Current Marketing Thoughts
Kevin Van Trump has over 20 years of experience in the grain and livestock industry.
Are Outside Market Woes Signaling QE3???
May 11, 2012
JPMorgan Chase announced a surprise $2 billion dollar trading loss in their "credit derivatives" group after the close yesterday. The losses are being blamed on "errors, sloppiness and bad judgement," the real kicker is their executives are saying the number "could get worse."
I am afraid in the end this is only going to open up another can of legal worms in Washington as many already feel what the Big Banks call "hedges" are nothing more than risky spec type plays using excess client deposits. With the MFGlobal debacle fresh on the minds of regulators and investors this is certainly not what we need. I wouldn't call it a "major" nightmare, but it certainly will do nothing to get the "outside" market winds blowing at our back.
As long as we are on the subject of Big Banks, lets not forget all of the problems in the Spanish banking system right now, also keep in mind the "downgrades" that may still be coming from the "Moody's" ratings agency around the next corner. If you remember, Moody’s warned earlier this year they were placing 17 of the worlds larger banks under careful review. The fear is sometime between now and mid-June some or ALL of these banks could be downgraded.
There is actually rumors stirring that a few of the bigger banks such as UBS, Morgan Stanley and Credit Suisse could be hit with significant downgrades. Keep in mind Federal Reserve Chairman Ben Bernanke commented in his speech yesterday that the US banking system is much stronger and more more resilient than a couple of years ago but still faces several challenges dealing with credit "quality" and overall "liquidity." Imagine that..."liquidity" issues??? Who would have ever guessed.
I should also note that a fairly sizable "hedge fund," was rumored to have liquidate some 25,000 corn and close to 15,000 cotton contracts as they prepare to close their doors in couple of weeks. Like many "hedge funds" they have been on the wrong side of the trade as of late and have been loosing money hand-over-fist. Because of this they are liquidating all of their positions and sending investors their remaining capital. Read additional info on this subject in my first story down below.
Could all of this this lead to QE3? That is the magic question still circulating in the trade. Some will argue yes, but I think the Fed is going to sit back and watch how things play out before they jump in with more quantitative easing. I think they will watch the US stock market. Another 100 to 200 point drop in the S&P500 and they will be more tempted to step in. If things continue to unwind in Europe, such as Greece leaving the EU, or Italy, Spain and Portugal melting down even further then I suspect the Fed makes a move. If we continue to see noticeable losses in the "housing" or "employment" sector then I would suspect the Fed jumps back in.
Otherwise if things stay "status quo" for the next couple of months I suspect the Fed moves to the sideline and lets the US elections play themselves out before making any additional moves. If I had to handicap the odds my guess would be 60/40 they move with some form or fashion of QE3 before the US presidential elections. Ultimately bullish the commodity markets as a whole as they continue their efforts to "deflate" the Dollar.
One last thought:
Corn traders are trying to desperately understand the USDA's logic in RAISING the "old crop" ending stock number while the cash market remains insanely tight in many parts of the country. Just the opposite of soybeans, the USDA actually left corn exports "unchanged," and decide to reduce feed-usage by another 50 million bushels (the lowest level now in more than 20 years). Throw on top of this the fact they raised Brazil's corn production by 5 million metric tons, while pushing the US "new crop" yield estimate to 166 bushels per acre... and all of a sudden we are swimming in corn.
Just keep in mind however we are not yet swimming in "REAL" corn, but rather the type of corn only "Peter Pan" can use... the "imaginary" kind! All across the country end-users are struggling to find corn, elevators are bidding up the basis because they can not get enough corn, ethanol plants are temporarily closing because they can not get enough corn, and China is importing corn right and left because they can no get enough corn, but yet the USDA tells the world we have a glut of "old crop" supplies. I am not saying they are wrong, because they are the ones making the rules, and they can count the cards anyway they see fit.
All I am saying is "thinking" there is a glut of supply and actually getting the corn in the hands of the end-users are two completely different animals. In a nutshell, I believe it will take the "old crop" some time to digest the latest round of bearish USDA data, but in the end I think prices will move higher as the market simply does NOT have enough "REAL" corn to go around. I realize we have plenty of the "paper" or in this case "imaginary" corn to keep the pipelines filled. I am just not sure for those who operate in the real-world and have real-livestock to feed, or real-ethanol to produce the "imaginary" corn is going to get the job done.
Before long we will be printing pretend Corn the same way we print pretend Dollars! In any regards, I may be dead wrong, but I believe "old crop" corn prices must move higher in order to entice more farmer selling. From where I sit, the farmers who have the bushels left are flush with cash, more storage than ever and certainly seem as if they are willing to "call" what they believe is simply another USDA "bluff." It could get wild in the July contract before this thing comes to an end so make sure you are belted in.
We are making some moves in response to what the market is showing us. You can sign-up here to receive a FREE trial of my Daily Grain and Livestock commentary in which you will see where I stand on cash sales and some strategies on how you can take advantage of "Money-Flow" and the Outside Markets. Just click here - Van Trump Report