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Week of April 28, 2008

Sunday, May 4, 2008, 1:11 PM

U.S. Sees First Sales Tax Revenue Drop in 6 Yrs.
(May 2, 2008 - MoneyNews.com)


Comment:
This is yet another solid
indication that the US is headed into a recession. Since we've not had
a consumer-led recession since the early 1990's (the one in 2001 was
exclusively a business investment recession...a very strange beast, and
the first I can find in the history books), there are really very few
investment professionals out there who even remember what one is.

Part of my advice to people I knew who were putting a house on the
market last year was to find themselves a Realtor who was in business
in the early 1980s. I thought it might make sense to have someone who
was around for an actual tough market helping to guide the process.
Similarly, you might want to take a close look at the age of your
broker. If he/she was in diapers in the early 1990's, they may not be
your best choice for understanding what the future might hold...

Iran under the Gun (May 1, 2008 - Tomdispatch.com)

Oil is expensive because oil is scarce (May 1, 2008 - Telegraph)


Comment:
Peak oil is getting ever more obvious in the news...

Great - For Pawnshops
(May 2, 2008 - Philadelphia Inquirer)


Comment:
This story indicates that the recession is moving higher and higher up the economic ladder...


The cost of keeping the economy afloat on oil
- (May 4, 2008 - Scotsman.com News)


Comment:
This is a nice article
describing the impact of petrol shortages on a complicated economy...it
hits in ways that are often unanticipated, because oil is so enmeshed
in everything, literally everything, that we do. And they are dealing
with this in the Northern UK right now due to strike-related shortages.

A few days ago I posted a breathless (and
ill-informed) article that claimed that a recent mega-oil find in
Brazil was going to help wean the US from Middle East oil. Astute
observers said at the time that it was unlikely to be cheap oil.

Brother, you can say that again.

Brazil Oil Trapped by 500-Degree Heat, Salt Barrier (Bloomberg - April 28, 2008)

April 28 (Bloomberg) -- Brazil's plan to become one of the world's biggest oil exporters hinges on exploiting crude six miles below the ocean surface in deposits so hot they can melt the metal used to carry uranium to nuclear plants.

Tapping what may be the biggest oil finds in the Western Hemisphere in three decades will require equipment that can withstand 18,000 pounds per square inch of pressure, enough to crush a pickup truck, pipes that can carry oil at temperatures above 500 degrees Fahrenheit (260 Celsius) and drill bits that can penetrate layers of salt more than one mile thick.

Pumping oil from the Brazilian finds, parts of which are 32,000
feet (10,000 meters) below the ocean's surface, will require boring almost twice as far down as the world's deepest producing offshore well.


Crushing temperatures, a mile of hot, corrosive salt, and a near
doubling of the deepest known producing offshore well. Hmmmmm...seems
like we might not be cutting the ties with the Middle East just yet.
This article goes to underscore two things. First, that the age of cheap
oil is well and truly over. Hope you enjoyed it as much as I did!
Second, the manner in which this find was breathlessly trumpeted as
proof that there's nothing to worry about with respect to oil goes to
show the level of desperation that is beginning to creep into the
collective consciousness.




Record number of homes sitting vacant, U.S. says
(CBSMarketWatch - April 28, 2008)

WASHINGTON (MarketWatch) -- The glut of homes on
the U.S. housing market worsened in the first quarter, according to
government data released Monday. The number of vacant homes in the
United States rose by 1 million in the past year to a record 18.6
million, the Commerce Department said.

Of those 18.6 million vacant homes, a record 2.3 million were for sale
at the end of the first quarter, pushing the vacancy rate for
owner-occupied units to a record 2.9%. Meanwhile, a record 4.1 million
vacant homes are for rent, with the rental vacancy rate rising to
10.1%.

For perspective, 18.6 million empty homes
means we could invite all of Canada down and give them a place to stay
for the night. Or the month. Of course, these empty homes are not
evenly scattered across the country but are concentrated more in some
areas than others. This is important because home prices are most
affected by the relative number of empty/unsold homes in a given area.
Once the areas with high concentrations of empty/unsold homes begins to
drop in price, they tend to drag down the neighboring areas as well.

I am still renting and will remain that way for a while. All the
data is confirming the fact that the US housing market has a ways to
fall. Housing prices are unlikely to stabilize until the vacancy rate
begins to fall, and the recession is likely to create even less housing
demand as people double up and move back home for a while.





Read this article!
A great description or the mess we're in, and how we got here, by a very smart, successful, and longtime market participant.


Immoral Hazard by Jeremy Grantham
(GMO - April 2008)

It’s not that the former Fed boss Greenspan was incompetent
that is remarkable. Incompetence is common enough
after all, even in important jobs. What’s remarkable is
that so many people don’t seem, even now, to get it. Do
people just believe high-quality self-justifying blarney?
Or is it that they apparently want to believe that critical
jobs in a great country attract great talent by divine right.
Sometimes, of course, they do, but sometimes the most
important jobs – even that of a presidency or a Fed boss
– end up with mediocrities. Let us pause here to regret
the absence of Mr. Volcker and wonder what a parallel
Volcker universe would have been like.



Food


The food crisis begins to bite
(The Independent - April 25, 2008)


Comment:
This is an excellent
summary of the current 'food crisis' and covers each major
country/region with a single paragraph. Want a crisp overview? Read
this.


Shortages Threaten Farmers’ Key Tool: Fertilizer
(NYT - April 30, 2008)


Comment:
Fertilizer is really just
petroleum by another name, especially the nitrogen component. A
shortage here reveals that our global food system is really, really
strained, and I take this article as another sign that Peak Oil may be
here. Further, this article will give you a good sense of what it will
mean when fertilizer is removed from the equation - many areas will
plunge back into hardship and starvation.


Emptying the Breadbasket
(Wash Post - April 29, 2008)


Where Every Meal Is a Sacrifice
(Wash Post - April 28, 2008)


Comment:
This article broke my
heart. While our central bank bails out the wealthy and well-connected,
poor people are starving. Closer to home, this tells me that it might
be foolish to assume that my central bank will act in my best
interests.


Food prices rising, but no shortage in U.S.
(MSNBC - April 29, 2008)



Iran


New U.S. carrier in Gulf a "reminder" to Iran: Gates
(Reuters - April 29, 2008)


Comment:
In
this article Robert Gates makes the claim that adding another carrier
to the gulf is "not an escalation." Clearly it is, and the rhetoric is
climbing sharply. Want to know why? Read the next article.


Official says Iran quits using US dollar for oil deals
(IHT - April 30, 2008)


Comment:
The US dollar is no longer
backed by anything. Or is it? Actually, it is backed by petroleum, in
the sense that if you want to buy oil anywhere in the world, you have
to have dollars. Oil is priced in dollars and it is bought in dollars.
Until now....



Coincidentally, or not, Iraq began a program of pricing oil for Euros
right before they were invaded by the US. Now there are only two
countries actively talking about pricing oil for something other than
dollars, and one of them, Iran, is being threatened daily by the US.
The other country? Venezuela. Which is why the next headline down gives
me chills....


U.S. terror report cites Venezuela, Iran
(CNN - April 30, 2008)


Comment:

Think of the odds. The only two oil-producing countries in the world
that want to price their oil in something other than dollars have now
been identified as "terrorist countries" by the US. Seriously, who is
even remotely fooled by this action anymore? These two countries have
something we want, and our politicians have decided to threaten them
into giving it to us. Not to play statesman here, but China has a very
different approach to getting what it wants from these countries, and
that involves an open checkbook, diplomacy, and courtship. It pains me
to say this, but our main competitor seems to have a lower risk/higher
return strategy than we do.



Economic News


Inflation could become new No.1 enemy
(Reuters - April 28, 2008)


April consumer confidence falls, outlook gloomy
(CBSMW - April 29, 2008)


Comment:
The lowest consumer
confidence in decades is a solid indicator that we are already in
recession....Main Street is hurting even as Wall Street parties on. The
disconnect has never been larger in all the time I've been observing
our markets.


Home prices plunging at a faster pace in February
(CBSMW - April 29, 2008)


Comment:

As was predicted long ago by a number of observers, myself included,
house prices have a date with a (much) lower value. What has me
concerned now is that the pace of the change is happening even faster
than I thought it would. Sometimes it's not where you end up, but how
fast the change occurs, that determines the outcome. A fast pace risks
a major banking accident, and another quarter point or bailout of a big
bank by the Fed is not going to do anything to change the odds.


Hiring leaps in public sector
(USA Today - April 30, 2008)


Comment:

Huh. There are 22 million government workers now, and the pace of
hiring keeps going up, up, up. To put this in perspective, that is one
out of six American workers. Imagine that there are 6 houses on your
street and five of the houses have to work hard enough to carry the
sixth. Until now we've made that a bearable burden by simply borrowing
to mask the true costs, not unlike the Iraq war experience. My local
town is struggling with a budget that simply isn't in line with our
local realities, but the thought of laying off workers is still not on
the list of acceptable options. My prediction is that the list is
abount to grow a bit longer...


In High-Priced Homes, Losses Growing
(Voice of San Diego - April 29, 2008)


Comment:

The house price collapse is moving up the food chain and striking deeper and deeper into the economic heart of the nation.


Coal price hikes boost electric rates, more increases coming
(Chicago Tribune, April 28, 2008)


Comment:

The cost of simply staying alive is going up. This article mentions 15%
to 20% electricity increases, mainly due to coal price increases. People
are getting squeezed. See next article.


Americans unload prized belongings to make ends meet
(AP - April 30, 2008)


Comment:
Well, that about sums that
up. Online auction and listing services are noticing a large increase
in people selling their stuff. This, too, is a pretty solid indicator
of the fact that we are in recession.


Economic News

Defaults on Insured Mortgages Rise 37% in U.S. From a Year Ago
(April 30, 2008 - Bloomberg)

Comment: The way that a lot of
mortgages were bought and sold so easily is that they were insured
against losses. Now those losses are piling up and there is some
concern that the insurers may not be able to survive the experience.
Insurance is only as valuable as the ability of the insurer to actually
cover the claims.

General Motors posts $3.3 billion loss
(April 30, 2008 - IHT)
Comment: GM posts an enormous loss
and...wait for it...its stock is now up more than 10% afterwards. GM's
losses are stemming from both its auto and its finance divisions, and
somehow the markets interpreted this as great news. I am stumped by
this line of reasoning, but it makes sense to somebody.


Economic distress in U.S. households takes a toll

(May 1, 2008 - IHT)

Comment: More evidence that a lot of
people are really beginning to suffer in this downturn...but Wall
Street is not among the victims. Yet.

Dumb as We Wanna Be
(April 30, 2008 - NYT)

Comment: Tom Friedman asks a few obvious questions about our national energy policy.

Fed Cuts Rate But Hints About a Pause
(May 1, 2008 - NYT)

Comment: Even as inflation is now a
national and international concern, keeping our banking/finance system
well-supplied with cheap money was a higher concern to the Fed. Of
course, the usual and soothing words about a potential 'pause' are
included.

Low Spending Is Taking Toll on Economy
(May 1, 2008 - NYT)

`Dumbest Idea Ever' Embraced by Pensions to Plug U.S. Deficits
(May 1, 2008 - Bloomberg)

Comment: This article stuns me. The
basic idea here is that states' pensions, which are underfunded, are
going to be 'funded' by use of an exotic and risky form of gambling. It
works like this:  A state, say Connecticut, sells a few billion
dollars' worth of bonds, and then takes the proceeds and places those
in its pension fund. So far, not much has happened. Debt has been
exchanged for cash, and so the fund is no better off, nor any worse,
than it was before. But the magic happens as a result of the fact that
the state is going to be paying 5.85% to the holders of the bonds but
expects to make 8.5% on the money it received from the bonds. As long
as the state earns 8.5% on the invested money it will 'earn' 2.65% on
the difference between its cost to borrow the money (5.85%) and what it
earns (8.5%)

The risk? What if the state does not earn 8.5%? Worse, what if it
earns less than 5.85%? Then this will be a sure-fire way to assure that
even less money
will exist in the pension fund than before. In fact, this is exactly
what happened to NJ (under Christine Whitman) when it attempted this
scheme in the late 1990s. If one considers that treasuries (the safest
investments) are earning less than 1/2 of the desired 8.5% rate, we can
be darned sure that the state will need to invest in very risky assets
to try and get that 8.5%. Candidates would be high yield bonds (which
are extremely risky, especially at this point in the business cycle)
and the stock market (which has had a zero return over the past 9
years).

In short, I am literally aghast that this particular form of gambling
is being tried at this point in time. You should find out if your state
is gambling in this way and do your best to stop it.

Gulf States May End Dollar Pegs, Kuwait Minister Says
(May 1, 2008 - Bloomberg)

Hmmmm....in the hours after this
announcement, which is about as dollar-unfriendly a piece of news as I
could concoct, the dollar is up strongly. All I can figure is that
either 'investors' don't read the same news I do, or the central banks
are providing official support to the dollar as they pursue some policy
that is important to central banking....



Food

K+S Defies Price Gravity as Potash Shortage to Last
(April 30, 2008 - Bloomberg)

Here's another article on fertilizer prices
and shortages, to complement the one from yesterday. This one has a
very interesting piece of data in it, which is this:

The stock-price surge comes as global fertilizer demand is rising 5
percent a year, leaving a 1.2 million-ton potash-production shortfall. The gap may last until 2012, according to Uralkali.

The shortage is adding to a food crisis of ``emergency proportions,''
United Nations Secretary-General Ban Ki-Moon said April 14. Grain
stockpiles fell to about 53 days' worth last year, the lowest level since record-keeping began in 1960.


A persistent shortfall in a key fertilizer AND the lowest recorded
levels of food on hand? That is a powerful combination that will not
easily be rectified by the usual mechanisms. Watch for ever-spiraling
food costs from here until, say, 2012.


Economic

U.S. House panel approves bill to assist troubled homeowners (May 2, 2008 - IHT)

WASHINGTON: The House Financial Services Committee pushed forward on
Thursday with an aggressive effort to help troubled homeowners,
approving legislation that would make up to $300 billion in
government-insured loans available to refinance the mortgages of
borrowers in danger of foreclosure.

The Democrats' legislation seeks to help homeowners by requiring
lenders to reduce the principal balances for borrowers at risk of
default. The bad loans, typically with high adjustable rates, would be
refinanced into more affordable 30-year fixed-rate loans insured by the
FHA

The new loans would be limited to no more than 90 percent of a
property's value, based on an updated appraisal. The government would
retain a stake in any future sale of the property, worth 3 percent of
the initial loan balance or 50 percent of net profit from a sale,
whichever is greater.


Comment: So
here's the plan. If you overpaid for a house and are in danger of
losing it due to your poor decision-making abilities, the government
will use taxpayer money to guarantee a new spate of loans offered at
90% loan to value (LTV). The banks and brokers (who most likely wrote
this legislation) are thrilled, because the amount of principal
reduction is likely to be far less than the losses they would incur
through the process of foreclosure. The homeowners are thrilled,
because they get a government-subsidized loan (although,
if my calculations are correct, they
will be locked into that loan/house for a long time), and the
politicians are thrilled, because they get to be seen as "doing
something" during an election year.

Who isn't thrilled? Taxpayers who might have wished to see their
tax money go to something other than rescuing people who made terrible
financial decisions. And the prudent people who did not participate in
the obvious madness of the latest housing bubble, as they will actually
get punished for being levelheaded during a time of mania.

U.S. job losses moderate in April; Nonfarm payrolls down 20,000 (May 2, 2008 - CBSMW)

WASHINGTON (MarketWatch) -- Job losses decelerated in April, suggesting
that the nation's economic downturn may be short and shallow rather
than long and severe.

Nonfarm payrolls fell by 20,000 -- far fewer than the average
80,000 jobs per month lost during the first quarter of the year, Labor
Department data showed.

Comment:
Okay, this report is just another absolutely unbelievable jobs report,
courtesy of the Bureau of Labor Statistics (BLS). And I do mean
unbelievable. If you are not familiar with this game the BLS uses a
special model to "calculate" ('guess at') the formation and destruction
of jobs that might have occurred during the reporting period but are
not yet visible to government databases. I suppose this makes some
sense, but you might as well just wait a month and count the W-2 forms.
Somewhere along the line it was determined that it was more important
to "model" these jobs so they could be seen sooner.

And somewhere along the way the model was horribly abused by those
seeking to paint a rosier picture of the jobs situation than reality
would indicate. Want proof? Here it is.

According to the BLS, the economy shed just 20,000 jobs. The data
actually said that the economy shed 287,000 jobs, but the Birth-Death
model added back 267,000 jobs so there was only a -20k decline
reported. Now, -20k sounds a lot better than -287k, and the -20k was
used by the financial markets to bid up the stock market(s) on the
basis of the fact that folks were expecting a far steeper decline in
jobs.

Where did the Birth-Death model say those new jobs were created? Well, look for yourself:




Among other additions, the 45,000
construction jobs that the Birth-Death model padded, er, added, to the
latest job report is the highest number of assumed construction jobs
that the Birth-Death model has added to that category in over seven years.
Can you imagine? The BLS wants us to believe that this past month saw
the largest addition of construction jobs as at any time over the past
7 years at a time when the newspapers are full of mass layoffs in
residential and commercial construction. As I said, simply
unbelievable.

ResCap to Start Exchange Offer on $14 Billion of Debt
(May 2, 2008 - Bloomberg)


Banking Crisis

Bernanke-Geithner `Rogue Operation' Spurs Further Bailout Calls
(May 2, 2008 - Bloomberg)

Comment:
More bailouts being requested. Who could have predicted this?

Bank of America May Not Guarantee Countrywide's Debt
(May 2, 2008 - Bloomberg)

Comment: Here's
a not-so-stealthy fishing expedition for a bailout by Bank of America,
who is now edging nervously away from the mountain of bad loans they
agreed to acquire from Countrywide.

Treasury officials to meet Wall Street execs (May 2, 2008 - Reuters)

Comment: Banking
crisis over? Nope. But it does offer the Treasury Department another
chance to get a little closer to the big private banks on Wall Street.

Bernanke Urged to Do More to Ease Bank Funding Costs
(April 30, 2008 - Bloomberg)

Comment:
Banking crisis over? Nope.


Iran

Iran Doubles Oil Stored in Tankers, Bolstering Rates (May 2, 2008 - Bloomberg)

May 2 (Bloomberg) -- Iran, OPEC's second-largest
oil producer, more than doubled the amount stored in tankers idling in
the Persian Gulf, sending ship prices higher as demand for some of its
crude fell, people familiar with the situation said.

Comment: It
would seem that Iran's oil is piling up and is now to the point that
they are having to store it in tankers at a cost of nearly
$150,000/day. Hmmmmm.....I know that the Treasury Department is
squeezing Iranian banks all over the world by forcefully requesting
that the host countries in which Iranian bank branches are located
sever all financial transactions with those banks. Here there is a
sudden lack of interest in Iranian oil, although the reason given in
the article ('refinery maintenance') sounds reasonable on the surface.

But what if this is tied to the banking issue, and the reason the ships
are not sailing is because Iran has been cut off from the ability to
process and collect payments for their oil? This could be another sign
of US-led pressure on Iran.


 U.S. Sees First Sales Tax Revenue Drop in 6 Yrs.
(May 2, 2008 - MoneyNews.com)


Comment:
This is yet another solid
indication that the US is headed into a recession. Since we've not had
a consumer-led recession since the early 1990's (the one in 2001 was
exclusively a business investment recession...a very strange beast, and
the first I can find in the history books), there are really very few
investment professionals out there who even remember what one is.

Part of my advice to people I knew who were putting a house on the
market last year was to find themselves a Realtor who was in business
in the early 1980s. I thought it might make sense to have someone who
was around for an actual tough market helping to guide the process.
Similarly, you might want to take a close look at the age of your
broker. If he/she was in diapers in the early 1990's, they may not be
your best choice for understanding what the future might hold...

Iran under the Gun (May 1, 2008 - Tomdispatch.com)

Oil is expensive because oil is scarce (May 1, 2008 - Telegraph)


Comment:
Peak oil is getting ever more obvious in the news...

Great - For Pawnshops
(May 2, 2008 - Philadelphia Inquirer)


Comment:
This story indicates that the recession is moving higher and higher up the economic ladder...


The cost of keeping the economy afloat on oil
- (May 4, 2008 - Scotsman.com News)


Comment:
This is a nice article
describing the impact of petrol shortages on a complicated economy...it
hits in ways that are often unanticipated, because oil is so enmeshed
in everything, literally everything, that we do. And they are dealing
with this in the Northern UK right now due to strike-related shortages.

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