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POSTPONED: What’s Next For Agriculture Prices? (Corn, Wheat, Soybeans and Protein)

Takeaway: Today's call has been postponed, a new date and time will be circulated once it has been scheduled.

The Hedgeye Macro Team and Restaurants Team will be hosting a Agricultural and Consumer Economics Expert Call with Professor Darrel Good of the University of Illinois. Good has been part of the faculty since 1976 and took part in developing a comprehensive farm risk management website (www.farmdoc.uiuc.edu). His efforts are now focused on the performance of grain futures contracts as well as corn and soybean yield trends. 

 

Topics will include: 

  • Supply side - planting intentions and farmer's economics
  • Demand side - key drivers of demand - ethanol, protein, consumption (domestic and abroad)
  • General long term trends to think about for farming - utilization, fertilizers, seed evolution
  • Thoughts on USDA projections, and their historical accuracy and what the implications are now
  • View on supply, demand, key drivers and prices next year (or next 6 - 12 months) for:
    • Corn
    • Wheat
    • Soybeans
    • Cattle
    • Chicken


Current subscribers of our Macro and/or Restaurant verticals will receive notification with the new date and time of this call along with the dial-in information automatically, if you have any further questions please email .

 

Good's Background

Darrel Good has a comprehensive understanding of agricultural markets and their economic implications.

"There was a time period in the early seventies when grain markets changed dramatically," said Good. "Russia started importing grain, prices just exploded to the upside and there was renewed interest in markets and prices. I was hired to help develop a very extensive educational program in marketing and risk management."  

  • Professor in the department of Agricultural and Consumer Economics, is marking his 33rd year with the University of Illinois
  • Developed, along with two other faculty members at U of I, a seminar called "Price Forecasting and Sales Management"
  • One of the founding members of the farmdoc team
  • Writes one of the featured newsletters on the farmdoc site, Weekly OUTLOOK , and he is a primary contributor to the AgMAS section
  • Current research includes:
    • Evaluation of the pricing performance of agricultural market advisory services
    • Evaluation of USDA production and price forecasts
    • Evaluation of pricing performance of Illinois corn and soybean producers  

EXPERT CALL ON AG PRICES POSTPONED

Due to the US markets and many offices being closed, we are postponing today's Expert Call on Ag Prices until a later date.

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 

 

 


European Banking Monitor: Risk Moves with Downgrade

Takeaway: US and EU bank swaps moved higher this week, reflecting concerns surrounding weak earnings and a Moody's downgrade of 5 Spanish regions.

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:

 

* U.S. and EU bank swaps were wider last week as a spate of blue-chip U.S. companies disappointed on 3Q earnings and/or guidance. Meanwhile, Romney's momentum slowed and Fiscal Cliff concerns are again taking center stage. In Europe, French, Italian and Spanish bank swaps showed the most deterioration.

 

* Perennial laggards Spain, Italy and Portugal saw their swaps widen notably last week. However, the U.S., Japan, Germany and France all saw government default swaps tighten.

 

On OMTs Reporting: The ECB has stated that Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis and the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis. There is no indication that the OMTs has been initiated to date.

 

 -------

If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

 

Matthew Hedrick

Senior Analyst

 

(o)

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European Financials CDS Monitor – Europe took its cues from America. European bank swaps were wider for 34 out of 37 reference entities WoW. Out of the three swaps that tightened this week, two were German (Deutsche Bank AG & IKB Deutsche Industriebank AG) and one was Belgian (Dexia S.A.). Spanish banks were sharply wider, where the average reference entity widened by 9.2%. This is the result of Moody's downgrading 5 Spanish regions on Monday of last week. Italian and French bank default swaps were also notably wider week-over-week.

 

European Banking Monitor: Risk Moves with Downgrade - 111.banks

 

Euribor-OIS spread – The Euribor-OIS spread tightened by less than a basis point to 10.4 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: Risk Moves with Downgrade - 111. Euribor

 

ECB Liquidity Recourse to the Deposit Facility – ECB Liquidity Facility balances ticked lower again this past week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: Risk Moves with Downgrade - 111. facility


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF

Takeaway: US and EU bank swaps moved higher this week, reflecting concerns surrounding weak earnings and a Moody's downgrade of 5 Spanish regions.

Key Takeaways

 

* U.S. and EU bank swaps were wider last week as a spate of blue-chip U.S. companies disappointed on 3Q earnings and/or guidance. Meanwhile, Romney's momentum slowed and Fiscal Cliff concerns are again taking center stage. In Europe, French, Italian and Spanish bank swaps showed the most deterioration.

 

* Perennial laggards Spain, Italy and Portugal saw their swaps widen notably last week. However, the U.S., Japan, Germany and France all saw government default swaps tighten.

 

* Rates on high yield corporate debt rose 14bps week-over-week, the first increase in a long time. The leveraged loan market also reflected that reversal. 

 

* The MCDX, our preferred gauge of municipal default risk in the United States, rose 3bps to 135 bps vs. the prior week. 

 

* Our Macro team’s quantitative setup in the XLF shows 1.5% upside to TRADE resistance and 0.9% downside to TRADE support.

 

Financial Risk Monitor Summary

Short-term: Negative / 3 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged  

Intermediate-term: Positive / 9 of 12 improved / 2 out of 12 worsened / 2 of 12 unchanged  

Long-term: Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - Summary4

 

1. American Financial CDS   Money center banks and large brokers saw their swaps widen by ~6 bps on average. Wells Fargo was the only exception in the group, where swaps tightened 1 bp. The median US Financial swap widened bps, and, overall, 20 out of 27 domestic financial institutions widened.

 

Widened the most WoW: AXP, MTG, AIG

Tightened the most WoW: TRV, WFC, LNC

Tightened the most WoW: HIG, C, BAC

Tightened the least MoM: MTG, XL, MBI

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - America

 

2. European Financial CDS – Europe took its cues from America. European bank swaps were wider for 34 out of 37 reference entities WoW. Out of the three swaps that tightened this week, two were German (Deutsche Bank AG & IKB Deutsche Industriebank AG) and one was Belgian (Dexia S.A.). Spanish banks were sharply wider, where the average reference entity widened by 9.2%. This is the result of Moody's downgrading 5 Spanish regions on Monday of last week. Italian and French bank default swaps were also notably wider week-over-week.

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - Europe

 

3. Asian Financial CDS – Asian bank swaps were mixed. Nomura Holdings of Japan saw its swaps tighten by 49 bps to 281 while Matsui Securities tightened 24 bps to 226 bps. Those were the largest movers of the week, both Japanese. In China, the China Development Bank tightened 14 bps to 105 bps. Overall, Asian banks were tighter by an average of 7 bps last week.  

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - Asia

 

4. Sovereign CDS – European sovereign swaps were mixed last week. Italy, Spain and Portugal widened by 30 bps, 33 bps, and 79 bps, respectively, while Germany and France saw their swaps tighten 9 bps and 7 bps. The U.S. tightened by 2 bps and Japan was tighter by 1 bp.

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - Sov Table

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - Sov 1

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - Sov 2

 

5. High Yield (YTM) Monitor – High Yield rates rose 14 bps last week, ending the week at 6.66% versus 6.52% the prior week.

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - High Yield

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 4.5 points last week, ending at 1730.99.

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - LLI

 

7. TED Spread Monitor – The TED spread fell 2.4 basis points last week, ending the week at 19.9 bps this week versus last week’s print of 22.3 bps.

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - TED

 

8. Journal of Commerce Commodity Price Index – The JOC index fell -4.2 points, ending the week at -4.81 versus -0.7 the prior week. The commodity bubble continues to pop.

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - JOC

 

9. Euribor-OIS spread – The Euribor-OIS spread tightened by less than a basis point to 10.4 bpsThe Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - Euribor OIS

 

10. ECB Liquidity Recourse to the Deposit FacilityECB Liquidity Facility balances ticked lower again this past week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - ECB

 

11. Markit MCDX Index Monitor – Last week spreads widened 3 bps, ending at 135 bps versus 132 bps in the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1. 

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - MCDX

 

12. Chinese Steel Steel prices in China rose 0.5% last week, or 18 yuan/ton, to 3763 yuan/ton. This index has had a solid bounce from its recent lows on 9/7/12, up 12.7% since then. That said, it remains 25% below its August 2011 levels, reflecting ongoing weakness in China's construction market. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - CHIS

 

13. 2-10 SpreadLast week the 2-10 spread tightened to 145 bps, this was 2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.  

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - 2 10

 

14. XLF Macro Quantitative Setup Our Macro team’s quantitative setup in the XLF shows 1.5% upside to TRADE resistance and 0.9% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - XLF

 

Margin Debt - September: +1.12 standard deviations 

NYSE Margin debt rose to $315 billion in September from $287 billion in August. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at margin debt levels in standard deviation terms over the period 1. Our analysis finds that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of significant risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value over the following 24-36 months. Overall this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag. The chart shows data through September. 

 

MONDAY MORNING RISK MONITOR: RISK RISES ON WEAK EARNINGS AND FISCAL CLIFF - Margin Debt

 

Joshua Steiner, CFA

 

Robert Belsky


Noisy Truth

This note was originally published at 8am on October 15, 2012 for Hedgeye subscribers.

“We think we want information, when we really want knowledge.”

-Nate Silver

 

Within the context of the always-on tweeter-net, I thought that was a really thoughtful quote from the introduction to Nate Silver’s new book, The Signal and The Noise. I’ll be reviewing his framework for forecasting in the coming weeks.

 

Silver says the “signal is the truth” and “the noise is what distracts us from the truth” (page 17). Without having read the bulk of the book yet, I can already assure you that doesn’t hold when attempting to proactively predict Risk Ranges in real-time markets.

 

Our most immediate-term risk management duration (TRADE) is, by definition, noisy. Whereas our intermediate and long-term (TREND and TAIL) work can often be mistaken as truth when the noise isn’t confusing our confirmation biases.

 

Back to the Global Macro Grind

 

Whether we like hearing it or not, we all have confirmation biases. That’s because we are human. At a bare minimum, I think Nate Silver and I agree on that. Thinking, Fast and Slow’s Daniel Kahneman would too.

 

Our risk management day involves grinding quantitative economic realities (data) with behavioral finance (timing). In order to make a probability-weighted forecast (taking a long or short position) we always look back, across durations, before looking ahead.

 

For us, the signal (and the noise) is real-time market prices – here’s what they did last week, across asset classes:

  1. US Dollar Index =up +0.4%, closing up for the 3rd week in the last 4 at $79.65 (bullish on both TRADE and TAIL durations)
  2. EUR/USD = down -0.7%, looking like the upside down of the USD Index (bearish on both TRADE and TAIL durations)
  3. CRB Commodities Index = down -0.3% (down -4.7% from the Bernanke Top, printing to Infinity & Beyond)
  4. Oil (blended Brent and WTIC) = up +2% (WTIC down -4.3% from the Bernanke Top)
  5. Gold = down -1.4%, as it continues to make a series of lower long-term highs (vs the 2011 Bernanke Bubble top)
  6. Copper = down -2.2% (bearish on both TRADE and TAIL durations)
  7. SP500 = down -2.2% (bearish TRADE resistance = 1448; bullish TREND support = 1419)
  8. Nasdaq = down -2.9% (bearish TRADE resistance = 3129; bullish TREND support = 3022)
  9. US Equity Volatility (VIX) = up +12.6% (bullish on both TRADE and TAIL durations)
  10. US 10yr Treasury Bond Yield = down -5% to 1.66% (bearish on both TRADE and TAIL durations)

In other words, there were plenty of signals and noises, across durations, in last week’s closing prices. There is also a confirmation bias in attempting to describe what happened because I, unlike Keynesian policy makers, believe that central planners are the primary causal factor in driving currency values and market correlations.

 

In the private sector, it’s ok to have a confirmation bias – you just have to be right more than you are wrong. If you’re wrong more than you are right, it’s ok - just go work for the government.

 

What do you do when you are wrong? For us, it’s pretty simple – we hold ourselves accountable to the mistake, try to learn from it, and grow. What other people do when they face adversity is up to them.

 

With the SP500 not having an up day in the last 6, what is the truth? Do growth and #EarningsSlowing matter? Or did it from the price where a lot of people thought Bernanke’s money printing meant the “fundamentals don’t matter”?

 

What are the fundamentals?

  1. US GDP Growth of 1.26% in Q2 2012, or consensus expectations of +3-4% growth 6 months ago?
  2. Global GDP Growth of 1.3% (Singapore just reported that for Q3 2012) or +3% as far as the excel model can see?
  3. The worst preannouncement ratio (4:1) of #EarningsSlowing misses since Q3 of 2001, or stocks are “cheap”?
  4. US Technology Sector (XLK) down -3.5% in the last month, or what it’s “up YTD”?
  5. US Financials Sector (XLF) down -1.6% last week on JPM/WFC earnings, or what they are “up YTD”?
  6. Chinese inflation down sequentially to +1.9% (SEP) or India wholesale inflation up sequentially to +7.8% (SEP)?

Some might say all of this doesn’t matter, and all you need to do is know where a 1-factor/1-duration simple moving average model tells you where the market is and everything is either fine. Some might say that all of it matters and is measurable. That’s closer to the Noisy Truth.

 

Our signals say all this noise adds up to us having 12 LONGS and 9 SHORTS for this morning’s US stock market open. Provided that the SP500 doesn’t close > 1448, we’ll likely sell on green bounces, and buy on red corrections closer to 1419.

 

Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1748-1774, $112.68-115.08, $79.34-80.05, $1.28-1.30, 1.61-1.71%, and 1419-1445, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Noisy Truth - Chart of the Day

 

Noisy Truth - Virtual Portfolio



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