Archive - May 2011

With the topic of oil once again dominating the air waves courtesy of Goldman's most recent flip flop on Brent, we look at one of those thing that few if any have actually done much analysis on over the past decade, namely supply and demand. As it is no secret that the primary driver in price formation of virtually all commodities has been excess liquidity, the actual fundamentals have been drowned for a long time. Yet they still remain. Of all "demand fundamentals", the biggest one is and will be China. Should the world indeed proceed to tighten across the globe, the question of Chinese demand will increasingly become one of substantial importance. Here is how Platts sees Chinese oil demand in the next several years: "China's demand for oil will grow 4-5% a year to hit 530 million-560
million mt (10.6 million b/d-11.3 million b/d) in 2015, with transport fuel
and chemical feedstocks driving the increase, a senior Chinese researcher
said Wednesday." Platts estimates that China's current oil consumption is about 450 million mts, a 12.2% increase over the past year. And following 2015, "Growth will then slow to 2%-3% a year, to reach 590 million-650 million
mt by 2020, said Liu Xiao Li of the Energy Research Institute, part of
China's economic planning agency, the National Development and Reform
Commission. With oil production in 2020 expected to be 200 million-230 million mt,
that would imply an import dependence of around 65%, she added." One can thus see why China is ever so cautious proceeding to procure E&P exposure and infrastructure projects around the world: the country realizes that without a friendly foreign "import" base, there is no way it can grow into its energy demand. Lastly, for those who collect parity facts, "in a presentation at the International Air Transport
Association's Aviation Fuel Forum, Standard Chartered Bank said China would
overtake Europe as the world's second largest consumer of oil before 2020,
with around 13 million-14 million b/d of demand. The bank's data indicates China would catch up with the US sometime
after 2030. Standard Chartered's data has China's oil demand approaching 17
million b/d around that year and still rising, with US oil demand around 18
million b/d and falling." Luckily by then we should have far more evidence whether the Peak Oil theory is indeed true, in which case the world will have far greater problems in the next 19 years than anything seen to date.

...And much more

A snapshot of the US Afternoon Briefing covering Stocks, Bonds, FX, etc.

Market Recaps to help improve your Trading and Global knowledge

While the commodity complex has been on a tear ever since the global recession cooled, there is one commodity that has been going nowhere: Natural Gas! Yet, we have been receiving hints that this game is about to change.

It looks like the SAC investigation is about to go to the very top. As we reported over the weekend, Senator Chuck Grassley recently commenced an investigation into at least 20 trades, both stocks and options, at SAC Capital, that may implicate the billionaire with the zamboni in insider trading (despite a very spirited defense that Mr. Cohen is a true humanitarian at, heart having recently purchased none other than the NY Mets, evidence of his civic duty) and lead to an insider trading conviction that would make the Raj Raj affair pale in comparison. Of course, any investigation of SAC would draw many parallels to Madoff, where it would appear impossible that any potential insider trading over the years occurred without the regulator's knowledge. Hence, in a new letter to the SEC, the senator has made it clear that he is now investigating whether or not SEC pursued and/or resolved any of the numerous Finra referrals regarding SAC. Grassley is also seeking: "how the number of referrals over this timeframe compares to similarly situated firms, [and] whether a Wells Notice was ever drafted with regard to SAC Capital related to any of these referrals or related to any other matter (if so, please provide a copy of any Draft or Final Wells Notice)." We expect to discover the answer to the last question to be exactly zero. We also expect that various district attorneys will suddenly jump at the opportunity to earn a few political brownie points now that they smell some very nutritious blood in the water.

Well, if anyone was looking for the green light to invade Syria, here it is:

• UN SAYS SYRIA VIOLATED NUCLEAR AGREEMENTS
• SYRIA VIOLATED INTERNATIONAL AGREEMENTS, BUILT REACTOR

And in case there is any doubt who is next:

• UN NUCLEAR WATCHDOG EVALUATING NEW IRAN WEAPON DOCUMENTS

It's a good thing the UN found all those WMDs that were the pretext to establish Halliburton's oil extracting infrastructure in Iraq. Then again, history never repeats itself.

Israeli Prime Minister Benjamin Netanyahu is set to address congress in a widely expected speech, the key focus of which will be to diffuse the situation following the president's remarks from last week over what the appropriate borders for the Israeli state should and should not be. As Reuters reports: "When Israeli Prime Minister Benjamin Netanyahu addresses Congress on Tuesday, many will be watching to see whether he escalates a war of words with the White House over how to make peace in the Middle East. Netanyahu has a mostly sympathetic ear in Congress, where few lawmakers in either party speak up for the Palestinians, hewing to decades of close U.S.-Israeli ties. But the Israeli prime minister has had a rocky relationship with President Barack Obama, and last week said the president's vision of a Palestinian state based on the borders of 1967 could leave Israel "indefensible."" Watch the full thing below.

Presented without commentary.

And so Yandex, the Russian SixDegrees.com, has broken for trading at $35. After hitting an initial print of $40, the stock is already down substantially from the high and at last print was trading around $31.79. Absent GETCO stepping in and stabilizing the stock price, there may be far fewer "like" buttons hit on this particular iteration of Facebook. In the meantime, we continue to eagerly await the public launch of the Ukrainian www.adultfriendfinder.com.

Some interesting headlines just hit Reuters:

• UK GOVT COMMITTEE SAYS IT BRINGS ACTIVITIES OF LARGE DEALERS ON  LONDON METAL EXCHANGE TO ATTENTION OF OFFICE OF FAIR TRADING
• UK GOVT COMMITTEE SAYS 4 LARGE COMPANIES OWN LME-REGISTERED  WAREHOUSES, CALLS THAT “RESTRICTVE”
• UK COMMITTEE NAMES JPMORGAN <JPM.N>, OWNER OF WAREHOUSER HENRY  BATH, AS ONE OF THOSE 4 COMPANIES
• UK COMMITTEE SAYS WOULD BE CONCERNED IF OWNERSHIP OF WAREHOUSES  BY DOMINANT DEALER ON LME WAS ANTICOMPETITIVE
• LME SAYS MINOR METALS TRADE ASSOC. ASSERTION TO UK PARLIAMENT ON  METALS WAREHOUSING IS “UNJUSTIFIED AND COMPLETELY OUT OF CONTEXT

The latest and last regional index confirms that the economy is now not only slowing its rate of expansion, but is in fact contracting. The narrative is plain ugly: "The index of overall activity was pushed into negative territory by weak readings for shipments and new orders, while employment growth held steady. Other indicators suggested additional softness. District contacts reported that capacity utilization turned negative and backlogs fell further, while delivery times grew more slowly. In addition, manufacturers reported an uptick in finished goods inventory growth." But not all is bad: for example those predicting inflation are once again proven correct: "Distrcit manufacturers reported that raw material prices increased at an average annual rate of 6.12 percent in May - the highest reading since the inception of our surve in December 1993 - compared to April's reading of 4.81 percent." Fear not: it is "transitory." And 82% of experts say no QE3 is coming so....

As the Fed-engineered stock market rally rolls over, then perhaps the Mainstream Media sitting in the press box sucking corporate-sponsor provided beverages will awaken and look at the progress of the Fed's game: lots of corporate hits, but no runs, nobody on base and zero RBIs (runs batted in)--that is, no jobs created despite the trillions in treasure lavished in new credit. It feels like we're entering the eighth or ninth inning of the Fed's perversely destructive game, and all we need is an umpire to call "STEE-RIKE!" and end the doomed-from-the-start "extend and pretend" game the Status Quo has been playing since 2008.

It may be time for the CME to hike some coffee margins as prices for the legal drug are starting to get out of control. According to Dow Jones, Smucker has just increased its average coffee product price by 11% in its 4th price hike in just the past year. This, along with all other comparable deflationary developments (according to some) could not have been foreseen by anyone, and will lead to the Fed's Elizabeth Duke discussing next year how, very inexplicably, America's low and middle classes are forced to choose between espresso shots and toilet paper.

The stock market peaked last February, not on April 29, as the indexes are suggesting. The stock prices of the best run companies in the most profitable industries are rolling over like the Bismarck. The best case is that we are nearly three weeks into a 10% correction that will take us to the 200 day moving average for the (SPX) at 1,234. (AAPL), (GOOG), (GS), (FCX).

When it comes to austerity in Europe, it appears that no costs are too big or too small. That goes for sharing teleprompters as well. Compare and contrast the latest remarks by Barack O'Bama (or Obama, following the president's prompt departure out of Moneygall on seasonally unadjusted volcanic ash concens) and Enda Kenny...