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I agree. Let's hope that surgery is a success and the additional damage is fixable.
jogging at home. :(
Huh, I loved the summation you provided on the solars and costs. It would be helpful to know the source, or at least who the someone was. Thanks for sharing.
Gee I know that, how could I forget? Thanks for the re-education on nominal versus adjusted for inflation. Sometimes the brain feels like its turned off.... Is this what it means to get older?
Thanks Joe for the site!
I'm not sure by what you mean by "nominal numbers" in the retail sales. Is there double counting there(wholesale plus retail)? Chinese retail sales are bittersweet if it means they are buying lots of cars (hence more demand for oil).
Roach promoted to silence it seems for us non-MS customers.
Thanks, Joe. I forget to check Yahoo. I know from time to time folks have complained about the accuracy of info on the site, but it is good as a first pass indication.
Reading about China's retail sales going up reminds me of that Roach guy who used to report about the savings short US and that China needed to start developing their internal economy. I guess Morgan Stanley shipped him off somewhere and we are no longer treated to his insight.
In the commercial real estate world transactions are down and values are down. I am not sure what kind of lag we will see until it shows up in SRS. Does SRS throw an unqualified div like QID?
Newly, can you elaborate on how you invested in other currency? I have to the extent that I have some euros left over from a trip two years ago. LOL.
The little guy moves on my computer.
PS. North state CA is quite nice. Athough I heard there are a lot of meth heads up here.
Joe, I meant to tell you the other day that I recently chatted with a commercial broker friend of mine. He echoed what you said about the challenges in re-financing.
BTW, I tried to post this earlier, but the past couple of days I have been having some trouble with the ihub interface and my computer. I keep having to re-boot. Operator error I'm sure.
Guz, are you sure you can't write covered calls? I know of IRAs that will let you do that. I believe I can do it at Schwab.
Good article from Sonders at Schwab
Consumer Woes Run Deep: Welcome Back to the 1970s?
by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.
June 10, 2008
It was a short-lived sense of nirvana when equity markets rallied sharply from mid-March, giving investors a sense that the worst of the credit crisis and the economy's woes was past. That was before a renewed surge (and attendant volatility) in oil prices and the latest disastrous unemployment report. The consensus in Schwab's Investment Strategy Committee (which I chair) is that we are in the midst of a W-shaped economic cycle, with the pick-up in growth—symbolized by the middle upward part of the "W"—driven by the stimulus package and strong exports. We feel that brief respite is over, and we're facing another bout of weakness, at least rivaling the first leg down.
Unlike the previous recession which hit businesses hardest, this one is walloping consumers. My new Consumer Pain Index combines changes in the stock market, the dollar, job growth, house prices, oil and other commodity prices. As the chart shows, consumers are now under more financial pressure than at any single time since the 1970s. That's consistent with recessionary times. I still believe we are in a recession that began late last year, and the recent uptick in the unemployment rate to 5.5% supports that view.
Consumer Pain Index plunges
Consumer Pain Index calculated using average year-over-year % change of S&P 500 Index, U.S. Dollar Index, nonfarm payroll, median home price (based on new and existing single-family homes), and inverse of oil price and Commodity Research Bureau Index. As of June 6, 2008. Source: FactSet.
CPI = nonsense in the minds of many
Nowhere is the pain being felt more than at the gas station and supermarket. Yes, "core" inflation (excluding food and energy) is contained, but many consumers would respond, "Are you kidding me?!" Until recently, few paid attention to the way the Consumer Price Index (CPI) gets calculated, but given roaring food and energy prices, many are becoming enlightened.
Over the past 30 years, major calculation changes have been made to the CPI due to "reselection and reclassification of areas, items, and outlets, (and) to the development of new systems for data collection and processing," according to the Bureau of Labor Statistics. If you eliminate those adjustments and calculate CPI as it would have been calculated in 1980, it would be nearly 12% today! No wonder I constantly hear from Schwab clients that they distrust government inflation data.
Why inflation feels higher than it is
SGS Alternate CPI reflects the Shadow Government Statistics estimate of CPI as if it were calculated using the methodologies in place in 1980. Pre-Clinton CPI reflects the SGS estimate of CPI as if it were calculated using the methodologies in place in 1990. As of April 30, 2008. Source: Shadow Government Statistics, www.shadowstats.com.
Shadow Government Statistics (SGS), from whom this chart comes, had this take on the above-mentioned CPI adjustments back in 2006: "The CPI was designed to help businesses, individuals and the government adjust their financial planning and considerations for the impact of inflation. The CPI worked reasonably well for those purposes into the early-1980s. In recent decades, however, the reporting system increasingly succumbed to pressures from miscreant politicians, who were and are intent upon stealing income from social security recipients, without ever taking the issue of reduced entitlement payments before the public or Congress for approval."
My hero, Milton Friedman
In reality, we've had an "inflation" problem for years and it has been triggered, as always, by easy monetary policy. When I served on the President's Advisory Panel on Federal Tax Reform in 2005, I had the great pleasure of meeting the late, great economist Milton Friedman. One of Friedman's claims to fame was his observation that inflation is always a monetary phenomenon: When you increase the amount of money in circulation, all else equal, prices are going to rise.
For the bulk of the past decade, rising prices were largely in assets: When we were experiencing "inflation" in stocks and home prices, we were happy participants, but now that inflation is directly hitting our pocketbooks, we are less sanguine. We are now suffering from what many feel were the irresponsible policies of former Federal Reserve Chairman Alan Greenspan, carried forward by the recent easy monetary policy of the Fed under current chairman Ben Bernanke. In the Greenspan era, bubbles in stocks and real estate were pumped up … today it's oil and other commodity prices. But this bubble is inflicting its damage as it's inflating—the other two wreaked their havoc as they deflated.
Oil = bubble redux?
The $17 spike in oil prices over two days (June 5 and 6) to nearly $140 per barrel was the largest two-day move ever and certainly can't be fully explained by supply/demand fundamentals or geopolitical risks. The energy futures market has become increasingly liquid but remains far too small to absorb the huge sums of global capital that are being wagered on oil price movements. Congress is certainly having a field day investigating speculation's impact, though as is their custom, they're more hesitant to place any blame on themselves.
I remain convinced that speculation is having a big impact on energy prices, at least at the margin. At the end of 2003, there was $13 billion in commodity index funds. By March of this year, that amount had grown 20 times, to $260 billion, and the momentum has been building—demand grew by more than $1 billion per day in this year's first quarter.
Signs of bubble-like conditions are getting more numerous by the day, suggesting that a major crack in oil prices could come at some point. The list includes, but is not limited to:
Congressional hearings on oil speculation.
Bernanke's comments on the dollar (more to follow on that).
Airlines and autos getting creamed.
Non-stop media coverage of the "energy crisis."
Gasoline subsidies being lifted or limited in Asia and India.
U.S. Strategic Petroleum Reserve additions halted.
Wall Street analysts' aggressive upside oil price targets.
Record decline in U.S. vehicle miles driven while SUV sales implode.
U.S. consumption of oil/oil products down nearly 4% in the first quarter.
Iranian "very large crude carriers" (VLCCs) holding 28 million barrels of oil in Persian Gulf on speculation of higher prices (and/or no buyers).
Demand destruction kicks in
We are also hitting an interesting threshold in global demand. As you can see in the "Oil expenditures hit 1980s 'breaking point'" chart, world expenditures on oil as a percentage of GDP are now at a level consistent with the "breaking point" in 1980, following which we experienced a decade-long decline in expenditures on oil and a 75% drop in oil prices. What we don't know, of course, is whether the new threshold is higher this time.
Oil expenditures hit 1980's "breaking point"
Annual average 1971-2007 with 2008 estimate assuming $118 oil price. As of December 31, 2007. Source: ISI Group.
None of our expressions about a potential blow-off phase for oil prices, or speculation's growing role as a price-setter, are meant to ignore the powerful forces of demand and supply. Unlike the 1970s, when we faced a supply shock, today's spike in oil prices is more about a demand surge, but it has come in the face of extremely tight supplies and limited new production.
Demand vs. supply shock
Economic theory holds that the effect of oil prices on the economy depends on the fundamentals of supply and demand. If prices ascend due to changes in supply conditions, the impact is depressed economic activity as energy becomes more expensive. But, if demand is the culprit, it leads to both a positive and negative effect. The positive effect is the purchase of U.S. goods and services by the growing emerging economies that drive demand.
That explains why oil's impact on our overall economy has been relatively muted—there are some offsetting positives (stronger exports to oil-rich and other fast-growth emerging economies) to the clear negatives. This has kept economic indicators like industrial production (one of the key determinants of recessions) in positive territory.
Has the Fed paved a road to 1970s-style stagflation?
I have regularly expressed my concerns about easy U.S. monetary policy, wondering whether we would have been better served if Bernanke & Co. had taken a different approach beginning last September (i.e., providing liquidity via their more creative facilities without cutting rates so drastically). The Fed's goal was to forestall a recession, but in doing so ignored the dollar (or implicitly fostered its weakness). At the same time, Congress unleashed the stimulus plan that has yet to have much impact on the economy (especially given that oil's rise has more than offset the value of the rebate checks).
Bernanke continues to reject comparisons to the 1970s, believing the U.S. economy's flexibility and resiliency will prevent the pass-through of commodity prices into a broader inflation problem. But the man who knows more about the dark days of the 1970s than most, former Fed chairman Paul Volcker, has other thoughts. He has said publicly that the Fed's explanations for today's policies echo those used to support easy money in the early '70s—with disastrous results—and that deeds, not words, are what's needed to protect the dollar. Remember, Volcker had to administer the foul medicine of higher rates and allow two back-to-back recessions in the early 1980s to fight inflation's nasty disease.
Rhetorical or actual inflation fighters?
It does appear that the Fed is now in pause mode, and the dollar enjoyed a brief respite as global interest rate differentials (the spread between yields here and overseas) stopped widening. The Fed may be trying to appear as inflation fighters, simply by not lowering rates any further. The Fed regularly talks about "inflation expectations," but this begs the question whether the central bank is more interested in fighting perceptions of the problem, rather than the problem itself.
Bernanke did break precedent recently when he, rather than Treasury Secretary Hank Paulson, commented on the dollar, saying the Fed was "…attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations." Those comments suggested, for the first time this cycle, that policy could go either way and rate hikes can't be ruled out.
Stopping inflation in its tracks isn't easy
Unique forces in the past 10 to 15 years have allowed for relatively loose monetary policy without runaway inflation—notably globalization and its attendant competition, which restrained prices. Now, we risk moving in the opposite direction. Just as it was difficult to cause inflation while globalized markets were keeping prices low, it's even more difficult to stop inflation when globalized markets are increasing prices.
The United States is a net importer; hence our large trade deficit. As our trading partners react to their own inflation problems, they have the economic growth and wage pressures to back up price increases, and they are now exporting inflation to our shores. The Fed can (and has) lowered rates to boost our economy, but in doing so, has only fanned inflation's fire more.
The next phase in this cycle may be one in which the Fed is forced to back up its rhetoric with real action. If the dollar sinks much further and/or oil and other commodity prices continue to surge, the Fed may be forced to raise rates regardless of the economic implications.
But all is not lost perhaps. A silver lining could be found in how we react as a nation. In the 1970s, conservation was seen as the primary long-term solution to that era's energy crisis. Today, we are thinking more comprehensively, embracing increased investment in alternative energy and better oilfield technology, along with conservation. Even today's most famous Texas oil man, T. Boone Pickens, is getting in the act—he's planning to build a $10 billion wind farm, the world's biggest yet. And that's not just hot air.
http://www.schwab.com/public/schwab/research_strategies/market_insight/todays_market/recent_commentary/consumer_woes_run_deep_welcome_back_to_the_1970s.html
Cy, thanks for the DVN piece. I look forward to reading it in more detail. You are a gem for sharing it!
Too bad I didn't play it. I'm such a wimp these days.
There was a guy in CA back in the late 80's early 90's who wanted to split the state into two or three. A lot of folks in Upstate Ca (and Southern Oregon) were very supportive.
I don't think commerical real estate will see the drop off that the residential side is experiencing. And I would expect the drop off to be slower in coming than one might expect. With the REITS one would really have to pay attention to where and what the underlying real estate is.
I'm told the institutional side of the business is still ok. The smaller transactions that non-institutional investors are typical of have slowed down as they wait to see what happens. I remember being surprised that a lot of these guys were cash buyers. Although with interest rates going up, cap rates will have to rise and therefore values should go down. Rent rates will generally increase depending on the lease and vacancy will depend on the quality of the tenants in place and location.
I read a rah rah piece on David Simon from Simon Property Group (shopping malls) and one thing that stuck in my brain was that the stronger retailers had tried concepts that didn't work and that these stores were closing down (eg Talbots Kids). However, the shopping mall owner would be paid to cancel the lease. Hence a short term bump in revenue.
OT Newly, I don't see many of those camper vans in the North State. They are probably out in Humboldt. Maybe now that this type of transport has been pointed out to me I'll see them all over! If its new I'll think it's you!
<<I read at one time that solar becomes cost effective at $150 crude.>> Joe, its interesting to learn that.
I haven't done anything in covered calls lately. I've been afraid that it would hamstring me, keeping me exposed to the downside and limiting the upside on things I wanted to hold on to. I guess you are finding that the premiums are worth the risk.
Hey guz, isn't this the time of year that you usually play KNOT? I'm not watching it but seeing your post reminded me of that stock play.
As does the Federal gov't. Alas, there is no place to hide.
Thanks. I see the similarity to the sub prime mess too, although I don't think it will be as much of a disaster. I've read recently that a state hasn't defaulted on a GO bond since before the civil war. That said, it is best to be wary of sectors like airport revenue and electric bonds and stuff from tiny municipalities. Makes sense to me. Since I'm not that familiar yet, individual munis still scare me and I'm not a big fan of bond funds.
Ajtj, a few weeks back you mentioned you weren't a fan of muni bonds. I've been meaning to ask you (and hope that you are willing to answer) why that is (bias towards equities? don't like bonds in general? the insurer situation? inflation concerns?...)
I've been lurking more on your board lately. I'm not a chartist so its hard for me to contribute but I thank you and the others here for sharing your/their work.
I guess what I am concerned about with solar is that it is heavily subsidized and it still doesn't "pencil". Just some discussion that the German gov't would reduce the subsidy knocked the sector down that day. When/if the US/state subsidy ends even more pressure to the sector. Although people might support solar, they also have to be able to afford it - hence my concern.
AD, do you think solar is a long-term viable space for investment/employment? I wonder sometimes if this is the latest version of a JDSU type story.
I can't bring myself to consider a long in GRMN at this point. Maybe I'll short some and ride a general market turndown. Better yet, I should just stay away...
Cy, did you know the duration on the CXE? Long term stuff has the greatest exposure to inflation. I'm trying to learn a little more about bonds and such.
I did have bad Voo Doo on DECK too, but then something happened to stem the red tide. My latest nemesis is GRMN, which AD brought up the other day as a long play he almost went in on and I almost shorted it. So far glad I didn't as it is up again today.
Thanks Pantera! I was also doing inertia "trading" with DVN. Wasn't sure what to do so kept holding on. It worked for awhile. Still in that one also. Cy alerted me to a wonderful call write op but I sadly let it pass.
Doing the occassional swing in DECK but just missed my limits on a couple of trades.
Good morning, Pantera. Do you have a sell target for FTO? Not that I'm selling much these days. Still doing inertia trading. Could be dangerous at this juncture.
Will the license plate be personalized "Newly2b" so we know it's you when you drive by?
Oops didn't delete cookies on log-in, off. Problem fixed.
I can't see the entire chart that others have posted. The scroll bar is the thingy on the side or bottom that allows you to change the view up/down or sideways.
Is anyone else having a problem with charts being cut off on the right margin? I don't get a scroll bar to get over to the missing material. I tried logging off and on again but that didn't work either.
FTO was an upgrade from Hold to Buy at Deutsche Securities.
Also, am I seeing right with these high targets from Friedman Billings on the coal stocks? Wow!
Hey Pantera, I think you might get another chance on SNP. I was wondering where you were thinking of buying and in doing my search came across this Reuters piece posted on another board. I pasted just incase you haven't seen it.
So is SNP your one "China" play? I see our friend Joe Stocks is really getting into China stocks these days. I haven't made the leap yet myself.
_______________________
China eyes windfall oil tax cut to avoid price rise
Thu May 29, 2008 2:50am EDT
BEIJING (Reuters) - After nearly exhausting its oil policy toolkit, Beijing has one last gambit to help it bolster oil company profits and avoid a painful rise in fuel prices before the Olympics -- relaxing its windfall production profit tax.
For Beijing, which is equally anxious to put a lid on inflation as it is to maintain social harmony ahead of the August Olympics, the choice is clear, analysts say.
"It's a no-brainer for China. If they are smart, they should cut or remove the windfall tax, recapitalize the oil companies, instead of hiking prices and risking runaway inflation," said China oil analyst Gordon Kwan of CLSA.
Executives from top upstream producer PetroChina (PTR.N: Quote, Profile, Research) and leading refiner Sinopec (SNP.N: Quote, Profile, Research) have appealed to Beijing for relief on the tax, which could go part way to easing the burden of buying costly imported crude or fuels to sell at low local rates.
Petrochina Chairman Jiang Jiemin said last week that the government is now considering a proposal to reduce the tax, which was imposed two years ago to charge domestic crude oil producers 20-40 percent of revenues at oil prices above $40 a barrel.
He gave no details, but Sinopec executives said Beijing could raise the starting point to $60 a barrel, preserving an estimated up to $6 billion in revenue on China's 1.36 billion barrels of annual output. Executives hope a decision is imminent.
After ushering in half a dozen measures in the last 19 months -- mostly tax incentives aimed at boosting local supplies by making imports cheaper or exports more costly -- adjusting the windfall tax is one of the few levers it has left.
And some analysts say it's about time that PetroChina (0857.HK: Quote, Profile, Research), which produces nearly two-thirds of China's crude but has been left out of Beijing's past handouts, get a cut of the subsidies since it is also a big refiner and retailer.
China handed out a $1 billion rebate to Sinopec Corp (0386.HK: Quote, Profile, Research) in April, the company said on Tuesday, part of a deal to rebate much of the 17 percent tax on imported crude -- a measure that does little good for PetroChina.
"It will be wise for the government to box with both fists. It will be fair to both PetroChina and Sinopec," said Liu Bo, a Shanghai-based analyst with Guojin Securities.
SHORTAGE RISK
More than Beijing's finances and PetroChina's profits are at stake -- global oil prices fell from their peaks this week as traders braced for slower demand from the fast-growing Asian region after a host of small consumers like Indonesia, Taiwan and Sri Lanka sharply raise subsidized domestic fuel prices.
Those hoping China, the world's second-largest consumer, would follow suit soon could be in for disappointment.
Even with domestic fuel prices lagging far behind global rates -- China has raised domestic prices only twice in the past two years with a 10 percent rise last November -- Beijing has the financial wherewithal to hold out for a while, analysts say.
Beijing could of course opt to ignore its politically powerful oil duopoly -- but doing so risks worsening domestic fuel shortages that analysts say are often caused by firms holding back fuel from the market, causing a visible shortage in supply both to minimize losses and to step up pressure on Beijing.
Diesel fuel shortages last week began cropping up in provinces like Zhejiang, Hebei and downtown Beijing, local drivers say, causing long queues and rationing. But they have yet to reach the fever pitch of last October, when a nationwide crisis finally forced Beijing to raise prices.
The gap between the domestic and global markets has widened swiftly with crude up 39 percent since China last raised rates.
For a graphic showing China's retail prices versus crude: here
Guojin Securities's Liu estimated that Beijing would have to increase its retail diesel price by 50 percent and gasoline by 25 percent to match that of the top consumer the United States, where consumer fuel taxes are similarly low.
But analysts agree China is unlikely to risk fanning inflation now near a 12-year high, or risk riling its people after this month's devastating Sichuan earthquake, by taking any sudden or significant measures.
Other countries with more precarious government finances have been forced to reduce subsidies, however, with Indonesia raising fuel prices by nearly 30 percent at the weekend.
"The government has been really concerned as oil prices rose much faster than expected," a Sinopec executive told Reuters.
"You use subsidies when you don't have many other choices. Aligning fuel prices with market rates is the ultimate goal, but the government has to measure the pace, has to take into account the quake impact, the high CPI."
The crude tax rebate, by returning 75 percent of the 17 percent value-added tax on about 3.6 million barrels of China's daily crude imports, is equivalent to raising fuel prices by 12-13 percent, which is still not enough to prevent losses, according to one Sinopec executive.
And China is already refunding the full rate of 17 percent VAT on gasoline and diesel imports, an incentive started last December and later extended through June. Oil traders expect it to be extended to cover third-quarter imports.
Those policies plus a forced build-up in domestic inventories ahead of the Olympics also forced China to become a net importer of gasoline for the first time ever in April, and has driven up diesel imports, one factor behind oil's latest rally.
That's a stark contrast to a decade ago, when Beijing had to slap a ban on diesel imports to fight rampant smuggling as domestic diesel was much more costly than imports.
At least the taking seems to be for an actual public good as opposed to another shopping center or office building like in New London.
Its making me smile (FTO). You should be grinning ear to ear!
FTO hanging tough. Up nicely today.
I seem to recall hearing about these dark pools before. I wonder if these dark pools are what got the low price on RIMM the other day that I couldn't get even though I had a standing limit order.
I think there is a difference on ticket writing policies between city cops and highway patrol. Last winter my husband forgot to put his seat belt on (old truck without the seat-belt nanny) and he was pulled over. The patrol guy basically stated that was his job - to give tickets.