Saturday, September 22, 2007

Confdence Crunch

9/23/07 Confidence Crunch

Sam Zell: "We're not really in a 'credit crunch. I think we're in a 'confidence crunch. I would argue the excess liquidity that existed eight weeks ago still exists today. It has a different risk premium on it, but the actual amount of liquidity has not changed. Over the last three years, people were flippant. They bought anything they wanted and were proud that they didn't do due diligence. I think they have all been chagrined and are scared out of their minds...Even when I buy newspapers in 2007, everybody says, 'If you didn't understand before, now you really don't understand."

We may have a confidence crunch but the fear crunch has disappeared. It was only a matter of weeks that the VIX was trading over 35, and now, it's dropped to 19. Is it destined to return to the 12 level or jump once again? I believe fear will return.

Not everyone believes we have a confidence crunch. The Rasmussen daily consumer confidence index rebounded to 110.7, and this is above the level seen for the entire month of June (before the shit hit the fan).

According to the LA Times, President Bush plans to ask lawmakers next week to approve another massive spending measure -- totaling nearly $200 billion -- to fund the war through next year, Pentagon officials said. If Bush's spending request is approved, 2008 will be the most expensive year of the Iraq war.
Our national debt ex- social security etc is $9 trillion. The Congress will approve an increase in the debt limit. Who will buy the new debt? China? India? Other ASEAN countries? Russia? Saudi Arabia? I don't think so. Just because you want to sell debt doesn't mean someone will buy it. Not with the dollar continuing to fall through the floor and creating negative returns for foreign bond buyers. Fear will return.

Robert Shiller: "The decline in house prices stands to create future dislocations, like the credit crisis we have just seen."

Jeffrey R. Nyquist: "The United States once held an international position of trust, and that trust has been abused. We say to ourselves that another drop in interest rates and we’ll avoid a recession. We’ll avoid the pain we’re due to suffer. Many decades ago the great economist, Ludwig von Mises, noted that a “drop in interest rates falsifies the businessman’s calculation.” The change in rates makes “some projects appear profitable and realizable which a correct calculation, based on an interest rate not manipulated by credit expansion, would have shown as unrealizable.” First there was a stock market boom, then came a real estate boom, and now we have to wonder what kind of boom we’ll see next. Perhaps it will be a “crack-up boom.” The United States has gotten away with financial abuses for a long time because the dollar is the international reserve currency. But the outside world is not stupid. They see that their investment in the dollar has resulted in a massive loss. The Chinese, Saudis, Japanese and British are losing trillions in buying power. The dollar’s decline is now accelerating, with massive consequences for all...We are on the brink. A once decent system, turned to dishonest practice, faces a day of judgment. Billions of lives are in danger. The flight into real values is about to begin. An age of blood and iron follows."

Peter Schiff: "To America's creditors around the world, whose mountains of dollar reserves will be debased by lower rates in the U.S., this action amounts to the monetary equivalent of "let them eat cake." My prediction is that rather than doing so, they will just throw it back in our faces, and refuse to continue funding our deficits...If Bernanke really had any guts he would have assured our creditors that they will be repaid with real purchasing power, and that the Fed was willing to put some teeth in our alleged "strong dollar policy". His capitulation proves that this phony policy was pure propaganda all along, merely designed to fool foreign creditors into holding our paper."

Doug Noland: "Continuing a trend that became quite pronounced last year, near double-digit financial sector growth far exceeds that of the real economy...Second quarter numbers suggests the scope of global dollar "recycling" requirements has inflated substantially. The Federal Reserve’s aggressive rate cuts earlier this week definitely only exacerbate what is becoming an untenable outward flow of dollar liquidity from the U.S. financial system to the Rest of World (that must, at a price, be “recycled” back into U.S. assets). We believe the current course of Fed policy is an attempt to Sustain the Unsustainable. The Q2 Flow of Funds report certainly confirms the enormity of ongoing Credit creation, intensive Risk Intermediation, and Financial Sector Ballooning – Classic Credit Bubble Dynamics. The bottom line is that only extreme levels of Credit expansion and intermediation now sustain bloated and maladjusted financial, economic and asset market structures. As we’ve witnessed, any interruption in the Credit creation process will almost immediately instigate financial dislocation. The Fed has chosen aggressive action in hopes of resuscitating Credit excess and Bubble Perpetuation. A less risky strategy for our system and currency would necessitate air flowing the other direction - out of Credit, asset and economic Bubbles. Postponing the adjustment process at this point ensures greater future financial tumult and economic hardship."

Inflation is under control? The Goldman Sachs Commodity Index is up 25% year to date.

Ethan Penner: ‘We’re probably at the closest point to a big meltdown, a depression-type meltdown than we have been in our lives."

Twenty-seven percent have already missed a payment, said First American LoanPerformance, which owns the largest database of U.S. mortgages.

Alibaba.com Corp confirmed that it will list unit Alibaba.com in the third quarter, raising 7.8 bln hkd.

Friday, September 21, 2007

Evaluating Assets

9/22/07 Evaluating Assets

The Daily Reckoning: "The Center for Responsible Lending predicts that foreclosures on subprime loans will lead to a total loss of $164 billion worth of home equity. Financial institutions are said to be facing losses of more than $300 billion from mortgage financing. But the real losses will be suffered by ordinary homeowners. The total value of residential real estate, in the United States, is about $21 trillion. A 15% loss would be the equivalent of a $3 trillion loss in household wealth."

Federal Reserve Board governor Kevin Warsh: "How quickly markets normalize may depend on the speed with which investors and counterparties gain comfort in their abilities to value assets. Some may find they are not well-equipped to make these evaluations."

A big overhang of property will bring U.S. house prices down further, but it is too early to say if the economy will plunge into recession, former Federal Reserve chief Alan Greenspan was quoted as saying on Friday.

A Mattel executive apologized to China on Friday, taking full responsibility for the recent wave of recalls of toys made in the country, according to media reports.

The euro-zone manufacturing purchasing managers index dropped to 53.2 in September from 54.3 in August, its lowest reading since November 2005. The euro-zone services purchasing managers index dropped to 54.0 from 58.0, its lowest reading since August 2005.

The U.K. Treasury said Friday that renewals with Northern Rock of existing uncollateralized deposits and wholesale borrowing and retail bonds are covered under treasury guarantee arrangements. The Bank of England's lifeline to crisis-hit mortgage lender Northern Rock may have totalled around 2.9 billion pounds ($5.8 billion), according to New Star Asset Management economist Simon Ward.

Gani Kasymov, a veteran politician handpicked as senator by Kazakhstani President Nursultan Nazarbayev, called on the government to shut down Tengizchevroil, the Chevron-led consortium operating the Tengiz field. He said the consortium was inflicting "massive harm" on the environment by stockpiling millions of tons of sulfur and said work should be suspended until it disposes of the substance. Similar calls in the past have preceded official action. Chevron said it has done nothing wrong. "Tengizchevroil operates sulfur storage in an environmentally safe manner consistent with Kazakhstan's laws and regulations, as well as international industry practices," the company said.

The Fed said Thursday that average daily bank borrowing from its "discount window" for the week ended Wednesday was $2.18 billion.
That was down from a daily average of $2.93 billion for the week ended Sept. 12, which was the highest since banks borrowed an average of $11.7 billion the week ended Sept. 12, 2001, as the Fed flooded the financial system with money.

According to AMG Data Services, in the latest week, equity fund inflows were $23.4 billion; taxable bond inflows were $975 million; xETFs equity outflows were -$410 million; and taxable bond inflows were $220 million.

Gary Dorsch: "The Fed has pumped $320 billion of temporary cash into the banking system since mid-August."

China is to impose a quota on investments on the Hong Kong stock market – which will reduce capital outflows to a fraction of the $100bn-plus forecast when its outward investment scheme was announced last month. Liu Mingkang, chairman of the China Banking Regulatory Commission, said there would be no limit on individuals. But he said there would be tight controls on the total amount. Mr Liu said there would be a “quota in general” and when that was reached, the State Administration of Foreign Exchange would reassess market activity. “They can lift and readjust the quota if necessary and appropriate – it’s a flexible ceiling,” he told the Financial Times.

The Wall Street Journal writes that Goldman Sachs and KKR may back away from a deal to buy Harman International (HAR) for $8 billion.

The National Hurricane Center on Friday said a storm system in the Gulf of Mexico "is gradually becoming better organized" with gusty winds up to 35 miles per hour, centered about 100 miles south of Apalachicola, Fla. "Environmental conditions are favorable for this system to become a subtropical or tropical cyclone at any time during the next 24 hours," the National Hurricane Center said.

National Weather Service forecasters predict the first potential "widespread" snowfall of the season could occur across the higher terrain of the Continental Divide Saturday night.

Home improvement and building products manufacturer Masco Corp. on Friday reduced its 2007 earnings guidance because of slowing new housing starts and the general weakening of the housing market. Masco estimates full-year earnings to range between $1.55 and $1.65 per share. It had previously expected $1.60 to $1.70 per share.

BJ Tubular Services ( a unit of BJ Services) announced it has been awarded a contract to provide conductor installation services offshore New Zealand by OMV New Zealand Limited on behalf of the Maari Joint Venture, which is comprised of OMV New Zealand Limited, Todd Maari Limited, Horizon Oil International Limited and Cue Taranaki Pty Ltd. The contract provides for hydraulic hammer conductor-driving for 10 slots on the Maari Field development in Block PMP 38160, located to the south of New Zealand’s Taranaki Coast. The scope of work calls for 30” stovepipes to be driven into the seafloor from the Maari Gravity Base Structure using a recoverable driving string. “With our efforts to expand BJ hammer services worldwide, we are extremely pleased to be delivering hammer conductor driving services in New Zealand for OMV,” said Doug Bell, hammer services manager for BJ Tubular Services. “I attribute our success in New Zealand to the effectiveness and safety of the services delivered by our Hydrohammer fleet, and to the experience and the commitment of our hammer services personnel,” he added.

Columbia University said it does not plan to call off a speech by Iran's president despite pressure from critics including the City Council speaker, who said the Ivy League school was providing a forum for "hate-mongering vitriol.

Toronto's Pollitt & Co.: "Just because OPEC [the Organization of Petroleum Exporting Countries] raised output quotas doesn't mean oil wells will respond."

HSBC to close wholesale lending Decision One Mortgage, which will result in 750 job losses.

November crude fell 16 cents to close at $81.62 a barrel Friday, but still gained 4.5% for the week.

December gold fell $1 to close at $738.90 an ounce Friday, but still ended the week with a gain of $21.10, or 2.9%. December silver was up 15 cents to close at $13.62 an ounce, tacking on 7.2% for the week. December copper was down 0.2 cent to finish at $3.5925 a pound, up 6% from a week ago.

The Treasury Department will suspend issuing some securities on Sept. 27, because Congress has not raised the U.S. debt ceiling, the department said Friday. The suspension applies to state and local government series securities, Treasury said, which are purchased by state and local governments.

Thursday, September 20, 2007

More Surprises

9/21/07 More Surprises

Kellwood, maker of midtier department-store clothing brands such as Sag Harbor, said it is considering an unsolicited buyout offer valued at about $544 million from Sun Capital Securities Group LLC. Sun Capital, an affiliate of Sun Capital Partners Inc., a Boca Raton, Fla.-based private investment firm, sent a letter Tuesday offering to buy Kellwood for $21 a share. That is a 38% premium to Tuesday's price of $15.17 a share in 4 p.m. New York Stock Exchange composite trading.

Herman Miller Inc. expects second-quarter profit of 51 cents to 57 cents a share, below the 59-cent average estimate of analysts surveyed by Bloomberg. The company also forecast sales of $475 million to $500 million, less than the $519.2 million average analyst estimate.

The spread between two- and 10-year Treasuries widened to the most since May 2005 on speculation that the tumbling dollar and Federal Reserve interest-rate cuts will fuel inflation.

According to the NY Times, the consortium that had agreed to buy Sallie Mae for $25 billion plans to return to the negotiating table and seek a lower price, people close to the group said. If the group fails, it may move to scuttle the deal.

The Dutch government says it could knock 0.75 of a percentage point off its economic output next year. And the governor of the Bank of Spain, Miguel Ángel Ordóñez, has had to reassure Parliament that the nation's financial system is "immensely solid," despite a drop in the share prices of banks and construction firms tied to a deflating property bubble.

"It might be fair to argue that Britain is in a worse position than the U.S.," says Adam Slater of Oxford Economics, a British consulting and forecasting firm.

Yen buying by Japanese individual investors reached a three-month high of $1.57 billion yesterday, figures from the Tokyo Financial Exchange indicate.
Bloomberg reports pensioners, businessmen and housewives, so-called mom and pop traders, accelerated purchases of Japan's currency a day after the Federal Reserve cut interest rates, eroding the yield advantage on dollar investments.
``Expectations of a narrowing gap in interest rates between the U.S. and Japan are prompting Japanese retail investors to buy the yen when it weakens,'' said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities. ``They are increasingly having strong anxiety about the dollar's fate.''

Daniel Amerman: " The higher the inflation rate - the greater the percentage of your assets that belongs to the government. This applies not just to taxes on ongoing income, but after-tax assets as well."

"FedEx increased its revenue and earnings against the backdrop of a sluggish U.S. economy," said Frederick W. Smith, FedEx Corp. chairman, president and chief executive officer. "Outside of the United States, the economy is generally solid, contributing to the growth in our international express shipments." FedEx expects second-quarter net income of $1.60 to $1.75 a share, below the Wall Street target of $1.97 a share.

According to Bankrate, the outlook for mortgage rates is not clear in the wake of the Federal Reserve's recent rate cut, with worries about economic weakness conflicting with potential inflation concerns.

Jon Markman: "According to (Satyajit)Das' figures, up to 53% of the $2.2 trillion commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages. When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion. Without a central governmental authority keeping tabs on these cross-border flows and ensuring a standard of record-keeping and quality, investors increasingly didn't know what they were buying or what any given security was really worth...So to the extent that the structured finance market is coming undone, not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust, Das says. That is why he considers the current market volatility much more profound than a simple "correction" in prices. He sees it as a gigantic liquidity bubble unwinding -- a process that can take a long, long time. While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as they did Wednesday, the evidence is not at all clear. The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks. Lower rates will not help that. "At best," Das says, "they help smooth the transition."

Christopher Wood: “This is not a sub-prime crisis. Sub-prime has merely exposed the bigger scam of structured finance; a scam that is about pretending that bad credit is good credit.” (Thanks to Barry Ritholtz for providing the quote)

The number of U.S. workers filing for unemployment benefits fell by 9,000 last week to a seven-week low of 311,000, the Labor Department reported Thursday. The four-week average of new claims - considered a better gauge than the volatile weekly figure - fell by 3,500 to 320,750, the lowest in four weeks. Meanwhile, the number of former workers collecting unemployment checks fell by 53,000 to 2.54 million in the week ending Sept. 8, also the lowest in seven weeks. The insured unemployment rate - the portion of all workers covered by unemployment insurance who are collecting benefits - stayed at 2%.

Goldman Sachs said Thursday that its third quarter profit rose 79% from a year ago, driven by a one-time investment gain and significantly higher mortgage trading revenue. The company said it earned $2.85 billion, or $6.13 a share, compared to $1.59 billion, or $3.26 a share a year ago. Revenue for the quarter rose 49%, to $23.80 billion, from $15.98 billion last year. Its fiscal third-quarter operating expense totaled $8.08 billion, up 55% from a year earlier and 20% higher quarter-over-quarter. The company said compensation and benefits expenses rose 68% from the year-ago period, driven primarily by the impact of higher net revenue. Headcount increased 7% during the third quarter, Goldman Sachs said Thursday. Non-compensation expenses rose 27% from a year earlier to $2.16 billion.

Bear Stearns fiscal Q3 net $1.16 per share vs $3.02. The company stated "Market conditions in both the mortgage and credit businesses were extremely challenging this quarter," the company said in the earnings release. "A general repricing of risk in the market led to significant reductions in both mortgage and credit-related revenue as volumes decreased while asset values declined."

The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.

From the Telegraph(UK): "Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signaling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East...Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress."

More delinquencies and foreclosures can be expected in the subprime, adjustable-rate mortgage market as borrowers face interest-rate resets, Federal Reserve Chairman Ben Bernanke said Thursday.

Carlyle Group, the buyout firm run by David Rubenstein, will sell a 7.5 percent stake to the government of Abu Dhabi for $1.35 billion.

The Dollar Index dropped to 78.50. The index hit a new 15-year low.

Natural-gas inventories rose by 63 billion cubic feet for the week ended Sept. 14, the Energy Department said Thursday.Total stocks now stand at 3.132 trillion cubic feet, down 32 billion cubic feet from the year-ago level, but 238 billion cubic feet above the five-year average, the government data said.

A gauge of future economic growth plunged 0.6% in August, pointing to slower economic growth ahead, the Conference Board reported Thursday. Just one of the 10 leading economic indicators was positive in August: the real money supply.

The Canadian dollar reached one-to-one parity with the U.S. dollar in early Thursday trade. It marked the first time the Canadian unit has seen that level since the 1970s.

October crude closed at another record level of $83.32 a barrel in New York, up $1.39, or 1.7%. The U.S. Minerals Management Service reported Thursday that about 27.7% of the oil production in the Gulf has been shut in or about 360,169 barrels of oil a day,

The Bombay Company Inc. filed for Chapter 11 in U.S. Bankruptcy Court for the Northern District of Texas "to address financial challenges and identify a strategic or financial investor."

Gold for December delivery closed up $10.40 at $739.90 an ounce on the New York Mercantile Exchange, and that is the highest price in at least 27 years. Other metals prices -- particularly silver which surged nearly 3% -- also posted strong gains.

Manufacturing activity accelerated in the Philadelphia region in September, the Federal Reserve Bank of Philadelphia said Thursday. The Philly Fed index rose to 10.9 from 0 in August.

The Day After

9/20/07 The Day After

British Airways said it's going to suspend its route between Detroit and London next year because of the difficulties in the auto sector. "Despite the fact we have operated in the Detroit-London market for over 50 years, we see no possible upswing in the business and have, therefore, decided to utilize the aircraft on other routes where it can make a profitable contribution to the airline's bottom line," the airline said in a statement.

The Bank of England's Monetary Policy Committee voted 9-0 to keep its key interest rate on hold at 5.75% earlier in September as it judged the upside balance of risk to inflation had receded, according to the minutes of the meeting published Wednesday. The MPC concluded the outlook was more uncertain after disruption in global credit markets continued. The committee said recent news "from the real economy," such as indicators on GDP growth and the margin of spare capacity, had not significantly changed its outlook. However, re-pricing of risk in credit markets could lead to a tightening of credit conditions without any further rise in the central bank's key rate. Also, the associated impact on asset prices from the credit turmoil could reduce wealth and affect the value of collateral available to borrowers, it said.

Kongkong & Shanghai Banking Corp. will cut its prime lending rate and deposit rates by a quarter point, the bank said in a statement Wednesday. The rate cut will bring the bank's best lending rate to 7.5% from 7.75% effective Thursday. The rate reduction follows a similar move by the Hong Kong Monetary Authority, Hong Kong's de facto central bank, to cut its base lending rate by half a percentage point to 6.25% earlier in the day.

Nouriel Roubini: "Thus I fear that, while a Fed easing may put a floor to the size of the hard landing, it may not prevent it for the same reasons why it did not prevent a hard landing in 2001. Also, today we have a credit crunch – on top of a liquidity crunch – that is caused by the fundamental insolvencies and distress of many over-leveraged households, mortgage lenders, home builders, some financial institutions and even parts of the corporate sector. You cannot resolve fundamental insolvencies with monetary policy injections alone. Those insolvencies and financial distress will take time to work out and will imply tight financial and credit conditions regardless of what the Fed does. For example, with high yield junk bond spreads higher by 200bps relative to the pre-crisis period, lower Fed Funds rates and even lower riskless government bond yields still imply significantly tighter financial and credit conditions and much higher real borrowing rate for such corporations. The same is true of a variety of other credit spreads that are now much higher in real terms. The real cost of capital is now much higher for households, corporations and financial institutions and will remain higher if credit spreads remain high because of a fundamental repricing of risk...I thus remain of the view that 50bps is too little too late and that we will experience a hard landing."

October-dated crude rose 71 cents to $82.22 a barrel and overnight traded as high as $82.37, its highest level ever.

Accredited Home Lenders Holding Co. agreed to be acquired by private-equity group Lone Star for $11.75 a share cash, the companies said.

Kellwood Co., the St. Louis marketer of branded and private-label apparel and consumer soft goods, said late Tuesday that it received a non-binding takeover proposal at $21 a share from Sun Capital Securities Group.

The Chinese government on Wednesday froze prices that it controls for the rest of the year, in the latest sign of Beijing’s mounting concern over inflation.
Beijing also stressed the importance of holding down market-driven prices during the forthcoming holiday period, saying it would have a direct impact on the country’s ”development, reform and stability”.
The government still administers a vast array of prices, including those for land, transport, utilities and fuel.

According to the Chicago Tribune, Tribune Co. has moved another step closer to getting the $290 million tax refund it said in June it expected on a $1 billion payment it made in 2005 after a U.S. Tax Court ruled against it.
At issue was a 1998 transaction for which Tribune acquired responsibility when it acquired Times Mirror Co. in 2000. The Joint Committee on Taxation has told the Justice Department that "it has no adverse criticism regarding the settlement," according to a court filing, and the Justice Department has initiated the formal refund process with the IRS, a precursor to Tribune dropping its appeal.

Douglas A. McIntyre: "Bernanke and his associates may have helped the stock market for a few days. But, they may have hurt the economy more than they know. Weathering tough times in mortgages, sour buy-out loans and hedge fund woes are one set of things. And, those are probably manageable. Hurting the consumer's daily costs has much greater consequences."

The euro rose as high $1.3987, a new high, in morning European trading before settling back to $1.3981, above the $1.3971 it bought in late New York trading the night before.

The Bank of England abandoned its opposition to emergency three-month money auctions and loosened lending standards, a week after Governor Mervyn King said such steps would encourage ``risky behavior.'' ``This measure is being taken to alleviate the strains in longer-maturity money markets,'' the bank said in a statement today. The Bank of England said it will accept ``mortgage collateral'' at the auction of 10 billion pounds ($20 billion) in loans next week. It will have a penalty rate of 6.75 percent.

The US home loan crisis could damage German growth by pushing up the euro and crimping exports from the biggest eurozone economy, Economy Minister Michael Glos warned Wednesday in an interview.

Interest rate cuts by Federal Reserve Chairman Ben S. Bernanke will spur inflation, cause the U.S. dollar to collapse and push the world's largest economy into recession, investors Jim Rogers and Marc Faber said. ``Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse,'' Rogers said in an interview from Shanghai. ``If Bernanke starts running those printing presses even faster than he's doing already, yes we are going to have a serious recession. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems in the U.S.''

Marc Faber: ``It's suicidal to cut interest rates.''

The euro rose over $1.40 for the first time ever and sterling traded over $2 against the greenback on Thursday morning. A report in the Daily Telegraph newspaper noted that that Saudi Arabia has refused to cut interest rates in tandem with the U.S. Federal Reserve for the first time, which it said suggests the kingdom is preparing to break the dollar currency peg. This move "risks setting off a stampede out of the dollar across the Middle East" the report said.

Angelica Corp.said Wednesday that Morgan Joseph has been authorized to pursue a possible sale of the healthcare textile rental and linen management services provider, and will be soliciting indications of interest from both strategic and financial buyers.

October crude closed at $81.93 a barrel Wednesday, up 42 cents for the session after marking a fresh, all-time intraday high of $82.50. U.S. supplies of crude fell more than expected last week and refinery activity fell, but motor gasoline supplies climbed, according to the Energy Department. October natural gas dropped 5.9% to close at $6.18 per million British thermal units.

December gold climbed $5.80 to close at $729.50 an ounce Wednesday. December silver climbed 18 cents to close at $13.105 an ounce and December copper closed at $3.5755 a pound, up 3.7%.

Treasury Secretary Henry Paulson urged the Senate to pass a measure to increase the limit on the national debt, saying that updated forecasts show the U.S. would reach the current debt ceiling on Oct. 1.

The American Petroleum Institute reported a fall of 1.6 million barrels in crude supplies for the week ended Sept. 14. The Energy Department had reported a decline of 3.8 million barrels for the latest week. Motor gasoline supplies were down 2.1 million barrels, the API said. But the government reported that supplies were up 400,000 barrels. Distillate supplies climbed 241,000 barrels, the API said. They were up 1.5 million barrels, according to the Energy Department.

The problems in U.S. credit markets are beginning to affect nonresidential, commercial construction across the country, according to a survey released Wednesday by the American Institute of Architects. "The apprehension in the industry is based around reports that growing default rates among subprime borrowers in the residential market has made credit more difficult to secure for nonresidential construction projects," said AIA Chief Economist Kermit Baker in a statement.

Tuesday, September 18, 2007

Banking

9/19/07 Banking

The Bank of England said Tuesday that it will provide an additional 4.4 billion pounds ($8.9 billion) in reserves to U.K. commercial banks through a two-day repurchase agreement at its base rate of 5.75%. The central bank said the action is intended to offset the disturbance caused by its decision to act as a lender of last resort to mortgage bank Northern Rock. Overnight lending rates fell back immediately after the announcement to 5.75% from around 6.25%, according to a Reuters report.

The Federal Open Market Committee cut its benchmark federal funds rate by a half percentage point to 4.75%. In an effort to ease the credit crunch, the Federal Reserve also reduced its discount rate in lockstep to 5.25%. In a statement, the FOMC said the action "was necessary to forestall some of the adverse effects on the broad economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."

Australia reduced its winter crop forecasts for grain production by 30% owing to unseasonably dry conditions.

Goldman Sachs forecast U.S. oil prices would surge to $85 a barrel by the end of the year, up $13 from its previous forecast, and said crude could climb as high as $90 due to tight supplies.

Paul Kasriel: "In sum, the U.S. economy has entered, at best, a growth recession – an environment in which excess capacity will begin to rise in the labor and product markets. In turn, this excess capacity will temper price increases of good and services, and most likely equity prices, too. At worst, the U.S. economy is on the cusp of entering a full-fledged recession. Either way, the Federal Open Market Committee (FOMC) will start cutting its target for the federal funds rate. We expect the first funds rate target cut of 25 basis points to occur at the FOMC meeting on September 18. This will just bring the fed funds rate target down to the 5% level the actual fed funds rate has been averaging over the several weeks...We anticipate that the target funds rate will have fallen to a level of 4.25% after the January 30, 2008, FOMC meeting – 100 basis points lower than where it is today. The risk case is that the fed-funds-rate target will be even lower than 4.25% on January 30 or in the immediate months thereafter."

Standard Chartered Plc said on Tuesday it had agreed to buy American Express Bank for around $860 million in cash to boost its private banking and correspondent banking services.

Brett Steenbarger: "So what do we have? A falling dollar, inflationary pressures, and fears of a weakening economy. Going into the Fed meeting, stagflation is on the radar."

October crude finished at $81.51 a barrel Tuesday, up 94 cents to mark a fresh record closing level on the New York Mercantile Exchange.
U.K. natural gas for same-day delivery rose to the highest in nine months as exports of the fuel to Belgium resumed and cooler temperatures boosted heating demand. Gas for delivery in the 24 hours through 6 a.m. tomorrow advanced as much as 13 percent to 39.5 pence a therm, according to prices on Bloomberg from the broker ICAP Plc. That's the highest since Dec. 20. It traded at 37.8 pence a therm at 8:48 a.m. local time, equivalent to $7.54 a million British thermal units. A therm is 100,000 Btus.
Meanwhile, ethanol has declined 35% this year, closing Monday on the Chicago Board of Trade at $1.61/gallon. Production of ethanol from corn will probably peak in 2008.

Lehman's Chairman and Chief Executive Officer Richard S. Fuld, Jr.: "Despite challenging conditions in the markets, our results once again demonstrate the diversity and financial strength of the Lehman Brothers franchise, as well as our ability to perform across cycles. For the quarter, we reported record net revenues in Investment Management, and our second highest net revenues in both Investment Banking and Equities Capital Markets. In addition, more than half of our net revenues for the quarter came from outside the U.S. We remain focused on delivering significant long term value for our clients and shareholders." Lehman's pretax margin in the fiscal third quarter fell to 28% from 32.7% in the year-ago period. The company recorded "very substantial" valuation reductions, most significantly on leveraged loan commitments and residential mortgage-related positions. What is the actual number of "very substantial" and do they fully reflect mark to the market valuations? Don't shareholders deserve transparency?

The number of foreclosure filings reported in the U.S. last month more than doubled versus August 2006 and jumped 36 percent from July, a trend that signals many homeowners are increasingly unable to make timely payments on their mortgages or sell their homes amid a national housing slump. A total of 243,947 foreclosure filings were reported in August, up 115 percent from 113,300 in the same month a year ago, Irvine, Calif.-based RealtyTrac Inc. said Tuesday. There were 179,599 foreclosure filings reported in July.

Mike Shedlock: " Shattered Confidence is starting to be a global thing. And confidence once lost is not easily regained."

German investor confidence fell more than economists forecast in September after rising defaults on U.S. subprime mortgages pushed up the cost of credit. The ZEW Center for European Economic Research in Mannheim today said its index of investor and analyst expectations dropped to minus 18.1, the lowest since December, from minus 6.9 in August. Economists expected a decline to minus 17, according to the median of 40 forecasts in a Bloomberg News survey.

E*Trade Financial Corp., this year's worst performer in the Amex Securities Broker-Dealer Index, cut its 2007 profit forecast by at least 25 percent because of bad home loans and said it will quit the wholesale mortgage business.

Excluding volatile food and energy, however, the core producer price index climbed a greater-than-expected 0.2% on higher drug and car prices. These gov't numbers are such crap.

Miguel Angel Fernandez Ordonez said the Bank of Spain won't be selling more gold this year. Under the central bank's gold agreement the Spanish central bank had been the largest seller of gold this year, according to reports.

Benchmark Equity Research late Monday trimmed its 2007 and 2008 profit forecasts for Exxon Mobil to reflect higher than expected upstream unit costs. For 2007, analysts said they now expect Exxon Mobil to earn $6.56 a share verses their earlier view of $6.82 a share. For 2008, Benchmark expects earnings of $5.94 a share, down from $6.06 a share.

Russian Foreign Minister Sergei Lavrov has expressed fears over the threat of war in Iran after talks with his French counterpart, Bernard Kouchner.

Yahoo announced Monday that it has agreed to buy Zimbra, a maker of Web-based e-mail software, for $350 million in cash.

Monthly capital flows to the U.S. including short-term securities shot up in July, to $103.8 billion from a revised $34.4 billion in June, with private foreign flows making up most of the gain, the Treasury Department reported Tuesday. The monthly number includes Treasury bills and other short-term securities. Net foreign private flows made up $65.4 billion of the monthly total, while net foreign official flows accounted for $38.4 billion. Meanwhile, net foreign purchases of long-term U.S. securities were $24.7 billion for the month, falling back from $119.1 billion a month earlier.

Adobe beat earnings estimates for the quarter and raised its forecast.

State Street Global Markets on Tuesday said its global investor confidence index fell by 7.5 points to 92.1 in September. The confidence of North American and European institutional investors declined, but the confidence of Asian institutions rose slightly.

The Dow industrials ended up 336.1 points, or 2.5%, at 13,739.5, its largest one-day point gain since October 2002, and its greatest percent gain since early April of 2003. The S&P 500 finished ahead 43.13 points, or 2.9%, at 1,519.78, while the Nasdaq Composite settled up 70 points, or 2.7%, at 2,651.66.

December gold climbed as high as $735.30 an ounce in electronic trading Tuesday afternoon in the wake of the Federal Reserve's decision to cut interest rates by a half percentage point to 4.75%. December gold had closed out the regular session at $723.70, down 10 cents. Gold futures in New York traded as high as $732 in electronic trading last year, and the lead-month contract hasn't traded higher than that since 1980, according to analysts.

The dollar dropped Tuesday after the Federal Reserve cut its key fed funds rate by 50 basis points, instead of the 25-basis point cut expected by many investors. The euro rose to $1.3953, compared to $1.3885 before the Fed decision, and the trade-weighted dollar index fell to 79.375, compared to 79.645.

Impac Mortgage Holdings announced Tuesday that it will close almost all mortgage lending operations and fire 144 employees. The company will stop making "Alt-A" loans, which constituted a majority of the company's business.

Monday, September 17, 2007

Running On Volatility

9/18/07 Running On Volatility

An estimated $4 billion (2 billion pounds) has been withdrawn by customers of Northern Rock, the U.K. bank that on Friday went to the Bank of England for emergency funding, BBC News reported.

Deutsche Telekom unit, T-Mobile USA, said Monday that it has agreed to buy SunCom Wireless Holdings for $2.4 billion in cash and debt. Under the agreed deal, SunCom shareholders will receive $27 per share in cash, bringing the total cash element of the deal to approximately $1.6 billion.

Leap Wireless International Inc. rejected a takeover proposal from MetroPCS Communications Inc., the providers of wireless-communications services said. Leap's board said MetroPCS's proposal was inadequate financially, not taking into account Leap's growth prospects.

Nokia agreed to buy Enpocket, a privately held mobile advertising firm, for an undisclosed amount.

Mitchells & Butlers said Monday that the post tax impact of marking-to-market the company's share of hedges entered into over the summer is a deficit of approximately 140 million pounds, as at September 13. At July 31, the post-tax deficit was 60 million pounds.

Shares of Oil Search Ltd. climbed 10.9% in Sydney after a Hong Kong-based newspaper reported China's state-owned China National Petroleum Corp. and its Hong Kong-listed subsidiary PetroChina Co. were considering a bid for the company, which is incorporated in Papua New Guinea. Oil Search has oil and gas operations in Libya, Egypt, Yemen and Papua New Guinea.

ITT Corp.definitively agreed to pay $56 a share for EDO Corp. Subject to conditions including a vote of EDO's holders, the companies hope to close the deal early in 2008. Lazard and UBS are advising ITT while Citigroup is advisisng EDO.

Howard Marks of Oaktree Management: "Risk cannot be eliminated; it just gets transferred and spread. And developments that make the world look less risky usually are illusory, and thus in presenting a rosy picture they tend to make the world more risky. These are among the important lessons of 2007."

Bob Woodward: "Alan Greenspan, the former Federal Reserve chairman, said in an interview that the removal of Saddam Hussein was "essential" to secure world oil supplies, a point he emphasized to the White House in private conversations before the 2003 invasion of Iraq."

Alan Greenspan: "I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil."

Greenspan said he would expect “as a minimum, large single-digit” percentage declines in US house prices from peak to trough and added that he would not be surprised if the fall was “in double digits”.

"It would not take much to tip the economy into recession," says Martin N. Baily of the Brookings Institution and former head of the Council of Economic Advisers under Bill Clinton. "The collapse of the boom in nonresidential construction, for example."

A European Union court dismissed Microsoft Corp.'s appeal against an EU antitrust order to share communications code with rivals and sell a copy of Windows without Media Player. The order also upheld a $613 million fine for the company.

The Dow is just 4 percent below its all-time high of 14,000.41, reached in July. With all the fixed income and risk problems still very much alive and well, the strength in the Dow is puzzling at best.

John Hussman: "The total amount of U.S. bank reserves affected by FOMC operations is less than $45 billion, and only the “excess” portion of that – typically about $2 billion dollars – is what determines the overnight Federal Funds Rate. Meanwhile, the total amount of borrowings through the “discount window” – though higher than in recent years – still amounts to only about $3 billion...To believe that the Fed operations matter, you have to believe that a $13 trillion economy is controlled by a few billion dollars of reserves and discount window borrowings, none of which vary materially from year to year...Total U.S. bank reserves have grown by only $3.1 billion since 1990, to a total of $44.9 billion. Again, it is the day-to-day trading between banks of this amount (and actually, only of “excess reserves” – typically about $2 billion dollars) that determines the Federal Funds rate...In contrast to about $2 billion in excess reserves that is the basis for the Federal Funds Rate, and about $3 billion that is currently being lent at the Discount Rate, the U.S. banking system presently carries about $3.4 trillion in real estate loans, and $6.3 trillion in total loans. Gross domestic product is currently about $13.8 trillion."

The WSJ on Boeing: "According to people familiar with the program, suppliers at factories in Italy, Japan and the U.S. continue to experience chronic parts shortages."

"Wolfgang Munchau: "Act II begins with a sharp slowdown in US economic growth. The two obvious questions that arise from this scenario are: how bad will the US downturn be and how contagious will it be? It looks as though it will be bad. Some optimists had hoped that the rest of the world could easily withstand a US recession and invented the infamous de-coupling theory. What they did not count on was the rapid decline of the US currency as expectations of a US recession were rising. A weak dollar is going to be the main global transmission mechanism...Add to this the more direct effects of the credit crisis plus the global cyclical slowdown that has already started and you have the ingredients for a sharp downturn. If the US economy tanks, the rest of the world will follow with some delay. Act II of the crisis is therefore the transmission from the US to the global economy."

Friday is a Quadruple Witching option expiration. There are many earnings reports and much economic data this week, and that on top of the Fed meeting, which I believe will be a non-event ( for many of the same reasons John Hussman pointed out above). These markets are fueled by volatility, and beneath the surface, there is substantial uncertainty with respect to risk and the credibility surrounding risk levels.

Illinois Tool Works reaffirmed guidance of earnings between 85 cents and 89 cents per share for the third quarter and $3.31 and $3.41 per share for the year.

Manufacturing activity in the New York area slowed in September, the New York Federal Reserve Bank said Monday. The bank's Empire State Manufacturing index fell to 14.7 in September from 25.1 in August. New orders fell to 13.6 in September from 22.2 in August. Shipments dropped to 5.1 in September from 28.8 in the previous month. This is the lowest level of shipments since June 2005. However, the employment index rose to 18.2 from 11.6 in August.

Former Shell chairman sees future oil at $150 a barrel

VMware's second-quarter earnings surged to $34.2 million, or 10 cents per share, from $15.2 million, or 5 cents per share, a year ago. Revenue jumped nearly 90 percent to $296.8 million, from $156.4 million in the prior year. Licensing revenue rose 80 percent to $204.4 million and services revenue more than doubled to $92.8 million.

October crude closed at $80.57 a barrel, up $1.47, or 1.9%. October natural gas climbed 6% to finish at a one-month high of $6.653 per million British thermal units.

December gold climbed $6 to close at $723.80 an ounce Monday on the New York Mercantile Exchange. December silver gained 19.5 cents, or 1.5%, to end at $12.90 an ounce and December copper closed at $3.42 a pound, up 2.75 cents.

Sunday, September 16, 2007

Next Week

9/17/07 New Week

According to the WSJ, ABN's board won't recommend either of the two rival takeover bids the Dutch bank has received, it told shareholders Sunday.

Business Objects , a French-American business intelligence software maker, is looking for a buyer and has appointed Goldman Sachs to find an investor, Le Figaro newspaper said. Le Figaro said there were five interested parties, including business software maker SAP of Germany. The paper did not name its source, and said neither Business Objects nor SAP would comment. Oracle and IBM have in the past also been mentioned as possible bidders.

John Mauldin: "As humans, that is what we do. We push the limits of greed, especially when accompanied by the illusion of stability, until the bubble bursts...As home prices drop 10% and then 15% and then 20%, boomers are going to realize that a large part of what they thought they had for retirement in the equity of their homes is not there. That means they need to spend less and save more. While that is good as an individual policy, it is rough on the economy at large. I still think this process ends in a recession...The problem, as I repeat, is not the availability of liquidity. It is the lack of credibility. No one is buying paper they are not absolutely 100% sure about. And until a new mechanism is developed that will allow for transparency in the mortgage markets which will then allow for the securitization process to being again, it is going to be tough to get a mortgage for someone who does not fall with the confines of conforming loans (for foreign readers, those are agency loans made by quasi government agencies like Fannie Mae which have the implicit backing of the US government.)"

Mike Burk: "The rise from the August lows has been led by the blue chips on declining volume this suggests a retest of the August lows is still likely. I expect the major indices to be lower on Friday September 21 than they were on Friday September 14."