Killer Combo of High Gas, Food Prices at Key Tipping Point

The combination of rising gasoline prices and the steepest increase in the cost of food in a generation is threatening to push the US economy into a recession, according to Craig Johnson, president of Customer Growth Partners.

Gas station in San Francisco.

Johnson looks at the percentage of income consumers are spending on gasoline and food as a way of gauging how consumers will fare when energy prices spike.

With gas prices now standing at about $3.90 a gallon, energy costs have now passed 6 percent of spending—a level that Johnson says is a "tipping point" for consumers.

"Energy is not quite as essential as food and water, but is a necessity in today's economy, and when gasoline costs more than bottled water—like now—then it takes a huge bite out of disposable spending," he said, in a research note.

Of the six US recessions since 1970, all but the "9-11 year 2001 recession" have been linked to—of not triggered by—energy prices that crossed the 6 percent of personal consumption expenditures, he said. (During the shallow 2001 recession, energy prices had risen to about 5 percent of spending, which is higher than the long-term 4 percent share.)

What may make matters worse this time around, is there has been a steep increase in food prices that occurred as well. In other recent recessions food costs were benign, at between 7.5 percent and 7.8 percent of spending.

This year food prices have climbed 6.5 percent since the beginning of early January, according to Consumer Growth Partners.

"The combined increase in the necessities of food and energy creates a harsh double whammy for already stressed consumers," Johnson said. The last time this happened was in the recession that lasted from 1973 to 1975.

Johnson estimates that food and energy eat up about 15 percent of consumer spending at today's prices, compared with about 12.7 percent two years ago.

Of course, at lower income levels, these percentages are much higher. One sign of the stress some consumers are already feeling is that some AAA offices have already seen an increase in out-of-gas service calls, as motorists try to put off filling their tanks or drive around trying to seek out the gas station with the least expensive price.

Also some regions are being hit harder than others. Gas prices in Hawaii continue to set new highs, according to AAA data. The average price on Wednesday was $4.51, topping the prior record of $4.50 for a gallon of regular unleaded set in July 2008.

25% Of Scotia Mocatta's Silver Transferred From "Registered" To "Eligible" Status: A 45% Reduction In "Physical"

Something interesting appeared in the daily NYMEX report of its silver warehouse stockpile data: Canada's largest bullion depository (and one of five total) reclassified a whopping 5.2 million ounces of silver from Registered to Eligible status. In order to get a sense of how big this amount is, which amounts to just under $238 million at today's fixing price, it represents just over 25% of the total silver stored at Scotia Mocatta, and about 5% of the total silver held across all depositories. The reason for this substantial shift is given as follows: "due to a reporting reclassification, 5,287,142 t oz was moved from Registered to Eligible." That's a pretty substantial reporting reclassification. Of course it could well be nothing but that, although one would imagine that a fat finger is somewhat unlikely when it comes to such a material amount. On the other hand, as those who follow the NYMEX data know too well, registered silver is actual physical Comex silver. Eligible on the other hand is sometimes called "someone else's silver" as it does not go through assays on exit/selling events. In other words, this is silver that can not be used to make delivery under a futures contract. As a result of this reclass, total registered silver dropped by 13% from 41.0 million ounces to 35.8 million. Assuming one does not have full faith in the simple error story, does this mean that deliverable silver just dropped by 13% overnight (this event occurred yesterday, but was reported as usual with a 24 hour delay)? And if so, is this effective transformation of physical to semi-paper silver indicative of what we may expect from other depositories in the next few days as the delivery notices start coming in?

Snapshot of silver holdings (link):

For those who are confused about the distinction between the two categories, SilverAxis has done a good analysis:

For those who aren’t familiar with the terminology, the registered category of COMEX warehouse bullion stocks generally refers to gold and silver bars against which COMEX warehouse receipts are outstanding. The COMEX publishes these stocks on a daily basis and they can be found here: Silver | Gold. The registered category is the total pool of gold and silver available at any time to meet delivery requirements under expiring futures contracts or to establish initial futures contract positions through a transaction called exchange-for-physicals (I’ll explain this another time). It is important to realize, however, that many parties holding COMEX gold and silver in registered form have no intention of making their holdings available for delivery. By this I mean that such parties are neither (1) holding a short futures position against the warehouse receipt nor (2) willing to sell their registered metal (warehouse receipts) to a party with a short futures position. Indeed, a substantial portion of those holding registered metal would have acquired the COMEX warehouse receipts by holding long futures positions for delivery. In other words, these registered stocks are held for investment and not for commercial purposes.

In comparison, the eligible category of COMEX warehouse bullion stocks generally refers to bullion held in the warehouses that meets the specifications of an acceptable COMEX bar (proper weight, size, purity and refiner) but does not have a COMEX warehouse receipt issued against it. For example, an investor might purchase several 1,000 oz. bars of silver from a dealer and then deliver the bars for allocated storage at a COMEX warehouse. This is a private arrangement and has nothing to do with the COMEX. Unless these bars are officially registered (the easiest way to do this is through the aforementioned exchange-for-physicals), they will remain in the eligible category until withdrawn from the warehouse by the investor. Thus, the appropriate way to treat eligible COMEX warehouse bullion stocks is that they represent metal that could potentially be registered at some point in the future but cannot presently be used to make delivery under a short futures contract.

We will follow this curious development which had not occured prior to silver entering its "parabolic" phase.

P.S. For those curious, Scotia Mocatta had a comparable "glitch" affecting its gold stocks, where 13% of its registered gold mozzied off to eligible status.

h/t DrDerivative

CHART: U.S. Military Spending Vs. The World

The increase in 2010 is almost entirely down to the United States, which accounted for $19.6 billion of the $20.6 billion real-terms increase. Excluding the U.S., the total in the ‘rest of the world’ barely changed in 2010, increasing by a statistically insignificant 0.1 per cent.

Greg Scoblete summarizes the rest of the world:

The Stockholm International Peace Research Institute has a new report out highlighting global military expenditures. As the above chart indicates, the U.S. retains a healthy lead.

Regionally, defense spending in Europe has fallen 2.8 percent while spending in South America has risen by 5.8 percent and in Africa by 5.2 percent. Brazil drove a lot of the South American growth. Asia rose only a modest 1.4 percent, which the Institute said was slower than previous years. Overall, global military expenditures ticked up slightly at 1.3 percent, the slowest growth rate since 2001.

CHART: Ten Years, Ten Increases In The Debt Ceiling

A 2nd chart we posted last week...

Watch The U.S. Debt Clock Tick Above $14.5 Trillion

http://dailybail.com/home/watch-the-us-debt-clock-tick-above-145-trillion.html

Diagnosis Negative: Severe case of debt, contagion risk remains elevated.

Nothing to see here. Move along. Continue shopping.

Wall Street Foreclosure Fraud Gone Wild — Bank of America Forecloses On Man Who Has No Mortgage

A few days ago I reported Federal Judges have finally started cracking down on Wall Street banks committing widespread mortgage foreclosure fraud.

3 different cases finding Wall Street bankers committing mortgage foreclosure fraud in the last month. Among the culprits U.S bank, GMAC, JPMorgan, Chase and WAMU.

Amazing… Everyone of these banks held out their hands for TAXPAYER bailout money.

Now that the tables are turned they are all committing fraud to foreclose on people’s homes.

I followed up on that story with even more fraudulent Wall Street Foreclosure Fraud which has halted banks from Foreclosing on homes in 23 states.

But Just How Bad Is Wall Street Foreclosure Fraud?

Boing Boing helps us answer the question in the article Bank of America forecloses on a man who has no mortgage.

Jason Grodensky, a Fort Lauderdale man who bought his house with cash last December was surprised to discover that Bank of America had foreclosed on him, though he has no mortgage. Florida’s foreclosure mills being what they are, the checks and balances against erroneous foreclosure have eroded to the point where banks can seize and sell homes they have no interest in.

Grodensky’s story and other tales of foreclosure mistakes started popping up recently across South Florida. This week, GMAC Mortgage — one of the nation’s largest mortgage servicers and a major mortgage lender — told real estate agents to stop evicting residents and suspend sales of properties that had been taken from homeowners in foreclosure. The company said it might have to “correct” some of its foreclosures, but was not halting those in process.

…

And the legal efforts required to resolve a foreclosure mistake are complicated. “Unwrapping it is like unwrapping Fort Knox,” said Carol Asbury, a Fort Lauderdale foreclosure attorney. “It’s very difficult.”

That’s right. As the Sun Sentinel reports this man’s home foreclosed on him even though there was no mortgage on his home and he bought his house with cash.

When Jason Grodensky bought his modest Fort Lauderdale home in December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage.

Grodensky knew nothing about the foreclosure until July, when he learned that the title to his home had been transferred to a government-backed lender. “I feel like I’m hanging in the wind and I’m scared to death,” said Grodensky. “How did some attorney put through a foreclosure illegally?”

Bank of America has acknowledged the error and will correct it at its own expense, said spokeswoman Jumana Bauwens.

Imagine that.

Living in your home which you own free and clear.

Then you find out you are being evicted and the deed to your house has been transferred to some government backed lender.

When you ask for answers information is locked down as tight as Fort Knox and no one will give you any answers on how it happened.

Only in America…

Thumbnail credit: Jason Grodensky had bought the Fort Lauderdale home with cash last December, then says his home was sold out from under him. (Robert Duyos, Sun Sentinel / September 19, 2010)

McDonald's warns of higher food inflation

LOS ANGELES/NEW YORK (Reuters) - McDonald's Corp (NYSE:MCD - News) forecast higher prices for beef, dairy and other items and said it would cautiously raise prices to keep attracting diners, who are grappling with higher grocery and gas bills.

Shares fell 1.5 percent after the world's biggest hamburger chain said it planned to offset some, but not all, of its higher food costs, with small price increases throughout the year.

McDonald's results landed a day after rival Yum Brands Inc (NYSE:YUM - News) reported strong China results that masked rising food and labor costs. Chipotle Mexican Grill (NYSE:CMG - News), which has nearly all of its 1,100 restaurants in the United States, saw higher food costs eat into margins.

McDonald's and other restaurant operators are getting squeezed by accelerating food costs and must figure out how to raise prices without scaring away already skittish diners.

"It's very hard to pass through price increase right now," said Stifel Nicolaus analyst Steve West.

McDonald's Chief Executive Jim Skinner said customers are getting "pinched everywhere. They should not suffer the same fate at McDonald's."

Chief Financial Officer Pete Bensen said the company would sacrifice some short-term margin to protect long-term growth. He added that McDonald's has experience finding the right recipe for price increases in fragile economic times.

McDonald's now expects food costs to rise between 4 percent and 4.5 percent in the United States and Europe this year. That is up from its prior call for a rise of 2 percent to 2.5 percent in the United States and an increase of 3.5 percent to 4.5 percent in Europe.

McDonald's in March put through a 1 percent menu price rise in the United States, where it plans additional increases. Prices in Europe are up by the same amount and the company plans to raise prices in China.

When it comes to raising prices, West said McDonald's has an edge because it attracts a higher-income diner than other fast-food chains. It could have the best luck raising prices on things like premium burgers and McCafe drinks that appeal to those customers, he said.

STEALING SHARE

After struggling during the recession, McDonald's has outperformed its fast-food peers by updating its menu to broaden its appeal beyond the young males that account for the biggest share of sales at most other fast-food chains.

"The bottom line is they're still doing a great job of growing revenue," said Peter Jankovskis, co-chief investment officer at Oakbrook Investments.

Analysts remain worried that high gas prices could force fast-food restaurant patrons to cut back. But Jankovskis said McDonald's was better equipped than others to cope.

McDonald's has roughly 32,700 restaurants around the world. The United States alone has 14,000 units, which means customers do not have to travel far to get to one.

"The big test will come in the summer months with gasoline remaining in the neighborhood of $4.00 (a gallon) -- that's when the strength of McDonald's will come through," he said.

March sales at restaurants open at least 13 months were up 3 percent in the United States, up 4.9 percent in Europe and gained 0.5 percent in McDonald's Asia/Pacific, Middle East and Africa unit. Asia results were adversely affected by the earthquake and tsunami in Japan, but that the impact on overall income was "minor," Skinner said.

First-quarter net income rose 10.9 percent to $1.21 billion, or $1.15 per share, topping analysts' profit view by a penny, according to Thomson Reuters I/B/E/S.

Total first-quarter revenue at the Golden Arches rose 9 percent to $6.1 billion, with sales in Europe leading the way.

Still, operating margin fell to 17.7 percent from 18.2 percent as costs for food and paper rose. Food and paper costs were 33.6 percent of sales in the quarter, compared with 32.9 percent a year earlier.

McDonald's shares fell 1.5 percent, or $1.17, to $76.23 in midday trading on the New York Stock Exchange.

(Editing by Maureen Bavdek and Gunna Dickson)