Category: Energy

Economics Update

No Comments

First, initial unemployment insurance claims increase, ba by 35K to 380K. Note that this is an inherently noisy figure, but it’s been bad for over a month, which indicates a trend.

Becasue of the Fed’s signals regarding future rate cuts, as na ga na do it, the dollar has strengthened, and oil has fallen a bit.

That being said, the Euro zone appears to be under increasing stress from the different economic trajectories of its members.

Citi appears to need more money, so it’s raising it through a $4½ billion stock offering, further diluting its stock holders equity.

Seriously, it’s like a dog chasing its own tail…down the drain.

We have a number out of San Diego, with house prices off dropping 19.2% since February 2007.

This means that if someone bought a 30 year fixed mortgage, with 20% down, that they would be under water on the loan if closing and broker costs are included.

Economics Update

No Comments

The big news, as it is on any day when the fed meets, is the decision, which was to cut the federal funds rate by 25 basis points. Of note that that they are no signaling no more cuts.

Of course, with the rate at 2%, it’s not like they can really cut much further.

Then we got the GDP numbers for the first quarter of 2008. The number is that U.S.GDP increased at an 0.6% annual pace, though this will likely drop when a final reading is released.

I will provide more detail, but the spin that this is not a contraction is false” initial reading, will fall. Also, we’ve already had 0.6% so far this year, we will likely see 3-4% inflation even with the bogus government data, it would be closer to 10% with honest data, and 0.6%-3%=-2.4% that’s a recession.

I, with the aid of the good doctor Roubini, will provide more detail in a later post.

Oil prices have dropped, which should come as no surprise. The spikes of the past few days were as the result of short term news, though the trend still seems to be up.

In real estate, we have
ortgage application volume falling 11.25% last week, and we have an analysis from Barclays Capital that upwards of half of Alt-A and subprime mortgages will be under water by year’s end, and they are predicting a fair amount of “jingle mail” as a result.

Economics Update

No Comments

The dollar is doing better now, $1.5613:€1.0000, as I type this, which is about 3% stronger than when it was above $1.60.

I put down most of the movement over the past week to people betting on what the Fed will do in interest rates, and the consensus that it will not cut.

Oil, however, just went up again, as did gasoline, because of reports of a pipeline attack in Nigeria. The reality is that supplies are so tight that even a minor disruption causes a minor panic.

The New York Times has discovered that the housing crisis has moved to tony Greenwich, CT. And so they cover it with wringing hands, because it interests their readers.

For the rest of us, the fact that the mosts states are having financial meltdowns, and many are near broke, because of falling tax revenues, are a matter of greater concern.

Also, Consumer confidence is at a 26 year low. That’s as in 1982, when we were at 10% unemployment, and so consumers are scaling way back on spending.

In a sign of the apocalypse, Moody’s is downgrading some more of the Alt-A mortgage backed slop. Who knew that a ratings firm would actually do its job.

It’s been a busy day for AMBAC, the monoline insurer, with a report that it may need to seek more capital after posting a $1.66 billion dollar loss for the quarter. Further confirming this report is the fact that their interim CEO is saying that there are no liquidity issues and that its ratings are solid.

S&P is back stopping Ambac on this explicitly stating that the loss will not lead to a downgrade.

Of course if the ratings agencies, or for that matter the financial markets, were at all honest, most the monoliners would already be rated as junk.

This is Not About Oil Production, It Is About Privitization

No Comments

I was wondering how long it would take, but the PAN and its ilk have been salivating at the possibility of privatizing Mexico’s state owned oil industry for decades, and now they are trying to make public theft of state assets a reality.

State ownership of the oil industry is a core value of the Mexcan body politic, so much so that there is a national holiday to commemorate the nationalization of the industry. It is considered to be a pillar of national sovreignty.

The reason that PAN loves the idea of privatization is because it will provide the opportunity to generate huge salaries and consulting commissions to the pale skinned Mexican elites who went to university at places like Harvard and Brown.

The facts are simple:

  • Mexican oil production is dropping.
  • Mexican oil revenues are at an all time high because of high oil prices.
  • It cost nothing to leave unexplored oil where it is right now.
  • There is no need to rely on big oil for the technical expertise to get at that oil.

When the Oil industry downsized and consolidated in the 1980s and 1990s, thousands of petroleum engineers and the like were without jobs, and many of them found positions with the oil services industry, which now arguably more technically capable than the big oil.

If they want these fields developed, the Mexican government could contract with companies with Halliburton and Slumberger*, and get the job done without signing over future earnings. What’s more they would get more local employment out of it, because big oil tends to employ lots of expats to get the job done.

The claims that Pemex “lacks the money and expertise” to get this done are driven by a desire among Mexican conservatives to sell $100 of oil for $1 today, because them and theirs will get an additional 50¢ in sweetheart deals.

Pemex does have problems, but these can be fixed.

*Full disclosure, one of my step mom’s life long friends is one of those Slumbergers.

Food Crisis Update

No Comments

I guess the part of the story we expect is this:

The rising prices are “threatening to plunge more than 100 million people on every continent into hunger,” Josette Sheeran, executive director of the United Nations’ World Food Program, said on the agency’s Web site Tuesday.

Foreign starvation, hand wringing over biofuels, etc.

Nothing to worry about here, we’re Americans…right???

WRONG

We are seeing severe shortages of rye flour, with no domestic supplies being available around July, and there are currently only 27 days wheat supply.

Additionally, we are seeing panic buying, which is forcing big box retailers to restrict bulk purchases of rice, so that they don’t run out.

We already have hunger in the US, just look at our overburdened food pantries, and it is going to get worse.

Economics Update

No Comments

It’s official, we’re in a recession, because Bush is denying that we are in a recession – Apr. 22, 2008.

For more direct evidence of a recession, we have American drivers cutting back on driving and gasoline usage. When Americans stop driving, it means that the recession is here…big time.

In energy, oil broke $119/bbl, $110/bbl now appears to be the new $100/bbl

Across the border, Canadian Central Bank cut rates by 50 basis points, but even so, the Canadian dollar is still above parity with the US dollar, but they are definitely seeing the fallout from the US downturn.

In other currency matters, the dollar weakened to above $1.60:€1.00, though it’s now about $1.5992.

At the beginning of the year, it was $1.48 or so.

In things related to banking and real estate, we have to start with the elephant in the room, that GSEs Fannie Mae and Freddie Mac are looking increasingly at risk, and a potential bailout would run to over $1 trillion, which might threaten the US government’s AAA rating.

Generally, bank profits are tanking, so it should come as no surprise that banks are retrenching.

Notably, Bank of America will be ending subprime operations, and tightening generally on mortgage standards, which makes it hard to understand why it’s buying Countrywide.

Citi needs more capital, so it’s offerring $6.2 billion in hybrid bonds, at 8.4%, with an A2 rating.

Hybrid bonds are….are….Ummm, a sort of hybrid between preferred stock and bonds…I’m confused, and they are described as “innovative”. I’ll try to get more information, but in the meantime, run away.

Finally, the Fed bailout of banks continues apace, reaching $360 billion with the sale yesterday.

Economics Update

No Comments

Current position of Dollar with Regard to Euro

The rebels in Nigeria’s delta region just bombed an oil pipeline, and in response, oil hit $117/bbl before settling at $116.69.

In addtion to lower levels of employment, hours worked by those still employed are also down, so there are fewer people doing less work to produce goods and services.

Both Citi and AT&T are announcing big layoffs because of losses (Citi), and “increased competitive pressure (AT&T).

It’s a recession already.

The Fed just auctioned off about $25 billion for non-magic beans, as a part of its ongoing Wall St. bailout.

Yesterdya, I talked about new home sales falling, today, it’s existing home sales falling 13%, but north of the Border in Canada, which has generally had a better regulated loan market.

Finally, a picture, courtesy of Paul Krugman showing the increase in the LIBOR-OIS spread since this all started:


The second image is actually a bit scarier, because it shows a longer time frame, and it shows that the spread is completely outside of historical norms.

Really, Really, Really Bad Ideas: Carbon Trading Edition

No Comments

Unfortunately, it’s hit the big time, with Fortune Magazine declaring that it has hit “the big time”, so it appears that much like new math, new Coke, sequels the Rocky, mortgage backed securities, and Astroturf, we will be seeing a lot of this.

The idea is that the government issues a limited number of carbon credits, basically permission to emit a certain amount of carbon dioxide into the atmosphere, and since there are fewer credits issued than would be actually needed, a “robust market” would be established where, because they can make money on these markets, carbon emitters would, through the magic of the profit motive, cut emissions.

You see, this market, with its highly compensated traders, and the complex investment vehicles that come with them, constitutes an unparalleled opportunity to create innovation.

Well, that’s the first problem. That’s what Alan Greenspan said about mortgage backed securities and credit default swaps, but it’s supposed to work just fine with combating global warming.

The second problem is that any regime for this is going to be difficult. You have to decide how many credits are issued, and who issues them, and how to regulate the market so you don’t have a lone trader bankrupting a multi-billion dollar company.

The most basic problem however, is that this is a tax on carbon.

Because your goal is to reduce carbon emissions, the number of credits issued must necessarily be lower than what the market really wants, at least a bit, which costs every business participating in it.

Only this tax goes to the polluters, at least the ones who manage to improve efficiencies or game the system by getting excess credits, and to the Bear Stearns types, who would leverage one of my farts if they could find a way.

If you are going to put a tax on pollution, then just tax that pollution, and let the government collect the monies, as opposed to the polluters and their parasites, and spend it on something other than multi million dollar executive compensation.

Economics Update

No Comments

First, the Euro just hit an all-time high, $1.5968:€1.0000 (see also here)

I don’t think that it’s going to get better either, because its clear that Bernanke is not going to raise rates any time soon, because Euro zone inflation just hit an all time high of 3.6%, which means that the ECB will raise rates, as their only official duty is to prevent inflation, as opposed to the Feds dual roles of both price and employment stability.

This seems to be reinforced by the statements of Jean-Claude Trichet, the president of the ECB, who is saying that the European Central Bank is still focused in inflation, and that there is, “a strong belief that a solid anchoring of inflation expectations is of the essence”.

US inflation was pretty much in line with forcasts in March, 0.3% for the CPI, and 0.2% for the so called “core rate”

Finally, oil broke the $115/bbl barrier, hitting $115.07/bbl.

Economics Update

No Comments

Real estate is still trending worse. We have the New York Times writing about how the troubles have gone global.*

We also are now seeing discounts up to 60% on the last sale price in bank auctions on properties in South Florida.

And it won’t get better soon, because when pollsters ask about buying a home, respondents reply, “What??? buy a house now??? Are you out of your bloody mind???“.

Energy prices are surging, with oil closing at a new all time high, $111.76/bbl.

Also, it looks like Wachovia is hemorrhaging, and so is cutting dividends and planning to offer stock for much needed capital.

*As an aside, I’m not surprised that Ireland is in this select group. The “Celtic Tiger” has always seemed to me to be closer to Thailand and Indonesia than the rest of the EU with its prosperity being almost completely driven by low wages and real estate, and Spain is a close second on this. This is not to say that they will become 3rd world countries, but that they both may end up far closer to EU members like Poland, Slovakia, Hungary, and Croatia than they had previously imagined.†
†Mass flows of speculative capital always produce a nasty hangover.

Economics Update

No Comments

First, we have a new peak in Jobless claims, 407,000, the highest level since Katrina hit New Orleans (here and here). Note, as always, that weekly jobless numbers are just a snap shot of a single week, and as such, there is a lot of noise, but this did not stop the dollar from retreating in response.

That being said, the fact that the IMF is predicting a global slowdown ain’t a good sign either.

Given that we have a consumer driven economy, the fact that people are falling behind on their debts at the highest rate in 15 years is a good indicator that we are already in a recession.

In energy, was down a buck, and gasoline hit a new record. Assuming that we are not at peak oil, there might be some moderation as the economy cools.

The markets are seeing a cooling economy too, driving Treasuries higher, because investors are looking for safe havens.

In real estate house prices fell in 21 metro areas, and foreclosures rose to record levels. Same old same old.

Finally, I’m beginning to feel like Keith Olbermann and Bill O’Reilly. I can’t make through a week without some insurer disaster intruding. In this case, it’s Triad Guaranty Inc., which is considering, “a plan to stop writing new business”, called a “run-off” in the insurance. Note that it’s business is mortgage insurance, as opposed to monoliner bond insurance.

Too many people defaulting on mortgages.

Economics Update

No Comments

Let’s see, we have Bernanke, testifying before the Congress’s Joint Economic Committee, saying that there is just the slightest possibility that the US Economy might possibly be slipping into a recession, which is Fed speak for, we are totally boned.

Not surprisingly, the US dollar tumbles, because recession=further rate cuts.

Truth be told, given the current nature of the credit markets, the Fed could lower interest rates to zero and it wouldn’t lower short term rates. They are pushing on a string, and people are unsure about the amount of risk, so rates won’t go down.

On quick numbers, we have new mortgage applications falling 29% (refi is way down too), oil prices rising, up to about $101.20/bbl, and gas prices at a record high, $3.287/gal.

On the good news side, ADP’s private report is showing an increase in private sector payrolls, though I would rever the reader to this article on underemployment, which points to growing numbers of people working part time jobs, a sign of employment weakness, for some context:

Keith Hall, the commissioner of the Bureau of Labor Statistics, which prepares the monthly jobs reports, said in Congressional testimony last month that this broader measure [underemployment report] stood at 8.9% in February, up from 8.1% a year ago.

“We’ve clearly had a broad weakening in the labor market,” Hall said.

My perspective, and I am an mechanical engineer, which means that I value tangible goods in my world view, is that the fact that factory orders are still declining, -2.5% in January, and -1.3% in February, is a better indicator, though I also consider the fact that car sales tanked last month, including Toyota, significant too.

Of course, economists, and other such folks, tend to look at consumer spending, so the fact that Discover Financial Services reported that its consumer spending confidence index is down might be a bigger deal for them.

In real estate, we have Manhattan condo and Co-op sales collapsing. It appears that the market is now crushing, “location, location, location”.

And on the more surreal side of real estate, we are finding an epidemic of copper pipe theft from abandoned homes. The hed is a real eye catcher, “ Some homes worth less than their copper pipes“.

This makes the USA sound like it’s suffering from Baghdad level looting.

Iraq Update

No Comments

First, we must mention that Tahsin al-Sheikhly, a spokesman for the Iraqi government’s security forces has been kidnapped by elements of the Mahdi Army (See here and here).

It makes one wonder if Maliki’s really the head of the Iraqi government, or a very subtle sketch comedy troupe.

The fighting continues, and we are seeing large protests in Baghdad over this.

It’s increasingly clear that Cheney wanted provincial elections to go forward, and signed off on operations against the Mahdi Army to do this, not because they would prevent elections, but because Maliki wants to take them out to prevent Sadr’s party from making political gains in the elections.

Of course, Maliki is vowing “no retreat” on the operations, but if this ends with a cease fire, he’s done, so it’s not like he has an alternative.

In the mean time, the Maliki forces are not doing well, and it appears that US Armored forces are now actively involved. The Iraqi army is not, as they say, “standing up”.

Finally, on the real reason that we are there, oil, we are seeing oil price spikes on pipeline sabotage.

Economics Update

No Comments

Oil is holding steady, and the dollar has strenghtened, but Gasonine has hit a new record.

My predictions, which are usually wrong, Oil is pretty much permanently above $100/bbl, the dollar has a way to go down still, probably settling sell south of $1.75:€1.00, and Gasoline prices will break $4.00/gal in a year, and that there will be overshoots on all of them.

But my predictive record sucks wet farts from dead pigeons.

It looks like the Federal Home Loan Banks will be performing the way that God and Herbert Hoover* intended, in that will be making things much worse by bailing out investors in bad mortgage bonds to the tune of $150 billion.

Hoover was a stalwart supporter of doing the wrong thing, back to his days in China, where he supporter what came very close to murder in Chinese mines.

Oh….JP Morgan blinked, and upped their offer on Bear Stearns to $10/share. This is a bailout of two groups of people:

  • The Bear Stearns employees who f&%$ed up the place to begin with.
  • The investors who saw the mess, and said, “Give me some of that.”

They both deserve to lose, and, of course, those people who bought at $5/share just made out like raped apes.

*Hoover created the FHLB system.

Economics Update

No Comments

Any time that the Fed cuts rates, it’s the lead economic story, and today the Federal Reserve huts its discount rate by 75 basis points to 2.25%.

There is not a whole bunch left for the Fed to do. At the rate that they have been cutting this year, they will be at zero some time in July.

We are in a pickle, and Paul Krugman is right when he says that at best we are almost in a liquidity trap, if we aren’t already there. The Fed cutting rates has very little effect on interest rates for the rest of the economy right now.

As a result of the rate cuts, and the inflationary pressures involved, Oil appears to be heading back up.

Additionally, low interest rates tend to push the dollar down. The dollar spent most of today above $1.58:€1.00, though it’s now strengthened to a bit less than $1.57, about 1% below the all time low of $1.5904:€1.0000 reached on Monday.


Our economy in 1000 words.

Of course the real economy, the one that most of not on Wall Street live in, had a few statistics too, with Industrial output dropping 0.5% in February and inflation on the move, with the core producer price index increasing by 0.5% in February.

And it’s not just our economy, it’s both pillars of “Anglo-Saxon Hypercapitalism”, with banks the Bank of England’s emergency 3 day loans totalling £5 billion obeing oversubscribed by almost 500%.

It also looks like Lehman may be the next brokerage to have to deal with a run on its accounts. It’s shares were down 39% in early trading Monday, though it had largely recovered today.

One source of revenue for the various financial houses, private equity buyouts and other forms of leveraged merger and acquistion activity, appear to be drying up. No one wants to lend right now.

It probably does not help that we have it looks like a new star is born in the ppathetic theater that is the monoliner insurance debacle, FGIC, which posted a $1.89 billion loss. If people cannot trust the insurers to pay off if you default, then maybe they don’t want to fund your ill conceived takeover scheme.

This applies to foreigners, who not only are not interested in investing in American businesses, but are avoiding what used to be the safe haven of US Treasuries.

Finally, housing starts hit a 17 year low, though the article optimistically states that it is “above forecast”.

A pox on economic reporters. A little truth a little earlier, and perhaps housing starts would not be the lowest since Poppy Bush was in the White House.