For the week, the Dow added 0.3% (down 2.8% y-t-d), and the S&P500 increased 0.5% (down 4.8%). The Transports gained 0.3%, increasing y-t-d gains to 12.0%. The Morgan Stanley Cyclical index declined 1.6% (down 1.8%), and the Utilities fell 0.8% (down 5.5%). The Morgan Stanley Consumer index dipped 0.4% (down 5.3%). The small cap Russell 2000 added 0.1% (down 5.8%), and the S&P400 Mid-Caps gained 1.1% (down 1.7%). The NASDAQ100 rose 1.0% (down 8.0%), and the Morgan Stanley High Tech index jumped 2.0% (down 7.1%). The Semiconductors surged 3.7% (down 4.1%), the Street.com Internet Index declined 0.7% (down 6.1%), and the NASDAQ Telecommunications index jumped 3.1% (down 4.6%). The Biotechs declined 1.5% (down 4.4%). Financials rallied. The Broker/Dealers jumped 6.4% (down 15.7%), and the Banks rallied 3.0% (down 5.1%). With Bullion down $30.80, the HUI gold index was smacked for 9.9% (up 0.4%)
Credits
Well dear reader regarding credits, in fact the past week did not bring anything new. We got more information about financial institutions announcing major write-downs. What might have changed slightly is that the institutions that so far made us believe that they had the problem under control now have to admit that they have to make write-downs as well. The list of the financial institutions affected is already huge and it seems that on a weekly basis new institutions are added. Apart from new ones, those who have been on the list already before still hit the tapes with even more negative information. Will this stop soon? Well my guess is that those who waited with informing the public, will have to come out with more negative information. Those who aggressively made write-downs maybe are not completely out of the problem yet but I do expect a slow down of the negative information from their side.
FED
Well dear reader one of course can be of the opinion that the liquidity injections of the Central banks are positive. So far it helped to save us from a major financial/banking crisis. However the costs are enormous and somebody has to pay. There is no way around it. The FED for example exchanged successfully, since the beginning of this crisis, about 159 billion USD into TSLF and lent out some 310 billion via TAFs.
Well dear reader, of course one can say that it will not be the Central Banks who will have to pay the mess. The argument is that Central Banks only provide the liquidity by taking papers as collateral and that banks will have to pay the money back sometime in the future. This, dear reader is of course correct. However in the case that the banks will not be able to pay back the papers would remain in the books of the Central Banks. That means that the Central Banks could end up with papers that have no market at all. If that will occur, what in my humble opinion is a possibility that cannot be ruled out, the taxpayer would have to pay the mess.
The problem finally (as expected) spurred over to Europe. According to an announcement from the Bank of England Governor Mervin King, the central bank will swap about $100 billion in U.K. bonds for mortgage-backed securities. According to King, interbank lending has all but ground to a halt.“There is no arbitrary limit on this, so it could well go higher,” King told reporters of the $100 billion glass ceiling. So that means that the BoE is ready to come to the rescue with bonds in hand.
Well dear reader it seems that the Bank of England in fact needs to help it's financial institutions. The Royal Bank of Scotland for example brought news that it was looking to raise another $10 billion. This came amid news that the City (London’s Wall Street district) faced its “blackest day in almost 20 years,” according to the Daily Telegraph , and would lose 3,500 jobs. Well England is rather known to have a lot of rain. Maybe the rainy season for the UK financial market has started now and thus terminating an almost 2 decades of sunny financial business.
April 25 – Bloomberg (Christian Vits): “Money-supply growth in the euro region slowed for a second month in March… M3 money supply…rose 10.3% from a year earlier after gaining 11.3% in February… The ECB has cited ‘vigorous’ M3 growth, which reached a 28- year high of 12.4% in November, as one of the upside risks to the inflation outlook…”
Well dear reader, in one of the previous musings I mentioned that not only the US were in a housing bubble but that several other countries were or still are in the same situation. Basically all Anglo Saxon countries are in the same situation. Now we can find headlines as the following:
Housing Fears Hit Europe Too
As The New York Times puts it, the mortgage bust has “gone global.” It’s a problem that mainly affects advanced Western markets. We’re seeing trouble pop up in countries where lenders and borrowers are more sophisticated (whatever that means). Countries like Britain, Ireland and Spain are all getting beat up by the housing leverage they piled on. In fact, many of these economies have seen even more “frothy” home price extension than the U.S., to use an old Greenspan term.
Back to the US
According to John Dugan, the nation's comptroller of the currency there will be more bank failures to expect. I certainly do agree on that statement. Dugan believes “That will come back more to historical norms and may go above that with time. That is a natural consequence of the economy going from historically exceptionally benign credit conditions to something that is more normal to something you would get in a downturn.”
Part of Dugan’s job is overseeing the nation’s 1,700 banks. Not exactly your dream job these days, we’d suspect
Commercial property.
Well dear reader the financial institutions did not only pour billions in loans to unqualified homeowners. They also handed out big money to build strip malls, "big box" stores, fast-food shops, movie theaters, office parks, warehouses, parking garages...and the whole network of businesses that sprung up around all those new boomtowns.
Well, dear reader, it is not difficult to imagine what happens now, when the boomtowns have less and less people (foreclosures hitting 37 year highs and with 17.4 million US houses completely empty) and the few remaining have less to spend.
There in fact are not many left to go to the malls and the few ones that still are around might go to the malls but without money in the pocket and with credit card lines eaten up.
Will those people go to more movies? Will they go out eating?
Well it certainly is not surprising that with the consumer spending slump and the tightening credit markets the wave of bankruptcies in American retailing is increasing. Thousands of store closings can be expected. The shopping malls and downtown shopping districts will look different. Empty shops and less people to shop seems to be in the cards.
Not only small shops are in troubles. In fact the whole problem is spreading quickly to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy soon.
Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.
Whether more chains file for bankruptcy or not, it will be hard to miss the impact of the industry’s troubles in the nation’s malls.
The International Council of Shopping Centers, a trade group, estimates there will be 5,770 store closings in 2008, up 25 percent from 2007, when there were 4,603.
Well dear reader, for years basically any commercial real estate deal, ugly or not, got finance without problems. Today nobody will throw money at these companies.
What about office space? Looks like the situation for office space will get more complicated too. Why? Well first of all the construction of late was for an expanding economy and as the economy might not expand as expected it will mean less need for office space. The increasing number of people without work, does certainly not help to improve this situation.
Bloomberg says we could see the worst drop in commercial property since the 2001 recession. Morgan Stanley is calling for a 15% drop over the next two years.
Already, real estate investment trusts (REITs) that deal in commercial property have gotten slammed. Does that mean that it is now a buying opportunity? Wait, there might be more to come.
"There are so many deals falling apart," says David Lichtenstein, head of a New Jersey group that manages over 20,000 apartments and 30 million square feet of retail space, "People who can get out are getting out."
Well dear reader, houseowners might be lucky and might be able to keep their property in the case they are able to renegotiate the terms. However getting funding for unneeded shopping malls will certainly be more complicated.
So what will happen, dear reader, when this commercial real estate bubble bursts? How much more money will the Central banks have to pour into the economy? How likely is the bursting of the commercial real estate bubble? Your guess is as good as mine, dear reader. However there are people who take that as a given.
Well dear reader talking about consumers following some more information.
Due to the fact that consumers were not able to access the ATM called mortgage anymore they got more and more into using their credit cards.
Credit card debt alone has hit a record $915 billion according to "daily reckoning" . That's already bigger than the estimated $900 billion locked up tight in subprime loans.
Daily Reckoning let us know that not only plastic has been used extensively but that other consumer installment debt has piled up too. According to them the total consumer debt stand at 2,48 trillion USD. This is more than the GDP of several countries.
Well dear reader, it seems that some more defaults on credit card debt can be expected. In fact the credit card issures do expect a 20% increase in defaults.
"Across the nation," says one report from The Associated Press, "Americans are increasingly unable to stretch their dollars...as they juggle higher rent, food, and energy bills. It's starting to affect middle-income working families."
Paychecks are lasting half as long. Some families skip meals. Wal-Mart reports empty aisles before regular paydays. Supermarkets say more and more customers come in to buy only the bare essentials.
Does this sound like more consumption or does it mean less? Well as consumption has been the most important driver of the booming US economy in the past, less consumption is certainly not good news.
Well dear reader, on below webpage you find an excellent opinion about the actual situation.
The Institutional Risk Analyst writes about
A Global House of Cards: Interview with Josh Rosner
following some parts out of the report
In a market comprised primarily of exchange traded instruments, there is little or no counterparty risk. OTC trades which reference exchange traded benchmarks are likewise far more stable. By replacing exchange traded securities with ersatz OTC instruments, Greenspan and the quant economists who dominate the Fed's Washington staff have created vast systemic risk that need not exist at all and that now threatens our entire financial system.
and
We are starting to see an acceleration of the delinquencies and loss rates moving from subprime through alt-a through the prime market. GSEs like Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) are in no position frankly to do much to save themselves let along save the market.
I really believe that everybody should read the interview, please go to the following web
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=269titutional Risk alyst
Food or Peak production?
Japan NO butter. According to news, there is no butter available in Japan. The Age, a respected Aussie newspaper, reports, “Japan's acute butter shortage… is the latest unforeseen result of the global agricultural commodities crisis.”
http://business.theage.com.au/japans-hunger-becomes-a-dire-warning-for-other-nations/20080420-27ey.html
Shortage has hit the USA, too. The New York Post reports, “Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply.
Even in the U.S., food rationing is becoming a reality, as much as the mainstream media would like to pretend it’s not. The lead story on Drudge today suggests Costco and other food wholesalers have begun to quietly limit purchases of flour, rice and cooking oil
Brick-throwing crowds have been reported in Egypt, Cameroon, Cote d’Ivoire, Senegal and Ethiopia. But these are not your usual protestors or hooligans…
Meanwhile, the army has been called out in Pakistan and Thailand to protect against thefts from stores, fields and warehouses.
Rising food crisis : Heading the Malthusian way?
Kavitha Cherian | Apr 18, 2008
In just two months, rice prices have risen 75% globally, and wheat prices are up 120% compared with a year ago. What factors might explain this rise, and are we doomed to higher food prices?
Robert Malthus argued that when a population is living at the subsistence level, and population increases geometrically (for example, a couple has three children, each of the three children eventually marries and produces three children, and so on) while food production only arithmetically, there will be more people than can be fed, with the result that population will decline through starvation, disease, or war until a new equilibrium is reached.
Malthusian theory might hold but many more exacerbating factors must be taken into account to explain the current soaring food prices:
Fueling the fire, Brazil announced this morning that the country would halt all rice exports. According to the Brazilian Agricultural Department, the country grows more rice than it consumes, but has nonetheless chosen to fix all exports to “follow the movement of the principal world producers.”
African and Latin American countries had outstanding orders with Brazil for over 500,000 tons of rice. They won’t be filled now.
What are some of the factors why food prices are going up?
First of all there has been a change of the consumption due to growing income in countries like China and India. With a higher purchasing power, the demand for food increases. At the same time the people with higher incomes shift their food away from traditional staples towards higher value foods like meat and milk. This dietary shift is leading to increased demand for grains as grains is used to feed livestock.
At the same time there is less and less arable land available. Just in China alone, the rush to turn traditional farm land into industrial zones or residential area has decreased arable land to critical levels.
Well dear reader, the weather in the last months has not helped neither to improve the food production problem. We had to face extreme weather conditions all around the world. Be it droughts as for example in Australia, which is an important grain exporter, or be it too much rain which destroyed seeds or be it freezing temperatures or floods. Unfortunately the frequency of these extreme conditions has increase over the past months. Let's hope that this trend will reverse soon.
Well dear reader even with "normal" weather conditions the productivity is falling.
Well dear reader world farmland planted with grains has declined since 1980, due to soil erosion, poor irrigation practices, air pollution and water shortages. Furthermore the overuse of the land as such has diminished returns further. High oil prices also make it more expensive to operate farm machinery and to transport agricultural products, as well as raising the cost of petroleum-based fertilizer.
Commodities
Oil / Peak Oil
April 21 – Financial Times (Carola Hoyos): “Saudi Arabia, the world’s biggest oil producer, has put on hold any plans to further increase long-term production capacity from its vast oil fields, its most powerful policymakers have said. In a series of statements, including one by the king himself, the kingdom has warned consumers it does not believe there is a need for further expansion, an assumption disputed by the world’s biggest developed countries.”
Well dear reader I have been of the opinion that Saudi Arabia has passed their Peak Production already. Of course they will not admit this fact. However several facts indicate that in fact they cannot increase their production. It has already been known that the Saudis injected sea water into their oil fields, in order to maintain the pressure. Injecting water or any other material with the goal to maintain pressure does help for some time. However once the reserve of the crude falls to a certain level, the production decreases much faster if the injection technique has been used before. Well dear reader Saudi Arabia imported a couple of months ago for the first time in their history heavy crude oil. Why do they have to import heavy crude if they can produce or extract it themselves? To me it seems that they had to fulfill a contract but were not able to get their own oil. Furthermore why is Saudi Arabia spending huge amounts for drilling and the search for new reserves if they really have the reserves they make us believe? I do not see much sense to spend billions trying to find new reserves, if I really have reserves for years in my possession. Well Matt Simmons wrote a book about the Saudi situation. He already 2 years ago, mentioned that he believes that the Saudis are close or past peak.
Some more information about oil.
April 21 – Bloomberg (Mark Shenk): “Traffic jams in Beijing and humming air conditioners in Dubai are replacing U.S. highways and suburbs as the driver of global oil prices. China, India, Russia and the Middle East for the first time will consume more crude oil than the U.S., burning 20.67 million barrels a day this year, an increase of 4.4%, according to the International Energy Agency. Economic growth of more than 8% in China and India, coupled with increasing car ownership among the countries’ combined populations of 2.45 billion people, will more than compensate for falling U.S. demand.
Precious Metals
A reader of the musings and friend has send me the following link
http://www.kitco.com/ind/Wallenwein/apr212008.html
Wallenwein expresses some excellent thoughts about Gold price manipulation. Please read
Salinas Price's address to the GATA conference is 23 minutes long and you can find it in three parts at YouTube here: http://www.youtube.com/watch?v=k7DHz6O1xPo
http://www.youtube.com/watch?v=mb_6pruXOU0
http://www.youtube.com/watch?v=PBw56tE-0gw
Well dear reader, precious metal prices have fallen over the past days. Only some 8 days ago the price of one ounce was above the USD 950 per ounce. One of the reasons why gold prices had to go down (in a managed way) can be found in the derivative market. Thanks to the success of managing down the gold price thousand of put options got from out of the money into in the money while for the call options we saw the contrary effect. Yes dear reader, the orchestrated take down gave the agents the possibility for some nice profits. Well maybe the precious metal price will not shoot up immediately but towards August we should see the start for the next leg up.
Well anyway to me it seems like gold being still cheap. Looking at the following chart I suppose you agree with my opinion.
Water
Dear reader as mentioned in previous posts, water is without doubt a commodity that will become more and more important. Our mother earth does have enough water. However unfortunately it is not potable water. If we look at the picture of potable water we can see clearly that there is not enough for everybody. Following some facts regarding water:
Here’s a list of water crisis facts, provided by Summit Global Management:
- The World Health Organization says that 60,000 children die each day from lack of water and/or dirty water, by far the largest health problem in the world.
- Only 20 percent of the world’s population currently enjoys the benefits of running water.
- Every year, according to the World Bank, the amount of global water polluted equals the amount of water consumed: Fresh water is disappearing at an alarming rate, especially when compared to the rising world population.
- Since the turn of the last century (1900), the U.S. population increased 200 percent, while per capita water usage shot up 500 to 800 percent, depending on the region.
- It takes 1,000 tons of water to produce 1 ton of grain; agriculture consumes 75 percent of the world’s fresh water. The World Water Council says we will be 17 percent short of necessary water to feed the global population by 2020.
- Users of the most water in California, in decreasing order, are alfalfa growers, cattle ranchers, cotton farmers, rice farmers, and the city of Los Angeles.
- In the United States there are 58,000 water utilities, 90 percent of which serve less than 4,000 homes and have operating budgets of less than $2 million.
- About 500,000 tons of pollutants pour into U.S. rivers and lakes each day.
- California accounts for 20 percent of all irrigation and 10 percent of all fresh water use in the entire United States.
Well dear reader to finish this musing, I'd like to apologize for not having posted earlier. I was busy organizing myself in a new location. The Spanish versions will still need some time.
Thanks for any feedback from your side. I do really appreciate it. I am particularly happy that many of you mentioned to me that you recommend my blog to others, be it your own children or friends. If you like them to receive my mails informing about a new post, let them know that they can send me a mail to musingsoffritz@gmail.com
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