Dollar Drag Provides Support for Grains

The return of the slumping US Dollar is providing strong support today for the grains. Corn, soybeans, and wheat have all moved steadily higher from the start of the day session today.

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

From the Wall Street Journal:

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.

Click here for the full story.

It appears that no one, including the largest and most prosperous emerging markets, are immune from the effects of this recession.

Dollar Resumes Its Slide

If the US Dollar continues to slide, then we have a classic conflict between the deflationary forces of sluggish demand, and the inflationary forces of a devalued currency. Perhaps this will yield commodity price consolidation or stagflation.

Awaiting the Fed

Today we play the waiting game for the Fed rate decision and statement this afternoon. Both volume and volatility have been unusually low yesterday and today.

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.

Here is the full story.
This may now be old news, since commodity prices have shown signs that they have bottomed during the month of December.

That said, as long as economic news remains weak, I don't see a new bull run in commodities. I suspect it will be a trader's market, meaning that opportunities will be short-term, lasting a few days or weeks. Even demand for commodities in China is softening significantly. For the foreseeable future, deflation is the concern of the world's central bankers. What an amazing turnaround, given that just 5 months ago, we were concerned about rapidly-escalating inflation!

China Industrial Output Falls More Than Expected

This is a significant headline, since many had considered China's industrial engine to continue to fuel global economic growth. I always thought this was a silly argument given that China has built its economy on exports. Without those exports, where will the growth come from? Despite the economic stimulus of the Chinese government and their focus on building infrastructure, I don't see that alone as being enough to power global economic growth, except for some construction, infrastructure, and limited commodities companies. Still, any economic stimulus is welcome relief during tough times.

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:

"Predicting the future is for

prophets, not profits."

At current price levels, demand decay isn't the only factor affecting crude oil prices. Production levels are also falling rapidly even within the United States.

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

John Mauldin always has a very interesting perspective on all things financial. He often includes in his newsletters the writings of other people with important perspectives on the financial markets. This week's newsletter from John had an interesting perspective on crude oil. Here are couple of short excerpts as a teaser to read more:

"...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."

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!
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.

Does This Look Like a Bottom to You?

This is the daily chart for corn. Does it look like a bottom to you? Despite the mild sell-off at the open of the market this morning, corn still looks like it will hold most of the recent gains, including overnight. Sure looks like a bottom to me!

The Fed: How Much of a Cut?

Perhaps the relative calm and low volatility in today's stock market is related to anticipation of the Fed rate decision this week. Will the Fed cut .50% or .75%? Since a cut is considered to be a certainty, it is likely that the market will react more to the statement than the rate cut itself tomorrow.

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

Eric Hovde, one of the investment managers that I most admire, has predicted, along with Meredith Whitney of Oppenheimer, that there are additional shoes to fall that may create new risks in the financial markets. Whitney has predicted an additional 20% drop in residential real estate values in 2009. Hovde warns of the following shoes yet to fall in the near future:

1. 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.
2. 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.
3. 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

Jean-Claude Trichet seems to have signalled an end to the rate easing cycle of the European Central Bank, causing the Euro currency to strengthen over the past week or two.

Meanwhile, traders of Fed Fund futures are suggesting the possibility that the Fed may slash interest rates this week from the current 1% to just .25%. This would peg the interest rate for the Dollar at the lowest among the G-10, setting up a potential for a Dollar carry trade. This can only hurt the Dollar and stoke fears of renewed inflation.

Dollar Continues to Fall, Commodities Continue to Rise

At the start of the new week, the Dollar has continued its slide that prominently manifested itself last week, and commodities have continued to rise. The link between the fate of the Dollar and commodity prices should not be underestimated despite denials from some politicians and a few members of the finance industry. Those in denial have a vested interest in keeping the fox in the Dollar henhouse.

Grains have risen with particular strength overnight, and crude oil has continued to build price strength as well, despite weakening demand.

This chart of crude oil overnight is symbolic of the phenomenon that is beginning to emerge, signaling what may be an end to the deflation of the commodity bubble. Note that while this is not the front month contract in this chart, crude oil is now priced at nearly $52/barrel, after reaching a nadir price of about $40.50 only about ten days ago.

I expect weak demand to put a lid on the upside potential for many commodities, but the bottoming process for commodity prices appears to be solidifying. Deflationary pressures won't end soon unless global economics rebound quickly (not a likely scenario, in my humble opinion), but physical commodities have a tendency to form rather firm, flat bottoms. If the Dollar continues to weaken, however, that ugly word "stagflation" will find itslef prominently on the lips of pundits again very soon. Obviously, each commodity has a distinct flavor in the process, but in a general sense, as a class, commodities are showing strong signs that the bottom has been found.

Tentacles of Madoff Losses Reach Far and Wide

I am not going to mention the Madoff fund losses to any significant degree here. However, it appears that the potential impact of the Madoff scandal may have even broader implications as the scope of the collapse widens. It may have greater impact on many more companies, pension funds, banks, etc. than is currently known. Each day, as more names of companies, people, funds, and institutions are revealed, I grow more surprised and alarmed to learn how broad and numerous the affected parties are.

The ripple effect of this fund collapse may yet reveal its most devastating consequences as those ripples move outward. This story should be watched, as the potential on derivative instruments and counter-party risk could still have even more devastating consequences as time moves forward. This has the potential to be a hidden time bomb whose worst victims have yet to be revealed. Many of those victims ultimately may even be people, companies, and institutions that never even had funds in Madoff's investment firm.

I'm surprised that so far, the stock market indexes haven't given greater weight to this news. It was certainly a surprise, so no one can credibly claim that it was already "priced into the market". However, it is possible that the biggest, most devastating surprises have yet to be fully revealed.

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.

With falling crude oil prices and an Obama Administration that is seen as opposed to more domestic drilling, domestic oil drilling in the United States has already begun to fall even more than expected. Ironically, it is beating down the share prices of drilling companies and sewing fears of potential supply disruptions when the economy begins to recover.

In a surprising weekly accounting, Baker Hughes' latest report showed that the number of drilling rigs in operation has fallen 12% in the September to early December period. Last week, crude oil rose for the second in three weeks, and volume-based indicators have now reversed to the upside. (I use these volume indicators as a leading indicator that typically reverses before prices do.) While OPEC's announcement last week that it will "severely" curtail crude production was blamed for last week's rise in prices, apparently the lower price is beginning to scrimp supplies domestically, also.

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.)