Tuesday, October 23, 2012 - Take Me to the Water

Take Me to the Water

by Sinclair noe

DOW – 243 = 13,102
SPX – 20 = 1413
NAS -26 = 2990
10 YR YLD - .03 = 1.76%
OIL - .43 = 88.20
GOLD – 21.80 = 1708.70
SILV - .78 = 31,77
PLAT – 38.00 = 1576.00

I'm still trying to figure out how Iran goes through Syria to gain access to the sea; this might take a while, so let's consider some other topics while we wait.

Today, the Dow Jones ended down 1.8% and the S&P 500 was off 1.4%. Why? Why? Who can explain why? Not me. But I can tell you that the Oracles of CNBC have figured it out and they can tell you why the markets moved, at least they can tell you after the fact. Here's what they spake:

Concerns about the strength of corporate earnings, particularly multinationals like DuPont, IBM and McDonald’s; increased selling by liquidity-seeking Europeans; China’s slowing economy; Wilbur Ross decided it might be better to invest in Spanish banks next year; Spain’s GDP continues to shrink; The short-selling ban in Spain expired yesterday; Obama used the word “sequestration” during last night’s debate, reminding people of the fiscal cliff; Fed policy continues to keep assets prices at some level above their fundamentals, but the fundamentals are worsening; Each round of QE has been decreasingly effective; The technicals of the S&P 500; Romney might win the election; Apple’s roll out of the iPad mini might be underwhelming.

The iPad mini roll out; it's small; I don't know if it's underwhelming; this is what moves markets? Who knew?

The NYT chalked the decline to falling corporate revenue and profitability. The Murdoch Street Journal blames earnings, or lack thereof, but only because they “refocused the attention of investors on the fragile global economic recovery”. Bloomberg says commodity prices are falling – that's the thing.

The strength of the US recovery has become a political issue in the presidential election. The US is doing better than other advanced economies, but this is not good enough. Rather than the V-shaped recovery that is typical of most postwar recessions, growth has been slow and halting. Fiscal policy could send us over a cliff, so for now we rely on monetary policy. That mean the Fed, and the Fed has doubled down with QE to infinity and beyond. Later this week, we'll learn their next.

The Federal Reserve FOMC is meeting to determine monetary policy. Here's a hint; interest rates will remain near zero. They're going to buy mortgage backed securities, lots of them.

Given that the central bank pledged last month to keep supporting the economy via asset purchases until it sees significant improvements, the Fed's assessment of the economy is seen as key to judging just how long the latest round of quantitative easing will last. Markets will be watching to see how the Fed characterizes recent housing and unemployment data and there may be some discussion regarding what more the Fed could do if required. What tools are left in the toolbox.

The Fed said last month it would buy $40 billion in mortgage-backed securities every month until there is substantial improvement in the labor market, taking an unprecedented step to tie bond purchases to economic conditions. Unlike in its two previous bond-buying programs, the Fed said it would only purchase mortgage-backed securities, hoping in part to help a housing sector that Fed Chairman Ben Bernanke called "a missing piston" in the U.S. recovery.

By buying mortgage-linked debt, the Fed aims to press mortgage rates lower, helping the housing market and also encouraging investors in mortgage-backed securities to switch into other assets, such as corporate bonds, lowering their yields as well; and just generally propping up the bond market.

Since the September FOMC meeting, there have been signs of improvement in both the housing and labor markets.

Housing starts were up 15% in September to its fastest pace in more than four years, a sign that the housing sector may be gaining traction and supporting the wider economic recovery.

The unemployment rate fell to 7.8 percent in September, falling below 8 percent for the first time since January 2009, the lowest since President Obama took office nearly four years ago. Tomorrow, Donald Trump will come out with his surprise announcement that Obama manipulated the jobs number. Please, please, do not listen to the idiot with the rug on his head. There's positive data, but the reality of the matter is - data has been very volatile. I think the Fed knows it's not a firm recovery and that doesn't provide the Fed with a lot of comfort. So, what will the Fed do this week? Not much, they just made these bold steps in the form of QE3 to infinity and beyond, so they can sit back and say, we're seeing how things are developing. And QE3 means they can change amounts at any time, and they might, especially if Congress runs like lemmings for the fiscal cliff.

Speaking of a recovery in real estate. NYT reports across the nation’s Corn Belt, even as the worst drought in more than 50 years has destroyed what was expected to be a record corn crop and reduced yields to their lowest level in 17 years, farmland prices have continued to rise. From Nebraska to Illinois, farmers seeking more land to plant and outside investors looking for a better long-term investment than stocks and bonds continue to buy farmland, taking advantage of low interest rates.

And despite a few warnings from bankers, the farmland boom shows no signs of slowing. Almost every year since 2005, except during the start of the recession in 2008, agriculture land prices have posted double-digit gains. In the same period, the Standard & Poor’s 500-stock index has had double-digit gains in only three of those years.

An August survey by the Federal Reserve Bank of Chicago showed a 15 percent increase in farmland prices since last year across a region that covers Iowa, Illinois, Indiana, Wisconsin and Michigan. Another survey released at the same time from the Federal Reserve Bank of Kansas City showed even higher growth in the Great Plains states, where farmland prices have increased 26 percent since last year.

The two Fed surveys and sales data have raised concerns from bank regulators about a potential farmland bubble, similar to the housing frenzy that helped set off the financial crisis. A year ago, rising farmland prices prompted regulators to warn banks not to relax lending standards. In July, the Kansas City Fed held a symposium to discuss concerns about a bubble.

According to an agriculture land survey by Iowa State University, prices have risen 32 percent since 2010. Statewide, farmland prices averaged $6,700 an acre, the highest ever, even after adjusting for inflation. Four years ago, prices averaged $3,900 an acre.

Agriculture Department data show that net farm income is expected to increase to $122 billion this year from $117 billion in 2011, a 4 percent increase even with the effects of the drought. That’s the highest income level since 1973 on an inflation-adjusted basis. Farmland values are getting a boost from corn and soybean prices, which had reached records highs because of the drought.

Farmers are carrying less debt than they were 30 years ago, and low interest rates are also a factor because they make it less costly for farmers to borrow. The federal crop insurance program also plays a role in keeping farmland prices high, by covering a majority of losses in revenue or crop yields.

For farmers in the land hunt, a potential bubble is barely a concern. They still need to buy more land to expand their businesses so they can generate more income. For farmers there is safety in land. People always want to eat. They understand the market is driven by demand.  What’s a C.D. at the bank? Half a percent. What’s the stock market? Unstable. Whether land prices go up or they go down again, you still have the property. And if you have land, a sunny day, food grows where water flows.