When Correlation Is Causation

by Tyler Durden

It is all too easy to dismiss endless charts showing long-run correlations that have become useless in the current liquidity-fueled boom in stocks and real estate in the US with the "well, correlation is not causation" meme, but in Spain, we suspect, few will argue that the relationship between the surging unemployment rate of the OMT-bound nation and its delinquent loan growth is hard to argue with. With both at record highs (and the latter picking up once again after a temporary haitus of seeming banking delays offered some hope), it appears the southern European nation is going from worse to worst.

but there is one 'thing' that is not correlated...

It's not just Spain though - the entirely fake-looking, relatively linear rise in official Italian bad debts is rising at the fastest rate since Dec 2011...

See the original article >>

Bad Loans Continue to Rise in Spain and Italy

by Marc to Market

Spain and Italy reported today that the share of bad loans have continued to rise. There is nothing to suggest that this is the peak. In fact, further deterioration is likely.

Bad loans at Spanish banks rose to 10.87% in April from 10.47% in March and 8.73% in April 2012. These doubtful credits rose to 167.1 bln euros. Spain's problem stems from the housing market boom. Prices have not bottomed.

S&P, for example, warns that another decline in house prices is needed. No sector has emerged to replace the housing related industries as an engine of growth for the Spanish economy. The contracting economy and high unemployment rates, even if it is mitigated in part by the cash economy.

Spanish banks had raised deposit rates to attract and retain savings. The higher deposit rates squeezed Spanish banks earnings. The central bank has successfully gotten the banks to reduce deposit rates. The yield on 1 year deposits, for example, have almost halved to 1.5% from nearly 3% at the end of last year. The decline in deposit rates led investors to pouring savings into mutual funds. Spanish investors have invested almost 7 bln euros into local mutual funds in the year through May.

Italy also reported its bad loan situation today and it is getting worse. The total amount of non-performing loans at Italian banks rose to a 2-year high in April. They are 22.3% above a year ago, a tad lower than Spain's 24.5% increase.

The country's banking association reported that the gross non-performing loans stood at 133.3 bln euros. Italian banks have made provisions to cover about half of this, leaving net NPLs at about 66.5 bln euros. The central bank has encouraged banks to make more provisions. Net NPLs did decline slightly in the first two months of the year as banks made provisions. However, they rose again in March and April to a new two-year high.

Italy did not have a housing market bubble like Spain. It has been the chronic poor growth and high debt servicing costs that have taken a toll. Although the PMIs suggest that pace of economic contraction may be slowing (in both Italy and Spain), it is likely to be insufficient to stem the rot.

If new loans were growing it would also help stabilize the nonperforming loan ratios. However, this is not the case. The Italian banking association data shows that last month, loans to households and businesses fell by 3.1% (though deposits increased by 7.3% to 1.21 trillion euros).

Five years into the crisis and Europe as still not addressed it banking problems. Yes the European Investment bank can help facilitate new loans to small and medium sized businesses. This bypasses the private sector banks without expediting the resolution of their problems.

European banks issuance of sovereign debt has fallen to the lowest level in a decade. Thus far this year, EU banks have issued 132 bln euros of senior debt compared with 158 bln in the same 2012 period. The ostensible cause is the fear the creditors will be held accountable going forward in a way they have not, for the most part up until now. That is what "bail-in" involves.

Senior debt holders have been typically treated as sacrosanct in the default or restructuring situation. However, new rules may place senior debt holders after depositors. The lower interest rate associated with the senior status seems less attractive. European banks have quadrupled their subordinated debt offerings this year compared to the same period a year ago.

See the original article >>

Hormel warns on profits as soaring hog prices tell

by Agrimoney.com

Shares in Hormel Foods dropped after the group cut its profits hopes, blaming "lower-than-expected results" in its pork operations, pressed by a rally in hog prices to their highest in nearly two years.

The maker of Spam luncheon meat cut to $1.88-1.96 a share, from $1.93-2.03 a share, its forecast for earnings in the year to October.

The downgraded figure opened the potential for only marginal earnings growth from the last financial year, and fell short of the $1.99-a-share result that Wall Street has factored.

The downgrade reflects "lower-than-expected results in our pork operations, higher input costs and softs sales of our retail products in our refrigerated foods segment", Jeffrey Ettinger, the Hormel chairman and chief executive, said.

While Mr Ettinger reassured on Hormel's long-term prospects, saying that the group was "very bullish about our future earnings potential", the profits warning sent its shares down 4.1% to $38.99 in early deals in New York.

The group, which does rear some of its own pigs, is known as one of the most reliable US corporations, having last month paid its 339^th consecutive quarterly dividend, extending a record of unbroken payouts stretching back to 1928.

Pork vs hogs

The warning by Hormel follows a sharp rally in prices of hogs, which has prevented pork processors from exploiting a rise of more than $20 per hundredweight in 10 weeks in the meat's wholesale values, the so-called "cutout".

The $100.76 per hundredweight that the cutout averaged last week "is the sixth highest weekly average ever", trailing only those recorded during a strong period in July and August 2011, Paragon Economics and Steiner Consulting said in a report.

However, lean hog prices have proven strong too, with spot Chicago futures rising from a late-March low of 76.80 cents per pound ($76.80 per hundredweight) to more than 102 cents per pound on Friday.

The rise in hog prices has left meat processors swallowing losses despite the strong wholesale pork market, with packer margins on Friday falling to a negative $13.25 per animal.

'Margins remain large'

Commentators have mixed views of the sustainability of the hog price rally, which has been widely attributed to the strength of demand in the US, thanks to the onset of the summer barbecue season, typically traced to the Memorial Day holiday weekend, and to persistent rumours of a pick-up in Chinese imports.

Chinese pork imports have tumbled so far in 2013, thanks to curbs imposed by Beijing on meat from producers using the ractopamine growth stimulant commonly used in America.

However, many observers believe that the takeover of US-based Smithfield Foods by China's Shuanghui International is opening the way to a revival in trade.

In fact, Smithfield was this month due to guarantee ractopamine-free pork from a third processing plant.

Meanwhile, US hog slaughter rates, and therefore pork supplies, have fallen to 2013 lows, as the prospect of lower feed bills, assuming domestic corn and soybean harvests meet expectations, puts the brakes on herd liquidation.

"Forward margins [for producers] remain large," US Commodities said, adding that "this will equate to no liquidation and maybe even expansion".

Peak prices?

Broker Doane Ag, noting that best-traded August lean hog futures peaked a week ago, said that "the uptrend in hog prices stalled and turned just sideways on the short-term chart".

The broker flagged "ideas that holiday featuring has run its course and that the premiums for nearby futures compared to deferred futures is unlikely to be sustained".

US Commodities forecast that "we are nearing a peak in the pork cutout" which should feed through into hog prices, and noting that US Department of Agriculture forecasts imply an uptick in slaughter rates.

However, Paragon Economics and Steiner Consulting said that it was "likely that pork values and hog prices will remain strong for several more weeks.

"The cutout has peaked in early August, on average, over the past five years."

The "key question" was whether prices of pork bellies, the source of bacon, can maintain the rise which has seen them account for 80-90% of the rise in the overall cutout.

"It seems that bacon is everywhere these days, and we are just now entering the prime BLT sandwich season as fresh tomatoes will become available soon."

See the original article >>

Orange juice seen falling as rains improve growing conditions

By Jack Scoville

FCOJ

General Comments: Futures closed a little lower in consolidation trading. Futures have been working generally lower since the USDA crop reports last week as showers have been seen and conditions are said to have improved in almost the entire state. USDA lowered production of Oranges in Florida, but decreased production had been expected. Traders are wrestling with more reports of losses from greening disease on the one side and beneficial rains that have hit the state on the other. Greening disease and what it might mean to production prospects continues to be a primary support item and will be for several years. Temperatures are warm in the state, but there are showers reported somewhere in the state every day now. The Valencia harvest is continuing. Brazil is seeing near to above normal temperatures and mostly dry weather.

Overnight News: Florida weather forecasts call for showers. Temperatures will average near to above normal.

Chart Trends: Trends in FCOJ are mixed to down with objectives of 141.00, 133.00, and 130.00 July. Support is at 145.00, 144.00, and 139.00 July, with resistance at 150.00, 154.00, and 156.00 July.

COTTON

General Comments: Futures were lower on what appeared to be long liquidation from speculators and perhaps some farm selling. Ideas of better weather in production areas were negative for prices. Traders talk of reduced production potential due to the poor weather seen until recently in the Delta and Southeast and still reported in parts of Texas. Trends are up. Ideas of good weather for US crops are still around. The weather has improved, but it is still too dry in Texas and drier weather is needed for the Delta and Southeast. Scattered showers are forecast for the Delta and Southeast, and wetter and warm weather is expected in Texas. Weather for Cotton appears good in India, Pakistan, and China. It is possible that futures made at least a short term high on Friday.

Overnight News: The Delta and Southeast will see some showers this week. Temperatures will average above normal. Texas will get showers today and tomorrow, then dry weather. Temperatures will average above normal. The USDA spot price is now 84.42 ct/lb. ICE said that certified Cotton stocks are now 0.543 million bales, from 0.539 million yesterday.

Chart Trends: Trends in Cotton are mixed to down with no objectives. Support is at 86.75, 85.60, and 84.75 October, with resistance of 90.10, 90.50, and 91.40 October.

COFFEE

General Comments: Futures were mostly a little lower in quiet trading. Interest has left the market in many ways, as many feel prices are too low to sell short again, but there are few who see any reasons to buy for the longer term. Arabica cash markets remain quiet right now and roasters in the US are showing little interest in buying. There is talk of increasing offers of Robusta from producers as they apparently did not sell when prices were much higher. Most sellers, including Brazil, are quiet and are waiting for futures to move higher. Buyers are interested on cheap differentials. Brazil weather is forecast to show dry conditions, but no cold weather. There are some forecasts for cold weather to develop in Brazil at the end of this week. Current crop development is still good this year in Brazil. Central America crops are seeing good rains now. Colombia is reported to have good conditions.

Overnight News: Certified stocks are little changed today and are about 2.746 million bags. GCA stocks are 5.147 million bags, from 4.867 million last month. The ICO composite price is now 116.04 ct/lb. Brazil should get dry weather except for some showers in the southwest. Temperatures will average near to above normal. Colombia should get scattered showers, and Central America and Mexico should get showers, with some big rains possible in central and southern Mexico and northern Central America. Temperatures should average near to above normal.

Chart Trends: Trends in New York are mixed to down with objectives of 116.00 July. Support is at 121.00, 119.00, and 116.00 July, and resistance is at 125.00, 127.00, and 130.00 July. Trends in London are mixed to down with objectives of 1765 July. Support is at 1700, 1680, and 1650 July, and resistance is at 1750, 1780, and 1810 July. Trends in Sao Paulo are mixed to down with no objectives. Support is at 147.00, 144.00, and 140.00 September, and resistance is at 151.00, 155.00, and 159.00 September.

SUGAR

General Comments: Futures closed higher on what appeared to be follow through short covering from speculators. The market has made a bottom and is now reaching for its targets in the recovery. Everyone talks about the big supplies, but reports of renewed demand interest helped rally the market again yesterday. July was higher as short speculators start to pull out of positions before the contract stops trading at the end of the month. There was no other real news for the market. Traders remain bearish on ideas of big supplies, especially from Brazil. Traders in Brazil expect big production as the weather is good. However, some say that the market has traded on big supplies for a long time now and deserves to rally for at least the short term. Demand is said to be strong from North Africa and the Middle East.

Overnight News: Showers are expected in Brazil, mostly in the south ad southwest. Temperatures should average near to above normal.

Chart Trends: Trends in New York are up with objectives of 1730 October. Support is at 1680, 1665, and 1650 October, and resistance is at 1730, 1760, and 1790 October. Trends in London are up with objectives of 495.00 October. Support is at 477.00, 472.00, and 469.00 October, and resistance is at 487.00, 491.00, and 494.00 October.

COCOA

General Comments: Futures closed lower on what appeared to be a lot of follow through speculative selling. There was not a lot of news for the market, and price action reflected this. Ideas of weak demand after the recent big rally kept some selling interest around. The weather is good in West Africa, with more moderate temperatures and some rains. The mid crop harvest is moving to completion, and less than expected production along with smaller beans is reported. Malaysia and Indonesia crops appear to be in good condition and weather is called favorable.

Overnight News: Scattered showers are expected in West Africa. Temperatures will average near to above normal. Malaysia and Indonesia should see episodes of isolated showers. Temperatures should average near normal. Brazil will get mostly dry conditions and warm temperatures. ICE certified stocks are lower today at 5.067 million bags. ICE said that 4 delivery noticies were posted today and that total deliveries for the month are 68 contracts.

Chart Trends: Trends in New York are down with no objectives. Support is at 2200, 2165, and 2140 September, with resistance at 2250, 2280, and 2300 September. Trends in London are mixed to down with objectives of 1380 and 1270 September. Support is at 1430, 1360, and 1320 September, with resistance at 1520, 1570, and 1600 September.

See the original article >>

Bonds Versus Stocks - Just Ask Japan

by Lance Roberts

The great "bond bull market" is dead.

Interest rates are rising on expectations of stronger economic growth ahead.

The "great rotation" from bonds to stocks is afoot.

These are all statements I have heard being made over the last month as 10-year interest rates went on a surge from deeply oversold levels to grossly overbought levels during that time span. The question, of course, is whether the stock market continue in its current bull market trajectory in the face of higher interest rates? Today's chart of the day is an overlay of the 10-year treasury rate and the S&P 500.

I have noted several things of importance in the chart above:

• The vertical dashed lines denote when rising interest rates either led to a correction in asset prices or an economic recession.

• I have noted major events for a chronological perspective.

• The secular bull market of the 80-90's was spurred by falling interest rates and inflationary pressures which boosted corporate profitability. With the markets valued at roughly 7x earnings with a near 6% dividend yield the markets were primed for credit expansion fueled stock market boom.

• I have noted (red circle) the recent "surge" in interest rates for some perspective. While the recent rise has certainly gotten the markets attention as of late; from a historical perspective we are still well within the confines of the current long term downtrend.

• I have also noted the similarity between the secular bull market in the 60-70's versus 2000 to present. The breakout to "all time" highs is not necessarily an indication of the beginning of new "secular bull market". With valuations currently 19x earnings on an trailing reported basis, earnings growth peaking for the current economic cycle and sub-par economic growth rates; the fundamental backdrop for a continued bull market from current levels is not available.

The "bull case" for the continued run in equities has been built around the continuation of monetary interventions from the Federal Reserve and a near zero-interest rate policy. However, if interest rates begin do begin to rise in earnest the fundamental backdrop changes dramatically:

• People buy "payments" rather than houses. Therefore, the much vaulted support from the sub-3% contribution from housing to the economy will dissipate rapidly as demand slows and prices fall to find buyers.

• Mortgage refinancing activity will slow to a stop. (Who refinances to higher mortgage payments)

• Higher interest rates make speculative home buying much less attractive.
  

• Personal consumption expenditures (which make up nearly 70% of GDP) will be negatively impacted as the rising costs of variable rate credit lowers discretionary incomes.

• Corporate earnings will decline as higher borrowing costs impact profitability.

• Corporate capital expenditures will slow as higher borrowing costs reduce the attractiveness of returns on new projects.

• Markets will be negatively impacted as higher leverage costs reduce profitability.

• Corporate bond issuance will slow sharply as borrowing costs surge.

• "Junk Bonds" will come under duress as higher interest rates sap funding for troubled companies leading to defaults and bankruptcies.

• Highly indebted municipalities are likely to be "shut out" of the municipal bond markets to obtain funding leading to defaults (i.e. Detroit)

• Higher interest rates will blow a massive hole in the CBO's government budget and deficit forecasts.
  

The list goes on but you get the idea. The impact of substantially higher interest rates are not good for the economy or the financial markets going forward. In the short term consumers, and the financial markets, can withstand small incremental shifts higher in interest rates. There is clear evidence historically to suggest the same. However, sustained higher, and rising, interest rates are another matter entirely.

However, before you get to excited, look back at that red circle in the lower right corner of the chart above. It is important to keep in perspective the recent "surge" in interest rates that has gotten the market's attention as of late. In reality, this is nothing more than a bounce in a very sustained downtrend. Is the bond "bull market" extremely long in the tooth? You bet. Does that mean that interest rates are set to surge higher in the near future? No.

While there is not a tremendous amount of downside left for interest rates to go currently - it also doesn't mean that they are going to substantially rise anytime soon. Weak economic growth, an aging demographic, rising governmental debt burdens and continued deflationary pressures can keep interest rates suppressed for a very long time. Just ask Japan.

See the original article >>

Pessimism Creates Buying-on-the-Dip Opportunity

By Rodney Hobson

Rodney Hobson had felt it was difficult to find opportunities in the UK stock market, but the recent reaction to economic news has allayed his concerns.

Back to Front
Markets have taken fright at the prospect of various governments, most notably in the United States, bringing economic stimulation to an end. This should be a cause for rejoicing and the latest falls in the London stock market present a buying opportunity that I feared might not occur until much later in the year, if at all.
It is a well known phenomenon that the same economic measure can have opposite effects on the stock market at different times. If a government takes measures to help the economy, that can be taken either as a signal that things will start to get better or a warning that the economic situation is worse than we thought.
Similarly when the government tightens up, that can be taken to mean either that things are getting better or that we should all start to batten down the hatches. The problem is that you never know how market sentiment will react to the news.
Hints that the US government will let its economic stimulus program tail off later this year, plus the reluctance of the Bank of England’s monetary policy committee to indulge in more quantitative easing, has caused a sharp fall in the FTSE 100 index. The inability of the European Central Bank to come up with any new ideas on ending recession and severe unemployment on the Continent has made matters worse.
Let us take them one by one. The reaction of markets to developments in the US is, in my view, particularly irrational. The US economy has come out of the financial crisis reasonably well, indeed exceptionally well considering that it all started with the collapse of the US housing market and the stand-off in Washington between Republicans and Democrats rumbles on.
We should be pleased that the Fed feels it is now in a position to let the US economy stand on its own two feet. The sooner that happens, the less difficult and painful it will be to unwind all the support dished out so far. In any case, the Fed is not proposing a sudden lurch from one extreme to another but a gradual tapering of economic stimulus, sensibly weaning the economy off its life support.
Similarly, the sooner the MPC brings quantitative easing to an end in the UK the better. Its reluctance to indulge in more buying of gilts reflects a belief that the economy is improving, albeit slowly. Latest indications of growth in services, manufacturing and construction support this view.
The eurozone is the most problematic area. As a whole, the continuing recession on the Continent is far worse than in the UK (new readers please note, I do not accept the ludicrous notion that a recession is two consecutive quarters of contraction and that one quarter of growth ends recession). While it is worrying that the ECB feels unable to do anything more at this stage to rescue the situation, I take a little comfort from the absence of any rash, knee-jerk measures. At least the ECB has been able to put off panicking for another month.
I believe that the fall in share prices has more to do with the fact that the bull run this year had gone too far and that good value was becoming very difficult to spot. The latest setback is merely an overdue correction waiting for an excuse to happen. I still have part of my ISA entitlement for this year to invest and was despairing of finding an opportunity. Shares have become worth buying again.

Spare Us the Truth
The truth always hurts more than lies. The IMF has declared that the rescue of Greece was more about saving the euro than about saving the Greek economy. Whoever thought it was otherwise?
This speaking of the unthinkable has naturally provoked outrage in Brussels because it comes uncomfortably close to the truth. There are many criticisms that can be launched against the European Union, and I have mentioned quite a few in this column over the years, but you cannot fault the EU on its determination to defend its dreams.
That is one reason why I remain reasonably optimistic that, in the short to medium term, there is little likelihood of the eurozone falling apart with the disruption that would inevitably cause.

Testing Times
News that AstraZeneca (AZN) is shelving a treatment for rheumatoid arthritis following disappointing trial results is a warning of the dangers of investing in pharmaceutical companies. Look at the share price table and you will see little evidence of decent yields in the sector, while price/earnings ratios are generally alarmingly high.
It is true that an ageing population should increase the demand for drugs but there are many hurdles for drugs to overcome before they are accepted and, at the other end of their lives, the most successful ones come under attack from generic copies.
Astra shares had almost reached an all-time high above £33 before falling back this week. The surprise to me is that the reaction was so mild, presumably because projected sales of the drug were less than 1% of forecast sales so the blow is not seen as too heavy.
Even so, I feel that Astra is overvalued. Sales and profits fell last year and are projected to continue on a downward path this year and possibly next. It is more lowly rated than GlaxoSmithKline (GSK), a key component of my portfolio, and rightly so. Glaxo has moved into consumer healthcare as a backstop in case its drug development programme falters. Astra has no such fallback.

See the original article >>