Saturday, October 20, 2007

The Music Goes Round And Round

10/21/07 The Music Goes Round And Round

Doug Noland: "Bank Credit ballooned an additional $32.1bn for the week (10/10) surpassing $9.0 TN for the first time. Bank Credit has now posted a 12-week gain of $360bn (18.1% annualized) and y-t-d rise of $707bn, a 10.8% pace. For the week, Securities Credit increased $10.8bn. Loans & Leases jumped $21.3bn to a record $6.606 TN (12-wk gain of $283bn). C&I loans rose $13.3bn, increasing the 2007 growth rate to 22.3%. Real Estate loans increased $7.9bn. Consumer loans added $1.9bn. Securities loans declined $2.2bn, while Other loans added $0.3bn. On the liability side, (previous M3) Large Time Deposits rose $22.4bn (5-wk gain of $100bn).
M2 (narrow) “money” added $1.0bn to a record $7.385 TN (week of 10/8). Narrow “money” has expanded $342bn y-t-d, or 6.1% annualized, and $458bn, or 6.6%, over the past year. For the week, Currency gained $1bn, and Demand & Checkable Deposits jumped $16.5bn. Savings Deposits dropped $25bn, while Small Denominated Deposits added $1.2bn. Retail Money Fund assets increased $7.3bn...The autumn respite from summer Credit tumult has run its course. Global central bankers may have succeeded at least temporarily in their aggressive liquidity operations. This liquidity, however, has characteristically avoided post-Bubble risky mortgages and mortgage-related derivatives. Today, a strong case can be made that Monetary Disorder was only exacerbated. To be sure, the unfolding spectacular bursting of the Mortgage Finance Bubble runs unabated. Meanwhile, myriad other global Bubble excesses have gone to only more dangerous extremes – certainly including global equities markets...It is now becoming clearer to market participants that the major banks in particular have huge exposures to myriad risks market and otherwise, previously having been distributed to various vehicles, structures and market operators. The problem today is that the preponderance of players active in this non-bank risk intermediation have been thinly capitalized and often leveraged. Too many were aggressively writing flood insurance in a drought, without the wherewithal to deal with an eventual flood. There’s now a severe one heading our way whether the Fed cuts rates or not...In the meantime, there is today apparently no alternative than massive banking system inflation. In just 12 weeks, bank Credit has ballooned $360bn. And as much as the unfolding mortgage debacle will impair the banking system, I fear it has already irreparably damaged “Wall Street finance.”..Stock market complacency over the past weeks was astounding. But if the markets head directly south from here, market confidence and the Fed’s capabilities will be tested simultaneously. Lower rates are definitely not the answer. Respite’s Over."

If you are an optimist, you are rooting for a mild recession.
If you are an optimist, then buy on the dip. Be my guest. Run the table.
If you are an optimist, keep your money in dollars. It's like panning for manure.
If you are an optimist, state there is a liquid market when marking to the market.
If you are an optimist, believe treasuries are a flight to quality.
If you are an optimist, reversion to the mean is for yesterdays.
If you are an optimist, then you believe that morals exist in "moral-hazard".

Mike Shedlock: "With "borrow short lend long" strategies everything is fine as long as asset prices rise. However, all hell breaks loose when the value of those long term assets sinks. In adverse conditions, banks are no longer willing to provide short term financing, and instead want their money back. Unfortunately there is no money to give back because the borrowers bet it all on mortgages or other asset backed securities that are now dropping like a rock."

The Associated Press reported currently large amounts of Georgia water are sent downstream to neighboring Florida and Alabama. The drought has heightened tensions among the three states, which have been locked in an ongoing dispute over how to manage the region's limited water supply.
Florida has complained the state is not sending enough water downstream to protect endangered and threatened mussels on the banks of a drying river. And Alabama Gov. Bob Riley has urged the Corps to release more water from Georgia's lakes to help his state cope with the dry conditions.
The Corps manages the water usage between the states. It faced heavy criticism in June when it accidentally released 22 billion gallons of water from Lake Lanier, a major source of drinking water for the fast-growing Atlanta metropolitan area. The error came as the state was sinking into a drought.
Federal officials must allow drought-stricken Georgia to slow the flow of water from its reservoirs, including Lake Lanier, or the state will face a severe water shortage that could affect millions of residents, the state's environmental commissioner warned in a letter to the U.S. Army Corps of Engineers on Friday.

Group of Seven finance ministers and central bankers said the credit-market rout will slow economic growth and strengthened calls for China to let its currency appreciate. ``Recent financial market turbulence, high oil prices and weakness in the U.S. housing sector will likely moderate'' the global expansion, officials said in a statement after meeting in Washington yesterday. ``Our overall economic fundamentals continue to be strong and emerging markets are providing critical impetus.''

Elbert Hubbard: “A pessimist? That's a person who has been intimately acquainted with an optimist.”

Henry To: "Given that railroad companies had been the strongest industry within the Dow Transports over the last 12 months, my guess is that we have seen the top in the Dow Transports in mid July - and at some point, this will put pressure on the Dow Industrials as well. However, given that much of the strength in the U.S. stock market has been focused on the Dow Industrials over the last 7 weeks, there is a good chance that the Dow Industrials will continue to rise over the next couple of weeks, but we believe that any all-time highs will be short-lived. Should this occur, however, chances are that many other major market indices will not confirm this all-time high, such as the Dow Transports, the Dow Utilities, the S&P 400, the Russell 2000, the American Exchange Broker/Dealer, the Value Line Geometric, and the Philadelphia Semiconductor Indices. Should the Dow Industrials make another all-time high - preferably in the 14,200 to 14,500 area, and should this be accompanied by continuing weak breadth and divergences among many market indices, then we will establish a 100% short position in our DJIA Timing System." (Henry established a 50% short on Oct 4th)

Mike Burk: "I think we are at the beginning of a cyclical decline that will take the market below the August lows. The Fed may retard the decline by lowering rates again at the end of the month...I expect the major indices to be lower on Friday October 26 than they were on Friday October 19."

Ayn Rand: “We can evade reality, but we cannot evade the consequences of evading reality."

Friday, October 19, 2007

Not Just Another Friday

10/20/07 Not Just Another Friday

Caterpillar also now expects 2007 earnings of $5.20 to $5.60 a share, down from its prior estimate of $5.30 to $5.80 a share. Caterpillar's preliminary outlook for 2008 reflects a sales and revenue increase of 5% to 10% and earnings up 5% to 15% from the mid-point of its 2007 estimate.

Steven Madden Ltd. stated that unnamed third parties have expressed interest in buying the company and that shareholders have asked the company to explore alternatives to enhance shareholder value.

For full-year 2007, Harley Davidson expects to ship between 328,000 and 332,000 motorcycles, down from 349,196 in 2006. The company also expects a "modest" decline in revenue and sees full year earnings falling 4% to 6% from 2006. In 2008, Harley anticipates "moderate" revenue growth, and earnings growth in the range of 4% to 7%.

Wachovia Corp.'s third-quarter net profit fell to $1.69 billion, or 89 cents a share, from $1.88 billion, or $1.17 a share, in the year-earlier period. Excluding merger expenses, earnings were $1.71 billion, or 90 cents a share. Analysts polled by Thomson Financial were expecting earnings of $1.03 a share, on average.

Schlumberger Limited's third quarter net income rose 35% to $1.35 billion, or $1.09 a share, from $999.8 million, or 81 cents a share, a year ago. Analysts had been expecting the firm to post earnings per share of $1.07 a share, according to data compiled by Thomson Financial. Sales rose to $5.93 billion, from $5.64 billion a year ago. Schlumberger said that growth in the third quarter was driven by international markets particularly Latin America, Russia, China and Indonesia. "Global demand for oil remains strong while non-OPEC production continues to disappoint," the firm said. However, the company said it could see lower rates for its natural gas processing operations in the U.S. as supplies rise. In addition, the company reported a 3 percent decline in revenue from North America during the third quarter and said it expects delays in Nigeria and Caspian region.

Massachusetts securities regulators have started a probe into whether Bear Stearns Cos. improperly traded with two in-house hedge funds, the Wall Street Journal reported on Friday.

Honeywell International Inc said on Friday profit rose 14.2 percent amid continued strong demand from the aerospace and commercial construction sectors, but results were slightly below Wall Street's expectations.

September home sales in Northern California sank to their lowest level in two decades as mortgages became harder to get, a real estate research firm said Thursday. A total of 5,014 new and resale homes and condominiums were sold last month in nine San Francisco Bay Area counties, a 40.1% drop from the same period a year earlier, according to DataQuick Information Systems.
Last month was the slowest September since the firm began keeping records in 1988.

The Bank of Japan remains committed to raising interest rates as the world's second-largest economy extends its expansion, Deputy Governor Toshiro Muto said. There have bee fits and starts; however, in my view, the carry trade is doomed.

Paul Kasriel: "Multi-family starts fell 34.3% in September whereas single-family starts were down only 1.7%. In terms of permits, the September declines were more evenly distributed - multi-family permits down 7.7% month-to-month in September and single-family permits down 7.1%. Single-family construction is much easier to turn off or on in response to changing demand conditions than is multi-family construction. Given the expectations of weak housing demand as far as the eye can see and given the glut of empty condos around the country, my bet is that the September weakness in multi-family starts will become the norm over the next 12 months."

Richard Daughty: But he (John Williams of Government Shadow Statistics) was not through with me yet, as he went on to report that the federal government will find that "the financial statements for the year will show a deficit based on generally accepted accounting principles likely well in excess of $4 trillion, come mid-December." Four trillion bucks a year in current and deferred federal government spending! A third of GDP! Yikes!" That's what you get with a kinder and smaller government!

Bloomberg: "The New York Board of Trade's dollar index touched 77.406, the weakest since the index began in 1973, down from its 2007 high of 85.28 on January 11."

Commonwealth Edison wants to raise electric bills by roughly 8 percent to replace aging infrastructure in some areas and extend service in fast-growing collar counties.

Roughly 3,300 people working in the western suburbs for oil giant BP PLC received notice today that many will be relocated, and some laid off, as part of the restructuring the company announced late last week, the Tribune has learned.

LA Times: "The commission's (FCC)Republican majority is expected to approve Tribune's request. Adelstein and Copps said Thursday that they were prepared to vote on the waivers."It's entirely inappropriate to exploit the urgency of a business transaction to leverage another agenda," Adelstein said. "It's just not fair to hold it hostage." Martin declined to comment. But his spokeswoman, Tamara Lipper, said the Tribune deal was not a factor in his proposed date for the media ownership vote, which she said Martin would consider changing.
"This has nothing to do with any particular transaction," Lipper said. "This has only to do with the fact that he thought this was the appropriate time given where we are in the process to begin a dialogue with his colleagues about how we could bring this to a close." Although Martin probably has enough support from fellow Republicans on the commission to pass whatever media ownership changes he proposes, he prefers a consensus on almost every vote. His move to link Tribune to the broader media ownership issue could help draw Adelstein's vote, as well as limit backlash from key congressional Democrats such as Sen. Richard J. Durbin (D-Ill.), who wrote to Martin in June to urge prompt action on the waivers."

McDonald's Corp., the world's largest restaurant company, said third-quarter profit increased 27 percent, helped by coffee and chicken in the U.S. and burgers in Europe.

Gilead Sciences posted Q3 earnings and sales above Wall Street consensus estimates.

Intuitive Surgical traded up almost 5% after beating earnings and raising guidance.

Todd Harrison pointed out that Thursday's Investor's Intelligence sentiment survey (that showed 62% bulls) was the highest reading since December 2004.

According to AMG Data, Including ETF activity, Equity funds report net cash inflows totaling $302 million in the week ended 10/17/07 with Domestic funds reporting net outflows of -$2.541 billion and Non-domestic funds reporting net inflows of $2.843 billion; Excluding ETF activity, Equity funds report net cash inflows totaling $894 million with Domestic funds reporting net inflows of $225 million and Non-domestic funds reporting net inflows totaling $669 million; Money Market funds report net cash inflows totaling $20.100 billion bringing the total net assets invested in the sector to a record $2.87 Trillion.

Home builder NVR Inc. stated new orders rose 12% to 2,660 units although it noted activity slowed "significantly" in August and September due to tightening in credit markets. The average new-order price in the third quarter fell 9% from a year earlier to $330,100, the builder said. The cancellation rate rose to 27% from 16% in the second quarter.

Robert McHugh: "We got a third consecutive Hindenburg Omen observation on Thursday, October 18th. These are the first observations since July 2007, so we consider it the start of another cluster. This is important because for all the statistical probabilities of a coming major decline to apply, there need to be at least two Hindenburg Omen observations within a thirty day period. We now we have three, which means there is a much higher than normal probability that a significant stock market decline will occur within the next four months, with the greatest likelihood being the decline would start within 41 days."

According to Bloomberg, credit-default swaps rose the most in three months this week as a planned $80 billion fund to rescue structured investment vehicles failed to stop two funds from warning they may be unable to repay debt.

Pakistan's central bank will continue with its ``monetary tightening'' to contain inflation, central bank Governor Shamshad Akhtar said.

Cabela's Inc., the retailer of hunting, fishing and camping equipment, reduced its forecast, saying it expects 2007 earnings to increase ``at a high single digit growth rate.'' The company had anticipated growth of more than 10 percent.

SanDisk Corp., the world's largest maker of digital-camera memory chips, said prices in the fourth quarter will fall ``moderately more'' than the 16 percent drop in the third quarter.

MMM reported third-quarter revenue of $6.18 billion, missing its projection of $6.29 billion.

One might ponder the following: the 10-year Treasury yield this week collapsed to 4.39%. At the same time, the Dow Jones Utility Average dropped from 520 to 498. Normally, the latter will rise as rates decline, and two-year note yields have fallen 40 basis points this week to the lowest since September 2005. The last time they had a bigger decrease was in the week ended Jan. 11, 2002. Futures traded on the Chicago Board of Trade suggested a 94 percent chance the Fed will reduce the target rate for overnight lending between banks a quarter-percentage point to 4.5 percent on Oct. 31, compared with 32 percent odds a week ago. What a difference a week makes.

Wachovia on Friday warned that the downturn in US credit markets might extend into next year as writedowns from losses on leveraged loans and mortgage-backed securities triggered a 10 per cent drop in third-quarter earnings.

"The reality of hunger is right here," said the Rev. Melony Samuels, director of The BedStuy Campaign against Hunger, a church-affiliated food pantry in Brooklyn. The pantry scrambled to feed 5,000 new families over the past 12 months, up almost 70 percent from 3,000 the year before.
"I am shocked to see such numbers," Samuels said, "and I am really concerned that this is just the beginning of what we are going to see."
In the past three months, Samuels has seen more clients in higher-paying jobs -- the $35,000 range -- line up for food as the fallout of the subprime mortgage woes takes hold. The Regional Food Bank of Northeastern New York, which covers 23 counties in New York State, cited a 30 percent rise in visitors in the first nine months of this year, compared with 2006.

The Dow wasn't even down 370 points on Friday and the pundits are talking about fear. Look at Amazon, Apple, Google, Garmin, RIMM, VMware, Yahoo, Intuitive Surgical etc etc. Shareholders in those companies are smelling money. The fear is in the financials. Yet, Bear Stearns is still trading at $117 and only a few days ago Goldman Sachs was at $235. The bottom line is simple: the blood hasn't even begun to run in the streets. Give me a break about the fear factor. It's pure BS.

Thursday, October 18, 2007

The Financials And The Danger Game

10/19/07 The Financials And The Danger Game

Washington Mutual reported a 72% decline in quarterly earnings and stated the ongoing weakness in the mortgage market would hurt results through the end of the year. What makes them think it will be better in 2008?

SunTrust Banks Inc. reported third-quarter earnings fell 23% on flat revenue, reflecting net valuation losses and severance expenses. The net valuation losses -- SunTrust marked to market valuations on loan warehouses and trading assets and liabilities carried at fair value -- knocked 28 cents a share off earnings. The severance costs -- for 2,400 job cuts in 2007 and planned for 2008 -- cut another 8 cents. Revenue was $2.04 billion vs. $2.03 billion.

Bank of America Corp.'s third-quarter earnings slid 32% to $3.7 billion, or 82 cents a share, from $5.42 billion, or $1.18 a share, a year earlier, hurt in part by a decline in global corporate and investment banking revenue. The results were significantly below expectations. The Charlotte, N.C. commercial bank's net interest income rose to $8.62 billion from $8.59 billion, while its provision for credit losses increased to $2.03 billion from $1.17 billion a year ago. Trading revenues declined over 90%!. Trading losses, defaults and writedowns cost almost $4 billion. The company's CFO sees home equity chargeoffs rising.

UnitedHealth said it is targeting earnings in a range of $3.49 to $3.50 a share for 2007. Earnings for 2008 are seen in a range of $3.95 to $4.00 a share and the company said it is planning to buy back around $7 billion of its shares by the end of 2008.

The country's vice head of National Development and Reform Commission, Zhu Zhixin, said Thursday in Beijing that the consumer price index in September increased by 6.2% from a year ago, after rising as much as 6.5% in the previous month, according to Reuters. "Prices may run at a high level for some time, but the possibility of a significant price rise is small," said Zhu, according to the report. When will this inflation be exported?

Chinese state-owned Citic Bank said Thursday it has held no talks with Bear Stearns about buying a stake in the U.S. investment bank, just days after a Chinese regulator said such a bid was under way.

Nokia's profit rose 85%.

Leading Wall Street chief executives predicted a 37% chance of a U.S. economic recession in the next 12 months, according to a survey released Wednesday.
In April, when the previous Financial Services Forum semiannual survey was conducted, the executives saw only a 24% chance of a recession in the coming 12 months.The forum is a policy group made up of the chief executives of 20 of the world's largest financial institutions, including Citigroup Inc., Morgan Stanley, Goldman Sachs Group and MetLife Inc.

The International Monetary Fund said thedollar “remains overvalued” and rejected claims the euro had risen too far. Contradicting Rodrigo Rato, the outgoing IMF managing director, who last week said “right now the dollar is undervalued”, the fund’s staff conclude the dollar is still too high. The multilateral lender also forecast slower growth in 2008 at 4.75 per cent, compared with 5.2 per cent expected this year.

PMI Group Inc., the second-largest U.S. mortgage insurer, forecast a third-quarter loss of $1.05 a share, citing losses in its U.S. unit and a drop in the value of its stake in Financial Guaranty Insurance Company. PMI's U.S. mortgage unit will incur losses amounting to $350 million in the quarter after the worst housing market for 16 years drove up home-loan defaults.

MGIC Investment Corp., the largest U.S. mortgage insurer, posted its first quarterly loss in 16 years and said it won't be profitable in 2008 as foreclosures increase from record levels. The net loss of $372.5 million, or $4.60 a share, was the worst quarter for the Milwaukee-based company since it went public in 1991.

Since July, 991 buy-to-let mortgage products - 72 per cent of the total - aimed at subprime customers with patchy credit histories have been withdrawn. In prime buy-to-let mortgages 438 products have been withdrawn, plus another 611 products - about 16 per cent of the mortgage deals on offer - in prime residential mortgage lending.

Thomas Tan: "The sub-prime is only the 1st layer of the onion being peeled, there is much worse danger yet to be revealed. It is amazing to see the high growth in all kinds of fixed income products during last 10 years called SIVs (structured investment Vehicles) such as RMBSs (residential mortgage backed securities), CDOs (collateralized debt obligations), ABS (asset backed securities for credit cards and auto loans), and all the OTC (over the counter) erotic and complex credit derivatives associated with them created and held by Wall St banks and financial institutions. This has been the largest financial alchemy after the medieval gold alchemy. Similar to medieval, this could turn out to be a pipe dream. The questions to be asked: Are these products really securitized, collateralized and backed by anything as claimed? Are these OTC credit derivatives really creating value as claimed? In general, most of these derivatives are unregulated, lack of any standards, no transparency, not public traded, no bid/ask price but an assigned "price" by the black box computer model, and no clearinghouse to guarantee anything. Their values thus returns are marked to model instead of marked to market, when in trouble, they are totally dependent on the balance sheet of their counterparts for survivability...What deepens this crisis is the level of leverage. Leverage is a double edge sword. Many hedge funds in trouble these days are the ones having over 5 to 1 leverage on their portfolio in order to generate double digit paper "return". Imaging 16-19% times only a leverage factor of 5, basically the whole portfolio is wiped out. This is exactly what happened to the two Bear Stearns hedge funds, they leveraged to 8 to 1, and got totally wiped out."

Dan Castellaneta: “All right, let's not panic. I'll make the money by selling one of my livers. I can get by with one.”

The National Association of Home Builders reported that current buyer traffic fell to a record low.

The dollar hit a record low against the euro on Thursday.

The head of the Federal Communications Commission has circulated an ambitious plan to relax the decades-old media ownership rules, including repealing a rule that forbids a company to own both a newspaper and a television or radio station in the same city. This would be a big plus towards completing the Tribune deal.

The Labor Department reported Thursday that applications for jobless benefits hit 337,000 last week, an increase of 28,000 from the previous week. That was the biggest one-week surge since jobless claims jumped 42,000 the week of Feb. 10.The increase was four times larger than the gain of 6,000 that economists had been expecting.

Nouriel Roubini: "A rookie central banker. Rising, unsustainable deficits. Rampant financial speculation. A burgeoning trade war with China. Why another financial meltdown is more likely than ever."

Ethanol and grain producer The Andersons Inc. projected earnings per share of between $3.15 and $3.35, up from previous guidance of $2.90 to $3.15 per share.

Hershey Co., the largest U.S. candy maker, said third-quarter profit fell more than analysts estimated and lowered its annual earnings and sales forecasts as Mars Inc. took market share and higher dairy prices raised expenses.

Wal-Mart Stores Inc. cut prices on 15,000 items this week, a 20% increase from its cuts last year. These price cuts come after it slashed prices earlier this month on toys. Additional discounts on electronics, home merchandise, food, and toys will be announced "in the days to come."

The Conference Board said Thursday, reporting that a gauge of future economic growth rose 0.3% in September. Seven of the 10 leading economic indicators increased in September. "So while the financial markets gyrated and the slump in housing intensified, the economy continued to perform at a slow but steady pace," said Ken Goldstein, labor economist at the Conference Board.

Robert McHugh: "We got another Hindenburg Omen observation on Tuesday, October 16th. This is the first observation since July 2007, so we need to exclude it from the July cluster as we are now four months past the last cluster's first observation. We consider Tuesday's observation the start of another cluster. This is important because for all the statistical probabilities of a coming major decline to apply, there need to be at least two Hindenburg Omen observations within a thirty day period. So, now we have the first, which means if we get another over the next month, there is a much higher than normal probability that a significant stock market decline will occur within the next four months, with the greatest likelihood being the decline would start within 41 days...We got a second consecutive Hindenburg Omen observation on Wednesday, October 17th, after yesterday's. These are the first observations since July 2007, so we consider it the start of another cluster. This is important because for all the statistical probabilities of a coming major decline to apply, there need to be at least two Hindenburg Omen observations within a thirty day period. We now we have two, which means there is a much higher than normal probability that a significant stock market decline will occur within the next four months, with the greatest likelihood being the decline would start within 41 days...Let's put it this way, while the odds greatly increase for a major decline now that we have a second observation, that does not mean one will come. It does mean that the odds are astronomically greater than random. The odds of a stock market crash are 25 percent, for example. All the major declines of the past 25 years were preceded by a confirmed (more than two observations within 30 days) Hindenburg Omen. There were no major declines without one preceding it. Now that a second observation has occurred within a 30 day period, that argues for scenario # 1 occurring, a deeper correction, perhaps as much as 1,500 points in the Dow Industrials. There have been instances where the subsequent decline after a confirmed Hindenburg Omen was as low as 4 or 5 percent, so scenario # 2, a minor decline is possible. However, we find it fascinating that we have another confirmed Hindenburg Omen right after a major phi mate and Fibonacci Cluster turn window. Plus a major Bradley model turn date occurred today, so something memorable may be coming."

The level of outstanding asset-backed commercial paper fell by $11 billion, or 1.2%, to $888.3 billion in the week ending Wednesday, the Federal Reserve reported Thursday. Asset-backed paper has fallen for 10 straight weeks, dropping by $295 billion, or 25%.

The Denison Alcoa plant will close. The announcement came from Ply Gem Industries that approximately 180 workers will be jobless. Ply Gem is one of the country’s leading manufacturers of residential exterior building products.

The Philly Fed index dipped to 6.8 in October from 10.9 in September.

John Williams and his Shadow Government Statistics through September:
M3 money supply growing at 14+% and inflation running at 10+%. It is not surprising to find oil above $89 a barrel, gold above $768, and the U.S. dollar index close to making another new multi year low. Why would a foreign entity want to buy dollar denominated assets with rampant inflation and raging credit deterioration? The consumer's balance sheet is under siege and the U.S. government is sinking under deficits. All that is a recipe for the Dow at 14,000?

Buying is picking up in Sallie Mae and its call options.

Chinese investors decreased their holdings of U.S. government debt $8.8 billion in August, while Japanese investments declined $24.8 billion, the Treasury said.

American Standard Cos. lowered its profit outlook for the year because of continued weakness in the residential housing market and high warranty costs.

U.S. banks had borrowed $10 million from the Federal Reserve's discount window as of Wednesday, the Fed said. On Wednesday, outstanding primary credit loans from the Fed (also known as the discount window) totaled $10 million, down from $40 million the previous Wednesday, and far below the $7.2 billion borrowed on Sept. 12.

Excluding certain items, Google said earnings for the period were $3.91 a share. Net revenue, or revenue minus payments made to other sites to acquire Internet traffic, came in at $3.01 billion, Google said. Considering how young a company Google is, these numbers are truly extraordinary. How many companies earn over $1 billion in three months on revenue of $3 billion?

Light, sweet crude for November delivery hit $90.02 in electronic trading Thursday evening. It was only about one year ago that crude had dropped in a straight line to about $50 a barrel. Lots of my friends criticized my thinking for loading up from $60 on down. That's my modus operandi-- to buy on the way down. Each to his own. I continue to believe that patient investors will be rewarded by accumulating natural gas. One way is to buy the ETF under the symbol UNG. It's about $41 and the range is roughly $33 to $54.

Sophocles: “If you are out of trouble, watch for danger."

Wednesday, October 17, 2007

Perception

10/18/07 Perception

Residential Capital LLC, the home-lending arm of GMAC Financial Services, will announce a reduction of about 25% in its work force.
The unit, known as ResCap, is expected to cut about 3,000 of its 12,000 employees, in addition to the 1,000 who were to be cut by the end of this month, as announced in January.

Thomas Au: "First of all, the fallout from subprime lending will be bad enough as it stands. But the real problem is that “subprime” is a metaphor for the whole U.S. financial culture."

Martin Hutchinson: "As the earnings season in the US stock market gets into full swing, the Dow Jones and Standard and Poors indices go from strength to strength, setting records about every other day. Yet their exuberance has failed to focus on one important factor: corporate earnings have peaked for this cycle and are set to decline substantially in the quarters ahead. The reasons for the peaking are pretty obvious. The credit squeeze in August may have eased, but there is now no doubt that it was a primarily US-led event, centered on the home mortgage industry. That is leading to earnings disasters throughout the financial services sector, with the notable and surprising exception of Goldman Sachs. (It is also bringing into question current risk management techniques; the Morgan Stanley “quant” operation lost $390 million on a single day in August, far more than the theoretical “value at risk” that was the centerpiece of their risk management calculation.) Losses from subprime mortgages are not going away, and they will be recorded in earnings over the next several quarters. As subprime mortgages default, more housing is brought onto the market, and house price declines accelerate. That process causes more previously sound mortgages to become delinquent, either because the homeowner loses his job or simply because the homeowner needs to move but is trapped by a mortgage that is now underwater. Any mortgage made at a higher loan to value ratio than the traditional 80% is endangered by a house price decline extending into the 15-20% range, with more than that on the coasts, as now seems likely."

U.S. architecture firms reported their smallest billings increase in 15 months as tightening credit made it harder for developers to build offices, shopping centers, warehouses and other commercial buildings. The Architecture Billings Index dropped to 51.1 last month, from 53.9 in August, the Washington-based American Institute of Architects said today in a statement. September's level was the lowest since June 2006.

The average retail price of heating oil in Massachusetts hit a record $2.75 a gallon, up 3 cents from a week ago and 40 cents higher than it was last year at this time, according to a state survey released. So much for muted inflation.

European Central Bank council member Klaus Liebscher said the bank remains focused on ``significant'' and rising inflation risks, suggesting it may still raise interest rates. ``The message was and is that risks to price stability are clearly pointing to the upside,'' Liebscher, who also heads Austria's central bank, said in an interview in Vienna.

Mike Shedlock: "Under the proposed rescue package Citigroup, J.P. Morgan Chase & Co. and Bank of America Corp. will set up a fund, or "superconduit," to act as a buyer of last resort. It will pay market prices for SIV assets in an effort to prevent dumping. [Mish comment: In other words, Citigroup is setting up a fund to buy assets from itself. How convenient. By the way, when you are buying something from yourself, who determines market price?"

Home sales in Southern California plummeted in September to a two-decade low.
In Southern California in September, home sales in six counties -- Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura -- fell 48.5% from the same month last year. They were at their lowest since DataQuick Information Systems, a real estate service, began compiling such statistics in 1988.

AT&T Mobility, the largest U.S. wireless carrier, confirmed Tuesday that some employees may be laid off as it transfers some of its information-technology work to IBM.

Consumer prices rose at the sharpest rate (0.3%) in four months during September, the government reported on Wednesday, as energy costs picked up after three months of decline. Meanwhile, a separate government report showed that U.S. home construction starts fell 10.2 percent in September to their lowest level in more than 14 years while building permit activity, a sign of future construction plans also dropped to a level not seen since mid-1993.
Consumer prices in September were 2.8 percent higher than a year ago, the largest 12-month increase since a matching 2.8 percent gain in March 2007, department officials said. Core prices were up 2.1 percent on a year-over-year basis.So far in 2007, consumer prices have risen at a 3.6 percent annual rate, well ahead of the 2.5 percent increase registered for all of 2006.

The Commerce Department said housing starts set an annual pace of 1.191 million units in September, lower than the 1.285 million units expected by economists. It was the lowest pace for housing starts since the March 1993 rate of 1.083 million units. Building permits fell 7.3 percent, the sharpest decline since January 1995, to an annual rate of 1.226 million.

The Oil Drum: "Both the International Energy Agency (IEA) and Energy Information Administration (EIA) figures show that global liquids production has been on a plateau since 2005. The IEA figures result in an average global production in 2007 up to September of 85.03 million b/d, almost to the same as the average 2006 production of 85.00 million b/d and higher than the average 2005 production of 84.10 million b/d. The EIA puts the average global 2007 production up to July at 84.40 million b/d, slightly lower than the average 2006 production of 84.60 million b/d and the average 2005 production of 84.63 million b/d.
World total liquids production remains on a peak plateau since 2006 and is forecast to fall off this peak plateau in the middle of 2009. According to the IEA, the current peak production of 86.13 mbd occurred on July 2006 and only one year later, June 2007 total liquids production fell to an unexpectedly low 84.50 mbd. A good increase up to 85.10 mbd occurred for September 2007. As long as demand continues increasing then prices will also continue increasing."

Bankers sold $2.2 billion of First Data Corp. senior unsecured bonds Tuesday, marking the first sizable sale of a leveraged buyout-related offering in the high-yield bond market since the summer credit crunch.

Come January, Social Security benefits for nearly 50 million Americans are going up 2.3 percent, the smallest increase in four years. It will mean an extra $24 per month in the average check, the government announced Wednesday. It's no wonder the government inflation numbers are so understated. That equates to screwing those on Social Security.

The parliament in Ankara convened at 3 p.m. Wednesday to decide whether to let Prime Minister Recep Tayyip Erdogan authorize a military incursion across Turkey's southern border with Iraq. Lawmakers voted 507-19 in favor of empowering the government to order the military to cross into Iraq during a one-year period, Parliament Speaker Koksal Toptan said.

United Technologies Corp. is forecasting a "challenging" year for 2008 due to moderating worldwide growth and a slowing U.S. economy, but the industrial conglomerate doesn't' expect a recession, said Greg Hayes, vice president of accounting and finance.

Crude oil futures reach new record high of $89 a barrel.

U.S. economic activity has slowed over the six weeks, according to the latest Beige Book report on current economic conditions released by the Federal Reserve on Wednesday.

I found it interesting that there was a gigantic decline in treasury yields on Wednesday, and yet, there was a decline in the Dow Jones Utility Average.

Allstate Corp.said late Wednesday its third-quarter net income fell to $978 million, or $1.70 a share, from $1.16 billion, or $1.83 a share, in the year-ago period. Consolidated revenue rose to $8.99 billion from $8.74 billion last year. Analysts surveyed by Thomson Financial estimated earnings per share of $1.67 on revenue of $8.94 billion.

Boston Scientific to cut 2,300 jobs.

Dan Millman: “Pain is a relatively objective, physical phenomenon; suffering is our psychological resistance to what happens. Events may create physical pain, but they do not in themselves create suffering. Resistance creates suffering. Stress happens when your mind resists what is...The only problem in your life is your mind's resistance to life as it unfolds.”

The Beat Goes On

10/17/07 The Beat Goes On

Only a slim majority of the 12 Federal Reserve district banks supported a half a percentage point cut in interest rates in September, according to minutes of the discount rate meetings released Tuesday.

Bernanke said the housing slump will be a ``significant drag'' on the economy into 2008.

"The ongoing housing correction is not ending as quickly as it might have appeared late last year," Paulson said in remarks prepared for delivery at Georgetown University. "And it now looks like it will continue to adversely impact our economy, our capital markets and many homeowners for some time yet."
"Let me be clear," Paulson said, "despite strong economic fundamentals, the housing decline is still unfolding. ... The longer home prices remain stagnant or fall, the greater the penalty to our future economic growth."

"The market for new homes is dead for all practical purposes," wrote Patrick McPherron, an economist for Moody's Economy.com.

Quintana Maritime explores strategic alternatives.

For October, ICSC expects retail sales to increase by about 2.5%, slightly improved from the sluggish 1.7% gain in September.

USBancorp said said conditions in the mortgage and housing markets are likely to remain tough over the next few quarters, and will likely lead to rising charge-offs and retail delinquencies. It said it expects its net interest margin to remain stable in the fourth quarter.

China Citic Bank Corp., the financial unit of Chinese conglomerate China Citic Group, is bidding for a stake in U.S. financial group Bear Stearns Cos., according to media reports citing a senior government official Tuesday.

D.R. Horton Inc , the largest U.S. home builder, said on Tuesday that quarterly net orders for new homes plunged 39 percent amid a spike in cancellations as the U.S. housing market continued to skip along rock bottom.

Ericsson AB said third-quarter profit was lower than its forecasts.

KeyCorp, Ohio's third-largest bank, reported third-quarter earnings per share from continuing operations of 57 cents, missing analysts' estimates of 73 cents.

The China Securities Regulatory Commission must protect investors and prevent market risks, Vice Chairman Tu Guangshao said at the Communist Party congress in Beijing. The country's investors should be ``more rational'' since ``the higher the share prices, the greater the risk,'' Chairman Shang Fulin said.

China Investment Corp., which manages the $200 billion sovereign wealth fund, said it may get more of the nation's record currency reserves to invest based on returns.

Harley-Davidson, Inc.'s results to disappoint.

The dollar amount of loans eligible for purchase by government-sponsored enterprises Fannie Mae and Freddie Mac won't go below the current level of $417,000 in 2008, the companies' regulator said Tuesday.

Paul L. Kasriel: "We think the Federal Open Market Committee (FOMC) will stand pat on its federal funds rate target at its upcoming October 30-31 meeting. We believe that one of the reasons it chose the more aggressive, 50-basis-point fed funds rate target cut at its September 18 meeting was so it would not feel compelled to change the target rate as frequently. But because weak September chain-store retail sales are likely to be a harbinger of weak holiday retail sales, the FOMC will be moved to cut its federal funds rate target again at its December 11 meeting. In other words, no Halloween treat from Bernanke & Co., but an early holiday gift."

Bear Stearns said it would eliminate 310 more mortgage jobs and analysts warned that investment banks may wind up making much bigger cuts. The news came as Bear reorganised its mortgage business and brought the bank’s total cuts to 540. It came a day after Morgan Stanley laid off 600 mortgage-related workers and Credit Suisse said it would shed 170 in its investment banking arm, bringing its total job losses to 320. Lehman Brothers has cut 2,500 mortgage-related jobs.

The Federal Reserve said that industrial output edged up 0.1 percent in September following no change at all in August. The August reading had been reported a month ago as a stronger 0.2 percent gain.

Video-rental chain Movie Gallery Inc. filed for bankruptcy Tuesday, succumbing to a mountain of debt incurred when it bought rival Hollywood Entertainment for $1 billion in 2005.

International investors sold a record amount of U.S. financial assets in August as tightening access to credit threatened economic growth and spurred an exodus from American stocks. Total holdings of equities, notes and bonds fell a net $69.3 billion after an increase of $19.2 billion in July, the Treasury Department said today in Washington. Including short- term securities such as Treasury bills, foreigners sold a net $163 billion, compared with a gain in the previous month.

The seasonally adjusted housing market index fell to a record low of 18 in October from 20 in September, the National Association of Home Builders reported Tuesday. It's the lowest reading in the index since its inception in 1985.

The Dolans say they won't raise their going private bid for Cablevision.

Why did Boeing oust the 787 program chief Michael Bair?

In after hours, Intel,Yahoo, and IBM saw their shares rise as their results exceeded estimates. It must be me but I wasn't very impressed. That must mean both stocks will rise to the moon. Meanwhile, Intel also announced that it plans to cut 2,000 jobs in the fourth quarter,reducing its total headcount to about 86,000.

Thornburg Mortgage swings to loss and omits dividend.

Midland Co., the Cincinnati specialty insurer, definitively agreed to be acquired by Munich Re for $65 a share cash, or $1.3 billion, the companies said. In a statement on Wednesday, the companies said the German reinsurer would also assume Midland's debt.

India's Sensex was recently down as much as 5.1% at 18,089.71.

Nomura, Japan's largest securities firm, plans to shutter its U.S. mortgage business in the wake of losses on mortgage-backed securities.

Monday, October 15, 2007

The Second Half Of October

10/16/07 The Second Half Of October

Crude-oil prices hit a record high in London Monday, with the November-dated light crude contract trading as high as $85.19 a barrel. The move came after gold prices reached a high of $760.80. It's trading at the highest level a front-month contract has seen in nearly 28 years. Platinum's ``fixing'' price used by some miners to sell production climbed to a record $1,425 an ounce in London.

Platts Chief Economist Larry Chorn expects a tighter supply and demand balance in oil within three years, based on the amount of spending on oil field development in 2005. "The fact that the industry fell behind in 2005 investment, the most recent year that complete data is available, means there will likely be a continued tight supply demand balance in and beyond 2010, in spite of a 70% percent investment increase in 2005 over 2000," Chorn said. The Platts study shows that the shortfall in 2005 could lead to an 800,000 barrel per day reduction in anticipated spare capacity within three years. This shortfall could grow to 4 million barrels per day in 2011 as existing fields continue to decline and demand rises.

"This was a disappointing quarter, even in the context of the dislocations in the sub-prime mortgage and credit markets. A significant amount of our income decline was in our fixed income business, where we have a long track record of strong earnings, and this quarter's performance was well below our expectations," Citigroup's CEO Chuck Prince said. Citigroup chief financial officer Gary Crittenden said Monday in a conference call that the ongoing turmoil in the credit markets could hurt the bank's fourth quarter results.

Nomura Holdings Inc., Japan's largest securities company, will post its first quarterly pretax loss in more than four years after losing 73 billion yen ($620 million) on U.S. home loans. Nomura will cut 400 jobs in the U.S. and report a 40 billion yen to 60 billion yen pretax loss for the fiscal second quarter.

Danaher Corp. agreed to buy Tektronix Inc. for $2.8 billion, or $38 a share.

Gannett Co. and Tribune Co. on Thursday will begin distributing a new weekly edition of USA Today outside the U.S.

PetroChina, China's largest listed oil and gas producer, said in the three months through September crude oil production totaled 212.3 million barrels, up 2.6% from the 207.0 million barrels it produced a year earlier. The company said it produced 378.1 billion cubic feet of natural gas, 17.3% more than the 322.4 billion cubic feet produced in the same period of 2006. In the first nine months of the year, the company produced 828 million barrels of oil equivalent, an increase of 34.2 million barrels or 4.3% from the year-earlier period. PetroChina passed GE in market cap.

Bank of Japan governor Toshihiko Fukui said he had concerns over the health of the global economy and was also monitoring the U.S. for possible downside economic risks.

Bloomberg's John Berry: "With economic news running no worse than when Federal Reserve officials cut interest rates last month, they aren't likely to move again when they meet the last two days of the month."

Fortune: "Much of the bank's Goldman's) spectacular third quarter earnings were paper gains from financial instruments that Goldman values largely according to its own estimates."

Bloomberg's Andy Mukherjee: "With each passing day, however, the fight is getting tougher. Gross capital inflows into Asia -- China, India, Hong Kong, Indonesia, South Korea, Malaysia, Singapore, Thailand, Vietnam, Pakistan and the Philippines -- have now risen back to the record highs recorded before the financial crisis of 1997. These flows are causing Asian assets -- from stocks to real estate -- to boil over. Limiting foreign capital to more manageable levels requires a reduction in Asian interest rates, something that isn't possible any time soon because of inflation."

Hu Jintao, party secretary, said in his opening address Monday to the party congress, held every few years, that development was of “decisive significance to build a moderately prosperous society…and socialist modernisation.”

Americans Leonid Hurwicz, Eric Maskin and Roger Myerson won the Nobel Memorial Prize in Economic Sciences on Monday for work that helps explain situations in which markets work well.

Government auctions of bills, notes and bonds in the fiscal year that started this month may rise more than 50 percent to $220 billion, according to UBS Securities LLC, one of the 21 primary dealers that underwrite Treasury auctions. The first decline in corporate tax revenue since 2003 increased the shortfall by 12 percent to $162.8 billion for the year ended in September, from $144.8 billion in the 12 months through April. UBS, whose economists are ranked the best on Wall Street in the latest poll by Institutional Investor magazine, forecasts a $225 billion deficit in fiscal 2008.

Motor Trend magazine has selected the 2008-model Mazda CX-9 as its sport utility vehicle of the year.

John Hussman: "Unfortunately, in contrast to more general Market Climates that we observe from week to week, the current set of conditions provides no historical examples when stocks have followed with decent returns. Every single instance has been a disaster."

The Empire state index rose to 28.8 v. 14.7 in September. The new orders index rose to 25.0 from 13.6, while the shipments index rebounded to 28.6 from 5.1. Manufacturers expect business conditions to remain favorable; the future index increased to 50.6.

"Macroeconomic drivers such as the weakening U.S. dollar, higher petroleum costs and market softness in North America impacted the quarter," said Alain Belda, Alcoa's chairman and chief executive officer.
I don't see those trends changing any time soon. Rather, they could worsen.

Eaton Corp's CEO Alexander Cutler said because of "economic uncertainties triggered by the late summer turmoil in global credit markets….the fourth quarter will not improve as we had earlier anticipated."

Time Warner Inc's Internet unit AOL will eliminate 2,000 jobs or about 20% of its workforce.

Alibaba.com Ltd. is raising up to $1.33 billion on the Hong Kong exchange in what would be the largest initial public offering by a Chinese technology operator, the company said in a preliminary listing prospectus Monday. Yahoo Inc., which holds a 39 percent stake in Alibaba.com's parent, Alibaba Group, plans to offer to buy about $100 million worth of shares, or 8.2 percent of the offering.

The first Baby Boomer applied Monday for Social Security benefits. Baby Boomers become eligible for Medicare in 2011.

Sunday, October 14, 2007

This Week Is The Crash Anniversary Of 1987

10/15/07 This Week Is The Crash Anniversary Of 1987

Gordon Brothers Retail Partners LLC of Boston and Hilco Merchant Resources of Northbrook, Ill., both specialists in asset dispositions and appraisals and other transactions, won the auction for Bombay. They will shut the U.S. stores and partner with two Canadian home-furnishings retailers, Bowring and Benix, to keep the Canadian stores open.

Australian Prime Minister John Howard called general elections for Nov. 24, and that will decide whether to bring troops home from Iraq.

Mike Burk: "You have to go back to late December 2004 during the Christmas / New Year holiday lull to find the level of NYSE downside volume as low as it is now...The patterns that define a cycle top are a high in all of the major indices confirmed by the breadth indicators then a decline, followed by a return to new highs in the blue chip indices unconfirmed by the breadth indicators and the small cap indices...The coming week in the 3rd year of the Presidential cycle the OTC has been up only 36% of the time with an average loss of over 1%. The SPX has been only slightly better, up 54% of the time but with an average loss still over 1%. Over all years the averages have been up slightly more than half of the time and the returns, on average, have been modestly positive...Nothing in the past week changed my expectation that we are at or near a market cycle high. In addition to deterioration in the breadth indicators the seasonal patterns are weakening. I expect the major indices to be lower on Friday October 19 than they were on Friday October 12."

The growth of search ads in the U.S. will slow to 13 percent in 2011 from 32 percent last year, according to New York-based research firm EMarketer Inc. Spending on the slice of the market that includes video will increase faster than search ads every year from 2007 through 2011, EMarketer said.
Have you considered taking some of your Google profits off the table?

According to the NY Times, several of the world’s biggest banks are in talks to put up about $75 billion in a backup fund that could be used to buy risky mortgage securities and other assets, a move designed to ease pressure on a crucial part of the credit markets that threatens the broader economy. Citigroup, Bank of America and JPMorgan Chase, along with several other financial institutions, have been meeting to come up with a plan to create a fund that could prevent a sharp sell-off in securities owned by bank-affiliated investment vehicles. The meetings, which began three weeks ago, have been orchestrated by senior officials at the Treasury Department, and the discussions have intensified in the last few days.

The Oil Drum: "The automated teller for home loans is empty and Americans are relying increasingly on credit cards to pay their living costs, indicating tough hurdles ahead for U.S. consumer spending and markets. Federal Reserve data released on Friday showed U.S. consumer borrowing rising by $12.18 billion in August, more than 20 percent more than economists had forecast. Most striking was an 8.1 percent increase in borrowing on revolving credit lines, mostly credit cards, to a record $909 billion. Credit card borrowings rose at the sharpest rate since early 2002. So what was it that persuaded consumers to rack up more debt during the month? Was it the increasing press coverage, no doubt reinforced by friends and family, that their houses were worth less than a month or a year ago? Or was it the near meltdown in financial and credit markets that prompted a surge in speculation about an upcoming recession? Quite possibly, it wasn't because they felt better, but because things had gotten suddenly worse."

According to the SF Chronicle, for the first time since the mid-1990s, some Bay Area counties are reducing property taxes for significant numbers of homeowners, mainly those who bought houses since late 2005 in areas where prices have declined.