Hidden inside every chart is a story. A story about where the price has been and where it might go in the future. Some stories are obvious. Others are a little more difficult to figure out.
Indices Updated : 06:59:05
Thursday, May 15, 2008
Testing 1,300 level
KLCI ends +0.1% at 1287.74 in sluggish trade on absence of market-moving catalysts; The tone of the market was mixed with strong gains in steel and plantation stocks offset by profit taking amid a weak technical outlook. Investors are still cautious because of the continued failure to surpass the 1300 level; gainers beat losers 371 to 313, with total 605 million shares traded; traders tip index to remain in 1275-1300 range near-term.
Rich countries like the U.S. used to store extra food in case of emergencies. Many grain elevators were built in the Great Plains after World War II for this purpose. 2 This stockpile reduced the volatility of food prices. When prices rose, the government released some grain into the market. When costs were low, the Department of Agriculture would support prices by purchasing surpluses. Excesses of wheat, milk, and butter were exported, given away or even destroyed for lack of demand. After the passage of the 1985 farm bill, the USDA divested itself of grain stocks and other foodstuffs.
What happens in the U.S. agricultural markets has a great impact on the rest of the world. America is the “Saudi Arabia” of grain as it is the largest exporter. The U.S. supplies 70% of the world's corn, and it has little 2007 crop surplus of soybeans and wheat left to sell. 3 Many poor countries depend on imports of these staples to feed millions of their hungry citizens.
Another major cereal exporter, Australia is just starting to lift out of a drought that started in 2002. 4 They lost most of the winter wheat crop and their main breadbasket, the Murray-Darling Basin is still excessively dry. Officials hope that the La Niña weather pattern will lead to bumper crops this fall. However, the La Niña that should bring rain to Australia and India will likely deny it to the U.S. agricultural heartland, as well as parts of Brazil and Argentina. 5
With increasing world demand and poor weather in the Southern Hemisphere, the margin for error has become very thin. This year, global wheat supplies are projected to hit a 60-year low, and barley will plunge to a 42-year low. Corn stocks are expected to drop to the lowest level since 1984. Global grain supplies are down to 50 days, less than half the amount just 8 years ago. 6
Another pressure on cereals is the increased global consumption of meat and dairy products. Asians were mostly vegetarian a half century ago, but today they can afford more animal protein. Increased demand for meat puts upward pressure on grain prices, as livestock consume large quantities of feed. Many pounds of grain are necessary to produce each pound of meat.
While China has approximately 25% of the world's population, it only has 10% of its arable land, making it vulnerable to food shortages. More land is turning into desert every year from climate change and poor soil management practices. Ground water is being depleted at a frightening rate, and China will likely have to import water in the form of grain. China isn't expected to export any corn this year, and may become an importer. Half the world's soybean crop is now consumed by China, and a small 2007 harvest has left stocks low. 7 Asian crises like bird flu and the current pig disease further deplete food supplies. 8
Another threat to the food supply is a mysterious disorder killing honeybees called Colony Collapse Disorder, or CCD. Even before this threat, bee populations shrunk 50% from their peak in the 1970s. Bees are essential to pollinate many commercial crops we take for granted. 9 About one third of fruits and vegetables produced in the U.S. depend on insect pollination.
Worker bees are suddenly disappearing and abandoning their hives, and some keepers have suffered a 90% loss of their insects. Even more odd, bee predators like the wax moth won't touch the unguarded hive. Theories range from stress to mites, fungus, pesticides, genetically modified crop poisoning and even abnormally large honeycombs, but no one knows for certain. Now another pollinator, bats are dying in a similarly baffling way in the Northeast U.S.
Much of the world's food supply is not eaten, but converted into biofuels. Even coffee beans are being harvested as an energy source. The EU has mandated that 10% of car fuels should be from biological sources by 2020, a target that will lead to much higher food prices.
Last year, 24% of the U.S. corn crop was used to produce ethanol. 10 In America, ethanol production is subsidized which pushes up the price of corn. At the same time, taxes are levied on foreign sugar ethanol to support domestic sugar growers. About 20% of the U.S. soy oil production is used for biodiesel.
However, this biofuel production is a drop in the bucket of gasoline demand. Even if all the grains harvested in America were converted to fuel, only 16% of the automobile needs would be met. Peasants in the developing nations may be forced off productive cropland so that governments may produce more profitable and nonedible biofuels for export to the energy thirsty West.
The world can't increase supply of food or biofuels easily. Global arable land has reached a plateau at 3.7 million acres. Prime farmland is still being purchased for housing developments decreasing acreage for planting. In suburbs across the United States, former farms are now growing condos and big box stores. Without more acreage under cultivation, "we go to a religion-based energy policy -- pray for good weather," remarked Monte Shaw, head of the Iowa Renewable Fuels Association. 11
All this excess demand has caused rapid increases in food prices, putting the poor in grave danger. Wheat, barley, and oats have more than doubled over the past year. The poorest individuals already spend 80% of their income on food, and they can't afford the price hike. There are nearly 900 million hungry people in the world with the population growing every year.
Jacques Diouf, head of the UN's Food and Agriculture Organisation warned of serious social unrest if food prices continue to skyrocket. In Argentina, farmers are currently on strike to protest the high export taxes on their soybean crop, while Italians protested the high price of pasta with a one day boycott last year. 12 In 2007, there was a huge protest in Mexico City as the price of corn jumped by more than 400%. 13 Food riots have also occurred in West Bengal, Burkina Faso, Yemen and Uzbekistan.
Nations feel pressure to control prices that are spiraling out of control, and keep their citizens from going hungry. Russia, Argentina and the Ukraine decided to restrict wheat exports to ease the pressure on the price of bread. Kazakhstan has a four month moratorium on exports. 14 Vietnam, Cambodia and Egypt have reduced their foreign rice sales, while India and Bangladesh banned exports of most types of rice. The devastating cyclone that recently hit Myanmar has only increased anxiety about the supply of staple foods.
Some experts hope that technology will be able to solve the food crisis. In the past the “green revolution” was a great success, enabling the world to feed more people on less land using hybrid crops, irrigation, fertilizer, and pesticides. In fact, this was really a petroleum revolution. Cheap energy allowed farmers to fuel tractors and other machinery that raised productivity. Globalization and low transport costs allowed farmers to find markets at the opposite end of the globe, allowing consumers to eat apples in May and strawberries in December. Fertilizers made from natural gas allowed food to grow in depleted, even sterile soil. Commercial pesticides are also produced from petrochemicals. 15 Oil is imbedded in every calorie we eat, and the surging price of petroleum will only accelerate food price inflation.
Many countries like to blame speculators for the price rise in foodstuffs. India has taken the extreme step of stopping trading in some commodities like potatoes and soy oil for at least four months, even though last year's ban in rice and wheat futures had no discernable effect. 16 These actions distract from the real cause of inflation, the debasement of their currency.
If you look at the price of a staple food like corn, the price was severely depressed. U.S. farmers were getting no more in nominal terms for their crop in 2005 than they did in 1994. Meanwhile, official CPI had increased by a third.
The bull market in foodstuffs is driven by real fundamentals. Prices are high because stockpiles are depleted, and forecasts for production in many commodities are poor. Prime farmland has been turned into subdivisions and big box stores. Pollinators are dying while the global population explodes. Food is being burned in gas tanks instead of eaten, eroding the margin of safety. The manufacture of biofuels also uses up part of the rapidly dwindling petroleum reserves.
Food is not a luxury and demand will not be significantly depressed by rising prices or punishing “speculators.” These higher food costs are not going away. In fact, I expect that food will take an ever increasing bite out of your budget, as governments competitively debase their currencies. News of shortages only exacerbate the problem as individual consumers stock up. While the Federal Reserve disparages this “inflationary psychology,” I think buying some extra non-perishable food is a wise idea.
KLCI shares end +0.9% at 1287.15 in moderate volume but off intraday high of 1289.31 as profit-taking narrows gains in plantations, oil & gas stocks and select blue chips. Decliners outpaced gainers at 397 to 310 while market lacked depth with almost 50% of available shares untraded. The benchmark drifted in 1280 to 1290 range with intermittent profit-taking capping gains. The lack of positive domestic catalysts capped the benchmark's rise, retail players largely adopted sell into strength strategy. KLCI tipped to trade in tight 1280-1290 range Thursday with interest possibly focused on similar theme plays such as oil & gas and plantation stocks.
KLCI ends +0.1% at 1276.09 in moderate volume supported by gains in government-led companies, select blue chips and high dividend yield stocks. Market breadth turned positive in late trade with gainers outpacing decliners 342 to 311. Local funds provided buying interest while retail players selectively accumulated plantations, trading & services and small-cap stocks. Benchmark index tipped to extend consolidation within 1265-1285 range tomorrow. Local funds helped to shore-up some selling pressure but intermittent profit-taking dragged the benchmark of its intraday high. The market is likely to consolidate within a tight range but oil & gas stocks, dividend plays and plantation stocks may post marginal gains.
May 1, 2008 -- THE Federal Reserve is almost at a dead end.
To understand what's happening with the US economy you have to look at two things that happened yesterday - the Fed's decision to cut interest rates by only a little bit and the economy's itty bitty growth in the first quarter. First, the Fed.
Because inflation is out of control, the Central Bank's leader Ben Bernanke - who inherited one helluva mess from his predecessor - is being forced to ratchet down the amount of monetary stimulus he should be providing to the economy.
So a quarter-point rate cut is all that the Fed could spare, what with the dollar declining to record lows on a regular basis, gasoline and other commodities being held captive by speculators and foreign governments bemoaning the lack of self control on the part of Americans.
In another eight weeks the Fed will meet again and it will do NOTHING.
The second thing that happened yesterday was the first-quarter estimate of the nation's gross domestic product - which is nothing more than the financial statement of the country.
I'll apologize here in advance because the rest of this column is going to be numbers - important numbers, to be sure, but mind-numbing digits for which the reader will need a load of caffeine.
Starbucks for everyone! Borrow money from the Fed if you can't afford it.
The Commerce Department estimated yesterday that the nation's economy grew at an annual rate of just 0.6 percent in the first three months of 2008. That was the same growth reported for the fourth quarter of last year.
There are several things that have to be kept in mind.
First, the 0.6 percent is simply an estimate that isn't based on many actual, hard numbers. In fact, it's such a squishy guess that the margin of error is an enormous plus or minus 3 percent.
And before you break out the champagne (or Propel if you're driving) the "annualized" growth of 0.6 percent means the economy in the first quarter expanded at a slothful 0.15 percent. (Divide the 0.6 percent by the four quarters of the year to come up with that figure.)
In other words, if the people of Peoria, Ill. had all suddenly gone on the wagon and stopped buying liquor for a day the economy probably would have contracted.
Worse, it was government spending and inventory building by corporations that created most of the first-quarter gain.
Neither of those is something you want to rely on for a recovery. But the situation was even more dismal than that.
In coming up with the 0.6 percent annual growth figure, the Commerce Department decided that inflation was just 2.6 percent.
That's lower than Wall Street had been expecting and a tad higher than in the fourth quarter.
Still, the 2.6 percent figure for price increases used for the GDP calculation was nowhere near the 4 percent inflation calculated by other government agencies.
If inflation, for instance, had been 4 percent then the nation's economy would have contracted by an 0.8 percent annualized rate.
And not only that, if inflation was being honestly reported the economy would have contracted in the fourth quarter of 2007 as well.
In other words, there would have been two straight quarterly declines in GDP and the debate over whether or not we are in a recession would be settled.
Not that there's any doubt about the recession - housing prices keep dropping, inventory of unsold homes continues to go up, the job situation is weak and family budgets are being drained by the higher cost of everything.
I really hate being a downer, but someone has to honestly assess this data.
In truth, the last two quarters could have had a larger economic contraction than I just explained.
John Williams, who runs ShadowStats.com, says another set of government numbers - the national income figures from the GDP report - shows that Wash ington could be overstating the health of the economy.
As weak as the GDP was, the national income figures hint that Americans might have actually had $139 billion less in come to spend in the fourth quarter than the government believed.
There is some hopeful economic news, which I offer to those of you who might be feeling suicidal about now.
Interest rate cuts could still have a positive impact on the economy. And the tax rebates might help - at least temporarily.
But right now the Fed is dead-ended. It will either have to stay right where it is, or back up. Neither one is a good option.
Chalongphob Sussangkarn knows a thing or two about volatile currency markets. Until February, he was the finance minister of Thailand, which over the last decade saw its currency plunge too low and surge too high. Yesterday, I bumped into Chalongphob at a Madrid hotel as he grappled anew with the vagaries of exchange rates -- this time as a consumer exchanging dollars.
``I should just get rid of these dollars before they fall even more,'' joked the president of the Thailand Development Research Institute, as we exchanged U.S. currency for euros.
Thailand's currency, the baht, has risen 16 percent against the dollar over the past 18 months, part of an Asia-wide trend. Hastening the dollar's slide is a Federal Reserve set on avoiding recession at all costs. On April 30, the Fed lowered its benchmark interest rate by a quarter point to 2 percent, the seventh cut since September.
While the Fed hinted it may be ready to pause, the amount of monetary stimulus in the pipeline is a growing threat to Asia. One immediate side effect is rising currencies, which poses challenges for Asia's export-dependent economies.
The bigger issue is that easy money is fueling global inflation.
``With inflation running very high in most countries, the ability of central banks to reduce interest rates to offset the impact of the U.S. slowdown is going to be constrained,'' says Subir Gokarn, Tokyo-based Asia-Pacific chief economist at Standard & Poor's.
Fed Up
Fed Chairman Ben Bernanke acts in the U.S.'s interest. Yet the Fed's cuts are adding ever more liquidity to global markets. While bad weather and the increased use of biofuels explain part of the run-up in food prices, rising oil costs are as a much a consequence of liquidity as demand.
Asia is on the front lines of the phenomenon, especially with investors like Mark Mobius betting on more rate cuts. Mobius, who oversees $47 billion in emerging-market equities at Templeton Asset Management Ltd., says Bernanke may cut rates to 1 percent as U.S. housing foreclosures worsen.
Central bankers in Asia could be excused for feeling a bit, well, fed up by sliding U.S. rates. Their concern is over ``hot money'' flows of the kind that wreaked havoc in Asia a decade ago. Investors who had poured in amid rapid growth fled even faster at the first sign of trouble. Large amounts of the liquidity created by the Fed are heading Asia's way to tap its rapid economic growth.
Too Much Money
The meltdown at Bear Stearns Cos. in March raised the stakes as the Fed stepped up its campaign of rate cuts. Asia was already awash in money thanks to the Bank of Japan. Even though Japan has been growing steadily since 2002, the BOJ's key lending rate is still a mere 0.5 percent.
Excess liquidity is dovetailing with Asia's record buildup of currency reserves. China, Japan, Taiwan, South Korea and India hold a combined $3.5 trillion of reserves. There's increasing evidence that Asia's currency holdings are seeping into the money supply, adding to inflationary pressures.
In a perfect world, economists would be predicting aggressive rate increases in Asia. Yet with more that two-thirds of the world's poor living in the region, central banks may be reluctant to slam on the brakes.
The Real Risk
Officials in Indonesia, the Philippines and Thailand may raise interest rates as higher oil and commodity prices feed into inflation, say economists such as Beng Ong at JPMorgan Chase & Co. in Singapore. It's unclear, though, how aggressive central banks will be even as crude oil, rice, corn, wheat and soybean prices reach unprecedented levels.
Timidity might be a mistake. Inflation is the real risk to Asia's long-term prosperity, not slowing U.S. growth. China's inflation has quickened to the fastest pace in 11 years, and consumer prices rises in Sri Lanka and Vietnam have exceeded 20 percent. Singapore's consumer price gains have reached levels not seen since 1982.
There can be little doubt inflation concerns will dominate the Asian Development Bank's annual meeting, which begins this weekend in Madrid. The ADB predicts inflation in Asia will reach a decade-high this year even as economic growth cools.
Paying the Price
``It's hard to exaggerate how much of a problem rising inflation is to Asia's short-term stability and longer-term prosperity,'' ADB Chief Economist Ifzal Ali told me in Tokyo last month. ``It really is THE issue.''
Some Asian policy makers sympathize with Bernanke's plight. As Philippine central bank Deputy Governor Diwa Guinigundo sees it, the Fed is pursuing a ``first-things-first approach.'' The trouble is, low rates are treating the symptoms of the U.S.'s problems, not the underlying sickness.
What ails the U.S. is too much consumption, too much debt, too little household savings and a financial system that's more vulnerable than once thought. Fixing these imbalances will require strong action from lawmakers and economic officials -- not more liquidity.
Japan squandered a decade believing low rates would restore its economy to greatness. The longer it takes the U.S. to heed those lessons, the more Asia may pay the price.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
I'm a hardcore Technical Analysis Trader in the Malaysian stock-broking industry. This is a personal weblog, reflecting my personal views and not the views of anyone or any organization. THIS BLOG ALSO DEDICATED TO MY SUBSCRIBERS WHO HAVE ENCOURAGED ME AND TO THE THOUGHTFUL TRADERS WHO DESIRE TO FOLLOW PRACTICAL RULES FOR TRADING INSTEAD OF GUESSWORK AND GAMBLING METHODS.
