Daily Sources 5/29

1. JAPANESE INDUSTRIAL PRODUCTION UP 5.2% IN APRIL FROM MARCH, DOWN 2/3DS FROM LAST YEAR--UNEMPLOYMENT ROSE TO 5%, JAPANESE REFINERS TO RUN 4% LESS CRUDE YOY

Jason Clenfield and Toru Fujioka at Bloomberg report that Japanese industrial production rose 5.2% in April from March.

"Still, output is running at two-thirds last year’s levels, saddling manufacturers such as Nikon Corp. with workers they no longer need and driving the jobless rate to a five-year high of 5%."

"There are signs that Germany’s economy is recovering from the worst recession since World War II. On May 25, the Ifo economic institute said its May business climate index climbed to 84.2 from 83.7 in April. This week, retailer Arcandor AG, which employs more than 23,000 people, said second-quarter earnings were 'surprisingly good.'"

James Topham at Reuters reports that Nippon Oil, Japan's biggest refiner, plans to refine 4% less crude in June from the year previous. Japanese refiners have excess production that they have been looking to export, given local demand reductions based on demographics and the current economic climate. Platts reported that Japan's national oil company's economists expect oil to fall to $45/b by the end of July--see Daily Sources 5/28 #6.

2. EUROZONE INFLATION FALLS TO ZERO, UPTICK IN GERMAN RETAIL SALES

Ralph Atkins at the Financial Times reports that the eurozone annual inflation rate fell to zero in May from 0.6% in May.

"Economists said inflation would turn negative in June, complicating further the task of the European Central Bank (ECB) as it seeks to combat the worst economic downturn for half a century in continental Europe.

Among the eurozone’s biggest countries, Germany and Spain have already reported negative national inflation rates."

Simon Johnson at Baseline Scenario notes that in January, Lucas Papademos, VP of the ECB, suggested that inflation would not fall below 2% for the eurozone. ECB head Jean Claude-Trichet responded to the zero inflation news by commenting that recovery is around the corner, and thus this should be ignored. Johnson's comments:

"1. Private sector demand is weak; it’s hard to see who will lead the recovery within the eurozone. In addition, the demand for European exports has fallen much more than expected, as seen--for example--in the big decline in German Q1 output.
2. The ability of the public sector to offset this decline with discretionary fiscal policy is quite limited, due to balance sheet constraints in some countries (look at the latest credit default swap data from weaker euro sovereigns ...) and clear policy preferences in others (i.e., how Germany worries about inflation, even when there is none).
3. Banks look troubled across many eurozone countries, and as the real economy surprises on the downside these problems will increase--with presumed implications for government bailout programs and balance sheets .... Remember that the European economy depends on banks much more than does the US."

Meanwhile, Frances Robinson and Jana Randow at Bloomberg report that the German Federal Statistics Office reported today that retail sales rose 0.5% in April from March and are down 0.8% from a year previous.

3. CHINA DECIDES TO HALT THE PUBLICATION OF ITS ELECTRICITY CONSUMPTION DATA

Paul Krugman at The Conscience of a Liberal quotes from a subscription-only article of the WSJ which notes that the question over China's reported industrial demand growth even as it has reported declines in electricity consumption has resulted in China's association of electricity generators halting the publication of consumption data. Krugman notes:

"Some China analysts are crying foul: If [Industrial Value-Added] IVA growth figures are being cooked, surely that means China’s recent GDP data have been overstated too. China’s statisticians use IVA output to estimate what accounts for nearly half of China’s GDP."

The IEA's report of May 14 noted the discrepancy, to some fuss--see Daily Sources 5/14 #2. Your humble blogger also admitted his perplexity just the day prior--see Daily Sources 5/13 #2. China's National Bureau of Statistics made its case defending its numbers versus the IEA's query on the 26th, suggesting that the measure of electricity generation has historically at times moved in different directions than value added figures, as one is an indicator of volume and the other of relative value--see Daily Sources 5/26 #5.

4. GATES SAYS THERE IS NO NORTH KOREA CRISIS

Julian E. Barnes at the Los Angeles Times reports that US Defense Secretary Robert Gates said that he didn't think anyone regarded the recent weapons tests by North Korea as a crisis:

"I don't think that anybody in the administration thinks there is a crisis. What we do have, though, are two new developments that are very provocative, that are aggressive, accompanied by very aggressive rhetoric."

Yesterday the US and South Korea upped their military alert level for the peninsula. In this, Gates may have been taking, to some extent, the advice of BR Myers, a researcher of North Korean ideology and propaganda, who wrote an op ed in the New York Times on April 2 which argued that in order to deal with North Korea we need to focus on countering its internal propaganda--see Daily Sources 4/2 #10. Clearly not appearing all that concerned as North Korea loudly asserts that all peace agreements are dead letters does not reinforce Pyongyang's sense of self-importance.

5. AS MUCH AS 30% OF THE WORLD'S UNDISCOVERED NATURAL GAS MAY BE NORTH OF THE ARCTIC CIRCLE, AND MOST OF THAT WOULD BE RUSSIA'S; CANADIAN MINING COMPANY TO FIGHT CONCESSION LOSS BY FIAT FROM CARACAS, SAYS THAT CHAVEZ HAS RUSSIAN CONSORTIUM IN MIND FOR THE PROPERTY

Margot Roosevelt at Greenspace reports that the most recent estimate of the US Geological Survey (USGS)--just published in Science magazine--is that 30% of the world's undiscovered gas and 13% of its undiscovered oil are located north of the Arctic Circle. Randolph E. Schmid at the Associated Press reports that of that 30%, most of the undiscovered natural gas is in Russian territory. (Schmid reports that the USGS paper suggests that only between 3 and 4% of the world's undiscovered oil lies north of the circle.)

"'These findings suggest that in the future the ... pre-eminence of Russian strategic control of gas resources in particular is likely to be accentuated and extended,' said Donald L. Gautier, lead author of the study published in Friday's edition of the journal Science.

Russia is already the world's leading natural gas producer, noted Gautier, of the Geological Survey's office in Menlo Park, Calif."

"Two-thirds of the undiscovered gas is in just four areas--South Kara Sea, North Barents Basin, South Barents Basin and the Alaska Platform--the report said.

Indeed, the South Kara Sea off Siberia contains 39% of the Arctic's undiscovered gas, the researchers said."

Meanwhile, George Soules at Platts reports that Canada's Gold Reserve de Venezuela has indicated it will ask for $5 billion in compensation for a mining concession Caracas canceled on Wednesday.

"The government formed a joint venture with Rusoro Mining Ltd., a publicly traded Canadian-Russian firm., late last year to develop the ... Las Brisas and Las Cristinas gold properties in tandem. ...

Rivero says President Hugo Chávez now has a Russian state gold company in mind for the project.

Las Brisas has estimated gold reserves of 10.2 million ounces of gold and 1.4 billion pounds of copper, according to Gold Reserve."

6. INDIA RECEIVES RECONNAISSANCE AND CONTROL EQUIPMENT FROM ISRAEL PREVIOUSLY DENIED TO CHINA AT THE BEHEST OF D.C.

Michael Collins Dunn at the MEI Editor's Blog reports that India has received its first Israeli Phalcon airborne warning and control system--Israel's analogue to the US AWAC. The US had objected to a sale of the system to China, which resulted in Israel canceling the deal. Collins also notes on the growing space-based cooperation between Tel Aviv and New Delhi--having cooperated in a number of satellite launches. He remarks:

"One doesn't need an advanced degree in geopolitics to see the growing Israeli-Indian cooperation as a response to Pakistan's missile programs, nuclear programs, and the growing concerns about Pakistan's stability. The fact that the Phalcon sale to India, while delivered a bit later than anticipated, did not encounter the strong American opposition that the proposed sale to China had, is also of interest."

Indeed. Worth reading in full, includes links to a variety of sources.

7. IRAN ACCUSES U.S. OF HAVING ARMED MOSQUE BOMBERS, FORMER NSC OFFICIAL DETAILS IRANIAN COOPERATION WITH U.S. IN AFGHANISTAN FOLLOWING 9/11

Zahra Hosseinian and Fredrik Dahl at the Washington Post report that Jalal Sayyah, of the governor's office in [Iran's] Sistan-Baluchestan province, blamed the US for arming those responsible for the bombing a mosque that took place yesterday:

"The terrorists, who were equipped by America in one of our neighboring countries, carried out this criminal act in their efforts to create religious conflict and fear and to influence the presidential election."

Ayatollah Sayyid Ahmad Khatami, a member of the Assembly of Experts responsible for determining who is qualified to serve as the Leader of the Revolution and a key ally of the current LOTR, said in his Friday sermon in Tehran, "The fingertips of America and Israel are definitely on this incident." There are Baluchi separatist movements in Iran and Pakistan, and large number of the ethnic group reside in south Afghanistan--in March the New York Times reported that two high-level reports on Pakistan and Afghanistan called for targeting a militant sanctuary in Quetta, ie, in Baluchi Pakistan--see Daily Sources 3/18 #8. Last year, in the New Yorker, Seymour Hersch wrote that anonymous sources had informed him that the US was funding with the Iranian Baluchi separatist movement. However, Hersch reported that there was a lot of opposition in the intelligence movement to working with the militants, as they were in large part Sunni Islamists, with ties to al Qaeda. Jeff Stein at SpyTalk reports that Hillary Mann Leverett, former White House National Security Council Iran expert, said:

"in December 2002, after the US gave Tehran the names of five al Qaeda suspects it believed were in Iran, the regime found two, which they delivered to the US air base at Baghram, in Afghanistan."

She also told the media that Tehran aided the US in targeting bombing campaigns of the Taliban in Afghanistan following 9/11 and that they deported hundreds of suspected al-Qaeda members. She said that Iranian officials had indicated to her that their support in Afghanistan was predicated on the hope of putting an end to the impasse with the US:

"They specifically told me time and again that they were doing this because they understood the impact of this attack on the US, and they thought that if they helped us unconditionally, that would be the way to change the dynamic for the first time in twenty-five years."

While I do not doubt Leverett's veracity, it is my suspicion that the regime in Tehran would mostly want a new understanding to be done covertly, while continuing to maintain their ideological self-justification which is predicated, in great part, on the US being the Great Satan--see "Law and Revolution in Iran."

8. AFRICAN ENVIRONMENTAL MINISTERS TO ASK DEVELOPED COUNTRIES FOR AID IN CLIMATE CONTROLS IN DECEMBER U.N. COPENHAGEN MEETING

Tom Maliti at the Associated Press reports that African environmental ministers, meeting in Nairobi in preparation for the December UN Copenhagen meeting on the environment, have indicated that there they will ask the developed nations for aid in addressing climate change issues. They gave no specific numbers, but analysts have argued that the continent will need at least $1 billion a year in order to address climate-related issues. In this they seem to be following the lead of China, India, and South Africa, which in late April called for $200 billion in aid to address global warming concerns--see Daily Sources 4/29 #1.

9. BRAZIL STILL SCHEDULED TO OFFER CONCESSIONS ON PRE-SALT OIL FIELDS DESPITE LEGISLATIVE DEBATE

Carola Hoyos and Jonathan Wheatley at the Financial Times reports that Brazil's mines and energy minister, Edson Lobão, told the paper that international oil companies will "certainly" be invited to bid for concessions in the "pre-salt" offshore oil fields next year.

"Oil industry analysts were surprised by his statement. 'It would rest on the assumption that Brasília will be able to promulgate a new regulatory framework in the near term, but there are so many stakeholders vested in the development of these fields that the legislative debate may be more arduous than expected,' said RoseAnne Franco, lead analyst for Latin America at PFC Energy in the US.

Brazil sold several concessions in the pre-salt fields before their potential became clear and has promised not to change those contracts."

The New York Times yesterday reported on the investigation the Brazilian Senate had launched into Petrobras, alleging that it had illegally awarded contracts, among other things--see Daily Sources 5/28 #7.

10. MEXICO TO HALVE DOLLAR AUCTIONS ON STRENGTHENING PESO

Valerie Rota at Bloomberg reports that Mexico is reducing its daily dollar auctions from $50 million from $100 million on a strengthening peso.

"Banco de Mexico will also reduce the amount of dollars it offers in auctions when the peso weakens more than 2% in a day, the country’s currency commission said in a statement. Those auctions will drop to $250 million from a previous $300 million, the commission said."

Generally-speaking, oil exporting countries whose currencies move up with the price of oil buy dollars in order to protect non-energy exports.

11. OAS MAY VOTE CUBA BACK IN

Mary Beth Sheridan at the Washington Post reports that the Obama Administration is fighting a potential vote at the Organization of American States [OAS] to readmit Cuba.

"Most Latin American countries broke relations with Cuba after its 1959 revolution. Nearly all have restored diplomatic ties, and the United States will soon be the only holdout in the hemisphere.

The Cuba ban could be lifted by a two-thirds vote of the OAS foreign ministers on Tuesday. However, the organization generally works by consensus, and several countries have indicated they do not want a showdown with the United States."

Earlier this week Caracas threatened to withdraw from the OAS and form a new hemispheric organization which would include Havana--see Daily Sources 5/26 #9.

12. SOUTH KOREA'S NATIONAL PENSION SERVICE TO REDUCE ALLOCATION OF HOLDINGS FOR U.S. TREASURIES

Saeromi Shin at Bloomberg reports that South Korea's National Pension Service, which held roughly 236 trillion won (~ $187 billion) of assets at end-2008, has reduced its target allocations for US treasuries in its annual revision of five year targets.

"The service plans to reduce its exposure to US Treasuries and to diversify its overseas investments to other government-related bonds and corporate bonds to boost returns, the [Ministry for Health, Welfare and Family Affairs] said."

13. COMMERCE DEPT REVISES Q1 GDP UP, CONTINUED UNEMPLOYMENT CLAIMS AT RECORD 6.79 MILLION

Jeff Bater at the Wall Street Journal reports that the Commerce Department has revised the GDP number for the first quarter upwards to a 5.7% annual rate of contraction from the previous 6.1% estimate.

"First-quarter spending by consumers advanced 1.5%, down from a previously reported 2.2% increase but above the fourth quarter's 4.3% drop. It contributed 1.08 percentage points to GDP in the first quarter.

Purchases of durable goods rose 9.6% in January through March, above the previously reported 9.4% increase and above a 22.1% drop in the fourth quarter. Durable goods are expensive items designed to last at least three years, such as cars.

First-quarter non-durables spending fell by 0.6%. Services spending went 1.3% higher."

Yesterday, the Department of Labor released data showing that for the week ended May 23, seasonally-adjusted first time unemployment claims were

"623,000, a decrease of 13,000 from the previous week's revised figure of 636,000. The 4-week moving average was 626,750, a decrease of 3,000 from the previous week's revised average of 629,750."

Calculated Risk comments:

"Continued claims are now at 6.79 million--an all time record. This is 5.1% of covered employment.

Note: continued claims peaked at 5.4% of covered employment in 1982 and 7.0% in 1975. So this isn't a record as a percent of covered employment."

Daily Sources 5/28

1. US SPECIAL ENVOY FOR SUDAN HAS PRODUCTIVE TALKS WITH HIS CHINESE COUNTERPART IN DOHA; HUMAN RIGHTS LAWYERS IN CHINA BEING DENIED LICENSE TO PRACTICE RENEWALS; GEITHNER IN CHINA SUNDAY TO PRESS A BROADER SOCIAL SECURITY NET AS MEANS OF IMPROVING CONSUMPTION

The AFP reports that US special envoy to Sudan Scott Gration had "very positive meetings" with Chinese special representative for Darfur Liu Guijin, according to a US State Department spokesperson.

"Gration, a retired US Air Force general, participated in Doha on Wednesday in the first ever meeting of the Darfur envoys from the five permanent members of the UN Security Council (Britain, China, France, Russia and the United States) and the European Union, Duckworth said."

China has a large presence in Sudan's oil sector. Meanwhile, Leslie Hook at the Wall Street Journal reports that Beijing has begun denying license renewals to law firms in the country which take human rights cases. Every year lawyers in China must renew their license to practice law by May 31.

"When asked about this trend, an official at the Beijing Judicial Bureau pointed out that the deadline for license renewal is still some days away. 'All lawyers are treated equally,' said Dong Chunjiang, a deputy director at the Judicial Bureau. He disputed the premise that some lawyers were 'rights lawyers,' saying: 'Our 19,000 lawyers are all protecting people's rights.'"

In April, China published its "National Human Rights Action Plan of China (2009-10)" which had outlined further protections it had as goals including specifically the legal rights of defendants--see Daily Sources 4/4 #1. (The two year plan included as aims broader access to social security, health care and education. Beijing officially identified rule of law as an area which it wants to develop over time at some point last year. In that vein, Michael M. Phillips at the Wall Street Journal reports that Treasury Secretary Timothy Geithner will urge Beijing to take "drastic" measures to convert the economy to one primarily driven by household consumption.

"That means encouraging Beijing to offer more generous health-care, retirement, welfare, educational and other benefits in order to persuade the average Chinese citizen that spending now doesn't mean starving later.

'The efforts China could take would be efforts to strengthen the comfort that Chinese households have in spending, which largely involves reducing or addressing the reasons why they feel such a great need to save for precautionary purposes,' said the senior Treasury official, who briefed reporters Thursday in advance of Mr. Geithner's departure on Saturday."

Geithner is scheduled to arrive in China on Sunday for meetings on Monday and Tuesday.

2. ONE CHILD POLICY MAY MAKE SEXUAL COMPETITION ONE MAJOR CAUSE OF CHINESE SAVINGS RATE

In an interesting conjecture, Zubin Jelveh at the Stash reports that Shang-Jin Wei of Columbia University and Xiaobo Zhang of IFPRI argue that China's one child policy, which has pushed the boy-girl ratio from 107-100 in 1980 to 120-100 currently, is responsible for an increase in the general savings rate in the country.

"The reason a shortage of women would cause an increase in savings is not clear. In order to compete for wives, a shortage could cause men and families with sons to save more in order to signal their wealth to potential brides. On the other hand, these groups might also spend more money on status goods like expensive clothes and cars to achieve the same end. However, the researchers find that across different provinces across China between 1978-2006, 'local savings rates are systematically and positively correlated with local sex ratios.'"

Jelveh includes a link to the Shang-Jin/Xiaobo working paper. Clearly sexual competition would be an especially difficult social force to overcome should China want to encourage more consumption domestically.

3. CHINESE AUTO FUEL ECONOMY STANDARDS BEING DEBATED--WELL IN EXCESS OF U.S. PROPOSAL; E.U. CHAMBER OF COMMERCE OFFICIAL ACCUSES BEIJING OF FREEZING FOREIGN FIRMS OUT OF STIMULUS PACKAGE-FUNDED PROJECTS

Meanwhile, Keith Bradsher at the New York Times reports that Chinese officials have drafted new automobile fuel economy standards plan which is now going through the process of interagency review.

"Mr. An [Feng, a leading architect of China’s existing fuel economy regulations who is now the president of the Innovation Center for Energy and Transportation, a nonprofit group in Beijing,] estimated that the average new car, minivan or sport utility vehicle in China already gets the equivalent of 35.8 miles a gallon this year based on the American measurement system of corporate averages and will be required to get 42.2 miles a gallon in 2015."

More cars have been sold in China so far this year than in the United States. Meanwhile, Kathrin Hille and Josh Chaffin at the Financial Times report that Joerg Wuttke, president of the European Union Chamber of Commerce in China, has accused Beijing of deliberately locking out foreign corporations from stimulus-related projects.

"At a meeting in Brussels earlier this month, the EU and China discussed the importance of ensuring that their companies were able to compete fairly for contracts arising from their respective economic stimulus packages."

Wuttke was specifically addressing a package of wind turbine orders worth €5 billion (~ $6.98 billion).

"The failure of the world’s leading wind turbine makers including Vestas, Gamesa, Suzlon and GE to even make it into the second round of the bidding has caused frustration as they have invested big in response to Beijing’s demand that they source at least 70% of their components locally."

4. U.S. AND SOUTH KOREA RAISE MILITARY ALERT LEVEL IN RESPONSE TO PYONYANG'S THREATS

Jon Herskovitz at Reuters reports that South Korea and the US have raised the military alert level for the peninsula following Pyongyang's nuclear bomb test Monday and the reiteration of its view that the 1953 armistice was a dead letter.

"North Korea kept up its steady string of strident rhetoric, saying in its official media that 'a minor accidental clash could lead to nuclear war.'

'As circumstances show, provocations of war on the part of the US and South Korea have gone well beyond the risky level. It's a matter of time when a fuse for war is triggered,' the North KCNA news agency reported a commentary in a state newspaper as saying."

Foggy Bottom reportedly hopes that the recent provocations from Pyongyang will drive Moscow and Beijing to take a tougher stand with the Hermit Kingdom.

"But many Chinese analysts say Washington overstates Beijing's sway over Pyongyang, as well as their government's willingness to use that influence.

'Undoubtedly, China also wants a swift and united response, but it probably won't give the United States all it wants. China has its own worries,' said Shi Yinhong, an expert on regional security at Renmin University in Beijing."

5. TURKISH JETS STRIKE KURDISH REBEL POSITIONS IN NORTHERN IRAQ

The Associated Press reports that Turkish airplanes struck Kurdish rebel positions in northern Iraq today, per a statement from the Turkish military.

"Thursday's attack came after six soldiers died when a military vehicle struck a land mine in Hakkari province, which borders Iraq. Authorities said the land mine, which wounded eight other soldiers, was planted by the rebels of the Kurdistan Workers' Party, or PKK."

6. OPEC LEAVES QUOTAS UNCHANGED, MINISTERS DIVIDED AS TO CAUSES FOR CURRENT RELATIVELY HIGH PRICES, JOGMEC ECONOMISTS EXPECTS OIL TO FALL TO $45/B BY END OF JULY

Ayesha Daya and Fred Pals at Bloomberg report that OPEC left its production quotas unchanged at its meeting today in Vienna, at 24.845 mb/d.

"'The market is oversupplied, it’s true,' OPEC Secretary General Abdalla el-Badri said at a press conference after today’s announcement. The group decided against cutting output in the face of excess supply to avoid sending the 'wrong signal' and disrupting an economic recovery, he said. 'If we are able to keep this $60 to $70 price for the remainder of the year, it will be fine.'"

Javier Blas at FT Energy Source reports that OPEC oil ministers are divided on whether the current price environment is due to fundamentals or a speculative bubble. Ali Naimi, Saudi Arabia's oil minister, reportedly thinks that the price is due to fundamentals, and is bullish on a global economic recovery, though he did "concede" that the price is not wholly due to fundamentals.

"Speculative money is exactly what Chakib Khelil, Algeria’s oil minister--an influential voice in Opec and a former senior World Bank official--thinks is behind the price increase, in sharp contrast with Mr. Naimi.

The Oil markets may be in a 'bubble' because prices are higher than fundamentals would indicate, Mr. Khelil said arriving in Vienna.

The Algerian minister is not alone. Abdullah al Attiyah, Qatar's oil minister, also thinks something is wrong. 'This price of oil now is functional but not related to demand and supply. We should not be too optimistic,' he said.

Abdalla Salem El-Badri, OPEC’s secretary general, agrees with the speculator’s camp. 'It is not the fundamentals behind the oil price rise,' he said, warning that it was 'sentiment' in spite of weak demand and high inventories what was propelling oil prices."

Blas notes that OPEC's economists appear to think the current price is more due to "market sentiment"--animal spirits--than fundamentals. Takeo Kumagai at Platts reports that Takayuki Nogami, a senior economist at Japan Oil, Gas and Metals National Corporation, said in an interview with the journalist that NYMEX sweet light was likely to drop to $45/b by the end of July, given that the current demand situation would only justify a $40/b price. (Nogami estimates that the OECD countries held 62.6 days in stocks at the end of April.)

"However, he expects crude oil prices to hover at around $60-65/b, prior to the drop to around $45/b by the end of July, due to growing optimism of an economic recovery in the stock market, which has been a driver of the recent rise in crude oil prices, coupled with the start of summer driving season in the US."

7. BRAZILIAN SENATE LAUNCHES INVESTIGATION INTO PETROBRAS

Alexei Barrionuevo at the New York Times reports that the Brazilian Senate has launched an investigation into Petrobras, and whether it had avoided taxes and awarded contracts illegally among other allegations.

"The investigation could prove an embarrassment for Mr. da Silva’s government, which is seeking to overhaul oil legislation to extract a much higher percentage of revenues from the deepwater oil fields, which are expected to hold five billion to eight billion barrels of oil and natural gas.

It could also be damaging to Dilma Rousseff, Mr. da Silva’s chief of staff and his handpicked candidate to succeed him in next year’s presidential elections, since she is also the chairwoman of the Petrobras board of directors."

8. MANUFACTURING ORDERS FOR DURABLE GOODS UP 1.9% IN APRIL FROM MARCH, DOWN 27.3% FROM A YEAR PREVIOUS; FITCH EXPECTS MOST REWORKED MORTGAGES TO BE DELINQUENT WITHIN 12 MONTHS

The Commerce Department announced that manufacturing orders for durable goods in April rose 1.9% from March, and fell 27.3% from a year previous. Meanwhile, E. Scott Reckard at the Los Angeles Times reports that Fitch Ratings released a report Tuesday which suggested that 55% to 65% of subprime mortgages, jumbo loans and little-documented home loans that banks had securitized currently being renegotiated will end up 60 days delinquent anyway within 12 months.

"For the subprime loans--the mortgages for the riskiest borrowers, with credit dings, bankruptcies and outsized debt loads--the projected 60-day delinquent rate was 65% to 75%.

Fitch based its projection partly on 'shrinking disposable income, escalating job losses and possibly some deceptive practices on the part of the borrowers themselves,' the New York company said."

9. TOTAL NORTH AMERICAN RAIL TRAFFIC DOWN 21.5% FOR THE WEEK ENDED MAY 23 FROM A YEAR PREVIOUS

Atlantic Systems has published it's railshare data, and total traffic year over year is down 21.5% in North America for the week ended May 23:



The biggest drop in cargo is still for metals and autos. The volume of coal transported by rail is down 9.3% for the year ended May 28 from the year previous.

10. U.S. ENERGY SECRETARY SAYS RAISING GAS TAXES POLITICALLY IMPOSSIBLE, COMMERCIAL CRUDE STOCKPILES DROP BY 5.4 MILLION BARRELS, NY HARBOR USLD SPOT CLOSED AT $1.42/B DISCOUNT TO NO. 2

Carola Hoyos, Fiona Harvey and Clive Cookson at the Financial Times interviewed US Energy Secretary Steven Chu and he said in response to a question of whether it would be best to raise taxes on gasoline in the US that "At this moment, let me be frank, it is not politically feasible."

"Higher petrol prices are likely to be one of the biggest potential sticking points of President Barack Obama’s cap-and-trade system when the bill moves from the Democrat-controlled House of Representatives to the more conservative Senate late this year.

Mr. Chu’s move against using taxes to raise US petrol prices is likely to frustrate environmental advocates who believe that the only way seriously to change Americans’ consumption habits is through higher prices."

Meanwhile, the EIA reported that commercial crude inventories declined by a whopping 5.4 million barrels to 363.1 million barrels in the week ended May 22. The number is still well above the give year historical average range for this time of year, but well above the median expectation of analysts for a 150,000 barrel decline, per a Bloomberg survey. Gasoline stocks fell by 600,000 barrels, well short of the median expectation of a 1.3 million barrel draw-down, but below the historical five year average range for this time of year. Distillate stocks rose by 300,000 barrels, and are 39 million barrels above the level seen for the week last year, or 35.6% more. Interestingly, the NY Harbor spot price for ultra low sulfur diesel closed yesterday at $1.5117/gallon, or a $0.0337/gallon discount to the spot price for No. 2--a $1.4154/b discount.

Daily Sources 5/27

JAPANESE EXPORTS RISE IN 1.9% APRIL FROM MARCH, DOWN 39.1% FROM LAST YEAR

Reuters reports that Japanese exports rose, on a seasonally-adjusted basis, 1.9% in April from March. Exports are down 39.1% in April from a year previous. Shipments to China fell by an annual rate of 25.8% and to the US by an annual rate of 46.3%. I'd expect industrial production to rise slightly as well, given the news in late April that March industrial output had gone up 1.6% from February--see Daily Sources 4/30 #2.

2. MORE DEBATE INSIDE CHINA ON ECONOMIC DATA; CHINESE CORPORATIONS TO ACQUIRE COAL-COKING OPERATIONS OF CANADA'S TECK; KUOMINTANG PARTY LEADER IN BEIJING TO DISCUSS FURTHER OPENINGS

Sky Canaves at the China Journal reports that China's retail sales data is coming under more fire. The State Information Office [SIO]--a government think tank--published a report in the China Securities Journal--also government-owned--which made clear that consumption had also been hit hard by the current slowdown. The SIO reported:

"retail sales numbers 'don’t fully and accurately reflect the changing trends in consumer demand,' in part because they don’t include consumer spending on services and housing, which have seen relatively steeper drops than spending in other areas. Monthly retail sales data should be considered in conjunction with quarterly household expenditure data and year-end total consumer spending growth, which it said are trending downwards. According to year-end data, consumer spending nominally increased by 16.1% in 2008. But with inflation, real growth was only 9.6%, the lowest level of growth since 2005."

The SIO recommended new measures to boost domestic consumption including expanding the current rural car and appliance subsidy program, low interest home improvement loans, increased funding for low income housing, and a reduction in tolls. The critique of household consumption data echoes an earlier official critique by a chief statistician at China's National Bureau of Statistics--see Daily Sources

Meanwhile, Xiao Yu and Steven Engle at Bloomberg report that Canada's biggest base-metals company, Teck Resources, Ltd., is in talks with Chinese companies to sell its coking-coal assets.

"'We are going through a process' of talks with Chinese companies, including steelmakers, to buy as much as a 20% stake in its coking coal business, Chief Executive Officer Donald Lindsay said in a television interview in Beijing today. He declined to name the companies."

And Michael Wines at the New York Times reports that Chinese President Hu Jintao hosted Wu Poh-hsiung, the head of the Kuomintang Party--currently in power--in Beijing for talks regarding increased bilateral trade ties and cross border movement yesterday.

"Last week Chen Chu, the highest-ranking elected official of the Democratic Progressive Party, or DPP, visited Beijing. Ms. Chen, the mayor of Kaohsiung, Taiwan’s second largest city, stressed that she was visiting the mainland to promote her city, not to signal any political retreat from the party’s independence stand. Trips to the mainland by DPP officials are nevertheless rare, and [Taiwanese President] Ma [Ying-jeou] quickly cited it as a sign that cross-straits relations were improving."

3. NORTH KOREA THREATENS ATTACKS ON SEOUL IF ITS SHIPS ARE INTERDICTED

Choe Sang-Hun at the New York Times reports that Pyongyang threatened to launch military strikes on South Korea should any of its ships be intercepted and searched as part of the US-led effort to prevent it from proliferating nuclear weapons or missile technologies. Seoul had agreed to join the US "interdiction effort" (um, i.e., blockade) Monday after North Korea conducted an underground nuclear test blast--its third. A North Korean military spokesman said today in an official statement:

"We consider this a declaration of war against us. Any hostile act against our peaceful vessels, including search and seizure, will be considered an unpardonable infringement on our sovereignty and we will immediately respond with a powerful military strike."

On January 30, Pyongyang unilaterally declared all peace agreements with Seoul null and void, including the armistice ending the Korean War in 1953 and the 1991 agreement on non-aggression and reconciliation--see Daily Sources 1/30 #3. North Korea reiterated its view that the peace deals between it and the South were a dead letter in its statement today. Former Secretary of Defense William J. Perry, Former National Security Adviser Brent Scowcroft and Council on Foreign Relations Senior Fellow Charles D. Ferguson have an op ed in today's Wall Street Journal on how best to approach the impasse with Pyongyang. Key excerpt:

"An effective strategy to reduce nuclear dangers must build on five pillars: revitalizing strategic dialogue with nuclear-armed powers, particularly Russia and China; strengthening the international nuclear nonproliferation regime; reaffirming the protection of the US nuclear umbrella to our allies; maintaining the credibility of the US nuclear deterrent; and implementing best security practices for nuclear weapons and weapons-usable materials worldwide."

Worth reading.

4. EUROZONE OVERNIGHT LENDING RATES RECOVERING, COULD PRESENT THE ECB WITH A DILEMMA

Joellen Perry at Real Time Economics reports that the euro-zone overnight index average rate rose to 1.146% Wednesday, after having hit a low of 0.486% on May 11, and above the European Central Bank's target of 1%.

"Keeping the overnight rate steady is a central bank’s main raison d’être. Central banks manage growth and inflation by setting a target rate for the overnight loans banks make to one another. The overnight rate guides other key interest rates--such as the benchmark for the rates banks charge one another for three-month loans. That rate, a reference point for many consumer and business loans across the euro zone, has been rising in tandem with the overnight rate. On Wednesday, it hit 1.270%, up from Tuesday’s 1.266%."

As Perry points out, this is a good thing because it suggests that the credit crunch has relaxed its grip on the markets, but that on the other hand it could reduce the ECB's options in dealing with the financial crisis because,

"If the overnight rate stays higher than the ECB’s target rate, then the ECB’s monetary policy is more restrictive than the central bank wants. That could end up putting a brake on the economy in the midst of a deep recession."

5. RUSSIAN OFFICER CORPS UNHAPPY WITH RESTRUCTURING IN MIDST OF FINANCIAL CRISIS

Philip P. Pan at the New York Times has a very interesting anecdotal account of discontent rising in the Russian military--particularly among its officer corps--as it undergoes the process of modernizing.

"Low morale over pay and housing has afflicted the Russian military since the fall of the Soviet Union, but grumbling in the ranks is rising sharply as President Dmitry Medvedev attempts to carry out the most ambitious restructuring of the nation's armed forces since World War II in the face of a severe economic downturn.

The plan seeks to transform an impoverished, unwieldy conscript army built to fight a protracted war in Europe into a more nimble, battle-ready force that can respond quickly to regional conflicts. Key to the overhaul is a drastic reduction in the number of officers, who now account for nearly one in three Russian servicemen.

By eliminating thousands of officer-only units that were designed to call up draftees in wartime, and moving to a leaner, brigade-based structure, Medvedev intends to cut Russia's officer corps from 355,000 to 150,000, dismissing more than 200 generals, 15,000 colonels and 70,000 majors."

The question is whether or not the current economic environment is a better or worse time to continue to carry out the restructuring plan, from a political perspective.

6. PAKISTAN'S SUPREME COURT READMITS SHARIF BROTHERS TO ELECTED OFFICE

Nasir Iqbal at Dawn reports that Pakistan's Supreme Court ruled that the Sharif brothers who lead the main opposition party--PML-N--were illegally barred from elected office.

"The decision paved the way for former Prime Minister Nawaz Sharif to return to parliament after nearly 10 years.

‘The June 23, 2008, judgment of the Lahore High Court and the Feb 25 order of this court are ex-parte on account of which certain factual aspects and legal provisions were not brought to the notice of the court and, therefore, were not considered, leading to miscarriage of justice which has been found by us to be errors apparent on the face of record warranting review,’ a five-judge bench ruled unanimously in a packed courtroom."

Encouraging, in my view--see The Law in Pakistan.

7. VENEZUELA AND BOLIVIA DENY ABSURDIST CLAIM THAT THEY ARE PROVIDING IRAN WITH URANIUM; HOUSEHOLD GOODS IN SHORT SUPPLY IN VENEZUELA

Carlos Valdez at the Associated Press report that Caracas and La Paz issued official denials today regarding the Israeli report which accused the two countries of supplying uranium to Iran.

"Bolivian Mining Minister Luis Alberto Echazu said his country doesn't even produce the radioactive metallic element, though he acknowledged that officials believe the country has some untapped uranium deposits.

'There isn't even a precise geological study of uranium deposits, and much less can there be talk of export' to another country, he said."

Venezuela also has estimated uranium reserves of some 50,000 metric tons, but currently has no mining operations. I am unclear as to why strategists in Israel, at this stage, would be anxious for a US scrap with Venezuela just now, given the drums still beating for war with Iran. A full-bore conflict with either could ill be afforded by the US just now and absurd-ist accusations, though creative, are not likely to burnish their credibility. Iran has a contract for enriched uranium supplies from Russia to feed the Bushehr nuclear power plant and, as has been widely reported, now has the capability to enrich uranium, of which it has proven reserves of about 3,000 metric tons and expected reserves of 20,000-30,000 metric tons.

Meanwhile, Tyler Bridges at McClatchy Newspapers has a story on consumer goods shortages in Venezuela. (The story is not the first in some anecdotal accounts of shortages faced in the cities due to the fall in the price of oil--see Daily Sources 2/2 #10.)

"'Today, there's no milk, no rice, no beans, no chicken, no meat, no butter and no cooking oil,' Francisco Quintero said as he shopped at a government store that sells subsidized staples for the poor."

Bridges reports that prices for pharmaceuticals and home appliances are skyrocketing as car manufacturers have decided to stop their production lines.

"'We're expecting the government to raise prices for rice, milk, meat and chicken by 40%," said Marlon Barragan, who manages a Mercal in Catia. He said that the prices 'will still be low.' The only question is whether the goods will be available.

The government is three to four months behind in providing dollars to drug producers to pay for their imports of goods and raw materials, said Edgar Salas, who heads a pharmaceutical trade association in Caracas. In all, the companies are owed about $250 million, he said."

8. FEDERALES ARREST 10 MICHOACAN MAYORS

E. Eduardo Castillo at the Associated Press reports that Mexican federal forces, in a raid that began Tuesday morning, have put under arrest ten mayors of ten cities in the central state of Michoacan.

"Most of the mayors were from towns in a mountainous region where there have been numerous beheadings and federal agents recently found 22 methamphetamine laboratories. Among those detained was the mayor of Uruapan, where La Familia gunmen dumped five human heads on a bar dance floor in 2006, the Attorney General's Office said in a statement.

The mayors came from different parties, including Calderon's own conservative National Action Party.

The detentions of elected officials show how Mexican cartels have infiltrated the country's political structure and how far-reaching their control is in rural Mexico, said Victor Clark, an expert on trafficking based in the drug-plagued northern border city of Tijuana.

It also marks a first for the federal government, which has arrested scores of corrupt police officers in the past but has never gone after such a large group of mayors."

9. G8 MEETING CREATES "PARTNERSHIP" TO SHARE ENERGY EFFICIENCY DATA

Platts reports that at the G8 meeting in Rome this weekend a International Partnership for Energy Efficiency Cooperation was created. Members will include the G8--Canada, France, Germany, Italy, Japan, Russia, the UK, and the US--as well as Brazil, China, India, Mexico and the South Korea. The agreement is intended "to make it easier for their governments to share information on curbing energy consumption."

10. TROUBLED U.S. BANKS NOW 21% OF TOTAL

Margaret Chadbourn and Alison Vekshin at Bloomberg report that the number of distressed banks, per the FDIC, has climbed to 21% of the total--the largest share of the US banking sector "troubled" in 15 years.

"Funds set aside by banks to cover loan losses rose 64% to $60.9 billion in the first quarter from $37.2 billion in the year-earlier quarter. [FDIC Chair] Sheila Bair said 97% of banks were 'well-capitalized' at the end of the first quarter."

21 banks have collapsed in the first quarter, the most since late 1992. The FDIC has taken over 36 this year.

11. PRE-EXISTING HOME SALES RISE 2.9% IN APRIL FROM MARCH, DOWN 3.5% ON THE YEAR; RISING UNEMPLOYMENT COULD AUGUR 1-3 MILLION ADDITIONAL FORECLOSURES AS RECESSION DRAGS ON

Barry Ritholtz reports that the recent National Association of Realtors data shows that existing home sales increased 2.9% in April from March (at seasonally adjusted rates), and down 3.5% from a year previous. Total inventory in April rose 8.8%--"The increase in inventory is somewhat worrisome, and supports our thesis that any stabilization in sales or prices will bring out more shadow inventory." In the meantime, in a post by Ritholtz yesterday, he outlined why more unemployment equals more foreclosures:

"• Foreclosure rates among prime borrowers have been growing fastest in states with higher unemployment.

• Economy.com expects mortgage defaults in 2009 caused by unemployment to double, from 29% in 2008 to 60% in 2009;

• Prime mortgages that are distressed (90 days delinquent, foreclosure, REO) are greater than 1.5 million;

• Alt-A loans--those given to people with slightly tainted credit--rose to 836,000.

• Subprime mortgages that were 'distressed' reached 1.65 million;

• From February 2008 to Feb 2009, total dollar value of distressed mortgages increased 60% in dollar terms;

• More than four million loans worth $717 billion were 'distressed' in February."

I'm not sure that his linear projection makes sense, given that arguably those most at risk of foreclosure due to job losses were hit first, but he predicts 500,000 to a million additional foreclosures--from February--in the next six months if the recession ends now. If the recession continues for another six months, Ritholtz argues that we should see two to three times that number.

12. HIGHER EDUCATION BUBBLE LIKELY TO POP NEXT

Former Massachusetts secretary of educational affairs, Joseph Marr Cronin, and president of New England College of Business and Finance Howard E. Horton argue in the Chronicle of Higher Education that the higher education sector is likely to get hit next. Key excerpt:

"According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440%--more than four times the rate of inflation and almost twice the rate of medical care. Patrick M. Callan, the center's president, has warned that low-income students will find college unaffordable.

Meanwhile, the middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up. In addition, endowment cushions that allowed colleges to engage in steep tuition discounting are gone. Declines in housing valuations are making it difficult for families to rely on home-equity loans for college financing. Even when the equity is there, parents are reluctant to further leverage themselves into a future where job security is uncertain.

Consumers who have questioned whether it is worth spending $1,000 a square foot for a home are now asking whether it is worth spending $1,000 a week to send their kids to college. There is a growing sense among the public that higher education might be overpriced and under-delivering."

Worth reading in full (h/t Yves Smith at naked capitalism.) UNESCO estimates that the US has over 14 million higher education students, which suggests that the represent a considerable share of the economy. Meanwhile, Jonathan D. Glater at the New York Times has an anecdotal account of teachers being faced with smaller loan forgiveness packages as the recession hits those state and federally budgeted programs.

"From Kentucky to Iowa to California, loan forgiveness programs are on the chopping block. Typically founded by their states to help students pay for college, the state agencies and nonprofit organizations that make student loans and sponsor these programs are getting less money from the federal government and are having difficulty raising money elsewhere as a result of the financial crisis.

The organizations say the repayment programs have been hurt by a broader effort by Congress to tackle the high cost of the federal student loan program by reducing subsidies to lenders.

Curbing the programs will make it harder to lure college graduates into high-value but often low-paying fields like teaching and nursing."

Daily Sources 5/26

1. JAPAN MAINTAINS 0.1% INTEREST; WILL ACCEPT US, UK, AND FRENCH DEBT FROM DISTRESSED BANKS IN RETURN FOR EMERGENCY FUNDS

The AFP reports that on Friday the Bank of Japan [BoJ] decided to maintain its benchmark interest rate at 0.1%.

"The BoJ also expanded the types of debt it will accept from banks in return for emergency funds to include bonds issued by the governments of the United States, Britain, Germany, and France."

2. E.U. PARLIAMENT PRESIDENT INDICATES THAT BERLIN IS UNLIKELY TO OK TURKEY ACCESSION TO E.U. ANY TIME IN THE NEAR OR MEDIUM TERM

Der Spiegel reports that the President of the European Parliament, Hans-Gert Pöttering, said in alive chat:

"It is my deep belief that--politically, culturally, financially and geographically--it would be too much to have Turkey as a member of the European Union."

Spiegel's backgrounder:

"With his statements, Pöttering underscored one of the central demands being made during the European election campaign in Germany by the Christian Democrats and their sister party in the state of Bavaria, the Christian Social Union (CSU). Both parties are calling for a 'consolidation phase' in the European Union and for Turkey not to be given full membership. 'The European Union cannot be borderless,' German Chancellor Angela Merkel said during the presentation of the party's European election manifesto in Berlin on Monday. The position puts the CDU on a direct confrontation course with its coalition partners in the German government, the center-left Social Democrats (SPD). For years, the SPD has pushed for full membership for Turkey in the EU, arguing it would be prudent for security policy and that the country serves as an important bridge to the Islamic world."

3. RUSSIA IN NEW ENRICHED URANIUM DEAL WITH THE U.S.

Steve Gutterman at the Associated Press reports that Russian uranium export company, Tekhsnabexport aka Tenex, signed a $1 billion package of contracts to supply three US utilities with enriched uranium.

"Tenex will supply fuel to the US utilities from 2014 through 2020 under the contracts, which provide the option for renewal, [Sergei] Novikov [, spokesman for the state nuclear agency Rosatom,] told the AP."

Russia is already the largest supplier of enriched uranium to the US nuclear sector under the Megatons for Megawatts agreement which exports uranium from dismantled Russian nuclear warheads which has been modified for commercial use. The Megatons for Megawatts deal is set to expire in 2013 and up until now US corporations had not contracted for the supply of uranium enriched from the raw ore.

4. CHINA AND RUSSIA JOIN U.S. IN CONDEMNATION OF NORTH KOREAN NUCLEAR TEST

Evan Ramstad, Jay Solomon and Peter Spiegel at the Wall Street Journal report that North Korea's nuclear weapons test Monday was met with near-universal condemnation internationally.

"The United Nations Security Council, holding an emergency meeting in New York Monday afternoon, 'voiced their strong opposition to and condemnation of the nuclear test,' said the current council president, Russian Ambassador Vitaly Churkin.

Mr. Churkin said in a statement that council members 'demand that [North Korea] comply fully with its obligations' not to conduct tests, under a Security Council resolution passed after Pyongyang announced its first test blast in October 2006."

Beijing released a statement saying it was "resolutely opposed to the test."

5. CHINA STATISTICS AGENCY RESPONDS TO ENERGY COMMUNITY'S SKEPTICISM REGARDING ITS INDUSTRIAL PRODUCTION/GDP NUMBERS

Andrew Batson reports that China's National Bureau of Statistics [NBS] is fighting back against the criticism leveled at it by the Paris-based IEA that its official 6.1% GDP growth rate for the first quarter doesn't add up with the fact that electric production fell by 3% for the same time period. (The IEA's report with its criticism was released on May 14--see Daily Sources 5/14 #2. That the criticism was fairly broadly held by the analytical community, see my comment on Daily Sources 5/13 #2 that it was "difficult to reconcile" the notion that industrial production was growing at 7% or more while electrical generation was dropping by as much as 4%.) The NBS pointed out on its website that comparing electricity consumption and GDP can be like comparing apples to oranges as electricity is measured in volumetric terms and GDP in yuan and,

"The bureau said that such gaps have appeared in other countries before without prompting notable comment. In 2001, it said, electricity consumption in the US dropped 3.6%, while GDP grew by 0.8%. In 2003. Japan’s electricity consumption declined 1.3%, while GDP grew 1.8%."

The NBS said that total energy consumption rose by 3% in the first quarter, which it argues is in line with its figure of 6.1% GDP growth for the period.

"But in a new report Monday, Standard Chartered economists Stephen Green and Li Wei argue that, properly measured, energy-intensive industries are not declining any faster than other industries. And the historical relationships between other statistical indicators have also broken down in recent months. So they conclude that the gap between falling electricity output and rising measures of value-added still looks 'problematic.'"

6. PETROCHINA TO TAKE 50% STAKE IN SINGAPORE'S JURONG ISLAND REFINERY


Jamil Anderlini at the Financial Times reports that PetroChina will pay $1 billion for the 45.5% stake in the Singapore Petroleum Company [SPC] held by Keppel Corporation. SPC operates one of the three major refining projects in Singapore, which is a major trading and shipping hub for petroleum products in the Asia Pacific. The city state's total refining capacity is about 1.3 mb/d. SPC owns 50% of Singapore Refining Company Private Limited which has a 50% stake in the 273.6 kb/d refinery joint venture with Chevron on Jurong Island. The other two refineries are held by ExxonMobil (605 kb/d) and Royal Dutch Shell (458 kb/d).

7. U.S. ASKS CHINA TO GET MORE INVOLVED IN PAKISTAN

Paul Richter at the Los Angeles Times reports that the US has asked China to provide Pakistan with training and military equipment to help counter the growing militant threat in the country.

"Richard C. Holbrooke, the administration's special representative for Pakistan and Afghanistan, has visited China and Saudi Arabia, another key ally, in recent weeks as part of the effort."

An interesting development to be sure, especially in light of the statement by the Chinese Ambassador to Pakistan's statement in early May that the US presence in the region was a "serious concern"--see Daily Sources 5/8 #5.

8. FRANCE INAUGURATES "PEACE CAMP" IN U.A.E.

BBC reports that President Nicolas Sarkozy formally opened a French air base in the UAE today. The base can house as many as 500 troops and includes a naval and air base as well as training facilities.

"'Be assured that France is on your side in the event your security is at risk,' Mr. Sarkozy said in an interview with the UAE's official news agency.

'Through this base--the first in the Middle East--France is ready to shoulder its responsibilities to ensure stability in this strategic region.'

An aide to Mr. Sarkozy is quoted by AFP news agency linking the base to an alleged Iranian threat: 'We are deliberately taking a deterrent stance. If Iran were to attack, we would effectively be attacked also.'"

In a standard issue Newspeak cogitation, the base has been named "Peace Camp." Mr. Sarkozy is also in the UAE to discuss their potential purchase of 60 new Rafale multipurpose jets, in a deal worth about €8 billion (~ $11 billion).



(h/t Joshua Keating at Morning Brief.)

9. VENEZUELA MAY WITHDRAW FROM THE O.A.S., START NEW HEMISPHERICAL ORGANIZATION WITH CUBA; MEANWHILE LEAKED ISREALI REPORT CLAIMS VENEZUELA IS SUPPLYING URANIUM TO IRAN'S NUCLEAR PROGRAM

The AP reports that Chávez has indicated that he would like to withdraw Venezuela from the Organization of American States [OAS] and work with Cuba--expelled from the OAS in 1962 primarily at the behest of the US--to develop an alternative organization to coordinate the interests of the Western Hemisphere. Meanwhile, Mark Lavie at the Associated Press reports that an Israeli government report was leaked to the media which claims that Venezuela and Bolivia supply Iran with uranium for its nuclear program.

"Bolivia has uranium deposits. Venezuela is not currently mining its own estimated 50,000 tons of untapped uranium reserves, according to an analysis published in December by the Carnegie Endowment for International Peace. The Carnegie report said, however, that recent collaboration with Iran in strategic minerals has generated speculation that Venezuela could mine uranium for Iran."

10. ECUADOR PROPOSES KEEPING OIL IN GROUND, SELLING CARBON CREDITS TO DEVELOPED WORLD

Joshua Partlow at the Washington Post reports that Ecuador--which rejoined OPEC 2007 after a 15 year hiatus--is trying to gauge interest in a plan whereby it would leave the oil reserves found under its Yasuni National Park untouched in return for cash from the developed world.

"Ecuador would sell certificates to governments or companies that would allow them to emit carbon dioxide in amounts corresponding to the carbon left underground in Yasuni."

"[Roque] Sevílla [, a prominent Ecuadoran environmentalist who is on the committee in charge of the Yasuni initiative,] said that focusing on carbon could save Yasuni. The 410 million tons of carbon dioxide that would avoid being emitted could raise $4 billion to $7 billion, Ecuador estimates."

The EIA estimates that Ecuador exported about 327 kb/d in 2008 and that it has about 4.517 billion barrels in proved reserves. About one fifth of this, or 831 million barrels, is thought to be under the Yasuni National Park. In June, the German Parliament resolved to support the project and provided funds for a study on how to put it into practice.

11. SOMALI TRANSITIONAL GOVERNMENT ASKS FOR INTERNATIONAL AID VS INTERNATIONAL JIHADIST-BACKED AL-SHABAAB

CNN reports that the President of the Transitional Federal Government [TFG] of Somalia, Sheikh Sharif Sheikh Ahmed, yesterday asked for international assistance in combating al-Shabaab via the media:

"I am calling on the international community to help Somalia defend against foreign militants who have invaded the country."

Al-Shabaab, which has splintered off from the Islamic Courts Union--the government ousted by Ethiopia with tacit US support after having been fingered as having ties to al-Qaeda--has become a cause celebre in the international jihadist community. (For example, Osama bin Laden issued an audio statement attacking the TFG, thus implicitly supporting al-Shabaab, in the middle of March, per Thomas Hegghammer at Jihadica.)

12. MERRILL LYNCH JOINS THOSE ARGUING SPIKE IN OIL PRICES A MAJOR CONTRIBUTING CAUSE TO CURRENT CRISIS; SAUDI KING CALLS FOR $75-80/B OIL (JUST THE PRICE AT WHICH DEMAND STARTS TO FALL), SAUDI OIL MINISTER CALLS FOR OPEC MAINTAINING CURRENT QUOTAS, BUT EVERYONE APPEARS TO BE PREPARING TO PRODUCE MORE & CHINA LOOKS SET TO RAISE PRODUCT PRICES ON DAY OF OPEC MEETING

Kate Mackenzie at FT Energy Source reports that Merril Lynch’s London-based commodities team has released a paper arguing--in parallel to James Hamilton's recent work--that the oil shock of 2006-8 is responsible for sharply worsening the current financial crisis. She quotes from the note:

"In our opinion, the Great Recession of 2008-09 is the result of a simultaneous shock of surging energy prices and mounting credit problems (Chart 8). The crisis was precipitated by the collapse of Lehman Brothers, but it was the oil price spike that killed emerging market growth. We firmly believe that the world economy would not have contracted so sharply in 4Q08 without the tremendous oil price spike to $150/bbl that occurred in 3Q08 ...."

The Merrill Lynch team thinks that a jump in oil prices to $70-80/b could pose risks to growth in the OECD countries and that the emerging markets face problems between $90-100/b. (This jibes with my thoughts on the subject earlier. To wit, that $70-80/b is where you see demand destruction in the US in the past--see Daily Sources 5/8 #3--or about $2.50-$3.00/gallon average national gasoline and diesel prices--see VMT vs Real Gasoline and Diesel Prices 1980-Oct 2008. Insofar as emerging market economies are dependent upon exports to the OECD countries and that those exports tend to be production inputs or relatively unsophisticated manufactured goods, I am unclear as to why $90-100/b is acceptable to them, given that high petroleum products prices essentially act as a regressive tax, ie hurts the pocketbook of their target market.)



Meanwhile, Kate Dourian at Platts reports that in an interview with Kuwait's Al-Seyassah newspaper, King Abdullah of Saudi Arabia said,

"We still believe that $75 or maybe $80/b is a fair price for oil, particularly in current circumstances."

And Tarek El-Tablawy at the Associated Press reports in an interview, Ali al-Naimi, the Saudi Oil Minister, told the Saudi daily Al-Hayat that OPEC was likely to maintain its current production quotas.

"Boosting production 'will not happen until we are sure that global inventories are reduced to their normal levels,' said al-Naimi, whose country is the world's largest exporter of crude. He said world crude inventories are currently at between 61 and 62 days of forward cover and the group wants to see them down to 52 or 54 days."

But, Ayesha Daya at Bloomberg reports that the latest Joint Oil Data Initiative [JODI] data indicates that Saudi Arabian oil output jumped from 8.065 mb/d in February to 8.358 mb/d in March, well above the implied quota of 8.051 mb/d. And Platts reports that despite a week's worth of fighting in the Niger Delta, which has recently forced Chevron to shut in 100 kb/d of production, a Nigeria National Petroleum Corp [NNPC] official said crude exports, including condensates, will export 2.01 mb/d in June and 2.04 mb/d in July. Nigeria's implied OPEC quota has been reported from 1.74 mb/d to 1.67 mb/d. The NNPC official said that the country is currently at 1.66 mb/d. Meanwhile, Platts reports that Sinopec's Chairman Su Shulin was quoted by the People's Daily yesterday as saying that he expected the government to lift the guidance price of petroleum products by May 28, which is when OPEC is set to meet.

"Sinopec's refining business has been in the red recently as international crude prices have risen above $60/barrel, Su said.

'According to the information released on May 8--regarding the [new] oil pricing mechanism--prices of oil products sold in the domestic market will be revised when the moving average of international crude prices over 22 consecutive working days falls outside a 4% fluctuation range,' Su said, indicating that domestic oil prices should be adjusted following the recent uptick in global crude oil prices.

The 22-day moving average of the crude basket rose above the 4% fluctuation range from May 1, hovering around 5-10%, Platts data showed."

14. CHINA HOLDS SO MANY U.S. DOLLARS THAT IT MUST BUY MORE TO SUPPORT THEIR PRICE

Jamil Anderlini at the Financial Times writes that China is stuck in a "dollar trap," meaning that it has no choice but to continue buying dollars with its growing reserves if it wants to conserve the value of its current holdings.

"Chinese and western officials in Beijing said China was caught in a 'dollar trap' and has little choice but to keep pouring the bulk of its growing reserves into the US Treasury, which remains the only market big enough and liquid enough to support its huge purchases.

In March alone, China’s direct holdings of US Treasury securities rose $23.7 billion to reach a new record of $768bn, according to preliminary US data, allowing China to retain its title as the biggest creditor of the US government."

Rebecca Wilder at News N Economics notes that according to IMF data China is by far the world's largest capital exporter, just as the US is the largest capital importer.



Ms. Wilder comments:

"China's current account flows are likely to end up in US capital markets. This makes sense, as the US is expected to be one of the forces to pull the globe out of recession through renewed import demand for global exports in the wake of massive fiscal and monetary policy. Eventually, though, push will have to come to shove when it comes to the US-China current account imbalance. The only question is when!"

Worth reading in full. Meanwhile, Ambrose Evans-Pritchard at the UK Telegraph reports that the yield on US 10 year treasuries has risen over 90 basis points since March, suggesting some resistance to the product in the market. (The People's Bank of China has rerouted its purchases of agencies and long term treasuries to treasury bills.)

"The US is not alone in facing a deficit crisis. Governments worldwide have to raise some $6 trillion in debt this year, with huge demands in Japan and Europe. Kyle Bass from the US fund Hayman Advisors said the markets were choking on debt.

'There isn't enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that countries are so intent on running. There is simply not enough money out there,' he said. 'If the US loses control of long rates, they will not be able to arrest asset price declines. If they print too much money, they will debase the dollar and cause stagflation.'"

Olivier Accominotti pointed out that France was in much the same situation in terms of holdings of UK sterling in the years leading up to WWII--see Daily Sources 4/23 #1--the dispute over which, by the way, was one key reason that the UK and the US were late to heed Paris' warnings as events began to hint at maleficent intent from Berlin at the time.

15. U.S. CONFIDENCE UP AS CASE-SHILLER PRICE INDEX DECLINES BY 19.1% IN THE FIRST QUARTER FROM A YEAR AGO!

The Associated Press reports that the Conference Board's Consumer Confidence Index in May rose to 54.9, from a revised 40.8 in April. The reading is the highest seen in eight months.

"'Looking ahead, consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market and incomes will improve in the coming months,' Lynn Franco, director of the Conference Board Consumer Research Center, said in a statement. 'While confidence is still weak by historic standards, as far as consumers are concerned, the worst is now behind us.'"

Interestingly, the Case-Shiller Home Price Index declined 19.1% in the first quarter from a year ago, and 7.5% from the fourth quarter, per Barry Ritholtz at the Big Picture. Ritholtz notes that prices are now at their 2002 levels:

I, Gimlet 5/22/09

Daily Sources 5/22

1. IEA SAYS ELECTRICITY CONSUMPTION IS TO FALL IN 2009, ONLY FALL SEEN FROM 1945, LOW FOSSIL FUEL PRICES LIKELY TO MAKE RENEWABLE INVESTMENT LESS ATTRACTIVE, IEA CHIEF ECONOMIST SAYS G20 NEEDS TO INCREASE RENEWABLE SPENDING BY 600% IN ORDER TO MEET CLIMATE PROTECTION GOALS

Ed Crooks at FT Energy Source reports that the IEA expects electricity consumption to fall in 2009, the first decline seen since 1945, per its report to be delivered to the G8 this Sunday in Rome. Crooks notes that an analysis by Colette Lewiner of consultancy Capgemini argues that the data does not suggest that renewable energy will be competitive in the near term:

"The current economic signals don’t give incentives to invest in renewable energies. The prices of fossil fuels make such investments even less profitable than before the crisis (for example for windmills compared to gas power stations). In addition, at their current low price, CO2 emissions represent only a small burden for gas or coal fired plants and therefore do not help to close the economic gap with the renewable energies.

In Europe in the second half of 2008 (compared to the second half of 2007) investments in renewable energies fell by 14% to US$21.2bn, and in the United States, there was a 50% reduction to $10.7bn."

Kate Mackenzie reports that Fatih Birol, the IEA's chief economist, made the following comment regarding the renewable energy component of the stimulus packages of the G20:

"We have looked at all G20 stimulus packages--and all the money they are putting into renewable energy. The money they have put aside for renewables is definitely important, but it is still much lower than what it should be, if we want it to be come to a sustainable level of energy trends--to bring CO2 emissions down. In order to come to that trend, [spending on] renewable energy needs to increase by a factor of six."

Meanwhile, Grant Smith at Bloomberg reports that JBC Energy's most recent technical analysis suggests that the current rise in oil prices is likely to stall at $62.65/b, and from there likely to fall back to $45/b.

"'Prices will fall to $45 before they rise in the second half of the year to $68,' JBC’s Vienna-based Chief Executive Officer Johannes Benigni said in a telephone interview. 'The recovery was too early, and as oil market fundamentals look extremely bad a correction is expected.'"

JBC Energy predicted that oil would start coming out of tankers at sea in May 5--see Daily Sources 5/5 #5--and the EIA has reported declines in US commercial crude (and gasoline) stocks in the weeks since.

2. SANFORD BERNSTEIN DEDUCES THAT CHINA IS ADDING 400 KB/D TO ITS STRATEGIC PETROLEUM RESERVES

Spencer Swartz at Environmental Capital reports that Neil McMahon at Sanford Bernstein analysts have deduced from satellite images on Google that the amount of oil entering strategic petroleum reserve ports in China has risen by as much as 400 kb/d, or about 0.5% of daily global demand or roughly 5.8% of China's implied consumption in March.

"'Our analysis confirms that tanker capacity arrivals into China have spiked up in recent months, in line with imports, but more importantly, tanker arrivals into Strategic Petroleum Reserve ports have increased materially,' Bernstein says Friday in a research report."

Kate McKenzie at FT Energy Source also quotes the following from the report:

"And satellite images confirm a significant increase in storage construction in the last few years. This suggests that China is stock-piling crude oil, in line with its stated objective to increase its days of forward cover, which currently stands at only 28 days of imports and 14 days of total consumption (if the SPR is full). This is well below the target level of 90-100 days. Overall, this recent drive by the Chinese to fill their SPR should have offered some support to crude prices, and will continue to do so going forward during implementation of the next two phases of the project."

China's current SPR storage capacity stands at about 136 million barrels or 42.5 days of import demand. The State Council in 2007 suggested that the government ought plan to build 120 days of import demand storage capacity. Xinhua reported that China plans to build an additional eight SPRs this year--see Daily Sources 2/5 #2. Gotta say the use of Google satellite images to deduce this is pretty brilliant--wish I had thought of that.

3. CHINA'S NDRC DETAILS WHAT STIMULUS HAS BEEN SPENT ON SO FAR

Sky Canaves at China Journal reports that China's National Development and Reform Commission (NDRC) has issued a report detailing the status of spending mandated by the 4 trillion yuan ($486 billion) economic stimulus package. As of April 30, the central government has spent 230 billion yuan for the stimulus. (70% of the stimulus is to originate from local governments and bank lending--the People's Bank of China noted that 92% of the lending targeted by the stimulus had already been met in the middle of May--see Daily Sources 5/12 #2.) Ms. Canaves provides a helpful breakdown of how the stimulus is to be allocated:

"1. Housing: China’s stimulus plan allocates 400 billion yuan (10% of the total stimulus) to the construction of low-income housing, upgrading shanty towns and other measures to improve housing conditions.

2. Rural Development: Basic village infrastructure and civil engineering projects, such as providing water, electricity and gas to rural areas will account for 370 billion yuan (or 9.25%) of stimulus spending.

3. Major Infrastructure. This area are set to receive the largest chunk of stimulus spending--1.5 trillion yuan, or 37.5% of the total. Projects include railroads, highways, airports, other large-scale basic infrastructure and an upgrade of the urban electricity grids.

4. Health Care, Education, Culture: Social development projects get 150 billion yuan (3.75%).

5. Environment: Energy saving, emissions reduction and ecological construction projects are allocated 210 billion yuan (5.25%).

6. Industry and Technology: China has allocated 370 billion yuan (9.25% of the total stimulus) to fund independent innovation and industrial restructuring.

7. Post-quake Reconstruction: One trillion yuan (25% of the stimulus) is to be spent on rebuilding areas hit by last year’s Sichuan earthquake."

Canaves also provides the NDRC's breakdown on what has actually been done with the monies so far.

4. S&P LOWERS OUTLOOK FOR UK DEBT TO NEGATIVE FROM STABLE

Julia Werdigier at the New York Times reports that Standard & Poor's lowered its outlook for UK sovereign debt from stable to negative.

"'Even assuming additional fiscal tightening,' S&P said in a report, 'the net general government debt burden could approach 100% of gross domestic product and remain near that level for the medium term.'

The two main rival agencies, Moody’s Investors Service and Fitch Ratings, maintained a stable rating for Britain and said it was not under review. Britain has been rated AAA by S&P since it initiated coverage in 1978 and has never received a negative outlook."

5. GAZPROM DEPUTY-HEAD SAYS GAS PRODUCTION TO BE DOWN 18% IN 2009 ON DECLINES IN EUROPEAN DEMAND, ECHOING IEA REPORT; EU AND RUSSIA FAIL TO COME TO NEW ENERGY ACCORD

Simon Shuster at Reuters writes that deputy head of Gazprom Alexander Ananenkov was reported by Interfax to have said that its natural gas output may well drop by 18% in 2009 on the back of steep falls in demand in Europe. Meanwhile, Clifford J. Levy at the New York Times reports that Russia and the EU failed to come to a new energy accord in meetings in Khabarovsk today.

6. VENEZUELA ANNOUNCES IT WILL NATIONALIZE MORE METALS COMPANIES, BRAZIL CONSIDERING FINANCING VENEZUELAN INFRASTRUCTURE PROJECTS


Daniel Cancel at Bloomberg reports that the Chávez administration announced the government will nationalize the hot-briquetted iron industry and other metal companies, without providing a schedule for the take overs.

"'These companies will be nationalized to create a single industrial complex,' Chávez said yesterday on state television. 'There’s nothing to discuss. We should have done this a long time ago.'

The companies would be brought under the same management and included in plans to build an industrial complex to refine and process raw materials into finished products in a bid to reduce expensive imports, Chávez said."

In the meantime, Brazilian papers today reported that Caracas is negotiating loans for as much as $4.3 billion from the Brazilian state development bank, per Guillermo Parra-Bernal at Reuters.

"Coutinho visited Venezuela this week to negotiate the final details of the loan accord, which could be announced when Chavez visits Brazil on May 26, according to [Brazilian daily] Folha

Some of the loans may involve trade finance deals and two credit facilities worth a total $723 million to expand the subway in the capital city Caracas. Odebrecht SA, Brazil's largest construction group, is handling the expansion."

7. MEXICO CITY RELAXES SWINE FLU ALERT, CONSUMER INFLATION DOWN 0.34% IN 1ST HALF OF MAY, UP 0.13% EX-ENERGY AND FOOD

Istra Pacheco at the Associated Press reports that Mexico City has relaxed its swine flu alert, citing a lack of new cases during a week's time.

"City Health Secretary Armando Ahued said nobody has been hospitalized with respiratory infections in the last three days, and no swine flu cases have been confirmed since May 14. 'We are seeing a 96.1% drop in cases, and that's why we are dropping the alert level to green today,' Ahued said."

Jens Erik Gould at Bloomberg reports that Mexican consumer price inflation fell by 0.34% in the first half of May.

"The annual inflation rate was 6.06 percent, remaining above the central bank’s forecast of no higher than 6 percent in the second quarter. Concern that inflation remains above target may lead central bank policy makers to slow the pace of interest rate cuts to only a quarter point in June, said Delia Paredes, a senior economist at Banco Santander SA in Mexico City."

Consumer prices fell in the first half of May mostly due to a reduction in energy prices mandated by the authorities, if you exclude energy and food prices, consumer prices rose 0.13%.

8. CFR RELEASES REPORT SAYING OIL SANDS PRODUCTION "ONLY" INCREASES GHG EMISSIONS BY 17%

Keith Johnson at Environmental Capital reports that the Council on Foreign Relations has released a report which suggests that the "well-to-wheel" environmental impact of developing Canadian and Venezuelan oil sands is "just" 17% more than regular crude. The part that is difficult to understand is the "just 17% more." Global oil consumption is roughly 84 mb/d or 30.66 billion barrels/year and accounts for a considerable portion of global greenhouse emissions. The US consumes about 25% of global oil production and its largest foreign supplier is Canada. Venezuela was our fourth largest supplier in February. When you are thinking in those terms, 17% is a lot. Perhaps the report, which I have not had time to read, will make this more comprehensible--it can be found here.

9. UNEMPLOYMENT IN US SET TO EXCEED EU'S

Floyd Norris at the New York Times reports that unemployment in the US may be higher than in the European Union once the EU data for April is compiled.

"'The current economic crisis,' wrote John Schmitt, Hye Jin Rho and Shawn Fremstad of the Center for Economic and Policy Research, a research organization in Washington, 'has turned the case for the US model almost entirely on its head.'"

The headline US unemployment rate rose to 8.9% in April with most analysts expecting further net job losses.

10. COMMERCIAL REAL ESTATE LEADING INDICATOR TANKING

Barry Ritholtz at The Big Picture links to Merrill Lynch/Bank of America analyst Neil Dutta's chart plotting the National Association of Realtors US Commercial Real Estate index from 1990:



11. BRODA GHEZZI AND LEVY-YEYATI ARGUE RECENT DOLLAR STRENGTH LIKELY TO REVERSE

The econoblogosphere is buzzing about the recent post by Christian Broda, Piero Ghezzi, and Eduardo Levy-Yeyati at Vox EU which argues that financial de-globalization will reverse the dollars gains versus other currencies.

"We believe [the global flight to safety favoring the US dollar] can be largely explained by three factors of varying degrees of persistence:

* A drastic decline in risk appetite that benefited low-risk US assets.

* A collapse of financial cross-border flows--i.e., 'financial de-globalisation'--associated with an increase in the home bias of domestic portfolios, which brought home an important stock of dollar-funded portfolio investment abroad.

* A sharp increase in US household savings due to the combined wealth effect of the burst of the housing bubble and stock market correction that, together with lower oil prices, contributed to balance the current account.

We believe this unexpected response of the US dollar will be reversed and that quantitative easing will only temporarily be able to keep US long-term rates at their current low levels. Three reasons lie behind this:

* An increase of global risk aversion that is eminently a transitory phenomenon that benefits US assets.

* The 'savings drain' that has replaced the pre-crisis savings glut, as fiscal stimulus and narrower trade surpluses take hold in major external savers (Japan, China and oil-exporting countries).

* The lower degree of financial globalization in a world with more financial regulation, which will toughen the terms at which current-account deficit countries can finance themselves."

In short, the collapse in international trade, turning toward domestic growth in China, reduced savings in Japan, should reduce foreign investment by countries with current account surpluses.

"The new financial landscape--with greater financial regulation and lower leverage--is likely to make this shortage of international capital more persistent. In turn, the retrenchment of private savers--especially in oil-exporting countries and Japan--and expansionary fiscal policies almost everywhere are likely to lead us towards a 'savings drain' by global lenders--the opposite of the 'savings glut' in pre-crisis years."

Well worth reading in full.