Timothy Hughes | 602-859-4100 | thughes@pricegroup.com
9/2/11 General Comments:
When will the deflation in real estate end ? The Federal Housing Finance Agency, which oversees the mortgage giants Fannie Mae and Freddie Mac, is set to file suits against more than a dozen big banks. It will accuse them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble and will seek billions in compensation. Suits are expected to be filed soon against Bank of America, JP Morgan Chase, Goldman Sachs and Deutsche Bank, to name a few. Fannie and Freddie lost more than $30 billion as a result of those deals. Private holders of mortgage securities are already trying to force the big banks to buy back tens of billions in soured mortgage-backed bonds. Topping off all of that, 50 state attorneys general are in the final stages of negotiating a settlement for abuses by the largest mortgage servicers such as BOA, JP Morgan and Citigroup. Federal officials are pressing for a $20 billion settlement.
Corn :
Funds sold an estimated 18,000 contracts yesterday taking some profits ahead of the long weekend. The market is called 5 cents higher as I write this letter. Technical damage was limited yesterday. Economic turmoil remains the wild card for all markets and the jobs data out this morning doesn’t indicate any positive change on the near horizon. One issue to keep in mind is the momentum building to end or scale back ethanol subsidies. In June Senator Coburn ( Rep. from Oklahoma) was pushing to repeal $6 billion in ethanol subsidies and to remove the $.54 per gallon import tariff on the fuel. Sen. Grassley ( Rep. from Iowa ) now appears to support legislation to reduce the tax break over a period of years. US government budgetary pressures seem destined to force changes in the farm bill. Almost 40% of the US corn crop goes to ethanol production today.
Soybeans:
Beans made the new weekly high by a cent and then promptly backed down this week. So far today the market still looks good technically and fundamentally to me. Production estimates continue to drop and weekly sales at 21.8 million bushels beat the trade estimates.
Cattle:
Packers have been bidding lower for cattle and producers are pointing out packer’s healthy margins. Bids in Texas yesterday were $1.10 – $1.11/pound and in Kansas bids were $1.11/lb. while cattle were offered at mostly $1.14/lb. or higher. Consumer demand remains key for the fall market with high beef prices in the stores and an uncertain economy.
Treasuries & US $:
I decided to combine comments today on the treasury and dollar because of how intertwined the two are at this moment. The flight into low yielding treasuries and a much debased dollar is being driven by the fear of a fragmenting Euro Dollar and the viability of sovereign bonds in the European community. German and Finnish opposition is putting the bailout backers up against a wall. Greece begged a second 109 billion euro bailout from it’s neighbors in July. Now that plan maybe kaput because of opposition from Finland. They will go along if they get Greek national assets as collateral. There is high anti-bailout sentiment in Finland. People in Germany and Austria are also balking at more bailouts and the political pressure against such actions is huge.
German Chancellor Angela Merkel insists she won’t be forced into backing the issue of Eurobonds for bailing out the PIIGS countries. She should be worried because it could drive up Germany’s borrowing costs by 47 billion euros according to the Institution for Economic Research in Munich. Opposition is also running high in France.
My conclusion is that although I believe that US bond yields must go significantly higher within the next year they remain a safe harbor for money that has few places to rest safely. The US dollar too will benefit as it becomes more apparent how risky bonds in Europe have become.
Have a great weekend.
Questions? Ask Tim Hughes today at 602-859-4100
