Separating the Wheat from the Chaff

The bullish data points that spurred the sudden (and short lived) spike in wheat futures in recent sessions seem much less compelling today as initial harvest projections from the world’s third largest producer start to emerge. After several years of bone dry weather Australian farmers are seemingly back on track with July rains helping forecasters project a yield of over 23 million metric tons for this season.

Andrew Barber

Pilgrim Pride’s Comments Mirror Tyson’s

Just as Tyson said yesterday that consumers have not yet felt the effect of higher grain prices, Pilgrim Pride said today that consumers “have just begun to see higher prices for meat and poultry in their local grocery stores.” Meat prices in the grocery channel have not yet moved up as much as other items, such as dairy, produce and cereals.
  • Management stated that production cutbacks have not been enough to cover feed costs. That being said, CEO J. Clinton Rivers said “American consumers should brace themselves for sticker shock at the meat case over the next 12 months.”

Increased Wheat Production In Australia Should Help Ease Prices

Bloomberg reported today that wheat from Australia, forecasted to be the world’s third largest wheat exporter this year (behind the U.S. and Canada) should return to the global market in 2008 after two years of drought. Managing Director of Malaysia's second-biggest miller Teh Wee Chye was quoted from a conference in Melbourne, “Australian wheat is important to us. We expect Australian wheat to come back into the global market in 2008. The current prospect of a huge crop in the northern hemisphere, as well as improved weather conditions in Australia, will lead to an overall improvement in the global wheat supply and result in lower and affordable wheat prices for both producers and consumers. This will bring food inflation to a more reasonable level.''
  • According to the article, wheat output in Australia is forecast to reach 23.7 million metric tons this harvest, up over 80% from last year’s drought-reduced crop of about 13 million tons.

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Scary Long Term Chart: US Personal Savings Rate, 1970-2008

This is another one of the most impactful charts that we put together for our July 16th "Bankruptcy Cycle" conference call. US Personal Savings Rates overlaid with 10 year US Treasury yields.

There is only one way for this Savings Rate to go from here. The implications for the US consumer spending are daunting.

Ask Paul Volcker and Team Obama where they think interest rates are going next.
Research Edge Chart

Corporate Leadership?

This "IBS session on Corporate Governance with Vikram Pandit '86, CEO of Citigroup" should be really interesting. Columbia has it promoted under "Capital Markets and Investment Leadership."

Hopefully someone asks Pandit about his tactical leadership approach in selling Citigroup shareholders his hedge fund, Old Lane, then imploding it.

Wall Street likes to pay people who "make money". It’s how you "make money" that counts.
The Bandit On Leadership - see Columbia's website for details...

Who Do You Trust?

So what was it this time that freaked everyone out? Democrats can blame Hank Paulson’s intraday “covered bonds” speech. Republicans can blame Barack Obama coming home from his world tour to host a Paul Volcker sponsored “economic summit”. Portfolio Managers can blame their analysts. Traders who bought into the “buy the banks” call from last week, can blame themselves. John Thain can blame himself.

The reality is that it is month end this week, and we have an oversupply of “Fast Money” chasing weekly and monthly performance. What happens to fast money when oil and fertilizer stocks stop working? Buy the Financials? Nice try. All of a sudden nothing is working, and the market factor that remains most misunderstood is that which you will not see until it has unwound. Do people out there legitimately think that this bear market is not going to take down a massive equity levered hedge fund? C’mon. Tail risk in this market continues to intensify.

It’s time to get real here. Even Bush and Obama will agree with each other now on that. Bush called Wall Street “drunk” last week, and Obama called it “irresponsible” this week. Make no mistake – this is the brave new world of US Election year populism. In the end it’s going to equate to higher cost of capital and less access to it. Re-regulation will follow. After that’s all said and done, the market’s headlines will be littered with 30 something year olds who blew up hedge funds, alongside 50 something year old sell siders like Vikram Pandit who launched his and did the same.

Obama is too young and naïve to be President, but the 51 year old Pandit Bandit is old enough to run America’s largest bank? Tech wrecks, Carly Fiorina and Meg Whitman weren’t good enough to keep their respective stock prices from falling, but now they’re good enough to advise team McCain on solving this economic mess? Whitman is 51 and Fiorina 53, fyi. Volcker is the only one in this political circus who is older than John McCain. He and McCain should team up – together they’re 151 years old!

This has nothing to do with age. Going forward, this is going to have everything to do with integrity and sound judgment. Who is going to mark their assets to market? Who is going to put the principles in their business ahead of principal? When a handshake means something again, we’ll all be better off.

Don’t look for that from Merrill’s new CEO, John Thain, who assured investors on his July 17th conference call that ``we believe that we are in a very comfortable spot in terms of our capital''. This morning Thain has Merrill taking another $5.7B write-down and raising $8.5B worth of stock. Are you kidding me?

Asia took that Merrill news and pounded both stocks and currencies. Chinese equities (which I am long) were down -1.8%. Japanese equities (which I am short) closed down another -1.5%. There was no economic news out of China, but Japan reported its highest unemployment rate since September 2006. Japan is re-entering the dark hole of negative real growth. Meanwhile India raised rates by a higher than expected 50 basis points to 9%, and investors ran for the exits again, closing the BSE Sensex down a sharp -3.9%. Taiwan lost -3% and Korea was down -2%. A crisis of confidence in the leadership of the US banking system is not going to help any asset class, globally.

John Thain now joins Vikram Pandit (Citigroup) and Dick Fuld (Lehman) as the current CEO flag bearers of Wall Street. In a ‘You Tube’-less and internet-less world, where transparency wasn’t such a powerful real time accountability tool, they may actually have gotten away with this kind of ‘say one thing - do the other’, behavior. Now, the rules are changing, and the whole world is watching. Who do you trust?



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