A data point on coffee this morning had traders taking note: the National Federation of Coffee Growers of Columbia is predicting a cyclical decline in Brazilian Coffee production will cause a global deficit as supply falls below demand that has grown dramatically in recent years.
To put in context, the grade of coffee produced in South America is the premium Arabica grade. Starbucks and other retailers have re-introduced premium South American blends to new audiences from the less urban parts of the US to developing Asian and Eastern European markets in recent years and Columbian Growers are betting that despite slowing growth one of the last sacrifices that people in those markets will make is their premium coffee in the morning.
Coffee Futures felt the same pressure as other soft commodities in recent months as the great deleveraging process saw a tremendous amount of capital flow away from static log index investments which were based on rolling front month positions. Unlike Oil or Gold, Coffee does not enjoy the same following among institutional investors as a standalone investment and so the absence of index investors will significantly impact open interest and volume. JO is an Ipath ETN based on the Dow Jones AIG Coffee sub index, which consists solely of front month NYMEX Coffee Futures on premium South American Arabica.
get free cartoon of the day!
Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox
By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.
In general, the data this morning held more bullish indicators than bearish:
· The VIX declined yesterday with a closing level of 53.11
· Yesterday’s volume was comparatively light yesterday –less than half the level we had seen during the capitulation sessions in previous weeks
· Sentiment indicators continue to come in at historic lows
· Credit spreads continue to show signs of contraction
At the time of this update, our marginally bullish stance is being tested, but we rely on a disciplined process and will adjust our market levels accordingly.
Capitalism rising in the east and setting in the west – Todd Jordan
With Keith McCullough unavailable today, it is once again my turn at bat. I recently spent a week in China so it seemed to be the appropriate topic for this morning’s note.
“Go west young man” – John Soule, 1851
Horace Greeley may not have coined this phrase but he certainly popularized it. That was in the second half of the 19th century. The first half of the 21st century is a very different time. My advice to our junior generation would be to “Go East Young PERSON” or at least look Eastward. One has to be politically correct here in the west, but not in China where capitalism is not an evil word.
So if you’re a young capitalist, go where you can be you. There is no shortage of opportunities. As reported by the China Daily there is a paucity of individuals with global financial experience, particularly in the investment arena. Shanghai banks are looking to Wall Street to fill that void.
I’m not suggesting China is actually a freer economy than the USA, yet. But on the margin, we are moving more towards socialism and China is moving the right way. Yes, China is an authoritarian regime and no, the country is not free.
But we invest in deltas here at Research Edge and the China delta is now positive. Keith was on the correct side of the China trade for most of this year and I’ve been negative on Macau, but when facts change, we change. One theme you will be hearing from us is China’s transformation from an industrial based economy to one that is based on consumption. Singapore made this transition and now generates per capita consumption 15x the rate of China. Now that is a huge potential delta.
In my narrow world of gaming, lodging, and leisure, it’s the Pearl River Delta that matters. Macau resides on this Delta and will continue to benefit from the capitalist delta sparking mainland China. One casino market, serving over a billion people with rapidly rising incomes and a cultural propensity to gamble; if there is one other gaming market with a decent growth profile, I’d like to know.
Here in the US, notwithstanding the recent government interference in our free markets, I see many signs of a leftward economic shift in our country. Not to be outdone by the free spending Bush administration and Republican congress, Democrats will have their own agenda to pursue, rather easily under Obama I might add. Get ready for a curbing of free trade, windfall taxes on profitable industries, higher overall taxes and even more spending, nationalized healthcare, government interference in mortgage contracts, equal pay legislation, onerous environmental restrictions, prescription drug controls, higher minimum wage, etc.
I’m making a purely economic argument. I’ll leave the discussion of whether there are social benefits that may accrue from some or all of those initiatives to Keith Olbermann and Bill O’Reilly to argue about. What I can say with some certainty is that a socialist agenda is bad for business, it’s bad for the economy, and it’s bad for the stock market.
Two other items I haven’t mentioned yet are more near and dear to my sectors: regulation and union power. Look, I’m all for regulation. Regulation of the government, that is. We could’ve used that earlier this decade with Fannie and Freddie but that was thwarted at every turn by Barney Frank-Lin Raines and “their” band of “ownership society” boosters, Democrats and Republicans alike.
The union issue is a big one, although I don’t know if executives and investors fully grasp it. We have written extensively on the prospects and ramifications of “The Employee Free Choice Act”. People don’t know this but the original name was “The Act To Eliminate The Cornerstone Of Our Democracy: The Secret Ballot”. That was too long so I see why they went with the shorter name.
Unions will prosper under Democratic control and “The Act” is a major tool of that newfound prosperity. The Employee Free Choice Act will be at the top of the 2009 legislative agenda. It will pass and it will affect businesses, particularly consumer businesses. In an environment with declining consumer spending, higher labor costs will deliver a near fatal blow to many companies.
The choice seems pretty clear. One can invest in a socializing market priced for capitalism or a capitalizing market priced for socialism. I think you know where we stand.
STEALING THE FUTURE
In one of the more pathetic developments of the global credit crisis to date, Argentine president Cristina Fernandez de Kirchner introduced legislation this afternoon to nationalize Argentina’s pension system in a move designed to get control over the $29 billion held in private retirement programs to prop up her floundering socialist regime. In advance of the anticipated announcement the benchmark Merval Index declined by 13.8% as yields on government bonds due in 2033 rose to 23.94%. Reportedly, large dollar sales by the central bank helped prop the peso during the day.
Since assuming Office last year after her husband’s second term as leader ended, Cristina Fernandez de Kirchner has made one misstep after another. You may recall that earlier in the year we covered the repeated farmer’s strikes that resulted from her attempt to tax agricultural exports as one of the themes in the Corn market bubble. Her actions at that time helped prevent her nation –the second largest economy in South America, from realizing the full positive impact of the greatest commodity boom the world has seen.
Cristina –known by her first name among supporters, and her husband painted themselves into a corner with reckless debt policies. Their failure to settle with holdout bondholders over the remaining government debt issued before the 2002 default effectively shut them out of the private markets while their decision to print fictitious CPI numbers to hold down interest rate on inflation linked bonds sold domestically shut them out of IMF programs. Only Hugo Chavez, that champion of absurd socialist programs, was a willing lender, at a less-than-comradely 15% coupon.
Observers now expect that, if the legislation is passed, the government will effectively eliminate its debts to the private pension system. For Argentineans who lived through the default in 2002 and the resulting cycle of rampant unemployment and currency devaluation, this will mark the second time they have seen their savings disappear.
As the dominos continue to fall globally we will see more socialists leaders make desperate decisions as they try to stave off the inevitable.
the macro show
what smart investors watch to win
Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.