MarketVVizard's Market Thoughts

Top 930. Feb 15, 2004 4:01 PM

» pbradford6 - Re: Re: Re: Re: Re: Europe G7 and Secular Shifts

In response to message posted by Austrian:

Austrian:

This may interest you.

Gold Report
2401 West Bay Dr.
Largo, Fla. 00770

FEB. 9 - The G-7: The central banks have finished their meeting in Boca Raton [Fla.] without any clear-cut announcement about the dollar and its decline against the euro and other major currencies. Greenspan and the boys put the European Community on notice: Get your economy going and growing (lower interest rates) or lose business in the U.S. Bottom line, folks, is that the countries that want to do business with us will have to flood the market with paper to knock down the value of their currencies against the U.S. dollar. That in turn will continue to make commodities more expensive against all currencies (inflation). The ride has only just begun.

-- Tom O'Brien

-- posted by pbradford6

Top 931. Feb 16, 2004 8:22 AM

» MarketVVizard - Social Security | Housing Trends Watch

If you are interested in the history of Social Security (last couple decades) this is a good article to read: http://www.ssa.gov/history/orals/ball5.h... I won't post it here because it is too long and dry for most people.

On an unrelated note I found this article informative (albeit somewhat disturbing):

As volume of foreclosures swells, some want moratorium
Philadelphia's sheriff, City Council join bid to suspend the auctions

By JASON STRAZIUSO
Associated Press Writer

PHILADELPHIA (AP) — Because a record number of homeowners cannot pay their mortgages, City Council, the sheriff and several advocacy groups are trying to convince a judge to suspend the city's foreclosure auctions. Last week saw a record 1,120 homes up for bid.

"This is the worst time for foreclosures basically since the Great Depression," said John Dodds, director of the Philadelphia Unemployment Project, the group leading the moratorium drive. "Something has to be done. You can't keep letting hundreds and hundreds of people lose their home every week."

The national rate of homes in foreclosure peaked at a record high of 1.2 percent of all mortgages in the first quarter of 2003. Experts say it takes between six months and a year for foreclosed homes to make it to auction, meaning a record number may now be on the block, though no one tracks that number.

Philadelphia Sheriff John Green this week said he would participate in a lawsuit to suspend the auctions, much like the sheriff did in 1983. Of course, he noted, there were only about 350 homes at the auction then.

Laura Armstrong, a spokeswoman for the Mortgage Bankers Association in Washington, D.C., said she's not aware of any other community suspending foreclosure auctions.

Unemployment, predatory lending, defaults on second and third mortgages and high fees from banks and lawyers are the primary causes behind the record foreclosures, experts say.

A dozen people on Thursday attended the Philadelphia Unemployment Project's weekly meeting to discuss how homeowners can stave off foreclosure. Some heard about the moratorium drive for the first time.

"That's the best news I've heard, and I've been to like six places," Mannie Willis, 37, said after the meeting. "God, I've been everywhere."

Willis, a former car salesman, said he was laid off in November 2002, then had a hernia operation in April 2003, causing him to get behind on payments. He said he tried selling the house, but that nonstop rising fees from banks and lawyers made it impossible.

"I got offers each time it was for sale, but the bank would raise the cost even more, so the offer was no longer good enough," Willis said. "On Monday it was this amount and by Friday it was $1,000 more."

Dodds met with state officials this week in charge of the Homeowners Emergency Mortgage Assistance Program, which helps owners make payments for two years as they put their finances in order. Dodds wants more applicants to the program to be accepted.

The program now accepts about 31 percent of applicants, said Brian Hudson, the executive director of the Pennsylvania Housing Finance Agency. Hudson said he's asked for more funding so the program can accept more people.

Hudson said he thought postponing the foreclosure auctions was a good idea.

"We're not talking about stopping (the auctions) for long, just slowing it down so we can see what's happening," he said.

Councilwoman Marion B. Tasco, whose resolution to join the lawsuit was passed unanimously on Thursday, said Council has been concerned about predatory lending for many years.

"I think the whole issue of 1,000 foreclosures is just so devastating and right in your face," Tasco said. "(The banks) are not going to be happy about it, but we'd rather have people have an opportunity to save their homes than put them out on the street."

Joseph Cudwadie, president of the Philadelphia Mortgage Bankers Association, has said his association would not oppose a moratorium, noting that lenders would rather have owners keep making payments. The auction sales are usually a loss for the lender.

There are critics, though. Alexis McGee, a real estate adviser in Sacramento, Calif., and president of foreclosures.com, said an auction is the end result of a financial agreement that wasn't met.

"Those people signed documents that said they were going to pay," McGee said. "You can't have some cowboy sheriff try to change the law."

But Green has said the banks he's talked to have been understanding, and Dodds said giving people time to recover is the best solution.

"Without time we have the biggest sheriff's sale in history," Dodds said. "With time people can get their house back."

-- posted by MarketVVizard

http://news.ft.com/servlet/ContentServer...

Top 932. Feb 16, 2004 8:27 AM

» Austrian - Re: Re: Re: Re: Re: Re: Europe G7 and Secular Shifts

In response to message posted by pbradford6:

pbradford6,
I get the Gold Report and follow Tom O'Brien. Currency devaluations is really just beginning in Europe.

I have only received 4 so far, and the jury is still out. Your thoughts on the Gold Report are welcome.

Regards,

-- Austrian

Related to Europe and their position between the rock and hard place:

Data releases to expose the eurozone's vulnerability
By Chris Flood
Published: February 15 2004 13:21 | Last Updated: February 15 2004 13:21

The outlook for the eurozone this year is causing increasing concern after last week's data showed that the French economy recorded its worst performance for 10 years in 2003, while the German economy contracted for the first time since 1993.

After these disappointing performances, Deutsche Bank economists are still forecasting that eurozone growth will improve from 0.5 per cent in 2003 to 1.8 per cent in 2004. However Thomas Mayer, Deutsche's chief European economist, said: "With private consumption remaining weak, the eurozone recovery seems more vulnerable to us than generally acknowledged."

The data releases this week will be vital in assessing this vulnerability given the possibility that the manufacturing sector and net exports might falter as the appreciation of the euro starts to offset the upturn in global demand.

Towards the end of this week, France and Germany will release a fuller breakdown of their fourth quarter gross domestic product data, with the preliminary data suggesting that net trade will have made a negative contribution to growth in the final three months of last year, due mostly to the stronger euro.

The chart shows the recovery in manufacturing output in the second half of last year in the US and eurozone. Data for eurozone industrial production in December is due for release on Wednesday. The consensus forecast is for an increase of 0.5 per cent on the month. Given the weakness earlier in 2003, this could mean the increase in output during the past year would be marginal at best.

In the US, manufacturing output expanded by only 0.1 per cent in 2003 but the evidence from purchasing managers' surveys is pointing to an acceleration of activity. The data for January due for release on Tuesday are expected to show a gain of about 1 per cent on the month.

In the UK, inflation data for January are due for release on Tuesday with consumer price index inflation expected to remain unchanged at 1.3 per cent. The RICS housing survey for January is also due out on Tuesday and is expected to show robust activity in the property market continuing.

The minutes of the Bank of England's monetary policy committee's February meeting are due for release on Wednesday. The Bank has revised its forecasts for economic growth upwards but inflation is still not expected to hit the 2 per cent target towards the end of the two-year forecast period.

Given Britain's high levels of household debt and with further increases in interest rates likely, it is the MPC's discussions on the outlook for the consumer that will be of most interest.

UK economic growth has been heavily dependent on consumer spending since the late 1990s. However, consumer spending is expected to moderate this year and there might be early indications of this in the data for January's retail sales, due for release on Thursday. Last year retail spending rose by 3.5 per cent, the weakest annual growth since 1999 and well down on the increase of 6.8 per cent in 2002.

The UK is hoping that the slowdown in consumer spending will form part of a broader re- balancing of the economy with a greater contribution to growth coming from the industrial sector and a recovery in investment. Forecasts from Deutsche Bank suggest that this year the UK will be the second best performing European Union economy with growth of 3.2 per cent.

-- posted by Austrian

Top 933. Feb 16, 2004 1:28 PM

» MarketVVizard - Steel / Coal

Steep price increases give steel users fits: Many lay the blame on China
Pittsburgh Post-Gazette
By Len Boselovic
Sunday, February 15, 2004

Jeffrey Nayhouse needs nerves of steel to open his mail box. Each day brings the owner of Allegheny Fence letters such as the one on Feb. 10 from Master Halco, which sells steel fencing to his Hazelwood company: Throw our price list out the window.

"Due to the existing environment, we cannot print pages as quickly as the [price] increases are taking effect. ... We have no idea when pricing and availability will stabilize," the company warned.

The story's the same at Bob Roberts' mail box. "I get a letter almost every day from a steel company or two steel companies or three steel companies we deal with and every letter is the same," says Roberts, vice president of Frank Roberts & Sons, a Punxsutawney building materials distributor.

"If it's steel, it's up and it's up significantly and it sounds like it's going be to up for the entire building season."

Rarely has the cycle in the cyclical steel industry swung with such abandon. Just a few years ago, prices were at 20-year lows, a phenomenon steelmakers blamed on 200 million tons of excess steelmaking capacity worldwide.

Since the first of the year, however, prices for steel products Nayhouse and other steel buyers rely on have jumped 30 percent or more. The chief reasons are the devalued U.S. dollar, frenetic consumption in China and skyrocketing prices for steel scrap and other raw materials.

Steel bar used to reinforce concrete has gone up "at least 50 percent since December," Roberts says. A box of nails that cost $14 or $15 dollars a few months ago now costs $24.

After being hit with back-to-back price hikes of 7 percent at the beginning of the year, Nayhouse was notified of another 15 percent increase last week. Availability has also become even more of an issue, as Nayhouse found out in a Feb. 12 letter from Richard's Fence of Akron, Ohio.

"The time for eloquent price increase letters is over," wrote vice president Bill Peterson. "We cannot get any strand wire until May and our supplier can not even give me a projected cost."

Other buyers whose orders are being rejected say they are facing the severest steel shortages since the 1970s.

"Some people I've talked to said it wasn't this bad back then," says Mark Magno, vice president of marketing for Wheatland Tube, one of Nayhouse's suppliers.

Wheatland has reduced production at its plants in Mercer County and nearby Warren, Ohio, to four days a week because it can't get enough steel to convert into pipes to sell to Allegheny Fence and other customers.

"Our order book says we could run our facilities more than that," Magno says.

Some of the shortages can be blamed on the cheaper dollar, which drives up the costs of imports.

The weakened dollar discourages foreign steelmakers from shipping products to the United States, even though the world's largest industrialized country can't produce all the steel it needs. And prices for the imports are being inflated further by ocean freight rates that have doubled or tripled over the last year.

Raw materials are another sore spot. More than half of U.S.-produced steel is made by melting junked cars, refrigerators and other steel products. Steel made from iron ore also relies on scrap, the price of which has more than doubled over the last year.

Prices for some high-grades of scrap are approaching $300 a ton. A few years ago a ton of sheet steel made from scrap wouldn't have fetched much more than $200. Steelmakers are imposing surcharges to cover their escalating scrap costs, including Allegheny Technologies. Last week, the Pittsburgh-based producer said it will charge an extra $60 per ton, effective tomorrow.

Coke, a baked coal used as a fuel by some steelmakers, is also in short supply and has seen its price roughly double in the past year. The shortage and the price increases have forced Weirton Steel and some other producers to cut back production.

Many blame the raw materials shortages on China. Unprecedented growth in steel production and consumption are expected to continue for the foreseeable future as that rapidly developing country rushes to join the ranks of industrialized nations.

"I can't imagine one country in the world could screw up the economy this much. What the hell are they building over there?" says Don Lawrence, purchasing agent for George L. Wilson & Co., a North Side building materials distributor. "China is basically screwing up the world market for steel prices right now."

Put all the factors together and you have what Tim Miller calls "a perfect example of the law of supply and demand."

"We have not seen the likes of steel increases like we have today for approximately 30 years," says Miller, Master Halco's vice president of operations.

John Anton of consultant Global Insight says the 200-million ton glut industry leaders were griping about a few years ago has pretty much evaporated. He blames growing demand in China, growth in other parts of the world, mill shutdowns and raw materials shortages that prevent mills from making as much steel as they can.

"I think they're running as hard as they can," he says of steel producers. "With prices like this, I think people would like to jump."

Tensions are mounting over how the price increases ripple through the industry. Big steel buyers are balking at the surcharges for raw materials, but little guys such as Roberts and Nayhouse have no choice.

"So far, no one's had the guts to do that yet with General Motors. But if you're a small buyer, you're up the creek," says analyst Charles Bradford of Bradford Research.

Farther down the supply chain, steel goods merchants are raising prices with little or no notice. Wheatland Tube notified customers Jan. 29 that starting tomorrow, orders will be priced when they are shipped. The new policy applies to orders Wheatland had already taken.

"Anticipate these conditions to continue at least through the first half of 2004, and expect the need for additional price increases in the near future to be very high," national sales manager Gerald D. Slattery, Jr., wrote. "We suggest that you inform your customers of continued rising prices for the foreseeable future."

There's an element of panic to the buying, as customers worried about paying more later -- if they can order at all -- stock up while prices are relatively low compared with what may happen and steel is still available. While that strategy seems reasonable, it won't when the market turns and prices head south.

"You don't want to get stuck with an inventory that's overpriced if it goes the other way," Roberts says.

Bradford said the problem will last until the scrap situation thaws. Weather is part of the problem. Freezing temperatures make it harder to collect scrap and shred it into small enough chunks to throw into a steelmaking furnace.

In addition, scrap will become more available as the economy heats up and manufacturers generate more of it, he says.

But warmer weather will also bring more business for companies such as George L. Wilson. If prices are so high and supply is so tight when business is slow, Lawrence asks, what will be it be like when demand picks up? "I hope the steel is there for us," Lawrence says. _____________________________________________
Coal prices surge as shortages take hold FT By Kevin Morrison February 14 2004

Coal is shedding its dirty and cheap image to become a sought-after commodity as customers shell out record prices for the black nuggets.

The increase in coal prices has little to do with market speculation as the majority of coal prices are set through long-term contracts. But the high prices have prompted the gradual emergence of a spot market as producers seek to take advantage of strong demand from steel producers.

The increase in demand has caught many coking coal producers by surprise and there are growing fears of shortages in the commodity as production capacity has failed to keep pace with the upswing in demand.

Jim Lennon, metals analyst at Macquarie Bank, said the shortage of coking coal follows fears of a collapse in Chinese exports, as it diverts more of its coal production into domestic usage to satisfy the needs of the country's steel industry.

Mr Lennon said this has caused panic buying, with reports of Chinese coking coal export prices reaching $400 per tonne before shipping freight costs. This is almost double the December price and up from less than $70 a tonne three years ago.

It also overshadows the 28 per cent price increase this week by BHP Billiton, the world's largest mining company, for its coking coal sale contracts to Japanese steelmakers for the year starting on April 1.

Xstrata, the London-listed miner, has so far not settled any long- term contracts as it prefers to take advantage of the higher spot price, analysts said.

"The shortage of coke is forcing steelmakers to consider productions cuts," said Mr Lennon.

Some US and Indian producers have already trimmed output, while the Italian steelmaker Riva has indicated that it was looking at closing a significant amount of its production capacity due to the shortage of coke, he said.

However, large parts of the steel industry have remained immune from the hike in spot coking coal prices as many are still under long- term contracts negotiated last year before the shortage fears. At the same time, producers have raised steel prices. Nucor, the biggest US steel producer, said it had increased prices due to higher raw material costs.

US hot rolled coil steel, the most widely quoted steel price, reached almost $500 a tonne recently from less than $200 a tonne three years ago, said Mr Lennon. Steel scrap prices have also risen sharply, with prices quoted at about $350 a tonne, a 75 per cent increase on three months ago.

-- posted by MarketVVizard

Top 934. Feb 16, 2004 1:42 PM

» MarketVVizard - Gas

Gas-pump sticker shocker
MW
By Myra P. Saefong
Feb. 14, 2004

SAN FRANCISCO (CBS.MW) -- Get ready to dig deeper into your pockets at the gas station this summer: $3 per gallon gasoline could be headed to a pump near you.

The expanding U.S. economy, limited supplies of certain blends and unexpected output cuts by major producing nations will likely propel U.S. retail prices well past their record high, industry experts said.

The Organization of Petroleum Exporting Countries, which supplies 40 percent of the world's oil, agreed Feb. 10 to rein in an estimated 1.5 million barrels of daily overproduction. Members also voted to cut their official output target by 1 million barrels to 23.5 million barrels a day, excluding production from Iraq, starting April 1.

The cartel's action comes as the national retail price of gas is only 10 cents below the all-time average high of $1.73 a gallon reached last August.

"OPEC's decision ... is one more reason on an already lengthy list of why U.S. consumers are likely to pay the highest gasoline prices on record this year," AAA spokesman Geoff Sundstrom said.

Gas prices "will certainly breach" the $2 mark on the back of OPEC's announcement, said Kevin Kerr, a senior trading director at KWEST Trading International. "At the same time, the economic recovery in the United States and other parts of the world ... and the draw on existing energy supplies could be disastrous."

Since the oil market didn't anticipate OPEC's dramatic moves, "the shockwave will be felt all the way to the pumps," Kerr said.

A survey of the five market analysts found all agree that retail gas prices will, at the very least, hit a new record this year.

Indeed, if crude inventories don't increase, and if OPEC votes to cut another 5 percent from its output, unleaded gas prices could reach the "upper limits of $2.75 to $3 this summer," said John Person, head financial analyst at Infinity Brokerage Services.

Dollar blame

One of the cartel's key reasons for the production cut -- a weaker U.S. dollar -- factors into expected price climb, thought the experts disagreed about its level of importance.

"Over and over again, OPEC raised crude oil prices ... saying the weaker dollar brings member nations lower revenues because oil is traded in dollars," Kerr said. "It isn't rocket science to figure out they will likely do this again with the dollar reaching new lows."

Fimat USA analyst John Kilduff sees a different driver. He said the dollar's decline coincides with a much bigger factor for oil prices: "The lowest U.S. crude-oil inventories in a generation."

Yet Tom Kloza, chief oil analyst at the Oil Price Information Service in Lakewood, N.J., believes the 2004 gasoline price rally won't be about crude, but about the level of gas supplies. "When traders fear a product may be 'short' as the season approaches, or when it actually is short or tight within [the] season, prices tend to migrate toward hyperbolic numbers."

Contributing factors

Retail prices will likely surpass $2 a gallon in two separate spikes," Kloza said, "one in the spring based on fear and uncertainty, and another toward the end of the summer."

The initial price jump will come during the transition from winter to summer blends of gasoline, which typically puts a strain on supply availability, Kloza said.

A variety of new state environmental regulations regarding gasoline formulation are having an increasingly disruptive impact on supplies, Fimat's Kilduff said.

"The mosaic formulation scheme that caused severe price spikes in California and the upper Midwest in the recent past is now coming to the New York Tri-State area, due to New York and Connecticut adopting ethanol as their oxygenation component, " he said. New Jersey has remained with the MTBE formulation, he added.

In addition, by July and August, the market might be experiencing average demand of 9.5 million barrels a day or higher at a time when production will likely top out at 8.8 million barrels or so, Kloza said.

With the economy gaining strength, this summer is "on pace to be a banner demand year," agreed Agbeli Ameko, a managing partner at energy-forecasting firm, Enercast Inc. "Supplies are lower and production is not keeping pace with this demand growth."

AAA's Sundstrom also noted that some travel experts expect robust spring and summer vacation seasons. That's a recipe for a peak- driving season where the supply and distribution system has no room for error, Kloza said.

"A refinery problem or two, an inordinate surge in demand, a loss of say, Venezuelan imports ... all this would create the much hackneyed 'perfect storm' characterization."

Paying the ultimate price

While Infinity's Person sees prices peaking at $3 in some metro areas in the worst of circumstances, OPIS' Kloza sees average prices rising above $2 but reaching the high-$2 range for only a brief period if at all. If any region sees prices near $3 a gallon, it would be already high-priced markets like California and Chicago and would occur only after a refinery outage or two, he said.

"The gasoline market will have an irregular heartbeat ... racing at times and resemble brachyadia at others," Kloza said. "The overall retail average for the year will be the highest ever," but there will a huge gap between the highest and lowest prices, which could still run as low as $1 a gallon in some states.

Fimat's Kilduff said it would be difficult for average prices to climb much higher than $2. "Some sort of government intervention would occur at levels around $2.25," he said, though he did accept the possibility of $3 gas in certain snag-prone areas, such as California.

Enercast's Ameko argued that federal and state politicians would likely intercede rather than sit idly by should prices skyrocket.

"Going into an election year, $3 retail prices would spell disaster," Ameko said. He doesn't expect demand to be strong enough to lift prices above $2.25, and suggested prices will average around $2.15.
___________________________________________________________
Airlines attack Europe jet fuel price spikes
Reuters
By Neil Chatterjee
02.16.04

LONDON, Feb 16 (Reuters) - Airlines have been forced to pay over the odds for jet fuel in Europe this month in a market dominated by a few major players, fuel buyers with major carriers said on Monday.

"There was a $20 a tonne increase in one day, and the airline industry has had to pay," said Isabelle Langlet, regional manager for fuel buying at Air France , pointing to a price jump early this month.

"There are several big players -- and the only solution for us would be to create a big trader to fight the majors' position," she told a Platts oil market pricing forum in London.

European jet fuel cargo prices spiked in early February to trade at a premium of $80 a tonne over February gas oil futures on London's International Petroleum Exchange, up 38 percent from a week earlier.

Traders at major oil companies say the European market was short of material as imports from the Gulf were reduced by refinery maintenance and as high U.S. prices diverted material away from Europe. Some traders also pointed to strong bidding from oil majors BP and Shell as helping drive the gains. Offers came in even higher at up to +$99 from major Total, before prices slipped back.

But there was a large gap between cargo and barge prices, with the latter more indicative of market fundamentals, airlines said. They say some companies having long positions on forward paper markets have been looking to boost benchmark cargo prices set by agencies such as Platts, which are used for short and long term contracts.

Leveraging paper profits from loss-making physical trades is a frequent activity on lightly regulated over-the-counter markets for crude oil and products markets and is not illegal, but it can raise the cost of fuels to consumers and industries.

Speculative traders who think the physical price will rise can buy forward paper, so that if they have to pay more for physical oil they can at least make money on a rising paper market.

Platts director of market reporting Jorge Montepeque told the forum that strong prices and tight supplies in both Asia and the U.S. meant fundamentals were behind the rise, as opposed to manipulation.

Airlines usually negotiate long-term contracts to buy jet fuel from oil refiners, but many also need to dip into the spot market to buy extra fuel and risk losing out in a rising market.

But traders said a pan-European airline fuel buying operation was very unlikely to happen.

"Air France are competitors with British Airways and so on, so there's no chance," said one.

-- posted by MarketVVizard

Top 935. Feb 16, 2004 1:50 PM

» MarketVVizard - China Steel Vacuum

Iron Range revives to meet booming demand in China
AP
By JOSHUA FREED
02/15/04

MOUNTAIN IRON, Minn. - Trainload after trainload of iron pellets rumble out of town, usually on their way to a U.S. steelmaker. But China's exploding steel demand has created a new market for American ore and brought jobs back to Minnesota's struggling Iron Range, the center of U.S. iron ore mining.

U.S. Steel's Minntac plant here is firing up an idled ore production line to meet a 650,000 metric ton order by Shandong Taishan Iron and Steel Co. And in nearby Eveleth, Laiwu Steel bought a 30 percent stake in what had been a shuttered ore plant, under a partnership with Cleveland-Cliffs Inc. The move put 385 people back to work in Eveleth, which had suffered from layoffs at the mine and other companies.

"Six months ago, if you'd have said we'd be shipping pellets to China, I'd have said `You're crazy,'" said Minntac general manager Jim McConnell.

That's because transportation - which can be three-quarters of ore's final cost - historically made it too expensive to export overseas from Minnesota and Michigan, where all U.S. iron ore is produced. While ore ships can move around on the Great Lakes, the large ships that could take it overseas profitably are too big to clear the Wellington Locks in Ontario, McConnell said.

None of the pellets being shipped to China were produced at Michigan's two mines, the Empire and Tilden in Marquette County, said Dale Hemmila, spokesman for Cleveland-Cliffs, which manages them jointly and is their primary owner.

"But we look at this relationship as being good for the company and good for everybody who works for Cleveland-Cliffs," Hemmila said.

Peter Kakela, a Michigan State University professor and expert on the U.S. ore industry, said he was skeptical that China would ever buy U.S. ore. Then he ran the numbers: China's economy jumped 9.1 percent in 2003. World ore prices jumped 18 percent last year, and 9 percent the year before. And China has more than doubled ore imports in the last three years, to 140 million metric tons.

"That's huge. All of Minnesota is producing maybe 40 million tons," Kakela said.

It may not last. Australia and South America are China's natural ore suppliers because of shorter shipping distances. McConnell said ore producers in those two places have announced production increases, which he expects to catch up with Chinese demand. McConnell predicts Shandong Taishan's demand for Minntac ore - he calls it a "bubble" - might last six to 18 months.

"The cost of transportation dictates that (China) will not be a long- term market for us," he said. Eventually, he expects Minntac to return to producing ore mostly for U.S. Steel and a handful of smaller domestic customers.

In Eveleth, more than 300 laid-off workers got their jobs back in December after Laiwu Steel and Cleveland-Cliffs bought and restarted a bankrupt ore operation. United Taconite isn't shipping ore to China. Instead, its ore pellets relieved demand elsewhere in Cleveland-Cliffs' operation, freeing up a Quebec mine it manages to supply Laiwu under a nine-year contract.

For Cleveland-Cliffs, the purchase of the Eveleth mine was fortuitous. On Tuesday, the company announced that higher ore prices should improve its operating earnings by about $40 million for 2004.

Transportation hasn't been the only thing skewing the playing field between U.S. ore miners and their foreign counterparts.

While other countries can still mine rocks that are as much as 65 percent ore, the U.S. exhausted its high-grade ore in the 1950s. Now, mines on Minnesota's Iron Range and in Michigan work in rock that might contain 30 percent ore. That means it needs more refinement before it can be sold.

At Minntac, extension cords as thick as a fist and hundreds of feet long snake through the 40,000 acre open-pit mine, powering giant electric shovels that scrape up ore-laden rock. Those shovels empty into towering 240-ton dump trucks with cab ladders that rise along the front like apartment fire escapes.

The rock is crushed and ground into a powder, then baked into marble- sized pellets. Taconite miners claim their pellets melt better than natural ore in steelmakers' blast furnaces.

Minntac, the biggest of six taconite producers on the Iron Range, fills a 140-car train five times a day with the pellets.

"Minnesota ore is such high quality that they can afford this shipping that's going on," Kakela said. He also believes the Chinese wanted to add another supplier to increase price competition.

That's fine with Joe Strlekar, president of the United Steelworkers Union Local 6860 in Eveleth.

"If it wasn't for that market opening up, we probably would still be in a shutdown situation," he said. Instead, Chinese demand is benefiting U.S. steel producers and, ultimately, workers.

He said some people have worried that feeding the Chinese steel industry now could hurt American workers later by creating Chinese competitors. But Strlekar said it's not clear that will ever happen, and, anyway, mineworkers need the work.

Said Eveleth Mayor Calvin Cossalter, "They sell things to us. Why can't we in return sell a high-end product to them?"

McConnell said his new customer has meant a change in his reading habits.

"It means I real all the articles on China," he said, "instead of skimming over them."

-- posted by MarketVVizard

Top 936. Feb 17, 2004 6:59 AM

» MarketVVizard - Debt vs. Income: At the Point of No Return

Debt vs. Income: At the Point of No Return
February 16, 2004
Richard Benson is president of Specialty Finance Group, LLC , offering diversified investment banking services.

At the beginning of 2003, the level of debt that American's owed as an absolute amount, and as a ratio of income, was already approaching levels never seen before. Debt can be handled in a number of ways: 1) earn enough money to pay it off; 2) default; 3) borrow even more; or, 4) pray for inflation so you can earn more dollars (but really pay back less). Where are we now?

Last year, personal income increased about 2%. Individual debt increased about 10%. Personal debt for autos, credit cards, etc., topped $2 Trillion - up about $120 Billion despite massive debt consolidation and mortgage refinancing. Mortgage debt rose about $800 Billion, and total individual debt rose over $925 Billion, while wages and salaries rose only $190 Billion. Retirees and savers saw their interest income shrink, as interest paid on savings dropped by $30 Billion. Indeed, given the Fed's low interest rate policies, it doesn't pay to save.

In December, the savings rate dropped to a new low of 1.5% and in the 3rd quarter of 2003, the only reason financial assets were acquired is because they were bought with borrowed money. The low savings rate is even more astounding when you consider the increase in Disposable Personal Income of around $200 Billion from the tax cut. The economy needs $500 Billion in government stimulus from tax cuts and increased spending just to keep employment from falling and to help consumers roll over their credit cards for another month.

The savings rate is actually materially overstated. Personal Income, according to the Bureau of Economic Analysis, includes a few hundred billion dollars in "imputed income" for owning your own home and receiving value for other "non-cash services". Imputed income is significantly greater than the 1.5% savings rate! Unfortunately, debt can only be repaid with actual cash flow. In January, Personal Income rose at about a 2% annual rate and very few jobs were created. Consumers are spending every last penny to live, and many are "tapped out".

What is perfectly clear from simple arithmetic is that without a sudden increase in the number of jobs and the wages they pay, individual debt can not be serviced by personal income. Worse yet, not only are people not saving, but their financial reserves are not in real cash. The only thing keeping the "national ponzi scheme" going is the illusion of wealth created by the Federal Reserve's low interest rates and liquidity that has allowed stock market valuations and housing prices to artificially inflate.

The market value of homes in 2003 rose about $1 Trillion and stock market values rose about $1.5 Trillion. The rising asset prices look like they balance rising debt on household balance sheets. Tragically, the increase in asset prices will vanish the day that interest rates rise, but the debts will still remain. Indeed, not only will the debt remain, but the cost of servicing it will go up dramatically. As interest rates rise, wages and salaries must increase or massive debt defaults will follow.

Income and job growth are so low that we have certainly passed "The Point of No Return". There cannot be an easy resolution to the debt bubble and resolution will only come when a crisis forces change. Perhaps, for this election year, crisis can be postponed by continuing to facilitate an increase in borrowing so that debts can be rolled over, but increased. By 2005, the ultimate outcome to resolve the debt problem looks like it will be a combination of inflation, rising interest rates and debt default.

The reason we do not believe that job and income growth will save the day for the American worker is we have never before seen in history such increases in government spending, tax cuts, federal budget deficits, consumer spending and borrowing, with so little job growth. The massive fiscal and monetary stimulus has mostly been spent. There will be some nice tax refunds this spring, and that's it! The peak of mortgage refinancing is already past. Construction spending is at a peak and the percentage of people who own their homes is at a record 69%. Mortgage underwriting shows that 5% of homebuyers in 2003 really couldn't afford to buy a home, and another 5% could lose their home if one spouse becomes unemployed.

While the industrial sector is recovering, employment in the manufacturing sector has not increased since the start of the recession - there has been job loss in manufacturing for the past 42 months in a row. The United States has been in an economic recovery for over a year and a half and continues to lose manufacturing jobs every month! This is unprecedented!

Capacity utilization in the US remains about 76%, while massive new investments in production capacity are being made in Asia. The drop in the dollar has primarily affected trade with Europe, and Europe isn't stealing our jobs. As long as Asia buys our dollar debt and continues to hold their currencies down against the dollar, job growth will happen there, but not here. Even when China and the rest of Asia "finally float" their currencies, few jobs will come back to America. In the United States, we only produce 45% of the manufactured goods we consume and much of that production is in electricity, petroleum refining, chemicals etc., that are capital intensive, with few workers required. Critically, many of the workers listed as employed in manufacturing are not engaged in manufacturing at all but in design, marketing, and distribution. Even if the Chinese currency doubled in value, the labor cost for a worker in China would still only be a fraction of the cost for an American in America. The sad fact remains that Personal Income growth will not happen because of job growth. Personal Income remains under pressure as higher "valued added" manufacturing jobs are exchanged for lower paying part-time and service jobs. America is losing manufacturing jobs paying $45,000 - $60,000 a year so it needs three new service jobs paying $15,000 - $20,000 a year just to replace the one manufacturing job that was lost.

So, where are Americans and their mountain of debt headed? If the days of borrowing more - courtesy of both the Federal Reserve and Asia's Central Banks - are winding down later this year when Asia revalues its currency, it looks like there will only be two ways out: increased inflation and debt default. Both are likely. When those Chinese goods at Wal-Mart go up 30% in price, Americans will see inflation. The Fed will accommodate most of the inflation, but there will be a rise in interest rates. Inflation, if allowed and encouraged, will save the wage earner so he can continue to service his consumer debts. Rising interest rates will smash into housing prices like a tornado in Kansas. Homeowners who have a 30-year fixed rate mortgage will come out in the end, if they don't have to sell their home for at least 10 years. Anyone who wants to sell their home will see some "asset deflation", and financial institutions will experience substantial "debt default". The Federal Reserve will "print money like crazy" to fight asset deflation and encourage inflation. Sometime before or after the Presidential election, the financial markets will be interesting, but painful to many.

Opinions expressed are not necessarily those of David W. Tice & Associates, LLC. The opinions are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security.

-- posted by MarketVVizard

Top 937. Feb 17, 2004 10:23 AM

» MarketVVizard - ABXA

OK -- I RARELY see a stock that's hyped in Barron's or any other popular media that I actually want to buy. I also said I don't trade BB stocks. But this week's Barron's highlighted a BB stock called ABX Air (ABXA) that seems quite compelling. Yes, its up like 26% today. But in the current market climate (i.e. lots of money sloshing around, speculation alive and well) I think this thing could easily double from its pre-Barron's level (i.e. another 50% of upside) before year end. Again, I have no idea how accurate the reporting is, but the company is supposedly currently trading at just 7 times next years estimated earnings and it has been growing at 25%. It is, has been, and will continue to be profitable. They are in the air freight business with 115 planes and 7400 employees. Stock only began trading last August. Do your own DD, but I do need something to balance out my shorts -- I figure this is probably a decent hedge as it is the best of all worlds -- value and growth and I'd have to image a lot of fund managers are salivating and wondering how they can establish a position. The shares are almost impossible to buy right now.

-- posted by MarketVVizard

Top 938. Feb 17, 2004 10:49 AM

» MarketVVizard - Hussman

February 17, 2004

There's a saying that goes “History doesn't repeat itself. Only we can do that.”

With the stock market trading at nearly 22 times peak earnings (the historical median is 11), and 62 times dividends (the historical median is 26); a market in which corporate insiders are liquidating stocks at upward of 5.7 shares sold for every share purchased (Vickers), while just 14.6% of individual investors (AAII) and 19.2% of investment advisors (Investor's Intelligence) are bearish, it is clear that investors are already far along the path to repeating their mistakes.

Last month, new inflows into mutual funds hit $40.8 billion – the highest figure on record. One would think that this might have bullish implications, at least over the short run. But then, one would be wrong. Mutual fund inflows are statistically correlated with movements in the stock market, but they are both a lagging and a contrary indicator. Specifically, mutual fund inflows are positively correlated with past stock market movements, and negatively correlated with subsequent stock market movements. The strength of these correlations is strongest about 12 months in either direction. So for example, strong gains in the stock market over the prior 12 months are reliably associated with above average mutual fund inflows, which are in turn associated with below average stock market returns over the following 12 months.

Interestingly, this isn't just a case of strong market returns in one year being followed by weaker returns the next. The mutual fund inflows do add independent explanatory power. So for example, if mutual fund inflows are stronger than can be explained simply by the past year's market strength, the market's performance over the following 12 months also tends to be weaker than can be explained simply by the past year's market returns. These correlations aren't strong enough to make reliable market forecasts, but it's clearly incorrect to interpret heavy mutual fund inflows as bullish evidence. Probably the best conclusion to draw is simply that the recent data on mutual fund inflows are consistent with the extremes we see in other contrary indicators such as bullish sentiment.

Fundamentals don't drive short-term market direction

Nothing in these remarks should be interpreted as a forecast of impending market weakness, particularly over the short term. As I frequently emphasize, overvaluation does not imply poor short-term returns. Rather, overvaluation means only that stocks are priced to deliver disappointing long-term returns. What matters in the short-term is investor's willingness to take risk. That's a psychological preference, and it's impossible to stand in front of investors saying “No, enough is enough.” All we can do is attempt to read investor's risk preferences out of market action. Hands down, the worst losses for stocks have historically occurred when valuations were elevated and investors became skittish toward risk, as evidenced by market action.

In my view, the major stock market indices have little investment merit from the standpoint of valuations, but there still enough speculative merit to warrant some exposure to market risk. What is essential, however, is the recognition that we are taking risk purely on the basis of speculative merit, that we have already established a line of defense against the potential failure of that speculative merit, and that our exposure to risk is modest and proportional to the return/risk profile that we currently observe.

Mistaking earnings trends for investment value

Unfortunately, many investors and analysts honestly seem to believe the idea that stock valuations are justified by fundamentals, and that at worst, stocks have run up a bit too fast over the short run.

That's where we part company. Investors' willingness to ignore value is based on a mistaken focus on earnings trends rather than levels; a belief that so long as earnings and the economy are improving, the actual prices paid for stocks will be justified by those fundamentals.

Unfortunately, this is the same faith that investors displayed at many market peaks throughout history, not least in 1929. As Benjamin Graham and David Dodd later wrote in their 1934 book, Security Analysis:

“The 'new-era' doctrine - that 'good' stocks (or 'blue chips') were sound investments regardless of how high the price paid for them -- was at bottom only a means for rationalizing under the title of 'investment' the well-nigh universal capitulation to the gambling fever… Why did the investing public turn its attention from dividends, from asset values, and from earnings, to transfer it almost exclusively to the earnings trend? The answer was, first, that the records of the past were proving an undependable guide to investment; and secondly, that the rewards offered by the future had become irresistibly alluring ... The notion that the desirability of a common stock was entirely independent of its prices seems incredibly absurd. Yet the new-era theory led directly to this thesis. If a stock was selling at 35 times the maximum recorded earnings, instead of 10 times its average earnings, which was the pre-boom standard, the conclusion to be drawn was not that the stock was too high but merely that the standard of value had been raised. Instead of judging the market price by established standards of value, the new-era based its standards of value on the market price.”

That willingness of investors to turn their attention “from dividends, from asset values, and from earnings, to transfer it almost exclusively to the earnings trend,” is something that we need to watch carefully. This doesn't mean that stock prices have to turn down anytime soon. But it is dangerous to assume that stocks are priced to deliver strong long-term returns to buy-and-hold investors.

Too much of a good thing

Still, market action remains generally positive for stocks. As I've noted frequently, a market in which investors have a robust willingness to take risk is a market where most stocks, industries, and security types will usually be advancing, with few clear or persistent divergences.

Looking at the data on the NYSE, fully 93% of stocks on that exchange are above their 30-week moving averages. There is also a broad uniformity across industry groups, and both corporate and Treasury bonds have been holding firm. Sure, we've seen some initial causes for concern, such as the recent weakness in the Dow Transportation Average, as well as some early fragility in the industry picture, but overall, market action seems strong. So why worry about those pesky valuations?

Simple. We're seeing a bit too much of a good thing here. Specifically, it's a good thing to see uniform market strength. But too much of that suggests an overextended and potentially vulnerable market condition.

Historically, markets that have been both highly overvalued and technically overextended have also been markets with the potential to decline a good distance before investors recognize that there is anything meaningfully wrong. After all, any early decline at this point would almost surely be accepted as a normal correction, given the advance we've seen.

And while I have a certain amount of confidence that our own measures of market action would identify a shift in investors' risk attitudes fairly early, that confidence is not nearly strong enough to justify a fully invested or unhedged investment position.

Accordingly, the Strategic Growth Fund is already about 50% hedged against the impact of market fluctuations. Based on certain short-term conditions, we also hold a “straddle” in both call options and put options here, because the probable volatility in the market over the short run (including the potential for a powerful short-term advance, as well as a breakdown) is likely, in my view, to exceed the volatility implied in those options.

Again, it is important to emphasize that the comments here relate to risk (which I view as substantial) and not probable short-term market direction (on which I have no opinion). Nothing in these comments should be interpreted as a forecast of oncoming weakness in the short-term. Rather, these comments are intended to point out the potential for substantial market losses in the event that investors' appetite for speculation begins to diminish at these levels of valuation.

Meanwhile, it's not necessary to make short-term forecasts. Indeed, our current position is very tolerant of short-term uncertainties. In the event of a strong advance, I would expect the call options to enhance our participation. In the event of a strong decline, I would expect the put options to reduce our exposure to market fluctuations to even less than 50% of the market's volatility. A flat market without substantial volatility would result in a certain amount of time decay that we could not recover through active management of that position. That potential time decay amounts to about 1% of assets here.

Market Climate

In stocks, then, the Market Climate remains characterized by unusually unfavorable valuations but still moderately favorable market action. We've responded to the level of valuations, a variety of early breakdowns in market action, and the overextended nature of the recent advance, but overall, we would still expect to benefit from further market advances, and to participate in at least some portion of any market decline that might emerge at present.

In bonds, the Market Climate remains characterized by modestly unfavorable valuations and modestly unfavorable market action. Bond investors are essentially playing Chicken with the Fed here, trying to stay on the road until the last moment before a head-on collision. Historically, the bond market has generally gone off the road immediately before the Fed started a tightening cycle. The belief that the Fed has time on its hands has encouraged bond investors to continue the “carry” trade – borrowing at low short-term rates and investing in higher yielding long-term bonds.

In our view, that carry trade actually does have some merit, given the steepness of the yield curve here. But our estimate of the risk is much higher than the market seems to assume. The risk here is not simply that the Fed tightens, but that market forces such as dollar weakness or inflation pressures could affect market yields even in the absence of Federal Reserve action, prompting a reluctant and lagging response by the Fed.

Probably the main factor that could shift us to a more constructive position in Treasuries would be a widening of credit spreads. The compensation offered by the corporate bond market for credit risk has become extremely thin. If we were to see that widen, it would be an important indication of potential economic weakness, as well as an indication that investors had become more averse to credit risk. Both factors would be favorable toward Treasuries.

At present, however, the prevailing evidence holds the Strategic Total Return Fund to a relatively short duration profile of less than 2.5 years (meaning that a 100 basis point move in bond yields would be expected to affect the Fund by less than 2.5% on account of bond price fluctuations). We continue to hold moderate investments in precious metals shares and utilities, as well as Treasury Inflation Protected Securities. We would be inclined to increase our investments in these alternative investments on price weakness.

-- posted by MarketVVizard