Saturday, July 03, 2010

Birth/Death Model

7/3/10 Birth/Death Model

Doug Noland: "In the markets, financial conditions continue to tighten, although this flies in the face of conventional thinking that near-zero Fed funds and ultra-low Treasury yields equate to "easy money." Risk aversion is increasingly entrenched, which ensures that "money" is becoming a lot less easy to come by. In particular, the leveraged players continue to be stung - hurt by faltering global risk markets, illiquidity, and acute instability throughout.

And with policymakers - fiscal and monetary - at this point largely hamstrung, one is hard-pressed to fashion a scenario where the leveraged players are anytime soon incited into re-risking and re-leveraging. Over the past couple of months, the speculator community has gone from playing government-induced reflation for all it's worth - to wishing they could somehow unwind long positions and perhaps even go short. When the markets' marginal source of liquidity is in the process of changing from leveraged long to bearishly short, the marketplace faces a period of tough conditions."

The Oil Drum: "When drivers hit the road in large numbers for the Fourth of July holiday, they will have something extra to celebrate — the lowest gasoline taxes since the early days of the automobile.

Holiday drivers will pay less than ever at the pump for upkeep of the nation's roads — just $19 in gas taxes for every 1,000 miles driven, a USA TODAY analysis finds. That's a new low in inflation-adjusted dollars, half what drivers paid in 1975.

Another measure of the trend: Americans spent just 46 cents on gas taxes for every $100 of income in the first quarter of 2010. That's the lowest rate since the government began keeping track in 1929. By comparison, Americans spent $1.18 in 1970 on gas taxes out of every $100 earned.

Although the federal gas tax — 18.4 cents per gallon — hasn't changed since 1993, tax collections are down because today's vehicles go farther on a gallon of gas, cutting tax collections while increasing wear and tear on highways. Inflation since 1993 has eroded the value of the tax to maintain roads."

Utilizing the birth/death model, the BLS stated that 362,000 jobs were created out of thin air in May and June.

Friday, July 02, 2010


7/2/10 Part 2: BP

China's announcement of live-fire exercises in the East China Sea to counter planned joint South Korea-US exercises in the Yellow Sea between the Korean Peninsula and China is an indication that China is more willing to play the military card than it has been before.

BP is understood to be in talks with the state-owned China National Offshore Oil Corporation (CNOOC) about selling its 60pc stake in Pan America. BP is looking to sell $10bn of non-core exploration and production assets, so this potential disposal would mean it would almost hit this target in a single transaction. It is understood that BP has sent its partners in the leaking well huge invoices for their share of the clean-up on June 6, which are due to be paid on Tuesday. Anadarko received one for $272m and Mitsui for $110m. Anadarko has accused BP of "reckless behaviour" and is likely to refuse to bear its share. However, a source close to BP said the company believes that Mitsui may be more compliant.

According to a report early Friday by Bloomberg News, Sanofi's chief executive officer has informed the Sanofi's board that the company was in preliminary negotiations to acquire a U.S.-based drug maker for around $20 billion. Shares of Allergan, Genzyme and Biogen were all up at least 5%.

The Dow Jones Industrial Average lost 46.05 points, or 0.5%, to 9,686.48, with all but four components ending lower. The S&P 500 fell 4.8 points, or 0.5%, to 1,022.58. The Nasdaq Composite fell 9.57 points, or 0.5%, to 2,091.79. For the week, the Dow lost 4.51%, the S&P 500 fell 5.03%, and the Nasdaq Composite sank 5.92%.

Investors in BP expect to see a change in its leadership, with a shake-up possible once the oil giant's leaking well in the Gulf of Mexico is capped, the Financial Times reported on Friday, citing leading shareholders and people close to the group.

A management change, with both Chief Executive Tony Hayward's and Chairman Carl-Henric Svanberg's jobs in jeopardy, could come when BP announces a capital raise, the paper said, citing an unnamed source close to the company.

Without steps to steady the ship, BP could become a target of a takeover attempt from companies like ExxonMobil , Royal Dutch Shell or PetroChina , the FT said, citing a source working on BP's strategy.

Barton Biggs, whose investments in stocks 15 months ago gave his Traxis Partners LLC a 38 percent gain in 2009, said concern the economy will contract spurred him to sell almost all his U.S. technology shares this week.
Biggs said he reduced the proportion of bullish bets in his hedge fund by up to 40 percentage points on speculation the withdrawal of government spending will turn a “soft patch” into a recession. On June 29, Biggs said long investments made up 70 percent of his fund’s holdings.

64,000 Jobs Losses

7/2/10 64,000 Job Losses

Total job growth dropped in June for the first time this year due as a quarter million temporary census workers were laid off, the Labor Department said Friday. Private sector payrolls expanded by a modest 83,000 in June lower than the 115,000 gain expected by economists surveyed by MarketWatch. The unemployment rate dropped to 9.5% in June from 9.7% in the previous month. This is the lowest level since July 2009. There was a sharp 652,000 decline in the labor force in June. Economists had expected the unemployment rate to remain steady.
“The recovery is going to stay more muted than markets had hoped,” David Semmens, an economist at Standard Chartered Bank in New York, said before the report. “Consumer spending will remain constrained during the coming months.” Private employment in June was led by gains in education and health services, transportation and leisure and hospitality. The decrease in census workers left 339,000 temporary employees still working on the survey, indicating more cuts to come that will keep distorting the employment figures for months. Manufacturing payrolls increased by 9,000 in June, the smallest gain this year and less than the survey median of a 25,000 increase. Employment at service-providers decreased 117,000 after rising 420,000. Construction companies cut payrolls by 22,000 after reducing them 30,000 in May. Average hourly earnings fell 2 cents to $22.53 in June, today’s report showed. The average work week for all workers declined to 34.1 hours in June from 34.2 hours the prior month. Manufacturing workweek for all employees decreased by 0.5 hour to 40.0 hours. Temporary help increased +21,000. Birth-death added 147,000 jobs. Take away the 83,000 jobs, and you have a loss of 64,000 non-farm payrolls.

ZeroHedge: " If there was a mean reversion to the last 10 year labor force participation average rate of 66.2%, there should be another 3.5 million jobless added to the 14.6 million tally. And as this differential is the easiest thing in the world for the BLS to fudge, adding the two and dividing by the labor force of 153,74, we get an unemployment rate of 11.8%, leaving aside all other such fudge factors are government hiring, temporary workers, birth death, etc. 9.5% or 11.8% - which one is more realistic for an economy finally realizing it never left the second great depression, you decide."

Earthfiles: " BP's Gulf Oil Disaster Reaching Record-Breaking 140 Million Gallons Since April 22, with Lots of Methane. Report upcoming.

“The levels of methane in the deep Gulf waters that we're seeing are
unbelievably high. I've never seen levels like this in the ocean before.”

- John Kessler, Ph.D., Chemical Oceanographer, Texas A & M Univ.

May Factory Orders: -1.4% vs. consensus of -0.8%. Apr. revised to +1% from +1.2%. Ex-transport -0.6%. Orders for non-defense capital goods excluding aircraft -1.4%.

General Motors' first-half sales in China surpassed those in the U.S. for the first time. GM sales in China totaled 1.21M vehicles - nearly 50% higher than the year-ago period - topping 1.08M sold in the U.S.

"New orders for manufactured goods in May, down following eight consecutive monthly increases, decreased $5.8 billion or 1.4 percent to $413.2 billion, the U.S. Census Bureau reported today. This followed a 1.0 percent April increase. Excluding transportation, new orders decreased 0.6 percent."

China's outstanding foreign debt totaled $443.2 billion as of March 31, a rise of 3.4% from the prior quarter, according to data released by the State Administration of Foreign Exchange on Friday. The agency said of China's debt holdings, about 70% was denominated in U.S. dollars, a rise of 2.2-percentage points on year, while Japanese yen accounted for 11%, a decline of 0.9-percentage point, and the euro accounted for about 5.5%, a drop of 0.9-percentage point on year.

Bank of China's capital adequacy ratio fell to 11.09 percent as of March 31, below the minimum 11.5 percent required according to the China Banking Regulatory Commission.

The Automatic Earth: "In short: banks have enormous funding problems, and even if they can sell debt, they’ll have to pay a lot more to do so, in the same marketplace that's already drowning in sovereign and municipal debt. The ultimate consequence is going to be that not only will your wages, pensions, health care and other services fade and slowly vanish, what's left of your wealth will increasingly be confiscated and handed to a bunch of rich gamblers with political clout."

“The flattening of the yield curve has been the worst kind,” Anthony Crescenzi, a money manager at Newport Beach, California-based Pimco, wrote to clients yesterday. It occurred during “a decline in market interest rates on both ends of the yield curve. Investors have become less optimistic about the outlook for both the U.S. and global economy.” As you may recall, this was my number one recommendation for 2010---flattening yield curve.

BP's Gulf Spill to Drive Down Rig Rates, Create Oversupply. BP Plc’s oil spill in the Gulf of Mexico will drive down rental prices for deep-sea drilling vessels by about 20 percent, analysts say, creating an oversupply of rigs as demand slows.

Bond markets are a bubble waiting to burst because the world economy is facing even worse problems after central banks flooded markets with cash to try to get out of the crisis, famous investor Jim Rogers told CNBC Thursday.

The Reserve Bank of India announced on Friday sooner-than-expected rate hikes of 25 basis points, or 0.25%, to its main lending and borrowing rates in an intra-meeting move. The increase sets the nation's repurchase rate at 5.5% and reverse-repo rate at 4%. In a statement on its Web site, the central bank cited "strong underlying growth momentum," with "robust growth and expanding exports" for its move to tighten monetary policy.

Wednesday, June 30, 2010


6/30/10 Jobs

U.S. private-sector firms created 13,000 more jobs in June, according to the ADP employment report released Wednesday. Job growth was "disappointingly weak," said Joel Prakken, chairman of Macroeconomic Advisers, which produces the report from anonymous payroll data supplied by ADP. Private-sector job growth was revised higher in May to 57,000 from 55,000 earlier. Economists are expecting nonfarm payrolls to fall by 130,000 when the government reports its estimates on Friday, including the loss of some 250,000 temporary workers.

Results from the ECB funding operation showed banks borrowed less than expected, easing concerns over their ability to cope with the repayment of nearly half a trillion euros in 12-month funds on Thursday.

The ECB said 171 banks borrowed 131.9 billion euros ($161.4 billion) over three months at a flat rate of 1 percent, below expectations in a Reuters poll for demand of 210 billion euros.

Companies are selling the fewest bonds since 2004 as rising cash levels let borrowers weather concern that the global economy is slowing.

Offerings fell 39 percent to $1.17 trillion in the first half from the same period in 2009, according to data compiled by Bloomberg. The decline was led by financial companies, which issued 35 percent less debt.

Refinancing drove total U.S. mortgage applications to an eight-month peak, as loan rates fell to or near record lows, but demand to buy homes sank toward 13-year lows last week, the Mortgage Bankers Association said on Wednesday. Refinancing drove total mortgage applications up by 8.8 percent, seasonally adjusted, last week. Nearly 77 percent of all loan requests were for a refinancing, the highest share
since April 2009.

Rob Hanna: "One notable breadth indication that hit an extreme Tuesday is the CBI, which jumped up to 14. I alerted followers of this via Twitter near the close. As I’ve written about and discussed many times in the past, moves to 10 or above have typically been suggestive of a strong bounce within a few days."

"Rightful liberty is unobstructed action according to our will within limits drawn around us by the equal rights of others. I do not add 'within the limits of the law' because law is often but the tyrant's will, and always so when it violates the rights of the individual."
-Thomas Jefferson

Anadarko Petroleum Co. received regular updates from BP about drilling operations on the Deepwater Horizon rig, the Financial Times reported. The firm also approved aspects of the design for the leaking Macondo well, according to the report which cited senior executives.

Goldman Sachs now says that it also used its own money to make secret wagers against the U.S. housing market. A senior Goldman executive disclosed the "bilateral" wagers on subprime mortgages in an interview with McClatchy, marking the first time that the Wall Street titan has conceded that its dealings with troubled insurer AIG went far beyond acting as an "intermediary" responding to its clients' demands.

The Oil Drum: "The UK Department of Energy and Climate Change (DECC) published their quarterly Energy Trends document last week. It covers up to the first quarter 2010. The key points:

* Total energy production in Q1 2010 was 6.5% lower than in the first quarter of 2009.
* Oil production fell by 6% compared to the first quarter of 2009.
* Natural gas production was 9% lower compared with the first quarter of 2009. The UK was a net importer of gas in the first quarter of 2010 by 155 TWh compared with 106 TWh in the first quarter of 2009.
* Coal production was 12.5% lower than a year earlier.
* Nuclear’s supply increased by 1% on the first quarter of 2009.
* Wind, hydro and other renewables supplied 6.5% less electricity than in the same period last year, with hydro down 44% as a result of less rainfall.
* Final energy consumption rose by 4% between the first quarter of 2009 and the first quarter of 2010, with rises in all sectors except transport which fell mainly due to the adverse weather conditions.
* Gas demand was 13% higher than a year earlier.
* Electricity consumption was 2.5% higher in the first quarter of 2010 compared to the same period last year."

Daily Reckoning: "A recent piece in the Telegraph highlights a warning from Andrew Roberts, RBS credit chief, to his clients that Bernanke may soon get going with “monster” quantitative easing.

What’s that in dollar terms? Perhaps up to $5 trillion… a number cited from a Bernanke speech as “pencilled in by the Fed Board as the upper limit for quantitative easing.” There’s only been about $1.75 trillion spent so far, so there could be a lot more money printing in the pipeline."

"Everyone is watching 1040 on the S&P," says Barry Ritholtz, CEO of Fusion IQ. "If those lows hold we'll see a bounce back. But by and large this market is looking much less healthy than it was just three or four months ago." As of midday Tuesday, Ritholtz's firm was 75% in cash and long a handful of names, including BJ Services, Navistar and the ProShares UltraShort QQQ, a bearish hedge. "We're certainly voting with our feet and carrying a lot of cash," he says. "Cash is better than losing money."

Given the S&P 500 is down about 15% after rallying nearly 80% from its lows of March 2009, "it's a little early to say the bull market is over," Ritholtz says. "Gun to my head, I would say this is a regular correction...but it's better to step back and not be involved when things are unclear than just throw a dart and lose money."

The Institute for Supply Management-Chicago Inc. said today its business barometer fell to 59.1 this month, in line with the median forecast of economists surveyed by Bloomberg News, from 59.7 in May.

Abraxis BioScience was the stock of note in early trading. Shares of the biotech group shot up over 20% to $73.04 on news that Celgene Corp. has offered $2.9 billion in cash and stock for the company.

Lower tax revenues and higher federal spending to fight the recession will push the federal debt to 62% of gross domestic product by the end of this year, the Congressional Budget Office predicted Wednesday. CBO also predicted that debt would reach 87% of GDP by 2020 if tax cuts enacted during President George W. Bush's term are extended. The agency also estimated that federal spending on mandatory health-care programs like Medicare and Medicaid will grow to 10% of GDP in 2035 if current laws don't change.

Peter Boockvar: "Bottom line, relative to the monthly increase in the labor force that is needed to be absorbed by job growth, we are in the midst of a 3rd straight jobless recovery."

Economists say the Senate's rejection of another extension of jobless benefits could actually cause more people to quit looking for work, which could push down the US unemployment rate.

ZeroHedge: "Inventories is now at the lowest reading since February 2009. Restocking is now over - no more GDP gains will be seen courtesy of this economic gimmick. "

Nearly one out of every three US home sales in the first quarter was a foreclosure property as steep price discounts boosted demand for distressed real estate, RealtyTrac said in a new report on Wednesday.

Sydney Morning Herald:

"Banks around the world must refinance more than $US5 trillion ($5.8 trillion) of debt in the coming three years, a massive rollover that poses threats to financial stability and growth.

The need to replace these funds, which are medium and long term, will place pressure on bank profit spreads and in turn may either prompt deleveraging, where banks sell assets that they can no longer economically finance, or simply lead to a bout of credit rationing, where borrowers must pay more to borrow, thus crimping investment and economic growth…

US banks have issued $US230 billion of debt in the first five months of the year, about 60 per cent of the rate they need to achieve over the three year period. Euro zone banks have issued $US133 billion, or about 70 per cent of their needed run rate.

One easy to see consequence is that, all things being equal, the cost for banks to issue debt should rise, as should competition among banks for consumer deposits. It is possible that a global desire to save more helps to blunt this effect, but even so the macroeconomic effect and the effect on asset prices will both be strongly downward." ZeroHedge believes the refinancing number is $15 trillion!

As the Afghan war's bloodiest month for Western forces drew to a close Wednesday, the widening scope and relentless tempo of battlefield casualties pointed to a formidable challenge for U.S. Army Gen. David H. Petraeus, the incoming commander.
At least 102 coalition troops were killed in June in Afghanistan, according to the independent website, far surpassing the previous monthly record of 76 military fatalities in August 2009.

Moody's Investors Service said Wednesday that it may downgrade the Aaa sovereign ratings on Spain because of deteriorating economic conditions. Moody's said that it may cut the ratings by one or two notches at the most. "Spain's growth prospects are weaker than those of other Aaa-rated sovereigns," said Kathrin Muehlbronner, a Moody's vice president and lead analyst for Spain, in a statement. "In the short term, the government's accelerated fiscal consolidation combined with the higher borrowing costs currently facing the government, consumers, and businesses will likely depress growth."

Wal-Mart Stores Inc., the world’s largest retailer, plans to sell $3 billion of debt in its biggest dollar-denominated bond offering since April 2008, according to a person familiar with the transaction.

The offering comprises $750 million of 5-year debt that may yield 53 basis points more than similar-maturity Treasuries, $1.5 billion of 10-year notes that may yield 70 basis points more than benchmarks, and $750 million of 30-year bonds may pay a spread of about 108 basis points, the person said. Proceeds will be used for general corporate purposes, the person said.

China June official PMI at 52.1 vs 53.9 in May.

The Nikkei fell 1% to 9,284.9 in the early minutes of trade, while the broader Topix lost 0.8% to 834.3, despite a surprise positive reading in the central bank's quarterly survey of large manufacturer sentiment. The Bank of Japan's quarterly tankan survey of business sentiment released Thursday showed that the diffusion index for large manufacturers improved more than expected to a positve reading of 1, beating the forecast of minus 4 predicted by economists surveyed by Dow Jones Newswires, and rising from minus 14 in the March survey. The headline figured improved for the fifth straight quarter, and was greatly improved from the record-low reading of minus 58 in the March 2009 tankan.

The Dow Jones Industrial Average (INDU) fell 96.28 points, or 1%, to 9,774.02 on Wednesday. The S&P 500 index fell 10.53 points, or 1%, to 1,030.71, while the Nasdaq Composite fell 25.94 points, or 1.2%, to 2,109.24. For June, the Dow industrials fell 3.6%, the S&P 500 fell 5.4% and the Nasdaq dropped 6.6%. For the second quarter, the Dow lost 10%, marking its first drop after four straight quarters of growth. The S&P 500 fell 11.9% and the Nasdaq slumped 12% during the quarter, with the two indexes posting their worst quarter since Dec. 2008.

ZeroHedge: " ICI has just reported $1,248 million in outflows from domestic equity mutual funds: this is the eighth sequential week of outflows since the Flash Crash, and a period during which $32 billion has been redeemed."

Tuesday, June 29, 2010

Treasury Yields

6/29/10 Treasury Yields

The yen rallied as a 2 percent fall in European shares .FTEU3 raised the safe-haven appeal of the Japanese currency, along with the Swiss franc and the dollar, while the high-risk Australian and New Zealand dollars took a beating.

"Equity markets are weak, so there's been a reasonably large reverse in risk-taking behavior," said Daragh Maher, senior currency strategist at Credit Agricole.

"It's been an amplified reaction, due to limited liquidity, and it will be difficult to tell how far the selling will extend."

By 0944 GMT, the euro had fallen more than 1.5 percent on the day to 107.80 yen according to trading platform EBS, its weakest since late 2001. It fell to 1.3250 francs the lowest since the single currency's 1999 launch.

The Swiss franc has gained broadly since the Swiss National Bank earlier this month backed off its pledged to intervene in the currency market to stem franc strength.

Against sterling, the single currency fell to 80.92 pence, its weakest since November 2008. It fell roughly 0.7 percent on the day to a two-week low of $1.2178, according to Reuters data.

Strikes in Greece and Spain highlighted resistance to Europe-wide austerity measures on Tuesday as the euro and shares tumbled ahead of a deadline for banks to repay a giant European Central Bank cash injection.

The fifth major strike this year by Greek unions disrupted tourism and public transport in protest at planned pension cuts and later retirement, while Spanish workers shut down Madrid's metro system in anger at a 5 percent public sector pay cut.

The risk premium on southern European government bonds over benchmark German bunds widened and the cost of insuring their debt against default rose as investors adjusted to the wider repercussions of the Greek debt crisis on the financial system at the end of the quarter, a traditional stress point.

The Conference Board Tuesday said its leading economic indicator for China rose 0.3% in April, correcting a previous reading of 1.7% increase and attributing the earlier reading to a "calculation error." The 0.3% reading represents a sharp fall from the 1.2% rise recorded in March.

Japanese Finance Minister Yoshihiko Noda said Tuesday that the nation's tax revenues will likely be 1.9 trillion yen ($21 billion) more than previously expected in the fiscal year that ended in March, totalling 38.8 trillion yen, according to published reports. Noda addressed reporters at a regular news conference after a cabinet meeting. Ministry figures also released Tuesday showed that the government sold a smaller amount of bonds than estimated last fiscal year. Due to the higher tax revenue, Japan's bond sales likely amounted to 52 trillion yen, 1.5 trillion yen less than forecast.

Japan's industrial production slipped in May, as did household spending, and the unemployment rate unexpectedly increased, all of which suggest Japan's economic recovery is slowing down.

First-time buyers purchased 46% of existing home sales in May, down from 49% in April.

Tropical Storm Alex, the first named system of the Atlantic hurricane season, strengthened today, forcing the evacuation of rigs in the Gulf of Mexico and pushing swells toward the worst U.S. oil spill.

The storm, packing maximum sustained winds of 70 miles (110 kilometers) per hour, was 460 miles southeast of Brownsville, Texas, before dawn today, moving north-northwest at 8 mph, the U.S. National Hurricane Center said in an advisory. The circulating winds were near reaching hurricane status of 74 mph.

The Economist: "Rising government debt is a Ponzi scheme that requires an ever-growing population to assume the burden -- unless some deus ex machina, such as a technological breakthrough, can boost growth. As Roland Nash, head of research at Renaissance Capital, an investment bank, puts it: "Can the West, with its regulated industry, uncompetitive labour and large government, afford its borrowing-funded living standards and increasingly expensive public sectors?"

Treasuries advanced, pushing two- year yields to a record low and 10-year yields below 3 percent for the first time since April 2009, amid concern European governments’ attempts to rein in debt will hinder growth.

BP is currently drilling two relief wells from rigs that are each about a half-mile from the site of the blown-out well. The first well is about a thousand feet vertically from the interception point and more than 17,000 feet below sea level. The second well, which was started about two weeks later than the first, is not as far along, and Mr. Wells said Monday that if the first well succeeded in plugging the gusher, drilling of the second would be halted.

Bloomberg: "Rather than forcing banks to spin off all derivatives trading as separate businesses -- preventing them from gambling with depositors’ money -- Congress will let them keep trading the instruments if they are hedging their own risks or for interest rate and foreign exchange swaps.

They will have up to two years to move derivatives that can’t be traded through a clearing house, including credit default swaps, into a separately capitalized subsidiary."

"The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7% in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40% in a month."

Today in Texas, one in five people struggle to feed themselves and one in five children live in poverty, according to the Center for Public Policy Priorities in Austin, founded by Benedictine nuns.

Sol Palha: "The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history. The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of institutional money market funds fell at a 37pc rate, the sharpest drop ever. "It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.

Executives from oil and gas companies on Monday concluded an hour-long meeting with U.S. Interior Secretary Ken Salazar without securing promises from the government to lift a deepwater-drilling moratorium imposed after a disastrous BP oil spill.

Crude oil for August delivery fell $2.45, or 3.1%, to $75.80 a barrel. Gold for the same month lost $1.60, or 0.1%, to $1,237.00 an ounce.

Home prices rose 0.8% in April compared with March in 20 major U.S. cities, according to the Case-Shiller home price index released Tuesday by Standard & Poor's. This is the first increase after six straight monthly declines. Prices have moved up 3.8% in the past year. Prices rose in 18 of the 20 metropolitan areas tracked by Case-Shiller in April compared with March. The gains highlight the impact of the federal tax credits for homebuyers. Buyers rushed to purchase before the tax credits expired at the end of April.

Nationally, prices have risen 3.8 percent from their April 2009 bottom. But they remain 30 percent below their July 2006 peak. "Inventory data and foreclosure activity have not shown any signs of improvement," David Blitzer, chairman of S&P's index committee, said in a statement. "Consistent and sustained boosts to economic growth from housing may have to wait to next year."

According to Florida Trend magazine, more than $3 billion in “Dirt Bonds” are in default. Dirt bonds are municipal bonds used to fund the development of streets, water lines, and other utilities for the many new communities that were planned during the real-estate boom years in Florida. Dirt bonds are backed by the taxing power of Community Development Districts (CDD) that manage the construction and development of communities. Interest payments are made to investors from reserves set aside until homebuyers and businesses move in to completed houses, office buildings, and strip malls, etc. Then annual taxes are collected, typically escrowed at banks holding mortgages on the properties. The bondholders get their interest payments from collected CDD taxes. An incomplete development doesn't have a tax base to pay bondholders.

The S&P is down sharply but still above the 1041 support level.

FMX Connect: "Natural gas prices gave back 14.4 cents on Monday, after having rallied just slightly more than 11 cents on Friday. That tells us that prices had started to discount Alex before it was even named. It also tells us, with yesterday’s activity, that the reaction was overdone. Traders were covering shorts on Friday, and it looks like huge numbers of covered contracts were matched by almost equally hurried selling, all ahead of Monday’s July contract expiration."

2-year treasury has just hit fresh all time low at 0.586%.

Reuters reports that Russ Feingold "said on Monday that he will not vote to advance the financial-reform bill." With this decision the senator is denying "his fellow Democrats the 60th vote they need to clear a final hurdle in Congress."

"My test for the financial regulatory reform bill is whether it will prevent another crisis," Feingold said in a prepared statement. The bill "fails that test and for that reason I will not vote to advance it."

U.S. consumers are increasingly worried about jobs and the economy, the Conference Board said Tuesday, as it reported that its consumer confidence index plummeted to 52.9 in June - the lowest level since March -- from a downwardly revised 62.7 in May. "Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence," said Lynn Franco, director of Conference Board's consumer research center. "Until the pace of job growth picks up, consumer confidence is not likely to pick up." Earlier this month the government reported that nonfarm payrolls grew by a seasonally adjusted 431,000 in May, but most of the new jobs were temporary jobs at the U.S. Census, with very weak private-sector hiring.

Yves Smith: "While the headline focuses on her outlook for housing, Meredith Whitney is bearish across the board, seeing little reason to cheer on the employment and bank earnings fronts. She sees a 10% fall in housing prices in the next six months (!), which will hit bank earnings (Whitney has argued since at least early 2009 that banks have been goosing earning by underreserving for losses) and the economy generally (a further decline in home equity plus lack of mobility of consumers wanting to sell their houses but facing a declining market has implications for consumer spending generally). She point out that consumer credit is tightening, which puts a crimp on small businesses (both via lower revenues and via restricted access to funds), the biggest engine of hiring, and on top of that, municipalities and states are cutting spending and shedding jobs."

Charles Hugh Smith: "A significant percentage of the U.S. trade deficit is due to importing petroleum. Minus out the oil imports, and we see that the U.S. imports have fallen considerably...U.S. policy pursues the goal of expanding exports to reduce the trade deficit. Desperate exporters might find the global market for their goods has shrunk, which means their domestic economies are vulnerable to a slowdown in exports."

BP Plc Chief Executive Officer Tony Hayward has the backing of the board and is not about to resign, according to Iain Conn, the oil company’s head of refining and marketing.

1-year Treasury at 1/4 of 1%!

Apple Inc. Chief Executive Officer Steve Jobs is due to attend the annual Allen & Co. media conference in Sun Valley, Idaho, giving him a chance to court executives he needs to add content to his company’s products.

China will cut duties on fuel oil, copper foil and about 500 other Taiwanese goods, underscoring the success of Taiwan President Ma Ying-jeou’s two-year drive for rapprochement between the civil war foes.

The Oil Drum: "As of 7am ET, Alex is just short of hurricane strength, moving slowly northwest, and continues to develop slowly. It should be declared a hurricane later today. Track guidance has consolidated somewhat, with most of the reliable models showing landfall in northern Mexico or South Texas. Hurricane Warning are now up for these coasts (Note that this year Warnings are issued at 36 hours - in previous years, a "warning" was not issued until the storm was 24 hours out). A turn more westward is anticipated today or tomorrow. There is still some uncertainty as to when and how sharp that turn will be."

BP pays U.S. first $69 mln over Gulf spill.

Liquefied natural gas tankers parked off Fujairah in the United Arab Emirates are storing the equivalent to about three months of China’s average purchases, signaling an oversupply in the market.

About 43 percent of the total capacity of tankers in the Gulf of Oman are holding LNG, Pan EurAsian Enterprises Inc. said in an e-mail yesterday, citing data from Odysseus tracking service. That’s equivalent to about 1.4 million metric tons of the cleaner-burning fuel. China imported 7.63 billion cubic meters, or 5.6 million tons, last year, according to BP Plc’s Statistical Review of World Energy 2010.

An oversupply of gas and weak demand have sent spot charter rates to the cheapest in five years, prompting producers and traders to take advantage of the low charges to store the fuel. Qatar, the world’s biggest producer of LNG, was idling at least eight tankers in the Gulf of Oman as of June 3, according to ship-tracking data from AIS Live Ltd. The vessels have a combined capacity of 1.8 million cubic meters, enough to supply the U.K. for more than a month.

China's first oil recovery vessel to deal with offshore oil spillage has made its maiden voyage in Tianjin on Tuesday to start its environmental protection mission in the country's waters.

The vessel, the first of this kind in China with a name "Offshore Oil 252", could clean up oil pollutions happening during the offshore oil production and also serve as a fire-fighting vessel in an emergency.

President Barack Obama says he expects Congress to pass a financial regulation bill even without the vote of the late Democratic Sen. Robert Byrd.

The Dow Jones Industrial Average fell 268 points, or 2.7%, to 9,870.30, its lowest close since early November. The S&P 500 index lost 33.33 points, or 3.1%, to 1,041.24, its lowest level since late October. The broad index was weighed down by a 3.9% drop in both its industrials and financials sectors. The tech-heavy Nasdaq Composite was the hardest hit of the three major averages, slumping 85.47 points, or 3.9%, to 2,135.18.

Prior to the close the S&P did not hold the 1041 level even though it closed there.

Oil for August delivery lost $2.31, or 3%, to $75.94 a barrel. Natural gas for August delivery retreated 19 cents, or 3.9%, to $4.54 per million British thermal units.

U.S. companies may be required to secure as much as $1 trillion due to a change in the wording of the financial reform bill currently being finalized in Congress, according to the International Swaps and Derivatives Association Tuesday. The group said companies will need a combined $400 billion for collateral to cover the current exposure of their over-the-counter derivatives transactions and another $370 billion in additional credit capacity to cover potential future exposure of those transactions. "If markets return to levels prevailing at the end of 2008, additional collateral needs would bring the total to $1 trillion," said ISDA in its report.

The American Petroleum Institute on Tuesday reported a decline of 3.4 million barrels in the nation's oil stockpiles in the week ended June 25. The Washington-based trade group also reported that gasoline stockpiles fell by 908,000 barrels while oil distillates rose by 3.98 million barrels. The refinery run rate slipped to 86.9% compared with 87.2% in the week ended June 18. A Citibank analyst had projected crude stocks to fall by 1 million to 2 million barrels and gasoline supplies to either fall or rise by 500,000 barrels. Distillate supplies were expected to rise by 1 million to 2 million barrels and the so-called run rate was projected to remain unchanged at 89.4%. The API data comes ahead of the more closely watched report by the Department of Energy, which will be released Wednesday at 10:30 a.m. Crude for August delivery fell 0.2% to $75.82 a barrel in electronic trading after the contract closed with a 3% loss to $75.94 in floor trading.

ZeroHedge: "June 29 ended up joining a list of such memorable dates as The Bear Stearns Crash, the May Flash Crash, the Lehman Crash, and the March 2009 666 crash: based on the TRIN/ARMS index, the NYSE index hit 5.88. It has been higher on just 4 other times before, specifically the four dates noted above. The indicator tracks up/down stocks divided by up/down volume on the NYSE -the higher the number, the greater the rush into decliners. Today's reading indicated that on the NYSE people could not get enough of selling, and in size. What is more worrisome is that in the last two months, we have seen an amplitude in the TRIN that has never occurred before: it has approached 0 (on low-volume melt up days), all the way to 12+ on 5/6 and nearly 6 today. This simply means that, as we have been claiming for a long time, there is increasingly less liquidity in the market. And we are talking real deep liquidity, not the churn BS that HFT algos do in Citi and now Tesla (thank you Goldman), and then, oops, drop all bids when something odd happens on 8,800 shares and the NYSE has to come in, bail out the market, and in the process derail the order flow of millions of shares of pent up supply and demand. A few more episodes like that and there will no demand and a lot of supply."

Monday, June 28, 2010

Challenging Downturn

6/28/10 Challenging Downturn

John Hussman: "Based on evidence that has always and only been observed during or immediately prior to U.S. recessions, the U.S. economy appears headed into a second leg of an unusually challenging downturn....Based on our standard valuation methods, the S&P 500 Index would have to drop to about 500 to match historical post-war points of secular undervaluation, such as June 1950, September 1974, and July 1982. We do not have to contemplate outcomes such as April 1932 (when the S&P 500 dropped to just 2.8 times its pre-Depression earnings peak) to allow for the possibility of further market difficulty in the coming years. Even strictly post-war data is sufficient to establish that the lows we observed in March 2009 did not represent anything close to generational undervaluation. We face real, structural economic problems that will not go away easily, and it is important to avoid the delusion that the average valuations typical of the recent bubble period represent sustainable norms."

BP said the costs of cleaning up the Gulf of Mexico oil spill, including the cost of the spill response, containment, relief well drilling, grants to the Gulf states, claims paid, and federal costs, have reached $2.65 billion, a $300 million increase from what BP said on Friday. Work on the first floating riser containment system, which will be connected to the Helix Producer vessel, is still anticipated to begin first operations at the end of June or in early July, which would take remains on schedule. It is currently anticipated that this system should increase total oil containment capacity by 20,000 to 25,000 barrels a day to a total of 40,000 to 50,000 barrels a day. A second floating riser system and additional capacity through a new cap on the blowout preventer are due in mid-July.

BP bought back more than $37 billion of its stock in a bid to return money to investors between 2005 and 2008. Those shares are now worth $15 billion, excluding dividends.

WSJ: Gulf Coast states are gearing up to follow shrimpers and hotel owners in seeking significant payouts from BP for lost revenue and other damages stemming from the oil spill.

U.S. foreclosure filings fell 3% in May from a month earlier, although bank repossessions set a new monthly record, according to market researcher RealtyTrac.
Foreclosure filings were made on 322,920 U.S. properties in May, up less than 1% from a year earlier. Bank repossessions hit a record monthly high.

Russia's state RIA Novosti news agency is quoting a senior Russian Cabinet official as saying that BP Chief Executive Tony Hayward is expected to resign, a report BP denied.

Paul Krugman: "

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending."

Commodity-shipping costs, which have dropped for 21 straight days, may fall as much as 20% in the third quarter because of an expanding fleet of dry-bulk vessels and slowing Chinese demand for iron ore, according to Mirae Asset Securities Co. Total capacity increased 7.2% in the first five months of the year, according to Clarkson Plc, the world's largest shipbroker. The global bulk fleet may expand 14% this year, as shipping lines move ahead with deliveries delayed during the credit crisis and global economic slump, according to Woori Investment & Securities Co.

G-8 Leaders Expect Israel May Act on Iran Nuclear Program, Berlusconi Says. Group of Eight leaders expect Israel may decide to take action against Iran out of concern that the country is building nuclear weapons, Italian Prime Minister Silvio Berlusconi said. Since “Iran is not guaranteeing a peaceful production of nuclear power, the members of the G-8 are worried, and believe absolutely that Israel will probably react preemptively,” Berlusconi told reporters today in Huntsville, Ontario, after a two-day meeting with other G-8 leaders. He didn’t elaborate.

U.S. reports showed consumer prices rose 0.2%, spending rose 0.3%, while the savings rate increased to the highest in eight months. Personal income increased $53.7 billion, or 0.4 percent, and disposable personal income (DPI)increased $49.0 billion, or 0.4 percent, in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $24.4 billion, or 0.2 percent. In April, personal income increased $59.4 billion, or 0.5 percent, DPI increased $63.7 billion, or 0.6 percent, and PCE increased $1.4 billion, or less than 0.1 percent, based on revised estimates. Real disposable income increased 0.5 percent in May, compared with an increase of 0.6 percent in April. Real PCE increased 0.3 percent, in contrast to a decrease of less than 0.1 percent.

Private wage and salary disbursements increased $22.8 billion in May,

with an increase
of $28.5 billion in April. Goods-producing industries' payrolls increased $10.3 billion, compared
with an increase of $6.1 billion; manufacturing payrolls increased $7.8 billion, compared with
an increase of $4.6 billion. Services-producing industries' payrolls increased $12.6 billion, compared
with an increase of $22.2 billion.

Government wage and salary disbursements increased $6.6 billion in May, compared with an increase
of $2.5 billion in April. Census decennial temporary and intermittent workers boosted government wages
and salaries by $5.7 billion in May.

Iran is prepared to resume talks over its nuclear program but will
wait until late August as punishment for recently imposed U.N.
sanctions, President Mahmoud Ahmadinejad said Monday. The outcome
of the talks will depend on whether Western powers hold Israel to the
same standards over its nuclear program, Ahmadinejad said at a news

The 30-year U.S. treasury yield drops to 4% and the 10-year to 3.03%.

The Dow Jones Industrial Average fell 5.29 points, or 0.1%, to 10,138.52. The S&P 500 Index dropped 2.19 points, or 0.2%, to 1,074.57. The Nasdaq Composite Index
dropped 2.83 points, or 0.1%, to 2,220.65.

Sunday, June 27, 2010


6/27/10 G-20

G-20 countries are on the verge of reaching an agreement on common goals for deficit and debt reduction, a European regulator said late Saturday.

"The fact that the G-20 probably will be ready to accept some targets for deficit reductions and debt reduction is very encouraging," European Commission President Jose Barroso told reporters. "I am encouraged by fact that there is a convergence about setting these minimum requirements on deficit and debt reduction. We expect it to be approved tomorrow." Leaders of the Group of 20 meeting in Toronto, Canada have agreed that the world's most advanced industrialized countries should reduce their budget deficits by half within three years. The G-20 summit concluded in Toronto late Sunday with signs of an economic policy rift between President Obama and other world leaders.

The Group of 20 countries said banks need to raise capital “significantly higher” in order to avoid a repeat of the global financial crisis, while giving lenders more flexibility to implement the changes.

Countries should adopt the new standards by the end of 2012, and banks will be allowed to phase in capital increases during a transition period, according to a draft of the G-20 statement sent to reporters today in Toronto.

Banks will have to increase common equity as a percentage of their so-called Tier 1 capital to allow them to withstand another crisis without significant government support, the statement said. The capital increases can be phased in over a timeframe that respects each country’s circumstances, and is “consistent with sustained recovery and limits market disruption.”

“The financial crisis has imposed huge costs,” the G-20 statement said. “This must not be allowed to happen again.”

Over 5.2 million Americans are currently on Extended Benefits and EUC. According to the WSJ, the cumulative number of people whose extended benefits are set to run out absent this extension, will reach 2 million in two weeks, and continue rising.

Mike Burk: "The market went from overbought to oversold last week. Seasonally the last 3 days of June are strong while the first 2 days of July are weak so we should see a bounce early next week.

I expect the major averages to be higher on Friday July 2 than they were on Friday June 25."

The Oil Drum: "Chuck Watson is telling us now that while Alex is now weakening as it goes over the Yucatan, we need to keep an eye on it. Some of the models are showing Alex creeping north a bit, before turning back to Mexico. So while the risk to the Deepwater Horizon area is down, it is not gone completely. There may be high waves affecting the near shore area, even if the storm does not come very close.

One thing that a couple of relatively gentle Hurricane seasons lulls us into forgetting is that when the nucleating storms start to crank up, they can come quite regularly for a significant period of time. Back in 2005, for example, the National Hurricane Center ran out of normal alphabetical names for the storms. I mention that because, while Alex, the first storm of the season, is now landing and crossing the Yucatan Peninsula, there is already another area of concern forming in the Atlantic."

The Automatic Earth: "We are in the early innings of a depression, guys, and we’ve never gotten out, there is zero chance of a double dip because we’re still mired neck-deep in the first dip. What we’ve done is what I’ve described before: we've taken money out of our left hand pocket and put it into out right hand one. Then we proceed to focus only on our right hand pocket and voilĂ : we tell ourselves we’re richer than we were before. Not only is that a stupid move, we’ve also been charged interest to move the cash from one pocket to another, and have been so happy to be rich again we didn't even notice.
That's all old news for those of you who been following The Automatic Earth through time, though you, like me, must be as amused as you are disturbed by the fact that it just keeps going on, this political spin machine that eats people alive and throws their remains off the back of the truck.
What is new is the arrival of a new stage in the debt deflation process: the moment in time when entities, be they companies or governments (let’s leave individuals out of it for now), run into trouble simply paying the interest on their debt, let alone the principal. I can’t quite prove that we have arrived there, but the little man inside says I'm dead on."

Israel's MA Industries is to buy U.S. firm Albaugh for about $1 billion, in a move which it said would boost its position in the Americas and cement its position as the world's biggest maker of generic crop protection chemicals.

ZeroHedge: "As we first reported last week, in an article that was met with much original skepticism, the Pentagon has now confirmed that a fleet of 12 warships has passed the Suez Canal, and is now likely awaiting orders to support the escalation in the Persian Gulf. The attached image from Stratfor shows the latest positioning of US aircraft carrier groups as of June 23: the USS Harry Truman (CVN-75) is now right next to USS Eisenhower (CVN 69), both of which are waiting patiently just off Iran. As for the catalyst the two carriers may be anticipating, we provide the following update from the Gulf Daily News where we read that Israel may be on the verge of an attack of Iran, with an incursion originating from military bases in Azerbaijan and Georgia."