Thursday, January 20, 2011

Why supermarket stocks are getting squeezed

Orange juice isn't the only thing at your supermarket that's been squeezed.

Rising food prices mean grocery store chains must absorb extra costs on items like meat, seafood, and produce, or they try to pass them along to customers. But many of those consumers are unemployed or have less money to spend, even on essentials. For now, the big chains are mostly choosing to absorb. As a result, profits are falling, and so are their stocks, making them one of the few dim lights in the market in 2011.

On Tuesday, Supervalu was the first of the grocers to report quarterly results, and the numbers for its fiscal third quarter were ominous: A loss of $202 million, or 95 cents a share, compared with a profit of $109 million, or 51 cents, in the same period a year earlier. The company, which operates Albertsons, Jewel-Osco, Acme and other chains, also cut its forecast for the year.

"This is going to be a challenging year going forward to manage inflation," Supervalu CEO Craig Herkert told analysts Tuesday. "It's just a fact and we believe these inflationary measures are going to impact consumers."

The result: "Investing in (grocers) now is certainly not for the faint of heart," says Philip Gorham, an analyst at Morningstar. (more)

Copper Gains to Record as China May Say Economic Growth Topped Estimates

Copper rose for a third day in New York and reached a record in London on speculation that China may say economic growth topped estimates, boosting the demand outlook, and inflation slowed.

The country’s economy expanded by 10.3 percent last year, Phoenix Television reported today. The broadcaster cited an unidentified official with the People’s Bank of China. Inflation was at 4.6 percent in December, it said, which would be less than the prior month’s 5.1 percent annual pace. The figures are scheduled for official release tomorrow.

“Copper was printing all-time highs as London opened, further encouraged by a leak of Chinese CPI data,” Alex Heath, head of industrial-metals trading at Royal Bank of Canada Europe Ltd. in London, said in a report. “If inflation has eased, the pressure will ease for further significant Chinese monetary tightening, and this triggered further fresh buying interest.”

Copper for March delivery added 2.1 cents, or 0.5 percent, to $4.449 a pound at 8:09 a.m. on the Comex in New York. Copper for three-month delivery climbed 0.4 percent to $9,741 a metric ton on the London Metal Exchange after reaching $9,781. All of the six main metals traded on the LME advanced except lead.

The rate of economic growth reported by Phoenix would exceed the 10.2 percent estimate in a Bloomberg survey of economists. The pace of inflation would match the median forecast in a separate survey. (more)

McAlvany Weekly Commentary

Perceptions Are Not Reality: U.S. Investors are Being Duped More than Most

A Look At This Weeks Show:

-Government debt Ceiling will have to be raised again and again.
-Bullish stock market sentiment suggestive of a peak.
-U.S. inflation indexes confirming what the rest of the world knows.

Faber: Inflation in Emerging Markets Makes US, Europe Better Bets Read more: Faber: Inflation in Emerging Markets Makes US, Europe Better Bets

Inflation is on the rise in emerging markets, and that makes the United States and Europe better investment opportunities in 2011, says Marc Faber, editor of the Gloom, Boom and Doom Report.

Rising food and energy prices will cause trouble in countries like China and India, he tells CNBC.

“We have money printing around the world, and that has led to very high food inflation and inflation in energy prices," Faber points out. "In low-income countries like China, India, Vietnam and so forth, energy and food account for a much larger portion of personal disposable income than in the United States."

The upshot: "These countries are suffering from basic high inflation, and that reduces the purchasing power of people,” he says. “So I think the monetary authorities in emerging countries are going to have to tighten or let inflation accelerate, both of which are not particularly good for equities." (more)

Gold Update, correction low will be put in place within the next three weeks

Long-term price targets are meaningless

Many commentators like to speculate on where the dollar-denominated gold price is ultimately headed. Some claim that it is destined to reach $3,000/oz, others claim that it won't top until it hits at least $5,000/oz, and some even forecast an eventual rise to as high as $50,000/oz. All of these forecasts are meaningless.

Long-term dollar-denominated price targets are meaningless because they fail to account for the change in the dollar's purchasing power, and the only reason a rational person invests is to preserve or increase purchasing power. To further explain by way of a hypothetical example, assume that five years from now a US dollar buys only 20% of the everyday goods and services that it buys today. In this case, the US$ gold price will have to be around $7,000/oz just to maintain its current value in purchasing power terms. To put it another way, in our example a person who buys gold at around $1360/oz today and holds it will suffer a LOSS, in real terms (the only terms that matter), unless the gold price is above $7,000/oz in January-2016. Considering a non-hypothetical example to make the same point, a resident of Zimbabwe who owned a small amount of gold and not much else would have become a trillionaire a few years ago, and would also have become broke.

The purchasing power issue is why the only long-term forecasts of gold's value that we ever make are expressed in non-monetary terms. For example, throughout the past 10 years we've maintained that gold's long-term bull market would very likely continue until the Dow/gold ratio had fallen to at least 5, and would potentially continue until Dow/gold reached 1. (more)

Oil Markets Watch Brent-WTI Spread as Price Approaches $100: Survey

“Brent/WTI at $8,” noted JPMorgan Global Energy Strategy’s daily oil market commentary last Friday. “Amazing!”

Oil nerds know the score but to the uninitiated, JPM’s referring to the price differential between two benchmark crude standards.

London Brent crude is within striking distance of $100 a barrel milestone. It’s not there quite yet. As of 11.15 a.m. Singapore time this Tuesday, the quote is $97.52/barrel. Compare that with the front-month U.S. light, sweet crude WTI contract trading at $90.95/barrel – a $6.57/barrel discount to Brent.

Late last week, Brent’s premium over WTI was even higher. On Friday, the February delivery Brent crude contract expired pushing the Brent-WTI spread to over $8 a barrel. That’s the highest in 23 months, which is why JPM and the analyst community is taking note and delving deeper into its implications for the market.

Right now, the narrative is about how long such a wide disparity can last, is it an aberration or reflective of fundamentals? Brent and WTI have long slugged it out for the title of world crude oil benchmark. You could say it’s been the enduring grudge match in the market’s recent history. Critics of WTI as a global standard argue that the main delivery point for Nymex futures in Cushing, Oklahoma is too local, subject to distortions and not compatible with an internationally traded benchmark.

‘Cushing Syndrome’

They do have a point. Inventories there have risen 18 percent since early November — when TransCanada started a pipeline bringing Canadian supplies to the region — and stockpiles hit a record in February 2009. The Cushing delivery point in Oklahoma has such a propensity to clog up due to limited capacity and one-way crude flows, writes Izabella Kaminska in the Financial Times, that the market has even coined a term for it — “Cushing syndrome”. (more)


Tom Demark, founder of Market Studies LLC is calling for a 10%+ decline in the S&P 500 that should begin within the next two weeks. DeMark’s Sequential and Combo indicators are used by many of the largest hedge funds in the world and are currently generating their first sell signal since 2007. Demark told Bloomberg that the decline could be “pretty sharp” and “I’m pretty confident that in one to two weeks, the market will be in a descent.”

Demark’s sell call coincides with very high levels of bullishness, sharp declines in short selling, high complacency levels as evidenced by the VIX (see below) and a general belief that equities will not be allowed to decline due to the ever present “Bernanke Put”.

Charting the GBP: Due for a Correction

Kathy Lien,

The British pound is currently enjoying its longest rally since July of last year. Nine straight days of gains has taken the currency from 1.54 to a high above 1.60. When a move in a currency pair becomes this overextended, it screams for a correction. Whether this correction is large or small really depends on the catalyst but when it comes to the GBP/USD, the correction is rarely less than 100 pips. Over the next 48 hours, there are TWO potential catalysts for a turn in the pound - Chinese data and UK retail sales. Weaker than expected Chinese economic data could easily trigger a wave of risk aversion that sends investors flocking into the U.S. data. Even if the data is good, retail sales on Friday could be bad - winter storms took a meaningful drag on consumer spending according to the BRC retail sales report. Should the GBP/USD fall, support will be at 1.5850. As long as this level holds, the uptrend will remain intact. Higher inflationary pressures provide fundamental support for the rally in the pound so the currency pair will not give up its gains easily.

Anyone have their tin hats on?

The Eight States Running Out Of Homebuyers

The single biggest problem in the U.S. real estate market is simple: There are very few homebuyers.

That seems obvious, but the “buyers’ strike” has caused house prices to drop, along with an epidemic of foreclosures. What’s worse, the long depression in real estate is probably not over. S&P has forecast that home prices will drop by 7% to 10% this year. The S&P Case-Shiller Index has dropped for most of the 20 largest real estate markets over the last several months. RealtyTrac recently reported that more than one million homes were foreclosed upon in 2010.

Many economists argue that the housing market may take four or five years to recover. Even if that’s proven to be true, the all-time highs of 2006 may never be reached again.

The devastation in some regions will never be repaired. Parts of Oregon, Georgia, and Arizona have become progressively more deserted. Since jobless rates may never recover, there is little reason to hope that the populations in these areas will ever rebound. Some homes will be torn down in these pockets of high foreclosures in the hopes that reducing supplies will boost prices. Whether that idea will work in hard-hit areas such as Flint, Mich. and Yuma, Ariz. remains to be seen. (more)

Panic Selling Hit SP500 Today, Silver and Gold Are Next: AAPL, GS

Today the stock market bled out with a river of red candles. All of the recent gains vanished in one session. Strong selling volume sessions like this are typically a warning sign that distribution selling is starting to enter the market.

Distribution selling is when the big money players start unloading large positions in anticipation of a market top. They do try to hide it by selling into good news or earnings when the average investors are buying into all the hype of better than expected earnings on the news. As average investors jump into the market because of the good news, this extra liquidity helps the big money players (banks, hedge funds, etc..) sell large amounts of their positions to the eager buyers. This is why the “buy on rumor and sell on the news” saying is kicked around wall street….

To me, panic selling is typically seen as a bullish sign to enter the market simply because if everyone is/has rushed to the door to sell what they own, then really most of the down side risk has been taken out of the market. That being said after an extended multi month rally and higher than selling volume I look at it more like distribution selling and a shift in momentum.

I feel the precious metals sector will be starting something like this in the near futures, and possibly it has already started as seen in the rising volume on the down days.

Let’s take a look at the charts… (more)