Issue No. 41 July 2008 Javea, Spain _____________________________________________________________________________
July 2008 – Monthly In this edition:
• Introduction – Whoops Apocalypse • Books for the Beach • The Business Cycle • Trade Recommendations – o o
Sell SXOP (European Construction and Materials) Buy Gold, Silver and Platinum
• Commodity Corner • Charts to make you go ‘Hmmm…’ o
Aluminium
o
Natural Gas
o
Sugar
o
Ted Spread
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Credit Spread
o
Hogs
• Positions (both open and closed out)
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Monthly Publication No.41 July 2008 ____________________________________________________________________________________
Introduction Whoops Apocalypse The summer is coming and generally the July Monthly is shorter than usual as many of you are off to the beach and don’t want to read too much. The summer is also often quiet. This month’s publication is, in keeping, also going to be short, but the difference is that the summer is not going to be quiet. The worst we have known The reason for the short Monthly is that there really isn’t much to say that I haven’t already said over the preceding three months. As you know I have spent the last three publications outlining why the markets and the global economies are going to get much, much worse. In these kind of markets there is no point in broadening our focus. Let’s concentrate on the main story and try to protect ourselves – or even make money – from what is likely to be the worst conditions in which we have ever worked (assuming not many of you were working in 1981/1982). This is not going to be a summer of love. Let’s just do a quick recap of my thoughts.
Broken economic models and a fearful future There is a real risk that the entire credit/leverage model of economic, financial, corporate and economic growth is now dead… at least for an entire generation. That’s quite a punchy statement but I think it may well be true. The world is going to learn the hard way that debt is not wealth. Debt is the inverse of wealth. The last shoe to drop in the rejection of the debt model will be the collapse of the Chinese credit bubble, and the emperor’s new clothing will be revealed. I do not expect this to happen yet, but when it comes (probably in three or four years time) the world will not be the place we now know and its future will be very uncertain. When China topples, the era of globalisation will be over and nations will move to protect selfinterest over all else. I expect food prices and water to be a major feature of this move towards self-interest. The US model of driving economic growth through debt expansion has reached its limit. The US has built up 100% of World GDP in debt. This is going to reverse. This unwinding will create ramifications for decades. That does not mean that the business cycle is dead. We will likely get another up-cycle after this downturn has finished – before possibly the worst global down-cycle since the 1930’s. My guess is that it will start in 2012 or thereabouts.
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Why the apocalypse? Why the apocalyptical view for the next down-cycle? Essentially, the US growth engine will be largely absent when China, India and the Middle East hit their limits of oversupply that they are rapidly accumulating now. That stall in future demand also causes huge dents in the upcycle of raw material supplying countries such as Russia, Canada, Australia and – more concerningly – South Africa, which could head towards society breakdown if it happens. We are likely to see huge gains in the price of foodstuffs putting tremendous pressure on Asian countries to fight secular inflation. They will see a 1970’s style economic quagmire, whilst the fallout of the debt burden will likely lead to US and European deflation. The aging population is the final icing on the cake. It is a secular change in trend that the world is hopelessly unprepared for.
Fixed Income In line with my view that the financial model is broken, the fixed income markets have largely seized up. Credit spreads are blowing out again. The inter-bank market is broken… entirely. Banks cannot fund anything at a decent level. Bank trading books that used to fund at Libor +10, now fund at Libor +250 in many cases. Libor itself is broken. No one can borrow money because no one is lending. Mortgages are hard to get, jumbo loans are virtually impossible to secure. Even non-leveraged businesses such as Family Offices cannot borrow money. No one will take any collateral. It is a total bloody mess. We are also left with a government bond market that is rudderless. The central banks are panicking. There is no leadership. Asian central banks, which will certainly see massive inflation for maybe a generation, are trapped like rabbits in the headlights. For example, Singapore has 7.5% inflation but 12month rates at less than 1%. Rates are going up in Asia. The jury is out on what happens in the Western world. Most people think inflation is going to get out of control. I, on the other hand, think deflation is a near certainty. I have never seen a credit crunch in history that was not deflationary. My bet is still for more rate cuts in the US, Europe, New Zealand and Australia etc., maybe this year or certainly next year. A collapse in yields will lead to a crisis in the pensions industry. A pensions crisis is the next shoe to drop in this cycle. There is nowhere for them to hide. _____________________________________________________________________________________________
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Softs will be the only answer Either pension funds load up with soft commodities or they risk not being able to fund their liabilities. I do not see how they have any other option. They will lose money in equities; yields will likely collapse so there is no yield to offer retirees; and they cannot yet profit from helping free up the financial system as the risks are still to the downside and its future is unclear. Corporate bond markets will not be the answer as they were in the last cycle. Nor will emerging market equities. Oil is already up 1400% so that offers no opportunity. The next phase will be soft commodities.
Equities It seems that my view here is playing out. The Dow has just had its worst June since 1930. I am expecting bad times ahead. What I am now really shocked at is that there are head-and-shoulders tops in almost every sector and every major market. I don’t think I have EVER seen anything like this. Look at this collection of head-and-shoulders tops… we can use the distance from the top to the neckline to give us downside targets, as the market tends to repeat the same fall again after the break. The Eurostoxx has broken the neckline and is leading the way. It is suggesting that the market can fall another 25% from here, giving a total decline of 50%. Staggering.
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The S&P500 is showing the same signs. If it breaks the neckline it will fall another 20%, taking the total decline to -40%.
The Hang Seng is also forming the same pattern. Worryingly it has fallen 38% so far and this projects to a 75% fall in the index from peak to trough. No one is prepared for this. No one.
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China also has a head-and-shoulders top… but this one projects back down to a new low for the index. It suggests a decline in the magnitude of 90%. No, that’s not a typo.
Even everyone’s bull market favourite, India, is in a world of pain…
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These types of patterns are repeated everywhere in sectors and indices. Sure, some are not as bad, but nothing looks good. Nothing. In the end, a theory that I had a while ago may well be proven. The secular bull market in equities died in 2000. Equities are just cyclical plays following the ups and downs of the economy, much like they have in Japan since 1990. The following chart illustrates my point. The SPX is just following Fed Funds. The SPX is more volatile so it does move around a bit more, but Fed Funds suggest that the SPX will come down to at least 950. The SPX, just like the short end of fixed income, is just a cyclical trade now. The relentless upward trend of equities is finished in the West.
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The Economy Simply put, there is no light at the end of the tunnel for the global economy. All forward-looking indicators are pointing lower. I think that the US will hit recession first (although technically NZ might be in one although not clear yet), but then the dominoes all across the Western world will fall. The UK and Spain are probably next but with the rest of Europe following suit soon after. This chart of the European Building and Materials sectors tells it all. There is going to be no escape for anyone. (Note: I wish to go short this sector to express some of these views.)
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The Dollar I think the Dollar is in the process of turning. The massive write-downs and paybacks of debt will take trillions of US Dollars out of the system. That can only be bullish. However, at this point the Dollar is not a clearly trending trade and is thus not an easy trade. The Dollar usually takes eighteen months to two years to turn. Even if it is turning now (which I think it may be), there will only be trading opportunities until 2010, when the true trend should accelerate. The only sharp turn in the Dollar was caused by the Plaza Accord. Unless we get a Plaza-style event we will not see a sharp turn but a gradual one. I have marked the previous turns on the chart on the DXY.
In terms of other currencies the trend is also less clear, but I am sure that inflation is not going to be bullish for Asian currencies (notice the Dollar fell over the whole 1970’s inflation period).
Oil There is not much to say. We are in the process of the blow-off top where demand destruction will kick in. Oil could go to $150 or $200. Frankly I have no clue, but my suspicion is that $160 might be breached. However, with the global economy this fragile, it is all bad. Next year expect to see negative YoY% change in oil prices, easing financial conditions and easing inflation concerns as some demand destruction takes place.
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Soft Commodities Nothing much new to add; Soft’s saw the biggest correction since the true bull market began (-24%), and are now bouncing. In a secular bull market we should now expect to see a 100% rise without any major correction. From my recent travels I am now certain that exposure levels to Soft’s from pensions funds, sovereign wealth funds, endowments etc. are in the range of 1% to 2%. What many of these players don’t yet realise is that the soft commodity story poses the biggest long-term threat to their portfolios, and in the case of sovereign wealth funds, one of the biggest long-term threats to their national security. There will soon be a stampede of investment as we see that number rise from 1% invested to 5% or more. Also it is worth bearing in mind that as countries such as China have to import more and more food at higher and higher prices, their trade surpluses will vanish rather rapidly. Sovereign wealth funds need to take this into consideration too. This chart of Soft’s is terrifying. The GS Ag Index has just had a big pullback from its monthly 9 Demark signal. This next move up will start new monthly counts. To my eye, that means that after such a large correction we could these soft commodities double in the next 12 months.
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Hedge Fund and Private Equity Although many people don’t know it yet, I think that we are going to see massive redemptions from hedge funds and private equity funds. Yet again in times of trouble, too few hedge funds have offered any protection. They lied about the fact that they can make money in down-markets as well as up-markets. The facts yet again prove this. The best the average hedge fund can say is that they have beaten the S&P500 relatively. Very few hedge funds are actually up this year. Having recently been involved in raising money for a hedge fund, I know that things are much worse than most people realise. Fund of Funds and Family Offices are strapped for cash. They cannot borrow on decent terms to give them liquidity, and many of their investments are tied up for a year. Many participants started to realise that the hedge fund dream was going sour earlier this year, but have to wait for year-end to get their money out. That money is coming out. Private equity guys offer no ability to exit at decent terms and no transparency as to the success of their strategy. Their business model is built on leverage. That model is broken. This industry will be on its knees in the next two years. No wonder so many hedge fund managers and private equity shops sold out at the highs. I did warn that anyone who invested was a fool, but urged those that could sell out to do so.
Summary The rather dramatic statement is that I urge you to do anything you can to project yourself from blowing up (expect P&L bleed even in quiet markets). Expect correlations to move around a lot. Expect volatility to be back in a big way. Be very careful of things like your prime broker or where your cash is held. Check the documentation. Make sure any deposits are segregated. Check your OTC docs. Check whether your swaps might be renegotiated to some non-Libor spread. Banks are going to try to worm out of everything. It will be a fight for survival. Be very, very careful. If you have the ability to take risk, then be short equity markets and buy some way out-of-the-money calls on fixed income, keep hold of your Soft’s and add some precious metals. That is the only path I see for survival.
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Books for the Beach Let’s lighten up! Hopefully we are all going to get some time on the beach in the next month or so and as per each July Monthly I would like to suggest some books you might enjoy that I have read or reread over the year. As in previous years, some books are brand new and some are old. Some are business-related and some are off the wall. I have rather eclectic tastes so there should be something for everyone… Affluenza – Oliver James This fascinating book introduces the concept of Affluenza, of which there are two definitions. affluenza, n. a painful, contagious, socially transmitted condition of overload, debt, anxiety and waste resulting from the dogged pursuit of more. affluenza, n. 1. The bloated, sluggish and unfulfilled feeling that results from efforts to keep up with the Joneses. 2. An epidemic of stress, overwork, waste and indebtedness caused by the pursuit of the Economic Dream. 3. An unsustainable addiction to economic growth. The book explores the connection with the dramatic rise in depression and stress-related illnesses since 1950, and the rise of consumerism and the pursuit of money. In the end the solutions put forwards are a little naïve, but the arguments put across throughout the book are very thought provoking. It is definitely worth a read. The Little Prince – Antoine de Saint-Exupéry A very old, small book about a little prince, written like a fable by one of the most famous French aviators and adventurers in the World Wars. This book is over 60 years old and its strong message, much like Affluenza above, remains pertinent and it also happens to be beautifully written and illustrated. It is timeless classic recently brought to life by the discovery that Saint-Exupéry was probably shot down in WW2 by a German Luftwaffe pilot who hero worshipped him but did not realise with whom he was in a dogfight. On realising that he killed his hero he held the terrible secret until last year when some journalists, trying to figure out Saint-Exupéry’s disappearance in the war, made the connection. They confronted him and he confessed to a lifetime of sadness and regret. Another amazing story connected with this magical little book. The Old Man and The Sea – Earnest Hemmingway Another small but perfect book (actually it’s a novella). Many of you will have read this as it’s clearly one of the most famous books ever written, but re-reading it is still a joy. I urge anyone to find a single sentence that is unnecessary or unnecessarily constructed. It is so crisp, pure and beautifully written it is a total marvel. It also is nice to be able to finish a whole book in a few hours! Oh, and it won him the Nobel Prize too. The First Year After Beatrice – Amin Maalouf This is the third book I have recommended from Maalouf (the incredible Samarkand being one and Leo the African being the other). This is equally eloquent but not quite as remarkable as the other two, which are historical stories intertwined with fiction. The story explores the subject of what happens if the world truly favours giving birth to boys over girls. Clearly we see this trend in China, India and Africa. This book explores the concept and the conclusions in the form of a novel. _____________________________________________________________________________________________
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One Hundred Years of Solitude – Gabriel Garcia Marquez Another illustrious book that many of you will have read. If you haven’t, then read it. It’s a stunningly expressive story of a small town in the South America jungle and its venture into the modern world, intertwined with Amazonian folklore and tradition. I can’t really describe it, but it’s beautiful, uplifting, comic and tragic all at the same time. No wonder he got a Nobel Prize for literature too. Ronnie – Ronnie Wood God, I’d have loved to have been a rock star. A surprisingly well-written and honest autobiography from the other guitarist in the Rolling Stones. The Black Swan – Nicholas Taleb Again a book many of you will have read. It’s a great read if you can get over the arrogance. Or I’ll Dress You in Mourning – Larry Collins and Dominique Lapierre One of the more articulate and most fascinating biographies I have ever read. It is the parallel story of the rise of the greatest bullfighter of the modern era, El Cordobés and the story of the birth of modern Spain. It’s a story of bone-grinding poverty, civil war and the rise of New Spain through the life of an incredible young bullfighter who became the obsession of a whole nation. You might not like bull fighting, but this book is stunning and unbelievably powerful. It makes Hemmingway’s book of bullfighting “Death in the Afternoon” feel like it was not worth reading and that’s saying something. It is also the most approachable account of the civil war I have read. Lapierre went on to write City of Joy about Calcutta and Freedom at Midnight, and the two of them wrote O, Jerusalem! Talented bunch. The Eyre Affair – Jasper Fforde This literary detective thriller comedy (clearly there is no such category) is so off the wall it defies description, but so intelligent you feel a bit stupid at Jasper Fforde’s knowledge of classic literature. If I’m making it sound like The Da Vinci Code for books then I am not getting my point across. It is so unique I can’t describe it. It’s a really enjoyable page-turner. The easiest thing I can do is crib someone else’s description from Amazon about the book. Jasper Fforde has a rich imagination that moves in wacky directions, an off-the-wall sense of humor that never quits, and a deep knowledge and love of literature which give shape and substance to this hilarious "thing" he's created. Not really a mystery, sci-fi thriller, satire, or fluffy fantasy, this wild rumpus contains elements of all these but feels like a completely new genre. Fforde combines "real" people from the "historically challenged" world of his plot with characters from classic novels, adding dollops of word play, irony, literary humor, satire--and even a dodo bird--just for spice. I hope that you enjoy reading some of these or re-discovering one you may have read a few years ago. Hopefully they will take your mind off the horrors of the economy and the markets. Have a great summer break. I have a feeling you might need it.
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The Business Cycle The economy continues its slow-motion crash course… ISM is slowly chopping its way lower…
BAA spreads have been leading the way for ISM and they suggest that ISM is in for a torrid time in the next six months…
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Consumer sentiment is leading ISM too…
Consumer sentiment is now at levels only seen in the bad recession of 1980…
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The OECD leading indicator for the US also suggests some big falls in ISM are only round the corner…
Our yield curve model suggests that this is only a temporary pause in the rate cutting cycle. I know most of you don’t believe it yet, but I am certain of it. What it shows is that Europe lags the US, but when Europe starts to slow the US has another down-leg. This is a very strong relationship.
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It also suggest the US yield curve will go to 300bps in the coming six to seven months.
Europe is clearly going to slow rapidly. Take a look at IFO expectations versus IP… it suggests we are going to see negative IP growth in Europe
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IFO also leads the DAX… equities in Europe are in for a rough time.
Meanwhile back in the US, IP has finally turned negative too…
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Housing is still a mess. Our index has finally had an uptick, but from the worst levels in history. This is a leading indicator. It leads the economy by at least 12 months.
Housing sector employment is driving total employment. Housing is suggesting that we are going to see more layoffs than the last recession.
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And remember this fascinating chart from Gerard Minack of Morgan Stanley? EPS is going to continue to fall for another two years… to the lowest levels in the last 50 years.
Over here is sunny Spain the dark clouds are gathering… this chart is über scary. We are heading for the worst recession in 40 years.
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Even the OECD Leading Indicator for India is now negative.
Cheery world, isn’t it? I’m trying very hard to stop myself buying some tins of food, bottled water, a shotgun and heading for the hills.
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Trade Recommendations Trade Recommendation 1 Sell SXOP European Construction and Materials Sector This trade recommendation is written up in the Introduction.
Trade Recommendation 2 Buy Gold Buy Silver Buy Platinum The world is falling apart. It’s the time to buy precious metals. They have been correcting for a while now, but look poised to break out again. I think it makes sense to be long. The charts all have wedge patterns… Gold
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Silver
Platinum
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Commodity Corner
The chart you need to think very hard about… If there is one chart that you need to grasp, it is this chart of the GS Agriculture Index divided by the SPX. Just think through what it is telling us about the future. It is a world so shocking that it almost looks like it is going backwards. If we return to the highs we are seeing a complete re-rating of financial assets versus agriculture. I think we may well go through those highs in the coming decades. That would be a 20-fold outperformance of Ags over the SPX…. Here is the chart…
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Commodity Update As many people have expressed concerns about the potential expansion of land and new crops, I thought it would be constructive to take some time to show the limited scope for an “easy solution”. We have previously shown how the yields on most major field crops have been entering a period of limited yield growth compared to previous yield advances, and when compared to global income growth. Other components are the productivity of the workers themselves and the need for the expansion of higher value perishables: fruits and vegetables. Fruits and veggies compete for resources, including land, labour, investment, and water. But the problem is that the devastatingly weak yield growth means that in order to keep pace with the needs and wants of rising incomes across the world, we have to see ever more land and resources diverted to these high value goods.
Yields have failed to keep pace with general population growth, let alone GDP growth, for almost 40 years! And it has recently become even worse.
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The per capita land harvested for vegetables is consistent with this premise: Grain Yields have roughly outpaced population growth on average, and have therefore been able to offer up land. This has all happened while the veggie yield per capita has been firmly negative.
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If we take a look at the differences in water intensity between grains and fruit & veggies, we can see that vegetables are more demanding. This means that they demand not only more acreage, but more water per acre as well.
This is a reason why the grain per capita chart below is so closely related to global water per capita. The larger and wealthier the new emerging countries become, the more water intensive crops they will demand. This helps limit the immediate increase in grain resources that everyone is expecting any day now. Grains lag water by five years. Per capita water peaked in 1979, five years before grain output.
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For these constraining reasons, a full onslaught of acres will lag ten years by our estimates, unlike previous episodes where we saw yields save the day.
The other major resource deficiency is farmers. The offspring of farmers don’t want to farm whilst the farmers themselves are becoming too old to do so. Demand for farmers is thus increasing. This deficit of workers has led to increasing reliance on mechanisation. In the 1960’s the argument went, “as long as we can replace workers with machines, there will be no problems”. So workers numbers dropped and machinery numbers rose. Simple!
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There is just one problem with this scenario. And that’s the subject of saturation. Back in the 60’s people were amazed at the productivity gains that tractors made, jumping from 250 hectares per tractor up to 350 HA by 1970. This growth in machinery demand helped to spur the last major commodity bull market as machinery forced (or allowed) younger prospective farmers to seek other employment and “a better life”. The great migration from farms to cities followed suit over the next few decades. But by the 1990’s “Hectare Per Tractor” growth looked non-existent. The gains in productivity had been had. Today marginal farmers across the world are adding to their machinery use, but at the slowest pace ever recorded. The gains have been had and the market is now officially saturated. Effectively we need employees to run the machinery, but they have left for the cities. In countries such as Russia, they lack both the mechanical equipment and the people to farm. The price of foodstuffs is going to have to increase a long way to make it economically viable (financially and socially) for people to farm the land in the middle of Russia. This doesn’t take into account the cost of transportation of the crops after harvest.
Corn The USDA report today (coming out later) will give us a better idea of the situation at hand in the Midwest. But for today we have plenty of estimates to work with. You already know our views on yields. This view is exacerbated by the fact that Iowa has the highest yields in the world! So if we take some conservative projections of, let’s say, a drop in yields to 147bu/acre and a drop of 2.5m harvested acres to 76.3m. That would leave us with a production of 11.22B bu. If we drop the total use by 3Mmt we get a global stock-to-use of 11.8% and a US stock-to-use of 3.8%!
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The only other scenario that could reverse this US stock-to-use number is if the US curbs exports in order to build it’s horribly low Ending Stocks. The US is like OPEC for corn. The country controls over 50% of the global export market and it wouldn’t take much to send importers scrambling to secure supplies. That would be incredibly bullish for the price of corn, clearly…
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With an export ban of 20Mmt from the US (to build Ending Stocks) we would see stock-to-use hover around 11% and demand for new sources of corn explode! Taiwan, the EU and Mexico would look to be the hardest hit by such a measure, while Argentina and Brazil would be the biggest winners.
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The Chinese have once again “found” a couple billion bushels of corn that they seems to have misplaced and that’s about all the bearish news I could find on corn this month. There is nothing you can believe coming out of China…
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According to some accounts there are sixteen bankruptcy filings from ethanol companies, and the market expects this to rise to +50 by the end of the year. Roughly 75% of all ethanol producers are vertically integrated though, and own both cornfields and ethanol production capacity, and are therefore unlikely to go bust. Keep an eye on this however, as the major bearish factor in the market is the Government pulling the plug (even a little bit) on ethanol.
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Soybeans Soybeans are in pretty much the same boat, only they are twice as speculative to assess because of the shorter growing period. So we will again keep our figures conservative. So for harvested acres we will assume 72m, along with a yield of 40.70bu/acre. That gives us 2.93B/bu. This would take expected production down by 175m/bu and Ending Stocks would drop precipitously to give us a US stock-to-use of… erm..… 1.
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I once again propose watching out for a drop in US exports. China will be the biggest loser by far, and nothing will push the market up more than China and India again banging the drum of “increasing stockpiles”; and although global stock-to-use will still be at 19%, these stocks aren’t in China. Expect some big buying in the next nine months. Brazil and Argentina are once again the winners.
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The Brazilian Vegetable Oils Industry Association has extended its ban on soybean planting in the Amazon. It was started in the summer of 2006, and was scheduled to st end on July 31 of this year. It will now go until July 2009. Greenpeace and the oils industry association concludes that no new soybean plantations were detected in any of the 193 areas that registered deforestation of 250 acres or more during the first year of the moratorium. The agreement includes about 94 percent of Brazil's soybean crushers.
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With this new bout of flooding across the mid-west and a very large chance of lower yields and acres, it’s highly likely that the USDA’s projections for a jump in Ending Stocks won’t be fulfilled. The numbers were speculative to begin with. That said we should expect demand for all oilseeds to drop in the next year.
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Coffee The USDA came out with its quarterly coffee report and has forecasted a record coffee crop of 140.6m bags, while their consumption number (consumption = exports + “domestic consumption”) came in just above production at 140.1m bags. This would bring producer stock-to-use to about 12.25%. •
The USDA has now voiced concerns about the coffee producing countries unusually low Ending Stocks, and now believes that there will be less coffee exported this year in order to rebuild them. The worry lies mainly with Brazil and is likely bullish for Arabica. Because of the off-cycle year next year, we can expect to lose roughly 7% of this year’s output. That would push production to 130.76m bags. If we decrease demand (because of the global slowdown) by 2.2% then we get demand of 137m bags. This would drawdown producer’s stock-to-use to 7.97%... This assumes perfect weather.
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Tata Coffee out of India has reported that the unseasonable rains have hurt a large amount of its Robusta coffee in March. There has been no quantifiable facts given yet, but it is likely that other farmers in region were also hurt. If we extrapolate this, then it is likely that the USDA has overstated India’s export and production figures for 2008/09.
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The major area of concern for coffee farmers is the issue of fertiliser costs and the weaker USD. In BRL terms, coffee has gone nowhere in price since 2004. If we take into consideration the huge jump in fertiliser costs as a % of coffee revenues, we can see that prices are near 2003 levels! This doesn’t do much to encourage new planting.
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Looking at the price of coffee and using the new input data for fertiliser costs, we can see that the real selling price of coffee in BRL terms has been moving slowly downwards.
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Cotton The USDA has made an amazing estimate, calling for cotton demand to rise this year to 127m bales! It is likely the USDA is making the mistake of looking at new capacity and not profitability or output. They did call for production to fall by 3% to 116m bales though, with Ending Stocks at 54.1m bales. This will bring the stock-to-use down to 42.6% if the USDA numbers are correct. If demand were roughly flat, as we would like to keep our estimates conservative, stock-to-use would be sticky at 46%...
•
Reports of “buying interest” for imported cotton in China has become more sporadic, Guangdong Province, the biggest textile exporting region of China has witnessed a continuous drop in its exports this year and as a result are planning on curtailing cotton imports.
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•
With poor profitability still in the cotton market and inconsistent weather, many analysts are predicting another loss of cotton acreage in the US. These estimates range from 500k to 1.2m acres! Even with a drop of 500k acres, stock-to-use would still be at 108% for the US and the effects on global stock-to-use would be a rounding error to most analysts.
Wheat Wheat estimates for all categories were raised this month. Production was raised to 663Mmt by the USDA and to 658Mmt by the IGC. Stocks were raised to 132Mmt by the USDA and 143Mmt by the IGC. Last but not least, demand was raised as well – but not by enough according to our calculations. With the surge in feed prices this month, it’s hard not to see a jump of at least 5% in consumption this year. In case you didn’t know, that would mean that demand would exceed supply… again. The market is not expecting this… This would take Ending Stocks down to 110, and stock-to-use would then drop to 17%, from 19.3% last year. But until we see statistical confirmation from the USDA we have to assume that the current forecasts from the USDA and IGC for 20.4% and 22.5% (respectively) stockto-use is correct.
•
It’s really all bearish supply side news, so I won’t bore you all with country-by-country announcements this month. But the next wave in the wheat market will likely be a bout of bullish demand side news on the back of higher feed prices and the likelihood of curbed US exports. So yes, we acknowledge that Ukraine, Russia, the EU, Australia, India and all the other countries of the world will have massive wheat output increases this year. But there will be demand for this wheat in the near future, whether it’s from farmers trying to hedge their exposure to corn deliveries or countries trying building grain stock.
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Charts to make you go ‘Hmmm…’
Chart 1 Aluminium I’m scared of trading industrial commodities in this environment but blimey, Aluminium is trading well…
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Chart 2
Natural Gas Another commodity that is doing well is Natural Gas. The price has risen 100% in six months!
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Chart 3 Sugar It is only a matter of time before that other oil substitute sugar, takes off too… when it goes it is probably going up 300% in a very short space of time.
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Chart 4 Ted Spread This Ted spread chart scares the hell out of me… it looks like we are going to a new level once we break this channel. I can only interpret this as a complete breakdown of the financial markets. A total failure of the system. Oh god.
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Chart 5 Credit Spreads Hmmm… Single A’s are blowing out again…
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Chart 6 Hogs This inflation-adjusted chart of Lean Hogs is unreal. It’s ready to blow…
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Positions FX Trade Recommendations th
Sell NZD vs. AUD Sell GBP vs. Yen UAE Dirham Fwd: Exp Nov/8/08 Sell ZAR vs. USD Sell ZAR vs. AUD Sell ZAR vs. RUB Sell Euro vs. USD Sell JPY vs. TWD Sell KRW vs. TWD Sell Euro vs. TWD
Oct 27 2006 th Nov 5 2007 th Nov 8 2007 st Jan 31 2008 st Jan 31 2008 st Jan 31 2008 st May 1 2008 st May 1 2008 st May 1 2008 st May 1 2008
Closed Out Trades 2008 th
Sell USD vs. Yen
Oct 27 2006
Entry Price
% Since Inception
%YTD
0.86 238.28 3.62 0.1336452 0.14921 3.2637 1.5475 0.2933 0.0304 47.61
7.86% 11.79% 1.10% 5.46% 11.82% 9.21% -2.02% 2.42% 4.09% -0.74%
9.46% 4.57% -0.35% 5.46% 11.82% 9.21% -2.02% 2.42% 4.09% -0.74%
Closing Date th Mar 6 2008
% Since Inception 13.85%
%YTD 8.62%
Fixed Income Trade Recommendations
Entry Price th
Short UK 10-yr yields Short US 10-yr bond yields Short US 5-yr bond yields Short US 2-yr bond yields Fed Funds Futures May 2009 EDM9 EDZ8 Short Sterling: Dec 2008 Short Sterling: June 2009 Short DE 2-yr bunds yields Long Asian Yields vs. US 10-yr
Sept 30 2005 st Jan 31 2005 th Mar 17 2006 th Nov 17 2006 th May 30 2008 th Nov 8 2007 st Mar 21 2007 th Feb 29 2008 th Nov 5 2007 th Nov 8 2007 th Jan 4 2007
4.28% 4.14% 4.62% 4.84% 97.015 95.825 95.475 95.39 94.4 3.91 Avg.
Taiwan
Jan 4 2007
th
2.57
India
Jan 4 2007
th
7.75
Singapore
Jan 4 2007
th
2.65
Thailand
th
Jan 4 2007
4.87
US 10-yr
Jan 4 2007
th
3.91
Singapore 10 year (long yields)
May 1 2008
2.44
Returns since Inception
Returns YTD
-76bps+11.79% +17bps+14.16% +127bps+12.3% +221bps+7.84% 8 149.8 137.5 -163 -59 -53bps+2.54% 0.744 0.970 1.230 0.875 0.140 -0.06 1.18
-54bps+2.15% -6bps+2.08% -7bps+2.33% +25bps+2.41% 8 106.8 22.0 -163 -61 -49bps+1.97% 0.744 0.970 1.230 0.875 0.140 -0.060 1.18
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Closed Out Trades 2008 Short Aussie 3-yr bond yields EDH8
Closing Date
% Since Inception
%YTD
March 2008 March 2008
+16.38% 130bps (+31.63%)
+0.91% 142.5bps(+33.73%)
th
Mar 6 2005 st Oct 1 2006
Commodities Trade Recommendations Corn March 09* Corn Dec 08* Oats Mar 09 Oats Sept 08 Oats Dec 08* Wheat Sept 08 Wheat Dec 08 Soybeans Nov 08 Rough Rice Sept 08* Rough Rice Nov 08 Coffee Mar 09 Coffee Sept 08 Coffee Dec 08 Cotton Mar 09 Cotton Oct 08 Cotton Dec 08 Live Cattle August 08* Live Cattle Dec 08* RL Lumber Sept 08* Palladium Short Oil vs. Sugar Short Oil vs. Lumber
st
Aug 31 2006 st Oct 31 2006 th Jan 16 2007 th Apr 16 2008 th Jan 16 2007 th Apr 16 2008 th Nov 30 2007 th Apr 16 2008 st Nov 1 2007 th Apr 16 2008 th Feb 28 2007 th Apr 16 2008 st Oct 31 2006 st Oct 1 2007 th Apr 16 2008 th Jan 16 2007 th Jan 16 2007 th Jan 16 2007 st Dec 1 2006 th Oct 25 2006 st Jan 31 2008 st Jan 31 2008
Entry Price
% Since Inception
%YTD
380.13* 288.779* 258.52 408 408.33* 953.2 7.744 1361 1230.99* 2099 135.64 139.5 161.44 69.75 81.79 83.81 89.787* 106.37* 400.72* 321.5 15.76 2.36
97.88% 172.53% 54.63% 9.22% 13.68% -4.32% 0.21 16.19% 50.04% -10.91% 10.70% 9.35% -3.31% 4.46% -4.50% -2.88% 10.94% 7.69% -46.30% 47.12% -34.58 -26.27
48.79% 66.24% 28.13% 9.22% 9.06% -4.32% 18.71% 16.19% 15.05% -10.91% 6.30% 9.35% -8.95% 11.80% -4.50% -7.22% 4.82% 0.26% -25.61% 27.84% -34.58% -26.27%
Closing Date
% Since Inception
%YTD
50 ticks,+7.7%
50 ticks,+7.7%
*Rollover value
Closed Out Trades 2008 Corn July 08 650/700 call spread
th
Apr 16 2008
th
Jun 30 2008
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Equities Entry Price
% Since Inception
%YTD
Feb 1 2006* th Jan 25 2007 th Feb 29 2008 th Feb 29 2008 th Feb 29 2008 th Apr 16 2008
st
$4.74 $1.63 13.75 8.58 2.24 2.19
-48.73% 59.51% -39.56% 1.40% 8.48% -24.66%
-17.06% 17.65% -39.56% 1.40% 8.48% -24.66%
nd
909.9 254 $36.34 30,468.00 19540 18.89 16.28 301.37 3597.34 5877.6 31487.15 144.34 425.5 728.6 212.7 572 535.35 6190.45 11712.6 26.31 21.085
41.18% -1.57% -35.64% 27.65 39.54 32.98 43.98 16.26 7.15 5.92 3.53 6.68 22.93% -10.36% -1.03% -14.34% -19.31% -12.67% -20.72% -19.26% 22.98%
20.54% -0.79% -27.76% 20.75 26.73 19.87 43.98 16.26 7.15 5.92 3.53 6.68 22.93% -10.36% -1.03% -14.34% -19.31% -12.67% -20.72% -19.26% 22.98%
Closing Date th Apr 15 2008 th May 30 2008 th May 30 2008 th May 30 2008 th May 30 2008 th May 30 2008 th Jun 24 2008
% Since Inception -6.38% -10.66% 2.33% 9.22% -5.39% -37.53% -2.2%
%YTD -6.38% -10.66% 2.33% -14.49% -12.98% 54.12% -2.2%
Trade Recommendations Long Aussie Wheat Board PGW Grain Corp ABB Grain Noble Group SG Padiberas Rogers Agriculture Index (DIAPAGB KY) COTN Cotton ETF International Paper Short Hang Seng Short H-Shares Short BHS Short PRC.PA Short SXAP Euro Autos Short Eurostoxx SX5E Short FTSE 100 Short South African All Shares Short EEM Ranbaxy Dr. Reddy Cipla Apollo Hosp Wyeth Dubai DFM General Index Saudi General Index VIX September 08 V2X Index 08
Feb 2 2006 st Oct 1 2007 st Mar 21 2007 th Nov 5 2007 th Nov 5 2007 th Aug 28 2007 th Jan 4 2008 th May 30 2008 th June 9 2008 th June 9 2008 th June 9 2008 th June 9 2008 th Jan 4 2008 th Jan 4 2008 th Jan 4 2008 th Jan 4 2008 th Jan 4 2008 th Jan 6 2008 th Jan 6 2008 th Feb 29 2008 th Jan 4 2008
*Includes dividend x4
Closed Out Trades 2008 VIX/J8 April AG TNH ADM DE North American Palladium AWB June 08 $3 Call Options
th
Jan 4 2008 th Apr 16 2008 th Apr 16 2008 th Nov 30 2007 th Nov 30 2007 th Oct 25 2006 th Apr 16 2008
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Background Raoul Pal has been publishing The Global Macro Investor since January 2004 to provide original, high quality, quantifiable and easily readable research for the global macro investment community. It draws on his considerable experience in running a hedge fund and advising many more. In its first three years of publication the compound returns of the recommended portfolio has been +287.65% with a 72% average number of winning vs. losing recommendations. Raoul Pal retired from managing client money in 2004 and now lives on the Valencian coast of Spain. Previously he co-managed the GLG Global Macro Fund in London for GLG Partners, one of the largest hedge fund groups in the world. Raoul moved to GLG from Goldman Sachs where he co-managed the hedge fund sales business in Equities and Equity Derivatives in Europe. In this role Raoul established strong relationships with many of the worlds pre-eminent hedge funds learning from their styles and experiences. Other stop-off points on the way were NatWest Markets and HSBC, although he began his career by training traders in technical analysis. Should you wish to receive information about membership please email us at
[email protected]. The number of members is STRICTLY limited, with only a few free spaces coming up each year, as the membership is full. If there are no free spaces available a waiting list will apply.
Raoul Pal, The Global Macro Investor, Javea, Spain th 30 June 2008 _____________________________________________________________________________________________
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