Evening markets: 'out of control' comment stymies crop rally

by Agrimoney.com

Farmers' rogues gallery gained a new name on Wednesday, Guenther Oettinger, the European energy commissioner, who with but one comment nailed a revival in financial markets.

The crisis at Japan's stricken Fukishima nuclear plant was "effectively out of control", he said, an analysis blamed for stoking concerns about the crisis, and putting a fragile recovery in agricultural commodity, and other, markets on the ropes.

"What did he think he was doing? Has he got a short on or something?" was the assessment of one crop investor that Agrimoney.com spoke to.

At North America Risk Management Services, Jerry Gidel said: "It is difficult is to justify what is going on.

"The information out there, it may not mean that corn should be flying. But does it deserve to be 20 cents lower? No.

"Nuclear energy is something that everyone is highly sensitive about."

Bahrain rumpus 

In truth, Mr Oettinger was given an undue share of the blame. Bahrain, for instance, also had a part to play in quelling the rebound in investor optimism sparked by a strong rebound in Tokyo stocks.

At least four people were killed in a crackdown in Bahrain, with unrest also reported in Algerian, Syria and Yemen.

So oil rose above the fears for the world economy which depressed shares and agricultural commodities, adding 0.6% in New York, while Brent crude gained 1.6% to rise back above $110 a barrel. And appeciating oil itself is a further depressant to hopes for economic prosperity.

Indeed, farm commodities proved less able to overcome headwinds which included a 0.6% rise in the dollar too, so weakening the competitiveness of dollar-denominated assets as exports.

Export trade lost? 

Corn was the worst hit, closing down 3.1% at a two-month low of $6.16 ½ a bushel for May, amid talk of the crisis in Japan, the top importer, lowering its demand.

"Japan is still the problem, with the overall consensus being that 40m-50m bushels of corn sales are in jeopardy in the current crop year," Darrell Holaday at Country Futures said, while saying this estimate was "really just a shot in the dark".

Still, it was given some credence by, conflicting, reports of ships unable to unload in Japan.

Benson Quinn Commodities said that "while port capacity appears to be adequate, many questions remain regarding the interior infrastructure".

Corn vs wheat

Technical factors were given some of the blame too, such as the fall through the important 100-day moving average line, and given the historically low spread between wheat and corn, which started the day less than $0.32 a bushel between Chicago's May lots.

That encouraged wheat buying which "helped wheat settle early on", Mr Gidel said.

And then there is the US sowings battle too to ponder, with price ratios between corn and soybeans "at exactly" the level of 2.1 "which would favour corn" plantings, according to Toepfer International, the German grains giant.

In fact, in new crop terms, corn didn't do so badly, closing up 0.2% at $5.49 ¼ a bushel for December delivery, led by soybeans for November which added 1.0% to $12.50 ¾ a bushel.

The better performance of new crop versus old crop corn, favouring the so-called bear spread, "is not bullish, because it is certainly not a sign of a market trying to ration only crop supplies", Mr Holladay said.

Fundamental talk

And, indeed, wheat was unsettled, ending down 0.9% at $6.62 a bushel for May delivery, and falling by one-quarter in less than a month.

Soybeans were the standout performer, finishing up all of 0.2% at $12.87 a bushel for May, helped by fundamentals, for a change, and the persistent, Australia-reminiscent rains dogging Brazil's harvest.

"The problems produced by the heavy rains in Brazil continue to develop as the means of transporting goods to ports have been damaged and harvest has been delayed in some areas," Benson Quinn Commodities said.

US Commodities added: "If wet weather continues, they may see some production loss," and some forecasters are already beginning to trim estimates.

Losing streaks broken 

At least European agricultural commodities had a weaker euro on their side, helping Paris wheat for May close 1.6% to the good at E206.25 a tonne, the first positive finish this month for the spot lot, on a continuous chart.

London May wheat did even better, jumping 4.7% to £178.00 a tonne for May, the first positive finish in nine trading days.

Paris rapeseed for May closed up 2.2% at E421.50 a tonne, helped by a Toepfer report highlighting raised winterkill in the German crop, the European Union's biggest.

Head and shoulders? 

Soft commodities were a mixed bunch too. Cocoa fell 1.2% to $3,215 a tonne in New York, for May, to its lowest close in nearly two months, as funds retreated.

And cotton, whose status as a non-food agricultural commodity makes it more sensitive to changes in economic prosperity, tumbled 3.1% to 185.12 cents a pound for May.

However, sugar was helped by resisting pressure to fall below its 200-day moving average, at 25.28 cents a pound, with New York's May lot ending 0.2 cents higher at 25.85 cents a pound.

Not that this is necessarily as good news as it seems.

"The chart technicians seem to suggest repeated closes below 27 cents will confirm a head and shoulders topping indicator which would suggest something around a further 4 cents correction to around 23 cents," Thomas Kujawa at Sucden Financial said.

"The bulls need the market above 27 cents sooner rather than later."

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Developed Countries Getting Hit Hard

by Bespoke Investment Group

Equity markets across the country have gotten hit pretty hard since February 18th (when the S&P 500 made its bull market high).  Below we highlight the performance of major equity indices for 79 countries since 2/18 as well as year to date.  The average year to date stock market performance of the 79 countries listed has now turned negative (-2.20%).  The average performance of the countries since 2/18 is -4.38%.  As shown, Japan is down the most since 2/18 with a decline of 16.13%.  Germany and France rank 2nd and 3rd worst with declines of 12.29% and 11.08% respectively. 

In the table we have outlined the G7 countries and shaded the four BRIC (Brazil, Russia, India, China) countries in light blue.  Earlier in the year, the BRICs were significantly underperforming while the G7 developed nations were outperforming.  Since 2/18, however, the opposite has been the case.  All of the G7 countries are down at least 4% since then, while 3 of the 4 BRIC countries are actually up! 

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Does Japan’s Nuclear Catastrophe Point to the End of Economic Growth as We Know It?

by Susan Arterian Chang

Nuclear energy appeared poised for a renaissance in recent years as policymakers around the world scrambled to offer incentives for new power plant construction to meet low-carbon energy targets. But the catastrophic events unfolding in and around Japan’s nuclear power plants following last week’s earthquake and tsunami serve as grim reminders to both policymakers and investors that while nuclear may be a low-carbon energy source the risks associated with its deployment are high, some of them immeasurable, and many of them beyond human control.

World leaders who had clung to nuclear energy as the silver bullet that would allow their economies to enjoy unfettered “clean energy” growth may now need to reckon with the unthinkable: the global economy cannot sustain unchecked growth and at the same time meet the carbon reduction targets required to head off climate catastrophe.

In promoting nuclear energy in a February 22, 2010, posting on his Facebook page, Obama’s Energy Secretary Steven Chu maintained that “no single technology” can supply the country’s growing requirements for low-carbon energy. “The Energy Information Administration projects an almost 20 percent increase in overall energy demand and over 30 percent increase in electricity demand over the next 25 years under current laws,” reported Chu. “If we want to make a serious dent in carbon dioxide emissions—not to mention having cleaner air and cleaner water—then nuclear power has to be on the table.” 

While Chu asserted that the Obama administration is supportive of investment in wind and solar, he noted that together these two sources of power currently provide only 3 percent of domestic electricity needs and, because of their intermittent nature, are unlikely ever to provide more than 20 to 30%. Meanwhile, he reports, nuclear energy “can provide large amounts of carbon-free power that is always available.”

President Obama has continued to enthusiastically embrace nuclear power as a central component of his clean energy policy and had planned to direct significant public monies to grow the sector. Most recently his proposed 2012 budget called for $36 billion in Federal loan guarantees for the construction of new nuclear reactors and $800 million for nuclear research, primarily for a new generation of small modular reactors, also known as “mini-nukes.”

In February the Obama administration announced that a total of $8.33 billion in loan guarantees had been earmarked for the construction of two new nuclear reactors in Burke, Georgia. Yet whether these guarantees would have lured private sector investors was by no means a certainty, even before the crisis at Japan's nuclear power plants riveted the world. Private investors had become increasingly wary of the cost overruns associated with past nuclear power plant projects, untested new technologies, managerial and safety concerns, and the continuing environmental risks associated with the disposal of nuclear waste.

Indeed a number of critics of the deployment of new nuclear power plants have been warning for some time that government incentives represent a massive transfer of risk to taxpayers from the private sector as well as an inefficient use of capital, better spent on clean technologies that can deliver low-carbon energy solutions faster and at a lower cost.

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In his paper “The Economics of Nuclear Reactors,” Mark Cooper, a senior research fellow for economic analysis at the Institute for Energy and the Environment, reports that “Wall Street and independent energy analysts estimate efficiency and renewable costs at an average of 6 percent per kilowatt hour, while the cost of electricity from nuclear reactors is estimated in the range of 12 to 20 pr kWh. The additional cost of building 100 new nuclear reactors instead of pursuing a least cost efficiency-renewable strategy, would be in the range of $1.9-$4.4 trillion over the life of the reactors.”

In his paper “Massive Nuclear Subsidies Won’t Solve Climate Change,” Peter Bradford, a former member of the U.S. Nuclear Regulatory Commission and a professor at Vermont Law School, maintains that the nuclear industry “and their congressional allies are praying toward the Mecca of failed industries: the federal treasury. As the economic risks of new reactors become ever clearer, the industry’s desire to offload them on the taxpayer grows apace.”

In the wake of Japan’s nuclear disaster that desire is likely to remain unfulfilled, at least for the time being. But if nuclear power cannot fuel clean energy growth and if Chu is right that renewables cannot fill the vacuum, what options are left? Indeed, Japan’s nuclear disaster may be telling us in no uncertain terms, what many ecological economists have been saying for years: we may have reached the limits to growth on our climate and resource constrained planet, and the implications for policymakers and for how we deploy capital in the coming decades will be huge.

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Inside Wall Street: Japan Crisis is a Buying Opportunity for the Stout-Hearted

By GENE MARCIAL

Don't panic. That's the first thing to keep in mind as the headlines shout that the global economic risk from Japan's nuclear crisis is rising.

Understandably, investors are running scared. The violent force of the earthquake and tsunami that devastated parts of Japan and raised the specter of a nuclear crisis could easily spell more trouble down the road for the global economy. Indeed, warnings now abound of a more turbulent and depressed market ahead.

The decline in global equity prices that started on Feb. 18 and got "exacerbated on March 15 by the fear of a worst-case scenario unfolding in Japanese nuclear power plants still needs to play itself out, and will have further to run," cautions Sam Stovall, chief investment strategist at Standard & Poor's.

That makes sense. But let's not forget: When there's gloom and doom in the air, there's also opportunity -- a rare chance to jump on stocks whose prices have been quickly pulled down due to panic among jittery traders. In spite of the market's current sharp decline, nothing fundamental suggests the end for equities has begun, as some commentators are now starting to proclaim.

Crisis Will Keep Fed on Accommodative Course
When the market rebounds -- and it definitely will -- it will be with a forceful kick that should equal the market's snap back after 9/11, and could conceivably catapult the Dow Jones industrial average back to the all-time high of 14,164.53 it hit on Oct. 9, 2007. The Dow closed on Wednesday at 11,613.30, down 242.12 or 2.04%.

In the meantime, investors should keep cool and calm. Look at the situation this way: The U.S. economic recovery is in full stride, and this shock to the Japanese economy can only result in more encouragement for the Fed Chief Ben Bernanke to make sure the U.S. economic recovery doesn't stall, which will mean continuing the Fed's policy of accommodation and loose money.
"S&P's Equity Strategy thinks the U.S. Federal Reserve Board will conclude that low short-term interest rates will help combat the global uncertainty," says S&P's Stovall. What's more, he adds, the Fed's recent statements on the state of the economy "may even increase speculation of a third round of quantitative easing, which would likely aid commodity and equity prices."

Splashy events such as the crisis in Japan or the turmoil in the Middle East invariably distract investors away from the gains the economy has achieved in the past year and a half. In times of geopolitical conflicts abroad and acute emergencies, technical analysts who follow the charts reigning supreme in assessing what's really happening to the equity and bond markets. But investors should pay more attention to the improving market fundamentals: Corporate earnings continue to be strong and the rebounding economy is gaining strength.

Technical analysts, who are skilled at assessing what may lie ahead based on past market trends and patterns, tend to fuel even more of what's already happening. When the market is in full decline, as it is these days, they tend to become more bearish and warn of how much lower it could go. The same thing happens when the market is on the upswing: They tend to calculate how much more upside there is. That's why wise investors should combine both fundamental and technical analysis in probing the market's motions.

An Oversold Scenario Developing

The first thing investors should do when the rest of the investing world is losing its clarity amid utter confusion is to draw up a list of the specific stocks they'd want to buy at bargain prices. Jump in as the Dow or S&P 500 head south. But make sure you have studied the fundamentals of those companies and the technical behavoirs of their stocks before pulling the buy trigger.

Right now, we know the market could still go lower, and that's when more opportunities should be seized by investors. Hopefully, they've already taken profits from the stocks that advanced during the bull market. Proceeds from those sales can fund their purchase of those now under-priced stocks.

Alec Young, analyst at Standard & Poor's international equity strategist, believes an "oversold" scenario may be developing in the international markets -- and the Japanese market in particular -- which could be exploited by short-term traders looking to take advantage of the falling prices.

In the U.S. equity market, "we recommend sticking with more cyclical sectors, as a recovery from this pullback would likely benefit those stocks and groups that were hit the hardest," says S&P's Stovall.

This Too Shall Pass

Investors should not lose track of what's important: the resilience of the U.S. economy. When investors refocus on this and away from what's happening in Japan and the Middle East, the shares of companies involved in the recovery, like those cyclical stocks, will be the market's front-runners once again.

Even before the massive disaster engulfed Japan, the markets were already showing signs of wariness and weariness. Not a few market analysts had been predicting a significant market downturn after a year of massive gains for equities. Obviously, the triple calamities of earthquake, tsunami and nuclear crisis in Japan were not being factored into any analyst's equations.

What should be in the equation as we look at markets now is that this, too, shall pass. Investors with the stomach for the ride should play the coming market rebound.

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DON’T USE A HUMAN TRAGEDY TO PUSH YOUR FAILING “JAPAN IS BANKRUPT” THESIS…

by Cullen Roche

I am amazed (and disgusted) at the number of commentators, pundits and “economists” who have come out in recent days to explain to the world how this human tragedy will result in a Japanese fiscal crisis.  The people pushing this story are are the same ones that have been telling us America is bankrupt for the last 10 years and would have gone bankrupt 100 times over by shorting the Yen and JGB’s over the last 20 years.  These pundits have been confounded for decades yet they never seem to lose credibility and never stop to consider why their thesis isn’t panning out.

In essence, these pundits say Japan is on the brink of a bond market collapse that will result in the inability of the government to finance its debt which leads to a Greek scenario.  Of course, what these people fail to recognize is that Japan is fundamentally different from Greece in that Greece is a currency user and Japan is a currency issuer.  Whenever someone compares Japan or the USA to a Euro nation you should immediately dismiss them and stop reading their content – they clearly do not have even the most basic understanding of monetary systems.

This is not to imply that Japan’s spending policies have been the right approach over the last few decades.  Japan’s policies over the years have been terribly misguided. Much like our own policies are currently misguided.  In the late 80′s Japan experienced dual bubbles in real estate and equities on the back of a stellar period of growth.  They had deregulated their banking system, allowed their economy to become financialized and to top it off their government decided it was wise to take advantage of this period of stellar economic growth by running a budget surplus to “get their financial house in order”.  In essence, this was almost exactly what the United States did in the years running up to our own dual bubbles.

Like the budget surplus in the USA in 1999 the surplus in Japan exacerbated the private sector debt problem as the public sector surplus resulted in private sector deficit.  This ultimately resulted in en epic bubble collapse.  Their solution was less than precise.  Rather than take the Swedish approach the Japanese decided to let their banks earn their way out of the crisis.  This only prolonged the inevitable deleveraging.  This was combined with insufficient budget deficits that would have allowed the private sector to deleverage more quickly.  This debt deleveraging resulted in anemic economic growth and persistent deflation.  What ensued was a series of start and stop recessions and recoveries that happened to overlap with a difficult period of economic growth in many other parts of the world.  As we all know it hasn’t been a pretty picture.

If all of this sounds familiar it should.  America is suffering the exact same thing as we speak.  But this confounds the hyperinflationists and defaultistas.  They just can’t understand why this spending isn’t resulting in inflation and/or bankruptcy in Japan.  The problem is, these pundits are working under a defunct model.  They are assuming that a nation with monopoly supply of currency can run out of money and become insolvent in the same way a household, business or Euro nation can.  The truth is, Japan can never run out of Yen.  They can cause a collapse in their currency in the form of hyperinflation by printing Yen far in excess of productive capacity, but that’s clearly not happening.  Japan is still struggling to battle deflation….

But none of this stops the pundits from using this tragedy to try to push their political agenda.  Facts aren’t necessary for these people.  If they can grab your attention via simple analogies and scary rhetoric they don’t need facts – they have won the second that you allowed yourself to be scared into listening to them.  But the facts don’t lie and the facts say Japan is neither close to bankruptcy nor close to hyperinflation. Let’s review some facts.

There is, arguably, no better measure of a nations solvency than CDS prices.  If you review the recent change in Japanese CDS you’ll notice that they are remarkably low considering the size of their public debt.  You’ll notice that Greece and Ireland are more than 6 times higher than Japan currently (via Bespoke):

What about their bond market?  If you’ll recall the solvency crisis last year in Europe one of the defining characteristics of risk was surging yields.  As I often say, there really are bond vigilantes in Europe.  If there are vigilantes in Japan they sure are asleep on the job.  Just look at Japan’s 10 year bond at 1.2%!  It has actually declined in recent weeks.  Investors clearly aren’t concerned about solvency.  And rightfully so.  There is no such thing as Japan running out of Yen.

(10 Year JGB Yield)

Make no mistake.  Despite this horrible human tragedy Japan is a strong and stable nation.  Their people are hard working, disciplined and remarkably innovative.  Their economy is stable, dynamic and diverse.  They are not bankrupt and they would welcome some inflation.  The USA is in a very similar position.  Thus far, we have walked a tightrope through this balance sheet recession without allowing the fear mongerers to scare us into austerity.  As we can see in Ireland, Spain and Greece the austerity approach has been nothing short of disastrous.

Our approach has been far from perfect.  We should have forced our banks to take more pain.  The response should have been focused on Main Street and not Wall Street.  The Fed’s powers and involvement in the markets should have been reduced rather than increased.  But this doesn’t mean we need to convince ourselves that the entire recovery response has been a failure.  In fact, a simple accounting identity shows that the government budget deficit is the only thing keeping us from sinking back in to recession. As I’ve said before:

“The deficit of the entire government (federal, state, and local) is always equal (by definition) to the current account deficit plus the private sector balance (excess of private saving over investment).”

“Since we are running a -3% current account deficit the government MUST spend to the tune of 3%+ of GDP if the private sector desires to save.  And that’s exactly what is occurring.  In fact, the 10% deficit is allowing the private sector to save quite a bit (roughly 7%). Make no mistake, the deficit spending of the last 2 years is what has generated recovery.”

Japan made the mistake of starting and stopping their stimulus at a time when the private sector was deleveraging.  This only exacerbated their problems and ultimately resulted in a kick the can strategy.  If there is one thing that we can learn from Japan it is that we are not going bankrupt and we are not suffering hyperinflation.  And if we make the mistake of Japan, by stopping and starting the deficit spending during a balance sheet recession we will certainly slip back into the abyss.  There’s a lesson to be learned from this human tragedy – don’t be scared into believing everything you read about our nation’s imminent bankruptcy.  If we allow ourselves to be scared into believing we are insolvent we’ll soon find ourselves suffering our own human tragedy.

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LESS MONEY, MORE MONEY – QE3 IN THE HEADLIGHTS?

By Rohan Clarke

The unwind of the carry trade has been in full swing for a couple of days now. It’s probably been accompanied by repatriation of capital by Japanese investment trusts and the like – time will tell. Given the bounce in USDYEN from this morning’s lows – without the aid of intervention – it’s likely that the peak of this flow has passed. Still, the withdrawal of the world’s best savers from the global capital markets can be expected to put upward pressure on interest rates from here on in.

The next phase of the crisis, as it will be played out in capital markets at least, will unfold over a couple of weeks as the impact on individual actors become clearer. Given the enormity of the events, it is unlikely that we will see a return to the optimism of a week ago – bounces in risk assets will be sold into.

The response from global governments, if they stick to the same script, will be to once again turn to the stimulus levers. Given that these have been overused of recent times, fiscal policy options are now somewhat constrained. As a result, it’s likely that ‘unconventional monetary policy’ will remain a feature of the landscape. In the US, the liklihood of QE3 being pre-announced ahead of the closure of QE2 has just risen dramatically.

So while we can argue cause and effect, fears of further price rises in real goods may be amplified by the crisis in Japan. It’s in this context, that an update of the Billion Prices Project price index for the US is in order:

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