Saturday, February 23, 2013

Friday, February 22, 2013

Stocks Roar Against Dismal News

Danger, danger, danger, Will Robinson! Bubble dead ahead!

Stocks closed up 120 points today despite this:

USDA Forecasts Record Corn, Bean Crops

US corn inventories will rebound from one of their lowest levels on record to one of the highest in 2013-14, as the harvest hits a record, but "strong foreign competition" limits exports. Perhaps this is the reason soybean prices appeared to top out today.
The US Department of Agriculture - in its first detailed forecasts for the domestic corn balance sheet in the forthcoming season - revealed it had factored a yield of 163.6 bushels per acre into its estimate revealed on Thursday of a record 14.35bn-bushel crop this year.
"Fall and winter dryness have little correlation with conditions during the following growing season and eventual yield outcomes," the USDA said, referring to, in some areas, the persistence of the 2012 drought which sent the yield to a 16-year low of 123.4 bushels per acre.
But use of the grain will not grow as strongly, enabling a recovery to 2.177bn bushels (55.3m tonnes) in stocks at the close of 2013-14, in August next year – more than three times the level at which they are expected to end this season.
Inventories at that level would represent the highest in 26 years – since the end of a late-1980s build in inventories which drove Chicago corn prices below $1.50 a bushel, a low not reached since.
USDA chief economist Joseph Glauber on Thursday forecast a sharp drop in prices in 2013-14, of one-third to $4.80 a bushel.
Economists at the U.S. Department of Agriculture, gazing into their crystal ball, see American farmers planting and harvesting huge amounts of corn, soybeans, and wheat this year. They're predicting a record harvest of corn: 14 billion bushels, up nearly 40 percent over last year's drought-crippled level.
With supply up, prices will fall. The USDA thinks that the price of the average bushel of corn could fall by a third. And soybean production and price are expected to follow a similar track.
Of course, these predictions assume good weather. USDA Chief Economist Joseph Glauber admits that he predicted the same thing last year at this time, but a drought in the Midwest turned anticipated glut into scarcity. Grain prices went up, putting a major squeeze on farmers who raise pigs, chickens, and cattle.
This week, the weather appears to be cooperating. As Glauber and his colleagues laid out their forecast in a Washington-area hotel, a storm was dumping more than a foot of snow on some of the places that needs it most, including Nebraska, Missouri, and South Dakota.

Futures Daily for Feb 22, 2013

Quiet Commodities! There are few movers today! Only cocoa and soybeans are showing good volatility!

Soft Soybeans: Is this the manifestation of a top? The USDA says it expects a record crop this year along with good global supply. The pattern on the daily chart (left) looks somewhat like a gravestone doji, so I'll be watching to see if prices continue to fall during Sunday evening action.
Cocoa Confirmed: Yesterday's buy signal was confirmed, and I'm watching for stronger follow-through. Today's 1% move higher is a good sign that cocoa has bottomed and will now move higher.

Copper Collapse: An Ominous Sign?

I've read analysis and heard it said that the price of copper, is itself, an economic indicator. It has been often observed that copper prices collapse as a leading economic indicator of an impending economic downturn. If that is correct, then the collapse of the price of copper this week is an ominously bad omen. Copper has collapsed in the past few trading sessions. Here is today's chart:

So while stock continue to rise without regard for any risk, this bellwether industrial metal is telling us to beware of a reversal sometime soon.
Note this quick summary from Reuters:

LONDON, Feb 22 (Reuters) - Copper slipped on Friday to its lowest level in
two months and showed its biggest weekly loss in 14 months on concerns about the
global economy and the demand for industrial metals.

Stock Rebound Explained

The problem with the logic from the WSJ is that nearly all of the stock rebound occurred BEFORE the Europe data was released. The rebound occurred last night before the Eurozone markets even opened! Interesting, too, that this news would trump the news of an impending Europe contraction that we saw today also. Shouldn't those two news events be more likely to cancel each other, rather than one news event being dismissed in favor of the contradicting one? But in the age of endless central bank interventions, why should we be surprised?

Stocks Higher Despite Eurozone Contraction

We must be back in the mode of pumping the stock market by Fed freshly-printed money.

Thursday, February 21, 2013

Stocks Down Again on Weak Economic Data

Bloomberg has a story today that Wall St insiders are selling in the greatest volume in more than 2 years. The Dow is now below 14,000 again, and the S&P 500 crossed below the 1500 handle within the past 30 minutes.

Commodities Daily for Feb 21, 2013

Philly Fed Shows Economy's Weakness

"The survey’s broadest measure of manufacturing conditions, the diffusion  index of current activity, decreased from a reading -5.8 in January to -12.5 this month (see Chart). The demand for manufactured goods also showed slight declines this month: The new orders index declined from a reading of -4.3 in January to -7.8 in February. Despite negative readings for general activity and new orders, the shipments index showed improvement: The index remained positive and edged slightly higher to 2.4. The percentage of firms reporting increased shipments (25 percent) was slightly greater than the percentage reporting declines (22 percent)."

The diffusion index also suggests a further decline for stocks:

 Stocks are still down, but have stabilized with the Dow off about 55 points. 

Stocks Clawing Back Despite Rising Unemployment Claims

Last week's low-ball unemployment claims were revised higher this morning, bringing them back closer to the moving averages, and today's claims were nothing to celebrate, either. Despite that, stocks are climbing at this moment, striving to get back to flat after a night of significant declines. Wall St figures that bad news is good news because the Fed just has to monetize still more debt if things are bad and getting worse.

The temporary downturn a few bars from the right represent the market reaction to this mornings unemployment claims news. It appears that Wall St now reads bad news... as good news!

More Selling Overnight

...but it appears that the early stages of a rally are under way.

Walmart has confirmed the whisper news that due to higher taxes, sales have declined. I'm hearing new reports of unemployment rising once again. When the wicked rule, the people mourn.

If Walmart is feeling the new pinch, so will everyone else!

Wednesday, February 20, 2013

Fed Meeting Minutes: Wall St Not Happy!

Gold is getting pummeled today (silver too)!

Futures Daily for Feb 20, 2013

Major movers today include soybeans, gold and silver, copper, cocoa, coffee (today's big mover), feeder cattle, live cattle. Plenty of volatility today.

More Evidence of Slowing Economy

Caterpillar reporting slowing global sales.
"We believe the driver of this /slowdown/ was the rapid decline in consumer sentiment that has been reported and is connected to the reduction in net pay consumers earn given the changes in tax rates that went into effect in January."
""We Are Confident There Is An Issue With The Consumer"
We’ve seen consumer sentiment change drastically within the last couple of months. We saw that after the first really payroll period in January, which is about the second week of January, we really start seeing a slowdown in Ancillary, Personal Training and membership sales." David Gallagher, CEO, NY Sports Clubs
FoxConn, China's largest private employer (800,000 workers) and manufacturer, and which manufactures Apple products, including the iPod and iPad, has initiated a hiring freeze. Slowing sales for Apple and other companies!

Stocks Turn Higher

Are These Signs of Economic Trouble Ahead?

First it was Walmart letting the truth finally slip last Friday when a leaked memo showed recent sales are a "total disaster." Today, as anyone who has looked at AAPL premarket quotes will surmise, it's Apple's turn, following a report in the FT that FoxConn, the world's largest contract electronics manufacturer, "has imposed a recruitment freeze across almost all of its factories in China 5th as it slows production of Apple's iPhone." It is not an internal memo, but in this particular case actions speak even louder than leaked words: 'The suspension in hiring by China's largest private sector employer, and the biggest assembler of Apple products, is the first search countrywide move since the 2009 downturn, prompted by the financial crisis. It underscores the weakening demand for some Apple products, Which has put pressure on the American company's battered share price. "Currently, none of the plants in mainland China have hiring plans," said Liu Kun, a company spokesman at Foxconn's largest manufacturing facility in the southern Chinese city of Shenzhen."

So first Walmart, the world's largest private sector employer with over 2 million workers, and now FoxConn, the world's largest tech-focused employer with 1.2 million workers, is also realizing what a cashless, consumerless "recovery" means, regardless whether it is due to Apple or not. And the markets still continues to wave it off as one off events.

Human resources officials at Foxconn's largest factories, local government officials and external recruiters working with the company said there had been internal notices on Tuesday and Wednesday to stop hiring until at least the end of March, 5th in response to reduced orders for the iPhone

Apple did not respond immediately to a request for comment, but Tim Cook, chief executive, told a conference last week that he did not think demand for iPhones was peaking. "We do not have the word 'limit' in the Apple vocabulary. . . I see a [smartphone] market that's incredible to be in. Maybe one of the best markets of all time, "he said.

However, at external recruiter in the northern province of Shandong, who identified himself only as Mr. Zhang, said Foxconn's demand for workers this year was as low as that in 2009.

The company's work force in China was estimated at about 800,000 during the 2009 crisis, but rose to 1.2m last year ahead of the launch of the iPhone 5 Workers' tenure at the company is less than 13 months on average, according to a person close to the company. This suggests that head count at Foxconn could fall by least of thousands if it stopped hiring for a month and its turnover of workers Remained as high as last year

Recruiters said hiring has stopped for the iPhone and iPad production lines in Shenzhen, the company's largest plant with more than 200,000 workers, as well as at Zhengzhou, the second-largest with about 200,000 workers, Which therefore makes iPhones. Taiyuan, Which had 79.000 workers as of September and makes iPhone parts, and Chengdu, Which makes the iPad were, thus putting a freeze on hiring.
As for Apple's demand-driven issues, those are very well known:
The move follows a recent decline in sales at Apple suppliers . "In January, Apple's supply chain-related gene names rally delivered a slowing sales momentum due to the sluggish shipments of MacBook, iPhone 5 and iPad during the holiday season," Nomura said in a research note this week.

Hon Hai, the Taiwan-listed flagship of the group Which uses the trade name Foxconn reported, at 8 per cent sales decline last month, and Quanta Computer , the world's largest notebook contract manufacturer and therefore at Apple supplier, saw sales drop 16 per cent .
Fear not: all shall promptly be well once FoxConn clarifies it wasn't really Apple's fault and the end-demand collapse was all due to Sandy, snow, meteors, the sequester and Bush. All in that order.
And now, back to your algorithmic, Fed-ordained stock "market" ramp, where news of global recession should be enough to lift the S&P by at least 10 points.

"There are no green shoots, there is no spring”

Above quote overnight from Spain's Prime Minister, Rajoy! There is no "joy" in Spain!
What a difference a day makes! Yesterday, confidence indexes in Europe surged, providing momentum for another rise in stocks.

Tuesday, February 19, 2013

It Must Be Another Fed POMO Day

Despite the extreme stock values, stocks are up sharply again today. It must be another Fed POMO day!

Americans See Their Government As Threat To Their Freedom

According to a January survey conducted by the Pew Research Center for the People & the Press, 53 percent of Americans think that the federal government threatens their personal rights and freedoms. That is the first time in the history of the Pew data, we might note, that a majority has felt so threatened by its own government. 

Grains Up, Metals Down

Fed Balance Sheet To Go Negative

I have likewise been saying for some time that the Fed has painted us into a corner. The voices of warning are growing in number by the day.

Mind-blowing analysis via Zero Hedge:

In April of 2010, Zero Hedge first brought up the topic of the Fed's DV01, or the implicit duration risk borne by the Fed's burgeoning balance sheet which at last check will approach 25% of US GDP by the end of 2013 (tangentially, back in 2010 the Fed's DV01 was $1 billion - it is nearly $3 billion now and rising fast). Recently, we have noticed that the mainstream media has, with its usual 2 year delay, picked up on just this topic of the implicit and explicit risk borne by Bernanke's grand (and final) monetary experiment. And slowly but surely they are coming to the inevitable conclusion (which our readers knew two years ago), that the Fed has no way out? Why? Ray Stone of Stone McCarthy explains so simply, a Nobel prize winning economist can get it.
From Stone McCarthy

Further asset purchases would compromise the Fed's longer run profitability in two ways.

First, because the securities have been purchased during a period of economic distress the yields on these securities are unusually low. The purchase of these securities has been financed by reserve creation. The cost of reserve creation is the interest rate paid on reserves (IOER) currently only 25 bps.

Of course, the interest rates on IOER, RRPs, and Term Deposits all represent variable interest rates, while the yields on SOMA are effectively all fixed rates. Thus, there is an asset/liability mismatch, which could compromise the Fed's Net  Interest Income (NIM) should short term interest rates rise. The Fed's exit from the extraordinarily low funds rate regime will not be compromise by the prospect of reduced or negative NIM. Instead, the remittances to the Treasury would be reduced or suspended.

How high do these short-term interest rates have to go before the NIM become negative?

In 2012 the Fed generated $80.5 bln in interest income on an average $2.606 bln in SOMA holdings, or about 3.1%. The SOMA was funded by paying only 0.25% on average reserve balances of $1.527 trillion or about $3.8 bln. In other words NIM was about $77 bln.

Had the IOER been consistent with what FOMC participants regard as normal in the longer-run, say 4-1/4%, NIM in 2012 would have been only about $15 bln, with a slightly restrictive posture, say 5-1/4% NIM would be close to zero, and with at 5-1/2% NIM would have been negative.

Now if we do the same arithmetic with a SOMA that is increased by $1 trillion due to the asset purchase programs, even keeping the effective yield at 3.1%, we see that NIM turns negative at a lower funds rate. Gross interest income from SOMA would increase to around $115 bln. At the same time if the IOER was set at 4-1/4%, NIM would fall from $15 bln to only $4 bln. At a 4-1/2% NIM becomes negative.
In other words, at Dec. 31, 2013, a 4.5% interest rate (or, as we call it, the D-Rate) is where the Fed starts losing money.
And then, if the Fed waits another year, the NIM breakeven is 3.5%... if the Fed then waits another year, the NIM breakeven drops to a minuscule 2.5%... and so on until year after year, the tiniest rise in rates will force the Fed approach Congress and explain why suddenly, not only is it not remitting interest income to the Treasury, but why just as suddenly, there is now a credit balance, that has to be funded by the Treasury (a move which monetarily will require the Fed to bail itself out, but which politically and economically will be an epic and final hit to the credibility of the Fed, as the Fed will be officially printing money just to print money).
Of course, the above analysis assumes the Fed delays and avoids exiting QE in 2013, and then 2014 (and so on) as this is the last instrument Bernanke and his successor have to push up the stock market, never mind the economy, the unemployment rate or inflation. Which the Fed will have no choice but do, and yet the longer it build the wall of QE worry, the greater the negative sensitivity to even the smallest increase in interest (and IOER) rates, if and when inflation picks up and Bernanke is taken to task with his "15 minutes" promise of eliminating hyperinflation.
In other words, while QE4EVA may be unlimited in the eye of the beholding Chairman, it is very much limited by the amount of reserves pumped into the system, and the amount of cash that Ben will have to pay banks as interest on their excess reserves.
Finally, as once again Zero Hedge readers know well ahead of everyone, it will be the foreign banks that will be the proud recipients of the tens or hundreds of billions of IOER funds when the inevitable IOER rate hike starts. This was explained here:
[S]ince it is improbable that excess reserves held by any banks will decline at all in the coming years, one can also assume that the annualized interest paid to foreign banks, which would amount to at least $5 billion pear year, every year, will continue indefinitely as a direct Fed subsidy to the bottom line of Foreign banks.

All of this, of course, ignores what happens should the Fed hike interest rates across the board, which will also mean rising the rates on IOER, once inflation finally strikes: simple math means a 1% IOER means some $20 billion in interest paid to foreign banks, 2% - $40 billion, 5% - $100 billion paid to foreign banks, and so on. Putting these numbers in perspective, let's recall that Italy's third largest bank just got a €3.9 billion bailout (its third), and has a market cap of some €2.9 billion.
Expect the MSM to figure out that it is precisely the foreign banks operating in the US, which now hold well more than half of all excess reserves in circulation, that will be the majority benefactors of the dollar bonanza that will be unleashed once the IOER begins its trickle up, in the next few years (or months at the rate record gasoline prices are soaring). Sadly, by then will we have far greater problems as a result of nobody once again understanding what is really going on behind the scenes.

New Merger Mania?

Stocks are rising this morning, just a few ticks away from another five-year high.