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WEEKLY NEWSLETTER VOL 2 ISSUE 34
CAVALIERE CAPITAL CORPORATION
WEEKLY PETROLEUM, SUGAR-BASED ETHANOL, and
ECONOMICS NEWSLETTER VOL 2 ISSUE 34.
Jose please visit our website for more information.
www.cavalierecapital.com
Sunday, August 24, 2008. VOL 2 ISSUE 34.
--THE FALLING OIL PRICE IS A LULL IN THE STORM.
--BRAZIL PLANS SPECIAL FUND FOR REVENUE FROM NEW OILFIELDS.
--BRAZIL'S PETROBRAS TO SIGN NORTHEAST OIL REFINERY DEAL WED.
--PETROBRAS IN TALKS WITH INDIAN CO ON PETROCHEM JOINT VENTURE
--PETROBRAS STUDYING A SHARE OFFERING.
--PETROLEUM COMPANIES RENEW BOLIVIAN INVESTMENTS.
--BRAZIL TO ALLOW FOREIGN INVESTMENTS IN PRE-SALT.
--VENEZUELA TO INVEST $1 BILLION IN PETROCHEMICALS.
--PETROBRAS TO INVEST $31 BILLION IN REFINERIES.
--ECUADOR TO RENEGOTIATE PETROLEUM CONTRACTS.
--PETROBRAS TO INVEST $1 BILLION IN BOLIVIA.
--PEMEX TO LEASE DRILLING PLATFORMS FOR $530 MILLION.
Add Mobile
--LOUIS DREYFUS INVESTS $433 MILLION IN BRAZIL ETHANOL MILL.
--SOUTHRIDGE RECEIVES $7.5 MILLION FOR BRAZIL ETHANOL PLANT.
--BRAZIL SUGARCANE MILLING COS IN THE RED.
--WHOLESALE PRICES RISING AT FASTEST PACE SINCE 1981.
--EX-IMF ECONOMIST SAYS WORST IS YET TO COME.
--HOUSING STARTS PLUNGE 11% A 26-YR LOW.
--FREDDIE PAYS HIGHEST RISK PREMIUM.
--FANNIE AND FREDDIE CRISIS DEEPENS.
--BOND FUNDRAISING COSTS SOAR.
--IT TOOK ME ALL MY LIFE. (My opinion)
THE FALLING OIL PRICE IS A LULL IN THE STORM
BRAZIL PLANS SPECIAL FUND FOR REVENUE FROM NEW OILFIELDS
Little more than a month ago the suggestion that Russian troops would be engaged in a
shooting war in Georgia leading to the closure of the Baku-Ceyhan pipeline would have
triggered a dram¬atic rise in oil prices. A barrel of crude was already trading at more than
$140 and the loss of another million barrels a day of supply could have pushed the figure on
and up towards the $200 predicted by some banks and by the chief executive of Gazprom.
In fact prices are almost 20 per cent below their July peak. The fall has come despite a
month of assertive Russian nationalism, whose victims to date include not just Mikheil
Saakashvili, Georgia's president, but also Robert Dudley, chief executive of TNK-BP, who has
been forced into exile in an undisclosed central European location. Other problems also
persist – including civil conflict in Nigeria and the failure of the Maliki government in Iraq to
agree on the legal structure through which international companies can invest in new oil
developments.
Why then the fall? The explanation for the change in sentiment lies in a combination of
factors that between them are transforming the level of spare production capacity – a
measure that over the past two years has become the leading indicator of world oil prices
and a signal to speculators.
First, demand levels have slipped back and look set to end the year more than 500,000
barrels a day below the initial projections. Demand, especially for petrol , is down in the US
and Europe as high prices work through to the pumps and as the economic slowdown takes
hold. The Japanese economy, the second-largest single source of energy demand in the
world – at 4.5m b/d – shrank by more than 2 per cent in the second quarter.
Almost all the remaining growth in oil consumption is now coming from the emerging
markets – especially China and India. Even there the rate of increase in demand has slowed
in the past six months. In a market that is sensitive to every change, even the Chinese
constraints on car use in advance of the Olympics have had an impact.
More important is the other side of the equation. High prices have encouraged producers to
expand output and a series of new development projects around the world, such as the
delayed Khursaniyah project in Saudi Arabia and new offshore fields in Nigeria and Angola,
are due to come on stream over the next six months.
The net result of these changes is that the level of spare capacity, which dropped at one
point to little more than 1m b/d, has crept up to about 1.8m b/d and could rise to 3m b/d by
next spring. Three million b/d was the historic level of spare capacity in place throughout the
1990s – a comfortable margin of security against problems anywhere in the world. If such
levels are restored the stage is set for a reduction of prices through the autumn and winter.
Prices could break through the symbolic $100 a barrel level – only this time they will be
heading downwards.
Those brave enough to predict oil prices are usually wrong, but the perception that the
fundamentals have changed has begun to affect the trading market and behaviour of
speculators. That is why the Russian invasion of Georgia had so little impact. Speculators in
particular are pulling out of oil – with a few beginning to bet on a further substantial fall. In
the words of one London trader: when prices have risen by more than 100 per cent in 12
months the chances are that the next move will be downwards.
None of this resolves the long-term challenges facing energy policymakers. The world is still
dependent on hydrocarbons for more than 80 per cent of daily energy needs. A year of rising
prices has only served to shift demand to coal. As a result carbon emissions continue to rise.
The dependence of the world's consumers on Saudi Arabia, Russia and a few other producers
remains high. Imports are set to rise in the US, Europe, China and Japan.
The big oil companies are losing market share and seem unable to secure significant access
to the few new discoveries being made in areas such as Brazil. The bulk of supplies are
controlled by state companies. With Russia and the core of the Middle East closed off, big oil
groups face a fundamental challenge to their raison d'être. Falling prices will relieve some of
the pressure on consumers but complacency would be misplaced. This is a lull in the storm
not a reversion to normality. The need for a transition to a more diversified, lower-carbon
energy economy is as urgent as ever.
BRAZIL PLANS SPECIAL FUND FOR REVENUE FROM NEW OILFIELDS
Brazil will create a special fund to handle revenues from potentially enormous oil reserves
found last year, Guido Mantega, finance minister, signalled yesterday.
Mr Mantega's remarks came amid reports that Luiz Inácio Lula da Silva, the president,
favours a new national oil company to oversee extraction of the reserves alongside
Petrobras, the state-run oil group.
The minister saidoil revenues from the pre-salt layer off São Paulo state - expected in three
to four years - would go into a special fund possibly similar to one operated by Norway.
Mr Lula da Silva was said by people at a meeting of ministers on Tuesday to have argued
that revenues from the proposed new national oil company should be spent on education and
poverty relief, according to Brazilian media reports.
Such ideas have caused consternation in the oil industry. Analysts say laws could be adapted
to secure more revenues for the state without large-scale regulatory change or the creation
of a company of uncertain design.
João Augusto de Castro Neves, a political consultant in Brasília, said: "There seem to be
basically two reasons for creating the company. One is ideological, the other political."
He said the creation of the company was in line with other recent government initiatives,
such as proposed changes in regulations covering the telecoms industry to allow the
emergence of a "national champion" to compete with foreign companies that dominate the
sector - that suggest support for an increasingly nationalist and state-dominated economy.
But he said the proposed new oil company could also be a political asset in the run-up to the
next presidential election in 2010. Mr Lula da Silva, currently in his second consecutive fouryear term, cannot run again and many analysts say his chief concern is to secure the election
of his chosen successor.
"The new oil company would be a bargaining tool to secure the support of his coalition
partners into the next government," Mr de Castro Neves said.
Initial estimates suggest 50bn to 80bn barrels may be contained in the recently discovered
offshore fields, which are among the least accessible oil and gas deposits on earth. In July,
Mr Mantega said the government hoped to build a fund with $200bn to $300bn in oil
revenues by as early as 2010.
BRAZIL'S PETROBRAS TO SIGN NORTHEAST OIL REFINERY DEAL WED.
Brazilian energy giant Petroleo Brasileiro SA (PBR), or Petrobras, on Wednesday will sign a
memorandum of understanding with the northeast state of Ceara to formally kick off
construction of a new refinery for premium oil products, a top Petrobras executive said
Tuesday.
Petrobras Refining and Supply Director Paulo Roberto Costa said in a company WebCast that
construction of the refinery will begin soon after signing of the memorandum. Petrobras will
invest $11.1 billion in construction of the refinery and related infrastructure, including port
improvements, Costa said.
The refinery will begin processing crude oil in 2014, gradually increasing output to its full
capacity of 300,000 barrels per day by 2016.
Virtually all of the refinery's output will go to exports, Costa said. He said the refinery will
produce premium oil products to meet rising environmental standards in the United States
and Europe.
BRAZIL'S PETROBRAS IN TALKS WITH INDIAN CO ON PETROCHEM JV
Brazilian energy giant Petroleo Brasileiro SA (PBR), or Petrobras, is in talks with Indian
company Reliance Industries Ltd. (500325.BY) on possible petrochemicals joint ventures in
Brazil, a top Petrobras executive said Tuesday.
Petrobras and Reliance have discussed possible petrochemicals ventures in the northeastern
Brazilian state of Pernambuco and in the southeastern state of Rio de Janeiro, said Petrobras
Refining and Supply Director Paulo Roberto Costa in a company WebCast. "Talks regarding
the Rio de Janeiro Petrochemicals Complex are preliminary," he said. "Talks involving
Pernambuco are more advanced."
Costa said Petrobras was interested in what he called Reliance's "great experience in the
petrochemicals segment" in India.
PETROBRAS STUDYING A SHARE OFFERING
The president of Petrobras stated last Friday that the company is studying, but not yet
planning, making a new share offering in order to obtain capital to develop recent discoveries
of crude oil in the pre-salt zone.
Jose Sergio Gabrielli, in declarations to the press, did not give any additional details
regarding the possible share offering by Petrobras. He said that it is also possible that there
might be a bond offering, since the debt ratio for the company was about 17%, and could be
as high as 25 or 30%.
"These projections are based on crude oil prices of $35. Last time I looked oil was $115,
therefore we have more leeway", he affirmed.
Petrobras has invested $1 billion in drilling 20 wells through a deep salt layer near the coast
of Brazil since 2005 and has found large quantities of light crude and natural gas.
UBS has estimated that to develop the Tupi and Carioca fields $600 billion will be required.
Petrobras depends little on financing, since it has $104 billion in cash flow per year, said
Gabrielli.
The company plans to invest $112 billion in the next five years, but it is taking another look
at these figures to place an emphasis in the pre-salt developments.
Antonio Carlos Pinto, manager of project conception for Petrobras, stated last Friday to
reporters that the crude extraction costs for these deep and technically difficult fields will be
very attractive.
"The extraction costs per barrel for the pilot production, according to what I've been told, are
extremely economical", said Pinto. "The largest costs for the pre-salt deposits is to drill the
wells. We are investing to reduce the costs and the duration of drilling", he added.
Petrobras announced last November that reserve estimates for the Tupi field were between 5
and 8 billion barrels of crude, the largest discovery in deep waters so far.
The possibility that the pre-salt reserves in Brazil might be in the order of 70 billion barrels,
caused widespread speculation that the government might take a greater share of the
petroleum riches.
PETROLEUM COMPANIES RENEW BOLIVIAN INVESTMENTS
CBH (Camara Boliviana de Hidrocarburos) confirmed this past Wednesday that the petroleum
companies operating the country have renewed their investments, after the freeze of the
past few years due to the uncertainty in the sector.
The president of CBH, Jose Mangela Bernardes, said last week that the private firms "are
already investing", thus confirming his prediction that capital flows would begin in the second
quarter of 2008.
"We were not wrong", said mangela as published by EFE, without giving any figures. In
addition he stated that "the new investment plans are being analyzed, not just in private, but
also in public", because the state owned company YPFB is now an "important shareholder"
willing to take "large steps."
The petroleum companies operating in Bolivia had frozen their investments in the last few
years since the 2005 reforms and the political nationalization since the inception of Evo
Morales' government.
This situation caused a decrease in natural gas exploration, which caused exterior
agreements not to be met, especially with Argentina.
In his speech, Mangela also stated that Bolivia "is in a privileged position because it has
enough reserves to meet its internal market, as well as export markets, for several decades.
Moreover, he added that Bolivia "has a very attractive exploration potential from the
geological perspective", but that "surely" we need to connect our reserves to the markets,
which, in his view, can be done with the existing technical capability of the country.
According to Brazilian government figures, private firms and YPFB have the intention of
investing at least $1.266 billion this year, with more than $200 million being the state's
portion and about $876 million being the private firm's share.
BRAZIL TO ALLOW FOREIGN INVESTMENTS IN PRE-SALT
The petroleum discoveries made since the end of last year, at a depth of 6,000 meters below
a salt layer, approximately 800 KM off the coast of Brazil, has generated a debate regarding
the formation of a new state owned company to explore and develop new deposits and in
addition to establish new rules to increase state participation in the discoveries.
Lula's administration confirmed that it will allow the participation of foreign companies in the
drilling of the pre-salt cap, considered to be the highest valued area for hydrocarbons in
South America.
The government's decision does not exclude the idea of a new state owned company to lead
development of that zone.
The minister of mines and energy, Edison Lobao, supports the idea of creating a new state
owned petroleum firm to administrate the discoveries in the pre-salt zone offshore Santos, to
which Petrobras' president Jose Sergio Gabrielli, stated that development of the new
petroleum fields in Brazil will require investments of both capital as well as new technology.
VENEZUELA TO INVEST $1 BILLION IN PETROCHEMICALS
The president of Venezuela, Hugo Chavez, stated last week that he invested almost $1 billion
in the Venezuelan petrochemical sector to upgrade his country into the second largest
polyethylene producer in South America, behind Brazil, by 2011.
"Several days ago I approved the expenditures of $950 million to continue to develop our
petrochemical sector", said Chavez during the inauguration of a polyethylene plant in the
state of Zulia.
The Venezuelan polyethylene production has been stable at 60 thousand tons per year, ever
since Chavez came to power 10 years ago. Chavez plans to increase production to 500
thousand tons per year by 2011. The Venezuelan president attributed the slow progress in
this sector to multinational companies that "kept Venezuela dependant, limiting its role to
one of petroleum production", and not its derivatives.
PETROBRAS TO INVEST $31 BILLION IN REFINERIES
Petrobras will invest $31 billion in two new refineries in the North of Brazil, which will
produce "premium" quality products with export quality. The more advanced of the two
plants is the refinery in the state of Ceara, which will cost $11.1 billion, according to the
company's purchasing director, Paulo Roberto Costa, during a press conference mentioned by
O Globo.
This unit will process 300,000 bpd of crude to produce derivatives of high commercial value,
like diesel and gasoline, for external markets.
Costa, with other Petrobras executives, also stated that the other refinery will also produce
for the external market, in the state of Maranhao, and will cost $20 billion and will process
another 600,000 bpd of crude. The first phase of this refinery will be ready in 2013 and the
second in 2015.
The executive added that with the beginning of operations at the new petrochemical complex
in Rio de Janeiro, with an investment of $8.5 billion, and with another refinery being built in
Recife, Brazil will be self sufficient in diesel production.
Despite the high expectations, Costa acknowledged that developing the reserves and
meeting the firm's objectives of exporting part of the crude in the form of refined products
will require a large number of platforms and technology which will take some time to obtain.
"Our financial capacity should not be a problem, but the physical capacity may be a difficulty,
both domestically as well as internationally," said Costa, in a Reuters interview in Fortaleza,
in the Northeast of Brazil.
The executive believes that it would not be convenient to develop the new fields without
increasing the refining capacity to add value to the riches.
"It makes no sense to increase petroleum production without increasing refining capacity",
he stated, reminding that Brazil wants to be an exporter of derivatives and not crude
petroleum. For this reason, Costa admitted that the five new refineries being planned by
Petrobras until 2016 may be insufficient to process all the crude which may be produced in
the new areas.
"With the entry of the pre-salt fields beginning in the second half of the next decade, there
will be additional needs and Petrobras will evaluate this keeping in mind the concept of
refining in Brazil to add value, generate jobs, cash flow and profits in Brazil", he added.
Even so, some of the new refineries will have to be modified to handle lighter crude, since
presently we are producing heavier crude.
"Now we are making changes to these projects because we see that there will be no heavy
crude, it will be light, so we will process a mixture of the two crudes", he added. In addition,
he indicated that the area of energy and gas may not go without its proper investments.
"Energy also involves construction, such as LPG terminals and other pipeline projects, since
the pre-salt zones also have gas and we cannot produce it and then burn it", said Costa. The
commercial production of the new deposits will begin towards the end of 2010 at the Tupi
field, where the pilot study predicts a production of 100,000 bpd and which soon thereafter
will be repeated in other fields nearby.
ECUADOR TO RENEGOTIATE PETROLEUM CONTRACTS
The minister of energy and petroleum, Gato Chiriboga, notified this past Monday that
Ecuador will renegotiate the petroleum production contract that it has with Pacifpetrol and
Escuela Politecnica del Litoral (ESPOL), which produces 1,600 bpd.
During the inauguration of a plant in Ancon, Chiriboga stated that the company Pacifpetrol
will have to revise the economic terms of the contract that it has with ESPOL, to be in
compliance with the new (political) policies that the government now has, regarding a larger
participation in projects, according to a report last Thursday in El Comercio.
The current contract, originally signed in 1994 between Petroecuador and ESPOL, is for
"specific services for the production of hydrocarbons, in the fields located in the Santa Elena
peninsula."
The terms call for the state to receive 12.5%, while of the remainder 87.5%, ESPOL has to
pay Pacifpetrol the costs and expenses realized, which are 75% approximately. Moreover, of
what remains to ESPOL, it has to allocate 30% for projects in Santa Elena, which between
1996 and 2008 amounted to $17.6 million.
Boris Abad, president of Pacifpetrol, added that the contract ends in 2016 and that the
negotiations will have a technical basis. "I am certain that the new agreements will be just
and will benefit ESPOL as well as the necessities of that province."
PETROBRAS TO INVEST $1 BILLION IN BOLIVIA
The Brazilian petroleum company Petrobras announced that it would invest $1 billion in
exploration in Bolivia during the next five years and its president in Bolivia, Claudio Castejon,
stated that the company is comfortable in that country.
"We are comfortable, the geological prospects are good, we are preparing to invest", he
stated this past Wednesday to the AP. By November we will finalize the drilling of the
exploration well Ingre, in the Southeast part of the country, with an investment of $40
million and a good probability of increasing our production of gas and petroleum.
The new investments also will go towards the development of mega fields in the South being
operated by Petrobras. The new exploration projects are being negotiated with Petrobras'
partners and later they will be agreed with the state owned petroleum company, YPFB, said
Castejon.
Petrobras re-started making investments in Bolivia after the hydrocarbon nationalization last
May. The company was affected by this action which converted about one dozen petroleum
multinationals to operators at the service of the state company.
According to official figures, Bolivia has 680 billion cubic meters of gas in its reserves and
hydrocarbons are its principal export, with 2007 revenues of $1.983 billion. Brazil is its
largest buyer, with daily purchases of 30 million cubic meters.
PEMEX TO LEASE DRILLING PLATFORMS FOR $530 MILLION
The state owned Mexican petroleum company Pemex began a bidding process this past
Tuesday for the leasing of four drilling platforms and associated equipment for drilling wells,
for a value of $530 million.
In its website, Pemex confirmed the publication in the Diario Oficial of a request for bids for
the leasing, without an option to buy, four drilling platforms for offshore use.
Three of the aforementioned platforms will have a capacity to operate in waters of up to 250
ft, while the fourth will have a capacity of 300 ft.
Pemex also stated that it will lease equipment for drilling wells to be utilized in the
completion, repair and deepening of wells. In the same request for bids, Pemex expressed an
interest in leasing, without an option to buy, modular equipment, diesel/electric with 1,000
HP, for the completion, repairs, re-entry and/or deepening of wells, including normal
maintenance, to operate in the Gulf of Mexico.
The request for bids places a time limit of September 23. The meeting for clarifications will
be on August 29 and the presentation and opening of bids will be on September 29, 2008.
Pemex indicated that this is part of an effort to increase production of hydrocarbons in
various fields in the Gulf of Mexico.
The lease terms will be of 4,116 days for one platform, 1,065 days for another, 500 days for
the third and 433 days for the last one, while the drilling equipment will be contracted for
510 days.
LOUIS DREYFUS INVESTS $433 MILLION IN BRAZIL ETHANOL MILL
Louis Dreyfus Commodities' ethanol unit, LDC Bioenergia, has invested $700 million Brazilian
Reals ($433 million) to open a new mill in Brazil's Mato Grosso do Sul state.
The sugar and ethanol mill has the capacity to crush 3 million metric tons of sugarcane,
increasing to 4.5 million tons in 2009, in a state that is becoming a new frontier state for the
country's ever-expanding ethanol industry.
The new mill will also produce 340,000 tons of sugar per year and 160,000 cubic meters of
ethanol per year. Brazil is the world's leading exporter of both sugar and ethanol. Only the
U.S. produces more ethanol.
The new mill brings Louis Dreyfus Commodities' total number of mills to eight, with a
combined capacity to crush 20 million tons of sugarcane, and to produce 1,100 tons of sugar
and 950,000 cubic meters of ethanol.
LDC Bioenergia canceled its plans to go public on the Bovespa stock exchange in Sao Paulo
this year once ethanol and sugar prices plummeted in early 2008. The plan is still in the
works, the company stated previously.
SOUTHRIDGE RECEIVES $7.5 MILLION FOR BRAZIL ETHANOL PLANT
Southridge Enterprises, Inc. (SRDG) announced that the Company's subsidiary, Southridge
Brasilia Corp. ("SBC"), has received a total of $7,500,000 from its project partners for the
construction of the ethanol facility in Brazil.
Southridge director, Mr. Marcio Santos, has been working closely with our Brazilian partners
Durmundo Carasca SA (DCSA) and Briskul Transaccao LTDA (BTL) in the development of the
Company's plant in Brazil. DCSA has now completed their $5,000,000 contribution for their
15% interest in the new facility. In addition, BTL has exercised their option to increase their
position in SBC for an additional $3,270,000, bringing their total interest to 35%.
The ethanol industry in the United States is facing diminishing profit margins that have put
many viable and well-funded projects in an increasingly difficult position to continue
operations. Due to the high commodity prices for corn and natural gas in United States,
Southridge management has decided to put both the Mississippi and Texas ethanol plants on
hold until market conditions improve the viability of these projects. As a result, the Company
has refocused and accelerated the development of the El Salvador and Brazil plants, as well
as increased the revenue from our ethanol sales efforts.
Dallas-based Southridge is developing ethanol plants in El Salvador and Brazil.
WHOLESALE PRICES RISING AT FASTEST PACE SINCE 1981
Wholesale inflation surged in July, leaving prices for the past year rising at the fastest pace in
27 years, according to government data released Tuesday.
The Labor Department reported that wholesale prices shot up 1.2 percent in July, pushed
higher by rising costs for energy, motor vehicles and other products. The increase was more
than twice the 0.5 percent gain that economists expected.
Core prices, which exclude food and energy, rose 0.7 percent. That increase was the biggest
since November 2006 and more than triple the 0.2 percent rise in core prices that had been
expected.
In other economic news, the Commerce Department reported that housing construction fell
in July to the lowest pace in more than 17 years. Builders broke ground on 965,000 housing
units at a seasonally adjusted annual rate last month — the weakest showing since March
1991 — as the housing industry continues to struggle with falling sales and rising mortgage
foreclosures.
The bad news on wholesale prices followed a report last week that consumer prices shot up
by 0.8 percent in July, leaving consumer inflation rising at the fastest pace in 27 years.
The July price pressures reflected in part the big surge in energy costs during the month that
pushed crude oil prices to a record of $147.27 per barrel and sent gasoline pump prices to an
all-time high of $4.11 per gallon.
Crude oil prices have fallen by more than $30 per barrel since then, raising hopes that the
surge in inflation will soon abate.
However, the price spikes in a number of areas seen in July raised concerns that the
prolonged surge in energy prices was beginning to show up more broadly throughout the
economy.
Such a development would put the Federal Reserve in a severe bind. The central bank would
like to keep interest rates low to give a boost to the badly lagging economy, but Fed officials
may feel pressured to start raising rates in an effort to make sure inflation does not get out
of control.
For July, wholesale energy prices jumped by 3.1 percent following a 6 percent gain in June.
That increase reflected big jumps in the price of natural gas, home heating oil and liquefied
petroleum gas, which offset a 0.2 percent dip in gasoline costs.
Food prices rose by 0.3 percent in July after a 1.5 percent surge in June. Beef prices jumped
by 7.4 percent, the biggest increase in nearly four years. Milk prices shot up by 5 percent,
the biggest gain in a year, while soft drink prices rose by 2.4 percent, the largest increase in
four years.
Excluding energy and food, the 0.7 percent rise in core inflation reflected big gains in the
prices of passenger cars and light trucks, pharmaceutical preparations and plastic products.
EX-IMF ECONOMIST SAYS WORST IS YET TO COME
The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the
next few months as the world's biggest economy hits further troubles, former IMF chief
economist Kenneth Rogoff said on Tuesday.
"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps.
I would even go further to say 'the worst is to come'," he told a financial conference.
"We're not just going to see mid-sized banks go under in the next few months, we're going
to see a whopper, we're going to see a big one, one of the big investment banks or big
banks," said Rogoff, who is an economics professor at Harvard University and was the
International Monetary Fund's chief economist from 2001 to 2004.
"We have to see more consolidation in the financial sector before this is over," he said, when
asked for early signs of an end to the crisis.
"Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson
said -- these giant mortgage guarantee agencies are not going to exist in their present form
in a few years."
Rogoff's comments come as investors dumped shares of the largest U.S. home funding
companies Fannie Mae and Freddie Mac on Monday after a newspaper report said
government officials may have no choice but to effectively nationalize the U.S. housing
finance titans.
A government move to recapitalize the two companies by injecting funds could wipe out
existing common stock holders, the weekend Barron's story said. Preferred shareholders and
even holders of the two government-sponsored entities' $19 billion of subordinated debt
would also suffer losses.
Rogoff said multi-billion dollar investments by sovereign wealth funds from Asia and the
Middle East in western financial firms may not necessarily result in large profits because they
had not taken into account the broader market conditions that the industry faces.
"There was this view early on in the crisis that sovereign wealth funds could save everybody.
Investment banks did something stupid, they lost money in the sub-prime, they're great
buys, sovereign wealth funds come in and make a lot of money by buying them.
"That view neglects the point that the financial system has become very bloated in size and
needed to shrink," Rogoff told the conference in Singapore, whose wealth funds GIC and
Temasek have invested billions in Merrill Lynch and Citigroup .
In response to the sharp U.S. housing retrenchment and turmoil in credit markets, the U.S.
Federal Reserve has reduced interest rates by a cumulative 3.25 percentage points to 2
percent since mid-September.
Rogoff said the U.S. Federal Reserve was wrong to cut interest rates as "dramatically" as it
did.
"Cutting interest rates is going to lead to a lot of inflation in the next few years in the United
States."
HOUSING STARTS PLUNGE 11% A 26-YEAR LOW
U.S. home builders sharply reduced the number of new homes starting construction in July
and dropped the number of new single-family permits to the lowest level in 26 years, the
Commerce Department estimated Tuesday.
Housing starts fell 11% to a seasonally adjusted annual rate of 965,000 in July, close to the
960,000 expected by economists surveyed by MarketWatch.
It marked the lowest level for housing starts in 17 years. June's starts were revised higher to
a 1.084 million annual pace. Housing starts are down 29.6% in the past year.
Builders are frantically cutting back their production of new homes, trying to work off a
mammoth glut of unsold inventory. Rising foreclosures on existing homes are complicating
the builders' efforts to bring supply back down to meet sluggish demand.
"The drop is good news because what is sorely needed in the housing market is a decrease in
supply, not an increase," wrote Tony Crescenzi, chief bond market strategist for Miller Tabak
& Co. "The lower the better."
In a separate report, the Labor Department said the producer price index jumped 1.2% in
July, while core wholesale inflation (which excludes food and energy prices) rose 0.7%, far
above expectations.
The big decline in July was largely payback from a surge of permits and starts in June
sparked by a new building code in New York City that provided a big incentive to rush major
condominium and apartment-building permits through before July 1.
The number of building permits for single-family homes and condos fell 17.7% to a
seasonally adjusted annual rate of 937,000, down 32.4% in the past year.
Back to the 1980s
For single-family homes only, permits fell 5.2% to a 584,000 pace, the lowest since August
1982. Single-family permits have plunged 41.4% in the past year. The number of permits for
single-family homes in the West region fell 10.8% to the lowest level in at least 20 years.
"We look for the single-family category to decline by another 15% to 20% before reaching a
trough later this year or early next," wrote David Greenlaw and Ted Wieseman, economists
for Morgan Stanley.
The number of single-family homes under construction in July fell 3.5% to 491,000, the
lowest in 16 years. The number of single-family homes completed dropped 7.2% in July to a
791,000 annual pace, the lowest since March 1983.
The government cautioned that its monthly housing data are volatile and subject to large
sampling and other statistical errors. In most months, the government can't be sure whether
starts increased or decreased. In July, for instance, the standard error for starts was plus or
minus 9%. Large revisions are common.
It can take four months for a new trend in housing starts to emerge from the data. In the
past four months, housing starts have averaged 1 million annualized, down from 1.01 million
in the four months ending in June.
On Monday, the National Association of Home Builders said builder confidence remained at
an all-time low in August, although expectations for future sales improved slightly.
FREDDIE PAYS HIGHEST RISK PREMIUM
The severity of the US mortgage crisis was underscored on Tuesday as Freddie Mac, one of
two government-sponsored enterprises that underpin the US housing market, paid its
highest risk premium yet on a five-year debt issue to raise $3bn (£1.6bn).
The sale of the Freddie bonds yielding 113 basis points more than comparable Treasuries
came less than a week after Freddie's rival, Fannie Mae, paid a record 122.5bp more than
Treasuries to lure investors to a three-year issue that raised $3.5bn.
Freddie and Fannie shares on Tuesday fell 5.01 per cent and 2.28 per cent respectively,
extending a slide that began on Monday after an article in Barron's suggested equity
investors could be wiped out by a government plan to rescue the two GSEs. The Treasury
said it had no intention of forcing such an outcome.
The Treasury's interim rescue plan for the mortgage financiers made a historically implicit
guarantee for their debt increasingly explicit. However, debt investors have demanded higher
risk premiums because of uncertainty over the details of any bail-out and fears about
deterioration in the housing market.
"This sale [was] seen as a key test of the quasi-private status [of Fannie and Freddie]", said
Michael Englund, analyst at Action Economics.
The five-year Freddie notes were sold with a yield of 4.172 per cent, 113bp over Treasuries.
That compares with a spread of 69bp on a five-year Freddie issue in May and a spread of
105.5bp on notes sold in March around the time of the Bear Stearns collapse.
Analysts were encouraged that the deal was oversubscribed and that participation by Asian
investors – important buyers of GSE debt – increased in the Freddie sale from the levels seen
in last week's Fannie issue.
Investors also appeared relieved that Freddie succeeded in selling the notes, pushing down
spreads on other GSE and mortgage debt. The new Freddie issue also tightened to 106bp
over Treasuries by day's end.
Asian investors bought 30 per cent of the Freddie deal on Tuesday, up from 22 per cent for
the Fannie issue last week. In May, Asian investors bought 41.3 per cent of Freddie's fiveyear issue.
Fannie's debt sale last week appeared to show that Asian investors and central banks were
beginning to scale back their involvement amid the uncertainty surrounding the groups.
FANNIE AND FREDDIE CRISIS DEEPENS
The US Treasury on Wednesday backed away from assurances that it would not have to
rescue Fannie Mae and Freddie Mac, as the crisis surrounding the mortgage groups deepened
with their shares falling for a third day.
Although it was granted new powers to extend its credit lines to Fannie and Freddie and
invest in their equity last month, the Treasury has been adamant it does not expect to have
to make use of the new authority.
But on Wednesday, a Treasury spokeswoman declined to repeat that assurance. Instead, she
said Treasury was "vigilantly" monitoring market developments and was "focused on efforts
that will encourage market stability, mortgage availability and protecting the taxpayer".
The shift in emphasis towards a more open-ended statement may not mean that the
Treasury is close to intervening to save Fannie and Freddie, since government funds would
still only be used as a last resort.
But it highlights the pressure facing Hank Paulson, US Treasury secretary, as he confronts
the return of unease surrounding Fannie and Freddie. A rise in the companies' borrowing
costs could translate into higher mortgage rates for prospective homebuyers, thereby
prolonging the housing slump.
Treasury officials had hoped the strengthening of the government guarantee implied in the
rescue plan would be enough to restore investor confidence.
"Hopes that making government support more explicit . . . would add stability have backfired
as holders further down the capital structure have turned up the heat, eradicating value
ahead of a potentially damaging capital infusion," Richard Hofmann, analyst at CreditSights,
said .
Daniel Mudd, Fannie chief executive, said in a radio interview yesterday that his company
had not asked the Treasury for help, nor had it been offered any, reiterating that the housing
agency has more capital than it has ever had in its history.
Fannie and Freddie shares have fallen 32.49 and 37.09 per cent respectively since Monday,
as investors have grown concerned about a government intervention that would dilute
shareholders and could affect holders of the groups' preferred stock and subordinated debt
issues.
Freddie's tumbling share price has also hamstrung the company's efforts to raise $5.5bn of
new capital it promised to issue in May.
BOND FUNDRAISING COSTS SOAR
Many banks and companies are paying more to raise money in the bond markets than at any
time since the recession in the early 1990s amid signs that the financial crisis is deepening.
Growing worries about the health of many banks, rising default rates and deteriorating
economic conditions across the world are forcing yields up as investors demand higher risk
premiums to buy bonds.
Spreads for US investment grade banks and companies rose to the highest level last week
since the early 1990s, according to Lehman Brothers. Spreads measure the extra interest a
company must pay above safe government bonds. This is known as the risk premium.
In Europe and Asia, spreads for many investment grade companies are at 10-year highs,
according to Lehman.
One of the biggest concerns is the health of Fannie Mae and Freddie Mac, the US
government-sponsored enterprises that have run into trouble because of the US mortgage
crisis. The mortgage financiers, which underpin the US housing market, paid the price for
these worries when both were forced to pay record high risk premiums on dollardenominated bonds this month.
Other issuers forced to pay very high yields over government bonds this month include
Citigroup, American Express, AIG and Deutsche Telekom.
Jim Reid, a credit strategist at Deutsche Bank, said: "I think it is fair to say the crisis is
deepening because people are very worried about the health of some financial institutions.
Will more fail? The fact is if you mark to market some of the illiquid assets the banks hold at
prices they could sell them in today's climate, it could make many of them insolvent."
Kevin Murphy, managing director for investment grade corporates at Putnam Investments,
said: "The topic du jour is Fannie and Freddie. Clearly, the market is looking for a solution
that is permanent, clear and definitive. That dwarfs everything." Willem Sels, head of credit
strategy at Dresdner Kleinwort, added: "Investors have become increasingly nervous as
default rates, particularly in the US, are now rising. People expected they would, but now it is
happening that has made them more worried."
The Lehman Brothers Credit index for US investment grade companies closed at 270 basis
points over US Treasuries last Wednesday, a record high since the early 1990s.
IT TOOK ME ALL MY LIFE. (My opinion)
A French woman, upon seeing Picasso in a Parisian restaurant, approached the great master
and insisted that he put down his coffee and make a quick sketch of her. Graciously, Picasso
obliged. When he was done, she took the drawing, put it in her handbag, and then pulled out
her billfold.
"How much do I owe you?" she asked.
"$5,000," was Picasso's reply.
"$5,000? But it took you only three minutes!" she exclaimed.
"No," Picasso answered. "It took me all my life."
Billionaire investor George Soros bought an $811 million stake in Petroleo Brasileiro SA in the
second quarter, making the Brazilian state-controlled oil company his investment fund's
largest holding.
As of June 30, the stake in Petrobras, as the Rio de Janeiro-based oil producer is known,
made up 22 percent of the $3.68 billion of stocks and American depositary receipts held by
Soros Fund Management LLC, according to a filing with the U.S. Securities and Exchange
Commission. Petrobras has since slumped 28 percent.
Soros has increased his mining and commodities holdings, a move that accelerated in the
first quarter with purchases of such companies as Cia. Vale do Rio Doce , the world's largest
iron-ore producer, and Talisman Energy Inc. , a Canadian oil and gas company. In
November, Petrobras announced the discovery of Tupi, a field with as much as 8 billion
barrels of reserves, making it the largest find in the Americas since 1976.
"Petrobras has something that other oil companies don't have: oil — lots of it and they're
going to find more," said Ricardo Kobayashi , equity fund manager with UBS Pactual SA in
Rio de Janeiro, which manages about $5 billion of stocks, including shares in Petrobras. "If
you can buy now and hang on, if you have the staying power, it's great."
Tupi is part of a new deepwater offshore region known as the pre-salt that may contain as
much as 50 billion barrels, according to Peter Wells , oil analyst with the U.K.'s Neftex
Petroleum Consultants Ltd.
The slump in the U.S. continues. Foreclosures are still rising in California.
There's "blood in the street," says Barron's of America's most famous street, located in lower
Manhattan.
Fortune tells us that the "next wave of mortgage defaults" is coming.
And down in Florida, the Miami Herald reports that the unemployment rate has risen over 6%
– its highest level in 13 years. Florida, along with California and Nevada, is where house
prices are falling fastest. Many of the people who used to work in construction, or real estate,
or installing granite countertops, or financing houses are now looking for work.
And here, we pause a moment to remember what a joke of an economy we Americans have
created. Fortune magazine reported a study that compared Germans to Americans. It found
that Americans did not work more hours, after all. We work about the same number of hours
as Europeans, generally. But Americans tend to do their work at low-skill, service jobs – like
flipping hamburgers or cleaning driveways. Germans work at real careers, cook their own
hamburgers and clean their own driveways. Germans put in fewer hours "on the job," as a
result.
But in the curious way in which statistics become confused with knowledge, the statistics on
hamburger joint revenue get fed into the figures for GDP growth. Then, it looks like the U.S.
economy is doing better than the German economy, even though both groups may be eating
exactly the same number of hamburgers. And then, too, U.S. economists and politicians
believe they have found the secret to economic success; because the US model puts people
to work...and boosts GDP growth. Soon, they are giving advice to the Chinese and wagging
their fingers at the Europeans. It's only later, when the credit runs out and their service
industries go broke...that they get the punch line – good and hard. Then, they have to cook
their own hamburgers again.
More bad loan write-offs are coming. July's home foreclosures jumped an astounding 55%,
while actual property seizures by banks surged 184%. Most of the losses that will come from
July's terrible real estate market have not yet been reflected in write-offs.
So far, financial institutions have lost an estimated $500 billion. Even the conservative
International Monetary Fund (IMF) says there's another $500 billion in losses to be
recognized. So at best, the crisis is only half way over.
That tells me that the Fed and Treasury ...
Will have to pump more money into the economy, and
Bail out more institutions.
It also means that ...
The Federal budget deficit is likely to explode even higher than the current estimate of a
record $500 billion for 2009, as tax receipts fall and spending is ramped up.
Indeed, few people are talking about it, but Congress just raised the national Federal debt
ceiling, which is the accumulated budget deficits, to a record $10.5 TRILLION!
On top of all this, we are just now seeing official economic stats turn south in everything
from retail sales, to durable goods orders, industrial production, and more.
The trend down for the economy is so powerful that Washington can no longer jerry-rig the
numbers. The rot is now coming to the surface.
"We're not just going to see mid-sized banks go under in the next few months ...
"We're going to see a whopper ... one of the big investment banks or big banks."
— Kenneth S. Rogoff
Former IMF Chief Economist
and Fed Governor
Lehman Brothers is on life support: In the second quarter, Lehman lost $2.8 billion, mostly in
residential real estate investments. Now, JPMorgan Chase says the firm may have to writedown $4 billion in assets in the third quarter to cover mounting losses from bad bets made in
the mortgage market.
There's no doubt Lehman is in a panic to offload assets; including a portfolio of up to $60
billion worth of troubled commercial real estate assets, according to investors involved in
that sale.
It's not going well. Recently, Lehman Chief Executive Dick Fuld nearly struck a deal to raise
almost $5 billion from South Korean wealth funds and institutions but the pact has now
disintegrated, reportedly because Lehman needed more money than was offered.
And just yesterday, Wall Street was rocked by news that Lehman has invited offers for its
highly prized asset management unit that includes Neuberger Berman.
If the deal goes through, it could turn out to be the worst possible news for Lehman.
Neuberger Berman is one of the ONLY assets Lehman owns that is actually profitable. The
company would become little more than a cesspool of rotting assets. Investors would
probably slaughter Lehman stock.
Bank of America is suffering huge loan losses: When BofA bought Countrywide, it was
thought that the big bank would save the subprime lender from failure. Now, it's looking
more like Countrywide could bring Bank of America to its knees.
The mess at Countrywide was far worse than anyone could have guessed: A staggering 83%
of the "option ARM" mortgage loans in its portfolio were made with little or no verification of
borrowers' incomes!
Now, one in eight of those borrowers are at least 90 days behind on their payments. A
whopping 72% of them are not even making full interest payments — much less payments
on their principal.
American International Group – America's largest insurer — is on the ropes: AIG plunged
5.9% yesterday after Goldman Sachs warned that the company may have to pay $20 billion
on credit-default swaps, suffer ratings-downgrades on its debt and have to raise capital on a
"large scale."
CapitalOne is headed for disaster: Just this Monday, shares of Capital One Financial plunged
nearly 5% after the credit card lender released data showing loan losses in its auto finance
and international divisions are soaring.
Mortgage Volume Fell 1.5% Last Week, MBA Survey Says
Mortgage rates fell last week, and yet that didn't inspire more borrowers to apply for a
mortgage, according to the Mortgage Bankers Association's latest survey, released on
Wednesday.
Application volume fell a seasonally adjusted 1.5% for the week ended Aug. 15, compared
with the previous week. Volume was down 34.2%, compared with the same week in 2007,
Washington-based MBA said. The MBA survey covers about half of all U.S. retail residential
mortgage applications. The volume of refinance applications fell an unadjusted 3.7%
compared with the week before, while the volume of applications to purchase a home fell a
seasonally adjusted 0.4%. The four-week moving average for all mortgages was down 4%.
Refinance applications made up 34.8% of all applications, down from 35.2% the previous
week. Adjustable-rate mortgages made up 8% of all applications, up from 7.3%. Mortgage
rates fell across the board, according to the survey. The 30-year fixed-rate mortgage
averaged 6.47% last week, down from 6.57% the previous week. Fifteen-year fixed-rate
mortgages averaged 5.99%, down from 6.17%. One-year ARMs averaged 7.07%, down from
7.15% the previous week.
The confidence of U.S. home builders stayed at an all-time low this month, but a trade group
senses a bottom is near for withering sales.
The National Association of Home Builders released results Monday of a monthly survey of
builders' thoughts on market prospects. Its latest index for sales of new, single-family homes
held steady at 16 in August, which is a record low.
But expectations for sales in the next six months rose to 25 this month from 23 in July, the
NAHB said. Within the NAHB's housing market index, the component for present sales of
single-family homes was 16, up from 15 in July. It measures current sales conditions. The
traffic of prospective buyers held steady at 12.
"While our overall measure of builder confidence remains at a record low at this time, it is a
good sign that two out of three of the HMI's component indexes rose in August, and this may
be an indication that we are nearing the bottom of the long downswing in new-home sales,"
NAHB chief economist David Seiders said. "Our current forecast shows stabilization of sales
during the second half of this year, followed by solid recovery in 2009 and beyond."
The latest government data, issued about three weeks ago, show new-home sales fell in June
by 0.6% to a seasonally adjusted annual rate of 530,000. While the decline was the fifth in
six months, it was modest and smaller than expected on Wall Street. Another promising sign
in the data showed inventories kept receding; bloated inventories are depressing prices and
construction. Year over year, new-home sales were 33.2% lower than the level in June 2007.
President Bush last month signed sweeping legislation to fight the housing crisis. It included
a temporary $7,500 tax credit for those buying a home for the first time.
"With the passage of crucial housing legislation last month that created an attractive home
buyer tax credit, there is a sense that home sales may soon be reaching a turning point,"
NAHB President Sandy Dunn said. "Builders are anticipating the stimulative effects of this
legislation and are optimistic that the tax credit will give those buyers who've been sitting on
the fence the reason they need to jump back into the market."
The overall housing market index for August was based on a survey of 376 home builders,
who answer questions about sales prospects now and in the near term. When the index
exceeds 50, it means the number of builders who see "good" sales outnumber those who see
"poor" sales. The numbers used in compiling the index are adjusted for seasonal variations.
Federal Reserve Bank of Dallas President Richard Fisher, in remarks Tuesday, says he
expects economic growth to "decelerate to a snail's pace, if not completely grind to a halt" in
the second half of this year, with a slowdown that may extend into 2009. He devotes most of
his speech to inflation, addressing the prospect that inflation will moderate against his
continued warnings this year about the inflation threat. Mr. Fisher employs an extended
metaphor — featuring his neighbor's pet python, Julius Squeezer — to assess the risks from
rising prices and raises the prospect of "a lingering inflationary fever."
Mr. Fisher, who has dissented in five Fed interest-rate decisions this year in favor of tighter
policy, says officials "must remain poised to act if slowing growth fails to contain inflationary
pressures." Excerpts of his remarks to a Progress & Freedom Foundation gathering in Aspen,
Colo.:
One could reasonably deduce from recent price reversals in oil and food prices that they
overshot on the upside and that their price run-up was a one-off development. If you
subscribe to this argument, you envision a process not unlike that of a python digesting
dinner: It visibly moves through the system, creating some moments of discomfort—in this
case, a temporary inflationary bulge—but is processed in reasonable time and done with.
Because this is a serious speech, I will refrain from telling you about my neighbor in Dallas
who had a pet python named Julius Squeezer. But I will tell you that I learned much from
watching that python over the years: He was an efficient processor of most anything he
swallowed, although there were times when he had to be taken to the vet to be treated for
indigestion.
It is tempting to deduce from the recent reversal of commodity prices—in particular, energy
prices save coal—that the discomfort manifest in headline inflation numbers that we
broached in July is passing through the system and is being squeezed out by slowing
economic growth. This is certainly a plausible economic scenario. Weakness in the U.S. and
other advanced economies will mitigate inflationary pressures, rendering them a temporary
inconvenience. In the parlance of central bankers, the recent run-up of headline and core
prices represents “noise” rather than underlying “signal.” Given that the Fed focuses on
signals about intermediate and long-term sustainable, noninflationary employment growth,
rather than short-term expediency, it is in keeping with our charter to give considerable
weight to this scenario.
… [A] second scenario is less felicitous. It acknowledges the manic-depressive nature of
commodity markets and recognizes that it was inevitable that price peaks would give way to
price valleys. But the scenario envisions the possibility that rather than passing through the
python, the recent burst of cost-push inflation is giving the beast digestion problems that
might manifest themselves in the form of a lingering inflationary fever.
Unless the python that is the U.S. economy can quickly pass the recent burst of cost-push
pressures, we risk a reinforcing spreading of inflationary impulses and expectations. Should
this happen and the Fed were to fail to address it, we would run the risk of losing the public’s
confidence in our ability to constrain inflation. … Thus, I urge you to observe closely the
noble python. He might digest and dispatch the recent inflationary surge, or he might gag on
it. It is too early to tell. And until we have a clear sense of what will prevail, monetary policy
makers must remain poised to act if slowing growth fails to contain inflationary pressures.
Federal Reserve Bank of Richmond President Jeffrey Lacker feels the Federal Open Market
Committee might have to hike interest rates before signs of an economic recovery are
confirmed. "It is important to withdraw this monetary policy stimulus in a timely way,"
Lacker said yesterday (Tuesday) in a Bloomberg Television interview. "That may require us
to withdraw before we are certain all of the weakness is behind us and before we are
completely certain that financial markets are as tranquil as we would like to see."
Economists and others react to the Producer Price Index's highest annual increase in 27
years:
Lower crude oil prices should help pull producer inflation much lower next month. Concern
about these inflationary developments has pushed the Fed to the sidelines despite a
softening economy. Because inflation is a lagging indicator of economic activity (and oil
prices have declined), the Fed still believes (hopes?) inflationary pressures will recede during
the remainder of the year. –Steven Wood, Insight Economics
The July PPI data suggest that cost pressures continue to build and that the pass-through of
prior increases into core finished goods prices may be accelerating. While the headline PPI is
likely to get some relief from lower energy prices in August, we do not believe that this will
mark the turning of underlying inflation pressures. Nonetheless, Fed policy remains
hamstrung by problems in financial sector and we continue to expect that policy will remain
on hold this year. –John Ryding and Conrad DeQuadros, RDQ Economics
The jump in producer prices represents a major risk for the economy at this fragile point.
While we're fans of the "one data point does not a trend make" philosophy of economic
analysis, evidence of elevated producer inflation is becoming harder to dismiss. –Guy LeBas,
Janny Montgomery
The higher than expected July core result was boosted by reported m/m increases in prices
for motor vehicles, with automobile prices said to be up by 1.4% and light truck prices up by
0.8%. With demand for such products crashing and burning, reported price increases such as
these can be chalked up to difficulty seasonally adjusting for dealer incentive programs which
differ in timing and size from year to year. Even so, the core inflation reading is a reminder
that some pass-through of higher commodity prices is occurring at the finished goods
producer level. –Joshua Shapiro, MFR Inc.
The results at earlier stages of production were ugly. The core intermediate (+2.0%) posted
its biggest monthly rise in nearly 30 years, with sharp gains in textiles, chemicals, fertilizers,
rubber and plastics, paper, and just about everything made of metal. The core crude
(+3.4%) was also way up again, returning to the prior trend of sharp advances after a brief
pause last month. Metals, especially iron and steel scrap, led the core crude upside. –David
Greenlaw, and Ted Wieseman, Morgan Stanley Research
After months of surging energy and commodity prices, final goods producers threw in the
towel on rising costs, and pushed through unusually large price increases at mid-year. With
energy and other commodity prices currently on the wane, the July spike in core producer
prices is quite likely to be the worst we will see in the near-term. –Kenneth Beauchemin,
Global Insight
Going forward, sluggish personal consumption and worsening business capex plans should
help restrain underlying inflation. Therefore, while the latest PPI report will not be welcome
news for FOMC members, the recent softness of commodity prices suggest cost pressures
are likely to abate over the second half of the year. –BNP Paribas
We know how these central bankers think. And the more a recessionary downturn grips the
world, the more Bernanke & Co. will fight against it. And they fight dirty – with counterfeit
money.
It's the "Endgame for Fannie and Freddie" says this week's Barron's . And the weekend news
brought word that the "US Likely to Recapitalize Fannie and Freddie." We expected nothing
less. The two lenders are said to be worth about a negative $50 billion each – for a grand
total of $100 billion. Of course, the feds don't exactly have a spare $100 billion lying around.
But so what...they've got plenty of funny money. As the endgame comes for more American
businesses and households, you can expect to see a lot more funny money passing itself off
as the real stuff.
U.S. producer prices unexpectedly (well it wasn't unexpected to me and you!) soared at their
highest annual rate in 27 years last month as rising wholesale prices for energy spread to a
variety of products including automobiles, prescription drugs and capital equipment. The
Labor Department said the producer price index for finished goods jumped 1.2% on a
seasonally adjusted basis in July, representing a 9.8% rise from the previous year. The core
index, which excludes food and energy, climbed 0.7% last month and rose 3.5% from a year
ago, a 17-year high.
I would say that for the last 200 years, America's elected politicians and scoundrels have
built up $5 trillion in debt. In the last few weekends, some un-elected officials added another
$5 trillion to America's national debt.
Suddenly we're on the hook for another $5 trillion. There have been attempts to explain this
to the public, about what's happening with the debt, and with the fact that America's
situation is deteriorating in the world.
I don't know why it doesn't sink in. People have other things on their minds, or don't want to
be bothered. Too complicated, or whatever.
I'm sure when the [British Empire] declined there were many people who rang the bell and
said: "Guys, we're making too many mistakes here in the U.K." And nobody listened until it
was too late.
When Spain was in decline, when Rome was in decline, I'm sure there were people who
noticed that things were going wrong. Below are a few thoughts on my mind:
• U.S. Federal Reserve Chairman Ben S. Bernanke should "resign" for the bailout deals he's
handed out as he's tried to battle this credit crisis.
• That the U.S. national debt – the roughly $5 trillion held by the public– essentially doubled
in the course of a single weekend because of the Fed-led credit crisis bailout deals.
• That U.S. consumers and investors can expect much-higher interest rates – noting that if
the Fed doesn't raise borrowing costs, market forces will make that happen.
• And that the average American has no idea just how bad this financial crisis is going to get.
Just consider this tidbit from the Energy Information Agency's August 12 Short-term Energy
Outlook:
Residential heating oil prices during the upcoming heating season (October though March)
are projected to average $4.34 per gallon compared with $3.31 during the last heating
season, an increase of about 31 percent. Residential natural gas prices over the same period
are projected to average $15.58 per Mcf compared with $12.72 per Mcf, during the last
heating season, an increase of about 22 percent.
Yes, dear reader. The circus will not change, until we change the clowns. It took me all my
life to find this out, and to develop the vision to see what lies ahead. As I have been saying
for a year in these newsletters, it will not be short lived or pretty for Americans. Everybody,
sooner or later, sits down to a banquet of consequences. Ours are at hand.
"No fathers or mothers think their own children ugly; and this self deceit is yet stronger with
respect to the offspring of the mind."
Miguel de Cervantes
"Criticism may not be agreeable, but it is necessary. It fulfils the same function as pain in the
human body. It calls attention to an unhealthy state of things."
Winston Churchill
Another week has passed. Your letters keep me on my toes and sharpen my wit. We will
need all the wit in the world, to navigate what is being thrown at us. Contact us if you think
we can be of help, or if you think you may be of help. Next week is just around the corner.
My kindest regards,
Jose Cavaliere
cavaliere@cavalierecapital.com
Nothing in this e-mail should be considered personalized investment advice. Although our
employees may answer your general customer service questions, they are not licensed under
securities laws to address your particular investment situation. No communication by our
employees to you should be deemed as personalized investment advice.
The information in this newsletter has been gathered from a number of sources including the
mainstream media such as The Wall Street Journal, the Associated Press, the Financial
Times, as well as CCC's own insights, industry relationships, and analysis of this and other
data.
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