Not Sleet Nor Freezing Rain Nor No Electricity Will Keep Me From My . . .

I Tried

I tried to post yesterday and only got out a couple of botched titles. Power still out here, so don't look for much before Monday.

Not Sleet Nor Freezing Rain Nor No Electricity

We Interrupt This Broadcast - For Freezing Rain

Interesting day here in New Hampshire. Freezing rain all night pretty much wiped out the electricity for the entire state. I have some charge on my computer, but the phones and internet are out too. I am currently connected through a phone card, but it has taken all day to get a connection. Apparently, even the cell towers are down. I am not saying it is bad, but a back hoe had to clear our street of fallen trees. Oh well, at least I got the day off to spend at home with no electricity or computer.

Given the week signal I have I am not going to attempt to surf and blog today. Hopefully things will recover tomorrow, though the radio said it could be several days. If that happens we may join some of our neighbors in some local hotels with power.

Evening Edition

This is terrible. Wall Street bonuses are to go down 50% this year to the lowest level since, dear Lord say it isn't so, 2002. What will they do, oh what will they do. I am not meaning to sound cold here, but I am looking to emphasize the headine that Bloomberg chose for this article, i.e. noting the bonus reduction versus the job loss. I personally am amazed that Wall Street is having any bonus this year. I mean the markets are down a tad, don't you think?

The true meat of the article is that Wall Street expects to lose 170,000 jobs between July 2008 and December 2010. Last I checked, losing your job is a bit more depressing than having your bonus cut in half, but the headline news is still the bonus problem. Nitpicking I know, but tell that to the 170,000.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aMPdmak0IjJQ&refer=home

30,000 Jobs Here, 30,000 There - Could Add Up

Bank of America has announced it plans to lay off between 30,000 and 35,000 employees over the next three years. Not a big surprise given the Merrill merger, the economy and the doo doo they have on their books. Good news is that it is smaller than the 52,000 announced by Citigroup. Expect more of same from their brethren.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aswiJZGC2Ca8&refer=home

Bad - It is very, very bad

If the auto industry does not get a bail, watch out. I continue to think that some Senators are playing hardball to get a better deal but wholly intend to give them some relief. There are hundreds of thousands and, with the knock on effect, perhaps even millions of jobs affected if the auto industry is allowed to fold. At a minimum, the government needs to either craft a non-bankruptcy bankruptcy or allow them to go into Chapter 11 with the goverment planning on providing the DIP financing. The companies are not about to get debtor in possession financing otherwise, so this would seem to be the minimum the government can do. This is a much better use of money than all the dollars they have thrown at the financial industry, yet it is really being dragged out.

Now you may start thinking that Ford, or perhaps moreso Toyota or other foreign car companies are a good bet if GM and Chrysler have to fold because some big competitors are gone. I am not saying no, but here are some other things to consider:

1. If the car companies are on the edge of the bankruptcy, their parts suppliers might just be there too. If they are there, the last thing they need is a couple of months of receivables tied up in auto company bankruptcies. I suspect some of these companies also supply other car manufacturers, so a bankruptcy by a parts manufacturer could disrupt a lot of car manufacturers.
2. Those parts manufacturers not taken down by a GM and/or Chrysler bankruptcy may well insist on payment up front instead of after the fact from the remaining manufacturers. That certainly puts a crimp in the remaining car manufacturer's finances if it happens.
3. Seriously I had a three, but while I wrote one and two I forgot three. It is really good and when I remember what it is I will be sure to let you know. Getting old is no fun - or at least not as much fun.

http://www.nakedcapitalism.com/2008/12/auto-rescue-bill-lacks-votes-to-pass.html

http://www.nakedcapitalism.com/2008/12/gm-hires-advisors-to-prepare-for.html

Admit Your Mistakes

I noted earlier today that gas prices are likely to go higher soon, in part because crude oil is up 16% this week. Well, this week's spike may lead to a temporary spike in gas prices, but I was thinking more long term. I gave one reason for my expectation, the OPEC meeting where they are expected to announce production cuts.

There are other reasons for an anticipated increase. For example, Russia, another leading oil producer, is considering joining OPEC, which may further coordinate supply quotas. Also, OPEC announced that their production was, for a change, in line with their existing quotas. The news that they were actually living within their quotas (most of them cheat) may have been taken as good news for those looking for higher oil prices, but, seriously, did they have any choice? I doubt that they decided to all of a sudden abide by their quotas. My suspicion is that they could not sell any more oil and had no choice other than to stay in quotas. Still, I expected earlier today that anitipated production cuts by OPEC would increase price. It pays to see the data.

I must recant my prediction as the data that I am now seeing tells me otherwise. I am a big fan of certain individuals and their opinions but I am even a bigger fan of facts, otherwise known as data. For example, adjustable rate mortgages (ARMs) are resetting a lot this quarter and that will continue at a high rate next year (Calculated Risks has nice charts showing this). Now 30 year fixed mortgage rates are down a lot so you might not think the resets will not be that bad, but a lot of ARMs are tied to the LIBOR and that is still fairly high. Translation, a boat load of loans will reset at higher rates next year barring a miracle and that will likely lead to another wave of foreclosures - barring a miracle. This is a fact worth knowing (and one key fact in my expectations). I like data. Reversion to mean is another data point (in various environments) that I like.

So getting some data on oil supply, demand and the like, is fantastic. And this has led to my mea culpa. The future is never certain, but from what I am reading here, in the medium term oil prices will stay low and perhaps go down further. For us, that is a good thing at least (at the most) in the medium term. Sure, I would like cheap gas for the rest of my life, but in time cheap oil will lead to distress in the Middle East, Russia, Venezuela and elsewhere. Some of these countries do not have very good crude and they cannot economically sell what they have at today's prices. They will eventually get desperate if oil prices stay where they are, and at least one of them has nuclear arms. So maybe - just maybe - we need to have oil prices go up a bit for global security/serenity. We too often forget the big picture and focus too narrowly. We are on a global stage and need to consider global impacts. Cheap oil is good and bad, just depends on your perspective.

http://www.platts.com/weblog/oilblog/2008/12/one_economists_dire_prediction_1.html?S=printer&

Folks, I have to end the night noting how incredible this day has been for me. First, last night Michael Panzner, a mentor of mine, quoted me on his blog and then today, Seeking Apha, another site I frequent, asked me to be a contributor to their site. These I consider honors from those I respect. Thanks for the support. But before I sleep, let me repeat my current motto - Hunker Down! The worst is yet to come. I truly mean that.

Lala Land

Yves at Naked Capitalism has a nice discussion on how financial institutions are moving another $610 billion of assets into the make-believe land of Level 3. That is where bad assets go when you send them to their room. Technically, it is suppose to be for assets the institutions cannot price using market price or pricing on comparable assets. Thus, they are allowed to price them using "unobservable" inputs. You know, the invisible kind from lala land. Yves does a good job of pointing out the games these institutions are probably playing, so I will not repeat that here.

Rather, let me focus your attention on another aspect of it that perhaps the financial institutions themselves are not considering; when you are playing games with your books and you know it and everyone else knows it, you are only adding to the sense of mistrust that is freezing the credit markets. "Credit" after all is derived from the Latin word for trust. No trust, no credit. Moreover, you are just kicking the can down the road. Eventually those bad assets will blow up and you will have to deal with that impact on your balance sheet. Putting them in Level 3 simply allows you to delay the day of reckoning. Why not go ahead and face the music now when everyone is already expecting your results to suck wind. The sooner we get this behind us the better.

Of course, that's easy for me to say.

http://www.nakedcapitalism.com/2008/12/quelle-surprise-banks-increase-mark-to.html

In the interest of full disclosure, my daughter calls her grandmother Lala. If you knew her grandmother, you would understand.

Making Some Progress

The attached Marketwatch piece has plenty of bad news for the third quarter, including a slight downward adjustment to the household net worth in the U.S. of $2.81 trillion. I hate it when that happens. Nonetheless, I am looking for silver linings here and the article has one. Despite the massive drop in net worth, Americans were able to reduce household debt for the first time ever recorded. Now I know this is more due to there being no new credit available than to us all voluntarily deciding to live within our means, but progress is progress even if it is forced upon us. As painful as this will be to the retail sector, we need to cut our debt, which means cutting consumption. We certainly are not going to be doing it by increasing our wages.

Obviously the government wants us to go out and spend and make everything look good. Retail sales will look good, store owners will look good and China factories will thank us, but nobody benefits in the long run by us living beyond our means. It is a new world coming, so get used to it. It would not be so painful had we let it happen sooner.

http://www.marketwatch.com/news/story/US-households-pay-down-debts/story.aspx?guid=%7B823A97D3%2DECA6%2D4887%2DA70B%2D9425366E7473%7D

573,000

That's the number of weekly unemployment insurance claims being reported by the DOL. This number is continuing to rise and sadly will undoubtedly do so for some time to come. As I have noted before, high unemployment typically tends to hang around quite a while (months or even years) after a recession has ended, and this one has not ended, so this will be the situation for a long time to come.

http://www.marketwatch.com/news/story/US-households-pay-down-debts/story.aspx?guid=%7B823A97D3%2DECA6%2D4887%2DA70B%2D9425366E7473%7D

You Knew It Would Not Last

One of the few things easing the pain lately has been low prices at the pumps. Gas is the cheapest it has been in years and OPEC doesn't like it one bit. Low demand at low price does not make a happy Middle East - or Russia or Venezuela. So it is not surprising that OPEC is expected to agree to a production cut at its December 17th meeting. That expectation is already driving the price of crude north again. Today nearly up to $49 a barrel, which is a week-to-date climb of 16%. Don't expect it to stop there. I suspect OPEC would like to see it at least in the $75-80 per barrel range. Of course they agree to cuts and then some of them cheat, but there will still be some reduction in output. The question then becomes whether other oil producing countries try to fill the production void. Perhaps, but for now don't expect the price at the pump to continue in the same direction it has for the past few months. Time to fill up the tank.

Truly Humbled

I gave hommage to Michael Panzner and within a day he finds it and posts it on his site, one I follow religously. Thanks is all I can say. His posts are well worth the read and I am looking forward to reading his new book, When Giants Fall. His posts and his book, Financial Armageddon, have led me well this past year. When I told friends a few months back of his predictions, they were in a state of shock and asked for more information. I told them to read the book as Michael Panzner knows much better than I. And now Michael has a new book I intend to read. I just want to say thanks to Michael for the hat tip.