Housing Update - How Far To The Bottom?

Inquiring minds have been asking for another housing update. My previous update was was on February 15,2008 in Housing Bottom Nowhere in Sight. I did not remember Bernanke's comments at the time but looking back now they sure seem funny.

CNBC is reporting Bernanke Expects Housing Recovery by Year End.

Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday he expects the downtrodden U.S. housing sector to improve by the end of the year, a senator who participated in the closed-door meeting said.

"He let us believe that the housing situation should begin to ameliorate by the end of the year," said Sen. Pete Domenici, a New Mexico Republican, told reporters.

Using the Japan Nationwide Land Prices model as my guide, here is how I have called things in real time.



click on chart for sharper image

I just added the Winter 2008 arrow. Housing prices are now one notch closer to their final destination. The US Timeline scale is compressed. At the current pace, housing will bottom in about 7 years vs. 14 years in Japan.

Flashback March 26 2005

The initial data point was established in the post It's a Totally New Paradigm on March 26, 2005. Here are some excerpts from that post.

• Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that "South Florida is working off of a totally new economic model than any of us have ever experienced in the past." He predicts that a limited supply of land coupled with demand from baby boomers and foreigners will prolong the boom indefinitely.
  
  
• "I just don't think we have what it takes to prick the bubble," said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90's. "I don't think prices are going to fall, and I don't think they're even going to be flat."
  
  
• Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership. "It is a new paradigm" he said.

Flashback October 27, 2005

Inquiring minds may wish to review Bernanke: There's No Housing Bubble to Go Bust.

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

What The US Can Learn From Japan

I recently came across an interesting report called The Age of Balance Sheet Recessions: What Post-2008 U.S., Europe and China Can Learn from Japan 1990-2005 by Richard C. Koo
Chief Economist, Nomura Research Institute, Tokyo, October 2008. The report contains some very interesting charts.

Click On Any Chart In The Set For Sharper Image

Exhibit 1. US Housing Price Futures Moving Closer to the Japanese Experience



Note: the line in pink is Tokyo Condo Prices while I am using Japan Land Prices as my model except with a US timeline that looks more like the above.

Thus I see a bottom in US housing in 4-5 years. If I can get a hold of the data that created the above charts I can probably get my friend "TC" to chart it going forward. My latest update from "TC" was Case Shiller and CAR Analysis November 2008 Release.

Exhibit 4. Cumulative Capital Losses on Shares and Land since 1990 Reached $15 Trillion or 3 Years Worth of Japan�s GDP



Exhibit 5. Balance Sheet Problems Forced Japanese Businesses to Pay Down Debt even with Zero Interest Rates



I have extensive comments on balance sheets and paying down debt below.

Exhibit 6. Japan�s GDP Grew even after Massive Loss of Wealth and Private Sector Rushing to Pay Down Debt



The above chart shows in pink the Japan Land Price chart that I have been using since Spring of 2005. It represents the Commercial Land Price Index in six major cities.

Exhibit 23. US Interest Rates Took 30 Years to Return to Their 1920s Level



The above chart should give treasury bears something to think about.

Balance Sheets and Paying Down Debt

There is every reason to believe US banks will face the same experience of paying down debts in a Zero Interest Rate world as opposed to going on a lending spree. Some will challenge this notion because of Obama's pledge to create jobs and rebuild infrastructure.

The counter is that Japan went on a wild spending spree as well, building bridges to nowhere and it did not do Japan any good. Here is an article by James Shaft quoting Richard Koo in A long, shaky bridge to recovery that discusses this very issue.

The lessons of Japan's stumbling path out of deflation and recession suggest that government spending can help stave off an extended recession, but it may take years not months and require an unlikely combination of political will and consensus.

That'll be a lot of bridges to nowhere.

Government spending can break the cycle. Not tax cuts, which will only go to pay down debt or are saved into a banking system that isn't working, but actual bricks and mortar. Think the New Deal's Works Progress Administration supersized or Japan building highways and bridges over seemingly every river, stream and rivulet.

"It was the fiscal stimulus that actually helped end the Great Depression, not the monetary policy," said Richard Koo, Tokyo-based chief economist at Nomura Research Institute and author of The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession.

"I don't think it will be over quickly. I am recommending at least three to five years seamless medium-term fiscal stimulus measures to give enough time for the private sector to repair its balance sheet."

Three to five years is an eternity in political life. It is an absolute sure thing that incoming President Barack Obama will design and implement a pretty chunky fiscal stimulus package even if President Bush does not pass one in his waning days in office. But think about how difficult it will be to maintain both the will and power to maintain a huge borrow and spend programme for several years.

Koo thinks that Japan, which was facing a far more serious destruction of assets, derailed its recovery with premature fiscal reform. "If we had known in advance that this kind of recession will never be over until private balance sheets are repaired and fiscal stimulus is needed to keep the economy growing, we could have done it in seven or eight years perhaps instead of 15," he said.

Near zero interest rates were ineffective in Japan because people and business refused to borrow, continuing to pay down debt to repair balance sheets that had been hurt badly by the fall in the value of assets like stock holdings and real estate.

I disagree with the conclusions of Koo and instead suggest that building bridges to nowhere wasted capital and prolonged Japan's deflation. Simple logic dictates that one cannot spend one's way to prosperity.

In the meantime I am sticking with my model that suggests there is another 3-5 years before housing bottoms in the US. I also expect the UK, Canada, and Australia to follow similar paths, offset only by the start of their respective housing busts.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Gordon Brown, Alistair Darling, Mervyn King Urge Banks To Lend

Complete silliness reigns in the UK as Prime Minister Brown, Chancellor Darling, and BOE Governor Mervyn King Urge Banks To lend.

U.K. house prices dropped to the lowest level in almost three years in November as banks starved the property market of credit, Hometrack Ltd. said.

The average cost of a home in England and Wales fell 8.1 percent in the past 12 months to 161,400 pounds ($248,000), the lowest since January 2006, the London-based property researcher said in a statement today. Values declined 1.1 percent on the month, compared with a 1.3 percent drop in October.

Prime Minister Gordon Brown urged banks to free up credit last week as political pressure mounts for him to implement measures to force them to lend. The Bank of England will cut the benchmark interest rate this week to 2 percent, the lowest since 1951, as policy makers combat the recession and the housing market slump, economists say.

Chancellor of the Exchequer Alistair Darling pledged last week to do �whatever is necessary� to get banks lending again. Bank of England Governor Mervyn King refused to rule out nationalizing financial institutions to revive credit.

With home prices plunging and unemployment rising the last thing banks should do is go on a lending spree. Forcing banks to lend will force them to incur more losses. It is as simple as that. The Chancellor, Prime Minister, and Governor have all lost their minds.

Elsewhere, the Bank of Japan is on the verge of fiscal insanity as well.

Public Broadcaster NKH says Bank of Japan to Hold Emergency Policy Meeting to encourage banks to lend.

The Bank of Japan, the country's central bank, will hold an emergency policy meeting this week, NHK reported, without saying where it obtained the information.

The bank will discuss creating a system to lend money to commercial banks and to encourage them to provide financing to businesses, public broadcaster NHK said.

Banks are in trouble because of excessive lending yet everyone seems to think the cure for excessive risk taking and poor lending practices is excessive risk taking and pool lending practices.

UK 'closer' to adopting the euro

The BBC is reporting UK 'closer' to adopting the euro

The UK is "closer than ever before" to joining the euro, according to the president of the European Commission, Jose Manuel Barroso.

Speaking on a French radio show, he said British politicians were considering the move because of the effects of the global credit crunch.

"I'm not going to break the confidentiality of certain conversations, but some British politicians have already told me, 'If we had the euro, we would have been better off'. "

"I know that the majority in Britain are still opposed, but there is a period of consideration under way and the people who matter in Britain are currently thinking about it", he said.

The value of sterling compared with other currencies has fallen during the credit crunch, and the UK government has had to spend massively in recent months to try to support the economy.

China�s November Manufacturing Contracts by Record

Bloomberg is reporting China�s November Manufacturing Contracts by Record.

China�s manufacturing contracted by the most on record and export orders slumped as a slowdown in the world�s fourth-biggest economy deepened.

The Purchasing Managers� Index fell to a seasonally adjusted 38.8 in November from 44.6 in October, the China Federation of Logistics and Purchasing said today in an e- mailed statement. Export orders, output and new orders all contracted by the most since the survey began in 2005.

China�s export orders declined to 29 in November from 41.4 in October, the survey showed. A reading above 50 reflects an expansion, below 50 a contraction. The output index fell to 35.5 from 44.3, while the index of new orders dropped to 32.3 from 41.7.

Weaker demand for Chinese goods and a slump in construction are undermining growth. China last month announced a $586 billion stimulus package and the biggest interest-rate cut in 11 years to revive the economy and counter the risk of spiraling unemployment and social unrest.

With stimulus running rampant, and monetary mistakes everywhere one looks, those looking for a complete collapse in the US dollar are unlikely to see it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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19,000 WaMu Employees Will Be Synergized Out Of A Job

Forbes is reporting JPMorgan Plans To Ax The WaMu Suits.

Up to 19,000 employees of Washington Mutual face being laid off this weekend as JPMorgan Chase turns up the synergy on its recent acquisition.

On Friday, JPMorgan Chase (JPM) said it expects to retain the 22,000 employees who work at Washington Mutual branches and 2,000 workers in the mortgage and wealth management divisions in California, spokesman Tom Kelly told Forbes.com. The company has not yet determined the total numbers to be cut in other states, but it planning to inform all former WaMu employees of their job status by Monday.

WaMu had about 43,000 employees as of June, according to a filing with the Securities and Exchange Commission. Combined, Chase and WaMu have about 5,400 branches. The company said it only plans to close about 10.0%.

The bulk of the job cuts will be at the Washington Mutual headquarters in Seattle due to the overlap in operations with the current employees at JPMorgan.

Merger Synergizing

Expect to see more synergizing from all mergers we have seen. Here is a list of synergy discussions now doubt underway.

• JP Morgan and Washington Mutual
  
• Bank of America and Countrywide Financial
• Bank of America and Merrill Lynch
• JP Morgan and Bear Stearns
• Wachovia and Wells Fargo
  

More Synergizing Coming

Still more synergy will come from hundreds of regional banks that have not yet gone under but will as the FDIC adds 54 more banks to its 'problem list'

The Federal Deposit Insurance Corp. said Tuesday the list of banks it considers to be in trouble shot up nearly 50 percent to 171 during the third quarter -- yet another sign of escalating problems among the institutions controlling Americans' deposits.

The 171 banks on the FDIC's "problem list" encompass only about 2 percent of the nearly 8,500 FDIC-insured institutions. Still, the increase from 117 in the second quarter is sharp, and the current tally is the highest since late 1995.

Banks that don't make the list can end up collapsing anyway -- the two biggest bank failures over the past year, Washington Mutual Inc. and IndyMac Bancorp, had not been on the FDIC's list of troubled banks. Wachovia Corp., which nearly failed before it got bought by Wells Fargo & Co. in October, had not been on the list, either.

Recently, community banks -- defined as those with assets under $1 billion -- have started to show similar stresses as their larger counterparts, the FDIC said.

Downsizing On Top Of Synergizing

Of course we cannot forget just plain old fashioned downsizing as noted in Citigroup's Town Hall Meeting

In yet another round of massive financial layoffs, Citigroup plans to cut about 50,000 jobs.

Combined with earlier cuts of more than 20,000 positions, the latest job cuts will equal a 20 percent reduction in the bank's workforce from peak levels reached in the fourth quarter of 2007.

In October, fellow blue chip American Express Co. (AXP) announced major layoffs, unveiling plans to slash 7,000 jobs. So far this year, Goldman has said it would cut 3,200 jobs, Whirlpool dropped the ax on 5,000, Yahoo cut 1,000 positions, and Hewlett-Packard shed 24,000 jobs.

Non-Financial Downsizing

After Christmas, expect to see massive job losses in commercial real estate, restaurants, and retail stores. Looking ahead there is no source of jobs anywhere to be found. Unemployment is going to soar.

Many who have not yet embraced frugality are going to have frugality embrace them.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Weekly Economic Potpourri November 29, 2008

Every week there are a numerous headlines that are worthy of mentioning but I simply run out of time. Here are a few headline news reports of interest from the past week.

Japan�s Factory Output Falls as Turmoil Hurts Exports

Japanese manufacturers reduced production in October and plan further cutbacks as a worsening global financial crisis weakens exports. Factory output fell 3.1 percent from September, when it rose 1.1 percent, the Trade Ministry said today in Tokyo. Economists surveyed by Bloomberg estimated a 2.5 percent drop.

Exports fell last month at the fastest pace in almost seven years and companies are responding to the slump by cutting everything from production to jobs and investment. Sharp Corp. said last week it may have to reduce output of televisions and fire some of the people who work on production lines; Toyota Motor Corp. will get rid of half its temporary employees; and Canon Inc. has postponed construction of a new factory.

Canadian Shoppers Lured To Detroit With Free $20 Gift Cards

Canadian shopping enthusiast Heather Gore described to CTV's Canada AM the long lineups at a Niagara Falls, N.Y., outlet mall where she was shopping at 12:01 a.m. on Friday morning."I have been coming here on Black Friday for the past five or six years," she said. "This year is the busiest I've ever seen it." Gore, a Toronto lawyer and veteran cross-border shopper, said she had seen many Canadians at the malls on Friday morning.

Some U.S. retailers, in fact, appealed directly to Canadian shoppers, in an attempt to bring them across the border for Black Friday. In Detroit, mall owner Taubman Centers Inc., offered a $20 gift card voucher to the first 2,008 vehicles travelling through the Detroit-Windsor tunnel between 5 a.m. and 10 a.m. on Friday.

"For those Canadians who make Black Friday an annual shopping tradition, we would like to be their shopping destination of choice," Taubman spokesperson Karen MacDonald said in a release.

Wal-Mart worker dies in rush; two killed at toy store

Three violent deaths in two stores marred the opening of the Christmas shopping season Friday. In the first, a temporary Wal-Mart employee was trampled to death in a rush of thousands of early morning shoppers as he and other employees attempted to unlock the doors of a Long Island, New York, store at 5 a.m., police said.

Video showed as many as a dozen people knocked to the floor in the stampede of people trying to get into the Wal-Mart store, Fleming said. The employee was "stepped on by hundreds of people" as other workers attempted to fight their way through the crowd, Fleming said. "Several minutes" passed before others were able to clear space around the man and attempt to render aid. Police arrived, and "as they were giving first aid, those police officers were also jostled and pushed," he said.

In the second, unrelated incident, two men were shot dead in a Toys "R" Us in Palm Desert, California, after they argued in the store, police said.

LandAmerica Goes Bankrupt

The nation�s real estate crisis has claimed its first title insurance giant, with Richmond, Va.-based LandAmerica Financial Group saying Wednesday morning that it had filed for bankruptcy protection amid a burgeoning mortgage crisis that, as of yet, shows no sign of slowing down.

The company said it and a subsidiary filed to reorganize under Chapter 11 of the U.S. bankruptcy code, and that it would sell its title underwriting subsidiaries, Lawyers Title Insurance Corporation and Commonwealth Land Title Insurance Company, as well as United Capital Title Insurance Company, to subsidiaries of Fidelity National Financial (FNF).

When the money goes, so does the toxic wife

As the recession worsens, a lot of rich men are finding their gold-digging wives are taking to their heels.

The Toxic Wife is the woman who gives up work as soon as she marries, ostensibly to create a stable home environment for any offspring that might come along, but who then employs large numbers of staff to do all the domestic work she promised to undertake, leaving her with little to do all day except shop, lunch and luxuriate.

Like a frog, the Toxic Wife needs to hop safely on to another lily pad, and a rich one, before leaving her husband. She won't stand on her own two feet. And finding a job is quite beneath her.

Lead Falls to Two-Year Low as Auto Demand Slumps; Copper Drops.

Lead fell to a two-year low in London as reductions in automobile production erode demand for the metal used mostly in car batteries. Copper declined. U.S. vehicle sales at the lowest since 1991 prompted cuts at General Motors Corp. and Ford Motor Co. China�s output of lead concentrate, used to make refined metal, climbed 14 percent in the first 10 months, according to Mainland Marketing Research Co.

Lead for delivery in three months declined $81, or 6.8 percent, to $1,105 a metric ton on the London Metal Exchange, the lowest since July 2006. Prices have dropped 57 percent this year. Inventories in warehouses monitored by the LME rose 250 tons, or 0.6 percent, to 41,200 tons, according to the exchange�s daily report.

Copper fell on concern a slumping U.S. economy will crimp consumption of Chinese imports and demand for industrial metals in the Asian economy. Some economic indicators in China showed a �faster decline� this month, National Development and Reform Commission Chairman Zhang Ping said in Beijing today.

Copper usage in the U.S., the largest buyer after China, fell 9 percent in the first eight months and demand in China rose 13 percent, according to the International Copper Study Group.

Housing is bad enough, but wait � it'll get worse

If you think the housing slump can't get much worse, Martin Feldstein thinks that both home prices and the broader economy can � and very likely will � get a whole lot worse.

"There are now 12 million homes in the United States with a loan-to-value ratio greater than 100 percent. That's one mortgage in four. The aggregate amount of that is some $2 trillion," said Feldstein. "If you look at the median (midpoint) loan-to-value ratio in that 12 million group of underwater mortgages � mortgages with negative equity � the median loan-to-value ratio is 120 percent."

That means about 25 percent of all U.S. mortgages are exceed the value of the homes the mortgages are financing. In the case of half the homes that are underwater, homeowners are paying a mortgage that's now 20 percent higher than the value of the home.

That's bad � but it's likely to get worse.

A recent report by First American Core Logic, a real-estate data firm in Santa Ana, Calif., estimated that as of Sept. 30, 7.5 million mortgages, or 18 percent of all properties with a mortgage, had negative equity. The group thinks there are another 2.1 million mortgages that are within 5 percent of going underwater.

The implications for many homeowners are staggering. Before the recent housing boom of 2000 to 2006, homes increased in value at a historical annual rate of about 2.3 percent when adjusted for inflation.

That means that for homeowners who owe 35 percent more than their homes' value, it would take, at historical averages, about 15 years just to break even on their home investment. They won't build equity. It would be a huge incentive for millions to hand the keys back to the lender and seek cheaper housing.

China downturn deepens, European rate cut sought

Central banks around the globe have slashed interest rates to try to ease the flow of credit and restart stalled economies. Economic sentiment in Europe's single currency zone hit 15-year lows in November and inflation expectations plunged, boosting the case for a big rate cut from the European Central Bank (ECB) next week. "The euro zone is in a deep recession, upping the pressure on the ECB to cut interest rates further," said Christoph Weil, economist at Commerzbank. "We envisage a first move next week on a scale of 75 basis points to 2.5 percent."

The Bank of England is also expected to cut rates by 50 basis points or more on Dec. 4, a Reuters poll showed. Benchmark rates are 3.25 percent in the eurozone and 3.0 percent in Britain, against 1.0 percent in the United States. China's central bank cut interest rates by the biggest margin in 11 years on Wednesday in response to a crisis which is reining in its once runaway growth, bringing worries about social unrest as jobs disappear.

Malls, hotels next victims in new mortgage crisis.

Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in. Malls from Michigan to Georgia are entering foreclosure. Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies' credit.

"We're probably in the first inning of the commercial mortgage problem," said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey. That's bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Unlike home mortgages, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

Woolworths Near Collapse, Risking 30,000 U.K. Jobs

Woolworths Group Plc was left on the edge of failure and MFI Retail Ltd. collapsed, putting more than 30,000 U.K. jobs at risk, after the economy's slide into a recession caused consumer spending to slump.

As sales crumbled, the retailer was hampered by debt that totaled 295 million pounds when its first half ended on Aug. 2, more than 16 times its current market value. Woolworths had interest costs of 18.6 million pounds in the period, more than today's market capitalization. The stock has plunged by nine- tenths this year after falling 62 percent in 2007.

U.K. home sales are at the lowest level in at least three decades, the Royal Institution of Chartered Surveyors said Nov. 11. A seizure in credit markets has restricted banks' ability to lend even as the Bank of England cut interest rates to the lowest since 1955.

The spending dropoff claimed victims from Ilva Furniture Ltd. to home wares retailer Rosebys Ltd., which both collapsed in September. Fashion chain MK One came under the control of administrators this month for the second time in 2008.

Shopping malls are running on empty

Life Plaza Center in San Gabriel used to teem with diners heading to Green Village, a Chinese restaurant in the middle of the horseshoe-shaped mall on Valley Boulevard.

But after the eatery closed five months ago, the 7,500- square-foot space remained vacant. With no tenants stepping forward and fewer customers clogging the parking lot, the plaza is quiet, with a curiously dark core.

It's a scene repeated in various forms throughout the region, as the economic crash that started rolling through single-family housing more than a year ago begins to hit shopping centers, turning what had been a residential phenomenon into one that threatens commercial real estate as well.

Business is so bad that an increasing number of retailers are calling it quits -- without waiting to see whether money can be made as the Christmas season gets underway.

For property owners, the loss of tenants means more than a reduction in the revenue that is collected from rents. If one store closes, customers are less attracted to the center overall, and the losses can snowball. Whereas in previous years it was easy to find new tenants, now they are scarce. And as the property owners find themselves getting in trouble, their typical recourses -- to sell the building or refinance it -- are also stymied by the stuck economy.

"We were charging $2.75 a square foot, but if we can get $1.75 for it, we'd be very lucky now," said Art Ko, a leasing agent for STC Management. "It's hard to even grasp what's a fair market price now. Everything is up in the air. We've had many deals where people just walked away the last minute. It's a buyer's market."

Satellite Halts Hedge Fund Withdrawals, Fires 30 After Losses

Satellite Asset Management LP, founded by former employees of billionaire George Soros, stopped client withdrawals from its three largest hedge funds and eliminated more than 30 jobs after losses reduced the firm�s assets to about $4 billion this year.

Satellite Overseas Fund Ltd., Satellite Fund II LP and Satellite Credit Opportunities Ltd. have declined as much as 35 percent in 2008, said a person with knowledge of the funds� performance. Simon Rayler, Satellite�s general counsel, declined to comment and wouldn�t disclose how many people remain at the firm�s New York headquarters or London offices. Satellite oversaw about $7 billion for clients at the end of last year.

More than 75 hedge funds have liquidated or restricted investor redemptions since the start of the year as they cope with fallout from the global financial crisis. Investors pulled $40 billion from hedge funds last month, while market losses cut industry assets by $115 billion to $1.56 trillion, according to data compiled by Hedge Fund Research Inc. in Chicago.

FDIC Lets Firms Without Charters Bid for Bank Assets

Investors including private-equity firms may find it easier to acquire U.S. banks after the Federal Deposit Insurance Corp. said it will let groups without charters bid for the deposits and assets of failing lenders.

The FDIC change, announced in a press release today, will help ensure �failing institutions are resolved in a manner that will result in the least cost to the Deposit Insurance Fund� by marketing assets to �known, qualified and interested bidders.�

U.S. regulators this year have seized 22 banks, the most since 1993, amid a credit crunch that fueled more than $968 billion in financial-company losses and writedowns since 2007. The Office of the Comptroller of the Currency on Nov. 21 granted a new type of national bank charter called a �shelf charter,� also designed to find buyers for failed lenders.

�This is the government being flexible,� said William Sweet, a partner in the Washington office of law firm Skadden, Arps, Slate, Meagher & Flom LLP. �They simply are trying to accommodate the interest by investors and the need for capital.�

FDIC adds 54 more banks to its 'problem list'

The Federal Deposit Insurance Corp. said Tuesday the list of banks it considers to be in trouble shot up nearly 50 percent to 171 during the third quarter -- yet another sign of escalating problems among the institutions controlling Americans' deposits.

The 171 banks on the FDIC's "problem list" encompass only about 2 percent of the nearly 8,500 FDIC-insured institutions. Still, the increase from 117 in the second quarter is sharp, and the current tally is the highest since late 1995.

Banks that don't make the list can end up collapsing anyway -- the two biggest bank failures over the past year, Washington Mutual Inc. and IndyMac Bancorp, had not been on the FDIC's list of troubled banks. Wachovia Corp., which nearly failed before it got bought by Wells Fargo & Co. in October, had not been on the list, either.

Nine banks failed in the third quarter, decreasing the FDIC's deposit insurance fund to $34.6 billion from $45.2 billion in the second quarter. This quarter, the pace appears to be picking up -- nine banks have already failed since Sept. 30, including Downey Savings and Loan Association, based in Newport Beach, Calif.

"To some extent, a bank failure is a regulatory failure," Ely said. Regulators, if they address bank problems early on, can convince a troubled bank to sell off assets, raise capital or find a buyer, he said. "My hope is they're moving faster on these problems."

The FDIC said Tuesday that commercial banks and savings institutions suffered a 94 percent drop in third-quarter profits to $1.7 billion from $27 billion in the same period last year. Except for the fourth quarter of 2007, it was the lowest quarterly profit since the fourth quarter of 1990. Those institutions wrote off $27.9 billion in loans as uncollectible during the quarter.

Recently, community banks -- defined as those with assets under $1 billion -- have started to show similar stresses as their larger counterparts, the FDIC said.

Survey says Texas manufacturing outlook is bleak

A Federal Reserve Bank of Dallas survey released Monday says Texas businesses are reporting sharp drops in most indicators of current activity. And nearly two-thirds of the 101 firms responding to the November Texas Manufacturing Outlook Survey said their evaluation of general business activity had worsened.

Several indexes for future production fell to their lowest levels since the survey started four years ago. The volume of new orders sunk to a record low, with more than half of those surveyed reporting decreases.

Texas produces more than 8 percent of manufactured goods in the U.S., behind only California.

40,000 Swarm Farm To Gather Free Food

A farm couple got a huge surprise when they opened their fields to anyone who wanted to pick up free vegetables left over after the harvest -- 40,000 people showed up.

Joe and Chris Miller's fields were picked so clean Saturday that a second day of gleaning -- the ancient practice of picking up leftover food in farm fields -- was canceled Sunday. " 'Overwhelmed' is putting it mildly," Chris Miller said. "People obviously need food."

She said she expected 5,000 to 10,000 people to show up Saturday to collect free potatoes, carrots and leeks. Instead, an estimated 11,000 vehicles snaked around cornfields and backed up more than two miles. About 30 acres of the 600-acre farm 37 miles north of Denver became a parking lot.

Brazilian Farm Credit Dries Up, Forces Growers to Reduce Crops

Coffee farmer Joao Carlos Terra says his trees will yield about a third less than planned next year because he can�t get a big enough loan to buy fertilizer and pesticide as the global credit crunch bites in Brazil.

Terra received only 10,000 reais ($4,300) of the 35,000- real loan he needed this month, so trees that should yield 250 bags of coffee next season will likely produce just 170, he said. Terra is planning to pick up extra work as a farmhand to support his wife and two sons.

�It�s kind of impossible to keep going like this,� said Terra, 29, who grows arabica coffee on about 10 hectares (25 acres) in Bom Jesus da Penha, a city in the southeastern state of Minas Gerais. �I don�t know what will happen.�

Freddie Portfolio Expands at 44% Rate in October

Freddie Mac�s portfolio of mortgage assets grew at an annualized rate of 44 percent in October after regulators directed the government-run company to ramp up purchases to ease constraints on the U.S. housing market.

The portfolio rose to $763.7 billion for the first full month that Freddie was under federal control, adding $26.8 billion in net new purchases of home loans and mortgage bonds, the McLean, Virginia-based company said in its monthly volume summary today. Freddie had cut its holdings by $61.4 billion in August and September �as it struggled to remain independent,� Jim Vogel, a debt analyst at FTN Financial wrote in a note today.

Freddie and Washington-based Fannie Mae, which slowed their growth to protect against rising delinquencies, were seized by regulators on Sept. 6 and directed to focus on helping struggling homeowners.

Zoo solves mystery of celibate polar bears

Puzzled zookeepers in northern Japan have discovered the reason why their attempts to mate two polar bears kept failing: Both are female.

The municipal zoo in the city of Kushiro in Hokkaido brought in a polar bear cub three years ago. They named it Tsuyoshi, after the popular baseball outfielder Tsuyoshi Shinjo, and waited until it reached reproductive age.

In June, the zoo introduced Tsuyoshi to its resident bear, an 11-year-old female named Kurumi, and waited for sparks to fly. But much to the disappointment of zookeepers, Tsuyoshi never made any amorous advances toward Kurumi. Earlier this month, zookeepers put Tsuyoshi under anesthesia to get to the bottom of the matter. That's when they made their discovery: Tsuyoshi is a female.

New Breakfast Cereal A Smash Hit

Shoppers everywhere are lining up for "Credit Crunch" the cereal.



Image courtesy of Live Leak.

Parents take note that it's fortified with hedge funds, kids love the free helicopter, and everyone loves the sugar coated derivatives. Enjoy a bowl with your kids today.

Something for everyone including weekend animal stories.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Rubin's Arrogance and Denial is Appalling

Former U.S. Treasury secretary Robert Rubin says he's not to blame for Citi's troubles.

Former U.S. Treasury secretary Robert Rubin said the near-collapse of Citigroup Inc, where he is a senior counselor, was due to the buckling financial system and not his own mistakes, according to an interview published on The Wall Street Journal's website on Friday.

Rubin, who is also a director at Citigroup, acknowledged he was involved in a board decision to ramp up risk-taking in 2004 and 2005, according to the paper, and said if executives had executed the plan properly, the bank's losses would have been less.

The Journal said Rubin has earned $115 million in pay since 1999, excluding stock options. "I bet there's not a single year where I couldn't have gone somewhere else and made more," said Rubin, according to the Journal.

My Comment: And exactly what does that prove other than there is a greater fool somewhere else?

Rubin cited former Federal Reserve Chairman Alan Greenspan as another example of someone whose reputation has been unfairly damaged by the financial crisis, according to the Journal

My Comment: Latching on to Greenspan as some sort of proof of innocence is like throwing a drowning man an anchor.

The paper reported that Rubin said of the current crisis: "what came together was not only a cyclical undervaluing of risk (but also) a housing bubble and triple-A ratings were misguided," he said. "There was virtually nobody who saw that low-probability event as a possibility."

My Comment: Rubin's statement displays ignorance at best and is a blatant lie at worst. There are plenty of people that saw this coming: Roubini, Shiller, Shostak, Schiff, me, and literally hundreds of bloggers all of which could have run Citigroup better than Citigroup management did.

Rubin told the Journal that the Citigroup board could bear some responsibility and that some things should have been done differently.

My Comment: How quaint. Rubin is saying: "It's not my fault, rather it's the fault of everyone else on the board."

Rubin's arrogance and denial is appalling.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Holiday Shopping Scrooge

Santa Claus may be hard at work as the holidays approach, but he will find many Americans struggling with a troubled economy. A CNN Poll On Holiday Shopping is an indication of what many of us suspect: This will be the worst Christmas shopping season on record. Let's take a look.

CNN Shopping Poll



Slow Sales And Layoffs

Here for the holidays: Slow sales and layoffs

What's going well for small businesses? Not much, according to The National Federation of Independent Business' monthly Small Business Optimism Index, which fell 5.4 points in October and landed at the third-lowest reading in the history of the survey.

"We're mired in a recession," said the NFIB's chief economist, Bill Dunkelberg. "Small business sales will be weak in fourth quarter, which may mean a negative Christmas," said Dunkelberg. "And that may spill over to the first quarter of 2009."

Only 5% of respondents think now is a good time to expand their facilities, the lowest reading since 1982 and the second lowest in the survey's 35-year history. The net percentage of owners reporting higher sales in the past three months fell to the worst reading the survey has ever recorded. Overall, 37% reported sales lower than they had three months ago, and 41% said their earnings have declined.

The employment picture was also grim. The average employment per firm dropped by .41 workers, and almost twice as many businesses reporting cutting employees as hiring them.

"When you hear about the layoffs, small businesses are the big picture," Dunkelberg said. "We hear about mass layoffs, but really the layoff of .41 employees per firm is a very big decline because small businesses employ so many." Small businesses with 500 or fewer workers employ about half of all private-sector workers, according to data gathered by the Small Business Administration.

Fewer gift cards this holiday season

On October 21, speculating about the bankruptcy of Circuit City, I offered these Circuit City Inspired Christmas Shopping Tips.

Shopping Tips

...

A big fancy fruit basket and items from food specialty stores may look practical but they are not. The markup on those things is astronomical. If you want to give someone a fruit basket, make it yourself. You can usually find an inexpensive basket to start from at a place like Hobby Lobby.

Many people are going to lose their jobs in 2009. I suspect those who are about to lose their job as well as those already out of a job will appreciate a gift card at a grocery store far more than a gift card at a knickknack store. Actually I do not like gift cards at all but most do. One advantage of a gift card is ability to take advantage of after Christmas sales.

Regardless of where you shop, my advice is to shop less and save more. Your job may be in jeopardy and you might not even know it. Frugality is the new reality for consumers and businesses alike.

A penny saved is a penny got. That penny is likely to be worth more tomorrow than it is today. It is one of the consequences of the deflationary times we are in.

Fewer gift cards this holiday season

Circuit City did go bankrupt and in its demise, a Retail Tsunami Hit Gift Cards.

The National Retail Federation reports shoppers will give fewer gift certificates this season and head to the sale rack instead.

Gift card sales will fall almost 6% this holiday season to $24.9 billion, down from $26.3 billion last year, according to the National Retail Federation's sixth annual Gift Card Survey, conducted by BIGresearch.

Fewer shoppers plan to purchase gift cards this year - 53.5% compared with 56.6% in 2007. And if they do purchase gift cards, shoppers are going to put less cash on them, according to the survey. The average amount that shoppers plan to spend on gift cards in 2008 fell to $147.33 from $156.24 in 2007.

"Since gift cards never go on sale, some price-conscious shoppers will be passing up gift cards in favor of holiday bargains," said NRF President and CEO Tracy Mullin in a written statement.

More Scrooge Than Santa

CNN is reporting Spending expected to be more Scrooge than Santa this year.

Black-Belt Shopping Strategies

Oprah Winfrey offers 10 Black-Belt Shopping Strategies. In contrast, I offer two.

1) Don't buy what you cannot afford.
2) Don't buy what you can afford.

Let's take a look at a few retailers and see how they are doing. Click on any chart in this set to see a sharper image.

Target (TGT) Weekly Chart



Hott Topic (HOTT) Weekly Chart



Abercrombie & Fitch (ANF) Weekly



Macy's Inc (M) Weekly



Wal-Mart (WMT) Weekly



With the exception of Wal-Mart, the carnage in this sector is almost unbelievable. Competition for customers is more intense than ever, and competing for customers means competing with Wal-Mart. The charts suggest Wal-Mart is winning.

Servicing Debt Is Key To Survival

It is a mistake to look at PE ratios alone to find bargains. Macy's has a lower forward PE than Abercrombie & Fitch. But Macy's also has $9.8 billion in debt vs. $100 million at Abercrombie. The debt to equity ratios are 1.02 vs. .056 respectively.

In an environment of rising unemployment, shrinking demand, and huge overcapacity, stores have no choice other than lower prices. Looking ahead, consumer frugality is going to be the new model. And the key to survival is the ability to service (and roll over) debt. Please keep that in mind when looking for bargains.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Europe Inflation Rate Plunges, ECB Expected to Cut 1/2 Point

Those pointing out the lagging nature of inflation, inflation meaning prices in this case, have called things correctly. In spite of a huge selloff in the Euro, Europe Inflation Rate Drops Most in Almost 20 Years.

Europe�s inflation rate fell by the most in almost two decades and unemployment increased, adding to pressure on the European Central Bank to continue cutting interest rates to battle the recession.

Inflation in the euro area slowed to 2.1 percent in November from 3.2 percent in October, the European Union�s statistics office in Luxembourg said today. The drop is the biggest since at least 1991 and puts the inflation rate at the lowest in more than a year.

The Frankfurt-based ECB has already cut its benchmark rate by 100 basis points in two moves since early October, part of a wave of reductions by central banks around the globe as they combat the worst financial crisis since the Great Depression. The drop this month brings euro-area inflation close to the ECB limit of just under 2 percent, which it has exceeded every month since September 2007.

It �gives the ECB more room to maneuver,� said Christoph Weil, an economist at Commerzbank AG in Frankfurt, who expects a 75 basis-point reduction next week to 2.5 percent. �And the rate cut process will continue.�

Data point �to a further deterioration in economic activity in late 2008,� said Gilles Moec, an economist at Bank of America in London. �Since inflation is also receding faster than anticipated, there is a clear case for a �higher-than-usual rate cut� on Dec. 4 by the ECB.�

Survey Predicts 1/2 Point Cut

An economist survey predicts the ECB to Cut Benchmark Rate 1/2 Point.

The European Central Bank will cut its benchmark lending rate by half a percentage point next week, failing to meet investor expectations of a bigger reduction to tackle the euro-area recession, economists predict.

ECB policy makers, convening in Brussels on Dec. 4, will cut its key rate by 50 basis points to 2.75 percent, the median of 53 economist forecasts in a Bloomberg News survey shows.

Investors are betting the ECB will lower borrowing costs by at least 75 basis points, Eonia forward contracts show, as the inflation rate tumbles at the fastest pace in almost two decades and companies shed jobs. The central bank has reduced its benchmark rate by 1 percentage point, or 100 basis points, in two moves since October, part of a wave of cuts by global central banks to counter the worldwide credit crunch.

�Three 50 basis points cuts in succession is radical by ECB standards,� said Laurent Bilke, an economist at Nomura International Plc in London, who used to work as a forecaster for the ECB. �The governing council follows a policy of gradualism, which means they take their time to make absolutely sure you anchor market and consumer expectations correctly. There�s no doubt that tough medicine is required but don�t expect more than homeopathic doses from the ECB.�

December FOMC Probabilities

In the U.S. the implied probabilities are for the Fed to cut by at least 50 basis points as the following chart shows.



click on chart for sharper image.
Above chart thanks to Cleveland Fed.

The race to Global ZIRP is rapidly advancing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Panic In China Over Jobs, Economy, Cotton

The Telegraph is reporting China slashes interest rates as panic spreads.

Factory workers surround a damaged police car during a protest outside Kai Da toy factory in Dongguan, China. Photo: REUTERS



The People's Bank of China cut interest rates by more than 1pc point as the economy crumbles and millions of jobs are predicted to go ahead of Christmas.

The move came just one day after the World Bank predicted that China would grow by 7.5pc next year. The level of growth may appear robust by Western standards, but it would represent the slowest economic expansion in China for the last two decades. It is also perilously close to the 7pc minimum level of growth that Chinese economists believe is necessary in order to create enough jobs for the 6m university graduates who will enter the jobs market next year.

The PBOC reduced its main borrowing rate by 1.08pc points to 5.58pc, the biggest one-off cut since the Asian Financial Crisis in 1997.

Yin Weimin, China's Social Security minister, has revealed that employment is the Communist Party's number one concern in the downturn and said the "situation is critical". Unemployment is expected to rise from 4pc to 4.5pc by the end of the year and anecdotal reports have suggested that 3m people have already been fired in the industrial province of Zhejiang alone.

Two major provinces, Shandong and Hubei, have already responded by banning companies from firing staff without permission from the government.

Government Response

Note the typical counterproductive government response, to prohibit companies from firing workers.

Factories will either pay those workers to sit and do nothing or those workers will produce goods at a loss that no one wants to buy.

Concern Over Slowdown, Jobs

Bloomberg is reporting China Rate Cut Highlights Concern Over Slowdown, Jobs

The central bank yesterday lowered its one-year lending rate by the most since the 1997 Asian financial crisis, less than three weeks after Premier Wen Jiabao unveiled a 4 trillion yuan ($586 billion) stimulus plan.

About 1,000 police and security guards this week attempted to break up a demonstration of fired workers that overturned a police car, smashed motorbikes and broke company equipment in southern Guangdong province, the state-run Xinhua News Agency reported yesterday.

China vaulted past the U.K. in 2005 to become the world�s fourth-largest economy, with growth averaging 9.9 percent for the past 30 years. The economy has expanded 68 times in size since free-market reforms began in 1978.

Gross domestic product may grow 5.5 percent next year, the slowest since a 3.8 percent expansion in 1990, CLSA Asia Pacific Markets forecasts. That compares with an 11.9 percent gain in 2007.

China, the world�s most populous nation, is aiming for at least 8 percent growth to provide jobs for workers moving to the cities from the countryside. A decline to even that level would be tantamount to a recession, according to Tao Dong, chief Asia economist with Credit Suisse AG in Hong Kong.

Two-thirds of small toy exporters closed in the first nine months of this year, the customs bureau said this week.

�Employment is being impacted by factory closures and many migrant workers are returning to their home towns,� Zhang said.

China is trying to keep the official urban unemployment rate below 4.5 percent this year, which would be the highest in at least a decade. The Labor Ministry says the figures don�t account for millions of migrants who work in urban areas but aren�t registered there.

�The aggressive rate cut is a response to the central bank�s concern about the short-term deflation risk,� said Xing Ziqiang, an economist at China International Capital Corp. in Beijing, who predicts another 108 basis points of rate reductions in the coming year.

The State Council has pledged �fast and heavy-handed investment� and a �moderately loose� monetary policy. The plan spans housing, rural development, railroads, power grids and rebuilding after May�s earthquake in Sichuan province.

�In previous crises China could always get out of trouble by boosting its exports,� said Xie. �This time that�s not an option.�

Reneging On Cotton Orders

In the midst of a slowing slowing exports China Textile Makers Said to Renege on Cotton Orders.

China's textile producers and cotton traders have reneged on purchase contracts for as much as 20,000 metric tons of overseas cotton after prices plummeted in the past three months, two global trading executives said.

As many as eight Chinese companies have failed to follow through on purchase agreements with merchants, and the trend may widen as the industry struggles with worsening demand and credit, said the executives, who declined to be identified as they are not authorized to speak to the media.

"Some Chinese cotton users initially tried to delay the contracts when prices began to fall," said Zhu Xuesong, general manager of China operations at merchant Ecom Trading (Shanghai) Corp. "When prices really plunged, they were caught with losses" they found difficult to accept.

China's cotton imports fell 8 percent in the first 10 months of this year to 1.9 million tons, customs data showed.

Cotton users are halting orders from the U.S., the world's biggest exporter, at the fastest pace in at least a decade as the economic slowdown erodes demand from China.

Cotton Futures At 2001 Prices



click on chart for sharper image

China Synopsis

• China has passed a $586 billion stimulus plan.
• China needs to grow GDP at 8% but GDP is expected to drop to 5.5%
• Two-thirds of small toy exporters closed in the first nine months of this year.
• Textile manufacturers are reneging on cotton orders.
• The State Council has pledged �fast and heavy-handed investment� and a �moderately loose� monetary policy.
• China cannot get out of trouble by boosting its exports.
• Employment is being impacted by factory closures and many migrant workers are returning to their home towns
• The government response to rising unemployment is to prohibit companies from firing workers.

Decoupling Is Dead

Decoupling is clearly dead but one would not know it from headlines still preaching yesterday's news. Please consider Decoupling isn't dead: Emerging economies like China continue to cut into US lead.

Decoupling is the theory that emerging nations are increasingly weaning off US economic dependence and, thus, would weather an American economic slump better than in the past.

A retrenching US consumer "is totally irrelevant to China's investments in clean water, improved agriculture and better infrastructure," says Jim Rogers, the former hedge-fund manager turned global investor.

Peter Schiff, president of Euro Pacific Capital, offers a more severe assessment: "Everyone thinks the US is the engine, but it's the caboose just being pulled along. China and the others are healthy economies that foolishly loaned us their surplus capital that we squandered. But that doesn't reflect on the local economies. They're still intact. The factories are still there, the work ethic is still there, and they're not entirely dependent on the US for their own growth."

Question Of Timeframe

It's true that over time, China will become increasingly less dependent on the US. However the key is "less dependent" as it may take decades if ever for China to become independent.

And in the intermediate term, arguably lasting many years, Yuan bulls such as Jim Rogers need address the issue of sustainable Chinese GDP growth which is probably closer to 3.5% than the 8% needed to keep on the pace China wants.

Jim Rogers and Peter Schiff both conveniently overlook the enormous $586 billion in Chinese economic stimulus (printing) while harping on stimulus and printing in the US. In relative terms, the size of China stimulus is roughly 16% of its entire GDP, an enormous sum of money.

Calling the US the caboose at this stage in the game is downright silly. Perhaps that will be true 10 to 20 years from now or perhaps it will never be true, but investing for a long term thesis over the short to intermediate term is a recipe for disaster. Actual results prove as much.

$SSEC Shanghai Composite Index



click on chart for sharper image

The Shanghai Composite Index after doing a moonshot in 2007 is now back below its 2000 yearly high. That's decoupling in reverse. And with sustainable Chinese GDP growth in question, don't expect another moonshot, although a significant bounce can happen at any time.

Renmimbi (Yuan) vs. U.S. Dollar Exchange Rate



The above chart courtesy of YahooFinance.

Since China removed the peg in since mid-2005 , allowing the RMB to fluctuate at a modest rate, the RMB has appreciated about 18% . If China allowed the RMB to float freely, it rather than the US dollar could conceivably crash.

For more on the China story please see:

• August 24: China's Olympic Sized Bust
• August 26: Is China's Growth Story Coming Unglued?
• September 2: China's Manufacturing Contracts for Second Month
• September 18: China, Russia Intervene In Equity Markets
• November 9: Peter Schiff Hugely Right, Enormously Wrong as Hard Landing Hits China

One simply cannot (rather I mean should not) harp on US economic weakness while ignoring the massive problems in China, the UK, the EU and in fact everywhere one looks.

I remind you of this statement: The State Council has pledged �fast and heavy-handed investment� and a �moderately loose� monetary policy.

I see no reason to be particularly bullish on China at this point. If China tries to expand at the same rate of growth it has for the last two decades, it is going to overheat. There are not enough jobs in China to support 8% growth without the US consumer. And in the near to intermediate term, the US is still the dog and China is still the tail no matter how much some people pretend otherwise.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Chesapeake Energy, Largest US Natural Gas Producer, Runs Out Of Cash

YahooFinance is reporting Chesapeake Energy may sell $1.8B stock to get cash.

Chesapeake Energy Corp., the nation's largest producer of natural gas, seeks to raise up to $1.8 billion through common stock sales in an effort to fund its drilling and exploration activities and mitigate the impact of lower natural gas prices on cash flow.

In two filings with the Securities and Exchange Commission late Wednesday, the company said it will issue shares worth as much as $1 billion before fees and also registered 50 million shares worth at most $791 million for potential sale.

Oklahoma City, Okla.-based Chesapeake said it will use proceeds from the $1 billion offering for general corporate purposes, including fund exploration, development and other capital expenditures.

The move would dilute holdings of shareholders, who already suffered through a substantial decline in Chesapeake's stock price this year. Shares closed at $20.24 on Wednesday, off 73 percent from the stock's $74 52-week high set this summer.

But the company said cash flow, borrowings and cash on hand have not been enough to pay for capital expenditures.

Chesapeake has used up the remaining financing available under its $3.5 billion bank credit facility and only $251 million is left of another $460 million credit line. Credit markets remain tight with financial institutions under duress.

CHK Daily Chart



click on chart for sharper image

This is the same silliness we saw with banks and financials. The companies kept paying unsustainable dividends and buying back shares at ridiculous prices. They did not raise money when they could but rather when they were forced to.

Can anyone ever get this right?

Petrobras Cash Shortage

In Brazil, Petrobras Cash Shortage Led to Tax Loan.

Petroleo Brasileiro SA was forced to borrow 2 billion reais ($881 million) from Brazilian state-owned discount bank Caixa Economica Federal as it faced �momentary difficulty� paying taxes, Energy Minister Edison Lobao said.

Petrobras, as the state-controlled oil company is known, said record profit in the third quarter resulted in a 11.4 billion-real tax bill in October, about 5 percent more than the 10.8 billion reais of cash it had on hand at the end of September, the Rio de Janeiro-based company said in a note on the Brazilian security regulator�s Web site.

�There were taxes that Petrobras had to pay that they really shouldn�t have had to pay because they weren�t generated by operating profit but by the strengthening of the dollar,� Lobao told reporters in Brasilia. �The company had to take money out of its cash holding to pay the taxes.�

Petrobras, which has spent more than 20 billion reais on investment so far this year and paid $6.2 billion in dividends, may also have had to borrow money from state-controlled Banco do Brasil SA to meet its obligations, Senator Tasso Jereissati said in a telephone interview.

The cash-flow problems may also have forced Petrobras to delay payments to suppliers over the last 30 days, Jereissati said. Petrobras officials weren�t immediately available to respond to Jereissati�s comments.

Petrobras said about a third, or 3.5 billion reais, of its record 10.9 billion-real third-quarter profit was the result of a 19 percent increase in the value of the dollar against the real in the quarter.

Petrobras�s ability to generate cash and borrow may be further hurt by a 60 percent decline in the price of oil since reaching a high in July and the world credit crunch sparked by recent U.S. bank failures, Lucas Brendler, an energy analyst at Banco Geracao Futuro in Porto Alegre, Brazil, said yesterday.

OPEC Has All Options Open

In other energy news, OPEC Has All Options Open, Including Cut.

OPEC has all options open, including a cut in production, when it meets this weekend in Cairo, said Shokri Ghanem, chairman of Libya�s National Oil Corp.

�We have to look for the possibility of stabilizing the market,� Ghanem told reporters when he arrived at his hotel. �The whole financial market is in a shambles so prices may still go down more, but we are sure it�s going to rebound.�

The 13 members of OPEC, which supply more than 40 percent of the world�s oil, are meeting for the third time in as many months to discuss a further cut in production after crude prices plunged more than 60 percent from July�s all-time high of $147.27 a barrel.

The crude oil market is over-supplied, OPEC Secretary- General Abdalla el-Badri said today in an interview in Cairo. He declined to recommend a course of action, saying any decision concerning production quotas was up to ministers to take.

Oil demand is falling faster than expected, Hasan Qabazard, head of research at the group�s secrectariat, said in an interview in Cairo today.

Peak Oil vs. Falling Demand

In the battle between Peak Oil vs. Falling Demand, falling demand is clearly winning even though OPEC member Libya suggests "We are sure oil prices are going to rebound.�

If OPEC is so sure prices will rebound, exactly why is a production cut necessary and why are inventories at 5 year highs?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

LBO Boom Over - Ontario Teacher's Pension Plan Off The Hook

In the summer of 2007, the Ontario Teachers' Pension Plan agreed to buy BCE (a phone company) for an absurd price of C$52 billion ($42 billion). The deal was supposed to close December 11. Now the deal appears to be falling through over solvency issues.

The Canadian Press is reporting BCE says Teachers' buyout 'unlikely to proceed' if solvency opinion not improved.

Bell Canada's roller coaster ride to privatization may finally crash under the weight of its prospective massive debt after an accounting firm raised serious doubt that the world's largest leveraged corporate buyout could succeed.

Bell parent BCE Inc. (BCE) said Wednesday a KPMG analysis indicated the company could not meet solvency tests in the agreement under which the company will be acquired by an investor group led by the Ontario Teachers' Pension Plan.

The opinion marked the latest hurdle for the $52-billion cash and debt deal, the largest takeover in Canadian history.

BCE said it disagrees, but "should KPMG be unable to deliver a favourable opinion on Dec. 11, 2008. (when the takeover is slated to close), the transaction is unlikely to proceed."

Shares in the company were hammered down in heavy trading to their lowest level in six years. After falling to $23, they closed at $25.25, a drop of $13.10 or 34.16 per cent on the Toronto Stock Exchange.

KPMG indicated BCE meets solvency tests under its current capital structure - but would not after being weighted down with the debt involved in the proposed takeover. In coming to its conclusion, KPMG assessed the value of BCE's future liabilities and assets that have eroded with the market meltdown.

BCE's underfunded pension liabilities are believed to be one of several challenges faced by the Montreal company.

Elliott Soifer, vice-president of Desjardins Securities International, said he doubts the deal can be salvaged by altering terms, including the $42.75 purchase price.

But industry observers believe Teachers' and the consortium of banks are likely delighted by the KPMG opinion because it potentially clears a path to extricate themselves from a tightly written deal that was signed when market conditions were much brighter.

They are also said not to be on the hook for a $1.2-billion break fee, although the parties are expected to pay tens of millions of dollars in banking and legal fees.

Citigroup and Toronto-Dominion Off The Hook Too

Bloomberg is reporting Citigroup, Toronto-Dominion Gain on BCE Transaction.

Citigroup Inc., Toronto-Dominion Bank and Deutsche Bank AG gained after BCE Inc. said its C$52 billion ($42 billion) takeover may collapse, helping the banks avert potential writedowns from financing the world�s second- largest leveraged buyout.

Citigroup, Toronto-Dominion, Deutsche Bank and Royal Bank of Scotland Group Plc are on the hook for about $34 billion for financing the BCE takeover, according to regulatory filings. The banks face potential writedowns because the global credit crisis has pushed down loan values, and made it harder for the lenders to find other banks willing to take on some of the debt.

The lenders have already taken writedowns from the credit crisis. The U.S. government agreed on Nov. 23 to support Citigroup with a $20 billion capital injection and a shield against losses on $306 billion of loans. Toronto-Dominion was forced to sell as much as C$1.38 billion in common shares this week to shore up its balance sheet after posting trading losses.

�It would have been nearly impossible,� to sell the loans, said Ron Mayers, vice chairman and head of alternative strategies of Desjardins Securities Inc. in Montreal. �Obviously that had negative financial implications for them.�

The buyout group led by the Ontario Teachers� Pension Plan agreed to buy BCE in June 2007. Toronto-based Ontario Teachers� is the largest shareholder of Montreal-based BCE.

Previously the Qu�bec Pension Plan (Caisse) and the Ontario Teachers' Pension Plan were on the hook for some $33 billion in ABCP. See 20 Canadian ABCP Trusts File Bankruptcy.

Where there's slush, figure Citigroup and the Ontario Teachers' Pension Plan will be deep in it.

Leveraged Buyout Boom Is Over

Bloomberg is reporting LBO Boom�s Last Vestiges Would Disappear With BCE Deal�s Demise.

The C$52 billion ($42 billion) purchase of BCE Inc. by private-equity firms may collapse, erasing the last vestiges of a leveraged-buyout boom that ground to a halt almost 18 months ago.

The BCE deal, led by Ontario Teachers� Pension Plan, Madison Dearborn Partners LLC and Providence Equity Partners Inc, is biggest remnant of a record $1.42 trillion of LBOs in 2006 and 2007. Its demise would be more evidence of how private- equity firms have shifted from multibillion-dollar buyouts to shopping for distressed companies amid a dearth of financing and a deepening global recession.

�BCE is really an Old World transaction,� said Randy Schwimmer, senior managing director and head of capital markets of New York-based Churchill Financial LLC. �In the New World, private equity buyers are looking to tease out value wherever it can be found, whether that�s in smaller new issues, distressed paper or mining their own portfolios.�

Announced private-equity deals have dropped more than 70 percent to $202 billion so far this year, according to data compiled by Bloomberg. The biggest transaction this year was the $7 billion stake bought by investors led by TPG Inc. in Washington Mutual Inc. That investment evaporated five months later when the U.S. government seized Washington Mutual�s assets, wiping out the TPG-led group�s $2 billion in equity.

At least $55 billion of LBOs have fallen apart since last year. The botched transactions include J.C. Flowers & Co.�s agreement to buy SLM Corp., the student lender known as Sallie Mae; casino operator Penn National Gaming Inc.�s deal with Fortress Investment Group LLC; and KKR�s plan to buy Harman International Industries Inc.

�It�s easy to imagine a scenario where we don�t have normalized markets again until 2011,� said Sean Ryan, an analyst at Sterne, Agee & Leach in New York. He pointed to the 1988 purchase by KKR of RJR Nabisco Inc., the $30 billion which stood as the biggest LBO on record until 2006.

�After all, how many years did it take for RJR Nabisco to get eclipsed?� Ryan said.

BCE Weekly Chart



click on chart for sharper image

The Ontario Teachers' Pension Plan is the largest shareholder of BCE. If the deal collapses, the teachers can thank their lucky stars they are not the only shareholder.

Canada May Have First Deficit Since 1997

While on the subject of Canada, inquiring minds are noting Canada May Project First Deficit Since 1997

Canadian Finance Minister Jim Flaherty probably will project the government�s first deficit in 13 years today as revenue evaporates, and may confirm the world�s eighth-biggest economy is on the brink of a recession.

�Don�t worry about the deficits,� said Mike McCracken, chairman of forecasting company Informetrica Ltd. in Ottawa.

At a meeting this month of the Group of 20 industrialized and emerging economies in Washington, International Monetary Fund Managing Director Dominique Strauss-Kahn urged nations to inject stimulus worth 2 percent of gross domestic product. For Canada, that would represent about C$30 billion.

Harper himself said the day before that Canada would run a �short-term� deficit to stimulate the economy if necessary, though he would seek to avoid a series of deficits that would outlast a period of sluggish growth.

The government must help companies in the auto industry immediately, because �they might run out of money within weeks, and it�s quite possible they�ll be bankrupt if we wait until February,� John McCallum, a Liberal Party legislator and former chief economist with Royal Bank of Canada, said yesterday.

�We�re seeing consumers being very careful with their spending -- they�ll fix something when it breaks, but when it can wait, it waits,� said Richard Roy, president of Boucherville, Quebec-based automotive-parts distributor Uni- Select Inc.

�All the economists who seem worth listening to are saying you have to spend in order to get out of a situation like this,� said Laura Singleton, 49, a homemaker visiting Parliament with her family from Rainy River, Ontario. �My understanding is that we aren�t doing any measures like that at the moment. I am wondering why.�

Don't Worry About Deficits Just Spend

Financial insanity is nearly everywhere you look.

CBCNews is reporting Flaherty hints at early budget to stimulate economy.

Finance Minister Jim Flaherty may table the next federal budget early to include infrastructure spending and other provisions to stimulate the ailing economy.

He said any package could be included in a sooner-than-scheduled budget, although he did not give a specific date. His officials also suggested that announcing stimulus measures before the next budget is a possibility.

Flaherty noted that the government has already committed to a $33-billion infrastructure fund that needed to begin releasing money sooner rather than later.

On Sunday, at the Asia-Pacific Economic Cooperation group's summit in Lima, Prime Minister Stephen Harper made similar comments that the economy appears headed for a technical recession and might have already slowed to "just about zero" growth.

Harper also suggested during the summit that the Canadian government will introduce a stimulus package to boost the economy, while trying to avoid setting the stage for a long-term government deficit.

Signalling a shift in his usual anti-deficit stance, he acknowledged that countries that choose to implement fiscal stimulus packages will likely find it necessary to run budgetary deficits.

The prime minister noted, however, that whatever short-term new spending his government pursues, it "will ensure that Canada does not return to long-term structural budgetary deficits."

Canadian Reality

The reality is Canada is in a recession, that recession is going to pick up steam, and there is nothing Canada can do about it that makes any sense.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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