Retail Sales Slow

July 25 (Bloomberg) -- Sales growth lagged behind profits as companies in the Standard & Poors’ 500 Index beat analysts’ estimates this week, a signal that economic recovery may be slow.

Second-quarter revenue at Caterpillar Inc. and Freeport- McMoRan Copper & Gold Inc. tumbled more than 30 percent from a year earlier, though earnings topped the average of analysts’ predictions. Amazon.com Inc.’s profit skidded and sales missed estimates. United Parcel Service Inc.’s sales slid 17 percent. Microsoft Corp. saw annual sales drop for the first time in 23 years as a public company.

“The economy is coming back but it is not going to come roaring back,” said Mark Zandi, chief economist at Moody’s Economy.com. Companies “are going to be reluctant to add investment and jobs until they get better sales.”

High Frequency Trading

Even Soybeans Succumb

Arlan Suderman tweet:
Buyers back off of grains today, allowing prices to slide into chart-driven sell stops in thin trade volume that amplifies the move.

Wheat Back to Support Level

Wheat prices are nearly back to the level where they have found support previously. It is becoming a good buy again! Also weighing on wheat is the possibility of changes to the wheat contracts.

From Bryce Knorr at Farm Futures:

There are a couple potential "quick fixes" to the problem of lack of convergence between Chicago futures and the cash market for soft red winter wheat. But a panel studying the issue for the Commodity Futures Trading Commission Thursday backed off from recommending any drastic changes.

Instead, the group appears ready to put together recommendations for more incremental modifications to the beleaguered contract.

The Subcommittee on Convergence in Agricultural Commodity Markets, created by the CFTC's Agricultural Advisory Committee, appeared in agreement only to support a proposal for what amount to variable storage charges on wheat held for delivery. The panel, which held a two-hour teleconference Thursday afternoon after the market closed, also asked the CFTC staff to prepare more information on a cash-settled wheat contract and a plan to discount wheat delivery certificates as they age.

The subcommittee dodged any action on the 800-pound gorilla in the debate – limiting index fund holdings. That issue will be addressed in three other CFTC hearings over the next two weeks. While much of those hearings will focus on energy, action to limit a hedge exemption index funds use as a loophole could also apply to the grain market, having serious consequences for prices.

Wheat prices broke sharply on Wednesday after Thursday's meeting was announced, with traders fearing drastic action could lead to liquidation.

There is much concern about buying wheat in the face of a potentially onerous Washington regulatory burden. They nearly always have destructive side effects that push prices higher and create shortages. It is suppressing prices until this whole thing shakes out! This will eventually lead to higher prices because farmers will cut production if prices remain below production levels.

No Follow-Through on Treasury Rout

I have been disappointed that treasuries haven't continued to drop today after yesterday's sharp sell-off! It appears that we are trapped at the same support level that we reached in the past few days (see daily chart). At least we haven't seen any significant rebound either! We're in a tight trading range!

IntradayDaily - note dotted line that represents support/resistance zone!

Grains Give Up Gains Into Weekend

Arlan Suderman tweet:

Prices pulling back ahead of the weekend after large short-covering gains on Thursday. Dynamics largely the same tho. Beans strongest.

And that's and understatement! I'm glad for this however, because this will allow me to position a new trade at a better price next week. It appears that grains have finally broken the link to the broader financial markets. While stocks have been skyrocketing, grains have remained in the doldrums for the past few weeks.

Arlan has also mentioned that traders are afraid of new regulations on the futures markets, and this is suppressing prices temporarily. Eventually, however, it will reduce the liquidity pool and make prices both more erratic and will move prices higher. It will also likely lead to shortages, as Arlan has indicated in my previous posts. He says that the cost basis for grains is increasing, especially if Cap and Trade passes, and farmers are planning to reduce production to maintain price levels.

Bubble Blowing

When this baby pops, look out beloooooow!

Treasuries - the Floor Falls Out!

It's mayhem in the markets!

Dollar Downtrend. Commodities Climbing. Inflation Igniting!

Crude oil is back to $67! Grains are skyrocketing, nat gas too!

"Visible Manifestation of All The Excess Liquidity"

So that's what all this is! "This is a very visible manifestation of all the excess liquidity that monetary authorities have poured into the system... seeking return." Stephen Roach, Chief Economist, Chairman, Morgan Stanley Asia. In other words, we're blowing more bubbles!

Ron Paul - Summary of Fed's Role in Crisis

Fundamentally Transforming the USA

"We are five days away from fundamentally transforming the United States of America." Barack Obama

It appears that his true nature was revealed in his own words, but the American People were too transfixed with persona... to see the person! They were too mesmerized with charisma... to see character!

Cost of Cap and Trade on Food

twitter from Arlan Suderman:
AFBF analysis, #farm input costs could incr $33-$78/A corn;$8-$20/A soy;$24-$48/A cotton; & $38 - $153/A rice. Cap/Trade

Hedge Funds and Index Funds In Commodity Markets

Index fund
Investment fund designed to match the returns on a stock market index. Mutual fund whose portfolio matches that of a broad-based index such as the S&P 500 and whose performance therefore mirrors the market as represented by that index.
Hedge fund
An investment vehicle that somewhat resembles a mutual fund, but with a number of important differences. If the fund is "off-shore", the fund does not have to adhere to any SEC regulations (and can only sell to non-U.S. investors or investment vehicles). These funds employ a number of different strategies that are not usually found in mutual funds. The term "hedge" can actually be misleading. The traditional hedge fund is actually hedged. For example, a fund employing a long-short strategy would try to select the best securities for purchase and the worst for short sale. The combination of longs and short provides a natural hedge to market-wide shocks. However, much more common are funds that are not hedged. There are funds that are long-biased and short-biased. There are funds that undertake high frequency futures strategies, sometimes called managed futures. There are funds that take long-term macroeconomic bets, sometimes called global macro. There are funds that try to capitalize on merger and acquisitions. Another distinguishing feature of hedge funds is the way that managers are rewarded. There are two fees: fixed and variable. The fixed fee is a percentage of asset under management. The variable or performance fee is a percentage of the profit of the fund. There are also funds of funds which invest in a portfolio of hedge funds. Another important difference with hedge funds is that the minimum required investment is usually quite large and, as a result, minimizes the participation of retail investors.

also from Arlan and Bryce at Farm Futures:

A look back at CFTC's latest weekly data on trader positions reveals some of the dynamics that have impacted prices in recent weeks. Corn prices rallied this spring as the trend-following hedge funds added 1.9 billion bushels to their net ownership of the feed grain between mid-February and early June. Index fund managers with long-term inflation concerns added 0.3 billion bushels of ownership during that same period, as the lead corn contract gained $1.00 per bushel.

The latest CFTC data is for the period ending July 14. As of July 14, the lead corn contract had lost $1.11, with another 35 cents since then. During that period, the trend-following hedge fund managers liquidated ownership of 0.6 billion bushels, while index fund managers actually added another 115 million bushels of ownership. Ironically, it's the index funds that CFTC seems focused on.

What does this data suggest that the money flow is telling us? Short-term dynamics are bearish for corn and the long-term dynamics are bullish. It does not however tell us if the short-term dynamics will last another week or for many months. That will heavily hinge on the global economy, the dollar and on the size of this year's crop. Those factors should determine whether the corn chart puts in a "U" shaped bottom or an "L" shaped bottom with low prices for an extended period of time.

Unfortunately, momentum is everything in the commodity markets and momentum is definitely on the side of market bears at this point. Hedge fund managers have little reason to change their strategy until chart signals turn upward. End users have every incentive to be patient as long as prices are coming down to them as well. Chatter of record yields simply add to the selling frenzy, with few traders having the courage to step in front of this train before it shows signs of turning around.

Impact of New Government Interference With Speculation on Commodity Prices

from Farm Futures' writers Bryce Knorr and Arlan Suderman. I think these guys are suggesting that we should expect short-term lower prices, but long-term higher prices due to shortages:

A rally in the greenback from this point can't be ruled out, but current government fiscal policy would still suggest that the long-term risk remains to the downside. That's what index fund managers are banking on as they continue to build ownership of hard assets. Yet, the short-term picture of a low-inflation threat, rising financial markets, bearish chart signals and favorable Midwest crop weather supports active selling by the trend following hedge funds.

Such was the case once again today, with corn quickly taking out last December's low and wheat feeling additional pressure from CFTC efforts to put position limits on the index funds. Ironically, the long-term impact of CFTC's attempts to bring about convergence between the cash and the futures market would likely be to reduce insurance revenue guarantees, which would be expected to reduce planted acreage and eventually reduce the supply of food-based commodities. I break down data on hedge and index fund ownership and its impact on prices later in this commentary.

Bond Vigilantes Trying To Do Their Job

Treasury traders are finding it difficult to push treasuries down despite strong equities and fewer purchases by BRIC nations. This is significant because following Bernanke's testimony yesterday, interest rates dropped. Now, the bond vigilantes are trying to push interest rates higher again.

New 2009 Low for Dollar

Corn - New Lows, But Volume Turns Bullish

The volume indicator has turned higher. Time to start buying!

At Least China's Stimulus Plan Is Working

NEW YORK (Reuters) - Thank goodness for the Middle Kingdom.

So goes the thinking among top U.S. executives this summer -- or at least it should. For China is proving one of the few bright spots during the U.S. earnings season as the country's super-sized stimulus package is starting to support demand for everything from computers to construction equipment.

While the results season is far from over, the list of companies that have cited China as a positive is already notable: Intel Corp (INTC.O), Caterpillar Inc (CAT.N), Coca-Cola (KO.N), Alcoa Inc (AA.N), Altera Corp (ALTR.O) and Cummins Inc (CMI.N), among others.

"I'm certainly glad I'm in China," John Watkins, chief executive of Cummins (China) Investment Co, said recently.

Cheapest Corn In At Least 10 Years!

Corn has reached a new record low not only for 2009, but for the decade!

State Budget Woes Deepen

from FT.com:

Sharply falling tax revenues across the US have left states facing fresh budget shortfalls and threatening further painful spending and service cuts following previous multiple rounds of belt-tightening.

In the first quarter of the calendar year, tax collections dropped by 11.7 per cent, the largest fall on record, according to the Rockefeller Institute of Government. Of 50 states, some 45 reported declines.

Early figures for April and May show an overall decline of nearly 20 per cent for total taxes, “a further dramatic worsening of fiscal conditions nationwide”, says the institute.

Billions of dollars of federal stimulus funds, combined with cuts to state employee jobs, school districts, healthcare and even the US prison system, have so far failed to close the budget gaps.

“The states are constantly trying to recalibrate their budgets to deal with a shrinking revenue base,” said Susan Urahn, managing director of state policy initiative at the Pew Center on the States.

It raises questions about how deep the decline in services may go, the direction of tax rates, and whether the federal stimulus measures are working.

The $23.7 Trillion Price Tag

The U.S. Inspector General said today that the total bailouts could cost the U.S. $23 trillion. This is stunning, especially since the Inspector General is a non-partisan officer of the U.S. government.

from Politico.com:

A series of bailouts, bank rescues and other economic lifelines could end up costing the federal government as much as $23 trillion, the U.S. government’s watchdog over the effort says – a staggering amount that is nearly double the nation’s entire economic output for a year.

If the feds end up spending that amount, it could be more than the federal government has spent on any single effort in American history.

For the government to be on the hook for the total amount, worst-case scenarios would have to come to pass in a variety of federal programs, which is unlikely, says Neil Barofsky, the special inspector general for the government’s financial bailout programs, in testimony prepared for delivery to the House oversight committee Tuesday.

The Treasury Department says less than $2 trillion has been spent so far.

Still, the enormity of the IG’s projection underscores the size of the economic disaster that hit the nation over the past year and the unprecedented sums mobilized by the federal government under Presidents George W. Bush and Barack Obama to confront it.

In fact, $23 trillion is more than the total cost of all the wars the United States has ever fought, put together. World War II, for example, cost $4.1 trillion in 2008 dollars, according to the Congressional Research Service.

Even the Moon landings and the New Deal didn’t come close to $23 trillion: the Moon shot in 1969 cost an estimated $237 billion in current dollars, and the entire Depression-era Roosevelt relief program came in at $500 billion, according to Jim Bianco of Bianco Research.

The annual gross domestic product of the United States is just over $14 trillion.

Treasury spokesman Andrew Williams downplayed the total amount could ever reach Barofsky’s number.

“The $23.7 trillion estimate generally includes programs at the hypothetical maximum size envisioned when they were established,” Williams said. “It was never likely that all these programs would be ‘maxed out’ at the same time.”

Still, the eye-popping price tag provoked an immediate reaction on Capitol Hill. “The potential financial commitment the American taxpayers could be responsible for is of a size and scope that isn’t even imaginable,” said Rep. Darrell Issa (R-Calif.), the ranking member of the House Oversight Committee. “If you spent a million dollars a day going back to the birth of Christ, that wouldn’t even come close to just one trillion dollars – $23.7 trillion is a staggering figure.”

Congressional Democrats say they will call for Treasury to meet transparency requirements suggested by the inspector general, said a spokeswoman for the Oversight committee. “The American people need to know what’s going on with their money,” said committee spokeswoman Jenny Rosenberg.

In his prepared remarks, Barofsky writes: “Since the onset of the financial crisis in 2007, the Federal Government, through many agencies, has implemented dozens of programs that are broadly designed to support the economy and financial system. The total potential Federal Government support could reach up to $23.7 trillion.”

The comment comes in the context of a quarterly report to Congress by the special inspector general. Barofsky will testify Tuesday before the House Committee on Oversight and Government Reform. The office of the special inspector general was created to serve as an auditor of the federal bailout by the same legislation that launched the TARP program itself.

Originally, TARP was intended, Barofsky writes, to facilitate “the purchase, management, and sale of up to $700 billion of “toxic” assets, primarily troubled mortgages and mortgage-backed securities.”

But that plan was soon rejected, and the TARP instead became a grab bag of bailout initiatives, including bailouts for GM, Chrysler and auto parts suppliers as the federal government struggled in real time to contain a spiraling economic disaster.

Barofsky reports that TARP has come to include 12 separate programs that include a total of as much as $3 trillion, “including TARP funds, loans and guarantees from other agencies, and private money.” Of the initial $700 billion allocated by Congress, Barofsky found that the Treasury has so far announced how $643.1 billion will be spent, and it has actually spent $441 billion as of June 30.

Barofsky’s calculation of a $23 trillion figure took into account a wide-ranging group of federal programs set up by disparate agencies within the federal bureaucracy.

The special inspector general counted approximately 50 initiatives or programs launched since 2007 to fight the economic collapse.

The Federal Reserve, he found, has increased its balance sheet from $900 billion to more than $2 trillion, and Barofsky estimated that the total amount of support to the economy by the fed is at least $6.8 trillion, because it is exposed to significant losses if many of the assets guaranteed by the Fed deteriorate in value.

The FDIC, Barofsky writes, has contributed $2 trillion in “new gross potential support.”

The Federal Housing Finance Agency – “under whose auspices fall the Government Sponsored Enterprises such as Fannie Mae [and] Freddie Mac,” – has effectively provided more than $6 trillion in gross potential support.

Treasury itself, Barofsky concludes, has contributed nearly $4 trillion of potential support to the economy beyond the TARP program itself.

And Barofsky points out the at the non-TARP programs, which are far larger than the TARP itself, do not come with the strings that the high-profile TARP money itself comes with, including executive compensation, and they don’t necessarily require congressional approval. And beyond the ability to tally their costs, Barofsky has no authority as an auditor over the non-TARP programs.

The hearing before the House Oversight Committee will be held at 10:00 a.m. Tuesday in room 2154 Rayburn House Office Building.

Grains Collapse Too

Favorable crop weather, weak outside markets. This is a free fall. Surprising, given the strong stock market and historically-low grain prices.

Corn - the yellow line is the previous support leve where I had planned to buy! Wow! What a break-out!
Soybeans

Stocks Slide Into the Red

Secular Bear Market for a Decade?

FDR continued the Depression for another decade, so why wouldn't those same policies on steroids by a man who considers FDR to be his hero? I now believe that this is an intentional move by Obama to intentionally depress the United States so that he and the Dems can build a permanent one-party government and permanently sabotage the United States Constitution.

I am not quite as bearish as this commentor, however. I think Obama will succeed in building his one-party rule. It will stagnate economic activity, but will help him build his "dictatorship of the proletariat" (as Carl Marx called it)! Obama and Jesse Jackson call it "economic justice" or "democracy of capital". The methods and goals are the same as Marx'. It's just a game of semantics! They are counting on the ignorance of the masses! The sad thing about ignorance is that those who possess it -- don't know it. Worse yet, they'll never admit it, either!

from CNBC:
This is nothing but a relief rally in a secular bear market and we’ll be in a secular bear market for another 10 to 15 years, said David Hefty, principal of Cornerstone Wealth Management.

“Right now, being bearish is nothing more than being realistic with what’s going on around us,” Hefty told CNBC. “We still have demand in this country coming down—it’s not going up, and it hasn’t stabilized.”

Hefty said he is most concerned about the following issues still facing the economy:

1. Next February—Mortgage “Armageddon” starts: “This is a middle and upper-class problem. These people want to spend—they make up 70 percent of our consumer-driven economy—but they’re not going to be able to.”

2. California: “If it goes bankrupt, it’s going to make Lehman’s bankruptcy look like child's play.”

3. Obama Administration policies: “If the health care bill, cap and trade and these kinds of policies actually pass, and penalize anyone in this country that actually knows how to make money and create jobs, it’s not only going to push unemployment in double digits, it’s going to keep unemployment in double digits…This is going to create a very long sideways market.”

Uncertain Stocks

Stocks are holding above negative, but wandering somewhat. Stocks are higher seven days in a row.

Crude At $65.50

What? S&P Goes Negative

After opening significantly higher this morning, we have seen a reversal in the stock markets, and the S&P 500 has now gone negative.

Cap and Trade to Hit Agriculture Hard

from the McCook Daily Gazette in Nebraska:
WASHINGTON -- Sen. Mike Johanns spoke on the Senate floor today regarding the impact cap-and-trade legislation would have on American agriculture. In advance of a hearing to be held on Wednesday in the Senate Agriculture Committee, Johanns outlined how agriculture will be hammered with increased production costs as a result of cap-and-trade. He reiterated that state- and commodity-specific analyses of cap-and-trade are essential for a successful evaluation of the true costs and Administration-promised benefits.

Highlights of the speech as prepared for delivery:

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"Different studies come up with varying numbers, but they all paint the same picture: agriculture loses. None of this should surprise anyone, because the bill is specifically designed to increase the cost of energy. In fact, according to the Congressional Budget Office, 'Reducing emissions to the level required...would be accomplished mainly by stemming demand for carbon-based energy by increasing its price.' We also know that farmers in America's Heartland get hit the worst by these energy cost increases. And we know that USDA agrees. Last week, USDA officials indicated in testimony to the Senate Environment and Public Works Committee that as a result of cap-and-trade legislation, 'the agriculture sector will face higher energy and input costs.'"

"As I mentioned, USDA knows what cap-and-trade will do to energy prices. Here's the kicker: At the same time, the Department also has indicated that 'USDA believes the opportunities from climate legislation will likely outweigh the costs.' Let me repeat that: USDA says energy prices will increase, but they think the opportunities from climate legislation will likely outweigh the costs. This kind of claim must be based on hard data. Surely, such a sweeping conclusion would not have been drawn unless the impact had been studied. If USDA has conducted analyses of increases in farm input costs and weighed them against measured opportunities, I applaud them. But, if that is the case, it is mystifying that the Department has not shared this analysis, despite having testified before the Senate twice in the two weeks preceding this one."

"That's why, last week, I sent a letter to current Secretary Tom Vilsack, who will testify at the Ag Committee's hearing this week. The letter requested USDA provide the following: a state-by-state analysis of the cost of cap-and-trade on agricultural industries; a crop-specific analysis; an analysis of how the legislation will affect livestock producers; and finally, USDA's assessment of how many acres will be taken out of production as a result of this bill, and what impact that will have on the availability and cost of food, fiber, feed, biofuels, and other agri-products."

Remarks as prepared for delivery by Senator Mike Johanns Regarding Health Care Legislation:

"Mr. President, I rise today to discuss a Senate Agriculture Committee hearing scheduled this week. The hearing is titled, "The Role of Agriculture and Forestry in Global Warming Legislation," and I look forward to participating in it. This is the Committee's first effort this year to tackle the ongoing climate change debate, and it will be an important hearing. Much discussion in both houses of Congress has centered on potential new legislation and regulations relating to climate change. Any kind of new climate-related law would have sweeping consequences that touch every corner of American life.

"Thus, I have made clear that any climate legislation requires a robust, open, and extensive debate on the Senate floor. Numerous studies have been released about how cap-and-trade would affect American life, including agriculture. During last year's debate over cap-and-trade, the Fertilizer Institute released a study stating that the legislation would result in a $40 to $80 increase in the cost to produce an acre of corn. That means higher input costs for livestock producers as well. That same study indicated the cost of producing soybeans would increase between $10 to 20 per acre. Wheat would jump $16 to $32 per acre.

"According to one recent analysis, the Waxman-Markey cap-and-trade bill would also have a severe impact on agriculture. If the bill is enacted, farm income is estimated to decrease as much as $8 billion in the year 2012. By 2024, farmers stand to lose $25 billion. An eye-popping $50 billion would be lost by 2035.

"Gasoline and diesel costs are expected to increase by 58 percent. Electric rates would soar by as much as 90 percent. Agriculture is an energy-intensive industry, and those kinds of increased costs would certainly put people out of business.

"But these are not isolated studies. The American Farm Bureau Federation -- the largest agriculture organization in the country -- also studied the costs. Farm Bureau reported that if Waxman-Markey were to become law, input costs for agriculture would rise by $5 billion compared to a continuation of current law. Other studies have indicated in various ways that the likely impact of cap-and-trade includes increased electricity and heating costs, construction costs, fertilizer prices, and also higher gas and diesel prices.

"Different studies come up with varying numbers, but they all paint the same picture: agriculture loses. None of this should surprise anyone, because the bill is specifically designed to increase the cost of energy. In fact, according to the Congressional Budget Office, 'Reducing emissions to the level required...would be accomplished mainly by stemming demand for carbon-based energy by increasing its price.' We also know that farmers in America's Heartland get hit the worst by these energy cost increases. And we know that USDA agrees. Last week, USDA officials indicated in testimony to the Senate Environment and Public Works Committee that as a result of cap-and-trade legislation, 'the agriculture sector will face higher energy and input costs.'

"Now Mr. President, at the very least, all of this tells us that this is a complicated issue--perhaps as complex as any we will deal with in Congress--not to mention costly. Given the gloomy predictions about cap-and-trade proposals, it seems clear to me that we need to take an approach that is extensive, methodical, and well thought-out. We need specific and clear analysis to make sure we know -- and more importantly, the American people know -- just exactly what the passage of this bill would mean.

"As I mentioned, USDA knows what cap-and-trade will do to energy prices. Here's the kicker: At the same time, the Department also has indicated that 'USDA believes the opportunities from climate legislation will likely outweigh the costs.' Let me repeat that: USDA says energy prices will increase, but they think the opportunities from climate legislation will likely outweigh the costs.

"This kind of claim must be based on hard data. Surely, such a sweeping conclusion would not have been drawn unless the impact had been studied. If USDA has conducted analyses of increases in farm input costs and weighed them against measured opportunities, I applaud them. But, if that is the case, it is mystifying that the Department has not shared this analysis, despite having testified before the Senate twice in the two weeks preceding this one.

"Having been Secretary of Agriculture, I know that USDA has an outstanding team of economists with expertise in such analysis. That's why, last week, I sent a letter to current Secretary Tom Vilsack, who will testify at the Ag Committee's hearing this week. The letter requested USDA provide the following: a state-by-state analysis of the cost of cap-and-trade on agricultural industries; a crop-specific analysis; an analysis of how the legislation will affect livestock producers; and finally, USDA's assessment of how many acres will be taken out of production as a result of this bill, and what impact that will have on the availability and cost of food, fiber, feed, biofuels, and other agri-products.

"Without detailed analyses, USDA's assertions about costs and benefits simply ring hollow. Why wouldn't USDA provide this information for us to evaluate? Isn't this why the Department exists? Agriculture is going to be directly impacted by this legislation, yet we have no analysis from the peoples' Department. If the people who feed the world are going to get hammered by this, we should know it before we vote on it, not after.

"So I hope the third time is a charm for USDA, and they bring more than rhetoric to Wednesday's hearing. Cap-and-trade will not affect states, crops, or regions equally. It will have a different impact on a corn farmer in Nebraska than on a chicken farmer in Arkansas. Similarly, it will impact the dairy farmer in New York differently than the orange grower in California. We need state-by-state and commodity-by-commodity analysis. A one-size-fits-all analysis simply will not give us a true picture of this legislation's impact. A national average won't paint a true picture.

"When you are camping, you can have one foot in the cooler and one foot in the campfire, and on average you're just right. The same goes for loose assessments that are riddled with averages. We have a responsibility to seek a full understanding of this legislation's effect on our nation's farmers and related agricultural industries.

"The information I requested is critical to helping the Senate and America's producers develop a clearer picture of cost increases for farmers and ranchers, which parts of the country will be hit hardest, and which industries within agriculture will incur the greatest losses as a result of this bill. I have asked for a copy of this analysis prior to the hearing. I believe the entire committee deserves an opportunity to review it. I am puzzled by the passage of nearly a full week since my request and no analysis has been provided. I trust the Administration has nothing to hide.

"I will remain engaged in this debate, and I look forward to Wednesday's hearing."

Oil Back Above $65

China reported overnight that its oil company, Sinopec, reported not only good profitability, but that oil consumption was increasing rapidly.

Lower Revenue + Cost-Cutting = Profitability

Earnings are coming in largely better than expected. However, most companies are achieving profitability through cost-cutting, not revenue growth. This works only in the short-term. This is not sustainable profitability for two reasons:

1. Most cost-cutting is achieved through cutting payroll. This lowers employment and can lead to a deflationary spiral as lower employment leads to lower spending, which in turn, leads to more cost-cutting and even lower employment.
2. Cost-cutting can generally only be done temporarily. Eventually, it begins to hamper future growth and profitability.
   

Treasure Trove of Treasuries

I'm beginning to wonder of the bond vigilantes are losing their grip!

Stagnant Stocks

Stocks are higher, but trading sideways.

Copper - New High for 2009

Swiss Franc Strong Despite SNB Attempts to Devalue It

It's the Weather! Good Weather Hits Corn, Soybeans

Improving weather prospects are hitting hard the price of soybeans and corn today. Good! This is a great opportunity to buy and a good price, especially since prices are showing signs of putting in a solid bottom.

Dollar Slammed

Crude oil rose near $65/barrel as the Dollar was slammed on a rising risk appetite! This is going to send commodity prices soaring, inflation higher, if it continues!

Gold Takes Off Past $955/Oz.

Goldman's Manipulated Markets!

from ZeroHedge blog. Unbelievable! America has its oligarchy!

A recent story in Advanced Trading goes after some of the minutae of High Frequency Trading and provides a glimpse of the total value that HFT may provide to behemoth PT powerhouses such as Goldman Sachs. The article presents a very valuable perspective on just why HFT is so critical these days, especially when cash traders go for 6 hour Starbucks breaks between 10 am and 3:30 pm: "high frequency trading firms, which represent approximately 2% of the 20,000 or so trading firms operating in the US markets today, account for 73% of all US equity trading volume. These companies include proprietary trading desks for a small number of major investment banks, less than 100 of the most sophisticated hedge funds and hundreds of the most secretive prop shops, all of which operate with one thing in mind—capture profit opportunities by being smarter and faster than the closest competition." And as the market keeps going up day in and day out, regardless of the deteriorating economic conditions, it is just these HFT's that determine the overall market direction, usually without fundamental or technical reason. And based on a few lines of code, retail investors get suckered into a rising market that has nothing to do with green shoots or some Chinese firms buying a few hundred extra Intel servers: HFTs are merely perpetuating the same ponzi market mythology last seen in the Madoff case, but on a massively larger scale. When it all blows up, the question is whether the SEC will go after the perpetrators of this pyramid with the same zeal that it pursued Madoff himself. We think not.

The reason for this, as the AT article points out, is that HFT has become the biggest cash cow for Wall Street: "The incredible capabilities offered by technology have given meteoric rise to a relatively few high frequency proprietary trading firms that now wield far greater influence on the markets today than most people recognize." How big of a cash cow:

"Proprietary trading takes in a number of unique strategies, including market making, arbitrage (ETFs, futures, options), pairs trading and others based on the linked trading of more than one asset class, e.g., futures index and cash equities. In fact, TABB Group estimates that annual aggregate profits of low latency arbitrage strategies exceed $21 billion, spread out among the few hundred firms that deploy them."

The $21 billion estimate is smack in the middle of the FIXProtocol estimated $15-$25 billion in revenue that HFT generates. So let's do a back of the envelope calculation: Goldman controls roughly 50-60% of principal program trading on the NYSE, which in turn accounts for 30% of all global program trading. Throw in Goldman's domination of dark pool trading through Sigma X, and one can come up to quite a sizable number - It would not be a stretch to conclude that, through various conduits, Goldman is directly responsible for over 20% of global HFT trading. 20% of $21 billion is over $4 billion a year. As margins on HFT are sky high (it doesn't cost all that much to tweak a few hundred lines of code - and if Sergey Aleynikov is any indication, $400,000/year for VPs in the program is peanuts for a firm like Goldman), this $4 billion likely drops to the bottom line almost dollar for dollar. Let's recall that Goldman's Q2 earnings were $3.44 billion. Does this mean that HFT/PT accounts for roughly 25% of earnings for the firm that is a hedge fund in all but FDIC backing? Zero Hedge would in fact take the over, especially in this environment where M&A fees are a distant memory. We leave this question open, but even if we are off, it would not be by order of magnitude, and would explain why Goldman has thrown the kitchen sink into dominating such NYSE programs as the SLP, and is expending so much energy to dominate dark pools as well.

Going back to the AT article, which provides some additional critical observations, especially with regard to the Aleynikov arrest and his ludicrous $750,000 bail which surpasses that of indicted Ponzier Sir Allen Stanford:

First, strategies that optimize the value of high frequency algorithmic trading are highly dependent on ultra-low latency. The right decisions are based on flowing information into your algorithm microseconds sooner than your competitors. To realize any real benefit from implementing these strategies, a trading firm must have a real-time, colocated, high-frequency trading platform—one where data is collected, and orders are created and routed to execution venues in sub-millisecond times.

Next, since many of these strategies require transacting in more than one asset class and across multiple exchanges often located hundreds of miles apart, i.e., NY to Chicago, that infrastructure will often require roundtrip long haul connectivity between the data centers. [TD:Any real estate professionals out there who can determine just how easy it is to set up a colocated station within millisecond distance of the NYSE, and whether or not Goldman has any rights of first refusal on this real estate optionality? Nothing like a little derivative monopoly to keep potential SLP vendors at bay]

Lastly and most importantly, this code has a limited shelf life, whose competitive advantage is diluted with each second it is outstanding. While a prop desk's high level trading strategy may be consistent over time, the micro-level strategies are constantly altered—growing stale after a few days if not sooner—for two important reasons. Firstly, because high frequency trading depends on ridiculously precise interaction of markets and mathematical correlations between securities, traders need to regularly adjust code—sometimes slightly, sometimes more—to reflect the subtle changes in the dynamic market. The speed and volatility of today's markets is such that the relationships forming the core of our algorithm strategies often change within seconds of our ability to implement the very strategies that exploit them. Secondly, competitive intelligence is so good across all rival trading firms that each is exposed to the increasing susceptibility of their strategies being reverse engineered, turning their most profitable ideas into their most risky. As a result, any firm acquiring the "stolen" code would gain benefit from it for no more than a few days before that firm would need to adjust the code to the dynamic conditions. Since these changes build on themselves, in a matter of weeks that code would look quite different from that which was originally "stolen."

And the conclusion:

There's no doubt that Goldman Sachs, or any other proprietary trading firm, could indeed lose tens of millions of dollars from its proprietary trading if their strategies are stolen—and that is very serious. The competitors that obtain access to these trading secrets could (and would) use it to front run or trade against it, ruining even the most well-planned tactics. This news story contains many very important sub-plots: trading espionage, the necessity for a trading firm to have sophisticated security systems built around its technology, the requirements for risk management, and even the potential for proprietary trading software to be targeted on a wider scale for terrorist activity; but more than anything else it highlights the critical role played by high frequency prop trading in this new market.

This is indeed, a conclusion that Zero Hedge has been pounding the table on for months. It is imperative that Wall Street firms shed much more light into this astronomically profitable yet highly misunderstood and under the radar concept. In the absence of more information, the likelihood that Wall Street firms who dominate order flow and have material unfair advantages over virtually everyone else, should be isolated from trading up to the point where they provide sufficient information to make the market a fair and equal playing field for all investors. Until that moment, investing, trading and speculating is doomed to have the same outcome for the majority of market participants as playing roulette with 35 instances of 00, a much lower fun coefficient and no ability to be comped for your room in light of significant trading losses.

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