Archive - Aug 10, 2012

Corn was already surging to new record highs before the USDA released the WASDE report this morning. With a consensus view of 10.929 billion bushels (compared to USDA's prior 2012 estimates of 12.97 billion), the USDA's 10.779 billion bushel forecast means a 17% slashing in harvest expectations. Crop conditions were the worst since 1988 with 69% of the Midwest in drought. Soybeans likewise were expected to show a 2.796 billion bushel production forecast (based on Bloomberg's survey) which compares with the 3.05 billion prior forecast from USDA and just came 4% below expectations. Bloomberg notes: "The U.S. drought means that global corn supplies will be critically tight for the next year; Livestock and milk-product prices will have to rise to cover the increased feed costs. Eventually, global consumers will have to pay the bill." It appears the algos were at play immediately after the report as prices surged (in corn) to $8.49 before falling rapidly back to $8.19, and are now up fractionally at $8.31. The biggest consequence is a heavier drag on any possibility of a sizable Chinese stimulus as food price inflation, as we noted last night, is set to stymie any flood of money.

Look around. Take a good long and hard look because the data is becoming unsettling and it is pouring in from all over the world. In China, where a hard landing was thought to have been avoided; one moment please, not so fast. The world’s growth engine is sputtering and there will be consequences. In Europe the situation is dramatically worsening with virtually every country in a recession with the notable exception of Germany though we predict they will join the club by the fourth quarter of this year or by the first quarter of next year. For those that think that the Fed will save the day, if not the planet, we suggest to you that you may be in for an unpleasant surprise. There is only so much they can do now and each Fed action is being met by a less and less reaction in the markets and of a shorter duration.

The Financial Times published an interesting article on Wednesday by a Tokyo-based analyst with Arcus Research, Peter Tasker, entitled of 'Cash out of gold and send kids to college'. The article is interesting as it is an articulate synopsis of those who are either negative on and or bearish on gold. It clearly shows the continuing failure to understand the importance of gold as a diversification and as financial insurance. Tasker incorrectly states that gold is "just another financial asset, as vulnerable to the shifts of investor sentiment as an emerging market." He conveniently ignores over 2,000 years of history showing how gold is a store of value. He also ignores recent academic research showing gold to be a hedging instrument and a safe haven asset. Another fact unacknowledged is how gold has clearly been a store of value since the current financial and economic crisis began in 2007. Since then gold has protected people from depreciating financial assets (such as equities and noncore bonds) and from depreciating fiat currencies such as the dollar, the pound and more recently the euro. 

European markets opened lower as risk-off was observed across the asset classes as participants reacted to the disappointing data from China overnight. Continental equity futures have moved horizontally throughout the session so far with little newsflow or influential data to sway price action. Heading into the European open, little has changed as all European indices are in the red, being led lower by consumer goods and utilities. China posted a sharp narrowing in their trade balance surplus to USD 25bln from USD 32bln in June, as the growth in exports slows across the month. As such, it is not a surprise to hear the usual market chatter of the Chinese central bank taking an imminent move to cut their Reserve Requirement Ratio today. However, as nothing has materialised, the riskier assets have not seen any significant lift from the talk.

• World’s Oldest Shipping Company Closes In Industry Slide (Bloomberg)
• Japan Growth May Slow to Half Previous Pace as Exports Wane (Bloomberg)
• China Export Growth Slides As World Recovery Slows (Bloomberg)
• Weidmann tries to muffle not spike Draghi's ECB guns (Reuters)
• Draghi lays out toolkit to save eurozone (FT)
• Concerns grow over prospects for sterling (FT)
• RIM Said To Draw Interest From IBM On Enterprise Services (Bloomberg)
• UN urges US to cut ethanol production (FT)
• Goldman Sachs Leads Split With Obama, As GE Jilts Him Too (Bloomberg)
• New apartments boost US building sector (FT)

The evidence mounts...

There was a time when Bill Ackman, constantly misperceived as a retail investing genius, blew up an entire fund solely dedicated to investing in Target, mostly via calls as in something out of Whitney Tilson's wettest dream (incidentally, another "investor" who could not get enough of JCP at $27), Pershing Square IV (full hilarious letter from Pershing Square Capital Punishment to the PSIV investors here). His current massive investment in JCP is luckily not a standalone fund, but it is now certainly stalked by the ghost of PSIV as JCP literally blew up overnight and any hope of the rumored "10-15 return" that Ackman predicted in the stock has now gone up in smoke. Oh well: there is always the gamble on Procter and Gamble.

The markets have been treading water over the past week, yet courtesy of the non-existant volume and the lack of sellers, VWAP algos have been levitating the S&P ever higher despite the lack of any new or credible reason for it to do so. Call it the Merkel vacation doldrums. It is so slow in Europe even Rajoy - now the gatekeeper for the next European phase of sovereign bailouts - is soaking in the sun somewhere, whether or not he may want to return to his job is another matter. As Reuters reports, his popularity is plummeting meaning the government will not survive if and when Rajoy demands a Spanish bailout: "Spanish Prime Minister Mariano Rajoy faces a cloudy return from his short summer break as his expected request for European aid in September will spur protests on the street and deepen cracks emerging in his conservative People's Party... According to an official poll released this week, if a general election were to take place now, Rajoy's People's Party would still win but would get only a 36.6 percent of the vote, down from 40.6 percent in a poll in May and 44.6 percent in the November vote." Which in turn means that Spain demanding a bailout could well mean a violent government overthrow and a follow through mimicking precisely what we saw in Greece, with the opposition party set to undo any bailout request by Rajoy (who knows all of this). In the meantime Bloomberg confirms that sentiment in Europe is resuming its turn as European markets fall led by the Spanish and Italian markets, 10yr yields in those countries rise. Chinese import & export data and French industrial production data were below estimates earlier. The euro is weaker against the dollar and commodity prices fall led by industrial metals. U.S. import price data is released later.