China alert: we saw another sharp fall in global shipping costs overnight as Chinese steel companies continue to cut their ship chartering for iron ore and coking coal. The Baltic Dry index of freight costs dropped to 2,502 points on Thursday, its lowest since early October. The index is now off 40% since its peak a month ago.

The FT and shipping websites pointed out that, so large has been the fall in Chinese orders, the cost of chartering the largest class of vessel — Capesize bulk carriers, which are mainly used to transport iron ore to China — has fallen below the cost of Panamax vessels, which are less than half their size and are used for transport of commodities such as grains (and can fit through the Panama Canal). Reports continue that Chinese steel mills will not buy iron ore in particular at the third quarter prices settled by BHP, Rio and Vale with other Asian buyers.

NAB wins: the US Supreme Court has ruled that foreign investors who bought NAB shares on an overseas stock exchange cannot sue in a New York court over large write-downs related to the bank’s Homeside disaster in the US around a decade ago. The court upheld a ruling by a US appeals court that dismissed the lawsuit on the grounds that American courts did not have jurisdiction. NAB lost $US2.2 billion on its Homeside investment and the three investors who bought shares in Australia, had wanted to pursue their class action in the US courts.

According to Reuters, the trio argued that foreign plaintiffs can sue in an American court for violations of the US securities laws based on transnational securities fraud. The US Government, SEC and the governments of Australia, the UK and France had supported the NAB in arguing against the case. “Writing the court’s unanimous opinion, Justice Antonin Scalia said the law at issue does not provide for lawsuits by foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges.”

BP hit: The oil giant’s share price hit a new low overnight, amid the general sell-off in the markets. The price fell 3.1% to close at $US28.74 a share. It fell to a low of $28.56 in the day, breaking a 52-week low set on June 9. The stock is now down 52% since April 20, when its Deepwater Horizon oil rig exploded off the coast of Louisiana, killing 11 workers.

What was that? some analysts (mostly outside the US) say the weakness seen in US housing in May is only temporary and there will be a quick upturn because of low mortgage rates. Dream on, the nitty gritty of this week’s figures show the sector is in the midst of another nasty contraction that low prices can’t and won’t change quickly. US mortgage rates (for 30 year loans) fell to a low 4.69% last week, according to the government controlled mortgage group, Freddie Mac. It said that thi was the lowest mortgage rates have been in the 38 years it has been collecting data.

Housing optimism misplaced: last week’s rate was down from the previous low of 4.75% when mortgage applications fell 6%. Mortgage applications in the first three weeks of this month are down a huge 15% from May. New house prices are down 10% in the year to May. May’s fall in applications was OK, given it was the month after the tax credit ended, but June’s fall? New US home prices are now at late 2003 levels, well before the subprime boom started boosting them. May’s new home sales figures revealed that April’s figure of an annual rate of 504,000 was cut to 446,000, because 58,000 contract cancellations, in the last month of the tax credit. That’s a cancellation rate of more than 10%, which the nascent bulls neglect to point out.

How long to sell? Well the May figures reveal that the time it takes a US home builder to sell a completed home was 14.2 months. Its been above 14 months now for several months. The big US home builder, Lennar revealed overnight that its new homes sales fell 10% in the latest quarter, all of it in May (and the share price rose because investors reckon the worst is over). There seems to be a realisation among US consumers that prices are falling (electronic goods, the cost of homes, the price of mortgages, air fares, cars). That means prices will continue to weaken. Most of the declining number of new mortgage applications are refinancings for existing homes, not deals to buy new or used homes. Real demand is therefore weaker than the already weak figures show.

Greening up: the conservative Canadian federal government (note T. Abbott and J. Gillard) has revealed a radical policy; it will phase out older coal-fired power plants to cut the country’s greenhouse gas emissions, as it moves to make natural-gas fired plants the new clean-power standard. The new standards will be in place early next year and will force power companies to get rid of older high-emitting coal-fired plants and require newer facilities to match the lower greenhouse-gas emissions of more efficient natural-gas fired plants. Reuters says Canada has 51 coal-fired plants producing 19% of the country’s electricity and 13 percent of its greenhouse gas emissions. 33 of those plants will reach the end of their economic lives by 2025. Unless the operators make substantial investments to cut emissions from the aging facilities, they’ll be required to shut down. The country’s Environment Minister was quoted by Reuters as saying “our regulation will be very clear”. “When each coal-burning unit reaches the end of its economic life, it will have to meet the new standards or close down. No trading, no offsets, no credits.”

Good news: as the US economy meanders its way back down the growth curve, there’s one bit of small news; corporate failures in America have fallen by more than half so far in 2010, compared to 2009. The recovery in demand, the easing of the credit crunch and rising exports have helped save companies from bankruptcy. Figures out this week in the US show only 50 companies have failed up to last week, down from 118 in the first half of last year. The dollar value is different, this year’s failures had assets of $US45 billion, against $US367 billion in the first six months of 2009. GM failed in the first half of last year with assets of $US91 billion and Chrysler was another large failure.

Not so good news: New York Arabica coffee futures hit a 12 year high overnight, with the Financial Times saying it was the second time this month that speculators trying to short prices were squeezed. Futures prices in New York spiked to the 12 year high, and are up more than 30% in the past two weeks as a result of a shortage of beans, which caught the shorts badly exposed and forcing them to buy to cover their positions. Supplies of Arabica beans (the best quality) are at 8 year lows because of crop shortfalls in Colombia and central America. Spot coffee prices are now trading at a premium to the futures prices. Enjoy the weekend cup, prices might not be so cheap if the current squeeze continues.

But also have a small cheer: the FT said many of the speculators were hedge funds which lost not once, but twice this month by completely misreading the market. “The rise caught many by surprise. Hedge funds and other speculators have made money for two years betting on declining, or short positions, of coffee prices. But earlier this month they were caught by squeezes as traders held on to their futures contracts at the exchanges in New York and London. After the increase in prices, many funds bet again on a rapid decline, but on Thursday they were proved wrong.” A price rise would be worth it just to see a few hedgies and other funny money people squeezed.

Peter Fray

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Peter Fray
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