Friday Morning Markets

I thought I got all my complaining off my chest in last night's article but now I wake up to more nonsense!

Sorry, I'm trying to stay positive but…  Well, come on:

"The days of cheap grain are gone," says Dan Basse, president of AgResource Co., a Chicago commodity forecasting concern.  This year the prices of Illinois corn and soybeans are up 40% and 75%, respectively, from a year ago. Kansas wheat is up 70% or more. And a growing number of economists and agribusiness executives think the run-ups could last as long as a decade, raising the cost of all kinds of food.

American families, which spend 9.9% of their disposable income on food, are facing the fastest-rising food prices in 17 years. The consumer's cost for everything from yogurt and popcorn to breakfast cereal and fast-food french fries is climbing. In U.S. cities last month, the average retail price of a pound loaf of whole-wheat bread was up 24% from a year ago, according to the Bureau of Labor Statistics. Whole milk hit $3.807 a gallon, up 26%

"We're in uncharted territory," says Christopher Fraleigh, chief executive of the food and beverage division of Sara Lee Corp., which earlier this month raised its bread prices 5%.  To cope, General Mills is shrinking the size of its breakfast-cereal packages, effectively raising the price per ounce. At a Dominick's supermarket in suburban Chicago, a 15.6-ounce box of Wheaties recently cost $5.16, more per ounce than the round steak London broil at the meat counter. Grain typically has accounted for a small part of the cost of packaged products like bread and ready-to-eat cereals.

That's the creeping "shadow inflation" we get at the early stages of an inflationary cycle.  The cereal box is smaller, the restaurant cuts back on bread, the Whopper shrinks, the car has less features, the movie has less special effects…  This is how an economy can collapse all around you and you don't actually realize it until it's too late to do anything about it. 

For instance, making fuel out of food is MONUMENTALLY STUPID and is causing more inflation than it cures.  While it's great for DE, MON, DD and the Midwest farming constituency (big Bush contributors) it is devastating for the rest of the World.  Humanitarian groups are cautioning that their budgets for food aid won't go nearly as far as they did in the past. Roughly 200 million of the 850 million malnourished people in the world's poorest nations receive some food assistance. "My major concern is that we will lose ground against hunger," says Josette Sheeran, executive director of the United Nations' World Food Program.

That's right, 200M people may starve to death so you can get your Hummer to the 7-11!  The entire global projected production of biofuels for 2030 is less than what the US alone would save in oil if we raised the mileage requirements for cars by 5%…  Madness! 

Madness, like the PCE index today has the government telling us that PCE inflation is up just 0.1%, the PCE Price Index is DOWN 0.1%, Personal income is up 0.3% and Personal Spending is up 0.6%.  Yipee!  People are spending money they don't have on inflation that doesn't exist.  You can't blame the people though, our government is leading by example as Congress approves the 5th increase in public debt since Bush took office, this one for $850Bn.  The good news is we're keeping it under $10T, with "just" $9.815 Trillion in sanctioned debt.  The $4,000,0000,000 Bush has borrowed so far is costing the US over $200Bn a year in interest alone to float. 

In another story that strangely headlines on Bloomberg but not the Wall Street Journal, Alan Greenspan said this morning in London that the risk of a US recession is increasing but still "less than 50/50."  “I'm not forecasting that we're about to get a significant recession in the U.S. or the U.K.,'' Greenspan said. “All you can basically know is whether the probabilities are increasing or decreasing.''

Asia is deciding whether or not to party on with a mixed market today.  The Nikkei gave back 46 points while the Hang Seng added "just" 77 points to finish the week at 27,142.  Soldiers in Myanmar cracked down on dissenters by swiftly breaking up street gatherings of die-hard activists, occupying key Buddhist monasteries and cutting public Internet access in that country's interpretation of the Patriot Act.  The Times of London, one of the only Western news organizations with a correspondent in the closed country, reports that without the monks the "marchers had lost a lucky charm. They felt less like crusaders for justice and more like what they resembled — scared, angry kids in T-shirts facing well-drilled troops with automatic weapons."  This is what happens when people get hungry…

We've already talked about how China is looking to get their farming population to take their money out from under the mattress and toss it back into the economy and now Japan is following suit, changing the country's finance regulations to encourage their households (the World's greatest savers) to play the markets with the $13 Trillion they have locked up in savings accounts.  This is exactly the kind of late-stage party fever that comes near the end.  How near the end are we is the question we all need to wonder about.

Europe is trading down ahead of our open.  Germany's IKB Deutsche Industriebank, which recently got a bailout, showed their fiscal Q1 profits dropped 67%.  The bank said increasing credit spreads in the latest quarter caused its net loss on financial instruments to widen to €43 million, compared with a loss of €6 million. IKB said the figures are related to a time period before the start of the critical developments at the bank. "Thus the impact of the current crisis is only reflected to a limited extent in the figures for the first quarter," said the bank, which released its earnings report a month and half later than originally planned.  In other words, as Al Jolsen said: "You ain't heard nothin' yet!"

Its largest owner, state-owned development bank KfW, subsequently assumed the €8.1 billion liquidity obligation, and also created together with other German banks a risk shield of €3.5 billion to cover possible losses on subprime paper held at the investment vehicle, called Rhineland Funding.  Like I said yesterday, the $2.27 Trillion we lost in housing value will have to show up on someone's balance sheets – well, here's 0.1541% of it – just 99.8459% remains to hit the fan!

Despite some very bullish chart signals, we detected a different sort of bull in yesterday's trading action and covered our positions with the DIA Oct $140 puts at $2.20 – they took a little beating yesterday but, as I said to the members, I'll sleep a whole lot better on the weekend with them in place.  We'll find out next week how much of this week's rally was window dressing – perhaps we will find a reason to party on and take the Dow to new levels but let's go in with both eyes open as I'm not sure how much more good news we can take!

Have a great weekend,

-Phil

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