Oil Prices Remain High Despite Record Inventories--Thanks Zimbabwe Ben

Good news, we have a new 2010 record high for US Oil Inventories. According to the Department of Energy oil inventories came in at 368,156,000 barrels last week. This is the highest amount ever for this time in the year. Despite the fact, oil prices remain at egregious levels courtesy of the Fed and its money printing ways. It is amazing to the see the disconnect between oil prices and supply/demand all because of money printing. Apparently, Zimbabwe Ben does not believe $80+ oil is inflationary so that means QE 2 is required to get oil back up to $120-$150. Perhaps then, inflation will be high enough for our criminal Federal Reserve Chairman. Maybe I am being too hard on Uncle Ben, after all he is printing money and debasing the dollar to "save" the economy. Somehow I do not think the American middle class (or what's left of it) will be so forgiving when they cannot afford to power their cars or food to feed themselves.

Click chart for larger image.




















Black Swan Insights
Read more >>

Share/Bookmark

Freddie Mac's Non-Performing Loans Jump 33% YOY

After the circus surrounding the Fed's QE 2 program is over, it is time to get back to the fundamentals of the US economy. While money printing can do wonders for asset prices (in nominal terms) it cannot help the real economy. Case in point government ward Freddie Mac which today reported a net loss for the 3rd quarter of $2.5 billion. As you probably know you the taxpayer is on the hook for all of the loses suffered by the GSEs, which could reach $400+ billion under a worse case scenario. Well it seems the worst case scenario is coming to fruition. Freddie Mac's non-performing loans surged 33% year over year from $90.5 billion to $121 billion despite all of the trial loan modifications nonsense. This brings non-performing assets to 6.1% of the portfolio and shows no signs of slowing. One of the more troubling aspects of Freddie Mac is that the company has only set aside $38.6 billion for loan loss reserves. This means that it is only a matter of time before the company is forced to tap the Treasury for more taxpayer money. But don't worry the Fed will be printing the money. Why there is no outrage about the GSE's is beyond belief.

One of the more interesting aspects of Freddie's Q3 report was the large increase in REO properties. Freddie now has $13.5 billion in REO on its books after repossessing $6.8 billion in Q3 alone. Expect this number to continue to increase as the government becomes one of the largest homeowners in the US. Karl Marx would be proud! The majority of the real estate is located in the Western region, which has experienced the largest decline in property values. If or when Freddie tries to sell these properties, they will be forced to take large losses, meaning taxpayers get to pay the bill. This is turning out to be one of the worst investments in US history.

Overall, it is really hard to know how bad Freddie is doing because of the way they present their financials. Most of it is based on future estimates of loan losses, etc which means the company can makes itself look better by forecasting a better economic scenario. Hey, it worked for the major banks so why not invsolent GSE's. Only in Zimbabwe...err..America.

Black Swan Insights
Read more >>

Share/Bookmark

Fed Decision: Will Print Another $600 Billion--Hello Zimbabwe

Well we got more money printing, but it was less than the $1 trillion expected. The Fed will print another $600 billion by the end of Q2 2011. Nothing really new here. We are going the way of Zimbabwe as money printing becomes the general tool to "boost" the economy. So far the markets have sold the news. The sky is the limit for commodities as a result of dollar debasement.

I will leave you with a very germane quote from the famous book on inflation "Dying of Money" by Parsson. It explains how hyperinflation starts and how once it begins, it is impossible to stop:
Holders of money wealth express their revolt by the simple act of getting rid of their money and money wealth and declining to hold it in the future any longer than necessary to get rid of it. They do not fly flags or demonstrate in the streets to express their revolt; they simply get rid of their money. When a sufficient inflationary potential has been laid up by the government in all the available reservoirs, that is all that is necessary. If the simple desertion of the money becomes widespread or universal, the latent inflation surfaces in the form of disaster. The duller the holders of money wealth are, the longer the government can go on storing up inflation but, by the same token, the more cataclysmic must the eventual dam burst be. The Germans were among the dullest and most disciplined of all holders of money wealth, and this alone permitted the government to build up so huge a pool of unrealized inflation before the burst.

The desertion of the money holders has many of the aspects of a panic, like any desertion in the thick of a struggle. All may be orderly in one moment and in full flight in the next. As slow and imperceptible as the inflationary economics were, the economics of disaster are sudden and unexpected. A filling of reservoirs which may have taken years may be emptied in a day.
Read more >>

Share/Bookmark

ISM Non-Manufacturing Index Comes In Better Than Expected

The Institute for Supply Management reported its non-manufacturing index came in at 54.3%, which was better than expectations of 54.0%. More importantly new orders, a leading indicator surged to 56.7. You get the idea from what respondents said that the economy is growing just very slowly with lack of demand as the main problem.  From the ISM:
The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee; and senior vice president — supply management for Hilton Worldwide. "The NMI (Non-Manufacturing Index) registered 54.3 percent in October, 1.1 percentage points higher than the 53.2 percent registered in September, and indicating continued growth in the non-manufacturing sector at a slightly faster rate. The Non-Manufacturing Business Activity Index increased 5.6 percentage points to 58.4 percent, reflecting growth for the 11th consecutive month at a substantially faster rate than in September. The New Orders Index increased 1.8 percentage points to 56.7 percent, and the Employment Index increased 0.7 percentage point to 50.9 percent, indicating growth in employment for the second consecutive month and the fourth time in the last six months. The Prices Index increased 8.2 percentage points to 68.3 percent, indicating that prices increased significantly faster in October. According to the NMI, 11 non-manufacturing industries reported growth in October. Respondents' comments remain mixed about business conditions and vary by industry and company. The trend of the overall comments indicates that there are signs of economic stabilization."


WHAT RESPONDENTS ARE SAYING ...


•"Sales are still down compared to last year, but showing a slight increase." (Public Administration)
•"Economy still slow for our industry, with very small signs of recovery. Strong downward pricing pressures from customers affecting business." (Professional, Scientific & Technical Services)
•"Some positive growth in comp [comparable] sales over the past 2 to 3 months." (Accommodation & Food Services)
•"Business is picking up ever so slowly, but improving." (Transportation & Warehousing)
•"Generally stable-to-improving demand for our products." (Wholesale Trade)



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Black Swan Insights
Read more >>

Share/Bookmark

ASA Weekly Employment Index At Two Year High

The American Staffing Association released its weekly employment index which tracks temporary and contract work. The index is now at the highest level since early 2008. Historically, this index has been a leading indicator for permanent employment. However, this has not been the case during this economic cycle as employers are not confident enough to hire permanent workers. From the ASA:
During the week of Oct. 18–24, 2010, temporary and contract employment increased 0.73%, pushing the ASA Staffing Index up one point to a value of 101.

At a current index value of 101, U.S. staffing employment is 46% higher than the level reported for the first week of the current year and is 22% higher than the same weekly period in 2009.




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Black Swan Insights
Read more >>

Share/Bookmark

Morgan Stanley Expects The Fed To Disappoint On QE 2

Morgan Stanley is out with a research report which indicates the Fed may announce a QE 2 program of around $100 billion a month for six months. If true, this would be much less than the what the market is currently pricing in--expectations are for something around $1 trillion. Personally, I think QE 2 will disappoint because the market has already priced in $1 trillion plus from the Fed. About the only thing that could juice markets higher would be something like $2-4 trillion (Goldman's estimate). The anticipation of QE 2 has distracted the market from the growing crisis in Ireland where CDS continues to blow out at an alarming rate. After QE 2 is finalized, the market will get around to these looming problems. From Morgan Stanley:
The Fed needs to send a clear message. The Fed faces a dilemma: As officials prepare to implement a new round of quantitative easing, they clearly want to adopt a flexible, open-ended approach to asset purchases, one that can be scaled to financial conditions and the economic outlook. Just as clearly, market participants, skeptical about QE's success, will likely gauge the Fed's resolve by the size and pace of the purchase program. We expect the Fed to announce an initial commitment to buy Treasuries at around a US$100 billion monthly clip for the next six months, close to what officials and market commentary have discussed, but less than markets seemed to price in over the past couple of weeks.

How to resolve the dilemma? We think that clear communication about goals and tools would help markets understand the Fed's commitment, which matters more than the size of initial purchases and should give officials the flexibility they need. By underscoring its resolve to achieve specified goals, the Fed could imply how long it will hold on to the assets it purchases. For example, downward revisions to the Fed's inflation forecasts for 2010 and 2011 would imply that policy will be more aggressive for longer to cut off any deflation tail risk. Equally, the maturity distribution of purchases should matter more than the initial size and pace of the program. Skewing purchases to the longer end of the yield curve could increase the bang for buck.

QE eases broad financial conditions. QE1 might provide guidance to estimate the impact of new large-scale asset purchases (LSAPs). Studies suggest that QE1 trimmed nominal Treasury yields by about 50bp, although the econometrics aren't robust enough to narrow a wide range of estimates. It's worth remembering that the decline in Treasury yields is far from the only channel through which QE1 worked; the easing in financial conditions more broadly was as important, and it may be more important today. Easing channels included boosting risky asset prices, depreciating the dollar, and promoting easier financial conditions abroad. It's no coincidence that equity and credit markets bottomed and the dollar peaked (on a broad, trade-weighted basis) just before the FOMC announced that it would buy Treasuries and scale up its purchases of mortgage-backed and agency securities at its meeting on March 18, 2009. Moreover, QE1 had a powerful impact on inflation expectations, judging by the 120bp increase in 5-year, 5-year forward inflation breakevens between March 2009 and April 2010. (Note that distant forward breakevens have risen by nearly 90bp from their August 2010 lows.)

Channels of monetary policy blocked or dysfunctional. The decline in long-term yields and easing in financial conditions should have a positive impact on credit-sensitive demands of the economy. However, it is difficult to quantify the economic stimulus that this will provide, because some traditional channels of monetary policy are blocked or dysfunctional. For example, the plunge in mortgage yields is having a smaller impact on refinancing activity than in the past. Tougher mortgage origination criteria - including ensuring that the loan is no more than 80% of the appraised value of the property, plus verification of the borrower's FICO score and income - have limited the number of eligible borrowers. Originators faced with ‘putbacks' from the GSEs (Fannie and Freddie) on prior loans are understandably skittish to extend credit to less-than-pristine borrowers. And the uncertainty around mortgage foreclosures and putbacks may further tighten the availability of mortgage credit.

What do policy rules say about size of stimulus needed? Traditional policy rules may provide some guidance for how much additional stimulus is needed, but with a wide range of error. New York Fed President Dudley suggests that US$500 billion of purchases would provide as much stimulus as a reduction in the federal funds rate of between half a point and three-quarters of a point. An estimated, traditional Taylor Rule prescribes that under the present circumstances - if policy rates could be negative - they should be -6% or even lower today. Combining these two models suggests that several trillion in asset purchases might be required to achieve the Fed's dual mandate. Given the blockages in monetary policy transmission channels, such estimates may have some validity, especially if policies to fix housing imbalances are unavailable. Yet, those estimates are obviously subject to substantial error.
Black Swan Insights
Read more >>

Share/Bookmark

Greek Deputy PM: "Debts exist to be restructured"

Call it a Freudian slip, or perhaps it was one of the first honest statements by a European politician regarding the sovereign debt crisis. According to ekathimerini.com, Greece's Deputy Prime Minister Theodoros Pangalos spilled what could be in the cards for holders of Greek debt. The Deputy PM said "Debts exist to be restructured..We may pursue it ourselves or the option may be offered to us and it could be in our interest to turn it down.” No doubt this will cause terrified Greek bond holders to buy as much Greek CDS as they can. And right now that protection is mighty high at 820 bps. More importantly. how do you say "debt default" in Chinese? After all, the Chinese have been big buyers of Greek debt, and publicly said they have confidence in the Greek government. They thought purchasinhg Greek debt at 10% was an easy investment. I wonder how the Chinese will react when the Greeks say in effect "F-You" and renege on their debt obligations? Do they get a few crappy islands as a consolation prize, at least? The Chinese should remember the old proverb: Thou shall not invest in bankrupt countries bearing high yields.

Black Swan Insights
Read more >>

Share/Bookmark

Fitch Says Shadow Housing Inventory At 7.5 Million--Will Take 40 months To Clear

Fitch just released a report which shows the housing market will not be recovering anytime soon. The report noted that as of September 2010, shadow housing inventory stood at a shocking 7.5 million properties. Another problem for the market to digest is the increasingly prolonged foreclosure and liquidation timeline. Fitch estimates that it currently takes 18 months from the time a homeowner stops making payments to the time banks actually sell the property, which is an all-time record. The main reason for the increase in the timeline is the government's politically motivated HAMP program, which foolishly tries to keep people who cannot afford their mortgage in their home. While this may be a good move for ambitious politicians, it only prolongs the process of default and foreclosure. According to recent numbers, the default rate for 2009 HAMP modifications is over 50%. A more startling statistic is that default rates for 2010 loan modifications is over 20%. About the only good thing about the HAMP program is that it is slowly winding down as there are not too many more homeowners eligible for the program.

Since the majority of loan modifications were down in 2009, it gave the artificial impression that the level of distressed inventory was decreasing and helped to boost home prices. But we now find out that this was not true, instead the drop was due to a large number of failed loan modifications. However, we are now seeing the banks foreclose on HAMP participants who could not afford their loan modification. This comes at a time when home sales have fallen off a cliff thanks to the expiration of the government's home buyer tax credit. Fitch is particularly concerned about this dynamic because it notes the market is simply not strong enough to support a flood of new REO (real estate owned by the banks) properties.

This report concludes that the large number of future distressed properties will lead to a further decline in home prices of 10%. Fitch does not expect housing to recover until late 2012 and the recovery will be very slow with modest prices increases (3%) in the future. Based on these assumptions, Fitch believes loss severity could increase by up to 5% for RMBS. Currently, loss severities on liquidated loans stand at 75% for sub-prime loans, 55% for Alt-A, and about 40% for prime. Personally, I think Fitch is a little too optimistic and believe that home prices could easily fall a lot further. Especially in the bubble areas of California, Florida, and Nevada where you could see prices fall 20% or more. Prices have to fall to get back in line with widely used measures of home affordability like price-to-income, home price-to rent, etc. This is a process the Federal Reserve will fight at all costs as it desperately tries to prop up nominal home prices.

Black Swan Insights

Related Articles:
Case-Shiller Home Price Index Dips In August
HAMP---50% Failure Rate For Trial Loan Modifications
Read more >>

Share/Bookmark

Irish Crisis Nears Endgame--5 Year CDS Surges To 495 bps

Poor Ireland cannot seem to catch a break these days. After a brief respite, 5-year CDS is back on the rise and is nearing all time highs reached back in late September. Furthermore, 10-year bond yields have increased to 7.20% and are 458 bps above similar German bonds, signaling investor concerns about the fate of the bankrupt country. The Emerald Isle has been beaten down by a 20-year housing bubble which burst, bringing down the countries largest banks. In response, the government has made tough decisions including harsh austerity cuts to help bring the budget deficit (currently around 11% of GDP) down. These steep cuts have reduced growth and made it harder for Ireland to grow its way out of its problems (2010 GDP growth is estimated at only 0.2%). To keep to its commitment of reducing the deficit to 3% of GDP, the Irish government is now contemplating 15 billion in more cuts to reduce the spiraling national debt currently at 70% of GDP. However, this number is misleading because it does not include the cost of the government's bank bailouts which have cost $50+ billion. If you add up the cost of the bank bailout, you get a debt to GDP number north of 100%, similar to Greece.

The problem for Ireland is that it is caught in a vicious cycle where debt is so high that the government must reduce spending which in turn reduces growth. Without strong economic growth the country has no chance of escaping the debt trap The country is locked in the Euro, so it cannot enjoy the benefits of a weak currency. Ireland is also rapidly facing the endgame of a debt fueled property bubble economic ruin. The game is similar to Greece. As long as Ireland can borrow at 4-5%, it will be fine, but as the debts rise and the economy remains stagnant, investors start to naturally worry about the country's ability to honor its debts. This leads to an increase in CDS as investors scramble to buy protection on their Irish bonds. Simultaneously, the bond market starts to demand an increased risk premium (currently 7.2%)  which raises Ireland's cost of servicing its debt. The increase in debt costs disturb investors, which leads to a further increase in bond yields (like 10%). At this point, mass fear hits the market as everyone wakes up the reality that Ireland cannot pay back its debts without consistently borrowing more money. Once this event runs its course, Ireland can no longer issue debt in the capital markets and suffers its first failed bond auction. The failed auction might not happen because the ECB might decide to buy the whole debt issue (as a stop-gap measure), but this scenario would lead to the same result---an EU bailout.

Ireland will be publicly humiliated by having to go to the EU Commission and seeking financial assistance similar to Greece. No doubt, the EU will oblige (after all the ECB is printing the money) but will implement draconian conditions to punish Ireland for its recklessness. This bailout will temporarily halt the panic in the Irish markets and give them some breathing room. However, the EU bailout will do nothing to solve the problem of Ireland's massive and unsustainable debt burden. The final chapter of this crisis is a mandatory debt restructuring where the bond holders of Irish (and Irish bank debt) take a large haircut (30-40%). In return, they will get a slightly higher interest rate and perhaps an extension to their bond maturities. While this may sound like a bad outcome for Ireland, a debt restructuring is what will ultimately provide the foundation for future economic growth.

Black Swan Insights
Read more >>

Share/Bookmark

ISM's PMI Strong In October--Surge In New Orders

The Institute for Supply Management released its monthly purchasing managers index. The composite came in at 56.9 which was an improvement from last months number of 54.4. More surprising was the surge is new orders which came in at 58.9--the largest month on month gain since 2009. From the ISM:
Manufacturing continued to grow in October, and at an accelerated rate as the PMI registered 56.9 percent, an increase of 2.5 percentage points when compared to September's reading of 54.4 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 42 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the 18th consecutive month in the overall economy, as well as expansion in the manufacturing sector for the 15th consecutive month. Ore stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through October (57.4 percent) corresponds to a 5.2 percent increase in real gross domestic product (GDP). In addition, if the PMI for October (56.9 percent) is annualized, it corresponds to a 5 percent increase in real GDP annually."

WHAT RESPONDENTS ARE SAYING ...
•"The dollar is weakening again, which is resulting in higher costs for our materials we purchase overseas. It is hurting our profit margins." (Transportation Equipment)
•"Business slowing down but still double digit over last year." (Chemical Products)
•"Currency continues to wreak havoc with commodity pricing."(Food, Beverage & Tobacco Products)
•"Customers remain cautious, placing orders at the last minute, making supply planning a challenge." (Machinery)
•"Our customer base — auto manufacturers — is expanding capacity and making major capital investments." (Fabricated Metal Products)


Read more >>

Share/Bookmark