"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Monday, October 6, 2014

USDA Crop Condition and Progress Data

It's Monday afternoon and that means its time for the latest batch of data from the USDA. Coming at the end of a day in which we witnessed some very strange and inexplicable ( from my fundamental point of view) big selloff in the Dollar and melt up in the commodity sector, perhaps this bit of fundamental data will take some of the zaniness out of the markets tomorrow, at least as far as the grains go.

Let me give you an example of some of the madness today:

1.) Coffee up 6.92%
2.) Sugar up 3.28%
3.) Copper up 1.25%
4.) Soybeans up 3.29%
5.) Corn up 2.86%
6.) Silver  up 3.03%
7.) Hogs up 3.06%

You get the point - whatever fundamental shift in the supply/demand equation that occurred since Friday and this morning was something I apparently did not read.

This is what happens when the hedge fund computers go beserk on a macro trade. Dollar - Down; BUY everything not nailed down.

Let me make a point here once more and get it out of the way. You will not hear a single peep out of the gold perma-bull crowd ( or the silver perma-bull crowd for that matter) about "manipulation" on a day like this. Why is that? Because their metal gods went higher, that is why. You see - that is normal in their minds. What is not normal is when the metal gods fall lower.

What they conveniently overlook however is that it is the SAME hedge fund computers that are doing the buying today that are also doing the selling on the big down days.

The point to take home is not "manipulation" but rather the new nature of our markets. They are run by machines - pure and simple - and these machines know nothing of skill or finesse when it comes to entering or exiting positions. They merely fire off their orders, whether it be to sell or as in today's case, to buy, and they do it automatically, ferociously and blindly based on how they are programmed.

For today, it sure looks as if the trade involving buying the Dollar and selling commodities was picked for some ripe apples and gave a whole lot of shorts a bloody nose.

Once the machines were able to bring prices up high enough to catch the buy stops, especially those of the general public and the small trader, the result was a huge buying frenzy from panicky shorts and the usual bottom pickers.

Whether or not this is reverses tomorrow remains to be seen but I suspect this is going to end up being a short-lived event. Unless I managed to miss something which I have not yet managed to discover.

That brings me to the world of the grains which experienced one of those mini melt-ups across their sector today. The catalyst was supposedly the rainy weather which will work to hinder the harvest but in my mind, that is just an excuse that some unfortunate wire service reporter had to come up with from his sources to explain the wild price action. The truth is more technical in nature for once the buying refused to let up as the Dollar continued weakening, it is just a matter of time before the hunters found the stops that they were looking for. It is no secret that the public is overwhelming short and bearish on the grains and those were the ones whose upside buy stops the bigger traders ( especially the pit locals) were gunning for.

Welcome to the world of commodity trading!

On the USDA reports however -

Let's start first with corn:

Amazingly, the condition of the crop managed to yet improve once more. I did not think that was possible this time of the year. What I am referring to is the percentage rated Good/Excellent. The number is unchanged from last week's reading of 74% but how it got there is interesting. The percent rated EXCELLENT actually gained 1% to 24% taking that from the Good category which dropped to 50% from 51%.

I do wonder however how much traders are going to pay attention to these ratings at this point in the season as they are more interested in harvest progress and crop maturity as they keep one eye on the weather forecasts.

Along that line, the corn crop made some very good progess over the past week. 77% of the crop is now rated mature compared to 60% last week and the 5-year average of 81%.

Harvest is at 17% compared to 12% last week and the 5-year average of 32%. This is what has the trade a bit in a tizzy and why the corn market is still carrying some weather premium. Iowa is only 5% harvested compared to its 5-year average of 26%. Minnesota is at 5% complete versus its 5-year average of 20%. It's essentially the northern tier of the country that has caught some focus.

I have maintained that the reason for the lag in crop maturity this year ( in some areas of the belt ) is actually on account of the ideal late-season growing conditions that we experienced. That kept the plant from shutting down as it normally does and instead kept it green and lush and growing. In my view, this will lead to very large kernel size and heavier ear weights which will boost the overall size of the final crop. It is going to take some time however to prove out my thinking on this.

For now, the trade is just looking at the harvest percentages at face value and is not giving much, if any, consideration to the incredible yields that are being reported from areas that have been harvested.

Essentially the same holds for the soybeans - the percentage of the crop rated Good/Excellent actually increased from last week's reading of 72% to 73%. The boost came from another 1% of the crop moving over to the Excellent category which is now at 20% compared to last week's reading of 19%.

On the maturity front - this last week was a big one for speeding the crop along. Iowa in particular showed a nice jump to 85% dropping leaves from last week's 65% reading. That compares to the 5-year average of 86% so as you can see, the maturity issue for beans is becoming less of an issue there. Illinois is at 83% compared to last week's 68% and the 5-year average of 82% so it has now moved ahead for the first time this year. Same goes for Indiana ( I am noting the big three "I's"); it jumped to 88% dropping leaves from 76% last week and its 5-year average of 87% - again this is ahead.

The overall national standings at 83% of the crop dropping leaves compared to 69% last week and the 5-year average of 84%.

Harvest is at 20% compared to 10% last week and the 5-year average of 35%. Again, just like the corn, this is what has some traders in a tizzy right now.

Iowa in particular is slow on the harvest as they are at 9% compared to the 5-year average of 42%. Illinois however is a bit better with harvest there at 18% complete versus the 5-year average of 32%. INdiana is at 18% also with its 5-year average at 30%.

All in all, this report is pretty much what the trade was expecting with perhaps corn coming in the lower end of expectations for harvest pace and beans on the upper end. Weather forecasts will thus be closely watched to determine when farmers can get into their fields.

Based on what I can see from the current forecasts, there will be regional windows open this week across the belt with more rain expected in the latter part. Harvest will continue to lag the 5-year average as a result but as of now, there is nothing to indicate that we will experience any quality issues.

My biggest concern is not quality nor is the slow pace of harvest but rather where we are going to put all of this grain once it is harvested. I am very serious about that.

Macro Trade Reverses from Friday

This set of comments will be brief as I am extremely busy today.

Friday's jobs numbers sent the Dollar soaring and the commodity complex reeling. Today, that trade is being reversed with the Dollar sinking sharply lower and the entirety of the commodity complex is now soaring.

If you ask me the reason for this you will get a simple answer: "Beats the hell out me". I have no idea what is going or why but that does not matter as the funds are covering shorts or buying like mad in the commodity complex for today.

In looking over the Board, the only commodities I see in the red today are natural gas and feeder cattle. Everything else if going mad.

What we get tomorrow is anyone's guess but larger scale traders are more than likely looking to sell rallies.

Tuesdays are famously called "Turnaround Tuesdays" in this business. We'll see if it lives up to its reputation tomorrow.

One big short covering squeeze day does not reverse a trend.