Welcome to Inflation folks!

An amazing day for inflation, and welcome to the 70's! The bond market sold off for pretty much the 2nd largest time in history; the 1st time was 1/23/2008, my birthday.

Effectively, we're seeing heavy inflation. The government is now not going to even report the key economic indicators because it has gotten so bad. Stick your investments into commodities, I say...

I'm going to paste an article from M. Ramsey King Securities, Inc. He offers great insight into what is going on.



The King Report
M. Ramsey King Securities, Inc.
Tuesday February 19, 2008 – Issue 3816 “Independent View of the News”

The FT: US banks borrow $50bn via new Fed facility US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks…The use of the Fed’s Term Auction Facility…saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February. http://us.ft.com/ftgateway/superpage.ft?news_id=fto021820081549448926

The supra-inflationary aspects of the revelations that the Fed is pouring enormous amounts of capital into the US financial system and England’s nationalization of Northern Rock have equity markets and commodity markets rallying and bonds declining sharply. Numerous investors and traders believe that horrible news is good news for stocks because the Fed and
other central banks will be forced to pump even more credit into the system. This linear thinking has been inculcated in investor and traders’ psyche over the past two decades. However, those were decades without a global inflationary threat, let alone a global food and energy inflation threat.

Few people, or less, know the magnitude of the problems in the financial system. The NY Times’ Gretchen Morgenson gives some insight into the scope of just one aspect of the mess.

Credit default swaps…insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.

The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.
No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity…

But an inkling of trouble emerged in a recent report from the Office of the Comptroller of the Currency, a federal banking regulator. It warned that a significant increase in trading in swaps during the third quarter of last year “put a strain on processing systems” used by banks to handle these trades and make sure they match up. http://www.nytimes.com/2008/02/17/business/17swap.html?_r=1&th&emc=th&oref=slogin

If you’re not concerned, you’re not ‘doing your work.’

Who has the most CDS exposure? Ms. Morgenson: JPMorgan Chase, with $7.8 trillion, is the largest player; Citibank and Bank of America are behind it with $3 trillion and $1.6 trillion respectively.

What fallout might occur? Ms. Morgenson: …when Delphi…filed for bankruptcy in October 2005, the credit default swaps on the company’s debt exceeded the value of underlying bonds tenfold. Buyers of credit insurance scrambled to buy the bonds, driving up their price to around 70 cents on the dollar, a startlingly high value for defaulted debt. Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered…

The Times: The cost of the Northern Rock crisis has reached the equivalent of £3,500 for every taxpayer as experts warned that the nationalisation rescue of the bank was bound to fail.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/19/nrock119.xml

The Third World bailout of leading financial instructions continues. Qatar plans to invest $15B in Credit Suisse over the next year.

Good thing inflation remains ‘well anchored’ according to Bernanke. The FT: Prices for top-quality spring wheat have jumped by 90 per cent in the past month and a half, boosted by a scramble by corporate consumers to secure scarce grain and speculative buying by investors. A surge on Friday in prices for wheat used in bread to an all-time high of $19.88 a bushel – the highest yet paid for any wheat contract and a three-fold increase from a year ago – prompted the US baking industry to call for wheat exports to be curtailed. http://www.ft.com/cms/s/0/bab47e26-dd85-11dc-ad7e-0000779fd2ac.html

China’s inflation surged 7.1%y/y in January, the highest reading in 11 years. Snowstorms were a factor.

The WSJ: Three Asian steelmakers agreed with a leading provider of iron ore on a 65% price increase for iron-ore shipments, reflecting a desire to lock in supplies before they get even more expensive and confidence they will be able to pass the price increase on to their own customers.

Japan's Nippon Steel Corp. and JFE Steel Corp. as well as Posco of South Korea have agreed to pay Brazil's Companhia Vale do Rio Doce , or Vale, 65% more for iron ore to be shipped from April 1. Other global steelmakers, including leading Chinese companies, appear close to accepting a similar increase in iron ore prices for fiscal 2008-09. http://online.wsj.com/article/SB120331883691774781.html?mod=hpp_us_whats_news

Three major food companies, Campbell, J.M. Smucker and Hormel Foods, report costs rose faster than sales in the prior quarter ended in October. AC Nielsen found eight U.S. branded-food companies, including Campbell, raised prices by more than 2%, on average, in the 12 weeks ended Jan. 26.

The NY Times’ Floyd Norris echoes our contention that retail sales data is inflate by the soaring cost of food and energy: Over all, Americans are spending about 13 percent more on food and energy now than a year ago. http://www.nytimes.com/2008/02/16/business/16charts.html?_r=1&oref=slogin

We learned from ‘The Big Picture’ web site that:
Due to budgetary constraints, the Economic Indicators service (http://www.economicindicators.gov/) will be discontinued effective March 1, 2008.

Economic Indicators.gov is brought to you by the Economics and Statistics Administration
at the U.S. Department of Commerce. Our mission is to provide timely access to the daily
releases of key economic indicators from the Bureau of Economic Analysis and the U.S.
Census Bureau. http://www.economicindicators.gov/

Barry Ritholtz: First we heard the bullshit about the costs of reporting M3 -- just before that aspect of money supply went sky high. Now this.

This new development implies (by parallel comparison to M3) that the economy is actually far, far worse than previously believed. The reason citizens should never let their government stop reporting ANY information is that they get to liking it. http://bigpicture.typepad.com/comments/2008/02/wtf-feds-shutti.html

The Reuters/University of Michigan index of consumer sentiment fell to 69.6 in February from 78.4 in January. This is the lowest reading since 1992 – the last full blown recession.

This apparent paradox really is really logical. Detroit metro sales of homes jumped 15% y/y in January. Foreclosures jumped 45.5%. http://www.detnews.com/apps/pbcs.dll/article?AID=/20080215/BIZ/802150373

When severe financial problems appear, it invites scrutiny by regulators that were remiss in their duties. And once the financial problems translate into economic duress, the populace becomes irate. And then politicians and regulators are forced to do the job that they had neglected. And then financial crimes and malfeasance are discovered, reported and prosecuted.

The WSJ (weekend): Democrats' Attacks On Business Heat Up As the Democratic presidential contest moves to the distressed industrial Midwest, Hillary Clinton and Barack Obama have ratcheted up their antitrade, anticorporate rhetoric. http://online.wsj.com/article/SB120312350441273057.html?mod=hpp_us_whats_news

The Telegraph: Germany was gripped by a growing tax scandal on Friday as state prosecutors disclosed that they were investigating "several hundred" people for suspected tax evasion…Klaus Zumwinkel, chief executive of Deutsche Post, parent company of DHL, resigned yesterday, a day after police searched his home and office. http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/16/cndeut116.xml

The Times (UK): Alistair Darling has criticised the huge bonuses being awarded to City executives during a period of economic uncertainty. The Chancellor said that boards should apply the “next-door neighbour test” to judge whether payouts would be regarded as excessive by the average man in the street. “People get fed up if they see others getting great big bonuses and they can’t actually see what they did. It can be extremely frustrating. http://business.timesonline.co.uk/tol/business/money/tax/article3378951.ece

The dollar had its biggest weekly loss this year versus the euro – blame Ben’s dovish braying.

Over the holiday weekend monoline rescue negotiations continued – no word yet.

The WSJ: On Friday, FGIC Corp., holding company for the nation's third-largest bond insurer, told the New York State Insurance Department that in effect it wants to split up the business. The idea would be to create a new company to insure safe municipal bonds and for the existing one to keep responsibility for riskier debt securities already insured, such as those tied to the housing market.

The move may help regulators protect investors who have municipal bonds insured by the firm. But it could also force banks who are large holders of the other securities to take significant losses. Some banks that have been talking with FGIC in recent weeks to bolster the firm were taken aback by the announcement and could yet try to block it, say Wall Street executives.
http://online.wsj.com/article/SB120308290353671507.html?mod=hpp_us_whats_news

There are no painless solutions to the monoline and most other financial problems. Someone must suffer. It’s just a question of whom and how much. And you can be sure US taxpayers will be hit somehow. The Times (UK): Citigroup shuts London fund to withdrawals Citigroup has moved to stop investors withdrawing their money from one of its London-based hedge funds after panic selling that saw investors try to pull out more than 30 per cent of the fund's $500 million (£254.3 million) assets.
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3373670.ece

The NY Times: For Edward S. Lampert, it appears the bloom is off the rose at Citigroup. The billionaire investor disclosed on Thursday that he has sold off more than 30 percent of his holdings in the struggling financial giant… http://dealbook.blogs.nytimes.com/2008/02/15/lampert-begins-parting-with-citi/

Platinum is up $50 in overnight trading and now trades above $2113/ounce. We are extremely grateful that inflation remains well anchored.

Today – SPHs are up 14 handles in overnight trading as traders and investors are delighted with the ugly news that appeared over the holiday weekend. If stocks get too jiggy in the morning, we’d look for a reversal in the afternoon. The Nikkei ran to a 166 point gain in its first 16 minutes of trading last night and proceeded to give up 90 points of the gain to end the first session.

Expected economic data: NAHB Housing Market Index 19…Minneapolis Fed Prez Stern speaks on the US economy in MN…After the close HPQ reports earning and guidance…CPI tomorrow – it appears bonds believe it will be worse than the consensus, and well anchored, 0.3% (Core 0.2%).

The NY Post: OBAMA 'ROBBED' IN NY Barack Obama's primary-night results were strikingly
underrecorded in several districts around the city - in some cases leaving him with zero votes when, in fact, he had pulled in hundreds, the Board of Elections said yesterday.
Unofficial primary results gave Obama no votes in nearly 80 districts, including Harlem's 94th and other historically black areas - but many of those initial tallies proved to be wildly off the mark, the board said. In some districts getting a recount, the senator from Illinois is even closer to defeating Hillar Clinton. Initial results in the 94th, for example, showed a 141-0 sweep for Hillary Clinton, but the recount changed the tally to 261-136...Brooklyn City Councilman Charles Barron called the understated figures "outrageous." http://www.nypost.com/seven/02162008/news/regionalnews/obama_robbed_in_ny_97932.htm

NY Mayor Bloomberg, just last week, said the US is starting to resemble a Third World Country.

The NY Times: Kosovo Declares Its Independence From Serbia The province of Kosovo declared independence from Serbia on Sunday, sending tens of thousands of ethnic Albanians streaming through the streets to celebrate what they hoped was the end of a long and bloody struggle for national selfdetermination.. What will Putin do? http://www.nytimes.com/2008/02/18/world/europe/18kosovo.html_r=1&th&emc=th&oref=slogin

CNN: A central passage in the stump speech Barack Obama has been giving in recent days -- aimed at convincing voters that his campaign is not just about lofty rhetoric -- is adapted from Massachusetts Gov. Deval Patrick, Obama's campaign acknowledged over the weekend.
http://www.cnn.com/2008/POLITICS/02/18/obama.patrick/

And we swear that we have heard these key parts of his stump speech elsewhere: ‘I am the light, the way the truth’ or very similar verbiage – and we’re not talking about Oprah!

The Boston Globe: So what did Michelle Obama think of the United States before her husband decided he wanted to run the place? “For the first time in my adult life, I am proud of my country,” she told a Milwaukee crowd today, “because it feels like hope is making a comeback.” (Obama’s Achilles Heel?)
http://www.boston.com/news/politics/politicalintelligence/2008/02/pride_in_the_na.html

ISM Index Non-Manufacturing numbers

The Institute for Supply Management today came out with numbers that sent stocks plummeting and bonds soaring in the AM. This may be great news for home loan interest rates, but bad news for your stock portfolio.

Essentially, the ISM Index came in at 41.9 in January,from 54.4 the previous month. What does this mean?

The Institute for Supply Management's non-manufacturing index reflects almost 90 percent of the US economy. This is the lowest since October 2001. A reading over 50 signals expansion, but under 50, it signals recession.

"This is a stunning fall,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. ``If accurate, it's dire news on the economy.'' (see here)

Numbers came in today at 41.9, signaling a recession. You can actually see the reaction in Asia as the Nikkei stock market is down 557 so far, coming in at 13,187 currently. The ISM shows us that we are gearing towards less growth, with that looming 'R' word on the horizon.

What will the Fed do? Another rate cut? (They only have so many of those) What about beefing up the stimulus package?(Free money....right?)

Consumers are now having to tighten their belts and actually pay as they go...what a concept! We'll see if this has a long-term effect; the consumer entitlement mentality in America is too well-ingrained to be ironed out after an economic hiccup. However, those with cash are going to find some sweet deals (think big, really big). Just hop on craigslist, and type in 'foreclosure' and see what pops up.

Cheers!