Category: Energy

Economics Update

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It’s been a busy day today, largely due to the imminent collapse of Carlyle Capital, the investment bank of the Carlyle group.

Lenders are seizing its assets:

By yesterday the fund had defaulted on $16.6 billion of debt and said it expected to default soon on its remaining debt. The fund’s $21.7 billion in assets were exclusively in AAA mortgage-backed securities issued by Fannie Mae and Freddie Mac, traditionally considered secure and conservative investments, which it was using as collateral against its loans.

They could not meet margin calls, and their share price has fallen 90%. See also here.

Paul Krugman has a very amusing comment, that the “Carlyle Group should have stuck to what it knows. It’s great at the merchant of death thing; at investment banking, not so much“.

It’s not entirely accurate, but still really funny, I used to work for the Carlyle Group, but they sold me to buy Dunkin Donuts. Seriously. They sold United Defense, where I worked 2003-2006, to BAE Systems.

In any case, the collapse of the Carlyle Capital has the market worrying about other possible collapses, with the Times of London reporting that, “Several hedge funds with assets of more than $4 billion (£2 billion) were on the brink of collapse last night or had halted withdrawals, despite moves by the US Federal Reserve“.

This has also hit US currency with the dollar falling to a 12 year low vs the yen and an all time low vs. the Euro, see here, and here.

The Yen has fallen below ¥100:$1.00, ant the Euro hit a new record of €1.000:1.5625. We are talking big time ugly, and there is still the Yen carry trade, where people borrow low interest Yen and invest the money at higher interest elsewhere, that takes a hit when the Yen strengthened.

The falling dollar also drove the price of oil up to a new record, over $111/bbl, and is part, if not most of the reason that gold broke $1,000.00/oz as a part of the flight from the dollar and concerns about inflation.

There will be more pain.

Speaking of pain, retail sales fell in February by the largest month to month amount in 5 years, 1.1%. The preliminary numbers showing an increase that I reported a week ago were apparently just that, preliminary.

Note that this does not correct for inflation, so it’s even worse.

In it efforts to restructure, Chrysler is completely shutting down for 2 weeks in July, that’s everyone who is getting the vacation, not just the guys on the line for retooling. They are claiming that it will, “boost productivity and efficiency”, but my guess is that a lot of folks people will have their vacations extended to forever.

Finally, no monoliner insurer bad news today, or perhaps I missed in in everything else going on, but Countrywide Financial continues to see climbing foreclosures, with the Frbruary rate of 1.64% being more than twice that of a year ago of 0.80%.

I really think that the deal for Bank of America to buy them will fall through, because what looked like a decent deal a few months ago is increasingly looking like a significant overpayment.

Economics Update

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I’m not sure if it even qualifies as news any more, but
oil hit a new record today, topping $107/bbl. Gasoline prices are following this trend, with prices rising $0.09/gallon over the past two weeks.

When this is combined with the fact that houshold wealth fell by $533 billion, (3.6% apr), in q4 of 2007. That’s without considering inflation.

When inflation is taken into account, all of 2007 is down.

In the ever entertaining world of the monoliner insurance, MBIA, is asking Fitch to stop rating its insurance units. They think that Fitch’s model is inaccurate, because Fitch is still considering a downgrade.

MBIA is insolvent, Fitch gets it, and S&P and Moody’s don’t.

As a result of this, we are seeing more of the non-profit and state run college lenders unable to secure financing, and hence unable to make loans.

Remember, these loans cannot be discharged by bankruptcy, and they are federally guaranteed, and no one will buy the paper.

This might explain why Lehman Bros. is cutting 5% of its workforce, about 1400 jobs.

One bit of good news is that China’s trade surplus dropped 63% in February, though one wonders how much of that is currencies readjusting, how much is a slowdown in the world economy, and how much is the winter storm that shut down the country for about a week.

BTW, its official, Malaysia is a Kleptocracy. That’s the only way to explain why, following a defeat that kept the National Front in the majority, but at less than 2/3, that the Kuala Lumpur Composite Index fell so sharply that they had to shut down trading.

This wasn’t even a change in party rule, just a drop below 2/3, and everyone was scrambling to get out because their business positions were predicated on corruption.

O happy day.

For what it’s worth, things are not much better in the US, where hedge funds are seeing margin calls on US treasuries. If treasuries go bad, forget the Honda full of silver, you need ammunition and canned goods.

Economics Update

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Oil hits another record, breaking $106/bbl, and the Dollar falls again another record against the Euro, and a 3 year low against the Yen.

As I’ve noted before, these are tied together. The expectation of a falling dollar pushes up the dollar denominated cost of oil to maintain the same global purchasing power.

Closer to home, the US lost 63,000 Jobs in February, which was an unexpected 5 year high.

Not surprisingly, this is accompanied by consumer confidence at a six year low.

Luckily for us, the Fed is riding to the rescue, and printing up more money to give to the jerks who screwed this up in the first place. The March money sales have been increased from $60 billion to $100 billion.

Carlyle Capital is being to forced to liquidate securities, one would assume well below purchase price, to meet its margin calls.

That’s what 32:1 leverage gets you.

The lenders are getting skittish, and they are starting to ask for some or all of their money back from hedge funds and other speculative entities.

And why shouldn’t they as the housing crash is chewing up their balance sheets like a great white shark.

So we have money fleeing to the safe haven of US treasuries, because they are expecting another shoe to drop, like, for example, the possibility that, Fitch Ratings might downgrade $160 billion in Alt-A mortgage backed securities, which is rumored to be imminent.

Economics Update

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Yawn, another day, another all time low for the Dollar vs. the Euro, breaking the $1.53:€1.00 barrier.

The expectation of a major fall in the dollar is one of the major causes of oil prices rising again today, though the fact that OPEC his telegraphing that there will be no production increase, contributes to this.

The job market is looking increasingly grim, with
nonfarm employment declining by 23,000, and, in a good indication of an incoming recession, productivity growth is declining.

We do have some good news, the appraisal standards for Fannie Mae and Freddie Mac are not officially implemented.

It would have been better news a year, or 5 years, ago.

I have this rule of thumb when looking at the economy, which is when something happens in high finance that is truly bizarre, start by assuming that it is bad news.

That’s the case with yields falling below 0% on Treasury Inflation-Protected Securities (TIPS).

TIPS are government bonds in which the principal appreciates along with the consumer price index. They are sort of inflation proofed as a result.

They are less riskier, because if inflation shoots up, you will get that back in the end, so the interest rate, which are set by auction, is lower.

Only for the past three days, the interest rate has been bid to less than zero, meaning that the bidders expect significant increases in inflation.

Paulson Sees New Capital Markets Proposals in ‘Weeks’

Bush’s Treasury Secretary is, after months of prodding by Democrats, coming up with a plan to close the barn door after the cow is gone, saying that, “We’re looking at the mortgage-origination process, we’re looking at the securitization process, we’re looking at rating agencies, we’re looking at disclosure issues, we’re looking at capital issues and regulatory issues in the weeks ahead.”

If it were done by honest decent and competent people, it would still be too late, but in this case it’s being done by Bush and His Evil Minions™, which means that it’s primary goal will be two fold, preventing meaningful regulation, and benefitting Bush, His Evil Minions™, and his campaign contributors.

The auction bond failure rate is nearly 70%, and appears to be getting worse, which means that at this critical time, with revenues falling, cities and states will find raising money for projects much more difficult.

In real estate, we now have mainstream press using phrases like, “Housing in ‘deepest, most rapid’ decline since Great Depression“, the alt-A crash is well and truly starter (Alt-A are not quite prime, typically credit scores over 700), and we have Ben Bernanke saying that housing woes could persist for years.

Additionally, we are about to see the revenge of the 2005 bankruptcy law, with filings up 18% from January, and 28% from the year before.

We are about to see the negative effects of the law, which were predicted when it was initially proposed.

BTW, all is not quiet in the ever entertaining world of the monoliner bond insurers. Ambac has announced a reorganization, where it will exit the mortgage securities market and raise $1.5 billion in new capital.

GM to Use LiIon Batteries in Hybrid Car Models

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I think that it’s clear that the lithium-ion batteries chosen by GM are superior to the standard NiMH, they are more efficient and lighter, but there are problems.

The article mentions overheating, but they actually heat up less in use.

The real problem is what is euphemistically called “rapid disassembly” in battery manufacturing*, which occurs when batteries overheat or are overcharged.

Basically because of the chemistry of a LiIon battery, these can cause dendrites, basically metal whiskers, to form between anode and cathode, shorting out the battery and discharging all of its energy in a matter of seconds.

Think about the Dell exploding laptops on crack. It looks a lot like a flare going off.

Of course, this would not be a problem with a properly designed system, but we are talking about General Motors, the folks who used the same aluminum alloy as Mercedes Benz for its Vega engine, but but chose a coolant that corroded aluminum.

I’d wait for at least the 3rd model year before buying.

*I worked for a battery manufacturer for a while.†
†And now my regular readers, both of them, are wondering if there is any field of endeavor where I haven’t worked. Well, yes. High finance. If I had worked on that, I’d have the money to spare for a domain name.

SAS Saying Old Fuel Guzzler Auircraft are Cheaper to Operate

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The Scandinavian airline SAS: is saying that its MD-80s would still be cheaper to operate, even if the cost of fuel doubled.

It doesn’t make a whole bunch of sense, given that the cost of oil is at an all time high, until you look at this quote:

n its newly-released annual report SAS Group says the effect of capital costs means the MD-80 is SKr5-10 million ($0.8-1.6 million) more profitable to the carrier than newer aircraft.

Capital costs for the type are SKr20 million lower, more than offsetting the SKr10-15 million in higher fuel and maintenance costs.

…

n its newly-released annual report SAS Group says the effect of capital costs means the MD-80 is SKr5-10 million ($0.8-1.6 million) more profitable to the carrier than newer aircraft.

Capital costs for the type are SKr20 million lower, more than offsetting the SKr10-15 million in higher fuel and maintenance costs.

(emphasis mine)

This is interesting not from an aviation perspective, but from a larger economic one.

It implies one of two things:

  1. That airlines going for the latest and greatest hardware are slitting their own throats, and that capital costs completely blow away operating costs.
  2. That the cost of capital today is high enough that upgradeing even with the historically high fuel prices, simply does not make economic sense.
  3. That they expect these planes to be used for surges in demand for seasonal and other reasons, and won’t the full utilization, and capital costs dominate.

The first reason is simply not credible. If it were, we’d all still be flying DC-3s, or at least upgrades 707s and DC-8s, since they take people to the same places just as fast.

That leaves reasons two or three, or reasons two and three.

From a macroeconomic standpoint, however, it’s reason 2, the cost of capital, that is most interesting.

This may very well be a major capital purchase that is being delayed because the capital markets have frozen up. That the increased risk premium that has resulted from the credit crunch simply make it too expensive to upgrade to better equipment.

That is how a credit crunch creates a recession, which makes the credit crunch worse.

Economics Update

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Let’s lead off with the dollar on it’s way down, it’s at a 3-year low vs. the Yen, and a new record low vs. the Euro, which is one of the things that has oil breaking another all time record, $104/bbl.

The value of the dollar is dropping, so the price of oil, which is sold in dollars, is increasing. One wonders how many countries are considering a Euro oil bourse other than Iran.

In real estate, we have the largest drop in residential and commercial construction in 14 years.

So much for commercial real estate being “immune” from this contagion.

The poster child for the real estate meltdown, Countrywide, is still hemorrhaging on its mortgages, with 90 day delinquencies at 5.6% (up 900% from a year ago), and this is threatening to torpedo the deal with Bank of America to buy them out.

FWIW, there are more foreclosures than sales in a number of the states in the West, and Florida.

On the macro level, we have Warren Buffett saying that the recession is pretty much all ready here, and the president of the Philadelphia Federal Reserve saying that inflation is not important, and that the first priority is keeping the economy on track.

When a central banker says, “Inflation, no big deal”, you know that you are up a certain creek sans paddle.

Further evidence of a slowdown is the fact that Ford and Toyota sales declined in February. Ford having declines is not a shocker, but when Toyota is not selling cars, no one is selling cars.

The happy news is that the FDIC doesn’t see there being a surge in bank failures, though it does make one wonder why they are calling back retirees and generally staffing up.

They expect to be as busy as a one legged man in an ass-kicking contest.

In the world of municipal bonds, which should be safe-havens in a time like this, it appears that the costs are increasing, and the ratings falling, for municipal bonds, because of the collapse of the auction security markets.

In bond insurance, we have a new, or at least new to me, bond insurer bleeding, Security Capital’s to the tune of $1.5 billion on various complex investments.

It’s already been downgraded.

Finally, Buffet is now saying that his offer to buy the muni business of bond insurers is no longer operative.

Berkshire Hathaway is aggressively bidding on municipal bond portfolios, and as other insurers are downgraded, their position can only get stronger.

Economics Update

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In local finance, we have King County, Washington potentially losing all of a $207 investment, the county claims that they will “only” lose 83 million, the state says all of it.

This will be repeated, and given that the auction rate bond market has collapsed, and localities are fleeing that instrument, their ability to issue bonds will be significantly diminished.

Don’t expect any new money to spent on roads, schools, water, sewer, fire, or police for the next 5-10 years.

In real estate we should note that 8.8 million homeowners, or 10.3% of all home owner are under water. They owe more than they can sell their houses for.

Gas prices hit are way up, which is an ill wind for consumer spending, which counts for 70% of the US economy.

Analysts are warning of risks to Fannie Mae and Freddie Mac, which makes the decision to allow them to finance even larger mortgages appear even stupider.

Fitch Ratings is saying that life insurance companies may take an $8 billion dollar hit on subprime and alt-A real estate investments.

It also looks like we will be seeing downgrades on the monoline insurers within a week or so.

And in hedge funds, we have D.B. Zwirn & Co. seemingly on the path to shutting down. It has shuttered its Special Opportunities Fund, a $4 billion hedge fund. Once it unwinds this, and it may take a while, they have less than $1 billion under management.

We also have Clifford Asness’ AQR Capital Management showing that mathematics based strategies are not working:

Asness’ AQR Capital Management has notified investors that its Absolute Return Fund, long one of Wall Street’s most stellar performing quantitative hedge funds, lost 15 percent of its value through mid-February. The slide follows an 11.9 percent drop through the end of November.

Bloomberg reported Friday that AQR flagship hedge fund now manages $2.9 billion, down from $4 billion.

I think that its clear, and should have been clear after LTCM went belly up nearly a decade ago, that these model based hedge funds don’t work.

The models break down when you get significant swings.

Economics Update

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The European Commission is predicting higher inflation and slower growth for this year.

Because the European Central Bank has controlling inflation as its sole mission, as opposed to the Fed, which also has an obligation to maximize employment, I think that we will see no rate cuts from the ECB, and perhaps a rate hike, which means that the current, and any future rate cuts by the fed will increase downward pressure on the dollar.

In terms of the US economy, we have the index of leading indicators index falling for the 4th straight month, the Philadelphia Federal Reserve’s report on manufacturing activity fell sharply, to the lowest point in 6 years, and Philly Fed’s future general activity index, which looks forward about 6 months, fell to the lowest number since 1990.

On the brighter side, this has driven oil prices down, because a recession implies reduced demand for energy, to $97.31/bbl.

In real estate, we have Mark Zandi, chief economist and co-founder of Moody’s Economy.com, predicting that home prices will fall 20% from their peaks.

He’s an optomist. First, interest rates are going up, and second, you always get overshoot in a correction like this. I expect a 40%+ drop in real terms, though inflation will mask some of that.

We also have the spread between adjustable-rate and fixed-rate mortgages growing. This is an indication that lenders are expecting rates to go up in the relatively near future, and they don’t want to be locked into low return loans.

We are also seeing localities recognize that they are going to get hosed on bond issues because of the bond insurance crisis, paying higher rates on lower rated bonds.

Oil Above $100 Following Refinery Explosion

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While oil has broken $100 in the course of a trading day, this is the first time that it has closed above $100, $100.01/bbl, with a peak of $100.10 hitting in the middle of the day.

Gas is above $3.00 again.

I understand how a refinery fire can get gasoline prices to jump, but I am not sure why the explosion and fire at Alon USA’s Big Spring, Texas, refinery would drive up oil costs. It seems to me that a reduction in refinery capacity would reduce the demand for oil.

Perhaps this facility is one of those tuned to the Venezuelan “sour” crude, and so it’s increased demand for light sweet crude.

Venezuela Threatens Oil Cutoff Over Exxon Lawsuit

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Well, it looks like we’ll have to choose between the folks who poisoned Prince William Sound, and the average American driver, because we have a threat from Chavez to cut off oil shipments over Exxon lawsuit filed in London.

How a company based in the US files suit in the UK, over actions taken in Venezuela is beyond me.

FWIW, Venezuelan oil is not fungible. It’s a “sour” crude, and refineries have to be set up to refine it, so this would be a hole in the world oil supply.

Clean Coal, Toxic Water

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Note that I have just added the Washington Independent to my blogroll…It’s a good source for news and commentary.

Check out this article on the toxic waste of “clean coal”.

According to the Environmental Protection Agency’s own research, coal ash dumping can lead to higher rates of cancer, developmental problems in children and adverse effects in women of child-bearing age. Despite the fact that coal ash contains mercury, lead, arsenic, chromium, cadmium, selenium, beryllium, and other toxic metals, the EPA has yet to categorize coal ash as hazardous waste. In addition, coal ash has been found to be up to 100 times more radioactive than nuclear waste, due to the concentrations of uranium and thorium that increase 10-fold after coal is burned.

Bush Begging People Who Sowed the Seeds of 911

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Yep, this is the result of 6 years of failed Bush policies, he goes to the House of Saud to beg for help.

This must be some sort of definition of “returning honor and dignity to the White House” that I was unaware of:

……These days, President George W. Bush needs the world’s biggest exporter of crude more than it needs him.

With oil at about $90 a barrel, the U.S. economy at risk of sliding into recession and American banks trying to raise cash to ride out the subprime-mortgage crisis, Bush has become a supplicant for Saudi financial help.

….

Senator Hillary Clinton tried to turn it into an object of derision by describing Bush as “begging the Saudis” to cut the price of oil. “How pathetic,” she said.

I got your back on this statement, Hill.

Pathetic.

Economic Update

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[on edit]
The lead off news is that the head of the IMF. Dominique Strauss-Kahn, is calling the global economic situation “serious”.

As to what he’s considering, Strauss-Kahn, a Frenchman is meeting with French President Nicolas Sarkozy to see what a the French response must be.

It just feels so good to be rescued by the French, huh?

Well, we don’t have US quotes, because it is a holiday, but there was a lot of blood in the foreign markets, with the FTSE-100 fallint 5.5 percent, the CAC-40 6.8%, and the DAX 30 plummeting 7.2 percent in Europe, and in Asia, the Shanghai Composite fell 5.8%, the (Singapore) Straits Times Index fell 6% (15.8% for the year), and India fell 7.4%.

The “markets” don’t think that the stimulus package, which is to say GW Bush’s “no money for the working poor” package, which tanked the US markets on Friday, Sucks.

For what it’s worth, the US meltdown is beginning to hit Europe, where there is increasing pressure for the ECB to lower interest rates. (My guess is not right now. The ECB is charged with keeping inflation down only, no requirement on employment)

European banks are tightening up lending standards in response to the meltdown, so short term liquidity problems may be coming to Europe too.

We also have the Bank of China, the 2nd largest lender in that country, share price dropping by over 6% because of concerns over their subprime exposure. There are rumors that they will show a net loss in 2007 as a result.

Oil, however seems not to be spiking lately. Recession fears have a way of doing that.

New Ultra Capacitor Technology

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I read a report about Lockheed-Martin signing a contract with a company called EEstore to get exclusive rights to their ultra-capacitor technology in defense and homeland security applications.

I’ve done a bit of looking around, there is a Wiki Page, and if it does 1/10 of what they say it does, it’s impressive tech.

The advantages of Capacitors over batteries are:

  • Fast Charging
  • Fast Discharging
  • Basically never wear out.

The disadvantages are:

  • They can lose their stored energy over time, though this can be a long time, as anyone who has been knocked on their ass after opening up a junkyard TV can attest. (This tech is supposed to have self-discharge rate of 0.1% per month)
  • Low power density.

This technology looks very impressive:

These units use barium titanate coated with aluminum oxide and glass to achieve a level of capacitance claimed to be much higher than what is currently available in the market. The claimed energy density is 1.0 MJ/kg (existing commercial supercapacitors typically have an energy density of the order of 0.01 MJ/kg and a lithium ion battery has an energy density of 0.54–0.72 MJ/kg).

Maxwell technology has ultracapacitors on the market, and their website has peformance of 3.29 Wh/kg, or about .01MJ/KG.

Corruption in Alaska Too Severe for Company

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This surprises me…..From ages 1-7, I lived in Alaska, and for most of that time, my dad was on Governor Bill Egan’s (D) cabinet, and it was not a particularly corrupt place. Now, it appears to resemble Nigeria.

Too corrupt for an energy company, in this case MidAmerican Energy Holdings Co. is a level of corruption that I did not expect to see in the US.

“As you are painfully aware the ongoing corruption investigations coupled with previous indictments, guilty pleas and convictions draw into question virtually every major Alaskan project participant and governmental levels from State to Federal,” says the letter from MidAmerican CEO David Sokol. “Obviously your administration had no involvement in these previous shenanigans nor did we; however, you and we alone cannot develop the pipeline project through AGIA’s expected process.”

MidAmerican was expected to be among the companies applying by Friday’s deadline for a package of financial and other pipeline incentives under Palin’s Alaska Gasline Inducement Act.

Oil creates bad government, which explains Texas.