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Friday, May 29, 2009

Obama Stimulus May End Up Hurting the Economy it Was Supposed to Have Helped

By Martin Hutchinson
Contributing Editor
Money Morning

Could the massive Obama stimulus plan end up hurting the U.S. economy?

It’s long been a worry, and now it’s beginning to seem possible.

The latest housing reports suggest that the recent rapid run-up in 10-year Treasury bond yields may be having an unhealthy effect on the U.S. housing market. That tells me that - although home prices are back to their long-term average in terms of earnings - we may not yet be close to the price bottom.

If that’s true, it’s very bad news. A further substantial decline in housing prices would destabilize the U.S. banking system again, because of all the mortgage debt in it, which would cause a very nasty “second leg” economic downturn. That would have one very ironic further implication: U.S. President Barack Obama’s $787 billion stimulus package - intended to help the U.S. economy push back the recession - would instead have succeeded in pushing it deeper into the mire.

A month ago, it appeared that the housing market might be in the process of bottoming out. The ratio of house prices to average incomes - which peaked at about 4.5 to 1 in 2006 - had fallen 33% from that apex, which brought the ratio close to its long-term average of 3.2 to 1, according to an S&P/Case-Shiller Index report. While interest rates remained low and government-backed home financing was readily available, it appeared the forces pushing up house prices (low interest rates and accessible financing) might soon come into balance and then dominate the forces that push home prices down (an inventory overage).

The jump in interest rates - from 2.07% on the 10-year Treasury bond in December to around 3.65% today - has weakened the case for a stabilization of housing prices. Mortgage rates, which were far below their levels of the last 30 years, have moved back above 5% — even for “conforming” mortgages. Thus the Mortgage Bankers Association index of new mortgage applications was down 15% in the latest week. Meanwhile, new home sales have merely stabilized at very low levels of an annual rate around 350,000 - compared to more than 2.0 million at the peak of the market, while the latest price statistics suggest that price declines continued to be quite rapid in March, and possibly even accelerated slightly.

This interest-rate increase does not currently seem to be caused by expectations of inflation, which has remained around 2% annually, although oil, gold and other commodity prices have ticked up. Instead, it seems to have been caused by the exceptionally high demands being made on the government bond market by the U.S. federal deficit, which is expected to total about 13% of gross domestic product (GDP), or more than $1.8 trillion, this year.

It’s not surprising that such a blip should have occurred this month; federal tax receipts are at their peak in April, as companies and individuals pay their taxes due, so the beginning of May saw a resumption of mammoth U.S. Treasury funding needs after a month’s pause.

If interest rates continue to increase, the effect on the already-weak housing market could be severe, as housing “affordability” would be reduced in a period in which prices were declining and unemployment was rising. That, in turn, could have a self-reinforcing downward effect on prices, as home inventories bloat further, and buyers hold back.

Currently, according to the S&P/Case-Shiller 20-city house price index, prices are down 32% from their peak, but remain 40% above 2000 levels, while consumer prices are only 24% above those of 2000. However, 2000 was not a “bear-market” year; prices had already enjoyed several years of rapid recovery from their early-1990s low. Should rising interest rates cause prices to continue falling to 2000’s level (another 28% decline), then on average every 80% mortgage undertaken since May 2002 (when the index first went above 125% of 2000’s level) would be underwater, having an owed principal amount that exceeds the actual current market value of the house. That would cause a surge in mortgage defaults more severe than any yet seen, extending far into the prime mortgage category - and probably causing the U.S. banking system to implode once again.

The stimulus-package funds, which began flowing in April, may actually induce some GDP growth this quarter. At the very least, the Obama administration infusion should hold the economy to a very minimal decline in GDP.

However, if interest rates keep rising, the effect of further housing-sector weakness and the wobbling banking system would overwhelm any stimulus benefits, and would cause a second “dip” in this recession - one that’s far worse than the first. The stimulus would, in that event, have proved counterproductive, killing the very economic recovery it was supposed to have stimulated.

Rising interest rates will have adverse effects on all countries with large budget deficits, the most notable of which are Britain and Japan. The effects would be harsh enough to actually prevent those countries from recovering from their own recessions.

For investors, the remedy is clear: Look to invest in countries that have produced only modest stimulus packages, and whose budget deficits are currently the smallest. In the invaluable statistical section of The Economist, a number of countries are projected to have budget deficits of less than 3% of GDP in 2009, in spite of their recessions.

At that level, deficits are easy to finance, and do not force up interest rates, so economic recovery should be relatively rapid.

Let’s take a look at some of those countries in question:

* Canada: Budget deficit forecast of 2.5% of GDP. Americans are fond of sneering at Canada for its high public spending and sluggish growth. Well, Canada’s public spending as a percentage of GDP peaked in the early 1990s and since 2000 the country has run budget surpluses. In 2009, Canada is forecast to have public spending lower than the United States, when provinces and states are taken into account, and to continue lower than its arch rival (the United States) for the foreseeable future. I wrote a few weeks ago about investment opportunities in the Canadian energy sector; those opportunities are even more compelling with the continued rise in the oil price to current prices of more than $62 a barrel.

* Denmark Finland and Switzerland: Wealthy European countries with healthy budget positions - deficits of 2.5%, 2.6% and 2.0% of GDP, respectively - will recover more quickly than their neighbors, because they have kept their economies in balance.

* Brazil: Probably the best of the lot, with a projected budget deficit of only 2% of GDP, inflation of 4.4% and bond yields of 11.8% — meaning it can indulge in a little monetary expansion if it needs to. Brazil will also benefit if inflation returns (as I expect it to), because that will push up the prices of its commodities exports.

So there you have it. Maybe the U.S. bond market and housing market will stabilize, and the American economic recovery will proceed smoothly - nothing is certain. But investments in Canada and Brazil, in particular, will protect you against the possibility that the U.S. situation doesn’t improve.

[Editor's Note:When the journalistic sleuths at Slate magazine recently set out to identify the stock-market guru who correctly predicted how far U.S. stocks would fall because of the global financial crisis, the respected "e-zine" concluded it was Martin Hutchinson who "called" the market bottom.

That discovery was no surprise to the readers of Money Morning - after all, Hutchinson has made a bevy of such savvy predictions since this publication was launched. Hutchinson warned investors about the evils of credit default swaps six months before the complex derivatives KO'd insurer American International Group Inc. He predicted the record run that gold made last year - back in 2007. Then, last fall - as Slate discovered - Hutchinson "called" the market bottom.

Now investors face an unpredictable stock market that's back-dropped by an uncertain economy. No matter. Hutchinson has developed a strategy that's tailor-made for such a directionless market, and that shows investors how to invest their way to "Permanent Wealth" using high-yielding dividend stocks, as well as gold. Just click here to find out about this strategy - or Hutchinson's new service, The Permanent Wealth Investor.]

Thursday, May 21, 2009

Canada's recession, likely its deepest since the Great Depression, may also be its shortest

OTTAWA -- Canada's recession, likely its deepest since the Great Depression, may also be its shortest.

Bloomberg News Published: Wednesday, May 20, 2009

Rising home and car sales, unexpected gains in building permits and employment, easing credit conditions and higher commodity prices signal Canada's slump may be nearing an end. Eight of 11 economists surveyed by Bloomberg this month predict the economy will return to growth next quarter.

"It doesn't feel quite like it's over yet, but people are breathing a little bit better," said Russ Girling, president of pipelines at TransCanada Corp., the country's biggest pipeline company, which recorded a 12% rise in revenue in the first quarter.

All but one of the country's five post-Second World War major recessions have lasted at least one year, with the shortest in 1957 at nine months, according to Philip Cross, who tracks the country's business cycles for Statistics Canada.

Canada's economy contracted at a 3.4% pace in the last quarter of 2008 and growth in the first quarter may shrink at a 7.3% rate, the Bank of Canada estimates.

The U.S. recession started in December 2007, according to the National Bureau of Economic Research, the arbiter of U.S. business cycles. Statistics Canada, which defines a major recession as a slump in which both employment and output post annual declines, has yet to date the start of Canada's recession, Cross said. The Bank of Canada has said the country entered into a recession in the fourth quarter of last year.

No Bailouts

While Canada has suffered from falling U.S. demand for exports, the country's banks have largely avoided credit losses. No government money has been given to any of Canada's 21 banks since global credit seized up in August 2007. The U.S. government oversees about US$200-billion in investments in banks through the taxpayer-funded Troubled Asset Relief Program.

Canada's housing market has also held up better than in the U.S., where prices declined 18.6% in February from a year earlier, according to the S&P/Case-Shiller index of 20 major cities. Average resale home prices in Canada dropped at less than half that pace during the same period, according to the Canadian Real Estate Association.

"We may not be in a recovery, but I think we might be in a position where it's not getting worse, where it's truly plateauing," Prime Minister Stephen Harper said in a May 8 interview, adding he'd like another "month or two" of data before coming to that conclusion.

Canada's benchmark Standard & Poor's/TSX Composite Index has posted a 50% gain in U.S. dollars since its low on March 9, compared with the 34% gain for the Standard & Poor's 500 Index over the same period.


Economists surveyed by Bloomberg this month said they expect Canadian growth to rebound at an annual pace of 0.5% in the third quarter and by 2% in the fourth quarter.

"In February, the rapid decline in demand had come to an end and by April, the rapid declines in employment had come to an end," Cross said. "Was that a temporary end or not? We don't know."

While Canada's jobless rate is at a seven-year high of 8%, the economy in April created new jobs for the first time in six months and sales of existing homes rose the most in more than five years. Credit markets are also improving. The Bank of Canada's composite index of financial market conditions is at its strongest since September.

Improved credit markets have allowed companies such as Enbridge Inc., the biggest transporter of oil to the U.S. from Canada's oil sands, to move ahead with the new debt sales to finance operations. Enbridge sold $400-million of bonds last week.

'Cross Our Fingers'

"Our approach is to watch for windows when we think there are opportunities to raise capital funds," said Richard Bird, Enbridge's chief financial officer. "This is a window and let's cross our fingers and hope that it's a trend."

A quick end to the recession would raise pressure on the Bank of Canada, led by Governor Mark Carney, to say it no longer plans to keep its benchmark lending rate near zero through June 2010. The country's central bank projected last month the economy will contract four consecutive quarters, bringing it closer to the average length of the last five major recessions.

"The Bank of Canada will have to revisit their own view of what they will do with interest rates," said Paul-Andre Pinsonnault, an economist at National Bank Financial. "GDP will be stronger than what they are looking for."

A quick end to the recession doesn't guarantee a strong rebound. DBRS Ltd., a rating company, predicts an L-shaped recovery for Canada, which it defines as "a prolonged period of flat or slowly improving performance."

"The earliest I can see an improvement is in October or November," said Jacques Plante, chief financial officer of Hart Stores Inc., a discount retailer. "I can't imagine we'll have anything positive this summer."

Tuesday, May 19, 2009

Chrysler, GM Dealer Cuts Point to More Rough Times Ahead for U.S. Automakers

By William Patalon III
Executive Editor
Money Morning/Money Map Report

Just days after Chrysler LLC said it would be cutting one quarter of its auto dealerships, 1,100 General Motors Corp. (NYSE: GM) dealerships have reportedly been told not to expect a relationship with the embattled U.S. carmaker after October 2010.

GM dealers targeted for separation were informed by letter over the weekend, Reuters reported.

The eradication of hundreds of hundreds of American auto dealerships is merely the latest development in the ongoing dismantling of the so-called U.S. “Big Three’’ – a process that seems likely to leave Ford Motor Co. (NYSE: F) as the last American automaker standing.

“These companies are making up for now for what they have avoided doing for years, if not decades,” industry analyst John A. Casesa, managing partner of consultantcy Casesa Shapiro Group LLC, told The New York Times. “And if the market doesn’t stabilize, this may only be Phase I.”

The moves will clearly change the entire auto-purchasing landscape for U.S. consumers. All told, nearly 800 dealers selling Chrysler brands were given notice that they would be cut off next month. These dealers represent about a quarter of the 3,200 in Chrysler’s dealership network, but account for only 14% of the company’s sales.

Without the dealership cuts, U.S. automakers will likely see their troubles continue. For instance, in its bankruptcy filing, Chrysler says it needs to streamline its distribution-and-sales operation to become more competitive. The current Chrysler dealership sells 303 vehicles per year, compared with 1,219 for a Honda (NYSE ADR: HMC) and 1,292 for Toyota. (NYSE ADR: TM).

GM is looking to close as many as 2,600 of its dealers – about 40% – by 2010. This weekend, it notified the first 1,010 that their franchise deals with General Motors would not be renewed after they expired in October. The other dealerships that will get cut are those that sell such brands as Hummer and Saturn – brands that GM plans to divest.

Both Chrysler and GM have been subsisting on government loans for months.

Just a few years ago, U.S. auto dealers were selling an aggregate 16 million vehicles annually. But after the biggest drop in vehicle sales in a quarter century, dealers are now struggling to even reach the 10-million-vehicle mark.

The letters to GM dealers did not specifically say the company would be filing for bankruptcy, but the move indicates that could well happen next month, which is when the longtime No. 1 U.S. automaker is due to submit a restructuring plan to U.S. President Barack Obama, The Times reported.

In fact, General Motors sales chief Mark LaNeve told reporters on a conference call that carrying out the plan without the benefit of bankruptcy-court protection would be nearly impossible, since state franchise laws make it "onerous and expensive" for manufacturers to force dealers out of business. Wrapped in the cloak of bankruptcy protection, however, the dealership contracts can be nullified, the The Wall Street Journal said.

Chrysler on Thursday asked its bankruptcy judge, U.S. Justice Arthur J. Gonzalez, to hold a hearing on June 3 to allow the company to reject its “contracts and unexpired leases with certain domestic dealers.”

At a time when the falling earnings are continuing to push U.S. companies to make deep job cuts, the dealership closures will add to the national rise in joblessness. The National Automobile Dealers Association (NADA) has estimated that all dealership closings – including those already announced by Chrysler and GM – could cost the U.S. economy 187,000 jobs – or more than the total U.S. employment of the two companies.
Market Matters

When the government was “forced” to help resolve the global financial crisis with bailouts and stimulus packages, analysts hoped for the best (economic and market recoveries) and feared the worst (overreach or even socialism).

To date, some signs have emerged that the recession may be nearing an end, though naysayers also warn about the ramification of “excessive” intervention.

On that note, the Obama administration has begun talks about a complete overhaul of the compensation structure for the entire financial services industry, a move that could even impact employees at institutions that did not accept bailout moneys. While some believe the current system rewards short-term goals in lieu of longer-term performance, many still feel the government is overstepping its bounds.

President Obama’s administration also announced plans to regulate certain derivative securities, many of which have done considerable damage to the balance sheets of the world’s leading institutions. While many “experts” agree greater transparency and oversight may have prevented some of the carnage, others worry that over-regulation is never a good things and efforts to improve the system actually may have the exact opposite impact. Stay tuned.

With the much-ballyhooed stress-tests in the books, banks moved to raise capital with US Bancorp (NYSE: USB), Capital One Financial Corp. (NYSE: COF), and Bank of NY Mellon Corp. (NYSE: BK) among those issuing $1 billion to $2.5 billion in new stock (and diluting current shareholders).

In fact, US Bancorp expects to be the first major institution to repay Troubled Asset Relief Program funds over the next few weeks. Meanwhile, as banks begin to move off the Treasury’s coffers, insurance companies become the latest recipients as The Hartford now is eligible for a $3 billion-plus government infusion with others to follow. Automakers continued their cost-cutting moves as both GM and Chrysler started saying goodbye to large percentages of their dealers (and perhaps another 150,000 in related workers), while Ford raised about $1.6 billion through a 300,000-share offering of its own. GM’s share price fell into penny stock territory for the first-time since 1933 as bankruptcy becomes an even greater likelihood.

On the earnings front, Macy’s Inc. (NYSE: M), JC Penney Co. Inc. (NYSE: JCP), Liz Claiborne Inc. (NYSE: LIZ), and Sony Corp. (NYSE ADR: SNE) all posted disappointing results, a sign that retailers have yet to overcome the ongoing consumer negativity. While Wal-Mart Co. Inc. (NYSE: WMT) continued to outshine rivals, its earnings were negatively impacted by currency translation.

Both SAP AG (NYSE ADR: SAP) and Intel Corp. (Nasdaq: INTC) expressed optimism about the future for techs as phrases like “bottomed out” and “glimmers of hope” brought renewed investor confidence, though the latter was greeted with a $1.45 billion record fine in Europe over sales and marketing abuses. Microsoft Corp. (Nasdaq: MSFT) announced its first debt offering in its 36-year existence and some expect the tech giant to explore acquisition opportunities.


Year Close (2008)

Qtr Close (03/31/09)

Previous Week

Current Week

YTD Change

Dow Jones Industrial












S&P 500






Russell 2000






Fed Funds





0 bps

10 yr Treasury (Yield)





+88 bps
Economically Speaking

Yep, the consumer is a fickle sort. In fact, consumer statistics are quite fickle these days as well. A few weeks back, same store sales for April showed enhanced retail activity, a strong sign for the consumer-driven economy. Well, this past week, the U.S. Commerce Department reported that April retail sales actually fell by 0.4%, a worse than expected showing and the eighth decline over the past 10 months. Before analysts could express renewed doubt about any pending recovery, Redbook Research threw even more confusion into the equation by reporting that chain-store sales climbed 0.1% during the first week in May and bested Wall Street expectations.

Additionally, the University of Michigan Sentiment Index reached its highest confidence level since September 2008. As long as the labor picture remains bleak, however, consumer activity may vary from one month (week) to the next as many folks remain hesitant to spend and continue saving for that rainy day.

The inflation gauges calmed down those deflation naysayers as the producer price index (PPI) climbed in April on rising food prices and the consumer price index (CPI) was reported as unchanged last month. Additionally, as oil prices creep a tad higher, the threats of (economy-hurting) price declines lessens; therefore, analysts can focus on other more pressing matters (like labor, manufacturing, housing, retail, etc.) and leave the (soon-to-come) inflation hysteria for another day. Of note, RealtyTrac reported foreclosures soared by over 30% last month as unemployed homeowners struggle to make their mortgage payments.

Weekly Economic Calendar




May 12

Balance of Trade (03/09)

First increase in deficit in 8 months

May 13

Retail Sales (04/09)

Surprisingly weak 0.4% decline in activity

May 14

PPI (04/09)

Rising food costs led to higher than expected number

Initial Jobless Claims (05/09/09)

Claims rose more than expected

May 15

CPI (04/09)

Unchanged from last month

Industrial Production (04/09)

6th straight monthly decline

The Week Ahead

May 19

Housing Starts (05/09)

May 20

Fed Policy Meeting Minutes

May 21

Initial Jobless Claims (05/16/09)

Leading Eco. Indicators (04/09)

[Editor's Note: When it comes to banking or global economics, there's literally no one better than Money Morning Contributing Editor Martin Hutchinson - a former investment banker with more than a 25 years experience. Hutchinson has proven himself to be a market maven and he is currently offering investors an opportunity to make $4.201 in cash in just 12 days. You can also subscribe to Martin's new investment service, The Permanent Wealth Investor, by clicking here .]

Saturday, May 16, 2009


I have been following Jon for several years and his topics are exactly what his website is "NO MORE FAKE NEWS"

Jon Keep up the great news. People all over the planet should now WHAT'S REALLY HAPPENING.

MAY 9, 2009. My new FREE telephone seminar, THE SHAPE OF THE NEW PLANET, will take place on Wednesday May 20, at 6:30PM Pacific Time.

To sign up, just click on the “Jon Rappoport Free Seminars” banner. If you’re reading this as an email and the banner didn’t come through in your email, go to my site, and you’ll see it.

The live seminar is free. If you don’t attend the call and want the mp3, you’ll have to pay for it.

In this seminar, I’ll lay out the guiding principles and assumptions of the old planet, the one that has existed up until now. I’ll paint a picture of what the new planet could look like, if enough people change their assumptions.

One of the best sources on old and new planet is Buckminster Fuller. He spent much of his life delineating the differences. Bucky was the best kind of radical thinker. He didn’t let cynicism stand in his way. He didn’t try to figure out what “limited choices” were available to the human race. He just jumped in with both feet. He worked from an innate faith in human possibilities.

Bucky also saw where certain trends were taking us, and how we could use those trends to re-frame the whole human condition.

There are two major forces that need to be considered in any vision of the future. One: what capabilities the human race has developed that can be turned to good use for the whole population of Earth. And two: how to protect the freedom and power of the individual along the way.

These are not easy questions. But approaching them head on offers the chance of a dialogue on where we are going in the next ten, 20, 50, 100 years.

In the seminar, I will approach these questions directly. I hope you’ll be there. And I hope you’ll invite your friends to be there, too.

In one part of our minds, we think “a vision of the future” is a useless fantasy. But in another part, we all want to realize a vision. It’s this second part I’m interested in and will address in the seminar.


Wednesday, May 13, 2009

The Six Ways to Play Canada’s Oil Sector

By Martin Hutchinson
Contributing Editor
Money Morning

With oil finally trading back above the $50-a-barrel level, it's time to recognize that crude prices are probably not going to remain low for very long, and may end up fluctuating in the $50-$80 range - regardless of what happens to the prices of other commodities.

After all, the economies in both China and India are apparently continuing to grow at a fairly rapid pace, and those countries' demand for transportation and other forms of energy are thus likely to keep pace. For some minerals, the period of high prices from 2005 to 2008 has produced a surplus. But no such effect has been seen in the oil market, as large new discoveries are hard to find.

If we've learned anything in the last few years, it's that political risk is very important in oil investments. It's not just a question of outright nationalization - as is true in Venezuela. Other greedy countries, like Nigeria, boosted the royalties payable when oil prices were high, and have shown little willingness to reduce them again now that they have declined.

Hence, it's once again time to look at investments in the one important energy source whose friendliness to the United States and decent quality of governance can be assured.

I'm speaking, of course, about Canada.

Canadian oil-and-gas investments are attractive for three reasons.

* Canada's political stability makes it a buffer against turmoil from less-stable oil sources.
* The country's conventional oil-and-gas sources add substantial capacity at reasonable prices to U.S. domestic oil production; these sources are profitable at almost any plausible oil price.
* And Canada's tar sands in the Athabasca region represent a potential source of oil, with approximately 1.6 trillion barrels of theoretically recoverable reserves. That's potentially larger than the Middle East, but with two major problems: The cost of production is high and the environmental impact could be substantial.

That last point - and the two major problems it identifies - is key. At low oil prices, both factors make tar sands problematic; it is politically more difficult to overcome environmentalist objections if secure oil sources do not appear a priority. However, at high prices, environmentalist problems go away, although they may add to extraction costs. However, if prices escalate rapidly, extraction costs also tend to escalate, so oil-shale-producers reaped less of a bonanza than they might have in 2007-2008.

Now that oil prices have stabilized, the cost increase has slowed, so that (for example) Suncor Energy Inc.'s (NYSE: SU) tar-sands-production costs in this year's first quarter rose only 6% from the previous year, hitting $28 per barrel. Since oil prices are currently around $58 a barrel, that leaves plenty of profit margin.

The Canadian oil business is still rather more entrepreneurial than the international majors - Calgary is that kind of place. I remember an instance when I was working as a banker back in the 1980s. I'd spent the weekend in New York with my girlfriend, and then turned up for a scheduled Monday lunch with some oilmen at the Ranchmen's Club. Not thinking, I'd ordered my normal urban cocktail, an Apricot Sour. This was quite rightly treated with great derision, and I was firmly presented with a bullshot (vodka and beef bouillon) - in a pint beer mug! Got the deal, I'm proud to say, but was pretty worthless for the rest of the day.

The message: Investing in Calgary oil is a little like dining at the Ranchmen's Club; you have to have certain qualities of fortitude and stamina!

Canadian oil companies you might look at include the following (when looking at earnings, the first quarter of 2009 is a good guide; 2008 is all over the place because of the bizarre behavior of oil prices):

Canadian Natural Resources Ltd. (NYSE: CNQ): Primarily a conventional oil producer, this company's operations are centered on Western Canada, the North Sea and offshore West Africa (Gabon), though it is also building an oil sands plant north of Fort McMurray, Alberta. It is trading at about 14 times earnings when you strip out misguided risk management, and about 80% above book value. It's over-leveraged, too. Conclusion: A decent company, but pricey.

EnCana Corp. (NYSE: ECA): North America's largest natural gas producer and conventional oil producer, with operations in Western Canada, offshore Nova Scotia and the Western United States. It is a leader in oil recovery through steam-assisted natural drainage. Based on first-quarter earnings, its Price/Earnings (P/E) ratio is about 9, and its Price/Book (P/B) ratio is about 1.7. It has only moderate leverage. Conclusion: This one looks like a decent value; it even pays a semi-respectable dividend, yielding 2.8%.

Imperial Oil Ltd. (NYSE: IMO): Majority-owned by ExxonMobil Corp. (NYSE: XOM). Even though it's now headquartered in Calgary, Imperial is the least Calgary-ish of Canada's oil majors. It owns 25% of Syncrude Canada Ltd., the oldest tar sands project, and also explores for and produces conventional oil in Western Canada and in the offshore Atlantic provinces. Imperial also refines and markets petroleum, owning a chain of service stations and convenience stores, and produces petrochemicals. It experienced a sharp drop in first-quarter earnings, its P/E based on the lower first-quarter results is about 40, with the stock trading at four times book value. Conclusion: Overpriced.

Nexen Inc. (NYSE: NXY): The former Canadian arm of Occidental Petroleum Corp. (NYSE: OXY), it owns 7% of Syncrude and another (Long Lake) start-up tar sands project, and has oil producing operations in Yemen, the North Sea, the Gulf of Mexico, Colombia and offshore West Africa. Its P/E is about 20 based on first-quarter results and it is very over-leveraged. Conclusion: Given the non-Canada risk, not very attractive.

Suncor Energy Inc. (NYSE: SU): A major tar sands play, Suncor has now agreed to merge with Petro Canada (NYSE: PCZ), a deal that's expected to close in the third quarter. Suncor also produces natural gas in Western Canada and operates refineries. Petro Canada has tar sands, natural gas, pipeline and retail operations. It is priced at about 30 times annualized first-quarter operating earnings, but oil prices are up about $10 since then (which should boost its earnings), and its tar sands production is ramping up. Conclusion: At 2.3 times book value, with a respectable balance sheet, it's a decent bet on oil's growth sector.

Talisman Energy Inc. (NYSE: TLM): The former BP Canada (NYSE ADR: BP), it was spun off in 1992, grew through acquisitions, and now has a diversified portfolio of holdings. It's active in Western Canada, the Western United States, the United Kingdom (including a wind-farm operation), Norway, Colombia, Peru, Algeria, Tunisia, Indonesia, Malaysia, Vietnam, Australia and Qatar. It has sold $2.5 billion worth of operations to raise cash. Talisman has a P/E ratio of about 8, based on its first quarter, or 11, based on continuing operations in that quarter. It has a P/B ratio of about 1.4, and only moderate leverage. Conclusion: An iffy company in terms of quality, but cheap, and is thus worth a look.
ow reached last month.

[Editor's Note: When it comes to banking or global economics, there's literally no one better than Money Morning Contributing Editor Martin Hutchinson - a former investment banker with more than a 25 years experience. Hutchinson has proven himself to be a market maven and he is currently offering investors an opportunity to make $4.201 in cash in just 12 days. You can also subscribe to Martin's new investment service, The Permanent Wealth Investor, byclicking here .]

Monday, May 11, 2009

Census Hiring and Reporting Methods Minimize April Unemployment

By Don Miller
Associate Editor
Money Morning

Employers cut 539,000 jobs in April, the lowest total in six months, but the Labor Department said the unemployment rate still soared to 8.9%, from 8.5% in March. While some analysts viewed the latest report as a sign of a nascent economic recovery, the unemployment numbers are almost certain to head higher before the recession is declared over.

Last week’s report could have been worse if the numbers hadn’t been held in check by a burst of federal government hiring of temporary workers to prepare for the 2010 Census.

The report was also skewed by the way the government categorizes the unemployed. As Money Morning previously reported, if laid-off workers who have given up looking for new jobs or have settled for part-time work are included, the numbers skyrocket.

In fact, if the latest unemployment report had included those workers, the rate would have soared to 15.8% in April, the highest on records dating back to 1994. The total number of unemployed now stands at 13.7 million, up from 13.2 million in March.

The data released Friday wasn't as high as the 620,000 job cuts that economists were expecting, but the payroll figures for March and February were revised to show 66,000 more job losses than previously reported.

The report showed job losses across almost all sectors of the economy, but at a slower pace than previous months. The manufacturing sector lost 149,000 jobs in April, after cutting 167,000 the prior month. Construction industries cut 110,000 jobs after shedding 135,000 in March.

The service industry, responsible for roughly 90% of economic activity lost 269,000 jobs after eliminating 381,000 in March.

The one bright spot was government hiring, with public payrolls soaring by 72,000 after the U.S. Census Bureau began hiring 140,000 temporary workers last month to produce the population count that comes once every 10 years. It will hire more than 1.4 million people to conduct the survey over the next year.

Even though unemployment rolls are now at the highest level since September 1983, many analysts believe the numbers signaled the economy's steep decline may be easing.

“We appear to have passed the point of the most severe job losses,” Dean Maki, co-head of U.S. economic research at Barclays Capital PLC (ADR NYSE: BCS) in New York told Bloomberg News. “It’s still a weakening labor market but it’s weakening less fast. There are a few headwinds to growth, and a recovery will” likely be “modest.”

The worst financial crisis since the 1930’s has taken a steep toll on U.S. workers and companies, and most economists expect the unemployment numbers will get worse as the housing, credit and financial sectors sort out the mess. The jobs numbers usually don’t rebound until well after an economic recovery begins.

Government “stress tests” to determine whether 19 of the largest U.S. banks had enough capital to weather further economic turmoil used an “adverse scenario” that included an average unemployment rate of 8.9% in 2009 and 10.3% next year. But economists projected in an April survey that the jobless rate would rise to 9.5% by year-end, Bloomberg reported.

In the coming months, economists expect job losses to continue for most — if not all — of this year. But some are hopeful the cuts won't be as deep.
"There are glimmers of hope. We are moving in the right direction in terms of layoffs. They are measurably less bad than what we've been through," Mark Zandi, chief economist at Moody's, told the Associated Press.

The biggest impact of job losses on the economy is the threat to consumer spending, the engine that drives 70% of Gross Domestic Product (GDP). After a first-quarter rebound, Americans could retrench again this quarter before spending shows sustained gains in the second half of 2009, according to economists surveyed by Bloomberg last month.

Joel Naroff of Holland, Pennsylvania-based Naroff Economic Advisors, thinks the numbers will be good for consumer confidence, which should help spending. In a note to investors, Naroff said the unemployment numbers are the latest in a long string of good news/bad news economic reports.

“This is a truly awful report that will likely be taken as a good report because the job losses have slowed,”he said. “As long as we continue to see the silver lining in the black clouds that overhang the data, then confidence will build. It does look as if we are falling more slowly and we are likely to hit bottom reasonably soon, at least as far as economic growth,”

The job cuts continued this week as steelmaker Severstal International (MCX: CHMF) said it's shutting plants in Wheeling, W.Va., and Warren, Ohio, forcing 3,100 layoffs due to the pullback in the steel industry.

E.I. duPont Nemours & Co. (NYSE: DD), the third-biggest U.S. chemical maker, plans to eliminate an additional 2,000 positions, while Microsoft Corp. (NASDAQ: MSFT) started laying off some of the 5,000 job cuts it announced earlier this year and left the door open for more in the future.

“We will continue to closely monitor the impact of the economic downturn,” Microsoft Chief Executive Officer Steve Ballmer said in a e-mail obtained by Bloomberg News. Redmond, Washington-based Microsoft will, “if necessary, take further actions on our cost structure including additional job eliminations.”

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever. Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation". "The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out the latest report and find out how you can profit.]

Friday, May 8, 2009

By Keith Fitz-Gerald
Investment Director Money Morning/The Money Map Report

As deep as the U.S. auto industry's financial crisis seems to be, there may actually be a fairly simple solution. Sell out to China. Nearly a decade ago, I warned that Detroit's Big Three, General Motors Corp. (NYSE: GM), Ford Motor Co. (NYSE: F) and Chrysler LLC had better learn to speak Chinese if they wanted to survive. I've repeated that warning many times since. Now, it appears that the idea is finally entering mainstream thought. China may well be Detroit's lifeline. From some ñ chiefly those who don't understand that Detroit has largely failed to make a passing grade in an increasingly global economy ñ my warnings have attracted a lot of criticism. That's unfortunate, because by adopting such a defensive posture, these critics have missed the real point I was making: Chinese companies would initially have no interest in taking over Detroit, but over time would likely demonstrate a deep interest in acquiring key parts of the U.S. auto sector ìvalue chainî that could support the expansionist efforts of their domestically produced brands. Distribution channels would be very attractive. And so would auto-parts producers, since they are a key element of such post-purchase ìaftercareî initiatives as maintenance and repair. The only real question, I noted at the time, was how big the lag would be between Chinaís acquisition of the U.S. auto-parts companies and the international expansion of its own brands. Absent the current financial crisis, I estimated the lag would have been five to 10 years. Now, however, that lag time has dropped to as little as five years. The reason: The financial crisis has eviscerated the market values of so many Western companies, creating bargain-basement opportunities for cash-rich Chinese companies that are so alluring that they were unfathomable a decade ago. Events are playing out just as I predicted. Enter the (Red) Dragon

Back in November, as GM and Chrysler tottered on the bring of complete collapse ñ and after Japanís Toyota Motor Co. (NYSE ADR: TM) had reportedly considered, and ruled out, the purchase of one, or both, of these carmakers ñ Chinaís SAIC Motor Co. Ltd. and Dongfeng Automobile Co. Ltd. ñ were reportedly working on a play to buy the two embattled U.S. firms, Huliq News and the 21st Century Business Herald both reported. Said one China auto-industry executive (who requested anonymity): ìWe really want to acquire some of our global counterpartsí core technologies now, because prices are so low.î His sentiment was echoed by Xu Liuping, chairman of Chongqing Changan Automobile Co. Ltd., Mainland Chinaís fourth-largest automaker, who recently said that ìthe longer the [global financial] crisis lasts, the bigger the chance of [a] failure or [of] a scale-down of some American and European carmakers.î For the most part, Chinese companies are still learning to do business overseas. They are not yet comfortable leading the charge in overseas markets, which is why so much of their overseas expansion efforts and shopping sprees remain largely confined to natural-resource sectors and, in the auto sector, auto-parts players. Top-tier managers of China-based companies recognize that the acquisition of overseas assets can strengthen their companyís domestic competitiveness. And with a market as big as Mainland China, thatís logical. But what might not occur to Western business leaders is that Chinese executives donít yet view themselves has having global-branding expertise, particularly when it comes to the so-called ìdesign elements.î Sign up below... and we'll send you a new investment report for free: "Credit Crisis Report."

Monday, May 4, 2009

Market Moves Will Remain on Hold Until Bank Stress Test Results Are Released Thursday

By William Patalon III

Barring some dramatic – and unforeseen – news this week, expect investors to tread water until Thursday, when the government is expected to release the results of the bank stress tests it conducted on the 19 largest U.S. banks.

The stress-test results are expected to show that the 19 banks may have to raise between $100 billion to $150 billion – or even more – in new capital. Investors will cause the shares of the strong players to zoom northward, and will likely savage the shares of the weakest players.

"I can’t think of a time since I’ve been watching banks when there’s been so much uncertainty about the true value of a key set of assets," Douglas Elliott, a fellow at the Brookings Institution, a Washington think tank, told Reuters.

The U.S. bank stress tests have transfixed the world financial markets for weeks, exacerbating the ongoing financial crisis – worsening the U.S. recession and shaking economies around the world. That’s escalated the burden on the still-new Barack Obama administration and on the U.S. Congress.

The banks being tested include Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC), and Goldman Sachs Group Inc. (NYSE: GS). All told, the 19 banks hold two-thirds of total U.S. bank assets.

"Most banks will have to raise capital in some form," Friedman, Billings, Ramsey Group Capital Markets Group (NYSE: FBR) managing director Paul Miller told Reuters. "The capital raises will be much bigger than people think."

Miller said that uncertainty about what the tests might reveal has made banks stocks "uninvestable" in the near term.

The issue for investors is that “you just don’t know how the government is going to view it," Miller said.

Public release of the stress test results is set for Thursday. The government is scheduled to brief the top officials of the banks themselves tomorrow (Tuesday).

Although all but one of the 19 major U.S. banks the government has stress-tested reportedly passed, many skeptics believe the banks are still using all sorts of accounting dodges to keep from revealing just much they still hold in toxic assets and bad loans, National Public Radio reported.

Friday, May 1, 2009

Secretive Bank Stress Tests Heighten Investor Stress

By Shah Gilani
Contributing Editor

The bank stress test of the nation’s 19-largest financial institutions is a flawed exercise that threatens to elevate the very economic-system stress it was designed to relieve.

The U.S. Treasury Department isn’t scheduled to release the results of the much-ballyhooed bank stress tests until Monday. Little has been revealed so far, but one fact seems certain: Whatever information is disclosed is likely to be either too much - or even more likely - not enough for analysts, investors and the public to determine the soundness of a banking system upon which the nation’s economic growth is predicated.

We’re already starting to see bits and pieces leak into the public domain. And the response hasn’t been positive.

Although the tests reportedly concluded that only one of the 19 banks that received a stress test would require additional capital, the government’s own bailout-fund watchdog has questioned whether it was really much of a test at all.

The reason: The “adverse scenario” used for the test was “disturbingly close” to current economic conditions, said Elizabeth Warren, the chairperson of the Congressional Oversight Panel for the Troubled Asset Relief Program, and a frequent critic of the government bailout programs.

Now the government is urging foundering giants Bank of America Corp. (BAC) and Citigroup Inc. (C) - which have already taken in a combined $95 billion in taxpayer-provided bailout money - to raise more capital. Flawed Assumptions Lead to Flawed Results

As outlined to the public, the stress tests were to pre-suppose a set of declining economic circumstances that would negatively impact bank balance sheets. For example, one scenario assumes that U.S. unemployment rises to 10.3% by the end of 2010. How or why the 10.3% assumption was chosen - as is the case with other scenario parameters - is unknown and is supposedly not to be revealed.

The assumption of testing through the end of 2010 means only that a two-year window was established for definitive calculations. Under this scenario, examiners assumed two-year cumulative losses of 8.5% on mortgage portfolios, 11% on home-equity lines of credit, 8% on commercial and industrial loans, 12% on commercial real estate loans, and 20% on credit card portfolios. The results are then totaled and weighed against assumptions - again unknown - about the capital positions of the banks at that time.

The fact that the assumptions themselves are a constantly moving target in our current crisis doesn’t lend comfort to any baseline conclusions that may be reached. On the other side of the equation, the tests don’t assume any revenue forecasts - either negative or positive - and may not assume further equity capital destruction or changing capital structures at the banks.

The idea is to take an expansive look at capital adequacy in the face of inherent credit risks, and exposure to off-balance-sheet liabilities, derivatives, or counterparty agreements. Once those risks are quantified, the government examiners will attempt to determine about how much capital is needed to support bank balance sheets and fluid liquidity. The net result of the tests is to identify which banks need to raise additional capital now to meet assumptions that may never happen, or may in fact be more destructive than assumed.

What’s missing, unfortunately, is an assumption of how much additional capital would be necessary to facilitate credit expansion - which, in turn, would serve to fuel economic growth. That, after all, should be the ultimate stress-test objective.

In fact, the key problem with the whole stress-test exercise is that it does nothing to improve financial-system transparency - something I’ve said would be key to a true reformulation of the U.S. banking system. As currently conceived, there will be no clear assessments possible as a result of these tests upon which private investors can rely to provide the necessary capital to make up for any shortfalls. The stress tests may, in fact, have the opposite effect - and could discourage new equity investment in any of the banks.
Where Are the “Toxic Assets” Hiding?

Whatever is revealed through the convoluted prism of the stress tests should be compared to the relatively straightforward data available from other institutions, such as the Federal Deposit Insurance Corp. (FDIC). The FDIC’s “Quarterly Banking Profile” offers a cut-and-dried summary of financial results for all FDIC-insured institutions.

According to The Financial Times‘ review of the data as of Dec. 31, loans outstanding were $7.87 trillion. The Times noted that Goldman Sachs Group Inc. (GS) economists estimate the shortfall in Tier 1 capital, given certain liberal assumptions, to be at least $753 billion.

The International Monetary Fund (IMF) has estimated that the potential losses of U.S.-originated credit assets held by banks and financial institutions around the world is $2.7 trillion, The New York Times said last week. While the percentage of those losses that sit directly on the books of U.S. banks isn’t known, it is widely assumed that the value of impaired assets exceeds $1 trillion. To further complicate and obfuscate necessary transparency, new accounting rules replace mark-to-market reality with subjective internally modeled accounting of the value of distressed assets. And until those unidentified and convolutedly accounted for assets are removed from bank balance sheets, they will weigh down the worldwide banking system for years to come.

Perhaps the greatest danger the stress tests will cause may result from seemingly healthier banks pressuring the government to take back taxpayer-funded capital, while at the same time facilitating a dangerous lopsidedness to the entire banking landscape.

The fallacy that some banks are doing well and want to pay back government money is easily pierced. Whether it’s for general liquidity, for credit spreads, or to backstop their efforts to raise additional capital, the truth is that there isn’t a single bank that isn’t currently using government support in some form. The only way to determine if a bank is healthy is to require it to stand entirely on its own and to not incorporate any cheap government capital or any government liquidity enhancing facility.

That will never happen in the current crisis. No bank is going to give up the preferential, cheaper cost of borrowed money provided by government vehicles when their competitors remain at the trough soaking up cheaper, government-backed capital resources. Until the entire system is self-sustaining, privately funded and supportable - and that distinctly assumes that some banks need to die a quick death and be buried - the system should be looked at as just that - a system.

Attempting to measure the health of every patient in the hospital by sticking a thermometer in only the sickest patients isn’t going to do anything to stem the epidemic. The Treasury Department made a fundamental mistake in offering to reveal the results of stress tests. What it should have done is conduct system-wide tests on all banks, after which it systematically merged and shut down institutions that were either desperately threatened, or downright insolvent.

Yes, equity capital would be lost. But, as a lesson in moral hazard, it would be the clearest signal possible that shareholders are responsible for controlling boards even more so than boards are responsible for controlling management and risks at corporate institutions.

Until private-equity investors are confident that the nation’s sick-and-injured banking patients are truly curable, there will be a decided reluctance to invest necessary capital into an uncertain future.

Nothing has been accomplished by these “stress” tests - except to further stress the banks, as well as the already-badly stressed U.S. economy.