Friday, July 11, 2008


7/12/08 March

Voltaire: “It is dangerous to be right when the government is wrong.”

Rather than discuss a potential bailout of Freddie and Fannie, it might be a good deal more meaningful to ask who is going to bailout the U.S. federal government? Certainly not the Fed, not the Treasury, not the taxpayers, not illegal immigrants, and not corporations- either public or private. Don't look to China, OPEC, etc. The sooner the U.S. defaults on its debt, the sooner we can rid of big government, a do-nothing Congress, and an Administration set on dismantling the Constitution. How do we now pay off debt now? We issue more debt and the twin tower deficits climb to the sky. Our standard of living declines each day. If you like the current conditions, keep your head in the sand and say nothing. Or you can march-- in front of the White House, in front of the Capitol, in front of Nancy Pelosi's office, infront of Harry Reid's office. Organize 24 hour marches-- 24/7 marches. Peaceful marches. You hold the key. It's all up to your voice and your vote.

Edward Abbey: “A patriot must always be ready to defend his country against his government.”

Foreign direct investment in China jumped 46% in the first half, according to government data released Friday. Overseas firms brought in $52.4 billion in investment during the six-month period, the Ministry of Commerce said Friday. Foreign direct investment in China was up 14% in 2007 against the preceding year.

Ayn Rand:“A government is the most dangerous threat to man's rights: it holds a legal monopoly on the use of physical force against legally disarmed victims.”

According to AMG Data Services, including ETF activity, Equity funds report net cash inflows totaling $1.568 billion in the week ended 7/9/08 with Domestic funds reporting net inflows of $3.268 billion and Non-domestic funds reporting net outflows of -$1.700 billion;

Excluding ETF activity, Equity funds report net cash outflows totaling -$2.522 billion with Domestic funds reporting net outflows of -$1.609 billion and Non-domestic funds reporting net outflows totaling -$912 million;

Excluding ETF activity, net outflows are reported in all Equity sectors except Real Estate ($193 Mil).

Robert McHugh: "Since the Plunge Protection Team Indicator last entered the territory where declines occur, back on April 16th, the Industrials have fallen one thousand, five hundred points, 1,500. Our Purchasing Power Indicator has caught an 1,100 point decline, and remains on a sell. Our Secondary Trend Indicator has caught a thousand points of the decline from May 2008, and remains on a sell. The Hindenburg Omen of June 16th caught almost 1,200 points of the decline. It still remains in force. So market conditions remain hazardous, and our indicators are serving us well."

The U.S. government is considering taking over mortgage finance companies Fannie Mae and Freddie Mac if their funding problems worsen, in a plan that could leave shareholders nothing, the New York Times reported, citing people briefed on the matter. Bush officials are also considering a plan that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies, the Times reported. The report cited officials as saying no action was imminent and neither mortgage company is in a crisis situation.

InBev NV boosted its takeover offer for Anheuser-Busch Cos. by $5 a share to $70 in an effort to seal a friendly deal with the iconic U.S. brewer, The Wall Street Journal reported Friday, citing a person familiar with the matter.

General Electric says its profit fell 6 percent in the second quarter, as discontinued operations and loss provisions weighed on results. General Electric Co. says it earned $5.07 billion, or 51 cents per share, compared with a year-earlier profit of $5.38 billion, or 52 cents per share. Total revenue has risen to $46.89 billion from $42.38 billion a year earlier.
On the basis of continuing operations, GE says it earned $5.39 billion, or 54 cents per share. "Our business fundamentals remain strong," said Chairman and CEO Jeff Immelt in a statement. "We have a significant equipment backlog and growing, high-margin service revenues. Our products and services help make our customers more productive in times of high energy costs. We have solid cash flow to reinvest in the businesses, pay an attractive dividend and execute a stock-buyback program. We are positioned for long-term growth."

Israeli Air Force war planes have practiced in Iraqi air space, possibly in preparation for a potential strike on Iran's nuclear sites, the Jerusalem Post reported Friday, citing remarks by Iraqi defense ministry sources to a local news network.

Ashland Inc. agreed to acquire Hercules Inc.for about $3.3 billion in cash and stock. The consideration works out to $23.01 for each share of Wilmington, Del.-based Hercules, equating to a buyout premium of about 38% over the shares' Thursday closing price. The parties expect the deal to be completed by the end of 2008. Terms call for Ashland to acquire all outstanding Hercules common stock for $18.60 a share in cash as well as 0.093 of an Ashland common share.

Brazilian oil workers have threatened a five-day strike against Petroleo Brasileiro.

India's Infosys Technologies said its fiscal first-quarter net income grew 20.7% year-on-year to 13.02 billion rupees ($303.5 million) as quarterly revenue jumped 28.7% to 48.54 billion rupees. The software company raised its earnings and revenue forecasts for the year started April 1. It now expects an earnings-per-share of at least 99.34 rupees, compared with its previous forecast of a minimum of 92.32 rupees. Full-year revenue is estimated to be at least 212.78 billion rupees, compared with a minimum of 198.94 billion rupees earlier.

Chevron Corp. said it expects second-quarter earnings to get a big lift from record-high oil and natural-gas prices, while weak margins continue to afflict its refining operations.

Randall Forsyth: "The impact of a failure of Fannie and Freddie, though technically insolvent, is beyond imagining, far greater than the bankruptcy of a Bear Stearns. For that reason alone, such an eventuality is unthinkable."

The cost of protecting debt sold by Lehman Brothers from default rose to the highest in almost four months, according to traders of credit-default swaps.

India's inflation accelerated to the fastest pace since 1995, raising concerns the central bank will increase borrowing costs for a third time this year. Wholesale prices rose 11.89 percent in the week to June 28, after gaining 11.63 percent in the previous week, commerce ministry spokesman Rajeev Jain told Bloomberg News in an interview.

Sales of New Zealand houses slumped for a fourth straight month in June as record-high interest rates curtailed demand for property.

The number of homes sold dropped 42.4 percent to 4,305 from 7,474 a year earlier, according to a report from the Real Estate Institute of New Zealand Inc. e-mailed to Bloomberg News today. Sales were at the lowest level since December 1991.

Prices of goods imported into the U.S. rose 2.6% in June, the Labor Department reported Friday, on higher imported petroleum and natural gas prices. Prices for May's imported goods were revised to a gain of 2.6% from a prior estimate of 2.3%.

Despite a record increase in the price of crude oil, U.S. exports increased at a much faster rate than imports did in May, pushing the trade deficit down to a seasonally adjusted $59.8 billion, the Commerce Department reported Friday. Exports increased 0.9% to a record $157.5 billion in May. Imports rose 0.3% to a record $217.3 billion.

Mark Twain: "The man who is a pessimist before forty-eight knows too much; if he is an optimist after it he knows too little”

Peru's central bank raised its key interest rate by 25 basis points to 6% late Thursday in a move to fight inflation. The rate hike is "aimed at preventing that the rises observed in the international prices of food and fuels will translate into higher inflation expectations in a context of a high pace of growth of both public and private expenditure," the bank said in a statement.

Treasury Secretary Henry Paulson said Friday the govenment is not planning an imminent bailout of Fannie Mae and Freddie Mac. In a short statement, Paulson said the government is committed to "supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission."

Patrick Henry: “The Constitution is not an instrument for the government to restrain the people, it is an instrument for the people to restrain the government - lest it come to dominate our lives and interests.”

U.S. corn production is expected to be 20 million bushels lower at 11.715 billion for the 2008/2009 period, the U.S. Department of Agriculture said in its monthly report on world supply and demand. The USDA said 2008/09 corn ending stocks are projected 160 million bushels higher at 833 million this month, as higher carrying and reductions in food, seed, and industrial use more than offset lower production and higher feed and residual use. Meanwhile, ethanol corn use for 2007/08 was lowered 50 million bushels based on reported delays in plant startups and construction, as well as lower-than-expected plant capacity utilization. Soybean production is projected to drop 105 million bushels to 3 billion bushels, due to reduced harvested area and yield. The USDA said projected 2008/09 ending stocks for soybeans is 140 million bushels, down 35 million from last month, as reduced exports and crush partly offset lower supplies.

Chile's central bank raised its key interest rate by 50 basis points to 7.25% late Thursday, citing deterioration in the inflationary outlook. "This increase in the monetary policy rate is necessary to ensure convergence of inflation toward 3% over the policy horizon," the bank said in a statement.

Freddie Mac and Fannie Mae said Friday they are both over their capital surplus requirements as mandated by the Office of Federal Housing Enterprise Oversight. Freddie said it was above its mandated 20% target surplus and Fannie said it was "substantially" above its 15% surplus requirement. Fannie said that it raised $7.4 billion of added capital in May, for a total of more than $14 billion in new capital since November 2007.

After trading below the 11,000 level, the Dow finished at 11,100.

Crude for August delivery closed up $3.43, or 2.4%, at $145.08 on the New York Mercantile Exchange. Gold for August delivery rallied $18.60 to end at $960.60 an ounce on the New York Mercantile Exchange.

IndyMac Bank's assets were seized by federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures.The bank is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said.

Thursday, July 10, 2008


7/11/08 Worry

Arthur Somers Roche: “Worry is a thin stream of fear trickling through the mind. If encouraged, it cuts a channel into which all other thoughts are drained.”

Dow Chemical says it has agreed to buy specialty chemicals maker Rohm and Haas for $78 per share, or more than $15 billion. This is about a $35 a share premium to theclosing price on Wednesday. Given the present economic uncertainties, it is difficult to envision a reason to pay this price. Financing for the $15 billion acquisition included a $3 billion equity investment by Berkshire Hathaway and $1 billion from the Kuwait Investment Authority, according to Dow Chemical. Debt financing has been committed by Citi, Merrill Lynch and Morgan Stanley, acting as financial advisors on the transaction.
By comparison, the combined market cap for Fannie Mae and Freddie Mac is $17 billion.

The number of homeowners stung by the rout in the U.S. housing market jumped last month as foreclosure filings grew by more than 50 percent compared with June a year ago, according to data released Thursday.Nationwide, 252,363 homes received at least one foreclosure-related notice in June, up 53 percent from the same month last year, but down 3 percent from May, RealtyTrac Inc. said. One in every 501 U.S. households received a foreclosure filing last month. More than 71,000 properties were repossessed by lenders.

Mortgage lenders Fannie Mae and Freddie Mac are "insolvent" and may need a U.S. government bailout, former St. Louis Federal Reserve President William Poole was quoted as saying in an interview with Bloomberg.

"Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer," Poole was quoted as saying in an interview held on Wednesday.

Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, are too big for the government to let them fail, leading Republican and Democratic lawmakers said.
The government-chartered companies, which own or guarantee about half the $12 trillion of U.S. mortgages, can count on a federal lifeline, said Republican Senator John McCain of Arizona and Democratic Senator Charles Schumer of New York.

Cullen Hightower: " We experience moments absolutely free from worry. These brief respites are called panic."

Wal-Mart Stores Inc. said Thursday its June sales at stores open at least one year rose 5.8%, excluding fuel. Analysts, on average, had expected the same-store sales to rise 3.8%, according to Thomson Reuters. Including fuel, same-store sales rose 6.4%. Total company sales for the five weeks ended July 4 rose 11.5% to $39.94 billion. Citing improved sales results during the quarter, Wal-Mart updated its second-quarter profit target to a range of 82 cents to 84 cents a share.

Boeing's 2008 guidance is still $5.70 to $5.85 a share, with the company citing company-wide performance and productivity. Next year's earnings are still seen $6.80 to $7 a share.

Excel Technology Inc., the East Setauket, N.Y., producer of laser systems and electro-optical parts, definitively agreed to be acquired by GSI Group Inc.for $32 a share cash, or about $360 million, the companies said.

Iran test fired more missiles Thursday, marking the third day of war games that have increased tensions with the West, Agence France-Presse reported, citing Iranian state television. Oil ended a two-day slide Wednesday after Iran tested a missile capable of reaching Israel. Meanwhile, U.S. Secretary of State Condoleezza Rice warned that Washington had boosted its security presence in the Gulf and would defend Israel and other regional allies, the news agency reported.

The International Energy Agency on Thursday said it expects 2009 energy demand to rise 1% from 2008 levels as it slightly tweaked this year's forecast demand higher by 80,000 barrels of oil a day. In 2009 global oil product demand will expand by 1 percent or 860,000 barrels to 87.7 million barrels a day, the IEA said.

U.K. home builder Barratt Developments said Thursday that it will cut around 1,200 jobs and scrap its dividend as it also said it's renegotiated terms with its banks.

First-time claims for U.S. unemployment benefits fell by 58,000 in the latest week, the Labor Department reported Thursday. At 346,000, initial claims were the lowest since April. The four-week average of those claims fell to 380,500, while continuing claims hit their highest level since December 2003. Continuing claims rose to 3.20 million, and the four-week average of continuing claims rose to 3.13 million.

The secretary general of OPEC says the oil producing group cannot replace any shortfalls if Iran is attacked and its crude is taken off the market.

Abdalla Salem El-Badri also says OPEC has no contingency plans to produce more if Iran is attacked.

In addition to Kleiner Perkins $100 million "ifund," there are at least two other VC-backed start-ups that are focusing on developing software for the iPhone.

UBS AG analysts cut their price target on Freddie Mac, the second-largest U.S. mortgage-finance company, to $10 from $28, citing growing credit losses and problems raising capital.

Rigzone: "According to the EIA, members of OPEC collectively took in $671 billion in net oil export revenues in 2007, a 10% increase over 2006. Saudi Arabia accounted for the biggest single share, with 29% of total OPEC revenues."

The Saudis say their production can jump to 12.5 million barrels a day. But data obtained by BusinessWeek show that's not likely.

The Standard & Poor's 500 Index fell into a bear market and may not stop tumbling until it reaches a level not seen since August 2004, if history is any guide.

The benchmark index for American equities plunged 2.3 percent to a two-year low of 1,244.69 yesterday, bringing the loss since its October record to 20 percent. A drop in the index of another 12 percent would match the average retreat of 11 bear markets since 1946, data compiled by Bloomberg and Bespoke Investment Group LLC shows.

China's trade surplus fell 20 percent in June as export growth plunged, the government said Thursday, and analysts said Beijing might try to help struggling exporters by slowing the rise of its currency in defiance of pressure from trading partners.

The June trade gap was still China's biggest so far this year at $21.3 billion, the General Administration of Customs reported. Exports totaled $121.5 billion, up 18.2 percent compared with June 2007 — a sharp drop from May's 28 percent growth rate, according to the agency. Imports surged 23.7 percent to $100.1 billion.

DAILY Reckoning: "Last week, we saw a report telling us that vacancies in retail space were increasing. The United States has ten times more retail space per person than France. When people spend less, much of this space will cease to be commercially viable. Soon, abandoned shopping malls will follow abandoned houses."

Insolvency for mortgage-finance giants Fannie Mae and Freddie Mac is a "very remote possibility," a Fox-Pitt Kelton Cochran Caronia Waller analyst wrote Thursday as shares of the two companies plunged after the opening. Analyst Howard Shapiro wrote that Fannie would need to lose $40 billion immediately and Freddie would need to lose $37 billion for their viability to be in question. Such losses are unlikely, Shapiro wrote.

Marathon Oil said refining profit margins fell 78% from the year ago period, but added that oil and natural gas output exceeded its target. "While the refining segment was generally weak, results may have been somewhat expected and Marathon's exploration business may help fend off a greater move to the downside," said analyst Brian Niemiec of Susquehana Financial. Much of the bad news has already been priced into Valero, Sunoco, Tesoro and Frontier Oil, he noted.

New Lows: Lehman 16+, Tesoro 16+, Sunoco 35+, Merrill Lynch 28+, Valero 33+, US Bancorp 26+, Cisco 21+, Advanced Micro Devices 4+, UnitedHealth 22+.

General Electric said Thursday it'll most likely pursue a spin off of its Consumer & Industrial division after a strategic review announced on May 16.

U.S. natural gas inventories gained 90 billion cubic feet in the week ending July 4 to 2,208 Bcf, the Energy Information Administration reported on Thursday. Analysts at Global Insight had expected a buildup of 102 Bcf. Last week's stocks were 389 Bcf less than last year at this time and 70 Bcf below the five-year average of 2,278 Bcf, the EIA said. After the data, natural gas futures for August delivery rose 9.1 cents, or 0.9%, to $12.10 per million British thermal units.

Zacharty Bercovitz: "Some patients I see are actually draining into their bodies the diseased thoughts of their minds."

San Francisco Federal Reserve President Janet Yellen noted financial markets remain "fragile," as evidenced by a rise in credit-default-swap spreads for many financial institutions. Plus, the market for private-label securitized mortgages -- the primary source of financing for nonconforming mortgages -- "remains moribund," she said. "Unfortunately, progress toward sturdier and more efficient financial markets is going to take some time, and that means the flow of credit is likely to remain impeded," she said at a lunch speech in Portland, Oregon.

Crude for August delivery closed up $5.6, or 4.1%, at $141.65 a barrel on the New York Mercantile Exchange. Gold for August delivery surged $13.40 to end at $942 an ounce on the New York Mercantile Exchange.

Whirlpool Corp. will close plants in Oxford, Miss., and Puebla, Mexico. The Oxford plant makes built-in ovens and cook-tops, and the Puebla plant makes semi- automatic washers. The closures will result in a shift of 500 jobs to Whirlpool's Cleveland plant, and 140 jobs to its plant in Celaya, Mexico.

So far this year there have been more then $756 billion in announced deals vs. $1.1 trillion by the same time in 2007, Dealogic said.

Russia's state-controlled energy giant Gazprom is in negotiations to buy Libya's total export volume of gas, oil and liquefied natural gas at competitive prices, according to a statement published Wednesday on Gazprom's Web site.

Wednesday, July 09, 2008


7/10/08 Consequences

"What is sure is that the consequences for the real (economy) sector of the financial crisis are still in front of us," Strauss-Kahn, the International Monetary Fund'smanaging director, said in an interview.

The U.S. dollar slipped against major currencies Wednesday after Iran tested a 1,200-mile range missile, Shahab-3, according to a report on the web site of Iranian state television Al-Alam.

One day after threatening to strike Tel Aviv and U.S. interests if attacked, Iran’s Revolutionary Guards were reported to have test-fired nine missiles.

American Airlines will cut about 13% of its workforce at Sea-Tac Airport in Seattle, and around 209 employees at airports in Texas. It may also dismiss up to 221 employees at its Florida destinations. American Airlines is the largest carrier at Miami International Airport.

A blind trust of New York City Mayor Michael Bloomberg is willing to pay between $4.5 billion and $5 billion for the 20% of Bloomberg L.P. that Merrill Lynch holds, The New York Post reported Wednesday, citing unnamed sources.

Google Inc. is struggling to sell advertising on YouTube, with projected 2008 revenue of about $200 million falling short of expectations, The Wall Street Journal reported Wednesday, citing two people familiar with the matter.

British consumer confidence fell in June, with an index released by mortgage lender Nationwide on Wednesday down four points to 61. Consumer sentiment about future economic conditions was the biggest factor in the drop, Nationwide said. Fifty-three percent of respondents said they expected the economic situation to be worse in six months -- the highest number this year and 24% more than in June 2007.

According to the WSJ, fast-growing retailer Steve & Barry's LLC is expected to file for Chapter 11 bankruptcy protection as early as Wednesday, say people familiar with the matter, a collapse that stands to hurt everyone from Sarah Jessica Parker to the nation's struggling mall owners.

Ed McCarthy: "The 1st quarter Fed Z1 report showed credit expansion barely dropping off from the 2007 annualized rate of $4 Trillion+ in the U.S. and Wall St. balance sheets still at their elevated level. A Known Unknown is how much of this may be due to the phenomenal rise in the price of virtually every commodity, animal, vegetable or mineral, produced on the globe and the credit necessary to permit such price explosion. Another Known Unknown (under Congressional investigation so don’t expect quick or honest resolution) is whether the exemptions for unlimited numbers of contracts granted the “Universal” banks by the CFTC and their ability to issue unlimited amounts of Commodity Index funds to hedge funds, private equity funds, pension funds, foundations and other 144A players since they have access to unlimited hedging given the above-mentioned exemptions has been a proximate cause of the commodity price explosion... Fannie, Freddie, the FHA and the FHLB’s are essentially the only current grantors of mortgages. Fannie and Freddie alone have $9 trillion in portfolio and guarantee potential liability. If they hit the 15% loss ratio seen already in a lot of residential, this is $1.3 trillion that would either have to come from some, at that point, very dubious capital markets or from an increase in the Federal deficit...The U.S. is in the process of nationalizing housing credit. Will that be necessary globally and can the U.S., deficit ridden and discredited in financially engineered finance of this nature, find the risk capital to de-nationalize housing or will it be necessary to also, as is the case, certainly to some extent, in the Bear debacle, further nationalize some or all of the leveraged “buyout” and private equity leverage as Bear is Marked” or otherwise valued to reality?..

The possibility of Asian and Arab/producer currency units, delinked and backed by natural resources is not unimaginable. The attractiveness of such currency units could lead to an amplification of what we saw this week on the back of a popular local restaurant’s menu: Euro’s accepted here! If a couple of these currency units are added to the European entrant, the further expansion to the ephemeral idea of an “Amero” (Canada, Mexico and the U.S. a la Nafta) abd then global movement to currency groupings is an unknown unknown to be considered.

Such creations would have even more appeal if they returned to some form of backing such as oil reserves or the outright acquisition of forms of “hard” reserves of some kind (gold certainly an entrant in such a sweepstakes)... IF the U.S. decides/is forced into Exchange Control, this may well affect the global restructuring of the financial services system and infrastructure significantly." I believe this Exchange Control is on the way.

Hoisington Investment Management: "The seemingly large gain in GDP pales in comparison to the loss in wealth, which GDP does not capture. Over the past fiscal year, holdings in the stock market, as measured by the Wilshire 5000 Stock Index, lost more than $2.1 trillion. Simultaneously, the 15.3% contraction in the Case Shiller Home Price Index suggests the wealth loss in value of household residences was a staggering $3.1 trillion. Without including the negative wealth impact for declining prices of automobiles and other durables the total wealth loss was approximately $5.2 trillion. Obviously, the sum of dollars being erased from our economic system has overwhelmed the amount of dollars being increased by inflation by a factor of more than 14 to one."

European Central Bank President Jean-Claude Trichet said inflation was at ``worrying'' levels, indicating central banks will have to do more to damp rising prices.

Houston-based ION Geophysical has agreed to purchase ARAM Systems of Canada for about $350 million in a merger of two oil-field seismic companies.

U.K. homebuilders Bovis Homes Group PLC and Redrow PLC each said Wednesday they were slashing staff by 40 percent — more signs of the distress in Britain's dismal and deteriorating housing market.

Rob Hanna: "Since 1986 there were only four other periods of time where the indicator had risen above the 58.1% level where it stood yesterday. Each instance would have been an opportunistic time to be long.
On Tuesday the market bounced. The S&P 500 managed to rise 1.71%. As far as oversold, short-covering rallies it didn’t seem particularly viscous." I feel confident that we can generate many reasons why Tuesday's rally was not impressive.

"Higher prices for our products and increased volumes more than offset the increased input costs facing the entire industry," Klaus Kleinfeld, Alcoa chief executive officer, said in a statement.

Business Week: "Women may not earn as much as men or fly up the corporate ladder as quickly, but they get the last laugh since they live longer. Right?

As it turns out, women probably aren't saving enough to bankroll those extra years in style. They invest more conservatively, start saving later and are more likely to be in and out of the work force, according to a study released Wednesday by Hewitt Associates, a human resources consulting firm.

Suddenly, retirement isn't looking so rosy.

Women live an average of 22 years after retirement versus 19 years for men and medical costs are rising, so women will need to save 2 percent more than men every year over 30 years to maintain their standard of living upon retirement, the study found."

Much has been written of peak oil. Have you considered peak debt levels? What takes place if debt tops out in the U.S. economy?

According to Bloomberg, Fannie Mae and Freddie Mac, ranked Aaa by the world's largest credit-rating companies, are being treated by derivatives traders as if they are rated five levels lower.

Credit-default swaps tied to $1.45 trillion of debt sold by the two biggest U.S. mortgage-finance companies are trading at levels that imply the bonds should be rated A2 by Moody's Investors Service, according to data compiled by the firm's credit strategy group. The price of contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac and to protect against a default doubled in the past two months.

Traders are overlooking the government's implied guarantee of the debt as credit losses grow and concern rises that the companies don't have enough capital to weather the biggest housing slump since the Great Depression. Washington-based Fannie Mae fell 73 percent in the past year on the New York Stock Exchange and McLean, Virginia-based Freddie Mac lost 60 percent of its market value.

Applications for U.S. home mortgages rose to their highest level since early June last week after an adjustment made for the Independence Day holiday, an industry group said on Wednesday.

ExpressJet Holdings, the parent of ExpressJet Airlines, said on Tuesday it would suspend branded commercial operations as of Sept. 2, blaming high fuel costs.

The Oil Drum: "Russia laid down official limits on the sale to foreigners of shares in strategic and raw materials companies on Wednesday, giving new regulatory force to the government's grip on Russia's natural resources wealth."

At least 23 homes and 25 other structures have been destroyed in Big Sur as flames marched over more than 125 square miles of land since June 21.

Although that fire is far from controlled — the rugged terrain has kept containment at 23 percent into the fire's third week — authorities lifted the mandatory evacuation order issued for 25 miles of the 31-mile stretch along the Pacific Coast Highway that had been closed.

Many of the 1,500 evacuated residents of Big Sur headed home Tuesday morning through smoke and ash, anxious to gauge the damage. Officials, however, cautioned that the lifted evacuation orders did not mean conditions had drastically improved.

The Chrysler Building, the Art Deco tower whose graceful curves help define the Manhattan skyline, was purchased by the Abu Dhabi Investment Council on Tuesday for an undisclosed price, Bloomberg News reported.

The Abu Dhabi sovereign wealth fund, which bought the skyscraper from a fund managed by Prudential Financial, was set to pay about $800 million for the Midtown Manhattan building, an unnamed source told Bloomberg last month. The New York Post reported the same figure then.

Bloomberg pointed out that it is the second sale of a major New York tower to a Middle Eastern buyer in as many months. The General Motors Building was sold to a Boston Properties consortium that included a Dubai fund last month.

U.S. crude inventories fell more than expected, down 5.9 million barrels to 293.9 million barrels in the week ending July 4, U.S. Energy Information Administration reported on Wednesday. Analysts surveyed by energy information provider Platts expected a drop of 1.9 million barrels.

At $18.52, Pfizer is selling at its highest monthly price and is getting close to a technical breakout. I have mentioned Pfizer several times in the past month. For patient investors I have stated it has, in my view, uncommon value.

Cisco Systems doesn't expect a tech-spending recovery until late this year or early next year.

Up to 40% of all U.S. regional banks could need capital raises and dividend cuts, an analyst for Credit Suisse said Wednesday.

The Dow Jones Industrial Average declined 236.77 points, or 2.1%, to 11,147.44. The S&P 500 dropped 29.01 points, or 2.3%, to 1,244.69, while the Nasdaq Composite shed 59.55 points, or 2.6%, to end at 2,234.89.

Crude for August delivery ended just 1 cent higher at $136.05 a barrel on the New York Mercantile Exchange. Gold for August delivery gained $5.30 to end at $928.60 an ounce on the New York Mercantile Exchange.

Northwest Airlines Corp. plans to cut 2,500 frontline and management jobs stemming from earlier announced capacity reductions.

Tuesday, July 08, 2008

Fannie Mae and Freddie Mac

7/9/08 Fannie Mae and Freddie Mac

Mortgage lenders Fannie Mae and Freddie Mac may not have to raise additional capital because of a new accounting law, an analyst for Keefe Bruyette said in a research note Tuesday. Speculation that changes to federal accounting laws could force the two companies to raise as much as $100 billion in capital sent the stock prices of both firms down more than 15% on Monday. "We believe this sell-off is unwarranted on this issue as the government-sponsored enterprise regulations already have capital requirements for off-balance-sheet exposures of the two companies," wrote analyst Frederick Cannon. "We believe that the government will stand behind the GSEs in this market, and when the market stabilizes that the GSEs will be able to increase earnings power significantly and thus the shares of both companies offer compelling upside at current prices."

Mortgage financiers Fannie Mae and Freddie Mac are adequately capitalized and continue to be active in the mortgage market, said James Lockhart, director of the Office of Federal Housing Enterprise, which regulates the two enterprises. Both of these companies are adequately capitalized, which is our highest criteria," Lockhart said in an interview with CNBC. "They have been very active in the mortgage market, and they are continuing to be. And, in fact, Congress has put on them the requirement to do jumbo mortgages and they have been doing those as well." Lockhart also said OFHEO is working with the Financial Accounting Standards Board, or FASB, on the revision of rule FAS 140, an accounting rule that raised concerns about Fannie and Freddie's capital needs and sparked a steep sell off of their shares on Monday.

After trading down to $11 in the morning, Freddie Mac traded up to $14 in the afternoon. Meanwhile, Fannie Mae traded down to $15 in the morning and rallied close to $18 in the afternoon.

Iraq's prime minister said Monday his country wants some type of timetable for a withdrawal of American troops included in the deal the two countries are negotiating.

Iran would strike Israel and the U.S. Navy in the Persian Gulf as a first response to any American attack on its nuclear program, an aide to Supreme Leader Ayataollah Ali Khamenei said.

Van Hoisington and Dr. Lacy Hunt: "Over the past fiscal year, holdings in the stock market, as measured by the Wilshire 5000 Stock Index, lost more than $2.1 trillion. Simultaneously, the 15.3% contraction in the Case Shiller Home Price Index suggests the wealth loss in value of household residences was a staggering $3.1 trillion. Without including the negative wealth impact for declining prices of automobiles and other durables the total wealth loss was approximately $5.2 trillion. Obviously, the sum of dollars being erased from our economic system has overwhelmed the amount of dollars being increased by inflation by a factor of more than 14 to one. Thus, once again, the bond market had it right--deflation is in ascendancy. Treasury bond yields fell, and they will continue to trend lower, creating an even more profitable environment over the next four quarters for long-term Treasury bond holders."

Siemens AG said Tuesday it would cut 16,750 jobs, or 4.2 percent of its global work force, to streamline operations and cut nearly $2 billion in costs in the face of a slowing economy.

Novartis AG said Tuesday it has completed the first stage of its $38 billion takeover of U.S. eye-care company Alcon Inc.The Swiss pharmaceuticals company paid current majority shareholder Nestle SA $10.4 billion cash for a 25 percent stake in Alcon. That is about $200 million less than when the deal was originally announced in April. Novartis still has the exclusive right to buy Nestle's remaining 52 percent stake in Alcon for about $28 billion between January 2010 and July 2011.

Jim Jubak: "Bear markets in stocks give investors two chances to lose their shirts. Get ready for your second shot at big losses.

First, you can take a huge hit in a bear market if you stay in stocks too long. If you sold out near the Oct. 9 high for the S&P 500, the past nine months have been a non-event. If you held on to what you owned then and maybe even bought more as the stock market rallied in September and October from its August slump, you may be down 20% or more.

Second, you can devastate what's left of your portfolio by getting back in too early. The S&P 500 started the bear market of 2000-02 with a gradual drop from its then-all-time high of 1,527 on March 24, 2000. By Sept. 1, the index was down just six points to 1,521. And then the carnage began, sending the S&P 500 down to 1,103 on April 4, 2001. That was a drop of 28%."

Federal Reserve Chairman Ben Bernanke said on Tuesday the U.S. central bank may keep an emergency lending facility for big Wall Street firms open past year-end while it seeks to restore financial market stability.

Office Depot said early on Tuesday that "pressure from weakening business conditions" pushed down second-quarter North American same-store retail sales nearly 10%. For the quarter ended June 28, total sales were "down slightly," the chain said. Office Depot's "sales trends worsened late in the quarter," shrinking its profit margin based on earnings before interest and taxes by 2 percentage points more than the narrowing of 2 to 2.5 percentage points it had previously estimated. ODP expects the economy to be "difficult" for the rest of 2008 but also expects profit margins to improve sequentially in the third and fourth quarters.

Pepsi Bottling Group Inc. posted a 7.4% increase in second-quarter net income amid solid revenue gains, particularly overseas, but the company trimmed back its sales outlook for the year.

Home values fell in 23 of 25 U.S. metropolitan areas in April, according to Radar Logic Inc., as sales of a record number of foreclosed homes pushed prices down.

The Sacramento, California, region saw the biggest drop, with prices falling 31.7 percent from April 2007. Sacramento was followed by the Las Vegas area (29.9 percent), San Diego (28.1 percent), Phoenix (25.5 percent) and Los Angeles (23.4 percent), Radar Logic said.
``Prices are going down so fast they can't go down much longer,'' said Christopher Thornberg, president of Beacon Economics LLC in Los Angeles, who predicts a total decline of 30 percent nationally in the housing recession. ``We've never seen prices fall like this.'' There's a first time for everything.

Mick P: "So here we are today, with Bankers wearing brown trousers to work to disguise the fear, the Primary Brokers looking directly into the regulatory future they dread and Hedge Funds hoping they have enough credit available to stay afloat. The actions taken by the Fed, Bank of England et al are now seen as "holding operations" allowing current practises to continue until the dawning of a new way, putting a line under the mess with a new paradigm that will define the next chapter in capitalism."

According to the Financial Times, nearly 80 per cent of senior executives at small and medium-size US manufacturing companies are pessimistic about the prospects for economic growth, according to a survey to be published on Wednesday. Attitudes within the sector towards the benefits of globalisation have also deteriorated markedly since last year .The report by RSM McGladrey, the consultancy, suggests the outlook for the US economy may be even gloomier than expected. Manufacturing has so far held up better than the service sector: US manufacturers defied bearish forecasts last month by boosting production for the first time since January, the Institute for Supply Management said last week.

U.S. oil refiners will be eligible for a 50 percent tax credit starting Wednesday if they agree to expand plant capacity, according to Sen. Kay Bailey Hutchison, R-Texas.

Rob Hanna: "One breadth indicator I like to watch is provided by Worden Bros. It measures the % of Stocks that are trading at least 2 standard deviations below their 40-day moving average (T2116). Rather than looking at stocks that are simply in a downtrend like the “% of stocks below the 40-day MA”, it looks for extreme readings. Of all the commercially available breadth indicators out there, this one most closely represents the spirit of the CBI. While the criteria are less stringent, it is still looking for somewhat extreme conditions to measure. Today T2116 hit a new high of 58.1%. The indicator dates back to 1986. I looked back to find all days that had readings higher than today’s. It was a short list: 7/23/02, 9/20 & 9/21/01, 8/31/98, and lastly 10/19/87 (Black Monday) through 10/28/87. That’s it. If you take a look at those dates you’ll find they were very opportune times to buy.
Of course breadth has been suggesting a reversal for a while now…"

The Associated Press: "U.S. exports to Iran grew more than tenfold during President Bush's years in office even as he accused Iran of nuclear ambitions and helping terrorists. America sent more cigarettes to Iran -- at least $158 million worth under Bush -- than any other products. Other surprising shipments to Iran during the Bush administration: brassieres, bull semen, cosmetics, fur clothing, sculptures, perfume, musical instruments and possibly even weapons. Top states shipping goods to Iran include California, Florida, Georgia, Louisiana, Michigan, Mississippi, New Jersey, North Carolina, Ohio and Wisconsin, according to an analysis by The Associated Press of seven years of U.S. government trade data.

Despite increasingly tough rhetoric toward Iran, which Bush has called part of an "axis of evil," U.S. trade in a range of goods survives on-again, off-again sanctions originally imposed nearly three decades ago. The rules allow sales of agricultural commodities, medicine and a few other categories of goods. The exemptions are designed to help Iranian families even as the United States pressures Iran's leaders.

"Our sanctions are targeted against the regime, not the people," said Adam Szubin, director of the Treasury Department's Office of Foreign Assets Control, which enforces the sanctions. The government tracks exports to Iran using details from shipping records, but in some cases it's unclear whether anyone pays attention."

"We're paying $700 billion a year for foreign oil. It's breaking us as a nation, and I want to elevate that question to the presidential debate, to make it the No. 1 issue of the campaign this year," T. Boone Pickens says.

Persimmon Plc, the U.K.'s second- biggest homebuilder, eliminated 1,100 jobs after the worst housing slump in 30 years dragged down first-half sales by 34 percent.

Crude-oil futures fell sharply for a second consecutive session Tuesday, trading as low as $135 a barrel.

VMWare Inc. announced that its revenue for the full 2008 fiscal year will come in "modestly below" its prior forecasts.

Britain's High Court ruled that Pringles aren't a potato snack, and thus aren't subject to value-added tax.

Bill Bonner: "Since '67, consumer prices are, officially, up seven times. Wages in America are up exactly the same amount. In other words, during your editor's entire adult lifetime Americans' per hour earnings have not increased a single penny."

Putting matters in perspective. In July 2003 Wal-Mart shares were trading at $59+. Five years later shareholders are trying to get even. This does not take into consideration the dividends or inflation.

At $35+ Valero is trading at a new 52-week low. If you believe crude is topping out, then VLO may prove a good investment for patient types.

Former secretaries of state James Baker III and Warren Christopher say the next time the president goes to war, Congress should be required to say whether it agrees. The co-chairmen of a bipartisan study group have proposed legislation that would require the president to consult lawmakers before initiating combat lasting longer than a week, except in cases of emergencies. In turn, Congress would have to act within 30 days, either approving or disapproving of the action.

In a sign that the U.S. housing market may weaken further, an index of sales contracts on previously owned U.S. homes fell 4.7% in May from the prior month, the National Association of Realtors reported Tuesday. The index, which is considered a leading indicator of existing home sales, was down 14% from the May 2007 level. By region, May's pending home sales index fell 7.1% in the South, 6% in the Midwest, 2.9% in the Northeast and 1.3% in the West. The April pending home sales index was revised to a gain of 7.1% from the prior estimate of a 6.3% increase.

The global carbon trading market rose to $59 billion worth of trades in the first half of 2008, nearly equal to the figure of $62 billion for all of 2007, according to Oslo-based research firm Point Carbon.

In the mid-morning Tuesday rally, Wal-Mart, GE, Pfizer, and Burlington Northern were standouts.

Inflation rates in the United States are "unacceptably high," and elevated inflation demands additional "vigilance" by the Federal Reserve, said Jeffrey Lacker, president of the Richmond Fed Bank, on Tuesday.

Spot prices for crude oil will likely average $127 per barrel in 2008 and $133 in 2009, the U.S. Energy Information Administration, the reporting arm of the Energy Department, said in a monthly report issued Tuesday. The EIA estimates are about $5 higher than last month's and compare to an average price of $72 in 2007.

There is unusually high volume in the Deere August 65 puts. The stock has gotten hammered recently and that includes Tuesday trading.

Alcoa Inc.reported a second-quarter profit of $546 million, or 66 cents a share, down from $715 million, or 81 cents a share, a year earlier. The quarter's results include a charge of $39 million, or 5 cents a share, relating to a gas pipeline explosion in Western Australia and power disruptions in Texas. Sales came in at $7.6 billion, compared with $8.1 billion, or $6.8 billion excluding divested business, a year ago.

The Dow Jones Industrial Average gained 152.25 points, or 1.4%, to end at 11,384.21. The S&P 500 rose 21.39 points, or 1.7%, to 1,273.70, and the Nasdaq Composite climbed 51.1 points, or 2.3%, to 2,294.42.

Robert McHugh: "We believe a one to two week rally into the July 22nd phi mate turn date has started. If our labeling is one degree too high, this rally will last two weeks. If it is the degree we are showing on the chart on page 8, then the rally will complete on the short-side of two weeks. In either case, we believe that a dangerous decline will begin after this rally completes, one that will scare folks. That is what the Elliott Wave patterns suggest at this time. It should last into the autumn. Then an election bounce of a thousand points wouldn't surprise us, but from levels much lower than we sit tonight. Prices should decline Wednesday in a wave {b} decline."

Hedge funds lost 0.68% in June, leaving them down 0.75% during the first half of 2008, according to early estimates released on Tuesday by industry performance tracker Hedge Fund Research.

Crude oil for August delivery closed at $136.04 a barrel on the New York Mercantile Exchange, down 3.8%, or $5.33, the biggest one-day loss in value since March 19. Gold for August delivery dropped $5.50 to end at $923.30 an ounce on the New York Mercantile Exchange.

U.S. consumers took on more debt in May, led by auto loans, the Federal Reserve reported Tuesday. Total seasonally adjusted consumer debt increased by $7.8 billion, or a 3.6% annual rate, in May to $2.57 trillion. This is about the same pace as April.

Russia said it will respond to a U.S. anti-missile shield near its border with military action, according to Agence France-Presse Tuesday, citing a statement from the Russian foreign ministry. "If a US strategic anti-missile shield is deployed near our borders, we will be forced to react not in a diplomatic fashion but with military resources," the statement said according to AFP.

Monday, July 07, 2008

Average Bear Market

7/8/08 Average Bear Market

Rob Hanna: "Downside persistence like we’re seeing has historically been bearish."

Since 1940, the average bear market has lasted 386 days and produced a peak-to-trough decline of 30.4% for the S&P 500, Barron's reports.

John Hussman: "Market internals deteriorated significantly last week, with major indices breaking below their March lows. Stocks are clearly oversold on a short-term basis, and that sort of price compression often invites a fast, furious, prone-to-failure rally to clear that condition.

One factor that's problematic here is that tradable bear market rallies tend to feature clearly falling interest rates, and are typically initiated by something of a selling capitulation. Now, the point isn't that we have to see a capitulation for the sake of capitulation. Rather, there remains a significant segment of analysts and investors who reject the premise that the U.S. economy is in recession. That segment creates downside risk, because if (and in my view, when) further evidence emerges to confirm a recession, their change in perspective could prompt some significant liquidation. Earnings disappointments (particularly second-half guidance) could feed into that risk as well...I would expect that deepening economic difficulties are likely to put commodity prices into a downtrend within a few months, and that will also tend to feed some speculative tendencies at some point, most likely benefiting consumer-related stocks and refiners... It should not be surprising if this speculative unwinding takes the price of crude below $60 a barrel by early next year."

APP Pharmaceuticals Inc., the Schaumburg, Ill., producer of hospital-based injectable pharmaceuticals for cancer, infections, anesthesia, pain and critical-care applications, definitively agreed to be acquired for as much as $29 a share, or $4.6 billion, by Fresenius SE.

U.K. home builder Persimmon will announce Tuesday that it has cut around 1,000 jobs, according to a report in the Telegraph newspaper.

China National Offshore Oil Corp., seeking to enter oil-field services, agreed to buy oil driller Awilco Offshore ASA of Norway for $2.5 billion, or 85 Norwegian kroner per share.

General Motors preparing to cut thousands of additional white-collar jobs and is mulling whether to sell or close more brands, people familiar with the matter told The Wall Street Journal.

Brewer Inbev intends to file a preliminary consent solicitation statement with the U.S. Securities & Exchange Commission to remove the board of Anheuser-Busch.

According to Kiplinger, some 122,000 borrowers with Countrywide home-equity lines of credit, or HELOCs, received letters in January informing them that they could no longer withdraw funds from their lines. A few months later, thousands of customers of other major lenders -- including Bank of America, J.P. Morgan Chase, Citibank, SunTrust, USAA, Wachovia, Washington Mutual and Wells Fargo -- also received notice that their lines had been frozen or reduced.

Sirius Satellite Radio Inc.'s acquisition of rival XM Satellite Radio Holdings Inc. may be cleared by federal regulators this month.

Barry Ritholtz reports that Marc Faber Expects Industrial-Commodity Demand to Drop.

According to the International Herald Tribune, in the United States, the quarter just ended was probably the first period since the early 1980s in which a bigger proportion of consumer spending went to gasoline, oil and other energy products than was spent on motor vehicles.

But even as the price of gasoline has soared above $4 a gallon, or $1.06 a liter, Americans are spending a much smaller share of their budgets on fuel than they did at the time of the last spike in oil prices, in 1980.

Jon Markman: "The collapse of market value since autumn has actually wiped out years of progress, putting all but a few big companies' returns for the decade below zero -- an extraordinary development that has jeopardized thousands of families' financial plans and possibly soured an entire generation on the stock market.

Indeed, it's fair to conclude now that the bear market of 2000-02 never really ended and that the 2003-07 period of modestly higher returns will look from a historical perspective like a twitch of life in a moribund carcass."

Brett Steenbarger: "* For six consecutive sessions, we have had over 2500 stocks across the NYSE, ASE, and NASDAQ making fresh 20-day lows. The highest number of 20-day highs over that period was 410.
* We have had more stocks making 20-day lows than 20-day highs for 20 consecutive sessions.
I think it's fair to say that a strong stock market is one in which, over time, we see more stocks making fresh 20-day highs than lows. A weak market is one in which the number of stocks making fresh lows outnumbers the number making highs...One definition of a bear market is one in which lower prices fail to attract buyers, leading to still lower prices. If you peruse the indicator reviews from the past several weeks, that is what we have been seeing."

U.S. store closings and cutbacks turned the second quarter into the worst for strip mall owners in 30 years, as budget-conscious consumers flocked to low-cost warehouse-style grocery centers.

Iraq has proposed a short-term memorandum of understanding with the United States rather than trying to hammer through a formal agreement on the presence of U.S. forces, the country's prime minister said Monday.

Jack Keane, a retired Army vice chief of staff: "There will be significant reductions in 2009 (in Iraq) whoever becomes president."

Courtesy of George Ure:

"My friend Bob Bronson ( ), from back in the days of the Longwave group at the University of Colorado's Center for a Sustainable Future (circa mid 1990's) sent along this really worthwhile analysis with permission to share:

"Another permabull story is emerging, which alone should be enough to convince you that the bear market they’re trying to rationalize is not nearly over.

It goes something like this.

Yeah, well, the stock market decline may have crossed over 20%, which means (we missed) it’s a bear market, BUT since the average bear market decline has only been about 30% it’s time (again) to anticipate a bottom.

Well, there have been 28 declines getter than 20% since 1870, and their median has been 35.7%, which is about twice 20% on a compounded basis. (the log of 1-0.357 divided by the log of 1-0.200 equals 1.98)

That means the bear market decline so far is really has only been half of such average bear markets. Of course, the second half of those declines have much more negatively impacting fundamentals with many times more associated investor pessimism as does the first half.

But there’s more with this kind of “expect the average” reasoning.

When the stock market declines 35.7%, which our work shows it surely will, then this “expect the average” reasoning would suggest a 46.9% decline, since that is the median of the 14 greater than 35.7%-sized previous declines since 1870. A 35.7% decline is equivalent to 2.84 compounded 20% declines.

And when the stock market decline reaches 46.9%, which our work shows it likely will, then expectations should be for a 49.2% decline, which is the median of the six greater than 46.9%-sized previous declines since 1870. A 49.2% decline is equivalent to 3.04 compounded 20% declines.

And when the stock market decline reaches 49.2%, which our work also suggests it likely will, then expectations should be for a 50.5% decline, which is the median of the three greater than 49.2%-sized declines. A 50.5% decline is equivalent to 3.15 compounded 20% declines.

The final extension of such “expect the average” is that when the stock market decline reaches 50.5% , which not-so-coincidently was the previous bear market decline from 3/24/00 through 10/10/02, the expectation then should be for the only larger decline since 1870: the 86.0% second downleg in the Great Depression Supercycle Bear Market from 4/17/30 to 7/8/32. Surely the mood of “irrational complacency” will succumb before then.

So the question is at what point will the majority of permabulls stop extending this “expect the average” reasoning to continue rationalizing no panic selling and looking for a near-term bottom like they are today? Although inevitable time-extending rallies will prolong false hopes, we expect they will abandon it before the stock market declines a second compounded 20%, or a cumulative 36% decline (1 minus 0.8 times 0.8).

Our work suggests the current 20% decline is only about the first third of the second downleg in what we call the Supercycle Bear Market, the “irrationally exuberant” echo-mania bust, which we fundamentally and technically quantify as an eventually deflationary economic Supercycle Bear Market Period.
In order to technically “base” and accommodate fundamental aftershocks from the current recession becoming very long and thus ultimately severe, we expect the Supercycle Bear Market Period will probably persist several years longer than the Supercycle Bear Market itself –probably through about Oct 2014. During the interim we expect the Supercycle Bear Market will most likely eventually decline at least a 50%."

The global financial crisis could lead to losses of 1,600 billion dollars for financial institutes, according a report in the Swiss Sunday newspaper SonntagsZeitung. It quoted a confidential study by the hedge fund Bridgewater Associates as saying losses for banks holding risky assets could be four times greater than the 400 billion dollars previously estimated.

Microsoft Corp.said Monday morning that it is open to discussing a "major transaction" with a new board of directors at Yahoo Inc. In a statement, the software giant said it has held talks with billionaire activist Carl Icahn, who is mounting a proxy battle for control of Yahoo.

The International Council of Shopping Centers predicts 6,500 stores will close this year, the most since 2001.

In April, the number of new homes for sale stood at 456,000 according to the U.S. Commerce Department, still a big number, but 93,000 below the mountainous figure a year ago.

According to Richard Suttmeier, chief market strategist of, the top five problem loan sectors to watch now are:

* Credit card debt
* Home equity loans
* Commercial real estate loans
* Commercial and development loans
* Derivatives generally ($182 trillion notional value)

We did get a bounce. It took place at the opening and got to plus 110 for the Dow. It didn't last long and turned into a triple digit loss. Apple and Google were two bright spots along with Yahoo.

Crude for August delivery dropped $3.92, or 2.7%, to settle at $141.37 a barrel on the New York Mercantile Exchange. Gold for August delivery fell $4.80 to end at $928.80 an ounce on the New York Mercantile Exchange.

The fragility of the U.S. housing and bank system could further kink up financial markets before an anticipated recovery in 2009, said San Francisco Federal Reserve President Janet Yellen Monday, with commodities presenting their own set of troubles. "Things could get worse before they get better," Yellen said in remarks prepared for delivery in San Diego.

Shares of Fannie Mae and Freddie Mac, the largest providers of funding for U.S. home mortgages, plunged to the lowest since 1992 on Monday on concern the companies need to raise more capital amid larger-than-expected losses.

Corporate "federal agency" debt obligations and mortgage-backed securities guaranteed by the companies also plummeted relative to government debt as investors thinned positions, analysts said.

Freddie Mac stock tumbled more than 18 percent in early afternoon trading, to $11.83, while Fannie Mae shares also dropped more than 18 percent, to $15.30.

A pending accounting change could also force Freddie Mac and Fannie Mae to raise capital at a difficult time, according to Lehman Brothers. The rule aimed at forcing companies to account for securitized assets on their balance sheets could mandate Freddie Mac and Fannie Mae to boost capital by $29 billion and $46 billion, respectively, the analysts wrote in a client note on Monday.

But while the gravity of the rule change is great, the two companies are likely to get exemptions, the analysts said.

Iran started war games on Monday and its president rejected a demand by major powers that it stop enriching uranium as "illegitimate," showing no sign of backing down in a stand-off over Tehran's nuclear ambitions. Missile units of the elite Revolutionary Guards' naval and air forces began war games, Iranian news agencies said, hours after the U.S. Navy said it had begun exercises in the Gulf.

Mortgage lender IndyMac Bancorp Inc., struggling to raise capital to stay in business, said Monday it has stopped accepting new loan submissions in its main mortgage lending divisions and plans to slash 3,800 jobs, or more than half of its work force.

Frontier Airlines says it is cutting 456 jobs in Colorado, and United Airlines has told state officials it plans to eliminate 150 jobs in the state.

AirTran Airways, the discount airline operated by AirTran Holdings Inc., will cut 480 jobs, or more than 5% of its workforce, because of high fuel prices, The Wall Street Journal reported on its Web site late Monday, citing company sources.

Commodities plunged the most since March, led by tumbling grain futures, as rains from eastern Colorado to Pennsylvania improved prospects for U.S. crops. Energy prices also dropped. The Reuters/Jefferies CRB Index fell 2.8 percent to 460.23, the biggest drop since March 19. Corn, soybeans, wheat and cotton plummeted the maximum allowed by U.S. exchanges.

The Financial Times reported that "Abu Dhabi ponders end of dollar peg." In addition, the paper observed that "Syria is aiming to build closer ties with China and India."

Sunday, July 06, 2008

A Bounce In The Cards?

7/7/08 A Bounce In The Cards?

The dollar has lost roughly a quarter of its purchasing power against the currencies of major U.S. trading partners from its peak in 2002. Mark Zandi, chief economist at Moody's, said expanding exports due to a weak dollar are "an important source of growth, but it doesn't add a lot to jobs, it doesn't mean very much for the average American household. For the average American, for the average consumer, these are pretty tough times."

Mike Burk: "The NY ADL is a running total of the number of NYSE declining issues subtracted from advancing issues.This indicator is at its lowest level since the July 2002 low several months ahead of the 2002 bottom. From the July 2002 low the SPX rallied 20.7% in a month before falling to its final low about 2 months later...The ambiguity over whether or not we should expect a retest was resolved last week when the NYSE recorded 652 new lows on Wednesday and the NASDAQ recorded 453...The extreme levels of new lows imply a high probability of a retest of the current low...By all measures the coming week has had, on average modest returns and the 4th year of the Presidential cycle has been weaker than the average...The market is as oversold as it has been at any time in the last 10 years. A bounce is likely and it could be of significant magnitude. Following the bounce a retest of the current low is likely.I expect the major indices to be higher on Friday July 10 than they were on Friday June 3."

The FTSE 100 index closed on Friday at its lowest level since November 2005 as it threatened to join counterparts in Asia, the US and Europe in bear market territory.

The UK benchmark has fallen 19.6 per cent from its peak in October, leaving it just short of the 20 per cent fall from a recent high that defines a bear market.

Lampedusa: “If we want things to stay as they are, things will have to change.”

Nearly 2,000 firefighters made a stand Saturday on Highway 1, near famous inns and spas bereft of tourists on this holiday weekend, as crews sought to beat back the out-of-control Basin Complex wildfire in Big Sur in advance of a heat wave expected to start rolling into the area Sunday.

According to the Houston Chronicle, even as low world prices and the weak U.S. dollar have hurt sugar exporters here, Colombia's biofuels industry is growing by leaps and bounds. Ahead-of-the-curve planning, technological breakthroughs and government incentives have helped Colombia emerge as the No. 2 producer of ethanol in Latin America, behind Brazil, and a leader in the manufacture of biodiesel.

"We took the initiative years ago and became a pioneer," Jorge Cardenas, president of the Colombian Biofuels Federation, said in an interview.

With just over 100 million gallons annually, Colombian ethanol production is dwarfed by the billions of gallons churned out yearly in the U.S. and Brazil.

Yet Colombia is a technological leader in the field and is experimenting with biofuel production using everything from sugar beets and palm oil to yucca.

Prieur du Plessis: "A tradeable rally is probably not too far off, but the primary trend of most global stock markets remains down. Trying to squeeze out a few basis points from a bounce could turn out to be a high-risk strategy, particularly as long as the oil spike persists, causing sentiment and other overbought/oversold indicators to become even more oversold before a meaningful rally manifests itself."

Brett Steenbarger: "This shift from an emerging markets growth story to a truly global recession theme has important implications for commodities markets as well as rates and equities. Inflation has been making the headlines, fanning concerns over central bank rate hikes, but falling materials shares may be foretelling a very different economic future."

Daily Reckoning: "This whole economic phase is about taking Americans down a notch," we told a friend over a glass of wine yesterday afternoon. It really is a classic case of imperial over-stretch…where Americans reached too far…spent too much…borrowed too much…and lived too high. Now, they're facing a major correction - with falling living standards, falling wealth, falling power, and falling prestige. There's no way out…the best they can do is to take their medicine as gracefully as possible. There are no magic levers Ben Bernanke can yank. No miracle knobs he can turn."

We should add that it's not only Americans who are being taken down. The British too are facing a correction of their own.

"British economy falling into an American-style slump," says the headline in the International Herald Tribune.

No wonder. The Brits borrowed even more than Americans and now have more debt than we do."

Iran will close the Strait of Hormuz, through which the bulk of Middle East oil is shipped, if the country is attacked, state-run Fars news agency reported, citing a military commander.

``All countries should know that if Iran's interests in the region are ignored, it is natural that we will not allow others to use'' the waterway, Fars cited Armed Forces Chief of Staff Hassan Firouzabadi as saying late yesterday.

The Strait of Hormuz between Iran and Oman at the mouth of the Persian Gulf handles the shipment of about 20 percent of the world's daily supply of oil, according to figures from the U.S. government's Energy Information Administration. The oil's main destinations include the U.S., Western Europe and Japan.

The oil majors now control less than 10 per cent of world resources of gas and oil, against 70 per cent in the 1970s, according to figures released by the office of Ernst and Young at the World Petroleum Congress in Madrid.

South Korea said on Sunday it was implementing a multi-stage contingency plan aimed at reducing energy consumption before the skyrocketing oil prices push Asia's fourth-largest economy into a full-fledged crisis.

Prime Minister Han Seung-soo told a televised news conference the government would restrict driving of cars owned by public organizations as part of the measures, adding a tougher set of steps would be adopted if oil prices rose further.

The United Arab Emirates canceled all its Iraqi debt Sunday and moved to restore a full diplomatic mission in Baghdad by naming a new ambassador. The Emirates' official news agency quoted the country's president Sunday as saying the UAE was canceling all $4 billion in debt owed by Iraq.
Jordan named an ambassador last week, and Kuwait and Bahrain say appointments are imminent.

NBC Universal, Bain Capital and Blackstone Group LP said Sunday they had signed an agreement to buy the Weather Channel properties from Landmark Communications. Financial terms of the transaction were not disclosed, although an earlier Wall Street Journal report had estimated the deal at $3.5 billion.