Friday, July 20, 2012

Food prices to rise for months?

Following  up on our past comments ( on rising food prices, we found the below article at concerning the situation.

US drought to hike global food grain prices

NEW YORK (Commodity Online): With the drop in production of foodgrains in US as the the country hit by the worst drought hit in past 25 years is likely to hike the global as well as domestic food prices for coming months.

Presently, price of most of the agri-commodities like wheat, corn, oilseeds among other are high on rising demand and is likely to move further.

US is the largest producer of oilseeds, corn and wheat in the world and with the drought like weather over the major growing areas affected the crop production.

According to Tom Vilsack, Agriculture Secretary, around 61% of the total agricultural land is characterised as being impacted by this drought, which includes 78% of the corn crop and 77% soybean is now in an area designated as drought impacted.

While, the demand for the commodities rising tremendously on the back of rising population. The demand for wheat, corn and oilmeals also been raised on the back of rapid growth of poultry and live stock industry.

In Chicago Board of Trade (CBOT), for August delivery, wheat traded up 6 cents to 909 2/8 cents per bushel, soybean traded up 14 cents to 1697 4/8 cent per bushel and corn rose 1 6/8 cents to 796 6/8 cents per bushel on 19th July.


We think that a sustained rise in food prices could further strain socio-economic conditions in the developing world. In addition, a rise in prices would also pressure inflation rates in the U.S., putting pressure on the Federal Reserve to hold off on any further monetary stimulus. Good thing the Fed looks at core inflation rates.

Update- The headline for the article is likely inciting a response to read the piece (and we have to admit we were drawn in) but it most definitely makes the point concerning food. Registration may be required.

Traders Edge 7-20-12- Down she goes....

The equity markets here in the U.S. are set to open lower, following a disappointing top-line growth at General Electric (although noting that earnings did beat estimates) and world markets that were generally lower.

As we stated yesterday, we increased our short-exposure, believing that the market were showing distribution at/near resistance levels.We also believe that the market will, at least, consolidate into $132 (on the SPY) and depending on sentiment may close the gap below $130. The SPY was up nearly 30bps yesterday on 129 million shares and is pushing into the May 4 downtrend with 193 million shares. This suggests the market will fail, technically speaking.

Fundamentally, we continue to believe that anemic economic growth and a lack of monetary stimulus are headwinds to further market appreciation.

For illustrative purposes we also show the price charts of the Russell 2000 Ishares ETF (ticker IWN) and the Powershares QQQ trust (ticker QQQ).

The ETF's on both the indices are showing the same technical characteristics as the SPY. The IWN was down nearly 50 bps yesterday on 49 million shares, after running into the May 3rd downtrend of 75 million shares. As for the QQQ, the ETF was up a nice 1.1%, most likely on the back of strong performance out of the tech space, including QCOM and EBAY. That said, the volume of on the Q's of 53 million compares to the May 4th downtrend of 107 million shares. The Q's are also at the 61.8% fib retracement level and may be setting up for decline into $53 level, which is the start of the most recent rally.

Our portfolios continue to have large exposure to coal stocks, some shipping names, a large cash position, precious metals and precious metal stocks, and our increased short exposure. We may add to the short exposure in the near future.

Thursday, July 19, 2012

Intraday Trading Update- Our Shorts are On

Is it getting hot out there or is the market showing signs if weakness. Considering the name of this post I think you can discern our thoughts. The SPY appears up against a resistance level and the volume is drying up.....

We also see signs of distribution in intra-day trading. The price of the SPY has bumped up against a level just underneath $138, and high prices have been met by increased selling volume.

Our opinion remains that the market will be hard pressed to experience any sustained increases. We see that the market will face headwinds from flat lining economic growth and the lack of any immanent monetary stimulus. Our shorts are on.

Trader's Edge 7-19-12

The S&P 500 traded up nearly 70 basis points in yesterday's trading and looks set to open higher, following world markets up. This is despite Spanish yields trading up over 7% (however we note that Italian yields are down in today's trading). We had reports from tech bell weather stocks yesterday, including Qualcomm, IBM, and EBAY. All the stocks for these companies are trading up in early morning trading, despite a mixed bag in earnings.

We would watch trading in IBM shares closely for a sign of investor sentiment and market direction, given its shares of the Dow Jones Industrial average.

The stock looks to be bouncing into the $193 level in early morning trading, an area of near term resistance. The stock looked oversold on the stochastic prior to yesterday's report and the bounce may  represent the market building cause for lower prices. We note that despite raising guidance that revenues were below consensus estimates due to a weak tech spending environment. We will have to take a closer look at the reported earnings and estimates here.

We will also be closely watching the market action today. We have not decided to add to our short exposure, but note (As a side note, we use ETF's and mutual funds to gain short exposure. Our vehicle of choice are the Active Bear ETF, ticker HDGE and the Girzzly fund, ticker GRZZX). that the market looks to tiring into this bounce. Look for a rejection of higher prices as this would suggest a forthcoming downside move.

We continue to see weakening momentum and strength characteristics in the market's technicals. We also think that the lack of a clear path on monetary stimulus actions and a flat lining economy suggest lower stock market prices. We shall see.

Links with your Breakfast

A look Yahoo's new CEO (we have a small position on thought the company represents a good asset play)

What Marissa means for Yahoo

(Despite large cash balances and valuable investments, we wonder if the company's desire to take Google on directly is not a losing battle.)

Thought on why the German bonds are trading at negative yields

New Tools at the Fed?

Goldman predicts Fed easing... QE3 or something else?

Compton, CA may be fourth Cali city to declare bankruptcy.

Chinese Housing prices rise....

... while mortgage applications jump in the U.S.

 The secret to persistence

Wednesday, July 18, 2012

Thoughts on Bernanke's Second day talking to congress

Comments and thoughts from Bernanke's second day with Congress.

- Bernanke thinks that economic growth will decelerate, but is likely to turn up later this year and in 2013.
-The Fed thinks that tight lending conditions and fiscal policies (or lack there of) are holding back the potential recovery. However, the Chairman also expects these headwinds will fade over time.
- Bernanke stated that employment growth has been and will be "frustratingly" slow.
- Energy price declines are bringing inflation rates down, indicates that inflation is not an issue hindering monetary actions at this time. 
- The downside economic trajectory and low inflation rates led the Fed to the extension of Operation twist 2.
- There was a "lively" debate between Ron Paul and Bernanke pertaining to the transparency of the Fed and the "Audit the Fed" bill. This will no doubt end up on youtube at some point.
- Bernanke reiterates the statement that any further Fed action will be precipitated by further economic and employment downside. 

 Our Comments....
The Fed is not ready to move on any further easing at this point. We believe that a QE3 program (or whatever the powers that be decide to call it) will be predicated on a sustained negative trends in employment data. This, of course, implies that traders watch (no matter how manipulated) the monthly employment statistics released by the BLS. In addition, investors and traders can also gain insight into unemployment trends by watching the weekly jobless claims numbers, the ADP employment report, and the regional manufacturing indicators for more clues.

We are surprised that Bernanke continues to cites low inflation rates due to a reduction in energy prices. So are we to understand that when inflation accelerates that we should look at the so called core inflation rate but when energy prices decline we should look at the total CPI?

Bernanke continues to defend Fed actions (why would he not) despite repeated attacks (rightfully so in our opinion) by Ron Paul and other similar Fed opponents. Clearly Bernanke believes (at least publicly) that the Federal Reserve acted rightly and lawfully in the face of the economic malaise over the last few years. We have read many opinions defending and criticizing the Fed, and whatever your opinions, we think John Hussman laid out the case as to how the Fed broke the law. (found here- This is a must read.

Traders Edge- 7-18-12- Market at Crossroad? King dollar lost its crown?

Although the futures were higher earlier this morning, the market looks set to open lower. Bernanke will once again speak to Congress today (the proceedings can be watched at starting at 10 a.m. EST) while housing starts and building permits data is set to be released.

We think that the U.S. stock market is at interesting inflection point, both broadly and technically speaking. So far, Bernanke seems wishy-washy on the possibility of QE3. This is while economic data appears mixed at best. We continue to think that the start of QE3 will occur once economic data/stock market/money statistics weaken considerably. In addition, the S&P 500, as exemplified by the SPY, appears to be at a technical resistance level. This caps off the rally that began in early June, a rally that has occurred on declining volumes.

We have a small short exposure in our portfolios (representing gains remaining from a profitable trade off the March highs) and are considering adding to this exposure.

As for king dollar, the Powershares dollar bull index has sold off on elevated volume levels. This is after closing somewhat above the May 2012 highs. We also note that the UUP rejected higher prices in yesterday's trading. We are unsure if this represents the start of larger decline in the UUP, noting that with Europe still in doldrums that traders are likely to move into dollar-denominated assets for safety. The UUP was also overbought on the stochastics, and this decline may just be alleviating that condition.

So has king dollar lost its crown? At this point we do not think so, but we would watch the Euro for more information. The FXE (Currency Euu shares trust- an ETF that tracks the Euro) currently shows little investor interest. However, the ETF is oversold and the trends in both the MACD and RSI have diverged from the price trend. This may indicate an impending directional change in the price.

Tuesday, July 17, 2012

Afternoon Link-a-palooza.

PIMCO on the state of asset allocation and strategy.

Bubbles are Efficient? The theory would seem to the course of history

Investors world-wide are looking for more stimulus

The NAHB Housing Confidence Index at its highest level since 2002. have you seen the stocks for homebuilders?

Cantor Fitz is building its equity business. Now opening a Japanese office.

The demise of the commodity supercycle is greatly exaggerated.

Google is not a technology company

Cognitive Dissonance- Jeffrey Saut's take on why the crowd is wrong.

Something brewing in the Muni market? Requires login.

Is borrowing from your 401K becoming the new MEW?,0,4038902.story?track=rss&

Lower Food Production to Hamper Potential Interest Rate Reductions?

From Link-

Stagflation risks rising in Asia; could impact global growth

With many North American crops in trouble due to severe drought conditions, analysts will be looking at Asia for signs of food inflation. Food inflation may prevent Asian countries from lowering rates, potentially creating growth problems not just for Asia, but globally. Right now the focus has shifted to India and the rising risks of a poor monsoon season.
The Hindu Business Line: - Weak monsoon poses a challenge in maintaining the high food production, the Agriculture Minister, Mr Sharad Pawar, said here on Monday. The monsoon deficit continues to be at 23 per cent till date, but there is no drought-like situation, yet, he said.

Rueing that India’s agricultural growth is still influenced by monsoon and vagaries of nature, Mr Pawar said meeting the 4 per cent growth was a challenge this year. He said kharif sowing [planting for the autumn harvest] will go on till the first week of August even as farmers anxiously wait for rains.
This is a dangerous development when combined with the US drought. Food accounts for almost a third of the CPI measure in a number of Asian countries.

Even prior to the increased upside risks to food prices, Asian nations had little room to lower rates in response to the global slowdown.

Source: DB

In spite of significant rate hikes since the lows of 2009 (chart above), rates for most Asian countries are roughly where they should be (except for Vietnam) based on the Taylor Rule (chart below). India and Thailand could lower rates another 100bp, but that's about it. In Sri Lanka, Indonesia and the Philippines the rates may already be too low.

Source: DB

As poor harvests propagate through the system and food inflation risks kick in, lowering rates further to stimulate Asian economies could become problematic. In fact these developments could spell stagflation for a number of nations in Asia - an extremely difficult situation for central banks to address.
DB: - Recent increases in wholesale and futures prices for corn and soybeans do not yet constitute enough of a potential threat to price stability to imply a need for rate hikes. But drought in the Western Hemisphere and a so-far disappointing monsoon in India do suggest that the risk of “stagflation” in Asia may be rising.
 This is an interesting implication surrounding lower crop yields. Dove tails nicely with the previous post concerning the escalation of the Arab Spring found here-

Bernanke on QE3...

Bernanke just laid out what would lead to QE3... instability in employment gains weighed against the "costs" of an additional monetary stimulus. One of those costs is likely the unhinging of inflation expectations versus the 2% implicit target rate. Watch the TIPS spreads. The 10-year TIPS spread is running at 2.13%.

Traders Edge 7-17-12

The U.S. stock markets are likely to open higher following the positive results of the Spanish bond auction. The yields on the 10-year Spanish bonds, which were approaching the all important 7% rate, have fallen more than 10 basis points on speculation of a large bailout of the country's banks. Risk-on is back, at least for today.

Bernanke is slated to talk to Congress today and tomorrow to discuss monetary policy with the Senate Banking Committee. (can be watched live here- Traders eyes and ears will be watching the testimony to see if the Fed Chairman gives hints towards a QE3 program. It is our belief that a future QE program is almost assured, but that traders looking for an imminent money printing regime will be disappointed. Although the monetary statistics and the World economy have slowed, it is our belief that there is enough pockets of strength to keep the Fed on the sidelines. We think that any future QE3 program will be big and bold and will only occur when the economy and/or inflation expectations slow significantly.

The S&P 500 seems stuck in a trading range in the short-term, as traders weigh second quarter earnings (beginning in earnest this week) and monetary/political actions.

We continue to watch the UUP and FXE for any indication of a trend change in the forex markets.

Handicapping an Escalation in the Arab Spring

With drought conditions in the U.S. and other farming regions pushing up agricultural commodities, we wonder if a flare up in the Arab Spring revolts will result. If you remember, what ultimately ended up being a political movement that toppled regimes in the Middle East, such as Egypt and Libya, began as protests in Tunisia and Morocco due to the rising food prices.

Of course, drought conditions will only be a short-term phenomenon and the parabolic moves in agricultural commodities that have been a result will also be short-lived. However, much of the Middle East and the developing World lives near, at, or below the poverty level, and any significant rise in food prices exacerbates the problem. Added to this volatile mix is the political tension created by high unemployment rates, demographics that skew toward young males, and a general belief in the illegitimacy of the respective governments. In addition, we should not completely discount the possibility of QE3, which would act to push down the value of the dollar and ultimately lead to higher prices of all dollar-priced commodities.

What say you?

The three-year charts for corn, wheat, and soybeans. 

Monday, July 16, 2012

Links to Ponder 7-16-12

NABE survey- “The rising sales and profit margins experienced earlier in the year may have been short-lived

More Chinese stimulus coming. Premiere Wen warns on recovery momentum

Wilbur Ross- Coal to face headwinds for years. (We shall see who is correct- a reduction in gas wells reducing supply and more normal winter can make headwinds disappear rather quickly. Especially considering natural gas prices are significantly higher world wide than in the U.S.)

Retail sales down 0.5% in June

.....and the chart

An AIDS vaccine on the horizon?

A LIMRA study suggests that consumers that work with financial advisors are more ready for retirement

Correlation of Stocks and Bonds- more interesting than you think.

Handicapping QE3 (1)

 Handicapping QE3 (2)

Want better team dynamics- insert more humor.

Be more lucky.

Traders Edge 7-16-12- A Tale of Two Earnings

The stock market in the U.S. is market is set to open lower as World indices closed or are trading mixed. Although earnings began last week, the real meat of quarterly earnings starts today, and will only begin to taper off next week. Retail sales and business inventories are set to be released in the U.S and may add fuel to the volatility fire surrounding earnings reports. The Consensus is looking for a paltry 0.1% rise in retail sales and and 0.2% gain in business inventories.

As for last Friday earnings announcements, Consol Energy (ticker CNX) reported their second quarter production updates. The company stated the coal division produced 14.6 million tons of coal, which includes 1.1 million tons of low-vol (read higher priced) metallurgical coal . In addition, the gas division produced 37.3 Bcf in natural in the second quarter. Although the company indicated that they continue to see some weakness (via talk of continue increased vacation schedules), we think these figures do not necessarily point to the calamity that the stock is indicating.

The shares of CNX are up against a short-term resistance level and the downtrend has not been broken. That said, we continue to believe that coal stocks remain attractive for a long-term purchase.

As for other earnings, both JP Morgan (ticker JPM) and Wells Fargo (ticker WFC) reported their quarterly results. It appears that investors liked what they saw. Shares of JPM traded up nearly 6% while WFC gained more than 3%. These results and the subsequent share price rise helped boost the the Financial spider ETF (ticker XLF) by nearly 3%

Although EPS beat the consensus at JPM, we are surprised as to the degree that the reduction in credit-related costs added to earnings (as a note, it is our opinion that most large banking concerns have significant leeway to reported any earnings number they want, considering the portfolios are marked to model. This adds a large degree of uncertainty to results in any one quarter). In the second quarter, credit costs were just 0.9% of revenue versus 6.6% in the year-ago period and 2.7% in the first quarter of 2012. The credit costs booked against revenue appears small relative to past revenue results and compared to net charge-offs, totaling $2.3 billion. That said, nonperforming assets as percentage of assets has improved over the last four quarters.

As for the chart, watch the resistance around $38.

In comparison, the results at WFC look cleaner. Although the performance is not directly attributable to the quality of the earnings, we also note that shares of WFC are ahead of JPM (see below). Credit-related costs were 14.6% of interest revenue in the second quarter. This compares to 16.3% in the first quarter of 2012 and 14.8% in the year ago period. In addition, nonperforming assets ticked down from the sequential quarter and the year ago period, a positive indication. That said, total charges of about $2.2 billion were ahead of the credit-related costs of $1.8 billion.

Update on Money Supply

The latest money supply figures were released by the Federal Reserve last Friday. Growth rates remain tepid at best, and continue to hover around stall speed. The 12-week annualized growth rate in M2 was a measly 1.7%, or a 4.9% average over the last three months. Growth rates in MZM, a more comprehensive definition of money, were worse off. Through July 2nd, the 13-week annualized growth rate was just 1.2% and an average of 3.4% over the last 3-months. Taking inflation into account, the real 3-month average rate of change in money was just 1.1% for M2 and a decline of 1.3% for MZM.

We think these figures point to tepid economic growth at best and note that the trajectory for growth has been down since before December 2011. That said, we also think that monetary statistics do not yet point towards a recession.

Sunday, July 15, 2012

Sunday Afterthought 7-15-12

We thought we would introduce a new weekly piece covering topics (any topic) outside of the investment world. To succeed in the investments and in life in general, we really need to be renaissance men and women.

This week's topic of sorts is the hubble space telescope and specifically the pictures taken by it. Althought there is nothing new about either, there is nothing more awe inspiring that will also make you feel insignificant while part of something great all at the same time. We uploaded a few pictures that we thought we impressive.

More (a lot more) can be found from the below. Enjoy.