Financial Markets and Economic Potpourri December 26, 2008

By: Mike_Shedlock

The barrage of noteworthy economic news continues unabated. I took a lot of time off posting Christmas Eve and Christmas. Here are a few headline news reports of interest from the past couple days that have been stacking up.

MetLife Drops as Commercial Mortgage Defaults Loom

MetLife Inc. and Prudential Financial Inc., the largest U.S. life insurers, declined in New York trading on concern that losses on commercial mortgages will surge as the recession deepens. No. 1 MetLife dropped $4.53, or 12 percent, to $32.88 at 4:02 p.m. in New York Stock Exchange composite trading. Prudential, based in Newark, New Jersey, fell $2.99, or 9.9 percent to $26.35. Lincoln National Corp. declined 13 percent.

Life insurers have cut jobs, curtailed stock buybacks and reduced dividends as losses on stocks, asset-backed securities and corporate debt deplete capital. The industry, which puts about 10 percent of its invested assets in commercial mortgages, may see losses rise to the highest levels since the early 1990s, according to Randy Binner, a life insurance industry analyst at Friedman, Billings, Ramsey Group Inc.

Commercial mortgage defaults are “certainly on the forefront of the radar screen,” Binner, said in an interview. Binner lowered his stock recommendation on Prudential to “market perform” today from “outperform.”

Prudential and Philadelphia-based Lincoln National have each plunged about 72 percent this year, compared with the 47 percent fall at New York-based MetLife.

Annuity And Pension Time Bomb

I still have not seen a mainstream media discussion of one of the big problems facing life insurers: guaranteed annuities. Many insurers offer annuities that guarantee 6% or more. Many pension plan assumptions are 8.5% or higher. The stock market is down 41%.

If I am correct, the S&P 500 is headed for 600, well over a 60% decline peak to trough. This is happening right as boomers are retiring and will be tapping those guarantees. Finally, the stock market will not come roaring back to new highs wherever it bottoms. For more discussion why, please see Peak Earnings .

Commercial property industry seeks bailout aid

A group of trade associations representing the U.S. commercial real estate industry is lobbying to be included in the Federal Reserve's $200 billion asset-backed bailout plan in order to head off a wave of foreclosures over the next few years.

In a letter to U.S. Treasury Secretary Henry Paulson, industry organizations have asked that the $200 billion Term Asset-Backed Securities Loan Facility (TALF) provide guarantees or financing, or purchase highly rated asset-backed securities collateralized by new or recently originated mortgages.

"Through the end of 2009, an estimated $400 billion in commercial real estate loans will mature, and the pace of maturities will increase over the succeeding years," the group of a dozen associations wrote in their November 26 letter to Paulson.

"With new loan originations at a standstill, commercial borrowers face a daunting challenge of refinancing maturing debt and, as a result, borrowers and lenders alike may experience rising foreclosures, delinquencies and loan losses," the letter said.

I have no sympathy for those who overleveraged in commercial real estate when it should have been clear years ago that consumers could not keep spending more than that made for perpetuity. There is rampant overcapacity in restaurants, furniture stores, appliance stores, nail salons, clothing stores, and anything else you can think of. The way to solve it if for a wave of bankruptcies to shake out the weak.

Rents needs to come down as do property values. The Shopping Center Economic Model Is History . Attempts to prop the market up are a futile waste of money.

Ethanol Producers Want Bailout

The Wall Street Journal is talking about An Ethanol Bailout

The commodity bust has clobbered corn ethanol, whose energy inefficiencies require high oil prices to be competitive. The price of ethanol at the pump has fallen nearly in half in recent months to $1.60 from $2.90 per gallon due to lower commodity prices, and that lower price now barely covers production costs even after accounting for federal subsidies. Three major producers are in or near bankruptcy, including giant VeraSun Energy.

So here they go again back to the taxpayer for help. The Renewable Fuels Association, the industry lobby, is seeking $1 billion in short-term credit from the government to help plants stay in business and up to $50 billion in loan guarantees to finance expansion. The lobby would also like Congress to ease the 10% limit on how much ethanol can be added to gasoline for conventional cars and trucks -- never mind the potential damage to engines from such an unproven mix.

Of course, the ethanol industry wouldn't even exist without the more than $25 billion in taxpayer handouts over the past 20 years. Congress only recently passed energy and farm bills that further greased ethanol production with a 51 cent a gallon tax credit, corn subsidies, plus increasingly stringent biofuel mandates. We were told, as usual, that profitability was just around the corner.

Ethanol from corn is an industry that should not even exist. It gets massive subsidies and still cannot make it. Instead of giving it more taxpayer money, the subsidies should be removed. Technologies that are not profitable in the free market should not exist at all.

Weekly Unemployment Claims Soar

On Christmas Eve the US Department of Labor released a Grim Weekly Claims Report .

In the week ending Dec. 20, the advance figure for seasonally adjusted initial claims was 586,000, an increase of 30,000 from the previous week's revised figure of 556,000. The 4-week moving average was 558,000, an increase of 13,750 from the previous week's revised average of 544,250.

Looking ahead the December jobs report is going to be ugly, the 12th consecutive contraction.

Fedex CEO calls for new tax policy to stabilize economy

Fedex Corp. (FDX) Chief Executive Fred Smith said Thursday he believed the root cause of the current economic crisis was a tax policy that encouraged growth in the financial sector at the expense of manufacturing. In the early 80s, the financial sector represented about 15% of U.S. industry profit, but that climbed to 32% after the federal government encouraged borrowing through the deduction of interest, according to Smith. Meanwhile, the tax on capital spending was significant, he said. "Unless, or until, those tax policies in the U.S. move toward [encouraging] industrial activity and away from leveraging, we will continue to have a massive deleveraging that we see occurring at this moment," Smith said. He dismissed economic stimulus plans that encourage consumer spending, saying in tough economic times people will just put it towards reducing their debt.

Expansion Decisions Come Back To Haunt Freeport Copper

Freeport Goes From First to Worst in 2008 as Copper Price Falls

Freeport-McMoRan Copper & Gold Inc., the best-performing stock among North American mining companies in 2007, turned into the worst this year. Analysts say the company may not fare much better in 2009 as copper prices slump.

Freeport, the world's second-largest copper producer has fallen 79 percent, the biggest loss in the 16-member Philadelphia Gold & Silver Index and the steepest decline since the shares started trading in 1996, as copper tumbled 58 percent in New York Mercantile Exchange trading.

Chief Executive Officer Richard Adkerson spent much of 2008 planning to expand until the rout in metals forced cuts in output and jobs and halted dividend payments and share buybacks. Freeport may have to make more cuts next year unless copper recovers because production costs are higher than metal prices for much of its North American operations, according to company data.

“Credit is still dead, inventories are still piling up and there's no demand to build anything,” Chris Wang, co-founder of SYW Capital Management LLC in New York, said in a telephone interview. “He's got to cut more at the operations, lay off people at central offices.”

Freeport produces two-thirds of its U.S. output at a cash cost of $1.40 to $1.60 a pound, the company said earlier this month. That means mines expected to yield 1.3 billion pounds of the metal next year, or almost a third of total output, are unprofitable at current prices.

Once again I have no sympathy. These companies brought this precarious position on themselves.

FCX - Freeport Monthly




In December of 2007 and again in July of 2008 Freeport increased its open market share repurchase program. What a waste of money.

Worthington hit on Goldman downgrade and slumping auto sector

Worthington Drops After Goldman Sees Default Risk

Worthington Industries Inc., the largest U.S. maker of steel frames for cars, plunged the most in almost three months after Goldman Sachs Group Inc. said the company may violate debt covenants and halt its dividend.

Carmakers and real-estate developers are the biggest buyers of Worthington's products and have been among the hardest hit by the global recession, which has caused companies and consumers to hoard cash. General Motors Corp. and Chrysler LLC, the first- and third-largest U.S. carmakers, last week received loans of $13.4 billion from the U.S. government to stave off bankruptcy as they attempt to make their businesses viable.

“We see further deterioration in its two primary end markets, auto and commercial construction,” analysts led by Sal Tharani said today in a note to clients. “There is added concern of counterparty risk in case of a potential bankruptcy by an automaker.”

Cerberus Suspends Withdrawals From Partners Fund, CNBC Says

Cerberus Capital Management LLC suspended withdrawals from its Cerberus Partners Fund, CNBC reported.

Redemptions were halted for as long as a year, CNBC said.

Russia Implosion Continues

Ruble Falls to Record Low Versus Euro as Russia Weakens Defense

The ruble fell to a record low against the euro as Russia's central bank extended six weeks of devaluations to compensate for falling oil prices. The ruble lost 1.3 percent to 40.7960 per euro at 12:48 p.m. in Moscow, the lowest level since the European currency was introduced in 1999. It declined 1.1. percent to 29.0107 against the dollar, a four-year low, capping a 20 percent drop since early August.

Russia's foreign reserves, the world's third largest, have fallen by a quarter since August to $451 billion as the central bank sought to prop up the currency and export revenue declined. Standard & Poor's cut Russia's credit rating this month for the first time in nine years to BBB on concern Russia is wasting reserves defending the ruble.

It is always a waste of money to squander reserves defending a currency. Currencies are going to go where they are going to go intervention be damned. Squandering reserves only makes matters worse.

UK Economy Worst Since 1990

U.K. Economy Shrinks Most Since 1990 in Third Quarter

The U.K. economy shrank the most since 1990 in the third quarter and mortgage lending dropped to the lowest in 14 years as tightening credit exacerbated the slide into recession.

Gross domestic product contracted 0.6 percent from the second quarter, the Office for National Statistics said in London today. The drop was bigger than the previous estimate of 0.5 percent, which economists had expected would be confirmed. Home-loan approvals plunged 61 percent to 17,773 in November from a year earlier, the British Bankers' Association said.

“It's going to get worse before it gets better,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc. “The weakness is very broad based. We think interest rates are going to go all the way close to zero.”

World Faces Total Financial Meltdown

World faces "total" financial meltdown: Bank of Spain chief

The governor of the Bank of Spain on Sunday issued a bleak assessment of the economic crisis, warning that the world faced a "total" financial meltdown unseen since the Great Depression.

"The lack of confidence is total," Miguel Angel Fernandez Ordonez said in an interview with Spain's El Pais daily.

"The inter-bank (lending) market is not functioning and this is generating vicious cycles: consumers are not consuming, businessmen are not taking on workers, investors are not investing and the banks are not lending.

"There is an almost total paralysis from which no-one is escaping," he said, adding that any recovery -- penciled in by optimists for the end of 2009 and the start of 2010 -- could be delayed if confidence is not restored.

Odds of consumer confidence coming back anytime soon are virtually zero. Unemployment is poised to rise to at least 9% from the current 6.7%. I am looking for several months where payroll employments falls 300,000 to 500,000. And if the BLS ever revises its pathetic birth death model, we might see one (or more) months substantially higher than that.

In November, Jobs Contracted 11th Straight Month .

The December 2008 jobs report will be out on January 2nd 2009. It will be God awful. However, the January 2009 will likely be worse. January and July are the months where the BLS makes massive revisions to its jobs totals. Those revisions are typically negative.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

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