MF Global Says Unauthorized Bets Lost $141.5 Million

“Wheat rose the most ever yesterday [the 27th] to the seventh record high this month, then fell by the exchange-imposed daily limit before rising again by the maximum allowed. The 25 percent rally from the day’s low to its high was bigger than all but seven annual price increases for wheat since 1973.”

Limit up, limit down, limit up all in one day… yeah, I can see someone losing $141,500,000 in that environment.

Click to enlarge (May Wheat Futures Contract, 5-minute chart)

Click to enlarge (May Wheat Futures Contract, volume-at-price)

Bernanke’s Rate Cuts Force Asia Back to Price Limits, Subsidies, by Shamim Adam

“Bernanke’s Fed has lowered its benchmark interest rate 2.25 percentage points since September, to 3 percent. The widening spread between U.S. and Asian borrowing costs draws more foreign money into the region, threatening to feed asset bubbles. Instead of raising their own borrowing costs or letting their currencies appreciate faster, Asian governments are resorting to artificial price curbs and subsidies.

Since Jan. 15, China’s National Development and Reform Commission has required producers and sellers of grain, cooking oil, meat products, milk, eggs and liquefied petroleum gas to seek government approval to raise prices in an effort to cool inflation expectations and ease ’social tension.’”

The price of wheat has nearly tripled since early 2006. A box of the imported breakfast cereal I regularly eat here in Beijing costs around $6.30 … the same box in the US costs around $4.60, I believe. I’m not looking for a substitute… yet.

Click to enlarge (Wheat, Weekly)

Related:
Wheat at around $10 a Bushel - December 19, 2007
Breakfast of Champion Trend Followers - September 25, 2007

A couple interesting things from Arjun Divecha in this week’s Barron’s. First, on the Chindia “misperception” –

“India has benefited hugely from this misperception of “Chindia.” By linking China and India together, people think that India is in the same league as China when, in fact, it is not. Let me give you a few numbers: In global zinc consumption, China consumed 29%, India consumed 3.8%; aluminum, China consumed 25%, India consumed 2.6%; oil, China consumed 9% of global oil, and India consumed 3% of global oil. These countries are not compatible. They are not even in the same league. India has got a whole lot of capital that it would not have gotten if people had thought of it separately. India is where China was 15 years ago in terms of per capita consumption. It is a great growth story, but equating it with China has meant a lot of global liquidity has flowed to it and helped India’s performance. It has made Indian stocks quite expensive, and that’s why it is our least favorite country. The economic story is terrific, the valuation story is not.”

Second, on the possibility (ha! why hedge?) of a bubble in China:

“China we don’t like, either. Although, I want to caution you on China because China could be in the beginning stages of a fairly large bubble. I’m not predicting it. I’m just saying it’s a possibility. There is a huge flood of money coming into the country as exports lead to massive amounts of capital inflows…so large the central government has not been able to sterilize them … The money supply has been growing at the 15% to 17%, about in line with GDP growth. But now it has suddenly stepped up to 25% or 30%, and in the last few months inflation has gone up to 6.9% in China.

That in and of itself could be a problem, but that is not what I’m focused on. I am focused on short-term interest rates at 3½%. If you are a saver in China, you are getting 3½% from the bank while inflation is at 6.9%. You can’t take money out of the country. So what are your options? Real estate and the stock market. That is why the stock market has gone up so much this year. This trend isn’t changing any time in a hurry.”

Related: Losing Less Money on Chinese Bank Deposits — Yippee!

(This is my last issue of Barron’s since I’ve canceled both it and wsj.com anticipating Rupert’s making them both free soon.)

We’ve already talked about the idea from last Monday, MAN — it dropped hard again today and is very rapidly approaching the upper bound of Target #1. I thank the folks who made comments on how best to manage this open position.

Click to enlarge (MAN Daily)

Microsemi (MSCC) was an idea sent out for last Tuesday:

Short MSCC below 23.64
Protective Stop above 24.12
Target #1: 20.53 to 20.93
Target #2: 18.53 to 18.90
Target #3: 14.71 to 15.00

Click to enlarge (MSCC Daily)

For no good reason, in some ways I find this a more exciting trade than MAN. The initial risk was around 50 cents and it’s already nearly 250 cents in the green (~5x initial risk). Top target of 20.93 is within spitting distance. I hope some of my many readers caught this big winner.

The box came up with one idea, long a tech stock (gasp), for Tuesday, December 18. It’ll probably work out as well as last week’s long in Symantec (a true clinker). :-)

I’ll send the idea out this afternoon (my time), so if you email me to join the list in the next six hours or so, you should get Tuesday’s idea. I’m adding about 100 names a day to the list so if you don’t receive the idea, just email me again to confirm that you’re on there.

The box came up with one idea, a short, for Monday, December 17. I’ve already sent the idea out, so if you email me to join the list you’ll begin receiving ideas on Tuesday. Again, if you joined the list long ago and haven’t received any ideas, then email me again. An overwhelming number of people are interested in receiving these ideas, which caught me by surprise, so I apologize if your mail got lost in the the crush.

Here are a few of the most read stories on the Bloomberg in the last day with selected excerpts (and my comments, if any, in italics).

As of 16-Dec-2007 at 23:05:55 (EST):

1. Centro Shares Slump After Profit Forecast Cut

“‘We never expected nor could reasonably anticipate that the sources of funding that have historically been available to us and many other companies would shut for business,’ Chairman Brian Healey said in the statement.”

Eerily similar statement to Garrett Thornburgh’s back in August.

2. Greenspan Favors Government Bailout for Homeowners

“It’s far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates. If you do that, it’ll drag this process out indefinitely.”

You can’t make this stuff up. So long, Ayn Rand! Warm up the helicopter, Ben!

3. Wheat Price Rises Above $10 for First Time on Supply Concerns

“Chicago wheat futures jumped by the exchange-imposed daily limit to $10.095 a bushel … Soybeans advanced to $11.9225 a bushel, the highest in 34 years, and corn rose to $4.4325 a bushel, a nine-month peak.”

How much does a box of Wheaties cost these days? :-)

4. Bears Capitulate as Treasuries Thwart Chart Watchers

“Technical analysis is based on the theory that a chart of the price of any asset or index contains clues about future movements … ‘The trendline is not the issue, it’s the symptom of the issue,’ said Kosar.”

Huh? I made fun of Kosar and his 25-cent ruler in my post last April, Why Technical Analysts Don’t Deserve To Be Taken Seriously

I thought it would be good to update and review one of the box trades from last week, and talk about various ways to manage the fear and greed of this open trade. You’ll recall my post last Sunday with this box pick:

Short MAN below 64.10
Protective Stop above 65.13
Target #1: 54.44 to 55.20
Target #2: 51.86 to 52.58
Target #3: 44.22 to 44.83

(IF YOU’D LIKE TO RECEIVE THESE DAILY TRADING IDEAS, PLEASE EMAIL ME TO JOIN THE LIST.)

A short entry should have been taken last Monday below 64.10 and a protective stop instantly put in place above 65.13. Assuming that you were risking around $500 on the trade, you would have shorted 500 shares.

On Tuesday the stock traded lower and closed at 62.13, which was close to 2x your initial risk. If you were the skittish type, you’d move your protective stop to breakeven by this point. On Wednesday MAN closed lower at 60.95, almost exactly 3x your initial risk. On Thursday the stock closed at 60.38 and on Friday at 59.45, over 4x your initial risk.

The highest target the box is looking for is 55.20, which is over 7% below Friday’s close (quite a drop).

An open short of 500 shares would be sitting on around $2300 of gains here, and you wouldn’t want to give that all up if price reverses and goes back up. I’m open to suggestions about what to do here (please leave a comment), but here’s one idea:

I think it might be smart to lock in around $500 in gains by covering 100 shares here and moving the protective stop on the remaining 400 shares down to around breakeven at $64 (if you hadn’t done that already). You can wait patiently for 55.20 with the knowledge that you took around $500 out and won’t get hurt on the remaining 400 shares if price reverses and trades back up through $64.

Letting it ride (greed) and intelligent stop management (fear) is an art that I certainly have never mastered.

What do you guys think?

Libor Fails to Drop From 7-Year High; Crunch Persists

“The actions by the central banks were just a placebo, a tranquilizer that doesn’t solve the problem of the mistrust among banks on one hand and the potential for more losses in credit on the other.”

Bloomberg has a slick function called SLIQ (Short-term Liquidity) which lets you plot various short-term (O/N, 7-day, 15-day, 30-day) interest rates in different regions (America, Japan, Europe, Australia, etc.) over any period. You can see how that 30-day asset-backed commercial paper spreads have re-exploded in December.

Click to enlarge

You can also see that short-term rates in Europe have jumped dramatically in December. End of year liquidity squeeze or something more ominous?

Click to enlarge

The box came up with one idea, a short, for Friday, December 14. Yesterday’s pick was a real clinker — a same-day stop-out. If you would like the receive these daily ideas, just drop me an email and I’ll add you to the list. If you wrote in the last few days and don’t receive today’s pick sometime today, then you should email me again. I’ve had to add hundreds of names to the list and some people may have been lost in the shuffle; sorry about that.