6/16/08 (Corn Up! Interest Rates Rising? Father's Day)

Traders,

We got a huge rally on Friday – but are pretty much still in the range between support and resistance. This is expiration week and will all the volatility we have had it will be hard to make a call in one direction or another. I would remain vigilant and hedge positions accordingly. This year is more about staying ahead of breaking news and securing positions. It will continue to be a hard year for long term investing, what looks like a good investment today can easily be tomorrows dog.

The uncertainty and risks in the commodity and currency arena is also lending more volatility to the equity side. I talked to one financial advisor friend last week and he said that he was just trying to beat inflation and hedge down principal, avoiding chasing yield. I think he is right! Keeping principal insured and beating inflation (even CPI) as a benchmark instead of the market is probably a better and sound goal. He further stated that he wasn’t too sure anyone will be able to tell up from down until after Jan 2009 (post elections) and also once we see the financial and commodity game play its course. I think he is right.


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Higher Commodities - Flooding

The commodities – specially energy and food are hitting new highs. Between a demand in food and the issues in oil – any bit of news which normally would only send little blips into the commodity pricing is sending massive volatility spikes. Watching the news over the weekend – saw more flooding in the Midwest United States and that is putting huge pressure on Corn prices which seems to be breaking records every month. Additionally wheat, rice, and soybeans are also making their run again.

The flooding damage is expected to cost between $300 million to $700 million – but at this juncture it is only a guess as the floods are not abating. Expected corn stockpiles may fall 53% to a 13 year low according to U.S. Department of Agriculture.

Tack on that the United Nations expect global food imports to exceed $1 trillion for the first time and we are starting to see the global picture more closely. In the past 6-12 months I have been reading some interesting statistics about industrialized countries and the logistics to making them work.

One of the most interesting things is the accelerated shift in China. Traditionally China fell into two halves – the rural farmlands and the industrialized sectors. While the rural farmer provided food to the rest of China they also provided for themselves – those in the rural areas did NOT rely on imports. But over the last decade an accelerated shift has taken place and that is people are moving FROM rural farmlands into the industrialized centers (some of the fastest growing cities in the worlds). This shift has caused an imbalance – by sending much MORE energy and food into the industrialized areas. These areas rely on importing energy and food into the region and are not self sufficient like the rural areas. Some economist predict that China will become an importer of some crops (as soon as 5 years) as their nation is rapidly changing. The amount of people in China and if this shift continues will put a strain on the world energy and food supplies. They have (and are) moving from an exporter to an importer.

The local (Southeast Asia) exports vs. imports have already shifted and seen disruption (The cyclone disruption of 600 tons of rice, Philippines becoming the largest importer of rice, Indonesia dropping out of OPEC, and more food and energy being shipping into China). These shifts are being felt now on a global scale and a massive rebalancing is taking place. As the cyclone wiped out rice supplies in Southeast Asia we saw nations STOP exports and also outbid each other for what WAS available on the global market – sending rice prices through the roof. Egypt and other parts of the world are seeing food riots.

Something that we had become accustom to seeing in only the bleakest parts of Africa are becoming a serious issue on the global scale. As India, China, and several other large populated countries are becoming more industrialized and becoming more reliant on imports than ever before.

Traditionally storms, floods, and other natural disasters have created interment spikes in commodities, usually just seasonal and then quickly redistribution of supplies start to meet demands again and the prices revert back down. But now as demands continue to push the limits of the existing supply change – what typically was just a blip in prices because of a flood or storm could have bigger impacts and cause more nationalization and shut-downs of trading windows as nations stop exportation to protect their own nations. We just seen it with rice, could this happen with corn, soybeans, and other crops? Sure.

Expect this volatility and price increase to trickle into the system and affect consumers. All food suppliers will see impacts to margins (Kraft, General Foods, Beer companies, etc.). Watch this sector as the agricultures are currently getting rocked. They are paying up – it is only a matter of time before they have to pass on prices or see margins shrink.

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Dollar and interest rates – confused yet?

Economist and Analyst are splitting into two camps – those that think and believe the Fed should and will raise rates as inflation becomes worst and those that think they may hold rates steady to make sure the financial sector and the credit crisis is abated. Which is on the forefront of the Fed’s mind? Who knows – the Fed is talking tough about inflation and that talk has translated into a bond sell off and some strength returning to the dollar. However, the discount window is still opened to Investment banks and Lehman (and others) are still treading water. The housing numbers are looking worse (more foreclosures) and credit is still very tight (try getting a loan!). At this stage policy has not changed, only talk – and since the talk has been focused on inflation and no longer the credit problem – many are predicting a raise in interest rates. Which – could stall the economy.

Even those that think that they will raise rates cannot agree (some say 50 bps by the end of the year and others say 25 bps in 2009) – no one really knows. The talk however is working – but maybe the bonds are oversold and the dollar rebound (1.53 to the Euro) is a little too much. The Fed hasn’t really done anything – other than just talk. After a while the Fed has to put their money where their mouth is and raise rates – or be called out that it was just talk.

But here is the sticker wicket, what will a 25 bps or even a 50 bps up move really do? When he started to cut rates to help flood the system with money – the first several 25 bps cuts did nothing – it wasn’t until he got aggressive and started hacking at them that we saw any signs of a difference. A 25, 50, even 100 bps raise will probably not stop inflation – or commodity prices from going up. Lastly he may try to serve (again) two masters. Raise the target 25, 50, or 75 bps and leave the discount unchanged (to help the banks). If he did that – what does that say to the world? It says he will print money and lend to the banks at a lower rate than the target! That will not give any relief to the dollar or curb inflation – it will also through a massive monkey wrench at the Libor rate. Hey – if you are a U.S. bank you can come to the discount window for cheap money and skip going to Libor.

For now it is talk and it has worked – or has it. Time will tell.

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Futures Pre-market

The futures are giving back some after Fridays rally – the spread is small – however it’s there and if it remains going into the opening – expect the Arb traders to put a little pressure on the basket. About 2 point in it as of 9am (ET).

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Support / Resistance

It’s like watching a Chinese Ping-pong match – your neck starts to hurt trying to follow the action. This market is up, then down, then up, then down. That kind of volatility does not spell confidence and leads to more risk and uncertainty. Investors are grasping at news and looking for some soundings in this turbulent market place. If we remain channeled – expect more up and down.


INDU 12000 / 12500 (In the middle of this river and expect more moves – expiration week could add more volatility, rather than less. Don’t call it as long as it’s between 12000 and 12500. Who the hell knows in here.)

NDX 1900 / 2000 (If really don’t have a clue – AAPL up 10 points, then down 10 points, the heavy weights do not know up from down and I expect that to continue. – spoonful of volatility)

SPX 1325 / 1375 (We could get through 1375 as easily as 1325 – but for now expect the roller coaster to continue. A violent up move or down move is in the cards.)

RUT 720 / 740-750 (This is the ONLY thing that has shown any strength on the bottom. It never broke the 720 line. For the broadest of indices money has NOT gotten sucked out to a point of breaking support. If this continues to be the case – it should help reduce volatility in the narrower indices and help them too find support.)

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Conclusion

The commodity (first oil and now food) is something that is rather concerning – it’s like we don’t pay attention to these things until they bite us. Expect as stores begin their restocks that food prices will only go higher – even a rate increase may not help bring down prices, even if it helps to strengthen the dollar somewhat – because we are talking about a serious supply side issue. We have to eat!

I want to conclude with Tim Russert and Father’s day. I am really sorry to see him go, specially over Father’s day. He was a key journalist – specially during the election cycle. While you maybe a conservative, liberal, etc. – Tim was one of the few, while openly being a liberal, he didn’t let people off the hook (even member’s of his own party.) I am going to miss that kind of journalism. There are fewer and fewer out there that are willing to put some hard questions even to their own party – that IS what journalism is about. We need more of that and less opinionated talk shows.

I hope everyone had a great Father’s day – at the end of the day family and health is the most important. All this market and political stuff should always come second to family!