Wednesday, December 17, 2008
Large Formerly Long-Only Funds Now Short Commodities Also
From Vic Lespinasse at grainanalyst.com:
"Calpers, the largest pension fund in the US, has said they are going to broaden their approach to commodities investing. Up until now they have followed the index fund long only model, especially the SP GSCI (S+P Goldman Sachs Commodity Index), which is having a losing year. Calpers said they will hire additional commodity advisors and consider investing in commodities from both the long and short side, following trends in both directions rather than only the long side."
OPEC Slashes Production by 4.2 Million BPD
OPEC ministers in Algiers have decided to dramatically cut crude oil production by more than double the expected amount, slashing output by 4.2 million barrels of production per day. Even still, the production cut is being met my market forces with somewhat of a yawn. Crude oil is trading lower now than before the announcement! Clearly, the crude oil market sees the cut as necessary given the global economic recession and the temporary glut in supply for the time being. Crude oil appears to be settling into a trading price range of about $43-$49 per barrel. Stock Index Futures Show No Follow-Through
Poor follow-through from yesterday's Fed-induced stock market rally leaves me feeling a bit worried. Of course, its still early, so we can hope for a rally during the day session. Fortunately, it appears that after falling about 170 points, the Dow appears to have bottomed and formed somewhat of a rally. Historically, following Fed decisions over the past 18 months, follow-through has been poor the following few days after the decision. Past is likely to be prologue. Has the Fed Switched to Quantitative Easing?
Click here for an excellent primer on how quantitative easing is supposed to work.
Here is another excellent article on the subject. (I also suggest reading the reader comments. Some are quite insightful.)
From Wikipedia, the description of quantitative easing is thus:
"With quantitative easing, [the Bank of Japan] flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves, and therefore little risk of a liquidity shortage. The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It also bought asset-backed securities, equities, and extended the terms of its commercial paper purchasing operation."
Unfortunately, quantitative easing didn't work very well, if at all, in Japan. Following the initiation of quantitative easing by the Bank of Japan in 1998, the stock market didn't bottom for 5 more years! Worse yet, real estate prices in Japan continue to fall nearly two decades later!
Tuesday, December 16, 2008
Stocks Move Higher, But...
Why hasn't the stock market moved higher more forcefully? Look at the up and down gyrations following the Fed move. Isn't this decision engineered to send stocks into the stratosphere? This is worrisome to me that stock index futures haven't shown greater enthusiasm for this "anything goes" and "whatever it takes" approach by the Fed. At this writing, one hour following the Fed's decision, the Dow is only about 100 points higher, and it is no higher than it was 1 minute following the Fed announcement. The reaction should have been just as parabolic as the foreign currencies were. This is very troubling indeed. It doesn't feel right to me. Dollar Plunges Off a Cliff Following Fed Policy Announcement

Euro Continues to Build Solid Foundation
Just as occurred during the first half of 2008, the ECB has signalled an end to its interest rate easing cycle, and the Fed has signalled even easier money to come. Thus, the Euro is rising once again, and the Dollar is crumbling under the weight of fiscal and monetary ease. The Euro is now in a new bull cycle, and today's trading is symbolic of that longer term trend. This chart shows the new trend on the daily chart.More Rude and Crude Perspective
From Bloomberg:
"[Merrill Lynch analyst Francisco] Blanch changed his 2009 price forecast at least four times this year as the worst global slowdown since 2001 spreads. His most recent estimate that crude may fall to $25 came on Nov. 26. The Organization of Petroleum Exporting Countries’ 13 members meet in Oran, Algeria, tomorrow to try to stem crude’s decline."Here is the full story.
My translation of this is to expect a wild ride in the energy sector. The supply and demand parameters for energy appear to be a moving target.
Russia's Industrial Output Falls
Click here for the full story.Russian industrial output plunged in November, exceeding even the most pessimistic expectations and affirming that the country's economic fundamentals are too fragile to fend off fears of a recession. Industrial production, hit by liquidity shortages and falling export demand, slumped an unadjusted 8.7% from November 2007, data released Tuesday by the Federal Statistics Service, or Rosstat, showed.
CPI Slides 1.7%
From Marketwatch:
The U.S. consumer price index fell by a seasonally adjusted 1.7%, the Labor Department reported Tuesday, the biggest drop since the government began adjusting the CPI for seasonal factors in 1947. On a non-seasonally adjusted basis, the CPI fell by 1.9%, the biggest decline since January 1932, at the nadir of the Great Depression.
This may now be old news, since commodity prices have shown signs that they have bottomed during the month of December.
China Industrial Output Falls More Than Expected
Monday, December 15, 2008
More Forecasts for Cheap Oil in 2009
“Heading into 2009, we believe many commodity prices are set to overshoot to the downside in response to the worst downturn in economic activity since the Great Depression,” said Deutsche Bank analyst Michael Lewis.
“2008 will go down as one of the most volatile and difficult years, ever” for oil, said Peter Beutel, analyst at energy consultancy Cameron Hanover.
“It was a year that started with runaway prices and all the makings of the worst inflation in nearly three decades. It is ending with imploding deflation and the worst recession in seven decades,” he added.
Merrill Lynch expects oil prices to average 50 dollars a barrel in 2009, as energy demand shrinks in the face of slow economic growth.
Deutsche Bank predicts average prices of 47.50 dollars in 2009, cutting its earlier forecast of 60 dollars.
Merrill Lynch commodity strategist Francisco Blanch said a rebound in crude prices was not on the horizon.
“With demand vanishing across all key oil consuming regions, a strong rebound in prices in the first half of 2009 is unlikely,” Blanch said.
Deutsche Bank's Lewis agreed, adding: “We expect energy and the industrial metals prices will remain the major casualties in this environment.”
I am not sure where to attribute the above quotes. They provide perspective on the dire nature of the economic malaise, but these investment banks don't have a particularly strong record of forecasting the price of crude oil, so I always take them with a grain of salt. Still, they provide perspective on the fundamentals of crude oil supply and demand.
As I have told myself many times:
Grains GIve Up Gains
Corn closed flat today, giving up the overnight gains, probably on stock market weakness. Wheat closed up, but modestly. Soybeans closed down. This seems somewhat bearish to me. I had hoped that we finally broken away from the link to equity markets that has prevailed over the past few weeks/months. Apparently, weak demand imposed by a weak economy still bears sway in the food commodity markets. Fresh Perspective on Crude Oil
You can read all of John's latest newsletter by clicking this link. Better yet, why not subscribe!? John's weekly newsletter is free, and it is always good reading!"...storage for oil is very tight. Oil producers are leasing very large ships to store excess oil, as they cannot find places to store it on land. Storing oil on ships is expensive, so that cost of storage gets figured into the price of oil a year out...
"The OPEC nations are not cutting back by any significant amount. Oil is backing up in the system. It is quite possible that oil could go a lot lower in the next few months as the world reels from a global recession, and that means the demand for energy will be down. Oil below $30? Without production cuts that is certainly in the realm of possibility."
Note: Oil is not something that can be turned on and off like a spigot. It is my understanding that once a well is drilled, the oil must be used or stored someplace. You can't just turn the wells on and off at will.
The Fed: How Much of a Cut?
Empire State Index Drops to New Low
New York's Empire State Index dropped to a record low of -25.8, after reaching a previous low of -25.4 last month. The index is an indicator of manufacturing activity in the Northeastern region of the United States. Any reading below zero represents a contraction in manufacturing activity. Stocks have shown weakness today as a result, but the Dow is off less than 100 points since Friday's close. Still, after rising nearly 100 points last night, stocks have given up all their gains and more so far today. I have found that if stocks decline less than 100 points following bad news, there is usually a good chance that they will recover. Unless more bad news comes out today, the dip is not that significant to me. Eric Hovde: 3 New Shoes to Fall
- Commerical Real Estate - as businesses begin to feel more and more of the effects of the recession, commercial real estate mortgages are showing starkly rising default rates. This growing risk could affect $4 trillion of commercial real estate loans during 2009.
- Corporate Loans - As earnings continue to be revised downward in what could be an endless spiral, corporate debt defaults will continue to rise, business bankruptcies will rise, and the result will be growing risks to the financial system.
- Municipalities - With the downward deflationary pressures on real estate values, property taxes will need to be revised downward to compensate. There is a delay of about 18-24 months before municipalities are hit with the lower tax revenues resulting from reduced property value assessments. This will result in significantly lower revenues to cities, counties, and state governments, and will lead to another round of lay-offs as government entities are forced to slash budgets and payrolls during 2009 and 2010.
Trichet: Easing Cycle Ending
Dollar Continues to Fall, Commodities Continue to Rise

Tentacles of Madoff Losses Reach Far and Wide
Sunday, December 14, 2008
Dollar Reaches 8-Week Low on Bailout Worries
The cost of financial bailouts is finally beginning to take a toll on the US Dollar, as the greenback has hit it lowest value in eight weeks. From Bloomberg:
The dollar fell to an eight-week low versus the euro on speculation a U.S. bailout for the country’s automakers will leave the government less money to protect the financial system. The greenback approached a 13-year low against the yen after U.S. President George W. Bush’s administration said it may use funds set aside for banks to prevent General Motors Corp. and Chrysler LLC from “collapsing.”Here is a Bloomberg story with details.
Not only is the timing of the Dollar's decline very poor for the U.S. economy, it is likely to halt the downward correction of commodity prices, and renew potential inflation worries.
Domestic Oil Production Falls In U.S.
Can a GM Bankruptcy Be Averted?
From Bloomberg:
"For General Motors Corp., the question is no longer whether it will get a government loan or if Chief Executive Officer Rick Wagoner will be replaced. It’s whether anything can prevent the largest U.S. automaker from sliding into bankruptcy... GMAC may now have to file for Chapter 11 protection, with or without a loan...'GM already is bankrupt and should file for bankruptcy,' said David Littman, senior economist for the Mackinac Center for Public Policy..."
Read the entire story here. (It is a rather lengthy article that explains GM's history in arriving at this sad crossroads.)
Saturday, December 13, 2008
Natural Gas Futures Remain Under Pressure
Natural gas prices continue to drop, even during the winter heating season when demand typically increases sharply. As the economy weakens, many industrial companies that run their factories on natural gas are scaling back operations, decreasing demand for the commodity. Natural gas prices today are 30% lower than they were at the nadir of natural gas prices before the commodity boom began last year. Natural gas prices have dropped nearly 70% from the apogee reached in July, just 5 months ago. Shouldn't we ask the gas company to start giving rebates to rate-payers, or at least roll back their latest rate increases that they imposed when natural gas prices exploded last winter? Free Money for the U.S. Treasury
The talk of a potential bubble in U.S. Government debt continues to grow, and the chorus grows louder every day. Other bubbles, including both real estate and commodities, have demonstrated similar phenomena, frequently not long before those bubbles have popped and the manias collapsed.
From Bloomberg today:
"The rally in Treasuries that pushed yields on bills below zero percent this week is adding to concerns that the $5.3 trillion market for government debt is a bubble waiting to burst."Click here for the full story.
Friday, December 12, 2008
The Treasury Bubble
"It's going to be a disaster for America."
"It is a bubble... It's the last bubble left... It is insane, but that's what bubbles are!" Jim Rogers
Jim also predicted that eventually, interest rates and inflation must go much higher.
Golden Grains Become Unhinged
All the grains have now begun to become unhinged, with soybeans, wheat, soybean oil, and even rice joining the fun! Despite soft crude oil and stock prices, the grains are showing signs of their historical independence from equities and other asset classes. A day like this has been a long time in coming! Time to make some gold from those grains!Corn Surges on Reports of Less Acreage for Spring 2009
Farm Futures Magazine released a report his morning that indicated farmers are reducing acreage to be planted next spring in corn in favor of soybeans instead. Corn prices opened under pressure due to the state of the stock markets, but immediately surged much higher, and continues to escalate higher at this writing. Corn is 30 cents higher from the lows near the open of trading this morning. Automakers + Government Create Pileup on the Market Freeway
This is market mayhem!
Jim Rogers Claims Most U.S. Banks "Totally Bankrupt"
From Reuters today:
Click here for the entire Reuters story."Jim Rogers, one of the world's most prominent international investors, on Thursday called most of the largest U.S. banks "totally bankrupt," and said government efforts to fix the sector are wrongheaded."
Rogers has repeatedly said that by infusing capital into failing banks, the Fed reward the bad behavior of bad banks while penalizing the banks that have performed responsibly.
Commodities Back Off Recent Highs
As a rippling consequence of the overnight plunge in stock index futures, commodity prices have also shown weakness by backing off recent highs during overnight trading. This chart for soybeans is symbolic of several commodities.$50 Billion Ponzi Scheme Exposed
From FT.com
"Bernard Madoff, the founder of Bernard Madoff Investment Securities and a former chairman of the Nasdaq stock market, was on Thursday charged by federal prosecutors with a multibillion-dollar securities fraud.
"Mr. Madoff, 70, told employees that he estimated the losses from this fraud to be “at least approximately $50bn”, according to federal prosecutors."
Click here for the entire story.
The potential counter-party risk on this could have wide-spread implications, so it has import far wider than just to those clientele that will be affected.
Corporate America Not Benefiting From Record Low Rates
From Bloomberg:
"The lowest yields on Treasuries are providing no solace to U.S. companies paying the highest borrowing costs on record. While rates on everything from four-week Treasury bills to 30-year bonds fall to all-time lows, companies are paying an average 10.8 percent on their debt..."
Here is the full story.
$2 Trillion Fed Rat Hole
Bloomberg sued under the Freedom of Information Act to uncover to whom the Fed has extended $2 trillion in loans. The Fed has refused to disclose both the recipients of the emergency loans and the nature of the collateral for those loans, despite requirements by Congressional legislation to do so.
“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, who oversees about $14 billion at New York-based ICP Capital LLC."Here is the Bloomberg story.
Bank of America Axes 35,000 Jobs!
From Yahoo and Reuters:
"Bank of America Corp said on Thursday it plans to eliminate 30,000 to 35,000 jobs over three years, reflecting its pending purchase of Merrill Lynch & Co and weaker business activity stemming from the economic recession."Click here for the full story.
Thursday, December 11, 2008
58,000 New Jobless Last Week!
Despite the recent uptick in stock index futures over the past several days, it's getting worse, folks! Today's announcement of new jobless benefit claims, covering a period of just a single week, added more than 58,000 new unemployed to the rolls last week, reaching a 26-year high of 573,000 on benefits. This is another sign that the economic prospects are worsening, and at a faster pace. The rolls of continuing unemployed (includes those not receiving unemployment benefits) reached a new high of 4.13 million Americans, also. Surprisingly, stock index futures moved modestly higher over the past hour following the report. Gold Rising as Skittish Investors Seek Safety
Now that treasuries are looking like a bubble, gold is rising again. Commodities are also showing signs of renewed vigor! Gold is higher for the past four consecutive days. With short-term treasury bills in negative yield territory, investors are startng to flee for the safety of the precious metal, considered by many to be the ultimate safe haven for worried investors. What will happen when investors begin to run for the exits with treasuries? This could become very frightening!Euro Rises, US Dollar Slumps
US Dollar Index futures:
Euro futures:
The Dollar rise of the past few months appears to be coming to an end, with the Euro at its highest level since summer, and the Dollar slumping. It is also leading to renewed signs of price floors for many commodities also. Gold rose more than $35 yesterday, after having increased for the fourth day in a row!CA Governor Schwarzenegger: California Nearing "Financial Armaggedon"
From San Jose Mercury News:
"A frustrated Gov. Arnold Schwarzenegger warned Wednesday that California is headed toward "financial Armageddon" if legislators continue their standoff over how to solve the state's ballooning budget deficit.
With the recession sending state tax receipts plummeting, Schwarzenegger announced that the state faces a budget shortfall of $14.8 billion in the current fiscal year, up from an earlier estimate of $11.2 billion. Looking ahead to mid-2010, the gap could grow to as much as $40 billion if nothing is done to cut spending or generate new revenue, administration officials said Wednesday."
Here is the full story.
Talk Grows of a U.S. Treasury Bubble
"Treasuries have some bubble characteristics, certainly the Treasury bill does" Bill Gross, Pimco CEO
“The flight out of Treasuries is something that will be breathtaking.” Mitchell Stapley, Fifth Third Asset Management
The U.S. Treasury officials indicated yesterday in New York that it will need to finance $1.5 to $2.0 trillion in 2009, a staggering amount of new debt.
Here is a Bloomberg story."The U.S. pledged $8.5 trillion, more than half of the country’s gross domestic product, to spur lending and limit the damage of the recession."--Bloomberg
German Finance Minister: UK Plan Is "Crass Keynesianism"
From Financial Times:
"Germany’s finance minister has launched a stinging attack on the “crass Keynesianism” pursued by Gordon Brown, the British prime minister, fuelling tensions on the eve of European economic crisis talks in Brussels."He's right! It is crass!
Here is the full story.
Russian Ruble Devaluation Gathers Steam
From Bloomberg:
"The devaluation of Russia’s ruble gathered pace as the central bank loosened its control of the currency for the fifth time in a month... Russia has drained 27 percent of its reserves since the start of August as the central bank sold foreign currency to stymie a 16 percent decline in the ruble versus the dollar. The currency has weakened along with the Micex stock index as investors took almost $200 billion out of the country amid the worst financial crisis since Russia’s 1998 debt default as oil slumped."
Here is the rest of the story on Bloomberg.
Wednesday, December 10, 2008
Stocks Go Negative
I'm surprised. After being up throughout the trading session, stocks have now gone negative as we head toward the last two hours or trading.
Where's the Beef?
Some readers may recall that last spring, I warned that later this year, livestock prices would rise because ranchers had reduced their herds. This phenomenon appears to be occurring now. This wasn't really a prediction, but rather, a natural consequence of smaller herds and higher feed prices. 1+1 =2! Smaller supplies were likely to lead to higher prices eventually. Now, although feed prices have dropped by 50-60%, the smaller herds are likely to lead to higher meat prices."Cattle prices rose for the second time in two days on signs that the shrinking U.S. herd may limit beef supplies next year. Hog futures declined."
Crude Oil Rebounds and Moves Higher
The price of crude oil has rebounded today following a temporary sell-off at the time that EIA inventory data was released earlier this morning by the US Government. Prices are now even higher than before the report was released. It appears that OPEC's assurances of stiff production cuts are beginning to have some bite, and prices may now be forming a firm bottom. Just as with stock index futures, bearish crude oil news today is being met with higher prices. This is very bullish!Leaping LIBOR!
LIBOR and Eurodollar deposits have leaped higher today as interest rates continue to drop even lower! The two futures are closely linked, since Eurodollar deposits are settled at the LIBOR rate. Both represent short-term interest rates on foreign deposits of US Dollars. The Eurodollar is much easier to trade, since it is far more liquid and maintains a very tight, 1-tick bid/ask spread almost around the clock!"Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a survey by the BBA before noon each day in London. The euro interbank offered rate, or Euribor, is published by the European Banking Federation earlier in the day."Here is another one from Bloomberg that offers a very good explanation of various Interbank rates.
Bailout Du Jour: White House and Congress Reach Agreement on Auto Company Loan
Stocks are moving modestly higher now that an agreement has been announced to provide funds to the automakers. This is apparently a strong dose of tough love. I don't think the auto companies are going to be able to do it, frankly. They are in a very tough position. We'll see!Are Treasuries Showing Signs of a Top?
Given both the collapsing volume (see lower panel) and the sagging prices, treasuries are showing signs of a top. If the stock market collapses again, traders will quickly regain their love for treasuries, but if the stock index futures continue to show signs of modest strength, treasuries may continue to move lower despite the Fed's determination to lower the Fed Funds rate and to buy treasuries to artificially suppress interest rates. China's Exports Down for First Month in Seven Years
From Marketwatch.com:
Here is the full story."China's exports declined in November, the first such contraction in more than seven years, underscoring the severity of the global slowdown, and painting a bleak outlook for the sustainability of mainland exports in the months ahead."



























