Saturday, December 29, 2007

Worst Case Scenario

12/30/07 Worst Case Scenario

Former First Republic Bank shareholders sued Merrill Lynch & Co on Friday accusing the Wall Street investment bank and brokerage of hiding billions of dollars of losses related to subprime mortgages while the companies' merger was pending.

Charles Rotblut, senior markets analyst at Zacks.com, said he expects the markets to stay choppy until the fourth-quarter earnings picture becomes clearer.
As of earlier this week, Thomson Financial had pegged earnings to fall 4.5% in the fourth quarter.

On Friday, federal funds futures priced in 98% chance that the central bank will ease the benchmark interest rate by a quarter-point to 4%, according to Action Economics.

Doug Noland: "During the year 2007, it became clear that the Federal Reserve had lost control of inflationary forces. The year ended with Import Prices up 11.4% y-o-y, the Producer Price index up 7.2% y-o-y, and the Consumer Price index up 4.3% y-o-y. Despite a weakened economy and another year of dollar devaluation, the U.S. Current Account Deficit remained in the neighborhood of $800bn. Coupled with huge speculative outflows seeking profits from global inflation, the world was absolutely inundated with dollar liquidity. It was, as well, a year of shattered myths: That astute global central bankers have inflation in check; contemporary finance effectively disburses risk to the marketplace, in the process shielding the banking system from Credit and market risk; “AAA” stands for safety and liquidity; nationwide home prices won’t decline; the Federal Reserve controls marketplace liquidity; commercial paper is safe; CDOs make sense; the financial guarantors face minimal risk. Indeed, the entire bullish notion of contemporary risk modeling, structuring, hedging, and financial guarantees (“Credit insurance”) is now in serious jeopardy. 2007 saw the initial bursting of the Great Credit Bubble. To be sure, the enormous Bubble in Wall Street-backed finance abruptly went from runaway boom to astounding bust. Much of the mortgage origination market collapsed spectacularly. Thirty percent annualized broker/dealer balance sheet growth came to an abrupt halt during this year’s second half. “Private-label” MBS issuance ground to a halt. The booming asset-backed securities and CDO markets faltered badly. The banking system’s off-balance sheet structured “vehicles” collapsed in illiquidity, another factor forcing the major lending institutions to balloon their balance sheets. The global inter-bank lending market seized up. The hedge fund industry waited anxiously for redemption notices. Counter-party risk became a very serious systemic issue. The global financial system ends the year on the precipice. Meantime, U.S. Bank Credit expanded almost 12% during the year, with Commercial & Industrial loans ballooning almost 21%. With Risk Embracement turning to Risk Aversion, the marketplace called upon the Money Fund Complex to Intermediate Risk. Money Fund assets expanded an unprecedented $729bn, or 30.6%. And as liquidity disappeared for Wall Street-backed mortgages, Fannie and Freddie’s Combined Books of Business inflated an unprecedented $600bn (or so). The Federal Home Loan Banking system ballooned its balance sheet by more than $200bn, in the process becoming Lender of Last resort to some very troubled financial institutions. Global central bankers engaged in unparalleled concerted marketplace interventions and liquidity injections. From the Fed’s Q3 “flow of funds,” total (non-financial and financial) U.S. system Credit growth expanded at an annualized $4.99 TN, sustaining the U.S. Bubble Economy but in an Unsustainable Manner – unsustainable in the quantity and structure of Credit and Risk Intermediation as well as the nature of economic activity. Financial sector debt expanded at an alarming 15.6% annualized pace, with Bank Credit, GSE, agency MBS, and Money Funds all expanding at double-digit rates. Of late, the Wall Street Credit crunch and severe tightening in risky debt markets have instigated recessionary forces. Many housing markets have gone from bad to worse – on the way to much worse. Florida is a mess, while California is an unfolding disaster. Some analysts have begun to recognize that U.S. asset and debt markets have not faced such precarious dynamics since The Great Depression. Meanwhile, collapsing U.S. and international interest-rates fuel myriad global Bubbles and inflationary pressures. In short, 2007 has been a continuation of the unfolding “worst-case-scenario.”

George W. Bush intends to veto a $700bn defense spending bill because it includes a provision that would give Americans the right to sue state sponsors of terrorism. The provision threatened to “imperil” billions of dollars of Iraqi assets and undermine US foreign policy and business interests, the president said on Friday.

Herbert Hoover: “The slogan of progress is changing from the full dinner pail to the full garage.”

Jim Jubak: "A 2008 economic slowdown or recession wouldn't need to be one for the record books in order to disappoint Wall Street. It could simply mark a return to the bad old days, from 1959 through 1983, when recessions lasted 50% longer, were nearly twice as severe and took place about twice as often. A September 2007 report from the Federal Reserve Bank of Dallas summarizes the difference between a recession in the bad old days and now: "On average, the five recessions from 1959 to 1983 were 47 months apart, lingered 12 months and were associated with a 2.17 percent peak-to-trough decline in real gross domestic product. By contrast, the 1990 downturn came after 92 months of expansion, lasted eight months and involved a 1.26 percent decline in GDP. The 2001 slump ended a record 120 months of uninterrupted growth, lasted eight months and entailed a GDP decline of only 0.35 percent."

Farmers in India, the world’s second-biggest wheat grower, may harvest more of the crop following early planting and “good weather” in the main growing areas, lowering overseas purchases. The country may harvest more than 75 million tons of wheat during the March-April harvest, the most since 2000, the nation’s agriculture commissioner said.

Industry analysts are predicting a lackluster end to an already dismal year for automakers, likely the worst in nearly a decade. Holiday discounts failed to bring consumers out of their funk, and December sales are expected to fall around 4 percent, which would bring the full-year total for U.S. auto sales to 16.1 million vehicles, the lowest volume since 1998.

Jack Paar: “Poor people have more fun than rich people, they say; and I notice it's the rich people who keep saying it.”

Robert McHugh: "In both cases, whether we see a Bullish and Bearish breakout, intermediate-term stocks should be rising in a Bull market by the second half of 2008. International Central Bank and U.S. liquidity infusions will make sure of that. The rally will not be economic prosperity-driven, but rather hyperinflation driven as stocks are purchased as a means of defense against a deteriorating dollar, as if they were a tangible asset. The open question as we close 2007 is where are prices going between now and then?"

As much as a half-foot of snow may fall in northern New England today as a wave a low pressure and cold air blows in from the U.S. Midwest and Plains. The storm yesterday dumped 8 inches (20 centimeters) of snow in Farwell, Michigan, said AccuWeather, based in State College, Pennsylvania, on its Web site.

U.S. stocks are poised for their first fourth-quarter decline since 2000.

Aristotle: “Learning is not child's play; we cannot learn without pain."

Friday, December 28, 2007

The Last Weekend Of 2007

12/29/07 Last Weekend Of 2007

The Wall Street Journal reported Friday, citing analysts and unnamed executives. Citi could sell 80%-held Student Loan Corp, its North American auto-lending unit, its 24% stake in Brazil credit card operation Redecard and the bank's Japanese consumer finance business, the report said. New Citigroup CEO Vikram Pandit is considering laying off as many as 20,000 employees and shedding business lines, the report continued, citing people familiar with the matter. HSBC may sell its auto-finance business, the report added.

Japanese industrial production dipped 1.6% in November from the previous month, easing for the first time in two months, while inventory levels rose 1.6%, marking its fourth month of gains, preliminary data from the Ministry of Economy, Trade and Industry showed Friday.

ING Group said it's going to sell its reinsurance unit NRG N.V. to Warren Buffett's Berkshire Hathaway Group for approximately 300 million euros ($433 million).

U.K. house prices fell by 0.5% in December, the Nationwide Building Society said Friday. Last month, prices fell by 0.8%.

Japan's benchmark Nikkei 225 traded weaker Friday in the final trading session of year, bringing its year-to-date-performance to minus 11.1%, marking its first annual decline in five years.

A judge ordered Finish Line to complete its $1.5 billion acquisition of Genesco.

Berkshire Hathaway has begun a municipal bond insurance operation for NY State.

Further cuts in U.S. interest rates would have a "harmful effect" on the dollar and the international finance system, a Chinese finance official wrote in a commentary Thursday in an official newspaper. The dollar's fall against many currencies has prompted investors to sell dollar-denominated assets, Hu Xiaolian, director of the State Administration of Foreign Exchange, wrote in the Financial News, a newspaper published by the central bank. "If the (U.S.) federal funds rate continues to fall, this will certainly have a harmful effect on the U.S. dollar exchange rate and the international currency system," Hu wrote.

The U.S. dollar index fell further to 76.26.

According to the an article in the FT, at the end of a year in which the dollar has endured a marked decline against other currencies, an unsettling question is beginning to be voiced: can the troubles of the US currency be confined to the financial world or are they set to undermine Washington’s place on the international stage? “This is the neglected dimension of the dollar’s decline,” says Flynt Leverett, a former senior National Security Council official under President George W. Bush. “What has been said about the fall of the dollar is almost all couched in economic terms. But currency politics is very, very powerful and is part of what has made the US a hegemon for so long, like Britain before it.”

"The severity of the subprime debacle may be only a prologue to the main act, a tragedy on the grand stage in the corporate credit markets," wrote Ted Seides, the director of investments at Protégé Partners, a hedge fund of funds, in Economics and Portfolio Strategy. "Over the past decade, the exponential growth of credit derivatives has created unprecedented amounts of financial leverage on corporate credit," he added. "Similar to the growth of subprime mortgages, the rapid rise of credit products required ideal economic conditions and disconnected the assessors of risk from those bearing it."

Peter Schiff: "The subprime mortgage crisis is merely the tip of a very large iceberg. Beneath the surface lies not only a sea of tenuous loans to prime borrowers, but also an assortment of other liabilities backed by auto loans and credit card debit. Now that home equity extractions, "zero percent auto financing" and "zero interest" credit card rollovers are much harder to come by, Americans must do without the credit lifelines that have previously kept them afloat."

More than 10 North American banks and fund managers have collectively injected $3bn into their money market and cash funds since October to stem losses. Janus, the fund manager, this week became the latest to bail out its money market funds. It put in $109m to buy troubled asset-backed securities from its funds. Half a dozen firms have made similar moves.

Nouriel Roubini: "The latest macro and financial news confirm that the US is headed towards a hard landing – specifically a serious recession - as a vicious circle of worsening real fundamentals is perversely interacting with severely worsening financial fundamentals and a severe liquidity and credit crunch."

According to AMG Data Services, Including ETF activity, Equity funds report net cash inflows totaling $12.645 billion in the week ended 12/26/07 with Domestic funds reporting net inflows of $9.970 billion and Non-domestic funds reporting net inflows of $2.675 billion; Excluding ETF activity, Equity funds report net cash inflows totaling $3.587 billion with Domestic funds reporting net inflows of $2.047 billion and Non-domestic funds reporting net inflows totaling $1.540 billion.

Let's look at the difference in pricing for natural gas between the U.S. market and the one in London. Natural gas here is going for $7.20. By comparison, natural gas for within-day delivery dropped 0.55 pence to 47.8 pence a therm, according to prices from ICAP Plc on Bloomberg at 11:14 a.m. London time. They were earlier today as high as 49 pence, the highest since Dec. 24. The latest price is equivalent to $9.56 a million British thermal units. A therm is 100,000 Btus.

Sales of new U.S. homes fell by a more-than-expected 9% in November to a seasonally adjusted annual rate of 647,000, the Commerce Department reported Friday. Meanwhile, October's sales rate was revised downward, to rise by 711,000, or 1.7%. They were previously estimated to have risen to a seasonally adjusted annual rate of 728,000. In the past year, sales of new U.S. homes are down 34.4% nationwide.

The Chicago purchasing-managers' index rose to 56.6% in December from 52.9% in November, according to media reports.

U.S. natural gas inventories fall 165 bcf last week, the lowest level in more than three months. Natural gas inventories have fallen nearly 550 billion cubic feet since the week ending Nov. 16. Natural-gas futures for February delivery was last up 6.6 cents, or 0.9%, at 7.266 per million British thermal units. Natural gas accounts for more than 20% of the U.S.'s total energy consumption, while petroleum products account for 40%.

Brazil said Friday that starting Jan. 1 it will require all diesel oil to contain 2 percent biodiesel in an effort to grow the market for the renewable, clean burning fuel.

Macy's Inc said it would close nine underperforming stores in Indiana, Ohio, Louisiana, Oklahoma, Utah and Texas. Macy's said the closings would affect 899 employees, who would be offered positions in nearby stores where possible.

Gold for February delivery closed up $10.9, or 1.3%, at $842.7 an ounce on the New York Mercantile Exchange.

According to Bloomberg, Legg Mason Inc. pumped $1.12 billion into two non-U.S. cash funds to prevent losses, the biggest bailout by a money manager tied to asset-backed debt sold by structured investment vehicles. The move, along with an earlier cash infusion, will reduce earnings per share by 15 cents in the quarter ending Dec. 31, the Baltimore-based company said today in a statement. Legg Mason has provided $1.47 billion to support money funds and other cash- management portfolios since November.

Thursday, December 27, 2007

More Hard Data

12/27/07 More Hard Data

Citigroup may need to cut its dividend by 40% due to CDO-related write-downs of $18.7 billion in the fourth quarter, Goldman Sachs estimated. The broker previously estimated an $11 billion write-down. Merrill Lynch have to take an $11.5 billion write-off, compared to Goldman's earlier estimate of $6 billion, and it now sees J.P. Morgan Chase write-downs of $3.4 billion, up from an earlier estimate of $1.7 billion.

EMC Corp.said that it will acquire Document Sciences Corporation for around $85 million in cash. Document Sciences stockholders will receive $14.75 in cash for each share of common stock, and is expected to be completed in the first quarter of 2008.

New homes construction in Japan fell 27% in November to 84,252 units from a year earlier, declining for the fifth straight month, according to data released by the Ministry of Land, Infrastructure and Transport Thursday.

Japan's economy accounted for less than 10% of nominal global gross domestic product in 2006, the first time it has fallen below the 10% threshold in 24 years, according to reports. Japan's economy contracted 4% in nominal terms to 4.37 trillion yen from a year earlier, accounting for 9.1% of the world gross domestic product in 2006, the Nikkei business daily reported, citing figures released by the Cabinet Office Thursday.

U.S. overall consumer confidence fell last week, according to an ABC News/Washington Post poll released Wednesday.
The consumer comfort index fell 6 points to -23 in the week ended Dec. 23, from -17 a week earlier.

According to the NY Times, a new regulation lets employers establish two classes of retirees, with more benefits for those under 65 and fewer, or none at all, for those older.

The yuan rose the most since China ended a fixed exchange rate to the dollar in 2005 as the central bank sought to curb inflation.

According to Rigzone, the largest energy contract in Iran was signed when the country inked a deal with Malaysia to develop two gas fields, Golshan and Ferdows, in southern Iran, as well as offshore fields.

French natural-gas reserves fell to 75.9 percent full in the week to Dec. 23 as traders pumped the fuel out of underground storage to meet demand.

Michelle Leder: "A quick skim of recent 10-Ds turns up this fascinating exhibit filed last week by BMW Vehicle Lease Trust 2007-1. Because this is a relatively new trust, there’s not enough history to go back a year. But going back one month shows a small, but potentially dangerous trend: at the end of October, there was only 1 loan in this trust that was 90 days or more late. But by the end of November, that had risen to 30. Granted, it’s a small number, but it’s still a 30-fold increase from one month to the next. And it’s presumably in a segment of the economy that’s about as far removed from sub-prime mortgages as you can get."

Richard Daughty: "Central banks believe that death by inflation is preferable to death by deflation. And now you know why I cry myself to sleep muttering "We're freaking doomed! We're freaking doomed!"

The European Central Bank drained 145.64 billion euros from euro-zone money markets on Thursday, within its upper limit of 150 billion euros, aiming to keep short term interest rates in line with benchmark lending rates.

U.S. mortgage applications sank last week to the lowest level since the end of last year despite falling borrowing costs, an industry trade group said Thursday.
The Mortgage Bankers Association's seasonally adjusted mortgage application index fell 7.6 percent in the week ending Dec. 21 to 603.8, its lowest reading since falling to 575.6 in the Dec. 29, 2006 week.

Seasonally adjusted initial jobless claims rose 1,000 to 349,000 in the week ended Dec. 22, the government reported Thursday. The four-week moving average for initial jobless claims fell 1,000 to 342,500, according to the Labor Department. The prior week's initial jobless claims level was revised to 348,000 from an earlier estimate of 346,000. Continuing jobless claims gained 75,000, reaching 2.71 million for the week ended Dec. 15. The four-week moving average for continuing jobless claims rose 13,500 to 2.64 million. Continuing jobless claims and the four-week moving average for those claims both reached their highest levels in more than two years.

A big jump in demand for civilian aircraft pushed durable goods orders up for the first time in four months in November, the Commerce Department reported Thursday. Excluding transportation orders, however, durable goods orders fell by 0.7% in November. New orders for non-defense aircraft and parts shot up by 20.9% in November, the data show. However, new orders for defense aircraft and parts dropped by 20.1% in the same month. Demand for capital goods also softened, suggesting business investment will be a drag on economic growth.

Boeing Co. orders more than tripled in November, to 177 planes, from the prior month. Bookings at the world's second- largest commercial plane maker have averaged 122 a month over the last three months.

Rio Tinto Ltd/Plc on Thursday hit back at rival BHP Billiton's hostile approach, playing up its independent growth prospects amid renewed speculation of a Chinese-backed counter bid. Beijing has sanctioned major state-owned corporates to look into three strategies for mounting counter-bids for Rio, including forming a domestic consortium; local players working in concert with foreign companies; or buying shares on the open market, according to a December 24 report in the South China Morning Post.

There are media reports of the assassination of Pakistani opposition leader Benazir Bhutto. Bhutto was seen as the front-runner to become Pakistan's next prime minister in elections scheduled for next month.

U.S. consumer confidence rose in December due to an increase in short-term expectations, though consumers "remain far from optimistic," the Conference Board reported Thursday. The consumer confidence index rose to 88.6 from a revised reading of 87.8 in November. However, December's reading is below last year's level of 110.0, as consumers have been concerned about higher energy prices and falling home prices.

Crude inventories fell by 3.3 million barrels to 293.6 million barrels in the week ending Dec. 21, U.S. Energy Information Administration reported on Thursday. Gasoline supplies rose by 700,000 barrels in the latest week, while distillate stocks fell by 2.8 million barrels, EIA reported. Crude for February delivery closed up 65 cents, or 0.7%, at $96.62 a barrel on the New York Mercantile Exchange.

The dollar is down 9.9 percent this year to $1.4502 per euro, after weakening 10 percent in 2006. The U.S. dollar index closed down at 76.76. "Americans will certainly find global hegemony a lot more expensive if the dollar falls off its perch," adds Kenneth Rogoff, former chief economist of the International Monetary Fund, in an article published this month. He maintains that the US has been fortunate to be able to use the huge low-interest dollar holdings of the central banks of China and Japan to finance higher return investments elsewhere, "but between the sub-prime US mortgage crisis and the dollar's ongoing decline, America's exorbitant privilege now looks a bit shaky . . . American voters, who are famously loath to increase taxes, might start thinking a lot harder about the real economic costs of their country's superpower status."

The Dow Jones Industrial Average fell 192 points, or 1.4%, at 13,359.61 points at the unofficial 4 p.m. close. The S&P 500 Index dropped 21.36 points, or 1.4%, at 1,476 and the Nasdaq Composite declined 47 points, or 1.8%, at 2,676.

Google Inc. increased its lead in the U.S. Internet search market in November at the expense of both Yahoo Inc. and Microsoft Corp., according to data released Thursday by Nielsen Online. Google's share of the market grew to 57.7% in November from 55.5% in October, according to Nielsen. Google rival Yahoo, meanwhile, saw its share of market dwindle to 17.9% from 18.8%. Microsoft also saw its share of the search market fall, to 12% in November from 13.8% in the previous month, according to Nielsen.

Gold for February delivery ended the session up $2.3, or 0.3%, at $831 .8 an ounce on the New York Mercantile Exchange.

Merrill Lynch & Co plans to announce about 1,600 layoffs after disclosing fourth-quarter write-downs, CNBC reported on Thursday.

More than three million people will have to wait until February to get their tax refunds because of Congress's late fix to the alternative minimum tax, the IRS said Thursday.

Wednesday, December 26, 2007

Hard Data

12/27/07 Hard Data

Nouriel Roubini: "The first hard data on the retail sales during the holiday season (going from Black Friday until December 24th) are in: excluding spending on gasoline retail sales were up a mediocre 2.4% relative to a year ago; including gasoline they were up 3.6% on the lowest end of forecasters’ expectations."

Holiday retail spending rose 3.6% from a year earlier, led by luxury goods and electronic-commerce purchases, MasterCard Advisors LLC said on Wednesday. Sales "came in just above the lower end of the range we were expecting, maintaining the slower, modest growth we've been seeing throughout the year," said Michael McNamara, vice president of research and analysis for MasterCard Advisors, in a statement. Apparel lagged and electronics sales rose "a very moderate 2.7%," the firm said. Gasoline prices were 30% to 35% higher than they were a year earlier, while the e-commerce segment may have been boosted by inclement weather, the firm said.

Kansai Electric Power Co. and Sumitomo Corp. will join forces with Kazakhstan's state-owned Kazatomprom to process uranium ore into nuclear fuel for power generation, according to reports. Japanese firm Nuclear Fuel Industries Ltd. will also be involved in the project, which is due to be formally announced in Kazakhstan later Wednesday, the Nikkei business daily reported.

Berkshire Hathaway and Marmon Holdings announced that Berkshire will purchase 60% of Marmon Holdings, a private company owned by trusts benefiting members of the Pritzker Family of Chicago. Berkshire will put up $4.5 bln for the stake and will acquire the remaining 40% through staged acquisitions over a five to six year period, to be based on future earnings. Marmon will make a substantial distribution of cash and assets to shareholders prior to the expected closing in the first quarter of 2008. The Marmon Group is an international association of more than 125 manufacturing and service businesses. Marmon, owned by trusts for the benefit of members of the Pritzker family, was an ailing manufacturing operation in Ohio when it was acquired by Jay and Robert Pritzker in 1953. It has collective revenue of about $7 billion and includes business interests ranging from construction and railroad and intermodal tank cars to specialty pipes, metal fasteners, crane leasing, store fixtures and food-preparation equipment. It employs about 21,000. Marmon has more than tripled its operating income and improved operating margins from 4.9 percent to 12.4 percent in the past five years.


China will scrap import duties on copper, coal and aluminum, and halve tax on oil products from the beginning of next year. Export taxes on semi-finished steel products will be raised to as much as 25 per cent and a 15 per cent export tax will be imposed on some stainless steel, welded pipes and other steel products in an effort to cool investment in the steel sector, the ministry added.

China, the world's second-biggest energy consumer, plans to increase crude oil imports through long-term contracts and cut spot purchases to cushion against price and supply fluctuations.

According to the WSJ, the credit crunch triggered by the downturn in the housing market is creating problems in commercial real estate, driving down prices of office buildings, shopping malls and apartment complexes, and leaving some owners scrambling for cash.

Crude oil rose for a third day in New York on concern shipments from Iraq may be disrupted after the Turkish military attacked bases of Kurdish rebels in northern Iraq.

Sentiment among Japan's small and midsize companies, especially in the housing sector, fell to its most pessimistic level in nearly three years in December, a government-affiliated lender said Wednesday. The sales outlook index, which measures the percentage of companies predicting that sales will improve over the next three months minus those saying it will worsen, stood at 6.4 in December from November's 8.9 reading, according to a business sentiment survey by the Japan Finance Corporation for Small and Medium Enterprise. That's the lowest since January in 2005 when the index had also fallen to 6.4.

According to Bloomberg, Kazuo Mizuno, chief economist at Mitsubishi UFJ Securities, the brokerage arm of Japan's largest bank (Mitsubishi UFJ Financial Group, predicts the dollar may fall 20% against the yen to ¥95/$1 in 2008.

Amazon.com Inc. said Wednesday its 2007 holiday season was its strongest to date, with Nintendo Wii game systems and the "Harry Potter and the Order of the Phoenix" DVD among its top-selling products. The online retailer said it sold about 17 Nintendo Wiis per second when the product was available. The fifth Harry Potter movie led DVD sales, followed by "Planet Earth: The Complete BBC Series" and "Pirates of the Caribbean: At World's End."

Mike Shedlock: "Wal-Mart Stores Inc. and other big-box retailers — buffeted by sagging sales and the housing slump — are pulling the plug on new-store plans in and around Chicago. The pullback is another sign of the darkening outlook for 2008, as retailers turn cautious on expansion."

U.S. home prices fell in October for the 10th consecutive month, declining a record 6.7 percent compared with a year ago, according to the Standard & Poor's/Case-Shiller home price index. "No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim," said Robert Shiller, who helped create the index, in a statement Wednesday. The S&P/Case-Shiller home price index tracks prices of existing single-family homes in 10 metropolitan areas compared with a year earlier. A broader index of 20 metropolitan areas fell 6.1 percent.

DemocracyNow.org: "We speak with a reporter from the Army Times who gives an inside account of how an army unit committed mutiny and refused to carry out orders in Iraq. After an IED attack killed five more members of Charlie 1-26, members of 2nd Platoon gathered for a meeting and determined they could no longer function professionally. Several platoon members were afraid their anger could set loose a massacre."

The Managing Director of the Management Bureau for Iran Electricity Network Mas'oud Hojjat said Iran is ready to commence the export of 600 million kilowatt electricity to Turkey, according to Fars News Agency.

FedEx Corp. said its freight segment will implement a 5.5% general rate increase, effective Jan. 14, and its long-haul less-than-truckload company will implement a similar increase for its general rates.

The dollar dropped as much as 0.6 percent against the euro after gaining 1.6 percent in the past two weeks.

Platinum futures for April delivery rose $11.10, or 0.7 percent, to $1,541.20 an ounce at 9:35 a.m. on the New York Mercantile Exchange, the highest ever.

President Bush on Wednesday signed a $555 billion bill that funds the Iraq war well into next year and keeps government agencies running through September.

Apple Inc. shares on Wednesday hit $200 for the first time in the company's history.

Crude futures for February delivery closed up $1.84, or 2%, at $95.97 a barrel on the New York Mercantile Exchange.

Gold futures for February delivery closed up $13, or 1.6%, at $829.5 an ounce on the New York Mercantile Exchange. The dollar index, which tracks the value of the greenback against a basket of other major currencies, fell for a third day, down 0.6% to 77.14, the lowest level since Dec. 17.

Cerberus Capital Management paid a $100 million termination fee to United Rentals Inc. Wednesday.

Tuesday, December 25, 2007

The Day After

12/26/07 The Day After

Post-Christmas sales have become even more important to retailers amid the rising popularity of gift cards, analysts said. Any help to ring in additional sales in a season that's expected to grow at their slowest pace in five years would also be welcome relief, they said.
According to ShopperTrak, Wednesday is expected to rank as the No. 6 holiday shopping day this year, after this past weekend and Black Friday -- the day after Thanksgiving that typically marks the start of the holiday shopping season, retailers' biggest selling period.

Costco Wholesale Corp. has had "pretty good" holiday sales and has kept inventories under control to avoid markdowns, Chief Financial Officer Richard Galanti told The Wall Street Journal. Selling well were more expensive gift packs with healthy and beauty items and those with chocolate and nuts. Also selling well, the executive told the paper, were women's outerwear and DVDs, while jewelry sales lagged.

Confidence among large Japanese companies declined in the three months to December, according to a government survey. An index tracking confidence among large manufacturers came in at 5.2 in the December-ended quarter compared with 7.7 in the preceding quarter, while confidence among large non-manufacturers fell to minus 2.2 from 5.3 in the preceding quarter, according to the Ministry of Finance's Business Outlook Survey.

Copper has risen more than 10% since Dec. 19.

The Treasury awarded $20 billion in 3-month bills at 3.28%, compared with last week's 3.0%. The bid-to-cover -- which measures bids received to bids tendered -- was 2.32, unchanged from last week. The indirect bid, a carefully watched category that includes foreign buyers, was 26.4%, up from 16.0% the week before. The Treasury also awarded $19 billion in 6-month bills at 3.49% compared with 3.28% last week. The indirect bid rose to 37.1% from 30.5% and the bid-to-cover rose to 2.61 from 2.34 last week. The auction "was well-bid, helped by the $2 billion cut in offering size to $39 billion, though light trading conditions limited demand," wrote analysts at Action Economics.

Target Corp warned on Monday that its December same-store sales were below expectations and said it now expects sales at stores open at least a year in the range of down 1 percent to up 1 percent, adjusted for a calendar shift.

Allan Sloan: "Am I really saying that the Fed, which to many people still seems omniscient and omnipotent, has lost much of its mojo? I am. Why should you care? Because if the Fed continues to lose clout, it will be even harder than it is now to rescue the world's financial system when the next disaster strikes the markets. And there's always a next disaster."

"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression. "It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds.

Bill Bonner: "Hear that noise? It's not sleigh bells ringing. It's not children singing. No, that's the sound of pumps working night and day. In addition to cutting rates, the Fed and the European Central bank are pushing up and down on their pumps as hard as they can - lending extra money as fast as borrowers will take it. The idea is to replace the liquidity that the markets are destroying…and prevent the free market from working. That is, the feds try to artificially increase the supply of cash and credit…so as to avoid correcting mistakes. As we explained on Friday, it's almost impossible for an economy to correct mistakes when the price of money is going down. Instead, mistakes are typically made worse. A guy who is deeply in debt, for example, finds that the easiest thing to do is to borrow more! Already, the feds have practically sunk the entire economy with too much debt; now they're trying to put more debt into the system.

After previously rebuffing an earlier buyout bid from rival CommScope, Westchester-based Andrew agreed six months ago to a $15-a-share offer from the North Carolina company. Under terms of the agreement, Andrew stockholders would receive $13.50 a share in cash, and an additional $1.50 in either cash or CommScope common stock, or a combination of the two.
On Monday, Commscope said the $1.50-a-share element will be in the form of CommScope stock, and said that based on the formula spelled out in the agreement, Andrew holders will now receive each of their shares $13.50 in cash and 0. 03154 CommScope shares.

Capital infusion comes at a price. In the case of Merrill Lynch, the discount was a stiff 17%.

According to Rigzone, Kazakh Energy Minister Saouat Mynbaiev said the state is poised to double its stake in the giant Kashagan oil field project to around 16% in a bid to settle a dispute with consortium partners over delays and cost overruns.

Cosmopolitan cities like New York and Miami have long served as second homes for affluent and accomplished foreigners. But the trend is growing. One in five American realtors has sold a home to a foreign investor in the past year, according to the National Association of Realtors. The events of 2007 have made the U.S. much more affordable for international home buyers. Severe dollar declines against the euro and pound have made U.S. homes much cheaper for Europeans. But even foreign buyers without that sort of currency advantage are benefiting from sharp drops in housing prices at a time when problems in mortgage lending are keeping many Americans out of the market.

Spending fell 2.2% for the week through Dec. 22 from a year earlier, Chicago-based ShopperTrak RCT Corp. said.

According to the WSJ, iSuppli Corp has cut its 2008 expectations of global semiconductor sales from 9.3% to 7.5% due to a slowing economy.

According to DSL Reports, "the newest Sprint Connection utility is installed on my notebook. Low and behold, it has GPS capability. An interesting feature, and probably a very useful one as well."

Mike Shedlock: "The Army had been given presidential approval to expand its forces by 74,000 over all by 2010, including the reserve component, to meet the stress of Iraq and Afghanistan and to prepare for future threats...This is not a "support the troops" agenda but rather a "keep more troops in harm's way" agenda. The altered plans are not "to meet the stress of Iraq and Afghanistan and to prepare for future threats" but rather an admission that there are simply no jobs no jobs available for returning troops. Bush would rather waste $70 billion and another 10,000 lives than admit his programs are a complete failures."

Monday, December 24, 2007

Eroding Credit Card Quality

12/25/07 Eroding Credit Card Quality

Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come. An Associated Press analysis of financial data from the country's largest card issuers also found that the greatest rise was among accounts more than 90 days in arrears. Experts say these signs of the deterioration of finances of many households are partly a byproduct of the subprime mortgage crisis and could spell more trouble ahead for an already sputtering economy. "Debt eventually leaks into other areas, whether it starts with the mortgage and goes to the credit card or vice versa," said Cliff Tan, a visiting scholar at Stanford University and an expert on credit risk. "We're starting to see leaks now." The value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October from a year earlier at 17 large credit card trusts examined by the AP. That represented more than 4 percent of the total outstanding principal balances owed to the trusts on credit cards that were issued by banks such as Bank of America and Capital One and for retailers like Home Depot and Wal-Mart. At the same time, defaults -- when lenders essentially give up hope of ever being repaid and write off the debt -- rose 18 percent to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission. Serious delinquencies also are up sharply: Some of the nation's biggest lenders -- including Advanta, GE Money Bank and HSBC -- reported increases of 50 percent or more in the value of accounts that were at least 90 days delinquent when compared with the same period a year ago. The AP analyzed data representing about 325 million individual accounts held in trusts that were created by credit card issuers in order to sell the debt to investors -- similar to how many banks packaged and sold subprime mortgage loans. Together, they represent about 45 percent of the $920 billion the Federal Reserve counts as credit card debt owed by Americans. The trend carried into November. As of Friday, all of the trusts that filed reports for the month show increases in both delinquencies and defaults over November 2006, and many show sequential increases from October. Discover accounts 30 days or more delinquent jumped 25,716 from November 2006 and had increased 6,000 between October and November this year. Many economists expect delinquencies and defaults to rise further after the holiday shopping season. Mark Zandi, chief economist and co-founder of Moody's Economy.com Inc., cited mounting mortgage problems that began after this summer's subprime financial shock as one of the culprits, as well as a weakening job market in the Midwest, South and parts of the West, where real-estate markets have been particularly hard hit. "Credit card quality will continue to erode throughout next year," Zandi said.

GE Capital said it agreed to purchase most of Merrill Lynch Capital, Merrill Lynch's wholly-owned middle-market commercial finance business. Financial terms were not disclosed. The acquisition, expected to close in the first quarter of 2008, will add more than $10 billion in assets and $5 billion in commitments to GE Capital Commercial Finance's base of $260 billion.

Merrill Lynch & Co. will receive a $6.2 billion cash infusion from Singapore's sovereign wealth fund Temasek Holdings Pte. and Davis Selected Advisors LP. Temasek will invest as much as $5 billion and New York- based Davis will buy $1.2 billion of Merrill stock, the brokerage firm said in a statement.

Online shopping revenue is up 19% in the pre-Christmas period of 2007 holiday season, according to ComScore Inc. [v: scor]. The online data monitoring group said online shoppers spent $26.29 billion for the first 51 days of the holiday season, from Nov. 21 -Dec 21, compared to $22.04 billion in the same period last year. The busiest spending day so far this year was Dec. 10, dubbed "Green Monday," when shoppers spent $881 million, ComScore said.

Aggressive discounting paid off for the period's stalwarts -- Costco Wholesale Corp , J.C. Penney Co Inc , Wal-Mart Stores Inc and Barnes & Noble Inc , consumer marketing firm America's Research Group said. Retailers who failed to discount -- such as Macy's Inc , Circuit City Stores Inc and Borders Group Inc -- were the season's worst performers, the survey found.

Not so long ago, Mexico succeeded as a low-cost producer to the auto parts world. But now its niche is threatened by global competitors who can trump it with lower salaries or superior quality and productivity.

MTC Technologies, Inc. has signed a definitive merger agreement to be acquired by BAE Systems, Inc. The transaction is valued at roughly $450 million for a cash price of $24.00 per share.

The New York Times writes that Target is having an especially rough holiday season.

John Hussman: "Currently, the combination of valuations and market action (not to mention recession probability) is one that has historically been associated with negative average returns. That doesn't mean that investors who keep riding the unicycle can't make a few more small bills, but it does mean that repeated risk-taking in conditions like the present has not been rewarding, on average, and has frequently involved significant and abrupt losses...neither the Fed nor the ECB have "injected" material amounts of "liquidity" into the international banking system in recent months. This is not a call for them to do so - to some extent their hands are tied by inflation pressures, currency risks, and profigate government spending (particularly in the U.S.). The problem is that by creating the illusion that they are doing something material - when the problem in the global financial system is not confidence, but solvency - the Fed and the ECB misdirect the attention of investors, provide false hope, and ultimately do a great disservice to investors...At present, the Fed has injected less than $20 billion in total “liquidity” since March – nearly all of which has been withdrawn from the banking system as currency in circulation. Normally, the Fed would have done a “permanent” open market operation by now, to finance this increase in currency demand (which predictably grows by $30-50 billion annually). But by constantly rolling over temporary repos every week or two instead, the Fed can act as if it is “doing more.”

Capgemini shares rose on Monday after a newspaper said Wipro, India's third-biggest software exporter, was expected to bid for the French computer consultancy firm.

United Rentals Inc. said it's terminating a merger agreement with Cerberus Capital Management's acquisition vehicles RAM Holdings Inc. and RAM Acquisition Corp. The equipment rental company said it's also requesting Cerberus to pay it $100 million in termination fee as part of the original merger agreement.

Singapore's inflation rate hit a 25-year high of 4.2% in November from a year earlier, reflecting higher food and housing prices, according to reports.

Will Rogers: “If we ever pass out as a great nation we ought to put on our tombstone 'America died from a delusion that she had moral leadership'.”

Bruce Collins: "Could we experience the horrifying effects of a K-wave depressionary cycle soon? Ian Gordon, a long wave analyst and expert on the Kondratieff effect, believes we are already there.
He writes:
“This is it. The Kondratieff winter is now underway in earnest and nothing can stop it. The huge credit expansion initiated by the Maestro, the past Federal Reserve Chairman, Alan Greenspan, has now reversed. The ensuing credit contraction will be devastating. It will take down creditor and debtor alike and will result in a destructive and frightening deflationary depression.”

“While the crash only took place six months ago, I am convinced we have now passed through the worst, and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger too is safely behind us.” – Herbert Hoover, President of the United States of America, May 1, 1930

“Gentlemen, you have come sixty days too late. The depression is over.” – Herbert Hoover, President of the United States of America, responding to a delegation requesting a public works program (stimulus) to help speed US economic recovery, June 1930

MAXjet Airways PLC said Monday it has filed for Chapter 11 Bankruptcy, blaming rising fuel costs and an increase in competition for business-class travelers for its inability to raise necessary funding. The trans-Atlantic business-class only airline listed just six months ago on AIM, London's alternative market.

Bob Rodriguez, the hugely successful manager of FPA Capitaland FPA New Income, recently announced he put a halt to purchases of stocks and high-yield bonds at both portfolios on Dec. 14. His decision is a reaction to the subprime mortgage-induced credit crunch, which he expects to worsen in coming months. Rodriguez says he'll review his actions weekly, but he doesn't anticipate any change in course until February or March 2008. In his September 2007 letter to FPA Capital shareholders, he wrote that the odds of a recession were 50% or greater. But in a conversation with Morningstar, he noted that as recently as a month ago, he would have placed the odds at 70%. Now he says the odds are closer to 100%.

The British pound hit record lows against the euro on Monday for the second straight day, weighed down by falling home prices and expectations that the Bank of England will keep cutting interest rates.

Charles E. Wilson: "No one should suffer from the great delusion that any form of communism or socialism which promotes the dictatorship of the few instead of the initiative of the millions can produce a happier or more prosperous society."

Sunday, December 23, 2007

Cycles

12/24/07 Cycles

Mike Burk: "Since 1928, during the last 5 trading days of the year, the S&P 500 (SPX) has been up 82% of the time with an average gain of 1.11%. During the 3rd year of the Presidential Cycle it has been up 95% of the time. 1987 was the only down year...Next year is the 4th year of the Presidential Cycle. The charts show an average of all years and an average of the 4th year of the Presidential Cycle. Calculations for the charts assume 21 trading days in a month and are calculated by averaging the return of each of the 1st 11 trading days of the month and each of the last 10. When there have been more than 21 trading days some days in the middle of the month have not been counted. When there have been less than 21 trading days some of the days in the middle of the month have been counted twice. All moves, either way, greater than 2% have been reduced to 2% so they do not distort the patterns.
Since 1888 the Dow Jones Industrial Average (DJIA) has been up 70% of the time during the 4th year of the Presidential Cycle with an average gain of 8.3%. Over all years it has been up 64% of the time with an average gain of 7.3%...I expect the major indices to be higher on Friday December 28 than they were on Friday December 21."

Congress passed a temporary fix for the alternative minimum tax last week. With the patch, the AMT will strike about 4.2 million tax returns - roughly the same as last year. Bottom line: If you paid AMT for tax year 2006, you probably will pay it for 2007 unless your income or family circumstances have changed.

The Seattle Times: "Even if you're not in danger of paying the AMT, make sure you don't squander deductions. That's a distinct possibility if you don't think through your bunching strategy. By bunching, a taxpayer pulls some deductions into the current tax year or pushes them into the next. The goal is to consolidate them in the tax year where they will exceed the standard amounts. For 2007 taxes, that's $5,350 for single filers and married individuals filing separately; $7,850 for heads of household; and $10,700 for married couples filing jointly. In 2008, the standard deduction amounts are $5,450 for singles and married taxpayers filing separately; $8,000 for heads of household; and $10,900 for married couples filing a joint return.

The Oil Drum: "Putin wields gas as a weapon. But the reality is that Russia can barely meet its own growing demand."

Mexican authorities announced on Friday that the country's daily minimum wage will get a small increase in 2008, with urban wages to rise about 4 percent to 52.59 pesos, or about US$4.85 (euro3.37) a day, roughly the same as the current rate of inflation. Workers in the Mexican countryside -- where lower wages prevail -- will see minimum wages rise by about the same rate, to between 49.50 and 50.96 pesos, or US$4.57 to US$4.70 (euro3.18 to euro3.27), a day, according to a minimum-wage commission representing the government, labor and industry. The increases will take effect Jan. 1.

24/7WallSt.com: "As a huge consumer of metals, China does not want to see a merger between Rio Tinto (RTP) and BHP Billiton (BHP). The new company might have too much leverage in raising prices. So, China political machine is working overtime to look at ways to lobby against the deal. And, it has brought in investment bankers to see if there are financial options for keeping the two big miners apart. According to The Telegraph, "The political and market-led interventions that China is considering include submissions to the UK and Australian competition authorities, a Chinese-backed white knight bid for Rio and a government-backed stake being acquired in Rio to block BHP's proposal". China's sovereign fund has the capital to put money into US companies, so why no buy a piece of Rio?"

According to the FT, Saudi Arabia plans to establish a sovereign wealth fund that is expected to dwarf Abu Dhabi’s $900bn and become the largest in the world.

Bill Bonner: "The trouble is that the government's solution to one problem is the cause of two more. The feds man the pumps 24/7 to try to keep the consumer economy from drying up. But the extra liquidity drives up consumer prices!"

During the 2006 and 2007 time period, Sprint invested more than $13 billion to enhance its networks. There is a market cap of $39 billion with revenues of $40 billion. The debt structure is not overbearing. Selling at a 52-week low, the stock could be an interesting year end investment.

Venezuelan President Hugo Chavez bolstered his cooperation with Cuba on Saturday by signing energy, farming and finance accords, including a deal to expand of one of his socialist ally's oil refineries. The Venezuelan leader, a strident foe of Washington's "imperialist" policies, is Havana's closest ally and the petroleum deals have helped Cuba's economy stay afloat.

Petraeus says U.S. may draw down Iraq forces during 2008. That will be offset by an increase in troops in Afghanistan.

Marsoft: "Although the market remains extremely strong as the new year approaches, freight rates have dipped a bit over the past month. After peaking in mid-November at $190,000 per day, Cape spot rates fell back to $170,000 per day by the middle of December. Likewise, the Baltic Panamax TC index has also declined over the past month, from $90,000 per day to $75,000 per day. However, rates on our benchmark USG/Japan grain route have held up much better, rising from $118 per tonne, or $80,000 per day, to $123 per tonne, or $85,000 per day. Meanwhile, rates for the smaller bulkers have seen a relatively mild decline over the past month, with Supramax rates dipping from $70,000 per day in mid-November to $63,000 per day by mid-December.
As spot rates have eased over the past month, dry bulk period charter activity has also slowed a bit, and period charter rates have followed suit. One-year time charter rates for a modern Panamax fell back from $78,000 per day in mid-November to $71,000 per day during the first half of December.
The dry bulk market continues to be buoyed by strong trade demand, with Chinese iron ore imports and U.S. grain exports especially high recently. In November, Chinese iron ore imports topped 35 million tonnes for the first time since March, and preliminary estimates show imports from Brazil continuing to grow much faster than from other sources. The latest figures show Brazilian shipments to China soaring to a record-high, up an astounding 75% compared to a year ago!"

Robert Hunter: “At the top of the cycle you write [policies for] everybody, no matter how bad, and at the bottom you cancel everybody, no matter how good. It's a manic-depressive cycle.”