Where Are My Manners/Food For Thought: Grains Market Primer

Where Are My Manners:
I was so excited to send through my first post last week that I forgot to pay homage. (Sorry!)
I just want to say thank you to Macro Man for the incredible opportunity to contribute to this blog and hope I can be up to par in terms of insightful market commentary, executable trade ideas, and refreshing levity that has made Macro Man popular.
Additionally, I would like to tip my hat to all the other posters of the blog - we don't need to make Macro Man great again; we need to make Macro Man greater than ever!
Always feel free to comment and give me feedback on my posts - whether it’s the writing or the ideas. I sincerely believe that if I put out an idea that every commenter agrees with (Harry H, that includes you bud) then the idea is probably not so great :). Also feel free to shoot me ideas of what you guys want to hear about as well - if I think I can add value writing, I will try!
Food For Thought (Grains Market Primer):
Between daily wood chopping at his desk and scavenging for food in the company pantry, Macro Clown often involves himself in the most unlikely of markets for that of a macro trader: grains and softs. 
The convention among those foreign to grains and softs  is to group these different groups of assets together. What a faux pas! This irks me as they are very different. Grains (corn, wheat, soybean and related products, oats, rice, etc.) display a lot more autocorrelation – there is a grains beta, if you will. I believe this is the case due to the characteristics of usage substitution and similar growing climates and environment for grains, with short and similar growing cycles of about 5 to 6 months.
Softs (sugar, coffee, cotton, orange juice, cocoa, etc.) also grow in similar climates to each other but there are more intricacies regarding their growing needs. And obviously, something like cotton isn’t exactly a substitute for something like coffee. Most softs also have a much longer growing cycle of multiple years which leads to large long term trends in prices - managed futures funds and CTAs fav.
 
Grains show similar trends but those trends happen in shorter (6 months to ~1 year) bursts. Currently, there are a couple of factors that are setting up good risk reward (putting yourself in a position to get lucky) for outright directional and spread bets.
Intuitively, as prices of these crops drop, production and marginal producers would be pushed out or forced to switch crops. As a result, supplies get drawn down and any supply shocks become sharply apparent, leading to a spike in prices. Truly, the cure for low prices is lower prices. Vice versa is also true.
Without being a meteorologist or having a crystal ball for supply calamities, Macro Clown can still use fundamentals of a crop to position him in an area of strong risk reward and (with some trusty chart work) find good entry and exit levels.
 
Long only trade: 
The directional view for grains here is that all of the major US grains are in deep value territory. Reviewing the WASDE number that came out today – there has been a buildup of ending stock in the main grains, as prices are at or near 10 year lows reflective of such glut. The market seems vulnerable to potential supply drawdowns or shocks.
 
What’s the result?
 
Soon there will be fewer than two million farms in America for the first time since pioneers moved westward after the Louisiana Purchase – Oh boy, this opportunity sounds as juicy of as the leftover BBQ ribs from the broker meeting – supposedly there is a wave of foreclosures coming in the near future as American farmers have accumulated too much debt. 
 
 
Charts look like it’s trying to make a bottom – a smooth technical analysis operator should be able to patiently find good entries with relatively tight stops. How far grains can run? (Think 7% to 10%  stop for 50% to 100% upside in the event of a supply draw down/shock) We’ve had bumper crops the last 3 years where weather in the US has been perfect. Let’s see how long this streak will last.
There are also some relative dynamics at play as well. Soybean has been the best priced crop in the past 5 years-ish. Needless to say, like investors, farmers also chase the market. There has been a land grab in the US Farm Belt in favor for soybeans at the expense of corn and wheat (there's an interesting WSJ article on this). Add to it today’s WASDE print showing a topping out of wheat stock. Sprinkle on the large non-commercial short position in wheat that has started to unwind. You end up with:
 
Wheat-soybean price ratio. The cure for low price ratios is a lower price ratio? Shrug. Sounds about right. 
As an additive to your portfolio, picking up some of these grains or the wheat-soybean basis opportunistically as a speculative lottery ticket looks pretty good here. Stash them for the year, do an anti-rain dance and see if anything good happens.
It’s not hard – Macro Clown stashes food from the pantry at his desk all the time. Speaking of which, where the hell are those pistachios snack packs…
Macro Clown (MC)
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IPA
admin
March 9, 2017 at 10:31 PM ×

Macro Clown, great post! You may want to plug this into your grains model:

http://asia.nikkei.com/Politics-Economy/Economy/Mexico-seeking-alternatives-to-US-for-farm-imports

Pistachios are my favorite too :)

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March 9, 2017 at 11:45 PM ×

Hi MC,

I have a huge position on the other side of your wheat/soybean trade.

Recapping what I said here:

1. The relative term structures of the futures make it difficult for this trade to pay out (and it would have been a lose in nineteen of the past twenty years), even if the relative spot prices move in a favorable direction.

2. The United States is a smaller player in wheat (in economic theory, they must accept the marked price), whereas in soybeans, they are the world's largest producer (and more of a price maker). This becomes more relevant during trade disputes.

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Macro Clown
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March 10, 2017 at 12:00 AM ×

Great points. You seem well versed in grains. I will take a look to see if I can address them.

The futures curve is definitely an important point - let me look at it on more scrutiny and come back on this - after my trip.

Your second point is correct as well. I believe US produces 30%+ of global soybeans, while wheat is much lower.

You can substitute wheat with corn here, they are both around same low levels relative to beans in recent history. I think US has a larger global market share there. Need to consult my BBG terminal after dinner.

I'll be sure to skip the tofu and eat extra bread. :)


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johno
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March 10, 2017 at 1:54 AM ×

Nice to see a new post, MC, and again, on something other than US equities and rates! Thank you.

That said, I was just reading GS's daily of March 8th and thought its discussion of neutral rates was kind of interesting. In particular, Yellen's mention that the moderately accommodative stance was consistent with the 180k pace of NFP versus structural 75-125k trend labor force growth. They then reference a piece from a couple years ago that measures r-star using unemployment gaps instead of output gaps. Though the latter is conventional, it's problematic when there's lots of uncertainty around potential growth (as there is now). Anyway, the estimates for r-star they come up with using employment are much higher than otherwise. Was just interesting to see a different argument for higher rates than I get to otherwise by using zero real plus inflation in 2018 ... I've been looking for more bearish cases I can believe. It's just hard when any pickup in ECI or average weekly earnings remains a sight unseen.

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abee crombie
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March 10, 2017 at 5:00 AM ×

Nice post MC.

I dont follow grains enough. I dont have the expertise. Too many things going on in different countries like Brazil, Argentina, Ukraine etc to really understand soya and wheat. I guess corn one can do with US only but then again the relative values.

Also I think farmer economics drive most planting decisions. You gotta have some view on their costs if you want to play these markets IMO. Id rather just average into POT and hope one day we will have a shortage again (though its not looking likely anytime soon) and make some money that way.

Btw, any thoughts on sugar anyone?

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Macro Clown
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March 10, 2017 at 5:42 AM ×

I was big on sugar at the end of 2015 - for many of the same reasons I am bullish on grains now.

I think in the boom, there were 300+ sugar mills in the South of Brazil. By the end of the bust, mills and companies in general were mired with debt and at the end of the year, you basically had 90 mills left in Q4 of 2015 - WSJ article.

The thing with sugar mills is that they need to be retrofitted every few years. The many mills left in Brazil needed to go through this process. However, retrofitting a sugar mill is like replacing ink for those old cheap printers - the ink cartridge itself would be $20 for a printer that only costed $25. So it was safe to assume that a number of mills in the group remaining would shut down due to a combination of too much debt and a much lowered sugar price.

Timing again was tricky, its always hard to find the right catalyst in fast moving markets before its too late - I know the basics and its pretty easy for me to be contrarian to price, but I don't know the minutia of these markets - my work mandate its inflation, rates and FX.

I basically used those slow moving broad based fundamentals to formulate a long term view, look for anecdotal evidence like the knowledge above to help me focus my interest and finally price action to actually enter the trade.

On Feb 22, 2016, there was huge buying interest in sugar going into the close. After markets were closed, ISO announced a surprise sugar shortage (suspicious huh) - with the slow moving fundamentals in favor (high stockpiles that had no where to go but down and peak in production that began to stall - really slow moving) I shoved in on Feb 23 during the huge move higher in sugar and it ran to the 20's before I started taking profits - ultimately hit 24 handle.

http://finviz.com/futures_charts.ashx?t=SB&p=w1

It turns out the catalyst was El Nino.

Turn the page to today, stockpiles are the lowest they've been since 2011. Production declines in Brazil have stopped and trending higher, although India production still hasn't shown a clear nadir (but keep in mind production data from BBG is really slow moving. I would say the trade is def to be on the short side. However, for grains and softs, there could always be black swan shocks to send prices ramping to the upside (even if it's temporary). It's a lot harder to time bottoms than to time tops IMO. Gotta stay nimble.

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Macro Clown
admin
March 10, 2017 at 6:22 AM ×

Meant to say its a lot harder to time tops than to time bottoms**

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Samuel Gruen
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March 10, 2017 at 8:29 AM ×

I don't disagree with the long position in Wheat but arguing it as a spread against Soybeans makes me cautious: the majority of farmers wouldn't make a choice between these two crops. There a couple more considerations at play than straight price ratios: 1) What is the calorie differential in price between the two crops (i.e. is the spread justified considering the amount of energy it brings)? 2) Wheat is (from what I understand after discussions with Iowa farmers) a "poor" land crop vs. corn and soybeans which are "rich" land crops: this means that regardless of price they will use the best part of their land to grow the corn and soy and allocate wheat to the worst part of their land. I think this has to do with yields of each crop relative to land quality.

I just think it's dangerous to assume that farmers are only price sensitive. But I agree with the Wheat bullish outlook as inventories are drawn down, just think it'll take some time to come through.

Cheers

Sam

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Samuel Gruen
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March 10, 2017 at 8:41 AM × This comment has been removed by the author.
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Samuel Gruen
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March 10, 2017 at 8:43 AM ×

Sorry, just to add: don't get me wrong, I made the same comment back in November (see here: https://www.lightfieldcap.com/single-post/2016/11/30/And-now-a-word-from-the-grain-market ) but then got the chance to speak with a couple farmers!

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Celeriac1972
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March 10, 2017 at 1:34 PM ×

Bitcoin - wtf? The pretence that there is a tradeable market here is becoming somewhat questionable...

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Leftback
admin
March 10, 2017 at 1:45 PM ×

Off topic, but obviously of current interest:

Average wages rose 0.2% to $26.09 an hour.
Hours worked was unchanged at 34.4 a week.

The Trumpflation train seems to be stalled in the tunnel between stations, rather like US infrastructure and transportation.
What a sorry, sorry mess this country has become, wallowing in 3rd world conditions while Harry H and others get rich....

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Macro Clown
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March 10, 2017 at 2:07 PM ×

In regards to the hourly earnings miss - I view it slightly differently. The 0.1% print last month was revised to 0.2%.

1.03*1.01 roughly equates to 1.02*1.02

If anything the latter is slightly higher. Not stellar but not exactly s stereotypical "miss" IMO either.

The nature of inflation is not smooth and steady (thus one mandate of the CB is to attempt to create inflation stability) But if we keep printed 200K jobs per month like this, don't be shocked if we eventually have an abnormal spike of that number to the upside in the upcoming months.

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Nick
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March 10, 2017 at 2:21 PM ×

Nice to see the post on grains! For me the main point when trading agriculture is the weather, the beauty of it is that nobody can predict if it's going to rain or not with any confidence over 2 weeks out. Of course there is ENSO (El Nino/La Nina/Neutral) but those are low frequency events and every instance of each is different. All in all this makes the playing filed close to level: ABCD might have a better handle on demand, while supply is for everybody to judge.
As far as the classification goes, I would separate grains (corn and wheat) and oilseeds (soybeans, canola/rapeseed, sunflower and palm). There are few interesting interactions between those groups. Let's look at few of them (with some simplifications).
Corn, feed wheat, soybeans meal are protein feeds used to produce meat and poultry. The actual breakdown of each in the mix is optimized depending on prices. From that perspective spreads between C, W and S make sense. The question is which relationships are stronger. C and S are planted more or less at the same time (if we look at the North America) so they directly compete for the same acreage, while wheat mostly takes a bite of a total acreage pie (planted at a different time). Taking this into account C vs. S is a classic ratio to trade.
Meal is the most protein rich substance and demand for this feed ingredient is growing across the developing world: China (swine), India (chicken). At the moment the supplies of S are more than adequate both projected US stocks (for the current marketing year) and foretasted South American crops (again current marketing year). Managed Money are long and might be wrong but here is the trick: last year funds where short into South American harvest and paid dearly, was to wet with quality and quantity loss, in the end all was not too bad but the rally was vicious. This year the scare came early (at SA planting), and until the harvest is in the bin there is no reason for a complete capitulation. Also with the demand as it is US needs the acres of S and the function of price is to add them. Corn is a preferred crop for many farmers (nice to manage) so S needs to win on price hands down. We will have a better understanding of prospective planting at the end of the month (PP report USDA). All in all - yes plenty of beans, price is good as the world needs them. Nothing is static but I would be very careful when thinking of selling S.
Another side of S and oilseeds is oil - and it has a story of its own. Palm (#1 oil culture) had a hit to production (and stocks) last year due to the drought in South East Asia caused by El Nino, the price reacted moving all other vegoils (well almost all of them - Sun did not care much) with it. Right now production is expected to recover by 2H17, and Palm is not a row crop, once planted it gives from say year 4 and keeps on giving till year 28 more or less contentiously. So plantations are selling, impacting all oilseeds. Two things to consider: EL Nino might be back, admittedly odds are even at the moment, though this is better than 1/3; US might change the rules of local biodiesel game by reinstating tax credit and switching it to producers from the blenders. Any of those 2 factors will have a significant impact on BO and S (S = BO*11 + BM*2.2 + crush margin).
To recap: there is flow and there are stocks. Stocks are high for grains and beans, low for vegoils. There were 3 good years of flow for grains and beans and 1 bad year of flow for vegoils. Vegoils are the most vulnerable to another flow disruption, and US policy change could be supportive to CBOT BO and hence to CBOT S. Any disruption to flow in grains will have an impact and the prices are low. Seems there is nothing to sell. Just watch out for the levels and events: US planting intentions, SA harvest, Palm production & ENOS, US EPA and tax biodiesel policy, positioning.
This is just scratching the surface, hope it is of interest.

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Leftback
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March 10, 2017 at 2:22 PM ×

MC, we have already "had" the abnormal spike... this isn't the 70s.... 2% is running "hot" these days. You really need to adjust your rose-colored spectacles or take them off and try the secular stagnation goggles instead. [It's a groovy view..]

You have to actually have price increases to generate inflation and in the US economy those are a function of crude oil and gasoline prices (which are going to fall this spring and summer, respectively) and wage increases (which are tepid at best). It is difficult for me to see this situation changing in the next six months.

Sorry to be so simplistic, and I HATE to agree with Dame Janet, but in a ZIPR/LIRP regime inflation, well, it's "transitory". Let's reduce this to its simplest form, look, to be honest, the y/y mini inflation spike of late 2016-early 2017 was created by the low prices of crude oil that prevailed last winter, what you lot and the PhDs call the base effect. Now that is ending. End of story and back to lowflation.

We are locked into a low growth environment for another decade. Get used to it.

If you don't believe me, check out the way the inflation expectations curve inverted recently, and watch it revert in the weeks and months ahead as the impotence of the new administration to stimulate the economy begins to sink in.

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Leftback
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March 10, 2017 at 2:27 PM ×

Btw, while we are still discussing employment, the data for Feb were especially strong in ... construction!! The weather was ... mild!! This means the usual Mar-Apr surge was simply brought forward and the next two months will be a little soft.

Engage brains, people. We are just watching little wiggles around a very low mean rate of change (~0) in a large economy. REAL GDP growth is something for the history books. NOMINAL GDP growth will continue to be between 1-2%, based on the US$ movements triggered by dovish or less dovish squawkings emanating from the Eccles building.

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CV
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March 10, 2017 at 3:38 PM ×

"REAL GDP growth is something for the history books. NOMINAL GDP growth will continue to be between 1-2%, based on the US$ movements triggered by dovish or less dovish squawkings emanating from the Eccles building."

Wow LB, that's pretty bearish even for a bond trader like you ;). Anyway, I think yield curve flattening here is the key trend. Some good observations on the big bond recently, and you have caught it nicely. So, nothing to argue with there. My base case; IF the Fed really has to go, the curve flattens. If that is not the case, well then rates likely will edge lower regardless. As a result, I like the 10y here.

Meanwhile, all the big bond guys are very worried about higher yields, but we all know they're loading up, right ;).

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abee crombie
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March 10, 2017 at 4:59 PM ×

Mall REITs getting hammered this week. Down every day.

Celeric did you buy bitcoin at $700 like I suggested? There is clearly some mania in all crypto currencies here... Dash coin up 300% this year. Basically these are penny stocks IMO, driven by Chinese and rich tech guys who think they know what they are doing. Too hard to predict when prices will go down but they will overshoot at some point (perhaps already)

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johno
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March 10, 2017 at 5:17 PM ×

Thanks for pointing out the construction #s, LB. Agree on base effects. Another NFP that fails to convince on wages too.

Looks like a big position-clearing in NOK. I've traded this very badly, but at least kept position size modest until adding today. I think this will be one exception that proves my trading rules (e.g., never add to losers!), but could be wrong. Looking into today's CPI, it isn't that bad, but between that, oil, and crowded positioning, you have today's price action.

Actually got long CAC futures the other day, still thinking this is very different from Brexit and that the likelier scenarios are quite positive. However, I will watch how Wilders does on election day versus polling to confirm whether Le Pen is as unlikely as I think.

Added to my USD put TRY call KO position overnight. CBT keeps pushing the effective rate higher. Question is, if they stop at 11%, will it be enough or do we need to see a further hike in the ceiling next week?

For the US equity bears out there, WSJ with an article on diminished buybacks. Personally, I'm neutral on US equities, but think we probably get a shallow correction as retail buying slackens.

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IPA
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March 10, 2017 at 6:47 PM ×

abee, on mall REITs, KIM and KRG have been some of my best shorts this year. I have been yapping about retail REITs here for a while but will go quiet for a month or so on them because I think it may be time to ring the register and look for a retracement here. My thinking is we get a major stop hunt, a flush of sorts on treasuries and a respectable bounce will ensue around next mid week in accord with Yellen's presser. REITs would follow. I am fishing TLT call spreads with silly bids. Rally may last until April-May. Nothing ever goes down in a straight line.

One should note that we just had a 50% retracement of selloff from ATH to YL on SPX and DJI futures. Can it be this easy? Close below YL is going to trigger some major selling, IMO.

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IPA
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March 11, 2017 at 1:13 AM ×

In light of some derogatory comments, relentless name calling, and accusations of most traders here being short spoos since their inception, I felt urge to update the clueless accusers about a few successful short ideas (among so many others that worked as well) that were discussed here on numerous occasions.

Airlines are out with February traffic and it absolutely stunk. LUV lost altitude today on lower Q1 unit revenue guidance. AAL and UAL revenue passenger miles are down big, DAL was up a bit but still a miss. AAL guided Q1 lower yesterday and DAL did three days ago. I think it's very clear that Buffett bought airlines in hopes of a quick corp tax cut before the wings would fall off, but I think he once again has been sucked into a value trap and this time he really may have bought these pathetic losers at the very top. Let's see if this recent atrocious traffic and unit revenue news coupled with DAL's lower guidance on 2017 margins due to higher costs sends even more players to the exits. But really, already as it is, DAL has a pronounced triple top and lowest close since 11/11/16 along with AAL, and UAL has a double top. LUV is the only one still getting love but I am not sure it can separate itself from the pack the way it did before. More pain to come, IMO. Sell more IYT and JETS.

O Canada! I (obviously) had no idea about today's TD story when I recommended to sell three Canadian banks sometime ago on my overheated Canadian housing outlook, very high consumer debt to income ratio, and double top view on monthly charts. As they say, there is never just one cockroach. After WFC fiasco one should have expected another bank or two to find similar fraudulent practices in their retail operations. TD is going to stink up the joint north of the border and I suspect some further noise on this. The notion of their strong banking presence in U.S. scares me even more as the regulators will be out in full force on both sides of the border on these Canadian banks now. Sell more TD, RY, and BMO.

On a broader issue with banks and in conjunction with this story, I can't believe that we don't hear more about what Spicer said a few days ago in his presser about Glass-Steagall and Trump's continued desire to power through with restoring the repealed law. I say sell XLF on that development and sell KRE on possible flattening of the yield curve, which I strongly believe KRE was doing today.

http://business.financialpost.com/investing/market-moves/td-shares-drop-the-most-in-two-years-after-cbc-report-on-high-pressure-sales-tactics

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Celeriac1972
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March 11, 2017 at 7:28 AM ×

Abee - I'm afraid not. A couple of years ago I had the pleasure of meeting the Winklevoss twins who made quite an impression on me. I was trying to hold a loosely stopped short position ahead of the SEC/Winklevoss ETF decision at 21:00 yesterday, but was stopped out by the +11%/-11% spasm seen in a 5 minute period about 7 hours ahead of the announcement. No doubt there is a rational/legal explanation for this!

I know I should know better. I will concede that you do....!

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Romandière
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March 11, 2017 at 7:30 AM ×

IPA
Easyjets seems to be doing well
http://corporate.easyjet.com/investors/traffic-statistics/2017/english/feb
When looking at airliners and retail(clothing) I cannot undo the impression that the US and the EU are on different paths.

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cowboy
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March 11, 2017 at 2:53 PM ×

LB, the US 10yr yield has broken thru a resistance line back to 2007 or so, and out of the recent 2.3-2.5 consolidation. I'm not an FI guy but it looks to be headed to 3%

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IPA
admin
March 12, 2017 at 7:35 AM ×

cowboy,

US 10-yr yield breakout duly noted, but I have a different scenario in mind. It does not get to 3% just yet, reverses @ 2.75%, and makes life difficult for everyone. The parking lot is full of cars and it needs to clear a bit. We will probably see 3% sometime this year, just not now, IMO.

Here is my chart http://imgur.com/ZTuOBXC

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