Friday, January 19, 2007
OIL INVENTORIES
EnergyOil Tumbles After Inventory BuildBy Simon ConstableTheStreet.com Staff Reporter1/18/2007 3:47 PM ESTURL: http://www.thestreet.com/markets/energy/10333313.htmlUpdated from 2:14 p.m. EST
Oil prices fell again Thursday and neared the psychologically important $50 level following news of higher inventories in the U.S.
Front-month crude contracts closed down $1.76 to $50.48 a barrel on the New York Mercantile Exchange, and other key products in the energy space were lower, as well. Heating oil was down 3 cents at $1.47 a gallon, while gasoline was lower by 2 cents to $1.36 a gallon.
Natural gas was the one riser, gaining 9 cents to $6.32 per million British thermal units.
The decline in oil came after the Energy Information Administration said that stocks of crude oil grew 2.2% last week to 322 million barrels. Inventories of gasoline and distillate fuel oils also were up, the EIA said.
"It seems the world is flush with oil, especially relative to recent years," says Peter Rodriguez, professor of economics at the Darden Graduate School of Business Administration and an energy market watcher. "This is the opposite of what one would expect this time of year," he says, noting that warm weather had reduced demand for heating fuels in the Northern Hemisphere.
With inventories so high, Rodriguez expects crude prices to remain closer to $50 a barrel than $60 for the next several weeks. In turn, that should help keep a lid on consumer price inflation, he says.
The energy exchange-traded funds -- the U.S. Oil (USO) fund and the iPath Goldman Sachs Crude Oil Index (OIL) -- were both losing 2.2% in recent action.
Turning to the energy complex, Fortis Bank upped its stock price target on Range Resources (RRC) to $36 a share from $32 and reiterated a buy rating. The stock was recently down 0.5% at $27.62.
Elsewhere, RBC Capital Markets hit Whiting Petroleum (WLL) with a downgrade, cutting its rating on the stock to underperform from sector perform. Shares recently were down 75 cents, or 1.8%, at $41.60.
Among the major energy companies, Exxon Mobil (XOM) was losing 1.1%, while Royal Dutch Shell (RDS.A) was down a fraction.
Oil prices fell again Thursday and neared the psychologically important $50 level following news of higher inventories in the U.S.
Front-month crude contracts closed down $1.76 to $50.48 a barrel on the New York Mercantile Exchange, and other key products in the energy space were lower, as well. Heating oil was down 3 cents at $1.47 a gallon, while gasoline was lower by 2 cents to $1.36 a gallon.
Natural gas was the one riser, gaining 9 cents to $6.32 per million British thermal units.
The decline in oil came after the Energy Information Administration said that stocks of crude oil grew 2.2% last week to 322 million barrels. Inventories of gasoline and distillate fuel oils also were up, the EIA said.
"It seems the world is flush with oil, especially relative to recent years," says Peter Rodriguez, professor of economics at the Darden Graduate School of Business Administration and an energy market watcher. "This is the opposite of what one would expect this time of year," he says, noting that warm weather had reduced demand for heating fuels in the Northern Hemisphere.
With inventories so high, Rodriguez expects crude prices to remain closer to $50 a barrel than $60 for the next several weeks. In turn, that should help keep a lid on consumer price inflation, he says.
The energy exchange-traded funds -- the U.S. Oil (USO) fund and the iPath Goldman Sachs Crude Oil Index (OIL) -- were both losing 2.2% in recent action.
Turning to the energy complex, Fortis Bank upped its stock price target on Range Resources (RRC) to $36 a share from $32 and reiterated a buy rating. The stock was recently down 0.5% at $27.62.
Elsewhere, RBC Capital Markets hit Whiting Petroleum (WLL) with a downgrade, cutting its rating on the stock to underperform from sector perform. Shares recently were down 75 cents, or 1.8%, at $41.60.
Among the major energy companies, Exxon Mobil (XOM) was losing 1.1%, while Royal Dutch Shell (RDS.A) was down a fraction.
Thursday, January 18, 2007
BERNANKE SPEAKS
"If early and meaningful action is not taken, the U.S. economy could be seriously weakened," Bernanke said in testimony to the Senate Budget Committee.
It marked the Fed chief's most extensive comments to date on the challenges facing the United States with the looming retirement of 78 million baby boomers, the oldest of whom will start retiring next year.
This huge wave of retirees will hit the U.S. budget as well as the economy, he said.
Absent policy changes by Congress and the White House, rising budget deficits are likely in the years ahead to increase the amount of federal debt outstanding to unprecedented levels, Bernanke said.
That could propel interest rates for consumers and businesses upward, which would be a worrisome development, he said.
"Thus a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits," he said.
THIS IS POLITICAL SUICIDE, NO ONE WANTS TO DEAL WITH THE $TRILLIONS OF UNFUNDED LIABILITIES NEAR $70 TRILLION, THIS CAN'T BE PUT OFF FOREVER.
2007 mild? 2008 BAMM!!!
It marked the Fed chief's most extensive comments to date on the challenges facing the United States with the looming retirement of 78 million baby boomers, the oldest of whom will start retiring next year.
This huge wave of retirees will hit the U.S. budget as well as the economy, he said.
Absent policy changes by Congress and the White House, rising budget deficits are likely in the years ahead to increase the amount of federal debt outstanding to unprecedented levels, Bernanke said.
That could propel interest rates for consumers and businesses upward, which would be a worrisome development, he said.
"Thus a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits," he said.
THIS IS POLITICAL SUICIDE, NO ONE WANTS TO DEAL WITH THE $TRILLIONS OF UNFUNDED LIABILITIES NEAR $70 TRILLION, THIS CAN'T BE PUT OFF FOREVER.
2007 mild? 2008 BAMM!!!
Friday, January 12, 2007
Thursday, January 11, 2007
CASH IS TRASH>>>?????
Recent Bill Auction Results
Per $100 CUSIP YIELD
28-DAY 01-11-2007 02-08-2007 4.800 4.885 99.626667 912795YS4
91-DAY 01-11-2007 04-12-2007 4.940 5.072 98.751278 912795ZB0
WHY RISK MONEY IN MARKET WITH 5% 90 day yields??????
D
Per $100 CUSIP YIELD
28-DAY 01-11-2007 02-08-2007 4.800 4.885 99.626667 912795YS4
91-DAY 01-11-2007 04-12-2007 4.940 5.072 98.751278 912795ZB0
WHY RISK MONEY IN MARKET WITH 5% 90 day yields??????
D
Monday, January 08, 2007
FABER SAYS CAUTION WARRANTED
Global Markets Face `Severe Correction,' Faber Says (Update3)
By Ian C. Sayson and Pimm Fox
Jan. 8 (Bloomberg) -- Marc Faber, who predicted the U.S. stock market crash in 1987, said global assets are poised for a ``severe correction'' and says it's time to sell.
``In the next few months, we could get a severe correction in all asset markets,'' Faber said in an interview with Bloomberg Television in New York. ``In a selling panic you should buy, but in the buying mania that we have now the wisest course of action is to liquidate.''
Faber, founder and managing director of Hong Kong-based Marc Faber Ltd., advised investors to buy gold in 2001, which has since more than doubled. His company manages about $300 million in assets.
The bullish outlook of traders in everything from bonds, equities and commodities to real estate and art suggests valuations are peaking, Faber said. Last year, the Morgan Stanley Capital International World Index of developed stock markets jumped 18 percent, while a survey of Wall Street's biggest bond- trading firms predicted U.S. Treasuries will post the best gains in five years during 2007.
``I am not a great buyer of assets now,'' Faber said. ``We may be in a situation where consumer-price inflation comes back and will have a negative impact on the valuation of assets.''
Faber, publisher of the Gloom, Boom & Doom Report, does have some favorites. Singapore and Vietnam are his top picks in Asia because stocks in Singapore aren't ``terribly expensive compared with interest rates'' in the city-state, while Vietnam's equities have ``incredible potential in the long run.''
Vietnam, Singapore
Vietnam's Ho Chi Minh Stock Index more than doubled last year and was Asia's best-performing benchmark. Singapore's Straits Times Index climbed 27 percent, beating a 15 percent increase in the Morgan Stanley Capital International Asia-Pacific Index.
So far in 2007, Vietnam's index has surged 10 percent, again leading gains in the region, and Singapore's is up 0.6 percent. The MSCI has dropped 1 percent.
Faber recommends investors steer clear of shares in the world's biggest developing economies after the emerging markets in 2006 outperformed their developed counterparts for a fifth straight year.
``Emerging markets could get kicked in the next three months so I'd be careful of buying Russian shares,'' Faber said. ``I'd also be careful of buying China and India shares now.''
Russia's dollar-denominated RTS Index surged 75 percent last year, while the Hang Seng China Enterprise Index, which tracks Hong Kong-listed shares of Chinese companies, jumped 94 percent. India's Sensex Index, which more than quadrupled in the past five years, is valued at 25 times estimated earnings.
Thailand, Japan
Faber also advises investors stay away from shares in Thailand, where he and his family are based. The nation's SET Index has been the world's worst-performing benchmark in the past month, sliding 15 percent as currency controls introduced by the central bank and bombs in Bangkok spooked investors.
``Valuations in Thailand are very inexpensive but I wouldn't buy tomorrow,'' said Faber. `` We have some political problems in Thailand right now. I'd wait for a couple of months.''
The SET is valued at 10 times estimated earnings, the lowest among 14 Asia-Pacific markets tracked by Bloomberg. MSCI's regional index is valued at 18 times.
On a more positive note, Japanese stocks may prove good bets this year, Faber said. The Nikkei 225 Stock Average climbed 6.9 percent in 2006 and the broader Topix index added 1.9 percent, the smallest gains among benchmarks for the world's 10 biggest markets.
Gold, Oil
In addition, the fund manager said gold should rally further on expectations that supply of the precious metal will decline and demand for it will increase to hedge against inflation. Gold climbed 23 percent last year, its sixth year of gains.
``The price of gold will continue to go up and probably very substantially,'' Faber said. ``In the long run, it's very clear that central banks are basically increasing the supply of money and the supply of gold is obviously very limited.''
Oil prices are also tipped to rise as political instability in the Middle East and other petroleum-producing areas threatens supply and global demand increases. Crude oil in New York added less than 0.1 percent to $61.05 a barrel in 2006, after tripling in the previous four years.
``Everyday the world is burning more oil than new reserves are added,'' Faber said. ``You wont see $12 dollars again'' for every barrel of oil. ``The trend is likely more to be upside because demand in Asia is going to double over time.''
To contact the reporter on this story: Ian C. Sayson in Manila at isayson@bloomberg.net and Pimm Fox in New York at at Pfox11@bloomberg.net
By Ian C. Sayson and Pimm Fox
Jan. 8 (Bloomberg) -- Marc Faber, who predicted the U.S. stock market crash in 1987, said global assets are poised for a ``severe correction'' and says it's time to sell.
``In the next few months, we could get a severe correction in all asset markets,'' Faber said in an interview with Bloomberg Television in New York. ``In a selling panic you should buy, but in the buying mania that we have now the wisest course of action is to liquidate.''
Faber, founder and managing director of Hong Kong-based Marc Faber Ltd., advised investors to buy gold in 2001, which has since more than doubled. His company manages about $300 million in assets.
The bullish outlook of traders in everything from bonds, equities and commodities to real estate and art suggests valuations are peaking, Faber said. Last year, the Morgan Stanley Capital International World Index of developed stock markets jumped 18 percent, while a survey of Wall Street's biggest bond- trading firms predicted U.S. Treasuries will post the best gains in five years during 2007.
``I am not a great buyer of assets now,'' Faber said. ``We may be in a situation where consumer-price inflation comes back and will have a negative impact on the valuation of assets.''
Faber, publisher of the Gloom, Boom & Doom Report, does have some favorites. Singapore and Vietnam are his top picks in Asia because stocks in Singapore aren't ``terribly expensive compared with interest rates'' in the city-state, while Vietnam's equities have ``incredible potential in the long run.''
Vietnam, Singapore
Vietnam's Ho Chi Minh Stock Index more than doubled last year and was Asia's best-performing benchmark. Singapore's Straits Times Index climbed 27 percent, beating a 15 percent increase in the Morgan Stanley Capital International Asia-Pacific Index.
So far in 2007, Vietnam's index has surged 10 percent, again leading gains in the region, and Singapore's is up 0.6 percent. The MSCI has dropped 1 percent.
Faber recommends investors steer clear of shares in the world's biggest developing economies after the emerging markets in 2006 outperformed their developed counterparts for a fifth straight year.
``Emerging markets could get kicked in the next three months so I'd be careful of buying Russian shares,'' Faber said. ``I'd also be careful of buying China and India shares now.''
Russia's dollar-denominated RTS Index surged 75 percent last year, while the Hang Seng China Enterprise Index, which tracks Hong Kong-listed shares of Chinese companies, jumped 94 percent. India's Sensex Index, which more than quadrupled in the past five years, is valued at 25 times estimated earnings.
Thailand, Japan
Faber also advises investors stay away from shares in Thailand, where he and his family are based. The nation's SET Index has been the world's worst-performing benchmark in the past month, sliding 15 percent as currency controls introduced by the central bank and bombs in Bangkok spooked investors.
``Valuations in Thailand are very inexpensive but I wouldn't buy tomorrow,'' said Faber. `` We have some political problems in Thailand right now. I'd wait for a couple of months.''
The SET is valued at 10 times estimated earnings, the lowest among 14 Asia-Pacific markets tracked by Bloomberg. MSCI's regional index is valued at 18 times.
On a more positive note, Japanese stocks may prove good bets this year, Faber said. The Nikkei 225 Stock Average climbed 6.9 percent in 2006 and the broader Topix index added 1.9 percent, the smallest gains among benchmarks for the world's 10 biggest markets.
Gold, Oil
In addition, the fund manager said gold should rally further on expectations that supply of the precious metal will decline and demand for it will increase to hedge against inflation. Gold climbed 23 percent last year, its sixth year of gains.
``The price of gold will continue to go up and probably very substantially,'' Faber said. ``In the long run, it's very clear that central banks are basically increasing the supply of money and the supply of gold is obviously very limited.''
Oil prices are also tipped to rise as political instability in the Middle East and other petroleum-producing areas threatens supply and global demand increases. Crude oil in New York added less than 0.1 percent to $61.05 a barrel in 2006, after tripling in the previous four years.
``Everyday the world is burning more oil than new reserves are added,'' Faber said. ``You wont see $12 dollars again'' for every barrel of oil. ``The trend is likely more to be upside because demand in Asia is going to double over time.''
To contact the reporter on this story: Ian C. Sayson in Manila at isayson@bloomberg.net and Pimm Fox in New York at at Pfox11@bloomberg.net
Monday, January 01, 2007
ADJUSTED MONETARY BASE CLICK FOR LINK.
level is DEAD ON JAN high, so NO growth since then. DEAD ON the lows from that peak.. WILL JAN look like 2006 with a meteoric VAULT? ANY further decline destroys a multi yr if not decade pattern of yr/yr higher highs!!!!
MARGIN DEBT LEVELS APPROACHING 2000 levels!!! 1,3 and 6 month/month RECORDS for increase.
THIS market is HIGHLY LEVEREDGED for GAINS!!!!!! as was or more so than in 2000 !!!
I say some kind of top appears first 2 weeks of JAN, then MIGHT pay off to be short term......short........will be very interesting going forward.
2007 is a year after mid term elections, known to be bullish.
D
level is DEAD ON JAN high, so NO growth since then. DEAD ON the lows from that peak.. WILL JAN look like 2006 with a meteoric VAULT? ANY further decline destroys a multi yr if not decade pattern of yr/yr higher highs!!!!
MARGIN DEBT LEVELS APPROACHING 2000 levels!!! 1,3 and 6 month/month RECORDS for increase.
THIS market is HIGHLY LEVEREDGED for GAINS!!!!!! as was or more so than in 2000 !!!
I say some kind of top appears first 2 weeks of JAN, then MIGHT pay off to be short term......short........will be very interesting going forward.
2007 is a year after mid term elections, known to be bullish.
D
Friday, December 29, 2006
Thursday, December 28, 2006
MULTIPLE BUBBLES FORMING
(from NPR this AM)
M and A activity, mostly PRIVATE EQUITY FIRMS!
8 of the 10 LARGEST deals ever were done in last few years and were private equity firms.
More and more of these are running after the same deals pushing up prices paid, HUGE multiples and premiums being paid saddling new companies with mountains of debt.
“the things that used to turn the economy/markets no longer do…” chances for defaults because of huge premiums is growing.
Money continues to FLOW into these private equity firms.
In some ways me bucko’s this is MUCH LARGER THAN 2000 action, it just isn’t seen as same as before meaning huge runups in penny stocks etc, the BUBBLE is in the MA activity and the higher multiples being paid, too MUCH money running after too few deals pushing prices paid up way beyond reasonable value.
Investors are complacent and comfortable with only blue skies seen ahead.
D
M and A activity, mostly PRIVATE EQUITY FIRMS!
8 of the 10 LARGEST deals ever were done in last few years and were private equity firms.
More and more of these are running after the same deals pushing up prices paid, HUGE multiples and premiums being paid saddling new companies with mountains of debt.
“the things that used to turn the economy/markets no longer do…” chances for defaults because of huge premiums is growing.
Money continues to FLOW into these private equity firms.
In some ways me bucko’s this is MUCH LARGER THAN 2000 action, it just isn’t seen as same as before meaning huge runups in penny stocks etc, the BUBBLE is in the MA activity and the higher multiples being paid, too MUCH money running after too few deals pushing prices paid up way beyond reasonable value.
Investors are complacent and comfortable with only blue skies seen ahead.
D
Tuesday, December 26, 2006
XMAS CHEER?
http://seattlepi.nwsource.com/business/297204_holiday26.html Holiday retail sales fall short of estimates, deeper discounts coming equal weaker profits from retailers.
SIGNS OF AN IMPENDING TOP
Transports very weak, sensitive to economic conditions. Have not confirmed new highs in the Dow.
Several FED indiactors showing contraction of economy.
DOA residential housing.
Democratic control of both houses means stagnation and less possibility of keeping or adding tax incentives.
Bull market long in tooth in cycle.
Peter Eliades points out MANY cycles predicting top between Jan0March period.
NAZ underperforming. Strength becoming more selective. Energy weak.
This may be a period where one would weed out weaker performers in portfolio, I may not be short just yet, but I am on defensive and not long. JMHO
D
SIGNS OF AN IMPENDING TOP
Transports very weak, sensitive to economic conditions. Have not confirmed new highs in the Dow.
Several FED indiactors showing contraction of economy.
DOA residential housing.
Democratic control of both houses means stagnation and less possibility of keeping or adding tax incentives.
Bull market long in tooth in cycle.
Peter Eliades points out MANY cycles predicting top between Jan0March period.
NAZ underperforming. Strength becoming more selective. Energy weak.
This may be a period where one would weed out weaker performers in portfolio, I may not be short just yet, but I am on defensive and not long. JMHO
D
Thursday, December 21, 2006
Wednesday, December 20, 2006
Saturday, December 16, 2006
SATURDAY MORNING POST
REQUIRED READING
http://www.hussmanfunds.com/wmc/wmc061211.htm DR JOHN HUSSMAN
http://www.stockmarketcycles.com/current_observations.htm PETER ELIADES
http://www.safehaven.com/article-6516.htm JOHN MAULDIN
http://www.safehaven.com/article-6515.htm DOUG NOLAND
http://www.safehaven.com/article-6514.htm DR RICHEBACHER
Corrections are short and painless, advance decline line continues to advance, life appears good for the ongoing bull market. As this bull from 2002 lows has exceeded its previous highs, we can consider it a Secular trend, most cyclical bull markets were long since dead.
What has also helped the market is the comeback of the hated weak sister US DOLLAR, mostly because sentiment got too negative, once this works off, new lows are possible.
Interest rates are still LOW historically speaking, and money is easy to obtain, it is possible that the housing sector has temporarally stabilized as some buyers may be inticed to come back into market. Sellers still reluctant to lower prices aggresively, but in ost areas they have stopped going up or have come down slightly, 2nd chance buyers may appear.
http://www.hussmanfunds.com/wmc/wmc061211.htm DR JOHN HUSSMAN
http://www.stockmarketcycles.com/current_observations.htm PETER ELIADES
http://www.safehaven.com/article-6516.htm JOHN MAULDIN
http://www.safehaven.com/article-6515.htm DOUG NOLAND
http://www.safehaven.com/article-6514.htm DR RICHEBACHER
Corrections are short and painless, advance decline line continues to advance, life appears good for the ongoing bull market. As this bull from 2002 lows has exceeded its previous highs, we can consider it a Secular trend, most cyclical bull markets were long since dead.
What has also helped the market is the comeback of the hated weak sister US DOLLAR, mostly because sentiment got too negative, once this works off, new lows are possible.
Interest rates are still LOW historically speaking, and money is easy to obtain, it is possible that the housing sector has temporarally stabilized as some buyers may be inticed to come back into market. Sellers still reluctant to lower prices aggresively, but in ost areas they have stopped going up or have come down slightly, 2nd chance buyers may appear.
HEAVY foreign investment money is still POURING in, money supply has begun to grow again http://research.stlouisfed.org/publications/usfd/page3.pdf but this years growth has been stunted.
Merger and acqusition activity has reached new extremes beyond even 2000 top, there is a LOT of money sloshing about.
Fund managers want extreme bonuses too, so year end performance should remain in bullish control. Early next year we could see some weakness, but not sure it will amount to much, yet.
This may be the first time in market history where a NEW BULL MARKET began near historic extreme valuations, valuations have come down because of record margins and profits also at record levels, but now SPX PE of 18 is getting pricey especially if profit gains slow or regress.
Everything returns to its norm sooner or later, that trip for the stock market will not be a pretty sight, from a BELOW 10 VIX (volatility) there is a TON of FEAR to feed on, but I must say a new BEAR MARKET is nowhere in sight.
A well diversified portfolio must be doing rather well, the question is, when the winds of change DO finally come, are you prepared to make changes?
Question marks, last bull market charge led all to new highs, near the end, the Transports began to fall onths ahead of final top in DOW, then NAZ in March. The SPX is still below its 2000 top, the NAZ 50% below. The Transports have not CONFIRMED the NEW HIGHS in the DOW, according to Dow Theory, these non confirmations have led to MAJOR MARKET TOPS!
So, I am watching the TRansports to see if they can rally to new highs with DOW, the NAZ? not gonna happen. However, the NAZ is VERY close to an area of HUGE resistance, of which a month ago I charted and pointed out if it could "get inside" this area, a SURGE on 100's of points should occur.
I also charted the double tops on Q's near $43.30 once broken could be riden long, a buy near $43.50 on a close above was there and use of $43.25 (just below breakout) would define a well controlled stop loss. We're about a dollar above that now.
FED meeting and OPEX Fri wnet with a whimper, bulls in control UNTIL SERIOUS SELLING PRESSURE arrives.
I will attempt to post every Sat, so check back until then take care
D
Wednesday, December 13, 2006
SUMMATION
http://stockcharts.com/charts/indices/McSumNASD.html
There is underlying weakness on the nazdaq IMHO, market may go higher, I feel within next 4-6 weeks a severe correction will be upon us.
That said, I cannot rule out Bull mkt continues, as adv/decline line is rising as does mkt.
D
There is underlying weakness on the nazdaq IMHO, market may go higher, I feel within next 4-6 weeks a severe correction will be upon us.
That said, I cannot rule out Bull mkt continues, as adv/decline line is rising as does mkt.
D
Saturday, November 25, 2006
The DR is in
SUICIDAL TRADE DEFICIT (gold-eagle.com)
Dr. Kurt Richebächer
On the surface, it seems that there are diametrically different views at work in the markets. While the rising bond prices and the falling commodity prices apparently suggest underlying distinct economic bearishness, the sudden surge in stock prices and persistent record-low credit spreads appear to reflect very optimistic expectations about the economy.
The turn in the bond market started in June with yields of 10-year Treasury notes at 5.25%. A decline to 4.7% generated a 5% return for investors within just three months. Annualized, this comes to a return of 20%. Take further into account that there is generally heavy leverage involved, multiplying this return between 10-20 times.
Considering further that this rate of decline of long-term rates has occurred against the backdrop of a firmly inverted yield curve, implying that expenses of carry trade exceed current yields, the strength of this move seems a bit surprising. The quick capital gains, though, have richly offset these interest expenses - for the time being. But to maintain these highly leveraged positions, it will need at least one of two things: either a further sharp fall in long-term rates providing new capital gains or rate cuts by the Fed reducing the costs of carry trade.
More surprising is the new bull run of the stock market in the face of an economic slowdown. Approaching recessions have always tended to depress stock markets in expectation of falling profits. Well, there is a tremendous difference between past and present experience.
Past recessions were all triggered by true monetary tightening, hitting both the economy and the markets. The current economic downturn is unfolding against the backdrop of unmitigated monetary looseness. While the Fed has raised credit costs from unusually low levels, it has done nothing to tighten credit. Its expansion has kept accelerating.
Credit demand has been running wild for consumption, housing and financial speculation. There is just one striking and ominous exception: Corporate credit demand for fixed investment remains zero. Corporations, too, have been borrowing heavily, but for mergers, acquisitions and stock buybacks, not for productive investment.
In 2005, nonfinancial corporations spent $136.8 billion less than their cash flow from retained profits and depreciations on capital expenditures. Simultaneously, they spent $363.6 billion on mergers, acquisitions and stock buybacks. Given their moderate cash surplus, one has to assume that the stock purchases were generally financed with borrowed money.
It is certainly reasonable to regard the strong trend of corporate stock purchases as an early negative indicator of investment intentions. Principally, there are two different ways for corporations to expand and to raise profits. One is the old-fashioned way of organic growth through creating new plant and equipment. The other is to purchase economic growth and higher earnings through mergers and acquisitions by going more deeply into debt.
What, then, has been happening more lately to mergers and acquisitions? In short, they have gone crazy. During the first quarter of 2006, they hit an amount of $558 billion at annual rate, and in the second quarter another $554.8 billion.
This compares with continuously weak capital investment. In the first quarter, it was $2.7 billion below cash flow, and in the second quarter, $43.2 billion above cash flow. There is an interesting comparison with the year 2000. Then, capital expenditures of nonfinancial corporations exceeded their cash flow by $310.8 billion, compared with net stock purchases of $118.2 billion.
We would say that these figures indicate a continuous, rather dramatic change in corporate policies of expansion away from new capital investment and toward "purchasing" growth and earnings. It started in the 1980s. It strongly intensified during the 1990s, and during the last few years has gone to extremes.
Stating this, we primarily have the long-term development in mind. But in the same vein, we are pondering what is going to happen to business investment in the short run, when consumer spending slows, or even slumps, in the wake of the bursting housing bubble. The generally highly optimistic expectations and forecasts about investment spending taking over from consumption as the driver of the economy greatly puzzle us.
To stress one important point, which appears to be generally overlooked: Some rise in capital spending is not enough. Given its much smaller share of GDP than consumer spending, it needs a very strong rise to offset even a minor decline in consumer spending.
While the markets seem to reflect highly conflicting views about the U.S. economy's outlook, we nevertheless presume one underlying common view, and that is the perception of very little risk of a possible recession because the Fed would, in any case, swiftly act to head off any gathering weakness. What matters from this perspective both in the bond and stock markets are impending rate cuts.
In essence, this is in line with the conventional thinking that the U.S. Great Depression of the 1930s, as well as Japan's prolonged malaise since the early 1990s, could have been avoided by prompter monetary easing. Whoever believes in this is entitled to be bullish both on stocks and bonds.
U.S. stock prices received their lift since June/July mainly from lower oil prices and lower long-term interest rates. To keep heading higher, it will now need sufficient earnings growth. After an unusually steep rise in profits during 2005, analysts are predicting more of the same. Our focus is on aggregate profits, as calculated and reported by the Bureau of Economic Analysis within the National Income and Product Accounts (NIPA).
The customary way of making forecasts of economic developments is to extrapolate the recent past. Profit growth in the United States during the last two years has been at its best for the whole postwar period. Profits of the nonfinancial sector in 2005 have jumped to $900.1 billion, from $584 billion in 2004 and $411.8 billion in 2003. These figures compare with a profit peak of $508.4 billion for the sector in 1997 and a profit low of $322.0 billion in 2001.
If you look at the profit development of U.S. corporations over the last 10 years, you will see that it is an awkward picture. Profits fared very poorly during the "New Paradigm" years of the late 1990s, presumably a time of excellent economic performance. No less astounding is their sudden steep rise in the course of 2005, from $624.2 billion in the fourth quarter of 2004 to $1,027.7 billion in the first quarter of 2006, happening while the economy distinctly slowed.
The irony is that after a strong rise during the first half of the 1990s, profits abruptly turned down during the "New Paradigm" years of the late 1990s. For six years, from the recession year 1991-97, the nonfinancial sector's profits had soared from $227.3 billion to $508.4 billion. As a percentage of GDP, these profits had risen from 3.8% to 4.9%.
While "New Paradigm" ballyhoo and stock prices flourished after 1997, business profits, as officially measured, suddenly slumped. As a percentage of GDP, they were a little higher at the height of the dot-com bubble than in the recession year 1991.
Coming to the recent recovery years, we must point to some irritating observations. On the surface, it looks like a fabulous profit development. From recession year 2001 to 2005, profits of businesses in the nonfinancial sector have more than tripled, from $322 billion to almost $1,100 billion. It was the best profit performance of all time.
However, this good-looking total consisted of two extremely different parts. It was in the first quarter of 2004 that profits exceeded their peak of 1997 for the first time. From there, they shot up almost vertically. Typically, it has been inverse that the very first years of recovery were best for profits.
21 November 2006
Dr Kurt Richebächerfor The Daily Reckoningwww.dailyreckoning.com
Editor's Note: Dr. Richebächer has found the best investments to protect your portfolio, no matter what lies ahead for us in 2007. See his full report here:
Wealth Insurancewww.isecureonline.com/Reports/RCH/ERCHG805
Dr. Kurt Richebächer
On the surface, it seems that there are diametrically different views at work in the markets. While the rising bond prices and the falling commodity prices apparently suggest underlying distinct economic bearishness, the sudden surge in stock prices and persistent record-low credit spreads appear to reflect very optimistic expectations about the economy.
The turn in the bond market started in June with yields of 10-year Treasury notes at 5.25%. A decline to 4.7% generated a 5% return for investors within just three months. Annualized, this comes to a return of 20%. Take further into account that there is generally heavy leverage involved, multiplying this return between 10-20 times.
Considering further that this rate of decline of long-term rates has occurred against the backdrop of a firmly inverted yield curve, implying that expenses of carry trade exceed current yields, the strength of this move seems a bit surprising. The quick capital gains, though, have richly offset these interest expenses - for the time being. But to maintain these highly leveraged positions, it will need at least one of two things: either a further sharp fall in long-term rates providing new capital gains or rate cuts by the Fed reducing the costs of carry trade.
More surprising is the new bull run of the stock market in the face of an economic slowdown. Approaching recessions have always tended to depress stock markets in expectation of falling profits. Well, there is a tremendous difference between past and present experience.
Past recessions were all triggered by true monetary tightening, hitting both the economy and the markets. The current economic downturn is unfolding against the backdrop of unmitigated monetary looseness. While the Fed has raised credit costs from unusually low levels, it has done nothing to tighten credit. Its expansion has kept accelerating.
Credit demand has been running wild for consumption, housing and financial speculation. There is just one striking and ominous exception: Corporate credit demand for fixed investment remains zero. Corporations, too, have been borrowing heavily, but for mergers, acquisitions and stock buybacks, not for productive investment.
In 2005, nonfinancial corporations spent $136.8 billion less than their cash flow from retained profits and depreciations on capital expenditures. Simultaneously, they spent $363.6 billion on mergers, acquisitions and stock buybacks. Given their moderate cash surplus, one has to assume that the stock purchases were generally financed with borrowed money.
It is certainly reasonable to regard the strong trend of corporate stock purchases as an early negative indicator of investment intentions. Principally, there are two different ways for corporations to expand and to raise profits. One is the old-fashioned way of organic growth through creating new plant and equipment. The other is to purchase economic growth and higher earnings through mergers and acquisitions by going more deeply into debt.
What, then, has been happening more lately to mergers and acquisitions? In short, they have gone crazy. During the first quarter of 2006, they hit an amount of $558 billion at annual rate, and in the second quarter another $554.8 billion.
This compares with continuously weak capital investment. In the first quarter, it was $2.7 billion below cash flow, and in the second quarter, $43.2 billion above cash flow. There is an interesting comparison with the year 2000. Then, capital expenditures of nonfinancial corporations exceeded their cash flow by $310.8 billion, compared with net stock purchases of $118.2 billion.
We would say that these figures indicate a continuous, rather dramatic change in corporate policies of expansion away from new capital investment and toward "purchasing" growth and earnings. It started in the 1980s. It strongly intensified during the 1990s, and during the last few years has gone to extremes.
Stating this, we primarily have the long-term development in mind. But in the same vein, we are pondering what is going to happen to business investment in the short run, when consumer spending slows, or even slumps, in the wake of the bursting housing bubble. The generally highly optimistic expectations and forecasts about investment spending taking over from consumption as the driver of the economy greatly puzzle us.
To stress one important point, which appears to be generally overlooked: Some rise in capital spending is not enough. Given its much smaller share of GDP than consumer spending, it needs a very strong rise to offset even a minor decline in consumer spending.
While the markets seem to reflect highly conflicting views about the U.S. economy's outlook, we nevertheless presume one underlying common view, and that is the perception of very little risk of a possible recession because the Fed would, in any case, swiftly act to head off any gathering weakness. What matters from this perspective both in the bond and stock markets are impending rate cuts.
In essence, this is in line with the conventional thinking that the U.S. Great Depression of the 1930s, as well as Japan's prolonged malaise since the early 1990s, could have been avoided by prompter monetary easing. Whoever believes in this is entitled to be bullish both on stocks and bonds.
U.S. stock prices received their lift since June/July mainly from lower oil prices and lower long-term interest rates. To keep heading higher, it will now need sufficient earnings growth. After an unusually steep rise in profits during 2005, analysts are predicting more of the same. Our focus is on aggregate profits, as calculated and reported by the Bureau of Economic Analysis within the National Income and Product Accounts (NIPA).
The customary way of making forecasts of economic developments is to extrapolate the recent past. Profit growth in the United States during the last two years has been at its best for the whole postwar period. Profits of the nonfinancial sector in 2005 have jumped to $900.1 billion, from $584 billion in 2004 and $411.8 billion in 2003. These figures compare with a profit peak of $508.4 billion for the sector in 1997 and a profit low of $322.0 billion in 2001.
If you look at the profit development of U.S. corporations over the last 10 years, you will see that it is an awkward picture. Profits fared very poorly during the "New Paradigm" years of the late 1990s, presumably a time of excellent economic performance. No less astounding is their sudden steep rise in the course of 2005, from $624.2 billion in the fourth quarter of 2004 to $1,027.7 billion in the first quarter of 2006, happening while the economy distinctly slowed.
The irony is that after a strong rise during the first half of the 1990s, profits abruptly turned down during the "New Paradigm" years of the late 1990s. For six years, from the recession year 1991-97, the nonfinancial sector's profits had soared from $227.3 billion to $508.4 billion. As a percentage of GDP, these profits had risen from 3.8% to 4.9%.
While "New Paradigm" ballyhoo and stock prices flourished after 1997, business profits, as officially measured, suddenly slumped. As a percentage of GDP, they were a little higher at the height of the dot-com bubble than in the recession year 1991.
Coming to the recent recovery years, we must point to some irritating observations. On the surface, it looks like a fabulous profit development. From recession year 2001 to 2005, profits of businesses in the nonfinancial sector have more than tripled, from $322 billion to almost $1,100 billion. It was the best profit performance of all time.
However, this good-looking total consisted of two extremely different parts. It was in the first quarter of 2004 that profits exceeded their peak of 1997 for the first time. From there, they shot up almost vertically. Typically, it has been inverse that the very first years of recovery were best for profits.
21 November 2006
Dr Kurt Richebächerfor The Daily Reckoningwww.dailyreckoning.com
Editor's Note: Dr. Richebächer has found the best investments to protect your portfolio, no matter what lies ahead for us in 2007. See his full report here:
Wealth Insurancewww.isecureonline.com/Reports/RCH/ERCHG805
Friday, November 17, 2006
FOR NOW MARKET CHOOSES TO IGNORE
Home builders slam on the brakes
Housing starts hit six-year low while permits, a key sign of builder confidence, slide to the lowest since 1997.
By Chris Isidore, CNNMoney.com senior writer
November 17 2006: 1:04 PM EST
NEW YORK (CNNMoney.com) -- New housing starts sank to the lowest level in more than six years in October and a key measure of builders' confidence in the market hit a nine-year low, a government report showed Friday.
Both housing starts and applications for new building permits tumbled well below Wall Street forecasts - a sign that the slumping housing market has not yet hit bottom.
"Today's figures clearly reveal that a quick turnaround in this sector is not just around the corner," said Anthony Chan, chief economist for JPMorgan Chase Private Client Services. "Any real turnaround may not be forthcoming until the central bank reverses course and begins to lower short-term rates again."
Housing starts plunged nearly 15 percent to a seasonally adjusted annual rate of 1.49 million in October from a revised 1.74 million in September, according to the Census Bureau report. That was the lowest reading since July 2000.
The pace of single family housing starts in October was down nearly 32 percent from the year-ago period when the home building boom was still roaring forward.
Building permits, seen as a measure of builder confidence in the real estate market, fell to the their lowest pace since December 1997, coming in at 1.54 million, down from 1.64 million in September. Permits for single family homes are also off 32 percent from the year-ago levels.
Economists surveyed by Briefing.com forecast that starts would fall to an annual rate of 1.68 million and permits to 1.625 million.
"Housing starts reported this morning was a shocker," said Phillip Neuhart, an economist with Wachovia. "The South -- the strongest home building region during the recent housing boom -- had by far the weakest month of any."
In some ways the slowdown in starts and permits is a positive for the housing market, since it will reduce the inventory of homes on the market, which as been depressing prices for both new and existing homes. But Neuhart said as inventory-induced slowdown is likely to depress the gross domestic product, the broad measure of the nation's economic activity, throughout all of 2007.
"We do not see healthy inventory levels being reached until at least the second quarter of next year," he said.
Another sign of weakness in the housing market came when a realty tracking firm reported Friday that home foreclosures rose once again in October, climbing 42 percent from year-earlier levels.
Still, before Friday's report, there had been hopes from other recent real estate reports that perhaps the slump in home sales and home building had bottomed out.
The National Association of Home Builders' survey of builder confidence for November posted a modest increase for the second month, even though far more builders still saw the market as poor rather than good. And housing starts rose in September, although permits fell.
In addition, mortgage rates fell sharply this week, with the average 30-year fixed rate mortgage dropping to 6.24 percent from 6.33 percent a week earlier, according to mortgage financier Freddie Mac. Mortgage applications climbed to their highest level since January in the most recent weekly reading from the Mortgage Bankers Association.
But other reports have showed weakness in prices for both new and existing homes, as inventories of both types of homes available for sale climbed to record levels. And home builders have reported having to offer attractive deals to move homes they have completed.
Major home builders have been reporting lower earnings and cutting forecasts for future results due to the downturn in new home sales.
Pulte Home (Charts), the nation's largest home builder, became the latest to report a stepper-than expected drop in earnings earlier this week, and cut its outlook.
"You can count us among the companies that would like to see this be the beginning of a more stable operating environment," said Pulte CEO Richard Dugas, after he cited some of the hopeful signs of improvement in the housing market during his call with investors following Pulte's earnings report. "But for now we will wait for the trends to continue and to broaden before we conclude that the bottom is being reached."
He said that it was important that Pulte and other builders cut back on housing starts, especially so called "spec homes" that are begun without a sales contract in hand.
"There is no need for us to aggravate existing market difficulties by throwing unnecessary supply into the market," he said.
Other home buildings reporting problems reduced earnings and or sales outlooks include Centex (Charts), D.R. Horton (Charts), Lennar (Charts), K.B. Home (Charts) and Toll Brothers (Charts).
Builders to buyers: Take this house, please!
October foreclosures jump 42 percent
Housing starts hit six-year low while permits, a key sign of builder confidence, slide to the lowest since 1997.
By Chris Isidore, CNNMoney.com senior writer
November 17 2006: 1:04 PM EST
NEW YORK (CNNMoney.com) -- New housing starts sank to the lowest level in more than six years in October and a key measure of builders' confidence in the market hit a nine-year low, a government report showed Friday.
Both housing starts and applications for new building permits tumbled well below Wall Street forecasts - a sign that the slumping housing market has not yet hit bottom.
"Today's figures clearly reveal that a quick turnaround in this sector is not just around the corner," said Anthony Chan, chief economist for JPMorgan Chase Private Client Services. "Any real turnaround may not be forthcoming until the central bank reverses course and begins to lower short-term rates again."
Housing starts plunged nearly 15 percent to a seasonally adjusted annual rate of 1.49 million in October from a revised 1.74 million in September, according to the Census Bureau report. That was the lowest reading since July 2000.
The pace of single family housing starts in October was down nearly 32 percent from the year-ago period when the home building boom was still roaring forward.
Building permits, seen as a measure of builder confidence in the real estate market, fell to the their lowest pace since December 1997, coming in at 1.54 million, down from 1.64 million in September. Permits for single family homes are also off 32 percent from the year-ago levels.
Economists surveyed by Briefing.com forecast that starts would fall to an annual rate of 1.68 million and permits to 1.625 million.
"Housing starts reported this morning was a shocker," said Phillip Neuhart, an economist with Wachovia. "The South -- the strongest home building region during the recent housing boom -- had by far the weakest month of any."
In some ways the slowdown in starts and permits is a positive for the housing market, since it will reduce the inventory of homes on the market, which as been depressing prices for both new and existing homes. But Neuhart said as inventory-induced slowdown is likely to depress the gross domestic product, the broad measure of the nation's economic activity, throughout all of 2007.
"We do not see healthy inventory levels being reached until at least the second quarter of next year," he said.
Another sign of weakness in the housing market came when a realty tracking firm reported Friday that home foreclosures rose once again in October, climbing 42 percent from year-earlier levels.
Still, before Friday's report, there had been hopes from other recent real estate reports that perhaps the slump in home sales and home building had bottomed out.
The National Association of Home Builders' survey of builder confidence for November posted a modest increase for the second month, even though far more builders still saw the market as poor rather than good. And housing starts rose in September, although permits fell.
In addition, mortgage rates fell sharply this week, with the average 30-year fixed rate mortgage dropping to 6.24 percent from 6.33 percent a week earlier, according to mortgage financier Freddie Mac. Mortgage applications climbed to their highest level since January in the most recent weekly reading from the Mortgage Bankers Association.
But other reports have showed weakness in prices for both new and existing homes, as inventories of both types of homes available for sale climbed to record levels. And home builders have reported having to offer attractive deals to move homes they have completed.
Major home builders have been reporting lower earnings and cutting forecasts for future results due to the downturn in new home sales.
Pulte Home (Charts), the nation's largest home builder, became the latest to report a stepper-than expected drop in earnings earlier this week, and cut its outlook.
"You can count us among the companies that would like to see this be the beginning of a more stable operating environment," said Pulte CEO Richard Dugas, after he cited some of the hopeful signs of improvement in the housing market during his call with investors following Pulte's earnings report. "But for now we will wait for the trends to continue and to broaden before we conclude that the bottom is being reached."
He said that it was important that Pulte and other builders cut back on housing starts, especially so called "spec homes" that are begun without a sales contract in hand.
"There is no need for us to aggravate existing market difficulties by throwing unnecessary supply into the market," he said.
Other home buildings reporting problems reduced earnings and or sales outlooks include Centex (Charts), D.R. Horton (Charts), Lennar (Charts), K.B. Home (Charts) and Toll Brothers (Charts).
Builders to buyers: Take this house, please!
October foreclosures jump 42 percent
Thursday, November 16, 2006
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