Wednesday, March 12, 2014

Weekly grains update

By Jeffrey T. Lewis

  • Brazilian crop agency Conab said March 12 that it cut its estimate for the 2013-2014 soy harvest because of a drought in some growing areas.
  • Brazilian farmers will grow 85.4 million tons of soy in the current season, according to Conab, which in its February report had forecast a crop of 90 million tons. The 2012-2013 harvest was 81.5 million tons.
  • Conab also cut its forecast for the two 2013-2014 corn harvests compared with the February report, to a total of 75.2 million tons from 75.5 million tons. That compares with a harvest of 81.5 million tons in the 2012-2013 season.
  • The worst drought in about 40 years in the states of Sao Paulo and Minas Gerais is harming Brazil's soy, coffee, sugar and orange crops.
  • Brazil is the world's biggest producer of sugar, coffee and oranges, and the second-biggest producer of soy, after the U.S.
  • Sao Paulo and Minas Gerais states together are Brazil's biggest producers of oranges, sugar cane and coffee, while Mato Grosso state is the biggest producer of soy.
  • Conab cut its estimate for Sao Paulo's soy crop to 1.9 million tons from 2.1 million tons in its February crop report, and reduced the estimate for Minas Gerais' crop to 3.3 million tons from 3.8 million tons in February.
  • Conab raised its estimate for Mato Grosso's production to 26.4 million tons from 26.2 million tons in the February report. For another big soy-producing state, Goias, Conab cut the forecast to 8.6 million tons from 9.5 million tons.
  • Conab publishes the reports monthly, and it's possible the agency will cut its soy estimate even more. The survey for the March report was carried out from Feb. 16 through Feb. 22.
  • The soy harvest is near its peak in March, and heavy rains in Mato Grosso since the end of the most recent survey have made it difficult for equipment to enter the fields. Some of the soy could already be starting to rot on the ground, and that situation could grow worse if the rains in Mato Grosso don't let up, agronomists say.


General Comments: Wheat was higher on ideas of good demand and worries about dry weather in the southwestern Great Plains. Parts of Texas are too dry, and the dry área extends north into some parts of Kansas. Crops in southern regions of this área are coming out of dormancy. The dry áreas had been expected to get some badly needed precipitation from the storm that passed through the Midwest, but the storm tracked north of the dry áreas. Current US forecasts call for moderating temperatures as Spring tries to arrive.

However, the overall pattern supports colder than average temperaturas overall for the foreseeable future, especially in the Eastern half of the country. US export demand has been solid, but the potential world competition has been the primary negative for US prices as the US wants to remain competitive in world markets. Ukraine remains a feature, and the government there said that crop áreas in Crimea will not get planted. But, the rest of the country is expected to plant normally. Charts show that Wheat futures held some support áreas and might try to move higher today.

Overnight News: The southern Great Plains should see dry weather. Temperatures should average near to above normal. Northern areas should see dry conditions. Temperatures should average mostly above normal. The Canadian Prairies should some snow Saturday, otherwise mostly dry conditions. Temperatures will be near to below normal, but western áreas could see above normal temperaturas this weekend.

Chart Analysis: Trends in Chicago are mixed to up with objectives of 668, 682, and 692 May. Support is at 656, 637, and 636 May, with resistance at 667, 679, and 692 May. Trends in Kansas City are up with objectives of 740, 759, and 768 May. Support is at 725, 707, and 703 May, with resistance at 738, 742, and 750 May. Trends in Minneapolis are up with objectives of 724 and 742 May. Support is at 706, 687, and 663 May, and resistance is at 716, 719, and 742 May.


General Comments: Corn closed higher in "Turnaround Tuesday" trading. There was no real news to push prices one way or another, but the strng rally in Wheat added some support to Corn prices. USDA might be forced to increase demand projections down the road. USDA cut domestic demand by cutting feed demand in a move that showed the devastation being caused to the hog Heard by the PED virus. Wire reports a couple of weeks ago showed that about 4.0 million pigs have already been lost, and Live Hog futures have been trading significantly higher ever since. Oats were higher after two sharply lower days as the Canadian government moved to forcé the railroads to move more grain to ports and the US on Friday. The move could ease the tight supply situation here in just a few weeks. The US relys on Canadian Oats and most come by rail. Weather in the Midwest will trend to mostly below normal through the weekend. The weather remains good in South America. The market will keep a close eye on the planting progress of the Winter Corn crop in Brazil as planting is delayed.

Overnight News:

Chart Analysis: Trends in Corn are mixed to down with objectives of 461 and 438 May. Support is at 473, 470, and 465 May, and resistance is at 485, 492, and 502 May. Trends in Oats are down with objectives of 414 and 354 May.  Support is at 416, 414, and 394 May, and resistance is at 438, 445, and 446 May.


General Comments: Nearby Soybeans and products closed lower in taalk of Chinese cancellations of purchases in Brazil and significantly weaker cash markets there. New crop months were nigher for no apparent reason, and it looks like bear spreads were very active. Overall, the market seems to have run out of some of its bullish steam since the crop reports were released. USDA increased export demand, but cut the domestic demand and increased imports to keep ending stocks a Little higher than the trade had expected. The cut in domestic demand came as less Soybean Meal demand is anticipated due to the reduced hog numbers. Less Soybean Oil demand was also anticipated due to the potential for less biofuels demand. There were more unconfirmed reports that China had cancelled purchases of up to 2.0 million tons of Soybeans from Brazil. China has had a very hard time getting out of purchase Contracts here so it is pushing Brazil. The reports might not be confirmed, but premium levels remain weak. Reports indicate that China has overbought Soybeans and need not buy more anytime soon. The harvest is active and should be more than 50% done in Brazil. Speculators overall remain very long Soybeans and Soybean Meal on ideas of tight supplies here in the Midwest, and began to liquidate some of these longs yesterday.

Overnight News:

Chart Analysis: Trends in Soybeans are mixed. Support is at 1402, 1388, and 1377 May, and resistance is at 1426, 1436, and 1445 May. Trends in Soybean Meal are mixed to down with objectives of 421.00 and 392.00 May. Support is at 438.00, 432.00, and 430.00 May, and resistance is at 450.00, 459.00, and 465.00 May. Trends in Soybean Oil are mixed. Support is at 4310, 4280, and 4190 May, with resistance at 4480, 4520, and 4580 May.


General Comments: Canola was higher on speculative buying. Farmers were scale up sellers. Traders think Canola is cheap compared to Soybeans, and some have been buying Canola and selling Soybeans as a spread. Canada annolunced a free trade pact with South Korea that could support canola demand. Traders remain bearish on the logistical problems that plague the Canadian Prairies that makes selling Canola and other farm products very difficult. These problems should ease in coming weeks as the Canadian government is now forcing railroads to move grain. Canola is cheap compared to other oilseeds and can move higher once the grain finally starts to move. Palm Oil was sharply lower on follow through speculative long liquidation. Ideas of crop losses from current dry Malaysian weather provide some support. Hwever, traders are worried about demand with Chinese economic weakness. Ideas are that they might buy less if the economy there continues to weaken., Plus, they have over bought in Soybeans and should have plenty of Soybean Oil to replace Palm Oil imports. Private export data was disappointing for thefirst third of the month. Ideas are that demand will only increase over time as Indonesia implements new bio fuels mandates involving Palm Oil.

Overnight News:

Chart Analysis: Trends in Canola are mixed. Support is at 442.00, 432.00, and 428.00 May, with resistance at 460.00, 467.00, and 473.00 May. Trends in Palm Oil are mixed to up with objectives of 2920, 2950, and 3030 May. Support is at 2860. 2825, and 2810 May, with resistance at 2920, 2950, and 2980 May.


General Comments: Prices closed higher, with old crop months leading the way. Much of the cash market remains tight, although mills in Texas appear to be covered. Much of the Mid South is trying to get fieldwork started and not interested in marketing. Texas producers are active with fieldwork amid a weaker cash market there. Both áreas should see drier and cool weather this week. California and what the producers will be able to plant remains an open question. Some very beneficial rains have hit California in the past week, but much more will be needed. Texas wáter problems are continuing as producers there return to the fields. Arkansas markets are quiet but firm. Asian long grain prices are steady. Charts show that futures may have reversed yesterday.

Overnight News: Mostly dry weather. Temperatures will average near to below normal this week and near to above normal this weekend.

Chart Analysis: Trends are mixed. Support is at 1533, 1520, and 1518 May, with resistance at 1544, 1549, and 1556 May.


General Comments: Dairy markets were mixed to higher in quiet trading. The market is tryingt to decide if it needs to rally more ori f it has done enough for now. Cheese and Butter are losing upside forcé. Milk made some new hioghs yesterday, but did not act like a new leg was needed at the end of the day. Cash markets remain generally strong, with export demand leading the way. Domestic markets are also strong as the weather remains cold and wet in many áreas. Some buyers are fighting the increased Butter prices, but willing to buy Cheese on price breaks. Milk and dried products demand is called steady right now. US production should start to increase as the Midwest gets warmer in the next few weeks. European production continues to increase, especially in the west due to better weather there. New Zealand production is strong, but dry conditions in Australia have hurt production there. Demand ideas for all dairy products remain strong, especially for Asia and especially China as the región and country import a lot of milk powder.

Overnight News:

Chart Analysis: Trends in Milk are mixed to up with no objectives. Support is at 2100, 2040, and 2020 April, and resistance is at 2145, 2180, and 2200 April. Trends in Cheese are mixed. Support is at 205.00, 202.00, and 199.00 April, with resistance at 210.00, 213.00, and 216.00 April. Trends in Butter are up with no objectives. Support is at 185.00, 182.00, and 180.00 April, and resistance is at 189.00, 192.00, and 195.00 April.

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Weekly softs outlook

By Jack Scoville


General Comments: Futures closed a little higher as weather stays dry in Brazil and as crops remain short in the United States. Florida fruit sizes have been small and the Greening Disease takes more and more of a toll on crops. The weather is still good in Florida and the chances to freeze trees is less as the sun gets higher in the sky and daylight hours increase. The Greening Disease is working hard to keep overall production down. The disease will affect production for several more years. Brazil has seen weather might that be stressing trees as reports indicate that many áreas still need rain. Mostly dry weather is in the forecast for Brazil. 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 Wednesday, then dry weather again. Temperatures will average near to below normal this week and near to above normal this weekend.

Chart Trends: Trends in FCOJ are mixed. Support is at 152.00, 150.00, and 148.00 May, with resistance at 157.00, 159.00, and 162.00 May.


General Comments: Futures closed higher again as Brazil stays mostly dry. Mostly dry weather is in the forecast through the weekend. Reports of increased offers from other Arabica producers above $2.00 per pound was seen, but tight markets overall kept futures from closing lower. London found more support on potential drought conditions in Vietnam and the possibility of production losses for the next crop. The lack of rain in Coffee producing áreas of Brazil over the last month has hurt Coffee production potential as the crop was forming cherries. Exports so far this year from Vietnam have been less than last year and might stay weak if the weather does not improve there. The market needs that Coffee to be exported to help fill the vacuum left by the poor production in Brazil. Trends are up in all three markets.

Overnight News: Certified stocks are higher today and are about 2.593 million bags. The ICO composite price is now 176.37 ct/lb. Brazil will get mostly dry weather. Temperatures will average near to above 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 223.00 and 245.00 May. Support is at 201.00, 193.00, and 184.00 May, and resistance is at 210.00, 213.00 and 216.00 May. Trends in London are up with objectives of 2210, 2260, and 2310 May. Support is at 2135, 2100, and 2035 May, and resistance is at 2195, 2220, and 2250 May. Trends in Sao Paulo are up with no objectives. Support is at 240.00, 234.00, and 229.00 May, and resistance is at 246.00, 252.00, and 258.00 May.


General Comments: Futures were lower in New York and much lower in London. Futures remain in a trading range and traders are looking for news. Only light precipitation is likely this week in Brazil to support the Bulls, but there should still be Sugar aropund. Little offer was reported from Brazil, but Thailand has been selling Sugar at stable differentials. Demand news remains hard to find. Weather has improved in Sugar áreas of Brazil, but overall the región remains too dry. Rains now could help the crop recoup some of the losses but regular rains will be needed soon. Charts show that the overall tone is mixed as the market is in a consolidation phase. Weather conditions in key production áreas around the world are rated as mostly good except for the dry weather in Brazil.

Overnight News: Brazil could see dry weather and near to above normal tempertures.

Chart Trends: Trends in New York are mixed. Support is at 1780, 1745, and 1705 May, and resistance is at 1845, 1865, and 1890 May. Trends in London are mixed. Support is at 470.00, 467.00, and 464.00 May, and resistance is at 479.00, 485.00, and 490.00 May.


General Comments: Futures closed higher and made new highs for the move on production concerns. Some bug infestations have b een reported in Camaroon that could cut production of the mid crop by 10%, and some are talking about the dry weather in Brazil, although the crop is at harvest there so that the dry weather could be beneficial. Mid crop conditions seem fair to good in the rest of West Africa and generally good in Southeast Asia.  Butter ratios remain strong on ideas of short supplies of Cocoa Butter in Europe and North America. Demand is strong as the Easter holiday is coming soon. 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 higher today at 4.382 million bags.

Chart Trends: Trends in New York are up with objectives of 3095, 3115, and 3235 May. Support is at 2975, 2950, and 2900 May, with resistance at 3020, 3050, and 3080 May. Trends in London are up with objectives of 1935 and 2005 May. Support is at 1870, 1855, and 1825 May, with resistance at 1900, 1930, and 1960 May.


General Comments: Futures were mixed, with nearby months a little lower and deferred months a little higher. Ideas that the US was pricing itself out of the market hurt nearby price action. There was Little in the way of news yesterday for traders, and the USDA reports had been largely anticipated by the trade. USDA projects tight ending stocks at the end of the current marketing year, and the domestic cash market has been strong due to very limited offers against the good demand. However, many think that demand can start to fade now with the high prices and buying interest is less at this time in futures. Brazil conditions are reported to be good in Bahia with warm temperatures, but the state needs rain and should get more this week. Warmer temperaturas are slowly returning to production áreas in the US and there has been some initial fiel;dwork done in far southern áreas.

Overnight News: Delta and Southeast áreas will get dry weather this week and showers this weekend. Temperatures will average near to below normal this week and near to above normal this weekend. Texas will see dry weather. Temperatures will average near to below normal this week and near to above normal this weekend. The USDA spot price is 86.68 ct/lb. today. ICE said that certified Cotton stocks are now 0.260 million bales, from 0.259 million yesterday.

Chart Trends: Trends in Cotton are mixed to up with no objectives. Support is at 90.70, 90.40, and 89.60 May, with resistance of 92.20, 92.80, and 93.40 May.

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Yield Notes

by Marketanthropology

Since testing and ultimately being rejected by the upper limits of last September's highs, 10 year yields have consolidated in a narrow 20 basis point range between ~ 2.6-2.8%. 
Our general take on long-term yields has been that despite their historically low disposition, they became comparatively stretched to an extreme last year after the Fed pivoted their policy posture with respect to QE. We have been looking for a long-term range to develop between the extremes of the past two years, naturally with yields working their way lower through the balance of this year. 
In the near term, we see the prospects for an acceleration of trend lower - should yields breach the recent lows from early this month. 
The banking sector, which has benefited from a strengthening yield environment over the past few years, looks particularly vulnerable and at a curious retracement position. 
Gold, which took the brunt of collateral damages from a rising rate backdrop last year has been leading the reversionary charge higher.

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How Long Does This Go On Before There's A Currency Crisis?

by Simon Black

How’s this for irony -

In our modern monetary system, the term ‘fiat currency’ refers to this absurd notion of paper currency that is conjured out of thin air by central bankers and backed by nothing but hollow promises.

‘Fiat’ is a subjunctive conjugation of the Latin verb ‘fi?’; literally translated, it means “let it be” as in “Let there be light.”

Or in this case… ‘let there be paper money,’ which pretty much crystalized the absurdity of our monetary system.

Former Fed Chairman Ben Bernanke summed this up nicely in a 60 Minutes interview he gave a few years ago in which he said, “We can raise interest rates in 15 minutes. . .”

And he was right. Central bankers can change interest rates whenever they want.

If you think about it, interest rates are nothing more than the ‘price’ of money. It’s the rate that people pay when they ‘demand’ money in the form of loans based on the supply of money available.

But this price of money is incredibly influential around the world. Interest rates affect the prices of shares in the stock market. Oil. Agricultural commodities. Real estate. Automobiles.

Almost everything we touch is affected by interest rates.

So in setting the price of money, we have given central bankers the power to effectively set the price of… everything.

Make no mistake, this is a form of price controls. And there’s not a doubt in my mind that one day (probably soon), future historians are going to look back and wonder how so many people could be bamboozled.

We have somehow been conned into believing that the path to prosperity is for the grand wizards of the financial system to conjure paper currency out of thin air.

Yet this notion of ‘money backed by nothing’ is an absurd fantasy that has failed every single time it has ever been tried before in history.

I bring this up because I want to share a chart with you that I presented yesterday to a savvy group of investors.

Bear in mind first that a central bank, like any bank or business, has both assets and liabilities.

Central bank assets are things like gold and government bonds (e.g. US government Treasuries).

Central bank liabilities are the ‘notes’ that they issue. And if you’re wondering what a central bank ‘note’ is, just look in your wallet.

If you’re in the US, those aren’t dollars. The dollar was defined by the Coinage Act of 1792 as 416 grains of standard silver.

Rather, you’ll see the paper in your pocket says “Federal Reserve Note”– a liability of the US central bank.

The difference between assets and liabilities is called equity, or the bank’s capital. And well-capitalized banks maintain substantial capital as a percentage of their assets.

You could think about this as a margin of safety. The less ‘capital cushion’ a bank has as a percentage of its assets, the less it will be able to withstand shocks to the system.

I tracked this data for the US Federal Reserve. And as the chart below shows, there has been an astounding decline in the Fed’s ‘margin of safety’ over the last few years.

1 3 How low does this go before theres a currency crisis?

The lower this line goes, the more the Fed gets pushed into insolvency.

Note that the trend levels out in early 2012, only to start another steep decline a few months later just as they told us the economy had ‘recovered’. This is apparently what recovery looks like.

The question I ask is: how low does this go before there’s a currency crisis?

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Dot-Com 2.0 Visualized (Or Peak Greater Fool)

by Tyler Durden

While central bankers, asset-gatherers, and TV 'personalities' remain nonchalant of stocks being in a bubble, some are positively vociferous over the manipulated mania US investors are currently re-experiencing. Until the last few months, the new dot-com bubble had been quietly hidden behind the walls of the private equity world (as we noted here), but as the following chart shows, the bankers have found a willing audience for 'stories' and 'spin' as the percentage of firms IPOing with negative earnings soars to its highest since Feb 2000... that didn't end well and we suspect "peak-greater-fool" won't this time either.

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How The Fed Has Failed America, Part 2

by Charles Hugh Smith

The only way to eliminate the financial parasites is to stop subsidizing their skimming and scamming, and the only way to stop subsidizing the financial parasites is to shut down the Fed.

Before I explain how the Federal Reserve has failed America, let's do a little thought experiment. Let's imagine that instead of creating $3.2 trillion and giving it to the banking sector to play with--funding carry trades and high-frequency trading, for example--the Fed had invested in carry trades itself and returned the profits directly to taxpayers.

Before we go through the math, let's recall how a carry trade works: Financiers borrow billions at near-zero interest from the Fed and then use the free money to buy bonds in other countries where the return is (say) 5%. The financiers are skimming 4.75% or more for doing nothing other than having access to the Fed's free money.
If the bonds rise in value (because interest rates decline in the nation issuing the bonds), the financiers skim additional profit. If the trade can be leveraged via derivatives, then the annual return can be bumped up from 5% to 10%.
OK, back to the experiment. The Fed created $3.2 trillion in its quantitative easing (QE) programs. let's say the Fed's money managers (or gunslingers hired by the Fed to handle the trading) earn around 5% annually with various low-risk carry trades.

That works out to an annual profit of $160 billion (5% of $3.2 trillion). Now let's say the Fed divvied the profit up among everyone who paid Social Security taxes the previous year. That's around 140 million wage earners. Every person who paid Social Security taxes would receive $1,100 from the Fed's carry trade profits.

The point of this experiment is to suggest that there were plenty of things the Fed could have done with its $3.2 trillion that would have directly benefited taxpaying Americans, but instead the Fed funneled all those profits to financiers and banks.

The Fed apologists claim that lowering interest rates to zero benefited American who saw their interest payments decline. Nice, but not necessarily true. Try asking a student paying 9% for his student loans how much his interest rate dropped due to Fed policy. Or ask someone paying 19.9% in credit card interest (gotta love that .1% that keeps it under 20%)--how much did your interest drop as a result of Fed policy?
Answer: zip, zero, nada. The Fed's zero interest rate policy (ZIRP)funneled profits to the banks, not to borrowers.
And let's not forget that many Americans chose not to borrow at all. What did the Fed do for them? It stole the interest they once earned on their savings. Estimates vary, but it is clear that the Fed's ZIRP transferred hundreds of billions of dollars in interest to the banking sector, income forceably "donated" by savers to the banks.
Lowering interest rates to zero is effectively a forced subsidy of borrowers by savers. But that's not the only subsidy: who makes money from originating and managing loans? Banks. The more loans that are originated, the higher the transaction fees and profits flowing to banks. So incentivizing borrowing generates more profits for banks.
Humans make decisions based on the incentives and disincentives in place at the time of their decision. Lowering the cost of money (interest) to zero creates an incentive to gamble the money on low-yield bets. After all, if you can earn 3% on the free money, then why not skim the free 3%?
If speculators had to pay 6% for money and 7.5% for mortgages (the going rate in the go-go 1990s), then the number of available carry trades plummets. The only carry trades that make sense when you're paying 6% for money are those with yields of 10%--and any bond paying 10% carries a high risk of default (otherwise, the issuer wouldn't have to offer such a high rate of interest to lure buyers).
All of these incentives to borrow money at zero interest rate are only available to banks and financiers. And that's the point of the Fed's policies: to stripmine the bottom 99.5% and transfer the wealth to banks and financiers. Lowering interest rates to zero incentivizes carry trades and speculative bets that do absolutely nothing for America or the bottom 99.5% of taxpayers.
A self-employed worker pays 50% more tax than a hedge funder skimming billions of dollars in carry trades. A self-employed worker pays 15.3% in Social Security and Medicare taxes and a minimum of 15% Federal income tax for a minimum of 30.3%. (The higher your income, the higher your tax rate, which quickly rises to 25% and up.) The hedge funder pays no Social Security tax at all because the carry trade profits are "long-term capital gains" which are taxed at 15% (20% if the Hedgie skims more than $400,000 a year).
Despite the Fed apologists' claims that ZIRP and free money handed to banks and financiers create jobs and start businesses, there is absolutely no evidence to support this claim. The only beneficiaries of Fed policies are tax accountants for the banks and financiers and luxury auto dealerships. Since Porsches and Maseratis are not made in the U.S., the benefits of the top .5% buying costly gew-gaws and evading taxes is extremely limited.
Attention, all apologists, lackeys, toadies, minions and factotums of the Fed: is there any plausible explanation for the wealthiest .5% pulling away from everyone else since the Fed launched ZIRP and QE other than Fed policies? And while we're at it, how about publishing a verifiable list of companies that were founded and now employ hundreds of people because the owners could borrow millions of dollars at zero interest?

Get real--no new business can borrow Fed money for zero interest. The only entities that can borrow the Fed's free money are banks and other financial parasites.

The truth is the Fed incentivizes and rewards the most parasitic, least productive sector of the economy and forcibly transfers the interest that was once earned by the productive middle class to the parasites. Though the multitudes of apologists, lackeys, toadies, minions and factotums of the Fed will frantically deny it, the inescapable truth is that the nation and the bottom 99.5% would be instantly and forever better off were the Fed closed down and its assets liquidated.
The only way to eliminate the financial parasites is to stop subsidizing their skimming and scamming, and the only way to stop subsidizing the financial parasites is to shut down the Fed.

Source: Wealth, Income, and Power (G. William Domhoff)

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Reaching for Yield: Worth the Risk?

By AllianceBernstein

Investors seeking more robust returns in a lower-interest-rate environment often look to high-yield bonds for answers. But it’s critical that they don’t reach too far down the credit spectrum in search of higher yields—as tempting as it may be.

High Yield’s Slippery Slope
We’re currently in the stable phase of the credit cycle—characterized by companies’ solid financial health—and we anticipate that we’re still years away from increasing defaults becoming an issue. But that doesn’t give investors the green light to begin stretching for higher yields by investing in lower-rated credits.

The display below shows cumulative five-year default rates, which worsen the further one slides down the credit scale. Even reaching for CCC-rated debt can put an investor in hot water and often isn’t worth the pain, as the compensation isn’t commensurate with the risk level. The extra premium investors receive is low relative to history—on top of default risk—and CCC debt is unattractively priced above par. Bottom line: avoid the yield stretch.


How Roll Can Help
During a steep-yield-curve environment in which interest rates are expected to rise, yield-curve “roll,” or a bond’s price increase as it moves closer to maturity, can act as a cushion against rising rates and declining prices. Over time, a bond’s yield progresses—or rolls—down the yield curve as its price ticks upward. Bondholders can especially benefit if interest rates rise by less than anticipated, as their bonds will likely be valued at a higher level than new issues of a comparable time frame.

Many credit curves are particularly steep today, creating opportunities for roll. The display below shows how roll can work for a five-year corporate credit default swap (CDS). For the bond’s total return (its income and capital appreciation) to be eroded, interest rates would have to rise by 200 basis points, which is unlikely.


Given the current environment, we expect high yield to continue its journey for the next couple of years, and as long as investors remain wary of yield stretch, and remember that roll is on their side, they’ll have a better chance of successfully navigating the road ahead—no matter what interest rates do.

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Xu Shaoshi says all is well with China's economy


China's propaganda machine went into full gear as it sets its sights on foreign economic forecasters who are continuing to profess slower economic growth for the nation. Is the West is picking on China again? Creating all this negative publicity?

People's Daily: - Among a number of foreign investment banks and international media, prophets of doom on the Chinese economy have begun to find their voices once more.
How should we view this negative publicity, and what is China's current economic situation? On March 5, Xu Shaoshi, head of the National Development and Reform Commission made clear that the Chinese economy has made a good start to the year and that future prospects are favorable. On the sidelines of the "two sessions" - the annual sessions of the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC) - reporters interviewed NPC deputies and CPPCC members.

Are the Western analysts just "prophets of doom" hyping up the China-slowdown story? While a severe recession in China remains an unlikely outcome, there is no question we are seeing PRC face some serious headwinds.
First of all it is well known that many of China's insiders, analysts working for Chinese organizations, seem to be just as bearish on China's economic expansion as their counterparts abroad. Moreover, key economic data continue to indicate that growth is below expectations - see the latest export figures for example. And while one could debate the veracity of such data due to seasonal effects and other biases, it's harder to argue with the markets. Commodities that are sensitive to China's industrial demand, particularly iron ore (see chart), steel (see chart), and copper (chart below) have been hit unusually hard. Clearly something is wrong here.

China's authorities certainly have the wherewithal to stabilize growth through either fiscal or monetary stimulus. They've done it before. The central government however has been trying to wean the country from both in order to contain the buildup of market bubbles in areas such as wealth management ($6 trillion shadow banking balance sheet), corporate credit, and real estate. And if all was well with the nation's economy, Beijing would be staying the course here.
Lately however China's central bank has become quite accommodative. It stopped appreciating the yuan - in fact the currency has been allowed to depreciate (see chart) to help the nation's exporters. It is also allowing short term rates to decline. Some of that decline is due to falling demand, as banks pull back on lending into certain sectors. Partially it is the result of PBoC injecting liquidity via unsterilized dollar purchases (yuan sales). Whatever the case, the outcome is a sharp decline in interbank rates - a loosening monetary stance.

1-week and 2-week SHIBOR

One could debate the reasons for each of these trends. But taken as a whole, it is hard to argue that it is business as usual in China - even if Xu Shaoshi made it perfectly "clear that the Chinese economy has made a good start to the year and that future prospects are favorable."

See the original article >>

Coffee – The Craziest Chart Of The Year Already

by AuthorWolf Richter

Brazil, the top producer of arabica coffee, has gotten hammered by drought. A few analysts have cut their estimates for the 2014/15 crop, with a leery eye on the 2015/16 crop. It’s not a catastrophe for the rest of the world, and there is a pretty good chance we won’t have to switch to drinking hot water.

But it was good enough for traders to nudge coffee futures up a few cents from their multi-year low of just over a buck a pound in November. In January, once the charts gave the go-ahead – among them, James Ferro of Signalinea posted his call on January 29 – traders piled in and went haywire and catapulted coffee futures to today’s high of $2.089 (before it ran out of hot air), having doubled in four months. 

To make life miserable for the rest of us coffee lovers. Our latte, espresso, or just plain good coffee is going to bite fiercely into our already mauled pocket book.

And here it is via Signalinea, a weekly chart (doesn't include today's moves) going back to 2007. Already the craziest chart of the year, though it’s just March:

So what’s next?

My beloved state of California too has been getting hammered by drought, and we produce 82% of the world's almonds, our second most valuable legal crop, after grapes, with sales of $4.4 billion in 2012. Production has doubled since 2006 to 1.9 billion pounds last year.

These almond orchards cover endless acres in the Central Valley, much of it in counties whose drought conditions have been labeled “extreme.” January and February, the middle of our rainy season, were mostly dry, after two dry years. There have been some good rains since, but still a drop in the bucket, so to speak. Growers need to irrigate their orchards with water that doesn’t exist this year.

So, in your bag, jar, or can of mixed nuts later this year and next year, watch for the magic disappearance of almonds, to be replaced with cheaper nuts to keep inflation from showing up in its ugly manner on the price sticker. And start counting the almond chips in your almond biscotti.

Another California item has jumped in price: homes. Teachers are a symbol of the middle class. In California, they earn on average $69,300 annually, fifth highest in the country. Not exactly a pittance. But it is a ludicrous pittance if they’re trying to buy a home. Read....

See the original article >>

Brazil cuts corn crop forecast, slashes soy hopes


Brazil revealed the first estimates of damage to its crop prospects from hot and dry weather, cutting forecast for corn and soybean production, but the downgrades failed to prevent a tumble in Chicago futures.

The Conab crop bureau cut by 280,000 tonnes to 75.2m tonnes its forecast for the domestic corn harvest this year.

And it slashed by 4.6m tonnes to 85.4m tonnes its forecast for the country's soybean harvest, ditching hopes of overtaking the US as the world's top producer of the oilseed.

The downgrades were blamed on the dry weather in southern and eastern Brazil which has fuelled a rally in prices in particular of coffee and sugar, for which Conab has yet to release updated estimates for domestic production.

In fact, Wednesday's revisions, while for soybeans putting Conab amongst the most pessimistic forecasters, failed to support Chicago prices of the oilseed, which tumbled 2.4% to $13.78 3/4 a bushel for May delivery in morning deals on talk of Chinese cancellations of import orders.

'Scarcity of rains'

Conab cut forecasts for soybean crops in all five regions of the country.

But the downgrade was particularly severe in the south, where in Parana, the country's second biggest soy producing state, "practically since the time of planting , the crop was severely affected by the lack of rainfall and high temperatures," the bureau said.

In Rio Grande do Sul, Conab warned that "pest attacks" had been "intensified in recent weeks by the scarcity of rains".

Further north, the crop in Goiás "was strongly influenced by climate, with low rainfall, associated with pest and disease attacks".

However, excess rains had proven a problem in Mato Grosso do Sul, slowing harvesting, Conab said.

Main vs safrinha

For corn, Conab raised the estimate for the second, or safrinha, crop, which is sown after the soybean harvest, by more than 900,000 tonnes to 43.8m tonnes, citing a boost from a recovery in prices.

However, the upgrade was more than offset by a 1.2m tonnes cut, to 31.4m tonnes, in the estimate for output from the so-called main crop because of the dry weather.

"Many crops were penalised by the scarcity of rainfall occurring in December, January and February," Conab said, terming this a "crucial" period for crop development in bringing pollination and early grain growth.

While, in its commentary, Conab failed to highlight any losses to coffee and sugar, it did cut its forecast for soybean production in Sao Paulo, the top cane growing state, by 9%, citing "climatic adversities".

The estimate for soybean production in Minas Gerais, the top coffee growing state, was slashed by 12% to 3.31m tonnes.

See the original article >>

The Big Debt Binge

by Pater Tenebrarum

Government Debt Soars Into Stratosphere

We had a global financial crisis in 2008 that was widely acknowledged to be the result of an unmitigated credit bubble egged on by loose central bank policy after the  peak of the tech mania in 2000. Of course, central banks themselves did not acknowledge their responsibility. According to Ben Bernanke, it wasn't the suppression of administered interest rates that set off the credit bubble that collapsed so spectacularly in 2008. Instead it was a 'lack of regulation'. Right. We wonder if Mr. Bernanke would be interested in acquiring a certain bridge in Brooklyn?

So what did our vaunted policy makers decide to do to battle the effects of the expired credit bubble? Simple, they did what they always do: they replaced it with an even bigger one. How much bigger has recently been revealed by the quarterly BIS review.

As Bloomberg informs us: “Debt Exceeds $100 Trillion as Governments Binge”.

A few excerpts:

“The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis as governments borrowed to pull their economies out of recession and companies took advantage of record low interest rates.

The $30 trillion increase from $70 trillion between mid-2007 and mid-2013 compares with a $3.86 trillion decline in the value of equities to $53.8 trillion, according to the Bank for International Settlements and data compiled by Bloomberg. The jump in debt as measured by the Basel, Switzerland-based BIS in its quarterly review is almost twice the U.S. economy.

Borrowing has soared as central banks suppress benchmark interest rates to spur growth after the U.S. subprime mortgage market collapsed and Lehman Brothers Holdings Inc.’s bankruptcy sent the world into its worst financial crisis since the Great Depression. Yields on all types of bonds, from governments to corporates and mortgages, average about 2 percent, down from more than 4.8 percent in 2007, according to the Bank of America Merrill Lynch Global Broad Market Index.”

“Given the significant expansion in government spending in recent years, governments (including central, state and local governments) have been the largest debt issuers,” said Branimir Gruic, an analyst, and Andreas Schrimpf, an economist at the BIS. The organization is owned by central banks and hosts the Basel Committee on Banking Supervision, which sets global capital standards.

In the six-year period to mid-2007 global debt outstanding doubled from $35 trillion, according to data compiled by BIS.

Marketable U.S. government debt outstanding has soared to a record $12 trillion, from $4.5 trillion in 2007, according to U.S. Treasury data compiled by Bloomberg. Corporate bond sales globally surged during the period, with issuance totaling more than $21 trillion, Bloomberg data show.”

(emphasis added)

Just to get this straight: in the six years to 2007, global debt doubled from $35 trillion to $70 trillion. This debt expansion seemed to stop in its tracks when the bubble imploded in 2008. In the six years since then, another $30 trillion in debt has been added.

In other words, in a span of just 12 years, global outstanding debt went from $35 trillion to $100 trillion. Keep in mind though that this refers only to debt that exists in the form of securities. Given that the most recent debt expansion consists mainly of government debt expansion, we know for a fact that much of this debt is unproductive. The funds have simply been consumed.

Here is a chart from the BIS report illustrating the situation:

BIS-Debt Bubble

The global credit bubble. There are now about $100 trillion in debt securities outstanding worldwide – click to enlarge.

Admittedly, while this debtberg was built, money has lost a lot of its purchasing power, so it is not as large as it appears on a nominal basis. There may well be additional and possibly quite discontinuous losses in the exchange value of money at some point going forward, given the huge expansion in the money supply witnessed all over the world.

Where to From Here?

There is zero evidence that this debt growth has had any positive effect on economic growth – rather the opposite. The global debt binge can be said to have gone into overdrive from 1971 onward, when Nixon decided to 'temporarily' default on the US gold obligation according to the Bretton Woods agreement. Ever since, real economic growth in the developed nations has been much lower than in the post war decades preceding the default, when debt growth was far more subdued (because it was at least a little bit constrained by the gold exchange standard). Moreover, given that outstanding debt has  roughly tripled over the past twelve years, we can conclude that such large debt growth is in fact extremely detrimental to the real economy's performance. Obviously, economic growth in developed nations has been completely underwhelming over this time span.

We should add here, the size of the debt as such is not the decisive point in this context. If the debt represented genuine savings and had been invested productively, its size should not worry us. However, we know that the impetus for this debt expansion has come from the artificial suppression of interest rates by central banks and we therefore know for a fact that much of this debt has not been employed productively. On the contrary, it has likely led to vast growth in capital malinvestment. Of course there is no question that there was e.g. enormous malinvestment in housing in numerous nations (and continues and/or has resumed in many more). We would argue though that there exist a number of less obvious instances of malinvestment that simply await their eventual unmasking.

Below is another chart from the BIS report, which shows the ratio of bank lending to total private sector funding in selected countries. We can infer from this chart that the total debtberg is a good size bigger than that represented by debt securities alone.

Bank credit-to-total-funding ratio
Bank lending in selected countries relative to total private sector debt funding – click to enlarge.

The BIS notes that this ratio depends on a number of factors, such as the legal tradition of the country concerned (and the protection it affords arms-length third party investors), the types of businesses doing the borrowing (whether or not they have assets that can easily be pledged as collateral) and the average size of businesses (smaller ones are more likely to borrow from banks).

Another interesting and not very surprising finding is that in 'normal' recessions (i.e. fairly mild downturns), access to credit remains more open in countries in which bank lending predominates, whereas in financial crises, the more market-based credit systems turn out to be superior. Here is an interesting excerpt:

“Banks and markets also behave differently when it comes to moderating business cycle fluctuations. In “normal” downturns, relationship banks, especially well capitalised ones, find it easier to keep lending than markets do.

Drawing on their long-term relationships with clients, banks are more inclined to offer credit during a downturn. By contrast, transaction lenders, who do not invest in information about the borrower, typically pull back during a recession.

However, a financial crisis can impair banks’ shock-absorbing capacity. When banks are under strain, they are less able to help their clients through difficult times.

In addition, during a financial crisis, banks may put off necessary balance sheet restructuring: instead, they may opt to roll over credit in an effort to postpone loss recognition (so-called zombie lending). This is something that capital market investors cannot afford to do. In a financial crisis, therefore, systems that are more market-oriented may speed up the necessary deleveraging, thereby paving the way for a sustainable recovery.”

(emphasis added)

Intuitively, this rings true, especially considering the recent experiences in the euro area. However, while euro area banks have been a bit lackadaisical in terms of deleveraging and strengthening their capital (this does not mean they have done nothing – they most certainly have), there are other signs that the liquidation of malinvested capital that has occurred in Europe was more intense than elsewhere.  There has furthermore at least been a token attempt at braking government debt growth and instituting economic reform. However, as our readers know, we are of the opinion that it has been done the wrong way (by trying to squeeze the private sector while leaving the government sector largely untouched) and that the reforms have not even remotely gone far enough.

The question is though where this enormous expansion in largely unproductive debt will lead. As far as we can tell, the tendency is for this growth to continue, with only temporary slowdowns occurring from time to time. However, it is a mathematical certainty that debt growth cannot exceed real economic growth forever and ever, regardless of how low interest rates (and the associated debt service costs) are. This is not least so because real wealth generation is impeded by too low interest rates. Hence, the ability to service debt is perforce declining, even while the debtberg continues to increase. It is therefore not possible to 'outgrow' the debt accumulation. That is just not going to happen.

Also, Japan's example demonstrates the inescapable fact that even if interest rates remain at rock bottom levels, once a certain threshold is crossed, the sheer size of the debtberg becomes so daunting that debt service costs begin to inexorably rise anyway. Then one arrives in the Land of pure Ponzi finance, which is where Japan's government already finds itself today.


In the long run, there are only two realistic ways in which this situation can be resolved: either there is a wave of defaults at some point (which would likely strain the ability of governments to protect depositors to the breaking point and would therefore have deflationary implications), or there is a 'flight forward', i.e., an attempt to 'solve' the debt problem via inflation – by a policy that deliberately aims at 'unanchoring' inflation expectations.

This is surely not something Western central banks would like to do, as they would risk their own destruction if the process 'gets away' from them. Sometimes though, we don't get what we want, but what we deserve. No-one knows when the strong demand for money and the continued improvement in the productivity of certain sectors of the economy that have kept the price effects of monetary inflation largely confined to financial markets and non-tradable services will give way to a declining demand for money. All we know for certain is that the supply of money has been vastly increased, but we cannot know a priori at what point it will affect the demand for money. There probably exists a threshold for this as well though, and once it is crossed, central banks may find that it is not so easy to put the genie back into the bottle. This is especially so as it seems likely that  the pressure to provide easy money will continue on account of political contingencies. Besides, governments can always commandeer central banks by revoking or restricting their nominal independence.

All of this seems a distant prospect today, but all it will take is a big enough financial and economic emergency. Then a lot of things can change in a hurry.

See the original article >>

Is It a Bubble Yet?

by Pater Tenebrarum

Warning Signs Proliferate Again

One of the best illustrations that we are in an unmitigated and absolutely frantic financial bubble is the recent rally in fuel cell stocks. Yesterday, PLUG (Plug Power), a stock that traded at a mere 15 cents last year, finally fell sharply from its high above $11,70 (yes, it has risen by about 77 times in a few short months) after Citron Research remarked that nothing – absolutely nothing – has actually changed at the company.

According to Marketwatch:

“Plug Power shares traded at their highest in five years, and the stock was the second most active in U.S. markets in early trading Tuesday.

Then Andrew Left of Citron Research came out and said Plug Power PLUG -1.16% shares would be fairly valued at 50 cents. Shares of Plug were recently down 25%. “It’s a casino stock, “the lowest form of speculative moonshot,” Left said in a note Tuesday. There are no profits, no unique technology, and the end of government subsidies looms, he added.

Nothing has changed in the year since the stock traded at 15 cents. “Revenue for the 9 months ended September 30, 2013 was $18.6 (million), vs $20.2 (million) for the prior year. Nothing more needs to be said.”

(emphasis added)

PLUG bubble-1The PLUG mini-bubble – click to enlarge.

Not only is this type of action highly reminiscent of the spring of 2000, it also turns out that the reason behind the moonshot is the fact that various companies are trying to avail themselves of federal subsidies by engaging in what are plainly uneconomic investments (if they were economic, they would not require subsidies):

“The contracts that have propelled Plug Power to stardom? Big companies such as Wal-Mart and FedEx are after the federal tax credits for renewable energy, Left said. That particular punchbowl, however, is likely to be taken away in a couple of years, he added.”

(emphasis added)

That particular punchbowl is indeed likely to be taken away.  For one thing, it is unaffordable and for another, global warming has stopped 17 years and 5 months ago (and counting). This is notwithstanding the fact that the political and bureaucratic elites continue to propagate the 'climate change' meme sotto voce at every opportunity.

Leveraged Loans, Penny Stocks and Profitless IPOs

Sentimentrader has posted a few updates recently that show that financial froth is quite out of bounds by now. For instance, the share of IPOs of money losing companies over the past six months has soared back to the highs last seen at the top of the technology mania in 2000. A full 74% of all IPOs issued over the past half year were in companies that are making losses. The securities of such companies bereft of income of course all tend to soar right after they hit the market.

In another update, it was pointed out that the value of trading in penny stocks has soared to a multi-year high:

Penny Stocks

Penny stock trading soars - click to enlarge.

Admittedly, a similar spike in 2013 subsided quickly and didn't turn out to mean anything, but since then there have been several intermittent spikes, and their frequency has clearly increased. At some point it will mean something (just because something has not had meant much so far does not mean it never will).

However, the soaring issuance of leveraged loans really takes the cake. This is a chart to make even hardened bubble-heads dizzy. It is especially noteworthy how the current surge compares to the surge in 2007, shortly before the last bubble peaked. Nothing remotely comparable has ever been seen before. It is a mirror image of record junk bond issuance and the mania for high yielding debt in general (whereby 'high yielding' these days actually means 'not yielding very much').

Leveraged Loans

Leveraged loan issuance goes bananas – click to enlarge.

See the original article >>

I’m Long Corn and Short Copper So I’m Short China

by Greg Harmon

That is the obvious play right? As China implodes Copper will sell off and the scare will raise Corn prices. Everyone is doing it.

Why is it that traders need to make everything so complicated? The latest story running around is that Copper will sell off because the economy in China is at risk or imploding. And since Copper is used as collateral for loans by some companies in China there will be a mass Copper liquidation. So if you believe that China will falter sell Copper. What? If you think that China will implode why not just sell China? I suspect this course of action has been put forth by the same people that think that they are long on the housing market by buying Ford stock (hey – they make cars and trucks, not houses) and suggest that you hedge your stock portfolio by buying VIX calls (a derivative on the S&P 500 Puts and Calls, which by the way have a higher correlation to those stocks). But I digress.

china copper

I understand that it may sound cool to be long VIX Calls or short Copper, but what is the point? I understood the point of trading or investing to be making money. And if you have a well thought out thesis, or from my technical perspective, the price action in a particular, sector, stock or ETF is giving an opportunity, then use that directly. You don’t like China, then sell China. There seems to be a good reason to sell China in the chart above. It broke the neckline of the Head and Shoulders Top on Monday and has a price objective to 1848 below. If you agree then just sell the China ETF $FXI short or buy $FXI Puts (sorry the Shanghai Composite stock can only be traded by Chinese nationals). But there is also the possibility of a Double Bottom and reversal at the 1990 level. Incidentally the purple blob underneath is the price of Copper. It is hard to see the same strong correlation between Copper and China that has existed the last 2 days in the rest of the chart. Maybe because it is not there? Also with the breakdown in Copper there are reasons to short that too. Just don’t claim you are short China if you do.

See the original article >>

Patterns suggests Doc Copper could fall 30% more!

by Chris Kimble


Doc Copper are you feeling ok, you don't look the best! Copper could well be forming a multi-year descending triangle. If this pattern read is correct, should Copper break support, selling pressure should increase.  A support break suggests Copper could trade another 30% lower. 

So far support is still in place....This is important, stay tuned.

My question on a bigger scale is, if Copper does trade lower, what is the macro message it would be sending? Should one construct their portfolios differently if Copper does fall hard?

See the original article >>

Renzi's Day

by Marc Chandler

The Chamber of Deputies approved the electoral reform bill that Renzi and Berlusconi had negotiated before Renzi squeezed out Letta to become Prime Minister of Italy. The bill goes to the Senate now.

That Renzi got the lower chamber to approve the bill is a minor victory, after all he enjoys a majority. There was some fear that, under Letta, the more than 200 amendments would have bogged down the process. In response to the Constitutional Court criticism of the previous electoral system, foisted by Berlusconi a new electoral system was created. It raises the threshold for parliamentary representation by a party and coalitions. Many small parties might not qualify, and this will make parliament less fragmented. It also provides a run-off mechanism that would kick in if no party/coalition secures 37% of the popular vote.

In order to secure approval of the bill, Renzi was forced to decouple it from his other pet political issue--strip the Senate of its legislative authority--turning it into an unelected body with local government representatives.

Assuming that the Senate passes the political reform, the Senate continues to run under the previous electoral law, as the Constitutional Court ruling long applied to the lower house. An election now would be chaotic and it may take a better part of the year before the Senate reform (and the necessary constitutional changes) can be implemented.

Later today in Italy, Renzi is expected to unveil more of his 100-day program. He claims that between spending cuts, lower debt service costs and increased revenue, he has 20 bln euros to fund reforms. There is some skepticism over his figure and the EC warned yesterday that tax cuts should not be predicated on uncertain projections of future revenue. It once again put Italy on its economic watch list (last week), citing Italy's high public debt and weak external competitiveness.

Renzi intends to use half of his calculation of his means. He is expected to announce a cut in the regional social security tax (Irpef) for low wage earners. Business sought a cut in the regional tax (Irap), but the signs from Rome are that the pressure will likely be rebuffed.

The government is expected to make it easier to hire and fire workers in the first couple years of employment and extend unemployment benefits, with some reforms of the program. As part of the labor reforms, Renzi is expected to propose a tax break for new hires.

In addition to labor market reforms, Renzi is expected to unveil new initiatives to pay debts of the central and local governments. Italian governments owe businesses roughly 60 bln euros and have been chastised by the EU for not addressing these quicker. In addition to the lack of access to capital and the economic weakness, the government's lack of payment only exacerbates the pressure on small and medium businesses.

Renzi is also expected to unveil fresh initiatives for schools, proposing to spend some 1.6 bln euros on modernizing school buildings, which can also act as a little stimulus for local economies.

A source of savings for the government is the lower debt servicing costs. As if on cue, today, the Italian government sold one year bills at a record low interest rate of just below 60 bp. It also sold, for the first time in 4-years new 10-year inflation-linked bonds. The break-even was 1.06%.

Many observers, like ourselves, find Renzi's claim to do in three months what Italy has not achieved in 30 years to be incredulous. Yet there is much hope for his success.

See the original article >>

Is the Energy Sector Running Out of Gas?

by Tom Aspray

Stocks absorbed their second day of selling on Tuesday, and the futures are trading lower early Wednesday in reaction to more weak data out of China. The Asian markets were down sharply again with the Nikkei 225 losing 2.60% and the Hang Seng dropping 1.6%.

Most of the Eurozone markets are also down over 1%, but so far, the selling in the US stock index futures is not too heavy as the S&P futures are down just five points. The daily technical studies are declining but the NYSE Advance/Decline did make new highs last week and is still above its WMA.

Therefore, the current pullback is expected to be a buying opportunity as another rally is likely since a more significant top typically would take more time to form. The energy sector, which tried to rally last week, was hit with heavier selling on Tuesday. So what is the technical outlook for this key sector now?

Click to Enlarge

Chart Analysis: The Select Sector SPDR Energy (XLE) is down 1.53% YTD with the 20-week EMA now at $85.94 along with the monthly pivot.

  • There is additionally support in the $85 area and the projected monthly pivot support at $83.46.
  • In early February, XLE had a low of $81.78, line a.
  • The weekly relative performance dropped below its WMA and support last October.
  • The RS line is well below its WMA and the long-term downtrend, line b.
  • There are no signs yet of a bottom, basis the daily RS analysis (not shown).
  • The weekly on-balance volume (OBV) looks ready to turn lower after failing to exceed the previous highs, line c.
  • The OBV has next support at its slightly rising WMA.
  • The weekly OBV did violate a longer-term uptrend, line d, during the January-February correction.
  • There is a resistance now at $88.30-$88.48 and a close above these levels is needed to reassert the uptrend.

The SPDR S&P Oil & Gas Exploration (XOP) has performed better this year as it is down just 0.35% YTD.

  • XOP was down just over 2% on Tuesday with volume 1 1/2 times the average.
  • Prices are now close to the daily starc- band at $67.31 with the 20-day EMA at $67.31.
  • The 50% Fibonacci retracement support of the rally from the February lows is at $67.41, which is very close to the quarterly S1 support.
  • The monthly projected pivot support stands at $65.15.
  • The daily relative performance moved briefly above resistance at line f last week.
  • The RS line has now broken its uptrend, line g, indicating that XOP is acting weaker than the S&P 500.
  • The daily OBV formed lower highs in February and has now dropped below its short-term support.

Click to Enlarge

Exxon Mobil Corporation (XOM), which makes up over 16% of XLE, dropped 1.5% on Tuesday. It is down 6.5% YTD and has next support at $85.94 and the 20-week EMA.

  • XOM is just below the monthly pivot at $94.09 and closed below the quarterly pivot at $95.04 last Friday.
  • There is further support in the $91-$92 area with the February low at $88.76.
  • The pattern in the weekly relative performance looks very similar to that of XLE.
  • It looks ready to make new lows this week and is well below its declining WMA.
  • The weekly OBV has dropped below its WMA with support now at the February lows and the uptrend, line c.
  • The daily OBV (not shown) is also below its WMA so both OBV time frames are negative.
  • There is initial chart resistance at Monday’s high of $95.55 with further resistance at last Tuesday’s doji high of $96.86

Valero Energy (VLO) was recommended in late January’s One High-Octane Pick and has been one of the strongest oil and gas refining stocks. Last week, it broke through resistance at line d.

  • Tuesday’s high at $53.92 tested the daily starc+ band, which is now at $55.07.
  • The 127.2% Fibonacci retracement target is at $55.55 with the weekly starc+ band at $57.34.
  • The daily relative performance has been very strong over the past week as it has surged above its downtrend, line f.
  • The weekly RS line (not shown) is close to its previous highs.
  • The daily OBV confirmed the price action as it broke out of its trading range, lines g and h.
  • The weekly OBV is also above its WMA but is still slightly below the early-2014 high.
  • There is initial support now in the $51.80-$52.20 area with stronger at $50.
  • The monthly pivot is at $48.78 with the quarterly at $44.43.

What It Means: The failure of the energy sector to rally with crude oil, which typically bottoms in February, has kept me from making many recommendations in this sector.

The technicals suggest that a further drop is likely as the RS analysis is leading prices lower. Our long position in Valero Energy (VLO) is up over 11% in six weeks, so it is time to take some partial profits and as I tweeted “sell 1/3 of the position in VLO on the opening.”

How to Profit: No new recommendation

Portfolio Update: Should be 100% long Valero Energy (VLO) at an average price of $48.11. Sell 1/3 on the opening and raise the stop to $48.66 on the remaining position.

Also still 1/3 long Schlumberger (SLB) from $87.13 as I reduced the positions just before it popped to the upside. Use a stop now at $89.23.

See the original article >>

Weekly energy market analysis

By Dominick Chirichella

Since breaching the $100/bbl level yesterday afternoon the spot Nymex WTI (NYMEX:CLJ14) contract has been steadily declining. The spot contract is off another 1.2% so far this morning. The market is finally acknowledging that the destocking of crude oil inventories in Cushing is resulting in a surplus building in the Gulf or PADD 3 region. I have been discussing this issue for several months in this newsletter and in our Energy Insight Blog “The Big Shift”.

As of last week’s EIA oil inventory report crude oil stocks in the Gulf are above last year and the five year average with the spring refinery maintenance season barely getting underway. Last night’s API report showed a larger than expected build in total crude oil stocks of 2.6 million barrels. Later this morning the EIA will release their report with a PADD breakdown. I am expecting another above average build in PADD 3 again this week.

The direction of WTI is primarily driven by the short term fundamentals with more and more market participants starting to recognize that it is not a question as to will a crude oil surplus build in the U.S. Gulf, rather how large will the surplus be and how long will the region remain in a surplus position. As the refining sector moves into the heart of the lower crude oil demand refinery maintenance season the surplus will only grow and likely grow at an accelerated rate.

As I have also warned the Brent/WTI spread is being impacted by the so called “Big Shift” as WTI has been in a downward trending pattern while the Brent contract has been much more stable. Until the refinery maintenance season is over in a few months or so the spread will have difficulty in working its way toward a more normal historical relationship that existed prior to the surplus years in the Cushing region.

The April spread has now breached the $8/bbl technical resistance area that has been in play since the middle of February. The spread is now looking like it will settle into an $8/bbl to $11/bbl trading range for the short term. The direction of the spread has been consistently moving in the inverse direction of the spot WTI contract as the Brent contract has remained relatively stable.

In fact the Brent (NYMEX:SCJ14) contract has been in a technical triangular or consolidation trading pattern while the WTI contract has been in a downtrend over the same timeframe. Brent is garnering support from the ongoing and evolving geopolitical issues in places like Libya, Ukraine and elsewhere in the MENA region as well as market participants starting to look forward to the North Sea maintenance season which will result in reduced supply of North Sea crude oil.

In the short term I expect the spread to remain with a bias toward widening while longer term the narrowing pattern should return.

Global equity markets are continuing to drift lower with the EMI Global Equity Index now at the lowest level of the year erasing all of the recovery gains over the last several weeks. The EMI Index is now showing a year to date loss of 5.9% with seven of the ten bourses in the Index now in negative territory. Although Brazil was the only bourse to add value over the last twenty four hours it is still the worst performing exchange in the Index. Canada remains on top of the leader board but if oil prices continue to slide Canadian equities are likely to get hit. Global equities have been a negative price driver for the oil markets as well as the broader commodity complex. The US dollar Index continues to move higher and is also acting as a negative price driver for oil and commodities.

The EIA released their latest Short Term Energy Outlook yesterday. Following are the main oil highlights from the report. In this month’s report they lowered their forecast for global demand by 100,000 bpd but also lowered their global supply projection by 300,000 bpd.

  • EIA projects world petroleum and other liquids supply to increase by 1.3 million barrels per day (bbl/d) in both 2014 and 2015, with most of the growth coming from countries outside of the Organization of the Petroleum Exporting Countries (OPEC). The Americas, in particular the United States, Canada, and Brazil, will account for much of this growth.
  • Harsh winter conditions over the past few months negatively affected well completion activity in the northern U.S. plays. As more evidence of this seasonal slowdown has appeared in the data, EIA has revised downward initial estimates for December 2013 and January 2014 U.S. crude oil production. Because the weather effects are temporary, much of the production slowdown is expected to be made up by accelerated completion activity over the next few months.
  • EIA expects strong crude oil production growth, primarily concentrated in the Bakken, Eagle Ford, and Permian regions, continuing through 2015. Forecast production increases from an estimated 7.5 million bbl/d in 2013 to 8.4 million bbl/d in 2014 and 9.2 million bbl/d in 2015. The highest historical annual average U.S. production level was 9.6 million bbl/d in 1970.
  • Projected world liquid fuels consumption grows by an annual average of 1.2 million bbl/d in 2014 and 1.4 million bbl/d in 2015. Countries outside the Organization for Economic Cooperation and Development (OECD), notably China, drive expected consumption growth. Non-OPEC supply growth contributes to an increase in global surplus crude oil production capacity from an average of 2.1 million bbl/d in 2013 to 3.9 million bbl/d in 2015.
  • EIA estimates that global consumption grew by 1.2 million bbl/d in 2013, averaging 90.4 million bbl/d for the year. EIA expects global consumption to grow 1.2 million bbl/d in 2014 and 1.4 million bbl/d in 2015. Projected global oil-consumption-weighted real GDP, which increased by an estimated 2.3% in 2013, grows by 3.1% and 3.5% in 2014 and 2015, respectively.
  • EIA estimates that OPEC crude oil production averaged 30.0 million bbl/d in 2013, a decline of 0.9 million bbl/d from the previous year, primarily reflecting increased outages in Libya, Nigeria, and Iraq, and strong non-OPEC supply growth. EIA expects OPEC crude oil production to fall by 0.5 million bbl/d and 0.3 million bbl/d in 2014 and 2015, respectively, as some OPEC countries, led by Saudi Arabia, reduce production to accommodate the non-OPEC supply growth in 2014.
  • EIA expects that OPEC surplus capacity, which is concentrated in Saudi Arabia, will average 2.6 million bbl/d in 2014 and 3.9 million bbl/d in 2015. This build in surplus capacity reflects production cutbacks by some OPEC members adjusting for the higher supply from non-OPEC producers. These estimates do not include additional capacity that may be available in Iran but is currently offline because of the effects of U.S. and European Union sanctions on Iran's oil sector.
  • EIA estimates that OECD commercial oil inventories totaled 2.59 billion barrels by the end of 2013, equivalent to roughly 56 days of consumption in that region. Projected OECD oil inventories rise to 2.61 billion barrels at the end of 2014 and 2.62 billion barrels at the end of 2015.

Wednesday's API report was neutral to bearish as total crude oil stocks increased more than the expectations while refined product inventories were declined mostly within the expectations. The build in crude oil is primarily related to the an increased in crude oil imports as well as the shifting of crude oil from Cushing down to the Gulf. The API reported a slightly larger than expected draw in gasoline and an expected draw in distillate fuel. Total inventories of crude oil and refined products were slightly lower on the week.

The oil complex is mostly lower as of this writing and heading into the EIA oil inventory report to be released at 10:30 AM EST today. The market is usually cautious on trading on the API report and prefers to wait for the more widely watched EIA report due out this morning.

Crude oil stocks increased by 2.6 million barrels.  On the week gasoline stocks decreased by about 2.2 million barrels while distillate fuel stocks decreased by about 0.8 million barrels. Refinery utilization rates decreased by 0.3% suggesting the spring maintenance season may be starting to get underway.

The API reported Cushing crude oil stocks decreased below the expectations by 1.3 million barrels for the week. The API and EIA have been very much in sync on Cushing crude oil stocks and as such we should see a similar draw in Cushing in the EIA report. Directionally it is neutral for the Brent/WTI spread.

My projections for this week’s inventory report are summarized in the following table. I am expecting a modest build in crude oil stocks as the restocking process continues for the eight week in a row. I am also expecting a modest draw in gasoline inventories and in distillate fuel last week with refinery run rates starting to decline.

I am expecting crude oil stocks to increase by about 2.4 million barrels. If the actual numbers are in sync with my projections the year over year comparison for crude oil will now show a deficit of 15.2 million barrels while the overhang versus the five year average for the same week will come in around 12.1 million barrels.

I am expecting crude oil inventories in Cushing, Okla., to show the seventh weekly stock decrease in a row as the Keystone Gulf Coast pipeline is continuing to slowly ramp up its pumping rate. I would expect the Cushing stock decline to be in the range of around 2 million barrels based on the fact that more oil was moved out of Cushing to the USGC on Keystone last week.

In fact the Keystone Gulf Coast line increased its pumping rate for the fifth week out of the last six weeks. Genscape reported an average flow of 308,751 bpd for last week (report period for this week’s inventory report) as the line continues to work its way up to full operating capacity. The Keystone Gulf Coast Line is impacting the crude oil storage levels in Cushing and should result in Cushing stocks consistently declining going forward. Last week alone the Keystone line moved about 2.2 million barrels of crude oil out of Cushing. This will be bearish for the Brent/WTI spread this week. I am also expecting an above normal build of crude oil stocks in PADD 3(Gulf) of over 2 million barrels.

With refinery runs expected to decrease by 0.2% and wit the industry working down its stocks of winter grade gasoline I am expecting a modest draw in gasoline stocks. Gasoline stocks are expected to decrease by 1.8 million barrels which would result in the gasoline year over year surplus coming in around 0.7 million barrels while the surplus versus the five year average for the same week will come in around 1.6 million barrels.

Distillate inventories are projected to decrease by 1 million barrels as exports of distillate fuel out of the US Gulf continue while heating demand last week was above normal on cold winter weather along the east coast. If the actual EIA data is in sync with my distillate fuel projection inventories versus last year will likely now be about 6.9 million barrels below last year while the deficit versus the five year average will come in around 28.5 million barrels.

I am adjusting my oil view and bias to cautiously bearish but I am still flying the caution flag as the situation in the Ukraine continues to unfold. Most of the commodities in the oil complex have breached their respective technical support levels and are moving into new, lower trading ranges.

I am maintaining my Nat Gas (NYMEX:HPJ14) view and bias at neutral as the market sentiment seems is shifting away from the winter weather trading mode. The Nat Gas market is exhibiting all of the signs of a market establishing yet another market top.

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Yuan Dive?

by Barry Eichengreen

BERKELEY – Since December, when the US Federal Reserve began tapering its monthly purchases of long-term assets, emerging-market currencies have fallen across the board.

The main exception, until recently, was China’s indomitable renminbi. But now the renminbi, too, has been falling against the dollar. So is this more evidence of the disruptive impact of the Fed’s policy?

The renminbi’s decline is not large, and whether it will continue is uncertain. But the movement is striking by the standards of what is still a heavily managed currency. And it is in the opposite direction from what everyone has come to expect.

Certainly, the Fed’s tapering of its quantitative-easing policy has had some effect. A standard money-making strategy for investors with access to Chinese financial markets has been to borrow dollars at low interest rates and buy high-yield Chinese assets. But tapering, by auguring higher US interest rates, makes it more expensive to borrow dollars and invest in Chinese assets. As “the carry trade” falls out of fashion, demand for the renminbi declines and its exchange rate depreciates.

But, while the Fed has been tapering since December, the weakness of the renminbi materialized only in February. Evidently, something else is going on.

The reality is that China’s tightly controlled currency falls only when the People’s Bank of China wants it to fall. The PBOC, not the Fed, calls the tune to which the renminbi dances.

So why has it been singing the depreciation song?

One possibility is that a weaker renminbi is, paradoxically, part of the Chinese government’s strategy for encouraging its wider international use. China is committed to broadening the renminbi’s role for foreign trade and investment-related purposes. Ultimately, it would like to see the renminbi achieve an international status comparable to that of the dollar.

To do that, China will have to develop its financial markets and open them to foreign investors. But opening those markets is feasible only if the authorities eliminate the perception that exchange-rate movements are a one-way proposition. So long as investors believe that the renminbi can only appreciate, opening the country’s markets will cause it to be flooded by foreign money, with unpleasant financial consequences, not the least of which is inflation.

Foreign investors therefore need to be reminded that the renminbi can fall as well as rise. Some observers regard the renminbi’s recent slide as an attempt to squeeze the speculators and signal the advent of a more flexible exchange rate. They believe that the PBOC is about to widen the currency’s trading band.

If so, the PBOC’s recent market moves are a good thing. If there is one clear lesson from history, it is that the combination of open financial markets and a rigid exchange rate is a disaster waiting to happen. China has already begun opening its financial markets. Thus, greater exchange-rate flexibility is overdue.

A second, less positive interpretation is that the PBOC is weakening the renminbi in order to boost Chinese exports. Reacting against excesses in the country’s property markets and shadow banking system, the PBOC has moved, not unreasonably, to limit the availability of cheap credit. But this may have caused domestic demand growth to slow more rapidly than expected. And boosting exports is, of course, China’s customary response to weaker domestic demand.

This less encouraging interpretation of the renminbi’s recent weakening suggests that official efforts to clamp down on the shadow banking system are not going well, and that the effort to engineer a soft economic landing is not on course. If this view is correct, efforts to rebalance the Chinese economy could now be put on hold, which would not bode well for future economic and financial stability.

Moreover, if China is pushing down the renminbi in order to goose its exports, its policy will not sit well with its foreign competitors, be they the United States or Japan. Complaints about currency manipulation and the associated diplomatic tensions will quickly return.

China is sufficiently opaque that it is hard to know from the outside which interpretation is correct. Future renminbi movements will tell the tale. Mainly up-and-down fluctuations would be a sign that the policymakers’ goal is to eliminate one-way bets and advance the cause of renminbi internationalization. A secular decline, by contrast, would indicate that demand in China is weakening and rebalancing has been suspended.

For now, the only thing observers can do is to watch closely and hope for the best. And it is the PBOC they should be watching, not the Fed.

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