Tuesday, May 10, 2011

The Inflation Train is Back on Track, Citi Shares Rise the Hard way, and the Carcass of Housing and Sovereign Debt issues

5/10/2011 Portland, Oregon – Pop in your mints…
A head fake.  That is the only way we can describe the action in the commodity markets last week.  Commodity markets differ from equity, bond, and money markets in that commodity markets are where real stuff changes hands, even if the owners never actually take delivery. 
When one buys a bond or equity, they own the vague or explicit promise of an income stream at some future date.  These streams generally come in the form of currency, which must pass through the money markets to get to their wallet.  From the time the bond or equity is purchased until the income hits their wallet, this income undergoes a hazing ritual in the form of taxes and regulatory fees which would cause any fraternity house to be banned from the college campus.  This hazing ritual reduces the income stream to a mere trickle.
It should come as no surprise, then, that speculation in stocks and bonds is much more profitable than any buy and hold strategy, especially when the FED is supplying free money at the casino!  Equities are easy to manipulate which makes them the preference of modern day money changers.
Take Citibank (C) for example, their share price was languishing around $4.50 per share (which is still way too much for their carcass of a balance sheet).  Most institutional investors (read those who invest workers' 401Ks), wouldn't touch it with a 10 foot pole, simply because the stock trades below $10 (which says something about the brain dead fund managers and their models but that is fodder for another Mint).  What to do?
Voila!  On Monday, Citibank opened with a share price around $44.  This was accomplished with a little mathematical operation called a "reverse split."  You see, Citibank, on a whim, made 10 of their shares suddenly equal to one share.  Problem solved!  Citi promptly fell more than 2%.
AIG, another carcass, pulled the same type of head fake in July of 2009.  After rising 87%, according to the Wall Street Journal, they are down 39% year to date in 2011.  Mathematical operations do not change fundamentals.
In contrast, when you buy a contract for wheat or any other commodity you have the right to take delivery of said commodity.  In the case of wheat, all you need is some yeast and an oven and you are on your way to a good meal.
Speculation in Commodity markets is their very essence and function.  The stakes are high.  These markets can literally affect the price of producer and consumer goods all over the planet.
If the income stream doesn't pan out for an equity or bond, the seller simply points the angry buyer to the prospectus where it tells them that the equity or bond may lose value for any number of reasons. 
In commodities, if the seller can't deliver the wheat they promised, people may starve.
Last week, the commodity markets went into a nosedive.  It appeared for a moment that they anticipated demand to plummet and called for worldwide production to slow.
This was merely a head fake.  Astute readers have picked up on the fact that we are comparing the commodity markets to a basketball player.  The prices of various contracts are the "head" of the basketball player and the fundamentals of the market (supply and demand) are the player's hips.
A head fake is where a player leads one way with his or her head and then darts the other way with the ball towards the goal.  As a defender (or investor in commodities) one MUST keep their eye on the opposing player's hips.
The fundamentals in the commodities markets take many years to change.  This week the fundamentals are driving commodity prices higher and signaling a looming hyperinflation after throwing a deflationary head fake at investors last week.
Nothing has changed to stop the "inflation megatrend", as Nadeem Wayalat of the Market Oracle calls it.  See for yourself in our Key Statistics below.  Even if the FED were to change course now and raise its short term interest rate target, it would take around three years for this to trickle down to consumer prices.
But how can this be?  Isn't there slack in employment, ever increasing sovereign debt issues, and an overhang of housing inventory in the US as far as the eye can see?
Again, this deflationary propaganda is a mere head fake.  They are describing the carcass of the old economic model that governments worldwide are fighting to prop up.  This carcass will continue to decay.
Behold, a new economy is arising far from the reaches of the carcass and its handlers.  Most of the FED's money will end up not propping up the carcass but rushing into the new model. 
Skyrocketing commodity prices, which still have a long way to rise, are announcing this fact loud and clear to those who will listen.
Stay Fresh!
P.S.  Please check out our latest 72 Hour Call at www.davidmint.com
Key Indicators for Tuesday, May 10th, 2011

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.