Friday Stories Part I

Most of these can be categorized under "it doesn't matter, until it does" and "go where the real money in the world is" (it's not here)

I'm on record last year saying 2008 will be the worst auto sales year in 2 decades... even Toyota is not immune (what is surprising is people are "surprised"?) As every good multinational is doing (even Japanese types), they are pushing to diversify away from the good ole U.S. - and quickly.

• Toyota Motor said Thursday that the slowdown in the United States economy would probably cause its first annual profit drop in nine years, accelerating a shift by it and other Asian car manufacturers into emerging markets like China, Latin America and the Middle East.
• The shifting emphasis toward emerging markets is part of a broader trend in the industry, and underscores the declining stature of the United States in the global economy. “Our profit structure has become more geographically balanced, with growing contributions from resource-rich countries and emerging countries,” Toyota’s president, Katsuaki Watanabe, said in a statement.
• Last month, Honda Motor projected an 18 percent drop in net profit this fiscal year, citing similar reasons.

Speaking of the Middle East, Citibank is sending one its most senior investment bankers to Dubai - permanently. I assume for more than just taking a hand in hat to constantly ask for capital infusions. Again... who has the money? [Feb 2: $2 Trillion of Petrodollars Need a Home this Year] Invest in companies those countries need. They will slow, they are not immune to global inflation but it's all relative....

• Citigroup announced late Wednesday that it was moving one of its most senior investment bankers to the Middle East, hoping to establish a stronger foothold in the oil-rich region.
• Mr. Verme will continue to oversee Citigroup’s investment banking division alongside Raymond J. McGuire, his co-head based in New York. But he will also take a big hands-on role in the region, helping develop relationships with new clients and build Citigroup’s presence in the Middle East.
• With a surge in petrodollars and rapidly-rising infrastructure needs, the Middle East has become a crucial area for all global banks. Investors in the region spent more than $64 billion on deals abroad by last September, more than double what they spent in all of 2006.

Moving back to the United States of Subprime, sure same store sales were "better than expected" (while generally being awful) but at what cost to profits? We are only seeing the top line (sales) - we'll soon see the bottom line (profits)

• "More retailers discount more heavily than in the past," said Sherif Mityas, a partner at consultant A.T. Kearney. "What they are picking up in sales they are giving back in margins. This is not a fundamental shift that we've hit bottom and now all is rosy."
• Better-than-expected sales bolstered by increased discounts and promotions most likely will translate into a lower bottom line, analysts said. Saks said Thursday increased promotions and clearance will have "a meaningful negative impact" on its first-quarter gross margin rate.

Back to my favorite topic - the global food crisis....
At the Chicago Board of Trade, they could see the potential for the commodity crunch well over a year ago. But let's not blame "speculators" for it all (a convenient excuse which was used in the late 70s as well)

• Casey explained that the traders and other followers of agricultural commodities began to notice about a year and a half ago that several factors were coming into play that would cause a squeeze in supply of rice and other agricultural futures at a time when demand was rising in places like China and India.
• "It became apparent we were going to become incredibly tight," he said. "Then at the beginning of the year we started noticing millions of dollars of hedge fund money sloshing around" all agricultural commodities.
• David Lehman, director of commodity research and product development at the CME Group, said that hedge funds, or other speculative money, have certainly added to the fever around these commodities lately. But he added that the so-called hot money is not what is driving the market, as some have claimed in the oil and gold markets. The latest report from the Commodity Futures Traders Commission about outstanding rice contracts shows that only about 19% of them are held by non-commercial investors, or companies that might be speculating as opposed to actually hedging against price moves.
• The food crisis is likely the first of many we'll see over the years as vital commodities suddenly appear scarce: oil, food, energy, even water. It's a warning sign not just for markets and investors, but for the entire prospect of a global economy. (I've been saying this since day 1 of the blog - the globe enters a new era - the "World of Shortages" scenario - one day wars will be waged over fresh water like they are today for oil - err I mean weapons of mass destruction)

Well if we cannot blame speculators... let's blame... I don't know... those pesky consumers! How dare they eat. Let's blame everyone instead of thinking about the root causes, ok? We tagged the rice issue before it hit the mainstream [Feb 13: As Asia Food Prices Bite, Analysts Warn of Worse to Come], because we actually follow news outside the US. Until the Costco news came out, it didn't register a blip to the national media. In January [Jan 21: Food, Food, Food] I wondered if CNBC would get around to this story by this summer... but they nailed it by late spring. I also said we need to pray for perfect weather globally this year; so far... not so good.

• (Rice) Prices have eased about $4 from the record level in April of around $25 per hundred pounds on the Chicago Board of Trade, but the situation isn't likely to improve much following last week's devastating cyclone in Myanmar that left as many as 10,000 people dead and a million homeless.
• Myanmar was the seventh largest producer of paddy rice in 2005, producing an estimated 24.5 million metric tons that year, according to unofficial figures from the Food and Agricultural Organization of the United Nations.
• "Basmati rice can only grow in a couple of places and with Myanmar out of growing this year, it's devastating," he said. "Rice only grows once a year, so there are no do-overs." Before the cyclone, there was more panic than shortage, "but panic is good enough and rice prices may now have much further to go," he said. "To lose Myanmar rice is a real loss of supply, not hoarding."

Scary thought of the day - as I outlined a long while back our crop shortages will rotate from 1 product to the next... by diverting corn into our trucks, we caused a shortage in wheat, soybeans et al in 2007. Then the following season (this season) we are going to see a big surge in wheat, soybeans plantings to take advantage of the high prices there (dropping prices temporarily)... which is going to lead to a shortage of... yet again... corn (next year). It's simply going to keep rotating crop after crop after crop as the market forces respond by farmers planting whatever was the most profitable crop the year before. [Feb 12: What is Being Ruined by ... What Else ... Hedge Funds and Speculators] I wrote then

Remember as they plant more wheat, that makes a shortage somewhere else - creating higher prices, and then next year that crop with high prices will be planted, creating a shortage somewhere else (corn ?) and so on and so forth. So all this new planting of wheat is just trying to get us back to where we were before the "corn ethanol" boom, pushed farmers into corn (creating shortages in everything else). And on and on we go... rotating from 1 shortage to another.

Now what do we have coming next year?

• The USDA is expected to report corn stocks for the year ending Aug. 31, 2009, to fall to 685 million bushels, according to analysts surveyed by Thomson Reuters, down 47% from 1.283 billion bushels in 2008. (that's frightful)
  
• On Thursday, corn futures for July delivery ended up 17.25 cents, or 2.8%, to a new historic high of $6.3025 a bushel on Chicago Board of Trade. Corn futures have gained nearly 40% this year
• The report will likely be neutral for corn prices as "the grain markets have already priced in reasonably tight corn supplies," he said in a research note. (hmm... "it's all priced in" yet again... I didn't realize a 50% drop in stockpiles was 'reasonable') :) Check back in a year, I think corn will be $8+).
• Still, at 3.1 billion bushels, corn for ethanol use accounts for nearly 30% of the nation's domestic corn consumption.

As I wrote in early April [Apr 3: Corn Jumps to $6 - Start Stockpiling Soda Pop]

And so it's already happening. What people miss in the wheat vs soybean v corn vs whatever debate is, we don't have enough acres period. Yields are too low despite all of Monsanto's (MON) best efforts. Corn's high prices 2 years ago led to a massive overplanting of corn, drawing down from wheat/soybeans/others. Wheat/soybean prices surged this year, because of the ethanol corn initiative. Now as wheat/soybean prices rise spectacularly, farmers turn this year to overplant those 2 - causing a shortage in corn in the coming months/year. Do you see how this is circular? And on top of all that is an ever increasing global demand picture for all things food.

It's all starting to come together. Agflation (food inflation) is going to continue to hit... looks like corn products which are scattered in nearly every part of the US food supply are going to see a huge rise next year... and politicians will still be arguing over taxing the oil companies instead of looking in the mirror at the terror they are helping create. Slow motion train wreck. Sad.

Again as I wrote then

If I had access to a narrow corn ETF I'd of loaded up on that before the crop report came out because this was a very predictable situation. (they trade in London but not here in the US - go figure). But instead we are left with Powershares DB Agriculture Fund (DBA) which cuts both ways - the rise in corn is offset by falls in wheat/soybeans.

And on and on we go, the corn ethanol boondoggle helping to accelerate a whirlwind of global food supply havoc... as wheat and corn stockpiles continue to multi decade lows. Praying for no bad weather this year across the globe..... as we await the inevitable global food crisis.

Our "keep our fingers crossed" policy continues. Expect much global suffering to be coming in the months and quarters ahead. But hey, at least the stock market is up. Thank Ben (keep printing, I mean that only helps to drive speculation and create liquidity to chase commodities ever higher).
Long Powershares DB Agriculture Fund in fund; no personal position