Tag Archives: inflation

10yr Treasury Notes Calling Fed’s Bluff

The interaction among the 10-Year Treasury Note’s market participants provides a great example of how the commercial traders’ actions, as categorized in the weekly Commitments of Traders report, can be predictive of future market movement. More importantly, this information can provide keen insight ahead of major market news events like the September FOMC meeting.

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What Inflation? – Addendum

Clearly, we hit a hot spot with last week’s piece. So much so, that I kept digging. I came up with more questions than answers but in asking those questions I came up with some data points and open ended questions worth pondering. We’ll look at the push and pull relationship between public and private spending and their combined effect on inflation. Then, we’ll finish with the spark of wage inflation struck by the competition between governmental subsidy programs versus rising wages in entry level retail positions.

Continue reading What Inflation? – Addendum

Weekly Commodity Strategy Review

We only published twice this week as my attention was focused on bringing a new Commitment of Traders trading program online. The primary improvement in this version is its ability to lock into large moves and score the occasional big win as opposed to the statistically based days past entry exits we’ve employed for the last few years. I’ll share more after some time trading it on my own account to examine its behavior.

Back to the independent research that separates us from 80% of the commodity trading population. We began this week with a look at the consolidation in the gold futures market for TraderPlanet. We said, “We believe the recent shift towards a more bullish stance by the commercial traders could provide the spark for this market to breach the $1,225 resistance and….”(Yesterday’s high was $1227.7)

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Gold and Silver Topping Out

The gold and silver markets have been perking up lately which happens to have coincided with the Fed’s talk of removing stimulus from the domestic economy. Logically, talk of higher interest rates has spurred interest in portfolio re-allocation towards gold and silver as investors attempt to get a jump on the beginning of a structural shift towards inflation. The result of this is that gold has rallied about 11.5% year to date and silver is up nearly 20%. Much of this rally has been technical in nature, as the markets have moved beyond some key chart points. Technical levels are always important in short-term trading. However, the fundamentals suggest that this rally may be petering out.

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Food Inflation is Here to Stay

Inflation is measured many ways. Government reports will talk about core inflation, inflation excluding food and energy, consumer price index, producer price index and so on. These measurements all exist in the academic world. Talking heads argue about it on TV. Real inflation, inflation that is felt throughout the world, is food inflation. Food inflation is here, it’s real and it’s here to stay.

The Food and Agriculture Organization in Rome tracks a basket of 55 commodities to measure global food prices. This month, it topped the June ’08 high due to regional production issues. Many domestic commodity markets are substantially below their ’08 highs. Remember $8 corn and $16 dollar soybeans? Lets not forget the input cost of $140 crude oil. The only reason prices didn’t sky rocket even more in 2008 is because the world was still reeling from economic meltdown. Savings rates were increasing and spending was declining. This kept fundamental demand in check. The 2008 rally was fueled by poorly timed commodity index fund buying coupled with rising fuel and fertilizer costs.

The commodity index funds were created to capitalize on the growing appetites of emerging markets. As foreign markets mature, their tastes will include a more western diet, which is heavily based on grain and meat consumption. For example, total United States meat consumption is approximately 250 pounds per person per year. China’s total meat consumption has nearly doubled in the last 10 years and is now around 100 pounds per person per year. This is still less than half of our consumption. Their population, which is four times larger than our own, could double their consumption again and still be below the average American’s.

The example above also translates into the grain markets. Think of soybeans in terms of vegetable oils and think of corn to feed the livestock. The USDA released their annual crop production report this week as well as their supply and demand reports. The United States planted and harvested more acreage than last year in corn and beans. The bean harvest was the second highest on record and rice did set a new record. Historically, these numbers would be seen as very bearish for the markets since they point to greater supply. However, looking deeper, we can see that ending stocks are near all time lows, which indicates exceptionally strong demand given the generous supply for 2010.

Food prices are beginning to soar. Just as decent nutrition is the most basic of luxuries in a developing economy, so is it the most primal of necessities. We are already seeing riots in many third world countries over the price of sugar and grains. Developing nations are faced with a two-headed monster of rising food costs in the open market as well as food that is moving to the black market. President Clinton’s primary focus in Rwanda was to safely transport food aid past the warlords and to the people. Algeria, Haiti, Bangladesh, Senegal and Indonesia have all experienced civil unrest due to rising food prices just in the last week. It is much more difficult to contract one’s appetite than it is to expand it. Any planting issues in the U.S. this spring would douse the global embers of unrest with gasoline.

The United States is responsible for nearly 40% of the world’s soybean production and approximately 70% of its corn. These are the staples that feed the world’s people and its livestock. Our crops yield five times the global average. The U.S. will export our agricultural intellectual property as Brazil, Russia and the Ukraine expect to grow their output by 30% over the next ten years. Fertilizer, seed companies and biogenetic engineering will become the next wave of global financial players as mother Earth prepares to deal with the strain of a swelling and hungry population.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Perhaps We’ve Gotten Ahead of Ourselves

Commodity Prices have been on a tear. No question about it. Gold has traded over $1,300 per ounce and silver is over $21 an ounce. The grain markets have seen huge gains in corn, beans, rice and oats. Even markets like coffee, orange juice and cotton have participated in the broad commodity rally. Does this mean it’s a good time to put more money in commodities? Not necessarily. This is where our philosophy diverges from stockbrokers. We don’t generate revenues for the firm based on equity under management. Therefore, our best business practice is to provide our individual traders with information that will help them be successful over the long term.

The commodity markets as a whole, have built this rally on the economically sound principals of inflation, which include a declining dollar and low interest rates. However, according to the data that I’ve been watching, it’s quite possible that we’ve gotten a bit ahead of ourselves in the economic cycle. At this point, the anticipation may be greater than the event.

Starting with the big picture. There is a third component to inflation that hasn’t gotten much press over the last year and that is, velocity. Velocity in economics is how quickly money is changing hands. The higher the velocity of a dollar and the more it circulates, the more action there is in the economy and the closer we are to potential inflation. What we’ve seen since the economic crisis began and the housing bubble collapsed is that the Federal Reserve Board has flooded the economic system with Dollars.

The adjusted monetary base of the United States has increased nearly 25% since September of 2008. Broadly speaking, this means there are 25% more dollars in our pockets and in our checking, savings and cd accounts at the bank. However, as I wrote last week, Americans are finally starting to save their money. This is why the velocity of money has declined by more than 17% since the economic crisis began in 2008. This is in spite of the Federal Reserve Boards attempts to stimulate spending.

The United States is the financial trading center of the world. We have the most mature stock and commodity exchanges. They are the most highly regulated and also the most liquid. Therefore, we are the hub of the global financial network. The commodity markets here in the U.S. service 40% of all traded commodities. Therefore, the prices of commodities traded here in the U.S. actually reflect a global view of fair value. The decline in the U.S. Dollar has made trading prices in the U.S. seem like the latest sale at Kroger, just bring in your Treasury coupon for double points.

Finally, in the weekly Commitments of Traders Reports, we have seen a very large build up of large speculator and commodity index trader long positions with the commercial traders increasing their short positions as the markets have climbed. The fact that many of these markets are significantly below their pre financial market collapse highs of early 2008 is a telltale sign that the current market rallies may be over extended. It’s important to note that the two groups supporting the commodity markets have no ties to fundamental value. The large traders are simply trend followers. They are willing to be long or short any market at any time. The commodity index traders are only allowed to purchase commodity contracts to keep their portfolios properly weighted. They will add positions as the market climbs and offset positions as needed on a market decline.

Commercial traders are the producers or, end line consumers of the actual commodities themselves. They are keyed into the entire production mechanism and have a keen understanding of the issues affecting their markets. The general theme I see building is that they believe many of these markets are substantially overbought and inflation is further away than we think. While they do believe there is inflation coming down the pipeline, they believe it is further off than the commodity markets are making it look. They have bought up large positions in short term Treasuries while taking a decidedly more bearish tone towards the long end of the yield curve. In fact, the commercial trader net position in the 30 year bond is the most bearish it’s been since 2005, prompting me to consider taking profits in our bond trade from several weeks ago.

The combination of an economy flooded with cash led many investors to anticipate inflation down the road, which makes commodities a very sensible place to put money. However, given America’s newfound desire to save, the flood of cash hasn’t quite had the textbook multiplier effect that was expected to increase GDP 50% for every dollar spent by the government. Given the over extended state of some markets combined with fundamental data supporting declining velocity, it may be a good time to adjust risk in the commodity markets.  Velocity will increase and repurchasing commodities on a pullback could be an effective strategy once the actual race finally gets going.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

Bucking the Dollar’s Decline

The main argument supporting inflation is based on the current prices in the commodity markets. The argument postulates that the massive injections of capital through low interest rates and the government’s active purchase of long term treasuries is debasing the U.S dollar and making our products cheaper on the international market. The logic is sound in assuming that price paid has a direct relation to the exchange rate. However, since 2007, the U.S. Dollar Index is down less than 5%. This doesn’t seem so bad on the surface until one considers that because the U.S. Dollar Index is trade weighted with more than 40% of its allocation going to the Euro currency futures, it doesn’t accurately reflect the Dollar’s value against the developing Asian nations and thus, the world.

 

United States’ businesses have made their profit margin through purchasing goods and services overseas at a favorable exchange rate and reselling them domestically for years. As a country, we have enjoyed our success for many years. During this process, we helped to develop an economic infrastructure overseas that we failed to remain competitive with domestically. The economies in these countries have continued to develop and strengthen and so have their currencies. We’ve seen the Dollar decline by more than 20% against the Indian Rupee and nearly 30% against the Japanese Yen since ’07. The Chinese Yuan/Renminbi is artificially capped by their government and has only been allowed to rise 7% against the Dollar over this same period.

 

The fact that the countries we’ve done business with for years are now stealing some of our economic thunder should come as no surprise. We’ve witnessed this story throughout history as cultures adapt new foreign technologies to their own use and use their production advantages of cheap labor, fewer legal restrictions and years’ worth of foreign direct investment to implement the same business plan in their own country, thus exploiting their own competitive edge in labor and capital, just like we did here, 100 years ago.

 

Productive land is the only production input with any upward price pressure. The inflation argument based on commodity prices is domestically tied to the agricultural land component of the economic equation. We have not seen inflation in labor as our own unemployment rate hovers under 10%. We have not seen inflation in the capital markets as the Federal Reserve Board recently committed to near zero interest rates for the foreseeable future. Finally, non- agricultural land has seen a crash in the housing market, which is being followed by the commercial market. Arable farmland and mineral deposits are the only sources of upward price pressure.  The growing middle class of India, China and other Asian nations is creating a consumption premium in the finite goods that must be grown or mined through their new found purchasing power.

 

Fortunately, we are able to benefit from the growing agricultural demand to help offset the years of domestic overspending. The United States still holds a strong lead in grain production. U.S. grain exports are on a tear this year and are expected to continue. China has been an importer of corn for the first time in 14 years and their soybean imports are up more than 5% from last year. We should be able to exploit this advantage as the developing middle class in India, China and the rest of Asia continue to move up the personal consumption ladder, which includes eating more of what they want and less of what they can afford. We will also see a surge in textiles and technology purchases as their disposable income climbs.

 

The net result of this is a changing shift in the floor prices for commodities as the world adapts to new levels of consumption and global production catches up. The old normal of $4 beans and $400 gold is long gone. The panic low of the economic meltdown in December of ’08 was $4.40 in soybeans and $700 in gold. Markets like corn and sugar never broke their upward trends. Currently, corn is supported by China’s continued imports while India remains the largest gold consumer.

 

The most compelling case, in my opinion, is in soybeans. Soybeans are fully supported by both China and India through solid demand in feed and cooking products. Technically, the soybean market has been trapped in a $2 sideways range for more than a year, trading between $8.75 and $10.50. Furthermore, as of January of this year, commercial traders, via the Commitment of Traders Report had actually accumulated, and held a net long position in this market until the recent test of the $10.50 highs. This implies that both soybean producers and end production consumers believe this area to be, “fair value.” Finally, we are on the cusp of the seasonally strongest time of year for the active soybean commodity futures contract. Therefore, any disruption in supply could generate a violent breakout higher, easily approaching $12.50 per bushel or, $10,000 per futures contract.

 

The United States will continue to benefit from our major advantage in farmable land and push it’s agricultural technology efficiencies to the utmost. Unfortunately, as a country, we would be lucky to cover 2% of the national debt through agricultural profits. A better personal finance option is to put the only source of domestic inflation to work by studying the markets themselves and learning how to take advantage of the supply and demand dynamics of a global agricultural imbalance.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

Corporate Perks

This blog is published by =
Andy
Waldock. Andy Waldock is a commodity futures trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, =
his
clients in any market discussed. The blog is meant for educational =
purposes and
to develop a dialogue among those with an interest in the commodity =
markets.
The commodity markets employ a high degree of leverage and may not be =
suitable
for all investors. There is substantial risk in investing in =
futures.

I was going to write an article this morning on =
trading
broken markets. My definition of a, “broken market,” is one in =
which
the fundamentals, like the Commitment of Traders Reports and technicals are at odds with each other. Clearly, we =
are
witnessing this in the equities markets. However, when I read the =
following
article in the Washington Post, I realized just how disjointed the =
equity
markets are from reality. How can top end wages increase at  4+% =
when inflation
is nil and unemployment is pushing 10%?

By Tomoeh Murakami Tse

updated 4:35 a.m. ET, Tues., Oct . 20, =
2009

NEW YORK – Even as the nation’s biggest financial =
firms were
struggling and the federal government was spending hundreds of billions =
of
dollars to save many of them, the companies as a group were boosting the =
perks
and benefits they pay their chief executives.

The firms, accounting for more $350 billion in =
federal
bailout funds, increased these perks and benefits 4 percent on average =
last
year, according to an analysis of corporate disclosures filed in recent =
months.

Some chief executives, such as Kenneth D. Lewis of =
Bank of
America and Jeffrey M. Peek of CIT Group, the major small-business =
lender now
on the brink of bankruptcy, each received about $100,000 more than a =
year
earlier for personal use of corporate jets. Others saw an increase in =
the value
of chauffeured services, parking or personal security.

Story continues below ?advertisement | your ad =
here

Ralph W. Babb Jr., chief executive of Dallas-based =
lender
Comerica, was compensated for a new country club membership, with an =
initiation
fee and dues of more than $200,000. GMAC Financial Services chief =
executive
Alvaro de Molina benefited from a $2.5 million payment from his company =
to help
cover his personal tax bill.

“You would have thought that this would be the =
moment
when everyone said, ‘Okay, the perks have got to stop — at least =
while
we’re indebted to the government,’ ” said Paul Hodgson, senior =
research
associate at the Corporate Library. “But that didn’t =
happen.”

This year may turn out to be different. In June, =
the
Treasury Department prohibited companies receiving bailout funds from
reimbursing senior executives for their personal tax =
payments.

In the meantime, Kenneth R. Feinberg, the Obama
administration official assigned to set pay for top executives at seven =
of the
companies receiving the most help, plans to curtail perks such as =
country club
fees when he rules on compensation later this month, according to people
familiar with the matter. Perks worth more than $25,000 are getting =
particular
scrutiny from Feinberg.

On average, the chief executives at 29 of the =
largest public
financial companies that have taken bailout funds received perks and =
benefits
worth more than $380,000 in 2008, according to compensation figures =
included in
annual proxy statements and supplied by Equilar, a compensation data =
services
firm. Individually, about half the banks increased their fringe benefits =
to the
top executives. The figures do not include relocation costs and related =
taxes,
typically one-time fees that can skew year-over-year =
comparisons.

In contrast to the 4 percent average increase in =
perks and
benefits at these companies, the average awarded to top executives at
non-financial companies in the Fortune 100 declined by more than 7 =
percent over
the same period, according to Equilar.

Andy =
Waldock

P =

866-990-0777

F =

419-624-0937

www.commodityandderiva=
tiveadv.com

The contents
of this e-mail communication and any attachments are for informational =
purposes
only and under no circumstances should they be construed as an offer to =
sell or
a solicitation to buy any futures contract, option, security, or =
derivative
including foreign exchange. The information is intended solely for the =
personal
and confidential use of the recipient of this e-mail communication. If =
you are
not the intended recipient, you are hereby notified that any use,
dissemination, distribution or copying of this communication is strictly
prohibited and you are requested to return this message to the sender
immediately and delete all copies from your =
system.