A Global Grain Powerhouse

October 12th, 2010

The appeal of farmland as an investment is pretty clear in a market in which clarity on anything is hard to find. It starts with one basic premise: The global population is expected to reach 8 billion by 2030. There are certain inevitable outcomes we can take from this. The most reliable is that we’ll need to produce a lot more food.

Though not original, I don’t think the market quite realizes the challenge involved in feeding all those mouths. Now, I’m not saying we face mass starvation. I’m not saying it can’t be done. I am only saying there are challenges and constraints more acute now than in the past. And these constraints make for an appealing investment idea.

First, let me sum up the size of the demand. There are a lot of ways to present the same data. The most arresting is perhaps from the USDA projections. These show that the incremental acreage required to feed this population by 2030 is about equal to the planted acreage in the US, Brazil and Argentina!

That’s a lot of acreage and a good reason to own farmland as an investment over the long haul. Arable land per person – which includes both land under cultivation and land that could be farmed – is a dwindling resource.

One other added wrinkle is that so many countries have biofuel mandates. That means the governments of the world are basically forcing industry to burn food to make energy. This is a major force in the markets. For example, just in the US, about one quarter of the corn harvested winds up in an ethanol plant.

All of this simply means we need to get more out of every acre. This gives a nice tail wind to the companies that work up and down the agricultural chain – from irrigation equipment to fertilizers.

One of the best and safest ways to participate in the broad global agri-boom is to own shares of a company like Viterra (TSE:VT; PINK:VTRAF). Remarkably, recent events have pushed the stock price all the way down to where I first recommended it to my subscribers in 2006. The stock has rebounded recently, but remains well below its all-time highs. The stock market has handed investors a gift, and let me tell you why.

Viterra is one of the largest agribusinesses in North America. It is the largest grain handler and agri-retailer in Western Canada and Southern Australia, with 85 grain elevators and 1.9 million tonnes of storage capacity. It stores, handles, processes and markets grain. The second biggest contributor to profits is its 259 retail chains that sell fertilizer, seed, crop protection products and small-scale agricultural equipment.

The market is focusing on near-term earnings weakness, as a number of investment banking firms have ratcheted down their earnings projects for this year. The consensus guess is somewhere around 60-70 cents this year. At the current quote of only $9.45, the stock trades for about 13-15 times this year’s earnings. These same firms have Viterra earning 85 cents for next year.

However, I look at this stock very differently. I’m not focused on the quarter-to-quarter earnings swings. I am interested in the larger story of how Viterra is building a global grain powerhouse.

When I recommended Viterra initially, the company was pretty much limited to Canada and grain handling. But today, it has expanded its menu of offerings and its geography with significant operations in Australia. It has invested a lot of capital in building one of the world’s most efficient grain-handling operations, with access to all the important markets, particularly those in Asia. Book value is about $9.36 per share.

With its strong balance sheet, low valuation and diversified agri-platform, Viterra is my favorite low-risk way to play the agricultural markets. The market seems to trade it like a fertilizer stock, but a better comparable is probably Archer Daniels Midland or Bunge. It’s safer than, say, Archer Daniels Midland, a mainstream favorite. And is considerably less leveraged than, Bunge, a popular Brazilian soybean processor.

Viterra is a buy. I look for it to return to $11-12 per share as we get into early 2011. That $12 target is simply its historical 15 times multiple on a 2011 guess of 85 cents per share in earnings. Longer term, I believe the stock has greater potential as the slow, but sure agricultural story unfolds.

Regards,

Chris Mayer
for The Daily Reckoning

A Global Grain Powerhouse originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
A Global Grain Powerhouse




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

A Global Grain Powerhouse

October 12th, 2010

The appeal of farmland as an investment is pretty clear in a market in which clarity on anything is hard to find. It starts with one basic premise: The global population is expected to reach 8 billion by 2030. There are certain inevitable outcomes we can take from this. The most reliable is that we’ll need to produce a lot more food.

Though not original, I don’t think the market quite realizes the challenge involved in feeding all those mouths. Now, I’m not saying we face mass starvation. I’m not saying it can’t be done. I am only saying there are challenges and constraints more acute now than in the past. And these constraints make for an appealing investment idea.

First, let me sum up the size of the demand. There are a lot of ways to present the same data. The most arresting is perhaps from the USDA projections. These show that the incremental acreage required to feed this population by 2030 is about equal to the planted acreage in the US, Brazil and Argentina!

That’s a lot of acreage and a good reason to own farmland as an investment over the long haul. Arable land per person – which includes both land under cultivation and land that could be farmed – is a dwindling resource.

One other added wrinkle is that so many countries have biofuel mandates. That means the governments of the world are basically forcing industry to burn food to make energy. This is a major force in the markets. For example, just in the US, about one quarter of the corn harvested winds up in an ethanol plant.

All of this simply means we need to get more out of every acre. This gives a nice tail wind to the companies that work up and down the agricultural chain – from irrigation equipment to fertilizers.

One of the best and safest ways to participate in the broad global agri-boom is to own shares of a company like Viterra (TSE:VT; PINK:VTRAF). Remarkably, recent events have pushed the stock price all the way down to where I first recommended it to my subscribers in 2006. The stock has rebounded recently, but remains well below its all-time highs. The stock market has handed investors a gift, and let me tell you why.

Viterra is one of the largest agribusinesses in North America. It is the largest grain handler and agri-retailer in Western Canada and Southern Australia, with 85 grain elevators and 1.9 million tonnes of storage capacity. It stores, handles, processes and markets grain. The second biggest contributor to profits is its 259 retail chains that sell fertilizer, seed, crop protection products and small-scale agricultural equipment.

The market is focusing on near-term earnings weakness, as a number of investment banking firms have ratcheted down their earnings projects for this year. The consensus guess is somewhere around 60-70 cents this year. At the current quote of only $9.45, the stock trades for about 13-15 times this year’s earnings. These same firms have Viterra earning 85 cents for next year.

However, I look at this stock very differently. I’m not focused on the quarter-to-quarter earnings swings. I am interested in the larger story of how Viterra is building a global grain powerhouse.

When I recommended Viterra initially, the company was pretty much limited to Canada and grain handling. But today, it has expanded its menu of offerings and its geography with significant operations in Australia. It has invested a lot of capital in building one of the world’s most efficient grain-handling operations, with access to all the important markets, particularly those in Asia. Book value is about $9.36 per share.

With its strong balance sheet, low valuation and diversified agri-platform, Viterra is my favorite low-risk way to play the agricultural markets. The market seems to trade it like a fertilizer stock, but a better comparable is probably Archer Daniels Midland or Bunge. It’s safer than, say, Archer Daniels Midland, a mainstream favorite. And is considerably less leveraged than, Bunge, a popular Brazilian soybean processor.

Viterra is a buy. I look for it to return to $11-12 per share as we get into early 2011. That $12 target is simply its historical 15 times multiple on a 2011 guess of 85 cents per share in earnings. Longer term, I believe the stock has greater potential as the slow, but sure agricultural story unfolds.

Regards,

Chris Mayer
for The Daily Reckoning

A Global Grain Powerhouse originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
A Global Grain Powerhouse




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

VIX Falls as Fear Returns

October 12th, 2010

Fear is looking cheap again.

The Volatility Index fell yesterday to 18.98 – its lowest level since April 29. That date happens to fall a few days after the Dow and the S&P hit their post-2007 highs…and a few days before the May 6 “flash crash.”

If you’re not familiar with the VIX, it’s a measure of fear in the market, based on what people are paying for options on the S&P 500.

VIX Decline

Today, even as fear rises ever so slightly, the VIX struggles to break through 20.

“We are getting close to extreme territory,” said Chris Mayer on April 12, when the VIX sat below 16. “We are near the limits of what that great rubber band of life will absorb before it snaps back. The VIX usually hovers between 10-20. So we are not quite there yet, but the tension is building.”

He went on to cite some of the factors…

“The financial system is still a rather creaky affair. Leverage is still high. Banks remain undercapitalized. The credit cycle has not yet run its full course, as there are still significant credit losses hiding in the cupboards of banks.

“Then there are the governments of the world. The US has awful credit metrics. It is bleeding money and owes huge debts. The states are also bleeding money and have large debts, including giant gaps in unfunded pension liabilities. They are perhaps worse off, because unlike the US government, the states cannot print their own money. Then there is the EU. And Japan.”

We ask this morning: How much of this has changed, six months later to the day?

Addison Wiggin
for The Daily Reckoning

VIX Falls as Fear Returns originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
VIX Falls as Fear Returns




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

OPTIONS, Uncategorized

VIX Falls as Fear Returns

October 12th, 2010

Fear is looking cheap again.

The Volatility Index fell yesterday to 18.98 – its lowest level since April 29. That date happens to fall a few days after the Dow and the S&P hit their post-2007 highs…and a few days before the May 6 “flash crash.”

If you’re not familiar with the VIX, it’s a measure of fear in the market, based on what people are paying for options on the S&P 500.

VIX Decline

Today, even as fear rises ever so slightly, the VIX struggles to break through 20.

“We are getting close to extreme territory,” said Chris Mayer on April 12, when the VIX sat below 16. “We are near the limits of what that great rubber band of life will absorb before it snaps back. The VIX usually hovers between 10-20. So we are not quite there yet, but the tension is building.”

He went on to cite some of the factors…

“The financial system is still a rather creaky affair. Leverage is still high. Banks remain undercapitalized. The credit cycle has not yet run its full course, as there are still significant credit losses hiding in the cupboards of banks.

“Then there are the governments of the world. The US has awful credit metrics. It is bleeding money and owes huge debts. The states are also bleeding money and have large debts, including giant gaps in unfunded pension liabilities. They are perhaps worse off, because unlike the US government, the states cannot print their own money. Then there is the EU. And Japan.”

We ask this morning: How much of this has changed, six months later to the day?

Addison Wiggin
for The Daily Reckoning

VIX Falls as Fear Returns originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
VIX Falls as Fear Returns




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

OPTIONS, Uncategorized

The Fed’s Teenage Temper Tantrum

October 12th, 2010

Notwithstanding overwhelming evidence to the contrary, the Fed remains steadfast in its refusal to accept any blame whatsoever for the near collapse in 2008 of the financial system it regulates. That said, the Fed is quick to take credit for having saved the system from disaster and for getting the economy back on track. On track? Well, over a year ago, Chairman Bernanke was talking about how the “green shoots” of recovery were increasingly evident. We’re not sure exactly what was green, other than the colossal amounts of freshly printed dollars being thrown at the economy, but just as young plants don’t always survive and thrive, the US economy is clearly struggling again of late, with the broad unemployment rate U6 having risen again to 17.1% in September.

Now it is rare for US central bankers to criticize government economic policy. A quid pro quo of an independent Fed is one that leaves the President and the Congress to their political business, which includes fiscal policy. On occasion, Fed Chairmen have been asked by the President or the Congress to give their opinion on certain policies, in which case they are obliged to offer one up, although normally this is done is an apolitical way.

Even rarer is for a US central banker to voluntarily criticize government policy, rather than as a response to an inquiry on a specific issue. Yet this is exactly what Fed Chairman Bernanke did last week, when he claimed that it would be wise for Congress to systematically exercise more budget restraint, perhaps in the form of explicit budget rules, which have been adopted by a handful of countries and also several US states. That’s right, the Fed’s latest excuse for why the US economy is not performing the way it should is that Congress has been doing a poor job and, as such, business and consumer confidence remain subdued, explaining much of why this recovery has been so weak, notwithstanding the extraordinary degree of stimulus, fiscal and monetary, that has been thrown at the economy since 2008.

While not entirely unprecedented, it is certainly rare for a Fed Chairman to exhort the Congress in this way. One could therefore surmise that Bernanke must feel quite strongly about this matter. By implication, his overt disapproval of chronically high budget deficits implies that he believes it would be better for monetary, rather than fiscal policy, to provide the stimulus necessary to get the economy back on track. While we happen to agree with Bernanke that fiscal policy is not the answer to the current set of US economic woes, we disagree that monetary policy can somehow succeed where fiscal policy fails. This is because US and to some extent global economic problems are structural rather than cyclical in nature. This structural malaise can be seen in various economic “imbalances”, which is econospeak for “unsustainable developments”.

Let’s place the current set of imbalances in context. As we know, the US has long run a current account deficit, implying that it has been consuming and investing more than it has been producing. The net result is a large accumulated debt owed to foreigners, in particular the big savers such as China, Japan, Germany, and a handful of other, primarily manufacturing economies. Now it is one of the basic accounting identities of economics that savings = investment. Money that is saved, even if put in the bank, finds its way into investment, say in the form of a commercial loan which a business then uses to finance new equipment or to hire additional workers. Another identity is that what is not saved/invested is, naturally, consumed. So what we have is: savings + consumption = production (GDP)

Back in the mid-2000s, as the US current account deficit grew and grew, it became fashionable to talk about a “global savings glut” which was “forcing” savings into the US, holding bond yields unusually low and, therefore, stimulating investment in housing and commercial real estate, among other areas. Bernanke himself used this argument in 2005, arguing that high rates of savings, in particular in Asian economies, were responsible for this “glut” of savings. This argument became, for a time, the conventional wisdom. Amongst Bernanke and his mainstream, neo-Keynesian policy and academic colleagues, this remains the explanation to this day for why US aggregate demand is so weak: The world, now including the US, is saving too much.

So when Bernanke was talking about there being too much savings, he was implying either that a) there was too little consumption; or that b) there was too much production. It must be one or the other. Now it is farcical to argue that from 2004-2007, the global economy was consuming too little.  Indeed, this was one of the greatest ever consumption booms in world history, led by the US course, where the household savings rate went outright negative. So therefore it must be the case that, in those years, the global economy was producing too much. Yes, that’s right, by claiming that there was a global savings glut, by implication Bernanke was claiming that the world was producing too much!  That it was, in other words, overheating! So why on earth did Messrs Greenspan and Bernanke not raise interest rates more, in order to slow the global economy?

The answer, we know, was that US consumer price inflation was low, so it seemed that there was no need to raise rates. But do you see the inconsistency in Bernanke’s argument? YOU CAN’T MANAGE THE RISKS OF DANGEROUS IMBALANCES–SAVINGS “GLUTS”, ASSET BUBBLES OR WHATEVER ONE CHOOSES TO CALL THEM–AND TARGET CONSUMER PRICE INFLATION AT THE SAME TIME! In other words, consumer price inflation targeting is a bogus policy, yet one on which Bernanke has staked his academic and profession reputation. And then, when it all blows up in arguably the greatest credit crisis in the history of the world, he has the audacity to assign blame to anywhere, anyone but the Fed itself–Wall Street,  Fannie/Freddie, China, the list grows and grows–and now at the US Congress!

When a young child is caught misbehaving, sometimes they attempt to make some simple excuse to talk their way out of it, only to find the parent knows better than to believe them. As the child grows, the excuses grow ever more complex in an attempt to obfuscate, deceive, bewilder or simply exhaust the parent into retracting an accusation. However, when a teenager is caught, rather than make increasingly elaborate and frequently futile excuses, it becomes more common to simply blame the parent!

Once upon a time the Fed used to make simple excuses such as “no one could see the bubble”, which was used following the dot.com crash in 2001-03. Then the Fed began to make increasingly elaborate, bewildering and, as demonstrated above, internally inconsistent excuses such as there being a “global savings glut” which the Fed could do nothing about. Now the Fed is blaming the Congress that created it and lightly oversees it for US economic woes. We’re sorry, but this sounds like a teenage temper tantrum to us, not the rational voice of a sensible, competent institution ready and willing to take responsibility for its actions past, present or future.  It is a sign of a teenager maturing into an adult when they not only stop making excuses generally but, even to the extent that they feel their parents are to blame in some way for their foibles, they move on, get over it, take responsibility and make the best out of the imperfect situation known as the human condition. If the Fed is indeed on such a path, then maybe there is some hope after all. We need only be patient, as all good parents are.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Fed’s Teenage Temper Tantrum originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Fed’s Teenage Temper Tantrum




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Real Estate, Uncategorized

The Fed’s Teenage Temper Tantrum

October 12th, 2010

Notwithstanding overwhelming evidence to the contrary, the Fed remains steadfast in its refusal to accept any blame whatsoever for the near collapse in 2008 of the financial system it regulates. That said, the Fed is quick to take credit for having saved the system from disaster and for getting the economy back on track. On track? Well, over a year ago, Chairman Bernanke was talking about how the “green shoots” of recovery were increasingly evident. We’re not sure exactly what was green, other than the colossal amounts of freshly printed dollars being thrown at the economy, but just as young plants don’t always survive and thrive, the US economy is clearly struggling again of late, with the broad unemployment rate U6 having risen again to 17.1% in September.

Now it is rare for US central bankers to criticize government economic policy. A quid pro quo of an independent Fed is one that leaves the President and the Congress to their political business, which includes fiscal policy. On occasion, Fed Chairmen have been asked by the President or the Congress to give their opinion on certain policies, in which case they are obliged to offer one up, although normally this is done is an apolitical way.

Even rarer is for a US central banker to voluntarily criticize government policy, rather than as a response to an inquiry on a specific issue. Yet this is exactly what Fed Chairman Bernanke did last week, when he claimed that it would be wise for Congress to systematically exercise more budget restraint, perhaps in the form of explicit budget rules, which have been adopted by a handful of countries and also several US states. That’s right, the Fed’s latest excuse for why the US economy is not performing the way it should is that Congress has been doing a poor job and, as such, business and consumer confidence remain subdued, explaining much of why this recovery has been so weak, notwithstanding the extraordinary degree of stimulus, fiscal and monetary, that has been thrown at the economy since 2008.

While not entirely unprecedented, it is certainly rare for a Fed Chairman to exhort the Congress in this way. One could therefore surmise that Bernanke must feel quite strongly about this matter. By implication, his overt disapproval of chronically high budget deficits implies that he believes it would be better for monetary, rather than fiscal policy, to provide the stimulus necessary to get the economy back on track. While we happen to agree with Bernanke that fiscal policy is not the answer to the current set of US economic woes, we disagree that monetary policy can somehow succeed where fiscal policy fails. This is because US and to some extent global economic problems are structural rather than cyclical in nature. This structural malaise can be seen in various economic “imbalances”, which is econospeak for “unsustainable developments”.

Let’s place the current set of imbalances in context. As we know, the US has long run a current account deficit, implying that it has been consuming and investing more than it has been producing. The net result is a large accumulated debt owed to foreigners, in particular the big savers such as China, Japan, Germany, and a handful of other, primarily manufacturing economies. Now it is one of the basic accounting identities of economics that savings = investment. Money that is saved, even if put in the bank, finds its way into investment, say in the form of a commercial loan which a business then uses to finance new equipment or to hire additional workers. Another identity is that what is not saved/invested is, naturally, consumed. So what we have is: savings + consumption = production (GDP)

Back in the mid-2000s, as the US current account deficit grew and grew, it became fashionable to talk about a “global savings glut” which was “forcing” savings into the US, holding bond yields unusually low and, therefore, stimulating investment in housing and commercial real estate, among other areas. Bernanke himself used this argument in 2005, arguing that high rates of savings, in particular in Asian economies, were responsible for this “glut” of savings. This argument became, for a time, the conventional wisdom. Amongst Bernanke and his mainstream, neo-Keynesian policy and academic colleagues, this remains the explanation to this day for why US aggregate demand is so weak: The world, now including the US, is saving too much.

So when Bernanke was talking about there being too much savings, he was implying either that a) there was too little consumption; or that b) there was too much production. It must be one or the other. Now it is farcical to argue that from 2004-2007, the global economy was consuming too little.  Indeed, this was one of the greatest ever consumption booms in world history, led by the US course, where the household savings rate went outright negative. So therefore it must be the case that, in those years, the global economy was producing too much. Yes, that’s right, by claiming that there was a global savings glut, by implication Bernanke was claiming that the world was producing too much!  That it was, in other words, overheating! So why on earth did Messrs Greenspan and Bernanke not raise interest rates more, in order to slow the global economy?

The answer, we know, was that US consumer price inflation was low, so it seemed that there was no need to raise rates. But do you see the inconsistency in Bernanke’s argument? YOU CAN’T MANAGE THE RISKS OF DANGEROUS IMBALANCES–SAVINGS “GLUTS”, ASSET BUBBLES OR WHATEVER ONE CHOOSES TO CALL THEM–AND TARGET CONSUMER PRICE INFLATION AT THE SAME TIME! In other words, consumer price inflation targeting is a bogus policy, yet one on which Bernanke has staked his academic and profession reputation. And then, when it all blows up in arguably the greatest credit crisis in the history of the world, he has the audacity to assign blame to anywhere, anyone but the Fed itself–Wall Street,  Fannie/Freddie, China, the list grows and grows–and now at the US Congress!

When a young child is caught misbehaving, sometimes they attempt to make some simple excuse to talk their way out of it, only to find the parent knows better than to believe them. As the child grows, the excuses grow ever more complex in an attempt to obfuscate, deceive, bewilder or simply exhaust the parent into retracting an accusation. However, when a teenager is caught, rather than make increasingly elaborate and frequently futile excuses, it becomes more common to simply blame the parent!

Once upon a time the Fed used to make simple excuses such as “no one could see the bubble”, which was used following the dot.com crash in 2001-03. Then the Fed began to make increasingly elaborate, bewildering and, as demonstrated above, internally inconsistent excuses such as there being a “global savings glut” which the Fed could do nothing about. Now the Fed is blaming the Congress that created it and lightly oversees it for US economic woes. We’re sorry, but this sounds like a teenage temper tantrum to us, not the rational voice of a sensible, competent institution ready and willing to take responsibility for its actions past, present or future.  It is a sign of a teenager maturing into an adult when they not only stop making excuses generally but, even to the extent that they feel their parents are to blame in some way for their foibles, they move on, get over it, take responsibility and make the best out of the imperfect situation known as the human condition. If the Fed is indeed on such a path, then maybe there is some hope after all. We need only be patient, as all good parents are.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Fed’s Teenage Temper Tantrum originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Fed’s Teenage Temper Tantrum




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Real Estate, Uncategorized

The Problem With Chasing Yield in a Bond Bubble

October 12th, 2010

There is a debate now as to whether there is a bond bubble or not. I think we are in a bond bubble. This bond bubble is not only for Treasuries and corporate debt, but across the yield spectrum. Too many investors are looking for yield, and their quest will end in tears.

As all these people are looking for yield, they push down those yields. Plus, the Federal Reserve is doing its best to keep interest rates low. So the end result is that IBM can borrow for three years at 1%. But really, these factors affect the whole spectrum of interest rates and yields.

For example, take a look at master limited partnerships, or MLPs. These vehicles are very popular with investors. But they are probably too popular. Mostly these companies own pipelines for oil and gas. They pay out most of their earnings to their unit holders. Yields are now about 5.5% for the popular Alerian MLP Index. A 5.5% yield looks good today. But about a year ago, MLPs paid about 8.8% on average.

But what happens if yields go back to 8.8%? The grim answer is that the price of an MLP yielding 5.5% would have to drop by 40% to produce a yield of 8.8%. In other words, these yields are anything but risk-free.

MLPs are too popular. They are overpriced, in my view. Most everything on the yield spectrum is similarly expensive. Investors are getting paid too little for the risks they are taking.

What’s happening in the junk bond market is another indication of a frothy market. Junk bonds are essentially higher-yielding corporate debt. People can’t get enough of them. In mid-August, we set a weekly record for the issuance of junk debt. For the year, volumes are up 80% compared to a year ago and will easily surpass the 2009 record.

All over, investors are scrambling for yield, and they are pushing down those yields to dangerously low levels. As a recent Wall Street Journal editorial – titled “Chasing Yields, Chasing Our Tails” – put it: “Nearly two years removed from the Lehman Brothers shock, bond investors are again ‘chasing yield,’ taking mounting risk for minimal future gains.”

In the end, I think it will end badly… I know it’s an unpopular message, especially regarding the yields. I get e-mails all the time from people who want yield. Well, I am calling it like I see it. And I’m telling you that you are going to get burned if you chase yield in this market.

Chris Mayer
for The Daily Reckoning

The Problem With Chasing Yield in a Bond Bubble originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Problem With Chasing Yield in a Bond Bubble




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

The Problem With Chasing Yield in a Bond Bubble

October 12th, 2010

There is a debate now as to whether there is a bond bubble or not. I think we are in a bond bubble. This bond bubble is not only for Treasuries and corporate debt, but across the yield spectrum. Too many investors are looking for yield, and their quest will end in tears.

As all these people are looking for yield, they push down those yields. Plus, the Federal Reserve is doing its best to keep interest rates low. So the end result is that IBM can borrow for three years at 1%. But really, these factors affect the whole spectrum of interest rates and yields.

For example, take a look at master limited partnerships, or MLPs. These vehicles are very popular with investors. But they are probably too popular. Mostly these companies own pipelines for oil and gas. They pay out most of their earnings to their unit holders. Yields are now about 5.5% for the popular Alerian MLP Index. A 5.5% yield looks good today. But about a year ago, MLPs paid about 8.8% on average.

But what happens if yields go back to 8.8%? The grim answer is that the price of an MLP yielding 5.5% would have to drop by 40% to produce a yield of 8.8%. In other words, these yields are anything but risk-free.

MLPs are too popular. They are overpriced, in my view. Most everything on the yield spectrum is similarly expensive. Investors are getting paid too little for the risks they are taking.

What’s happening in the junk bond market is another indication of a frothy market. Junk bonds are essentially higher-yielding corporate debt. People can’t get enough of them. In mid-August, we set a weekly record for the issuance of junk debt. For the year, volumes are up 80% compared to a year ago and will easily surpass the 2009 record.

All over, investors are scrambling for yield, and they are pushing down those yields to dangerously low levels. As a recent Wall Street Journal editorial – titled “Chasing Yields, Chasing Our Tails” – put it: “Nearly two years removed from the Lehman Brothers shock, bond investors are again ‘chasing yield,’ taking mounting risk for minimal future gains.”

In the end, I think it will end badly… I know it’s an unpopular message, especially regarding the yields. I get e-mails all the time from people who want yield. Well, I am calling it like I see it. And I’m telling you that you are going to get burned if you chase yield in this market.

Chris Mayer
for The Daily Reckoning

The Problem With Chasing Yield in a Bond Bubble originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Problem With Chasing Yield in a Bond Bubble




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Smoothed Breadth and Market Dead Air – Internal Divergences

October 12th, 2010

Anyone who knows me knows how big a fan I am of “Market Internal” divergences (or momentum divergences as well).

They’re one of my favorite methods of market analysis, as they seek to reveal the health – or weakness – of a trend in progress.

Divergences often appear ahead of big turns in price, and the last few months have certainly been no exception of that rule.

Let’s take a look back at the prior two major Breadth divergences (and subsequent reversals) and then look at what breadth says right now.

First, let me explain the indicators.

Instead of showing actual Breadth ($ADD) or Volume Difference (of Breadth) – $VOLD, what I’ve done on the daily frame is smooth them both out with a 20 period simple moving average.

You can use a 10 day SMA – same logic – but the point is to smooth out the volatility and arrive at a clearer picture of what’s going on under the market’s hood.

Let’s start with prior divergences.

1.  APRIL/MAY DEATH RALLY

Ok, I’m sensationalizing the terminology, but that’s really what it was to those trading it.

It was a situation where Breadth, Volume, and Momentum declined almost every day as the market rose every single day.

You couldn’t really get short, as there was no trigger (you can’t trade short off a divergence – you need price to break a trendline for entry), and you really couldn’t get long because at any day, the market could ‘fall apart’ due to the lengthy non-confirmation… which was exactly what happened.

Anyway, this was a great lesson in how divergences undercut a rally in progress, but just because divergences exist does not mean the market will collapse the very next day.  Price often rallies longer than most people think it will.

The main idea is that trading long in an environment of lengthy, massive divergences (such as April/May) is extremely risky and similar to playing Musical Chairs where the music will stop – those caught without a chair will suffer.

It’s also like walking farther out into a frozen lake where the ice is becoming weaker under your feet – the longer you walk and ignore the danger of the ice cracking under your feet, the more danger you’re in.

Anyway – the April/May divergence period was one of the worst I can remember seeing – and it ended appropriately and exactly as expected – with a Crash, not a thud.  We now call this the “Flash Crash” but divergences suggested at the potential of a devastating crash the longer the market rose on daily declining ‘internals.’

2.  JULY POSITIVE DIVERGENCE AT LOWS

Markets are more likely to “Crash” down than they are to “crash” up, particularly when forming a bottom (in other words, you’re more likely to see huge, single down days than you are to see huge single up-days).

As the S&P 500 pushed to new 2010 lows at the 1,010 level in July, internals (Breadth and Momentum particularly) showed POSITIVE divergences.

Price formed a key (visible) LOWER low while internals (and momentum) formed a HIGHER indicator low – locking in a positive divergence.

The positive divergence preceded a short-term reversal that took the market back to 1,130… where a negative divergence (not really captured by the smoothed 20 day average) sent the market back down.

3.  SEPTEMBER/OCTOBER RALLY

That brings us to the present, where the situation is looking similar to the April/May period, but if that’s the case, we’re somewhere in the late-middle period of a grossly overextended rally that is showing consistently weaker momentum and internal support.

In the charts above, I highlighted areas where Breadth peaked and then – in the case of April/May – labeled the resulting higher price action as “Dead Air” which is a good way to visualize it.

It’s like a tree that looks strong from the outside, but internally is decaying.

And if we take the recent past and apply it to the present, we can suspect that price CAN continue rising higher and higher, but the longer it does so WITHOUT the support of momentum and internals actually increases the probability of a severe pullback/reversal – as opposed to a gentle retracement.

What’s remarkable is that just before the actual May Flash Crash (May 6th), the 20 day SMA of Breadth almost turned negative (zero-line).

We’re seeing the current 20 day SMA of breadth nearing the zero-line again as price pushes higher and higher.

I won’t extrapolate any more beyond that, but it goes without saying that you should probably be more cautious to the long-side, even though we could certainly see higher prices yet to come – especially if the market breaks above 1,170 and travels back to the 1,200/1,220 region.

If volume, momentum, and breadth do NOT increase as price subsequently rises… look out for a much sharper correction to come that would correspond with the Bullish “Music” stopping.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Smoothed Breadth and Market Dead Air – Internal Divergences

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Will the US Economy Ever Again See Full Employment?

October 12th, 2010

How are things on the pampas?

Tolerably fair, it appears…

We just got here. Too soon to rush to judgment. From what we can tell, though, the poor Argentines seem to be shooting themselves in the foot…and the leg…and everywhere else. They’re going to be taking out buckshot for years…

It should be a great time for the pampas. They have some of the richest, flattest, best-watered farmland in the world. Farm prices are high. Other prices are fairly low.

But leave it to the politicians to mess things up. Argentine beef – which ought to be the country’s most prized export – is losing market share, especially to the Uruguayans. How come? Because the Argentines taxed beef exports in order to keep prices low at home. You see, the gauchos can manage an economy too!

What was the result? Farmers switched from raising cattle to raising soybeans. And wouldn’t you know it, then, they had a disastrous drought.

More on that story as we find out more…

In the meantime, let’s look at the hottest market in the world – the gold market.

Gold is so hot it’s hard to believe it won’t melt down. Watch out.

And remember, the bull market in gold is a distraction. The big story now is still the Great Correction. It’s here. It continues. And it will take years to sort out.

Consumer credit went down $3.3 billion in August – the 7th month in a row of decline. Just what you’d expect in a correction.

If this is not a Great Correction, it’s doing a good impression of one.

The New York Times:

In the one-two punch long feared by many economists, hiring by businesses has slowed while government jobs are disappearing at a record pace.

Companies added just 64,000 jobs last month, a slowdown from 93,000 jobs in August and 117,000 in July, the Labor Department reported Friday. But over all, the economy lost 95,000 nonfarm jobs in September, the result of a 159,000 decline in government jobs at all levels. Local governments in particular cut workers at the fastest rate in almost 30 years.

“We need to wake up to the fact that the end of the stimulus has really hit hard on local governments,” said Andrew Stettner, deputy director of the National Employment Law Project. “There is much more of a slide in the job market than what we really need to clearly turn around.”

With the waning of the $787 billion Recovery Act passed in 2009 and credited with increasing employment by millions of jobs, finding new policies potent enough to speed up the recovery has proved difficult.

Meanwhile, Investors’ Business Daily has more bad news. At the present rate it will take another 10 years to get those jobs back:

The US economy lost 95,000 jobs in September, far worse than expectations for no change in employment. More Census-related temp jobs ended, as expected, but state and local governments slashed staff far more than predicted.

So far in 2010, the US has added just 613,000 jobs – for a monthly average of 68,111.

Employment bottomed in December 2009 at 129.588 million – two years after peaking at 137.951 million. At this year’s pace, the US won’t recoup all those 8.36 million lost jobs until March 2020 – 147 months after the December 2007 high.

That would obliterate the old post-World War II record of 47 months set in the wake of the 2001 recession.

The current jobs slump also is the deepest of any in the post-war era, with payrolls down as much as 6.1%. They are still 5.6% below their December 2007 level.

With state and local governments likely to shed workers for at least the next year or two as budget woes continue, the hiring burden will fall entirely on the private sector.

Private employers did add 64,000 workers last month, but that was a little less than consensus forecasts and far below what’s needed.

The US needs to create 125,000-150,000 jobs each month just to absorb new workers and prevent unemployment from rising. So returning to the old peak employment a decade later would hardly suggest a healthy labor market.

It is worth pausing a minute to think about that last paragraph. It’s not enough just to get back the 8.36 million jobs that were lost in the crisis. The US also needs to create about 15 million MORE jobs over the next 10 years in order to stay even with population growth and return to full employment. That’s about 23 million all together.

Well, guess how many jobs were created during the last 4 months. None. Instead, the economy LOST nearly 400,000 jobs. So you could say that at the present rate, Hell will freeze before we recover those 8.36 million jobs…and it be even longer before the economy is back at full employment.

Does that sound like a correction to you? It does to us.

What happens to people in a correction? They get poorer. And here’s the evidence… For the first time in 70 years, New York residents are earning less money than they did the year before. This report from Reuters:

The recession put a 3.1 percent dent in the personal incomes of New York state residents, who endured their first full-year decline in more than 70 years, according to a report released Tuesday. Paychecks or net earnings tumbled 5.4 percent, while dividends, interest and rent slid 8.4 percent, to a grand total of nearly $908 billion, the state comptroller’s report said.

Not only did New Yorkers’ personal incomes fall “almost twice” as much as they did in the nation as a whole, but they have yet to recover to pre-recession levels, Comptroller Thomas DiNapoli said.

The drop occurred even though the job-destroying recession was milder in New York than in the rest of the country.

One reason for the hit to New Yorker’s pocketbooks is Wall Street’s dominance among the state’s employers; pay and job security are often highly volatile in the securities industry.

Regards,

Bill Bonner
for The Daily Reckoning

Will the US Economy Ever Again See Full Employment? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Will the US Economy Ever Again See Full Employment?




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Will the US Economy Ever Again See Full Employment?

October 12th, 2010

How are things on the pampas?

Tolerably fair, it appears…

We just got here. Too soon to rush to judgment. From what we can tell, though, the poor Argentines seem to be shooting themselves in the foot…and the leg…and everywhere else. They’re going to be taking out buckshot for years…

It should be a great time for the pampas. They have some of the richest, flattest, best-watered farmland in the world. Farm prices are high. Other prices are fairly low.

But leave it to the politicians to mess things up. Argentine beef – which ought to be the country’s most prized export – is losing market share, especially to the Uruguayans. How come? Because the Argentines taxed beef exports in order to keep prices low at home. You see, the gauchos can manage an economy too!

What was the result? Farmers switched from raising cattle to raising soybeans. And wouldn’t you know it, then, they had a disastrous drought.

More on that story as we find out more…

In the meantime, let’s look at the hottest market in the world – the gold market.

Gold is so hot it’s hard to believe it won’t melt down. Watch out.

And remember, the bull market in gold is a distraction. The big story now is still the Great Correction. It’s here. It continues. And it will take years to sort out.

Consumer credit went down $3.3 billion in August – the 7th month in a row of decline. Just what you’d expect in a correction.

If this is not a Great Correction, it’s doing a good impression of one.

The New York Times:

In the one-two punch long feared by many economists, hiring by businesses has slowed while government jobs are disappearing at a record pace.

Companies added just 64,000 jobs last month, a slowdown from 93,000 jobs in August and 117,000 in July, the Labor Department reported Friday. But over all, the economy lost 95,000 nonfarm jobs in September, the result of a 159,000 decline in government jobs at all levels. Local governments in particular cut workers at the fastest rate in almost 30 years.

“We need to wake up to the fact that the end of the stimulus has really hit hard on local governments,” said Andrew Stettner, deputy director of the National Employment Law Project. “There is much more of a slide in the job market than what we really need to clearly turn around.”

With the waning of the $787 billion Recovery Act passed in 2009 and credited with increasing employment by millions of jobs, finding new policies potent enough to speed up the recovery has proved difficult.

Meanwhile, Investors’ Business Daily has more bad news. At the present rate it will take another 10 years to get those jobs back:

The US economy lost 95,000 jobs in September, far worse than expectations for no change in employment. More Census-related temp jobs ended, as expected, but state and local governments slashed staff far more than predicted.

So far in 2010, the US has added just 613,000 jobs – for a monthly average of 68,111.

Employment bottomed in December 2009 at 129.588 million – two years after peaking at 137.951 million. At this year’s pace, the US won’t recoup all those 8.36 million lost jobs until March 2020 – 147 months after the December 2007 high.

That would obliterate the old post-World War II record of 47 months set in the wake of the 2001 recession.

The current jobs slump also is the deepest of any in the post-war era, with payrolls down as much as 6.1%. They are still 5.6% below their December 2007 level.

With state and local governments likely to shed workers for at least the next year or two as budget woes continue, the hiring burden will fall entirely on the private sector.

Private employers did add 64,000 workers last month, but that was a little less than consensus forecasts and far below what’s needed.

The US needs to create 125,000-150,000 jobs each month just to absorb new workers and prevent unemployment from rising. So returning to the old peak employment a decade later would hardly suggest a healthy labor market.

It is worth pausing a minute to think about that last paragraph. It’s not enough just to get back the 8.36 million jobs that were lost in the crisis. The US also needs to create about 15 million MORE jobs over the next 10 years in order to stay even with population growth and return to full employment. That’s about 23 million all together.

Well, guess how many jobs were created during the last 4 months. None. Instead, the economy LOST nearly 400,000 jobs. So you could say that at the present rate, Hell will freeze before we recover those 8.36 million jobs…and it be even longer before the economy is back at full employment.

Does that sound like a correction to you? It does to us.

What happens to people in a correction? They get poorer. And here’s the evidence… For the first time in 70 years, New York residents are earning less money than they did the year before. This report from Reuters:

The recession put a 3.1 percent dent in the personal incomes of New York state residents, who endured their first full-year decline in more than 70 years, according to a report released Tuesday. Paychecks or net earnings tumbled 5.4 percent, while dividends, interest and rent slid 8.4 percent, to a grand total of nearly $908 billion, the state comptroller’s report said.

Not only did New Yorkers’ personal incomes fall “almost twice” as much as they did in the nation as a whole, but they have yet to recover to pre-recession levels, Comptroller Thomas DiNapoli said.

The drop occurred even though the job-destroying recession was milder in New York than in the rest of the country.

One reason for the hit to New Yorker’s pocketbooks is Wall Street’s dominance among the state’s employers; pay and job security are often highly volatile in the securities industry.

Regards,

Bill Bonner
for The Daily Reckoning

Will the US Economy Ever Again See Full Employment? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Will the US Economy Ever Again See Full Employment?




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

G-7 Squashes Currency Rally

October 12th, 2010

The currencies are much weaker this morning, after digesting the G-7 decision on Saturday, and all the saber rattling with China… But in the real scheme of things, I would suggest to you that this weakness is nothing more than correcting a “too far, too fast” move by all the currencies following the FOMC meeting on Sept 21st.

Speaking of Sept. 21st, the minutes of that FOMC meeting will be on display for all to see this afternoon. Remember on Friday, I told you that there is some slippage in the thought that quantitative easing (QE) is a done deal for the November 2nd meeting of the FOMC… Well, those thoughts are getting more air play, which is also causing some slippage in the currencies… The FOMC meeting minutes should put those thoughts to bed, but there’s uncertainty this morning, and with uncertainty you get currency weakness, that’s just the way it is, some things will never change…

Well… The G-7 meeting last Friday and Saturday, had a BIG surprise for everyone, that is, everyone except the conspiracy theorists that believe we are headed for a “one rule-one global currency”… Now, I love a good conspiracy story as much as the next guy, but I’ve stayed away from pinning my colors to that conspiracy mast… But the actions of G-7 last weekend really push me toward the conspiracy corner… Here’s the skinny…

Financial officials worldwide said at a meeting in Washington that The International Monetary Fund (IMF) should take the lead in preventing competitive devaluation from triggering a destructive round of protectionism. US Treasury Secretary Timothy Geithner strongly backed the move, saying the IMF has a crucial role to play in rebalancing the world economy. “It is ultimately the responsibility of countries to act, but the IMF must speak out effectively about challenges and marshal support for action,” he said.

Hmmm… I don’t know, you tell me… Does that look like a baby step in the direction of a one-rule, global currency to you?

So… The currencies have uncertainty dripping off of them this morning, even the Chinese renminbi (CNY), which had reached a record high of 6.6639 yesterday, is weaker this morning. I would have to think that given how fast all these currencies gained on the dollar, along with gold and silver, that we’re going to see some consolidation for the next week or so… We could see the euro (EUR) slip back to the mid-1.30’s but remain much stronger than it was back in June.

There’s one currency though that’s rocking the dollar strength boat, and that is the Japanese yen (JPY), which is ready to slip below 82 and trade with an 81 handle… WOW! Remember a few years ago, when I kept saying over and over again that Japanese yen was undervalued when it was 110? I said then that yen could trade below 100, and everyone laughed hysterically at me… But that was then, and this is now… And to me, Japanese yen at 81 is preposterous! The cry that yen is a destination for the “flight to safety” investors is just outright weird to me… The yen is now in uncharted waters, and I don’t know about you, but I wouldn’t want my boat in uncharted waters…

At the top, I mentioned that there was saber rattling with China going on… Well, now the Europeans are shouting a bit louder that they are dissatisfied with China’s currency policy… So, now the US and Europeans are ganging up on China. It just so happens that this Friday, the US president could take the next step and actually call out China, and name them a “currency manipulator”… Hmmm… I wonder if the president will put his money where is mouth is with regards to China… For being named a currency manipulator is a bad thing for a country, as penalties, tariffs, and other dastardly things could be bestowed on them.

Again… The Chinese aren’t telling us or the Europeans how to run our respective countries… It wasn’t the Chinese that pushed the US or Eurozone GIIPS to spend like drunken sailors… I only use that line to bring up a great line by Ronald Reagan who said that, “We could say [pick your party] spend money like drunken sailors, but that would be unfair to drunken sailors. It would be unfair, because the sailors are spending their own money.”

No… They didn’t… And so now, we point the blame finger at China, even though our problems and the Europeans’ problems were self-inflicted! If I see Schumer on TV one more time blaming China, I think I’ll get physically ill!

OK… Enough of that! Well… Remember how I’ve harped and harped for years about how the birth/death model used here in the US to adjust the employment numbers, doesn’t work? Well.. Get a load of this story that I saw Friday morning… “The Labor Department on Friday will give an initial estimate of how far off its count of employment may have been in the 12 months through March. The government admitted earlier this year that its count through March 2009 had overstated employment by 902,000 jobs.

“The department blamed its 902,000 miss on faulty estimates of how many companies were created or destroyed, and it has not yet made any changes to the so-called birth-death model that produces this projection.”

Speaking of Jobs… The Jobs Jamboree was quite disappointing on Friday, losing 95,000 jobs in September… The unemployment rate remained at 9.6%… But, you and I know that this is a “trumped up” rate, for if “all the unemployed” were counted this rate would be 22%… For new readers new to class, the government drops individuals from the unemployment rate once their unemployment benefits run out… Makes no sense, but that’s the government for you! So… When you count up the unemployed like they should be counted the unemployment rate goes to 22% or maybe even 23% with today’s report.

And I told you on Friday morning that the currencies would rebound should the Jobs data disappoint, and that’s what happened, for most of the day on Friday… But Sunday night, the Asians got in on the profit taking, and their reaction to the G-7 news, and that currency rally from Friday is in the rear view mirror now.

And before I go on, I want to tell you about a rumor that I keep hearing over and over again recently… And that is that China and the Arab States, and even Russia, are teaming together to remove the dollar from their trade settlements. You may recall that a year or so ago, China signed currency swap agreements with almost all of Asia, and then went into South America, with Argentina and Brazil… All that was done to remove the dollar from their trade settlements, and soon, China became Brazil’s top trading partner… Is China attempting to remove the dollar from oil contracts now? Well, if this rumor is true, then that would be the case… Hmmm… This won’t be good for the dollar or the US should the rumor become fact.

Gold and silver are off a bit this morning, after enjoying a day in the sun after the G-7 meeting… Currency disputes drive investors to gold, and so does any thought of the conspiracy I talked about earlier… But…That was yesterday; today life goes on. No more hiding in yesterday. ’Cause yesterday’s gone… Gold has given back $9, and silver 25-cents this morning.

Then there was this… From The Washington Post

Report warns of coming wave of municipal pension shortfalls

The nation’s largest municipal pension plans are carrying a total unfunded liability of $574 billion, which comes on top of as much as $3 trillion in unfunded pension promises made by the states, according to a report released Tuesday.

The report calls the unfunded pension obligations “off-the-balance-sheet debt” that threatens to starve services such as police protection, recreation centers, parks and libraries.

“The ability of local governments, particularly cities, to provide the levels of service they do now is threatened by this liability,” said Joshua Rauh, a Northwestern University business professor who co-authored the report with Robert Novy-Marx, a University of Rochester professor.

To recap… The G-7 meeting turned the currency disputes over to the IMF… Does that wrinkle anyone else’s forehead? The currencies are seeing some selling this morning, as the uncertainty of things leads to a “flight to safety” once again, with Japanese yen trading close to an 81-handle! The FOMC meeting minutes print this afternoon, and should put all those nonsensical thoughts about no QE to bed. And the president could call out China as a currency manipulator this week…

Chuck Butler
for The Daily Reckoning

G-7 Squashes Currency Rally originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
G-7 Squashes Currency Rally




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

G-7 Squashes Currency Rally

October 12th, 2010

The currencies are much weaker this morning, after digesting the G-7 decision on Saturday, and all the saber rattling with China… But in the real scheme of things, I would suggest to you that this weakness is nothing more than correcting a “too far, too fast” move by all the currencies following the FOMC meeting on Sept 21st.

Speaking of Sept. 21st, the minutes of that FOMC meeting will be on display for all to see this afternoon. Remember on Friday, I told you that there is some slippage in the thought that quantitative easing (QE) is a done deal for the November 2nd meeting of the FOMC… Well, those thoughts are getting more air play, which is also causing some slippage in the currencies… The FOMC meeting minutes should put those thoughts to bed, but there’s uncertainty this morning, and with uncertainty you get currency weakness, that’s just the way it is, some things will never change…

Well… The G-7 meeting last Friday and Saturday, had a BIG surprise for everyone, that is, everyone except the conspiracy theorists that believe we are headed for a “one rule-one global currency”… Now, I love a good conspiracy story as much as the next guy, but I’ve stayed away from pinning my colors to that conspiracy mast… But the actions of G-7 last weekend really push me toward the conspiracy corner… Here’s the skinny…

Financial officials worldwide said at a meeting in Washington that The International Monetary Fund (IMF) should take the lead in preventing competitive devaluation from triggering a destructive round of protectionism. US Treasury Secretary Timothy Geithner strongly backed the move, saying the IMF has a crucial role to play in rebalancing the world economy. “It is ultimately the responsibility of countries to act, but the IMF must speak out effectively about challenges and marshal support for action,” he said.

Hmmm… I don’t know, you tell me… Does that look like a baby step in the direction of a one-rule, global currency to you?

So… The currencies have uncertainty dripping off of them this morning, even the Chinese renminbi (CNY), which had reached a record high of 6.6639 yesterday, is weaker this morning. I would have to think that given how fast all these currencies gained on the dollar, along with gold and silver, that we’re going to see some consolidation for the next week or so… We could see the euro (EUR) slip back to the mid-1.30’s but remain much stronger than it was back in June.

There’s one currency though that’s rocking the dollar strength boat, and that is the Japanese yen (JPY), which is ready to slip below 82 and trade with an 81 handle… WOW! Remember a few years ago, when I kept saying over and over again that Japanese yen was undervalued when it was 110? I said then that yen could trade below 100, and everyone laughed hysterically at me… But that was then, and this is now… And to me, Japanese yen at 81 is preposterous! The cry that yen is a destination for the “flight to safety” investors is just outright weird to me… The yen is now in uncharted waters, and I don’t know about you, but I wouldn’t want my boat in uncharted waters…

At the top, I mentioned that there was saber rattling with China going on… Well, now the Europeans are shouting a bit louder that they are dissatisfied with China’s currency policy… So, now the US and Europeans are ganging up on China. It just so happens that this Friday, the US president could take the next step and actually call out China, and name them a “currency manipulator”… Hmmm… I wonder if the president will put his money where is mouth is with regards to China… For being named a currency manipulator is a bad thing for a country, as penalties, tariffs, and other dastardly things could be bestowed on them.

Again… The Chinese aren’t telling us or the Europeans how to run our respective countries… It wasn’t the Chinese that pushed the US or Eurozone GIIPS to spend like drunken sailors… I only use that line to bring up a great line by Ronald Reagan who said that, “We could say [pick your party] spend money like drunken sailors, but that would be unfair to drunken sailors. It would be unfair, because the sailors are spending their own money.”

No… They didn’t… And so now, we point the blame finger at China, even though our problems and the Europeans’ problems were self-inflicted! If I see Schumer on TV one more time blaming China, I think I’ll get physically ill!

OK… Enough of that! Well… Remember how I’ve harped and harped for years about how the birth/death model used here in the US to adjust the employment numbers, doesn’t work? Well.. Get a load of this story that I saw Friday morning… “The Labor Department on Friday will give an initial estimate of how far off its count of employment may have been in the 12 months through March. The government admitted earlier this year that its count through March 2009 had overstated employment by 902,000 jobs.

“The department blamed its 902,000 miss on faulty estimates of how many companies were created or destroyed, and it has not yet made any changes to the so-called birth-death model that produces this projection.”

Speaking of Jobs… The Jobs Jamboree was quite disappointing on Friday, losing 95,000 jobs in September… The unemployment rate remained at 9.6%… But, you and I know that this is a “trumped up” rate, for if “all the unemployed” were counted this rate would be 22%… For new readers new to class, the government drops individuals from the unemployment rate once their unemployment benefits run out… Makes no sense, but that’s the government for you! So… When you count up the unemployed like they should be counted the unemployment rate goes to 22% or maybe even 23% with today’s report.

And I told you on Friday morning that the currencies would rebound should the Jobs data disappoint, and that’s what happened, for most of the day on Friday… But Sunday night, the Asians got in on the profit taking, and their reaction to the G-7 news, and that currency rally from Friday is in the rear view mirror now.

And before I go on, I want to tell you about a rumor that I keep hearing over and over again recently… And that is that China and the Arab States, and even Russia, are teaming together to remove the dollar from their trade settlements. You may recall that a year or so ago, China signed currency swap agreements with almost all of Asia, and then went into South America, with Argentina and Brazil… All that was done to remove the dollar from their trade settlements, and soon, China became Brazil’s top trading partner… Is China attempting to remove the dollar from oil contracts now? Well, if this rumor is true, then that would be the case… Hmmm… This won’t be good for the dollar or the US should the rumor become fact.

Gold and silver are off a bit this morning, after enjoying a day in the sun after the G-7 meeting… Currency disputes drive investors to gold, and so does any thought of the conspiracy I talked about earlier… But…That was yesterday; today life goes on. No more hiding in yesterday. ’Cause yesterday’s gone… Gold has given back $9, and silver 25-cents this morning.

Then there was this… From The Washington Post

Report warns of coming wave of municipal pension shortfalls

The nation’s largest municipal pension plans are carrying a total unfunded liability of $574 billion, which comes on top of as much as $3 trillion in unfunded pension promises made by the states, according to a report released Tuesday.

The report calls the unfunded pension obligations “off-the-balance-sheet debt” that threatens to starve services such as police protection, recreation centers, parks and libraries.

“The ability of local governments, particularly cities, to provide the levels of service they do now is threatened by this liability,” said Joshua Rauh, a Northwestern University business professor who co-authored the report with Robert Novy-Marx, a University of Rochester professor.

To recap… The G-7 meeting turned the currency disputes over to the IMF… Does that wrinkle anyone else’s forehead? The currencies are seeing some selling this morning, as the uncertainty of things leads to a “flight to safety” once again, with Japanese yen trading close to an 81-handle! The FOMC meeting minutes print this afternoon, and should put all those nonsensical thoughts about no QE to bed. And the president could call out China as a currency manipulator this week…

Chuck Butler
for The Daily Reckoning

G-7 Squashes Currency Rally originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
G-7 Squashes Currency Rally




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

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SP500 at 1170 – What the Charts Suggest Next

October 12th, 2010

So far, the S&P 500 has gently crept to the two shorter-term upside price targets after the breakout from resistance at 1,130.

Now that the index tests the second upside target, what does the daily chart show and what are the odds of breaking through… or falling down from here.

Let’s take a quick look:

Let’s do a little historical tracking first.

From a chart standpoint, resistance levels are important markers as price journeys to them.  It’s reasonable to expect a pause at resistance, but if that pause does NOT occur, then you must be on the look-out for higher price targets and higher resistance levels to play for (as a short-term trader).

In various posts – and in nightly member reports – the likely price target on the “IF/THEN” situation for a breakout above 1,130 has been 1,170.

See the prior posts:

SPX Breakout and Market Realities You Should Know

Is This Really It?  SPX Above 1,130 and Tips on Trading Breakouts

This situation is one of the best learning experiences for newer – and even experienced traders – who 100% doubted it was conceivably possible to rise above 1,130.  It was, we did, and we’re here.

So now we return to the present – what’s going to happen at 1,170?

In short, the same sort of “game” and IF/THEN statements.

To keep it concise, IF price breaks out above 1,170 THEN the next upside resistance target is 1,200 (round number) and 1,220 (2010 high and major Fibonacci).

Ok so that makes sense, but what are the odds of that happening, as they exist right now?

Given the tendency of the market to shatter resistance on increasingly lower volume and momentum – making this one of the weirdest breakouts I can ever remember – it might be wise to take into account this unusual bullish rally that has broken a lot of historical rules to get where it is.

From a Chart Purism standpoint, odds seem NOT to be in favor of a breakout, due to the following conditions:

A clearly weakening technical structure as evidenced by a considerable negative VOLUME and Momentum (3/10 Oscillator) Divergences.

Price formed a doji (candle) yesterday at the 1,170 expected price target (resistance) which coincided with the upper Bollinger Band.

Market Internals did not confirm the push to new index highs and also diverged at the 1,170 intraday level (especially the TICK).

This is a long rally, and the market has a historical tendency to swing back and forth, up and down, as it moves from level to level.

And I could go on.

The main idea right now is to watch the 1,170 level - be neutral to short-term bearish while we’re under the level, but also keep a close eye on the layers of support underneath price right now.

Those include daily moving averages, the 1,130 key price level, and rising trendlines (the main one ends about 1,145).

So we’re setting up one of those games where we have upside resistance on negative divergences, but lower rising support levels and a short-term uptrend in progress.

The bias is long for continuation above 1,170, neutral between 1,130 and 1,170, and bearish under the 1,120 level (and especially 1,100… which is 60 points below).

Keep a close watch on price, and eliminate your biases on what price can or cannot do.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
SP500 at 1170 – What the Charts Suggest Next

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SP500 at 1170 – What the Charts Suggest Next

October 12th, 2010

So far, the S&P 500 has gently crept to the two shorter-term upside price targets after the breakout from resistance at 1,130.

Now that the index tests the second upside target, what does the daily chart show and what are the odds of breaking through… or falling down from here.

Let’s take a quick look:

Let’s do a little historical tracking first.

From a chart standpoint, resistance levels are important markers as price journeys to them.  It’s reasonable to expect a pause at resistance, but if that pause does NOT occur, then you must be on the look-out for higher price targets and higher resistance levels to play for (as a short-term trader).

In various posts – and in nightly member reports – the likely price target on the “IF/THEN” situation for a breakout above 1,130 has been 1,170.

See the prior posts:

SPX Breakout and Market Realities You Should Know

Is This Really It?  SPX Above 1,130 and Tips on Trading Breakouts

This situation is one of the best learning experiences for newer – and even experienced traders – who 100% doubted it was conceivably possible to rise above 1,130.  It was, we did, and we’re here.

So now we return to the present – what’s going to happen at 1,170?

In short, the same sort of “game” and IF/THEN statements.

To keep it concise, IF price breaks out above 1,170 THEN the next upside resistance target is 1,200 (round number) and 1,220 (2010 high and major Fibonacci).

Ok so that makes sense, but what are the odds of that happening, as they exist right now?

Given the tendency of the market to shatter resistance on increasingly lower volume and momentum – making this one of the weirdest breakouts I can ever remember – it might be wise to take into account this unusual bullish rally that has broken a lot of historical rules to get where it is.

From a Chart Purism standpoint, odds seem NOT to be in favor of a breakout, due to the following conditions:

A clearly weakening technical structure as evidenced by a considerable negative VOLUME and Momentum (3/10 Oscillator) Divergences.

Price formed a doji (candle) yesterday at the 1,170 expected price target (resistance) which coincided with the upper Bollinger Band.

Market Internals did not confirm the push to new index highs and also diverged at the 1,170 intraday level (especially the TICK).

This is a long rally, and the market has a historical tendency to swing back and forth, up and down, as it moves from level to level.

And I could go on.

The main idea right now is to watch the 1,170 level - be neutral to short-term bearish while we’re under the level, but also keep a close eye on the layers of support underneath price right now.

Those include daily moving averages, the 1,130 key price level, and rising trendlines (the main one ends about 1,145).

So we’re setting up one of those games where we have upside resistance on negative divergences, but lower rising support levels and a short-term uptrend in progress.

The bias is long for continuation above 1,170, neutral between 1,130 and 1,170, and bearish under the 1,120 level (and especially 1,100… which is 60 points below).

Keep a close watch on price, and eliminate your biases on what price can or cannot do.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
SP500 at 1170 – What the Charts Suggest Next

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