Financial Clues

2008-07-01T11:08:00.000-07:00

I am currently modifying my website. Thanks for your patience during this effort.

Giving Homes Away

2008-06-25T17:02:00.000-07:00

"Senator Sherrod Brown, D-Ohio, left, accompanied by Sen. John Kerry, D-Mass., gestures during a news conference on Capitol Hill in Washington, Tuesday, June 24, 2008, regarding the housing and mortgage crisis on Capitol Hill in Washington. (AP Photo/Charles Dharapak)"

Summary

A massive foreclosure rescue bill cleared a key Senate test by an overwhelming bipartisan vote of 83-9. Next steps include complete passage by the Senate, reconciliation with the House version, and submission to President Bush who has vowed to veto it.

The measure would let the Federal Housing Administration back $300 billion in new and cheaper home loans for an estimated 400,000 distressed borrowers. These homeowners normally would be considered too risky to qualify for government insured fixed-rate loans.

What This Really Means

During the days of sub-prime easy money, homeowners were given loans that they later were unable to pay back.

These same homeowners are unable to qualify for "normal" government-backed loans.

But instead of letting the homeowners foreclose on the homes, and letting the banks get what they deserve, Congress has decided to let the FHA provide new loans to these homeowners.

And if the homeowners get in trouble again, that is no problem for the FHA. The taxpayer will come to the rescue.

So as Agora's 5 Min. Forecast said today, "Congress is creating a “super-subprime” class of homeowners… putting a taxpayer backstop behind a group of borrowers who have proven they can’t afford their mortgages."

Weekend Trivia: Sunday Marks One Year Of What?

2008-06-22T07:59:00.000-07:00

Answer
Today will mark the completion of one year for my blog.

Accomplishments, Problems and Plans

I'm happy and proud to say that I was able to publish something every single day this past year. Special thanks to my guest writer (TL) who did help me out upon several occasions.

Looking back on my postings, I'm surprised at the amount of material and the quality of the content that I was able to publish. Writing has never come easily to me. I've always preferred math over reading and writing.

While I think that there is a critical message tied up in all of these postings, I think that I need to do a better job of coordinating and summarizing all of this information. The blog tends to read like too many random postings.

I also think that it is now time to market this blog to a much wider audience.

With these improvements in mind, I plan to take this blog in a different direction. Stay tuned for more details.

Favorite Postings From The Past Year

---Weekend Trivia Question: 02/10/08 discussion of the tulip bulb mania

---Weekly Chart: 06/25/07 discussion of world population trends

---Fun Money: 10/21/07 discussion of Quasi Universal Intergalactic Denomination money

---Worthless Money: 05/22/08 discussion of Zimbabwe's $500,000,000 note that is worth about $2 US

---Most Interesting: 06/10/08 discussion of abandoned property

---Best Editorial: 01/15/08 discussion on sharing the blame for the sub-prime mortgage crisis

---Long Term Trends: 03/05/08 discussion of the falling dollar over the past 138 years

---Government At Its Best: 10/24/07 discussion of ethanol politics

---Scary Implications: 08/12/07 discussion of our military being active in 148 countries

---Panic: 09/19/07 discussion of a run on the bank at Northern Rock

---Big Numbers: 02/07/08 discussion of the $1 quadrillion derivative exposure

---Most Disturbing News Item: 12/12/07 discussion of the $19 million sexual-discrimination verdict awarded to the Fresno State University basketball coach

---Naive American Public: 04/24/08 discussion of a chain letter proposal to lower oil prices

---Outstanding Question: 11/01/07 discussion on the future of the petrodollar

---Long Term Prediction: 04/22/08 discussion of crude oil hoarding

---Best Investment: 11/04/07 discussion on how to invest in gold

---Hope For America: 06/18/08 discussion of the entrepreneur spirit in the country

And More June Quick Hits

2008-06-20T13:24:00.000-07:00

ENERGY MARKETS

---On Monday, Crude oil prices peaked at $139 per barrel and unleaded gasoline prices peaked at $4.08 per gallon. Prices have been very volatile all week, but generally flat.

---Breitbart.com reported that "OPEC president Chakib Khelil said on Friday it was illogical an irrational to ask the oil cartel to increase output so as to take the pressure off soaring prices."

---China raised gasoline and diesel prices by 18% this week. This was the first increase in eight months and the largest increase on record. Reaction was the same as in the US.

---The Federal Highway Administration reported that for the six months ending in April, a total of 30 billion less miles were driven on our roads. This 1% drop is the the biggest since the Iranian revolution in 1979.

---AP reported that San Diego residents are increasingly going to Tijuana, Mexico to fill up their car with $2.54 a gallon gasoline.

---Legendary oilman T. Boone Pickens said the import of foreign oil is "the biggest transfer of wealth in the history of mankind."

COMMODITY MARKETS

---Agriculture prices continue to increase, primarily due to the flooding in the Midwest. Corn set an all-time record price on Monday.

---The Financial Times reported that "US meat, dairy and poultry producers yesterday urged regulators to re-examine ethanol mandates, which are tightening limited grain supplies and forcing a run-up in feedstock prices that threatens their livelihoods."

---The newspaper also reported that Mexico is freezing the cost of 150 basic food stuffs in an effort to combat rising inflation. Unfortunately, the history books are filled with examples of the futile efforts of price controls.

---Stock markets around the world are down sharply this week over continued worries about commodity prices and inflation in general.

---Obviously, Kellogg is being impacted by higher agriculture prices. But instead of raising prices, they announced instead that they would reduce the size of boxes by an average of 2.4 ounces for 14 items.

CONFLICTING OPINIONS

---Telegraph.co.uk reported that "The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.....Such a slide on world bourses would amount to one of the worst bear markets over the last century."

---In an opposing opinion, the World Bank raised the outlook for China with a forecasted GDP growth of 9.8% this year.

ECONOMIC INDICATORS

---Wholesale prices (Producer Price Index) increased 1.4% in May, contributing to an increase of 7.2% over the last year. The core rate (excluding food and energy) only rose by 0.2%, but this is not exactly relevant in our everyday lives.

---The European Union's statistical office reported that Eurozone inflation increased to 3.7%, the highest level in 16 years.

---The Conference Board reported that the leading economic indicators rose at 0.1% in May, equaling the 0.1% increase in April and up marginally from the 0% change in March. Cannot get much flatter than this.

---A survey by the Business Roundtable showed the the CEO Economic Outlook is currently at a five-year low.

---And finally, none of this is lost with the American public. An AP-Ipsos poll showed that 80% of the country believes that the country is moving in the wrong direction. This is the lowest level in the five year history of the poll.

REAL ESTATE

---The Commerce Department reported that the number of new housing starts fell in May to the lowest level in 17 years.

---In the Sacramento metropolitan area, home sales inched upward for the second consecutive month, recording their highest level in 20 months. But particularly disturbing is the fact that 51% of existing home sales were foreclosures that were owned by banks. Homes are moving, but prices are in a free-fall.

---YahooNews reported that "More than 400 real estate industry players have been indicted since March - including dozens over the last two days - in a Justice Department crackdown on incidents of mortgage fraud nationwide that stem from the country's housing crisis."

---The Tampa Tribune reported that "Condo Company Unwraps Plan For Clothing-Optional Pool.....Swimmers will have the option of wearing nothing at all at the Arbors at Branch Creek, a complex of 390 homes that landed on the idea to help move units in a down market."

OTHER INTERESTING ITEMS

---Burger King introduced a $190 burger in London which features Japanese Wagyu beef, an Iranian saffron bun with organic mayonnaise, white truffles, pink Himalayan rock salt and onions fried in Cristal Champagne. All proceeds are going to a charity that helps London's less advantaged children.

---Breitbart.com reported that "A luxury flat in Hong Kong has sold for 225 million Hong Kong dollars (28.8 million US), the most expensive apartment per square foot ever sold in Asia."

---The internet continues to play havoc with the music industry. The Financial Times reported that sales of physical music (mostly CDs and music DVDs) declined by 13% during 2007.

---Telegraph.co.uk reported that "Martha Stewart has been refused a visa to Britain because of her criminal convictions for obstructing justice."

---In a followup to previous postings, Senator Arlen Specter has finally agreed to let go of Spygate. Apparently the government has figured out that there are more urgent problems in this country than a football scandal.....it took almost a year to figure this out.

---YahooNews reported that "In this Oct. 28, 1958 file photo, professional golfer Sam Snead gyrates with a hula hoop on the golf course in Miami Springs, Fla. It's hard to believe in age of action-packed video games and other whiz-bang gadgets, the Hula Hoop once was the hippest toy around. The hoopla started 50 years ago Thursday, June 19, 2008 when entrepreneurs Richard Knerr and Arthur 'Spud' Melin sought a trademark for a plastic cylinder that had inspired by a similar toy that had enjoyed modest success in Australia's school yards. (AP Photo)"

Drastic Measures For A New Energy Policy

2008-06-19T00:10:00.000-07:00

It's amazing what $4 a gallon gasoline will do. The entire country is in a panic. CNBC now has a permanent ticker called "America's Oil Crisis." After decades with essentially no energy policy for the country, the politicians are suddenly making headlines in an attempt to fix the problem.

Yesterday, I think that I may have heard the best idea for a new policy since I was waiting in gas lines during the last oil crisis in the 1970s.

Also yesterday, however, I heard perhaps the worst idea for an energy policy. This makes a "no energy policy" seem like a wonderful thing.

Resurrection Of Nuclear Power

YahooNews is reporting that "Sen. John McCain called Wednesday for the construction of 45 new nuclear reactors by 2030 and pledged $2 billion a year in federal funds 'to make clean coal a reality,' measures designed to reduce dependence on foreign oil.....

He said he would set the country on a course to build 45 new ones by 2030, with a longer-term goal of adding another 55 in the future"

The National Oil Refinery Of The United States

Responding to President Bush's call for Congress to lift the moratorium on offshore drilling, House Democrats called for nationalization of oil refineries.

FoxNews.com is reporting that at an off-camera briefing, "Rep. Maurice Hinchey (D-NY), member of the House Appropriations Committee and one of the most-ardent opponents of off-shore drilling [said] We (the government) should own the refineries. Then we can control how much gets out into the market. [emphasis added]....

Rep. Rahm Emanuel (D-IL) [said] They (Republicans) have a one-trick pony approach.....

Rep. Nick Rahall (D-WV), Chairman of the Resources Committee [said] You cannot drill your way out of this."

The stupidity of these remarks cannot be overemphasized.

Crude oil goes into a refinery and gasoline comes out of the refinery. The refinery operations are not the reason prices are going thru the roof. In fact, refinery companies have suffered during this crisis as their margins have been squeezed.

And who really believes that the government and all their bureaucracy can run a company more efficiently than the private sector?

As I'm reading this, I have thoughts of Chavez and how he has run the Venezuelan National Oil Company into the ground.

As this blog has highlighted in many postings, there are numerous culprits for the current energy crisis. In my humble opinion, however, Congress is at the top of the list. They've had no energy policy and their mismanagement of the dollar is the biggest reason for the increase in gasoline prices. Prices are actually flat when measured in terms of gold. And if you use the government formulas for determining inflation from the 1980s, inflation-adjusted oil prices have actually declined over the last 30 years.

You have to ask yourself what this country is all about: Do we support a free market economy, or are we to become a socialist state? Everyone will have a vote in November.

The Entrepreneur Spirit Is Alive And Well

2008-06-18T11:59:00.000-07:00

As this blog has attempted to demonstrate over this past year, our country faces many complex and challenging problems.
I've been accused of being too critical at times, but my response has been that I'm just presenting a realistic analysis of the problems out there. It is my strong belief that if we are going to move forward, it will be led by the small businesses of America.

I had the opportunity to attend "The New California Hall of Fame Celebration" last night. This annual event was hosted by Golden Capital Venture Funds and recognizes business leaders in the Great Central Valley of California. These top 100 companies generate more than $50 billion annually in revenue and employ more than 250,000 people.

It is often said that the foundation of our country is made up of small businesses. This was very apparent at this event. While some of the names are very recognizable, most are not household names. But that doesn't take away from the great things that these companies are doing.

The entrepreneur spirit helped build our country. This event demonstrated that the entrepreneur spirit is still alive and well. If the government can stop itself from interfering, there is hope for the country.

Ross Perot Is Back With His Charts

2008-06-17T11:25:00.000-07:00

Remember Ross Perot when he ran for president in 1992 and 1996? He may be best remembered for his charts. While the public tended to laugh at these charts, I thought they did a great job of demonstrating his points. As they say, a picture is worth a thousand words.

Well, Ross Perot and his charts are back.

Website Launched Yesterday
According to the press release on PerotCharts.com:

"Ross Perot Launches Public Information Website About U.S. Economic Crisis

PerotCharts.com Illustrates that We Are Running Out Of Time to Stop Deficit Spending

DALLAS, TEXAS - JUNE 16, 2008 /PRNewswire/—Ross Perot, business leader and former presidential candidate, announced today the launch of 'PerotCharts.com,' a public information website that contains objective, factual information about the current economic crisis in America. The site is being launched as an alert and appeal for American citizens to inform themselves about federal government spending. Perot said, 'The U.S. national debt reached $9.4 TRILLION on April 30, and it is increasing by more than $1 billion every day. We are leaving our children and grandchildren with debt they cannot possibly pay.'

PerotCharts.com consists of three major components: a video featuring Ross Perot discussing the purpose of the website, a blog where new charts and other information are posted daily for study and comment, and a narrated chart presentation explaining the economic problems our country faces.

The website is not affiliated with any political party or candidate. Most of the data and research for the charts is gathered from official government sources.

'The economic crisis facing America today is far greater than anything since the Great Depression,” said Perot. “Our federal government continues to spend us deeper into debt. The American people must get directly involved and demand an end to deficit spending. This website will provide information for citizens to do just that.'"

Example Of What Can Be Found On Website

Launch Includes Charts In Following Categories:
Budget Deficit, Challenges, Education, Federal Budget, Gross Domestic Product, Healthcare, Medicare and Medicaid, National Debt, Population, Savings, Social Security and Taxation

Check It Out
An initial review of the site is very impressive. Just as exciting to me is that the theme is very similar to what I'm attempting to present in this blog.

Weekly Chart: Corn Prices Continue To Set Records

2008-06-16T11:56:00.001-07:00

Chart: Chicago Board of Trade; July 2008 Corn Contract

Corn Cannot Catch A Break

First, it was the biofuel program; corn farmland was diverted to the production of ethanol.

Then, it was higher fuel costs; surging diesel costs made it more and more expensive to grow corn.

After that, inflation began to impact other raw materials for farmers; fertilizer costs have gone thru the roof.

And now, the Midwestern floods of 2008 have wiped out many of the corn and soybean crops.

Is it any wonder that corn prices have skyrocketed to new records on a daily basis? It is simple supply and demand.

Surging Prices

Friday's trading action saw corn prices higher for the 12th straight consecutive day, including seven consecutive days of record closes. Corn for July delivery closed at $7.32 per bushel on Friday.

In early trading today, corn jumped 3% to a new record, before settling back.

Weekend Trivia: What Is The Misery Index?

2008-06-15T13:25:00.000-07:00

Defintion

Misery Index (9.7 = Unemployment rate (5.5) + Inflation rate (4.2)

According to the official Misery Index website, "The misery index was initiated by economist Arthur Okun, an adviser to President Lyndon Johnson in the 1960's. It is simply the unemployment rate added to the inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation both create economic and social costs for a country. A combination of rising inflation and more people of out of work implies a deterioration in economic performance and a rise in the misery index."

The website has quite a bit of historical detail and analysis.

Today's Status

Source of charts: WSJ

During the last ten days, the government has reported that between April and May, 1) unemployment increased from 5.0% to 5.5% and 2) inflation (CPI) increased from 3.9% to 4.2%. With these deteriorating numbers, the Misery Index is getting renewed attention.

Additional Information
For additional information on the Misery Index, check out Wikipedia.

Weekend Trivia: What Is The Misery Index?

2008-06-14T10:17:00.000-07:00

The answer will be published in the Sunday posting.

More June Quick Hits

2008-06-13T14:08:00.000-07:00

COMMODITY MARKETS

---After crude oil set an all-time high of $139 per barrel one week ago, gasoline prices immediately jumped to a national average of $4 a gallon and have continued to rise throughout the rest of this week.

---Gazprom, the Russian national oil company, predicted that crude oil prices will reach $250 per barrel next year. The Gazprom CEO said that "There is a certain influence from speculators, but this is not a determining influence.....The competition for resources is growing and the tendency is very noticeable."

Noticeable by everyone except American politicians.

---Politicians are getting very creative in their futile attempt to respond to the higher energy prices. The Minneapolis City Council is considering a law which would limit idling in a car to three minutes. My first response was that they may want to help us by cutting back on the length of time spent waiting at traffic lights.......or even better, how about synchronizing traffic lights.

---In a CNN poll, 83% of Americans consider $4 gasoline "a major problem or crisis." I can hardly imagine what they will think when they have to pay $10 per gallon prices like our friends in Europe. As they say, we haven't seen nothing yet.

---Corn prices surged past the psychologically important $7 per bushel level this week and traded at an all-time record of $7.255 on Thursday. As the WSJ reported, "Keeping the heat under food prices, the Agriculture Department trimmed its one-month-old forecast of the U.S. corn harvest by 3.2% because of a rain-delayed planting season in parts of the Midwest." No doubt this week's flooding problems will make the situation worse.

---Other agriculture products setting new record CBOT contact prices this week include Soybean Meal, Cocoa and Sugar.

ECONOMIC INDICATORS

---The Labor Department reported that the Consumer Price Index (CPI) rose by 0.6% in May, and 4.2% for the past twelve months. Among the slew of numbers reported, one interesting piece of data showed that the price of imports, excluding oil, rose by a 20-year high of 6.6%. Thanks again to the weak dollar.

---The Federal Reserve's "Beige Book" collection of regional reports indicated that the economy was "generally weak."

---RealtyTrac reported that the number of foreclosures rose by 48% in May vs one year ago, and up 7% from the prior month.

---On a more positive note, the stimulus checks are being given credit for the surprising 1% increase in retail sales in May.

AMERICA ON SALE

---Reminiscent of the purchase of Pebble Beach by the Japanese in 1980, foreigners are once again buying up American trophy properties. The Chrysler Building in NYC is being purchased by Abu Dhabi Investment Council. The Flatiron Building, also in NYC, is being purchased by an Italian investment fund.

---As forecasted two weeks ago, InBev SA of Belgium formally made a $46 billion buyout offer for Anheuser-Busch.

---Despite this hard evidence of the declining dollar, however, there is no need to worry. President Bush said this week that "A strong dollar is in our nation's interests."

Your weekly art news

2008-06-12T11:30:00.000-07:00

The subject of contemporary art has made a few appearances on Financial Clues and, big surprise, here it is once again. Art Basel, the world's largest art fair, was held in Switzerland last week and did very well despite a 20-50% drop in US attendees.

Art Basel, Buoyed by Global Buyers, Escapes U.S. Economic Woes

U2 to sell $12m Basquiat

-RL

Abandoned Property

2008-06-10T22:27:00.000-07:00

I have come across a few interesting sites on the Internet that document abandoned properties. Many of these urban explorers adhere to a strict code and do not vandalize the properties and do not disturb or steal anything inside.

The photograph above is of an abandoned resort outside of Taipei in the city of San Zhi. There are many theories as to why the property was never used and abandoned but nothing too certain. Some believe it was a construction accident that left the resort haunted while others believe it was the victim of a real estate bubble.

More photos: http://www.flickr.com/photos/yusheng/sets/72157594518737058/

This is a stunning image of the 105 story Ryugyong Hotel in North Korea. The building was started in 1987 but construction stopped in 1992 when the government ran out of money to fund the project. It was reportedly a response to a South Korean hotel built in Singapore. The government got into a game of one-upsmanship and is now left with a concrete building that sometimes gets airbrushed out of skyline photographs.

This is a server room in Sun Microsystems' abandoned Palo Alto, CA building. What started with the .com bust ultimately ended with this massive campus being left behind.

More photos: http://www.abandonedbutnotforgotten.com/ABNF/sun_microsystems.htm

What projects are being abandoned now that will be explored in the future?

-RL, guest blogger

Exporting on Ebay

2008-06-10T14:18:00.000-07:00

My firsthand experience with the weakening US dollar...

I have been buying and selling on ebay for many years; event tickets, import-only records and books, and music equipment. This includes guitars, drums, amplifiers, and recording equipment. It has been easy to buy used gear, use it for a project, and then re-sell it for basically the same price.

I recently decided to mix digitally in my recording studio so I had some gear to sell. The pieces for sale were all high end and relatively easy to ship so I made the auctions available to international bidders. Over the course of a week I received close to 100 questions from international bidders and 0 from domestic bidders (This is about 20x the normal number of queries). The page views were off the charts. I have never had this type of excitement or such a high number of bids on an auction.

I ended up selling used gear for 10-15% higher and new gear for 95% of the original purchase price. All items went to European buyers.

In a related story, I have been casually looking for a vintage Vox AC-30 for a few years and thought this might be a good time to buy. Guitar amps are big and heavy and US sellers typically do not want to ship them overseas. I immediately found a seller in North Carolina that needed to unload his AC-30 in a hurry and bought it for roughly 55% of the value of a mint condition amp (this one had a few cosmetic flaws that could be fixed for under $100).

-RL, guest writer

Weekly Chart: Mortgage Resets Just Getting Going

2008-06-09T08:19:00.000-07:00

Source
Data is from Credit Suisse; chart was published by a variety of websites, including Agora Financial's 5 Min. Forecast on 05/21/08.

Summary
Many people in Washington and on Wall Street would like to believe that the worst of the housing / financial crisis is behind us. This chart suggests that this thought is nothing but a dream.

Sub-Prime Mortgage Resets
Sub-prime mortgages have received most of the criticism thus far. Numerous postings over the past year have addressed the problem and the proposed solutions. What is surprising, however, is that the volume of such loans which are resetting is just NOW peaking. As foreclosures typically lag mortgage resets, we can expect foreclosures to continue rising.

Option Adjustable Rate Mortgage Resets
The Agora article reports that "One of the more brilliant innovations in the mortgage industry in the last four years — the option ARM — allowed homeowners to pick their payment each month for a few years. As the borrower, you decide how much to pay each month… bare minimum, interest only or — gasp — interest plus part of the principal. Great while you get to choose. But when the option expires, the bank resets your ass with a hefty fixed rate."

This wave of mortgage reset will not even start until next year and really doesn't get going until 2010, and peaking in 2011. We are still in the early innings of a long baseball game.

FYI: A Federal Reserve consumer handbook defines
payment-option ARMs as follows:

"A payment-option ARM is an adjustable-rate mortgage that allows you to choose among several payment options each month. The options typically include the following:

---a traditional payment of principal and interest, which reduces the amount you owe on your mortgage. These payments are based on a set loan term, such as a 15-, 30-, or 40-year payment schedule.

---an interest-only payment, which pays the interest but does not reduce the amount you owe on your mortgage as you make your payments.

---a minimum (or limited) payment that may be less than the amount of interest due that month and may not reduce the amount you owe on your mortgage. If you choose this option, the amount of any interest you do not pay will be added to the principal of the loan, increasing the amount you owe and your future monthly payments, and increasing the amount of interest you will pay over the life of the loan. In addition, if you pay only the minimum payment in the last few years of the loan, you may owe a larger payment at the end of the loan term, called a balloon payment."

Weekend Trivia: Friday Was The 30 Year Anniversary Of What?

2008-06-08T10:54:00.000-07:00

Answer
Friday marked the 30-year anniversary of Proposition 13 in California. This landmark proposition limited property taxes and required a two-thirds vote for state tax increases.

Background
Prior to 1978, property was accessed every year by county accessors and property taxes calculated based upon these estimates of property value. With the booming housing market and the high inflation levels of the 70s, property values skyrocketed. In some parts of the state, housing prices doubled within five years. This resulted in similar increases in property taxes. Frustration had been increasing since the 1960s and when it was not addressed by politicians, the voters took the matter into their own hands.

As The Sacramento Bee reported, "Proposition 13 rolled back home assessments to 1975-76 levels and limited property taxes to 1 percent of a property's assessed value. It placed a 2 percent ceiling on future increases."

Implications
Many people believe that this measure started a 30-year tax revolt across the country, that continues to this day. Within five years, almost half of the states in the country passed similar measures. The Reagan tax cuts followed in 1983.

Proposition 13 has always been a very polarizing topic. Few issues get more attention than taxes and this measure has always been identified with this issue. With the 30-year anniversary this week, The Sacramento Bee had no less than five editorial columns addressing the pros and cons of this measure.

To this day, California has had trouble balancing its books. The annual budgeting process is a nightmare. Proposition ends up being the scapegoat. As one editorial headline exclaims: "Proposition 13 at 30: What a mess it has made."

On the other hand, California has managed to find numerous other ways to generate revenue. It has among the highest state income tax rates in the country. Its fiscal problems are more a reflection of politicians wanting everything rather than a lack of money. If nothing else, it has made the politicians more accountable. As a contrasting editorial exclaims: "Proposition 13: 30 years of protecting taxpayers."

Today's Support
A recent poll found that by a 57% to 23% margin, California voters still approve Proposition 13. Support jumps to 64% across all homeowners and leaps to 79% for those homeowners who still own their homes 30 years later.

Given the fiscal problems of the state, this support surprised many people. But as the president of the Howard Jarvis Taxpayers Association said, "Proposition 13 has a gold-plated name brand."

June Quick Hits

2008-06-06T12:06:00.000-07:00

MARKETS
---So much for the recent correction in crude oil prices. As I write this posting, crude oil is at an all-time high at $138 after posting the single-day largest increase ever for the second consecutive day. A Morgan Stanley analyst predicted prices could reach $150 by the July 4th holiday.

---Volatility has picked up this week. The DJIA rose by 200 points yesterday and is down more than 300 points today. It is very comical to watch the TV pundits get jerked around. Their most recent explanation for a market movement is quickly discounted when the market suddenly reverses direction.

---Employment numbers are full of contradictions. Early in the week, an ADP Employer Services report said that private-sector employers added 40K jobs in May vs. a forecasted drop in employment. This was further supported by an unexpected drop in new unemployment claims. The market's euphoria was thrown out the window today when the Labor Department said that unemployment jumped from 5.0% in April to 5.5% in May. This is the largest increase in 22 years.

---It looks like Moody's will be lowering the ratings of the municipal bond insurers. This should set the stage for another round of losses in the ongoing financial crisis.

---The OECD (Organization for Economic Cooperation and Development) lowered its forecast for global growth to 1.8% in 2008 and an even lower 1.7% in 2009. These numbers are down from prior forecasts of 2.3% and 2.4%, respectively.

GLOBAL WARMING
---The Paris-based International Energy Agency reported that the world needs to spend $45 trillion to build 1400 nuclear power plants, vastly expand wind power, and invest in new clean energy technology in order to reduce greenhouse emissions by 50% by 2050. That comes out to $7500 for every man, woman and child on the planet today.

---After making statements about how this is the most important issue facing mankind, the global warming bill was tabled after only three days of debate. The issue will be saved for the new president and Congress to address next year. That should leave time for Congress to deal with more important issues today, such as the NE Patriot cheating scandal.

---The Seattle Post-Intelligencer is reporting that Seattle park officials are recommending that bonfires at city beaches be reduced this year and possibly banned altogether next year, all in an effort to fight global warming.

HEADLINE OF THE WEEK
---Financial Times, 06/06/08: "GM chief defends reliance on SUVs and pick-ups.....Is it the US manufacturers who are stupid? I don't think so."

But then again.....GM's stock price is at a 26-year low. The company announced this week that they would be closing 4 truck plants and possibly selling the Hummer brand. In my humble opinion, this comment alone makes him pretty stupid.

REAL ESTATE
---Michael Crews Development in San Diego is offering a "buy one home, get one home free" deal. By purchasing a $1.6 million home in San Pasqual Valley, the buyer will also get a 2000 square foot 2nd home worth $400K in Escondido.

---The Mortgage Bankers Association reported that Q1 new foreclosures and late payments were the highest on record, going back to 1979.

---Speaking of foreclosure, Ed McMahon is $644K behind in payments on his $4.8 million mortgage. His house has been on the market for two years, but being near Britney Spears' house appears to be working against him. I'm just hoping that my tax dollars are not used to help bail him out.

OTHER INTERESTING ITEMS
---USA Today is reporting that "Body-scanning machines that show images of people underneath their clothing are being installed in 10 of the nation's busiest airports in one of the biggest public uses of security devices that reveal intimate body parts."

Water Shortages Pose Larger Threat Than Energy And Food

2008-06-05T11:12:00.000-07:00

Summary

Not a day goes by without some new report of water shortages somewhere in the world. My hometown of Roseville declared a Stage 1 drought alert last month. Yesterday, California declared that the state is in drought. States in the Southeast are suing each other over water rights. And that is just in the United States. It is generally perceived that the water situation in this country is much better than the situation in most other parts of the world.

Two new developments in the last 24 hours highlight the worsening crisis:

World Crisis

The melting of Himalayan glaciers threatens the water supply to the world's rivers

The Telegraph.co.uk published an article today which said that "A catastrophic water shortage could prove an even bigger threat to mankind this century than soaring food prices and the relentless exhaustion of energy reserves, according to a panel of global experts at the Goldman Sachs "Top Five Risks" conference."

The Goldman Sachs report said "water was the petroleum for the next century.....Demand for water continues to escalate at unsustainable rates. At the risk of being alarmist, we see parallels with Malthusian economics. Globally, water consumption is doubling every 20 years. By 2025, it is estimated that about one third of the global population will not have access to adequate drinking water."

California Declares State In Drought

Governor Arnold Schwarzenegger signing an executive order stating that the state is officially in a drought. This proclamation will allow the Department of Water Resources to take immediate action to address the situation.

The state drought underscores the need for improved water infrastructure. Lawmakers are currently negotiating a $10 billion water infrastructure bond. Timing couldn't be worse as it coincides with the financial crisis the state faces.

It's OK In My Backyard

2008-06-04T11:20:00.000-07:00

Historic Vote

"Hyperion Resources supporter Joyce Brotscheller, right, hugs Hyperion employee Javon Martin after hearing the election results that favored the refinery project Tuesday evening. The Brotscheller home was the scene of a victory party. (Sioux City Journal photo by Jerry Mennenga)"

Possible First New Refinery In 32 Years

The biggest news in yesterday's voting was Obama officially winning the Democrat nomination for president. The next biggest election result may have come from Union County, South Dakota.

By a convincing 58% to 42% margin, the county voted to build the nation's first new oil refinery in the country in 32 years.

The Sioux City Journal reports that "At stake was billions of dollars in capital investment and thousands of high-paying jobs. From the beginning, Hyperion executives said they would abandon its Union County site, just north of Elk Point, if a majority of voters failed to give their blessing to the rezoning.....

Hyperion touted the so-called "green" technology in its proposed energy center, which it claims would be the world's cleanest. The refinery would process 400,000 barrels of tar sands crude from Alberta into low-sulfur gasoline, diesel and jet fuel."

What Has Happened To Democracy In This Country?

"While conceding defeat, opponents vowed to keep fighting the controversial project on every imaginable front, pressing on with a lawsuit it filed against the county over the zoning procedures and opposing Hyperion as it applies for a bevy of state and federal permits.

'We have strategies in place to slow or delay all the permit processes,' Ed Cable, chairman of the anti-Hyperion group Save Union County, said after the vote."

Elections don't seem to matter any more. Results get overturned in court. This is a very disturbing trend in this country.

Hoping The Opposition Has To Pay $10 A Gallon For Gas

They deserve it. Unfortunately, they will probably try to blame the oil executives and drag them into court.

Mixed Messages And Contradictions

2008-06-03T11:00:00.000-07:00

Summary
To an outside observer listening to US politicians, it has to be comical. To the oil exporting nations in the Middle East, it's got to be confusing.

The US is open for business.....Please invest your SWF dollars here.....But make sure that you drop your oil prices before we decide to sue you.

Yep, that's the kind of place I would like to invest my billions.

Suing OPEC
The US House of Representatives passed a bill that would create a new antitrust task force within the Department of Justice which among other things, would allow the DOJ to sue OPEC for violating antitrust laws. This bill, HR 6074, was passed by an overwhelming margin of 324 to 84.

Never mind the fact that these same politicians are the PRIMARY reason, in my humble opinion, for the high gasoline prices. They have no energy policy and their management of the dollar explains a majority of the price increase. Too bad Joe Six-pack has no clue about this.

It would really be comical if the US actually tried to bring an OPEC member to court. Would they show up? Would they even acknowledge the request? Or would they be off in China or India or some other emerging country selling their scarce crude oil? At that point, $4 gasoline would probably disappear forever.

Goodwill Tour
At the same time that we are bashing our oil exporting friends, US Treasury Secretary Henry Paulson is the Middle East on his "goodwill tour." YahooFinance is reporting that the four-day tour to Saudi Arabia, Qatar and the United Arab Emirates is designed "to discuss currency and economic issues with regional leaders and reassure them that the United States remains receptive to their investments."

Among the things that Paulson said:

The US is "open for business."

"As we seek to open new markets abroad, America will keep our markets open at home to investment from private firms and from sovereign wealth funds. We reject measures that would isolate us from the world economy."

"High oil prices are the result of supply and demand factors that are likely to persist for some time. Supplies have been affected by low capacity expansion and declining yields, while demand has surged largely due to growth in emerging markets. Speculation and the depreciation of the dollar are likely only small factors behind oil price increases."

"I am committed to promoting policies that enhance the underlying competitiveness of the U.S. economy and ensure that the dollar remains the world's reserve currency."

"The U.S. dollar has been the world's reserve currency since World War Two and there is a good reason for that. The United States has the largest, most open economy in the world, and our capital markets are the deepest and most liquid."

Weekly Chart: Food Prices Hitting Developing Nations The Hardest

2008-06-02T13:29:00.000-07:00

For most of us, it is impossible to imagine what it must be like to spend half of our money on food. The problem becomes that much more worse when reported inflation is increasing by 10% and most of that is food-driven.

The world is finally beginning to notice and take action.

This past April, a World Bank meeting of 150 countries endorsed a new deal for global food policy.

Tomorrow, the United Nations' Food and Agriculture Organization is sponsoring a food summit in Rome. The WSJ reports that the "World Bank announced a $1.2 billion fund to help poor countries cope with escalating prices.....[in an ] attempt to shape the summit so it produces action, not just speeches."

This will be followed up by meetings of the Group of Eight industrialized nations in June and the Group of Seven nations in July.

Robert Zoellick, president of the World Bank Group, discusses "A 10-point plan for the food crisis" in a recent Financial Times editorial.

Weekend Trivia: Which US Airline Has The Largest Market Capitalization?

2008-06-01T06:06:00.000-07:00

Airline
A---Southwest Airlines
B---American Airlines
C---Northwest Airlines
D---Delta Air Lines
E---Continental Airlines
F---United Airlines
G---JetBlue Airways
H---SkyWest
I---Alaska Air Group
J---Allegiant Travel
K---Republic Airways
L---US Airways
M---AirTran Holdings
N---Hawaiian Holdings

Regional Airline Is World King

Southwest Airlines is a cute, no frills regional airline based out of Dallas. It's ticker symbol of "LUV" pretty much summarizes what most of its customers think about it. Yet, many competitors don't take it seriously. Nonetheless, Southwest Airlines' market capitalization of $9.2 billion represents 43% of the total capitalization of the entire US-based airline industry. To put this into perspective, Southwest is larger than the total of the next six airlines COMBINED.

Looking at the larger Dow Jones US Airlines Index which consists of 38 publicly traded airlines from around the world, only Lufthansa has a larger market cap than Southwest Airlines.

The 04/09/08 posting summarized a variety of airline problems which included: bankruptcies, failed mergers, safety issues, skyrocketing fuel costs and product delays. In the 50 days since that posting, the bad news has accelerated and there has been panic across the industry. Flights are being canceled and as a new commercial sarcastically shows, customers are being charged for everything but the kitchen sink.

Southwest Airlines has somehow managed to avoid all of these problems. And as a recent WSJ headline said, "Southwest Rides Fuel Hedges Past Rivals." With Jet fuel rising to $170 per barrel, "Southwest has locked in more than 70% of its jet-fuel requirements this year at a price equivalent to $51 a barrel for crude oil. By contrast, other big carriers have hedged 30% or less of their fuel needs this year. Those carriers generally expect to pay the equivalent of $85 to $100 per barrel of oil under their hedging programs." Southwest has done such a good job with its hedging operation, a case study has been developed and is taught in business schools.

Final May Quick Hits

2008-05-30T13:04:00.000-07:00

MARKETS
---Equity markets are up modestly this week as most commodities appear to be taking a breather from their recent price surges. Crude oil, precious metals and agriculture prices have all come down off their recent highs.

---After eight weeks of record prices, crude oil actually fell about $7 this week. But gasoline prices at the pump are still catching up. They set an all-time record today for the 23rd consecutive day.

---Higher prices are finally impacting driving habits. The Federal Highway Administration reported that US drivers drove 11 billion less miles in March vs the previous March. That was the largest year-to-year drop since data has been collected beginning in 1942.

---Not many things are more American that a Budweiser beer. This may be changing as Belgium-based InBev has made an unsolicited $46 billion offer to buy Anheuser-Busch.

INDICATORS
---Q1 GDP growth was revised upward from 0.6% to 0.9% on an annual basis. Markets reacted positively as this was a sign that a recession [defined as two quarters of negative GDP] may be avoided.

---The Reuters / University of Michigan Surveys of Consumers confidence index for May fell to the lowest level since June of 1980.

---The Conference Board reported on Tuesday that the Consumer Confidence index for May fell to the lowest level in 16 years. Soaring gasoline prices and weakening prospects for job growth drove the decline.

---Standard & Poor's/Case-Shiller reported that national home prices fell 14.1 percent in Q1 compared with a year earlier. This is the steepest decline since inception of the index in 1988.

---AP reports that "Sales of new homes rose in April for the first time in six months although the unexpected increase still left activity near the lowest level in 17 years.....The Commerce [Department] report showed that the median price of a new home sold in April dropped to $246,100 in April, down 4.2 percent from April 2007."

OTHER INTERESTING ITEMS
---Hollywood actors should stick with what they do best. They tend to get in trouble when they open their mouths. Christian Dior has pulled its advertisements that feature Sharon Stone after the actress commented on how the Chinese earthquake was tied to the country's bad karma over their treatment of Tibet.

---Exactly 100 years ago this past Monday, Wired, reports that "A British company strikes oil in Persia (now Iran). It's the first big petroleum find in the Middle East, and it sets off a wave of exploration, extraction and exploitation that will change the region's -- and the world's -- history."

---Indonesia announced that they were withdrawing from OPEC.

---Wake Forest and Smith College are among the first "selective" colleges to jump on the bandwagon to do away with SAT and ACT scores as tools for admitting students.

Quotes Speak For Themselves

2008-05-29T12:40:00.000-07:00

Investment Guru Warren Buffet
---"I think the tidal wave that hit various financial institutions since last August has largely been recognized and felt. In terms of the effect on the economy in the United States, we don't know, but I think it will be longer and deeper than many people do. There could well be a lot to come."

---The United States was "already in recession, perhaps not in the sense that economists would define it [with two consecutive quarters of negative growth], but the people are already feeling the effects. It will be deeper and last longer than many think."

---"If the current account deficit continues, the dollar will be worthless five-10 years from now."

Former Federal Reserve Chairman Alan Greenspan
---"We're in a recession."

---"I still believe there is a greater than 50 per cent probability of recession...that probability has receded a little and I think the probability of a severe recession has come down markedly.....No one knows how this tug of war will end - specifically, whether the financial crisis will end before it drags down the real economy."

Current Federal Reserve Chairman Ben Bernanke
---The "financial distress that we are seeing now is among the most severe episodes of the postwar era."

Chinese Premier Wen Jiabo
"I myself watch very closely the development in the world economy and the U.S. economy, and I'm deeply worried."

Merrill Lynch CEO John Thain
---"I hope those who say we are at the end [of the financial crisis] are correct - I am somewhat more skeptical."

JP Morgan Analysts
"We had the NASDAQ, we had LTCM, we had the various forms of emerging-market crises in the '90s, we had the real estate crisis of 20 years ago: In most of these the direct impact on the behavior of the parties involved lasted more than 10 years. It looks like it takes a generation for the memory to fade and for the same mistakes to be made again."

Sallie Mae CEO Albert Lord
---"Today's environment is the most difficult we have seen in our 35-year history of student lending.....Under current conditions.....loans can only be made at an economic loss."

International Energy Agency Economist Fatih Birol
---"We should leave oil before oil leaves us. That should be our motto.....Looking at this long term, it becomes clear that nothing changes whether oil runs out in 2030 or 2040 or 2050. One day, it will definitely be finished. We should prepare for that day with research and development, how we can replace oil, what kinds of living standards we will be able to maintain, what alternatives we can develop."

Education Bureaucracy

2008-05-28T10:34:00.000-07:00

As my 04/27/08 posting discussed on the 25 year anniversary of "A Nation At Risk," the country is now spending almost twice as much money now (adjusted for inflation) as it was when the report was published.....and the quality of education is probably worse.

In my opinion, teachers are not to blame. In fact, I don't think they get enough credit or support for the difficult jobs that they provide.

I cannot say this about the administrative components within the system.

In yesterday's posting, I recommended Ron Paul's new book "The Revolution: A Manifesto". Throughout the book, he provided example after example of how bloated government programs are wasting billions of dollars. One such example is the education system:

"To get an appreciation for the difference between public and private administration in terms of bureaucracy and cost-effectiveness, consider this. The Brookings Institution's John Chubb once investigated the number of bureaucrats working in the central administration offices of the New York City public schools. Six telephone calls finally yielded someone who knew the answer, but that person was not allowed to disclose it. Another six calls later, Chubb had at last pinned down someone who knew the answer and could tell him what it was: there were 6,000 bureaucrats working in the central office.

Then Chubb called the Archdiocese of New York, to find out the figure there. (The city's Catholic schools educated one-fifth as many students as did the government-run schools.) Chubb's first telephone call was taken by someone who did not know the answer. Here we go again he thought. But after a moment she said. "Wait a minute; let me count." Her answer: 26."

"Why would we expect a system based on legal plunder, as ours is, to be a net benefit to the poor or middle class, in whose name so many government schemes are enacted? Every one of the special benefits, on behalf of which hundreds of millions of dollars are expended on lobbyists every year, makes goods more more expensive, companies less efficient and competitive and the economy more sluggish. Given that the politically influential and well connected - neither of which includes the middle class or the poor - are the ones who tend to win privileges and loot from government, I do not understand why we take for granted that the net result of all this looting is good for those who are lower on the economic ladder."

The Revolution: A Manifesto

2008-05-27T08:02:00.000-07:00

Book Recommendation

Continuing on the Memorial Day theme from yesterday's posting, I'm recommending the following book: "The Revolution: A Manifesto" written by Ron Paul.

I realize that Ron Paul is currently running for President and many people will discount this book as nothing but a written campaign speech.

Please don't do that.

It doesn't matter if you are Republican or a Democrat or a Libertarian or a member of any other party. The book asks some very basic questions about what this country is all about. It discusses freedom and liberty and very much relates to what we celebrated yesterday. It discusses how the founding fathers of our country warned against many of the actions that our government is pursuing today.

The book came out last month and immediately jumped to the #1 nonfiction book on the New York Times Best Sellers list, a top 10 book for Amazon, and the #1 political book for Amazon. Despite the topic, it is an extremely easy and fun read.

The Product Description on Amazon

"This Much Is True: You Have Been Lied To.

The government is expanding. Taxes are increasing. More senseless wars are being planned. Inflation is ballooning. Our basic freedoms are disappearing.

The Founding Fathers didn't want any of this. In fact, they said so quite clearly in the Constitution of the United States of America. Unfortunately, that beautiful, ingenious, and revolutionary document is being ignored more and more in Washington. If we are to enjoy peace, freedom, and prosperity once again, we absolutely must return to the principles upon which America was founded. But finally, there is hope . . .

In THE REVOLUTION,Texas congressman and presidential candidate Ron Paul has exposed the core truths behind everything threatening America, from the real reasons behind the collapse of the dollar and the looming financial crisis, to terrorism and the loss of our precious civil liberties. In this book, Ron Paul provides answers to questions that few even dare to ask.

Despite a media blackout, this septuagenarian physician-turned-congressman sparked a movement that has attracted a legion of young, dedicated, enthusiastic supporters . . . a phenomenon that has amazed veteran political observers and made more than one political rival envious. Candidates across America are already running as "Ron Paul Republicans."

"Dr. Paul cured my apathy," says a popular campaign sign. THE REVOLUTION may cure yours as well."

Contemplating Memorial Day

2008-05-26T09:45:00.000-07:00

As we enjoy our BBQs across the country today, we should stop for a moment to reflect on what Memorial Day is all about.

In today's A-Letter from The Sovereign Society, Bob Bauman writes that "Memorial Day is a day when Americans should pause and focus on the ultimate price so many have paid over the centuries to win and preserve our freedom.

To observe that so many have died in the American cause.....only accentuates the meaning and importance of the cause for which they gave their 'last full measure of devotion' as Lincoln said.

They died before their time, with promises unrealized, in the service of their country. Their very real sacrifice for our liberties makes it all the more important that we guard against diminution of those liberties in our own time — whether the threat is from abroad, or from within our own government."

It is this last point that many people in our country are struggling with today. Our freedoms at home continue to be taken away. The recent 9/11 attacks have resulted in less liberty. At the same time, our country has tried to force our "freedoms" on others throughout the world. Our imperialism has resulted in our troops being stationed in 75% of the countries in the world.

The Global Peace Index 2008 was just published and as the Financial Times headline claimed, "US and Russia ranked among least peaceful nations." In fact, the US ranked 97th out of 140 countries.

This index is published by Vision of Humanity. Per its website, "Vision of Humanity groups together a number of interrelated initiatives focused on global peace. It brings a strategic approach to raising the world’s attention and awareness around the importance of peacefulness to humanity’s survival in the 21st century."

Continuing with Bob Bauman "Each generation has taken up and continued the struggle to protect liberty......But ask yourself this, how many Americans today would be willing to die for the freedoms and liberties we supposedly enjoy — as more than a million before us have done? And do we still enjoy the liberties for which they fought and died? Or have freedoms been slowly taken from us, devaluing the sacrifice of their deaths? Did they die in vain? In his eloquent Gettysburg Address, President Abraham Lincoln suggested that what we do as a people would determine the answer to that question.

Today let's remember the real meaning of Memorial Day and never forget those who made the ultimate sacrifice for our liberties."

Weekend Trivia: What Is The Significance Of This Painting?

2008-05-25T09:05:00.000-07:00

This three-paneled art piece was painted by Francis Bacon and is titled "Triptych, 1976". According to Artinfo.com, "The mythology-infused and intellectually complex composition.....replays some of Bacon’s favorite angst-ridden themes and crackles with his bravura painting technique."

The painting made history last week when it was auctioned off for $86.3 million at the Sotheby's Contemporary Art Sale. An anonymous phone-bidder from Europe was the winner.

This sales price is the highest ever recognized at auction for a contemporary piece of art, and is the fourth most expensive piece of artwork ever recognized at auction in any category.

For the Sotheby's Contemporary Sale, Artinfo.com reports that "The sale’s $362,037,000 total beat its $356,650,000 high estimate and exceeded the firm’s previous high-water mark for a contemporary sale, set at $315.9 million in November. Christie’s still holds the record for a contemporary sale, achieved last May when it made $384,654,400.

Eight works made more than $10 million each, 14 exceeded $5 million, and 55 made over a million. For number crunchers, that works out to an average lot price of $4,959,410. Eighteen artist records were set."

Obviously, the art market has managed to avoid the turmoil of the current financial crisis that is impacting many other markets. Or maybe it's the cheap US dollar. Because the European winner is paying in Euros, maybe it's a bargain.

And More May Quick Hits

2008-05-23T09:13:00.000-07:00

MARKETS
---For the eighth consecutive week, crude oil traded at record highs and this translated into record national gasoline prices at the pump.

With the tremendous amount of press this is getting, my contrarian prediction is that crude oil is ready for a near-term correction, possibly a sharp correction downward. But this may not result in lower gasoline prices as they have actually lagged on the upside, relative to crude oil.

---The WSJ is reporting that "In a sign of the growing price pressures throughout the developing world, Ukraine moved to strengthen its currency Wednesday by revising its longstanding peg to the dollar." Yet another strike against the US dollar.

FARM BILL PASSAGE
---Congress has overridden President Bush's veto and the farm bill is now history. Last minute changes make this bill even more ridiculous.

---The WSJ reports that "The bill purports to limit subsidies to those earning a mere $750,000, but loopholes and spousal qualifications make it closer to $2.5 million.....

Yet it turns out this farm extravaganza may burst federal budget targets even more than we thought a week ago. That's because the new price supports, the guaranteed floor payments farmers receive for their crops - have been raised to match this year's record prices.....

Sugar producers..... receiving the difference between the world price of sugar, which is now $12 per pound, and the guaranteed price of about $21 per pound. That's a roughly 75% subsidy for already wealthy cane growers and a nice payoff for the $3 million they contribute to House candidates each year."

REAL ESTATE MARKET
---In a lesser known indicator (tracking home prices for homes backed by Fannie Mae and Freddie Mac), the Office of Federal Housing Enterprise Oversight reported that Q1 home prices fell 3.1% vs a year ago, and 1.7% vs the prior quarter. This is the largest drop in the 17-year history that the data has been tracked.

---Who can you believe? It was initially reported by Capitol Weekly that California Congresswoman Laura Richardson "walked away from the mortgage on her $535,000 Sacramento home, letting the house slip into foreclosure and disrepair less than two years after she bought it with no money down." Despite county records supporting this, the LA Times reports that she claims that the house "is not in foreclosure and has not been seized by the bank. I have worked with my lender to complete a loan modification and have renegotiated the terms of the agreement."

---Concerned with foreclosure properties being ignored by their owners, the Canton, Ohio city council is proposing jail time for tall grass. CantonRep.com reported that Law Director Martuccio "acknowledged it's more difficult to pursue a corporation or bank criminally. However, he said 'theoretically' it can be done by following a paper trail to an individual responsible for that corporation."

QUOTE OF THE WEEK
---Sacramento Bee, 05/18/08: "Realtors not happy with tone of columns." While most realtors are probably very honest and hard working people, it's tough to feel sorry for them. There is plenty of blame to go around, but realtors did play a large role in the housing crisis.

OTHER INTERESTING ITEMS
---A federal appeals court ruled on Tuesday that the U.S. discriminates against blind people because they are unable to differentiate between the various denominations. This ruling may force the Treasury Department to redesign their money, possibly with raised markings or differing sizes. If you ask me, the paper is becoming more and more worthless. Maybe they should take this opportunity to go back to "real" money by using gold and silver coins.

---NBC11.com in the Bay Area is reporting "First In Nation 'Polution Fee' Coming To SF. The Bay Area Quality Management District's board of directors on Wednesday approved new rules to charge businesses a fee for the pollution they emit."

---American Airlines may be struggling with skyrocketing fuel prices, but its reaction to the problem will likely make matters worse. In an industry where customer service is horrible, they are canceling flights, laying off workers and will start charging $15 for the first checked bag. In my humble opinion, customers would understand and accept price increases because of fuel costs, but take away customer service and they will be mad. Is it any surprise that the stock went down 25% in just one day of trading this week? Meanwhile, I pity those poor flight attendants who already had an impossible job to get all those carry-on bags in the overhead bins.

---Reuters Photo

YahooNews reports that "The Wall Street Burger Shoppe just raised its price from $150 to assure its designation as the costliest burger in the city.....The burger seeks to justify its price with a Kobe beef patty, lots of black truffles, seared foie gras, aged Gruyere cheese, wild mushrooms and flecks of gold leaf on a brioche bun."

Zimbabwe Provides Real Experiment In Worthless Paper Currencies

2008-05-22T08:20:00.000-07:00

Zimbabwe Inflation

Do a Google search on "Zimbabwe inflation" and the first page of 10 results has answers which range from 24,000 percent to 1 million percent. I'm not sure anybody really knows what the correct answer is. I'm not sure it even matters at this point. By the time you figure it out, it will have changed.

This Week's Monopoly Money

With hyperinflation, an ongoing challenge is printing paper money to keep up with the changing "value" of the money.

The most recent 500,000,000 bearer cheque was introduced this week. How much is this worth? Today, it can be converted into about $2 US.

Photographs courtesy of Ebay seller Youre-in-good-hands

Africafiles.org is reporting this week that "The Reserve Bank of Zimbabwe, grappling with record-breaking inflation, has introduced a new Z$500 million bank note barely two weeks after issuing Z$250 million and Z$100 million denominations. The beleagured central bank has also introduced agro cheques, which come into circulation on Tuesday and expire in December. The agro cheques are in Z$5 billion, Z$25 billion and Z$50 billion denominations.....

This is the third set of high denomination notes to be issued this year, the last on May 6 when the Z$250 million and Z$100 were put in circulation. On April 2, the RBZ launched a Z$50 million note, itself following on the introduction of a Z$10 million note in January. The southern African nation, currently gripped by a post-election crisis, has been ravaged by hyperinflation which reached 165,000 percent in February. It decided recently to float its currency to eliminate speculation on the black market. The country's chronic economic crisis has condemned millions to grinding poverty with at least 80 percent of the population living below the poverty threshold amid mass shortages of basic goods in shops."

Last Year's Monopoly Money

I first addressed the Zimbabwe inflation problem in the 07/06/07 posting. At that time, I showed the following bearer cheque:

How much was this 100,000 bearer cheque worth last July? Coincidently, it could be converted into $2 US.

Yes, that's right. Ten months ago, it took a 100,000 bearer cheque to purchase a cup of coffee. Today, it would take a 500,000,000 bearer cheque to purchase that same cup of coffee.

More Oil Theatrics In Washington

2008-05-21T11:10:00.000-07:00

Summary
Despite numerous efforts by our politicians to control oil prices, the market continues to set records day after day. Our government hasn't figured out yet what is driving this or the fact that the market is bigger than it is.

1970s vs Today
Many people like to compare the price increases of the 1970s with the price increases of today. It is all about supply and demand. But in the 1970s, OPEC controlled the supply side of the equation and prices jumped. Today, emerging market demand is causing prices to skyrocket. There is a huge difference between these two scenarios. The implications and solutions are quite different.

New Price Predictions
---Goldman Sachs predicted that crude oil would reach $140 by July, and average $148 next year.
---Oilman T. Boone Pickens expects crude oil to reach $150 by the end of the year.
---OPEC's president warned last month that crude oil prices could hit $200 and there would be little the cartel could do about it.

President Bush Begs For More Oil
For the second time this year, President Bush traveled to Saudi Arabia to plead with them to increase production levels. "You've got to be concerned about the effects of high oil prices on some of the biggest customers in the world."

But as Exxon-Mobil CEO Rex Tillerson said last week [per WSJ] , "it's 'astonishing' and 'terribly upside down' that a U.S. president would lobby a foreign government to boost production even as much of the United States remains off limits to domestic drilling."

The response from Saudi Arabia was filled with many political implications. King Abdullah initially ignored the request and then after President Bush had already left, he responded by saying that they had already agreed to increase production by 300,000 bpd the previous week. Although they are now pumping oil at the highest level in two years, the increase represents 0.3% of global daily demand.

The increase is also deepening the rift among OPEC members. Other members distanced themselves from Saudi Arabia, saying that supply was already higher than demand.

Begging Followed Up By Preaching
In a speech this past weekend, President Bush told leaders in the Middle East that they are running out of oil and that they needed to reform and diversify their economies. "Over time, as the world becomes less dependent on oil, nations in the Middle East will have to build more diverse and more dynamic economies." He used this speech to highlight the need for "extending the reach of freedom."

While Bush's message is accurate, it was not well-received. Talk about horrible timing. Beg one moment, and then preach the next moment. He has zero credibility and the region doesn't like to be preached at by someone so unpopular.

Congressional Games With No Punch
Reuters reported that "The House of representatives overwhelmingly approved legislation on Tuesday allowing the Justice department to sue OPEC members for limiting oil supplies and working together to set crude prices.....The legislation also creates a Justice Department task force to aggressively investigate gasoline price gouging and energy market manipulation.....The bill also requires the Government Accountability Office to carryout a study on the effects of prior oil company mergers on energy prices"

Last week, Senate Democrats introduced legislation that would stop a scheduled arms sale to Saudi Arabia unless the latter increased production by one million bpd.

Congress is considering tightening of oil trading regulations in an effort to decrease "speculation" in the marketplace.

Today, executives from the five largest oil companies testified before a Senate Judiciary Committee. This provided very entertaining TV. When Committee Chairman Leahy said that there was an unexplained disconnect with prices, Shell Oil Chairman Hofmeister countered by saying that "the fundamental laws of supply and demand are at work." The oil companies are also at the mercy of OPEC. Just today, for instance, Nigeria confronted Shell and several other oil companies, demanding billions of dollars related to offshore drilling.

And then there is Hillary on the campaign trail. She suggested that she would end the OPEC cartel. She would have about as much success as I would.

Meanwhile, Inflation Reports Show Gasoline Price DROPS
Only our government could come up with this one. In the month of April, the Labor Department reported that gasoline prices fell by 4.6% at the wholesale level and 2% at the consumer level, both adjusted for normal seasonality.

And I have a bridge to sell the American public.

BRIC Becoming A Reality

2008-05-20T10:13:00.000-07:00

Photo courtesy of Wikipedia

Definition

As defined by Wikipedia, "BRIC or BRICs are terms used in economics to refer to the combination of Brazil, Russia, India, and China. General thinking is that the term was first prominently used in a thesis of the Goldman Sachs investment bank.....The main point of this 2003 paper was to argue that the economies of the BRICs are rapidly developing and by the year 2050 will eclipse most of the current richest countries of the world. It's important to note that the Goldman Sachs thesis isn't that these countries are a political alliance, like the European Union, or a formal trading association, but they have the potential to form a powerful economic bloc."

Now More Than Just A Term

Well after this weekend, Wikipedia needs to update their definition.

As Frank Holmes of U.S. Global Investors wrote: "There was a small and little-publicized gathering in the heart of Russia today that years from now may be viewed as a watershed event in the ever-quickening shift of economic and political power from West to East.

The gathering in Yekaterinburg was the first for the foreign ministers of the four BRIC countries: Brazil, Russia, India and China. Among the key topics on their agenda are trade, development and other economic issues.

The BRICs, of course, are the world’s four largest emerging-market economies. On a purchasing-power parity basis, the combined GDP of these four countries in 2007 ($14 trillion, according to the IMF) made them the same size as the United States and just a little smaller than the European Union ($14.7 trillion).

It’s important to note that GDPs in the BRIC countries are growing at rates far exceeding those of North America and Europe. With policies for peace and prosperity that promote political stability and economic expansion, their clout only stands to grow in the future."

Almost half of the world's population is represented by BRIC.

Final Comments

I think that this is a great development. It is another indication that the rest of the world is catching up to the United States. In fact, I believe that many emerging-market countries will have passed us by before we even know what happened.

The world is becoming smaller and smaller every day. It does not start and stop at our shores as much of our naive country thinks. The fact that this meeting was not mentioned in any US-based media outlet that I could find, speaks volumes to our ignorance.

Weekly Chart: How Safe Is Your Pension?

2008-05-19T12:22:00.001-07:00

The problems with the unfunded liabilities associated with Social Security and Medicare have been well documented. Despite the $50 TRILLION price tag, most people tend to ignore the problem. Worst case, the government can just turn on their printing presses. That is what they do for all of their other massive spending programs.

But the situation is far different and much more dire when it comes to the public workers at the city, county and state level. These government agencies do not have the ability to print money. Their options are much more limited. In other words, if you are a taxpayer, they will be coming after you.

The washingtonpost.com published an excellent article regarding this growing crisis: "Growing Deficits Threaten Pensions; Accounting Tactics Conceal a Crisis For Public Workers."

It is pretty easy to notice a trend with this chart.

Unfortunately, the chart will probably rise much more sharply in the future. This chart reflects the assessment by local governments which have many reasons to be overly optimistic. The credit crisis of 2007 / 08 and the current recession are not yet reflected. Longer term, demographic trends will make the problems worse.

Contributing to the problem is the fact that local governments have broad leeway in their accounting practices. There is no federal oversight and many of their practices are illegal in the private sector.

"Such 'accounting nonsense' has been 'pushing the envelope -- or worse -- in its attempt to report the highest number possible' for their investment returns, wrote billionaire investor Warren E. Buffett in a recent letter analyzing pensions for shareholders of his company. Taxpayers ultimately will pay the price when these forecasts prove wrong."

The article presents many examples of local governments with pension problems and the games that they play:

"In Montgomery County, which has promised to pay $3 billion in health-care benefits to retirees, government officials accepted the advice of consultants who urged the county to nearly quadruple the amount it sets aside to cover this commitment. But the county council voted to delay this full funding for five years. Now the council, which claims wide legal latitude, is considering whether to postpone it for another three years.

'The biggest issue is the lack of standards in regards to government pensions,' said Timothy L. Firestine, Chief Administrative Officer in Montgomery County. 'You can make up your assumptions as you go.'"

At the end of the day, local governments will have to make tough tradeoffs between normal spending on day-to-day responsibilities and the pensions of former employees. This "may be shaping up to be a massive breach of faith with a generation of public employees."

Weekend Trivia: What Is The Great American Streetcar Scandal?

2008-05-18T09:59:00.000-07:00

Summary
This was a conspiracy led by General Motors to eliminate streetcars and trolleys across the country, in order to create a new automotive market.

More Detail
Beginning in the 1920s, General Motors began a "covert campaign to undermine the popular rail-based public transit systems that were ubiquitous in and around the country’s bustling urban areas. At the time, only one in 10 Americans owned cars and most people traveled by trolley and streetcar [about.com]." Virtually every city with at least 10,000 people had a streetcar.

With help from Standard Oil, Firestone Tire, Mack Truck and Phillips Petroleum, General Motors created and funded a holding company named National City Lines. The company "acquired most streetcar systems throughout the United States, dismantled them, and replaced them with buses in the mid 20th century. It is alleged by historians that NCL's companies had an ulterior motive to forcibly gain mass use of the automobile among the U.S. population by buying up easy-to-use mass light rail transportation countrywide and dismantling it, leaving populations with little choice but to ride their buses [Wikipedia]."

By 1946, NCL controlled streetcar operations in 80 American cities. “Despite public opinion polls that showed 88 percent of the public favoring expansion of the rail lines after World War II, NCL systematically closed its streetcars down until, by 1955, only a few remained,” writes author Jim Motavalli in his 2001 book, Forward Drive.

Elimination of the public trolley systems ultimately led to creation of the national interstate highway system. "GM was later instrumental in the creation of the National Highway Users Conference, which became the most powerful lobby in Washington. Highway lobbyists worked directly with lawmakers to craft highway-friendly legislation, and GM’s promotional films were showcasing America’s burgeoning interstate highway system as the realization of the so-called 'American dream of freedom on wheels.' When GM President Charles Wilson became Secretary of Defense in 1953, he worked with Congress to craft the $25 billion Federal-Aid Highway Act of 1956. Referred to at the time as the “greatest public works project in the history of the world,” the federally funded race to build roads from coast-to-coast was on [about.com]."

Implications For Today
During much of the past century, the automotive industry in our country represented what was great about our country. Its success was what the rest of the world strived for. Cheap oil and mass produced cars allowed the country to become much smaller. It gave rise to suburbia, allowing people to work in the cities and drive home to their quiet homes in the suburbs.

But things began to change in the 1970s. OPEC began flexing their muscles and Japan began making quality automobiles. Today, gasoline prices are rising sharply, the US automotive companies are struggling and our roads are falling apart. More and more people are questioning the suburban model of the US; the urban models that exist in Europe and elsewhere make a lot of sense.

As an example of how difficult it has been for the US automotive companies, General Motor's stock price today is only 50% of what it was forty years ago. Many analysts believe that the company will ultimately end up in bankruptcy.

As "ngl east bay power" commented to my Saturday question, "Great Question! A great American step in the wrong direction long term.....Why don't they position themselves now as leaders of the proliferation of mass transportation via rails and turn back history??!!"

Credits and Additional Reading
Much of this answer was provided by About.com and Wikipedia. Check out those sites for additional information.

And More May Quick Hits

2008-05-16T09:56:00.000-07:00

ENERGY MARKETS
---For the seventh consecutive week, crude oil traded at record highs and this translated into record national gasoline prices at the pump. This is despite the fact that the government tried to convince a gullible public that April gasoline prices fell 2% after adjusting for seasonality.

CONSUMER CONFIDENCE
---The Reuters / University of Michigan consumer confidence survey fell to its lowest level in 28 years. "Record numbers of consumers viewed the economy in recession and saw little hope of recovery anytime soon."

REAL ESTATE
---The National Association of Realtors reported that the median price for single-family homes fell 7.7% in Q1, the largest year-over-year decline since this indicator began in 1982. There were price declines in 100 of 140 metropolitan areas in the country, with Sacramento leading the way with a drop of 29.2%.

---RealtyTrac reported that April foreclosures jumped by 65% compared to a year ago. Making matters worse, there are some interesting reports coming out of local bureaucratic offices. In some areas, lenders are asking the local office to slow down processing such that the market can absorb the higher inventory of house. In other areas, processing is being backed up on its own due to the sheer volume of notices.

---The Commerce Department reported that construction of new homes posted its largest increase in more than two years in April. The 36% increase in apartment construction more than offset the 1.7% drop in single-family homes.

---The PalmBeachPost.com is reporting that "An oceanfront Palm Beach mansion Donald Trump owns is under contract for sale to an unnamed foreign buyer for $100 million.....But as proof that even the super-rich are not completely immune to the whims of the market, Trump did have to come down from his original asking price of $125 million." Don't feel too sorry, however, as he only paid $42 million in 2004.

HEADLINE OF THE WEEK
---YahooNews on 05/15/08: "Bernanke: Banks must get better at forecasting risk." No kidding.

OTHER INTERESTING ITEMS
---ASIMO (Advanced Step in Innovative Mobility), the robot designed by Honda Motor Co., conducted the Detroit Symphony in a performance of "The Impossible Dream" from "Man of La Mancha."

---Some things refuse to go away. Spygate made headlines in February (see 02/06/08 posting when Senator Spencer of Pennsylvania threatened to initiate hearings about the New England Patriots illegal videotaping activities. After further investigations, the league found no further wrongdoings. The Boston Herald was satisfied and their headline read "Sorry, Pats." Well, Congress is still not convinced and Senator Spencer issued new threats to hold hearings similar to the one that produced the Mitchell Report on performance-enhancing drugs in baseball. With priorities like this, the next item should be no surprise.

---UPI is reporting that politician approval ratings are near all-time lows. President Bush is at 29% and the US Congress is at 18%. This may explain help explain how a nineteen year-old freshman at University Of Oklahoma was just elected mayor of Muskogee, a city of 38,000 people in the northeastern part of Oklahoma. That is one way to get rid of career politicians.

---The Hollywood Reporter is saying that "The network [Fox] is set to announce 'Secret Millionaire," a new series from RDF USA in which wealthy benefactors go undercover in impoverished neighborhoods. For about 10 days, a multimillionare meets financially destitute locals and experiences what it's like to live on a meager budget for the first time in their lives. At the show's conclusion, the millionaire reveals his true identity to the community and gives a minimum of $100,000 of his own money to at least one deserving person."

House Democrats have taken a different approach toward millionaires. They are proposing a tax surcharge on the wealthy to pay for expanded education benefits for veterans of the wars in Iraq and Afghanistan. The "Patriots' Premium" would be 0.5% on incomes of $500K for individuals and $1 million for couples.

---AP caption: "Annette Wanzek prepares to gas up a customer's car at the only pump in WIndsor, N.D. As prices reach $4 a gallon and beyond, old pumps are difficult and expensive to upgrade so they can count past $3.99 and replacing them is beyond the means of small station owners who operate on the thin profit margins."

The Government Is Lying To Us

2008-05-15T08:16:00.000-07:00

Summary
Government reports have always been suspect, but this month's inflation report today is the most absurd I've seen. It is totally beyond comprehension.

The Labor Department reported that consumer prices rose by only 0.2% in April. Even more ridiculous, they said that ENERGY PRICES WERE FLAT FOR THE MONTH. The unchanged reading reflected a 4.8% increase in natural gas prices, offset by a 2% DROP IN GASOLINE PRICES.

Looking At The Facts

---Crude oil prices per barrel rose from $101 on April 1 to $113 on May 1; this is an increase of 12% in just one month.

---The average price of a gallon of regular gasoline in the United States rose from $3.29 on March 31 to $3.60 on April 28; this is an increase of 9% in just one month. At one point during April, gasoline prices set record highs for 17 consecutive days. This data is from government reports.

---For five consecutive Friday postings beginning on April 4, I reported that "crude oil traded at record highs and this translated into record gasoline prices in Sacramento, California and the US."

---Record crude oil and gasoline prices have been a hotly discussed problem in the media every single day.

Partial Explanation

---The government said that the drop in gasoline prices reflected their accounting process which reflects seasonal patterns. The reported price drop of 2% was derived from an unadjusted increase of 5.6% during the month.

---I understand adjusting for seasonality, but we are still left with two questions. First, how come the 5.6% increase does not match the 9% increase reported elsewhere by the government? Second, these numbers suggest that gasoline prices normally rise by 7.6% EVERY April. I'm not buying that.

Contradiction

If in fact energy prices are flat or declining, why is the government doing everything in its power to address THIS PROBLEM?

Just this week, the House initiated an investigation into the role of speculation in the energy markets.

Or how about the proposal by two of the presidential candidates to drop the gasoline tax during the peak summer driving season?

Or how about those stimulus checks which are going to help Americans pay for higher gasoline prices? In today's WSJ, a headline reads: "For Many, Stimulus Check Will Buy Gas."

Who Would You Invest Your Money With?

2008-05-14T15:21:00.000-07:00

Summary
There are many different approaches to investment. Two recent events highlighted two such approaches. These approaches could not be any more different.

Meeting #1
---Sponsor: Berkshire Hathaway

---Event: 2008 Annual Shareholders Meeting. This annual meeting is very entertaining and has a cult-like following. This year's event had 31,000 people filling up Qwest Center.

---Keynote speakers: Warren Buffet (age 77) and Charlie Munger (age 84); two of the top investors of all time.

---Quotes from the meeting (courtesy of Chris Mayer of Agora Financial's Rude Awakening 05/07/08):

"We like businesses that drown in cash."

"Utter uselessness of mainstream financial theories taught in schools."

"We like ideas you don't have to carry to three decimal places.....If someone walked in here and weighed 350 pounds, I might not know he weighed 350 pounds, but I would know he was fat."

"Turning American corn into motor fuel is one of the dumbest ideas I've ever seen."

Meeting #2
---Sponsor: The Credit Risk Committee of the International Association of Financial Engineers

---Event: The Need for Second Generation Models for Structured Credit Products

---Web site: IAFE

---Likely Attendees: Twenty-something-year old hedge fund managers

---Promotional Material: "The overwhelming growth of the CDO market over the past year has driven significant innovations in the modelling and pricing of structured credit instruments and CDOs,. In practice, however, industry participants have still largely relied on first generation of models, with well documented practical and theoretical limitations. For example, the Gaussian Copula framework as commonly applied to price synthetic CDOs is static in nature and not arbitrage-free, and its treatment of bespoke portfolios is ad hoc. Furthermore, given their complexity, the valuation of cash CDOs still commonly relies on simple bond-models and matrix pricing, and the application of more sophisticated option-pricing models for this instruments is not common practice.

This session introduces new developments of practical models for structured credit valuation and risk. In particular, we discuss the application of dynamic models for pricing and hedging synthetic CDOs, and detailed bottom-up models to value bespoke portfolios and cash CDOs using Monte Carlo techniques."

---Special Thanks: Stansberry & Associates S&A Digest 05/06/08 for highlighting this meeting to your editor. "It's good that they're addressing this after seeing only $300 billion in losses from the existing generation of structured credit products."

---Editorial Comment: Somebody.....please translate this into English.

Government Should Go Away And Hide

2008-05-13T15:44:00.000-07:00

Just Wondering

How come whenever there is a problem, the almighty government thinks that it is needed to fix the problem? More times than not, they make the problem worse. And oftentimes, the original problem was caused by the government itself.

Judging by all of the recent backlash to their programs, we all might be better off if the government went away and hid.

Most Americans Think The Stimulus Checks Will Not Work

A CNN / Opinion Research Corp. poll conducted in late April shows that 82% of Americans believe the stimulus package will not boost the economy. Can you imagine what the percent would have been if people were not actually collecting money from the government?

"Only 24% of respondents.....said they would spend the check on something they need or want. Nearly half - 45% - of those polled said they would use the check to pay off bills, and 22% said they would put it in the bank."

Food Crisis Trumps Ethanol Pipe Dreams

I've written extensively on the perils of the government's push for ethanol (check out postings from 10/24/07). With the worldwide food crisis, the government is now getting the message loud and clear.

The WSJ provides a nice editorial on how quickly the government is moving away from this wasteful program. The title sums it up: "The Biofuels Backlash.....Ethanol used to be a green passion; sorry about that."

Backlash Over Housing Bailout Plan

Last week, the House approved the housing bailout plan which would allow the Federal Housing Administration to insure $300 billion in new loans, but only after the lenders agree to lower the principal to help distressed borrowers. The backlash has already begun and President Bush has threatened to veto the bill. In an article titled Democrats Face Rescue Backlash, the WSJ is reporting that "The Republican protests are striking a chord with some Americans who are paying their mortgages on time or who didn't buy more house than they can afford."

Things get very disturbing when you read the fine print. In an editorial titled The Biggest Housing Losers, the WSJ says that "There is the $230 million for housing counseling to be distributed by the Neighborhood Reinvestment Corporation. You might think that all of this money will simply be disbursed to left-wing activists in the nonprofit world. But at least $35 million is specifically earmarked for lawyers, who can then pursue foreclosure-related litigation. Now there's a way to help housing markets clear."

And Now The Latest Government Rescue Plan

The WSJ is reporting today that "A House committee has begun an investigation into speculation in energy markets, including the role of investment banks, and is planning to hold hearings in May and June, according to a Democratic aide and several people invited as witnesses. In particular, lawmakers are taking aim at hedge funds and investment banks, blaming them for playing a pivotal role in pushing crude-oil prices to record levels."

Never mind that yesterday's posting showed that economists believe that only 11% of the price is because of speculation. And forget about the NY Times editorial today that said that there was no evidence of a oil bubble.

The only thing that the government sees is high gasoline prices and their job is to find problems and fix them. Never mind the fact that they have no energy policy, or they do not allow drilling in our own backyard, or they have intervened in the Middle East for 50 years.

Weekly Chart: It's About Supply And Demand (Mostly)

2008-05-12T10:07:00.000-07:00

Source: WSJ "The global surge in food and energy prices is being driven primarily by fundamental market conditions, [emphasis added] rather than an investment bubble, say the majority of economists in the latest Wall Street Journal forecasting survey."

Despite what gets sensationalized in the news, the price increases are not being caused by the "big" oil and food conglomerates, nor are they being caused by out-of-control hedge fund managers on Wall Street. In fact, the economists believe that government policy (represented by central bank policy, foreign-exchange issues and the biofuel mandate) plays a larger role in the inflation problem than the private sector.

The economists have mixed views on inflation going forward. Sixty percent believe that the Federal Reserve is doing enough to manage inflation, while forty percent believe that it is not doing enough. Most expect oil prices to moderate a bit, but don't believe that inflation is going away.

Most economists seemed to focus on where the US was in the current credit crisis. Thirty-six percent thought that it was almost over, while sixty-two percent thought it was only about half-finished. These assumptions seemed to drive their outlooks for inflation.

In my opinion, I think that Allen Sinai of Decision Economics Inc. hit it on the head when he said that "The U.S. isn't as big a part of demand for oil and food as it was years ago. We'd need to see a global downturn to tame inflation."

To view all results from the May, 2008 Economic Forecasting Survey by the WSJ, check out the interactive link at WSJ survey.

Weekend Trivia: What Is Unique To These 23 Countries?

2008-05-11T07:57:00.000-07:00

Answer: These 23 countries have adopted Flat Tax systems.

Source: Presentation by Dan Mitchell of the Cato Institute at Casey's Crisis & Opportunity Summit, March 2008

Wikipedia: "A flat tax (short for flat rate tax) is a tax system with a constant rate. Usually this would refer to household income, and possibly corporate profits as well, being taxed at one marginal rate. Flat taxes, implemented as well as proposed, usually exempt household income below a statutorily determined level that is a function of the type and size of the household."

General Observations:
---The flat tax movement is a fairly recent trend that has accelerated in the current decade.

---The list predominantly includes countries from Eastern Europe and republics that made up the former Soviet Union. The notable exception is Hong Kong which is generally perceived to have a very successful economy and has had a flat tax system since 1947.

---The average tax rate for these 23 countries is 16%. Once successfully implemented, the tax rate generally declines.

United States Efforts
---Democrat presidential candidate and former governor of California Jerry Brown proposed a flat tax system as part of his core platform in 1992.

---Former House Majority Leader Dick Armey and FreedonWorks have sought grassroots support for the flat tax.

---Republican presidential candidate and publisher Steve Forbes proposed a flat tax system as part of his core platforms in 1996 and 2000.

From The Inside Flap Of His Book:

"File your taxes on a postcard?

Impossible!

Guess again, says Steve Forbes, in his important new book Flat Tax Revolution. In fact, countries around the world have freed their taxpayers to do just that—and we can too with a simple flat tax that will slash tax rates, spur economic growth, and put the IRS out of business.

In Flat Tax Revolution you’ll learn:
· How a simple 17 percent flat tax will save you time, money, and worry
· Why the Flat Tax will eliminate the IRS, its bureaucrats, its paperwork, its nightmares, and its hassles
· Why the Flat Tax will create jobs, and bring back ones we’ve lost overseas
· How other countries are already reaping the benefits of a flat tax system
· How the flat tax will stop special interests getting tax breaks at your expense
· How the flat tax will eliminate shady accounting in business (something that our current tax system encourages)
· Why the Forbes Flat Tax is also a tax cut
· What you can do to make the Flat Tax a reality

As Steve Forbes shows, the Flat Tax shouldn’t be a partisan issue—it should be a taxpayer issue. And you can make it happen.
What are you waiting for? Buy this book and join the crusade!"

More May Quick Hits

2008-05-09T13:47:00.000-07:00

MARKETS
---For the sixth consecutive week, crude oil traded at record highs and this translated into record national gasoline prices at the pump. The three largest US airlines all increased their fuel surcharge today.

---Bloomberg.com is reporting that "Futures traders are betting for the first time since December 2005 that the [US] dollar will gain against the euro."

---Rice prices peaked two weeks ago and have since fallen a bit. The Philippines, the top global importer of rice, canceled a large rice tender (purchase) as it expects even lower prices in the next several months.

Last week's announcement by Thailand to form a rice cartel received considerable criticism. That prompted an about-face this week and the plans have been scrapped.

HOW SERIOUS IS THE BUSH VETO THREAT?
---After months of negotiations, Congress finally agreed upon a five-year $300 billion farm bill.

---The House approved the housing bailout plan which would allow the Federal Housing Administration to insure $300 billion in new loans, but only after the lenders agree to lower the principal to help distressed borrowers.

CORPORATE NEWS
---YahooFinance is reporting that "Citigroup Inc. said Friday it aims to shed about $500 billion in assets and grow revenue by 9 percent over the next five years, as it tries to rebound from massive losses tied to deterioration in the mortgage and credit markets."

---Microsoft dropped its bid for Yahoo after the two companies could not agree upon a price. This may go down as a lose-lose proposition. Microsoft looks embarrassed and still lacks a strategy to compete against Google. Meanwhile, Yahoo remains independent, but is facing pressure from shareholders to get the stock back to the level of the Microsoft bid.

---In a desperate move to move its gas-guzzling trucks and SUVs, Chrysler has offered to pay new buyers all gas costs above $2.99 for a period of three years.

---Meanwhile in an effort to sell more of its pickups and SUVs at a loss, General Motors is offering to pay $200 million to help end a strike at its key supplier, American Axle.

---The WSJ is reporting that "UBS AG agreed to return about $35 million to Massachusetts cities and other government entities that bought investments for their short-term cash needs but found themselves unable to sell the securities easily because of the credit crunch." Too bad that individual investors don't carry the same clout that Massachusetts does.

HEADLINE OF THE WEEK
---YahooNews on 05/05/08: "Oil surges past $120 on supply concerns; Gas prices have slid more than a cent since Friday." Wow.....a penny reduction for several days; talk about sounding desperate for a price drop.

OTHER INTERESTING ITEMS
---Vallejo became the largest city to ever file for bankruptcy in California. The city has been hit by falling revenues due to the housing crisis and they were unsuccessful in renegotiating contracts with police and fire labor organizations over the last several months.

---For the third consecutive year, the US Postal Service is increasing the cost to mail a first class letter. Rates are rising by one cent to 42 cents, effective on Monday. With inflation picking up, those Forever Stamps are sounding better and better all the time.

---Consumers are getting a head start on their stimulus checks. The Federal Reserve reported yesterday that consumer credit increased by $15.3 million last month to $2.6 billion (which excludes mortgage debt).

Outsourcing "Guinness World Records" To China

2008-05-08T06:33:00.000-07:00

I don't know if they have outsourced publishing of this book to China, but if they haven't, they should. A day hardly goes by without some new announcement that China has established some new "largest" or "best" or "greatest" record of some kind.

A recent sampling of stories in the news includes:

Longest sea bridge:
China inaugurated a 22-mile long bridge that connects Jiaxing city near Shanghai to the port city of Ningbo. The bridge is second in length only to the Lake Pontchartrain Causeway Bridge in New Orleans, but since the Chinese bridge goes over the ocean, it is being billed as the world's longest sea bridge.

Largest internet community: The Chinese research firm BDA reported that at the end of 2007, China had 210 million online users vs. 216 million in the US. Based on market growth, China has surpassed the US this year.

Largest banks: The Boston Consulting Group is reporting that China now has three of the largest four banks in the world. Based upon market capitalization at the end of 2007, Industrial and Commercial Bank of China had the #1 position, China Construction Bank had the #2 position and Bank of China had the #4 position. Chinese rankings have probably improved during 2008 as Western banks have experienced further deterioration in the current financial crisis.

"Most advanced airport building in the world":
These pictures are from the recently opened Terminal 3 at Beijing International Airport. It opened in February after only four years of construction. It only cost $4 billion and did not have any of the normal glitches seen by other new airports (i.e. Heathrow and its new $8.7 billion terminal).

As Agora Financial's 5 Min. Forecast says, "Down the street from Terminal 3, conxstruction is nearly complete on China Central Television's new building, easily the world's largest television station / media headquarters.

And that's not too far from South China Mall, the world's largest shopping mall which is powered in part by Three Gorges Dam, the recently completed world's biggest dam and hydroelectric power plant."

Largest LED display:
"GreenPix is a groundbreaking project applying sustainable and digital media technology to the curtain wall of Xicui entertainment complex in Beijing, near the site of the 2008 Olympic Games. Featuring the largest color LED display worldwide and the first photovoltaic system integrated into a glass curtain wall in China, the building performs as a self-sufficient organic system, harvesting solar energy by day and using it to illuminate the screen after dark, mirroring a day’s climatic cycleThe Media Wall will provide the city of Beijing with its first venue dedicated to digital media art, while offering the most radical example of sustainable technology applied to an entire building’s envelope to date."

Even more striking than the above-mentioned infrastructure projects are the venues for the upcoming Olympics. The world will get a first hand look at these structures in exactly three months.

Crude Oil Prices: $200.....Vs....."Mother of all Bubbles"

2008-05-07T11:04:00.000-07:00

Peak Oil Predictions

An analyst for Goldman Sachs is warning that crude oil prices could surge to $200 per barrel in the next two years. This is the same analyst who correctly predicted three years ago that the price would reach $100 per barrel.

Source of chart: Financial Times

This latest prediction follows last month's prediction by OPEC president Chakib Khelil who also said that crude oil prices could reach $200 per barrel.

In options trading, the number of contracts betting on crude oil hitting $200 a barrel by the end of 2008 has tripled since the start of this year.

Mother Of All Bubbles

In a completely opposite view on the market, there is a school of thought that says that peak oil is many decades away. These analysts believe that the current prices reflect a bubble waiting to burst. The fundamentals suggest that a weakening economy is leading to lower demand and prices will eventually fall. The higher prices rise, the harder the fall will be when the bubble bursts.

Michael Lynch, President of Strategic Energy & Economic Research Inc., said that oil has become "the mother of all bubbles." He is predicting that prices will fall as low as $80 per barrel this year and as low as $50 in the next several years as more supply comes on line.

Meanwhile Back At Home

The United States had better hope that the "Mother of all Bubbles" scenario happens. They have absolutely no energy policy in place to deal with $200 oil. Rather than a meaningful discussion of what $10 per gallon gas prices would mean, the country is fighting over an 18.4 cents-per-gallon tax holiday for several months. This gimmick may save the average driver $30. Yet as Bloomberg.com reports, "More than 200 economists, including four Nobel prize winners, signed a letter rejecting proposals by presidential candidates Hillary Clinton and John McCain to offer a summertime gas-tax holiday."

Talk about not seeing the forest for the trees.

Which scenario is correct? Time will tell. My money says that peak oil and higher prices are with us for the long term. As I write this posting, crude oil prices are setting all-time records at $123 per barrel.

What Are They Thinking: Farm Bill Vs. Food Crisis?

2008-05-06T08:57:00.000-07:00

Congress and the Bush Administration are finalizing the terms of another five-year Farm Bill. A total of $300 billion will be spent over the next five years.

The timing couldn't be better.

Every day, headlines scream about the food crisis throughout the world. There are food shortages everywhere and food prices are at all-time highs. The United Nations World Food Programme (WFP) is pleading with the world for more money to feed the hungry.

But wait.

The United States is going to spend $300 billion on a "farm bill" and NONE of the money is going toward fixing the worldwide food crisis. In fact, it does just the opposite. Millionaire farmers are being paid NOT to grow food.

What gives?

In a separate action, the United States recently promised $200 million in emergency aid to fight the food crisis. This is nice, but what a weak effort. This is less than one-tenth of one percent of the farm bill. This is less than the amount of money that the country is spending every day in Iraq. If we were so concerned about humanitarian efforts, it would seem to me that feeding the starving people of the world would be a higher priority than trying to resolve a foreign civil war.

I just don't get it. Call me naive. Or maybe I'm just not smart enough to figure it out. But I have just one question: How come a $300 billion farm bill would not address a worldwide food crisis?

Weekly Chart: Crack Spread Says Gasoline Prices Will Rise

2008-05-05T11:46:00.000-07:00

Source: DailyWealth.com, 04/10/08, Matt Badiali

"The prices of oil and gasoline share a tight relationship. The difference between the two is commonly called the 'crack spread' ('cracking' is the industry term for refining crude oil into products like gasoline).

Rarely does the price of a barrel of oil cost more than an equal amount of gasoline. It doesn't make sense. That's like a bushel of wheat becoming more expensive than the bread you could make from it.

But exactly that happened in March of this year. Take a look at this chart...

This chart compares the price of a gallon of gasoline to a gallon of crude oil. In current dollars, the average crack spread has been roughly 1.25 – meaning for every dollar a refiner spent to buy oil, it profited 25 cents.

The line at zero represents that average. Whenever the spread is greater than zero, refiner margins are fat and the companies are raking in profits. When the line falls below zero, times are tough. Most of the time (nearly 70%) the spread never strays beyond plus or minus 1 on the chart.

As you can see, the spread is near its lowest point in the last 10 years. It's currently at -1.15 and has been as low as -2.39 in recent weeks – grossly out of whack. Simply put, things just can't get any worse for refiners."

This out-of-balance situation will probably correct itself with higher gasoline prices. This is likely to happen without higher crude oil prices.

Making matters worse, gasoline prices will probably go higher for two other reasons. First, prices normally rise in the summer as families pile into their cars and take vacations. Second, crude oil prices show no sign of stopping. Just today, they traded above $120 a barrel for the first time ever.

This will not be good for the American driving public. The politicians are already getting involved as evidenced by McCain's proposal to temporarily halt the gasoline tax.

But instead of complaining, maybe its time to get even. Refining companies should benefit as the crack spread moves back to a more normal relationship. Buying stocks in those companies could pay off.

Buying stocks in the refining companies is the conservative way to play this trade. For a much more speculative trade, there are crack spread futures and options. Check out the Nymex for more information.

Weekend Trivia: Explain These Two Opposite Market Reactions

2008-05-04T13:20:00.000-07:00

Two large companies reported Q1 earnings this week and had very different reactions from the market:

Company A

---Q1 2008 Loss: $<3.3> billion
---Total 2007 Loss: $<38> billion
---Q1 2008 Revenue: Down 2% from prior year
---Trailing P/E: None; no earnings
---Stock market reaction: 9% increase in one day

Company B

---Q1 2008 Profit: $10.9 billion
---Total 2007 Profit: $41 billion
---Q1 2008 Revenue: Up 34% from prior year
---Trailing P/E: 12
---Stock market reaction: 4% decline in one day

Answer
---The simple answer relates to expectations. Despite the miserable performance of General Motors, its results were better than expected and the stock went up. On the other hand, ExxonMobil had great results, but they were a bit less than what Wall Street expected and the stock went down.

---Another simple answer relates to guidance going forward. General Motors said that it expects a recovery in the second half of this year and the market liked what it heard and drove the stock price higher. ExxoMobil, however, did not provide such optimism going forward and the stock was punished by Wall Street.

---Another explanation is that the stock prices already reflected all possible good news with ExxonMobil and all possible bad news with General Motors, prior to their announcements.

GM's stock price is only 50% of what it was six months ago, and incredibly, the stock is only 50% of what it was 43 years ago. The stock price already had discounted any possible bad news that could come out of the earnings announcement. And when bad news (relatively speaking) did not come, the stock jumped upward.

ExxonMobil's stock price has doubled in the last four years and it reached an all-time high several months ago.

---Looking longer term, Wall Street may be suggesting that the recent trends will reverse. General Motors was once one of the most respected companies in the world and many analysts believe that it can turn things around. As for ExxonMobil, many analysts believe that crude oil prices of $120 is a fluke and when prices settle down, the fortunes of the oil companies will also fall.

---Of course this longer term look is only one theory. It's also possible that the world is experiencing peak oil and that crude oil prices will continue to escalate. This theory would suggest that there will be continued benefits seen by ExxonMobil and additional losses seen by General Motors as they try to figure out what to do with their gas guzzling trucks and SUVs.

My money is long big oil companies and short General Motors.

Time will tell which long-term look is right.

May Quick Hits

2008-05-02T11:07:00.000-07:00

ECONOMIC INDICATORS
---As reported in the Wednesday posting, "Q1 GDP limped along at 0.6%, the same level as the prior quarter. On the negative side, this is a very weak number and shows an economy in trouble. But on a positive note, the number was slightly better than expected and it remains positive and keeps the economy out of official "recession" territory."

---There were mixed numbers reported on the labor front. The Labor Department reported that claims for unemployment rose by 35K last week, twice what economists were expecting. They also said that employment fell by 20K people in April, much better than expected. Earlier in the week, the ADP report had showed a surprising increase of 10K jobs in the private sector in April. Finally, the Labor Department said that despite the lower employment numbers, the unemployment rate fell from 5.1% in March ti 5.9% in April.

If you ask me, all of these numbers indicate that not much changed as all of the indictors are based on a variety of statistical estimates.

---The Conference Board's Consumer Confidence Index fell to a five-year low in April. Included in the report was an indicator that said that the fewest number of consumers in 30 years will be taking a summer vacation this year.

COMMODITIES
---Many commodity prices peaked late last week or early this week. Since then, there have been fairly sharp, but normal, corrections. Gold is leading precious metals downward. Rice is leading agriculture prices downward. And crude oil has fallen over 5% in several days.

---For the fifth consecutive week, crude oil traded at record highs and this translated into record gasoline prices in Sacramento, California and the US. Expect airline prices to continue flying upward as fuel is the largest variable cost for the industry.

---Organization of Rice-Exporting Countries (OREC) is the unofficial name for the proposed cartel. Members include Thailand, Vietnam, Cambodia, Myanmar and Laos. Samak Sundaravej, the prime minister of Thailand, said "We hope to be a group of five to help each other in trading rice on the world market."

Speaking of rice, the Philippine Justice Secretary, Raul Gonzalez, proclaimed that any trader caught hoarding rice will be sentenced to life in prison.

REAL ESTATE

---The S&P / Case Shiller Home Price Index for 20 metropolitan areas fell by 12.7% in February compared to a year ago, the largest drop since inception of the index in 2001. David Blitzer, chairman of the index committee at S&P said that "There is no sign of a bottom in the numbers."

---RealtyTrac reported that Q1 foreclosures rose 23% from Q4 and 112% from a year ago. RealtyTrac spokesman Rick Sharga said that "Foreclsoure activity hasn't slowed down yet.....We expect to see another foreclosure peak in the late third or fourth quarter of the year because of the record number of resets coming."

---The Census Bureau reports that a record 18.6 million homes are vacant.

---The National Association of Realtors is projecting that with more people now entering the rental market, average rents will rise 5.3% this year, following increases of 3.1% last year.

HEADLINE OF THE WEEK
---Sacramento Bee, 04/26/08: "All signs point to lousy year for home builders." That's news?

OTHER INTERESTING ITEMS
---YahooNews is reporting that "Harry's Bar, the famed Venice watering hole where Ernest Hemingway held court over hearty food and stiff martinis, is offering a discount to 'poor' Americans suffering from a weak dollar and subprime blues.

The decision by the owner of the restaurant, one of the most expensive even when the U.S. currency is strong, underscores the growing concern about the weak dollar among tourism operators in Italy and elsewhere in Europe.

A sign posted outside the restaurant at the weekend reads: 'Harry's Bar of Venice, in an effort to make the American victims of subprime loans happier, has decided to give them a special 20 percent discount on all items of the menu during the short term of their recovery.'"

---The New York Times is reporting that "Thieves peeled long strips of lead from the roof of St. Michael and All Angels, until a barking dog sent them fleeing from this tiny Leicestershire village. But by then, they had left a hole of about 100 square feet in the top of the 800-year-old church.

For centuries, people have stolen religious artifacts in Europe, including chunks of religious buildings, but Britain is in the midst of an accelerating crime wave that some experts call the most concerted assault on churches since the Reformation.

Instead of doctrinal differences, the motivation is the near record price that lead — the stuff many old church roofs are made of — is fetching on commodity markets."

More Rumblings About Ending US Dollar Peg

2008-05-01T12:01:00.000-07:00

Background
Throughout most of the world, crude oil is priced in US dollars. That has given rise to the "petrodollar" term.

Many exporting countries have gone one step further and actually pegged their currency to the US dollar. The GCC (Gulf Co-operation Council), for example, consists of six Gulf oil exporting states and all but Kuwait has tied their currency to the US dollar.

For these countries, they are forced to follow US Federal Reserve actions. When the Federal Reserve lowers interest rates, these foreign governments lower their interest rates. But the financial status of these countries is not necessarily the same as the financial status of the United States. What might be good for the United States, may not be good for these oil exporters.

For a more detailed explanation of the "petrodollar" trade, check out the 11/01/07 posting.

Yesterday's Federal Reserve Action and Resulting Actions
The Federal Reserve lowered interest rates for the seventh time in eight months from 2.25% to 2.00%.

The United Arab Emirates, Bahrain and Qatar lowered their benchmark interest rates today by the same quarter point to match the US Federal Reserve cut. Oman moved their interest rate in line with the London Inter Bank Offered Rate. Saudi Arabia is expected to lower their rates when they return from their weekend.

Inflation Problem
The United States believes that it needs to lower interest rates to avoid a recession and offset the financial banking crisis. But the GCC does not suffer any of these problems. Just the opposite; their economies are doing quite well. The lower interest rates have created huge inflation problems in those countries. A Bloomberg.com article says that "Inflation is running close to 10 percent in Saudi Arabia and the U.A.E., while Qatar's consumer prices rose 14 percent in the fourth quarter."

De-Pegging Rumblings
Bloomberg.com is reporting that "Gulf states are considering dropping their pegs to the dollar after the U.S. currency's decline stoked inflation across the region, Kuwaiti Finance Minister Mustafa al- Shimali said.

'Yes, there are some' Gulf Cooperation Council states considering dropping their pegs to the dollar, which has fallen 13 percent against the euro in the last 12 months, al-Shimali said in an interview in Kuwait late yesterday without naming the countries. 'Some countries will do what we are doing [de-pegging].'

Al-Shimali's comments may restoke speculation of a change in Middle East currency systems that eased after the United Arab Emirates and Qatar last month ruled out any revaluation or dropping the dollar peg in the short term. The issue will remain a key issue as long as inflation remains high."

Additional Discussion
Check out the 11/27/07 posting and the 01/20/08 posting for further discussion of concerns over the weak US dollar.

Markets Don't Know What To Do

2008-04-30T12:28:00.000-07:00

Key Economic Reports
The markets were eagerly anticipating today's Q1 GDP report and the Federal Reserve's announcement regarding interest rates. After much anticipation, there was almost no reaction.

Q1 GDP limped along at 0.6%, the same level as the prior quarter. On the negative side, this is a very weak number and shows an economy in trouble. But on a positive note, the number was slightly better than expected and it remains positive and keeps the economy out of official "recession" territory.

The Federal Reserve lowered its federal funds rate from 2.25% to 2.00% and said that it may be done lowering rates for the time being. These actions were the worst kept secret since the last time the board met.

Muted Reaction
Normally, these reports generate huge market movements. Not this time. With only a few minutes of trading left in the day, there has minimal reaction.

The DJIA is up, while the NASDAQ and S&P 500 are both down, all changes being relatively small.

Precious metals are flat. Gold is off very slightly, while silver is up marginally.

The US dollar remains relatively flat against other currencies.

In The Grand Scheme of Things, Nothing Has Really Changed

The housing market remains a mess with sharply decreasing prices and increasing foreclosures.

Banks remain in trouble as today saw Citigroup raising more money and the EU bailing out a troubled German bank.

The government deficits continue to grow at all levels. Just today, the Bush administration reintroduced the one-year Treasury security in an effort to "cope" with the soaring budget deficit, including the stimulus check payments which began this week. Yesterday, Governor Schwarzenegger talked about the California state budget being twice the level previously mentioned.

Inflation is going thru the roof as food prices and gasoline prices remain at record levels.

The government (politicians from both parties, Treasury, Federal Reserve) are all trying to fix the problems by giving money away. Nobody is willing to provide the tough medicine that is required. Where is the next Paul Volcker? Raising rates above 15% to protect the dollar was not pleasant, but it was required and it did fix the problem. Now, our problems are worse and nobody is stepping up to the plate. We have gone from a huge creditor nation when Volcker led the Fed to a huge debtor nation today.

Looking Ahead
Buy Gold!!!

Use the current correction as an opportunity. Even with another $100 correction in the price, gold would still be in a bull market and would remain above its 50-week moving average.

What Are You Doing With Your Handout?

2008-04-29T13:43:00.000-07:00

Free Money
Economic Stimulus Checks.....Rebate Checks.....Recovery Rebates...Rebate Funds.....Handouts.....Call it what you want, but the government began sending out checks into the bank accounts of about 800,000 taxpayers on Monday.

Mixed Reaction
Most politicians were all smiles as this was earlier than expected. President Bush said that "The money is going to help Americans offset the high prices we're seeing at the gas pump, the grocery store, and also give our economy a boost to help us pull out of this economic slowdown."

But one politician was not happy. Senator Chuck Schumer said "It's galling to think that taxpayers' stimulus checks will be lining the pockets of OPEC. The sad truth is that the average American family will spend almost their entire stimulus check on higher gas prices this year."

Gasoline Prices #1 Concern of Americans
Indeed, a Kaiser Family Foundation survey showed that the price of gasoline prices is the top economic concern of American families today. This was even more important that the #2 concern of getting a good-paying job, or the #3 concern of paying for health care, or the #4 concern of paying the rent or mortgage payment. Even for households earning more than $75K per year, a quarter of them described paying for gasoline as a serious problem.

How do we pay for the gasoline once the handouts are spent?

OPEC Response
And I can hardly imagine what will happen if the words of OPEC's President Chakib Khelil come true. He warned on Monday that oil prices could hit $200 a barrel and there would be little the cartel could do to help. "The prices are high due to the recession in the United States and the economic crisis, which has touched several countries, a situation that has an effect on the value of the dollar. Each time the dollar falls 1 per cent, the price of the barrel rises by $4 and of course vice versa." I'm not sure about the math (this implies that a 10% increase in the dollar would lower crude oil prices to $70), but I get the concept.

Welcome to the 21st century.

Weekly Chart: State Financial Crisis

2008-04-28T11:51:00.000-07:00

Source: BREITBART.COM

The United State may or may not already be in a recession. As the 01/06/08 posting indicated, the Business Cycle Dating Committee "normally declares the start of a recession six to 18 months after the event. Since recessions typically last less than a year, this means a recession can be over before it has officially begun."

It is a different picture at the state level. Most states are experiencing deteriorating budgets, with many states already in a recession.

The National Conference of State Legislatures will soon be publishing the results of its survey of all 50 state fiscal directors. In the current fiscal year, 16 states are reporting shortfalls in their budgets. Looking ahead to the next fiscal year that begins July 1, the situation gets worse as 23 states are reporting budget shortfalls.

Similarly, the Center on Budget and Policy Priorities reported last week that 27 states are projecting shortfalls of $39 billion for the next fiscal year.

Expect these numbers to get much worse going forward. Slowdowns typically result in falling tax revenues and it is almost impossible to convince the public to raise tax rates. At the same time, governments are slow to see the accelerating problem and slow to drop their spending plans.

Weekend Trivia: Today Is the 25-Year Anniversary Of What?

2008-04-27T10:58:00.000-07:00

ANSWER: Saturday marked the 25th anniversary of A Nation at Risk

Title Page of Report
An Open Letter to the American People

A Nation at Risk: The Imperative for Educational Reform

A Report to the Nation and the Secretary of Education, United States Department of Education
by The National Commission on Excellence in Education
April 26, 1983

Wall Street Journal Description
As the WSJ described, this was " the influential Reagan-era report by a blue-ribbon panel that alerted Americans to the weak performance of our education system. The report warned of a 'rising tide of mediocrity that threatens our very future as a nation and a people.' That dire forecast set off a quarter century of education reform that's yielded worthy changes – yet still not the achievement gains we need to turn back the tide of mediocrity."

Twenty-Five Years Later
The quality of our education system can be debated forever. Sure, there have been huge gains. But there have been huge setbacks as well. One can find numbers that support either side of the argument.

My belief is that education today is worse than it was 25 years ago.

Even if I accept the argument that it is the same, the WSJ reports "we're also spending tons more money. (In constant dollars, per pupil spending in 1983 was 56% of today's.)" We are spending almost twice as much money for the same results.

As the 1983 study predicted, the United States is being passed by countries all around the world. This cannot bode well for our future.

And just today, the cover story from The Sacramento Bee presented an in depth study which showed that school districts were changing the classifications of students so that they could meet the rules of No Child Left Behind: "Over the past two years, 80 California school got 'out of trouble' with No Child Left Behind after changing the way they classify their students, a Bee analysis has found. The change nudged their status from failing to passing under the federal law." In effect, school districts are spending valuable resources to "work" the system, rather than teaching our students.

This country talks about equality and ending racial tensions, yet our government only encourages differences by creating different standards for different groups. Just as my 02/28/08 posting on the Census Bureau discussed, this country goes out of its way to profile our people.

The title of the WSJ article sums it up best: "Twenty-Five Years Later, A Nation Still at Risk"

Final April Quick Hits

2008-04-25T09:19:00.000-07:00

MARKETS
---For the fourth consecutive week, crude oil traded at record highs and this translated into record gasoline prices in Sacramento, California and the US.

---The Reuters / University of Michigan Consumer Confidence Index fell to a 26-year low in April.

---Agriculture prices continue to set records, almost on a daily basis. Rice and corn are leading the charge.

---Precious metals gave back some of their recent gains this week. Gold has fallen below $900 per ounce after breaking the $1000 mark last month.

---Coal provides 70% of China's energy and supplies have fallen to 12 days of consumption overall, and less than one week in rural areas. The China Regulatory Commission says that the shortages are "multidimensional" without going into detail.

---The Shanghai Composite Index has fallen 50% from its peak last year. In an effort to boost the equity markets, the Chinese authorities have intervened by 1) rolling back a year-old tax increase on stock transactions and 2) putting in place rules for big block trades to be handled off the regular stock market in an effort to reduce volatility. The intervention resulted in a dramatic 9.3% increase in their market Friday.

---The futures markets indicate that the Federal Reserve is expected to lower interest rates next week by 0.25% to 2.00%. This would be the seventh cut in eight months, and possibly the last cut in this cycle.

---The US dollar struggled all week. It is very close to all-time lows. The Euro set an all-time record this week and the Australian dollar hit a 24-year high and is approaching parity with the US dollar.

---The Financial Times is reporting that "Afghanistan's opium crop is forecast to fall by up to a half this year, counter-narcotics officials in Kabul say, as evidence emerges that some poppy farmers are switching to legal crops [wheat] because of the rising price of food."

REAL ESTATE
---DataQuick reported that Q1 foreclosures in California skyrocketed 327% from last year. Default notices for the same timeframe were only up 143% from last year. This should get worse as only 41% of the state's sub-prime loans have been reset and the peak doesn't even occur until August.

---The Commerce Department reported that new home sales plunged to their lowest level in over 16 years. The median price in March fell 13.3% from the prior year, the largest percentage decrease since July 1970. Absolute numbers were down 36.6% from a year ago.

---The National Association of Realtors reported that sales of existing single-family homes fell for the seventh time in eight months. Sales were down 2% from the prior month and the median price was down 7.7% from the prior year.

OTHER INTERESTING ITEMS
---Actor Wesley Snipes was sentenced to three years in prison on tax convictions. In his battle with the IRS, he had claimed that he did not owe taxes as the government had no legal right to collect taxes. He was prosecuted under misdemeanor charges, after successfully being acquitted on the more serious tax fraud charges. Writing checks to the government for $5 million did not help reduce the maximum sentence allowed.

---The Associated Press is reporting that "The U.S. military's health insurance program has been swindled out of more than $100 million over the past decade in the Philippines, where doctors, hospitals and clinics have conspired with American veterans to submit bogus claims." Until the government can put in place the necessary controls to spend my taxes in a competent manner, I will always vote "NO" on tax increases.

---Toyota passed General Motors in selling the most vehicles worldwide in Q1.

---Following up to the posting earlier this week on sugarcane-based ethanol in Brazil, for the first time, that country consumed more ethanol than gasoline at the pumps. In addition, the WSJ is reporting that "Brazil's largest ethanol producer said it would pay $826 million to acquire Exxon Mobil Corp.'s Esso chain of gas stations in the country."

---Meanwhile, the US government released new fuel economy rules on Earth Day. The next generation of cars and trucks will need to average 31.6 miles per gallon by 2015 and 35 miles per gallon by 2020.

The Naive American Public

2008-04-24T00:09:00.000-07:00

"How We As Consumers Can Impact Dropping Gas Prices"

I received this chain letter today from my sister. The email claimed that the American public could lower gasoline prices to below $2.00 per gallon by boycotting Exxon and Mobil and forcing a price war. If every person sent the email to 10 other people each day, by the 8th day, the entire country could be informed of this coordinated action.

I love my sister, but this is nothing but BS.

Even if the chain letter succeeded in reaching the entire country, the coordinated action would not work. The American public has no clue what is driving gasoline prices. They are channeling their frustration in the wrong place.

It's A Matter Of Supply and Demand

Supply and demand form the basic foundation of free markets.

The problem is that the Exxon Mobil Corporation is a relatively small supplier on the world playing field.

The other problem is that the American public is a minority player in terms of demand, especially on the fringe.

The oil market is much larger than the American public buying gasoline from one company.

Sure, there could be some short-term implications for Exxon Mobil and maybe gasoline prices, but the impact would be small and short-lived. This reminds me of when a small town boycotts a new WalMart because of what it will do to the local mom-and-pop shop. They may make a big statement locally, but it really doesn't change anything in the grand scheme of things.

Worldwide Demand Driven By China and India

---The 10/08/07 posting discussed the growing demand in China and India. Their demand for oil will follow the same pattern seen by other countries before them. The difference is that there are 2 billion people in these countries.

---The International Energy Agency predicts that sometime this year for the first time, the combined oil usage of China, India, Russia and the Middle East will exceed that of the United States.....and that doesn't comprehend the rest of the world.

Worldwide Supply Controlled By OPEC

---The 03/11/08 posting showed that "ExxonMobil is the the largest oil company in the world, but its $40 billion in 2007 profits doesn't even place it in the top 50% of OPEC earners."

---There is a growing debate on whether or not "peak oil" has been reached. Crude oil production peaked three years ago and there is concern about depleting oil fields in Mexico, Russia, Nigeria, Venezuela and possibly Saudi Arabia. Even if "peak oil" hasn't been hit yet, it probably is only a decade or two away. Implications are still the same.

And Making Matters Worse

---The 03/03/08 posting showed that crude oil prices have actually fallen in the last five years.....if measured in gold rather than the US dollar. This is just but one implication of our reckless fiscal behavior. The American public doesn't understand how things like deficits, lower interest rates, the sub-prime mortgage mess, bailouts, weak dollar and the Iraq war all contribute to higher gasoline prices at the pump.

---It is ironic that the US oil companies are so maligned when they are not allowed to drill for oil in the US and there have been no new refineries built since the 1970s.

---The "crack spread" between the price of crude oil and the price of gasoline is at record levels and suggests that pump prices will go up dramatically.

---Predictions: Gasoline prices will average over $4 a gallon this summer driving season. Prices may eventually correct, but this level will seem very cheap ten years from now.

Sugarcane-Based Ethanol Leaves Corn-Based Ethanol In The Dust

2008-04-23T10:14:00.000-07:00

"It's time to rethink food-to-fuel mandate"

This is the headline that appeared in the Washington Post and was republished by The Sacramento Bee today. It seems that the momentum behind corn-based ethanol is quickly changing. Every day there are new studies which highlight the problems with the program. The 10/24/07 posting discussed many of these shortfalls......including the worldwide food shortage that has resulted.

Unfortunately, our government seems to be the last one to figure things out. It was only several months ago that President Bush signed the energy bill that mandated huge increases in renewable fuels, mostly with corn-based ethanol.

The WSJ reported that "Energy Secretary Samuel Bodman said Friday that the growing emphasis on corn-based ethanol has contributed to higher food prices, and he said the nation should begin 'moving away gradually' from ethanol made from food such as corn." Move away gradually? What does he have in mind? Does he mean change the recently imposed mandates for 2022? Just a thought, but how about stopping now....not 15 years from now.

Sugarcane-Based Alternative
Meanwhile, while the Untied States struggles with its corn-based ethanol program, Brazil's sugarcane-based ethanol program is thriving.

The WSJ is reporting that "As high corn prices continue to pressure U.S. ethanol companies, Brazilian competitors see a window of opportunity this summer for their homegrown ethanol made from less-expensive sugarcane.....

One reason is that Brazil is harvesting a record-breaking sugarcane crop that will easily exceed 500 million metric tons, or 550 million short tons, according to industry analysts at Datagro in São Paulo. The sheer volume, and the estimated 20 billion liters (5.2 billion gallons) or more of ethanol that is going to be made from it, will push Brazilian ethanol prices lower. Wholesale prices now are around $1.64 a gallon, according to the University of São Paulo's rural economy think tank Cepea/Esalq.

Even with a 54-cent tariff imposed on Brazilian ethanol exports, Brazil wholesale hydrous ethanol prices are around $2.18 a gallon, compared with around $2.55 a gallon on average now for U.S. ethanol.

Another reason is that high corn prices -- hovering just under $6 a bushel on the Chicago Board of Trade -- means U.S. corn ethanol producers face small -- or no -- profit margins."

Is Rice Hoarding A Prelude To Crude Oil Hoarding?

2008-04-22T11:09:00.000-07:00

Picture from Drudge Report

LESSONS FROM THE RICE MARKET
---Panics can happen very quickly.

---Prices can skyrocket just as fast; rice prices tripled in several months.

---Hoarding happens at an individual level as well as a national level. Export countries can quickly stop shipments to other countries.

PEAK OIL
There is a huge debate in the energy world as to when "peak oil" will hit. There is one argument that it has already passed. Consider the following facts:

---Worldwide daily production peaked in May of 2005. Despite record prices and growing worldwide demand, oil production has actually been falling.

---Saudi Arabia's oil production has been very flat and they have turned down requests from the United States to increase production. They claim that it does not believe there is a need for further expansion. They cited "imperfect" market signals, the move away from oil, the worsening world economy and the turbulence in financial markets as reasons to hold back.....But as many analysts believe, maybe it is simple as their inability to raise production levels.

---Last week, Russia surprised the world by announcing that a lack of investment will result in a fall in oil production for the first time in ten years.

---As the 08/21/07 posting indicated, Mexico may stop exporting oil in seven years. Today, it is the 2nd largest exporter to the United States, and the 5th largest exporter in the world.

PREDICTIONS
---Either peak oil has already happened, or it will likely happen in the next decade or two. This is against a backdrop of steadily rising demand, particularly from emerging countries.

---It is only a matter of time before the oil market experiences the disruptions now seen in the rice markets. Huge price increases and hoarding can be expected. $100 oil is nothing. Once the crisis hits, you can add a zero to this number.

---Because of the geopolitical and military implications of oil, the market disruptions will probably be extremely severe. Expect the government to ration how much gasoline you can use in your automobiles.

---Eventually, the world will really get serious about alternative energy. But it will probably be too late. Mining uranium and building nuclear power plants can take decades, not months or years.

Weekly Chart: Rice Prices Go Straight Up

2008-04-21T10:55:00.000-07:00

WORLD STAGE
Picture and article courtesy of the Financial Times

"Rice prices hit the $1,000-a-tonne level for the first time on Thursday as panicking importers scrambled to secure supplies, exacerbating the tightness already provoked by export restrictions in Vietnam, India, Egypt, China and Cambodia.

The jump came as the Philippines, the largest rice importer, failed for the fourth time to secure as much rice as it wanted.

The unsuccessful tender followed Bangladesh’s inability to buy any rice at all this week."

IMPACT FELT ACROSS COUNTRY

The New York Sun is reporting that "Many parts of America, long considered the breadbasket of the world, are now confronting a once unthinkable phenomenon: food rationing.

Major retailers in New York, in areas of New England, and on the West Coast are limiting purchases of flour, rice, and cooking oil as demand outstrips supply. There are also anecdotal reports that some consumers are hoarding grain stocks.

At a Costco Warehouse in Mountain View, Calif., yesterday, shoppers grew frustrated and occasionally uttered expletives as they searched in vain for the large sacks of rice they usually buy.....The bustling store in the heart of Silicon Valley usually sells four or five varieties of rice to a clientele largely of Asian immigrants, but only about half a pallet of Indian-grown Basmati rice was left in stock. A 20-pound bag was selling for $15.99."

PANIC HITS SACRAMENTO

Pictures and article courtesy of The Sacramento Bee

"The global rice panic has come to south Sacramento.

As word of food riots and export shutdowns in Asia reached California in recent weeks, worried shoppers have been buying up hundreds of pounds of rice at a time from the Asian supermarkets that line Stockton Boulevard, looking for security against rising prices.

'When people saw the price jump $2 or $3, they started buying like crazy – 10 bags, 15 bags,' said Cu Van, a floor manager at Goldstar Supermarket. Each bag weighs 50 pounds.

In recent weeks, the retail price for a 50-pound sack of Thai jasmine rice, the prized variety served steamed in Chinese and Southeast Asian cuisine, has risen from roughly $20 to $40, straining budgets for families and restaurants."

Weekend Trivia: Explain The Strategy Of "Shorting Naked Puts"

2008-04-20T10:40:00.000-07:00

INTRODUCTION
Stock options are often viewed as being very risky. Indeed, most option strategies are very speculative. If you're not careful, you can lose all of your investment.

But there are two stock option strategies which are very safe and help reduce risk.

Of the two strategies, "selling covered calls" is the most understood.

The second strategy involving "shorting naked puts" is less understood.

GETTING PAID TO GO SHOPPING
The following analogy shows how the strategy of "shorting naked puts" works. This scenario was written by Jeff Clark of GrowthStockWire.com:

"Imagine you're walking through your favorite clothing store. As you rummage through the discount racks, looking for a bargain, you notice a beautiful cashmere sweater. It's the same sweater you thought about buying a few months ago for $100. Today, it's on sale for just $40.

The sweater is a terrific buy at that price. But you'd be even more willing to buy it for $35.

So, you approach the cashier and inform her if the sweater drops to $35 within the next couple of months, then you'd be willing to purchase it. She nods her head in agreement, opens the cash register, and gives you $2.

You stuff the $2 into your pocket and exit the store, knowing that you may get to buy the sweater at an exceptional price within the next two months. And if the price never drops, then you at least made a couple of bucks for your patience.

Wouldn't it be great if you could really get paid to go shopping?

Basically, you found a bargain, agreed to buy it at an even better price, and got paid a couple of bucks for your willingness to do so.

Of course, we know you can't buy sweaters this way. But you can use this technique to buy stocks.

That's right. You can actually get paid to simply agree to buy already beaten-down value stocks if they get even more beaten down.

The strategy I'm talking about is known as 'shorting naked puts.' Like covered call writing, shorting puts is a fabulous income strategy, especially during bear markets. Unfortunately, however, just like covered call writing, this strategy is misused by many investors and misunderstood by almost everyone.

Let's be clear... Selling puts is a strategy where you get paid for agreeing to buy a stock at a specified price at some point in the future. If the stock declines, then you'll buy it at the bargain-basement price. If the stock doesn't decline to the agreed-upon price, then you keep the option premium as a profit.

It's as simple as that."

And More April Quick Hits

2008-04-18T17:28:00.000-07:00

NO STOPPING INFLATION
---For the third consecutive week, AAA is reporting that gasoline prices hit an all-time record in Sacramento, California and the United States.

---Crude oil topped $115 per barrel for the first time ever this week.

---Food prices continue to go thru the roof: rice and corn reached new all-time highs this week.

---Copper prices traded at new highs this week, while precious metal prices were mixed this week.

---The Labor Department reported that wholesale prices soared 1.1% in March, driven by higher food and energy prices. For the past 12 months, wholesale prices are up by 6.9%.

---The Labor Department reported that consumer prices rose by 0.3% in March. Over the last 12 months, consumer prices are up by 4%......if you believe the government data.

---AP reported that "The U.S. is wrestling with the worst food inflation in 17 years.....U.S. food prices rose 4 percent in 2007, compared with an average of 2.5 percent annual rise for the last 15 years, according to the U.S. Department of Agriculture. And the agency says 2008 could be worse, with a rise of as much as 4.5 percent." What are these people eating? Some food prices are increasing by this amount on a monthly basis.....not on an annual basis. And the government wonders why people don't trust them.

MORE FINANCIAL WRITE-DOWNS
---Citigroup today announced another write-down of $14 billion and the elimination of 9000 more jobs. The stock is trading UP by 6%.

---Merrill Lynch reported yesterday another write-down of $6.5 billion and the elimination of 3000 more jobs. The stock is trading UP 2% today.

---Wachovia posted a Q1 loss and said that it would need to raise $7 billion in new capital.

FOLLOW-UP ITEMS
---This past Tuesday was tax day and I discussed the problems of being an athlete and having to file taxes in 20 or 30 states. My astute basketball-loving wife reminded me that there are even larger implications for athletes playing in multiple countries. In addition to the tax implications, there are also currency implications. Not too long ago, for instance, an NBA player probably thought they were getting a pay cut if they played with Toronto. All of a sudden, this doesn't look like such a bad prospect.

---Last Friday I mentioned that Frontier Airlines became the latest airline to file for bankruptcy. What was really strange is that they were blaming their woes on their credit card processor. The Sacramento Bee said that "while it's common that banks processing airline credit card transactions hold a certain amount of a carrier's proceeds in their own accounts until a passenger completes travel, it is unusual for a processor to suddenly change its cash withholding policy." If you ask me, the processor probably should have changed the policy much sooner if the airline was that close to bankruptcy.

OTHER INTERESTING ITEMS
---The caption of the News.com.au picture reads "Green space ... the world's largest passenger ship – the cruiseliner Project Genesis – will feature its own New York-style Central Park and levitating bar."

---The Mercury News is reporting that "Joe Six-pack will have to pay a lot more to get his buzz on if Assemblyman Jim Beall has his way. The San Jose Democrat on Thursday proposed raising the beer tax by $1.80 per six-pack, or 30 cents per can or bottle. The current tax is 2 cents per can. That's an increase of about 1,500 percent. Beall said the tax would generate $2 billion a year to fund health care services, crime prevention and programs to prevent underage drinking and addiction."

---Agora Financial's 5 Min. Forecast is reporting that "Sheikh Hamdan bin Mohammed bin Rashid al-Maktoum, the heir of Dubai leadership, spent $2.7 million on a single camel this week. After viewing the beast during a UAE camel beauty pageant.....He also spent another $2 million on 15 other, evidently less superior, camels."

---Housing activity is picking up sharply in the Sacramento area, but not everything is rosy. Bank-owned homes now account for more than half of all sales and that is resulting in plunging prices. The median price of $247K is at a 5-year low.

---New Ebay listing for "The Original Pacific Wheel Ferris Wheel at Pacific Park" The auction price for the famous nine-story ferris wheel on the Santa Monica Pier starts at $50,000.

More Census Bureau Laughs

2008-04-17T07:31:00.000-07:00

Introduction
The 02/28/08 posting highlighted some of the crazy questions that the government asks of us thru its Census Bureau.

Equally ridiculous is the Census Bureau's methodology for collecting the information.

Pencils and Paper
The WSJ is reporting that "The Census Bureau will drop plans to use hand-held computers to count millions of people during the 2010 census and instead go back to pencils and paper."

"Harris [computer developer] spokesman Jim Burke said that in field trials last year, the handsets operated with 99.5% accuracy and census takers were generally comfortable with the technology. The handsets still will be used for address verification and mapping, but the Census Bureau lacked the "comfort level" to use the devices for the follow-up count."

Who said that the United States is a world-leader? Looks to me that we are haven't left the dark ages.

$14 Billion Price Tag
"The bureau's decision to shelve technology that was supposed to make the count more accurate will add $3 billion to the cost of the count, bringing the price to more than $14 billion."

What's $14 billion? We've become numb to these big numbers. But translating this down to an individual basis, the government is spending $50 to count every man, woman and child in the country. Go to a sold-out football game with 100,000 people and it is costing $5 million to count and collect data on those people.

The Accuracy Question
I would think that spending $14 billion should provide a fairly accurate number. I would be happy with a 0.1% error rate, representing 300,000 people. Unfortunately, the results will be off by up to tens of millions of people. How can I claim this? Well, how many people are in this country illegally? Do a search on the internet and you can find a range from 10 million people to 35 million people. In no way am I against these people living here. In fact, I believe that we need to develop a plan to make them citizens. But that is an argument for another day. My problem is with the huge disparity in the numbers.

Economies of Scale
Where are the economies of scale? At $50 a head, it doesn't feel like there are any economies of scale.

A basic economic principle is that increased volumes should bring increasing returns to scale; or put differently, increasing volumes should result in decreasing costs. One would think that 300 million is a large enough number to achieve some kind of economy of scale.

But who am I to judge? Maybe the economies of scale are there and I just don't see it. Maybe if the population of the country was smaller, say 10 million people, the cost would have been several hundreds of dollars per person. Other countries could probably provide this data. We should go it. My guess is that some of them have gone beyond pencils and paper.

More Information: check out the WSJ article.

Advice To World Leaders: Be Careful What You Ask For

2008-04-16T14:55:00.000-07:00

Background
This past weekend say government leaders from around the world getting together to discuss the world's problems. If nothing else, these meetings always provide some comical relief. The semi-coordinated meetings included:

1) G-7 finance ministers (members include US, Germany, UK, Japan, France, Italy and Canada; they represent two-thirds of world GDP).
2) International Monetary Fund
3) World Bank

Food vs. Global Warming
The United States has mostly ignored the global warming problem and has caught nothing but grief from the rest of the world. It is the only major country in the world not to ratify the Kyoto Protocol.

Probably the biggest exception to this has been the US policy pushing corn-based ethanol. Over the last several years, the "politically correct" politicians from the US and the rest of the developed world have been slapping themselves on the back, bragging about the success of this program.

Well, this is all changing very quickly.

It turns out that ethanol may actually increase global warming, rather than decrease global warming (check out postings on 02/12/08, 10/24/07 and 10/23/08). Now agrofuels are being blamed for the world food crisis. Apparently, food is more important than global warming. Gee, go figure.

The United States is once again facing the brunt of this backlash. The same politicians who were recently gloating about the biofuel program are now condemning the program. India's finance minister, Palaniappan Chidambaram, said that "When millions of people are going hungry, it's a crime against humanity that food should be diverted to biofuels."

You have to love the irony.

US dollar vs. Euro
G-7 finance ministers downgraded their outlook for the world economy and put much of the blame on the US and its financial crisis. They signaled their concern for the weak dollar and implemented "new language" to support the currency. While there was no agreement for intervention, they seemed to "warn" speculators trying to drive down the dollar.

On the surface, this US dollar discussion seems reasonable. But maybe not so.

Consider the fact the last actual currency intervention by the G-7 occurred in 2000. At that time, the concern was the strong US dollar and the weak Euro. They were concerned about the US trade-deficit and global imbalances. They took measures to prop us the Euro and for years, welcomed the weakening greenback. Apparently, the dollar has fallen too much. The pendulum has swung back too far in the other direction. There is now a dollar crisis. With the declining dollar, there has been a surge in inflation, led by sharply higher commodity prices.

Once again, the government has fixed one problem, only to create another problem, which may be worse than the original problem that they were trying to fix. The G-7 will undoubtedly overreact again with this new problem.

Of course, they will not pursue an approach which would let the markets sort themselves out without intervention. The politicians are being paid to meddle and "fix" problems.

The most hilarious statement at the G-7 meeting this past weekend came from US Treasury Secretary Henry Paulson. He talked about "in very strong terms our commitment to a strong dollar."

It is one thing to disagree with the US decision to sacrifice the dollar in an attempt to fix its financial crisis. But don't lie so blatantly. And the government wonders why politicians are held in such low esteem. Duh.

Happy Tax Day

2008-04-15T09:03:00.000-07:00

It is that time of the year again: The local news cameras interviewing people tonight who are in their cars waiting in line to get their tax returns postmarked by the post office.

Few political issues get more attention and get people more excited than taxes. Past postings have discussed tax issues; expect more of the same in future postings. Today's posting will touch on several interesting issues that have come my way recently.

The Tax Code and Incentives
At a recent investment conference that I attended, Dan Mitchell of the Cato Institute gave a speech on "The Real Cost of Government" where he addressed a variety of tax policies and trends around the world. He pointed out that the government was increasingly using higher taxes on tobacco in an effort to raise its costs and discourage its use. In this example, you could say that the government understood how the tax code could be used effectively to incentivize a desired action. Why then doesn't this same government understand this same principle when it comes to capital gains taxes? Raising taxes on investments will only discourage the free market concept of our capital markets.

Where Are the Volunteer Contributions?
Written into the tax code is a provision for making volunteer contributions to the government. You always hear people arguing for higher tax rates, but I have yet to see anybody actually lead by example. To the best of my knowledge, nobody has ever given more to the IRS than what the current regulations required.

67,200 Pages and Growing
The WSJ had an interesting article on the size of the federal tax code. It continues to grow dramatically each year and this year will be no exception. In response to the current financial crisis, politicians are charging ahead to see who can provide the most bailouts, incentives and giveaways. The end result will be a variety of loopholes which will make the tax code that much more bloated.

The Hidden Tax Cost of Being an Athlete
The Sacramento Bee had an interesting article today on the tax implications of being a professional athlete today. Trying to understand the federal tax code is one thing. But how about trying to understand and file taxes in 10 or 20 or 30 states? Play one game in a new state and they will want their "fair share" of taxes. Heck, you don't even have to play; just suit up and sit on the bench. Or attend training camp in another state. That state wants your money also.

Weekly Chart: Farm Costs Going Thru The Roof

2008-04-14T14:55:00.000-07:00

Source: WSJ

Everywhere you look, headlines are highlighting the worldwide food crisis. There are shortages throughout the world, prices are skyrocketing, and deadly protests are breaking our everywhere. Haiti's Prime Minister Jacques Edouard Alexis resigned this past weekend after a week of rioting over higher prices for staples such as rice and beans.

In their article "Higher Food Prices May Be Here to Stay," the WSJ showed why it believed that there is little hope of any relief any time soon. Farmers may be getting more revenue for their food, but their costs are also skyrocketing.

This chart looks at the increase in diammonium phosphate fertilizer costs over the past decade. Talk about a hockey-stick looking chart. Unfortunately, this is but one example of surging costs that farmers are facing. Other increases include:

---Higher fuel costs to run tractors and equipment.

---Higher equipment costs because of strong demand from China and other developing countries.

---Higher costs for fertilizers, insecticides and other chemicals.

---Higher farm wage costs.

---Higher land costs.

---Expiration of hedges that helped slow down cost increases during 2006-07.

---And finally, let's not forget the "cost" of growing crops for food vs the growing of crops for subsidized fuel (ethanol).

Weekend Trivia: What Is The Plaza Accord?

2008-04-13T10:44:00.000-07:00

Answer
On 09/22/85 at the Plaza Hotel in NYC, the finance ministers from the five largest economies in the world (United States, Japan, West Germany, France and the UK) reach an accord on a variety of economic policies. The agreement defined specific actions for each country to take in an effort to lower the value of the dollar.

Unintended Consequences Of Government Actions
On the surface, the coordinated intervention was successful. The dollar fell 54% against both the Japanese Yen and the German Mark in just two short years.

As with many government programs, however, there were some unintended consequences. Japan agreed to a looser monetary policy which helped the Yen rise as desired. But this led to the Japanese asset bubble of the late 1980's, which in turn led to their stock market crash. Twenty years later, their economy still has not fully recovered.

Similarly, the Plaza Accord goal to lower the value of the dollar resulted in a run on the dollar. The intervention was so successful, that the Louvre Accord had to be hatched two years later to stabilize the currency.

Is government intervention ever really required? Can it ever really succeed? Maybe the government should take a hands-off approach and let the free markets take care of themselves.

Look at what the Federal Reserve has done with interest rates this decade. Lower rates.....raise rates.....lower rates. Stimulate the economy, slow it down, re-stimulate it again. Pop the technology bubble, create a housing bubble, pop the housing bubble, create a commodity bubble....does it ever end?

The Plaza Accord As Described by The Economist:

"On September 22nd 1985, finance ministers from the world's five biggest economies - the United States, Japan, West Germany, France and the UK - announced the Plaza Accord at the eponymous New York hotel.

Each country made specific promises on economic policy: the United States pledged to cut the federal DEFICIT, Japan promised a looser monetary policy and a range of financial-sector reforms, and Germany proposed tax cuts. All countries agreed to intervene in currency markets as necessary to get the dollar down. Perhaps not surprisingly, not all the promises were kept (least of all the American one on deficit cutting), but even so the plan turned out to be spectacularly successful. By the end of 1987, the dollar had fallen by 54% against both the D-mark and the yen from its peak in February 1985.

This sharp drop led to a new fear: of an uncontrolled dollar plunge. So in 1987 another big international plan, the Louvre Accord, was hatched to stabilise the dollar. Again specific policy pledges were made (the United States to tighten fiscal policy, Japan to loosen moentary policy). Again the participants promised currency intervention if major currencies moved outside an agreed, but unpublished, set of ranges. the dollar promptly rose."

For More Information On The Plaza Accord, Check Out Wikipedia

More April Quick Hits

2008-04-11T11:46:00.000-07:00

MARKETS
---US Treasury Secretary Henry Paulson said in a speech earlier this week that the US economy has "turned down sharply" and risks getting much weaker.

---In a repeat performance this week, as was stated in last week's blog, "Hitting the trifecta, AAA is reporting that gasoline prices hit an all-time record in Sacramento, California and the United States." Crude oil topped $112 per barrel for the first time ever this week.

---The Federal Reserve auctioned off another $50 billion to cash-strapped banks in the ongoing credit squeeze. This is the ninth such auction which now totals $310 billion. In a related move, the European Central Bank auctioned off $15 billion in the sixth coordinated action with the Federal Reserve.

DISMAL ECONOMIC INDICATORS
---The Reuters / University of Michigan consumer confidence index plummeted in April to its worst level since the stagflation days of March 1982.

---Despite a variety of government proposals to respond to the mortgage crisis, the number of mortgages going delinquent is accelerating. Equifax and Moody's Economy.com are reporting that 4.46% of all mortgages were at least 30 days past due at the end of Q1. This is up from 3.98% in Q4 and 2.92% a year ago.

---Retailers had a tough March as a report from UBS - International Council of Shopping Centers showed the weakest March results in 13 years.

---The Commerce Department reported that the trade deficit increased unexpectedly by 5.7% in February. In a mixed message, Americans spent less on imported oil for the first time in a year, but more on new foreign-produced cars.

INTERNATIONAL MONETARY FUND
---The IMF announced that it plans to sell 13 million ounces of gold, or 12% of its holdings. It is ironic that in an effort to shore up its financial situation, it is doing something that is contrary to the advice that it gives to its nation members.

---The IMF is projecting that the sub-prime financial crisis will end up costing nearly $1 trillion, based upon mid-March pricing.

---Because of the ongoing financial crisis, the IMF once again lowered their growth projections for 2008 and 2009. For the United States, they are now projecting anemic "increases" of 0.5% and 0.6%, respectively. For the entire world, they now see growth of only 3.7% and 3.8%, with a 25% chance of a global recession.

CORPORATE NEWS
---This week's bailout award goes to Washington Mutual, the largest US savings and loan company. It received a $7 billion capital injection from a private equity firm after it wrote off $3.5 billion in bad loans and eliminated 3000 jobs.

---Stock markets are down sharply today as GE announced very disappointing earnings. This bellwether rarely surprises to the downside and when it does, it is perceived to be very negative for the rest of the economy. Reuters is reporting that today's intraday drop of 12% is the sharpest drop in two decades.

---Responding to slowing sales and an image of selling a "bitter" coffee, Starbucks launched a new brewed coffee named Pike Place Roast.

---Wednesday's posting mentioned 4 airlines that have gone bankrupt in the past 3 weeks. Add to that list 1) Oasis Hong Kong which stopped flying two days ago and 2) Frontier Airlines which filed for bankruptcy protection today.

OTHER INTERESTING ITEMS
---You know that things are not looking up for the US when Canada rejected a proposed buyout of a Canadian company (MacDonald Dettwiler and Associates) by a US-based company (Alliant Techsystems). Bloomberg.com reports that Canada had not blocked a foreign takeover since at least 1985. Apparently, the space deal was deemed to be too sensitive and there was no "net benefit" to Canada. Richard Clark, a Toronto lawyer specializing in mergers said that "It's a shot across the bow and the government [Canada] knows that this will be taken seriously, not only be the prospective buyer, but also the U.S. government."

---22 years after completion, the Eurotunnel finally reported an operating profit. This is quite a turnaround for the company that operates the Channel tunnel between England and Europe. It was only 18 months ago that the company filed for France's equivalent of Chapter 11 bankruptcy protection.

---Local6.com in Orlando, Florida is reporting that the town of Oakland, Florida is considering a proposal to limit water consumption to 100-gallons-per person-per day. As with most other commodities, water is becoming more and more scarce throughout the world.

Food Shortages Vs. Subsidies For Farmers

2008-04-10T01:36:00.000-07:00

Summary
With worldwide food shortages.....and record high prices for most commodities (including wheat, corn and rice).....and relatively high incomes for farmers and the agribusiness....why in the world would the government renew a RECORD farm bill subsidy of $286 billion?

I'm just a naive bystander, but why not take the $286 billion and feed the people who are starving around the world? The United Nations is pleading for a token $500 million.

Food Crisis
Not a day goes by without more reports of the food crisis throughout the world. Prices are skyrocketing, basic staples such as rice are in short supply and riots have broken out around the world. A small sampling of recent headlines include:

---BBC News: Food riots turn deadly in Haiti

---NY TImes: The world food crisis

---Financial Times: UN pleads for $500m to avoid food crisis

---Bloomberg.com: Rice jumps to record on Philippine imports, curbs on exports

Farm Bill History
The farmer has played an important role throughout much of the country's history. Farming is a tough life and is characterized by boom and bust. During the Great Depression, about one-quarter of the population lived on farms and endured tough economic times. With this backdrop, the farm bill safety net was created.

Today, agriculture is big business. Only 2% of the population live on farms. Nevertheless, the farm bill subsidy still exists in a big way. Every five years, Congress debates and renews the bill. For the past five-year cycle, the farm bill has provided $260 billion for various programs. This works out to almost $1000 per person in this country.

Congress is currently debating renewal of the program. The House and Senate are working against an April 18 deadline to reconcile their programs which are estimated to cost $286 billion. The current law allows for payments to producers with adjusted gross incomes up to $2.5 million. President Bush has proposed lowering this limit to $200,000 and is threatening to veto the bill.

With payouts this large, is it any wonder that the agribusiness industry has spent $80 million into lobbying?

American Farmer Making Record Profits
A recent report in the WSJ shows that the average household income of a farmer is substantially higher than the average of all households in the country. And the discrepancy is increasing. These numbers don't even comprehend the surging commodity prices this year. Furious trading saw wheat prices surge 25% in a single day and rice prices surge 30% in a single day.

It is no coincidence that the one of the few areas in the country seeing real estate price appreciation is farmland in the midwest.

I have nothing against the farmer making a decent living. I have nothing against the agribusiness. But I do have a problem subsidizing them to the tune of hundreds of billions of taxpayer dollars that don't exit.

Farm Bill Craziness
Growing corn must be as good as it gets for a farmer. Because of the ethanol debacle, farmers are encouraged (subsidized) to grow corn. On top of being subsidized for growing the corn, they then sell the corn into the marketplace for record prices. It is no wonder that more and more farmland is being converted to growing corn. But in trying to satisfy our fuel needs, a food crisis has developed. Just in case that corn collapses down the road, however, Congress has provided a safety net thru the farm bill. And corn is the largest recipient within this bill.

On a completely different level, the WSJ discussed another absurdity of the farm bill:

"The goal was to target more benefits at farmers who work the land and need financial assistance, while weaning benefits away from the well-to-do. Recent recipients include 92-year old David Rockefeller, heir to oil-baron John Rockefeller. He received $554,000 in subsidies from 1995 to 2005 for farm operations and land conservation in New York, according to a spokesman for Mr. Rockefeller and government data compiled by the Environmental Working Group, which is lobbying for an overhaul of farm programs. The spokesman says Mr. Rockefeller has reinvested about $600,000 into the community where his farm is located, and that his late wife Peggy loved to farm and raised cattle."

Real Airline Woes

2008-04-09T10:16:00.000-07:00

Background

Yesterday, this blog poked fun at the airline industry over its silly regulations concerning cell phones and seat belt demonstrations.

Today, I will look at some of the real issues that the industry is facing.

The airline industry has always been one of boom and bust. The intense capital nature of the business makes it very difficult to make money. In fact, in the history of the industry, airline earnings have a CUMULATIVE NET LOSS. Today's problems will only add to this record.

Bankruptcies: 4 In 3 Weeks

---Aloha Airlines filed for Chapter 11 bankruptcy and shut down operations on March 31.

---ATA Airlines files for Chapter 11 bankruptcy and shut down operations on April 2.

---Skybus Airlines ceased all operations and filed bankruptcy papers this past Saturday.

---Champion Air, a Minnesota-based charter airline, will stop flying by May 31.

Stalled Mergers

---The proposed merger between Delta Airlines and Northwest Airlines has been on hold for months as the two unions representing the pilots have been unable to reach agreement.

---United Airlines and Continental Airlines began merger talks earlier this year, but talks have been put on hold as these two airlines are waiting to see what happens with the Delta and Northwest discussions.

---The Air France - KLM buyout of Italian Carrier Alitalia is facing opposition from Alitalia labor unions. If agreement is not reached soon, the Italian government will be forced to jump in.

Safety Issues

---The Federal Aviation Administration has begun cracking down on airline compliance with safety inspections. This has resulted in cancelations at American Airlines, Southwest Airlines and Delta Airlines.

---American Airlines canceled over 1000 flights today, or about one-third of its schedule, impacting about 100,000 travelers. Inspection of wiring problems caused cancelations of hundreds of flights two weeks ago and 460 flights yesterday.

---Several weeks ago, Southwest Airlines grounded about 10% of its fleet as it inspected for structural problems. The inspection lapse resulted in a $10.2 million fine from the FAA.

Fuel Costs
---Fuel prices continue to go higher. Another record was set today. There is a growing belief that this is not a temporary spike. Yesterday, the Energy Agency forecast that oil prices will average $101 for the entire year; this is a sharp increase from earlier projections.

---UPS, the world's largest shipping company, warned today that 1st quarter earnings will be lower than expected due partially to higher fuel costs.

New Product Delays

Yahoo Finance is reporting that "The Boeing Co. delayed its 787 jetliner program again Tuesday, pushing back its expected debut in commercial service to the third quarter of 2009 as it continues to grapple with problems involving its supply chain and the need to redo work done by contractors.

The newest delays push the 787's schedule back approximately another six months and mean the aircraft touted for its potential to be more fuel-efficient than other large jets is now more than a year behind its original schedule.....

The fourth delay with the 787, coming less than three months after the last one, further undermines Boeing's credibility on the much-hyped program and also is a setback to the more than 50 airlines that have placed nearly 900 orders for the top-selling plane. Buyers are likely to seek compensation for the delays."

The Usual Ongoing Problems

Delayed flights.....Lost luggage.....Dealing with Homeland Security.....You get the idea. It's no wonder that the industry has such a bad reputation.

So Much For Safety Concern BS

2008-04-08T11:52:00.000-07:00

For years, the airlines have been brainwashing us on safety concerns with the use of cellphones on planes.

Well come to find out, this safety concern has been nothing but BS.

Surprise, surprise!

Yesterday, the European Union announced new technical and licensing standards which will lead to the use of cell phones on airlines throughout the 27-nation bloc. The Financial Times is reporting that trials have been underway since December on Air France, testing the use of text messages, pictures and email via phones. The second stage of testing began last week and includes voice calls.

In another article in The Sacramento Bee, "The EU insists the change will not compromise safety."

With this "safety concern" behind them, the airlines will now have to deal with the social aspects of increased chatter on flights. There are strong opinions on both sides of the issue. Some airlines may still ban the use of cell phones, while other airlines will not impose restrictions.

Back in the United States, cellphone usage in the skies is currently banned by no less than two government agencies: the Federal Aviation Administration and the Federal Communications Commission. Despite the EU decision, both agencies said Monday that they have no plans to change their rules.

Once the Federal Aviation Administration finally gets their act together regarding electronic devices on planes, they can then focus all of their attention on the seat belt demonstration. This remains the silliest regulation of all-time. When was the last time that you met someone who didn't know how to fasten a seat belt?

Maybe it was a child going to school on a school bus. Why don't busses have seat belts? That's a story for another day.

Weekly Chart: Commodity Price Comparisons

2008-04-07T10:00:00.000-07:00

Click chart to make larger

Commodity prices have been surging over the last year. But not all commodities are the same. Taking a look at the the last 200 days of trading, different patterns emerge.

The Reuters/Jefferies CRB Index is a broad based commodity index which includes all categories (live cattle, cotton, soybeans, sugar, frozen concentrated orange juice, wheat, cocoa, corn, gold, aluminum, nickel, unleaded gasoline, crude oil, natural gas, heating oil, coffee, silver, copper and lean hogs) . This index is up 25% over the last 200 trading days.

Over this same timeframe, energy prices have increased 48% and agriculture prices have increased 47%. It is very ironic that these prices hit everyone's pocketbook, but the government oftentimes reports inflation numbers that EXCLUDE the "volatile" food and energy prices. Call me a skeptic, but maybe the government wants to make their numbers look better than they really are.

Precious metals get all of the attention, but they lag energy and agriculture prices with gains of 39%.

Tracking the slowing economy, industrial metals have only increased 3%.

The offset to higher agriculture prices is lower livestock prices. Higher food prices are making the livestock business very difficult.

Weekend Trivia: Today Is the 75-Year Anniversary Of What?

2008-04-06T01:41:00.000-07:00

ANSWER
Signing of Presidential Executive Order #6102

SUMMARY
This is an executive order signed by President Franklin D. Roosevelt on April 5, 1933 which prohibited the hoarding of gold coins, gold bullion and gold certificates in the United States. The order required that all such gold had to be tendered to the government by May 1, 1933.

HISTORY as described by Wikipedia
Franklin D. Roosevelt was sworn in as President of the United States on March 4, 1933. The country had just suffered thru four tough years known as the Great Depression. Believing that the national emergency still existed, Roosevelt believed that hoarding of gold was a grave threat to the country and it was necessary to prohibit such practice.

"The government required holders of significant quantities of gold to sell their gold at the prevailing price of $20.67 per ounce. Shortly after this forced sale, the price of gold from the treasury for international transactions was raised to $35 an ounce. The U.S. government thereby devalued the dollars (which it had just forced citizens to accept in exchange for their gold) by 41% of its former value....

The government held the $35 per ounce price until August 15, 1971 when President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus abandoning the gold standard."

Although the gold standard was abandoned, it was still illegal for US citizens to hold gold. On the very eve when the gold standard was abandoned, the National Committee to Legalize Gold (NCLG) was founded. After more than three years of work, it finally became legal to own gold again on December 31, 1974. The act did not, however, repeal the Gold Clause Resolution of 1933, which said that contracts are unenforceable if they use gold monetarily rather than as a commodity of trade.

An interesting result of the NCLG efforts was a privately-sponsored monetary symposium entitled "Investing Towards Freedom". This became an annual investment conference which continues to this day in New Orleans.

After abandonment of the $35 price in 1971, gold skyrocketed during the rest of the decade and peaked at $850 on January 21, 1980. This remained the all-time high until January 2nd of this year.

LOOKING FOWARD
It is often said that if we don't learn from history, we will be doomed to repeat it. The sub-prime driven credit crisis today, as well as the recent increases in gold prices, may be large warning signs. Owning some gold makes a lot of sense today for a lot of reasons.

TEXT
The complete text of Executive Order #6102 can be found at The American Presidency Project.

April Quick Hits

2008-04-04T11:37:00.000-07:00

MARKETS
---Corn prices have surged 30% this year to an all-time record price of $6 a bushel. The price is being driven by dwindling supplies, less plantings, and surging demand to feed livestock and support ethanol. On top of these record profits for farmers, the government, in its infinite wisdom, is finalizing the renewal of the 5-year farm bill. The final tab is expected to exceed the last 5-year total of $260 billion, which saw corn geting the largest subsidy. See next week's posting for more discussion.

Following up to the Tuesday posting regarding food shortages, World Bank chief Robert Zoelick said that "Thirty-three countries around the world face potential social unrest because of the acute hike in food and energy prices."

---Hitting the trifecta, AAA is reporting that gasoline prices hit an all-time record in Sacramento, California and the United States. Thinking that the big, bad oil companies are behind this, oil executives were paraded in front of Congress to explain the problem. Protesting high diesel prices, independent truckers across the country organized an impromptu strike, causing massive traffic problems.

The politicians don't seem to realize that about 70% of the gasoline price is determined by the global price of crude oil which the US oil companies do not control. Making matters worse, crude oil prices have increased more than gasoline prices; expect pump prices to increase further as we approach the summer driving season.

---The IMF once again lowered its forecast for 2008 global growth to 3.7%. They define a worldwide recession as annual growth slowing to below 3% and now give odds of 1 in 4 chances of this happening.

---Finally for the very first time, Federal Reserve Chairman Ben Bernanke uttered the word "recession". He acknowledged that the country could slip into recession this year. President Bush and Treasury Secretary Henry Paulson continue to go out of their way to avoid using that word.

DISMAL ECONOMIC INDICATORS
---The Labor Department reported that the economy shed 80,000 jobs in March. They also reported that January and February losses were more than previously reported. The net result was a jump in the unemployment rate to 5.1%. The manufacturing and construction sectors continued to be the hardest hit, but hey...............the government did its job by hiring more people......again.

Contradicting these numbers, the ADP National Employment Report said that 8000 jobs were added in March.

---The Labor Department reported that new jobless claims increased to the highest levels since 09/17/05 following Hurricane Katrina.

---The Commerce Department reported that overall construction activity fell 0.3% in February. The housing component fell for the 24th consecutive month.

---The Commerce Department also reported that factory orders fell by 1.3% in February, twice the level expected by economists.

---The American Bankruptcy Institute reported that consumer bankruptcies jumped 27% in Q1 vs. the same period a year ago.

---The Institute for Supply Management reported that its monthly gauge of manufacturing activity increased slightly from 48.3 to 48.6, but remained below the sub-50 contraction level.

---A New York Times / CBS News poll said that 81% of respondents believed that the US is seriously off-track. This is the highest level since this question has been asked beginning in the 1990s.

MORE SUB-PRIME WRITEDOWNS
---UBS reported write-downs of an additional $19 billion for Q1 and the surprise departure of its chairman.

---Deutsche Bank reported that it expected write-downs of $4 billion for Q1.

---Lehman Brothers reported that it will need to raise $3 billion in emergency funding to stay afloat during this ongoing credit crisis.

---Finally, in the feel sorry for me category, TimesOnline is reporting that "The chief executive of Bear Stearns accused traders yesterday of bringing down his securities firm by spreading unfounded rumors designed to induce a panic that led to a run on the group." In my opinion, if this is all it took, they deserved what they got.

OTHER INTERESTING ITEMS
---The California gold rush is being revived. With prices over $1000 per ounce, more and more people are trying their luck at panning for gold. A number of news reports are showing up in the newspapers and on TV.

---It is common knowledge that the housing crisis has led to declining lumber production and prices. But an unintended consequence is that there is now a worldwide shortage of sawdust. Apparently there is huge demand for the stuff for such products as animal bedding and particleboard.

So Much For My Childhood Fishing Hole

2008-04-03T11:22:00.000-07:00

I grew up in Michigan and spent many summers visiting my grandparents at their summer home in Marine City. This was located on the St. Claire River; about a mile across the river was Canada. Back in the day, river traffic was heavy and freighters would float by every few minutes. Goods could be shipped all the way from Chicago to the Atlantic Ocean.

Wikipedia pictures showing
1) Head of river looking into Lake Huron, showing the twin Blue Water Bridge
2) Great Lakes freighters navigating on the lower St. Clair River. View is from the U.S. side, looking across to Canada.

I have many memories from those summers, but my fishing stories probably top the list. My Grandfather would take me and my cousins to several fishing holes that only the locals knew about. Once we found a school of bass, we were catching fish as fast as we could put bait on the hook. In fact, I'm not sure we even needed bait; it was that easy. Our small group could pull in over one hundred fish within a couple of hours. I can hear everyone laughing now, but for those who are skeptical, I have pictures to back up the story.

Typically, these fishing holes were on the Canadian side of the river. But during this more peaceful era, this didn't mean anything. Canadians seemed no different than us and there was no real thought of two different countries. We rarely stepped foot in Canada, but it was never an issue if we did. It seemed no different than stepping foot on American soil further down the river from my grandparent's place.

Passport Now Required To Fish

Obviously, you know where I'm going with this story. We live in a much more complicated world today. The United States and Canada are separated my much more than a mile of the St. Claire River.

The USA Today had an article last week that discussed all of the regulations that must be met to take a chartered fishing trip from the shores of Ohio and into Lake Erie.

"The rules apply to all the Great Lakes, but opposition is most potent on Erie because the geography of the lake means the best fish are often over the international line.

Some operators haven't decided whether they'll continue fishing in Canadian waters. If they do, the operators will be required to:

•Fax in passengers' personal information — name, date of birth and government ID number — to the local Customs and Border Protection office an hour before they leave shore. The names will be run against terrorist watch lists.

•Make sure passengers carry either a passport or a government ID and a proof-of-citizenship document.

•Send the passengers to a local border protection reporting station after landing, so they can call in on a videophone.

Officers will be watching and doing spot checks on patrol boats and government aircraft. 'Our concerns are anything from terrorists and terrorist weapons to drugs and undocumented aliens,' says Brett Sturgeon, a spokesman for Customs and Border Protection.

Jim Bonner, whose Sunshine Charters business has been taking tourists fishing on Lake Erie for 25 years, calls the rules 'a waste of taxpayers' money.'

'It's a shame' he says. 'It's just wide-open water.'"

Getting By On Food Stamps

2008-04-02T11:35:00.000-07:00

Yesterday's posting discussed the food crisis facing people around the world. Rice is a staple for almost half of the world's population. Prices are going thru the roof and supplies are in jeopardy as leading export nations have stopped exporting. In the United States, food is generally available, but affordability is becoming an increasing problem.

This headline appeared in The Independent. As the caption shows, "Food stamps are the symbol of poverty in the US. In the era of the credit crunch, a record 28 million Americans are now relying on them to survive - a sure sign the world's richest country faces economic crisis."

A recent article in the Sacramento Bee presented the following interesting facts:

---Almost one in ten Americans is now receiving food stamps. This is the highest number since the program first began in the 1960s. This is the second highest percentage ever seen, slightly below the numbers after the recession in the 1990s.

---Forty states showed increases in recipients during 2007.

---Food stamps are an entitlement program, with eligibility guidelines set by Congress and the federal government paying for benefits while states pay most administrative costs.

---Federal benefits are projected to increase from $34 billion in 2008 to $36 billion in 2009.

---The state of California and Sacramento County reported increases of 20% and 25%, respectively, from 2003 to 2008.

---States with the highest rates include Michigan at one in eight residents, and West Virginia at one in six residents.

Rice Shortages Creating Social Unrest

2008-04-01T16:01:00.000-07:00

Summary
Commodity prices have been surging since the turn of the millennium. To many of us, the daily records have been frustrating. Paying more at the pump is not pleasant. But for billions of people around the world, the situation is much worse. Having enough food to live on cannot be taken for granted.

This plight can be seen from recent headlines in the news. The following headlines have appeared in the Financial Times, the Wall Street Journal and the Sacramento Bee over the last several weeks.

Food Headlines In The Financial Press
---UN pleads for $500m to avoid food crisis
---Forget credit and oil - the next crisis will be over food
---Food stamps likely to set an unwanted record this year
---Wheat in biggest one-day rise as price soars 25% to record high
---Food-cost hike seen as farmers plant less corn
---Farm crisis deepens in Argentina

More Specifically; Rice Headlines In The Financial Press
---Fears rise of unrest across Asia as rice price surges 30% in a day
---Rice hoarding in Asia pressures supplies
---Rice prices reach 34-year peak
---Filipino diners face half portions of rice
---The rice is tight

Additional Rice Facts
---Prices have doubled in Asia since the beginning of the year.
---The US Department of Agriculture predicts that global rice stocks will fall to their lowest levels in 25 years.
---Protests have broken out in Guinea, Egypt and the Philippines. Social unrest has hit countries throughout Africa, including Cameroon, Burkina Faso and Senegal.
---Export restrictions have been implemented by leading export nations, including India, Viet Nam, Cambodia and Egypt.

Picture from Financial Times, 04/02/08

Weekly Chart: Violent Emerging Market Correction

2008-03-31T11:53:00.000-07:00

Click image to make larger

Emerging markets are often compared to US markets on steroids. It really doesn't matter what country you choose. Their chart patterns are very similar. This is a five-year look at the Shanghai Stock Exchange Composite Index.

There was euphoria in China when the exchange doubled in 2006, and then doubled again in 2007. Everyone jumped into the markets. Housewives became day traders. There was no limit to the upside. A billion people were going to move to the cities and adopt western lifestyles.

Well you know the rest of the story. It was only a matter of time before the market corrected. In five short months, the index has corrected by 43% and there is absolutely no sign of a bottom. It is still in a free-fall.

By comparison, as ugly as it has felt with US stock markets, the DJIA is only down 14% from its all-time high. Even the more volatile NASDAQ is only down 20% from its 52-week high.

Weekend Trivia: What Is The Jekyll Island Club Most Famous For?

2008-03-30T11:45:00.000-07:00

Simple Answer: Location of a secret meeting which created the Federal Reserve.

Brief History

According to Wikipedia, "The Jekyll Island Club was an elitist private club located on Jekyll Island, on the Georgia coastline. It was founded in 1886 when members of an incorporated hunting and recreational club purchased the island for $125,000." It was added to the National Register of Historic Places in 1972 and is a resort today.

Steve Sjuggerud of Dailywealth.com says that "According to resort's current brochure: 'The Jekyll Island Club was described in the February 1904 issue of Munsey's Magazine as 'the richest, the most exclusive, the most inaccessible club in the world.' Its impressive members included such luminaries as J.P. Morgan, William Rockefeller, Vincent Astor, Joseph Pulitzer, William K. Vanderbilt and other recognizable names, on the roster were Macy, Goodyear, and Gould.'"

Secret Meeting To Create The Federal Reserve

Wikipedia continues: "Jekyll Island was the location of a meeting in November 1910 that may have hastened the creation of the Federal Reserve. Following the Panic of 1907, banking reform became a major issue in the United States. Senator Nelson Aldrich, (R-RI) the chairman of the National Monetary Commission, went to Europe for almost two years to study that continent's banking systems. Upon his return, he brought together many of the country's leading financiers to Jekyll Island to discuss monetary policy and the banking system, an event which some say was the impetus for the creation of the Federal Reserve.

On the evening of November 22, 1910, Sen. Aldrich and A.P. Andrews (Assistant Secretary of the Treasury Department), Paul Warburg (a naturalized German representing Kuhn, Loeb & Co.), Frank A. Vanderlip (president of the National City Bank of New York), Henry P. Davison (senior partner of J. P. Morgan Company), Charles D. Norton (president of the Morgan-dominated First National Bank of New York), and Benjamin Strong (representing J. P. Morgan), left Hoboken, New Jersey on a train in view of a group of confused reporters, who were wondering why these bankers, representing about one-sixth of the world's wealth, were gathering at this particular place and time and leaving together.

Forbes magazine founder Bertie Charles Forbes wrote several years later:

'Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundred of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance.

I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written... The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. Off the party set. New York’s ubiquitous reporters had been foiled... Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real birth of the present Federal Reserve System, the plan done on Jekyll Island in the conference with Paul, Frank and Henry... Warburg is the link that binds the Aldrich system and the present system together. He more than any one man has made the system possible as a working reality.'"

Ongoing Controversy

Creation of the Federal Reserve has been debated ever since. Many economists believe that it was a flawed system from the start. There is a school of thought that says that it led to the Great Depression 20 years later, the very thing it was designed to prevent. This same school of thought believes that the current financial mess was created by the Federal Reserve and that their solutions are only making the problem worse. The legendary economist Milton Friedman recently told a finance conference that the Federal Reserve should be abolished.

Additional Reading

I have not read this book, but I have seen it referenced many times in the financial community.

The book description on Amazon reads "Where does money come from? Where does it go? Who makes it? The money magicians' secrets are unveiled. We get a close look at their mirrors and smoke machines, their pulleys, cogs, and wheels that create the grand illusion called money. A dry and boring subject? Just wait! You'll be hooked in five minutes. Reads like a detective story — which it really is. But it's all true. This book is about the most blatant scam of all history. It's all here: the cause of wars, boom-bust cycles, inflation, depression, prosperity. Creature from Jekyll Island will change the way you view the world, politics, and money. Your world view will definitely change. You'll never trust a politician again — or a banker."

Final March Quick Hits

2008-03-28T16:00:00.000-07:00

MARKETS
---Rice is a staple food which feeds half of the world's population. As with many commodities, its price is at record levels. But this did not prepare anyone for a 30% increase in prices on Thursday. This is not a typo. The price surged 30% in one day. Fears of social unrest are spreading throughout Asia. Look for more detail in a blog posting next week.

---Last week's euphoria with the Federal Reserve rescuing the market is long gone. As has been typical of their interventions the last six months, the good news is quickly forgotten and Wall Street gets back to worrying about how bad this financial crisis will really become.

---Most markets (US equities, gold and crude oil) started strong early in the week, only to give back most gains by the end of the week. Crude oil prices jumped after an attack on an Iraqi pipeline, but these gains were only temporary.

---The Shanghai Composite Index remains in a severe bear market. With a decline of 5% on Thursday, the index is at a nine-month low and is down 44% from its peak. The index did reverse itself on Friday with a 5% gain as Agora Financial's 5 Min. Forecast reported "rumors suggest the Chinese government may enable gamblers worldwide to trade futures on the Shanghai Composite."

MORE NEGATIVE ECONOMIC INDICATORS
---The Reuters / University of Michigan Consumer Sentiment Survey fell from 70.8 in February to 69.5 in March. These levels are usually associated with recessions.

---The Conference Board's consumer-confidence index plummeted from 76.4 in February to 64.5 in March, or the lowest level since 1973.

---The Commerce Department reported that Orders for Durable Goods (big-ticket items expected to last three years) fell 1.7% in February.

---The Commerce Department reported that February new home sales fell to its slowest pace in 13 years.

---The S&P / Case-Shiller Index showed that home prices in major metropolitan areas plunged 10.7% in January from one year earlier; this is the sharpest drop in the 20 years that the data has been collected. Prices are now down for 13 consecutive months.

---Hold on, there is hope. The National Association of Realtors reported that sales of existing homes increased an unexpected 2.9% in February. But it came with a cost: prices fell in the largest year-over-year drop since records began in 1999.

CORPORATE NEWS
---Apparently not everyone was happy with the Federal Reserve arranged buyout of Bear Stearns by JPMorgan for $2 a share. The politicians are asking why the Federal Reserve is bailing out Wall Street firms and not individual homeowners. And did they even have the authority to do what they did? In response to a huge backlash from Bear Stearns shareholders and employees, JPMorgan increased the buyout offer by 5X, or from $2 a share to $10 share. They are also offering large financial incentives for employees to stay on.

---The merger of Sirius Satellite Rado and XM Satellite Radio received antitrust clearance from the Justice Department and it now moves to the Federal Communications Commission for final approval. It took the Justice department over one year to figure out that there were numerous alternatives to satellite radio and that the general public would not be harmed. Why this took more than 30 seconds escapes me. When you see what emerging countries are doing over the same one year, it is no surprise that the US is quickly falling behind.

---Seven years after the collapse of the energy giant, Citigroup agreed to pay $1.66 billion to Enron creditors to settle two of the largest remaining claims over its involvement in the collapse. Now that this is out of the way, Citigroup can focus on the wave of new lawsuits over its involvement in the sub-prime mortgage crisis.

---After paying over $5 billion for Jaguar and Land Rover, and then many billions more trying to build the brands, Ford Motor has sold both auto companies to Tata Motors for only $2.3 billion. No wonder that Ford's stock is at a 22-year low.

Reporting From Casey's Crisis & Opportunity Summit; Day 2

2008-03-27T00:19:00.000-07:00

Sitting thru two days of financial discussions has been fascinating. I'm confident that many of the ideas discussed will end up in numerous future blogs. My challenge today, however, is to create a short blog which summarizes everything that I have heard. I have decided to do this with two pictures.

Johannes Gutenberg invented the printing press in Germany in 1439. The printing press is considered to be one of the greatest inventions of all-time. Wikipedia says that "The impact of Gutenberg's printing press in Europe was comparable to the development of writing, the invention of the alphabet or the Internet, as far as its effects on society."

But as with many things in life, good things can be used in wrong ways.

For most of our history, the US has had a monetary system backed by gold. In fact, during the early years for our country, the founding fathers spent quite a bit of time discussing monetary systems.

Jumping forward almost two hundred years, President Nixon abandoned this gold link in 1971. Our government has been free to print as much money as they want. Who cares if budgets aren't balanced. Since the dollar was taken off the gold standard, there has been a slow erosion in the value of the dollar. This slow erosion is starting to accelerate.

At the end of the day, what is a dollar worth? It is backed by nothing but the so-called good faith of the government. This is the same government that has figured out that few people understand the inflationary tax of running the printing presses overtime. And this has been reinforced by the rest of the world which anointed the US dollar as the world reserve. But things are starting to change now. The current credit crunch is directly related to the paper currency that is no longer providing real support.

A monetary system that is back by a printing press is very dangerous and eventually ends up being a bankrupt system. The history books show that paper currencies always end up worthless.

Reporting From Casey's Crisis & Opportunity Summit; Day 1

2008-03-26T11:17:00.000-07:00

I'm attending the second in a series of ongoing investment conferences sponsored by Casey Research. As the title implies, the conference is looking at the financial crisis that surrounds us and the investment implications for dealing with it.

The CRISIS side of the conference is the easy part. Every presenter has done a great job at clarifying the problems and backing it up with boatloads of slides. There certainly will be no lack of material for future blog postings.

The more difficult aspect of the conference is the OPPORTUNITY side. Unfortunately, there is not much agreement on what to do after leaving the conference.

The most obvious crisis is the the sub-prime financial mess. The debt markets have been broken. Companies are going bankrupt and the governments have had to intervene with a variety of actions. The opportunities are less obvious. Gold bullion has skyrocketed, only to correct by 10% last week. The gold mining stocks have lagged the gold bullion action. There is quite a bit of debate as to whether we are in the early stages or the late stages of the financial meltdown. Forecasts for gold ranged from $800 to $8000. Both forecasts may be correct; it is only a matter of timing.

Peak energy is a growing crisis, as measured in terms of record prices, as well as long-term diminishing supplies. In looking at opportunities, alternative energy plays are attractive, specifically hydro and geothermal plays. Canadian natural gas stocks are expected to provide opportunities. While everyone believes that the world will move toward more nuclear power, there is a big debate as to whether the run in uranium stocks is over.

Peak food is starting to make headlines recently. The United Nations is saying that they are unable to feed people because of soaring food prices. Commodity and agriculture plays have done extremely well in the past several years and should do well long-term, but a correction is probably overdue and would be normal in an ongoing bull market.

The crisis is really about peak everything. As an example, today's ethanol mandate is nothing but a modern-day agriculture policy driven by the government as it converts land use to energy production.....with huge implications for food, water, climate and energy.

Economic Stimulus Act....Stimulating The Post Office

2008-03-25T10:43:00.000-07:00

Wasting Taxpayer Money

In an effort to congratulate itself for the Economic Stimulus Act of 2008, the government instructed the IRS to send out notices to an estimated 130 million households that would be getting rebate checks soon.

Each letter costs 32 cents to print, process and mail; that works out to $42 million to inform the public of what nice people our politicians are. What a waste of taxpayer money.

But it gets worse.

And Then Lying About It

Politics being what they are, the mailing drew criticism. Why should the government spend $42 million to contact people who normally file tax returns and would get their payments automatically?

Facing this criticism, the IRS announced that they would back off of their original plan and only contact about 21 million people who receive Social Security or Veteran Affairs benefits and do not normally file tax returns.

I remarked at the time that the government actually listened and was going to do the right thing.

But sadly, I was wrong.

The IRS said one thing, but did another thing. From my informal poll, they went ahead and mailed the notice to everyone. I received the notice, both of my two adult children received the notice, my in-laws received the notice, and even my accountant received the notice. I have not talked to anyone who said they did not receive the notice.

The IRS lied to us. But it gets worse.

And Then Wasting More Taxpayer Money

The last paragraph of the notice says that "All individuals receiving payments will receive a notice and additional information shortly before the payment is made." This is a second notice which should cost an additional $42 million.

But wait, postal rates are increasing a penny per letter, effective May 12. This second notice will cost $43 million.

Finally, the actual stimulus checks will result in a third letter, at a cost of an additional $43 million. Of course, the IRS cannot combine this rebate with any tax refund which would be mailed at about the same time.

Adding up the cost of the three letters, the IRS will spend $128 million of our taxpayer money, just to make us feel good.

Weekly Chart: Does The Federal Reserve Add Stability?

2008-03-24T09:04:00.000-07:00

Federal Reserve Mission Statement (per their website):

"The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

Today, the Federal Reserve’s duties fall into four general areas:

1) conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
2) supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
3) maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
4) providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system"

Is This A Picture Of Stability?

The Federal Reserve maintained relatively high interest rates in the late 90's as it tried to slow down the tech bubble. But when the dot-com bubble finally crashed in 2000, the Federal Reserve was slow to react. They finally started lowering rates in 2001, and eventually took them all the way down to 1.0%.

These low interest rates then contributed to the real estate bubble which began five years ago. The Federal Reserve responded by sharply raising rates in 2005-06 to slow down this new bubble. Predictably, the real estate bubble broke in early 2007, but the Federal Reserve didn't begin to lower interest rates until September. It has been trying to catch up ever since then. The Federal Funds Rate has dropped from 5.25% to 2.25% in just six months.

In my opinion, the Federal Reserve has changed its Federal Funds Target Rate in REACTION to an economy that is already changing. It typically is slow to react, and oftentimes, it then overreacts. It feels like the tail is wagging the dog.

Just wondering
What if the Federal Reserve held their interest rates steady at 3%? What if the money supply was expanded at the same rate as the economy grew? Would the economy be much more predictable and less likely to alternate between extremes of contraction and expansion?

Historical studies have shown that the US economy worked fine for many years prior to the existence of the Federal Reserve. I'm not advocating that they disappear, but maybe they should promote more firm strategies. Maybe they should be more proactive and less reactive. Or maybe they should just keep their hands off the economic levers.

Weekend Trivia: What Is The CRB RIND?

2008-03-23T10:00:00.000-07:00

The CRB RIND is a Raw Materials Index published by the Commodity Research Bureau. The index consists of the following 22 obscure raw materials:

Burlap, Butter, Cocoa beans, Copper scrap, Corn, Cotton, Cottonseed oil, Hides, Hogs, Lard, Lead scrap, Print cloth, Rosin, Rubber, Steel scrap, Steers, Sugar, Tallow, Tin, Wheat, Wool tops and Zinc.

"The Spot Market Price Index is a measure of price movements of 22 sensitive basic commodities whose markets are presumed to be among the first to be influenced by changes in economic conditions. As such, it serves as one early indication of impending changes in business activity. The commodities used are in most cases either raw materials or products close to the initial production stage which, as a result of daily trading in fairly large volume of standardization qualities, are particularly sensitive to factors affecting current and future economic forces and conditions."

These raw materials typically do not get attention-grabbing headlines. They are not normally influenced by the futures market and large speculators and hedge fund traders. The markets are dominated by factory purchasing agents and suppliers. For that reason, they are believed to better represent what is going on in the marketplace.

That be said, the index has been almost as volatile as other commodity indices. It peaked on Monday with the Bear Stearns financial crisis, and then fell sharply the rest of the week because of a combination of the various Federal Reserve actions and a technical correction.

And More March Quick Hits

2008-03-21T12:58:00.000-07:00

Source: WSJ, 03/20/08

MARKETS
---What a crazy week. The Bear Stearns crisis over the weekend led to sharp stock market declines and sharp commodity prices increases on Monday. The Federal Reserve then stepped in to coordinate the Bear Stearns bailout and lower interest rates by 0.75%. This reversed the market actions of the prior several weeks.

---When all was said and done, the DJIA increased 3.43% for the week and the NASDAQ increased 2.06% for the week.

---Commodity prices fell across the board. In the three trading days since their peaks on Monday, gold fell 9%, crude oil fell 9% and silver fell 23%. The CRB Index, which tracks 19 tradable commodities, fell 7%. Meanwhile, the US dollar reversed course and increased by 3.4%, a huge move by currency standards.

---As the Wednesday posting indicated, the jury is out as to whether or not these reversals are for real or are just normal corrections in the longer term trends.

ECONOMIC INDICATORS AND POLLS REMAIN NEGATIVE
---Wholesale prices rose 0.5% during February, bringing the annual PPI increase to 6.4%.

---New housing stars and new housing permits both fell in February to their slowest levels in 17 years.

---The Conference Board's leading economic indicators fell for the fifth straight month, the longest streak since the tech bust seven years ago.

---A USA Today poll said that more than three out of four Americans believe that the country is in recession, the worst reading since September 1992.

---A CNN / Opinion research poll said that inflation is the number one economic concern for Americans.

OTHER INTERESTING ITEMS
---Ignoring the difficult credit environment surrounding them, Visa went public and their IPO raised a US-record $19.65 billion. The offer price had been increased to $44, and in the first day of trading, the stock closed at $56.50 per share.

---Breitbart.com is reporting that the Canadian interior ministry said that a record 429,649 people moved to Canada last year. The country is trying to bring in immigrants to address labor shortages and the politicians are fighting over how successful the program has been. Talk about a difference between Canada and the United States.

---Also in Canada, the International Speculator is reporting that Canadian schools are graduating 1200 geologists a year, against a demand for 9000 of them. As a result, the starting salary for a new geologist now exceeds that of a new MBA.

---The blog Marginal Revolution is reporting "Over here in the Netherlands, court proceedings are starting this week on the 'biggest speculation fraud ever in the Netherlands'..... Investors have lost tens of millions of euros in what turned out to be a big pyramid scheme. Now for the ultimate irony. Any idea what these people were investing in? Tulip bulbs. Really." Check out my 02/10/08 posting which discussed the most famous market bubble of all time involving tulip bulbs.

---The Financial Times is reporting that "A wheat trader at MF Global, one of the world's biggest commodities brokerages, lost $141.5 million by making 'unauthorised' trades.....The news wiped more than a quarter off the value of the company's shares."

---The new $5 bill began circulating this month. It is much more colorful and supposedly much more difficult to counterfeit.

March Madness Office Pools

2008-03-20T17:07:00.000-07:00

Office productivity is taking a hit this week as March Madness begins today. Office workers have completed their brackets and now the games are beginning.

Fun With The Numbers

---75% of office workers make bets of $20 or less in office pools.

---48% of office workers believe that the NCAA tournament is the most popular office pool, edged out just barely by the 51% who favor the Super Bowl.

---While only $750 million will be wagered on the NCAA tourney, lost productivity will total $1.7 billion.

---37.3 million office workers are expected to participate this year, with 1.5 million of them actually watching games from their desk.

---While winning money is the primary motivation for 36% of office workers, 45% of them said that they were driven by camaraderie. Maybe the productivity loss can be justified by the team-building benefits that are derived.

---Source: compiled by The Sacramento Bee

Looking At The Legality Of Office Pools
In California, office pools are illegal and current law allows first offenders to be jailed for up to one year and fined $5000. This may change soon as Assembly Bill 1852 has been drafted and would reduce penalties to only $500. Jail time would be eliminated.

The Sacramento Bee article reported that "Jeffries' bill was sparked by the Riverside County arrests of Margaret Hamblin, 73, and Cari Gardner, 39, on charges of operating a $50 betting pool at an Elks Lodge in 2006."

"The Lake Elsinore Republican said his goal is to make the punishment fit the offense - not to legalize office betting." But with Indian casinos, lotteries, and horse racing all legal, why even bother addressing office pools?

My neighborhood poker group is getting together next week. Do I need to worry?

Lost In All The Excitement

2008-03-19T17:33:00.000-07:00

Craziness
Markets are all over the place. Stocks, bonds, commodities, currencies and interest rates.................they are all acting crazy. One day they make dramatic moves one way, only to make even more dramatic moves going the other way the following day. The DJIA skyrocketed 420 points yesterday, only to give back 293 points today.

What does all of this mean? At the end of the day, what has really changed? What are the implications for investing?

Government Will Do Whatever Is Required
From President Bush to Federal reserve Chairman Ben Bernanke to Treasury Secretary Henry Paulson.....the words and actions of everyone say the government will do anything to prop up the US economy and avoid a financial meltdown.

The financial tools that have been used thus far include: interest rate reductions, liquidity injections, SIV Superfund, mortgage regulation changes, stimulus program, Term Securities Lending Facility (TSLF), Term Securities Lending Facility (TSLF) and charter expansions. New financial tools seem to be added to the toolbox every month.

US Dollar Sacrificed
In trying to manage the financial slowdown, the government has two conflicting choices. On the one hand, there are a variety of tools that that can implement which essentially floods the market with liquidity. This usually will help in the short term, but may push the real underlying problems into the future. Bailouts and fiscal stimulus programs are often associated with this approach. Problems tend to be inflated away and the US dollar suffers as a result.

On the other hand, however, the government can step back and let the markets sort themselves out. With this approach, Bear Stearns would be allowed to go bankrupt, homeowners would be forced to lose their homes, and the stock markets would probably plummet. This solution is usually more severe and can result in a severe recession. It is typically more difficult in the short term, but better in the long term.

The government has clearly chosen the first choice. It is no accident that the US dollar continues to decline on a daily basis against all other major currencies.

Federal Reserve Now Responsible For Investment Banks
Until this weekend, the Federal Reserve only regulated commercial banks. Their main charter was to provide a sound banking system such that the deposits of ordinary people were protected. Their charter did not include investment banks. These investment banks do not accept deposits and do not resemble normal banks. But with this weekend's actions, the Federal Reserve has taken it upon itself to lend money and put taxpayer money at risk to these "nonbanks."

The Government Will Guarantee Mortgages
When all is said and done, the government will guarantee risky mortgage-backed securities. With the new Term Securities Lending Facility (TSLF), the Federal Reserve will swap federal reserve securities for mortgage-backed securities. The government is taking on all of the risk, while the financial institutions are sheltered from their troubled mortgages. And when I say government, that is you and me.....the taxpayers. Don't get me wrong; the homeowner who loses their house is not protected. Instead, the large Wall Street firms who peddle these mortgages are protected.

In addition, Fannie Mae and Freddie Mac have been given more power to purchase mortgages and keep the housing market afloat. Bloomberg.com reported today that the Bush administration reduced the amount of capital the companies are required to hold as a cushion against losses. This is in addition to the relaxing of portfolio caps earlier in the month. This will allow the two firms to guarantee $2 trillion in mortgages this year.

It is very ironic to me that these two firms which contributed heavily to the current housing meltdown, are now being given additional authority to help fix the problem.

Investment Implications
The jury is out on whether or not the government will succeed. There are strong arguments on both sides of the fence. Your view of the government's ability to prevent a financial meltdown should guide you on whether or not to invest in the stock market.

As for me, I remain very nervous. Despite all of the government activities thus far, markets remain down and it still feels like the economy is worsening. The euphoria with each government intervention is good for about 24 hours. And then it is back to falling markets.

More obvious to me is that there are huge inflation implications and the US dollar will be sacrificed. The best way to play this is through gold and silver. This remains my number one recommendation. Check out my posting on 11/04/07 which provides 10 different methodologies for investing in gold, ranked by risk. For any of the categories, let me know if you want any specific recommendations.

Editorial: S&A Digest today:

'It was 10 years ago that I [Porter Stansberry] met Jim Rogers for the first time. Sjuggerud and I sat next to him at a speaker's dinner in New Orleans. He was bullish on commodities and had just set up his own commodity index fund. In addition to being an excellent speculator, Rogers understands more about the history of finance than just about anyone in the whole world. And he knows the Fed is making a horrible mistake with its bailout of Bear Stearns:

They are really giving up on the dollar, they are driving the dollar down, they are printing money as fast as they can. Look, the Federal Reserve has just in the last week spent $230 billion taking on loans, house loans, mortgages, out of the system. This man Bernanke was never elected by anybody, I don't know where he gets the audacity to spend $230 billion of our money to bail out a few friends on Wall Street. This is totally outrageous. He is next going to be in his helicopter going around the world collecting rent payments from people. Who gave him the authority to do that? To destroy the dollar, to destroy our currency, to essentially destroy the American economy? And no one ever voted for the man. It is just mind boggling to me. And then he gives more money to Bears Stearns, so these guys can continue to drive around in their Maseratis."

Weekly Chart: 50-Year Low For 3-Month US Treasury Bill Yields

2008-03-18T08:24:00.000-07:00

Bloomberg.com reported yesterday that "Treasuries rose and the three-month bill rate plunged to the lowest since the 1950s.....Investor demand for the relative safety of short-term government debt sent the three-month bill rate down 16 basis points to 1 percent, according to Bloomberg's market average. It touched 0.652 percent, the lowest level since May 1958, when the U.S. was emerging from a recession."

This first chart is yesterday's intraday trading for the three-month treasury bill. The right-side scale shows the percent yield.

Click chart to enlarge.

This second chart looks at the last one year of trading for the three-month treasury bill. Again, the right-scale shows the percent yield.

Click chart to enlarge.

Bear Stearns.....Bear Market.....Bare Exposure

2008-03-17T12:51:00.000-07:00

Who Can You Believe?
President Bush.....Federal Reserve Chairman Ben Bernanke.....Treasury Secretary Henry Paulson.....Bear Stearns CEO. They all have insisted recently that the markets are operating smoothly. After seeing what has happened to Bear Stearns in the last week, however, these words are nothing but BS.

All of the financial news networks are abuzz over the Bear Stearns debacle. Analyst after analyst after analyst is paraded across the TV screen to provide their so-called "expert" opinions. What amazes me is that anyone would listen to these opinions. Given that NOBODY predicted that the Bear Stearns' stock price would go from $57 to $2 in two trading days, how can any opinions be taken seriously? How can anyone know if we are in the early stages or the late stages of this financial meltdown?

Although the analysts may not know anything, some people did. Who knew what and when did they know it? It sure feels to me that the Federal Reserve knew what it was going to do this past weekend when it announced last Tuesday that it would accept risky mortgaged-backed securities to be pledged against US treasuries.

Chronology Of Events

Last Tuesday
The Federal Reserve has announced that they will allow financial institutions to pledge risky mortgaged-backed securities to purchase 28-day loans of Treasury securities. The initial commitment for this Term Securities Lending Facility (TSLF) is $200 billion, but they left the door open for additional operations down the road.

One Day Later On Wednesday
In a CNBC report on Wednesday of last week, "The chief executive of Bear Stearns told CNBC that despite recent market volatility, he is not aware of any imminent threat to the Wall Street investment bank's liquidity.....In an exclusive interview with CNBC's 'Squawk On the Street,' Alan Schwartz said he does not know where the rumors originated.....Schwartz says he has numbers to back up his insistence that the bank's position is solid."

Two Days Later On Friday
The Federal Reserve and JP Morgan orchestrate an emergency bailout for Bear Stearns to prevent it from collapsing. JPMorgan provided secured funding to Bear Stearns for 28 days, and those loans were insured by the Federal Reserve.

Another Two Days Later On Sunday
With bankruptcy eminent, the Federal Reserve orchestrates the sale of Bear Stearns to JPMorgan for $240 million, or $2 per share.

Bear Stearns' Stock Crashes
12/12/07: $100
02/27/08: $ 87
03/13/08: $ 57
03/14/08: $ 30
03/17/08: $ 4

Additional Federal Reserve Actions Over The Weekend
---Creation of another lending facility for big investment banks to secure short-term loans. Previously, their lending facilities were only available to commercial banks.

---Lowering of its lending rate to financial institutions from 3.50% to 3.25%.

---And of course, the Federal Reserve meets tomorrow and the expectation is that they will lower the federal-funds target rates anywhere between 0.5% and 1.0%.

Flight To Safety
In chaotic times like this, investors flock to the safety of US treasuries. In intraday trading today, demand was so high that the yield on 3-month treasury bills fell to 0.63%. Reuters is reporting that this is the lowest yield seen in 50 years.

Weekend Trivia: What New Industry Is Applied Materials Pursuing?

2008-03-16T09:15:00.000-07:00

Answer: Solar Power

Applied Materials is the largest company in the Semiconductor Equipment & Materials industry. It provides the equipment to the semiconductor industry which allows them to produce integrated circuits. With today's technology, billions of transistors can be squeezed onto one piece of silicon the size of your fingernail.

Applied Materials has a market capitalization of $28 billion and current sales are $10 billion per year.

Earlier this month, Applied Materials announced that it had booked a $1.9 billion order, five times larger that any other order it had previously received in its core business. In a disclosure to the Securities and Exchange Commission, the company said that this new agreement was from an unidentified privately-held company outside the United States, with multiple solar-panel factories.

A Financial Times article reported that "Citigroup analysts said they believed it was a Chinese government consortium planning to build a 'solar city' in Suzhou, a city of more than 2m people 40 miles from Shanghai.....Citigroup said it believed the order was to provide equipment for about 15 production lines."

More March Quick Hits

2008-03-14T11:25:00.000-07:00

MARKETS (identical to last week.....and the week before)
---Gold leads metal prices to all-time highs.

---Crude oil leads energy prices to all-time highs.

---Wheat leads grain prices to all-time highs.

---US dollar at all-time lows against foreign currencies.

PSYCHOLOGICAL BARRIER BROKEN

RUN ON THE BANK

---Bear Stearns was the fifth-largest investment bank in the country......until today.

---As AP reported today, " Bear Stearns Cos., one of the most venerable names on Wall Street, turned to a rival bank and the federal governmnet for a last-minute bailout Friday to prevent it from collapsing....Nearly half the value of Bear Stearns, or about $5.7 billion, was wiped out in a matter of minutes."

---Continuing, AP said "The Federal Reserve reponded swiftly to pleas from Bear Stearns that its coffers had 'significantly deteriorated' within a 24-hour period as rumors about the bank's situation fueled the Wall Street version of a run on the bank."

AND PRESIDENT BUSH'S RESPONSE
---Speaking at The Economic Club of New York today, President Bush addressed the current economic climate in the country.

---Acknowledging problems, he made such comments as "these are uncertain times," and the country "obviously is going through a tough time."

---But President Bush ignored talks of recession and was very upbeat about what the government has done to help. "Today's events are fast moving, but the chairman of the Federal Reserve and the secretary of the treasury are on top of them and will take the appropriate steps to promote stability in our markets.....Every time, this economy has bounced back better and stronger than before.....It's important not to overcorrect, because when you overcorrect, you end up in a ditch."

As I'm listening to this, I think back to his comments about how great a job Mike Brown of FEMA did in responding to Hurricane Katrina, days before he was essentially fired. And speaking of ditches, how do you overcorrect when you've already driven off the cliff?

---Separately, economic advisor Dana Perino said in last week's White House Press Briefing in response to a question of oil prices and the US dollar: "I'm under strict instructions, and have been from the beginning, to not talk about the dollar, and I'm not going to get fired to satisfy your question."

Falling Employment Numbers

2008-03-13T00:36:00.000-07:00

Fewer People Working In 2008

Per my posting on 03/07/08, "The Labor Department reported today that there was a reduction of 63,000 jobs in February, the sharpest decline in five years. They also revised their January numbers down to a net loss of 22,000 jobs..... Ironically, the unemployment rate edged down from 4.9% to 4.8%, suggesting that discouraged people were leaving the civilian labor force."

Every time that employment has fallen for two consecutive months in the past 40 years, there has been a recession.

The Bureau of Labor Statistics news release on 03/07/08 provides quite a bit of detail on recent employment trends; information is provided on more than 150 industries.

While it would be a mistake to reach a conclusion on only two months of data, it can be fun (or frustrating) looking at the data. Jumping out at me is that while there has been a net decrease of 85,000 jobs, the private sector has actually contracted by 127,000 people, while the government has added 42,000 employees. I hope this is not a trend.

Looking At Long-Term Employment Trends

The Bureau of Labor Statistics also provides an enormous amount of historical data. The table below looks at the big picture. Some obvious trends include:

---Over the last 50 years, the country has become more and more a service-based economy. This is a good thing to the extent that new companies are created, or if the jobs are professional in nature and support fields such as health-care. It is not a good thing if it is supporting more jobs at McDonalds or Starbucks.

---The manufacturing component has steadily fallen from 35% in 1960 to 16% today. More alarming, the absolute number of manufacturing jobs is now declining.

---While government jobs have grown in absolute numbers, they have been remarkably flat at 16% of the total employment over the past 50 years. More disturbing is the fact that just in the last year, there are more people now working for the government than there are people manufacturing real stuff.

More Magic Tricks From The Government

2008-03-12T12:44:00.000-07:00

GOVERNMENT ACTIONS

---Interest Rate Reductions: The Federal Reserve has lowered the discount rate five times since 09/18/07; rates have dropped from 5.25% to 3.00%. A sixth cut is expected next week.

---Liquidity Injections: The Federal Reserve has injected liquidity into the marketplace on an ongoing basis since August; many times coordinating these efforts with other foreign central banks.

---SIV Superfund: At the prodding of the Treasury Department, the nation's three largest banks planned and then abandoned an effort to set up a $75 billion superfund for distressed mortgage assets.

---Mortgage Regulations: Politicians and the judicial system have put forth a variety of proposals which would revamp mortgage regulations, void mortgage contracts and change bankruptcy law.

---Term Securities Lending Facility (TSLF): Since announcing the program in December, the Federal Reserve has provided $210 billion in short-term loans to troubled financial institutions through the new auction mechanism. This remains an ongoing effort.

---Stimulus Program: Rebate checks totaling $168 billion will be going out to everyone, thanks to the bipartisan effort to stimulate the economy.

---Term Securities Lending Facility (TSLF): And now yesterday, the Federal Reserve has announced that they will allow financial institutions to pledge risky mortgaged-backed securities to purchase 28-day loans of Treasury securities. The initial commitment is $200 billion, but they left the door open for additional operations down the road.

EDITORIAL COMMENTS

---This is not your basic economic slowdown. Past recessions have not required this level of manipulation by the government.

---The measures taken thus far are only adding fuel to the fire. You cannot solve a problem of too much loose credit by providing MORE credit. This only makes the problem worse and the eventual solution that much more difficult.

---With each government action, the equity markets have typically reacted positively for a day or two, but quickly came to their senses and continued their downward pattern.

---The real solution (medicine) requires difficult and painful actions. In a report today, Keith Fitz-Gerald of the Money Morning / The Money Map Report offered these ideas: "1) Stop printing so much money, 2) Create incentives for institutions to lend to each other, a strategy that includes raising interest rates, 3) Stop socializing debt, 4) Let the free-markets work freely and 5) Tell the American people the truth."

Energy Prices Out Of Our Control

2008-03-11T12:15:00.000-07:00

The Markets
---Crude oil continued its pattern of setting new records on a daily basis as it traded at an all-time record of $108 per barrel this morning.

---AP is reporting today that "Gas prices at the pump rose overnight to a record national average of $3.2272 a gallon, according to AAA and the Oil Price Information Service."

---Now you can bet on future gasoline prices. UGA (United States Gasoline Fund) is an ETF that just began trading on the Amex.

World Politics
---For the second time this year, OPEC rejected President Bush's request to increase oil output. As the NY Times reported, "OPEC members.....chose to leave their production levels unchanged, saying the market has plenty of oil already. The cartel's president blamed financial speculators and American economic problems, which have helped lower the value of the dollar, for the high oil prices."

---Reiterating this point, Reuters is reporting that "Oil prices will stay at current levels for the rest of this year due to speculation and geopolitical tensions, Algerian state media on Monday reported OPEC President Chakib Khelil as saying."

---Middle Eastern countries are experiencing inflation problems because oil is priced in US dollars and their currencies are pegged to the US dollar. It is very ironic (putting it politely) that former Federal Reserve chairman Alan Greenspan recently told the Saudis that they could control inflation by dropping their peg to the US dollar.

US Politics
---For the fourth time in the past year, House Democrats have submitted a bill which would eliminate a $18 billion tax incentive package that the five largest oil companies currently enjoy. They would use the money to boost incentives for alternative energy programs. The White House has threatened to veto the measure again. Even if it did pass, there would only be a 2% impact to profits, and if the costs were passed on to consumers, it would only raise pump prices by a penny a gallon.

---Despite the criticism regarding oil company profits, in the grand scheme of world affairs, that is not the problem. Going after the US oil companies will not change the price at the pump. Their profits are relatively small on a world scale. As Stansberry & Associates reported, ExxonMobil is the the largest oil company in the world, but its $40 billion in 2007 profits doesn't even place it in the top 50% of OPEC earners:

$194 billion, Saudi Arabia
$63 billion, UAE
$57 billion, Iran
$55 billion, Nigeria
$54 billion, Kuwait
$51 billion, Algeria
$48 billion, Venezuela
$44 billion, Angola
$41 billion, Libya
$38 billion, Iraq (see discussion below)

Supply Problems
---The Financial Times headline yesterday said that "Canada fears US law will hit oil exports." The issue is that "importing oil form Canada's oil sands deposits are at risk because of US legislation to curb greenhouse emissions." These deposits are the largest in the world outside of Saudi Arabia.

---The Financial Times also reported yesterday that new reserves in 2007 in the Gulf of Mexico were the lowest in ten years. This is particularly disappointing for US oil majors as "The deep-water Gulf of Mexico is one of the few areas to which the majors have access without the fear of intervention by state owned oil companies."

---Gazprom, the Russian state-owned oil company that is the world's largest gas producer, is creating fears across Europe. In the short term, it is threatening to cut natural gas supplies to the Ukraine by 50% because of an ongoing political dispute. Gazprom currently supplies about 25% of Europe's needs and about 80% of this flows through the Ukraine. Independent of the politics, there is concern that longer term, Gazprom will be unable to meet European demand for years to come as they have not made the necessary investments to bring on additional supplies.

---The WSJ reported yesterday that "China's use of nuclear power is growing far faster than originally planned." Revised estimates for 2020 have been increased by 50%. "China wants to rapidly increase nuclear power because it offers a cleaner alternative to coal.....the price of coal is soaring."

And Then There Is Iraq
---The NY Times' headline asked "Where's all of Iraq's oil money?" "Two senior members of the Senate Armed Services Committee have requested a full accounting of how Iraq is spending its soaring oil revenues amid starkly conflicting estimates of how much the country has invested in rebuilding infrastructure and providing basic services to its citizens." At today's oil prices, it is believed that 2008 revenues will be $56 billion. But accounting for this revenue is another matter. Bottom-line, the US still is investing in their infrastructure and services remain dismal.

Weekly Chart: Another Look At Crude Oil Prices

2008-03-10T15:28:00.000-07:00

Source: NY Times

Crude oil is trading above $107 per barrel today. This is another all-time record price.

Last week, I showed how crude oil prices have actually fallen over the last several years....when priced in gold.

Another interesting view of crude oil prices is looking at historical inflation-adjusted prices. Despite the fact that the price has quadrupled since 2000, it is only now at the inflation-adjusted price that it traded at during the oil shock in April 1980.

There is a huge ongoing debate regarding peak oil and the implications for oil prices. Tomorrow, I will address some of the near-term issues impacting oil.

Weekend Trivia: How Was The DJIA Changed Last Month?

2008-03-09T13:17:00.000-07:00

ANSWER
---Added: Bank of America, becoming the fifth financial company in the Dow Jones Industrial Index

---Added: Chevron, becoming the second oil company in the index

---Dropped: Altria Group, the largest cigarette manufacturer

---Dropped: Honeywell International, manufacturer of aircraft components, specialty materials and other industrial products

BACKGROUND
---As the 07/15/07 posting indicated, the DJIA was introduced in 1896 with 12 companies in the index. Over the years, the composition of the index has changed. It now consists of 30 companies and General Electric is the only original member of the index.

---As the country has changed over the last century, the index has become less and less dominated by industrial (manufacturing) companies. This latest change is no exception as two manufacturing companies were dropped and replaced with two non-manufacturing companies.

---Interestingly, this is the third time that Chevron has appeared in the DJIA. It first appeared in 1924 as Standard Oil of California.

---The combined market capitalization of the two new companies is $359 billion, vs the market capitalization of $193 for the two companies that were dropped.

PRIOR CHANGES
---Being added to the DJIA is not necessarily a good thing. The last seven companies to be added ALL have lower stock prices today when compared to the day that they were added.

---11/01/99: Intel, Microsoft, Home Depot, and AT&T were added.

---04/08/04: American International, Pfizer and Verizon were added.

ADDITIONAL INFORMATION
---Check out the article in the WSJ.