Category: Energy

Oh My God Economics Update

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I normally don’t note stock market swings, but 778 points after House ‘Phants kill the Paulson bailout bill?

Surprisingly, the dollar is up and oil is down.

Money with half a brain should be fleeing in the other direction, but it appears that European banks are in real trouble too, because their governments are bailing a bunch of them out.

Not that US banks are doing much better, with Citi getting the bits of Wachovia for magic beans.

So not both the US Federal Reserve and various foreign central banks are shoveling money out the door.

Meanwhile, Iceland did what Paulson should have, when it nationalized the Glitnir bank, as has the UK, which has nationalized mortgage lender Bradford & Bingley.


Economics Update

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With upwards of 70% of the US Economy being consumer spending driven, it’s not good news that the final for consumer confidence missed expectations, 70.3, as opposed to the forecast 71.0, but it does reflect the fact that the final number for economic growth in the 2nd quarter was revised downward.

The fact that August new home sales are the lowest since 1982, which was not a great year for the economy either, points to the fact that the economy sucks in the real world too.

Of course, while all this is going on, Congress is still fighting over bailing out Wall Street, which has lead to a muddled picture for the dollar.

That beins said, it’s clear that the energy markets are banking on a recession with both oil and retail gasoline heading lower.

All this uncertainty is why 30 year mortgage rates exploded this week, going from 5.78% last week, to 6.09% this week.

31 basis points in a week….Ouch.

FWIW, the central banks are shoveling cash out the door, which will eventually start devaluing the currency (inflation).

Economics Update

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Once again, the big story is the bailout, which I will not cover here, it gets its own posts, though I will be dealing with some of the market effects of the proposal, which can be viewed as positive, if you are an optimist, or negative, if you are me.

First, the US dollar took it’s biggest hit vs. the Euro in 7 years, because of concerns that this bailout will end up being so expensive that it will debase the currency, and as a result, crude oil climbed the most ever, more than $25/bbl before settling at the end of the day at $120.92/bbl, up $16.37.

You can view the price in oil as a belief among traders that the economy, and hence demand, will be recovering, or you can believe that traders think that this plan will push the dollar over the edge. I think that the contemporaneous fall of the dollar indicates the latter.

The increase in prices appears to be a part of a more general rebound in commodities, though retail gasoline continued its downward path, but gasoline tends to lag oil by a few weeks, as it is actually a manufactured final product, as opposed to a raw material.

In either case, it appears that The Commodity Futures Trading Commission is not taking a close look at oil trading as a result of the volatility today.

The Chicago Fed sees more signs of a recession, reporting a drop in economic activity.

Finally, it there are indications that investors are just beginning to see US treasuries the same way that they did during the Japanese meltdown…You know…the one that lasted fifteen years.

Honestly, if that happens to the US, it will be much worse, because we lack the safety net of Japan.

Economics Update

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If you think that this crisis is over, it’s not even close, as evidenced by the fact that 40% of US money market funds posted no returns yesterday:

More than 40 percent of U.S. taxable money market mutual funds posted zero return Thursday amid persistent turmoil in the credit markets, fund tracker Lipper said Friday.

Lipper said 560 of the 1,263 classes of taxable money funds it tracks earned no return Thursday. This compared with 73 classes that posted zero return Wednesday and 63 Tuesday.

A lot of taxable money mutual funds “put up big fat zeros yesterday,” said Jeff Tjornehoj, senior research analyst at Lipper in Denver. “This is unprecedented in recent history.”

Expect to see the phrase, “unprecedented in recent history,” a lot in the next few months.

Part of this was no doubt the rather large gyrations in US T-Bills over the past few days, which went almost to 0% a on Thursday, because people were so concerned about finding safe havens. The 3 month T-Bill was at 0.22% Thursday, before heading back up to 0.91% on Friday following announcement of various rescue plans for the financial markets.

The dollar rose in response to the bailouts too, as did oil, though gasoline is down for the 3rd straight day, as that market adjusts to the realities of Hurricane Ike.

That being said, even with the rescue packages, Moody’s is still looking at cutting its ratings on monoliner insurers Ambac and MBIA.

Also, it now looks like Morgan Stanley is still looking at merging with a commercial bank, even if the news of the bailout plans may have helped.

How it Should Be Done

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The Democrats are worried about the offshore drilling issue being used against them. They know that it’s bogus, but it’s also VERY easy to demagogue.

What do do?

Pass a bill that allows it, but contains provisions that will make the Republicans vote against it.

Include things like:

  • Reducing the distance to shore from 100 to 50 miles when the Republicans want it much closer.
  • Having the states receive no royalties from new drilling, which makes legislative approval next to impossible.
  • Eliminates $18 billion in tax breaks for big oil.
  • The bill would also force the release of 70 million barrels of oil from the nation’s emergency reserves
  • Provide tax breaks for efficient building construction and companies that promote bicycle commutes
  • Require all utility companies to generate at least 15 percent of their power by alternative fuels by 2020.

The senate will never pass this, it will never get pasty filibuster.

All of which have Bush threatening a veto, so you have a trifecta: The Dems vote for it, the Repugs vote against it, and then they have to vote to support Bush’s veto.

Job well done.

Economics Update

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You know that there is a problem, when I open with ratings downgrades.

We have S&P downgrading Washington Mutual to junk status, and even more significantly, AIG, the largest insurance company in the world has been downgraded by Fitch Ratings to A from AA-, and S&P and Moody’s downgraded them too, from to A- from AA- for S&P, and to to A2 from Aa3 for Moody’s.

This is ugly, and it is not surprising that the costs of corporate bond insurance has skyrocketed on what is called “counterparty risk” by the MBA types, and the belief that you are dealing with a bunch of lying bastards foo the rest of us.

It’s the same reason that the costs of overnight borrowing has gone up too, with the LIBOR more than doubling from 3.10625% to 6.43750%.

No one knows when the next shoe is going to drop, and even the additional $70 billion that the Fed dropped out of helicopters wasn’t much help.

It’s why we’re seeing Thornburg Mortgage struggle under a sudden onslaught of margin calls.

When Goldman Sachs earnings 70%, even though they hedged against the real estate crash, you know that no one is making money.

And at the end of all this the Fed decided to leave interest rates unchanged, which is not surprising, since they are already pushing on a string.

Meanwhile, the dollar is behaving like my cat when he gets outside in a rain squall, it really did not move, but you can see the conflict between fear driving people to dollars, and the fear of the US financial meltdown driving people away from the dollar.

We actually saw consumer prices fall, driven by falling energy prices (oil is now about $91.15/bbl on demand concerns from the financial meltdown)

Gasoline still went up, driven by the came hurricane refinery concerns that have driven prices over the past 4 or so days.

Economics Update

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Seeing as how the nationalization-in-everything-but-name of the GSEs has been covered elsewhere on the blog, it won’t be here.

That being said, the response of the international markets, rising dollar and oil prices falling despite a hurricane pointed at the gulf, appear to be positive.

It comes from the fact that while shareholders will get F$#@ed, the foreign national banks and sovereign wealth funds which bought Fannie and Freddie paper are getting bailed out.

It also looks like the monoliner bond insurers are winners here too, at least that’s how their stocks reacted to the news.

This does not mean that the housing crisis is over, or even that it has bottomed out, which is why foreclosures hit a record high in Q2.

Additionally with the official unemployment rate spiking to a 5 year high, the rest of the economy sucks wet farts from dead pigeons too.

What’s more, as Krugman notes that the U6 numbers are positively grim.

The common reported number is U3, while U6 is:

Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers

And U6 is higher than it was in the worst part of the 2001 recession:

It’s not just banking, real estate, or employment though; Paul Volker is saying that the current financial system, which relies on complex securitization, as opposed to conventional loans is very broken.

The best proof of this is that the bank of China is suffering a liquidity crisis, because its investments are illiquid.

Economics Update

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Well, once again, we have the financial press, trumpeting so called good news, that US home prices did not fall as fast as the previous month, even though the year over year decline was 15.4%.

They are noting that home sales are up a bit, but they neglect to note how many of these sales are short sales and REO (foreclosure, basically) sales.

The numbers that I’ve seen are around 20-30%, and no one notes that inventory is still at historical highs.

On the brighter side, consumer confidence is up, largely on the fact that Gasoline has fallen over 10% over the past few weeks, as it did again today, though oil is up over concerns regarding hurricane Gustav.

Everyone is expecting a fully coupled worldwide slowdown, and so the Dollar is now at a 6 month high, even though we are seeing signs of commodities bouncing back, at least that’s what the market in copper is showing, with contracts for immediate delivery being rather higher than those for 3 months delivery.

I would also note that Fannie and Freddie are slowing the rate of mortgage purchases for their portfolio, which means two things, that mortgages will be harder to get and more expensive, and that they are “deleveraging”, which is finance speak for trying to get themselves out of the hole that they have dug.

Economics Update

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The Philly Fed chief is calling for higher interest rates, because of inflation concerns.

The fact that there are now closings of marginal mines and the like would also indicate that the commodity plunge of the past 6 weeks or so is going to bottom out soon.

Though, truth be told, I’m not sure that it will make much of a difference, as the the fact that spread between LIBOR and the Fed Funds rate is 78 basis points, near an all time high, and an indicator that the Fed has largely lost control over interest rates in the rest of the economy, as well as indicating that the credit system is still frozen up.

Mean while, in real estate, we have bad news presented as good news, with stories trumpeting an increase in existing home sales in July, and soft pedaling a 7% year over year house prices.

Why is this National Association of Realtors (NAR) Bulls$#@?????

Because, Seasonally adjusted it’s ignoring seasonal adjustments July and August are always big months, particularly for parents who do not want their children to change schools mid year. It’s actually the worst seasonally adjusted numbers since 2000.

This is why 75% of Americans have negative view of economy, because the financial press is a bunch of Pollyannas, who ignore the the fact that aggregate weekly hours have been experiencing continuous negative growth on a month-to-month basis since January 2008.

Meanwhile, among the Wall Street Banks, we are now getting reports of a dead pool for Lehman CEO Dick Fuld. He’s expected to be out within a year, which does not bode well for the company as a whole.

Meanwhile, Robert Rubin is stepping down from his position chairman of the board’s executive committee, though he will remain on the board, which probably means something, but I do not know what, but considering Citi’s record, I’m assuming bad news.

Meanwhile, oil is up today, even though the Baku-Tbilisi-Ceyhan pipeline has resumed flow, but gasoline prices continues their downward course.

Thedollar is mixed today.

OK, Maybe I was Wrong to Dismiss the Oil Speculation Theories

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I’ve been dismissive of accusations that speculation is responsible for most of the oil price run up.

I have always suggested that arbitrage might cause excessive volatility, but have been dubious on the idea that speculators are responsible for most, or even much, of the current oil price run up.

Unlike electric power, where one can shut down a plant to juice the market, you can’t hide all that oil, you have to pay to put it somewhere

Well, the CFTC just discovered that Vitol, a company that thought to primarily be in the business of hedging oil for large consumers, like Southwest Airlines, to save costs, has been aggressively holding huge amounts of futures contracts as a speculative investment too, at one point holding about 11% of all trades on the New York Mercantile Exchange (Nymex).

So the CFTC now pegs the percentage of speculative, i.e. non-consuming, trading at around 81% of volume.What’s more the CFTC found out about this by mistake.

I still believe that the primary cause of the run-up was supply and demand lines crossing, but with this level of speculation, and this level of leverage, it’s reported that Vitol could have purchased over $8 billion in oil futures for less than $1 billion, it’s possible that there were issues of excess volatility and over-shoot on the price of oil.

Economics Update

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Ummm….This is not a day for pleasant economic news.

First, the Leading Economic Indicators indicate a bigger slowdown than anticipated, dropping 3x more than expectations, and then the Philly Fed index fell for the 9th straight month.

Employment isn’t good either. While new unemployment claims fell, the 4 week rolling average rose, and in any case at 432,000 claims (seasonally adjusted, which is the elephant in the room), it’s still too damn high.

If you are a monetarist, then we have more bad news, because the growth rate for M3 has dropped off a cliff (chart pr0n below):


Note that this is a graph or the rate of growth, not the money supply, so the effect on the overall money supply is less than it appears, but, “As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.”

The chart is a rolling 3 month average of the annual rate, and the rate for May-July is 2.1%, indicating a contraction of the M3 money supply in real terms, which would suggest downward pressure in housing and financial markets.

We also have the Reuters/Jefferies CRB Index of commodities making the biggest weekly jump in over 30 years and oil up by 6 bucks, along with the dollar falling which seems to indicate that the past few weeks might just have been profit taking…a breather before an ascent to the summit, though
gasoline is down over a dollar today.

Economics Update

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As it always is in times of crisis, we are seeing a flight to government bonds. Everything else appears too dicey, with mortgage applications at a nearly 8 year low, estimated food inflation for this year may be at a 28 year high, and home prices in high priced areas falling like a stone, even if volume is up a bit.

In energy and currency, the dollar is up a bit, as is oil, though neither are up significantly, and gasoline is down for the 34th straight day, and it’s now down about 10% from the peak.

Iraq Sweetheart Oil Deals Appear Dead

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It appears that the short term sweetheart deals that Bush and His Evil Minions™ engineered are not sweet enough for the oil companies.

The theory was that these short term contracts would lock in, or nearly lock in, longer term more lucrative contracts, but it appears that the Iraqis were driving a hard bargain.

It appears that these folks can’t even pay their supporters in the oil bidness competently.

Details here.

Economics Update

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It looks like concerns about GSEs are roiling the markets again, so one wonders when the government will nationalize Fannie and Freddie.

It won’t happen under Bush and His Evil Minions™, needless to say, but I see it as inevitable for the next president.

Meanwhile, energy is still trending downwards, with oil falling as the path of Fay becomes clearer, and gasoline falling fo the 32nd straight day.

The dollar is down a bit, but I’m not sure if this is a pause in a rally as people take profits, or a change in direction.

In any case, it looks like labor day air travel is going to be way down, yet another sign of the slowing economy, and the fact that airlines have become so bloody awful.

Finally, home prices in the UK fell by 4.8% year over year, showing again just how well the “Anglo Saxon Model” of capitalism works when things go bad.