The US Dollar today:
The Euro today:
Wednesday, December 17, 2008
Grains Slashed In Sympathy to Crude Oil
Grain prices have been slashed this morning at the open in sympathy to the drop in crude oil prices. Corn, wheat, and soybean prices have also sold off in early trading. I would be very surprised if prices don't recover and move higher.
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."
This is significant because if other large funds follow suit, it will help to prevent commodity bubbles like what we saw earlier this year. If Calpers and others take both long and short positions in commodities, then there will be market forces of equal weight that will influence prices both higher and lower. Large pools of liquidity are needed in the futures markets to provide tight spreads with constant price discovery. They are a benefit to all market participants. It will also remove much of the motivation that Congress has to impose new and potentially onerous regulations on the futures markets. This development will help to keep the markets free, open, and most importantly, liquid!
Since the commodity boom earlier this year, exchange traded funds that short the commodity markets have also blossomed, and they have probably also been a moderating influence on the commodity markets. These are helpful developments that help all market participants and are a free market response to previous market inequities. The futures markets have shown themselves to be self-repairing! This is a typical adjustment that occurs naturally in free markets and millions of market participants, all acting independently and in their own self interest, take actions to fill the gaps of prevoius market inequities. As market participants see ways to profit from market gaps, they quickly take actions to fill those gaps, and the inequities disappear.
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. This is a favorable price for motorists and is welcome news for the world economy. However, most experts in the crude oil markets recognize that this price is below the drilling and production costs in most parts of the world. Hence, crude oil production is likely to fall over the next year or two until the price of crude rises again to make additional production profitable.
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?
Now that the Fed has effectively reduced interest rates to zero, what are the new arrows in the Fed's quiver? One is quantitative easing, which was employed with limited success by the Bank of Japan during its deflationary cycle a few years ago. What is quantitative easing? In a short definition, it is lowering interest rates to near zero and flooding the financial system with excessive liquidity in an attempt to stimulate private lending. A better question is, does it work? The Bank of Japan's own assessment of its effectiveness was that "the possible stimulus obtained... was likely to be limited." Ouch!
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.)
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."
Now doesn't that sound just like what the Fed is doing now?
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!
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!
Thus, one must wonder why the Fed is using it now. It certainly has a pall of desperation about it. Is this all they have left to try? Recent Fed documents suggested that the Fed might soon begin to use it, although the Fed seems reluctant to call it that. The Fed says it is engaging other forms of stimulus also. But a spade is still a spade, even if you call it something else. If it walks like a duck and quacks like a duck... Perhaps the Fed has other forms or additional arrows still in mind? They'd better, because quantitative easing doesn't have a very good history of success!
Tuesday, December 16, 2008
The Commodity Bust is OVER!
This is the daily chart for corn. Even more amazing is that this chart was complete before the Dollar plunged today. Imagine what this chart will look like when trading begins again this evening!
So Do Natural Gas and Crude Oil!
After a brief dip, both natural gas and crude oil explode higher also.
Finally! Stocks Take Off!
What took so long?! Finally, buyers step in to push stock indexes higher also!
Gold Goes Stratospheric!
While the grain markets were closed at the moment of the Fed's rate decision, gold has gone stratospheric in anticipation of higher inflation.
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
The Fed has indicated that it will lower interest rates to as low as 0%, and that it will continue to buy heavy volumes of U.S. Treasuries well into the distant future.
US Dollar Plunges following Fed rate 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.
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