Front page story in today's Financial Times is about "Emerging Markets inflation surges"
Latest China CPI inflation rate is 5.4%, India is 9%, US is 1.2%.
The article notes:
One side-effect of surging inflation is a stronger incentive for Beijing to let the renminbi rise in order to lower the price of imported commodities.
Saturday, April 16, 2011
Thursday, April 7, 2011
Energy stocks drop about 2% after EIA inventories only slightly more than expected. Signal investors are skittish
Yesterday's action in the oil and gas names was surprisingly negative considering how minor the apparent news behind the move was. Whenever the stock trading looks odd compared to the news flow, it can indicate an important shift in psychology. In other words, if the market fails to go down in the face of bad news, or it goes down despite good news, it can be a key clue.
Yesterday (4/6/11) there was widespread price weakness in equities in the energy sector and the closely-correlated agriculture sector. with a number of ETFs falling around 2%, while the overall market rose about 0.2%. This pullback took these equities back to where they were about a week earlier. The sector ought to be watched closely to see whether this is the beginning of a downtrend, or just a temporary overreaction to what seems like a minor bit of news. The trigger was a weekly report from the EIA on petroleum inventories, which came out as scheduled at 10:30 am Wednesday. The closely watched US commericial crude oil inventories (excluding the SPR) was up 2 million barrels to 357.7 million barrels from 355.7 the week before and 1.5 million barrels higher than the same week a year ago. That small change, up 0.6%, compares to an expected rise of 1.6 million. Thus the magnitude of the "surprise" was only 0.4 million barrels. That amount represents about half an hour of the the total petroleum and products used by the US economy at the current rate of 19 millions barrels per day. Below is a chart showing how the inventories have been trending, including this most recent data point for the week ended April 1.
Inventories are above the normal range now, but that is not new. They have been above, or at the high end of, the average range for the past two years. The EIA report did not seem to have much effect on oil prices themselves. Here is what the WSJ reported about futures prices.
"Light, sweet crude for May delivery was up 15 cents to $108.49 on the New York Mercantile Exchange following the report. Front-month May reformulated gasoline blendstock, or RBOB, dropped 1.25 cents to $3.1888 a gallon. May heating oil rose 0.97 cent to $3.1947 a gallon."Below is a chart from yesterday's EIA report of oil and product spot prices since January 2010. The green line is the WTI crude oil series that was $108.49 as noted in the WSJ report. In this chart, the scales are set so that the dollars per gallon on the left are exactly 1/42 of the dollars per barrel on the right hand scale, reflecting the fact that one barrel equals 42 gallons. Thus, gasoline (red line)and heating oil prices (red line), in dollars per gallon, can be viewed on the same chart as oil prices in dollars per barrel.
The equity markets had a much different reaction to the EIA data than the oil markets themselves. Starting right about 10:30 am eastern time, when the data were released, most equities tied to energy and agricultural companies weakened.
The first chart below shows a year of daily prices. The main index shown with candlestick bars is hte PowerShares S&P Small Cap Energy portfolio. The scale is % change so that multiple indexes can be compared. The lines represent a variety of energy and agriculture ETFs, and these have all been fairly closely correlated and have been moving up as oil prices have moved up. Note that the last point shows a small downtick on each of the series. This reflects the reaction to the EIA data. The symbols of the various ETFs shown in the chart, for thoese who care about details, are OIH,OSX, VDE, XLE, MOO, DBA, and XOI.
To get a clearer picture of the timing of the move down, we zoom in on the last 10 days of data shown in ten minute intervals in the chart below. The same PSCE ETF compared to the same 7 related ETFs are shown. Ignore the first two bars of the PSCE ETF for April 6 as there was some anomalous trading in the first half hour or so. Then, from 10:30 am Wednesday until about the middle of the day there was a significant drop in all of these price series that takes them back to about where they had been a week or so ago. There is a small rise in the second half of the trading day for most, but they close well below the prior day closes and the opening prices.
In conclusion, we saw energy equities, which have been rising strongly since about August 2010, hit with selling pressure in reaction to a seeminly very small surprise that crude oil inventories were higher than expected by about 30 minutes of all petroleum usage. Since the fundamentals of the situation do not match up with the technicals, something psychological seems to be going on. We know that investors can panic and the herd can move in a new direction even though the news cannot explain it. This bears watching.
Yesterday (4/6/11) there was widespread price weakness in equities in the energy sector and the closely-correlated agriculture sector. with a number of ETFs falling around 2%, while the overall market rose about 0.2%. This pullback took these equities back to where they were about a week earlier. The sector ought to be watched closely to see whether this is the beginning of a downtrend, or just a temporary overreaction to what seems like a minor bit of news. The trigger was a weekly report from the EIA on petroleum inventories, which came out as scheduled at 10:30 am Wednesday. The closely watched US commericial crude oil inventories (excluding the SPR) was up 2 million barrels to 357.7 million barrels from 355.7 the week before and 1.5 million barrels higher than the same week a year ago. That small change, up 0.6%, compares to an expected rise of 1.6 million. Thus the magnitude of the "surprise" was only 0.4 million barrels. That amount represents about half an hour of the the total petroleum and products used by the US economy at the current rate of 19 millions barrels per day. Below is a chart showing how the inventories have been trending, including this most recent data point for the week ended April 1.
"Light, sweet crude for May delivery was up 15 cents to $108.49 on the New York Mercantile Exchange following the report. Front-month May reformulated gasoline blendstock, or RBOB, dropped 1.25 cents to $3.1888 a gallon. May heating oil rose 0.97 cent to $3.1947 a gallon."Below is a chart from yesterday's EIA report of oil and product spot prices since January 2010. The green line is the WTI crude oil series that was $108.49 as noted in the WSJ report. In this chart, the scales are set so that the dollars per gallon on the left are exactly 1/42 of the dollars per barrel on the right hand scale, reflecting the fact that one barrel equals 42 gallons. Thus, gasoline (red line)and heating oil prices (red line), in dollars per gallon, can be viewed on the same chart as oil prices in dollars per barrel.
The first chart below shows a year of daily prices. The main index shown with candlestick bars is hte PowerShares S&P Small Cap Energy portfolio. The scale is % change so that multiple indexes can be compared. The lines represent a variety of energy and agriculture ETFs, and these have all been fairly closely correlated and have been moving up as oil prices have moved up. Note that the last point shows a small downtick on each of the series. This reflects the reaction to the EIA data. The symbols of the various ETFs shown in the chart, for thoese who care about details, are OIH,OSX, VDE, XLE, MOO, DBA, and XOI.
To get a clearer picture of the timing of the move down, we zoom in on the last 10 days of data shown in ten minute intervals in the chart below. The same PSCE ETF compared to the same 7 related ETFs are shown. Ignore the first two bars of the PSCE ETF for April 6 as there was some anomalous trading in the first half hour or so. Then, from 10:30 am Wednesday until about the middle of the day there was a significant drop in all of these price series that takes them back to about where they had been a week or so ago. There is a small rise in the second half of the trading day for most, but they close well below the prior day closes and the opening prices.
In conclusion, we saw energy equities, which have been rising strongly since about August 2010, hit with selling pressure in reaction to a seeminly very small surprise that crude oil inventories were higher than expected by about 30 minutes of all petroleum usage. Since the fundamentals of the situation do not match up with the technicals, something psychological seems to be going on. We know that investors can panic and the herd can move in a new direction even though the news cannot explain it. This bears watching.
Wednesday, April 6, 2011
The Corn ETF
Teucrium, new since 2009, sponsors an ETF that trades on NYSE under the symbol CORN. It is a commodity pool that invests in a number of corn futures and is designe to mirror the daily percentage changes in corn futures.
It should be in my portfolio. Note that the history on CORN only goes back to 6/10/10 and so the chart does not show the 2008 peak in corn, which was June 2008, very close to the peak oil price in August 2008. The corn price has already surpassed its 2008 peak. Some 40% of the US corn crop is now going to make gasoline, and weather has lowered production, and inventories are unusually low.
The stochastics are saying today is not a good time to enter this trade. Daily chart shows it is overbought. Continue to monitor it for an entry on the long side. Looking for other ways to play agriculture.
Here is a brief profile of the corn market from the ETF propsectus, followed by a daily chart for the period January 2006 through December 2009.
It should be in my portfolio. Note that the history on CORN only goes back to 6/10/10 and so the chart does not show the 2008 peak in corn, which was June 2008, very close to the peak oil price in August 2008. The corn price has already surpassed its 2008 peak. Some 40% of the US corn crop is now going to make gasoline, and weather has lowered production, and inventories are unusually low.
The stochastics are saying today is not a good time to enter this trade. Daily chart shows it is overbought. Continue to monitor it for an entry on the long side. Looking for other ways to play agriculture.
Here is a brief profile of the corn market from the ETF propsectus, followed by a daily chart for the period January 2006 through December 2009.
Monday, April 4, 2011
The next big thing: energy and ag
Looking back for about 16 years, which gets us back to 1995, the way to have made a lot of money in equity markets was to have identified and ridden the two bubbles over this period. The first was the dot.com bubble (from about 1995 to the peak in the NASDAQ index on March 10 2000), which ended with the "tech wreck" (2000 to 2002). The second was the housing bubble (2004-2007), which ended in the 2008-09 financial crisis. The Fed's overly expansive monetary policy was at least in retrospect a contributing factor to each bubble, and the Fed used monetary easing to lessen the negative impacts after eqch bubble burst. Now in spring 2011 the Fed is again easing, this time via QE2, scheduled to end in June 2011, and one naturally wonders what might be the next bubble?
I believe it will be a bubble in energy and agriculture, and the signs are already there that these related sectors are starting too "bubble". Oil prices and food prices have risen significantly from the post-financial crisis trough. [add some charts here to demonstrate] These sectors are connected in that oil is a significant input to growing crops (fertilizers, operating farm equipment, transporting foods to markets). There is even an influence going the other way in that rising food costs appear to have been a factor in the unrest in poorer oil producing countries like Libya.
Besides the evidence of rising oil and food costs, there is a great body of research on "Peak Oil" that I find compelling. A great deal of the economic growth of the past hundred years or so was because of the remarkable power of (cheap) oil. Despite all the inefficiencies inherent inthe process, the idea that is is possible to move a 2500 lb fully-loaded vehicle for 20 to 30 miles using a gallon of a fuel that costs about the same as a gallon of milk is astonishing when one thinks about it.
One compelling piece of evidence in favor of Peak Oil (withough having to get bogged down in estimates of supply, demand, proven reserves, inventories, probable reserves, unused capacity, etc.) is the spike in oil prices in August of 2008 to $147 per barrel. Unlike the spikes of 1973 and 1979, which were caused by supply disruptions in the Middle East (the Arab oil embargo in 1973,and the overthrow of Sha of Iran in 1979), the oil price rise from 2006 to 2008 was the result of demand outstripping supply. Even though there were no major supply-side disruptions in 2006-2008, and even though the incentives to produce were strong from rising prices, and the global system was operating full, prices rose enough to create a supply shock that was a major factor, along with the financial crisis in the wake of the financial system melt-down, in the world-wide major recession of 2008-2009.
From Wikipedia: Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. This concept is based on the observed production rates of individual oil wells, and the combined production rate of a field of related oil wells. The aggregate production rate from an oil field over time usually grows exponentially until the rate peaks and then declines—sometimes rapidly—until the field is depleted. This concept is derived from the Hubbert curve, and has been shown to be applicable to the sum of a nation’s domestic production rate, and is similarly applied to the global rate of petroleum production. Peak oil is often confused with oil depletion; peak oil is the point of maximum production while depletion refers to a period of falling reserves and supply.
[add more about the supply demand balance outlook in oil globally]
[add more about food crisi]
Just as the upcoming oil crisis was preceded by a similiar criss in 2006-2008, there was also an food crisis in 2007-2008.
Again, we turn to Wikipedia:
The years 2007–2008 saw dramatic increases in world food prices, creating a global crisis and causing political and economical instability and social unrest in both poor and developed nations. Systemic causes for the worldwide increases in food prices continue to be the subject of debate.
Initial causes of the late 2006 price spikes included droughts in grain-producing nations and rising oil prices. Oil price increases also caused general escalations in the costs of fertilizers, food transportation, and industrial agriculture. Root causes may be the increasing use of biofuels in developed countries (see also food vs fuel),[1] and an increasing demand for a more varied diet across the expanding middle-class populations of Asia.[2][3]
These factors, coupled with falling world-food stockpiles all contributed to the worldwide rise in food prices.[4] Causes not commonly attributed by mainstream views include structural changes in trade and agricultural production, agricultural price supports and subsidies in developed nations, diversions of food commodities to high input foods and fuel, commodity market speculation, and climate change.
As I explore investment ideas based on this theme, the first thing I looked at is the ETF from Power Shares S&P for small cap energy. PSCE is the symbol. Bought a small amount on 4 5 11. I wanted to download crude oil price data so that I could compare it to the equity stock prices of PSCE or other individual equities. The futures price data is apparently not readily available for download for free on the Internet. I guess the futures exchanges keep the data to themselves unlike the equity exchanges.
I did manage to find daily prices from the EIA. They are for Cushing OK delivery. Here is the link:
http://www.eia.doe.gov/dnav/pet/pet_pri_fut_s1_d.htm
What is noteworthy is how quickly oil prices have rebounded even though economies around the world are still well below the levels of 2008 when prices hit their prior peak.
I believe it will be a bubble in energy and agriculture, and the signs are already there that these related sectors are starting too "bubble". Oil prices and food prices have risen significantly from the post-financial crisis trough. [add some charts here to demonstrate] These sectors are connected in that oil is a significant input to growing crops (fertilizers, operating farm equipment, transporting foods to markets). There is even an influence going the other way in that rising food costs appear to have been a factor in the unrest in poorer oil producing countries like Libya.
Besides the evidence of rising oil and food costs, there is a great body of research on "Peak Oil" that I find compelling. A great deal of the economic growth of the past hundred years or so was because of the remarkable power of (cheap) oil. Despite all the inefficiencies inherent inthe process, the idea that is is possible to move a 2500 lb fully-loaded vehicle for 20 to 30 miles using a gallon of a fuel that costs about the same as a gallon of milk is astonishing when one thinks about it.
One compelling piece of evidence in favor of Peak Oil (withough having to get bogged down in estimates of supply, demand, proven reserves, inventories, probable reserves, unused capacity, etc.) is the spike in oil prices in August of 2008 to $147 per barrel. Unlike the spikes of 1973 and 1979, which were caused by supply disruptions in the Middle East (the Arab oil embargo in 1973,and the overthrow of Sha of Iran in 1979), the oil price rise from 2006 to 2008 was the result of demand outstripping supply. Even though there were no major supply-side disruptions in 2006-2008, and even though the incentives to produce were strong from rising prices, and the global system was operating full, prices rose enough to create a supply shock that was a major factor, along with the financial crisis in the wake of the financial system melt-down, in the world-wide major recession of 2008-2009.
From Wikipedia: Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. This concept is based on the observed production rates of individual oil wells, and the combined production rate of a field of related oil wells. The aggregate production rate from an oil field over time usually grows exponentially until the rate peaks and then declines—sometimes rapidly—until the field is depleted. This concept is derived from the Hubbert curve, and has been shown to be applicable to the sum of a nation’s domestic production rate, and is similarly applied to the global rate of petroleum production. Peak oil is often confused with oil depletion; peak oil is the point of maximum production while depletion refers to a period of falling reserves and supply.
[add more about the supply demand balance outlook in oil globally]
[add more about food crisi]
Just as the upcoming oil crisis was preceded by a similiar criss in 2006-2008, there was also an food crisis in 2007-2008.
Again, we turn to Wikipedia:
The years 2007–2008 saw dramatic increases in world food prices, creating a global crisis and causing political and economical instability and social unrest in both poor and developed nations. Systemic causes for the worldwide increases in food prices continue to be the subject of debate.
Initial causes of the late 2006 price spikes included droughts in grain-producing nations and rising oil prices. Oil price increases also caused general escalations in the costs of fertilizers, food transportation, and industrial agriculture. Root causes may be the increasing use of biofuels in developed countries (see also food vs fuel),[1] and an increasing demand for a more varied diet across the expanding middle-class populations of Asia.[2][3]
These factors, coupled with falling world-food stockpiles all contributed to the worldwide rise in food prices.[4] Causes not commonly attributed by mainstream views include structural changes in trade and agricultural production, agricultural price supports and subsidies in developed nations, diversions of food commodities to high input foods and fuel, commodity market speculation, and climate change.
As I explore investment ideas based on this theme, the first thing I looked at is the ETF from Power Shares S&P for small cap energy. PSCE is the symbol. Bought a small amount on 4 5 11. I wanted to download crude oil price data so that I could compare it to the equity stock prices of PSCE or other individual equities. The futures price data is apparently not readily available for download for free on the Internet. I guess the futures exchanges keep the data to themselves unlike the equity exchanges.
I did manage to find daily prices from the EIA. They are for Cushing OK delivery. Here is the link:
http://www.eia.doe.gov/dnav/pet/pet_pri_fut_s1_d.htm
What is noteworthy is how quickly oil prices have rebounded even though economies around the world are still well below the levels of 2008 when prices hit their prior peak.
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