August 24, 2007 by Addison Wiggin & Ian Mathias
- The secret’s out… Four of Asia’s largest banks come clean about subprime exposure
- Countrywide founder decries “worst crisis in 55 years”
- Bond king predicts housing slump not seen since Great Depression; calls on the president to bail the country out… yeah, right
- Gold: short term sell-off, long-term rally… Clarke and Bugos weigh in with charts. What you should do if you’re holding bullion or stocks.
- Corn and soy underwater in the Midwest… prices to spike again
- *Uranium price stalls, but microcap uranium play set to soar Four
- Mobs, Messiahs and Markets hits No. 1 on Amazon list… not even released yet….
Four of Asia’s largest banks all revealed sizeable investments in U.S. subprime-backed securities this morning.
The Bank of China — that nation’s second largest bank — announced they hold nearly $10 billion in U.S. subprime-backed mortgages. Coupled with their Hong Kong arm, the bank could have as much as $11.25 billion tied up in these doomed derivates.
Industrial and Commercial Bank of China, the world’s largest lender by market value, said over 4% of its foreign exchange investment portfolio is made up of subprime bonds, accounting for over $1.2 billion.
We have been incredulous the Chinese were able to dodge the subprime mess… turns out they were just playing their lousy hand close to the chest.
Singapore’s DBS Group Holdings and Taiwan’s Cathay Financial joined the coming-out party. Their combined exposure is another $1.7 billion.
Here in the U.S., the depth of the fetid housing swamp is still being plumbed.
“Market forecasters currently project over 2 million defaults before this current cycle is complete,” notes Bill Gross in his latest missive. “The resultant impact on housing prices is likely to be close to minus 10%, an asset deflation in the U.S. not seen since the Great Depression.”
“Granted, stock markets have periodically retreated by significantly more, but stocks have never been the savings nest egg for a majority of Americans,” continued Gross. “70% of American households are homeowners, and now many of those that bought homes in 2005-2007 stand a good chance of resembling passengers on the Poseidon – upside-down with negative equity.
“A 10% ‘hook’ in national home prices is serious business, indeed. It’s little wonder that Fed, Treasury and congressional leaders are shifting into high gear.”
The question is will they be able to save anyone?
The Fed injected another $17 billion in the U.S. financial system yesterday. The net effect on domestic markets? Zero… zilch… zippy. The Dow and S&P 500 both finished close to even.
 |
| Angelo Mozilo, born 1939. |
Markets are in “one of the greatest panics I’ve ever seen in 55 years in financial services,” said Countrywide chief Angelo Mozilo in an interview yesterday. Probably not a hard conclusion for Mozilo to arrive at given his company is in the eye of the storm… still, the man’s been around a few years. He started Countrywide in 1969 with one employee.
When asked if a recession is around the corner, Mozilo responded, “I think so…”
“I know I’ve been proven wrong so far, but I can’t believe that when you’re having a level of delinquencies, foreclosures — equity has disappeared, equity is gone, the tide has gone out — that this doesn’t have a material effect…on the psyches of the American people, and, eventually, on their wallet.”
For its part, “the Office of Thrift Supervision reported that troubled loans at federally regulated savings and loans (or thrifts) increased 49% over last year to the highest level in 14 years,” Chris Mayer told us yesterday.
Troubled loans are those that were 90 days or more past due. Of the 836 regulated thrifts, 10 were said to be “problem thrifts.” That’s up from only four in 2006.
“This is important because thrifts make one out of every four mortgages in this country. Seems too hard to imagine housing turning around until the thrifts get better.”
“Housing prices could probably be supported by substantial cuts in short-term interest rates, but even cuts of 200-300 basis points by the Fed would not avert a built-in upward adjustment of ARM interest rates,” Bill Gross continues. “Nor would it guarantee that the private mortgage market — flush with fears of depreciating collateral — would follow the Fed down in terms of 15-30 year mortgage yields and relaxed lending standards.”
“Additionally, cuts of such magnitude would almost guarantee a resurgence of speculative investment via hedge funds and levered conduits, which have proved to be the Achilles’ heel of the current crisis. Secretary Paulson might also have a bone to pick with this ‘Bernanke housing put,’ since it more than likely would weaken the dollar — even produce a run — that would threaten the long-term reserve status of greenbacks and the ongoing prosperity of the U.S. hegemon.”
“Write some checks, bail ’em out, prevent a destructive housing deflation that Ben Bernanke is unable to do,” writes Gross to President Bush, suggesting a full-blown government intervention.
Et tu, Bill?
We’re afraid the president and the federal government don’t have much a track record for helping people in a crisis. This time will be no different.
The pound and euro both regained ground on the dollar overnight. The rival currencies are now back up to $2.00 and $1.36, respectively. Turns out when every headline reads “Looming Rate Cut,” currency traders start selling greenbacks… who’d have thought?
Is it time to sell gold, too? Jeff Clark, in yesterday’s Growth Stock Wire, says so…
“I realize I’m not going to win any popularity contests by talking bad about precious metals,” wrote Jeff, “but one look at a chart of the Gold Bugs Index tells the whole story.”
“The arrows point to the last five failed breakout attempts,” explains Mr. Clark. “You can see last week’s breakdown from an ascending triangle pattern. This is a very bearish development for the gold sector. And it suggests that after a brief oversold bounce, we’re going to see some more downside action.
“Gold stocks are a leading indicator for the price of gold. If the stocks rally, then the metal rallies shortly thereafter. If gold stocks fall, then it doesn’t take long before the price of the metal turns down as well.
“Last week’s big spike down in the HUI should lead to a sharp spike lower in the price of gold. And it could happen within the next week or two.”
“There is significant historical precedent behind a potentially bullish gold price explosion by the end of the year,” writes our own Ed Bugos, refuting Mr. Clark, albeit unknowingly.
“Everyone will notice the general inverse relationship between the dollar and the gold price that can be seen in the chart,” writes Ed, “but it is not a well-known fact that the gains in the price of gold that occurred in the top three bull market moves alone (shaded regions in the above data series), where exchange rates were most stable, explain nearly two-thirds of this whole move in gold prices — more than $400 of the gain from $35 to $650 — while the U.S. dollar’s foreign exchange rate fell less than 5% net.
“If we apply the 1970s model to the current move that started in 2005,” continues Ed, “we would suggest that it could end in late 2007 with a run in gold prices to somewhere between $900-1,200, and the dollar might well be only a few points from where it is today when it all blows over. Both of the instances of dollar stability in the ’70s saw the most spectacular gains in the gold price, and by all counts, the same factors are at play today. Investors were surely just as surprised by it then as they will be today.”
An ounce of gold will currently set you back $660. If Jeff and Ed are right, expect short-term weakness followed by a year-end bull run. We’ll our eye on it for you…
“It’s no secret uranium’s bull market has stalled lately,” reports Greg Guenthner of Penny Stock Fortunes and Bulletin Board Elite, “but this lull is nothing but a massive buying opportunity.”
Uranium has struggled topping its June high of $138. Since then, prices have fallen to as low as $110, and major uranium plays like Cameco have followed suit.
“As one of the only serious CO2-free sources of energy,” Gunner tells us, “nuclear power isn’t going anywhere. The U.S., France and Japan are all totally on board with the future of nuclear power, and plenty of emerging markets are eager to get their hands on nuclear technology too… for one reason or another.”
For now, Gunner thinks power plants aren’t buying uranium, because prices are still high (yellowcake was only $10 in 2002). “But soon enough, their hands will be forced,” he says. Bulletin Board Elite subscribers can look forward to Gunner’s next pick — a microcap uranium player with serious profit potential. Click here for more…
“The flooding and prior steamy hot weather,” reports Kevin Kerr from the commodity pits, “are going to make this year’s harvest a big disappointment.”
“Kernel counts for corn are poor, and with all this wet weather, many soybean crops are underwater or will get hit by mildew and disease. Not to mention the fact that farmers simply can’t get equipment into the fields. Heck, you’d need a combine on pontoons in some places.
“High hopes from planting intentions in April now seem like a distant memory. I expect bean yields will be awful and corn to be much lower weight and quality than projected. All this means even higher prices, especially this winter.”
For ideas on trading these price swings, make sure you’re reading Mr. Kerr’s Resource Trader Alert
“I’ve been watching the ‘meltdown’ in Zimbabwe’s economy,” writes a reader. “If you gents were called in and given the power to do whatever you wanted, how would you fix them up?”
Oh, man… are you kidding? We could solve that problem in 5 Min. Heh.
“With only my natural cynicism to draw upon,” wrote a reader, off to a good start, “I am thinking that BOA was asked by the financial guys in Washington (the Fed) to make that investment in Countrywide. It is pretty easy for me to imagine 20 top moneymen sitting at a big table last weekend trying to figure out how to stop the real estate and credit nose dive. $4 billion seems like a bargain on a trillion in bad loans.
“It is also my opinion that foreclosed homes are not being offered on the market. Here in Naples, there are people listing $400,000 homes admitting they are ready to take the $100,000 hit on property they bought in 2005 and 2006. Of course, no one thinks the units are even worth $400,000. But I know some of the houses here have been foreclosed and they are not on the market. So banks are hoping they can sit on the real estate as assets on their balance sheets until recovery?
“Since there is no income coming from these assets and there are significant maintenance costs associated with most of these properties, one wonders how much longer this charade can continue.”
A housewife in Japan was sentenced this morning after evading over $1.2 million in Japanese taxes. Japan’s version of the IRS followed a paper trail to 60-year-old Yukiko Ikebe’s home, where they found her surrounded by millions in kimonos and jewels.
How did she get so much cash? Forex trading.
Mrs. Ikebe “felt it was unfair to have to pay tax on her gains when she made losses some years,” said her judge. Amen to that. She was fined $300,000 and released.
Regards,
Addison Wiggin
The 5 Min. Forecast
P.S. Crazytown. We mentioned yesterday that Mobs, Messiahs and Markets was available for purchase on Amazon. This morning, it’s at No. 1 on the Amazon business best-sellers list… and all the stock is sold out. Hmmn. The official release date isn’t until Aug. 31. What’s all the fuss about?