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Thursday, March 20, 2008

Toddling Ever Forward

EU indicators showed slowing growth at a pace that was greater than expected. Oil and gold fell again overnight.

US initial claims rose on an SA basis to 378,000. The SA insured unemployment rate rose to a .3 differential from 2007.

The next few weeks pose some difficulties with seasonal adjustments involving the timing of Easter and various spring break calenders, so a degree of caution should be exerted when interpreting initial claims data for this period.

On an NSA basis, continuing claims have dropped slightly for three weeks. However the yearly comparison change is now intimidating - the unadjusted change is 416,010, which is a YoY rise of 16%. Because these data are one week behind, this is probably the most statistically significant stat in the report. Insured unemployment rates are growing:
The highest insured unemployment rates in the week ending March 1 were in Alaska (5.0 percent), Michigan (4.3), Pennsylvania (4.0), Rhode Island (4.0), Wisconsin (3.9), Idaho (3.8), New Jersey (3.5), Oregon (3.5), Vermont (3.5), California (3.4), and Massachusetts (3.4).
Continued weakness in auto and truck sales are hurting a number of states.

There was a sudden break in intermodal rail shipments. It may have more to do with the blizzard and the Chinese New Year than anything else, because it is a sharp diversion from trend. Intermodal rail shipments were down 3.4% for February and for the first two months of 2008. The first week of March showed a puzzling drop in carloadings (which have been up YoY on commodities) and a collapse in intermodal by 15.1%. I'll be watching rail freight closely over the next few weeks!

Regarding the dollar and commodities: you can take your pick of explanations. Either the dollar is tending to gain because people are selling commodities and this implicitly devalues commodity-dependent currencies, or commodities are being sold because the dollar is looking better. Both explanations are being advanced.

My belief is that someone noticed that people weren't going to be buying much of this stuff at the prices it was carrying. Take gold, for example. At the current price, quite a few individuals will be motivated to dump gold chains and the like.

The big exchange to watch is Brazil's Bovespa. How it breaks today will tell a lot.

Update: Two excellent articles on commodities and the continuing problems with auction rate securities.
Gold for immediate delivery dropped as much as 4.1 percent to $905.41 an ounce, the lowest since Feb. 19, and traded at $920.65 as of 12:53 p.m. in London. The metal's 8.3 percent drop this week would be the biggest since March 1983. The U.K. and U.S. are on holiday tomorrow.
No one's going to say "bubble", but.... What's scary about the pace of the drop is that it can pose problems for various hedges and become a force of its own. Commodities are usually the last bubble.

Philly Fed improved from last month. -17.4 is better than -24, although it indicates a decisive contraction.

An ECB luminary is now claiming that the Fed rate cuts will help the Euro economy:
European Central Bank Vice President Lucas Papademos said the U.S. Federal Reserve's interest-rate cuts will help to support economic growth in Europe.

The reduction in U.S. borrowing costs ``will support global economic demand, with a favorable impact on the euro area,'' Papademos said at a press conference in Moscow today. ``We have full trust in the decisions and actions taken by the Federal Reserve.''
Gurgle. The decoupling hypothesis just got stabbed to death. Papademos appears to be trying to narrow the gap between the USD and Euro.

Here is a linked list of his speeches and interviews. They reward the reader. This Feb, 2005 interview with Handelblatt discusses asset bubbles, etc, and contrasts Papademos' views with Greenspan's. Greenspan loved bubbles; Papademos was more concerned about the damage. It is true that asset bubbles can't be addressed with monetary policy, but they are susceptible to regulation which focuses on risk.


The Great Unwind has begun, Citigroup warns
Avoid leveraged companies, countries and consumers, bank's strategists say

"We are now confronted by a broad bloodbath in the credit markets," Citigroup said. " The most leveraged paper is falling in value because it is leveraged, and now the least leveraged paper is also falling in value because it is owned by leveraged investors."

This widening may be caused by leveraged investors such as hedge funds having to sell good quality assets to meet margin calls, or requests for more cash or collateral.


Massive De-leveraging Slams Commodities

Margin requirements have been raised at most of the major exchanges over the last couple of days. More importantly, margin requirements on CFD’s (Contract For Difference) have been raised DRASTICALLY. CFD’s are the weapon of choice for commodity investors. That is literally sucking the life right out of the usual suspects: Oil, and Gold. All other commodities, especially those that have gone parabolic, metals and softs, are getting the same treatment. This is MASSIVE de-leveraging at its best

Vader - see this search on my blog I know.

What's particularly rough about a commodity break at this time is that much growth has been concentrated in EMs, quite a few of whom are quite dependent on commodities. There are also chains of lending dependent on performance.

So this poses a more significant threat to the EU than most now believe, and it also indicates another area of stressed lending.

The question is how far it will go. Brazil is pretty much the dividing line. If Brazil's exchange can do pretty well, there is no huge global deleveraging that creates a global crisis. Of course, some funds will be severely hit regardless.

If the "huge deleveraging" occurs, Brazil's Bovespa exchange will see sharp losses. In other words, it is important to distinguish between panicked financial types and the real economy.

So far the real global economy is surviving the financial problems quite well, although the CBs are scrambling to accomplish that.

Because no one can hope to know what everyone's real positions are, it is impossible right now to distinguish between a correction and a bust.

These analysts function in a world of their own. I do not want to write bad things about people, but there are troubling aspects to much financial commentary. It is difficult to find truly disinterested discussions of most financial trends.
Yep almost all information is presented with some point or view or another. I quickly looked at your presentations and did not see this emphasized. But you were on top of it.

My acid test is if the news is more bearish that I am, there is real problems. I am seeing stuff that not only did I not imagine, but I could not imagine because I did not really know. What worries me is that when my POV matches the general POV, then I need to look for some turning point.

The thing about commodities is that hot money that cannot invest in the usual suspects went into commodities. Now that de-leveraging is hitting the hot money, then there will be some fall off in commodities. Where it all ends, no one really knows.

Of course all the leverage is the problem in the financial meltdown. With profits dropping on plain old financial instruments, leverage allowed plain old stuff to get jazzed up. Lipstick on pig so to speak. Now reality is setting in.

I cannot speak for financial talking heads, but a study of political 'experts' found flipping a coin has a better chance of being right. I've seen some articles on hedge funds that question their expertise, and index fund beats the majority of financial advisors yet still.

I saw a story on tent cities in Calif--http://tinyurl.com/2zkjqq--If true, that scares me more than any other statistic. My interest is History and Society more than Economy. This has not happened in the US since the 50s for economic reasons.

The other thing is that the political rhetoric is just like the early 30s and the denial of extending UE benefits is right out of the same time.
These other countries are going to go after us-- in as many ways as they can.

All we can do is ride the waves.

Yet, still say people should find creative ways . shall I say, to make lives miserable for all the financial crooks involved.


You're doing a lot of extra good work here, especially when not feeling well all the time.
Suggest maybe a couple per week for you.
People will be v. understanding.

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