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Thursday, November 1, 2007

Just Another Cut...

With oil and gold at record highs, the US dollar at record lows and the US economy still growing at a respectable rate, “Helicopter” Ben Bernanke cut rates again. Only this time he was more reluctant.

Fed May Be Done Cutting as Inflation Risk Increases (Update1): “Federal Reserve officials may be done cutting interest rates after voicing new inflation concerns and signaling they won't be surprised by further housing weakness.

Chairman Ben S. Bernanke and his colleagues cut the benchmark rate yesterday by a quarter point to 4.5 percent and said risks of higher prices and slower growth are “roughly” balanced. They warned that energy and commodity prices may place “renewed upward pressure on inflation.””

Brilliant. Just brilliant insight by the Fed. Each and every single one of their cuts is a direct inflation injection. There isn’t even much of a lag anymore. Cut and the dollar drops, commodities rise and import prices rise.

Proctor and Gamble announced their earnings and missed. Their explanation was simple: Rising input costs. Their solution was just as simple: Raise prices.

Exxon Mobile announced this morning with a similar story.

Exxon Mobil Profit Drops as Refining Margins Narrow (Update3): “Exxon Mobil Corp., the world's largest oil company, posted its biggest drop in quarterly profit in more than three years after equipment and power failures slowed gasoline output and refining margins narrowed.

Third-quarter net income fell to $9.41 billion, or $1.70 a share, from $10.5 billion, or $1.77, a year earlier, Irving, Texas-based Exxon Mobil said today in a statement. Per-share profit was 4 cents below the average of 16 analyst estimates compiled by Bloomberg, sending the company's stock lower.

Retail gasoline prices in the U.S., the world's biggest market for the fuel, fell almost 6 percent. At the same time, oil rose, squeezing the gap between crude costs and refined fuel prices. That margin, called a crack spread, and production disruptions outweighed gains from record oil prices.”

Input prices (crude oil) rose much faster than output prices (the consumer good gasoline). Since crude price strength is a result of both a weakening US dollar and increased geopolitical risk, it is likely that crude won’t fall substantially in the near future. Instead, expect crack spreads to blow out shortly with the predictable result of a sudden dramatic increase in gasoline prices at the pump.

“The profit decline was the largest for Exxon Mobil since the first three months of 2004, when oil averaged about $35 a barrel, less than half its current price.”

Credit Suisse Profit Falls After Debt Market Swings (Update5): “Credit Suisse Group, Switzerland's second-largest bank, said it's “too early to predict” an end to the credit-market swings that caused $1.9 billion of writedowns and the first profit decline in a year.

Net income fell 31 percent to 1.3 billion Swiss francs ($1.1 billion), or 1.18 francs a share, in the third quarter, the Zurich-based bank said today. Credit Suisse stock fell the most in almost three months, pulling European bank shares lower.”

Since the real estate bubble has yet to hit bottom, it is safe to assume that the ‘credit market swings’ are far from over.

“The size of the writedowns is equal to about 5.2 percent of the company's 42 billion francs in shareholders' equity, or assets minus liabilities.”

We are talking about real money here. Writedown’s of this size have the knock on effect of severely curtailing the bank’s activities… with the riskiest activities getting the axe first.

“While revenue fell 15 percent to 6.8 billion francs, the bank cut personnel expenses by 30 percent to 2.4 billion francs.”

Expect more, serious job losses from the financial sector as a whole.

Deutsche Bank Shrinks Bonus Pool After Writedowns (Update1): “Deutsche Bank AG, Germany's biggest bank, shrank its bonus pool after 2.16 billion euros ($3.12 billion) of losses and writedowns linked to the U.S. subprime collapse led to the securities unit's first loss in five years.

Deutsche Bank cut personnel costs at the corporate and investment bank by 87 percent in the third quarter by taking back some funds set aside for bonuses in the first half, Chief Financial Officer Anthony di Iorio told analysts on a conference call today. The stock rose 3.7 percent in Frankfurt trading.”

Jobs cuts and pay cuts. Nothing like satisfying the shareholders at the expense of the employees to improve both moral and productivity…

Citigroup Shares Fall to Four-Year Low After Analyst Downgrades: “Citigroup Inc., the largest U.S. bank, fell to the lowest in four years in New York trading after a CIBC World Markets analyst downgraded the stock and said the bank may cut its dividend or sell assets to shore up capital.”

Surprised? Mish saw this coming in his October 19th post Enron Accounting at Citigroup. Wait, it will get worse… much worse.

“The ratio of Citigroup's tangible equity to tangible assets fell to 2.8 percent, the lowest in decades and half the average for its peer group, Whitney said.

Citigroup's tier 1 capital ratio, a measure used by regulators to make sure banks have enough cash to cushion losses, fell to 7.4 percent at the end of the third quarter from 8.64 percent at the same time last year.”

You definitely don’t want to be the weakest of the pack going into this perfect economic storm… While nature has a way of culling the weak, capitalism accelerates that process and has the nasty habit of generating serious collateral damage for good measure.

Radian Posts First Loss as Home Slump Boosts Claims (Update3): “Radian Group Inc., the third-biggest U.S. mortgage insurer, reported a loss of $703.9 million, the largest yet in an industry roiled by claims from failed home loans. The company fell 15 percent in New York trading.

Radian had a third-quarter loss of $8.78 a share, compared with a year-earlier gain of $112 million, or $1.36 a share, joining larger rivals, MGIC Investment Corp. and PMI Group Inc. in reporting its first quarterly loss as a publicly traded company. Radian, based in Philadelphia, wrote down its $468 million stake in Credit-Based Asset Servicing and Securitization LLC, owned jointly with MGIC, it said today in a statement.”

No worries though, Countywide said last week that they foresee a profitable next quarter… so that should definitely help the mortgage insurance industry. >grin< “The worst U.S. housing slump in 16 years deepened as homeowners with private mortgage insurance defaulted on 22 percent more loans in September than a year earlier, according to an industry trade group. Falling home prices make it harder for struggling homeowners to sell or refinance their property and for banks to cover their loans in a foreclosure sale. The insurers help lenders recoup losses.” Oh. Never mind. Consumer Spending in U.S. Rose Less Than Forecast (Update5): “Consumer spending in the U.S. rose less than forecast in September as house prices fell and fuel expenses climbed.

The 0.3 percent increase followed a revised 0.5 percent gain in August that was smaller than previously reported, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation rose 1.8 percent from a year ago, matching economists' estimates.”

The housing ATM has been shut off for quite a while now and the credit card ATM is reaching saturation (See yesterdays post). Construction related and financial industry job losses should start mounting rapidly now…

U.S. ISM Manufacturing Index Fell More Than Forecast (Update2): “Manufacturing in the U.S. slowed more than forecast in October as factories received fewer orders and production contracted, an industry report showed today.

The Institute for Supply Management's factory index fell to 50.9, the lowest in seven months, from 52 in September. Readings greater than 50 signal expansion.

Manufacturing is on the verge of stalling as the deepening housing slump weakens demand for construction equipment, furniture and appliances, economists said. Overseas growth and a weaker dollar are boosting exports at firms including DuPont Co. and Agco Corp., helping avert a broader factory slump.”

Getting close that magically swing point of 50 where things finally and officially go into ‘contraction’ mode.

Chrysler to Cut Up to 11,000 Jobs, Drop 4 Models (Update1): “Chrysler LLC said it will eliminate as many as 11,000 more hourly and salaried jobs and scrap four models as the automaker deepens cuts under new owner Cerberus Capital Management LP.

The job reductions include 8,500 to 10,000 hourly and 1,000 salaried positions, and will occur through next year, the Auburn Hills, Michigan-based company said in a statement today. They include trimming shifts at two plants in Michigan and one each in Illinois, Ohio and Ontario.”

I point out this story because the market loves leveraged buyouts. The real world effects of LBO’s however, is far less desirable in the short run. Each and every single LBO results in massive job losses. In part this is done to legitimately restructure the company, but also to pay the carrying costs of the debt required to finance the deal. On the job front, the last few years of LBO mania have yet to fully manifest themselves. Expect more of these headlines, especially as some of the over hyped and over leveraged LBOs start to get into some trouble as both the US and global economies slow…


David Wozney said...

Re: “... gold at record highs, the US dollar at record lows ...

A “Federal Reserve Note” is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as having the value of 1/42.2222 fine troy ounces of gold.

Ben Bittrolff said...

Very interesting. I had no idea.

Anonymous said...


URL for the definion of USA dollar on cornell or findlaw that matches your claim? Oh, right, that web page is reliable...

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