Don't Blame The Short-Sellers
Guess what? Up until 2003, all US investment banks were allowed only 12 to 1 leverage. Then in 2004, the U.S. Securities and Exchange Commission gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Guess which ones they were then? Bear, Lehman, Merrill, Morgan and Goldman. Three men down and two walking wounded.
So whilst they point the finger at short-sellers, they really want to be pointing it at themselves, and the management of the Five Horsemen of the Apocalypse who leveraged themselves up to 40-1 with bad investments.
Crude Posts Largest Three-Day Gain Since 1998
Crude oil rose by more than six dollars a barrel Friday, capping the biggest three-day rally in almost a decade, on speculation government measures to resolve the bank crisis will spur the economy and bolster demand.
Crude for October delivery rose $6.67 to settle at $104.55 a barrel on the New York Mercantile Exchange. Earlier, futures touched $105.25 a barrel, the highest since Sept. 9.
There was a technical element to trade Friday as October crude oil contract expires Sept. 22, and some traders were buying oil to cover shorts.
Still, prices are down 29 percent from a record $147.27 a barrel reached on July 11.
Next week, traders are expecting the Energy Dept to reveal low U.S. inventories in the wake of hurricanes Ike and Gustav, which should also add support.
Not Everyone Is A Fan Of Proposed US Bailout
Criticism is starting to mount over the US government's proposed bailout of the ailing financial markets before its even happened.
Critics say that government actions, such as those that prevented the failures of Fannie Mae, Freddie Mac and American International Group Inc., can't postpone the inevitable worsening of housing and financial markets. They say the bailouts by the Fed and Treasury also encourage future reckless risk-taking by investors.
They have a point.
The Fed or Treasury first stepped in to rescue investment bank Bear Stearns Cos. in March, followed by the takeover of mortgage companies Fannie Mae and Freddie Mac in September. This week the Fed put up $85 billion to keep insurance giant AIG afloat, and Congress is mulling tens of billions of dollars in loans to Detroit automakers.
Critics are asking: "how far down the road do they go, and where do they stop?"
The ranking Republican on the Senate Banking Committee, Richard Shelby of Alabama, said he wants the Fed to let markets work rather than opt for bailouts, even if the consequences are "brutal."
Peter Boockvar, an equity strategist at Miller Tabak & Co in New York, agrees. Bailing out Bear Stearns and creating lending facilities for investment banks, he said, "gave financial companies a false sense of security that they had time to de-lever at their leisure."
Unless the central bank stops interfering with market discipline, Wall Street's problems will continue, he said. "The market can get to the right price on its own," Boockvar said. "Anything that prevents it from happening is just prolonging the inevitable."
Vera To Jack It In?
VeraSun Energy Corp. said late Thursday that it has retained Morgan Stanley to help it "evaluate strategic alternatives."
VeraSun shares plunged to $1.33, an all-time low, and lost nearly three-quarters of their value Wednesday after the company began a public offering of 20 million shares and said it expects to post a third-quarter loss between $63 million and $103 million. The stock had traded as high as $17.75 in December.
The company late Thursday abandoned the stock offering, which comes as little surprise considering the sharp share price drop.
VeraSun, founded in 2001, went public in June 2006 amid perfect market conditions. Corn was cheap, gas was expensive and refiners were clamoring for more ethanol to use as a cleaner-burning alternative to the additive MTBE.
It appears that the company locked in much of its corn requirements around $7/bushel, leaving it unable to take advantage of the commodity's recent fall to $5-5.50/bushel, and facing crippling margin calls.
Poet or ADM may be potentail buyers, but any aquisition of VeraSun would give them close to a quarter of the US ethanol market, triggering competition concerns.
Ethanol producers have so far successfully lobbied to keep the current federal mandates and subsidies for renewable fuels. However, agriculture secretary Ed Schafer said last week that the industry needed to become "self sustaining" and wean itself from subsidies.
A removal of the 46c a gallon tax break on ethanol could spell the end of the industry overnight.
CBOT Closing Comments
CORN
Corn futures rallied sharply on Friday, as the financial community became positively euphoric about the bailout "cocktail" unleashed by the government on Thursday and that halted the liquidation selling pressure from the hedge and index funds. The market also saw a little support from pessimistic reports of downed corn in the ECB caused by Hurricane Ike’s remnants. For the week prices were still down 21 cents, however. On Friday, Dec was up 15 cents at $5.42 1/4.
SOYBEANS
Soybeans futures were down on the week, but higher on Friday. Soy oil had a strong rally, limit up at times, thanks to rising prices for diesel fuel and its potential use as biodiesel. The better stock market performance was also seen as possibly signifying improved consumer demand later down the road. Beans, meal and oil were all lower for the week, due to demand concerns and also due to a deferral of frost threats to most of the growing area. November beans were up 27 1/2 cents on Friday at $11.43 1/2.
WHEAT
Wheat futures closed mostly 20 to 25 cents higher on Friday, erasing the damage done on Thursday and continuing a pattern of alternating up and down days while the market chews through competing visions of its future. World supplies are ample at the moment, and the US wasn’t sucessful in selling to the Egyptians. However, USDA’s weekly Export Sales report on Thursday was stronger than the trade had expected and Friday price action was higher once the larger threat of index fund selling abated. CHI Dec was up 25 1/4 at $7.18. KC was up 22 1/4 at $7.56 1/2 and MPLS Dec was up 21 cents at $7.85.
EU Wheat Prices Bounce On Outside Markets
EU wheat futures closed modestly higher Friday in a technical bounce from recent steep losses as outside markets rose, buoyed by the news that the US Treasury and Federal Reserve were working on a plan to rescue the ailing financial markets.
Crude for October delivery rose more than $6/barrel to close at $104.55/barrel.
Paris November milling wheat closed up EUR2.00 at EUR170.00/tonne and London November feed wheat ended up GBP0.75 at GBP106.50/tonne.
Trading was thin and volume low, with the cash market particularly slow as operators waited for commodities to stabilise following this week's extreme volatility.
Nevertheless, traders stressed that fundamentals remained bearish, with some predicting the expected rally in Chicago will be short-lived.
Strategie Grains this week raised its estimate for the 2008 EU soft wheat crop by 3.7 million tonnes to 137.6 million.
Meanwhile Toepfer raised its 2008 EU soft wheat production forecast to 139.4 million tonnes, up 4.2 million tonnes from its August forecast of 135.2 million tons, and up 25% on the year.
eCBOT Close/Early Call
eCBOT Futures posted reasonable gains Friday, but fell some way short of erasing Thursday night's steep losses.
Prices were buoyed by the intervention of the US Treasury and Federal Reserve in the financial markets in an attempt to shore up confidence following the collapse of Lehman Bros, the taleover of Merrill Lynch and bailout of AIG early in the week.
Corn closed around 8-10c firmer, with soybeans and wheat around 10-12c higher.
Crude is also benefitting from the news and is steady at $100.30/barrel.
Earliest calls for this afternoon's CBOT session are: Corn futures are expected to open 5 to 8 higher; soybeans 9 to 12 higher; wheat 8 to 12 higher.
Hungary 2008 Grain Crop Up 42%
Hungary's 2008 grain crop is now seen at 7.93mmt, up 43% on last year according to the country's Central Statistics Office.
The final wheat crop is now seen at 5.65mmt, 42% higher than last season's 4mmt, despite planted acreage being up only 1% on 2007.
Barley production was 1.48mmt, 45% higher than 2007.
