Saturday, August 18, 2007

The Situation

8/19/07 The Situation

Randall Forsyth: "Even with relatively easy conditions in the fed-funds market, spreads in the commercial paper market have spiked sharply higher, a "telltale of the asphyxiation of liquidity in the U.S. credit markets," says BCA Research's daily comments. Spreads on so-called asset-backed commercial paper have soared, at least based on quoted rates. In actuality, the ABCP market is all but at a standstill for less than prime borrowers amid the cloud of suspicion that has engulfed the market. Some of the assets backing ABCP have been collateralized debt obligations, the derivatives where subprime mortgages often are major components. BCA says the spike in the spread on ABCP over double-A quality financial commercial paper is paralleled by a dramatic widening in A2/P2 (one grade below prime quality) paper versus double-A nonfinancial paper. That move recalls a similar spike during the Long Term Capital Management crisis in 1998."

I keep writing about commercial paper because the problem in this monetary sector has been overshadowed by the subprime morass. As such, the problem has gone largely unnoticed on Main Street. That is a mistake.

Unless an investor is entirely on the sidelines, one's portfolio will show red during sharp and quick 10% market declines. I was so negative in the late summer of 1987 that I did go entirely into cash. As it happens this time, I did see the end of the yen carry trade and did suggest going long the yen several times during the past three months. I saw the liquidity problems developing in the subprime, Alt A, and commercial paper area. I lightened the portfolio and hedged the rest. Despite 40+ years in investing, my hedges were not perfect, and therefore, the portfolio still had one or two red spots. Did my longs in the VIX and the yen offset the red spots? Sure. But that is not the point. I still have more to learn in the hedging area. I was taught a cheap lesson.

Benjamin Graham: " Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed."

Business Week: "Markets can't work when lenders don't know what collateral is worth."

George Ure: " If we get something really large like a magnetic pole shift, or the actual Charles Hapgood nightmare scenario, it would only make sense that the high iron content material of the earth's mantel/surface would be doing some straining, and that might cause earthquakes. Something which deserves more study in the literature is the question "If the magnetic field is measurable deteriorating now, what originally 'set it' and has it flipped before? Seems likely, but whether a resetting has ever happened - and more importantly, what caused it - is a grand field for study. Never enough time around here, though. The point to remember is Albert Einstein's assessment that Hapgood's theory made sense to him. The crust of the earth slipping like an orange peel around what's on the inside is not to be taken lightly... There's a total lunar eclipse on August 28th, and then next summer we have a total solar eclipse coming. When planets line up, so do the gravitational forces, and the quake in Peru this week may have been just a foretaste of more tectonic stresses as external fields influence that ground you're standing on."

Nouriel Roubini: "
Now with financial conditions significantly tightening in credit and financial markets the shock to private consumption, real capex investment of the corporate sector, and residential investment will be even more severe, thus increasing the risks of a US hard landing (either a growth recession with growth below 1% or an outright recession). You have the beginning of a severe credit crunch in mortgage markets (not just sub-prime but also near prime and prime mortgages) and in consumer credit (especially non-credit card consumer debt); a severe tightening of credit conditions for anything related to real estate (housing, non residential real estate) and mortgages; and a sharp increase in credit spreads for the corporate sector that will push down corporate capex spending. Add to all this rising risk aversion, panic, fall in consumers, corporate, investors’ confidence that are important drivers of durable and capital spending decisions and you have all the conditions for a US hard landing.
Will the Fed be able to rescue the economy and avoid the hard landing? This is quite unlikely in my view."

Brett Steenbarger: "We had 598 new 20 day highs on Friday and 633 new lows--quite an improvement...Broad rally lifted the vast majority of shares: 32 new 52 wk highs among NYSE common stocks; only 25 new lows."

First Magnus Financial Corp., a national mortgage lender that is suspending operations, says it has laid off 99 percent of its nearly 6,000 employees nationwide and closed all of its more than 300 offices.

According to Bloomberg, the leaders of China and Kazakhstan agreed to finance and build a network of pipelines to supply the world's fastest-growing major economy with oil and gas from the Caspian Sea region.``The Caspian will be linked to western China,'' Kazakh President Nursultan Nazarbayev told reporters in the capital Astana today after meeting with his Chinese counterpart Hu Jintao. ``These are major projects and today we reached agreement on these issues.'' Kazakhstan's Atasu-Alashankou oil route will be extended and a gas link from Turkmenistan to China through Kazakhstan will be built, Nazarbayev said. The gas link will bypass Afghanistan, Tajikistan and Kyrgyzstan, landlocked countries between Turkmenistan's Caspian shore and China... Kazakhstan and Turkmenistan are the biggest energy suppliers in the former Soviet Union after Russia. The Caspian region they share with Azerbaijan, Iran and Russia holds about 4 percent of the world's proven oil and gas reserves.

John Mauldin: "Almost 50% of the loans made last year were made with little or no documentation check, and 60% of those people overstated their incomes by more than half!!! That means 30% of the loans made were to people who were stretching to buy a home and whose actual income would not qualify them for a home anywhere close to what they bought...As I showed last week, there are already some 2006-vintage subprime RMBS's that have over 50% of their loans at 60 days past due, with over 25% already in foreclosure or having been repossessed. That is in less than a year, and the interest-rate mortgage resets have not even really kicked in!..foreign investors own as much as 16% of the total mortgage securities. Mutual funds have about 16%. Oddly, for all the publicity, hedge funds probably have less than 5%. But they were leveraged, so the losses are magnified...The problem is, quite bluntly, that no one knows what the values of some of the mortgage-backed securities are. And if you don't know, you don't buy. And today, even very well-designed CDOs with no subprime exposure are selling at discounts, if they are selling at all. Senior bank loans are selling at an apparent discount to subordinated debt (which is not selling, so no one knows the value, so the "price" is the last trade). And what about the banks that bought those CDOs? What exposure do they have? Are they in a fund or part of the bank capital? Do you want to lend them money on the overnight markets, for a few basis points more than government securities? The commercial paper market for many banks has simply evaporated. These banks depend on this market for their financing."

Doug Noland: "The much more important issue is whether the Fed and global central bankers have the capacity to maintain the necessary Credit creation to sustain inflated asset markets and Bubble Economies over the intermediate term. More specifically and immediately, will Fed rate cuts halt a rapidly unfolding mortgage Credit collapse? The acute crisis unfolding throughout the commercial paper market can be likely be somewhat ameliorated through aggressive lending at the Fed’s discount window. But the tattered MBS marketplace is a whole different story...With the bursting of the Credit Bubble and the accompanied dramatic downturn in Credit Availability and Marketplace Liquidity, expect a snowball-like surge in the number of layoffs of highly-compensated employees and spending cutbacks (marketing and capital investment)...the fundamental problem with Wall Street finance is that the proliferation of speculating, leveraging and hedging strategies ensures an eventual liquidity crisis. As well as derivatives function for firm’s seeking to shift or hedge, they are a smoldering disaster when an entire marketplace perceives it can hedge market risk. There will be no one take the other side of the trade. Similar dynamics are in play for Credit “insurance.” Credit derivatives and “arbitrage” appear to work too well during the boom, ensuring Credit excesses and wholesale risk distortions that expand over the life of the boom. However, this “market” will inevitably prove unviable during the downside of the Credit cycle. Again, there will be unmanageable losses – in this case mushrooming Credit losses - and few with the wherewithal to make good on their obligations...the dilemma today is that it requires enormous Credit growth and risk intermediation to sustain what has become a global proliferation of myriad Bubbles. The task involves sustaining inflated financial asset prices, real asset prices, incomes, corporate profits and government receipts – not just next week but going forward. The amount of required ongoing Credit creation is unprecedented, at the same time that bursting speculative Bubbles spur unparalleled deleveraging (forced selling of previously leveraged securities holdings). GSE balance sheets aren’t available to absorb any deleveraging, placing the entire role on global central bankers. Central banks have great capacity to create liquidity. But their ability to manage the unfolding breakdown in private-sector risk intermediation is much more ambiguous."

Mike Burk: "We are only 21 trading days from the all time high set for the DJIA on July 19 and number of new lows suggests this decline will be significant. There is probably further to go on the downside. I expect the major indices to be lower on Friday August 24 than they were on Friday August 17."

In recent weeks Yahoo has seen some insider buying of its stock. The company's SmartAds initiative may have something to do with that buying interest. Using SmartAds, advertisers provide Yahoo with sets of backgrounds, images and text that can be mixed and matched to create a virtually unlimited number of different ads. The approach combines technologies Yahoo developed itself with others it acquired. Bringing together this creative zip with the ability to target users based on interest and location gives display advertising the flexibility and direct-response qualities that have fueled the boom in search advertising. Yahoo says it could show SmartAds across its sites, including on premium pages such as the home page. SmartAds, if they prove more lucrative, also could benefit Web publishers that partner with Yahoo, driving more publishers to join Yahoo's nascent display-ad network. Yahoo has deals to provide display ads to eBay, a consortium of newspaper companies, Comcast Corp. and AT&T Corp., with whom it shares ad revenue.
I anticipate that SmartAds will begin to contribute to the company's growth rate in revenues and earnings per share. For patient investors, Yahoo may provide some very pleasant returns. I like the risk/reward at the present $23 level.

Ted Williams: "To be a good hitter, you've got to get a good ball to hit."

Friday, August 17, 2007

The Discount Rate Cut

8/18/07 The Discount Rate Cut

The Fed lowered the rate at the discount window by 50 basis points to 5.75%! According to Action Economics, the reduction was made to narrow the gap with the overnight Fed funds rate, which remains at 5.25%. The discount rate is offered to banks. "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth," the policy-setting Federal Open Market Committee said in a statement.

Borse Dubai has made a $4bn cash bid to buy OMX, clearing the way for a full takeover battle with Nasdaq which has offered $3.7bn for the Nordic stock market company.The battle for control of OMX began on August 9 after Borse Dubai acquired 4.9 per cent of OMX and obtained options from hedge fund investors in OMX to acquire a further 23.5 per cent at SKr230 a share.

Midwest Air Group reached agreement on a deal to be bought by TPG Capital for $450 million, or $17 a share. Northwest Airlines will be a passive investor in Midwest.

Darden Restaurants Inc. agreed to acquire Rare Hospitality International Inc. for $38.15 a share in cash, or roughly $1.4 billion, in a tender offer. The bid represents a 38.7% premium over Rare Hospitality's closing stock price on Thursday. With annual sales of $1 billion, Atlanta-based Rare Hospitality operates and franchises 317 restaurants, including 287 LongHorn Steakhouse restaurants and 28 Capital Grille restaurants. Orlando-based Darden expects to launch the tender offer on Aug. 31 and for the offer to close in October.

Goldman Sachs, in a note published before the half-point cut in the discount rate, said the Fed funds rate could hit 4.5% by year-end, with a cut of at least a quarter-point on or before Sept. 18. "Credit has crunched, and activity will slow. Rate cuts will follow," the Goldman analysts said.

Consumer sentiment weakened in mid-August, the University of Michigan and Reuters reported Friday. The UMich consumer sentiment index fell to 83.3 versus 90.4 in July, well below the reading of 88.0 forecast by analysts surveyed by MarketWatch.

The Fed also injected $6 billion thru a 3 day REPOS.

The benchmark rental rate for shipments to Asia, used to settle freight contracts between owners and oil companies, climbed 1.2 percent to 50.44 Worldscale points yesterday, its biggest one-day gain in six weeks. The rate was previously at its lowest since October 2003.

Gold for December delivery rose $8.80 to close at $666.80 an ounce on the New York Mercantile Exchange.

Mortgage lender NovaStar Financial Inc. said it plans to cut about 500 employees, or 37% of the workforce.

Crude oil for September delivery rose 98 cents to close at $71.98 a barrel on the New York Mercantile Exchange. The contract gained 51 cents on the week. New forecasts said Hurricane Dean will turn into the central Gulf of Mexico and threaten oil and gas installations.

Friday was only the third time that the Dow opened up 300 points or more. After getting to a plus 320 or so, it then drifted down to a plus 80 before closing 233 points higher. The Nasdaq was up about 54 points and the S&P 500 close to 35 points.Despite this impressive action, the VIX was only down a fraction at 30. There are many who believe this volatility will continue at high levels.

The Oil Drum: "The Tennessee Valley Authority shut down one of three units at the Browns Ferry nuclear plant Thursday because water drawn from a river to cool the reactor was too hot, a spokesman said. The nation's largest public utility shut down Unit 2 about 5:42 p.m. CDT because water drawn from the Tennessee River was exceeding a 90-degree average over 24 hours, amid a blistering heat wave across the Southeast. "We don't believe we've ever shut down a nuclear unit because of river temperature," said John Moulton, spokesman for the Knoxville, Tenn.-based utility.

California posted a net loss of jobs in July and the unemployment rate ticked up to 5.3%. The number of jobless Californians looking for work increased 18,000 to 960,000 in July. That was 98,000 more than a year earlier.

Rigzone: "ConocoPhillips is to shut in two of its four Ekofisk fields in the North Sea at the end of September to allow for a planned pipeline tie-in, it said Friday.The company plans to shut in the Eldfisk and Embla fields for approximately 21 days from Sept. 20, the director of communciations for ConocoNorge, Ingvar Solberg said. The estimated production to be shut in is approximately 1.3 million barrels of oil equivalent, Solberg said."

Between The Hedges: " The 50-week moving average of the percentage of bears is currently 36.5%, an elevated level seen during only two other periods since tracking began in the 1980s. Those periods were October 1990-July 1991 and March 2003-May 2003, both of which were near major stock market bottoms."

According to Bloomberg, asset-backed commercial paper yields soared by the most since the Sept. 11, 2001, terrorist attacks after the Federal Reserve cut its discount rate to try to calm financial markets.Top-rated asset-backed commercial paper maturing Aug. 20 yielded 5.99 percent, up 39 basis points since yesterday and the most since a 45 basis point increase on Sept. 20 in the wake of the terrorist attacks in New York City and Washington.Issuers are offering the highest rates in almost seven years to entice lenders who are trying to avoid taking mortgage- backed securities as collateral to avoid exposure to losses from U.S. subprime mortgage delinquencies.

Thursday, August 16, 2007

The Big Reversal

8/7/07 The Big Reversal

China reduced its holdings of US Treasury securities for a third straight month, by $2.3 billion, to $405.1 billion.

The most recent monetary injections by the Fed lowered, at least on a temporary basis, the Fed funds rate to 4.5%, lower than the 5.25% target rate. Yet, volatility continued on the rise in equities as the VIX found a new high level at 30+. Risk aversion and the significant rise in the yen against the dollar have served to limit the effectiveness of the Fed actions. This should not come as a surprise. The flavor of the week remains short-term treasury bills.

Confidence among U.S. homebuilders fell more than forecast in August to the lowest since 1991, as cancellations and more restrictions on lending took a toll.

Brazil's portfolio of Treasury securities increased $41.5 billion to a record $93.6 billion in the first half of 2007, Treasury data showed.

"The turbulence in subprime mortgages has now spread to the commercial paper market -- a $2.2 trillion market in the USA that is the working capital lifeblood for the corporate sector," David Rosenberg, North American economist at Merrill Lynch, wrote in a note to clients on Wednesday. "This is looking worse than just another credit cycle."

St. Louis Federal Reserve Bank President William Poole said on Wednesday financial market turmoil had not undermined the U.S. economy and there was no need for the central bank to ride to the rescue with an emergency rate cut. "It's premature to say that this upset in the market is changing the course of the economy in any fundamental way," he said in an interview with Bloomberg. "Obviously, there could be an impact, but we have to rely on some real evidence."

Countrywide Financial Corp. drew down an $11.5 billion credit facility to boost its liquidity. Moody's and Fitch both lowered Countrywide's credit rating.

The Japanese yen's gains accelerated on Thursday as New York traders arrived, with the dollar going from above the 115 yen level to as low as 113.55 yen -- the greenback's worst level since August 2006. The dollar traded at 116.26 yen late Wednesday.

On Thursday morning the Fed added $5 billion in a RP operation and maintains its objective at a 5.25 Fed funds target rate although that rate is now 5%. Then the Fed injected another $12 billion a bit later.

U.S. home builders cut back again in July, starting construction on the fewest number of new homes in more than 10 years, the Commerce Department reported Thursday. Housing starts fell 6.1% in July to a seasonally adjusted annual rate of 1.381 million, the lowest since January 1997. The decline was larger than the expected fall to 1.40 million. Authorized building permits dropped 2.8% in July to a seasonally adjusted annual rate of 1.373 million, the lowest since October 1996 and less than the 1.40 million pace expected by economists surveyed by MarketWatch. Housing starts are down 21% in the past year, while permits have fallen 23%.

Initial claims for U.S. state unemployment benefits rose by 6,000 to 322,000 in the week ending Aug. 11, the Labor Department reported Thursday.

Financial markets remain stressed. The question remains how much that stress has spread throughout the economy as it tests the stability of our country's economic infrastructure.

Nouriel Roubini: “Risk is present when future events occur with measurable probability” while “Uncertainty is present when the likelihood of future events is indefinite or incalculable”. This distinction between risk and uncertainty helps to explain the recent market panic and turmoil. Today, the FT cites a market economist at Lehman who said: “We are in a minefield. No one knows where the mines are planted and we are just trying to stumble through it”. A few days ago another market participant put it this way: “It is not the corpses at the surface that are scary; it is the unknown corpses below the surface that may pop up unexpectedly”. Unknown minefield; unexpected corpses: this is “uncertainty” rather than “risk”. Risk can be measured and priced because it depends on know distributions of events to which investors can assign probabilities. Uncertainty cannot be priced by markets because it relates to “fat tail” distributions and extreme events that cannot be easily predicted or measured."

At the opening on Thursday, the Nasdaq had dropped 10% from the recent high.
Margin calls are becoming more frequent and creating heavy liquidation.

Will the Fed lower the rate at the discount window?

As the VIX approached 35, the buying in the yen has accelerated. At the same time, the money center banks found significant strength and profit taking took crude to $71 a barrel and natural gas, with the weather a factor, found some buying at 6.87. Meanwhile, the VIX closed below 31.

The 2-year note ended up 12/32 at 101 with yields at 4.082%.

Gold for December delivery tumbled $21.70, or 3%, to close at $658 an ounce on the New York Mercantile Exchange. Other metals futures also declined sharply, with silver selling off 8%, copper dropping 7% and palladium dropping 6%.

The financials paved the way for a big reversal from the Dow down 343 points to a small loss by the end of the day. The S&P 500 also showed a big reversal and closed with a small gain.

HP sees pro forma eps for the year of $2.86-2.87 with third quarter earnings 5 cents above expectations with margins moving up to 9%

Big fire at the Chevron Mississippi refinery.

The Bank of Canada injected C$370 million ($346 million) into financial markets on Thursday in a bid to lower the overnight interest rate toward the central bank's target and improve liquidity.The bank has been intervening almost every day in the last week through its Special Purchase and Resale Agreements in the wake of troubles in the U.S. subprime mortgage market. On Wednesday it injected C$350 million.

A group of 10 major financial players, including Quebec's giant provincial pension fund, said Thursday that, at a meeting in Montreal, they have reached an agreement to bail out the battered $40-billion market for so-called third-party asset-backed commercial paper (ABCP).

Wednesday, August 15, 2007

The Bell Rings

8/16/07 The Bell Rings

Monthly capital flows to the U.S. including short-term securities fell back in June, to $58.8 billion from a revised $107.3 billion in May, as private investors bought smaller amounts of Treasury bonds, notes and other investments. Net foreign purchases of long-term U.S. securities were $148.6 billion for the month, falling back from$163.7 billion a month earlier. Private investors bought $94.8 billion in long-term securities, down from $152.2 billion worth of those securities in May. Meanwhile, central banks and other official institutions bought more securities in June including $32.5 billion in Treasury bonds and notes.

The benchmark subprime mortgage index linked to home loans made in last year's second half fell to a record low on Wednesday, as nervous investors sold risky bonds and liquidity fears rose, traders said. The ABX 07-1 "BBB-" index fell to a record low 34.66 on Wednesday, versus 36.75 at the prior close and a record low close of 35.14, traders said.

The Treasury will auction and issue about $1 billion in 8-day cash management bills on Wednesday, the department announced. The auction and issuance of the bills was previously unscheduled.

The Labor Department said consumer prices rose 0.1% last month, the slowest inflation rate in eight months. The core rate, which removes volatile food and energy prices, increased 0.2%

The British Bankers' Association said that the overnight sterling LIBOR rate -- the interest rate banks charge each other when lending money -- fell again on Wednesday, suggesting that banks' immediate concerns about short-term volatility in the markets are abating. The sterling rate dropped to 6.01% from 6.12% on Tuesday.

U.S. banks caught in the credit market upheaval have started refusing to lend money against hedge funds' subprime credit portfolios, the Financial Times reported Wednesday. Hedge funds said several banks in recent days had cut off lending to funds that use credit portfolios, including mortgages, collateralized debt obligations and subprime securities, as collateral, the newspaper said. That leaves the highly leveraged funds heavily reliant on their prime brokers for borrowing, the report added.

WCI Communities expects to record pretax asset impairment charges of $34 million to $54 million for the quarter. In an Aug. 10 filing, WCI said it expected to post a loss of about $16.9 million for the quarter, which included $14 million of pretax impairment charges. The company also said it continues to believe that its cash flow from operating activities and investing activities for 2007 will range from $530 million to $730 million. Additionally, WCI said it's finalizing negotiations with its lenders for an amendment of its bank covenants beginning in the quarter ended June 30.

Real average weekly earnings fell by 0.1 percent from June to July after
seasonal adjustment, according to preliminary data released today by the Bureau
of Labor Statistics of the U.S. Department of Labor. A 0.3 percent increase in
average hourly earnings was offset by a 0.3 percent decrease in average weekly
hours and a 0.1 percent increase in the Consumer Price Index for Urban Wage
Earners and Clerical Workers.

Crude oil for September delivery rose 95 cents, or 1%, to close at
$73.33 a barrel on the New York Mercantile Exchange. September heating
oil rose 4.44 cents, or 2%, to end at $2.0269 a gallon. September
reformulated gasoline gained 3.50 cents, or 1.8%, at $2.0088 a gallon.
September natural gas, which had rallied earlier in the session, fell
7.60 cents to close at $6.864 per million British thermal units. The
contract hit an intraday high of $7.192.

The S&P 500 is now given up all its gains for 2007. We have now dropped from 14,000
on the Dow to 12,800+.

Countrywide Financial 30-day paper going for 12% as the stock drops to $20.

Amgen Inc. will cut 12% to 14% of its workforce, or 2,200
to 2,600 jobs, as part of a restructuring, and the biotech company cut
its 2007 adjusted earnings forecast to a range of $4.13 to $4.23 a
share from its earlier view of $4.28 a share. Amgen said its lower earnings outlook for
2007 is due to lower Aranesp revenues.

David Walker, GAO head: "time to learn from history and take steps to ensure the American Republic is the first to stand the test of time."
Grimly, in Walker's vision of the country's future a government driven to financial crisis will need to dramatically raise taxes, cut programs, and brace for a currency crash as foreign debt holders dump U.S. bonds and notes.
"I’m trying to sound an alarm and issue a wake-up call." He says the country is not taking the challenges to the long-term sustainability of the nation "seriously enough."
In the report, Walker cites Bush administration policy on energy, education, environment, immigration, and Iraq as leading the country along an "unsustainable path."
"Our very prosperity is placing greater demands on our physical infrastructure. Billions of dollars will be needed to modernise everything from highways and airports to water and sewage systems. The recent bridge collapse in Minneapolis was a sobering wake-up call. They need to make fiscal responsibility and inter-generational equity one of their top priorities. If they do, I think we have a chance to turn this around but if they don’t, I think the risk of a serious crisis rises considerably."

Returning close to normal

8/15/07 Returning Close To Normal?

The European Central Bank made its fourth consecutive unscheduled one-day tender operation, for 7.5 billion euros. The ECB said market conditions were "close to normal." The weekly tender operation was for 310 billion euros.

The euro-zone economy grew at a 2.5% annualized, or 0.3% quarterly, rate during the second quarter, the Eurostat statistics agency.

The July U.K. consumer price index fell 0.6% month-on-month, according to data from the Office of National Statistics. Ecnomists had been expecting CPI to dip by 0.2% in the month. On an annual basis, the CPI showed a rise of 1.9%. It is now below the Bank of England's 2% inflation target. The ONS said that falling food prices was the biggest contributor to the fall in monthly CPI. The retail price index showed that inflation fell to 3.8% in July, down from 4.4% in June.

UBS fell 3% after it said that the current market turbulence could lead to a weak third quarter.

The Bank of Japan Tuesday drained 600 billion yen ($5.08 billion) from the money market to suck out excess liquidity, after injecting 1.6 trillion yen over the previous two days, according to reports. Wire service reports said the move came after the overnight call rate - the interest rate on interbank borrowings - dipped to 0.1% Tuesday, falling well below the BOJ's target of 0.5%.

Wal-Mart Stores Inc.'s Japanese retail unit Seiyu Ltd. said on Tuesday it now expects to post its sixth straight annual loss in 2007 on sluggish sales, but dismissed speculation that the results would prompt Wal-Mart to pull out of Japan.

Wal-Mart's earnings per share from continuing operations were 72 cents per share before a gain of 4 cents. Analysts on average were expecting 76 cents, according to Reuters Estimates. Chief Executive Lee Scott blamed the disappointing performance on economic pressure around the world. "It is no secret that many customers are running out of money toward the end of the month," Scott said on a recorded conference call, citing consumer pressures ranging from high gas prices to the U.S. housing slump. For its third-quarter, Wal-Mart forecast earnings per share of 62 cents to 65 cents from continuing operations, while analysts on average were expecting 68 cents. For the fiscal third quarter, Wal-Mart estimates U.S. same-store sales to rise 1% to 3%. For the full year, the company said it expected earnings of $3.05 to $3.13 per share from continuing operations, down from an earlier view of $3.15 to $3.23. Analysts were expecting $3.16.

Home Depot Inc. reported a 15 percent fall in second-period profit on Tuesday as sales fell short of expectations amid the softer U.S. housing market. The company still expects per-share profit to decline as much as 18 percent this year and reiterated that it was in talks that could lower the price or possibly derail the sale of its HD Supply wholesale business. Earnings fell to $1.59 billion, or 81 cents a share, in the second quarter ended on July 29, from $1.86 billion, or 90 cents a share, a year earlier. Excluding discontinued operations, earnings for the latest period were 77 cents a share, better than the 72 cents expected by analysts, according to Reuters Estimates. Sales fell 1.8 percent to $22.18 billion, below the $22.3 billion analysts expected. Sales at stores open at least a year fell 5.2 percent. The average purchase fell 2.8 percent to $58.30.

Countrywide Financial said Tuesday that its total July mortgage fundings rose 6% from year-ago levels, to $39 billion, but they fell 14% from June 2007 levels. "Mortgage funding volume declined 14% on a sequential month basis, which reflects our tighter lending guidelines that have significantly curtailed total production," Countrywide president and CFO David Sambol said in a press release.

The British Bankers' Association said Tuesday that the overnight sterling LIBOR rate -- the interest rate banks charge each other when lending money -- fell to 6.12% from 6.5% on Monday. The fall "suggests banks' worst fears about credit markets are receding, at least for now," the industry association said in a statement. "Today's change does not mean a return to normality by any means," the BBA said. "But it does mean banks are lending with more confidence than they have been in recent days."

VMware, a subsidiary of computer storage and software company EMC , is selling 33 million shares in an IPO on the New York Stock Exchange. VMware said late on Aug. 13 that shares will go for $29 apiece, at the high end of the company's forecast range. The stock opened at $50. Intel on July 9 invested $218.5 million for a 2.5% stake in VMware, and will add an executive to VMware's board. On July 27, Cisco Systems said it's paying $150 million for 1.6% of the software maker. VMware technology helps IT departments make more economical use of servers, the powerful computers that run Web sites and corporate data networks.

Paul Kasriel: "From 1929 through 2006, there were only 13 years in which households incurred deficits – i.e., spent more in total than they earned after taxes. Two of these household-deficit years occurred during the Great Depression of the 1930s, three occurred shortly after the end of World War II and one occurred in 1955. The remaining seven household-deficit years occurred in 1999 and 2001 through 2006. Three things to note: (1) that households have run deficits in six out of the past seven years is unprecedented; (2) the magnitude of the 2004, 2005 and 2006 household deficits are unprecedented, and; (3) the household deficits starting in 1999 occurred in a period when asset prices showed extraordinary increases."

Addison Wiggin: "Milk was, once again, more expensive than ever last month. The average American paid $3.80 per gallon, up 50 cents from January, said the USDA's latest report. The government agency predicts a 46% increase in international prices during roughly the same period. The USDA also estimates China's dairy consumption will increase at least 15-20% annually in the next few years."

Led by a 2.5% increase in energy prices, wholesale prices increased a larger-than-expected 0.6% in July, the Labor Department reported Tuesday. Wholesale food prices fell 0.1%, the third straight decline after hefty increases at the beginning of the year. Excluding food and energy prices, the core producer price index increased 0.1%, as expected. Producer prices are up 4% in the past year, while core prices are up 2.3%, the biggest gain in nearly two years.

The U.S. trade deficit narrowed unexpectedly by 1.7% in June to $58.1 billion, the Commerce Department said Tuesday. Exports rose faster than imports in June. The U.S. trade deficit with China widened to $21.2 billion in compared with $19.6 billion in the same month last year.

Sanford Bernstein says Citi could have $3 bln credit losses.

The Oil Drum: "1) Crude oil - Production of crude oil decreased by 503,000 b/d from April to May. Total production in May was estimated at 73.06 million b/d by the Energy Information Administration (EIA), which is 1.21 million b/d lower than all time high crude oil production of 74.27 million b/d reached in May 2005.
2) Total Liquids- Production of all Liquid fuels decreased by 550,000 barrels per day from May to June, according to the latest figures of the International Energy Agency (IEA). Resulting in total world liquids production of 84.28 million b/d, which is 564,000 b/d lower year on year from June 2006 to June 2007 and 1.85 million b/d lower than all time maximum liquids production of 86.13 million b/d reached in July 2006.
3) OPEC - Total crude oil production of the OPEC cartel decreased by 50,000 b/d to a level of 30.16 million b/d from May to June, according to the latest estimates of the IEA. Preliminary figures from the EIA show an increase of 370,000 b/d from June to July resulting in OPEC crude production of 30.37 million b/d.
4) Non-OPEC - Total liquids production of non-OPEC decreased by 460,000 b/d from May to June, according to the latest figures of the IEA. Production has dropped from 50.57 million b/d in February to 49.31 million b/d in June. The overall production decrease in June resulted mainly from declining production in Canada (130,000 b/d), the United Kingdom (140,000 b/d) and Norway (370,000 b/d). Mexican production increased with 30,000 b/d in June.

In a University of Michigan customer satisfaction survey scheduled for release Tuesday, consumers gave Google a score of 78 out of a possible 100 points, down three points from last year. It was the first time Google slipped below 80 points since 2002, when the company was added to the survey. Meanwhile, Yahoo gained three points to 79 to secure the top spot.

The Federal Reserve didn't inject any liquidity into the financial system during its normal 9:30 a.m. open market operation, the New York Federal Reserve said Tuesday. It was the first workday since May 11 that the Fed didn't conduct any temporary repurchases of Treasurys from banks, although the Fed said it stood ready to lend money later in the day if needed.

Gold for December delivery ended down $1.20 at $679.70 an ounce on the New York Mercantile Exchange.

According to Reuters, Sam Zell remains committed to taking Tribune Co. private, a source close to the transaction said on Tuesday, as shares of the U.S. newspaper publisher and broadcaster fell because of concerns that the deal might not go through. Zell's perspective on Tribune "as an investment and as a company has not changed," said the source, who requested anonymity because the source was not authorized to speak for Zell.

Crude oil inventories fell by 2.5 million barrels to 333.90 million barrels in the week ending August 10, the American Petroleum Institute reported Wednesday. Gasoline supplies fell by 800,000 barrels to 202.3 million barrels in the latest week, while distillate stocks declined 200,000 barrels to 128 million barrels, API said. In a separate report, the Energy Department said that crude oil supplies fell 5.2 million barrels to 335.2 million barrels in the latest week. Gasoline stocks declined 1.1 million barrels to 201.9 million barrels, while distillate stocks rose by 200,000 barrels to 127.7 million barrels, the Energy Department said. Refineries operated at 91.8% of their operable capacity last week, the government said.

Monday, August 13, 2007

Some Surprises And Some Expected

8/14/07 Some Surprises And Some Expected

Karl Rove plans to leave the White House at the end of August.

Sunni politicians maintained a hard line Monday after Iraqi Prime Minister Nouri al-Maliki invited key Sunni and Kurdish allies to a crisis conference in a desperate bid to reach a compromise among Iraq's divided factions.

Goldman Sachs Group on Monday said a group of investors that includes Eli Broad and Hank Greenberg will sink $3 billion into one of its biggest hedge funds that has seen its value plunge amid market volatility.

The European Central Bank injected an additional $65.3 billion into the banking system on Monday to soothe rattled credit markets, while insisting that market conditions are "normalizing."

The Bank of Japan said it had injected 600 billion yen (5.0 billion dollars) into the money market to avert liquidity shortages as a result of problems in the US subprime mortgages sector for risky borrowers. The BoJ had already pumped one trillion yen into the financial system on Friday.

The New York Federal Reserve injected just $2 billion in liquidity into the market on Monday, well below the $52 billion requested by banks and other institutions, according to a posting on the New York Fed's website. The $2 billion was injected in the form of overnight repurchase agreements and purchases of Treasuries and agency debt.

The Bank of Canada added C$670 million, or $638 million in U.S. dollars, down from C$1.685 billion on Friday.

Blackstone Group said second-quarter net income surged to $774.4 million from $224.1 million in the second quarter of 2006.

Several leading natural gas companies will gather in Denver this week at a natural gas and climate change conference beginning Monday.
Among the companies presenting on topics including climate change and pipeline transportation are: Questar Corp., Halliburton Co., Anadarko Petroleum Corp., Whiting Petroleum Corp., EnCana Corp. and BJ Services Co. Goldman Sachs analyst Brian Singer recently upgraded the exploration and production sector to "Attractive" from "Neutral." Singer expects exploration and production stocks to bottom by the end of September, if they haven't already.
"We believe risk to our already bullish views on crude prices and refining margins is skewed to the upside which gives us greater confidence in our above-consensus natural gas view for 2008 and 2009," Singer wrote in a client note.

China's National Bureau of Statistics on Monday said its consumer price index jumped by 5.6% in July from the same month last year, the highest rate of increase since 1997. Food prices were the main culprit, led by a 45% rise in some meat prices.

Brad Setser: "The release of China’s July trade data was overshadowed by far more dramatic developments in the markets. What is a $24.4b surplus accumulated over a month compared to the decision of the world’s central banks to inject over $200b into the world’s banking system over two days? But China’s July surplus is still remarkable. Some had expected that the end of certain export rebates would have pulled some July exports forward, increasing the June surplus and cutting the July surplus. But that didn’t seem to happen. Others expected that concerns about the safety of Chinese products would cut into China’s export growth. That too didn’t happen."

Sears Holdings Corp. said Monday its second-quarter profit may decline more than it previously forecast, hurt by weakness at both its Kmart and Sears chains and increased discounts for apparel.
The company also said it will repurchase as much as $1.5 billion in additional shares. The company had $19 million remaining for repurchase under an existing plan.

John Hussman: " Contrary to the apparent belief of investors, the Fed did not shift its policy, nor did it “bail out” the mortgage-backed securities market by “buying” them from banks. What actually happened is that the Federal Funds rate shot to about 6% on Friday morning, and the FOMC brought it down to its target rate by entering into 3-day repurchase agreements . The banks sold securities to the Fed on Friday, and are obligated to buy them back from the Fed on Monday at the sale price, plus interest. Such open market operations are designed to ease the immediate demand for liquidity, and to give the banks and dealers more time to find buyers in the open market for the securities they are trying to liquidate...Now, the size of the operation ($38 billion) was unusual, as was the scale with which the Fed allowed dealers to submit mortgage-backed securities as collateral, rather than simply Treasury and agency securities. My impression is that in doing so, the Fed had no intent of “bailing out” the mortgage backed market, or of creating a huge “moral hazard” by absorbing losses for the irresponsible behavior of lenders. Rather, the Fed had to allow submission of mortgage-backed securities because that's what the banks actually own, and it's precisely the collateral for which the banks can't find a buyer...Given that about $1.4 trillion of interest-only adjustable-rate mortgages were issued in 2005 and 2006, and hundreds of billions in sub-prime mortgages are already delinquent, a $38 billion repurchase operation by the Fed, where the securities posted as collateral have to be bought back by the banks unless the banks default, is hardly a “rescue operation.”

Excluding autos and gas, retail sales rose 0.6% in July after remaining unchanged in the previous month. Excluding autos, sales rose 0.4% in July after a 0.2% fall in June. The increase was in line with expectations. Excluding gasoline, sales increased 0.4% in July after falling 0.7% in the previous month.

Homebuilder Hovnanian Enterprises delivered 3,179 new homes in the third quarter, down 31% from a year earlier. Net contracts decreased 24% to 2,539, excluding 255 net contracts for unconsolidated joint ventures. Contract backlog as of July 31 stood at 7,126 homes, down 31% from the year-ago period. As a result of the continued deterioration in demand and pricing in certain communities since the end of the second quarter, the company said it expects to take pre-tax charges of $90 million to $110 million related to land impairment and write-offs of development costs and land deposits in the third quarter.

Japan's economy expanded 0.1% during the April-June period over the previous quarter after adjusting for inflation, according to official data released Monday. The growth is Japan's slowest in three quarters, and increases chances that its central bank may hold short-term interest rates unchanged after a two-day meeting next week, according to reports.

Amgen filed a 10-Q report with the Securities and Exchange Commission stating it was exploring cost-cutting measures in order to offset the impact of weaker sales of its top-selling anemia drugs.

Crude oil for September delivery rose 15 cents to close at $71.62 a barrel on the New York Mercantile Exchange, after earlier hitting an intraday high of $73.19. Natural gas dipped 3 cents to $6.79.

Gold for December delivery closed down 70 cents at $680.90 an ounce on the New York Mercantile Exchange. The Dollar Index, which tracks the greenback against a basket of the world's major currencies, rose 0.4% at 81.035.

Sunday, August 12, 2007

This Week

8/13/07 This Week

Robin Williams: "Politicians are like diapers. They need to be changed often and for the same reason."

Five American soldiers were killed south of Baghdad, including four in a single roadside bombing, the military said Sunday. The deaths announced Sunday raised to at least 3,690 members of the U.S. military have died since the Iraq war started in March 2003, according to an Associated Press count.

LA Times: ""We're going to have a bear market in housing for a while," said Christopher Cagan, director of research for First American CoreLogic in Santa Ana. "It's going to be bad to be a seller or someone forced to refinance in the impact zone." Lenders' inventories in the counties of Los Angeles, Riverside and San Bernardino grew by 5,829 during the second quarter, according to data compiled for The Times by First American, a real estate tracking firm.
Cagan said Southern California's hardest-hit areas -- the impact zone -- will be the Inland Empire, the high desert and the northern reaches of L.A. County. These are where foreclosures are the greatest and, as a result, the market is weakest."

"U.S. dollar assets, including American government bonds, are an important component of China's foreign exchange reserves as the dollar enjoys a major position in the international monetary system based on the large capacity and high liquidity of U.S. financial markets," Xinhua quoted the official as saying.

Mike Burk: "Volatility is relatively high and both upside and downside volume are at or near all time highs. The last time we had similar conditions was in early 2001 and we had a bear market rally that lasted about a month. The market is beginning a rally which should last about a month. I expect the major indices to be higher on Friday August 17 than they were on Friday August 10."

Matt McCracken: "The next market cycle is shaping up to be an Inflationary Bear Market (IBM) that will provide a once-in-a-lifetime profit opportunity for those who know how to invest in this type of market environment. Unfortunately, the ensuing IBM will lead to significant losses for the majority of individuals who have implemented a traditional asset allocation of stocks, bonds and REITs."

A spokesman of the Shiite cleric Moqtada al-Sadr in Iraq's holy city of Najaf dismissed the US military claims on his presence in Iran. Col. John Castles, commander of the 82 Airborne Division's 2nd Brigade Combat Team, said on Friday that al-Sadr had returned to Iran, where he had spent several months earlier this year.Al-Sadr's office said he was still in Iraq. The spokesman in al-Sadr's headquarters in Najaf, south of Baghdad, called the US assertion a "baseless rumor."

China's oil imports to fuel its booming economy jumped to a new monthly high in July, rising 39 percent over the same month a year ago, according to data released Friday. China imported 103.8 million barrels of oil in July, or an average of about 3.4 million barrels a day, according to the General Administration of Customs.

The Egyptian Prime Minister announced that India's largest private sector company, Reliance Industries, is planning to invest $10 billion in Egypt to produce petrochemicals and oil products for the growing markets of Europe and United States, Bahrain Tribune reported.

The Iraqi Oil Minister said that several Russian companies have recently shown their eagerness to take part in the overall development of oil fields throughout the south of Iraq, IDP reported. He further added that since the fall of Iraq's former regime, the Russian government has been attempting to renegotiate the $4 billion deal signed by LUKOIL in West Qurna. It is of significance that the Iraqi government will deal with the Russian companies in accordance with Iraq's new oil law and ways that best serve the Iraqi economy.