Rig Count Slumps

The total number of crude oil and natural gas rigs currently operating in North America slumped 1.1% to 918 during the week ended May 15. This was the lowest level since February 2003. The total number of rigs now stands some 60% lower than the 2008 highs. When energy prices rocketed to record levels last year, the number of operating rigs soared – as drillers simply couldn’t keep up with escalating global demand. Now that the global economic activity has cooled, with most of the world in recession, energy prices have collapsed from year-ago levels — forcing producers to shutter rigs. Natural gas prices are currently about 70% of year-ago levels at $4.098/million Btus. The record high was registered on July 2, 2008, at $13.694/million Btus. We suspect that depressed gas prices will continue to dampen drilling activity and the number of rigs in operation.

Source: Argus Research - Market Watch 5-22-09

Theory of Decoupling Not Discredited After All

Evidence is starting to pile up that points to an economic rebound in the near future among the biggest emerging nations, even if the U.S. continues to struggle. Naysayers who rejected the theory of decoupling -- emerging economies going their own way opposed to depending on richer nations -- might have been a bit hasty. The Economist (21 May.)

Headline Financial News

Foreclosures, inventories to delay housing recovery to 2010:
Falling prices, rising foreclosures and a huge inventory of unsold homes suggest a broad recovery in the housing market is unlikely until next spring, possibly later. The construction of homes and apartments dropped 12.8% in April to 458,000 units, the fewest in 50 years, the U.S. Commerce Department reported. InvestmentNews/The Associated Press (19 May.)

Royal Dutch Shell's stockholders reject executive-pay plan:
Nearly 60% of shareholders attending Royal Dutch Shell's annual meeting voted to reject the company's executive-pay plan and demanded that members of the committee that proposed it resign. The proposal called for awarding bonuses to executives despite the fact that the company's performance has repeatedly fallen short of targets set in 2005. The Times (London) (20 May.)

China subtly diminishes exposure to U.S. Treasuries:
China, long the biggest foreign buyer of U.S. Treasuries, is implementing a subtle shift in its investment in response to the large amount of debt the U.S. has put on the market since the economic crisis began. Anticipating that the U.S. will be forced to push up interest rates at some point to cope with inflation, China is shifting its Treasury buying from long-term debt to shorter maturities. Reuters (19 May.)

Obama administration considers all-new financial regulator:
The creation of a financial watchdog responsible for protecting consumers when they use a wide variety of financial products, ranging from mutual funds and credit cards to mortgages, savings accounts and college loans, is being seriously considered by the Obama administration. Officials think the action is necessary because existing federal regulators put a low priority on consumer protection, and some financial products are totally unregulated. The Washington Post (20 May.) , The Wall Street Journal (20 May.)

Financial Headlines

Warrants become key issue as banks look to repay TARP:
Banks are eager to repay the U.S. government for money they received through the Troubled Asset Relief Program and to do so as quickly and inexpensively as possible. The government received warrants from the banks when the financial system was poised for disaster, and those warrants are becoming a sticking point. The New York Times (18 May.)

Hedge fund clients of Madoff sued by liquidating trustee:
The trustee liquidating the investment firm of Bernard Madoff sued hedge funds managed by Fairfield Greenwich Group, demanding the return of $3.2 billion that the funds withdrew from their Madoff accounts. The lawsuit states that the funds received annual returns ranging from 10% to 21% from Madoff, figures that the trustee described as "unrealistically high." The trustee also found evidence of 280 stock trades for the funds that are "clearly fictional," according to court papers. The New York Times (18 May.)

U.S. could struggle 5 years after recovery, Krugman says:
Rising unemployment, which is expected continue after the recession ends, could lock the U.S. into a "depressed economy" for as long as five years, Nobel Prize-winning economist Paul Krugman said at a financial conference in Seoul, South Korea. He said it is possible the U.S. economy will return to GDP growth this summer, with Europe following "a little bit later." Forbes/The Associated Press (19 May.)

Libor indicates credit crunch is over, economists say:
For the first time since May 2007, Libor returned to a normal level, prompting economists to say the credit crunch has ended. "This marks a return to normal territory and gives us hope that we can cope with anything that comes now," said Peter Chatwell, an interest-rate strategist at Credit Agricole's Calyon. "It indicates that the banks are well capitalized, with no more surprises. It gives us hope that we have a functioning banking system and that we can now go about the job of running the broader economy." The Times (London) (19 May.)

Unemployment to linger as recovery begins, Geithner says:
Joblessness will continue to increase, even as evidence emerges that the U.S. economy is stabilizing, Treasury Secretary Timothy Geithner said. Millions of Americans will continue to suffer from the effects of the downturn because hiring lags behind rising economic growth, he said. The Sun (Baltimore)/The Associated Press (18 May.)

Financial News Headlines

New taxes for life insurers? The Obama administration wants to tag life insurers with $12.8B in new taxes over the next decade, even as the sector recently garnered approval to receive TARP bailout funds. New proposals would restrict some tax breaks received by purchasers of insurance or insurance companies themselves. Industry followers say the changes could hit sales of corporate-owned life insurance. The Wall Steet Journal May 18.

ECB hopes it's done with easing. European Central Bank governing council member Axel Weber said it's unlikely the ECB will take further action to address the financial crisis. "Unless circumstances worsen considerably, previous measures are adequate, in my view," Weber said, adding, "We would come to reassess our strategy only in the case of a dysfunctional banking system." Late last week, Eurostat reported euro-area GDP fell a record 2.5% in Q1 from Q4, sparking speculation of further rate cuts from the current 1% benchmark. easybourse.com May 15.

Changes to Fed's powers likely on horizon
The U.S. Federal Reserve is at a turning point. The financial crisis is expected to result in the Fed gaining the authority to supervise large, systemically important financial institutions. However, the Fed could lose its emergency-lending power or its regulatory authority over consumer-finance activities. The Wall Street Journal (18 May.)

U.S. economy weak but not in free fall, official says
The latest data suggest the U.S. came through the worst of the recession and the economy should start recovering before the end of the year, said Peter Orszag, the White House budget director. The nation's record-high budget deficit should start coming down once the economic recovery gets under way, he said. Reuters (17 May.)

Paulson Demanded That Banks Accept Government Aid

Former U.S. Treasury Secretary Henry Paulson told the CEOs of the nation's largest banks that they needed to either accept billions of dollars in government aid or regulators would force them to accept the taxpayer money. "If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance," according to Paulson's talking points for a meeting with the executives. "We don't believe it is tenable to opt out because doing so would leave you vulnerable and exposed." Bloomberg (14 May.) , Reuters (14 May.)

Can the World Absorb $33 Trillion of New Bonds?

The twelve most industrialized of the world's G20 countries will have to issue about $10 trillion worth of new bonds to cover the cost of the current crisis. However, Reinhart and Rogoff estimate the true cost at $15 trillion in the best case scenario and a whopping $33 trillion - 1/3 of total global savings - in the worst case. Issuing governments may have to inflate away their debt or pay drastically higher yields if deflation does not materialize (Niels Jensen et al)

In the early part of 2009, government bond yields are likely to remain low in the face of the sharp slowdown in global growth. Against this background, deflationary fears and talk of zero official interest rates will continue to outweigh worries about the additional supply of government bonds (Dresdner Bank)

Source: RGE Monitor 5-13-09

Financial Headlines

Survey: Growth to return to U.S. economy in second half
Leading forecasters said in a survey that they expect the U.S. economy to start growing in the third quarter of this year. They also predicted that the unemployment rate will peak in the first three months of next year. "The past month provided fresh evidence the decline in business activity is starting to moderate, buttressing consensus expectations that the economy will emerge from recession in the second half of this year," according to the Blue Chip Economic Indicators newsletter in which the survey was published. Reuters (10 May.)

Obama administration to get tough with antitrust rules
Reversing the Bush administration's approach that favored big corporations, the Obama administration is preparing to aggressively enforce antitrust laws. Christine Varney, head of the U.S. Justice Department's antitrust division, is scheduled to announce policy changes in a speech Monday. The New York Times (11 May.)

Ed Yardeni Follow-Up

“Commanding Heights” is a book by Daniel Yergin and Joseph Stanislaw first published in 1998. It traces the rise of free markets during the last century, as well as the process of globalization. It takes its title from a speech by Vladimir Lenin, who used the phrase "commanding heights" to refer to the segments and industries in an economy that effectively control and support the others, such as oil, railroads, banking and steel. Today, governments around the world are taking power back from free markets, particularly financial markets, under the pretext that they have failed. In fact, the markets were hobbled by a combination of anti-market regulations and the lack of enforcement of regulations that leveled the competitive playing fields. In the US, the power grab is spreading to banking, autos, energy, and health care. Here is a brief chronology of recent developments around the world in this epic power struggle:

(1) It started with TARP, which was proposed by Hank Paulson and Ben Bernanke and enacted by Congress on October 3, 2008. This politicized the financial rescue program in the US. It gave the government the power to dictate how recipients must manage their companies. On October 13, Paulson forced nine major banks to take some of the TARP money even though most of them didn’t need it or want it.
(2) In December, Ken Lewis, the CEO of Bank of America, had buyer’s remorse after having agreed to purchase Merrill Lynch in mid-September. Mr. Lewis contends that Paulson and Bernanke also advised him not to share his second thoughts with BofA shareholders who were about to approve the deal.
(3) On February 26, the Obama administration unveiled its budget, which includes significant increases in spending on social welfare, especially health care. The resulting deficits are projected to total more than $9tn over the next 10 years.
(4) On March 30, 2009, the White House fired Rick Wagoner, the head of General Motors. The Obama administration is orchestrating the restructuring of the auto industry. President Obama declared that the US government stands behind GM's warranties.
(5) The government is pushing legislation aimed at bringing down credit card fees.
(6) The Obama administration is pushing to have student loans made by the government rather than private lenders.
(7) Democrats in Congress are moving to make the Obama administration’s health care proposals filibuster proof by pushing the proposed legislation as part of the budget reconciliation process.
(8) In Russia, the government is in effect nationalizing the industries that were once controlled by the oligarchs, who borrowed too much and must now be rescued by their comrades in the Kremlin.
(9) In China, the government is pumping large sums of money into infrastructure projects aimed at stimulating economic growth to offset the shuttering of thousands of manufacturers as a result of the plunge in exports.
(10) Governments are raising taxes, especially on high income earners. The Bush tax cuts will be allowed to expire at the end of 2010. States from New York to California are raising income tax rates and user fees. Prime Minister Gordon Brown’s government laid out plans on Wednesday for more than $1tn in deficit spending over the next five years, a scale of public debt that critics say is without precedent in Britain. In addition, his government now plans to hike the top marginal income tax rate from 40% to 50%, rather than to 45%.

U.S. Consumers on a Tightrope as They Face Increasing Financial Headwinds

Personal income fell 0.3% in March 2009, after falling 0.2% in February 2009, while disposable personal income grew less than 0.1% in March. Personal spending fell 0.2%, while inflation adjusted spending declined by 0.2% in March after rising 0.1% in February. The savings rate rose to 4.2% in March from 4.0% in February

Weakness in the labor markets continued to drive down personal income while government transfers remained the main source of personal income in March (BNP Paribas)