Saturday, December 20, 2008

Our Currency

12/20/08 Our Dollar

"The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding,’"William Poole, former president of the St. Louis Fed said.

Doug Noland: "The way I see it, the Fed Board sent a direct message to the markets that it is resolved to do whatever is necessary to ensure sufficient system Credit will be forthcoming – a quantity that for our purposes is in the, say, $2.0 TN annual range. The dilemma for the Fed (and markets) is that while such an enormous amount of Credit would do little more than steady our maladjusted “Bubble Economy,” it would perpetuate the massive flow of dollar finance out to the global financial system. In short, the Fed’s determination to reflate ensures continued Monetary Disorder. And I would further argue that Ongoing Monetary Disorder – and associated corruption to various market pricing mechanisms – will impede system adjustment and extend the lengths of U.S. and global downturns and restructuring periods....Especially after examining the most recent “Flow of Funds” report, I contemplate the dollar’s prospects from a global flow of funds perspective. At this point I will assume that fiscal and monetary policies will succeed in generating $2.0 TN or so of new Credit in 2009 (Trillion dollar growth each in federal borrowings, the Fed’s balance sheet, and commercial bank Credit would push the system much of the way there). In this scenario, the economy would likely still be mired in recession, short-term rates would remain near zero, and our Current Account Deficit would remain in the $600bn to $650bn range. Including other financial outflows, the Rest of World would be called upon to purchase another Trillion or so of our financial claims next year - and for years on end....At this point, I would not want to count on the Chinese (or others) accumulating another Trillion of our IOUs anytime soon. I don’t expect the return of their appetite for U.S. securitizations, corporate bonds, and “repos” anytime soon. Indeed, these IOUs have lost their acceptability as a means of global payment remuneration. It also seems reasonable that this year’s market dislocations have reduced the appeal of the strategy of holding U.S. securities while hedging underlying currency exposure in the derivatives market. And, at today’s pitiful yields, there is little ongoing incentive to continue hording Treasuries....At the end of the day, I expect the dollar to suffer from its relative dismal position with respect to both financial flows and our economy’s deep structural maladjustment. Years of egregious Credit and spending excesses have left an economic structure uniquely dependent upon, on the one hand, huge ongoing public sector Credit injunctions and, on the other, huge unending imports. This is a terrible predicament for a currency."

One- and three-month Treasury bill rates ended the week at about zero. Two-year government yields were little changed at 0.70%. Five-year T-note yields dropped 18 bps this week to 1.27%. Ten-year yields sank 49 bps to 2.08%, and 30-year bond yields dropped 42 bps to 2.58%.

MarketSci blog: "In a nutshell, the market has generally been bullish around the beginning and end of each trading month. By my count, this turn-of-the-month bullishness usually covers the first three and final four trading days."

Traders locking up storage space for crude created a huge rift in prices Friday between oil that must be delivered in several weeks and oil that can be taken in February.

The January contract for crude expired Friday and with stockpiles rising at the key storage facility in Cushing, Okla., the price dropped close to a five-year low as brokers and traders attempted to unload supply for whatever price they could get.

"If you could find storage for it, it's a way to get rich real quickly," said Peter Beutel, an analyst with Cameron Hanover.

That's what I'm taking about!!!!!!

The dollar index sank 2.8% to 81.30. For the week on the upside, the South Korean won increased 6.4%, the Swiss franc 6.5%, the New Zealand dollar 5.1%, the Mexican peso 4.0%, the Euro 4.1%, the Danish krone 4.0%, the South African rand 3.4%, the Swedish krona 3.0%, the Singapore dollar 2.1%, the Canadian dollar 2.0%, and the yen 2.4%. On the downside, the Norwegian Krone declined 1.5% and the British pound 0.2%. In the emerging currencies, the Iceland krona dropped 4.1% and the Russian ruble 1.7%.

The WSJ: “California may soon have more bankrupt towns on its hands. The city of Vallejo, Calif., gained national attention earlier this year by filing for Chapter 9 bankruptcy protection. Now, two neighbors are fighting to avoid the same fate, as the state’s economic crisis spreads. Isleton and Rio Vista, small towns roughly 50 miles northeast of San Francisco, say they have begun consulting with bankruptcy lawyers as they draw up plans to deal with their mounting budget crises… California’s troubled towns can’t expect much help from the state. A state board voted Wednesday to shut off $3.8 billion in financing to hundreds of infrastructure projects to preserve cash… ‘California’s fiscal house is burning down,’ State Treasurer Bill Lockyer said." "Pin risk occurs when the underlier of an option contract settles close to the option's strike value at expiration. In this situation, the underlier is said to have pinned. The risk to the writer (seller) of the option is that they cannot predict with 100% accuracy whether the option will be exercised or not. Therefore, the writer may end up with a residual position in the underlier. There is a chance that the price of the underlier may gap adversely, resulting in an unanticipated loss to the writer. In other words, an option position may result a large, undesired risky position in the underlier on the Monday following expiration regardless of the actions of the trader."

Vice President-Elect Joe Biden said the U.S. economy is in danger of "absolutely tanking" and will need a second stimulus package in the $600-billion to $700-billion range.
"The economy is in much worse shape than we thought it was in," Biden said.
When did the light dawn in his head? Obviously, Scranton, PA is not Main Street.

Whole Foods has begun offering free internet service.

Friday, December 19, 2008

Cushing And Crude And Brent

12/19/08 Cushing And Crude and Brent

“World crude oil prices are currently driven by barrels of crude in Cushing, Okla. and not by the OPEC announcement of a 4 million barrels a day cut,” said Olivier Jakob, managing director of Petromatrix GmbH in Switzerland.

Crude oil stockpiles at Cushing, where oil that’s traded on in New York is delivered, climbed 21 percent to 27.5 million barrels last week, the highest since May 2007, the government said in a report on Dec. 17. OPEC’s biggest production cut in more than a decade this week has failed to stop the slump in prices as the deepening global recession saps demand.

Crude oil for delivery in January fell. Crude oil for February delivery gained 13 cents Friday to $41.80 a barrel in electronic trading on Globex. February crude will become the front-month contract on Monday and showed greater trading volume. Crude oil for January delivery tumbled $1.72, or 5%, to $34.50 a barrel. The contract expires today.

A few times over the past two years I have discussed Cushing, crude contracts in the U.S., and Brent crude. Each time there has been a significant opportunity presented. Storage in Cushing will ease. It always does. The Jan. crude contract is trading at $34 a barrel and Brent crude is trading at $44. This spread will narrow and frequently crude in the U.S. sells at a premium to Brent. I view this as the best risk/reward available today.

Rune Likvern: "There is a significant chance that the U. K. will run short of natural gas in storage before the end of winter."

Central banks around the world announced their latest effort to pump cash into the financial system on Friday but noted overall demand for U.S. dollars has declined, in a sign the global credit crunch may be easing.

The Bank of Japan cut its benchmark interest rate to 0.1 percent, increased purchases of government debt and announced plans to buy commercial paper for the first time as the deepening recession starves companies of funds.

"Standard & Poor's cut the credit rating or outlook of 12 major U.S. and European financial institutions Friday, saying the move reflected its view of the significant pressure on large, complex financial institutions' future performance as the global economy slows further. S&P added it is raising its overall assessment of bank industry risk and said it believes there will be more volatility in funding markets. The parent firm or banking subsidiaries of Bank of America (BAC), Barclays (BCS), Citigroup (C), Credit Suisee (CS), Duetsche Bank (DB), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), Royal Bank of Scotland (RBS), UBS (UBS), and Wells Fargo (WFC).were all downgraded one or two notches while HSBC (HBC) has its outlook cut to negative, but its credit rating unchanged."

The Nikkei average fell 1.1 percent on Friday in cautious trade ahead of a decision on interest rates by the Bank of Japan, while Toyota Motor slipped after a newspaper report warned about an annual operating loss.

Polaroid Corp said on Thursday it had filed for Chapter 11 bankruptcy in order to facilitate its restructuring.

Barneys New York on Thursday began offering up to 75% off some clothes, reductions usually reserved for after-Christmas sales, when retailers make way for spring goods.

FedEx on Thursday moved to slash employees’ salaries and other benefits in the face of what Fred Smith, chief executive, called “the worst economic conditions in the company’s 35-year operating history”.

Betting the downturn will steepen in the next six months, FedEx plans to add an additional $200m to its cost-cutting program in the fiscal year to the end of May and will trim expenses by $600m in 2010.

Television sales in the United States are predicted to drop in 2009, according to a new report from DisplaySearch, a market research firm. It would be the first sales decline in at least a decade, said DisplaySearch, and the first decline in revenue since 2000.

Bay Area home values plummeted to an eight-year low in November, as discounts on foreclosed properties continued to draw buyers and drive down prices. The median for existing single-family homes in the nine-county region fell to $350,000, a 47.8 percent drop from a year ago and the lowest level since September 2000, according to MDA DataQuick. Nearly 50 percent of the houses that sold during the month had been repossessed in the last year.

Office rents in SF are down 22%.

The Japanese economy will shrink this fiscal year and will manage only flat growth the following year, the government said Friday, underlining looming fears about a global recession.

The Cabinet Office lowered its forecast for the nation's gross domestic product — the value of goods and services — for the fiscal year through March 2009 to a 0.8 percent contraction. In July, it had expected 1.3 percent growth. It expects growth to stay flat during the fiscal year ending March 2010.

Caterpillar Inc., the world's largest maker of construction and mining equipment, said Thursday it will lay off employees in Illinois and North Carolina as economic turmoil dampens demand for its products.

The company said it will lay off 814 production workers at an engine assembly plant in Mossville, Ill., where volumes have plummeted due to lower demand for engines for on-highway trucks, Caterpillar machines and commercial applications.

Peoria, Ill.-based Caterpillar said it notified the employees of the layoffs, scheduled to begin Feb. 23, on Thursday.

Also Thursday, Caterpillar announced an unspecified number of temporary layoffs at two factories in North Carolina. Caterpillar notified the workers at the Clayton and Sanford plants on Thursday afternoon and said it is planning additional non-production days at both factories in 2009.

The Clayton plant, which employs about 800 people, already was scheduled for a 10-day furlough to help offset costs.

The 10-year Treasury note's yield sank as low as 2.04 percent, and the 30-year bond's yield dropped as low as 2.52 percent on Thursday.

Auto-parts suppliers rallied Friday on reports that the White House said it would extend a $17.4 billion rescue plan to Detroit automakers. Yields on the benchmark 10-year Treasury notes soared 7 basis points to 2.156%. Yields on the 30-year bond rose 7 basis points to 2.599%.

Gold for February delivery lost $26.50 to $834.10 an ounce in early electronic trading.

Weyerhaeuser Co. is reducing its quarterly dividend to 25 cents a share from 60 cents a share. The forest-products company also warned that fourth-quarter earnings will come in significantly below expectations, blaming the ongoing housing slump and weak pulp market, and that it sees challenging market conditions continuing through 2009. Weyerhaeuser also said its board approved the repurchase of up to $250 million of the company's shares and set a wage freeze for executives and salaried workers.

Denmark cut its key interest rate by 0.50 percentage points to 3.75% on Friday.

French investment bank Natixis said Friday that it will cut 840 jobs by the end of next year and scale back its corporate and investment banking operations.

The price of gasoline, which soared to above $4 per gallon in July and hit motorists and industry hard, could retail at an average $1 per gallon next year, brokerage Alaron Trading Corp forecast on Thursday.(I say don't bet on it)

Alaron energy analyst Phil Flynn told a conference in Chicago he expected crude oil prices to range between $25 and $50 per barrel in 2009, with the short-term target being $35.

"We're not going to see commodities turn around overnight. We're entering a new era in commodities with more stable prices and we will not see the big spikes in prices we've seen in the past," Flynn said.

Egan-Jones Rating Co. on Friday reaffirmed its lowly D rating on General Motors Corp.'s credit, even after the White House said it would provide $13.4 billion in federal aid, with another $4 billion likely in February. The credit ratings agency said the money will "cushion the blow" but told its clients to watch for another bailout by President-elect Obama and an eventual bankruptcy filing.

General Electric Co., the biggest issuer of U.S. corporate bonds, has a one-in-three chance of losing its AAA credit rating in the next two years as earnings deteriorate, Standard & Poor’s said.

S&P cut the outlook on the company and that of its GE Capital finance arm to negative from stable. While the AAA ratings were left intact, S&P said in a statement today that it was concerned about cash flow and funding for the finance unit as global conditions worsen. GE Capital’s stand-alone rating, without parent support, would be A+, four levels below, it said

An oil price of around $60-$70 is best for both producers and consumers in the long term, Eni Chief Executive Paolo Scaroni told reporters on Friday.
Low oil prices were immediately attractive to consumers but lead to under-investment and supply shortages further down the line, he said.
"In the short term consumers love the idea," Scaroni said. "I've made a caclculation that at this level of price every American household has 6000 more dollars in their pocket to spend on other things."

Copper futures on the Shanghai Futures Exchange plunged by the daily limit to the lowest in five years after global inventories climbed, signaling waning demand during the recession. Copper fell to a four-year low yesterday on the London Metal exchange after the exchange-monitored stockpiles rose to 324,175 metric tons, the highest level since Feb. 12, 2004.

comScore released US qSearch data for Nov-08. The data shows that total search queries in Nov. from the core search engines were 12.3 billion, up 22.3% Y/Y versus 20.1% Y/Y growth in October and 21.0% Y/Y in Q3. GOOG gains query share and growth accelerated – Nov. queries grew 32.3% Y/Y, which marked a reacceleration versus 29.6% Y/Y growth in October and 35.0% in Q3. In Nov., GOOG had 63.5% share, up 42 bps versus October share of 63.1%, and up about 77 bps versus Q3 share. This represents a new record high query share for GOOG.

Sovereign Bancorp to cut 1,000 jobs.

Gold for February delivery ended down $23.20, or 2.7%, at $837.40 an ounce on the Comex division of the New York Mercantile Exchange. Despite the loss, gold finished the week up 2.1%.

UNG, the ETF for natural gas, made a new 52-week low as did USO, the ETF for crude. Natural gas made a 15-month low at $5.34. Fifteen months ago UNG was at $35 or 13 points higher with natural gas almost at the same price. U.S. light crude for January delivery, which was due to expire later on Friday, fell 77 cents to $35.45 a barrel by 12:34 EST. It earlier fell to $33.44, its lowest since April 2004. The more active February contract, however, was up 73 cents to $42.40, with cuts in OPEC production expected to take hold in that month.

London Brent crude gained 79 cents to $44.15.

The S&P 500 could fall to as low as 600 in 2009 and "alternative assets" like commodities and currencies will provide no shelter for investors, says Gary Shilling, president of A. Gary Shilling & Co.

The Dow Jones Industrial fell 25.88 points, or 0.3%, to finish at 8,579.11,down 0.6% from last Friday's finish. The S&P 500 climbed 2.32 points, or 0.3%, to end at 887.6, up 0.9% from a week ago. The Nasdaq Composite rose 11.95 points, or 0.8%, to 1,564.32, giving it a 1.5% gain on the week.

Electronic Arts plans more job cuts, bringing total layoffs to 1,000, and will consolidate or close at least nine facilities.

The benchmark 30-year fixed-rate home mortgage in the U.S. fell to a national average of 5.17% this week, the lowest since Freddie Mac began its weekly rate survey in 1971.

The VIX dropped about 2 1/2 points to roughly the 45 level.

An ill-timed outbreak of wintry weather is threatening to deliver a further blow to struggling US retailers, as they wind up one of the toughest holiday shopping seasons in memory with a last frantic push for sales.

“I would say that the people who are saying it’s the worst in memory are right,” said Emanuel Weintraub, a veteran retail and apparel consultant, of the promotional frenzy that has erupted amid the slump in consumer spending.

Thursday, December 18, 2008


12/18/08 Contango

An orderly bankruptcy of U.S. automakers remains on the table as the White House considers how to proceed with a rescue plan, White House spokeswoman Dana Perino said Thursday. Bush administration officials are "very close" to reaching a decision on how to proceed, Perino said during the daily White House briefing. Treasury Secretary Henry Paulson has quarterbacked the effort to review the request of auto makers for government money to help them weather the fierce economic downturn. The firms will have to make "tough decisions" in order to receive taxpayer assistance, Perino said.

China's government said Thursday that it cut retail prices for gasoline and diesel and will also raise fuel consumption taxes, state media Xinhua reported Thursday. China's National Development and Reform Commission said it would cut prices for fuel starting midnight Thursday by 900 yuan ($131.7) per tonne for gasoline and 1,100 yuan per tonne for diesel. The price for jet fuel will be lowered to 5,050 yuan per tonne, down 2,400 yuan from 7,450 yuan, Xinhua said. Starting Jan. 1, China will also raise the gasoline consumption tax from the current 0.2 yuan per each liter to one yuan per liter and diesel consumption tax from 0.1 yuan per liter to 0.8 yuan one liter, Xinhua said.

Pentar, the Golden Valley, Minn., water treatment and storage products manufacturer said it is responding to deteriorating economic conditions by accelerating restructuring actions, among other actions, and it expects to cut about 1,600 jobs, or more than 10% of its workforce, this year.

Ingersoll Rand's full-year adjusted earnings per share from continued operations are now expected to be in the range of $3.00 to $3.55, down from a previous $3.35 to $3.55.

Pier 1 Imports, Inc.said its third-quarter net loss widened to $36.9 million, or 41 cents a share, from $10 million, or 11 cents a share, in the year-earlier quarter. Same-store sales for the quarter fell 17.8%, in line with previous guidance. Total sales dropped 20% to $301 million. The company said it expects the current challenging environment to continue "well into fiscal 2010" and possibly longer.

Homebuilder Lennar's revenue fell to $1.2 billion, from $2.1 billion. Backlog fell 60% to 1,599 homes, while new orders are down 46% to 2,563 homes. "In 2009, cash generation will continue to be our top priority," said CEO Stuart Miller.

The Ifo Institute's closely-followed gauge of German business sentiment fell to a record low in December, news reports said, dropping to 82.6 from a reading of 85.8 in November.

Dutch chip equipment maker ASML Holdings said that it will take measures to cut costs, including reducing its workforce by more than 10%, or roughly 1,000 jobs.

In very early trading, stock futures for the Dow Jones industrial average are up 0.6 percent and for the S&P 500 up 0.3 percent; Nasdaq 100 futures indicated down 1 percent.

Omnicom Group, the nation's largest advertising, marketing and corporate communication conglomerate, may be preparing to cut as many as 3,500 jobs, according to Advertising Age, an industry publication that cited unnamed executives close to the situation.

FedEx affirmed its forecast for 2009, after cutting the outlook last week. FedEx said that weakenening global economic conditions are offsetting sizable savings from a steep drop in fuel prices and the benefit of new customers from DHL, which is dramatically scaling back its U.S operations.

Real spending on travel and tourism (spending adjusted for price changes) turned down sharply in 2008:3, decreasing at an annual rate of 8.1 percent—the largest decline since 2001:4. In 2008:2, real spending grew 2.8 percent (revised). By comparison, real gross domestic product (GDP) declined at an annual rate of 0.5 percent (preliminary) in 2008:3 after growing 2.8 percent in 2008:2.

January crude down $1.48, or 4%, to $38.59 a barrel. Gold for February delivery gained $3.50 to $872 an ounce on the New York Mercantile Exchange. The dollar was mixed against major counterparts.

Yields on the benchmark 10-year Treasury notes fell to 2.097%, while those on the 30-year bond were down at 2.607%. Yields on two-year notes were down at 0.0708%. First-time claims for state unemployment benefits dropped 21,000 to 554,000 in the week ended Dec. 13, easing back part of a surge in the prior week, the Labor Department reported Thursday. Still, the four-week average of those claims rose 2,750 to 543,750 - the highest level since December 1982, and initial claims are not expected to drop again until mid-January, according to the Labor Department. For the week ended Dec. 6, the number of Americans continuing to collect benefits fell 47,000 to 4.38 million. The four-week average of continuing claims rose 92,000 to 4.23 million -- the highest since January 1983. Compared with the same week a year ago, new jobless claims are up about 59%, while continuing claims are up 66%.

The dollar index, which measures the U.S. unit against a basket of six major currencies, stood at 78.498, compared with 78.584 in late trade Wednsday.

Capital outflows from Russia will remain at high levels and hit $90-$91 billion next year, Deputy Economics Minister Andrei Klepach said on Thursday, according to a report by Russian news agency RIA Novosti. Klepach said Russia's international reserves are expected to decline $110-$140 billion, but will remain above $300 billion, according to the report.

Natural gas inventories fell by 124 billion cubic feet to stand at 3,167 billion cubic feet during the week ended Dec. 12, the U.S. Energy Information Administration reported Thursday. Analysts polled by Platts expected a reduction of between 107 billion cubic feet and 112 billion cubic feet. After the data, January natural gas futures were flat at $5.63 per million British thermal units.

Manufacturing in the Philadelphia region bounced off in December, the Federal Reserve Bank of Philadelphia reported Thursday. The Philly Fed diffusion index rose to negative 32.9 in December from negative 39.3 in November. The reading in November was the worst since October 1990. Readings below zero indicate contraction.

More economic weakness is in store for the first few months of 2009, the Conference Board said Thursday. The index of leading economic indicators fell 0.4% in November, with negative contributions from six of the 10 indicators, and the largest negative contribution from building permits. The largest positive contribution came from the money supply. "An intense housing downturn that's about to begin its fourth year and a severe financial crisis with nearly frozen credit markets have sharply lowered consumer and business expectations," said Ken Goldstein, economist at the Conference Board. The result for October was revised to a decline of 0.9% from a prior estimate of a 0.8% drop.

February crude futures, which come to the fore after January's expiry Friday, were around $5 higher than the current front month but also fell $1.46 to $43.15.
"There is an unusually large contango spread, nearly $5, and the January contract expires in a few hours," said Kevin Norrish, analyst at Barclay's Capital in London.
"So what's the real price?...the February price is a much better bet."

In order to become a bank holding company, and eligible for a slice of the federal government's $700 billion bank rescue plan, GMAC must show that it has at least $30 billion in regulatory capital. The company has said it needs about 75 percent participation on the offers in order to meet that requirement. They are far away from that number.

GMAC warned last week that failure to convert to a bank holding company would have a "material adverse effect" on its business. And some analysts have speculated that without the federal financial help, the company could be forced to file for bankruptcy protection or shut down the ResCap division, which has accounted for the bulk of its recent losses.

The ECB cut its official deposit rate by 50 basis points to 1% below the key rate and raised its marginal lending rate by 50 basis points to 1% above the key rate. Its benchmark repo rate remains unchanged at 2.5%.
The euro was buying $1.4290, down from $1.4404 in late North American trading Wednesday and down from an earlier Thursday high of $1.4716.

January crude ends down $3.84, or 9.6%, at $36.22 a barrel. Gold for February delivery fell $7.90 to end at $860.60 an ounce on the New York Mercantile Exchange.

Gartner Inc. on Thursday said spending for chip making equipment will fall 32% in 2009 as semiconductor manufacturers shift to "panic mode" in the face of "an economic recession of unknown proportion." The tech industry research group said semiconductor equipment spending is also expected to fall to fall 31% in 2008.

The VIX is approaching its November lows.

According to AMG Data Services, November Equity Fund Outflows -$1.4 Bil; Taxable Bond Fund Outflows -$13.3Bil xETFs Equity Fund Outflows -$20.3 Bil; Taxable Bond Fund Outflows -$14.6 Bil.

Potash Corp. of Saskatchewan said late Thursday that it lowered its full-year earnings guidance because of softness in global fertilizer demand. Potash sees full-year earnings of about $10.75 a share, about 10% below the midpoint the company's last indicated guidance range.

Business software maker Oracle Corp reported quarterly profit in line with expectations but posted a drop in new software sales as the global economic slowdown hurt demand and a stronger dollar hit non-U.S. sales.

"They are managing through this downturn relatively well, but they're not immune for a slowdown," said Jeff Gaggin, an analyst with Avian Securities.

Net income fell to $1.296 billion, or 25 cents a share, from $1.303 billion, or 25 cents, a year earlier.

BlackBerry maker Research In Motion posted a quarterly profit that was in line with its forecasts on Thursday, and also delivered a rosier than expected outlook and said it's seeing strong holiday sales of its smartphones despite a slow economy.

RIM said it earned $396.3 million, or 69 cents a share, in the three months ended November 29. That was up from a profit of $370.5 million, or 65 cents a share, a year earlier.
Revenue was $2.78 billion, up from $1.67 billion in the same quarter of last year.

The Federal Reserve's balance sheet totaled $2.34 trillion in the week ended December 17, according to the latest report released by the central bank on Thursday. This is up 2.2% from the previous week. The Fed's assets and liabilities totaled $850 billion only two months ago.

The Dow Jones Industrial Average fell 219.35 points, or 2.5%, to 8,604.99. The S&P 500 declined 19.07 points, or 2.1%, to finish at 885.35, while the technology-laden Nasdaq Composite shed 26.94 points, or 1.7%, to close at 1,552.37.

Wednesday, December 17, 2008

The Euro, Gold, And Crude

12/17/08 The Euro, Gold, And Crude

Silver futures rallied more than 7%.
Gold for February delivery surged $30.20, or 4%, to $872.90 an ounce in electronic trading on Globex. Earlier, the contract hit an intraday high of $873.20 an ounce.

The dollar index, a measure of the U.S. dollar against a trade-weighted basket of six currencies, fell 1.8% 78.54.

The Organization of Petroleum Exporting Countries has decided to cut its oil output by 4.2 million barrels a day from September levels, or 2.2 million barrels a day from current output, the Wall Street Journal reported on its Web site Wednesday. Most analysts anticipated a cut of about 2 million barrels a day.Yet, oil for January delivery fell $3.27, or 7.4%, to $40.35 a barrel on Globex. The U.S. Energy Information Administration reported that U.S. crude supplies rose by 500,000 barrels during the week ended Dec. 12.The EIA also reported a rise of 1.3 million barrels in gasoline stocks last week as well as a rise of 2.9 million barrels in distillate stocks. Analysts expected a 900,000-barrel decline in U.S. commercial crude stocks as well as a rise of 1.5 million barrels in gasoline stockpiles, according to a Platts survey. Distillate stocks were expected by analysts to increase 1.8 million barrels.
Crude oil stocks rose by 89,000 barrels during the week ended Dec. 12, American Petroleum Institute (API) reported Wednesday. In a separate report, the U.S. Energy Information Administration reported that U.S. crude supplies rose by 500,000 barrels last week. API also reported that motor gasoline stocks fell by 1.6 million barrels last week and distillate stocks dropped by 597,000 barrels.

"The Federal Reserve has embraced 'Helicopter Bernanke's' inflate or die massive reserve and money creation academic theories in an attempt to prevent deflation," said Mark O'Byrne, executive director at Gold and Silver Investments Ltd., referring to Fed Chairman Ben Bernanke.
"Markets realize that this will lead to a lower dollar and higher gold prices in the medium and long term," O'Byrne said in a research note.

Western Digital Corp.said Wednesday it is laying off about 2,500 workers and is cutting its outlook for the fiscal second quarter.

General Mills increased its full-year earnings guidance to $3.83 to $3.87 per share. Previously, 2009 earnings guidance was $3.81 to $3.85.

Retailers saw a ninth consecutive month of falling year-on-year sales volume in December, with a clear majority of firms reporting a decline in activity, the Confederation of British Industry reported Wednesday. The CBI distributive trades survey found 13% of firms said volumes were higher in the first half of December, while 67% said they were lower, for a rounded balance of -55 -- the lowest reading since the survey began in 1983. That's down from a November balance of -46. Economists had expected the balance to rebound slightly to -44. "The next week will be nail-bitingly tense for retailers as they pin their hopes on a last-minute Christmas dash," said Andy Clarke, chairman of the CBI's distributive trades panel.

The largest U.S. pension fund, California Public Employees' Retirement System, is fighting to avoid the biggest fall in returns in more than 75 years, owing to exposure to risky land deals, according to a report in The Wall Street Journal on Wednesday. The report said Calpers has sent a warning to California cities, towns and schools that they may need to pitch in more money to cover retirement and other benefits the fund provides for 1.6 million workers. The fund has lost nearly a quarter of its assets since July 1.

- The number of persons claiming British jobless benefits rose by 75,700 in November, the Office for National Statistics reported Wednesday. The rise exceeded expectations for an increase of around 45,000. The unemployment rate in the three months ending in October rose to 6%, up from 5.6% in the previous three months and 5.3% in the same period last year. The number of unemployed totaled 1.86 million, up 137,000 from the previous three months and 238,000 on the same period in 2007.

Nissan Motor Co. said Wednesday it will reduce production in Japan by 78,000 units starting January 2009 amid waning demand for automobiles. The automaker said it will also gradually reduce 500 short-term employees during the first quarter of 2009. Nissan shares ended 4.1% lower in Tokyo.

Honda Motor Co. will announce later Wednesday a plan to postpone or abandon some capital spending plans in Japan and may cut its operating profit target for the fiscal year ending in March, according to a report Wednesday in the morning edition of the Nikkei newspaper. The automaker is likely to cut its operating profit forecasts to around 300 billion yen ($3.4 billion), slashing about 200 billion yen off its earlier forecast made in October, or about 70% below last year's level, the report said without citing its source. Honda is also planning to scrap its plan to unveil the luxury Acura brand in Japan in 2010. The cancellation, the second time Honda has put off the release after earlier dropping a planned rollout scheduled from the autumn of 2008, will lead to cost savings across its dealership networks. Honda will also delay plans to build a 48-billion-yen Acura research facility in Tochigi Prefecture.

Nearly 60 percent of CFOs say the U.S. economic recovery will be delayed until the fourth quarter of 2009 or later, while 71 percent of European CFOs expect Europe’s recovery to be delayed until at least the fourth quarter of 2009.

According to the WSJ, Jeffrey Immelt lowered profit projections for General Electric Co.'s industrial businesses -- including jet engines, power turbines and medical equipment -- but said the units should still make money despite the global economic downturn.

Mr. Immelt declined to offer a corporate-wide earnings forecast for 2009. But his projection for the industrial units for next year, combined with GE's previously announced plan to shrink its finance unit, suggest overall profit at the Fairfield, Conn., conglomerate will decline in 2009 for a second consecutive year.

The yen appreciated to its strongest level against the dollar in 13 years as the US Federal Reserve unexpectedly cut interest rates from 1 per cent to a range of 0 to 0.25 per cent.

The yen’s strength – it reached Y88.24 to the dollar by mid-afternoon in Tokyo – puts pressure on the Bank of Japan to cut interest rates from their current level of 0.3 per cent to 0.1 per cent at its meeting that starts on Thursday.

Morgan Stanley said Wednesday it lost $2.37 billion during its fiscal fourth quarter as it took a range of losses on assets amid one of the roughest quarters for investment banks.

The New York-based firm, which is aggressively building on its new status as a bank holding company, lost $2.34 per share for the quarter ended Nov. 30. It lost $3.61 billion, or $3.61 per share, during the year-ago period when it took a $9.4 billion write-down on mortgage-related assets as the housing crisis began to spiral downward.

The Bloomberg Professional Global Confidence Index slipped to 6.1 from 6.6 in November. A reading below 50 means pessimists outnumber optimists. The index, which is a year old, reached an all-time low of 4 in October.

“People are scared,” said Roberto Padovani, a senior strategist at Banco WestLB do Brazil SA in Sao Paulo who took part in this month’s survey. “The dive in the U.S. is much bigger than expected and good fundamentals in Brazil and China aren’t enough to offset pressure in the other direction.”

General Motors Mexico will temporarily shut down assembly lines at three of its Mexican car factories as part of an overall strategy to cut production due to falling demand, the company said.

The ruble headed for its biggest decline against a dollar-euro basket in more than three months.The currency, which is managed against the basket to protect exporters, slid 1.2 percent to 32.6219 against the basket by 11:25 a.m. in Moscow, as Bank Rossii, the central bank, said it widened the trading band it allows the ruble to trade within. The currency is headed for its biggest intraday drop, based on closing prices, since Sept. 3.

A recent report produced by the U.S. Army War College's Strategic Institute warns that the United States may experience massive civil unrest in the wake of a series of crises which it has termed "strategic shock."

The report, titled Known Unknowns: Unconventional Strategic Shocks in Defense Strategy Development, also suggests that the military may have to be used to quell domestic disorder.

"Widespread civil violence inside the United States would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security," the report, authored by [Ret.] Lt. Col. Nathan Freir, reads.

"Deliberate employment of weapons of mass destruction or other catastrophic capabilities, unforeseen economic collapse, loss of functioning political and legal order, purposeful domestic resistance or insurgency, pervasive public health emergencies, and catastrophic natural and human disasters are all paths to disruptive domestic shock." it continues.

"An American government and defense establishment lulled into complacency by a long-secure domestic order would be forced to rapidly divest some or most external security commitments in order to address rapidly expanding human insecurity at home..."

What could cause such unrest? Massive joblessness? Foreclosures? Rising bankruptcies?

Loss of purchasing power due to a collapsing dollar? A stock market crash? The Fed printing press breaking down due to overheating?

Richard Daughty: "Total Unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers", zoomed to 12.5%! It's worse than I thought!"

A majority of the world’s biggest currency-trading firms say the dollar’s appeal as a haven amid the financial crisis all but evaporated.

The U.S. currency slid to a 13-year low against the yen today and the weakest versus the euro in 11 weeks after the Federal Reserve reduced its target interest rate yesterday to a range of zero to 0.25 percent, the lowest among the world’s biggest economies. CMC Markets said today the currency’s prospects appear “ominous.” State Street Global markets said the dollar’s outlook has been “undermined.”

“The dollar has been under heavy downward pressure,” said Robert Minikin, a senior currency strategist in London at Standard Chartered Bank Plc. “This move is very well-justified and has a long way to run.” Standard Chartered is preparing to cut its dollar forecasts, Minikin said.

There are some severe dangers in the Fed's new course of action, says Uwe Parpart, chief economist & strategist, Asia at Cantor Fitzgerald. He tells CNBC it could undermine the value of the dollar and create a bond market bubble.

Joseph Mason: "Monetary policy effectiveness relies crucially on banks’ willingness to lend, which all agree is now sorely lacking. The important consideration, however, is why? The fact of the matter is that, without adequately transparent financial measures investors and banks alike will not allocate funds to any borrower. With over fifteen times “off-balance sheet” exposures as “on-balance sheet” exposures in US commercial banks and the demonstrated possibility for those “off-balance sheet” items to unexpectedly come back “on-balance sheet” in times of distress, investors and banks are loathe to lend and will remain so until the absurdity of “off-” and “on-balance sheet” distinctions is put to rest."

NY Times: "In the early hours of Sept. 15, after the government refused to rescue the foundering Lehman Brothers, something odd happened. The Federal Reserve lent tens of billions of dollars to a subsidiary of the newly bankrupt bank.

In other words, government officials who had refused to risk taxpayers’ money on Lehman before it collapsed did just that after it collapsed.

On Monday the Fed lent the Lehman unit $87 billion through JPMorgan Chase. After being repaid on Tuesday, it lent another $51 billion — putting the bailout, arguably, in the same league as the initial $85 billion bailout for the American International Group.

This mystery loan is just one piece of the larger Lehman puzzle. Who lost Lehman? Why, and how? Three months later, those questions still nag.
A series of court documents that detail the Fed’s loan have dribbled out in recent weeks, but they raise more questions than they answer....The recently disclosed documents detailing the Fed’s loan to Lehman’s subsidiary cast some light on a failed effort to prevent Lehman’s implosion from cascading through the financial system. The loan, according to these documents, was a “carefully thought-out decision” to stabilize the market by propping up Lehman’s broker-dealer business, called LBI New York, so it could stay afloat long enough to “facilitate an orderly wind-down” of tens of thousands of trades with the other Wall Street firms. The unit was kept out of the Lehman bankruptcy."

Bill Bonner: "No, in our mind, an economy is a living thing…organic…natural…subject to moral laws rather than mechanical rules. In our theory, people don't get what they want or what they expect…they get what they've got coming. Sooner or later."

The euro has jumped higher to $1.43 while 10-year Treasury bond yields have fallen to 2.15%!

Chrysler financing arm may halt dealer loans.

Gold for February delivery rose $25.80 to end at $868.50 an ounce on the New York Mercantile Exchange. Earlier, the contract soared to an intraday high of $883.60 on Globex.
Crude for January delivery fell $3.54, or 8%, to end at $40.06 a barrel on the New York Mercantile Exchange. Earlier, the contract fell to an intraday low of $39.88 a barrel in electronic trading on Globex.

Valero Energy Corp. said Wednesday it's slashing production to cope with a pressured gasoline refining business, as market prices pushed down by depressed crude demand continue to plumb multi-year lows.
As retail U.S. gasoline prices remain below $1.70 a gallon, Valero spokesman Bill Day said overall crack spreads in the industry are down $5 to $10 a barrel on the auto fuel.

Chrysler announced Wednesday it is closing all its North American manufacturing plants for at least a month, the starkest move taken by U.S. automakers as they anxiously await word about government loans.

Attempting to cut costs, GM was halting construction of a plant tied to one of its most important projects, the Volt. Ford also said it will shut down 10 plants for an extra week in January because of sluggish sales.

Chrysler said it would extend the normal two-week holiday shutdown that begins Friday to at least Jan. 19 at all 30 of its factories due to slumping sales.

The Dow Jones Industrial Average declined 99.8 points to 8,824.34. The S&P 500 dropped 8.76 points to 904.42, while the Nasdaq Composite fell 10.58 points to 1,579.31.

The US currency suffered its biggest one-day slide against the euro since the birth of the single European currency in January 1999 as the euro jumped from under $1.40 to above $1.44.

Tuesday, December 16, 2008

The Fed Is All In!

12/16/08 The Fed Is All In!

The Fed lowered interest rates to zero percent and said they would be buying mortgage backed securities and clearly indicated the printing press spigot would be open wide. In response, the S&P 500 rose 5%, gold for February delivery rose $7.60, or 0.8%, to $850.40 an ounce, and the U.S. Dollar Index got clipped by 2.5% to 80+, a huge move. The euro jumped to $1.39. Only a few days ago it was $1.31.

U.S. home builders slashed construction of new homes in November, driving housing starts far below the worst levels seen in 50 years, the Commerce Department reported Tuesday. New starts dropped an eye-popping 18.9% to a seasonally adjusted annual rate of 625,000, the lowest rate since the Commerce Department began keeping records in 1959. Starts were far lower than the 740,000 expected by economists surveyed by MarketWatch. Building permits fell 15.6% in November to a seasonally adjusted annual rate of 616,000, also a record low. Permits for single-family homes fell 12.3% to a seasonally adjusted annual rate of 412,000, a 27-year low.

European Central Bank President Jean- Claude Trichet said there’s a limit to how far the bank can cut interest rates and signaled policy makers may pause in January.

The Baltic Dry Index (BDI) is up over 10% to 711 in the past few weeks. It’s down over 93% for the year. In fact, if you consider this move in terms of this summer’s price high of 11,793 - it’s moved barely half a percent. The BDI is the price used to determine global shipping rates and prices. Like blood pressure does for humans, BDI measures the flow of goods for the economies of the world. And just like us, excessively low or high readings are bad.

Because it isn’t traded, the BDI cannot be moved artificially. It’s one of the best ways to judge the true health of global trade and our economy.

And it’s not just domestic lines; Asian shippers have been on the move as well. Time will tell if these movements are the start of a new trend or just a bounce. But the water transportation sector could use some good news - it’s down over 37% since October 1st. By comparison, the S&P is only down 25%.

For 2009, ITT sees earnings per share in the range of $3.60 to $4.00, including anticipated restructuring costs. Adjusting for the expected negative impact of foreign currency exchange, total revenue is anticipated to be down between 2% and 6%.

Air Products to eliminate approximately 1,300 positions, or about 7% of the firm's global workforce.

The preliminary December composite purchasing managers index fell to 38.3 from 38.9 in November, according to news reports.

The board of Constellation Energy Group could approve a deal to sell half its nuclear power business to Electricite de France for $4.5 billion as early as this week, Bloomberg reported Tuesday.

China's fixed-asset investment grew 26.8% in the January-to-November period from a year earlier, according to data released by the National Bureau of Statistics Tuesday.

According to the WSJ, Macintosh sales declined 1% in U.S. stores in November, lagging behind the overall PC market, as the consumer pullback caught up with Apple.

According to the FT, Venezuela and Iran, Opec’s two most hawkish members, on Tuesday called on the cartel to double the number of barrels it has already promised to withhold from the market in a bid to boost prices

Analysts expect the group, which supplies about 40 per cent of the world’s oil, to pledge at its ministerial meeting in Oran, Algeria, on Wednesday to reduce its output by 2m barrels a day.
This would represent a production cut of more than 7 per cent in an effort to push prices back towards the $75 a barrel that most cartel members need to balance their economies.

HSBC Holdings Plc, Europe’s biggest bank, may seek to raise about $14 billion as increasing bad-loan provisions erode profit, CLSA Asia-Pacific Markets said.

Rep. Ron Paul: "It is not the job of government to sustain business. The government should get out of the way, and instead examine excessive regulations, tax policy and red tape that have been hostile to manufacturing in this country. We should get back on a sustainable economic course in this country, or we are doomed to collapse, as the Soviets did, under the crushing burden of big government and a strangled economy that can no longer pay for it."

Steve Saville: "The point we are trying to make is that there is substantial downside risk in the T-Bond price right now regardless of what the market is discounting. Given that bonds have been rallying with gold and gold stocks it is likely that the bond market is expecting the Fed to start targeting long-term interest rates via large-scale debt monetisation. In other words, the bond market has probably been rallying in anticipation of additional monetary INFLATION. If the Fed announces such a scheme then the bond price will likely remain near its current elevated level or move even higher (depending on the Fed's target), but if the Fed does not announce some form of artificial support then there's a good chance that the T-Bond price will plunge."

The producer price index fell 1.7% in November. The core CPI, which excludes food and energy prices, was flat in November. Year over year, the overall CPI has risen 1.1%, while the core has risen 2%.

Eaton Corp. has cut 3,400 staff this year. "We continue to evaluate a range of additional actions to further align our cost structure to the lower markets," he said. "Our current expectation is that these additional actions will be taken very early in 2009."

Goldman Sachs Group Inc.said fourth-quarter net revenue in investment banking fell 48% from the year-earlier period to $1.03 billion. The company reported its first ever loss as a public company in the fourth quarter, posting a deficit of $2.12 billion, or $4.97 a share, compared to a profit of $3.22 billion, or $7.01 a share in the year ago period. The company blamed a sharp slowdown in mergers and acquisitions for the 54% decline in net revenue from its financial-advisory business, which came in at $547 million. The credit crunch also took a toll on the firm's underwriting business, and net revenue there dropped 37% to $460 million, said Goldman, which has converted to a bank-holding company and participated in the government's financial rescue.

Johnson Controls Inc.said it's withdrawing its 2009 targets as its eyes a first-quarter loss tied to deteriorating automobile production.

Chain-store sales for the week ended Dec. 13 fell 0.4% from the year-ago period, according to a survey released Tuesday by the International Council of Shopping Centers and Goldman Sachs.

Best Buy Co said it was offering buyout packages to its corporate workers in a bid to cut expenses.The company also said it would substantially cut new store openings next year and its shares rose 11 percent in premarket trading.

Excluding impairment charges, profit came to 35 cents a share. Analysts had expected 24 cents a share, according to Reuters Estimates.

Revenue rose 16 percent to $11.5 billion, boosted by inclusion of Best Buy Europe.

The Fed’s Open Market Committee will probably cut the benchmark rate in half, to 0.5 percent, according to the median of 84 forecasts in a Bloomberg News survey. The central bank may also signal plans to channel credit to businesses and consumers by further enlarging its $2.26 trillion of assets.

U.S. automaker General Motors said on Monday it has reached an agreement with GMAC on the deferral of payments by GMAC-financed dealers of up to $1.5 billion for GM vehicles until Dec. 30.

According to Rigzone, seven of the ten largest oil-and-gas discoveries worldwide this year occurred in Latin America, reaffirming the region's promising potential for hydrocarbon exploration.

Real average weekly earnings rose by 2.3 percent in November 2008. A 0.4 percent increase in average hourly earnings and a 2.1 percent decrease in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) were partially offset by a 0.3 percent decrease in average weekly hours. Over the year, real earnings increased 2.2 percent.

According to the FT, oil companies and traders are storing at least 50m barrels of oil in supertankers in a clear sign of supply outstripping demand as the global economy slows.

The surge in floating storage, – enough to meet France’s oil imports for a month and the biggest since late 2001–, is likely to push the Opec oil cartel, which is due to meet on Wednesday in Oran, Algeria, to make a deeper production cut to reduce stocks. Storing oil in tankers is unusual as it is significantly more expensive than inland.Opec ministers said in November they intended to reduce developed countries’ oil stocks from the equivalent of 56 days of demand to 52. But the surge in floating storage indicates that tanks are brimming, in spite of Opec’s having announced 2m b/d in cuts. Indeed, inventories have risen to almost 57 days’ demand.

Nouriel Roubini foresees many more job losses in the U.S. and social upheaval abroad.

Joan Wright:"Something's gotta give. The emotional cost of two parents working is debilitating - I'd rather take the financial loss and simplify than live with the emotional battering, upheaval and stress."

The Saudi Arabian Monetary Agency reduced its repo rate by 50 basis points to 2.5% Tuesday in a move "to ensure adequate system liquidity to meet domestic credit demand and in view of evolving domestic and global developments." It also cut the reverse repo rate to 1.5% from 2%.

Retail gasoline prices held steady at $1.66 a gallon, according to the AAA Daily Fuel Gauge Report.

- Keefe, Bruyette & Woods on Tuesday forecast price depreciation of roughly 5% on new U.S. homes and losses of between 5% and 10% on existing homes for 2009, but expects prices to bottom by spring. "While we expect the current environment of limited liquidity and continued credit deterioration to persist into 2009, we expect both home prices and asset prices to bottom in 2009," KBW analysts wrote in a report. "We expect credit losses to stabilize once home prices stabilize."

Daiwa House Industry Co., Japan’s biggest home builder, said it may sell some houses and apartments at a loss to lure buyers as a recession threatens to prolong the country’s longest housing slump.

Daiwa House has cut prices for some apartments by as much as 20 percent, Tetsuji Ogawa, executive vice president and chief financial officer, said in an interview. The Osaka-based company is also reducing land purchases by about two-thirds for the six months through March from a year earlier.

“We have to sell at a loss in some cases,” said Ogawa. “If we don’t generate cash flow, we won’t be able to make new investments.”

Aluminum dropped to a five-year low in London on signs demand from the auto industry and home builders is falling faster than production cuts. Copper and other metals on the London Metal Exchange also declined.

The dollar fell to a two-month low against the euro on speculation the Federal Reserve will cut the target lending rate to near zero today.

The U.S. currency also approached the lowest level in 13 years against the yen as the central bank considered deploying its balance sheet as the key tool for monetary policy. European Central Bank President Jean-Claude Trichet said there’s a limit to how far the bank can cut borrowing costs and signaled it may pause in January.

The U.S. currency gained 6.5 percent versus the euro and 30 percent against the pound this year on short-term funding pressure and demand for the greenback as a haven.

“The dollar had a big strong rally for several months,” said Jim Rogers, chairman of Singapore-based Rogers Holdings, in an interview on Bloomberg Radio. “It was an artificial rally, in my view. It was caused by everybody being forced to reverse their positions.”

The three-month cost of borrowing in dollars, or London interbank offered rate, fell to the lowest in more than four years today at 1.85 percent.

Stephanie Pomboy: "The share of income that consumers can actually spend is at its lowest in the post-war period. It had not been a problem, because consumers would just borrow to fill that gap. But now, they don't have appreciating assets against which to borrow. So while we could get a rally in risk assets -- including high-yield debt -- it's likely to be a short-term rally within a context of a secular bear market....We are going to see a secular rotation from paper assets to hard assets like gold. The whole global competitive currency devaluation, including that of the dollar, plays right into that."

Gartner Inc. on Tuesday said the semiconductor industry will experience consecutive years of lower sales for the first time in its history in 2009.

Ford Motor Co. Executive Chairman Bill Ford Jr. says the company's December U.S. auto sales don't look too bad through the first two weeks of the month.

Ford says the month is turning out "relatively well" compared with November. Ford sales were down 31 percent in November when compared with the same month last year.

Bristol-Myers Squibb Co.plans to cut its workforce by another 10% through 2010 after announcing similar plans last December, according to media reports late Tuesday. Last December, the drugmaker said it would cut about 10% of its workforce when it had about 43,000 employees. The company expects to cut 800 jobs by the end of the month, according to reports.

Treasury Secretary Henry Paulson said Tuesday that he is not contemplating a plan to set a 4.5% points mortgage rate for new home loans, though he acknowledged that the agency is working to lower mortgage rates. "We didn't float any plan," Paulson said.

Adobe said earnings for the period were 60 cents a share. Analysts on average estimated Adobe would post earnings excluding special items of 57 cents a share, on $917.7 million in revenue, according to FactSet Research.

GE maintained its reduced forecast and kept the dividend at the same level. "While 2008 has been a challenging year for the global economy and for many of our businesses, we still expect to earn over $18 billion and outperform the S&P 500 Industrials and Financials sectors," said Chairman and Chief Executive Jeff Immelt in a statement. "We expect the difficult market conditions to continue in 2009."

The Dow Jones Industrial Average climbed 359.61 points, or 4.2%, to 8,924.14. The S&P 500 gained 44.59 points, or 5.1%, to 913.16. The Nasdaq Composite rose 81.55 points, or 5.4%, to 1,589.89.

Honda Motor Co.has dropped plans to launch its luxury Acura brand in Japan and will postpone or curtail other domestic capital spending due to a gloomy profit outlook, The Nikkei reported on its Web site Wednesday.

The Federal Reserve's aggressive moves to lower interest rates will likely cause a short drop in conventional mortgages rates to as low as 5%, said Tony Crescenzi, chief bond market strategist at Miller Tabak, Tuesday. Rates on 30-year mortgages currently average about 5.5%.

Crude oil for January delivery fell 85 cents, or 2%, to $43.70 a barrel in electronic trading on Globex. The Organization of Petroleum Exporting Countries plans to cut crude oil production by an additional 2 million barrels a day, The Wall Street Journal reported on its Web site Tuesday, citing Saudi Arabia's Oil Minister Ali Naimi.

Monday, December 15, 2008

Crude Oil

12/15/08 Crude Oil

Crude oil rallied more than 8% to above $50 on expectations that the Organization of Petroleum Exporting Countries will cut its output at Wednesday's meeting. Gold for February delivery jumped $22.50, or 2.7%, to $843 an ounce on the Comex division of the New York Mercantile Exchange, the highest since Oct. 15.
Monday's gain in gold followed its 9% advance in the past week. In other metals, March silver futures rose 1.1% to $10.345 an ounce. January platinum gained 1.6% to $835.20 an ounce and March palladium added 0.4% to $175.65 an ounce.

Goldman Sachs downgraded Apple Inc. to neutral from buy, citing concerns over consumer spending in the first half of 2009 and the company's valuation premium. AT&T was cut to neutral from buy by Goldman Sachs.

Illinois Tool Works Inc.expects fourth quarter earnings per share from continuing operations to be 44 cents to 52 cents. The company estimated that revenue would fall 7% to 9% in the quarter. For the full year 2008, Illinois Toolworks is forecasting continuing operations net income per share to be in a range of $2.94 to $3.02. The full-year forecast assumes a total Company revenue growth range of 6 percent to 7 percent, the firm said.

Rob Hanna: "No doubt traders will hear about a possible “Santa Claus Rally” many times in the next few weeks. When looking at the S&P 500, though, I found the best week in December to be option expirations week. The edge has been especially pronounced over the last 24 years. During that period the market has closed the week higher about 81% of the time."

Brett Steenbarger: "I continue to view this as a range market; we need to see continued strength in NYSE TICK and a renewal of stocks making fresh 20-day highs to sustain a breakout move to the upside. With the weak money flow numbers, I'll need to see confirmation of strength from other indicators before assuming such a breakout. Renewed weakness in TICK and a continuation of 20-day lows outnumbering highs would lead me to expect a test of last week's lows.
Longer term, we continue to see a pattern of lower highs and lower lows during the overbought and oversold periods in the Cumulative DSI, suggesting we haven't yet reversed the bear."

Electrolux, the second-largest maker of domestic appliances, on Monday provided another dire warning about the state of worldwide consumer demand by cutting more than 3,000 jobs while indicating that its operating profit for the fourth quarter could be as much as 60 per cent below last year’s figure.

Northern Trust, the Chicago-based bank, said on Monday that it would cut 450 jobs, or 4 per cent of its workforce, to reduce costs and improve efficiency amid worsening economic conditions.

According to the FT, the US banking industry could lose billions of dollars in annual interest payments, according to a study that warns of credit card lenders raising prices after a regulatory overhaul.

The Federal Reserve board will meet this week to finalise changes to rules governing the $970bn credit card business.

In a survey released last week by the American Kennel Club, 81 percent of respondents said they would buy holiday gifts for their dogs, and 69 percent would sooner tighten their belts on friends and extended family than tighten the collars on their dogs. And 65 percent would rather eat ramen noodles than make their dogs eat on the cheap.

Huntsman Corp. will end its $6.5 billion deal that would have seen it acquired by Hexion Specialty Chemicals Inc., a tie-up that unraveled because of the global credit crisis and sparked a string of lawsuits.

Toni Straka: "Going out of its way in order not to disclose documents related to the give-away of $2 trillion, the Fed rejected a Freedom of Information Act request by information provider Bloomberg that requested information about the recipients of this sizable addition to taxpayers' burden. Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression. The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests."

Homes in the United States have lost trillions of dollars in value during 2008, with nearly 11.7 million American households now owing more on their mortgage than their homes are worth, real estate website said on Monday.

U.S. homes are set to lose well over $2 trillion in value during 2008, according to an analysis of recent Zillow Real Estate Market Reports.

Home values declined 8.4 percent year-over-year during the first three quarters of this year, compared to the same period in 2007, the reports showed.

Manufacturing activity in the New York area contracted at a record pace in November, the New York Federal Reserve Bank said Monday. The bank's Empire State Manufacturing index fell to negative 25.8 in December from negative 25.4 in November. New orders and shipments were slightly higher, but unfilled orders fell to a record low. Prices paid plunged to negative 7.5 in December from 27 in November.

Almost a third of hedge funds will shut or merge after the $1.5 trillion industry posted its worst ever performance this year, according to IGS Group, which advises hedge funds on raising money.

“The failure rate is going to go up, the closure rate is going up, and the merger rate is going up,” IGS Chief Executive Officer John Godden said in an interview in London. “It’s going to be a 30 percent wipe out.”

Capital One Financial, one of the largest issuers of MasterCard and Visa credit cards, said on Monday credit quality deteriorated in several areas of lending in November, as unemployment grew and the economy eroded. In a regulatory filing, the company said the annual net charge-off rate for U.S. credit cards increased to 6.98 percent in November from 6.54 percent in October, while the rate for loans at least 30 days delinquent rose to 4.70 percent to 4.48 percent.

Wal-Mart Stores' chief executive said on Sunday he sees changes in the habits of the chain's customers as they contend with the recession, and also said Wal-Mart had offered to help the incoming Obama administration with health care and environmental issues.

"The number one issue today is (consumers') concern about their job," Lee Scott said on NBC's "Meet the Press."

"In our pharmacy group, we have increases in prescription drugs, but not at the same rate it was," he said. "What we're seeing is an increase in self-treatment."

While the total amount of U.S. government debt outstanding rose to $10.7 trillion in November from $9.15 trillion a year earlier, the amount of interest paid in the last two months fell by $10 billion, according to the Treasury Department.

The sticking point, which ultimately killed prospects for an agreement, was a Republican demand to set a specific date for cutbacks in auto-worker wages and benefits. Corker says lawmakers were “three words” away from a deal. “Had we agreed on a date, any date that’s reasonable, I think it would have passed the Senate with 90 votes,” he says.

The world’s 50 richest Arabs have lost a staggering $25 billion between them in the last year, as the global financial crisis sweeps through the region.
The figures are revealed in the Arabian Business 2008 Rich List, which will be published on Sunday.

Atmel said it will cut its North American workforce by 11% and implement a 10-day shutdown for non-manufacturing employees, among other planned actions to lower its costs.

The output of the nation's factories, mines and utilities fell 0.6% in November on broad-based weakness across manufacturing industries, the Federal Reserve reported Monday. The production of U.S. factories declined 1.4% in November, despite the resumption of work at Boeing Co. after a strike ended. Mining output rose 2.5% as oil and gas production continued to recover from September's storms. Excluding the rebounds from the strike and the storms, industrial production fell about 1.5% in November, the Fed said. Capacity utilization in industry fell to a five-year low of 75.4% from a revised 76%.

The one-month U.S. Treasury bill yield turned negative in a safe haven bid on Monday, while signals of deflation in a factory index briefly lifted longer maturity government securities prices into positive territory.

The one-month Treasury bill yield turned slightly negative according to data from online fixed income trading platform TradeWeb, showing that investors were paying a fee to keep their money in ultra short-dated government instruments.

Rebecca Wilder: "The budget deficit is already estimated to reach $1 trillion (yes, $1,000,000,000,000) in 2009, and that doesn’t include the $300 billion, no $500 billion, no $1 trillion stimulus plan. When is it okay to worry?

If the only new federal outlays were in relation to the second ECONOMIC stimulus package, then I wouldn't be as worried. However, the U.S. government has already funneled $1.06 trillion into stemming the credit crisis, leaving little wiggle room for Obama's latest $1 trillion stimulus package. Time to worry."

Brokerage firm and investment manager Charles Schwab Corp. said Monday it is cutting at least 100 jobs in an effort to improve operating efficiency.

In Iraq, nearly 150,000 U.S. troops remain in Iraq. More than 4,209 members of the U.S. military have died. In Afghanistan, there are about 31,000 U.S. troops and commanders have called for up to 20,000 more.

RBC Capital Markets shuffled ratings on several oil service stocks on Monday, including an upgrade of sector leader Schlumberger to outperform from peer perform. RBC Capital Markets cited the oil service giant's geographic and product service breadth and said its earnings will decline the least through 2010 relative to its large cap peer group. Schlumberger shares rose 6.4% to $43.69. RBC downgraded Allis-Chalmers Energy Inc., Cameron International, National Oilwell Varco, Noble Corp and Weatherford to sector perform from outperform. Rowan Companies Inc.drew a downgrade to underperform from sector perform on "risks associated with reduced activity and pricing in the offshore jackup market."

The dollar index, a measure of the U.S. dollar against a trade-weighted basket of six currencies, fell 1.4% to 82.02, down from 83.662. "After largely being confined to range trading against the major European currencies in recent weeks, the dollar has broken down," said Marc Chandler, head of global currency strategy at Brown Brothers Harriman & Co. The euro rallied 2.5% at $1.3691, up from $1.3374. The British pound surged 2.3% to $1.5290 from $1.4933.

Crude for January delivery was last down 60 cents, or 1.3%, at $45.68 a barrel on the New York Mercantile Exchange. It had surged 8.1% to $50.05 a barrel earlier, topping the $50 mark for the first time since Dec. 1. The contract jumped 13.4% last week, the biggest weekly rally in four years.

The Dow Jones Industrial Average finished down 65 points, or 0.8%, at 8,564, off an earlier low of 8,469, and a high of 8,676. The S&P 500 index lost 11 points to 868, while the Nasdaq Composite fell 32 points, or 2%, to 1,508.

Crude for January delivery fell $1.77, or 3.8%, to close at $44.51 a barrel on the New York Mercantile Exchange. It had surged 8.1% to $50.05 a barrel earlier, topping the $50 mark for the first time since Dec. 1. Gold for February delivery rose $16 to end at $836.50 an ounce on the Comex division of the New York Mercantile Exchange, the highest closing level since Oct. 15.


12/14/08 China

Kohl's Corp. and Forever 21 Inc. won a joint bid to take over 46 former Mervyns stores for $6.25 million, the companies said Friday. Department-store operator Kohl's will assume 31 of the locations, while trendy retailer Forever 21 will have 15 sites, pending approval by the court overseeing Mervyns' bankruptcy proceedings. Almost all the stores are in California.

The Iranian Oil Ministry says Iran is proposing a cut in OPEC's production of up to 2 million barrels per day.

The ministry's Web site quotes Iran's Oil Minister Gholam Hossein Nozari as saying Iran would push for a production cut of 1.5 to 2 million barrels per day at the organization's meeting in Algeria on Wednesday.

Nozari said Sunday the proposed cut is meant to provide balance to the oil market.

China aims to increase its money supply 17 percent in 2009 and encourage lending to boost domestic consumption and buoy growth in the world’s fourth-largest economy.

M2, the broadest measure, including cash and all deposits, will increase 17 percent, the State Council said in a statement on its Web site. The government will also suspend the issue of three-year central-bank notes and aims to increase total financial-institution lending by 4 trillion yuan ($584 billion) next year, the statement said.

Peter Schiff: "Once the government runs out of foreign and private sector bidders for new treasuries, the Federal Reserve will be the only buyer, and the hyper-inflation cat will be completely out of the bag. Sensing this, the Fed has recently indicated a desire to begin issuing its own bonds. However, since dollars are already recorded as liabilities on the Fed's balance sheet (dollars are in actuality Federal Reserve Notes) the Fed already issues debt. The difference now is that they are proposing to issue interest bearing debt. Perhaps the Fed feels this will make holding its notes more appealing. However, since the interest will be paid in more of its own script, I do not believe this con will work."

Kongsberg Automotive, a Norway-based supplier of automotive, commercial and industrial products, said Saturday that it plans to close facilities in Ohio and Kansas and move production to Mexico as part of a restructuring of its North American operations.

Kongsberg officials said the decisions were a result of the "global automotive market collapse" that has resulted in a steep drop in demand for automotive components especially in North America.

Kongsberg said its Van Wert, Ohio facility will close sometime in the summer and its production will be transferred to the company's Nuevo Laredo, Mexico facility, eliminating about 105 jobs.

The company said it also plans to move its Haysville, Kan. facility's production to its facility in Matamoros, Mexico. The Haysville facility will also close sometime in the summer, affecting about 100 jobs, Kongsberg said.

Natural gas is down 26% year to date versus a 53% decline in oil.

Don't expect an announcement Sunday or Monday from the White House on a possible plan to prevent the collapse of the troubled auto industry. That's the latest word from White House officials. We'll see.

Banco Santander of Spain plans to cut 1,900 jobs in 2009 as it absorbs two acquisitions made this year, the bank said.

The cuts total 8% of the 23,000 jobs at its British business, which includes Abbey National plus the acquired Alliance & Leicester and the savings business of Bradford & Bingley.

In 2009, Honeywell forecasts sales of $33.6 billion to $35.3 billion and earnings per share of $3.20 to $3.55. "Overall, 2008 sales will be up 6%, earnings per share is expected to increase approximately 20%, and free cash flow conversion will be greater than 100% of net income," said Chief Executive Dave Cote said in a statement.

China's industrial output growth slowed to 5.4% in November, easing from 8.2% in October, the weakest pace of gains since Feb. 2002, according to data released by the National Bureau of Statistics Monday.

Japan's Nikkei 225 Average, which slumped 5.6% Friday, soared 4% to 8,561.22 even after Bank of Japan's tankan survey showed business sentiment dropped sharply. The broader Topix index gained 3.4% to 840.78. Australia's S&P/ASX 200 rose 3.5% to 3,633 and South Korea's Kospi jumped 3.5% to 1,141.87, while New Zealand's NZX 50 index rose 0.8% to 2,697.17.

The Bank of Japan's quarterly tankan showed the headline diffusion index for large manufacturers deteriorated at its fastest pace since August 1974, falling 21 points to minus 24. The reading was the weakest in nearly seven years.

Bill Felckenstein: "Stocks may claw upward for now, but the next quarter could be a different story. And while the threat of financial-stock collapses is fading, this brutal recession has far to go."

John Hussman: "In the 11 trading sessions from November 20 to December 8, the S&P 500 gained 20.9% based on end-of-day closing values. It certainly has not felt as if the market enjoyed an advance in excess of 20% from its November low to last Monday's close, but it has been a material gain (from which some retracement is quite possible).

I continue to view the market as undervalued, but clearly 20% less so than a few weeks ago. Of course, a 20% difference is material. While our investment stance remains modestly constructive on the basis of valuation, we have somewhat less exposure to market fluctuations than we had a couple of weeks ago when prices were extraordinarily compressed. What bothers me about the recent rebound is the tepid volume and general lack of leadership. We certainly don't observe market action from any industry group that reveals investor expectations for an economic recovery. The advance we've seen is better characterized as a short squeeze, and a period where investors have “stepped back” from extreme panic, rather than something that reflects investors “looking across the valley to the eventual recovery.”

Sunday, December 14, 2008

Relief Rallies

12/13/08 Relief Rallies

Michael Pento: "This week marked the beginning of what I believe is the manic bubble stage in the nearly three decade long Treasury bull market. On Monday, the U.S. Department of Treasury sold $27 billion of three month bills at a discount rate of .005%. That rate is the lowest since the auction began in 1929. On Tuesday, $30 billion of four-week Treasury bills were sold at 0%! Again, the lowest yield ever recorded for that security.

According to data compiled by Bloomberg, 41 U.S. money market funds have daily annualized yields at or less than .05% including four funds with a yield of zero. If one needed more evidence of this epic bubble, you could find it in the fact that a 2-year Treasury note yields just .8% and a 1 year bill offers a paltry .45% as of today's trading." I never knew a debt printing press could be a safety net offering no monetary return. One is never to old to learn new tricks.

John Mauldin: "There are things in today's markets that are simply astounding. They should not exist, yet they do. Why should US bills trade at negative interest? How can oil be trading at all-time highs in terms of spreads over the next year? Bank debt and bonds are trading at discounts not to be believed. Want some free money? I show you a trade that gives you (almost) just that. Fed funds at zero? Are we starting to push on a string?...

This morning West Texas Intermediate January oil futures prices were (courtesy of Dennis Gartman) $45.80. This rises to $52.28 by just April. A few day's ago, Dennis reports, the spread between the first and fifth futures months had risen to $8.06, the highest ever. When oil was at $147, the spread was an average of $3.25, or about 2.5%. You can buy January 09 crude futures at a stunning 34.5% lower than January 2010.

That means if you could find a place to store that oil, you could lock in a guaranteed 34% profit, less the cost of storage. Sounds like easy money. This is just something that shouldn't be. But what this tells us is that storage for oil is very tight. Oil producers are leasing very large ships to store excess oil, as they cannot find places to store it on land. Storing oil on ships is expensive, so that cost of storage gets figured into the price of oil a year out."

The Federal Deposit Insurance Corporation said late Friday that the Sanderson State Bank of Sanderson, Texas, was closed by the Texas Department of Banking, making it the 25th U.S. bank failure of the year.

Toyota Motor Corp is likely to further cut its earnings forecasts and report an operating loss of about 100 billion yen ($1 billion) in the October-March period, Japanese media reported on Saturday.

George Ure: "Probably middle of next week before we get the complete picture, but already it's clear in some of the early West Coast container traffic reports that things are continuing to deteriorate down on the docks. The Port of Los Angeles reports November outbound traffic was down 12.83% and inbound traffic (e.g. coming to the US) was down 9.69% - worse than October and down 10.4% for the month.

Over the bridge in Long Beach, November container traffic inbound was down 13.6% compared with year-ago figures and worse (from a balance of trade standpoint) the outbound containers were down 23.6% for a fiscal YTD decline of 8.9% and a decline for November of 16.8%

As if that's not enough to kill the trucking business, we notice that the state of California has put in tough new air pollution standards that will cost may truckers their jobs."

The regulations, approved one day after the California Air Resources Board's landmark vote to curb greenhouse gases, require all trucks and buses, whether or not they are registered in the state, to retrofit or replace their rigs starting in 2010.

Air board officials estimate the changes will cost the trucking industry $5.5 billion, causing some truckers to plead for financial assistance. They said they will offer truck owners $1 billion in help.
After hearing public comment for two days, the board voted unanimously in favor of the rule.

According to the WSJ, General Growth Properties Inc. scored a victory in its struggle to manage its $27 billion debt load by refinancing several mortgages coming due, but the mall owner still was negotiating Friday to extend the deadline on a $900 million loan due at midnight. General Growth gave itself some breathing room by retiring $58 million in bonds and refinancing $814 million in mortgages due in 2009. The mortgages and retired bonds were held by a retirement system, according to people familiar with the matter.

The head of OPEC says Russia and three other non-cartel members will take part in the oil producers' summit next week in Oran, Algeria.

Chakib Khelil says Russia will send its deputy prime minister in charge of energy and its oil minister to Wednesday's summit. The other guest countries invited by the 14-member cartel are Oman, Azerbaijan and Syria.

Khelil asserts that a final consensus has been reached by the Organization of Petroleum Exporting Countries to reduce oil output levels.

The OPEC head, who is also Algeria's oil minister, spoke Saturday. Inc., China's leading search engine, is cutting its projected revenue by up to 15 percent after it dropped some advertisers because of a scandal over unlicensed companies selling medical products.

The Fed refuses to grant Bloomberg News's request to disclose the recipients of more than $2T of emergency loans from U.S. taxpayers and the assets it's accepting as collateral. "If they told us what they held, we would know the potential losses that the government may take, and that’s what they don’t want us to know."

Created in 1919, GMAC has lost $7.9 billion in the five quarters ending Sept 30.

While its Residential Capital mortgage unit has been the main source of its troubles, GMAC's auto finance unit is also losing money as more borrowers are missing payments and the value of leased vehicles declines.

Mike Burk: "Although most of the major indices were up last week there was very little strength in the short term indicators.

I expect the major indices to be lower on Friday December 19 than they were on Friday December 12."

Tim Wood: " I see no evidence at this time to say that the November bottom has marked THE bottom or that the bear market is now over. Rather, the now one-year old primary bearish trend that was first established on November 21, 2007 still remains intact and as a result, the Dow theory is still forecasting stormy economic conditions. Here's why. According to Dow theory, once the primary trend is established it is considered to still be in force until something happens to invalidate that trend. To date, nothing of the kind has occurred and I believe, based upon the data at hand today, that there will be continued liquidation in the future as the deflationary forces of K-wave winter continue to bear down...I view any relief rallies from these oversold levels merely as intermission."