Saturday, May 30, 2009

The Debts of the Spenders: US Corn "Knee High by the Fourth of July" Disappoints

*Credit Gato.chan

Remember, planting delays are generally considered bullish for traders (b/c of supply concerns). And the weather has not been cooperating.

Satellite imagery courtesy of NOAA web site.

During this past week, U.S. corn planting increased nearly 15 percentage points from the previous week, according to USDA’s planting progress report. Yet, the planting is still more than 20 percentage points behind the five-year average.

The Debts of the Spenders: Eurozone Inflation Drops to Zero

Bond bulls take heart. Goldbugs be warned.

According to the latest government statistics from the Eurozone, annual inflation will fall to zero. That's right: Z-E-R-O. In other words, the lowest since 1991 (before the ECB was even formed).

I find the economic outlook to be entirely credible. Continental banks took on dramatically more risk than their Japanese or even American counterparts. Exposure to potentially bad E. European loans remains a tail risk.

Moreover, the Eurozone is entirely too dependent on the public sector for macroeconomic activity (the private sector remains swaddled in a byzantine maze of red tape and trade union hostility - 6 week vacations and 30 hour workweeks are not exactly popular w/employers that need to watch the bottom line). While it is unlikely that govts will enact deep spending cuts, SOME measure of fiscal austerity is in order - especially for the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) countries which share the characteristics of lacking deep capital markets and relying too much on employing their populations as functionaries.

Indeed, the situation in Greece, Ireland, and Spain are especially severe as all 3 nations are in the middle of some especially painful housing deflation. While the situation was nowhere near as bad as offering NINJA (No income, no job, no asset) loans to borrowers, European bank officers had succumbed to the same poor sighted judgment as their American and British peers.

Eurozone annual inflation rate falls to zero

By Ralph Atkins in Frankfurt

Published: May 30 2009 03:00 | Last updated: May 30 2009 03:00

Eurozone inflation has fallen to zero, the lowest rate since at least 1991, and could fall lower as a result of the region's severe recession as well as cheaper oil prices.

The annual inflation rate in the 16-country region fell from 0.6 per cent in April to 0 per cent this month, according to Eurostat, the European Union's statistical office.

Economists said inflation would almost certainly turn negative in June, complicating further the task of the European Central Bank as it combats the worst economic downturn for half a century in continental Europe.

Among the eurozone's biggest countries, Germany and Spain have already reported negative national inflation rates. The US has also reported year-on-year falls in consumer prices but UK inflation is expected to remain positive, largely because of the effects of sterling's weakness.

Although forward-looking confidence indicators have suggested the eurozone is contracting at a much slower pace than at the start of the year, the latest ECB credit data underscored the continuing weakness of eurozone economic activity. They showed annual growth in eurozone mortgage lending and consumer credit turned negative in April for the first time since the launch of the euro in 1999.

The ECB has cut its main interest rate by 325 basis points since last October to 1 per cent, the lowest ever, and is not expected to announce any change after its meeting next week.

But it has followed the US Federal Reserve and Bank of England in announcing an emergency asset purchase programme to help revive financial markets. The ECB will next week announce details of plans to buy €60bn ($85bn, £52.5bn) in covered bonds, which are issued by banks and backed by mortgages or public sector loans.

One likely solution is that the package will be split according to eurozone countries' capital shares in the ECB, which would result in Germany accounting for about a quarter of the €60bn programme.


The Debts of the Spenders: 10k Lawyers Laid Off in the US in 2009 (So Far)

I can already hear the lawyer jokes. (They're not funny if you're an attorney). The good news is that attorneys continue to retain strong numbers in small practice areas (such as estate planning, personal injury, and immigration). Not so much in corporate lit.

For those non-legal types wondering what the numbers were, first year associates at big firms were getting offers of $165k/year STARTING up until last summer. Of course, they also had to bill 2500 hours/year. That trend is certainly coming to an end. More importantly, the billable hour is under threat as firms reconsider the wisdom of alienating their clients. The era of charging .20/paper clips to expenses is definitely over.

2009’s Toll: More Than 10,000 Law Firm Layoffs and Lower Pay Trend

Posted May 28, 2009, 10:43 am CDT
By Debra Cassens Weiss

The pace of law firm layoffs may be slowing, but the numbers continue to grow, hitting more than 10,000 this month for the year of 2009 alone.

At the end of last week, 3,881 lawyers and 6,282 staffers had been laid off since the beginning of the year by major U.S. law firms, the blog Law Shucks reported.

While layoffs are slowing, another trend appears to be gaining steam. Several law firms are cutting associate pay, including Reed Smith, DLA Piper, Sonnenschein Nath & Rosenthal, Nixon Peabody and Seyfarth Shaw.

Lower pay for lawyers could be a lasting effect of the recession, according to recruiter Jerome Kowalski of Kowalski & Associates. "These meganumbers in terms of compensation are just going to disappear," he told the Legal Intelligencer last week.

Friday, May 29, 2009

The Debts of the Lenders: Time for a Break in the Emerging Market Rally?

Emerging market CDX spreads from Markit.

Time for a break in the rally for e.m. govt bonds and associated currencies?

The Debts of the World: Corn, Wheat, and Soybeans Supply Crunch

IGC Cuts 09-10 World Grain Output To 1.72B Tons

The world’s 2009-10 grain crop is forecast at 1.721 billion metric tons, the International Grains Council said Friday.

The figure is 0.3% lower than the 1.727 billion forecast in April by the IGC and is 3.4% lower than its estimated 2008-09 figure of 1.782 billion tons. Grain production is expected to fall partly due to reduced crop output in the U.S. and the E.U. and a return to normal production levels following a bumper crops in 2008, IGC said.

“In the U.S. continued planting delays due to wet weather are likely to have a significant impact on yields and production may fall short of last year’s. Hot and dry conditions in south-eastern Europe are affecting E.U. crop prospects,” the council said.

World grain carry-over stocks in 2009-10 are expected to be 328 million tons, from 343 million tons in 2008-09. Meanwhile, the council raised its 2009-10 wheat output estimate by 0.2% from April’s to 652 million tons and lowered its 2009-10 corn output estimate to 771 million tons.

“Although the world wheat crop estimate (has) increased because of significant upward revisions for China and Russia, markets reacted nervously to the very difficult spring planting conditions in parts of North America and overly dry weather in southern and eastern Europe,” IGC said.
The corn estimate was ratched down, partly due to major planting delays in the U.S.’s eastern corn belt which suggested that more area might be switched to soyabean planting, thereby lowering corn yields.

World corn stocks are expected to fall 15.9% in 2009-10 to 118 million tons compared with 2008-09. The “biggest fall will be in the U.S., while stocks in China are expected to remain ample,” IGC said. Meanwhile, world wheat stocks are expected to rise 5.7% to 167 million tons in 2009-10 compared with 2008-09.

Source: CME News For Tomorrow

Thursday, May 28, 2009

The Debts of the Spenders: Soy Futures Break 8 Month Highs

The overall tone in agriculture is that of a weakening dollar and stagflationary (inflationary?) fears. And yes, a lot of bullish clues were hidden in the COTs report. Other commodities that rallied are of course oil but also some of the softs such as cocoa and sugar. I am just regretting that I set my stops rather tight and took profit too early.

July CBOT Soy Maintains Strong Price Gains

July soybean futures at the Chicago Board of Trade Wednesday hit an eightmonth high of $12.00 3/4 a bushel. Prices are in a steep three-month-old uptrend on the daily bar chart. The soybean
bulls continue to exert strong technical control over the market.

The next major upside price objective for the bulls is to push July futures prices above psychological resistance at $13.00 a bushel, which would allow the bulls to proclaim “beans in the teens.”

That phrase has been in the grain trading lexicon for decades, and only came to fruition last year.
For July soybeans there is technical resistance located at this week’s high of $12.00 3/4 and then at the August 2008 low of $12.27. Above that lies chart resistance at $12.50 and then at

Importantly, from a Fibonacci technical perspective, there is strong technical resistance at the $12.22 price level in July soybeans. That is the 50% retracement of the price move from the contract high of $16.50, scored last July, to the low of $7.96, scored in early December of last year. A push and close in prices above $12.22 would be significantly bullish, from a Fibonacci perspective.

On the downside, solid chart support for July soybeans is located at $11.75 and then at this week’s low of $11.51 a bushel. Multiple closes back below major psychological support at $11.00 a bushel would dent bullish enthusiasm and begin to suggest a major market top is in place.

Source: CME News for Tomorrow

The Debts of the World: How To Solve China's Dollar Trap

This is my proposal:

China needs to do exchange swaps w/Argentina, Brazil, and other Latin American nations (predominantly S. American). Dollar debt (treasuries) can be swapped in exchange for stuff that China needs - physical commodities such as iron, copper, lumber, beef, pork, wheat, soybeans, etc.

It's a deal of harmonious proportions as the Chinese like to say. Beijing gets to divest itself of unwanted dollars while S. America gets to prop its politically fragile states w/dollars. If done in large enough amounts, states such as Argentina will even be able to re-boot their dollar pegs.

Of course, this deal cuts out the traditional middleman - the IMF and World Bank. So an official deal is unlikely to happen soon. However, low level, BILATERAL accords have been going on for some time between individual ministers of respective nations (This information can be found in trade reports coming out of Argentina and Brazil for example. Most of this information is NOT in English so it helps to have a healthy command of Spanish or Portuguese. The Chinese for their part are very adept at hiding information through their official media channels). Make no mistake - Chinese commissars are not stupid. They simply wish to avoid antagonizing the US eagle at a time when their own internal development is fragile.

The Debts of the Spenders: A Closer Look at the Fed's Bond Purchases

Old news for some. Recent news for others.

For all its shortcomings, the NY Fed is remarkably transparent about its bond purchases (quantitative easing). You can find a history of their purchases here:

The Debts of the Lenders: Eurodollar Clarification

I received some private messages regarding the Eurodollar chart asking me to clarify.

Here is what it means:

We are in a correction and consolidation period where traders (most likely big desks) are trying to re-assess the spreads over official interest rates - the premium different banks must pay (e.g. 3 month Libor), and the steepness of the yield curve in Treasuries (remember the TED spread explanation I gave?).

Based upon the pattern of the Fed, BOJ, BOE, and even the ECB throwing money at the problem (through quantitative easing bond buybacks, ABS spread price fixing, free money to banks, etc.)
the contract looks like it has a bullish bias.

Another way of looking at it is to say that the banks need to hedge against all the high beta junk they've been acquiring - casinos, luxury real estate, Mexican pig flu tainted resorts, etc.

The caveat of course is that a shoe could drop. Er.. like a potential bond mkt implosion.

The Debts of the Spenders: Bond Vigilantes Migrate To Russia

Skepticism among the BRIC (Brazil, Russia, India, China) countries that form the core emerging bloc is running at all time highs. Not surprisingly, most of the ministerial ire is focused on the drunken spending binge of the US govt. Well, actions have consequences.

The Russian Finance ministry has apparently been talking to the Chinese about the SDR (special drawing rights) currency raised by a visiting functionary, who in an apoplectic nervous breakdown, publicly derided the dollar as a junk currency in mid-February (see my older February posts).

DJ UPDATE: Russia Willing To Invest $10 Bln In IMF Bonds


MOSCOW (Dow Jones)--Russia is willing to invest up to $10 billion in bonds that could be issued by the International Monetary Fund, Finance Minister Alexei Kudrin said Wednesday.
"We are currently discussing in the government the possibility of making a decision in the near future about investing up to $10 billion in IMF bonds," Kudrin told President Dmitry Medvedev in a televised meeting.

The IMF is preparing its first bond offering, potentially tailored to the BRIC countries of Brazil, Russia, China and India.

Russia's offering would equal that of India and would be roughly about a quarter of the $40 billion China is expected to contribute to boost the IMF's resources.

At the Group of 20 leading industrial and developing nations summit in London last month, IMF Managing Director Dominique Strauss-Kahn said the fund has the authority to issue bonds, although few details have emerged since.

Russian officials said an IMF decision on the bonds could come in the autumn.
The bond would most likely be denominated in an IMF quasi-currency called special drawing rights, or SDRs, which the fund created in 1969 as a way of supporting its members. Russia and China would welcome SDR bonds, as both countries have been advocating that SDRs could ultimately replace the dollar as a global reserve currency.

At the IMF and World Bank spring meeting in Washington last month, Russian Finance Minister Alexei Kudrin said his government is interested in purchasing some of the securities, providing they are liquid enough, enabling quick withdrawal in case of need.

Russia's contribution would be to spend some of its massive gold and foreign exchange reserves, held at the central bank, on purchasing the IMF bonds.

Although Russia is mired in a deep recession - with the economy expected to contract by as much as 8% this year - the country is still in possession of the world's third-largest foreign exchange reserves, standing at $391.3 billion as of May 15.

Kudrin said earlier this week that Russia itself may have to borrow around $7 billion abroad next year to finance its budget deficit and $10 billion in the coming years. He added, however, that Russia won't turn to the IMF for a loan.

Wednesday, May 27, 2009

The Debts of the Lenders: BOJ Turns Temporarily Hawkish

So, it looks like the adventures in money printing are coming to a temporary stop. And here I thought the yen was determined to finish the race to the bottom against the dollar. Just remember it's a marathon and not a sprint.

DJ BOJ Minutes Hint At Turning Point In Monetary Policy -Nikkei

TOKYO (Nikkei)--The Bank of Japan's policy board last month addressed the issue of an exit strategy from special liquidity-supplying measures currently in place to alleviate the credit crunch, The Nikkei reports Thursday.

With central bank programs to buy corporate bonds and commercial paper set to expire at the end of September, the market's attention is turning to whether they will be continued.

According to the minutes from the April 30 meeting, released Wednesday, one member said "it might be necessary to examine how to terminate the temporary and exceptional measures that had been adopted."

The comment represents the first sign from within the BOJ of a possible turning point since steps were taken to ease monetary policy.

The Debts of the Lenders: Eurodollar Futures Hold Key to Equity Markets

Fate is not w/o a sense of irony. Events move in cyclical patterns.

The answer to this spring's equity rally lies in last fall's TED spread. Or rather, 1 specific part of it, the Eurodollar futures. While a high TED spread was indicative of panic among market participants, a lower TED spread is indicative of confidence among traders. Remember Eurodollars are the ED component of TED w/the first part taken up by T or Treasuries (both are 3 month contracts).

Of course there are slight differences as the most obvious change is in FRONT MONTH eurodollar futures rather than three months out. The shift to front month contracts is indicative of bullish momentum among the "specs" or speculators that have moved away from hedging towards gambling - even as volume has declined. Moreover, global governments worldwide have decided that nothing is too big to fail and have turned on the monetary spigots - a decided change from last fall when they were more focused on damage control and ushering out a lame duck US President.

As I said in an earlier article,

institutional fund flows INTO bullish Eurodollar futures contracts are indicative of more risk taking activity. And the way to gain a peek into the fund flows is through the Commitment of Traders report that is released every Friday afternoon by the CFTC. I have been slowly gathering data from the COTs and noticed an extreme imbalance among bullish positions. The way to read these imbalances is to create a spreadsheet and then note negative correlations as "debits" in the system that traders are taking out as being bullish while positive correlations are "credits" returning back to the system where traders are being bearish. It's an imperfect and rather simplistic analogy but a rather fit one when you consider the futures markets are a "0 sum" game between traders. All outcomes are binary here. And the COTs captures it well.

All this spring, I had been looking in the wrong direction - charting the Vix, charting the S+P, charting the DJIA, charting bonds, charting yen - parts of it made sense but was often conflicting w/other data pts. In retrospect, the answer was simple. These were all parts of the whole.
It took a glance at the COTs data while doing my commodity crunching analysis for soybeans that I noticed the extreme Eurodollar position.

But this time, I believe that the COT holds the key. Moreso than other financial assets, Eurodollar positions are indicative of a greater pattern. It is like distinguishing the forest from the trees.

Conclusion: Chart the Eurodollar futures to find out where the rest of the market is headed.

Tuesday, May 26, 2009

The Debts of the Lenders: Eurodollar Futures and COTs Data Narrate the Extent of the Equity Rally

Data from the latest Commitment of Traders report on May 22 shows an EXTREME imbalance in contracts purchased. That imbalance has grown since the last report a week earlier on May 15.

The frothiness is apparent in Eurodollar futures with front month contracts breaking outside of Fibonacci resistance levels. Eurodollars are mostly traded by institutions seeking to hedge spreads over government interest rates (e.g. the contracts measure the premium banks must pay per 3 month LIBOR and the yield curve's steepness).

But what this activity reveals is a lot more than just trading in one asset class - it represents the cost of credit itself to big players and encourages excessive risk taking. As a result, 2 asset classes have benefited the most from the rally - a) commodities, which are traditionally associated as an inverse inflation hedge; and b) high beta plays, such as commercial real estate, casinos, luxury retailers, and other poor fundamental stocks.

Further examination of the daily chart reveals additional insight. Volume has DRAMATICALLY declined since early May. And the RSI is coming down from an overbought peak.

For more information:

The Debts of the Spenders: Technicians call for Gold To Hit $1250/Ounce

I am not exactly a fan of gold. In my opinion, there are better stores of value such as agricultural products or even energy feedstocks. However, the dramatic bond selloff in US treasuries in recent days has attracted not only the attention of the bond vigilantes but also the goldbugs (again).

Technical analysts are calling for $1250 ounce as an important pivot point. (While T/A is inherently biased on the individual practitioner, I've decided to include mention of this piece from Bloomberg b/c of the media attention such targets will call). If enough people start to call a particular target, it becomes a self fulfilling prophecy of sorts:

May 26 (Bloomberg) -- Gold may target a record $1,250 an ounce as a continuation head-and-shoulders pattern may be forming within a longer-term trend, Standard Bank Group Ltd. said, citing trading patterns.

A break and close above $1,050.40 “provides warning that an important breakout” has occurred, Darran Grabham, the bank’s technical analyst, wrote in a note yesterday. A head-and- shoulders pattern is formed when a commodity makes three consecutive peaks, with the middle being the highest. It forms during a series of increases over time.

The Debts of the Spenders: SEC Promotes Regulatory Arbitrage W/Proposed Money Market Changes

When will they learn. After breaking the buck ( a reference to the Reserve Primary Fund which sank below its $1 NAV, net asset value, after exposure to Lehman Brothers paper. The $1 rule is a threshold of regulatory capital and applies to US money market funds ) last fall, money market funds fell into a deep slide and led to the formation of an unprecedented dollar rally. The result was an environment of forced liquidation where funds were forced to sell anything and everything to raise cash on a short term basis to meet redemption demands.

However, the SEC is now proposing that the $1 NAV Rule, or more formally known as Rule 2A-7 of the Investment Company Act of 1940 (I hate talking in legalese but have to revert to form occasionally), is nothing more than a symbolic formality, a relic of older times. You know, like Glass Steagall.

The removal of Rule 2A-7 can lead to potentially . . . dramatic changes as it seems like a blatant endorsement of more "financial innovation"; e.g. risk taking. If approved, expect a resurgence into inflationary bubble building assets like commercial real estate, hotels, and other high beta assets.

In June, the SEC will consider radical changes to Rule 2a-7, including the elimination of the stable $1 NAV, limiting a fund's size relative to its respective market, requiring minimum cash reserves such as 10% of the fund's total assets, and requiring money funds to have insurance guarantees similar to the Federal Deposit Insurance Corporation's bank guarantee.

But without a $1 NAV, industry leaders fear that trillions of dollars of assets could leave the mutual fund industry for other sectors that are perhaps less suited to handle such traffic.

The Debts of the Spenders: FDIC Asset Levy To Be Increased (Again)


Survivor banks get to continue subsidizing loser banks.

The Debts of the Spenders: ICE Enables TAS Trading for USDX Futures

Since so much attention has been focused on the dollar, I believe it's time to throw a spotlight on some new trading changes.

Starting Monday, June 22, 2009, the ICE Exchange will support Trade At Settlement (TAS) trading for their US Dollar Index futures contract on the ICE electronic trading platform.

TAS capability allows a trader to enter an order to buy or sell the futures contract during the course of the day at a price equal to the settlement price or at a price that is up to two minimum price fluctuations above or below the settlement price (in the case of USDX futures, the minimum price fluctuation is .005 index points, or $5).

If you're confused, just remember that TAS trading has traditionally been associated w/the softs - sugar #11, coffee, cocao, and of course, frozen orange juice.*

*In the movie, Trading Places, the Duke brothers lost their family fortune in frozen OJ spread trading to the wily Eddie Murphy and Dan Akyroyd. A modern revision of the film would have dollar contracts replacing Tropicana.

For more information:

The Debts of the Lenders: Dubai Leads Global Housing Slump

May 26 (Bloomberg) -- Dubai, home to the man-made Palm Jumeirah and World island developments, suffered the biggest reversal among global housing markets following the collapse of an investment bubble, Knight Frank LLP said.

House prices in Dubai, the second-largest of the seven sheikhdoms that make up the United Arab Emirates, fell 32 percent in the 12 months ended March 31, according to a report by the London-based property broker published today. A year earlier, homes appreciated at an annual rate of 48 percent.

Dubai “is in a mess,” said Nick Barnes, head of international residential research at Knight Frank. “A lot will depend on developers and how long they can hold on before getting into fire-sale territory.”

Monday, May 25, 2009

The Debts of the Spenders: Coming Soon - CDS Case Law Coverage

After perusing the blogosphere, I am shocked that there is a real dearth of information about legal developments in the case law of CDS trading. Many legal practitioners are not even aware of how rapidly securitization is being remade in the courts. What information is available is scant and remains locked w/in the byzantine archives of Westlaw and Lexisnexis (the main legal search engines that are the equivalent of Bloomberg terminals).

W/that in mind, I am going to fire up the legal search engines and embark on a project to start cateloguing relevant cases in securitization. Cases will be displayed in good, old fashioned IRAC format (Issue, Rule, Analysis, Conclusion). Contrary to popular opinion, legal writing is supposed to be concise and relevant. IRAC is a tool taught to 1L's (first year law students) to prepare them for eventual practice. Now, I do not claim to be the world's best legal writer - in fact my writing standards have taken a decidely casual tone - but will endeavor to give a good, old college try.

*This project is meant to be a casual review and is NOT intended to provide legal advice.

The Debts of the Lenders: China Stuck in Dollar Trap

Despite recent protestations from the fx market, the dollar remains the world's reserve currency b/c of purchasing decisions made in Beijing. Indeed, Chinese officials have PUBLICLY acknowledged that they are stuck in a "dollar trap" where they are forced to continue buying more just to keep up the value of their older purchases.

But instead of just looking at the dollar, consider what China's SAFE (State Administration of Foreign Exchange) outlook for other currencies are for the foreseeable future: bullish Aussie, VERY bearish gilts, and neutral Euro. It's no surprise that these 3 major currencies are occupying the Politburo's attention - Australia is a key provider of industrial metals like copper and iron ore, the Eurozone is fast growing into a secondary export market after the US, while the UK retains some prominence in the financial markets b/c of London's legacy pull.

China’s official foreign exchange manager is still buying record amounts of US government bonds, in spite of Beijing’s increasingly vocal fear of a dollar collapse, according to officials and analysts.

Senior Chinese officials, including Wen Jiabao, the premier, have repeatedly signalled concern that US policies could lead to a collapse in the dollar and global inflation.

But Chinese and western officials in Beijing said China was caught in a “dollar trap” and has little choice but to keep pouring the bulk of its growing reserves into the US Treasury, which remains the only market big enough and liquid enough to support its huge purchases.

Friday, May 22, 2009

The Debts of the Spenders: The New Dollar Basket

The equity rally has been going on for nearly 3 months straight. It took a while longer
but corp and emerging market bond spreads have also improved. Obama has done a lot to goose the market w/the approval of mythical accounting standards and "get out of jail free" cards even as the FDIC Friday bank failures contiue.

However, the greater macro-economic and fiscal health of the US government have also detiorated by an inversely proportional amount. Every tick upwards in the market indices was accompanied by a further slide in the dollar's purchasing power. Moreover, the worrying state of local finances has also grown considerably. While a lot of attention has been focused on rising Treasury bond yields, another sector to consider is muni bonds.

Why own munis? B/c of the tax free benefit? Perhaps that attitude made sense when state governments had some modicum of fiscal restraint.

But now?

State revenue is falling rapidly as property and sales and income tax receipts continue to decline.

Funds CAN and WILL be downgraded or unable to roll over their commercial paper thus forcing yields to rise. And while Treasuries have SOME modicum of safety due to their deep capital market access, it can essentially be summarized as a giant pyramid scheme of suckering emerging market lenders like China and Brazil to continue speculating in future American tax receipts.

While I am very bearish over all as to America's future there DOES remain a shining light. The US has unrivaleled comparative advantages in its agriculture sector - vast fields of golden wheat, oats, corn stalks, rice fields, and herds of cattle, pigs, and other farm animals.

So, here is my proposal.

Instead of basing the dollar on an implicit backing of government stability, replace it w/an explicit basket of hard assets. Assets that foreign investors can rely on to continue retaining their value. Remember, most of America's foreign trade partners can care less about such abstract principles as democracy, free markets, and other fancy rhetoric. Recent events have shown that policy makers have about as much respect for these things as banking capital adequacy ratios.

Replace "In Debt We Trust" w/"In Grains We Trust." The dollar's new value will be based against the market price of a basket of hard assets such as agricultural grains. Investors have always trusted physical assets - tangible items of value that can be touched and stored.
The Federal Reserve will be abolished and its functions replaced by the Dept of Agriculture whose forecasts, weather predictions, and pest analyses will take on the same importance as Monetary policy meetings.

The Debts of the Lenders: Qatari Sovereign Wealth Fund Aims to Invest in UK Commercial Real Estate

Qatar fund eyes global property expansion

By Daniel Thomas in London

Published: May 21 2009 23:38 | Last updated: May 21 2009 23:38

Qatari Diar, the sovereign wealth-backed property company, could as much as double its £3bn ($4.7bn) UK property portfolio – which includes part of the consortium that owns the “Shard” skyscraper development in London – as part of a wider global expansion.

In his first UK interview, Ghanim bin Saad al Saad, the chief executive of Qatari Diar, told the Financial Times: “Our investment in the UK is £3bn and we are willing to increase to £5bn or more.


The Debts of the Spenders: Banks Not Repaying TARP

Is anyone surprised?

The Debts of the Spenders: Western Corn Belt Gets Planting Done

Be ready for a pullback in corn prices. Some arb traders are running bull spreads on soy while also shorting corn.

Western Corn Belt Quietly Gets Its Planting Done

Producers in the western corn belt are spending the spring exactly where they most want to be - in the fields and out of the news. While Illinois and Indiana remain under the microscope due to soggy weather that has pushed planting well behind, agronomists further west say that
planting is all but done and the outlook is good.

“I would say we look very good as a whole. It looks like we’ve got pretty good stands everywhere,” said Mark Wooldrick, with E-Valley Agronomics, in West Point, Neb. “If you’re looking for gloom and doom, you’re not going to find it around here.”

The state had planted 93% of the crop as of Sunday, up from 79% last year. Iowa and Minnesota are similarly in good shape, with 90% planted in Iowa, compared to 73% last year, and 90% in Minnesota, up from 62% in 2008. Those numbers should be close to 100% when the U.S. Department of Agriculture releases its crop progress report Tuesday, agronomists said.

Emergence in all three states was also at or above the five-year average. Illinois, by contrast, was only 20% planted as of Sunday, and Indiana was 24% planted.

The strong progress in the western corn belt has helped cap upside movement in the corn market, analysts said. “We’ve got five major corn producing states, and we’ve got 60% that are off to probably some of their better starts than they’ve seen in a number of years,” said Chad Henderson, analyst for Prime Ag Consultants.

He added that the western progress sometimes gets forgotten because “no one wants to hear about the crop that looks good.”

Source: CME News for Tomorrow

Thursday, May 21, 2009

The Debts of the Lenders: Japanese Return to the Farms

Agriculture bull Jim Rogers has been suggesting for quite a while now that people in the 1st world will have to go back to the farms b/c of a generational crunch in the sector. Apparently the Japanese govt has similar thoughts and is encouraging unemployed workers to migrate to the country for some good old fashioned manual labor.
(This is an older story from last month that I just discovered)

There was also an article in the Financial Times providing an update today. I am trying to find it and will post the link when I do.

The Debts of the Spenders: Soybeans Bullish for Summer 2009

While soybeans stocks remain fungible, the supply story is not looking good and is thus driving up prices.

*Oh yea, the weaker dollar has something to do w/it.*

Tight Old-Crop Soy Stocks To Keep Bullish Trend Flowing

Soybean futures prices are likely to remain on a bullish trend this summer because of market ideas that old-crop inventories will tighten below current government estimates.

Bullish sentiment is the driving force behind Chicago Board of Trade soybeans’ two-month rally, and with strong underlying demand, fears are mounting that oldcrop supplies could run short by the end of the 2008-09 marketing year.

Private analysts are lowering their forecasts for old-crop ending stocks, with some calling for ending stocks below 100 million bushels. U.S. Department of Agriculture estimated 2008-09 U.S. soybean inventories at 130 million bushels May 12.

“One hundred million bushels is only a matter of 10 days of usage, and that places increased pressure on end users to secure supplies with only a small cushion of inventories available,” said Gavin Maguire, research director at e-Hedger in Chicago.

Prices have rallied in an attempt to ration demand, as strong export interest from China continues to dwindle down old crop inventories. Shrinking production prospects for Argentina has shifted demand to U.S. shores as well.

Meanwhile, stronger soymeal export demand has spawned another bullish argument for the soybean market as the boost in crushing activity puts an additional strain on tight old-crop soybean inventories.

The bullish theme is expected to carry into the fall harvest, with traders and end users concerned about soy product availability, said Dan Basse, president of AgResource Company in Chicago.

Bull spreads have served as bullish signals for the market place, illustrating the concern participants are placing on tight old-crop stocks. The July/November CBOT soybean spread since April 28 has rallied from 83 cents to $1.50.

The July-November spread is a bull spread, and refers to being long a nearby contract and short a deferred contract. It is called a bull spread because these spreads most often perform best in bullish, demand driven markets. When a commodity is in short supply, nearby contracts can go to significant premiums over the deferred and outer contracts may lag as they expect deliveries
from future production. The spread has peaked at $1.66, but gave ground on profit-taking Wednesday, raising concerns that upward movement was exhausting, with the trade figuring the
market’s bullish attributes were already factored in.

AgResource Company in a market note Thursday said they doubt that the bullish run is over, but amid a lack of fresh demand news, some consolidation of gains is anticipated. New investment funds are expected to push into the grains and all commodities on any modest correction, AgResource added in the market note.

Not-so-firm cash basis at the gulf, rumors of China canceling prior purchases and end users having second thoughts about buying beans at $11.50 a bushel are factors, however, that could limit nearterm gains, Maguire said.

Nevertheless, inventories are tight enough to warrant the current run up in prices. But pushing prices above $12.00 a bushel is questionable unless China’s appetite for U.S. soybeans remains stout and domestic crusher continue to bid up prices in an effort to secure supplies late in
the marketing year, Maguire said.

Planting delays for U.S. soybeans is another factor that will keep risk premium in the market. The potential for the late arrival of new crop soybeans from the southern Midwest and Delta raises additional concerns for end users looking for supplies in the fall.

“Normally early harvested soybeans from the Delta in late August and early September can take away some of the strains on tight old crop inventories,” said Maguire. “But given the planting delays this year, they might not arrive in time if demand keeps up,” Maguire added.

The market is poised to continue on a volatile, bullish course, with downside potential limited as buyers swoop in to buy profit taking price breaks. Despite the strong upward push in prices,
export demand has not wavered. The USDA announced Thursday sales of U.S. soybeans
for export in the 2008-09 marketing year during May 7-May 14 totaled 700,600 metric tons, 74% above the previous week. With 15 weeks remaining in the 2008-09 marketing year export commitments of 1.233 billion bushels are 99% of the USDA’s export projection for the year.

Source: CME News for Tomorrow

Wednesday, May 20, 2009

The Debts of the Spenders: CBOT Rice Futures Disappoint In Face of Larger Grains Rally

I received a private email from a reader who asked why I did not cover rice but seemed intent on writing about only soybeans, corn, and wheat. Ok. I will be honest. The rice action has been uninteresting from a volume and trading perspective. The rice environment has been bearish all spring on the backs of a last year's commodity slide.

Unlike corn or wheat, rice has yet to recover. And there is no alternate corn-soybeans planting dynamic. In fact, rice has several planting cycles - as many as 3 or 4 harvests a year in fact (depending on the strain).

Another factor is rice's enormous political weight among the emerging markets or as I call them here, the Debts of the Lenders (particularly the socio-economic weight given in Asia to this staple crop). Price controls, import restrictions, and other political gimmicks were hastily enacted last summer on the backs of rhetoric about hyper-inflation. Farmers reacted predictably and planted a lot. Moreover, several Asian nations decided they didn't face such severe shortages and started to sell their hoards on the market to raise money in last fall's deflationary spiral. Well, you can guess what happens when several big players decide to sell at the same time.

But at least one analyst is taking a contrarian perspective.

CBOT Rice Stumbles In Presence Of Large World Supplies

A year after prices soared to unheard of levels amid panic over supply shortages, rice appears to be plentiful and the market is in the midst of a prolonged slump.

The stalled global economy, large Asian crops and governments’ loosening their grip on their stocks have all conspired to keep prices under pressure for months, analysts said.

Chicago Board of Trade futures closed at $11.94 per hundredweight in the nearby July contract Tuesday, down from $15.63 on the first trading day of the 2009 and down from an intraday high of $13.57 on April 13. On April 24, 2008, the nearby contract hit an all-time high of $24.85.

Although the market has had brief rallies and remained range-bound at times, the trend has been lower since the start of the year. “The markets can collapse, they can rise, but they can also just sort of grind down,” said Milo Hamilton, co-founder of “And that’s what we’ve been seeing.”

Rice’s performance is in stark contrast to other grains markets. It’s also a drastic departure from last year when fears of shortage sparked food riots internationally and purchase limits for a couple of U.S. retailers.

Looming over the market are large supplies in some Asian countries that, unlike last year, are willing to part with some of it. Thailand is expected to unload some of its government intervention stocks into the market, with the USDA projecting 2009-10 exports of 8.5 million
metric tons after the country was a net importer in 2008-09. India is expected to end its export ban (as well as its ban on rice futures trading). Smaller countries such as Indonesia and Bangladesh are expected to curb imports.

The U.S. Department of Agriculture projected world rice production for 2009-10 at a record 448.1 million tons, up 4.5 million from the current year.

“Large crops are projected for most of Asia, including record crops in Bangladesh, Cambodia, India, Indonesia, the Philippines, and Thailand; and a near record in Burma and Vietnam,” the report stated.

The seeds for the current bear market were sown during last year’s historic bull market, some analysts said.

Mark Creed, president and CEO of Creed Rice Company, said that growers “undoubtedly responded to high prices” and planted more rice. Governments also intervened to encourage growers to plant more rice and pursue higher yields, he said.

He added that would-be buyers have been “constipated” with high-priced stocks purchased last year.

“There’s no question that what happened last year was extremely detrimental to the overall process of the market,” Creed said.

Analysts mostly agree that there was no shortage of rice last year; the problem was that some countries decided to ban exports. Now, Thailand and India are expected to slowly release supplies.

“They’re sitting on it, they’re still not selling it much yet, but eventually they’re going to have to,” said Jack Scoville, vice president of Price Futures Group.

In the face of the large supplies and a market that shows no signs of returning to last year’s highs, buyers have largely retreated to the sidelines, analysts said. “Basically, people are buying hand to mouth,” Hamilton said. “When you have those large supplies in countries, there’s
always an opportunity for the buyer to think he can get a better price some time.”

Analysts disagree as to how bearish current market is, and how long prices will continue to drag. Some say the market needs a surprise buyer, which they add seems unlikely.

Creed said the most obvious way the market could get a jolt is from a natural disaster. He thinks the large supplies could loom over the market through the first half of 2010, although he notes that others don’t think prices will suffer for that long.

The market’s swoon has been supply driven, he said, and a disruption of supply is how it could rebound. He said that as an example, a reduction in the Indian crop from 100 million tons to 80 million tons, perhaps because of an unusual monsoon season, which could change the market’s
outlook in short order.

Jeremy Zwinger, President and CEO of the Rice Trader, said the long-term supply situation is not as bearish as it seems to some right now. Stocks-to-use ratios are still low, he said, and the seemingly ample supplies are a product of very strong crops.

“You don’t have record world crops every year forever,” Zwinger said. “You need to have a record crop every year to be able to keep up with the population increase. If you dropped down to the (production) level of five years ago today, you’d have massive issues.”

He added that the biggest factor in the market’s climb last year and its plunge this year has not been supply and demand, but the dollar. It was weaker last year and has rebounded, but Zwinger and others expect it to plunge again. That will make prices higher, he said.

A wild card for the CBOT market is the U.S. supply situation. Traders and analysts say the only supportive element in the market at the moment is crop concerns in Arkansas, the nation’s top riceproducer, due to heavy May rains and flooding. Analysts say that the industry mostly
believes that the USDA’s estimates for the crop and ending stocks have been overly optimistic.

Source: CME News for Tomorrow

Tuesday, May 19, 2009

The Debts of the Spenders: CBOT Expands Trading For Grains, Soy

Now traders can buy LEAPs further out.

CBOT To Allow Traders To Trade Farther Out In Grains, Soy

Starting next month, traders will be able to take positions farther out in Chicago
Board of Trade grain and oilseed futures than previously allowed, the exchange said

The CME Group Inc. (CME), which owns the CBOT, said it planned to expand
its wheat, corn, soybean, soyoil and soymeal futures cycle guides, which determine
when contract expirations are authorized for trading. The expanded cycles take
effect June 8.

The exchange said it will update its grain and oilseed cycle guides by “filling in
gaps in the cycle.” It will add one additional new crop expiration and its preceding
July expiration for corn and soybeans and its preceding October and July expirations
for soyoil and soymeal. In CBOT corn, for example, traders will be able to trade out
as far as December 2012, as opposed to the current limit of December 2011.

The cycle guides have not been expanded since January 2003, according to the
CME. The expansions are warranted because trading volume and open interest have
grown “significantly” since then, the exchange said.

“Larger overall markets and higher volatility are causing demand for additional
futures expirations not covered in the existing cycle guides,” the exchange said in a
notice distributed on the CBOT trading floor.

Source: CME News for Tomorrow

Monday, May 18, 2009

The Debts of the Spenders: Wheat Fungus Watch

SRW Wheat Producers Watch For Fungal Diseases After Rains

Persistent rains in the eastern U.S. Midwest and Delta are raising concerns about the threat of fungal diseases to the type of wheat used in pastries and snack foods.

The biggest worry for growers of soft red winter wheat so far is Fusarium head blight, a disease that can reduce grain yield and quality, crop specialists said.

The disease, also known as head scab, infects plants when weather is wet during the flowering stage of development. Illinois, Missouri and Arkansas are expected to have trouble with head scab, although it’s too early to identify infections in some areas, specialists said.

However, the crop in Ohio, the top SRW wheat-growing state, has not started flowering yet and isn’t facing any serious disease threats, said Pierce Paul, an Ohio State University plant pathologist.

“In general, the wheat looks great in Ohio,” he said.

Total soft red winter wheat production is projected at 422 million bushels this year, down from 614 million last year, according to the U.S. Department of Agriculture. Producers reduced plantings to about 8.4 million acres from 11.2 million last year following a sharp drop in prices.
In Ohio, producers seeded 1 million acres for the 2009 crop, down from 1.1 million last year, according to the USDA.

Production is seen at 65.3 million bushels, with an average yield of 66 bushels per acre, down from 74.1 million last year, when the average yield was 68 bushels.

“The risk of head scab generally increases if frequent rain occurs at the time the crop is flowering,” Paul said.

“We’re going to have to keep our eyes out. As of today, the risk is pretty low.”

In Illinois, by contrast, the risk for scab was “pretty high” in far southern areas due to heavy rains about two weeks ago, said Carl Bradley, extension plant pathologist for the University of Illinois at Urbana-Champaign. Plants that flowered later are probably facing less of a risk as
conditions dried up last week, he said.

It’s a little too early to see the development of symptoms of head scab, including bleached heads, in Illinois, Bradley said. There were some producers who sprayed fungicides to help suppress
the disease, he said.

Illinois is expected to produce 50.4 million bushels of wheat in 2009, with an average yield of 63 bushels, down from 73.6 million last year, when the average yield was 64 bushels, according to the USDA. Growers planted 850,000 acres, down from 1.2 million last year.

In Missouri, producers are watching for head scab because most areas, particularly in the south, were soggy during flowering, said Laura Sweets, a University of Missouri extension plant
pathologist. Wheat in central Missouri was flowering at the end of last week.

Missouri planted 600,000 acres of wheat for 2009, down from 730,000 acres last year, according to the USDA. Production is estimated at 38.3 million bushels, with a yield of 51 bushels, compared to 55.7 million last year, when the average yield was 48 bushels.

Source: CME News For Tomorrow

The Debts of the Spenders: Former CFTC Regulator Warns of Banking Lobbyists

May 18 (Bloomberg) -- Brooksley Born, the former U.S. commodities regulator who lost the fight to police over-the- counter derivatives a decade ago, said the banks that caused the financial crisis are trying to stop the overhaul of the market.

“Special interests in the financial-services industry are beginning to advocate a return to business as usual and to argue against any need for serious reform,” Born said today as she accepted a Profile in Courage award from the John F. Kennedy Library. If changes aren’t made “we will be haunted by our failure for years to come,” she said.

As the chairwoman of the Commodity Futures Trading Commission in 1998, Born warned that the unregulated contracts posed a serious danger to the global financial system and moved to address changes in how swaps based on interest rates, commodities or currencies were traded. She was stopped by Alan Greenspan, Arthur Levitt and Robert Rubin, who all argued the market could regulate itself.


The Debts of the Spenders: Muni Bond Funds See High Inflows

A lot of it has to do w/continued ZIRP (long term bear market in treasuries) as well as proposed higher tax rates by President Obama.


The Debts of the Spenders: EU Grants Approval for Germany to Nationalize Hypo Bank

Hypo Bank was the sordid case connected to Icelandic banking defaults last year. They also possess considerable real estate liabil- er... I mean investments in New York City. If you walk around parts of Manhattan, the Hypo logo can be seen affixed to the vacant storefront window panings of ground level commercial real estate.

The EU Commission said the move does not raise any competition concerns allowing it to unconditionally approve the takeover.

The German government recently said it held more than 47 per cent of Hypo Real Estate shares.

Hypo Real Estate is the most prominent German victim of the financial crisis. It ran into trouble in September after its Dublin, Ireland-based unit Depfa Bank failed to find short-term funding amid the widening credit crunch.

Sunday, May 17, 2009

The Debts of the World: JB, IG, and EM Spreads

Emerging mkt, junk bonds, investment grade. The pictures are labeled for easy interpretation.

Summary: After a broad rally in April and early May(declining spreads indicate greater optimism), bond traders became skeptical of macro-economic conditions sometime last week. The greatest skepticism was found in junk bonds (referred to as high yield in the industry). I'm not an OTC bond trader and spend most of my time in equities, commodities, or treasuries - things that are exchange driven. So any additional insight from the fixed income sector is appreciated.

Source: Markit's CDX Indices

Friday, May 15, 2009

The Debts of the Spenders; Grain Bulls Consolidate Profits Amid Technical Selling

I find it ironic that by the time the mainstream media gets word of the ag pits, traders have already seized the chance to lock in profits or more likely use the sudden attention to trigger their sell stops. It seemed as soon as the Wall Street Journal and Financial Times chose to publish stories about "soybeans on fire" and "7 and a half month highs" that traders took the cue to sell.

(I already took profits at the end of last week and so left some green shoots on the table).

Nothing fundamental changed - the N. American weather reports remain poor, the Chinese are still buying, and S. America remains a political mess. However, the nominally stronger dollar and weakness over in the larger oil markets (energy trading eclipses grains) weighed on prices today. Key technical levels in corn and soy were tested and failed.

In other news, it appears that the US government has confirmed what commodities advocate Jim Rogers has been pounding the table for so long: that US farmers are facing a credit crunch.

Plains Farmland Value Stabilizes, Credit Tightens In 1Q -Fed

Farmland values appeared to stabilize during the first quarter of 2009, but farm income declined and credit for farmers tightened, the Federal Reserve Bank of Kansas City said.

The report, based on a survey of 255 banks in the Tenth Federal Reserve District, showed that non-irrigated farmland values climbed 1.4% during the first quarter, while irrigated acreage held steady and ranchland values declined by 0.9%.

Farmland values were up 2.9% for non-irrigated land and 3.8% for irrigated land versus a year ago. The district includes Kansas, Nebraska, Oklahoma, Colorado, Wyoming and the western third of Missouri.

“District contacts reported demand for good quality farmland was still strong, but the market for marginal farmland has slowed dramatically,” the report states. Weaker crop and livestock prices
caused farm income to dip in the first quarter from record highs in 2008, with the weakest performance in Oklahoma and Kansas, which faced dry weather that hurt the wheat crop.

The lower income curbed capital spending, as “survey respondents noted that new equipment sales slowed dramatically as agricultural producers postponed purchases or bought used equipment instead.”

The report also noted tighter credit standards. The percentage of lenders raising collateral requirements reached a record high, and the rate of loan repayment fell for the second straight quarter.

Interest rates edged lower, the report said, averaging 6.6% for real estate loans and 6.9% for operating loans. Stress on the wheat crop due to drought caused an increase in the number of loan referrals to non-bank credit agencies, particularly in Oklahoma, the report said.

Source: CME Commodity News For Tomorrow

The Debts of the Lenders: Chinese Graduates Become Enamored w/Civil Service Careers

The US and China are similar in more ways than one. Like the upward parallel trend towards a pursuit of civil service jobs instead of private sector work.

This article is encouraging as it marks the recent graduate market - a news segment that has traditionally been overlooked in favor of covering the woes of aging boomers. (While not all recent graduates are young there is a demographic bias towards those under the age of 25). Perhaps US media outlets will deign to cover the next bomb to unravel - the May/June graduation wave of those unable to find employment.

Students are under great stress to succeed, said Li of the human resources ministry. China has a one-child policy. Parents in eight of the biggest cities -- including Beijing, Shanghai and Guangzhou -- spend about a third of their incomes on education, according to the Beijing-based Horizon Research Consultancy Group.

“Every student carries the hope of the entire family, so there would be great social impact if they can’t find jobs,” Li said. “The government is under pressure.”

Civil service is nicknamed the “gold rice bowl” because of its stability, annual pay raises and benefits packages, Wei said. Most of the more than 10 million civil servants work in government and law enforcement, and in related agencies.

The Debts of the Spenders: Allegations of SEC Insider Trading Surface

Do as I say. Not do as I do. Hey, if Henry Paulson and other esteemed leaders can do it then why not lower ranked functionaries?


Two attorneys for the Securities and Exchange Commission are under criminal investigation by the Federal Bureau of Investigation for allegedly trading stocks on insider information, CBS News reported Thursday on its Web site, citing an SEC inspector general report. The attorneys were not identified by name, but one, a man, was described as working in the agency's chief counsel office. The second, a woman, works in the enforcement division.

Both, according to CBS, traded stock in a large financial services company despite being told by another SEC employee of investigations into the company. The attorneys have denied any wrongdoing. The SEC, in a statement, said the its inspector general's report does not accuse any SEC employee of insider trading or conclude that any such activity took place, but that the agency has been taking steps to protect against improper conduct.

The Debts of the Spenders: US TIC Data Comfortably in Line W/Forecasts

Bond vigilantes and policy pundits (myself included) are in for some disappointment this month on the TIC data. TIC data measures the net inflow of foreign money into subsidizing Uncle Sam's voracious crack habit of spending future generations' money today.

The results measure March - a time when equities were just beginning to "recover." (Govt paper has an inverse relationship to equity). This indicates that institutions remained skeptical of the equity (err.....short squeeze) rally throughout the month and preferred to be ensconced w/in more secure assets. This means that April's data should be interesting. . .

Net foreign purchases of long-term securities were $55.8 billion.

  • Net foreign purchases of long-term U.S. securities were $56.4 billion. Of this, net purchases by private foreign investors were $30.0 billion, and net purchases by foreign official institutions were $26.4 billion.
  • U.S. residents purchased a net $0.6 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $36.9 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities increased $26.7 billion. Foreign holdings of Treasury bills increased $47.9 billion.


Thursday, May 14, 2009

The Debts of the Spenders: Midwest Corn Belt Under Flood Warning

Time is working against farmers who are trying to meet planting deadlines. Indiana and Illinois farmers have not even planted 10-12% of the crop this year b/c of wet conditions on the ground.

Traders got excited today b/c later planted crops run the risk of late harvests (aka frost season). If any readers remember, last year's crop was also planted late but overall good weather (warm summer sun) led to a bountiful harvest (and depressed prices).

See the weather report for yourself. Be sure to click on "Warnings and Forecasts" on the upper left panel. The green patches around the Mississipi as well as further west in the Dakotas indicate extensive flood watches.

The Debts of the Lenders: Chinese Cut Industrial Land Prices by 30%

The words "China" and "Environmentalist" are normally considered oxymorons. The two words are rarely seen in the same sentence. Two decades of intense industrialization has turned much of the country into a polluted wasteland w/acid rain, lower water tables, and disease outbreaks routine among both livestock and the populace.

However, a powerful Chinese ministry seems intent on removing these negative images and improving the economy at the same time. Can it be done?

Read the announcement for yourself. As for now, I remain skeptical. But a longer term investment down the road in the sectors mentioned below might be a wise choice.

BEIJING, May 14, 2009 (Xinhua via COMTEX) --

China's Ministry of Land and Resources has announced a 30-percent cut in the minimum purchase price of land for industrial use in order to boost investment.

However, the statement on the ministry website Wednesday failed to say when the cut would take effect. The move would "further implement the government's policy of boosting domestic demand and push forward steady and rapid economic development," said the statement.

The new rule will apply to investments that make intense use of land and those involving the processing of agricultural, forestry, animal husbandry and aquatic products.

The ministry set minimum prices for industrial land use in January 2007 to curb the selling of cheap land-use rights for industrial use to attract investment and seek a higher GDP growth.

The Debts of the Spenders: Penalty Fees for Secondary Bond Market To Keep Floor on Interest Rates

This should put a floor on interest rates from going too low. Failures to deliver were traditionally a big problem in the US govt bond markets. It got to ridiculous levels last December- early January when treasuries spiked and interest rates plunged. The timing was strange too: December - January is traditionally a period known as the "January Effect" when MM's take advantage of the light holiday volume to pump the market in their chosen sector. In other words, equities rallied but bonds rallied too. Normally, there is an inverse relationship between the two.

I am also assuming that these recent fees are part of the Fed's plan. Allowing SOME measure of inflationary creep is desirable to stimulate private lending again (b/c it makes commercial bonds more attractive on a yield basis) and drives the stock markets higher (b/c ultra-low rates begin to trigger penalties among fund managers who can't charge much for holding secure paper).

But not too much or key benchmark rates tied to mortgages, credit cards, and other aspects of business and consumer lending will overshoot. As always, Bernanke is playing a dangerous game here. The grain markets' surge are a shining example of predicting future stagflation.

NEW YORK (Dow Jones)--Introducing a penalty fee for failed transactions in the $5 trillion Treasury securities repurchase market has been a huge step toward improving repo trading and could serve as a template for future reforms.

Charging for failed transactions has significantly improved market liquidity and established a practical working model for future industry-based solutions, said Tom Wipf of Morgan Stanley, who chairs the Treasury Market Practices Group, an industry body sponsored by the Federal Reserve Bank of New York.

The penalty charges came into effect on May 1 and are levied on participants who fail to return borrowed Treasurys on time.

Since then, the number of fails in the Treasury repo market has fallen significantly, Wipf noted. That trend was already in place ahead of the May 1 launch date, according to data published by the New York Fed. Total repo fails stood at $79 billion as of April 29, from a peak of more than $2.7 trillion in October. That was when many repo market participants were unwilling or unable to return the securities borrowed amid the general market panic after the bankruptcy of Lehman Brothers.

The Debts of the Spenders: CDS and MBS Central Clearinghouses a Step in the Right Direction

Transparency is key.

But what the feds need to do is make something like the Commitment of Traders equivalent data available for all to see - free of charge. This would of course require granting the CFTC greater authority over the OTC markets. As of now, ICE is the only clearinghouse that has been approved by the govt to trade exchange driven CDS (and that is limited mostly to financials).

However, ICE was approved by only 1 regulatory arm - the SEC. The CFTC did not grant its consent as it was seen to be widely favoring ICE's rival, the CME Group (now the CME and CBOT after they merged). This is not surprising when you consider that a considerable number of regulators hands that pack the CFTC come from the Chicago crowd.

The CFTC's inclusion makes sense when you consider that securitization of derivatives is the central core of their mission statement.

I have included a link below to show what the ideal reporting version would look like for CDS and MBS trading positions:

The Debts of the Spenders: London Office Rents Return to 1991 Levels

If you build too much of it, they won't come. Supply > demand. Basic economics. Same story in NYC and other major metropolitan centers around the world - yes even in China.

The City already has enough empty offices to hold two- thirds of Canary Wharf, the docklands area developed 1 1/2-miles east in the 1980s to lure investment bankers. About 9 million square feet (855,000 square meters) are available in the City and that may climb to 12 million by the end of 2009, according to CB Richard Ellis Group Inc., the biggest commercial property broker. Almost 19 percent of all City offices may be vacant next year, analysts at CB Richard Ellis estimate.

“We’re in the eye of the storm,” said Bryan Higgins, chief investment officer of Irish homebuilder Menolly Group, which bought 107 Cheapside in the City three years ago for 150 million pounds ($227 million). The building has no tenants. “Supply way exceeds demand,” he said.

Rents will drop to 40 pounds per square foot by the end of this year, the same as 1991 when Canary Wharf got its first tenants, analysts at London-based King Sturge International LLP estimate. Prices declined to 46.50 pounds per square foot in the City during the first quarter from a high of 65 pounds in mid- 2007. Rents fell to as low as 30 pounds two years after Canary Wharf opened.

Square Mile

The City is reeling after the increase in building that followed the construction of more than 10 skyscrapers at the 97- acre Canary Wharf site along the Thames River.

Canary Wharf was perceived “as a complete threat,” said Colin Hargreaves, who leases offices in London for Jones Lang LaSalle Inc., the second-largest publicly traded commercial broker. The idea was to build “something really big, so we can fight Canary at their own game. You end up with the buildings you’ve got now,” he said.

Wednesday, May 13, 2009

The Debts of the Spenders: Argentine Soy Crop Worsens on Weather; Shorts Scramble to Cover

As always, weather continues to remain a critical factor in the grain pits. Soy broke multi-month highs today based on technicals as well as this type of news. Rumors that the Chinese were no longer sourcing Argentine supply as "too unreliable" did not help the bears either (funds had accumulated a substantial short position per the Commitment of Traders report) who were forced to short cover.

Argentina Soy Quantity, Quality Drops On Drought-Ag Secretariat

With the bulk of the 2007-08 soy harvest complete, the crop continues to show extensive drought damage that has hurt quality and quantity, the Agriculture Secretariat said Tuesday in its weekly crop report.

The soy “crop has suffered weather problems from planting to harvest. The persistent drought and high temperatures have affected yields, which are under historical levels. Samples from the harvested fields are showing a low weight and high amount of green seeds,” the Secretariat said.

In March, the Secretariat forecast soy production at 37 million to 39 million metric tons, but revoked that forecast immediately after releasing it due to what it called “errors.”

However, sources in Argentina’s Agriculture Secretariat expect the 2008-09 soy crop to total a dismal 33 million metric tons, according to a report in local daily Clarin last week. Both the Buenos Aires Cereal’s exchange and USDA forecast production of just 34 million tons, down sharply from the early expectations of about 50 million tons.

Despite a record area planted with soybeans this season, the forecast of 33 million tons marks a decrease of over 13% from last season. Early forecasts had pegged 2008-09 output at a record 50 million tons, which indicates that about a third of the crop was felled by drought.

As of May 7, 84% of the 2008-09 soy crop had been harvested, up five percentage points from the same date last year. As of May 7, 79% of the 2008-09 corn crop had been harvested, up 12 percentage points from this point last season.

The corn crop was seriously affected by drought this season. The Secretariat forecasts final production at 12.5 million to 13.8 million tons, the smallest crop in over five years.

Source: CME News for Tomorrow

The Debts of the Spenders: Vix ETNs and Leveraged Decay

I do not understand why any investors would ever get involved w/these things.

VXX and VXZ are 2 ETNs that are based on the VIX (the CBOE volatility index). Why buy the ETN when you can already trade options on the vix itself through the CBOE?

However, swing traders may love this vehicle. I have included charts that show Bollinger bands and ATR (Avg true range) to reflect just how dramatic the decay can be.

Just keep in mind 2 things:

1) It's a levered vehicle (itself a risky thing) built on modeling risk itself! That's 2x as risky. Both history and the math show that there are juicy opportunities to take advantage of the inherent decay.

2) It's an ETN. Which means filling out a K1 for tax purposes. Ugghhh. K1 compliance is enough to give me a blinding headache. Not even my accountant loves them. Which is strange when you consider how much extra he charged for my (brief) foray into trading other types of ETNs (I now trade ETNs through options which avoids most of that problem).

Of course there is no such problem if you are trading in some kind of tax shielded vehicle . . . like an IRA for ex (b/c there is no basis).

The Debts of the Spenders: The Wheat Weather Outlook

Watch the end of this month when the crop insurance deadline looms.

Time Runs Short For US Spring Wheat Planting After Delays

Time is running short for spring wheat producers who have spent weeks waiting for weather to clear up so they can plant their crop.

Many farmers in North Dakota, the country’s top spring wheat-growing state, will give up on planting wheat if they can’t get it done before the end of the month, crop specialists said. Yield potential has already started to wither because of the planting delays, caused by unseasonably
cool temperatures and excessive precipitation, they said.

Overall, 35% of U.S. spring wheat was planted as of Sunday, down from 77% last year and the average of 78%, according to the U.S. Department of Agriculture. Thirteen percent of the North
Dakota’s crop was seeded, down from 78% last year and the average of 74%. Farmers won’t be able to make much planting progress this week because of damp weather across the northern Plains, meteorologists said.

Rain fell Tuesday in North Dakota and was expected to continue Wednesday.

“Thirteen percent planted, that’s pretty discouraging,” said Joel Ransom, a North Dakota State University extension agronomist. “It’d be hard to catch up, that’s for sure, even if we have good
planting conditions. We don’t. We’re still getting lots of reports of puddles in fields, and now this new rainfall is going to set us back further.”

Along with being the tail-end of the planting period, May 31 also is the deadline for growers to apply for full crop insurance coverage, Ransom said. After that day, growers will receive less money if they file insurance claims because the weather prevented them from seeding a
crop, he said.

“If they have insurance and do a prevent plant, then maybe that’s what they’ll take,” he said. “I think most people want to plant a crop if they can get out there.”

The weather looks as though it may dry up next week, which could offer producers a window to advance planting, said Drew Lerner, president of World Weather Inc. Producers can plant a lot of wheat quickly if conditions turn warm enough and dry enough, agronomists said.

The northern Plains will see a “marked warm-up” for at least two days early next week, according to a forecast from T-Storm Weather. However, that should “set the stage for at least a few more” thunderstorms, the private weather firm said.

“It won’t be absolutely dry, but they should have a better environment next week,” Lerner said.
North Dakota produced 246.4 million bushels of spring wheat other than durum in 2008, with an average yield of 38.5 bushels per acre, according to the USDA. Total U.S. production of spring wheat other than durum was 546.7 million.

Source: CME Commodity News for Tomorrow

The Debts of the Spenders: The Soy and Corn Story

It may be time for the grain bulls to take some profit off the table. I already did myself. Despite its fundamental flaws, the dollar remains very oversold. Caveat - if the Feds increase bond purchases then the dollar could very well remain at subdued levels for a while longer.

The grains story continues to be dominated by the soybeans - corn relationship. Soybeans had remained in a somewhat bearish stance until a few years ago due to the glut of projected supply from S. America (mainly Brazil and Argentina) as well as the US. However, that story started changing about 2 years ago when farmers - possessed by tales of magical profits in the ethanol boom - (remember one year ago?) switched over to corn and sugar.

The resulting soy acreage was replaced by corn. Naturally, as THE hyped commodity, corn was the first to fall at the end of last summer. But all grains suffered. Now market prices are just beginning to recover.

Corn is traditionally considered a higher risk/higher reward crop b/c of fertilizer costs. It takes considerably more fertilizer to maximize corn yields than soy. So watch fertilizer prices - as well as oil which is an important feedstock in the production process. Considering the current economic environment, farmers are also less eager to move over to corn as they were last year - especially if you remember how dramatically the grains tanked last fall.

Along w/ENSO wet conditions and Chinese buying, soy looks to be the outperformer of the two (so far) this spring. But if enough farmers switch production to soybeans then there is a potential reversal of the trade.

I expect the corn market to contain a carryover of at least 1.5 billion bushels going into this fall's harvest. This is a comfortable amount. Remember, farmers and hedgers were burned last year and are loathe to resume the bidding frenzy that awoke the normally sleepy pits. One factor that might spark interest among corn bulls are the ethanol laws that mandate corn for ethanol use. Again, watch oil prices closely as higher prices for crude will make ethanol margins profitable again.


*PS I am going to do an article on wheat coming soon.

The Debts of the Spenders: Obama's Tax Hikes and Muni Financing Backdoor

Tax hikes. That is one way the feds could help troubled localities and states finance their funding obligations. Despite all the hullabaloo about the US loss of wealth, America continues to retain a disproportionately large share (compared to the rest of the world) of rich or at the very least well to do.

President Obama's budget proposes to hike the marginal tax rates of the wealthy to 36% and 39.6% beginning in fiscal 2011, and to increase by 5% the capital gains and dividends tax rate for the wealthy - tax changes that market participants say could lead to higher demand for tax-exempt bonds.

"The Obama tax hike [on the marginal rates] would mean that muni investors could buy bonds about 40 basis points richer in yield to achieve the same after-tax yield," said Matt Fabian, a managing director at Municipal Market Advisors.

Wealthy would be defined as married couples earning over $250,000 and individuals earning $200,000 or more.

However, the administration has abandoned a proposal aired in a budget outline released in February that would have capped the amount of deductions taxpayers could take at 28%, another move that may have pushed wealthier investors into the muni market.

Tuesday, May 12, 2009

The Debts of the Lenders: China Stockpiling Agriculture Products

China To Up Ag Goods Storage On Higher Stockbuilding

The Chinese government said Monday it will boost spending in the next
two years to increase its capacity to store more agricultural products as the
country has been expanding its state reserves.

The investments would create capacity to store 15 million tons of
grains, 1.75 million tons of edible oils, 400,000 tons of sugar and 500,000
tons of cotton, according to a statement issued by the State Council, the
country’s cabinet, published on the government’s Web site. The statement
didn’t specify the size of the spending.

China plans to purchase a total of nearly 70 million tons of grains and
soybeans at prices higher than those prevailing locally since last year’s
harvest to protect farmers’ interests. The government is being forced to hold
on to the stock because it is unable to deliver on its plan to sell at levels
“higher than the purchase prices,” due to the fall in rates triggered by the
global slowdown.

“Domestic agricultural product prices face high downward pressure,” the
government said in the statement.

The recent surge in soybean futures traded on the Chicago Board of Trade
may rovided some selling opportunity for the government, but that may not
come soon as large volume of imported soybean is expected to arrive in May
due to purchases ade earlier when prices were low.

The government will arrange CNY3 billion to support large scale breeding
of hog and cows to produce milk, and expand its reserves of locally made milk
powder, it said.

Source:CME Commodity News for Tomorrow

Friday, May 8, 2009

The Debts of the Spenders: Soybean Supply Predicted to Tighten

Most grains (corn, wheat, and soybeans) w/the exception of rice (which closed lower) surged ahead of bullish fundamentals today. Next week holds some key releases from the USDA including its wheat and soy projections.

The crop progress report (to be released Monday) is projected to show continued ENSO wet conditions in the Midwest.

The U.S. Department of Agriculture is expected to cut its estimates for 2008-09 soybean ending stocks, with a strong export pace seen as the catalyst for the adjustment, according to analysts.

The USDA will also provide its first projections for the 2009-10 carryout when it releases its May supply and demand reports Tuesday.

The average of estimates from analysts surveyed by Dow Jones Newswires expect 2008-09 U.S. ending stocks to come in below the previous month’s estimate of 165 million bushels. The average of analysts’ estimates surveyed by Dow Jones Newswires project 2008-09 marketing year ending stocks at 130 million bushels from a range of 86 million to 148 million bushels.

The USDA’s report is scheduled for release at 8:30 a.m. EDT (1230 GMT) Tuesday.

Analysts anticipate if the USDA makes changes to the 2008-09 balance sheet, it will adjust usage figures, with strong potential for an increase in exports.

Source: CME News for Tomorrow

The Debts of the Spenders: 50% of XLF Out on Loan to Short Sellers

Per late April. Of course things are probably a bit different now after a 2 week juncture.

DJ TECHNICALLY SPEAKING: Financials Seen At A Key Juncture

By Rob Curran

The results of the government's stress tests hit the tape Thursday and may allow investors to identify the strongest and weakest of the banks. The Financial Select Sector SPDR (XLF), an exchange-traded fund that reflects the performance of the financial sector in the Standard & Poor's 500, has more than doubled since its bear-market low in early March. This is the latest in several sharp rallies since its peak in the summer of 2007. There's ample evidence that the latest rally was fueled in part by bears buying back their bets against the sector.

In late April, there were $2.42 billion worth of the XLF out on loan to short sellers, according to Mike Long, of Short Alert Research. That's almost half the value of outstanding shares of the ETF, Long estimated.

Intraday patterns also suggest that bears buying back bets has played a major role in the recent rally.

Credit Suisse is tracking the performance of a basket of stocks with a heavy short interest and comparing their performance to that of the S&P 500. On Monday, the S&P 500 gained 3.4% while the basket of short favorites rose 4.7%. That spread was wide enough to suggest a squeeze, particularly as the spread widened throughout the afternoon, suggesting a rush to cover.

The financial sector has consistently led market gains despite reports that the stress tests will result in dilutive capital raises for many banks. The only fundamental argument for the banks is that a budding improvement in the economy and the Federal Reserve's efforts to make lending and securitization viable will allow them to "earn their way out" of their solvency crisis, traders say.

"We are at a critical juncture technically," said Christian Bendixen, director of technical research at Bay Crest Partners.

The financial sector of the S&P 500 has reached a level on a 21-day "Relative Strength Index," a measure of short-term momentum, where "they have failed in the past since this bear market began."

Bendixen sees some technical signs that the financials will fail at this level again:

"Volume has been diminishing, and the rate of change, the speed of [financials] gains compared to the S&P 500 are not sustainable," Bendixen said.

Market-timing indicators suggest the financials are reaching an "exhaustion point," he said.

With the government assuring investors that it will prevent another major bank failure one way or the other, it's hard to see the crisis of confidence in the banking sector reaching the fever pitch of March again soon.

The Debts of the Spenders: (Real) Green Shoots in Grains

Soybeans, wheat, and corn continue to break out to new highs. While soybeans are fungible, the Midwest grain pits are excited about fundamentals such as poor weather and planting reports. Of course, the weaker dollar also features prominently in here.

The Debts of the Spenders: Bond Traders Stress Test US Treasury Yields

There is a price for everything. Yesterday's much hyped stress tests for US banks passed (more or less) w/flying colors as judged by the equity market's reaction. However, the cost of expanding corporate welfare was priced into the 30 year auction which ended on a poor note.

Is the equity rally sustainable? Can the US govt maintain the delicate balancing act of keeping borrowing costs low?

Yesterday's ECB and BOE announcements of bond market intervention bring renewed pressure on the US to follow similar moves. Perhaps next week.

Thursday, May 7, 2009

The Debts of the Spenders: The ECB Embarks on "Credit Easing" w/Covered Bond Purchases

Today the ECB's Trichet announced a "credit easing" program of bond offerings known as covered bonds. Covered bonds are bonds that are backed by actual collateral - unlike a govt's implicit trust and safety. The collateral will vary from country to country w/in the Euro zone but can range from mortgages (commercial or residential), public infrastructure debt (railroad, bridge, and tunnel financing), and even shipping. While the market for this debt can be somewhat . . . illiquid (hmm shades of auction rate securities!), Trichet's purchases make the ECB a potential market maker.

Remember, the chief structural flaw of the EU is that the Maastricht Treaty prevents individual member nations from debasing their own currency. This legal restriction was originally aimed at preventing notorious spenders w/large public budgets (the PIGS - Portugal, Italy, Greece, and Spain) from embroiling wealthier members. Until now, these nations had relied on hopes of a bailout by the more fiscally responsible states such as Germany -something that is deeply unpopular among Germans (unsurprisingly). But while currency control remains in Brussels, individual nations are still responsible for obtaining financing on their own through bond sales.

Some pundits theorized that the ECB would be forced to make a single "Eurobond" that would cover all 2 dozen or so EU members. But the ECB has apparently decided that experiment would take too long and pose its own complications. Instead Trichet's foray into covered bond purchases has all the hallmarks of a classical EU ministerial play - an ad hoc, disruptive affair that failed to take into consideration effects on other angles of the capital markets.

LONDON (Dow Jones)--Euro-denominated government bonds came under heavy selling pressure Thursday as demand for safe-haven government debt receded as risk appetite improved, with equity markets advancing as concerns over the results of the U.S. bank stress tests eased.

The European Central Bank's decision to cut its refinancing rate by 25 basis points to a new record low of 1.0% was widely anticipated, and had limited market impact. The ECB left its overnight deposit rate unchanged at 0.25%, also as expected.

However, government bond prices came under further pressure after ECB President Jean-Claude Trichet announced that the central bank would introduce 'nonstandard measures' and embark on an asset purchase program.

Speaking at a press conference following the ECB's interest rate decision, Trichet said the ECB would extend the maturity of its repurchase operations by introducing a new 12-month fixed-rate, full-allotment tender.

"The ECB was clearly unwilling to countenance a shift into U.K./U.S.-style QE," said Richard McGuire, market strategist at RBC Capital Markets. "It appears likely this apparent change in stance is designed to provide the Bank with a further cushion of conventional policy easing before it might be required to further up the credit-easing ante or be dragged down the logistically-challenging QE route."

The European Central Bank blazed a trail into unconventional policy Thursday, saying it will purchase up to EUR60 billion debt securities outright and offer cheap liquidity to commercial banks at longer maturities.

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