Ags
The USDA releases their world supply and demand outlook today for all agricultural commodities. We generally see big price swings off this release. We’re also in the middle of planting season for most of the US. It’s interesting that my concerns of soil being too dry and not holding enough nutrients flipped to where things have been too wet/cold for farmers to get their summer crops planted. A report Wednesday showed that only 7% of corn acreage has been planted so far when farmers typically have close to 50% in the ground. It’s a concern because if you plant too late you don’t give the crops enough time to germinate before the summer heat hits. I still think the ags offer some of the best value right now and I’m somewhat hoping prices take a dive after the report is released to pick up more.
As a quick side note, how commodity prices move is the opposite of stocks. Stocks slowly grind higher but fall sharply; commodities slowly grind lower but rise sharply. This is due to the nature of supply/demand. In the case of food, demand is usually constant and slowly increases each year as population rises. The onus is on supply to keep up. When weather affects supply you get sharp spikes in price. This makes investing in commodities painfully tough as they slowly fall for months and months making you feel like you made a bad investment, but then pop creating your gains in a matter of weeks.
Capital Flows
I added (a small amount) to the US Dollar Index position this week. In addition to the capital controls being imposed, this week the EU admitted that depositor’s money will be used in the case of further bank bailouts. Whether it’s right or wrong doesn’t matter. This is exacerbating the issue of smart money flowing out of Europe. Isn’t it ironic that when the government tries to control something, they always create the opposite effect?
The question becomes, where does the money go? And the answer is the US. The Euro is creating a lot of problems in the global financial system right now. It used to be one of the major reserve currencies but that’s quickly changing. China recently cut their reserves held in Euros from 13% to about 8% and other nations are doing the same. I’m sure you’ll see it spread across some of the other major currencies, but it’s becoming apparent that the US dollar is still the best place in town. That’s why we’ve seen the dollar strengthening against nearly all other major currencies since the beginning of February. What I find interesting is that if this trend continues (as I expect), it can potentially create the greatest short squeeze of all time! Think about how many companies and countries around the world have borrowed in US dollars. They did this because they could get lower rates here in the US than at home and hopefully benefit from a falling US dollar as well – as has been the case since 2000. If the dollar continues to strengthen from the flight out of Europe, it could be quite painful for all of these borrowers. The same thing happened in Australia in the 1980’s when they tried to borrow at much lower rates in Swiss Francs. The Franc appreciated creating big losses.
With rates held artificially low, the money isn’t going into US Treasuries as much as it used to though and they hate holding cash but they’re running out of quality investment options. So we’re now seeing central banks buying….US equities! Bloomberg had a great report on this two weeks ago.
Stocks
Global US companies still remain the biggest, safest equities to own. The move we’re seeing in the stock market has gone far beyond normal market activity, being driven by yield hungry investors including everyone from retirees to underperforming hedge funds to central banks. Moves like this can be very powerful and typically continue far longer than anyone could predict. The problem is the inherent risk that builds as too many people move to the same side of the boat…
Have a great weekend and thanks for following!
-Nick