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Daily Digest - Jan 7

Tuesday, January 6, 2009, 8:40 PM
  • Metal loses its mettle: Alcoa (AA) cuts like crazy even though it is profitable
  • More observations on the economy, and none of them good
  • Minutes of the Federal Open Market Committee December 15-16, 2008 
  • German billionaire Merckle takes his life amidst financial crisis 
  • Economic slump weakens pending home sales 
  • A sign that credit is going to flow (chart)?
  • The very flawed weekly mortgage applications survey
  • Auto sales (chart)

Economy

Metal Loses It Mettle: Alcoa (AA) Cuts Like Crazy Even Though It Is Profitable 

Alcoa (AA) announced that it will fire 13,500 people and 1,700 contractors. The full-time people are 13% of the firm's work force. Alcoa will also freeze hiring and salaries and cut capex by 50%. 

The company's CEO made a statement: "These are extraordinary times, requiring speed and decisiveness to address the current economic downturn, and flexibility and foresight to be prepared for future uncertainties in our markets." That sounds like what every large company CEO has said when layoffs hit this year.

The drop in commodities prices and the recession are catching up to the metals industry. That largest firms in the sector will have to keep cutting. It would not be shocking to see this part of the economy lose 100,000 jobs this year. 

More Observations On The Economy, And None Of Them Good  

Going back a year it would have been very hard to find more than a handful of economists who believed that a global recession would potentially drive down GDPs in most of the world's largest nations. 

The Fed's notes on its last meeting released today show that the agency was more concerned about the situation than they might of let on.

In the last few days, more experts have been willing to venture unusually pessimistic opinions.

David Rosenberg of Merrill Lynch believes that the recession will not end this year and could go well into next year. According to Reuters, he said that "The housing and stock market slumps have wiped out $13 trillion in household wealth. That means Obama's tax cut measures may wind up going toward rebuilding savings, which would provide scant immediate economic lift."

Carmen Reinhart, from the University of Maryland, was not willing to be outdone in the gloom department. He reckons that housing will not hit a bottom until the middle of next year and that unemployment will rise to 11%. Reuters reports that "The two emphasized that, despite the best efforts of governments and monetary authorities around the world to stem the crisis, policy measures can only do so much to contain the aftermath of the largest debt bubble in modern history."

That is probably enough bad news for today.

Minutes of the Federal Open Market Committee December 15-16, 2008  

In the forecast prepared for the meeting, the staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010. Real GDP appeared likely to decline substantially in the fourth quarter of 2008 as conditions in the labor market deteriorated more steeply than previously anticipated; the decline in industrial production intensified; consumer and business spending appeared to weaken; and financial conditions, on balance, continued to tighten.

Rising unemployment, the declines in stock market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to continue to hinder household spending over the near term. Homebuilding was expected to contract further.

Business expenditures were also likely to be held back by a weaker sales outlook and tighter credit conditions. Oil prices, which dropped significantly during the intermeeting period, are assumed to rise over the next two years in line with the path indicated by futures market prices, but to remain below the levels of October 2008.

All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly bove the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting.

The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate eductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. More inflation was projected to slow considerably in 2009 and then to edge down further in 2010.

German Billionaire Merckle Takes His Life Amidst Financial Crisis  

Another prominent figure has reportedly taken his life amidst the turmoil of the financial markets. In this case, it appears that 74 year-old German billionaire Adolf Merckle has committed suicide. German newspaper Die Welt noted that the head of the family business empire was worth an estimated 7 billion euros (nearly $10 billion). 

Merckle is, or was, on Forbes list of the 100 most wealthy. The interests of the family control HeidelbergCement and other conglomerated interests which employ more than 100,000 people with an annual revenue base of roughly 30 billion euros.

Merckle recently was credited with garnering a last minute bridge loan for the interests, but he is also said to be one of the ones caught up on the wrong side of the exponential move seen in the Volkswagen-Porsche SNAFU of late-2008.

It appears that Merckle killed himself by stepping in front of a train, although we won't go into further detail for many reasons.

Financial loss is starting to take on new extremes.

Economic Slump Weakens Pending Home Sales  

After holding fairly stable for a year, pending home sales declined in the face of job losses and an eroding economy, according to the National Association of Realtors®.

The Pending Home Sales Index, a forward-looking indicator based on contracts signed in November, fell 4.0 percent to 82.3 from a downwardly revised reading of 85.7 in October, and is 5.3 percent below November 2007 when it was 86.9. The current index is the lowest since the series began in 2001.

Lawrence Yun, NAR chief economist, said a weakening was inevitable. "Mounting job losses and very weak consumer confidence deterred home buyers from signing contracts in November," he said. "December's housing market activity could be comparably lower due to ongoing problems in the economy, so a real estate-focused stimulus plan is urgently needed." 

A Sign That Credit Is Going to Flow (Chart)?

The Very Flawed Weekly Mortgage Applications Survey 

Mortgage and housing are back in the spotlight like never before. Everywhere you look there are silver linings, lights at the ends of tunnels and ‘mustard seeds' of hope. This is all great - I encourage hope as a broader theme in life. But ‘hope' should not be the primary metric in an important business or investment decision - most analyst and media have based their mortgage and housing analysis primarily on ‘hope' for the past two years.

Since conforming mortgage rates (= or <$417k) fell from 5.875% - 6.125% in November to the 5% to 5.25% range today, there has been increasing hype surrounding the weekly mortgage applications survey. In the past, this has been a decent measure of future refi and purchase loan fundings but not any longer.

In mid-December, a weekly release was put out that citing results that compared with 5-years ago. The bottom calling rush was on. The end result was scores of media, economists and analysts calling for the ‘great refi-boom' to carry the nation out of its housing crisis and onto great things.

Of course, the primary thesis was that ‘if the refi market is at the same pace as 2003 then what followed 2003 in housing, mortgage and the macro economy may follow'. This is not the case. The fact is that refi loan application counts are far fewer than 2003 levels and actual loan fundings far less than that. Data being represented in this manner have led to several disappointments over the past two years. The fall out makes for less trust and weaker markets.

Does anyone really believe that with 60% of CA, AZ and FL home owners and over 90% in NV in or near negative equity that refi's can be anywhere near 2003 levels?

Auto Sales (Chart)

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12 Comments

Davos's picture
Davos
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Re: Daily Digest - Jan 7

old2.jpg

switters's picture
switters
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Re: Daily Digest - Jan 7

$13 trillion in wealth gone, vs. $8.5 trillion in bailout-related monies (latest estimate I've heard).  New Obama tax break likely to go towards paying down bills - not buying more cars or plasma screen TVs.  Definitely does seem like deflation will persist for some time to come.  People are terrified and they've gone AWOL from the consumer army, for good reason. 

castlewp's picture
castlewp
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U.S. Shopping Mall Vacancies Reach 10-Year High

With all the talk about home foreclosers, this topic seems to fall through the cracks with the MSM.

http://www.bloomberg.com/apps/news?pid=20601087&sid=azgge9HHWzZE&refer=home

Doug's picture
Doug
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Posts: 3125
Re: Daily Digest - Jan 7

Jim Willie, in a Financial Sense column, makes several points that seem to be contrary to many of the talking heads these days, but also threw out an assertion, in the context of arguing that oil prices are about to take off, that I find breathtaking:  "A hidden motive is strong: render great harm to both the Saudis and Russians, who are planning to launch new gold-backed currencies within 12 months time."

http://financialsense.com/fsu/editorials/willie/2009/0107.html

Has anyone else heard about the gold backed currencies?

bikemonkey's picture
bikemonkey
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Re: Daily Digest - Jan 7

You know it's bad out there when Lawrence Yun realigns the NAR propaganda message with reality.  The NAR's message has been hopeful throughout this crisis.  But the capitulation is a good sign that we may be approaching a housing market bottom maybe?

mainecooncat's picture
mainecooncat
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Re: Daily Digest - Jan 7

Hi Doug,

No, I haven't heard about the Saudis and Russians launching gold-backed currencies within twelve months' time. However, I've always felt that one of the reasons for the unprecedented crash in oil prices (despite its inherent value and inevitable scarcity) was that it (the price dive that is) was helped along as much as it could by Western nations and players who realized that astronomically high prices directly enriched and, consequently, emboldened basically a who's who of enemies and rivals.

It's no coincidence that Russia's invasion of Georgia took place during the oil price spike window.

From the perspective of the US, UK, and Israel:

High oil prices = Rich enemies.

Low oil prices = struggling to stay afloat enemies.

Oil, its price, and the infrastructure by which it is allotted and delivered is perhaps the ultimate geostrategic weapon.

Just look at Venezuela's dire predicament right now. They could be bankrupt within months. Who knows, if the price had stayed at $147, they'd be invading Colombia (just kidding on that one but you get my point).

 

Doug's picture
Doug
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Re: Daily Digest - Jan 7

Mainecooncat

Thanks for responding.  Your thesis makes sense.  And, we seem to have embarked on a tit for tat course, with oil producers, including China and Saudi Arabia, figuring out ways to store oil to keep it off the market.  Todays news that Russia is cutting off its natural gas lines to Europe.  I just happened to be talking to an exchange student from Germany this evening (It's funny how kids from other countries seem to be much more aware of their countries' politics and economies than our kids are) and he said that Germany gets virtually all it's natural gas and gasoline from Russia.  Same for the Ukraine.  Things seem to be ratcheting up.

Mike Pilat's picture
Mike Pilat
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Re: Daily Digest - Jan 7
mainecooncat wrote:

Oil, its price, and the infrastructure by which it is allotted and delivered is perhaps the ultimate geostrategic weapon.

This sounds like a quote out of "Crossing the Rubicon." I've started reading it on google books. It never ceases to amaze me how many people with all different sorts of diverse backgrounds view oil with the sort of respect it deserves. Mind you this is not in the mainstream quite yet, but my point is that oil is the ultimate resource when viewed from any angle. The more I learn about it, the clearer and clearer it becomes that oil is wealth and dollars are not. 

Just a question: I've read what feels like reams about gold price manipulation and it certainly adds up, though I can't say I blindly accept every theory that's been put forth. As you speak of oil as an economic weapon, then I have some questions: What exactly can the USA do to keep the oil price suppressed? Is it so simple as engineering a recession, fear and demand destruction? If so, where were the powers that be last summer? And why are would we try to suppress the oil price rather than deal with the problem directly by cutting demand and investing in alternatives? 

And lastly, our control over oil, only works as long as the dollar reigns supreme. If the powers that be plan on punishing our enemies with low oil prices, what is the backup plan when the "enemies" decide to price oil in gold or Euros?

A brief review of history suggests we have been involved in economic warfare for some time now. It is only now becoming blatantly obvious. History really does seem to repeat itself. The primary reasons for war always seem to have economic foundations. Not surprisingly, the winners of wars tend to be the ones with the most resource availability.

Any thoughts on potential motivations or avenues of intervention in oil markets, as mentioned above?

Thanks,

Mike

castlewp's picture
castlewp
Status: Gold Member (Offline)
Joined: Oct 7 2008
Posts: 304
Re: Daily Digest - Jan 7
Mike Pilat wrote:
mainecooncat wrote:

Oil, its price, and the infrastructure by which it is allotted and delivered is perhaps the ultimate geostrategic weapon.

This sounds like a quote out of "Crossing the Rubicon." I've started reading it on google books. It never ceases to amaze me how many people with all different sorts of diverse backgrounds view oil with the sort of respect it deserves. Mind you this is not in the mainstream quite yet, but my point is that oil is the ultimate resource when viewed from any angle. The more I learn about it, the clearer and clearer it becomes that oil is wealth and dollars are not. 

Just a question: I've read what feels like reams about gold price manipulation and it certainly adds up, though I can't say I blindly accept every theory that's been put forth. As you speak of oil as an economic weapon, then I have some questions: What exactly can the USA do to keep the oil price suppressed? Is it so simple as engineering a recession, fear and demand destruction? If so, where were the powers that be last summer? And why are would we try to suppress the oil price rather than deal with the problem directly by cutting demand and investing in alternatives? 

And lastly, our control over oil, only works as long as the dollar reigns supreme. If the powers that be plan on punishing our enemies with low oil prices, what is the backup plan when the "enemies" decide to price oil in gold or Euros?

A brief review of history suggests we have been involved in economic warfare for some time now. It is only now becoming blatantly obvious. History really does seem to repeat itself. The primary reasons for war always seem to have economic foundations. Not surprisingly, the winners of wars tend to be the ones with the most resource availability.

Any thoughts on potential motivations or avenues of intervention in oil markets, as mentioned above?

Thanks,

Mike

Mike, keep reading Rubicon.  Ruppert gives you a complete map of potential motivations. I just finished it and it changed my entire view of life as I knew it.

Bill 

deadman's picture
deadman
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Re: Daily Digest - Jan 7

For the last few years, I've prescribed to the idea that OIL literally and figuratively fuels the global economy.

Now I understand that the debt-dependant, highly leveraged global economy is calling for a doubling of global 'GDP' in the next 6-10 years in order to follow the exponential growth curve. I've realized that no amount of oil consumption can accomplish the goal of doubling the global 'GDP'. I'm suspect that the power-brokers will return to their old tricks of leveraging to make up for the lack of true growth.

Also, I never would have guessed that the rate of wealth destruction would outpace the massive printing of dollars, nor the fact that global investors would dump so many assets and seek refuge in the dollar. 

Pandabonium's picture
Pandabonium
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Re: Daily Digest - Jan 7
Doug wrote:

Jim Willie, in a Financial Sense column, makes several points that seem to be contrary to many of the talking heads these days, but also threw out an assertion, in the context of arguing that oil prices are about to take off, that I find breathtaking:  "A hidden motive is strong: render great harm to both the Saudis and Russians, who are planning to launch new gold-backed currencies within 12 months time."

http://financialsense.com/fsu/editorials/willie/2009/0107.html

Has anyone else heard about the gold backed currencies?

Yes. Right on this website.   Member "pinecarr" posted about it on the current events forum January 3rd:

http://www.peakprosperity.com/forum/gulf...

The post references this article: http://seekingalpha.com/article/112731-will-the-new-gcc-single-currency-include-gold

Very interesting development!

 

RubberRims's picture
RubberRims
Status: Silver Member (Offline)
Joined: Nov 22 2008
Posts: 145
Re: Daily Digest - Jan 7

 

A nice post to read. Springing to mind was a documentary made about a year ago called (Why do we fight)

You will find it on Google. It has just the right amount of perspective to understand what drives America. Unfortunately its not for democracy or freedom, especially not for those who have to endure western values imposed on them.

America wakes up in the morning with a simple view of domination and power to be in all-places at all-times.

Congress works hard to keep the money flowing in all dirctions more so in to the war machine. Ultimately as this post has indicated oil brings with it all-things. So 90% of America veiws the world with just the right amount of ignorance to keep them from the truth.  Innocent

 

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