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Five Things You Need to Know: U.S. Taxpayers to Help Energy Companies Get Back On Their Feet Again, Central Bank "Weirdness" Explained, India Curbs Enthusiasm, Don't Judge a Housing Market Book By Its Book Cover, Wait! Title Revision! Title Revision!


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. U.S. Taxpayers to Help Energy Companies Get Back On Their Feet Again

The Interior Department has dropped claims that Chevron (CVX) systematically underpaid the government for natural gas produced in the Gulf of Mexico, a decision that could allow energy companies to avoid paying hundreds of millions of dollars in royalties, the New York Times reported.

  • So, seems like Uncle Sam got busted for trying to get his hands in somebody's pockets. What's the big deal?
  • In return for the right to drill on federal lands and in federal waters, energy companies are required to pay the government a share of their proceeds.
  • This decision sets a precedent that could make it easier for oil and gas companies to lower the value of what they pump each year from federal property, thereby reducing their payments to the government.
  • Meanwhile. according to the Times, the Interior Department has sweetened incentives for exploration and pushed to open wilderness areas for drilling, while cutting back on full-scale audits of companies; audits intended to make sure the companies are paying their full share of royalty payments for those exploration and drilling rights.
  • Bush Administration officials knew that dozens of companies had incorrectly claimed exemptions from royalties since 2003, but they waited until December 2005 to send letters demanding about $500 million in repayments, the New York Times said.
  • In February, the Interior Department acknowledged that oil companies could escape more than $7 billion in payments because of mistakes in leases signed in the 1990s.
  • And four government auditors last month publicly accused the Interior Department of blocking their efforts to recover more than $30 million from the Shell Oil Corporation, the Kerr-McGee Corporation and other major companies.
  • In answer to our first question, "What's the big deal?": Perhaps the big deal is that the royalty payments, which were intended to compensate U.S. citizens for granting corporations the "privilege" to profit from the natural resources contained in those public lands, was mishandled from the very beginning and the fiasco now extends across three separate presidential administrations and two opposing parties.
  • Yeah, and if that makes all of us just a little bit mad, here's the kicker. You know what we're going to do about it? I'll tell you what we're going to do about it. We're going to sit down, shut up and like it. Enjoy!

America, the beautiful... from seal to shining seal.

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2. Central Bank "Weirdness" Explained

Europeans' confidence in the economy rose to a five-year high in October and Inflation slowed to 1.6 percent in October, according to Bloomberg.

  • An index of sentiment among executives and consumers in the dozen nations sharing the euro rose to 110.3, the highest since February 2001, Bloomberg reported.
  • Inflation slowed to 1.6 percent in October, holding below the European Central Bank's 2 percent limit for a second month, a separate report showed.
  • There are two reasons for bringing this up.
    - The first is that despite the slowdown in inflation the ECB is still likely to raise rates next month.
    - The second reason is that the ECB practices an Inflation Targeting central bank model.
  • Yesterday in Five Things we discussed inflation targeting. Now, look at the ECB, which may be one of the most explicitly communicative central banks in the world.
  • With lower energy costs giving both businesses and households more spending power, the ECB is concerned over inflation. This is largely misunderstood in the mainstream media.
  • Lower energy prices in a consumption-based economy are believed by these central bankers to exacerbate "hot" economic growth while higher energy prices are deflationary to the extent they act to reign in consumption.
  • Yesterday we tried to explain this while reviewing a 2003 Bernanke speech on inflation targeting in which we ran across the following nugget: Contrary to conventional wisdom, higher oil prices for the Bernanke-led Fed were actually more likely to cause an ease in short-term rates than a rate hike.

3. India Curbs Enthusiasm

The Reserve Bank of India increased its key interest rate Tuesday for the fourth time this year, according to the International Herald Tribune.

  • In a midterm monetary policy review, Yaga Venugopal Reddy, governor for the Reserve Bank, announced that the bank's repurchase rate, the cost for other banks to borrow funds, would go up by a quarter point to 7.25 percent.
  • This is the fourth interest rate increase this year.
  • In the past two years, the Reserve Bank has raised its key rate by 150 basis points to prevent the soaring Indian economy from fueling inflation, the IHT reported.
  • India is second only to China among the 20 largest economies in economic growth.
  • As well, consumer spending is on the rise, as Indians with disposable incomes are borrowing from banks to splurge on a variety of purchases ranging from homes to cars, the IHT reported.
  • The IHT said Inflation rose to 5.26 percent in mid-October despite low global oil prices.
  • Hey, maybe the IHT guys should read Number Two above!

4. Don't Judge a Housing Market Book By Its Book Cover

This morning we stumbled across the following blog, "David Lereah Watch," on a tip from Barry Ritholtz's Big Picture.

  • As Five Things readers already know, we're slightly wary of taking at face value any housing market analysis from Lereah, the author of "Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investments Will Climb Through the End of the Decade - and How to Profit From Them," not so much because of the fact he wrote a book that is super bullish on real estate , but because he is the "chief economist" for an organization (the National Association of Realtors) whose self-described mission is to help its members (realtors) become more profitable.
  • There is absolutely nothing wrong with the NAR helping realtors become more profitable. We just don't expect to hear impartial housing data analysis from someone employed by the NAR.
  • In the old days they would have called that a "conflict of interest." Today it's called "being a chief economist."
  • Anyway, we ran across this Lereah blog and discovered that you really can't judge a book by its cover, not when the cover changes every year based on the incoming housing data.
  • Take a look. You can't make this kind of stuff up.

5. Wait! Title Revision! Title Revision!

According to their 3Q 2006 U.S. Foreclosure Market Report released today, RealtyTrac reported that 318,355 properties entered some stage of foreclosure nationwide, an increase of 17 percent from the previous quarter and a 43 percent increase from the third quarter in 2005.

  • "What our third quarter research appears to be showing is that the first wave of adjustable rate mortgages is having a negative impact on the number of homes going into foreclosure," said Saccacio. "With the volume of these loans--more than $1 trillion of them due to adjust over the next 15 months--this is a trend that definitely bears watching," reported.
  • A 55 percent increase in foreclosures launched Florida as the leading state with total foreclosure filings during the third quarter.
  • James J. Saccacio, chief executive officer of RealtyTrac, states that hikes in interest rates and a slump in the market are two key factors to the 43 percent increase since third quarter 2005.
  • The bad news here is that Lereah's publisher is probably going to have to change that book cover... again.

In 2005, National Association of Realtors Chief Economist David Lereah released the book,
"Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investments Will Climb Through the End of the Decade - and How to Profit From Them."

Interestingly, the title for the 2006 edition of the book was changed to,
"Why the Real Estate Boom Will Not Bust - and How You Can Profit From It."

Below are Minyanville's suggestions for subsequent title revisions in later editions of Lereah's book through 2015:

2007: "Why the Real Estate Boom Will Not Bust and How Foreclosures are Technically Part of the Continuing Real Estate Boom, In a Way."
2008: "Why the Real Estate Boom in Distressed Properties Will Not Bust (except in certain local markets) and How You Can Use Leverage to Profit From It."
2009: "Why the Phrase "Real Estate Boom" is Often Misunderstood to Mean Higher Prices and How You Can Pray for Them."
2010: "Why the Real Estate Boom Will Soon Bounce Back and How to Eventually Profit From It."
2011: "Why Did I Have to Write "The Real Estate Boom Will Not Bust Through the End of the Decade" and How Did I Not Realize How Long A Decade Really Is?"
2012: "Oh, Dear God, Please, Please Let the Real Estate Boom Bounce Back... and How You Can Profit From It."
2013: "Please, Please, Just Let the Real Estate Boom Come Back This One Time for This One House and How You Can Break Even From It."
2014: "Why I Am Willing to Accept a Small Loss of 35% On the Real Estate Boom and No Longer Care About How to Profit From It."
2015: "Why Can I Maybe Borrow a Couple Dollars Off You Until the Real Estate Bust is Over?"

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