Soaring Soybeans

I believe that more investors are beginning to bet on future inflation by returning to the commodity markets. This is one reason why the price of gold has continued bouyant despite soft prices for other commodities. Soybeans are benefiting handsomely today. Other grains have also moved higher, but to a lesser degree.

The Myth That the Bad News Is "Priced In"

In John Mauldin's weekly newsletter last week, he invited Bennet Sedacca of Atlantic Advisors to write an opinion on the state of the U.S. economy. Here is a very brief excerpt from a very good opinion called "Setting the Bull Trap":

"Forcing money into risky assets is perhaps the most dangerous experiment ever done, and is so large in scale and so unprecedented that we have no idea how it will end. I expect it to end poorly and with hyper-inflation. The funneling of assets into risk is masking the deteriorating fundamentals and giving the appearance of a market that has bottomed. But this is sleight of hand, an illusion.
"The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card-and with our money no less. They are also setting up the ULTIMATE BULL TRAP-a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter that there will only be sellers left.

• Unemployment on every front is rising. market that has bottomed.
• Tax receipts are down and State Governments are suffering.
• The debt market, except that artificially supported by the Government is closed.
• Earnings estimates for the S&P 500 are down 60% year-over-year.
• Stocks (using the Dow as a proxy) are at the same level they were 10 years ago.
• Industrial Production around the globe is imploding.

"Here is the magical question: "why is there is so much bad news, and is it fully discounted in prices?" If so, "why are the Fed, FDIC and Treasury Department so desperate to drive down interest rates to zero, buy troubled assets, ruin what used to be an efficient debt market in Mortgage Backed Securities, Corporate Bonds and Preferred Stock?"

Read the entire newsletter here.

Stocks Head South On Dismal Unemployment Data

Stock traders and investors must not have liked the internal data released by the Bureau of Labor Statistics, because now, the sell-off has begun. Note how solid the selling is over the past 30 minutes.

Grains Continue to Rebound Overnight

Grains have continued to rebound after Wednesday's losses, with soybeans (see chart) leading the way significantly higher.

Employment Falls 524,000 in December, Jobless Rate Climbs to 7.2%

The headline job losses in December were roughly as expected -- 524,000 jobs lost. However, traders were prepared for a much larger number, so the first reaction will likely be positive. The unemployment rate rose to 7.2% (highest since 1993).

The average hourly work week slid to 33.3 hours, and since this number is a leading indicator, it suggests even more job losses yet to come, since most employers cut hours worked before they cut the jobs themselves. This is the lowest average workweek figure in history since records were began in 1964. The implication of this is that job losses will continue to accelerate over the coming months! It is still getting worse!

The revisions for the previous six months (June - November 2008) have increased the job losses for each of those months. Most troubling to me was that service-sector job losses represented more than half the losses in December, since in previous months, this sector had remained fairly resilient and job losses were minimal. This suggests that job losses are spreading and broadening. This was the worst annual job loss in the United States since World War II!

From my experience, the initial reaction of the financial markets is usually short-lived. As economists begin to study the underlying internal numbers and react to those over the weekend, we may see a different reaction on Sunday evening or Monday morning.

From the U.S. Bureau of Labor Statistics website (pay particular attention to the household survey -- it is usually the most telling):

Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.
Unemployment (Household Survey Data)
In December, the number of unemployed persons increased by 632,000 to 11.1 million and the unemployment rate rose to 7.2 percent. Since the start of the recession in December 2007, the number of unemployed persons has grown by 3.6 million, and the unemployment rate has risen by 2.3 percentage points.

Grain Bulls Bounce Back

Despite the weakness in equity and crude oil markets today, grains have bounced back strongly. Analysts were expecting continued weakness in the grain markets, but grains have rebounded forcefully almost from the opening bell.

A Little Good News Today

Following the disappointment of Wal-Mart's earnings and sales announcements this morning, other news has helped to put a floor -- at least temporarily -- under the stock index futures. Target reported that their sales slumped only half of the expected amount.

Additionally, the U.S. government reported that new jobless claims were less than expected. However, this data is somewhat suspect, because yesterday, the government also reported that the telephone lines (for people to call in their new jobless claims) crashed because they were so overwhelmed from people calling in to place new unemployment claims. This can only be a very negative sign.

Wal-Mart Earnings Disappointment, Lower Earnings Forecast, Send Stocks Lower

The Wal-Mart earnings disappointment and revised lower earnings forecast has sent stock futures lower in early pre-market trading. As a Dow component, Wal-Mart shares are dropping in pre-market trading, sending both the Dow and S&P 500 index futures lower.

So How Bad Was December Retail?

This week, we are awaiting reports on how bad the retail Christmas figures were. The market is expecting bad news, but how bad is a question for debate. Here are a few headlines being released this week:

• Costco Sales Fall 4%
• Sears Drops 7.3%
• Williams-Sonoma Comparable Sales Drop
• Macy's to Close 10 Stores
• Abercrombie Posts 20% Decline
• Limited Sales Down 10%
• Wal-Mart Expected to Outperform
• Weaker Holiday Gift Card Sales
• Supervalue Sales Decline
• Wal-Mart Steers Profit Forecasts Lower
• Saks and Nordstrom Remain Laggards

Note: Despite the above headline, even Wal-Mart's December sales were up only 1.7%, disappointing analysts, who expected a 2.8% increase. Sam's Club sales, like its competitor Costco, were down!

Bursting the "First Five Days of January" Myth

Every year, I hear the pundits on the various business channels perpetuate the debate about whether the first five days of January will be a predictor for the rest of the year. Mark Hulbert, who has spent his journalism career studying such phenemenons as indicators and especially market-sentiment indicators, wrote this piece today:

"...You can make no rational bet about the market's direction in 2009 based on how the stock market performs in the first five days of January."

Here is his article.

Earnings (Disappointment) and Lay-Off Season

The Dow is down another 50 points at this writing, and both Eurozone and Asian stock markets are down almost across the board. (So are my beloved grain futures.)

David Calloway wrote this prescient editorial on Marketwatch:

"Everybody should have known the holidays would only delay it. The freight train of job cuts, plunging earnings and massive spending cutbacks set to hit the economy was, thankfully, pushed back a few weeks while stunned investors and workers across the globe caught their breath after the worst fourth quarter in decades.
"...Earnings season, the time for companies to 'fess up just how bad it's been for them in the last three months, is here."

Read his entire commentary here. He says now, "the great dying begins".

And now, the earnings disappointments begin. Yesterday, the stock market dipped when three Fortune 500 companies all issued earnings disappointments and reduced their earnings forecasts. Two also announced lay-offs. The three companies were from different industries, but seemed to bring a cold dose of reality to the optimistic sentiment of the past few weeks, especially since a few were from sectors that had previously thought to be resilient. Last night, Lenovo, a technology company, also issued dissapointing earnings news, throwing more cold water on the idea that technology stocks would escape the bloodshed and pain. They won't.

I have thought throughout this recession that eventually, investors would be disappointed, since in past recessions, technology purchases, representing discretionary spending for consumers, have always been hit hard. Tech stocks are not a safe haven from the dip in consumer spending.

And here is an article from Bloomberg today about the effect on stocks due to an expected onslought of earnings disappointments:

Stocks in Europe and Asia dropped, sending the MSCI World Index lower for a second day, on concern the deepening economic slump is wiping out earnings growth and demand for commodities. U.S. index futures declined.

Here is the entire story.

Have a Glass of Milk! It's Very Cheap!

Milk futures have been plunging since the beginning of December. Why haven't prices dropped at the grocery story then?

Grain Bull Ends!

The grain markets have signalled an end to the bull trend that lasted throughout the month of December. The collapse in equty markets today appears to have been the cause. If prices confirm by moving lower during the next trading session (this evening or tomorrow), then a complete liquidation of grain futures is warranted.

Note: Grain prices moved lower across the board during evening trading, confirming the sell signal. The grain bull is dead!

Bank of England: Lowest Interest Rate in Over 300 Years!

From Marketwatch tonight:

On Thursday, the Bank of England is widely expected to make a landmark statement of its own.
Facing what many economists expect to be the deepest recession since World War II, the nine-member Monetary Policy Committee is seen as virtually certain to drop the central bank's key lending rate to the lowest level since its founding in 1694.

Here is the full story.

The Magnitude of the Monster

Great editorial from the Wall Street Journal tonight:

Whether or not you think new spending will stimulate the economy, the one undeniable truth is that this money has to come from somewhere, which means that it is borrowed or taxed from the private economy. This spending blowout is all but guaranteeing huge future tax increases, and anyone who thinks only the rich will pay is living an illusion. Taxpayers need some new champions in Washington -- and fast.

Read the entire article here. Be prepared to be afraid. Very afraid!

CBO Projects Staggering $1.2 Trillion Deficit -- Before Counting the Obama Stimulus!

From Marketwatch today:

The U.S. government will run a $1.2 trillion budget deficit in fiscal 2009, the Congressional budget Office estimated Wednesday, offering a stark assessment of the red ink facing the country and the incoming administration of President-elect Barack Obama...
"The overall deficit number is a challenge to President-elect Obama, who is seeking to enact a major stimulus plan of close to $800 billion...
"Enactment of an economic stimulus plan would add to that deficit," the CBO warned Wednesday..."

Here is the rest of the story.

Do you get that? This article is suggesting that the total 2009 U.S. Government deficit is likely to reach $2 trillion this year, if the Obama economic stimulus package is enacted as expected! And that doesn't even include the debts and balance sheet obligations incurred by the Treasury and Federal Reserve!
Perhaps this is why treasuries are selling off today (see above chart).

Poor ADP, Earnings Sock Stocks

The ADP unemployment report this morning was worse than expected, manifesting additional weakness in the United States economy. This month, however, instead of job losses being centered in the construction, housing, and financial sectors, the majority of job losses occurred in the services sectors of the economy for the first time. The ADP jobs report includes only private-sector jobs losses, and occurs as a precursor to the BLS (government) jobs report on Friday. However, since ADP reported that the private sector job losses alone were 693,000 during December, it raises questions about how bad the BLS version will be on Friday. ADP reported that they have adjusted their methodology so that it more closely reflects the BLS figures due out on Friday. If this is true, in future months the ADP figures may take on greater significance to investors.

Transferring the Risk -- To the Taxpayers

From Bloomberg today:

Chairman Ben S. Bernanke sees the thawing of frozen credit markets as critical to a recovery, and is determined to try to prevent a second wave of credit distress as the U.S. weathers bad economic news over the next two quarters. The Fed is now looking at ways to revive lending by using its balance sheet to hold loans and bonds that investors don’t want.

Here is the complete story.

It is my belief that as long that the United States Congress continues to spend without limit, the Federal Reserve Bank continues to print without limit, and the United States Treasury continues to borrow without limit, the future will eventually reflect a very ugly scenario!

The New Commodity Bull

Just when the central banks of the world are deluding themselves with the idea that inflation is under control, commodity prices are surging much higher once again.

Soybeans (other grains have similar charts) - up 30% over the past month

Crude Oil - up 40% in 7 trading sessions. Crude has touched $50/barrel today.