Near-Term Technical Picture Appears Bullish but Fundamentals Point to Downside Potential

  | by: John Hampson May 29, 2011

The near term technical picture for stocks appears bullish (click to enlarge images):


There is also upward pressure into and around the new moon of June 1st:


Plus there are three current contrarian bullish indicator readings: AAII sentiment, Advance / Declines and Investors Intelligence market correction expectations:



Source: Bespoke Investment

Source: Sentimentrader
A little caution is required though as there is a window of forecasted geomagnetism 27th to 30th May, which would result in negative pressure.
It is important to note that we haven't reached oversold readings or seen sellling capitulation signals that typically mark a new bullish upleg for the market, and I believe this fits with a continued period of market consolidation and range ahead.
Leading indicators have recently ticked lower but cannot yet be said to be pointing to a significant slowdown, though they may go on to do so. Coincident and retrospective economic data of late has surprised to the downside, suggesting that oil prices and Japan's troubles have had more of an impact than forecast. This is reflected in the Citgroup Economic Surprise Index:

Source: Short Side Of Long
Given recent disappointment in both leading and coincident data, together with imminent removal of US QE, it should not be surprising that stocks have not been able to break higher. At the same time, it is noteworthy that there has been little momentum in selling and despite being only 50 points off the S&P500 high, certain indicators (such as the three above from Bespoke and Sentimentrader) have reset fully. I believe such a combination means it is most likely that we will see an extended period of consolidation ahead but without deep selling, and that would be relatively normal here:


A period of consolidation and range is often difficult to trade. My strategy is to look for short term opportunities on the long side. I choose 'buy the dips' over 'sell the rips' because of my reasoning that the cyclical bull market will continue (see May 12th analysis: 11 reasons why the cyclical stocks bull will continue).
However, I am aware that the Puetz crash window of June 9-18, the removal of QE at the end of June (if the Fed gives no signal of a QE3) and the potential continued decline in leading indicators all have the potential to accelerate a move to the downside, so I will be keeping leverage low.
I would welcome a wash-out move to the downside, as it will likely present the last golden opportunity to load up on the long side for the final part of this cyclical stocks bull. But patience may be required, as we work through the current economic soft patch, before the market is ready to truly push on again. Danske Bank expect the second half of the year to see a natural upturn in growth again, as Japan recovers and as oil prices have eased.
If that positive feedback looping doesn't materialise as the trigger for the final cyclical bull upleg, then it isn't unreasonable to expect some form of QE3 may be administered to do the job, as the Fed has been clear in its support of asset prices.
Disclosure: I am long stock indices

Top 5 Graphs of the Week: Japan, U.S., Monetary Policy in EM

  | by: Econ Grapher May 30, 2011 | about: DIA, JYN, QQQ, SMK, TUR, UDN, UUP

This week we look at some of the latest economic data coming out of Japan; noting a rare occurrence of positive inflation, and observing a further trade deficit in April. Then we look at some U.S. data, first checking in on the U.S. consumer sentiment index, and then a proxy for investor sentiment - long term mutual fund flows. Finally, the latest monetary policy interest rate decisions are covered-off.

1. Japan Inflation
As noted Japan recorded a rare positive inflation figure in April as consumer prices rose 0.3% on an annual basis, having sat at 0% for most of this year, while April 2010 saw deflation of -1.2%. A certain degree of the positive inflation figure can be attributed to temporary shortages brought about by the earthquake, but inflation had been in a mild upward trajectory anyway. Like the rest of the world, Japan had seen some impact from rising commodity prices (as can be seen in the upward trend in imports on the next chart). Meanwhile, aggregate demand has probably only had a marginal impact on inflation as the Japanese economy has been in its second recession after a brief period of growth.
Click to enlarge

2. Japan International Trade
Japan reported exports of JPY 5.2 trillion in the month of April, down -13% year on year and -12% month on month. Imports were JPY 5.6 trillion, up 9% from April last year and down -1% compared to March. The April figures add another month of trade deficit as rising import costs meet relatively stable exports. The April figures did see some impact from the earthquake, as supply chain disruptions weighed on exports. Overall, Japan is yet to see either its exports or imports reach pre-crisis levels, which shows the weakness of the Japanese economy, but also the slow rate of growth and economic recovery in its trading partners (not to mention a rising share of global exports for China and other emerging markets).
Click to enlarge

3. U.S. Consumer Sentiment
The Reuters/University of Michigan U.S. consumer sentiment survey showed some improvement in the final reading for May, with the index at 74.3 vs consensus 72.4, and the April reading of 69.8. Future expectations performed well, at 69.5 vs 61.6 in April, meanwhile current conditions was basically flat at 81.9 vs 82.5 in the previous month. So while the current conditions result was not inspiring, the trajectory of the future expectations part was promising, indeed if the trajectory continues it will be positive for the medium term outlook, which is consistent with other indicators and conditions.
Click to enlarge

4. U.S. Mutual Fund Flows
U.S. mutual fund flows remained in positive territory in total during April, with the majority of net inflows going to bond mutual funds, showing a possible pick up in momentum after flows into bond funds dried up at the start of the year. Domestic equity flows continued to languish, while foreign equity fund flows remained positive as investors looked elsewhere for better macro-economic fundamentals. It will pay to watch this chart through the year, especially as key events unfold such as the ending of quantitative easing, and a potential short-term correction in U.S. equities. A final thought on the chart below is the large amount of funds that have flown into bond mutual funds, this aspect will be interesting for equities when / if bond returns begin to suffer as the monetary policy stance turns later this year.
Click to enlarge

5. Monetary Policy Review
The past week in monetary policy saw six emerging market central banks announce interest rate decisions. Those that altered interest rate levels included: Israel +25bps to 3.25%, and Nigeria +50bps to 8.00%, while those that held interest rates unchanged were: Pakistan 14.00%, Turkey 6.25%, Georgia 8.00%, and Mexico 4.50%. So it was very much a continuation of the theme where emerging markets begin to take more caution in balancing the growth vs inflation risks, but also as the inflation impulse begins to taper off as policy measures and stable commodity prices begin to take effect. But the rate hikes in Israel and Nigeria show that inflation pressures are not completely gone in emerging markets, indeed Vietnam is still a hotspot of inflation.
Click to enlarge

Summary

So we saw the emergence of inflation in Japan, after a long period of deflation, however short term factors were likely the main cause of this. Meanwhile, Japan's international trade results showed stagnant growth and short term impact from the earthquake. In the U.S., consumer sentiment improved again heading in a promising trajectory. Also in the U.S., long term mutual fund flows pointed to some interesting trends, and some key areas to watch in the stock and bond markets through the rest of the year. Finally, the week in monetary policy saw two emerging market economies tighten, while other emerging markets opted for caution in the growth risk vs inflation risk balancing act.

Barcelona 3 ManUre 1

http://www.3news.co.nz/VIDEO-HIGHLIGHTS-Barcelona-wins-Champions-League-Final-2011-at-Wembley/tabid/415/articleID/213073/Default.aspx

Pep Guardiola's tactics were spot on. His back 4 kept an appropriate distance between them and Valdes. They know that Hernandez and Rooney can outrun Mascherano and Pique. So they did not press up very far.

The midfield of Basquets, Xavi and Iniesta were rock solid. Iniesta and Xavi roamed the furthest afield. They were the first line of defence whenever Messi, Pedro or Villa lost possession. Boy were they effective. Even if ManUre got past them, Basquets sat deep, just in front of Pique and Mascherano, protecting the central defence.

There is a bigger gap between midfield and defence. But ManUre did not quite exploit the space. That's because none of their midfielders managed to break out of defensive positions. All they could muster were long passes to Hernandez and Rooney. This played right into the hands of Pep Guardiola. He knew United didn't have a speedy midfielder able to splay passes. Giggs at 37 has lost his legs. Scholes is a shadow of a player he once was. ManUre needed a Zinedine Zidane. Fergie could have let Rooney drop a bit deeper to play in that hole. Perhaps he did, which was how ManUre scored the equaliser and temporarily gave them hope.

Messi dropped deep and was a decoy for most of the game. He gave Pedro, Iniesta, Villa and Xavi space whenever he took possession, because he almost always drew 3 ManUre players to him.

The other players, especially Xavi, Iniesta and Villa were incredible as well, able to create space out of a barrage of ManUre bodies. The impecable timing of holding on to the ball long enough to draw an opponent towards you before releasing it to a team mate in space.

Pure beauty, pure poetry.

No answer to Barca genius

Sir Alex's side left chasing shadows as brilliant Barca boss Wembley showpiece

Last updated: 28th May 2011

Messi: Scorching second leaves United flummoxed

Villa: Made the game safe with gorgeous third

Rooney: Scored a brilliant leveller for United

2 of 3

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Teams

• Barcelona
• Manchester United

History repeated itself at Wembley as Manchester United were left chasing Barcelona's shadow in a European Cup final, with Pep Guardiola's side reclaiming the Champions League with a deserved 3-1 victory in the capital.

United went into half-time level after Wayne Rooney had exquisitely equalised Pedro's opener for Barcelona but after the interval had to concede to their opponent's collective and individual genius, as Lionel Messi and David Villa both etched their names on the scoresheet.
Sir Alex Ferguson's side were spirited throughout but in the end had no answer to a Barcelona team that plays a brand of football that is unparalleled in the modern game in terms of its majestic simplicity.
Before a ball had even been kicked both coaches had demonstrated possessing backbones made of iron in making unsentimental and unflinching team selections. For United top goalscorer Dimitar Berbatov was afforded not even a place on the substitutes' bench, with Michael Owen surprisingly preferred to the 21-goal Bulgarian to provide striking back-up for Rooney and Javier Hernandez.

Tough choices

In resisting the urge to start with the fit-again Darren Fletcher the Scot remained true to his promise of trading blows with Barca, when many had predicted he'd box clever and utilise his compatriot in a tight midfield five designed to hustle as far up the field as possible.
Guardiola sprung an even bigger shock when leaving out the club's heartbeat and captain Carles Puyel, with the Caveman of Catalunya left to lick his wounds on the bench as Javier Mascherano was selected alongside Gerard Pique at centre-half.
As the atmosphere simmered inside a stadium that housed both clubs' first European Cup wins, in 1968 and 1992 respectively, the inclusion of Eric Abidal in Barcelona's starting XI despite only having recently returned to playing after a battle with liver cancer provided a human element to proceedings that put into perspective Bill Shankly's infamous quip about life, death and its relation to football.
The opening sparring almost held up a mirror to the game which ensued in Rome two years' ago as United snarled out of the traps with a collective curled lip. The omnipresent Park ji-Sung was like a dog with a bone in gnarling at the legs of Xavi and Andres Iniesta, while Hernandez's infectious workrate and clever movement in the lines between Pique and Mascherano gave Barcelona plenty to ponder.

Bright start

Twice Victor Valdes was forced to race off his line after first Edwin van der Sar's huge clearance upfield and then Ryan Giggs' more subtle threaded pass threatened to get United in behind.
As if bristled by United's brio Barcelona soon awoke from their relative slumber to engine chances of their own. Trademark pockets of pretty football had United at full stretch as Rio Ferdinand had to show immaculate timing on Villa to dispossess the Spaniard with his left boot cocked to strike, before Van der Sar gathered smartly as the same player looked to shoot across him from Xavi's cute pass.
Such is the precision of Xavi's passing it looks as though he's worked them out beforehand with a protractor and so it proved as Guardiola's on-field lieutenant began to dictate from the centre of the field.
It was though from the right that he fashioned Barca's first genuine chance as his low cross saw Pedro dart in front of Vidic before pulling the ball wide, while Villa set his sights from range before arching one a yard or so wide.
With United looking punch drunk if not quite on the ropes Vidic had to pull off his finest Bobby Moore, circa '66 impersonation, with Messi in full flow on the edge of the box. Respite proved only to be momentary.
With rhythmic fluidity Barcelona forged ahead in the 27th minute of an engaging first half, which Guardiola's side very much bossed in terms of possession.
Iniesta found tormentor-in-chief Xavi in the peripheral space between defence and midfield and with United's back four uncertain whether to go to the ball or back off, Barcelona struck with the clinical precision of a Mafioso hit-man.
Pedro's darting run into the space vacated by Patrice Evra's decision to track Messi was expertly found by Xavi's slide-rule pass and after wrong footing Van der Sar with his eyes, the finish was beautiful in its simplicity.
With Messi, The Flea, dropping his shoulder at will and ghosting into dangerous areas United's players looked as though they might have to resort to using a rolled-up newspaper to stop him.
If United were to exorcise the spectre of Rome an immediate response was required. Rooney had the answer.
After dropping deep close to Barcelona's left touchline he exchanged short passes with Carrick before making inroads towards Barca's box. There was a suspicion of off-side when he stabbed the ball into the path of Hernandez but when the Mexican found his team-mate with a return pass there was nothing uncertain about Rooney's finish as he empathically wrapped his boot around the ball to send it high beyond Valdes from the penalty spot.

Screamer

Barcelona were right to be shocked such was their ascendancy at that stage but still they kept playing their football as the effervescent Messi eased past Vidic with a gorgeous nutmeg before just failing to meet Villa's return pass on the stretch.
If United were happy to hear the half-time whistle to regroup the words of their manager proved fruitless, as after the interval Barcelona set about living up to their mantle as one of the world's greatest ever club sides.
Like an express train they made United look like a more prosaic steam model in comparison, as a buccaneering Dani Alves forced Van der Sar to save with his feet after Messi's pass had carved United open again.
As if hypnotised by Barcelona's almost abstract understanding of space and how to find it, United had no answers to their incessant forward forays.
Messi's 53rd goal in the 53rd minute of the final game of a most remarkable of seasons owed little to their famed passing, but rather the Argentine's innate ability to conjure something from nothing. As United backed off Messi made a yard before unleashing a rocket of a daisy-cutter from around 20-yards that beat Van der Sar all ends up.

Messi magic

There was to be no answer this time. Instead Barcelona treated the ball expertly, caressing it around the field - teasing United's players as an alley cat would a wounded field mouse.
Just shy of the 70 minute mark Messi turned from goalscorer to architect as he laid on a stunning third for Villa. Bewitching Evra on the left flank he cut inside United's box at speed. As Nani failed to clear, Sergio Busquets was allowed to nudge into the path of Villa, whose curling finish into the top corner from the edge of the area was no less than a masterpiece.
United never let their heads drop as Rooney scooped onto the top of the net and Giggs cried penalty when striking the ball onto the hand of Villa but in truth, even Ferguson must have known this was a bridge too far, even for a Manchester United side famed for its ability to conjure miracles in the face of adversity.
Paul Scholes and Puyol were handed touching cameos but the likely last game in the Manchester United legend's career will be remembered for Barcelona's brilliance in claiming a fourth European crown. It was one they richly deserved.

Barcelona	Team Statistics	Manchester United
3	Goals	1
1	1st Half Goals	1
12	Shots on Target	1
4	Shots off Target	2
6	Blocked Shots	1
6	Corners	0
5	Fouls	16
1	Offsides	5
2	Yellow Cards	2
0	Red Cards	0
89.6	Passing Success	79.6
15	Tackles	23
73.3	Tackles Success	73.9
68.4	Possession	31.6
54.7	Territorial Advantage	45.3

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U.S. Banks Aren't as Strong as They Look

  | by: Shah Gilani May 27, 2011

U.S. banks are seeing positive trends in several measures of their health. That's the good news. Unfortunately, U.S. banks continue to struggle with some much more deeply entrenched problems. Those problems pose a major threat to banking-system health -- and they could even cause the U.S. economy to stumble.
Investors who have been heavily and successfully invested in emerging markets, commodities and precious metals have started to repatriate capital back into the U.S. market in anticipation of domestic growth. However, to really gauge whether that's the correct move to be making right now, those investors would be wise to keep an eye on U.S. banking trends.
The message here is clear: Don't be fooled by the "official" outlook for U.S. banks -- the superficial statistics and their in-depth counterparts tell two very different tales.
Good News for U.S. Banks?
It's important to understand that bank performance statistics are a compilation of the finances of all reporting U.S. banks. Most of this information comes from statistics provided by the U.S. Federal Reserve and the FDIC. But as we'll see shortly, the Top 10 U.S. banks hold more than half of the industry's assets, meaning any of the trend numbers are very likely to be skewed -- and in a big way.
The good news for banks -- particularly the "too-big-to-fail" giants -- is that they are experiencing some real improvements ... at least, by some important measures. First-quarter profits totaled $29 billion, a 67% profit over the same quarter last year and the seventh-consecutive quarter of bottom-line improvements, the FDIC said. Total net charge-offs in the first quarter of 2011 totaled $33 billion, a 37% decline that also included a hefty 39% drop in credit-card charge-offs. Non-current loans fell 4.7%. And in the area of money that's "reserved" against possible future loan losses, banks set aside a full $31 billion less in this year's first quarter than they did a year ago.
The big banks have already turned in several quarters of profit improvements - based mostly on such declines in loan-loss reserves. And now those institutions are flaunting some highly positive trends in asset quality, which they say will result in lower-loan-loss provisions in the future.
Finally, as a result of such strong capital improvements at the biggest of banks, average capital ratios reached an all-time high.
But the bigger picture isn't as bright as might be indicated by some of these good trends. And here we must understand how some of these apparently upbeat numbers and trends can fool us.
There are 7,575 banks that hold an aggregate $7.2 trillion that's insured by the FDIC. But the 10 largest U.S. banks hold more than half of the assets held by the entire banking industry. The bottom line: Those 10 banks can skew the sector averages, hiding any trends, developments or problems at the smaller institutions that make up the rest of the industry.
The FDIC blithely reported that only four banks were added to its "problem list" in the current year's quarter -- but here, too, a broader context is required. For one thing, that "problem list" -- which identifies banks that don't have enough capital to protect them against risk -- stands at 888. That means that nearly one in every nine (888 of the 7,575 FDIC-insured banks) U.S. banks is in trouble.
Those 888 banks have total assets of more than $397 billion. And even though only four banks joined that list in the fourth quarter, the grand total of 888 is the most in 18 years.
Here's the really scary part: Back in 2006, that list only had 50 banks on it. There were 26 bank failures in the first quarter of 2011. That comes after last year's total of 157, which was the highest amount since 1992. On its face, that seems to be an improving trend. But with 888 banks identified as "problems," that's a trend that could turn very quickly.
Here are two other disturbing trends -- these, too, masked by the big-bank skew:

• First, while big banks continue to report earnings improvements, thanks to the ongoing reduction in loan-loss reserves, the FDIC says that banks with less than $1 billion in assets are doing just the opposite -- and are continuing to add to their loan-loss-reserve pools.
• Second, while overall profits were higher, this was yet another bit of big-bank sleight-of-hand: The profit improvement was driven by the decline in loan-loss-reserve set-asides; bank revenue for the first quarter of this year was actually down $5.5 billion, or 3.2%, on a year-over-year basis.

While that doesn't sound like much, and it isn't terribly bad, it is only the second time in the 27 years that the FDIC has been keeping such statistics that quarterly revenue actually fell. The only other time was the fourth quarter of 2008 -- during the depth of the global credit crisis and the Great Recession.
Six of the 10 biggest banks over the period reported lower non-interest revenue, which fell 3.7% to $58.6 billion for the entire industry. Eight of the 10 largest banks reported lower net-interest income, which was down 3% to $106 billion on an industry-wide basis. And banks reported tighter margins and a 17% drop in revenue from "service" charges and "fees," which include such items as overdraft charges and late-fee charges on credit cards.
Total loan and lease balances for the quarter were down 1.7% from a year ago. Again, while that doesn't sound so bad, it is actually the fifth-largest drop in loan book balances in the FDIC's 27 years of keeping such records. Worse, loan balances have been falling for two straight years.
Beware of the Economic Fallout
It's no secret that the U.S. economy is highly consumer driven. So while many of our multinational corporations are in great shape -- thanks to strong overseas demand -- domestic growth has been sluggish, partly as a result of weak loan demand, which is being increasingly reflected in banks' metrics.
If we actually remove the nation's 10 biggest banks from our field of vision, the domestic picture based on the rest of the banking industry looks anemic, at best. I say that based on the fact that big banks are making most of their net new loans to one or both of two places -- to overseas borrowers or to foreign banks. And that means the contribution they've made to the domestic economy has been much less than is needed to foster real growth.
Banks are facing increased U.S. regulatory oversight (which is a good thing in the long run) at the same time they're facing heightened international standards based on pending Basel III requirements that will have to be met. But it's not the addition of regulatory constraints that banks are suffering from (most of them under the Dodd-Frank Wall Street Reform and Consumer Protection Act have yet to be written and the Basel III requirements are to be phased in over several years yet to come), it's sluggish loan demand partly resulting from their own more-stringent standards.
Going forward, investors must take special care to watch and see if banks are growing -- and, if they are, how are they getting that growth?
If domestic loan demand improves, that's a good sign that banks are getting back on track. If, however, loan books expand as a result of lowered standards, well, look out below. (The one particular scenario to beware of here goes like this: The market for the already-well-served, and highly creditworthy borrowers becomes even more saturated due to intense competition. Banks, in search of more growth, see no option but to chase after "subprime" borrowers who are once again viewed as viable customers. It happened once before.)
When it comes to U.S. banks, revenue, interest margins, fee revenue, loan-loss reserves, charge-offs and customer profiles are all important metrics to track, and to scrutinize, in order to gauge the health of the banking industry -- and the outlook for U.S. GDP growth.
But don't let yourself be fooled by the more superficial figures. After all, with U.S. banks, we've now demonstrated just what to look for.

Pop An Antacid Before Viewing These Economic Charts

  | by: Lou Basenese May 27, 2011 | about: GLD, SLV

It’s Friday again, which means it’s time for me to select a handful of graphics that put the most important economic and investment news into an easy-to-understand chart format for you.
This week… China’s effect on the global gold market, the U.S. housing market’s ongoing woes and a downright scary-looking chart regarding one of Europe’s biggest nations.
So let’s get to it…
China: The Land of Golden Speculation
About a month ago, I revealed a disturbing truth about silver’s rally.
I noted that that the primary driver behind the precious metal’s meteoric rise wasn’t economic supply and demand. Instead, it was rampant speculation, which made a correction inevitable.
Sure enough, that’s what happened – and we could be in store for a repeat performance… but this time, in the gold market.
For the first time ever, Chinese demand for gold outpaced the combined demand for gold in United States, France, Germany, Italy, Switzerland, the United Kingdom and other European countries.
The major driving force behind that surge? You guessed it… investment demand.
(Click charts to expand)

Over the past year alone, investment demand for gold in China more than doubled, according to the latest quarterly report from the World Gold Council.
If that doesn’t smack of rampant speculation, I don’t know what qualifies. And just like any other speculative bubble, when China’s appetite for gold investments wanes, get ready for a bumpy landing!
The State of the Housing Union: Depressing
In the light of some recent seemingly positive U.S. real estate statistics, I went to great lengths this week to put the news in perspective and show you that the housing market isn’t even close to being on the mend. (If you missed them, you can read Part 1 here and Part 2 here.)
But just in case the 12 statistics I highlighted didn’t convince you, this week’s update on new home sales from the Commerce Department should do the trick.

As you can see, we’re on pace for a sixth year of declines – and in jeopardy of hitting a record low. As for homebuilders – and homebuilding stocks – it’s safe to say they’re in store for another tough year..
Why Italy’s Debt Downgrade Scared the Crap Out of the Markets
Last weekend, Standard & Poor’s downgraded Italy’s credit rating from “stable” to “negative.” The news immediately put the global markets on edge and initiated a three-day sell off.
So what’s the big deal? I mean, we’ve already endured sovereign debt crises and downgrades in Greece, Portugal and Ireland. Adding another European country to the list couldn’t be that bad, right?
Wrong!
As this chart shows, exposure to Italy’s debt by publicly traded banks dwarfs the other nations, meaning that a default would send shockwaves through a banking sector still on the mend.

Now you know why investors didn’t just say, “Ah, forgetaboutit!”

These 12 Real Estate Stats Scream One Thing

These 12 Real Estate Stats Scream One Thing (Part 1)

  | by: Lou Basenese May 27, 2011

The latest report from the National Association of Realtors reveals that residential real estate prices are more affordable than they’ve been in almost a decade.
The median price for existing homes fell by 5% year-over-year and now stands at just $163,700.
Score one for homebuyers.
In addition, money is cheap. Mortgage rates fell for the fourth week, with a 30-year fixed-rate loan hitting a yearly low of 4.63%, according to Freddie Mac (FMCC.OB).
Score two for homebuyers.
These two factors alone – depressed prices and cheap money – normally lead to rampant speculation.
But we’re not living in normal times. And if you’re tempted to jump back into the housing market now, you need to get your head checked first.
The truth is, the real estate market is overrun with terrible fundamentals. And I’ve compiled 12 stats to prove it. I’ll share the first six with you today and the next six tomorrow.
And just so you don’t kill the messenger, I’ll also provide some ideas on how you can profit from – or at the very least, reduce the pain of – further price declines.
So let’s get to it…
Hope isn’t Enough to Eliminate Excess Supplies
On the supply side of the equation, there’s so much housing inventory that no silver bullet solution exists.
The only answer to absorb it? The passage of time – lots of time. Consider…
Supply Glut #1: Existing Homes
At the end of April, there were 3.87 million previously owned homes for sale. That represents a 9.2-month supply at the current sales pace, up from an 8.3-month supply in March.
Supply Glut #2: Foreclosures
There are currently 2.25 million homes in the foreclosure process. That’s equal to an extra 5.3-month supply, based on the current sales rate.
Supply Glut #3: Shadow Inventory
There are currently 1.8 million homes in shadow inventory, according to CoreLogic. Shadow inventory includes homes that are seriously delinquent (i.e. at least 90 days past due), homes that are in some stage of the foreclosure process and homes that banks have already repossessed, but haven’t put back on the market for sale. That’s equal to an extra 4.3-month supply, based on the current sales rate.
Add it all up and we’re looking at about 18.8 months worth of supply that needs to be worked off.
And that, folks, is where basic economics applies.
That much excess supply is bound to lead to lower prices. All the government subsidies, home affordability programs, or cheap money in the world can’t overcome that fundamental principle.
So how about the demand side?
Even If We Give Homes Away, Demand Won’t Perk Up
Sadly, demand conditions aren’t too rosy, either. Consider:
Demand Destroyer #1: Underemployed and Underpaid
With unemployment resting at 9% and wage growth stagnant (up just 0.1% in March), millions of consumers can’t afford to buy a new home. Not to mention the fact that tighter credit restrictions are also severely limiting the pool of potential buyers.
Demand Destroyer #2. Consumers Not in the Mood
Even if consumers could afford to buy a home, they’re not in the buying mood. The latest National Housing Survey from Fannie Mae (FNMA.OB) reveals that 36% of Americans believe buying a home is risky nowadays. By comparison, only 17% thought so back in December 2003.
As Anthony Sanders, a professor of finance and real estate at George Mason University, says, “Risk is always a bad thing for the housing market.” Simply put, consumers buy when they’re confident, not afraid. And they’re clearly afraid now.
Demand Destroyer #3: Prisoners in Our Own Homes
Even if Americans wanted to buy a new home – and could afford it – they can’t. Not without coughing up a serious amount of cash at closing. Why? Because an estimated 11.1 million homeowners are sitting on negative equity. And close to five million are sitting on more than 25% negative equity, according to CoreLogic.
It’s All About the Fundamentals
The fundamentals don’t add up to an imminent rebound in real estate prices. On the contrary, in fact. Excess supply and historically weak demand point to nothing but lower prices ahead.
I know that’s a tough pill to swallow, given that real estate prices are already off 29.5% from the peak in June of 2006. But it’s true.
In my next post, I’ll provide six more stats to convince you once and for all. And then I’ll share some ideas on how you can actually fight back against the declines. So stay tuned.

These 12 Real Estate Stats Scream One Thing (Part 2)

  | by: Lou Basenese May 27, 2011 | about: DHI, ITB, PHM, TOL

In yesterday’s column , I sounded the residential real estate alarm. Specifically, I said that the market is set for further price declines, despite two pieces of good news recently. I based my prediction on six supply and demand statistics – and today, I’ll provide six more figures that really drive the point home.
However, this isn’t Wall Street Depression Daily. And as promised, I’ll share some ideas on how you can profit from – or at the very least, reduce the pain of – additional price deterioration.
So let’s get to it…
Insiders Are Voting With Their Feet
In the face of excess supply and weak demand in the housing market, the only thing that would convince me of a potential rebound would be if housing industry insiders were optimistic.
But that’s not happening.
Statistic #1 – Insider Sentiment
Take PulteGroup (NYSE: PHM), for example. The company has slashed almost 75% of its employees since the housing market peaked.
And yet, the company recently announced another consolidation plan… but this time, in the executive ranks. It doesn’t bode well for a rebound when the nation’s second-largest homebuilder is still firing, not hiring.
And while PulteGroup’s decidedly bearish actions are speaking louder than its words, other homebuilders are vocally bearish, too.
One of them is Toll Brothers Inc. (NYSE: TOL), the largest U.S. luxury homebuilder. Its CEO, Douglas Yearley Jr., says spring sales have been “disappointing” and that “people are still scared.”
And of the housing market, Bill Wheat, Chief Financial Officer of DR Horton (NYSE: DHI), says, “We feel it could still be a struggle in 2012.”
Additionally, no insiders at the three homebuilders mentioned are backing up the truck to buy their own company’s shares at depressed prices. So clearly, they don’t have any faith in a rebound yet.
And that’s the feeling among analysts, economists and industry experts, too.
Can You Say “Consensus?”
Believe me, as a longtime contrarian investor, I tried to find an exception.
But I couldn’t dig up one single expert who’s predicting a rebound in real estate prices in 2011. Instead, they’re all decidedly negative. Consider:
Statistic #2 – More Price Declines This Year
Jason Kopcak of Cantor Fitzgerald says prices could fall another 10% to 15% this year.
Statistic #3 – No Housing Bottom Until 2012
CoreLogic expects prices to drop another 5% before bottoming out in 2012.
Yale University economist, Robert Shiller (of the S&P/Case-Shiller Home Price Indexes), weighs in, too, stating that although it’s unlikely, “a 30-year decline in home prices [adjusted for inflation] is certainly a possibility.”
I’m all for being a contrarian. But in this case, banking on a real estate rebound isn’t contrarian… it’s stupid.
And it appears that investors who were previously betting on a rebound are finally waking up to this reality, too.
Premature Speculation is Waning
If we take a closer look at the homebuying that is actually occurring, one trend immediately stands out: Investors’ interest in residential real estate is wavering.
Statistic #4 – All-Cash Transactions
All-cash transactions dropped to 31% in April, down from a record level of 35% in March. And because investors account for the majority of all-cash purchases, the drop suggests that they’re waking up to the poor fundamentals and waiting for more attractive entry points.
Statistic #5 – Homebuying Activity
If we take purchase activity overall, the trend is pointing down there, too. In April 2010, for example, investors only accounted for 15% of purchase activity. In March 2011, that number had risen to 22%. But last month, the figured dipped to 20%.
Simply put, investors jumped the gun. They thought that prices a year ago represented an attractive entry point and starting buying. But now they’re tapping the brakes. Coincidence? I think not.
Don’t Fight the Trend
So what if you doubt every statistic I’ve provided both here and in yesterday’s column?
Well, there’s one set of numbers that you can’t refute. And that’s the actual trend in residential real estate prices. After all, momentum is a powerful market force – and in this case, it’s headed in the wrong direction.
Statistic #6 – A Miserable First Quarter
Zillow.com reports that home prices fell another 3% during the first quarter – the biggest quarterly decline since 2008.
As Stan Humphries, Zillow’s Chief Economist says, “Home value declines are currently equal to those we experienced during the darkest days of the housing recession.”
He adds, “With accelerating declines during the first quarter, it is unreasonable to expect home values to return to stability by the end of 2011.”
Bottom line: Real estate prices are still declining… and headed lower still. So don’t fight it… just accept it. And then do something about it.
Here are a few ideas to consider…
How to Hedge Against – Or Profit From – Falling House Prices
The overwhelmingly weak fundamentals make a compelling case for selling short or buying puts on the iShares Dow Jones U.S. Home Construction Index Fund (NYSE: ITB).
As David Resler, Chief Economist at Nomura Securities International, says, “We’re still in the doldrums in the housing market.” Clearly that’s terrible news for the bottom lines and share prices of the 28 homebuilders and homebuilding-related companies included in the ETF.
Other more advanced options include trading futures contracts on CME Group’s (Nasdaq: CME) exchange. Contracts on home prices in 10 metropolitan areas are available. You can find out more information about these products on CME’s website or by visiting market maker, Jim Dolan’s, website: HomePriceFutures.com.
And if you’re actively looking to buy real estate, two firms – Home Value Protection and Property Value Insurance – plan to start offering products that allow you to purchase an insurance policy against a drop in home prices at closing. It will cost you about 1.5% of the sale price and they should be available within the next year, if not sooner.
Whatever you do, though, don’t rush to buy residential real estate. As I’ve hopefully demonstrated by now, prices are headed one way from here – down. So even though local markets differ, chances are you’ll get an even better deal the longer you wait.

Commodity ETF Floas Report: GLD Inflows Increase; SLV Liquidation Continues

Money is flowing back to Agriculture and gold ETFs. I've got a new idea. Perhaps ETF volume is as important as stocks' volume. It shows the type of ETF people are investing.

 

Commodity ETF Flows Report: GLD Inflows Increase; SLV Liquidation Continues

by: Hard Assets Investor May 27, 2011 | about: CHIM, CTNN, DBS, FOIL, GDX, GDXJ, GLD, IAU, JJN, KWT, MOO, MXI, SIVR, SLV, TAN, USV, XLE, XME

 

By Sumit Roy
Finally — for the first time in four weeks — commodity-related exchange-traded funds saw net inflows, as investors tiptoed their way back into the space. Sector performance varied significantly, however, with three of the five sectors actually seeing outflows. But thanks to strong investor interest in precious metals — which received over $1 billion of fresh capital — total commodity-related ETP inflows registered at $684 million.
The only other sector to see a net inflow on the week was agriculture, with $187 million. The energy, broad market (multicommodity) and industrial metals sectors saw outflows of $293 million, $204 million and $32 million, respectively.
Almost the entirety of this week’s precious metals outperformance was thanks to a single fund — the SPDR Gold Trust (GLD), which received inflows of $1.1 billion, reversing a good chunk of the $2.4 billion in outflows it saw over the past three weeks.
Similarly, agriculture’s outperformance was due in large part to the Market Vectors Agribusiness ETF (MOO), with $227 in inflows. Investor interest in this fund has been stellar recently, as it has shown up on the top five creations list for three weeks straight, racking up $750 million in inflows in that same period.
Three gold funds — the iShares Gold Trust (IAU), Market Vectors Gold Miners ETF (GDX) and Market Vectors Junior Gold Miners ETF (GDXJ) round out the top five list for the week, with inflows of $77 million, $67 million and $57 million, respectively.
Looking at the other end of the spectrum, at the worst-performing products of the week, we see the iShares Silver Trust (SLV) leading for a second week in a row, with $241 million in redemptions. That comes on the heels of last week’s $429 million of outflows. As we’ve discussed thoroughly in our Precious Metals Monitor, investor interest in gold has been much more resilient than that in silver in recent weeks.
Right behind SLV was the Energy Select SPDR ETF (XLE). This fund has appeared on the top creations and redemptions list frequently over the last few months, as traders use it for exposure to the very volatile energy sector.
Moving on, the SPDR S&P Metals and Mining ETF (XME), iShares S&P Global Energy Sector Index Fund (NYSE Arca: IXC) and iShares S&P Global Materials Index Fund (MXI) took the Nos. 3, 4 and 5 spots on the redemptions list last week, with outflows of $181 million, $55 million and $25 million, respectively.
Shifting gears to price performance for the week, silver funds dominated as the metal rebounded off recent lows. But it was the iPath Pure Beta Cotton ETN (CTNN) that led, with a hefty 11.54 percent return. On the surface, CTNN’s performance is puzzling given the fact that cotton prices were essentially flat during the week, but considering the ETN has very little in the way of assets and is fairly illiquid, such oddball moves aren’t all that unusual.
Other than CTNN, all the other top five price performers were silver-related. The UBS E-TRACS Silver ETN (USV), PowerShares DB Silver Fund (DBS), ETFS Physical Silver (SIVR) and iShares Silver Trust (SLV) saw gains of 9.75 percent, 7.99 percent, 7.88 percent and 7.86 percent, respectively.
Finally, the bottom price performers last week consisted of solar and industrial metals-related products. The Market Vectors Solar Energy ETF (KWT) and Guggenheim Solar ETF (TAN) led with declines of 9.84 percent and 8.83 percent, respectively. The iPath Pure Beta Aluminum ETN (FOIL), Global X China Materials ETF (CHIM) and iPath Dow Jones-UBS Nickel Subindex Total Return ETN (JJN) followed, with respective losses of 7.83 percent, 6.46 percent and 4.93 percent.

Fund Flows Data: May 20 – 25, 2011

Commodity ETF Weekly Flows By Asset Class

	Net Flows ($, mm)	AUM ($, mm)	% of AUM
Agriculture	186,66	12.369,54	1,51%
Broad Market	-203,75	16.083,41	-1,27%
Energy	-292,96	35.938,73	-0,82%
Industrial Metals	-32,37	3.561,15	-0,91%
Precious Metals	1.026,26	94.912,08	1,08%
Total:	683,84	162.864,93	0,42%

Top 5 Commodity ETF Creations

Ticker	Name	Net Flows ($,mm)	AUM ($, mm)	AUM % Change
GLD	SPDR Gold	1.099,78	59.587,25	1,88%
MOO	Market Vectors Agribusiness ETF	227,18	4.610,38	5,18%
IAU	iShares Gold Trust	77,10	6.721,43	1,16%
GDX	Market Vectors Gold Miners ETF	67,14	6.695,09	1,01%
GDXJ	Market Vectors Junior Gold Miners ETF	57,21	2.095,68	2,81%

Top 5 Commodity ETF Redemptions

Ticker	Name	Net Flows ($,mm)	AUM ($, mm)	AUM % Change
SLV	iShares Silver	240,56	11.452,90	-2,06%
XLE	Energy Select SPDR ETF	187,10	9.044,86	-2,03%
XME	SPDR S&P Metals and Mining ETF	180,69	1.018,81	-15,06%
IXC	iShares S&P Global Energy Sector Index Fund	55,64	1.346,86	-3,97%
MXI	iShares S&P Global Materials Materials Index Fund	25,03	775,95	-3,12%

Top 5 Weekly Performers (Excluding <1,000 Shares Traded)

Ticker	Name	Weekly Performance	Weekly Volume	AUM ($, mm)
CTNN	iPath Pure Beta Cotton ETN	11,54%	5.100	6,10
USV	UBS E-TRACS CMCI Silver Total Return ETN	9,75%	3.660	9,21
DBS	PowerShares DB Silver Fund	7,99%	827.374	189,96
SIVR	ETFS Physical Silver	7,88%	2.206.208	638,19
SLV	iShares Silver Trust	7,86%	199.668.780	11.452,90

Bottom 5 Weekly Performers, Excluding <1,000 Shares Traded

Ticker	Name	Weekly Performance	Weekly Volume	AUM ($, mm)
KWT	Market Vectors Solar Energy ETF	-9,84%	518.300	30,85
TAN	Guggenheim Solar ETF	-8,83%	1.192.169	167,96
FOIL	iPath Pure Beta Aluminum ETN	-7,83%	1.600	4,21
CHIM	Global X China Materials ETF	-6,46%	36.351	5,92
JJN	iPath Dow Jones-UBS Nickel Total Return ETN	-4,93%	43.128	13,05

Top 5 Volume Surprises, Funds >$50 mm AUM

Ticker	Name	Average Volume (30 Day)	1 Week Average Volume	% of Average
UCI	UBS E-TRACS CMCI Total Return ETN	21.431	218.816	204,20%
PSAU	PowerShares Global Gold and Precious Metals Portfolio Fund	16.102	124.812	155,02%
AMJ	JPMorgan Alerian MLP ETN	1.083.897	8.350.603	154,08%
GNR	SPDR Global Natural Resources ETF	24.559	170.399	138,77%
FAN	First Trust ISE Global Wind Energy Index Fund	85.495	592.448	138,59%

Disclaimer: Data provided by IndexUniverse. All data as of 6 a.m. Eastern the date of publication. Data is believed to be accurate; however, transient market data is often subject to subsequent revision and correction by the exchanges.

In Equity Markets - 'It's the Earnings, Stupid'

  | by: Wade Slome May 27, 2011 | about: DIA, QQQ, SPY

Political strategist James Carville famously stated, “It’s the economy stupid,” during the 1992 presidential campaign. Despite a historic record approval rating of 90 by President George H.W. Bush after the 1991 Gulf War victory, Bush Sr. still managed to lose the election to President Bill Clinton because of a weak economy. President Barack Obama would serve himself well to pay attention to history if he wants to enter the “two-termer” club. Pundits are placing their bets on Obama due to his large campaign war chest, a post-Osama bin Laden extinguishment approval bump, and a cloudy Republican candidate weather forecast. If however, the unemployment rate remains elevated and the current administration ignores the spending/debt crisis, then the President’s re-election hopes may just come crashing down.
Price Follows Earnings
The similarly vital relationship between the economy and politics applies to the relationship of earnings and the equity markets too. Instead of the key phrase, “It’s the economy stupid,” in the stock market, “It’s all about the earnings stupid” is the crucial guideline. The balance sheet may play a role as well, but at the end of the day, the longer-term trend in stock prices eventually follows earnings and cash flows (i.e., investors will pay a higher price for a growing stream of earnings and a lower price for a declining or stagnant stream of earnings). Ultimately, even value investors pay more attention to earnings in the cases where losses are deteriorating or hemorrhaging (e.g. a Blockbuster or Enron). Another main factor in stock price valuations is interest rates. Investors will pay more for a given stream of earnings in a low interest rate environment relative to a high interest rate environment. Investors lived through this in the early 1980s when stocks traded at puny 7-8x P/E ratios due to double-digit inflation and a Federal Funds rate that peaked near 20%.
(Click chart to expand)

Source: HaysAdvisory.com – S&P 500 earnings growth keeps chugging along despite worries.

Bears Come Out of Hibernation
Today, earnings portray a different picture relative to the early eighties. Not only are S&P 500 (SPY) operating earnings growing at a healthy estimated rate of +17% in 2011, but the 10-year Treasury note is also trading at a near-record low yield of 3.06%. In spite of these massively positive earnings and cash flow dynamics occurring over the last few years, the recent -3% pullback in the S&P 500 index from a month ago has awoken some hibernating bears from their caves. Certainly a slowing or pause in the overall economic indicators has something to do with the newfound somber mood (i.e., meager Q1 real GDP growth of +1.8% and rising unemployment claims). Contributing to the bears’ grumpy moods is the economic debt hangover we are recovering from. However, a large portion of the fundamental economic expansion experienced by corporate America has not been fueled by the overwhelming debt still being burned off throughout the financial sector and eventually our federal and state governments. Companies have become leaner and meaner – not only paying down debt, but also increasing dividends, buying back stock, and doing more acquisitions. The corporate debt-free muscle is further evidenced by the $100 billion in cash held by the likes of IBM, Microsoft Corp. (MSFT), and Google Inc. (GOOG) – and still growing.
At a 13.5x P/E multiple of 2011 earnings, perhaps the stock market is pricing in an earnings slowdown? But as of last week, about 70% of the S&P 500 companies reporting Q1 earnings have exceeded expectations. If this trend continues, perhaps we will see James Carville on CNBC rightfully shouting the maxim, “It’s the earnings, stupid!”

Are the Banks Short Rare Earth Stocks?

| by: Jeb Handwerger May 27, 2011 | about: FXI, GS, LYSCF.PK, MCP, REMX

By Jeb Handwerger
The front page headline in The Wall Street Journal a couple of weeks ago read, “Goldman Sachs (GS) warns of surplus with rare earths (REMX), rare earths seen growing less rare.” If there was ever a case of journalistic malfeasance or in the least clumsy misinformation, this article had to be it.
To begin with the analyst may have been wrong. In my opinion the headline should have read, “Rare Earths Seen Growing Rarer-Possible Mass Buying Explosion Straight Ahead.”
It is well known that Goldman Sachs hires only the most adept of highly paid analysts so when Goldman speaks, Wall Street listens. Goldman’s opinions on commodities are carefully followed so when the story begins about a surplus of rare earths, investors' ears are apt to perk up.
The article states that Goldman’s opinion, “matches the outlook of many other market participants who believe the current boom is overdone...we envisage some price softness in the 2013-2015 period.” Goldman’s analyst Malcolm Southwood adds, “The rare earth price boom is nearing its peak. The supply deficit will peak this year before the market slips into surplus 2013 rising into 2015.”
I beg to differ. Goldman bases its analysis mainly on one company - Lynas Corporation (LYSCF.PK) - which happens to be an early selection for my readers in the rare earth sector. Statistically this skews the rare earth universe in that one company is cited as representative of the entire field.
Southwood omits many important considerations such as differentiating between heavy and light rare earths and dumping everything into the Lynas basket. No consideration whatsoever is given to the difficulty of extracting rare earths from its ore.
Goldman’s analyst fails to see that Lynas is facing opposition from environmentalists as they attempt to build a separation plant in Malaysia.
Currently, there is no other major separation facility of heavy rare earths outside of China. This consideration alone may put a premium on the end products, which we know are used in many high tech areas and which have been labeled as critical by the U.S. Government. Please review the exhaustive study done by the Department of Energy, which contradicts Goldman’s analysis by clicking here.
In fact the Chinese, who command the rare earth space may themselves be a net importer and the supplies for their own needs are growing scarcer. Investors forget quickly, not long ago, China strove to take control of Lynas’s assets, but was countermanded by the Australian Government. Do not be surprised to see China intensifying its search for rare earth deposits (FXI) globally.
Goldman’s writer did not do his homework. To buttress his argument he includes several words about major deposits such as Greenland Minerals, which he claims is more than twice the size of Lynas’s Mt. Weld and Molycorp’s (MCP) Mountain Pass put together. Alas, it is located on “an isolated mountainside just south of The Arctic Circle.” Far from suitable infrastructure such as suitable highways that might bring ore to markets at reasonable cost.
Moreover, the rare earth mining stocks have risen much less than the price of the rare earth oxides themselves. This consideration may foreshadow the eventual breakout from a long sideways technical base. The upside breakouts of our rare earth selections are apt to be impressive.
The Goldman article errs in citing Lynas and Molycorp as the main actors on this stage---a gross misrepresentation. Indeed in a few years global requirements will rise that will need many companies the size of Lynas and Molycorp.
U.S. Legislators are thinking about taking the case before the World Trade Organization to free the West from Chinese domination of rare earths. The Pentagon has observed that the shortage of rare earths means a slowdown in the manufacturing of strategic weapon systems crucial to U.S. military operations.
The Goldman report showed a surplus in light rare earths, not in the critical heavy rare earths used in the permanent magnets placed into hybrid engines and wind turbines, such as dysprosium, terbium and europium. Not all rare earth deposits are created equal and the majors nearest to production do not have these critical elements.
Experienced investors have always maintained an ingrained suspicion of the large brokerage institutions. We have only to look at the recent judgments rendered by the court system against once trusted financial institutions. One of the first actions taken by these giants upon receiving assistance from The Fed was to use the funds to award themselves lavish Christmas bonuses.
No truer advice can be given to the independent investor than to say Caveat Emptor when it comes to accepting stories, which may be intentionally misleading from major banks.
The scenario even becomes more interesting when the large short interests held in rare earths by these brokerage houses becomes apparent. Their probity and impartiality becomes somewhat tarnished as impartial arbiters supposedly working on behalf of the independent investor.
In conclusion, the rare earth marathon may be ready to take off.

CF Industries: Time to Take Some Profits

I decided to buy an agricultural stock so I ran through my financial modelling filter and wala, CF Industries appear to fulfil most of my criteria. Monsanto and Archer Daniels came close too. But CF Industries was the cheapest of them all. After holding them for 4 months, I finally took some handsome profit but retained half of my holdings.

 

CF Industries: Time to Take Some Profits

by: Chris Damas May 27, 2011 | about: AGU, CF

It has been a great one-week run for the stock of fertilizer producer CF Industries Holdings (CF). The company is trading at $155.91, up almost $6 after hitting a high of $156.34, and smashing the 2011 high of $153.83 set on February 10. CF closed at $139.06 last Friday, so it’s up 12.1% in five days.

It could go higher, but I think the risk is there for a pullback until mid-next week, when we get a better fix on the weather going into early June. Our target price for CF is $186 by harvest time in October.

[Click all to enlarge]

We continue to like the dominant retail agriculture vendor in the corn belt, Agrium (AGU), and think it is undervalued after underperforming CF over the past couple of months. Agrium is somewhat more difficult to analyse than CF, as the company has international operations in South America, Australia, Europe and Egypt. Our 2011 price target remains $100.

But for now, we are out of CF and AGU for the long Memorial Day weekend, taking profits this morning.

Here is the current action on North American fertilizer stocks.

• AGU at $86.04 up $1.47
• CF at $155.91 up $5.72
• Mosaic (MOS) at $70.49 up $1.34
• Potash (POT) up $56.36 up $1.18

Volumes are low due to the impending Memorial Day holiday and an early close on the bond market.

A lot is riding on Midwest farmers’ ability to get corn seed into the ground before a key date: June 5. That's the final planting date for full insurance coverage in key corn-producing states that are lagging the planting pace due to incessant wet weather. These include Indiana, Michigan and Ohio.

It’s also the date for corn farmers to determine if they want to opt for “prevented planting” on their crop insurance contracts. This option would afford lower payments per acre, but also remove the need to buy fertilizer.

Corn farmers also have the option of shifting to faster-growing corn seed hybrids to allow them to plant later but avoid the risk of early fall frost killing the plant, or leaving them with a high moisture crop that requires drying.

Agrium benefits no matter what crop the farmer puts in the ground -- part of its appeal -- as it sells seed and crop protection (chemicals) as well as nutrients and advanced, slow-release urea, amongst other products.

CF stock is trading off the Dec. 11 new crop corn futures, which hit a high of $6.8475/bushel yesterday and is currently 6.78 ¼, up 2 cents.

But sometimes I think it’s irrational to do so, given the corn price is going higher because of the threat of less being planted, and therefore less fertilizer could possibly be required. Remember, the later-season alternative to corn is usually soybeans, and beans can fix nitrogen naturally, requiring no chemical nitrogen fertilizer.

The forecast for Ohio and Indiana, two states with significant wetness problems impeding corn planting, is sunny, but not until next week. Currently, a storm system is over Iowa (fully planted), but this threatens to shower the Eastern Corn Belt over the weekend. So Ohio and Indiana may not show much real progress. Remember, more than a sunny day may be needed to dry out the fields sufficiently to allow farmers to get their equipment into the fields. Getting stuck in the mud, and having the soil compacted, are real risks.

The USDA crop progress report showing planting data as of Sunday May 29 will not be out until Tuesday at 4pm. The data is collected on Monday mornings through a vast network of agricultural extension agents on a county by county basis. This week, the data will be reported a day late, but it will still be for the Sunday. Four days is a long time to find out whether the corn crop has been planted sufficiently to warrant the latest price rise in CF, AGU and other corn-belt dependent equities.

In the meantime, anything can happen over a long weekend – the Greek credit crisis goes nuclear, Gaddafi gets killed, or Yemen blows up even more. Any of these events could create a run on the dollar and knock down fertilizer stocks.

Here’s a map of the level of wetness in the North, and dryness in the South in the US as of May 21.

The states of Indiana, Ohio and North Dakota -- the main corn-producing states suffering from wet weather-delayed planting -- totaled 11.4 million acres or 13% of corn planted in 2010. Indiana was already half planted as of last Sunday, but North Dakota is muddy and probably stuck at 49% with only 7% emerged, compared to the 33% average for the last five years. It has been cold in the northern states as well as wet.

Ohio is the key battleground state for incremental corn planting. Last Sunday, Ohio was only 11% planted versus 80% on average for the third week of May. According to CF CEO Steve Wilson, Ohio farmers are planting “furiously.” If he is right, then the planting season should come through okay, and CF will sell a lot of nitrogen on those acres. However, the nitrogen sales might come in the form of UAN applied with irrigation in the third quarter, as farmers have no time to inject Anhydrous Ammonia in Q2, which is a lucrative product for CF.

Farmers are riding out the wet weather, hoping not to have to execute their prevented planting options come Sunday, June 5. Unfortunately, we won’t find out how many opted not to plant corn until the June 6 USDA report. That’s a risk I am not willing to bet on right now.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CF, AGU over the next 72 hours.