The price of oil briefly hit a new all-time high yesterday in a landmark event that finally pushed petroleum past the inflation-adjusted record set in 1980.
The Wall Street Journal leads its Business & Finance column and fronts its Money & Investing section with the news that oil futures topped out at $103.95 yesterday—about twenty cents above the twenty-eight-year-old record—before retreating to $102.45 for the day. The New York Times puts the news on the front of its Business Day section.
But, it gets worse
In more bad inflation news, gold closed in on $1,000 an ounce, a number the WSJ calls “psychologically important,” while the NYT reports that natural gas and gasoline futures hit new records and the FT reports corn, rice, and soybeans all set new highs.
Each of the papers says the commodities run-up is being driven by inflation fears, with the Federal Reserve signaling it is leaning toward inflationary rate-cut policies to fight a sharp economic slowdown.
The WSJ says OPEC is perplexed that oil prices are soaring as the economy slows, weakening demand for consumption. The NYT reminds us that the plunging dollar (which touched a new record low against the euro yesterday) has much to say about that:
Like many commodities, oil is priced in dollars on the international market. A falling dollar tends to buoy oil prices in part because consumers using stronger currencies, like the euro or yen, can afford to pay more per barrel.
Quote of the day
The Los Angeles Times has the best story of all the papers on oil prices&it’s easy to read and has the best context. It raises the prospect that the commodities price increases are a speculative bubble, and provides our Quote of the Day:
These days, Croft, 52, a quality-control specialist from Los Angeles, is easing up on the gas pedal when he drives, buying cheaper, unbranded gas, cutting back on clothes purchases and considering a hybrid car to offset high gas prices, he said.
“I’ve downgraded from steak and pork chops to smaller portions of spaghetti and hamburgers,” he said. “Everyone else is raising prices too, gouging people to make up for the increase in the gas. It’s a huge emotional strain on all involved.”
Shares of Thornburg Mortgage plunged 51 percent after the company missed margin calls and said it needs to raise capital or it will go under. The company’s problems are particularly alarming because it didn’t dabble in the subprime realm, but the panicked credit markets have crimped its ability to fund itself, says the Journal, which notes that just 0.44 percent of Thornburg’s loans are sixty days late—a number that beats the industry by a wide margin.
The FT reports that Thornburg says even if it survives the immediate crisis it faces stiff odds if it has to write down more of its lending portfolio.
Bloomberg reports that a Dubai sovereign-wealth fund says Citigroup will need to raise more capital to offset new losses, which an analyst wrote will likely reach $18 billion in fresh write-downs of assets during the first quarter.
A bright spot
Unlike Citigroup and Thornburg, most companies’ balance sheets are in solid shape going into this downturn, the NYT reports on its front page:
The typical American corporation has increased its savings so sharply that it probably has enough cash on hand to completely pay off its debts.
That should be good news in an economy unsettled by rising energy prices, tightening credit, gyrating stock prices and declining values for the dollar and the family homestead. Indeed, the Federal Reserve chairman, Ben S. Bernanke, cited strong corporate balance sheets as a bright spot in the darkening forecast he presented to Congress last week.
Some analysts also speculate that these cash-rich companies may start sharing their wealth with investors through special dividends, providing welcome stimulus for the economy.
The Times story is nice enough, but we would have liked it to touch on the fact that for years companies haven’t been able to find investments good enough to justify spending their cash on. What does that mean for the economy and long-term stock valuations?
An FT scoop
The FT scoops on its front page that Ambac Financial has decided not to split itself into two “good bank/bad bank” companies. The paper says the company figured such a move would open it up to lawsuits, and reports that the firm will announce as early as Wednesday that it has completed raising the capital ratings firms say is necessary to keep its AAA rating—for now.
That’s good news for banks who would otherwise have to take billions of dollars in fresh writeoffs if Ambac’s credit ratings sink. The eight banks leading the bailout of the company include Citigroup and UBS, which can’t exactly spare the capital these days.
We’re still wondering how it makes sense for a company to bail out its own insurer. Aren’t insurers supposed to bail out their insureds?
Mixed reviews of borrower rescue
The WSJ reports on A3 that the Hope Now Alliance mortgage plan helped a million borrowers stay afloat in its first seven months.
The Washington Post on D1 is confusing about the details of the new report, but notes that a banker who helps run the Hope Now program questions its long-term viability. The banker says those “helped” by the program could face higher costs in the long run.
The Journal also says most people don’t get helped:
Critics say that while the industry is intensifying its efforts, it still isn’t helping most of the borrowers in trouble. “Seven out of 10 homeowners who are seriously delinquent get no attention at all” from their mortgage company, and thus aren’t benefiting from workout programs, said Mark Pearce, deputy banking commissioner in North Carolina, citing a recent study by state officials. Mortgage companies say they have a hard time reaching many borrowers who fall behind on their loan payments.
Buffett: it’s a recession
In economic news, a manufacturing gauge fell to a five-year low—and a level indicating that the industry is in recession—while construction spending fell nearly 20 percent in January—the biggest drop in fourteen years.
Commercial real-estate building, which has helped keep the construction industry afloat as homebuilding slowed dramatically, dropped 0.8 percent. The WSJ on C1 says office-building sales tumbled 42 percent in the fourth quarter while mall and strip-mall sales took a 31 percent dive.
Warren Buffett is glum in a CNBC interview:
“By any common sense definition, we are in a recession,” Buffett said. “Business is slowing down. We have retail stores in candy, home furnishings and jewelry; across the board, I’m seeing a significant slowdown.”
He also says stocks are not yet cheap.
And finally, more bad news
Car and truck sales in the U.S. fell 10 percent in January, the NYT says on C1. Gas-guzzling light trucks were particularly shunned, with sales down about a quarter at Chrysler and General Motors.
The WSJ says on A3 that the decline is the fourth in a row.
Computer-chip sales slid by 7 percent in January as consumers retrenched.