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On Fri, Aug 8, 2008 at 2:47 PM, Cesar writes:

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Hope they don’t dig it up and take it home!

Lost Sovereignity

Oil-rich Fund Eyeing Foreclosed US Homes

By Teri Buhl

There’s a new land grab starting in America.

Foreign money, which up to now has focused its attention on investing in iconic commercial real estate - like Barneys New York and the Chrysler Building - is now moving to scoop up tens of thousands of discounted foreclosed homes across the country.

One sovereign fund, said to have earmarked $29 billion to purchase foreclosed residential real estate, recently hired a West Coast mortgage broker and is starting to search for bargains, The Post has learned.

The search, which is being carried out, in part, by Field Check Group mortgage consultant Mark Hanson, who was retained by the broker, Steve Iversen, is concentrating on single- and multi-family REO (real estate owned) homes, or homes that have already been taken over by the mortgagee.

Neither Iversen nor Hanson would disclose the name of the client, but sources told The Post it’s a sovereign fund.

The unidentified fund joins individual US investors, hedge funds and Wall Street banks in kicking the tires of REO homes, which have fallen in value so much that they are now tempting investments.

A sovereign fund would have two distinct advantages over other investors - the depressed value of the US dollar makes the homes a bargain, and sovereign funds have deeper pockets.

The sovereign fund of Abu Dhabi, for example, has a reported $875 billion in assets, while Norway has $391 billion, Singapore has $303 billion and Kuwait has $264 billion in their sovereign funds, which are funded by proceeds from oil sales.

The Abu Dhabi Investment Authority is expected to announce next month what type of US distressed assets they will be investing in and real estate is at the top of the list, according to a report in Financial Times last week.

ADIA did not respond to an e-mail question about REO investments.

So far, prices on bulk sales of REO properties vary based on location and are selling from 60 cents to 80 cents on the dollar. Hanson started out offering 40 cents on the dollar for about $2.5 billion worth of California properties owned by IndyMac and Washington Mutual but was turned down. The banks refused to comment.

Hanson is now willing to pay 50 cents to 60 cents on the dollar for a collection of California REOs worth at least $500 million.

In fact, this week Hanson’s team negotiated a $2 billion package mixed with homes across the country for 31 cents on the dollar. While progress seems slow, Hanson reminds us this is only a nine-month old industry.

Some market experts think such deeply discounted REOs, like the deal Hanson just closed, are more fiction than fact.

“The size and discount of that type of deal isn’t the norm yet,” said Robert Pardes, with Recourse Recovery Management Services, a provider of mortgage advisory services.

“The critical mass of bulk REO is in well-capitalized institutions that don’t need to sell yet in bulk at a deep discount because they are better off not taking substantial hits to the capital just to get the assets off their books,”

This may change, should the market become more crowded with bank failures and distressed institutions, he said.

Enoch Lawrence, senior vice president of CB Richard Ellis, says “This type of bulk buy would make an impact on the market. They are in a unique position because they have a long time horizon to invest and a cheap cost of capital. It’s actually a perfect time for them to acquire these REO assets.”

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My current assessment is that the crude sell-off has caused the USD’s strength.

Lower crude prices make the USD ‘harder to get’ as oil producers get fewer USD for the same volume of crude (and product) exports to the US.

Likewise, this also brings down the US trade gap which is about half directly related to oil prices, so nonresidents have fewer USD to meet their USD financial asset savings desires.

Crude has been brought down by technical selling, which also brought with it technical buying of USD as trend following trading positions were unwound.

The crude market has gone into contango as would be expected with a futures sell off and tight inventories.

Tighter US credit conditions made the USD ‘harder to get’ while increased deficit spending makes the USD ‘easier to get’ resulting in GDP muddling through at modest rates of growth.

The Russian invasion probably helped the USD today.

Eurozone credit quality erosion with the onset of intensified economic weakness may be triggering an exit from the euro. The lowest risk euro financial assets are the national governments which carry similar risk to US States, and are vulnerable in a slowdown that forces increasing national budget deficits that are already in what looks like ‘ponzi’ for credit sensitive agents.

Eurozone bank deposit insurance is not credible and therefore the payment system itself vulnerable to an economic slowdown.

With the Russian army on the move, public and private portfolios may not want to hold the debt of the eurozone national governments that they accumulated when diversifying reserves from the USD.

I expect the Saudis to resume hiking crude prices once the selling wave has passed. I don’t think there has been an increase in net supply sufficient to dislodge them from acting as swing producer. And I also expect them to continue to spend their elevated revenues on real goods and services to keep the west muddling through at positive but sub-trend growth.

And the Russian invasion will linger on and help support the USD as a safe haven in the near-term

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Comments about this post from email:

MIKE:

Again, its very likely you have permanently damaged demand at prices that are still over 100-

It’s possible the growth of crude consumption has slowed, but I still think it’s doubtful if consumption had declined enough to dislodge Saudi price control. July numbers still not out yet.

in addition asset alligators around the world are actually or synthetically short the dollar after 8 years of dollar selling…

Agreed. The question is the balance of the technicals, and if the CBs no longer buying USD has been absorbed by others.

For now, yes, short covering has mopped up the extra USD sloshing around from our trade gap, but it’s still maybe $50 billion per month that has to get placed. Not impossible for non-government entities to take it but it’s a tall order.

The Russian invasion helps a lot as well. That could be a much more important force than markets realize. Looks like a move to further control world energy supplies. A middle-eastern nation could be on the bear’s menu. I doubt the US could do anything about a Russian takeover of another neighbor. Certainly not go to war with Russia. and they know it.

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I.O.U.S.A. Movie Trailer

It’s like fighting the Hydra.

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Government spending kicking in with 2007 spending that was delayed to 2008:

Topical article: The GOP’s December Surprise by James K. Galbraith

Durable Goods Orders Rise Unexpectedly

by Michael M. Grynbaum

A separate report showed that orders for big-ticket items rose last month, beating economists’ expectations. A surge in export orders and *investment in military-related products* sent durable goods orders up 0.8 percent in June from a revised 0.1 percent in May, the Commerce Department said. Excluding orders for military-related goods, orders were up only 0.1 percent.

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Looks like they buckled quickly to get the rest of the bill through ASAP.

Pension fund provisions out of House bill

by Doug Halonen

A bill in the House Agriculture Committee that would deal with commodity speculation was dramatically revised today to delete provisions in a previous draft that would have barred pension funds from investing in agricultural and energy commodities and engaging in equity and interest rate swaps, a committee aide said.

“(The) pension provisions are out of the bill,” the aide, who asked not to be identified, wrote in an e-mail response to a P&I Daily inquiry. The aide could not say why the provisions were removed.

Pension industry advocates said that the threat of the bans — included in the draft bill that was being circulated Wednesday — was met by significant opposition from pension fund representatives.

The draft and the revised bill were both sponsored by Rep. Collin Peterson, D-Minn. The committee will vote on the bill this afternoon, according to the committee.

“It’s going to be a pretty innocuous bill,” said one pension industry lobbyist, who asked not to be identified by name. “We’re not sweating it for sure.”

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Just saw that the house just rejected this.

Looks like it was one more reason for technical weakness in crude, along with the vote to limit speculation and the oil storage company’s futures and cash market issues and bankruptcy.

White House threatens veto on bill to sell govt oil

by Tabassum Zakaria

(Reuters) The White House on Thursday threatened to veto legislation that would require the government to sell 10 percent of the oil in the nation’s emergency petroleum stockpile.

The House of Representatives was expected to vote on the bill later on Thursday. Democrats hope the legislation will lower oil prices by putting on the market more of the Strategic Petroleum Reserve’s light, sweet crude that is sought by refiners.

“Drawing down our emergency oil reserve in the absence of a severe energy disruption is counter to the purpose of the SPR, and offers the nation a quick fix instead of much needed long-term, responsible energy solutions,” the White House said in a statement.

The bill would require the government to sell 10 percent of the emergency stockpile’s oil, or 70 million barrels, in the open market. About 40 percent of the stockpile’s oil is light sweet crude.

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Karim writes:

• CATERPILLAR SEES ECB CUTTING RATES AT LEAST 25BP BEFORE YR END
• CATERPILLAR SEES NO SIGN OF RECOVERY IN NORTH AMERICAN HOUSING
• CATERPILLAR ASSUMES AT LEAST ONE MORE RATE CUT LATER THIS YR
• CATERPILLAR SEES ‘DIFFICULT’ FOR ECONOMY TO AVOID A RECESSION
• CATERPILLAR SEES OIL PRICE AVG ABOUT 16% HIGHER IN LAST HALF
• CATERPILLAR SAYS 2Q SALES/REVENUE UP 30% OUTSIDE NORTH AMERICA
• Caterpillar Net Rises 34% as Asia, Mideast Building Lift Sales
• Caterpillar Reports All-Time Record Quarter Driven by Strong Growth Outside North America

Right, weak domestic demand for sure. But note the last few lines that represent the booming exports even though domestic economies around the world are slowing.

That’s what happens when they spend their accumulated hoard of USD here and spend less at home as they try to get rid of their USD hoards. This doesn’t stop until their holdings of USD fall to desired levels.

I still see continued domestic weakness with GDP muddling through due to exports and government spending.

And ever higher prices pouring in through the import/export channel.


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Too Big to Fail?

by Peter S Goodman

Using public money to spare Fannie and Freddie would increase the public debt, which now exceeds $9.4 trillion. The United States has been financing itself by leaning heavily on foreigners, particularly China, Japan and the oil-rich nations of the Persian Gulf.

This is ridiculous, of course. The US, like any nation with its own non-convertible currency, is best thought of as spending first, and then borrowing and/or collecting taxes.

Were they to become worried that the United States might not be able to pay up, that would force the Treasury to offer higher rates of interest for its next tranche of bonds.

Also ridiculous. Japan had total debt of 150% of GDP, 7% annual deficits, and were downgraded below Botswana, and they sold their 3 month bills at about 0.0001% and 10 year securities at yields well below 1% while the BOJ voted to keep rates at 0%. (Nor did their currency collapse.)

The CB sets the rate by voice vote.

And that would increase the interest rates that Americans must pay for houses and cars, putting a drag on economic growth.

As above.

For one thing, this argument goes, taxpayers — who now confront plunging house prices, a drop on Wall Street and soaring costs for food and fuel — will ultimately pay the costs. To finance a bailout, the government can either pull more money from citizens directly,

Yes, taxing takes money directly, and it’s contradictionary.

But when the government sells securities they merely provide interest bearing financial assets (treasury securities) for non-interest bearing financial assets (bank deposits at the Fed). Net financial assets and nominal wealth are unchanged.

or the Fed can print more money — a step that encourages further inflation.

This is inapplicable.

There is no distinction between ‘printing money’ and some/any other way government spends.

The term ‘printing money’ refers to convertible currency regimes only, where there is a ratio of bill printed to reserves backing that convertible currency.

Skip to next paragraph “They are going to raise the cost of living for every American,”

True, that’s going up!

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Totally misguided regarding public purpose.

For one thing, the shareholders of the agencies are still there for ‘market discipline’ - all that’s been done for them is eliminated liquidity issues, not solvency issues.

At the end of the day a lot of houses were built for a lot of people who live there.

These are real assets and real standards of living that have been supported.

Is anyone arguing it’s a waste of real resources? That’s the real issue.

Also, fiscal policy is all about demand management, not a ‘pretty’ balance sheet by some arbitrary standard.

And, of course, without the fundamental understanding that the funds to pay taxes and buy government securities comes from government spending policy is likely to be suboptimal at best.

Also, note the bias towards ‘inflation’ that’s built into the political process.

This all supports prices and GDP.

There are no supply side constraints on government spending and/or lending with floating fx, unlike the gold standard of 1907/1930, and other fixed fx regimes, past and present.

Time for comrade Paulson to pull the plug on the Fannie and Freddie charade

by Willem Buiter

Are Fannie Mae and Freddie Mac adequately capitalised, as asserted recently by US Treasury Secretary Hank Paulson, Federal Reserve Board Chairman Ben Bernanke and their regulator Office of Federal Housing Enterprise Oversight Director James B. Lockhart III? The answer is: obviously not, if these two government-sponsored enterprises of the US federal government had to make a living on normal private commercial terms. Obviously not if they were subject to the market discipline preached by Paulson and Bernanke, but not practiced when it comes to large financial institutions perceived as systemically important (too large or too interconnected to fail) or too politically sensitive to fail.

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The world has enough actual issues without tossing in a few contrived ones.

The fact that the ratings agencies will actually do this also testifies negatively to their state of knowledge while there is no threat of solvency, there is a threat of downgrades and secs getting cheaper by a few basis points, as happened in Japan.

And, worse, as the government has the same fears as the ratings agencies that there is risk of counter agenda policy decisions for the wrong reasons.

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Small consolation - declining real terms of trade helping insurers.

Progressive Gains as Record Gasoline Curbs Driving

by Erik Holm

Americans are driving less for the first time since 1980, data compiled by the Federal Highway Administration show. The rate of accidents per insured vehicle fell 0.5 percent in the first quarter from a year earlier after increasing in 2007, according to Insurance Services Office Inc. in Jersey City, New Jersey.

“We may be at a very special point where things have changed dramatically,” Progressive Chief Executive Officer Glenn Renwick said at an investor meeting last month.

Americans drove about 20 billion fewer miles during the first four months of 2008, down 2.1 percent from a year earlier, according to the Federal Highway Administration in Washington. Progressive of Mayfield Village, Ohio, was the top performer on the 24-member KBW Insurance Index during the three months through yesterday, gaining 21 percent.

The number of drivers probably fell again in May when gas prices approached $4 a gallon, said Meyer Shields, a Baltimore- based analyst at Stifel Nicolaus & Co.

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Twin themes remain - weakness and higher prices.

In Q2 2006 it seemed to me that the financial obligations ratio couldn’t get much higher which meant consumer debt could not grow at a faster pace.

With the budget deficit in decline and the trade gap still widening, it would have taken increasing rates of growth of consumer debt to sustain GDP, so my forecast was for gradually declining GDP growth rates over time.

At the same time, I was calling for ever higher crude prices as I saw the Saudis as a swing producer/price setter intent on hiking prices.

This was all temporarily derailed in Aug 2006 when Goldman changed the composition of its commodities index and liquidated substantial amounts of gasoline and crude from the basket of futures purchased and held by its fund, and another fund that followed the Goldman index also re-weighted funds and liquidated substantial numbers of futures contracts. This action pushed prices down until the liquidation was over, but then at year end Goldman and also AIG at year end changed their indexes and again drove prices down. Shortly thereafter it was announced that Goldman was turning its index over to S&P to avoid related party conflicts, or something like that, and the Saudis have resumed their clandestine price hiking.

In general, the Valance charts show economic weakening since Q2 2006. The subprime blow up took away demand in the housing sector as fewer buyers qualified for mortgages when the number of undetected fraudulent applications was reduced, with exports first picking up the slack in 07, and government kicking in soon after in 08.

With the government deficit now proactively growing again, and the financial obligations ratios starting to relax, GDP should continue to muddle through.

“Muddling through” also means, however, that demand will be high enough to support the current level of crude/food/import prices and allow core prices to catch up with headline CPI as the rising food/crude/import prices are also factors of production that are driving up costs.

So far, GDP has muddled through as domestic demand has weakened.

All the surveys look about like these - working their way lower over time, with some turning up recently from the lowest levels.

Government spending is on the rise, as a conspicuous drop in the rate of spending in 2007 is making a comeback in 2008, along with the fiscal package now kicking in.

Housing is way down, to the point where it could recover by 50% and still be depressed.

Rising affordability and the passage of time to digest the disruption of the subprime related issues along with increased government spending and increasing exports are beginning to turn things around from the bottom that may have been reached last October/November.

The outlook for the future may have bottomed at these very low levels.

Actual inventories of unsold new homes are steadily falling and median prices are showing signs of a bottom also pointing to a possible bottom for the housing sector.

Government spending and exports have kept the economy from getting a lot worse.

No matter how you look at it, the ‘labor markets’ are on the soft side.
Productivity increases have allowed positive GDP growth with reduced labor input.

Government to the rescue! GDP will be sustained as long as this holds up.

Not terrible here either, apart from the auto industry getting caught out with too many large trucks to sell.

Inflation will only get a lot worse as crude keeps rising.

NOTE: The dip from the Goldman effect in August 2006 has been largely reversed in CPI with the others following with a lag.

And these are the wholesale prices and import prices that have also more than recovered from the Goldman effect and are in the process of getting passed through to retail prices.

Export prices are booming, expectations way too high for the Fed, the CRB back on trend after the Goldman dip, and demand for Saudi crude holding firm at current prices.

All the price surveys look about like this.

Demand looks strong here as well.

Meanwhile wages remain ‘well-anchored’ as real wages go negative after being about flat for a few decades. And even the most liberal members of Congress seem to think this is a ‘good thing’ as they congratulate the Fed Chairman for keeping wage pressures low.

We are in the process of discovering it IS possible to have inflation without wages leading the way, just like the rest of the banana republics with weak currencies, rising import prices, export led growth, and declining real terms of trade.

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US Energy Consumption as Percent of GDP

Interesting how the price hikes get us back to the 1970s ratio. One of the arguments that it was different this time around was that crude is a lower percentage of GDP than it was then.

The pass-throughs to the rest of the price structure are just getting started, and I expect them to persist well past the peak in crude prices.

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The CEO Economic Outlook Survey doesn’t look too bad.

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US April machine tool demand down from March

by Ayesha Rascoe


(Reuters) Demand for the machine tools that shape metal for products such as car engines and refrigerators dropped sharply in April, two groups said in a joint report on Sunday.

U.S. April machine tool demand declined 27.6 percent to $396.47 million from $547.81 million in March, the American Machine Tool Distributors’ Association (AMTDA) and the Association for Manufacturing Technology (AMT) said.

Demand grew 29.2 percent from $306.86 million a year earlier in April 2007.

Exports continue to boom as this very volatile series suggests.

US Exports YoY

March demand was revised upward from $544.62 million reported a month ago.

In the first four months of 2008, demand for machine tools, which gives a sense of the pace of manufacturing, stood at $1.587 billion, up 19.9 percent from $1.324 billion in the same 2007 period.

“Export demand for U.S. manufactured products and the global boom in infrastructure development continues to fuel the surprising growth in capital equipment investment,” said AMT President John Byrd in a statement. “The decline from March to April is not surprising, considering the extraordinary results posted in March.”

Demand for machine tools dropped throughout the country in April. In the South, demand fell 59.8 percent, while demand decreased 35.2 percent in the Northeast and 31.7 percent in the Central United States.

Demand also dipped 10.4 percent in the Midwest. In the West, however, demand rose 3.4 percent.

The machine tools report is generally based on a survey of about 200 manufacturers, distributors and importers of machine tools that represent 76 percent of the machine tool market.

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Muddling through above recession levels.

TABLE-US chain store sales rise 2.0 pct last wk-Redbook

NEW YORK, June 3 (Reuters) - Redbook Research on Tuesday released the
following seasonally adjusted weekly data on U.S. chain store sales:
Year-over-year: Week (w/e 5/31/08 vs year ago) 2.0 pct
Year-over-year:Month (May 2008 vs May 2007) 1.8 pct
Month-over-month: (May 2008 vs April 2008) 1.9 pct

 

The Johnson Redbook Retail Sales Index is a sales-weighted index of year-over-year same-store sales growth in a sample of large U.S. general merchandise retailers representing about 9,000 stores. (Editing by Theodore d’Afflisio; U.S. Treasury desk; Tel: 646-223-6300)

–

 

NEW YORK, June 3 (Reuters) - The International Council of
Shopping Centers and UBS Securities on Tuesday released the
following seasonally adjusted weekly data on U.S. chain store
retail sales.
WEEK ENDING INDEX 1977=100 YEAR/YEAR CHANGE WEEKLY CHANGE

                              (percent)         (percent)

May   31           484.3             1.2               -0.8

May   24           488.2             1.5                0.0

May   17           488.3             1.6               -0.4

May   10           490.3             0.5               -1.0

May    3           495.4             2.3               -0.2

The ICSC-UBS weekly U.S. retail chain store sales index is a

joint publication between ICSC and UBS Securities LLC. It

measures nominal same-store sales, excluding restaurant and

vehicle demand, and represents about 75  retail chain stores.

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No sign of recession here.

Several May surveys are showing signs of turning around some.

This was all ‘better than expected’ with prices blipping up and actual inventories continuing lower.

Still down but could be bottoming as well.

Still moving higher.

May price data has the Fed’s undivided attention.

Confidence falls to new lows probably due to rising inflation expectations.

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Karim writes:

 
• Core pce up 0.1% m/m and unch at 2.1% y/y (recent high 2.5% in 2/07; recent low 1.9% in 9/07); 3mth annualized rate back to 1.9%

Yes, the Fed welcomes this but is concerned about its forecasts given food/energy/import/export prices and pipeline pressures.

 
• Headline rises from 3.1% to 3.2%

And likely to go up from here.

 
• Personal income up 0.2% m/m; wage and salary component posts decline of 0.2%; likely reflecting end of seasonal bonuses in Q1

Yes, but sufficient to keep consumption muddling through and not collapse as the Fed had feared.

 
• Chicago PMI rebounds from 48.3 to 49.1

Still weak, but yet another sign the worst may be over.

 
• Final Michigan reading largely unch but 5-10yr infl expex up a tick from 3.3% to 3.4%

Yes, and very troubling for the FOMC. There have been numerous strong statements regarding the imperative of not letting inflation expectations elevate.

 
• All add up to ISM likely holding below 50 next week; payrolls down another 50-75k and ue rate back up to 5.1% or 5.2% for May

Yes, weak, but not recession, and strong enough to support the stock markets and ever higher consumer prices.

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Karim writes:

The ICSC weekly chain store sales index was unchanged for the week ending May 24 compared with the prior week and rose by 1.5% from the same week of the prior year–steady with the prior week. The ABC News/Washington Post Consumer Comfort Survey for the period ending May 25 continued to show a record low buying climate evaluation by consumers (for two consecutive weeks) with 81% of respondents calling it a bad time to spend money.

ICSC Research’s statistical analysis (combined with the consumer survey result) suggests that the record high gasoline prices at the pump are dragging down chain-store sales demand by nearly 1 percentage point currently, while the lift so far from higher income, because of the federal tax rebate, is only offsetting that spending drag by about a quarter of percentage point. As such, the net effect (approximately -0.75 pp.) continues to be negative on store spending. April chain store sales on a year-over-year comparable-store basis rose by 3.5%, based on ICSC’s tally of retail chains. However, the April 2008 increase was exaggerated by the shift in the date of Easter compared with April 2007. Over the prior two months, the average monthly year-over-year pace was 1.5%.

Yes, the key is whether the oil producers ’spend’ the funds here or ’save’ them and build reserves as they did in the 1970’s.

So far the booming US exports and annecdotal evidence of massive infrastructure expenditures in the middle east indicate they have been spending their higher revenues and sustaining US GDP at muddling through levels.

This means employment and growth muddle through but real terms of trade and our standard of living declines

As of May 23, 43% of the $107 bn. personal federal tax rebate already has been distributed to taxpayers, which should begin to turn the consumer spending tide a bit. In a special consumer tracking survey taken between May 22 and 25, 12% of households reported spending most of the rebate already. Based on the latest tax rebate flow that would imply approximately $5 to $10 bn. of the rebate was spent already by the 51.7 million taxpayers receiving a rebate check so far.

According to an ICSC Research tax rebate survey, released on May 19, ultimately 22% of households expect to spend the rebate, which will potentially mean nearly $25 bn of spending power over the next several months. For the fiscal month of May, ICSC Research expects monthly sales will grow by between 1% and 2% on a year-over-year same-store basis.

My best guess is more will be spent with a relatively short lag of maybe 30 days after receiving the checks. This includes using the checks to make down payments on deferred purchases, such as small appliances and home improvements, which has a multiplier effect.

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