Trading Soybeans With Smaller Margins, Limited Risk

A few traders have indicated to me that since soybeans are the most volatile of the grains, the potential risks and losses are too much for their risk profile. However, I've noticed that soybean oil and soybean meal can also be traded with a smaller margin and more limited risk. Both futures have margin requirements that are about half that of the soybean contract. The down side is that both also tend to have less liquidity than the intact bean.

I've also noticed another interesting phenomenon. I've noticed that when I intend to sell, it is most profitable to sell soybean oil. When I wish to buy, on the other hand, it is best to buy soybean meal. Meal tends to move higher, faster than the oil. Oil tends to move lower at a faster pace than the meal. Shown here are the daily charts for both. Also, the chart for soybean meal tends to more closely match that of the chart for the soybean contract.

Soybean Meal -- Moves Higher at a Faster Pace

Soybean Oil -- Moves Lower at a Faster Pace

Stocks Swing to Black on Positive Housing Data, Pharma Profits

Good News on the housing front! Pending home sales rose 6.3% during January. Howing the number of existing homes that have been vacated due to foreclosure also rose to a record 19 million. Still, the surprise to the upside in pending home sales was enough to move stocks weakly into positive territory! Positive earnings from drug makers has also helped to fuel some optimism this morning.

Treasuries Tumble

The picture says it all today! More of a challenge by the bond vigilantes to the fortitude of the Fed! The size of the supply is apparently the greatest factor influencing the rising interest rates, as investors are demanding a higher interest rate to compensate for the increased risk. If America is going to borrow their way to prosperity, they're going to pay through the gills!

Dow Chemical, Motorola Earnings Rock Stocks

Bad earnings reports are pressuring stocks once again overnight, but only modestly. The S&P Index Services is now expected to report the first negative earnings report in its history. Losses at Motorola and Dow Chemical both rocked the market overnight. Perhaps the weakness of the dip is suggestive of a rally when the market opens.

Stocks Move Back to Black

The S&P 500 and Russell 2000 have erased all losses for the day and moved back into positive territory once again. At this rate, the Dow may also end higher for the day.

Trading Perspective From John Mauldin

An excerpt from John Mauldin's most recent newsletter:

Seriously, buy and hold in a secular bear market like we are in is a losing strategy. On an inflation-adjusted basis, you are down if your holding period has been 30 years! Most of us would think that 30 years is the long run! On a nominal basis, you are about where you were ten years ago, if you are in a broad index.

Even if you are a value investor, you have gotten creamed in this market. (Some great value investors are down 60%. Their experience of buying and holding solid companies, which had worked so well for so long, needs to be married with some risk discipline.) You need a sell discipline. Barry's system, or others like it, can at least get you thinking about selling rather than riding a stock all the way to the bottom and hoping it comes back. Hope is not a viable investment strategy...

The best traders and managers have risk controls and sell disciplines and they stick to them. Period. They don't fall in love with a stock or a commodity position.

Here is John's full newsletter.

In his latest newsletter, John mentions and discusses software that combines both fundamental and technical analysis in a single software platform. This is rare in his newsletter. I am not familiar with the sytem, so I neither endorse nor discourage it. However, when John mentions "Barry's system" in the above quote, this trading software/system is what he is referring to. I mention this only as an explanation of the above quote, not as an endorsement. In his complete newsletter, Mauldin has a more complete explanation of how the system works, a special introductory rate for his subscribers, and a link to take advantage of the offer.

"Not the Time for Profits" - Pres. Obama

Pres. Barack Obama today mentioned that these are not times for businesses on Wall Street to make profits. What a stunning statement! Was this a freudian slip or a reflection of his true attitude toward business? I hope it was a slip of the tongue, but one certainly must wonder if it was a freudian slip that is based upon his deep-seated attitudes. Wow!

Stocks Rebound, Collapse on New Job Cut Announcements

Stocks put in a bottom, rebounded to positive territory, and have now collapsed again on new large job cut announcements from Macy's and Morgan Stanley. Macy's also announced that it would cut its dividends and make a tender offer to retire some of its debt load, an action that is interpreted as bearish. Morgan Stanley is cutting 3-4% of its staff.

Stock Index Futures Slide Lower

Stock futures during overnight trading in Asia and Europe have continued to slide lower. This surprises me, since I expected the stock market bulls to successfully defend the Dow 8000 support level. However, the data is so negative, and there is so little news that can provide upward momentum, that the Dow futures, trading more than 100 points lower than Friday's close, are suggestive of further weakness ahead during the day session. We are close to testing the November lows for the Dow. Another terrible and disappointing jobs report this Friday would be a tipping point one direction or the other.

Fed Fights Back Against Bond Vigilantes

I haven't seen the data, but in an environment in while investors have been selling U.S. treasuries, it appears that the Fed's verbal intervention last Tuesday may be having an impact. Interest rates overnight have been moving lower, even on long-term treasury futures, including both the 10-year and 30-year. The charts show increasing treasury purchases and higher prices, despite a "debacle" in treasury purchases according to a fellow blogger who is a bond specialist. He suggested that last week's treasury auctions were a debacle because of weak demand. How, then, are they so strongly higher overnight?

Opinions Mixed in Davos on "Bad Bank"

From Bloomberg:

Nobel laureate Joseph Stiglitz said any decision by President Barack Obama to establish a so-called bad bank to rid financial companies of toxic assets risks swelling the national debt.
Obama’s administration is moving closer to buying the illiquid assets currently clogging bank’s balance sheets and preventing them from boosting lending, people familiar with the matter said this week...
Whether a bad bank would accelerate an end to the financial crisis split delegates attending the Davos talks. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said such an operation would help if “executed well.” Billionaire investor George Soros said in an interview that “it’s not the measure that would turn the situation around and enable banks to lend.”

Here is the full story.

It should be noted that Dimon's bank would benefit from being able to rid itself of toxic assets by disposing them through the bad bank. I suppose, then, that so would Dimon.

Nouriel Roubini: Prescient Prophet of Economics

Two years ago, when Nouriel Roubini spoke at the Davos World Economic Forum, many considered his dire assessment of the global economy as excessive and he was considered to be the latest Dr. Doom. Not any more! Now, because his forecasts have been so accurate, he is now vindicated. He has tremendous credibility because he has been so accurate. Here are excerpts from Bloomberg regarding his acceptance this week in Davos:

Even as he wins plaudits for his prescience, Roubini, 50, says worse lies ahead. Banks face bigger credit losses than they realize, more financial companies will require state takeovers and the world economy will keep shrinking throughout 2009, he says.

“The consensus is catching up with me, but it’s still behind,” Roubini said in an interview in Davos. “I don’t know what some people are smoking.”

“I was intellectually vindicated,” Roubini says. “But I was vindicated by having an economic disaster which has political and social consequences.”

While the U.S. government is resisting nationalizing its biggest banks, Roubini says it will have no choice because they are now “effectively insolvent.” And the outcome may be even worse than even he anticipates if governments fail to take aggressive steps to recapitalize banks and revive their economies, he says: “The risk of a near-depression shouldn’t be underestimated.”

Here is the entire article.

Treasury Funding May Force Interest Rates Higher

Bloomberg suggest that treasuries rose yesterday, but this chart shows them flat for the day. The article is still very interesting:

Treasuries fell for a second week after the U.S. sold $78 billion of notes, the start of what’s forecast to be a record amount of debt this year to pay for a burgeoning budget deficit and fiscal stimulus programs...
“In the long term, you’re going to see Treasury yields rise as we deal with the mother of all supply challenges,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley’s individual-investor clients...
The U.S. will probably borrow $2.5 trillion this fiscal year ending Sept. 30, almost triple the $892 billion in notes and bonds sold the prior 12 months, according to Goldman Sachs Group Inc., one of the 17 primary dealers required to bid at Treasury auctions.

Here is the full article.

The Challenges of "Good Bank", "Bad Bank"

This is a fascinating article from Bloomberg this weekend. I suggest skipping to the section entitled, "Pricing Rotten Assets" through the end. There were many interesting points raised concerning the trade-offs regarding the pricing of all these bad loans.

Here is an excerpt:

“Creative pricing of toxic assets will only postpone the pain, extend the duration of the crisis, and present a bigger bill,” Northern Trust Securities Inc. economist Asha Bangalore said in a Jan. 23 research note.
If the government purchases the security at $85, the future losses and bill to the public purse would be less. The problem is, this price could cause banks to recognize as permanent their losses on other securities. Right now, they claim those losses are temporary.
Such a move would cripple banks’ regulatory capital ratios. Plenty of banks could still fail. In that case, banks and taxpayers both get hit.
Buying the security at the market price of $65 means banks and the financial system immediately face a day of reckoning. While bank balance sheets would get unclogged, many wouldn’t be able to, or willing to, face the losses.

Here is the entire article.

Worst January in History for Dow, S&P 500, Russell 2000

Gold Has Further to Go

This long-term chart shows the trend for the price of gold, with the upper and lower trend lines shown in green. The next long-term trend line on the up side is around $950/oz.

Gold Leaps Still Higher

Gold continues to leap even higher on concerns about inflation that will come down the road, and that all this spending will lead to an eventual collapse of the Dollar. Safety is number one for investors, and this is why gold continues to climb higher despite recent Dollar strength. Gold is up $110/oz. in 11 trading sessions -- $10 each day!

Government Can't Create Wealth, Just Redistribute It

Also from Minanville:

The reality is that printing money, which is precisely what is going to take place under this $888 billion "economic stimulus" package, cannot create real savings or wealth, it can only redistribute it.

Here is the link to the Minanville article containing both the last two posts.

Investment in Banks: For Better? or For Worse?

Here is some perspective from Minanville:

According to Time Magazine (via Barry Ritholtz), since October, the government has deposited $165 billion into the accounts of the nation's eight largest banks, which are now worth $418 billion less than they were four months ago. Also, the Congressional Budget Office estimates that the government's preferred shares are showing a $20 billion loss, the magazine reports.
"All told, the government's annualized rate of return on its investment in the nation's largest banks is -1,096%."

Why am I not surprised that the investment our government has made into these banks -- by borrowing more money and creating monstrous new debt -- is worth substantially less than what we put into them? Since when has the government ever been known for making good investments?

Perhaps when President Obama uses his latest poll-induced buzzword, "investment", with the American People to make his spending plan appear palatable, we should be very skeptical. In fact, we should run, not walk, for the exits! The fact is that the so-called stimulus plan is nothing of the kind. It is spending. It is nothing more... than more pork! It's more of the same we've come to see from Washington for decades and generations of Americans! It's no change at all!

At -3.8%, GDP is Better Than Expected, But...

Most people would consider an headline GDP figure of -3.8% right now to be better than what was expected. What was expected was a figure of -5.5%! So why are stocks down, then? Because the better-than-disastrous 3.8% was only better because companies were building up their inventories, and that suggests that an even worse Q1 and Q2 in 2009 are likely. It also suggests that even more job losses are coming. If companies have larger-than-expected inventories, then they need fewer employees to keep their inventories at level to sustain sales. And that means that even more job cuts are coming! That's why the stock market is down on this news, and continuing to move still lower.