Friday, September 18, 2009

Grains Collapse in Closing Minutes

This chart shows soybean oil, which had been up 75 cents all day, but gave up all its gains and closed only 8 cents higher. All the other grains had similar sell-offs. Arlan Suderman said it was positioning before the weekend.

Thursday, September 17, 2009

Mortgages Consolidated Into Government, Big Banks

from WSJ:
More than half of U.S. residential mortgages are now being made by just three large banks.
It's a stunning change, but is it good for the housing market, and to what extent will it boost profits over the long-term for this elite trio, Wells Fargo, Bank of America and J.P. Morgan Chase?
Right now, housing remains on government life support. Treasury-backed entities are guaranteeing around 85% of new mortgages, while the Fed buys 80% of the securities into which these taxpayer-backed mortgages are packaged.

No Perfection in Trading

from Abnormal Returns blog:

The perfect is the enemy of the good. – Voltaire
There is no room for perfectionism in trading.  Trading is a decidedly messy enterprise filled with false starts and missteps.  Traders trying to pick off the top and bottom ticks in the market are going to find themselves frustrated on a consistent basis.  Trying to wrestle perfection from a trading regimen is a false promise.
A need to achieve perfection is in some ways related to a need to be right.  To quote ourselves from an earlier post:
For traders, being right is overrated. It is far more important knowing when you are right, and when you are wrong, and acting accordingly.
Being right is only part of the process in attaining profitability as a trader.  In a certain sense we need only be good enough to attain profitability.
In summary, being right may be a necessary component of trader profitability, but it is not sufficient.  Proper money management techniques are required to turn trading decisions into trading profits.  While it is difficult some times to take, being wrong is a part of being a trader.  Don’t let the need to be right prevent you from becoming a better trader.
A need for perfectionism could manifest itself in any number of ways.  For instance, a chartist may be unwilling to trade if they are unable to find a stock with each and every indicator lining up in one direction.  If you are facing issues of perfectionism in the markets here are a few tips from Peter Bregman at the How We Work blog which provided the inspiration for this post.
  1. Don’t try to get it right in one big step.  Just get it going.
  2. Do what feels right to you, not to others.
  3. Choose your friends, co-workers and bosses wisely.
A few quick notes on these points for traders.  The first point is especially relevant to systems traders who spend days/weeks/years trying to perfect a methodology before letting it loose on the markets.  The fact of the matter is that there are no perfect systems, and even good systems need to be adjusted over time.  Trading small may be a good way to overcome this initial anxiety.
The second point is something we touched on in another post.  No one person has all the answers.  There are as many different ways to trade as there are traders.  While it is crucial to try and learn from other traders it is you who are ultimately responsible for your trades.  So don’t let another trader’s viewpoint dictate your own actions.
The third point may be less relevant to trading, but let’s give it a try.  While most traders don’t have bosses or co-workers, but they do have friends.  This is especially true in today’s world of blogs, Twitter and StockTwits.  As Bill Luby at VIX and More notes it is important for traders to stretch themselves in search of new ways of viewing patterns and ultimately our approach to the markets.
It is often said that every trader gets what they ultimately crave from the markets.  Ultimately however what should be seeking is some level of fulfillment.  As Brett Steenbarger at TraderFeed writes:
Therein lies the appeal and the danger of markets: they can be arenas for self-development and mastery, or they can become battlegrounds for enacting our worst fears, insecurities, and conflicts. They can bring the kind of happiness on Nate’s face, or they can bring considerable suffering.
In conclusion, seeking perfection in the markets is a fool’s errand.  Traders can only strive to make themselves better with each trade and each trading session.  Only through this directed effort can one ultimately find fulfillment in the markets.
Afterword:  We are trying to practice what we preach.  This post is by no means perfect, but is in our opinion good enough to publish…

Gold Continues Rise, Reaches $1026

We're now just $7 away from the previous record of $1033.

Natural Gas Doubles in Eight Days; CFTC Position Limits at Work

From a low of about 2.400/m BTU, to a high today of about 4.700/m BTU, the price of natural gas has nearly doubled in eight trading days. This is the impact of the onerous new CFTC restrictions on position size limits - higher prices, lower liquidity, more erratic movements.

Wednesday, September 16, 2009

Grains Rebound

Grains still lost, but rebounded forcefully into the close.

Natural Gas Up 56% in Just Eight Days

Roller Coaster Grains

Arlan Suderman was dead right. Sell into the rallies! Corn has given up almost all its gains from yesterday. Soybeans also. This is classic short-covering rally, followed by more shorting. Here's what Arlan twittered today:
GFS Midday update does not support frost threat in 6-10 day; prices responding by dropping lower.

Cap and Trade Equivalent to 15% Income Tax Increase

from CBS News:
The Obama administration has privately concluded that a cap and trade law would cost American taxpayers up to $200 billion a year, the equivalent of hiking personal income taxes by about 15 percent.

A previously unreleased analysis prepared by the U.S. Department of Treasury says the total in new taxes would be between $100 billion to $200 billion a year. At the upper end of the administration's estimate, the cost per American household would be an extra $1,761 a year.

A second memorandum, which was prepared for Obama's transition team after the November election, says this about climate change policies: "Economic costs will likely be on the order of 1 percent of GDP, making them equal in scale to all existing environmental regulation."

The documents (PDF) were obtained under the Freedom of Information Act by the free-market Competitive Enterprise Institute and released on Tuesday.

These disclosures will probably not aid the political prospects of the Democrats' cap and trade bill. The House of Representatives approved it by a remarkably narrow margin in June -- the bill would have failed if only six House members had switched their votes to "no" -- and it faces significant opposition in the Senate.

One reason the bill faces an uncertain future is concern about its cost. House Republican Leader John Boehner has estimated the additional tax bill would be at $366 billion a year, or $3,100 a year per family. Democrats have pointed to estimates from MIT's John Reilly, who put the cost at $800 a year per family, and noted that tax credits to low income households could offset part of the bite. The Heritage Foundation says that, by 2035, "the typical family of four will see its direct energy costs rise by over $1,500 per year."

One difference is that while Heritage's numbers are talking about 26 years in the future, the Treasury Department's figures don't have a time limit.

"Heritage is saying publicly what the administration is saying to itself privately," says Christopher Horner, a senior fellow at the Competitive Enterprise Institute who filed the FOIA request. "It's nice to see they're not spinning each other behind closed doors."

"They're not telling you the cost -- they're not telling you the benefit," says Horner, who wrote the Politically Incorrect Guide to Global Warming. "If they don't tell you the cost, and they don't tell you the benefit, what are they telling you? They're just talking about global salvation."

The FOIA'd document written by Judson Jaffe, who joined the Treasury Department's Office of Environment and Energy in January 2009, says: "Given the administration's proposal to auction all emission allowances, a cap-and-trade program could generate federal receipts on the order of $100 to $200 billion annually." (Obviously, any final cap-and-trade system may be different from what Obama had proposed, and could yield higher or lower taxes.)

Because personal income tax revenues bring in around $1.37 trillion a year, a $200 billion additional tax would be the equivalent of a 15 percent increase a year. A $100 billion additional tax would represent a 7 or 8 percent increase a year.

One odd point: The document written by Jaffee includes this line: "It will raise energy prices and impose annual costs on the order of XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX." The Treasury Department redacted the rest of the sentence with a thick black line.

The Freedom of Information Act, of course, contains no this-might-embarrass-the-president exemption. You'd hope the presidential administration that boasts of being the "most open and transparent in history" would be more forthcoming than this.

Pension Plan Disaster Straight Ahead

from Money and Markets:
I’ve talked about corporate pension plans before, but in a few short weeks I think we’re going to get some shocking news. Namely, that the government backup for failed pension plans is more underfunded than it has ever been before.
Back in April, I told you a bit about the Pension Benefit Guaranty Corporation and its decade of running in the red.
But just to recap: The PBGC is there for workers when their companies break retirement promises, and yet ironically, the PBGC itself has been underfunded every year since 2002!
To its credit, the organization was doing a decent job of getting back toward the black lately. It cut its deficit slightly in 2005, then made major strides in 2006 … 2007 … and 2008.
Now that streak looks ready to end — in a BIG way — when the PBGC reports its full-year financial results at the end of this month.
I’m basing that on what the group’s acting director Vince Snowbarger told a Senate Special Committee on Aging back in May. At that point, he said the PBGC was running a $33.5 billion deficit in 2009.
That’s THREE TIMES the size of the group’s deficit last year, and the largest shortfall in its 35-year operating history!
As Snowbarger stated in his written testimony:

“The increase in the PBGC’s deficit is driven primarily by a drop in interest rates and by plan terminations, not by investment losses. The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums. Nevertheless, over the long term, the deficit must be addressed.”
PBGC Acting Director Vince Snowbarger and former director, Charles Millard,  testify before the Senate.
PBGC Acting Director Vince Snowbarger and former director, Charles Millard, testify before the Senate.
I’m willing to bet that the PBGC’s official release at the end of this month is going to show a rather dire situation, possibly worse than the mid-year deficit.
And the most important part of Snowbarger’s statement is that this deficit WILL need to be addressed.
That raises a few important questions …
First, Where Does the PBGC Get Its Funding?
The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. That basically means it’s a quasi-governmental agency, much like Fannie Mae and Freddie Mac were. (Yes, feel free to either shudder or snicker at this point.)
Essentially, the PBGC builds up a kitty by collecting premiums from working pension plans, and then uses that money to dole out benefits when companies go bankrupt or otherwise abandon their plans.
The PBGC currently guarantees basic pension benefits for about 44 million U.S. workers and retirees taking part in nearly 30,000 defined benefit pension plans.
Before I go any further, here’s a quick refresher on defined benefit pension plans: They’re the dying breed of retirement plans that guarantee participants a set amount of money — paid monthly for life — generally based on the number of years of service performed at a company.
To operate these plans, companies have to sock away money for each covered worker. More importantly, they have to hope their investment assumptions work out well enough to produce enough in future returns to cover promised payouts.
When their investment portfolios don’t perform as planned — and that has been happening across the board lately given a rather tumultuous decade for stocks — companies must either dig deep into their corporate coffers or discontinue their plans.
You can see why very few old-line companies are offering defined benefit pension plans to their new crop of workers. And why they’re having a hard time keeping their existing plans solvent.
More importantly, we should all remember that the PBGC basically faces the same challenges … plus a couple of additional hurdles.
Like private companies, it has a set amount of money in its kitty. And like private companies, it has to hope future investment returns allow that money to grow fast enough to cover future outlays.
But it CANNOT borrow from its regular operations to cover its deficit. After all, it doesn’t have a regular business to fall back on …
It CANNOT discontinue its operations, obviously …
And given the fact that fewer companies are choosing to continue offering defined benefit plans, it has fewer and fewer healthy plans to collect premiums from!
So Where Will the PBGC Get the Money
to Correct Its Massive Deficit?

Here’s the thing … the PBGC does have a lot of money in its plan. And it’s unlikely that anyone currently receiving benefits is going to suffer in the short-term.
As Snowbarger noted in his testimony, because benefits are paid out monthly, the PBGC has some leeway. Plus, a greater number of failed plans means more immediate funding for PBGC because most companies leave behind some money when they close shop.
chart Pension Plan Shocker Dead Ahead!
However, none of that makes the long-term health of the PBGC any better. It really only has a few ways to solve its systemic underfunding.
Obviously, if its investment portfolio has a rip-roaring rally, everything will be just peachy. But the idea of investment gains making up much ground is a long shot. Especially once you realize that the PBGC’s portfolio is about 30 percent in stocks and 70 percent in bonds!
That kind of an asset allocation certainly helped the PBGC avoid an even bigger catastrophe during the recent meltdown. However, based on historical returns, we should hardly expect it to post massive gains going forward.
The second option is for the PBGC to cut the amount of benefits it pays out to current recipients or to reduce the amount it offers to future workers covered in the event of plan failures. Remember that the PBGC already imposes a cap on how much it pays out workers — currently $54,000 a year to anyone 65 years or older.
Still, I don’t see it being able to reduce payments to anyone already covered. Only the idea of a smaller guarantee to future recipients is a possibility. They could simply maintain current payout levels and let long-term inflation work its magic.
But really … the PBGC simply needs to get more money into its coffers.
A lot of experts are calling for higher premiums being charged to member pension plans. And that may certainly happen. Yet there are two big drawbacks to this approach, as I see it:
First, as previously noted, there are already fewer and fewer companies offering defined benefit pension plans.
Second, charging the good plans higher premiums will only give companies one more reason to STOP providing defined benefit pension plans, which would exacerbate the existing problem.
That leaves just one place for the PBGC to get its money … you and me!
The PBGC’s Ongoing Deficit Will Likely Be
One More Bailout for Uncle Sam to Deal With

The story is just like all the others — whether it’s Fannie, Freddie, Social Security, the FDIC, or some other program.
They start with great intentions. They run fine when things are going well. But when things go bad, they become taxpayer money pits. They’re beasts that need constant feeding, growing hungrier and hungrier with time.
In the case of the PBGC, things have been running surprisingly well up until this point. And the organization has never taken a dime of taxpayer money yet.
I should also note that interest rate changes greatly affect the organization’s balance sheet … with higher rates making future obligations less of a problem.
Still, what are the odds that we’ll see a couple more major plan failures before the economy finds its footing? And what are the odds that taxpayers will ultimately be on the hook for at least some money five or ten years from now?
You know which way I’d be betting.
Best wishes,
P.S. The real lesson in all this is that we cannot rely on anyone or anything for our individual retirement security. In fact, those of us who act responsibly may very well end up shelling out MORE money to fund ailing systems and failing government backstops.

No Limit Stocks

Maybe Jim Rogers was right. Stocks may hit Dow 50,000. The Fed is printing and injecting money without limits.If this isn't a bubble, I don't know what is!

New Record for Gold at $122

Dollar Down Eight Days In a Row

Tuesday, September 15, 2009

Inverse Relationship Between Gold and Dollar

Gold Rockets Higher

Corn Limit Up

Trade Wars Are In the Air

from WSJ:

A Protectionist President

Like Hoover, Obama is abdicating U.S. trade leadership.

President Obama traveled to Wall Street yesterday to press his case for more financial regulation, but the bigger economic issue of the day concerned other White House policies. To wit, what does it mean for the world economy if America now has its first protectionist President since Herbert Hoover?
The smell of trade war is suddenly in the air. Mr. Obama slapped a 35% tariff on Chinese tires Friday night, and China responded on the weekend by threatening to retaliate against U.S. chickens and auto parts. That followed French President Nicolas Sarkozy's demand on Thursday that Europe impose a carbon tariff on imports from countries that don't follow its cap-and-trade diktats. "We need to impose a carbon tax at [Europe's] border. I will lead that battle," he said.
Mr. Sarkozy was following U.S. Energy Secretary Steven Chu, who has endorsed a carbon tax on imports, and the U.S. House of Representatives, which passed a carbon tariff as part of its cap-and-tax bill. This in turn followed the "Buy American" provisions of the stimulus, which has incensed much of Canada; Congress's bill to ban Mexican trucks from U.S. roads in direct violation of Nafta, prompting Mexico to retaliate against U.S. farm and kitchen goods; and the must-make-cars-in-America provisions of the auto bailouts. Meanwhile, U.S. trade pacts with Colombia, Panama and South Korea languish in Congress.

Unemployment Worse Than We Think

A recent Manpower Employment Outlook Survey produced gloomy results, with hiring plans dropping to their lowest level since the survey began in 1962. While a miniscule 12% of employers expect to increase staff in the fourth quarter, 69% are holding pat, and 14% are planning a decrease. Ouch! That means folks looking for jobs may be hard-pressed to find employment for the rest of this year.

Grains Spike, Corn Nearly Limit UP

Threat of frost has finally hit the grain markets. Yesterday, Arlan Suderman said that only 8% of the corn crop was developed beyond threat of damage. Normal for this time of year is 36%.

Monday, September 14, 2009

Natural Gas Proves Explosive in Yo-Yo Price Action

This is probably due to the announcement that the UNG ETF will resume issuing new shares.

Cap and Trade Will Devastate Farm Incomes, Food Production

from Feed Stuffs:
...a key study recently conducted at the request of Sen. Saxby Chambliss (R., Ga.), the ranking Republican on the Senate Agriculture Committee, pointed to a very different outcome. That study was cited frequently last week by senators hailing from states that the study showed would suffer.

The study was conducted by Texas A&M University's Agricultural & Food Policy Center, which ran a computer modeling analysis of impacts of the House-passed cap-and-trade program on crops and livestock across the U.S. (Feedstuffs, Sept. 7). The center used its historic database of 90 representative -- or "virtual" -- farms for the analysis.
"The ground truth that this study shows is very serious," Chambliss said. "The study says 71 of 98 farms will be worse off under the House cap-and-trade plan, even in the early years of the program. Most concerning: The 27 farms that benefit do so only because other producers go out of business. Not one rice farm or cattle ranch benefits, while only one cotton operation and one dairy benefit mainly due to the fact that they both grow a significant amount of feed grains."
Chambliss reported that nearly all of the 27 farming operations that realize benefits under the House's Waxman-Markey bill are located in the midwestern Corn Belt.
The study indicated that the benefits are predominantly the result of increase revenue from higher prices because fewer acres were planted to these crops rather than income gains coming from payments under a carbon offset program.
"While, intuitively, we knew that there would be winners and losers in cap-and-trade, we did not know that the benefits and costs would be so disproportionate and regionally perverse," Chambliss said.
He asked, "How can we, as members of this committee, endorse a policy that favors only one part of the country while hurting all the others?"
Several senators, both Republicans and Democrats, seemed engaged in the same question.
Interestingly, the question was raised on the same day it was announced that Senate Agriculture Committee chairman Tom Harkin (D., Iowa) would hand over the chairman's gavel to Sen. Blanche Lincoln (D., Ark.), whose rice, cotton and poultry state would be among the losers under cap-and-trade.

More On the Trade War

from 24/7 Wall Street:
China voiced unusually strong objections to tariffs put on its tire exports to the US. The American government believes that the Chinese are targeting the industry which is costing US jobs. Labor unions will like the decision, as will a number of members of Congress who think China does not work on a level playing field when it comes to trade.
China has already begun the process of retaliation. It has the upper hand in a trade war with the US and it is about to use that hand to proves its supremacy.
The mainland government has said it will scrutinize U.S. imports of chicken and auto products and may put limits on them. The Chinese Ministry of Commerce said “China has consistently opposed trade protectionism, and the country’s actions since the financial crisis have reflected this stance.”
The fear of China using its financial and manufacturing muscle to compete effectively in the US and elsewhere abroad has grown as the global recession has taken a tool on jobs. There is also increasing resentment over China using capital from its $2 trillion in foreign currency reserves to buy up cheap assets, particularly commodities and real estate, which have been pushed down by the economic crisis.
China has a large advantage over the US on the trade issue. Large American companies like Wal-Mart (WMT) source so many good from China that the supply chain could not be replaced by getting manufactured goods elsewhere. China does not rely as much on American important as the balance of trade shows every month.
The temptation to take actions against China for instances where it ships goods to America at what appear to be below market prices will increase as unemployment moves to 10% and beyond. But, it is a sucker’s game for the US. China has the factories and America has the consumers.  All locking out China’s products does is drive up consumer prices and drive down consumer spending which is still the engine of US GDP.

Government Debt Bubble

Not often do I agree with the New York Times:

This time is different.
That’s what people argue every time a bubble inflates, and what they think every time they are chastened by its popping. But century after century, decade after decade and year after year, human beings irrationally exuberate all over again...
But a sovereign debt bubble — which many argue is driving the acceleration in gold prices — could prove far more dangerous.
So many countries, like the United States, are running up such large national debts as a percentage of their overall economies that they could risk eventual default. Even without outright default on their obligations, the value of government bonds sold to finance these deficits could plunge, costing investors a lot.
“Talk about a big bubble that really affects the global economy,” said Kenneth Rogoff, an economics professor at Harvard whose new book, “This Time Is Different,” chronicles 800 years of debt-driven financial crises.
“The huge run-up in government debt has led to patently unsustainable fiscal policies across a number of major countries,” he said. “So far, the rest of the world’s been willing to finance it, primarily with savings from China and elsewhere, but if investors’ confidence is shaken, we might see the interest rates on long-term debt rising, and rising very sharply.”
Debt crises are usually associated with developing countries, like Brazil, Argentina or Zimbabwe. But they can affect big, rich economies too, where the scale of global damage can be much greater.
“Look at California,” Mr. Rogoff said. “It’s incredibly rich, but Californians want a lot of services but don’t feel like taxing themselves to pay for them. You can be incredibly rich and still go bankrupt.”
The depth and breadth of the pain unleashed by the recent housing bust have led political leaders and central bankers to reconsider their duties to pre-empt, rather than just respond to, potential bubbles, and the same is true with the potential bubbles that economists foresee today.
China has started to tighten monetary policy to rein in the hype surrounding its equities. Politicians in the United States, while torn over the means, are discussing ways to bring the deficit until control.
The Group of 20, at its coming meeting in Pittsburgh, is expected to address ways to calm financial frenzies. The solution may involve additional regulation, guidelines for financial compensation and possibly requirements for more market transparency so that, at least in theory, investors can better judge what they are taking on.
But however stringent such new regulations may be, economists say, they cannot completely defeat human nature. Investors will continue to be hypnotized by get-rich-quick deals, seeking investments that magically double, double without toil or trouble.
“Ultimately, bubbles are a human phenomenon,” said Robert Shiller, a Yale economics professor and Cassandra of the current crisis. “People just get a little crazy.”

Sunday, September 13, 2009

Obama Sides With Unions, Risks Trade War With China

Sept. 14 (Bloomberg) -- China announced dumping and subsidy probes of chicken and auto products from the U.S., two days after President Barack Obama imposed tariffs on tires from the Asian nation.
Chinese industries complain that they’re being hurt by “unfair trade practices,” the nation’s Ministry of Commerce said on its Web site yesterday. The dumping investigation relates to poultry alone, a spokesman said in Beijing today. The ministry didn’t specify the value of imports of the products.
Rising protectionism may hamper world trade and undermine the global economy’s recovery from recession, the European Central Bank said last week. The U.S. placed tariffs starting at 35 percent on $1.8 billion of tire imports from China, backing a United Steelworkers union complaint against the second-largest U.S. trading partner.

By Geoff Dyer in Shanghai and Tom Braithwaite in Washington
Published: September 13 2009 06:53 | Last updated: September 14 2009 02:21
A full-blown trade row erupted on Sunday night between the US and China after Beijing accused Washington of “rampant protectionism” for imposing heavy duties on imported Chinese tyres and threatened action against imports of US poultry and vehicles.
Trade relations between two of the world’s biggest economies deteriorated after Barack Obama, US president, signed an order late on Friday to impose a new duty of 35 per cent on Chinese tyre imports on top of an existing 4 per cent tariff.
In his first big test on world trade since taking office in January, Mr Obama sided with America’s trade unions, which have complained that a “surge” in imports of Chinese-made tyres had caused 7,000 job losses among US factory workers.

Stiglitz: It's Worse Now Than Ever! Trade War Erupting Between U.S., China?

The banking crisis is getting worse! The "too big to fail" banks are growing bigger! The Dow was down nearly 100 points tonight before bottoming! There are also signs of a trade war brewing between the United States and China -- over tires!

From Bloomberg:

Sept. 13 (Bloomberg) -- Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”

from Marketwatch:
HONG KONG (MarketWatch) -- China said Sunday it would launch an anti-dumping investigation into U.S. sales of chicken and auto products, a move apparently in response to Washington's decision to impose punitive sanctions on Chinese tire imports late last week.