“The Economy Is In Shambles”- Buffet

No really what do you think

In a live interview on CNBC today, Warren Buffett said there has been little progress over the past few months in the “economic war” being fought by the country. “We haven’t got the economy moving yet,” he told Becky Quick.

READ THE FULL CNBC INTERVIEW TRANSCRIPT

While the economy is a “shambles” and likely to stay that way for some time, he remains optimistic there will eventually be a recovery over a period of years.

BECKY: The last time we sat down to talk to you was on May 4, and at that point you told us that you think we’re in an economic war right now. How much progress do you think we’ve made in that war?

BUFFETT: Well, it’s been pretty flat. I get figures on 70-odd businesses, a lot of them daily. Everything that I see about the economy is that we’ve had no bounce. The financial system was really where the crisis was last September and October, and that’s been surmounted and that’s enormously important. But in terms of the economy coming back, it takes a while. There were a lot of excesses to be wrung out and that process is still underway and it looks to me like it will be underway for quite a while. In the (Berkshire Hathaway) annual report I said the economy would be in a shambles this year and probably well beyond. I’m afraid that’s true.

Buffett also noted that he had a cataract operation on his left eye about a month ago. He joked that he thought it might help him see “green shoots” for the economy, but so far he hasn’t seen any hopeful signs.

Taking a firm position in an ongoing debate in the financial markets, Buffett says he’s not concerned about deflation, but thinks inflation will be a problem in coming years.

Despite his negative view on the economy, Buffett still believes the stock market is attractive “over the next 10 years” when compared to alternatives like Treasury bonds.

Buffett endorsed Ben Bernanke’s reappointment as Federal Reserve Chairman, saying “you couldn’t do better.” He also praised Treasury Secretary Tim Geithner.

Asked about how Apple handled Steve Jobs’ liver transplant, Buffett said it is a “material fact” when the CEO of a company is facing major surgery. He thinks criticism of Apple over the matter is appropriate.

Buffett repeated his criticism of “cap and trade” as a method to control pollution, saying it would be a huge, regressive tax.

Uncle Sam Play’s a Role

If you still doubt the role of the Community Reinvestment Act in encouraging lax lending practices, you should check out this 1996 pamphlet published by the Comptroller of the Currency. It discusses “some activities undertaken by small national banks that demonstrate exemplary performance under the Community Reinvestment Act.” Those activities now look a lot like the creation of toxic loans.

And what are those activities?

* Hawley National Bank is praised for offering residential loans with flexible terms, including three-year and five-year balloons and adjustable-rate mortgages. It also offers down-payment assistance.
*

First National Bank of the Berkshires’ loan portfolio, which consisted mostly of real estate related loans, is said to “reflect positively” on the bank’s efforts to meet CRA requirements. “The bank’s most innovative product is a mortgage loan, offered to customers of all income levels, that requires only a 3 percent down payment. In addition, the bank pays most of the closing costs and will escrow those to be paid by the borrowers. According to the bank officer, this product has received tremendous interest and represents about 80 percent of new loan originations,” the pamphlet says.

These examples are offered as “helpful hints” to other banks on how to comply with the CRA.

Sinopec Gobbles Addax Petroleum

By GUY CHAZAN and SHAI OSTER

China again sought to satisfy its hunger for natural resources, as state-owned Sinopec Group agreed to acquire oil-exploration company Addax Petroleum Corp. for 8.27 billion Canadian dollars (US$7.19 billion), in what would mark the largest overseas takeover by a Chinese company.

The deal increases Sinopec’s presence in one of the world’s hottest oil-exploration frontiers — offshore West Africa — and establishes it in oil-rich but politically sensitive Iraqi Kurdistan.

The transaction also underscores the growing appetite for risk among Chinese resource companies. For years, they tended to tread cautiously, especially after U.S. political pressure forced Cnooc Ltd. to abandon its $18.5 billion bid for oil producer Unocal Corp. in 2005.

But in the past year, Chinese state-owned companies have been encouraged to make acquisitions by a central government convinced that the global financial crisis has created an unmatched buying opportunity.

They are taking advantage of depressed asset prices and access to Chinese credit to strike deals designed to secure the resources needed to power China’s growing economy.

The purchase also demonstrates growing confidence among Chinese energy companies. In the past, they have preferred to strike government-to-government deals and offer loans for oil. Over the past half-year, China has proffered more than $45 billion in loans to Russia, Brazil, Venezuela and Kazakhstan in exchange for long-term crude supplies.

But deals like the Addax acquisition show they are gradually growing into international oil companies, capable of striking high-profile, cross-border deals. They are even expanding into countries, such as Syria, deemed too risky by Western oil companies.

But not all of China’s efforts have been successful. In early June, Anglo-Australian mining giant Rio Tinto Ltd. rejected Aluminum Corp. of China’s $19.5 billion offer for part of the company after recovering markets made the deal financially unpalatable. That deal also faced economic, political and shareholder opposition, reflecting fears over the consequences of giving China direct access to big supplies of natural resources.

The Addax deal also marks the first time a global oil giant has ventured into the Kurdish autonomous region of northern Iraq. Authorities in Baghdad have denounced as illegal the roughly 30 oil contracts negotiated between the Kurdish regional government and foreign energy companies like Addax. Western oil majors have steered clear of Kurdistan for fear of antagonizing the Iraqi government.

Sinopec’s foray into the region suggests the tide might be turning. Earlier this year, Iraqi Oil Minister Hussain al-Shahristani gave approval for foreign companies developing oil fields in the Kurdish region to export their crude directly to international markets. Addax was a beneficiary of the change and has been shipping oil since the start of this month.

Still unclear, however, is how foreign companies will be compensated for the oil they export, with most sales revenues being channeled to Baghdad.

“The Sinopec deal shows the big boys are now more confident about investing in Kurdistan,” said Helmut Langanger, head of exploration and production at OMV AG, the Austrian energy firm that is also drilling for oil in the Kurdish region. OMV says its presence in the north disqualified it from participating in Iraq’s first oil-licensing round, scheduled for next week.

“The Chinese must feel comfortable that they can manage this, otherwise they would never have announced it,” said one person familiar with the deal.

Based in Switzerland and listed in London and Toronto, Addax is one of the largest independent oil producers in West Africa and the Middle East by volume. Aside from Kurdistan, it operates off Nigeria, an area that has seen huge exploration success in recent years.

The company produced 136,500 barrels a day on average last year, or about 1.7% of China’s daily consumption. China used about eight million barrels daily last year, according to the BP Statistical Review of World Energy.

The deal is a coup for Addax Chief Executive Jean Claude Gandur, one of the founders and principal shareholders in the company. He is a Swiss citizen who grew up in the Egyptian city of Alexandria and started out as an oil trader in the 1970s.

He set up his own West African trading operation, Addax & Oryx Group, in 1987 and later began acquiring stakes in oil fields while gaining a reputation as a buccaneer who thrived in tough, politically risky settings.

In 1994, he hived off Addax’s oil-exploration and development business into a separate company, Addax Petroleum, and listed it on the Toronto Stock Exchange 12 years later.

Sinopec offered C$52.80 a share, 16% more than Tuesday’s closing price in Toronto. In a statement, Addax said its board recommended that shareholders accept the offer and said senior executives, including Mr. Gandur, have agreed to sell their combined 38% stake to Sinopec.

Sinopec called the acquisition “a transformational transaction” that would accelerate its international growth.

Putting pressure on Chrysler

By ALEX P. KELLOGG

GMAC LLC is suspending wholesale financing for certain Chrysler Group LLC dealers it considers to be too risky to lend to, GMAC and Chrysler confirmed Wednesday.

The move could ultimately push more Chrysler dealers out of business and hurt the company’s ability to sell vehicles. During its bankruptcy restructuring, Chrysler shed 789 dealers.

GMAC, formerly the captive lending arm of General Motors Corp., recently took over financing of Chrysler dealers’ inventory after Chrysler’s own lending arm stopped doing so. (For other GM news, please see articles on B3.)

About 60% of the roughly 2,400 dealers who survived Chrysler’s bankruptcy applied for interim wholesale financing with GMAC, according to Chrysler. So far about 6% — more than 80 — have been informed that their wholesale financing has been temporarily suspended, the company said.

GMAC declined to say how many of the dealers so far have been vetted to continue to receiving loans, and refused to confirm the number of dealers it has suspended. The company said it will need about six months to complete the vetting process.

GMAC said the process was part of normal due diligence. GMAC’s goal in part is to avoid doing business with dealers who are too big a financial risk, Mike Stoller, a company spokesman said.

The lender earlier provided interim financing to all Chrysler dealers who applied for it. It received billions in government aid to do so, including $7.5 billion in late May.

But surviving Chrysler dealers always were set to be vetted later, said Mr. Stoller. “The next step was always to go back and look at each of the dealerships individually,” he said. Mr. Stoller said GMAC wasn’t working with Chrysler on this effort and that it had “no particular goal in mind” for the number of dealers to continue to receive loans.

According to GMAC, suspended dealers typically have 30 days to improve their balance sheets or they must find another company to provide them wholesale lending.

But few Chrysler dealers GMAC rejects are likely to gain the additional capital to get back on board, or find another lender, such as a large bank, willing to take on their loan needs, given the current lending market.

“This definitely puts them [Chrysler] at a disadvantage,” said Mark Rikess, founder of Rikess Group, a California-based dealer consulting firm. “They’ve got a very weakened distribution channel right now.”

The car maker still has too many dealers, he said, but for the moment it needs those it has to survive and buy its vehicles.

Chrysler and GM both rely on GMAC for much of their retail-customer and wholesale financing. Chrysler Financial has been forced to wind down its lending due to a lack of capital.

This leaves Chrysler as the only major U.S. auto maker without a finance firm with which to work closely.

Chrysler expects to have most of its surviving plants running again by July, and will need dealers to buy cars so the company can begin generating revenue.

Fed believes inflation will be subdued for dome time

By Craig Torres

June 24 (Bloomberg) — The Federal Reserve refrained from increasing its $1.75 trillion bond-purchase program, said the pace of economic contraction is slowing and predicted inflation will remain “subdued for some time.”

“Substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time,” the Federal Open Market Committee said in a statement after a two-day meeting in Washington where it also kept the benchmark interest rate between zero and 0.25 percent. The rate will stay at “exceptionally low levels” for an “extended period.”

Chairman Ben S. Bernanke is watching to see how quickly the economy can recover from the deepest recession in five decades: Orders for durable goods unexpectedly rose in May, a government report showed today, while unemployment continues to climb. The Fed also wants to quell concerns that the $1 trillion expansion in its balance sheet will fuel inflation, pushing bond yields higher and crippling any rebound in the economy.

“The Fed wants to be clear they are not raising rates anytime soon,” said John Silvia, chief economist at Wachovia Corp. and a former economist in Congress. “They are leaving their options open. The plan is to stay the course at this point in time.”

The Fed said “the pace of economic contraction is slowing” and noted “conditions in financial markets have generally improved.” The central bank added that it “is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”

Absence of Dissent

Today’s decision was unanimous. The Fed’s $300 billion Treasuries-purchase plan is scheduled to end in mid-September, according to the FOMC statement at the conclusion of the March 17-18 meeting, when it was announced. The Fed also committed to buy up to $1.45 trillion of housing debt this year. At its current rate, the Fed will reach the $300 billion of Treasuries by late August.

Total assets on the central bank’s balance sheet grew $1.17 trillion over the past year to $2.07 trillion as the Fed loaned to banks, commercial paper issuers, and purchased bonds outright to support the flow of credit to consumers and businesses.

“This is a very difficult period,” said Marvin Goodfriend, a former senior adviser at the Richmond Fed who is now an economist at Carnegie Mellon’s Tepper School of Business in Pittsburgh. “The Fed is exposed to a concern about inflation because it hasn’t committed itself to a low-inflation objective, yet the Fed may need the flexibility to expand its balance sheet further if the economy underperforms.”

Yields

Treasuries fell for the first time in four days, with yields on the 10-year note increasing six basis points, or 0.06 percentage point, to 3.69 percent at 4:58 p.m. in New York.

While central bankers have indicated they accept the increase as long as it reflects expectations for an economic recovery, a further increase may put such an outcome in jeopardy.

The Standard & Poor’s 500 Index pared gains and the Dow Jones Industrial Average fell after the Fed announcement. The S&P 500 rose 0.7 percent to 900.94 in New York after climbing as much as 1.8 percent earlier. The Dow declined 23.05 points, or 0.3 percent, to 8,299.86.

Mortgage rates have risen in tandem with yields, potentially delaying a rebound in the housing market. The average 30-year mortgage rate increased to 5.59 percent earlier this month, the highest since November, before slipping to 5.38 percent in the week ended June 18, according to Freddie Mac, the McLean, Virginia-based mortgage-finance company.

‘Too Low’

“Looking back, we are all cognizant of what transpired in 2003 and 2004 when the Greenspan Fed just left the federal funds rate too low for too long,” said Richard Schlanger, a vice president at Pioneer Investment Management in Boston who helps oversee about $13.5 billion in bonds. Bernanke succeeded Alan Greenspan at the Fed’s helm in February 2006.

Bernanke told Congress during testimony on June 3 that the Fed “will not monetize” U.S. debt, addressing concern that the central bank’s purchases of government debt might be used to finance deficit spending. Measures of overall inflation retreated in April while so-called core prices rose.

The personal consumption expenditures price index rose 0.4 percent for the year ending April. Oil prices tumbled from an average price of $112 a barrel in April last year to an average of around $50 a barrel the same month this year. Prices minus food and energy rose 1.9 percent for the year ending April.

FOMC Challenge

“The challenge for us on the Federal Open Market Committee will be to shrink our balance sheet and tighten policy soon enough when the recovery emerges to prevent rising inflation,” Richmond Fed President Jeffrey Lacker said in speech in Raleigh, North Carolina, on June 10.

Inflation expectations have also increased. One such measure, the difference between yields on 10-year Treasuries and 10-year inflation-linked U.S. notes, rose to 1.84 percent yesterday from 1.41 percentage point at the start of last month.

Fed officials revised their estimates for growth, unemployment and inflation at today’s meeting. Their new forecasts will be available when the Fed publishes meeting minutes next month.

Private forecasters expect the economy to grow 1.9 percent next year, with inflation at 1.8 percent, according to the median estimates in a Bloomberg News survey. The unemployment rate will rise further, averaging 9.7 percent for 2010, according to economists in the survey. The jobless rate stood at 9.4 percent in May, the highest since 1983.

Wealth Destruction

Job losses and record wealth destruction suggest consumer spending may not sustain the gains reported in the first quarter. Department stores Macy’s Inc. and Dillard’s Inc. and luxury chain Saks Inc. reported on June 4 that sales declined more than forecast in May. FedEx Corp. said last week that profits will trail analysts’ estimates because of an “extremely difficult” economy.

“A slow economic recovery is still a recovery, and sooner or later the Fed will take back their emergency rate cuts,” said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “As long as the low rates Fed pledge is conditional on the economic outlook, those green shoots are going to drive investors out of bonds.”

Money-market futures contracts show traders see a higher probability of a Fed rate increase in early 2010 than they did a month ago. Still, current data contain few signs that the economy will rapidly turn from recession to growth and accelerating consumer prices.

Consumers Pulled Back

Industrial capacity use rates fell to a record low in May. Consumers pulled back on spending in both April and March as falling home prices, tighter credit, and high unemployment reduced confidence.

“The market sometimes gets ahead of itself, and this is one of those times,” Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania, said before the announcement. “We will see core inflation continue to moderate given high and rising unemployment and excess capacity in almost every corner of the economy.”

Commodities lead the way

By Jonathan Burgos and Masaki Kondo

June 25 (Bloomberg) — Asian stocks rose, led by mining and technology companies, after metals prices gained and orders for U.S. durable goods unexpectedly increased.

Komatsu Ltd., an earthmoving equipment maker that gets a quarter of its sales from the Americas, added 3.5 percent in Tokyo. Rio Tinto Ltd., the world’s third-biggest mining company, climbed 2.7 percent in Sydney. Mitsubishi Electric Corp. surged 7.2 percent after the Nikkei newspaper reported the company is planning to set up solar power manufacturing facilities in the U.S. and Europe.

“Undoubtedly, the economy has hit bottom and is rebounding,” said Mitsushige Akino, who oversees about $522 million at Ichiyoshi Investment Management Co. in Tokyo. “Some investors are staying on the sideline to see how this slow recovery will play out.”

The MSCI Asia Pacific Index rose 0.8 percent to 101.60 at 11:12 a.m. in Tokyo. Optimism the global economy is recovering has boosted the gauge by 44 percent from a more than five-year low on March 9. The Organization for Economic Cooperation and Development lifted its forecast for growth in the economies of its 30 member nations yesterday for the first time in two years.

Japan’s Nikkei 225 Stock Average advanced 1.6 percent to 9,741.87, while South Korea’s Kospi Index gained 1.6 percent. Australia’s S&P/ASX 200 Index added 0.7 percent as the International Monetary Fund raised its 2009 and 2010 growth forecasts for the country’s economy.

Futures on the Standard & Poor’s 500 Index added 0.1 percent. The gauge rose 0.7 percent in New York yesterday. U.S. orders for items meant to last several years increased 1.8 percent in May, a Commerce Department report showed. Economists had estimated a 0.9 percent drop.

Metals Prices

Komatsu, which gets more than 80 percent of revenues supplying construction and mining equipment, added 3.5 percent to 1,480 yen. Honda Motor Co., which derives 45 percent of its sales in North America, gained 2.1 percent to 2,610 yen.

The durable goods report boosted speculation demand for resources will increase. A gauge of six metals in London climbed 4.8 percent yesterday, the most since March 19, while copper jumped 3.1 percent in New York.

Rio Tinto climbed 2.7 percent to A$50.94. BHP Billiton Ltd., the world’s biggest mining company, gained 1.3 percent to A$34.15. Mitsubishi Corp., which gets more than half of its profits from commodities, advanced 2.6 percent to 1,785 yen.

Mitsubishi Electric surged 7.2 percent to 610 yen. The company plans to build plants for assembling solar power generation systems in Europe and the U.S. next fiscal year, Nikkei newspaper reported, without citing anyone.

Australian Economy

Samsung Electronics Co., the world’s biggest maker of liquid-crystal display televisions, added 1 percent to 586,000 won after a U.S. trade agency said some of the company’s products had been infringed by Sharp Corp. Some Sharp LCD televisions and computer monitors should be banned from the U.S., the country’s International Trade Commission said yesterday.

Harvey Norman Holdings Ltd., Australia’s No. 1 electronics retailer, climbed 4.1 percent to A$3.03. David Jones Ltd., the country’s second-largest department store chain, gained 2.5 percent to A$4.10.

The IMF said Australia’s economy will contract 0.5 percent this year, compared with a 1.4 percent decline estimated in April. The economy will grow 1.5 percent next year, the IMF said, after previously forecasting a 0.6 percent increase.