Monday, April 18, 2011

Reaping Profits on Corn and Cotton, These scarce commodities have outperformed gold

Corn prices hit a new high last week, at $7.65 a bushel, and are now back to levels last seen at the peak of crude oil prices in mid-2008.

Inventories are reported to be at 15-year lows, and they are still declining, according to analysts. This is a surprise in a way because higher prices should have killed demand by now.

It’s a little hard to believe, but you know the big hubbub about physical gold hitting new heights, up 20% in the past year? It’s got nothin’ on physical ears of golden kernels. Yellow corn, the type fed to animals being prepared for slaughter as well as by ethanol refineries, is up 120% in the past year.

The problem is scarcity. Weather has been bad, and not enough was planted. ”Essentially, we don’t have any corn. That’s the bottom line,” said Sterling Smith of Country Hedging, a commodity broker in St Paul, Minnesota, to the Financial Times.

It’s a paradox that these higher prices haven’t yet affected core inflation enough to worry the Federal Reserve — or even make a dent in demand. Smithfield Foods (NYSE:SFD), a major pork producer, told investors that it has not seen any “consumer fatigue to the pricing that we have seen them so far.”

Of course a lot of this corn is going into our cars. The Department of Agriculture estimates that 40% of last year’s American crop was turned into 900,000 barrels a day of ethanol. One reason is that rising crude oil prices have kept the cost of “corn oil” competitive.

We can expect the situation to go from serious to critical if U.S. cornfield yields are threatened over the rest of this year. And if crude oil moves toward the $150-plus area that I am expecting due to an acceleration of turmoil in the Middle East, then this rally in corn may just be getting started.

I recently wrote about the new threats to oil production in Nigeria and Yemen, and a new threat emerged in recent days in the West African country of Gabon, where a strike recently cut production when workers wanted American and European oil specialists kicked out of their country to make more room for the Gabonese.

The exchange-traded fund for corn prices is Teucrium Commodity Trust Corn Fund (NYSE:CORN), and it has traded as many as 250,000 shares a day in the past few weeks, though the average is around 100,000.

Where will future demand come from? It looks like China, according to a Barclays analyst in a Bloomberg report last week.

The analyst, Sudakshina Unnikrishnan, told the wire: ”The problem really is that we haven’t seen any letup in Chinese demand.”

And a Macquarie Group analyst added that risks to the U.S. crop from snow and cooler weather and increased global demand may help push corn to a record $10 a bushel as early as June — about 30% higher than the current quote.

Imports by China ”could be as high as 2.5 million metric tons, easily double that of last year,” said Unnikrishnan, who correctly predicted in November that increased cotton purchases by China would help drive prices to an all-time high. China is ”increasingly becoming more reliant on imports because of domestic diet conditions and inventories,” she told Bloomberg.

As we have discussed, the main reason for the rise of corn demand in China has been to feed animals, as the real increase is in protein consumption. A J.P. Morgan analyst told the wire service: ”People are getting wealthier so they eat more meat. That’s why you need feed, soybeans and corn to feed the livestock with.”

While corn is looks very interesting from a practical point of view, the chart of the cotton fund looks the most compelling to me as a trader. It is rebounding out the sort of consolidation that has led to tremendous runs higher in the past nine months. The seasonal pattern is also very bullish right now, with gains recorded in the next two to three weeks when prices have been set up like this.

Plunging into commodity prices might not be your thing, but they are one of the main games in the marketplace this year, and a way to fight back against inflation. Looks good for at least a small position as a probe, say 2% to 3%.

This Chart Shows Microsoft Stock is a Steal at $25: MSFT

If you’re looking for a good stock to buy, I just noticed that there’s some sort of software outfit in the Seattle area. Here’s a look at Microsoft‘s ($MSFT) stock and its EPS line.

The stock line is in blue and if follows the left scale. EPS is in gold and it follows the right. The two lines are scaled at a ratio of 15-to-1. The forward earnings represent Wall Street’s consensus for Microsoft stock.

microsoft pe ratio chart

Microsoft is currently expected to earn $2.63 per share in this calendar year which means the stock is trading at about 9.6 times this year’s estimate.

The S&P 500 is expected to earn 96.69 this year which means it’s trading at 13.5 times this year’s estimate. That meansMicrosoft (NASDAQ: MSFT) is going for a 29% discount to the market’s valuation.

On top of that, MSFT stock is holding $4.76 in cash which generates almost no income. This means that the “operations” assets of Microsoft are probably going for around eight times earnings.

Microsoft stock looks cheap.

Technically Precious with Merv

Silver Continues to Outpace Gold.

Once again silver is out pacing gold in the weekly performance. Is it too much of a good thing? Only time will tell. Lower gold volume versus higher silver volume seems to suggest the betting is really on silver.


The week started on the down side but ended on the up side. The long term indicators remained positive throughout. Gold remains above its positive sloping moving average line. The long term momentum indicator remains in its positive zone above its positive sloping trigger line. The volume indicator continues to move above its positive trigger line but remains below its previous high of late March. This is the one indicator still holding back. All in all the long term rating remains BULLISH.


The intermediate term is just as easy as the long term was. Gold continues above its positive moving average line. The momentum indicator continues in its positive zone above its positive trigger line. The volume indicator continues to move higher above its positive trigger line. The intermediate term rating therefore remains BULLISH. This is confirmed by the short term moving average line remaining above the intermediate term line.


I guess the global environment is still not all that great as the gold investors and speculators continue to send gold into new high ground. It will be interesting to note who has the more power behind the move, investors or speculators. We’ll probably know that on the next serious correction. A serious correction will end with gold eventually moving into even higher highs if the investors have the upper hand. If the speculators have the upper hand gold would continue declining into a bear market move. So, we’ll just have to wait until that time, which is not yet here.

The weekly action was down and up BUT on low relative volume. Gold action volume has remained below its 15 day average even as the average has been steadily declining. Over the past 15 days there were only three days where volume exceeded the 15 day average and those were on down price movement days. This is what professionals mean when they say the price is moving up higher on a wall of worry. No one seems to be too enthusiastic about the move but on the other hand no one wants to be left behind either.

Gold continues to move above its short term moving average line and the line slope remains in a positive slope. The momentum indicator remains in its positive zone and is once more above its positive trigger line. It is just about to enter its overbought zone so do not be surprised if we get some lateral or negative action over the next short period. The daily volume action has already been mentioned. The upside enthusiasm seems to be somewhat suspect. Anyway, all told the short term rating remains BULLISH. This is confirmed by the very short term moving average line remaining above the short term line.

As for the immediate direction of least resistance, that seems to be to the up side but one should be on guard for some lateral or negative motion. Gold is once more getting quite far above its short term trend line and one might expect a move back towards the trend. The Stochastic Oscillator is positive and not yet in an overbought position but that could be just a day or two of more upside action. I’ll go with the up side for another day or two but the lateral or downside does not look like it’s far away.


Silver continues to out perform gold but with the Friday boost into new highs it looks like the thrust is just about ready to take a breather. The latest action is butting up against the upper resistance trend line of a three month channel and that means either a lateral move or a reaction back to the lower support. The intermediate term momentum indicator is entering its overbought zone which further suggests a possible rest or reaction ahead. However, a decisive break above the resistance line would mean a new more aggressive up trend and much, much higher prices.

For now everything is positive with the ratings for all three time periods being BULLISH.


Gold and silver up, stocks down. It looks like speculators have decided that the stocks have moved too high too fast and have started taking some profits. Declines were generally in the order of 3% to 4% with the Merv’s Spec-Gold Index taking the biggest hit at 7.0%. Of course, the speculative silver stocks have been the biggest beneficiaries over the past several weeks so a bigger decline during a bad week was no surprise.

I have been mentioning the potential negative divergences in the various Gold and Silver Indices. It looks like the reversals of trend may be coming due although one week does not make a reversal trend. We need a little more convincing than one week.

Merv’s Precious Metals Indices Table

Well, that’s it for this week. Comments are always welcome and should be addressed to

By Merv Burak, CMT

China Hikes RRR For Fourth Time In 2011: As Real Estate Bubble Pops, JPM Sees "Mass Affluent" Rushing Into Gold

Following leaked (and confirmed) news that in March Chinese inflation came at 5.4%, the PBoC has once again decided to intervene, enacting its fourth Reserve Requirement Ratio hike of 2011. From Bloomberg: "Reserve ratios will increase a half point from April 21, the People’s Bank of China said on its website today. The move, taking the requirement to 20.5 percent for the nation’s biggest lenders, came less than two weeks after the central bank boosted benchmark interest rates. “Tightening will continue until there are signs that inflation has been effectively brought under control,” Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., said before today’s announcement. A surge in foreign-exchange reserves to $3 trillion last month and rebounding lending and money-supply growth have highlighted overheating risks in the fastest-growing major economy. Gross domestic product rose 9.7 percent in the first quarter from a year earlier and inflation accelerated to 5.4 percent, the most since July 2008, the statistics bureau said April 15. Inflation has exceeded the government’s 2011 target of 4 percent each month so far this year. The increase in reserve requirements was the fourth this year." Naturally, this also means that the plunge in real estate ASPs, confirmed everywhere, but most pronounced in the capital, is set to continue. This, according to JPM's Jing Ulrich, means that with real estate no longer an attractive asset bubble, the "mass affluent" Chinese will be forced to invest in gold and alternative property investments. From Dow Jones: This group "has seen its investment options sharply affected by restrictive housing measures" such as property taxes, increases in down-payment requirements, and raised interest rates, "since these households possess sufficient capital to purchase investment property, but do not have the same degree of access to investment vehicles such as private equity funds and retail property" as the super-rich, she says, adding that equities, gold and alternative property investments are therefore the key beneficiaries."

Below is Goldman's take on the RRR hike:

The People’s Bank of China (PBOC) announced today that the reserve requirement ratio (RRR) will be raised by 50 bp, to be effective April 21. After this hike, the official RRR for large banks will be 20.5% and 18.5% for small and medium banks. However, given the usage of the Dynamic Differentiated RRR, the actual RRR varies for different banks.

The hike withdraws around Rmb350 billion out of the banking system. The hike was widely anticipated given 1) the rebound in March CPI inflation and activity growth; 2) large amount of central bank bills expiring; 3) large amount of FX net inflows (close to Rmb400 billion in March); and 4) numerous comments from senior policy makers including the Premier on controlling inflation using monetary tools.

We reiterate our view that there has been a clear preference from the PBOC to use the RRR as a regular tool to absorb liquidity, to a large extent in replacement of central bank bill issuance because it tends to be 1) more proactive (because its an order as supposed to a negotiation in the case of bill issuance); 2) high profile in terms of its signaling effect; and 3) cheaper (the required reserve interest is 1.62%, significantly lower than the 3%+ bill rate). As a result, the RRR hike itself does not necessarily imply a net tightening if the amount of expiring bills and FX inflows are larger as it is the case now. We expect repeated RRR hikes going forward as it has been over the past half year. As we estimate the excess reserve ratio is still above 1%, the hike is not directly binding and the burden of net monetary tightening will still mostly fall on window guidance (explicitly or implicitly via the Dynamic Differentiated RRR). In the meantime, we expect the PBOC to allow further currency appreciation (6% on an annual basis) and hike benchmark interest rates (1 more hike of 25 bp in 2Q2011).

And the full Jing Ulrich note:

Ulrich On Investment BehaviorUlrich On Investment Behavior

Top Marginal US Tax Rates: 1916-2010

Here's a great graph of US income tax rates back to when personal income taxes were started from Visualizing Economics (hat tip Barry Ritholtz). You can see the marginal rate for personal income has come way down from its 1945 peak.

A few months ago, Michael Hudson answered the question, "Why Did America Have A 90% Income Tax Under Eisenhower? ". He says the original premise of the income tax law was based on 18th and 19th century classical economics and the price theory of economic rent. First and foremost, Hudson says that meant to the economists of the late 19th century and early 20th century that America would get rich through productivity gains that came from the work of highly paid labour. Hudson argues that is why Asia is more productive today: because living standards are increasing. However, to the degree one made considerably more than the average income, Hudson argues it was assumed in the early 20th century that this was the result of rent-seeking or monopoly privilege of the sort we saw during feudalism. Therefore this income was largely taxed away.

Watch the video for his answer, but this quote from another post of his below gives you the gist.

[Adam] Smith argued, its industrial capitalism would have to shed the vestiges of feudalism. Ground rent charged by its landed aristocracy should be taxed away, on the logic that it was the prototypical “free lunch” revenue with no counterpart cost of production. He noted at the outset (Book I, ch. xi) that there were “some parts of the produce of land for which the demand must always be such as to afford a greater price than what is sufficient to bring them to market.”

In 1814, David Buchanan published an edition of The Wealth of Nations with a volume of his own notes and commentary, attributing rent to monopoly (III:272n), and concluding that it represented a mere transfer payment, not actually reimbursing the production of value. High rents enriched landlords at the expense of food consumers – what economists call a zero-sum game at another’s expense.

The 19th century elaborated the concept of economic rent as that element of price which found no counterpart in actual cost of production. and hence was “unearned.” It was a form of economic overhead that added unnecessarily to prices. In 1817, David Ricardo’s Principles of Political Economy and Taxation elaborated the concept of economic rent. Under conditions of diminishing soil fertility in the face of growing demand, value was set at the high-cost margin of production. Low-cost producers benefited from the rising price level. Ricardo helped clarify the concept of differential rent by applying it to mining and subsoil wealth as well as to land. Heinrich von Th√ľnen soon added the more helpful concept of rent-of-location (site value).

The important classical point was that economic rent was produced either by nature or by special privilege (“monopoly”), not labor effort. Hence, it was that element of price that could not be explained by the labor theory of value, except by marginal costs on what Ricardo hypothesized to be “rentless land” as recourse was made to poorer soils. Ricardo’s follower John Stuart Mill explained that being income without labor or other costs, such rent formed the natural basis for taxation.

-The Deficit Commission and America's Neo-feudal Economy

Income Corporate Capital Gains Tax Rates thumb

Related Reading

The Curse of the Silver Trade

Everyone wants to be popular.

We all want the respect of our peers. We crave the adoration of friends and family. It's a natural human condition to desire popularity.

But in the financial markets, popularity is a curse. It's the popular trades that blow up. They suck us in and get us thinking how cool it is to be in this trade or that trade. Then, at the precise point where everyone loves the trade, the market blows it up.

The market hates popularity.

Indeed, if we were in high school, the market would be the one shooting spit balls at the homecoming queen. And right now, that queen is silver.

It seems everyone loves silver. And why not? It's had a spectacular run. It's trading at its highest level in 31 years. It's up over 100% since last September. And all sorts of market pundits believe we could see $50 per ounce over the next few months.

Who wouldn't want to hang out with the most popular kid on the street?

But before you go and offer up all your lunch money to become part of the "in" crowd, take a look at this chart...

This is a long-term chart of the price of silver plotted against its 200-day moving average (the blue line). The 200-day moving average (DMA) serves as a magnet for the price of silver. Any time the price drifts too far above or below the line, the magnet pulls it back in.

The red lines on the chart highlight times when silver was trading 50% above or below its 200-DMA. When the chart is too far above the line, silver is popular. On the previous two occurrences -- in early 2006 and early 2008 -- the market dealt with that popularity by crushing silver 33% and 60%, respectively.

In October 2008, silver was trading about 50% below its 200-DMA. The metal was horribly unpopular. It was the nerdy, pimply teenager nobody wanted to hang out with. Of course, that turned out to be the best time to buy it.

Today, silver is trading more than 50% above its 200-DMA. It is, once again, a tremendously popular trade. Everybody's talking about it, and everybody wants a piece of it.

Be careful. While it's nice to hang out with the popular kids, it's best to stay out of the way when the spit balls start flying.

At the very least, silver needs some time to consolidate its recent gains. The best case is the metal could hang out here for a while and give the 200-DMA a chance to rise up closer to the current price. The worst case is silver could be headed for a nasty correction.

Either way, if you're thinking about buying silver, you'll likely get a safer entry level a few months from now.

Best regards and good trading,

Jeff Clark

Finnish election results may spark euro jitters

Early results Sunday from Finland’s parliamentary elections suggest the anti-EU bailout True Finns party will hold the second-most number of seats and could even be part of a coalition government.

Such an outcome may mean the EU’s planned bailout of Portugal is vetoed by Finland, a move that would roil the euro-zone markets.

With half the votes counted the True Finns were on 19% support, and on course for 41 seats, tied with the Social Democrats and one seat less than National Coalition Party’s predicted 42-seat haul, the BBC reported.

Finland is the only euro-zone country that requires bailouts to be approved by its parliament. Strong gains by the True Finns could derail a planned rescue for Portugal.

A stronger-than-expected showing by the True Finns, “or if some members from other parties take a similar line, could make things very touch and go,” said Steven Barrow, currency and fixed-income strategist at Standard Bank. “And clearly if there’s any possibility at all that Portugal might not get its money, it could hit bonds and the euro hard.”

Strategists note that the main opposition Social Democrats have hinted they may also oppose a bailout. The center-left Social Democrats opposed bailouts for Greece and Ireland.

The Portuguese bailout remains unlikely to be derailed, “but caution seems to be the watchword here until we can be sure that Finland can’t upset the party,” Barrow said.

European Union officials hope to finalize negotiations by mid-May on a Portuguese bailout expected to total around 80 billion euros ($115.7 billion).

A charismatic leader?

Timo Soini, head of the True Finns Party.

At the least, True Finn’s ability to tap into anger over euro-zone bailouts may mean the next government draws an ever harder line in negotiations over Finland’s role in future rescues.

Much of the True Finns party’s recent success has been attributed to its leader, Timo Soini. The 48-year-old politician is often described as folksy and charismatic, with a reputation for witty speeches and vivid metaphors.

“How come they can’t see the euro doesn’t work?” Soini told Bloomberg earlier this year. “If a melon and an apple each wear the same size baseball cap, everyone can see that just doesn’t work.”

Soini is a “very charismatic” leader, who has skillfully employed populist slogans to denigrate opposing parties, said Ilkka Ruostetsaari, a professor of politics at Finland’s Tampere University.

The True Finns have “features that are common to all populist parties in Europe,” including a hostility to immigrants, Ruostetsaari said. A successor to Finland’s Rural Party, the True Finns have broadened their base of support from the countryside to suburban and urban areas, he said.

Soini contends Finland shouldn’t have participated in bailouts for Greece and Ireland. The True Finns oppose providing additional funding guarantees for the European Financial Stability Facility and the European Stability Mechanism, which will replace the EFSF in 2013.

Finland so far has agreed to guarantees on around €8 billion of funding for the EFSF. As one of the euro zone’s six AAA-rated country’s, the nation of 5.4 million people is set to provide crucial backing for the region’s bailout programs.

Tough talk on bailouts

Pasi Kuoppamaki, chief economist at Sampo Bank in Helsinki, said negotiations to form a new government could take some time. And if the True Finns become the third- or second-largest party in parliament, there could be reverberations in the financial markets, he said, speaking before the polls opened.

But like many observers, Kuoppamaki is not convinced that the True Finns would be in a position to block bailouts or increased rescue funding even if they were able to secure a junior role in a new government.

Finnish officials, however, reacted to the True Finns’ rise by offering tough talk on bailouts.

Finance Minister Jyrki Katainen, leader of the pro-EU National Coalition Party, warned at last week’s meeting of EU finance ministers that Portugal must implement additional austerity measures that go beyond the proposals rejected by the nation’s parliament in March.

And Finland last month balked at committing to a previously-outlined plan for the euro-zone’s AAA-rated nations to boost guarantees to the EFSF. Prime Minister Mari Kiviniemi, who heads the Center Party, said the decision should be made by the nation’s next parliament. EU leaders agreed to finalize the plan in June.

The BBC reported Sunday that while Katainen’s NCP will remain the largest party, Kiviniemi’s Center Party’s number of seats may fall to around 36. Even before the election, Katainen was seen as a strong possibility to lead the next government as prime minister.

Finland was hit hard by the global downturn in 2008, but has since bounced back strongly along with other northern European countries. The International Monetary Fund expects Finland’s economy to grow 3.1% in 2011 and 2.5% in 2012. The unemployment rate is seen at 8% this year, falling to 7.8% in 2012.

Finland’s deficit (equal to 2.5% of gross domestic product in 2010) and debt load (48.4% of GDP) are among the lowest in the euro zone and sit comfortably below the EU limits of 3% on deficits and 60% on debt.

The apparent appeal of the True Finns’ insular message runs in contradiction to the Finnish economy’s reliance on globalization, said Jan Randolph, head of sovereign-risk analysis at IHS Global Insight.

Finland is a major exporter of electronic goods. Mobile phone giant Nokia Corp. (NYSE:NOK) (OMX:FI:NOK1V) , the nation’s dominant corporation, accounted for 1.6% of GDP in 2009, according to Danske Bank.

But if Finnish politics rarely dominate headlines across Europe, European issues are rarely at the heart of Finland’s election campaigns, observers noted.

“This is out of the ordinary,” Sampo Bank’s Kuoppamaki said. It reflects “a feeling that Finland has been taking care of its own affairs,” while others in the euro zone have shirked their responsibilities — a feeling that the True Finns have successfully tapped.

Randolph sees little chance Finland will turn away from the euro zone in the wake of the elections.

“More worrying is the general spread of populist and nationalist politics in the EU,” Randolph said.

French President Nicolas Sarkozy’s UMP party suffered big losses in regional elections in March, with the far-right National Front making large inroads, he noted.

The tone makes it more difficult to sell austerity in debtor nations and to make the case for backing the euro and the EU in creditor countries, Randolph said.