Tuesday, June 24, 2008

Investor Business Daily: Heating, Electricity Rates Rising as Prices for Natural Gas Surge

Keep this sort of news on your radar each time we hear about the '2nd half' or 'early 2009' recovery. The consumer is stressed from so many directions I cannot keep track. We've been on the home heating beat since LAST winter (we're early) but this is one of those lagged inflation effects that we have not even touched the tip of the iceberg yet. And frankly, when I was warning about it last winter natural gas and oil were 40-50% lower in price. Again there are some limitations on what utilities can pass on in any one year, and some of the product (coal/natural gas/home heating oil) is on longer term contract but as those contracts come off, and new ones (at market prices) are brought on, the American consumer is going to take a direct hit. People "feel" gas prices because it hits with a short lag - home heating, air conditioning and the like will be next winter and summer's direct hit. (and the winter after that) It sounds alarmist but you are going to see a lot of decisions in the bottom 1/3rd of America between food and heating the residence in the coming winters. Those Walmart retail jobs in the new era service economy just do not pay for these rates of increases.
  • Consumers struggling with $4 gasoline face ballooning costs for another energy source: natural gas. Natural gas futures have vaulted 154% since its Aug. 27 low to $13.203 per million British thermal units on Monday. The run-up has outpaced the rise in crude oil, which has doubled.
  • Consumers may not feel the full impact immediately, but continued high prices will push up monthly utility bills, if they haven't already done so. Americans often use natural gas for heating stove tops and water, but they see a bigger hit when they fire up gas furnaces in the cold winter months. Also, rising prices show up in electricity costs, with natural gas providing the fuel for more power plants across the country.
  • "The consumer really hasn't seen the impact of higher prices," said Chris Jarvis, president of Caprock Risk Management. "There aren't that many people griping about it yet."
  • Utilities have begun to pass on some of those costs to customers. But rate increases vary widely, depending on location and other factors
  • As a heavily regulated industry, utilities don't pass on higher energy costs as quickly as oil companies do at the pump. They also have long-term contracts, insulating them somewhat from soaring market natural gas prices.
  • Xcel Energy (NYSE:XEL - News), which serves residents of Colorado and seven other states, has raised the price of electricity for customers by 15% in the first half of 2008 in Colorado, spokesman Tom Henley says. Xcel is proposing an additional 10% hike for the third quarter. Henley says natural gas prices are a key reason. Nearly half of Xcel's power capacity comes from natural gas. The other big power source is coal, which also is soaring in price.
  • As for the natural gas that customers buy directly to heat their homes or water, Xcel wants rates in July that will be 38% above the year-ago period.
  • Eisenhauer notes 44% of the utility's electricity comes from natural gas-fired power plants. Utilities rely on long-term contracts and other instruments, says Owen, shielding themselves from volatile spot and futures prices.
  • Consumers should hope for no big hurricanes or a sweltering summer that requires more natural-gas fired electricity, they say (let's hope hurricane season is quiet this year, it would be the 3rd year in a row of no major hits - so we are pressing our bets)
We outlined this story earlier this month as well, more directly to home heating oil which seems to dominate the New England utilities [Jun 1: AP Heating Oil Shock to Hit New England]. We'll revisit late next fall when we start hearing the consumer in shock and awe.

Once again, I stress how anything consumer discretionary that does not cater to the upper 2% is in for a world of hurt in the year(s) ahead. Until home prices fall enough so people only use 1/3rd of their income on a rental/mortgage payment and/or people start getting wage increases of 7-10% type to reflect true cost of life the American consumer will be stressed. It is as simple as that - or I suppose if oil, gas et al drop to 2006 levels. People in power poo poo food and energy as if they were not the 2nd and 3rd/4th biggest line items in a persons expenses... the effects (psychological and economic) are tremendous. Without wages rising much, the pie of spending must draw down from one place (sporting events, camping trips, entertainment, non essential travel, Vegas, boating, eating out at restaurants, buying that extra pair of shoes) and go into essentials. This is pooring of America 101, and why sentiment gauges continue to fall to ungodly rates (in a low inflation, low unemployment - by government standards - economy).
  • Consumer confidence fell in June to its lowest in 16 years as high inflation continued to sap confidence and pushed expectations for the future to a record low, the Conference Board said on Tuesday
  • its inflation expectations gauge matched the record-high 7.7 percent (strange how consumers anticipate inflation, when government reports claim it's just silly to assume there is much)
  • The Conference Board said its overall monthly measure of consumers' mood declined to 50.4 this month -- the lowest since 47.3 in February 1992 -- from a revised 58.1 in May.
  • The index has now dropped by more than half since last July, when it was at 111.90.
  • Consumers made a grim assessment of their present situation and their future prospects. The present situation index dropped to 64.5 from a revised 74.2 in May. The expectations barometer slid to an all-time low of 41.0 from a revised 47.3 in May.
Once more, the total inability for workers to demand wage hikes aligned with the 'true' inflation rate is what sets apart this oil shock from the 70s. The Federal Reserve and corporations love it. One group is the loser from this outcome. You can guess who(m).

Near Term Fate for Commodities?


It appears today was a rotation station day - out from commodities and into housing, and some financials. Final stage of correction approaching? Dunno. Too early to tell. However, the clip above may show the near term fate of commodities? ;)

Bookkeeping: Buying some Apple (AAPL) Ahead of Research in Motion (RIMM) Earnings

Keep in mind folks, we are down about 7% straight in 3 weeks and as I outlined this weekend tomorrow is setting up for a potential positive day as a lot of "safer" blue chip type of multinationals report... along with Uncle Ben. Despite constant mismanagement and poor predictions (i.e. as the economy weakens, inflation will dissipate) people always look to authority figures in times of unrest. So Uncle Ben is the calming figure - even though he will most likely do nothing tomorrow, traders will use any sliver of data point to make a case to buy. In fact, when these 4 companies report tomorrow, you can see CNBC chiming in "what is all the fuss about, things are clearly going well" - everyone has absolute short term memory and FedEx, UPS, Dow Chemical will be forgotten in a snap.

Further on Wednesday we have a slew of earnings reports from some of the best companies out there so we could have a good psychological day. Monsanto (MON) on the agriculture side, Nike (NKE) on the global brand side, Oracle (ORCL) on the big cap tech side, and Research in Motion (RIMM) on the must have gadget side. So it is quite easy to get overly negative here, but nothing in a straight line (even if you are a full blown bear) - we should expect head fakes along the way, causing pain to whatever side of the tape you are.

Nothing straight down, or up. Unless you were in the thicket in January 2008 - when in fact it was straight down. Aside from Oracle I could see the other 3 companies really having some major positives so that could set the mood brighter tomorrow and Thursday AM. Unfortunately it's always impossible to gauge the market reaction to Uncle Ben and crew so thats an unknowable variable.

With that in mind, I've cut some short exposure into this morning's tape and also am adding some Apple (AAPL) with halo effect via good results in Research in Motion (RIMM) in mind. The stock is trading around its 50 day moving average so it's pulled back to a first support level, and it's a solid place to begin to rebuild. Much like any purchase at this point, I am going slow but for now Apple is back up to a 1.4% stake. I would still like to ultimately add Apple in larger scale in the $160s (or $150s), but $174/$175 is a decent beginning. I do still believe it will go lower however over time - this is a classic double top forming - and there is a nice gap in the chart around $156

Again I've been struggling to find new technology names that actually have secular growth over 15% annualized, so my first preference is simply to add to the few names we already have in the portfolio, but I wanted to see lower prices, so we are starting to get some of that now. When money does come out of commodities (and for all you doubters - nothing straight up - it will happen at some point) it will flow into other areas so we want exposure there too.

Once we get through these earnings reports, will revisit the mood of the market Thursday around noon. Or if good reports are met with selling that would be another strike against this market. Between now and mid day Thursday the mood will be news dependent, and how people react to said news. Volatility ahead....

Long Apple, Research in Motion in fund; no personal position

Bookkeeping: A Touch of Baidu.com (BIDU) Added Back

Until we see some panic selling, my purchases will be modest. But we will layer in as prices depress.

When last we visited Baidu.com (BIDU), it was up 36% in 5 weeks so I was selling @ $377 on May 7th [Bookkeeping: Cutting Most of 3 Positions on Huge Runs]. Usually we don't nail things that perfectly but essentially the top was in. I've been buying very small lots ($3K or so) in the $320s but here at $305 I'll make a bit larger buy, so we've retrieved our sold shares for a 19% discount in about 7 weeks. The stock is now at its 200 day moving average, a key support level. If this breaks, it could free fall, so I'd look to add shares in the $280s (April lows), and if that does not hold $220s-$240s (late winter lows). The farther it drops the larger the buys will become. For now, just increasing Baidu.com to 1.5% of portfolio.

At this point, I'd rather start buying this type of merchandise that is already on sale, rather than the commodities, most of which are nowhere near any support level. Waiting for more fear in a general sense...

Long Baidu.com in fund; no personal position

We Need Fear...

We need people in commodities to not feel bullet proof or smug in their 'safe havens'...

We need 8-12% daily down drafts in oil stocks, coal stocks, natural gas, and fertilizers. (the "generals")

We need people to throw in the towel and not to feel like they are safe in any spot.

We need people chasing small cap oil stocks like Pyramid Oil (PDO) 120% up in 5 days (up nearly 1500% in 2 months), to run for the hills and not feel like this market is so easy.

That is the last stage I've been waiting for. When there is no place to hide. Every other stage has played out to perfection. We are now in the 2nd to last stage where people are hiding out in the last group standing (commodities) and they feel as if they are on top of the world as the rest of the market crumbles around them.

The last stage is when these hopes of that set of people are erased and they begin to experience similar pullbacks as everyone else has felt. As I wrote in this week's roundup - we could be coming to this time shortly. Let's see if we get some of those moves ...

I remain patient waiting for this moment. Then we can be confidant it's time to start layering in some purchases.

Dow Chemical (DOW) Raising Prices for 2nd Time in 2 Months

Wow, this is amazing... Andrew Liveris CEO of Dow Chemical (DOW) is one of my favorite CEOs - he has blasted the entire energy policy in the United States (if you call it a policy) [May 28: Bravo Dow Chemical CEO] and just 5 weeks ago instituted a price hike of 20%. Now the company is out this morning with ANOTHER 25% price hike along with fuel surcharges. Breathtaking. On top of that they are idling production (read: laying off workers) because unlike the auto companies they don't have unionized workforces, so when they cannot sell a product for more than it costs them (i.e. make a profit), they simply shut down production. Which in theory could lead to even more inflation as supply is taken off line (and can't be good for laid off workers). Frankly it's a big mess. Dow is the type of company that has products that go into almost everything in the supply chain which is why these type of companies are important to keep a track of.

Now the good news is the government reports won't show this as inflationary so nothing to worry about. Unless you live in the real world... where inflation is a tax on all things - producers and consumers.
  • Dow Chemical Co (NYSE:DOW - News), the biggest U.S. chemicals manufacturer, said on Tuesday it will boost its prices by as much as 25 percent, institute freight surcharges and cut output of some products because of soaring energy prices.
  • The price hikes come after last month's across-the-board 20 percent increase by the Midland, Michigan-based company, which makes thousands of products ranging from plastic wraps to car parts and insecticides.
  • "What we're doing is trying to protect our earnings," Chairman and Chief Executive Officer Andrew Liveris told broadcaster CNBC.
  • Dow said it is also undertaking a series of cost reduction measures on staffing, facilities and spending at its automotive unit because of the decline in North American auto sales.
  • The price increases announced on May 28 were not enough to cover the additional energy prices increases, Liveris said.
  • Liveris again called for the U.S. government to overcome political squabbling and pass energy measures that will increase supplies. "We've got to get bipartisan energy policy ... this is too important a country to take aspects of energy policy off the table," he told CNBC.
  • From August 1, Dow will implement a surcharge of $300 per shipment by truck and $600 per shipment by rail in North America for customers buying chemicals, hydrocarbons and plastics. Freight charges will be applied in other regions later this year.
  • Dow also trimmed it production of the industrial chemical ethylene oxide by 25 percent and idled 30 percent of its North American acrylic acid output. The company will idle 50 percent of its European styrene production, and has cut European polystyrene production by 15 percent.
Cutting jobs, cutting production, raising prices - all sound like good things. All things we predicted last summer/fall as Wall Streeters screamed for joy every time Uncle Ben cut rates so their stock accounts could go up 1.2% that day on "great news from the Federal Reserve". No free lunches.

If you are new to the blog in the past month, I'd encourage you to go to this post [May 30: Weekend Homework for Readers - more Dow Chemical CEO] and spend the time listening to the CEO in his last round of interviews. There appears to be more sense in this 1 man than 98% of Washington D.C. Quite a sad situation really.

Oh yes, after the Fedex (FDX) warning last week, are we surprised UPS (UPS) is also out warning? Shouldn't be - these are only bellweathers of the US economy; the only people surprised are the "2nd half recovery" pollyanas. Inflation - it's everywhere. Except government reports in the United States.
  • UPS(UPS), citing a sluggish U.S. economy and the blistering rise in fuel costs, has cut its second-quarter expectations.
  • The Atlanta-based overnight package carrier said it expects to earn 83 cents to 88 cents for the quarter. It originally anticipated earnings between 97 cents and $1.04.
  • Slow U.S. economic growth and skyrocketing fuel expenses have resulted in lower-than-expected domestic package volume and reduced use of premium air products, the company said. Additionally, it said "the anemic U.S. economy" is affecting international results. (wait, I thought the great international story was what was keeping the market holding up? Rut roh raggy)
UPS shares are now at a 5 year low ... right ahead of the '2nd half recovery'. Strange eh?

Let's not forget CNH Global (CNH), one of the big equipment makers (especially agriculture) - even they have to increase costs (albeit by a miserly 5%) to offset rising costs of all commodity inputs. We warned this is going to be a big issue but Wall Street is behind the curve. Now the evidence is mounting. It is amazing what you see when you ignore government reports and only listen to the companies themselves. 2 completely different worlds.
  • Farm equipment maker CNH Global NV (CNH) said on Monday it was slapping a 5 percent surcharge on its tractors and combines as it joined the growing list of global companies complaining of the toll rising commodity prices are taking on their profits.
  • ...the move was a "response to sharp and sustained increases in its costs for steel, energy, commodities, and transportation."
[Jun 20: Steel Nabs Another One - Lindsay Corporation]
[May 17: WSJ - Fast Rising Steel Prices Set Back Big Projects]
[May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks]

Long Liveris

Cleveland Cliffs (CLF) - A Man Among Boys

Let me be the first to say I lightened up on this stock far too early - and we never had enough exposure (at most 1.5% of the fund). We have nearly a double in this position since adding it in the hectic March sell off. What a performance; and a little known fact is they have serious metallurgical coal exposure on TOP of their iron ore exposure [Chinese Warned of Record Rise in Ore Price - 85-95%!] [Apr 7: Posco Agrees to 200% Coal Price Increase]

It is funny to read through this article because I was in this name back in the days when they bought Portman and I remember the very negative reaction by VERY SHORT SIGHTED investors - who many times much prefer companies do not spend on R&D or don't spend on smart acquisitions - since all they care about are moves to boost EPS one quarter out. But never in my imagination back then did I foresee this type of move. The move into met coal? Prescient. Personally I've been blown away that one of the mining world's "Big 3" have not taken Cleveland Cliffs (CLF) out a long time ago.
  • Cleveland-Cliffs Inc. has seen its stock price rise more than 300 percent since the beginning of 2007. But that's nothing.
  • If you go back to January 2001 -- the height of the steel crisis -- Cliffs' stock price has gone up some 5,000 percent, from about $2 a share to more than $100 today.
  • That means a $20,000 investment then is worth $1 million now. (@&*(@!&*!)
  • Global growth, especially in China, and a weak U.S. dollar have been the drivers, pushing up demand for steel made here and abroad. Cliffs mines in Michigan, Minnesota and Canada supply blast furnaces across North America with iron ore, the main ingredient in making steel, while their mines in Australia ship to China and Japan.
  • Cliffs recent foray into metallurgical coal is expected to pay off in a big way, too.
  • It has made all the right moves, beginning with a decision to expand its iron ore reserves in North America at a time when bankrupt steel companies were looking to unload them. Adding reserves at bargain prices proved brilliant, as Cleveland-Cliffs had more iron ore to sell once the steel industry consolidated and surged back to life.
  • The company's then chief executive John Brinzo didn't stop there. In early 2005, flush with cash, the company bought into an Australian iron ore company called Portman Ltd. The move didn't sit well at the time with Cliffs investors who chastized Brinzo. They thought a better use of Cliffs' new-found wealth was to buy back shares, thereby rewarding current shareholders with instant gains.
  • Last year, Cleveland-Cliffs expanded again under Brinzo's successor Joe Carrabba, this time into metallurgical coal. Cliffs' paid $450 million and absorbed $150 million in debt for PinnOak Resources LLC, which included coal mines in West Virginia and Alabama.
  • Metallurgical coal, as opposed to the thermal variety burned to make electricity, is converted into coke. It's then mixed with iron ore in a blast furnace to produce molten iron, the first step in the steel making process.
  • Carrabba said he expects coal contracts that now pay an average of $94 per ton to renew for at least $250 per ton when they start to expire at the end of this year in the United States and next April for European customers. About 60 percent of Cliffs' coal is exported, with much of it going to ArcelorMittal plants in Europe.
  • "I would say over the last four or five years there really isn't anything they've done wrong," said David MacGregor, analyst with Longbow Research in Independence.
  • While Harbinger likes Cliffs' business fundamentals, it's also thinking the company could be a takeover target at a premium price. Among those speculated to be interested in Cliffs is steel giant ArcelorMittal. It's already Cliffs' largest customer, commanding 44 percent of its North American iron ore sales.
  • Unlike oil, iron ore is not traded on a commodities exchange and elicits little speculation from investors, he said. (this is also why I like iron as opposed to some other commodities - along with longer term contracts)
[Mar 7: Starting 2 Mining Positions Emphasizing Iron Ore]
[Feb 22: Didn't Realize Cleveland Cliffs had Coal Exposure]

Long (not enough) Cleveland Cliffs in fund; no personal position

Monday, June 23, 2008

'Rising Tide Growth' Performance vs Peers May Update

As Rising Tide Growth approaches its 1 year anniversary I have begun to track performance versus it's peer group, the "mid cap growth" category of mutual funds.

Apr 23: 'Rising Tide Growth' v Mid Cap Growth Mutual Fund Peers
May 9: 'Rising Tide Growth' Performance vs Peers April Update

The Apr 23 post has a detailed methodology breakdown.

This is still not an apples to apples comparison until we hit the July period as that will be our first year, but as each month passes we get closer to a direct comparison. With May complete we have 10 months of direct comparison and the other 2 months we assume 0% return, to reach a 12 month return.

Our general big picture goals once live is to try to finish in the top 10% of our category most years - that would place us at the very top over 3 year, 5 year, 10 year time frames. Of course that goal won't be reached every year, but have to aim high. There are about 1870 funds in this category so any finish near the top 200 or so would place you in the top 10%.

As of May 31st, Rising Tide Growth NAV was $12.24, creating a 22.4% return (we started at NAV $10.00). As always my results are kept by third party, which I link to in the left margin of the blog.

RTG Return: +22.4%
Top 25 peer range: +20.6% (1st place) to +7.4% (25th place)
Average of all peers: -0.8%

Here are the top 25 performers in the category for May 31 2008 - after a quick break last month when we fell out of the top slot, we are back to the equivalent of being the #1 "fund" in the country for our category. Barring something ridiculous we should be able to hold in the top 10 slots (the 10th best is way down at +11.9% return), as June is going very well (versus market and peers), and we only have about 5 weeks after this one to finish out "our year".

Ultimately, the goal is to be near the top of this list in the 3 year, 5 year, and 10 year categories...

[Legal Disclaimer: Rising Tide Growth fund is a hypothetical fund and in no way, shape, or form can we guarantee similar results in a similarly structured product when launched]

This Day in Agriculture - India Falling Below Potential / Opening Conservation Lands to Farming in the US

A couple of interesting reads from the previous week - it does highlight some potential solutions to the growing food crisis i.e. If India could even become 2/3rds as productive in their agriculture sector, they could race up to join the United States and Russia/satellite states as an agriculture giant. But it is a long road ahead.

NYTimes: In Fertile India, Growth Outstrips Agriculture
  • With the right technology and policies, India could help feed the world. Instead, it can barely feed itself.
  • India’s supply of arable land is second only to that of the United States, its economy is one of the fastest growing in the world, and its industrial innovation is legendary. But when it comes to agriculture, its output lags far behind potential. For some staples, India must turn to already stretched international markets, exacerbating a global food crisis.
  • Forty years ago, a giant development effort known as the Green Revolution drove hunger from an India synonymous with famine and want. Now, after a decade of neglect, this country is growing faster than its ability to produce more rice and wheat.
  • ....while (Prime Minister) Mr. Singh worries about feeding the poor, India’s growing affluent population demands not only more food but also a greater variety.
  • India’s own people are paying as well. Farmers, most subsisting on small, rain-fed plots, are disproportionately poor, and inflation has soared past 11 percent, the highest in 13 years.
  • The Green Revolution introduced high-yielding varieties of rice and wheat, expanded the use of irrigation, pesticides and fertilizers, and transformed the northwestern plains into India’s breadbasket. Between 1968 and 1998, the production of cereals in India more than doubled. But since the 1980s, the government has not expanded irrigation and access to loans for farmers, or to advance agricultural research. Groundwater has been depleted at alarming rates. (the ultimate shortage)
  • Family farms have shrunk in size and quantity, and a few years ago mounting debt began to drive some farmers to suicide. Now many find it more profitable to sell their land to developers of industrial buildings. (loss of arable land - this is repeating in many developing countries as "urban" takes over "rural")
  • Among farmers who stay on their land, many are experimenting with growing high-value fruits and vegetables that prosperous Indians are craving, but there are few refrigerated trucks to transport their produce to modern supermarkets.
  • A long and inefficient supply chain means that the average farmer receives less than a fifth of the price the consumer pays, a World Bank study found, far less than farmers in, say, Thailand or the United States.
  • Here in Punjab, more than three-fourths of the districts extract more groundwater than is replenished by nature.
  • Today only 40 percent of Indian farms are irrigated. “When there is no water, there is nothing,” Mr. Chawla said. (that's a problem...)
  • The luckiest farmers make more money selling out to land-hungry mall developers. Gurmeet Singh Bassi, 33, blessed with a farm on the edges of a booming Punjabi city called Ludhiana, sold off most of his ancestral land. Its value had grown more than fivefold in two years.
NYTimes: U.S. May Free up More Land for Corn Crops
  • Signs are growing that the government may allow farmers to plant crops on millions of acres of conservation land, while a chorus of voices is also pleading with Washington to cut requirements for ethanol production.
  • In disasters, the Environmental Protection Agency can roll back requirements for ethanol production, which could free up a large amount of corn for animal feed. Mr. Grassley, a strong ethanol backer, rejected that proposition, but in recent days many industries that depend on corn have urged the government to act.
  • About 34 million acres are enrolled in the government’s biggest conservation program, known as the Conservation Reserve Program. Farmers enroll their land for as long as a decade and cannot take it out without paying severe penalties.

It Really is all about China - When it Comes to Cement

Paul Kedrosky over at Infectious Greed has one of those graphs where truly the saying "a picture is a worth a thousand words" speaks volumes. It truly is amazing how China dwarfs everyone - they are doing 10x more than any peer. In fact if I eyeball it, if you add every other country in the world together as one entity; it appears China would be consuming more. As I keep repeating, this economy is like an out of control Ferrari racing on oil slick mountain roads. How to keep control of the steering while is not something I'd wish on anyone.

(click to enlarge)

One name I've followed for a long time, is Mexican cement maker Cemex (CX) which is one of the world's giants (#3 in the world). Unfortunately they are so intertwined with the US market, the stock has been a disaster for a while. I was getting excited about 6 weeks ago, as the technical condition of the chart began to improve, and it looked like a breakout was happening, but just like that, the chart snapped. However, they do not seem to have major Chinese exposure.
  • Cemex, the world's number-three cement maker, cut its 2008 forecast for pre-tax earnings to $5.3 billion on Monday, battered by the weak U.S. housing market and a slowdown in key European markets
  • "We continue to face a difficult economic environment in the United States with construction falling more than originally anticipated," Chief Financial Officer Rodrigo Trevino said in a statement.
  • Cemex, the top building materials company in the United States, had forecast 2008 earnings before interest, tax, depreciation and amortization (EBITDA) of $5.6 billion. "We now expect EBITDA for 2008 of about $5.3 billion," Trevino added.
  • For Cemex, which competes globally with Switzerland's Holcim (HOLN) and France's Lafarge (LAFP), the impact of the U.S. housing crisis comes as Cemex increased its market share through last year's $16 billion acquisition of Rinker, which had 80 percent of its operations in the United States.
  • "We now expect domestic cement volume in the United States to decrease by around 12 percent, ready-mix volume to decrease by about 21 percent and aggregates volumes to decrease by around 20 percent for the full year 2008," Cemex said. (sounds like an economy ready to rebound any minute now)
  • Housing slowdowns in Spain and the United Kingdom are also hurting Cemex, which has operations in more than 50 countries. (notable - as we've been saying the UK is a mini USA and both countries followed the Americans into lax mortgage standards which led to major housing bubbles - in fact many say Spain has the worst of the bunch)
  • In Spain, where the economy is cooling after a decade of high growth levels, the company expects cement volumes to decrease by about 17 percent this year. "This was lower than we expected and a little worrying given that Spain is one of Cemex's top markets," said a Mexico City-based cement analyst who declined to be named.
  • The UK housing market is also cooling as the economy falters, feeling the impact of the U.S. credit crunch. The average cost of a UK house has fallen by about 8 percent from a peak in August last year.
  • That follows a near decade-long boom, during which the price of the average UK home more than tripled. (easy credit, easy money, lax guidelines - another wonderful US import!) Cemex said it sees British cement volumes falling about 9 percent in all of 2008.
Bottom pickers might find this chart appealing as Cemex (CX) hits March lows and near January lows... again note the false breakout just over a month ago - how vicious the market can be.

Sohu.com (SOHU) - Analysts Race to it's Defense

I was hoping for more of a sell off in Sohu.com (SOHU) after Friday's "news" that after an Olympic style bump this year in their advertising business, things would return to more normal in 2009. [Jun 20: Sohu.com Sees Ad Revenue Slowing in 2009] Notable Calls blog points out that analysts have rushed to its defense this AM, and the stock is bouncing sharply at least for now. Again, gaming not advertising has provided the spark in this name.
  • Citigroup notes Friday's sell-off was sparked by a Reuters article confirming what almost everyone already knew: Sohu will face challenging YoY comps on its brand adv side due to a post-Olympics "hangover" effect. However, the firm believes online gaming will continue to power rev and earnings growth in 2009. They were modeling +18% YoY for 2009 adv revs, so the company's expectations of "+20-30% YoY" is actually stronger than their estimates. Finally, they note that online gaming is highly immune from growing inflationary pressures in China, another positive. Accordingly, the firm raises their 2009E estimate, increases tgt to $90 (from $80), and reiterates Buy rating.
  • 2Q tracking ahead of plan; 3Q looks excellent - Citi believes both Adv & Gaming are having a strong quarter, and should come in above company guidance. 3Q is also set to be very strong, especially with Olympics adv, which should benefit from Sohu recently being granted the rights to show live streaming video of all events. Sohu is easily one of the, if not the, fundamentally best positioned names for at least the next 2 quarters.
  • Merrill Lynch reits Buy & $95 tgt on SOHU after a massive sell-off on Friday triggered by a report by Reuters on growth of Sohu’s online ad, 40% of revenues in 1Q08, to slow down to 20-30% YoY in 09. Even given a significant US market correction on Friday, they see overreaction to the article. Firm also sees Sina as another victim.
  • MLCO believes the company has been communicating the same message (slowdown in ad growth in 09) for a few months. They also believe the range is inline, if notbetter, than most analysts’ estimates. For example, they are looking at 22% growth in online ad only and Bloomberg consensus shows a 23% growth in sales (including games and wireless services).
  • Firm believes the focus should be on Sohu’s potential margin expansion in 2009, despite lower topline growth. They expect Sohu to obtain a high-tech status and thus a 15% tax rate for 2009. They are also modeling material operating leverage as they expect the reduction in Olympic-related spending next year, est. to be US$15-20m, to be able to offset most of the increase in operating expenses to support organic growth. They therefore expect net margins to improve to 35% in 09.
Long Sohu.com in fund; no personal position

Agriculture Consolidation: Bunge (BG) to buy Corn Products (CPO)

These names are not really my focus in the sector, but Bunge (BG) has a fertilizer component to it, and while I don't really care too much about the acquisition I like the increased guidance. A trend I expect to see across the fertilizer space as we move ahead.
  • Fertilizer producer and oilseed processor Bunge Ltd (NYSE:BG - News) said on Monday that it would buy Corn Products International Inc (NYSE:CPO - News) for $4.4 billion to gain a leading position in finished corn products such as starches and sweeteners.
  • Separately, Bunge raised its 2008 earnings forecast to $9.35 to $9.65 per share from $7.10 to $7.40, not counting the effects of the acquisition, which the company expects to close in the fourth quarter.
  • Analysts were expecting Bunge to earn $7.59 a share in 2008, according to Reuters Estimates.
No positions

FinancialTimes.com: Chinese Warned of Record Rise in Ore Price - 85 to 95%!

Iron Ore continues its incredible ascent... the beat goes on; one can only wonder when China (who, like the Fed is also in a box) says no mas. I thought Vale (CVRD) asking for 65% price increases were outrageous [Feb 19: CVRD (RIO) Secures 65% Increase in Iron Ore Pricing], but apparently since these 2 producers have closer locations - they are asking for higher prices (longer distances = more shipping costs to bring in RIO iron ore)

China almost has to (to some degree) continue growing or risk the social unrest of telling scads of newly formed urbanites that they need to go back to the countryside and resume their rural lifestyle. Quite possibly one of the most interesting economic experiments of all time - managing 1.3 Billion people through torrid growth.
  • Rio Tinto (RTP) and BHP Billiton (NYSE:BHP) have asked their Chinese steelmaker customers to accept the largest ever increase in iron ore prices or risk the interruption of supplies from Australia.
  • Traders and industry officials said the mining companies have demanded price increases for their annual iron ore contracts in excess of the record 71.5 per cent rise of 2005 and were fighting for increases of 85-95 per cent.
  • Rio and BHP have warned their Chinese clients some annual contracts will expire next Monday and they would cease supply under the old terms. They have told them the ore would instead be sold into the spot market, where prices are higher.
  • The bold step indicates that the heated annual price negotiations, already well beyond their traditional conclusion date, are set to move into a hostile phase.
  • Analysts said most of Rio's iron ore contracts would expire on June 30. However, some BHP contracts do not expire until September, leaving the latter time to negotiate and allowing Rio to take the lead in the discussions.
  • Rio and BHP are demanding a larger price increase than Brazil's Vale because their proximity to China reduces shipping costs.
  • Traders said that freight costs from Australia to China collapsed last week by 37 per cent as at least one of the mining companies stopped booking some vessels for July to ship under the old contracts. That move signalled their intention to move shipments into the spot market if the negotiations failed. (this appears to be the main reason spot pricing of the Baltic Dry Index dropped so suddenly - and it appears to be relative temporary)
  • Although China has record high iron ore inventories, the country depended heavily on imports, they said, and it would not be long before it had to cave in and buy into the spot market.
  • Morgan Stanley said in a report the ore market was under "unprecedented" pricing developments and . . . "remains very tight and in significant deficit".
Rio Tinto (RTP) CEO on CNBC Friday saying he is bullish on China for... another 10-15 years (granted he is biased)\

In the end, those with hard assets will win. These are the "big 3" in mining.

Long Vale in fund; no personal position

June Update - Top 10 Winners & Losers

Previous editions can be found
  1. May 1
  2. Mar 16
  3. Dec 18
Here is our every so often look at best and worst contributors to the fund; as long as the winning group in aggregate is larger than the losing group we should be in good shape.

On the winning side, essentially a long fertilizer/coal paired with short financial/commercial real estate has been our core winning play. Fertilizer really helped us last fall/winter and coal has taken the reigns this spring. Keep in mind I use a basket approach for most sectors - so in theory I could of had "1 huge winner" in each sector instead of multiple large winners as shown below. Alpha Natural Resources (ANR) has only been with us since early April, when I switched into it from Peabody Energy (BTU) and in that short time it's cracked the top 10, even though my weighting has been 3-4% of fund at most. Financials have been helping us almost every month. In the next tier of winners (slots 10-15) are non commodity names such as Illumina (ILMN) which has not been a major weighting for a long time after a huge run in 2007, and Baidu.com (BIDU) which has not been a great buy and hold stock (some traumatic sell offs), but I've traded this one very well. Of course the magnitude of dollars gained is in large part based on weighting I've put on each stock - i.e. Mosaic (MOS) has many times been a 6-8% weighting in the fund whereas Illumina or Mastercard (MA) has rarely been over 2%.

Top 10 Winners
Mosaic (MOS) +57.2K - fertilizer
Ultrashort Financial (SKF) +38.6K
CF Industries (CF) +33.3K - fertilizer
Potash (POT) +28.5K - fertilizer
Mechel (MTL) +23.9K - steel/coal/iron
Consol Energy (CNX) +21.3K - coal
Massey Energy (MEE) +10.0 - coal
Ultrashort Real Estate (SRS) +17.9K
Alpha Natural Resources (ANR) +16.1K - coal
Mastercard (MA) +11.0K - credit cards

On the losing side, most of these names have been sold off so there is no chance to "improve" on the losses. Trina Solar (TSL) hemorrhaged even more money since last we looked in early May - in fact 3 of my 10 losers are solar names. I've come to the conclusion that my style of investing does not mesh with the way these stocks trade - I like to build up positions on strength as opposed to weakness, but much like the dry bulk shippers - this is one group that is so volatile you simply must buy them when the charts look completely broken - since when they do rebound, the rebounds are swift and you do not have time to rebuild positions in a structured, incremental way. Specific to Trina Solar is a year's worth of underperformance, but that's a whole different matter. One day I hope to see some of these names switch to the other side of the ledger (big winners) instead of big losers. On the good end there is only 1 new name added to this list since last we looked (the less new additions, the better for us obviously). The only newcomer is my "insurance" policy (hedging vehicle) against my basic material (i.e. the closest thing I can have to short agriculture/chemical stocks) - Ultrashort Basic Materials (SMN). While it is a loss, it is actually doing it's "job" - as stated when I bought this position, if I am losing money on it, that means the counterweights (long positions) in the same sector must be doing well. Which they are. That said, I'd like to see this loss reduced - hopefully shortly.

Top 10 Losers
Thornburg Mortgage (TMA) -25.6K - high end mortgages
Trina Solar (TSL) -25.5K - solar
LDK Solar (LDK) -14.1K - solar
Riverbed Technology (RVBD) -11.0K - networking
MFA Mortgage Investments (MFA) -9.5K - mortgage REIT
Crocs (CROX) -9.0K - plastic shoes
NII Holdings (NIHD) -8.1K - cell phone
Ultrashort Basic Materials (SMN) -7.5K
Solarfun Power (SOLF) -6.6K - solar
Chicago Bridge & Iron (CBI) -6.1K - infrastructure

Sunday, June 22, 2008

AP: Record Corn Prices Mean more Expensive Dairy, Meat

As long predicted [May 27: Update on Corn and Livestock] the chickens (couldn't resist) are coming home to roost.... as always we are early and you never know when a thesis will hit critical mass. But as I've been repeating I think "oil" will be replaced with "food" as the inflation of choice for the news channels to stress over later this year and into early 09.

I will say the action this week in iPath DJ Livestock ETN (COW) was very encouraging. [Apr 23: Initiating iPath DJ Livestock ETN (COW) - Make up your own Farm Animal Headline]

I've mentioned this name, iPath DJ Livestock ETN (COW) recently as a play on the twin tower effects of (a) governmental ineptitude (ethanol boondoggle) and (b) Fed induced grand larceny against savers and lower/middle class (inflation). While I could see grains having a short term setback if the dollar strengthens, I do believe meat inflation is going to be the next shoe to fall, as producers cut back, creating the next shortage.

The weighting is currently
60% cattle, 40% hogs. Either way, get your freezer stocked up, by Labor Day those BBQs are going to cost a pretty penny. Inflation will eventually push up the value of all finite resources... including stocks! (always a bright side)

Here comes said chickens....
  • Raging Midwest floodwaters that swallowed crops and sent corn and soybean prices soaring are about to give consumers more grief at the grocery store.
  • In the latest bout of food inflation, beef, pork, poultry and even eggs, cheese and milk are expected to get more expensive as livestock owners go out of business or are forced to slaughter more cattle, hogs, turkeys and chickens to cope with rocketing costs for corn-based animal feed.
  • ...experts say the trickle-down effect could be more dramatic later this year, affecting everything from Thanksgiving turkeys to Christmas hams.
  • ...pork supplier...high corn costs were already forcing producers in his industry to cut back on the number of animals they raise.
  • "There's definitely liquidation of livestock happening," and that will cause meat prices to rise later this year and into 2009, said Brenneman, who is also the vice chairman of the American Meat Institute.
  • It's a similar story for U.S. beef producers, who now spend a whopping 60-70 percent of their production costs on animal feed and are seeing that number rise daily as corn prices hover near an unprecedented $8 a bushel, up from about $4 a year ago.
  • "This is not sustainable. The cattle industry is going to have to get smaller," said James Herring, president and CEO of Amarillo, Tex.-based Friona Industries, which buys 20 million bushels of corn each year to feed 550,000 cattle.
  • "We're in survival mode now," said Paul Hill, chairman of West Liberty Foods, a turkey processor based in West Liberty, Iowa. He estimated U.S. turkey producers will reduce their flocks by 10 to 15 percent nationwide, a cutback that will send consumer prices dramatically higher.
  • If corn were to rise to $10 a bushel, Richard Lobb, spokesman for the National Chicken Council, said recouping costs through higher retail prices may not be possible. "Can you possibly charge enough for the chicken to recoup that investment?" he said. "That's a question no one can answer yet because it's never been done."
Send your thank you notes to your local Congressman/women who votes "yes" for corn ethanol! And for the 50th time - please stock up your freezer with meats... immediately.

Long iPathDJ Livestock ETN in fund and personal account

Bookkeeping: Weekly Changes to Fund Positions Week 46

Week 46 Major Position Changes

Fund positions of 1.0% or greater can be found each week in the right margin of the blog, under the label cloud and recent comments areas; I highlight weekly the larger position changes.

Being a long only fund, via Marketocracy rules, the only hedges to the downside I have are cash or buying short ETFs. I cannot short individual equities.

To see historic weekly fund changes click here OR the label at the bottom of this entry entitled 'fund positions'.

Cash: 24.0% (vs 15.6% last week)
51 long bias: 54.7% (vs 58.3% last week)
9 short bias: 21.3% (vs 26.1% last week)

60 positions (vs 60 last week)
Additions: Powershares DB Agriculture Double Long ETN (DAG), Ciena (CIEN)
Removals: Powershares DB Agriculture Fund (DBA), Morgan Stanley (MS)

Top 10 positions = 28.3% of fund (vs 30.9% last week)
38 of the 60 positions are at least 1% of the fund's overall holdings (63%)

Major changes and weekly thoughts
It has been a rough few weeks for the markets - the S&P 500 is now down over 8% from its interim peak reached about a month ago, and 6% in the past three weeks. I have misspoke on some earlier entries when I wrote we have broken the March "Bear Stearns" bottom; in fact we are just at the April lows in the 1320s on the S&P. Aside from 1 day of panic selloff (Bear Stearns Monday) the market has bottomed out at mid 1270s both in January and March 2008. So if we continue downward this is the technical level everyone will be looking at. I would expect the market (if it gets there) to make a stand there as "those in the know" realize this level must be held or all the hedge fund computers and technicians will be throwing in the towel (read: selling) if this threshold is broken. That said, markets that sell off this harshly typically have some vicious bounces in the opposite direction (up) which tend to punish those who are pressing the short side, so I can assume it will be a tricky market for bears and bull alike. When we do have rallies, shorts can lose a lot of money in a very short amount of time, even if the interim trend is down.

As for this week, looking at the calender Wednesday will dominate the news as the Federal Reserve meeting takes place and everyone will be pinning their hopes for some magical elixir from our favorite sugar daddy, Uncle Ben. The Federal Reserve continues to be in a box - can't cut rates because they've already stoked structural inflation, and can't raise rates because no one has been that courageous since the Volcker era (raise rates into a slowing economy) This is a much more political "independent" body, than in days past. If I were Ben, I'd actually raise rates by 25 basis points and then at least signal to the world I had an ounce of credibility on inflation - that 25 basis points would mean nothing in the big picture but at least would be a decorative move to show inflation is now a concern. Instead, I assume we will get "strong language" in the statement. Big deal.

Further on Wednesday we have a slew of earnings reports from some of the best companies out there so we could have a good psychological day. Monsanto (MON) on the agriculture side, Nike (NKE) on the global brand side, Oracle (ORCL) on the big cap tech side, and Research in Motion (RIMM) on the must have gadget side. So it is quite easy to get overly negative here, but nothing in a straight line (even if you are a full blown bear) - we should expect head fakes along the way, causing pain to whatever side of the tape you are. I personally would like to see capitulation type (what I call "waterfall" selloffs) where almost every well know stock drops 8-12%, and the stocks that have held up the best finally are trashed. This would jack up the fear factor and from these events come at least intermediate bottoms. Most of my favorite names both in the portfolio and names on my "to do" list in terms of what I want to add to the portfolio have still stubbornly held up, so I am still awaiting price targets to add to these positions, or introduce new names to the fund. As always, we won't catch the bottom - and some of our buys (if we do indeed get some waterfall selloffs) will immediately go underwater but without a crystal ball one just must scale in, into the painful selloffs - and look 3-6 months out and realize the best names will recover. This strategy has generally served us well. Most of the fund trades of late have been with asset allocation (moving cash/short/long exposure around as the market ebbs and flows). I do expect, if we do get a more serious sell off in the week(s) ahead to have a lot more transactions into the teeth of the selling. This was a relative quiet week.

Below are the fund changes this week - the specific rationale for each of these major moves is explained in the weekly posts which can be accessed in the left margin of the blog under archives.

Some of the larger changes (chronologically) to the fund below:
  1. Monday, we took some solar exposure off the table as both Trina Solar (TSL) and Yingli Green Energy (YGE) made what I considered to be dead cat bounces. I'd like to increase solar exposure at lower prices, and broaden out the exposure to new names - unfortunately the ones I was interested in, made some huge gains early this week so we missed them this time around. This is a volatile group and if we do get waterfall selloffs, these names can drop like a rock.
  2. Similarly on Tuesday, we cut some ICICI Bank (IBN) on an identical technical bounce to the solar names, stocks below key moving averages that bounced too (and subsequently failed to move through) resistance. Right now touching anything Indian is toxic as the country grapples with inflation.
  3. After mulling over the fact we called this move in corn almost perfectly but did not have a pure play available to us to take advantage of the 40%+ move, I switched our agriculture commodity exposure - not by much, we simply entered a vehicle that has 2x the movement of the old vehicle we once owned. This allows us to control the same "movement" with (in theory) half the exposure. If the greater market sells off, I'll be interested to see how these commodities react - will they move down in tune? Or move in the opposite direction. Either way I believe food is going to replace oil as the inflation of back half 2008 that is most talked about.
  4. Wednesday, after a review of Morgan Stanley's (MS) results, and just how poor they were in relation to Goldman Sachs' (GS) I closed out the position and put some of that cash into Goldman Sachs. While I believe the companies hit the worst will rebound the most once the tide turns in financials and hedge funds start buying this sector (and don't forget how quickly short covering can move the worst stocks up), I am willing to give up some of that in return for the "relative" safety of the best of breed. So we are changing from a "mini basket" of 2 investment banks, to just one - the one.
  5. I don't normally highlight individual Ultrashort transactions because I move the position sizes often but since this was a relatively large change in direction and counter intuitive to market strength, I mentioned the increase in both Ultrashort Basic Materials (SMN) and Ultrashort Oil & Gas (DUG). I'd rather short some individual names as hedges, but since we cannot short, we have to use this method which is a very blunt object instead of a fine instrument.
  6. Friday, I began increasing my financial exposure (again counter intuitive) with one of our other long held names, asset manager Blackrock (BLK).
  7. I went through a list of about 25 tech names, to pick one to add exposure to this sector as a "non commodity" idea that could be in favor as hot money might try to escape commodities sometime in the next few weeks - I went back to a beaten down former fund holding Ciena (CIEN) - mostly because unlike analysts I liked their earnings report, and the stock just reported earnings so we do not have earnings risk for another 2.5 months unlike most of its brethren. In other words, hopefully much of the carnage is already in its past... the stock did behave very well Friday but in waterfall selling nothing will be safe - its all "relative". I am not sure how long I will hold this position - for now it is more of a trade. Truth be told, I'd rather buy more of our current tech holdings, but wish for lower prices to do so.
The above do not include the majority of my trades in my Ultrashorts which I am trading quite often as the market ebbs and flows.

Americans Running Out of Places to Hide Debt - Now Credit Cards Go

We've been on this beat a long - since the fund was born, we've been saying this is the first consumer led recession we've had since the early 80s and many (most?) market participants who have entered post 1983 are not prepared for it. They are going by the wrong playbook - the "corporate led" recession. Remember back then (almost a year ago) we had just began our first credit dislocations, interest rates were over 5%, and everyone was telling us not to worry! After all stocks always go up over time - just be patient. How patient - is a decade enough? They lied [Mar 26: Stocks Tarnished by Lost Decade] Houses have never gone down nationwide - don't listen to the hecklers! They lied [Jan 24: They Said it Could Never Happen. Ever.] Need I go on? I won't - you get the picture.

Back to our friend the consumer... he is in big trouble. We are financially illiterate (if we were not, we would never allow our government to do the things it does - we'd be storming D.C. in outrage) On top of financially illiterate we are massively overextended.... as I wrote then, when everyone was focused on the narrow niche that was subprime loans - that's just the tip of the iceberg. The easy to see spot. We have a whole nation built on consuming. A nation whose wages have not kept up with (relatively low) inflation eras, not to mention what we've had the past half decade. So they turned to their homes - and withdrew from that ATM. Over. And over. And over. Once home prices began to fall, that spigot turned off because frankly, many in the 2005 and later era got a house for little to no down... so without home appreciation there is no "bank" to draw upon. ATM is off. But no, pundits told us - we will be fine - just a little problem this summer and we'll be fine by fall... after all the Federal Reserve (starting in mid August) is on our side. And the market took off like a scorched monkey - racing to new highs in September and October 2007. On Kool Aid dreams.

Meanwhile I was typing to a much smaller audience: this is lunacy. The consumer is going to keep looking for spigots - personal loans, home equity loans, 8 year car loans, drain 401ks, and finally credit cards. Well that happened, the great "juggling act" of 2006-2007. And the bill is now coming due - the banks are beginning to turn off this spigot as well per the NYTimes. As I've been writing this will lead to bankruptcies - just a trickle for now. But we should see the tidal wave begin in 2009. I'm early. Just be patient. You see, when you run out of places to hide your debt, and your creditors come knocking and you're out of house equity to hide, you're out of 401k to hide, you're out of car loan to hide, you're out of credit card to hide - well you're doomed. And that's for those who remain employed. Sounds unreasonable right? Just as unreasonable as "stocks always go up over extended periods of time" and "housing will never fall nationwide".

We don't talk about this one much since it's a long term issue but we have whole series of posts so we have it on paper when it does start playing out (series from Aug 07 to Jan 08 here) and from there... (note you won't find this stuff in government reports)

[Apr 8: Late Payments on Consumer Loans at 16 Year Highs]
[Apr 10: WSJ - Borrowers Keep Piling on Debt] (we never learn)
[Apr 30: MSNBC - Americans Tapping Attic for Spare Cash]
[Jun 3: WSJ - Pinched Consumers Scramble for Cash]
[Jun 3: Credit Card Usage is Surging, Risking Another Debt Crisis]

So let's overlay that last headline, with the news from this NYTimes article - people turning to cards.... while credit card companies turn off the spigot... and the conclusion from this in an economy that is 70% consumer spending? Aha - 2nd half recovery. Again we can ignore reality and listen to government reports of joy, and CNBC pundits of happiness - or go walk to a neighborhood full of people who earn the median US wage of $38K and ask them how life is going in this low inflation, low unemployment environment. Trust me, even the "well off" are turning to credit cards to pay that $75-$85 gas fill up... how's it working for those in lower income strata? Juggling... it's going to be coming to an ending within 12 months. Then comes the real pain. So about this time next year after the debt for the 'housing bailouts' are working through, the debt from the 2nd 'stimulus' check is worked through (trust me, it's coming), then should come the debt hit from the 'credit card bailouts'... and our grandchildren must be built like Atlas to try to hold up all this debt we are going to be piling on them due to our current era of lack of self control and financial education. Strong dollar anyone?
  • The easy money that led Americans to depend on credit cards to pay their bills is starting to dry up.
  • After fostering the explosive growth of consumer debt in recent years, financial companies are reducing the credit limits on cards held by millions of Americans, often without warning.
  • Banks... are cutting the limits for customers who have run up big debts, live in areas that have been hit hard by the housing crisis or work for themselves in troubled industries.
  • The reductions come as consumers, squeezed by a slack economy, a weak housing market and rising unemployment, are falling behind on monthly credit card payments in growing numbers.
  • Credit card lenders are also culling their accounts ahead of new rules that are intended to benefit consumers but could limit the profits on customers deemed bigger risks.
  • Many Americans have come to rely on credit cards to cover everyday expenses like groceries, gasoline and medical bills, in addition to big-ticket items and luxuries. While consumer spending, the nation’s economic engine, has been surprisingly resilient of late, a more sweeping reduction in credit card limits could pose serious challenges for hard-pressed consumers and, in turn, the broader economy.
  • Many are already feeling pinched. Pamela Pfitzer, a family therapist with a stable six-figure income, was stunned when she went to a garden center near her home outside Sacramento in early April and tried to buy about $30 worth of flowers with her American Express card. Her transaction was denied, she says, even though she insists she had rarely missed a payment and had just made one for $1,000.
  • After inadvertently hitting her credit limit a few months ago and then falling behind on a mortgage payment, Ms. Pfitzer said her limit was lowered by American Express to $900 from $2,300. (oops)
  • Then last month it happened again, she says, when she tried to buy office furniture with her Wells Fargo Visa card. Although she had just made a payment of about $700, Ms. Pfitzer found out that her credit limit had been lowered to $2,000 from $2,800.
  • In all the years I have had credit cards, I have never had this happen before,” Ms. Pfitzer said. “Now it has happened twice in the last few months.”
  • Banks and mortgage companies are required by law to notify customers within three days of changing the limits on a home equity line of credit, and many have been aggressively lowering them. But credit card lenders have 30 days to notify their customers, and often do so only after taking action. (Credit card companies also happen to be major contributors to political campaigns - the world is their oyster)
  • Washington Mutual cut back the total credit lines available to its cardholders by nearly 10 percent in the first quarter of the year, according to an analysis of bank regulatory data. HSBC Holdings, Target and Wells Fargo each trimmed their credit card lines by about 3 percent.
  • Among those four lenders, that amounts to a reduction of about $15 billion in three months.
  • Big banks face intense pressure on their balance sheets as they bring on billions of dollars worth of complex mortgage-related investments and other loans they are struggling to sell. Meanwhile, they are bracing for a surge in credit card losses as the job market and economy falter. (what? 2nd half recovery won't allow that to happen)
  • Michael Taiano, a credit card industry analyst at Sandler O’Neill. He projects that credit card loss rates for lenders, now around 5.7 percent, could go as high as 10 percent in next 18 months. That would be higher than the peak levels reached after the 2001 technology bust. (I predict higher than that)
  • Since borrowers typically run up their balances before they stop paying, issuers have started cutting lines of credit. Often, lenders will lower customers’ credit limits as they pay down their debt — a technique known in the industry as “chasing the balance.” This way, they are on the hook for less money if borrowers default.
  • Bill Ryan, an analyst at Portales Partners. “The consumer that used to use his house as an A.T.M. is now starting to use their credit card as an A.T.M.” (same undisciplined behavior, different vehicle)
  • Chase Card Services, the consumer arm of JPMorgan, is taking similar action on distressed borrowers, especially in places like California, Arizona and Florida, where home prices have declined sharply.
  • It has definitely made me spend less,” she said. But Ms. Sherman said that it had been a blow to her ego, too. “It made me feel like I wasn’t responsible,” she said.
  • Meredith Whitney, an Oppenheimer banking analyst, said the impact of the recent regulatory proposals on lender profits could be so severe that she expected the industry to pull back $2 trillion in outstanding credit lines by 2010. That would be a 45 percent reduction in credit currently available to consumers.
Think about that last statement above, and even if its 50% correct, stare at the all and think about the implications. Overlay that with 70% of our economy is consumer spending in our "new era, service economy" and get back to CNBC with your thoughts about the impending boom/recovery/blah blah blah.

The United States of Subprime is in deep do-do. Both the government and the people - but the government can just run printing presses. The people? Not so much. Their printing press is found at the local lawyers office when they file personal bankruptcy.

And to think, we have not even started a recession....

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