For the week, the Dow (down 3.1% y-t-d) and the S&P500 (down 5.3%) each jumped 4.3%. The Transports surged 5.9% (up 11.6%) and the Morgan Stanley Cyclicals 6.2% (down 0.3%). The Morgan Stanley Consumer index gained 1.9% (down 4.9%), and the Utilities rose 3.3% (down 4.8%). The broader market was strong. The small cap Russell 2000 jumped 4.8% (down 5.9%), and the S&P400 Mid-Caps gained 4.4% (down 2.7%). The NASDAQ100 jumped 5.6% (down 8.9%) and the Morgan Stanley High Tech index 5.5% (down 9.1%). The Semiconductors increased 5.2% (down 7.5%), The Street.com Internet Index surged 7.4% (down 5.4%), and the NASDAQ Telecommunications index jumped 4.9% (down 7.5%). The Biotechs declined 0.7% (down 3.0%). The Broker/Dealers surged 7.2% (down 21%), and the Banks rallied 3.4% (down 7.9%). Although Bullion declined $6.90, the HUI Gold index increased 2.9% (up 11.4%).
Well dear reader, looking at what markets did this week, we certainly can say that the PPT has done a really fine job. Yes the first reports of the earning season were rather disappointing. GE came out with lower than expected results mainly due to their financial positions. Well not all of the reports were as bad as expected which of course helped the stock markets to close the week in positive territory. However dear reader, we have to keep in mind that results reported were not really excellent at all. We have to keep in mind as well that some of the results did only look acceptable due to some bookkeeping gimmicks. In fact there are many observers would qualify to better than expected reports as really weak. Of course as the expectations were so low fulfilling these low expectations was not that difficult. I consider myself a positive thinking person and I do like positive thinking people but I am not really sure if meeting some mediocre expectations is really that positive. Well anyway, does it mean that everything is OK now?
Although expectations are much lower than in the past, does that mean we will not have to deal with some disappointments? Your guess is of course as good as mine. So what do you believe?
Is there more to come?
Well dear reader it certainly seems so. Just towards the end of the week the follow news hit the tape.
Citi came clean with another $12.1 billion in write-downs. They announced a $5 billion first-quarter loss this morning, too.
Following dismal earnings and a new hefty write-down, Citi announced 9,000 heads will roll this morning -- that’s in addition to the 4,000 Citi employees already given the boot this year.
Merrill Lynch followed their own bad news yesterday with the announcement they’ll be letting 10% of their work force go, another 4,000 souls.
After the tech bust, Merrill put the kibosh on 30% of its employees. So as trends go, we’re just scratching the surface…
Well dear reader some people believe that we are through the worst already and some believe that everything will improve this year. Do you agree? Well I for my part still have my serious doubts. Why? Well first of all, as you dear reader already know, we have according to www.shadowstats.com, been in a recession for the past 6 years and not only as some wants us to believe for a few weeks. Secondly US consumers definitely are consuming less. Furthermore the US consumers and of course consumers in many other countries (especially Anglo Saxon countries) are deep into dept already. Being deep into debt makes it certainly very difficult if not impossible to get more credit. That means that in some way consumption has to be reduced. Rising prices of the items essential for living do not help consumers to have more money in the pocket. Money they used to spend for other items so far. So what can be expected? Possibly a retail sector in trouble, some shops will disappear and empty commercial real estate space will increase considerably. This, dear reader seems already to be the case in the US and some other countries. Therefore, dear reader, my humble guess is that we can expect serious problems in the commercial real estate and consumer credit markets which will lead to considerable writedowns in the billions
Following some information regarding consumers
April 15, 2008
Retailing Chains Caught in a Wave of Bankruptcies
The consumer-spending slump and tightening credit markets are unleashing a widening wave of bankruptcies in American retailing, prompting thousands of store closings that are expected to remake suburban malls and downtown shopping districts across the country.
Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales…
Consumer credit
In the meantime, here’s some shocking news: Americans are digging themselves ever deeper in debt. Figures from Equifax and Moody’s show average balances on credit cards during the first quarter of 2008 rose 9.5% from a year earlier. Home equity lines of credit are up 8.1%.
The figures are worse in places where housing prices got the most out of control during the bubble. Astounding.
But this time around, the increased spending isn’t necessarily for SUVs and big-screen TVs. "Food, fuel and medicine,” says a credit counselor with the National Foundation for Credit Counseling, “people are charging their day care, even their tithes to church, and any incidental items."
Well dear reader it seems that the day of reckoning is getting closer. Seems that soon the bill has to be paid. The consumption orgy seems to have stopped. Money is now used mainly to pay for what is needed rather than what is wished or nice to have. According to information I came across a few days ago, a member of management of one of the top retail chains, mentions that sales have fallen almost to zero lately and this although they have lowered prices considerably.
Credit crisis
Well dear reader wouldn’t you be happy if you as a business owner could unload their trash (if you would hold some) to an official entity and afterwards go on with your business as usual? Would be really nice wouldn’t it? Well what is happening right now is just that, please read the remark from Bloomberg.
April 9 – Bloomberg (Jody Shenn and Pierre Paulden): “Wall Street firms may be bundling high-yield, high-risk corporate loans into securities to use as collateral to borrow from the U.S. government, according to a report by Morgan Stanley analysts. Securities firms can borrow against collateralized loan obligations at the Federal Reserve’s Primary Dealer Credit Facility… The Fed set up the facility last month, its first extension of credit to non-banks since the Great Depression.”
And
April 11 – The Wall Street Journal (Serena Ng and Susanne Craig): “Financial engineering helped get Wall Street into its current credit-market problems. Now, Wall Street’s Lehman Brothers…is using a little engineering -- and some help from the U.S. Federal Reserve -- to bolster its finances. In recent weeks, Lehman moved $2.8 billion in loans, including some risky leveraged-buyout debt that has been difficult to sell, into a newly created investment vehicle it named ‘Freedom,’ which in turn issued debt securities backed by the loans. About $2.26 billion of the securities received investment-grade credit ratings from Moody’s… and S&P. Lehman then pledged some of the securities as collateral for a low-interest, short-term cash loan from the Federal Reserve… One person familiar with the matter said the vehicle was named Freedom because it was designed to give Lehman freedom to tap as much cash as possible if needed. The size of the borrowing from the Fed wasn't known, but the person said it wasn’t ‘material’ and was meant as a test of what the Fed would accept.”
Wow thank you FED. What else could we bundle into securities in order to pass the hot potato to the FED? There must be hidden some more trash somewhere. You might have wondered how some financial institutions with huge Tier 3 assets were able to avoid writedowns so far. Correct? Well know we might have an explanation. Don’t’ we?
Well dear reader lately Wall Street indeed seemed more like wild West than sophisticated East. Revolver and Wall Street. That does not seem to fit or does it? Well guess what, Wall Street has it’s problem with the Revolver facilities, please read on
April 11 – Financial Times (Paul J Davies): “Banks involved in lending to riskier companies, such as those bought out in debt-funded private equity deals, could face a new drain on their balance sheets from borrowers drawing down extra funding. There is a growing trend of highly leveraged companies taking extra debt by drawing on so-called revolver facilities, which are prearranged guarantees to lend. These facilities are granted by banks for a fee… Analysts said that these companies were increasingly concerned about their ability to refinance debt and the fact that banks might try to walk away from such facilities. ‘The easy conclusion to make . . . is that a lot of companies may now draw on their revolvers because they are concerned about counterparty risk and the implications of banks’ trying to walk away from the [Clear Channel] deal,’ said Bradley Rogoff, analyst at Lehman Brothers…”
Wachovia to get capital infusion: WSJ
http://www.reuters.com/article/businessNews/idUSN1331373420080414
Following a comment I found on the net. Unfortunately I do not remember the author anymore. Anyway dear reader I think the comment as such is quite accurate.
Quote
There has to be a link between these "outside investors" and the FED. Given what happened to BSC who would throw "capital infusion" into banks that can’t even calculate what their losses are? Any rational person would buy 7B$ of gold.
Unquote
Some more about unloading crap (sorry for the word)
Goldman unloaded senior secure LBO bank debt at 65 cents on the dollar. This would be equivalent to AAA/AA asset-backed paper. So, whilst our SEC won't enforce FAS 157 because of a disruptive market and lack of pricing data, this one huge mark analysts can use when assessing the banks with large level 3 asset exposure...SIXTY FIVE CENTS on the DOLLAR for senior secure debt:
http://business.timesonline.co.uk/tol/business/industry_ sectors/banking_and_finance/article3739556.ece
That means all below investment grade rated Level 3 assets are probably at best worth 10-15 cents.... Well dear reader do you remember which financial institutions have loads of Tier 3?
April 16 – Bloomberg (Shannon D. Harrington and Abigail Moses): “Credit-default swaps worldwide expanded to cover $62.2 trillion of debt in 2007 as investors rushed to protect against losses triggered by the collapse of the U.S. subprime mortgage market. Contracts outstanding rose 37% in the second half of 2007 from…the first half, the… International Swaps and Derivatives Association said… The market, which has grown from $34.5 trillion in 2006, doubled in each of the previous three years as traders used the derivatives as a cheaper and easier way to invest in corporate debt. ‘While the amounts at risk are just a fraction of notional amounts, these give us a good sense of market activity,’ ISDA Chief Executive Officer Robert Pickel said…”
April 16 – Bloomberg (Abigail Moses): “The $62 trillion market for credit derivatives needs regulating to prevent a ‘calamitous chain’ of market failures, Credit Suisse Group’s head of investment banking, Paul Calello, said at the industry’s biggest gathering. ‘All sectors of the financial system need to act -- both regulators and industry,’ Calello told the International Swaps and Derivatives Association conference… ‘There will be new regulation, and there should be; voluntary efforts are not enough.’”
Well dear reader, as mentioned in a recent musings, someone has to pay sometime. Once again let’s cross our fingers and hope that the counterparties will be able to do so.
Following interesting information about the CDO’s.
April 15 – Financial Times (Aline van Duyn and Michael Mackenzie): “’Tranche warfare’ has broken out in the $450bn market at the heart of the credit crunch as hard-hit investors scrap over the pools of debts that make up -so-called collateralised debt obligations. Some investors in the differently rated and ranked slices of CDOs - known as tranches - have taken advantage of the - little-noticed terms in the -structuring of such instruments to seize control of the assets and cut off payments to other debt-holders. Such conflicts have resulted in lawsuits as investors question the rights of others, such as senior noteholders who supposedly hold the least risky tranche of a CDO… The fights between tranche owners is another example of how little attention investors paid to the exact terms and conditions in the rush to complete CDO deals. It also highlights the potential for stress in the structured finance market, as ratings downgrades of assets backing bonds in turn trigger more losses or ratings downgrades.”
April 15 – Bloomberg (Mark Pittman): “Standard & Poor’s said it’s likely to cut the AAA credit ratings on $52.7 billion of securities backed by subprime home loans because of expectations for an increase in mortgage defaults and losses.”
Credit Default Swaps
When the smartest guys in the room designed their credit default swaps, they forgot to ask one thing – what if the parties on the other side of the bet don't have the money to pay up? Credit default swaps (CDS) are insurance-like contracts that are sold as protection against default on loans, but CDS are not ordinary insurance. Insurance companies are regulated by the government, with reserve requirements, statutory limits, and examiners routinely showing up to check the books to make sure the money is there to cover potential claims. CDS are private bets...
Please read on
http://www.webofdebt.com/articles/derivative-disaster.php
US Dollar
Well dear reader the US Dollar has lately not shown any strength at all. So far there seems not to be an end to the trend that dollar holders want to get rid of the dollars. It is more and more difficult to find willing buyers in order to unload it’s dollars. Would you buy dollars at this price dear reader? People traveling around the world find out that changing dollars into the respective local currencies is more and more difficult. Just until recently it was almost impossible to change Euros in some markets. This however does not seem to be the case anymore. Au contraire, it seems that everybody prefers to receive Euros and to avoid the green/black papers. Of course dear reader, there are still some countries that have officially a peg to the dollar. However most of them are considering to change the beg in favor of a basket of currencies. Although their leaders officially keep the line that they will not make any changes to the system, it seems that they are quietly changing their holdings into some stronger currencies. The very wise ones buy the real and only true currency which is in my opinion certainly is quite precious. Suppose it is not difficult to guess which currency I mean. Yes, as you know, it is gold. Anyway the dollar seems to be in a primary bear market. That dear reader means that over the next months or years we possibly will see a much lower Dollar. However we have to keep in mind that a primary trend, such as the bear market trend in the Dollar, is not a one way street. Within a primary trend secondry trends often occur. What does that mean? Well dear reader it means that although like for example with the Dollar there is a clear primary bear market trend there could be days, weeks even months whereas there will be a trend the other way round. That means that for example in the case of the Dollar there might be months with the dollar getting stronger. These secondary trends can occur at anytime and more likely so in a clear oversold situtation. So dear reader although I see the dollar way weaker we might see dollar rallies from time to time.
Following some remarks from Jim Rogers
Quote
The U.S. dollar is a terribly flawed currency. I’m trying to get all of my money out of U.S. dollars. I don’t know why anybody would put money into the U.S. dollar, and by extension into the U.S., as we stand here today. The U.S. is probably the largest debtor nation the world has ever seen!
The United States’ foreign debts are increasing at the rate of $1 trillion U.S. dollars every 15 months. U.S. foreign debt is over $13 trillion, and rising rapidly. It’s the official policy of the central bank to debase the currency. They’re trying to drive down the value of the dollar.
They’re trying to drive down the dollar. I’m trying to be patriotic. I’m trying to sell dollars. That’s what they want. I’m trying to help them drive down the value of the currency.
All Americans should. There are certainly probably good reasons to put some money in dollars. For instance, if you have to buy cotton, you have to have dollars.
But for the most part - I, anyway - am joining other people who’re trying to avoid the U.S. dollar, because Washington has sent a very clear signal: "We want the dollar to decline. We’re gonna do our best to make it decline."
Well, everybody has to make their own decision. I’m trying to do what the Federal Reserve wants me to do, and I’m selling dollars.
Unquote
Oil
Well dear reader, oil touched 116 USD per barrel this week. T. Boone Pickens expect that we will see 125 in a realitve short time. As you know I have no doubts that we will see 150 this year.
We clearly have less and less production of the crude while the demand is increasing. A possible lower demand in the US due to even stronger recession will not have an impact on the demand side. The increasing demand from countries like China and India will be much higher than the possible decline in US consumption. So dear reader it is possibly not such a bad idea to get used to higher oil prices. Be prepared to face shortages or interruptions of oil deliveries as possibly conflicts to assure black gold will increase and the oil producing countries will export less (be it because their own consumption is increasing or because they are already past peak).
Food production
Well dear reader the food production seems to get worse by the week. Last week I let you know about the Thai farmers sleeping in their fields and about the official opinion of the Worldbank in the sense that 33 countries risk riots due increase of food prices or lack of food. Well government in some countries are already worried. The government of Haiti for example had to step down due to the riots because of the high food prices. Possibly we will see some more changes ahead. If it is done by force is one thing if not it will be done on the ballots. Following some more information about this increasing problem.
Farmers in Pakistan are planting less wheat because of rising fertilizer costs.
Well dear reader not only in Pakistan is it difficult to get fertilizers at acceptable costs. The same is true for many countries, including the US. Some farmers were not able to buy enough fertilizers. Furthermore they are afraid to use them as the weather has been and seems to be bad. If the rains start again, the fertilizers would go not with the wind but with the water.
April 8 – Bloomberg (Terry Barrett): “Global food prices rose 57% in March from a year earlier, according to the UN Food and Agriculture organization. From a month earlier prices rose 1.4%.”
April 10 – Financial Times (Javier Blas): “For the past 40 years, consumers have had the upper-hand in the global rice market, which has witnessed a steady decline in prices, interrupted only by the brief spike in 1973-74 triggered by the first oil crisis. The structural decline in prices was the result of the Green Revolution, the agronomics movement that spread the use of irrigation, fertiliser and high-yielding varieties of rice in Asia in the late 1960s and led to bumper crops. Rice production per hectare jumped in developing countries from 1.7 tonnes in 1961 to 4 tonnes in 2006. This ‘buyers’ market’, however, has flipped abruptly this year into a ‘sellers’ market’ because of a fundamental change in the balance between supply and demand. This is likely to keep prices in the medium-term well above historical levels, analysts and traders say. The price of Thai medium-quality rice, a global benchmark, traded on Wednesday at a record high of $854 a tonne… It has more than doubled since the end of last year.”
April 18 - Bloomberg (Rattaphol Onsanit and Luzi Ann Javier): “Rice futures rose for a fifth day, recording the biggest weekly advance in at least seven years, on concern export curbs imposed by China and Vietnam will spread as importing nations struggle to meet their needs… ‘More and more countries will have restrictions on exports,’ Frederic Neumann, an economist at HSBC…said… ‘There’s some pressure on the Thai government to curtail shipments.’”
So why the deadly acceleration of this long-running trend? Is it all down to biofuels and increased meat consumption in China? Unfortunately, no. Things have entered a much more disturbing phase. Please read on
The global grain markets are caught up in a vicious cycle.
With the price of grains going through the roof, government officials in grain-exporting countries have become alarmed by rising food costs at home. Their natural response has been to artificially limit grain exports, through the use of expensive tarriffs and outright quotas.
With normal supply lines cut short -- or in some cases, cut off completely -- the global grain markets have been tipped into a panic. Suddenly, the marginal suppliers are no longer there. If you think of grain availability like financial liquidity in a time of crisis, the picture becomes clear.
No Luck for Farmers
Farmers in the developing world are furious. After many years of struggle, when it looked like their hard work would finally be rewarded, many developing world farmers have discovered that they still can’t win. The export profits that would have come their way in a free market system have been diverted or destroyed instead, thanks to emergency measures from the local government.
Well although the export restrictions do not favour the local farmers as they cannot benefit from higher world market prices, it is nevertheless a driving factor in the global food crunch.
Hoarding Mentality
The anger of the farmers and the shutting down of grain supply lines has fueled a “hoarding mentality” that only intensifies as grain prices rise. Vertical price trends and scary headlines only reinforce the hoarding instinct.
As a result of all this, there is no simply no telling how high the price of rice and other food staples could go. In economist terms, food is the ultimate “inelastic good”; people have to eat, or they will die. Countries that are net importers of grain have to pay up, no matter the price.
Well dear reader that to me that does look as much higher food prices. Is there anything we can do about it? I doubt it. As an individual you might be able to grow your own food and therefore not to feel the high prices as such. However as economies we have to accept the fact as such I guess.
This long term trend will mean much higher prices.
Commodities
Are we still in a bull market or was it a bubble that has burst?
In order to have an idea, one should look at past commodity bull markets.
Most people who think of a commodity bull market turn their minds to the one of the 70’s. Those who lived in the 70’s remember long lines of cars waiting before the gas stations. Remember that in some countries governments limited driving for example decreed car free Sundays. Some people of course remember as well gold’s rise and the Hunt’s brothers cornering of the Silver market. However if we look at history, the 70’s bull market in fact was the shortest bull market at least in the last 200 years. It was in my opinion an artifical bull market anyway. Artificial? How that? Well it was artificial in the sense that the Saudies reduced themselves oil production and did not export to certain countries. Therefore it was not a bull market due to a “normal” demand/offer situation. What is a normal demand/offer situation? Well dear reader, the ideal situation is that demand can be covered by supply and therefore prices stay stable. However in the case of very low commodity prices, the commodity producers do not produce at all or reduce their production or look for any measures in order to survive. They certainly will not invest in new exploration or new investments in infrastructure and therefore no new additional production will come online. As demand with the growth of world population increases steadily but production not, there will be a point where the actual production does not meet demand. From that point on existing physical stockpiles will be used and therefore reduced constantly until there comes the moment where production plus what comes from physical stockpiles does not meet demand anymore. Well as you know this is the moment where we enter the bull market as those who need the commodity will gladly pay higher prices in order to assure their supply. Higher prices of course is good news for the commodity producers. So it would be interesting for them to take advantage of this situation by producing more of the commodity. Well dear reader as all of you being in the business of producing commodities know, new production does not come online immediately. Production or extraction of metals or oil for example cannot be increased immediately. First the oil or metal companies will have to find new reserves and once found they will have to build new infrastructure. Taking the decision to invest in new exploration, finding new reserves and building the infrastructure takes a lot of time. Average over the last 200 years this took 18 to 25 years in each bull cicle.
Well dear reader what does that mean. It means in my opinion that the actual bull cicle is still young with it’s 8 years. It possibly means as well that this bull market will be explosive. Why? Because we have one billion people hogging two thirds of the world’s available natural resources. Another 5.6 billion people get by on the other third.
It’s that 5.6 billion that want more of the essentials. More calories. More protein. Heating and lighting and air conditioning. Cars to drive and garages to park them in.
Fast-growing, emerging market countries need infrastructure to accommodate all this. It will take massive natural resource commitments to build out the necessary transportation links, power plants, buildings, ports, and so on. The challenge is easy to see: demand is huge and resources are limited. Talking about the bull market, we should not forget that all that money that is printed (almost 20% more paper money on a yearly basis) will lead to inflation and in general terms to higher prices of many things, including commodities. This combination is what makes a bull market and it is this combination that makes the 20 year commodity cycle look quite intact. Perhaps this is why legendary investor Jim Rogers argues that “we” are in the 4th inning of a 9 inning game.
Well dear reader, do not forget that commodity markets can be very volatile (commodity investors are forced to remember this fact from time to time whenever strong corrections occur). Therefore most probably we will see more crazy ups and downs as the “weak hands” get shaken out. Some commodities might do better than others. There might be extended time where prices to not move neither to the upside nor to the downside. However, regarless of the bumps along the way, it looks like the trend will endure for many years to come.
Precious Metals
Please read on the following link a report from John Embry
http://www.sprott.com/pdf/investorsdigest/digest.pdf
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