Moody's Lonski Sees Fed Cut in Absence of Housing Bottom

Lonski is pretty outspoken. He sees the Fed cutting rates as long as housing does not bottom. Contrary to that believe the market starts to price in a rate increase by November 2008 according to FF futures and Eurodollar futures.

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John Lonski, chief economist at Moody's Investors Service, talks with Bloomberg's Rhonda Schaffler and Suzanne O'Halloran in New York about Federal Reserve Chairman Ben S. Bernanke's speech to an Atlanta Fed conference in Sea Island, Georgia, today, the outlook for Fed monetary policy, the U.S. housing market and economic growth.

click for video











video: John Lonski, chief economist at Moody's Investors Service, talks with Bloomberg
http://www.bloomberg.com/avp/avp.asxx?clip=mms://media2.bloomberg.com/cache/vMpIVMXf7QZE.asf

San Francisco's Janet Yellen to speak about U.S. economic prospects

Janet L. Yellen speaks at a conference in Vancouver about, "Credit, Housing, Commodities, and the Economy". Her outlook for inflation is too optimistic for my liking but admits there are risks. In case she is wrong, she and her peers at the Fed face a "possible erosion of credibility".

Here is a condensed version:

I believe that the Fed’s liquidity operations, combined with its 325-basis-point cut in the Federal funds rate—a substantial easing of monetary policy—are having a beneficial effect on financial markets. Although overall financial conditions are still far from normal, there are some rays of hope that the strains may be easing a bit.

Housing
I’ve already discussed the precipitous fall in house prices nationally, so it’s striking to note that, even with these declines, the ratio of house prices to rents remains quite high by historical standards. That, of course, suggests that further price declines may be needed to bring housing markets into balance. This perspective is reinforced by futures markets for house prices, which expect further declines in a number of metropolitan areas this year. In particular, the Case-Shiller composite index for home prices shows a 15 to 20 percent year-over-year decline in the second half of this year.

The bottom line is that construction spending and house prices seem likely to continue to decline well into 2009.

Commodity Prices
Finally, some commentators have argued that commodity prices have been pushed up by investors shifting demands to commodities in the face of the current financial turmoil as debt and equity investments appear much riskier. However, if this factor were playing a significant role, I would expect to see big increases in inventories of commodities as investors were expecting to make profits on rising prices. So far, I have not seen the evidence that this is occurring.

Outlook for inflation
Under present circumstances, judging future changes in commodity prices is obviously an important part of any inflation forecast. As I noted, future markets generally are expecting these prices to flatten out and remain at around today’s very high levels. If this happens, then the effects of commodity prices on inflation will dissipate. In order to continue to put upward pressure on inflation—which, after all, is the rate of change of prices—commodity prices would have to do more than remain at today’s high levels. They would need to keep on rising.
(I absolutely disagree!!!)

Indeed, futures markets and some forecasts—for example, the IMF World Economic Outlook—expect many commodity prices to remain at around their current high levels rather than reverse course.

I see little reason to believe that we have entered, or are about to enter, such a period of stagflation. For one thing, although current data on growth and inflation have departed from desirable levels, matters looked far worse 30 years ago than they do now.

In addition, the slack in labor and product markets stemming from the weakening in economic activity that seems likely should put somewhat greater downward pressure on inflation going forward. Therefore, my forecast of the most likely outcome over the next couple of years is that total and core inflation will moderate from present levels.

While none of these measures are perfect indicators of inflation expectations, recent movements highlight the risk that our attempts to deal with problems in the real economy could lead to higher inflation expectations and an erosion of our credibility.

Policy
With core consumer inflation running at about the same rate, the real funds rate now stands at an accommodative level of around zero. These cuts in the target rate, along with the actions to foster greater liquidity in financial markets, have mitigated the worst effects of the credit crunch. But they have not resolved it. Indeed, my sense is that the process of resolution will unfold only gradually.

Under these circumstances, I consider the current level of monetary accommodation to be appropriate. That, together with the fiscal package, should be sufficient to promote a gradual step up to moderate economic growth later this year.



source: Credit, Housing, Commodities, and the Economy
Speech to the Certified Financial Analysts Institute, Annual Conference Vancouver
By Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco
For delivery on May 13, 2008, 10:00 AM Pacific time, 1:00 PM Eastern
http://www.frbsf.org/news/speeches/2008/0513.html#4

Eric Dinallo wants to regulate the CDS market

The unregulated credit derivatives market is a concern to market regulators. According to billionaire investor George Soros couterparty risks on derivative contracts were behind the dramatic rescue of Bear Stearns. The notional value of CDS contracts has soared to $62,000bn from less than $1,000bn at the end of 2001. There are two kinds of CDS says Eric Dinallo, NYS Insurance Dept. superintendent. About 20 percent of the market provides protection against bonds that are owned and the rest 80 percent are short or "naked CDS".

NYS regulators want to have at least a debate about a possible oversight role, but there are others like Greg Zerzan, counsel and head of global public policy at the International Swaps and Derivatives Association, who caution about more regulation.

"It is important to remember that dealers in these markets are highly regulated institutions, whose derivatives books are subject to capital requirements and scrutiny,"

In the second part of the video Dinallo makes his case for more regulation:

"The pricing might be higher but the valuation might be different because there is a regulation behind it and there is a different solvency requirement behind it."

"...as to the others ("naked CDSs") is clearly more of a speculative play, ....and we should definitely have a discussion about what role we (Insurance Dept.) should play in it and whether there really is a distinction between CDS as insurance product and CDS as a pure shorting instrument."

click for video










video: MBIA Posts Large Losses
Insight on MBIA earnings and the state of the credit markets, with Eric Dinallo, NYS Insurance Dept. superintendent
http://www.cnbc.com/id/15840232?video=738896956

PMI Gets Aggressive on Loan Modifications

Bond insurers take a bigger part in loss mitigation strategies in an effort to keep more delinquent borrowers in their homes. This makes perfect sense because insurers are the one's paying out the claims to servicers and investors. HW reports that PMI has loosened its previous restrictions on loan modifications.

The new guidelines — which apply to all delinquent loans insured by PMI — allow a servicer to modify loan terms without PMI’s prior consent, and do not allow penalty or late charges to be capitalized into what a borrower owes.

One source noted that few outside the industry understand just how large a role the MI companies play in any loss mitigation scenario. Since much of the servicer’s and investor’s ultimate loss severity totals are tied to a claims payment from the insurer, it’s the insurer’s guidelines that largely drive loss mitigation strategies offered to borrowers.

“These are huge, empowering changes,” said one executive at large servicing shop. “In the past, we were sort of stuck with whatever program was outlined in the master policy, and had to wedge that around investor negotiations.”



source: PMI Gets Aggressive on Loan Modifications
By PAUL JACKSON, HW
http://www.housingwire.com/2008/05/12/pmi-gets-aggressive-on-loan-modifications/

Lowest NYSE volume for the year

One has to wonder how much conviction is behind the ambitions of Wall St. bulls recently. Today's consolidated NYSE volume was a low for the year. The chart below comes from Barry Ritholtz's excellent blog The Big Picture.

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source: Lowest NYSE Volume of the Year
Posted by Barry Ritholtz, The Big Picture blog
http://bigpicture.typepad.com/

Attorney Generals weigh in on regulating Wall St.

Out with Greenspan's Ayn Rand approach and in with new regulation, this seems to be the new drumbeat Wall Street has to fear. If realized it adds one more nail to the coffin of Wall Street's profitability.

part1
click for video










part 2
click for video











video: Discussing issues that affected Wall.St., with Martha Coakley, Massachusetts attorney general; Tom Miller, Iowa attorney general; Richard Blumenthal Connecticut attorney general and CNBC's Becky Quick
http://www.cnbc.com/id/15840232?video=738705972

video: Attorney Generals on Regulation
Discussing how much is too much, with Martha Coakley, Massachusetts attorney general; Tom Miller, Iowa attorney general; Richard Blumenthal Connecticut attorney general and CNBC's Joe Kernen
http://www.cnbc.com/id/15840232?video=738736406

Will the dollar break 1.50 against the euro any time soon?

In the currency market the sentiment is slowly shifting towards a slight improvement in the greenback amid signs that the European currency euro might be at or near its peak. In April we reported about a shift in the speculative sentiment index to a net long position in the euro/dollar currency cross. On April 29 speculative positions on future contracts betting that the greenback will gain against the euro were 21,315 net long contracts. There were net-short positions in each of the previous 123 weeks.

dailyFx.com specualtive sentiment index












Option buyers are also betting that the euro will decline further. The so-called risk- reversal rate had a 0.44 percentage point premium for euro puts relative to calls on May 9. In the prior month the the premium pay were in favor of euro call options.

Two factors are playing into the recovery of the dollar. One, the credit crisis is slowly abating and two, in its latest rate setting meeting the Federal Reserve hinted towards the possibility of a pause. Interest-rate futures on the Chicago Board of Trade show an 84 percent chance the Fed will keep its target unchanged at 2 percent when policy makers next meet on June 25, with the balance of the odds calling for a quarter-percentage point cut. A Bloomberg survey of economists shows that the EZB will probably lower its main refinancing rate to 3.75 by the end of September.

Extrem positions in future contracts are often seen as contrarian indicators. The last time net longs were that high, in December 2005, the dollar was near an end of a one year rally against the euro. Traders are also talking about a slightly oversold euro. Central banks especially from oil producing countries viewing the euro at this level as a cheap buy.

Another contrarian indicator the COT index for the euro currency is at extreme low levels. COT over the last 52 weeks is at 2 and over the last 13 weeks is at 8. This Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over the last 52 weeks. A reading close to O suggests that a bottom is forming and a reading close to 100 suggests that a top is forming.

Commercial positions are from large cooperations who use the currencey markets to hedge their exposure to foreign currencys.


To conclude where the currency crosses will be headed next much will depend on the US economy and whether the Federal Reserve can pick up its inflation fighting mandate any time soon. There are many Fed speakers on the wires this week, but as long as there is only talk we don't see any real recovery in the dollar just yet.




read also: Euro SSI Flips For The First Time Since 2006
http://manonthestreet64.blogspot.com/2008/04/euro-ssi-flips-for-first-time-since.html

source: Euro and Pound Positioning are Bullish
dailyfx.com
http://www.dailyfx.com/story/charting_center/futures_positioning_cot_report/Euro_and_Pound_Positioning_is_1210600965432.html

source: Dollar Bulls Gain Control as Euro May Be Near Peak
http://www.bloomberg.com/apps/news?pid=20601085&sid=a9kCQvcL5qCg&refer=europe

Citi's shares are overvalued - Meredith Whitney

In the clearest sign yet, that the global credit crisis is easing global bond issuance jumped 42 percent in April to $1.1 trillion the most since June 2007. The trillion dollar mark in sales was reached only four times since 1995. Financial stocks rebounded today after last weeks sell off but Meredith Whitney, analyst at Oppenheimer, thinks that shares of Citigroup are still overvalued. Her comments come after Vikram Pandit outlined plans to get rid of $400 billion of assets over the next three years at a Citigroup analyst and investor meeting on May 9.

Here is what she had to say in a Bloomberg interview:
Citigroup Inc. Chief Executive Officer Vikram Pandit faces an "impossible feat'' in turning around the biggest U.S. bank as it faces "seismic'' costs to restructure.

"They don't have the revenue power, they don't have the earnings power in so many of their businesses. Even Stephen Hawking could not pull this off''

"The credit outlooks and the loss assumptions for banks across the board are way too low. The outlook for earnings across the board is going to be much worse than people expect.''

"Dividend cut is a foregone conclusion" "Citi is one of the most overvalued among the financial industry"

She also comments about the new CEO Vikram Pandit:
"The most revealing thing to me is ...Vikram did not know the deposit base of the bank. That is your core franchise for most bank managers. Ken Lewis would rather die than not knowing their deposit base."

"The presentation was glaringly light on actual mechanics, and run-rate earnings figures seemed to cherry pick revenue and credit scenarios from recent years...Pandit set no delivery date as far as execution."

click for video

















update: Tue May13, 11:00 a.m.
Oppenheimer's Whitney cut profit estimates for the four biggest U.S. securities firms in a note dated yesterday, citing weakness across their businesses. Whitney reduced her second- quarter projections by 41 percent on average and by 48 percent for the full year.




video: Citi's Pandit Faces `Impossible Feat,' Whitney Says
Oppenheimer & Co. analyst Meredith Whitney
http://www.bloomberg.com/avp/avp.asxx?clip=mms://media2.bloomberg.com/cache/vr77oJzULZEU.asf

Blodget and Task discuss the Fed's inflation problem

Crude surged to $126 and GS warns of a super spike to $200, it is no wonder that the inflation warning needle is going into the red. The EZB talked hawkish and left rates unchanged last week. Henry Blodget and Aron Task take on the Fed in its inflation fighting mandate and blow essentially into the same horn we did since quite some time. (Greenspan - a huge failure,
A fictional peek into the future)

"spineless Bernanke",
"..is the dual mandate written in the constitution?"
"people are basically saying its the Fed's job to elliminate business cycles."
They mock what is currently perceived as the Fed's role to "privatize profits and socialize losses".

Blodget also mentions oil.
"Oil is at $125 a barrel, a year ago this would have been inconceivable", alluding to the Fed's role in weakening the US dollar.

click for video




source: Bernanke's Bind: Fighting Inflation Could Crimp Consumers, Credit Markets
Henry Blodget and Aaron Task
http://finance.yahoo.com/tech-ticker/article/16419/Bernanke's-Bind-Fighting-Inflation-Could-Crimp-Consumers-Credit-Markets?tickers=AIG,WMT,COST

read also: Greenspan - a huge failure
http://manonthestreet64.blogspot.com/2008/04/blog-post_08.html

read also: A fictional peek into the future
http://manonthestreet64.blogspot.com/2008/04/fictional-peak-into-future.html

George Soros - The New Paradigm for Financial Markets

The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.
by George Soros,
Publisher: Perseus Publishing
Pub. Date: May 2008





Over the weekend I had time to read the new book from billionaire hedge fund investor George Soros. The legendary investor was one of the first to respond to the current financial crisis with a razor sharp and comprehensive analysis.

In the first part Soros explains in detail the theory of reflexivity. This is what he calls his "life's work" and deals with the inherent flaw in market fundamentalism. Markets work like social networks and fundamentals are altered through the influence of market participants. This differs from the view of the fundamentalists that markets are always right and revert to the mean. Boom and bust cycles do exist but they eventually take care of itself. This is known as the efficient market hypothesis.

Soros in the book's second part argues that this inherent flaw in market fundamentalism has weakened financial markets to a point where the emergence of a new paradigm for financial markets is inevitable. The trigger was the credit crisis of 2008. His razor sharp analysis of the current crises that commenced in August 2007 and has its origin in the collapse of the subprime mortgage market is one of the most impressive parts of this chapter.

The current crisis marks the end of a "superboom" in financial markets that started after WWII and accelerated during the Reagan/Thatcher governments when market fundamentalism took hold. This superboom was characterized by huge credit and monetary expansions. According to Soros this expansion has nowhere to go and is now ending. The emerging new paradigm has two faces. One, the dollar looses its status as reserve currency and two, interest rates on U.S. government debt are bound to rise.

Once again Soros proves that he is capable of analyzing money flows like nobody else does. It is known that his endowment fund has made several billion dollars profit in 2007. The book is highly recommendable for anyone who wants to get a peek into the investment mind of the best hedge fund manager in the world. He is currently (time of publication) short U.S. and European equities and the US dollar and long Chinese and Indian equities and "other currencies" than the USD.

The 'golden spike' commemorated

On May 10, 1869, in Promontory Summit, Utah, the “golden spike” was driven into the final tie that joined 1,776 miles of the Central Pacific and Union Pacific railways, ceremonially creating the nation’s first transcontinental railroad. And America was transformed.

A testament to the great American entrepreneurial spirit

May 2008 USDA crop forecast shows balanced supply and demand

Commodity brokers are overstating the bullish case in an attempt to extend the rally.

Gavin Maquire, Iowa Grain Co. Research Director:
Declining soybean stocks in the wake of a fairly decent acreage increase in the US ...confirming global consumption is on a rising trajectory.

James Cordier, optionseller.com founder:
Report was extremely bullish for both corn and soybean.
So much of today's corn production goes to ethanol. That's got to have to be revisited. If we stop ethanol right now corn would sit at 6.25 where we are right now. Corn has a very good chance to go to 7.5 a bushel this fall.
Corn planting is down 50% from previous gestimates. We are looking at corn yields not nearly as high as what we were anticipating just a month ago. That's gonna be very bullish this fall when we actually harvest the crop.

Cordier with more commodity bull(shit) 101:
We have insatiable demand from all the BRIC nations and we see that continuing. To think that we are about to bubble out in commodity prices especially grains any time soon, insatiable demand throughout the world is going to continue for the next 6 to 12 month and it is not too late to participate in it.

Maquire finds some truth:
In wheat we are probably going to head lower.

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To find out what is really going on here are some facts from the USDA's World Agricultural Supply and Demand Estimates:

• Global wheat production for 2008/09 is projected at a record 656 million tons, up 8 percent from 2007/08, and up 5 percent from the previous record in 2004/05.


• Total U.S. corn use in 2008/09 is projected down 2 percent as reductions in feed and residual use and exports more than offset a continued expansion in ethanol production. Ethanol use is projected at 4 billion bushels, up 33 percent from 2007/08.


• Global coarse grains production for 2008/09 is projected at 1.1 billion tons, up slightly from the current year record, despite the year-to-year decline in U.S. corn output. Foreign coarse-grain production is expected to increase 4 percent from 2007/08.


• Soybean crush ending stocks for 2008/09 are projected at 185 million bushels, up 40 million from 2007/08, leaving the stocks-to-use ratio at a relatively low 6 percent.


• Global oilseed production for 2008/09 is projected at 423 million tons, up 32.2 million tons from 2007/08.

Supply and demand in U.S. and World corn markets is more balanced than commodity bulls would like us to believe (see red circles):

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USDA's 2008 crop production forecast for the U.S. is bright compared with 2007 with an above average crop for wheat, winter wheat and soybeans. Higher U.S. yield and world production are expected to make up for a slightly lower corn production.

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source: World Agricultural Supply and Demand Estimates, May 2008
http://usda.mannlib.cornell.edu/usda/current/wasde/wasde-05-09-2008.pdf

source: Crop Production
Released May 9, 2008, by the National Agricultural Statistics Service (NASS)
http://usda.mannlib.cornell.edu/usda/current/CropProd/CropProd-05-09-2008.pdf

video: Grow your portfolio with ags
CNBC
http://www.cnbc.com/id/15840232?video=735307029

European bank lending worse in first quarter 2008

EZB, The euro area bank lending survey, April 2008:
The results of the April 2008 bank lending survey indicate a further increase in the net tightening of credit standards for loans to enterprises (up from 41% in the fourth quarter of 2007 to 49% in the first quarter of 2008), with net tightening increasing more for large than for small and medium-sized enterprises. Banks’ risk perception regarding general economic activity, the industry or firm-specific outlook, and the cost of banks’ funds and balance sheet constraints contributed to the further increase observed in banks’ net tightening of credit standards. Banks also reported a further increase in the net tightening of credit standards for loans to households for house purchase (up from 21% in the fourth quarter of 2007 to 33% in the first quarter of 2008). In addition, the net tightening of credit standards for consumer credit and other lending to households rose (up from 10% in the fourth quarter of 2007 to 19% in the first quarter of 2008).


With regard to demand for loans, banks reported that net demand for loans to enterprises was negative in the first quarter of 2008, a decline by comparison with the slightly positive net demand observed in the previous quarter. Net demand for loans to households for house purchase also fell further in the first quarter of 2008 and was negative, while net demand for consumer credit and other lending to households was broadly unchanged over the same period.


Banks reported that their access to wholesale funding had deteriorated over the past three months, especially as regards securitisation activity. In addition, the percentage of banks reporting that events in financial markets are having a considerable impact on the cost related to their capital position and some impact on lending has increased over the past three months.


The sample group of banks participating in the survey comprises 113 banks, representing all of the euro area countries, and takes into account the characteristics of their respective national banking structures. Since these banks differ considerably in terms of size, the survey results are weighted according to the national shares of total outstanding euro area lending to euro area residents. All 113 banks participated in the April 2008 survey (i.e. there was an overall response rate of 100%).


source: The euro area bank lending survey, April 2008
European Central Bank
http://www.ecb.int/stats/pdf/blssurvey_200802.pdf

Long Islanders line up for $1.06 gas

The average price of a gallon of gas reached a record $3.65 today. Cheap gas is worth the wait for 106 lucky Long Islanders.

The Newsday article cites an interesting survey:
But one sacrifice many Long Island drivers appear unwilling to make is swapping a bigger vehicle for a more fuel-efficient model. Conducted amid rising fuel prices in February and March, a survey of 850 Long Island residents showed that, while one-tenth of drivers would consider buying a hybrid and 14 percent would consider a compact, roughly two-thirds of drivers preferred something other than a smaller car with better gas mileage.

click for video
















video: newsday.com
http://www.newsday.com/video/?autoStart=true&topVideoCatNo=default&clipId=2453603

George Soros on the recent stock runup and commodities

Billionaire investor George Soros says commodity bubble will burst; stock runup is a rally in a bear market. He is not short commodities.

"This is a bear market rally. We could have seen the peak either last Friday or in the next couple of weeks."

"I think I could loose a lot of money being short commodities. You want to have more evidence of a peak, it is impossible to call the peak, you are either too late or too early."

click for video

















video: George Soros On Commodities
Robert Lenzer, National Editor, Forbes.com
http://www.forbes.com/video/?video=fvn/streettalk/bl_st_soros050708b

What "sea change"? - GM will still produce 1 million SUVs by 2012

It seems that the auto industry is slowly responding to the changing reality of fossil fuel driven motion. The long lasting state of denial is nevertheless surprising taking the close ties between the Big3 in Detroit and Washington into account. The search for an explanation leaves us with three alternative possibilities. One, the state of denial is not restricted to Detroit but reaches out to Washington as well. Oil production in the United States has peaked in the 1970s, since then the country depends on other energy sources. In certain circles in Washington the ties to energy producers in particular from the Middle East are very close. Maybe they are not. Two, Washington is basically cut out of the loop with Middle Eastern producers and therefore has no clue what is really going on. The third possibility, one that I favor, is the falsely over-hyped theory of peak oil production.

Domestic auto sales have plunged in recent years. Annual auto sales are now forecast to come in below 15 million units, which by some estimate brings General Motors and its peers closer to bankruptcy.


What is the godfather of the domestic auto industry doing that as some say constitutes as a "sea change"? GM engineers are considering to shift away from large SUVs like the Tahoe to a more car-like construction by 2012. Annual production of SUVs and pickup trucks would be reduced by 40 percent to 1 million vehicles from 1.7 million. Still a very high number given the high price of oil. A barrel of WTI closed above $123 on May 7th. GM also tries to meet a government requirement to cut fuel use 40 percent by 2020. That again is a very long time.

The fact that the industry is in no real hurry to change its ill advised habits is clearly at odds with the pressing nature of today's energy markets. Why else would GM still produce 1.7 million SUVs and postpone an increase of fuel efficiency by another 12 years to a level already seen in European and Japanese cars today? Detroit and Washington are either out of the loop (their minds) or this "energy problem" will reverse itself at least to a certain degree.

One hint towards the latter comes from OPEC Secretary General who in a press release emphasizes that in recent months oil prices have been mainly driven by financial market developments and the increased flow of speculative funds into oil futures.

Here is the original press statement:
There is clearly no shortage of oil in the market. OECD commercial oil stocks remain above the five-year average, with days of forward cover at a comfortable level of more than 53 days. US crude inventories, meanwhile, rose by almost six million barrels last week, which is a further indication that oil supplies are plentiful. OPEC Member Countries continue to produce at more than 32 million barrels a day (mb/d). In addition, a number of new OPEC crude oil projects have started to come on-stream and OPEC spare capacity continues to increase, with the figure currently standing above 3 mb/d. At the same time, crude oil movements indicate that some Member Countries are unable to find buyers for their additional supply.

El-Badri reiterates that OPEC stands ready to act if the market shows a need for any further measures. If we believe that we are not surrounded entirely by liars and the power brokers in Washington are not cut out of the loop just yet than we must consider the possibility of plenty of oil in the future. Consider also the news coming out of the American Trucking Associations with such heavy weights like FedEx, UPS and Con-way as members.

The American Trucking Associations says adherence to a handful of new proposals will reduce fuel consumption by 86 billion gallons and carbon dioxide emissions -- the main culprit of climate change -- by 900 million tons for all vehicles over the next 10 years.

According to the US Department of Transportation buses and trucks consumed about 100 billion gallons of fuel per year in 2005 . A few simple recommendations like speed limits for trucks at 68 mph, reduced engine idling, increase of fuel efficiency, or easing of congestion by improving the nation's highways can help to reduce consumption by almost 10 percent.



source: GM May Break Up SUV-Truck Marriage to Cut Fuel Use, Emissions
Bloomberg, Thu May 8, 2008
http://www.bloomberg.com/apps/news?pid=20601109&sid=ak87hDNumPjU&refer=news

source: Press statement by HE Abdalla Salem El-Badri, OPEC Secretary General
No 7/2008
Vienna, Austria - 8 May 2008
http://www.opec.org/opecna/Press%20Releases/2008/pr072008.htm

source: Truckers introduce plan to slow fuel consumption, emissions
Thu, May 8 2008, 16:29 GMT
http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=a990ee42-3a12-4ea5-b787-56dbe3cac120

source: Motor Vehicle Fuel Consumption and Travel in the U.S., 1960–2005
http://www.infoplease.com/ipa/A0004727.html

New tools at the Fed - curse or blessing?

EconWeekly has an interesting take on the ingenuity of new lending facilities at the Federal Reserve. The Fed's new tools are outside traditional channels of open market operations and include the Term Discount Window Program (TDWP) and the Term Auction Facility (TAF). These programs are intended to provide liquidity and ease money market strains in the interbank market as witnessed by a blow out of short term rates like LIBOR. The downside of this actions is reflected in the quality of the balance sheet of the Federal Reserve. According to EconWeekly there is considerable concern that the Fed will run out of valuable Treasury securities and will replace them with questionable collateral. This could overwhelm the Fed's balance sheet and consequently the value of the government’s debt obligations.

Here is EconWeekly's take:


In 2007 the Federal Reserve made an effort to provide liquidity through channels other than open market operations and repos. To that effect, it created the Term Discount Window Program (TDWP) and the Term Auction Facility (TAF).

Loans to commercial banks and primary dealers, from one facility or another, represent now a much larger fraction of assets. The fraction of Treasurys has declined to 53% from 87%.

The concern now is that the Fed may run out of Treasurys. In theory, the Fed could continue extending loans indefinitely. The problem is that, with no Treasurys left over, the Fed would not be able to offset expansions of the monetary base, as it’s been doing for months. Reserve balances would balloon, pushing down the federal funds interest rate to zero. So the Fed is now pondering the following alternatives:

1) Purchase mortgage-backed securities directly. The Fed could finance such purchases by selling Treasurys, and in that case reserve balances would not be affected.

2) Have the Treasury issue more debt than it needs and deposit the cash at the Fed. The Fed would use that cash to purchase Treasurys. While lending conditions don't improve, the new funds would soon turn into loans to banks. This would change the way we view sovereign debt. With this plan, the value of the government’s debt obligations would become contingent on the portfolio of dodgy securities that the Fed accepts as collateral.

3) Let the Fed issue its own debt. The Fed would use the funds to purchase securities or make loans.

4) Remunerate reserves. As Greg Ip explains, “if the Fed paid, say, 2% interest on reserves, banks would have no incentive to lend out excess reserves once the federal funds rate fell to that level.”.... It would also reduce the amount of inter-bank lending, as banks would keep more of their cash in their safe-deposit box at the Fed. That lending would be replaced by loans from the Federal Reserve.



source: The Fed's new tools (II)
EconWeekly
http://www.econweekly.com/2008/04/feds-new-tools-ii.html

Source:Fed Seeks Approval to Pay Interest to Banks
GREG IP, WSJ, May 7, 2008
http://online.wsj.com/article/SB121011673771072231.html

Bernanke speech on foreclosures - May 5th

Fed chair Bernanke addresses the Columbia Business School in New York on the problem of mortgage delinquencies and foreclosures. The stress in the U.S. housing market is not abating, foreclosures are rising an home prices are falling. He calls on Congress to allow for a larger participation of the Federal Housing Administration and the GSEs in the rescue efforts. He seems to be at odds with the administration and suggest a "write-down of principal or other permanent modification of the loan by the servicer" when the value of the home has fallen well below the value of the mortgage loan. Bill Gross and others are suggesting a similar approach, which seems increasingly likely given the current situation.

About one quarter of subprime adjustable-rate mortgages are currently 90 days or more delinquent or in foreclosure. Delinquency rates also have increased in the prime and near-prime segments of the mortgage market, although not nearly so much as in the subprime sector. As a consequence of rising delinquencies, foreclosure proceedings were initiated on some 1.5 million U.S. homes during 2007, up 53 percent from 2006, and the rate of foreclosure starts looks likely to be yet higher in 2008. Nationally, as of the fourth quarter of 2007, the rate of serious delinquency, as measured by credit records, stood at 2 percent of all mortgage borrowers, up nearly 50 percent from the end of 2004.

On the subject of additional mortgage initiatives:
The Congress can take an important step by moving quickly to reconcile and enact legislation permitting the Federal Housing Administration (FHA) to increase its scale and improve its management of risks. ...Giving the FHA greater latitude to set underwriting standards and risk-based premiums for mortgage refinancing, as well as more flexibility in product development, would allow it to help still more troubled borrowers.

In addition, because the GSEs have resolved some of their accounting and operational problems, their federal regulator, the Office of Federal Housing Enterprise Oversight, has lifted some of the constraints that it had imposed on them. Thus, now is an especially appropriate time for the GSEs to move quickly to raise significant new capital, which they will need to take advantage of these new securitization and investment opportunities, to provide assistance to the housing markets in times of stress, and to do so in a safe and sound manner.

Bernake's "heat maps", showing data for the fourth quarter of 2007, are somewhat outdated. The situation has deteriorated significantly. It is noted that the home price chart uses the OFHEO numbers which are significantly less severe than the Case-Shiller home price index.

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source: Mortgage Delinquencies and Foreclosures
Chairman Ben S. Bernanke
At the Columbia Business School's 32nd Annual Dinner, New York, New York, May 5, 2008
http://www.federalreserve.gov/newsevents/speech/Bernanke20080505a.htm

State level coincident indexes forecast no recession yet

Since the advanced numbers for first quarter GDP came in better than feared a heated debate is going on whether we are already in a recession or not. Martin Feldstein, head of the National Bureau of Economic Analysis (NBER), thinks that the U.S. economy is not in a recession yet. The forecasting value of NBER is challenging for two reasons. First, its analysis is quite often released well after the peak of economic activity and second, the frequent revisions to economic data make a timely forecast more difficult. In the 2001 recession economic activity peaked in March of 2001, the date of NBER's public release was eight month later in November 2001. NBER's delayed release takes 7 months to report peak activities and 16 months for troughs, on average. There is clearly a need for a more timely forecast of peak economic activities.

States should provide a useful link to national fluctuations in the business cycle because economic activity at the national level is simply the sum of economic activity (in dollar terms) of the component states. The Federal Reserve Bank of Philadelphia releases 50 state level coincident indexes which are released on a monthly basis. It also breaks out the nations diffusion index which is calculated as the percentage of state coincident indexes growing minus the percentage declining.

As talk of a recession has increased, data from the individual states are telling us another story: Although the nation is slowing, it is not showing a recession. The Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for March 2008. The indexes increased in only 19 states for the month, decreased in 22, and were unchanged in the remaining nine (one-month diffusion index of -6). For the past three months, the indexes increased in 31 states, decreased in 14, and were unchanged in the other five (three-month diffusion index of 34).

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Contrary to common believe NBER does not use just movements in GDP for recession dating but defines a recession as follows:

“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.”

The four state-level variables in each coincident index are non-farm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). Frequent revisions to economic data are nevertheless challenging for both the coincident index and NBER's release.

While these revisions are often small, the most recent January BLS rebenchmark dramatically increased the level of the diffusion indexes in the fourth quarter. The December value was most affected. Pre-revision, the one-month diffusion index was -6 percent, but by February, it had been revised to 56 percent; the three-month diffusion index was less affected but still showed a sizable revision from 42 to 74 percent.

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source: State Coincident Indexes in March 2008
Federal Reserve Bank of Philadelphia
http://www.philadelphiafed.org/econ/indexes/coincident/2008/CoincidentIndexes0308.pdf

It never ends for Wall Street

Bear Stearns layoffs could exceed 10,000, but here comes the fun part:

Bear Stearns staff made redundant will receive nine months full pay and a cash payment equal to one-third of their bonus last year.

Gawker asks, " Why the hell are we bloggers again?"



source: Bear Stearns layoffs could exceed 10,000
Harry Wilson, Financial News online
http://www.financialnews-us.com/?page=ushome&contentid=2450552487

Fed reports banks tightened credit in first quarter of 2008

Banks in the US reported wide-ranging credit-tightening and a decline in loan demand over the last three months, according to a Federal Reserve survey released today.

For large and medium sized companies, 55% of US banks reported tighter lending standards in the April survey, up from 30% in January. Fifty-two pct had higher standards for small businesses.

The cost of loans also went up, with 70% of banks saying they raised the spread of their loan rates over their cost of funds for large and medium firms. Sixty-five pct raised spreads for small firms.

Foreign banks operating in the US reported even larger percentages of credit tightening and increased spreads.

The bankers "pointed to a less favorable or more uncertain economic outlook," the Fed survey said, and "noted that concerns about their banks' current or expected capital position had contributed to more stringent lending policies over the past three months."

Although some companies were returning to banks for financing after non-bank sources became less attractive, the bankers overall said businesses were cutting back on borrowing because they were cutting back on investment in plant and equipment.


For their mortgage lending, banks were making traditional mortgages harder to get even for the best borrowers and backing out of any other kind of mortgage lending. About a quarter said demand for mortgages had fallen in the last three months.

Sixty-two pct of the banks said they now had tighter standards even on prime mortgages for borrowers with the best credit ratings.

Seventy-six pct of the banks that still made so-called non-traditional home loans (with special down payment or repayment features) said they were tighter with credit. 15 of the 52 banks responding said they no longer made non-traditional loans.

Seventy-eight pct of the banks that made subprime loans reported tougher standards but only 9 of 52 were still in the subprime business.


Banks were also getting tougher on credit cards. Thirty pct in April vs 10% in January had reduced their lending. "Significant" numbers of banks "reduced credit limits on credit card loans and increased minimum required credit scores." The banks were also raising their interest rate spreads on consumer lending.

On student loans, 40-45% of banks expected cutbacks this fall.



source: The April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices
Board of Governors of the Federal Reserve System
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200805/fullreport.pdf

Not everything is quiet on the Western Front

Credit and housing woes continue and throw a speed pump into the bear market rally. Here are some headlines from HousingWire:

FHA Refi Plan Hits Speed Bump in Senate Committee
The roadblock in this case appears to be primarily one man: Sen. Richard Shelby (R-Ala.), the ranking Republican on the Senate Banking Committee, who is either the last bastion of sensibility or a troublesome holdout, depending political affiliation.

Back in January congress and the White House enacted a stimulus package that also raised GSE loan caps.
Tentative Economic Stimulus Package Would Boost FHA, GSE Loan Caps
Published: January 24, 2008
The package also raises the conforming loan limits for Fannie Mae and Freddie Mac, beyond the current $417,000, which would allow the government-sponsored companies to buy bigger loans in areas with high housing costs. Rep. Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, said the new limit would be 125% of a metropolitan area’s median housing price, up to a cap of about $725,000.

S&P Cuts 184 Prime Jumbo RMBS Classes; Warns AAA Downgrades Ahead
Standard & Poor’s Rating Services said late Thursday that it cut ratings on 184 classes of U.S. residential mortgage-backed securities from 52 transactions backed by prime jumbo loan collateral. All affected deals were from the 2006 vintage, and none of the cuts reached up to the AAA level.

At least not yet. S&P also put 110 ratings of mostly AAA-rated prime jumbo RMBS classes on negative ratings watch, after announcing the downgrades. The warnings represent the first signal from any major rating agency that prime jumbo mortgages may be running into greater problems than originally expected.

Thursday’s cuts totaled an issuance amount of nearly $3.5 billion, S&P said — a fraction of the prime jumbo market, to be sure, even within the 2006 vintage. But an unnerving trend, nonetheless.

S&P Stops Rating Home Equity RMBS; Cites “Anomalous” Borrower Behavior
“After reviewing and analyzing the performance data available for U.S. closed-end second-lien (CES) mortgage loans and the related residential mortgage-backed securities (RMBS), Standard & Poor’s Ratings Services believes that this market segment does not allow for a meaningful analysis of new issuance and securitization,” the agency said in a press statement late Thursday.

Apparently, there simply isn’t enough credit enhancement in the world to account for losses that reach that high — and while S&P said it will continue surveillance on existing CES deals, sources said that S&P’s announcement underscores just how heavy losses really are in an area of mortgage finance that was once among the industry’s hottest.

How hot? Consider that S&P rated nearly $18 billion in CES deals druing 2007 alone.

Investment Dealers’ Digest, which interviewed S&P spokesperson Adam Tempkin, noted that S&P is seeing borrower behavior that Tempkin characterized as “anomolous and unprecendented” — a reference to a growing number of borrowers simply walking away from their homes.

Insured Defaults Up 37 Percent in March
Borrowers with mortgage insurance fell more than 60 days behind on their mortgage payments at an increased pace in March, with the number of primary insurance defaults up 37 percent last month relative to year-ago numbers. The Mortgage Insurance Companies of America, a trade group comprised of most of the major private mortgage insurers, said earlier this week that 58,131 defaults were recorded in March, up from 42,362 one year earlier.

The number of defaults has fallen steadily from January’s high-water mark of 68,950, although industry experts say such an early-year trend is common. In 2007, the number primary insurance defaults fell 19.3 percent between January and March; this year, the number of defaults has fallen 15.9 percent since January. MICA does not seasonally-adjust its data.

UBS Investment Research Monday cut its growth forecast for the U.S. economy, saying it now expects the economy to contract rather than grow in the third quarter because of a worse than expected slump in the real estate market. The firm lowered its third-quarter real gross domestic product growth estimate to negative 0.5% from a previous estimate of positive 1.5%.

Vitner of Wachovia sees recession without negative GDP

According to Mark Vitner, senior economist at Wachovia, the U.S. economy might just skirt a decline in real GDP but will nevertheless be in a recession because of continued decline in business spending and purchases of consumer goods.

We think we are in a recession right now, but I don't know if we see a negative GDP number at all in 2008.

Real final sales declined by 0.2 percent AR, when you add back in the improvement in the trade deficit it is actually down by 0.4 percent. So the economy that matters most to consumers is actually declining, consumer spending on goods and business fixed investment.

I think that you can have a recession without having a decline in real GDP. Its never happened before but I do think its possible ( see Mike Darda). We could see 4 out of 5 quarters with negative final sales to domestic purchases. We would see a decline in domestic demand but because of the improvement in the trade deficit, which is correcting from 6 percent to 3 percent of GDP, that could keep overall GDP growth in positive territory, even so consumers and businesses actually see final demand decline.

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excerpts from the Bureau of Economic Analysis, National Economic Accounts
GROSS DOMESTIC PRODUCT: FIRST QUARTER 2008 (ADVANCE):

Real personal consumption expenditures increased 1.0 percent in the first quarter, compared with an increase of 2.3 percent in the fourth. Durable goods decreased 6.1 percent, in contrast to an increase of 2.0 percent. Nondurable goods decreased 1.3 percent, in contrast to an increase of 1.2 percent. Services increased 3.4 percent, compared with an increase of 2.8 percent.

Real nonresidential fixed investment decreased 2.5 percent in the first quarter, in contrast to an increase of 6.0 percent in the fourth. Nonresidential structures decreased 6.2 percent, in contrast to an increase of 12.4 percent. Equipment and software decreased 0.7 percent, in contrast to an increase of 3.1 percent. Real residential fixed investment decreased 26.7 percent, compared with a decrease of 25.2 percent.

Real final sales of domestic product -- GDP less change in private inventories -- decreased 0.2 percent in the first quarter, in contrast to an increase of 2.4 percent in the fourth.



video: Vitner of Wachovia sees recession without negative GDP
Bloomberg,
http://www.bloomberg.com/avp/avp.asxx?clip=mms://media2.bloomberg.com/cache/vT.QFmTuCC14.asf

source: GROSS DOMESTIC PRODUCT: FIRST QUARTER 2008 (ADVANCE)
Bureau of Economic Analysis, National Economic Accounts
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

read also: NFP declined by 20k in April 2008
http://manonthestreet64.blogspot.com/2008/05/nfp-declined-by-20k-in-april-2008.html

Warren Buffett looks to Europe

"We are happy to invest in businesses that earn their money in the euro, or in companies that derive their earnings in Germany, or from the sterling in the UK, because I don't have a feeling that those currencies are going to depreciate in a big way against the dollar.

"I'm willing to bet the dollar will weaken against other currencies over the longer term, so I feel no need to hedge those currencies."

The "oracle from Omaha" is not always right. In 2006 his dollar short bet let him down substantially, but he had the Federal reserve against him. Today looks different.


source: Warren Buffett bets his bottom dollar on European businesses
Edmund Conway, The Daily Telegraph
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/05/cnbuff105.xml

NFP declined by 20k in April 2008

A look at the numbers, with Diane Swonk, Mesirow Financial, Mark Zandi, Moody'seconomy.com, Mike Darda, MKM Partners, Jack Bouroudjian, Brewer Investment Group, CNBC's Rick Santelli, Steve Liesman & Hampton Pearson.

Here are some of the candies:
Santelli: November Fed Funds are selling off, we are looking at a 20 percent chance of tightening many months down the road.
Zandi: This recession is a mild recession.
Liesman: Workweek actually fell, the diffusion is pretty low.
Darda: ....it could just be a very severe slowdown. Could this just be the first recession in history where we do not see one quarter of negative growth let alone two.
Swonk: ...its not the disastrous scenario that some people were suggesting.

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update: Fri May 2nd, 2 p.m.

The BLS diffusion index, which aims to capture the percentage of industries with increasing and decreasing employment, is slowly deteriorating. The three month average is down four month in a row. This is the first time since the 20o1 recession, which saw rather significant job losses. 50 percent indicates an equal balance between industries with increasing and decreasing employment.

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here are a few more stats:
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video: April Jobs Report
CNBC
http://cosmos.bcst.yahoo.com/up/player/popup/index.php?cl=7648092

source: Employment Situation of the Bureau of Labor Statistics
http://www.bls.gov/news.release/empsit.toc.htm

read also: Non Farm Payrolls down 80k in March
http://manonthestreet64.blogspot.com/2008/04/non-farm-payrolls-down-80k-in-march.html

Real out-of-pocket spending shrank in Q1

Posted by: Michael Mandel on May 01

According to the BEA’s latest report, real personal consumption grew at a 1% rate in the first quarter. But once I take out the parts of PCE which don’t actually come directly from consumer pockets, the rest of real PCE actually shrunk at an 0.1% rate.

Is the consumer still spending?

Michael Mandel, chief economist BusinessWeek, believes that another drop in the market is yet to come because of a broad decline in consumer spending. The recession in the US started in November 2007 with a decline in private sector employment that has shed some 300000 jobs so far. Personal consumption is holding up still positive, but only because of "quirky statistics". The government's "personal consumption" includes outlays for Medicare, Medicaid, and private health insurance to about $1.8 trillion out of $10 trillion total. It also includes "imputed" item such as $1.1 trillion owner-occupied rent which is a theoretical payment of rent (not real rent). Without these categories, which are not coming out of the pockets of consumers, inflation adjusted personal spending has actually fallen since November. The decline is pretty much across the board. (see table "Where the Money is Going" here).

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Domestic auto sales for April came in very weak with sales among the Big 3 down between 10 and 20%. Drew Matus from Lehmann Brothers expects nonfarm payrolls to be down 90k in April.


source: The Consumer Spending Mirage
by Michael Mandel, chielf economist BusinessWeek
http://www.businessweek.com/magazine/content/08_16/b4080000602263.htm

Goldbug Sinclair cuts to the chase

Jim Sinclai's MineSet
http://www.jsmineset.com/

Let’s cut to the chase:
1. The potential for the bottom of the gold price being today is 75%.
2. If it is not today, then the bottom for the price of gold is very close by.
3. The downside in gold will be in by the end of the first week of May or sooner.
4. On the 8th of May interest will increase in junior precious metals shares. This interest will first be in the most meritorious issues.
5. Probabilities support the price of gold going back above $1000, failing, and on the third try making a new high.
6. The price of gold is going to $1650.
7. The euro is going to a minimum of 2 to the dollar.
8. The USDX will trade at .5200
9. Precious metals shares will be the darlings of the market prior to 2011.

These are rather extreme positions but Sinclair is not unreasonable at all.

Exxon's first quarter earnings and the Rockefellers

Exxon Mobile reported today that its first-quarter profit climb 17 percent to $10.9 billion -- the second biggest U.S. quarterly corporate profit ever. The results nevertheless disappointed in part because of compressed refining and wholesale margins. Record crude prices and compressed prices on refined product cut into earnings on the refining and marketing side where earnings were off 39 percent from a year ago.

Overall production fell 5.6 percent from a year ago, in part from natural field declines and maintenance. Production fell 3% when excluding production losses from its operations in Venezuela, divestments, OPEC quota effects and price and spend impacts on volumes.

Capital and exploration expenditures for the three months ended March 31 rose 30% to $5.49 billion from $4.2 billion in the year-ago period.

There is criticism that the company spends too much money to repurchase shares instead of reinvesting it into new exploration or alternative energy. We have referred to this earlier, ExxonMobil's R&D spending is 'tiny'. In its latest annual report stated that R&D spending in the last five years was a meager $3.5 billion, in the same period Exxon made $160 billion in profits.

Trouble is also brewing in the upper echelons of Exxon's management. The Rockefeller family, who's great-great grandfather founded the company, speaks out about Exxon Mobile with Liz Claiborn of Fox Business. The family together with shareholders hopes to get the company on a different track and invest more in alternative energy in the future. Similar attempts in the past have failed on lack of shareholder support.

Peter O'Neill, Rockefeller Family CMTE spokesman:
"We think its very very important for Exxon Mobile to have an independent chair, especially in a time when energy markets are changing so much....Having an independent chair will give you the best probability that they be able to test assumptions."

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video: Rockefeller Family on Exxon Mobil
http://cosmos.bcst.yahoo.com/up/player/popup/index.php?cl=7627185

source: Exxon Profit Rises Less Than Estimated on Output Drop
Bloomberg
http://www.bloomberg.com/apps/news?pid=20601103&sid=au6tA0_7RbGM&refer=news

read also: ExxonMobil's R&D spending is 'tiny'
http://manonthestreet64.blogspot.com/2008/04/exxonmobils-r-spending-is-tiny.html