Archive for May, 2007

Making of an AAAs

It’s not very tough. Moody’s did it recently when they discredited their near 100 year old rating research history by giving ridiculously positive ratings to some not so positive Icelandic banks. The research bust happened again and John Moody might have had strange reactions, if he was around.

But then we witness it all the time. If you are a trader, you do understand that 30% is a good chance for your trades to hit a stop loss and it’s the other 70% that you need to ride. Market is full of surprises and you just have to be alert not to be fooled more than 50% of the time. If you beat this statistics, you just avoided the AAAs.

But unfortunately mathematics and history have statistically been seen as weak subjects. And the fraternity beyond trading needs more of an effort in these two areas to understand that fooling around happens all the time and if this time it was Moody’s, its very normal. The law of averages invariably catches up.

We have some fooling around happening in our local markets too. The local politician does not understand that Futures are zero sum games and Futures have been risk management tools constructed as early as 1607 by Japanese traders to protect the rice farmer, not to cheat him. We have a seven year history of successful equity futures around us in India, but the politician, who is of course human and with good intentions struggles to grasp this logic. We understand this naivety, it’s all around us happening again and again with cyclical precision, till sanity returns.

We have covered Wheat twice here in our free forecasts, first on 6 Nov and second on 22 Jan. The first time we covered the grain, it was going up and USDA (United States Department of Agriculture) was pressing alarm bells on wheat and local newspapers were quoting actively on the impending wheat crisis. All the stories pointed to a price increase. This was when, we at Orpheus gave a potential limit of International Wheat prices at 6 and a turn down from there. This was when international spot prices were ruling at 5.6. Prices tested near 6 levels on 30 Apr and are now below Nov prices. The local NCX Wheat spot fell 23% in the same time from 1165 to the current low near 900.

One can ofcourse justify the fall in price. There are always reasons for everything that we see around us. But these reasons still can not tell you the entry price or target for Wheat 3 months from now, despite what the FMC or the politician might do. The historical truth is clear, markets were created for the farmer, hindering the market and assuming food prices can be managed is nothing short of high ranking AAAs.

Internationally, prices still look weak and some more easing can not be ruled out. And even locally any reprieve back to 1000 on NCX Wheat should be short lived and needs review. But though simplistic, the crisis talk, the alarm bell, the import rush for grains, is too obvious in the media. The sentiment suggests positivity on wheat, the very reason it might be early to bottom pick on the grain for an intermediate term (multi week to multi month) rise. You have to hold on till insanity reaches an extreme and sanity shows first signs.

Apart from Wheat, WAVES.AGRO.210507 covers COFFEE, CORN, BIO FUEL INDEX, SOYA, SOYA BEAN OIL, COTTON and SUGAR. Barring COTTON, which made another low on ETC COTTON below our anticipated support, rest all the agro assets we cover are in sync with our anticipated projections.

The IRISH Potato

Now we might call it the MCX May Potato, but econohistory quotes the Potato’s Irish origin comprehensively. Due to blight, the great famine happened between 1845-49 destroying the primary source of food for many Irish. This is a classic case study of the linkage of a crop and an economy.

According to some estimates, 500,000 to 1 million deaths occurred in the three years slashing 12 per cent of the total population. The strange fact was that the crisis happened well into the otherwise prosperous industrial age. The famine got bloated owing to the single crop dependency, primitive communications, poor retail distribution system and poor land reforms. A single crop got the economy crumbling down. And it was only later that the agricultural act was changed.

And econohistory is more complicated as human beings are myopic and don’t link potato’s with economics. In today’s situation, too, the increasing importance of Potato is clear — the price of May MCX Potato has been outperforming the MCX AGRI index. This is a leading indicator that the crop should remain an important one for the country given that India is one of the biggest producers and consumers of Potato.

MCX May seems to be headed down from 630 to 540. Technical reasons suggest a short term a-b-c corrective is running for the crop. 540 is a multi-month support and should hold. And considering the Agri index is still trended up, the intermediate trend for Potato still seems to be up. The key levels stand near 600.