Friday, February 19, 2010

The Debts of the Spenders: Cities Weigh Chapter 9

Chapter 9 is a seldom used term to describe municipal bankruptcy provisions (re-organizations) if a city or other local government branch falls behind in its financial obligations; e.g. where its cash flow has turned substantially negative. This is not new. Similar fears afflicted the muni debt market in fall 2008 when nearly every financial sector turned south.

But savvy players like PIMCO's Bill Gross saw a chance to buy muni debt and those managers who followed made a tidy return on the severely marked down bonds. Their surge in price was part of a greater tide lifting all boats in the 2009 fixed income rally where HY (high yield; aka junk bonds) outperformed every other sector - equities, commodities, and FX. Munis have historically been considered "safe" as their default rates are a lot lower than private sector actors. The wealthy also use muni's as tax shelter vehicles because many states and jurisdictions make their bond returns tax free for local residents.

Is there another opportunity available here?

Maybe. Maybe not. The environment of fear that led to a technically and fundamentally oversold market does not exist today. Or at least not yet.

Tuesday, February 16, 2010

Agricultural Update: El Nino Waning in 2010?

The widely followed Australian Bureau of Metereology issued its report that the risks of El Nino are lessening. This is important because it means that regular rainfalls will return, which is bearish for agriculture prices since there is less uncertainty over crop yields. But on the other hand, the end of El Nino's warm water effects indicate that the ever volatile energy markets for crude and natural gas may spike in the coming months because of an increase in hurricanes.

Indeed, contracts for active CME grains (May contracts) and Nymex crude (August) are already beginning to display this seasonal effect.

You can click here to see a dynamic stop action map of Pacific sea temperatures from November 2009 to the present:

Australian Bureau: Pacific Indicators Suggest El Nino Waning

Temperatures in the Pacific Ocean suggest an El Nino event is waning, though current patterns are typical of such an event, the Australian Government’s Bureau of Meteorology reported Tuesday.
Surface and sub-surface temperatures remain warmer than average in the equatorial Pacific, but climate models suggest these will cool in the coming months but remain above El Nino thresholds
until April or May, according to the bureau’s weekly tropical climate note.

El Nino events are typically associated with above average sea temperatures in the eastern and central tropical Pacific and are usually but not always associated with below normal rainfall in the second half of the year across large parts of southern and inland eastern Australia. An El Nino can have a disastrous impact on agricultural production in eastern Australia, particularly for non-irrigated crops such as wheat.

The bureau’s Southern Oscillation Index, another indicator of an El Nino, measured minus 23 for the 30 days ended Feb. 14, falling sharply from minus 10 in January. An El Nino typically is associated
with strongly negative values for the SOI, sustained for several months around minus 10 or lower.
The recent rapid decline in the SOI can be partly attributed to several tropical disturbances affecting French Polynesia, it reported.

Source: CME News For Tomorrow

Monday, February 15, 2010

The Debts of the Lenders: Chinese FDI Surpasses US Overseas Investment

In the 1992 US Presidential campaign, Independent candidate Ross Perot famously stated that ratification of the NAFTA treaty would lead to the "giant sucking sound of thousands of US jobs" to foreign locales such as Mexico. Fast forward to today and the focus has shifted from Mexico to another cheaper locale, China.

For years, most attention on China focused on FDI or foreign direct investment. In the 1990s, low interest rates in Japan drove investor funds to the mainland in search of higher yield (This trend is still continuing). These investors were later joined by adventurous Western (mostly American) funds in search of investment potential. Growth really took off though with the death spiral of US manufacturing as firms continue to offshore manufacturing away from North America.

But, 2009 marked the year when investment flows went the other way - from China towards the US. Does this mean that the dividends of globalization are finally starting to pay off for Washington lobbyists? Apparently not.

While Chinese investment remains very diverse, the focus of the political leadership is all too apparent:

. . .Chinese outbound investment (whether in the US or elsewhere outside of China) is still predominantly focused on securing natural resources and forward integrating into sources of critical raw materials deemed integral to China's manufacturing infrastructure and industrial capacity.

Meanwhile, US workers continue to wait for the long promised fruits of global integration. With real unemployment at record highs and no economic recovery in sight for the average American, they may have to wait a while longer. So far, it looks like Ross Perot may have been right.

Friday, February 12, 2010

The Debts of the Lenders: India's Central Bank Faces Stark Choices in Raising Rates To Avoid Food Inflation

I first discussed India's problems with food shortages last summer here.

But here is a more recent update:

The Financial Times also reports:

Spiralling food prices have provoked debate about whether the Reserve Bank of India will be forced to raise interest rates to try to cool the economy. Already the bank has begun to exit its loose monetary policy by raising banks' reserve needs

This problems is endemic to not just India but nearly all the emerging market nations. Ministers face different challenges from their Western peers. Instead of asset deflation and shrinking/aging population pools, emerging markets in Asia, Latin America, and the Middle East are confronted with a young workforce that needs to remain steadily employed and fed. Any sort of contribution towards domestic issues is going to indirectly affect the fiscal sustainability of Western governments reliant on fund flows to maintain record borrowing deficits.

Monday, February 1, 2010

Agricultural Update: US Corn Crop Faces Possible Mass Spoilage

Questionable Quality Of US Corn May Bring Masses To Market Soon

The prospect of warming weather in coming weeks could subject millions of bushels of stored U.S. corn to spoilage, resulting in waves of farmer selling and even lower prices, even though cash values are already at three-month lows.

Farmers won’t be able to wait out higher prices because damaged corn in storage could easily spoil as temperatures rise, making it all but worthless. Some suggest prices could tumble as much as a dollar per bushel from current levels, if farmer selling overstocks the supply pipeline. Much of the U.S. corn crop was stored with higher-than-usual moisture levels because a wet fall didn’t allow the crop to dry properly, making molds and the toxic
byproducts they produce a problem.

Farmers sold immediately what they could not store, but most of the crop
remains in bins or piled on the ground. January’s freezing weather halted the quality decline, but the snowy weather also has kept some farmers from getting to bins and marketing corn. A sharp break in prices since Jan. 12, when the U.S. Department of Agriculture said the U.S. corn crop was much bigger than expected, also has limited farmer selling. Benchmark Chicago Board of Trade March corn prices are down about 15% since Jan. 11 and Monday traded around $3.59 a bushel. The national-average cash-corn price was $3.18 entering Monday’s trading session.

“I am sure the sharp break will stop some of those bushels moving in the short run, but they will eventually have to come to market before planting season arrives or run the risk of being junk,” said an Iowa corn processor.
The Iowa processor said that, of the farmers that are selling now, about onequarter are bringing high-moisture corn that is prone to deterioration and difficult to store. If quality is poor, farmers will inevitably get less money for their corn. Dockage discounts imposed on corn of extremely low quality can total nearly $2 to $3 per bushel, providing heavy incentive for elevators and farmers to market it before such damage occurs. “I am hearing reports that up to 75% of on-farm stored grain is suffering from at
least some condition issue. This will only get the temperature warms,” said West Bend, Iowa, commodity trade adviser Karl Setzer. “The last time we had storage issues in corn was in 1992, which caused corn deliveries to increase 5% during the second quarter of the marketing
year. This would equate to roughly 500 million bushels of corn this year.”

During the second quarter of 1992, CBOT nearby futures prices fell 6%, but
Setzer said prices this time around could drop even more than that, depending on what farmers do. He added that some cash grain market advisers are telling their clients to wait to sell on general ideas corn prices could rally later this year, but “this is a very risky move, however, given this
year’s quality issues.”

Source CME News For Tomorrow