Tuesday, February 8, 2011

Dennis Gartman on Corn, Cotton and Speculation Curbs

Corn, cotton and commodity position limits are top of mind for many traders Monday, as softs continue their year-long surge.

Corn [CCV1 673.5 -1.25 (-0.19%)] prices hit 30-month highs early Monday after the U.S. Department of Agriculture forecast China's imports would exceed previous records this year. The corn price spike raised concerns that exchanges may consider position limits to curb speculation in the commodity.

There’s recent precedent for such limits. On Thursday, the IntercontinentalExchange announced a crackdown on cotton speculation. ICE intends to require large cotton contract buyers to prove they have an “economically appropriate” reason for their orders. That "economically appropriate" reason, by the way, means a business has exposure to cotton prices and requires a hedge. A clothing manufacturer, for example, hedges its input costs with futures.

Cotton [CTCV1 Unavailable () ] prices are up 160 percent in the past year due to crop destruction in many large cotton-producing nations, like Australia, which has suffered from considerable flooding. Cotton mills and clothing manufacturers have argued that the steep price increase will force consumer price hikes and could damage their businesses, prompting the ICE to act.

A currency and commodities trader with more than 30 years of experience, Dennis Gartman on Monday said ICE’s move is “terribly bearish for cotton.”

“It reminds me very much of the change that was done in the early 1980s when silver [SICV1 29.355 0.012 (+0.04%) ] was skyrocketing higher and the governors of the COMEX said all trading would be for liquidation only," Gartman explained. "Silver went from $50 to $10 within two months.”

Gartman cautioned, however, that it was unlikely the ICE or other exchanges would extend such limits to other commodities.

“I don’t think this will spread to other commodities, nor should it,” Gartman said, adding that cotton’s surge has been particularly aggressive.

Still, there is talk that more actions to curb speculation could come. Earlier this year, the Commodities Futures Trading commission proposed position limits in more than two-dozen commodities including corn, soybeans and coffee. The CFTC plans to vote on the proposal in the next two months.

How An Economy Grows And Why It Crashes: Peter Schiff (Audio Book)

How an Economy Grows and Why it Crashes uses illustration, humor, and accessible storytelling to explain complex topics of economic growth and monetary systems. In it, economic expert and bestselling author of Crash Proof, Peter Schiff teams up with his brother Andrew to apply their signature "take no prisoners" logic to expose the glaring fallacies that have become so ingrained in our country's economic conversation.

Inspired by How an Economy Grows and Why It Doesn't a previously published book by the Schiffs' father Irwin, a widely published economist and activist, How an Economy Grows and Why It Crashes, incorporates the spirit of the original while tackling the latest economic issues. With wit and humor, the Schiffs explain the roots of economic growth, the uses of capital, the destructive nature of consumer credit, the source of inflation, the importance of trade, savings, and risk, and many other topical principles of economics.

Other than Thomas Woods, there may be no one else that can explain the often intimidating field of economics as clearly and simply as Peter Schiff. Even if you are at a complete loss when it comes to understanding economics, this book will help you to understand that economics is actually a very simple concept to grasp.

Complete with humorous anecdotes, Peter and Andrew Schiff retell their father's masterpiece (How an Economy Grows, and Why It Doesn't) in a new, modernized version.

John Kaiser: The Best Junior Market in the World

5 Ominous Signs the Bond Bubble Is Breaking

Despite their calm words , bond managers can't be sleeping well—what with their worries about interest rates and inflation, the housing market and municipal bankruptcies keeping them up at night.

So just when will this bond bubble burst? Treasurys are as expensive as they've ever been; bond king Bill Gross, manager of Pimco Total Return, the world's biggest bond fund, called the end of the 30-year rally in bonds way back in October; and the Federal Reserve's program to snap up Treasurys in hopes of reviving the economy could end in June without further government action. And still nothing catastrophic has happened. But smart financial advisers and fund managers are diligently watching for signals that the end is near and so should you. Ironically, good economic news--such as an improved housing market or increased consumer spending--could be disastrous for your bond portfolio. Here then are five key signs too look for that could signal the bond market is taking a turn for the worse.

1. A rise in interest rates.

Let's face it: Interest rates can't get much lower after falling steadily for the past three decades, so a hike is coming sooner or later--and that's bad news for bonds, especially Treasurys. If employment and consumer spending improve, the Federal Reserve is likely to lift interest rates to control inflation, says Greg McBride, a senior financial analyst at Bankrate.com. Higher rates could decrease the value of existing bonds because investors would likely flock to newer issues with higher yields. (more)

Ballsy or Crazy? Where Are We On Inflation and Hyperinflation

For better or worse, in the financial blogosphere, I’m Hyperinflation Boy.

I haven’t actually written that much on the subject: Only five posts from a total of 82 over the last year. I posted the most recent one back in late October—over three months ago—where I made a series of concrete predictions about inflation and hyperinflation of the U.S. dollar.

The predictions were either really ballsy or really stupid—even I can’t quite decide. But be that as it may, it’s only fair and right to revisit the subject, recapitulate my arguments, and then check to see if I was on the money, or full of shit.

To begin: Last August 23, I posted an article called How Hyperinflation Will Happen. I guess the piece must’ve struck a nerve, because between my site and a couple of other places where it was reprinted, it got over half a million page views.

My basic thesis was simple: If there is another financial crisis, I argued that capital would not flee to Treasury bonds—instead, it would flow to commodities. And this spike in commodity prices would lead to dollar hyperinflation. (more)

Crude Oil Decreases to One-Week Low as Egyptian Tensions Ease

Oil fell to the lowest level in a week as talks between the government and opposition leaders helped ease tensions in Egypt, reducing concern that supplies will be disrupted.

Oil dropped 1.7 percent in New York as Egyptian banks began to reopen after two weeks of unrest and the sale of Treasury bills resumed. As the unrest subsided, crude supplies at Cushing, Oklahoma, the delivery point for New York-traded futures, stood at a six-year high in an Energy Department report last week.

“It looks like the situation in Egypt is calming down,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis.

Crude oil for March delivery declined $1.55 to settle at $87.48 a barrel on the New York Mercantile Exchange, the lowest level since Jan. 27. Futures have fallen 5.1 percent in the past five days.

Egypt’s government pledged progress within a month toward free elections, a move intended to persuade protesters to leave Cairo’s Tahrir Square after two weeks of rallies aimed at toppling President Hosni Mubarak. (more)

$2,000 Gold And 10 More Surprising Predictions From Credit Suisse

You're not going to make money betting on the consensus. So if you're looking for contrarian investments, Credit Suisse's Andrew Garthwaite has picked out 11 economic events that are more likely than anyone thinks.

Surprise scenarios include $2,000 gold by year-end. Several factors support this "surprise" including:

  • Gold goes up when real Fed fund rates are negative -- and they are
  • Excess leverage leads to money printing or default
  • China and Japan haven't started buying gold yet
  • Gold does not display characteristics of a bubble
  • The inflation-adjusted gold price is still well-below peak

Credit Suisse is keeping an official target of $1,500 for gold, but it admits that these factors could drive a major surprise to the upside.

Garthwaite also names a booming U.S. economy as a viable scenario. Here are the rest of the surprises:


China Moves to Strengthen Grip Over Supply of Rare-Earth Metals

China is building strategic reserves in rare-earth metals, an effort that could give Beijing increased power to influence global prices and supplies in a sector it already dominates.

Details of the stockpiling plans haven't been made public. But the outlines of the effort have emerged in recent statements from Chinese government agencies, state-controlled companies and reports in government-run media. The reports say storage facilities built in recent months in the Chinese province of Inner Mongolia can hold more than the 39,813 metric tons China exported last year.

China controls more than 90% of current global supply of rare-earth metals—a group usually classified as 17 elements and sometimes are called "21st Century gold" for their importance in such high-tech applications as laser-guided weapons and hybrid-car batteries. Beijing has been tightening its exports with a quota policy.

Mining companies around the world have responded by taking steps to increase production. Many rare-earth minerals aren't actually rare, and China doesn't have a monopoly on deposits of any particular rare-earth elements. The U.S. Geological Survey recently estimated that China has about half the world's 110 million metric tons of rare-earth deposits, however. Mining in the U.S. and elsewhere fell off several years ago, in part because of environmental concerns. Australia's Lynas Corp. U.S.-based Molycorp Inc. and other companies are ramping up operations. But a new mine can take a decade to develop, and processing of rare-earth elements will remain concentrated in China for years. (more)

Joe Saluzzi on High-Frequency Trading: The Equity Market Is Now Controlled By The Machines

Joe Saluzzi, co-founder of Themis Trading LLC and outspoken exchange expert, is concerned with how high-frequency trading has brought the capital markets into uncharted - and dangerous - territory.

"Things have changed," he cautions. With 50-70% of all trades being conducted by algorithms at micro-second time intervals, real human traders are increasingly challenged to understand how our markets actually work. "No longer do the technical patterns - that have lasted for years and years, and are written about all over - work anymore."

In the following interview, Joe and Chris plunge into "dark pools" and other poorly-understood elements of our now-machine-dominated financial exchanges. The current system is fraught with risks of further "flash crash"-like disruptions, and at a fundmental level, feels a lot like sanctioned theft by the deep-pocketed institutions who can outspend on technology and speed. This is an important interview for anyone involved in trading (professionally or personally), as well as investors who want to know how today's markets truly operate.

Click the play button below to listen to Chris' interview with Joe Saluzzi:

Download/Play the Podcast
Read the Transcript of the Podcast
Report a Problem Playing the Podcast

In this podcast, Joe sheds light on why:

  • The flash crash happened and why our vulnerability to future crashes is even higher now.
  • How the majority of trades that happen on a daily basis are now conducted by machines that have no underlying concern or understanding for the companies who's securities they trade. The market has become volume for the sake of volume - which is not healthy.
  • How the complexity and pace of the current technology driving trades has become so complex that it has effectively evolved beyond our ability to fully understand its risks.
  • Why the government agencies responsible for understanding and overseeing exchanges are woefully under-resourced and unprepared to be effective in this new era.
  • How the average trader is destined to lose in today's market, while the big banks & HFT firms who can afford to win the arms race are making essentially-guaranteed profits.

As with our recent interviews with Jim Rogers, Marc Faber and Bill Fleckenstein, Jim ends the interview with his specific advice for the average trader/investor.

Underground world hints at China's coming crisis

To understand how far ordinary Chinese have been priced out of their country's property market, you need to look not upwards at the Beijing's shimmering high-rise skyline, but down, far below the bustling streets where nearly 20m people live and work.

There, in the city's vast network of unused air defence bunkers, as many as a million people live in small, windowless rooms that rent for £30 to £50 a month, which is as much as many of the city's army of migrant labourers can afford.

In a Beijing suburb, beneath one of the thousands of faceless residential tower blocks that have carpeted the city's peripheries in a decade-long building frenzy, one of Beijing's "bomb shelter hoteliers", as they are known, agrees to show us his wares.

Passing under a green sign proclaiming "Air Defence Basement", Mr Zhao leads us down two flights of stairs to the network of corridors and rooms that were designed to offer sanctuary in the event of war or disaster.

"We have two sizes of room," he says, stepping past heaps of clutter belonging to residents, most of whom work in the nearby cloth wholesale market. "The small ones [6ft by 9ft] are 300 yuan [£30] the big ones [15ft by 6ft] are 500 yuan."

Beijing is estimated to have 30 square miles of tunnels and basements, some constructed after the Sino-Soviet split of 1969, when Mao's China feared a Soviet missile strike, and many more constructed since to act as more modern emergency refuges. (more)

More confident consumers break out credit cards

Americans are putting more money on their credit cards after more than two years of cutting back, a sign that they are gaining confidence in the economy.

The first increase in credit-card debt since the financial crisis hit helped to boost overall consumer borrowing 3 percent in December, to a seasonally adjusted annual rate of $2.41 trillion, the Federal Reserve said Monday. It was the third straight monthly gain.

Borrowing in the category that includes credit cards rose 3.5 percent, the first rise since August 2008. Borrowing on auto loans increased 2.8 percent.

Mark Zandi, chief economist at Moody's Analytics, viewed the gain as an encouraging sign that households are becoming more confidence about the economy and jobs. He also said banks are loosening some lending restrictions put in place after the financial crisis.

"The credit spigot is opening," said Mark Zandi,

Even with the December gains, consumer borrowing is just 0.7 percent higher than the more than three-year low hit in September. It is 6.6 percent below the high set in July 2008. But analysts predicted further credit gains in coming months. (more)

Stocks advance on M&A with further gains seen

Merger activity drove the Dow and S&P to two-and-a-half-year highs on Monday in the latest in a series of mileposts that point to more gains ahead.

Buying accelerated after the S&P 500 broke through the 1,313 mark, taking the index further into levels that prevailed before the financial crisis. More than two stocks rose for every one that fell on both the New York Stock Exchange and Nasdaq, but the day's rise came on lighter-than-average volume.

Diversified industrial company Danaher Corp (NYSE:DHR - News) agreed to buy medical diagnostics company Beckman Coulter Inc (NYSE:BEC - News) for about $6.8 billion. Oil driller EnsCo Plc (NYSE:ESV - News) said it would buy Pride International Inc (NYSE:PDE - News) for about $7.3 billion.

"The size of these deals is an indication that the buyers feel comfortable putting that cash to work while the companies being bought are undervalued," said James Dunigan, chief investment officer at PNC Wealth Management in Philadelphia, which oversees $105 billion.

"The level of the broader market is reasonable, but there are these individual situations that deserve a higher premium than the market is getting over all." (more)