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Guest Name New Oil Turfs Locally  6/16/2008  1. Call to ease restriction on drilling on federal lands: a. Northern Alaska b. Southern Wyoming c. Eastern Great Basin d. Powder River Basin e. Uinta-Piceance Basin. 2. The answer to high oil prices is to increase supply 3. The average gas price for May, 2008 was $4.039 a gallon. 4. 91 million acres of federal land are under lease. 27% of the onshore acres are producing oil. Oil companies don’t know how much oil is under the lands, so they buy up large swaths in hope that a fraction of that land will produce oil. 5. Will oil companies acquire addition lease agreements on the federal lands, if restrictions are lifted? Oil companies have millions of acres under lease currently without production. Oil companies are not likely too rush into new areas to develop oil production. Congress wants to review these leases and not renew the lease if the land is not oil producing. Oil companies often snatch up lease land that will not be developed for years. Some of these smaller companies make money on their reserves and not oil production. Currently, oil companies must give up their leases on non-producing oil lands, after 5 to 10 years, but usually can apply for an extension. 6. Higher oil prices have driven interest in oil fields that were not profitable below $60 a barrel. 7. The Chinese in cooperation with Cuba are drilling in the Gulf of Mexico.   Treasury sell off - worries about inflation  6/11/2008  1. Investors sold Treasuries believing that the Fed will increase rates to slow inflation. Sell rates today and tomorrow buy higher rate bonds. The two year note has raised sharply in yields. 2. Selling long-term securities started as investors feared inflation erosion of long-term value of their bond assets. 3. Rising energy prices (oil at a $131 a barrel) and rising food prices have the fed talking strong against inflation. Unemployment rose to 5.5 percent.   MBIA and Ambac lose triple A  6/6/2008  1. Says Jay Brinkmann, “For example, while subprime ARMs represent 6 percent of the loans outstanding, they represented 39 percent of the foreclosures started during the first quarter. Prime ARMs represent 15 percent of the loans outstanding, but 23 percent of the foreclosures started. Out of the approximately 516,000 foreclosures started during the first quarter, subprime ARM loans accounted for about 195,000 and prime ARM loans 117,000, but the increase in prime ARM foreclosures exceeded subprime ARM foreclosures with increases of 29,000 and 20,000 respectively over the previous quarter.” 2. The foreclosure problems in California and Florida are extraordinary and they are the main drivers of the national trend. 3. California, Florida, Arizona and Nevada represent 62 percent of the foreclosures on prime ARM loans and 29 percent of prime fixed-rate foreclosures. 4. Bond insurers MBIA and Ambac were stripped of their triple A rating to double A. Moody Investors Service warned that it would likely knock down the rating further. 5. The $2.6 trillion municipal bond market has been in the process of valuing insured debt based on its rating rather than that of the insurers. 25% of the new muni were insured verse 50% the previous year. 6. The Security Exchange Committee will be adding new ratings labels on both structured finance and municipal bonds. A label such as “s” will be added on those bonds that include subprime mortgages.   $500 Trillion dollar Derivatives Market  5/30/2008  1. Investment bankers asked Timothy Geithner, president of the Federal Reserve Bank of New York, to open loans to investments, previously not opened and the Fed does not regulate investment banks. Geithner was persuaded to ask Bernake to open the discount window to investment banks. The window had not been opened since the 1930s remaining closed because of the moral-hazard consequences from speculation investing. 2. Jan, 2008, Bernake cut interest rates by 0.75 and raised concern that inflation might rise. The fed desired to avert financial meltdown, prop up the stock market, and deal with inflation in the future. The fed did not execute a bailout of Bear Stearns. A fed bailout could trigger hyperinflation caused from massive dollar devaluation. 3. Bear Stearn lawyer, Rodgin Cohen called Geithner expressing concern over the companies situation. Schwartz call Geithner to tell him Bear Stearns had retained an investment bank to fund them. That day a full run began with customers and lenders yanking billions of dollars from the firm. Bear Stern faced bankruptcy. 4. The fed issued a $30 billion loan to cover Bear Stearns losses in mortgage back securities. $13.4 trillion dollars was being leverage on $80 billion by Bear Stearns, 167 times, in the derivatives market. The fed was convinced that Bear Stearn should not be allowed to become insolvent. JP buys Bear Stearns for $2 per share greatly underestimated risk associated for leverage securities backed by mortgages. 5. Derivatives are futures, forwards, options, and swaps. Derivatives reduce risk for one party. Derivatives hedge against the future, invest small now for the option to buying later. Derivatives are contracts based on or derived from some underlying asset, reference rate (interest rates or exchange rates), or indexes. 6. Derivatives can be based on assets such as commodities, bonds, interest rates, exchange rates, stock market index, and consumer price index. Derivatives allow investors to make massive money by leveraging on small movements in price. In derivatives someone losses money while someone gains money, a supposed zero sum game. 7. If Bear Stearn went bankrupt the lenders would receive collateral. 8. JP Morgan by buying Bear Stearns becomes the reigning derivatives king with $90 trillion on its books. 9. Additionally, at risk was the larger $43 trillion CDS insurance market for which Bear Stearn insured $13.4 trillion and the $150 trillion bond market and the $500 trillion derivatives market.   AIG Credit-Default Swap woes  5/9/2008  1. AIG reported a $12.5 billion loss 2. U.S regional banks are reporting big losses on loan deliquencies 3. AIG blames weakness in the housing market, credit-market woes, and stock market volatility, as causes for their losses 4. AIG took a $9.1 billion write-down on credit derivatives payouts and $6.1 billion in investment losses 5. AIG stock price has dropped 40% since 2007 6. The IRS says AIG owes $329 billion in back taxes 7. AIG risks increases as credit-default swaps fail and AIG has to hand over cash. "The credit derivative has one party making periodic payments to other and receives the promise of a payoff if a third party defaults. The former party receives credit protection. " (Wikipedia) AIG is the seller and receives the periodic payments. As the third party defaults, AIG must provide the buyer, cash payouts. 8. Just a note, In 2007, Collatateralized Debt Obligations was $35 trillion, 2008, it was $43 trillion. Credit default products are the most commonly traded credit deivative product.   Case for $150/bar Oil  5/7/2008  1. Indonesia, a member of OPEC, says, it will pull out of the cartel, next year, as its daily production has dropped below 1.7 million bar/day. 2. The spare production capacity, used in time of crisis, has dropped to 2 million bar/day less than 2.3% of daily demand. 3. At the pump, a $150 bar of oil equates to $4.50 gasoline prices 4. The price of oil is hedged upward by speculators as a hedge against a slumping dollar. 5. Militant attacks in Nigeria destablize the region and reduce pumping capacity to 2.5 million bar/day. 6. Aging fields in Russia and Mexico have crimped crude production. 7. 2008, Non-OPEC production grew about 1%, falling below expectation. Non-OPEC oil suppliers produce 50.5 million bar/day. 8. The Goldman Sach bank says oil could hit $200/bar.   Foreclosures over 2%  3/25/2008  Chicago Naperville, Ill 46,345 (2.5%), Altanta-Sandy Springs-Marietta, Ga 26,310 (1.8%), Detroit-Livonia-Dearborn, Mich, 19,647 (2.4%), Phoenix-Mesa-Scottsdale, Ariz, 18,585 (1.8%), New York-White-Plains-Wayne, NY 18,442 (1.2%), Denver-Aurora, Colo, 17,048 (2.4%), Riverside-San Bernardino-Ontario, Calif, 11,640 (1.1%), Los Angels-Long Beach-Glendale, Cal 11,057, (0.6%), Washington-Arlington-Alexandria, DC, Va, Md, Va 10,881 (0.9%), Cleveland-Elyria-Mentor, Ohio, 8,266 (1.3%) Central Banks have bought $100 billion of Freddie Mac and Fannie Mae loans. The banks seek to stablize the faltering quasi government private corporation. Fannie Mae and Freddie Mac and Countrywide Financial Corp and Wells Fargo own 33,729 foreclosed homes, at the end of 2007. HUD is finding that homes are taking longer to sale shifting from 175 days a year ago to 196 days. About 30% of the HUD homes are in Ohio and Michigan.   Commodity : Steel Prices rise  3/19/2008  The steel fabrication business employees 1.5 million people and layoffs are rising in many metal-forming companies. Steel is experiencing higher commodity prices and lesser demand. Overseas markets have strong demand for components associated with mining equipment, farm equipment, oil and gas pipes, and aerospace parts. Consumer buying of cars, refrigerators, and houses are down. 2008 demand for household appliances fell 15%, motor vehicles 7%, and construction equipment 10%. Steel prices could increase 30% for makes of lawn and garden, agriculture and automobiles and energy costs 20%. “Where is the demand for the material to justify these prices?” Steel imports are low. Foreign steel makers are less interested in the US. ArcelorMittal announced higher prices, Nucor is up 30% from last year, AK Steel increase $70 a ton for flat-rolled products. The average expected rise in steel cost is expected to be 20%. Iron ore costs are higher, coke costs are higher, and scrap prices are higher.   Credit Default Swaps  3/17/2008  Credit Default Swaps can be used to manage risk without selling the corporate bond or government bond. Credit Default Swaps are a form of insurance for banks, pensions, and hedge funds (Party A) too protect themselves against the companies they invest in against debt default. Insurance is bought to protect against loss. Without insurance, if company X defaults on debt, the bond value is lost. For example, a pension fund (Party A) buys a CDS and pays a 2% premium per year broke up over four quarterly payments, payable too a derivative bank; on the books, the risk of default is eliminated by the insurance; and CDS coverage lasts 5 years. Since the CDS is not tie to a physical asset it can be bought and sold. Speculation on the credit-spread works drives buying and selling of CDS contracts. Without a CDS, a third party profits by identifying, a company with weak financial performance and offers to pay $900k for a $1 million bond from party B and profits $100k, if the company paid its debt. With CDS, party B profits: “Alternatively, one could enter into a credit default swap with the Party B, by selling credit protection and receiving a premium of $100,00. If the company does not default, one would make a profit of $100k without investing anything.” Speculation profits are on the margin. Swap prices decline as credit quality increases and rise when quality worsens. “Some who believes that a company’s credit quality will change could potentially profit more from investing in swaps than in the underlying bonds.” Problem: Party A buys the CDS from Party B, Party B can assign the insurance contract to another party; the final party may or may not be in a position to pay the bond’s full value in the case of Party A default. If companies default on their obligations, buyers of credit default swaps would lose money, banks would tighten credit, and interest rates would rise. Why is the Bear Stearns demise a epic portioned crisis Bear Stearns influence is felt in the securities repurchases market. What will happen with the $43 trillion dollars in complex CDS insurance stabilizing against debt defaults? The push to buy additional insurance pushes the prices of the premium higher. If losses reach a certain level – companies will be forced to buy insurance to protect against debt default.   Yen drops below 100  3/14/2008  Mar 2008, the yen drops below the 100 mark, 20 yen from its low in 1995. Further steep declines in the dollar could lead to global loss of confidence in the dollar and push interest rates higher. The fed is pulling the dollar lower with inter rate cuts. Interventionism causes recession and depression. The fed believes the dollar demise is helpful, a fool and his money. The euro was at 1.5609, the Singapore dollar, at $1.3791; and Chinese Yuan, at 7.0904 to the dollar. Nikkei Stock market is down 19%. Every time the dollar slips by one yen, Toyota’s profits drop by $350 million. Bank of Japan cannot raise rates when the economy is weak. Short term and long term outlook weakens as the dollar declines. In 1995, Japan fought back by intervening in the currency market, in boosting the value of the yen and increased government spending. Japan has a big budget deficit and a stimulus package will be difficult. If Commodity prices rise then it would offset a stronger yen. Commodities are global so price does not artificial rise. If commodity price rose, Japan would take no advantage from the stronger yen: export decrease and imports of commodities cost more. For example, Imported wheat costs and food prices would increase. Fannie & Freddie Mac took $5 billion in losses for 2007; Fannie Mae down 58% and Freddie Mac down 65%. They need to raise $40 billion in capital. Fannie & Freddie Mac seem broke. With losses, it seems that investment capital is unattractive.   Municipal Bonds, VRDO, Swaps  3/6/2008  The Variable Rate Demand Obligation Bond market is a $500 billion dollar business. VRDO are a line of credit by a commerical bank. VRDO provide long term financing at short term rates. Interest rates change weekly, but the borrower pays the average of the weekly changes, monthly to a bond trustee. Principal is paid semi-annually. The municipal bond market is a $2.4 trillion dollar debt machine. A Municipal swap allows two counterparties too swap fixed rate interest payments for their floating rate payments; the swap agrees to give the fixed rate in exchange for a percent of the revenue stream. Jefferson County has a $5.2 billion dollar sewer debt. The county wanted to refinance debt and lower their payments. The County had a bond rating down grade force more collateral required for the swap. To enter into a swap agreement the county needed $184 in collateral for the debt transaction. VRDO for the Swap seems improbable and the county fears default. The county has $194 million but can no expend that in the swap deal because of other costs. Jeff Previdi said "Your VRDO's bleeding you slowly but terminating that swap will bleed you quickly."   86% of $3.2 trillion  2/29/2008  There is “no global financial architecture in place to supplant the dollar”. In 2008, the dollar has decline 40 percent over a six year slide against the euro and 20 percent against other currencies. The prophet of doom and gloom, Fed chairman Bernake gave speeches about turmoil in the housing market and gloomy perspectives about the economy. Dollar demise advocates give three positive beats for the weak dollar: 8 percent per year exports increase and this causes more job creation too fill export orders, and devaluation of the trade deficit. A huge national deficit of $9.3 is still only 75 percent of GNP and far less than a 125 percent after World War II. The dollar is embedded into a vast global financial system. Countries, who are dependant on the dollar for purchases of oil, commodities, and imports must deal with dollar decline problems. Commodities trade in dollars. A buyer who holds other currencies finds it cheaper to exchange the current for the dollar and buy the commodity. Commodity prices have not declined 40 percent in six years. The price of the commodity in dollars has not climb faster than the rise in the foreign currency against the dollar. Therefore, the commodity is cheaper for the buyer of a non-dollar denomination. The dollar is involved in 86% of the $3.2 trillion in transaction per day, down from 90% in 2001. Two thirds of the central banks are dominated in dollars and the huge US trade deficit with partners makes the unwinding of the dollar more challenging. 80% of Indonesian exports are in dollars. The decline dollar makes oil more expensive, oil has breached the $102/barrel price, analyst still declare, “not as high per real cost as the 70s”; I’m anticipating a $4 gallon/gas summer.   Inflation in China  2/20/2008  2007-2008, China prices surged 7.1%, caused by heavy snows that froze power grids and shut down road and rail transportation across much of Central and Southern China. The shortage pushed prices higher causing inflation ratest to peak. Storms killed animals and damaged crops. Chinese food prices have rose 18.2% China is pursing tigher monetary policies raising interest rates six times in 2007. The tigher monetary policy keeps the yuan valuation from falling and with a $400 to $500 billion foreign reserve. Labor intensive growth in manufacturing has allowed China to accumulate wealth and subsidizing State Owned Enterprises making possible artificially low employment and living aids; Short term, the subsidizing keeps prices low and US consumption high. Subsidizing will fail because large industrial planning needs capitalistic allocation of resources; capitalism driven by the free market is more efficient at allocating resources. China should use its foreign reserve and let the yuan increase in value. A stronger yuan gives stronger purchasing power for foreign natural resource; a stronger yuan makes exports more expensive; a stronger yuan increases real income for the workers; and a stronger yuan does not reduce local consumption trends. China local consumption is increasing and its economy more independant of US consumption. The large foreign reserves could be used to purchase foreign assets and companies. The Chinese also have large savings that they are looking to invest into foreign companies. 90 of Chinese savings are help in State owned banks. Most of the savings are loaned to SOEs and foreign investment is discouraged. The banks will need to raise interest rates to attract savings, but in order to do so, they must raise loan rates, covering loses and non performing loans. The foreign currency is like a massive bank account in a foreign country, as long as the yuan remains strong there is no motivation to exchange the foreign reserve. China would not be hurt by a more flexible exchange rate for the yuan. So why is China building up its foreign reserve? China is creating "globally competitive multinationals" from it's state firms, in the sectors of natural resources (oil and iron) and consumer goods and high tech industries. The hope is that China firms will become global brands.   Canadian dollar 16% up, Euro 13% up against the dollar  2/11/2008  Feb 2008, the dollar is down 16% against the Canadian Dollar and 13% against the Euro. The European countries are complain about a weak Yuan believing it should appreciate in value. The soft dollar has helped US exports. European and Canadian stronger currencies make it more difficult to compete against American companies. Will the Euro have to bear the brunt of the currency adjustments? Why is the ECB slow to adjust their rates believe inflation will rise in Europe? How can inflation rise in Europe if the euro must bear the brunt of the current differences? The Yuan has been allowed to rise 15% the dollar since 2005. I expect the G7 to continue applying pressure for more increases. "When measured against the currencies of its major trading partner, the yuan has only climbed 9%." Europe and Canada are claim the yuan is artifically weak. Mud slinging is blaming the Chinese for a weak dollar. There are interest rate differences, the ECB and the Fed have different rates and viewpoints of world economics. The fed wants economic promotion and a booming stock market. The ECD wants to control inflation and is resisting cutting rates and the higher rates lift the euro.   Fed ready to cut rates  1/25/2008  Has Chairman Ben Bernake been to ready to cut rates, ready up a falling stock market? The fed cut rates by .75 percent holding the rate at 3.75 percent. The .75 percent cut in part because of fears of overseas stock market plunge. The fed states the rate cut is the result of downside risks in the economy and mounting volatility in the market (investor confidence, financial institution stability, and asset prices). The fed is holding that it was not driven by the equity market. The fed was driven by the equity market, the fed was panicking, and the cut moved to protect investors against loss. Bonds are the area to watch. When bonds downgrade ratings it suggests that banks are facing increased defaults, a deterioration in asset values. Slowing profits means the credit crisis is not over.   Desalination  1/17/2008  If you take the time and have the discipline to read "Cadillac Desert" then your probably aware of the need for desalination technology. Carlsbad, Cal is starting to build a $300 million water desalination plant. It will produce 50 million gallons of water a day, enough to supply water for 100,000 homes. World wide there are about 13,080 desalination plants producing more that 12 billion gallons of water a day. As runoff slows and water from the Colorado becomes less reliable desalination becomes more feasible. Poseidon plans to sell water for $950 per acre foot, 325,851 gallons of water; the plant estimates it will cost $1.10 per 1000 gallons of water to filter. How does it work? 1. Seawater enters the plant and filters coarser particles, sand, sediment, and dirt 2. the pretreated water is force under high pressure through semipermeable membrane which separates the salt and minerals from the water 3. fresh water is store in a reservoir for usage 4. The concentrated brine residue is discharged back into the sea.   7.47% China One-Year benchmark  12/21/2007  The People’s bank of China raised its one-year benchmark to 7.47%, to curb lending, and slow economic growth. China’s consumer price index increased by 6.9% in November from a year earlier, the economy is overheating. The one year deposit rate increased to 4.14%, designed to attract saving and encourage savers to leave their money in the bank. As the rates increase, Chinese denominated currency look more attractive putting upward pressure on appreciating values of the Yuan, push up the stock market, and boost real estate prices. Investing dollars in China is still difficult for both inflows and outflows. “Dollar, to libor, to Yuan means it cost almost nothing to borrow U.S dollars and bet them in China.” As the Yuan becomes more expensive this causes the price of Chinese goods to increase. The combine pressure of a declining dollar and appreciating yuan causes Chinese businesses to close business. Big trading companies start looking for other foreign businesses where the currencies are not as strong. US orders and European orders start to fall in China. The impact is not felt immediately because big orders are placed far in advance. However, currency differences impacts profit margins for the Chinese businesses. Also, increased expense to ensure safety and quality in Chinese products will have a cost.   Fed Auction  12/14/2007  For now the Fed is playing the liquidity game to avert recession by increasing liquidity in the financial sector. Inflation pressure inhibits the fed when gas prices rose 35% for the year causing consumer prices to increase and food prices to increase. Bank interest rates remain high because investors are holding their money, banks are returning to conservative loaning practices, and credit is tight. The financial system has become rigid as fear of losses in CDO bond ratings, hedge fund downgrades, and avoidance of commercial paper have played out. How does the fed create liquidity? The fed has $267 billion in treasury bill which it holds to adjust liquidity. The fed redeems some of these notes to temporarily create liquidity. In 2007, the fed will sale off $25 billion in treasuries in an private auction. The banks buy the bonds, at discount, and use the asset to generate credit. Citigroup plans a $49 billion bail out for its structured investment vehicles; the cause of the problem being CDO backing of assets and avoidance linkage in commerical paper. SIV use commericial paper to fund their organizations. Citigroup may bring the SIV in on hte books and stocks prices may initially drop as the losses increase but hopefully investor will buy, in late 2008, as they believe that the company has taken steps to solve the financial rupture.   Quarter Point Cut 4.25%  12/12/2007  The fed hopes to "stall recession" by cutting fed rates by a quarter of a percent. The market pulled back 2.1% in response because the fed failed to give the expected half a percent cut. The fed is providing cheap money and it hopes to combat banks and financial institutions unwillings to lend. Investors are fleeing for safety into bonds and bond prices rose and yields dropped. Companies tied to financial services took the brunt of the rate cut according to Financial Select Sector (SPDR). The Yen boost in strength against the dollar finishing at 110.64 yen/dollar. Investor bought yen because of its low interest rate and low trading pattern. The fed hopes to help the economy get over the "rough patch".   Chery rapid expansion  12/4/2007  Chery's rapid expansion is straining the company caused from a shortage of workers. Currently, there are 25,000 workers churning out cars and Chery Automobile company has become the largest vehicle maker in China. In 2007, 326,813 vehicles were sold in China and 110,000 vehicles were exported. By 2010, the company expects to be churning out one million vehicles verses nine million sold by GM and Toyota. The company is building a new assembly line that will increase production by 700,000. The company is experience demand from Russian and Latin America where its low prices have been appealing.   4 July Add a Thought