Gleanings 471 – Compliments of Nick Rost van Tonningen (July 27, 2012) Posted by John on July 28, 2012

Despite all public hand wringing by ‘talking heads’, incl. Fed Chairman Bernanke,  about the state of the economy, there seem to be some “green shoots”, incl. :

• the NAHB/Wells Fargo Builder Sentiment Index in June was 35, up from 29 in May, and double what it was not long ago. While still some distance from the ‘tipping point’ of 50, this was its highest level in five years & the trend is improving rapidly;
• the Fed’s Industrial Production Index was up 0.4% MoM in June, up from -0.2% (adjusted  from the preliminary -0.1%), net in line with the market’s expectation of 0.3%);
• container throughput at US ports on a YoY basis has been growing at an accelerating rate for the last six months.

On the other hand, the latest US retail sales data were “ugly across the board”, down 0.5% MoM in June, the first time since 2008 (when the country was deep in recession)  they have been  negative for three months in a row (due to softer demand for consumer goods from cars through electronics to building supplies (the latter despite the pickup in the Builder Sentiment Index).

Mohamed El-Erian ,CEO of California-based PIMCO, which manages the world’s biggest bond fund, was quick to throw cold water on rumours emanating, via the Al-Watan newspaper, from an unnamed official of Egypt’s (Muslim Brotherhood) Freedom & Justice Party that he was a possible technocrat candidate for the post of Prime Minister. His reaction : “I have no idea where the rumour is coming from … I haven’t been approached formally, and I don’t expect to be approached … If I were, I could tell you that I would not be a candidate. There are many more qualified people there … At this stage in Egypt’s history … it is very important that the candidate include people in Egypt and that they have gone through the revolution in person.” – The idea of having him as Prime Minister would presumably be to give the office more international legitimacy. But it would have been domestically controversial; for he has dual citizenship (in fact a few years ago he sued the US government since he was tired of waiting after qualifying & applying), and early in the election campaign the acquisition of US citizenship late in life by the grandmother of the Brotherhood’s first choice as its Presidential standard bearer led to him being ruled ineligible, and its ultimately successful candidate, & now President, the US-educated Mohamed Morsi, was only its – reluctant – second choice. Still, El-Erian’s choice of words (i.e. “formally”) suggests the idea may have been floated informally by him & this may be his way of formally saying “Thanks but No Thanks.”

The severity in Kansas of the heatwave cum drought in the US can be gauged from the fact that early morning temperatures there are in the mid-80s, well above the “normal” mid-60s. While  amid adequate moisture conditions high overnight temps may be conducive to rapid corn growth, when there is little, if no, moisture in the soil, as is currently the case, it just helps to set the crop back more faster, & shrivel yields more & more. So total harvest forecasts are now drifting below 13BN bushels, down one-eighth in less than a month (& those for some regions by as much as 25%) & are still sliding. And while the five year average for the crop conditions at this time of the year is for two-thirds of it to be rated “Good to Excellent” since early July that ratio for corn has nose-dived from 60% to half that, & it is an indication of how bad things really are for corn when one crop analyst can, with a straight face, note the soybean crop is in ‘comparatively good’ shape because its “Good to Excellent” ratio was 38% vs. corn’s 30%. One “Drought Monitor Map” shows  the entire US except the very Northwest & Northeast is now suffering from conditions rated from “Abnormally Dry” to “Exceptional Drought”.

Germany’s top court, the Federal Constitutional Court in Karlsruhe, may be becoming the eye of the Eurozone hurricane. It recently announced it won’t rule on the constitutionality of Germany’s participation in the planned  ESM (European Stability Mechanism) until September 20^th, thereby limiting the funds available for bailouts in the interim to the 240BN Euros remaining in the EFSF (European Financial Stability Facility) – and who knows what will happen if its ruling were to be negative. And now it is about to have to deal with a challenge by Bavaria of the system whereby the richer German states subsidize the poorer ones – so now it is no longer just a matter of the “rich” Germans objecting to maintaining “lazy” Greeks in the style they have become accustomed to but also of better-off Germans objecting to have to do so for their less well-off fellow Germans.    

GLEANINGS II – 471

Thursday July 19^th, 2012

MORE THAN THE SUMMER DOLDRUMS (CIBC WORLD MARKETS)

• Liquidity has dried up almost completely in some parts of the capital market. The easy explanation for this is ‘it’s just the summer doldrums’. But there is more to it. Portfolio managers have become more return of-, than return on–, capital-oriented and, with the Lehman-, & more recently the MF Global-, debacles still fresh in their minds have become loath to lend bonds because of concerns they could have trouble getting them back. And when securities’ lending slows down, liquidity suffers. After that one can take his/her pick as to why this may  be more than just summer doldrum thing from one, or more, of the following : Dodd-Frank, the Volcker Rule, the London Whale, the LIBOR scandal, the continued fiscal & economic challenges facing the US & much of Europe (& the inadequate response to date thereto), and the across the board credit rating downgrades of large numbers of banks.

And how about the Middle East, climate change & the evolving US corn crop debacle?

EMAILS SHOW GEITHNER FLAGGED BARCLAY’S LIBOR RIGGING IN 2008

(G&M, Kevin Carmichael)

• In response to a demand by Randy Neugebauer (R.-Texas), the Chairman of the House Financial Services Committee investigating the LIBOR tampering scandal, the New York Fed on July 13^th released a host of internal reports, slide presentations, emails & transcripts related to the affair. Its view is that they prove it had pushed its counterparts in Britain to correct the problems with LIBOR, among others pointing to an email the then New York Fed President, & now US Treasury Secretary, Timothy Geithner had sent on June 1^st, 2008 to Bank of England Governor Mervyn King, & to the record of an April 11^th, 2008 telephone call in which a Barclays employee had told a New York Fed official “We know that we’re not posting ,um, an honest Libor … We are doing it, because, um, if we didn’t do it, it draws, um, unwanted attention to ourselves.”

Geithner may have had an excuse of sorts for not pushing the matter aggressively since, as President of the New York Fed, his pay cheque comes from the treasuries of some of the very major US banks alleged to have been co-conspirators with Barclay’s. But Mervyn King had not even that (lame) excuse& his failure to be proactive in this matter besmirches, in the waning days of his career, an otherwise stellar reputation in academia &, for the past 21 years, at “the Old Lady of Threadneedle Street” (aka the Bank of England), especially if, as alleged, one of his Deputies had encouraged the corruption of the LIBOR rate system on a ‘wink-wink, nod-nod’ basis).

SEVEN WAYS U.S. HOUSING MARKET IS LOOKING UP (AP)

• Prices – In half the cities in the S&P/Case-Shiller Index prices have risen in the past 12 months, but … the Index is still one-third below its 2006 peak, & at its 2003 level;
• New home sales – Their 369,000 annual pace is the best in over two years, but … only half the minimum 700,000 pace that economists deem healthy;
• Sales of pre-owned homes – they are up 9.6% YoY, but … have slowed from their two-year high in April & their 4.55MM annual rate is well below the 6MM ‘normal’ rate;
• Builder sentiment – it’s at a five-year high, but … still well below the 50 ‘tipping point’;
• Home builder stocks – YTD they are up 60% vs. the S&P 500’s 9%, but … the earnings may not yet be there to support those prices:
• Mortgage rates – the rate on fixed rate 30-year mortgages is at a record low 3.56% & has fallen below, or matched, all-time record levels for 11 of the past 12 weeks, but … people hav difficulty getting approved for mortgages; and
• Construction – Housing starts in June were up 6.9% MoM to a an annual rate of 760,000, the most since October 2008 (& up from  478,000 during the nadir of the housing bust), but … this is only a fraction of the 1.5MM level deemed “healthy” & the 2MM peak during the housing bubble & there has been a shift to more multiple housing units & smaller homes.

Some may see ‘green shoots’ while others may see less reason for optimism about the near-term outlook for the residential construction industry.

CHINA SHIFTS GEARS IN CANADIAN HUNT (G&M, Martin Mittelstaedt)

• Once Chinese companies let Canadians or Americans look after their interests in Canada. But no more. Increasingly they are doing their own deals. Thus in recent years they have invested $23BN buying their way into, & in some cases  gaining control of, Canadian-based resource companies. In addition, many smaller Chinese investors are looking to do smaller deals. As a result, the Ontario-based China Mining Association of Canada estimates that the number of Chinese miners or mining investment companies in Canada has more than quadrupled in the past two years to over twenty. And the Chinese often target first nations  on the grounds that as Jerry Xie, EVP of China Gold International Resources Ltd, a state-owned China National Gold subsidiary, puts it “If the project is located in the first nations territory, you have to deal with them”; thus last month Grand Chief Ruth Massie, who heads an umbrella group of Yukon first nations, met with a group of Chinese officials & miners who wanted to “know the do’s & don’t of meeting with first nations.’

Much of the boom in the Yukon is fueled by Chinese exploration funding. Canadian security officials are concerned about the growing Chinese presence in Canada (& the possibility they may seek to ‘buy’ political influence here as they are wont to do elsewhere, of which there was a hint in Ottawa within the last year). And in 2007 a subsidiary of state-owned Sinopec, one of the world’s largest companies, brought in Chinese temporary workers for a job in the oilsands, two of whom were killed in a work place accident, in the aftermath of which the Alberta government found reasons to believe it had been defrauding its workers of their wages, had trouble getting Workers’ Compensation death benefits to their survivors, & in 2009 laid 53 charges against Sinopec the company for infractions of provincial work place health & safety regulations that Sinopec has been fighting ever since, right up to the Supreme Court of Canada level (basically on the grounds that the Alberta government has no control over it). And, as these things tend to go when Chinese ‘national interests’ are concerned, if the Supreme Court were to rule against Sinopec, retaliation by Beijing could be expected to ensue).  

CRISIS IN ISRAEL A THREAT TO MIDEAST PEACE (AP, Josef Federman)

• On July 17^th Israel was plunged into a political crisis when Kadima, with 28 seats in the 120-seat Knesset its largest party, pulled out of the Netanyahu coalition just two months after having joined it in what at the time was deemed  a ‘coup’ for Natanyahu. Kadima’s new leader, Shaul Mofaz, a former IDF Chief of Staff, shortly after replacing Tzivi Lipni decided to join the coalition expecting to have a say in implementing the court-ordered end to the decades-old blanket exemption from compulsory military service for an estimated 60,000 ultra-Orthodox Jewish seminary students. The reason(s) he gave for leaving was that when “We made a real effort to push toward a new law that would change the balance of service”, he encountered “red lines” not to be crossed, & that “Netanyahu has chosen to side with the draft-dodgers” (seemingly accepting their leaders’ argument that those exempted serve the nation through prayer & study).

The law allowing the exemption expires on July 31^st & not long ago Israel’s High Court of Justice ruled that making one sector of the population carry a disproportionate share of the load (of compulsory military service) was unconstitutional. The vast majority of (secular) Jews want this burden to be shared by all of their fellow Jews (women have long been included, albeit for a shorter period, and the leader of the well right-of-centre-but-not Haridim Yisreal Beitenu Party, Avigdor Lieberman, even wants to extend it to Israeli Arabs) & salt is rubbed in their wounds by the fact the students receive welfare to sustain them (& their families) while they study the Torah; in other words, they see them as freeloaders who make no real economic contribution & are a burden onto  hard-working Israeli tax payers.  Bringing in Kadima gave the Netanyahu coalition government an unprecedented 94 seats  in the Knesset (which in theory would have allowed him to do what he bloody well pleased) & without it he is back to a more ‘normal’ but still manageable 66.  Netanyahu supposedly promised Shaul Mofaz three things in return for his party joining the coalition & Mofaz himself becoming Deputy Prime Minister : to abolish the wholesale exemption for Haredim religious students, to change the election process to make it harder for small parties to get seats in the Knesset & to launch a new Palestinian peace effort. If so, he failed to deliver on even the first of these. One analyst’s view is that  he recognizes the growing size & clout of the Haredim community & decided that “Being allied with them is more important than an alliance with Kadima”. And another that he chose the Haredim over Kadima  and by doing so “instead of shaping the future of the country … is securing his own” (which may not be altogether correct; for he is shaping the country allright but  in a manner that may not prove long-term sustainable). The common wisdom now is, as it was two months ago, that Netayahu will call an election for early this fall (which is just about the last thing the Middle East needs right now), one year ahead of time, in which, if the polls are correct, Kadima under Shaul Mofaz would be decimated (one can only hope that, as often the case, the common wisdom will be proven wrong). And the conscription issue must touch a nerve in Netanyahu; for in 2003, when he was Minister of Finance, his nephew in a very high profile case refused to be inducted in the IDF on the grounds he was a pacifist & objected to its oppression of the Palestinians, to the point of even refusing to do alternate service in a hospital, ending up serving seven separate jail sentences, for a total 214 days (until the IDF realized the futility of trying to change his mind & decided the publicity surrounding the case was doing more harm than good?)      

ISRAEL WORRIED ABOUT FALLOUT FROM SYRIA BOMB (JP, Yaakov Katz)

• On July 18^th a suicide bomber killed several top members of President Bashar al-Assad’s inner circle right in the country’s security headquarters (an event a senior official called “a 7 on the Richter scale”, although it may in the end prove to have been more of an 8, or 9). Later that day Israeli Defense Minister Ehud Barak phoned his American counterpart, Leon Panetta, to tell him “the assassination will speed up Assad’s downfall … We are closely tracking the possibility that Hezbollah will try and move more advanced military platforms or chemical weapons from Syria to Lebanon”. This is in line with senior Israeli officials in recent weeks telling foreign visitors that Israel is concerned about three possible scenarios : the transfer of Syrian chemical weapons to Hezbollah, a fragmentation of the country that will enable small groups, or even lone gunmen, to gain access to Syrian chemicals weapons & use them against Israel, and  Assad in going down deciding to take Israel with him & firing everything in his rocket arsenal in its direction (the IDF meanwhile is speculating Assad may ask Russia to help him escape from the country before it is too late – via its naval base at Tartus?).

The fatal attack in Bulgaria on a bus carrying Israeli tourists, for which Hezbollah & Iran has been variously blamed (with Israel by Pavlovian-like blaming the latter) will only add to Israel’s paranoia & give Netanyahu more justification for mischief. And Jordan too has started to worry about al-Assad or rogue elements flinging rockets carrying chemical payloads in its direction.     

PIPELINES BYPASSING HORMUZ OPEN (USA Today)

• Both Saudi Arabia & the UAE have increased their ability to have their oil bypass the Strait of Hormuz as diplomatic tension over Iran’s nuclear programme is ratcheting up & sanctions are reducing Iranian oil exports to 20-year lows. On July 15^th the UAE loaded its first tanker at the terminal in the port of Furaijah of its new 370 km., US$3.5BN pipeline that can carry 1.5MM bbld. of oil from its oil fields near Abu Dhabi to the Indian Ocean.  And Saudi Arabia has converted a 48-inch pipeline originally built during the Iran-Iraq war to carry Iraqi oil to the Indian Ocean, but later converted to carry Saudi gas, back to carrying oil so as to allow 2MM more bbld. of oil to bypass the Strait. This means that now two-thirds of the UAE’s-, & over half of Saudi Arabia’s-, exports no longer need to go through the Strait (i.e. 40% of its one-time 17MM bbld. throughput).

Many experts continue to believe Iran’s threat to close the Strait is a bluff; for it needs it open both to get its own oil out & its (food) imports in, and knows that trying to close it would prompt a military confrontation it would be unlikely to win. That may be so but it could be effectively closed by …….. the insurance companies if they were to declare the Gulf a war zone & to refuse to provide insurance coverage to ships in it. And history is awash with examples of leaders being pushed, or precipitating themselves, into irrational & potentially self-destructive behaviour      .

LIBYA’S LIBERALS LEAD IN PARLIAMENT VOTE (al-Jazeera)

• The National Force Alliance (NFA) led by Mahmoud Jibril got 39 of the 80 seats set aside for parties, the Muslim Brotherhood’s Justice and Construction Party 17 & a host of smaller party the remaining 24. Nearly 2.9MM Llbyans, 80% of those eligible to do so, registered  to vote & 62% of those (40% of them women) actually voted on July 7^th. Only one woman candidate was successful in winning one of the other 120 seats set aside for individuals running on their own merit (i.e. without official party affiliation); nevertheless the assembly will have 33 women members because the parties had been required to alternate the names on their lists between males & females.

This was a disappointment, & a huge embarrassment, for the Brotherhood. Now just imagine the pressure on the non party-affiliated members of the assembly to support this, that or the next party. Having said that, the use of the word “Liberal” in the headline is misleading & valid in relative terms only; for there are likely few Libyans who would meet our definition of “Liberal”.

MODERATE RE-ELECTED IN TUNISIA (Reuters)

• At its first ever Party Congress Tunisia’s Islamist Ennahda Party has re-elected, by a 70% vote, Rachid Ghannouchi, a ‘moderate’, to lead it for another two years. The party won a plurality of the seats in last October’s election & has since been in a coalition government with two secular parties, under pressure from the Brotherhood to introduce Sharia law.

Like Bush, the Romney the Republicans cannot cope with any democratic election that throws up a government not of their liking & are accusing Obama of being in cahoots with the Islamists, especially after Hilary Clinton’s tète-a-tète with Egyptian President Mohamed Morsi.

PASSENGERS CAUSE COLLISION (AP, Aya Batrawi)

• In Cairo, Egypt, on July 17^th, passengers that had to wait for 30+ minutes for their train so as to allow another train to go through, got so annoyed they placed logs & rocks on the track that was to carry it, causing it to side swipe yet a third train & three cars of the incoming train to overturn, injuring at least four passengers.
• Since last year’s uprising there have been so many protests by rail passengers against inadequate service, & strikes by rail workers for better wages, that in January alone 1,720 trains had been delayed.

Rail is a key mode of transportation for Egyptians because it is cheap compared to air travel &  the limited number of commercial airports in the country limits the scope for it..

 GREECE SEEKING BRIDGE LOAN (Reuters)

• A Finance Ministry official said on July 17^th the government needs a bridge loan to cover its funding needs through August since the next instalment of funding from the EU & the IMFis not expected to be released until September. Its European partners have promised   to cover its funding needs through August, when 3.3BN Euros of bonds come due, but have yet to specify how that will be done & meanwhile are pushing for progress on the reform front. While an anonymous Finance Ministry official told reporters “We are fighting to secure the bridge loan by September”, Jean-Claude Juncker, the Luxemburg Head of the Eurogroup of Eurozone Finance Ministers, keeps telling investors, & the Greek government itself, that a solution to its latest funding crisis will be found in August.

So how is that money going to be paid back?          

INDIA SEEKS ACTION ON UAE BOAT SHOOTING (al-Jazeera)

• In the early afternoon of July 17^th the USNS Rappahannock, a 31,200 dwt. ‘underway fleet replenishment oiler’, with a crew of 81 civilians & three military officers (& a military gun crew to ward off pirates?), was headed for the UAE port of Jebel Ali. Sixteen kilometres off the UAE coast a nine metre boat powered by three outboard motors of a type not unlike the fast attack boats of Iran’s Revolutionary Guard, came within 8 kms (5 miles) of it. According to the US Navy it sought to contact the smaller vessel by loudspeaker (at a 5 mile distance?) & radio, and by flashing lights & firing warning (the latter denied by the vessel’s crew) and, when that brought no response, opened fire with a 50-calibre weapon since, as Lt. Greg Raelson, a spokesman of the US Navy’s Bahrain-based 5^th Fleet told al-Jazeera “US ships have an inherent right to self defense against potential threats … The safety of our vessels and of our personnel is of the utmost priority.”  Unfortunately, the boat was a fishing vessel with an Indian crew, one of whom was killed & three more wounded.

The various stories about this incident vary greatly, & this is al-Jazeera’s (that despite being owned by the Emir of Qatar, is on the whole rather professional in its coverage).This may have been a case of “the use of excessive force” & of a failure of “measured response”. For, if al-Jazeera is correct, it raises the issue of how much of an immediate threat a nine metre boat five miles away (i.e. a absolute minimum five minutes’ travel) poses to a ship 23x its length & thousands times its weight, especially when it is doubled hulled, with the two shells six feet apart (although it is also a fact that 50-calibre gun fire is not overly effective over a 5 mile range). But it does go to show how tense & trigger-happy the situation is becoming in the Persian Gulf (increasingly akin to kids playing with matches in a powder magazine or, in a more modern context, people wearing steel-toed boots on an LNG carrier  – one spark & the whole thing goes BOOM!), thereby increasing the scope for Iran to provoke an incident with major international implications.(the Rapahannock is not a US Navy ship proper, but a Henry J. Kaiser class civilian-crewed ship operated by the Military Sealift Command, an 8000-staff, Washington-based entity whose purpose in life is to “replenish US Navy ships, conduct specialized missions, strategically preposition combat cargo at sea around the world and move military cargo and supplies used by deployed US forces and coalition partners).