Filed under: International markets, Rumors, Products and services, Consumer experience, Middle East, Economic data, Oil, Recession

With the recent surge in oil prices, many of you out there may be hoping to see OPEC come in and cool the market with a production increase, but that’s far from likely to occur. In fact, OPEC now finds itself in a pretty uncommon position (wsj.com subscription required), with the likely outcome being that the group will decide to do nothing at all.

So what exactly is OPEC looking at? The most obvious factor that the group must contend with is all time highs in oil, and a current cost per barrel of $102.50. For so long we kept wondering if / when we would be seeing $100 oil, and that time has come, and now it seems like oil has formed a pretty solid base of support above the psychological $100 barrier. This would typically lead you to believe that OPEC would come in and lift production in order to cool off prices.

But, on the other hand, OPEC also has to contend with a weakening dollar, fears over a possible recession, and rising inventories in America. All three of these, by themselves alone, would be enough to put pressure on OPEC to actually look at tightening its supplies. The group definitely doesn’t want to see a recession spread across America and put a serious crimp in the nation’s appetite for oil.

Up until the past few weeks we were getting signals from OPEC that we would be seeing some cuts coming in the near future, but now I believe it to be highly doubtful that any cuts are coming in the next several months. Politically it just wouldn’t look right to see the group lower its output will prices are at all-time highs. But then again, OPEC typically does what OPEC wants to do.

OPEC has argued that the current surge in prices has nothing to do with fundamentals. They point to the rising inventories in America as evidence that demand is not up to the levels that would justify opening up the pumps a tiny more. In fact, they’ve estimated that demand this year will fall 400,000 barrels a day under that of 2007.

So what will OPEC ultimately decide to focus on? Should it look at the current record high prices and look to put some oil into the market? Or can we anticipate it to pay more attention to the inventory levels in the U.S.? In the end, I think that OPEC will lean more towards cutting back supplies to prevent over saturating the market in the event of a recession down the road, but for now, I wouldn’t expect to see any changes coming out of the group.

What are your thoughts? Does OPEC need to step in a lift its quotas in order to cool prices down, or should they stand by and let the market figure it out for itself for the time being? What would you do in their shoes?

Michael Fowlkes has worked as a stock trader for seven years and spent the last four years working as an analyst for the online investment advisory service Investor’s Observer.

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Filed under: Other issues, Good news, Abbott Laboratories (ABT), Housing, Federal Reserve

The U.S. Federal Reserve will conduct two auctions of 28-day credit through its Term Auction Facility in March, the Fed announced Friday, in a statement.

The Fed said it will offer $30 billion in an auction on March 10, 2008 and $30 billion in an auction two weeks later, on March 24, 2008.

The Fed also reiterated its support for the term auction facility policy. The Fed said: “The Federal Reserve intends to conduct biweekly TAF auctions for as long as necessary to address elevated pressures in short-term funding markets. Decisions regarding auctions in April will be announced by Friday, March 28.”

The Fed also announced some technical changes to procedures for the March auctions to improve the overall efficiency of the auction process. The minimum bid rate and other auction details will be announced at 10 a.m. EDT (New York time) on Monday, the auction day. Previously, this information had been provided on the Friday before each auction. In addition, the bidding period will be shortened to two hours — to 11 a.m.-1 p.m. EDT (New York time) — from the three-hour bidding period that had been used in previous auctions.

The results of each auction will be announced at 10 a.m. EDT (New York time) on the Tuesday following each auction; final settlement will occur on the Thursday following each auction.

Economic Analysis: The Fed’s announcement will no-doubt be welcomed by many executives and economists, among others. The $60 billion will supply short-term funds for those banks that need it, and the Fed’s statement reiterates Fed Chairman’s Ben Bernanke’s commitment to keep the Term Auction Facility open “for as long as necessary,” as the nation deals with its most serious financial problem since the savings and loan crisis of the late 1980s-early1990s. Perhaps more significant than any other TAF consequence, the TAF ’s funds “adds more time to the time clock,” to borrow a sports metaphor, giving banks more time to adjust operations to deal with losses in subprime mortgages and related asset products.

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Filed under: Earnings reports, Forecasts, Amer Intl Group (AIG), Economic data, Housing

Bring back Hank Greenberg. At least when he ran AIG (NYSE: AIG) it was making a lot of money.

In the last quarter, the huge insurance operation lost $5.29 billion. The fourth-quarter results “included a pre-tax charge of roughly $11.12 billion from a net unrealized market valuation loss related to the super senior credit default swap portfolio of the company’s AIG Financial Products Corp. derivatives unit,” according to MarketWatch.

The most remarkable thing about AIG’s quarter is that management said 2008 could be a repeat performance, especially if the housing and credit markets stay bad. At this point, that would look like a good bet.

AIG’s forecast signals that huge banks and brokerage houses, which hold mortgage-based derivative paper like AIG does, are apt to post more massive losses, at least in the next couple of quarters. It raises the question about how many of those financial firms will have to raise additional capital.

Warm up the Gulfstream. It is time to fly to Singapore and the Middle East again.

Douglas A. McIntyre is an editor at 247wallst.com

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Filed under: Economic data, Housing, Recession

Treasury Secretary Henry Paulson is not normally the first person I’d look to for cogent, well-reasoned analysis, but I have to say his comments on mortgage bailouts are right on.

Talking to the Wall Street Journal (subscription required), Paulson referred to many of the aid proposals making the rounds in Washington as “bailouts” for reckless lenders and borrowers: “I don’t think I’ve seen any scenario where the American taxpayer needs to be stepping in with more taxpayer dollars.”

He added that “I’m seeing a series of ideas recommended involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street.”

Mr. Paulson believes that urging the lenders to cut borrowers some slack is the role the government should play, and I agree. Knock yourself out: if you can talk to the bankers and convince them to play nice, I’m all in favor of it. But don’t spend our money bailing out lenders and borrowers, while artificially propping up the housing market.

And I’m still dying for an answer to my lingering question: Why is it bad if someone with no equity in their home loses the home? Is someone who “owns” a home but doesn’t have any equity really a home owner?

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Filed under: Politics, Housing, Federal Reserve

With home foreclosures expected to increase in 2008 as the second wave of variable interest rate mortgages reset, an influential member of Congress is expected to introduce legislation that would enable the Federal Housing Administration to purchase at-risk loans, enabling them to be refinanced and preventing homeowners from being foreclosed upon, The Financial Times reported Wednesday.

U.S. Congressman Barney Frank, D-Massachusetts and chairman of the Home Financial Services Committee, is floating a $15 billion initiative that would authorize the FHA to purchase as many as 1 million at-risk mortgages, The FT reported. Some loans, such as those for investment properties and vacation homes, would not be eligible for the program.

The overlooked FHA

Overlooked during the “Roaring 1990s” economic expansion and this decade’s housing boom, the Federal Housing Administration is a Depression-era agency that insures loans made to borrowers with poor credit.

If introduced, Frank’s proposal would be one of several bills circulating in Congress designed to prevent the current housing slump — the nation’s most severe housing slump in more than 20 years — from worsening. To-date, the Bush Administration has steered away from government buys of classes of loans and favored private initiatives aimed at restructuring them, along with public-based monetary policies designed to improve banks’ cash flow.

Critics: rewards bad choices

Among other criticisms, critics charge that the private sector banks should be able to withstand the massive amount of foreclosures and defaults brought on by the housing slump. Rep. Frank disagrees. “You can’t put an end to the economic problems without reducing foreclosures,” Rep. Frank stated, The Wall Street Journal reported Wednesday. (Subscription required.)

Critics also state an FHA program would amount, in many cases, to rewarding people who made bad choices, and/or encourage reckless financial behavior. Economist Steve Affinito disagrees, saying the latter “is a viscous double-standard of the very worst sort.”

“If the critics are concerned about the government rewarding people who made bad choices, then why did the [U.S.] Federal Reserve establish the Term Auction Facility to provide short-term liquidity, which are loans, to banks?” Affinito stated. “The banks made bad choices. If the government is against helping entities after they made bad choices, the government should let the banks fail. The answer is obvious enough. The government is not against it, and there are positives associated with intervention, so the FHA plan is a legitimate tool.”

Affinito added that there’s solid U.S. Government case precedent for assistance, both to the banking system and to homeowners. In the 1930s, the government created the Home Owners’ Loan Corp. to help borrowers avoid foreclosure, he said. The post-World War II GI bill for U.S. military service veterans also guaranteed veterans’ first-home mortgages, “which constituted a form of assistance,” Affinito stated. The GI bills’ insurance also enabled veterans to secure mortgages at a lower interest rate.

Economists and analysts estimate that by the end of 2009 up to 1.3-1.5 million home mortgage holders may need some form of assistance to avoid foreclosure.

Congress weighing other ideas

Further, along with the Rep. Franks’ FHA proposal, other ideas also are being floated in Congress. The federal Office of Thrift Supervision, a division of the U.S. Treasury, is working on a plan to help borrowers who owe more on their mortgages than their homes are worth, The Journal reported Wednesday. (Subscription required.) In addition, lawmakers are stated to be working on a separate $20 billion bill for grants and loans to state and local government to help to buy up foreclosed and abandoned homes.

Still, Affinito admits that Rep. Frank and other Democrats will need to compromise and find common ground with those Republicans receptive to the FHA plan; President Bush is also apt to at least voice criticism of the proposal, if not threaten an outright veto, on unnecessary government intervention grounds, Affinito added.

Even so, Rep. Frank isn’t deterred. “It was the lack of government intervention that got us here,” Rep. Frank stated, The Journal reported Wednesday. (Subscription required.)

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Filed under: Private equity, Housing

For hedge funder operator Och-Ziff (NYSE: OZM), it’s been a wild ride since its IPO in November, mostly downhill. The company’s stock price has gone from $32.80 to $20.02.

But this week things have been improving. Och-Ziff announced a fairly good earnings report. For example, the firm posted distributable earnings of $505.5 million, or $1.27 per share. What’s more, assets under management spiked 48% to $33.4 billion.

Yes, with such amounts, it doesn’t take too much work to generate juicy fee income. And Och-Ziff has produced consistent returns. Keep in mind that the firm has an opportunistic approach to investing, which includes exotic strategies and broad global reach.

And yes, the firm thinks that the recent market turbulence is presenting some good investment options. Och-Ziff said it plans to devote 10% of its $20 billion OZ Master Fund to the beaten-down credit market — including even residential mortgages.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

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ZonkerWilliam suggests a bulletin from the American Institute of Physics, which discusses a study noting that recent spacecraft, such as NEAR, appear to display velocity anomalies much like those seen in Pioneer 10 (which were observed beginning ten years ago). The anomalies amount to up to 13 mm/sec., with a measurement accuracy of 0.1 mm/sec. Quoting: “A new look at the trajectories for various spacecraft as they fly past the Earth finds in each case a little amount of surplus velocity. For craft that pursue a path mostly symmetrical with respect to the equator, the effect is minimal. For craft that pursue a more unsymmetrical path, the effect is bigger.”

Read more of this story at Slashdot.

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Filed under: Earnings reports, Forecasts, Toll Brothers (TOL), Housing

Shares of luxury homebuilder Toll Brothers Inc. (NYSE: TOL) are higher in early trading despite posting a decline in its quarterly profit. It looks like the company is still looking for the light at the end of the tunnel as lower sales and increased write-downs resulted in weak earnings results.

During the first quarter, Toll Brothers stated it swung to a loss of $96 million, or 61 cents per share as the weak U.S. housing market put a curb on demand and builders were forced to slash home prices. In addition, the company reported that the number of signed contracts for new homes dropped 46% to $573.1 million from the same period last year.

Included in the company’s numbers were pre-tax write-downs of $245.5 million. Excluding that, the largest U.S. luxury home builder’s earnings would have been $57.3 million, or 35 cents per share. Analysts, on average, forecast a quarterly loss of 44 cents a share.

All of the recent recession chatter has accompanied a drop in consumer spending that led to a 23% drop in quarterly sales. Revenue during the first quarter slipped to $842.9 million, down from $1.09 billion in the same period last year. For the quarter, analysts were anticipating the company show a revenue of $818 million.

Amid continued fears over a possible recession, with investors showing increased worries over the slumping housing market and credit crunch, Toll is one of the first major home builders to report earnings. Despite its weak earnings figures, analysts at Lehman Brothers are not disappointed and show optimism over the company’s future gains.

Analyst Megan Talbott McGrath initiated coverage on the stock this morning with a “Positive” rating, anticipating improved sales trends in the U.S. homebuilding industry within the next two quarters. Even though the broker believes that stocks in the sector will remain volatile as new home sales haven’t “reached a bottom,” McGrath anticipates that trends will improve by the second half of 2008. She gave an “Overweight” rating to Toll Brothers with a $27 price target.

For now, it looks like McGrath might be correct in her assessment as traders have pushed shares of the stock up 2.74% in early morning trading.

Eliza Popescu is a financial writer for the online investment advisory service Investor’s Observer.

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Filed under: Bad news, Economic data, Housing, Recession

Sales of new homes fell 2.8% to a seasonally-adjusted annual rate of 588,000 in January 2008, the U.S. Commerce Department announced Wednesday (pdf). Economists surveyed by Bloomberg had expected a seasonally adjusted rate of 600,000.

Meanwhile, the December 2007 seasonally-adjusted total was revised to 605,000.

The median sales price of new houses sold in January 2008 fell 4.3% to $216,000; the average sales price rose 0.7% to $276,600.

In addition, the seasonally-adjusted estimate of new houses for sale at the end of January 2008 was 482,000 — representing a 9.9-month supply at current the current sales rate.

Economist Steve Affinito told BloggingStocks Wednesday the January 2008 new home sales data is in-line with earlier data on existing home sales, indicating that the housing slump is far from over.

“The important numbers in today’s report are the median home price and inventories. The median home price fell over 4% to $216,000 and that indicates considerable market softness, and inventories remain at housing recession levels, nearly 10 months,” Affinito stated. “Keep in mind that these stats are occurring while near-record-low mortgage rates are working their way into the system. So it recommends home buyers are reluctant to commit, which is understandable, given the likelihood of future housing price declines.”

Housing lowers U.S. GDP

Further, Affinito said the housing sector’s slump is apt to continue to subtract from U.S. GDP through at least Q3 2008, and possible well in Q4 2008. Affinito added that he now expects the slumping housing sector to lower 2008 U.S. GDP by about 1.0-1.2 percentage points.

“The U.S. economy is diverse and technology-intensive, but housing still plays a significant role because it feeds so many lateral sectors, like appliances, furniture, and home improvement/landscaping,” Affinito said. “The economy really benefited from housing during the housing boom, and now we’re seeing the reverse effect during the correction.”

As a result, Affinito believes U.S. Q1 growth will register -0.2% to -0.5%, with a similar reading in Q2, adding that an increase in the home foreclosure rate in the second half of 2008 would deepen and prolong the recession.

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Filed under: Housing

I recently read an excellent book that makes the case for a long-term bull market in student housing: Michael Zaransky’s Profit By Investing in Student Housing: Cash in on the Campus Housing Shortage.

Unfortunately, many investors lack the resources (time and money) to pursue investments in condos/apartments etc. but Mr. Zaransky writes about another possibility: a trio of publicly-traded REITs that specialize in student housing. There’s American Campus Communities, Inc. (NYSE: ACC), GMC Communities Trust (NYSE: GCT), and Education Realty Trust, Inc. (NYSE: EDR).

There are compelling arguments that student housing will prosper because of a shortage of dorm space and an increase in the college-age population and the percentage of people who attend college. Student housing may be more resilient/less tied to broader economic trends than the rest of the real estate market.

All of the REITs mentioned above sport dividend yields over 5%, and might be worth a look for investors seeking real estate exposure.

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