Inspiration

If pigs could fly this place would be a busy airport, says the sign in my local pub.
But the price of gold is flying. And Hong Kong will open a new precious metal depositary at its international airport.

A discussion was started by Michael Lewis and is now getting wings. Also Paul Krugman has written a piece: How Did Economists Get It So Wrong?
If you want to read something this weekend… well here you go

• Huge day for gold and silver miners... majors Goldcorp and Kinross reach new 52-week highs. Jaguar, Eldorado, Goldfields, Minefinders, Silvercorp, and Silver Wheaton at new highs.

• iShares silver surges to new 52-week high.

• Don't forget the bull market in lead... lead ETF at new 52-week high.

Enough said. It's time to switch off the PC and walk to the pub to enjoy a good Guinness and some songs

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Sweet

Sweet things are happening. Sugar is still heading higher. We talked about this before. The sugar cane output in India is suffering due to a weak monsoon season while in Brazil they have a problem with too much water. Raw-sugar futures in New York have surged to the highest level in 28 years.
Good to know: Brazil and India are the world’s two largest producers

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Inspiration...

And elsewhere:

• China considers steel limits... concerns about oversupply send ore producers Rio Tinto and BHP lower.

• Big Canadian banks surge... Toronto-Dominion and Royal Bank of Canada hit new highs.

• Natural gas falls as much as 7% to seven-year low.

Good luck

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Natural Gas: a hot topic

What began with the UNG, appears to be spreading quickly across the entire commodity exchange-traded product space. Almost every day another fund is announcing the suspension of new share issues – at the risk of destabilising its tracking record, we might add — on fears the CFTC will soon act to restrict fund positions across commodity futures.

From the Financial Times

Investors who followed the dramatic growth of United States Oil at the end of 2008 and beginning of 2009 probably remember how it took up a vast share of the U.S. oil futures market on the New York Mercantile Exchange, or NYMEX. Without CFTC scrutiny, the fund never had to stop issuing shares, but it did produce tremendous distortions in the market as other traders front-ran its massive trades and prevented it from benefiting as the spot oil price began to rise. As assets fell, so did the contango produced by the USO’s holdings, and the fund finally began to move with the oil prices.


The bigger and badder sequel to USO began in the Spring of 2009 as money flooded into United States Natural Gas. Compared with crude oil, which has one of the largest and most liquid commodity futures markets in the world, natural gas is a sleepy corner of the market. Assets in UNG swelled to more than $4 billion by July 2009, by which point the fund held nearly every long position in the front-month contract of the NYMEX natural gas contract, as well as huge positions in the equivalent contract on the London-based Intercontinental Exchange, and substantial swap contracts with major broker-dealers. UNG was not the 800-pound gorilla of the natural gas market–it was King Kong.


Regulators did not step in as UNG continued to grow and its price continued to shrink. The SEC simply refused to approve more shares once the fund ran into its preapproved limits from its latest prospectus (a situation that has since changed). As UNG stopped issuing shares, we saw money start to pour into the similar iPath DJ-UBS Natural Gas Total Return Sub-Index ETN (though this fund is not an exact substitute for UNG, as it tracks a different contract one month further out on the futures curve). However, concerns about regulatory action seem much higher nowadays. PowerShares DB Crude Oil Double Long ETN stopped issuing new shares on August 18 at an effective position size of $960 million (double its actual assets to adjust for leverage). Just this morning, Barclays halted issuing new shares of GAZ.

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Inspiration

In case you were out on Friday, Meredith Whitney was at it again calling for continued bank failures. This time she is calling for some 300 to be the tally. But now Nouriel Roubini is out playing Dr. Doom again with the greater and greater case for more bank failures and for a double-dip recession. Speaking of recessions, the World Health Organization has a swine flu recession scenario out. It may sound a lot like the SARS recession call of 2003 and 2004.

Further:

• S&P 500 at new 2009 high. Up 50% from March closing low.
• Shoemaker Crocs still soaring... at new 52-week high and up 548% from March low.
• Natural gas hits 15-year low relative to "real money," gold.
• Major nanotech play Vecco Instruments at new 52-week high.

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El Nino

On August 19 the World Meteorological Organization said the El Nino phenomenon — currently causing havoc in soft commodity prices but which generally has a dampening effect on natural gas prices as it brings warmer weather in the winter — might actually turn out to be weaker than first expected.

Here’s the Reuters report for your consideration:

GENEVA, Aug 19 (Reuters) - An El Nino building up in the Pacific looks like being only a mild version of the phenomenon that has in the past brought devastation around the globe, the United Nations weather agency WMO said on Wednesday. But the World Meteorological Organisation warned that even a weak El Nino — a phenomenon in which changing sea temperatures in the Pacific Ocean affect weather around the world — could seriously disturb normal climate patterns in many regions, bringing drought to some places and heavy storms to others.

“What appears to be emerging is a weak to moderate El Nino, but one that will continue for the rest of this year and stretch into the first quarter of 2010,” senior WMO climate scientist Rupa Kumar Kolli told a news conference.He said the new El Nino would have nothing like the strength of the 1997-98 version — the worst on record — which produced extreme weather that wreaked death and destruction across the southern hemisphere and parts of the north.

That El Nino brought huge storms which battered western coasts and towns in Latin America, killing hundreds of people there and elsewhere around the globe and causing billions of dollars of damage in Asia and Australia.Both developing countries and richer nations have been anxiously watching the new event in the Pacific, fearing that even minor changes in weather patterns could seriously damage economies already battered by the global recession.

Kolli was presenting a WMO situation report and outlook for the alternating and linked El Nino/La Nina events in which sea surface temperatures in the Pacific, the world’s largest ocean, either climb above average or drop below it.

Kolli did not say how El Nino would affect any particular region.

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Inspiration

What do we see?

* Gold testing its 100-day moving average to the downside
* Canadian dollar and the TSX are both seemingly on their way to test their 50-day moving average
* The CRB index and the oil price broke below its 50-day m.a. yesterday
* Another 35 points, or 3.5%, for the S&P 500 to do likewise
* The 10-year Treasury note yield just smashed through its 50-day m.a. and has 20bps to the downside left to test the 100 day m.a.
* The VIX index jumped 15% to 27.89 — last time it was here (July 10), the S&P 500 was sitting at 879 (100 points south of where it closed yesterday)
* Chinese market correcting... down 6% yesterday.
* Metals companies dropping... Alcoa, Freeport-McMoRan, U.S. Steel all lose 6% yesterday on China correction.
* Drug giants Wyeth and Schering-Plough reach new 52-week highs.
* White metal falls 5.5%... Silver is below $14 per ounce. Sphere: Related Content

I don't like Mondays...

Monday morning in Asia has given way to some sharp moves lower across markets. Shanghai stocks are below 3,000 after gapping lower at the open (last 2975.50), Copper is limit down (5%), LME Copper down $125 from the London close (2% - main support on 3m LME Copper is $5950, last $6120), other Asian bourses are 1.2%-2.6% lower, while risky currencies such as AUD and Asian FX are being sold aggressively - AUD$ traded from .8324 to a low of .8203

From Reuters: "China Investment Corp (CIC), the country's $200 billion sovereign wealth fund, is set to pour up to $2 billion soon into the U.S. mortgage system by hiring mandates under the U.S. Treasury-backed Public-Private Investment Plan (PPIP), sources told Reuters. The firms in talks with CIC are designated PPIP managers and include Alliance Bernstein LP, with sub-advisers Greenfield Partners LLC and Rialto Capital Management LLC; Angelo Gordon and Co LP with GE Capital Real Estate; BlackRock Inc; Invesco Ltd; Marathon Asset Management LP; Oaktree Capital Management LP; RLJ Western Asset Management LP; Trust Company of the West; and Wellington Management Co LLP, said the sources."

From Goldman Sachs: “Closing our long oil/gas ratio tradeAlthough we continue to expect the oil/gas ratio, currently at 20.7 in the prompt contract, to increase further between now and the end of the summer, we believe this is a good exit point. Hence we are closing our long oil/gas ratio trading recommendation at a total profit of 3.37."

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Natural Gas

How are they doing ? The commodity sector and the S&P500, we mean.
We have a chart whith the key commodity related ETFs and the S&P500 starting in March. The US Oil Fund ETF (ticker: USO) and the Base Metals ETF (ticker: DBB) were able to cope with the pace of progress of the S&P500. The Natural Gas ETF (ticker: UNG) was the weakest sector of this group.

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Steel ETF

We learned already a little about iron ore and China.

What will happen to this?

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Baltic Dry Index and China

We mentioned the collapsing Baltic Dry Index yesterday and illustrated this with a chart of the soaring inventories in China of iron ore. The warehouses are full and this is bearish for iron ore, BDI and the AUD.
But….
When the stockpiles are considered as a % of steel production (and thus as a "stock to consumption" ratio), the figures are less alarming. You can see below that Steel production has rocketed higher as well, and iron ore stockpiles this year are actually lower as a % of total steel production (144% vs 157% according to our commodities team). So this steel production chart is a big mitigating factor when considering the Iron Ore and BDIY charts

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Many voices... one tune

Now consider this: most physical intermediaries are focused on hedging via the energy markets. They’re not in the business of trading oil equities and interest-rate products. That’s not necessarily the case for hedge funds and investment banks active in the commodities space. With clever algorithms at their disposal there’s no reason why they can’t outwit the physical intermediaries with what they know more about, especially with a latency advantage. Areas they know more about, that is, like equities and bonds.
This becomes increasingly tempting with so many commodity ETFs trading on “high frequency” friendly platforms like the NYSE Arca. The key here is detecting the arbs between the underlying price of the commodities and the actual trading price of the units. Then there’s the arbitrage with the interest-rate and Treasury markets. In the days of floor trading, simultaneously buying oil and selling Treasuries if a mis-pricing in inflation expectations opened up would be possible but not half as fluid. Algorithms can completely automate that process.
Is it any surprise then that oil is showing such an increased correlation with the dollar and equities?

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Iron ore

Spot iron ore prices are fast approaching $100 a tonne, well above the levels at which miners and steelmakers in Japan, South Korea and Europe have struck supply deals, as demand outside China recovers.
The surge in spot prices has spurred several banks to forecast that benchmark - annually negotiated - prices will rise next year, reversing their previous expectations of a fall in prices. "The market is going up, up and up," said one London-based iron ore broker.
Spot ore prices in China rose this week to $93 a tonne - including freight - and industry observers said the market could hit a year high above $100 a tonne in the near term. The surge is a remarkable rebound from April's low of $58 a tonne.

The producers of ore are Vale do Brazil, Rio Tinto and BHP Billiton.

Now is this the effect of restocking or of a pick-up of demand?
China announced that in June 49.42 million tonnes of steel were produced – an all-time monthly high. We hope this figure is reliable.

The current spot price is almost 15 per cent above the level at which annual benchmark deals have been struck between global miners and big steelmakers outside China. Those agreements cut benchmark prices for the 2009-10 year by about 33 per cent from the 2008-09 level.
Chinese steelmakers and miners remain deadlocked about a benchmark deal for 2009-10.

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Summer Song

It ‘s Friday. Let’s have a smile.
This one comes from Andy Borowitz

In what some on Wall Street are calling the biggest blockbuster deal in the history of the financial sector, Goldman Sachs confirmed today that it was in talks to acquire the U.S. Department of the Treasury.
According to Goldman spokesperson Jonathan Hestron, the merger between Goldman and the Treasury Department is “a good fit” because “they’re in the business of printing money and so are we.”…
Mr. Hestron said the only challenge facing Goldman in completing the merger “is trying to figure out which parts of the Treasury Dept. we don’t already own.”

The future for Bernie Madoff is less bright than everybody expects. ‘He will leave prison in a bag or in a coffin’ comments one man, owner of http://www.wallstreetprisonconsultants.com/.
His intake is original and – I believe – true: not his former clients, but the banks where he is hiding al his billions have an interest to silence him.

Diamonds are forever. That’s what we all believe. Hmmm, learn everything about this story on http://www.theatlantic.com/doc/198202/diamond.
And than there is this.

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Irish banks are losing ground... once more

In Dublin fair city, where girls are so pretty, the Irish banking sector is slipping away. Anglo Irish Bank, nationalized, announced they probably would halt payment of interests on part of their bonds. They cite the European Commission as source of this action in order to get the 3 bln EUR investment approved which was done earlier this year by the government.
Allied Irish and Bank of Ireland are trading substantially lower on this news.

I like the comments of Brett Steenbarger, intelligent as always:

Commodities have become a pretty good proxy for sentiment regarding the prospects for global economic recovery, as growth can be expected to generate increased demand for oil, industrial metals, and food stuffs. After breaking out of the base extending from December through April, commodities (DBC, above) have pulled back into that base, as investors have renewed questions regarding growth prospects. With that, inflation themes have taken a back seat to deflationary concerns, strengthening the U.S. dollar and sending Treasury prices higher (and yields lower).
For investors, nothing is more important than scoping out the prospects for inflation vs. deflation. The movements of the various asset classes are a kind of voting mechanism regarding those prospects and, thus far, are voting for continued economic weakness.

And then there is this: http://invislib.blogspot.com/ . The invisible library. If you want to look to something different this weekend than this is it. The Invisible Library is a collection of books that don’t exist, except in the pages of other books. It is physically manifesting at the Tenderpixel Library in London, but will resume invisibility after 12 July.

Time’s up folks. We close the laptop and stroll to the local pub for having a good Guinness. Take care and everyone a jolly good weekend. Sphere: Related Content

Baltic Dry Index

You hear very seldom about it, but there exists an active trader network trading the Baltic Dry Index. The magic number there is 4000. Now it seems that dry bulk shipping rates for things as iron ore, coking & thermal coal and grains are cooling down a little. The only reason the index has held up so far is the congestion in Chinese ports and the port inventory build going on in the same place. Odds are that declining steel and seaborne iron ore trade will be a major headwind for this sector in the second half of this year especially after de spectacular growth of the bulk shipping fleet last year.

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Profit taking?

When will oil roll over?

Not yet.

In the mean time, elsewhere...

Coal is going down. Commodity stocks as a whole seem to be under pressure, but this sector suffers quite heavily the last sessions.
Aside: look to big names as BHP Billiton (ticker: BHP). Profit taking time is there. This trade became the last months so crowded, that it became harder and harder for all names here to make any headway. Now they seem to be rolling over.

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Themes

Theme 1.
China = commodities. All these shipping movements are caused by inventory building by the Chinese. But production is still going down compared with the figures from the same month last year.
Ship owners are now charging 58.000 USD a day for large bulk carrier freighters but just 24.000 USD for next year and 2011.

Theme 2.
Indices are moving at the start of a week. Not at he end. This week is an expiration week. And the opening gambit was down.
Technically we’re moving in a very narrow range for weeks now. The reflation trade is a very crowded trade as is the ‘dollar is weak, bonds are weak’ trade.

Theme 3
This week Research in Motion is reporting results. RIMM, AAPL, GOOG and the semiconductors ETF SMH are holding up the NASDAQ. If they go, the NASDAQ will go too.
Not to forget: there was a time you had to be invested in individual names but the market has transformed to ETF/sector dominance.

Theme 5
The inversion of short term LIBOR-rates and short term Treasuries. Normally LIBOR is yielding more than the ‘safest’ investment on this planet. However, this is not the case for the moment as everybody is dumping govvies.

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The strange volume spike

The Goldman Sachs Commodity Index has nothing to do with Goldman anymore. The GSCI is index of 24 commodities weighted by world production. Goldman believed that each commodity could be weighted in proportion to the share of that commodity in the economy. How can you do this? No idea. But ok. Of the total index, 45% is weighted to crude oil. 73.5% is dedicated to energy commodities. Of the remaining 27% of the index, 10% is allocated to each of agricultural commodities and industrial metals. The final 7% is split between precious metals and livestock.
Now look what happened at the end of the beautiful month of May with the volume. Who was positioning himself there without any price reaction?
Strange.

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Uranium

Did you know that now-defunct Lehman Brothers is still sitting on a 500.000 lb stockpile of uranium? Large enough to produce some very tricky devices. Should they dump this U3O8 on the market, it could have an influence on prices. But Lehman promised not to do this and to wind down the position over the next coming two years.
The question is: what the hell is Lehman Brothers doing with uranium? On behalf of speculating clients? Or on behalf of their own account? And a second question: what more commodities are they stockpiling?
And what with other investment banks?

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