TaoEconomics

by Addison Wiggin & Ian Mathias

• S&P 500 sinks to 11-year low… Chris Mayer explains massive forced selling on Wall Street
• Probably a good time to get our fiscal house in order… Rob Parenteau with some personal finance advice
• Have any stocks escaped the 2008 market madness? Sure… the 13 S&P stocks not in the red 
• Traders flee equities, accept anything in return… bond yields sink to record lows 
• Congress “faces reality”… Big Three bailout on hold until December

  It’s one thing for techs to go bust. But S&P 500 companies that are supposed to be the "real economy" and throwing off dividends? Ouch.

“Yeah,” Chris Mayer responded by IM this morning after looking at this chart. “This is the most impressive collapse since the 1930s because of the its breadth. I mean, the S&P 500 getting cut in half from its high in about a year? The S&P 500?! Ouch, indeed…”

  “There is massive forced selling on Wall Street,” Mr. Mayer goes on to explain, “as hedge funds and other big investor pools meet redemptions. In other words, say a hedge fund investor wants his money back. The hedge fund manager, if he doesn’t have the cash on hand to meet the redemption, must go out and sell stock to raise the money. It doesn’t matter if he thinks he’s holding a bunch of 50-cent dollars, he must get rid of something.

“In many cases, the presence of debt gives this forced selling greater urgency. If the hedge fund used debt to fund purchases of stock and suddenly has to meet margin calls — that’s more selling.

“The numbers coming in so far are just mind-blowing. Some of the big hedge funds have suddenly shrunk a whole lot. Consider these examples from 1440 Wall St.:

• Atticus Capital, another much-celebrated hedge fund, went from $8.1 billion to $510 million
• SAC Capital , run by the Steven Cohen, went from $14.4 billion to $7.7 billion
• Vinik Asset Management, lead by Jeffrey Vinik, who once ran Fidelity Magellan, went from $11.8 billion to $1.8 billion!

“Remember, this is as of Sept. 30.These numbers could be halved again. And also remember, these 13-F filings just show assets at that time. The reduction is a combination of selling and a decline in market value.
 
“Getting through this year could be rough on the existing portfolio, at least as far as outward appearances go. We’ve got tax-loss selling in the mix, too. I don’t like to guess about the market, but what the heck: My guess is we don’t see much relief until some of the money comes back in the new year.

“I don’t think investors are going to be happy holding cash or T-bills for long, especially when some of the valuations and yields in the market look so compelling. The markets swing between greed and fear. The pendulum is still on the fear side, but it won’t be there forever.”

We’ll be broadcasting the second installment of the Emergency Retirement Recovery Series Webinar on Monday, featuring Chris Mayer and hosted by John Wilkinson. It’s free… you can sign up here.

  “With respect to your personal finances,” says Rob Parenteau the newly minted editor of The Richebacher Letter, “an environment like that above requires as a first step bringing household expenditures in line with income. Rolling over debt is likely to prove more difficult for households in the days ahead. Once household spending is no longer reliant on credit, reducing expenditures to pay down high-interest-rate consumer debt may prove to be one of the best investments available.

“Repairing credit scores might also prove a timely investment right now, as banks are likely to further tier customers, even after the credit convulsion has passed, and homeowners will want to be in good shape if and when mortgage rates come down enough to allow another refinancing wave to develop.”

For those more concerned about systemic failure in the U.S. financial system, we suggest you consider the services of outfits like EverBank and the Sovereign Society, to explore options for diversifying your portfolio exposures to different nations. More to come…
 

 After yesterday’s decline, the S&P 500 has been reduced to 752, the lowest level since 1997.

  Yesterday, we looked at all the S&P’s biggest losers of the credit crisis. So… lest you think we’re all gloom and doom here at The 5, today, we share with you the survivors (so far) in 2008. All 13 of ’em:

Hmnnnn… discount retail, drugs, breakfast cereal, tobacco… and Dr Pepper.

  The Dow closed yesterday at 7,552. It opened up 100 points today. But if it closes below 7,181, Monday could be a real doozy.

  As the market tested new credit crisis lows, yesterday’s yields on U.S. Treasury securities hit record lows, too. The yields on 2-, 5-, 10- and 30-year bonds all hit their lowest levels in the history.

Investors are still willing to accept next-to-nothing yields in exchange for shelter from the mass murder on Wall Street. But when this trend reverses, we expect it to do so quick and hard. When? Hmmmn… that’s complicated. And depends how far beyond support levels the Dow and S&P are going to fall before sentiment turns. Could be a while yet.

  We must have jinxed Berkshire Hathaway by endorsing it earlier this week. BRK A shares dropped 12% Wednesday, their worst trading day in at least 23 years. The company reported a 77% decline in third-quarter profits year over year, and has been trading down for the last nine days in a row.

You can pick up an A share today for “just” $77,500… nearly $20k cheaper than our buy price of $95,000. Heh.

  One of Berkshire’s latest buys, Goldman Sachs, hasn’t been going very well so far. That 10% coupon for this year is long gone, and Goldman shares have fallen below $50… $3 lower then their IPO price in 1999.

  Citigroup has lost half its market cap since Tuesday. Shares of C dropped below $5 yesterday.

What may be an inconsequential price for the everyday investor is a big deal for funds of the world. Most institutional investors and pension funds are barred from owning stocks below $5 a pop. Money managers who have been clinging to Citi will likely have to pull the trigger before the end of this quarter.

  And since market intervention has worked so well this year… Fannie Mae and Freddie Mac announced yesterday that they will postpone foreclosures during the holiday season. From Nov 26-Jan 9, the government-rescued enterprise (GRE) will be on foreclosure hiatus.
 
“We felt it was in the best interest of both borrowers and Fannie Mae to take this extra step to ensure that homeowners with the desire and ability to prevent foreclosure have an opportunity to stay in their homes,” said Fannie’s new CEO Herb Allison. During the freeze, Fannie and Freddie will work with another government agency, the audaciously named “HOPE Now,” to reduce payments and interest rates for at-risk borrowers.

  The dollar didn’t benefit too much from yesterday’s sell-off. The dollar index is showing some resistance to the 88 level, having only exceeded it once during this dollar boom. As we write, it’s around 87.6.
 

  Gold, on the other hand, is off to the races this morning. The spot price is up $25, to $775 an ounce. The dollar’s failure to respond to yesterday’s decline is helping reinstill confidence in gold. Plus, the S&P 500’s and Dow’s rapid approach to technical lows is ramping up “safe haven” buying.

  And as we suspected yesterday, you’ll have remarkably cheap gas to fuel your holiday trips in the coming week. The national average gas price dipped below $2 a gallon today for the first time since March 2005.

Gas is down 50%, or $2.13 from its all-time high set in July. On average, a gallon today will set you back $1.98.

  “We have to face reality,” admitted Senate Majority Leader Harry Reid. Not the reality that an automaker bailout is a bad idea… but the reality that no one outside of Washington supports it.

Congress will recess until the week of Dec. 8, so members can go home, , collect bribes, patronize their constituents, sleep with young aides and so on. When they return, the “Big Three” will present their case — make one last stand — and maybe, just maybe, this thing will be over.

Heh. Must be Friday.

  “The incongruity,” writes a reader, $5 words in hand, “between the reported total compensation of the U.S. autoworker — roughly $70 per hour — and the impossibility that they are thus making about $150,000 a year to screw on lug nuts is reconciled by the fact that ‘total compensation’ combines salary plus those gilt-edged health benefits, FICA, Social Security, etc. Their take-home pay is closer to about $40 per hour — still good money, mind you.”

  “I come from a different industry completely,” writes another, “than that of the automobile. But I was a dues-paying union member for 30 years until I retired at 52-years-old!

“It is regrettable that this country doesn’t think that labor unions are necessary anymore. That is why we now have the classification of ‘the working poor’: those who work 40-60 hours a week and can’t afford to buy food without food stamps; those that never get to take a vacation with their families because they cannot afford to take time off work without pay (they have no paid vacations), let alone go anywhere; those that will depend on Social Security for their retirement income. (It used to be known as the middle class.)

“Thank you very much, but I would rather pay dues to my crooked union and walk away with livable wages, medical benefits for me and my family and a pension that my trusty government cannot just decide to tap into. Also, there was a tremendous number of college graduates that worked for the same company, but they made more money out of their field! You act as if these companies just handed wages out to undeserving workers. Trust me, I DESERVE AND HAVE WORKED hard for the benefits that I have received in the past and those that I get now.”

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. We thought we found some more controversy surrounding I.O.U.S.A. yesterday… then we realized who was making the comments. Mike Norman is one of those nitwits you see on CNBC from time to time shouting inanity, never letting anyone else finish a cogent thought.

On the bright side, Norman’s most endearing quality is that he’s a perfect specimen of the modern airhead. A man who’s only chance of survival comes by way of leeching off producers in the greenrooms of today’s fictitious mass media. Without his ilk, life on the media circuit would be much less entertaining.

On the other hand, he’s one of the morons who helped get us into this mess in the first place. Here he is among a montage of people laughing in Peter Schiff’s face for calling a 15% correction in house prices back in 2006.

You can read Norman’s insightful review of I.O.U.S.A. here.

P.P.S. If you haven’t secured your copy of I.O.U.S.A. yet, now’s as good a time as ever. We’ve bundled it together with a companion book and some investment wisdom from Chris Mayer… a package available only to readers such as yourself. Get your bundle, here.

by Addison Wiggin & Ian Mathias

• Markets plunge… Dow, S&P 500 technicals on the verge of either historic bottom or precipitous fall
• Greg Guenthner on the decay of household stocks… over 100 S&P names less than $10
• Moving markets today… a royal endorsement and a foreboding unemployment stat
• Byron King with one of many themes emerging from the New Orleans Investment Conference
• “Buy gold,” says David Galland… but only under a certain level
   

  Watch the market today. The Dow has been finding support around 8,000 for over a decade.

The Dow’s next historic low was set in 2003 at 7,397, and then back in 2002 at 7,181. The next level of support after that… ummm… it doesn’t really exist. Maybe 3,800?

  This morning, 101 members of the S&P 500 sell for less than $10 a share. Some of last century’s household names headline the list — Xerox, Alcoa, Starbucks, Motorola, Yahoo, E*Trade, Allied Waste, Citigroup… and, of course, Ford and GM.

In the 28-year history of the index, there have never been this many “penny stocks” among the 500. In fact, 186 stocks on the S&P 500 don’t even meet the index’s market cap qualification… to be on the index, companies are supposed to have a market cap over $4 billion.

For perspective, at the nadir of the dot-com bust, 59 members of the index dipped below $10. After Black Monday 1987, 35 had dripped that low… or lower.

  “This is pretty crazy,” notes our small-cap turned blue chip analyst Greg Guenther. “In some cases, this is a chance to hop into a time machine and buy these names before they were big. There are some real industry leaders in this bunch… some entrenched manufacturing/supply names with big market shares and proven competitive advantages.

“But there are plenty that deserve to be less than $10 a pop. Now is probably not the time to go out and buy every beaten-down household name you come across. Starbucks is a great example. SBUX is a ‘mass affluence’ play, one that sells perceived luxury to the common man in the form of $5 lattes. That kind of company will get crushed when consumers are scrambling to trim their budgets. In fact, I would be cautious toward anything resembling midrange to high-end domestic retail… there’s just no telling how the consumer will fare in the next few quarters.”

Greg’s preparing a special blue chips turned penny stocks issue for his Penny Stock Fortunes subscribers. As one of our least expensive publications, these picks are worth the price of admission. Get the details, here.

The U.S. market got a small vote of confidence today from the Middle East. Prince Alwaleed bin Talal of Saudi Arabia announced this morning he will boost his stake in Citigroup by at least $350 million. The investment would give the Saudi royalty over 5% control of the company.

  But the boost from Alwaleed didn’t last long. It was all but canceled by the worst jobless claims data in 16 years. Weekly jobless claims shot up 27,000 from last week, to 542,000 – the highest since Bill Clinton was interviewing his first round of White House interns.

The four-week average is up to over 506,000 — its highest level since 1983. We don’t get a new unemployment report from the Bureau of Labor Statistics until Dec. 5, but at this rate, 6.5% is looking like “the good ol’ days.”

  “We are beginning to pay the societal costs,” opines Dan Denning, “of a sustained economic policy that favored finance and consumption over production and savings. That policy saw the formation of a Wall Street-Treasury Dept. Axis.

“That Axis advocated running a capital account surplus. It was partly to offset the rising current account deficit. But in some ways, the surplus in the capital account came about because of policies that encouraged debt and consumption, the very things that led to the current account deficit. The result was a boom in American financial services — while American manufacturing was shipped offshore.

“The costs are higher unemployment, fewer skilled workers, greater consumer debt, more government borrowing from foreign creditors and the disappearance of a healthy industrial base. None of those costs are going to be absorbed by TARP or any other bailout planned by Congress.”

  Meanwhile, if you’ve been a Treasury bond investor this year, seeking low returns and even lower risk, you’ll likely be one of the biggest winners of 2008. The Lehman U.S. Treasury Index is up 7.4% year to date. Compared to the S&P, down over 40% — it’s looking pretty good.

  The “credit crisis” is far from being over. The lending rate between banks, aka the Libor, looked like it was returning to normalcy a few weeks back. But not so much anymore. The three-month rate has crept slowly down to 2.17% — a full point above the Fed’s target — while the overnight has flat lined around 0.44%.

But the best gauge might be the Libor-OIS spread, the difference between three-month Libor and overnight interest rate swaps:

Despite billions in bailout capital from central banks all over the planet, banks are still cautious. The markets have yet to thaw.

  Amazingly, traders are still fleeing to the “safety” of the U.S. dollar. The dollar index has quickly regained all its losses from yesterday, and then some. At 87.4, it’s about a half a point from its 52-week high.

The euro has fallen to $1.25 a pop. The pound is closer to the $1.40 technical support we mentioned yesterday, now at $1.47. The yen has strengthened to 94, as global risk aversion has taken some wind out of the carry trade’s sails.

  “I’ve spent a lot of time talking about and listening to opinions on the dollar this week,” Byron King writes, fresh off the plane from the New Orleans Investment Conference. “EverBank’s Frank Trotter was there, discussing investments in foreign currencies. And Frank Holmes — gentleman and scholar — was there from U.S. Global Investors, with his unique perspectives on emerging markets and international money flows.

“Between the two Franks, I could discern the sense that the strong U.S. dollar is due for a major correction in the not-too-distant future. This will cause many foreign currencies to appreciate. It will also probably cause the prices of both oil and gold to rise. How soon? We’ll probably be well into it during the first quarter of 2009. So it may be time to diversify a portion of your funds out of dollars.”

  The dollar’s strength is intensifying a commodity sell-off. Crude oil is the most notable victim, now barely clinging to $50 a barrel.

Thus, you can count on $2 gasoline by the weekend. The AAA national average was $2.02 early this morning, when oil was closer to $53 a barrel.

  Gold is faring remarkably well today, despite the broad commodity smack down. Still, it’s far from booming… up about $5 from this time yesterday, at $740 an ounce.

  “I have read a number of analysts,” says our colleague David Galland, of Casey Research, “who have expressed the view that gold could dip to the mid-to-low-$600 level.

“Could happen, but I think not. Already, buyers of physical gold are finding anything near $700 to be cheap, and so are helping to build a floor under the monetary metal.

“While we already know $750 is no magic number below which gold cannot fall or below which it cannot loiter, I take no small comfort in the fact that there is a clear increase in demand at that price. In time, as the dollar continues to participate in the fiat currency race to the bottom, that number will ratchet higher and higher still. Maybe not overnight, but in the next six months to a year, certainly…or as certain as anyone can be about anything these days.

“We can’t say with certainty what path gold will take between now and the time this crisis is over. But until I can see some tangible evidence that it has lost its value as money, I’m a happy holder and, at under $750, a buyer.”

  So you may have heard by now, the execs for the Big Three automakers each took private jets to their testimony before Congress yesterday. Average cost for the flight from Detroit to Washington? $20,000… Northwest had flights available that day for $288 coach, $837 first-class.

"It’s almost like seeing a guy show up at the soup kitchen in a high hat and tuxedo," Rep. Gary Ackerman, a Democrat from New York, said of the dynamic trio. "Couldn’t you have downgraded to first class or something, or jet-pooled or something to get here?"

Maybe they should have driven.

  “So Barney Frank wants to talk about income disparity?” asks a reader, responding to Frank’s allegation that the auto bailout is a form of “union busting.” 

“OK, let’s try this one. In 2006, the average hourly wage of a person with a high school diploma was $13.46 per hour. For those fortunate enough to receive insurance and other forms of compensation, the average was $17.50 per hour in total compensation. These averages encompass all age groups.

“However, if you are a Detroit auto worker with a high school diploma, your total compensation comes to: $67.78 (Ford), $70.43 (GM) or $72.59 (Chrysler) per hour.

“Now, that is income disparity.” 

The 5: Hmmn… that would be some $150,000 a year per worker. Are we sure those numbers are right?

  “All of this brouhaha” writes our last, “about bailing out the auto industry and how destructive it will be to the country — sounds a lot like the moans and groans of the steel industry (and steel unions) a few decades ago when the Japanese and Koreans were killing the U.S. companies with low prices for bulk steel. The biggies, like U.S. Steel and Bethlehem, went under.

“And you know what? Small, progressive and aggressive steel companies arose in the U.S. — not for the cheapo junk steel, but for the better grades, for alloys and for hi-tech steels. And in a few decades, the industry bounced back better than ever. The U.S. was THE place to buy the good stuff. The Far East was where you bought the cheap bulk stuff. Did it ‘hurt’? Yeah, for a while, but you know, we got over it and came through it all the better. We just forgot what we learned.

“How many innovative car companies do you think will start popping up in the U.S. when the dinosaur Big 3, and their fat-assed dinosaur management, are finally gone? I don’t think that innovation is completely dead in the U.S.; it’s just been shut down in favor of huge management bonuses paid for killing industries through blind stodginess. Let’s see, how many U.S. car companies were still trying to crank out SUV guzzlers when gas prices were scaling Everest? Let the dead die so that the living can grow.
 
“Sorry, unions and union members, but the day is over that a dumb back can command a sizeable (read uncompetitive) wage and benefit package just for showing up to do a job that, in many cases, a monkey could be trained to do. Better get some education. The new companies will be high-tech — there will be plenty of jobs for those with a reasonable education and training. Dumb backs will get to clean toilets at a commensurate wage.

“Hear that Fed and Treasury and Congress? Don’t waste money trying to resurrect dinosaur corpses. Put the money into opening up investment in new technologies, good products and well-run companies. Put the money toward training a labor force that can be part of competitive industries. And start the ‘do it or fail’ philosophy in the schools. First-grade would be good.”

What a mess…

Addison Wiggin
The 5 Min. Forecast

P.S. Don’t forget to check out the next installment of our Emergency Retirement Recovery Series. It’s free, all you have to do is sign up, here.

by Addison Wiggin & Ian Mathias

• Record-setting inflation and housing data… how your dollar and gold holdings reacted
• Dan Amoss on Fed policy and “the likely outcome of this crisis”
• Bill Jenkins shares a long-term currency trading opportunity
• Rob Parenteau on stock picking during the credit crunch
• The “Big Three” bailout crescendos… will Washington save the U.S. auto industry? Will China?

  Gold experienced a bit of “shoot first, ask questions later” rally this morning. It jumped $30 on the New York opener, and then fell back.

The dollar index did just the opposite, dropping a full point before recovering. Markets this jittery generally signal a trend-reversal on the way. That would mean, the dollar rally we’ve been seeing during the credit crisis this fall is teetering…   

  Consumer price and housing numbers provided the "quick flash" catalyst. Today’s consumer price index (CPI) confirmed what the consensus wanted to hear: Inflation concerns are on the back burner.

The CPI fell a record 1% in October. Like yesterday’s PPI report, energy prices were the driver of the sudden “price deflation.” Gas, for example, fell a record 14% during the month. Food prices in October rose 0.3%, but that was the smallest gain since May of this year.

The “core” consumer price index, which excludes food and energy prices, fell 0.1% — the first decline since 1982. The drop in the core rate caused traders to think “all-clear” at the Fed… rate cuts and more stimulus on the way…

  Housing data sank to a whole new level this morning, too.

Housing starts, the measure of builders breaking ground on new homes, fell 4.5% in October, to an annual rate of 791,000. The Commerce Dept.’s been keeping track of this sort of thing in 1959 — never has the annual rate been this low. Never.

Same with the department’s gauge of building permit applications. They plunged 12%, to an annual rate of 708,000. That’s 1,000 homes worse than the previous low, set in Mach of 1975.

  The National Association of Home Builders sentiment index fell to a score of 9 in November, down from 14 in October and the lowest level ever recorded. If there’s any hope for a housing bottom soon, it’s this: Sentiment can go only 8 points lower.

  “You can’t ignore the massive and limitless inflation schemes coming from the Treasury and the Fed,” urges Dan Amoss.

“Those fearing deflation assume that every American consumer is stereotypical: an overextended, credit card-addicted, house-flipping gambler. This is simply not the case. Many Americans don’t have a mortgage. And most Americans with mortgages are still making their payments. They have, however, temporarily reined in discretionary spending because of falling house and stock prices.

“Those fearing deflation also assume that demand for debt is low and falling. But demand for debt doesn’t always come from businesses or households looking to invest more or spend more. Any business or household looking to refinance existing debt at lower rates — and there are many — is a source of demand for new debt. Banks borrowing at the Fed window at 1% or less will be looking to supply this new debt by make highly profitable loans to creditworthy borrowers.

“Once borrowers refinance, they may not be as aggressive about spending or expanding business as they used to be. But at least they will have access to credit. In the Great Depression, they did not. So the economy fell into a negative feedback loop of asset sales, bank failures and rising unemployment.

“Sure, such an action would guarantee a decade or more of stagnation in housing prices, but it would also slow or flatten the rapid decline in prices. This is the essence of the Treasury and Fed actions: to stop the deleveraging from getting out of control — even at the cost of future economic stagnation.

“Like it or not, I think this is the most likely outcome from this crisis.”

  "There is no wonder the dollar will weaken," Eisuke Sakakibara, Japan’s former top currency official told Asia Times yesterday. "The dollar now looks strong for a technical reason. The money the U.S. financial firms had invested in the world is being repatriated into the homeland, causing dollar buying. But once this conversion into the dollars is done, the currency will head south."

“Faced with the unprecedented growth of the U.S. budget deficit,” the Times explains, “and the prospect of an increasingly weaker dollar compared with the yen reducing the value of Treasury debt held by Japan, economists in Tokyo are calling for the administration of President-elect Barack Obama to issue U.S. Treasuries denominated in yen and other currencies…

"‘The U.S. will be forced to issue foreign currency-denominated U.S. Treasuries in its hour of need,’ said [Tokyo chief economist for Mitsubishi UFJ Securities Kazuo] Mizuno. ‘The U.S. cannot finance its deficit by itself. The U.S. financial system cannot survive without foreign investors. We will see “Obama Bonds” in the future.’"

Great… just what we need. An Obamanation.

  “Keep and eye on the sterling/dollar pair,” notes one of our currency advisers, Bill Jenkins. “I use it as a basis for looking at other currency pairs as well. With the pound at $1.50, we are now approaching, in the sterling, a multiyear low of $1.40.

“From a technical side, that figure has provided a good base for the last 16 years. The pound bounced off this low in 1992, and found it as a base for the end of 2000-early 2002. So if you care to speculate with the pound, you are close to a very good long-term buying opportunity.”

By the way, if you recall, a couple of months ago, we asked if you’d be interested in a currency trading service from Agora Financial. The answer was a resounding yes… so we went to work finding a trader and assembling a strategy we think suits. Bill Jenkins is our man. And we’re proud to announce we’re only a couple weeks away from putting his talents into service.

Stay tuned… we’ll keep you up-to-date.

Tuesday was another volatile, but ultimately uneventful day for equity investors. Stocks swung up, then down, then up again… major indexes finished up about 1%. Tech was the star of the show. HP issued a defiantly good earnings forecast for 2009, while Yahoo CEO Larry Yang announced his resignation, much to the delight of his shareholders.

And like the majority of 2008, banks were the dogs of the day. Despite announcing job cuts exceeding 52,000 employees, Citigroup’s shares fell to $7 a pop, a 13-year low.

  “With equity markets down over 40% peak to trough,” advises Rob Parenteau, “much of the damage is likely done, and if anything, price overshooting to the downside should reveal some selective bargains. Having said that, maximum earnings risk lies straight ahead, and very few portfolio managers have lived through a full-blown recession.

“Deep value investing styles — harkening back to the days of Benjamin Graham, even — may help identify possible buy candidates. High-dividend-yield stocks are only a place to start, since many dividend payments may be reduced as corporate profits are challenged in the quarters ahead. Low-debt, high-cash-holding and high-free-cash-flow companies should be favored, as well as companies with dominant market shares that may be able to take advantage of weaker competitors.

“Steady earnings growers, especially steady top-line revenue growers often found in the consumer staples, health care and utility sectors, are generally better placed to ride out an economic storm of this magnitude.”

  Alas, to Barney Frank’s chagrin, the New York Stock Exchange notified Fannie Mae yesterday that the firm is in danger of being delisted.
 

Put that in your pipe and smoke it

 
Shares of FNM have closed under $1 for over 30 consecutive days, which means it no longer qualifies to play on the Big Board. Fannie has until Nov. 26 to explain itself to the NYSE or else it’s off to the Nasdaq or OTC.
 

  Another of Barney Frank’s pet projects appeared before Congress this week. The CEO’s of the “Big Three” automakers marched to Capitol Hill and begged for a bailout yesterday and today. Oh, sorry, a “bridge loan.”
 

“A bridge to what?” we ask

GM’s CEO Rick Wagoner told Congress that his company has a 50/50 shot at having enough money to stay in business beyond the New Year. Should GM fail, “Societal costs would be catastrophic: 3 million jobs lost within the first year…and a government tax loss of $156 billion over three years."
 

  “The primary purpose of the bill,” said Hank Paulson yesterday, effectively slamming the door shut on an automaker bailout, “was to protect our financial system from collapse. The rescue package was not intended to be an economic stimulus or an economic recovery package.”
 
Votes to pass this proposed “bridge loan” don’t exist. Unless the Big Three can convince (buy?) several key Republican congressmen, it’s not going to happen.
 

  “Bankruptcy would be very disruptive,” Rep. Frank commented on the proceedings, speaking for his prime constituency.

“There is also an assumption that if you do bankruptcy, you could undo labor contracts. Now, the unions, to their credit, have negotiated some concessions. But you know, we already have too much union-busting and too much income inequality for the average worker in this country for us to now say by the way, if you’re a company and you haven’t been able to totally get rid of the unions, then go bankrupt and rewrite, write down the contracts.”
 

  “OK, this is what a nation gets when it screws up its economy and manufacturing base,” comments our former Navy pilot Byron King, who normally maintains an even keel. “Now the Chinese are seriously discussing buying GM or Chrysler… for pocket change.”

“This is more than just IBM selling its PC biz to Lenovo — which was traumatic at the time, if you recall. The strategic implications are immense — essentially causing the U.S. to exit the domestic car business. It’s not just cars… it’s the whole industrial base that supports building cars. From tires to paint to glass to seat belt clickers…. it’s all part of a gigantic industrial ladder that supports millions of jobs and thousands of communities.
 
“Thank you, politicians! Thank you, regulators! Thank you, auto unions! Thank you bankers! And thank you to the top brass for the shortsighted management for all these years! How will the American people react? Just accept this as a matter of orderly globalism? Yeah. Fat freaking chance. People will be looking for heads on a platter, for this one.

“Was this what it was like in old Rome? People strolling on the walls in August 410, looking out, saying to each other… "Hey, who are those funny-looking people camped out on the plains? Alaric the Visigoth? Never heard of him."
 
“Sic transit gloria mundi.”

  “My parents grew up during the Great Depression,” a reader writes. “It was pounded into my head as I grew up. One thing I learned was when a government is bankrupt and no longer can support its paper currency, or has any, it issues script. Scripts value is set by government fiat. It’s worth what the issuing government says it is worth.

“My grandfather was paid with script issued by the city of Detroit when he was a Detroit cop and the city was bankrupt. The difference between Detroit and the federal government is the city of Detroit bought back its script and the federal government hasn’t and won’t. Ever! The Depression never ended. It was alleviated by the wartime production.

“The difference between the Great Depression and now is the Federal Government was quite wealthy then as opposed to the bankrupt government of these modern times. During the Great Depression the Fed pumped money into the economy but never enough to relieve the depression until the WW2 when the US became the war materials supplier to the ‘Free World.”’

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Don’t forget, we’re expecting a major announcement tonight, one that could revolutionize investing. Our go-to technology analyst Patrick Cox believes it could do for investors in the 21st century what railroads, cars and computers did over the past 100 years. Learn more here.

P.P.S. We’re also taking requests for the second installment of our Emergency Retirement Recovery Series of Webinars . This one features Chris Mayer and a deeper look into his Chaffee Royalty program… to sign up for free, visit this page.

by Addison Wiggin & Ian Mathias

• Government financial bailout now most expensive endeavor in U.S. history… tops even WWII
• So why is no one worried about inflation? Chris Mayer on the “reflation” of 2009
• Market volatile as ever… Surprising places where the “smart money” is seeking profits
• Bill Bonner on a very rare occurrence in stocks and bonds
• Plus, “If you’re so smart, what’s your solution?” a reader asks… The 5 responds, below

Wow. The U.S. government has now thrown more money at this “credit crisis” than it did fighting the entire Second World War.

By CNBC’s estimation, the cost for World War II — adjusted for inflation — was $3.6 trillion. At $4.2 trillion, the credit crisis of 2008 clocks in as the most expensive endeavor in American history.

That’s a lot of moola getting pumped into the system. In ordinary times, the meters would be screaming, “Inflation!”

But we assure you, there are few warm bodies in Washington who care about inflation. The “consensus” agrees with Ben Bernanke and Hank Paulson that government should spend whatever it takes to reinflate the economy.

On the surface, the latest producer price index (PPI), a measure of prices at the producer level, indicates the “consensus” might be right not to worry about inflation. The PPI fell by a record 2.8% last month. According to the Labor Dept. this morning, gasoline prices for wholesalers fell by 12.8% — their biggest drop in 22 years. Food prices fell for the first time in eight months, down 0.2%.

Thus, producer inflation rose 5.2% over the last 12 months — steep, but not as bad as the Street anticipated. Sigh.

However, if you strip out energy and food costs, which economists are wont to do, given their volatility, “core” PPI rose 0.4% — more than anticipated. The “core” inflation rate has now risen 4.4% in the last year — its fastest rate since the Berlin Wall fell.

The Fed isn’t out of the woods, by any means.

“I think we’re set up for some huge reflation in 2009,” asserts our managing editor Chris Mayer. With the latest Grant’s Interest Rate Observer in hand, Chris passed on a few inflationary notes we’ve become all too familiar with:

The Fed’s balance sheet has grown by 133% in the past 12 months. Traditionally, growth over 10% was seen as too aggressive

The Fed’s balance sheet crossed $1 trillion for the first time in September. It then broke through $2 trillion Nov. 5. And according to Federal Reserve Bank of Dallas estimates, it could top $3 trillion by 2009

Federal Reserve bank credit is up 1,560% from this time last year.

“Our Federal Reserve seems hellbent on making Argentina look like Switzerland in terms of monetary restraint. Why is this ballooning balance sheet inflationary? The Federal Reserve increases its assets by buying stuff — financial assets of banks and others. The Federal Reserve pays for these assets by creating money that did not exist before. That’s it. Simple as pie.

“Of course, our government is not acting alone. Central banks across the globe are doing the same thing, if with somewhat lesser vigor, at the moment.

“In any event, it means paper money will buy less. We may see nominal prices — for oil and gold and metals — continue to fall in the short term, but long term, look for huge reflation in 2009.”

In the market… another day, another roller-coaster ride for U.S. equities.

Traders started the week in a bad mood, due mostly to business as usual on Wall Street, but especially after Japan officially declared recession. Stocks drifted up late morning, but quickly reversed on news of massive Citigroup job cuts, more signs of distress from automakers and lousy industrial output data.

All of the S&P’s 10 sector groups fell, but financials, consumer discretionary and materials led the way.

In such turbulent markets, what are the “smartest guys in the room” doing?

John Paulson, arguably the smartest investor of 2007, is buying securities backed by residential mortgages. Paulson, who personally earned $3 billion last year after betting against subprime, started buying up these toxic assets last week after the Treasury announced it was no longer interested in using TARP money to buy asset-backed securities. Paulson manages over $36 billion.

In a similar fold, Marty Whitman, one of the modern heroes of value investing, is ramping up his contrarian purchasing. The manager of the famous Third Avenue Value Fund scooped up truckloads of MBIA, Ambac and GMAC shares and notes.

“Distress securities seem to be trading at ultra attractive prices,” he told his shareholders this week. “Discounts have widened appreciably for the common stocks of very well-capitalized companies where the common stocks trade at meaningful discounts from readily ascertainable net asset values (‘NAVs’); and where the prospects appear good that over the next five years, such NAVs will increase by not less than 10% per annum compounded.

“I have the unique perspective of being a distressed investor for many decades, and safe and cheap [investing] on a long-term basis seems to be about as attractive as it was in the 1970s.”

Another smart fellow, Warren Buffett, is buying Big Oil. Berkshire Hathaway told the SEC this week it had quietly acquired 66 million shares of ConocoPhillips, making BRK its biggest shareholder. Buffett also commanded Berkshire to pick up a big stake in Eaton, an aero and auto parts manufacturer, and more shares of NRG Energy, a power producer.

On the other side of the ledger, Buffett reduced holdings in Bank of America by nearly half, and sold just a little bit of his beloved Wells Fargo.

All told, we see Buffett is taking the “buy stocks” advice he gave in The New York Times last month… BRK purchased almost $4 billion in equities during the third quarter, while selling “only” $300 million.

Also, it might not be a bad time to pick up shares of Warren Buffett himself. Berkshire Hathaway A shares have fallen below $100,000 for the first time in two years. If you’ve got $95,000 you’re just dying to invest, we could certainly think of worse places to put your greenbacks.

Despite falling 32% this year, BRK is still outperforming the S&P 500 by nearly 10%.

“There’s still more downside potential for most stocks,” cautions our new options adviser, Wayne Burritt. “As you can see from this daily chart of the S&P 500 — a good stand-in for the broader U.S. stock market — U.S. stocks continue to slide. In fact, a break below 849 — the red dotted line on the chart — is now very likely. And that means key near-term support is pretty much out the window.

“Below that, my technical signals tell me the S&P 500 won’t likely find support until 769, or 7,197 on the Dow. Those are the October 2002 lows that sparked the latest bull run that ended last October.

“In other words, the market is on course to give back everything it gained in the latest, five-year long bull run. And it will likely do so in a fraction of the time.”

“Stocks are down so much,” notes Bill Bonner, “that dividend yields are beginning to look respectable again — averaging about 3.8%. For the first time in 50 years, you can get more yield from a stock than from a 10-year U.S. Treasury bond. You remember, stocks were supposed to pay lower dividends because stockholders are supposed to earn capital gains, as well as dividends. The combination of capital gains and dividends gives investors a total return greater than bonds; this is the ‘risk premium’ that you get to compensate you for periods when stocks go down. What happened to the risk premium? Here it is!

“When is the risk premium at its lowest? At the very moment when investors believe it is highest. That is, at the end of the ’90s, investors came to believe that they couldn’t go wrong with stocks. They were so sure that stocks were the way to go that they willingly bought stocks that paid little or nothing in dividends. They thought the price of the stock would go up; so they didn’t need dividends.

“But stocks have gone nowhere since the mid-’90s. Now investors want dividends.”

In markets today, traders are keeping an eye on Capitol Hill. The House Oversight Committee is concluding its week of economic harassment by grilling the bigwigs: Hank Paulson, Ben Bernanke and FDIC chief Sheila Blair are all testifying today. Any hints into the details of the TARP or the confidence and capabilities of this panel could shake up the stock market. We’ll include a “best of” in tomorrow’s 5.

And across the hall, the Senate Democrats proposed legislation yesterday that would lend $25 billion to the Big Three automakers. If passed, the bill would simply take a chunk out of the TARP’s $700 war chest and send it off to Detroit.

Opposition among the Republicans and in the White House is significant, and this one looks like it will end up a stalemate. Still, Majority Leader Harry Reid is pushing for debates and test votes this week, so we’ll keep an eye on it.

In the oil patch, light sweet crude fell to a 22-month low of $54 a barrel today. Like last week, traders are selling oil in anticipation of Wednesday’s Energy Dept. inventory report. Like the previous seven weeks, the government is expected to report more excess supply and weaker demand for oil and gas.

The only real buying pressure we’ve seen has come courtesy of… ummm… pirates?

Yarrr! We come for ye crude!

Well, not exactly. The modern pirate is an angry Somali armed with  RPG’s and motorboats. Somali rebels pulled off an impressive heist Monday, jacking a Saudi supertanker hauling about $100 million in oil. We’re not sure what they plan to do with it, as the ship is kind of… huge:

The hijacking added about $1 to oil’s price in New York yesterday, but traders have since shrugged it off and sold crude back down to $54. If you plan on sailing off the coast of Africa with valuable cargo, you’ve been warned.

But as oil prices fall, so does your price at the pump. The national average is quickly closing in on just $2 a gallon. Considering the rate of decline lately, and today’s national average of $2.06 a gallon, the average American will be paying less than $2 a gallon by this time next week.

Gasoline is at its lowest retail cost since March of 2005, over $1 cheaper than this time last year.

Gold continues to consolidate into a tighter and tighter range. It’s been stuck between $730-750 all week, and currently sells for $738 an ounce.

“It is very easy to be critical,” writes another, “of Obama’s wanting to spend money to invest in energy development and infrastructure to try to kick-start the economy. Investors have been putting money into pushing paper around. They are not interested in taking the risk, but will be glad to take over the investment when they can privatize profits.

“Have you looked at your portfolios lately? How well are your suggestions for investments doing? If you stopped all government spending today, there would be a complete economic tsunami tomorrow. What is your solution to turn this ship around?”

The 5: The problem with running deficits as a matter of course, as the U.S. has done for the better part of the last 40 years, is when there’s a real crisis, the government is short on resources. Where is the $4.2 trillion we led off today’s 5 with going to come from, for example?

The government, under Barack Obama’s leadership, should tighten its belt; balance the budget; and set up tax incentives to encourage saving and investment in productive assets locally, be it alternative energies, infrastructure or otherwise. Hmmn… seems like we just said that yesterday. Oh yeah, we did.

Instead, what the “consensus” wants it to do with all this borrowing and spending is reinflate the fictitious paper and consumer economy. Trouble is if they’re successful, they’ll have to keep it alive on government support. Then you can kiss the dollar goodbye.

Regards,

Addison Wiggin

The 5 Min. Forecast

P.S. Seems like a good time to have a documentary on the subject out in theatres for “regular” people to get a bead on what’s happening to their country. Apparently, the Motion Picture Academy agrees… I.O.U.S.A. was shortlisted for the Oscar yesterday. That means, among all 94 documentaries that qualify for an Oscar nod in 2008, the Academy has whittled down the 15 it’s willing to consider for the final nominations on Jan. 22. Five films will be chosen on that date.

P.P.S. If you haven’t heard, Pat Cox is making a very big announcement tomorrow. He’ll reveal what he believes will be the next breakthrough transformational investment class. Just as railroads, automobiles and computers were to previous generations, Pat says he knows what will lead us into the next age of investing. If you want to be the first to read his special report, sign up here.

by Addison Wiggin & Ian Mathias

• Welcome to the Fantasyland issue of The 5…
• “Shouldn’t worry about the deficit,” assures Barack Obama… “yes we can” keep spending
• Can’t balance the budget of your dreams? Call the Treasury… Atlanta’s doing it
• Gold still suffering… Ed Bugos’ future fantasies for precious metals stocks
• Plus, no one immune to the great housing illusion… the infamous Neverland Ranch shuts its doors

  “We shouldn’t worry about the deficit next year or even the year after,” the U.S. president-elect Barack Obama said on 60 Minutes over the weekend.

We were afraid that Barack’s message of “change you can believe in” was going to make it harder to take issue with politics as usual in Washington. But now we see he already drank the Kool-Aid and we had nothing to fear but fear itself.

“The consensus is this, that we have to do whatever it takes to get this economy moving again. We’re going to have to spend money now to stimulate the economy.”

  “During recessions,” our Rob Parenteau says, explaining the prevailing mentality among economists, policy wonks and Treasury Secretaries in Washington, “the private sector pulls back and tries to move into a net saving position to weather the storm.

“Households and businesses can only save if some other sector is willing to deficit spend. An improvement in the trade deficit would help the private sector, but we are not getting the necessary results on trade yet.

“That leaves the adjustment all on the back of the fiscal deficit, which has regained 2004 lows in a very sharp fashion this year. Without a sufficient turn in the trade deficit, the attempt by the private sector to save will endanger income growth, and thereby worsen the debt default situation.

In other words, the worst thing that can happen right now is that consumers come to their senses and stop spending more than they earn.

“It’s a vicious cycle,” Parenteau concludes. “One a highly leveraged economy can’t afford without severe consequences. Given these pressures, a trillion-dollar fiscal deficit in 2009 is not out of the question.”

  “Barack Obama will restore fiscal discipline to Washington,” his website says.

Heh.

If that were true, he’d step out of the way, let the consumer economy go bankrupt, put tax incentives in place to encourage savings and investment in local productive assets. Unfortunately, “the consensus” doesn’t want to see that happen.

  And thus, with the federal checkbook wide open, everyone has their hand out: The mayors of Philadelphia, Phoenix and Atlanta each sent letters to the Treasury Department asking for $50 billion of the $700 billion Troubled Assets Relief Program (TARP).

Just like Bear Stearns, Fannie, Freddie, AIG, all the banks and now even the big three automakers – the mayors claim that their city’s fiscal standing is dire. Barring federal intervention, they claim, layoffs and taxes will increase rapidly while important infrastructure projects will be canceled. 

Between the three cities, annual budget shortfalls exceed $410 million. All claim they are unable to balance the books without Federal aid.

  We have to “prove that we have our fiscal house in order,” before asking for federal handouts, said Arnold Schwarzenegger. The Governator’s state faces an $11 billion budget shortfall, which he plans to remedy by – heaven forbid – cutting wasteful programs and scaling back spending.

“Anyone that wants to go and think that they don’t have to shift down and make changes — if it is states; if it is local government; if it is the auto industry, or any other industry, as far as that goes - they’re living in a dream world or in a fantasy world.”

When this guy says you’re living in a “dream world”…

  The original purpose of the TARP “is to stabilize financial institutions and strengthen the financial system, promote lending and so on,” reiterated Treasury Secretary Paulson Friday.

While Paulson’s latest TARP adjustment proves the methodology of the program is hardly set in stone, he’s been going out of his way to hint that unless you’re one of this old banking buddies, you aren’t getting a slice of the pie.

  “The secretary essentially took some scissors, cut it out and threw it away,” complained Rep. Dennis Kucinich of the Treasury’s TARP switcharoo. “All of a sudden, the Treasury sent a signal to the banks: `Forget about it. We’re going to give you the money you want and you do what you want with it.’”

We try to pay as little attention to House Oversight hearings as possible, but Friday’s grilling of TARP chief Neel Kashkari was particularly funny… in a pathetic way. If you are a senior Congressman in the mood for whining, Friday was your day.

“Every decision that you make,” Rep. Elijah Cummings told Kashkari, “you think about those folks who are losing their jobs and who are in pain and who are not going to have a decent Christmas… They’re going to probably be sitting under the Christmas tree with no presents.”

Soon after, Cummings called Kashkari a “chump.”

  Against this backdrop of politics and plunder, personal bankruptcy filings in the U.S. jumped 8% from September to October. Filings exceeded 108,000 in the month, the highest number since 2005, when the government enacted laws that made filing more difficult and expensive.

Personal bankruptcies are up 37% from this time last year.

  And consumer confidence remains as low as any time since voters sent Jimmy Carter packing back to his peanut farm. The latest reading of the Reuters/U of Michigan consumer sentiment index scored a 57.9 for the current month – a bit higher than October’s 57.6… and better still than June’s 28-year low of 56.4.

According to a Bloomberg survey, this gauge of consumer sentiment will retest previous lows by the end of the year.

  Despite the Fed’s best attempts to re-inflate the economy, U.S. GDP will “grow” a mere 0.2% in 2008, according to the National Association of Business Economics.  96% of all economists surveyed by the group say the U.S. economy is in recession now. Over 75% say the current contraction will stretch beyond the first quarter of 2009.

For all of 2009, NABE respondents slashed their GDP estimates. In the beginning of October they were calling for 2.2% growth next year. Now they predict 0.7%.

  Japan is “officially” in recession, too. While we’ve declared it a few times in these pages, the Nipponese government finalized the third quarter GDP contraction of 0.1% today. Coupled with the second quarter’s 0.9% contraction, Japan is now in its first textbook recession since 2001.

Factor in the European Union’s admission of recession this month, and the world’s first and third and laregest economies are both “officially” shrinking.

Isn’t deleveraging fun?

  Banks are still canning people in Lower Manhattan. Citigroup announced today it will be cutting up to 52,000 more jobs. That’s about 15% of its already trimmed down workforce.

And JP Morgan Chase is expected to cut another 3,000 jobs for its integration with Bank of America. That’s nearly 10%.

  Still, despite all the trouble here in the U.S., the dollar booms. Investors were racing out of equities again this morning, and they wanted cash. Thus the dollar index remains at a lofty 87.

  Oil has fallen, accordingly, to $57 a barrel. The sector seems particularly vulnerable today, as Japan’s declaration of recession implies reduced oil consumption from one of the world’s largest economies.

  Gold is floundering too. It’s been stuck between $700 and $750 for the last three weeks. Today, an ounce goes for $735.

 “I am excited about the values that I see out there,” says our gold stock advisor, Ed Bugos. “And even if gold makes another lower low, I think the gold share sector has bottomed.

“Historically, the market discounts the in-ground resource of an established and diversified producer by some 75-85%… the exact amount depends on a whole myriad of variables. However, the reason for the discount is simply economic: It costs money upfront to get it out of the ground and to the market in the future.

“In any case, if gold is worth $750 per ounce, the market would historically attribute a value in the range of $110–185 per ounce of gold in the ground for your average miner, or about $150 on average. That’s where we are right now.

“At $1,000, the range is $150–250 per ounce, or $200 on average. That’s part of the reason that gold stocks in general have fallen so much, and the reason they have performed so sluggishly relative to gold: They have been on the expensive side since 2004.

“At their heights, stocks like Kinross were fetching $270 per ounce, even Newmont was getting $240 per ounce, while Barrick and Goldcorp saw values closer to $400 per ounce. Such values suggest a gold price of $1,200–1,400 before taking the effects of cost inflation into account. That is, when gold hit $1,000, gold stock investors imputed a $1,200–1,400 price target.”

If and when gold rebounds, Ed tells us, a similar spike should occur again amid the miners.

  As if we needed it, today we have further proof the U.S. housing fantasy has come to an end: even the freakishly eccentric Michael Jackson can’t afford to keep the lights on.

No more Neverland? Probably for the best…

Late last week, the King of Pop gave up the infamous Neverland Ranch. He owed about $24 million on the property. He apparently handed the debt, the deed, and the keys to the Ferris wheel over to some LLC with whom he shares a shady financial connection. The same company, Colony Capital, rescued him from foreclosure in May… now it seems he’s given up on the prospect on luring youth with petting zoo’s and carnival rides all together.

  “As can be seen on this chart,” writes a reader, “the Dow closed Friday by coming to rest almost exactly on the 200 MONTH moving average - not to be confused with the 200 day moving average. The closing value of the Dow was 8497.31 and that of the 200 mma was 8500.31.

 
“The Dow is at a major ‘reckoning point’ and today and the next few days (especially through the end of November) will be crucial in determining which way it resolves. Right now the Dow is the "last soldier standing", as the S&P 500 and the NASDAQ Composite are already substantially below their respective 200 mma’s.”

The 5: The Dow tested that moving average today.  It fell through, then bounced back. As we write, it’s right on the precipice. We’ll keep an eye on it for you.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. This morning we did an hour-long interview with a gentleman in St. Louis who said he was born in 1922. He remembers the Great Depression like it was yesterday, he said, but doesn’t remember it being all that great. The government seems to be just as out to lunch now as it was then. And remember… the last Depression ended in a World War. We paraphrase, of course, but you understand, right?

“When you get to a point,” former Treasury Secretary Paul O’Neill says in I.O.U.S.A. “when you can no longer service your debt – you’re finished.”

You can still pick up your copy of the DVD and book, along with a subscription to Capital & Crisis, right here.

by Addison Wiggin & Ian Mathias

• Bush speaks, markets surge… did Dubya deliver a market bottom?
• More dismal data… record jobless claims, foreclosures
• Government budget expanding at 4 times 2007 pace… T-bond sales show crack in Empire’s armor 
• Byron King on why you should enjoy $60 oil… while it lasts
• Chris Mayer with one region seemingly unfazed by the global credit meltdown

  “History has shown” the lame(st) duck president said yesterday in a speech at the Manhattan Institute, “that the greater threat to economic prosperity is not too little government involvement in the market, it is too much government involvement in the market."

Curious words for one who has presided over the largest government intervention since Franklin Delano Roosevelt made it illegal for ordinary Americans to own gold.

"If you seek economic growth, if you seek opportunity, if you seek social justice and human dignity, the free market system is the way to go."

Extraordinary.

So does that mean he’s calling off the dogs at the Treasury and the Fed? Of course not, Dubya was just philosophicatin’.

  Even so, a wave of nostalgia gripped traders while Bush 43 was speaking , and together they helped the U.S. stock market stage a defiant rally.

Phew! Earlier in the day, the S&P 500 had fallen below 839 — a new credit crisis low. The crash flag was flying high and whipping in the wind.

  But by the time Bush was finished, stocks were soaring. The Dow staged a 911-point swing, or over 10% from valley to peak. When the dust settled, major indexes were up 6.5-7%.

Was it Bush’s speech? The mysterious “plunge protection team”? Nah… it was likely a technical correction to the upside. Pre-election volatility is still in full play. Look for the markets to test new lows again soon. We’re a long way from capitulation in this bear market.

The following list of economic data points doesn’t help matters much…

  The markets started out the day in a sour mood because of a historically bad jobless claims number. 516,000 Americans filed for jobless benefits last week, the most since the Sept. 11 attacks.

Even worse, the total population seeking unemployment handouts now exceeds 3.9 million, the most in 25 years. You can expect more news of this vile ilk in the months to come.

  The housing sector was looking as homely as ever yesterday, too . Nearly 85,000 homes were foreclosed upon in October, RealtyTrac reported. A total of 279,561 borrowers received some kind of foreclosure notice during the month — a 5% jump from September and a 25% rise from the same time in 2007.

October was the 34th straight month foreclosure activity increased year over year.

Since August 2007, the month RealtyTrac identifies as the beginning of the end, nearly 1 million homes have been repossessed by lenders.

  And retail sales fell a record 2.8% in October. Retail is now down for the fourth straight month… this time, by the biggest margin ever.

We weren’t at all surprised to see auto sales hit the bricks, down 5.5%. But it was interesting to see gas sales plummet 12.7%, despite the cheapest price at the pump since early 2006.

  Mortgage enabler Freddie Mac lost a tiny bit of money in the third quarter… about $25.3 billion.

Like Fannie Mae last week, Freddie unleashed some horrid earnings numbers today: $14 billion lost in “deferred tax assets”; another $9 billion in mortgage-backed security-related write-downs; $6 billion more for credit expenses.

The government-sponsored entity (GSE) announced that it would also tap the Treasury’s $100 billion emergency fund for $13.8 billion to fill in a gaping shareholder equity deficit. Freddie Mac’s liabilities have overwhelmed its capital cushion to the tune of $13.7 billion.

  The European Union declared a recession for their member nations today. Collectively the 15-nation shrank by 0.2% in both the second and third quarters — the first eurowide recession in 15 years.

  You’ll find this reassuring: Yesterday, Congress interrogated the world’s five highest-paid hedge fund managers in 2007.

George Soros, James Simons, John Paulson, Phil Falcone ad Ken Griffin — likely the most wealthy panel ever convened before the House Oversight Committee — each took home at least a $1 billion annual salary last year.

"Hedge funds were an integral part of the bubble." Soros admitted in his testimony. "But the bubble has now burst and hedge funds will be decimated. I would guess that the amount of money they manage will shrink by between 50-75%. Excessive deregulation has inflicted enormous losses on the general public and there is a real danger that the pendulum will swing too far the other way.”

“In my opinion,” suggested Simons, “the most culpable [are] the rating agencies, which allowed sows’ ears to be sold as silk purses."

  Perhaps Congress should spend more time balancing its books than bothering the private sector.

The U.S. budget deficit ballooned a record $237 billion in October, the first month of its fiscal year. That’s four times bigger than last year’s month opener, and more than half the budget deficit for the entire 2008 fiscal year. According to data released this week, total government spending in the month exceeded $400 billion.

The Bush administration’s 2009 budget forecast still reads a deficit of around $482 billion. Good job guys… you’re already halfway there!

Of course, by pointing this out, we’re being alarmist. Better not mention it to your friends.

  The dollar enjoyed a quick sell-off yesterday as stocks surged. The index shed a full point, to 86.2. The Dow, however, was down 275 by midday today… so the index is catching some flight to cash enthusiasm. As we write, it’s closing in on 87 again.
 

  Yesterday’s auction of long-term Treasury bonds may give us an indication of where dollars are headed in the long term, however.

A couple of weeks ago, we noted the 30-year note was paying its lowest dividend since inception. We suspected that once the election was over and there was a clear trend in place in the equities markets, it would get a lot harder for the government to sell these bonds at auction… and interest rates would have to rise dramatically just so they could keep the lights on at the Treasury Building.

Well, yesterday, the Treasury had an unusually hard time unloading $10 billion worth of long-term IOUs. They had to raise interest rates 10 basis points during the auction just to sweeten the deal. In other words, it cost the Treasury another couple hundred million bucks just to get enough interest to sell ‘em all. This, my friend, is how foreign lenders can have a larger influence over interest rates in this country than even the Federal Reserve does

We’ll be keeping a close eye on this trend. A nation addicted to debt cannot afford rapidly rising interest rates.

  Gold got a nice pop from yesterday’s equity rally.  And it’s still rising today. The spot bounce bounced off $700 an ounce yesterday, to above $740 as we write.

  Oil rebounded yesterday, too. Light sweet crude rebounded a few bucks, to just below $60. Today, though, it’s following stocks again… back down. As we write, a barrel goes for $57.
 

  “Enjoy cheap oil while it lasts,” warns Byron King in today’s Rude Awakening .

“Don’t get me wrong. The world won’t run out of oil in seven-10 years. That’s not how it works. It’s just that volumes of conventional oil are declining. The takeaway point is that the energy markets will tighten up, like a hangman’s noose around the collective neck of the oil-consuming world.

“So how long will we have to wait for this ‘future’ to show up? Well, how long will the current worldwide recession last? I don’t know. But I do know that if you can afford to be patient with your funds, you should be buying at this very moment the companies that own oil reserves in the ground, and the oil service companies that extract oil and natural gas. These firms should eventually stage a comeback as oil prices rise again.

“The nearby chart shows the total hydrocarbon resources in the world and the relative costs to convert them into a barrel of oil or oil equivalent. This is my summary, based on several different government and academic compilations:

“These are big numbers, right? And they can supply a lot of energy over a long time…at a price. But that price will almost certainly be more than $60 a barrel…much more.”

  “Looking at Saskatchewan,” notes Chris Mayer, with another investment opportunity, “you’d never know markets are suffering a global slowdown.” Chris has been hunting for investment treasures in all the “last places you’d look” regions of the world. Again and again, he tells us Saskatchewan is where it’s at.

“As far as natural resources go, Fortune has smiled broadly on this land between the 49th and 60th parallels. It is the world’s largest producer of uranium and potash. The former is a critical component in the ‘nuclear renaissance.’ The latter is a key fertilizer that sells for $1,000 per ton, compared with only $300 per ton a year ago. Saskatchewan is the world’s largest exporter of chickpeas and lentils. And it is also rich in oil and gas. The U.S., in fact, buys more oil from its northern neighbor than it does from Kuwait.

“Saskatchewan is also in a particularly good spot to gain from biofuel and farmland trends. Almost half of all the farmland in Canada is found in its golden prairies. Wheat, canola and barley represent three-quarters of the crop acres in the province.

“The primary attraction of Saskatchewan farmland is cheapness. For all farmland prices in the region, Saskatchewan is the cheapest of the lot, at $405 per acre.

“At a time when governments everywhere face gaping budget shortfalls, Saskatchewan is awash in cash. On a budget of only $9.4 billion, the province reports a surplus of $3.1 billion. Of this, some will go toward highway repairs, better hospitals and improved schools. Not needing so much money, the government announced the largest cut in personal income taxes in its history.

“It also paid off 40% of its provincial debt. Prudently, the government also decided to sit on a $2 billion cash cushion, just in case. Even the icy-cold fingers of the credit crisis seem stunted here. Canada’s big agricultural lender is backed by the state. Farmers still have access to credit to plan for a big harvest next year.”

  “It seems likely,” writes a reader with perhaps the last word we’ll print on this American automaker debate, “that most who so vehemently argue in favor of purchasing cars from U.S. automakers might be future (or current) recipients of UAW pensions. Two other thoughts:
 
“1.) When executive management is spending more time trying to figure out how to ring their bonus plan bell than they spend on real improvements in their company’s operational efficiency and long-range planning, they’d better be ready to pull the rip cord on that golden parachute — and hope their company still has the money to pay them when it’s over.

“2.) If your job is so awesome that your skills and the free market won’t allow you to replace more than 60% of your current income (can you say $30-40 per hour assembly line watchers with obese benefit plans?), then your days are numbered — and your employer is headed down the tubes. That kind of system simply doesn’t represent reality — at least not in the 21st century.
 
“So what do GM executives and their rank-and-file UAW workers have in common? Their legal representatives both negotiated such wonderful contracts that they put the company out of business. Turn out the lights, I hear the fat lady humming!”

  “Enough with the union bashing already,” says another, responding already. “If anybody’s been paying attention, the percentage of union jobs has fallen drastically over the last few decades, due to union busting and right-to-work laws. At the same time, real wages have not gone up at all, while prices have drastically. People have had to borrow to make up the difference. Now they’ve borrowed too much, and the whole house of cards is falling. The middle class has been decimated, and the lack of unions has had a lot to do with it. You need a strong middle class to have a good economy, but politically, we couldn’t care less about them.

“The executives’ wages went up. The people who complain most about unions are usually on those higher pay scales. They decided not to compete for quality. People used to buy American when it wasn’t junk. I wouldn’t plunk down an investment in an American car. My ‘95 Maxima has 250,000 miles. Blaming unions for sh***y cars is stupid. They didn’t come up with planned obsolescence.
 
“And let’s not forget that when they close plants, they are generally moving them out of the country. What was that comment about no manufacturing base and third-world countries again? Who’s been shipping out the manufacturing jobs?
 
“All the American car companies had to do was make quality cars that weren’t designed to fall apart. We operate a union construction company. People pay for quality. And I’ve never seen stronger Buy American’ sentiment than among union members.”

Enjoy your weekend,

Addison Wiggin
The 5 Min. Forecast

P.S.  I.O.U.S.A., the film, opens in the U.K. tonight. If you care to read The Telegraph’s review, it’s short, and right here.

I.O.U.S.A., the book, passed the president-elect again this morning, and is at No. 1 on Amazon’s best-seller list as we write. Hopefully, we can keep it there this time, eh?

by Addison Wiggin & Ian Mathias

• Paulson reworks financial bailout: New targets for investment… even you can apply!
• Markets plummet… Bill Bonner on when stocks will be cheap enough to buy
• OECD predicts global recession… Germany admits contraction has already begun
• Wall Street CEOs forecast “rapid,” “deep” U.S. recession
• Joel Bowman on a peculiar hissing sound emitting from the Middle East

  For an erudite debate over the Paulson doctrine, we turn to our friends at The Onion this morning:

The Money Hole.

It’s not any more complicated than that, is it?

  Indeed, Paulson and company announced a TARP switcheroo yesterday. Now the Treasury’s Troubled Asset Recovery Program (TARP) is suffering a serious case of the STD “mission creep.”

Instead of purchasing troubled assets from banks, the Treasury, as of this morning, plans to continue investing directly in banks, using your money, encouraging them to lend more. Jump-starting a market for mortgage-backed securities is apparently too tricky… better to give money to the banks that got us into this mess in the first place.

And with the remaining TARP funds, Secretary Paulson suggested the government provide more easy money for student, auto and mortgage loans… even credit card relief.

But… what about the ambiguously named “troubled assets,” we ask hesitantly? Perhaps we shouldn’t take their acronym so literally. The troubled asset appears to be the U.S. consumer.

  Really… TARP funds are so accessible you can get an application on the Internet.

Here’s an idea: Fill out an application with whatever kind of BS data you prefer and send it in. If you can get a hold of some of the relief funds, we’ll publish your results… if for no other reason to illustrate how goofy this whole idea has become.

  The stock market hated Paulson’s announcement. Aside from an initial lack of transparency for the allotted bailout funds, now the Treasury seems uncertain as to how to proceed? Forget it… the Dow plummeted another 4.7% yesterday, to 8,282, about 100 points away from a five-year low.

   “At these prices, many investment pros are ready to get back in,” notes Bill Bonner. “Stocks are a bargain, they say. You get more value for money than you got in years, they point out. ‘Both my money and my mouth say the same thing,’ adds Warren Buffett: ‘Buy equities.’

“The stock market bulls aren’t necessarily wrong. But we announced a ‘Trade of the Decade’ in 2000 — sell stocks, buy gold. The decade has a few more months to run, so we’ll stick with it. At the beginning of this decade, you could get about 40 ounces of gold for a unit of the Dow stocks. Now, you barely get 12. If you’d done the trade and stuck with it, you’d be up about 200%.

“Besides, it looks to us as though the Dow is going to drop below 5,000 before this is over. Dividend yields have risen to almost 4%. When the dividend yield reaches 6%… and you can trade 1 ounce of gold for the entire Dow… call us.

“In the meantime, we still think it’s a good idea to take advantage of the low price of gold.”

  Gold is cheaper than usual today. The spot price is down almost $50 since Monday, to about $710 as we write.

  If you’re looking to dodge the 2009 recession, consider moving to… ummm… the moon. At least, that’s the vibe we’re getting from the Organization for Economic Cooperation and Development this morning.

The OECD forecast today that GDP will contract by an average 0.3% in all of its 30 member countries… with few exceptions, the 30 biggest economies in the world.

Specifically, the OECD says the U.S. will contract 0.9% next year. The eurozone will fare a bit better, shrinking 0.5%. Japan, already in recession, will contract another 0.1%. Should the OECD’s forecast come true (which wouldn’t surprise us one bit), it would be the first time since the oil shocks of 1974 that all three of these regions suffered recessions simultaneously.

Unfortunately, the OECD has been pretty generous with its GDP forecasting this year. As late as June, the group suggested the worst of the credit crisis was over and forecast 1.7% growth for its 30 member nations.

  Germany, Europe’s biggest economy, entered recession this morning. The country revealed a 0.5% third-quarter contraction. Coupled with the country’s second-quarter GDP reading of negative 0.4%, Deutschland is officially recessing. Even if the German economy manages to rebound this quarter (ha!), this will still go down as the worst German contraction since 1996.

  “We think [the U.S. recession] could be deep; we don’t know how deep," suggested a cryptic Jamie Dimon today, CEO of JPMorgan Chase. "We think the economy could be worse than the capital markets crisis."

We’re not exactly sure what Dimon is saying, and suspect neither is he. But if the Dow has dropped 37% and he suspects the economy is worse… well, that can’t be good.

“Right now,” echoed John Thain, head of Merrill Lynch, “the U.S. economy is contracting very rapidly. We are looking at a period of global slowdown. This is not like 1987 or 1998 or 2001. The contraction going on is bigger than that. We will, in fact, look back to the 1929 period to see the kind of slowdown we’re seeing now.”

  Yet the good old I.O.U.S.A. still turned in a $56 billion trade deficit in September — down 4% from August, the Commerce Dept. announced today.

But before we get our knickers all in a twiddle, the trade deficits’ improvement can be attributed almost entirely to a record decline in fuel import prices. The average cost of an imported barrel of oil fell 12% during the month, the most ever. In fact, all imports declined by a record 5.6%.

If the trade deficit were contracting because of increased production in the U.S., that would be cause enough for knickers-twiddling. Alas, excluding petroleum, the deficit actually widened by about $2 billion in September. Sales of American-made products overseas fell to their lowest level since the Sept. 11 attacks.

  The crack in the facade of American consumer “wealth” has become a gaping crevasse. “In 42 years of retailing," said Brian Dunn, COO of Best Buy, “we’ve never seen such difficult times for the consumer… Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we’ve ever seen."

The company dropped a doozy of an earnings announcement yesterday, which the market translated as a bellwether for the consumer at large. Same-store sales fell 7% in October, and Best Buy officials suggested they could fall another 15% by year-end. The company slashed its earnings expectations for fiscal 2009 (ending in February) by nearly 30%.

Best Buy, mind you, is an industry leader.

   Still, the mighty consumer hasn’t tapped out quite yet. Wal-Mart was, yet again, the darling of an otherwise very ugly day in the market Wednesday. The world’s No. 1 retailer managed to increase profits 10% in the third quarter. The company pocketed $3.1 billion in the quarter, a cool $300 million better than the same time in 2007.

But even Wal-Mart is bracing shareholders for a rocky 2009. The company trimmed fourth-quarter same-store sales expectations to as little as 1% growth.

  Understandably, currency traders have relaxed their dollar-buying frenzy. Even the most headstrong dollar bull must be a little nervous this week, and thus, the dollar index has kept to a tight range since we wrote you last. It’s still at a lofty 87.5.

  As equities fell yesterday, most commodities followed suit. Oil fell again, to as low as $57 a barrel.

“Current energy prices are just too low to support the level of energy investment that the world needs going forward,” insists Byron King, yesterday’s IEA report in hand. “Meanwhile, the U.S. government is spending trillions of dollars forward just to bail out the banks and bankers, not one of whom runs pump jacks.

“The IEA estimates that the oil industry will have to invest over $350 billion per year to counter the steep rates of decline in output. And even that will not be sufficient to maintain levels of output for traditional forms of crude oil. Thus, much of the future investment will have to go toward extracting other kinds of hydrocarbon substances.

“In its World Energy Outlook, the IEA categorically states that ‘Current global trends in energy supply and consumption are patently unsustainable.’

“There’s not much wiggle room in that statement. According to the IEA, despite the recent fall in oil prices, the medium- and long-term outlooks for energy supply are grim. Conventional oil output is destined to decline. Demand will still grow, however, especially in the developing world. And the twain shall meet only by prices rising to clear the market. ‘It is,’ as our Arab friends like to say, ‘written.’”

  And over in the UAE… a loud hissing noise. “Dubai finally joined the elite of the elite when it comes to embarrassing market meltdowns,” writes the Rude Awakening’s Joel Bowman from his UAE pad. “After plunging over 16% in the first two trading days, Dubai’s DFM Index may now rub shoulders with the likes of Russia, Iceland and Ukraine in the illustrious ‘Sub-60% YTD Club.’

“Such a calamitous collapse wouldn’t have been possible without insidious government intervention into the everyday life of the economy. Distortion of market fundamentals, rent caps, wage manipulation, ongoing ‘Emiratization’ of the labor force, bloated welfare programs, intervention into the banking and construction sectors, nationalization of the emirates’ resources and the blatant and severe restrictions on freedom of the press have all played their part.

“Even the mighty Dubai real estate bubble is making a resounding pop. According to The National newspaper, ‘Residential prices for Emaar Properties’ signature Downtown Burj Dubai development have fallen by at least 22%, with reductions of up to 50% within the Burj Dubai tower itself.’
 
“Local real estate brokers are trying to sure up investors who, having sensed that the game might be up, are scrambling for the door, selling at and even below zero-premium. Such a panicked exodus must have seemed so unlikely when the centerpiece tower sold out in record time. (The tower is not even due for completion until late next year!)”

  Our last item today you may want to place in your “it could be a whole lot worse” file. No matter how bad your portfolio’s been slammed this year, you’ve probably done better than this heavy hitter:

Sheldon Adelson, head of Las Vegas Sands was once the third richest man in America.

Not a big believer in diversification or hedging, Adelson put his life’s fortune in LVS stock. It was $144 a share in October 2007… it’s barely $5 today. That’s a $30 billion loss for Sheldon. His fortune has been reduced to a “mere” $2 billion.

Forbes says barring a spectacular turnaround in December, he’ll be the biggest annual loser ever in their “400 Richest” list.

  “Please! I beg you,” writes a very enthusiastic reader this morning, “just give me a crack at the reader with a bias toward American-made autos. I have a bone to pick with him/her AND the U.S. auto industry, particularly Ford. Back in the 1980s, when Ford came out with the Taurus, I was talked into buying one, as my father-in-law had worked for Ford. I’ll save you the long, sad tale but bottom line, the car literally fell apart at the seams with me having to pour hundreds of my hard-earned 1980s dollars into fixing the hunk of junk. When we traded it in, to get rid of it, the car had not even broken 90,000 miles and the dealership we dealt with was embarrassed it couldn’t offer but just $75 for it on trade-in. We didn’t bother to tell them we were inwardly thrilled to not have to pay them to take it off our hands!

“I say all this to make my point that during the entire time we had problems with the American ‘Made With Pride’ piece of junk, I contacted Ford dealerships, spoke with personnel at the Hapeville plant that built the Taurus and even wrote to HQ in Michigan. Their response? Lots and lots of sympathy, but ZERO results. I swore then I would N-E-V-E-R in my lifetime buy another Ford product. The next new car I purchased was a 1993 Honda Civic VX, which I still drive for a 120-mile per day commute. It gets 40 miles per gallon on average and is approaching 300,000 miles! Best damn investment I EVER made!
 
“So anytime a ‘fellow American’ talks to me about poor-mouthing American automakers, I let ‘em have it. As far as I’m concerned, Ford and its employees STOLE money out of my pocket and put it into theirs because they didn’t make good on their part of the trade, and I don’t give a rat’s tail about how good their products are today — point being they owe me a car for free over a five-year period with ALL major repair work covered at THEIR expense, JUST TO BREAK EVEN, before earning a chance at being considered for future auto purchases.

“Well, Ford? (Silence.) Hmm, I didn’t think so. All four vehicles I own are Japanese made, and I couldn’t be happier! So don’t give me that ‘fellow American’ crap, you thieves! You did it to yourself, you idiots!”

The 5: Yikes…

  “There you go again throwing that xenophobia charge around,” writes another, apparently monitoring our use words that begin with the letter ‘x.’ “How is it xenophobic for the commenter who prefers his/her Cadillac CTS to challenge (with source citations) your contention that foreign cars are of better quality? Sure he/she is emotional, but you cherry-picked certain tangential claims made and focused instead on only part of the argument.

“I really am interested in how you see this as xenophobic. It seems, rather, that you have your own emotional knee-jerk reaction to anyone who might be challenging your quasireligious devotion to free trade and all that it entails, including, but not limited to, free labor trade and, thus, open borders. The arc of American history is not the whole of history. Yet you undoubtedly would characterize previous generations of Americans as morally deficient for their preference for things American, cultural and otherwise. But history is replete with examples of empires whose decline was at least partially caused by a refusal to engage in a little protectionism, again, cultural and otherwise.

“If markets were truly free worldwide, then perhaps your points would ring a little less hollow, but when it’s a one-way street, the lopsided current account balance and consumer- (rather than production-) based economy that we now have leads inexorably to said decline and implosion from within.”

The 5: Amen to that.

Addison Wiggin
The 5 Min. Forecast

P.S. This is your last chance to save a ton of money . Bulletin Board Elite is half off its normal price until midnight tonight. Get the details on this rare offer, here.  

  
P.P.S. And we have to pass on this little nugget: a feedback page for the RNC . Pretty telling.

by Addison Wiggin & Ian Mathias

• American optimism at all-time low, 2009 recession imminent… Fannie and Freddie to the rescue?
• Chris Mayer with good news for oil investors
• Another day, another double-digit decline… Russian market, currency plummeting
• Pat Cox with a “huge” breakthrough medical tech about to become reality
• Have we hit a nerve? The automaker debate rages on in The 5’s inbox

  Oy. “The $700 billion financial bailout program,” the New York Times sums up Treasury Secretary Paulson’s speech this morning, “will not be used to buy troubled mortgage-backed assets, as originally intended. Instead, capital would be provided directly to nonbank companies, as well as banks and financial institutions, and that more would be done to prevent home foreclosures.”

  Is it any wonder 83% of Americans think the U.S. is “headed in the wrong direction”?

According to a CNN poll released this week — after Obama rode to vi