Saturday, March 14, 2009

Government Obligations

3/14/09 Government Obligations

Doug Noland: "The “Flow of Funds” illuminates why the collapse of the Greatest Credit Bubble in history has not yet translated into one of the greater economic collapses. Despite financial panic and the freezing up of Credit markets, Total Non-Financial Credit expanded at a 6.3% annualized rate during the fourth quarter. While down from Q3’s 8.1% pace, I would argue that 6% plus Credit expansion was about the minimum required to forestall systemic implosion. Importantly, this feat was achieved by the federal government expanding borrowings at a 37% annualized rate....For all of 2008, Treasury securities outstanding increased an unprecedented $1.239 TN, or 24.3%. Meanwhile, Agency securities (GSE debt and MBS) jumped $716bn, or 9.6%. Combined federal and quasi-federal securities outstanding ballooned an incredible $1.955 Trillion in just one year. For comparison, Treasury and the Agencies combined to increase debt securities $1.146 TN during 2006, $514bn in 2005 and $240bn in 2004. This ramping up of government Credit growth is outdoing even the historic surge in mortgage Credit during the Mortgage Finance Bubble years....Washington should feel quite fortunate that the markets continue to accommodate such alarming debt expansion at such meager little interest rates. There is little mystery why the Chinese and our other creditors are increasingly disturbed by our government’s borrowing habits.... I am firmly in the camp that believes that Washington is now trapped in a massive inflation of government obligations – the latest round of historic Credit inflation captured clearly throughout the Q4 2008 “Flow of Funds” data. The worst case scenario unfolds when our creditors and the marketplace turn against these government obligations. "

Daniel Aaronson and Lee Markowitz: "The take-home message is that the Federal Reserve can only do so much to instill confidence in markets. So far the Federal Reserve has been working overtime to stabilize fixed income markets. Now that long-term Treasury bonds are falling, the Federal Reserve will be forced to bail out another borrower - the US Government. As the Federal Reserve begins to buy Treasuries, the Federal Reserve will quickly become overwhelmed by its purchases, and all US fixed income prices will fall. At that point, the only option for the Federal Reserve would be to print new money at increasingly faster rates. Likely, it will be too late because the Dollar already will have resumed its decline. Only precious metals and certain foreign currencies will preserve purchasing power as a result of the Federal Reserve's troubled policies."

Iran's oil minister suggested Saturday that a weekend OPEC meeting should decide to cut back on crude output, adding his voice to those in the organization who think supply has outstripped demand.
"There is too much oil on the market," Gholam Hossein Nozari told reporters on the eve of a ministerial meeting of the 11-nation Organization of the Petroleum Exporting Countries.
Other influential OPEC members have also said the group should reduce production.

The EU's top antitrust official called Saturday on banks to show more leadership and come clean about potential losses in order to restore trust in the financial system.

Mike Burk: "During the 1st year of the Presidential Cycle, next week has had negative returns for over 20 years. The other years have not been much better....
The market is overbought from last week's rally going into a seasonally weak week. I expect the major indices to be lower on Friday March 20 than they were on Friday March 13."

Friday, March 13, 2009

Safety In Question

3/13/09 Safety In Question

The U.S. trade deficit narrowed by 9.7% in January to $36.0 billion, the lowest monthly gap since October 2002, the Commerce Department said Friday. This is the sixth consecutive decline in the trade balance, the first since the new data series was started in 1992. Both imports and exports declined in January. The petroleum deficit shrank to $14.7 billion in January, the lowest since September 2004. The U.S. trade deficit with China widened to $20.57 billion in compared with $20.31 billion in the same month last year.

Import prices are down 12.8% in the past year, the largest year-over-year decline in the 26-year history of the index. The 0.2% decline in February was the smallest decline since July, as imported petroleum prices increased 3.9%, the first increase in seven months. Prices received by U.S. exporters fell 0.1% in February, the sixth decline in the past seven months.

Sunoco Inc. said Friday that it will eliminate about 750 salaried positions in 2009.

The International Energy Agency on Friday revised down its forecast for 2009 global oil demand by around 300,000 barrels a day to 84.4 million barrels a day, or a roughly 1.5% fall year-on-year, on a reassessment of demand prospects. The IEA also cuts its forecast for non-OPEC supply growth by 380,000 barrels a day for 2009, following a reappraisal of ongoing problems at Azerbaijan's ACG fields.

China’s Premier Wen Jiabao said he’s concerned about the safety of U.S. government debt. China, the U.S. government’s largest creditor, is asking “the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets,” Wen said today in Beijing.

Credit Derivatives Research's counterparty risk index (CRI) broke through 300bp on 9 March, reaching an all-time high. Eleven index members traded wider (more risky) and none traded lower.

The Organization of the Petroleum Exporting Countries said global demand will fall by 1.01 million barrels per day (bpd) in 2009 to average 84.61 million bpd. Its previous forecast was for demand to contract by 580,000 bpd.

World oil demand is falling for the first time in a generation as the deep global downturn closes factories and brings unemployment to the world's largest economies.

Russian news agencies said Thursday that Vice Premier Igor Sechin would attend the OPEC meeting in Vienna and that his country supports the idea of trimming production.

According to Bloomberg,

the 2010 U.S. census may provide an extra kick to the U.S. economy, just as the effects of President Barack Obama’s $787 billion stimulus plan start to take hold.
The census will put more than 1.4 million people on the federal payroll over the next year, making it the largest peacetime government jobs program ever, according to the Census Bureau. The first 140,000 will start work in April. Most of the rest will be hired early in 2010.
The jobs, though temporary, may ease some of the pain in a labor market where almost 3 million have been put out of work in the last five months. The Census Bureau will spend about half its $14 billion budget for the 2010 headcount on personnel, including jobs that pay $10 to $25 an hour and last several weeks to several months. The workers being hired now will be sent out beginning April 6 to double-check addresses around the country.

Rep. Ron Paul: "Removing governmental power to manipulate money, removes the temptation for government to spend, print and cheat. Sound money ensures that our government’s spending priorities would be brought into sharp focus and reduced to only what we can afford.
Sound money also limits the ability to wage wars of aggression. Imagine how much more careful Washington would have to be about starting a war if they did not have this financial sleight of hand at their disposal! Fiat currency allows government do expensive things they should not be doing while paying the bills with cheap money. The Federal Reserve has lately been auctioning off large amounts of treasury bills as a way to finance the wars in Iraq and Afghanistan, and our crushing entitlement burden. The resulting devaluation of the dollar is quickly eroding our image as a good trading partner in the world. As a consequence, there is therefore more talk of economic isolation and war.
This vicious cycle of spending, fighting and inflating is not what Americans want. It is what the government wants, and it has had to deceive the citizens into allowing and supporting it. Sound money curbs the government’s ability to engage in these shenanigans and reduces the wars we fight to only truly defensive ones, for which Americans are more than willing to stand and fight. So in these ways, sound money is very conducive to peace."

According to AMG Data, for the week ended March 11,
Equity Fund Outflows -$8.4 Bil; Taxable Bond Fund Outflows -$347 Mil
xETFs - Equity Fund Outflows -$8.2 Bil; Taxable Bond Fund Outflows -$872 Mil

Exxon Mobil Corp.’s oil discovery off the coast of Brazil may hold enough crude to rival the nearby Tupi prospect as the Western Hemisphere’s largest find in three decades.
Exxon Mobil’s Azulao-1 well tapped a reservoir that could contain 8 billion barrels of recoverable oil, said Luiz Lemos, a partner at TozziniFreire Advogados, a Brazilian law firm that represents foreign energy companies with projects in the South American nation.

Over the Tues. thru Thurs. period we have had a big equity rally, but little or no participation with Wal-Mart or Costco. These companies reflect the consumer and small businesses.

The Institute of International Finance, a trade group for global banks, cast doubt Friday on a key plank of the Obama administration's plan to rescue the banking system.

President Barack Obama's auto task force has hired a bankruptcy lawyer to help evaluate options for the troubled U.S. auto industry, according to media reports late Friday. The task force reportedly hired Matthew Feldman of New York law firm Willkie Farr & Gallagher LLP.

On Friday, the Dow Jones Industrial Average gained 53 points, or 0.8%, to end at 7,223. For the week, the Dow advanced 9%. The S&P 500 index rose 5.8 points, or 0.8%, to end at 756 on Friday. The broad index jumped 10.7% for the week. The Nasdaq Composite gained 5 points, or 0.4%, to 1,431, ending 10.6% above last Friday's level.

Gold for April delivery, the most active contract, gained $6.10, or 0.7%, to end at $930.10 an ounce on the Comex division of the New York Mercantile Exchange. Crude oil for April delivery fell 78 cents, or 1.7 percent, to settle at $46.25 a barrel at 3:02 p.m. on the New York Mercantile Exchange. Prices have gained 1.6 percent this week and are 3.7 percent higher so far this year.
The 100-day moving average is $47.17. Oil hasn’t settled above the mean of its last 100 closing prices since Aug. 1, when it finished at $125.10. Futures jumped 11 percent yesterday, leaving crude poised for its fourth weekly gain.
“Technically, with a reversal that engulfed two days of losses, the picture is quite strong,” PetroMatrix GmbH said in its report today. “It is back to testing the resistance.”

Thursday, March 12, 2009

The Three Day Rally

3/12/09 The Three Day Rally

Roche Holding AG has struck a deal with Genentech Inc to acquire all outstanding shares in the U.S. biotech group for $46.8 billion, or $95 a share, the Swiss drugmaker said on Thursday.

Signaling persistent labor market weakness, the number of workers filing initial claims for state unemployment benefits rose 9,000 to a seasonally adjusted 654,000 last week, the Labor Department reported Thursday. The smoothed average of new claims over the past four weeks rose 6,750 to 650,000 -- the highest level since October 1982. The number of people receiving unemployment checks in the week ending Feb. 28 rose 193,000 to a record 5.32 million. The four-week average of these ongoing claims increased 124,250 to 5.14 million, also a record high level. Meanwhile, the insured unemployment rate, the proportion of covered workers receiving benefits, rose to 4% -- the highest since June 1983 -- from 3.8%. The data go back to 1967.

Retail sales dropped 0.1% in February, better than the 0.4% decline expected by economists surveyed by MarketWatch. January's sales gain was revised much higher, to a 1.8% gain from the 1% increase estimated a month ago. Sales are down 8.6% in the past year and had declined for a record six straight months before January's surprising gain. Auto sales sank 4.3% in February. Excluding autos, retail sales rose 0.7% in February after an upwardly revised 1.6% gain in January. Economists expected sales excluding autos to rise 0.2%.

Gilead Sciences Inc.said Thursday it offered to buy CV Therapeutics Inc.for $20 a share in a deal valued at $1.4 billion. The Foster City, Calif., pharmaceutical company said it expects the purchase to close in the second quarter and add to earnings no later than 2011, pending shareholder approval. Gilead will pay for CV with cash on hand.

Japan’s economy contracted at the fastest pace since 1974 last quarter as exports, output and business spending collapsed.
Gross domestic product shrank an annualized 12.1 percent in the three months ended Dec. 31, less than the 12.7 percent reported last month, the Cabinet Office said today in Tokyo.

U.S. home foreclosure activity resumed its upturn in February after a brief dip, despite numerous programs meant to quell the record pace of failing mortgages, RealtyTrac reported on Thursday.

Filings, which include notice of default, auction sale or bank repossession, rose 6 percent in February after slipping 10 percent in January, and leaped 30 percent from a year ago, the Irvine, California-based real estate data firm said.

One in every 440 households with loans drew a filing last month, RealtyTrac said. Nearly 291,000 properties in the U.S. got a foreclosure filing in February, the third highest monthly total since RealtyTrac began tracking the data in January 2005.

Chinese oil imports have dropped 13 percent in the first two months of the year while the country's exports plunged 25.7 percent year-on-year in February.
The lower crude oil imports are showing that China is building fewer stocks than a year ago as the capacity as been mostly filled," said Olivier Jakob of Petromatrix in Switzerland. "But the lower crude imports should not be fully extrapolated as an indicator of the state of Chinese petroleum consumption."

Standard & Poor's Ratings Services lowered its long-term rating for General Electric Co. on Thursday to AA+ from AAA, and reaffirmed its stable outlook. For GE Capital, the conglomerate's financial arm, the rating was dropped to A from A+.

Chris Puplava: "The size of existing homes for sale is nearly 4 times the size of new homes for sale. Thus, we can expect housing prices to continue to decline until the inventory of existing homes can be brought down, with the negative wealth effect of falling real estate prices to continue to weigh on the consumers psyche for the foreseeable future...I believe the retrenchment in consumption will take place well into the next decade as consumers learn they can’t count on stock and home appreciation as savings. It will take years to restore their balance sheets to more comfortable levels and actually begin to save. For this reason the U.S. economy faces major headwinds that will not likely abate until the next decade."

The nation's 100 largest corporate pension plans were underfunded by $217 billion at the end of 2008, holding only 79% of the assets needed to cover estimated long-term liabilities. That compares with an $86 billion surplus — 109% of estimated liabilities — at the end of 2007, according to Watson Wyatt, a human resources consulting firm.

U.S. natural gas inventories fall 112 bcf last week: EIA.

Freddie Mac reported yesterday that it lost $50.1 billion last year, almost half of it in the final three months of 2008, and would need an additional $30.8 billion in taxpayer assistance to stay solvent.

Family net worth had hit an all-time high of $64.36 trillion in the April-June quarter of 2007 but has fallen in every quarter since that time.
The record 9 percent drop in the fourth quarter pushed total net worth down to $51.48 trillion, a level that is 20 percent below the third quarter 2007 peak.

Benchmark crude for April delivery jumped $4.70 to settle at $47.03 a barrel on the New York Mercantile Exchange. In London, Brent prices gained $3.69 to settle at $44.88 on the ICE Futures exchange.

Billionaire Warren Buffett’s Berkshire Hathaway Inc. had its top-level AAA credit rating cut by Fitch Ratings, which cited concern about the potential for losses in the insurer’s equity and derivatives holdings.

Dow industrials gain 238 points, up 3.4%, at the closing bell. S&P 500 up 3.9%; Nasdaq up 3.9%.
From the Monday lows, the markets have now gained 12%. The S&P surged 11% since March 9.

Chile's central bank Tuesday evening slashed its key interest rate by 250 basis points to 2.25%.

PPG Industries Inc.said Thursday it will eliminate about 2,500 jobs, or about 6% of its workforce worldwide, to cut costs.

Gold for April delivery, the most active contract, rose $13.30, or 1.5%, to end at $924 an ounce on the Comex division of the New York Mercantile Exchange.

Wednesday, March 11, 2009

Bondholders Beware

3/11/09 Bondholders Beware

The number of completed U.S. foreclosures in February was 121,756, the highest monthly total since the crisis began, according to data from The figure was a 67% increase from the 72,694 reported in January and was also well above the previous monthly high of 104,243 set last September. The number of pre-foreclosure filings also set a new monthly record, rising 24% to 207,703 in February from 166,860 in January.

National Semiconductor Corp.sees sales falling by 5% to 10% sequentially in the fourth quarter. In addition, it plans to cut 850 jobs worldwide and close its assembly and test plant in Suzhou, China and its wafer fabrication plant in Arlington, Texas. The closures will occur in phases over several quarters, eventually resulting in the elimination of an additional 875 positions. National Semiconductor will take a charge of $160 millon to $180 million in related expenses.

Weyerhaeuser Co said late on Tuesday it would indefinitely close four mills and permanently close five service centers, affecting about 480 jobs.

China's exports in February slid 25.7 percent from a year earlier, dwarfing forecasts of a 5.0 percent fall, while imports dropped 24.1 percent, close to projections of a 25.0 percent decline. The drop in exports was the steepest since bankers started keeping records in 1993. The resulting trade surplus was $4.84 billion, a three-year low, compared with $39.1 billion in January and a record $40.1 billion in November, the customs administration said on its website, The drop in the surplus to well below the forecast $27.3 billion figure, sparked broad dollar buying.

In LA, more than 8,800 teachers and other employees of the nation's second-largest school district will receive notices of impending layoffs for the next school year, the Board of Education decided Tuesday.

Rob Hanna: "A 90% day is a day where volume and points are 90% one directional. A 90% up day would occur when 90% of the volume traded and points traded on the NYSE are to the upside....I’ve found 90% days coming directly after a bottom tend to lead to market weakness....Both 1 and 8 days later all of the instances saw the S&P trading lower. Interestingly, while the test went back to 1970, 6 of the 8 instances found have occurred in the last 2 years. Prior to that it was unusual for a 90% day to occur directly following a low."

Neiman Marcus said its loss in the quarter was $32.6 million.
Neiman, which runs both its namesake and Bergdorf Goodman stores, faced a 21.4 percent drop in second quarter sales to $1.08 billion, while same-store sales fell 22.8 percent.
The company has also said that it will cut out or delay some projects to give itself additional liquidity.

Japan's equity market is currently 10.8% of the total global equity market capitalization, according to Standard & Poor's. That compares with the current U.S. equity market weight of 43.2%.

Mike Shedlock: The course of defending the bondholders of insolvent institutions is not sustainable. Do the math. The collateral behind private market debt is being marked down by easily 20-30%. That debt represents about 3.5 times GDP. That implies collateral losses on the order of 70-100% of GDP, which itself is $14 trillion. Unless Congress is actually willing to commit that amount of public funds to defend the bondholders of mismanaged financials so they can avoid any loss, this crisis simply cannot be addressed through bailouts. Bondholders have to take losses. Debt has to be restructured. There is no other option - but the markets are going to suffer interminably until our leaders figure that out.
Bailing out the bondholders is impossible."

The Oil Drum: "The United States consumes 25 barrels of oil per capita, Japan consumes 16, and Korea 15. Interestingly, they all followed a very similar pattern of development. As their economies grew, oil consumption per capita expanded until it found a plateau. Developed economies ultimately become more service-oriented, so it's natural for oil consumption per capita to stop growing with GDP.
How far are China and India from stopping to grow oil consumption per capita? China consumes roughly two barrels of oil per capita. India consumes 0.9.
This would be fine and dandy if China and India did not each contain more than a billion people. But their oil consumption will grow many times in the next 20 years, assuming the global economy does not sink into a black hole. (Let's hope not!) "

A senior Kuwaiti official says OPEC is likely to announce a production cut during its meeting Sunday in Vienna.
Supreme Petroleum Council member Emad al-Atiqi told Kuwait's Al-Seyassah daily in remarks published Wednesday the Organization of the Petroleum Exporting Countries' decision "is expected to be endorsed unanimously due to what is happening with prices."

manufacturingorders collapsed in January as the global recession smothered exports.
Orders plunged 38 percent from a year earlier, the biggest drop since data for a reunified Germany started in 1991, the Economy Ministry in Berlin said today. From December they fell 8 percent, four times as much as economists expected and extending their worst decline on record.

U.S. soybean inventories before the 2009 harvest will be 12 percent smaller than forecast a month ago and the lowest in five years because of rising export demand, the government said.
Supplies on Aug. 31 will total 185 million bushels, down from 210 million projected in February and down from 205 million bushels a year earlier, the U.S. Department of Agriculture said today in a report. Stockpiles were a record 574 million bushels in 2007.

Citi analyst says, “Our revised energy price forecast calls for a barrel of WTI crude oil to average $47 in 2009, $55 in 2010, $60 in 2011, and $65 in 2012.

Gasoline inventories decreased by 3 million barrels in the week ended March 6, the Energy Information Administration reported. Analysts surveyed by Platts had expected a reduction of 1.2 million barrels. Meanwhile, crude inventories rose by 700,000 million barrels, while analysts had expected a decline of 1 million barrels.

Over the last few trading days, the VIX has declined from 50+ to 42+ and continues range-bound.

According to Bloomberg,
Citigroup Inc. and Bank of America Corp.’s bond prices are sliding on concern that owners of debt issued by U.S. financial firms will be forced to swallow losses if the industry needs another bailout.
U.S. bank debt has lost 7.8 percent and yields have jumped to record levels compared with benchmark rates in the past month, even after taxpayers committed more than $11.6 trillion to prop up financial firms. With shareholders almost wiped out at banks like

Citigroup and lawmakers resisting more rescues, holders may be asked to swap bonds for new debt that offers reduced interest rates or lower face values, analysts said.

“The bond market is getting more scared every day,” said

Gary Austin of PDR Advisors in Charlotte, North Carolina, who manages $450 million in fixed-income securities. “At some time, the government is going to say enough is enough, the only way we will give you more cash is if the bondholders have to be hit.”

Dow Chemical Co., the largest U.S. chemical maker, is in talks to revive the commodity-plastics joint venture with Kuwait that the country’s Petrochemicals Industries Co. abandoned last year.
“We are definitely in discussions,” Chief Executive Officer

Andrew Liveris said today in a telephone interview. “I want to downplay expectations because of what happened last time.”

Dow, based in Midland, Michigan, also is talking with two “very interested alternatives” about buying a stake in the basic-plastics unit, Liveris said.

Confidence in the world economy dropped in March as the slump proved deeper than forecast and the Obama administration launched new rescues of financial institutions, a survey of Bloomberg users on six continents showed.

The Bloomberg

Professional Global Confidence Index fell to 5.95 this month from 8.5 in February. A reading below 50 means pessimists outnumber optimists. Sentiment about Europe and the U.S. slid, while respondents in Asia were less pessimistic about their region, the survey showed.

The global economy may shrink for the first time since World War II, with trade collapsing by the most since the Great Depression, the World Bank said this month. The erosion of confidence is exacerbating the decline.

California, South Carolina, Michigan and Rhode Island — registered unemployment rates above 10 percent in January, and the national rate is expected to hit double digits by year-end.

“The country faces grave challenges, both in terms of its short-term economic health and its long-term fiscal future, and working our way out of these difficulties will not happen overnight,” Peter Orszag, director of the White House’s Office of Management and Budget, told Congress yesterday. “Our economy is in a deep recession, which threatens to be more severe than any since the Great Depression.” Corporate tax revenue in the past five months has plunged 45 percent from a year earlier. Individual income tax collections were down 13 percent so far this fiscal year. During the first five months of fiscal 2009, which began Oct. 1, the country’s deficit swelled to a record $764.5 billion for the period, compared with a $265 billion shortfall during the same period a year earlier.

Crude for April delivery ended down $3.38, or 7.4%, at $42.33 a barrel on the New York Mercantile Exchange. The EIA report also showed petroleum demand has been falling. Total petroleum products supplies over the past four weeks, including gasoline, jet fuel and diesel, averaged 19.3 million barrels a day, down by 2.1% from a year ago.

Geithner said the U.S. plan would be ready before President Obama goes to the G20 leaders meeting in early April.Geithner repeated the White House's call that G20 nations enact strong stimulus. Not all G20 nations are as eager as the U.S. to boost spending and take on more debt. Although Geithner did not specify what he had in mind, prior discussion of the IMF's balance sheet has usually focused on the sale of some portion of the international financial institution's substantial store of gold.

Brazil's central bank late Wednesday cut its key interest rate by 150 basis points, to 11.25%, as Latin America's largest economy faces possible recession. The rate now stands at its lowest level since the Selic rate was established in 1996.

Tuesday, March 10, 2009

Buying Protection

3/10/09 Buying Protection

The cost of buying protection against the risk that the United States will default on its mounting debt has surged in the past months, outpacing the rise in corporate-credit costs, now that the government has absorbed more private-sector debt.
The spreads on credit-default swaps for U.S. government debt jumped to 97 basis points Tuesday, nearly seven times higher than a year ago and 60% higher than the end of last year, to a level roughly in line with those of France, according to data supplied by Markit. The spreads also hit a record last week.

Prominent banking analyst Meredith Whitney warned that "credit cards are the next credit crunch," as contracting credit lines will lower consumer spending and hurt the U.S. economy.
Whitney said available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone, and she estimates over $2 trillion of credit-card lines will be cut within 2009, and $2.7 trillion by the end of 2010.
"Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy," Whitney said.
Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon, she said.
Meredith Whitney said Citigroup will have to sell more of its assets to stay in business.

"Trillions of dollars of loans have been mispriced by Citi", said Whitney. "By my math, they don’t make money in any of their businesses."

Whitney says Citigroup will be forced to sell their "crown jewels" if they are going to get any more bailout money from the government. "They're going to have a 'yard sale.' They will be a smaller and less of an international business going forward," says Whitney.

German exports fell 4.4% in January on a calendar and seasonally adjusted basis, with imports falling 0.8%, the Federal Statistics Office reported Tuesday. Against the prior year, exports fell 20.7% to 66.6 billion euros ($84.6 billion) and imports fell 12.9% to 58.1 billion euros. The foreign trade balance showed a surplus of 8.5 billion euros in January 2009. The current account of the balance of payments showed a surplus of 4.2 billion euros in January 2009, according to provisional data from the agency.

China's consumer price index dropped 1.6% in February from the year-earlier period, taking the economy into a deflationary zone, according to official data released Tuesday, media reports said.

The current excessively low oil prices cannot guarantee its long-term stability in the crude market, Secretary-General of the Organization of Petroleum Exporting Countries (OPEC) Abdalla Salem El-Badri said on Friday.

“There has been a strong repricing of credit risk as there is a panic almost about the financial sector,” Brian Yelvington, strategist at Creditsights, says.
“So far, most of the pain of the problems at financial institutions is being taken by shareholders and taxpayers, but there are real concerns that the problems will be so large that the pain will shift to holders of bonds and other securities.”

"Some of these banks are walking dead and should be closed," said Sen. Richard C. Shelby of Alabama, a 20-year veteran of the Senate Banking Committee and its senior Republican. "We are propping up financial institutions that are insolvent and have already failed. The government has made a political decision to keep them going at the taxpayers' expense."
At the other end of the political spectrum, the AFL-CIO Executive Council voted unanimously last week to urge President Obama to nationalize problem banks as a way to stimulate and stabilize the financial system.

Want to restore confidence? FDIC chief Sheila Bair says. Then purge banks' toxic assets, no matter the cost. "This takes courage to do, but if we don't do it, history shows..."

ICSC Research expects same-store sales for March will be flat to down by one percent from the same month of the prior year.

Bill Bonner: "The Dow is down near 6,500. Only 1,500 points to go. At least, that was our guess a few years ago. We figured that the Dow would have to go to 5,000 in order to get down to real bottom prices.
Will the bear market finally be over then? Nope. That’s just where you can begin looking for a bottom. Remember, markets tend to overshoot.
So far, the Dow has wiped out 43 years of gains. Adjusted for inflation, it was at this level back when the Beach Boys and the Beatles were just starting out. Actually, we don’t remember when the Beach Boys and the Beatles began…but it must have been in the md-’60s."

Michael E. Lewitt: " Right now, the network is very sick. When a system is allowed to hide risk for so long, it is ill-equipped to manage that risk when it finally emerges from the shadows....Debt-financed government demand can't be sustained indefinitely, which is why this policy is doomed to fail in the long run. The U.S. balance sheet is not a bottomless pit, although it is increasingly coming to resemble a Black Hole. At some point, the economy will have to generate sufficient tax revenue to pay for this government spending or the country will lose its AAA rating and ultimately become a troubled credit. Economic demand will ultimately have to become savings-driven or it will again collapse."

The latest polling of the American Association of Individual Investors last week found 70% were bearish, the most in the survey's near-22-year history. Bulls totaled only 18%, making the sentiment the most lopsidedly negative since October 1990, a week before a bear-market low.

Richard Russell: "The Dow has lost 7,536 points in less than two years -- all thus without a major correction. Common sense, for what it's worth, tells us that a correction 'should be just around the corner.'

"But something bothers me about all the talk of an impending big, upward correction," Russell continues.

"First, too much is being written about the odds of a near-term, major upside correction. If the expected upward correction arrives, too many advisers are going to look 'smart.' Usually, corrections in bear markets arrive suddenly and when least expected."

A measure of U.S. employment expectations fell to its lowest level since 1982, amid fresh evidence the job market slowdown is rapidly becoming a global phenomenon, according to a quarterly survey by Manpower released on Tuesday.

The staffing services company said its seasonally adjusted net employment outlook for the second quarter of 2009 (April-June) fell to a level of minus-1, from 10 last quarter and 15 in the second quarter of 2008.

The index measures the difference between employers who plan to add jobs and those who plan to cut them.

United Technologies Corp cut its 2009 profit target by about 13 percent and said it would eliminate 11,600 jobs as it no longer anticipates an economic recovery this year.
The world's largest maker of elevators and air conditioners said on Tuesday it expects to earn $4 to $4.50 per share in 2009, lower than the $4.65 to $5.15 per share it previously forecast.

The Commerce Department said total January wholesale inventories dropped 0.7 percent compared to a revised 1.5 percent fall in December, previously reported as a 1.4 percent decline. Inventories were depressed by record drops of 4.8 percent in autos and 3.5 percent in furniture as companies sharply cut back output to deal with slackening demand.
Compared to the same period a year ago, inventories rose 1 percent.
Falling sales lifted the inventory-to-sales ratio, a measure of how long it would take to sell stocks at the current sales pace, to 1.30 months' worth - the highest since a matching reading in January 2002 -- from December's 1.27 months.

The SEC is not planning to suspend the controversial mark-to-market accounting rule that has forced banks to report billions of dollars in asset write-downs, a source told Reuters.

The U.S. jobless rate will reach 9.4 percent this year and remain elevated through at least 2011, threatening the nation’s longer-term growth potential, a monthly Bloomberg News survey indicated.

Brazil’s economy shrank the most on record in the fourth quarter, increasing pressure on policy makers to slash the benchmark lending rate tomorrow for the second straight meeting.
Gross domestic product fell 3.6 percent in the fourth quarter from the previous three-month period as companies cut output and jobs in response to the global credit crisis, the national statistics agency said in Rio de Janeiro.

Fed chief Bernanke says the government will not allow big banks to fail. Citigroup says it has been profitable so far this year.

The Energy Information Administration Tuesday slightly lowered its forecasts for this year and next year's oil prices, citing the ongoing global economic contraction. Oil price will average $42 per barrel this year and $53 next year, the EIA said in a monthly report. The EIA had said a month ago that it expected prices to average $43 and $55 in this and next year. "The global economic contraction continues to depress energy demand," the EIA said in the report.

NEW Zealand central bank Governor Alan Bollard will probably cut the benchmark interest rate to a record low tomorrow in an attempt to steer the economy out of its worst recession in 22 years.
The Reserve Bank of New Zealand will cut the official cash rate by 50 basis points to 3 per cent, according to seven of 13 economists surveyed by Bloomberg.
Three say Mr Bollard will lower the rate by 75 basis points and three predict 100 points.

Iran does not yet have any highly enriched uranium, the fuel needed to make a nuclear warhead, two top U.S. intelligence officials told Congress Tuesday, disputing a claim by an Israeli official.
The Dow industrials added 379.44 points, or 5.8%, to finish at 6,926.49. The S&P 500 Index gained 43.07 points, or 6.4%, to 719.60, and the Nasdaq Composite climbed 89.64 points, or 7.1%, to 1,358.28.

On the New York Mercantile Exchange, crude for April delivery ended down $1.36, or 2.9%, at $45.71 a barrel. Gold for April delivery dropped $22.10 to end at $895.90 an ounce on the New York Mercantile Exchange.

Google captured 72.1% of U.S. searches in February, compared to 66.5% in the same period a year earlier. Meanwhile Yahoo captured 17% compared to 20.6% a year earlier, according to Hitwise. Microsoft captured 5.6% of searches compared 7% a year earlier, while captured 3.7% compared to 4.1%.

The cost of borrowing in dollars for three months in London rose for an 11th day as banks sought cash to cover their commitments through the end of the first quarter.
The London interbank offered rate, or Libor, that banks say they charge each other for such loans climbed two basis points to 1.33 percent, the highest level since Jan. 8, the British Bankers’ Association said. The Libor-OIS spread, a gauge of bank reluctance to lend, increased to the most since Jan. 9.

Treasuries fell as stocks rallied and the Treasury held the first of three auctions this week that will raise $63 billion as concern over unprecedented levels of borrowing reduced demand for the relative safety of U.S. debt.
The record $34 billion sale of three-year notes drew a yield of 1.489 percent, the highest since monthly sales of the security resumed in November. The yield on the 10-year note rose the most in a month. Ten-year note yields increased 15 basis points, or 0.15 percentage point, to 3.00 percent at 5:26 p.m. in New York, according to BGCantor Market Data. That’s the largest increase in yield since Feb. 3.

Monday, March 09, 2009


3/9/09 Mergers

Merck buying Schering-Plough. Merck sees cost savings of about $3.5 billion annually beyond 2011 from the deal. The combined 2008 revenues of the two companies totaled $47 billion, and Merck believes it will maintain its current credit ratings.
"It seems somewhat inevitable," said Jeffrey Holford, analyst at Jefferies in London.
"The industry needs to shrink because there is just not the same market for branded pharmaceuticals going forward as there has been over the last 10 years," he said. "There is overcapacity, and (Merck and Schering-Plough) need to take each other's capacity out of the market."
Under the agreement, Schering-Plough shareholders will receive 0.5767 shares of Merck and $10.50 in cash for each of their shares. Each Merck share will automatically become a share of the combined company.

Senator Richard Shelby, top Republican on the banking committee, said the United States should not mimic Japan, which in the 1990s propped up failing banks and prolonged its economic downturn.
"Close them down, get them out of business. If they're dead, they ought to be buried," Shelby told ABC's "This Week" program. "We bury the small banks. We've got to bury some big ones and send a strong message to the market."

Sterlite Industries, India’s largest metals producer, has said it is to buy the operating assets of bankrupt US copper miner Asarco for $1.7bn, nearly $1bn less than the price it had agreed in November last year.
The deal was renegotiated following a 60 per cent drop in copper prices from the record high of $8,940 a tonne in July, and will catapult Sterlite into the top 10 of global copper producers.
The Indian group – a unit of UK-listed
Vedanta Resources, controlled by Indian businessman Anil Agarwal – agreed to pay $1.1bn in cash and $600m in a senior secured non-interest bearing promissory note over nine years. Payments made on the note could increase if the price of copper exceeds $6,000 a tonne.

According to Citi strategist Tobias Levkovich, 99% of NYSE stocks are trading at or below their 200-day moving averages. "Confidence in future earnings growth is near non-existent based on our analysis and is closing in to near the lows seen over the past 40 years. In this sense, credit conditions and disappointment with policies thus far are trumping the various fiscal and monetary stimuli," he said in a note to clients. Citi is upping the energy sector to overweight from market weight, but cutting pharma and biotech to underweight from market weight.

CF Industries Holdings Inc. said Monday its board of directors rejected a buyout proposal from Agrium Inc. as grossly inadequate. CF Industries also announced its board of directors reaffirmed its plan to buy Terra Industries Inc. Agrium offered about $3.6 billion for CF Industries on Feb. 25. CF Industries closed Friday with a market cap of $2.93 billion.

Capital One Financial Corp. said Monday its board of directors expects to reduce the company's quarterly dividend from 37.5 cents a share to 5 cents a share, beginning in the second quarter of 2009.

U.S. publisher McClatchy Newspapers Inc. said Monday that it will reduce its workforce by 15%, or around 1,600 full-time equivalent employees, and cut wages for remaining staff as part of its previously announced restructuring plans.

Japanese shares gave up early gains to end lower Monday, with the benchmark Nikkei 225 Average ending at its lowest level in at least 24 years. The Nikkei ended 1.2% lower at 7,086.03, the lowest finish in a data series dating back to 1985, according to FactSet. At its latest close, the Nikkei is less than a fifth of its all-time high of 38,915.87, which it touched nearly two decades ago.

Ronald Reagan: “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help."

About 25 percent of the San Francisco region's approximately 16,000 building trades workers are out of work, compared with nearly full employment last year, said Michael Theriault, secretary and treasurer of the San Francisco Building and Construction Trades Council.
"I've received calls from people in other parts of the country about work here, and I tell them not to come," Theriault said.
The city received 5,600 building permit applications in July. In January, it received just over 4,000. More important, the monetary value of the permits, which often indicates the size and complexity of projects, dropped from about $240 million in July to $78 million in January. As a result, the city's Building Inspection Department laid off 48 employees earlier this month.

John Hussman: "I suspect that the markets are about to get volatile, possibly to an extent beyond what we observed in October and November.
The misguided policy response from Washington has focused almost exclusively on squandering public money and burdening our children with indebtedness in order to defend the bondholders of mismanaged financial institutions....The course of defending the bondholders of insolvent institutions is not sustainable. Do the math. The collateral behind private market debt is being marked down by easily 20-30%. That debt represents about 3.5 times GDP. That implies collateral losses on the order of 70-100% of GDP, which itself is $14 trillion. Unless Congress is actually willing to commit that amount of public funds to defend the bondholders of mismanaged financials so they can avoid any loss, this crisis simply cannot be addressed through bailouts. Bondholders have to take losses. Debt has to be restructured. There is no other option – but the markets are going to suffer interminably until our leaders figure that out. "

Barry Ritholtz: " Stocks have lost $11 trillion in market value since the October 2007 peak, according to Marketwatch.
This is based on the Dow Jones Wilshire 5000 index, which includes nearly every U.S.-listed stock. Losses since the start of 2009 are $2.6 trillion. Nearly half of all stocks in the index are now trading at less than $5, and 37% are under $3."

McDonald's cautioned Monday that the stronger dollar and commodity costs will likely squeeze its first-quarter revenue results and margins.
The fast-food chain said it anticipates quarterly sales to be off by at least $600 million and earnings to be hurt by 7 cents to 9 cents per share if foreign currency rates stay at current levels.

The World Bank predicted Sunday that the global economy would shrink in 2009 for the first time since World War II.

The Oil Drum: "Chevron, the second-biggest US oil company, will in the next few months begin large-scale testing of a production technique that could unlock tens of billions of barrels of reserves across the Middle East. The technique, for producing heavy oil that cannot be extracted using conventional methods, will be used in the partitioned neutral zone between Saudi Arabia and Kuwait. Chevron’s plans follow its success in extending its licence from the Saudi government to operate in the neutral zone for a further 30 years."

WTI crude is now trading above Brent crude. U.S. crude for April delivery rose $3.24 to $48.76 by 1414 GMT (10:14 a.m. EDT), a more than 7 percent gain after closing at $45.52 on Friday. Brent was up 75 cents at $45.60

The value of global financial assets including stocks, bonds and currencies probably fell by more than $50 trillion in 2008, equivalent to a year of world gross domestic product, according to an Asian Development Bank report.

Capital spending in the chip industry will fall 45% in 2009, as the semiconductor industry reels from a downturn, Gartner Inc. said Monday. The tech research group forecast semiconductor capital spending of $16.9 billion this year, down from $30.8 billion in 2008.

French oil major Total will reduce runs at its refineries operating in France by about 20 percent due to poor margins as demand for fuel falls, trade sources said on Monday.

Simon Johnson: "Derivatives have the potential to create a
rent-seeking structure that is unparalleled in human history. No society can afford to allow that kind of financial system to operate. Either we figure out how to make it much more transparent - and amenable to outside review - or the re-regulation process currently in the hands of Senator Dodd and Congressman Frank needs to consider more radical alternatives."

Merck traded at a 15-year low. P&G, Oracle, and Cisco made a new 52-month low.

New Zealand house prices fell 8.9 percent in February from a year earlier as a deepening recession deterred buyers.

President Barack Obama’s administration has halted free-trade talks with the New Zealand government, said, citing Prime Minister John Key.
So-called Trans Pacific Partnership talks have been suspended while the U.S. government assesses its priorities, reported the New Zealand-based Web site operated by Fairfax Media Ltd.

According to the WSJ, the board of Genentech Inc. is near a deal to sell the biotechnology company for $95 per share to suitor Roche Holding AG, according to people familiar with the matter.
The two sides were in discussions over the weekend and were close to announcing the transaction on Monday.

The Dow Jones Industrial Average fell 79.89 points, or 1.2%, to 6,547.05. The S&P 500 dropped 6.85 points, or 1%, to 676.53, and the Nasdaq Composite declined 25.21 points, or 2%, to 1,268.64, its lowest close since October 2002.

Crude for April delivery closed up $1.55, or 3.4%, at $47.07 a barrel on the New York Mercantile Exchange, the loftiest closing level for a front-month contract since Jan. 6.

Gold for April delivery fell $24.70, or 2.6%, to end at $918 an ounce on the Comex division of the New York Mercantile Exchange.

White & Case LLP, the New York-based law firm with more than 2,400 lawyers, announced plans to fire about 200 junior attorneys and 200 staffers in response to the decreasing market for legal services.
White & Case also will defer the start date of about 60 percent of this year’s incoming class of first-year attorneys in the U.S. until 2010, the firm said in a statement today. An undetermined number of partners will be laid off in the future, according to the statement.

The Standard & Poor’s 500 Index is likely to drop to 600 or lower this year as the global recession intensifies, said Nouriel Roubini, the New York University professor who predicted the financial crisis.

Sunday, March 08, 2009


3/8/09 Energy

Tony Erikson: "Non OPEC-12 oil production peaked in 2004 at 46.8 million barrels/day (mbd) shown in the chart below. This oil definition includes crude oil, lease condensate, oil sands and natural gas plant liquids. If natural gas plant liquids are excluded, then the production peak remains in 2004 but decreases to 42.1 mbd.
The US Energy Information Administration (EIA) and the International Energy Agency (IEA) should make official statements about declining non OPEC-12 oil production to renew the focus on oil conservation and alternative energy sources.
Annual averages of non-OPEC Production in Mb/day
2002 Average 39,520
2003 Average 40,299
2004 Average 40,989
2005 Average 40,799
2006 Average 40,850
2007 Average 40,838
2008 Average 40,319"

Colin Campbell: "Non-OPEC production fell in 2008 and is likely to decline in 2009. Russia, which accounted for the majority of the increase in non-OPEC production in the past decade contracted in 2008 and will likely do so again in 2009."

Brent Steenbarger: "It's clear that the market patterns since mid-2007 have shifted from those that preceded. Weekly weakness has not been followed by a strong bullish edge and weekly strength has been followed by substantial weakness."

The Oil Drum: "Beneath the frozen plains of eastern Montana and Wyoming lie the largest coal deposits in the world — enough to last the United States more than a century at the nation's current burn rate.
The fuel literally spills from the ground where streambanks cut into the earth, hinting at reserves estimated at 180 billion tons. But even here lawsuits over global warming and the changing political landscape in Washington are pummeling an industry that has long been the backbone of America's power supply.
In recent weeks, a group of rural Montana electric co-ops abandoned a partially built 250-megawatt coal plant, ending a four-year legal campaign by environmentalists to stop the project. The co-ops plan to instead get their electricity from a natural gas plant — more expensive for customers but also more likely to get built.
A few miles away, the U.S. Air Force dropped plans for a major coal-to-jet fuel plant once touted as the harbinger of a new market for coal. There are no signs it will be revived."

I keep thinking back to when Citigroup was trading at $45. Over and over again you could read about the smartest investors owning the stock and how cheap the shares were. Do you remember Bear Stearns trading at $170? Are the smart guys going to bail you out of your losses?
The fight for Genentech has been going on since July. Would you have held on to your shares for this long a period with equities collapsing around you?

Mike Burk: "The market is as oversold as it has been at any time since June 1932. There have been three 20+% rallies since the early October low and another is long overdue, but, the extreme number of new lows suggest a retest so whatever we get will be a bear market rally.
I expect the major indices to be higher on Friday March 13 than they were on Friday March 6."

“The best thing that could probably happen to General Motors, in my view, is they go into Chapter 11,” Senator John McCain said on the “Fox News Sunday” program today.
The automaker could reorganize and renegotiate its labor contracts to come out “stronger, better, leaner,” McCain, from Arizona, said.

Japan's current account balance swung to a deficit of 172.8 billion yen ($1.76 billion) in January as the decline in exports accelerated in the face of a global economic downturn, according to data released by the ministry of finance Monday. The figure is much lower than economists' estimate of a 15 billion yen deficit and comes on the back of a 125 billion yen surplus in the previous month. The deficit is Japan's first in 13 years, according to reports. January exports plunged 46.3% year-on-year, more than the 35.1% decline registered in December, while imports tumbled 31.7%, compared with a 21.2% fall in the previous month.

The Nikkei 225 Average rose 0.5% to 7,209.99, while the broader Topix index slipped 0.1% to 720.88. Other Asian markets also rebounded after falling last week, with Australia's S&P/ASX 200 up 0.7%, South Korea's Kospi up 1.9%, led by shipbuilders and real estate stocks. New Zealand's NZX 50 added 0.2%.

OPEC will limit exports again when the group meets March 15, according to a survey by Bloomberg News.
OPEC states have more of an incentive than ever to restrict output because the combination of declining prices and the global recession will reduce earnings 59 percent this year to $402 billion, according to the U.S. Energy Department. Crude demand will drop for a second year, the first back-to-back decline since 1983, the International Energy Agency said.
OPEC’s cutbacks are “enough to address the surplus,” said Harry Tchilinguirian, the senior oil analyst at BNP Paribas SA in London. “If they do more and try to pursue a price target too aggressively, there’s a risk of over-tightening the market when the economy is weakening, stalling the recovery.”