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IndyMac Collapse Second Largest Bank Failure In U.S. History

Well, it wasn’t long before all those recalled FDIC employees were put to good use. From MarketWatch tonight:

IndyMac Bancorp Inc. became the biggest casualty of the subprime mortgage crisis on Friday, as federal regulators shut down the troubled Pasadena, Calif.-based savings bank in one of the largest U.S. bank failures ever.

The Federal Deposit Insurance Corp. said in a statement it will take over operations of IndyMac, which will open for business on Monday as IndyMac Federal Bank. The thrift had total assets of $32.01 billion as of March 31.

IndyMac Bancorp Inc. now has the distinction of being the second-largest financial institution to fail in U.S. history, according to the Office of Thrift Supervision, which had regulated IndyMac.

MarketWatch reporters Jonathan Burton and John Letzing noted:

Regulators said the “immediate cause” of IndyMac’s failure was a deposit run in recent days that began after a June 26 letter to the OTS and the FDIC from New York Senator Charles Schumer was made public. The letter voiced concerns about IndyMac’s soundness.

By July 10, depositors had pulled more than $1.3 billion from their accounts, the OTS said in a statement.

“The institution failed today due to a liquidity crisis,” said OTS Director John Reich. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”

Schumer couldn’t immediately be reached for comment late Friday.

It must be pretty lonely up there on that pedestal right now…

Bank Slayer?

Source:

“Latest victim of mortgage crisis, IndyMac taken over”
Jonathan Burton, John Letzing
MarketWatch, July 11, 2008

Sunday Edition: December 2, 2007

The Great Escape
If you haven’t heard yet, U.S. Treasury Secretary Henry Paulson announced on Friday that the mortgage industry was working with the U.S. Treasury Department on a broad plan to save the homes of subprime borrowers with adjustable-rate mortgages who cannot afford higher payments as their interest rates reset in coming months, but who otherwise could afford to stay in their homes. Earlier this afternoon CNBC reported that mortgage industry executives worked Saturday on the details of a homeowner “rescue plan,” where interest rates on some subprime mortgages could be frozen for up to 7 years. This weekend’s activities took place so that Secretary Paulson could announce a framework for the plan tomorrow, with full details released by Wednesday.

The Wall Street Journal reported Saturday that many of the particulars need to be hammered out, including the duration of the interest rate freeze and which subprime borrowers would be eligible for the bailout. Also unclear are the number of future mortgage resets. The Federal Reserve estimates that 2 million mortgages face resets, with as many as 500,000 homes in danger of being lost. As much as $362 billion in subprime mortgages are due to reset in the coming year, according to Banc of America Securities.

According to CNBC:

Deutsche Bank said in a report Friday that the population Paulson’s plan is aimed at — owner-occupants with at least some equity and facing their first reset — comprises 1.2 million loans valued at $258 billion, or one third of outstanding “first-lien” subprime loans.

Already, the proposed bailout is drawing fire from critics.

Some on Wall Street are saying that the U.S. government has overstepped its boundaries by meddling in the markets. Mark Adelson, a principal of Adelson & Jacob Consulting LLC, which consults on securitization and real estate issues, told the Wall Street Journal that:

There’s a part of this that’s just morally repugnant. The problem is that the policy makers are talking to servicers about giving away other people’s money.

It’s not the servicers’ money, but shareholders’ and investors’ money.

Andy Chow, manager of a $7 billion portfolio of mortgage bonds and other fixed-income assets for SCM Advisors in San Francisco, told the Journal that the success of the plan will depend on how many borrowers qualify. “Given what we know right now, it would benefit a smaller number of borrowers than the market is assuming,” he said.

Alan Fournier, a fund manager at New Jersey-based Pennant Capital Management LLC., is forecasting that the rescue plan may prolong the pain of the housing slump. He told the Journal that the Treasury’s program may merely delay inevitable foreclosures for some people who can’t afford their homes, while allowing holders of mortgage-backed securities to put off marking down their assets. Fournier explained, “This reduces the pressure short-term to bring everything to a clearing price. We really just need to let it wash through.”

Finally, there is the threat of lawsuits from investors in mortgage-backed securities. A temporary freeze on troubled home loans may help prevent defaults, but it would also reduce the amount of interest the loans would pay. “These investors were promised a certain yield, based on the expected hikes in interest rates, and an automatic freeze without reviewing individual loans may give them grounds to sue mortgage servicers,” CNBC reported today.

I’m curious to find out how homeowners who acquired their properties through conventional fixed-rate mortgages feel about the proposed plan.  Does it make you angry knowing that your neighbor in a comparable home may be getting their low-interest teaser rate extended up to 7 years, while you pay off that higher, fixed-rate loan?

Parting Shot
When I was in college, a roommate used to return from home with a bundle of tabloid newspapers to be used for bathroom reading material (thanks Mrs. McGrath!). I read a lot of ridiculous stuff in those papers.  Nowadays, I just turn on the television or read the mainstream press when I’m looking for that same type of entertainment. In the December 10 issue of Time, horror writer Stephen King said the following when asked who he would choose for Time’s 2007 “Person of the Year”:

Britney Spears and Lindsay Lohan symbolize the media’s growing obsession with issues of personality over substance. People care more about the details of Spears’ child-custody case than they do about where the billions the U.S. government has poured into Iraq have gone. It’s time for a discussion of whether the news media have chucked their responsibilities and run off to Tabloid Disneyland.

If it bleeds, it leads…

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Sunday Edition: November 25, 2007

Subprime Mortgage Crisis Growing
According to the Wall Street Journal yesterday, calculations by the Bank of America Corp. show that interest rates are set to rise on $362 billion worth of adjustable-rate subprime mortgages in 2008. Banc of America Securities, a unit of Bank of America, estimates that $85 billion in subprime mortgages will reset this quarter, another $85 billion will reset in the first quarter of 2008, and $101 billion of mortgages will reset in the second quarter of 2008. The estimates include loans packaged into securities and held in bank portfolios. In addition to the $362 billion of subprime ARMs that are scheduled to reset during 2008, Banc of America Securities said $152 billion in other loans with adjustable rates are scheduled to reset next year, including “jumbo” mortgages of more than $417,000 and Alt-A loans, a category between prime and subprime.

According to the Journal:

Many of the subprime mortgages that have driven up the default rate went bad in their first year or so, well before their interest rate had a chance to go higher… Now the real crest of the reset wave is coming, and that promises more pain for borrowers, lenders and Wall Street. Already, many subprime lenders, who focused on people with poor credit, have gone bust. Big banks and investors who made subprime loans or bought securities backed by them are reporting billions of dollars in losses… The reset peak will likely add to political pressure to help borrowers who can’t afford to pay the higher interest rates.

The Mortgage Bankers Association estimates that 1.35 million homes will enter the foreclosure process this year with another 1.44 million homes in 2008, up from 705,000 in 2005.

U.S. Recession May Harm Emerging Markets
London-based HSBC Asset Management told Reuters yesterday that an economic recession in the United States will affect emerging markets, even though some believe that decoupling from U.S. growth has taken place. Christian Deseglise, head of HSBC AM’s $85 billion global emerging markets business, told Reuters that the possibility of a U.S. recession was looking real now compared to earlier this year. Deseglise said:

Talk of recession in the US economy has increased lately so the story of decoupling from the US economy is being looked at more carefully … this may be causing the latest bout of nervousness. In February-March, there were fears but no evidence of slowdown. Now we are not dealing just with fears, but with something that is really out there. There are real issues with many sectors that may have a slowdown impact on the rest of the world.

Deseglise talked about the fallout from a U.S. recession:

If the US were to go down to one percent growth, emerging markets have the inner strength to grow within themselves. But if the US were to enter into a prolonged and severe recession that will have a detrimental effect. Emerging markets don’t need a fast growing US economy but they still need a growing US economy… I don’t think a recession is priced into the market.

HSBC Asset Management wouldn’t be the first to dispel the notion of decoupling from the United States. On November 2, I talked about how Stephen Roach, Chairman of Morgan Stanley Asia, told an audience in Mumbai, India, that he didn’t buy into the theory of decoupling:

I think the thing that worries me the most, and this is where I would really underscore the point for you in India, is that equity markets in this region, including your own, are discounting this optimistic, rosy scenario called decoupling. There is the strong belief that because the US has slowed so far, and Asia hasn’t, that any further slowdown will leave Asia unscathed. Think about it for a second. The slowing that’s occurred in the US right now has been in homebuilding activity. It’s America’s least global sector. You stop building a house in America, there’s almost no impact on Asian exports to the US. The slowing that will be coming over the next year will be in the consumer demand sector, which is America’s most global sector. So, we are going to see the US slowdown go from a domestically driven to a globally driven slowdown. I am sorry, as bullish as I am about Asia, Asia will not be an oasis of prosperity in a softer global demand climate. To the extent that emerging market equities are buyers of the global decoupling thesis, including in your own market right here, I think there could be a significant correction in emerging market equities that certainly could hit the Indian stock market quite hard.

Supporters of decoupling disagree. Reuters said:

Some observers say solid fiscal and monetary policy, healthy balance of payments, and China’s rise as a counterweight to the United States has helped emerging nations decouple from US growth and act as a safe haven from developed market turmoil.

In addition, they argue that the United States takes in just 16% of emerging market exports now, compared with 25% in 2001. In 2006, exports to other emerging nations overtook the volume of goods and services sent to developed nations.

Parting Shot
On the Euro Pacific Captial website, president and investment advisor Peter Schiff talked about how the actions of Wall Street and the U.S. government are forcing Gulf and Asian nations to reconsider their efforts in propping up the U.S. economy. In “Heads We Win, Tails You Lose” from November 23, Schiff said:

Perhaps the icing on this “let them eat cake” mentality was provided by Wall Street itself. In a year with record losses, Wall Street firms announced that they would also be paying record bonuses to their employees. The rationale for this PR fiasco was that since the losses were not the fault of the employees (really?), they should not be made to suffer. So rather than sharing the pain being endured by their firms’ shareholders (clearly even less culpable then themselves), Wall Street’s fat cats will rub salt in their owners’ wounds by compounding their losses with the additional expense of lavish bonuses. Following the outlandish pay packages already given to ousted CEO’s who clearly were responsible for the losses, Wall Street’s “heads we win, tails you lose” attitude will not go over well abroad.

Enjoy it while it lasts… which won’t be for much longer.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Sunday Edition: November 11, 2007

The United States Of Debt
On November 6, the Denver Post talked about U.S. Comptroller General David M. Walker as he participates in the “Fiscal Wakeup Tour.” In an earlier post I spoke of tour, which is sponsored by the Concord Coalition and attempts to explain in plain terms why budget analysts of diverse perspectives are increasingly alarmed by the nation’s long-term fiscal outlook. Walker, who is the chief auditor of all federal programs and activities, is a political independent who is pleading with American voters to elect only presidential candidates who make budget reform a top priority. Why is he so concerned? According to the Post:

The federal budget is crumbling, he says. The nation continues to borrow at an alarming rate and to saddle today’s toddlers with exorbitant debt they may not ever be able to repay. The country can’t afford the Medicare and Social Security benefits it has promised. And politicians seemingly refuse to level with Americans about how much financial trouble the country faces if it sticks with the status quo much longer.

According to the nation’s auditor:

Let me tell it to you straight. The. Math. Politicians. Sell. Does. Not. Work. And if we don’t start dealing with the truth soon, this country could face dire consequences.

He adds:

Do not vote for anyone who is unwilling to make fiscal responsibility and intergenerational equity one of their top three priorities.

In response to those who insist that the United States can grow its economy enough to head off its impending trillion-dollar debt, Walker says his calculations show our annual economic growth must be at least 10% for the next 75 consecutive years for this to work (by the way, in the nineties the economy grew at an annual average of only 3.2%). Walker concludes, “We can’t grow our way out of this. Some very tough decisions must be made.”

Click here to watch the Denver Post’s presentation of “The United States Of Debt.” According to the Post, “This colorful video primer featuring Walker and some of the information he highlights when meeting with civic groups across the country will bring you up to speed in a hurry on one of the nation’s most pressing issues.”

Dissing The Dollar
I usually don’t pay attention to the antics of the in-crowd, but the following two are worth mentioning. On November 5, Bloomberg reported that Brazilian supermodel Gisele Bundchen wants to remain the world’s richest model and is insisting that she be paid in almost any currency but the U.S. dollar. Patricia Bundchen, the model’s twin sister and manager in Brazil, said in a telephone interview back in September that, “Contracts starting now are more attractive in euros because we don’t know what will happen to the dollar.”

Peter Schiff of Euro Pacific Capital had this to say about the greenback’s slide in the latest issue of his free newsletter The Global Investor:

The dollar’s fall is now so pervasive that the world is walking away from it en masse. The story has even been given some sizzle with the announcement from Brazilian supermodel Gisele Bundchen that she will no longer accept modeling contracts in dollars. Never seeing a cloud attached to any silver lining, knee-jerk bulls such as Larry Kudlow have suggested that Bundchen’s decision is a contrary indicator that the dollar has bottomed. In truth, the only notable bottom here belongs to Gisele herself.

On Friday, the Wall Street Journal reported that in the video for his new single “Blue Magic,” American rap artist Jay-Z is shown spending euros rather than dollars, “thus annointing the European currency as the rap world’s new bling,” according to the Boston Herald. Jim Cramer, host of CNBC’s “Mad Money, remarked, “But when things have gotten to the point that even people like Gisele and Jay-Z realize the dollar is too weak, things have gotten out of control.”

Parting Shot
Time magazine reported in its November 12 issue that some parents are skipping a mortgage payment so that they can get their hands on a ticket ($1,000 and up in some cases) for their child to attend a Hannah Montana concert. In case you didn’t know, Disney’s Hannah Montana is the number one show for kids and tweens on basic cable. The 54-city accompanying concert has sold out within minutes in every town.

On a side note, St. Louis-based radio station Y98 offered dads the chance to be their daughter’s hero- by putting on high heels and racing 50 yards to win 4 concert tickets.

According to Reuters, Mark Edwards, director of programming at Y98, said, “We got a couple of hundred phone calls from people asking questions about where to get high heeled shoes big enough for husbands and about 150 men turned up in high heels.”

By the way, the winner of the race didn’t give the tickets to his kids. He was competing on behalf of his boss who has a young daughter…

It’s good to be the king.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Sunday Edition: November 4, 2007

Skeletons In The Vault
Last Friday, Bloomberg reporter Betty Liu interviewed Beeland Interests chairman Jim Rogers. Rogers, co-founder of the Quantum Hedge Fund with George Soros in the 1970s and well-known investment author, has been quite vocal lately regarding his negative outlook on the U.S. economy. However, this interview caught my attention as the legendary investor warned specifically about the dangers from something called level 3 assets held by investment banks. What are level 3 assets? Basically, it’s a classification given to assets that barely trade and whose values are largely the result of informed guesswork by a bank’s own employees. Level 3 assets may include mortgages (subprime included), securitized credit card obligations, leveraged buyout bridge loans, asset-backed commercial paper, complex derivatives contracts, and credit default swaps.

Here’s what Jim Rogers had to say in the interview:

Betty Liu: I want to get your take on the investment banks. Do you think we’re addressing the problems enough, the credit problems there?

Jim Rogers: I am short the investment banks, as you know. I added more not too long ago. There’s a lot of phony bank bookkeeping going on. You should learn the word level 3 accounting, level 3 assets, because you’re going to hear a lot about it in the next 6 months.

Rogers repeated his warning once again:

Betty Liu: So you think that the financial sector is not addressing the problems correctly? You think those problems are going to continue with us for quite some time?

Jim Rogers: Betty, listen to the words level 3 accounting, or level 3 assets. The government, or, accounting profession is now making these guys own up and next year they’re going to have to come up with the real thing. Huge numbers of assets are hidden away in level 3 assets which firms make up the numbers what they’re worth. They don’t have to put them into the market place. But starting next year, they have to. Listen to those terms, level 3 assets, because you’re going to see a lot of problems on Wall Street.

Under accounting standards SFAS 157 and 159, set by the Financial Accounting Standards Board (FASB), starting this November 15, banks will be required to divide their tradable assets into three “levels” according to how easy it is to get a market price, and according to a Dow Jones Newswire piece last Friday, it will be the auditors’ job to determine whether the right inputs to value level 3 assets were used. Because the valuations for these assets were performed by bank employees, and bonuses are paid out when the bank’s quarterly profit rises, there’s a very good chance these assets are grossly overvalued.

On October 29, Martin Hutchinson, a business and economics editor at United Press International and publisher of a weekly column of economic and market commentary called “The Bear’s Lair,” talked about what might happen once the shenanigans are uncovered:

Goldman Sachs has disclosed its Level 3 assets, two quarters before it would be compelled to do so in the period ending February 29, 2008. Their total was $72 billion, which at first sight looks reasonable because it is only 8% of total assets. However the problem becomes more serious when you realize that $72 billion is twice Goldman’s capital of $36 billion. In an extreme situation therefore, Goldman’s entire existence rests on the value of its Level 3 assets.

The same presumably applies to other major investment banks – since they employ traders and risk managers with similar educations, operating in a similar culture, they probably have Level 3 assets of around twice capital…

The capital underlying Wall Street, at the top, is not all that large – a matter of a few hundred billion. Given the piling of risk upon risk that has been engaged in over the last few years, and the size of the losses in the mortgage market alone that seem probable – my own estimate last spring of $980 billion looks increasingly likely to be somewhat below the final figure – it appears almost inevitable that in a bear market in which liquidity dries up and investors become skeptical, Wall Street’s capital will be wiped out.

Parting Shot
During his interview with Bloomberg on Friday, Jim Rogers had this to say about last week’s job data:

Well, first of all, they’re fraudulent numbers. The government’s making these numbers up… I don’t know why they keep doing it, because they’re losing all credibility, and we know that whatever numbers they publish will be revised dramatically next month. So, it’s a charade. I don’t know why they bother. I don’t know why anybody bothers. I know you have to report something, but it’s a charade.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Sunday Edition: October 28, 2007

Alarm Bells For America

The freedom of the press is one of the great bulwarks of liberty, and can never be restrained but by a despotic government.
-Thomas Jefferson, 3rd U.S. President and Declaration of Independence author

In my 11 years of public sector employment, I worked with a number of civil servants who always placed the public interest first. Then again, I also had the displeasure of working alongside some incompetent and unprofessional individuals who looked out only for themselves. Thinking I had seen everything, I was upset to learn from the Washington Post this weekend that the Federal Emergency Management Agency (FEMA) staged a fake press conference last Tuesday as FEMA employees posed as reporters and asked questions, while real members of the press listened in on a telephone conference line and were unable to ask questions. According to the Post, FEMA announced the news conference about 15 minutes before it was to start, making it unlikely that reporters could attend. However, to “accommodate” the press a telephone conference line was set up so reporters could listen (but not ask questions).

During the briefing, Vice Admiral Harvey E. Johnson Jr., FEMA’s deputy administrator, called on questioners who did not disclose that they were FEMA employees. Johnson answered questions regarding the recent California wildfires with an emphasis on FEMA’s improved response since Hurricane Katrina in 2005. For example, one question was, “Are you happy with FEMA’s response, so far?” Johnson replied, “I’m very happy with FEMA’s response so far. This is a FEMA and a federal government that’s leaning forward, not waiting to react. And you have to be pretty pleased to see that.” After the stunt had been discovered, White House press secretary Dana Perino said on Friday that “it is not a practice that we would employ here at the White House. We certainly don’t condone it. We didn’t know about it beforehand… They, I’m sure, will not do it again.” I’m not so sure. According to the Salem-News (OR) yesterday, in 2005 a political operative was busted after asking President George W. Bush simple and easy questions while posing as a White House reporter.

This action was a little too Stalinesque for my taste. In present-day America, it seems the public interest is increasingly becoming subjugated to self-interest. For our purpose, let this incident serve as a reminder that the next time you hear “don’t worry, be happy” from Washington or Wall Street when it comes to our economic health- be wary. Do your own research, filter out the “noise,” and make up your own mind.

Washington and Wall Street will continue to pursue their best interests, which may not always be the same as yours and mine…

Chicago Immune To Housing Woes?
Last Thursday, the Illinois Association of Realtors announced that the average price paid for an existing home in the Chicagoland area rose 5.9% in September. On Friday evening, four members of the local media appeared on “Chicago Tonight” and discussed the topic of “Slumping home sales unnerve the real estate market here.” One of the guests, Daniel Miller, business editor of the Chicago Sun-Times (number ten U.S. newspaper based on daily readership), said that if you’re a prospective homebuyer in the Chicagoland area- now is the time to buy. One of the other panelists nodded his head in agreement with the comment. In this morning’s real estate section of the Chicago Tribune, a piece made reference to a recent report from the Headrick-Wagner Consulting Group out of Naperville, Illinois, that says Chicago home values increased 2.8% from last year.

After seeing all this, am I supposed to believe that Chicago is immune to the housing woes afflicting other major metropolitan areas in the United States? Or, are these guys just reminding the world why we’re called the “Windy City”? (Note: some believe Chicago got this nickname not because of the weather, but rather Chicago politicians and their propensity to “blow a lot of wind.”)

Here’s what I know. Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, told the Wall Street Journal last Thrusday that home values, as measured by the S&P/Case-Shiller U.S. National Home Price Index, are likely to fall about 7% this year and a similar amount in 2008. The Journal’s quarterly survey of housing-market conditions in 28 major U.S. metropolitan areas shows that inventories of unsold homes are still rising in most of them, prices are generally falling, and overdue loan payments are piling up. This applies to Chicago as well. The most recent data for the S&P/Case-Shiller Home Price Indices shows that U.S. home prices in major cities were falling at their fastest rate in 16 years. For 10 major cities (including the Chicagoland area), home prices fell 0.6% in July and were down 4.5% in the past year, the sharpest decline since 1991. Robert J. Shiller, Chief Economist at MacroMarkets LLC and a creator of the index, said on September 25 that:

The decline in home prices clearly continued into the summer months. The year-over-year decline reported for the 10-City Composite is the lowest since July 1991… The further deceleration in prices is still apparent across the majority of regions, with 16 of the 20 metro areas showing a drop in their annual growth rate from what was reported in June.

Focusing solely on Chicago, from June to July home values increased 0.1%, according to the S&P/Case-Shiller data. This followed a rise of 0.2% from May to June. However, when we look at the previous 12 months, the value of a Chicago home declined by -0.9%. According to the Wall Street Journal, housing inventory in the City of Chicago also increased 5.4% year-over-year in September.

My own research leads me to believe that the Chicagoland residential real estate market is not as rosy as some would like you to believe. This may be due to my use of the S&P/Case-Shiller Indices. Back in February, O. Emre Ergungor, an economist at the Federal Reserve Bank of Cleveland, said, “Despite their potential weaknesses, the Case–Shiller Indices are still an improvement over other house price indices commonly cited in the media, one published by the Office of Federal Housing Enterprise Oversight (OFHEO) and another by the National Association of Realtors (NAR).”

As Daniel Miller said, it is a buyer’s market in Chicago. Just not right now, or else you’ll probably lose money.

Parting Shot
CNBC talked to Swiss investment analyst Dr. Marc Faber on October 22 about the U.S. economy. Faber is famous for advising his clients to get out of the stock market one week before the October 1987 crash. Discussing the outlook for the U.S. housing sector with Dr. Faber, CNBC said:

Manhattan is the great exception to U.S. trends, continuing to rise in price even when strong U.S. regions show signs of decline. But Faber says that in the bigger perspective, New York property is as vulnerable to a credit bust as any major metropolitan areas, such as “Hong Kong, Zurich and Frankfurt.”

His real-estate advice: “Buy a farm and learn to drive a tractor.”

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Sunday Edition: October 21, 2007

Something Wicked This Way Comes
It was only a matter of time before prices at the pump went up with oil hovering around $90. According to the nationwide Lundberg survey of about 7,000 gas stations, the national average for self-serve regular unleaded gas was nearly $2.80 a gallon on October 19, up 4.92 cents per gallon in the past 2 weeks. Survey editor Trilby Lundberg told Reuters this weekend that:

While gasoline prices moved up just under a nickel in that period, crude oil prices are up the equivalent of 18 cents per gallon. That missing 13 cents and more will probably turn up at the pump and soon because it represents margin squeeze over months for refiners, jobbers and retails — those who make, deliver and sell gasoline.

At $2.80 a gallon, gas prices are 60 cents more than at this time last year. The all-time high of more than $3.18 was reached back on May 18, 2007. High gas prices act as a drag on the economy. The more they rise, the more consumers have to spend on fuel and the less they have to spend on other goods and services, which drives the U.S. economy. Lundberg noted that the average price is likely to exceed $3 per gallon in coming weeks.

G-7, G-Whiz
Talk about sending the wrong message. The Group of Seven (G-7) finance chiefs ended their weekend meeting without offering verbal support for the U.S. dollar.
The G-7 consists of the United States, Japan, Germany, France, Britain, Italy and Canada. G-7 finance ministers meet several times a year to discuss economic policy. While the officials urged China to speed up appreciation of the yuan, it did not comment on the prevailing dollar weakness against other currencies, most notably the euro. Analysts have said this silence was largely expected, since U.S. leaders are hoping a weakened currency will boost American exports and reduce the massive current account deficit. Yet, should the decline in the dollar’s value continue to accelerate, foreign investors may sell their dollars and move their cash into other markets where interest rates are rising and whose economies appear better off. The American economy will suffer. An Associated Press article from September 25 talked about such a scenario:

If foreigners’ buying habits change, that could have a broad impact on financial markets- and U.S. consumers, too. For instance, if they sell their U.S. Treasury holdings, or don’t buy new government bonds or notes, then Treasury prices will go down and yields will go up. That will likely send mortgage rates higher since they are pegged to the 10-year Treasury note. That could unravel any good that has come from the Fed’s rate-cutting action and put the economy in a precarious spot. It makes you wonder why this administration isn’t doing more- or anything- to help the dollar.

Currency traders interpreted the silence as meaning official attempts at propping up the greenback are unlikely, according to Reuters earlier today. Michael Woolfolk, senior currency strategist at The Bank of New York Mellon, said “The G7’s statement effectively gives a green light to continue selling the dollar.” Traders may refocus this week on slower economic growth in the U.S., high oil prices, and the housing slump. Phyllis Papadavid, currency strategist at London-based Societe Generale, told Reuters that, “There’s acknowledgment that the fundamentals in the U.S. economy aren’t up to scratch at the moment, and in that regard the dollar isn’t in the clear.”

The greenback has been falling for more than 5 years now, and recently hit a new low against the euro and 26-year low against the pound. While the U.S. dollar lost 8% of its value last year against a basket of foreign currencies, it is already down another 7% to date. Still, Washington claims to support a strong dollar policy. On October 16, U.S. Treasury Secretary Henry Paulson said:

In terms of the upcoming G7 … the strong dollar is in our nation’s interest. I have said repeatedly that, and currency values should be determined in competitive markets, based on underlying economic fundamentals.

Actions speak louder than words, Mr. Secretary.

Follow Through
In a post from last Thursday, I talked about how overseas private investors sold a record amount of U.S. securities in August. According to the U.S. Treasury Department earlier in the week, the total holdings of equities, notes, and bonds fell a net $69.3 billion, after an increase of $19.5 billion in July. The outflow from U.S. assets was a record high and the first since the financial market crisis back in 1998.

You may be interested to know that former Federal Reserve Chairman Alan Greenspan said in a speech earlier today that the recent performance of the U.S. dollar may be tied to overseas investors unwilling to buy more U.S. debt. Speaking from Washington, D.C., Greenspan said, “Obviously there is a limit to the extent that obligations to foreigners can reach.” According to Bloomberg, the popular, yet controversial, economist noted that the dollar decline may be “an indication America is approaching this limit.”

Parting Shot
Back on July 2, I wrote about U.S. Treasury Secretary Henry Paulson and his views on the troubled U.S. housing sector:

The former chairman of Goldman Sachs stated that the downturn in the housing market is “at or near the bottom. It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.”

In my August 1 post, I talked about how Secretary Paulson felt that housing’s economic fallout was contained:

According to Reuters, “Paulson added that he did not see anything that caused him to reconsider his view that the economic damage from the housing correction was ‘largely contained,’ despite losses in a number of financial institutions and a long period for subprime issues to move through the economy.”

Fast forward to October 16. The former Goldman Sachs chairman had this to say to Georgetown University’s law school:

But let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy. The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth.

Good grief…

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Sunday Edition: October 14, 2007

It’s great to be back from my “fall break.” While out, I managed to keep on top of the latest financial news, so I have lots of material for upcoming posts in Boom2Bust.com. Now, let’s get down to business…

Import Prices Starting To Hit Home
Back on October 11, the Bureau of Labor Statistics of the U.S. Department of Labor reported that the U.S. Import Price Index increased 1% in September following a 0.3% drop in August. A 5.4% rise in petroleum prices for the month helped contribute to the September increase.

Another negative influence on import prices has been the weakening U.S. dollar relative to other currencies. Consider the following data from the Wall Street Journal’s MarketBeat Blog on the same day the BLS report was issued:

• Canada- change versus dollar +16.5%, change in import prices +5.3%
• Euro Zone- change versus dollar +13%, change in import prices +1.4%
• UK- change versus dollar +7.1%, change in import prices +3.3%
• China- change versus dollar +5.4%, change in import prices +1.6%
• Japan- change versus dollar +.1%, change in import prices -.5%

Luckily, import prices haven’t mirrored the gains of the producer country’s currency against the dollar. Perhaps foreign companies are willing to settle for lower profits to maintain a presence in the massive U.S. marketplace. As an American consumer, I hope the present situation can last. As a realist, I’m inclined to think that it’s wishful thinking.

Wall Street As An Economic Barometer
The Wall Street Journal’s Economics Blog caught up with Merrill Lynch economist David Rosenberg back on October 2 as he examined the effects of Federal Reserve interest rate cuts on the U.S. stock market. Rosenberg found that the stock market always rises in the first month after an initial interest-rate cut, and the average increase is almost 4%. It’s interesting to note that since the federal funds rate cut back on September 18, the Dow Jones Industrial Average and the S&P 500 are up 2.6% and 2.8%, respectively.

Rosenberg also looked at whether or not recessions happen while the stock market is booming. In looking at the 1990-91 recession, he saw that the S&P 500 peaked on July 16, 1990, after rising 3.4% over the previous month. The recession also happened to start that July. Looking back further, Rosenberg studied the recession of the early 1980s and found that the stock market peaked on February 13, 1980, even though a recession had started the month before. He said, “From our lens, the stock market is doing what it always does in the month after the first cut in the Fed funds rate — and that is to rally on the sugar rush of the liquidity infusion.” Yet, Rosenberg also noted that the performance of equities further on down the road depends more on how the real economy responds. On the present situation, he says, “What we do know is that the economic backdrop has become worse, not better,” and put the probability of a recession in the next 12 months at 70% in a recent Journal survey.

Speaking About Recession…
According to Reuters on October 11, about half of all U.S. states are collecting less from their sales taxes than expected, which could signal a recession lies ahead. Philippa Dunne is a co-editor with the New York-based Liscio Report, which was founded by veteran bond-market reporter John Liscio in 1992 on the belief that real time information on monthly state tax receipts is crucial to understanding the state of the United States economy. Ms. Dunne said that, “There are a lot of unknowns, but the state sales tax receipts are pretty much at recession levels.” She added that about 25 states are seeing disappointing sales tax revenues. How sales taxes perform is one way to judge a region’s economy since the data is released promptly and reveals consumer spending trends that are otherwise hard to discern, according to Goldman Sachs in a July 2007 report.

Parting Shot
Last Thursday, U.S. Treasury Secretary Henry Paulson said ahead of an October 19 meeting of finance ministers and central bankers of the Group of Seven major industrial nations that, “A strong dollar is in our nation’s interest and the currency values should be set in a competitive marketplace based upon underlying economic fundamentals.”

It just so happened that the U.S. dollar hit a lifetime low against the euro last week and has recently plummeted to record lows against a basket of major currencies.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Sunday Edition: September 30, 2007

Baby Bond Boondoggle
On Friday, U.S. Senator and 2008 presidential candidate Hillary Clinton floated the idea of providing every child born in the United States a $5,000 “baby bond” from the government to help pay for the future costs of college or buying a home. Senator Clinton said, “I like the idea of giving every baby born in America a $5,000 account that will grow over time, so when that young person turns 18 if they have finished high school they will be able to access it to go to college or maybe they will be able to put that down payment on their first home, or go into business.” According to ABC News Friday, with around 4 million babies born in the U.S. each year, the program would cost more than $20 billion annually, not counting administrative costs. Clinton and her aides provided no details on how the baby bond program would be paid for, what it would cost, or how it would be applied or enforced. Republican presidential candidate Rudy Giuliani said on the Sean Hannity radio show that the Clinton campaign is “based on pandering to the point where I think they think the American people are stupid.”

Senator Clinton is studying up on her history. This sounds an awful lot like the 1928 presidential campaign, where a circular published by the Republican Party claimed that if Herbert Hoover won there would be “a chicken in every pot and a car in every garage.” Our predecessors bought into it, however, and elected Hoover the 31st President of the United States.

Ironically, several months after Hoover took office, Americans witnessed the 1929 stock market crash and the Great Depression. Will history repeat itself?

The Fiscal Wake-Up Tour
Tonight I learned about “The Fiscal Wake-Up Tour” that is being sponsored by the Concord Coalition. From their website, The Fiscal Wake-Up Tour is a joint public engagement initiative by The Concord Coalition, the Budgeting for National Priorities Project at the Brookings Institution, and the Heritage Foundation. U. S. Comptroller General David Walker, who I’ve talked about before in Boom2Bust.com, is an advisor and has participated in each of the events. The purpose of the Tour is to explain in plain terms why budget analysts of diverse perspectives are increasingly alarmed by the nation’s long-term fiscal outlook.  Many events are scheduled for the remainder of 2007 and for 2008, including Atlanta, GA (October 1), Hartford, CT (October 23), and Baltimore, MD (October 29). I have never attended one of the Tour events, but would like to in the future. If you’re interested in finding out more about “The Fiscal Wake-Up Tour” you can visit their website.

Perhaps Senator Clinton should attend one of these sessions. Just an idea…

Cramer Follow-Up
Last Wednesday I told you how Jim Cramer of CNBC’s “Mad Money” went on NBC’s “Today” show and said not to buy a home right now or “you will lose money.” On Friday, Cramer went back on “Today” to talk about his comments, along with Charles McMillan, president-elect of the National Association of Realtors. Cramer was unapologetic. In fact, he had this to say:

Charles has to sell real estate, and I have to try to save or make people money. I can’t save or make people money by telling them to buy real estate.

At least he’s being honest. You can watch the conversation here on YouTube.

Parting Shot
Back on September 10 the Financial Times (UK) ran a story about how recession “is the word on everyone’s lips.” The Times noted that the word is usually avoided by Wall Street economists. David Rosenberg, chief economist at Merrill Lynch had this to say about its usage:

It is like looking a client in the eye and telling them that their child is ugly. It is not what people want to hear.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Sunday Edition: September 23, 2007

Reminiscing
Wow! Can you believe that today is the first day of autumn? Summer always seems to go so quick (especially as you get older). The season is especially short in the Chicagoland area as the weather has gone from winter to summer and back again (bypassing spring and fall altogether) these past few years. I always try to venture north to Wisconsin (specifically, Burlington in the southeastern part of the state) in order to get my fall fix. Nicest people in the planet in Burlington- last week while I was in town preparing my boat for winter storage I drove to the McDonalds to grab a fast breakfast and almost ran over one of the workers in the drive-thru, who just smiled and wished me “good morning”. If the same thing had happened in Chicago, I’m sure his colleague would be telling me where to stick my Egg McMuffin…

Being the first day of fall, it also marks the end of the first season of Boom2Bust.com, which debuted Memorial Day Weekend. Since its unveiling, I’ve sensed a few more Americans are starting to question the economic health of the United States. I know… the government, the Fed (a private bank, in case you didn’t know), and Wall Street keep telling us everything’s fine. But that’s their job, and quite frankly, they’re very good at it. However, if you look beyond the rhetoric you may see some significant threats to our economic well-being:

• Inflation- If you believe the “official” data, then the latest inflation number is around 2%. But if you’re like me, you’re a little suspect of this number when prices for everyday items seem to indicate otherwise. According to the formula used prior to the Clinton administration the headline rate of inflation is running around 5.5% as of last month. If we use the CPI formula that was in place back in 1980, headline inflation is significantly higher.
• Employment- Employers cut 4,000 workers from payrolls in August, which was the first time in four years. Look back farther and you’ll see that U.S. employment growth has been trending downwards for more than a year. Especially worrisome is that since the beginning of 2007 more than 40,000 mortgage industry workers and 20,000-plus construction industry workers have lost their jobs, according to Chicago-based global outplacement firm Challenger, Gray & Christmas Inc. Also, the number of temporary workers hired fell in each of the previous 6 months, and was down 2% in July from the start of the year. Economists believe that businesses cut temporary workers first before turning to full-time employees.
• Housing- Considering housing-related employment accounted for about 1 in every 10 jobs in 2006, this sector must be followed carefully. The National Association of Realtors recently admitted that the worst housing slump in at least 16 years will extend into 2008 as tighter loan standards cut into home sales. The group has already cut its home-sales forecast 9 times this year. The NAR may report on September 25 that home resales declined 4.5% to an annual rate of 5.49 million, the lowest in 5 years, according to a Bloomberg survey. Two days later, the Commerce Department is projected to report new homes sales fell to an 828,000 pace, 4.6% less than in July. The National Association of Home Builders/Wells Fargo index of builder confidence for September dropped to 20, matching the January 1991 reading as the weakest ever. Levels lower than 50 mean most respondents view conditions as poor. The Case-Shiller U.S. National Home Price Index revealed U.S. home prices in the second quarter of 2007 fell 3.2% compared to the same period in 2006. The price drop marked the largest year-over-year decline ever recorded in the 20-year history of the index. The Case-Shiller index, which tracks multiple sales of the same homes, is considered by many observers to be the best gauge of national and metro real estate values. According to RealtyTrac Inc., in August the total number of U.S. foreclosure filings, including defaults, scheduled auctions and bank repossessions, rose 115% from a year earlier.
• Dollar- The greenback is broke, but probably not down and out- yet. Regardless, as of Friday the U.S. currency stood near a 31-year low against the Canadian dollar while the euro has continued to set new record highs against the dollar, climbing above $1.41 for the first time ever. If the dollar continues to weaken, as many analysts and traders expect, imports sought by U.S. consumers could cost more. A weaker U.S. currency, besides pushing up the price of foreign goods, also drives up the price of commodities priced in dollars, such as oil, and has a big impact on consumer spending (which accounts for around 70% of U.S. gross domestic product). Should the dollar decline sharply, we may see foreign investors dump their U.S. dollar-denominated assets, which would mean major trouble for the U.S. economy.
• Consumer Debt- Consumer and mortgage debt is running at over 120% of disposable income. U.S. consumer debt rose in July at a 3.7% annual rate to $2.46 trillion. The amount of revolving credit, such as credit cards, carried by consumers rose in July at an annual rate of 6.6%, or by $5 billion, which was the third straight month of significant gains. Revolving credit was up 6.4% in June and a whopping 10.9% in May. The U.S. personal savings rate was only 1% and 0.5% for the first and second quarters this year.
• National Debt- Last week Treasury Secretary Henry Paulson informed lawmakers that the U.S. government would hit its current debt ceiling of $8.96 trillion at the end of the month. The national debt is the total accumulation of annual budget deficits, which must be financed with borrowed money. Unless Congress votes to raise it, the country would be unable to borrow more money to keep the government operating and to pay debt obligations coming due. The proposed boost of $850 billion would be the fifth since President Bush took office in 2001.

Are you uneasy knowing all this? I sure am! Yet, these are just some of the economic threats that come to mind as we say goodbye to summer. I will be particularly watching derivatives in the coming months, as I fear these financial instruments have the potential for wreaking havoc in spite of their “reputation” of minimizing risk.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Sunday Edition: September 16, 2007

Alan Greenspan: Beyond “60 Minutes”
Tonight on 60 Minutes Lesley Stahl interviewed Alan Greenspan, Federal Reserve Chairman from 1987 to 2006. The U.S. economic outlook is “pretty gloomy”, according to “Easy Al”. Greenspan told “60 Minutes” that it was not yet clear whether current turmoil in the financial markets will have a deep and lasting effect on the U.S. economy. However, in an interview for today’s Financial Times the former chairman said the turmoil was “an accident waiting to happen”. According to the Times:

He said the price of risk had fallen to unsustainably low levels beforehand, with investors addicted to asset-backed securities that offered some additional yield over Treasury bonds as if they were “cocaine”. Mr. Greenspan said this demand induced the big increase in the origination of subprime mortgages by mortgage brokers… The rise in defaults on subprime mortgages was only the trigger that set off a broad re-evaluation of risk, he argued.

Alan Greenspan also talked to Lesley Stahl about the troubled U.S. housing market, and said that U.S. home prices will fall further. In Sunday’s Financial Times interview he said the decline in home values “is going to be larger than most people expect”. Greenspan predicted “as a minimum, large single-digit” percentage declines in U.S. home from peak to trough, and added that he would not be surprised if the fall was “in double digits”. Mr. Greenspan guessed that prices were probably already down 2-3% from their peak.

The well-known economist said on tonight’s program that in the long term, the biggest problem facing the U.S. economy is the re-emergence of inflation and rising interest rates. He didn’t elaborate, but in the Times article Greenspan said that his successors at the Fed would have to be careful not to ease rates too aggressively because the risk of an “inflationary resurgence” was greater now than when he was Fed chief.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Sunday Edition: September 9, 2007

Lest We Forget
Ahead of the sixth anniversary of 9-11, Osama bin Laden appeared on video to ridicule President Bush about the war in Iraq and to remind the world of his escape from capture. The leader of al-Qaeda also told Americans they should convert to Islam if they want the war to end. Bush’s homeland security advisor, Frances Fragos Townsend, appeared on two Sunday talk shows and played down the capabilities of bin Laden and al-Qaeda. Townsend, who was appointed Homeland Security Advisor by the President in May 2004 and has a legal background, told viewers of “Fox News Sunday” and CNN’s “Late Edition”:

This is about the best he can do… This is a man on a run, from a cave, who’s virtually impotent other than these tapes… We know that al-Qaida is still determined to attack, and we take it seriously… But this tape appears to be nothing more than threats. It’s propaganda on their part… There’s nothing overtly obvious in the tape that would suggest this is a trigger for an attack.

I wish I shared the same view of al-Qaeda as Ms. Townsend, as the majority of U.S. intelligence analysts feel that al-Qaeda are anything but impotent. According to the Associated Press today:

Terrorism experts say the network is regrouping in the lawless Pakistan-Afghanistan border region. The latest National Intelligence Estimate says al-Qaida is growing in strength, intensifying its efforts to put operatives in the United States and plotting against U.S. targets that will cause massive casualties. The U.S. is in a “heightened threat environment” and al-Qaida is the most serious threat, the analysts found.

Enter Michael Scheuer, CBS News consultant, former CIA analyst, and author of Imperial Hubris: Why the West Is Losing the War on Terror and Through Our Enemies’ Eyes: Osama bin Laden, Radical Islam, and the Future of America. Scheuer, a 22-year CIA veteran, was the head of “Alec Station,” the CIA’s unit responsible for tracking al-Qaeda, from 1996-1999. Ironically, Scheuer was mentioned in bin Laden’s latest video. “If you would like to get to know what some of the reasons for your losing your war against us, then read the book by Michael Scheuer,” said bin Laden. White House aide Frances Fragos Townsend said the video was nothing else but propaganda. CBS News said on Saturday that the Intel Center, an independent analysis group which had studied the tape, along with Homeland Security Director Michael Chertoff, believe the tape is not an indication of an impending attack on American interests. But Scheuer disagrees. He told CBS:

The Intel Center is almost always right. I think there’s an overwhelming threat in it. Bin laden, again, offered us a chance to convert to Islam, which is required in their religion before they attack us. So to say there’s no threat in this message is just 180 degrees incorrect.

Earlier today Frances Townsend said that, “We ought to remember, six years since the tragedy of September 11th, we haven’t seen another attack.” I understand her logic, and I fear it may be tragically flawed considering who it’s being applied to.  One defining characteristic of Osama bin Laden is patience. His favorite Islamic verse is, “I will be patient until Patience is outworn by patience.” Remember this: In 1993, bin Laden started plotting the 1998 bombings of the U.S. embassies in Kenya and Tanzania; it took two years to coordinate the attack on the USS Cole; eight years passed between the two attacks on the World Trade Center.

Lest we forget.

Christopher E. Hill
Editor
editor@boom2bust.com

Sunday Edition: August 26, 2007

The Great American Bailout, Part 3
Earlier this month, U.S. Senator and 2008 presidential hopeful Hillary Rodham Clinton proposed the establishment of a $1 billion fund to bail out homeowners in danger of losing their residences to foreclosure. Now, famed bond fund manager Bill Gross said this week that the White House should bail out millions of American homeowners who are facing foreclosure. The founder of the fixed-income investment firm PIMCO and columnist for Fortune wrote in his monthly investment outlook on PIMCO’s web site:

If we can bail out Chrysler, why can’t we support the American homeowner?… This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard-working Americans whose recent hours have become ones of frantic desperation… Write some checks, bail ‘em out, prevent a destructive housing deflation that (Fed Chairman) Ben Bernanke is unable to do.

Gross’ policy recommendations including creating an agency to coordinate bailouts or aid for homeowners, and modifications to the Federal Housing Authority program. He argued that a bailout would also benefit Wall Street. Gross predicted that, “Your stocks and risk-oriented levered investments will spring to life like the wild flowers in Death Valley after a flash flood.”

And I thought the Clinton plan was nuts. Peter Schiff does a fine job at explaining the negatives behind such a proposal in Friday’s Market Oracle:

Setting aside the constitutional or ethical arguments against it, the cost of such a bail out would be staggering. My guess is that the price tag would exceed one trillion dollars (Gross estimates the cost at only around $200 billion). Even if Gross’ numbers are accurate, it still represents a significant sum which we would likely have to borrow from abroad. What Gross fails to consider is the moral hazard implicit in such a bail out. Were the government to create a program whereby anyone falling behind on their mortgage could have their loan restructured to some lesser amount with lower payments, one would have to be an idiot not to take advantage of it. If such a nutty plan were ever implemented, it would not be 2 million homes going into foreclosure as Gross fears, but 20 million.

And guess who’ll be stuck with the bill…

Goldman Sachs Housing Study
According to Friday’s Wall Street Journal, the chief U.S. economist at Goldman Sachs feels home prices remain relatively expensive when compare to typical family income. Jan Hatzius says that during the housing boom years of 2000 to 2005, the ratio of the median-price home to the median family income rose 42% above the mean ratio of the previous 25 years, mainly due to escalating home prices. Even though housing prices have declined since, the price-to-income ratio still remains 32% above the mean. “Unless household incomes start rising rapidly, housing prices could have a lot further to fall,” said the Journal.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com

Sunday Edition: August 19, 2007

No More Weekend Editions
When I was in high school my English teacher (who bore a striking resemblance to Mr. Kotter from Welcome Back Kotter) had us read the book Iacocca: An Autobiography. For the younger readers out there, Lee Iacocca is a former CEO of Chrysler who is credited with turning around the carmaker’s fortunes in the 1980s after it was on the verge of bankruptcy. As a result, he became one of the most widely-recognized businessmen in the world. One custom that Mr. Iacocca shared in his book that really impressed me was that in spite of all his hard work, he was adamant in setting aside Friday night, Saturday, and Sunday for his family. Only on Sunday night would he crack open the briefcase and get a head start on the coming work week.

In tribute to Mr. Iacocca, instead of posting an occasional “weekend edition,” a “Sunday edition” will be posted on a regular basis from this point onward. Therefore, 6 out of 7 days a week you will now be able to find new material at Boom2Bust.com.

Thar She Blows!
After a slow beginning to the 2007 Atlantic hurricane season, Hurricane Dean is making headlines as it marches through the Caribbean. When I first saw that the projected path of Dean was shifting south, I was glad that the probability of the storm making landfall in the United States, especially in populated areas and/or in the vicinity of energy infrastructure, was diminishing. However, upon looking closely at the U.S. National Hurricane Center’s 3-day projected path, I noticed that the hurricane appeared to be headed in the direction of Mexico’s Bay of Campeche, located off the south-eastern coast of the country in the Gulf of Mexico. The significance of this area is that it accounted for 73% of Mexico’s total crude oil production in 2005.

The Bay of Campeche is the site of Mexico’s Cantarell oil field, one of the largest oil fields in the world, according to the Energy Information Administration (EIA). In 2005, Cantarell oil made up 60% of Mexico’s total production. Also in that year, Mexico was the second largest source of crude imports for the United States.

Energy markets have been volatile since 2004 and 2005 when hurricanes Ivan, Katrina, and Rita pummeled energy infrastructure on the U.S. Gulf Coast. The Gulf of Mexico accounts for roughly 1/3 of domestic U.S. oil production and more than 15% of its natural gas. Also, almost 1/2 of U.S. refining capacity is located in Gulf Coast states and is vulnerable to storm damage.

As I write this, Reuters is reporting that oil prices have tumbled over 1% in early overseas trade as Hurricane Dean appeared unlikely to disrupt key production and refining centers in the U.S. Gulf Coast region. “Oil prices are falling because Hurricane Dean is heading away from the U.S. oil centres. That’s the main factor driving down prices,” said David Moore, a commodities analyst at the Commonwealth Bank of Australia.

However, the U.S. National Hurricane Center is forecasting that while Dean could spare the U.S. Gulf Coast it could strengthen into a rare and potentially catastrophic Category 5 storm and slam into Mexico’s Yucatan Peninsula.
If Dean crosses the Yucatan and enters the southern Gulf of Mexico, it could disrupt oil production in the Gulf of Campeche and cause havoc in the global oil market. Earlier today Reuters reported that Mexico has already started to evacuate 13,360 workers from its Gulf of Mexico oil rigs. According to the state oil company Pemex, the impact of the evacuations on oil production will be known early Monday. A company spokeswoman said, “Production is currently normal, but this (the evacuations) will affect production. We will have an idea (of how much) early on Monday.”

Time’s Up
Back on June 21, I published “Housing Slump Ends In 2 Months.” The post focused on Bank of America’s Chief Executive Officer Kenneth Lewis, who told Bloomberg on June 19 that the U.S. economy will pick up speed due to a recovery in the housing sector. Lewis predicted, “You’ll see the economy begin to pick up in the third and fourth quarters,” and the slowdown in home sales is “just about to be over.” He went on to declare that the housing market will begin to improve in the next month or two, forestalling a recession. And I wrote, “It will be interesting to see just how Mr. Lewis’ housing prediction pans out 2 months from now. I’m circling August 19 on my calendar…”

August 19 is here, and the signs of an improved U.S. real estate market are missing. July new-home sales are predicted to have slowed to a 10-year low when announced later this week. Inventories of unsold homes on the market represent an 8.8-month supply at the June sales rate (last month reported), the highest inventory of homes for sale in 15 years. The slump has been made worse in recent months by turmoil in the mortgage market triggered by rising defaults by subprime borrowers falling behind on payments on adjustable-rate loans. Many of those borrowers are in or heading toward foreclosure, adding to the already large inventory of homes for sale and weighing on home prices. A wave of defaults has already forced banks to tighten mortgage lending standards, which will likely prolong the worst real-estate slump in 16 years. The weak housing market is also expected to weigh on economic growth in the second half of 2007 as demand falls for construction materials, appliances, and home furnishings.

Have a wonderful week,

Christopher E. Hill
Editor
editor@boom2bust.com