Pimco's Bill Gross September 2008 letter was massive, There's a Bull Market Somewhere
The following passages were massive!
- This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami. Central bankers, of course, adopting the cloak and demeanor of firefighters or perhaps lifeguards, have been hard at work over the past 12 months to contain the damage. And the private market, in its attempt to anticipate a bear market bottom and snap up “bargains,” has been constructive as well. Over $400 billion in bank- and finance-related capital has been raised during the past year, a decent amount of it, by the way, having been bought by yours truly and my associates at PIMCO. Too bad for us and for everyone else who bought too soon. There are few of these deals now priced at par or above, which is bondspeak for “they are all underwater.” We, as well as our SWF and central bank counterparts, are reluctant to make additional commitments.
Step 2 on our delevering blackboard therefore has stalled and is inevitably morphing towards Step 3. Assets are still being liquidated but there is an increasing reluctance on the part of the private market to risk any more of its own capital. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning. There may be a Jim Cramer bull market somewhere, but it’s primarily a mirage unless and until we get the entrance of new balance sheets, and a new source of liquidity willing to support asset prices.
And the strong statement were posted on CNBC, Bill Gross to Paulson: I'm Not Buying It
- But as far as Gross is concerned, if Fannie Mae , Freddie Mac, Citigroup and Merrill Lynch hold offerings to raise capital, Pimco will be sitting them out.
This puts Henry Paulson and the Treasury Department in position to have to act. Washington has been holding on any kind of bailout, hoping that buyers like Gross will keep struggling banks afloat. But by refusing to take part, Gross, the biggest bond buyer in the world, is in effect calling the Treasury’s bluff.
And over on Newsweek, another Gross, Daniel Gross writes about the falling oil. Most are believing that lower oil will ease inflation but Daneil Gross doesn't think that the great inflation scare of 2008 is over! The Bad News About Falling Oil Prices
- Yes, the falling prices of commodities are welcome news. But on the way up, and on the way down, there is rarely a direct translation of changes in commodity prices into changes in consumer prices. In recent years—and especially in the past year—businesses have acted as shock absorbers, unwilling or unable for competitive reasons to pass along the full brunt of the costs. But many of the shock absorbers have become worn, suggesting that inflation is likely to rise even if commodity prices drop.
To get a sense of what I'm talking about, look at two measures of inflation: the Producer Price Index and the Consumer Price Index. The PPI measures the inflation that producers (people who buy stuff that they then package into other stuff or sell to other people) experience, and it breaks down the price increases in crude, intermediate, and finished goods. The CPI measures the inflation that consumers experience when they pay for gas at the pump, food at the grocery store, and clothes at the mall.
The PPI has been on a rampage in the past year, thanks to the raging costs of raw materials, commodities, and energy. In July, the PPI rose a hefty 1.2 percent from June, and the price for finished goods rose a worrisome 9.8 percent from July 2007. In the past year, the prices of crude and intermediate goods rose an incredible 51.2 percent and 16.6 percent, respectively. These numbers bear witness to a progressive absorption of costs as goods go through the supply chain.
A look at the CPI reveals another phase in inflation absorption. The CPI is running hot, too. In July, it rose 0.8 percent from June 2008, and 5.6 percent from July 2007—the highest level of this century. In the past three months, the CPI has been rising at a 10.6 percent annual rate. The data show a significant gap between the PPI (up 9.8 percent in the past year) and the CPI (up only 5.6 percent in the past year). Translated into English, it means producers have been able to pass on only about 60 percent of their higher costs to consumers. The result has been sharply lower profits. In the first 11 months of the current fiscal year, corporate income taxes are off 14.6 percent. Economist Paul Kasriel of Northern Trust notes that operating profits over the S&P 500 have declined year over year for three straight quarters. Last week, with 96 percent of the constituents having reported, S&P 500 profits were down 29 percent from the year before.
But isn't that all in the past? After all, we know the Federal Reserve and the stock market are more concerned about the next three months than the last three months. And the recent fall in commodity prices should, in theory, translate into lower prices for all participants in the economy. Or maybe not. First, there's always a lag between the action in the commodity markets and the prices of finished goods—especially at a time when companies desperately need to pad their margins. Second, despite the action in the commodity pits in recent weeks, the indicators of inflation at the producer level have picked up pace through this year, accelerating through the second quarter and into July.
Third, many companies have reached their limit in absorbing higher costs. That is why we've had large bankruptcies in the restaurant industry (Bennigan's), and in retailing (Linens 'n Things). Today, every company is faced with a choice of absorbing the higher costs passed on to them by suppliers or passing them on to consumers. Many companies are choosing the latter course. Airlines are furiously tacking on charges for luggage, food, drink, blankets, and pillows. Hershey's, complaining of costs for sugar and other commodities that have risen between 20 percent and 45 percent so far this year, in August announced a 10 percent price increase. Frank Bruni reports in Wednesday's New York Times that restaurateurs are substituting cheaper goods (shiitake mushrooms instead of morels, lump crabmeat instead of jumbo lump crabmeat) and keeping the prices steady. When you pay the same for smaller portions or for goods of lower quality, that's inflation.
So, no, the great inflation scare of 2008 isn't over. It may just be beginning.
However, on today's Business Times, our second Finance Minister says that Malaysia inflation: 'The worst is over'
- THE worst for inflation is behind us and the consumer price index (CPI) will grow slower than July's 8.5 per cent in the following two months, Second Finance Minister Tan Sri Nor Mohamed Yakcop said.
Malaysia's inflation rate grew at the fastest pace in 26 years to remain high in July after a 7.7 hike in June, as higher costs of food and transportation drove the CPI up.
But the government is convinced that the current high inflation rate is temporary and that raising interest rate may not be the best option to rein in price gains.
"(The high) inflation is one-off and it is moderating. It should be lower than 8.5 per cent in August and September. The worst is behind us," Nor Mohamed said when interviewed by The Exchange, a business programme on TV3 in Petaling Jaya yesterday.
Boone Pickens reckons that oil will returning to $150 per barrel within a year! See video clip on Bloomberg http://www.blinkx.com/video/pickens-sees-oil-returning-to-150-a-barrel-within-year/cFLyfEPnpU3NRC9LogV1aA
And the Baltic Dry is now sinking deeper!
The BDI closed at 5663, down another 211 pts or 3.59%!!
Here are some of the recent blog postings.
1. The Collapse of the Baltic Dry Index
2. Goldman Downgrades Bulk Shippers!
3. Baltic Dry Index Keeps Falling!
4. Baltic Dry Index Stages Strong Rebound!
5. Baltic Dry Index Set For Strong Recovery???
6. Baltic Dry Index Plunges To Seven Month Lows!
7. The Baltic Dry Index Keeps On Plunging!
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