Category: Energy

Economics Update

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Consumer confidence just fell again, and hit an all time low, 37.7, the lowest number since the Conference Board started keeping records in 1967.

What with the Case-Shiller index showing a November home price drop of 18.2% year over year, and California home prices falling a staggering 42% year over year along with word of that there have been 519,895 job cuts announced since election day.

It’s all a major bummer.

We do have a report that Obama will direct his TARP funds toward consumers, as opposed to the corruption orgy under Bush and His Evil Minions™, which is good news, but it looks like Fannie Mae will need another $16 billion of that.

Meanwhile, Sweden, which handled its early 1990s banking crisis about as well as anyone, it was able to wrap up its intervention years ahead of schedule and with a profit, is looking at injecting cash into its banking system again.

Russia is looking at doing the same for its banks.

In any case, the lousy consumer confidence numbers have had the effect of driving oil down, and scaring people into fleeing to the safety of the dollar, which drove the buck up.

Economics Update

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Well, it’s official now for the British, they are in recession too.

Not surprisingly, the Pound has tanked and the dollar is generally up on this news.

The Ruble further weakened too.

We also now have ING warning that France’s AAA sovereign debt rating is at risk.

Meanwhile, on this side of the pond, the New York Stock Exchange has lowered its market capitalization requirement for companies on the exchange.

They delisted a record 53 companies last year, and my guess is that they are worried about breaking 100 this year, so they changed the requirement to account for a tanking market.

A more general indicator of economic activity, the rail freight traffic, has fallen sharply.

Generally, the high energy prices of 2008 favored the industry, but when total economic activity falls, so does rail traffic, even as it grows relative to trucking. (H/T Calculated Risk: Rail Freight Traffic Off Sharply in 2009)

In the intersection of banking and real estate, it appears that the regulators of Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLB) are seriously tightening up regulations because they are still engaging in risky activity.

I just want to note that I suggested that this might be an issue in March of last year.

Also, it appears that the inventory and foreclosure numbers are worse than you think.

Banks are not wanting to flood the market, so they are holding back on placing some of their foreclosures on the MLS and delaying foreclosures on properties in default, so there is a “ghost inventory” out there that is not showing up in the numbers.

In energy, oil was up today.

Economics Update

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Most of the news today seems to involve currency and other nations, with the dollar rising against all major currencies, particularly the British Pound, which fell to its lowest level since 1985.

Considering the fact that the U.K. jobless rate and budget deficit has grown significantly, this should be no surprise.

On the other side of Europe, Russia is pulling back from Ruble support, engaging in what is called a “dirty” float, because they are burning through their currency reserves.

Meanwhile, S&P cut Portugal’s debt rating 1 step, from AA- to A+.

If you want to know the effect of this, you need only look at Greece, where the the rates that they have to pay on their bonds jumped following a similar downgrade. The spread over similar German debt went from 55 basis points (0.55%) to 325.1 basis points (3.251%).

In US real estate, the NAR index of builder confidence fell to 8, below the prediction of 9, with 50 being neutral. (!)

In energy, Oil is up.

Gas Deal Reported

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I hope that this one is not a false alarm

Under the reported deal, Ukraine will pay 20 percent less than the European price for this year. This means a substantial increase for Ukraine in the first quarter but the price could fall significantly later in the year as gas prices are expected to drop.

It does seem to be a fair deal to both sides….Which Is why I’m wondering when it will fall apart.

Also, Slovakia has put off restarting is Soviet era nuke plant.

They had declared an emergency because of the gas crisis, and were talking about restarting it.

Economics Update

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You know that old saying about releasing bad news on a Friday, because everyone is looking toward the weekend?

It’s one of those Fridays.

Let’s start with Ireland, where the Anglo Irish Bank, the 3rd largest in that country has been declared insolvent and nationalized. I’m beginning to think that the “Celtic Tiger” is on its way back to poetic poverty, particularly now that places like Poland and Slovakia are cheaper labor markets.

In the world of recession/deflation, we have the CPI falling 0.7% and industrial production falling 2% in December.

I’m beginning to think that the US will start to resemble Ireland…Without the Poetry bit.

We also have a couple of updates courtesy of Calculated Risk, with Los Angeles Area Port Traffic falling sharply and office vacancy rate rising in Q4.

Note that there are predictions of a 30% drop in office rents, and that exports are dropping more than imports, so this is not a turn around on the deficit.

In retail, we have Toyota North America announcing cuts in production, and Circuit City is going to liquidate, as in, no more Circuit City, no kidding.

In currency, more bailouts to banks means more concerns about the dollar, so it fell today.

In energy, oil was up slightly today, but down most of the day, after the IEA predicted that demand would continue to fall, and retail gasoline was up again, which means that it’s gone up around $0.20/gal since New Years day.

Economics Update

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Well, weekly first time jobless claims at rose to 524,000, and the 4 week moving average was down 8000 to 518,500, and continued claims fell slightly, from 4.6 to 4.5 million. (Scary graph pr0n on right)

I’m not sure how much of this is being effected by the short weeks of Christmas and new years, but it should sort out in the next few weeks.

Not unsurprisingly, the Federal Reserve’s Beige Book, a collection of anecdotal economic information reported by the various Federal Reserve banks, was really quote grim.

Unsurprising, considering that foreclosure filings rose 81% in 2008 over 2007.

Housing is not recovering in the near term, even with mortgage rates hitting another record low.

One of the reasons that there will not be a recovery is that commercial real estate is imploding right now, with the volume of loans for office space and rental properties defaulting or becoming delinquent expected to triple in 2009.

In international finance, S&P downgraded Greek sovereign debt, from A to A-, and the ECB cut its benchmark rate to 2%, an all time low.

Not surprisingly, both of these pushed the dollar up today.

The juxtaposition of economic weakness with a stronger dollar drove oil down too.

Upgrading Freight Rail as Stimulus

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Phillip Longman makes the very good point that while people are talking up bullet trains, they are ignoring freight rail infrastructure.

I used to work as an engineer at GE Transportation Systems* on their locomotives, I was Lead Engineer on the Blower Cab Structure on the AC6000 Locomotive, and as a result, I consider myself to have some background in this industry.

Simply put, it is easier, cheaper, and faster to upgrade or repair existing for rail, and medium speed (say less than 150 km/h) rail than it is to construct new rail for what Atrios calls “Supertrains”.

Cargo transport is energy inefficient in the US, and the upgraded infrastructure would increase speeds, even for short haul passenger rail, and reduce accidents.

Best of all, this is all shovel ready, you don’t need an environmental impact statement, or to go before a planning board, or to seize land by eminent domain to repair and upgrade rail lines.

*Yes, I have worked everywhere. Maybe I can’t hold down a job, but more likely this has been my role as “technical hit man”, where you are parachuted in to take care of a specific need.

There is Only One Side Here Acting Like a Thief

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And it is not the Russians.

So we have an “agreement” 2 days ago, and Russia puts a little gas into the system, in order to verify that the Ukrainians are not tapping the gas going to Europe, and they get the following:

Ukraine’s state energy firm said it could not ship the gas without cutting off several of its own regions.

So, why do I believe that this points a finger at Naftogaz and the Ukrainians?

Because rerouting some of the gas in one direction, and some in another is how these networks are supposed to function.

I would also add that the fact that the Ukrainians are refusing to route the gas to Europe and refusing to allow monitors into dispatching centers and control rooms as agreed to by both sides.

This is not how an honest broker behaves.

Meanwhile, the governments on the EU side of the pipeline are freaking out, and Medvedev has called for an emergency summit on this in 3 days in Moscow.

Economics Update

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Scary Picture of the Day:
Industrial Output Cliff Diving

The U.S. trade deficit fell by 28.7% in November, not because we are exporting more, but because consumption is falling so quickly. This is why you don’t see decoupling in the world economies (see chart pr0n)

While we are on the topic of international capital flows, it appears that Standard and Poor’s is threatening to downgrade the debt of Spain and Portugal because of increasing deficits.

Of course, and I am not a deficit hawk right not, it does beg the question about what to do with the US government shortfall, as it was $485.2 billion in the first quarter of fiscal year 2009 (October 1, 2008 – December 31, 2008), which is more than the deficit for all of FY 2008.

When is S&P going to warn us, and when is S&P going to be prosecuted for its recent fraud on the public? After the meltdown of various instruments that S&P saw fit to declare AAA, one wonders why. I would not employ any of the major ratings agencies as pastry chefs.

We have some good news though, the TED spread fell to 98 basis points (0.98%), dropping below 1% for the first time since August 15.

The TED spread is the difference between 3 month treasuries and 3 month interbank loans, and the spread goes up as uncertainty about getting your money back goes up.

BTW, homes won’t be turning around any time soon, Beazer Homes is reporting a 53.2% drop in home sales Q4 2007 to Q4 2008.

So with all of this uncertainty, people are pulling money out of palces like Spain and Portugal and putting it in the US, which drove the dollar up today.

Oilrose too, largely on promises of large production cuts by the House of Saud.

Economics Update

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Well, it looks like cutting defense spending to help the economy may not work, S&P is threatening to downgrade New Zealand’s AA Credit Rating.

By the time this is over, I would not be at all surprised if we see a number of countries out there like Australia and New Zealand with rating in the “B”s.

Well, we’ve got another retailer bankruptcy, Shane Co., a Jeweler with 23 stores in 14 states….We’ll see a lot more of this.

The Dollar rose, because traders are expecting the ECB to cut rates.

Also, Oil is back below $40/bbl.

Economics Update

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The big news was the employment data, which I blogged on earlier, but here is the rest:

Wholesale inventories, and wholesale prices fell sharply in November. Even so, the “stock-to-sales ratio” rose because of less buying.

Looks like wholesale deflation to me.

Oil fell on the jobs news, because the unemployed don’t consume much oil.

The Dollar was mixed, losing against the Pound and Yen, and gaining against the Euro.

OK, so I Finally Have a Handle on What is Going on in the Ukraine Gas Fiasco

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First, the prior contract on natural gas prices, which covered both gas and transit fees across Ukraine expired.

So Gazprom its Ukranian counterpart Naftogaz were negotiating, and then, because there was no deal on prices, Russia reduced shipments to the Ukraine but shipped more to the EU, on the far side of the pipeline, along with routing as much gas as possible via Belarus.

Russia then shut down the feed Ukrainian pipeline, because they said that the Ukrainians were stealing the gas, which has led to gas disruptions across Europe.

So they are now in negotiations, and there are a number of sticking points:

The first is that Ukraine wants to cut the contracted agent for the gas sales, RosUkrEnergo, because they believe it to be corrupt, which is probably true, but it also gives them the ability to monitor just how much gas enters the Ukraine from Russia.

The next big issues are over price. Ukraine was paying $179.50/tcm (thousand cubic meters) with a transit fee of $1.70/tcm/100 km, and has offered $201/tcm with a transit fee of $2.05/tcm/100km.

When you consider that a lot more gas goes through Ukraine than is used there, it sounds like a wash in terms of cost to the Ukranians.

Gazprom wants to keep the transit fee the same, and charge $480/tcm, which is much closer to the market rate, it’s selling gas to the EU at around $420/tcm.

So the numbers offered by Gazprom seem to be in line with the market, plus about 20% because you always start negotiations that way as the seller.

In any case, the EU has gotten agreement from both sides to act as an independent monitor of gas flows, because they want their gas:

After phone conversations with Prime Minister Vladimir Putin of Russia and his Ukrainian counterpart, Yulia Tymoshenko, on Wednesday, the European Commission president, José Manuel Barroso, said both leaders had agreed in principle to allow monitors to verify gas movements. But he also warned both countries — and particularly Ukraine — that failure to help restore supplies could have consequences for their relationships with the European Union.

(emphasis mine)

It turns out that the best guess here is that reductions of gas leaving the Ukraine side were far greater than the reductions that the Russians reported on their side, and the implication is that the Russians are actually telling the truth when they are saying that the Ukrainians are stealing gas from the pipeline.

Also Wednesday, Chancellor Angela Merkel of Germany spoke with Putin by phone, and in Moscow, Putin met with a former German chancellor, Gerhard Schröder, who now serves as chairman of the board of a Gazprom-controlled company planning to build a pipeline from Russia to Germany under the Baltic Sea, cutting out Ukraine.

(emphasis mine)

It appears that the Germans certainly think that the Ukraine is taking more than it buys from Russia, and I’m inclined to agree.

Much of recent Ukrainian economic expansion, before the world wide recession hit, was driven by below market gas supplied with the implied quid pro quo that Ukraine would be an ally of Russia, and having to pay fair market value for the gas is a real hardship, particularly now that FSU countries’ economies seem to be in free fall.

Like the chicken said, “You knew the job was dangerous when you took it.”

That being said, we are not seeing a punitive price, and best evidence is that the Ukrainians are stealing the gas.

Economics Update

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Well, real estate sucks, with pending home sales falling by 4% (BTW, Manhattan apartment prices fell 4% too, so ain’t nothing going up.)

Manufacturing data is out too, and it’s grim, with factory orders falling twice what was forecast in November, and Toyota deciding to idle its plants for 11 days over February and March.

The last time Toyota did this was in the early 1990s recession, and they did it for one day.

Services did better than expected, with the Institute for Supply Management’s (ISM) non-manufacturing index rising. The prediction was that it would fall from 37.3 to 37 in November, but it rose to 40.6.

Better than expected, but any number below 50 still counts as contraction.

A bit of up news is that Calculated Risk’s Credit Crisis Indicators are showing improvement today.

But with all this going on it is no surprise that consumer bankruptcies rose by nearly a third in 2008.

The problem with the 2005 act was that people don’t declare bankruptcy on a whim, they declare bankruptcy when they fall of the tight rope that is middle class existence in the United States, and there is no safety net to catch them.

In currency, the dollar rose against the Euro, largely on the expectations of further rate cuts by the ECB.

In energy, oil finished the day down, but it spent part of the day above $50/bbl for the first time in about a month.

Economics Update

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Just so you know, the whole auto industry is in a tailspin.

All the auto manufacturers are seeing sales fall by more than 30%, with Chrysler falling by a whopping 53%, year-over-year.

My guess as to Chrysler is that the American public realizes on some unconscious level that Cerberus is a pump and dump operation that cannot be trusted.

In real estate, construction spending was down by 0.6% from October to November, which was better than the consensus estimate of 1.4%, which to my mind is a serious WTF number. 1.4% a month is Sta-Puft Marshmallow man time.

In central-bank land, we have reports that the Federal Reserve and the ECB are working together to avoid deflation, which indicates that central bankers on the both sides of the pond are scared.

The ECB’s only charter is to control inflation, but now they are trying to figure out how to get inflation back into their economies.

No surprise that we are still seeing a flight to safety that is driving the dollar up against both the Euro and Yen.

In energy, oil is up again, largely on concerns about the Middle East, and retail gasoline was up 1.4¢/gal, the 6th straight day in a row, which seems to indicate that gas prices will be rising in the near future.

Finally, here is a pretty picture:

It’s a measure of the ISM Manufacturing index (I mentioned this last week). The graph is courtesy of The Bonddad Blog, and he accurately describes this as “cliff diving”.