Note From Editor Sara Nunnally: We have been inundated with news of uprisings in the Middle East, and how instability has been affecting crude oil prices. Indeed, crude oil topped $100 a barrel for the first time since 2008. But behind these uprisings are price swings from a different commodity sector: agriculture.

This week’s guest article comes from Kent Lucas, editor of Safe Haven Investor and Global Income Generator. What follows is an in-depth account of what’s happening to food prices — wheat, corn, sugar — and why climbing agriculture commodity prices have sparked such upheaval.

Food Crisis Megatrends — Reasons to Be Scared, Reasons to Get Invested

“The Great Food Crisis of 2011″ is here. That’s what the highly respected magazine Foreign Policy is calling the rampant food inflation that is causing problems worldwide.

The British government just completed a two-year study involving 400 experts from 35 countries to assess the global food situation. The results are scary. Here’s what the report said:

By 2050 global food supplies will not be sufficient to feed an expanding population. The UN estimates that food production must rise by 70 percent to feed a world population of more than nine billion in 2050. [But] rising demand and surging global population coupled with increasing resource conflicts over land, water, and energy will hamper food production.

And the United Nation’s Food and Agriculture Organization (FAO) states that the “double whammy of high food prices and the global economic slump pushed an additional 115 million people into poverty and hunger.” Over 1 billion people go hungry every day and it’s rising.

Why? It’s a combination of factors. In part, Mother Nature is to blame. Couple a handful of devastating floods and a widespread drought with rising demand and the problem grows exponentially. The result is higher prices that fewer people can afford.

Today, the FAO Price Index is higher than its 2008 peak. Look at how much prices spiked in 2010 (red line):

Source: FAO

2008 was also a bubble year for many commodities as U.S. food prices were up 5.5%. But 2011 isn’t as simple as a bubble — supply-and-demand economics suggest long-term imbalances. We have a real crisis when we combine the dismal long-term outlook with short-term supply shocks caused by the forces of Mother Nature and, arguably, climate change. It is time to be prepared.

Food Inflation Everywhere

Wheat is nearing all-time highs in Britain and France. Governments around the world are now stockpiling grains. They’re buying millions of tonnes of commodities for their reserves to prevent social unrest and to attempt to contain inflation.

This buying frenzy is adding to the pricing pressure.

Here’s an idea of how much commodity prices have spiked:

Source: CNBC (as of 2/2/11)

Countries across the globe, including the major wheat exporter Russia, have banned exports to control prices. But that’s causing prices to rise even further as businesses and consumers stock up.

China has been implementing serious policy and pricing measures to keep inflation in control and to keep its suffering rural citizens at bay. Chinese insiders think “the natives are getting restless.”

Last year, with floods in China and Pakistan, food prices in Asia surpassed the extremes of 2007-2008. For example, the critical food staple rice shot up from $300/metric ton to $1,100/metric ton — a surge of over 250%.

The shocking stories are everywhere.

In many developing countries, the high cost of basic food staples is exceptionally dangerous as the world’s poorest citizens spend close to 75% of their miniscule income on food! A 15% increase in food prices is flat-out devastating to these regions.

Global Riots & Egypt

“Bring us sugar!” was the chant by thousands Algerian rioters just a few weeks ago. Sugar is a cheap, popular source of calories in many developing countries and the price of sugar is now at 30-year highs.

When I mention rioting, Egypt immediately comes to mind. But that country isn’t the first. Actually, more than 60 food riots have occurred in more than 30 countries in the past several years! And in the past few weeks, there have been government protests in Tunisia, Algeria, Morocco and Yemen — all in part because of rising food prices.

But when severe riots and protests bring down a country as relevant as Egypt, that’s different. When the situation in Egypt threatens Mideast stability and consumes our daily news, we know we have a problem on our hands.

The riots are not only about dethroning Hosni Mubarak, the 30-year president. The real catalyst was the poor standard of living and the leader’s reluctance to improve Egyptians’ daily lives. At the core of that discontent is, of course, food inflation.

And the same kind of anger is brewing in many other Middle Eastern countries. Who knows how far social unrest will spread in the Middle East? But the unsettled political climate in Egypt and in many other countries is very worrisome and is likely to continue this year.

I think you get the point.

Prices will rise even further in 2011. There is no relief in sight for food inflation.

The bottom line is the demand for food is rising faster than food can be produced.

(I’m a guest editor today, but don’t forget, you can sign up for Smart Investing Daily and let regular editors Sara Nunnally and Jared Levy simplify the stock market for you with their easy-to-understand investment articles.)

Food Crisis Megatrends — Reasons to Be Scared, Reasons to Get Invested

More worrisome are the dominant megatrends affecting food supply and prices.

These are the real problems and threats to food stability:

• Rapid reduction in arable land
• Fast-growing populations
• Water shortages
• Changing consumer diets that require more crop inputs
• Decreasing crop yields

The solution is simple: Agricultural output must improve. One study shows that agricultural output must double by 2050. That requires growth of 3.4% a year at least for the next 10 years compared with only 2.4% annual growth for the past 10 years. Some significant output gains must be made.

Editor’s Note: This food crisis is real, and it is growing… The repercussions are scary, but through crisis comes opportunity. Kent is working on a special report on these numerous opportunities. Everything from seeds to fertilizer to machinery to land itself will be affected, and Kent’s report zeroes in on the best way to attack this crisis… and come out with profits. You can learn more about Kent’s report here.

Article brought to you by Taipan Publishing Group. Additional valuable content can be syndicated via our News RSS feed. Republish without charge. Required: Author attribution, links back to original content or www.taipanpublishinggroup.com.

Agricultural commodities have had a bumpy ride over the past month. At the end of January, we started following two agricultural securities: the iPath Dow Jones UBS Grains ETN (JJG:NYSE) and the PowerShares DB Agriculture ETF (DBA:NYSE).

If you recall, I introduced these two exchange-traded assets by noting two technical formations — a broadening descending wedge and a gap-up.

I told you that gap-ups can sometimes be filled, and we waited to jump into JJG and DBA to see if we had more upside movement.

We did, but over the past few days, JJG has since dropped back to fill its gap.

This is what it looks like…

View larger chart

And this is what it means.

Now that the gap is filled, that level becomes a support point. For JJG, we see that this has happened. On Feb. 23, JJG bounced from an opening price of $51.44 and climbed more than 2 dollars to close at $53.49.

JJG has since moved higher.

But why this sudden change in prices? Is it just a technical formation, or has something changed fundamentally for agricultural commodities?

Agricultural Commodities Supply and Demand

The USDA announced again that increased corn acreage would lift inventories by the end of the season, and that recent data suggests a continued decrease in soybean meal. Wheat prices have whipsawed this past week due to the continued unrest in the Middle East and North Africa and rebounding demand, according to Lee Gaus from IFG Futures.

From many analysts, though, the correction in grains prices is a bullish correction. Across the board — corn, wheat, soybeans — the Commodity Research Bureau thinks this pullback is temporary.

If we combine that with the bounce we’ve seen in JJG’s chart, we have a convincing argument for more upside potential in agricultural commodities securities like JJG and DBA.

Now that JJG has found support from filling in that gap from January, we can now use that level as a static stop-loss point… meaning if JJG dips and closes below $51.24, you should exit your position. That price, $51.24, is the closing price from Jan. 11, 2011, the day before the gap up.

There is a chance for a move lower from current prices. High commodity prices could confuse demand, and some stocks of grains are higher than average.

(Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the stock market for you with our easy-to-understand investment articles.)

But if prices do move lower, the larger consensus points to support within the bullish uptrend. For JJG, $51.24 is also the lowest price at which it could trade and remain in its bullish uptrend.

What About the PowerShares DB Agriculture Fund?

Let’s take a look at PowerShares DB Agriculture Fund, though, because it’s trading just a little differently than JJG.

PowerShares DB Agriculture Fund’s holdings are mostly in what’s known as “softs.” Things like coffee, sugar and cocoa. And these commodities have been soaring.

Cocoa is at a 32-year high… Coffee prices climbed to a 13 3/4-year high… And sugar is experiencing a bullish correction from a 30-year high. The outlook for all three of these softs is bullish. Tight supply of both coffee and cocoa is exacerbated by strong demand.

The Commodity Research Bureau says that demand for cocoa is up 4%. The bureau also notes that coffee production is off 4.5%.

That’s one of the reasons why PowerShares DB Agriculture Fund found support before filling its gap up from late January. Take a look…

View larger chart

The difference between JJG and DBA price movements is mainly due to the differences in supply and demand for their holdings.

It’s clear that DBA’s coffee, sugar, and cocoa holdings have tighter supplies with growing demand — at least for this season. JJG’s grains have a bit more supply, and that means the high prices that have stunted demand combined with greater inventories have caused JJG’s price to drop more significantly.

What Should Investors Do?

If you’re already positioned in JJG or DBA, consider holding for a push higher.

DBA needs to push past $35 to spark another significant climb, but with the supply-and-demand projections expected to be very tight this season (Brazilian Arabica production could be off as much as 13%), such momentum is possible.

JJG will have to climb above $56 — which could be a bit of a stickler — for upward momentum to continue. Remember to employ a static stop-loss at $51.24 to limit downside risk. Prices for grains held in JJG are still high relative to supplies, though increased demand from places like China could be enough to keep commodity prices moving higher.

Editor’s Note: One top silver company is poised to make a major announcement about their newest mine any day now. If you own stock on the day results come out, you could make 81% in a matter of hours. Get my valuable silver tip is this exclusive investment report.

Article brought to you by Taipan Publishing Group. Additional valuable content can be syndicated via our News RSS feed. Republish without charge. Required: Author attribution, links back to original content or www.taipanpublishinggroup.com.

As the green line in the above chart portrays, the Agri-Food Price Index has more than doubled in the past four years. How many industries around the world have experienced the selling price of their product move higher that dramatically? Over the same period of time we also note, using the red line, that the price of $Gold has not kept up with the price of Agri-Food.

One of the big lessons of this past year has been that Agri-Foods are not produced in a factory. They are also produced, with rare exception, one time of the year. They are grown in dirt, not the nearest social network site. In 2010, Russia barred the exportation of wheat. Wheat in Russia, as is the case in most countries, is harvested only one time a year. Worlds will not know till near the middle of this year if any Russian wheat will be exported. A complacent world expected Australia to help fill the  gap, only to have that game rained out.

China has indeed been a massive miracle of industrial production over the past decade. That nation has demonstrated an uncanny ability to build a plethora of goods at wonderfully low prices. From televisions to solar panels, China can produce vast surplus of many things. That is, with the exception of Agri-Food.

With Agri-Food, it must increasingly import them. In 2010 that China was a net importer of corn became painfully apparent as the price of corn moved dramatically higher. It had actually achieved that status the year before by importing distillers dry grain. Was part of President Hu’s visit to the  U.S. in part to discover the minimum bid for Iowa?

Many have benefitted from the inadequate supplies of Agri-Food, and in particular the higher prices. In above chart, the green line portrays what Agri-Equities have been doing over the past several years. Solid brown line is for $Gold. While both have arrived at about the same spot on the graph, they took different paths.

A naive review of that graph might also conclude that Agri-Equities and $Gold have moved together.  On the contrary, they have not moved in close conjunction with each other. Coefficient of determination (R2) is only 4%. That means that combining Agri-Equities with $Gold in a portfolio would have produced the about same return as either, but would have done so with far less total investment risk. Not owning Agri-Equities is a risky investment position, especially in a world with an increasingly inadequate Agri-Food supply.

Our 4th Agri-Food Commodities: An Investment Alternative, January 2011 was recently released to considerable interest. This analysis, though statistical, dry, and boring, has rapidly become the standard for reporting and analyzing returns produced by Agri-Food commodity prices. It thoroughly documents the superiority of returns produced by Agri-Food commodity prices, which ultimately drive the returns on Agri-Investments. This report can be previewed at our web site or at www.scribd.com

By Chris Mayer

01/24/11 Gaithersburg, Maryland – A story I’ve been warning about for years is making sensational headlines right now.

It’s a story most people don’t realize could make a huge impact on all of our portfolios in a number of ways.

“US Crop Stock Forecasts Deepen Fears of Food Crisis” read a recent Financial Times headline. The US government cut its estimate for key crops. This came only a week after the UN warned the world faces “food price shock.” Corn and soybean prices jumped and now sit at 30-month highs. Inventories are very tight. Corn is up 94% since June!

And the world worries about a repeat of 2008, when food riots erupted in poor countries around the world.

This has been in the works for a long time. It was there for all to see. The ratio of arable land to people has been falling for decades. Gains in crop yields have slowed. Population has expanded and income levels have grown. Diets have shifted. More people are eating more meat, which is much more grain-intensive to produce.

And the love affair with biofuels puts food production in direct competition with energy. Plus, there are water scarcity issues affecting food supply. My readers have made tremendous gains from this trend by owning shares of agricultural fertilizer producers Potash (POT) and Mosaic (MOS).

I should also make the point that this fits in with another topic I’m concerned about: inflation. Now, the man on the street uses the term “inflation” to mean when prices for everything seem to go up. Or put another way, inflation is when the dollars in his pocket buy less. In truth, this is the effect of inflation. The root cause is simply money printing. When you print more money, that money has less value than if you didn’t print any new money at all.

So what we are seeing with rising commodity prices is not only the supply and demand story I led off with. It’s also the effect of paper money losing its purchasing power in the real world of things. This, too, was easy enough to see. Finally, all that money printing – the “quantitative easing” baloney you’ve heard about – is coming home to roost.

Still, it’s disconcerting to see it all playing out. For the sake of our world, I’d rather have gotten this one wrong. But we have to deal with the market we are in. So what might “Food Crisis II” mean from an investment point of view?

Food prices will have to rise: There is no way around this. We are all going to pay more for food. Wells Fargo predicts US retail food prices will rise about 4% this year. Some things will go up much more. Pork and beef could rise more than 10%.

This won’t necessarily mean that meat producer stocks are good buys, because they may not get to raise prices to fully offset the rise in feed costs. Anecdotally, for instance, The Wall Street Journal cited a Minnesota 300-cow operation that reported feed costs had doubled. Plus, I’ve listened in to the conference calls of a number of food producers – Tyson, Hormel, and Sanderson Farms. They all talk about getting squeezed by rising feed costs.

I do think these companies will be good buys sometime this year, because people will adapt and farmers will respond. Producers won’t produce meat at a loss for long. And farmers will bring every resource they have to bear. It’s been slow getting the crops in the ground so far in many places. But ultimately, there is a lot of potential supply from Brazil and the US.

Still, weather is the big wild card here. If we have a drought in the US or in Brazil, this could really get ugly.

Emerging markets are vulnerable: This follows from the above. It doesn’t really faze the typical American to have to pay 4% more at the grocery store. Food is still such a small part of the typical American’s budget. I think Michael Pollan in The Omnivore’s Dilemma points out that the US spends 9% of its income on food, which is among the lowest percentage of any people anywhere at any time in history.

The same is not true in India or China or many emerging markets. In China, people spend 50% of every incremental dollar on food. And in India, it’s more like 70%. So the rising price of food is felt more keenly in these markets.

The price of food is rising faster in emerging markets, too. In India, food prices are up 18% and at their highest level in a year. China has the same problem. Prices rose 5% in November alone. All around the world, emerging markets have a big problem with rising food prices. Indonesia’s president is trying to get people to grow their own chili peppers. And the South Korean government recently released emergency stores of cabbage, pork, mackerel, radish, and other staples. I could go on and on.

The point is that the emerging markets boom is not going to go far when it faces a food crisis. Already, the markets are starting to reflect this. India’s Sensex was down three straight days and off 6% to start the year. Other markets also started badly. And if China and India and the rest slow down, it’s going to have a huge impact on all those stocks and commodities most sensitive to emerging market growth.

I’m keeping a close eye on these developments. There will be opportunities in this crisis, as with all others. For instance, though rising grain prices are not good for meat producers or emerging markets right now, it’s a boon for fertilizer stocks. As the old golf saying goes, “Every putt makes somebody happy.”

Regards,

Chris Mayer
for The Daily Reckoning

Read more: Food Crisis II http://dailyreckoning.com/food-crisis-ii/#ixzz1C5gcBTtG

While onion prices are not included in our Agri-Food Price Index, they were not necessary to move the index to a new high. Around the world rising global demand along with constrained supply slammed into the weather, most of which was bad. From drought in Russia to flooding in Australia, that which could go wrong has gone wrong. If the world had adequate reserves of Agri-Food such developments would not matter, but it does not.

Regrettably, the world does not have bountiful Agri-Food reserves. U.S. Department of Agriculture(USDA) forecasts that in this coming year the world will have only 41 days of corn in reserves. Rice reserves will be only 61 days. Wheat is a guess as no one knows yet how much will come out of Russia, if any, or the U.S. As an indication of the wheat situation, U.S. export sales, made but not completed, are up more than 100% from a year ago.

Onions, sugar, and cotton, about which we talked last time, are important indicators of the global Agri-Food situation. Why? Some of them are not absolutely necessary, onions and sugar, or necessary in overly bountiful quantity, cotton. Most of us could live with a few less T-shirts per year. Their production, though, must compete with real foods, those necessary to sustain people. In the world of tomorrow, onions, sugar, and cotton must compete with corn and soybeans for productive acreage. Sugar at one time was a food only available to the aristocracy, and that may happen again.

Other signs of stress are apparent in the global Agri-Food system. Palm oil price is portrayed in the chart below. Palm oil is the most consumed vegetable oil in the world. China and India are both the largest consumers and importers of vegetable oils. With domestic consumption of edible oils in those two nations exceeding production, growing demand on global edible oil supplies is likely to continue. As is apparent in the chart, palm oil prices have moved dramatically higher.

Vegetable oils are essential to the cooking process. Every meal we eat either includes vegetable oil or another Agri-Food that must compete for the supply of oil seed grains. Edible oils are derived from oil palm fruit and the crushing of soybeans, corn, canola, sesame, etc. Cooking in vegetable oils rather than animal fats may not appease the food gestapo, but it may become necessary. Necessary does not, however, mean cheaper.

The extraordinary weather related price gains will likely fade sometime this year. Weather is a classic case of a system that tends to regress to the mean. Bad weather becomes normal, and good weather gets worse.

Those strong Agri-Food price gains of 2010 supported dramatic price action in many of the Agri-Equities. Should weather become more normal, those equity prices might be forced to normalize. Between now and then, investors have an opportunity to research those Agri-Equities. If one’s portfolio was void of Agri-Equities in 2010, that is, as they say, water under the bridge. One would not want to make the same mistake when looking back from 2012.

Finally, we have no further information on rumor that the Lexus might become the state bird of Iowa.

Our 4^th Agri-Food Commodities: An Investment Alternative, January 2011 has recently been released. This analysis, though statistical, dry, and boring, is rapidly becoming the standard for reporting the returns produced by Agri-Food commodity prices. It thoroughly documents the superiority of returns produced by Agri-Food commodity prices, which ultimately drive the returns on Agri-Investments. This report can be previewed at our web site or at www.scribd.com

The Food and Agriculture Organization of the United Nations has some nice charts to help us visualize the scary resurgence of inflation in food prices:

If you’ve been in a market lately, you already know sugar (NYSE:SGG), oil & fats, and cereals have surged the most.

The FAO notes we’re seeing historically high prices again:

By mid-2008, international food prices had skyrocketed to their highest level in 30 years … Though food prices have fallen from those 2008 peaks, they are higher than they were before the onset of the food price crisis and will likely remain volatile.

Unfortunately, a strengthening global economy coupled with a monetization of the US debt spells danger for where prices may head in 2011.

Profit from the News: Find out which stocks stand to benefit most in Your Cheat Sheet to Investing in Agriculture >>

Those higher prices of the latter half of 2010 will be incorporated into the cost of clothing in 2011. World is being forced to pay more for cotton to entice farmers to grow cotton rather than food. Farmers can only grow one Agri-Food crop at a time in those fields, generally one time a year. Farm fields are not factories. If you want cotton, be prepared to give up some cornflakes. It is either cotton or “corn.” And forget all that nonsense about ethanol raising the price of Agri-Food to the world. Every time someone buys a T-shirt, the price of Agri-Food will rise.

Oh, and forget shifting to wool. According to the USDA, price of wool is up about 50% from a year ago. That is going to make those sweaters needed to survive Global Cooling a lot more expensive. But, that has other ramifications. If the world wants wool, it will need to allow lambs to become wool bearing adults. So, enjoy that rack of lamb this holiday, you may not be able to afford it next year cause you bought a sweater.

As the next chart portrays, cotton was the winner this past year. A bale of cotton outperformed Gold by a factor of about 4 and the stock market by a factor of more than 5. In fact, 9 of 15 Agri-Food commodities in that chart performed better than Gold. That development should come as no surprise. Every person around the world must buy Agri-Foods. No one by necessity needs Gold.

Extraordinary gains achieved by Agri-Food commodities in 2010 are not likely to be repeated in the coming year. Tractor stocks will not likely rise by 60-100% again in 2011, as they did this past year. However, with the global Agri-Food system moving to a short supply situation in the long-term, price gains will need to be above those experienced by other prices. Not only will they need to be, but because Agri-Food commodities in general are operating in the price inelastic portion of the long-run supply curve they will. $7 corn this time next year is a real possibility, and much of the world will be glad to get it at that price.

Performance of Tier One Agri-Equities was also good in 2010, almost double that of the S&P 500. Tier Two, Agri-China equities, lagged during this period. In 2011 those positions will likely be reversed. Those Agri-Equities with exposure to the massive task of feeding more than 1.4 billion people have a long term wind to their back. That subtly aside, a portfolio without Agri-Equities will be at a serious disadvantage in the decade ahead.

AGRI-FOOD THOUGHTS is from Ned W. Schmidt,CFA,CEBS, publisher of The Agri-Food Value View, a monthly exploration of the Agri-Food grand cycle being created by China, India, and Agri-Energy. To contract Ned or to learn more, use this link: www.agrifoodvalueview.com

With the Federal Reserve Currency Bubble comes, as always, those that benefit. As  above chart portrays, one of those beneficiaries has been Agri-Food commodity prices. Our Agri-Food Price Index continues to set new highs. On the other hand, we continue to show the miserable performance of U.S. equities, a consequence of Federal Reserve and Obama Regime mismanaging the U.S. economy.

As evident in chart to right, Agri-Food commodity prices have matched the highly touted returns in $Gold. Over time the return on Agri-Food commodities should be higher than that for $Gold. When $Gold is harvested, a goodly part of it goes into storage to last forever. When Agri-Food commodities are harvested, they are eaten and disappear.

Double digit real growth is hard to achieve in the world today. However, as chart to right portrays, U.S. grain exports are this year’s growth industry. This chart, from USDA data, is for the Big Four, corn, soybeans, wheat, and rice. Measurement is in tons, not dollar values.

Bar on left is the year-to-year change in Big Four grains already exported by U.S. Agri-Producers this crop year. Middle bar is for export sales that have not yet been completed. Final bar on right is for total of first two charts. How many industries are reporting double digit real growth? And remember, these are staple grains, not iPads.

Why have Agri-Grain demand and the prices of those Agri-Grains risen so dramatically?

First, Agri-Food demand from the world, driven in large part by China, is straining the capability of the global Agri-Food supply system. China is now a net importer of soybeans, corn, and beef. That list will continue to expand.

Second, the global Agri-Food system is now operating in the price inelastic portion of the  long-run supply curve. That means that prices rise more than the percentage change in demand. See The Joy of Agri-Food Price Inelasticity.

Thirdly, the ongoing effort of the Federal Reserve to unilaterally devalue the U.S. dollar is lowering the real price to the world of U.S. grains. A falling dollar makes U.S. Agri-Food production a bargain for foreign consumers. That policy is raising dollar value of Agri-Grains because the value of the dollar is less. Part of the inflation that the Federal Reserve hopes to achieve with devaluation of dollar will arrive in the form of dramatically higher food prices. Question: Will U.S. consumers be able to afford to eat if the Federal Reserve continues its policy of dollar devaluation?

In the chart below on next page, highlighted by arrow, is the ongoing devaluation of U.S. dollar engineered by Federal Reserve. If that group of intellectually inbred academics is allowed to fully implement their dollar devaluation, world will continue to reinvest their dollars in Agri-Food commodities and other real assets like $Gold rather than hold dollars. Eating will become more expensive, but that is part of the stated goal of Federal Reserve policy. More inflation is its goal.

On the other hand, the inverted parabolic curve portrayed in that curve is a coiled spring. Probability of a move counter to that over zealous selling of the U.S. dollar is increasing. Parabolic curves, normal or inverted, due ultimately correct. Were that not true the NASDAQ Composite Index would be at “10,000″ and oil would be at “$250.”

A large “dollar premium” has been built into all commodity prices. When the dollar reverses path, that “dollar premium” will be removed. And quite simply, world is not likely to tolerate a group of intellectually inbred Keynesian ideologues to unilaterally devalue the dollar. Such a development could create a major opportunity for investors as those assets, $Gold, Agri-Equities, etc., remove the “dollar premium” from prices.

Economic growth in China and India will create the largest middle class in history over the next decade, more than a billion people. As their incomes rise, they will eat better. Global demand for Agri-Foods will continue to rise, and bump against a price inelastic long-run supply curve. As a consequence, Agri-Investments are likely to be one of the most lucrative investment themes for the decade ahead. Investors should be researching this sector now, awaiting those always inevitable corrections and consolidations that can be used to make timely investments

.

One day does not make a trend, but sometimes early leadership after an event like the November 3rd QE2 announcement holds for the next leg up in asset prices. The early read after the first hour and forty-five minutes in the new QE2 world is bullish. With markets extended and sentiment getting a little on the giddy side, a correction could come at anytime. Given what we know as of the November 3rd close, the odds favor risk assets making higher highs before we turn the page on 2010. If a correction comes, it should represent a buying opportunity. Early leaders include the NASDAQ (QQQQ) and emerging market stocks (EEM).The bottom portion of the chart below shows the relative strength of (a) silver (SLV) vs. gold (GLD), (b) consumer discretionary (XLY) vs. consumer staples (XLP), and (c) “junk” bonds (JNK) vs. Treasuries (TLT). Silver has more industrial uses than gold. Gold has more appeal than silver when times are tough. Silver carried the day on November 3rd relative to gold which is bullish for risk and the economic outlook. Under bullish market, monetary, and economic conditions, we would expect to see more interest in consumer discretionary stocks relative to the more defensive consumer staples. The early read with discretionary vs. staples is also bullish. Similarly, “junk” bonds had more interest from buyers than defensive Treasuries after the QE2 details became known – again pointing toward bullish outcomes. Notice the evidence below has nothing to do with a personal bias or an opinion – it is what it is.

There were some concerns from the November 3rd trading day relative to volume, breadth, resistance, and volatility. Volume was impressive yesterday, but we would like to see better intraday results on November 4th and/or 5th.

Market breadth on the day of the Fed’s QE2 announcement improved into the close, but we would like to see more conviction in the coming days. A day with roughly 70% of stocks advancing would improve the odds of the S&P 500 moving toward 1,230 or 1,250. Trading activity on November 2nd and 3rd helped clear up some short-term concerns about the market, including those related to market breadth. We still need to see more improvement on a few fronts, but the last two days have us moving in the right direction.

As we noted on October 13th in Possible QE Upside Targets, a barrier of resistance stands directly in front of the S&P 500. We believe the market will break through, but the question is pre-correction or post-correction. Longer-term (next few weeks) higher highs are probably in the cards for most risk assets, but we will continue to monitor conditions with an open mind.Another concern which may be moving us closer to a correction is volatility. The currency markets, which have been big drivers of weak-dollar assets such as copper, gold, silver, and emerging market stocks, have seen a significant pick-up in volatility, indicating indecision among market players. While things look good at the moment, just when investors begin to get more confident is typically when we need to be on “correction alert”.

As we described in Quantitative Easing: How Does The Money Get Into The Real Economy?, the global reach of the Fed’s eighteen primary QE dealers will assist the freshly printed U.S. dollars in finding their way into a wide variety of countries and global markets.

One way to monitor the health of a market rally is to monitor the rally’s leadership. As long as the current leaders remain healthy, the market in general is probably healthy as well. The move in tech stocks after the Fed’s Quantitative Easing announcement (QE2) gives an early bullish read on Chairman Bernanke’s plans to print more money.

The most notable reaction to QE2 may have been in TBT, which allows holders to “go short” U.S. Treasuries, meaning TBT makes money when the price of the Treasury EFT (TLT) falls.

Gold has yet to make a new high, but the short duration of the recent correction was impressive from a bullish perspective. The fact gold is lagging silver tells us the economy may be better off than most believe – not strong, but not headed for a double-dip. As we repeatedly stated over the summer, an objective review of the economic data never placed high odds on a GDP double-dip – that could change, but currently the double-dip scenario remains the lower probability outcome.

One advantage to owning agricultural commodities, like corn, is their aggregate gains over the last year have been a little more subdued relative to copper and silver.

Like gold and silver, the U.S. dollar gave us a head-fake looking like it may rally. Dealing in probabilities takes into account you could be wrong. It also allows you to focus on the task at hand (trying to make money) rather than defending a forecast. Flexibility remains key as we head into unchartered QE2 waters.

The dollar should play a role in the next market correction, which may be due to arrive sometime in the next few weeks. Keep an eye on market sentiment, which is currently extended and concerning.

The video below is part six in a six part series on quantitative easing and its possible impact on the markets and your purchasing power. Part six gives an overview of QE investment strategies. The video was recorded a few weeks ago, but the basic concepts still apply. You can access all six parts in the QE series on this quantitative easing page.

The CCM 80-20 Correction Index has firmed in the last two days which indicates the threat of an imminent correction has been reduced (not passed entirely, but reduced). The CCM Bull Market Sustainability Index (BMSI) also remains firmly in bullish territory relative to the longer-term outlook (next few months). We will continue to post frequent updates on Short Takes. We still believe the next correction may be a buying opportunity, but we will have to see how things unfold.Chris Ciovacco
Ciovacco Capital Management