Like the illusion of Wall Street, with its vast and powerful investment banks, now shuttered, China too is an illusion perpetuated by the Globalists that gave us the 15,000 mile Caesar salad, poisoned cat food and lead based paint on babies' pacifiers. Like the illusion that money would come from thin air to always push housing prices higher, China has spent a generation pursuing its illusion. Pursuing an unattainable dream to be like the West, while 6000 years of its carefully shepherded top soil blows into the sea.
Posted: Wed Aug 13, 2008 6:34 am Post subject: Re: Trader's Corner 2008
'We Live in an Era of High Energy Prices'
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Tanaka: Despite all inadequacies, I think that the IEA can still provide relatively precise information in this regard. We believe that, in principle, there are sufficient resources left to allow production until 2030. The problem lies above the ground: Countries are not investing enough in the exploration of new reserves and the expansion of old facilities. This gives us reason for concern.
SPIEGEL: What are the consequences?
Tanaka: We have noticed that production volume is declining sharply. According to our projections, the volume in existing oilfields worldwide decreases by an average of 5 percent a year. This means that each year we need an additional 3.5 billion barrels of oil a day just to offset these losses. At the same time, however, demand is growing by about a million barrels a day. This imbalance makes it clear how incredibly tight the market is. A gap is developing here.
SPIEGEL: Is there a risk of supply bottlenecks developing?
Tanaka: As we have seen, in the current situation even a minor interruption in production can cause instability and trigger a jump in prices. All it takes is the news of a strike by oil workers in Nigeria. That's why it's so important that we work closely with the producers. I often communicate with OPEC Secretary General Abdalla Salem el-Badri, and OPEC President Chakib Khalil, as well as with Saudi Oil Minister Ali al-Naimi. In an emergency, we have to be able to work together smoothly and react flexibly within 24 hours.
SPIEGEL: The oil price has declined somewhat in the past few weeks. Could the most recent crisis truly be over?
Tanaka: We remain cautious in our assessment. Naturally, we have seen that demand for fuel in the United States is declining and that Saudi Arabia wants to expand daily production by 2.5 billion barrels of oil. Such signals are reflected in the price. We expect that the market will settle down in the coming one or two years. After that, however, the situation could become tense once again. A price level of less than $20, as we had 10 years ago, is something we'll probably never experience again.
SPIEGEL: Such regimes can only stay in power thanks to the high oil price. They're doing a booming business based on the scarcity of fossil fuels, while citizens and business owners worldwide are groaning under the cost burden. To what extent, in your view, does the global economy suffer from high oil prices?
Tanaka: There is a reliable indicator for this, which economists call the "oil burden." It describes the relationship between a country's expenditures for crude oil and its gross domestic product. This value increased dramatically this year. It is higher than it was in the days of the first oil price shock, in 1973, and it's approaching the level of the second shock, in 1979. Emerging nations that do not produce any significant amounts themselves are especially hard-hit, like Thailand or Vietnam. Some of these countries have subsidized fuel in the past, but now they're cutting back on this financial assistance, because it's getting too expensive for them and, by doing so, they hope to force their citizens to conserve energy.
SPIEGEL: Does this ease the situation in the oil markets?
Tanaka: It could in fact have a restraining effect on demand. This year China is spending roughly $40 billion on such subsidies, which isn't exactly a small amount. We are not in favor of this subsidy policy. We believe that the right thing to do is to pass price changes on to the consumer in as unadulterated a fashion as possible.
_________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Thu Aug 14, 2008 2:53 am Post subject: Re: Trader's Corner 2008
German lead European slowdown
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The German economy, Europe's largest, contracted for the first time in almost four years in the second quarter, led by a slump in construction.
Gross domestic product fell a seasonally adjusted 0.5 percent from the first quarter, when it rose a revised 1.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists expected a 0.8 percent decline, the median of 41 forecasts in a Bloomberg News survey showed. In the year, the economy grew 1.7 percent when adjusted for the number of working days.
The stronger euro and slower global growth have damped demand for German exports just as faster inflation erodes domestic spending power. The second-quarter contraction was exacerbated by companies bringing forward investment in construction due to unusually mild weather in the first three months of the year.
``It could have been worse,'' said Andreas Rees, chief economist for Germany at UniCredit Markets & Investment Banking in Munich. ``We won't see a crash scenario, but we don't expect a recovery over the next six months.''
The second-quarter decline was mostly due to a drop in construction, capital investment and consumer spending, the statistics office said. Trade made a positive contribution largely because of a decline in imports. The office will publish a detailed breakdown of the data on Aug. 26.
Global Slowdown
The global economy is cooling after oil and food prices rose to records and the U.S. subprime mortgage market collapsed, making banks reluctant to lend and driving up the cost of credit.
France, Europe's second-largest economy, also shrank in the three months through June, the country's national statistics office said in Paris today. GDP fell 0.3 percent from the first quarter, when it rose 0.4 percent.
The economy of the 15 nations sharing the euro probably shrank 0.2 percent in the second quarter, its first contraction since monetary union a decade ago, another survey of economists shows. The European Union's statistics office in Luxembourg will publish that report at 11 a.m. today.
Germany and France, the euro area's two largest economies, contracted in the second quarter as faltering sales undermined investment by companies and soaring costs eroded consumer spending power.
German gross domestic product fell a seasonally adjusted 0.5 percent from the first quarter, when it rose a revised 1.3 percent, the Federal Statistics Office in Wiesbaden said today. In France, GDP declined 0.3 percent, reversing a 0.4 percent gain in the previous three-month period.
The stronger euro and slower global growth have damped demand for euro-area exports just as faster inflation erodes domestic purchasing power. Confidence in Europe's economy has fallen to the lowest in almost 15 years and European Central Bank President Jean-Claude Trichet last week said growth will be ``particularly weak'' through the third quarter.
``There are two factors here: a correction from the strong first quarter and an underlying slowdown,'' said Aline Schuiling, an economist at Fortis in Amsterdam. ``The first-half picture is of moderate growth and it is going to remain weak in the euro zone for the remainder of the year.''
The prospect of weaker earnings prompted a recent slide in Chinese shares, with the Shanghai Composite Index sinking to a 19-month closing low on Wednesday, down more than 10 percent in four sessions and down 60 percent from last October's peak.
"Manufacturers will have to accept lower profit margins to keep market share," said Wu Haijun, Shanghai principal at Power Pacific Corp of Canada, a foreign investor in Chinese stocks.
Rising costs are also squeezing earnings.
Producer price inflation hit 10 percent in July, the first double-digit rate since the mid-1990s. While the recent pull-back in global commodities prices may ease the pressure, many analysts think that could simply give the government room to hike domestic fuel prices again this year.
And fierce competition is preventing producers from passing on costs to consumers. Consumer price inflation eased to 6.3 percent in July, leaving it nearly four percentage points below factory-gate inflation and squeezing corporate margins.
A third threat to earnings is the weakness of markets themselves. The stock market's slump is slashing commissions at brokerages and hurting other companies, especially insurers, which supplement earnings with investment profits.
The property market is also cooling, albeit less dramatically than the stock market.
The shaky property market, and with it, the prospect of rising bad debts, is another danger for the financial sector, which makes up around 30 percent of China's company earnings, Wu and others said.
China's industrial production grew at the slowest pace since February 2007 on weaker export orders and factory shutdowns to clear the air for the Olympic Games.
Production rose 14.7 percent in July from a year earlier, the statistics bureau said today, after gaining 16 percent in June. That was less than the 15.9 percent median estimate of 20 economists surveyed by Bloomberg News.
``This slowdown may indicate that export growth will be lower in coming months,'' said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong. ``Factory closures before the Olympic Games played a small part.''
Weakness in economies around the world pared orders for goods, while higher fuel and raw-material prices deterred some companies from expanding. The slowdown, exacerbated by attempts to prevent pollution in Beijing during the Olympics, suggests an acceleration in China's July export growth is unlikely to be sustained.
"It's a race against time" whether the global economy ends up in a recession, Gilles Moec, an economist at Bank of America in London, said. "Japan and Europe had been seen as protected from the U.S. slowdown. Strangely enough, it seems that Europe and Japan are paying the price now."
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More signs of the economic slowdown appeared on two continents, Asia and Europe.
On Thursday, the German economy contracted by 0.5 percent in the quarter from April through June, from the previous quarter, the weakest performance in more than five years, the Federal Statistics Office said.
In Europe, the Bank of England offered on Wednesday a pessimistic outlook for the rest of the year, saying that it expected inflation to hit 5 percent because of energy and food prices and the economy to stagnate.
And in Asia, Japan appears to be flirting with a recession, government data showed Wednesday.
"The numbers were awful," Hideo Kumano, chief economist at Dai-ichi Life Research Institute in Tokyo, said after the Japanese government reported that the gross domestic product shrank at an annual 2.4 percent rate in the three months that ended June 30. "Things are going to be very tough in the second half of the year."
Even as commodity prices are beginning to ease, the credit and housing crises in the United States, coupled with the highest inflation in a generation, are weighing on consumers.
In Europe, where new figures on the overall economy are to be released on Thursday, analysts are expecting more bad news as well.
U.S. consumer prices rose in July at twice the the expected rate, leading inflation to the fastest rate in more than 17 years, as costlier energy and food, a government report showed Thursday.
The Labor Department said the consumer price index rose 0.8 percent in July from June. That was far above the 0.4 percent gain that economists polled by Reuters had forecast for July.
Prices rose 5.6 percent from July 2007 - the sharpest year-over-year rise since a 5.7 percent increase in January 1991. That was also well above the 5.1 percent increase that economists had forecast.
Oil prices peaked above $147 a barrel last month, but they have retreated to around $116 a barrel Thursday, while prices for other commodities have also declined over the last few months. That has given economists some hope that inflation will abate in the second half of the year.
Energy prices rose 4 percent in July after a 6.6 percent June gain and were up 29.3 percent on a year-over-year basis. Food costs rose 0.9 percent following a 0.8 percent June increase and put food costs 6 percent higher than a year ago.
Excluding food and energy items, the so-called core CPI rose 0.3 percent in each of June and July, slightly above forecasts for a 0.2 percent gain in July. On a year-over-year basis, core prices rose 2.5 percent in July, slightly more than the 2.4 percent rise that was forecast.
source: U.S. consumer prices rise 5.6% _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Last edited by MrBill on Thu Aug 14, 2008 7:43 am; edited 3 times in total
Joined: Feb 20, 2005 Posts: 2886 Location: Uppsala, Sweden
Posted: Thu Aug 14, 2008 3:53 am Post subject: Re: Trader's Corner 2008
While I never give company investment advice, I do give people heads up on things they might find it interesting to look at.
And this time, it's a car company (gasp!).
Namely PSA Peugeot Citroen.
So why should anyone buy a car company during an energy crisis which is bound to get worse?
After a strong fall in the share price because of rising oil prices and worries about a collapse in car sales, the company is trading at a p/e of 6 and a p/b around 0,5(!). Everyone loves a p/b under 1. And while equity per share is twice as high as in 1999, the share trades at the same level as in 1999. In this credit environment, companies with low debt is a very good thing.
The company is cutting the labour force, increasing margins (from 1-2 % aiming at 6 %) and have launched several new models (the model range will be 50 % renewed in 2009 compared to 2006) while strucutural changes in the company might be in the cards.
75 % of sales are in Europe, no sales in the weak US market, no exposure to the dollar, increasing production and building new plants in the emerging markets where the economy is still strong (and will stay strong in my opinion)
But when buying any company you really can not only look at if the company looks cheap. The most important thing is if they make good products which customers will buy. And I think this part looks good for PSA.
PSA is the biggest manufacturer of small diesel engines. I think this pretty much sums it up. They are leading in the trend for smaller efficient diesel cars.
PSA Peugeot Citroen and Mitsubishi are due to announce an agreement to co-operate on powertrains for electric cars.
The French and Japanese carmakers will sign a letter of intent to investigate, develop, produce, and use motors, inverters and other components for electric cars, according to two people familiar with the plan.
You might also look at Peugeot family holding company Societe Fonciere which trades at a 30 % discount to the PSA share. Said family controls 30 % of the share capital and 45 % of the votes of PSA Peugeot Citroen and about 75 % percent of the holding of the holding company is PSA shares. The remaining 25 % is invested in stuff like shares in other French industrial companies, in the private equity fund the company runs, in the company that owns the French superhighways, and so on.
I don't own any of these stocks, just only indirectly via a fund, probably valued at about €200. Not that I can own directly either, as my investment account doesn't have access to the Paris exchange.
Another company, which I also own only indirectly that might warrant a look is south German integrated agriculture conglomerate Baywa. _________________ Peak oil is not an energy crisis. It is a liquid fuel crisis.
Despite extensive agricultural price weakness since early July, we maintain our bullish outlook and reiterate substantial upside price risks for corn and soybeans, respectively. Given the limited accuracy of mid-summer monthly yield forecasts, along with 2008's elevated risk of weather-related crop damage, we regard market optimism over material harvest upside as premature and see demand largely absorbing any incremental supply.
Recent weather favorable, but late season yield risk concerning
We don't dismiss the impact of recent favorable Midwestern weather, but we're more focused on conditions through harvest. Our concerns over 2008 U.S. crop yields are anchored by elevated frost risk on delayed spring planting, forecasts for interim cooler weather (which may complicate crop development) and any late-season outbreak of moisture-related crop blight. We're also cautious over existing 2008 high yield forecasts given that August estimates historically have had a relatively low correlation to actual yields. Given these early reporting uncertainties, we're more comfortable leveraging our industry contacts and believe that 2008 U.S. corn and soybean yields may fall below 150 and 40 bu/acre, respectively.
Improved near-term margins for U.S. ethanol production and
slower-than-expected livestock liquidation support our expectations for minimal 2H08 corn and soybean demand moderation. Recent grains pricing weakness further reinforces this view, given our estimates that ethanol margins have returned to the black and the economics of corn feed have improved relative to wheat substitution. While a scenario of severe demand rationing may be averted with a strong U.S. harvest, we continue to see demand straining tight carry-out into mid-2009.
source: Goldman Sachs Commodities Research
August 14, 2008
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Metals
Lowering our gold price forecast on expected dollar strength
As US dollar fundamentals are now expected to improve, we are lowering our gold price forecast to $745/toz, $810/toz and $740/toz from $890/toz, $905/toz and $810/toz on a 3-, 6- and 12-month basis.
US dollar fundamentals are now expected to improve...
The US dollar has recently begun to show initial signs of strength as the fundamental picture for the dollar has improved substantially in recent weeks. Goldman Sachs economists have raised their forecast for the US dollar as: (1) OECD growth outside the US has weakened rapidly, with both European and Japanese activity and sentiment data now becoming decisively weaker, and
(2) initial signs of a substantial improvement of the US BBoP through continued strong export performance and rising US capital inflows, as evident in the narrowing of the US trade deficit to $56.7 billion, relative to a consensus $61.5 billion deficit. On the back of stronger current and expected dollar fundamentals, our economists have changed their dollar forecasts against most currencies including the Euro and the Yen.
...leading us to lower our gold price forecast
We have long argued that, first and foremost, gold trades inversely with the US dollar. Our currency based gold fair value model suggests that the gold price had overshot its fair value over the past few weeks and has now once again converged with our fair value price estimate. Going forward, as the dollar is now expected to strengthen against the three consumer and three producer country currencies (EUR, JPY, AUD, CAD, ZAR, INR) that are included in our model, we are lowering our gold price forecast to $745/toz, $810/toz and $740/toz from $890/toz, $905/toz and $810/toz on a 3-, 6- and 12-month basis.
source: Goldman Sachs Commodities Research
August 14, 2008
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USD grinding higher
US inflation data failed to result in a rethink of US interest rate expectations despite the much bigger than expected jump in headline inflation. The market is still pricing in some probability of higher interest rates over coming months but this did not extend further following yesterday’s data, especially as the rise in core inflation was only slightly above expectations. If anything, we believe that the market is overly hawkish in its US rate view and although we concur that interest rates will move higher, a Fed rate hike is unlikely before Q2 2009 at the earliest. We look for inflation pressures to ease due to slower growth, declining commodity prices and favourable base effects. This could pose risks to the USD rally given the potential for a more dovish shift in US interest rate expectations especially as interest rate markets elsewhere have already become increasingly dovish over recent weeks.
The dovish shift in interest rate markets outside the US has played particularly negative for the AUD and CAD versus the USD as they have had the highest correlations with interest rate differentials over the last month; 0.94 in both cases based on the 1-month correlation with respective Dec 08 interest rate futures. Moreover, the AUD and CAD could rally if the shift in interest expectations becomes more hawkish in their local markets. Of course, commodity prices will also play a part and could continue to exert a negative influence on commodity currencies if the downtrend in commodity prices persists. However, as with the move in currency markets the move lower in commodity prices is looking over extended at present suggesting that the fall in interest rate sensitive commodity currencies will be less rapid and prone to correction over coming weeks.
Overnight the USD continued to grind higher in Asian trade as markets reacted to the positive close in US equities and lower commodity prices. The contraction in Eurozone GDP in Q2 revealed yesterday and plethora of weak Eurozone data releases over recent weeks has limited the ability of the EUR to capitalise on any USD pullback and the USD is likely to retain a firm tone into the European session. In the absence of key data releases in the European session markets will turn their attention to several US data releases today including the August Empire Manufacturing survey, June US Treasury TICS flows, July Industrial Production and August Michigan Confidence.
We look for a slight improvement in the Empire survey; sentiment is likely to have been boosted by lower energy prices given the drop in oil prices over recent weeks. Nonetheless, the index is set to remain at a relatively low level consistent with a downbeat manufacturing activity outlook. Moreover, given the usual volatility of this survey it is likely to have little market impact. The TICS data will be scrutinised to ascertain whether foreign capital inflows were sufficient to cover the trade deficit of $56.8 billion and we expect capital inflows to have easily covered the deficit. We are slightly more bearish than the consensus for industrial production but another weak outcome should come as little surprise given the downbeat survey evidence over recent months. Most attention will be on the preliminary Michigan sentiment index and we look for a slight rebound in sentiment. The drop in gasoline prices will be a factor helping to shore up consumer confidence as well as the boost from the tax rebate cheques and firmer equity market performance over recent weeks. However, the ongoing deterioration in labour market conditions threatens to limit any improvement and confidence is likely to languish at multi year lows.
Posted: Mon Aug 18, 2008 2:06 am Post subject: Re: Trader's Corner 2008
The Currency-Commodity Tug 'O War Continues
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Using the correlation
The dollar’s major-currency trade-weighted index has just seen its biggest monthly rise since 1992, which makes it an interesting time for Standard Bank to begin publications devoted to G10 currencies.
First and foremost, we’d say that the sharp dollar rally seen in the last month makes us more confident that the dollar’s slide against most major currencies, which began in 2001, is over. The path back to a stronger dollar in coming years won’t be a smooth one. There’s still a lot wrong with the US outlook, in terms of poor growth, high inflation, large trade deficits, big budget deficits and a decline in policy credibility following last year’s credit crunch. What’s more, the dollar is still bound to continue declining against some non-G10 currencies, like the renminbi, irrespective of how the dollar performs against G10 currencies like the euro and the pound.
One other point about the dramatic rally in the dollar in recent weeks is that it is not, in our view, a consequence of a seismic shift in relative economic fortunes. The reality of slumping growth might have caught up with the likes of the UK and Eurozone, hitting the pound and the euro but, as we just mentioned, the US economic outlook is hardly a bed of roses. Instead, we see the dollar’s rally as little more than a response to the apparent bursting of the commodity bubble.
Add to this the fact that traders and investors have seemingly been positioned short of the dollar and the recipe for a stronger dollar has clearly come together in the last few weeks. What happens from here? The steepness of the dollar’s rally leaves the currency looking overbought and badly in need of a breather. But it is hard to see this happening if commodity prices – especially oil – continue to plunge.
There’s nothing more that the currency market likes than a strong correlation. If traders can take their cue for euro/dollar from movements in another price – like oil – it makes their job a lot easier. These correlations don’t tend to persist over the long haul. Last year the strong correlation was between the dollar and credit spreads, like the ITRAXX index – but who looks at this anymore? Right now its commodities – and oil in particular—and the market could cling on to this correlation for a few months yet. So, if oil prices and other commodities continue to slump, euro/dollar should fall to 1.40 over the next few months, even if it takes a breather first to correct the overbought condition. If commodity prices stabilise, and even rally, we don’t think that the dollar will slump.
Sentiment seems to have taken an important turn here and hence we think that stability, or strength, in commodities will merely elongate the ‘breather’ for the dollar over the next few months, before it resumes its climb again.
I do not necessarily endorse Standard's view of either the US dollar's strength or the permanence of the bursting of the commodities bubble especially oil in particular. That remains to be seen. But what is apparent is that some market participants that have been on board with the commodity rally are now jumping off the bandwagon. An important shift in sentiment.
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Energy Weekly
The tug of war between fears and fundamentals continues
Despite economic-related concerns, recent data releases confirm that oil fundamentals continue to be tight, underscoring that structural supply-side drivers and emerging markets demand continue to offset OECD demand weakness.
Concerns over demand weakness continue to overshadow supportive fundamentals. We believe that although the bearish sentiment linked to deteriorating economic conditions may continue to put pressure on prices over the next few weeks, potentially exacerbated by negative gamma effects, mounting signs of strength in oil fundamentals provide support and suggest significant upside risk to prices in the autumn.
Strong EM demand and constrained supply tighten fundamentals
Recent data releases confirm that constrained supplies and supportive emerging markets demand continue to more than offset weak OECD demand. Declining supplies in mature producing regions and strong non-OECD demand more than countered the 1.1% price-induced decline in OECD demand in 2Q08, leaving total OECD inventories flat in 2Q08 against a seasonal 900 kb/d build, and below 10-year average levels for the end of July. The 9.5% annual increase in Chinese demand in July exemplifies that non-OECD countries continue to absorb oil supplies and keep fundamentals tight even in an increasing price environment. Further, this week's US Department of Energy (DOE) statistics have confirmed a decline in refined product inventories prompted by refinery run cuts, against a backdrop of continued low crude inventories.
A decline in long-dated oil prices has underpinned the recent sell-off, at the same time as timespreads have strengthened reflecting supportive near-term fundamentals. We believe the decline in long-dated oil prices is largely a correction after a dramatic acceleration in May and June. However, the long-term drivers are intact and the structurally constrained supply environment will likely continue to drive long-dated prices higher. At the same time re-accelerating industry cost inflation is increasing the cost-based floor to prices, which we currently estimate at US$105/bbl.
source: Goldman Sachs Commodities Research
August 15, 2008
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Natural Gas Weekly
Higher US production has led us to lower our price forecast
However, we believe current US natural gas prices are oversold as they stand below estimated marginal costs of production. Further upside to prices could come from downside supply risks during the peak of the hurricane season and upside demand risks from fuel substitution against coal.
We are revising up our average Jun08-Mar09 US production forecast by 720 mmcf/d
The US natural gas balance has become significantly softer in the past month, which is particularly significant if we take into account that US weather was warmer than average in the period. The magnitude and persistence of such strong builds suggest that weakness in natural gas demand alone does not fully explain the observed changes in inventories and that there is likely more supply in the system than we had anticipated.
With no need for incremental LNG, there is no need to price at international levels
Given the upward revision in our supply forecast, we believe US
inventories no longer need incremental LNG imports to reach comfortable levels by the end of injection season. Therefore, we are lowering our average Sep-Oct 2008 US natural gas price forecast to $9.25/mmBtu, closer to the marginal cost of production, down from $13.00/mmBtu previously, as there is no longer the need to compete with Asia or Europe for LNG. We are also lowering our 2008/2009 winter NYMEX natural gas price forecast to $10.30/mmBtu, down from $13.40/mmBtu previously, as higher US production will likely require lower natural gas prices to balance the market and guarantee plentiful supplies through the end of winter.
Summer 2009 to remain well supplied
We expect US natural gas inventories to reach a comfortable 3451 Bcf at the end of injection season and 1553 Bcf by the end of the winter. Such well-supplied inventories, combined with still strong US domestic natural gas production, will likely keep summer 2009 NYMEX natural gas prices close to marginal cost of production. Hence, we are also lowering our average April-August 2009 NYMEX natural gas forecast from $10.30/mmBtu to $9.10/mmBtu.
source: Goldman Sachs Commodities Research
August 15, 2008
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USD ascendancy
It is a quite start to the week for the markets in terms of economic data, and indeed for the week as a whole things could be relatively patchy which should mean little prospect of a re-think in terms of the interest rate outlook in developed markets. Yet, the re-think regarding the USD looks set to continue for now, even if the rise in commodity prices has driven some mild USD weakness overnight. Signs in the middle of last week that some of the currencies were managing to stabilise against the greenback faltered afresh on Friday, with the USD pushing through key levels. The data is unlikely to stand in the way of further USD gains through the week, but the rally is feeling increasingly stretched, and has moved beyond the levels consistent with recent moves in relative interest rate expectations. But the massive repositioning of the market, reflected in IMM data, has lent considerable momentum to the USD, and picking the bottom on the EUR is now akin to catching the falling knife.
The options market looks nervous about the possibility that the downside could extend further. One way to consider this is to look at the “risk reversal skew”. This is an option based hedging strategy, buying an OTM put and selling OTM call. The difference in volatility premiums between the put and the call can convey market information about the directional bias within the forex market. Currently, the risk reversal skew for EUR/USD is at a historic low, one interpretation being that the market is scrambling to buy further downside protection, even at these much lower spot levels.
Fans of fundamentals would of course hope for some respite in the European data to provide the turnaround. There are some grounds for optimism. Germany’s ZEW index could recover a little on the back of the improvement seen in equity markets, given this is a survey of investment analysts. The flash estimates for German and French PMIs could also show a more stable reading after months of decline, perhaps buoyed somewhat by the drop in oil prices which should ease some of the pressure on margins. The bounce in the US Empire survey last Friday gives some grounds for optimism on this front.
EUR bulls, or alternatively those who have missed the USD rally, will also hope that the US data stems the flow. Unfortunately for them, the data is thin on the ground with a rise in PPI unlikely to provoke much excitement given the market has already seen the upside surprise on CPI last week. Housing starts should post an impressive decline, but this merely reverses the upward distortion in June ahead of the introduction of new legislation that had builders rushing to file. In any event, housing market weakness will not be enough to trip up a market increasingly convinced that the US economy and financial system will avoid the abyss. Bernanke is unlikely to want to disavow the market of this stance given his efforts to rebuild confidence, and his speech at the Jackson Hole Symposium on Financial Stability will likely signal that while the strains will persist for now, the policy initiatives in place will ensure the financial system’s longevity.
Of course, it is not just the EUR that is suffering, with GBP struggling in the face of a dovish BoE and soft economic data. House price data out this morning showed little respite in the stream of negative news, another drop posted in August as the market stagnation is prolonged by the uncertainty over possible changes to stamp duty. Retail sales, later in the week could fall further to bring them closer into line with the more downbeat signals from the surveys. MPC minutes, which will presumably echo some of the dovish sentiments of the Quarterly Inflation Report, will be eyed to see if this has extended to additional dissent in terms of the vote. With the British Chamber of Commerce now forecasting a technical recession, the case for rate cuts is building which will keep GBP on the defensive. Its only respite might be the view that a lot of bad news is already in the price given the 14 big figure slide in GBP/USD over the last month.
Japan too will offer little distraction from the gloom, with the BoJ likely to further downgrade its assessment of growth while leaving rates unchanged despite the likelihood the inflation will top 2% in data next week. Furthermore, both the AUD and NZD are managing to regain some poise after this collapse, aided by the modest revival in commodity prices. This could limit any upside for JPY from an exit from commodity currencies.
Although there is no denying that we have broken the back of the recent energy and commodity price rally, I do believe it is too premature to call an end to the super bull market in energy and commodity prices that started in 2002 due to a weak US dollar, rapid global money supply growth and, of course, the Asian growth story.
Those fundamentals are still largely in place. I see this more as a technical correction within a larger trend. Refering to the graphs above I am very suspicious of any trend that magically turns the corner next year and begins to improve. Is that an FOMC forecast or simply wishful thinking?
I may be wrong. Certainly it will make some long-term, equity plays in energy, commodities, infrastructure and engineering much more attractive as entry points in those previously expensive sectors improve. Not only that, but multi-family rental units in Alberta are coming down in price, so it has definitely been worthwhile to be patient and to keep my powder dry! ; - ))
And what has all this to do with the price of rice in China?
Quote:
Fisherman Cao Jianzhou may abandon the job his family has done for more than half a century because rising fuel costs mean he loses money every time he sets out to sea from his home northeast of Shanghai.
``About 70 percent of the fishermen in our village lost money in the first half of this year,'' said Cao, 44, who catches crab and shrimp with his eight-man crew off Chongming Island. ``Some have quit and survive on the fee from selling their boats for scrap.''
Cao is one of 750 million Chinese fishermen, farmers and their families who are being squeezed after the government in June joined India, Malaysia and Indonesia in raising state- controlled fuel prices to cut losses for refiners. The 17 percent increase in gasoline prices and 18 percent jump in diesel fall disproportionately on rural China, where household incomes average 315 yuan ($46) a month.
``This will add to the pressure on millions of Chinese fishermen and farmers suffering because they have to pay more for raw materials,'' said Tommy Xiao, a research director at Shanghai JC Intelligence Co., which advises investors on commodities. ``Farmers have no choice but to keep chugging along.''
While the central government has eliminated taxes on grain and increased subsidies to keep farmers on the land, rising fertilizer and fuel costs have canceled out those incentives, farmers say.
Billions in Subsidies
About 730 million Chinese earn a living from farming and more than 20 million depend on fishing, using diesel to fuel their tractors and trawlers. Average rural incomes are less than a third those in urban areas, government figures show.
The state pledged 19.8 billion yuan in subsidies to ease the pain for fishermen, farmers and public transport operators after the latest fuel-price increase.
Posted: Mon Aug 18, 2008 7:16 am Post subject: Re: Trader's Corner 2008
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Rebound in store for shares of potash makers
Falling crops prices have dogged shares of potash producers in recent weeks, but the sell-off in these crop nutrient makers appears overdone and their shares look poised for a rebound.
Despite a decline in crop prices, analysts contend that global demand for potash remains strong, prices for the crop nutrient will remain at record highs, supply continues to be tight and new capacity is still a few years away.
"On a long-term view and on a fundamentals view, (I am) very comfortable with the outlook a year from now for the likes of Potash Corp and other companies like it. We think they will be generating significant earnings," said Canaccord Adams agriculture analyst Keith Carpenter.
Potash helps to improve the size of kernels, seeds and fruit and is a key crop nutrient along with nitrogen and phosphate. The bulk of the world's potash deposits are currently found in Canada, Russia, Belarus and Germany.
Potash prices have more than quadrupled within the last year and touched $1,000 a tonne last month.
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Potash Corp of Saskatchewan Inc, Mosaic Co, Agrium Inc, Intrepid Potash, K+S, Silvinit, Israel Chemicals, Uralkali all enjoyed strong share-price gains in the first half of 2008, but have seen their share prices drop about 30 percent or more since peaking in mid-June.
"We don't look at this sector as a bear market, we look at it as a correction and we expected the correction," said Terence Ortslan, managing director of TSO and Associates.
A recent workers strike at three of Potash Corp's mines, which account for about 30 percent of the company's production capacity and about 5 percent of global capacity, could spur another spike in potash prices.
Furthermore, with U.S. regulators rejecting a proposal to lower the ethanol mandate for 2009, analysts expect farmers to increase their corn acreage in the coming planting season, a move that will likely boost potash demand in the United States.
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VOLUMES SPUR GROWTH
Potash price increases have propelled the shares of companies in the sector this year, but the big driver in 2009 is more likely to be gains in shipment volumes.
In North America, although potash demand remains fairly steady, increased corn acreage will be a factor in spurring volume growth.
Moreover, in 2008, China managed to secure contracts for only a fraction of the potash that it has historically imported. Hence, analysts believe the Chinese will be forced to agree on next year's potash import contracts very quickly as inventory levels within the country are likely to at historic lows.
"The Chinese are not in the driver's seat here to negotiate from a point of strength, they need the volumes and they have no second choice," Ortslan said, adding that China is really in a spot.
China, the world's largest importer of the crop nutrient, was kept on a tight leash by producers this year. The country, which typically imports more than 6 million tonnes of potash a year, was able to sign contracts for only about 2 million tonnes of potash deliveries this April.
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"I think next year, we are going to see a bigger bump in volumes than in prices. Any price gains next year will be more marginal and more opportunistic, rather than fundamental," Ortslan said.
But, not everyone is convinced that potash demand for the 2009 crop planting season will remain as strong given the record high potash prices.
"The thing to remember is that farmers both here and abroad have not been confronted with these extremely high potash prices. The demand destruction will be substantial, but it has not occurred yet," said one industry expert, who asked not to be named.
Lars Chettche, of Frankfurt-based Metzler Equity Research cautioned that the potash markets are seeing a kind of bubble and that current potash price levels might not be sustainable in the long run.
However, even skeptics concede that with a tight supply situation and no new major potash capacity coming on-line in the next few years, it is extremely unlikely that the price of potash could collapse in the near-term.
Experts believe that a new greenfield mine that produces about 2 million tonnes of potash could take five to seven years to set-up and would cost more than $2.5 billion.
"No matter how you look at it, the world's inventory ratios for grain are dangerously lean ... So next year, we are looking at another very strong year of fertilizer application," said Ortslan.
Source: Reuters, Monday, 18 August 2008
UpDATE: farm gate versus factory floor
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All exports of goods and services in the first half of the year rose at a $52 billion annual rate, adjusted for inflation, up 7.1 percent. Commodities accounted for 41 percent of the increase and manufactured products contributed just 12 percent, the bureau reported. (The figures strip out such items as arms sales and exports to American territories, like Puerto Rico and the Virgin Islands.)
Such unevenness, favoring commodities, is unusual, given that manufactured products, even by this definition, account for 40 percent
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And while equity per share is twice as high as in 1999, the share trades at the same level as in 1999. In this credit environment, companies with low debt is a very good thing.
