News of interest today

Irans yen for the euro

Iran, the worlds fourth largest oil producer, has reportedly shifted from the US dollar to euro and yen as currencies in which it will trade its crude produce.

This is seen as a major blow to the US dollar as a reserve currency.

Irans move may be determined partly because of its ongoing political stand-off with the US. However, that need not be the only consideration to have prompted Iran to shift to the euro and yen.

Many oil exporting nations, as indeed other emerging economies accumulating dollar reserves, have been worrying about the structural weaknesses in the US economy and the prospect of the dollars long-term decline.

A survey by the US treasury department measured foreign holdings of US securities as of June 30, 2007, to be $9,772 billion. This should easily cross $10 trillion this year, which is about 75% of the US GDP. Of this, $3,130 billion is held in US equities, $6,007 billion in US long-term debt securities, and $635 billion in US short-term debt securities.

Mind you, the outstanding foreign holdings in US securities are growing on an average at over 25% in recent years.

Emerging economies are beginning to feel uncomfortable about putting so much in US dollar-denominated assets year after year. Oil exporting countries themselves have about half a trillion dollars worth of US securities today. By designating future oil trading in euro and yen, Iran is clearly trying to diversify its assets by denominating them in currencies other than the dollar.

If other West Asian oil exporters were to do the same, the US or any other net oil importer, will be forced to buy euro and yen to purchase oil from the international market. The power of the US dollar as a reserve currency will certainly fall, to that extent. Indeed, nations holding US dollar assets will have to evolve new strategies to protect the value of their forex reserves as the axis of global economic power shifts rapidly. No one, including Americas arch rivals in the geo-strategic play, would want the dollar to suffer a precipitous decline as it would erode everyones asset value. But they must all prepare for a gradual decline, for sure.

(Note--for more info on Iran, Oil and the US Dollar see my other posts: IRANS Oil Bourse to Open, US Warns IRAN)


Consumer spending up mainly because of sharp price increases

Don't be fooled by a larger-than-expected increase in consumer spending. People aren't buying more — they're just paying more for what they buy.

That is raising doubts about whether the 130 million stimulus payments the government began sending out this week will be enough to lift consumers' sagging spirits.

The Commerce Department reported Thursday that consumer spending was up 0.4 percent, double the increase economists had forecast. However, once inflation was removed, spending edged up a much slower 0.1 percent.

The March reading was the fourth straight lackluster performance and did nothing to alleviate worries that consumer spending, which accounts for two-thirds of total economic activity, remains under severe strains, reflecting an economy beset by multiple problems.

Rising food costs, soaring energy prices and falling employment have pushed consumer confidence to its lowest levels in five years. Incomes in March rose a weak 0.3, but after removing inflation, after-tax incomes were flat.

The Bush administration is counting on its $168 billion stimulus program to give the economy enough of a lift to keep the country from slipping into a full-blown recession, but private economists are worried the boost could well be fleeting.

"Consumers are facing bad news on all fronts," said Nigel Gault, chief U.S. economist at Global Insight. "Any burst of spending based on the stimulus payments is likely to prove short-lived."

Sal Guatieri, senior economist at BMO Capital Markets, said economic growth could still turn negative this quarter even with the rebates. He cited a recent Associated Press-Ipsos poll that found only 19 percent of people plan to spend their rebates, with others surveyed preferring instead to use the $600 to $1,200 checks for the typical family to pay off bills or boost savings.


Home Depot Takes Wrecking Ball To Stores

The economy has been hurting since the subprime mortgages began their tumble toward foreclosure, taking anything housing related, especially home goods, along for the bumpy ride.

On Thursday, Home Depot announced that it was shutting down 15 of its underperforming flagship stores. The mercy killings are supposed to wrap up in the next few months with 1330 employees being axed or reassigned. Wall Street rallied after the tough love announcement.

In a bleeding real estate market and with new management at the helm, the Atlanta-based company has pulled back on expansion plans and is excising vestigial parts.

These tough calls weren't in the game plan a year and a half ago. In September 2007, it had been reported that Blake said he had no plans to make any broad-based job cuts or reduce the number of its core retail stores in the face of a persistent housing slump that wasn't expected to improve anytime soon.


Sun Micro turns in loss of $34 million

Sun Microsystems Inc. on Thursday said it swung to a fiscal third-quarter loss and that it will cut up to 2,500 jobs as the computer server and software company said "significant challenges" in the U.S. market contributed to its sales slipping from a year ago.

On a conference call to discuss the results Sun Chief Executive Jonathan Schwartz said the company was hampered by weakness in the U.S. economy that "presented Sun with significant challenges" and overwhelmed progress that Sun made in developing nations.


Auto Sales Remain Weak; Chrysler Posts 23% Drop

The U.S. auto industry's struggles continued in April as General Motors Corp. (GM) and Ford Motor Co. (F) and Chrysler LLC posted double-digit drops in U.S. light-vehicle sales despite having two extra selling days than a year earlier.

GM, hobbled by a strike at a major axle supplier, posted a 16% sales drop while Ford sales slid 12%. Chrysler reported a 23% decline. Japan's Toyota Motor Corp. (TM), thanks to Easter falling in March this year, managed to snap a four- month streak of weaker sales and post a 3.4% rise.

The gas-price spike combined with persistent economic turbulence had set the stage for April to be yet another tough month in what is expected to be the industry's toughest year in at least a decade.


Fed Discount-Window Lending to Banks Rises 8% to $11.6 Billion

May 1 (Bloomberg) -- The Federal Reserve's cash loans to commercial banks rose 8 percent in the past week, reflecting borrowers' continuing need for funds.

Loans to commercial banks through the traditional lending facility increased $857 million in the week ended yesterday to a daily average of $11.6 billion.

As of April 30, $17.8 billion of overnight loans through the primary-dealer program were outstanding with Wall Street firms, while commercial banks had $12 billion of discount-window loans, the Fed reported.

The Fed also reported that the M2 money supply rose by $27.9 billion in the week ended April 21. That left M2 growing at an annual rate of 6.7 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

The Fed reports two measures of the money supply each week. M1 includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks. M2, the more widely followed, adds savings and private holdings in money market mutual funds.
During the latest reporting week, M1 rose by $19.4 billion. Over the past 52 weeks, M1 declined 0.1 percent. The Fed no longer publishes figures for M3.


Airlines slow down flights to save on fuel

Drivers have long known that slowing down on the highway means getting more miles to the gallon. Now airlines are trying it, too — adding a few minutes to flights to save millions on fuel.

Southwest Airlines started flying slower about two months ago, and projects it will save $42 million in fuel this year by extending each flight by one to three minutes.

On one Northwest Airlines flight from Paris to Minneapolis earlier this week alone, flying slower saved 162 gallons of fuel, saving the airline $535. It added eight minutes to the flight, extending it to eight hours, 58 minutes.

Across the board, airlines are feeling the pain of higher energy prices. For jet fuel delivered at New York Harbor, the spot price — airlines pay it when they need more fuel than they've already locked down in a contract — has jumped 73 percent in the past year, to $3.54 a gallon, according to government data.

Airlines are trying other measures as well to deal with higher fuel costs, including raising fares, adding fuel surcharges to tickets and charging extra for a second checked bag rather than a third.

It's a tough time for the airline industry. Several smaller airlines have filed for bankruptcy protection in recent weeks, many citing high fuel costs. Fuel costs have also resulted in sharp first-quarter losses by some airlines.


Have a good evening

Randy