Portugal CDS spread widens again

by SoberLook.com

The date is set for the troika inspectors to pay a visit to Portugal.

CBS News: - Portugal's Finance Ministry says inspectors from the country's bailout creditors will arrive Sept. 16 to assess Portugal's progress on repairing its public finances and adopting economic reforms.
In return for a 78 billion euros rescue package in 2011, the creditors -- the International Monetary Fund, European Central Bank and other euro countries -- demanded spending cuts to reduce debt. They also required measures to modernize the economy. Disbursement of bailout funds depends on Portugal's compliance.

Of course these compliance targets have been loosened considerably since the original agreement. Based on the new hurdle level, Portugal should be able to pass the "inspection" this time around. Given the trajectory of the fiscal balance however, the second half of the year is less certain.

Source: CS

But even if the nation is able to meet its targets, there is no way it can return to the private markets in the near future in order to fund its government. And that's assuming the political infighting doesn't preclude them from running into trouble with troika in the near future (see overview).

The Economist: - Even if the recovery gathers momentum and the two governing parties manage to avoid further splits, few believe Portugal will be able to last the course without more outside help. The main question is whether this will take the form of a precautionary credit line, which the authorities could draw on as necessary, or another bail-out with further tough conditions attached. As long as the government delivers promised reforms, other euro-zone governments will probably continue to support it, possibly providing some form of debt relief without calling for write-downs by private-sector investors.

With financing sustainability in question, investors are becoming nervous once again. CDS spreads widened to the levels we saw during the constitutional crisis (see post). It is not just the absolute level of CDS spreads that signals uncertainty. The spread to other peripheral nations, such as Italy and Spain, is now particularly wide.

Source: DB, Markit

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Q.E. - The #1 Threat To The Economy

by Lance Roberts

During this morning's usual reading and research I ran across an posting by Josh Brown which was discussing the "#1 Threat To The Market."   When you first read the headline of the article you immediately assume that the main risk would be Syria, earnings growth or the pending debt ceiling debate.  However, I think Josh gets the primary argument correct in identifying interest rates as the real issue.  He states:

"So of the litany of current market fears - Syria, Egypt, China's banking system, the Taper, the debt ceiling, the budget battle, the twerking epidemic, high oil prices, etc, the one I am most worried about is the effect of higher rates on the housing market."

As I have stated so many times previously (see here, here and here) rising rates are an anathema to the economy and, ultimately, the stock market.  Rising rates impact borrowers, consumption, capital expenditures and housing.  The table below shows the percentage contribution of each subsector of the economy to overall GDP. (Note: Josh references data that suggests that housing made up 40% of the most recent GDP report.  It was actually closer to 15% but the net impact to housing from rising mortgage rates is significant nonetheless.)

Since the primary borrowers of consumer credit are generally those that are living "paycheck to paycheck" rising interest rates reduce disposable incomes which impacts future consumption.  The latest report on personal spending suggests that this is likely already manifesting itself and will negatively impact economic growth through the end of the year.  Furthermore, rising interest rates, as Josh suggests, will negatively impact the housing market as rising interest rates price buyers out of the market.  This point is especially important since the bulk of buying has been driven by speculators purchasing homes to turn them into rentals.

Rising rates lowers the profitability of rental properties which will slow the speculative buying frenzy.  Eventually, if rates rise enough, it will force a "rush to market" of these homes as speculators try and capture price gains.  The problem will become who the buyers will be as rising rates have priced many first time homebuyers out of the market place.  With residential homeownership already at the lowest levels since the 80's the push higher in rates poses a real potential threat to the housing market and its contribution to GDP.

Lastly, rising rates puts businesses on the defensive as increasing borrowing costs have a negative impact on refinancing activities, returns on capital investments and increases inventory holding costs.

So, as you can see in the chart above, the real threat to the economy is from higher interest rates which negatively impacts the two major contributing factors of personal consumption and private investment.  Which leads me to the one point where I disagree slightly with Josh which is on the impact of the Federal Reserve and their ongoing monetary intervention programs.  Josh states that:

"...supporting the housing market should be the Fed's number one goal right now, not chasing phantom asset bubbles. The good news is that the Fed itself seems to be aware of this. Recently a trial balloon had been floated in the direction of Goldman's chief economist, who is now talking about a taper that could involve maybe buying less Treasuries each month but more mortgage backed securities (MBS), thus supporting housing (see: Goldman's Latest on the September Fed Announcement at Zero Hedge)."

The reality is that the Fed's intervention programs are what is causing rates to rise currently.  The chart below shows the 10-year Treasury rate on a 6-month rate of change basis.  As you can see volatility in rates was more tied to variations in economic activity in years leading up to 2009.  However, once the Fed begin its various intervention programs volatility spiked dramatically. 

It is important to note that the current spike in interest rates is NOT ANY different in terms of velocity or magnitude relative to what we have already seen twice before.   What will be the same will be the drag on economic growth and eventually the stock market.

The point here is that if the Fed is really serious about supporting the housing market, and the economy, then they should immediately set a future date for when their monetary interventions, in its current form, will cease.  As that date approaches, just as has occurred at the end of the previous two programs, interest rates would begin to fall as money rotated back into Treasuries for "safety" as the stock market corrected.

The problem is that the drop in the markets also negatively impacts the economy as consumer confidence wanes and consumption declines.  This, of course, is not beneficial; so the Fed continues to intervene with continuing rounds of interventions. As I stated above the real threat to the economy is the impact of the Fed's interventions on interest rates.  However, like a patient dependent on life support, it is only with these interventions that the economy can maintain a pulse.  Welcome to the liquidity trap.

There are certainly more than enough things to impact the market currently, as Josh correctly notes, and the spike in interest rates is likely the most important from an economic perspective longer term.  However, I certainly wouldn't completely dismiss the other issues either.  We are now very long in the tooth in the current economic expansion and with valuations, profits and earnings per share all at levels that have historically only been seen near the end of cyclical bull markets rather than the beginning.  As I stated in that post:

"While there may not be an asset bubble currently; valuations by both of the metrics (CP/S and EPS) studied here are clearly rich.  However, for investors, it is important to remember that valuation measures are horrible short term market timing devices.  In the long run valuations mean everything.  While I am not suggesting that the market is about to plunge into its 3rd major reversion for this century, even though that possibility does exist, I am suggesting that future returns will likely not be anything to write home about either."

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Apple bangs this…Harvested gains & collected some Pocket Change-

by Chris Kimble

CLICK ON CHART

Premium Members bought Apple on the double bottom at $402 per share.

Recently Premium members collected some pocket change, as we harvested gains in Apple at $499 as it hit its 38% Fibonacci retracement level at (1) above.

It would be bullish for Apple if it can break the 38% Fib level.  Due keep in mind that over the past two weeks Apple has created two bearish wicks at this key Fibonacci resistance level!

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Corn follows soybeans higher, while wheat tests support

By Allendale Inc.

Corn: Overnight, corn followed the bean market higher, as it has done recently but when beans gave up a little ground, the corn gave up much more.

This market has been able to follow beans on the thought that there was still a risk for early frost this year. Coming in Tuesday morning, there were still no forecasts for an early frost and some claimed that threat was off the table. Without frost risk, trade is still assuming that dryness will not affect the corn crop anymore as the crop is too far advanced. If the dryness causes plants to die before black layering, then there is a case that test weight can be lost, which is something trade will not likely focus on for some time yet. A scenario where test weight is lost but not bushels would be one where we need to look back at 2009 to predict future trade. In that crop year, the sizable bounce was not seen until the start of October.

On the technical side, the December corn filled the chart gap left at 474 ½, which leaves next support at 463 1/2 and resistance at 508 1/4. When corn closed the December settled almost right in the middle of the trading range during the month of August. Trade was looking for a 3% drop in the GTE rating, which is exactly what was seen.

Going forward, we should still look at bean bounces to offer the best short-term support but with frost risk now off the table, that support is likely to be even less than it was last month…Ryan Ettner

Soybeans: Bean market bulls came out of the long holiday weekend on a tear as the market gapped sharply higher on the open. A bullish spin of the weather was given credit for the strength.

This strong move higher was capped when the market bulls were not able to take out the contract high that was scored last week. The market tried twice in the morning to take out the contract highs, but both attempts failed. That led to some profit taking as the market closed 21 ¾ off the session highs. This close was still 29 ¼ higher for the day so, as a whole, soybean bulls had a pretty good day.

With the heat and lack of rain that the crop has experienced over the past week the general view of the trade is that the crop is getting smaller not bigger. Roughly 40% of the soybean crop could be considered under drought stress after this weekend’s rain events. With this week’s forecast calling for a generally warm, dry trend we would anticipate the crop will continue to shrink back this week.

The trade was anticipating crop ratings would drop 3% to 5% due to the weather. The report released after the close showed that the good to excellent ratings fell in line with expectations coming in with a drop of 4%. The USDA now estimates that 54% of the current crop is rated good to excellent. The five-year average for the good to excellent ratings is 55%. The five-year average, not including last year’s poor crop ratings, is 61% good to excellent. With a hot, dry forecast in the works this week we would look for ratings to drop again next week.

Many in the trade are now talking that the national bean yield will fall below 40 bpa on next week’s WASDE report. Allendale will be releasing the results of our 24th annual yield survey Wednesday morning at 7:30, Chicago time. If the crop would drop below the 40 b/a threshold this year’s production would only be a shade above last year’s 3.015 billion crop, using the USDA current acreage estimate. If you lower acres due to prevented plant this year, crop will be smaller than last year. We are looking for planted acres to drop 1 million when the USDA is done revising its data.

We don’t anticipate the market to fall out of bed until the driest areas of the country get rain and stabilize the crop. The crop definitely is getting small not bigger after this week’s heat and lack of rain. We would not recommend fighting the market’s upside momentum until the current weather pattern changes. If the pattern stays put and the national yield drops below 40 bpa, a price move above the $15.00 level is not out of the question as the market would have to rally to ration what beans we have left to sell…Jim McCormick.

Wheat: 

• Weekly wheat grain inspections came in at 36.41M bu, which is much better than expectations ranging from 24-28M bu.  Last week’s inspections totaled 31.27M bu.
• Japan is seeking 116,350 tonnes of wheat in a tender ending September 5th with 67,923 tonnes being of US origin.
• Turkey overtook Egypt as Russia’s leading importer of wheat in July as Egypt is now looking to Romania and Ukraine for cheaper wheat supplies.
• Egypt’s GASC announced they purchased 355,000 tonnes of Black Sea wheat over the weekend for mid-October delivery.
• Analysts estimate Brazil HRW and spring wheat imports could reach 3-4 mmt due to a poor Argentinian wheat crop.
• December Minneapolis wheat tested and held support at 723’4 today, but the next move lower will result in a new contract low… Alex Bassett

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Dr. Paul Craig Roberts on Syria, World War III, Dollar Collapse and $30,000 Gold

By Jason Hamlin

When it comes to war in Syria, economist Dr. Paul Craig Roberts says, “This time the big lie didn’t work like it did in Iraq.”

Let’s cut to the chase… the reason for looking for a fabricated excuse to attack Assad is to continue the radicalization of Muslims in hopes that it spreads to Russia and China. It is a way that Washington can de-stabilize Russia and China and get them out of their way in pursuit of global hegemony.

Now that the rest of the world (except the French government) sees Washington fabricating lies as a justification for war, no one will participate. If they had any evidence, they would have given it to the British Prime Minister so that he could have carried the vote in Parliament. They only have unconfirmed intelligence.

Even if Assad did use chemical weapons, he did not use them against his own people. He used them against terrorists attacking his country that are not Syrian. They are outsiders, many of which are members of Al Qaeda.

After Syria will be Iran, where Russia and China will draw a firmer line in the sand. An attack on Syria is a stepping stone towards world war with Russia and China, which are both well armed. This is where we are heading and it is madness, with nothing to be gained.

The polls in the United States range from 60% to 90% of people against war with Syria. If Congress authorizes an attack, they are clearly not representing the will of the people. In Western democracy, not a single government has the confidence of the people. Assad has a higher approval rating in Syria than Obama in the United States or Cameron in the U.K.

On fallout of a possible Syrian war, Dr. Roberts worries, “If they start abandoning the dollar, the collapse of the exchange rate will bring down the whole house of cards in the United States. The Fed will lose control. The banks will fail. Prices will rise dramatically. People will essentially not be able to pay their bills. It will be an unbelievable mess.”

What would happen to gold with a Syrian war? Dr. Roberts says, “If you get a real collapse in the dollar, gold could be $30,000 an ounce. Who knows?”

The gold and silver market is rigged, just like the bond and stock markets. As long as they can naked short gold and silver on the COMEX market, they can dump huge amounts of paper contracts to drive the price down and keep it capped. They CAN’T keep in capped if the dollar goes in terms of other countries losing confidence and dumping dollars.

There is a huge supply of dollars in the world, as they have been pumped out ever since Bretton Woods. The world is drowning in dollars. There is such a huge supply that if the world loses confidence and want out, there is nothing to buy them up with. Got gold?

The full interview with Dr. Paul Craig Roberts is below and is a critical viewing material:

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Hedge funds more positive on ags - but not cotton

by Agrimoney.com

Hedge funds rebuilt their exposure to rising agricultural commodity prices despite the biggest turn bearish on record on cotton, fuelling a slump in futures spurred by improved production hopes.

Managed money, a proxy for hedge funds, raised its net long position in futures and options in the major US-traded agricultural commodities by more than 65,000 lots in the week to August 27, according to data from the Commodity Futures Trading Commission, the US regulator.

That took the position nearly to 300,000 contracts, a two-month high, and representing a marked recovery from a net short of 2,686 lots early in August, the only net short on records going back to 2006.

And it defied a collapse of nearly 24,000 contracts in the net long on New York cotton futures and options, the biggest turn bearish on prices of the fibre on record.

'Challenge the record crop'

The change in tack comes amid improving hopes for production in many geographies, notably the US itself, where the condition of the cotton crop improved in late August.

The proportion of US cotton rated "good" or "excellent" was, as of August 25, 47%, up four points in two weeks, according to US Department of Agriculture data, as rains shifted from the South East, where excess moisture had been hurting crops, to Texas, where rainfall is needed.

Furthermore, a strong monsoon has boosted output hopes in India, the second-ranked producer, which is now looking at a 28m-bale crop, according to Rabobank, which has said that the drop in commodity currencies has lifted hopes for southern hemisphere crops too in boosting margin potential.

"Australian cotton production is expected to challenge the record crop of 2013-14, and is forecast to reach 4.9m-5.55m bales at this preliminary stage," Rabobank said.

"Brazilian production is expected to lift 30% year on year to 7.5m bales in the 2013-14 season," above the USDA forecast of 7.0m bales.

China factor

The increases offset expectations of a fall of some 7% in to 32.5m bales, 500,000 bales below the USDA forecast, to output in China, where focus has also returned to the potential ending of a cotton farmer support policy which has been seen has lifted values worldwide.

Luke Mathews at Commonwealth Bank of Australia flagged talk that "China is preparing to end its current, and controversial, cotton stockpiling program and possibly shift to a direct cotton subsidy".

The programme, in offering farmers a guaranteed price well above international market values, has left the state with huge inventories, while prompting mills to turn to imports, and often finding their costs lifted such that they become uncompetitive.

Chinese yarn imports hit a record 200,000 tonnes in July, as textile companies turned abroad for cheaper supplies.

Soybeans in vogue

Turns more positive were seen in hedge fund positioning on corn and, especially, soybean futures and options as dryness and heat dented prospects for Midwest crops.

Managed money raised its net long in to a two-month high of 138,182 contracts, adding more than 90,000 lots in two weeks, a bullish surge beaten only twice previously.

In Chicago wheat, futures in which have followed row crops higher, hedge funds cut their net long position by nearly 13,000 contracts.

However, the revived crop prices have, in trimming expectations of a slump in feed bills, reduced bullish sentiment on livestock, with hedge funds cutting their net long exposure to lean hogs by 5,706 lots during the week.

That broke a 20-week streak, dating back to April, of unbroken increasing net long exposure, to a record high of 81,905 on August 20.

Hedge funds did continue to raise their net long in feeder cattle, after data showed the herd being fattened on US feedlots far smaller than expected, hinting at tight supplies, and elevated prices, ahead.

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