Investors Betting on Inflation, Dollar Devaluation

Investors are beginning to show concerns for inflation again, as they are buying gold and agricultural commodities. We have now seen a divergence between consumption commodities like energies and industrial metals, and food and safe haven commodities like gold and grains. As long as economic conditions remain weak, consumption commodities will also remain relatively week. However, as long as financial fear motivates people, and they can't get yield from fixed income investments without high risk, both food and precial metals futures will remain strong. This chart shows the surge in gold on today's intraday charts. Despite this, even crude oil has moved 7% higher today, pushing the Dow into positive territory for the day on energy company strength.

Grains Continue to Move Stoutly Higher

Look at the size of that last candle on this daily chart for soybeans today. That maribozu candle says it all -- that grain commodities are in a new bull trend! Soybean prices have been higher 11 of the last 14 days. Weather will be the primary driver for grains from now until Sping '09. And to think that all the analysts' opinions that I read each day indicated that grains would open flat to lower today! At the same time, however, this bull trend is beginning to look a little too parabolic for my comfort. I wouldn't be surprised to see a retracement soon, before prices continue even higher.

Here is a Bloomberg article reporting this story.

Headlines Influencing My Trading Today

I am watching the following headlines that are likely to affect my trading today:

Retailers' Holiday Sales Drop 5.5 to 8%

Great Series of Articles on Finance in Russia on FT

Battered Commodities to Perk Up in Late 2009

Russian Trading Halted After 12% Drop

CA Courts Affected By Budget Crisis

Moscow Agrees to Oligarch Bailout

Japan's Factory Output Plunges 8.1% to 55 Year Low

Holiday Sales Tumble as Consumers Cut Spending

Russia's Central Bank Devalue Ruble Again

GMAC Now Bank Holding Company

Business and Finance Headlines for Christmas Eve

U.S. Falls Deeper Into Recession

US Home Prices Fall Near Depression Pace

Russia's Central Bank Devalues Ruble for Third Time In Week, Seventh This Month

Japan's Manufacturer Confidence Slumps Most on Record

Jobless Claims Jump to 26-year High

Americans Curb Spending As Income Declines

U.S. Stocks Gain As Durable Goods Orders, Spending Top Forecasts (by the way - doesn't this headline appear to contradict the previous one?)

Russia to Raise Nuclear Missile Output Fourfold

2008 Bailouts Cost Most Than All U.S. Wars Combined

The total value of the bailouts undertaken by the federal government in 2008 now exceeds the combined cost of every major war the United States has ever engaged in, according to a comparison of war costs calculated by the Congressional Research Service (CRS) and the value of the bailouts as calculated by Bloomberg News or Bianco Research. According to CRS, all major U.S. wars (including such events as the American Revolution, the War of 1812, the Civil War, the Spanish American War, World War I, World War II, Korea, Vietnam, Iraq and Afghanistan, but not the invasion of Panama or the Kosovo War), cost a total of $7.2 trillion in inflation-adjusted 2008 dollars.

Click here for the rest of the story on cnsnews.com.

Volume This Week Just 1/3 of Normal

The trading volume for many futures this week is only about 1/3 of normal. I have decided that liquidity is so poor, I'm not going to attempt to trade again until next week.

From Junk to Junkier

From Bloomberg:

General Motors Corp. and Ford Motor Co., the two largest U.S. automakers, had their debt cut further below investment status by Standard & Poor’s and Moody’s Investors Service.
GM’s unsecured debt was trimmed one level to C, or 11 grades below investment quality, by S&P. Moody’s lowered its rating on $26 billion in Ford debt by two grades to Caa3, or nine below investment quality.

Click here for the entire story.

Stocks: Five Consecutive Down Days

Today was the fifth consecutive negative day for stock index futures. However, it has taken these five days to eliminate all of the last stock market rally that occurred last Monday, one day before the Fed's rate decision. Sometimes it seems that an eternity can occur in one week!

Dollar, Ruble Both Devalued Today

From Bloomberg:

The dollar fell for a second day against the euro before U.S. reports today that economists estimate will show sales of new and existing homes approached the lowest level in at least nine years in November... The ruble slid to the lowest level against the dollar in almost three years as Russia devalued the currency and tumbling oil prices battered its economy.

Click here for the entire story.

Stock Market Slow Leak Today

After spending much of the trading day trading without much direction, we are now seeing a slow slide downward.

Toyota Expects 2009 Operating Loss

This morning, Toyota announced that it expects its first operating loss in 70+ years during 2009. The company also admitted that selling hybrid cars, including the Prius, is a money-losing proposition. Hybrid cars are so expensive to make that they lose money on each one they sell.

Interestingly, during the recent testimony of the auto company CEO's before Congress, they promised to build more and more hybrid cars. If these companies, including Toyota, can't build a hybrid and sell it profitably, then how will the Big Three American can companies become profitable by promising to build and sell more hybrids?

Bailout Du Jour: Commercial Real Estate Developers Line Up at the Taxpayer Trough

Commercial real estate developers are now approaching Congress for a bailout, saying that commercial real estate mortgage defaults are now rising rapidly. The developers have told regulators that because credit has tightened, they are having difficulty rolling over their loans when they come due. Commercial real estate typically uses mortgages of 3-5 years, especially during the construction phase, after which they roll them over to new mortgages, often with a different lender. The tight credit market, combined with rising default rates, is proving to be a perfect storm in the commercial real estate market.

Regular readers will recall that about two weeks ago, I mentioned here that Eric Hovde had predicted that commercial real estate would eventually result in another economic crisis, and another shoe would fall.

"I Think It's Going to Be Getting Much Worse"

The above statement was made by John Dugan, U.S. Comptroller of the Currency on CNBC this morning. The Comptroller of the Currency is the administrator of the national banking system. He was reporting on a study recently released that indicated that loan modifications are not successful in averting mortgage default and foreclosure for most of the homeowner-borrowers that have been its beneficiaries.

“Re-default rates increased each month and showed no signs of leveling off after six months,” Dugan said in a statement. “This trend of increasing delinquencies underscores the need to understand why these modifications have not been more sustainable.”

Mr. Dugan wasn't sure if the modifications don't work because the modifications weren't drastic enough, or if the people simply were in over their heads so deep that no form of loan modification would have any hope of helping them. In either case, between 50-60% of loan modifications result in new defaults and foreclosures within 6 months of the modifications. Doesn't it make sense to know this before the modifications are made so that taxpayer funds aren't wasted by throwing good money after bad? (One of my cardinal rules of trading is never, never, never add to a losing position. You always lose money that way.) Regardless, this is why Mr. Dugan said that the mortgage crisis is going to get much worse and foreclosures are certain to continue to rise! (And Congress will continue to create more debt so they can throw good money after bad!)

Difficult Trading Expected This Week!

Many traders have either finished their 2008 trading year or have simply gone on vacation. Volume is light and price action is very choppy. We should expect difficult trading conditions, with erratic price action for the balance of the year, but especially for the next few days before and after Christmas.

Soybean Meal Still Looks Good

Soybean meal has been up 9 of the past 11 days! I had been trading soybean oil, but it has been flat for the past week. Perhaps meal deserves more of my attention! I sure like this chart! Soybeans has also continued to rise, but not as solidly and consistently as the meal. Wheat and corn are showing signs of price exhaustion the past couple of days.

I am watching the grains closely, but I am also watching stocks and the Dollar. The price of grains over the past few months has been linked to both to some extent. If the Dollar drops, that will be supportive of grain prices. The same holds true to a lesser extent with stocks. If stocks rise appreciably, that is also supportive of grain prices. If, on the other hand, the Dollar rises and stocks drop, it will tend to suppress grain prices.

But what will happen if a combination of the above occurs? For example, what effect with we see on grains if the stock market tanks, and the Dollar drops also? All bets are off in that situation. Perhaps we would see a consolidation, which is typical in an environment of conflicting fundamentals.

How Does the Fed Find the Money To Buy All Those Treasuries?

Isn't that a good question? The answer:

They print them! Yes, out of thin air! Or computer 1's and 0's!

How strange that the Fed would try to stimulate the economy by printing more and more money, and using that money to buy more and more treasuries to suppress interest rates. Mean while, Congress is trying to stimulate the economy by going deeper and deeper in debt, selling more and more treasuries. It seems like a very vicious circle.

This same method of stimulation, known as quantitative easing, was used by Japan over the past 20 years. Unfortunately, it didn't work. But unlike Japan, the United States doesn't have vast reservoirs of foreign reserves to spend. The United States is building up only one thing: debt!

U.S. Federal Deficit Skyrockets

As if the U.S. Government debt wasn't high already, we have just jumped from the frying pan into the fire.

Federal spending grew 25 percent in 2008 according to a joint White House-Treasury Department report released this week. Taxpayers will end up more than $1 trillion this fiscal year alone (2009) in the hole thanks to this steep rise, which is accounted for mostly by significant growth in veterans' benefits and tax revenues that have remained static due to a yearlong recession. The scary part is that this trillion-dollar red mark comes before Uncle Sam's bailout escapades are taken into account. President-elect Obama's plan for another stimulus package early next year will only increase the federal deficit, which went from $162.8 billion in fiscal 2008 to $454.8 billion just one year later. But never fear, members of Congress are set to receive a pay raise of $4,700 a year beginning in January.

This "damn-the-torpedoes" strategy of not worrying about the deficit during times of economic strain will one day sink the American economy. This year, the federal government will spend $450 billion on just the interest on the national debt. Again, that's interest on last year's total federal debt. That interest payment ranks fourth in total government outlays, behind Medicare-Medicaid, Social Security and defense. In 30 years, the government's current tax revenue will cover only half of what it owes. We're soon going to be looking for change, all right. Pocket change!

The Shrinking S&P 500 Index

From Marketwatch.com:

"Standard & Poor's said late Thursday that it has changed the market capitalization guidelines for its U.S. indexes, cutting what a company needs to be worth before it can enter one of its categories. For large-cap stocks, reflected by the S&P 500, the value was cut to $3 billion from $4 billion."

Click here for the entire story.