Archive for April, 2008

Is It A Recession Yet?

Kurt Brouwer April 30th, 2008

The economy limped along in the first three months of the year, growing at a rate of 0.6%. If that sounds like a slowdown, it is. In fact, it was the same modest growth rate we saw in the fourth quarter of 2007. Though this rate of growth is nothing to brag about, it is still positive. That is, we are not in a recession yet — at least, as long as these numbers hold up. The U.S. Department of Commerce is famous for revising GDP statistics, so it remains to be seen whether or not this number gets changed. Nonetheless, this report indicates we are not in a recession now [emphasis added]:

Economy Expands 0.6% In First Quarter (Associated Press - Fox News, April 30, 2020)

The bruised economy limped through the first quarter of this year at only 0.6% as housing and credit problems forced people and businesses alike to hunker down.

The country’s economic growth during January through March was the same as in the final three months of last year, the Commerce Department reported Wednesday.

The statistic did not meet what economists consider the classic definition of a recession, which is a retraction of the economy. This means that although the economy is stuck in a rut, it is still managing to grow, even if modestly.

…Earlier this year, some economists thought the economy would actually lurch into reverse during the opening quarter. Now, they say they believe that will likely happen during the current April-to-June period.

Gross domestic product measures the value of all goods and services produced within the United States and is the best measure of the country’s economic health…

This is an odd environment and today’s report just continues the trend. Clearly, some industries such as housing and finance have hit the wall. For them, it is clearly a negative economic environment. But, overall the economy just gimps along. You will hear the R word — recession — over and over again in coming months because we are in the middle of a presidential campaign. However, the signs are that the economy is slowing, but has not yet gone negative enough to warrant the proper use of the term recession.

Lehman Report Says Oil Bubble May Burst

Kurt Brouwer April 29th, 2008

This is an interesting report that takes a contrarian stance on the future for oil. It’s from, which is India’s biggest online business magazine [emphasis added]:

Oil Bubble Will Soon Burst, Says Lehman Report (, April 25, 2020)

The oil boom is on its last leg and may last a few months before a clutch of new refineries start operations amid slackening economic growth across the world, consultancy firm and investment bank Lehman Brothers has predicted in a report.

The report said supply is in fact outpacing demand growth even as inventories have been building up for quite some time now. This announcement must surely come as a huge relief for consumers reeling under high oil prices for some time now.

I like the strong position statement in this piece. It challenges the conventional wisdom that oil prices are going to go up much more than they have.

Tellingly, this news comes only two days after Thomas Boone Pickens, an American billionaire who made a fortune in oil speculation, predicted that oil could reach the $150 mark soon. Justifying his stance, he had said that the current global oil supply of 85 mbpd was well short of the requirement of 87 mbpd. “When you have 85 billion to cover 87 billion, the price has to go up,” he said.

”Inventories have been building since the beginning of the year. We have pretty significant projects starting soon in Saudi Arabia, and large off-shore fields in Nigeria,” said Michael Waldron, the US bank’s oil analyst.

Saudi Arabia has started production at its 500,000 barrels per day Khursaniya field while the new 1.2 million barrels per day (mbpd) Khurais field will start next year, the report pointed out.

Saudi Arabia plans to spend $90 billion in oil exploration and production over the next five years, lifting capacity to 12.5 mbpd by the end of 2009 while a clutch of new refineries will add almost eight mbpd of new capacity by 2010, the report pointed out..

Reliance Petroleum’s 600,000 bpd refinery at Jamnagar in India also featured in the report. The facility is to be tested by trial runs in July and expected to be commissioned in September.(See: Reliance plans trial runs at Jamnagar refinery in July)

However, the report makes no mention of the planned capacity addition which will double the amount of oil refined per day, from 0.6 mbpd to 1.2 mbpd. This would effectively catapult it from the estimated third position to the top of the oil refining stakes. This was asserted by H R Meswani, executive director of Reliance Industries Ltd (RIL), back in 2006, when the company was scouting for funds for the project.(See: Reliance Petro may borrow up to $2 billion for refinery expansion)

The build-up in supply comes at a time of cooling world demand. Recession in the US is expected to curb consumption by 300,000 bpd this year.

Americans are changing their driving habits in the face of sky-high prices. I saw a recent report that, as a result, demand for gas has fallen by several percent.

…Lehman also trimmed its forecast for global growth from 1.5 mbpd to 1.1 mbpd, predicting a slide in prices to $83 next year and $70 to $80 in 2010 . This was very much in contrast to the five-fold increase in prices that oil has seen over the last half a decade.

Drilling costs have even started to fall with the levelling of oilfield machinery and maintenance costs. These are all time-honoured signs that the cycle may have topped, it pointed out.

The report blamed the price spike on a $40 billion inflow into commodity index funds this year, much of it from Middle East sovereign wealth funds - the petro-investors may have second thoughts about gaining ”double exposure” to commodity prices.

”Financial flows have been the marginal driver of prices since the onset of the credit crunch. Investors are using oil as a hedge against inflation and a falling dollar,” the report said.

The index effect has lifted prices by $20 to $30 a barrel. This could reverse sharply once the dollar starts to stabilise against the euro, since the euro/dollar exchange has become the proxy watched by oil traders for signals, it said…

Nothing grows to the sky and no price trend — in any market — goes up forever. So, oil prices will stabilize at some point when supply and demand are in balance. That is something that is indisputable. The key question is when will this happen and what will be the catalyst. This piece takes the position that new oil fields and new and expanded refineries mean that supply is going up, while demand falls.

Falling demand certainly will have an impact. Another important factor is the dollar. It does not have to strengthen dramatically against the Euro, but a modest uptick will change the dynamics of speculative trading in commodities such as oil.

Sequoia Fund To Open Up Again

Kurt Brouwer April 28th, 2008

The venerable Sequoia Fund — closed to new investors since 1982 — is slated to reopen to new investors on May 1. The reopening of Sequoia startled me a bit when I heard the news because this fund has been closed for most of my career.

If you are not familiar with the fund, it follows Warren Buffett’s investment style and strategies as closely as any mutual fund does. This brief report from Morningstar give you a bit more on the fund’s history and investment record [emphasis added]:

Fund Times: Sequoia To Reopen After 25 Years (Morningstar, April 28, 2020)

Sequoia Fund (SEQUX), run by investment advisor Ruane, Cunniff & Goldfarb, will reopen its doors to new investors on May 1, 2020. This grand old fund has been closed since Dec. 23, 1982. The New York-based fund shop says that its shareholders have aged since that time and consequently, attrition has become an issue. Indeed, the fund has generated an annualized 6.1% gain over the last decade-beating both its large-blend category and the S&P 500 Index by a wide margin-but its assets under management have fallen from $5.0 billion as of year-end 1998 to $3.8 billion through March 2008. Like many other great value offerings that have reopened recently-including Dodge & Cox Stock DODGX and Longleaf Fund LLPFX-this fund’s managers also want to take advantage of the recent market volatility to invest in new ideas or add to existing positions.

…The portfolio is compact with roughly 10 to 25 stocks. (Berkshire Hathaway BRK.A alone represents a fourth of the fund’s assets.)…

For more on the fund’s history and investment strategy, you can go here to its web site. Unlike most mutual fund web sites, it is not very marketing-oriented.

The fund was founded in 1970 by Bill Ruane and Rick Cunniff and it compiled a very good track record during the 1970s, which were difficult years for stock investors. Then, the fund closed right at the start of the greatest bull market in history.

The fact that Ruane and Cunniff closed the fund back in 1982, was viewed as shocking by many mutual fund companies because gathering assets is the name of the game for many funds. Sequoia clearly marched to the beat of a different drummer back then. By opening up now, it may be continuing that tradition.

California Public Employees Take Big Hit On Real Estate

Kurt Brouwer April 26th, 2008

CALPERS or the California Public Employees Retirement System has $241 billion in assets, so the struggles it is having with real estate have to be taken in context. Nonetheless, the potential loss of a billion here or a billion there — after a while it adds up to real money. This piece documents how a deal that included lots of smart people just blew up [emphasis added]:

Calpers-Linked Land Partnership Gets Default Notice (Wall Street Journal, April 26, 2020, Michael Corkery)

A large California land partnership involving one of the largest U.S. pension funds has received a notice of default on a $1 billion loan after failing to meet certain terms of its lenders.

LandSource Communities Development LLC, a partnership that involves the California Public Employees’ Retirement System, received the default notice Tuesday, amid talks to restructure $1.24 billion of debt. The partnership, which owns 15,000 acres in Southern California, had received an extension to meet its current loan terms, including a required payment, but the deadline expired on April 16. The default notice applies to about $1 billlion of the total debt.

…Partnerships such as LandSource were a common way to own and develop land during the housing boom. They provided high returns to investors and lenders and a way for builders to keep highly leveraged land off their books. But the ventures have run into trouble as the value of undeveloped land has plummeted and as demand for new homes has eroded.

MW Housing Partners, which includes Calpers, took a 68% financial stake in LandSource in early 2007 amid the slowing housing market. Cerberus Capital Management’s LNR Property Corp. unit has a 16% stake, and home builder Lennar Corp. has a 16% stake. Lennar and LNR operate the management of LandSource. None of these equity partners is liable for the debt if LandSource defaults. Calpers and Cerberus representatives declined to comment.

…LandSource’s trouble followed mounting stress at two large joint ventures in Las Vegas, called Kyle Canyon Gateway and Inspirada, involving many of the nation’s largest home builders. One partner in these ventures said Friday that it is unlikely that it will meet its obligations to the deals. The partner, home builder Kimball Hill Homes, announced Wednesday that it had filed for Chapter 11 bankruptcy protection…

The part I like most about this is that the joint venture partners seem to be ready to take the loss very quickly. Instead of hanging on for years and years, these investors are taking the hit and moving on. Assuming this trend continues in other real estate ventures that are struggling, we will be able to move much more quickly through the down cycle.

If you are one of the 1.5 million public employees or retirees who gets retirement and healthcare benefits from CalPERS, no doubt you hate to see this sort of thing. But, CalPERS has done very well with real estate over the years and this is just the flip side of those good years. It comes with the territory.

New Look For Fundmasteryblog

Kurt Brouwer April 26th, 2008

As you can see, we’re working on the blog a bit. Mainly, I wanted a wider column width and we have that figured out.

We’re still working out a few things, but I hope you enjoy the new look.

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