoboda tend to flourish.

Speaking of economic and financial hardship, the Yanukovich government was welcome to subsidized gas deliveries from Russia's Gazprom. However, Russia has of course no interest in extending the discounted price to the new government – and it can point to the fact that there is still a rather large unpaid bill outstanding:

“Russia's energy ministry said on Saturday it saw no reason to extend an earlier agreed gas discount to Ukraine for the second quarter due to unpaid debt for deliveries, the Interfax news agency cited a representative at the ministry as saying.

Russian gas producer Gazprom said earlier on Saturday that Ukraine's debt for 2013 and this year's deliveries stood at $1.55 billion. "If this continues to happen, is there any point in continuing the existing agreement on gas supplies at discount prices? No," the agency cited an unnamed ministry representative as saying.”

(emphasis added)

Of course these sudden second thoughts about the gas discount and the Ukraine's overdue payments are mainly designed to increase the political pressure on the new Ukrainian government.


The Western insistence that the Ukraine must remain as it is glosses over the fact that it is a deeply divided country. Clearly citizens of Western Ukraine sympathize with Europe, while Eastern Ukrainians sympathize with Russia. Even the occasional Ukrainian warship is unwilling to obey its new masters in Kiev. The division between the two halves of the Ukraine has long-standing historical roots.  There is undoubtedly genuine frustration in the population over the antics of the country's political elite, but whether the new rulers will turn out to be any better than the old ones remains to be seen (experience to date suggests otherwise, as political corruption has seemingly become deeply entrenched).

Experience also suggests that the two opposed groups are simply unable to find a modus vivendi. In other words, forcing them to remain in a single nation state will only lead to even more conflict. When borders drawn by dictators of the past become an unending source of conflict, it is probably best to rearrange them.

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Year-to-Date Commodity Winners

by Pater Tenebrarum

Weather-Driven Rallies – Coffee Goes Bananas

The top performing commodity so far this year has been coffee, which erased almost to years of declines within a few weeks in a rally driven by news of a worsening drought in Brazil. As the Guardian reports:

Don't panic. But there could be a global coffee shortage. Usually, during this time of year, the delicate arabica coffee plants in the mountains ofBrazil, where most of the world's coffee comes from, are maturing. White, fragrant flowers have appeared, followed by cherrylike fruit, each containing two seeds: arabica coffee beans, the most popular in the world.

But last month the worst drought in decades hit Brazil's coffee belt region, destroying crop yields and causing the price of coffee to shoot up more than 50% so far this year. The drought is historic, forcing more than 140 cities in Brazil to ration water. Newspapers reported that some districts are receiving water only every three days.

For now, retail prices for coffee are stable. Roasters typically have enough supplies to cover themselves for a few months. But if the price of the arabica beans continues to rise, consumers could start seeing the cost of their morning coffee creep up later this year, according to Jack Scoville, a futures market analyst specializing in grains and coffee, among other commodities.

(emphasis added)

Coffee prices are traditionally driven by the weather. The usual pattern is for prices to rise sharply when there is unexpected frost in one of the major Brazilian growing regions. Droughts are actually a bit of an exception, but the current dry spell is happening at a decisive time of the year, when the coffee plants apparently need moisture the most.

Since coffee prices are always weather driven, the rallies tend to be swift and spiky, and are as a rule followed by long, drawn-out declines. Coffee so to speak becomes a 'get rich quick' scheme every few years. The current rally has been big, but if the drought continues, it could easily become even bigger, considering the historical trading range. It is also worth mentioning that global coffee demand continues to grow, a side effect of economic growth in emerging markets.

Coffee contract-mayCoffee, daily, the active May contract. The rally since the low in early November has erased almost two years of declines – click to enlarge.

coffee, monthlyCoffee, monthly (nearest contract): there have been several spike rallies due to unfavorable weather in Brazil over the years – usually they are followed by long, drawn-out declines. The recent rally has been big, but if the current dry spell continues, it could get even bigger – click to enlarge.

Gentlemen Don't Trade Oats

"Gentlemen don't trade oats!" Allegedly this is an old saying from the CBOT dating back to the 1880s –  we are however not 100% sure about the source. All we know that along with “oats know”, it has become one the sayings every trader has heard at some point. More recently we read that the idea behind the saying was that the market in oats was very easily manipulated, hence gentlemen should stay away. The second saying is meant to indicate that oats tend to lead rallies and declines in the grains complex.

Anyway, so far this year, oats are not only the second strongest commodity due to delays in rail shipments from Canada. The delays are due to the recent cold weather and the need to move very large wheat and canola crops. Apparently there is now a shortage of rail cars as a result. Oats have actually hit at least a 25 year high and probably an all time high.

First the daily chart showing the “active” March contract (on Friday, 217 contracts traded, hence the quote marks).

oats, daily

Oats, daily (March contract). Oats have been on a tear due to problems with rail shipments – click to enlarge.

The long term monthly chart shows that this is probably an all time high (we're not sure where oats traded in the 1970s, but all grains have made new all time highs over the past decade or so, and oats are probably no exception).

Of course oats seem rather overbought by now, and as soon as rail shipments resume, front month prices will probably readjust rather quickly.

oats monthly

Oats, monthly (nearest contract) – entering uncharted waters – click to enlarge.

Gold Misbehaves

Below is a complete list of the year-to-date performance of all US listed futures contracts (including financial contracts). It is noteworthy that the best performing futures contract not influenced by the weather is actually gold. Gold? Wasn't it 'certain' to go down due to 'tapering'?

Actually, we are beginning to lean toward a higher short term target then the previously mentioned $1,360 level – and it has nothing to do with recent geopolitical upheavals (price increases due to geopolitical news are always given back quickly once the situation calms down again; we have no idea why anyone would think such news are a good reason to buy gold in the first place). The idea is actually based on an anecdotal observation. When gold suffered a brief pullback last week, a veritable flood of bearish commentary poured forth in the mainstream financial press (we counted altogether six different such comments and/or articles on Thursday alone, and we didn't even have much time to look around on that day, so we have probably missed a few). It seemed as if almost all the analysts who have expressed their bearishness late last year felt the urgent need to come out to reaffirm their stance. When a routine pullback is immediately greeted with so much skepticism it is usually a sign that the rally has further to go.

Meanwhile, large speculators have continued pulling back on their gross short position in the gold market, while adding slightly to their longs. Contrary to standard lore, we regard this as a bullish sign.

Readers may recall that we frequently expressed our misgivings about the growing big trader gross short position last year, noting that it was not a bullish sign. In the meantime the gross short position has declined to just over 60,000 contracts, leaving big speculators about 110,000 contracts net long, which is still 140,000 contracts below the highs seen in the course of the bull market. Small speculators finally went net long as well, but their net long position is still one of the smallest of the past 13 years. Having said all that, it should be pointed out that the rally that failed at the $1,430 level in the second half of last year saw very similar developments in trader positioning. We believe though that this level is actually a target that could be reached in the course of the current rally (after some to and fro near $1,360, the initial target).

year-to-date leadersThe complete list of year-to-date gains and losses in US listed futures contracts – click to enlarge.

gold dailyGold, April contract. The recent pullback was greeted with an unusual number of bearish pronouncements – click to enlarge.

Mind, in the short term there could still be a further pullback in the cards – but as long as the $1,270-$1,290 area holds, we think gold is good to go further. The targets are simply derived from where rallies stopped previously, as these levels should provide strong lateral resistance.

gold, targetsPossible targets for the recent rally in gold. Given that there is so much skepticism, the higher of the two targets actually appears to be attainable – click to enlarge.


Quite a few commodities have 'woken up' this year, but there is nothing that  indicates that the market's views about global economic growth have improved. On the contrary, economically sensitive copper is one of the biggest losers year-to-date. Mostly the rallies seem weather-related, or are actually tied to signs of economic weakness rather than strength (gold, treasuries). The big exception in the industrial commodity space is crude oil, which has strengthened markedly again (natural gas prices have been driven by the cold weather as well). Crude oil inventories have recently delivered a few downside surprises, so the strength seems largely related to supply issues.

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Coffee to spike on dry weather

By Isis Almeida

Arabica coffee (NYBOT:KCK14), this year’s best performing commodity, may climb to the highest in almost three years as dry weather during the next two months threatens to cut production in top grower Brazil, J. Ganes Consulting said.

Futures traded on ICE Futures U.S. may rise to $3 a pound by May from $1.90 now, Judy Ganes-Chase said today in an interview at a seminar at the International Coffee Organization in London. Prices surged this year as dry weather is set to cut Brazil’s output to 48 million bags from a previous forecast of 56 million bags, estimates F.O. Licht GmbH.

“The market is going to react to the situation now,” said Ganes-Chase, president of the Panama City-based researcher. “The market needs to rally now to jump-start and promote production in other areas and shift the supply chain.”

Arabica coffee rallied 72% this year, making it the best-performing commodity in the Standard & Poor’s GSCI gauge of 24 raw materials. The price was last above $3 in May 2011. A smaller crop in Brazil may tip the global market into the first shortage in five years next season, Stefan Uhlenbrock, an analyst at F.O. Licht, said at the seminar today. The surplus was estimated at 7.2 million bags in 2013-14.

Brazilian producers are taking advantage of the current rally to sell and the potential for growers to have sold too much may also help prices rise later, Ganes-Chase said. Sales from this year’s crop are currently a record 15 million bags, according to Cooxupe, Brazil’s biggest coffee-growing cooperative. That compares with 3 million bags a year earlier.

Higher Market

“How much of the crop was sold already and is it going to be there, or are you going to run into a situation where there are going to be defaults?” Ganes-Chase said. “You’re going to have a smaller crop and there will be less selling going into it and now there’s the potential for it being oversold and producers having to lift hedges, so that’s another a reason why the market needs to go higher.”

Dry weather in Brazil will probably result in a bigger loss in quality than in quantity this year, Ganes-Chase said. The impact will be bigger next year as trees don’t have enough energy to grow more productive tissue, where the new flowers will blossom and the cherries containing the beans will grow. While the global coffee deficit will be small, traders are reacting as forecasts shifted from surplus expectations.

“What matters is what the market had been anticipating and what it will actually be,” she said. The market was expecting a big surplus and now it will probably be “a little short,” she said.

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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China On The Verge Of First Corporate Bond Default Once More

by Tyler Durden

While everyone was focusing on the threat of tumbling debt dominoes in China's shadow banking sector, a new threat has re-emerged: regular, plain vanilla corporate bankruptcies, in the country with the $12 trillion corporate bond market (these are official numbers - the unofficial, and accurate, one is certainly far higher). And while anywhere else in the world this would be a non-event, in China, where corporate - as well as shadow banking - bankruptcies are taboo, a default would immediately reprice the entire bond market lower and have adverse follow through consequences to all other financial products. This explains is why in the past two months, China was forced to bail out not one but two Trusts with exposure to the coal industry as we reported previously in great detail. However, the Chinese Default Protection Team will have its hands full as soon as Friday, March 7, which is when the interest on a bond issued by Shanghai Chaori Solar Energy Science & Technology a Chinese maker of solar cells, falls due. That payment, as of this moment, will not be made, following an announcement made late on Tuesday that it will not be able to repay the CNY89.8 million interest on a CNY1 billion bond issued on March 7th 2012.

FT reports:

The company has until March 7th to repay the interest, charged at an annual 8.98 per cent, the company said in a statement. “Due to various uncontrollable factors, until now the company has only raised Rmb 4m to pay the interest,” it said in the statement.

Trading in the Chaori bond, given a CCC junk rating, was suspended last July because the company suffered two consecutive years of losses. The company had a further RMB1.37bn loss in 2013, according to the results it posted on the exchange.

Just pointing out the obvious here, but how bad must things be for the company to be on the verge of default not due to principal repayment but because two years after issuing a bond, it only has 4% in cash on hand for the intended coupon payment?

Furthermore, as noted previously, China has so far been able to kick the can on its defaults for nearly three decades. Which is why suddenly everyone is focusing on this tiny company: Chaori Solar’s default – if it transpires – would mark the first time a company has defaulted on publicly traded debt in China since the central bank began regulating the market in the late 1990s. Bloomberg adds, citing Liu Dongliang, Shenzhen-based senior analyst at China Merchants Bank, that such a default would be the "first of a string of further defaults in China.”  FT continues:

Though the bond is relatively small, a default could deliver a sharp shock to risk management strategies in China vast corporate debt market, estimated by Standard&Poor’s to be $12tn in size at the end of 2013.

Any default could also slow down new issuance. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 per cent, from Rmb1.82tn to Rmb4.74tn, between December 2008 and September 2013.

In January, a Chinese fund company avoided a high-profile default, reaching a last-minute agreement to repay investors in a soured $500m high-yield investment trust, in a case that had sent tremors through global markets.

Then again, those who follow China's bond market will know that Chaori's failure to pay interest would not really be the true first Chinese corporate default: recall as we reported almost exactly a year ago:

For the first time, a mainland Chinese company has defaulted on its bonds. SunTech Power Holdings has been clinging on by its teeth but after failing to repay $541mm of notes due on March 15th - and following four consecutive quarters of losses through the first quarter of 2012 and since then having failed to report quarterly earnings - owed to Chinese domestic lenders, the firm is restructuring. As Bloomberg reports, Chinese solar companies are struggling after taking on debt to expand supply, leading to a glut that forced down prices and squeezed profits - and most notably were unable to renegotiate its liabilities and obtain “additional flexibility” from creditors. This is highly unusual and perhaps is the beginning of a trend for Chinese firms.

So yes: a prior default, and one by a solar company no less. However, going back down memory lane again, ultimately Suntech had the same fate as all other insolvent corporations in China do - it got a post-facto bailout:

Struggling Chinese solar panel maker Suntech Power Holdings Co Ltd is set for a $150 million local government bailout, a step towards tackling its $2.3 billion debt pile that is at odds with Beijing's effort to wean the sector off state support. The lifeline comes from the municipal government of Wuxi, an eastern city where Suntech's Chinese subsidiary is headquartered, and follows Shunfeng Photovoltaic International Ltd's signing of a preliminary deal to buy its bankrupt Chinese unit.

Curious why China's local government continues to balloon at an exponential pace, and has doubled in roughly two years to roughly CNY20 trillion (that's the real number - the official, made up one is CNY17.9 trillion or $3 trillion)? Because just like the Fed and ECB are the ultimate toxic bad banks in the US and Eurozone, respectively, in China all the bad debt ultimately disappears under the comfortable carpet of the broad "local government debt" umbrella. However, things like these must never be discussed in polite public conversation. Which is why despite what Guan Qingyou, an economist with Minsheng Securities said in his Weibo account that the "first default might not be a bad thing even that means more defaults might happen, because it is ultimately good for the market reform", the reality is that once the dam breaks, it may well be game over for a country that only knows one thing - how to kick the can ever further.

There are additional considerations: As the FT also notes, "given the squeeze on credit supply already seen in January this year, corporate debt defaults could further slow momentum in China’s fixed asset investments." In other words, the just announced 7.5% GDP target revealed ahead of the National People's Congress will be impossible to achieve, should China be unable to fund the Capex to build its burgeoning ghost cities, should rates spike.

Which is why this too default will ultimately be made to disappear.

And the next one, and the one after that, because "now" is never the right time to make the right, but difficult decision.

But how much longer can China avoid reality? Not much if one consider this just crossed headline on Bloomberg:


Recall coal is the industry that China's near-bankrupt Trusts have most of their exposure to.

And then there are our four favorite charts confirming the dire situation in China's credit market:

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How the Empire Might Strike Back

by Charles Hugh Smith

All those focusing on the West's lack of leverage are forgetting that the Empire retains multiple way of striking back.

Many observers have focused on the relative paucity of the West's diplomatic and military options in Ukraine. Others focus on Russia's sources of leverage: cutting off natural gas to western Ukraine and Europe and/or dumping its reserves of U.S. dollars: Putin Adviser Urges Dumping US Bonds In Reaction to Sanctions.
That applying such leverage could backfire on Russia receives less coverage. Does anyone doubt the Federal Reserve's ability to print $200 billion to buy the entire Russian holdings of Treasuries? What's another $200 billion on top of $4 trillion?
Recall that Russia holds those Treasuries/U.S. dollars as reserves for its own benefit. Dumping the dollars simply creates the need for an immediate replacement, especially as the ruble craters.
All those focusing on the West's lack of leverage are forgetting that the Empire retains multiple way of striking back. For example, bringing the costs of misadventure home to Russia's politically influential 1/10th of 1%.
A knowledgeable correspondent submitted these observations:

1. After Edward Snowden the entire "intelligence community" is looking for major payback. Here is a heavy weight added to Ukraine's side of the scales. This is leading edge satellite and electronic intelligence, plus a detailed order of battle on actual Russian forces available and their locations. NATO can also provide access to advanced command and control facilities and advanced battle planning cells. In addition to numbers and morale the Ukraine will be able to mass their forces at the right spots and ignore unthreatened areas.
2. Are you a heavy hitter 0.1%'er New Russian supporting Vladimir Putin? Your entire financial and personal history could soon appear on internet social media, too. In Russian.
US and British agencies have collected many millions of dirty selfies almost by accident. Imagine what they've collected on purpose against major intelligence targets. For instance, every member of the Russian Duma, the cabinet and all their top staffers.
3. Precision guided financial and visa sanctions applied throughout the entire western world. This is not the USSR in 1979 anymore. The entire upper strata of Russia's elite, including all of Putin's United Russia Party, are now extremely international. They and their extended families travel frequently to all the world class watering holes to sun, dine and shop. They have offshore bank accounts and credit cards (as witnessed in Cyprus). They own vacation homes in Spain, Miami, Italy, the Greek Aegean Islands et al. Their children by the tens of thousands attend western universities on student visas. They have massive investments in stock and real estate throughout the entire 'west'.
As a result, they are personally vulnerable to sanctions pressure in a way the Soviet nomenklatura never was. This Ukrainian adventure could carry uniquely painful and personal high price tags.
The media would not be alerted; the targets will simply start getting messages like this:
"Your passport and visa are invalid for entry. Please follow this officer..."
"I'm sorry ma'am, your credit card was declined."
"Invalid PIN number."
"User ID & Password are invalid. Please reenter correct user ID and password".
Massive materialism and corruption is the basis of Putin's elite domestic support. Once he can't deliver the goodies anymore they'll drop him.
The EU previewed this class of soft weapon when it began compiling blacklists of Ukrainian officials deemed responsible for the shootings on the Maidan in late February.
Consider the massive personal financial corruption on Yanukovych's part that was subsequently exposed. It seems likely the tailored sanctions threat played a major role in disaffecting his key political lieutenants and allies. That band of thieves also all had significant offshore assets at stake.
Yanukovych's government was a scale model of Putin's own political patronage and government system. It is more robust but has many of the same weaknesses.

Thank you, A.C. Discussions of modern warfare often revolve around asymmetric warfare in which the side with few conventional assets is able to leverage unconventional assets against a conventionally superior force. There are all sorts of asymmetric advantages that can be pressed home, and those targeting the wealthy will not be mentioned in speeches.
This is not to suggest this kind of asymmetric leverage is being applied or will be applied or should be applied; I am simply pointing out that it could be applied, and with very little fanfare or effort.
Others have referenced the same capabilities: U.S. has options for Russia’s declaration of war on Ukraine.

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Can the rally in global commodities be sustained?


We are seeing broad improvements across global commodity markets. To be sure, commodity valuations are still at depressed levels relative to the past decade, but after a prolonged decline, broad indices seem to have stabilized.

CRB BLS broad commodity index (source: barchart)

The rally across a number of commodity sectors however resulted from a variety of factors, most of which are believed to be transient. For example the cold winter pushed up US natural gas prices (though exports could provide a floor - see post) and hot/dry conditions in Brazil sent coffee prices flying (see chart). Some argue that the two unusual weather patterns are related - a scary thought.
The Ukrainian crisis on the other hand pushed up wheat and corn prices.

WSJ: - Wheat prices rose as much as 6.8% before easing in midday trading. Wheat for March delivery at the Chicago Board of Trade settled at $6.26 a bushel, up 27 cents, the highest closing price in nearly three months.

May US corn futures (source: barchart)

Corn futures also gained from the Ukraine unrest, finishing at their highest price in more than five months. Corn for March delivery rose 6 cents, or 1.4%, to $4.64 a bushel in Chicago.
Ukraine grain exports continued Monday despite the unrest. However, looking ahead, grain buyers that would normally consider the country for grain shipments are largely turning elsewhere, three Europe-based traders who deal in physical grain supplies said Monday. The traders said difficulty obtaining financing due to the country's turmoil is slowing business for Ukraine-based grain companies.

Gold has also been recovering recently - up 12% for the year on slow Fed taper and better demand.
It's not clear if these higher prices across a number of commodities can be sustained. Slower growth in China (combined with weaker yuan) is not helping base metals such as copper for example. Many analysts are also quite bearish on crude oil. Should the geopolitical risks subside, we may get a correction there. Nevertheless we haven't had a commodities rally like this in quite some time.

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One of the Greatest Bargains in Stocks Today

by Bill Bonner

Keeping Up With the Debt

More analysis from Chris on the situation in the Crimean Peninsula below. This is a fast-moving situation with big implications for our favorite emerging market, Russia.  (Hint: We still think it’s a bargain.)

What we know for sure is that the news out of the region gave the markets a serious case of the heebie-jeebies. The Dow ended Monday's session down 153 (back from a 250-point sell-off). Gold rose by $28 an ounce.

We also know that the Fed’s zero-interest-rate policy … and its $4.1 trillion balance sheet are a standing invitation for trouble. What form that trouble takes will be determined later. Meanwhile, Washington’s mountain of debt gets bigger and bigger – aiming for $20 trillion of official debt by 2020. As it gets bigger it weighs on the economy. Several studies have shown debt slows down economic growth.

The reason is fairly easy to see. Remember that hamburger you ate in 2007? You enjoyed it then. The hamburger joint made money. The cook made money. And the economy registered a boost to GDP.

But if you paid for it with a credit card, the transaction may still be incomplete. You may still be paying interest on that burger. That means less money for you to spend … and less for others to earn. And this drag on the economy won’t go away until you’ve paid off the debt.

In monetary terms, the money supply expands when a credit-card loan is made. It contracts when it is repaid. Banks create money ex nihilo when they make loans. When  repaid, the loan goes back whence it came.

As economies slow down it becomes harder and harder to keep up with the debt. More and more of current output must be used to satisfy past consumption. By way of comparison, the US government has 10 times as much debt-to-GDP as Russia. In this sense, the US has 10 times as much trouble in store, should it find itself in a debt squeeze.

But again, we await developments …

Escape from Aiken

We spent all day yesterday driving back home to Baltimore from Aiken, South Carolina.

“You’re not going to try to drive back,” said the clerk at the Willcox Hotel. “There’s a huge snowstorm coming. The whole East Coast is going to get hit hard. You won’t be able to make it. Better stay here another day.”

But we were getting a little restless … not that Aiken isn’t delightful and charming. But we had been there a week. Wife Elizabeth had won her blue and yellow ribbons for horse-riding. It was time to move on – snow or no snow. So we set off early in the morning … keeping an eye on the weather via our shiny new iPhone. It was sunny and warm in South Carolina; it was hard for us to believe the weather could be so much worse up the coast.

We dallied, taking small roads over to Columbia to get a better idea of the countryside. What we discovered was that it was poor. The earth was poor; in some areas there was barely any topsoil covering the white sand. People were poor too; many of them lived in dilapidated trailers or rustic shacks. Often, there were the husks of automobiles and trucks decorating their yards and gardens.

Almost as soon as we got on the highway the foul weather caught up to us: first a light rain… then a heavy rain… then a freezing rain… then, as we entered North Carolina, sleet … and finally snow. We kept up a tolerable pace. Our plan was to continue driving north as long as possible. If the snow became too heavy or the road too icy we would put in at a motel in Greensboro … or Durham … or, if we made it that far, Richmond.

The thing that bothered us was the geography of the route. There is a vast pine forest that envelopes Route 85 as it goes through North Carolina and Virginia. If the storm were to hit us hard there, we might not find a port to put into. Signs were warning travelers. Cars and trucks were returning home. The roads were becoming quieter and quieter.

A Strange Liberty

Still in a light snow, we set out from Durham hoping at least to reach Petersburg or Richmond before we got walloped. Our wheels (on a Ford F-150) do not have much traction unless the truck is loaded. Normally, it slips and slides readily. But the longer we kept chugging along, the more ice clung to the chassis and the heavier it got. Soon, the road was covered in snow and ice; but we just kept moving along without much trouble.

By the time we got to Richmond, it looked as though we had reached the end of our travels for that day. Traffic was still thin, but there were many accidents. Several cars had hit the guard rails … a few more had slid off the road … and one tractor-trailer, pulling what looked like a gasoline tank in tow, had jackknifed just south of the city.

But just when we began looking for a Super 8 motel, or a Sleepy Time Inn, the sky brightened enough to give us hope. Besides, our iPhone reported that the snow had stopped in Washington, DC. If we could just get clear of Richmond, we reasoned, it might be smooth sailing.

As it turned out, getting clear of Richmond was a long, slow slog … but it eventually worked out more or less as we had hoped. We arrived at the Washington Beltway at rush hour. But there was no rush. Federal employees had deserted their posts at the first snowflake. The Beltway was as empty as we’d ever seen it.

And with the cops busy with so many accidents in the area, we felt a strange liberty. What should we do? Rob a liquor store or just break the speed limit?

In the event, we hastened home …

Market Insight: Russia Remains a Bargain – Despite Fears of War

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

The Russian stock market is a bargain for long-term investors at 5.7 times reported earnings and a dividend yield of 3.4%. But not everyone sees it that way. Many see the political risk associated with Vladimir Putin’s leadership as simply too high, no matter how steep the discount on Russian stocks.

As Kim Iskyan, editor of Stansberry & Associates’ new Global Contrarian letter, put it:

“Putin has just proven wrong anyone who held out hope that the discount of Russian shares to the rest of the world might narrow. He just confirmed all the concerns about the high levels of political risk in Russia. If Putin can invade Ukraine, he can do pretty much anything … in any realm of the economy or markets or the government. He has just proven everyone’s worst nightmare.”

The thinking is that the Russian economy is in for dark times as a result of Putin’s incursion into Ukraine. We respectfully disagree…

First, Putin is de-escalating tensions with Ukraine. Reuters reports that he has ended the amassment of troops along Ukraine’s border. So, it’s by no means clear that Russia’s bloodless incursion into Crimea will turn into a shooting war.

Putin sent troops into South Ossetia, in the former Georgian Soviet Socialist Republic, six years ago. Those troops remain there today. No all-out war followed – although this was widely feared at the time.

And like in South Ossetia, it’s unlikely that Putin’s ambitions stretch farther than Crimea – where Russia has a large naval base… strong ethnic and historic ties… and where the newly appointed head of the local parliament had appealed to Moscow for protection following the regime change in Kiev.

Meanwhile, fears of sanctions against Russia… and its effects on the country’s energy exports … don’t stack up. Rob Marstrand, the chief investment strategist at Bill’s family wealth investment advisory, Bonner & Partners Family Office, recently got off a call with some of his contacts in Russia.

They reckon the risk of major economic sanctions is low. The US may try to impose sanctions if tensions continue to escalate. But the EU is unlikely to follow suit.

About one-third of the EU’s oil and gas supply comes from Russia. And Brussels knows that any sanctions would provoke serious retaliation from the Kremlin – something an already weak Europe can ill afford. In fact, Russia could benefit from tensions, as the price of oil rises…

If you already own shares in Russian companies, keep in mind that panic selling in a crisis is nearly always a bad idea. Russia remains a huge exporter of natural resources … has growing corporate profits … and much lower debt-to-GDP than most developed nations.

Its stock market remains one of the biggest bargains in the world today. Of course, you need to have a lot of physiological strength to buy when others around you are panicking. But that’s always the case when the stock market presents real bargains …

RTS, weeklyRussia's RTS Index, weekly. The recent events have led to a decline below lateral support (blue line), but the weekly candle shows a big rebound from the lows and what appears to be somewhat more dubious trendline support (in red) - click to enlarge.

RTS daily
A close-up, showing the daily chart of the RTS index. On November 21 last year, the protests in Kiev began. Obviously the Ukrainian upheaval has not been good for Russian stocks. The big red candle put in on Monday and Tuesday's large rebound are both tied to the situation in the Crimea – click to enlarge.

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ISM Services Collapse To Lowest In 4 Years; Employment Worst Since Lehman

by Tyler Durden

ISM Services headline index collapsed to 51.6 (missing expectations of 53.5) to its lowest since February of 2010. We are sure many will proclaim this as "weather-related" but remember the strong performance of the Manufacturing print. Respondents worried about weather, Obamacare, and oil prices... as the employment sub-index crashed from 56.4 (highest since Nov 2010) to 47.5 (lowest since Mar 2010) - the biggest drop since Lehman!

Big miss and lowest print in 4 years...

ISM Services Employment craters...

And before you blame the weather, the Manufacturing and Services data do not converge on that opinion...

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Prepare for The Euro Breakout

by Greg Harmon

The Euro has been struggling in a range for some time. From the daily chart below of the Currency Shares Euro Trust, $FXE, the price action has been consolidating in a ‘W’ like pattern, making an Ascending Triangle. This pattern targets a move equal to the biggest part of the triangle on a breakout. In this particular case a $5 move. And with the price holding near the top of the triangle that would target a move to 141.60 on a break higher. The other indicators, RSI and MACD

fxe d

support this. But what is interesting about this chart is that it did break out, for just a minute, early on Monday, only to be dropped later. Is this a sign that orders were in to buy from Friday that pushed it higher? If the Ukraine situation settles does this mean a break could happen Wednesday? Or by the rate decision later in the Week? It seems primed. But

fxe w

141.60 may not be the end of it then. A check of the weekly chart shows that the short term break would also trigger a longer term Cup and Handle that targets a move to 152.50. Does that make it more intriguing?

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