U.S. Stock Markets closed through January 2, 2007

December 29, 2006

U. S. equity markets will be closed on Monday, January 1st, 2007 in observance of the New Year`s Day holiday. The U. S. equity markets will also be closed on Tuesday, January 2nd in observance of the National Day of Mourning for President Gerald R. Ford.

Major U.S. Investors Indices updated: Friday, December 29, 2006, 4:04:57 PM
S&P 500 1,418.30 -0.45%
DJIA 12,463.15 -0.31%
RSL 2K 787.66 -0.86%
NASD 2,415.29 -0.42%

Economic Report December 21, 2006 An Economic Winter Ahead

December 21, 2006

I have posted several articles on this page for your educational purposes. The U.S. Economy and our governments raising debt to, now over $4 trillion dollars, endangers all American citizen's financial future. Please contact your local representitive. Inflation has not slowed. Unemployment is increasing, no matter what they say. Today's stock market action was a reflection of that.

Economic Growth Slows to 2 Percent Pace
Thursday December 21, 10:53 am ET
By Jeannine Aversa, AP Economics Writer

Economic Growth Slows to 2 Percent Pace in Late Summer Held Back by Housing Slump

WASHINGTON (AP) -- Economic growth slowed to a 2 percent pace in the late summer, more sluggish than previously thought, as the real-estate bust weighed on overall business activity.
The new reading on gross domestic product for the July-to-September quarter marked a slight downgrade from the 2.2 percent annual rate estimated a month ago, the Commerce Department reported Thursday.

The economy has been losing momentum all this year. The main culprit behind the third quarter's slowdown was the deepening housing slump.

Investment in home building was slashed at a 18.7 percent rate -- even more than previously estimated -- and the largest cut in 15 years. That shaved 1.2 percentage points off third-quarter growth, the most in nearly 25 years.

Economists were expecting the government's old GDP estimate of 2.2 percent growth for the third quarter to hold.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the country's economic health.

In other economic news, the number of newly laid-off workers signing up for unemployment benefits rose by 9,000 to 315,000 last week, the Labor Department reported. That was in line with economists' projections.

The Conference Board, meanwhile, reported that a gauge of future economic activity advanced 0.1 percent in November, suggesting that the economy will continue to expand in the coming months. That showing also was in line with analysts' expectations.

On Wall Street, stocks mixed with the Dow Jones industrials down slightly and the Nasdaq up a bit.
The new GDP figure underscores just how much speed the economy has lost this year as the crumbling housing market, the toll of the Federal Reserve's two-year credit tightening campaign and once-surging energy prices have crimped economic activity.

In the first three months of this year, the economy grew at a hot 5.6 percent pace, the strongest spurt in 2 1/2 years. However, in the second quarter, growth slowed to a 2.6 percent pace as galloping energy prices and the impact of higher borrowing costs turned consumers and businesses cautious.

Many economists believe the economy stayed lethargic in the current October-to-December period. Forecasts range from a pace of around 1.7 percent to 2.5 percent.

Even with expectations that economic activity will continue to be subpar in the months ahead, most analysts don't expect the economy to fall into recession.

Republicans and Democrats have differing views on the extent to which Americans have benefited from the economic expansion over the last five years.

A top priority for the Democrat-controlled Congress, which convenes in January, will be raising the federal minimum wage from $5.15 an hour to $7.25 an hour. It hasn't gone up in nearly 10 years.

Americans' gave President Bush lower marks for his economic stewardship. The president's approval rating on the economy sank to 38 percent in December, down from 43 percent in November, according to an AP-Ipsos poll.

In the third quarter, consumers boosted their spending at a 2.8 percent pace. That was a tad less than previously estimated and was a factor in the third quarter GDP figure being marked down from last month's estimate. Still, consumers in the third quarter were spending at a slightly better pace than they did in the second quarter.

Business spending on equipment and software, meanwhile, rose at an annual rate of 7.7 percent, stronger than previously thought. Investment in new plants and buildings increased at a brisk pace of 15.7 percent in the third quarter, less than estimated a month ago.

Companies' profits gained ground in the third quarter. One measure showed after-tax profits rising by 4.2 percent. Although that was slightly less than previously estimated, it nevertheless marked a big improvement from the meager 0.3 percent increased logged in the prior quarter.

With corporate profits growing, companies have stayed in a good hiring groove even as overall economic growth has slowed. The nation's unemployment rate stands at 4.5 percent, considered low by historical standards.

As the economy has slowed so has inflation.

An inflation gauge tied to the GDP report showed that core prices -- excluding food and energy -- rose at a rate of 2.2 percent in the third quarter, unchanged from a previous estimate. That was better than the 2.7 percent pace in the second quarter. Energy prices, which had soared in the summer, have since calmed down.

Even with the improvement, though, core inflation is still higher than the Fed would like to see. The Fed, however, predicts that core inflation will move lower in the months ahead as economic growth remains subdued.

Against that backdrop, the central bank has felt comfortable holding interest rates steady, which it has done since August. Before that, the Fed had steadily boosted rates for two years to fend off inflation.

The Fed's goal is to slow the economy enough to thwart inflation, but not so much as to cripple economic activity.

=======

Oil Prices Fall on Forecast
Thursday December 21, 1:22 pm ET
By J.W. Elphinstone, AP Business Writer

Oil Prices Fall After Mild Weather Forecast, Gulf Coast Operations Come Back on Line

NEW YORK (AP) -- Oil prices fell more than $1 a barrel Thursday on forecasts of mild weather for the Northeast and after shipments returned to normal in the Gulf Coast region.

Light, sweet crude for February delivery fell $1.08 cents to $62.62 a barrel by midday in New York trading on the New York Mercantile Exchange.

February Brent crude at London's ICE Futures exchange slipped 36 cents to $62.87 a barrel.
Oil prices came under pressure after the National Weather Service forecast Thursday that temperatures in the Northeast will remain above normal through the first days of January.

Meanwhile, shipping operations along the Gulf Coast returned to normal after more than a week of disruptions due to dense fog. The delivery problem helped to create a big draw down in last week's oil stocks.

U.S. crude inventories plunged by 6.3 million barrels last week from the previous week, the Department of Energy reported Wednesday, much lower than analysts' expectations of a drop between 1.8 million barrels and 2 million barrels.

On the news, the Nymex crude contract had risen 26 cents Wednesday to settle at $63.72 a barrel, a three-month closing high, but market enthusiasm was tempered by expectations that stocks will rebound.

"We could see a build in stocks next week after those supplies are offloaded," said Tom Bentz, a broker at BNP Paribas Commodity Futures in New York. "So the markets are discounting the inventory report. That's the reason the market didn't hold up."

Unleaded gas inventories posted an increase last week, rising by 1 million barrels but still lower than average. Gas futures were trading at $1.6800 a gallon in New York, up less than a cent.
Inventories of distillate fuels, which include heating oil and diesel fuel, also rose last week by 1.2 million barrels and are at average levels for this time of year.

Heating oil futures dropped by more than a penny to $1.7120 per gallon, while natural gas prices rose by 4.1 cents to $6.809 per 1,000 cubic feet.

"Heating oil and crude stocks are currently above levels seen in recent years, however gasoline inventories are 3 percent below the five-year average," said Vienna's PVM Oil Associates of the divergent picture revealed by Wednesday's data.

Crude has been trading between $60 and $64 a barrel since the end of November.

Prices rose $1.41 a barrel last week, mostly because OPEC agreed to cut production by 500,000 barrels a day starting in February. That cut came after the cartel said in October that it would remove 1.2 million barrels a day of production from the market.

While traders were initially skeptical of OPEC's ability to get members to comply with the October cut, a drop in production from most of the cartel's 11 members has given more weight to the last decision.

Associated Press Writer George Jahn in Vienna, Austria also contributed to this report.

=======

Stocks Move Lower After Philly Fed Manufacturing Index Turns Negative
Thursday December 21, 2:11 pm ET
By Tim Paradis, AP Business Writer

NEW YORK (AP) -- Stocks pulled back Thursday after economic data pointing to a slowing economy and weakness in regional manufacturing weighed on investor sentiment in light trading ahead of the holiday weekend.

Stocks, which initially showed little movement, fell after the Philadelphia Federal Reserve's December business index, which gauges regional manufacturing activity, came in at a negative 4.3 compared with a positive reading of 5.1 in November.

Earlier in the session, investors tried to shrug off news that the economy grew at a slower pace in the third quarter than had been estimated. Gross domestic product fell to 2 percent in the third quarter amid a cooling real estate market; the Commerce Department estimated a month ago that the reading would be closer to 2.2 percent.

"I think with the low volume nobody is really around to trade the stuff," said Ryan Larson, senior equity trader at Voyageur Asset Management, a unit of RBC Dain Rauscher. "So I wouldn't put too much credence in this pullback."

In early afternoon trading, the Dow Jones industrial average fell 47.19, 0.38 percent, to 12,416.68.
Broader stock indicators also moved lower. The Standard & Poor's 500 index was down 5.91, or 0.42 percent, at 1,417.62, and the Nasdaq composite index was down 13.24, or 0.55 percent, at 2,414.37.

Bonds rose sharply on the weaker economic data, with the yield on the benchmark 10-year Treasury note falling to 4.56 percent from 4.60 percent late Wednesday. The dollar was lower against other major currencies, while gold prices fell.

Light, sweet crude oil was down $1.02 at $62.70 per barrel on the New York Mercantile Exchange.
Comments from Richmond Federal Reserve President Jeffrey M. Lacker, who has long warned of the threat of inflation to the economy, further dented sentiment Thursday. According to prepared remarks of a speech in Charlotte, N.C., Lacker said: "The risk that core inflation surges again, or does not subside as desired, clearly remains the predominant macroeconomic policy risk."
Larson noted that the comments weren't surprising as Lacker has dissented in the central bank's recent decisions to leave short-term interest rates unchanged.

The Fed left rates unchanged at its last four meetings after raising rates 17 straight times since 2004 in an attempt to cool the economy and curb inflation. Wall Street has been waiting to see whether the central bank can steer the economy toward a soft landing or whether growth will slow too quickly and push the economy into recession.

Though drawing less attention than other economic data out Thursday, a gauge of future economic activity advanced 0.1 percent in November, suggesting the U.S. economy will expand modestly in coming months. The report from the Conference Board, an industry-backed research group, found its Index of Leading Economic Indicators edged up to 138.2 last month following a revised increase of 0.1 percent to 138.1 in October.

David Darst, chief investment strategist at Morgan Stanley's Global Wealth Management Group, contends that investors will study fresh economic data but will try to take stock and look to where markets will be headed next year. "We're going to see mixed trading. I think as we get into the last 10 days of the year, people are trying to weigh and assess what's happened," he said.

Profit reports from drugstore chain Rite Aid Corp. and packaged-food maker ConAgra Foods Inc. offered some support Thursday, underscoring a notion that companies will still squeeze out growth amid a slowing economy.

Rite Aid rose 8 cents to $5.45 after reporting a narrower fiscal third-quarter loss amid stronger pharmacy sales and increased prescription volume. The company reiterated its profit forecast.

ConAgra rose 62 cents, or 2.3 percent, to $27.47 after its fiscal second-quarter profit rose 44 percent. The company, whose brands include Healthy Choice, raised its forecast for the year.
Horizon Health Corp. rose $3.21, or 19.9 percent, to $19.34 after the company, which operates mental health treatment facilities, agreed to be acquired by Psychiatric Solutions Inc. for $321 million plus the assumption of $105 million in debt. Psychiatric Solutions rose $1.31, or 3.6 percent, to $37.39.

Jabil Circuit Inc. fell $2.47, or 9.3 percent, to $24.10 after the company's fiscal first-quarter results disappointed Wall Street despite a 34 percent increase in revenue.

PMC-Sierra Inc., which makes chips used in communications and networking equipment, fell 35 cents, or 5.1 percent, to $6.54 per share, after cutting its fourth-quarter profit forecast.

Financial-services company International Assets Holding Corp. fell $14.28, or 30 percent, to $33.65 after it swung to a fiscal fourth-quarter loss amid volatility in commodity prices.

The Russell 2000 index of smaller companies was down 3.25, or 0.41 percent, at 782.31.
Declining issues outnumbered advancers by about 3 to 2 on the New York Stock Exchange, where volume came to 751.9 million shares, compared with 769.2 million traded at the same point Wednesday.

Overseas, Japan's Nikkei stock average closed up 0.22 percent. Britain's FTSE 100 closed down 0.24 percent, Germany's DAX index was down 0.20 percent, and France's CAC-40 was down 0.07 percent.

New York Stock Exchange: http://www.nyse.com/
Nasdaq Stock Market: http://www.nasdaq.com/

Stock Market Moves on Monday, December 18, 2006

Spot Gold: $ 615.70 and falling
Spot Silver: $12.86/oz
Spot Platinum: $1,099/oz
Crude Oil Futures: $633.06
Gasoline Futures: $ 1.69
Natural Gas Futures: $7.18
Tokyo market ended up.

FOREX-Yen recovers ahead of BOJ, dollar looks to data
Enbridge gets support for $1.3-bln pipeline project

On Monday, investors will closely watch third-quarter U.S. current account deficit data at 1330 GMT, although some may tread cautiously, given November PPI and housing starts due on Tuesday.

Oracle, the world's biggest maker of database software, is expected to report second-quarter earnings of 22 cents per share after the market close, up from 19 cents a year earlier.


Topping Monday's merger stories, U.S. pharmacy benefits manager Express Scripts Inc. (ESRX.O: Quote, Profile , Research) offered to buy rival Caremark RX (CMX.N: Quote, Profile , Research) for about $26 billion, threatening to break up a deal struck last month with CVS Corp. (CVS.N: Quote, Profile , Research).

Working to fend off an $8.4 billion merger bid from US Airways, Delta is expected as soon as Monday to file its sweeping bankruptcy reorganisation plan, the Wall Street Journal said on its Web site.

The WSJ site also reported that private equity firms have been moving into prime position to buy orthopaedics maker Biomet Inc. (BMET.O: Quote, Profile , Research), with an auction for the company now in its final days.
Also on Monday, Bayer AG (BAYG.DE: Quote, Profile , Research) agreed to sell its cellulose products unit, Wolff Walsrode, to Dow Chemical Co. (DOW.N: Quote, Profile , Research) for an undisclosed amount.

Argentina Province Bans Open-Pit Mining

By Jon A. Nones and Karl Heilman
15 Dec 2006 at 08:49 PM EST

St. LOUIS (ResourceInvestor.com) -- The parliament of Argentina’s western province of Mendoza disabled its mining sector this week, voting to suspend all open-pit mining and halted issuing any new exploration and mining permits in the province. A couple of Canadian-listed juniors developing projects in the area felt the repercussions immediately.

The Mendoza Province, famous for its wine making industry and ski resorts, has faced strong environmental opposition. Mining opponents fear the blasting and chemicals used in metals mining could pollute water supplies - especially needed for the Malbec vines grown in the plains below the Andes. The main industry in the area is agriculture.

At a session on Wednesday, lawmakers voted to suspend open-pit metals mining indefinitely because the local government had failed to meet a 30-day deadline to draw up a plan to safeguard the environment from mining projects. Permits for new mining claims were also put on hold as well until the new law is finalized.

Michael Keating, Senior Vice President of Frontier Strategy Group, told RI this is part of a general worldwide trend where state and local authorities try to “wrest control of mining activities and cash flows from mining projects away from central governments.”

“They often use environmental issues as the tip of a wedge that also includes a desire to derive more direct benefit from mining permitting processes, royalties, taxes, etc.,” he said.

CAEM President Martin Dedeu said in a statement, “It is very serious that an industrial and productive activity is being attacked at a time when investment to develop the sector is essential.” But this isn’t the first time environmental opposition has curbed mining in Argentina.

In September 2005, the province passed a law trying to block exploration by Tenke Mining [TSX:TNK] on environmental grounds. Mining exploration was stopped for 90 days while the government tweaked regulations.

In July 2005, lawmakers in the Rio Negro Province, south of Mendoza, ratified a law banning the use of cyanide and mercury in mineral processing. And this year, the governor of Chubut Province enacted a three-year metal mining moratorium, directly affecting Meridian Gold’s [NYSE:MDG; TSX:MNG] Esquel gold project.

“It's clear that miners can no longer simply rely on the word of the national level Minister of Mining but have to include regional and local politicians and other civic leaders in all stages of negotiations,” added Keating. “This is classic stakeholder management, and when not done correctly, disappointing outcomes usually follow.”

However, copper and gold are among the South American country's biggest mineral exports, and official reports predict investment in the sector will top $6 billion between 2006 and 2010.

According to Argentina’s Cámara Argentina de Empresarios Mineros (Chamber of Mining Companies), the law will put at risk more than seven hundred projects, which are currently under development in Mendoza with relative investments of about $1 billion.

Two such development projects are Exeter Resource’s [AMEX:XRA; TSX:SRC] La Cabeza gold/silver project and Global Copper’s [TSX:GLQ] San Jorge gold and copper property, both mentioned in the press by the head of the Provincial Mining Chamber, Roberto Zenobi.

Read the entire article at: http://www.resourceinvestor.com/pebble.asp?relid=27266

The unprecedented diplomatic pilgrimage to China to save the U.S. Dollar

By Peter Schiff
President, Euro Pacific Capital

BEN AND HANK’S NOT SO EXCELLENT ADVENTURE
Friday, December 15, 2006

This week, in what I believe to be an unprecedented diplomatic pilgrimage, the sitting U.S. Secretary of the Treasury and the Chairman of the Federal Reserve were dispatched to China. Ostensibly they were sent to pressure the Chinese into allowing their currency to appreciate against the dollar. In reality, they were more likely sent there to do just the opposite.

Despite the hawkish public tone coming from Washington, the private dialogue was likely to have been far meeker. My guess is that Bernanke and Paulson kowtowed to America’s biggest supplier and largest lender, and pleaded for them to keep the goods and credit flowing. Although it didn’t take place in Macy’s window, the affair may qualify as the “mother of all butt kissings.”

The last thing that Paulson and Bernanke want is for the world to recognize the financial precipice upon which the U.S. economy now teeters, and China’s unique ability to push it over the edge.

It is absurd to imagine that they would actually demand that China revalue its currency. Think about what such a request actually implies. It means that Americans would pay higher prices for the goods they buy and higher interest rates on the money they borrow.

Does anyone really believe that American politicians are in China to demand higher prices and higher interest rates for American consumers? Since such a combination would surely produce a sever case of stagflation, does anyone really believe that Greenspan and Bernanke went to China to demand that they push the U.S. economy into recession?

It is far more likely that they are there to persuade the Chinese to maintain the current currency peg so that Americans can continue to enjoy the artificially high standard of living that the massive subsidy provides. No doubt they will likely try to convince the Chinese that doing so is in their interest as well, though I am not sure just how much longer that dog will continue to hunt.

Once Chinese officials grasp the concept that the only thing standing between their citizens and much higher standards of living is the currency peg, they will abandon it completely. The result will be abundance in China and scarcity in the U.S. China will then be awash in credit and consumer goods while America will be devoid of both and awash in paper dollars.

Think about today’s unchanged reading on November CPI, or Wednesday’s 1% gain in November retail sales. What would happen to the CPI and retail sales if both prices and interest rates surged?

The biggest factor boosting retail sales was the 6.5% gain in consumer electronics. Does anyone want to guess where most of that stuff was made, or how it was paid for? How many big screen TVs could Americans “afford” to buy on credit if both prices and interest rates went up by 25% or more?

As usual, the media interpreted the recent retail sales figures as evidence of a strengthening U.S. economy. Nothing could be further from the truth. Such sales merely reflect the strength of the economies that produced the goods in the first place, not the economy of the nation that went deeper into debt to consume them.

Ironically, during the very week that Paulson and Bernanke were trying to convince the Chinese to keep buying dollars, Alan Greenspan was making a good case why the rest of us should sell. The former Fed chairman, adding his voice to that of his predecessor Paul Volcker, predicted that the dollar’s recent slide would continue for years to come and cautioned that it would be foolish for anyone to keep all of their money in just one currency.

From my perspective it would be foolish for anyone to keep any money in U.S. dollars. If the Chinese come to their senses and pull all that American wool out of their eyes, then look out below.

Before they do protect your wealth and preserve your purchasing power before it’s too late.
Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

Oil jumps after OPEC sets fresh supply cut

Thursday, December 14, 2006

Oil jumps after OPEC sets fresh supply cutCartel has agreed to cut oil output by 500,000 barrels a day, or 2 percent, but not until February.

December 14 2006: 7:22 AM ESTLONDON (Reuters) -- Oil prices jumped on Thursday morning on OPEC's decision to cut oil output by 500,000 barrels a day beginning in February.

Front-month January contracts for U.S. light crude climbed $1.07 to $62.43 a barrel in electronic trading, on top of a 35-cent gain on Wednesday.

In London, Brent crude for January delivery rose $1.09 to $62.42 a barrel.

The U.S. government reported Wednesday that crude stocks fell 4.3 million barrels last week as imports declined, while the International Energy Agency said industrialized countries' crude stocks fell 40 million barrels in October - a trend that continued last month as well.

The numbers strengthened the position of OPEC delegates who preferred to enforce the last cut before adding a new one.

"We are satisfied with the decision we took in Doha," Kuwaiti Oil Minister Sheikh Ali al-Jarrah al-Sabah told reporters, referring to OPEC's emergency gathering in October.

Oil has fallen from a mid-July peak of $78.40 but is still historically high at triple the price at the end of 2001.
Higher Asian demand coupled with worries over supply from Iraq, Nigeria, Iran and Russia helped fuel the rally.

Find this article at:
http://money.cnn.com/2006/12/14/markets/oil.reut/index.htm?postversion=2006121407

Oil Prices Up After US Inventories Decline OPEC ministers say may hold off on more oil cuts
http://today.reuters.com/news/articlebusiness.aspx?type=ousiv&storyID=2006-12-13T175219Z_01_L13135896_RTRIDST_0_BUSINESSPRO-OPEC-MEETING-DC.XML&from=business

Tuesday, December 13, 2006
Reuters.comBy Barbara Lewis

ABUJA (Reuters) - OPEC appeared willing on Wednesday to pull back from more oil output cuts, responding to consumer nation calls to hold off until winter has passed to guard against price spikes that would hurt the world economy.

OPEC, which produces over a third of the world's oil, will hold talks on Thursday to decide whether to curb supplies beyond the 1.2 million barrels per day ministers agreed from November 1.

Some ministers and officials signaled their priority was to ensure compliance with that deal, which succeeded in arresting a 25 percent price slide, before making additional reductions.

"I don't think there will be any cut," the head of Libya's delegation, Shokri Ghanem, told Reuters on Wednesday.
OPEC ministers agree the market is oversupplied -- stocks in top consumer, the United States, are the highest since 1998 for the time of year -- but some fear cutting during peak demand could drive prices further above $60 and hurt consumer nations.

The opinion of leading exporter Saudi Arabia is key in determining OPEC output policy. Oil Minister Ali Al-Naimi told reporters on his arrival the market was in better shape than when ministers last met, at October's emergency talks.

"The fundamentals of the market are much better than they were in October," he said, adding: "We probably have a little work to do to make it an even better, more stable market."

"We have to work together as a team," Naimi said. "We have done well so far, we may have to do some more."

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Expected Supply Drop
By Robert Tuttle
Dec. 13 (Bloomberg) -- Oil futures rose for the first time in four sessions in New York after a government report showed the biggest decline in inventories since July.

Supplies of crude oil fell 4.3 million barrels, or 1.3 percent, to 335.4 million barrels in the week ended Dec. 8, the Energy Department reported today. Refineries operated at 89.1 percent of capacity, 1.4 percentage points less than a week earlier. OPEC ministers meet in Nigeria tomorrow to discuss an output cut to counter higher-than-normal crude inventories.

``I am a bit surprised by the magnitude of the crude draw,'' said Andy Lipow, president of Lipow Oil Associates LLC, a consulting company based in Houston. ``It seems to be very strange that crude drew so much while the refinery operating factor declined as well.''

Crude oil for January delivery rose 35 cents, or 0.6 percent, to $61.37 a barrel on the New York Mercantile Exchange. Prices are up 4.9 percent in the past month.

The decline in crude oil inventories left supplies 13 percent above the five-year average.

Refineries ``are flush with crude,'' said William Adams, chief energy and capital market strategist at LaSalle Futures Group Inc. in Chicago. OPEC ``really needs to cut now because there is no one out there to buy, there is no immediate or short- term demand.''

Crude oil, expressed in euros, has fallen 9.8 percent this year, risen 0.3 percent in yen and has dropped 12 percent in British pounds.

Brent crude oil for January settlement fell 19 cents to $61.33 a barrel on the ICE Futures exchange in London. Today was the eighth straight decline for Brent, the most consecutive daily drops in more than a year.

OPEC Meeting

The Organization of Petroleum Exporting Countries, producer of 40 percent of the world's oil, may postpone deciding on further output cuts at its meeting tomorrow, the group's president, Edmund Daukoru, said today.
``It doesn't have to be a cut,'' Daukoru said in Abuja, Nigeria.

OPEC's basket price, a weighted average of 11 blends produced by OPEC nations, fell 33 cents to $57.41 a barrel yesterday.

``We have probably a little more work to do to make it a better, more stable market,'' said Saudi Arabian Oil Minister Ali al-Naimi. ``The fundamentals of the market are much better today than they were in October,'' al-Naimi told reporters today in Abuja. He declined to say whether he would support a cut.

$60 Is `Fair'

Crude oil at $60 a barrel is ``fair'' to both producers and consumers, Kuwaiti Oil Minister Ali Jarrah al-Sabah said in Nigeria today. Iran and Venezuela have called for further cuts.

Libya's top oil official, Shokri Ghanem, told reporters in Abuja that there is ``no need'' for OPEC to cut output at this meeting and that current oil prices are ``OK.''

The group agreed to trim output by 1.2 million barrels a day last month, citing rising stockpiles. The 11 nations reduced daily production by an average 550,000 barrels in November, according to a Bloomberg News survey of producers, analysts and traders.

``It looks like OPEC ministers have come to an agreement that they aren't going to cut'' until the most recent cut is more fully complied with, said Gordon Elliott, risk management specialist at FC Stone LLC in St. Louis Park, Minnesota.

Fuel Inventories

Supplies of distillate fuel, including heating oil and diesel, dropped 445,000 barrels to 131.9 million barrels, leaving supplies 0.2 percent below the five-year average, according to the Energy Department.
Gasoline inventories fell 174,000 barrels to 199.9 million barrels, leaving supplies 4.1 percent below the five-year average.

``The market is going to be dragged up and gasoline is going to lead the way,'' Lipow said.
Reformulated gasoline, or RBOB, rose 2.5 cents, or 1.6 percent, to $1.6221 a gallon in New York. The fuel is made to be blended with ethanol before delivery to filling stations.

In a report today, the International Energy Agency, an adviser to 26 oil-importing nations, maintained global demand forecasts for 2006 and 2007. It said China's 2006 oil demand growth will be 5.6 percent, down from a previous estimate of 6.2 percent.

Crude oil inventories fell 40 million barrels in October to 2.7 billion barrels, equal to 54 days of consumption, a day less than in September, the IEA said in its report. The agency cautioned that high oil prices could trim demand.

Eni SpA said it restored production at the Okono/Okpoho offshore fields in Nigeria over the weekend, bringing back 55,000 barrels a day. Eni had declared force majeure at the fields, meaning the company could not meet contracts, after armed militants attacked last month.

To contact the reporter on this story: Robert Tuttle in New York at rtuttle@bloomberg.net

Summary of Weekly Petroleum Data for the Week Ending December 8, 2006

U.S. crude oil refinery inputs averaged 15.3 million barrels per day during the week ending December 8, down 169,000 barrels per day from the previous week's average.

Refineries operated at 89.1 percent of their operable capacity last week. However, gasoline production increased last week compared to the previous week, averaging nearly 9.3 million barrels per day, while distillate fuel production declined, averaging over 4.0 million barrels per day.

U.S. crude oil imports averaged 9.6 million barrels per day last week, down 701,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged over 10.0 million barrels per day, 132,000 barrels less than averaged over the same four-week period last year.

Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 967,000 barrels per day. Distillate fuel imports averaged 465,000 barrels per day last week.
U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 4.3 million barrels compared to the previous week.

However, at 335.4 million barrels, U.S. crude oil inventories remain well above the upper end of the average range for this time of year. Total motor gasoline inventories inched lower by 0.1 million barrels last week, and are below the lower end of the average range.

Distillate fuel inventories declined by 0.5 million barrels, and are in the lower half of the average range for this time of year. A decline in high-sulfur distillate fuel (heating oil) inventories more than compensated for a slight rise in diesel fuel inventories (a combination of ultra-low-sulfur and low-sulfur).

Total commercial petroleum inventories fell by 7.5 million barrels last week, and are just above the upper end of the average range for this time of year.

Total products supplied over the last four-week period has averaged 21.0 million barrels per day, or 0.7 percent more than averaged over the same period last year. Over the last four weeks, motor gasoline demand has averaged over 9.3 million barrels per day, or 1.9 percent above the same period last year.

Distillate fuel demand has averaged nearly 4.3 million barrels per day over the last four weeks, or 3.0 percent above the same period last year. Jet fuel demand is down 6.5 percent over the last four weeks compared to the same four-week period last year.

Economic challenges grow as force of China's impact grows in USA

by David J. Lynch, USA TODAY

Smack in the center of the country, more than a thousand miles from the Pacific Ocean, Oklahoma isn't a place most people regard as a hotbed of China fever.

So when China scholar Peter Gries flew to the University of Oklahoma for a job interview this spring, he wasn't sure what he would find other than cowboys and oil wells.

What he discovered was a state energetically retooling for a globalized economy bearing an ever more distinct "made-in-China" label.

"I was shocked they had this massive China initiative going on. … What I discovered really did blow me away," says Gries, who was hired to head the university's new Institute for US-China Issues.

SMALL BUSINESS BLOG: Want to do business with China? Read Kafka

The 3-month-old institute, deep in tumbleweed country, illustrates the widening impact China's rise is having on the United States. In the five years since China embraced global integration by joining the World Trade Organization, bilateral trade has almost tripled. The volume of goods flowing between the two countries this year is running at an annual rate of $328 billion — 10 times the level in 1992.

China's WTO membership sparked far-reaching domestic reforms in the still-nominally-communist nation, leading to an economic flowering as well as greater personal freedom for individual Chinese. It's also meant hefty profits for U.S. corporations operating in China, such as General Motors.

Marrying 1.3 billion Chinese to the global economy, however, has left its mark on the United States. Tens of thousands of jobs in textile plants in states such as North Carolina have been wiped out by low-wage Chinese competition even as U.S. consumers enjoy lower-priced clothes, toys and furniture made in Chinese factories. Through massive purchases of U.S. Treasury bonds, the Chinese government effectively finances Americans' consumption-heavy lifestyles.

In recognition of China's growing importance to the U.S. economy, Treasury Secretary Henry Paulson flies to Beijing on Tuesday for the first session of a new "strategic economic dialogue" between the U.S. and Chinese governments. Paulson will head an unusually high-powered delegation including Federal Reserve Chairman Ben Bernanke and six Cabinet colleagues.

Q&A: Treasury chief hopes for 'good work plan'

China's spreading impact

Financial waves from China's rise already have spread beyond traditionally international cities such as New York, Washington and Los Angeles to reshape life in the heartland. Children in Chicago's public schools study Mandarin. A regional bank in Ohio is scrambling to keep pace with business customers obsessed with the Chinese market. And a struggling iron ore mine in northern Minnesota enjoys new life thanks to China's ravenous appetite for raw materials.

Surging interest in all things Chinese can be seen in the trade delegations from San Bernardino, Calif., and San Antonio flocking to Beijing as well as the stream of popular books with titles such as China Shakes the World, Chinese Lessons and China, Inc.

Paulson's trip reflects the relentless political controversy that has accompanied China's commercial rise. In joining the WTO, China committed itself to follow international trading rules, including lowering tariffs on imported products and lifting requirements for import licenses and quotas.

Tariffs have been slashed. But critics in the U.S. business community, and in the new Democratic-led Congress, complain that the Chinese have flouted other commitments, notably on protecting the intellectual property of foreign copyright holders. Pirated movies, music and software remain widely available in China despite repeated vows of government crackdowns.

U.S. manufacturers also have grown hoarse griping that the Chinese unfairly subsidize their exports through cut-rate financing from state banks and a currency whose value is kept artificially low.

Monday, Susan Schwab, the U.S. trade representative, told Congress that China's record on WTO compliance is "decidedly mixed." In a 100-page report, Schwab said China has made good progress implementing required reforms, but "excessive Chinese government intervention" in the economy blocks smoother trade ties and forward momentum has stalled.

Some industry representatives want the U.S. to formally complain to the WTO about China's subsidies and currency policy. Frank Vargo, vice president for international economic affairs at the National Association of Manufacturers, who was among the business executives meeting with Paulson last week, calls China's approach to its trade commitments "too cute by half."

Economic challenges

Paulson's Beijing foray comes as both China and the United States face economic challenges. There are increasing signs the U.S. economy is slowing, and some economists even warn of a possible recession next year.

Meanwhile, China, which has grown at an average annual rate of 10% since 1991, is attempting a complicated transition from export-led growth to an economy fueled by domestic consumption. The shift, intended to stabilize an economy flirting with dangerous excesses, would result in larger purchases of foreign-made goods, including from the USA, thus potentially defusing rising protectionist sentiment in Congress.

Gries' new institute, which conducts policy research and promotes public education about China, is driven by the same broad understanding that motivates Paulson's high-level diplomatic effort: However remarkable China's rise has been to date, the Middle Kingdom will only be more consequential tomorrow.

The past 15 years, China's per capita output has more than quadrupled, vaulting it to the world's No. 4 economy behind the U.S., Japan and Germany. But there's more to come: This year, China for the first time overtook Japan to become the second-largest investor in research and development behind the U.S., according to the Paris-based Organisation for Economic Co-operation and Development.

In Oklahoma, China's rising profile includes construction next year of an auto assembly plant in Ardmore, population 34,000, a town in the southern part of the state. The plant will assemble cars under the MG brand, which was acquired last year by Nanjing Automobile.

If Gries has his way, it won't be the last China-related business attracted to Oklahoma. Last month, he accompanied a local chamber of commerce delegation on a prospecting trip to China. He's also working to upgrade the undergraduate curriculum so students get a better understanding of Chinese language, history and culture.

"I want to put OU on the map as a place for Chinese studies and also put Oklahoma on the map as an excellent place for businesses interested in China," he says.

American companies have long found the lure of China's 1.3-billion-person market seductive. At National City, a Cleveland-based regional bank, trade specialist Alfred Ho says China's growth is proving irresistible for local exporters. "It's not a question of whether or not they should do business in China, it's almost a matter of necessity," says Ho, a bank vice president.

Three-quarters of the bank's business customers inquire about selling to China. Since China entered the WTO five years ago, National City has recorded a 210% increase in the value of letters of credit it provides to underwrite exports to China.

As National City's clients have expanded their involvement with China, the bank has gone beyond traditional banking services. Last month, National City — which operates in Ohio, Illinois, Indiana, Kentucky, Michigan, Missouri and Pennsylvania — unveiled a China consulting service that offers would-be exporters a network of China-based experts in supply-chain management, labor and brand management.

In a hint of what's ahead for the Sino-U.S. relationship, a 70-member Chinese delegation looking for investment opportunities visited Cleveland last week. Ho says inward investment from China will pose a fundamental question for many American businesses: "Will you be putting your company up for sale to Chinese interests?" he says.

China's U.S. investments

Chinese buyers already have acquired a number of U.S. companies. Wanxiang Group owns an auto parts maker in Rockford, Ill., while computer-maker Lenovo purchased IBM's laptop business for $1.25 billion in 2004.

Chinese investment ignited political controversy last year when a state-owned oil company, CNOOC, sought to purchase Unocal, a second-tier U.S. oil company. The bid ultimately collapsed amid furious congressional opposition.

But with China now sitting on more than $1 trillion in reserves, the bulk of it held in U.S. dollars, future acquisition attempts are virtually inevitable. And any broad effort to block them would cost the U.S.

Similar deals are threatened by the rise of protectionist sentiment in both the USA and China. In the past two years, according to Morgan Stanley, members of Congress introduced 27 separate pieces of legislation cracking down on trade with China. When Paulson sits down with Chinese leaders this week, one topic should be finding ways to smooth the way for future cross-border investments, says Jeffrey Bader, former head of Asian affairs on the National Security Council.

"They're going to be looking for equity investments and acquisitions of the sort that Japan and the Europeans have done for years, and there's no reason they shouldn't," says Bader, director of The Brookings Institution's China initiative.

Exhibit A in that argument is an aging iron ore mine in Minnesota's northern Iron Range, where Chinese cash helped save about 500 jobs. After several tough years, the mine, then known as Eveleth Taconite, filed for Chapter 11 bankruptcy in May 2003.

The closure idled several hundred workers until the end of that year, when a 70/30 partnership between Cleveland-Cliffs and Laiwu Steel acquired the firm's assets at auction for $3 million in cash and the assumption of $40 million in environmental liabilities.

China's ravenous appetite for ore to feed its steel mills was behind Laiwu's interest. From 2002 to 2005, Chinese consumption accounted for 54% of the global growth in steel demand, according to the International Monetary Fund.

"Perhaps we wouldn't have gone ahead and pulled the trigger (without Laiwu)," says Donald Gallagher, president of North American operations for Cleveland-Cliffs. "They were key to making the deal and getting it done."

Dollar Falls After Greenspan Says He Expects Further Decline / No Interest Rate Increase

Tuesday, December 12, 2006

Fed Leaves Rate Unchanged, Signals Softer Outlook

By Craig Torres and Scott Lanman

Dec. 12 (Bloomberg) -- The Federal Reserve kept the benchmark U.S. interest rate at 5.25 percent and suggested a softer growth outlook while continuing to note inflation risks.

The Federal Open Market Committee called the cooling of the housing industry ``substantial,'' one of the few changes in language from its previous statement in October. Policy makers, who met in Washington today, predicted a moderate expansion ``on balance over coming quarters,'' rather than simply ``moderate,'' and called recent economic indicators ``mixed.''

Chairman Ben S. Bernanke still anticipates the economy will withstand the downturn in housing and manufacturing, leaving inflation as his main concern. Traders focused instead on the new language, interpreting it as a step toward interest-rate cuts next year. Bonds yields and the dollar fell.

``The only change I see is a somewhat more dovish assessment of housing,'' said Jeffrey Kleintop, chief investment strategist at PNC Wealth Management in Philadelphia, which oversees $52 billion in assets. ``For the next couple of meetings, they probably won't make any more changes, but will have plenty of opportunities early next year to guide market expectations as to when cuts may begin.''

Today's decision extends a respite from two years of rate increases that ended in June. Bernanke and most of his colleagues are counting on the economy slowing enough to cool inflation without the need to resume tightening credit.


Conflicting Interpretations

Speculation about a rate cut is premature, said Brian Sack, vice president at Macroeconomic Advisers LLC in Washington and a former economist at the Fed's Division of Monetary Affairs.

``The statement was not intended to be a first step towards a policy easing,'' said Sack. ``The `mixed' data and `substantial cooling' in housing have not affected their baseline view that growth will recover going forward and that inflation risks remain.''

Richmond Fed President Jeffrey Lacker cast his fourth dissent in favor of raising the overnight lending rate between banks to bring inflation down at a more rapid pace. Lacker won't vote again until 2009. Chicago Fed President Michael Moskow, who stressed the possibility of higher borrowing costs on Dec. 1, will become a voting member next year.

``Some inflation risks remain,'' the FOMC said, repeating a phrase used since June. ``The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth.''


Bernanke's Year

Bernanke, 52, closed his last policy meeting of the year with core inflation higher than when he succeeded Alan Greenspan on Feb. 1. The economy has slowed and the jobless rate surprised economists by dropping to 4.5 percent, from 4.8 percent at the start of Bernanke's term.

Inflation has been stubbornly elevated based on the Fed's preferred measure, an index tied to consumer spending minus food and energy. The core personal consumption expenditures price index rose 2.4 percent for the year ending October, above the tolerance zone of 1 percent to 2 percent stated by Bernanke and other officials. The October reading was just below the 2.5 percent reported in August, the fastest pace since April 1995.

At the same time, the Fed's pledge to keep inflation low has kept the longer-term outlook for prices stable. Traders expect inflation to average 2.44 percent over the next five years, according to yield differences on Treasury notes and government inflation-indexed bonds. That's below 2.53 percent when Bernanke became chairman on Feb. 1.

Some traders expect the Fed to cut its benchmark rate at or before the May 9 meeting, based on the price of interest-rate futures on the Chicago Board of Trade.


`Holding Pattern'

``The Fed is in a holding pattern,'' said Jason Schenker, an economist at Wachovia Corp. in Charlotte, North Carolina. ``They're still concerned about inflation and those fears have not been assuaged.''

Policy makers may be waiting for results of the holiday shopping season to judge whether the housing and auto slumps are spilling over into the broader economy. Consumer spending accounts for about 70 percent of the U.S. economy.

Bernanke, giving his most extensive remarks on the economy since July, said in a Nov. 28 speech that ``economic activity has, on balance, been expanding at a solid pace'' outside of the housing and auto industries.
That clarification may come in the minutes of today's session, to be released on Jan. 2, or in Bernanke's testimony to Congress in February.

To contact the reporter on this story:
Craig Torres in Washington at ctorres3@bloomberg.net .


Dollar Falls After Greenspan Says He Expects Further Decline
"I expect that the dollar will continue to drift downward until there is a change in the U.S. current account balance,'' Greenspan said, speaking from Washington by satellite to a business conference in Tel Aviv. "It's imprudent to hold everything in one currency.''

By Min Zeng

Dec. 11 (Bloomberg) -- The dollar fell the most in a week against the euro after former Federal Reserve Chairman Alan Greenspan said the U.S. currency will probably keep dropping until the nation's current-account deficit shrinks.

The U.S. currency fell in three of the past four years. It has lost 10.5 percent this year versus the euro as investors bet the European Central Bank would lift interest rates more than the Fed. It's ``imprudent'' for investors to keep their holdings in one currency, Greenspan said.

``The dollar is heading where the current account deficit goes,'' said Tim Mazanec, a senior currency strategist at Investors Bank & Trust Co. in Boston. ``A widening deficit will cause the U.S. more pain.''

The U.S. currency weakened to $1.3239 per euro at 4:07 p.m. in New York from $1.3203 on Dec. 8. The dollar fell to a 20- month low of $1.3367 per euro this month. The U.S. currency pared some of an earlier gain, trading at 116.97 yen from 116.33 on Dec. 8.

The yen dropped to a record low of 154.87 per euro earlier today after a Bank of Japan official told Jiji Press the central bank probably wouldn't raise interest rates next week.

``I expect that the dollar will continue to drift downward until there is a change in the U.S. current account balance,'' Greenspan said, speaking from Washington by satellite to a business conference in Tel Aviv. ``It's imprudent to hold everything in one currency.''


Trade Shortfall

A bigger shortfall in the U.S. current account, the broadest measure of trade, means more dollars need to be converted into other currencies to pay for imports. The U.S. current-account deficit was $218.4 billion in the second quarter, the second-biggest on record.

``You have a former Fed chairman talking about dollar weakness,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research. ``The market is still trapped in a negative dollar sentiment, especially against the euro.''

Losses in the dollar were limited as investors speculated the Fed will keep rates unchanged at a meeting tomorrow and suggest inflation remains a risk. Traders pared bets the Fed will cut rates next quarter following a U.S. Labor Department report on Dec. 8 showing job growth accelerated in November.

The Fed will keep the benchmark overnight lending rate between banks at 5.25 percent for a fourth straight meeting, according to the median estimate in a survey by Bloomberg News. The Bank of Japan's rate is 0.25 percent while the European Central Bank's benchmark is 3.5 percent.

`Inflation Risks'

``Some inflation risks remain,'' the Fed said in a statement after its previous rate decision, on Oct. 25. ``We cannot let up our guard on inflation,'' Fed Bank of Chicago President Michael Moskow said last week in an interview broadcast on CNBC.com.

The personal consumption expenditures price index, minus food and energy, rose 2.4 percent for the year ending October, the 31st month at or above the top of the ``comfort'' range of 1 percent to 2 percent indicated by Fed Chairman Ben S. Bernanke.

Fed funds futures indicate traders see about a 28 percent probability the central bank will reduce rates to 5 percent before April, down from about 100 percent before the labor report.

``I wouldn't go against the Fed right now,'' said Greg Schwake, head of foreign exchange trading at Fortis Financial Services LLC in New York. ``The Fed has been transparent that they are still worried about upside risks in inflation. The sentiment favors the dollar.''

66 Percent
The dollar gained the most in two months against the yen and rebounded from near a 20-month low versus the euro on Dec. 8 as the Labor Department data showed the U.S. added 132,000 new jobs in November after a revised gain of 79,000 a month earlier. The median forecast in a Bloomberg News survey was for 100,000 jobs.
The dollar accounted for about 66 percent of central banks' currency reserves by March, according to the Bank for International Settlements, down from around 70 percent in 2001.

Russia and other oil-producing countries shifted assets away from the dollar and into the euro and yen in the second quarter, the BIS said in its quarterly review.

Russia and members of the Organization of Petroleum Exporting Countries reduced dollar holdings to a two-year low of 65 percent of the total, from 67 percent in the first quarter, the Basel, Switzerland-based bank said in a report on its Web site.

``People are concerned about diversification away from the dollar, especially people at central banks who make long-term decisions about foreign-exchange reserves,'' said Lu Xinyi, chief strategist in Tokyo at Mizuho Corporate Bank Ltd. ``The whole concept implies dollar selling'' against the euro.

To contact the reporter on this story: Min Zeng in New York at mzeng2@bloomberg.net .

The U.S. Dollar and Housing Market: RIPPLES, MOMENTUM, FEEDBACK

December 8, 2006
By Jim Willie CB
Holder of a Ph.D. in Statistics at Carnegie Mellon University
Publisher, The Golden Jackass website
http://www.freemarketnews.com

For specific detailed analysis of the Gold, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and Fed monetary policy, see instructions for subscription to my newsletter research reports, which include stock recommendations positioned to rise in the commodity bull market. Articles in this series are promotional.

A steady, relentless, and nearly perpetual force pushing the USDollar down in the next two years will be the housing bear market. Most economists seem woefully inept and insufferably weighed down by optimism, as they issue silly pronouncements couched as analysis but teeming with nothing but hope and badly disguised promotion.

As policy shifts toward relieving the pressure exerted from the housing decline, slightly lower interest rates will matter little. Closely behind comes the Weimar-like push on monetary expansion, an accelerated effort to inflate. Housing will not respond much at all, but our world reserve currency will from severe debasement, as its exchange rate tumbles into the basement of shame. The USDollar will undergo major damage while gold and silver make new highs. The most painful twist will be the rise in energy costs (crude oil, natural gas, diesel, gasoline, heating oil) mainly from the US$ effect, despite somewhat lower domestic demand as the USEconomy slows. China & India will chug along.

The biggest housing bull market (12 years since 1993) will be followed by the greatest housing bear market in the modern era. It has been launched in descent. Economists miss three critically important and powerful factors since they choose to act like banker apologists, promotional pitchmen, corporate marketing agents, brokerage harlots, bogged down by wishful thinking, inhibited by preservation of their own continued paycheck.

1) Ripple effects slam business niches operating closely to housing, which is unavoidable since such a large supporting cast assists in the acquisition, construction, selling, and financing of homes. How can a large object like housing fall without affecting neighboring objects in its proximity? It cannot.

2) Momentum effects are very difficult to gauge in the financial world, where physics plays a valid role in a somewhat hidden nature. See my “Financial Market Physics” from June 2005 for a broad list of relevant phenomena. How can a large object like housing reverse course without a tendency to remain in backward motion? It cannot.

3) Feedback effects guarantee that each quantum step down ensures a reaction from observers and passive participants who are pressed to respond. How can a large object like housing take a jump down in price appreciation, a jump down in sales volume, a jump up in inventory, and a jump out of the lax lending room altogether without inviting a secondary reaction? It cannot. These three effects are analyzed more fully in the November issue of the Hat Trick Letter, where members can read.

The housing decline, with a 10% annualized decline in the last six months, will drag the USEconomy, and worsen the current recession. We in the United States have been in a recession for five years, if you wish to live in the world of reality. The CPI is under-stated, as the GDP is over-stated. Use 1990 statistical reporting methods, and one sees that at least 4% and probably 5% must be subtracted from official GDP doctored growth statistics. This doctor chooses to remove the nonsense and live in the world of reality. As an official negative GDP is announced reluctantly in early 2007, that will mean the GDP decline is actually a 5% recession, if again, you wish to live in the world of reality.

It is clear to all but the most blind mavens that the USFed is finished with interest rate hikes. Inflation fears are cited only by goofy Fed Governors, paid to speak stupidly. The USFed will, just like in 2001, suddenly act to stimulate the USEconomy in a matter of a few months, with interest rate cuts.

Gold will love it. Unless Europe and Japan stop hiking rates and join with rate cuts themselves, the USDollar will register multi-decade lows. It is really just a matter of time before the Western World (with adopted son Japan) follows monetary policy directed by Dr Weimar, whose directives will be as desperate as they will be simple. Damn the market torpedos! Full speed ahead on money printing! We must prevent a global recession! Real money like gold & silver will shine! Hedges like energy deposits will soar!

THE RIPPLE EFFECT

One third of job creation has come from the housing industry in the last five years, well documented. A recent McGraw Hill study estimated that $1200 billion in construction spending occurred within the national economy in the 12 months ended August 2006. In connection with that study, their conclusion was that the decline in housing sales and prices has occurred more quickly and less orderly than anticipated.

The McGraw Hill study forecasts a 1% decline in 2007 construction spending after a 12% rise in 2005. Key details behind the current decline are tied to a 5% drop in single family home building and a 3% drop in the construction of stores and shopping centers. Therein lies an important ripple.

As a whole, the construction industry accounts for about 9.5% of the USEconomy. James Haughey of Reed Construction Data sums up the linkage. “When there is a new neighborhood, there is a new grocery store and pizza parlor in a small shopping center… It will be a delayed impact because the pipeline of shopping centers is so full.” He expects a falloff in retail spending very soon.

My forecast is that retail spending will be the last piece to fall into place. Ironically, that is precisely what financial market observers are looking for in order to conclude an economic slowdown.


THEY AWAIT THE LAGGING INDICATOR, NOT ANY LEADING INDICATOR LIKE RANK AMATEURS.

Cut in half, home equity extraction no longer comes to the economic rescue. The peak annualized cash jerked out of homes was $732 billion in 3Q2005. The latest recorded figure is $327 billion in 2Q2006, down by over half. Retail consumption and the ability to sustain households are at great risk.

This home equity dependence is a recent phenomenon, having emerged onto the scene in the 1990 decade. Home equity extraction has rendered the overall economy like a sick patient lying prone on a gurney with a line of credit acting like an intravenous flow in near total dependence. The patient does not rise to go build in factories, because the factories are largely gone. To think the economy will be spared, held immune from the housing damage, is mindless and naïve and absurd. Housing will deliver monstrous ripples, much like a motorboat does to a small canoe on a lake in summertime. Been there, done that, not fun!

Beware that the US tendency to devote the majority of construction outside the sectors known for productive capacity is a defect of the USEconomy. Houses do not generate ongoing income like a factory. This is precisely where the ripple effects will be felt, the initial damage. Building of homes, shopping malls, and retail shops is not a viable foundation for any economy, since no productive output. Instead they are severe misallocation of resources, labor, materials, and equipment.

We are a nation avidly building bubbles, whether financial or residential. Approximately 90% of US economic growth in recent years is derived from the housing bubble and consumer spending, a dire signal. Meanwhile in the last year, consumer spending growth has outpaced income growth by a 3:1 factor. The most surprising element of the housing bear market underway is its widely recognized genuine nature on Main Street, beyond the fluffy specter of Wall Street.

Realtor agents, mortgage brokers, commercial agents, small and large real estate tycoons and barons, community business leaders, almost everyone realizes we next must deal with a housing bust. Official statistics cannot lie on this one. This current bust is in our faces, all around us, with visible signs for sale and stories of loss, if not heartache.

Job layoffs are only beginning in the housing sector. The list of home builders under deep stress actually covers almost all its members. In fact, my forecast is for a major home builder to declare bankruptcy sometime next year in a major shock announcement. KB Home is the prime candidate. The HGX home builder stock index is likely to lose over 75% of its peak value.

Expect a bounce occasionally as prices come down, but each bounce will be followed by yet another painful crushing decline. The current rise in the HGX index has gone too far, spitting in the face of deteriorating statistics which are nowhere in recovery. In fact, expect five or six bounces, much like a victim would experience falling down a staircase. This will turn ugly.

Home suppliers have disclosed their early stage pain. Fallout is hitting sellers of diverse building supplies (like plumbing, hardware, carpentry, wiring, lumber, landscaping), but also faucets, fixtures, carpets, cabinets, appliances, and furniture.

Home Depot has warned already a couple times, with more coming. These are the ripple effects in related industry groups. Job losses already announced on the finance sector, such as by mortgage lenders. This is only the beginning, to be followed by jobs tied to the exhausted consumer in retail chains. More layoffs will follow in the lending institutions. See recent Washington Mutual and Countrywide announcements.

As ripples slam the US Economy, the US Federal Reserve will be forced to abandon its tightening bias. Let’s be clear. That nutty bias is designed to placate foreign US Treasury Bond holders, who want assurance of higher bond yields and more protection for their vast TBond assets, both in bond principal value and currency exchange rate.

Many authors, including me, have warned of diametrically opposite forces pulling at the USFed. Domestic housing pain will force the US Fed to cut interest rates, as economic and political forces prevail. The USDollar smells it, or one should say FOREX currency traders smell it.

They have delivered a serious blow in the last three weeks to the clownish US Dollar whose fundamentals resemble a Third World currency. More US Dollar declines lie directly ahead. Gold, silver, oil, and natural gas will love it, and jump for joy in a higher price.

THE MOMENTUM EFFECT

An object in motion tends to remain in motion, until a new force acts upon it. This is a basic law of physics. It applies to the USEconomy, and in particular to the housing market. Evidence lies in a 10% annualized price decline in existing houses. When taken against the $20 to $22 trillion housing base, we have monumental MOMENTUM.

Imagine a 20 ton boulder rolling 10 meters in six minutes, and the associated momentum. Imagine a 20-foot sailboat which moves at the mooring dock by 10 meters in 6 seconds, and the associated momentum. Each is extremely difficult, if not impossible, to stop in place. The object continues to move. It crushes everything in its path and does not stabilize quickly, coming to a stop. The same is true of the housing market.

The mere concept of a Soft Landing is as nonsensical as a jet aircraft losing its engine power and landing comfortably. It falls quickly to earth, just like a brick, and crashes. In fact, NASA pilots refer to the space shuttle as a “flying brick” affectionately. If anybody can identify a true soft landing example in the last 30 years of US Economic history, please check into the nearest clinic for your anti-psychotic medication. If not, then you firmly stand in reality.

In the housing market, momentum has a strong psychological component. In the upward course seen from 1994 to 2005, the mere belief that home prices would continue to rise tended to keep demand strong. Now on the other side of the mountain, the belief that home prices would continue to soften will tend to keep buyers at bay, watching from the sidelines, awaiting more favorable and attractive prices.

The concept of momentum was clear on the upside, but nowhere yet mentioned on the downside. Evidence of momentum comes after all the internal forces work their destructive magic, like ripples and feedback. Momentum in the marketplace cannot be proven, only observed. To expect the housing market to step down in price structure, without a continuation, is mindless. The internal forces must do the job of the marketplace, namely find a price which clears current inventory, and find a price which attracts new supply. Right now, inventory is large, growing, and nowhere near the norm. Right now, buyers are not only standing aside, but lenders are restricting mortgage lending, except for truly insane outfits which have a cruel lesson ahead.

Greenlight Financial advertises a low 6.95% fixed mortgage rate with no requirements for income verification, tax returns, bank statements, or property appraisal. Such insane offers will vanish altogether very soon. The target audience is the subprime group of borrowers with miserable credit.

Fast forward two years and this batch will show very high defaults. And yet another mortgage lender has gone kaput in the same putrid arena. Ownit has appealed to the subprime borrowers, even offering 45-year mortgages. The firm has been shuttered, despite its well-heeled partner, 20% owned by Merrill Lynch. Subprime borrower delinquencies, defined as 60 days late, have doubled in the last year to 3.9% of outstanding contracts.

Greenspan is on record as justifying the asset bubbles as positive. Home equity is counted as bonafide wealth in his perverse equations. He boasts of the “impetus to spending” and “virtuous cycle“ that bailed out the nation after the stock bubble & bust with his signature in 1999-2000. His styled rescue to avert a prolonged statistical recession in 2001 was derived from an economic dependence upon asset bubble wealth, much like a garden variety drug addiction.

To fully appreciate the insanity of the foundation for the USEconomy, consider this. From 2001 through 2005, outstanding mortgage debt rose 68% from $5293 billion to $8888 billion. One author joked that housing has not merely been the icing on the cake, but rather “housing has been the cake.” In the summer of 2005, Greenspan (still USFed Chairman) was clear in his statements that he was targeting the housing asset prices. Such recklessness is irresponsible beyond description.

We will see the momentum soon unstoppable. One cannot reduce a bubble, but only prick and burst it. Alan G. Magoo is a poor student of both finance and physics.

The momentum effect will gradually dishearten US policy makers in the banking community. The soft landings in both the USEconomy and the US housing market are fairy tales. As the tale is let go in favor of more reality, the US Federal Reserve will be forced to lower interest rates. However, momentum in such a large body as a national economy is powerful. A minimal 25 basis point interest rate cut will accomplish almost nothing. Only a full 1% rate cut would have a mitigating relief effect on housing and consequently the USEconomy. The USDollar will surely respond to the gradual chipping away of nonsensical forecasts, stubborn monetary policy, and economic fundamentals. More USDollar declines lie directly ahead. Gold, silver, oil, and natural gas will love it, and jump for joy in a higher price.


THE FEEDBACK EFFECT

We have not even begun to hear about the vicious nature of the feedback loops. By this is meant the effect on retailers, job layoffs at the shopping malls and retail chains, fresh rounds of homes put up for sale, foreclosure auctions, bankruptcies (both private and corporate), reversal of monetary policy, eroded consumer confidence, and shattered confidence in the US Federal Reserve. Job losses already announced by mortgage lenders are only the beginning, to be followed by jobs tied to the exhausted consumer. More layoffs will follow from related sectors.

Few attach a linkage between the housing market decline and the car sector job layoffs marred by plant closures. They should, since a link exists. Detroit foreclosures lead the nation. My joke to some friends is that the housing bear market will be finished after numerous mortgage firms and home builders go bankrupt, but with a final exclamation point of real estate agents selling their own homes. A case in point comes from a story this week from Washington state. Former Univ of Washington Huskie football player Scott Greenlaw has been forced into bankruptcy.

The state’s largest mortgage brokerages has left a trail of angry employees, expensive lawsuits, unpaid taxes, and government investigations. Greenlaw is trying to avoid bankruptcy by selling his own $4 million waterfront home to pay his debts, in sharp contrast to financing homes for others. What a nasty turn of events for a former college football star who cobbled together $225k to start a company in 2001 that grew to more than 400 employees.

His Merit Financial claimed to underwrite more than $2 billion in loans, while its head basked in its glow studded as millionaire publicity magnet. Some wonder if the firm’s ruin hinged on its practice of hiring athletes and stunning attractive but inexperienced young loan officers amidst minimal managerial oversight. Expect more such stories, just like we saw in 2000 with glitzy tech and internet millionaires whose fortunes vanished as rapidly as they were assembled.

Sheriff sales of tax delinquent properties have grown. My local newspaper used to feature one page of same, but now three or four pages are flush with such notices. We have yet to hear much of foreclosure home sales by banks, which is two stages away on the staircase of events. The final signal of the housing bust will be the sale of realtor agent homes, after they go bust.

You will hear about it in California and Denver first in a river of tears.

As distressed sales occur, the mainstream market is adversely affected. Home builders will sell also under distress, but not through local government events, since unpaid property taxes are not involved. The next step in the feedback loop process is home builders dumping houses at a loss. Another caveat on new home sales points to their price. Some builders offer financing at below 0% for a fixed period, or toss in a swimming pool, or give away a BMW, or pay the first quarter for property tax.

The 9.7% price decline among new homes seen in October might be much much worse than stated. If quality improvements can be factored into GDP statistics, then they should be factored into new home sale prices. New home prices are falling more quickly than reported. In addition to these sales at a loss, homeowners who are underwater are next to dump their homes on the market, fearful of going deeper underwater. They must produce cash at sale closings. Of course, some will hope for the best and suffer the worst. They are human after all, and might believe the press reports laced with self-serving lies. We have not even begun to see banker auctions, which might be planned for later in 2007 during the new year.

The stream of propaganda flows freely. The most outrageous is from the National Assn of Realtors, who have embarked on a $40 million national campaign whose tagline pitch is “It is a Great Time to Buy or Sell a Home” which is the first such promotion in their history. Wow! Conjures up images of NewSpeak and the “1984” novel by George Orwell. Idiot savant Alan Greenspan somehow in late October saw “early signs of stabilization” in the housing market, a self-serving viewpoint to be sure. It is unsure what he looks at, surely not data, probably a substandard murky crystal ball bought from a pawn shop. He pointed to home purchase mortgage applications having flattened at relatively high levels. Take a look next spring, Alan.

The application index is 18% below a year ago, with no justification for any stable upcoming behavior. Baseless optimism can be found among lenders also. Countrywide Financial CEO Angelo Mozilo might be promoting his company stock. “We have already had a hard landing… In 2008 we will have one hell of a year for people who remain in the industry.” He expects the mortgage market to “tread water” in 2007. Sounds more like wishful thinking and hope than a well founded forecast upon solid analytical basis.

As feedback loops inflict untold damage, during round after round of responsive whacks to both the USEconomy and the housing market, the US Federal Reserve will be forced not only to respond, but to act in desperation. The confirmation is going to show up in the USTreasury Bond Yield curve, in the form of a steeper inversion. In the last week of November, the spread between the 2-year yield and the 10-year yield grew to 20 basis points. My forecast is for it to grow to at least 40 basis points.

To claim the USEconomy is strong when the long-term bond yield is now under 4.5% with further declines on the horizon, well, it is plain incompetent from an analytic standpoint. The feedback loops will serve to undermine the USFed credibility, especially when housing prices do not stabilize. The feedback loops will tend to produce new sellers just when the market struggles to reduce unsold inventory.

The USDollar will surely respond to the gradual erosion in confidence in not only the USFed to solve our ills, but the US capitalist leadership to maintain its reputation and prestige. The weakest industrialized economy soon will be identified as that of the United States. More USDollar declines lie directly ahead. Gold, silver, oil, and natural gas will love it, and jump for joy in a higher price.


HOMEBUILDER STOCK INDEX

The apparent recovery in the homebuilder stock index HGX is a clear bear trap. Investors who jump in will be losers, in my view. The giant downleg since April from 270 to 190, a painful 30% decline in less than four months, needed some time to resolve the imbalances, to force adjustments among the builders, and to deceive the public investors into thinking the worst is passed. It is not. This was short covering, no more.

The housing bear market will include numerous recoveries then pauses, each to offer time to fool the optimists. The rebound has recently mustered enough gusto to surpass the 50-week moving average, which surprised me given the continued horrendous home inventory data.

The stock investors for HGX component companies believe that interest rate cuts will save the builders. They might overlook the inventory problems, tied to both homes and land options. They might overlook that homes under current construction have yet to hit the market, where imbalances already persist. Expect them next March and April.

The worst will be over only after at least one and possibly two national home builder companies go bankrupt. They still are logging huge land lease losses. At the current pace, home builders continue to add 1.7 million units onto the market, almost 50% above demand, and clearly above population growth. When completed, they will add further to inventory. Some housing development locales are turning into ghost towns, with massive ripple effects assured. Even Fed Governor Janet Yellin has made public remarks about such ghost towns in California.

Charles Hugh Smith of Oftwominds has designed a criss-cross chart which depicts housing starts, housing sale prices versus inventory growth and the rise in foreclosures. He also has a pathogenesis staircase of six steps. We have only witnessed the pain of two of these clearly marked steps. Directly ahead are the feedback loop effects in action. As this housing crisis plays out, the greatest effect will come to the USDollar, precious metals, and energy. Industrial metals depend upon Asian expansion in addition to Western economies.