by Addison Wiggin & Ian Mathias
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Housing stats sink to new lows… important data details the mainstream’s been missing
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Dollar resumes rebound… Middle Eastern nation affirms dollar peg
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Industrial metals getting slammed… Chris Mayer on buying dips in the mining sector
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Byron King with an energy dilemma “we had better figure out now”
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An ETF debuts smack in the middle of one of our favorite themes
The swan dive in house prices continues:
The S&P/Case-Shiller index of house prices in 10 major cities is now down 17% annually. The 20-city measure isn’t far behind… it’s down 15.9%.
“Not one market is showing a positive return over the past 12 months,” said David Blitzer, chairman of the index. “Seven of the metro areas are reporting declines in excess of 20%.” Ouch.
There may be one silver lining to this gloomy cloud. The acceleration of the index’s decline wasn’t as severe in June as it was in April and May. The 10-city HPI fell 0.6% in June. That’s bad, but not as gruesome as the 2-2.5% crashes we saw in the preceding months. Home prices are still falling — everywhere — just not as fast.
To that we add this positive trend: New home sales jumped 2.4% in July.
Still, sales are still down 35% from July 2007. The median home price is down 6.3% from last year, to $230,700. And inventories remain very high, a 10.1-month supply. The Commerce Dept. considers a five-six-month supply healthy.
The dollar index leapt to 77.5 overnight — a new 2008 high.
Looking around the world, the greenback has had a part in just about all the headline trades in the past 24 hours:
“The [dollar] peg is here to stay,” Muhammad al-Jasser, vice governor of the Saudi Arabia central bank, decreed overnight, “no ifs or buts.”
Only a few months ago, Middle Eastern nations were scrambling to decide when — not if — they’d ditch their pegs to the dollar. Granted, the House of Saud has been less inclined to drop the dollar. But the language from the Saudi central bank today makes this particular policy alteration seem all but impossible.
Markets make opinions, we like to say.
Two “Gulf Arab investors” are trying to buy the Hummer brand from GM. According to a mysterious Reuters reports, two unnamed investment bodies from separate, but unnamed Gulf nations have expressed interest in taking the gas guzzlers off GM’s hands. This could get interesting, as you might recall from last month, when we told you about Hummer’s booming presence in China.
Seriously, is there a better home for Hummer than the Middle East? Gas is less than $1 a gallon in Saudi Arabia… and it might be one of the few global economies that can still stomach a rig that gets 10 mpg.
Oil fell again overnight. The front-month contract for crude sank as low as $113 this morning. Dollar strength and waning demand are to blame, say the talking heads on TV.
But this morning, news comes that Hurricane Gustav is brewing in the Atlantic, and it’s giving oil traders a rash. Look for more about Gustav tomorrow. In the past few minutes, oil has popped back up to $117.
“Capital costs for energy projects have swelled in recent years,” notes Byron King. “The costs for key inputs — steel, cement, copper, aluminum, machinery, labor — have outpaced inflation. And it won’t all come to an end just because the Beijing Olympics are over. There’s still a lot of concrete to pour in the Middle Kingdom.
“Take a look at the following chart, prepared by the U.S. Federal Energy Regulatory Commission (FERC). The chart shows the capital costs of building power generation capacity in the U.S. in 2008 compared with 2003-2004.
“As the graph makes clear, the inflationary environment in power generation capital costs has impacted all types of systems. Nuclear has increased the most, because it uses the most steel and concrete. Costs for coal systems have increased quite a bit, as well.
At the same time, the fact is that coal and nuclear generate in excess of 60% of the U.S. electricity supply. And much of the installed base is between 30-40 years old, with a significant amount even older.
“So this installed base of power generation systems is coming to the end of its design life. What will replace it? We had better figure that out now, because it will take the next 20 years (and more) to build the next generation of power systems and plants.”
Over the last decade, the costs of the materials needed to build energy infrastructure have skyrocketed. But over the past six months, the commodity correction/dollar rebound has slammed most industrial metals.
“The old-timers of commodity investing,” notes Chris Mayer, “say the best time to buy commodity companies is when the industry has lost money. The idea is that this is when stock prices are usually low. And miners will start to cut back on production, which will foretell a recovery in prices, profits and, ultimately, stock prices.
“Such times come around every so often, when the cost to produce, say, nickel rises above the price at which you can sell nickel. Even the slow wits of the business see that you can’t make that up in volume. To keep digging under such prices is like digging your own financial grave.
“And so we see that nickel prices are down 30% this year and down 60% from mid-2007 highs. All the while, mining costs are rising. So mines around the world are shutting down production. And new mines that looked promising suddenly look less so.
“But if you can’t buy commodity stocks now, you may never be able to pull the trigger.
The long-term thesis behind the names seems firmly in place. It has a lot to do with China and India and the rest of the emerging market crowd — but especially China.”
Chris mentioned three separate stocks he recommends his Capital & Crisis readers pick up while miners are cheap. If you ask this editor, those tickers alone are worth the price of your subscription. Get the details here.
Here’s something to keep your eye on: The first dry shipping ETF debuts today.
If you’re bullish on mining stocks and commodities, chances are you also think highly of the shippers of the world tasked with moving them around. And if you can’t pick your fave, check out ticker “SEA” today. It’s officially called the Claymore/Delta Global Shipping Index ETF.
Caveat emptor, of course.
Gold took a hit as the dollar rose overnight. It fell nearly $20 an ounce. But that proved to be a quick-and-dirty buying opportunity. The spot price has rebounded to $815 as we write.
Major U.S. stock indexes fell significantly yesterday. The Dow, S&P 500 and Nasdaq all fell about 2%.
AIG, the world’s largest insurance company, fell to a 13-year low after Credit Suisse issued a nasty downgrade. Lehman Brothers also dragged the market down. The investment bank had been drifting up on a rumor that the Korea Development Bank might come to its rescue. But yesterday, Korean officials said the KDB’s potential acquisition is "improper," and since then, the market has largely given up on a potential Korean rescue.
J.P. Morgan copped to losses in Fannie and Freddie — the first of, what we expect, many U.S. banks to do so. J.P. Morgan Chase said yesterday that it’s lost 50% investing in the two GSEs this quarter… or about 600 million smackeroos.
“Excellent film,” notes a reader, commenting once more on the premiere of our film, I.O.U.S.A. “Nearly sold out here in Houston.” We don’t have final numbers, but we believe around 50,000 people saw the film on Thursday night.
“I reminded my friends,” the reader continues, “that Warren Buffett has a LOT to lose by the American public becoming pessimistic. Berkshire Hathaway is overvalued and dependent on irrational optimism, so Buffett’s comments have to be taken in light of that reality.
“I greatly enjoyed the film, but I was disappointed that none of the panelists were either informed enough or honest enough to admit that it’s impossible to become ‘responsible enough’ to pay off our debts. A cut in government spending material enough to start to pay off our debt would certainly tank our consumer-driven economy and, thus, slash tax revenues. Our economy does not have the family-level excess capacity that it had in prior distressed times.”
“Does anybody still trust Warren Buffett?” asks another. “The Sage of Omaha is the guy with a major stake in Moody’s, the people who helped create the current financial unpleasantness with bogus ratings on shady financial instruments and the people who sold them. Then he steps in to ‘help’ by offering to buy the best of this trash for pennies on the dollar.
“Sorry, Warren, no sale. Far as I can see, this guy is part of the problem, and definitely part of a financial system that has morphed from part hustle into full-blown scam. His willingness to play Pollyanna in public makes clear that in the crunch, he is shoulder to shoulder with the likes of Greenspan, Paulson, et al. He knows on which side his bread is buttered. I’m surprised Agora is surprised by him.”
The 5: “Agora” wasn’t surprised by him. I was. Buffett participated in the discussion that lead to the trade deficit section of the film. He reviewed the film and said he liked it. He agreed to sit on the panel and help advance the idea of assembling a “bipartisan commission” to address the deficits, Social Security, Medicare and Medicaid. He even admitted that if the national debt rose to a higher percentage of GDP than it is right now, it could be “politically instable.”
Buffett prefaced his position as the “token Pollyanna” on the panel by saying he had full faith that the resilient American people would find a way address the challenges facing the nation. Uh… yeah. But don’t we have to agree that there’s a problem before addressing them? We’ve been making fun of Bush’s “Make the Pie Higher” speech for years… and here comes Buffett, parroting the same noxious theme at our own premiere. Oy.
Regards,
Addison Wiggin
The 5 Min. Forecast
P.S. We screened the film at the Impact Film Festival inside the compound at the Democratic National Convention in Denver yesterday. The event was surreal. Just to get in, we had to present identification to a gaggle of deadpan praetorians wearing dark sunglasses at a checkpoint of cement blocks and barbed wire four blocks away from the convention center. Inside, bands of jackbooted police officers roamed the grounds. Helicopters flew overhead.
Because security was so tight, there were only 50 or so people at the screening. Sen. Kent Conrad, the chairman of the Senate Budget Committee, introduced the film. We’ve been to 15 or so screenings, in front of all kinds of audiences… this one produced the most muted response to date. During the panel discussion afterward, we discovered most of those in attendance were reps from the media.
Allen Boyd, a congressman from Florida, sat on the panel with David Walker, Patrick Creadon and me. Boyd and Conrad are among a few Democrats trying to convince their party members that in order to advance the social agenda laden within the discussion at the convention… they have to also have to figure out how to pay for it. Novel idea, that one… Given the speeches that commenced soon thereafter on the convention floor, we’re not holding our breath.
Next Tuesday, we head to the Republican convention in St. Paul, Minn.