Have energy prices peaked?
Could oil mania be coming to an end? | Anatole Kaletsky - Times Online
Today, with oil reaching new highs, is probably not the best day to link the article from the U.K. Times Online. However, it is interesting and thought provoking so I will reprint a few exerpts and you can read the rest if interested.
Concerning a U.S. recession:
While the slowdown in Britain and Europe has only just started, the US economy now seems likely to avoid an outright recession as Washington’s huge tax cuts, interest rate reductions and bank and mortgage bailouts appear in the nick of time over the economic horizon,
What could prevent economic recovery:
there is now only one key uncertainty marring the signs of improvement: the huge increase in energy, food and other commodity prices since the start of this year. This now poses a far greater danger to the world economy and financial system than the correction in US and British housing markets and the related credit losses suffered by leading banks.
Three reasons commodity inflation is worse than housing deflation:
First, rising prices of food and energy hit poor people hardest and therefore provoke turmoil among groups that would otherwise be politically apathetic
Secondly, inflation is inherently harder for governments and central banks to deal with than deflation
Thirdly, the countries most exposed to the risks of commodity inflation - China, India and other large consumers of energy and food - are precisely the ones that the world economy now depends on for most of its growth.
However, the author puts forth the opinion that the commodity inflation is primarily panic and speculation driven and not by a supply and demand imbalance. He gives several arguments to back up his position and I will include one:
The Chinese and Indians are not eating any more rice today than they were three months ago. The doubling of rice prices cannot therefore be explained by a sudden shift in supply and demand. And the same is true of oil, since the global growth of oil output in the past two years has been substantially faster than the growth of consumption.
The article closes with this note:
This week Brian Marber, one of London’s most experienced technical analysts and one who has been consistently forecasting higher oil prices, told his clients that the trend was probably reversing. Let us hope he is right.
Read the article and see if you get the same take from it that I do. Four years ago we were in the middle of a housing price boom and look where we are today. The same four years ago gold was under $400 an ounce and oil was under $40. Is this another bubble that will burst in the near future?
Bank-owned homes are real estate’s new gold rush
Business - Bank-owned homes are real estate’s new gold rush - sacbee.com
This article from the Sacramento Bee definitely caught my eye. The gist of the story is that more 2,000 homes have been bought from banks in the last two months and 60% of the existing home sales in the Sacramento region are homes that have been foreclosed on by banks.
Good deals are available to those who could not afford a home in the region a few years ago and investors are scooping up properties. Sacramento was a blazing market from 2002 until early 2006 with 25% per year price increases and lotteries for the right to purchase new built homes. Many of those purchases were for investment and went to the lender when prices fell and interest rates increased.
I wrote yesterday how lower rates are now making mortgages more affordable and foreclosure rates could slow. This article is one small sign that excess inventory has reached attractive prices and a bottom may be near.
Finally, if you subscribe to the WSJ online an article today that bank owned inventory is still growing nationwide: Foreclosure Rate Outpaces Sales by Lender Is the Sacramento article a leading indicator, as things from California often are? You decide.
What if Mortgage resets are at lower rates?
This is strictly my own story and observation, but I have not seen any argument to this effect in the financial news so I thought I would throw it out. As the Fed cuts interest rates, the rates for those with adjustable rate mortgages may not see their payments go up, or they even my decrease. I will use my mortgage as an example.
I took out an ARM in November 2005 with a 3 year rate of 5.0%. After the 3 year period the rate will reset at a rate approximately 2% over the 1 year LIBOR rate for the next 12 months. With the 1 year LIBOR currently at about 2.5%, if my mortgage reset today my rate would actually fall.
I am hoping the Fed cuts rates a little more and they stay low until at least December, when the rate will reset. Nothing wrong with a lower mortgage payment!
I know there are a lot of mortgages with lower initial rates than mine, but I was getting quotes closer to 6% three years ago, so 3 year ARM mortgages started at those rates should definitely reset lower in the current rate environment. Rates were quite a bit lower in 2002-2004, but the common 3 or 5 year rate locks on those have long run out and those mortgages should be resetting once a year with relief coming for those still making their payments.
My light weight analysis leads me to believe that foreclosure rates should slow on ARMs, as rates are reset lower than the current payment for many mortgage holders.
Thornburg Mortgage sells its soul to stay afloat
According to the WSJ, Thornburg Mortgage has reached a agreement with 5 of its lenders to freeze margin calls at this time. From what I read the price is very high:
- The 5 lenders will receive warrants for up to 27% of the outstanding common stock at 1¢ per share.
- The dividend will be suspended for the remainder of 2008. If profitable the company can declare a dividend in December to be paid in January 2009.
- The repo parties will keep 100% of the principal repayments on the affected securities and 20% of the interest paid.
- TMA must still raise close to $1 billion in new capital in the next 7 days.
I hope they can make this fly and keep the company going. Beside being a shareholder, I have a mortgage through Thornburg, and they have quality service. I guess time will tell if this move is enough to save the company.
Note: I have a long position in TMA.
Future looks positive for VeraSun Energy
VeraSun Energy (VSE: 6.19 -0.01 -0.16%) has released 4th quarter and year end results and the verdict is mixed. Results were better than estimates with the company company coming out with a positive 4¢ per share vs. the estimated loss of -2¢. It is too the company’s credit that they can stay profitable in this difficult market, but as revenues grow, earnings per share need to turn upwards soon. Revenue growth remains strong, 2007 revenues were 52% higher than 2006 and ethanol shipped increased 57% to 353 million gallons. The management’s philosophy is to become the largest, low cost producer of ethanol in the country, giving them the ability to ride out tight markets profitably. So far they are doing that.
Of course, as investors we want to know what the future will bring. During the conference call management highlighted some interesting facts. Here are a few, shorter term and long term:
Short term:
- For Q1, 2008 (which is almost over, so the numbers should be accurate), their average corn price is about $4.50, 90¢ higher than Q4, 2007 and the average received for a gallon of ethanol about 50¢ higher. Since you get about 2.8 gallons per bushel of corn, the spread will be improved. Also, the company will ship 35 million gallons more product in this quarter, so I see net profits increasing.
- The merger with U.S. BioEnergy (USBE: 0.00 N/A N/A) should close in the second quarter. This will give the company over 1.6 billion gallons of annual production by the end of 2008.
- For 2007, sales of VeraSun’s own branded VE85 grew at a 62% rate, showing growing acceptance.
Longer term:
- Construction of new ethanol plants basically ends at the end of 2008, early 2009. Production will level off at around 13.5 million gallons per year.
- Ethanol production is now about 4% of gasoline use. If most of the country adopts the E10 standard (and it appears they will) the production increase from todays 7.5 million gallon capacity will handily be absorbed.
- Corn production is projected to increase 2.5 billion bushels in 2008. Ethanol production will only take 1 billion bushels of the increase. The pressure on corn prices should ease. Future (10-15 years) increases in corn yields will more than exceed the increase required by ethanol production.
- VSE will start producing corn oil, to become biodiesel, at some of their plants this year. The corn oil will ad about 10-15¢ EBITA to each gallon of ethanol.
- VeraSun is actively investigating ethanol from cellulose technology. They will add that technology when it becomes economically feasible. Who do you think will do a better job: A company with years of ethanol production experience or a startup without a record?
The bottom line for me is, the company has a long term plan to reduce expenses and increase production. As the low cost producer, VSE will stay profitable even in tight times. Longer term looks positive for increased profitability and hopefully share prices. When that will be is the question. I think it is a good time to think about acquiring a position in VSE.
Note: I currently do not have a position in VSE.
Thornburg Mortgage getting squeezed out of business!
Well, it appears the little guy, Thornburg Mortgage (TMA: 0.73 +0.02 +2.82%) is being squeezed out of business by the holders of its reverse repurchase agreements. TMA filed yesterday that J.P. Morgan Chase will exercise its rights to seize the collateral because Thornburg has not come up with an additional $28 million for margin requirements. This is after TMA has provided what appears to be $570 million towards the account.
I see J.P. Morgan (JPM: 46.53 -0.49 -1.04%) getting the assets at values far below what they will eventually be worth, but first they sucked all of the cash out of Thornburg they could get.
The big banks win several ways with this. First they drive a small, but efficient company out of the jumbo mortgage business leaving the big boys more opportunity to gouge their jumbo mortgage customers. And they get that company’s assets at fire sale prices which in a year or two will show up as nice trading profits on their balance sheet.
I may be wrong in my analysis here, but it make sense to me. It appears that the only think that can save TMA at this time is a deep-pocketed white knight.
Note: I am long TMA.
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