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December 31, 2008

U.S. puts up $6 billion to support GMAC

Filed under: news — Tags: , , — Snowman @ 7:02 am

The Bush administration on Monday expanded its bailout of the U.S. auto industry, saying it was buying $5 billion in equity in auto and mortgage finance company GMAC and increasing a loan to General Motors by $1 billion.

The action was the latest in a lengthy series of emergency government moves aimed at easing the worst credit crisis since the 1930s and limiting the severity of a year-long recession.

The Treasury Department said it would buy $5 billion in senior preferred equity with an 8 percent dividend from GMAC as part of an effort to ensure the solvency of a company considered crucial to GM’s survival.

It also said it would lend up to $1 billion to fund GM’s purchase of equity in support of GMAC’s reorganization as a bank holding company. That loan would come on top of assistance extended to the No. 1 U.S. automaker earlier this month.

SALES DECLINES

The government agreed on December 19 to rescue GM and Chrysler LLC with up to $17.4 billion in loans to stave off a collapse that would have cost hundreds of thousands of jobs and dealt a severe blow to an economy already in recession. Of that amount, $13.4 billion was earmarked for GM.

President George W. Bush said at the time that it would be irresponsible to let the automakers die. The White House moved on its own after Republicans in the Democratic-controlled Congress blocked a deal to provide emergency funds.

U.S. auto sales have plunged to 25-year lows in recent months and are not expected to recover substantially until after 2009 under the most optimistic of outlooks online cash advances. The recent steep drop in sales, which automakers and analysts have linked to the credit crisis that took hold in September, has pushed both GM and its smaller rival Chrysler LLC to the brink of collapse.

The Treasury said it was dipping into a $700 billion financial bailout fund approved by Congress in early October to buy the equity in GMAC and extend the loan to GM.

GMAC won Federal Reserve approval to become a bank holding company last week, a move intended to give it freer access to emergency government funds and help it avoid bankruptcy. GMAC has had to raise additional capital to achieve bank holding company status.

The company, co-owned by GM and private equity firm Cerberus, has lost $7.9 billion over the last five quarters as the credit crunch lifted its borrowing costs sharply and the value of many of its assets plunged.

DIVIDEND RESTRICTIONS

GMAC agreed to restrictions on dividend payments and executive pay as part of the equity injection. The bonus pool available to the top 25 executives was cut by 40 percent from 2007 levels, a Treasury official told reporters on a conference call.

GMAC said in a statement that GM and a Cerberus management affiliate have agreed to buy $1.25 billion in new GMAC shares. Previously announced separate exchange and cash tender offers have been satisfied, it said.

Representatives of GM and Cerberus could not be reached for comment. 

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December 29, 2008

Bank of Israel May Reduce Benchmark Rate to 2%: Week Ahead

Filed under: online — Tags: , , — Snowman @ 7:26 pm

The Bank of Israel will probably lower its benchmark lending rate tomorrow to a record as Governor Stanley Fischer seeks to shore up flagging economic growth, a survey showed.

The rate will be cut by half a point to 2 percent, according to seven out of 12 economists surveyed by Bloomberg. Four expect a reduction of three-quarters of a point while one anticipates a full-point cut. The Jerusalem-based central bank will announce its decision at 6:30 p.m. tomorrow.

Fischer reduced the base rate twice in October and twice again in November by a total of 1.75 points as economic growth eased and the inflation outlook improved. Two of the cuts were unscheduled. There have been no reductions yet in December.

“Fischer is acting cautiously now and prefers to cut gradually,” said Inon Dafni, an economist at Israel Discount Bank Ltd. “He moved more quickly in October and November when there was more of a crisis atmosphere in the world than there is now.”

The central bank announced additional steps on Dec. 22 to increase liquidity in the financial system in a bid to coax banks into cutting the cost of credit to borrowers and increase lending.

The central bank’s moves have been made easier by the drop in inflation expectations payday loans. Its last survey of economists, released Dec. 17, showed consumer prices rising 0.7 percent in the next 12 months. That compares with an annual 4.5 percent in November and a target range of an annual 1 percent to 3 percent.

Economic Growth

Economic growth eased to an annualized 2.3 percent in the third quarter from 4.1 percent in the second and 5.2 percent in the first. The central bank forecasts a further slowing to 1.5 percent in 2009.

Last week, the benchmark 6.5 percent Shahar bond due in January 2016 rose 1.2 percent to 118.2, with the yield falling 20 basis points to 4.44 percent. The shekel weakened 3.3 percent as of Dec. 25 to 3.8665 per dollar from 3.7210 a week earlier.

The Tel Aviv Stock Exchange’s benchmark TA-25 Index declined 7.7 percent, its biggest one-week drop in five weeks, to 634.93. Holding companies posted the biggest losses, with Africa Israel Investments Ltd., Lev Leviev’s property development group, losing 23.1 percent; Israel Corp. down 19.9 percent; and Delek Group Ltd., which is controlled by Yitzhak Tshuva, shedding 19.4 percent.

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December 26, 2008

Gas slips below $1.66

Filed under: legal — Tags: , , — Snowman @ 10:14 pm

Gasoline prices declined for the fourth straight day on Tuesday, falling below the $1.66 per gallon mark, according to a national survey of credit card swipes at gasoline stations.

The national average fell .4 cents to $1.659 per gallon for regular unleaded, according to motorist group AAA. A recent 86-day streak of declines ended at $1.656 in mid-December when prices bumped slightly higher.

Prices at the pump have dropped $1.751 per gallon from a year ago and are now down 59.6% from the record-high of $4.114 per gallon reached in mid-July.

All 48 contiguous states and the District of Columbia recorded prices below $2 a gallon, with the cheapest gas found in Wyoming ($1.452).

Alaska continued to have the highest price at $2.572 per gallon, followed by Hawaii, which stands at $2 pay day loans.371.

The price of crude oil, the main component in petrol fuels, has also declined as crude investors fear the global economic slowdown will decrease demand for fuel.

Oil prices fell Monday as the January contract, which sank below $40, closed last week. The February contract became the front-month contract, with prices starting the day above $40 a barrel. Crude prices have declined more than $100 a barrel from a record high of $147.27 on July 11.

The AAA figures, compiled by Oil Price Information Services, are state-wide averages based on credit card swipes at up to 100,000 service stations across the nation. 

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December 23, 2008

Buffeted “quants” are still in demand

Filed under: marketing — Tags: , , — Snowman @ 3:08 am

Last week, New York University and Carnegie Mellon sent a new class of math whizzes out into a profession that is both blamed for the financial collapse and charged with preventing it happening again.

Many of these so-called quantitative analysts, or “quants,” graduating from elite financial engineering courses will end up writing computer programs that handle an ever greater share of market trading.

Because some of their mathematical models failed to take into account factors that later turned out to be crucial, quants have been blamed for compounding risk and exacerbating the crash in financial markets.

But far from going into decline, those with financial engineering degrees are still in demand as hedge funds and banks seek ways to measure previously unforeseen risks and factor them into their models.

The profession’s reputation took a beating in August 2007, when some quant funds — which try to beat the market by crunching vast amounts of data at lightning speed — lost a third of their value in a matter of days.

Many blamed the math commandos for failing to factor in extreme events, in this case unprecedented numbers of home mortgage foreclosures.

Critics and practitioners alike agree they need to improve their modeling, and that begins at the elite financial engineering programs, which have come to be known as “quant farms.”

Both New York University and Carnegie Mellon University in Pittsburgh, which between them minted about 100 new quants this month, have tweaked their curricula, lest their graduates miss another brewing disaster health insurance companies.

Meanwhile, at Columbia University, the masters of financial engineering program has tried to give its students a wider view of the market outside mathematical models, said program director Emanuel Derman.

“You have to understand you are dealing with people and markets, and they don’t respond the way physical systems do,” said Derman, a former managing director at Goldman Sachs ().

PLUS CA CHANGE

As the mortgage crisis gathered steam last year and financial markets became volatile, quant funds, which make up about 7 percent of the hedge fund universe, were caught flat-footed.

To raise cash, they started selling stocks, which created unusual moves in stock prices, throwing other quant models off. Finally, the selling snowballed into a full market panic.

“Before you know it, you have a chain reaction and the whole market dives on the basis of what amounts to a mathematical prediction,” said Peter Morici an economics professor at the University of Maryland.

“You create a mathematical herd. That’s why so often these schemes based on math models end in tears.” 

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December 20, 2008

Stocks plunge at the end of day

Filed under: management — Tags: , , — Snowman @ 10:26 am

A selloff on Wall Street accelerated in the last hour of a volatile session as traders square up positions for a handful of options that expire Friday, known as "quadruple witching."

The Dow Jones industrial average (INDU) lost 219 points, or 2.5%.The broader Standard & Poor’s 500 (SPX) index shed 19 points, or 2.1%, and the Nasdaq composite (COMP) fell 27 points, or 1.7%. All three indexes seesawed in early going.

The market is typically more volatile ahead of "quadruple witching," when equity options, stock index futures, stock options and single-stock futures all expire on the same day. There are four such Fridays in the year, and they tend to be preceded by increased market volatility.

"Most of the action around that occurs the day before," said Fred Dickson, chief market strategist at D.A. Davidson & Co. "What we are seeing at the end of the day is an option and futures selloff related to tomorrow’s expiration."

Investors also focused on the recession, which has delivered sour economic reports and chipped away at global demand for oil.

A torrent of bad news, that had been ignored in the previous session, came back to haunt the markets in the afternoon session. "We have had a market that has really, up until yesterday, been pretty resilient in the face of negative news," said Art Hogan, chief market analyst at Jefferies & Co. "The market has been ignoring a lot of bad news and it is not ignoring it today."

With the holiday week approaching, trading has also slowed. "Volume is fairly low," said James Shelton, chief investment officer at Kanaly Trust Company. "The markets are getting ready for the holidays."

Market breadth was negative. On the New York Stock Exchange decliners beat out advancers 3 to 2 on a volume of 1.4 billion shares. Meanwhile on the Nasdaq, decliners beat out advancers nearly 2 to 1 with a total market volume of 2.1 billion shares.

On Wednesday stocks ended the day modestly lower after Morgan Stanley (MS, Fortune 500) posted a staggering $2.3 billion loss for the fourth quarter which far exceeded analyst expectations.

Investors were primarily taking their cash out of mutual funds in the past week. According to a report from TrimTabs Investment Research released Thursday, $6.0 billion was removed from equity-based mutual funds in the week ended Dec. 17th. The week before, $2.8 billion flowed out of these funds.

Mutual funds that invest primarily in U.S. stocks lost $5.6 billion, which added to losses of $1.7 billion in the previous week. Stock-based funds that invest primarily in foreign stocks lost $389 million, on top of a loss of $1.1 billion in the previous week.

Digesting Fed’s moves: Investors are still digesting the Federal Reserve’s rate-cut announcement from earlier in the week, according to Shelton. The U.S. central bank lowered its key interest rate to a range of between 0% and 0.25%. The cut was the 10th time the central bank has slashed rates in the past 15 months.

Another analyst echoed the sentiment. "We are still watching investors and traders digest and react to the Fed announcement from Tuesday night," said Dickson.

Along with slashing the key interest rate, the agency indicated that it would consider purchasing its own long-term Treasurys, among other ways of juicing the struggling economy, now that the key lending rate has already been reduced as far as it can.

Economic reports: The U.S. economy has officially been in recession since the end of 2007, but market watchers don’t need a slew of reports to know the economy is suffering. "You would have to be under a rock to not know that we are in a global economic downturn," said Joe Clark, managing partner at Financial Enhancement Group.

The Labor Department reported that the number of people filing for initial unemployment benefits totaled 554,000 in the week ending on Dec no fax pay day loan. 13. That was a decline of 21,000 from the previous week’s 26-year high of a revised 575,000 claims. A consensus estimate of analysts compiled by Briefing.com expected 558,000 claims for the current week.

According to Shelton, the weekly unemployment data, which came out in the morning before the session opened, was not a market mover. "We have seen a steady stream of very bad employment numbers, so this is no surprise," he said. Stocks were higher at the open of the market and remained nearly unchanged for most of the session.

Meanwhile, the leading indicators index fell by less than expected in November, according to a report from the Conference Board. The leading indicator fell by 0.4% compared to Briefing.com economists’ expectations that it would dip 0.5%. In the prior month, the indicators fell 0.8%.

Also, the Philadelphia Fed Index, an indicator for regional manufacturing, came in with a reading better than expected. The Philly Fed reported that its index improved to negative 32.9 in December, from negative 39.3 in November. According to a consensus of projections from Briefing.com, the index was expected to fall to negative 40.5. Any negative reading suggests weakness, but the rebound from November is a positive sign.

Oil: Oil prices fell below $37 a barrel Thursday, reaching levels not seen since June 2004. Crude oil for January fell $3.84 to settle at $36.22 a barrel on Thursday. The Organization of Petroleum Exporting Countries announced Wednesday that it will cut production by 2.2 million barrels a day in January.

The price of crude oil has fallen more than $100 from the record highs hit over the summer, but as the global economy has slowed to a crawl, demand for energy has also slowed.

Dickson said that oil prices dropping off the ledge is a reinforcement of the severity of the global economic downturn.

Company news: FedEx (FDX, Fortune 500), the package delivery company, reported a better-than-expected fiscal second quarter, ended Nov. 30. FedEx reported a quarterly profit of $1.58 per share, slightly better than the $1.57 per share projected by a consensus of analysts, according to Thomson Reuters. FedEx also said that it would be trying to cut costs in the face of economic headwinds.

After the market close, software vendor Oracle (ORCL, Fortune 500) reported its second-quarter earnings were hurt by the stronger U.S. dollar. Sales of $5.6 billion were just short of analysts’ expectations and earnings of 34 cents per share, when adjusted for expenses, were in line with consensus expectation, according to Thomson Financial.

Meanwhile, the auto industry continued to be under close examination. The Wall Street Journal reported Thursday that struggling automakers General Motors (GM, Fortune 500) and Chrysler have restarted merger discussions. However, a GM spokesman denied the report on Thursday morning.

The U.S. auto industry has been in the spotlight recently as the fate of the $14 billion bridge loan that General Motors and Chrysler requested hangs in limbo. The Senate overturned the bailout request, but then the Bush administration said it would consider using some of the allocated $700 billion in bailout funds to step in and help the failing car makers. Chrysler announced late Wednesday that it is stopping all vehicle production in the United States for at least a month.

Other markets: The dollar gained against other major currencies, with the yen just off the 13-year high it reached against the dollar Wednesday. Meanwhile, the 15-nation euro and the British pound both lost against the greenback.

In global trading, European and Asian markets were mixed.

Treasury prices, meanwhile, continued to rally, sending yields to record lows. The benchmark 10-year note rose 1 5/32 to 114 31/32 and its yield fell to an all-time low of 2.07%, down from 2.18% late Wednesday. 

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December 19, 2008

Obama promises to bolster financial regulation

Filed under: online — Tags: , , — Snowman @ 7:42 am

President-elect Barack Obama promised on Thursday to strengthen financial regulatory agencies and crack down on runaway “greed and scheming” in an effort to restore stability to a reeling U.S. economic system.

Obama named veteran regulator Mary Schapiro as chairwoman of the Securities and Exchange Commission and Gary Gensler to head the Commodity Futures Trading Commission. The president-elect said he would charge them with leading a broad overhaul of the financial regulatory system.

“These individuals will help put in place new, common-sense rules of the road that will protect investors, consumers and our entire economy from fraud and manipulation by an irresponsible few,” Obama told reporters in Chicago.

“These rules will reward the industriousness and entrepreneurial spirit that’s always been the engine of our prosperity, and crack down on the culture of greed and scheming that has led us to this day of reckoning,” he said.

Obama also named Georgetown University law professor Daniel Tarullo to fill one of the seven seats on the Federal Reserve Board, which is battling to ease a credit crisis and fend off a deepening recession.

The SEC, created after the 1929 stock market crash to police markets and restore investor confidence, has come under heavy criticism after the Wall Street meltdown and financial scandals exposed lapses in its oversight.

The collapses of investment firms Bear Stearns and Lehman Brothers prompted scathing criticism from lawmakers who said the agency, charged with monitoring publicly traded firms, should have flagged the problems earlier.

Criticism has intensified with the $50 billion investment fraud — one of the biggest in history — allegedly carried out over many years by Bernard Madoff on line pay day loans.

“We have been asleep at the switch. Not just some of the regulatory agencies, but some of the congressional committees that might have been taking a look at this stuff,” Obama said.

Obama, who takes office on January 20, said regulatory reform would be one of his earliest initiatives and he would release a detailed plan for regulatory changes. He said there was a need to potentially consolidate some regulatory agencies.

Under one scenario backed by some lawmakers, the SEC would be merged with the CFTC, which oversees the markets for instruments such as futures contracts and options on oil, coffee, sugar and other commodities.

ENTER 21ST CENTURY

“We are going to have to greatly strengthen our regulatory apparatus, and update it from what worked for a 20th century financial system, so that it works in a 21st century financial system,” Obama told reporters.

“I think the American people right now are feeling frustrated that there’s not a lot of adult supervision out there,” he said.

Schapiro is now chief executive of the Financial Industry Regulatory Authority, a self-regulatory body for the securities industry. She was an SEC commissioner for six years, then became chairwoman of the Commodity Futures Trading Commission in 1994 during the Clinton administration. 

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December 17, 2008

Japanese automakers feel our pain

Filed under: marketing — Tags: , , — Snowman @ 10:03 pm

TOKYO — Japan’s automakers aren’t celebrating the troubles of their U.S. rivals, believing that what’s bad for the industry in America is bad for carmakers in Japan, too.

In recent years, the Japanese have expanded in the U.S., making the world’s biggest auto market a cornerstone of their growth strategy. By growing more American, however, they have become such a part of the U.S. industrial landscape that the collapse of any of Detroit’s Big Three would be a blow to the Japanese manufacturers.

"The damage to our business is certain to be tremendous," Toyota Motor Corp. spokesman Hideaki Homma said Monday. "The conditions for the U.S. auto market are extremely tough right now, and any additional negative is sure to make things worse."

Things are so tough in the U.S. that on Monday Toyota said it is shelving its plans to build the popular Prius hybrid in Mississippi. Despite investing $300 million in the plant so far and having completed 90 percent of it, the automaker is delaying production there indefinitely.

Japanese carmakers in the U.S. share many of the same parts suppliers with General Motors Corp., Ford Motor Co. and Chrysler LLC. If a Detroit automaker were to collapse, suppliers likely would follow in a damaging chain reaction.

More broadly, the U.S. crisis could lead to huge job losses and further weaken consumer spending, especially for big-ticket items such as automobiles. Together, the Big Three automakers employ 239,000 workers in the United States. Counting other businesses that depend on the automakers, economists estimate that 2.5 million jobs would be lost if all three went out of business.

"Whether it is the impact on consumer confidence or the impact on the suppliers that we all share, having one or more of the major automakers in severe distress has consequences for the entire industry," said Simon Sproule, corporate vice president of global communications at Nissan Motor Co., Japan’s third-biggest carmaker.

Among the major U.S. suppliers are Delphi Corp., Bosch Auto Parts and TRW Automotive.

Dan Irvin, spokesman for Mitsubishi Motors North America, said the Japanese automaker is "on the sidelines" on the specifics of the bailout proposals, but some assistance for the U.S. industry likely is needed payday loans for people with bad credit.

Mitsubishi has one factory in the U.S., in Normal, Ill., that employs nearly 1,600 people. Irvin said the plant does not share any parts suppliers with the Big Three.

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"We would say that these are extraordinary economic times and the auto industry is critical to the American economy," Irvin said. "So in an extraordinary situation, some kind of extraordinary help for these major players in the auto industry is probably appropriate."

Fred Standish, a spokesman for Nissan’s U.S. arm, also offered support in principle for federal aid.

"What we hope comes out of all of this is a strong and vibrant U.S. auto industry, and so we would support efforts that we think would result in that," he said. "As for what those things are individually, we have to wait and see what Congress or the president … come up with."

Jeffrey Smith, spokesman for U.S. operations for Honda, Japan’s No. 2 automaker, said the company "encourages initiatives that are essential to maintain the short and long-term stability and viability of the auto industry."

The Bush administration is considering ways to give emergency aid to GM and Chrysler. Ford has asked Congress for a line of credit.

A possible advantage from a collapse of the U.S. auto industry could come only many years later — perhaps in a decade — when Japanese manufacturers would compete against weaker rivals in the U.S., especially if they further exploit their lead in green technology with hybrids or electric vehicles, said Koji Endo, an analyst with Credit Suisse in Tokyo.

"But that’s for the long, long term," he said. "For now, the situation is bound to get worse for the Japanese."

Source

December 16, 2008

Ex-Nasdaq chair arrested for securities fraud

Filed under: money — Tags: , — Snowman @ 12:57 am

Former Nasdaq chairman Bernard Madoff was arrested Thursday and charged with a single count of securities fraud for allegedly operating a multibillion-dollar Ponzi scheme from his investment advisory business, federal authorities said.

Madoff, 70, operated the advisory business separately from his Bernard L. Madoff Investment Securities, a securities broker dealer with its principal office in New York City, the Department of Justice said.

"We are alleging a massive fraud - both in terms of scope and duration," said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. "We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable."

A source with knowledge of the investigation told CNN that Madoff appeared in court Thursday and bail was set at $10 million bond. The bond was signed and Madoff was released.

According to the complaint filed with the U.S. District Court of Southern New York, two senior employees of the securities broker firm told investigators that Madoff ran the advisory business from a separate floor of the securities firm offices. One of the senior employees said that Madoff kept the advisory business’ financial records under lock and key and was "cryptic" about its business.

A document filed by Madoff with the Securities and Exchange Commission early this year said the advisory business served between 11 and 25 clients and had about $17.1 billion in assets, the complaint said.

But on Wednesday, the complaint said, Madoff told senior employees that the advisory business was a fraud, that he was "finished," had "absolutely nothing," that "it’s all just one big lie" and that it was "basically, a giant Ponzi scheme easy payday loans."

Madoff said the business had lost about $50 billion and that he planned to turn himself in to authorities in a week. But, the complaint said, he told the employees he wanted to distribute the $200 million to $300 million he had left to certain selected employees, family and friends.

Madoff faces a maximum penalty of 20 years in prison and a $5 million fine if he is convicted.

The SEC sued Madoff Thursday, accusing him of a "multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm." In the suit filed in Manhattan federal court, the SEC said it was seeking an asset freeze and appointment of a receiver for the firm as emergency relief for investors, an SEC statement said.

Madoff’s attorney, Daniel J. Horwitz, said, "Bernie Madoff is a long-standing leader in the financial services industry. He intends to fight to get through this unfortunate set of events."

Ted Weisberg, president of Seaport Securities, said that Madoff "was an innovator" who, for years, offered investors a guaranteed return and that he continued to attract investors in that way.

Madoff was known as a hard-working, solid broker, Weisberg said, and the news is "inconceivable" to people who knew him.

Madoff founded his securities firm in 1960 and expanded to a worldwide client base. He served as Nasdaq’s chairman in 1990, 1991 and 1993, according to Nasdaq Senior Vice President of Communications Bethany Sherman.

CNN’s Ali Velshi contributed to this report.  

Source

December 11, 2008

Pelosi: Stimulus bill ready soon

Filed under: finance — Tags: , , — Snowman @ 2:39 pm

Speaker Nancy Pelosi says the House of Representatives is ready and committed to having an economic stimulus bill ready by early January.

Pelosi said Tuesday that members of the House are "working on that right now." And she also said that a major part of the discussion is what elements are needed to both restart the economy and stabilize the job market.

Pelosi told NBC’s "Today" show that "this is a priority" for Democrats and said that "we have been begging" for over a year to do this compare car insurance prices.

The California Democrat did not put a price tag on such a stimulus bill, but she did say it would have to be larger than initially envisioned because of the deterioration in the health of the economy. Congress passed a $168 billion stimulus plan last year and President Bush signed it into law. 

Source

December 9, 2008

Refiners rush to store cheap crude

Filed under: economics — Tags: , — Snowman @ 9:06 am

A big discount in oil prices for prompt delivery is leading U.S. energy companies to fill up their storage tanks at a time of the year they normally run down stockpiles for tax purposes.

The trend could spell bloating inventories in the world’s largest energy consumer into the new year, keeping pressure on prices that have already slumped more than $100 a barrel since July as economic turmoil hits consumer demand.

It could also be a boon for some of the nation’s top oil storage companies, like Enbridge, Plains All American and TEPPCO, all of whom have been expanding at the key futures delivery point in Cushing, Oklahoma.

“Tax considerations that normally discourage stock building around year end may not be a big deal this time around due to the recent price drops,” said Antoine Halff, analyst at Newedge Group in New York.

Front-month oil futures were running at roughly $44 a barrel on Monday — down from record highs over $147 a barrel hit in July — creating a relative bargain for buyers.

But more importantly, the front-month price is also trading at levels far below contracts for delivery farther in the future, meaning companies can make money simply by holding the oil in storage.

For example, front-month oil futures are running about $7 a barrel below oil futures for delivery in May, and some $35 a barrel below oil futures for delivery in five years.

Dealers said the market structure, called a contango, is due partly to expectations that U.S. President-elect Barack Obama’s plans to shore up the economy will help brake the freefall in fuel demand.

The exceptional circumstances of a steep slump in oil prices and an unusually high contango market structure have reversed the normal year-end run down in commercial crude inventories related to LIFO, or “last in, first out,” tax considerations quick pay day loans.

TWENTY MONTH INVENTORIES

Refiners are eyeing all space available to ramp up their crude storage, including ships, sources said. Brokers estimate about 10 VLCCs, or very large crude carriers, are holding about 20 million barrels offshore in the U.S. Gulf.

“We also expect inventories to continue to build as the entire energy complex remains in a strong contango resulting in very favorable economics to buy and store just about any of the major energy commodities,” said Dominick Chirichella, of Energy Market Analysis.

U.S. crude oil stocks have climbed around 30 million barrels, or more than 10 percent, since September, putting them near the top of the five-year range, according to U.S. government data. (For an interactive graphic, click here:https://customers.reuters.com/community/commodities/graphics/DOE_Actual.htm )

Meanwhile, stocks at Cushing, Oklahoma, the delivery point for NYMEX crude futures, hit an 18-month high of 22.9 million barrels in late November, according to the data.

“Over the last two-and-a-half months the contango in the NYMEX forward curve has continued to grow,” said Stephen Schork, editor of the Schork Report. “Given that tankage will likely cost you anywhere from 70 to 75 cents a barrel, that is enough of a discount to carry inventory for the next twenty months,” said Schork. 

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