GalaTime

• NY Times: A Sea of Unwanted Imports

Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property. And for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles.

• Bloomberg: Junk Bond Yields Reach Record 20% as Economy Declines

Yields on speculative-grade corporate bonds surpassed 20 percent for the second straight day as a declining economy increased the risk of default.

Junk bonds have lost more than $187 billion in market value since August on speculation the U.S. recession will leave a glut of companies unable to meet their debt payments.

About 72 percent of high-yield issuers have bonds trading at so-called distressed levels, or with yields of at least 10 percentage points more than similar-maturity Treasuries, Merrill data show. That ratio implies a default rate of 18 percent in the next 12 months.

• Reuters: Greece braces for shipping storm

In just a few months, dry cargo rates have fallen by more than 90 percent as a five-year boom has turned to bust. For Greece, which owns a fifth of the world’s fleet, that spells trouble.

At 170 million tonnes, its merchant fleet is the largest in the world, ahead of Japan. It is the second biggest contributor to Greece’s 240 billion euro economy after tourism, accounting for 7 percent of output.

Dry cargo vessels that commanded $150,000 a day in May are now earning $7,000 or less. Prices could fall further next year, when a record number of ships are set to flood the market: more than 10,000 new ships are currently on order.

• Paul Kedrosky: Breakeven Oil Prices in Gulf States

These numbers have risen in recent years, but not with exploration and extraction costs, but with higher country-level program expenditures causing higher oil prices to be required to balance their budgets.

Also see, Times Online: ‘Axis of Diesel’ forced to change its ways by plummeting oil price

Deutsche Bank estimated in a recent research note that Iran and Venezuela need an oil price of more than $95 a barrel to balance their budgets, and Russia requires a price of $75. That compares to a break-even figure of $55 for Saudi Arabia.

• Hindu Business Line: Iron ore exporters to China hit by payment defaults

Iron ore exporters have been hit by a cash flow crisis with Chinese importers defaulting on payment obligations. Besides, Chinese banks are also refusing to honour the letters of credit issued on behalf of the importers.

Each LC is valued at about $3 million. All trade between India and China is invoiced in US dollars. At least 15 LCs have been dishonoured by the banks, translating into $45 million.

The Chinese importers had lifted Indian iron ore at prices as high as $120 a tonne. Currently these prices are ruling at around $40 a tonne.

• Business Standard: Cement firms’ capacity use dips to four-year low

The capacity utilisation of cement-makers, which has been on the wane since April 2008, has dropped to 82 per cent in the second quarter ended September 2008 as compared to 90 per cent in the corresponding quarter a year earlier.

The drop was also exacerbated by the addition of 31 million tonnes of fresh capacity in the past year. Growth in cement demand for the rest of the current financial year is estimated to moderate further to 6-8 per cent.”

• Business Standard: Demand slump hits RIL’s Jamnagar plan

Reliance Petroleum, a subsidiary of Reliance Industries, is likely to commission only half of its refinery’s capacity at Jamnagar by December-end as demand for fuels such as naphtha and fuel oil has dropped across the world.

Reliance Petroleum’s 29 million tonne per annum refinery, being constructed in a special economic zone, will export almost all of the fuels it produces. These exports are primarily aimed at the US and Europe.

The refinery, which will add nearly 20 per cent to the nation’s refining capacity and make Reliance the largest crude oil refining company in India, will produce fuel oil and polypropylene only when the entire plant is commissioned.

• Bloomberg: Gulf Shares Fall as Banks Tighten Credit; Kuwait Halts Trading

Persian Gulf stocks tumbled, sending Dubai’s index lower for a sixth day and spurring a trading halt in Kuwait, as banks tightened credit terms and oil plunged to a 21-month low.

Emaar Properties PJSC slid to the lowest in more than four years as the Middle East’s largest real-estate developer said it is reviewing its recruitment policies amid the property slowdown.

Dubai property buyers will lose 30 percent of what they have paid if they default, cancel, or breach their purchase contracts, Gulf News reported, citing the Land Department.

Emaar declined 5.6 percent to 3.18 dirhams, the lowest since October 2004. The shares have dropped 36 percent this week.

• Bloomberg: U.S. Stocks Surge, Led by Shares of Energy, Real-Estate Firms

Declines in midday trading today pushed the S&P 500 to 35 percent below its average for the past 200 days, only the second time that’s happened since the Great Depression. The last time was a day before the index rose 12 percent on Oct. 13, the biggest rally since 1939.

The S&P 500 swung between gains and losses at least 38 times, including a drop that sent the benchmark index to its lowest level since the Iraq War broke out 5 ½ years ago.

The gains in oil producers came after the valuation of the S&P 500 Energy Index retreated to less than 6.2 times earnings for the group, the cheapest since Bloomberg began tracking the data in 1995.

Huge turn-around in the US markets. Triple test of bottom? Just another volatile day on the way to S&P 600?

. . . if you’re willing to relocate to Siberia.

Times Online: Producers in turmoil as Russian oil hits $10 a barrel

Heavy export tariffs have almost wiped out the profit margin from selling crude oil outside Russia, forcing Siberian producers to sell at prices as low as $10 a barrel on Russia’s domestic market. Fears are mounting that the profits squeeze may speed the decline in Russian oil output, already down 6 per cent this year.

Oil producers complain that the levy is always excessive, but when oil prices fall quickly, the change in the tax rate takes months to catch up.

• Business Standard: Commodity price crash hurts firms

The crash in commodity prices is hurting companies as many are carrying huge inventories of raw material, and in some cases, finished goods made with raw material bought at higher prices.

A leading paint-maker conceded that the company stuck with raw material of petrochemical and natural products, whose prices have crashed 30-50 per cent from their peaks.

Orissa Minerals Corporation (OMC), a PSU which mines and sells chrome ore, has reduced prices of the ore by 40 per cent last quarter but finished product (ferrochrome) prices have fallen by 50-60 per cent.

. . . globally scrap prices have started moving up, which is the first sign of recovery in demand. Steel companies have signed long-term contracts for iron ore ($84 a tonne) and coking coal ($305 a tonne) but prices will be revised only next year though spot prices have crashed. New contracts are likely to be signed at $100-$150 a tonne for coking coal and at $50 a tonne or lower for iron ore.

• Business Intelligence Middle East: Gulf’s huge cash pile is a ‘global anchor’

For every QAR 3.65 issued by the Qatar Central Bank, it has almost US$3 in reserves. Qatar as well as other Gulf states have emerged as saviours in the current financial crisis, Adhip Chaudhuri, an economy professor said yesterday.With the exception of Kuwait, where people participated in the ‘derivative dance’ that preceded the current economic meltdown, Qatar, Saudi Arabia and UAE have huge dollar surpluses that they can use as a cushion.

It is hard to believe that with oil prices at $55, this cash cushion will last very long. And building very, very tall towers & palm-shaped islands doesn’t seem consistent with creating economic value.

• Bespoke: 50-Day Average Daily S&P 500 Change At 3.26%

Volatility begets volatility, until it doesn’t. And here’s a thought I came across: “during very volatile times, there are few voluntary buyers or sellers. Only forced sellers”.

• Houston Chronicle: Oil prices low? Chevron CEO says no

O’Reilly tossed aside the notion that oil prices are low. Although half its unprecedented summer high of more than $145 a barrel, $60-$70 oil is still pricey.

On a global basis, it’s the equivalent of 240 million barrels of oil a day, if you can transfer all the energy into oil terms. Put it in gallons per second, it’s 120,000 gallons per second. That’s oil, coal, gas, nuclear, all the sources of energy that the globe uses.

At some point, inevitably demand growth will occur again. We’re in a demand shrink at the moment, based on all the data. Two things have to happen. The price has to stimulate that — that’s how markets work. And that in turn has to help stimulate economic growth.

• Bloomberg: China Announces 4 Trillion Yuan Economic Stimulus

China announced a 4 trillion yuan ($586 billion) stimulus plan to spur expansion in the world’s fourth-largest economy, helping sustain global growth as the U.S., Europe and Japan teeter on the brink of recession.

The funds, equivalent to almost a fifth of China’s $3.3 trillion gross domestic product last year, will be used by the end of 2010.

The package announced today, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports.

• Business Standard: Pantaloon’s turnover shoots up 87 per cent

Kishore Biyani’s Pantaloon Retail, the country’s largest listed retailer, has posted an 87 per cent growth in Diwali sales from its value retail formats — Big Bazaar and Food Bazaar — compared with the year-ago period, the highest growth rate in three years.

Consumers are spending more on value for money products. All categories in food and fashion are doing well. In fact, the same store growth of 50 per cent in value formats is a record increase for us,”

One of the few retailers who’s got it right in India.

Background:

• Aug 1 - Steel production, consumption & price trends
• Sept 18 - Steel Stocks & Prices - Mittal vs Market
• Sept 25- Steel prices - Anyone feeling bullish yet?
• Oct 3 - Steel stocks - Cramer disses them too!

A complete turn-around in 4 months: ArcelorMittal to cut 30% output

ARCELORMITTAL, the world’s largest steelmaker, reported on Wednesday profits rose 29 per cent in the third quarter but said it would cut output by nearly a third as a sharp economic slowdown dampens demand for the steel used in houses and cars.Warning of tougher times ahead, ArcelorMittal said it needed to ‘rebalance supply and demand’, putting on hold an ambitious expansion plan that would have increased steel shipments by a fifth by 2010. 

India steel makers have also (finally) gotten the market’s message: SAIL, Tata Steel stay put, others cut output

While JSW Steel has said it would cut output by 20% from November, Ispat Industries will slash 15%. Essar Steel said it’s looking at ‘rationalising’ production, while Bhushan Steel Ltd will chop galvanised steel output by 20-30%.

JSW Steel’s new 3-mtpa blast furnace in Vijayanagar, which was to kick off in October, has been delayed by two months.

These guys were planning to hike steel prices only a couple of months ago. Badly in need of a reality check.

The last hope for steel makets remains infrastructure. But with China & ME/GCC beginning to bust, and Indian infrastructure projects bound to get delayed, I doubt there’s much hope there. But we’ll have to wait for a few more months before steel (and cement) manufacturers accept that as well.

• Bloomberg: Crude Oil Falls Below $60 in New York, Lowest Since March 2007

Crude oil fell below $60 a barrel in New York for the first time since March 2007 as a global economic slowdown cuts demand for fuels. Prices, which have tumbled 59 percent since reaching a record $147.27 on July 11, are down 37 percent from a year ago.

U.S. fuel demand during the past four weeks averaged 19.1 million barrels a day, down 6.7 percent from a year ago.

Who would have thought?

• Bronte Capital: Berkshire Credit Default Swaps
  

I am quite familiar with Berkshire - about as familiar as you can get by reading stat statements and the like . . . If 9.11 had been nuclear they might have had problems - but as my “Risk Aversion Berkshire Style” post makes clear fat tail risk is not part of the formula.  

So why is the five year credit default swap spread on Berkshire over 200bps?  I have no idea and it makes no sense to me.  Maybe it is just irrational bearishness about everthing (ie BUY HARD) or maybe there is something I do not know.

Now that’s scary.

• Prudent Bear: Rate Cuts everywhere

ECB cuts rates by 50 basis points, more action expected

UK interest rates slashed to 3%

Bank of Korea Lowers Rates for Third Time in a Month

Swiss central bank cuts interest a half point

• Mint: Steel cos cut prices by up to Rs6,000 per ton to keep afloat

India’s leading steel producers have slashed prices of their products by up to Rs6,000 a tonne to ward off the threat of cheaper imports from countries like China and Ukraine amid a dip in demand.

The price cut comes even as Industry awaits a government decision on its demand for imposition of 15% duty on steel imports among other fiscal measures.

The international prices have corrected in the past two months by around 50% and the domestic prices have been reduced to counter the increasing imports.

Quite a change within 3 months: Readings: Steel prices, SWF Speculators, Chinese value

• Economic Times: SBI to cut lending rate by 50 basis points in two days

The country’s largest lender, State Bank of India, on Tuesday said that it will reduce its benchmark lending rate by at least 50 basis points in a day or two, a move that will make home, auto and personal loans cheaper.

The bank last increased its PLR by 100 basis points to 13.75 per cent on August 12. Besides, he said the deposits rates would also be reduced in the next couple of weeks.

The markets are indeed being juiced - CRR cuts, repo rate cuts, FM’s suggestions to banks and what not.

• Hindu Business Line: Iron ore exports down to a trickle

Iron ore exports from the country have been reduced to a trickle. Shipments from the country dropped 81 per cent in October compared with the same period a year ago on fall in demand from China and glut in the global markets.

International prices have plunged to $50 a tonne f.o.b from a high of $140-150/tonne.

. . . there were no takers for iron ore even at this low price couple with a lower freight charge. For the April-October period of the current fiscal, iron ore exports are projected to have declined to 39 mt from 48 mt during the same period a year ago. During 2007-08, about 120 mt of iron ore were exported, most of them on spot to China at over $100 a tonne.

Any guess on what will now happen to iron ore prices? And inflation?

PS: Bigger bubbles ’bout to burst: China & ME/GCC.

• Bloomberg: Gulf Citizens Beg for Bailout Amid Stock Rout

Gulf economies are more susceptible to financial turmoil than in the past because of their greater dependency on international expertise, investment and tourists to diversify away from oil. While Dubai, home to the world’s tallest building and the man-made Palm Island, is considered most at risk, no part of the Persian Gulf will go untouched.

Kuwait on Wednesday became the third Gulf state to prop up its banking system. It did so after losses on currency derivatives at Gulf Bank KSC, the country’s second-largest lender by assets, sparked a surge in customer withdrawals from the bank.

The United Arab Emirates said Oct. 12 it would guarantee deposits of all local lenders and large foreign banks. It also set up a $19 billion facility to help banks make loans. Saudi Arabia, the world’s largest oil exporter, put $2.7 billion into a government-run bank in Riyadh to provide no-fee loans to low- income citizens.     

Dubai - The one bust no one’s talking about yet.

Bloomberg: Goldman Drops Coverage of Ethanol Makers After VeraSun Fails

Goldman Sachs Group Inc.’s analysts abandoned coverage of the ethanol industry today after VeraSun Energy Inc., the largest publicly traded U.S. ethanol maker, filed for Chapter 11 bankruptcy protection.

Pacific Ethanol Inc.’s half-decade money-losing streak will continue for at least another five years, Murti and Mody said in the note. Pacific’s shares fell 87 percent this year.

Was this the shortest bubble amongst the many created during the 2003-2007 period?

• Yahoo: Manufacturing sector contracts to 26-year low as new orders and production slow

In what some economists called a sure sign of recession, the Institute for Supply Management said Monday its manufacturing index fell to 38.9, the lowest reading since September 1982.

Monday’s reading was dramatically below this past September’s reading of 43.5 and far lower than economists’ expectations of a reading of 41.5.

Why is this a surprise? Have you seen the Baltic index lately? Or copper prices? Steel? Chinese manufacturing statistics?