What causes credit crisis and how do i know maket is recovering??

The credit markets are a more important measure of the severity of the financial crisis than the stock markets. But the credit markets are much more difficult to follow. On this page, there are five ways to gauge the recent disruptions in the credit markets, which is much easier to understand for general understanding.

Source

Cost of Gas accounts for just 4.0% of personal consumption

As to be expected, the media is all over this disturbing trend in gas prices.Per usual, though, the line of reporting on this issue is sensational rather than rational.

At this time last year, the national average was $3.05 per gallon, up from an average of $2.91 per gallon at the same point in 2006 which, in turn, was up from an average of $2.24 at the same point in 2005.

The Energy Information Administration, a unit of the Department of Energy, reports that the national average for a gallon of gasoline as of May 5 is now $3.61. Presumably, that average will continue to go up as oil prices continue to increase.

A Scenario
We'll assume a vehicle is driven 15,000 miles per year and gets 20.3 miles per gallon, which is a rough estimate of the average fuel economy reported by the Environmental Protection Agency for model years 2003 to 2007 on light-duty vehicles.
For ease of comparison, we have taken the average annual price of gasoline reported by the Energy Information Administration for the years 2003 to 2007, and have computed an average price for 2008 through May 5.

Using these figures, we calculate the following:



The cost of gasoline is chewing up a larger portion of one's household income than it used to. It is an aggravating development, but ultimately, it isn't a death blow to consumers or the economy.

It may shock you to learn, too, that the cost of gasoline accounts for just 4.0% of personal consumption expenditures. That's not a typo. We're talking four percent, yet the media reports would have one think the cost is closer to forty percent. In effect, then, a 10% increase in gas prices reduces spending power by 0.4%.

Sensational stories sell more newspapers, of course, and get more viewers to tune in, particularly when the issue is one with which we can all relate.

The rising cost of gasoline gets everyone fired up so, naturally, in this election year some politicians are calling for a gas tax holiday. However, what we really need a break from are the half-baked reports on the impact of rising gas prices.

A rational approach when discussing gasoline costs would demand that there is an acknowledgment that high gas prices are dampening consumer spending. At the same time, it would reveal that high gas prices haven't damned the consumer to a monastic lifestyle.

Source

Agribusiness traders & Retailers are raking in huge profits from the Food Crisis

The world food crisis is hurting a lot of people, but global agribusiness firms, traders and speculators are raking in huge profits.

Much of the news coverage of the world food crisis has focused on riots in low-income countries, where workers and others cannot cope with skyrocketing costs of staple foods.

But there is another side to the story: the big profits that are being made by huge food corporations and investors.

1. Cargill, the world's biggest grain trader, achieved an 86% increase in profits from commodity trading in the first quarter of this year.

2. Bunge, another huge food trader, had a 77% increase in profits during the last quarter of last year.

3. ADM, the second largest grain trader in the world, registered a 67% per cent increase in profits in 2007.

4. Tesco, the UK supermarket retail giant, rose by a record 11.8% last year.

5. France's Carrefour and Wal-Mart of the US, say that food sales are the main sector sustaining their profit increases.

6. Investment funds, running away from sliding stock markets and the credit crunch, are having a heyday on the commodity markets, driving prices out of reach for food importers like Bangladesh and the Philippines.

Source

Secretary Condoleezza Rice Blames Growing Indian, Chinese Appetite For Global Food Crisis - A JOKE !!!

U.S. Secretary of State Condoleezza Rice's comment that the "growing Indian and Chinese appetite is contributing to the global food crisis" has kicked up a controversy.

In an interactive session at the Peace Corps 2008 Country Directors Conference, Rice said the "improvement in the diets of people in India and China", which is forcing the governments there to keep food "inside" is a cause for the current global supply shortage.

The top Bush administration official said the ongoing food crisis was mainly due to "four causes."

1. Food Production seems to be declining and declining to the point that people are actually putting export caps on the amount of food.

2. Improvement in the diets of people, for instance, in China and India, and then pressures to keep food inside the country.

3. The "incredible cost" that fuel prices, everything from fertilizer to transportation costs, was bringing on the ability to distribute or to get food to people, was identified as another factor by Rice.

4. The fourth factor was the one relating to "biofuels", which was "not a large part of the problem, but it may, in fact, be a part of the problem," she added.

Indian Govt Reacted Strongly -

Indian Government has said the U.S. Secretary of State has made a wrong assessment of the whole problem. Planning Commission Deputy Chairman, Montek Singh Alhuwalia said, "I don't agree that there is a global food crisis because of India and China. There is an increase in food production too in both the countries."

"The increase in production and use of biofuels might be the cause why cultivable area is limited," he added.

However, the Left parties came down heavily on Rice for her comments. One of the senior politburo members condemned her statement as "bad, indecent and cruel."

"The whole presumption is that the developing world is suddenly eating more than they were and suddenly they are not suffering from malnultrition as they were," said the member.

Source

Rising Prices, Higher Volatility and Greater Risk in Agribusiness

Growing Farmers / Grain Elevator issues worldwide, if we summarize they come down to following for easy understanding–

1. Risk hedging tools (Future and Options) on the derivatives market are getting more expensive (more margin) and less reliable (volatility).
These tools have long provided a way to lock in the price of a crop as it is planted, eliminating the risk that prices will drop before it is harvested. With these hedging tools, grain elevators could afford to buy crops from farmers in advance, sometimes a year or more before the harvest.
But that was yesterday. It simply is not working that way today.

2. Crops prices are soaring on the updraft of growing worldwide demand, and a weak dollar is making the crops more competitive in global markets.


3. Crop prices are not just much higher; they also are much more volatile. For example, a widely used measure of volatility showed that traders in March expected wheat prices to swing up or down by more than 72 percent in the coming year, three times the average volatility for that month and the highest level since at least 1980.


4. Those wild swings in expected prices are damaging the mechanisms — like futures contracts and options — that in the past have cushioned the jolts of farming, turning already-busy farmers into reluctant day traders and part-time lobbyists.
Farmers used to leave the market-watching to traders who work for big grain elevator companies. But with some of those companies now refusing to buy crops in advance because hedging has become so expensive and uncertain, farmers have to follow and trade in those markets themselves.

5. Higher volatility in grain prices means higher crop insurance premiums to be paid. This is not just a problem for farmers. Eventually, those costs are going to come out of the pockets of the consumers.

6. Grain elevators are coping with the volatility and hedging problems by refusing to buy crops in advance, foreclosing the most common way farmers lock in prices.
Frustrated over the flawed futures contract, Mr. Fletcher (A grain elevator guy) is voting with his feet. Last year, he entered into a contract with A.I.G. Financial Products, a leading sponsor of commodity index funds, which allows him and the index fund to hedge their risks without using the C.B.O.T.

Instead of using futures or options, A.I.G. simply buys the commodity directly from Mr. Fletcher, who stores it for a fee and buys it back six months later. His storage fee is lower than the one built into the C.B.O.T. contract, so A.I.G. pays less for its stake in the market. And he has a hedge he can rely on.
“I did a deal with them for corn a year ago, and this year I’m doing a deal on soybeans,” he said.

But private deals like these do not provide pricing data to other farmers and to the rest of the food industry, which has long relied on the Chicago Board of Trade as the best measure of supply and demand. If such bilateral contracts become more common, it will be harder for everyone in the industry to anticipate costs and potential profits — which could also push prices up.
This growing uncertainty about prices and hedging “just makes the market less efficient,” said Jeffrey Hainline, president of Advance Trading. “And anything that makes these markets less efficient increases the cost of food.”

7. Higher volatility means putting more cash as margin.
When the margin call arrives, a farmer sometimes has to rely on his bank to advance him the margin he needs to keep those hedges in place — a worrisome requirement even for a successful farmer in an economy already struggling with a credit squeeze.
“The nightmare scenario is when you have to make margin and you’re looking out your back door and seeing, maybe, a crop problem,” he said. “Everybody has a story about a guy they know getting blown out of his hedge” by unmet margin calls.

8. On dozens of occasions since early 2006, the futures contracts for corn, wheat and soybeans have expired at a price that was much higher than that day’s cash price for those grains.

For example, soybean futures contracts expired in July at a price of $9.13 a bushel, which was 80 cents higher than the cash price that day, Professor Irwin said. In August, the futures expired at $8.62, or 68 cents above the cash price, and in September, the expiration price was $9.43, or 78 cents above the cash price.
Futures, for example, are less reliable. They work as a hedge only if they fall due at a price that roughly matches prices in the cash market, where the grain is actually sold. Increasingly — for disputed reasons — grain futures are expiring at prices well above the cash-market price.




When that happens, farmers or elevator owners wind up owing more on their futures hedge than the crops are worth in the cash market. When that happens, no one can be exactly sure which is the accurate price in these crucial commodity markets, an uncertainty that can influence food prices and production decisions around the world.

These disparities also raise the question of whether farmers, who rely almost exclusively on the cash market, are being shortchanged by cash prices that are lower than they should be.

Source 1 and 2

Biofuels + and -

Corn ethanol
Pluses: May reduce U.S. reliance on oil imports and enable moderate reduction in emissions of greenhouse gases compared with oil. Fosters the building of biofuels infrastructure

Minuses: Ethanol is energy intensive to produce, and the recent boom has pushed corn prices to more than $5 a bushel (from $2 in 2006). That is increasing the cost of everything from beef to soft drinks. The biofuels craze is helping drive up grain prices worldwide as farmers devote more acres to corn and less to other crops. Over 450 pounds of corn are needed to fill a 25-gallon tank with ethanol_ enough calories to feed a person for a year.

Biodiesel
Pluses: Made from vegetable oils like soy and canola and animal fat, biodiesel provides 90% more energy than is required to produce it. Compared with petroleum-based diesel fuel, biodiesel is estimated to cut greenhouse-gas emissions 40% to 80%

Minuses: Like corn ethanol, biodiesel's production from food crops boosts "agflation." European demand has been blamed for inducing farmers in Southeast Asia to burn and replant the rain forest with palm plantations, which has released large amounts of greenhouse gases. Production is limited at the moment_ just 250 million gallons in 2006.

Sugar-cane ethanol
Pluses: Sugar cane yields more ethanol per acre than corn, and it requires less energy to produce; hence, it is regarded as greener than corn ethanol. Sugar isn't a food staple, so making ethanol from it hasn't driven up food prices as has the production of large amounts of corn ethanol. Brazil makes nearly as much ethanol from sugar cane as the U.S. does from corn; cane provides nearly half of Brazil's transportation fuel from plants grown using about 1% of its arable land.

Minuses: Growing sugar cane requires a warm, rainy climate, which limits its potential as a global fuel source.

Cellulosic ethanol
Pluses: Made by breaking down wood chips, farm waste, and nonfood crops like grasses, cellulosic ethanol wouldn't require diverting the use of cropland. Scientists are making progress at breaking down plants' tough cellulose and lignin molecules, the key to turning nonfood biomass into fuel.

Minuses: Still costly and difficult to make, ethanol produced from nonfood plants is more energy intensive than that made from corn and sugar cane. By one estimate, putting all the grassland in the U.S. into fuel production could replace only about 10% of petroleum.

Algal biofuel
Pluses: The fastest-growing plants, algae theoretically can produce 30 times more energy per acre than other biofuel options. A particularly rich mix of byproducts can be made in algal-biofuels operations (everything from nutraceuticals to feedstocks for making plastics), potentially abetting their cost-effectiveness. This is the biofuels' dark horse.

Minuses: Unlike cellulosic ethanol, the biomass for making a lot of fuel from algae doesn't yet exist; it has to be grown from scratch. Harvesting is still expensive. Cost-effectively producing algal biofuels on a large scale may be many years away.

Read the story here

Rumor is that AT&T will cut iphone price by as much as $200 this summer (2008) !!

When the 3G iPhone is introduced this summer, AT&T, the exclusive U.S. iPhone sales partner with Apple, will cut the price by as much as $200, according to a person familiar with the strategy.

AT&T is preparing to subsidize $200 of the cost of a new iPhone, bringing the price down to $199 for customers who sign two-year contracts, the source says. Apple is expected to have two versions of the new iPhone, an 8-gigabyte-memory and a 16-gigabyte-memory model with price tags widely expected to be $399 and $499.

AT&T and Apple declined to comment.

At $200, the iPhone would be within reach of a much wider consumer market and give AT&T a strong magnet to pull lucrative customers away from rivals like Verizon Wireless (VZ), Sprint (S) and T-Mobile (DT). The $200 rebate or subsidy would be limited to AT&T customers and not available through Apple’s stores. The new iPhone sold by AT&T will likely be locked or programmed so buyers can’t take the cheaper iPhone to another phone service.

Unfortunately, the $200 subsidy will supposedly be limited to AT&T customers and won't be available through any of Apple's stores

Read the story here

Rating agencies incredible role in the subprime mess

Obscure and dry-seeming as it was, this business of rating securities offered a certain magic. The magic consisted of turning risky mortgages into investments that would be suitable for investors who would know nothing about the underlying loans. To get why this is impressive, you have to think about all that determines whether a mortgage is safe. Who owns the property? What is his or her income? Bundle hundreds of mortgages into a single security and the questions multiply; no investor could begin to answer them. But suppose the security had a rating. If it were rated triple-A by a firm like Moody’s, then the investor could forget about the underlying mortgages. He wouldn’t need to know what properties were in the pool, only that the pool was triple-A — it was just as safe, in theory, as other triple-A securities.

Over the last decade, Moody’s and its two principal competitors, Standard & Poor’s and Fitch, played this game to perfection — putting what amounted to gold seals on mortgage securities that investors swept up with increasing élan. For the rating agencies, this business was extremely lucrative. Their profits surged, Moody’s in particular: it went public, saw its stock increase six fold and its earnings grow by 900 percent.

By providing the mortgage industry with an entree to Wall Street, the agencies also transformed what had been among the sleepiest corners of finance. No longer did mortgage banks have to wait 10 or 20 or 30 years to get their money back from homeowners. Now they sold their loans into securitized pools and — their capital thus replenished — wrote new loans at a much quicker pace.

Mortgage volume surged; in 2006, it topped $2.5 trillion. Also, many more mortgages were issued to risky subprime borrowers. Almost all of those subprime loans ended up in securitized pools; indeed, the reason banks were willing to issue so many risky loans is that they could fob them off on Wall Street.

But who was evaluating these securities? Who was passing judgment on the quality of the mortgages, on the equity behind them and on myriad other investment considerations? Certainly not the investors. They relied on a credit rating.

Thus the agencies became the de facto watchdog over the mortgage industry. In a practical sense, it was Moody’s and Standard & Poor’s that set the credit standards that determined which loans Wall Street could repackage and, ultimately, which borrowers would qualify. Effectively, they did the job that was expected of banks and government regulators. And today, they are a central culprit in the mortgage bust, in which the total loss has been projected at $250 billion and possibly much more.
In the wake of the housing collapse, Congress is exploring why the industry failed and whether it should be revamped (hearings in the Senate Banking Committee were expected to begin April 22).

Whom can we rely on as an investor then?
The agencies have blamed the large incidence of fraud, but then they could have demanded verification of the mortgage data or refused to rate securities where the data were not provided. That was, after all, their mandate. This is what they pledge for the future. Moody’s, S.&P. and Fitch say that they are tightening procedures — they will demand more data and more verification and will subject their analysts to more outside checks.

This leaves an awkward question, with respect to insanely complex structured securities: What can they rely on? The agencies seem utterly too involved to serve as a neutral arbiter, and the banks are sure to invent new and equally hard-to-assess vehicles in the future.

Read the enire story here

Infants thrown off roofs to thank God !!

Religious traditions are diverse and sometimes as bizarre as they can get. A village in Solapur, Maharashtra (India) has a dangerous tradition of throwing newborns from a height of 50 feet onto a sheet, which is held by devotees.

This is an age-old tradition practiced by couples who are blessed with a child after taking a vow at the dargah. The devotees also believe that this ritual is good for the health of the child.

"People have been following this tradition for almost 500 years now". While the practice may seem dangerous and superstitious to others, the devotees strongly believe that the fall will not harm the infants. The reason given is that there has been no recorded evidence of any physical disability to the infants.
"It’s our family tradition and so we follow it," a devotee said.

Both Muslim and Hindu families take part in this ritual, however the state administration chooses not to interfere and provides heavy police security during the ritual every year.



Read the ful story here

How subprime affected MBS, CDOs and Rating agencies?

Below is a visual step by step representation of how subprime loans were re-packaged by the institutions and then rating agencies went on to rate them as good investment grade.








A working model can be found here
To understand subprime, pls read here.