Monday, June 30, 2008
June 30, 2008
Falling Prices Grip Major Stock Markets Around the World
By CARTER DOUGHERTY
FRANKFURT — As the United States markets edge toward bear territory, losing nearly 20 percent of their value from last fall’s peak, investors might wonder where they can turn for relief.
The gloomy answer: nowhere.
Many of the major markets in Europe and around the world have already entered a bear market. Germany and France are among the markets suffering the most, and once high-flying emerging markets in countries like China and India have collapsed even more drastically.
Higher inflation, exploding energy costs, troubled credit markets and worries about an inflationary psychology, it turns out, are global concerns. And fixing these problems — and bringing optimism back to stock markets worldwide — is proving to be difficult for central bankers, who are trying to contain inflation without risking even slower growth.
“The recent downturn in equities is essentially about investors worrying that central banks are going to be tougher than anyone had expected,” said Erik F. Nielsen, chief Europe economist at Goldman Sachs.
The market numbers are uniformly grim.
In Europe’s largest economy, Germany, the benchmark DAX index is off slightly more than 20 percent this year, and the CAC-40 in France is down almost 22 percent. The Euro Stoxx 50, a gauge for the 15-nation euro zone, has declined by about 24 percent. The nearly 15 percent decline in the FTSE 100 in Britain looks tame by comparison.
Emerging market indexes have fared even worse. The Hang Seng in Hong Kong has plunged nearly 21 percent, the Shanghai Composite has lost nearly half its value this year. The Bombay 500 in India lost about 38 percent.
The declines at major stock markets worldwide suggest that the same economic concerns are in play: rising inflation, which has been caused for the most part by record oil prices. Oil hit a new high of $140.21 a barrel on Friday.
And central banks around the world, including the United States, are indeed moving to head off resurgent inflation by raising interest rates. While such a move can contain inflation, it can also squelch growth. Indeed, the likelihood of higher interest rates has already been fueling the market sell-offs as investors around the world try to digest all manner of bad economic news.
In Australia, inflation is running near its highest level in 16 years, and in March the central bank raised the benchmark lending rate to a 12-year high. The People’s Bank, China’s central bank, tightened credit again this month by raising banks’ reserve requirements for a second time. China is struggling to control inflation without hurting its fast-growing economy; the same story is playing out in Indonesia and India.
On Sunday, the world’s top central bankers began a two-day meeting in Basel, Switzerland, where they were considering approaches to calm nerves about inflation while avoiding a shock to economic growth. The United States is near or in recession, while growth is fading in Europe.
On Thursday, the European Central Bank may take matters into its own hands. In all likelihood it will raise its benchmark interest rate by a quarter percentage point, to 4.25 percent, hoping to curb inflation of both food and energy prices. Prices in the 15-nation euro area rose by 3.7 percent in the year through May, nearly double the bank’s informal goal of just below 2 percent.
The Federal Reserve appears poised to follow suit. Last week the central bank voted to hold the short-term federal funds rate steady at 2 percent, ending a series of rate cuts. But it also hinted strongly that worries about inflation might compel it to raise the rate later this year. The rate affects what consumers pay for mortgages, car loans and other credit.
“Europe tends to paint this in black and white,” said Ethan S. Harris, chief United States economist at Lehman Brothers in New York. “In the U.S., the balancing act is going on.”
The absence of a unified global strategy for calming inflation has not been lost on investors who are searching for an anchor of stability, and coming up short.
“When you have central banks around the world doing different things — following a different road map — that can be problematic,” said Quincy Krosby, chief investment strategist at The Hartford, a financial services firm.
Then there is the politics.
The European Central Bank’s decision to get out in front is being debated in Europe, where growth is cooling under the pressure of oil prices, the strong euro, and fading demand in the United States. The bank’s primary mandate is to keep inflation low, but that does not stop European politicians from worrying about growth.
Oil prices, while an enormous factor in the decision-making that will go on this week in Europe, are only part of the calculation. A more generalized inflation, feeding through to consumer prices and influencing demands for higher paychecks, also deprives businesses of the confidence that they had until recently about how to make decisions on building factories, hiring employees or developing products.
“The longer inflation remains high, the more damaging it will be for longer-term economic growth prospects,” Morgan Stanley wrote in a report about inflation creeping upwards worldwide. “High inflation rates usually go hand-in-hand with a higher variability of inflation, which raises uncertainty and can thus reduce investment spending.”
Stock market volatility caused by inflation worries has also complicated the pressing task of recapitalizing banking systems, above all in the United States but also in Europe.
As equity markets crumble, much-needed recapitalizations “become more and more difficult” because investor appetite for new sales of shares declines, Mario Draghi, the Italian central bank chief, who heads global efforts to reform financial regulation, said last week. Efforts to overcome the credit squeeze, in other words, have become hostage to the economic slowdown that the squeeze helped create.
Charles Duhigg and Michael Grynbaum contributed reporting from New York.
When I was in India for my brothers wedding around Dec 3rd 2007 (seems like ages ago), I advised my uncle Shirish (who is a stock broker) to treat the Indian stock market which then was rising 500 points each day with extreme suspicion. Looking back, it seems like I was right. With the Indian market down 38% - your average investment of 100 dollars in India is now worth 62 dollars from the start of 2008! If I had more guts, I would have gone short (the opposite of going long or buying) the Indian ETF. I have been short the Russell 2000 index in the US since the end of May by investing in TWM. The good news is that India like China will eventually turn around and create a buying opportunity of a life time.
shows the "average economic and social ideology of adults within each state ... scaled so that negative numbers are liberal and positive are conservative""
In the graph below, each state is shown twice: the avg social and economic ideologies of Democrats in the state are shown in blue, the avgs for Republicans in red.
Democrats are much more liberal than Republicans on the economic dimension: Democrats in the most conservative states are still much more liberal than Republicans in even the most liberal states. On social issues in any given state, the average Republican is more conservative than the average Democrat.
New Milk jugs are optimized in shape for better transportation economics. Environmentally friendly etc. The secondary effects of higher gas prices are here. The ongoing debate in the markets is if the rise in price of crude related to supply (Peak Oil) or to speculation. This current oil price shock has its genesis in several things: Bush / Cheney, 911, Saudi Arabia, OPEC, Speculation, The Federal Reserve, The US dollar, Chindia to name a few of the actors. Higher energy prices are fine with liberals as it forces a secular environmentally friendly change. And ofcourse commodities are the only area on Wall Street currently in a bull market.
Friday, June 27, 2008
June 27, 2008
The Sam’s Club Agenda
By DAVID BROOKS
Among the many dark tidings for American conservatism, there is one genuine bright spot. Over the past five years, a group of young and unpredictable rightward-leaning writers has emerged on the scene.
These writers came of age as official conservatism slipped into decrepitude. Most of them were dismayed by what the Republican Party had become under Tom DeLay and seemed put off by the shock-jock rhetorical style of Ann Coulter. As a result, most have the conviction — which was rare in earlier generations — that something is fundamentally wrong with the right, and it needs to be fixed.
Moreover, most of these writers did not rise through the official channels of the conservative or libertarian establishments. By and large, they didn’t do the internships or take part in the young leader programs that were designed to replenish “the movement.” Instead, they found their voices while blogging. The new technology allowed them to create a new sort of career path and test out opinions without much adult supervision.
As a consequence, they are heterodox and hard to label. These writers grew up reading conservative classics — Burke, Hayek, Smith, C.S. Lewis — but have now splayed off in all sorts of quirky ideological directions.
There are dozens of writers I could put in this group, but I’d certainly mention Yuval Levin, Daniel Larison, Will Wilkinson, Julian Sanchez, James Poulos, Megan McArdle, Matt Continetti and, though he’s a tad older, Ramesh Ponnuru.
Ross Douthat and my former assistant, Reihan Salam, are two of the most promising. This pair has just come out with a book called “Grand New Party: How Republicans Can Win the Working Class and Save the American Dream.”
There have been other outstanding books on how the G.O.P. can rediscover its soul (like “Comeback” by David Frum), but if I could put one book on the desk of every Republican officeholder, “Grand New Party” would be it. You can discount my praise because of my friendship with the authors, but this is the best single roadmap of where the party should and is likely to head.
Several years ago, Tim Pawlenty, the Minnesota governor, said the Republicans should be the party of Sam’s Club, not the country club. This line is the animating spirit of “Grand New Party.” Douthat and Salam argue that the Republicans rode to the majority because of support from the Reagan Democrats, and if the party has a future, it will be because it understands the dreams and tribulations of working-class Americans.
They open the book with a working-class view of recent American history. Douthat and Salam write admiringly about the New Deal. They mention Roosevelt’s economic policies, but they also emphasize the New Deal’s intense social conservatism. Self-conscious maternalists like Eleanor Roosevelt and Frances Perkins ensured that New Deal programs were biased in favor of traditional two-parent families.
Liberals write about economic inequality and conservatives about social disruption, but Douthat and Salam write about the interplay between values and economics and the way virtue and economic security can reinforce each other.
In the 1950s, divorce rates were low and jobs were plentiful, but over the next few decades that broke down. The social revolutions of the 1960s and the economic revolution of the information age have emancipated the well-educated but left the Sam’s Club voters feeling insecure.
Gaps are opening between the educated and less educated. Working-class divorce rates remain high, while the mostly upper-middle-class parents of Ivy Leaguers have divorce rates of only 10 percent. Working-class kids are unlikely to complete college, affluent kids usually do.
Liberals have a way to address these inequalities — the creation of a Denmark-style welfare state. Conservatives have offered almost nothing. The G.O.P. has lost contact with its own working-class base. This is the intellectual vacuum that “Grand New Party” seeks to fill.
The heart of the book is the last third, where Douthat and Salam lay out a series of policy ideas to help working-class families cope with economic, health care, neighborhood and family insecurity.
“What all these ideas, from the sober to the speculative, have in common is a vision of working-class independence — from bosses, from bureaucracy, from entrenched interests of all kinds,” Douthat and Salam write. This is not compassionate conservatism (which flattered the mind of the compassionate donor), it’s hard-work conservatism, which uses government to increase the odds that self-discipline and effort will pay off.
I’m not sure how quickly the G.O.P. can swing behind this working-class focus and this vision of government-enhanced social mobility. But the McCain campaign really needs to. So far, McCain’s platform is like an omnibus spending bill — lots of decent ideas thrown together with no larger social vision.
It may take a few defeats for the G.O.P. to embrace a Sam’s Club agenda, but sooner or later, it will happen. Trust me.
Consumer sentiment at lowest level since 1980
By Burton Frierson
NEW YORK (Reuters) - Consumer confidence fell more than expected in June, hitting another 28-year low as surging prices and mounting job losses contributed to a bleak outlook, according to a survey released on Friday.
The Reuters/University of Michigan Surveys of Consumers said five-year inflation expectations remained steady at the peak of 3.4 percent reached in May, which was the highest in 13 years.
Federal Reserve officials have focused on long-term inflation expectations and the persistence of such pressures heightens their dilemma -- whether to fight price growth or support a weak economy in the grips of the worst housing slump since the Depression of the 1930s.
The Surveys of Consumers said the final June reading for its index of confidence fell to 56.4 from May's 59.8. The report said the pace of consumer spending is likely to sink at least through the start of 2009.
"Moreover, gas prices have risen to an all-time peak, food prices posted the largest increases in decades, home prices have fallen faster than any time since the Great Depression, and there has been widespread distress associated with foreclosures," the report added.
Also weighing on consumers, data earlier this month showed U.S. employers shed jobs for a fifth straight month in May and the unemployment rate jumped to 5.5 percent, its highest in more than 3-1/2 years.
Economists had expected a reading of 57.0, according to a Reuters poll. Their forecasts ranged from 55.9 to 60.0. The final June result is slightly below the preliminary figure of 56.7 released on June 13.
"Overall, no new information, only confirmation of prevailing weak sentiment," analysts at RBS Greenwich Capital said in a note to clients about the report.
Financial markets showed little immediate reaction to the report. Stocks were flat and the dollar was down against the yen. Government bonds were higher on the day.
The June reading is the lowest since 51.7 in May 1980, which was also the lowest reading ever. The index dates back to 1952, though the survey has been conducted since 1946.
One-year inflation expectations declined to a still-elevated 5.1 percent from May's 5.2 percent. May's one-year inflation expectations reading was the highest since 5.2 percent in February 1982.
The index of consumer expectations fell to 49.2 in June -- its lowest since May 1980. This was down from May's 51.1. Meanwhile, the index of current personal finances fell to 69 in June -- the lowest on record -- from 80 in May.
(Editing by Jonathan Oatis)
As expected, it is getting uglier - FAST. This is a consumer led recession. Expect consumer spending to drop dramatically once the short term bounce from government refund checks runs out. All consumer discretionary items are going to get hit at the median to upper consumer levels. Restaurants, Retail, Autos, Electronics, Housing (but we knew that!), Vacations, Road Trips - all of it! Once full fledged layoffs start - I expect targeted education industries to do well. I expect collection and repo agencies, bankruptcy lawyers and consultancies (on both consumer and business levels) to do booming business.
June 24, 2008
Fit, Not Frail: Exercise as a Tonic for Aging
By JANE E. BRODY
Fact: Every hour of every day, 330 Americans turn 60.
Fact: By 2030, one in five Americans will be older than 65.
Fact: The number of people over 100 doubles every decade.
Fact: As they age, people lose muscle mass and strength, flexibility and bone.
Fact: The resulting frailty leads to a loss of mobility and independence.
The last two facts may sound discouraging. But they can be countered by another. Regular participation in aerobics, strength training and balance and flexibility exercises can delay and may even prevent a life-limiting loss of physical abilities into one’s 90s and beyond.
This last fact has given rise to a new group of professionals who specialize in what they call “active aging” and an updated series of physical activity recommendations for older adults from the American Heart Association and the American College of Sports Medicine. These recommendations are expected to match new federal activity guidelines due in October from the United States Health and Human Services Department.
But you need not — indeed should not — wait for the government. Even if you have a chronic health problem or physical limitation, there are safe ways to improve fitness and well-being. Any delay can increase the risk of injury and make it harder to recoup your losses.
Miriam E. Nelson, director of the John Hancock Center for Physical Activity and Nutrition at Tufts University in Boston and lead author of the new recommendations, observed last fall in The Journal on Active Aging that “with every increasing decade of age, people become less and less active.”
“But,” Dr. Nelson said, “the evidence shows that with every increasing decade, exercise becomes more important in terms of quality of life, independence and having a full life. So as of now, Americans are not on the right path.”
Jim Concotelli of the Horizon Bay Senior Communities in Tampa, who oversees fitness and wellness program development for communities for the elderly in several states, noted this year in The Journal on Active Aging that many older Americans were unfamiliar with exercise activities and feared that they would cause injury and pain, especially if they have arthritis or other chronic problems. Yet by strengthening muscles, he said, they can improve joints and bones and function with less pain and less risk of injury.
The key is start slowly and build gradually as ability and strength improve. Most important is simply to start — now— perhaps under the guidance of a fitness professional or by creating a program based on the guidelines outlined here.
Although medical clearance may not be necessary for everyone for the moderate level of activity suggested, those with a known or possible problem would be wise to consult a doctor. And a few sessions with a trainer can help assure that the exercises are being done correctly and not likely to cause injury.
Until recently, physical activity recommendations for all ages have emphasized aerobics, or cardiovascular conditioning, through moderate to vigorous activities like brisk walking, cycling, lap swimming or jogging for half an hour a day five or more days a week. For those unable to do 30 minutes at a time, the activities can be broken up into three 10-minute intervals a day. If you have long been sedentary, start with even shorter intervals.
For people who prefer indoor workouts, a treadmill, cross-trainer, step machine or exercise bike can provide excellent aerobic training for the heart, lungs and circulation. Those unable to do weight-bearing exercise might try swimming or water aerobics. Keep in mind that 30 minutes a day of aerobic activity five days a week is the minimum recommendation. More is better and can reduce the risk of chronic disease related to inactivity.
Contrary to what many active adults seem to believe, physical fitness does not end with aerobics. Strength training has long been advocated by the National Institute on Aging, and the heart association has finally recognized the added value of muscle strength to reduce stress on joints, bones and soft tissues; enhance stability and reduce the risk of falls; and increase the ability to meet the demands of daily life, like rising from a chair, climbing stairs and opening jars.
Strength training can be done in a gym on a series of machines, each working a different set of major muscle groups: hips, legs, chest, back, shoulders, arms and abdomen. Or it can be done at home with resistance bands or tubes, hand-held barbells or dumbbells or even body weight. One program, the Key 3 program diagrammed here, was devised by Michael J. Hewitt, research director for exercise science at the Canyon Ranch Health Resort in Tucson. It can be completed in 10 minutes with practice.
As Dr. Hewitt explained in the International Longevity Center-USA newsletter, skeletal muscles can only contract and thus are always arranged in pairs. “One muscle of the pair pulls to bend the joint (flexion), and its antagonist pulls to straighten the joint (extension).” Thus, a strengthening program must be balanced, he said, “pairing every pulling lift with an opposite pushing action.”
Dr. Hewitt emphasized that to reduce the risk of injury and premature muscle fatigue, the large muscles should be exercised first, followed by the smaller muscles, with the postural muscles exercised last. For example, one would start with chest and upper back muscles, then the arms and shoulders and finally the lower back and abdomen.
Muscles have to be overworked to grow stronger. The goal for each exercise is three sets of 8 to 12 repetitions to muscle fatigue. Muscles also need time to recover. So strength training should be done two or three times a week on nonconsecutive days.
The new recommendations add flexibility and balance to the mix. Improving balance and reducing the risk of falls is critical as you age — if you fall, break your hip and die of pneumonia, aerobic capacity will not save you. Ten minutes a day stretching legs, arms, shoulders, hips and trunk can help assure continued mobility, and daily exercises like standing on one foot and then the other, walking heel to toe or practicing tai chi can improve balance.
The recommendations, issued last August, are geared to healthy adults 18 to 64, with a companion set for those 65 and older or those 50 to 64 who have chronic health problems or physical limitations. Details can be found at www.acsm.org. Under “Influence,” click on Physical Activity Guidelines From ACSM and AHA.
The experts who made these recommendations urge all adults to adopt them now. As C. Jessie Jones, co-director of the Center for Successful Aging at California State University, Fullerton, said, “People can’t wait until they’re in residential or long-term care to get started.”
I firmly believe that if I can make it up to age 70 in "solid" good shape, advances in medical technology will allow me to live longer and healthier. I imagine a world where cloned organ transplants will be common, where nano robots will clean out my arteries and where cancer will have been conquered.
Thursday, June 26, 2008
Release Date: June 25, 2008
For immediate release
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.
Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.
Richard Fisher was right in voting for a rate increase. The rate decreases are helping banks recapitalize I suppose but are directly contributing to the bubble in commodities. The ECB on the other hand has indicated that it is likely to raise rates next month. While everyone is counting on slower consumer growth to cool inflation - I am not so sure that will play out. Stagflation has a better than 50% chance in my opinion
Tuesday, June 24, 2008
From MarketWatch: Four years of home gains have been wiped out
Home prices in 20 major U.S. cities have dropped a record 15.3% in the past year and are now back to where they were in 2004, according to the Case-Shiller home price index released Tuesday by Standard & Poor's.Prices in the 20 cities are now down 17.8% from the peak two years ago. The biggest declines were seen in Las Vegas, Miami and Phoenix, with prices falling by 25% or more in the past year. Prices in 10 cities have fallen by more than 10%. Prices were lower in April than they were a year earlier in all 20 cities tracked by the Case-Shiller index.Note that the Composite 20 is not the national index, but this show prices are still falling in many areas of the country - and still falling quickly (the Composite 20 fell 1.4% in April alone).
As noted earlier, S&P reported that the Case-Shiller home price composite indices declined sharply in April. The Case-Shiller composite 20 index (20 large cities) was off 15.3% YoY through April, and off 17.8% from the peak.Note: the composite 20 index is not the National Price index, but this does suggests the national index will be off sharply in Q2.However, 8 of the 12 cities in the composite 20 saw month to month price increases.
Click on graph for larger image in new window.
This graph shows the price changes for several selected cities that I've been following. Prices continue to fall in the 'bubble' cities, like San Diego, Miami, and Las Vegas. Prices actually rose slightly in areas that saw less appreciation, like Denver and Cleveland. However this could just be seasonal noise, as these cities saw small increases last year at this time too.
The above post is courtesy Calculated Risk which is a blog I follow very closely. CR and Tanta the co-posters of that blog are very astute and they have been calling the housing downturn play by play. Thank you CR & Tanta for all the work you do.
June 25, 2008
Japanese Warship Visits Chinese Port
By HOWARD W. FRENCH
SHANGHAI — In the first such visit since the Second World War, a Japanese naval warship steamed into a Chinese port on Tuesday, docking at a heavily guarded naval base in Guangdong Province for a five-day port of call.
The visit of the 4,650-ton destroyer Sazanami, which was billed as an earthquake relief mission, is being seen by many military and diplomatic analysts as part of a broad and gradual reconciliation between the two countries, the pace of which has quickened since a five-day visit to Japan in May by Chinese President Hu Jintao.
“When a naval vessel visits, it sends a clear signal that the countries have buried the hatchet and are working for peace,” said Gao Hong, director of the political research office of the Chinese Academy of Social Science’s Japanese Research Institute. “This is the clearest sign yet of the improvement in relations between the two countries. It says they no longer harbor animosity toward each other.”
Mr. Hu’s visit was the first by a Chinese head of state in a decade, and was seen by commentators in both countries as having moved Japan and China in the direction of a closer and friendlier working relationship.
Relations between the two neighbors have long been cool, in large part because of China’s lingering resentment of Japan’s conquest and occupation of this country between 1931 and 1945.
Mr. Hu’s visit was followed almost immediately by the devastating earthquake in Sichuan Province on May 12 that killed almost 70,000 people, and Japan earned a measure of goodwill here by being among the first countries to provide relief assistance.
Last week, the two countries also agreed on terms for the joint development of natural gas fields in disputed territorial waters of the East China Sea.
Each step in the reconciliation has brought reminders, however, of the depth of nationalist sentiment in China and of lingering emotions in some quarters against Japan. The warship visit, for example, was originally intended to take place early this month, according to Chinese media reports, but was postponed, ostensibly because of the political sensitivities.
As it is, the port of call is closed to most media, and the ship’s visit will be unusually low-key for a goodwill mission. The conservative Japanese newspaper, Sankei Shimbun, for example, reported that a planned concert performance by a Japanese naval band had been canceled and that access for Japanese media to the port had been restricted.
“We are considering the possible reaction of the Chinese people,” said Takashi Sekine, a Japanese Defense Ministry spokesman, according to Reuters. “We need to consider the situation.”
A Chinese Foreign Ministry spokesman, Liu Jianchao, denied that Chinese public opinion opposed the port call. “Strengthening our exchanges and cooperation in the field of defense will be supported by the people and I don’t think there will be any public anger,” he said in a news conference in Beijing.
The recent agreement over the development of gas fields in the East China Sea, however, illustrated the continued sensitivity of political developments involving Japan. Beijing handled the announcement of the agreement with unusual circumspection, and as word of the agreement spread, it quickly drew expressions of outrage from many Chinese Internet commentators. Chinese censors have busily removed many of the comments since then.
On Tuesday, there was a similar flurry of blogging activity, with one online commentator writing, “as long as Japan hasn’t made a formal apology for the history of invading into China, hasn’t stopped the domestic action of glorifying the invading history, we will oppose any of the Japanese military force coming again into China.”
Another reminder of sensitivities here came shortly after the earthquake, at a time when China was desperate to provide shelter for the affected populations of Sichuan Province. Japan offered to fly in tents and other emergency supplies aboard a military aircraft, but China appeared to change its mind on the airlift idea after considering the likely hostile public reaction to military aircraft from Japan.
An editorial in the state-run China Daily newspaper acknowledged the potential for controversy regarding the naval visit, but said that the Japanese ship visit was part of an effort to “build trust and dispel each other’s doubts.”
Saw the movie Children of Huang Shi last night. Moving picture with the brutal Japanese invasion of China as the background. Recommend watching. I dont think China Japanese relations will ever be anything beyond an uneasy and wary calm.
Monday, June 23, 2008
By Yuriy Humber
June 23 (Bloomberg) -- The uranium industry's worst year is about to collide with a nuclear construction program in India and China that rivals the ones undertaken during the oil crisis of the 1970s.
The result is likely to be a 58 percent rebound in uranium to $90 a pound from $57 now, according to Goldman Sachs JBWere Pty and Rio Tinto Group, the third-biggest mining company. Uranium plunged 57 percent in the past year as an earthquake damaged a Japanese nuclear plant that's the world's largest and faults shut down reactors in the U.K. and Germany.
Plans for India and China to end electricity shortages will ripple from northwest Canada to the Australian outback and the flatlands of Kazakhstan, the primary sources of uranium. India will start up three reactors this year, with another six due in 2009, in India, China, Russia, Canada and Japan. Uranium demand worldwide will rise as fast as oil this year, or 0.8 percent, Deutsche Bank AG forecasts.
``The first wave of growth is going to come from the emerging economies,'' said John Wong, fund manager with CQS UK LLP in London, which has $10 billion under management including $150 million of uranium investments. ``People are starting to look at coal, at gas, at oil and seeing the energy prices go up, they wonder about uranium.''
The yearlong decline in uranium contrasts with record prices for oil and coal as Asian energy demand expands and concern mounts that emissions will cause global warming to worsen. The world needs to build 32 new nuclear plants each year as part of measures to cut emissions in half by 2050, the Paris-based International Energy Agency says.
Because malfunctions shut reactors in Japan, the U.K. and Germany, nuclear power production and uranium use dropped 2 percent in 2007, only the third time consumption has fallen since the 1970s, according to data compiled by BP Plc, Europe's second-largest oil company by market value. Prices are so low that some uranium mines are close to being unprofitable, says Merrill Lynch & Co., the third- largest U.S. securities firm.
``If you look at what is necessary to sustain increased production, to make the kind of projects that everyone is talking about fly, prices better not get much lower or those projects are going to fall over,'' says Preston Chiaro, chief executive of Rio Tinto's energy unit. ``I don't think that spot price is indicative of what prices will look like through the course of the year.''
In India, Nuclear Power Corp.'s 220-megawatt Kaiga plant in the southern province of Karnatka and another at Rawatbhata in the northern state of Rajasthan are due to come on line this year. China started two units in 2007 and will bring on three more through 2011, says the World Nuclear Association. Iran plans to begin generation this year at its 950-megawatt Bushehr reactor, which is at the center of the nation's conflict with the West.
``China is just on the verge of a second rapid phase of expansion,'' says Ian Hore-Lacy, director of public communications for the WNA in London. ``Each year China seems to raise their sights further.''
To be sure, safety concerns remain the biggest risk to nuclear construction and uranium's revival. Proposed reactors were canceled in the 1970s because of environmental protests, while accidents at Three Mile Island in Pennsylvania in 1979 and Chernobyl, Ukraine, in 1986 further eroded support. In Japan, new projects face delays as utilities improve earthquake resistance to restore confidence after the closure of Tokyo Electric Power Co.'s Kashiwazaki Kariwa and revelations that companies falsified safety records.
``It is worth remembering that this is an industry that can be brought to its knees overnight by one major mishap or one well-executed terrorist action,'' Paul Hannon, an analyst at London-based commodities research company VM Group in London, wrote in a report this month.
Uranium demand was 66,500 metric tons last year, according to data from Denver-based consultant TradeTech LLP. Consumption may jump 55 percent to 102,000 tons by 2020, forecasts Macquarie Group Ltd., Australia's biggest securities firm.
Uranium use now is 69 percent greater than the 39,429 tons that was mined in 2006, the most recent data from the WNA show. The balance comes from inventories and decommissioned weapons. A Russian accord to export fuel recovered from warheads to the U.S. expiries in 2013.
``Secondary supplies are finite and rapidly being depleted,'' Deutsche Bank analysts led by Michael Lewis said in a June 20 report. ``Continual supply issues and the likelihood of increased demand from utilities should drive the spot price higher during the third quarter of this year.''
Demand is set to increase as existing reactors are brought back on line, while nuclear energy gains converts.
South Africa, which is struggling to meet electricity demand, plans to award a contract for construction of a 120 billion-rand ($15 billion) nuclear plant. In the U.K., the Labour government wants more atomic capacity to reduce its emissions.
U.S. Republican presidential candidate John McCain said last week he will push to almost double the number of nuclear reactors to lessen the nation's dependence on foreign oil. Barack Obama, the presumptive Democratic nominee, also backs nuclear power. There are 104 reactors operating in the U.S., though the last to come on line was in 1990, according to the Nuclear Energy Institute.
Prices will have to increase if uranium production is to meet the rising demand, said Kevin Smith, head of uranium trading at New York-based commodities brokerage Traxys.
Canada's Cameco Corp., the world's largest uranium producer, reported it spent a total of about C$45 ($44) to produce a pound of uranium in the first quarter, compared with its average realized price of C$40.85 a pound. While Cameco, which also mines gold, still posted a profit for the quarter, lower uranium prices are a problem for other companies developing new mines, according to Smith.
``There are a lot of production projects that are feeling the pain,'' Smith says.
To contact the reporter on this story: Yuriy Humber in Moscow at firstname.lastname@example.org Last Updated: June 22, 2008 19:01 EDT
Sunday, June 22, 2008
Saudi Arabia Boosts Oil Supply, May Pump More Later
By Ayesha Daya and Glen Carey
June 22 (Bloomberg) -- Saudi Arabia may raise its oil production beyond a planned 200,000 barrel-a-day increase in July if the oil market requires extra supply, Saudi Oil Minister Ali al-Naimi told consumers at a summit in Jeddah.
Saudi Arabia's commitment to government and business leaders to pump 9.7 million barrels a day next month came after crude rose to a record $139.89 in New York on June 16. Saudi King Abdullah said at today's summit that his country, the world's biggest oil exporter, seeks ``reasonable'' prices. OPEC President Chakib Khelil said a Saudi boost is ``illogical'' because refiners don't need more crude.
The International Energy Agency estimates that world oil use this year will climb 800,000 barrels a day, or 1 percent, as demand climbs in emerging markets. Stagnating production from Russia and the North Sea and disruption in Nigeria are also contributing to higher prices, which have touched off strikes, riots and accelerating inflation in nations around the world.
``Saudi Arabia is prepared and willing to produce additional barrels of crude above and beyond the 9.7 million barrels per day, which we plan to produce during the month of July, if demand for such quantities materializes and our customers tell us they are needed,'' Naimi said.
Saudi Arabia's capacity will be 12.5 million barrels a day by the end of 2009 and may rise to 15 million after that if necessary, he said.
The president of the Organization of Petroleum Exporting Countries, Khelil, blamed $135 oil on speculative investors, the subprime credit crisis and geopolitics, rather than a shortage of supply. Khelil, who is also Algeria's oil minister, today dismissed the argument voiced by consuming nations that possible supply shortages are driving up prices.
``The concern over future oil supply is not a new phenomenon,'' he told reporters in Jeddah. Asked if oil prices would fall after the meeting, he replied: ``I don't think so.''
More than 35 countries, seven international organizations and 25 oil companies took part in today's summit in the Saudi Red Sea port, including U.K. Prime Minister Gordon Brown, U.S. Energy Secretary Samuel Bodman and Exxon Mobil Corp. Chief Executive Officer Rex Tillerson.
The Saudi King and other producer-nation officials including Kuwaiti oil minister Mohammed al-Olaim also called for greater regulation on oil market investors. The U.S. Commodity Futures Trading Commission is currently investigating the role of index-fund investors in the doubling of oil prices during the past year.
OPEC itself is divided. While Saudi Arabia is boosting output, other OPEC members including Libya, Algeria, Iran, Venezuela and Qatar are opposed to higher production, saying refiners aren't asking for more crude.
Libya's top oil official, Shokri Ghanem, said after the meeting ended that the Saudi output boost wouldn't affect the oil price, and yesterday said his country may have to cut its own production in response to the Saudi move.
Venezuelan Oil Minister Rafael Ramirez, also asked whether the oil price was likely to fall after the Saudi move, said: ``I don't think so because it's not a problem of supply.''
Kuwait, OPEC's fourth largest producer, said it's ready to join neighboring Saudi Arabia and raise output, if needed.
Oil rose to $139.89 a barrel on June 16 as investors bought commodities to hedge against a weakening U.S. dollar and concern mounted that demand is growing faster than supply. Gasoline retail prices over $4 a gallon in the U.S. are raising concern that the economy may slip into recession. Crude oil for July delivery closed June 20 in New York at $134.62 a barrel.
U.S. Energy Secretary Bodman rejected calls to put greater control on markets, and said a shortage of supply was responsible for high prices. He disputed the view that speculators are leading the markets to record levels.
The market needs between 3 million and 4 million barrels a day of spare oil production capacity, compared with the 2 million barrels a day currently available, Bodman said. OPEC says the world's spare capacity is about 3 million barrels a day, with two-thirds of that in Saudi Arabia.
``Market fundamentals show us that production has not kept pace with growing demand for oil resulting in increasing, and increasingly volatile, prices,'' Bodman said in a speech today.
Italy's Minister of Industry Claudio Scajola and Brazil's Energy Minister Edison Lobao were among consumer-nation officials attending the Jeddah summit that said more supply was needed to ease prices. ``We expect Saudi Arabia to open the taps,'' Austrian Economy Minister Martin Bartenstein said in an interview two days ago. ``One third of inflation in the euro zone comes from energy and inflation is now of importance.''
Speaking in Jeddah today, the Austrian minister said: ``We would like to see more oil on the market. That is the only action I can think of that can discourage the speculators.''
Adam Sieminski, chief energy economist at Deutsche Bank AG, and other analysts maintain that consumers will need to curtail demand before prices head lower. The biggest drop in prices in 11 weeks came on June 18, after the world's second-biggest oil consumer, China, raised gasoline, diesel and power prices to rein in energy use.
Saudi Arabia will increase production capacity to 12.5 million barrels a day of oil by the end of next year and could add a further 2.5 million barrels a day if needed, from some new giant fields, Naimi said.
Zuluf, Shaybah Fields
``The Saudi announcement of a possible increase in capacity to 15 million barrels a day is a robust statement; it would be a huge increase,'' ENI SpA Chief Executive Officer Paolo Scaroni said in an interview in Jeddah today. ``The world is worried about the shortage in spare capacity and any improvement will change this sentiment.''
The further daily capacity includes 900,000 barrels from the Zuluf field, 700,000 barrels from Safaniyah, 300,000 barrels from Berri, 300,000 barrels from Khurais and 250,000 barrels from Shaybah, Naimi said.
U.K. Prime Minister Brown said in Jeddah today he will open Britain's energy industry to investment from oil producing nations as a way of keeping a lid on crude prices and paying for measures to clean up the environment. Further talks may be held between producers and consumers this year in London, he said.
To contact the reporters on this story: Ayesha Daya in Jeddah email@example.comGlen Carey in Jeddah firstname.lastname@example.org Last Updated: June 22, 2008 12:12 EDT
June 22, 2008
Mr. Bush, Lead or Leave
By THOMAS L. FRIEDMAN
Two years ago, President Bush declared that America was “addicted to oil,” and, by gosh, he was going to do something about it. Well, now he has. Now we have the new Bush energy plan: “Get more addicted to oil.”
Actually, it’s more sophisticated than that: Get Saudi Arabia, our chief oil pusher, to up our dosage for a little while and bring down the oil price just enough so the renewable energy alternatives can’t totally take off. Then try to strong arm Congress into lifting the ban on drilling offshore and in the Arctic National Wildlife Refuge.
It’s as if our addict-in-chief is saying to us: “C’mon guys, you know you want a little more of the good stuff. One more hit, baby. Just one more toke on the ole oil pipe. I promise, next year, we’ll all go straight. I’ll even put a wind turbine on my presidential library. But for now, give me one more pop from that drill, please, baby. Just one more transfusion of that sweet offshore crude.”
It is hard for me to find the words to express what a massive, fraudulent, pathetic excuse for an energy policy this is. But it gets better. The president actually had the gall to set a deadline for this drug deal:
“I know the Democratic leaders have opposed some of these policies in the past,” Mr. Bush said. “Now that their opposition has helped drive gas prices to record levels, I ask them to reconsider their positions. If Congressional leaders leave for the Fourth of July recess without taking action, they will need to explain why $4-a-gallon gasoline is not enough incentive for them to act.”
This from a president who for six years resisted any pressure on Detroit to seriously improve mileage standards on its gas guzzlers; this from a president who’s done nothing to encourage conservation; this from a president who has so neutered the Environmental Protection Agency that the head of the E.P.A. today seems to be in a witness-protection program. I bet there aren’t 12 readers of this newspaper who could tell you his name or identify him in a police lineup.
But, most of all, this deadline is from a president who hasn’t lifted a finger to broker passage of legislation that has been stuck in Congress for a year, which could actually impact America’s energy profile right now — unlike offshore oil that would take years to flow — and create good tech jobs to boot.
That bill is H.R. 6049 — “The Renewable Energy and Job Creation Act of 2008,” which extends for another eight years the investment tax credit for installing solar energy and extends for one year the production tax credit for producing wind power and for three years the credits for geothermal, wave energy and other renewables.
These critical tax credits for renewables are set to expire at the end of this fiscal year and, if they do, it will mean thousands of jobs lost and billions of dollars of investments not made. “Already clean energy projects in the U.S. are being put on hold,” said Rhone Resch, president of the Solar Energy Industries Association.
People forget, wind and solar power are here, they work, they can go on your roof tomorrow. What they need now is a big U.S. market where lots of manufacturers have an incentive to install solar panels and wind turbines — because the more they do, the more these technologies would move down the learning curve, become cheaper and be able to compete directly with coal, oil and nuclear, without subsidies.
That seems to be exactly what the Republican Party is trying to block, since the Senate Republicans — sorry to say, with the help of John McCain — have now managed to defeat the renewal of these tax credits six different times.
Of course, we’re going to need oil for years to come. That being the case, I’d prefer — for geopolitical reasons — that we get as much as possible from domestic wells. But our future is not in oil, and a real president wouldn’t be hectoring Congress about offshore drilling today. He’d be telling the country a much larger truth:
“Oil is poisoning our climate and our geopolitics, and here is how we’re going to break our addiction: We’re going to set a floor price of $4.50 a gallon for gasoline and $100 a barrel for oil. And that floor price is going to trigger massive investments in renewable energy — particularly wind, solar panels and solar thermal. And we’re also going to go on a crash program to dramatically increase energy efficiency, to drive conservation to a whole new level and to build more nuclear power. And I want every Democrat and every Republican to join me in this endeavor.”
That’s what a real president would do. He’d give us a big strategic plan to end our addiction to oil and build a bipartisan coalition to deliver it. He certainly wouldn’t be using his last days in office to threaten Congressional Democrats that if they don’t approve offshore drilling by the Fourth of July recess, they will be blamed for $4-a-gallon gas. That is so lame. That is an energy policy so unworthy of our Independence Day.
Our energy policy is such a joke. It is worth remembering that Increase in Prosperity if directly proportional to increase in energy available and increase in energy efficiency.
Saturday, June 21, 2008
RBS issues global stock and credit crash alert
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 12:19am BST 19/06/2008
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
RBS warning: Be prepared for a 'nasty' period
Such a slide on world bourses would amount to one of the worst bear markets over the last century.
RBS said the iTraxx index of high-grade corporate bonds could soar to 130/150 while the "Crossover" index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.
"I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names.
"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.
RBS expects Wall Street to rally a little further into early July before short-lived momentum from America's fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.
"Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.
US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit.
The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said.
"The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said.
Kit Jukes, RBS's head of debt markets, said Europe would not be immune. "Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates.
"The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB. Wider spreads between the German Bunds and peripheral markets seem assured," he said.
Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.
Information appearing on telegraph.co.uk is the copyright of Telegraph Media Group Limited and must not be reproduced in any medium without licence. For the full copyright statement see Copyright
I got into TWM (the anti Russell 2000) about 3 weeks ago and have added more shares as decent entry points as the market started to turn down. TWM seems to have clearly bottomed and seems ready to break out. I would not be surprised to see a 40% return on TWM over the next 3 months. This is not a recommendation to buy or sell TWM - please do your own research. This blog does not take responsibility for any losses
courtesy of www.bigcharts.com
June 21, 2008
Rise in Renters Erasing Gains for Ownership
By RACHEL L. SWARNS
WASHINGTON — Driven largely by the surge in foreclosures and an unsettled housing market, Americans are renting apartments and houses at the highest level since President Bush started a campaign to expand homeownership in 2002.
The percentage of households headed by homeowners, which soared to a record 69.1 percent in 2005, fell to 67.8 percent this year, the sharpest decline in 20 years, according to census data through the end of March. By extension, the percentage of households headed by renters increased to 32.2 percent, from 30.9 percent.
The figures, while seemingly modest, reflect a significant shift in national housing trends, housing analysts say, with the notable gains in homeownership achieved under Mr. Bush all but vanishing over the last two years.
Many of the new renters, meanwhile, are struggling to get into decent apartments as vacancies decline, rents rise and other renters increasingly stay put. Some renters who want to buy homes are unable to get mortgages as banks impose stricter standards. Others remain reluctant to buy, anxious that housing prices will continue to fall.
The confluence of factors has largely derailed what Mr. Bush called “the ownership society,” his campaign to give millions of people — particularly minority and lower-income families — a shot at homeownership by encouraging lenders to finance more home purchases.
“We’re not going to see homeownership rates like that for a generation,” said Mark Zandi, the chief economist at Moody’s Economy.com, a research company.
For many minority and lower-income families who viewed homeownership as a stepping stone to building wealth and passing it on to their children, the transition from owning to renting has been the unraveling of a dream. Burdened now by debt and bad credit, some of these families are worse off than they were before they bought.
“The bloom is off of homeownership,” said William C. Apgar, a senior scholar at the Joint Center for Housing Studies at Harvard University who ran the Federal Housing Administration from 1997 to 2001. “We’re seeing more dramatic growth in renters and a decline in the number of owners. People are beginning to understand that homeownership can be a very risky venture.”
Mr. Apgar said the Joint Center had predicted an increase of 1.8 million renters from 2005 to 2015, given expected population trends. Instead, they saw a surge of 1.5 million renters from 2005 to 2007 alone. In the first quarter of this year, 35.7 million people were renting homes or apartments, census data show.
“Even though we’re only looking at a short period, these trends are pretty powerful,” Mr. Apgar said.
Mr. Zandi said he believed that minority and lower-income homeowners had been hardest hit. Nearly three million minority families took out mortgages from 2002 to the first quarter of this year, housing officials say. Since minority families were more likely to receive subprime loans, economists believe these families account for a disproportionate share of foreclosures.
Tony Fratto, a White House spokesman, said that officials had hoped the homeownership gains would stick. “We’re disappointed that conditions in the housing market didn’t allow those gains to be sustained,” he said. “But we’re optimistic that they can return.”
The new renters include people like Tina Williams, a 43-year-old medical assistant who lost her three-bedroom colonial in Cleveland to foreclosure in March after her adjustable rate mortgage spiked and she struggled to find work.
Ms. Williams slept at a homeless shelter and at the homes of friends after five apartment complexes rejected her, citing her bad credit and history of foreclosure.
Finally, someone offered to rent her the third floor of their house. Her new $300-a-month rental has a bedroom, a living room and a bathroom, but no kitchen.
“People say, ‘Tina, how are you living?’ ” said Ms. Williams, who has cobbled together the semblance of a kitchen with a microwave, a minirefrigerator and an electric frying pan.
“I say, ‘I’m living on God’s grace and mercy,’ ” said Ms. Williams, who had dreamed of passing on her first home, bought in 2001, to her two grown daughters.
“My daughter says I’m living in a hole in the wall,” she said. “But I can eat every day. I have a roof over my head. When I found this place, I started shouting for joy.”
Nationally, rents have increased about 11 percent since 2005, when homeownership rates started to decline, though that growth is slowing, according to the Bureau of Labor Statistics. In 2005, vacancy rates for rental properties in Cleveland hovered around 10 percent, according to the Northeast Ohio Apartment Association, which represents landlords in the Cleveland area. Today, the rate stands at 5.2 percent.
Christopher E. Smythe, the association’s president, said the collapse of the housing market had improved the economic climate.
“Our apartment traffic is up, people are renting again and occupancies are up,” he said in a letter to members this year.
In other places, like Los Angeles, the slump in the housing market has begun to push up vacancies as condominiums are converted into rentals, according to Raphael Bostic, the associate director at the Lusk Center for Real Estate at the University of Southern California.
But those new apartments are often out of reach of struggling families. And since many owners of rental properties are also going into default, the foreclosure wave has resulted in fierce competition for affordable apartments in some cities.
In Rhode Island, 41 percent of the state’s foreclosed properties are multifamily dwellings, which would most likely have housed tenants, a recent study by the National Low Income Housing Coalition concluded.
“We’re seeing the displacement of tenants at the same time that we’re seeing former homeowners enter the rental market,” said Raymond Neirinckx, a coordinator at the Rhode Island Housing Resources Commission, which handles housing policy.
Meanwhile, some people who have lost their homes find that landlords view them with suspicion.
Steve Allen, 51, a Vietnam veteran in Seattle, was repeatedly rejected when he and his wife, Lesa, started searching for an apartment this month. Some apartment managers said no because they had lost their home to foreclosure. Others said their credit scores were too low.
Debbie Suber, 46, who lost her home in Cleveland last year, said she and her husband were lucky to find a landlord who was willing to consider their income, not their credit scores. “By the grace of God, that’s why I have a place,” she said.
Times are also tough for renters hoping to buy. Banks have tightened mortgage standards, insisting on good credit scores, proof of income and sizable down payments. Lez Trujillo, the national field director for Acorn Housing, a nonprofit group that helps lower-income families get mortgages, said a third of their applicants ended up with houses just a few years ago. Now, it is one in 10, she said.
Barbara O’Leary-Hatfield-Liberace, a 68-year-old retiree and an Acorn member, encountered such difficulties when she and some friends decided to buy a $340,000 house in Seattle.
The mortgage company they consulted said they needed to clean up their credit and come up with a $45,000 down payment, money they do not have.
So on most nights, when Ms. O’Leary-Hatfield-Liberace thinks about her dream house, she reaches for the rosary that she keeps under her pillow.
“I pray a lot and hope to heck we’ll win the Lotto,” she said.
Good luck with that lotto. During the recent boom in house prices credit standards were dramatically loosened. Mortgages once upon a time were given by neighborhood banks to people living in the neighborhood who were well known to the bankers. Globalization and securitization of credit ended this phenomenon and led to an unbelievable boom in mortgage availability to people with little or no credit history. Mortgages were given to people with no jobs and no source of active or passive income. Pick your monthly mortgage schemes were available to low FICO individuals. Well, the rooster has come home. Home prices are out of tune with historical rents. So either rents have to go up (by increasing demand for rent such as this article) or home prices have to come down (as we're currently witnessing in the Case Schiller index) or a combination of both. Inflation will also help and so will the falling dollar. Rising inflation means that home prices dont have to fall all that much! Ask yourself this question. You think your home price has doubled or tripled in the last 7 years? Is that in dollar terms or gold terms or in Euros? Gold (if you believe this to be the true holder of monetary value has quadrupled during this time). In gold terms, your home price has actually fallen. Expect credit availability to shrink (as bankers relearn the business of mortgages), rents to increase and home prices to fall in the next 3 years. Sometime soon, it will again become cash flow positive to buy a condo with 20% down and rent it out. Till then, the pain continues.
Friday, June 20, 2008
June 21, 2008
Banks Trimming Limits for Many on Credit Cards
By ERIC DASH
The easy money that led Americans to depend on credit cards to pay their bills is starting to dry up.
After fostering the explosive growth of consumer debt in recent years, financial companies are reducing the credit limits on cards held by millions of Americans, often without warning.
Banks that issue cards like Visa and MasterCard, as well as the American Express Company, are cutting the limits for customers who have run up big debts, live in areas that have been hit hard by the housing crisis or work for themselves in troubled industries.
The reductions come as American consumers, squeezed by a slack economy, a weak housing market and rising unemployment, are falling behind on monthly credit card payments in growing numbers. Credit card lenders are also culling their accounts ahead of new rules that are intended to benefit consumers but could limit the profits on customers deemed bigger risks.
Many Americans have come to rely on credit cards to cover everyday expenses like groceries, gasoline and medical bills, in addition to big-ticket items and luxuries.
While consumer spending, the nation’s economic engine, has been surprisingly resilient of late, a more sweeping reduction in credit card limits could pose serious challenges for hard-pressed consumers and, in turn, the broader economy.
Many are already feeling pinched. Pamela Pfitzer, a family therapist with a stable six-figure income, was stunned when she went to a garden center near her home outside Sacramento in early April and tried buying about $30 worth of flowers with her American Express card. Her transaction was denied, she says, even though she had just made a $1,000 payment and almost never missed one in her life.
It turned out that shortly after falling behind on a mortgage payment and being hit with a tax lien, American Express had lowered her credit limit to $900 from $2,300. The flowers pushed her over the new cap.
Then last month it happened again, she says, when she tried to buy office furniture with her Wells Fargo Visa card. Although she had just made a payment of about $700, Ms. Pfitzer found out that her credit limit had been lowered to $2,000 from $2,800.
“In all the years I have had credit cards, I have never had this happen before,” Ms. Pfitzer said. “Now it has happened twice in the last few months.”
Banks and mortgage companies are required by law to notify customers within three days of changing the limits on a home equity line of credit, and many have been aggressively lowering them. But credit card lenders have 30 days to notify their customers, and often do so only after taking action.
Such moves can cause a consumer’s credit score to drop, forcing the person to pay higher interest rates and making it harder to obtain new loans.
Even so, disclaimers in the fine print of credit card applications typically stipulate that the issuer can cancel or alter credit limits at any time, regardless of customers’ payment or credit history.
Washington Mutual cut back the total credit lines available to its cardholders by nearly 10 percent in the first quarter of the year, according to an analysis of bank regulatory data. HSBC Holdings, Target and Wells Fargo each trimmed their credit card lines by about 3 percent.
Among those four lenders, that amounts to a reduction of about $15 billion in three months. Over all, the amount of available credit for the industry appears to be about flat, with the three biggest issuers — Bank of America, JPMorgan Chase and Citigroup — slightly increasing their overall credit lines. But even they are trying to rein in risky individual accounts.
Big banks face intense pressure on their balance sheets as they bring on billions of dollars worth of complex mortgage-related investments and other loans they are struggling to sell. Meanwhile, they are bracing for a surge in credit card losses as the job market and economy get worse.
Consumers are reaching deeper into their pockets to pay for groceries and gas. Last year, as many as half of all those who took out home equity loans used the money to help pay down their credit card debt, according to J.D. Power research. But home equity is no longer an easy source of financing. And month after month, cardholders keep falling behind on their bills.
“This downturn is the perfect storm where the consumer is getting squeezed from all levels,” said Michael Taiano, a credit card industry analyst at Sandler O’Neill. He projects that credit card loss rates for lenders, now around 5.7 percent, could go as high as 10 percent in next 18 months. That would be higher than the peak levels
reached after the 2001 technology bust.
Since borrowers typically run up their balances before they stop paying, issuers have started cutting lines of credit. Often, lenders will lower customers’ credit limits as they pay down their debt — a technique known in the industry as “chasing the balance.” This way, they are on the hook for less money if borrowers default.
“They are trying to cut their risk exposure,” said Bill Ryan, an analyst at Portales Partners. “The consumer that used to use his house as an A.T.M. is now starting to use their credit card as an A.T.M.”
American Express is reducing credit lines for customers holding subprime mortgages and small business customers in industries tied to the real estate market. And Chase Card Services, the consumer arm of JPMorgan, is taking similar action on distressed borrowers, especially in places like California, Arizona and Florida where home prices have declined sharply. Washington Mutual, HSBC, Target, and Wells Fargo all acknowledged they were pulling in lines of credit as part of broader strategy of reducing risk.
None of the lenders, as a matter of policy, would comment on individual customer accounts.
Cardholders in places like Orange County, Calif.; Las Vegas; and Phoenix have noticed their credit lines shriveling up.
John D. Craig Jr., a college administrator from outside Buffalo, said he had regularly been paying own his balance on a rarely used card when Chase informed him they were reducing his credit limit to $4,000 from $20,000. The news took him by surprise.
“For two or three years, it was, ‘We are going to give you more credit, more credit more credit,’ ” he said. “Now, in the last two or three months, it has been the exact opposite.”
Those who work in real estate-related fields say they are being pinched by the credit card lenders at a time when they most need to have money available. .
In Seattle, Phillip Rodocker, a sales associate for a large residential real estate firm, said that the credit limit on his Citi Visa platinum credit card had been reduced in April to $4,800 from $8,000 even though he says he never missed a payment and had no recent credit blemishes.
Leslie Sherman, the owner of Realty Executives in Las Vegas, said American Express reduced the credit limits on several personal and business cards virtually at the same time.
“It has definitely made me spend less,” she said. But Ms. Sherman said that it had been a blow to her ego, too.
“It made me feel like I wasn’t responsible. I know when to put my reins on and when not to,” she added. “I didn’t appreciate someone thanking me for always paying my bills on time and being a good customer by dinging my credit.”
Meredith Whitney, an Oppenheimer banking analyst, said the impact of the recent regulatory proposals on lender profits could be so severe that she expects the industry to pull back $2 trillion in outstanding credit lines by 2010. That would be a 45 percent reduction in credit currently available to consumers. Risky borrowers would be squeezed the most.
Customers with stronger credit histories have probably noticed few changes. But card issuers are also becoming pickier about whom they approve. In April, nearly 30 percent of senior loan officers said they were tightening their credit card lending standards this winter, according to a Federal Reserve survey. That was about three times as many who said they did so in the fall.
Lenders are also sending fewer offers in the mail. The volume of direct mail promoting credit cards fell nearly 19 percent since last October, to about 900 million pieces, according to Mintel Comperemedia, a marketing research company.
And borrowers already in debt, once courted by card companies, are being shunned.
Zero-balance teaser rate offers have fallen by about 15 percent over the last year, according to Mintel.
Consumer Debt on the lower end of the FICO scores is the next shoe to fall in the world of Wall Street finance. Securitized products of Auto loans, Car loans, HELOCs (your mortgage as your ATM) will all suffer. This will lead to further losses in Financials at a time when home prices are STILL falling. Credit availability will become scarce leading to a significant retrenchment in living standards for significant numbers of Americans. I expect debt collection businesses on the consumer level and corporate bunkruptcy specialists will be very busy in the next 2 years. The collateral damage will ripple through even high end "Nordstrom consumers" as well although I suspect the ultra luxury "Hermes consumers" will do just fine in a rising inflation environment. Somehow those people always seem to make money
Tuesday, June 17, 2008
June 18, 2008
Labor Costs Rise, and Manufacturers Look Beyond China
By KEITH BRADSHER
HANOI — Canon is no longer building or expanding factories in China, but the company is doubling its workforce at a printer factory outside Hanoi to 8,000.
Nearby, Nissan is expanding a vehicle engineering center. Hanesbrands, the underwear company based in Winston-Salem, N.C., is building two new factories here, as is the Texhong Textile Group from Shanghai.
China remains the most popular destination for foreign industrial investment in the world, attracting almost $83 billion last year. But a growing number of multinational corporations are pursuing a strategy that companies and analysts call “China plus one,” establishing or expanding Asian bases outside China, particularly in Vietnam.
A long list of concerns about China is feeding the trend: inflation, shortages of workers and energy, a strengthening currency, changing government policies, even the possibility of civil unrest someday. But most important, wages in China are rising close to 25 percent a year in many industries, in dollar terms, and China is no longer such a bargain.
More than corporate profit margins are at stake. When the cost of making goods in Asia rises, American consumers inevitably feel pain. The Labor Department said Thursday that import prices were 4.6 percent higher in May than a year earlier for goods from China and 6.4 percent higher for goods from southeast Asia.
Companies are using the China-plus-one strategy to mitigate the risks of overdependence on factories in one country.
Multinational corporations are “thinking about all the world and keeping a balance” between China and other countries, said Edward Kang, the chief executive of Ever-Glory International, a sportswear manufacturer in Nanjing, China. Ever-Glory, which sells to Wal-Mart and Kohl’s, is building a factory in Vietnam to supplement its three factories in China.
Companies remaining in China are desperately seeking to control costs.
“We will maintain our capacity in China, but we will make it more automatic and reduce the number of employees,” said Laurence Shu, the chief financial officer of Shanghai-based Texhong, one of the world’s largest manufacturers of cotton and spandex fabric.
To limit labor costs, Hanesbrands is building a largely automated factory in Nanjing. But the company is also building a factory in Vietnam, in addition to a factory it bought here, and two more in Thailand.
Gerald Evans, the president of global supply chain at Hanesbrands, said that compared to China, “we found more ready availability of both land and labor in both Vietnam and Thailand.” Hanesbrands will be shifting some manufacturing from Mexico and Central America to Asia.
In China, where rural villages are running low on able-bodied young workers to send to factories, wages are rising more than 10 percent a year for many assembly-line workers. And pay is rising even faster for skilled workers, like machinery repair technicians, company executives said.
In coastal provinces with ready access to ports for exports, even unskilled workers now earn $120 a month for a 40-hour work week, and often considerably more. Factory workers in Vietnam still earn as little as $50 a month for a 48-hour work week that includes a full day on Saturdays.
Texhong estimates that average labor costs per textile industry worker in China will rise 16 percent this year, including increases in benefits costs — on top of a 12 percent increase last year. New regulations are making it harder for companies to avoid paying for benefits, like pensions, further increasing labor costs.
When those increases are combined with a currency rising against the dollar at an annual pace of up to 10 percent, labor costs in China are now climbing at 25 percent a year or more in dollar terms.
Inflation in China — more than 8 percent in February, March and April and 7.7 percent in May — raises the prospect that labor costs will soar even faster soon. That could push up prices for a wide range of goods exported to the United States.
China is also phasing out its practice of charging lower corporate tax rates for foreign-owned companies. By contrast, Vietnam still offers foreign investors a corporate tax rate of zero for the first four years, and half the usual rate of 10 percent for the next four years.
Foreign direct investment in China has grown by a third over the last three years. By contrast, foreign direct investment has more than doubled in this period in the Philippines, quintupled in India, and soared more than eight-fold in Vietnam.
Faster rates of increase in other Asian countries partly reflect lower starting points. but investment is still growing quickly, and now it’s growing from high levels. For example, foreign investment in Vietnam reached nearly $18 billion last year.
A popular saying among Western investors these days is that Vietnam is the next China. Cambodia, with even lower wages attracting garment manufacturers, is called the next Vietnam.
But how long those analogies will hold — in a world where economies evolve from agriculture to manufacturing to services in a couple of decades — is unclear.
As foreign investors leap into each new country, they drive up the cost of workers and goods, a dynamic that makes it less likely that a shift in investment patterns will hold down inflation in American imports.
A recent survey by Grant Thornton, the global accounting and consulting firm, found that companies were more worried about attracting and retaining key staff in Vietnam than anywhere else in the world. (China was a close second.)
“We trained them, we educated them and then they quit,” said Akira Akashi, the chairman of Nissan Techno, a division of Nissan that designs vehicles.
The company plans to expand to 1,400 engineers in Vietnam by 2010. Beginning engineers here still earn just $200 a month, less than half the salary in China and less than a tenth of American and Japanese salaries.
Even blue-collar labor is becoming harder to find. In addition to the size of the labor force, infrastructure is also likely to be a brake on how fast China plus one can expand. Most countries in Asia, including Vietnam, have not improved transportation links as quickly as China has. Lengthy traffic jams slow down shipments and drive up costs.
Vietnam’s biggest selling point for many companies is its political stability. Like China, it has a nominally Communist, one-party system that crushes dissent, keeps the military under tight control and changes government policies and leaders slowly.
“Communism means more stability,” Mr. Shu, the chief financial officer of Texhong, said, voicing a common view among Asian executives who make investment decisions. At least a few American executives agree, although they never say so on the record.
Democracies like those in Thailand and the Philippines have proved more vulnerable to military coups and instability. A military coup in Thailand in September 2006 was briefly followed by an attempt, never completed, to impose nationalistic legislation penalizing foreign companies.
“That sent the wrong signal that we would not welcome foreign investment — this has ruined the confidence of investors locally and internationally,” finance minister Surapong Suebwonglee said in an interview in Bangkok.
Yet, like China, Vietnam does not offer complete tranquillity either. For instance, workers are becoming more vocal and staging more strikes, despite a government ban on independent unions.
Nearly 20,000 workers walked out this spring at a Nike shoe factory run by a Taiwanese contractor. The workers only went back to work when given a 10 percent raise, to $55 a month, and a larger meal subsidy.
That restive pattern is evident in the only country with enough workers to accommodate more than a fraction of the investment China sees: India, which demographers expect to surpass China in population in the next two decades.
But many companies are leery of poor roads and congested ports in India, as well as long sailing times for components that must be shipped from existing factories in China.
And even in India, workers with industrial skills or the ability to speak English are increasingly scarce — and their wages have been rising by 10 to 20 percent a year.
That has led to worries about India’s long-term competitiveness, even at companies investing heavily there, like Ford, which is planning to spend $500 million on factory expansion.
“I keep saying to our people, ‘How long will it be until we’re priced out of the market?’ ” said John Parker, Ford’s executive vice president for Asia, Pacific and Africa. “The impact of that some day is you’re no longer low-cost.”
As a long term investor, it would be worth keeping a Vietnam ETF in your portfolio at some point. I have not researched it yet or determined a good entry point.