Money Flow into the Grains and the Fiscal Cliff
Dec 27, 2012
Washington will take another swing at a "fiscal cliff" compromise with the President, House and Senate all back in session today. The Labor Department will release the weekly jobless claims number early this morning followed by the December "Consumer Confidence Index" and "New Home Sales" figures for November. There is actually some whispers and rumors floating around that there is a "behind-the-scenes" attempt being launched in Washington to get Boehner to step down and Paul Ryan to take his place (not sure if there is any validity to this). For the most part there has not been a lot of significant changes in the outside markets since our last pre-Christmas report. Macro analyst continue to keep all eyes firmly focused on the US fiscal cliff. While rating agencies continue to place more focus on US concerns surrounding the US "debt ceiling." In fact just yesterday the US Treasury announced that they would reach their debt-limit on December 31st, but with some creative math they should be able to survive for another 60-days. The fear is this could prompt some Ratings Agencies to warn on US downgrades, ultimately adding even more downward pressure to the outside markets. I see no real outside market support coming our direction until more is known out of Washington.
Money-flow continues to be a major concern for me, especially considering the fact this past year has been another mediocre one at best for the hedge funds. The HFRX, a widely used measure of industry returns, is up by just 3%, compared with an 18% rise in the S&P 500 share index. There was actually an incredible statistic in "The Economist" recently that showed a simple-minded investment portfolio--with 60% in shares and the rest in sovereign bonds--has delivered returns of more than 90% over the past decade, compared with a meagre 17% after fees for hedge funds. It is actually being reported that about 1/3 of all hedge funds have lost money this year. Even though investor interest in hedge funds has exploded since 2000 (now over $2.2 trillion in assets), with many funds struggling to show profits and the stock market performing better than in the past, will money continue flowing into the hedge sector at the same pace it has? I am not so certain. In the Ag markets we have seen a drastic reduction in length during the past several weeks. Most sources thinking the funds are now just long about 265,000 corn contracts, about 120,000 soybeans, and "short" close to 20,000 CBOT wheat contracts.
As for today I suspect the "outside" markets will continue to pressure the trade as major "money-flow" is pushed to the sideline fearing the worst in Washington. Even though I personally believe some type of "deal" will eventually be reached, there is a 50-50 chance now that the "new-deal" could be viewed as negative by the larger players, therfore causing even further liquidation. On the flip-side a compromise viewed as positive will generate a more "risk-on" type attitude. Who knows what will happen in Washington, therefore I suggest spec players continue to swim close to the shore. Bull spreads in an attempt to play the tight ending stocks and logistical issues look to be the play in Ag's. The trade will be eager to see today's weekly ethanol data along with tomorrow's export sales numbers. Producers should have a good start on their 2013 marketing...
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