Archive for June, 2007

Azacualpa, Honduras – A Rotary Mission Project

Saturday, June 30th, 2007

Hello all,

Just wanted to give you an idea what I’m up to during the week of July 9 to 15.

My Rotary club, Champaign West Rotary, is partnering with the Baptist Church of Savoy in the building of a children’s home in Azacualpa, Honduras.

Our club got this idea from Debbie Hirschi, our current but soon to be past president. She is a member of the church and they have built a number of structures (cottages to house children, a dining hall) to assist with the growth of the children’s home over time.

Our club had been looking for an international project and Debbie had the (really great) idea about partnering with her church.

I am headed there with Woody Chenault and Mike Hirschi (the club’s new three amigos) and we will purchase all the materials, hire the labor, and get started on the construction of the cottage our club is building. Come November, another team will go there and work on putting the roof on the cottage. Then, in January, we hope to send 8 to 12 people there to finish the cottage, furnish it, dedicate it, and move in 12 new orphans.

One of the problems that we’ve identified and which we are hoping to make a small but needed impact upon, is that the orphans in Honduras frequently end up in the drug trade and have a negative impact upon our country, smuggling drugs in and selling them on the street. The kids that can grow up in a children’s home like this one and stay in school, have a good chance of having a positive life, earning a decent living, and having a positive impact on Honduran society.

We clearly cannot help everyone, but if our cottage can give 12 kids a chance at an education and a real life, that its truly worth the effort.

The three amigos will be meeting with the San Pedrosula Rotary Club while in Honduras and we hope to establish a formal relationship with them, potentially expanding our influence in Azacualpa. Their club already has built a neighborhood there and they are looking to build a community center. Maybe we can work with them and expand the positive influence of Rotary beyond the children’s home.

Anyway, keep the three amigos in your thoughts and send us positive energy as we get this project under way. The photo above shows you the kids at play and a glimpse of one of the cottages similar to the one we will be building.

If you have an interest in the environment and our National Parks (one of most important things about living in the USA – if you don’t visit them, you are missing out on a truly fantastic experience), see the post prior to this one for a short summary on my July 4th excursion to Crater Lake, Oregon. For photos of other National Parks, you can visit my travel website [ mballard.smugmug.com ] and check out Glacier, Yosemite, Grand Canyon, Yellow Stone, and Denali. The United States under President Teddy Roosevelt started the national park system, the first of its kind in the world; I highly encourage you to check them out and get in touch with the natural beauty our country has to offer.

Investment postings will resume when I return from the Rotary project. Until then, best wishes for a great summer!

Mark

Crater Lake, Oregon

Saturday, June 30th, 2007

Hi everyone,

I am headed out to Crater Lake for the week of the 4th and will not be blogging. I’ll be hiking, boating, and white water rafting, then we are renting a car and driving up the Oregon Coast. I am excited as its always something I’ve wanted to do.

Enjoy your holiday and know that our major themes of Ag, Energy and Metals are in play and making money.

In the next blog, I will discuss my week in Honduras from July 9 to July 15, on a mission trip for my Rotary Club.

Happy 4th!

Mark

Ag Story

Thursday, June 28th, 2007

Below is a story from the Associated Press this morning on the Ag Industry. If you don’t have Ag exposure in your portfolio, you are missing out on the biggest trend since the energy and metals trends began a few years ago.

WASHINGTON (AP) – Commodity traders will look to a government report on agricultural products Thursday to gauge the impact of June’s inclement weather on U.S. crop prices.

The Department of Agriculture is scheduled to release its June agricultural prices report at 3 p.m. EDT. The report measures the average prices received by farmers for crops including corn, soy beans and potatoes as well as livestock and poultry. The prices are usually slightly lower than actual market prices.

Unexpectedly harsh weather in the past month led to great volatility in pricing for both wheat and corn. Heavy rains in the Midwest sent wheat prices soaring to a 10-year high of more than $6 a bushel in mid-June. Prices were also affected by unusually dry conditions in the wheat-producing Black Sea region, where the Ukraine halted exports of the crop.

Meanwhile corn farmers in the Eastern U.S. continued to experience dry conditions, keeping prices above $4 a bushel.

For May the government reported the average price of corn at $3.48 per bushel, up more than 60 percent from $2.17 last year. The average price received for wheat was $4.70, 15 percent above $4.09 in May 2006.

Farmers have watched corn prices steadily rise as ethanol producers such as Illinois-based Archer Daniels Midland Co. and Pacific Ethanol drive demand for corn. More than 100 ethanol plants have sprung up across the country as investments in alternative fuel increase, according to the Renewable Fuels Association, a trade group for ethanol producers.

Greater demand for corn also has driven up prices for other commodities as farmers dedicate fewer acres to crops such as beans and grain. The Department of Agriculture on Friday is scheduled to release a report estimating how many acres of corn farmers will plant for the coming season.

Bear Stearns and Merrill Lynch Play Musical Chairs

Monday, June 25th, 2007

Do you remember the game Musical Chairs? Its being played these days by big brokers Merrill Lynch and Bear Stearns. The music has stopped and Merrill appears to have stolen the chair out from under Bear. In this case, Bear started a fund of subprime mortgage paper, and Merrill loaned it money to do so. The value of the fund dropped, and Merrill seized the collateral for its loan.

The subprime mortgage market continues to have a negative impact on our financial markets. Friday saw a near 200 point decline in the Dow, and today we saw a 100 point advance disappear and turn into a loss. These ups and downs are part of the normal workings of the stock market. What is really scary is that the whole subprime market is based upon the sharing of risk.

The big brokerages have developed a complicated risk sharing arrangement through the derivatives market. It is supposed to be a system that allows them to reap extra return while swapping out the excess risk with someone else, putting them in a risk neutral position.

When we something like this musical chairs game go wrong for one of the brokers, it makes me worry about the much bigger issue of the derivatives market. What happens to J P Morgan, with $4 Trillion of derivatives exposure if the risks really aren’t all neutralized? It could throw a wrench into the nation’s financial system, sending both the stock and bond markets into significant bear markets.

Will it happen? Probably not, but the risk is there. Bear probably never thought their fund would implode or that another broker would have a part in it. Stay aware of the risks and don’t be surprised if the shared risks in the derivatives market are not as neutral as everyone assures us they are.

Mark

Entry for June 13, 2007

Wednesday, June 13th, 2007

Below is a nice piece written by Tony Crescenzi that discusses the reason we are not seeing a repeat of 1987.

Five Reasons This Is Not 1987

With respect to the rise in market interest rates, some like to compare the recent period to 1987 and the impact that rising market interest rates had on stock prices. This is a mistake for many reasons.

Probably the most important points are these:
1. Yields were significantly higher, with the 10-year at 9.6% at the end of September 1987 and 10.2% in October.
2. The yield increase that occurred at that time was far more sizable, with the increase in the 10-year’s yield increasing 2 percentage points.
3. The U.S. banking sector is stronger today than then.
4. Inflation is lower; the CPI was at +4.4% and headed higher in September 1987.
5. The derivatives market has grown to $400 trillion.

The derivatives market provides opportunities to hedge risks in ways that were not possible in 1987, particularly interest rate risks.

Dow Then

Tuesday, June 12th, 2007

See the post below for more info on this chart.

Mark

Dow Now

Tuesday, June 12th, 2007

It Was 20 Years Ago Today…

Above you can see a chart of the Dow as it looks today. In the posting called Dow Then, you can see the chart of how the Dow looked before/during/after the 1987 crash (Courtesy of Helene Meisler’s blog).

On the 1987 chart point A was a consolidation about 14 months prior to the Crash. It lasted about 3 months. On the current chart, point A was approximately 14 months ago and it lasted approximately 3 months.

Point B is the breakout and rise from that consolidation. On both charts it lasted about 4 months before a correction set in.

Point C is a two month correction on the 1987 chart. Same as we had now, this past Februrary and March.

Point D was a two month persistent rise in 1987. Same as we had now.

The question is if last week’s peak is the equivalent of the peak on August 25, 1987. Most likely not, but it would be imprudent not to include it for you to review.

Mark


Food Inflation Becomes Problem in China

Monday, June 11th, 2007

http://www.nytimes.com/2007/06/08/business/worldbusiness/08prices.html

The link above is to a story in Friday’s NY Times detailing how pork prices have skyrocketed in China in recent days (you may need to sign-in to read the story).

Just as we’ve been discussing food price inflation in the US as a potential issue of concern, the same thing is happening in China. Probably most concerning is that Chinese companies are starting to raise prices on their exports so they can defray rising costs at home. This does not bode well for inflation in the states since so much of our spending these days comes from Chinese imported goods.

The stock market has not yet absorbed the potential impact of rising inflation. Last week’s 400 point selloff in the Dow as bond rates began their rise from inverted yield curve levels to the 30-year bond now being flat with overnight rates was likely only the beginning of difficult times ahead for stock market investors that do not have a healthy allocation to energy, metals, and ag in their portfolios. These were the winners in the 70’s inflation tainted market and they will be the winners in this newest inflation scenario.

Tonight at 10pm EDT China will announce its May inflation data, and Friday the US CPI will be announced. These are the numbers that will point the direction for the world’s bond and stock markets for some time to come. Be prepared for the analysts on TV to be surprised and shocked.

Mark