August 16 – A bearish cloud drifted over both the commodity and equity markets overnight, as Wall Street prepares to wrap up a week of trading. Profit taking hit the equity markets following big gains this week as recession worries diminished, while commodity traders fretted again about over supply problems amid soft demand. The above concerns were then supported by a bearish report on housing starts this morning. The VIX is trading near 16 this morning, while the dollar index pulled back to trade near 102.7. Yields on 10-year Treasuries are trading near 3.89%, while yields on 2-year Treasuries are trading near 4.05%. Crude oil prices are down by roughly 2% this morning, while the grain and oilseed markets are all lower as well – posting fresh multi-year lows in some cases.
Housing starts fell to an annualized rate of 1.238 million units in July, down from a downwardly revised 1.329 million the previous month, and down from analyst expectations of 1.342 million units. Permits for new home construction fell to an annualized rate of 1.396 million, down from an upwardly revised 1.454 million the previous month, and down from analyst expectations of 1.430 million. It boils primarily down to two factors in the housing market. First, is consumer confidence strong enough to make a long-term commitment to financing new home construction? Recent data suggests that consumer confidence improved somewhat last month, while remaining somewhat cautious. We saw a surge in mortgage refinancing on a drop in mortgage rates, but only a slight increase in new mortgage applications late in the month. The other question is, why should I as someone considering making such a commitment do so now, if all the headlines I’m hearing from Wall Street suggest that home mortgage rates will be much lower six months to a year from now? Why not wait? The demand is still there amid a shortage of housing, but the consumer has been convinced that better times for making such a commitment will come to those who wait.
Part of China’s economic stimulus plan has been its massive trade-in campaign that subsidizes the purchase of new durable goods, such as appliances etc. That would create jobs building the products, while also creating new jobs to recycle the old products that get traded in. Many brands utilized the government trade-in campaign to offer the 10 – 20% discounts to create demand. However, newly released data suggests that the campaign introduced in April has had a limited impact on the economy thus far as consumer sentiment remains quite low. Alibaba Group’s earnings report indicated that its profits fell 29% in the second quarter of this year to 24.3 billion yuan, which was well below the 30.4 billion yuan expected by analysts. The other e-commerce giant in China – JD – saw its net revenues rise by just 1.2% due to the necessity of cutting prices to create demand. However, China’s central bank chief hinted at a press conference today of possible drastic measures to jumpstart the economy in the near future.
The commodity bears are expected to be well fed next week, as the Pro Farmer Midwest Crop Tour feeds a daily dose of data from corn and soybean fields across the Midwest to the markets. Dozens of cars filled with tour participants will spread out across the Midwest Monday morning, with one group starting in the Ohio and the other in South Dakota, and the groups will meet up Thursday night in southern Minnesota. They will be posting pictures and reports on social media throughout the week, while also feeding information back to traders. Pay less attention to actual numbers themselves, although there is value to comparing numbers with those of past years on the same routes. But I also get much value from the subjective commentary on field conditions, such as soil moisture levels, presence of disease, overall health of the crops, etc. The western group should see the worst conditions on Day #1.
There’s one critical piece of information though that the tour will not provide. Tour participants will calculate corn yields utilizing a formula that assumes 90,000 kernels per bushel. The month of August has been very mild for the Midwest thus far. Mild temperatures tend to slow the maturation process, leading to greater kernel length. That difference can be difficult to visually see. Can an untrained observer tell if a corn kernel is 5 – 10% longer? Most cannot. But a larger kernel reduces the number of kernels in a bushel – resulting in more bushels per acre. That number can fall to 85,000, 80,000, or even 75,000. The impact on yield then can be significant, resulting in tour participants under-stating the final yield that will eventually be revealed by the combine when harvested. We won’t know the actual impact until the corn is harvested, but the current weather pattern suggests that corn yields will have more upside risk than downside risk relative to the reported numbers next week. The tour group does not estimate soybean yields, but rather soybean pod counts. That reflects the difficulty of yield calculations in a standing soybean crop in mid-August, but there is value in comparing pod counts versus previous years. Keep in mind that the crop is still adding pods in many cases, as well as seed size. Big crops get bigger as long as the weather remains favorable.
