Even Willy Wonka might struggle to use this much chocolate. Yesterday, somebody bought 241,000 tonnes of cocoa beans. The purchase was enough to move the entire global cocoa market, sending the price to the highest level since 1977, and triggering rumours and intrigue in the City.
It is unclear which person, or group of traders, was behind the deal, but it was the largest single cocoa trade for 14 years. The purchase was enough to move the entire global cocoa market, sending the price to the highest level since 1977, and triggering rumours and intrigue in the City.
Analysts said it was very unlikely that a chocolate company, such as Nestle or Kraft, or even their suppliers, would buy such a huge order in one go and that is was probable that one or a number of speculators, possibly hedge funds, had attempted to corner the market. By doing this, they would have control of the entire supply in Europe, forcing the price yet higher.
Eugen Weinberg, an analyst with Commerzbank, said: "For one buyer it would likely be a little bit too large. It would be a crazy number. That said, if you're cornering the market ..."
"If it looks like cornering, feels like cornering and the price difference between Europe and the US is so large, it probably is cornering."
Capital Economics, the consultancy led by Roger Bootle, expects house prices to fall 5pc this year, and 10pc in each of 2011 and 2012. In total, the group predicts a collapse in house prices of 23pc from the start of 2010 – a deeper drop than the 19.3pc crash during the recession.
"Higher taxes, spending cuts and rising unemployment all point to fresh house price falls this year and next," the forecasters said in a report. "The benefits of low interest rates will be undermined by a fresh tightening in mortgage lending criteria."
It is the second report in less than a week to make grim reading for Britain's homeowners. PwC warned "there is a 70pc chance that UK house prices will still be below peak 2007 levels in 2015 in real terms ... and that real house prices [after inflation] may not regain their previous peak levels until around 2020".
It's come to this: The Texas budget outlook has become so bleak that we're comparing rather favorably to the one state where balanced budgeting goes to die.
People, our budget deficit is now as bad as California's.
Texas: $18 billion shortfall (estimated) or about 20 percent of state spending.
California: $19.1 billion shortfall (official estimate) or about 20 percent of state spending.
The numbers match up pretty neatly.
A couple of caveats: Texas—as you probably know—budgets in two-year cycles. If the budget gap does turn out to be $18 billion (and we won't have an official number until early next year), that would represent about 20 percent of the $87 billion in state funds that Texas allocated for 2010-2011.
California budgets one year at time. But the state spends about double what Texas does. So a $19.1 billion budget gap represents about 20 percent of the roughly $83 billion California will spend this year from its general fund.
Talks with the International Monetary Fund (IMF) and the EU ended prematurely on Saturday without a conclusion of the country's programme review, which means Hungary will not have access to remaining funds in its 20 billion euro (16.9 billion pound) loan secured in 2008 until a deal is reached.
This is a risky path for a country which has a poor budget track record and which runs central Europe's highest public debt at about 80 percent of gross domestic product, analysts said.
Although Hungary does not face an immediate pressure on state finances as its 2010 financing seems to be secure thanks to unused loans and cash reserves, it needs the lenders' safety cushion as an external anchor of credibility.
For now, the market seems to be shrugging off this news.
The true scale of the national debt is £2 trillion - more than twice the official figure, an alarming study shows.
The black hole in the public accounts equates to £78,000 for every household in the country.
The 'real' state of the national finances is exposed in a study published today by the Centre for Economics and Business Research, which warns of a series of mammoth debts that aren't revealed by the official figures.
The national debt - forecast to reach £932m by next spring - does not include a number of expensive liabilities, such as the cost of civil service and town hall pensions and projects funded under the Public Finance Initiative.
Putting these liabilities into the official figure would add £1.13 trillion to Britain's whopping overdraft, according to CEBR.
Under the worrying scenario, the debt would jump from 62% to 138% of Britain's income.
With a sharp wit and a sharper tongue, Mr. Hendry, a plain-spoken Scot, has positioned himself as the public contrarian thinker of this city's very private hedge fund community.
The euro? It's finished, Mr. Hendry proclaims.
China? Headed for a fall.
President Obama? "If there was a way to short Obama, I would," Mr. Hendry said.
Last May, on British television, he verbally sparred with Jeffrey D. Sachs, director of the Earth Institute at Columbia and perhaps the best-known economist writing on developmental issues.
Before that, he took on Joseph E. Stiglitz, the Nobel laureate, about the future of the euro. "Hello, can I tell you about the real world?" Mr. Hendry interjected at one point. Video of the encounter was a huge hit on YouTube.
Oil giant BP PLC was Monday considering yet another method to kill its ruptured Gulf of Mexico oil well amid concerns that the cap it installed last week could be allowing oil and gas to seep out the sides.
Meanwhile, a federal panel investigating the disaster heard that the Deepwater Horizon drilling rig suffered a series of power outages and seized-up computers in the months before it exploded.
BP's new containment cap has stopped the flow of oil since Thursday, but with the well now sealed at the top, government officials are worried that oil and gas could now be escaping elsewhere.
The rig's chief engineer, Stephen Bertone, testified during a panel hearing in Kenner, La., that the Deepwater Horizon suffered a series of maintenance problems in the months before the well exploded.
Investigators have identified more than 20 "anomalies" in the rig's last two days that could have contributed to the disaster, according to a document written by the panel's investigators and reviewed by The Wall Street Journal.
I have no idea how many things have been tried at this point. However, I do know they have all met with failure.
China is now the world's biggest energy consumer, knocking the U.S. off a perch it held for more than a century, according to new data from the International Energy Agency.
The Paris-based agency, whose forecasts are generally regarded as bellwether indicators for the energy industry, said China devoured 2,252 million tons of oil equivalent last year, or about 4% more than the U.S., which burned through 2,170 million tons of oil equivalent. The oil-equivalent metric represents all forms of energy consumed, including crude oil, nuclear, coal, natural gas and renewable sources such as hydropower.
The figures reflect, in part, how the global recession hit the U.S. more severely than China and hurt American industrial activity and energy use. Still, China's total energy consumption has clocked annual double-digit growth rates for many years, driven by the country's big industrial base. Highlighting how quickly its energy demand has increased, China's total energy consumption was just half the size of the U.S. 10 years ago.
China's voracious energy demand helps explain why the country—which gets most of its electricity from coal, the dirtiest of fossil-fuel resources—passed the U.S. in 2007 as the world's largest emitter of carbon dioxide emissions and other greenhouse gases.
China's rate of growth in energy consumption is not sustainable. Therefore, China's desire to grown at 8% or more a year is not either.. Peak oil or perhaps even oil wars will put an end to it.
In the blink of an eye, the economic focus in Louisiana has shifted from recession recovery to avoiding actual and potential job losses piling up at a staggering rate.
And there's very little that the state can do: The tally is due to the Obama administration decisions affecting petroleum, defense and space -- all coming together in a perfect storm.
Last Tuesday, Northrop Grumman Corp., faced with tighter Pentagon spending and Obama administration priorities aimed at Afghanistan and away from the Navy, said it would shut its Avondale shipyard -- the state's largest industrial employer with about 5,000 workers -- in early 2013 after two military ships are finished.
Another source of misery is the deepwater petroleum drilling moratorium in the Gulf of Mexico. The six-month "pause" that the Obama administration insists on could kill the drilling business off the Louisiana coast for years, industry and government officials warn.
Of the 33 deepwater rigs in the Gulf when the Deepwater Horizon exploded, two found new long-term homes in Egypt and off the coast of Africa within a week -- just as the industry promised would happen.
Louisiana State University economist James Richardson said a six-month moratorium could slash 18,000 to 20,000 jobs. With that prediction, consider that the entire state, at the lowest point of the post-2008 economic meltdown, had lost about 49,000 jobs.
The oil spill already has had a well-documented effect on fishing and tourism along the coast. Quantifying a number is difficult -- the first state jobs report since the moratorium and the full arrival of the spill is due out July 23 -- but state officials already have warned that it won't be pretty.
Then there's the end of the space shuttle program. Earlier this month, the last external fuel tank expected to fly rolled out of the Lockheed Martin Corp. operation at the NASA Michoud Assembly Facility in New Orleans. By the end of September, only about 200 workers will still be around from a payroll of 2,700 in 2008 and 5,000 during the mid-1980s.
The Oysters are Dead
Please consider this video regarding oyster harvesting in the gulf.
Alternative link: http://www.youtube.com/watch?v=Larp-93rWp0
Oysters are bottom feeders and concentrate pollutants. Even if the oysters were not dead, would you want to eat them? With that thought in mind, perhaps it's a good thing they are dead or someone might attempt to sell them.
My advice: Don't eat oysters or for that matter warm-water fish unless you know exactly where they are from.
For the first time since the government started collecting the data, central banks, mutual funds and U.S. banks are buying more government securities at Treasury auctions than Wall Street's bond dealers.
Foreign and domestic investors bidding directly at note and bond auctions bought 57 percent of the $1.26 trillion in Treasuries sold by the government this year, up from 45 percent during the same period in 2009 and as little as 32 percent for all of 2008, according to government data compiled by Bloomberg. Bids compared with the amount of debt sold, the bid-to-cover ratio, rose 18 percent from last year's 14-year high, according to data that Treasury started collecting in 1994.
"The data shift that we had from the first quarter to the second quarter has been fairly dramatic and came sooner than many investors would have expected," said Eric Pellicciaro, New York-based head of global rates investments at BlackRock Inc., which manages about $1 trillion in bonds. "Treasuries are still attractive."
Primary dealers, which are required to bid in government auctions and act as the trading partner to the New York Fed, have won the lowest proportion of Treasuries in auctions since the government began releasing the data in 2003.
Bond Bears
Even bond-market bears such as primary dealer Morgan Stanley have trimmed forecasts for U.S. yields to rise in the second half of the year, with slow growth likely to keep the Federal Reserve from increasing record low borrowing rates into 2011. The target for overnight loans between banks has been zero to 0.25 percent since December 2008.
Morgan Stanley of New York has lowered its estimate for the 10-year yield at the end of the 2010 to 3.5 percent from 5.5 percent at the start the year. The median projection of 55 forecasts in a Bloomberg survey is 3.36 percent, down from 3.80 percent in June.
Pent-Up Demand Takes Hold
Over the past few years I have received many taunts from people saying treasuries were a sure loser.
However, a few inquiring minds did ask who would buy them. My reply was there was a pent-up demand for treasuries. I said so in a rebuttal to Doug Kass on The Street.
Kass: The bond market is in a bubble that is reminiscent of (and quite possibly as extreme as) other bubbles during previous eras. From my perch, the only issue is the timing of this trade.
Mish: Timing is indeed everything and perhaps there is a temporary selloff. But the primary trend is for lower yields. Perhaps much lower yields. There is no bubble in bonds. Not yet.
...
Furthermore, the pent up demand for treasuries in the US is enormous. They are despised by nearly everyone here. This internal pent up demand can easily pick up any slack from reduced purchases by foreigners. 2.5% yields may looks measly, but not vs. 15% declines in the stock market. 30%? 50%? Most are severely underestimating the potential for enormous stock market declines here.
Anyone who wants to short treasuries with impunity on this economic backdrop can be my guest.
There is no bubble in treasuries if you look closely at the fundamental issues. Those who want to see how low treasury yields can get and stay there, need to look at Japan. Yields in the US are going to go far lower and stay lower longer than nearly everyone thinks.
Yields are much lower now, yet I see no reason to change my stance. By the way, I did issue an opposite warning in January 2009.
It is quite possible the lows in treasury yields are in. Unlike 2008 where I was constantly beating the drums for lower yields, 2009 could be different. Here are the facts: 3 month and 6 month yields hit 0% and the 10 year came close to hitting 2%. Could there be lower yields still? Yes, quite easily. Is it worth playing for other than as a hedge or part of an overall investment strategy? No.
The subsequent bounce in yields provided an ample opportunity to get back in..
Where To From Here?
Morgan Stanley's 5.5% prediction is quite the miss. Moreover a revision to 3.5% is quite a revision.
Yet, as always, the key question is "where to from here?"
The answer depends on the data but the backdrop for favorable economic news seems unlikely. Thus, even after that huge downward revision in yield estimates, Morgan Stanley is likely to be off on the high side in my estimation.
Lack of Faith in Common Sense
From where I sit, it appears that nearly everyone has too much faith in the Fed's ability to reflate and too little faith in common sense reasons why that's not likely to happen anytime soon.
One key point is that consumer attitudes towards borrowing and bank attitudes towards lending have changed. We have reached a Consumption Inflection Point - No One Wants Credit and consumer spending plans have plunged.
That is an enormous headwind for Bernanke to be fighting. With retiring boomers downsizing spending, kids out of college hundreds of thousands of dollars in debt, and a grim picture for jobs nearly everywhere, those expecting the Fed to pull a miracle out of its hat are simply asking too much.
The above link addresses what is happening. This post will address the reasons why.
Reasons for Nonsensical Earnings Estimates
Analysts do not do their homework on what is really happening and why. Instead they see rising earnings and take them at face value, nearly always figuring following quarters will be better yet.
Analysts do not understand the dynamics of debt deflation, peak credit, the baby boomer retirement dynamics, etc. In short, Analysts do not understand the global macro picture is bleak.
Analysts look at a steep yield curve and think the Fed can lift the economy.
Analysts have not yet caught on to the fact that consumer spending and bank lending attitudes have changed for good.
Analysts in general have a vested interest in getting the public to buy stocks, annuities, etc. because that is how they make money.
US Banking Earnings are a Sham
David Stevenson at MoneyWeek addresses the first bullet point above quite nicely. Please consider The US banking recovery is a sham.
Let's hear it for the bankers!
There may be plenty of gloom gathering elsewhere. But the moneylenders – or some of them at least – seem to be doing very nicely. For example, US giant JP Morgan Chase has just revealed a staggering 76% jump in its second-quarter profits.
What's more, it's part of a steadily rising trend in improved results.
The chart below shows JPMorgan's recent quarterly profits. These have now climbed right back to 2007's high point. That's nothing short of amazing. And it's more than enough to get bank bulls quite excited again.
But hang on a minute. Maybe there's a con trick being played here.
For one thing, JP Morgan hasn't achieved any 'real' growth. The bank's revenues actually fell by 8%. Investment banking and fixed-income trading results both dropped.
So where did all the money come from?
The figures aren't as good as they first seem
Well, the bank only turned in such a 'good' result because it slashed its "provision for credit losses" by two thirds, from $9.7bn to $3.4bn. In other words, all (and more) of JP Morgan's latest profit was due to the bank making a much lower allowance for bad debts – loans that could go sour because the debtors can't repay to the bank the money they've borrowed.
But this isn't just about bad debts – or JP Morgan. As Bradley Keoun and David Henry at Bloomberg point out, other US banks will be pulling strings to make their results look good: "Bank of America and Wall Street firms are now depending on an accounting benefit last used in the depths of the credit crisis to prop up their results".
New accounting rules artificially inflate earnings
The arcane-sounding FASB 157 rule may seem deadly dull, but for bankers it's very important – and very controversial, too. Here's how it works. When banks want to borrow money, they often do so by selling bonds. These are in effect IOUs. FASB 157 lets these banks pretend they'll buy back their IOUs at current market rates, even though they may have no real intention of doing so.
Now let's say that a bank's IOUs drop in price – for example, because it's reckoned by the market to be dodgier than was previously thought, meaning that the risk of holding those IOUs rises.
Although the face value – the actual amount owed on the IOUs – stays the same, the bank is now allowed to assume that it owes less money to its creditors. So it can book the difference between the previous IOU value and the current, lower price as a profit.
Bank of America, the biggest US bank by assets, may record a $1bn second-quarter gain from writing down its debts to their market value, says Keith Horowitz at Citigroup. Morgan Stanley will also probably record $1bn in such debt valuation adjustments in the second quarter, he says, equal to 60% of his estimate for the firm's pre-tax income.
Chris Kotowski at Oppenheimer is very clear what this really means. It's an accounting "abomination", he says, because fluctuations in the value of the debt don't change the amount the banks owe.
Accounting "Abomination"
Any person reading this now understands what an accounting "abomination" FASB 157 created.
However, analysts don't know that or they simply do not care. As as noted in the 5th bullet point at the top, sell-side analysts have a vested interest in not knowing or not caring about these kinds of abominations.
This explains how forward earnings estimates have been ridiculously ratcheted back up to 2007 highs. To top it off, not only are the forward earnings estimates a sham, this quarter's bank earnings estimates are a sham as well.
The hook has been set. Stocks look "cheap" based on continually upgraded forward earnings estimates, yet those estimates are highly unlikely to say the least.
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