Grain Bull Picks Up Steam

Across the board today, fresh buying is adding steam to the bull market in grains. Continued rain and flooding in the grain-growing regions of the United States have destroyed between 25-30% of this year's crop thus far. Corn has set multiple new record highs, and is on track for a new closing high. Soybeans is just 50 cents shy of a new historical high, and wheat is surging powerfully into a new bull trend. All three grains have closed higher 8 of the past 11 trading days.

Impact of Ethanol Mandates on Food Prices

Interestingly, the USDA's recent revised crop forecast indicates that this year's crop destruction is about 390 million bushels. The Congressional ethanol mandates are for the U.S. to use 400 million bushels of this years crop. Since the original USDA crop forecast was for around 1.4 billion bushels, and that amount is now reduced to about 1 billion now, it is conceivable that if the poor weather continues, we could use about 50% of this year's entire corn crop for making ethanol. That's HUGE! Don't blame traders! Blame Washington!

Corn
Soybeans
Wheat

Corn Climbs Higher

The price of corn continues to set new records almost every day, including the latest this morning.

CPI Surprises to Upside

Monthly CPI for May was 4.2%, still higher than expected and modestly higher than the Fed's comfort zone. Unfortunately, most people I know give little credibility to the BLS measurement methodologies. Most people recognize that inflation is much higher than government statistics indicate. This is underscored by the fact that most other industrialized nations show much higher inflation that the U.S., despite their having stronger currencies. If only the U.S. reports data that is consistently lower than these other nations, it calls into question the accuracy of the data.

Since both treasuries and equities are moving higher, we must assume that the market is greeting the news with a yawn. If inflation had been hotter, we would have expected the opposite to occur.

Shock: US Dollar Breaks Out HIGHER!

It has been a long time since I have had the pleasure of mentioning that the US Dollar has now broken out higher into what may become an uptrend. Note in the daily chart (left side) that the US Dollar Index futures have broken out above the Upper Bollinger Band.

Not to dampen the bullish spirit, but one of my favorite financial commentators, Michael Pento, wrote a great article last night on why the Fed is talking up the Dollar and speaking about inflation concerns, but is very unlikely to follow up the talk with interest rate hikes, despite their implied threats to do so. If he is correct, the Dollar correction could be short-lived, and the Fed's credibility may be even further damaged. Read his opinion here:

A Conflict That Bodes Ill for the Dollar

In another very fascinating article today on inflation, the Dollar, and the Fed, Joseph Brusuelas, Chief Economist for Merk Mutual Funds (specializing in currencies), also contends that the Fed is almost certainly bluffing, and that the Dollar and the American people will be the victims of that bluff, as inflation becomes more and more unhinged. Very interesting!

The Hawkish Illusion: Calling Bernanke's Bluff

New Commodity ETN

I don't mention ETFs/ETNs on this blog very often, but a rather unique new commodity ETN has just begun trading. The symbol is LSC. It's uniqueness lies in that it takes both long and short positions in commodity futures. Read more about it on my ETF blog linked at the right side of this page.

Stronger Dollar + Weaker Crude = Soft Grain Prices

The grains have lost their gains overnight, after corn reached another new all-time high price. Both soybeans and wheat are lower than yesterday's settlement prices, and corn is barely holding onto a hair-thin gain. A much stronger Dollar and softer crude oil prices are being cited for across-the-board weakness in the grain complex. A statement by Fed Governor Plosser, calling for interest rate hikes as soon as possible, has underpinned the Dollar and led to a good rally. The tit-for-tat between the Fed and the ECB continues. Weather continues to suppress hopes for a good crop yield, and it is therefore bullish for prices over the longer-term.

Stock Index Futures Rebound Firmly

S&P 500 bulls have pushed the index rather stoutly back above support at 1340. Such a rebound is not uncommon. Lack of follow-through bad news overnight may give the bulls some time to catch their breath and build some confidence for a rally. Art Cashin, veteran floor trader for UBS over several decades, says today's bullish move is a reflex rally. If so, it is a rather forceful one, with the Dow more than 160 points higher this morning on good, but not great, retail sales data. Retail sales were up a mere 1%, but still more than expected. One would have expected much better retail sales results with all that debt-dripping stimulus from the government, I would think. Often in months past, when the data was analyzed, it was clear that the stronger retail sales were in grocery stores and gas stations, which only stimulate higher inflation, not economic recovery. Time will tell in the next few days.

Still, a 160-point move higher seems a bit strong for such impotent data. Some firings at Lehman Brothers may also be having an impact on stocks by inspiring renewed confidence on Wall Street that the financials may be looking up. For some reason, on Wall Street, bad news is often seen as good news because it fosters a (mostly false) sense that the market is now turning higher.

Who knows! Perhaps the stimulus checks are having an impact! Personally, I'm skeptical!

Stock Market Bears Break Through Key Support

In the bull/bear battle today for the S&P 500 key support level of 1340, the bears have won out in the closing minutes of the session. If the bulls don't get some solid news that would drive prices higher very soon, then it's likely that the stock market will fall even further. With the Fed talking hawkish, stock markets bulls may not have the Central Bank on their side this time.

Cotton Locks Limit Up Too

Stock Market Bulls Draw Line in the Sand

The key 1340 level (yellow line on this chart) on the S&P 500 futures continues to be successfully defended -- so far -- by the stock bulls. This is a key technical support level for stocks. That's a tough line in the sand to defend given the current bearish sentiment.

All Grains Lock Limit Up

Can you say, "inflation", Mr. Bernanke? All three of the main grain products have locked limit up today, with corn striking a new all-time high price as well as a new all-time closing high, if it remains limit up through the remainder of the session. With more than 45,000 in the bid pool for corn (and 27,000+ for soybeans), this is a very strong possibility. It is extremely rare that all three grains reach limit up on the same day, and is probably symptomatic of higher food inflation for consumers at some point in the not-too-distant future.

This is food inflation coming at the U.S. economy. Unfortunately, the American people will feel this inflation down the road. It now appears that poor weather in the agricultural regions of the United States have permanently reduced this year's crop forecasts, and the market is adjusting prices accordingly.

Corn Reaches Limit Up, Backs Off

Corn has now surpassed the $7/bushel handle for the first time ever, and prices has reached the daily lock limit price. corn

Grains Rocket HIgher At Start

The entire grain complex has rocketed strongly higher out of the starting gate this morning. Corn has reached yet another all-time high price just under $7/bushel.

New Records for Corn

Corn has set two new records today. Corn has closed at a new record high of $6.7325, and has set a new all-time record high ($6.7375) in the closing moments of trading as well. This is probably bullish for a continuation of the bull trend in corn.

Stocks See Saw Higher

The stock indexes today are on a steady see saw trade higher and higher. Note that there are six consecutive profitable trades in both directions.

Jobs: More Malarkey from CNBC

Correcting the erroneous spin spread by Steve Liesman of CNBC following last Friday's terrible NFP jobs report, John Mauldin wrote the following this past weekend:

There are two unemployment surveys. One is for businesses, called the establishment survey, and for whatever reason that is the one most people pay attention to. When they do the household survey, they found that the number of employed people fell by 617,000 last month, spiking the unemployment rate to 5.5%. Some on CNBC said it was just teenage unemployment showing up in the numbers, but that is not true. Teens... accounted for just 0.2% of the rise. Adult unemployment rose to 4.8% and accounted for 0.3% of the rise. (By the way, technically, for the three people with no social life actually watching the scorecards, the household survey dropped 250,000 jobs; but after you adjust for factors in the establishment survey and seasonally adjust, you get 617,000.)

Here is another:

Wages declined by 0.2 in April in nominal terms, and forget about it in real, after inflation numbers. David Rosenberg of Merrill Lynch notes that the 0.2% decline in real spending on durables and semi-durables was the 6th decline in a row, which has never happened in the 49 years that such data has been tracked.

Read the newsletter in its entirety here:

When Bubbles Collide

So what's the truth? Did Liesman get it wrong? Based upon tax records from States and the Federal Government, people are earning less and tax receipts by the States are falling significantly, suggesting lower employment and thus, fewer receipts by the States from income taxes. "In short, wherever you look, tax receipts are down. That means income and sales are down. There is no spin that trumps tax receipts," Mauldin says.

Fantasy Inflation

Here is a short excerpt from a recent blog posting by Bill Gross of Pimco, the world's largest bond holder:

The U.S. seems to differ from the rest of the world in how it computes its inflation rate in three primary ways: 1) hedonic quality adjustments, 2) calculations of housing costs via owners' equivalent rent, and 3) geometric weighting/product substitution. The changes in all three areas have favored lower U.S. inflation and have taken place over the past 25 years, the first occurring in 1983 with the BLS decision to modify the cost of housing. It was claimed that a measure based on what an owner might get for renting his house would more accurately reflect the real world – a dubious assumption belied by the experience of the past 10 years during which the average cost of homes has appreciated at 3x the annual pace of the substituted owners' equivalent rent (OER), and which would have raised the total CPI by approximately 1% annually if the switch had not been made.

In the 1990s the U.S. CPI was subjected to three additional changes that have not been adopted to the same degree (or at all) by other countries, each of which resulted in downward adjustments to our annual inflation rate. Product substitution and geometric weighting both presumed that more expensive goods and services would be used less and substituted with their less costly alternatives: more hamburger/less filet mignon when beef prices were rising, for example. In turn, hedonic quality adjustments accelerated in the late 1990s paving the way for huge price declines in the cost of computers and other durables. As your new model MAC or PC was going up in price by a hundred bucks or so, it was actually going down according to CPI calculations because it was twice as powerful. Hmmmmm? Bet your wallet didn't really feel as good as the BLS did.

You can read the rest of Bill's thoughts, which were part of John Mauldin's latest newsletter, at this location:

Fooling With Inflation

Atrocious Treasuries

Treasury futures are trading just as erratically as the grains in early trading today. This chart is almost impossible to trade. Treasuries showed a short-term sell-off last night following hawkish comments from Fed speakers. However, today, treasuries are so erratic that trying to trade them is a nightmare.

Grains Open Very Erratic

The grains are trading so erratically, I'm going to leave them until things settle down. Trying to trade during such conditions are a certain way to lose money.

Russia's Oil Chief Predicts $250 Oil Next Year

"We think it will reach $250 per barrel in the foreseeable future," Chief Executive Alexei Miller told news media people earlier today. That's more than $110 higher than today's price.

USDA Sees Corn Production Falling!

The USDA crop progress report this morning indicates that corn production in the United States this year has been slashed the forecast by 70 million bushels to the lowest since 1995. I expect that this will likely result in sharply higher corn prices when the market opens this morning.

Saudis Open the Spigots a Little Wider

The Saudi Oil Ministry has announced that they will open the oil spigot and increase production. Consequently, crude oil prices are moving lower from highs earlier this morning that were only $1 from a new record high.

Oil On the Rise Again

Oil is already over $138/barrel, and still rising today, having erased all the lower prices from oil's swoon yesterday. This is beginning to show some signs of a consolidation pattern. However, oil is consolidating at a price that is far to high! At this price, it could kill economic growth. It is certainly killing the stock futures this morning!

Fed Hawks Talk UP the Dollar

The gyrations in the currency markets lately have turned into a game of tit-for-tat between the heads of the European (ECB) and American (the Fed) Central Banks. You'd think they were are war with each other, seeking for the dominance of their own central bank and for the title of the world reserve currency for their respective currency. Play nice, guys!

Last night, Chairman Bernanke, for the second time in a few days, has talked up the US Dollar, and the currency has risen and responded. This is a stunning development, since in the past, anytime Chairman Bernanke was asked about the influence of slashing rates on the devaluation of the Dollar, he refused to comment, saying that the Dollar was the realm of the US Treasury Department and Secretary Paulson. So what changed that Mr. Bernanke reversed himself and has started to verbally intervene to defend the Dollar? It is because the Dollar's collapse has become so precarious that it is igniting uncontrolled inflation!

Why It's Nuts to Suggest Speculators Are Taking Delivery to Hoard Oil

Here is my response to someone in a forum that claimed that the Investment Banks are taking physical delivery of crude oil and hoarding it away somewhere:

I figured that some uninformed person would CLAIM that large spec funds are taking physical delivery of oil and just hoarding it somewhere. Of course they COULD take physical delivery of oil, but the question is: Would it be a prudent use of their clients funds to do so? And when you examine the ramifications and expense of doing so, the answer is a quick and resounding, "NO"! It is silly idea without fact or foundation for many reasons:

1) To take physical delivery, a speculator would no longer be able to use a leveraged margin account. Instead of putting up $6000 per contract, they would have to fork over $139,000 per contract at today's price. For an IB to take physical delivery of 1000 contracts, they must now fork over $139 million to pay the cash delivery price.
2) They now must find a place to store it. If Goldman Sachs has taken physical delivery of 1000 contracts, they now must find a place to store 42 million gallons of crude oil. You don't just store 42 million gallons under your bed mattress! It would be easier to just leave the oil where it is in the earth and store it there than to take physical delivery. Eventually -- and very quickly -- you would run out of storage room. At 42,000 gallons per contract, the bed mattress fills up very rapidly! Why not just BUY the oil field? It would make a lot more sense -- and cents! There would be no storage cost, and no one could accuse you of hoarding, if you just buy the oil field and sit on it!
3) Now that they have taken physical delivery, they now have purchased -- at a cash price -- an asset that no longer earns a return. It just sits there. It doesn't earn interest or a dividend. It will only provide a return when it is eventually sold. It's dead money! What kind of silly investment is that?
4) They must arrange not only for physical storage, but also transport of those 42 million gallons of oil. How many tanker trucks is that? The cost would be astronomical, especially at today's gas price, just to find enough trucks and truckers to transport 42 million gallons of highly flammable liquid to a secret hiding place.
5) Now you have to pay the astronomical cost of securing such a facility against both thieves and those who would destroy your oil. This is an on-going expense that mounts day after day regardless of whether you ever make a penny of return on your investment. Again, it is both a bad investment and a silly idea. The oil suddenly becomes and expense, rather than an asset that earns a return.
6) Where on earth are they hiding such astronomical volumes of this hoarded oil? Like I mentioned before, you can't really hide such huge volumes of a substance like oil just to hide it and hoard it from the world? Show me where all these millions of barrels of oil are all being hidden. Show me the oil! You can't hide millions of barrels of oil under your mattress or in a bank deposit box! You would have a hard time finding it (about like finding weapons of mass destruction in Iraq) because it doesn't exist. Prove all this hoarded oil exists by showing me where it is!
Note: the only people in the world that have a genuine interest in hoarding oil are the countries that have it and sell it. OPEC has an interest in hoarding it for two reasons. One reason is the reason for which OPEC was created -- to control supply and push prices higher. The second reason -- a new one that has surfaced in the past few years -- is to preserve their oil for their own people's use. In a world where oil reserves are shrinking, more and more oil-producing nations are saying that they want to KEEP their oil for themselves and the future use of their own people! I can't say that I blame them!
7) Now, you must may millions of dollars a month of rent out of pocket each month for storage costs just to sit on an asset that draws no return at all. Oil does no good to its owner unless it is refined and sold for a profit.
8) It would be a much better decision for a speculator to take their profits on their futures contract by shorting the market before taking delivery. Of course, doing this nullifies the long-only argument that uninformed people try to make to suggest that speculators are manipulating the market, for the reasons I explained in my previous post.

No reasonable investor would assume the costs and the risks of taking physical possession of millions of gallons of oil just to sit on it with the hopes of selling it later at a higher price. I don't think the Investment Banks are that stupid. The question is, are we stupid enough to buy such a silly argument?

Betcha Can't Guess...

what this chart is for.

This is the daily chart for one of the stronger bull runs of any futures contract. Note, however, that the Klinger Volume indicator in the second panel is showing heavy selling of late.

Would you be surprised to learn that this chart is for the Mexican Peso, beginning in early March of this year? It hurts to admit that even the Mexican Peso is gaining against the US Dollar in recent history.

Grain Prices Mirror Oil Today

Shrugging off weather-related fundamentals, the grains appear to be taking their lead for prices from the price action of crude oil today. The Dollar appears to have found some support, also, which might also be a factor.

Surprise -- Grains Open Flat to Down

All the morning commentaries I've read this morning have been expecting grains to open sharply higher across the board, but instead, they have opened flat to down this morning. Cold, wet weather and flooding across much of the grain belt is increasing the likelihood of a disappointing harvest. The commodity markets never cease to provide unexpected surprises! The charts show the 15 minute versions of corn (left), soybeans (center), and wheat (right).

Corn Higher By 20 Cents to Another Record

In early evening trading, corn has already risen to 2/3 of the entire daily lock limit amount. Note in the left chart (daily) that corn has already broken out above the Bollinger Bands, an powerful indication of new uptrend. It is higher 6 of the past 7 days. Note also that tonight, corn opened nearly 20 cents higher, and has moved only higher since then.

Interestingly, both soybeans and wheat are also higher this evening by about the same amount -- 20 cents. However, only corn is within easy striking distance of reaching the lock limit price.