Dupon't Pioneer Hi-Bred Buys Two Seed Companies (DD; MON)

Pioneer should book $5 billion in seed sales next year. First up, Zack's Analyst blog:
DuPont Buys Two Seed Makers

EI DuPont de Nemours & Co. (DD - Analyst Report), the world’s second- largest seed maker announced that its Pioneer Hi-Bred seed unit has acquired Washington Court House, Ohio-based Seed Consultants Inc. and Lake Providence, Louisiana-based Terral Seed. These companies had been distributing seeds under the Pioneer trademark.

DuPont’s wholly-owned subsidiary, Pioneer Hi-Bred International Inc., operates in the seed industry and has seed production facilities located throughout the world. Seed production is performed directly by the company or contracted with independent growers and conditioners. The acquisitions are in sync with Pioneer’s PROaccess business strategy, which was introduced in December 2008. Through the strategy Pioneer aims to make available its seed genetics to more growers around the world through a network of partnerships and new brands.

Earlier this month, Pioneer completed acquisitions of other ProAccess partners, including Hoegemeyer Hybrids of Hooper, Nebraska; NuTech Seed of Ames, Iowa; and AgVenture Inc. of Kentland, Indiana.

DuPont’s Agriculture and Nutrition segment’s sales inched up 2% to $1.3 billion on a 5% rise in volumes in its recently reported third quarter. DuPont has divested many businesses in the segment, which led to lower top-line growth. Yet the segment is experiencing higher sales in the North American seed business.

With the introduction of new hybrids in 2010, the seed business grew significantly in North Americaduring the third quarter of 2010 with the corn share being 35%, a year-over-year increase of 3%, and the soybean share being 31%, a 5% increase from the year-ago level. DuPont ranks sixth in crop protection chemicals and second in seeds....MORE

A bit of backround from the linkvault, Reuters via the New York Times, August '09:

Monsanto and DuPont Heat Up Rivalry Over Seeds

KANSAS CITY, Mo. — It’s getting dirty down on the farm.
As U.S. farmers prepare to harvest billions of bushels of corn and soybeans — main ingredients in food, livestock feed and transportation fuel around the world — the two titans of seed technology, Monsanto and DuPont, are ramping up their rivalry to new heights.

DuPont is accusing Monsanto of illegal anti-competitive practices, while Monsanto counters that DuPont is engaging in a covert smear campaign that borders on fraud.

The chief executive of Monsanto, Hugh Grant, this week sent a letter, a copy of which was obtained by Reuters, to the DuPont chairman, Charles O. Holliday Jr., accusing the company of a “serious breach of business ethics” and requesting that a special committee of DuPont’s independent directors investigate what Mr. Grant called an “attack” on Monsanto’s seed business.

Monsanto executives claim that DuPont has supported forged documents and secretly financed Monsanto critics....MORE

The seed biz is so much more interesting than Hollywood hijinks.

"Bunge warns on grain price pressures"

From the Financial Times:

The pressures driving grain prices to two-year highs will not subside for at least a year, the head of a leading agricultural trader has said in a warning that deepens short-term worries about food price inflation.

But Alberto Weisser, chief executive of Bunge, rejected a growing view that high food prices are here to stay.

The US-based company is one of the biggest traders of commodities such as soyabeans, giving its executives an inside view into global food markets.

Mr Weisser said tight grain conditions would persist well into next year. “For the next 12 months I think you will see volatility of prices,” he told the Financial Times in an interview at company headquarters in White Plains, near New York....MORE

Time for Some 'Black Swan' Puts as Short Interest Falls to Lowest Level of the Year? (SPY)

I am a sick puppy. I see a story like this and I think:
a) everyone has rushed to the same side of the Titanic.
and
b) if we do get a drop it could be dramatic as there will be no short covering to ease the fall.
From Bloomberg:

Short Selling Against S&P 500 Drops to Lowest Level in 12 Months

Wagers against the Standard & Poor’s 500 Index fell to a one-year low as short sellers slashed bets that phone and consumer discretionary stocks, including Qwest Communications Inc. and Abercrombie & Fitch Co., will retreat.

Short interest on the S&P 500 dropped to 7.29 billion shares, or 4.15 percent of shares available for trading, as of Dec. 15, down 2.9 percent from two weeks earlier, according to data compiled by U.S. exchanges and Bloomberg. For phone companies, it slid 12 percent to 440.9 million, and fell 8.7 percent to 1.2 billion shares for consumer discretionary stocks.

"There’s been a lot of optimism in the market and it shows in many ways," said Richard Sichel, who oversees $1.5 billion as chief investment officer at Philadelphia Trust Co. "None of the main indicators make you want to move out of stocks other than for individual reasons."...MORE

I'll come back to this in a few days, for now I'd probably think something like a Jan. 120 put on the SPY at half a buck but that is just a facile something to say. A bit more thought and I'm sure a sub-index or two would look more attractive. And I'd  be tempted to buy a bit more time, maybe the Feb. although they cost triple the Jan.

The S&P 500 closed at 1258.51 so they are a bit out of the money. A 10% drop would get the index to 1132.66 which puts the 120's at $6.74 intrinsic.

"The Limits to Racketeering"

From Volatility:

According to Joseph Tainter’s theory of imperial collapse, as societies become more complex, they must expend an ever greater portion of the energy they have available simply on maintaining their complexity. Although social and technological advances may achieve profitable returns for awhile, once a certain level of complexity is reached, diminishing returns set in. Eventually, at the late imperial stage, the complexity of the power structure, the military infrastructure, the bureaucracies, all the rents involved in maintaining an ever more bloated parasite class, their luxuries, the police state required to extract these rents and keep the productive people down, and the growing losses due to the response of the oppressed producers, everything from poor quality work to strikes to emigration or secession to rebellion, reaches a point where the system can only cannibalize itself and eventually collapse.

 

Julian Assange’s theory of the secrecy tax he’s trying to impose through Wikileaks is one example of these diminishing returns on imperial complexity. All the indications are that Wikileaks has been successful in this.

 

One dynamic of the system which makes citizen action so difficult is its distributed responsibility for repressing the people. But perhaps the same dynamic also generates an inner weakness.

 

The way things are today, anyone who wants to reform anything, anywhere (or in the case of politicians, pretend to try to reform) finds himself blocked by some vested interest which pops up to resist. There’s always a particular criminal who, in defending his own piece of the action, also takes the lead in defending the corporatist system as a whole, in that particular fight. The resources of change are always more thinly and broadly distributed than the force of the status quo, which concentrates immediately in the form of that special interest. That’s the way kleptocracy works. That’s also part of the reason regulation of rackets can never work.

 

However, there’s also a reverse vector here. The system is dedicated to the growth of every wealth and power cell. So the federal government never has any intention of rigorously regulating anybody. If it ever tried, it would face the same concentration of resistance. But it’s also constantly importuned by the aggression of those same concentrations, usually many or all of them at once. Each interest is not only a conservative defender of the status quo, but a reactionary aggressor.

 

So we have the vector of reform blocked and shattering itself on the immovable object of the entrenched racket. And in the same way we have the vector of that same racket’s insatiable greed and aggression as an irresistible force pushing the inertial government and power structure as a whole. As physics equations, these are identical effects, although in one case the racket is stationary, in the other it is in motion. In both cases its inertia is immutable.

 

The vector of racket greed, what Marx called the siren song luring the racketeer, cooing “Go on!…Go on!”, is always in the direction of greater expansion, greater complexity, monopolizing more of the finite system resources for itself. The system as a whole cannot achieve sufficient concentration at any point to resist this aggressive concentration.

 

It follows from this that there’s no way the system can rationalize itself or retrench in its own self-interest. Trying to do this, it would run into the same special interest resistance at each point. It too would find itself more dispersed than the concentration which resists. Nor can it even keep up its sham pretenses to democracy, two conflicting parties, the rule of law, since there’s no way for it to distribute responsibility for anyone in particular sustaining a loss. Nor is there anyone who would be rewarded for imposing this loss on anyone within the fraternity. Each racket or individual racketeer says, “Why should I take the hit for the common (elite) good? Let someone else take it.”

 

The recent doubling down on the ethanol mandates is a good example. The ethanol racket is absurd even by this kleptocracy’s standards....MORE

HT: naked capitalism 

"Ex-Shell president sees $5 gas in 2012"



From CNN Money:

The former president of Shell Oil, John Hofmeister, says Americans could be paying $5 for a gallon of gasoline by 2012.

In an interview with Platt's Energy Week television, Hofmeister predicted gasoline prices will spike as the global demand for oil increases.

"I'm predicting actually the worst outcome over the next two years which takes us to 2012 with higher gasoline prices," he said.
Tom Kloza, chief oil analyst with Oil Price Information Service says Americans will see gasoline prices hit the $5 a gallon mark in the next decade, but not by 2012.

"That wolf is out there and it's going to be at the door...I agree with him that we'll see those numbers at some point this decade but not yet." Kloza said.

"The demand is still sluggish enough in some of the mature economies."...MORE

"U.S.-China Current Account Imbalance Could Disappear."

There's a headline for ya. From Real Time Economics:

Current account imbalances in the U.S. and China will shrink and maybe even disappear in the next few years, eliminating a threat to international economic stability, a former chairman of President Reagan’s Council of Economic Advisers posits in remarks set for delivery next month.

“Although natural market forces should resolve such imbalances without the need for specific government policies, the government actions in both countries have actually contributed to their persistence and prevented market forces from correcting the problem. That may be about to change,” Martin Feldstein, a Harvard University economics professor, said in an advance copy of remarks set for delivery at the Allied Social Science Associations annual conference.

The Commerce Department earlier this month said the U.S. current account deficit widened 3.2% to $127.2 billion in the third quarter, reflecting rising imports of consumer goods. Most of the current account balance is made up of trade in goods and services, but the broad measure of U.S. international transactions also includes transfer payments and investment income.

The U.S. deficit — and surpluses in China, Germany and other countries — has been a source of friction in international relations and a cause of concern as the U.S. only slowly emerges from a recession.

Feldstein said that while international negotiations have not resulted in any real commitments to shrink current account imbalances, progress will come as Americans save more, the federal budget deficit narrows, the dollar declines in value and China invests more domestically.

Feldstein imagines the U.S. national saving rate rising by 2% of gross domestic product and budget deficits declining to 3% of GDP from 8%, producing a combined saving rise of 7% of GDP....MORE

CLSA calls Trina and First Solar Cheap, Stocks Shrug (TSL; FSLR)

They are the class acts in the industry but that doesn't move stocks. FSLR is down $1.98 at $129.20, TSL -51 cents at $23.03.
There is something oddly attractive about doing fundamental analysis on these former high flyers, for now though they're "for tradin', not buyin'" but one day they may have what Ben Graham called the "margin of safety".
From Barron's Tech Trader Daily:
FSLR, TSL Cheap On ROIC, Says CLSA

CLSA Asia-Pacific Markets solar analyst Mark Heller this morning writes that First Solar (FSLR) and Trina Solar (TSL) shares are undervalued, based on their return on invested capital, which he considers a better valuation metric than revenue and earnings growth.

Heller defines ROIC as net operating profit after tax divided by invested capital. That measure is compared to each company’s weighted average cost of capital (WACC). Rising earnings are only meaningful for a company, Heller notes, if that company’s ROIC is higher than its WACC. If it is, then the faster the earnings growth rate, the higher the earnings multiple should be for the stock, in his view....MORE

Corrected: Rare Element Resources Ltd, Molycorp both Up Over 10% on China Move (REE; MCP)

Correction: MCP is still a year away from production.
REE $13.56 up 15.62%, MCP actually down a dime at $49.34 after trading with a $55 handle.
These are rather enthusiastic moves for companies that either aren't in production (REE) or have just started (MCP). We pointed out the initial pop in yesterday's "What's Moving: "Rare Element Resources Ltd UP 12.40%" (REE)". Someone obviously had the tip on the cut in Chinese export quotas.

My short side radar is starting to glow. The perfect play for the Chinese would be to maintain a very tight supply to Japan and the West until MCP, Lynas and REE go into production and then crash the market.
There is currently no way to figure discounted cash flow values for these mines so folks are taking proven, probable and even possible reserve numbers, multiplying by their favorite integer and then forgetting to discount back. That spells opportunity to those panthers sharp enough to wait patiently in the tree until the moment comes to pounce.

From an October post, "Japan Scrambles for Rare Earth" (AVL.TO; LYC.AX; MCP) 600111: Shanghai:

...Words like "uranium", "rare earths", etc. seem to be magic to

 those unsuspecting who are often fleeced...

Gerald M. Loeb

The Battle for Investment Survival

Simon & Schuster, 1935

I'm getting a bit creeped out by all the attention focused on the Rare Earths. Unless one is trading on material non-public information it is probably prudent to stick with the larger producers, the big daddy being our old pal Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co., Ltd., symbol 600111 although it has better than doubled in the last six months.
As the quote ascribed* to Mark Twain says about mines:

 "a hole in the ground owned by a liar."

If you are dead set on wild-ass speculation here are some of the names:
Rare Earth Metals: Stocks and a new ETF (AVL.TO; NEM.TO; QRM.X)

Here's the headline story from Reuters:

The surge, which extends the nearly 10 percent jump that Molycorp posted on Monday, came after China cut its first batch of rare earth export quotas for next year by more than a tenth in the face of a threat by the United States to complain to the World Trade Organization over the export limits.

In late morning trading on the New York Stock Exchange, shares of the Greenwood, Colorado-based company were last up 7.4 percent at $53.11 after earlier trading as high as $55.22.

China produces about 97 percent of rare earth elements, which are used in high-technology, clean energy and other products that exploit their properties for magnetism, luminescence and strength.

China's Commerce Ministry allotted 14,446 tonnes of quotas to 31 companies, which was 11.4 percent less than the 16,304 tonnes it allocated to 22 companies in the first batch of 2010 quotas a year ago.

The Ministry said in a statement on its website at http://www.mofcom.gov.cn/ that it had added more producer companies to the quota list, but cut volumes allocated to trading companies for the metals used in high-tech goods....MORE

Farmland: "Pricing the Good Earth" (DE; POT;MON; CAT; MOS)

A question we've pondered a few times, see links below.
From Barron's:

U.S. farm income is solid, debt is low, and crop prices and productivity are high. Does that mean that farmland is a good investment?

In the rush for hard assets over the past few years, some investors have planted farmland in their portfolios hoping to harvest nice gains.

On paper, at least, they have. U.S. land values are rising on strong prices for agricultural products, fueled to a great extent by robust exports to emerging nations. Advocates for owning farmland include big-name investors like Marc Faber and Michael Burry. But skeptics wonder whether the boom is setting up investors for a rerun of the crash that ended a similar period almost 30 years ago.

Back in the early 1980s, the sector was plunged into crisis when overleveraged farmers went bankrupt as interest rates skyrocketed to nosebleed levels during the last of the Carter years and the start of the Reagan administration.

Could a bubble be forming again in the heartland? Even Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., urged caution recently, alarmed that land prices, now 58% above 2000 levels in inflation-adjusted terms, foretell another bust—which could put more pressure on the already battered banks whose deposits her agency insures. But excessive leverage, a big villain in the crash of the 1980s, doesn't appear to be a major threat to farmers today.

"I would say we are perfectly priced for the current environment right now. If it changes radically, we could be mispriced in a new environment," says Michael Swanson, an agricultural economist for Wells Fargo, one of the largest lenders to commercial-farming operations.

Fundamentals are supporting the farm economy, says James McCandless, a managing director of UBS AgriVest. Farm income is strong, he says, while debt is low and crop productivity is increasing. In 1990, UBS AgriVest became one of the first firms to invest in U.S. farmland for tax-exempt institutions. Its farmland investments had a gross value of $544 million at the end of the third quarter.

Harvest This!

Intrepid investors should look at the yields on cropland, even if they don't plan to move to Green Acres. Farmland values have been appreciating nicely over the medium and long term.

While pockets of farmland—in the Dakotas, Nebraska and Kansas, for example—have risen strongly lately, most of the latest gains have been modest. In August, the Agriculture Department reported that the average price of farm real estate nationwide had been $2,140 an acre, as of Jan. 1, 2010, up 1.4% from the level a year earlier—but 86.1% above the level a decade before. And the National Council of Real Estate Investment Fiduciaries Farmland Index, which measures investment property, shows a third-quarter total return of 1.03%.

Gary Schnitkey, a professor of agricultural and consumer economics at the University of Illinois, says that farmland prices in his state—one of the nation's major agricultural producers—are in line with current interest and lease rates (also known as cash rents). Capitalized value, which is defined as the cash rent divided by the interest rate on a 10-year note, now equals about 95% of land prices, he says. In 1981, capitalized value soared to a heady 267%, while from 1990 through 2010, it averaged 107%. Farmers' debt-to-equity ratio is currently 12.8%, according to the U.S. Department of Agriculture, versus 13.6% in 2008; it was as near 30% in the mid-1980s.

One factor working against the development of a bubble is that big institutions—some of which were burdened by illiquid alternative investments, such as timberland, in the recent financial crisis—have done more talking about buying farmland in recent years than they've done purchasing. "There's a low level of participation by institutions…It's mostly individuals who own it, especially in the U.S.," says Jose Minaya, head of TIAA-CREF's natural-resources group, which has $2 billion in farmland investments in the U.S., Brazil and Australia....MUCH MORE

Some of our links in last month's ""Land Becomes Cash Crop in Farm Belt":

"Is TIAA-CREF Investing In Farmland A Harbinger Of The Next Asset Bubble?"
Société Générale's Dylan Grice: "Higher crop prices 'permanent'" (ADM; SYT)
"Is agriculture the next big investment thing?" (DBA; FUD; MOO; RJA)
Marc Faber: "'Buy farmland and gold,' advises Dr Doom"
Green Acres is the Place to Be: "The UK farmland grab"
"Wall Street Eyes Farmland"
Hedge Funds Buying Farmland
The Last Holdout: "U.S. farmland fetches top dollar despite recession"
The hedge fund manager who bought a farm

There are many more, use the search blog box, keyword farm or farmland.
You can also copy and paste the query:
http://climateerinvest.blogspot.com/search?q=farmland

"Tesla: Selling More Shares Than Cars" (TSLA)

The stock is down 14.86% on the day.
From TheStreet:

Tesla(TSLA_) has sold about a shopping mall parking lot full of electric cars in its history -- yet, on Monday, the pioneering electric car IPO darling was selling plenty of its shares, not the pickup in sales activity on which Tesla shareholders have been betting.

The 180-day lock-up period for early investors in Tesla to sell shares -- primarily venture capital investors -- ended on Monday, and as many as 75 million Tesla shares previously prohibited from hitting the open market were free to trade.

It's a classic supply-and-demand issue, from the most general perspective, with available shares  for trading, at least, in theory, about to quadruple.

Tesla shares were down 13% on Monday morning -- with the decline widening as high as a 15% drop at one point -- and with close to four times its average trading of 1 million shares traded before midday.

Tesla shares were the biggest market loser on a light day of trading on Monday.

There are roughly 93 million shares of Tesla stock outstanding, and according to the terms of its lock-up period, 75 million shares were prohibited from being sold until Monday.

The end of the lock-up period doesn't mean that venture capital investors are rushing en masse to sell their Tesla shares. However, the end of the lock-up period presents a classic problem for a stock in a sexy sector that has been backed by venture capital and taken public with much fanfare: namely, the overhang on the company's shares as venture investors are given the freedom to exit their positions when they want and in whatever amount they want to offer into the market.

It's not as if the company itself is doing a secondary offering, which is a market event that always causes a sell-off in shares, based on fears that the secondary will cause dilution in existing shareholders' stock....MORE

Banking: Ducats for Caravaggio, The Genoa Connection and Medici Moolah

A threefer from The Economist:
Ledgers that throw light on the past

SAINTS are important in Italy, nowhere more so than in Naples where San Gennaro is patron and protector. Three times a year, including December 16th, an ampulla containing the saint’s blood leaves a sanctuary in Naples Cathedral’s richly decorated royal chapel, a treasury of candelabra, frescoes, bronze and silver statues and quarry-loads of marble. Neapolitans gather to see the congealed blood liquefy.

Through a paper trail of documents authorising payment of craftsmen and painters, historians can piece together what the chapel cost when it was built and decorated in the 17th century. Not far from the cathedral, down one of the narrow streets that thread through the city’s historic heart, is Europe’s largest archive of banking and economic records. Owned by the Istituto Banco di Napoli Fondazione, it contains 300m documents and 25,000 huge ledgers (a few of which are shown above).

A deposit of 60 ducats (about 200 grams or seven ounces of gold), the rent for a farm in 1569, is the oldest piece of paper, from a time when Spanish kings ruled the Italian south. In 1794 the Bourbon monarchy created the Banca Nazionale di Napoli, bringing together eight public banks, including the Banco dei Poveri which was established in 1563. More name changes followed until the Piedmontese monarchy settled on Banco di Napoli in 1861 after ousting the Bourbons and unifying Italy....MORE

And:

The Genoa connection

WHO were civilisation’s first financiers—the moneymen who could transform one man’s deposits into another customer’s credit? Perhaps they were the Egibi family in Babylon as early as the 7th century BC, though a more plausible case can be made for Pasion, an Athenian contemporary of Socrates at the start of the 4th century BC, when bankers were already the butt of music-hall humour (“the most pestilential of all trades”). Egyptians were using cheques 70 years before the birth of Christ, but Eurocentric historians look no further back than medieval Europe.

Even then, there is confusion about where the first European bankers banked. For example, Niall Ferguson, in his entertaining British television series, “The Ascent of Money”, is so dazzled by the magnificence of the Medici in Florence in the 15th century that he gives them more credit, as it were, than they deserve.
If European banking was invented anywhere, it was probably in Genoa in the 12th century, spurred on by the revival of trade in the Mediterranean. That, at least, is the case convincingly put forward at a website devoted to the history of the bank of San Giorgio. The site was formally launched at the end of 2008 at the conclusion of a 25-year study of Genoa’s early economic history in the voluminous and carefully preserved state archive. The prize possessions are documents from the 12th century describing financial instruments that are commonplace today....MORE

And:

Medici moolah

TIM PARKS is a polymath among authors. He is a prolific novelist. In Italy, where he lives, he is a translator, an essayist, a memoirist and a professor. He also writes authoritatively about football. The subject of his new book extends his range even further, though Cosimo and Lorenzo de Medici would make convincing fictional characters. They are the two greatest celebrities in the history of banking, rivalled only by Nathan Rothschild.

Cosimo was the Renaissance man, well-read, with educated taste in painting and sculpture, and immensely skilled at having his cake and eating it. (In an aside, Mr Parks reports that the equivalent Italian expression is to have your wife drunk and your wine keg full.) Cosimo's reward for financing the restoration of the convent church of San Marco in Florence was a Papal bull absolving him of his sins—each and every one. Cosimo's grandson, Lorenzo, known as the Magnificent—though that is how Medici bankers generally referred to the boss—was a great patron in the time of Ghirlandaio, Pollaiuolo, Botticelli and Leonardo, all Florentine painters of genius.

No doubt the Medicis truly appreciated art, but Mr Parks is under no illusions about the ultimate purpose of the family's patronage. It was designed to make Florentines feel so good about the city that they were willing to suppress their republican instincts, and surrender political power to the Medici. It was brilliantly done. Niccolò Machiavelli praised Cosimo's ability to mix power with grace. But one of his first acts on becoming leader in 1434 was to change the rules which had curtailed banking operations. Mr Parks is a quick study, and his explanation of bills of exchange and trade finance in 15th-century Europe is a model for all economic historians. Consequently, when he says that one of Cosimo's first actions was to legalise "dry exchange"—a clever banker's shortcut to escape the church's strict laws against usury—we understand that the inspiration is self-interest and the motive is profit. Mr Parks, who is sceptical about bankers, writes about them with pace, wit and some passion.

The Medici dynasty was not long-lived. It began with Cosimo's father in 1397 and ended in 1494 with the flight of Lorenzo's son, Piero. Mr Parks asserts that the bank's attraction to political power eventually proved fatal. No banker can be a prudent lender when he is buying influence in court and financing armies, and lending to clients who considered repayment somehow undignified....MORE

What's Moving: "Rare Element Resources Ltd UP 12.40%" (REE)

I must say your humble scribbler didn't see that one coming.
From What's Moving:

Rare Earth (REE) adds $1.18 to $11.34 and bullish flow is detected, with heavy trading in the Jan $9, 10, 11, and 12.5 calls. Total call volume is 9,240 contracts or 2X the average daily. Implied volatility is up 10 percent to 80. Looks like speculative call buying, perhaps in reaction to a PC World story that noted that “Colorado-based Molycorp resumed active mining of the rare earth metal facility at Mountain Pass, California last week.” MCP is up 10 percent ...

[humble? bwahahaha -ed]

Climateer Line of the Day: More than we Needed to Know About Cramer Edition

Although I am a bottoms up guy...

-Jim Cramer

quoted in "Jim Cramer Picks His Top DOW Stocks For 2011" at Clusterstock.

Too True to Be Funny

From Dilbert.com:

Energy Bulletin's "Predictions for 2011"

From Energy Bulletin:

Everyone in the Peak Oil Community knows the danger of making predictions. As the poet Burns framed it, “The best-laid schemes o’Mice an’ Men / Gang aft agley.” What gang aft agley more often than our energy and environmental situation these days? Trying to call the future is a challenging project. But ASPO-USA and Peak Oil Review have combined to pull together predictions about what we can expect in 2011 from a wide range of thinkers, writers, scholars and experts, who graciously agreed to risk being wrong so that you can have the inside scoop!

I believe that oil prices in the US will average $88-92 a barrel in 2011 but may climb toward $100 by the end of the year, while natural gas prices in the US will average $4.00-4.25 in 2011 but may climb toward $5.00 by the end of the year. I believe that much of the “shale gale” euphoria will begin to unravel in 2011 and there may be some important distress situations or even bankruptcies that will underscore the risk of these ventures. I suspect that the rush to “liquids-rich” gas plays in the US will be exposed as low-resource potential ventures rather than another Saudi Arabia of crude oil. I imagine that the miracle of Chinese growth will begin to show some weakness in 2011 as state-directed economics becomes unstable. The PBC has been artificially keeping inflation low by buying dollars and creating bonds to keep the money supply low. The loans for big infrastructure projects will not uniformly perform. This cannot last. True inflation is higher than revealed and, when it is known, will show the vulnerability of the economy because the rural sector is not sharing prosperity with the urban sector. Sovereign debt problems in Europe will continue to create instability in the global economy. The EU concept is flawed because a single currency does not allow weak economies to devalue their currency.
–Arthur Berman, petroleum geologist and board member of ASPO-USA

I expect 2011 will be a year of recession and increasing layoffs. It may start off reasonably well, but then an attempted price rise of oil to, say, $120 barrel, will prove to be too much for most economies. There will be countries and smaller political subdivisions (state, city) that take steps to restructure their debt with longer maturities. All of this will drive interest rates up, and make credit harder to find. The recession will worsen as credit contraction ensues. Governments will scramble to try to keep each other and banks from failing. In some cases they will be successful; in other cases they will not be.
– Gail Tverberg, actuary and writer, is editor of The Oil Drum.

MORE

Remember $1.00 per barrel equals approx. $100 Bil. in GDP change.

E2 Wire's "...5 energy issues to watch"

From The Hill:

It’s been a dynamic past 12 months on the energy front. The massive Gulf oil spill dominated much of the news cycle. And while Democratic efforts to pass comprehensive climate change legislation in the Senate failed, the Obama administration is moving ahead with plans to use its existing powers to regulate greenhouse gas emissions.

With the end of the year drawing close — the 111th Congress is over and President Obama is in Hawaii with his family for the holidays — it seems only fitting to turn our attention to next year.

Without further ado, here are five things to watch out for in 2011:

Attempts to block the Environmental Protection Agency’s climate regulations:

On Thursday, just hours before most people in Washington left town for the holidays, the EPA made two major announcements in its efforts to reduce the country’s greenhouse gas emissions. The agency laid out a timetable for phasing in emissions standards for power plants and refineries, and announced it would issue greenhouse gas permits in Texas, where the governor had refused to align with federal rules. On top of that, beginning in January the EPA will, on a case-by-case basis, begin phasing in rules that require large new industrial plants and sites that perform major upgrades to curb emissions.

The move is certain to fuel the fire of opposition against the Obama EPA’s efforts. Republicans, emboldened by their majority in the House and swollen numbers in the Senate come next year, have promised to fight the EPA. While Sen. Jay Rockefeller’s (D-W.Va.) effort to delay the EPA’s authority to regulate greenhouse gas emissions by two years failed, he’s promised to try again next year. Other Republicans have promised to get in on the action.

All eyes are on the new Republican House and energy and enivornment committee chairmen: Rep. Fred Upton (Mich.) will chair the Energy and Commerce Committee, Rep. Doc Hastings (Wash.) will chair the Natural Resources Committee and Rep. Ralph Hall (Texas) will chair the Science and Technology Committee. All three lawmakers are planning to turn a critical eye toward the Obama administration’s climate change policies....Four MORE

HT: Dr. Hazlett

Insurance: Betting on the Old and Decrepit

[I do it every morning -ed]
Okay, not so decrepit.
From Salmon:

The longevity trend bond arrives

Swiss Re reinsures a lot of life insurance. As a result, it could lose billions of dollars if a lot of insured people die young, due to pandemics, terrorism, or the like. To hedge that risk, it has sold about $1.8 billion in mortality bonds to date. Such bonds earn a healthy yield, so long as there’s no big rise in mortality. If there is, then the bondholders lose some or all of their principal, and it’s used instead to make those unexpected life-insurance payouts.

Mortality bonds are an expensive hedge, though — one last year had a yield of 617bp over benchmark lending rates. Swiss Re would much rather hedge its mortality risk in a profit-making manner, by writing longevity risk. That’s what it did last year with the UK’s Royal County of Berkshire Pension Fund: in return for a steady stream of insurance premiums, Swiss Re contracted to pay out Berkshire’s pension obligations. The risk in that kind of deal is that the pensioners live too long, and that Swiss Re’s total payouts will be much bigger than the total insurance premiums.

Insuring longevity risk, then, is a great deal for Swiss Re: not only should it be profitable, if it’s priced correctly, but it also helps to naturally offset the company’s mortality risk. If people live longer, then pension payouts will be higher, but life-insurance payouts will be lower. And vice versa....MORE

 
(Wikipedia)

“The only perfect hedge is in a Japanese garden”.
-Old traders adage

Outlook 2011 & the Next Decade: Is The Smart Money Right About China?

In January 2010 we had a post, "Jim Chanos' "China is Dubai Times 1000" May be a Losing Bet":

I have a lot of respect for Chanos. His work on Enron was exactly right and very brave, especially when you consider the political, media and investment giants who backed the company. Hell, folks as diverse as Paul Krugman, NASA's Jim Hansen, Lawrence Lindsey and Bill Kristol took the Crooked E's payola. Fortune magazine called ENE "The most innovative company in America" for six years running. Chanos stood up and said the emporer has no clothes, and put his money where his mouth was.


On the other hand going up against the Chinese government could make you broke before you're proven right....

It is the same situation that Gluskin Sheff's David Rosenberg ran into with the U.S. economy, he may or may not have been right about our economic quagmire but he seriously underestimated the effects of the government's reaction in delaying the worst-case realization:

I usually don't have much time for Gluskin Sheff's David Rosenberg. His pig-headed refusal to listen to the market as the averages advanced more than 70% was not only arrogant but expensive for his firm's clients.

I can handle arrogant as long as you're right, hell I can tolerate a fat guy in a grass skirt and spike heel Manolo Blahniks if he's right.
It would be fun to watch him tottering around.
But Mr. Rosenberg hasn't been right for a while and he's not funny.

Funny is important if you're doing the Angel of Death schtick. Here's our thinking ...

-Climateer Line of the Day: Damn Arrogant Economist With Faint Praise Edition

The thing is, you have to be correct about both the doom and the timing. If you are predicting the end of the world it is usually best to make the occurance far enough into the future that your audience is either dead or demented on the appointed date.

If you insist on a call that even your clients with alzheimers can remember you have to do serious analysis and consider the millions of moving parts that go into a dynamic system.
In the case of China the government can delay the day of reckoning long enough to really hurt the time adjusted returns of the shorts.

If you have a situation that will fall 30% and it happens in a year you've put up some professional level numbers.
If it takes two years, your annualized gain is down to 14.5% and your 2 and 20 are at risk.

You may want to read the Dec. 25 ZeroHedge post "China's Christmas Present To The World: Another Interest Rate Hike" for an indication of how serious the Chinese government is.

From EconForecast:

China has been ranked as the top growing country among the G20 since 2001 and is expected to retain that title for at least another five years (See Growth Chart). However, the news coming out of China for the past three months has not been good. It is looking more and more that it is not a question of if China is a bubble and going to burst, but when.

The country has major infrastructure issues, troubling population dynamics, poorly aligned employment outcomes, inflation problems, a real estate bubble, an opaque and potentially insolvent banking system (had mark-to-market accounting been applied), geo-political problems with North Korea and Taiwan, and an underperforming stock market in 2010 (see stock comparison chart).

Smart Money Rushing Out

While the hot money is flooding into China, the smart local money is doing everything they can to get their money outside of China, which partly explains why Shanghai SE Composite has underperformed other markets for the past year or so (see Comparison Chart).

The many issues of China could conspire to become the biggest train wreck waiting to happen, and potentially dwarf any little budget problems in Europe by a factor of ten.

Big Trouble In Big China

China has a population related societal structural problem. The nation has tried to utilize the vast manpower to its advantage over the last two decades building a powerhouse manufacturing economy through the availability of low cost workers, which supplied the world with lower cost goods....MORE

The question is: Where do you rush to? Venus?
As Zhi Peng Sinatra said:

...My little town blues
Are melting away
I'm gonna make a brand new start of it
In old Shanghai.
If I can make it there,
I'd make it anywhere
It's up to you,
Shanghai, Shanghai.

Shanghai, Shanghai!

California Sure as Hell Isn't Going to Turn the U.S. Economy Around

The Cali economy was a fantasy and any policies based on fantasy are guaranteed to end badly. This is something we've been trying to point out for the last three years. We've got a few links in "Climateer Headline of the Day: California La La Land Edition", for more use the search blog box with some combination of keywords: California, economy, Zimbabwe del Norte, etc.
From Dr. Housing Bubble:

Looking into the crystal ball of California real and the 2011 market – 5 charts examining the future of California housing and real estate. Case Shiller Los Angeles tiered home price index, nonfarm employment, unemployment benefits, and total market inventory 

The joy of the holidays provides a respite from all the economic challenges facing the California economy.  It has been an arduous three years of riding on a financial rollercoaster and very few states depended on housing as much as California.  There are varying metrics measuring the home price decline in California but overall the state has seen prices fall by 40 to 50 percent from the mountainous peak depending on what index you are looking at.  A 40 to 50 percent decline screams like a Greek siren at a post-Christmas sale but is it a deal?  Many Californians have adjusted their rose colored glasses and we have a generation of new home buyers that know nothing else than bubble home prices.  To many, extreme home prices seem to come with the California territory like 405 gridlock or warm winter days.  Yet bubbles do burst and the real question most should be asking is how much lower will prices go?  To answer that, I want to examine a variety of measures including personal income to home price growth but also where the economy currently stands as we enter 2011.


The first chart examines individual personal income and the California house price index.  This index is provided by the Federal Housing Finance Agency.  This index is generous since it puts the California home price decline from the peak at 31 percent.  We’ll use this to measure it with personal income growth:

Chart 1 – CA House Price Index / CA Personal Income


Even based on these generous assumptions, home prices on a statewide level are still inflated based on historical metrics going back to the early 1970s.  What people need to keep in mind is that this metric averaged out during more prosperous economic times.  What is odd is that with a statewide unemployment rate of 12.4 percent and an underemployment rate of 23 percent (second only to Nevada) you would expect that home prices would be below their historical average.  This would make sense since housing should track the overall health of the California economy.  What we see right now however is the housing market technically performing better if we use prices than the statewide employment market.  Prices are coming down like tree sap from an exposed tree.  We can measure this by using the CA House Price Index (CAHPI) and measure it up against total nonfarm employment:

Chart 2 – Nonfarm employees versus California Home Prices


Like a forensic investigator we need to find the turning points in markets and the chart above shows the story of two large employment bubbles.  Through the 1990s it was technology based but in 2000 you see it move lower as the tech bubble burst only to rise up yet again as the California housing bubble took off.  What is more fascinating about this chart is that home prices never corrected after the tech bubble burst and just kept going up like a silver helium filled balloon.  So using the start of the housing bubble as the starting point may not account for the price correction that should have occurred after the technology bubble popped.  What you find in the above chart is that employment kept expanding roughly 1 to 2 years more after the peak in home prices was reached in the latest real estate bubble.  Nonfarm employment in the state is now back to late 1990s levels and California home prices are back to levels last seen in 2003.  Inflation adjusted prices are now flirting with a lost decade similar to what Japan is experiencing with their two lost decades. 

If you look closely above, nonfarm employment has hit a trough but hasn’t moved up.  The same applies to housing prices.  The question is where do things go from here?  It would be absurd to assume that home prices would go up and lead employment growth.  This was the cause of the last bubble.  It is safer to assume that employment growth will then lead to future home price growth.  Yet home prices are still inflated simply by examining historical price metrics.  But you also have to parse the data.  A mortgage broker that made $100,000 or more a year and now can only find a $30,000 a year job is now counted as fully employed.  Yet it would take 3 brokers and some change for what was produced in income (and tax revenues) from the peak bubble years....MORE

"How inflation creates commodity mini-cycles"

From Stefan Karlsson's blog at the Christian Science Monitor:

What is the effect of inflation on commodities prices? It's more subtle than you might think.

As Jim Rogers persuasively argued in his book Hot Commodities, most commodity prices goes through long super cycles because commodities have a low short term price elasticity of supply and demand., while having a lot higher long term price elasticity of supply and demand.


If there is a big increase in demand (or decrease in supply), supply (from new sources) can increase only slightly in the short term because it takes a lot of time both for natural reasons and political (environmentalist, bureaucratic etc.) reasons to find more of for example oil and metals, and even when new resources are found, new obstacles of both natural and political nature prevents them from being actually extracted.
As a result, the increase in demand from some or decrease in supply must in the short term be met by a decrease in demand (from others) through higher prices.

Moreover, the required short term price adjustment is further elevated because most people find it too difficult or expensive to adjust in the short term. If they have an SUV and gas prices go through the roof, they still might not switch to a hybrid car because the switch would be very expensive.

For these reasons, sudden increases in demand or decreases in supply will cause dramatic short term price increases and these increases will usually stay for a while.

However, after several years, new wells or mines will be found and after several more years, commodities will be extracted from them. As a result, supply will start to significantly increase. Moreover, after several years with elevated prices, people will have been able to reduce their use or perhaps even entirely substituted it. As a result, demand will significantly decrease....MORE

See also:

Société Générale's Dylan Grice-"Commodities: ‘Their Expected Long-Run Real Return is 0%’"