Sugar spikes on futures trading re: Australian cyclone - damage to sugar plantations

And we still have riots/turmoil in the middle east, namely Egypt; which on all reports started or was ignited by the cost of food and living expenses increasing. Now with sugar spiking, also not to forget meat exports to the middle east falling off from Australia (also related to cyclone 'Yasi'), which in turn will effect meat/live export futures (upward price spikes). Flash point tensions (middle east) could get far worst as the inflation squeeze on food will now exasperate from natural disasters that have hit Australia.


+1.35 +3.98% Volume 80,122 Feb 2, 2011, 1:59 p.m. Previous close 33.93 ¢ 35.28 ¢ Change +1.35 +3.98% Day low 34¢ Day high 36¢ Open: 34.10

Cataogory 5 Cyclone "Yasi" about to hit East Coast Australia (Queensland) - update 1

USA and Cyclone 'Yasi'

Size composition for scaling (examples). Please go here for rest of set

Cataogory 5 Cyclone "Yasi" about to hit East Coast Australia (Queensland)

After the devastating floods in January 2011, now comes this monster cyclone:

Oil (Brent) breaks $100, oil up on risk aversion (Middle East)

Basically the middle east is heading into credit contagion, which means the longer there is uncertainly in that region, i.e civil unrest/political turmoil, credit spreads will widen and the costs to insure sovereign debt will blow out too. With Egypt's CDS spread widening to 4%, at the cost of $440,000 on 10 million (Sovereign Debt), at this point one has to expect, even with a possible China inflation crash scenario, that has spooked markets in the last week (note oil/gold under pressure). A follow on from China's inflation issue is the serious problems now occurring in the middle east, this will then feed back into the inflation problems of Asia/China etc. We are now in a extreme economic game changer, with oil/food prices spiking. Further oil prices may cause China to react. How? Well, if the US continues on a path of US dollar deprecation, China will force the interest rate hand and sell US Treasury's. They will do this quickly and spike up USD's and UST yields, with the 10yr going well over 5%, and a pressure the US fiscal policy to tighten. This will be forced upon the US by China.

As discussed in Oil on a 25mth cyclical bull run, China is a net importer of oil, that and they are hall-marks of hyper inflation ( eg tea price one week is a certain price, next week it goes up again). Oil (WTI) starts to head towards $95, at any case over $90, it will be a breaking point for China in it's inflation dilemma.

The other option? China crashes a potion of it's economy, say housing.

In the meantime, oil is going upward.

Note the narrowing Brent/WTI spread

Doomsday Trading - Middle East/Africa turmoil

Turmoil has started on food inflation/price increases, potential to spread. Major hotspot is Egypt.

May become global i.e Europe (social unrest from food inflation).

Markets have moved into risk aversion with gold/oil buys, industrial commodities/stocks may still come under pressure.

Reuters 31/01/2010

"Cautious trading could also come if earnings do not outperform and erode optimism about profits. The government's January jobs report on Friday will highlight the week's economic data.

Worries that Egypt's unrest could spread to other countries in the Middle East, home to the world's top oil exporters, caused investors on Friday to pull out of stocks and into bonds and other safer assets. U.S. crude futures settled more than 4 percent higher on Friday.

Market volatility skyrocketed on Friday as indexes tumbled and investors scrambled to hedge against further losses. The VIX index .VIX, the market's fear gauge, rose 24 percent, its biggest daily percentage jump since May 20.

By Sunday, more than 100 people had been killed in Egypt after five days of protesting the government of Hosni Mubarak. Protests in other nations has investors worried about destabilization in the region.

"I don't like this. It is spreading and contagion risk is rising," said David Kotok, chairman and chief investment officer at Cumberland Advisors in Sarasota, Florida.

Investors were also worried that an extended rise in oil prices could hurt global recovery. Analysts had been forecasting a pullback in the market for weeks, given the recent sharp gains, and said the Egypt news could be an excuse for some investors to sell.

"It could well turn out to be a short-lived correction, and it would be dangerous to try and time this thing," David Kelly, chief market strategist for JPMorgan Funds in New York, said, noting he has a long-term bullish outlook.

The Standard & Poor's 500 index .SPX is still up 18 percent since the start of September, roughly when the current rally began.

The Dow Jones industrial average .DJI snapped an eight-week streak of gains with Friday's close. The S&P 500 and Nasdaq also ended with losses for the week.

The Nasdaq fell more than 2 percent on Friday while the S&P and Dow both were down more than 1 percent.

SCOUTING BLUE CHIPS

Monday could see a bounce-back after Friday's losses, followed by more consolidation, said Matt McCormick, a portfolio manager at Cincinnati-based Bahl & Gaynor Inc, which has $3.2 billion in assets.

"My recommendation for clients is that if you have profits, especially in lower-quality names that have benefited from QE2 (quantitative easing), now is the time to take profits and look at blue chip names that haven't gained as much," he said.

Marshall Gause, CEO and chief investment officer at asset management firm Geneva Funds Partners in Denver, said worry about Egypt could cause the S&P to drop between 0.5 percent and 0.75 percent at Monday's open, but he said there was a "good possibility" of closing positive on the day."

Market correction imminent, Gold/Copper correlation corrections due (update 4) - SPDR Gold ETF sell off

Good to track against the Gold price, with rumored huge stop losses at $1300, a capitulate sell thereafter. If the ETF market collapses could see sells shift into other ETF commodity markets.

Market correction imminent, Gold/Copper correlation and corrections due (update 3) - sell signal on Gold

As discussed in Market correction imminent, Gold/Copper correlation and corrections due (update 2) if gold was to break the low of 1361 it was destine to enter a sell signal thus correction.

This has nothing to do with global economy improving or risk approving meaning shares are attractive, instead what we are entering into is a commodity correction most probably stemming from China i.e fears of hard landing.

Watch all risk crosses for unwinds, continued stock pressures emerging markets.

Panic trades coming up: major oil, copper, gold, stock corrections (update 1)

• Cocoa re: current political turmoil and export bans. Cocoa price London futures (sterling: 2191). In June 2010 a hedge fund called Armajaro Holdings tried to 'corner' market, it played a risk hand and got burned - as the Cocoa price collapsed. Good to watch for price spikes via hedge fund plays and potentially crashes.

refer to July 2010 Armajaro Holdings play that went south as the market squeezed out huge 'cornered positions'

On July 16, Anthony Ward’s Armajaro Holdings attempted to corner the world cocoa market by taking delivery of 7% of the world’s physical supply when prices were at a 32-year high of $3,200/tonne.

The 240,100 tonne purchase was the largest in 14 years and spooked end users who were convinced Armajaro’s move would cause a supply squeeze just as confectioners were gearing up for increased holiday season production.

After the news broke, Tim Spencer, a former Armajaro executive, told the New York Times that, “Globally, [Ward] is unmatched in his knowledge of cocoa.”

Eugen Weinberg, an analyst at Commerzbank in Frankfurt, told the paper that “The squeeze was really timed perfectly.”

And Juergen Steinemann CEO of Barry Callebaut, the world's biggest chocolate maker told the Financial Times, "If you consider the fundamentals, I'd tend to say prices won't fall. There's no fundamental reason why cocoa should become cheaper."

But, at the time, Shawn Hackett, president of Hackett Financial Advisors, a money management firm with a focus on agricultural commodities, told Minyanville that he had quite a different outlook.

“Every once in a while someone attempts to do this. It’s always a huge failure and never works,” Hackett said. “I couldn’t be more bearish on cocoa, especially after this news.”

Hackett noted that, “the market will force [Ward] out of that position and cocoa prices will likely fall substantially from here.”

He continued, “I think we’re going straight down in the cocoa market. There are other speculators out there who can short the cocoa market and make a fortune. The hedge fund community doesn’t care about each other, they care about making money. They’re probably thinking, ‘Okay, now this guy is on an island, we can go short, hammer this thing down, and blow him out.’ Then that starts triggering stop losses, there’s a cascading effect, his equity is then falling and falling and falling…I can just see this guy getting totally ruined.”

Turns out, Hackett was right.

Armajaro’s mammoth play didn’t cause the sky to fall, nor did cocoa prices go through the roof. In fact, quite the opposite occurred, as prices have dropped 26% since.



The Wall Street Journal now reports that “Two hedge funds run by Armajaro, including its CC+ Fund, which focuses on cocoa and coffee, lost about 6% of their value during the first two weeks of August, according to investors who have viewed the returns. And since then, prices have continued to decline, suggesting Mr. Ward could be coming under more pressure.”

Hackett explains what investors can learn from the “Great Cocoa Scare of 2010”:

When you see a dramatic purchase like this, it almost always signifies a near-term panic buy that is associated with a major high point in a market. You see it periodically, like with cotton in early ’08. There was a rush of panicked buying right before the market changed direction, and several end users that had been around for years and years went bankrupt. Ford (F) panicked about palladium 10 years ago when it went from $200/oz to $1200/oz and bought up massive quantities for catalytic converters. "Let’s not take any chances -- we need this stuff." Well, it just went straight down to $400 after that.

According to Hackett, the pattern is always the same.

It’s unbelievable. You hear it over and over again -- "This time it’s different, this time it’s bullish," but it never is. It inevitably ends in disaster. It’s always been a clear topping signal, a quintessential contrarian indicator, and when you see this happen, either get out of a long position or go short. Cocoa was at $3200/tonne when the announcement came out, Monday morning it was down to $2950/tonne. There was a brief rebound rally, and now it’s down to $2700/tonne. And it’s all happened literally since that supposedly bullish indicator.

A near-term bottom will likely be established “the minute you hear Armajaro’s out completely,” says Hackett. “When somebody blows a position out like that, the overhang of the market is gone -- it takes all the psychological pressure off, there’s no one there to pick up the slack, and the buyers come rushing in.”

Hackett maintains that “during much of the rally that many thought was fundamentally-based, it was obviously artificial demand. It just wasn’t moving up for the right reasons.”

Companies like Hershey (HSY), Tootsie Roll (TR), Kraft (KFT), and even Archer Daniels Midland (ADM), which processes cocoa for manufacturers globally, could benefit from the move down in cocoa.

“Buying at 20, 30% lower prices should help improve margins going into 2011, at least on the input cost for cocoa,” Hackett says.

“In the Armajaro case, as typically happens, the true investment opportunity was to do exactly the opposite of what seemed logical. It’s very hard to do, it never feels comfortable to do what everyone else isn’t, but if you want to realize a return that’s better than most, you have to do something that’s different than most."

Dow breaks psychological 12,000 resistance - entering 2007/2008 sell side trading ranges.

In October 2007 the Dow peaked @14198, from February 2008 it then fell back to a low @12069, then going into an August 2008 close @ 11543, from there it subsequently collapsed and fell to it's March 2009 low of 6470.

Currently the Dow has now reached June 2008 ranges (June 2008) high @ 12638

The 12000 is a psychological resistance as the bear market started in June 2008, and as discussed began to sell from the high @ 12638 (Jun 2008) , or course the question is can, despite the Federal Reserve insistent effects via Permanent Open Market Operations, maintain an upward momentum with the Dow and S&P 500. The answer is unclear, as currently both POMO injected liquidity and High Frequency Trading (HFT) are maintaining/supporting trading ranges. But the reality is that both the Dow and S&P500 are overbought and a correction is due. Several, if not a collection of coincidences or triggers will initiate a sell of both the Dow and the S&P 500 (and other indexes).

As discussed in Panic trades coming up: major oil, copper, gold, stock corrections, one should watch for a possibly sell either via extreme risk based initiated losses, or HFT programs selling hard on a fear sell (geopolitical/social/political unrest).

Inflation: global food blowout 2011

It begins: similar to 2008 when inflation spiked on food and oil.

from WSJ 25/01/2011

"Fast-growing emerging nations are taking increasingly aggressive actions to beat back rising food prices as they grow more worried of threats to stability if prices don't start to retreat.

Developing-market governments have unveiled a laundry list of measures—including price caps, export bans and rules to counter commodity speculation—to keep food costs from disrupting their economies as price spikes that some had hoped were temporary have stretched into the new year. Some economists worry that any further supply shocks could push prices even higher, triggering a food-price crisis like the one the world witnessed in 2008, when higher food costs led to violent unrest across the developing world.

Workers handle rice sacks in Jakarta. Rice prices remain below highs in 2008, when higher food costs caused unrest across the developing world.

In the latest indication of concern, Indonesia said Thursday it will remove import tariffs on more than 50 items including wheat, soybeans, fertilizer and animal feed in an effort to slow the rise in food prices. Indonesia is also planning to raise taxes on palm-oil exports to 25% from 20% next month, according to a government official familiar with the matter.

Bad weather, more-affluent populations and underinvestment in agriculture have pushed up prices of everything from wheat, rice and onions in India, chilies in Indonesia and water spinach in China. Some point to low interest rates in the U.S., Japan and Europe, as investors use cheap financing to invest in globally traded commodities such as rice, sugar, cotton and oil, driving their prices higher. Soy bean prices in the past six months have risen 46% to more than $14 a bushel at the Chicago Board of Trade. Sugar, while lower than in November, is still up 34% over six months ago to around 31 cents a pound in IntercontinentalExchange trading.

In response to the price pressures, India earlier this month extended bans on exporting lentils and cooking oil. It also struck a deal with archrival Pakistan to import 1,000 tons of onions, a key cooking ingredient whose price has skyrocketed after floods.

China and several countries in the Middle East have instituted or strengthened ongoing price controls. South Korea has lowered import tariffs on some foods. Indonesia has been encouraging its citizens to plant chilies to boost supply."

Panic trades coming up: major oil, copper, gold, stock corrections

Away from any technical or even fundamental cues, rather it's when greed eventually implodes.

This is when the market gets really interesting.

Refer:

• JP Morgan Chase (rumored) holding over 90% copper via the London metal exchange

• Hecto US/UK oil trader buying up huge Brent Crude related contracts, thus driving up the Brent Crude oil price, as discussed in China's support of 'junk' EU bonds will create a further bond bubble as market become even more oversupplied. China/West will get higher oil price (on speculative oil pricing)

From the Telegraph 19/01/2011

"Hetco, which is part-owned by US oil and gas group Hess Corp, was said to have taken control of eight North Sea Forties oil shipments and two Brent cargoes – and it is believed to be in the market for more. The move would give Hetco more influence over the price of oil for immediate delivery. The cargoes are for February delivery.

The reports suggested that Hetco's purchases were the basis of a trading play and the trading house now has 30pc of the Forties oil being loaded next month and 25pc of Brent cargoes. Brent crude's premium over West Texas Intermediate oil has been increasing to abnormal levels since August last year, as US inventories of both oil and gas remain at high levels.

The news propelled Brent crude futures to $98.60 in intra-day trading on Wednesday, but this was still below the 27-month high of $99.20 seen last week. Many analysts expect the oil price to move above $100 a barrel this year.

However, there was also speculation that Hetco had been trying to sell some of its supply of Forties crude, but had failed to find a buyer for a third day in a row.

Brent crude for March delivery closed at $98.08 yesterday, a gain of 28 cents"

• The SPDR Gold Trust (ETF's) as discussed in Market correction imminent, Gold/Copper correlation and corrections due.

Good to watch a panic sell off on the ETF gold market, yearly chart:




If we do see 'fat finger' sells or even rogue trades going haywire, it would be on an inflation panic. With food/energy prices about to spike, a follow on 'sell panic may' occur. As the realization of damaging inflation is to company profits and operational costs, stock indexes may get caught up in any major sell off.

China inflation breakout invertible - Societe Generale

Good thing about Societe Generale is back in November 2009 they warned about a sovereign lead global collapse (debt crisis) way before most banks even wanted to except the idea that Europe was a debt burden basket case, with a structurally bankrupt banking system. So it is probably wise to take notice when they issue a report, even though the hallmarks off hyper-inflation are creeping up, all it will take (as discussed on MEC research) is oil to maintain it's $90+ presence and food inflation from natural disastrous floods (southern hemisphere), droughts (northern hemisphere) to become something very serious for China.

From Business Insider 19/01/2011

"China's leadership has not properly addressed their inflation problem and now their own version of quantitative easing is coming home to roost, according to Societe Generale.

The assumption is that the inflation China is experiencing right now is just the same as the food price inflation it experienced in 2004-2005, and 2007-2008. But actually this is more about the country's quantitative easing program, which it has achieved by flooding banks with cash.

Check out this visualization of what that program looks like, from SocGen:

Image: Societe Generale

That increase in the money supply is now hitting home, driving up food prices, and perhaps even creating the asset bubbles everyone is scared of in real estate and commodities. "Policymakers have not done enough and an inflation break-out is now inevitable," according to Societe Generale.

The best case scenario is that those bubbles don't take hold, but it seems rate hikes and bank lending changes won't be enough.

From Societe Generale (emphasis ours):

Moreover, not all the inflationary pressure can be addressed by monetary policies. We expect longer-term inflation to become entrenched over the medium term, fostered by the ongoing supply-demand imbalances within the economy. This part of inflation is difficult to avoid because of resource constraints and the inelasticity of non-discretional consumption.

But even more worrying may be what we can tell from the inflation trend.

Societe Generale suggest that, actually, China may be unlike any other rising power in world history. Compared to the U.S., Germany, and Japan, China's population is multiples bigger. The impact of that population size may be that inflation, on a global scare, is inevitable.

From Societe Generale:

The recent turn in real commodity prices since China’s WTO ascension may reflect two China specific factors. First, China’s population is proportionately larger than population levels during the earlier industrialisation of the US, Germany and Japan. Second, China has a relatively low per-capita endowment of natural resources. As we see strong income growth, rapid urbanisation, and a westernisation of the Asian diet, China’s inflation problem could be profound.

Read more: http://www.businessinsider.com/china-long-term-inflation-2011-1#ixzz1BWXah7jk

Asian intervention on the EUR: over half a billion used to buy EUR (update 1)

After the insane buy up of EUR (and possibly more EU bonds) by China/Japan. The market took a cue to demolish the US Dollar.

So, China/Japan gift to it's self from massive EUR/EU bond intervention; an oil price spike. Nice work, with China flirting with outright hyperinflation we all await the inflation tipping point.



US futures markets (on open) should be bid on oil, eye $94 on short/mid dated contracts

Asian intervention on the EUR: over half a billion used to buy EUR

Asian sovereign fund via investment banks via Asia's love affair with currency intervention and manipulation are trying to stabilize the EUR, possibly to create a bid for European Bonds as Asia/China dump some US Treasury's.

What ever the case between 500-600 billion was used with US/Swiss banks and Hedge Funds joing the buying spree.

...but of course the US dollar is sold just adding to more export inflation problems in China/Asia

Rule: small series of coincidences usually lead to an event or disaster

• 10yr spike, rumored 'fat figure' trade

• TIC data showed China showing less interest in US Treasury holdings

• Portugal denied rumors of a canceled auction 20/01/2011 and confirmed talks with Abu Dhabi.

• Spain's savings banks could meet loan losses, will try and tap Asia for more money

• inflation driven 'food riots' spreading from the Tunisia to rest of Africa, Egypt, Middle East

• extreme weather events: floods southern hemisphere

Shanghai Composite possible -3% hit looming 17th Jan 2011

Nasty.

Australian floods: inflation spike banks make calls on RBA hikes

Basically to support their (banks) massive long carry trade positions on the high yield AUD.

SYDNEY (Dow Jones)--The Australian dollar slid in Asian trading Monday, damped by banking moves in China. Australian bonds also slid on the inflationary concerns, which could force the Reserve Bank of Australia's hand into raising rates. Trading in Asia was partly subdued Monday ahead of the U.S. market shut-down for the Martin Luther King Jr. holiday. Still, after Beijing late Friday said it will raise banks' reserve requirement ratio by 50 basis points, following six hikes last year, many Asian currencies were under pressure, including the Australian dollar. Even with the China move, however, a further sell-off in the Australian dollar this week is unlikely, said Greg Gibbs, head of foreign exchange strategy for RBS in Australia. Among the week's big events, several U.S. companies will post fourth-quarter results, while housing and manufacturing data is due in the U.S. and the U.K., respectively. In addition, European finance ministers will be meeting over the next couple days, with the market anticipating more from them to bolster their response to the ongoing European debt crisis, said Gibbs. "The rates outlook has not changed too much and there are certainly reasons to be quite positive on Australia medium term. I expect buying interest will hold up," around 0.9850, he said. At 0500 GMT, the Australian dollar traded at US$0.9878, down from US$0.9958 late Friday. Against the Japanese yen, the Australian dollar recently changed hands at Y81.875, from Y82.225. Also impacting the Australian market on Monday, an estimate of consumer prices in Australia rose 0.2% in December, pointing to increasing inflationary pressures for the economy, according to a report by TD Securities-Melbourne Institute. The latest rise in the TD-MI monthly inflation gauge continues a string of rising inflation data, after increases of 0.4% in November and 0.3% in October. The report briefly helped the Australian dollar pare some of its decline, while also weighing on Australian bonds. In the rates futures market, the three-year March spot contract lost two ticks to 94.86 while the 10-year contract declined three ticks to 94.44. Westpac strategists noted the inflationary pressures will continue, which would force the country's central bank to hike rates once again. "(Inflation) has clearly bottomed and is starting to accelerate. This is reinforcing our view that the subdued underlying CPI rate of 2.4% (annualized) in the third quarter is likely to be the cycle low," they said.

The RBA should hold off any rates pending the increased borrowing costs for home owners, but with Aust bonds yields paying a premium, it's more likey that any sell off is occuring via newer high yield bonds hitting the market - as government borrowing costs increase from the Queensland flood crisis.

And/or China slowing, commodity markets selling.

Australian floods: food shortages for flood victims, nation will see food inflation spike

"The death toll of this week's devastating floods stands at 15, with 55 people still missing.

Last night, “Ann from Moggill” detailed on ABC Radio her family’s harrowing experience running low on food.

With three adults and five children in their family home, having given refuge to another family of flood evacuees, Ann's husband went to the nearby Moggill State School emergency centre to ask for milk.

The distressed mother told ABC he had been given one cupful, and told he had to "drink it on the spot". Requests to take it home to his family were denied.

This morning, Andrew Solomon, the operations manager of another nearby evacuation centre at Moggill Uniting Church, said strict rationing procedures were still in place.

He said while the first of two military Unimog vehicles arrived with provisions at 11pm last night, at that time there were already 100 people at the centre in need of food, and he expected many more to return this morning.

Mr Solomon said that while meals would be served at the centre, there were not yet enough supplies to hand out bread and milk."

The Age 14/01/2011

Algorithmic trading patten or HFT on the Dow 13/01/2010

Normally a grind, or steady bid/offer spread. The below batten is also relevant of the widening sell/buy spreads. High Frequency Trading (computer algorithm) is here to stay, you can't deal with it, don't trade in the markets. Or lean to adapt and wait for cues of how to make money when the system overloads and panics (like human/s) and and causes a sell dislocation order go through; knocking out institutional (major banks/pensions funds/larger brokerage firms) longs positions in the process. Eventually this will happen, much like the May 6th 2010 Flash Crash. But with wider consequences as commodity markets (reaching bubble status) crash in tandem with equities.



Remember the golden rule for an eventual (financial or otherwise) disaster: it is small coincidences that build up to an major event.

Good to watch for unusual trading pattens tail end of Jan 2011 and related news i.e environmental/climate, geopolitical, food inflation/tensions etc

Go to this link from Wired Magazine on Algorithmic trading (early article Dec 2010)

Japanese 'funds' are throwing money at risk again '

Terrible investors. Still they chase risk and yield with an obsessed love affair with the AUD.

Someone should tell them that the devastating Queensland/Australian floods will probably end up being a huge fiscal/economic headache for Australia.

Also that JGB bond yields are rising in tandem with UST's and one day Japan will need to auction a TON of debt to finance their barely functioning economy