Sunday, August 28, 2005

August 28, 2005 Greenspan Warns On Housing Imbalance, Cracks In US Housing Appear

Greenspan Warns On Housing Imbalance, Cracks In US Housing Appear

``The real problem is the US economy is just too leveraged. Starting with the housing industry, the country is too dependent on derivatives markets to create the illusion that interest rate risk can be conjured away.” John Dizard, columnist, Financial Times

Last week, I opined that the US Federal Reserve could be targeting the US real industry for its ‘froth’, hence the thrust to maintain the incremental hikes of its Federal Reserve rate at a “measured” pace. Apparently, Mr. Greenspan officially validated my analysis in his recent speech at Jackson Hole, Wyoming, stating that ``Our forecasts and hence policy are becoming increasingly driven by asset price changes."

Mr. Greenspan’s speech was practically an implicit admonition on the ballistic price dynamics of the exploding credit mortgage fueled real estate industry in the United States. In essence, he has latently acknowledged the ‘froth’ in the industry (emphasis mine), ``If we can maintain an adequate degree of flexibility, some of America's economic imbalances, most notably the large current account deficit and the housing boom, can be rectified by adjustments in prices, interest rates, and exchange rates rather than through more- wrenching changes in output, incomes, and employment.

Mr. Greenspan says that this phenomenon grew out of complacency due to the perceived ‘long period of economic stability’ which has led to ‘lower risk premiums’ and which market participants view as ‘structural and permanent’.

The stark warning in his own words (emphasis mine), ``But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."

This warning shadows Sir Greenspan’s “irrational exuberance” call on the stock market mania in 1996. The Nasdaq bubble imploded at the onset of the millennium in 2000.

With Greenspan’s shot across the bow, you have been warned!!

Further, I’d like to point out one recently enacted law that may even trigger the `reversion to the mean’ could be the new federal Bankruptcy Reform Act which is slated to take effect in October 17th of this year.

According to Dana Blankenhorn, in the article Dating the Next Recession, ``Borrowers must begin paying back credit card loans based on a 10-year payback, doubling many minimum balances, and New rules force borrowers to repay those debts, even after filing bankruptcy... Faster write-downs of credits by borrowers means fewer assets for credit card banks. Forcing borrowers to pay back their loans, even after bankruptcy, means those assets can't be written-off, and those bankrupt borrowers can't be extended new credit. It's a squeeze on bank assets, from both sides of the ledger...So two things happen, even in the best of all possible worlds. Assets decline, while new assets become harder to generate.”

The law essentially cuts the 20-year credit terms to only 10 years which translates to a jump in monthly payments. The doubling of the minimum balance monthly payoff will hit consumers who are in debt to the eyeballs starting on November! Notwithstanding, borrowers are required to pay even after bankruptcy. Let me quote at length Dana Blankenhorn very important message (emphasis mine)...

``Millions of people (I have no idea how many, but the number may be in the 10s of millions) are already at their limits, squeaking by and paying the minimum on their credit card balances. To protect themselves, the banks made it the law that rates on balances that fall past-due automatically jump to over 30%. But this is, in fact, no protection at all. The banks' assets are frozen, and while they might be paid back in time, the chances of raising more assets (remember, loans are assets to the banks) declines dramatically once the hammer falls on borrowers...

``People have been encouraged (by subsidies, and the fact that banks can always sell their loans to Fannie Mae and Freddie Mac) to create a mortgage "asset bubble," with interest-only and adjustable-rate loans. People were then encouraged to furnish these palaces through credit cards or second-mortgages.

``This has happened nationwide, not just in the areas where the supply of new housing has been tight.

``So let's say you're stretched and October rolls around. The credit card bill jumps. The natural inclination (the one encouraged by banks) is to tap the home equity. But that may already be tapped. With many tapped people forced to put homes on the market (to stave off bankruptcy) a downward spiral begins. Home equity values fall, and with each turn more over-extended homeowners find themselves with negative equity. Home equity loans must be called, mortgage loans start to default, foreclosures add more assets to the pile. (Those who deal in foreclosures are already cheering.)”

How this would affect Sir Greenspan’s “structure finance” regime of about $3 trillion of Asset Backed Securities (ABS), over $6 trillion of Government Sponsored Enterprises (GSE) exposure and over $220 trillion of derivatives is a wonder if not a spectacle to behold.

Yet there are quite a number of signs that appear to indicate that the real estate sector is rolling over...

  • ``Bankruptcy filings to federal courts in the April-to-June quarter totaled 467,333, according to data released Wednesday from the Administrative Office of the U.S. Courts. That marked a record number of filings made in any quarter. Of that total, most -- 458,597 -- were personal bankruptcy filings; the remaining 8,736 were businesses filing for bankruptcy, the data showed.” reports the New York Times.
  • According to Dr Steve Sjuggerud of the Investment U, ``New home prices have spiraled downward for three straight months. They're down 14% in that time, from $236,300 in April, to $203,800 today. A drop of more than $30,000!

``The way The Wall Street Journal reported the statistics, it seemed like home prices have been going up. But it was the number of houses sold rising 6.5%. The median price of a home fell in July alone by - get this - 7.2%. Wow!”

Chart courtesy of Investment U

  • ``In July of last year, the supply of condos and co-ops on the market nationwide was only enough to cover 3.5 months of sales. Now, NAR estimates that the supply’s enough to cover 5.3 months of sales, a 51.4% jump.” notes analyst Martin Weiss.
  • In addition Mr Weiss observed that ``Inventories of homes for sale rose 2.6% to 2.751 million, a 4.6-month supply at the current sales pace. That’s the largest inventory since May 1988. And today, it was announced that the inventory of unsold NEW homes is also at a record (despite an increase in sales).”
  • According to BCA Research, ``Real mortgage rates are still low compared to past Fed tightening cycles, but the Affordability Index for first-time buyers has plunged below the average of past cycles because of soaring prices. Any fading in the wealth tailwind from housing could hit consumer spending hard, especially given the escalating drag from energy prices.”

Chart courtesy of yahoo finance

  • Finally stocks of homebuilders and subprime mortgage lenders have recently been buffeted, as shown in the chart above, the PHLX HOUSING SECTOR INDEX. Even lumber prices as shown below have collapsed!

Lumber chart courtesy of Moore’s Research Center

Robert Kiyosaki, author of the best selling “Rich Dad/Poor Dad" series of books, wrote three articles warning of the an impending real estate crash where he writes, ``In a nutshell, we really do not have a real estate bubble... the world is in a currency bubble. In other words, the governments of the world have printed too much "funny" money and cash will soon turn to trash.”

Mr. Kiyosaki, today, recommends buying gold and silver, he wrote, ``Also, I am getting rid of my U.S. dollars. As you may know, the U.S. dollar has lost nearly 40% of its value against other currencies in the last four years. That means if you have $10,000 in savings in the year 2000, it is worth about $6,000 in purchasing power. Rather than holding cash in the bank, Kim and I have been holding our excess cash in gold and silver bars. Why? Because you will know that the dollar is falling because the price of gold and especially silver will begin to rise. When silver goes higher than $8.50 an ounce and gold reaches $500 an ounce, you will know the end is near. When the crash comes, the currency of many countries will go down in purchasing power as the price of these two precious metals rise in value.”

In other words, this is no time to lollygag or be complacent. The risk factors today appear to be gaining momentum or accelerating with no less than Sir Alan Greenspan underscoring the imbalances issue coupled with a law that could have serious unintended consequences.

Remember that the Phisix has a correlation of 34% relative to the US S & P 500 benchmark according to Standard & Poor's Global Stock Markets Factbook 2004/Matthews Funds Asia which I wrote about last August 1 to 5 edition, (see Yuan Adjustments Bolsters Emerging Markets, Commodities). In other words, if the US markets take a beating, over the short-term our market could be affected. Yet, this does not mean that we have to be out of the market but rather it is exigent on us to be defensive.Posted by Picasa

Aug 28 2005 Petro Subsidies Unnerves Indonesia’s Financial Markets

Petro Subsidies Unnerves Indonesia’s Financial Markets

``Men in general are quick to believe that which they wish to be true. “ -- Julius Caesar

Local mainstream analysts are wont to facilely attribute deflating asset prices on oil concerns. While I have mentioned in the past that Oil concerns may have SOME effects in today’s price levels, the activities in the domestic financial markets appear to support my assessment that oil concerns are subordinate to the present monetary tightening environment in the US.

Because your prudent investor analyst wants to show you the impact of an actual ‘oil induced shock’, let us turn to our neighbor, Indonesia as paradigm, whom ironically is a member of the oil producing cartel, the Organization of Petroleum Exporting Countries or the OPEC.

As you can see from the chart above courtesy of BCA Research, the Indonesian currency (upper window), the rupiah cratered by a startling 4.6% in a month, while its bond yields (lower window) soared making it the worst performing bond in the Asia Pacific sphere, according to Bloomberg’s Yumi Kuramitsu and Naila Firdausi, ``The iBoxx Indonesia index has fallen 5.5 percent in 2005 as of Aug. 23.”

In addition, the insurance premium on the possibility of a credit default via the credit default swap derivative surged. According to the same Bloomberg report, ``The annual cost of insuring $10 million of Indonesia's U.S. dollar-denominated government debt for five years using credit- default swaps rose to 325,000, from $300,000 yesterday, according to Deutsche Bank AG prices. A week ago, the cost was about $245,000. Indonesia's dollar-denominated international bonds have junk ratings of B+ from Standard & Poor's and one step lower at B2 from Moody's Investors Service.”

Naturally, because of the sharp selloff in Rupiah denominated assets, the equity benchmark represented by the Jakarta Stock Exchange (JKSE), as illustrated in the above chart courtesy of yahoo finance, likewise ‘fell off the cliff’ down 12% since August 11 or in about 2 weeks!

Indonesia’s present economic and financial woes stem NOT directly from the standpoint of absolute price levels of oils but rather due to the structural makeup of GOVERNMENT SUBSIDIES ON OIL!

Because domestic demand for the fossil fuel exceeds that of the production (declining rate), the country has resorted to importing oil to meet demands. According to Bloomberg’s Christina Soon ``Indonesia's oil production fell 4.5 percent last year to 1.13 million barrels a day while oil consumption rose 1.4 percent to 1.15 million barrels a day, according to data from BP Plc, the world's second-largest publicly traded oil company...The country's fuel consumption may rise 7 percent in the second half from the first six months, Mohammad Harun, spokesman for the nation's biggest oil producer, PT Pertamina, said in an e- mailed statement on Aug. 12.”

``The country may import a net 61,000 barrels a day this year, compared with net exports of 27,000 barrels in 2004, based on figures in a document prepared for the Energy and Mineral Resources Ministry and obtained by Bloomberg News.” notes Bloomberg’s Yumi Kuramitsu and Naila Firdausi.

Since government restricts a `pass through’ of the price of fuel to its consumers and instead absorbs the price differential, this has accounted for a substantial chunk of strain in the country’s fiscal budget, ``President Susilo Bambang Yudhoyono on Aug. 16 forecast spending on fuel subsidies may reach 140 trillion rupiah ($13.4 billion) this year, threatening his plan to narrow the budget deficit and boost spending on health and education. Subsidies will widen the budget deficit to 1 percent of gross domestic product, the president said on Aug. 16, up from 0.8 percent.” reports Bloomberg’s Christina Soon.

Caught between the proverbial ``Devil and the deep blue sea” the government’s desire to balance its budget runs in conflict with the interests of the populace. Aburizal Bakrie, Indonesia's top economics minister recently announced that fuel prices will increase this January. The last time Indonesia raised fuel prices by as much as 34% (!) was in March.

The heightened risk of political unrest and higher inflation landscape has caused the present ruckus in the country’s financial markets. According to widely followed BCA Research, ``Markets worry that the removal of subsidies will push inflation higher and increase political risks. In 2001, when the government last attempted to remove fuel subsidies this incited social unrest and led to the reinstatement of the subsidies. Market conditions are fluid and further weakness is likely. However, the inflationary shock from higher fuel prices will be transitory and long-term bonds yielding nearly 14% offer good value.” In short, BCA believes that the ‘transitory’ actions are simply knee-jerk reactions that presents for a buying opportunity.

Two important reflection points from the ‘Indonesian experience’. First, subsidies, for short term pacification of the general public, wreaks havoc on government finances which eventually percolates to the financial markets, as I have argued against the proponents of crowd appeasing nationalization or government subsidies in my May 2 to 6th edition `The Cure Is Worse Than The Disease’.

Second, because oil price shocks have ‘stagflationary’ effects on oil importing countries, which means it reduces the rate of growth, and leads to an increase in the general price level or potential inflation, higher interest rates or tightening money environment are its natural outgrowth, something that we have not yet seen in the local market, so far. As shown by the chart below from the National Statistical Coordination Board NSCB.

91-day Philippine Treasury Bills

So before you believe the mainstream analysts’ folderol that the current ennui in the domestic market is oil related, check out if the financial markets (across asset classes) are validating this view.

Finally, many economists correlate high oil prices to a consumption tax. Maybe it is, however, in my view they are even worse than taxes. Not only are they a drag to consumer spending, business hiring, capital expenditures, corporate profits and foreign currency reserves, the increased oil bills go overseas particularly to oil exporting countries. In short, it is a wealth transfer from oil consuming countries to oil producing countries. At least taxes get spent domestically whether one would argue that it be spent judiciously or otherwise. Posted by Picasa

Sunday, August 21, 2005

Bill Ridley: Saudi Arabia - The Next Mid East Flashpoint

An important read from Bill Ridley of the political equation in Saudi Arabia could even tilt oil prices to the roof!

Saudi Arabia - The Next Mid East Flashpoint

The last thing the United States needs right now is another conflict in the Mid East to deal with, but unfortunately America’s key ally in that troubled region is showing signs that they are on the brink of a civil war.

At stake here are 26% of the world’s oil reserves and 204 trillion cubic feet of natural gas. If extremist revolutionaries get their way, they will attempt to bring the U.S. and the rest of the western world to their knees by jacking up oil prices to punitive levels.

For the worst possible reasons, the likelihood of oil and gold dropping much further in price seems highly unlikely. In fact, it is very possible we could see sharper price spikes.

Playing into the latest price surge over $60 has been the recent death of Saudi Arabia 's King Faud, which has traders fretting the country's oil output could be disrupted as concerns of a civil war heighten. Just hours before the newly crowned King Abdullah arrived in the holy city of Medina , security forces killed the leader of al Qaeda in Saudi Arabia in a gun battle.

Earlier this month, terrorism concerns caused the U.S. to shut an embassy and two consulates. In an already skittish market, any unrest in Saudi Arabia is especially unnerving particularly given the fact that the major source for terrorism funding and manpower comes mostly from Saudi Arabia who are also world’s leading supplier of oil.

Saudi Arabia has the potential to become the world’s biggest political and economic disaster and is one of the major reasons why we are now paying more to fill up our cars.

Some energy economists are saying that the cost of a barrel of oil now has a $10 to $15 premium due to the uncertainty in the Middle East . Analysts are also worried that the now ruling King Abdulla will lose control of Saudi security and most importantly, control of the oil infrastructure.

Increased terrorist activity is hard for oil analysts to ignore. Last year a truck bomb blasted a main Saudi police station which was followed by the May 29th attack at a foreign workers compound in Khobar. An organization calling itself the al-Qaeda of the Arabian Peninsula later released statements denouncing members of the Saudi Royal Family and accusing them of plundering the nation’s oil wealth.

You would think that a nation that controls 25% of the world’s oil reserves would be a shining star for education and development for their people instead of the home base for terrorist financing and training.

So what happen?

Close examination reveals that the Saudi Royal Family of some 6,000 princes (women are excluded), along with favored business buddies like the bin Ladens, absorb virtually all the billions of oil revenues. This is another classic example of third world politics where the power elite keep themselves in luxury while their subjects are kept under strict control.

The Saud Royalty enforce Islamic laws and harsh punishments against the 22 million subjects under their rule. By our standards, their rule of the law is primitive. For the worst lawbreakers, public beheadings are still the norm.

To help keep the masses somewhat happy however, billions of dollars have been doled out to the under classes. These funds have gone to some positive things such as schools and mosques however there is a clear money trail showing that al Qaeda terrorists have also been on the receiving end.

Clearly, this terrorist financial support shows there is dissention within the ranks of the Saudi power elite. The clearest example being Osama bin Laden himself.

Life in the Desert

The Saudi ruling classes have riches beyond our comprehension. They have gone to the best schools in Europe and the United States, received the best medical care from American and European doctors. I remember one story from a nurse who said that one of the sheiks she had given care to in his palace had gold bars on the floor of his bedroom to keep his feet cool!

Unfortunately this extravagant wealth has not trickled down to the average family who live in the streets outside the palace gates in Riyadh. Millions of fundamentalists live in a world of fear, ignorance, and poverty which has breed contempt. Such a state of mind is open to believing the negative religious doctrine that focusing on death and destruction of those people and places which they believe are responsible for their unhappiness.

The mind control tactics of the religious leaders will keep the masses satisfied until they reach paradise either by their natural death or by sacrificing themselves for their cause. When you live a life of hell, a suicide bombing, is a glorious answer and a face saving escape.

Of course in reality what is happening is a transfer of power from one group of self centered control fanatics to another. One group uses their education, breeding and military control to maintain power and the other use religious doctrine to persuade the masses to do their biding.

Caught in the middle of this mess is the economic stability of the western world.

In the 1970s another U.S. ally, the Shah of Iran, was driven out of power by religious fanatics led by the Ayatollah Khomeini. Washington insiders are now worried The House of Saud may also fall victim to an internal uprising.

The state of mind of the average Saudi citizen is worrisome. Their views of the world are summed up within the pages of the Arabian bestseller, Bin Laden, Al-Jazeera, and I.

The book reviews an interview with Osama bin Laden well before September 11th. In the book he proclaims that "Every American man is an enemy, whether he is among the fighters who fight us directly or among those who just pay U.S. taxes."

When it comes to the oil resources bin Laden says, “A barrel of oil should cost $144. By these calculations, Americans have stolen $36 trillion from Muslims. They owe each member of the faith $30,000."

The only reason that OPEC hasn’t put the screws to the western world has been the overpowering influence of the Royal Saud family.

Saudi Arabia and the US have maintained a special relationship since 1945 when President Roosevelt and King Ibn Saud cut a deal whereby the U.S. would help keep them in power in exchange for reliable oil supplies.

This arrangement had worked well for many years but now it appears to be unraveling. To guarantee their wealth, the House of Saud has had to suppress the religious fanatics while keeping up appearances that they themselves are of the faith of the righteous.

To facilitate their security, the Royal family has had to rely on American help, without being too obvious about it.

Showdown in the Desert

Last year the House of Saud decided they should crack down on these misappropriated “charity” organizations that have supported terrorism. One such foundation called the Al Haramain Islanic Foundation has dished out about $50 million a year to groups who have links to terror organizations.

The situation is further complicated by power struggles within the top ranks of the Royalty. There are those within the House of Saud who oppose King Abdullah. And it would seem, so do many Saudi citizens.

The British newspaper, The Observer commented that "Anti-government demonstrations have swept the desert kingdom in the past months in protest at the pro-American stance of the de facto ruler, King Abdullah.”

Saudi’s minister of interior, Prince Nayef, who is also in charge of preventing terrorism, has strong support though he seems neutral toward the extremist element. Perhaps this is why four terrorists where able to disguise themselves as security forces and enter the well fortified foreign workers compound at Khobar which killed 22 people in 2004. More unbelievable is that the terrorists actually escaped while being surrounded by hundreds of security forces!

Aside from al Qaeda, much of the Saudi population are not big fans of the United States because of the close ties with Israel and U.S. military’s presence there since the end of the Gulf War.

If Prince Nayef decides to challenge Prince Abdullah, he may have the help of terrorist supporters. Within Saudi Arabia there is a generation of hard core religious fanatics who have been brainwashed into believing they are on a mission to rid the world of non-believers. This is what one Arab writer has described as the “culture of death.” These are the people who don’t think twice about blowing up innocent people along with themselves.

Meanwhile, the targets of choice for terrorists in Saudi Arabia are the western workers who live and work there. Alex Standish, the editor of Jane’s Intelligence Digest, said the situation in Saudi Arabia has strong parallels to the fall of the Shah of Iran who was toppled in 1979. He said there is a lot of evidence to suggest al Qaeda is gathering strength.

This isn’t a pleasant scenario however it’s very real. More troubling is that if Saudi Arabia ’s oilfields ever go offline for too long, the world will go into a major economic tailspin. The United States and the rest of the industrial world are counting on Saudi to increase their oil production, not dial it back. It should be more then obvious the world will not sit idly by and wait for the Saudi’s to sort out their political problems.

Vinnell Corporation “Mercenaries are Us”

You may recall hearing about Vinnell Corporation last year when the bombing of their premises in Saudi Arabia made headlines around the world. This was the second such attack on Vinnell’s property and personnel in Saudi Arabia , the first attack having been done in 1995.

Vinnell is a subsidiary of Northrop Grumman and in 2004 they were in the last year of a $831 million five year contract to train Saudi’s 80,000 National Guard under the supervision of the U.S. Army.

Jane's Defense Weekly has described these guardsmen as "a kind of Praetorian Guard for the House of Saud, the royal family's defense of last resort against internal opposition." That is why Vinnell and its employees were targeted in 1995 and again in May 2004.

By extension, The Saudi Arabian National Guard, are seen as a de-facto American military force. Without the National Guard, the royal family would be forced to leave the country and the revolutionaries could step in and use their control of oil to bring down the western world.

This cannot happen and it won’t. What remains unclear is to what degree will the U.S. military need to act in order to stabilize Saudi oil supplies over the upcoming months. As it looks right now, Saudi Arabia could be the next the next battle ground for U.S. forces.

In 2004, Saudi authorities with guidance from the CIA, started uncovering a network of Islamic extremists, arms, and sleeper cells all over the kingdom. Though a strong anti-Saud movement has been in existence for many years, officials are stating they have only just discovered these cells since last year following the May 12 suicide bombing in Riyadh.

Since the bombings back in May, Saudi officials have arrested more than 200 suspects.

Though authorities have just scratched the surface of uncovering these militants, it is clear from the large numbers of terrorist cells found and the sophistication of their arsenal, that this group is very powerful and well connected to money and the black market arms trade.

Militant expert and journalist with the Asharq alAwsat newspaper, Mishari al-Thaidi, says “it’s clear that they have sympathizers all over the Muslim world, including many young Saudis vulnerable to the call of Jihad (holy war), more recently because of the US war in Afghanistan and Iraq. The portrayal of those as crusader wars against Muslims makes it easier for al-Qaeda to gather recruits.”


Back in 1945 President Roosevelt and King Ibn Saud cut a deal whereby the U.S. would help the Royal House of Saud stay in power in exchange for reliable oil supplies. Though the U.S. has had many worry free years of oil supplies from Saudi Arabia , things are unwinding.

Though we don’t get a lot of news about Saudi Arabia ’s growing revolution, it just may be the main stream media’s top news story in the not too distant future.

If extremist revolutionaries get their way, they will attempt to bring the U.S. and the rest of the western world to their knees by jacking up oil prices to punitive levels.

Having positions in gold has always been the best insurance policy against the potential for a major financial and political upheaval. It’s been decades since global economic security has been in such tenuous position. The logic of owning gold in some form makes more sense today then ever before in our generation.

Flattening Yield Curve, Soaring US Dollar Leads Phisix, Peso Lower

Flattening Yield Curve, Soaring US Dollar Leads Phisix, Peso Lower

The turn of events have turned sour to my optimistic projections this week as the Phisix (-3.52%) succumbed to a correction as well as with the Philippine Peso’s huge setback down by.72% or back to the P 56 levels at 56.045.

Because your analyst is predisposed to take his views from the 35,000 feet foot level, we will examine how the region performed compared to the Philippines. According to Bloomberg’s Kevin Cho, ``The Morgan Stanley Capital International Asia-Pacific Index, which tracks more than 1,000 stocks in the region, lost 1.8 percent to 104.41, the biggest decline since the five-day period ended May 13.”

Only Pakistan, India, Japan and New Zealand recorded gains in a region plagued by losses.

Further, it appears that Asia’s currencies have also taken a hit, according to a report from Bloomberg’s Christina Soon, the Thai baht was down 1.2% to THB 41.31, the Singapore dollar fell 1.3% to S$1.6705, Taiwan’s dollar slumped .9% NT$ 32.189 and the South Korean won dropped 1.2% to KRW 1,025.70. While the Malaysian ringgit fell .42% to MYR 3.7665, the Chinese remembi/yuan was also down to .08% to CNY 8.1047, the Australia dollar down 2.7% to 75.14, as well as the Indian Rupee slightly lower by .1% to INR 43.583.

In short, ALL currencies in Asia across the board fell and the doldrums was likewise reflected in the performances of most of the Asian bourses.

According to almost all of the reports I read, including most local analysts higher OIL prices have been the major culprit…OIL, OIL, OIL.

Are these claims backed by evidence?

The following chart courtesy of, shows that during the previous week the Phisix’s (candlesticks) rally was coincidental to the WTIC oil benchmark (red line) while this week the Oil benchmark fell almost simultaneously with the Phisix, except for Friday’s (Saturday-Philippine time) steep rally in the oil benchmark. So of all ironies, how can one claim that the almost synchronized declines in global equities were triggered by oil concerns?

This is exactly what in behavioral finance is called as the follies of rationalization or the process of constructing a logical justification using the du jour events from news headlines.

I’d like to bring the light on the next issue, the US dollar index. As you can see from the above chart, the US dollar index represented by the green line, whose correlation I have shown you last week, appears to be reinforcing itself. Did you notice that the recent top of the Phisix coincides with the recent bottom of the US dollar? This means that as the US dollar climbs, the Phisix loses its bullish momentum.

Aside from the losses of the Asian currencies, the US dollar index soared by 1.87% this week at the expense of the Euro (-2.17%), Yen (-.93%), Canadian Loonie (-1.31%), British Pound (-1.05%) and the Swiss franc (-2.16%).

In other words, in my opinion, it is the rebound of the US dollar index ACROSS the board or against most global currencies which has served as the causal factor behind the weakness in global equities more than oil concerns!!!

As can be seen in the above chart, courtesy of, not only has oil and global equities, represented by the Dow Jones 1800 global equity benchmark (green line) weakened but so as with the emerging market bonds (red line) represented by the JP Emerging Debt Funds (-.22%), as well as the commodities benchmark represented by the CRB-Jeffries Index (candlesticks) which was down by 2.41%.

So what has caused the rally in the US dollar, one might be inclined to ask? Reports say that oil prices (again!) have raised inflation expectations, thereby prompting the US Federal Reserve to continue with its ‘measured’ rate of increases. In short, the currency markets focus may have shifted to the interest rate yield differentials once again.

However, if inflation was the concern, why then has US treasury yields been declining or US bond indices been rallying during the week? In fact, the yield curve has been flattening with the spread of the 2-year yield and the 10-year yield down by 2 to 20. And if the US Federal Reserve continues to raise its short term rates while long end of the curve remains at current levels the yield curve may eventually invert, raising the prospects of a US recession in 2006!

This flattening yield phenomenon reflects a monetary tightening environment and has diminished the arbitrage or ‘carry trade’ activities which has taken the fuel out of the global equity investing.

Given that foreign money preponderates on the investment activities in the Philippine Stock Exchange, with about 62.58% exposure for the week, I would suspect that the flattening of the yield curve has had significant effects on the latest retracement of the Phisix.

Although, foreign money still accounted for net inflows for the week to the tune of P 111.038 million, a noteworthy observation is that taking away the cross trades of Aboitiz Equity Ventures (-1.0%), the market could have turned negative relative to foreign capital flows. In fact, Thursday and Friday accounted for net foreign selling.

In essence, the Phisix languished as foreign activities shriveled or turned net selling due to the flattening yield curve more than oil concerns. The Peso which may have found a reason to correct on news accounts of ‘import season’ rationalities also fell victim to the global rise of the US dollar, apparently as capital flows streamed back to US dollar denominated bonds/treasuries, on the premise that the US Fed would continue to prop up its short term rates. I think Chairman Greenspan is targeting the ‘froth’ in the bubble-like boom in the US real estate industry and may find 2006 as a very challenging year for the US and global equities.

While high oil prices have been touted as the major cause of recent weaknesses, the financial market’s reaction appears to be telling otherwise. If indeed high oil is the cause of the weakness in Philippine stocks or the Peso, why haven’t the oil exploration companies share prices jump in line with higher oil prices, when they are essentially the INSURANCE to high oil prices? This does not make any sense.

As can be seen in the above chart, the three year chart of Dow Jones Emerging market Oil and Gas index have soared in tandem with oil/energy prices! I’ll repeat…oil companies are your insurance to higher oil prices.

So far, in my view, the US dollar rally this week constitutes a technical rebound, more than anything else. The near record high oil prices should drive the US trade deficit, which represents over a third of its imports, much higher and should structurally weigh on the US dollar over the long term.

Your prudent investor recognizes that the major risks to the world financial markets in the form of the US housing bubble, record level energy prices, the unstable US dollar and tightening monetary environment, and is keeping vigil over these developments. Posted by Picasa

The Oil Chatter

The Oil Chatter

``Crude oil, once seen as a wealth-creating blessing for mankind, is fast turning into the devil’s tears.” Lutz Kleveman, The New Great Game: Blood and Oil in Central Asia

In view of the prevailing apprehensions about the rapidly rising energy prices, your prudent investor analyst wants to clarify that today’s situation is dissonant from the previous oil spikes such that today’s rise is largely due to ‘demand driven’ rather than supply ‘political’ shocks that had occurred in the past, of course this aside from the ‘supply inelasticity’ factor-not enough supplies to meet demand, where shortage is likely to persist due to the time lag to increase supply. It means that growing prosperity in emerging market economies have largely fueled today’s energy spike!

The pictures and excerpts below from gatewaypundit blog, exemplifies the current oil ‘demand-driven’ dynamics…

``Cars line up to buy petrol at a petrol station in Dongguan, south China's Guangdong province, August 17, 2005. China's southern manufacturing heartland of Guangdong is plagued by closed service stations, fuel rationing and hours-long gas queues. (China Daily)

``Closed service stations, fuel rationing and hours-long gas queues plaguing China's southern manufacturing heartland of Guangdong are piling pressure on the country's oil majors to boost supply into the loss-making market. (Reuters)

Again as I have highlighted last week, this is simply part of the unfolding commodity cycle. Yet, as for concerns regarding the ‘peak oil theory’, let me reiterate that the theory suggest that while the conventional or cheaply extracted global oil supplies maybe peaking, there are abundant energy alternatives that can to be accessed PROVIDED the viable price levels.

``We have oil for at least 40 years at present consumption, at least 60 years’ worth of gas, and 230 years’ worth of coal. At $40 a barrel… shale oil can supply oil for the next 250 years at current consumption… All in all, there is oil enough to cover our total energy consumption for the next 5,000 years. There is uranium for the next 14,000 years.” writes, Bjørn Lomborg in The Skeptical Environmentalist.

Let me quote another favorite analyst of mine, Mr. Martin Spring who did a fantastic write up on global energy investments, ``Business Week reported recently how higher energy prices make various non-traditional sources of energy commercially viable, giving these examples:

  • Mining the oil sands of Canada and Venezuela is profitable at $25-30 a barrel;
  • Oil-from-coal (as produced in South Africa for many years) and making alcohol fuel from sugar (already a big business in Brazil) are profitable processes with oil at $35-40 a barrel;
  • Oil from America’s huge shale deposits becomes viable at $40 a barrel and higher.
  • New nuclear power stations are already viable in the US, without any subsidies, at only two-thirds the level of current electricity prices.
  • Another source suggests that the huge gas-to-liquid plants being built in Qatar to convert natural gas into diesel fuel will be profitable at oil prices above $14 a barrel.

This means that at current levels, high cost energy alternatives becomes a feasible option, albeit it will take years(!) to put current investments in these projects on stream.

In the meantime, what we have to worry about is the TRANSPARENCY of OPEC member countries about their ACTUAL PROVEN RESERVES considering that quotas have been issued based on these, from which member countries are thought to have padded up on its reserves to increase quota output allocations. Saudi Arabia for example, according to Matthew Simmons, CEO of Simmons & Company International, a Houston investment bank specializing in energy issues claims that ARAMCO’s last field by-field proven reserves estimates for Ghawar, the largest of the kingdom’s oil field, was made in 1975!

This makes world supplies on ‘razor-thin’ margins vulnerable to supply disruptions arising from simply just any incidents such as typhoons/hurricanes to terrorist strikes to geopolitical bedlams to oil platform fires, etc…

In other words, a meltup ‘shock’ is a bigger probability compared to a meltdown of oil prices due to the structural changes in the global oil dynamics. However we have to keep in mind of the fundamental premises; rising oil prices are part of the unraveling commodity cycle, cheap oil days are gone, the world is not running out of energy alternatives and that demand supply factors or oil/energy economics are the primary determinant of oil or energy prices today.

``Truth, when not sought after, rarely comes to light." - Oliver Wendell Holmes American Physician, Poet and Humorist. 1809-1894 Posted by Picasa

Friday, August 19, 2005

US Dollar and Not Oil is the Culprit!

The weakness of the Phisix is definitely NOT correlated to OIL prices for the time being! As in the chart above, Oil prices have weakened (red line) coincidental to the sagging Phisix. Meanwhile, the latest inflection top of the Phisix coincides with the inflection bottom of the US dollar (green line). So for analysts mouthing that the lethargy of the Phisix is oil related is definitely spouting bunkums. Posted by Picasa

Sunday, August 14, 2005

Soaring Oil Prices Underscore Upturn In Commodity Cycle

Soaring Oil Prices Underscore Upturn In Commodity Cycle

Headlines today bannered that crude oil prices soared to record levels. While it is true that the nominal price of oil is at record levels, the real prices or the inflation adjusted prices of oil is still far from what it was in 1980 at over $90 per barrel.

The chart above courtesy of shows you the movement of the price of oil since 1970. It can be noted that recessions in the US have almost consistently followed oil price spikes.

I find it real strange to find people still in steep denial about the dynamics of rising oil prices. In fact, alot of commentaries I heard lately attribute the current prices spikes to either geopolitical events or speculation. Like any other financial assets, as I have explained several times since 2003, the oil price dynamics is a function of CYCLES. Simply, as the chart above shows, oil has completed a full cycle in about 30 years and is at the seminal phase of the new cycle, which I think resembles the 1970-1975 period.

However, relative to the price spikes of the 70’s which were primarily ‘event driven’ or OPEC instigated supply shocks, today’s spiraling prices are basically structurally driven; incremental demand arising from the industrialization of China and the rising standards of living around Asia, which equates to more energy usage of consumer durables such as airconditioners, motor vehicles and others.

To quote Dr. Marc Faber, ``In fact, if we look at what happened to per capita oil consumption during phases of industrialization in the US between 1900 and 1970, we see that per capita consumption rose from one barrel per year to around 28 barrels. In the case of Japan's industrialization between 1950 and 1970 and South-Korea's between 1965 and 1990, per capita oil consumption rose from one barrel to 17 barrels.

``In the case of China, oil demand per capita is still only 1.7 barrels per year, and for India it has only reached 0.7 barrels. By comparison Mexico consumes annually about 7 barrels of oil per capita and the entire Latin American continent around 4.5 barrels.

``Therefore, starting from such a low base, oil consumption in Asia will, in my opinion, double in the next ten to 15 years from currently 20 million barrels per day to around 40 million barrels per day.”

Chart above courtesy of

More demand than supply= spiraling oil prices

Further, years of underinvestment due to depressed oil prices and nationalization of oil companies led to the miscalculation of global demand and investment misallocation leading to today’s ‘out-of-whack’ imbalances.

For example, no gasoline refineries where built after 1976 in the US, such that with oil refineries operating at 95%, wear and tear has resulted to 14 disruptions in US refineries since July 20th according to Bloomberg which prompted gasoline prices to shoot past $2, particularly $2.0048 a gallon after hitting an intraday record high of $2.0145.

In addition, there has been no major oil field or ‘elephants’ discovery in 35 years. I recall an anonymous analyst at Bloomberg who cited that for every 5 barrels the world consumes only 1 barrel is found as replacement.

An even grimmer outlook is that of the “Peak Oil” theory, where the celebrated late Shell geologist Dr. M. King Hubbert predicted that US oil supplies reached its zenith in 1970, who was initially dismissed and ridiculed by the public, which turned out to be uncannily accurate.

Chart courtesy of

Today, peak oil advocates forecast, using the same methodology of Dr. Hubbert, that an oil crisis looms as global oil supplies are peaking coincidental to the present time when demand growth for fossil fuel is accelerating!

Matthew R. Simmons, president of Simmons and Company International, a specialized energy investment banking firm, contends that ``Saudi Arabia's oil fields now are in decline, that the country will not be able to satisfy the world's thirst for oil in coming years and that its capacity will not climb much higher than its current capacity of 10mbd. Considering the growth in demand, this could easily spark a global energy crisis.” writes Care for a $182 bbl oil as Mr. Simmons predicts?

In other words, even if the peak oil advocates are only partially right, it means that the AGE of CHEAP oil is finally over.

Because price is a function of demand and supply, prices determine where allocation would be and would affect fundamentally the lifestyle of people. I recall then in the early 70’s where our family’s car was an 8-cylinder Chevrolet Impala which eventually was replaced by a smaller Toyota Corolla in the early 80’s. Looking at the 30 year chart, I understand now WHY my dad’s decision to the shift the make our car then.

Using the same analogy and premise, I have argued that cheap oil prices begot the current fad of SUVs, not to mention the availability of cheap credit. Do you share the view that SUVs will still be a fad if gasoline prices hit $4-5 per gallon in the US? I don’t. Whereas oil and energy prices continue to scale new heights, the likelihood for new modes of vehicles possibly alternative fuel adjustable engines like Brazil’s ‘flexi-cars’ or much fuel efficient less energy consuming vehicles to be in vogue in the future.

Finally, it is interesting to note that for the week not only crude oil and gasoline was in record territory but also heating oil and natural gas at a 4 year high. Copper prices soared to fresh record levels anew with Gold nearing its 16-year high. Posted by Picasa

Could the Philippine Peso Be Part of the Yuan Basket?

Could the Philippine Peso Be Part of the Yuan Basket?

China unexpectedly revealed a parcel of its currency configuration last week to announce that the US dollar, the Euro€, Japanese Yen¥ and the South Korean won taking up the largest share of the modified basket since it reformed its currency construct last July 21st from entirely a US-dollar peg.

It also disclosed that other countries with significant trade relationship with China were also incorporated to its ‘managed float regime’ such as Singapore, UK, Malaysia, Russia, Australia, Canada and Thailand and hinted that currencies of more countries could be included provided that such countries, to quote People’s Bank of China Governor Zhou Xiaochuan speech, ``has a prominent exposure in terms of foreign trade, external debt (interest repayment) and foreign direct investment (dividend).” The revered Governor Xiaochuan explicitly added, ``Generally speaking, annual bilateral trade volume in excess of US$10 billion is not negligible in weight assignment, whereas that exceeding US$5 billion should also be considered as a significant factor in currency weight deliberation.”

It struck me to note that the Philippine bilateral trade with China has reached the level of `` not negligible in weight assignment” to quote the China’s People Daily Online, ``According to Chinese statistics, the trade volume between China and the Philippines soared to 9.4 billion US dollars in 2003, up 78.7 percent year-on-year. The 10 billion-dollar target for 2005 is likely to be exceeded as trade volume is expected to hit 13 billion dollars by the end of 2004, and the leaders of the two countries have set a target of 20 billion US dollars for the next five years during Philippine President Gloria Macapagal-Arroyo's state visit to China early September.”

According to the Philippine Embassy in Beijing whose chart above I included, ``In 2004, bilateral trade volume reached US$13.33 billion, representing a growth rate of 41.8 percent over the figure of US$9.4 billion in 2003. In the past five years, bilateral trade volume grew at a healthy annual average of 43.78 per cent, with the Philippines gradually selling more to China than it buys from China.”

It appears that China’s thrust is to veer away from exclusively utilizing the US dollar, which it considers as “unstable”, as a medium of exchange for its trading transactions with other countries as can be gleaned from the statement of the Governor, ``When you look at currencies used in trade settlement, although some countries and regions prefer US dollar as the currency for trade settlement with China, this situation is changing gradually and trade settlement in local currencies are increasingly the choice of trading partners…it can better reflect the competitiveness of RMB against major currencies, better absorb the impact generated by an unstable US dollar.” (emphasis mine) The statement could also imply that China is promoting its currency as an alternative to the US dollar!

Going back to the Philippine Peso, as per the defined parameter of the PBoC’s governor, the volume of trade which is in the excess of the $10 billion threshold level qualifies the Philippines as a peripheral currency to China’s basket, and most importantly, with conspicuous joint efforts to expand bilateral trading relationship to about US$20 billion to US$30 billion in the next 5 years! To quote, the Joint Statement of the Philippines and China following the state visit of Chinese President Hu Jintao (April 28, 2005) ``The two sides should give full play to the existing economic cooperation and trade mechanisms, tap into their economic complementarity and potential for cooperation, broaden and diversify trade structure, further expand trade and investment and make efforts to raise bilateral trade to over USD 30 billion within the next 5 years.”

This means that China would be a prominent buyer of the Philippine Peso, despite the ongoing domestic political mess!!! An expanding trade relationship with China should translate to even more buying of China into the Peso to account for weighting adjustments for its currency basket!

Remember, what is SMALL for China is essentially BIG for the Philippines. Based on Asian Development data in 2003 China’s GDP based on current prices is US$ 1.443196 trillion while the Philippines is $78.25 billion which is equivalent to only a meager 5% of China’s. In addition, Money supply represented by M2 for China is at US$2,731.83 billion in 2003 compared to the Philippines’ US$30,906 million or about only 1.1% of China’s. Even if the Peso represents a negligible share in its currency universe, the Peso volume required to fill its share would be immense on Philippine standards.

If I am right about the Peso’s inclusion to the China’s basket, then fundamentally China sets the floor price of the Peso! You can just imagine China’s growing economic clout or influence to the Philippines which eventually should gradate to the political sphere too.

Caveat for the Peso bears!Posted by Picasa

Thursday, August 04, 2005

JETRO and KWR International: Asia is the best bet for business

Because of the political hullabaloo, countless commentaries focusing on the hapless state of the country have been floating around.

There are two ways to actually to view the country; for a pessimist one needs to only look at the insulated bleak state of the Philippine government, for the optimist, one only needs to look outward and seek its prospects.

However, there are catalytic underlying developments around the world today that have dominated economic realities such as the increasing trend of seamless barrier interactions which has its own ripple effects such as increased trade, global capital flows, deepening of the financial markets, outshoring/outsourcing phenomenon among others … As Japan’s Jetro and KWR International writes in the Asia Times….

``Despite the political, social, economic, demographic and other challenges that exist in Asia and Japan itself, it is clear the region represents an increasingly attractive and important component of global markets, which internationally focused corporations and investors neglect at their own risk. Those who focus solely on the risks will surely miss out on the many opportunities for enrichment afforded by Asia's large population, its ongoing industrialization and urbanization, and its increasingly affluent middle class.”

To read on the entire article simply click on this link: