From subprime to Alt-A,

For all readers who prefer to read my Spanish version, please click on http://themusingsoffritz-espanol.blogspot.com/ or click on the link (links to my other blogs) on the right hand side

The Expanding Menu of Horrors
BY FRANK BARBERA, CMT

Over the last 20 years, municipal issuers and other investors have utilized auction rate securities (ARS) to meet their financing needs. During that period of time, seldom have these auction rate securities met with insufficient demand. That is, until the last few weeks when concerns about monoline insurer solvency have caused the market to place a huge premium on liquidity, in turn, causing many of the bidders at these auctions to pull out. The result: thousands of auctions have failed, or been priced at huge 20% reset type premiums. Since late January, the ‘cap’ rates for a wide variety of ARS paper have expanded from 4% to as high as 20%, with most notes now at least 15%. The reason, with the monolines under a serious threat of being downgraded, a number of the large brokers who in the past offered a liquidity backstop, have now simply stopped bidding. Under the terms of the arrangements, the auction arrangers are not obligated to repurchase the securities much to the horror of investors who thought these securities were absolutely liquid instruments.

Chalk this up as one more instance of the unwinding of derivatives markets which, week in and week out, has continued unabated in 2008. In fact, last week, according to Bloomberg.com, UBS concluded that “mathematical models that traders use to calculate prices in the 2 trillion dollar market for collateralized debt obligations simply don’t work anymore. In its commentary, UBS admitted that integral ‘correlation’ models which represent the odds of one default potentially infecting another, and the very fabric of pricing for many of these derivative securities, now show a nearly 100% chance of contagion. As a result, any number of quant funds are already in deep trouble in 2008, some down as much as 15 to 20%.
http://www.financialsense.com/Market/daily/tuesday.htm


Hedge Funds

Folks (yes dear reader I am still down under and here one uses the word folks), please keep in mind that a high percentage of the still some over 8,000 hedge funds are invested in papers that are not easily tradeable. There will be many hedge funds that will have to sell their leveraged positons as soon as they can. Unless you know exactly what is in the black box called hedge fund, I would be extremely careful with investments in hedge funds. Personally I believe it is better to be out for the moment being. I expect for the next months some very though times for hedge funds. It would not surprise me to see increasingly notices in the financial news about hedge funds that just got out of business. Once again, my dear reader, some winter cloth might come handy for the very cold breezes that seem to be on the horizon.


Following a remark from Williams www.shadowstats.com

The current inflation problem, however, is not due to strong demand for goods and services, but rather it is due to commodity supply (oil and food) distortions, a weakening U.S. dollar and accelerating growth in the broad money supply. Accordingly, the current downturn in the economy will not bring meaningful relief from rising prices.
By the way according to Williams one can expect the M3 for February on a year to year basis at a new high. Inflation will increase. Too much new green/black papers are produced right now.

Dear reader in one of my posts last year I wrote about the US comptroller Walker informing us about the shortfalls. Walker finally decide to quit his job a few days ago. Following a comment from him:

he last time we looked, the shortfall between what had been promised – in the form of Treasury bonds, Medicare, Medicaid, Social Security and the like – and what might reasonably be collected in taxes toted up to some $50 trillion, or about a half a million dollars per family. In other words, the whole country is bankrupt...and the financial obligations of the U.S. federal government should be regarded by investors as though they were subprime debt. It is a huge debt that the debtor cannot pay.
Have there been some political leaders who might have promised too much? And worse, might have spent too much? What bill? Well someone will have to pay not only the party. Even the fiddler who only played a few seconds will request his share or maybe a bit more of his share. He certainly will insist that somebody will pay.


Credits

Bond insurers Ambac and MBIA will keep their coveted AAA credit ratings, announced Standard & Poor’s yesterday … confirming the corruption and consistent inaccuracy in the ratings industry. Debt issued by both of these insurers will maintain the same credit rating as bonds from the likes of GE and Exxon Mobil… at least for no

From Subprime to Alt-A

Yes dear reader, the write downs due to bad credit is not over yet. There is much more to come. Alt-A which so far seemed to be OK, are starting to feel the heat. It seems that there is no real market for those papers. Once again there is a loss of confidence and I am sure that it will not be the last investment category that will face the same fate.
From Bloomberg.com

AAA bonds with 6 percent coupons backed by 30-year, fixed- rate ``jumbo'' prime loans of more than $417,000 probably traded for 2.5 cents per dollar less than similar agency securities, the report said, compared with 2.25 cents last month. Agency securities have also declined, with Washington-based Fannie Mae's 6 percent, 30-year fixed-rate bonds falling from $102.66 per $100 on Jan. 31, to $101.86 today, Bloomberg data show.

About $950 billion of Alt-A mortgage securities are outstanding, compared with about $650 billion of subprime securities and $500 billion of prime-jumbo securities, according to Frank. Potential losses stemming from subprime-backed bonds are larger because of two-sided derivative contracts linked to the debt, many of which have been packaged into collateralized debt obligations and turned into securities.


Commodities/Rogers and more

The U.S. is in recession," Jim Rogers told reporters on a visit to Dublin yesterday. "It is going to get worse. They [the U.S. central bank] are printing money and are trying to prevent the recession -- they are putting on Band-Aids,” he said.

Light, sweet crude trades for a bit above 100 bucks

"I think oil’s going to back off," pontificated the legendary T. Boone Pickens last week, "The weakest quarter is the second quarter. We'll drop $10 or $15 a barrel in the second quarter. I think we'll be back above $100 in the second half of the year."

The legendary energy investor told CNBC that he has taken on short positions in both light, sweet crude and natural gas.
Let’s hope he is right in order to allow us to increase our long position. For investors who like risk a short might be something to look at. However I believe that shorting now is risky and therefore if you would like to take the risk, please do use amounts that would not hurt you if you would loose.


Softs/agricultural commodities



Please see chart above
Why have agriculture stocks outperformed the overall market? Wheat, corn and soybean prices are all more than triple their long-run averages, and there isn’t much we can do about this problem.
The world population is growing and the amount of available farmland remains virtually unchanged. The end result is less farmland per person.

But people still have to eat. Getting more and more production out of each last square inch of farmland is critical. The only commercially viable solution is to use more fertilizer.

Fertilizer consumption is growing at record pace just to keep crop production in line with demand. But if high crop prices are any proof, it’s just not enough. As a result, the biggest and best opportunities will crop up (sorry about that) in the agriculture sector over the next few years.

Rogers Says Sugar, Other Agricultural Commodities to `Explode' 
2008-02-28 04:48 (New York)
Feb. 28 (Bloomberg) -- Jim Rogers, who predicted the start of the commodities rally in 1999, comments on the outlook for sugar, cotton and other commodities.

He spoke today at the CLSA Japan Forum in Tokyo.

On the outlook for agricultural:

``If I told you how bullish I am about agriculture, you'd ask me to leave the room. Prices of agricultural commodities are going to explode. Inventories of food are the lowest they've been in over 40 years. The number of hectares devoted to wheat farming has been declining for over 30 years.'

``All of you should get all the sugar you can. The price of sugar is going to explode.'

``I'm bullish on cotton and have been for a while. A lot of people in the textile business are starting to convert from synthetics to natural fibers again because it's so much cheaper' given the rise in prices for oil used to make synthetic fibers.

Personally, dear reader, I do have no doubt at all that agricultural commodities will rise in price over the coming years and so will agricultural land or farms. The trend is in my opinion crystal clear.


Gold

Gold is slowly reaching higher and higher all time levels. Are these levels really all time high? Not really. Yes if we look at absolute numbers it is, however if we look inflation adjusted it certainly is not. Therefore all these news about all time high should be in fact in relation to inflation. This of course is in most cases not reported. In that sense gold is definitely one of the least understood investments. James Turk has a comment on that and I only can say that James Turk who, in my opinion is one of the finest gold specialist worldwide, definitely hits the point with the following remark:

Quote
Gold is one of the world’s most misunderstood asset classes. A recent press release by the World Gold Council no doubt added to that confusion, which arises because so many people – including many people within the gold industry – refuse to acknowledge that gold is money. They attempt to analyze gold as if it was a mere commodity with some jewelry fabrication and unimportant industrial application instead of what it really is – money.
Any good, service or commodity has value if it is useful. Gold’s value derives from its usefulness as money. In other words, gold’s value arises from its usefulness in economic calculation.

Peak Oil

Dear reader
I found on www.lemetropolecafe.com the following information about Oil. You know already that I have been saying for years that Peak Oil is close and lately that we have reached the plateau. I am a strong believer that we passed Peak already and that we will see higher oil prices. Peak Oil will change our live, no doubt about it. I copy the information as it is because I believe it is an excellent overview

QuoteOil could reach as high as $200 by the third or fourth quarters of this year
Energy Sector Trends Paint "A Very Alarming Picture"


The concept of 'peak oil' has been derided by the big oil companies for years, but last week the chief executive of the oil giant Royal Dutch Shell, Jeroen van der Veer, released a study forecasting the end of easy oil. Dr. Jim Buckee, retired president and chief executive of major independent Talisman Energy, claims he was not surprised that Royal Dutch Shell admitted oil supplies were getting tighter. Dr. Buckee says 'peak oil' is either here, or very close. "It is the underlying decline of the world's major fields that is the dominant driving factor here," he said.

If you think that at the moment the world is consuming 30-plus billion barrels a year of oil and is finding seven or eight billion barrels a year, and this state of affairs has been going on now for 20 or more years. . . It's obviously unsustainable and the world is increasingly drawing on the bigger, older fields. You couple that notion with the irreversibility of decline and you've got a very alarming picture."

Dr. Buckee says the cost of a barrel of oil could reach as high as $200 by the third or fourth quarters of this year, and that prices would have to get that high before it would have any particular impact on demand. "I don't think that really we've seen any rationing of consumption by price," he said. Source: (ABC Premium News (Australia))

Oil at $100 a barrel gives exporters an incentive to pump more, but their difficulty in doing so indicates the world is struggling to sustain production. A growing number of leading industry figures, including the CEO's of Total and ConocoPhillips, now question mainstream forecasts for supply. They suggest the era of "plateau oil" is nearer than many in the business have admitted.

Some argue it may not be possible to boost flows beyond the current rate of 86 million barrels per day (bpd). Conventional supply from non-OPEC producers have missed forecasts in recent years and appear for now to have hit an "effective plateau", according to the International Energy Agency (IEA), adviser to industrialized countries. (Reuters)

Global demand for oil is likely to grow by about 1.4 million barrels a day in 2008 according to forecasts by Lehman Brothers. Current global demand is roughly 86 million barrels per day. Some experts predict lower economic growth will reduce demand. Lawrence J. Goldstein, an economist at the Energy Policy Research Foundation, expects global demand to grow by less than a million barrels a day in 2008 due to slowing economic growth. (New York Times)

Nigeria has warned energy companies it wants to renegotiate oil and gas exploration and production contracts covering offshore oilfields in the next three months, claiming record prices are yielding a windfall to Western oil firms operating in that region. It is the first time Nigeria has come up with a timeframe for renegotiating the complex agreements. The government signaled late last year it would review the contracts in an effort to secure a greater share of profits from offshore production. The Nigerian move reinforces a global trend of oil-exporting countries demanding better concession terms to reflect surging prices. Oil executives say the government's decision to follow the example of countries such as Russia, Algeria and Venezuela. Militant violence in Nigeria has shut in a fifth of output since 2006. (Financial Times) Royal Dutch Shell, the largest foreign company in the strife-torn Niger River Delta, said it would take a $716 million charge against earnings due to the deteriorating security situation. Industry sources say that in addition to the production shutdown about 435 miles of pipeline and thousands of barrels a day of crude oil and condensates have been stolen. Much of the pipeline has been used for pillars in house construction. Nigeria's government is also not paying its share of joint-venture investments in the Shell venture, claiming it cannot fund its portion. Nigeria has budgeted only $5 billion of the $9 billion it was supposed to invest in the Shell operated project in 2008. Nigeria is one of the major OPEC exporters of light, sweet crude oil, so any disruptions in supply will quickly impact world markets. (Washington Post, BusinessWeek)

With oil markets booming Gulf states will enjoy a staggering, unprecedented increase in wealth over the next decade that will give them vast financial power across the globe. By one estimate, the five oil-and-gas-exporting nations - Saudi Arabia, United Arab Emirates, Kuwait, Qatar and Oman, with a combined population of 23 million citizens - will add $6.2-trillion (U.S.) to their revenues over the next 14 years. That's roughly the equivalent of adding Canada's total annual output to their revenues every two years. Those estimates assume oil prices of $70 per barrel. The producer's revenues would increase at higher average selling prices.

The International Energy Agency (IEA), a state-backed oil watchdog for industrialized countries, attributed recent record oil prices to pressures caused by strong demand and falling stock levels. In its monthly oil market report for January, the IEA forecast demand in 2008 of 87.8 million barrels per day (bpd), an increase of 2.3 percent, or 2 million bpd from 2007 levels. (AFP)

Average gasoline demand last month was 7 percent higher compared to the same week last year, even with prices 30% higher, according to a MasterCard report.

China is set to become the world's largest consumer of energy by about 2010 according to a study by the International Energy Agency (IEA). The World Energy Outlook report predicts that China will overtake the US in its energy use. The Chinese economy has expanded by 11.4% over the past year, reaching its fastest growth rate in 13 years. The Chinese economy is very energy inefficient. It takes more than four times as much energy to generate a unit of GNP in China than in does in the U.S. according to a recent study published by Gordon Feller (chart at right).

China's crude oil imports rose 12.4 percent in 2007 to a new record. Crude oil imports for 2006 increased 16.9 percent from the previous year. (Xinhua)

China is facing widespread, temporary electric power shortages that could affect global energy markets if they aren't resolved soon. The distribution system is having trouble keeping up with the country's rising demand for electricity. Regulators said yesterday that 13 provinces and major regions, including the industrial-and-export hub of Guangdong in the south, will experience a total shortfall of about 70 gigawatts of electricity - one-tenth of China's total. Coal stockpiles have fallen to less than half typical levels, analysts said. (Wall Street Journal)

China's Prime Minister Wen Jiabao responded to growing public anxiety about inflation by announcing that China would freeze energy prices in the near term, even as international crude oil futures have continued to surge. Inflation has hit an 11-year high in China.

Crude oil production in Mexico's huge Cantarell oil field will continue to decline this year at around the same pace as in 2007, Pemex announced. Average daily production at Cantarell is forecast to drop by 200,000 barrels in 2008, increasing pressure on the state-owned oil monopoly to ramp up output at smaller oil fields. The decrease in production would be a drop of 16 percent from Cantarell's December 2007 output of 1.26 million barrels per day (bpd), its lowest level of the year. Yields at Cantarell declined 16 percent during 2007, slightly more than forecast. Pemex aims to keep its total crude output at around 3.1 million bpd by increasing production at other fields. Total Mexican output in 2007 declined by 5.3 percent. (Reuters)

The Energy Information Administration reported a record-high 274 Bcf natural gas draw from storage for the week ended January 25th. The five-year average draw is 185 Bcf. The draw from storage surpassed the previous record-high withdrawal of 260 Bcf (in January 1997) and comes on the back of powerful heating degree days that were 21% above normal.

Low nuclear utilization is one reason for the strong incremental gas demand. Imports from Canada are also lagging. For the month the draw was 659 Bcf compared to a five year average draw of 580 Bcf. Working gas in storage now totals 4% above the five-year average and 13% below last year's levels. Depending on the weather the next couple of months the volumetric draw from storage could be the largest we have ever seen. The chart at right from AmericanOilman.com tells the story. From a five year high (blue line) in week 49 of 2007 we have fallen quickly (yellow line) in 2008. If trends continue we will need to inject much more natural gas into storage this spring and summer than we did in 2007, which should help keep prices firm.

Before 2010, the price for a thousand cubic feet of natural gas will be $10 per thousand cubic feet, T. Boone Pickens predicted at a presentation last month. Crude oil prices will reach $100 a barrel again before the end of 2008. "We are importing 62 percent of our oil now, and the two largest producers are Saudi Arabia and Russia," Pickens said. "And the two largest consumers of oil are ourselves and China. . . We have kind of got ourselves in a bit of a spot that is going to get even more uncomfortable." (NewsOK.com)

The latest production figures published on theOilDrum.com website indicate that liquids production has jumped upward the last few months after more than two years of flat production. 'Liquids' includes both crude oil and natural gas liquids. Data is from the Energy Information Administration (red line) and the International Energy Agency (blue line), both credible sources. If 2008 global demand forecasts of nearly 88 million barrels per day are correct, even the spike in production will not meet the growing demand. In that case demand would have to be met by draw-downs in inventories. Or supplies would need to be rationed by higher prices.

While OPEC decided against expanding output in a meeting last month, some oil traders say that OPEC members such as Saudi Arabia, United Arab Emirates and Angola have allegedly added around one million barrels a day to world supply since early last fall. If so, this spare capacity will assist in meeting growing demand and natural resource depletion rates inherent in many of the older fields. (Wall Street Journal)

We think the supply and demand trends in the energy sector are long term issues, and that they present very attractive opportunities for investors.

Joseph Dancy
LSGI Venture Fund
Adjunct Professor of Energy Law, SMU School of Law
February 23, 2008
Unquote

Down under

Dear reader

I know that a few of you checked already if there is a new post. Sorry for being a bit late this week. I have been traveling through 5 countries the last 2 week and therefore I did not have much time to go through the information and to put the post together. Anyway please keep on checking for new posts. Next week I should be quite busy however in March I should have more time.

Now to the musings

For all readers who prefer to read my Spanish version, please click on http://themusingsoffritz-espanol.blogspot.com/ or click on the link (links to my other blogs) on the right hand side


Despite the slowdown in the US economy and contrary to popular opinion, the commodities markets are hot! This should not come as a surprise to you my dear reader. I believe that I mentioned several times in my musings, that I have no doubt that we are clearly in a secular bull market in commodities, especially Oil, Natural gas and of course precious metals. Due to the strong influence of oil in the production of agricultural commodities, I have no doubt neither, that softs such as wheat, corn and so on will go up in prices over the next months and years. Crude oil hit USD 100 this week. I still believe that we possibly will see USD 150 barrel this year. Therefore I will increase my oil position whenever I see some down corrections. Natural gas seems to have broken out of a multi months down range. Precious metals do look fine as most of the time. If history is a good lead, we should see stronger prices up to April and again from August on.

Down Under
After having spend a few days in Bangkok Thailand, our trip went on to Australia, Sydney. Although we only stayed 2 days in “down under” I got an idea of basically 2 topics. First: Inflation. Inflation is clearly on the rise in Australia and apparently in New Zealand as well. Central Banks seem to be willing to increase interests In order to fight inflation (well in fact what they should do is stop printing money). Anyway higher interests in Australia and New Zealand and lower interests in the US should lead to have the Aussie and the Kiwi appreciate towards the USD.
Following a few facts

1. 9% rose the retail food prices over 2007 in Australia (and this with fruit prices falling)
2. 18% trop in red meat export volumes due to high Aussie
3. 20% increase in steel products is already announce for April (10% in March and 10% in April)
4. Inflation is the highest since 16 years.
5. Petrol prices up 14% in 2007


Neither the Aussies nor the Kiwis do really have experience with inflation, at least not the CEO’s that actually are leading their companies. Although the Central Banks indicate that they want to fight inflation by rising interest rates, we do not know if they really will do it on one side and if they really do have the experience to do it on the other side. Here again, the actual leaders do not have experience with high inflation

Secondly: Mining business is doing well however they have problems to meet the demand. Although Australia is an important natural resource producer country, especially regarding minerals, the many mining companies from Australia (like their competitors elsewhere) can not really take advantage of higher commodity prices as their cost base has gone up considerably. The mining industry has to face many challenges from a lack of experienced workforce (who wanted to study mining in the last 20 years), higher production cost (fuel, staff remuneration, lack of critical equipment and it’s costs and so on). What does that mean for commodities. The bottleneck we face actually will be there for some more years (yes dear reader years not months). The structural problems will take years to solve. Just to train the staff to be qualified will take years. This does not include that it is more and more difficult to find new resources and to mine them afterwards.

That fact confirms clearly my strong opinion that the secular bull market will stay here for several years and that one should have a least one third of it’s bankable assets invested in commodities.

Dear reader in Sydney I saw several adds on a lot of bus stops with the following text (sorry I wanted to download the photo but somehow it does not work out):

"I WISH I'D BOUGHT GOLD BEFORE THE RUSH"

IF ONLY I'D READ SMART INVESTOR --- FINANCIAL REVIEW

Other adds with the same wording only gold was exchanged for oil were around too.

Yes my dear reader, if you had the chance to read my musings or if you had the chance to hear my opinion about commodities, especially gold and oil over the last 6 years, you certainly will not have to lament having known about the trend too late.



A short comment to Thailand. Well it has been the first time in Thailand and therefore the first impression might not be the correct one. What I was able to see clearly was the difference between developed countries and a country in development. This of course will not mean that in a few years it could very well be the other way round. A person I met and apparently knows Thailand and India very well as he travels to these countries several times a year and has done these trip for years, he says that Thailand has improved enormously over the last 2 decades. So it seems they are on the way up, while some developed countries in my opinion clearly are on the way down. What Thailand has to improve anyway is corruption. Why do I know that? Well the way a police officer stopped our driver on the highway, and just put his hand into the car in order to receive his money shows a lot. Our bus was full with tourists. The police officer might have thought that we would not know what he does but the way the whole szene showed me clearly that corruption is very high and that the normal, poor guy on the street, has no way than to pay. If this does not change, I do not see much future for Thailand apart from what they are known for already. I mean I have lived several years in develping countries where obviously corruption is a fact as well. I have been faced with police asking in a nice way for some support (you know my daughter has today it’s birthday and I still have to buy her her birthday gift, what shall I do? Etc) but I must say the way the Thai police guy got his unwarranted money was almost surreal. He in fact seemed only to use his “damned right” sorry for the harsh words to get the money what obviously seems to be the way it is. Long way to go, no doubt.