By Agora Financial | 17 June 2008
Global Money Supply Surging… Chris Mayer On How To Invest Accordingly Two energy commodities outperforming crude oil… and how they’ll affect your electric bill Christopher Hancock’s favorite international oil play… Honda unveils zero-emissions car, plans mass production… Corn surges, towns devastated by Midwest flooding… readers ask: Why bother rebuilding?
The U.S. housing sector has taken a turn for the worse… again. After a month's reprieve, housing hurt back with a vengeance... American housing starts have fallen to their lowest level in 17 years, reports the Commerce Department today. Builders broke ground at an annual pace of 975,000 last month. That’s a 3.3% decline from April and a 32% crash from this time last year. Starts on single-family homes fell 1%, to a 17-year low, as well. Building permit applications declined, too, down 1.3%.
Today’s worse-than-expected report was a harsh blow if you’ve been rooting for a housing comeback… after housing starts surprisingly increased in April, the optimistic at heart were hoping the bust had bottomed. As we mentioned back then, the sudden rise was due to apartment and condo construction. Today’s numbers support our more probable thesis— the housing crisis is far from over.
So it’s no surprise that builder confidence has fallen to a record low. The National Association of Home Builders/Wells Fargo housing market index has sunk to a score of 18, the group reports this week. To make matters even worse, U.S. mortgage rates are currently at an eight-month high. According to data from Freddie Mac, the average 30-year fixed-rate mortgage is 6.3%. Not since October has the cost of borrowing money for a home been so expensive.
"Mortgage rates jumped this week after a number of Federal Reserve officials… expressed concern over a threat of inflation," said Frank Nothaft, Freddie Mac VP and chief economist. "This led some market participants to believe that the Fed will raise rates more aggressively over the year than previously thought." For all the Federal Reserve rate cuts to date (3.25%), mortgage rates have fallen only about 0.5% since this time last year.
The dollar fell all day yesterday. On the heels of yesterday’s European inflation report , traders placed big bets that the European Central Bank will soon begin hiking rates. The euro has surged nearly 2 full cents versus the greenback, but has since backed down a bit. You can buy one this morning for $1.54.
"Check out the table I stumbled across this morning," responds Chris Mayer to our coverage of global inflation yesterday. "It’s from the shareholder letter of QB Partners. It shows you the annual money and credit growth of a number of currencies."Doesn’t make you feel too confident about the value of most of these currencies, does it? On a relative basis, the Japanese yen and Swiss franc look like the places to be. The rest of these countries print money at double-digit rates. Many over 20%.
"So it’s a good time to be in tangible assets: land, metals, oil and gas… These things will hold their values against collapsing currencies better than paper assets of any kind (i.e., portfolios of mortgages, pools of credit card debts, etc.). Probably better, also, to be on the ‘necessity,’ rather than the ‘discretionary,’ side of the economy. Invest in stuff people need, rather than, say, luxury watches or premium cat food."
Wholesale prices surged 1.4% in May, reports the Labor Department today. Its producer price index (PPI) soared from a score of 0.2% in April, the biggest monthly gain in six months. All in all, wholesalers paid 7.2% more for goods this May than they did last year. Ouch. Par for the course, food and energy prices rose the most. Energy costs soared nearly 5% in May, while food prices hopped up 0.8%. Most everything was at least a bit more expensive last month… looking over the report, the only significant deflationary movement was in car and truck prices, down 1%.
Combine today’s PPI report with last week’s CPI and you’ve got the fastest rate of producer and consumer inflation in more than six months. Both reports were worse than expected, and both show food and energy prices inflating rapidly. Get ready for electricity to become much more expensive. American utility companies are raising prices up to 29% this year, reports USA Today. We can’t blame them… prices for coal and natural gas, which produce the majority of electricity in the U.S., have been soaring.
With coal prices nearly doubling and natgas futures up 60% since the new year, a 30% hike in consumer utility costs seems conservative. "Gazprom is looking to penetrate the North American market," says Christopher Hancock, our international investing adviser. "Gazprom, Russia’s state-controlled natural gas mega biz, hopes to distribute the gas coming from its vast Shtokman field to North America, the most heavily traded gas market in the world. Western companies have been buying Gazprom’s gas and then trading it to sell in the markets where it was most profitable. Now Gazprom wants to garner a piece of that business for itself."
Aside from declaring its latest North American ambitions, Gazprom has also recently pulled off a huge backdoor entry into the Libyan oil market. There’s even talk of a Gazprom listing on the New York Stock Exchange. "One thing’s for sure," says Mr. Hancock. "Gazprom will likely remain the world's most politically influential corporation well into the future. Assuming drilling activity and infrastructure overhauls take place as we expect, we won’t be surprised to see Gazprom’s share price rise, along with its influence."
Oil suffered some big swings yesterday. Crude spiked $6 in morning trading on the news of European inflation and subsequent dollar weakness. In fact, traders pushed oil up to a new intraday record high of $139 and change. But since then, oil’s been trending down steadily. The EU inflation reading, a bad German investor confidence report, nearly double-digit inflation in Asia and the typical malaise here in the states… there’s a feeling permeating the market that demand can’t be sustained. Coupled with the production news out of the Middle East , oil’s been traded back down to $133.
The national average gas price fell today, as well… a little. Retail gas prices reached a record high of $4.08 yesterday, but have since "retreated" two tenths of a cent, to $4.078. Feel better yet? Today’s price is up 36% from this time last year [[But it's still selling for a HUGE discount to oil, based on BTU equivalent units: normxxx]].
Honda unveiled the world’s first production-ready hydrogen-powered car yesterday.
That’s the Honda FCX Clarity. Basically, the thing combines a stash of hydrogen with air in a way that creates electricity, which powers the engine. The only byproducts, says Honda, is heat, water and a golf cart-like hum. In other words, this baby has zero emissions. We’re told it’s got a 270-mile range with a fuel-efficiency equivalent of about 74 miles per gallon [[which, I suppose, neglects to include the cost of the hydrogen production...: normxxx]].
Honda says around 200 FCXs will be made over the next three years. At present, it takes around a quarter of a million dollars to make just one FCX. But Honda has decided not to pass on that cost— the car is available for a three-year lease for only $600 a month. If you’re not a Southern California A-lister, good luck… that’s the only place they’ll be leased, and the first batch has already been spoken for by Hollywood producers, CEOs and Jamie Lee Curtis.
The price of corn edged past $8 a bushel for the first time today. Much of the U.S. Corn Belt is simply underwater. On June 30, the U.S. government will officially report how many millions of acres were lost just to this flooding. Current estimates range from 3-5 million acres, or about 4-6% of the national crop.
The U.S. stock market was a hodgepodge of small gains and losses yesterday. Oil prices soared, but then retreated. Lehman Bros. announced a big loss, but it wasn’t worse than expected. Inflation is getting fearsome, but Chicago futures are pricing decent chances of a Fed rate hike this summer. By the end of this balancing act, the Dow rose 0.3%, the S&P 500 finished where it started, and the Nasdaq lost 0.8%.
In today’s trading, Goldman Sachs is the stealing the show. The world’s largest investment bank beat second-quarter earnings expectations by a handsome margin. Profits from asset management and stock underwriting efforts buoyed earnings to $2 billion in the quarter. That’s about $4.58 a share, much higher than the forecasted $3.42. Profits were down 10% from this time last year, but compared to other investment banks, Goldman seems immune to the credit crisis. Or they are just really, really good at faking it.
Lastly, gold is still around $885. It’s been chasing the dollar up and down since we wrote to you yesterday, but for the most part, the gold story is unchanged.
"I live in southern Louisiana," says a reader. "I remember very vividly several congressmen asking why should we rebuild the areas around the Gulf of Mexico that were ravaged by Katrina and Rita. This was the big discussion of the day. People along both party lines all over the country asked why should we rebuild Louisiana and Mississippi.
"Well, I have a question. Why should we rebuild any of the flooded plains of the Midwest? Didn't it flood over there about a decade ago, and now it’s happened again? Hey, what is good for the goose is good for the gander.
"Just a word of caution to all you people in the Midwest who will eventually get the government help you so desperately want. The government will screw up the process of rebuilding far, far worse than you can possibly imagine. Trust me on this one."
"Over 100 years ago," writes another, "our government tried to halt building any human-inhabited structures in all the flood zones. The idea was to save the government the cost of building and maintaining dikes, bailing out flood-stricken homeowners and keeping insurance for homes affordable. The bill almost passed, but the lobbyists succeeded in looking out for the wealthy landowners.
"It is still time to halt the practice and save this country's taxpayers continually wasted tax dollars. But, with all the publicity and sympathy for flood victims making the news, I guess it would be political suicide to start putting an end to all this stupidity."
Best regards,
Ian Mathias
The 5 Min. Forecast
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Normxxx
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