Friday Stories Part II

We discussed this on the natural gas side Wednesday [May 7: Roundup for the Day]

And don't look now, but in a World of Shortages even natural gas could be causing us some issues NEXT winter says Goldman Sachs. (remember, global competition for resources - if we won't pay, someone else i.e. a government with cash - will)

But don't look now, it's going to hit whether your utility uses coal or natural gas... this is sort of like investing in oil stocks 3-4 years ago - to offset the prices your paying in real life, you need to make money on the stocks in your investments... I think there is going to be serious sticker shock next winter; and if you think this next winter will be bad just wait for the one after that - the increased costs will take time to filter through the system. As I say almost daily - the real inflation hitting this country is going to shock people - especially those who dictate our national policies on fictional government reports. We are going to see some major upheavel as people become very angry as things they consider necessities begin to get out of reach for those on the lower end and consume a much larger % of income on the middle end USAToday: Coal Price Hikes Boost Electric Rates, More Pain Coming

• Consumers struggling with high gas prices, rising food costs and falling home values have something new to worry about: Sharply rising electricity rates due to a surge in coal prices over the past year.
• There is an abundance of coal in the United States, but like other commodities its price is increasingly dependent on events elsewhere in the world. Snowstorms this winter cut coal production in China and heavy rain flooded mines in Australia — the world's largest coal exporter. Meanwhile, demand for coal to generate electricity and make steel is rising almost everywhere, especially in fast-growing China and India.
• Central Appalachian coal, a benchmark grade that's widely used by power plants, has jumped from around $40 a ton in early 2007 to almost $90 a ton now. Coal from the Powder River Basin in Wyoming and Montana, which has about three-quarters the heat content of Central Appalachian coal, jumped from less than $10 a ton to almost $15 a ton over the same time period. Utilities must burn more Powder River Basin coal to generate an equivalent amount of energy, and it must travel east by rail, which adds significantly to its final cost. Utilities such as American Electric Power, for instance, mostly burn Appalachian coal in their eastern plants, but rely on cheaper Powder River Basin coal in the west.
• American Electric is able to limit its rate increase in West Virginia to 15% — even though coal prices have doubled recently — because, like most other utilities, it buys coal via a portfolio of hundreds of contracts that let it lock in prices. But as contracts expire, they must then be re-negotiated at rising rates. (so unless we have a dramatic drop in coal prices, we are only passing along a fraction of the coal price increases at this time - let's see how government steps into the "free market" and tells utilities they cannot raise prices to 'market levels' - I'm sure that will come in "free market" America)
  
• That's bad news for consumers like Rodrigo Goines, 36, a disabled Lexington, Ky., resident whose government assistance checks barely cover his meager living expenses now. "I'm not going to be able to afford it," Goines said. "If they keep raising these rates, I'm gonna be in trouble." (this will be a growing refrain)

USAToday: Gas Prices Rattle Americans

• Record high gas prices are prompting Americans to drive less for the first time in nearly three decades, squeezing family budgets and causing major shifts in driving habits, federal data and a USA TODAY/Gallup Poll show.
• ...most Americans say they are cutting back on other household spending, seriously considering buying more fuel-efficient cars and consolidating their daily errands to save fuel.
• February was the fourth consecutive month in which miles driven in the USA fell, an analysis of Federal Highway Administration data show. There hasn't been a similar decline since 1979, when shortages created long lines at pumps. (this is "demand destruction") The decline, while small, is significant because the U.S. population and number of households, drivers and vehicles grow by 1% to 2% a year.
• Half of households with incomes below $20,000 say they face severe hardships because of soaring gas prices. Three-fourths of households making $75,000 or more also are changing how they use their cars.
• Dawn Morris, a consultant in Dover, Del., is blunt about how gas prices are affecting her family. "It's killing us," she says. She and her husband often stay home on weekends, and when she balances her checkbook, "every third line it says gas: $20, $30, $50."

It's so bad, Americans are even abandoning SUVs! Perish the thought!

• High fuel prices are causing the value of used SUVs to plummet, often below what's listed in the buying guides many shoppers use to negotiate with dealers.

Ok enough about energy inflation... let's move on to food inflation... woo-hoo. NYTimes: High Prices for Staple Foods Dip, but Volatile Markets Remain. Again, keep in mind as we think of people in many developing countries ... food makes up 60-70% of their expenditures - so think of your mortgage/rent... double its cost to you each month and that is what % they spend on food. Now assume your rent/mortgage has doubled in the past 12-18 months. Now panic. That's the equivalent to what is happening to the world's poor...

• After months of startling increases, the prices of rice, wheat, soybeans and several other foods have come down recently, a development that could ease some of the panic in global food markets.
• Prices remain volatile and remarkably high by historical standards, and few agricultural experts expect the days of inexpensive food to return soon. There is no sign of a drop steep enough to make food affordable again for the hundreds of millions of people in poor countries who are struggling to maintain adequate diets.
• The spot price of rice from Thailand has dropped by close to 20 percent in the last two weeks after nearly tripling in the first four months of this year.
• Many retailers and wholesalers around the world had not yet passed the full extent of this spring’s price increases along to consumers.
• Rice is perhaps the world’s most politically fragile crop. Nearly half the world’s population depends on it as a staple food. An even higher proportion of the world’s poor people depend on it, as imported rice has displaced local crops in cities across Africa and the Caribbean over the last decade, even as the crop retained its primacy in Asia.
• The spot price of a heavily traded good grade of rice exported by Thailand peaked at $1,100 a ton in late April, with a few purchases at even higher prices by buyers demanding huge quantities. But traders said Thursday that the going price was $880 to $920 a ton, although buyers of large quantities could still expect to pay more. The latest rice prices are still far above the price of $385 a ton prevailing in mid-January. (again, imagine the impact of your mortgage/rent x 2 - going up by this amount from January to today; we only spent 10%ish of our income on food here in the States)
  

Last, let's move on to some interesting stories in the the world of real estate

First, in the residential real estate market my chain event prediction from last summer of "subprime to Alt A to prime" is now appearing to be hitting the prime mortgage borrowers. Remember, everyone was placing the blame on those "darn subprime borrowers" and once we fixed them - all the housing problems would go away. It sounds ludicrous now but that was the "wisdom" spoken to us last summer. (by the same folks saying "no recession folks, just move along - booming in 6 months") Instead I was saying subprime is the symptom of a larger disease - just the tip of the iceberg. [Feb 14: NYTimes: Mortgage Crisis Spreads Past Subprime Loans] Here is the beginning of what is underneath the water's surface: USAToday: Mortgage Crisis Seeps to Prime Loans

• The first concrete evidence that delinquencies on mortgage bills have spread well beyond those with subpar credit shows that even prime borrowers have increasingly fallen behind on their house payments. The figures remain relatively small so far. But if they rise further, delinquencies on prime loans — given only to those with good credit — could prolong the housing crisis.
• About 2.3% of prime loans were 60 days' past due in February, the highest level in at least a decade, according to data from FirstAmerican CoreLogic LoanPerformance. That's up from 1.4% a year ago.
• "We're seeing the prime area coming under pressure, with delinquencies moving up," Bethune says. "We're in uncharted territory, and it's definitely been affecting the prime market, although it's still not anywhere as severe as in the subprime market."

3 Stories that may or may not interest you but I found a bit fascinating

1. I'm always amazed at how people who take outsized risks in finance get 2nd and 3rd chances to squander their investors money. I guess it's cool to do in real estate as well in NYC - the WSJ has a story about a big time real estate developer who went bust 16 years ago; and now he is repeating his act in Vegas. Maybe he'll get another chance in a few years - because he can chalk it up to a "once in a lifetime dislocation in markets" - just like failed hedge fund managers do (after pocketing millions of money of course) Here is an exact quote from the story that sums up all the "dumb money" in this country chasing the same people who keep getting this money for some reason In an interview earlier this year, Mr. Eichner said he was a victim of the credit crisis, and that banks eventually would lend to him again. "It's probably pretty safe to say that somewhere in 2009 or 2010, Bruce Eichner will surface with another one, something," he says. "There's zero that will stick to my shoes." - and that folks pretty much sums up the world of the rich and infamous.
2. All 3 major candidates rode the real estate boom, along with you - curious to see all the real estate these 3 folks own? The WSJ has an overview (hint, the McCains own at least 7 properties - I really need to marry a beer distributor - if any are reading please email me) And we wonder why Huckabee was the only Republican who was talking about the tough economy in the primary.
3. You thought private equity guys were out there doing deals with corporations? building, fixing, and then selling businesses? Nah...that's so 1990s. This new era of private equity guys goes and buys rent controlled NY apartments, harasses the current tenants to the point they leave, at which point the private equity firm can jack up the rent to the new market price and BINGO - cash flow spigot flows. See, who said private equity was dead?
   

• Some residents and tenant advocates say that they began seeing what they consider a pattern of harassment of low-income tenants this year and suspect that it is a result of the new owners’ business models. Tenants have been sued repeatedly for unpaid rent that has already been received by the landlords; they have been sent false notices of rent bills, lease terminations and nonrenewals; and they have been accused of illegal sublets.
• Nevertheless, tenants must answer the notices in court, but many have responded by moving out, court documents indicate. When they vacate the apartments, the owners can increase the rents substantially.

You just have to love how big money works in this country :) The little guy continues to get smashed. If it's not gas prices, or food prices, its ornery private equity guys using questionable/illlegal (I assume sending false notices of rent bills is not kosher?) to try to make some quick bucks so they can join the McCains and buy that 6th house. BooYah! (tm) Did I mention the 15% tax rates these guys get for such work? Nice!