Sunday, February 7, 2010

(Good Report) Market Commentary By Art Cashin February 4, 2010

(Art has a story for just about any situation in life, gotta love this guy)

Cashin’s Comments

On this day (+2) in 1858, that august deliberative body, the U.S. House of
Representatives was calmly discussing a matter of import to the nation. Well....maybe
"calmly discussing" misses the point. The House was in mid-debate/mid-filibuster on
the topic of admitting Kansas to statehood....and whether such admission should be
as a Free State or slave state.

The debate had been going since the prior day and as it moved into the wee small
hours of February 6th the tension, partisanship and weariness began to show. Since
night-time in February, in Washington, in the Capitol building, in the 1850's tended
not to be too warm, several members of Congress were said to have sipped (or
gulped) some alcoholic beverages....just to stave off the chill.

Rep. Keitt of S.C. made a rather uncomplimentary remark about Rep. Galusha Grow
of PA. (who had the floor at the time). Rep. Grow responded with an equally unkind
assessment of Keitt. Keitt went for Grow's neck, but was knocked to the ground.
Soon most of the House was wrestling, spitting, kicking and punching their worthy
and distinguished colleagues. Spittoons and inkwells flew through the air. The
Speaker gaveled for order with no success. The Sergeant at Arms beat members with
his staff (in a non-partisan way, of course).

Rep. Grow was being pummeled by Barksdale of Mississippi when Washburn of
Wisconsin rushed to Grow's defense. Washburn's intention was to grab Barksdale by
the hair with his left hand and knock him out with a right uppercut. But when he
grabbed Barksdale's hair, it came off in his hand. Shocked, Washburn screamed. The
rioting representatives looked up and saw a suddenly bald Barksdale…..and
Washburn waving his wig. "My God, he's been scalped!" shouted someone and the
riot broke up in riotous laughter.

To mark the day, suggest to the bipartisan leadership that they appoint someone from
the Hair Club as doorkeeper.

The tape was neither hairy nor scary Wednesday. It was idle and indifferent.
Buck Bounces A Bit So Stocks Buckle A Bit – Duh! Stocks soften. Gold softens.
Oil softens. Most commodities softened. And, so the dollar must have – you guessed
it Sherlock, the buck bounced. Pundits pointed to things like Pfizer earnings or to
some of the data missing the estimates. But down on the playing field, it was clear
that it was all about the buck and nothing more.

We wrote yesterday that the easy part of the reflex rally was over. Sure enough the
market obliged by producing an inconclusive session. The fog has set in, and, despite
Sandburg, it didn’t come in on little cat’s feet, it came in on lower volume. Just a
boring and frustrating day. Yawn.

How Dry I Am (And Maybe A Little Hungry Too) – Last year, I suggested that 2010
might be the year of food shortages around the globe. That may be why I was struck
by a piece put out by the always sharp-eyed, Andy Lees, of UBS in London. Andy
reviewed a treatise on global water put out by the World Economic Forum
(pronounced “Davos”). The figures Andy pulled from the report are downright
stunning. Here’s how Andy began:
Water – The global growth inhibitor!!!, written by the World Economic
Forum, and entitled “The Bubble is Close to Bursting”, gives some pretty hard facts about water security that
mean present day assumptions about economic trends seem unlikely to bear any reality to what transpires. It
does talk about long term affects from global warming, but given that is all theory, I want to concentrate on just
the hard facts as we know them.

70% of global freshwater withdrawals are used for agriculture – (up to 90% in developing economies), but it is
thought that 50% of that water is wasted against the most efficient irrigation systems. A typical meat eater’s
diet requires twice the water input than a vegetarian diet of similar nutritional value – (meat itself requires 10
times the water per calorie than plants), so a simple switch to meat would wipe out all the possible efficiency
gains from drip irrigation etc, before accounting for the 2bn – 3bn (30% - 45%) growth in population numbers
expected over the next 25 – 40 years. There simply isn’t the water for the world at large to go on the Atkins diet.
“With business as usual water use practices, by 2025, water scarcity could affect annual global crop yield to the
equivalent of losing the entire grain crops of India and the US combined (30% of global cereal consumption”.
Andy then went on to point out that if we tried to increase energy supplies by 5% using something like Ethanol, it would
double the global agricultural demand for water. Andy then goes on to compare water usage to GDP.

Not only does China use 10 times the energy per unit of GDP than does Japan, but it uses 5 times the water per
unit of GDP than the world on average, and 8 times the water per unit of GDP than the US. There simply are not
the resources available to lift China’s GDP per capita to the levels of the West. Of China’s 669 cities, 60% suffer
water shortages and half of them lack wastewater treatment. Treating sewage – (pumping) – requires large
amounts of energy that China cannot afford. The global market for water and sanitation infrastructure is
estimated to grow from USD400bn a year today. By 2015 an average annual investment of USD772bn will be
required for water and wastewater services around the world.

We’ll have more on China in a minute but the WEF paper on water may well be worth a weekend read. Not only will
water shortages become a drag on the global economy, it may be the cause of conflict both among nations and within
them. It will also be a great investment opportunity.

Does Jim Chanos Read Stratfor? – Jim Chanos, the noted short seller, has been very public recently with his bearish outlook
on China. Yesterday he got an unexpected assist from the folks over at Stratfor. Here’s what they wrote in a piece titled
“China’s Unsustainable Economic Model”.

CHINA RELEASED THE BREAKDOWN of its economic growth statistics on Tuesday. Bottom line: falling exports
weighed heavily on growth and nearly canceled out the GDP gains of domestic consumption. Investment —
mostly in infrastructure and public services — comprised over 90 percent of growth.

These results capture the essence of everything STRATFOR has said about the Chinese economy over the past
year. Like many countries affected by the recent economic crisis, China resorted to government stimulus to
make up for the sudden loss in private demand. But unlike other states that use such measures in emergencies,
China’s growth has always been fueled by massive infusions of government funds and credit from a statecontrolled
banking system. The endless stream of loans nourishes the businesses that employ China’s enormous
population. Exports play an important role because they bring in new money to be redistributed by the banks as
directed by the government.

Of course, the redistribution process creates divisions between the haves and the have-nots, but such divisions
can be elided when times are good. It is only when exports slump that it becomes evident that China’s
consumers are too poor to buy all the goods the country produces, and the weight of maintaining growth falls
squarely upon the financial system. This setup is particularly problematic because a centrally controlled financial
system that endlessly transfers wealth from efficient internationally-linked sectors to inefficient state sectors will
eventually collapse under the weight of bad loans.

As you would expect from Stratfor, they go on to analyze the impact of the economics on both China’s internal politics and
on China’s geo-political posture. They may have far deeper problems than tapping on the lending brake to deflate a
housing bubble. Stay tuned.

Cocktail Napkin Charting – Once again the S&P struggled when it hit the resistance band at 1102/1105. Minutes before
10:00, the S&P hit its intra-day high of 1102.72. Within seconds, it began to head lower. By noon it looked ready to
challenge the support band at 1087/1092. Instead it stopped at 1093 and then churned choppily sideways for the balance
of the day.

As noted yesterday morning and, again, above, the “easy” part of the reflex rally is over. The market has a couple of
options on where it heads next. They range all the way from resuming the January selloff to resuming the December rally.
This window of uncertainty could last until about Tuesday. The market should show its hand by then.
For today, the napkins again suggest early resistance at 1102/1105 with critical backup at 1112/1115. Support again looks
like 1087/1092. The fall back from there would be 1070/1075. Breaking below 1070 could put the bears back in control.
Consensus – Initial Claims could set the tone, especially if there’s a surprise jump in the data. Once again, you can gauge
the extent of currency influence by comparing the action in stocks, oil and gold. The game’s on the table. Stay very, very

Trivia Corner
Answer - The state capitals that begin with the same letter as their states are: Dover (Delaware); Honolulu (Hawaii);
Indianapolis (Indiana); Oklahoma City (Oklahoma).
Today's Question - Three pounds of apples and two pounds of apricots cost $2.25. The apples cost less than the apricots.
(One final clue - for the same $2.25 you could buy either apples only or apricots only and not wind up with fractional pounds.)
How much per pound are the apples?


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