Forecast | GroupHelp.NET - Easy everything!

06 Jan

Resource War, Investing in Demographics, Bottom for Stocks and Gasoline, Fund Managers and More!

Posted by admin, under Forecast, Information

Russian dispute turns into European crisis… the first days of a coming resource war?
Not Russia’s only problem… Chris Mayer on a global demographic shift
Enjoy $1.60 gas — it might soon be gone… the beginning of the end of the gas price crash
Survey says: Fund managers name their favorite asset class for 2009… but can you trust them with your money?
J.W. Burritt on the technical bottom for stocks… how to trade the market’s wide new range

Just days after Russia promised the world that its gas dispute with Ukraine wouldn’t affect European energy supplies … spigots are running dry. From Reuters:

Gas shipments from Russia to Germany have been “massively reduced”
Italy can access only 20% of Gazprom’s typical supply
Slovenia claims Russian gas supply was cut by 90%
Czech supplies down 75%; Hungary… down 20%

Croatia, Austria, Turkey… the list goes on and on. The EU says supply to member nations has changed “dramatically” overnight and they’re getting worse. Who knows how this will end. But we are faced with a question: How long will Russia hold energy over European heads before someone takes a shot?

The Labrynth: Russia’s Pipelines Strangle Europe

As we forecast on Friday , we expect Russian-agitated “resource wars” to be a reoccurring theme this year… and beyond.

On the investment front, energy turmoil in Europe has given oil prices a kick in the pants. The front-month contract is $50 a barrel today, up 40% from its December low of $33.

Thus, we reiterate our call that the bottom for gasoline prices is likely close. On Dec. 15, retail gasoline ended its 86 straight days of decline, and since then, the price has stayed within a narrow range… about $1.62-1.65. You can see from this chart, if gas hasn’t hit a bottom, it’s at least starting to take a breather:

The national average rings in at $1.68 today for a gallon of the cheap stuff.

“Russia has a whole other problem most people don’t talk about, too” Chris Mayer commented yesterday. “Russia and Eastern Europe are in the midst of the biggest drops in population since the plagues of the Middle Ages. Putin calls the decline in population in Russia ‘the most acute problem facing our country today.’

“Yet in sub-Sahara Africa, population is blooming. Currently, the sub-Sahara has the highest fertility rates in the world. Several other countries will experience, or are experiencing, population booms — Iraq, Afghanistan and the Palestinian territories.

“Researchers Neil Howe and Richard Jackson recently gave an interesting tidbit on how the world is changing: ‘For the past several years,’ they told The Washington Post, ‘the U.N. has published a table ranking the world’s 12 most populous countries over time. In 1950, six of the top 12 were developed countries. In 2000, only three were. By 2050, only one developed country will remain — the United States.’

“What will the effect of these shifts be? What will it mean as an investor? Hard to say, though there are lots of theories. Booms tend to happen with growing and youthful populations. If so, you’ll want to short Europe, both its Western and Eastern halves. And go long Africa and the Middle East. Asia is a mixed bag. China is aging. But India is young.”

In 2002, we published a book analyzing, among other things, the impact of shifting demography on the economies of the world. Sitting on the desk in front of me is a contract with the publisher for an anniversary update of the book. As the more pragmatic I.O.U.S.A. also illustrates, we suspect demography will play a much bigger role in the future of the economy and markets than anyone reading or writing The 5 today is prepared to accept.

The Federal Reserve officially kicked off its mortgage-manipulation campaign yesterday. For the first time, the creature from Jekyll Island purchased Fannie Mae- and Freddie Mac-issued mortgage-backed securities. In other words, the very same toxic assets that cut the market in half and brought the U.S. economy to its knees… are now being amassed by the central bank.

No word yet how much the Fed purchased yesterday, but we know they’ve allocated $500 billion for the cause. Should they spend it all, the Fed would have piled 11% of the $4.5 trillion MBS market onto their bloated balance sheet .

Not to be outdone, the U.S. Treasury bought another $15 billion in banking stocks yesterday. Uncle Sam picked up shares of PNC, Fifth Third and SunTrust, among others. The U.S. government has now purchased over $187 billion worth of financial stocks through the TARP program.

Nor could the FDIC sit by and let the Fed and Treasury have all the fun … they helped GE Capital unload $10 billion worth of corporate debt yesterday. The government arm backed every penny of the GE debt sale, the biggest guarantee through its “Temporary Liquidity Guarantee Program” since inception in November.

In a plot that’s beginning to inspire ennui, market traders were demanding high yields for GE bonds… government bureaucrats, brimming with wisdom, stepped in to set those rogues straight.

Stocks in the U.S. suffered a choppy session yesterday and ended with a loss. The Dow fell the furthest, down almost 1%. The S&P 500 and Nasdaq weren’t far behind. Aside from more promises from incoming president, the “best” market-moving news came from Apple, whose CEO Steve Jobs promised Mac-aholics everywhere that he wasn’t dying.

Bad news abounded… a recap below.

High-grade corporate bonds will likely outperform other asset classes in 2009 , says a survey of fund managers published in the Financial Times today. More than half of the money runners polled said corporate bonds were the “most likely rally in 2009.”

Their least favorite class? Treasury bonds.

But we pause for a moment to ponder the herd: Of the 4,934 U.S. mutual funds with more than $100 million under management, according to MorningStar, not one made investors money in 2008.

The average fund returned a 39% loss in 2008… curiously, the exact same decline as the S&P 500. Had you simply stashed your money in the Dow index fund, you’d have done 6% better, not including fees.

Even golden boy Ken Heebner didn’t make his clients money. After beating all his mutual fund peers the year prior with an 80% gain, Heebner’s CGM Focus Fund plunged 48% in 2008.

Baltimore’s own Bill Miller takes the cake for worst returns… his Legg Mason Opportunity Trust shed 65%.

Still, for equities, “a technical near-term bottom could well be in” notes our John Wayne Burritt.

“But before you pop the champagne, notice the two dotted horizontal lines on the chart. These mark the upward and lower bounds of a potential trading range for U.S. stocks. For the S&P, that range is 741-1008. And while that’s certainly better than a grueling bear market, a trading range is not a bull’s best friend.

“While there may be some upside action, it’s not likely to trend upward in any significant way. And without a solid uptrend, bulls don’t have much to celebrate.

“Still, there is a way to play it. Notice that this range is fairly large. In fact, from its bottom to top, the current bound for U.S. stocks creates a massive 36% swing. That means that there are potential put plays at the top before the market turns down and potential call plays once it bounces off the bottom.”

Burritt is the architect of a new program we have called Income on Demand — a precise strategy for earning extra income on the stocks you already have in your portfolio… even if they’ve gotten shellacked in the last few months. To illustrate the strategy we invited Mr. Burritt to our studio here in Baltimore to record a Webinar that outlines the opportunity. You can watch it starting later this week for free. Just sign up here.

The dollar remains the currency en vogue among traders today. The dollar index continued its nearly month-long rally, inching up another half a point, to 83.5.

Despite the dollar strength, most commodities are holding their ground, or even rising. Gold sank to $850 yesterday, but has held on to that level today.

And if you own copper or copper stocks, today ought to be satisfying. Copper is up 7% today on news from Dow Jones, of all places. The famous index stewards will be rebalancing the AIG commodity index, and copper is rumored to be receiving a heftier weighting.

Automakers unveiled another doozy of a monthly sales report yesterday. Sales for the nation’s six most popular manufacturers — GM, Honda, Ford, Chrysler, Toyota and Nissan — all fell at least 30% in December year over year. Chrysler took the biggest hit, down 53% from last year. Nissan and GM fared best, with a 31% decline in sales.

Thus ends the worst quarter for auto sales since 1981, and the worst year since ’92.

Making matters worse, pending home sales hit their lowest rate on record in November, the National Association of Realtors said today. Their pending home sales index sank to 82 during the month, worse than the Street expected and the lowest score since they started keeping track in 2001.

The U.S. service sector is still contracting, too. The ISM’s gauge of the American service industry rang in at 40.6 in December, its third consecutive month scoring below 50… the line that divides expansion and contraction.

Good news, though: The service sector is up a bit from November’s record low of 37.3. The Street was expecting a new record low, as were your editors.

Can’t be surprised to see consumer bankruptcies shot up 32% in 2008. 1.06 million Americans filed for bankruptcy last year, the American Bankruptcy Institute announced yesterday.

“It is ironic,” writes a reader, “that we live in what we profess to be a global economy but we are deceiving ourselves. America’s balance of payments deficit is the evidence that America purchased more abroad that they produced. Those countries that benefited from the vast American demand for cheaper foreign goods and services should have reciprocated to bring these balances of payments into equilibrium.

“Trade is supposed to be conducted in goods and services. Balance of payments surpluses should not be permitted to fund the purchase of real estate in Manhattan or U.S. Treasury bonds. Under Bretton Woods, the dollar being backed up by gold, the nations were forced to live within their means.

“While America has been negligent in its spending, those surplus nations have been negligent by not reciprocating and buying American goods and services. The stimulation should come from those surplus nations holding large amounts of U.S. dollars, for if America declines, they will not only have lost their best customer, but the U.S. dollars they hold so dear can become worthless paper.

“China ignored its domestic economy and insisted on being an export-driven economy. If it had been vigilant, it would have seen this coming. Stimulating domestic demand may have increased demand for American products and modified the situation somewhat. China even now has the potential to become a vast domestic market, but it seems to me that they are dragging their feet.”

The 5: Hmmmn… seems as though the Chinese have reciprocated precisely by buying U.S. debt. Otherwise, the U.S. government would have gone bankrupt long ago. And… the Chinese economy was, until July 2007, growing at a healthy average of some 10% a year, so we wouldn’t exactly call that dragging their feet.

Still, we agree thinking the credit-binging American consumer could be the “economic engine of the world” indefinitely without producing is and has been a gamble on both sides of the Pacific. Now we’ve got hordes of politicians and bankers — here in the U.S. and around the world — promising to get the economy “back on track.” Unfortunately, it was the track itself that was leading to hell.

“I was just wondering,” writes another, “as I see central bankers throughout the world stumbling over each other trying to outstimulate their economies over others, isn’t a recession a natural occurrence in the economic cycle best left alone to correct itself? But what the hell do I know? I’m a carpenter. I pound nails for a living.”

The 5: Hey, don’t sell yourself short. Jesus of Nazareth was a carpenter.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. To sign up for Income on Demand, the next installment of the Emergency Retirement Recovery series, click here. It’s free.

05 Jan

New Year Rally, Obama’s Plan, Shorting in 2009, The Second Wave of the Housing Bust, and More!

Posted by admin, under Forecast, Information

by Addison Wiggin & Ian Mathias

Markets kick off 2009 with sizable rally… what’s behind the best New Year’s rally since 2003
Obama bounce back in effect… Rob Parenteau on whether his $1 trillion plan will actually work
Dan Amoss on the difference between shorting in 2008 and 2009
Bullish factors for gold (and gold stocks) for 2009
The second wave cometh… more troublesome commercial real estate ripples on the horizon

For the first time in a long time, we can tell you today that the U.S. stock market is up year to date:

The major indexes rang in the new year with a 3% rally on Friday — the best first day of a new year in the last six. And a sharp contrast to 2008, when the Dow had its worst opening day since 1983.

To accomplish that feat, the market shrugged off the only piece of data worth noting… the Institute for Supply Management (ISM) manufacturing survey started off the new year at a new 28-year low.

We have to say we love the financial media chatter on this first business day of the penultimate year of the first decade of the new millennium. On the one hand, the president-elect is promising a $300 billion tax cut to accompany the now $775 billion stimulus package working its way through Congress.

On the other hand, a consortium of state governors are calling for Obama to expand his rescue package to over $1 trillion. Leaders of New York, New Jersey, Massachusetts, Ohio and Wisconsin petitioned the president-to-be Friday for around 300 billion extra bailout bucks, mostly to help offset state budget shortfalls.

Meanwhile, 40% of government debt held by public investors will mature in the next 12 months… roughly $2.5 trillion. Meaning they’ll have to roll it over at whatever rate the market will bear at the time.

“It’s curious,” one reader wrote, capturing our mystification over the weekend, “that full-grown adults are willing to bet their lives on a new medicine because it worked on 2-ounce mouse, yet they can’t believe that what happened in a ‘tiny’ economy such as a Zimbabwe or an Iceland can happen in a big economy like the United States.”

Happy New Year!

“Investors will initially welcome the promise of fiscal stimulus from the incoming administration,” writes Rob Parenteau, steward of The Richebacher Letter, “before realizing the nature of the challenge ahead. If Dr. Richebacher was correct in his assessment, nothing less than the entire global production structure needs to be reoriented.

“Asian production results point to a depression developing in that region. And the world is starting to realize it can no longer rely on serial asset bubbles and credit-financed consumption. But the apparent solution — so far — is for countries around the globe to reach for an increased public sector role in the economy. We are beginning to see hints of protectionism, as well. As the old regime breaks down, this is the solution developing before us… by accident.

“We sincerely doubt Dr. Richebacher would see public deficit spending and protectionism as a road back to sustainable economic growth. Rather, we would vastly prefer to see a rebalancing of the global production structure and a simplification of finance. Asian nations must become more domestic demand driven. And the Anglo-American nations, in particular, must save and reinvest earnings in tangible capital equipment, rather than mergers or stock buybacks. That is clearly a longer-term project requiring adequate changes in prices, incentives, income and capital, but it is a project he repeatedly championed for the length of his career.

“In the meantime, desperate fiscal and monetary measures around the globe during 2009 may help cushion the nightmarish blow wrought by the failure of the old global economic and financial arrangements. But they are unlikely to be a sound basis for the next leg of growth.”

“2009 should be a year,” Dan Amoss comments further, “when fundamental analysis should start to matter once more. That will be a welcome development, because 2008 was a year when the following strategy worked best:

1) Sell short any stock or ETF, without bothering to do any fundamental research
2) Invest the proceeds in Treasury bonds, preferably with as much margin as possible
3) Repeat Steps 1 and 2, over and over.

“Clearly, this ‘deflation trade’ strategy is not sustainable over longer time frames — not in an era of worldwide paper money standards. In fact, I’d expect that such a shotgun-based investment strategy of short S&P 500/long Treasuries could lead to big losses in 2009.

“The economy will remain weak, but I think the worst of the widespread market carnage is behind us. Future damage should be concentrated in sectors with horrible fundamentals.”

But for now, investors are happy to bid stocks up… AND buy the dollar. The dollar index is up a point and a half from Friday, to around 83 this morning, heading thus far in the direction of its credit crisis high of 88.4 set on Nov. 21, 2008.

“The dollar is kicking up its heels once again,” writes EverBank’s Chuck Butler, “and this is to be expected during this Obama bounce. The markets are swayed by the smooth-talking President-elect’s call for $300 billion in tax cuts, a job creation program and (possible) $1 trillion economic stimulus package.

“But all these things cost money, lots of money, and money we don’t have, unless… we just go and print more. This is why I believe that once all the euphoria of the Obama presidency has run its course, the markets will do a V8 slap to the forehead and realize we’ve just dug ourselves a deeper hole!”

Gold hasn’t been too pleased with the dollar’s uppityness. In fact, she’s downright depressed. The spot price fell $30 over the weekend… below $850 an ounce this morning.

“In 2009,” forecasts Ed Bugos, keeping his eye on her meds, “economic conditions will deteriorate. Unemployment will reach double-digit rates before the year is out.

“As the year wears on and investors sort out the fallout of 2008, I believe that there will be fewer plausible investment alternatives to gold, and that markets will begin to realize the errors of the government’s current policy. The big winners in all this will be gold shares, which will perform better than gold, as they have been absolutely cheapened beyond belief, and risk premiums fall.”

Despite dollar strength, oil has greeted the new year with glee. Light sweet crude jumped 23% last week. In dollar terms, that’s nearly a $9 leap, to $48 this morning.

Last week was the black goo’s biggest since August 1986, after… hmn… a global equity rally and strife in Gaza.

Mortgage rates have pickled to at least a 37-year low. The average 30-year fixed loan went for 5.1% last week, Freddie Mac reports, which is the lowest since the company started keeping track in 1971.

No surprise, then, mortgage applications are at a five-year high. Mortgage application activity stayed around 1,200 last week, the Mortgage Bankers Association said. That’s the most weekly apps since July 2003.

But these historically low rates and the surge in mortgage applications aren’t doing diddly for the housing market. 83% of all applications recorded last week were for existing homes. And why not? If you can lock in for 30 years at or near 5%… go for it.

Meanwhile, the next leg of the real estate bust is already coming down. In nearly every major city, 10% of office buildings are now vacant.

“Virtually every market in the country will see a rise in vacancy rates of between 2-5% by mid-2009,” Bill Goade, head of CresaPartners, told The New York Times this morning. According to a report by Real Capital Analytics, an estimated $400 billion worth of commercial real estate loans come due this year, $107 billion of which are already delinquent.

Of course, you can leave it to Wall Street to make matters worse. Approximately 60% of all commercial property loans made in 2006-2007 were securitized into the same kinds of debt tranches and CDOs that set the credit crisis in motion in July 2007.

The banks sitting on them now? They rank among the only firms to escape calamity in 2008. Bank of America, J.P. Morgan and Morgan Stanley hold “tens of billions of dollars” worth of the stuff — each.

Oy.

“Imagine my surprise,” writes a reader headlining a smattering of random e-mails we received over the weekend, “upon finding the following clue in the Sunday crossword puzzle of The Miami Herald: ‘2 down: 2008 documentary about the national debt’

“It has a lot of vowels, so I predict I.O.U.S.A. will be the answer to many crossword questions for years to come. Would you have predicted a development like this for your film in your wildest dreams? What a country!”

The 5: Amen. And… we have an ‘in.’ The Miami Herald picked up The New York Times crossword puzzle from the week before. Will Shortz, the editor of The New York Times puzzle, played the role of lead protagonists in Patrick and Christine’s first film, Wordplay.

By the way, the Critics’ Choice Awards will be announced this week. After we published the link for audience votes , we blew the survey to pieces. At one point, we had over 80% of the votes. The only other movie or actor to get reviews similar was Heath Ledger for Best Actor, who clocked in at about 84%. The Dark Knight was up there too.

It’s all absurd, of course, but kind of entertaining to check out. You can do so here. There are a bunch of reader comments on the site too.

“It seems to be going on under the radar,” writes another reader, on a completely unrelated subject, “but there has been some serious buying action in the uranium miners since Obama was elected. Maybe these people think (or know) that uranium will be the new Green in 2009?”

The 5: We suspected as much as well… on Wednesday.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Just a reminder, we’re encouraging sign-ups for the next free installment of the Agora Financial Retirement Recovery Webinar series. If you haven’t already participated in one of the Webinars and would like to… you can sign up for free here.

This week’s installment covers a champion income strategy we think will pan out well in 2009 while we await the outcome of the world’s concerted bailout strategies. Check it out Income on Demand — it’s free… right here.

02 Jan

2008 in Review: Best and Worst Indexes, Stocks, Commodities, Currencies and More!

Posted by admin, under Forecast, Information

by Addison Wiggin & Ian Mathias

2008 retrospective… unless you reside in a small African country, your market lost money
A closer look at the year for American markets… the few winners, and many losers
Worst year on the books for commodities too… with four notable exceptions
Crude oil pops 14%… Russia moves another pawn in the coming resource war
But isn’t there “a lot of oil out there” to share? Byron King explains crude misconception
Need to recover from 2008 losses? The 5 unveils “Income on Demand” solution

Tunisia…

Had you known it at this time last year, you would have taken a page out of William S. Burroughs’ book and hidden away from this global crisis with a hookah pipe in your hand.

You could have wiled away your time studying the remnants of Carthage, reading up on your St. Augustine, dipping your feet in the Mediterranean… and had your money stashed away in the only market on the planet where stocks increased in “value” in 2008.

As we promised Wednesday, here are the best and worst global markets over the last 12 months. What a disaster:

Iceland is even worse than it appears. The table above values its stock market in kronur, which thanks to the Icelandic government are… ummm… worthless. Convert what’s left of their market to U.S. dollars, and the crash was closer to 97%.
We’d say Iceland’s year was a valuable lesson in the pitfalls of leverage, debt and central banking… but we doubt many leaders learned much from the tiny nation’s collapse.

Here in the U.S., we finished the year in the middle of the list of worst performers. The Dow, despite a nice series of up days over the last week, ended 2008 down 33.8%, its heftiest annual loss since 1931. Only two of its 30 components stayed in the black for the year: McDonald’s and Wal-Mart.

Other major indexes fared even worse. The S&P 500 closed the year with a 38.5% loss. All 10 of the S&P 500’s sectors declined… financials the worst, down 58%. Consumer staples fared “best,” falling 18%. Only 31 of its members ended the year in the black. Family Dollar was the S&P 500’s best performer, up 36%.

The Nasdaq ended up the worst of the big three U.S. indexes, plummeting 40.5%. That’s the biggest yearly loss in its 37-year history.

Approximately $7 trillion of investor worth was wiped out. If you’re sitting on some of those losses and waiting for the market to come back, we’ve designed a specific strategy to help you earn Income on Demand. For details on getting details… see the P.S. below.

In the strange, but popular world of ETF investing, 19 of the top 20 ETFs this year were of the short or ultra short variety. Here’s the cream of the crop:

ProShares UltraShort Semiconductor (SSG), up 110.9%.
ProShares UltraShort Technology (REW), 95.3%
ProShares UltraShort Russell MidCap Growth (SDK), 94.4%
ProShares UltraShort Russell 1000 Growth (SFK), 80.8%
ProShares UltraShort QQQ (QID), 77%.

But in the rough and rugged markets of 2008, commodities were a decent place to hide your money, right? Maybe? No?

Behold, the worst year for commodities since, well, we believe, the Great Depression. The Reuters/Jefferies CRB Index, the most followed gauge of all commodity prices, fell 36%. The index was born in 1956, and this is its worst year on the books.

15 of the 19 raw materials tacked by the CRB fell this year. The biggest losers include:

But all was not lost for commodity investors. The Ivory Coast, the world’s biggest producer of cocoa, had a tough harvest this year. As simple as that, cocoa bucked the biggest commodity trend of our lifetimes, with a few others in tow:

Still, we expect once the year of the Great Government Intervention concludes… that would be 2009, not its predecessor… commodities will once again be a great place for your money.

Crude oil ended the year with a 14% surge when Russia took another step towards resource wars with Europe. Light sweet crude jumped over $5, to $44 a barrel, after Russian owned energy giant Gazprom announced it was cutting off supplies to Ukraine. Russian officials insist the move was only a result of unpaid bills… but it’s easy to picture ulterior motives.

Europe gets about a fifth of its gas from pipelines that run through Ukraine, and it’s no secret Gazprom (and Russia in general) has been crushed by fall of resource prices. Earlier this year during Russia’s skirmish with Ossetia, we forecast a future of resource-related war. We’ll add this story to that file… and keep an eye on Mother Russia. More on the preposterous ideas coming out of the former Soviet Union in reader mail, below…

Today, traders have brushed off Gazprom and oil is back down another 8%, to $41 or so. Lousy manufacturing stats from the U.S. and China (more below) prompted traders to return to the popular mantra: Demand is down, supply is ample.

“When people say things like ‘There’s still a lot of oil out there,’” notes Byron King, “they are not necessarily wrong. But they mean that there is a lot of oil out there that is NOT in giant oil fields. (Or if they’re so smart, how come they haven’t found any giant oil fields lately.) It’s oil that you will not drill up with just a relatively small number of high-output wells, like in the big oil fields of Saudi or Russia.

“The ‘lots-of-oil’ crowd is talking about hydrocarbon molecules (not necessarily light, sweet crude, either) in deposits that are more dispersed, further out, in deep water, under more rock or salt layers, with higher temperatures and pressures. Or they are talking about heavy oil, or bitumen in tar sands, or kerogen in oil shales or even some transformation of coal.

“When people use the expression ‘lots of oil,’ they mean the expensive stuff. It’s oil that requires many expensive wells or immense processing facilities, drilled or built with technology that we have just barely invented. And it’s the oil that you will never see if prices stay at $37 per barrel for long.”

Amazingly, the dollar ended the year stronger than it began. The dollar index reads 81 today, a full 5 points higher than it did 12 months ago. The euro goes for $1.39, about a nickel cheaper than its price at the start of 2008. The pound, at $1.45, is one of the world’s biggest currency losers for the year… its down almost 50 cents for the year versus the greenback.

And if the pound was the dollar’s biggest victim, the Japanese yen is surely its biggest rival. The yen strengthened 19% this year versus the dollar, its best year since 1987. One greenback will get you about 90 yen today, compared to 110 at the start of the year.

Gold buyers celebrated the end of 2008 by installing a bottom on New Year’s Eve, around $860. The spot price has been trending up ever since. You can get an ounce today for around $880.

In December, Chinese manufacturing activity contracted for the fifth month in a row, their government announced today. China’s purchasing managers’ index scored 41 in December (below 50 signifies contraction), just above the record low set in November.

America’s gauge of manufacturing, the ISM’s monthly report, found a fresh 28-year low in the same month. The ISM reports this morning its measure of factory activity shrank to 32.4, the lowest score since 1980.

Today’s jobs report was postponed until next Friday. We’re certain the Bureau of Labor Statistics didn’t want to put a damper on anyone’s New Year’s euphoria just yet.

With the new year comes some big changes in the banking world. Bank of America closed its $19 billion all-stock buyout of Merrill Lynch today, creating the biggest financial services company in the U.S.

Wells Fargo concluded its own $12 billion purchase of Wachovia today, too.

“If you have heard of the intelligence term ‘PSYOPS,’” writes a reader, “or ‘psychological operations’, then may I suggest that this is what we are dealing with with regard to Mr. Panarin’s comments about a U.S. split into the various parts. Panarin’s comments are merely misinformation and half-truths put out by an ex-KGB intelligence operative to the intended victim: that is, U.S. citizens.

“Don’t get me wrong, the parts of his statements dealing with economic, financial and leadership calamities in the U.S. are partly true; however, that is the trick of the propagandist, to insert half-truths into their statements. The fantasy that is the breakup of the country into its regional subcountries is just that, pure fantasy and an ‘off the top of my head’ kind of statement that doesn’t deserve the text space that people are currently writing on it… including my own blurb.”

“While Panarin’s scenario,” writes another, “seems a bit off-the-wall with regard to the US getting split up and divided among other nations, it is not so far off the mark in being a realistic possibility with regard to our country acknowledging the disadvantages of being such a large nation with a very big pile of eggs in the henhouse.

“An eventual dismantling of the federal government in favor of state sovereignty would be a step in the right direction. It is much easier see progress, however slight, at the local level, where almost all of the good people who call themselves Americans are ready to knuckle down and work harder AND offer helping hands to their living, breathing neighbors (if not bankers) RIGHT HERE at home!”

“The reader who actually believes,” writes our last reader, responding to Wednesday’s inbox, “that a majority of the population will fight to keep the U.S. a ‘single, sovereign nation’ is the one who is delusional.

“I’m as patriotic (and heavily armed) as the next fellow, but I wouldn’t lift a finger to preserve this bankrupt (morally, politically and fiscally), warmongering shell of an empire. As far as I’m concerned, it (and its subjects) has failed nearly every test given to it since the federal coup of 1779 and it deserves to be dumped unceremoniously onto the scrapheap of history. And good riddance.”

The 5: Welcome, 2009… what calamities await ye?

Addison Wiggin
The 5 Min. Forecast

P.S. If you’re holding onto your losses in the stock market, waiting things out until Mr. Obama gets the economy “back on track” — whatever that means — we’ve got a great way for you to earn income from your existing portfolio… with no extra expenses or fees… just free and easy income. We call it Income on Demand. You can learn all about it in the next installment of the Agora Financial Emergency Retirement Recovery Webinar series. Sign up for free right here.

If you’ve signed up for previous Webinars… no need to sign up again. The Webinar will air next week. You’ll get plenty of advance notice. Again, it’s free, no purchase necessary. 2009 promises to be another interesting year in the markets… might as well earn some Income on Demand while you’re waiting for the next bubble to commence. Check it out here.

31 Dec

One Story to Embody 2008, Two Ratios Show Room to Fall for Stocks, Death of the Euro, and More!

Posted by admin, under Forecast, Information

by Addison Wiggin & Ian Mathias

A fitting end to 2008… an easy money crisis “fixed” with more easy money
Equity bottom still out of reach… two historic ratios provide ample evidence
Bill Jenkins on the big currency story of 2009: death of the euro?
Worldly markets close the books for 2008… The 5 awards “Worst Index of the Year”
Jobless claims down, but numbers (and media) deceive… Patrick Cox explains some common misconceptions

How should we celebrate New Year’s Eve? Perhaps with a fitting microcosm for all of 2008: 24 hours after receiving a $6 billion taxpayer handout from the Treasury, GMAC — the financial arm of GM — announced a year-end 0% financing push on five different models.

GMAC, along with other auto lenders, put the kibosh on free loans in October, when the world instantaneously realized, “Hey, maybe credit shouldn’t be so easy!” Today, they’re back. Never mind that GMAC is borrowing money from the Treasury at 8% and lending it out at 0%. Just move those ’08 models off the lot, GM, you don’t have to worry about making bad loans until they’re at least 30 days past due.

If there’s any cure for a crisis begat with too much easy money, damn it, it’s MORE easy money.

Mazel tov!

Prost!

Salud!

(Sounds of cheers, applause and general crowd approval.)

The Fed also granted GMAC the “bank holding company” pedigree it pleaded for last week… even though GMAC has yet to reveal the results of a capital-raising effort that the Fed deemed necessary for them to be a “legit” bank.

Under their new status, GMAC too will be able to start taking bank deposits from unsuspecting American savers. (Heh. Good thing there aren’t too many of those left.)

Despite the giant free lunch at GMAC, loan issuance in the U.S. plummeted 55% in 2008. Banks lent “only” $764 billion in the U.S. this year — the lowest amount since 1994.

According to data released today from Reuters Loan Pricing Corp., institutional borrowing and loans for leveraged buyouts saw the biggest cutbacks this year, both decreasing over 80% from last year.

So if loans are scarce and the market stinks… no surprise that investors are sitting on historically huge piles of cash , right?

According to data from Bloomberg and the Fed, the total value of U.S. cash holdings, bank deposits and money market funds exceeds $8.84 trillion. That amounts to 74% of the entire market cap of U.S. equities — and the highest ratio since 1990.

But it’s possible we haven’t seen the half of it…

“In July of 1982,” explains Dan Denning, “the total cash position was 95% of total market cap. Stocks bottomed at that point, and the S&P 500 rose by 36% over the next six months, according to Bloomberg.

“Then there’s 1974. The total cash position of investors actually exceeded the stock market capitalization by 121%. Then, between October 1974 and March 1975, stocks rallied by 31%. So what does it all mean?

“Well, you have come to a fork in the road. How you see the cash surplus tells you a lot about yourself. The obvious conclusion, based on the examples cited by Bloomberg, is that a surge into cash as a percentage of the total equity market cap precedes a rally in stocks. That’s the good news.

“The bad news is that the current cash-to-market-cap ratio has not reached historical extremes. For it to do that, the cash position would have to rise even more, or stocks fall even further or some combination thereof. And even then, there’s no guarantee investors will return to stocks.”

Another indicator of the true value of U.S. stocks: The S&P 500/gold price ratio returned to 1 this week for the first time in 17 years. In other words, one ounce of gold hasn’t been able to buy one share of the S&P since 1991.

But again, while this ratio may be near historic averages, there still seems to be plenty of room on the downside for stocks… or upside for gold.

When the ratio of stocks to gold collapsed in 1971, it fell 93% over the next decade, to a low of only 0.17. So far, during this correction, the ratio has fallen only 82%. Leaving plenty of room for stocks to fall more… and/or gold to rise.

If you’d like to buy some gold today, an ounce goes for just above $860. Since spiking to $885 Monday, it’s been slowly trending back down.

While gold has been drifting lower, the dollar is still sweet-talking investors. The dollar index is up nearly a full point from yesterday, to 81.6

“The euro could die in 2009,” forecasts our new currency man Bill Jenkins.

“When the European Union was formed, most supporters saw it as the cat’s pajamas. Strongly growing economies, all banded together, ready to take the economic world by storm. And so long as the party lasted, everybody was happy. Everybody was making money. The wine was flowing in France, and the beer in Germany.

“But now that the flasks and kegs are empty, all the party food has been consumed and it’s time to pay the caterer, all the participants are looking at each other to see who is going to pick up the bill…

“A number of the euro countries are in real trouble… Spain, Italy and Greece, just to name three. At the same time, chief member Germany, which has always been the economic muscle behind the euro (and a model of fiscal reliability) is falling into recession. They will no longer have the "excess" to help bring lagging countries along.

”Add that to the fact that now many of the eurozone countries are crying out to the ECB for ‘stimulus.’

”Who is going to pay for that? Germany, of course! Are they willing to do that? Probably no more than you and I are willing to pay for a bailout for Mexico! Additionally, had Germany not been sharing its wealth with the less-productive nations of the ‘zone,’ they would certainly be in a much better economic position right now…

”Needless to say, if the European Union begins to fragment, the euro will go into the toilet. Where will all the currency chasers turn then? I would suspect right back to the dollar. Now, don’t get me wrong, if this happens, and that is a pretty big if, it is not going to be next week. But we need to keep our eyes open on the big trends to see where there is opportunity to make some money.”

Further around the world, most Asian markets closed the books on 2008 early today. Thus, we’re ready to present one award for the year… the worst performing major market:

China’s best known index fell a remarkable 65.2% in 2008. That’s nearly $3 trillion in share value. We’d say Chinese investors are way worse off than their American counterparts… but the SSE rose over 300% between 2006-2007.

As we write your 5 Min. this morning, other markets around the world are still rounding down their last day of 2008. Check us out Friday and we’ll kick off the New Year with a full wrap-up of worldly gains and losses. Some of the world’s minor markets will report some dreadful drops (poor Iceland).

U.S. market makers are trying to end 2008 with a bang. The Dow, S&P 500 and Nasdaq all shot up over 2% yesterday. Traders were curiously emboldened late in the day when GMAC became a bank holding company and hinted it would kick off an aggressive lending program soon.

Today started a bit more cautiously. As we write, the Dow is near break-even.

Initial jobless claims have fallen to their lowest level in two months, the Labor Dept. reports today. First claims for unemployment fell by 94,000, to 492,000, last week, way below expectations.

But don’t expect an unemployment bottom. This latest reading was skewed by part-time holiday hiring. And really… what kind of jackass fires people during the holidays anyway?

The real employment number? Continuing claims. A total of 4.5 million people are currently collecting unemployment benefits — the most since 1982.

No shock then that consumer confidence has hit another record low. The Conference Board’s measure sank to 38 in December, from 44 the month before.

The group started this survey in 1967… today’s reading marks the lowest score on the books.

But we’re starting to get suspicious of that consumer sentiment survey, too. Our Patrick Cox helps to explain why:

“It is important that we understand that the stock market is not the economy. Even people who are not investors tend to make this mistake. It’s easier to make that mistake if you’re personally invested. On the surface, however, it’s obvious that economies don’t change as dramatically as the market does. Paper losses can be painful, but they don’t translate directly into the destruction of real assets.

“I am pointing out the obvious because I’m so sick of mainstream media’s economic coverage. We know, in fact, that our so-called Fourth Estate has the collective IQ of an underachieving adolescent. We know this because the mainstream media utterly failed to cover the oncoming credit crisis. They did so even as rational analysts were screaming that Fannie Mae and Freddie Mac were headed for a cliff. When the media spin current events, remember how wrong the pinheads were until now.”

Patrick goes on to show that unemployment in the Great Depression didn’t soar until after the market crash of 1929. The worst joblessness of that era began a year later, after the Smoot-Hawley tariffs were passed… then really took off in 1932 when the new administration came in with promises to “fix” everything. Then, unemployment skyrocketed, culminating with one in four Americans out of work by early 1934.

If you’re currently an Agora Financial Reserve member, read the rest of the story — including Cox’s explanation of how and why nuclear will “go green” in 2009 — here. If you’re not currently a member, you still have 48 hours to claim your spot and get AF’s top level of research for life… at a substantial discount.

“I wonder how,” a reader begins, “the National Retail Federation expects President Obama to help retail sales by reducing sales taxes when President Obama does not run the states. Have they forgotten that states charge, collect and spend those sales taxes?

“A point that doesn’t seem to be made often enough is that the $20 billion in savings is fraudulent. Forgetting for the moment the obvious indirect costs, if the states get $20 billion less, then they will have $20 billion less to spend. The citizens who save $20 billion will then have $20 billion in fewer state services to enjoy. The retailers are losing too. The states in which they are located will be forced to raise fees on retailers to make up for the lost revenue.

“Even if the NRF is able to correctly state the request to an Obama administration, and then somehow get that $20 billion from the federal government, it is still a robbing Peter to pay Paul situation. Now the federal government will have $20 billion less to put into other programs on behalf of its citizenry. And the money doesn’t exist anyway!”

“Igor Panarin’s prediction,” writes a reader, referring to yesterday’s 5 , “that the United States would proceed into civil war and could conceivably split up into six pieces is the kind of drivel that would come from a former KGB member. He’s either highly delusional, is processing our financial hard times through the lens of Russian political history or is just trying to get some notoriety by trying to come up with something so far-fetched that the bored journalists will run this ‘hot’ story.

“The freedom of speech that our country provides pretty much guarantees that the majority will always hear the whining and complaining from countless minority and special interests. This may give outsiders the impression that this country is divided and morally depraved. Despite our shortcomings, the majority of the U.S. population knows that this is still the best country to live in and will fight to our last breath to keep it a single, sovereign nation.

“Although, I do have to admit that there would be some humor in seeing someone like Nancy Pelosi bow to the directives of Hu Jintao.”

“Although I tend to agree with Igor Panarin,” writes another, “that the U.S. may undergo a ‘disintegration,’ I believe it will be more economic, with associated food riots, rising crime and other symptoms of a society in decay/distress. What will not happen is a partitioning of the U.S. proper to the wannabe superpowers.

“Why? The U.S. has 270 million firearms, out of a total of 650 million civilian-owned firearms worldwide, approximately 90 small arms per 100 citizens. We who have prepared will certainly insist (over my dead body) against any foreign state assuming control or ‘reversion.’ Besides, these entities have as much, if not bigger problems, than the U.S., except for, maybe, Canada.”

Happy New Year, eh?

Addison Wiggin
The 5 Min. Forecast

P.S. Again, we’re running the best deal of the year for our highest level of investment research and insights. But the offer ends in 48 hours. Don’t delay. Before too long, you’ll have champagne and streamers competing for your attention and you may miss out. Check it out, right now.

30 Dec

How to Spot the Bottom… Then What to Buy, Home Prices Crash, Has China Peaked? And More!

Posted by admin, under Forecast, Information

Home prices fall… again. The latest record-setting swan dives
Chris Mayer on how to spot the bottom… and what to buy when it comes
World’s biggest companies hold shockingly little cash… global market in the hands of Buffett, China
But can China capitalize? Byron King on how China has “reached its pinnacle”
Russian professor predicts end of U.S. by 2010… will Houston be taking orders from Mexico City?
Plus, your prophecies for 2009… and The 5’s editors issue a forecasting challenge

Like a crackhead kicking a trash can reverberates through your hangover headache, the folks from the S&P/Case-Shiller Home Price Index updated their data this morning:

“Home prices are back to their March, 2004 levels,” reports David Blitzer, one of the index’s stewards. “Both composite indices and 14 of the 20 metro areas are reporting new record rates of decline. As of October 2008, the 10-City Composite is down 25.0% from its mid-2006 peak, and the 20-City Composite is down 23.4%.”

Phoenix, Las Vegas, San Francisco, Miami and LA remain the worst housing markets in the country, in that order. Dallas and Charlotte are the “bright” spots, having fallen only 3-4% annually.

The entire financial world had placed a wild bet that house prices in the U.S. would go up indefinitely. The year 2008 will go down in history as the year that proved them wrong… and then all hell would break loose.

The reverberations will continue to reach far and wide in 2009. As a sign of things to come, the first post-Christmas retail bankruptcy occurred Monday. “Parent Co.,” an ironically named retailer of children’s products, filed Chapter 11 yesterday. Our bold, out-on-a-limb forecast for the day: They will not be the last.

Parent Co. joins the ranks of well-known bankrupt retailers like Circuit City, Boscov’s, Sharper Image, Mervyn’s, Linens ’n Things, Whitehall Jewellers and Steve & Barry’s

“If some miracle doesn’t happen,” notes Bill Bonner, “this will go down as the worst year in Wall Street history. Worse than ’29? A lot worse.

“1929 had been a big winner for investors before the crash began in the last quarter. When the champagne was finally poured on New Year’s Eve, investors were less than 10% below where they began the year.

“This year has been all bad. Investors are looking at a loss over 40%. The typical investor in the stock market has probably lost half his money.”

U.S. indexes showed no indication of a year-end miracle yesterday. The Dow inched down steadily as the day progressed, fueled mostly by Middle Eastern news — Kuwait’s broken deal with Dow Chemical and the war in Gaza.

Without any compelling reasons to buy, most major indexes drifted down about 0.3%.

History suggests sluggish and lame markets can — and do — last for much longer than most investors believe is possible. Exhibit A: The Japanese stock market closed out 2008 this morning — its worst year ever – long after its equity and real estate bubbles popped in the early ’90s.

Despite the Nikkei 225’s 1.3% rise today, the index fell 42.1% for the year. The closest comparison would be the 39% annual dive in 1990, after the great Japanese stock bubble popped so magnificently. Still, even compared to that incredible fallout, 2008 takes the cake.

The Nikkei closed today at 8.859. Another 10% or so, and the Japanese market will be flirting with a 25-year low. How does one say “ouch” in Japanese? Itai!

Rather than commit hari-kari… let’s do something unusual and try to think, umn, positive… it is the holidays, after all. How will we know when the bear market is bottoming? And what should we buy when it does?

“Normalized earnings for the S&P 500 could be $60-70,” Agora Financial’s managing editor, Chris Mayer, opined this morning, taking a shot at an answer.

In layman’s terms, that’s a possible low of 600-700 for the S&P 500… 30% lower than it is today.

“The S&P at 600 is entirely possible,” Mayer continues. “So we could have more room to go. But it doesn’t have to go there. Signals to watch — when earnings stop falling quarter to quarter. I actually think we’ll see a big rally early 2009 a la 1930, when the Dow was up 48% from its bottom by April. Big rally coming, and that will be your last chance to dump your weaker holdings.

“If you are going to invest in stocks in 2009,” Mr. Mayer suggests, “stick with hard assets, management teams with proven track records, strong balance sheets and businesses with good disclosures (i.e., no black boxes or funny business). Ag-related stocks will have a good year, I think — fertilizer stocks, in particular. Oil stocks will come back, too, particularly oil field service stocks.

“Natural gas stocks will do even better, particularly the low-cost producers.

“I think now is a good time to pick up India’s blue chips, if you can sit with them for a while. I like emerging markets still. This is a pause, and not the end, of the emerging market growth story. It’s much bigger than most people think. India has less exposure to exports than China, has a lot of savings, little debt, a very young population (half under the age of 25) and some leading companies dirt-cheap…

“Lots of problems, to be sure, as all emerging markets do, but India will come back.”

Of the 100 biggest companies in the world by market value, only 29 are in a net cash position — more liquid assets than debt.

Here are the top four, as listed by the Financial Times:

Berkshire Hathaway — $106 billion in net cash
Bank of China — $101 billion
Industrial and Commercial Bank of China — $89 billion
China Construction Bank — $82 billion

If this isn’t a sign of the times, we don’t know what is.

But “the Chinese growth miracle has reached its pinnacle,” opines our Byron King, contrary to the evidence above.

“During the run-up to the Olympics, the Chinese government closed tens of thousands of factories in and around Beijing, just to control the air emissions and help to create blue skies for the Olympiad. It seemed to work as pageantry. By the time the marathon runners were trotting past the Great Hall of the People, Beijing looked like a picture postcard in its splendor.

“But how many of those closed factories have not yet reopened? All across China, we now learn, several hundred thousand factories are closed, with numerous millions now unemployed. All across the Middle Kingdom, owners and investors are closing factories faster than they are opening new ones. The export-led model of development has hit the rocks. Exports are down, incomes are falling, labor strife is up. This is bad for social harmony.

“It will doubtless get worse in 2009. Yet the larger truth is that China’s problem is part of a global phenomenon. From New York to London to Dubai to Shanghai, trillions of dollars of global capital have vanished — wrecked by deleveraging and associated market losses. The global banking system is in ruins. Trust is ofttimes gone, and scarce in the best of cases. Capital flows are being interrupted by new Chinese Walls the likes of which not even ancient emperors could have dreamed.

“With the export model broken, the mercantilist money machine is also perturbed. This will impact — negatively — Chinese willingness to continue to buy U.S. Treasuries. Which will impact — negatively — the U.S. ability to fund its chronic national deficits and long-term debts.”

The other hallmark drama for the year continues unabated. The U.S. Treasury piled us all deeper in debt last night when it threw GMAC a $6 billion life preserver.

Turns out the auto loaner couldn’t wait for its “bank holding company” upgrade from the Fed. Thus, Paulson and company were “forced” to pull another $6 billion from the TARP to keep GM’s financial arm afloat. $5 billion will be loaned straight to GMAC, and the government will get an 8% coupon. The other billion goes to GM, which has been ordered to increase its 49% stake in GMAC.

The results of GMAC’s huge debt-to-equity exchange Friday are still a mystery. Judging by the Treasury’s sudden injection, it didn’t go so well.

Unfortunately, the initial phase of Paulson’s bailout plan, the clunkily acronymed TARP, is already out of money. The $6 billion going to GMAC is actually money that’s already been allocated toward the bank recapitalization project.

If Congress does not approve the second half of the TARP bailout, the Treasury will bounce some pretty large checks.

Following events from a safe distance, a former Russian KGB analyst says the outlook for Americans is dire. And predicts the breakup of the United States by mid-2010.

"There’s a 55-45% chance right now that disintegration will occur," Igor Panarin told The Wall Street Journal this morning. "One could rejoice in that process. But if we’re talking reasonably, it’s not the best scenario — for Russia."

“Mr. Panarin posits,” according to the WSJ, “that mass immigration, economic decline and moral degradation will trigger a civil war next fall and the collapse of the dollar. Around the end of June 2010, or early July, he says, the U.S. will break into six pieces — with Alaska reverting to Russian control.”

But the professor is not necessarily happy about it. “Though Russia would become more powerful on the global stage,” he says, “its economy would suffer because it currently depends heavily on the dollar and on trade with the U.S.”

Hmmn… we’re trying to imagine some cowboy from Bakersfield submitting to Chinese rule. Or a Texan taking his orders from Mexico City. Heh.

After briefly falling below 80 yesterday, the dollar index has stabilized around 80.6 today.
The euro and pound are on the verge of parity for the first time ever. The pound, slammed by a large U.K. recession, housing crisis and lower-than-normal rates, has weakened to 98 pence per euro. Year to date, it’s down 25% versus the multination currency.

The approaching parity is reflected in the dollar exchange, as well. A euro today goes for $1.40… the pound a “mere” $1.45.

Commodity traders are taking profits today after Monday’s rally. Oil jumped as high as $42 a barrel, before retreating to $38.

Ditto with gold. It rose as high as $885 yesterday, but goes for just above $870 as we write.

“I believe oil and gold are the places to start getting well positioned in for 2009,” writes a reader, “if one hasn’t already. Oil especially is being primed for a V-shaped recovery. If investors are paying attention, they understand that the unrealistically low price of oil is just that — unrealistic.

“Many oil and gas exploration and production projects have been shelved due to the financial crisis and falling price. Some major oil exporters have exhausted their reserves, Mexico being one. Oil exploration and production require oil prices to be over $100 to be profitable. OPEC drastically cut production levels, due to falling demand. Problems of shortages and spiking oil prices are looming.

“Gold is also primed for a spike as the bailouts and stimulus package get under way. Great way to make up for the losses in 2008 if you’re ready for the ravages that will come along with this!”

“I believe 2009,” writes a reader with his own year-end forecast, “is going to be the beginning of a ‘rich get richer’ story that will reach levels never previously even imagined. This is how I see it playing out. There are many solid companies that have more than sufficient cash to get through the upcoming tough times, but are trading at huge discounts to their historic value. At the moment, the real estate- and energy-related sectors seem to have more of these companies than some other industries, but they exist everywhere. As is often the case, Mr. Market has overreacted and taken down the good with the bad.

“I predict that once there is even a hint that the economy is starting to turn around, there will be a flood of leveraged buyouts whereby those with access to cash will be buying the best companies for a fraction of even their future one-three-year value. And the banks will rush in to provide the financing with the cash they got from the Fed and currently have sitting on the sidelines.

“Bottom line is that Joe the Plumber will find out about a year from now that the only companies still in his portfolio are the companies that the buyout companies did not want. For buyout firms like KKR and Carlyle, this is going to better than robbing a bank, since it is legal. I suggest you provide some guidance as to how to share in this upcoming M&A activity.

“Even a master list of companies that are beaten down but still are earning good money and have plenty of cash would be a start.”

The 5: We’re on it.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. While we’re at it, we’d like to propose a little contest. Some background: Yesterday, we were in LA recording some last-minute commentary for the bonus features being released with the PBS Home Video edition of the I.O.U.S.A. DVD. In preparation, we had a short conversation with Bob Bixby, executive director of the Concord Coalition and one of the protagonists of the film. He suggested that the projection of a $1 trillion deficit for the federal government in 2009 is extremely “conservative.”

Patrick Creadon, the film’s director, said he thought it would come in at $1.3 trillion. I reminded him that if you include all the bailout funds, stimulus packages and structural imbalances of the federal budget, the feds have already spent over $2 trillion in FY 2008. We were going to arm-wrestle… but then thought of a better idea: Let’s hold a contest among readers of The 5.

Who can guess the deficit in 2009? We’ll have to pick a date for final entries… cook up some ground rules… and establish a nice prize for giving it a shot. But if we’re going to witness the financial destruction of the great American republic, we might as well have some fun doing it. You game?

P.P.S. Don’t forget, you’ve got less than three days to take advantage of our deepest discount of the year. Learn about this massive savings, here.

29 Dec

2009 Forecast, More Banks to Fail, Retail Disappoints, Recession Stock Picks, Huge Tax Cut and More!

Posted by admin, under Forecast, Information

by Addison Wiggin & Ian Mathias

How to profit in 2009: Think like a Fed governor
A “mere” 25 banks failed in 2008… proof that the FDIC expects many more next year
Retail on the brink… preliminary reports suggest holiday consumption even lower than anticipated
So who will thrive in 2009? An unsavory list of stocks prime to benefit from a lousy economy
Middle East moving markets… why news from Kuwait and Gaza is affecting your portfolio today
Byron King on the $200 billion consumer bailout Congress never passed

“The key to approaching 2009,” writes Dan Amoss today, kicking off our week of New Year forecasts, “is to view everything form the perspective of the Treasury and the Fed, as distasteful as that may be. Everyone knows that the real economy stinks and we have too much debt. I doubt everyone realizes just how extreme Treasury/Fed will be in using the deficit and the paper money system to stop the Great Depression 2 scenario.

“I expect the inflationary bailout initiatives to start attacking deflationary forces from the ‘flank,’ to use a military term. The banking system destabilized because its collateral — houses and mortgage backed securities — collapsed in 2008. While the authorities may not be able to reinflate old bubbles, I’m betting they can employ cheap Treasury financing to cushion the decline. This involves refinancing homeowners out of toxic mortgages into conventional mortgages. They’ll also find some way to deal with the problem of negative home equity, even if it involves highly inflationary tactics like Treasury assuming losses from principal reductions via Fannie and Freddie, and if foreigners balk at absorbing new Treasuries, the Fed will monetize them. If so, we could see a fast track to the gold and oil bubbles that I predicted last year.

“In markets, it’s far too easy and popular to be bearish on everything but Treasury bonds, so odds favor a sharp rally in early 2009 — a rally in the S&P 500, led by stocks with the most sustainable fundamentals, including energy, commodities and infrastructure. Stocks with weak fundamentals may participate, but quickly roll over as economic reality sets in. Many will go to $0 in bankruptcy.”

The Fed’s latest bailout target? GMAC, the financial arm of GM. Bernanke and company granted GMAC the mythical status of “bank holding company” late last week. Like Goldman Sachs and American Express, GMAC is set to join the group of about-to-fail financials given last minute access to the Fed’s discount window, and potentially TARP funding.

That’s great news if you’re in GM’s corner. GMAC handled roughly 35% of GM’s retail loans in 2007. Thus, a GMAC failure would be, umm, less than ideal for the doomed automaker. Shares of GM popped 13% Friday on the news.

But GMAC isn’t an official bank holding company yet. Part of the Fed’s deal stipulated that GMAC successfully conduct a complicated debt-for-equity exchange by midnight Friday. Long story short, that deadline came and went, and GMAC spokespeople won’t say if they pulled it off.

Twenty-five banks went under in 2008. We’re surprised to report the FDIC had a quiet Christmas weekend, without a single last-minute financial failure. And given their propensity for weekend takeovers, we’ll guess that there will be no more bank closures in 2008.

Granted, 25 is the most since the S&L crisis that plagued the ’80s. We set some records in 2008 too, like Washington Mutual, the biggest bank failure ever. But still, just 25 banks… doesn’t that feel a little too easy?

The FDIC thinks so — 171 institutions remain on their “problem list.” They’ve already doubled the budget for 2009, to $2.2 billion. According to American Banker, most of that money is headed to the FDIC’s “resolution and receiverships” division, which plans on hiring another 800 bean counters to help deal with rising bank failures.

We expect a healthy share of retail failures in 2009 too. The latest shred of evidence: From Dec. 1 to Christmas Eve, total retail sales (excluding autos) fell 8% year over year. That’s even worse than November’s 5.5% plunge.

We admit, these MasterCard stats are skewed. If you factor out gasoline, retail sales are down “just” 2.5% in November and 4% in all but the last week of December. But even without gasoline sales… once the final tallies come in, we suspect this Xmas retail activity will be declared the worst on record.

And if you thought wealthy shoppers and high-end retailers were immune to this holiday funk, you were wrong. Check out this interesting breakdown from today’s WSJ:

No surprise, the National Retail Federation is the latest group to beg for a government bailout. The country’s laregest retail trade oganzation petitioned Barack Obama last week to add a series of tax-exempt shopping days to his “New New Deal” stimulus package. The NRF wants three 10-day periods of tax-free shopping in 2009, which the group estimates would save consumers up to $20 billion.

As evidenced by our coverage above, consumers failed to open their wallets when retailers offered huge, desperate holiday discounts… why would they rush into stores for a 6% tax break?

So who will thrive in this retail apocolypse? If you insist on consumer names, the people at breakingviews.com might be on the right track. Behold its “Poor Getting Poorer Index.” As the site describes it, “a basket of 22 equal-weighted stocks that includes the retailers, white-label manufacturers, repossession agencies, dollar stores, pawnshops and other public companies poised to capitalize on rising poverty.”

Over the last 12 months, this motley crew index is up 9%. Considering the S&P 500’s 40% fall over the same period… not too shabby.

Stocks muddled through last week, ending down just a bit. Low volume and more weak economic news pushed the Dow down 0.7% for the week. The S&P 500 fared worse, down 1.7%, and the tech-heavy Nasdaq kept with its volatile ways, falling 2.1%.

This morning, it’s looking about the same. Stocks are slowly drifting down, led mostly by this bit of news:

The government of Kuwait backed out of a $17 billion deal with Dow Chemical today. The Kuwaiti Cabinet said they feared the worldwide slowdown could bring “unpredictable consequences to any global firm” and that the deal was just too risky. Now that oil’s under $40 a barrel, we suspect they’ll be spending petrodollars a bit more thoughtfully.

The two groups were planning to establish the world’s largest maker of polyurethane.

The price of oil soared 8% this morning after Israel’s somewhat-surprise attack in Gaza over the weekend. While Israel and Hamas renew their battle over the holy land, oil traders are a bit worried about Middle Eastern supply chains. Oil was due for a day up anyway… this morning’s rally snapped a nine-session losing streak.

Thus, light sweet crude popped to just over $40 a barrel.

Gas prices, on the other hand, have found a new credit crisis low. The national average fell for its 10th consecutive day this morning, to $1.61. You’d have to travel back to February 2004 to find gas that cheap… amazing. Prices are down over 60% from July’s record high of $4.11.

“The U.S. Energy Dept. statistics state,” writes Byron King, “that the nation burns about 9.4 million barrels of gasoline per day. That’s about 395 million gallons (at 42 gallons in a barrel). Let’s say a gallon of gasoline is $2.75 cheaper than it was back in July, when I was paying $4.40 per gallon. Take 395 million gallons per day times $2.75 savings per gallon. That’s almost $1.1 billion PER DAY that U.S. consumers are saving at the gasoline pumps. That’s over $32 billion per month of savings, or about $200 billion over six months.

“$200 billion? As the saying goes, ‘Show me the money.’ In a sense, the world oil industry has given the American people a huge tax cut. Or call it a ‘bailout bill’ for consumers, except that Congress did not borrow the money to fund it. And that $200 billion is not just money coming out of the hides of Big Oil and those betes noires like Exxon Mobil or Chevron. No, this is a $200 billion cheap-oil tax cut paid for by the sheiks of Araby, Mr. Putin of Russia, Generalissimo Chavez of Venezuela and Mr. I’m-a-Dinner-Jacket of Iran. Could not happen to a nicer bunch, eh?

“So American consumers are receiving a benefit that could be worth, say, $200 billion over six months. But there’s no addition to the national debt, and it’s being paid for by people we don’t like very much. Win-win, right? That’s the best kind of tax cut.”

Of course, cheap oil and gas have downsides too. For Byron’s full account, read your latest Outstanding Investments alert.

The violence in Gaza gave traders another reason to sell the dollar today. As we write, the dollar index is down a full point, barely clinging on to 80.

The Russian ruble remains the currency headline of late. Last month, the Russian government snipped the trading band between the ruble and a basket of other currencies… considering the crashed prices of oil and gas, the ruble deserves to be taken down a few notches.

The Russian currency has since plummeted to a four-year low versus the dollar and an all-time low compared to the euro. This morning, it’s down another 1.5%

The sum of today’s entire issue equal