Agriculture runs

This caught people off guard: Soaring prices threaten new food crisis

Corn ran 13.3% in one day as the closely watched USDA report lowered the estimated US output by 4% which will slash US stockpiles of the foodstuff to the lowest levels since 1996. Oats, barley, soy and wheat also ran sending DBA (+6.3%), CORN (+14.6%) and others on a tear while TSN and SFD got dropped like ugly sisters.

The key reason attributed to the shortage was a convergence of adverse weather around the world this year (hot, dry, wet, etc), though this can hardly be a surprise. In the world of infinitely fast information and literally hundreds of millions of individual market players, what are the chances someone didn't say "hey, maybe crop yields will be 4% lower this year?" We here at inflation bubble are looking for signs of global monetary policies (such as US-QE) showing up as price inflation, which it inevitably has too (unless "this time it's different" ... my favorite phrase).

So, if the price of corn just rose 13% in one day, does this count?

Looking back a bit here, assuming interest rates 'had to rise' (especially in the near term) is one of the most painful calls of my life (the other was betting heavy that GS and MS were going to fall in Oct-2007, I missed this one by 1 lousy year!)... It is obvious now that the Feds can, and will, manipulate interest rates to all time lows and keep them there (for the time being), but this does not mean that inflation will not be seen elsewhere.

IT IS POSSIBLE TO EXEPERIENCE INFLATION WITHOUT RISING INTEREST RATES. Case in point, all this hoopla around the currency wars, essentially a game of international musical chairs of sorts: a race to the bottom before there is no longer any more ink in the press and this whole debt charade goes (potentially literally) nuclear. However, this can take a Frustratingly. Long. Time (the Feds have a shitload of ink). But let's not miscalculate anything here: gold is at $1,350 for a reason, up 350% from 2003, which was coincidently the time that "banks" began rubber stamping NINJA loans to anyone who could fog a knife. After gold, I predicted agriculture would be next. Now that it turns out I might be right, I have stepped out of the woods, shaved the beard, shaken off the $20k in unfortunate late-summer losses (really it was all about money management and not picks-- getting greedy and all), and put my mountain-manned soul-searched being of the past two months to work for the common good.

So with that I'll thank my lucky stars for being long CORN (stock) and DBA Jan11-28 calls and look forward to what next week brings. A crash back down means more hibernation on the inflation bandwagon, but a further run is reason to watch very, very carefully. The times are potentially, as they say, 'a-changin.'

So on to next week and beyond, one initial point to contemplate on the prognostication front: DBA left a nasty "evening star"-esque candlestick pattern back in June 2009. This is indeed troubling as the last few months mirror the run-up to this previous one closely. However, overlay this chart with gold and something eerie is seen: a divergence around that same point in time, Agriculture went down and sideways as gold soared. If one of these plays catch up to the other, then something is going to move, and soon.

Is the hibernation over?

FFO versus Au

Can someone please explain this?:

Some serious decoupling going on around January 2003. Isn't this when the housing bubble was in full swing?

(Source data on fed rate and gold)

Left axis is gold multiplied by the Fed rate (as a hard integrer, not as a percent). On the right is gold divided by the Fed rate.

Whatever this means, were off in the "10,000 units" zone again. Zooming in on the last few years:

Wanna guess where there first purple point ticks off the baseline? Answer: October 2008.

But remember, the Fed keeps the rates low because there is no inflation. At least, that is what you're being told, and the government always tells the truth, so move along ...

Some recent trading activity and thoughts - Last weekend of August, 2010

These are my current TBT and TLT positions:

TLT:

1) 10 Sept-110c (these are meant to capture any further appreciation in treasuries should they still be mid-rocket-rise like Dec 2008, when TLT hit 122+).

2) 4 Jan11-100p (would anticipate rolling these to 105 if TLT should go over 115 this month)

TBT:

3) 60 Sept 35 calls

4) 10 Sept 45 calls (old position that never got rolled down, not expected to make jack here)

5) 5 TBT Sept 40/33 put spread (short the 40 puts, long the 33 puts). This position used to be 10 contracts and I had to shrink it back. Looking to kill the trade off over the course of the month due to disliking short puts on leveraged funds (more on that below)

I also have two more TBT plays I would consider LEAPS (these suck because one of the epiphany's I've had recently is that long term investments in leveraged funds is a non-starter). I'm looking to close these on any near term bounce:

6) 10 Jan11-43c, and

7) 10 Jan12-75c

Suprisingly, should interest rates continue to fall, even after Friday's treasury pullback, I would only need TLT to reach ~113.50 in order to break even on the short term plays (considering also that much of the loss has been factored into the the rolls from August, hence the -$15k bitch-fest in a comment following my last post). So either, treasuries need to go way WAY up (TLT 115+, less preferable scenario), or follow Friday's march much lower (TBT 36+, more preferable scenario).

Another position I entered recently was 10 SDS Jan11-32p. This is a 2X leveraged fund that rises when the S&P500 drops. I am not necessarily bullish on the market, but have certainly noticed a trend in the price action of leveraged funds in general. EVERY THING ELSE BEING EQUAL, PUT OPTIONS ON LEVERAGED FUNDS ARE PREFEREBALE IN THE LONG RUN. This is simply due to the premium the fund must pay to remain properly leveraged. When the market falls in the short term I lose on SDS, but if it stagantes or rises slightly, the puts outperform the calls due to decay in the long term (even if the market drops a little this still works out).

I'm not going to try to dig it up now but last year I noticed something funny about two leveraged funds that were both 2x (or 3x) the US financial sector in opposite directions. OVER 2 YEARS THEY WERE BOTH DOWN, one about 60% and the other 90%. That is, if you had bought puts on both you would've been guaranteed a profit regardless of market direction. This type of 'free money' does still exist and needs to be exploited.

Hyperinflation

Here's a good twin set (original and Part 2 follow-up) blog article pair that lays out a case for American hyperinflation, with a particularly good execution mechanism that ultimately comes around to the following four conclusions:

1) A hyperinflationary event will happen, following the crash in Treasuries.

2) Commodities will be the go-to medium for value storage.

3) All asset classes will collapse in short order.

4) Most importantly—civil society will not collapse along with the dollar. Civil society will stumble about like a drunken sailor, but eventually right itself and carry on with a new normal.

Forbes editorial

Adding some color to the announcement of QE2:

"I expect the coming doses of quantitative easing will finally spark adverse reactions, first in the dollar and later in the bond market. When a falling dollar forces consumer prices and long-term interest rates to rise, the Fed’s actions will be rendered impotent. The Open Markets Committee will have to make a horrific choice: fight inflation by tightening policy into a weakening economy, or fight recession by allowing inflation to burn out of control. I think it’s obvious that they will choose inflation, all the while pretending that it doesn’t exist."

My question is when?? TBT is killing me. Everyday, interest rates GO DOWN MORE! I'm bleeding tremendous losses and have exacerbated a chasing strategy that has hurt me in the past... the very point of which tracking decisions through a blog was originally intended to help cure.

This week I expect to make some changes. The key is to stay focused, to not panic, and take control instead of losing it.

Bubble forming in bonds

Even Forbes is getting in on it now:

“Have Americans ever been satisfied with earning a steady but low rate of return? What we have in American history is rolling from bubble to bubble, whether it’s stocks, real estate, commodities, emerging markets, time shares . . . when one bubble bursts they are moved to the next one.” Lee implies that the bubble currently forming is in bonds.

Inflation, not economy, now principal risk

Inflation is the 800 pound gorilla in the room, but it is a ghost of a gorilla because you sure cannot see it when mortgage rates are at an all time low (4.54% ?!?!?). This is the point of maximum opportunity. Go short treasuries!

Option Expiration Friday

Ug. Black Friday. Expiries... I've got a few....

Here's Thursday's (7/15) action first:

- Sold 3 (of 4) GOOG Jul-500c @ 8.70 near EOD - not real hopeful of earnings upside but kept 1 call on hand for it (up 5.68, +188%).

- Sold 20 TBT Jul-36p @ 0.17 (-55% - in hindsight, this cash-in was premature, and a good hedge against poor GOOG earnings and a down Friday was lost ....)

- Day traded 10 QQQQ Jul-45c (in at 0.44 out at 0.74, +68%)

Friday's Expiry list: (all of these are -100%)

GOOG: 1 x 500c (-3.02), 2 x 540c (-1.85), 8 x 560c (-2.03)

LEN: 6 x 15c (-0.79)

TBT: 10 x 37c (-0.69), 10 x 34p (-0.12)

$302 + 370 + 1624 + 474 + 690 + 120 = 3,580 total loss.

Action items: roll -10 TBT 40p to August. Clear out NSM near EOD, if over 14.

Monster Money Printing Pre-Holiday week trading

This latest market downtown and negatively-spinning market data practically ensures that Uncle Ben's deflation protectionist policy will slip by the JECK Feds (the austerity-measurists Kansas, Richmond, Philadelphia, and Dallas Federalists).

Remember that Uncle Ben was prepared to bail-out up to $5T and he's at a measly $1.8T so far. We're just scratching the surface.

Now, having said that, even IF these bail-outs are applied, and when, the effect on inflation is easily 18 months out, providing credence to the unprofitably of my recent maniacal TBT buying spree, however, it is an eventuality and needs to be factored into any portfolio.

PS - my opinion is, further bail-puts are more of a 'when' than an 'if' because the US will never sacrifice its the dollar's global hegemony via deflation.

Fed Rate News today

Headlines focusing on 'double dip recession' talk. Inflation a million miles away from the dialogue at this time.

Contrarian point

Beware the inflation hypsters!

It's hard to fight the 20-year chart in that link. TBT buyers beware! (but I'm still in for now....)

Tuesday Profit taking

I'm not bearish, just currently over-bullish and taking a little off the top from the recent bounce. Trades are in the comments.

YES DRUDGE - Did you save me????

DRUDGE GOES POSTAL WITH $19.6T FRONT PAGE POST.

If TBT doesn't move up 4% tomorrow I throw in the towel and join the deflation movement.

Looming "Third Bubble" about to go ............. Pop!

First equities (2000), then credit (2006) and now bonds (20XX????).

Don't hold your breath, but don't wait too long to get in either. Always be protected out there (TBT!).

Friday Action (6/4)

No trades on Thursday. Working. The benefit of a balanced portfolio is being comfortable taking a day to a 3 weeks off without fear or much concern.

Friday June 4:

IN:

TBT short put spread, sold 10 Jun-41 puts at 2.31 and bought the 32's at 0.03 [possibly hold to expiry]

OUT:

sold ZQK at 4.87

June 1 action:

- 4 GOOG-560c at 3.10. [Hold for run-up to earnings, roll to August expiration if necessary]

- TNA, 100 shares, in at 46.24 (out at 47.07), re-entry at 46.24, [holding overnight for market bounce]

- 1000 SH C at 3.93. [Long-term hold]

- ZQK 400 sh @ 4.59 [hold for the week]

Google Play

Around 2/28/2008 GOOG's 50-day MA fell below the 200-day (price: 473). Over the next 19 days the stock lost about 7% (439) before going on a 44 day run to 600 (+37%, including an earnings event in April).

On 5/27/2010 it looks like the 50-day has once again dropped below the 200 day, usually a bearish sign. However, if GOOG we're to repeat the price performance from 2 years ago, it could be setting up nicely for a contrarian play. Using the price on the May 28th close of 485, and similar price action this time around, a drop to 450 is possible (around 6/15), and then a run to 615 by July 29th. August options are not available, so using July options as of Friday's close, and assuming most of the run this time around will be captured by the July earnings event (and the earnings release falls before options expiration, which they usually do with GOOG), this has the following profit potential per $1000 invested:

This analysis would recommend the 560 to 580 strike range (a paltry 1,700+% gain). The July 560, 570 and 580 calls closed at 3.32, 2.50 and 1.75, respectively. These actually seem pretty cheap considering the VIX is still rattling around 30+. It would be nice to see volatility fall before getting into this position, but not at the expense of any upside on GOOG if they've already turned the corner. If the volatility remains high this may be a good straight stock play but you lose the leverage and eat up margin.

Now, it's obviously a fool's errand to try and time 37% moves in stocks over a month and half timeframe, but in this case you would only need to be right once every 18 times in order to break even. If you were right, say, only 1 in 10 times you are still making 80% a year....

So anyway, this seems like a relatively good risk/reward, as far as GOOG goes in my opinion. Obviously the lower strikes are 'safer.' Even without the herculean run up to 600+, the 520 calls are 10.50 and would "only" need GOOG to run to 542 in order to double in value, and still has the potential to turn into $9,000 if the run-up were to occur. July might not be far enough out and this position may need to be rolled into August during a good bull run but those are good problems to have.

I was looking to scale into this position during the first week or two of June. I've also been looking at C, with Bill Ackerman's big surprise call-out and all, but at $114 B Market Cap... dunno... really hard to imagine this thing back at $300 B or more any time soon, but maybe worth scaling into a straight stock position in the next several weeks as a long-term hold.

Moody's calls out increasing US debt on a timeline (finally)

Says as early as 2013 you-know-what could hit the fan ...

Treasury sees slim demand for 5-year debt

UGLY.

US Treasuries / Corporate Bonds' rates invert. "Exceedingly Rare."

Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.

The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves.

Gold: commodity without a counterparty or credit risk

"It must still be early in the gold bubble. Two masters of the hedge fund universe, George Soros and John Paulson, have vastly increased their bets on gold."

"I've met privately with veteran investment managers like Morris Offit of Offit Capital Advisers and learned that gold is fast becoming a more highly weighted asset in portfolios. The gold bubble is a function of the growing unrest about the debasement of currencies, not only the dollar, but also the euro and other European currencies whose nations have too great a debt load and must raise gobs of money or risk default."

"Gold's investment glimmer is also a function of growing unease, specifically about the ability of the Obama Administration to reduce the budget deficit and finance extending health care. The rising interest in gold reflects a concern about America's place in the world, an expectation of slower growth in comparison with more dynamic economies in China, India and other developing nations."

DEBT DEBT DEBT DEBT

Remember when 1 TRILLION was a big number. Well now it's $10 TRILLION. Do I hear a 100 TRILLION. How long until these numbers matter?

Not long now...

Head of IMF wants global currency

"Dominique Strauss-Kahn, the head of the International Monetary Fund, suggested Friday the organization might one day be called on to provide countries with a global reserve currency that would serve as an alternative to the U.S. dollar."

"He said having other alternatives to the dollar 'would limit the extent to which the international monetary system as a whole depends on the policies and conditions of a single, albeit dominant, country.'"

Gold Watch

Gold's Breaking the Rules:

"[Gold] recently broke from its usual inverse relationship with the U.S. dollar to move more in sync with the climb in the greenback, showing off its prowess as a resilient world favorite."

"In a world where governments are openly devaluing their fiat currencies in an attempt to ease increasing stimulus debts and increase exports, central banks are figuring out the best way to preserve their wealth: the U.S. dollar and gold. Look for them to trade up together," he said.

"Gold's ability to rise in most major currencies is suggesting people are choosing it as an alternative to paper currencies," said Peter Grandich, a metals writer at Agoracom.com. And people are choosing the precious metal "because of the huge amount of debt the western world has piled up and the belief the only way out from under it is to reflate."

Bracing for Higher Interest Rates

Higher interest rates are coming.

That was the unmistakable message from the Federal Reserve last week when it increased the discount rate, the rate it charges banks for borrowing reserves. Although the move came sooner than many expected, it was a healthy step toward more normal conditions and a sign the banking system is healing. The Fed stressed that the move doesn't mean any imminent rise in the more important federal-funds rate. Despite the soothing words, it's a clear warning that near-zero interest rates won't last forever, and that the Fed is prepared to act when necessary to raise rates.

---> However, the article stresses that "inflation hedges" such as gold are over-valued and recommends rebalancing your portfolio with no real sense of urgency over the next three months.

Feds prepare to sell a record $126 billion in U.S. debt this week.

10-year yield at 3.78%

WaPo - Inflation falls to lowest since 1982

"Government data released Friday showed that a closely watched measure of inflation fell in January for the first time since 1982, potentially giving the Federal Reserve more leeway to keep interest rates at ultra-low levels."

- One must trust government numbers...

"When energy and food costs are added in, consumer prices overall rose 0.2 percent, the Labor Department said. But the core figure is widely considered a more precise gauge of long-term inflation trends."

- So core inflation is 2.4% annual less volatile energy/food. Not exactly "lowest in 28 years."

"The Fed does not think that inflation will be a problem through this year, if only because the economy is still in a wobbly recovery. When people are out of work and don't have as much money to spend as they used to, there's less demand for goods, which keeps inflation down. Institutionally, that's the Fed's view. "

- And the Fed's view on a 10X money supply and trillions in deficits?

"But not every Fed policymaker agrees. In a speech Thursday, St. Louis Federal Reserve Bank President James Bullard said the financial markets are expecting inflation to pick up, citing increased spreads between yields on ordinary Treasury securities and inflation-protected Treasury securities, whose principal rises and falls with prices. If inflation-protected Treasuries are selling at a faster clip, that means people are worried inflation will rise. "

- I'll be keeping my eye on what James Bullard has to say going forward...

TBT chart check-up

The exchange traded fund, TBT, is one of the best ways to hedge against a potentially devastating rise in interest rates, should the US Gov't begin to find it difficult to continue to sell trillions of dollars worth of treasuries to finance out-of-control spending ... :)

Today's action indicated continued technical strength with a close today right at 50:


Tepid investors could certainly wait until the 50-day moving average crossed over the 200-day, though this is a long term plan (2-3 years overall) so their is no harm in waiting as opposed to getting in earlier, especially if you personally think interest rates are going to drop. Some perspective is helped by also viewing the 3-month chart next to the 2-year:


Setting up nicely for a bull run, wouldn't you say? Let's go TBT!

Methodologies:

BABY BEAR: Long stock, 2 shares for every 100 bucks. Go nuts.

MAMA BEAR: A little more leverage: Jan-2011 calls at 53 for 4.15. (close on Feb 18). You have 12 times the gain potential but limited time (10 months). You control 24 shares for every 100 bucks, but need 57.15 or higher by next January to break even.

PAPA BEAR: Bull call spread, buy the Jan11-50 calls at 5.40, and sell the 60 calls for 2.30. You're risking $3.10 to make $10. The probability of a 10 point move is more than 50/50, making this a lower risk than it appears. $322 potential per $100, but you have set a target for 60.

Personally, I like the mama bear play, because it doesn't cap the upside should things really get moving.

Dollar strengthens as inflation rate rises

NEW YORK, Feb. 18 (Xinhua) -- The dollar extended gains on Thursday as wholesale prices increased more than expected last month.

The U.S. Labor Department reported that the producer price index for finished goods rose a seasonally adjusted 1.4 percent in January on the back of higher energy costs, much higher than analysts had expected. The core PPI, which excludes volatile energy and food prices, rose 0.3 percent, also higher than the expectation of 0.1 percent.

The Fed has left key interest rates at a record low levels as risk of inflation was kept in check. Rising wholesale inflation may weigh on Fed's decision on when to start tightening credit.

The latest statement from Fed, which was released after market closing on Thursday, said the central bank decided to increase the overnight loan rates it charges banks by 25 basis points to 0.75 percent.

The dollar was boosted as speculation of higher interest rates lured more investors.