gas demand +.9%

Give Saudi/Russians comfort that they can keep hiking.

And markets say Fed will keep ‘accommodating’.

So much for higher prices curbing demand!

DJ US Gasoline Demand +0.9% On Week – MasterCard SpendingPulse(DJ)

NEW YORK (Dow Jones)–U.S. gasoline demand for the week ended Dec. 21, measured by purchases at the pump, rose 0.9% from a week earlier, according to a report by MasterCard Advisors LLC, a division of MasterCard Inc. (MA). Gasoline demand increased by 597,000 barrels, or 85,286 barrels a day, to 67.919 million barrels, or 9.703 million barrels a day, last week, according to the report, which is compiled by SpendingPulse, a retail data service of MasterCard Advisors. The four-week average demand level was 65.518 million barrels, or 9.36 million barrels a day, MasterCard said, up from 96,429 barrels a day from a week ago. Retail gasoline prices fell 1 cent to an average $2.98 a gallon over the week, the report said. That is 28.4% higher than a year ago.

SpendingPulse is a macroeconomic indicator that reports on national retail sales and is based on aggregate sales activity in the MasterCard payments network, coupled with estimates for all other payment forms, including cash and check. MasterCard SpendingPulse doesn’t represent MasterCard financial performance. The Department of Energy is due to issue its weekly petroleum data, including gasoline demand, on Thursday at 10:30 a.m. EST.

The data, put out by the DOE’s Energy Information Administration statistics and analysis unit, doesn’t count how many gallons are sold. Instead, it offers a “Product Supplied,” or implied demand figure, in its weekly report. “Product Supplied” represents the total volume of gasoline that has moved on from refineries, pipelines, blending plants and terminals on its way to supplying retail stations.

-By Matt Chambers, Dow Jones Newswires; 201-938-2062;
matt.chambers@dowjones.com
Dow Jones Newswires
December 26, 2007 14:00 ET (19:00 GMT)
Copyright (c) 2007 Dow Jones & Company, Inc. – – 02 00 PM EST


Saudi/Fed teamwork

Looks like markets are still trading with the assumption that as the Saudis/Russians hike prices the Fed will accommodate with rate cut.

That’s a pretty good incentive for more Saudi/Russian oil price hikes, as if they needed any!

Likewise, the US is a large exporter of grains and foods.

Those prices are now linked to crude via biofuels.

And the new US energy bill just passed with about $36 billion in subsidies for biofuels to help us keep burning up our food for fuel and keeping their prices linked.

This means cpi will continue to trend higher, and drag core up with it as costs get passed through via a variety of channels. In the early 70’s core didn’t go through 3% until cpi went through 6%, for example.

Ultimately everything is made of food and energy, and margins don’t contract forever with softer demand. In fact, much of the private sector is straight cost plus pricing, and govt is insensitive to ‘demand’ and insensitive to the prices of what it buys. And the US govt. indexes compensation and most transfer payments to (headline) cpi.

And while the US may be able to pay it’s rising oil bill with help from its rising export prices for food, much of the rest of the world is on the wrong end of both and will see its real terms of trade continue to deteriorate. Not to mention the likelihood of increased outright starvation as ultra low income people lose their ability to buy enough calories to stay alive as they compete with the more affluent filling up their tanks.

At the Jan 30 meeting I expect the Fed to be looking at accelerating inflation due to rising food/crude, and an economy muddling through with a q4 gdp forecast of 2-3%. Markets will be functioning, banks getting recapitalized, and while there has been a touch of spillover from Wall st. to Main st. the risk of a sudden, catastrophic collapse has to appear greatly diminished.

They have probably learned that the fed funds cuts did little or nothing for ‘market functioning’ and that the TAF brought ff/libor under control by accepting an expanded collateral list from its member banks.

(In fact, the TAF is functionally equiv of expanding the collateral accepted at the discount window, cutting the rate, and removing the stigma as recommended back in August and several times since.)

And they have to know their all important inflation expectations are at the verge of elevating.

They will know demand is strong enough to be driving up cpi, and the discussion will be the appropriate level of demand and the fed funds rate most likely to sustain non inflationary growth.

Their ‘forward looking’ models probably will still use futures prices, and with the contangos in the grains and energy markets, the forecasts will be for moderating prices. But by Jan 30 they will have seen a full 6 months of such forecasts turn out to be incorrect, and 6 months of futures prices not being reliable indicators of future inflation.

Feb ff futures are currently pricing in another 25 cut, indicating market consensus is the Fed still doesn’t care about inflation. Might be the case!


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2007-12-26 US Economic Releases

2007-12-26 S&P-Case Shiller Home Price Index

S&P/Case-Shiller Home Price Index (Oct)

Survey n/a
Actual 192.9
Prior 195.6
Revised 195.7

2007-12-26 S&P-CS Composite-20 YoY

S&P/CS Composite-20 YoY (Oct)

Survey -5.7%
Actual -6.1%
Prior 4.9%
Revised n/a

2007-12-26 S&P-Case-Shiller 20 MoM%

S&P/CS 20 MoM (Oct)

Survey n/a
Actual -1.42%
Prior -0.84%
Revised n/a
% Change -69.05%

2007-12-26 Home Price Index

S&P/Case-Shiller TABLE

Survey 1
Actual -4
Prior 0
Revised n/a

It’s a big city index and has been down more than broader measures. Biggest drops have come in Miami, Las Vegas, Detroit, and Los Angeles. Also, these are October numbers – old news now.


2007-12-26 Richmond Fed Manufacturing Index

Richmond Fed Manufacturing Index (Dec)

Survey 1
Actual -4
Prior 0
Revised n/a

2007-12-26 Richmond Fed Manufacturing TABLE

Redmond Manufacturing TABLE

Some weakness and higher prices.


2007-12-26 ABC Consumer Confidence

ABC Consumer Confidence (Dec 23)

Survey n/a
Actual -23
Prior -17
Revised

This was when CNBC was still gloomy. Now that CNBC has turned a bit more optimistic, maybe the number will turn up as well.


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Government spending and inflation comments

Government Spending (Trailing Twelve Months)

Note how the ‘soft spot’ in govt. spending corresponds to the softening in domestic demand. Fortunately exports have been expanding sufficiently to sustain reasonably high levels of GDP.


CRB Index

PCE Price Index

Looks like a full recovery from the Aug 06 gasoline price collapsed engineered by Goldman’s changing of their commodity index weightings?


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Strong gdp and high credit losses

CNBC just had a session on trying to reconcile high gdp with large credit losses. Seems they are now seeing the consumer clipping along at a +2.8% pace for Q4. No need to rehash my ongoing position that most if not all the losses announced in the last 6 months would have little or no effect on aggregate demand. Credit losses hurt demand when the result is a drop in spending. And yes, that happened big time when the subprime crisis took the bid away from would be subprime buyers who no longer qualified to buy a house. That probably took 1% away from gdp, and the subsequent increase in
exports kept gdp pretty much where it was. But that story has been behind us for over a year.

The Fed is not in a good place. They should now know that the TAF operation should have been done in August to keep libor priced where they wanted it. They should know by now losses per se don’t alter aggregate demand, but only rearrange financial assets. The should know the fall off in subprime buyers was offset by exports.

The problem was the FOMC- as demonstrated by their speeches and actions- did not have an adequate working understanding of monetary operations and reserve accounting back in August, and by limiting the current TAFs to $20 billion it seems they still don’t even understand that it’s about price, and not quantity. Too many members of the FOMC
are mostly likely in a fixed exchange rate paradigm, with its fix exchange rate/gold standard fractional reserve banking system that drove us into the great depression. With fixed exchange rates it’s a ‘loanable funds’ world. Banks are ‘reserve constrained.’ Reserves and consequently ‘money supply’ are issues. Government solvency is an issue.

With today’s floating exchange rate regime none of that is applicable. The causation is ‘loans create deposits AND reserves,’ and bank capital is endogenous. There are no ‘imbalances’ as all current conditions are ‘priced’ in the fx market, including ANY sized trade gap, budget deficit, or rate of inflation.

The recession risk today is from a lack of effective demand. There are lots of ways this can happen- sudden drop in govt spending, sudden tax increase, consumers change ‘savings desires’ and cut back spending, sudden drop in exports, etc.- and in any case the govt can instantly fill in the gap with net spending to sustain demand at any level it desires. Yes, there will be inflation consequences, distribution consequences, but no govt. solvency consequences.

So yes, there is always the possibility of a recession. And domestic demand (without exports) has been moderating as the falling govt budget acts to reduce aggregate demand. But the rearranging of financial assets in this ‘great repricing of risk’ doesn’t necessarily reduce aggregate demand.

Meanwhile, the Saudis, as swing producer, keep raising the price of crude, and so far with no fall off in the demand for their crude at current prices, so they are incented to keep right on hiking. And they may even recognize that by spending their new found revenues on real goods and services (note the new mid east infrastructure projects in progress) they keep the world economy afloat and can keep hiking prices indefinitely.

And food is linked to fuel via biofuels, and as we continue to burn up every larger chunks of our food supply for fuel prices will keep rising.

The $US is probably stable to firm at current levels vs the non commodity currencies, as portfolio shifts have run their course, and these shifts have driven the $ down to levels where there are ‘real buyers’ as evidenced by rapidly growing exports.

Back to the Fed – they have cut 100 bp into the triple negative supply shock of food, crude, and the $/imported prices, due to blind fear of ‘market functioning’ that turned out to need nothing more than an open market operation with expanded acceptable bank collateral (the TAF program). If they had done that immediately (they had more than one outsider and insider recommend it) and fed funds/libor spreads and other ‘financial conditions’ moderated, would they have cut?

There has been no sign of ‘spillover’ into gdp from the great repricing of risk, food and crude have driven their various inflation measures to very uncomfortable levels,and they now believe they have ‘cooked in’ 100 bp of inflationary easing into the economy that works with about a one year lag.

Merry Christmas!


♥

Re: Is $700 billion a big number

(an email and an article)

On Dec 23, 2007 5:37 PM, Russell Huntley wrote:
>
>
>
> For a very bearish take on the credit crisis, see: Crisis may make 1929 look
> a ‘walk in the park’. The article includes a $700 billion loss estimate from
> the head of credit at Barclays capital:
>
> Goldman Sachs caused shock last month when it predicted that total crunch
> losses would reach $500bn,

Yes, could be. Rearranging of financial assets.

leading to a $2 trillion contraction in lending
> as bank multiples kick into reverse.

I don’t see this as a consequence. Bank lending will go in reverse only if there are no profitable loans to be made.

With floating exchange rates, bank capital in endogenous and will respond to returns on equity.

This already seems humdrum.
>
> “Our counterparties are telling us that losses may reach $700bn,” says Rob
> McAdie, head of credit at Barclays Capital. Where will it end? The big banks
> face a further $200bn of defaults in commercial property. On it goes.

Been less than 100 billion so far. Maybe they are talking cumulatively over the next five years?

>
> UPDATE: My main interest in this article was the quote from Barclays
> Capital. There has been a growing agreement that the mortgage credit crisis
> would result in losses of perhaps $400B to $500B; this is the first estimate
> I’ve seen significantly above that number.
>
> I noted last week that a $1+ trillion mortgage loss number is possible if it
> becomes socially acceptable for the middle class to walk away from their
> upside down mortgages.

Historically, people just don’t walk out onto the streets. They are personally liable for the payments regardless of current equity positions, and incomes are still strong, nationally broader surveys show home prices still up a tad ear over year.

Yes, some condo flippers and speculators will walk. But demand from that source has already gone to zero – did so over a yar ago, so that doesn’t alter aggregate demand from this point.

And that doesn’t include losses in CRE, corporate
> debt and the decrease in household net worth.

Different things, but again, the key to GDP is whether demand will hold up, including exports.

And probably half of aggregate demand comes directly or indirectly from the government. Don’t see that going negative. And AMT tax just cut fifty billion for 2008 will help demand marginally.

>
> The S&L crisis was $160B, so even adjusting for inflation, the current
> crisis is much worse than the S&L crisis (see page 13 of this GAO document).

That was net government losses? Shareholders/investors lost a lot more?

And a $1 trillion per day move in the world equity values happens all the time.

Q4 GPD being revised up to the 2% range. This has happened every quarter for quite a while.

Yes, it can all fall apart, but it hasn’t happened yet. And while there are risks to demand, negative GDP is far from obvious. Those predicting recessions mainly use yield curve correlations with past cycles and things like that.

Interesting that the one thing that is ‘real’ and currently happening is ‘inflation’, which the fed doesn’t seem to care about. And it won’t stop until crude stops climbing.


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Repo Mkts and TAF

(an interoffice email)

On 12/21/07, Pat Doyle
wrote:
>
>
>
> It is becoming apparent that the funding pressures for year end are ebbing.
> The ease in pressure has a lot to do with the TAF and coordinated CBK
> interventions. The Fed is getting the cash to the people who need it.
> Discount window borrowings have been slowly climbing as well approx 4.6bb
> now. The Fed statement that they will provide this TAF facility for as long
> as needed is easing concerns amongst banks and providing a reliable source
> of funding for “hard to fund” assets.

Should have done this in August!
>
>
> There is and has been a lot of cash in the markets still looking for a home.
> Balance sheets are slowly cleaning up but balance sheet premiums (repo) will
> remain stubbornly high as long as the level 3 type assets remain on
> dealer/bank balance sheets.
>
>
>
> The current spread between the 1×4 FRA vs. 1×4 OIS is 57bps..

This looks like a good play – seems unlikely LIBOR will be at a wider spread than the discount rate. Load up the truck?

1×2 FRA vs.
> 1×2 OIS is 40bps. Spot 1mos LIBOR VS 1MOS FFs is 4.86 vs. 4.25 or 61bps.
> These spreads still represent continued unwillingness to lend in the
> interbank market and also illustrate a steeper credit curve.
>
>
>
> Turn funding has not changed substantially. While funding appears to be
> stabilizing, balance sheets are still bloated and capital ratios are still
> under pressure therefore balance sheets will remain expensive in repo land.
>
>
>
> From another bank;
>
> Mortgages over the year-end turn traded at 5.25 today, which we still feel
>
> is a good buy here considering the amount of liquidity the fed has been
> dumping
>
> into the system as of late (via the TAF and standard RP operations) and the
>
> expectation that they will continue to do so on Dec 31. Treasuries also
> traded
>
> over the turn traded today at 2.50, the first treasury turn trade we’ve seen
> in
>
> quite some time.
>
>
>
>
>
> Yesterday Tsy GC O/N’s backed up from the low 3s to 3.70. The FED has been
> actively trying to increase the supply of treasuries in the repo markets.
>
>
>
> AGENCY MBS repo has been steadily improving. 1mos OIS vs 1mos AGCY MBS has
> gone from a spreads of 63bps last week to 15bps last night. And spreads to
> 1month LIBOR have widened by 33bps AGCY MBS from L-23 12/13 to L-56 12/20.
> Again LIBOR still showing the unwillingness of banks to lend to each other.
>
>
> -Pat
>
>
>
>
> Patrick D. Doyle Jr.
>
> AVM, L.P. / III Associates
>
> 777 Yamato Road
>
> Suite 300
>
> Boca Raton, Fl. 33431
>
> 561-544-4575
>
>


♥

2007-12-21 US Economic Releases

2007-12-21 Personal Income

Personal Income (Nov)

Survey 0.5%
Actual 0.4%
Prior 0.2%
Revised n/a

OK number.


2007-12-21 Personal Spending

Personal Spending (Nov)

Survey 0.7%
Actual 1.1%
Prior 0.2%
Revised 0.4%

Nice bounce back from a low number also revised up. Makes the two month average about 0.75%. This will cause further upward revisions of Q4 GDP.


2007-12-21 PCE Deflator YoY

PCE Deflator YoY (Nov)

Survey 3.4%
Actual 3.6%
Prior 2.9%
Revised 3.0%

Back to my favorite quote from September, ‘If the fed doesn’t care about inflation, why should I?’

Wonder what it takes for the fed to care?


2007-12-21 PCE Core MoM

PCE Core MoM (Nov)

Survey 0.2%
Actual 0.2%
Prior 0.2%
Revised n/a

2007-12-21 PCE Core YoY

PCE Core YoY (Nov)

Survey 2.0%
Actual 2.2%
Prior 1.9%
Revised 2.0%

Core at or though fed’s upper bound.


2007-12-21-u-of-michigan-confidence.gif

U. of Michigan Confidence (Dec F)

Survey 74.5
Actual 75.5
Prior 74.5
Revised 2.0%

People still watching CNBC.


2007-12-21 Inflation Expecations - 1 Year Ahead

Inflation Expectations – 1 Year Ahead

Survey n/a
Actual 3.4%
Prior 3.2%
Revised n/a

One of the fed’s indicators – don’t like this action as they think once it elevates it’s too late.


2007-12-21 Inflation Expecations - 5 Years Ahead

Inflation Expectations – 5 Years Ahead

Survey n/a
Actual 3.1%
Prior 2.8%
Revised n/a

As above – once it elevates it’s too late.


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