ISM MISSES BY A MILE – IS IT TIME TO PANIC?

by Cullen Roche

This morning’s ISM Services report missed estimates substantially. Headline came in at 52.8 vs expectations of 57. The underlying data was even worse. New orders tanked 11.4 points to 52.7. Unemployment fell to 51.9 from 53.7. Meanwhile, prices, though falling, remain at very high levels.

The answers from respondents nicely summarizes the environment:

• “Business conditions [remain] unchanged. No supply impact from the Japan earthquake/tsunami, but continue to track with the supply base.” (Management of Companies & Support Services)
• “Revenues are picking up slowly, but the growth is positive as compared to last month and the same month last year.” (Real Estate, Rental & Leasing)
• “Looking forward with reserved caution. Cost of goods by this fall are a big worry.” (Accommodation & Food Services)
• “Continuing economic uncertainty will curtail or delay project spending for the immediate future.” (Educational Services)
• “Fuel prices continue to be challenging and in addition to shipping, are influencing the cost of materials.” (Public Administration)
• “We are seeing price increases in many areas, and the lead times are stretching out. Our business activities are improving at a moderate rate.” (Wholesale Trade)

So what we have is an economy that remains very weak where job’s growth is still muddling along and rising prices are hurting corporate profits. Those who are finding solace in the idea that this weak report confirms QE3 might reconsider. If anything, this report only confirms my findings that QE has had no meaningful positive impact on the economy. In fact, you could easily argue that the cost increases due to commodity price speculation are the only meaningful result of QE2 and are having a negative impact on the overall economy.

What does it all mean? Well, the good news is that the index is still expanding. Although 52.8 is a big miss it is still an expansion. So it’s not yet time to panic. It is worth noting, however, that lower ISM reports have correlated very highly with equity returns (see here for more). Although the ISM Manufacturing report remains robust at 60.4 it would be surprising to see the two indexes diverge permanently. Because these are diffusion indexes we can likely expect the ISM Manufacturing report to decline in the coming months. And as I discussed last month, that could be a significant headwind for equities – even though it doesn’t point to economic doom.

For now, I still believe the US economy is strong enough to maintain meager growth. The risks still are exogenous – primarily foreign related as China eases their economy and Europe remains mired in a debt crisis. Our balance sheet recession is very much alive, however, the government has done just enough to offset the negative impacts. Unfortunately, the Fed appears to have added another risk to the scenario in commodity prices. We should all hope that the price boom in commodities does not lead to a price collapse. If anything, all of this only confirms the thinking that “hedge in May” is a good idea.

See the original article >>

Global factors not supportive of base metals rebound

By Gautam Koderi

Economic uncertainty, recovery in the US dollar and rising inflationary pressure has painted the base metals’ market red. Copper prices at LME had managed to climb above $9600 per tonne last week supported by the weakness in the dollar; however, falling risk appetite killed the momentum.

In the broader sense, Industrial metals have been on the back foot after it climbed towards fresh peaks during mid first quarter of 2010. Employment and housing market of US is yet to stabilise and European debt troubles are still at large. In the East, inflation appears to be the bigger threat. The fundamental backdrop of industrial metals is grim and any possibility for pullbacks to erstwhile peaks is slimming.

Chinese inflation treaded at 5.4 percent, above the government target, in spite of the incessant effort of the country’s central bank (PBOC) to rein prices in. China has already raised reserve requirements for commercial banks four times this year and benchmark interest rates 4 times since last October.

The weaker than expected Chinese manufacturing PMI set the market tone weak on Tuesday in spite of the comment from the PBOC official that Chinese inflation will moderate in the coming days. Chinese manufacturing PMI fell towards 52.9 from the previous 53.4.

Nevertheless, the metals found solace in the decent factory orders and vehicle sales of US. But, MCX witnessed its industrial metals end the day with gains as the depreciation in the Indian rupee offset the weakness that gripped international prices.

At the time of writing, most active MCX copper May futures traded at 416.95 per Kg, up -1.48%. Lead, Zinc and Nickel closed at -0.53%, -1.40% and -0.59% respectively on Wednesday.

The market currently has adopted a wait and watch strategy ahead of the European Central Bank rate decision and US Non-Farm payrolls that will unfold later during the week.

The stock movements, on the other hand, of base metals last week were mixed. Copper inventories fell almost 10 percent for the sixth continuous week towards the lowest since December 2011. Aluminium stocks also fell during the period, but zinc and lead stocks climbed.

See the original article >>

Silver: Strong fundamentals to beat transient speculation

By Rakesh Neelakandan

Silver futures dropped for a third day on Comex as the exchange hiked margin money requirements. The drop is seen as the worst run for the commodity since January.

July silver contract on Comex dropped as much as 5% to touch $40.465 per ounce, subsequent to losing 7.6% Tuesday and 5.2 % on Monday.

CME Group—the owners of the Comex—announced this week that minimum amount of cash to be deposited for borrowing silver for trading would climb to $16,200 per contract at the close of business from Tuesday. Prior to that, the margin was at $14,513, according to a Bloomberg report.

A year before margins stood at $4,250 !

Back in 1980, silver prices dropped 78% subsequent to a rally that had taken silver to $50.35 an ounce.

We are yet to know if silver is in the same bubble though content to the tune of many a Gigabytes is available in this regard. Theories galore; facts hide and truth evades.

But let us dig a bit deeper and return to the basics; the fundamentals:

There are five reasons why silver prices would go up despite this correction. And they form the fundamentals:

1. Robust industrial demand
2. Bullion coin demand
3. Global inflation
4. ETF fund flows
5. Weak dollar

Robust industrial demand
Over the next five years, silver demand is slated to rise to 666 million ounces which would form 60% of total fabrication demand. The figure is a 36% increase over 2010’s demand of 487 million ounces; according to GFMS Ltd. The demand from the industry forms lion’s share of silver fabrication demand.

The recession of 2008 made a significant dent in silver consumption on the part of the industry, but demand surged and resurgence occurred in 2010.This demand trend is expected to continue.

Silver use is surging in electronic and thermal equipments. Stronger industrial demand from US and Asian countries like India and China through 2015 would keep silver prices up.

Given its unique characteristics silver cannot be substituted and hence its price inelastic.

Silver coin demand
American Silver Eagle coins are in short supply as investors ply to secure their cash by buying the coveted coin. The American Precious Metals Exchange has warned of potential delays running into Mid-May in Silver Eagles delivery. (APMEX is offering $3 premium over spot for any Silver Eagle coins in any quantity.)

Recently, director of Canada’s Royal Mint reportedly told that sourcing of silver was becoming “very difficult” with prices of the commodity climbing.

Silver prices and Canadian Maple Leaf and the Silver Eagle should go a lot higher so that people would find it attractive to sell.

Global inflation

Inflation is surging around the globe and people are eager for a hedge which they found in silver bullion. Global inflation made silver to touch an all time high in the international market recently ($49.820 on Comex).

ETF fund flows into silver
Silver assets being held by the ETFs dropped 1.1% to 15,169.80 metric tons on Tuesday in the event of correction in markets.
But, with the above said fundamentals being strong, it is highly unlikely that ETF fund flows into silver would dwindle.

Weak Dollar
Weak dollar gives buyers the necessary appetite for silver as well and the commodity surged almost 4% on the US futures market to a 31-year high of USD 47.90 recently. With the US debt at historic high levels, and QE2 in progress, the chances are that dollar will continue to remain weak unless the interest rates are hiked in US. But, this is a remote possibility.

Back in the past,.silver, touted the poor man's gold, was reportedly depressed artificially for a while by certain quarters. But strict norms, later effected changed the horoscope of the commodity. Fundamentals, rather than speculation began to drive silver.

May be the rally is silver’s cathartic exercise!

See the original article >>

China cannot for ever avoid oilseed imports

by Agrimoney.com

China cannot keep up its low pace of oilseed imports, signalling better times ahead for palm oil prices – with the country potentially facing an enhanced need for soybean purchases too.

Standard Chartered analyst Abah Ofon flagged an end to the weak rates of Chinese palm oil imports, which fell 37% month-on-month in January and a further 20% in February, once alternative supplies from state reserves run dry.

China, which vies with India as top buyer of vegetable oils - and is undispute leader in soybean imports - has capped prices of items including edible oils in a battle against inflation, which central bank governor Yi Gang on Wednesday said may yet require further "active measures" to control.

To assist vegetable oil and oilseed processors, left facing negative margins, the government has unveiled the release at a discount of agricultural commodities from state reserves, including 1.5m-2m tonnes of rapeseed oil, of which 1.2m tonnes has already been sold, and 3m tonnes of soybeans.

"Rapeseed oil reserves were estimated at 2m-3m tonnes before the start of the sales, so current stocks are likely to be low," Mr Ofon said.

"With limited soybean and rapeseed acreage anticipated over the coming season, China may have little choice but to turn to imports."

'Resurgent demand'

Furthermore, conversations with traders had suggested that China's palm oil demand "will be boosted by the onset of warmer weather", which is a particularly key factor for the vegetable oil, which solidifies at a higher temperature than rapeseed oil or soyoil, and so is less use in, for example, in biodiesel in the winter.

In fact, stronger energy prices were another reason to expect higher palm oil prices, which are set to rise from below 3,300 ringgit a tonne in Kuala Lumpur to average 3,700 ringgit a tonne in the July-to-September period.

While "bearish events", also including strong South American soybean production and recovering Indonesian and Malaysian palm oil output, would "dominate" the second quarter, "our overall outlook remains bullish in anticipation of resurgent demand from China and India", Mr Ofon said.

'May backfire'

The comments follow a caution from Oil World, the influential analysis group, that China's moves to stem domestic prices of edible oils may enhance import needs ahead, by dissuading growers from planting soybeans.

"The Chinese government's policy of imposing price limits on vegetable oils, which also pressured domestic soybean prices ... may backfire later this year by curbing domestic soybean output much below requirements," Oil World said.

On the Dalian exchange, the benchmark January soybean contract closed down 1.1% at 4,424 yuan a tonne on Wednesday, down some 7% from a high three weeks ago, and despite apparently continuing rises in food prices in the broader economy.

The group has also warned over the long-term efficacy of state soybean sales, given that Chinese processors consume some 4.0m-4.5m tonnes a month.

"Subsidised soybean sales of 3m tonnes can alleviate the situation for Chinese crushers only temporarily."

The comments follow continued concerns over China's demand for oilseeds, following a series of cancellations of soybean import shipments.

See the original article >>

Commodity markets slip as funds desert them

by Agrimoney.com

Agricultural commodities got off to another soft start.

Credit Agricole summed up the atmosphere in financial markets as "one of rising risk aversion, with commodities facing the brunt of pressure".

This was evident in falls in share prices of many Sydney-listed miners, such as BHP Billiton, as well as agricultural resources stocks such as fertilizer group Incitec Pivot, which dropped nearly 4%, following on from 3% losses in the likes of North American peers such as Agrium, Mosaic and PotashCorp on Tuesday.

And it was shown in commodity markets themselves, where crude dipped again, to two-week lows, and copper eased in Shanghai.

"Last week there was talk that a few of the larger hedge funds were going to exit their commodity positions including grain and take their money elsewhere to play and maybe that is exactly what is taking place as we begin the new trading month," Jon Michalscheck at Benson Quinn Commodities said.

'Not helping sentiment'

Back in China, prices of financial assets looked distinctly off the boil, with Shanghai shares down 2.3%, on track for their lowest close since February, and many, if not all, agricultural commodity futures on the slide too.

Cotton (of which China is the top producer, consumer and importer) for September slid 2% on the Zhengzhou exchange.

And that provided a negative backdrop for New York cotton, which resumed its downward movement, shedding 2.3% to 153.86 cents a pound for July delivery, as of 07:20 GMT, after a bounce in the last session attributed to dry weather in Texas and flooding in parts of the Mississippi basin, major US growing areas.

Similarly, soybeans, of which China is also the top importer, dropped 1% for September, a negative sign for futures in Chicago, where the oilseed dropped 0.5% to $13.57 ½ a bushel for July delivery.

"Weak demand from China is also not helping sentiment," Australia & New Zealand Bank said, adding that soybean prices were also feeling the pressure from the prospect of US sowings increasing as farmers prevented by rain from planting corn switch instead to the oilseed, which can be later seeded.

Mike Mawdsley at Market 1 said: "It does appear likely there will be less corn and more soybean acres."

'Done by this weekend'

Not that corn itself escaped a sell-off either, even the new crop December lot, which proved resilient in the last session, but shed 0.5% to $6.58 ¾ a bushel this time on the improved, if not ideal, sowing conditions.

"We know locally the planters have been rolling big time and some will be done by this weekend," Mr Mawdsley, based in Iowa, said.

The old-crop July contract lost 0.3% to $7.21 ½ a bushel, still feeling pressure from Tuesday's unexpected delivery by ADM against the expiring May contract, signalling, in the words of Commonwealth Bank of Australia's Luke Mathews, "that nearby futures prices are currently too high".

Tour results

And with its fellow grain continuing to struggle, wheat eased too, down 0.7% at $7.87 ½ a bushel in Chicago for July delivery, with early results from a US crop tour a depressant to prices too.

Initial chatter from the Wheat Quality Council's ride around wheat in Kansas, the top wheat-growing state, showed improved yields from last season and good soil moisture levels, although this was from areas not affected by the well-publicised drought.

A tour of some of these farms is on the agenda for Wednesday.

Kansas-traded hard red winter wheat for July lost 1.0% to $8.89 a bushel.

'Situation is worsening'

Not, of course, that America's weather woes are the only market movers. ANZ noted that Western Australia, usually Australia's top grain-growing state, "remains dry" as the planting window opens.

"Further rainfall remains critical for planting. For the next week the Western Australia wheat belt will be heavily influenced by several high pressure systems, resulting in no forecast rainfall through to at least next Wednesday," the bank said.

"How extensive the forecast rain for France will be on the weekend" will also have a big influence for prices.

The signs aren't good: "In France, the situation is worsening and no rainfalls are forecast for the next [few] days," Paris-based consultancy Agritel said, noting that "crop development is 15-18 days early", a sign of stress rather than a reason for farmers to cheer.

Still, with commodities taking the brunt of investors' move from riskier assets, such factors were drowned out in early deals.

See the original article >>

The Hidden Consequence of Inflation

by Claus Vogt

Last Wednesday Federal Reserve Chairman Ben Bernanke repeated what he stands for: A rampant inflationary monetary policy. He seems totally oblivious with the sad history of inflationary policies. And he obviously ignores the grave outcome that his and Alan Greenspan’s money printing policies had on the financial markets, the economy, and general welfare. 

So I’d like to discuss an often overlooked consequence of money printing: The relationship between inflation and poverty.

Inflation Replaces
Thrift with Theft

Inflation leads to an impoverishment of great cross-sections of the population. During hyperinflationary phases, such as experienced by Germany in the early twentieth century or by Zimbabwe in the twenty-first century, this process happens quickly. With relatively moderate inflation rates, it occurs far more slowly. But in either scenario, thrift is replaced by theft — it reduces your wealth.

Why? 

The newly created money, which is not backed by tangible assets, always goes into circulation at some point within the economy. In other words, someone is always the first to possess the new money and the first to spend it. 

These first beneficiaries are the inflation winners — they enjoy an incalculable advantage, for they can make purchases on the market at old prices, before the new demand drives prices higher. 

However, those who are last in line to get the new money are the inflation losers, forced to pay higher prices.

Bubbles Distribute
Wealth Unfairly 

That is also the result when inflation manifests itself in the form of speculative bubbles. Examples include: The stock market bubble of the late 1990s, the recent housing bubble which was accompanied by an echo stock market bubble, and now, during the current echo stock bubble. 

The new money causes asset prices to rise sharply. Those who own them may see their wealth grow significantly, at least in nominal terms. And Fed members even brag about this so called wealth effect. 

But those who don’t own such assets and can’t afford to buy them are left behind, unable to compete or cope. 

The relatively small group of asset holders becomes richer, while those depending on fixed incomes or earning low wages become the losers. The longer this policy keeps going, the wider the gap becomes between rich and poor. 

And now all over the world, especially in the U.S. … 

The Gap between Rich and
Poor Is Growing! 

Today the small number of super-rich holds a far greater share of total wealth than a few years ago. This is not always a bad thing, as long as the wealth is generated by entrepreneurial effort. 

After all, the men and women behind great interventions and products that make the world a better place should be rewarded. This is indeed a necessary mechanism propelling progress and wealth accumulation.

Yet it is precisely this connection — between effort and reward — that is increasingly weakened during speculative booms and inflationary periods based on easy money! 

Here’s what happens: The government bloats the money supply. And rich rewards are lavished on those who contribute little value to society. Then the connection between effort and reward becomes so arbitrary that it becomes meaningless.

In that kind of environment, real interest rates are negative. Consequently, he who saves money is constantly losing buying power, as illustrated in the following chart.

So it’s not a shock that during the late 1990s the savings rate in the U.S. fell to the lowest levels ever seen. 

And as you can see on the chart below, in spite of rising swiftly during the past recession, the U.S. savings rate is still historically low.

Savings are important. They are the source of real investments and therefore the basis of wealth creation. But this important piece of economic knowledge seems to be lost with our politicians and central bankers …

They are in the bubble blowing business — doing everything in their power to discourage saving and encourage risk taking and speculation. What’s more, they’re neglecting the devastating aftermaths of previous burst bubbles.

 

Unstable Money Threatens

Unstable Money Threatens

Tthe Foundation of Society

Stable, reliable money is the foundation of healthy, balanced, and sustainable growth. In contrast, abusing the printing press to create money leads to the impoverishment of broad sections of the population. 

The policy of extreme easy money pursued across the globe, which Ben Bernanke is advocating so emphatically, is highly unjust. It’s in many respects a fundamental assault on society. Not only does it lead to growing income inequality, it also threatens to disrupt the very social harmony that Keynesian politicians pay lip service to.

Ben Bernanke has again made clear that money printing will be with us as long as he is in the lead. This tells me that the secular bull market in gold is not in jeopardy. 

Therefore I continue to suggest gold bullion and gold ETFs, such as SPDR Gold Shares (GLD). Yes, there will be corrections from time to time, even severe ones. However, they should be greeted as buying opportunities.

See the original article >>