Bartlesby

What’s Bad for Wheat Could Be Good for Agriculture ETFs

Tom - could you please state your sources for your comments that the fungus "could wipe out more than 80% of worldwide wheat crops" and that "Estimates are that 19% of the world’s crop is already in danger."

Also the JJG is an ETN that is equal-weighted between only corn, soybeans and wheat futures. Thus a move in wheat prices will have a greater impact on the JJG than the DBA or the GRU.

This Rally Should Have Staying Power

J.D. - what is your basis for saying that "Stocks, both in the U.S. and abroad, are very cheap from a historical perspective"? Using Price/Book values during a period of massive asset devaluation seems rather questionable.

The forward 12-month estimate for the S&P500 As-Reported Earnings is currently $28.51. At today's 870 index level that puts the S&P's forward P/E at almost 31. Compare this to the historical average of 15.8 and we are nearly twice as expensive as historical "fair value."

(The S&P earnings history and estimates are available at www2.standardandpoors....).

Many bullish arguments today employ Operating Earnings rather than As-Reported Earnings, which grossly understates the earnings multiple. At the current multiple of nearly 31, a cautious approach is most prudent.

Buy Before Earnings Season

I find it remarkable that after the last 18 months we still see such blatant disregard and disrespect for risk. Buy before earnings announcements? The most positive aspect of this earnings season will simply be that we have more information to work with at a time of tremendous uncertainty. Uncertainty = more risk, not less. This is the time to be patient and prudent with your money. If you want to gamble, go to Vegas...they need the business.

Dollar, Gold and Oil: Gauging the Turn

Ashraf - in your chart you say that the 100-day MA exceeds the 200-day MA for the first time in 2 years, yet the chart shows that the 100-day exceeded the 200-day only 8 months ago.

Could you please clarify and also explain how this suggests a price target of $1,050 by the end of the quarter?

John Embry: Gold and Silver Are the Ultimate Insurance Policy

Mr. Embry asserts several glaring factual errors here. He states that "there is increasing activity in sunspots" right now, when in fact we are witnessing the lowest sunspot activity in quite some time. Check out spaceweather.com and solarcycle24.com for recent data and observations.

He also incorrectly states that farmland values "have fallen off a cliff". According to The Agricultural Newsletter from the Federal Reserve Bank of Chicago – February 2009, a survey of includes Illinois, Indiana, Iowa, Michigan, and Wisconsin shows “good” agricultural land values in the District actually ROSE 5% annually last year; Wisconsin demonstrated a 13% increase.

While all land values on a quarterly basis within the District contracted 4%, this hardly qualifies as "falling off a cliff".

The Prosperity Dispatch and Mr. Mickey seem to run about as much due diligence on their interview candidates as a Fund-of-Funds investing in Madoff.

Not Out of the Bear Market Yet

Agreed Macro Man - we are far from out of the woods. I would recommend qualifying any data that comes directly from Chinese officials with independent market data. The Baltic Dry index, and particularly the charter rates for Capesize vessels (which carry the Australian thermal coal you referenced), can serve as a good qualifier for gauging Chinese industrial activity.

We should also be wary to assume that a Chinese rebound will lead the global economy out of the dark. The China-US relationship is predicated on Chinese production and US consumption. The path to recovery may very well require the Chinese to develop their domestic consumer economy, while the US must save and produce more.

Real Disposable Personal Income Grew 3.3% in January

...and personal savings jumped to an annual rate of $545.5 billion, the highest level since monthly records began in 1959. The rate of saving jumped to 5%, the largest increase since March 1995.

The improvement in real income certainly helps to shore up household finances, but let's keep perspective on this point. Income is moving heavily into savings right now, not consumption.

How Does Silver Perform in a Deflation?

When looking at this price history, keep in mind that 60 years ago there was 10 times as much silver as gold globally. As of 2008 there was roughly 5 times as much gold as silver. This is quite the reversal and certainly favors silver's outperformance.

Lonely Geithner

The first mistake was to nominate Geithner as Secretary. The man who was responsible for overseeing the NY banks during the last 5 years is now responsible to turn the ship around. This is complete lunacy. We might as well hire Angelo Mozilo to run Fannie and Freddie.

Investors and the media have discussed ad nauseum the uncertainty that Geithner and the administration have caused through lack of details, delaying announcements, etc. Another way to look at this situation is that Geithner/the White House have actually removed uncertainty. They have made it rather clear that they are ill-equipped to manage the crisis right now.

There are no easy answers and no quick fixes, but poor decision-making and a lack of credibility are making a bad situation much, much worse.


On Feb 27 04:33 AM morph366 wrote:

> It's a trade-off decision for Obama - would he look bad if he hangs
> Geithner out to dry too early or even worst if he allows Geithner
> to go in front of the world's media on an ongoing basis and continue
> to disappoint and convey the sense that the job is too big for him.
> Hard decision for a new President to make especially when people
> are losing confidence and getting angrier with every new trillion
> dollar commitment.

Waiting for Inflation? It May Take Awhile

We must also consider the possibility that these shifts in short run supply and demand are structural and not just cyclical, in which case we are witnessing a reduction in long run GDP supply (i.e. potential output).

If this is the case, your output gap discussed here may actually be smaller than you think.

Investment Landscape's Fabric Is Fraying

While equity price declines are often exacerbated by short sellers, this is by no means "unnatural". This is the free market at work, painful thought it may be.

Short selling is a mechanism born of free markets to hedge risk exposure, as well as to speculate on market direction. If we use language like "Equities values are ALLOWED [emphasis mine] to be brought down" - then we are crossing the sacred line between properly regulated free markets and government control.

If you believe regulators/government should "allow" market participants to behave only in a way that benefits the larger group, then you are playing the wrong game.

Let's inforce the uptick rule and "allow" the markets to run their natural course. If that scares you, park everything in cash and wait for the dust to settle.


On Feb 24 10:45 AM glassbox wrote:

> The market's gone crazy with allowing anomalies which does not help
> in value building. Equities value are allowed to be brought down
> unnaturally with the allowance of short sellers (whether borrowed
> or not) whilst bonds are slightly better with no direct shorting
> - although one can attempt to set up a proxy exposure via the CDS
> markets.
>
> At this rate, its no wonder equities have been seeing the 'tail wagging
> the dog' phenomena - values are being established by a small group
> of players to the detriment of the larger group that chooses to stick
> by an investment.

Will Commodities Be Affected by the South American Drought?

The combination of drought and tight credit has already had a drastic impact on fertilizer consumption (and therefore yield) in the current South American crop season. Some recent evidence:

Brazil’s National Association of Fertilizer Distributors recently reported that fertilizer deliveries fell nearly 9% in 2008 versus 2007. However, a closer look reveals that this drop was driven entirely in the October-December period. Whereas Brazil saw a 5% increase in deliveries for the first three calendar quarters, the final quarter showed a 36% decrease in October, a 50% decrease in November and a 38% decrease in December as compared with 2007.

Will SPY Reach 2002 Levels?

Brian - while your point on market timing using PEs is certainly valid, consider that 424/500 companies in the index have now reported an aggregate net LOSS of $11.97 for Q4 2008. This puts the SP500's ttm EPS at $26.16, which gives us a current multiple of nearly 30. While the quarterly loss may be exaggerated by one-time writedowns, we are still significantly overvalued at these levels.

Even an overly optimistic PE at 20 would give us an index level at roughly 523. We should be careful to assume that the downside is limited when the index history tells us otherwise.

On Feb 18 06:37 PM Brian Dightman wrote:

> Thanks Richard, I enjoy your work. I have found using P/E’s to establish
> entry points in broad market positions difficult. For example, if
> investors wait for PE multiples to arrive at or near 15 (your approximate
> as reported P/E average), they may find the market has left them
> behind. In the last bear market the as reported P/E did not hit a
> low until the end of 2006 at 17.4, well after markets advanced from
> lows hit in late 2002.
>
> I realize it was the day you wrote the post but we are essentially
> now at 2002 levels and I find the current environment tempting. I
> raised cash throughout the first part of 2008 and experienced only
> small declines in strategies for the year. I do expect more downward
> pressure on U.S. stocks base on the contraction in consumer spending
> that is likely to stay with us until the employment and housing situations
> improve. I’m not sure we will get to a level where the P/E on as
> reported earnings hit 15. My concern is that with huge amounts of
> cash sitting on sidelines when the market does start to move it is
> going to do so swiftly and may consolidate at a higher level. In
> summary, I would argue the risk level for starting to re-enter the
> market at this level is fairly low. We have had a healthy 50% delince
> from market highs. Can it go lower, sure? If it does it is not likely
> to stay there for long...unless we are a repeat of Japan in the 90's.
> Proceeding with caution.

Reflation Trade? Not for Agriculture

The grains represent only 10-12% of total drybulk volume, and thus have only a marginal impact when comparing the BDI to farm product sales. We should be careful to make inferences on the BDI from this one metric alone. By contrast, coal and iron ore volumes exert much more influence over short-term shipping rates.

Why China Can't Dump U.S. Treasuries

This view is well-articulated yet it assumes that the current US-China fiscal relationship is the right model for the future. The counter-argument here is that to recover and achieve longer-term stabilization, China must develop its consumer economy and spend more on global goods, while the US must reduce consumption and return to a higher production balance. What good is China's current policy if there are drastically fewer US buyers of their products? What good is our current policy if we continue to produce proportionally less than we consume?