U.S. Economic/Financial News
More Warnings of Hedge Fund Blowout
Following what looks likely to be the failure of the $1 billion Red Kite Management hedge fund, a $10 billion Goldman Sachs hedge fund has now told investors it lost 6% for 2006, Bloomberg and other financial websites reported Feb. 6. Goldman's Global Alpha fund had never previously lost money. Goldman's chief financial officer told analysts that fees will drop across the company, and that "this will be significant."
Jim Rogers, co-founder with George Soros of the Quantum Fund, and now based in Australia, put out a warning Feb. 5 of leveraged takeover defaults and hedge fund blowups. "There is going to be a gigantic shakeout when the whole buyout mess comes apart," Rogers wrote. "They are paying too high prices, and they are leveraging themselves too much." "We've had financial crackups, and when the next bear market comes, we are going to have some more major financial collapses and who knows, we might have another depression." On hedge funds, Rogers' forecast was short-term: "We are going to see a lot more blowups."
Another warning, "Hedge Fund Problems Start with the Fed," was circulated by a Wachovia banker and two credit analysts, as a presentation for a Feb. 16 forum of the Professional Risk Managers International Association in New York. "The big problem [on credit markets] is that all current prices are propped up by extraordinary liquidity. Take that away, and prices will be much lower [i.e., interest charges on bonds will go much higher], and many issuers will default. The Fed and the U.S. Treasury are the chief culprits in an approaching perfect storm of systemic financial risk."
Wall Street Pushes for 'Green Hedge Funds,' Bio-Fuels
Here are the latest developments in the Wall Street/Bio-Fools lunacy:
* A "Wall Street Green Trading Summit" is scheduled for April 16-17 in New York City, sponsored by Reuters and others. Leading Europeans involved in carbon trading are to speak; invited big-wig speakers include Hillary Clinton, and top officers of JP Morgan Chase and Goldman Sachs. Topics include "Biofuels Trading Markets.... The Latest on Green Hedge Funds.... Tying Emissions Reductions to Green Investments...." (Global Change Associates, Feb. 8.)
* The House of Representatives voted up on Feb. 8 a bill to provide for further storage and transportation of biofuels. H.R. 547, the "Advanced Fuels Infrastructure research and Development Act," commits funds to study how to distribute more ethanol and biodiesel. It now goes to the Senate. Never mind that many current gas station tanks and other equipment cannot tolerate E85 and some forms of biodiesel.
Loudoun Home Construction Plunged Toward Zero in 2006
In 2006, Loudoun County, Virginia, a bedroom community 40 miles west of Washington, D.C., issued 3,284 permits to build residential homes, which is 35% below the level of 5,065 permits issued in 2005, and 50% below the level of 6,500 issued in 2003, the Washington Post Loudoun Extra reported Feb. 4. 2006 represented Loudoun's lowest level of home construction in ten years. Peter Morici, a University of Maryland economist, characterized the shift in building permits between 2005 and 2006, as "a very, very large drop." Morici emphasized, "Loudoun County has been a hot area. So what this tells us is the bloom is off the rose in Loudoun County, and it could indicate a shift region-wide."
Incredibly, there is a backlog of 36,000 homes that the County had approved for construction, but which were not built. This reflects sheer mania: the home builders were planning to build, but could not. Many are grinding their teeth.
However, undeterred by the real world, permits for nonresidentialmostly commercialconstruction in Loudoun County, which Lyndon LaRouche had described as "ground zero" for the housing bubble, increased from 2 million square feet in 2002, to 4.1 million square feet in 2006. Supposedly, the new stores and office buildings would be built for economic activity that doesn't exist.
Half of U.S. Consumers Say Housing Price Collapse Likely
The Experian-Gallup Personal Credit IndexSM survey, which is conducted annually, reported on Feb. 5 that 47% of all U.S. consumers say they think a housing bubble and collapse of housing prices is likely (16% say very likely, 31% say somewhat likely). Ten months earlier, in April 2006, 42% responded that a housing price collapse was likely; in May 2005, 37% said it was likely. So much for the myth, spread assiduously by the Wall Street Journal and other publications, that few Americans think that housing prices will plunge.
With respect to rental units, Ty Taylor, president of Experian Consumer Direct, asserted, "Housing market conditions may not have reached bottom at this point, with 57 percent of renters thinking there is the potential for a price collapse in their local areas over the next few years."
Blackstone/EOP Takeover Largest Ever
The notorious hedge fund Blackstone Group LP won a takeover bid Feb. 9, for the world's largest property company, Equity Office Properties Trust (EOP). EOP, based in Boston, agreed to the deal after Blackstone raised its cash offer to $39 billion, beating the rival bid of Vornado Realty Trust. This constitutes the largest corporate takeover ever, and represents another excess for hedge funds. Blackstone acquires 590 commercial properties throughout the United States, and is moving deeper to take over the market: it raised a record $5.35 billion real estate fund last June, and is expected to raise another $10 billion fund for property investment this year.
'Secret Plan' for Chrysler Accelerates U.S. Auto Liquidation
The Detroit News reported Feb. 5, the major elements of "a secret restructuring plan dubbed 'Project X' [that] is focussed on transforming Chrysler into a smaller, more efficient [sic] automaker." The newspaper stated that the plan would be unveiled Feb. 14, calling for "unprecedented sharing of vehicle architectures and parts between Chrysler and Mercedes." The News continued, "The plan also outlines deep cost cuts: plant closings, a reduction of factory shifts and employee buyouts aimed at slashing more than 10,000 blue-collar jobs. Sources said the likely closures will include an assembly plant in Newark, Delaware, and an engine plant in Detroit." The plant scheduled to be closed in Detroit is the Mack Engine Manufacturing plant, which consists of two complexes, Mack I (which manufactures V-8 engines), and Mack II (which manufactures V-6 engines). The Mack complex employs 1,200 production workers; most of the overall job cuts are to come from elimination of shifts at plants throughout the country.
The Chrysler action follows by less than two weeks Ford Motor CEO Alan Mulally's announcement Jan. 24, that Ford will close 40% of its North American plants (16 out of 42) and cut 39% of its production and salaried employees (50,000 out of 130,000) in the period which began at the end of 2005, and ends in the first quarter of 2008. During 2006, GM announced that it would close 14 plants and lay off 30,000 production workers. By the Summer of 2007, absent LaRouche's Economic Recovery Act, hardly any of machine-tools of the auto industry will be in existence.
TVA To Build Nuclear Plants, Not Worry About Debt
The occasion of release of the Federal budget on Feb. 5 promoted the annual call from the monetary maniacs in Washington for the Tennessee Valley Authority TVA to pay down its debt, and register with the Securities and Exchange Commission. TVA has refused to do this for years. In fact, the TVA, established by President Franklin Roosevelt, is self-financed, but gets favorable lending terms as a Federal authority. The Office of Management and Budget on Feb. 5 urged debt reduction to "position TVA for a more competitive electricity market, and achieve a more sound business risk profile." FDR would turn over in his grave.
"Sometimes debt isn't bad, especially if you are increasing the value of your assets by adding more generation," explained Jack Simmons, director of the Tennessee Valley Public Power Association, which buys low-cost electricity from the TVA. "I don't think we are in too bad shape, and I certainly don't get up every day worrying about paying down the debt," said TVA chairman Bill Sansom.
This year, TVA will reopen the Browns Ferry nuclear plant shut since 1985, and soon decide to spend up to $7 billion over the next few years to complete an unfinished unit at Watts Bar, and build two new nuclear plants.