Wikinvest Wire

Friday Lite

Friday, September 29, 2006

A slight deviation from the usual Friday fare is in store today. The first piece, while just a bitty thing at the outset, has grown to such size that it has crowded out a few other aspiring Friday participants.

It's not as lite as usual, but it's still Friday.

Dr. Copper on the Commodity Bubble

Some say that copper is the metal with a PhD in economics because so much of the industrial world requires its services in one way or another. It is said to be able to pierce through the haze of other volatile commodity trading, its supply/demand fundamentals and price movements pointing the way to the future.

Volatile oil has been pointing the way to the basement lately - a slight revival in recent days has offered a glimpse of what could be again, but there seems to be too much goodwill in the world right now for the fear premium to be reinstated any time soon.
Of course in this case, anytime soon means between now and the election.

Rumors abound regarding the influence wielded by new Treasury Secretary Paulson and his commodity trading cohorts back at Goldman Sachs. Word is that the Goldman Sachs Commodity Index recently reduced the weighting of gasoline from eight percent to two percent, causing all funds that track this index to sell unleaded gasoline futures in the past few weeks.

Coincidentally, there is an extremely high correlation between falling gasoline prices and rising consumer confidence, and naturally, the approval ratings of elected officials.
That's a mighty steep slope, one that when turned upside down can do wonders for the party in office. The purported popping of the commodities bubble has been nothing but good news for Americans who have long suffered from high energy costs.

The popping of the commodities bubble couldn't have come at a better time.

Gold doesn't seem to be paying too much attention to any popping noises coming from the energy sector. It is tracing out what chartists might call a "wedge", and when the tracing is complete, so they say, a bold move is in store. Which way? We'll see.
The reluctance of several rather shrewd central banks to part with gold bars that they were authorized to sell under the Washington Agreement is very bullish for the yellow metal and restores a tiny bit of confidence in a select few bankers of the world (Germany and Switzerland).

But, what is this in the chart below?

Dr. Copper is having none of the wild up and down action that some of his less educated peers have been experiencing - poor natural gas was too embarrassed to even offer up a chart for display here, shamed as it has become in recent weeks after having fallen apart so.

Amid all the commotion of bursting energy prices, Dr. Copper just sits there - cool, calm, and collected, apparently waiting for all the others to gather their wits.
Now, word is that copper inventories in London are building and global demand will soon fall abruptly, perhaps causing Dr. Copper to have to go back to school. Those stories have been heard before and will be heard again - Dr. Copper will pass judgment in due time.

But, as it is, with all the hubbub about Henry Hub and his pals, Dr. Copper isn't looking flustered or concerned in the least.

Having more than doubled in the last year, copper sits at new, much higher price levels telling the rest of the world that this is the new reality. That, when measured against the U.S. dollar and other paper money around the world, its value has increased rapidly over the last year, not yet signaling a return to price levels seen just last year.

We'll see just how smart Dr. Copper is in the months ahead.

Volcker and Greenspan - Just Trying to Help

Recent reports of former Fed chair Paul Volcker suggesting that interest rates should be raised to fight inflation have stood in stark contrast to rumors that former Fed chair Alan Greenspan suggested they be lowered to help the housing market.

"I am a little bit more worried about inflation,'' said Volcker, 79, speaking at a discussion sponsored by the Women's Economic Round Table in New York yesterday. Gerald Corrigan, who served as New York Fed president from 1985 to 1993, said he shared Volcker's concerns.

While the inflation rate isn't "high"' or "running away,'' Volcker said, "it is kind of creeping up, and I am impressed by the degree of pressure, if that is the right word -- psychological pressure, political pressure -- there is not to do anything about it.''
What's poor Ben Bernanke to do? The job of Federal Reserve Chairman has gotten a lot more complicated in the last thirty years. Without consulting Wikipedia, can anyone even name a Fed chairman prior to William McChesney Martin?

Danger Will Robinson!

These stories about hedge funds and systemic risk along with comments by New York Fed chief Tim Geithner and others are all starting to scare people. For years, everyone's been talking about hedge funds collapsing, resulting in an early end to financial markets as we know them, but nothing bad ever happens. Can't we just stop talking about it?

Hunter Leaves Amaranth, Investors on the Hunt
SEC official: No new hedge-fund regulations needed
Hedge funds home in on housing
Fed's Powers May Need to Be Extended, Geithner Says
More hedge funds deregister after ruling
SEC and FBI bare teeth at hedge funds
Pirate Capital Says Half of Investment Staff Resigns
Cullen Says Hedge Funds May Have Spurred N.Z. Dollar
Rising interest rates fuel bets by hedge funds
China demands international hedge fund surveillance
Hedge funds put in a strong performance
'Borderless' regulation needed to tackle derivatives trading
Amaranth May Make Goldman, Morgan Biggest Winners
Regulators globally concerned over opacity of hedge funds

That robot picture was kind of tall, so more stories about hedge funds were needed to fill in the space at the bottom. They weren't hard to find - all within just the last few days.

Housing Deflation Search Results

The potential problems resulting from systemic risk are greatly magnified by prices going in the opposite direction of where they are supposed to go (i.e., up, always up). About six weeks ago, search results for the phrase "housing deflation" were first captured in the New Economic Indicator section of a previous edition of Friday Lite.

At the time, it was 875 for Google, 251 for Yahoo!, and 339 for MSN Search.
Today they stand at 909 for Google, 259 for Yahoo! and 275 for MSN Search.

It's still early (and MSN search is still a bit odd).

The combination of systemic risk and housing deflation converge nicely in the story of Casey Serin, a 24-year-old Carleton Sheets protege from Sacramento who now has a blog that goes by the name of
After going to few seminars I bought 8 houses in 8 months across 4 states with no money down. I fixed and sold 2 and then ran out of cash.

I am now facing foreclosure on 5 houses.

I'm learning my lessons, finding solutions and blogging about it. Comments appreciated!
In a sad commentary about the times in which we live, combining elements of both fifteen-minutes-of-fame and easy money, Casey isn't sure what to expect as a result of baring all in his blog. He's not sure if he's going to end up in jail, on the cover of Time Magazine, or both.

Big House Bob Tells it Like It Is

San Diego realtor Bob Casagrande once again reports on real estate near the Mexican border.
The average price for August was approximately $614,000, down about 2% from last August. If you break this down between attached and detached homes you find that the attached average price of $445,000 is down 5% from last year and the detached average price of $713,000 is flat with last August.
The average price change is varying from house type to house size. The smaller condo's - 900 sq ft - have seen a price decline of 7.6% from last year while the larger 1500 sq ft condo has seen a price increase of 1.8%. While in detached homes the 2500 sq ft homes have seen a 12% decline in prices and the over 2800 sq ft - the smallest market segment - have seen prices remain flat from last year.
Well, as long as the bigger homes hold their value, we'll probably be OK.

Let The Guidance Begin Be Benign

The result of a year long effort by banking industry regulators to restore some sense of order to the mortgage lending business is due within the next few days. Guidelines for nontraditional mortgage products such as pay-option and interest-only loans will soon be ready.
"We view the...guidance as relatively benign and unlikely to materially impact the business models of option ARM lenders, namely Countrywide (CFC), Washington Mutual (WAMU), Downey Financial (DSL), and Indymac (NDE)," three analysts from Friedman Billings Ramsey wrote in an industry update. "We would not be surprised if the stocks trade higher after the release of the guidance as it lifts another layer of uncertainty for investors in the business model."
The good news is that the stocks are likely to trade higher. The bad news is that the word "proactive" remains absent from any banking regulator dictionary.

The Economics of Movie Rentals

This story from The Onion demonstrates how other segments of the economy are rapidly adopting the business model of the nation's mortgage lenders.

According to press releases, Blockbuster’s new nationwide program, "The End Of Fees," promoted using $7 million of the company’s last remaining $10 million, will eliminate all costs associated with DVD rentals as well as per-unit charges for its video games, snacks, carbonated drinks, gumball machines, promotional cardboard standees, and literally anything else a customer comes across at one of its thousands of nationwide locations.

"I’m proud to announce that, starting Oct. 1, Blockbuster customers will be able to take home the hottest new releases for as little as the price of absolutely nothing," said Blockbuster Vice President of Marketing Patricia Waters, whose company's stock dropped nearly 50 percent last year against "On Demand" digital cable and by-mail movie services such as Netflix. "At Blockbuster, the movie-viewing experience has never been more affordable.
Similar to the practice of mortgage lenders booking unpaid interest on pay-option loans as revenue, Blockbuster plans to book the unpaid fees for DVD rentals as revenue as well. Analysts expect Blockbuster stock to trade much higher.


jmf said...

hello tim,

good summary of a busy week.

as long as nearly 50% of all people in mid septmeber 2006(have checked it twice!) think

"Most expect their home's value to rise in next few years"

you really have to wonder what the heck is going on in the us.

enjoy reading and have a nice weekend

denial / hope/ brainwashed Most expect their home's value to rise in next few years

apollo3333 said...

Some of you might also follow the CRB index as a general measure of inflation.

Recently, it has collapsed with most of the other commodities.

You might be interested in this article by Adam Hamilton, which shows that the CRB was recently changed to make energy a larger component.

I suspect this will make the CRB index more accurate as a measure of commodity inflation.

pac said...

Hi Tim,

For those wondering about the GSCI reweighting, here are three links: (look at pg 61 of 85) (look at pg 62 of 88)

Results for Unleaded Gas PDW (percent dollar weight):

2003: 7.23%
2004: 8.13%
2005: 7.90%
now: 2.31%

Apparently, the change took place in July.

Hope that helps.

Anonymous said...

Geinther is right. All this lack of anything really bad happening, the Greenspan put, etc. is going to go horribly wrong one of these days. The whole world economy is like one giant frog in a giant pot of water that is slowly being brought to a boil. If you were to have been in a coma for the last ten years and just awoken you would be shocked at what you see, yet the game goes on and everybody continues to think that all the risks are hedged and there are no "fat tails". If you extrpolate out over the next tens years after the last ten years, where the %#!@ does that put the world economy?

Tim said...

Repost of Aaron Krowne 09/29 - 9:29 AM (long links make Explorer crazy)

You're more right about the Volcker thing than you realized! :



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