Well Dell spoiled the fun afterall. The S&P ended down 1.4% on Friday failing to hold onto Thursday's momentum. The Chicago PMI was stronger than expected, while US personal income and expenditure data came in pretty much in line, with the notable exception of income, which was materially worse than expected at -0.7% on the month as the tax rebate effect unwound, compared to expectations of -0.2%. The surprising strength of Q2 GDP now looks to be on even shakier ground than previously thought because as everyone knows, the US savings ratio must rise. That will be far more painful against a backdrop of falling income.
Crude and NatGas are slightly lower in a trading session convened especially (its Labour Day in the US today so all other markets are closed). Gustav is expected to make landfall today. It has the potential to wreak as much damage as Katrina and has already shut three-quarterss of oil output in the GOM. Yet crude and ng have been and are relatively calm? The IEA have already said that the SPR would be tapped if required while Thursday's NG storgage figures were merely the latest in a summer's worth of bumper numbers. In other words, inventory for each looks adequate - rightly or wrongly, there is appears little fear of supply disruption.
PMIs out in Europe today, the US tomorrow. The Chinese one this morning showed manufacturing to have contracted again in August. How seriously should this be taken? The Chinese economy is about the only engine firing the global economy right now and weakness there will have serious consequences indeed, not least in the commodity markets.
The truth, however, is that we just don't know. Is the PMI a reliable guide to activity? Probably not. It's difficult to find a correlation with any activity data. But suppose it was. To what extent does this weakness reflect the Olympics shut down? Again, we have no idea. We'll just have to wait for September's release, and beyond to see if China has avoided the "Olympic curse" (Morgan Stanley have shown that 10 of the last 11 Olympic hosts saw slumping activity in the year after the Games). Finally, if we accept that there is actually a slowdown going on, as evidenced by the authorities loosening lending standards and mulling fiscal stimulus, is any slowing caused by a weakening external sector likely to have the same devastating effect on overall activity and the domestic economy as it would in otherwise moribund economies such as Japan or Germany? I suspect not. Retail sales are now growing at a faster pace than exports, while all that infrastructure - water network, power plants and rail roads to name just a few - is as important as ever to the long run objectives of the government. But again - who knows? FAI of 50% of GDP is hardly "balanced." Is it disconcerting to be so utterly dependent on the part of the global economy we seem to know the least about? Yes, it is.
Where do the stock markets go from here? The end game for the financial system - nationalisation of credit - isn't even in sight yet and anyone thinking the July 15th was THE "capitulation" marking the bottom is thinking wishfully indeed. The peak to trough decline of the SS&P500 that day was 20%, buy the way, putting the US market in an "official bear market" according to the talking heads on TV.
But consider this: the entire model of Western (certainly Anglo-Saxon) economic growth over the past two decades has been based on the leveraging of activity. As private sector debt levels rose to 160% of GDP in the US (230% in the UK) the financial share of Amerian private sector business output rose to 25%, despite employing only 7% of its employees. As the conventional wisdom grew that one should never bet against the US consumer, growth and activity were significantly higher than they otherwise would despite real income growth going nowhere during those decades. It was more alchemy than wealth creation, but the magic required ever decreasing interest rates. Now, the secular fall in yields that took them from double digits in the early 80s to close to zero in the early part of this decade is over.
The GSEs can no longer afford to support the housing market. Banks remain unwilling to lend to one another. US Bank Credit is now 3.7% lower for the first time in 50 years. And US incomes are contracting. The machine is broken. Indeed, with a slow motion energy crisis likely to take yeilds higher on a secular basis over the next ten years or so, it will be impossible to fix it. Deleveraging - selling what you can to pay down debt, or simply defaulting - is the new leveraging. Does anyone really think that in such a context, 20% off most major indices is as bad as bad as it gets?
I'd been expecting a bounce to take us up to just shy of 1400 on the SPX, giving us a bear-market rally of 15% or so from the 1200 low reached on July 15th. Not that there's anything magical about 15%, or about 1400, but we had a rally of similar magnitude after Bear Stearns was bailed out ... also, the July 15th felt sufficiently panic-like to engender a commensurately impressive opposite response. But it has felt anything but. The stuttering 9% rally we've seen from that 1200 low to the recent high of 1320ish has been on low and declining volume ... meanwhile, banks have hundreds of billions of financing to arrange at rates which will be be at levels hundreds of basis points higher than they are paying now, while the lagged effect of the recent withdrawl of the last guys playing the mortgage game - Fannie and Freddie - ensures a second leg down in the housing market awaits.
Is there light at the end of the tunnel? No. But there will be some succour as central bank cuts policy rates as inflation peaks for this cycle. One of the worst inflation problems in EM land has been that of Vietnam, yet signs there are that the worst is over (for now) helped the mkt there rise by 19% in August. The inflation we've seen so far, at least in developed markets, has been entirely food and energy related. In July, depending on which index you look at, food and energy prices were 75-100% higher YoY. That means that anything less that 75-100% higher YoY will bring down the rate of headline inflation. Oil is likley to go materially lower near term, and while I'm more bullish of agriculture, we're already so far off the March highs it's unlikely we'll see food inflation at those rates for some time yet.
On the grains ... Western Australia received fantastic rains in the parts of the wheat belt which needed it most. I wonder if the same prayer group who have taken credit for the recent fall in oil prices turned their attention to the Australian farmers plight? http://news.bbc.co.uk/1/hi/business/7566566.stm
The IGC, meanwhile, upped their forecast global grain harvests and inventory levels for end May 2009.
Sunday 31 August 2008
Thursday 28 August 2008
US GDP "strong" ... Dell down 15% ... waiting for Gustav ... South Africa expecte a bumper harvest ... the bull mkt in rubber ...
Stocks were strong yesterday (SPX +1.5% @ 1300) and we've just had a strong overnight in Asia (Nikkei +2.4%, Shanghai +2.8%) where Japanese CPI came in weaker while industrial production, the PMI, housing and retail sales all came in stronger ... sounds like Goldilocks-san to me ... falling energy prices certainly helped yesterdays US rally but it was the GDP report which really got things moving, the latest data report this week to come in stronger than expected and get the talking heads on CNBC into a frothy excitable lather.
To be fair, if you allow yourself the economists option of exing-out the things which are bad, like the US housing outlook (and UK housing outlook for that matter - yesterday's nationwide housing report was grim, as was an excellent broker note I read very plausibly arguing for a50% housing correction), the fundamental insolvency and continued deterioration of the US financial system or the related question mark over the entire model of US economic growth over the past 25 years, things don't look so bad. That's certainly the view of the stock market right now. Onwards and upwards and who am I to argue? No one.
Maybe Dell is though. After hours they reported weak profits citing margin pressure and a spread of US weakness to Europe and Asia. The stock was down 15% aftermarket and the SPX futures are down a couple of points this am.
The dollar is slightly weaker in Asian trading this morning, partly because of Dell presumably, but no doubt too because of the overnight oil price which strengthened once more after yesterday afternoon's shenanigans. At 15.30 yesterday, Nat Gas storage came in at 102bcf, materially higher than the 84bcf expected. I think that puts storage well above seasonal averages and should ensure sufficient inventory that the US need not import LNG from the world markets, where it is trading as high as $25/mbtu in parts of Asia. Of course, a very cold winter could yet undermine the US position, as could a particularly devastating hurricane season, as was the potent concoction in the winter of 2005 which pushed NG prices above $15. As I write, Gustav is back down to a tropical storm but only because it made land in Jamaica. As Louisiana braces itself once again, as Shell, Exxon, BP etc. evacuate staff (Shell, who's rigs lay in Gustav's direct path, has already said its production will be affected), and as the IEA says it stands ready to release oil stockpiles if required, we'll just have to see what level of intensity it reaches today when it returns to the warm waters of the GOM.
Such concerns were far from the forefront of the NG market's mind yesterday, however, with a volatile session even by that market's wild standards. It seems as though everyone who bought NG over the last couple of days thinking that reading obscure weather web sites made them expert at hurricane prediction tried to sell at exactly the same time - immediately after the bearish storage report. NG was nearly 10% lower at its worst. This pulled down crude and, as far as I could see, rippled out into the rest of the commod space - crude and grains were all trading lower last night, though now seem to have recovered.
On the Ag front, and following on from the the weakness of the Baltic Freight index I highlighted here US grain exports fell 60% last week, US prices being out of kilter with global prices apparently. On the supply front, South Africa is the lastest country to announce its expectation of a bumper crop. The 12m tonnes the Crop Estimates committee now expect will be the highest in 13 years. This year is certainly shaping up nicely in terms of grain output. Wherever you look, Russia, Ukraine, France, Germany, Australia etc etc etc, you see an impressive supply response to recent high prices.
However, what I find staggering is that notwithstanding this response, the DoA project inventories to be at similar levels to those at the beginning of the year. In other words, demand is rocketing too. If correct, the recent softness of agricultural prices is less a reflection of slack markets than it is of a fortuitous harvest. Mother nature is unlikely to remain so giving in future harvests. The next "food crisis" surely lurks menacingly around the next corner. Its just that as Kevin Keegan said, we don't know where the corner is.
Rubber inventories on the Tokyo Commod Exchange hit a three year low this morning, pushing rubber up to Y342/kg, close to its all time high of Y352 reached a few weeks ago. An economist argued a few months ago to me that since all commodities were rising in unison, there must have been a single (monetary) driver. A priori proof, he argued, of a bubble.
Of course, to a man with a hammer every problem is a nail. And while he's right in the sense that there is one driver - simplistically, let's just call it China - he's wrong in that not all commodities are actually rising. Nickel and zinc are good examples of markets where supply and inventories have risen (so much that prices have fallen to sub-marginal cost levels now - see XTA's nickel mine closure a few weeks ago) and I suspect shipping rates will follow suit in coming years (with one new ship to float every other day in 2009, one each day in 2010 I seem to recall reading somewhere). The ones which have risen and remain "elevated" are precisely the ones with supply issues and low inventory levels, as the rubber market currently demonstrates (and yes, it does feel silly to be talking about "the rubber market").
To be fair, if you allow yourself the economists option of exing-out the things which are bad, like the US housing outlook (and UK housing outlook for that matter - yesterday's nationwide housing report was grim, as was an excellent broker note I read very plausibly arguing for a50% housing correction), the fundamental insolvency and continued deterioration of the US financial system or the related question mark over the entire model of US economic growth over the past 25 years, things don't look so bad. That's certainly the view of the stock market right now. Onwards and upwards and who am I to argue? No one.
Maybe Dell is though. After hours they reported weak profits citing margin pressure and a spread of US weakness to Europe and Asia. The stock was down 15% aftermarket and the SPX futures are down a couple of points this am.
The dollar is slightly weaker in Asian trading this morning, partly because of Dell presumably, but no doubt too because of the overnight oil price which strengthened once more after yesterday afternoon's shenanigans. At 15.30 yesterday, Nat Gas storage came in at 102bcf, materially higher than the 84bcf expected. I think that puts storage well above seasonal averages and should ensure sufficient inventory that the US need not import LNG from the world markets, where it is trading as high as $25/mbtu in parts of Asia. Of course, a very cold winter could yet undermine the US position, as could a particularly devastating hurricane season, as was the potent concoction in the winter of 2005 which pushed NG prices above $15. As I write, Gustav is back down to a tropical storm but only because it made land in Jamaica. As Louisiana braces itself once again, as Shell, Exxon, BP etc. evacuate staff (Shell, who's rigs lay in Gustav's direct path, has already said its production will be affected), and as the IEA says it stands ready to release oil stockpiles if required, we'll just have to see what level of intensity it reaches today when it returns to the warm waters of the GOM.
Such concerns were far from the forefront of the NG market's mind yesterday, however, with a volatile session even by that market's wild standards. It seems as though everyone who bought NG over the last couple of days thinking that reading obscure weather web sites made them expert at hurricane prediction tried to sell at exactly the same time - immediately after the bearish storage report. NG was nearly 10% lower at its worst. This pulled down crude and, as far as I could see, rippled out into the rest of the commod space - crude and grains were all trading lower last night, though now seem to have recovered.
On the Ag front, and following on from the the weakness of the Baltic Freight index I highlighted here US grain exports fell 60% last week, US prices being out of kilter with global prices apparently. On the supply front, South Africa is the lastest country to announce its expectation of a bumper crop. The 12m tonnes the Crop Estimates committee now expect will be the highest in 13 years. This year is certainly shaping up nicely in terms of grain output. Wherever you look, Russia, Ukraine, France, Germany, Australia etc etc etc, you see an impressive supply response to recent high prices.
However, what I find staggering is that notwithstanding this response, the DoA project inventories to be at similar levels to those at the beginning of the year. In other words, demand is rocketing too. If correct, the recent softness of agricultural prices is less a reflection of slack markets than it is of a fortuitous harvest. Mother nature is unlikely to remain so giving in future harvests. The next "food crisis" surely lurks menacingly around the next corner. Its just that as Kevin Keegan said, we don't know where the corner is.
Rubber inventories on the Tokyo Commod Exchange hit a three year low this morning, pushing rubber up to Y342/kg, close to its all time high of Y352 reached a few weeks ago. An economist argued a few months ago to me that since all commodities were rising in unison, there must have been a single (monetary) driver. A priori proof, he argued, of a bubble.
Of course, to a man with a hammer every problem is a nail. And while he's right in the sense that there is one driver - simplistically, let's just call it China - he's wrong in that not all commodities are actually rising. Nickel and zinc are good examples of markets where supply and inventories have risen (so much that prices have fallen to sub-marginal cost levels now - see XTA's nickel mine closure a few weeks ago) and I suspect shipping rates will follow suit in coming years (with one new ship to float every other day in 2009, one each day in 2010 I seem to recall reading somewhere). The ones which have risen and remain "elevated" are precisely the ones with supply issues and low inventory levels, as the rubber market currently demonstrates (and yes, it does feel silly to be talking about "the rubber market").
Wednesday 27 August 2008
Euro strong on ECB comments ... ECB to turn the tap to Spanish banks off ... Gustav feels like Katrina ... when does wheat smell of fish?
As is typical the $ hasn't stop falling since I proclaimed its correction to be fully in play yesterday morning. Axel Werber (sounds like a heavy metal drummer but is in fact president of the Bundesbank) said that ECB would be likely to raise, not lower, interest rates at the end of the year if the economy recovered.
Well maybe ... data has been stronger, not weaker these last few days, including yesterday's US durable goods report. But I can't help remembering Bernanke speaking in a similar tone and with like confidence back in May post the very decent Bear Stearns rally in the market, only for the GSEs to subsequently blow up into the July meltdown. The US has a second wave of housing pain upon it. The GSEs, who represent 80% of all mortgage activity no longer have the capital to continue their support operation and are reigning in activity as we speak. The housing market remains vulnerable on various metrics (such as affordability) and I reckon another 10-20% fall from here is likely. The whole financial system is leveraged against a depreciationg asset and you get the impression they're out of options on the recapitalisation front. So I suspect the GSEs won't be the last blow up. Who's next? Who the hell knows, but I note that Goldmans were weak on further earnings downgrads, amid general strengthening in the BKX too yesterday ... I keep saying it, but if you see someone walking on water, they're not. They're doing something very clever, but they're not walking on water. How the hell are GS making money? Does anyone actually know? And JPMorgan are on the hook for how many trillions of derivatives? Anyway, the end game will be a nationalisation of the financial system or, more likely, its debt and we're still some way from that.
Interesting piece in yesterday's WSJ saying that the solvency of the GSEs didn't matter so long as they were government guaranteed, which is a cute way of looking at it. But if they are tightening standards and reigning in lending (debt issuance down 40% in July, conforming mortgage rates 50bp higher now compared to June) then the GSEs are failing in their role as a policy vehicle. Surely this matters a great deal to the government - what's the point of guaranteeing their operations if you can't make them an effective policy lever?
And speaking of policy levers ... the ECB look set to change the rules on collateralised lending to financial institutions. One of the reasons the liquidity crunch has been less sever in Europe is that the ECB accepts a wider range of ABS collateral for its govvies. The Spanish and UK banks have been the biggest beneficiaries. But the ECB want to make sure the rules aren't "abused"with some issues being originated by banks with the express intention that they can be shifted straight onto the ECBs books. Careful what you wish for ...
The glimmer of hope is that the Chinese slowdown has been exaggerated by the Olympic shut down. It's not plausible to see China escaping a sharp slowdown in its biggest export market. But those power plants, railways, dams need to be built regardless of how bust the US financial system is. And Chinese retail sales are now growing stronger than its exports. The authorities hit the pause button on an economy the size of Mexico before the Olympics (in the way only the Chinese can) and are now set to let it run again. Time will tell. Commodity bulls certainly hope so.
Commods are quiet this morning, rising about as much as the $ has fallen. Gustav has been sapped of some of its intensity after making land south of Cuba. It is expected to regain that intensity, possibly to a cat 3, over the Caribbean and enter the GOM by Aug 30th, which is Saturday. Louisiana have declared a state of emergency. Sadly, it all feels a bit Katrina like. Incidentally, Katrina hit on the Labour Day weekend in 2005. Nat Gas gapped by 20% when the mkts opened on the Tuesday, falling 10% from that opening in the same session. As things stand at the moment, the time to sell Nat Gas/Oil/Gold will be on Monday which will be possible even though the US will be closed using the European traded ETFs.
The Baltic Dry Index fell again yesteday, reportedly on a lack of grain shipments. The problem is't that there is no grain, but that farmers are witholdling their grain in elevators in anticipation of higher prices. Wheat for sale directly from grain elevators in the Mississippi sell at $5.95 a bushel compared to the Chicago exchange price of $8.24 ... hmm ... doesn't that smell fishy?
I've probably been reading up too much on market corners, but if I was trying to corner the wheat mkt, I'd need several billion dollars (value of US crop last year was roughly $15bn) to buy lots of futures, take delivery and stick it the elevator. That would make the elevator price trade substantially below the exchange price. But who has that sort of money? The Saudis? Rich with oil money ... living in a dry desert ... looking to buy farmland ... hmmm, the Saudis ... who tried to corner the silver market in the 70s ... yes, the Saudis ... or the Russians? Record harvest for them ... but why corner a grain mkt though? It'd be political suicide being blamed for world hunger. Surely its just too bad an idea, cornering wheat? Then again, aren't market corners always bad ideas? Am I becoming one of those loony conspiracy theorists? Yeah, probably ...
Earnings at Sinofert, China's largest fertiliser importer doubled as their chief exec said the export price controls were having little effect. He expected prices to continue rising at the next round of contract talks to be held sometime in Q4 ...
Well maybe ... data has been stronger, not weaker these last few days, including yesterday's US durable goods report. But I can't help remembering Bernanke speaking in a similar tone and with like confidence back in May post the very decent Bear Stearns rally in the market, only for the GSEs to subsequently blow up into the July meltdown. The US has a second wave of housing pain upon it. The GSEs, who represent 80% of all mortgage activity no longer have the capital to continue their support operation and are reigning in activity as we speak. The housing market remains vulnerable on various metrics (such as affordability) and I reckon another 10-20% fall from here is likely. The whole financial system is leveraged against a depreciationg asset and you get the impression they're out of options on the recapitalisation front. So I suspect the GSEs won't be the last blow up. Who's next? Who the hell knows, but I note that Goldmans were weak on further earnings downgrads, amid general strengthening in the BKX too yesterday ... I keep saying it, but if you see someone walking on water, they're not. They're doing something very clever, but they're not walking on water. How the hell are GS making money? Does anyone actually know? And JPMorgan are on the hook for how many trillions of derivatives? Anyway, the end game will be a nationalisation of the financial system or, more likely, its debt and we're still some way from that.
Interesting piece in yesterday's WSJ saying that the solvency of the GSEs didn't matter so long as they were government guaranteed, which is a cute way of looking at it. But if they are tightening standards and reigning in lending (debt issuance down 40% in July, conforming mortgage rates 50bp higher now compared to June) then the GSEs are failing in their role as a policy vehicle. Surely this matters a great deal to the government - what's the point of guaranteeing their operations if you can't make them an effective policy lever?
And speaking of policy levers ... the ECB look set to change the rules on collateralised lending to financial institutions. One of the reasons the liquidity crunch has been less sever in Europe is that the ECB accepts a wider range of ABS collateral for its govvies. The Spanish and UK banks have been the biggest beneficiaries. But the ECB want to make sure the rules aren't "abused"with some issues being originated by banks with the express intention that they can be shifted straight onto the ECBs books. Careful what you wish for ...
The glimmer of hope is that the Chinese slowdown has been exaggerated by the Olympic shut down. It's not plausible to see China escaping a sharp slowdown in its biggest export market. But those power plants, railways, dams need to be built regardless of how bust the US financial system is. And Chinese retail sales are now growing stronger than its exports. The authorities hit the pause button on an economy the size of Mexico before the Olympics (in the way only the Chinese can) and are now set to let it run again. Time will tell. Commodity bulls certainly hope so.
Commods are quiet this morning, rising about as much as the $ has fallen. Gustav has been sapped of some of its intensity after making land south of Cuba. It is expected to regain that intensity, possibly to a cat 3, over the Caribbean and enter the GOM by Aug 30th, which is Saturday. Louisiana have declared a state of emergency. Sadly, it all feels a bit Katrina like. Incidentally, Katrina hit on the Labour Day weekend in 2005. Nat Gas gapped by 20% when the mkts opened on the Tuesday, falling 10% from that opening in the same session. As things stand at the moment, the time to sell Nat Gas/Oil/Gold will be on Monday which will be possible even though the US will be closed using the European traded ETFs.
The Baltic Dry Index fell again yesteday, reportedly on a lack of grain shipments. The problem is't that there is no grain, but that farmers are witholdling their grain in elevators in anticipation of higher prices. Wheat for sale directly from grain elevators in the Mississippi sell at $5.95 a bushel compared to the Chicago exchange price of $8.24 ... hmm ... doesn't that smell fishy?
I've probably been reading up too much on market corners, but if I was trying to corner the wheat mkt, I'd need several billion dollars (value of US crop last year was roughly $15bn) to buy lots of futures, take delivery and stick it the elevator. That would make the elevator price trade substantially below the exchange price. But who has that sort of money? The Saudis? Rich with oil money ... living in a dry desert ... looking to buy farmland ... hmmm, the Saudis ... who tried to corner the silver market in the 70s ... yes, the Saudis ... or the Russians? Record harvest for them ... but why corner a grain mkt though? It'd be political suicide being blamed for world hunger. Surely its just too bad an idea, cornering wheat? Then again, aren't market corners always bad ideas? Am I becoming one of those loony conspiracy theorists? Yeah, probably ...
Earnings at Sinofert, China's largest fertiliser importer doubled as their chief exec said the export price controls were having little effect. He expected prices to continue rising at the next round of contract talks to be held sometime in Q4 ...
Asia turning the tap off = local $ bottom
The dollar has weakened against the euro by around a cent this morning, taking commodity prices higher with it. Why? Because the Chinese, who hold nearly $400bn worth of long term agency debt are no longer keen to buy it. This is very significant. Headlines will be written about how it spells the end of the existing financial world order, how the foreigners (mainly Asian) who've financed the US credit binge aren't playing any more, and how the end of the dollar, the US economy and possible the world as we know it is upon us. As a prognosis of the dollar's problems at least, this is all true. It makes little sense that the world's reserve currency is the world's largest debtor nation by a distance. When the British Pound was the reserve currency and made the transition from creditor to debtor nation following WW1 the decline in its value over the following decades and generations was spectacular. But it was also a very slow unfolding. As world leadership passes to a non-english speaking people for this first time in 200 years the same fate surely awaits the dollar today.
BUT, this adjustment will be an ongoing one which will probably take for the rest of my life to play out. Nearer term, the decline which started in 2001 is due a correction and central banks becoming squeamish is likely a good short-term signal that we're seeing it now. Jim Rogers (who is also a huge dollar bear) says in Market Wizards that it should be a central plank of any speculator's strategy to bet against central banks. Financial history is littered with monetary authorities losing control of the internal and external value of their currency. With few exceptions (the BoJ are alone to my knowledge in making money by running the carry trade from JGBs into into USTs so profitably ... so far) it pays to be on the other side of government/central banking activity. Think Gordon Brown and gold in 1998.
Moreover, despite what the headline writers will write about the coming financial armageddon, how much damage can the Chinese or Asian CBS really do? Clearly, they'd have an effect. But the $2.2tr total treasury and agency held by foreign central banks debt represents only 5days average trading volume in Treasuries alone. It's certainly possible that dumping such an amount on the mkt would affect the price, but isn't it equally possible to slowly liquidiate? That Asian CBs refusing to buy Agency debt (while still buying USTs - smart money this is not) somehow seals the inevitably fate of the dollar in the coming months just isn't clear to me. So Central Banks finally waking up to what everyone else has kown for quite some time, and becoming alert to the trend that's been in place for seven years is more likely an indication that we're at a local bottoming in the dollar.
That should mean the commodities "bubble" is burst too. But commodities have risen by a much greater amount than the dollar has weakened in recent years. To suggest, as a surprising large number of people seem to be doing right now, that commods and oil especially is largely dollar driven is quite simply empircally incorrect. The closest inverse $ play is gold though (which has risen in all currencies, not just $) and it will be interesting in the coming months to see how it holds up. If this is a real bull mkt we'll have had the correction and be ready to advance further, regardless of what the dollar does over the next few months.
Anyway, the most important factor affecting energy markets has been hurricane Gustav (another silly name - why don't they call it something really scary like hurricane Adolf, or hurricane Gary Glitter?) It's been downgraded to a tropical storm but is expected to move over Haiti and strengthen again as it hits warm water. Its currently projected path takes it directly onto the Gulf states and threaten oil production next week. That will be the time to sell NatGas.
Elsewhere in commodity land , Argentine and Brazilian soybean output is at risk from unusually dry weather, BBG reports this morning. Argentinian corn planting (2nd biggest corn exporter) is expected to fall by 20% because of the drought. Cocoa, meanwhile, is continues to strengthen on concern that the sinister sounding "Black Pod" disease, which turns the beans black and mushy, is likely to be spread by wet weather. In the metals, India is set to raise taxes on exports of iron ore from 15% to 20%, an unnamed source told the Economic Times.
Other news of note, Pimco is to follow Black rock in set up a $5bn fund to buy distressed senior mortgage backed debt. Wonder how much of the trillions outstanding that'll buy?
BUT, this adjustment will be an ongoing one which will probably take for the rest of my life to play out. Nearer term, the decline which started in 2001 is due a correction and central banks becoming squeamish is likely a good short-term signal that we're seeing it now. Jim Rogers (who is also a huge dollar bear) says in Market Wizards that it should be a central plank of any speculator's strategy to bet against central banks. Financial history is littered with monetary authorities losing control of the internal and external value of their currency. With few exceptions (the BoJ are alone to my knowledge in making money by running the carry trade from JGBs into into USTs so profitably ... so far) it pays to be on the other side of government/central banking activity. Think Gordon Brown and gold in 1998.
Moreover, despite what the headline writers will write about the coming financial armageddon, how much damage can the Chinese or Asian CBS really do? Clearly, they'd have an effect. But the $2.2tr total treasury and agency held by foreign central banks debt represents only 5days average trading volume in Treasuries alone. It's certainly possible that dumping such an amount on the mkt would affect the price, but isn't it equally possible to slowly liquidiate? That Asian CBs refusing to buy Agency debt (while still buying USTs - smart money this is not) somehow seals the inevitably fate of the dollar in the coming months just isn't clear to me. So Central Banks finally waking up to what everyone else has kown for quite some time, and becoming alert to the trend that's been in place for seven years is more likely an indication that we're at a local bottoming in the dollar.
That should mean the commodities "bubble" is burst too. But commodities have risen by a much greater amount than the dollar has weakened in recent years. To suggest, as a surprising large number of people seem to be doing right now, that commods and oil especially is largely dollar driven is quite simply empircally incorrect. The closest inverse $ play is gold though (which has risen in all currencies, not just $) and it will be interesting in the coming months to see how it holds up. If this is a real bull mkt we'll have had the correction and be ready to advance further, regardless of what the dollar does over the next few months.
Anyway, the most important factor affecting energy markets has been hurricane Gustav (another silly name - why don't they call it something really scary like hurricane Adolf, or hurricane Gary Glitter?) It's been downgraded to a tropical storm but is expected to move over Haiti and strengthen again as it hits warm water. Its currently projected path takes it directly onto the Gulf states and threaten oil production next week. That will be the time to sell NatGas.
Elsewhere in commodity land , Argentine and Brazilian soybean output is at risk from unusually dry weather, BBG reports this morning. Argentinian corn planting (2nd biggest corn exporter) is expected to fall by 20% because of the drought. Cocoa, meanwhile, is continues to strengthen on concern that the sinister sounding "Black Pod" disease, which turns the beans black and mushy, is likely to be spread by wet weather. In the metals, India is set to raise taxes on exports of iron ore from 15% to 20%, an unnamed source told the Economic Times.
Other news of note, Pimco is to follow Black rock in set up a $5bn fund to buy distressed senior mortgage backed debt. Wonder how much of the trillions outstanding that'll buy?
Sunday 24 August 2008
Still waiting for the Koreans to show up ... worst credit contraction in 50yrs ... housing "stabilised"? ... a cold winter beckons ...
The Korean financial regulator said the Korean Development Bank should take a "cautious" approach to buying banks abroad. "We welcome any efforts led by the private sector to go global, but it may not be proper for state-owned financial institutions to lead the role and take on excessive burdens" since the difference between the public and private sector in Korea is blurry at best, this looks like an excuse not to get involved to me.
I'd always thought "credit crunch" was just an overused euphemism for recession. Maybe there's a good reason for that though - total US bank credit, which is nearly always expanding, contracted in the second quarter by -3.7% the steepest drop in credit expansion in the last 50 years. I can't see how the financial sector recovers (i.e. no longer needs to raise capital) until the US housing market recovers. Yesterday's existing home sales showed a stabilisation of sorts, rising 3.1% from July. Unfortunatley, home inventory rose to a new record high of 4.7m homes. That's 11.2 months supply. Prices have a bit more "adjusting" to do yet, which will ensure plenty more banking insolvencies. BKX down >3% yesterday, dragging the SPX to a 2% fall.
The dollar weakend on the financials news and "fears that the Fannie and Freddie might need bailing out by the Treasury" (as if there was an alternative outcome) but is pretty much where it started right now. Oil prices got a slight boose yesterday from the $ action, and from tropical storm Gustav. BBG reports that the Russian Duma's recognition of the break away Georgian regions was important too, though I doubt it actually was. The consensus seems to be that Medvedev is unlikely to do the same though because, as things stand he has a bargaining chip of sorts. But is it as strong as everyone thinks it is? What has actually changed, or would be changed by official recognition? The Europeans still need their gas, the American's still need their help with Iran.
Anyway, the chairman of Indonesia's oil and gas regulator said Indonesian output (which has declined by 40% in the last 12 years, is set to fall by 14% by 2015. "The output fall is a natural decline because 90 percent of Indonesian fields are mature ones". At the country's 29 active fields, which account for 70 percent of overall output, "the average annual decline rate is 16 percent."
Agriculture was relatively strong yesterday, trying to rally but being snuffed out by lacklustre oil. Reports of rain in Australia pulled wheat lower, but corn and beans were higher on reports of dry conditions in the Midwest worsening crop condition. Farmer's almanac also predicted an unseasonally cold winter. They're quite an interesting crowd and claim their forecasts, which use sunspots, lunar cycles and are widely ridiculed by the establised weather forecasters who think nothing of the silliness of using complex statistical models, have 80-85% accuracy. I have a lots of sympathy for the effect of solar activity on temperatures and annecdotally old folk indicators of cold winters, such as fog density in August are pointing in the same direction. So I'll be trading the grains from the long side from here. The late plantings due to floodings in the US this year make the crops more vulnerable to an early frost.
Meanwhile, the Chinese look set to increase tazes on urea exports from 135% to 185% (!!) to ensure domestic supplies for farmers. Urea prices are holding firm above $800/tonne despite annecdotal reports that fewer farmers can afford to pay the high prices. Probably because in 2007, China was the largest urea exporter but is now tightening that supply ... sounds a familiar story, albeit with slightly different mechanics from the usual scarcity induced supply reductions we've seen with oil, coal and will soon see with the grains themselves.
I'd always thought "credit crunch" was just an overused euphemism for recession. Maybe there's a good reason for that though - total US bank credit, which is nearly always expanding, contracted in the second quarter by -3.7% the steepest drop in credit expansion in the last 50 years. I can't see how the financial sector recovers (i.e. no longer needs to raise capital) until the US housing market recovers. Yesterday's existing home sales showed a stabilisation of sorts, rising 3.1% from July. Unfortunatley, home inventory rose to a new record high of 4.7m homes. That's 11.2 months supply. Prices have a bit more "adjusting" to do yet, which will ensure plenty more banking insolvencies. BKX down >3% yesterday, dragging the SPX to a 2% fall.
The dollar weakend on the financials news and "fears that the Fannie and Freddie might need bailing out by the Treasury" (as if there was an alternative outcome) but is pretty much where it started right now. Oil prices got a slight boose yesterday from the $ action, and from tropical storm Gustav. BBG reports that the Russian Duma's recognition of the break away Georgian regions was important too, though I doubt it actually was. The consensus seems to be that Medvedev is unlikely to do the same though because, as things stand he has a bargaining chip of sorts. But is it as strong as everyone thinks it is? What has actually changed, or would be changed by official recognition? The Europeans still need their gas, the American's still need their help with Iran.
Anyway, the chairman of Indonesia's oil and gas regulator said Indonesian output (which has declined by 40% in the last 12 years, is set to fall by 14% by 2015. "The output fall is a natural decline because 90 percent of Indonesian fields are mature ones". At the country's 29 active fields, which account for 70 percent of overall output, "the average annual decline rate is 16 percent."
Agriculture was relatively strong yesterday, trying to rally but being snuffed out by lacklustre oil. Reports of rain in Australia pulled wheat lower, but corn and beans were higher on reports of dry conditions in the Midwest worsening crop condition. Farmer's almanac also predicted an unseasonally cold winter. They're quite an interesting crowd and claim their forecasts, which use sunspots, lunar cycles and are widely ridiculed by the establised weather forecasters who think nothing of the silliness of using complex statistical models, have 80-85% accuracy. I have a lots of sympathy for the effect of solar activity on temperatures and annecdotally old folk indicators of cold winters, such as fog density in August are pointing in the same direction. So I'll be trading the grains from the long side from here. The late plantings due to floodings in the US this year make the crops more vulnerable to an early frost.
Meanwhile, the Chinese look set to increase tazes on urea exports from 135% to 185% (!!) to ensure domestic supplies for farmers. Urea prices are holding firm above $800/tonne despite annecdotal reports that fewer farmers can afford to pay the high prices. Probably because in 2007, China was the largest urea exporter but is now tightening that supply ... sounds a familiar story, albeit with slightly different mechanics from the usual scarcity induced supply reductions we've seen with oil, coal and will soon see with the grains themselves.
Friday 22 August 2008
LEH to die slowly
Almost as surreal as the idea that private equity might be about to bail out the GSEs (because as everyone knows, the problem with the GSEs is that they just aren't leveraged enough), BBG has just reported that the Korean Development bank is very close to taking out LEH afterall. Honestly. Korean bureaucrats running the risk-taking, swashbuckling and once mighty Lehman Brothers. I struggle to imagine a worse fit. My guess is they'll kill it in half the time it took Dresdner to kill Kleinwort Benson ... let's say five years?
The lending capacity in the world right now is more reflective of how outsized the credit bubble, which took a generation to inflate, eventually became than it is of the actual demand for loans. And while we've probably seen the inflation peak for this cycle, I reckon it's now a structural problem. Interest rates will be trending higher not lower, and the GDP+ business model of leveraging everything up because interest rates were in secular decline is now going into a reverse. That will likely last another generation and only the smartest and most far sighted banks will survive. I struggle to see grey-suited South Korean committee guys succeeding. Of course, Fuld has no choice. The sophisticated bankers that got LEH into is current condition in the first place had already screwed it up.
The lending capacity in the world right now is more reflective of how outsized the credit bubble, which took a generation to inflate, eventually became than it is of the actual demand for loans. And while we've probably seen the inflation peak for this cycle, I reckon it's now a structural problem. Interest rates will be trending higher not lower, and the GDP+ business model of leveraging everything up because interest rates were in secular decline is now going into a reverse. That will likely last another generation and only the smartest and most far sighted banks will survive. I struggle to see grey-suited South Korean committee guys succeeding. Of course, Fuld has no choice. The sophisticated bankers that got LEH into is current condition in the first place had already screwed it up.
Just like the old days
It was just like the old days yesterday, with everything going up except the dollar (which fell heavily). Well, stocks and commodities were higher. Bonds were looking OK in Europe until the Euro PMIs came out slightly stronger in the morning (suggesting very weak rather than disastrously weak activity - just wait till the next few months if you want to see disastrously weak activity) while in the US, the flight to quality bid Ts had enjoyed diminished over the day. The flip side of that was stronger stocks including, to some extent, financial stocks which gaped lower on the open on the LEH news, but drifed higher for the rest of the day without closing up for the day. Resources were the real driver of higher index prices though. Stocks rising with oil and gold soaring ... makes you nostalgic ... if only it could be like that every day.
It can't though, mainly because the US financial system's insolvency problem is deteriorating further. S&P reported that delinquencies for subprime loans in 2006 rose from 34.2% in Feb to 41.7% in July. Alt-As went from 15.2% to 21.5%, non-conforming jumbos (which aren't guaranteed) trading 12c lower than conforming. The picture is similar for 2007 bonds, with sub-prime delinquencies rising to 31.2 from 23, Alt-As from 9.1 to 14.1 and jumbos from 1.9 to 3.2. Over time, delinquencies always rise so you have to be careful when reading about "record highs for foreclosures" as an indicator that things are getting worse. Its the rate of change which is more important. Those rates of change don't look to encouraging though. And why should they? House prices remain in freefall and although there are tentative signs of stabilisation, those occured before the GSEs became so distressed even they turned off the tap. Another leg down in the housing mkt beckons, and the longer Hank keeps his Bazooka in his pocket the uglier it will be.
Its probably why Thain at ML is reportedy scheduled to pop in to some of the Asian Sov funds, including Korea. Hope he does better than Fuld did. Temasek said yesterday they were interested in looking at bank funding should opportunities present themselves (wonder if Fuld tried there?) Corn and beans rose yesterday on news that the late plantings caused by this years fooding are at risk from an early frost. Western Australia (world's third largest exporter) said lack of rain looked like bringing its crop in at the lower end of forecasts.
Today Bernanke speaks on financial stability. That'll be interesting. I'm sure he'll stress is inflation fighting credentials, as is obligatory ... if he meant it though he'd do more than talk. A good place to start would be by painting it 100 times on the outside of the Whitehouse while noone's looking ... "How much do you hate inflation Ben? Cos we really hate it, not like the Washington Popular Front. If you want to be in the People's Front of Washington, you have to really hate inflation. "Oh I do, I do. I really really really hate inflation"").
It will also be interesting to see how commods behave today. Ags are down this morning, as you'd expect given the run they'd just had. But oil is the big one. It traded through $121 last night which was a big support on the way down. We corrected about 25% from $147 and I'd be amazed if that was it for the oil price given the influence of distressed buying (Semgroup) in pushing it to $147 in the first place, not to mention the weakening global backdrop. In 2001, a couple of years after the bull market started, oil fell by 50% as global activity fell of a cliff post the tech bust. That'd take us to $75ish, which is probably where the highest marginal cost producers are. If the global economy isn't as weak as it was then (I suspect it's weaker but who the hell knows?) , well we've had a couple of 35% corrections during this bull mkt. That would take us to $100. That's the next level at which I'll start nibbling on some of the energy trades. In the meantime, I'll leave it to those who know more.
It can't though, mainly because the US financial system's insolvency problem is deteriorating further. S&P reported that delinquencies for subprime loans in 2006 rose from 34.2% in Feb to 41.7% in July. Alt-As went from 15.2% to 21.5%, non-conforming jumbos (which aren't guaranteed) trading 12c lower than conforming. The picture is similar for 2007 bonds, with sub-prime delinquencies rising to 31.2 from 23, Alt-As from 9.1 to 14.1 and jumbos from 1.9 to 3.2. Over time, delinquencies always rise so you have to be careful when reading about "record highs for foreclosures" as an indicator that things are getting worse. Its the rate of change which is more important. Those rates of change don't look to encouraging though. And why should they? House prices remain in freefall and although there are tentative signs of stabilisation, those occured before the GSEs became so distressed even they turned off the tap. Another leg down in the housing mkt beckons, and the longer Hank keeps his Bazooka in his pocket the uglier it will be.
Its probably why Thain at ML is reportedy scheduled to pop in to some of the Asian Sov funds, including Korea. Hope he does better than Fuld did. Temasek said yesterday they were interested in looking at bank funding should opportunities present themselves (wonder if Fuld tried there?) Corn and beans rose yesterday on news that the late plantings caused by this years fooding are at risk from an early frost. Western Australia (world's third largest exporter) said lack of rain looked like bringing its crop in at the lower end of forecasts.
Today Bernanke speaks on financial stability. That'll be interesting. I'm sure he'll stress is inflation fighting credentials, as is obligatory ... if he meant it though he'd do more than talk. A good place to start would be by painting it 100 times on the outside of the Whitehouse while noone's looking ... "How much do you hate inflation Ben? Cos we really hate it, not like the Washington Popular Front. If you want to be in the People's Front of Washington, you have to really hate inflation. "Oh I do, I do. I really really really hate inflation"").
It will also be interesting to see how commods behave today. Ags are down this morning, as you'd expect given the run they'd just had. But oil is the big one. It traded through $121 last night which was a big support on the way down. We corrected about 25% from $147 and I'd be amazed if that was it for the oil price given the influence of distressed buying (Semgroup) in pushing it to $147 in the first place, not to mention the weakening global backdrop. In 2001, a couple of years after the bull market started, oil fell by 50% as global activity fell of a cliff post the tech bust. That'd take us to $75ish, which is probably where the highest marginal cost producers are. If the global economy isn't as weak as it was then (I suspect it's weaker but who the hell knows?) , well we've had a couple of 35% corrections during this bull mkt. That would take us to $100. That's the next level at which I'll start nibbling on some of the energy trades. In the meantime, I'll leave it to those who know more.
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