Saturday, December 6, 2008

Grain Prices at Multi-Year Lows

Because of the collapse in commodity prices, I decided to check to see how low current corn, soybean, and wheat prices are compared to the past several years. I was stunned to learn that all three grains haven't seen prices this low at any time this century! This current price deflation is likely to lead to production cuts, increased demand, or both. That inevitably will lead to higher prices again at some point, but no one knows when!

Friday, December 5, 2008

Bulls Battle Back

I don't know if this is a short-covering rally or if the bulls have managed to battle back to the flatline today, but it is certainly a bullish sign that following such horrendous job and employment news, the stock market indexes have pulled back to positive territory thus far today. It will be interesting to see if, over the next two hours, the longs are willing to hold those positions over the weekend, or if negative sentiment will lead them to liquidate again instead. Anything can happen in the last hour of trading.
My gut instinct tells me that Wall Street is erroneously assuming that the worst just has to be over, that all the bad news is now priced into the market, and that therefore the market just has to go up now. It is true that many of the largest stock market rallies in history have been bear market (sucker's) rallies. I'm convinced this is more "irrational exuberance", to put it in Alan Greenspan's terms. Just because stocks have dropped a lot doesn't mean they now just have to go higher. What goes down can still go lower, and I suspect that in time, it will!
Unemployment is Worse than the Headline Indicates
The true unemployment numbers are far more horrific than the headline this month. The household survey showed -673,000 jobs lost last month. Furthermore, The BLS' unemployment statistic has a strong tendency to be understated during a recession. This is baked into the cake due to the way the BLS calculates and makes adjustments to the figures. That's why the September and October figures were revised strongly downward. It is very likely that next month, the November figures will also be revised downward. And December is starting off like a nightmare too. In the first five days of December, we have also seen job cut announcements by large corporations of more than 300,000 jobs to be eliminated this month. If that pace continues throughout December, the November figure we saw this morning will seem like a paltry pitance compared to what's yet to come! Over the weekend, John Mauldin will report some of the internals beneath the headlines. I'll post some of his newsletter, or a link to it, here.

Frequently, I will take a lunch break at this hour of the trading day and return again to trade the volatility of the closing hour of trading.

Those Poor Grain Farmers!

The global asset sell-off is causing grain prices to plummet. Funds are liquidating grain futures and open interest is plunging. Note the intraday corn chart above and the daily chart below. The same speculators that were blamed for driving commodity prices higher six months ago are getting no credit or thanks for selling and driving prices to excessively-low levels now. Where's the justice?

Prices have now dropped so low that prices for corn, soybeans, and wheat have dropped below farmer's production costs. The high cost of fertilizer, fuel, seed, etc. will force many farmers to make the decision to leave some of their land fallow and claim a government check instead. With grain in storage at record multi-decade low levels already, these low prices may influence many growers to cut production in the 2009 growing season. This will undoubtedly lead to not only higher prices, but quite possibly food shortages in some parts of the world. It will become more expensive to eat!

Treasuries Regain Their Footing

I was so surprised when treasuries temporarily sold off earlier this morning. What a great time to buy more treasury futures at a discount. Now, treasuries have regained their footing and are rising again. The 10-year note shown in this chart has just crossed into positive territory for the day (see yesterday's close as the purple line in the left chart)!

Stock Market Bulls Push Back on a Down Day

I remain bearish personally, but stock market bulls have pushed back quite forcefully this morning for the second time since the disastrous jobs report a few hours ago. I use these times to take profits and to get ready to sell into the rally when it shows signs of weakness again. Those poor perma-bulls have been getting slaughtered throughout this year. But as they say, "Where's the beef?" Anyone for a steak?

Mortgage Delinquencies Reach Record 6.99%

In other news today, mortgage delinquency rates have also reached a new record -- 6.99%! Foreclosures are also nearly 3% of all mortgages!

Click here for the story on

Crude Continues to Plunge On Weakening Economy

Crude oil has also continued its fall as propspects of even weaker demand drive prices still lower. Who would have ever predicted that crude oil would reach $42/barrel, and plunge of more than $105 in just four months!

Surprise Sell-Off In Treasuries

Look at the surprise sell-off of U.S. treasuries following the announcement of the job losses this morning!

U.S. Economy Loses Over 1.2 Million Jobs in 3 Months

With the unemployment rate reaching 6.7% in November, and job losses for the month reaching an unexpectedly high 533,000, it appears that the economy is deeping in its recession. Additionally, the BLS revised job loss numbers downward for the previous two months as well. In total, the U.S. economy has now shed more than 1.2 million jobs in the past 90 days. The blood-letting continues!

Here is an article with more details.
Surprisingly, however, stock index futures have not dropped precipitously! Just wait until the market opens! It will be an interesting day!
Read here the reactions to varoius economists to the news on the Wall Street Journal's website:

Leading Indicators: Pointing to Even Worse Times to Come

Leading economic indicators are pointing to even worse times to come, unfortunately. Those who opine that we have hit bottom may have buyer's remorse when they realize that the indicators that point to the path forward are indicating that the economy is going to get even worse than they are now. Some leading indicators are setting all-time record lows that have never been recorded before.

Jobs, Jobs, Jobs: Hold On For a Wild Ride Today

With the monthly Non-Farm Payroll report to be released this morning at 8:30 am EST, the focus in trading today will be almost exclusively on jobs. With announced job cuts this week alone of more than 300,000 for large corporations, the job situation is probably only going to get worse next month.
Today's data release is expected to be bad, so a terrible jobs report will not necessarily send the stock index futures lower. However, if the jobs report is even worse than the 350,000 drop that is expected, another volatile down day for stocks could be in the offing. Right now, the stock index futures are dead flat in anticipation of the release of this number, and I don't expect much trading until that time. Other futures are hanging on the result of the jobs report also, including even grains and crude oil.

Thursday, December 4, 2008

The See Saw Continues

Key word: Optimism! The Dow closing hour yesterday:Key word: Pessimism! Buy the rumor (above) and sell the fact (below)?
The Dow closing hour today (see below):
It appears that the financial markets aren't convinced, after seeing the automaker's CEOs testify before Congress today, that this bailout will work. But they are convinced that it will cost the American People a lot of money! Dr. Mark Zandi of Moody's testified that it won't cost just $34 billion; he said it will cost a figure closer to $125 billion. Look out belooooow:

Job Cut Parade

Dupont cutting 2,500 jobs (+ 4,000 contractors)
Credit Suisse cutting 5,300 jobs (mostly in U.S.)
AT&T cutting 12,000 jobs
Nomura cutting 1,000 jobs
Belden to cut 20% of staff
Viacom to cut 7% of staff
Adobe to cut 600 jobs

New unemployment claims fell last week by 21,000. However, the 4-week moving average, which is the number market insiders watch, continues to climb.

Here Come the Automakers, Round 2

Did you see the testimony of Dr. Mark Zandi, chief economist for Moody's website? He said that it was very likely that the automakers would be coming back to the U.S. government for more money by Q3 2009. He said the total tin cup request by the Big Three could be as high as $125 billion!

Central Banks Slashing Rates

The Bank of England, the Reserve Bank of New Zealand, and the European Central Banks are all cutting interest rates today to try to stimulate growth and emerge from the respective recessions in their countries.

More Bad News From Merck, Dupont, AT&T

Wednesday, December 3, 2008

Volatility Is NOT Good When It's a See Saw

Volatility is the bread and butter of traders like me. Market movement is very good when it brings large moves in one direction or the other, and whether that movement is up or down doesn't matter. However, on a day like today, when the market is volatile, but in several directions on the same day, it becomes much more difficult to trade, and can often bring sharp losses.

Harvard Endowment Fund Loses Nearly 1/3 of Its Value in 2008

"Harvard officials said they were planning for a decline of 30% in value for the year. Harvard said the school's worst single-year investment loss was 12.2% in 1974, when the endowment stood at less than $1 billion and its funds contributed far less to the school's operations."

Here is the rest of the Wall Street Journal article.

Liquidity matters! When I read this article, I realized that Harvard made investments that were profitable, but which couldn't be sold when they started to lose momentum. This is why I try to concentrate my trading on futures instruments that are liquid. If you can't get rid of it, you can't turn paper profits into real ones! "Honey, Junior's tuition is going to go up!"

Stock Market Freefall

The picture says it all. After spending most of the trading session today in positive territory, stock index futures have collapsed. I don't even know what news announcement precipitated this collapse, but does it matter? This is one of the reasons that I trade using technical analysis. The charts will tell me that something has happened, even if I don't know what that event was.

Treasury-Trove of Profits

Buying treasury futures over the past few weeks has been one of the most reliable sources of profits. Now, with stocks finally sinking today, traders are buying still more treasuries, escalating prices to new record highs again today.

ISM Services Falls to All-Time Record Low

The ISM services index is also down 5 points more than expected, falling from 44.4 in October to 37.3 in November. This is an awful number, indicating a sharper service sector contraction than expected. Stocks, however, are moving modestly higher following the report. We are seeing the financial markets ignore bad news. This is typically a bullish indicator when traders are expecting such bad news that even disappointing news is discounted.

ADP Jobs: Down 250,000 in November

The ADP jobs report, a private report issued monthly two days before the BLS report issued by the U.S. government's NFP report, shows that employment declined in the United States by 250,000 during November. Unlike the U.S. government figure, the ADP only includes private sector jobs. It suggests that perhaps Friday's NFP figure may also disappoint to the downside. The figure was a larger drop than expected, and stock index futures are moving somewhat lower as a result. However, despite the lower open, the futures don't appear to me to be powerfully down.

$34 Billion Big Three Bailout Pricetag -- For Now!

The three American automakers presented a plan to Congress yesterday for a bailout request of $34 billion. GM and Chrysler have indicated that without the bailout, they will be forced into bankruptcy before the end of this month. Tomorrow, the companies' CEO will testify once again before Congress.

Chrysler is a private company. The company was taken private when Cerberus bought Chrysler from Daimler Benz several months ago. Why are the taxpayers being put on the hook to bail out a private equity-owned company?

Isn't this just money down a rat hole? If the automakers want a bridge loan, then where is the bridge to? And since the government doesn't have the money to fund the bailout, the only way they can do it is to borrow even more money. Doesn't the government need a plan to avoid bankruptcy even more than the automakers?

Click here for a great Wall Street Journal editorial on why it won't work.

Tuesday, December 2, 2008

GM Needs $1 Billion/Week to Survive Til 2009!

Imagine! General Motors has indicated that they need $4 billion just to survive until next year, nearly $200 million each business day. And they want the taxpayers to fund it for them.

Here is the Bloomberg article.

Treasuries Drive Still Higher

U.S. treasury futures continue to drive still higher, pushing interest rates lower. This is a great bull run for treasuries as shown on this daily chart, and Fed Chairman Ben Bernanke yesterday promised to continue buying treasuries to drive interest rates down and inject more liquidity into financial markets. Despite a higher stock market today, investors worried about economic prospects continue to bid treasury futures even higher.

Worst Recession in Post-WW II Era

That headline is not mine. It is one of the bullet points in the latest assessment of the U.S. economy by David Rosenberg, North American Economist for Merrill Lynch. Here is a small excerpt:

Expect the worst recession in the post-WWII era
First, this is going to be the worst recession in the post-World War II era, in our view. The ECRI leading indicator hit a record low for the fifth week in a row – down to - 29.2 as of the November 21st week versus -28.2 the week before. This index, which leads real GDP by two quarters with a 70% historical correlation, is getting further and further away from the prior all-time low of -19.8 that defined the worst recession of the post-WWII era and saw a six-quarter consumer recession coincide with a 45% peak-to-trough decline in the stock market. Perhaps the fact that this bear market is proving to be even more severe is symptomatic of an economic downturn that will also prove to be deeper and more prolonged. After the flurry of data released just before Thanksgiving, we are now tracking close to a 4.5% QoQ annualized fall in real GDP in 4Q. This would be the largest pullback since the 1982 recession, and we see a similar contraction in the first quarter of 2009.

Translation: It's bad, folks! And, if he's right that we will see another 4.5% GDP contraction in the first quarter of 2009, it's going to get a whole lot worse!

Stocks: "I Want to Believe"

This chart today reminds me of the poster than Fox Mulder, the protagonist from the television series "The X Files", had placed on the wall in his office. Stock index futures are higher this morning, but not yet showing strong conviction in the still steeping, stagnating economic outlook. Stock market bulls want to believe that we can see a rally, but despite higher prices today, it is difficult to find good reasons to buy and drive prices significantly higher. A guarded, but positive outlook for GE's finance company this morning, and hope for a reworked plan to bail out automakers, appear to be market drivers today.

P/E ratios for the S&P 500 remain too high once next year's plunging earnings are taken into account. Analyst estimates continue to be revised downward, and as they do, current P/E's will appear to make the market appear still high-priced. Hard to believe, but just wait, watch, and see.

Beaten Down Commodities

From Bryce Knorr at Farm Futures Magazine this morning:

"Open in interest in the corn market dropped by a staggering 350,000 contracts after expiration of December options, according to the latest CFTC commitments report, delayed due to the Thanksgiving holiday. Funds were net buyers on the week, however, though speculative hedge funds remain net short overall. Open interest dropped another 10,000 contracts yesterday on December deliveries, with 1,850 contracts put out. Stoppers are starting to emerge, as holding corn provides a better return that investing in Treasuries."

This one statement seems to be symbolic for many futures in the current market. The accompanying chart for soybeans, a favorite of traders, shows how erratic trading has become for the grain markets over the past few months, and liquidity has dried up and funds have liquidated their positions. This is not the sign of a healthy market. Liquidity has been more than halved over the course of the summer and fall months. It is significant that funds remain net short also. Everyone blamed funds and traders for the rise in commodity prices over the first half of the year, but no one gives them credit for also driving prices down more than 50% over the past four months to prices that are near two-year lows.

Monday, December 1, 2008

Dow Gives Back 680 of Last Week's 783-Point Gain

Wow! What a sell-off!

It's Official Now! We're In a Recession!

The National Bureau of Economic Research, the non-partisan group of economists that determines economic cycles, today officially announced that the United States began a recession in December 2007. The official announcement always arrives in a belated manner because the nature of the data only permits economists to analyze and recognize a recession after it has begun. This may seem like just a semantic technicality, since most people already acknowledge that the United States is in a recessionary period. However, the NBER is the group that makes the designation official. Therefore, there can no longer be any debate about whether it is a fact. It is a fact!

Here is a story on Forbes about the announcement.

Treasuries Rocket Higher When Bernanke Speaks

At the precise moment that Fed Chairman Ben Bernanke's speech was released today, treasuries, which had already risen dramatically today, rocketed still higher and at an accelerated pace. The green arrow on this chart represents the moment that Mr. Bernanke began his speech. This reaction was almost certainly due to Mr. Bernanke's comment that the Fed may lower interest rates even more at the next FOMC meeting mid-December, and that the Fed will continue to buy treasuries, probably at an accelerated pace. The Fed funds rate is at only 1% now, so the Fed can't lower rates too much more. JP Morgan has predicted that the Fed will cut rates to 0% in January '09. Fed Fund futures traders seem to agree.

As a policy, at the moment that a Fed governor is scheduled to begin a speech, the Fed will post the text of that speech to the Fed's website. Thus, all the financial markets receive the text of the speech at the same moment in time, and the markets often react immediately to the remarks being made, even though it may take several minutes for the speaker to deliver their comments.

There is only one thing that I can't figure out: How do people read through those speeches and react so quickly? :) The market response usually occurs within seconds of the speech being released. I'm a good reader, but even I'm not that fast!

Eurodollars Take Off

I love to trade Eurodollar (this is the interest rate instrument, not the Forex-related one) futures because they are very liquid (OI > 1,000,000 contracts) and provide one of the most reliable signals in futures. However, I must admit that I haven't the slightest idea what moves this futures instrument. It does not correlate at all with treasuries. The CME's website says that the Eurodollar represents US Dollars on deposit in banks outside the United States and that the contract is settled upon delivery at the LIBOR rate. However, it seems to operate with very little correlation to the US Dollar Index, LIBOR (except on the delivery date), or treasury interest rates. It also tends to move much more gradually than most other trading instruments, so I don't have to have a lightening-fast clicking finger to trade it.

Dow Down 400 Points!

Volatility continues, and the Dow has now erased most of last week's record-setting rally.

And Now, Grain Prices Plunge Into the Depths, Too!

With grain prices having been so strongly linked to demand decay and poor economic performance lately, grains continue to show weakness in the price complex. I fully expect to see a stout rally in the grains sometime this winter, but today, prices continue to show weakness. We should keep in mind that Congressional mandates for the 2009 season require that nearly 50% of all domestic corn production be used for ethanol, an amount significantly higher than it was for 2008.

This price weakness for grains (corn and soybeans especially) is significant because farmers may decide to significantly cut production next Spring if prices remain at these levels. Current corn and soybean prices are below farmers' production costs according to recent reports from analysts, so either the supply will diminish at these prices levels (as farmers cut production), or perhaps demand will rise. Typically, however, during an economic slump, demand remains soft for commodities, thus suppressing prices. Still, food commodities tend to establish very firm bottoms and move higher while other commodities like industrial metals continue to fall. After all, we still have to eat even when industrial production slumps!

China PMI Causes Global Asset Sell-Off!

China's government data released last night indicated that the manufacturing sector there is contracting rapidly. This caused all sorts of assets, including all physical commodities and equities, to sell off heavily today. China has continued to report high GDP growth, and this report suggests that there is a likelihood of a hard landing in China, and that will in turn crush demand for many commodities.

I had read over the weekend news reports that in China, manufacturing company CEOs are disappearing without a trace. In China, bad performance may not only result in poor bonuses. Because of the legal loopholes and often onerous government oversight, poor performance may result in being imprisoned or even worse. Thus, some manufacturing executives, rather than run the risk of terrible consequences, are choosing to run or hide instead.

Good Black Friday Retail Numbers, But...

Black Friday's retail sales numbers looked good, so why are stocks slumping today? The headline figure, showing a healthy increase over last year's numbers, looked great. However, the devil is in the details, and they show some rather dour internals. It isn't my purpose to review them here (too busy trading), but many shoppers indicated in surveys that they have alread completed all their holiday shopping. (I am one of those. I finished shopping more than a week ago. However, I've always tried to complete my Christmas shopping list before Thanksgiving.) Furthermore, retailers have slashed their prices so far already that margins are terrible.

OPEC: No Change in Production!

Crude oil has plunged today also, given that OPEC was unable to reach agreement over the weekend on a production cut. The price of crude oil has fallen far enough today that the line showing last Friday's settlement price no longer even appears on the screen shot. It is down about $4.50 so far today. Take that, Hugo Chavez!

It is still my person opinion, however, that crude oil will eventually reach a bottom and move higher once again. Within the next 5-6 years, both Mexico and Britain will run out of oil and will be forced to begin to import oil. Russia's production is also declining. In 2008 alone, global crude oil reserves have declined by 6-9%! This dwindling supply dynamic is bound to eventually push prices higher again, and perhaps at an accelerated rate.

Stock Sentiment Turns Sour Again!

Stock index futures have plunged this morning, quickly erasing much of last week's rally, and the day is just getting started! Prices have already reached levels near Tuesday's close from last week. What may happen the rest of the day today is anyone's guess, but it doesn't look good to be down nearly 350 points on the Dow in the first 30 minutes of the session. The picture says it all!

U.S. Treasuries Reach Lowest Yields -- EVER!

Treasuries continue to be bought heavily, both by fearful investors and the U.S. government itself to fund its on-going rescue operations. I believe this is the biggest bubble in history, as yields continue to plunge, in some cases even going negative, as fear drives strategies around the world. I have been buying treasury futures also, but I don't buy them for the yields. I will hold them only as long as they continue to rise. Once a reversal or consolidation occurs, I'll exit. I watch my Exponential Moving Average meticulously, and I watch the Klinger Volume indicator for early signs that momentum is shifting to the sell side. So far, so good!

The fact that since record-keeping began, treasury yields have never before been this low, is a sign of how stridently negative the sentiment remains in the financial markets of the world.

U.S. Treasuries Continue March Higher

Amazing that despite historic low interest rates, the 10-year treasury futures continued to march still higher (interest rates, lower) in overnight trading! U.S. treasuries are perceived as the ultimate flight to safety, and thus, rising treasury prices are considered to be a barometer of negative market sentiment.

Moody's Mark Zandi: 0% GDP Is "Optimistic" for 2009

Moody's chief economist Dr. Mark Zandi is now saying that if the United States sees GDP at 0% growth for 2009, we'll be lucky! He says that 0% GDP for 2009 is optimistic rather than realistic!