10 March 2008

More financial structural disconnect

I got this email from my ex's Dad over the weekend. Bill is President of the National Cotton Shippers Association and President of Phoenix's Handwerker-Winburne Cotton, Inc. He is truly an global expert in the commodity, and an awesome capitalist. They move the commodity physically and they move the future/derivatives financially.

I've read and re-read it a few times, trying to "get" all of the underlying micro and structural macro forces that are at play right now in this economy. It's crazy...it's not very pretty.

Wanted to share for your digestion.


ps, I'm back. After a 5 month blogging break, (the most amazing, blessed, intense spiritual, relational, beautiful personal, and God-driven 5 months of my life) I promise now to be more fully committed to my writing...even if I will just be talking to myself :)



Jared: Mauldin's (Outside the Box) article a couple of weeks ago covered these bonds and their potential for an inability to "reset". Although quality bonds like the ones noted in the description below are pretty secure, the very fact they catapulted from 3 to 6-7% illustrates the growing lack of liquidity in this market along with growing concern over the level of the $. The municipalities were simply trying to capitalize on an inverted yield curve with short term rates so low. Party's over!

The challenge will now be trying to put this economy back together. No small task and even more daunting in an election year when candidates will promise anything to get elected. In this environment.....no one wants to tell it like it is. Any unfortunately again.....most people don't want to hear it.

My take......"the tip of the iceberg". I think we're really in trouble. It will become global.

In a somewhat related issue, I just came back from D.C. last night. Likely having gone unnoticed by most people, the cotton futures market last week went absolutely ballistic. A week ago yesterday, Friday the 28th, cotton was 'limit-up" in all futures months. Again limit up on Monday. Coincidently, Monday was also the first day that commodity futures were to be margined at their "synthetic" value, not just the close on the day. Although cotton futures were limit up and trading halted....the options markets continue to trade. A "synthetic value" (or value at which the futures would likely be trading to yield such options prices) is determined and posted by the board of trade. On Monday, margin calls for cotton were issues at 11.5 cents/lb. Concurrently, the minimum amount required to trade was increased by approx. 30%. Margin calls to the cotton trade (of which business like mine are an integral part) was approximately 1.8 Billion dollars. Significant positions were liquidated the following morning following many's inability to post the margin. Our market has never seen such a massive move in one day and coupled with the need to margin "synthetically" it virtually put many out of business. The market followed thru on Tuesday and Wednesday at limit-up each day then Thursday and Friday "limit down".
Absolutely incredible and of course uncertainty prevails today.

Actually, as luck would have it, I was attending a board of directors meeting in D.C. on Tuesday and Wednesday. Our group visited the Chairman of the House Ag Committee and the senior staffers for the chairman of the Senate Ag committee (purpose was initially to discuss pending farm bill issues). In the environment of this upheaval of the cotton futures market, and thru the help of our Washington legal counsel, we arranged a meeting on Friday morning with the Chairman of the "CFTC" (Commodity Futures Trading Commission). He came to our directors meeting and brought along his chief of surveillance. Incredible meeting and discussion. Insight into the markets that I had never imagined. These financial markets are global to say the least and as one might assume, prone to outside efforts to manipulate, avoid detection, veiled trader identies, etc., etc., I will say, I was amazed at the CFTC's prompt attention to our concerns and the chairman left with what I feel was a genuine interest in looking into the impetus of what went wrong. "Wrong" in that the futures market price had become "completely" disconnected from the value of the underlying commodity. Completely.

I might add that it is common knowledge that not only energy but "grain" prices have exploded. There are fundamental reason why the "grains" have moved significantly higher. Principally is the energy policy congress has adopted to create ethanol from corn. Corn acreage has moved from the agricultural sector to the energy sector. Consequently, feed grains have risen significantly, not only corn but wheat as well. Note that world wheat supplies are near historical lows. So of course with acreage moving into the energy complex, you would expect wheat, oats, soybean prices to move higher to compete with corn for "acreage". But world cotton stocks are at high historical levels......simply not warranting the kind of market explosion we say last week.

I could go on but I only create more questions than answers. I try not to be an alarmist but "concerned" just doesnt' quite get the message across. Buckle-up and get ready to hold on!

Hope you get a chance to come to Mimi's graduation. If you haven't heard, she was just accepted to NYU's (New York University) Masters program in Spanish literature in Madrid, Spain.