Archive - Mar 2011

The president is due to address America's energy "security" any minute now. We wonder if he will address the fact that OPEC is set for a bumper export year, generating profits of over $1 trillion for the first time ever. Of course, that is money that will have to be recycled back into US bonds so it is bullish.

Longtime readers will recall that we've had several conversations here regarding the impact that the Fed's quantitative easing policy is having on the costs of everyday food items. Soaring prices of agricultural commodities are going to continue to have a devastating effect on the purchasing power of average Americans and consumers around the globe. Since prices have now recovered some from the selloffs after the Japanese earthquake and tsunami and since there is no end in sight to QE, I thought it was time to once again take a look at out favorite commodities and assess where their prices may be headed over the spring and summer.

Exhibit A in Efficient Market Theory. A few minutes ago the DOE released its crude oil inventory data for the Week of March 25. With Crude inventories expected to decline from 2,131K to 1,500K (you know the whole economic improvement thing and what not), instead we got a build to 2,945K, with Cushing surging from 177K to 1,689K. What would one expect should get killed on this data? Oil right? Yet below we get a glimpse of what mega leveraged and ultra trigger finger happy correlation desks trade like these days.

While many commodities are experiencing a long-overdue correction as the inflation trade takes a breather, lean hogs continues to surge higher, and at last check were just off record highs. Which is why many are following the presentation the company is currently conducting at the JP Morgan global protein conference to get a sense of whether consumers are finally balking at protein purchases. Apparently the answer is no. As Reuters reports, "U.S. consumers have not yet slowed purchases of pork at grocery stores and casual dining restaurants despite this year's much higher prices, U.S. pork producer Smithfield Foods Inc said Wednesday." And why should they: with millions living mortgage free, since the average mortgage delinquency length is now 537 days, that many more people can afford it, and everything else, at virtually any price. Ironically the Fed, by indirectly cutting out on this key expense (not to mention the FASB's ongoing MTM freeze which permits banks to mark mortgages, even delinquent ones, at whatever price they want) is allowing the population to experience an effect comparable to wage growth. Which is one of the key aspect ignored by the media and those who perceive deflation as imminent: while wage growth is surely a key component to stimulating pernicious inflation, eliminating key consumer overhead ends up having the same net effect. And since banks are in no rush to kick squatters out, expect to see increasing price pressure not only on pork but on all other commodities too.

Reuters reports that just as Zero Hedge has been expecting as along, global economic growth is starting to slow. According to a leaked copy of the World Economic Outlook report coming out shortly:

• US GDP growth has been cut to 2.8% from 3.0% in 2011; while 2012 (which will be cut at a later date) was raised to 2.9% from 2.7%.
• Japan 2011 GDP cut to 1.4% from 1.6%, 2012 to 2.1% from 1.8% (same as above)
• Euro zone 2011 GDP raised to 1.6% from 1.5% in 2011; 2012 raised to 1.8% from 1.7% - good luck with this one.
• China 2011 GDP remains at 9.6%, slowing to 9.5% in 2012

Something remarkable happened to property taxes in the U.S. while housing lost 31% of its value from 2006 to 2009: they went up by $100 billion (27%). Equally remarkably, as we can see from this U.S. Census Bureau data on state and local tax revenues, property taxes went up even when housing slumped in the early 1990s. So though U.S. housing continues losing value--U.S. home prices declined in January, continuing a downward trend that began in August, with average U.S. home prices retreating to summer 2003 levels, according to the S&P Case-Shiller home-price indexes--property tax revenues continue their inexorable rise. So even as the net worth of property has fallen by a third, the property taxes collected from the owners have risen 27%. Exhibit A in this ceaseless rise of property tax revenues is the structural shortfalls in state and local government budgets between what was promised to various fiefdoms and constituencies at the apex of various bubbles, and what is sustainable in non-bubble times.

With all the recent excitement in Japan, some may have forgotten that the entire MENA region is currently experiencing a historic, and in many cases very violent, revolution. Conveniently, Emad Mostaquew of Religãre Capital Market has shared an extended overview of the current snapshot in the Middle East and North Africa region. Of particular note is the section on Yemen. As was disclosed yesterday it now appears that the US is directly funding "flickers" of Al Qaeda in Libya, and possibly will be arming such factions in the future, it now appears that Yemen's internal response to instability will also gravitate around the Al Qaeda strawman: "After several prominent defections following the death of 52 protestors at the hands of government snipers, President Saleh began negotiations to step down. This appears to have been a ruse to gauge opposition strength and once he was offered a host of concessions to leave, he withdrew his offer, using the time to solidify ties with key tribes. Saleh’s key tactic has been to emphasize the chaos that would follow his departure, with Al Qaeda in the Arabian Peninsula (AQAP) central to US and Saudi concerns. To play on these fears, security forces have been pulled from key governorates, which are now no longer under government control and have been releasing rebel leaders." Then again, perhaps judging by recent developments in Libya, the US may not be all that concerned about Al Qaeda after all. Much more in the full report below.

One can be rest assured those Irish haircuts are coming. Will the other indebted EU nations just sit back as Ireland clips its debt without following suit? Doubtful! Remember, I have been warning of this event for over a year, and the daisy chain effect is still being ignored.

Want a cheap undated put on oil? A Darwinian thinning out has taken place over the last 30 years, while management has learned to make this worst nightmare of an industry efficient. The top four airlines now control 75% of the US market. The industry has fewer seats than in 1982; while inflation adjusted fares are down 40%. When was the last time you saw an empty seat on a plane? (AA), (LUV).

• Greenspan Op-Ed: Dodd-Frank fails to meet test of our times (FT)
• The ‘Grand Bargain’ is Just a Start (Martin Wolf)
• Parts Shortages Spread to Japanese Operations in U.S. (WSJ)
• Osborne Insists Plan B Will Mean Higher Rates (Independent)
• Apollo Global Raises $565.4 Million in Expanded Share Offering (Bloomberg)
• Summit Swings Behind Libyan Rebels  (FT)
• Are commodity prices peaking? (MarketWatch)
• Merkel Faces Pressure on Euro, Taxes (WSJ)
• Inflation Comes at Us Like a Knuckleball (Mike Pento)

And so the GDP revisions start coming fast and furious. Following repeated warnings from Goldman (which also modestly cut its GDP forecast), implying that the only firm that matters is about to cut GDP across the board, Fed "Expert Network" Macroeconomic Advisers, headed by the inimitable Larry Meyer, has decided to provide value to its client(s) and slash Q1 GDP from 4% to 2.3%. This means that Joe LaVorgna is furiously coming up with scenarios that blame everything from snow to gamma rays to the dog eating his excel spreadsheets for why he is about to trim his permabullish outlook.

The ADP private payroll number has disappointed, coming below expectations of 208K, and down from a previously revised 208 from 217K. The number is also far weaker compared to a whisper expectation that actually had a 3-handle in front of it (unclear how much BarCap was involved in setting that benchmark). From the report, which does its best to hide the fact that the economy needs to create about 150k jobs a month just to stay in line with population growth: "This month’s ADP National Employment Report removes any remaining doubt that private nonfarm payroll employment accelerated heading into 2011. The increase of 201,000 is in line with the consensus expectation both for today’s report and for Friday’s jobs report from the Bureau of Labor Statistics. The average monthly increase in employment over the last four months – December through March – has been 211,000, consistent with a gradual if uneven decline in the unemployment rate. This is almost three times the average monthly gain of 74,000 over the preceding four months of August through November." The worst performing sector continues to be construction: "In March, construction employment dropped 5,000. The total decline in construction employment since its peak in January 2007 is 2,126,000. Employment in the financial services sector increased 4,000 in March." But that's ok: financial services sector employment increased for the first time since 2007.

Markets mostly positive this morning ahead of the ADP Employment numbers and despite sovereign ratings downgrades for Greece and Portugal yesterday. Housing figures continue to disappoint as MBA Mortgage Applications today showed a decrease of -7.5% for the week v 2.7% prior. Challenger Job Cut figures for March came in at -38.6% YoY v +20.0% prior. ADP payroll figures estimated at 208K additional jobs will also preview this month’s labor market as the anticipation for Friday builds. Yesterday S&P cut Portugal’s sovereign debt rating for the second time this week to BBB- from BBB and Greece’s rating from BB+ to BB-, with Portugal left on negative outlook and Greece left on watch negative. The decision centered on both countries’ unsustainable debt levels and inevitable draw on the EFSF as well as the agency’s rather dim view of the future ESM. Asian stocks on the rise after Japanese manufacturers resumed production for the first time since the earthquake earlier this month. The Chinese press is reporting that the PBoC may raise RRR 6 more times this year to add onto the 3 adjustments made already in 2011. The Chinese leading index pushed up slightly to 101.05 v 101.04 prior.

Gold commenced 2011 at $1,420.78/oz and with two days of trading left in the first quarter, gold is marginally higher at $1,420/oz. It is therefore flat for the quarter after another quarter of correction and consolidation. A lower quarterly close would be the first lower quarterly close in 9 quarters. This may be beneficial to some of those short the gold market who may be attempting to 'paint the tape' and engineer a lower quarterly close - in the forlorn hope that this could lead to momentum selling by trend, following hedge funds and traders. A lower quarterly close may be achieved but the fundamentals of anaemic supply and continuing strong demand both from the investment sector, but also from the jewellery and industrial sectors (dental and electronics primarily) internationally, and particularly in China and Asia in general will likely see gold continue to rise in 2011. Interestingly, March 2010 and the first quarter last year (see chart above), also saw gold flatline prior to strong gains in April and the second quarter of 2010 (Q2 10). Gold rose by nearly 6% last April and by nearly 12% in the quarter. The unresolved eurozone debt crisis and the emergence of the Japanese natural and nuclear disasters and geopolitical risk in oil producing nations means that the fundamentals today are as sound as they were in 2010 - if not more sound.

It is a pity that Dr Miyamoto is not alive to offer his unique insights today. Luckily, we have the benefit of his writings.