Saturday, March 21, 2009

The Debt Trap

3/21/09 A Debt Trap

Doug Noland: "I believe the Bernanke Fed committed a historic mistake this week – compounding ongoing errors made by the Activist Greenspan/Bernanke Federal Reserve for more than 20 years now. I find it rather incredible that Discretionary Activist Central Banking is not held accountable – and that it is, instead, viewed as critical for a solution. Apparently, the inflation of Federal Reserve Credit to $2.0 TN was judged to have had too short of a half-life. So the Fed is now to balloon its liabilities to $3.0 TN, as it implements unprecedented market purchases of Treasuries, mortgage-backed securities, and agency and corporate debt securities. And what if $3.0 TN doesn’t go the trick? Well, why not the $5 or $6 TN Bill Gross is advocating? What’s the holdup? Washington fiscal and monetary policies are completely out of control. Apparently, the overarching objective has evolved to one of rejuvenating the securities and asset markets and inciting quick economic recovery. I believe the principal objective should be to avoid bankrupting the country. It is also my view that our policymakers and pundits are operating from flawed analytical frameworks and are, thus, completely oblivious to the risks associated with the current course of policymaking....In reality, the paramount risk today has very little to do with prospective rates of consumer price inflation. Instead, the critical issue is whether the Treasury and Federal Reserve have set a mutual course that will destroy their creditworthiness - just as Wall Street finance destroyed theirs. Additionally, what are the economic ramifications for ongoing market price distortions?....I would argue that market pricing for government and mortgage finance remains highly distorted – a pricing system maligned by government intervention on top of layers of previous government interventions. These contortions become only more egregious, and I warn that our system will not actually commence its adjustment and repair phase until some semblance of true market pricing returns to the marketplace. Yet policymaking has placed peddle to the metal in the exact opposite direction....once government interventions come to severely distort a marketplace it is a very arduous process to get the government out and private Credit back in (just look at the markets for mortgage and student loan finance!). This is a major, major issue....But seeming “stabilization” will be in response to massive Washington stimulus and market intervention – and will be dependent upon ongoing massive government stimulus and intervention. It’s called a debt trap. The Great Hyman Minsky would view it as the ultimate “Ponzi Finance.”...once the government "printing press" gets revved up it’s very difficult to slow it down. This week currency markets finally took this threat seriously."

Michael Santoli: "This month the swaps market is implying that dividends for the S&P 500 companies would fall to $20.28 per share in 2009 from the $28.39 paid in '08. Then the market is foretelling a further 24% 2010 drop.
If the swaps market is remotely correct, then next year the S&P 500 will yield something close to 2% of today's index value, versus the current stated yield of 3.6%. This is alarming given that more than a third of total equity-market returns since the late 1920s has come from dividends rather than share-price gains."

NY Times: "Industry analysts estimate that the nation’s banks are holding at least $2 trillion in troubled assets, mostly residential and commercial mortgages.
The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.
In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.
In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.
The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending." How much money will the taxpayers lose on this venture? Look at the results from the government takeover of IndyMac Bank. This toxic plan is much riskier.

Let's put that $2 trillion in perspective:
James Quinn: "
The Wall Street geniuses peddled MBSs, CDSs, and CDOs, to pension plans, cities, states, foreign banks, foreign villages, and anyone else who wanted to get in on the easy money. With AAA ratings, no one bothered to conduct due diligence and understand what could go wrong. The amount of derivatives outstanding rocketed from $40 trillion in 2000 to $684 trillion in 2008. It has been reported that 80% of all Credit Default Swaps outstanding in 2008 were speculative. There was no hedging going on. Wall Street had become a Las Vegas casino. Credit default swaps totaling $440 billion were written by AIG. These were pure speculative bets and the American taxpayer is still paying off. The bill is up to $160 billion so far. The executives at AIG must have exceeded their loss goals, because the American taxpayer is paying $165 million in retention bonuses to executives of the unit that nearly collapsed the worldwide financial system. Why would anyone want to retain these executives? If these people were asked, “How do you sleep at night?” they would respond, “On a big pile of cash”."

OptiSolar Inc., which grabbed headlines last year with plans to build a massive solar power plant in California's Central Valley, has stopped its manufacturing operations and will lay off most of its staff.
Low on funding, the company has been searching for a buyer but hasn't been able to find one, said Alan Bernheimer, OptiSolar's vice president of communications.
In all, 200 employees will lose their jobs: 142 at the company's Hayward headquarters and 58 at a second facility just outside Sacramento. Fewer than 100 employees will remain. The company will continue hunting for a buyer and could resume production of its thin-film solar panels in Hayward if someone purchases the operation, Bernheimer said.

For the first time in 15 years, the key measure of annual container traffic there fell, according to data released Friday by the Port Authority of New York & New Jersey. The number of 20-foot equivalent units moving in and out of the port complex dropped by less than 1 percentage point to 5.27 million units in 2008.
The modest decrease was driven by steep declines in the final two months of last year.
Don Hamm, who runs the Port Newark Container Terminal for Ports America Group at the complex, said the slowdown is intensifying.
"I've been in the business for 40 years and I've never seen anything like this," said Hamm, a Ports America executive vice president. "It's extremely painful."
The number of loaded 20-foot equivalent units being exported from the port complex plunged 25 percent in December, while imports dropped 11 percent, according to the Port Authority. November exports were down 10 percent and imports fell 4 percent. Twenty-foot equivalent units are a standard unit of measurement for cargo containers, which come in a variety of sizes.
The steel containers are piling up around the port complex because of the decline in exports.

Boeing issued new 60-day layoff notices today to about 900 employees.

Satyajit Das: "The idea of introducing credit default swaps, which exacerbated the US crisis, is bad. The RBI has been considering the introduction of credit default swaps (CDS) — essentially a form of credit insurance — in the Indian markets for some time now. Recent events, internationally, indicate that these complex and powerful financial instruments frequently have unforeseen consequences for market participants and the financial system. As former New York Federal Reserve President Gerald Corrigan told policymakers and financiers on May 16, 2007: “Anyone who thinks they understand this stuff is living in la-la land.”....
The unpalatable reality is that much of what passed for financial innovation was specifically designed to conceal risk, obfuscate investors and reduce transparency. The process was entirely deliberate. Efficiency and transparency are not consistent with the high-profit margins that are much sought after on Wall Street. Financial products need to be opaque and priced inefficiently to produce excessive profits or economic rents.
In October 2008, Alan Greenspan acknowledged that he was “partially” wrong to oppose regulation of CDS. “Credit default swaps, I think, have serious problems associated with them ,” he admitted to a Congressional hearing. This from the man who on July 30, 1998, stated that: “Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary.”
On March 6, 2009, Bloomberg reported that Myron Scholes, the Nobel prize-winning co-creator of the eponymous Black-Scholes-Merton option-pricing model, observed that the derivative markets have stopped functioning and are creating problems in resolving the global financial crisis. Scholes was quoted as saying that: “[The] solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and … start over…”
The RBI would do well to consider the issues identified in permitting CDS trading in Indian financial markets."

United Airlines said Friday a key measure of revenue would fall 11 percent to 12 percent in the first quarter, one more sign that the recession is hurting air travel.

Tim Wood: "From a Dow theory perspective, we are still operating within the context of the bearish primary trend that was established on November 21, 2007. I also want to remind everyone that according to William Peter Hamilton, on November 21, 2007 the “Stock Market Barometer” forecasted “Stormy Economic Conditions” and today nothing has changed. Therefore, the Dow theory is also currently suggesting that these reinflation efforts are not going to work....As for Dow theory, I want to point you to the following quotes from the great Dow theorist Robert Rhea. “Manipulation is possible in the day to day movement of the averages, and secondary reactions are subject to such an influence to a more limited degree, but, the primary trend can never be manipulated." ....Can the Fed actually hold off K-wave winter or keep the market up forever and ever and create a period of endless prosperity without the market ever experiencing Phase II or Phase III of the bear market? I guess this remains to be seen, but my view is NO."

Publilius Syrus: "A small debt produces a debtor; a large one, an enemy."

Canadian Oil Sands Trust said on Friday it is cutting its 2009 outlook for production from the Syncrude Canada Ltd oil sands venture, the world's largest producer of synthetic oil.
Canadian Oil, the joint venture's largest owner, cut the production forecast to 109 million barrels from 115 million barrels. It said this works out to 40 million barrels of production net to the trust, down from 42.3 million.

A proposal to put the Federal Reserve in charge of market oversight is losing congressional support after its main backer, Barney Frank, said criticism over American International Group Inc. “undercuts” his proposal.
“There’s still a need for a systemic-risk regulator,” Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, said yesterday. “The argument for the Fed alone has lost a lot of political support. I think that’s now got to be re-looked at.”

Friday, March 20, 2009


3/20/09 Government

The United States Of Ponzi: A country that has, for over 25 years, spent more than its income and run an endless string of current account deficits - may eventually default on its foreign debt, Nouriel Roubini says.

Kelvin Throop: "If people behaved like governments, you'd call the cops. "

Peter Cooper: "Buying up your own debt is no more useful than swapping one credit card for another. It is nothing close to sound finance. It is the last act of desperation when there is nothing else left to do."

Louis Brandeis: "Our government... teaches the whole people by its example. If the government becomes the lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy."

"Fiat Group intends to make it absolutely clear that the proposed alliance will not entail the assumption of any current or future indebtedness of Chrysler," the company said in a brief statement.

A “black hole” in the US commercial property market is set to put further pressure on troubled banks, the head of leading private equity firm Apollo Management has warned.
Leon Black, founder of the firm, said the extra costs of cleaning up the US banking industry could total as much as $2,000bn, putting further strain on the economy. He said the woes of the commercial property had not yet been reflected fully on bank balance sheets.

Mark Twain: "It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress. "

Industrial production in the euro zone continued to tumble in January, posting a 3.5% decline from December and dropping 17.3% from the level seen in January 2008, the statistical agency Eurostat reported Friday.

Robert Prechter: "If you're reading the newspapers, you know that companies have been cutting dividends. In fact, they've been cutting them at the fastest rate in half a century. So it is going to be difficult for values to get back to a normal valuation range. So the stock market has quite a bit lower to go in order to catch up with normal values, and this suggests that real estate may have the same sort of trend going on."

Hotel occupancy rates have fallen from 65.5% a year ago to 55.2% in early March, according to Smith Travel Research, a Tennessee firm that tracks the industry. Manufacturing plants ran in February at 67.4% of their capacity, the lowest utilization rate since the Fed began keeping records in 1948.

European steel makers said Friday that one in six workers have lost their jobs or are working shorter hours as demand for steel has collapsed.

Just to illustrate the volatility in various markets, on Wednesday natural gas closed at a 6 1/2 year low at $3.68 and on Thursday, in early trading, UNG, the ETF for natural gas traded at a new 52-week low. By the close, natural gas had risen 52 cents and USO was up over $2 per share.

The Federal Deposit Insurance Corp. said late Thursday that it has completed the sale of IndyMac Federal Bank FSB, the firm it took over last year, and that it took a $10.7 billion loss on the deal.

Fluor Corp. said Friday it received notification from the Kuwait National Petroleum Company to stop work on the al-Zour refinery. Fluor has approximately 300 employees performing engineering work on the project. The remaining contract value of approximately $2.1 billion will be removed from its backlog in the first quarter, the Irving, Texas company said.

A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.
Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Benjamin Lichtenberg: "Democracy: The state of affairs in which you consent to having your pocket picked, and elect the best man to do it."

Sony Ericsson said it would sell barely half of the phones it sold last quarter.

China, the world’s biggest gold producer, will seek to increase its underground gold reserves by 800 metric tons and raise production to 290 tons this year, the Ministry of Industry and Information Technology said. China has foreign exchange reserves of $2 trillion with 600 tons of gold. Last year China consumed 360 tons of gold with output at 280 tons.

The unemployment rate is 11.2% for Veterans.

Baker Hughes said its total North American rig count fell by 102 to 1,244 in the past week, down from 1,346 in the prior week and off by 868 from the year-ago level of 2,112.

U.S. congressional analysts are expected on Friday to forecast even more red ink than expected, a record $1.8 trillion deficit for fiscal 2009, which could complicate President Barack Obama's efforts to pass his $3.55 trillion budget plan for 2010.
The Congressional Budget Office is expected to project a $1.8 trillion deficit for the fiscal year that ends September 30 and then forecast a drop to $1.4 trillion for fiscal 2010, a source familiar with the numbers told Reuters.

$1 Trillion Deficit Seen for Next Ten Years. President Barack Obama's budget would generate deficits averaging almost $1 trillion a year over the next decade, according to the latest congressional estimates, significantly worse than predicted by the White House.

American Express Co shares tumbled 6.6 percent to $12.20 after analysts at Friedman, Billings, Ramsey said the company may post a loss in 2009 and 2010, hurt by growing unemployment levels and rising credit card defaults. They also said American Express may slash its dividend.

Brokers lowered their 2009 profit forecasts for GE.

Trucking company YRC Worldwide will close 11 service centers and this will impact 350 workers.

Gold for April delivery, the most active contract, fell $2.60, or 0.3%, to end at $956.20 an ounce on the Comex division of the New York Mercantile Exchange.

The Bank of Mexico surprised financial markets on Friday by cutting its overnight lending rate by a greater-than-expected 75 basis points, to 6.75% from 7.5%.

General Motors Corp. and Chrysler LLC, which have requested as much as $21.6 billion in additional government aid, may need “considerably” more than that, said Steven Rattner, the Treasury’s chief auto adviser.

The Postal Service is offering early retirement to 150,000 workers.

Banks in Colorado, Georgia and Kansas were closed by regulators, bringing the number of bank failures this year to 20, while the National Credit Union Administration Board seized corporate credit unions in California and Kansas that have a combined $57 billion in assets.

The Dow Jones Industrial Average fell 126.01 points to 7,274.79. The S&P 500 declined 16.96 points to 767.08. The Nasdaq Composite dropped 32.92 points to 1,450.56.

Gordon Ringoen: "The real problem is that the supply/ demand theory is just about totally wrong. This same theory that did not allow the experts to foresee the financial bubble developing is not going to show us the way out of our dilemma. "

Thursday, March 19, 2009


3/19/09 Commodities

The number of people collecting state unemployment benefits jumped by 185,000 to a record seasonally adjusted 5.47 million in the week ending March 7, while new claims dipped by 12,000 to 646,000 in the week ending March 14, the Labor Department reported Thursday. The four-week average of new claims rose by 3,750 to 654,750, the highest level in 26 years. The insured unemployment rate - the proportion of covered workers who are receiving benefits - rose by two-tenths of a percentage to 4.1%, the highest in nearly 26 years.

The recession will continue in the near term, and a return to strong growth is unlikely until next year, the Conference Board said Thursday. The index of leading economic indicators fell 0.4% in February, following a downwardly revised gain of 0.1% in January. The interest rate spread was the largest positive contributor in February, while initial claims for unemployment insurance were the largest negative contributor. "Strengths and weaknesses were roughly balanced" in the index, said Ken Goldstein, economist at the Conference Board. "Financial market volatility remains strong, and the credit market freeze is relenting very slowly."

The Federal Reserve's balance sheet increased 8.7% to $2.041 trillion in the week ended March 18, the central bank said on Thursday. By comparison, the Fed's assets and liabilities were only $870 billion in December 2007.

The dollar index fell 1.4% to 83.04, down from 84.184 in late North American trade Wednesday. It was only days ago that the index was at 88+.It was the largest 2-day decline since 1971.

FedEx Corp.said Thursday that it earned $97 million, or 31 cents a share, in the third quarter. In the same period last year FedEx earned $393 million, or $1.26 a share. Revenue fell to $8.14 billion compared to $9.44 billion. Analysts polled by FactSet Research estimated, on average, earnings per share of 48 cents and sales of $9.01 billion. FedEx says it will continue to implement more cost-reduction initiatives and will take a charge of $100 million in the fourth quarter related to them. In the fourth quarter Fedex expects to earn between 45 cents and 70 cents a share.

MeadWestvaco Corp. said Thursday that its Louisa, Virginia, and Caguas, Puerto Rico, folding carton plants in 2009. Approximately 278 hourly and salaried employees from Louisa and Caguas will be impacted.

Pacific Capital Bancorp said late on Wednesday that it would cut 300, or 22%, of it jobs to cut costs.

Oil rose to $50 a barrel for the first time since January on Thursday after a move by the Federal Reserve to buy government bonds hit the dollar and revived expectations the U.S. economy could soon begin its recovery.

Gannett told analysts that sales at its flagship USA Today could be down as much as 35%

Ten-year yields fell 4 basis points to 2.48%.

Gold for April delivery surged $56.50, or 6.4%, to $945.60 an ounce in early North American electronic trading. Crude oil for April delivery rose $2.86, or 6%, to $51 a barrel in electronic trading on Globex. Earlier, the contract hit an intraday high of $51.65 a barrel. Silver popped 12% to 13.45.

Philly Fed's Business Outlook edges up to -35.0 from February's -41.3, better than consensus for -38.0. The index has been negative for 15 of the past 16 months, and all broad indicators show continued weakness.


John Browne: "In 2000, the published U.S. Treasury debt was a staggering $5 trillion. Today, it is approaching three times that number. If non-public debts and IOU's are included, the national debt amounts to some $55 trillion!...The American public is now in a mood of mounting anger. They know this so-called stimulus amounts to generational robbery. So yes, political will is essential, not to convince the people they are wrong, but to acknowledge that they're right."

The posh Greenbrier resort, which has gone from hosting presidents and royalty to posting losses, filed for Chapter 11 bankruptcy protection Thursday and unveiled a deal to sell itself to hotel giant Marriott International Inc. for up to $130 million. Monthly revenue plummeted approximately 63 percent to just over $1 million in February, from more than $2.7 million in January, according to a financial statement included in the bankruptcy filing. The document puts the resort's pretax loss at $3.74 million in January and $4.96 million last month.

- General Electric Co.'s real estate arm said Thursday its debt-default rate on loans in its portfolio could rise to 10% under adverse economic conditions.

The U.S. Energy Information Administration said natural gas supplies fell by 30 billion cubic feet, slightly above the target of 28 billion cubic feet, but enough to spark a rally in down- beaten natural gas prices and equities tied to that business.

China, the world’s largest iron ore consumer, will press mining companies to cut benchmark prices to below 2007 levels, following a decline in steel prices, said the China Iron and Steel Association.

Caroline Baum: "The hero of Ayn Rand’s “Atlas Shrugged” is smiling because he’s seen it all before: the government’s intervention in the private sector; the constraints placed on business in the name of the people; the desperation on the part of government bureaucrats when they realize their leverage is limited; and -- this part is still fiction -- the decision on the part of business leaders to walk away from the enterprises they built."

"American Express has seen its asset quality deteriorate at a pace that exceeds median levels for the industry," said S&P in a statement.

The head of the Federal Deposit Insurance Corporation said Thursday that the government's strategy in the financial crisis of bailing out huge institutions deemed "too big to fail" must be replaced by a new model.
FDIC Chairman Sheila Bair told Congress a new system of supervision that prevents institutions from taking on excessive risk and becoming so large their failure would threaten the financial system is needed.

Joseph A. Schumpeter: “Capitalism inevitably and by virtue of the very logic of its civilization creates, educates and subsidizes a vested interest in social unrest."

Benchmark crude for April delivery surged $3.47, or 7 percent, to settle at $51.61 a barrel on the New York Mercantile Exchange. Oil prices hit $52.25 earlier in the day, a price last seen on Dec. 1.

Gold for April delivery rose $69.70, or 7.8%, to end at $958.80 an ounce on the Comex division of the New York mercantile Exchange.

Natural gas rose 50 cents to end at $4.18.

Corn, soybeans, and wheat had major up moves on Thursday.

The Dow Jones industrial average fell 85.78, or 1.2 percent, to 7,400.80.
The Standard & Poor's 500 index fell 10.31, or 1.3 percent, to 784.04.
The Nasdaq composite index fell 7.74, or 0.5 percent, to 1,483.48.

Lam Research Corp. will cut 375 jobs, or about 10% of its workforce, by the end of the June quarter, according to a filing with the Securities and Exchange Commission. The chip maker said about 225 of the cuts will be in North America, with the remainder in Asia and Europe.

Copper jumped more than 6 percent, while nickel, lead and zinc also posted sharp moves to the upside.

A total of 5,032 new and resale houses and condominiums changed hands in the Bay Area last month, up 26.1 percent from February 2008, according to a MDA DataQuick report released Thursday. The Bay Area's median price of $295,000 was down a record 46.2 percent from February 2008.
Throughout the Bay Area, 52 percent of existing home sales were properties that had been foreclosed at some time in the last 12 months. That's up from a revised figure of 51.9 percent in January and 22.3 percent in February 2008.
In Alameda County, 46.2 percent of existing homes sales last month were foreclosures while in Contra Costa County that number was 65.1 percent. In San Mateo County, 31.3 percent of existing home sales were foreclosures.

According to AMG Data Services, in the week ending March 18, Equity Fund Inflows $2.2 Bil; Taxable Bond Fund Inflows $3.1 Bil
xETFs - Equity Fund Inflows $117 Mil; Taxable Bond Fund Inflows $947 Mil.

Wednesday, March 18, 2009


3/18/09 FOMC

The FOMC statement: "To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months." Who else would buy our long term Treasury securities? Just the Fed. Let's jump for joy as we monetize our debt! The dollar index , which tracks the greenback against a basket of six major currencies, was at 85.185, compared to 86.471 before the Fed announcement. The Fed stated "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." The Fed said that it would concentrate its purchases between two-year and 10-year Treasurys.

"We could be in for a heck of an inflation," says MarketWatch chief economist Dr. Irwin Kellner, who thinks the Federal Reserve's moves put the economy at long-term risk for short-term gain. Kellner does think there will be short-term gain, though. "The Federal Reserve has used up an awful lot of ammunition," says Kellner. "If there was any doubt the economy was going to recover this year, this should remove it."

A surge in borrower defaults and unemployment pressures will make 2009 an even uglier year for banks than last year, analyst Meredith Whitney said.

A large number of households say that even one missed paycheck would spell financial ruin. And even in households that remain well off, the surveys show a festering fear that financial problems are lurking.
"This is flashing so bright red," said Paul Ballew, senior vice president of Nationwide Insurance Co. "Roughly 60% of the population was ill-prepared (financially) before the meltdown."
A MetLife study released last week found that 50% of Americans said they have only a one-month cushion -- roughly two paychecks -- or less before they would be unable to fully meet their financial obligations if they were to lose their jobs. More disturbing is that 28% said they could not make ends meet for longer than two weeks without their jobs.

The World Bank has cut China's gross domestic product estimate for 2009 to 6.5%, a forecast that falls below the mainland's own projection of an 8% expansion this year.

Real average weekly earnings fell by 0.3 percent in February 2009.

The CPI-U increased 0.4 percent in February after rising 0.3 percent in January.

The Kremlin published its priorities Monday for an upcoming meeting of the G20, calling for the creation of a supranational reserve currency to be issued by international institutions as part of a reform of the global financial system.

The International Monetary Fund should investigate the possible creation of a new reserve currency, widening the list of reserve currencies or using its already existing Special Drawing Rights, or SDRs, as a "superreserve currency accepted by the whole of the international community," the Kremlin said in a statement issued on its web site.

U.S. mortgage applications surged in the latest week, driven by a spike in demand for refinancing as the average rate on 30-year fixed-rate home loans fell, the Mortgage Bankers Association said on Wednesday.

RGE Monitor: "Overview: U.S. credit card defaults rise to 20 year-high. Analysts estimate credit card chargeoffs could climb to between 9 and 10% this year from 6 to 7% at the end of 2008. In that scenario, such losses could total $70 billion to $75 billion in 2009 (Reuters). Meanwhile, the $5trillion in outstanding credit card lines (of which $800bn is currently drawn upon) are being trimmed even for credit worthy borrowers with Meredith Whitney estimating that over $2 trillion of credit-card lines will be cut in 2009 and $2.7 trillion by the end of 2010. Research shows that unemployment is one of the most important drivers of credit card and auto loan loss rates. RGE (Kruettli) estimates that credit card charge-off rate could reach 13% (or $146bn) in the worst case scenario."

The architects' billing index rose in February after hitting an all-time low in January, the American Insitute of Architects said Wednesday. A leading indicator of construction spending, the index rose to 35.3 in February from 33.3 in January. Readings over 50 would indicate more work at most architectural firms. "Despite a higher score than last month, we are likely to see light demand for new construction projects through much of the year," said AIA chief economist Kermit Baker. "There is hope that the stimulus bill will result in more project activity, but that is also dependent on banks easing lending standards in the months ahead."

The Commerce Department reported Wednesday that the current account deficit, which includes investment flows and other transfers as well as trade, dropped 7.9 percent to $673.3 billion in 2008 from $731.2 billion in 2007.

Gasoline inventories rose by 3.2 million barrels in the week ended March 13, the Energy Information Administration reported. Analysts surveyed by Platts had expected a decline of 2.1 million barrels. The EIA also reported a 2 million barrels increase in crude inventories and a 100,000 barrels gain in distillate stockpiles, which include heating oil and diesel.

"Among contacts surveyed at Sherwin-Williams stores, 60% reported lower year over year sales," Longbow analyst Dmitry Silversteyn said. "At Wal-Mart, 70% of survey respondents reported year-over-year declines." As the existing backlog of commercial construction projects come to an end, demand from contractors is likely to decline further, as there are few new projects being initiated, he said.

At $11.80, Cliffs Natural Resources made a new 52-week low. The high is about $122!

S&P 500 Index back above 800 for first time since Feb. 17.

Gold future rose more than 4% to above $920 an ounce after the Federal Reserve surprisingly committed to buy $300 billion in longer-term Treasurys to help the economy recover. Gold for April delivery rose 4.2% to $926 an ounce in electronic trading. Floor trading closed before the Fed's decision, with prices down 3% to close at $889.10.

Crude oil for April delivery fell $1.02 to finish at $48.14 a barrel on the New York Mercantile Exchange. However, in electronic trading the April contract was last up $1.28, or 2.7%, to $49.42 a barrel.

Specialty chemicals maker Chemtura says its U.S. operations have filed voluntary petitions for Chapter 11 bankruptcy protection after a recent drop in order volumes led to a sharp decline in its liquidity and cash flow.

Yields on the benchmark 10-year note declined 47 basis points to 2.54%, the biggest drop since the stock market crashed in October 1987.

The Dow Jones Industrial Average gained 90.88 points, or 1.2%, to finish at 7,486.58. The S&P 500 Index added 16.23 points, or 2.1%, to 794.35. The Nasdaq Composite gained 29.11 points, or 2%, to finish at 1,491.22.

Tuesday, March 17, 2009

St. Paddy's Day

3/17/09 St. Paddy's Day

The Federal Reserve has no option but to start buying Treasurys as the government's needs for financing are huge, but the government bond market is a disaster in the making, Marc Faber, editor and publisher of The Gloom, Boom & Doom Report, told CNBC.

The Financial Accounting Standards Board has proposed allowing companies to use 'significant judgment' in valuing assets in inactive markets or under distressed circumstances. The FASB has been under pressure from lawmakers who feel the fair-value rule, also known as mark-to-market accounting, has made the current financial crisis worse. The board will vote on the proposal April 2 and, if approved, companies will be able to apply the revised rule to their Q1 financial statements.

Mexico placed a tariff on $2.4B of U.S. goods after the U.S. restricted Mexican trucking. The tariff affects around 90 items from 40 states. Mexico's economic minister Gerardo Ruiz Mateos said the measure was taken "for the incompliance of the country in its agreements regarding transport under the North American Free Trade Agreement... That is what is commonly known as measures of retaliation."

At the earlier stages of processing, prices received by manufacturers of intermediate goods decreased 0.9 percent in February after falling 0.7 percent in the previous month, and the index for crude materials declined 4.5 percent following a 2.9-percent decrease in January.
Excluding volatile food and energy prices, wholesale prices increased 0.2%, more than expected.

Foreclosures and bad loans raced through the banking industry in 2008, with the more than 8,000 U.S. banks registering a 149 percent increase in troubled assets, according to a new analysis of bank financial reports to the federal government.

While a large majority of banks were still healthy, 163 ended the year with more troubled loans than capital, up from only 13 a year earlier, according to the analysis of data from the Federal Deposit Insurance Corp. by and the Investigative Reporting Workshop at American University in Washington, D.C.

Weyerhaeuser to close lumber mills and cut 307 jobs.

Nucor Corp. expects a first-quarter loss of 55 to 65 cents a share. Wall Street analysts expected the Charlotte, N.C. steel maker to report a profit of 41 cents a share, according to a survey by FactSet Research. The company cited continued deterioration in economic and market conditions. "The unprecedented speed and magnitude of the global economy's decline to depressed levels not seen in our lifetime have presented severe challenges in 2009," Nucor said. "The economy has fallen off a cliff -- and there is no visibility as to the timing of the recovery."

Boosted by an 82% increase in construction of condos and apartment buildings, U.S. housing starts surged 22% in February to a seasonally adjusted annual rate of 583,000, the Commerce Department estimated Tuesday. Much of the gain was due to better weather. It was the first increase in eight months. Construction of new housing units had plunged 38% in the previous three months before February's unexpected jump. Economists had forecast a further drop to 456,000, despite an expected surge in multifamily construction. Building permits, which are less volatile than the starts data, rose 3% in February to a 547,000 annual rate. Permits for single-family units rose 11% to a 373,000 rate, the largest percentage gain in 18 years.
Even with February's rare burst of activity, housing construction is down a whopping 47.3 percent from a year ago.

Nokia Corp. will cut 1,700 jobs globally as it adapts to reduced demand for its mobile phones.

“It takes massive balance-sheet expansion to generate significant easing in financial conditions,” said
Andrew Tilton, an economist at Goldman Sachs Group Inc. in New York who used to work at the Treasury. “More needs to be done.”
This week’s FOMC meeting could mark a shift toward more aggressive monetary expansion to fight deflation after demand waned for many of the Fed’s existing programs. One top consideration is an increase in the pace and size of a $600 billion program to buy bonds issued and backed by U.S. housing agencies such as Fannie Mae, analysts said.
Other measures could include everything from purchases of Treasuries to corporate bonds, Tilton said.

The number of Americans who think another Great Depression will occur within the next year is on the rise, a poll released Tuesday shows.
Forty-five percent of people questioned in a CNN/Opinion Research Corporation survey said another depression is likely.

As former British Governor of Hong Kong Chris Patten has noted, "China has been the world's largest economy for 18 of the past 20 centuries."

In January, credit card delinquencies and charge-offs breached all-time highs for the second consecutive month and Moody's predicted numbers to increase in later months.

The U.S. risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital, investor
Jim Rogers said. “The U.S. is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings.

Caterpillar Inc. on Tuesday announced plans to lay off more than 2,400 employees at five plants in Illinois, Indiana and Georgia as the heavy equipment maker continues to cut costs amid the global economic downturn.

Gold for April delivery fell $5.20, or 0.6%, to end at $916.80 an ounce on the Comex division of the New York Mercantile Exchange. Crude gains 3.8% to end at $49.16, the highest since Dec. 1.

American International Group paid bonuses of $1 million or more to 73 employees, including 11 who no longer work for the company, according to New York Attorney General Andrew Cuomo.

The Dow Jones Industrial Average added 178.73 points, or 2.5%, to finish at 7,395.7, its highest close since Feb. 19. The S&P 500 Index climbed 24.23 points, or 3.2%, to 778.12. The Nasdaq Composite surged 58.09 points, or 4.1%, to 1,462.11. The VIX dropped almost 3 points to close at 40.80.

G. Allen Brooks: " So far, this rig market correction has lasted 26 weeks, but is continuing and we have lost 905 rigs, or 45% of the peak working rig fleet. At the moment, this rig downturn in terms of the number of working rigs lost is worse than either of the other two rig market corrections, and it has accomplished its damage in considerably less time than the earlier periods. This current rig downturn reminds us of the collapse of energy stocks last fall....However, the magnitude of the U.S. rig count fall has been dramatic. It fell by 788 active rigs, or 61%, from the peak to the end of February. In contrast, the international rig count has only dropped by 88 rigs, or 8%. One has to believe that there is risk of a further decline in the international rig count over the coming months if oil prices remain depressed - at least compared to their levels of the past two years - and show few signs of rising while the credit crisis continues to adversely impact capital availability for all segments of the global petroleum industry and thus their willingness and ability to fund drilling programs... If we assume the international rig count mirrors the U.S. count and retreats to that activity level, there is room for an additional approximately 275 rig drop from February's 1,020 working rig count. While we cannot rule out a decline of this magnitude, our intuition suggests that it is too severe a correction."

Stephen Gandel: "Last week, mortgage giant Freddie Mac said that it had lost $50 billion in 2008 alone. A look at the company's books suggests the government will have to spend at least triple that much to save the financial firm from collapse. If the housing market worsens, the tab could even be larger. "Freddie's portfolio of [mortgage] insurance is more risky than the market was led to believe," says Paul Miller, an analysts at FBR Capital Markets. Sister company Fannie Mae lost even more last year, with $58.7 billion of red ink."

Monday, March 16, 2009


3/16/09 Oil

The Oil Drum: "The world's third-largest oil company [BP], behind Exxon Mobil and Royal Dutch Shell, has reduced its production forecast for the next several years and is reviewing its degree of investment in major projects around the world. spending and exploration costs, BP Chief Executive Tony Hayward has warned. Natural gas prices also have weakened. Hayward estimates oil prices must reach $50 a barrel to cover this year's dividend and $60 to cover the dividend and investment in projects.
BP will continue to pay a dividend, Hayward has said. Although the firm has a large cash cushion from years of profitability, some analysts question his decision."

John Hussman: "The defensive and structural (probably long-term) shift of consumers and businesses toward less borrowing and more saving, combined with aggressive competition to preserve market share, creates a situation where we can expect lower profit margins per unit of production for the foreseeable future."

Agrium Inc.said Monday that it has commenced an exchange offer for all of the outstanding shares of CF Industries Holdings Inc. Under the terms of the offer, CF stockholders would receive $31.70 in cash and 1.0 common share of Agrium for each CF share. Alternatively, CF stockholders have the option of electing to receive for each CF share either 1.7866 common shares of Agrium or $72.00 in cash, subject to proration. "CF's refusal to engage in discussions with Agrium left us with no choice but to take our offer directly to CF stockholders," said Agrium Chief Executive Mike Wilson.

OPEC will focus on completing cuts agreed upon last year, trimming an additional 800,000 barrels per day.

Rigzone: "The IEA, a think-tank for oil-consuming countries, predicts average production of around 600,000 barrels a day at Cantarell in 2009, compared with Pemex' target of 756,000 barrels a day, according to the IEA's monthly Oil Market Report.
Last year Cantarell output fell by one-third to an average of 1 million barrels a day, dragging down overall Mexican production by 9% to a 13-year low of 2.79 million barrels a day.
Pemex continues to shut in wells at Cantarell that produce too much natural gas or water. As the oil layer of the reservoir recedes after decades of exploitation, wells higher up start to pump natural gas, while wells lower down extract more water."

Mexico derives nearly 40% of its revenues from oil. Lower oil production will have a large impact on this country.

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated significantly in March. The general business conditions index fell to a fresh low of -38.2. The new orders and shipments indexes also dropped sharply to new record lows, and the inventories index declined to its lowest level since 2001. The indexes for both prices paid and prices received remained negative for a fourth consecutive month. Employment indexes remained close to their recent lows.

Cisco Systems plans to announce it will start building its own servers, placing the firm in direct competition with long-time partner Hewlett-Packard.

Illinois Tool Works Inc. reported an operating revenue decrease of 21% for the three months ended February 28. The revenue decline for the three months was due to a 20% decrease in base revenues and a 7% fall off in contributions from currency translation. As a result, the company is now forecasting first-quarter earnings per share from continuing operations to be in a range of 8 cents to 16 cents.

In a new CNN/Opinion Research Corp. survey released Monday morning, 36% of people questioned said unemployment is the most important economic issue facing the country today, almost three times higher than the 13% who felt the same way last April. Unemployment is the top economic concern in the new poll. Inflation is second at 20%, followed by the mortgage crisis at 16%, the stock market at 14% and taxes at 11%.

The Federal Reserve reported Monday that industrial output dropped by 1.4 percent last month, slightly worse than the 1.2 percent decline that economists had expected.
The weakness included a 0.7 percent fall in manufacturing output, which pushed the operating rate at the nation's factories down to 67.4 percent of capacity last month, the lowest level on records that go back to 1948.

While the recent surge is encouraging, it's still too soon to be talking about a market bottom, Pimco co-CEO Mohamed El-Erian said Monday.

"If you're intellectually honest, we simply don't know. There are so many moving pieces," the executive at the world's biggest bond fund told CNBC. "The reality is we were overdue for a technical bounce. We're getting it, but it's too early to call the bottom with any conviction."

In early Monday trading, the Dow rose 150 points. At the same time, the VIX moved up to the 43 level and the Nasdaq barely moved into the plus side. By the time the close came around, the Dow closed down 7 points. The S&P 500 index ended down 2 points, or 0.3%, at 753, off a high of 774. The tech-heavy Nasdaq Composite fell 27 points, or 1.9%, to 1,404.

U.S. home builders remained extremely discouraged about their business in early March, according to a monthly survey released Monday by an industry trade group. The housing market index stayed at 9 on a scale of 1 to 100 in March, the National Association of Home Builders said, just above the all-time low of 8 reached in January. The index has been either 8 or 9 in the five months since November. At the current level, the index shows that about one in 12 builders says business is good.

Crude for April delivery closed up $1.10, or 2.4%, at $47.35 a barrel on the New York Mercantile Exchange, the loftiest closing price for a front-month contract since Jan. 6. It was down more than 3% earlier. Gold for April delivery, the most active contract, fell $8.10, or 0.9%, to end at $922 an ounce on the Comex division of the New York Mercantile Exchange.

The Seattle Post-Intelligencer, owned by The Hearst Corp., will stop publishing its print edition and become a Web only news site, the newspaper said Monday. The last print edition of the paper will be published on Tuesday. Hearst said the P-I will become the nation's largest daily newspaper to shift entirely online.

Alcoa said it will lower its quarterly dividend to 3 cents a share from 17 cents, which is expected to save the company more than $400 million a year.
Alcoa also laid out plans to reduce $1 billion in capital expenditure in 2010, bolster working capital by $800 million in 2009 and secure about $1.1 billion in funds via public offering of common shares and convertible notes.


3/15/09 OPEC

Russia says it is sending a permanent observer to OPEC.
The move signals closer ties between the largest non-OPEC producer of oil and the organization accounting for more than a third of world output.

OPEC is pumping more oil than the market can absorb, Iraqi Oil Minister Hussain al-Shahristani said on Saturday.

OPEC members need to fully comply with the group's existing oil production cuts, as the world oil market is oversupplied by between 1.5 million and 1.6 million barrels a day, Venezuelan Oil Minister Rafael Ramirez said Friday.

Bill Fleckenstein: "A bear market rally . . . will be captivating, causing people to believe the worst is over, but will almost certainly be a head fake....For now, investors should be patient and err on the side of not losing money. But it's always worthwhile to keep looking for names you might like to own -- window-shopping, as I described it last week -- and looking for an opportunity to get involved.

A lot of times, the hardest part of investing (or speculating) is doing nothing."

N. Gregory Mankiw: " According to the president’s budget, federal outlays will be 27.7 percent of
gross domestic product in 2009 and 24.1 percent in 2010 — levels not reached since World War II."

Richard Shaw: "Why we think this is a bear market rally:

Given that this is Friday the 13th, citing 13 reasons that the bear will continue in spite of this rally seems appropriate.

Current P/E: the current 20+ P/E on trailing “as reported earnings” is too high for this set of negative sales, earnings and dividends growth conditions.

Forward P/E: the projected 2010 S&P 500 earnings by Standard and Poor’s at about $40 would only support 800 at best (20 P/E), and more likely would support 600 (15 P/E), assuming there was a general recovery under way — before that time, the current market should sell for less than 800, and perhaps less than 600.

Earnings: profits are still declining in the aggregate

Dividend Yield: banks and other companies continue to cut dividends, reducing stock appeal and putting total return in question until dividends stabilize and begin to grow (historically dividends generated about 1/3 of total return for the S&P 500)

Revenue: overall sales are down — declining sales, earnings and dividends are not reasons for bullish markets.

World GDP Growth: credible parties (Goldman Sachs, IMF, and noteworthy individuals, such as Nouriel Roubini, predict worsening global economies) — until forecasts for improvements within 12 months or less for the US or world economies become prevalent, the market is unlikely to “anticipate” with a sustainable trend reversal to a bull

Government Intervention: the US and global economies are currently highly government policy dependent, and while policies are becoming more clear, they are not all revealed, and there are suggestions more may be needed — the resulting uncertainty warrants low valuation until government policies to “save” and “stimulate” economies are no longer the centerpiece of investor hopes and earnings prospects

Real Estate: the US and global real estate asset deflation continues with waves of negative impact on household and institutional wealth — until property prices stabilize, or are believed to be about to stabilize, a new bull market will have difficulty gaining traction.

Other Bank Shoes to Drop: the major banks have not yet experienced likely future write-downs associated with non-mortgage asset types, such as credit cards and auto loans.

Auto Industry: the fate of GM, Chrysler and the entire supply chain is uncertain with unknown government involvement.

LBOs: private equity firms built on leverage may not be able to continue to service and rollover the debt they used to make recent optimistic acquisitions — those debts could be a further burden on the financial sector.

Retirees and Pre-Retirees: the 55 and over crowd who control the largest portion of US private assets are not as likely to risk their life accumulations in stocks relative to bonds as they were in the boom times of the last couple of decades — that will delay the onset of a bull and subdue the extent of a bull when it occurs

Credit Availability: the credit and leverage availability that helped the US stock market recover from the 2002-2003 bottom is not available at this time to increase household expenditures and corporate capital investment — even the US government may be put on credit rationing by China, which today said it is “worried” about the credit quality of their US Treasury holdings, which has implications about their willingness to support the borrowing our “stimulus” programs require and assume to be available."

Even if Chrysler LLC gets additional government loans, it could face another cash shortage in July when revenue dries up as the company shuts down its factories for two weeks to change from one model year to the next, its chief financial officer said.

Baker Hughes to cut 1500 jobs.

G-20 Finance officials pledged “whatever action is necessary” but failed to offer specifics about a coordinated approach.

OPEC says it will keep production levels unchanged. “We decided to leave this unchanged and now it is time to fully adhere to the cuts we agreed upon,” said Qatari Oil Minister Abdullah Bin Hamad Al-Attiyah.

Shareholders in Rio Tinto Ltd/Plc are trying to overturn a controversial $19.5 billion investment in the mining group planned by Chinese state-owned Chinalco, a report said on Sunday.

Switzerland's biggest bank UBS plans to cut up to 5,000 senior and management jobs in the next few weeks, Swiss weekly SonntagsZeitung said on Sunday.