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WEEKLY NEWSLETTER VOL 3 ISSUE 15
Monday, April 13, 2009 7:33 AM
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WEEKLY LATIN AMERICA PETROLEUM, SUGAR-BASED
ETHANOL, and ECONOMICS NEWSLETTER.
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Sunday, April 12, 2009. VOL 3 ISSUE 15.
--PETROBRAS ANNOUNCES PIRACUCA COMMERCIAL OIL FIND.
--IRAQ INVITES PETROBRAS TO BUILD MID-SIZE REFINERY.
--VENEZUELA AND JAPAN SIGN ENERGY AGREEMENTS.
--COLOMBIA AND VENEZUELA TO BUILD GAS PIPELINE.
--PETROBRAS TO EXPLORE IN URUGUAY.
--IRAN TO DEVELOP RESERVES IN VENEZUELA.
--ECOPETROL DISCOVERS NEW RESERVES.
--COSAN RISES TO SIX-MONTH HIGH ON PETROBRAS SPECULATION.
--INDONESIA TO PRODUCE SUGAR-BASED ETHANOL.
--BRAZILIAN STATE OF S.P. TO INCREASE ETHANOL CONTENT IN GASOLINE.
--ETHANOL PRICES IN COLOMBIA TO DROP.
--PETROBRAS INAUGURATES BIODIESEL PRODUCTION FACILITY.
--CONTINUING JOB CLAIMS HIT NEW RECORD.
--BUDGET DEFICIT TRIPLES TO $957 BILLION FOR FIRST 6 MONTHS OF YEAR.
--SELLING WORTHLESS ASSETS TO EACH OTHER. (My opinion)
PETROBRAS ANNOUNCES PIRACUCA COMMERCIAL OIL FIND
IRAQ INVITES PETROBRAS TO BUILD MID-SIZE REFINERY
Brazil's government-controlled energy giant Petrobras (PBR) announced Monday night a
commercial oil and natural gas find in the Santos Basin 200 kilometers off the coast of Sao
Paulo state.
In a statement filed with the Brazilian Securities and Exchange Commission, or CVM,
Petrobras said the well, called Piracuca, holds estimated light oil and natural gas reserves
equal to 550 million barrels of oil.
The well, also known as BM-S-7 under the nomenclature of the government's National
Petroleum Agency, is controlled by Petrobras, which holds a 63% stake in the site. Spain's
Repsol (REP) holds 37%.
Petrobras said further studies are necessary to determine the best methods for extracting
the oil and gas.
Petrobras had previously registered evidence of oil and gas at the BM-S-7 site with Brazilian
authorities. On Monday night, the company's filing indicated, for the first time, the presence
of commercially viable reserves.
IRAQ INVITES PETROBRAS TO BUILD MID-SIZE REFINERY
Brazilian government-controlled energy company Petrobras (PBR) has received an invitation
from Iraq's government to build a mid-sized oil refinery in that country, Petrobras said
Thursday in a statement.
"Iraq has invited Petrobras to participate in joint projects in that nation. All proposals will be
evaluated by the company. Petrobras is always open to evaluating new business proposals,"
Petrobras said in its statement.
Iraqi Planning Minister Ali Ghalib Baban invited Petrobras to participate in the building of an
oil refinery with a daily capacity of at least 200,000 barrels, a Petrobras official who asked
not to be named told Dow Jones Newswires.
On Wednesday, Baban met with Petrobras Chief Executive Jose Sergio Gabrielli and the
company's head of international affairs, Jorge Zelada.
Petrobras will create a committee to study the issue, the company said.
Among the alternatives provided by the Iraqi government is the option for Petrobras to build
the refinery alone or through a joint venture. Petrobras operated in Iraq in the 1970s, but
left the nation when war broke out between Iraq and Iran in the 1980s.
VENEZUELA AND JAPAN SIGN ENERGY AGREEMENTS
The presidents of both countries announced last week that the countries' relations in areas
such as energy, investments and commerce would be strengthened, with the participation of
Japanese companies in the production of oil and gas in the country.
President Hugo Chavez of Venezuela stated that the countries would sign seven bilateral
agreements in areas of common interest, especially in the energy sector. Among them is an
agreement for Japanese companies to participate in the Junin 11 block, in the Orinoco belt.
This "assures about 30 billion barrels of oil with an extraction cost of only $1.50," he said.
The governments of both countries also agreed to form working groups with the objective of
having Japanese companies perform infrastructure projects, said Chavez after a meeting
with Taro Aso, Japan's Prime Minister.
The agreements will also involve the expansion of railways, roads, and housing, said Chavez,
who is on a visit to Asia.
According to the Agencia Bolivariana de Noticias (ABN), besides the projects, "teams from
both countries will evaluate all possibilities for cooperation in areas such as economics,
technology and science.
COLOMBIA AND VENEZUELA TO BUILD GAS PIPELINE
Colombia and Venezuela are to hold a bilateral meeting this coming week, in order to agree
on terms and details regarding a natural gas pipeline from Venezuela, that will provide
Colombia with natural gas beginning in 2012.
The meeting, to take place this coming Tuesday in Caracas, is being held because the
Colombian Energy Minister is concerned with the delays in construction.
"We have the perception that they are late, but I have to confirm this at the meeting that we
will hold over there," said Colombia's Minister of Mines and Energy, Hernan Martinez,
according to El Nacional.
The Colombian Minister spoke in New York regarding the current situation and prospects for
the energy sector in his country, during a meeting organized by the Colombian-American
Association.
During the meeting, the Minister was optimistic about the future of the petroleum market
and crude prices, despite the economic crisis. He expects crude prices to soon reach $60.
Moreover, he stated that $47 billion in investments would be made during the next six years
in the energy and mining sectors, in Colombia.
PETROBRAS TO EXPLORE IN URUGUAY
Petrobras intends to invest $30 million at first to begin its exploration efforts in Uruguay.
The Brazilian petroleum company was the only one in the region to purchase a package of
information from Ancap, so two months later its efforts begin.
Carlos Varella, the president of Ancap, stated that "we can say with certainty that Petrobras
will participate in the E & P phase of the Uruguay Round."
According to Varella, just one exploration well offshore Uruguay will cost Petrobras about $35
million."
Moreover, the Brazilian company plans to invest another $15 million this year in Uruguay, in
order to improve its retail gas stations, for pipeline extensions and maintenance.
In addition, Petrobras will invest in a plant to mix propane with air in Paysandu, which will
allow for residential and industrial sales.
Petrobras began to operate in Uruguay in December of 2004, by distributing natural gas in
the interior of the country, and then it formed a partnership with the state-owned petroleum
company Ancap, according to El Pais.
IRAN TO DEVELOP RESERVES IN VENEZUELA
The governments of Iran and Venezuela signed an agreement in which Iranian petroleum
company Petropars, will develop a new crude oil discovery in the South American country.
According to the company, the agreement also includes the creation of a maritime
transportation company, to transport the crude oil from Venezuela.
The contract was signed last weekend in Tehran, between Iranian president Mahmud
Ahmadineyad and his Venezuelan counterpart, Hugo Chavez, according to a report in
Venevision.
Moreover, according to ministers of both countries, a plan to construct two refineries, one in
each country, is being investigated.
Iran is presently developing the Ayacucho field, in the Venezuelan jungle.
During Chavez's visit to Iran, nine cooperation agreements were signed in the areas of
energy, finance and production.
ECOPETROL DISCOVERS NEW RESERVES
The Colombian state petroleum company Ecopetrol announced last week the discovery of
new crude deposits in Putumayo, to the Southeast of the country, with an initial production
capacity of 300 bpd.
This is Ecopetrol's first discovery this year. The discovery was made at an exploration well
called Quriyana-1.
"Natural production is estimated to be 300 bpd, but this may be increased by the use of
artificial lifting technology," said an Ecopetrol press release.
A spokesman for the company stated that soon technical studies would commence, to
establish the extent of reserves.
Ecopetrol is Colombia's largest company and it generates more than 60% of the national
hydrocarbon production in the country, and has E & P operations in Brazil, Peru, as well as
the U.S. Gulf of Mexico.
Colombia's petroleum production increased in 2008 to 588,000 bpd.
COSAN RISES TO SIX-MONTH HIGH ON PETROBRAS SPECULATION
Cosan SA Industria & Comercio, the world's biggest sugar-cane processor, rose to a sixmonth high in Sao Paulo on a media report it's seeking a partnership with Brazilian statecontrolled oil company Petroleo Brasileiro SA.
Cosan gained 9 percent to 14 reais in Sao Paulo trading, the highest since Sept. 26. The
shares have rallied 45 percent in the past five days.
Billionaire Cosan controlling shareholder Rubens Ometto is seeking funds from Petrobras and
the National Bank for Economic and Social Development to boost the company's assets, Rio
de Janeiro-based newsletter Relatorio Reservado said last week, without saying where it got
the information. Petrobras may be looking for a partnership with Cosan to export ethanol to
Japan, Global Equity Administradora de Recursos' Mariana Goncalves said.
"The news floating around is that Petrobras is interested in creating a private company that
would sell ethanol to Japanese markets," Goncalves, an equity analyst at Global in Rio de
Janeiro, said in a telephone interview. "That company would be managed by Cosan."
Petrobras's head of biofuels, Alan Kardec, said April 3 that the oil company is seeking
partners and assets to boost ethanol output in the South American country. The partners
would help Petrobras start new projects or buy existing ethanol mills.
INDONESIA TO PRODUCE SUGAR-BASED ETHANOL
Indonesia is planning to increase sugar cane cultivation by 3.5 million hectares during the
next 20 years, as well as modernizing its sugar/ethanol industry, and introduce flex-fuel
vehicles into its market.
With this plan Indonesia intends to reduce its dependency on fossil fuels and to become
another biofuels producer in the world, according to Paulo Camiz de Fonseca, Indonesia's
Consul in Sao Paulo.
Last Wednesday Fonseca brought an Indonesian delegation to UNICA, in order to obtain
more information and data regarding Brazil's ethanol development model, which will be used
as a basis for that country's own plan.
Indonesia has already created legislation mandating ethanol in the gasoline, which presently
may vary from 3% to 5%. "The next steps are to form relationships with Brazilian
companies, both to import ethanol from them, as well as to form joint ventures with them in
Indonesia," he said.
BRAZILIAN STATE OF S. P. TO INCREASE ETHANOL CONTENT IN GASOLINE
The government of the State of Sao Paulo is requesting an increase in the content of
anhydrous ethanol in the gasoline, from the present 25% to 30%. The purpose is to utilize
more ethanol, since its prices have decreased since June of 2004. In the last two months,
producer hydrated ethanol prices dropped by 31.1%, while anhydrous prices dropped by
21.3% in Sao Paulo state.
ETHANOL PRICES IN COLOMBIA TO DROP
The price of a gallon of ethanol in Colombia is expected to drop significantly because of a
recent decision by the Ministry of Mines to modify the formula used to set its price.
The government has decided that when setting prices to be paid to the ethanol producers in
the country, the price of sugar refined for export will no longer be considered.
This will mean reduced revenues for ethanol producers in the country, since refined sugar
has a higher price.
In March, ethanol prices in the country were $3.20 per gallon, but with this change the price
is expected to drop to about $2.50 per gallon.
The new law has provoked a lot of debate in the country's sugar industry, since it may
change the ethanol model in the country.
The ex co-director of the Banco de la Republica, Salomon kalmanovitz, said that the
government decided to change the formula last October, because ethanol producers were
receiving large additional revenues.
Kalmanovitz says that Colombian ethanol is more expensive than the Brazilian ethanol which
could be imported, and because of this, retail gasoline prices to the consumer have not
dropped, according to La Republica.
PETROBRAS INAUGURATES BIODIESEL PRODUCTION FACILITY
Last week Petrobras inaugurated the Darcy Ribeiro biodiesel production facility, in the
Brazilian state of Minas Gerais. With a total cost of R$95 million ($43.2 million), and a
production capacity of 57 million liters of biodiesel per year, the new plant is joining two
others already operating in the states of Bahia and Ceara, thus increasing total capacity to
170 million liters of biodiesel per year.
CONTINUING JOB CLAIMS HIT NEW RECORD
First-time claims for state unemployment benefits dipped a seasonally adjusted 20,000 to
654,000 in the week ended April 4, reaching a level that is 83% higher than the same period
in the prior year, the Labor Department reported Thursday. The four-week average of these
initial claims fell 750 to 657,250. For the week ended March 28, the number of people
collecting state unemployment benefits reached yet another new record, gaining 95,000 to
5.84 million - double the level in the prior year. These continuing claims have gained for 12
consecutive weeks, and have reached new weekly records since late January. The four-week
average of continuing claims rose 146,750 to a record 5.65 million. The insured
unemployment rate - the proportion of covered workers who are receiving benefits - rose to
4.4% from 4.3%, reaching the highest level since April 1983.
BUDGET DEFICIT TRIPLES TO $957 BILLION FOR FIRST SIX MONTHS OF YEAR
March deficit hits $192 billion has receipts drop 28%, outlays rise 41%
The U.S. federal budget deficit rose to a record $956.8 billion in the first six months of the
fiscal year after the government stepped up spending to cope with a recession that has
depressed tax receipts, the Treasury Department reported Friday.
The deficit is well on its way to the $1.75 trillion -- or 12.3% of gross domestic product -that the White House has estimated for the full fiscal year, which ends in September.
The deficit through the first six months is more than three times higher than it was at this
time last year. The government has borrowed $1 trillion from the public so far this fiscal
year.
In March, the deficit widened to $192.3 billion from $48.2 billion in March 2008. Outlays rose
41% to $321.2 billion from $227 billion, while receipts dropped 28% to $129 billion from
$178.8 billion.
The government has borrowed $1 trillion from the public so far this fiscal year.
Receipts from individual income taxes fell 27% in March, versus year-earlier figures.
Individual refunds are up 14% so far this year. Compared with a year earlier, corporate
income tax receipts fell 90% to $3.4 billion.
Much of the increase in outlays in March came from extraordinary investments by the
government in banks and Fannie Mae and Freddie Mac, loans to credit unions, and increased
spending from the stimulus package for unemployment insurance and Medicaid. Some of
those investments should be repaid over time, but the government is booking them as cash
expenses for now.
In March, Fannie Mae received $15.2 billion, Freddie Mac received $30.8 billion, and
unemployment benefits totaled $10.6 billion.
Through the first six months of the fiscal year, outlays are up 33% to $1.95 trillion. Receipts
are down 14% to $989.8 billion. Corporate income taxes are down 57% to $56.2 billion,
while individual income taxes are down 15% to $429.7 billion. Payroll taxes are up 0.3% to
$430 billion.
SELLING WORTHLESS ASSETS TO EACH OTHER! (My opinion)
We just learned this week that life insurers have joined the seemingly endless line of
companies seeking — and getting — government-funded bailouts. The Treasury Department
is going to infuse capital into life insurance firms that are organized as bank holding
companies or that own a thrift subsidiary. Many of those firms have seen their share prices
plummet and their investment portfolios come under pressure.
Sallie Mae says it is ADDING 2,000 jobs. But wait...2,000 jobs isn't really very many. And
who are they employing? Debt collectors?
"Consumers fall behind on loans at record rate," says a headline in USA Today.
A record number of consumers are falling delinquent or into default on their loans, a problem
that some economists say will only get worse this year.
A record 4.2% of consumer loans were delinquent at least 30 days in the fourth quarter, the
latest data available, according to the Federal Reserve. Another 4% of consumer loans were
in default, meaning they'd been written off by lenders.
Recent data from the American Bankers Association and Moody's rating agency show the
same sobering trend: More consumers are paying late - or not at all - on home, car and
credit card loans.
Job losses are closely correlated to loan defaults, economists say. And as more people
become unemployed, they're increasingly giving up on loan payments.
Credit card debt has just taken its biggest plunge in 32 years...maybe ever. Credit card
balances fell 9.7% in February. And the number of open credit card accounts is going down
too.
"Mortgage delinquencies soar in the US," says a Reuters article. Remember, delinquencies
are the beginning of the process. Then come foreclosures and auctions - all eventually
driving housing prices down further.
John Williams of ShadowStats.com has been persistently providing us with more accurate
data than the government's official data on inflation and unemployment, among other key
measures.
His latest estimate of the true March unemployment rate in the United States: 19.8 percent!
Williams points out that:
"The pattern of impossible biases being built into the headline monthly payroll employment
continued with March 2009 reporting. Instead of the headline jobs loss of 663,000,
consistent application of seasonal-adjustment factors would have shown a more-severe
monthly jobs loss of about 750,000. This upside reporting bias has been seen in 11 of the
last 12 months, with a rolling 12-month total upside headline-number bias of 1,345,000."
The proof: In every single one of its six most recent monthly payroll reports, the BLS has
announced massive upward revisions in prior months' job loss numbers — with five of those
even exceeding its own guidelines for the acceptable margin of error (plus or minus 5
percent).
"The severity and breadth of the job losses in March — which afflicted nearly every industry
outside of health care — prompted economists to conclude that an agonizing plunge in
employment prospects was still unfolding."
The New York Times
Singapore's total employment jumped 8.1 percent in 2008, including a 58 percent gain in
construction employment.
In Hong Kong, luxury property prices are on the rise again, climbing 2.1 percent so far this
year, while property transactions overall jumped nearly 60 percent over February's pace.
China's retail sales for January and February jumped 15.2 percent overall, with urban sales
up 14.4 percent and rural sales up 17.0 percent.
Auto sales in China surged 25 percent in February from a year earlier to 827,600 vehicles.
Sales of LCD screens for TV's are projected to top 113 million units, up more than 20 percent
from 2008, while LCD notebook panels will grow to 177 million units, up 26.6 percent over
2008.
Home sales in Shanghai totaled 1.5 million square meters in March, a whopping 91 percent
increase over January.
The Fed reported in March that households lost $5.1 trillion, or 9 percent, of their wealth in
the last three months of 2008. That's the most ever for a single quarter in the 57-year
history of record keeping by the central bank. For the full year, household wealth dropped
$11.1 trillion, or about 18 percent. That's the largest decline EVER recorded.
Banking analyst Meredith Whitney , who called the bank bubble quite loudly when many
others ignored it, was forecasting that nervous bankers would eliminate at least $2 trillion of
available credit on credit cards by the end of next year. That was six months ago. Now, she
thinks she underestimated the cutback and has revised the number to $2.7 trillion (about
half of available credit). The effect of those cutbacks on already anxious consumers is bound
to be enormous.
A bank analyst at Caylon Securities issued a loud warning earlier this week when he
predicted that the percentage of loans that American banks will need to write off in the next
few years will exceed levels during the Great Depression.
Here is how he described what's coming:
"The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust
for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and
anger of regulators."
The foreclosure wave is about to surge. Any realtor with a brain knows that the Freddie Mac
and Fannie Mae moratorium on foreclosure-evictions established in November expired on
March 31. You're going to see five months of pent up foreclosures hit the market in the next
few months.
Home prices continue to plummet. And every real estate agent must know that the S&P
Case-Shiller 20-city housing price index has dropped for 30 months in a row and the most
recent numbers showed the largest drop in history by falling 2.8 percent in just the last 30
days on top of a 19 percent drop in the last 12 months.
On Tuesday CNBC did a feature story on home sales in foreclosure central - California. In
one suburb outside Stockton, where one out of every 67 homeowners received a foreclosure
notice last month, new home inventories miraculously plummeted from 130 to just 17. One
builder went from four sales in five months to nine sales in one month. Tax incentives
definitely played a role. Nevertheless, the trend jives with the latest overall market data.
Recall, new homes sales jumped an unexpected 4.7% in February.
Another positive - lumber prices, a leading indicator for the housing market, rebounded
roughly 30% in the last three weeks. (The housing market accounts for two thirds of lumber
consumption.)
Five banks announced they returned money given to them under the TARP program. And the
TED Spread - a key indicator of perceived credit risk in the economy - is back below 100
basis points (bps) after peaking last October at 464 bps. (Keep in mind, the historical
average TED spread is 30 basis points, so there's still a ways to go.)
Wells Fargo Wholesale Lending, is changing their minimum credit score requirements for
conventional loans from 620 to 720, a reduction in debt-to-income ratios from 45% to 41%,
and an increase from 80% to 85% loan-to-value for cash-out refinances. These changes are
likely due to pressure from the Private Mortgage Insurance companies, who are looking to
reduce their risk of loss.
Also, we are seeing an increase in the default rate for FHA loans. The default rate has
recently risen from 5% to 7%. Default is defined as either 90 days overdue or already in
foreclosure. If this continues, taxpayer dollars may have to be used to subsidize the FHA
mortgage insurance program for the very first time. Said HUD Secretary Shaun Donovan,
"We should, within a few weeks, be able to present to you our estimates of whether (or not)
it will be self-financing."
The U.S. Treasury Department has just announced that, in response to pleas from insurance
companies, it's expanding its TARP bailouts to include insurers who made terrible choices
and are now twisting in the wind.
They say they've made so many dumb investments, they can't possibly survive unless
Washington takes more money from you — and gives it to them!
The Financial Times tells us that U.S. banks that have received government aid, including
Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying
toxic assets from other banks. So what's to prevent all these banks from overpaying for each
other's assets with our money ... overpayments that would leave Uncle Sam holding the
bag?
Absolutely nothing that I can see.
US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan
Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals
[emphasis mine] under the Treasury's $1,000bn (£680bn) plan to revive the financial
system.
Spencer Bachus, the top Republican on the House financial services committee, vowed after
being told of the plans by the FT to introduce legislation to stop financial institutions "gaming
the system to reap taxpayer-subsidized windfalls."
Mr. Bachus added it would mark "a new level of absurdity" if financial institutions were
"colluding to swap assets at inflated prices using taxpayers' dollars."
Now, what are they really trying to do? Here is a simple explanation by Justice Litle:
Imagine, for a moment, that I have a beat-up old mini-fridge in the back of my garage. It
has a coolant leak, it's a little moldy, and it smells like stale beer, but I'm pretty sure it still
works.
Meanwhile, you happen to be in possession of a rusty old lawn mower. The blade is caked
beyond recognition with fossilized grass clippings, the gunk that passes for oil has never
been changed, and the thing takes twenty or thirty pulls to start... but you, too, are fairly
certain your lawn mower "works."
Now imagine that you and I make a deal. I will sell you my disgusting mini-fridge for the
princely sum of a hundred thousand dollars. You, in turn, will sell me your ancient lawn
mower for a hundred thousand dollars. I write a six-figure check out to you, and you write a
six-figure check out to me.
Nothing's really happened, right? All we've done is swap two crap assets, neither one worth
fifteen bucks in the real world, and furthermore swapped an identical large chunk of change
($100,000) between our respective bank accounts.
But hold on! Did I mention that we both employ highly creative accountants?
Here's the good news about our little swap. Thanks to our exchange, I can record a massive
profit on my books... to the tune of $99,900, or whatever sum is left over above and beyond
the book-entry carrying cost for my fridge. And you can do the same with your lawn mower.
In the real world, the only thing that happened is junk got swapped with junk. In fantasyland accounting world, however, you and I both just conjured up fantastic profits out of thin
air.
And it gets even better... did I mention that the government has generously granted me a
non-recourse loan in order to provide the funds with which to buy your $100,000 lawn
mower?
I didn't actually have to move $100K out of my bank account and into yours, because
$93,000 of it was covered by government loan. The same privilege was extended to you, of
course.
And of course the proceeds of my loan were sent to you as cash... and the proceeds of YOUR
loan were sent to ME as cash... which means the wonderful taxpayer ponied up TWICE – to
the tune of $186,000 – to fund our little phantom transaction with real dollars.
See how great this is? We swap crap assets worth zilch, pretending they are actually worth
$100,000... we record a massive profit on our books... and we collect real profit in the form
of a $93,000 handout to both of us (the non-recourse loan).
Of course, someone will eventually scratch their head (just like Kenny boy's farmer) and say,
"Hey. We don't have anything worth $100,000 here. We've got a disgusting mini-fridge and
a rusty lawn mower."
But by the time that happens, you and I will be in clover... and by definition we never had to
pay back the loans anyway! Aren't giant handouts grand?
To understand what the banks plan to do under the guise of the PPIP "rescue plan" by way of
swapping toxic assets with each other, simply replace "mini-fridge" and "lawn mower" in the
above example with "toxic asset A" and "toxic asset B."
Then up the scale from $100,000 to hundreds of billions – all the way up to a cool trillion
maybe – and there you go.
Writing for voxeu, Barry Eichengreen of the University of California, Berkeley, and Kevin H.
O'Rourke of Trinity College Dublin say: "Globally we are tracking or doing even worse than
the Great Depression, whether the metric is industrial production, exports or equity
valuations. Focusing on the US causes one to minimize this alarming fact. The 'Great
Recession' label may turn out to be too optimistic. This is a Depression-sized event."
Influential analyst Mike Mayo assigned an "underweight" rating to U.S. banks, Reuters
reported. Saying loan losses may exceed Great Depression levels and the government may
be forced to take over large lenders, Mayo advised clients to sell shares of banks. Mayo
gained recognition in 1999 at Credit Suisse AG (ADR: CS), for correctly taking a bearish
stance on bank stocks when other analysts remained bullish.
Chris Kotowski, an Oppenheimer & Co. (OPY) analyst, said Bank of America Corp. (BAC)
needs to raise $36.6 billion in equity to align capital ratios with those of its competitors.
Kotowski also cut the bank's quarterly earnings estimate to 2 cents a share from 10 cents
because of higher than expected credit card and loan losses, Bloomberg reported.
Sales at U.S. wholesalers rose 0.6% in February, the increase in eight months, the
Commerce Department said yesterday (Wednesday) in Washington. The surge led to a 1.5%
decrease in the value of inventories, a record drop that indicates distributors are well on
their way to eliminating the glut in stockpiles. At the current sales pace, it would take 1.31
months for distributors to deplete the amount of goods on hand, the lowest since November.
When inventories decrease, any stabilization in demand translates into a pickup in orders
and production, Bloomberg reported.
Royal Bank of Scotland plc (ADR:RBS) said it may eliminate as many as 9,000 additional
jobs to curb costs and repay $3.7 billion in government bailout money over the next three
years. The bank said the actual number of losses may be "significantly lower" because of
efforts to shift employees to new positions, Bloomberg reported.
The number of delinquent mortgages rose 7% in February, with 39.8% of subprime
borrowers at least 30 days behind on their mortgage payments, Dann Adams, president of
U.S. Information Systems for Equifax Inc, told Reuters. "I'm trying to find optimism in these
numbers, but I'm pretty hard pressed to do that," Adams said.
A survey of U.S. chief executives released last week (Tuesday), showed two-thirds plan
additional layoffs and expect sales to decline in the next six months as their confidence in
the economy continues to fall, Reuters reported. The Business Roundtable's quarterly CEO
Economic Outlook Index fell to negative 5 - the first negative reading in the survey's six-year
history - and down from a fourth-quarter reading of 16.5. Readings below 50 means CEOs
expect contraction rather than growth.
The word "unprecedented" seems too weak to convey just how much money is being printed
and/or borrowed to buy off the recession. So, when will all this money start showing up as
higher prices at the supermarket and shopping mall? And when will gold react to this bumper
crop of paper?
The historical record indicates that a surge in money growth has its peak effect on economic
activity about 9 to 18 months later. Add another 12 months or so for the peak effect on
consumer price inflation. In other words, the Federal Reserve is always driving with a loose
steering wheel. Most of the experience behind those numbers is with relatively tame ups and
downs in the business cycle - not the kind of financial violence we've been seeing lately which adds another variable. And on top of that, the numbers are about peak effect, not
initial effect.
So the timing remains uncertain. But what we do know is that there are clear and
unavoidable consequences to wildly energetic money creation, including, sooner or later,
rampant price inflation.
The United States can't wait out a correction in comfort. Its people have debts, not savings.
Deflation doesn't make them richer; it makes them poorer. And in order to pay their bills,
they have to cut spending and increase saving. This puts further downward pressure on the
economy and creates a very uncomfortable situation for Americans. The more they save to
pay their debts, the more the economy contracts. The more it contracts, the less revenue
they have available to save.
Yes dear reader. The stock market may be going up, but the trouble is far from over. In fact,
I think things are still going to get far worse.
Here are a few quotes which I think merit your attention:
"People in this country don't realize how bad things can be. I lived through the Great
Depression. I remember people standing in bread lines. It was hard to get a job, any job,
back then. But now, you see the restaurants are still full. People are still spending money.
They may be worried and they may be beginning to save, but there's no sense of urgency.
And there's a rally on Wall Street. You know, every bear market produces a rally. You can
expect the market to retrace its steps by one- to two-thirds. And every bear market has a
surprise. I think the surprise is that this is going to be a lot worse than people expect."
Richard Russell is 84. He's been writing his investment newsletter, Dow Theory Letters, for
50 years.
"Why was someone as compromised as [Lawrence] Summers made the White House's point
man overseeing $2.86 trillion in bailout funds to the financial moguls whom he had enabled
in creating this mess and many of whom had benefited him financially? Will no congressional
panel ever quiz Summers about his grand theory that the derivatives market required no
government supervision because, as he testified to a Senate subcommittee in July of 1998,
'the parties to these kinds of contracts are largely sophisticated financial institutions that
would appear to be eminently capable of protecting themselves from fraud and counterparty
insolvencies.'"
—Robert Scheer, Creators.com
"After 35 years in America, I never thought I would see this. I still can't quite believe we will
sit by as this crisis is used to hand control of our economy over to government. But here we
are, on the brink. Clearly, I have been naive."
Stuart Varney, Wall Street Journal
"The debt crisis is much greater than the government has reported. The FDIC's 'Problem List'
of troubled banks includes 252 institutions with assets of $159 billion. The updated review by
Weiss Research, however, shows that 1,816 banks and thrifts are at risk of failure, with total
assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in
the prior quarter."
Martin Weiss
"Banks are on a prayer mission that somehow prices will come back and they won't have to
face reality... Unemployment is going over 10%, commercial real estate hasn't even begun
collapsing and corporate credit defaults are just getting started."
Andy Beal (Billionaire owner of Beal Bank)
Beal further thinks as many as 4,000 more banks would fail if they were forced to provide a
true accounting of their toxic-asset-ridden balance sheets. These banks have seen a shortterm fix in the suspension of mark-to-market accounting rules (as noted yesterday), but that
doesn't improve their true health.
It is important to note that no nation in recorded history has ever bailed itself out for
anything other than a short-term basis by printing money the way we are. We're gaining
liquidity at the expense of value.
This crisis has never been about a lack of liquidity. It's been entirely fabricated because there
was too much easy money out there and too little control over it. The end result is
extraordinary inflation and that's what Central Bankers are risking.
We have been reduced to a situation where the government is encouraging the banks to use
creative accounting and instigating the sale of worthless assets to each other, with federal
guarantees. The taxpayers are sure to lose, while the big players gain. If you think I have
this wrong, please show me what I am missing.
All my best,
Jose Cavaliere
cavaliere@cavalierecapital.com
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