Archive - Feb 13, 2011 - Story

Now that the Rare Earth bubble has come and gone (and may well come back again depending on how much China wants to stretch its political muscle), the Rice bubble is in progress, and may see prices going back to the $24 range we saw last in 2008 when net CBOT non-commercial spec contracts were approaching the 8k levels, the last R-bubble prediction is coming true. Back in October, Zero Hedge said the next bubble are the 3Rs -Rare earths, Rice and Rubber. Lo and behold, rubber just hit an all time high on the Tocom, after returning 30% YTD. And far more importantly to those who care about such things, the rubber forward curve is in backwardation. No need to explain what that means.

First it was "Get Ready For Higher Food Prices" going mainstream... Now, logically following, it is "Get Ready For Margin Collapse." As Zero Hedge has long been warning, the one immediate consequence of surging commodity prices as a result of endless liquidity, is a collapse in corporate margins. Now, about 6 months after we first broached the topic, it has finally hit the mainstream media. The WSJ highlights what is so obvious, it is no wonder no sellside "strategist" is willing to touch the topic with a ten foot pole: "This earnings season has seen a much-welcomed return to revenue growth, giving investors another reason to push stocks to two-year highs. But beneath the surface lurks a fresh worry: For many companies, the cost of raw materials is rising at a faster pace than revenue. Blame it on soaring prices of everything from cotton to copper and corn. That has squeezed profit margins more markedly than many analysts anticipated—and is serving as a worrying sign for future earnings." But yes, aside from the painfully obvious collapse in margins, and thus plunge in net income (sorry, companies can't fire their skeleton crew workers any further) which will mean 2011 S&P 500 EPS will come far, far lower than prevailing consensus, everything is fine...and don't forget to BTFD.

Democracy, as Churchill said, “is the worst form of government except for all those other forms that have been tried from time to time,” the assumption being that because the state is the only conceivable form of government (and therefore necessary for civil society to exist), the democratic state is the best state, even if it is merely the best among bad ones. This flies in the face, of course, of the godlike esteem in which democracy is held around the world, both by those who are ruled by such states and by those who yearn to be. Democracy, after all, is based on “the proposition that the legitimacy of all political power arises from, and only from, the consent of the governed, the people” – the assumption being that the democratic state embodies this noble proposition.

In the early part of the week (Monday – Tuesday) China will release key lending growth data. Goldman expects the amount of CNY loans made in January to be around Rmb1.1 trillion, up from Rmb480 billion in December. The yoy growth of CNY loans is expected to fall to 18.5% yoy in January from 19.7% yoy in December. Also, January net exports are expected to decline to US$9.8 billion vs.US$13.1 billion in December. Meanwhile China CPI is expected to continue to rise to 5.3% from 4/6% previously.

The final nail in the zombified Build America Bond program may be finally approaching, in which case the dead cat bounce in the MUB may be about to end. After late last week Gerald Connolly,
D-Va, proposed an extension to the BAB program through 2012, resulting in yet another risk bounce in the one asset class that has seen a major walloping in early January, not to mention record outflows (and a corresponding inflow into US equities), it seems that the GOP is not very excited about the prospect of further state subsidies. From the WSJ: "Key Republicans signaled they would block renewal of the Build America
Bonds program as the Obama administration prepared to reinstate the
bonds in the 2012 budget plan due Monday. Build America Bonds were originally introduced as part of the $787 stimulus program in 2009 but expired at the end of last year. They allowed states and localities to sell taxable bonds and receive a federal subsidy payment from the Internal Revenue Service equal to 35% of the interest costs on their bonds. But Sen. Orrin Hatch (R., Utah), the ranking Republican on the Senate Finance Committee, said late Friday that BABs were "simply a disguised state bailout." "These bonds rightly expired at the end of 2010 and it is my hope the Obama administration does not try to resurrect such a nonsensical provision in their upcoming budget," he said." Yet that is precisely what the president intends on doing, while somehow pretending that the budget will actually cut $1.1 trillion from the deficit over the next decade. Just how crazy is it to request that at some point America has a president and economic advisors who actually understand at least the most basis mathematical concepts, the key of which is that spending does not equal saving...

As you know by now, the endless money printing by our inept and foolish "leaders" is causing prices to rise in all things dollar-denominated. Economics 101 teaches us that more dollars chasing a static supply of goods leads to an increase in price. Eventually, these rising input costs are passed along to the consumer in the form of cost-push inflation. This insidious monster is the most painful of economic afflictions as rising costs are not met with commensurate rises in wages. The pain to the consumer is great and often brings about social unrest and upheaval. We will surely discuss this phenomenon in greater detail in the days ahead. For now, I wanted to give you charts on some items that we don't normally follow here, just so you can grasp the dimension and scale of that which lies ahead.

Analyzing last week's CFTC Commitment of Trader data continues to confirm our assumption that ever more speculators are honing in on rice as the fulcrum commodity. Jumping to a fresh year high of 6,652, non-commercial net spec contracts are the highest they have been since December 2009, when they hit 6,773, and approaching the record from early 2008. Yet while the price of rough rice in late 2009 was comparable to recent price levels in the $16 region, the peak from early 2008 was 50% higher, approaching $25. Therefore it is safe to assume that should speculative interest continue surging at the current rate, and if it were to approach the spec exposure of ~8,000 last seen in early 2008, then the price of rice has a long way to go...

Zero Hedge enjoys entertaining contrarian views, even to our own. The most notable recent one comes from Peak Theories which speculates that based on technical patterns, food prices are bound to fall. The one exception is rice, as we have speculated is long overdue for a major surge in price. Furthermore, as we will shortly show, speculative traders seem to agree with CFTC data indicating that net non-commercial specs continue to surge. As for dropping commodities, the ball we believe is in Bernanke's court - as last week's ICE margin hike in cotton demonstrated, exchanges' actions are now backfiring, and the only immediate price catalyst is broad market liquidity. Thus the question is whether Bernanke believes the Russell 2000 is at a high enough level that allows for a food price correction yet...

All those who were hoping that Egypt would open its stock market today, as had been indicated previously by the Egyptian Central Bank, will be disappointed. Not only will the CASE not open today, but it will remain shut on Monday and Tuesday as well. The reason: the Thermidor reaction at local banks is starting. Per Reuters: "Egypt's central bank declared Monday a bank holiday after a series of worker protests and strikes on Sunday at state-owned banks." Oddly enough, in the power vacuum immediately following a revolution, when the country has just transferred power to a supposedly beneficial, but not really, military regime, Egypt's number one priority is not to keep the general casino open. What a disgrace. More from Reuters: "Banks were also due to be closed on Tuesday, which is an official holiday marking the Prophet Mohamed's birthday. "Employees are demanding higher salaries," Deputy Central Bank Governor Hisham Ramez said by telephone, adding that strikes were mainly at state and not private banks." But do not despair, according to the perfectly efficient ($25MM AUM) EGPT ETF, the Egypt stock market is currently 15% undervalued. All that is needed to make sure that someone can pocket a guaranteed 14.6% arbitrage is for the Egyptian financial industry to have enough people left employed to open the stock market.

Now that the FCIC has declassified all of its interviews with the people responsible, or profiting, for the housing crisis (among which are those of John Paulson, Hank Paulson, Lloyd Blankfein, Dick Fuld, Jonathan Egol (the man who helped Fab Tourre construct Abacus), Alan Greenspan and of course Agent Orange himself - Angelo Mozilo), there is one interview strangely withheld. That of the man largely at the heart of everything - Ben Bernanke. From Bloomberg: "The Financial Crisis Inquiry Commission, created by Congress to investigate and report on the causes of the market meltdown late last decade, won’t publicly release its full 2009 interview with Federal Reserve Chairman Ben S. Bernanke, a commission spokesman said. The interview is quoted in the congressionally authorized
panel’s final report, which cites the November 17, 2009,
“closed-door” session in 11 footnotes. The Fed chief discussed
a range of topics including the central bank’s failures and why
the government rescued Bear Stearns Cos. and let Lehman Brothers
Holdings Inc. go bankrupt, the FCIC report shows." And yet, it appears to contain information so sensitive it would once again rain fire and brimstone on everyone, and like an audio medusa, lead to widespread petrifying contagion everywhere it was heard. Once again we discover that the Fed has learned nothing from the Pittman episode, nor from the Paul campaign to bring some transparency to its actions. We do learn, however, that the Fed continues to believe it is above the people, and that the information it is privy to will never be voluntarily released to those whom it supposedly serves courtesy its three mandates, all of which have the words "Russell" and "36,000" in them.