Tuesday, June 16, 2009

Floundering In The Sea Of Red Ink

Brazil, Russia, India and China form bloc to challenge US dominance
With public hugs and backslaps among its leaders, a new political bloc was formed yesterday to challenge the global dominance of the United States.

The first summit of heads of state of the BRIC countries — Brazil, Russia, India and China — ended with a declaration calling for a “multipolar world order”, diplomatic code for a rejection of America’s position as the sole global superpower.

President Medvedev of Russia went further in a statement with his fellow leaders after the summit, saying that the BRIC countries wanted to “create the conditions for a fairer world order”. He described the meeting with President Lula da Silva of Brazil, the Indian Prime Minister, Manmohan Singh, and the Chinese President, Hu Jintao, as “an historic event”.

“We are committed to advance the reform of international financial institutions so as to reflect changes in the world economy. The emerging and developing economies must have a greater voice,” they said.

The declaration also satisfied a key Kremlin demand by calling for a “more diversified international monetary system”. President Medvedev is seeking to break the dominance of the US dollar in financial markets as the world’s leading reserve currency.

He favours the establishment of more regional reserve currencies, including the Russian rouble and the Chinese yuan, to prevent economic shocks. Mr Medvedev said: “The existing set of reserve currencies, including the US dollar, have failed to perform their functions.”


High Housing Starts Don't Reflect Reality
So my first thought was: there's got to be something wrong with this number . A 17 percent surge in housing starts didn't make a whole lot of sense to me at first, but after talking to my minions I'm now getting the picture.

First of all, the biggest part of the gain was in multi-family, up 61.7 percent month to month, but that's after falling 49 percent in April. Patrick Newport, an economist at HIS Global Insight, says the multi-family market is still in a "deep slump," despite the monthly jump. "Permits, which better gauge underlying conditions, fell 8.3 percent, the 11th consecutive monthly decline, to a record low of 110,000 units 9annual rate," says Newport. "The recent sharp decline in this market is related to financing. Some builders are overwhelmed with debt. Others cannot find funding to finance projects with positive net present values."

As for single family, Dan Oppenheim over at Credit Suisse tells me that "the bit of stabilization earlier this year (the end of buyer paralysis after the end of last year) led a few builders to get their plans set for more."

But analyst Ivy Zelman gave me a huge nugget: 50 percent of sales in May were on spec. She says we're seeing a lot of spec homes now because, "today's consumer wants to touch and feel the house." The positives are that cancellations are down, sales are better and there's less negative pricing, although discounts are still prevalent. "The patient was without a pulse in the fourth quarter," Zelman notes, "and now the patient's in ICU."

I'm not trying to be a bear here, just a pragmatist. The government and industry programs to ease foreclosures are not showing big successes. A lot of Alt-A borrowers are in big trouble and many won't qualify for any of the bailout programs. With interest rates in the mid 5's, refinancing isn't going to do much of anything for many borrowers. There is no sign of abatement in delinquencies, and while investors are in there, using old-fashioned cash to eat up inventories of distressed properties, there are plenty more foreclosures in the pipeline just waiting to hit the market.

U.S. Factory Production Falls; Capacity at Record Low
June 16 (Bloomberg) -- Industrial production in the U.S. fell in May for the 16th time in the last 17 months, reflecting declines in consumer goods and business equipment that signals the manufacturing slump remains broad-based.

Output at factories, mines and utilities decreased 1.1 percent last month, in line with forecasts, after falling a revised 0.7 percent in April, Federal Reserve data showed today in Washington. The amount of industrial capacity in use dropped to a record-low 68.3 percent.

The fallout from bankruptcies at Chrysler LLC and General Motors Corp. may ripple beyond auto-related industries in coming months. Without a rebound in manufacturing, any recovery from the worst economic slump in half a century will take longer to emerge.

“The rate of decline has slowed, but there are lots of problems that have yet to be cleaned up,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “We’re going to be bouncing along the bottom for a protracted period of time.”


Yep, more proof that Bumbling Ben Bernanke's second half recovery is going to be a real humdinger. Hey, great idea, we have a 10.5 month supply of homes on the market, let's build some more! I lost count of the headlines I saw today touting the 17.5% "increase" in new homes construction. LOL! 17.5% of next to nothing is still next to nothing, but it makes great headlines...even if they are grossly misleading.

Ben, you've got what's left of America's factories producing very little and the American consumer with very little to spend on what little the factories are producing. How do you get a "recovery" from that?

A new role as 'risk regulator' could reshape Fed
WASHINGTON (AP) -- The Obama administration's plan to revamp regulation and prevent any more crashes like those that felled AIG and Lehman Brothers includes a bold new idea: Empower the Federal Reserve to oversee the biggest financial players whose failure could threaten other institutions and the economy.

But some lawmakers and economists say making the Fed a "systemic risk regulator" would itself be a high-stakes risk that would distract from its core mission: reviving the economy.

They say the Fed shares blame for the financial crisis that erupted last fall. Along with other regulators, it failed to crack down on risky mortgages and lax lending standards that ignited the crisis.

Unless the Fed improved its oversight abilities, "giving the Fed more responsibility at this point is like a parent giving his son a bigger and faster car right after he crashed the family station wagon," said Mark Williams, professor of finance and economics at Boston University and a former Fed bank examiner.

Lack of Regulation Didn't Cause the Crisis and More Rules Won't Prevent the Next One
On Monday, Tim Geithner and Larry Summers penned an op-ed piece in the Washington Post entitled A New Financial Foundation. On Wednesday, President Obama is expected to put his full weight behind this vision of a new regulatory framework for Wall Street.

Before this discussion goes any further, Jeff Matthews of Ram Partners, wants you (and presumably policymakers) to remember this: "The epicenter of the financial crisis that almost brought the world to its knees was the regulated portion of the U.S. financial system -- in particular Fannie Mae and Freddie Mac, two of the most regulated entities ever created."
Furthermore, "every publicly traded bank that has gone out of business had financial statements signed by their CFOs and CEOs," the veteran money manager notes. Such assurances were prescribed by
Sarbanes Oxley, the legislation that emerged in the aftermath of the corporate scandals at Enron, WorldCom and others earlier this decade.

As discussed in the accompanying video, every bubble in history has been followed by regulatory attempts to prevent its repeat, and yet bubbles continue to be a regular occurrence in market-based capitalism.

Second-Half Recovery Is "Nonsensical": Economy Still Descending, Ritholtz Says
Wednesday's report of a 17% monthly rise in housing starts made for some dramatic headlines, but don't confuse that with an actual recovery, says Barry Ritholtz, CEO of Fusion IQ and author of Bailout Nation.

"Housing Starts did not ‘soar' as Bloomberg claimed; you soar high in the sky, and a move from ankle to knee level does not qualify," Ritholtz writes on his popular blog, The Big Picture. "This was not, as The WSJ asserted, a ‘Surge in Home Construction.' Rather, it was a bounce off of record lows."

Ritholtz's bigger point is that the free fall from September to March was so agonizing, it feels good to be in a "normal" recessionary environment, as he believes we're currently experiencing. Ritholtz compares the economy today to a skydiver right after the parachute opens - the fall is now controlled, but you're still descending.

Furthermore, the fund manager says hopes for a second-half recovery are "nonsensical" citing the continued pressure on U.S. consumers and lack of evidence of a business recovery, as evinced by today's capacity utilization data, the lowest on record going back to 1967.

The Mental Nature of the Credit Crisis
By Bill Bonner, The Daily Reckoning
The rally may run through the summer; it may not.

Asked about the rally on Wall Street, Barron’s latest Roundtable panel had various views about how far and how fast it would take us. But all were sure of one thing: the worst is over. We will not go below the lows set this past March.

This recovery is for real, they believe…and so is the bull market on Wall Street.

Investors believe it too. Analysts believe it. Economists believe it.

And why not? The ‘Committee to Save the World,’ part II, is on the job. And here are two of the three committee members writing in the Washington Post. “We have nothing to fear but fear itself,” they would have written. But that line had already been taken:

Like all financial crises, the current crisis is a crisis of confidence and trust. Reassuring the American people that our financial system will be better controlled is critical to our economic recovery.

By restoring the public’s trust in our financial system, the administration’s reforms will allow the financial system to play its most important function: transforming the earnings and savings of workers into the loans that help families buy homes and cars, help parents send kids to college, and help entrepreneurs build their businesses.

Get it, dear reader? The slump has nothing to do with bad investments and bad businesses…or with too much debt…or with too many producers making too much stuff for too many people who can’t pay for it.

Instead, it’s all in our heads! And if we can make some ‘reforms’ that cause the public to think everything is all right, well…heck…everything WILL be all right.

Except that it’s not all right. You can pull as much wool over the public’s eyes as you want, GM still won’t be a going concern. Nor will any of the other problems go away. And until those problems are worked out, there won’t be enough earnings and savings to push the economy forward.

As for the feds’ confidence tricks, they only make the situation worse. If the public spends more money…it just goes even deeper in debt!


Gold and Silver held their respective support today, Gold around 928, and Silver 14. Both will need to pursue some follow thru to the upside tomorrow to get the CRIMEX monkey off their backs.

Gold Bulls must reassert themselves at 942 quickly, or risk further downside reaction towards support at 918. A move back through 950 may signal that a new interim low is established.

As is most often the case when the Precious Metals correct in price, Silver finds itself with the most work to do, and the bigger hole to dig out of. Silver Bulls must take back 14.60 to regain control of the market from the Hoods of the CRIMEX.

As was suggested yesterday, there are no fundmental improvements supporting a bid for the US Dollar. Nervous shorts are all that keep the Dollar's head above 80 at this point. The Sea Of Red Ink that the Dollar is floundering in will surely wash back over it shortly...

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