Monday, April 03, 2006

Todays News

I’d like to point out a few issues that made news today. When looked at separately, each of these things don’t mean much, but when taken in totality the prevailing trend illustrates that all is possibly not well in our economy… The Dollar is shaky, Commodities are soaring, mortgage rates are rising, manufacturing softens, housing inventory builds as home sales slow, Jobs/wages at GM and Delta are at stake and OIL prices show absolutely no sign of coming down… As each day passes, I see us one step closer to a late 2006 or early 2007 Recession.

US Dollar Drops Against Most Major Currencies

The dollar fell against the euro, yen and the British pound on Monday after two reports showed that the economies of Europe and Japan continue to strengthen and U.S. data indicated slower growth in March.

U.S. manufacturing expanded in March but at a slower rate and below economists' expectations. The Institute of Supply Management's manufacturing index registered 55.2 last month, falling from 56.7 in February. Readings above 50 indicate that manufacturing activity is expanding, while those below 50 indicate shrinking activity.

Gold Reaches New 25 Year High

Precious and industrial metals soared on Monday amid fund buying and buoyed by a weak dollar and sky-high oil prices, with gold scaling to a 25-year peak.

Gold futures at the New York Mercantile Exchange's COMEX division rose 1.3 percent to come within striking distance of the psychologically key $600-an ounce level.
Investors have been raising their bets on precious and base metals as they diversify portfolios. Gold has also been sought as a safe haven against inflation and violence in the world.

James Turk, founder of online metals exchange service, said gold was breaking out of the trading range that has confined it since it hit an all-time high in January 1980. He felt a gold and silver bull market "was still young".

Silver futures have also been rising on expectations the first silver exchange-traded fund (ETF) would be approved soon.

(Randy’s comment: I believe we’ll see $600 gold and $12 Silver in 1-2 weeks)

Mortgage Rates Climbing

According to, rates are up for every type of mortgage.

Sub-prime Mortgage lenders Shut Down

A cooling housing market and inverted yield curve are beginning to take their toll:
DALLAS, April 3 /PRNewswire/ -- Two mortgage companies have gone out of business amid an industry slowdown, according to, a dominant online news source for the mortgage industry.

The parent of Capital Alliance Funding Corp. announced Friday that the nonprime wholesale lender would close its doors and sell off or transfer all mortgages in its inventory. The move was approved unanimously by the San Francisco-based company's board of directors. Inc., a 300-branch operation, abruptly stopped doing business over a week ago, two of the company's managers told An e-mail sent to employees "just said you guys were done." The national net branch company, which claimed more than $1 billion in originations annually, did say in the e-mail it had begun the process of closing the operations because the "constant changing of the industry proved to be too great in the end."

The real estate finance sector has struggled to maintain production amidst rising rates. In addition, an inverted yield curve and the pace of rate increases left many companies with sagging earnings during the fourth quarter.

US manufacturing softens, while construction jumps & pending home sales slow

U.S. manufacturing growth moderated in March, while February data showed an unexpectedly large spike in construction spending but a drop in pending home sales, according to reports released on Monday.

Car sales figures from the nation's automakers were also on the soft side for March, which analysts said was consistent with a gradual slowdown in U.S. consumer spending.
Taken together, the day's data suggested the American economy was still humming along nicely, but raised doubts about future plans for business investment.

The factory weakness was modest but broad, with declines in both new orders and employment accompanying the pullback in the pace of expansion in the Institute for Supply Management's monthly survey of sector executives.

The robust spending contrasted with a decline in pending home sales, which reflected a gradual recent slowing in the American housing market.

"Pending home sales are showing signs of leveling out, indicating that the housing market is entering a period of stabilization," the National Association of Realtors said.

Housing Bubble Trouble

This is an excellent article. Suggest you open the link and read the whole thing.
WITH NEW HOME SALES DOWN 10.5 percent in February, and with home prices declining for the fourth month in a row, it's high time for a sober look at the consequences of a major housing correction. The Federal Reserve, Wall Street economists, and other observers of the U.S. economy are closely watching the housing market because it has been a key driver of economic growth over the past several years.

Roughly a quarter of the jobs created since the 2001 recession have been in construction, real estate, and mortgage finance. Even more important, consumers have withdrawn $2.5 trillion in equity from their homes during this time, spending as much as half of it and thus making a huge contribution to the growth the U.S. economy has enjoyed in recent years (consumer spending accounts for two-thirds of GDP).

But consumers cannot keep spending more than they make. Eventually, home prices will flatten, the flood of "cash out" refinancings will become a trickle, and consumer spending will slow, as will job creation in housing-related industries. The big question is this: Will the housing sector experience a soft landing and slow the economy or a hard landing that pushes us into recession?

NOT ONLY ARE HOUSE PRICES at extreme levels by traditional measures, but the manner in which home purchases have been financed in recent years is also disconcerting. Consider the growth of interest-only and "pay-option" adjustable rate mortgages--loans that initially don't require borrowers to repay principal. With the latter, also known as an option-ARM, the outstanding balance owed can actually get bigger every month. A few years ago these loans barely existed. Last year they accounted for more than a third of new loans (see chart at right).

What's worse, the vast majority of these loans were extended based on "stated income," which means the bank didn't verify the income of the borrower. Of course, consumers usually have to pay more if they don't provide tax and payroll records to the bank to verify their income. Common sense suggests many are fibbing about their income to qualify for a larger loan.

Such loans are risky because after an initial period of three or five years with low rates and no principal payments, the loans "reset," and consumers can experience 50 percent or even 100 percent increases in their monthly payments. About $2 trillion in loans, or a quarter of outstanding mortgage debt, will reset in this fashion during the next two years according to Therefore, millions of households are about to experience significant payment shock.

GM Sells 51% stake in GMAC to raise much needed cash

April 3 (Bloomberg) -- General Motors Corp. agreed to sell a majority of its finance unit to a group led by Cerberus Capital Management LP for $7.4 billion as Chief Executive Officer Rick Wagoner struggles to rescue the world's largest automaker.

The sale of a 51 percent stake in General Motors Acceptance Corp. to Cerberus, a New York-based private equity firm, gives Wagoner cash to buy out workers and develop new cars and trucks to win back buyers lost to competitors such as Toyota Motor Corp. GM will get about $14 billion, including the $7.4 billion and proceeds from other asset changes. Shares of GM fell.

Delta Pilots May Strike

Delta's 6,000 pilots have threatened to strike if the bankrupt Atlanta-based airline (Pink Sheets: DALRQ) is allowed to reject the pilots' labor contract. If the results tomorrow show majority support for a strike, ALPA can set a strike date.

Delta wants to reject the pilots contract so it can impose $325 million in pilot wage cuts it claims it needs to come out of Chapter 11 successfully. The airline and the pilots failed to come to an agreement on pay cuts by a set March deadline and the issue is now up to a three-person arbitration panel in Washington, D.C.

Crude Oil neared $68 barrel today on Iran and Nigeria concerns before dropping back to $66.74

Oil prices retreated Monday afternoon after moving to almost $68 US a barrel because of the uncertain outlook for supplies out of Iran and Nigeria. The May contract for light sweet crude on the New York Mercantile Exchange gained 11 cents to $66.74 US a barrel after surging as high as $67.90 US.


Out at the peak said...

What do you think about Venezuela trying to sell their oil for a flat rate of $50? Somehow, I don't think this is going to work out as you'll still have a bidding war between countries that require that oil...

$50 oil?

contrarian2day said...

I read the article earlier today. Great for the US, but I don't think it'll go anywhere... expecially since most analysts predict the dollar will soon start to depreciate (once the Fed halts).

I predict we'll see $100 barrel oil before we see $50..

Anonymous said...

Venezuela is trying to exploit its tar sands (unconventional oil) and boost its quota within OPEC, probally this is only posturing.

Also tar sands are both difficult, energy intensive and exdpensive to exploit, so if it costs 40 USD a barrel to obtain, they will want to sell it for more than a 10 USD profit.

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