Shipbuilding Torpedoed by Subprime Causes Cost Surge, by Todd Zeranski

“Freight rates have risen as fewer vessels have been delivered. The Baltic Dry Index, a measure of rates, has risen 58 percent in the last year as an index tracking the number of cargo ships under construction has fallen 21 percent in that time.

A year ago, banks would finance as much as 80 percent of an order [to build a ship], with 12- to 15-year loan terms. Now, financing usually doesn’t exceed 65 percent, and terms are 10 years or less. Prices have doubled, with even high-quality credit clients paying about 1 percentage point over LIBOR.”

Here are the weekly charts for the Baltic Dry Index and DryShips (DRYS) … slightly correlated I’d say. Fascinating how everything inter-relates: Benny’s Bank Bailout, Crazy Commodities, Dollar Destruction, Dearth of DryShips, ok, I’ll stop at ‘E’.

Click to enlarge (Baltic Dry Index)

Click to enlarge (DryShips)

The Fed statements are too wordy and wishy-washy, so I’ve tightened things up.

Recent information indicates that Economic activity remains weak. Household and business spending are weak as are has been subdued and labor markets have softened further. Financial markets remain under considerable stress., and Tight credit conditions and the collapsing real estate market deepening housing contraction are likely to will weigh on economic growth over the next few quarters.

Although readings on core inflation have improved somewhat, Energy and other commodity prices have increased dramatically and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices to stop rising in coming quarters and an easing of pressures on resource utilization. [We give no reason why we believe these prices will stop going up.] Still, uncertainty about the inflation outlook remains high. It will be necessary to We will continue to monitor inflation developments carefully.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth over time and to mitigate the risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

This last paragraph is troubling because the Fed’s massive campaign to “foster market liquidity” has also promoted massive price instability, i.e. inflation (see paragraph two). It’s impossible to make sense of something that’s self-contradictory.

Jeremy Grantham engages in some armchair quarterbacking and fairly vicious Greenspan bashing in his latest Quarterly Letter (PDF). There are a few good bits within his rantings, including this one:

“… the two great economic setbacks of the 20th Century – the 1929-34 Depression and the rolling depression in Japan since 1989 – were both preceded by major asset bubbles and speculation. Milton Friedman and his troops can maintain that this suggested relationship between bubbles and troubles is nonsense and that all that was needed was good monetary policy. My response is that this view represents a touching faith in economic and financial theory of which tricky humans make a mockery.”

But Grantham has an even more touching faith: the Fed has the ability to move against the formation of major asset class bubbles, assuming they can accurately identify those bubbles as they form. That’s an idea that deserves to be mocked.

From this week’s interview in Barron’s:

“Many people today still don’t realize that the growth companies of this decade are global infrastructure, commodity and energy companies and not necessarily firms making deodorant, soda, diapers or drugs. We’re not buying yesterday’s winners that are now trading for 20 times earnings.

Coca-Cola is a great company but it’s a 20-P/E stock that has annual earnings growth of 10%. I want to buy the reverse, a 10 P/E stock growing at 20%. For the past 20 years, people thought the only areas of secular growth were consumer products, health care and technology. They treated economically sensitive companies as deep cyclicals and didn’t value them properly. These are the growth industries of this decade.”

True, but I still like KO, and PEP for that matter.

Legg Mason Value Trust Letter to Shareholders: First Quarter 2008

“For investors who are trend followers, or theme driven, or who primarily build portfolios around forecasts, or who employ momentum strategies, price is dispositive. When they do badly, it is because prices moved in a direction different from what they thought. For value investors, price is one thing, and value is another. When prices move against us, it usually means that the gap between price and value is growing, and our future expected rates of return are higher.”

Try using that “deferred outperformance” line when you have a two-year track record, lol. To everyone I buried in my Ten Favorite Financial Stocks, don’t worry, our outperformance has just been deferred.

From an interview with Warren Buffett earlier this month:

“I read a few prospectuses for residential-mortgage-backed securities - mortgages, thousands of mortgages backing them, and then those all tranched into maybe 30 slices. You create a CDO by taking one of the lower tranches of that one and 50 others like it. Now if you’re going to understand that CDO, you’ve got 50-times-300 pages to read, it’s 15,000. If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you’re now up to 750,000 pages to read to understand one security. I mean, it can’t be done. When you start buying tranches of other instruments, nobody knows what the hell they’re doing. It’s ridiculous.”

Reminded me of Bill Ackman’s $109,000 bill for photocopies. I wonder how many pages John Paulson read? 3,000,000,000 photocopies at a dollar a page would be breakeven. :-)

Wall Street Winners Get Billion-Dollar Paydays

“Mr. Gross, the fund manager, warned that the widening divide among the richest and everyone else is cause for worry.

‘Like at the end of the Gilded Age and the Roaring Twenties, we are going the other way,’ Mr. Gross said. ‘We are clearly in a period of excess, and we have to swing back to the middle or the center cannot hold.’”

Reporter Jenny Anderson neglects to mention that Bill Gross is a BILLIONAIRE himself, having taken 1% off the top every year of his entire professional life. It’s nice that Gross knows a little Yeats, but it’s pure hypocrisy for one of the most successful members of the world’s largest skimming operation to say that the pay his hedge fund competitors earn is “ugly.”

Light-Years Ahead of the Crowd: Interview With James B. Rogers, Private Investor

Rogers doesn’t say anything new in this interview, but here are some selected excerpts:

“If I’m right, the best skill I can give [my two baby girls] is to be completely fluent in Mandarin … Perhaps the safest investment is the renminbi, the Chinese currency. I don’t see how the renminbi should not go up against the dollar, anyway, for the next several decades. Commodities, of course, are a great way to invest in China.

There are some industries in China that are going to do well, no matter what happens to the world economy — water treatment, for instance. Agriculture. Power generation. Another growing industry is tourism; the Chinese have not been able to travel for some 300 years, for a variety of reasons.”

I wrote a beautiful “Most Read Stories” post with links to ten articles, expertly selected excerpts, and my usual pithy and erudite comments. Then I lost it all with a single errant click before publishing it.

All that’s left is this amusing juxtaposition of headlines from the Most Read Stories last week.

Next time someone who’s not familiar with markets asks you what caused the credit crisis, use this great analogy from Paul O’Neill to explain things:

Q: It’s so hard to understand how the subprime mortgage crisis has triggered a financial crisis of global proportions.

A: If you have 10 bottles of water, and one bottle had poison in it, and you didn’t know which one, you probably wouldn’t drink out of any of the 10 bottles; that’s basically what we’ve got there.

– via the R man –