by Addison Wiggin & Ian Mathias
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Bernanke gets candid at cocktail hour… His sobering forecast, and what he’s still overlooking
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Oil rockets to $88… Dan Amoss on how “clunkers” could lead you to profits in the oil industry
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Dollar rallies… but the ECB will continue to push for stronger euros
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GodMozilo’s wreckage of Countrywide not over yet… Survival puts up 187%
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Chavez institutes vice tax, Venezuela moves even lower on The 5’s “places to visit” list
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Plus… a conspiracy theory from our Whiskey friends and your comments on nuclear energy… all in the next 5 Minutes
“The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year,”
said Chairman Bernanke at a New York Economic Club dinner last night. Ben must have had a few glasses of the bubbly. Early on, his comments were particularly candid by Fed standards.
But then, he said this: “Part of the reason that we have some confidence in inflation remaining well controlled is we expect to see the economy growing more slowly at the end of this year” and early next year.
We’ve been wondering how inflation can be the Fed’s “predominant concern” if they’re still willing to cut interest rates. The answer appears to be something like: “We’re not worried about inflation because we’re expecting the economy to struggle.” Hmmn…
So… they’ll cut interest rates to spur the economy… and restore inflation to the Fed’s predominant concern? Mind pretzel.
“Someone needs to remind Ben Bernanke,” comments our Dan Amoss, “that the credit bubble wouldn’t have gotten so large were it not for the Fed.
The Fed guarantees the solvency of the credit markets like Fannie Mae guarantees the solvency of the mortgage-backed security market. Without Fannie Mae, mortgage-lending practices wouldn’t have gotten crazy. Without the Fed, CDO issuance wouldn’t have mushroomed.
After the speech, when Henry Kaufman asked Bernanke what kind of information he’d need to be a more effective policymaker, Bernanke responded: “I would like to know what those damn things are worth,” apparently referring to doomed CDOs getting written off like a return of Britney Spears’ career.
“These types of securities lie at the heart of this summer’s crisis,” says Dan. “They are symptomatic of a credit bubble that had grown out of control — a credit bubble that was kick-started by Alan Greenspan’s ultra-loose policies after the tech bubble burst. Knowing that the Fed is always poised to bail out underwater loans, lenders threw caution to the wind. By merely “signaling [the Fed’s] willingness and ability to provide liquidity to markets as needed,” Bernanke might as well be saying, “Party on!”
“Sure…who cares… party on Wayne!”
Luckily for day traders, Chairman Bernanke’s comments came after the markets were closed and they were off downing bubbly of their own…. drowning a day in the red. The Dow and S&P both dropped a little less than 1%.
They’re down another half percent as of this morning.
Oil prices skyrocketed over $2 per barrel yesterday, to $86, during U.S trading, up to nearly $88 on overnight futures — an all-time high. The mainstream press is blaming petty politics by U.S. Speaker of the House Pelosi. Yawn.
“Young jackup rig fleets and oil service/equipment companies will boom,” writes Dan Amoss in response to record high oil prices.
“This chart from the September 2006 issue shows that lots of today’s ‘old clunkers’ entered service when disco was still popular. The global jackup rig fleet tripled during the 1970s. Construction of all other types of drilling rigs also soared. When OPEC hiked production in the mid-’80s, oil prices crashed and drilling profits vanished.
“But bust has given way to boom, and these trends tend to last a decade or more. This drilling industry underinvested in equipment for about 20 years.
“‘Clunkers,’ of which there are plenty, now earn dayrates that are hardly worth the investment in scarce, expensive drilling crews. So we should expect to see a spike of attrition, or rig scrapping, in the next 10 years — even in the midst of a drilling boom.”
Dan has added several picks to the SI portfolio that match these criteria. “You want to own drillers that have been proactively investing in their rig fleet for years,” says Dan.
Click here for more on the global oil grab.
The dollar rallied yesterday, albeit slightly. The N.Y. Fed’s “Empire” manufacturing index surprised traders to the upside and helped push the dollar back to $1.41 versus the euro and $2.03 against the pound.
But don’t hold your breath. “The rise in oil prices,” writes Chuck Butler from the EverBank trading desk, “and the associated inflation will help the euro stage a comeback soon.”
Chuck: “The inflation pressures they bring are EXACTLY what the European Central Bank has been scared of, and what kept interest rates moving up… until the August meltdown of credit. ECB President Trichet spoke last night, and once again gave no indication that he or the ECB is uncomfortable with the strong euro… I’m seeing euros trade down below 1.42 again this morning… looks like it’s buying time again.”
Elsewhere in the currency world, carry traders and speculators took profits off the table, driving the Aussie dollar back below the 90 cent mark. The yen rallied to 116.
As we showed you in yesterday’s 5, gold and oil often share the same fate… and yesterday was no exception. Gold gained a remarkable $10 in Hong Kong trading overnight, soaring from $757 to $767. The red-hot metal has since cooled off, and now trades for $758.
In an ironic act, mere hours after announcing its part in a $100 billion credit bailout fund, Citigroup announced a 57% quarterly plunge in profits. Citi chief Charles Prince warned investors two weeks ago that Citi’s profits could fall as much as 60%, and fall they did. Citi has thus far revealed losses of just less than $6 billion.
Citi’s other partners in the $100 billion fund, Bank of America and JPMorgan Chase, are scheduled to report quarterly results this week, as well.
Countrywide CEO Angelo Mozilo is bracing his portfolio for further CFC bloodshed. Here’s the rundown of his trading activity last week:
That’s about $16 million in stock value for Mozilo. If his portfolio allocation is any indication of CFC’s future performance, look out below. We wouldn’t be surprised to see another round of layoffs this week.
On the other hand, if you’re holding puts, like The Survival Report subscribers, you’re up 187%.
Former Qwest CEO Joseph Nacchio is appealing his recent insider trading conviction.
Nacchio was busted for selling Qwest stock in spring 2001, just before financial woes caused prices to fall. He’s now saying that at the time he sold, he was only taking profits, and that he believed the share price would continue to rise.
“And this is where it gets nasty,” writes Greg Grillot, following the story in Whiskey & Gunpowder. “Nacchio claims the share price should have continued to rise because of expected top-secret NSA contracts worth hundreds of millions. Those contracts were suddenly withdrawn by the NSA because, according to Nacchio, Qwest refused to take part in an illegal warrantless surveillance program proposed by the NSA in February 2001.”
Could Nacchio’s allegations be true? Would the NSA blackmail a hugely successful U.S. company — with your tax dollars — because they refused to help the government break its own laws? Nah. Not in America.
Another sign of the times — PetroChina surpassed GE as the world’s second largest company yesterday.
PetroChina stock has gained 13% in the last five months, catapulting the company’s net worth to $434 billion, well past GE’s $420 billion. Asia’s biggest company is now second only to Exxon Mobil.
Exxon’s market cap is estimated at $518 billion… In the context of Chinese growth over the past year, we wouldn’t be too surprised if PetroChina topped the list in the near future.
Hugo Chavez furthered his campaign against enjoyable existence yesterday. The Venezuelan dictat…er, president drove up alcohol and cigarette taxes 20%.
“We cannot be spending the international reserves of this country on whiskey,” said Chavez, who went on to claim that whiskey is a drink for rich people, not revolutionaries. “I’m not willing to continue offering dollars to import whiskey in these quantities. What kind of revolution is this? The Whiskey Revolution? The Hummer Revolution? No, this is a real revolution!”
Seriously.
Thus, taxes on whiskey, brandy, cognac and all other alcohol not made with sugar cane rose by 10%, or up $1.79 per liter. As you may have guessed, he also plans on raising taxes for luxury items… like Hummers.
Smokers got some up the arse too… cigarettes now carry a 70% tax, up 20% from last week. Chavez calls this new wave of vice taxes a way to prevent the social, economic and moral repercussions of “overconsumption.” Good luck.
“The comments on nuclear reactors by your reader in Friday’s 4:36 segment are so far off the mark that it is hard to know where to begin,” writes a reader. “As a former Navy nuclear power officer qualified to run two different nuclear power plants, I can tell you that the Navy’s first reactors were liquid sodium plants, and the Navy went to pressurized water early on because liquid sodium is dangerous and hard to manage: It is highly corrosive, and it burns spontaneously upon contact with air, among other things. Additionally, pressurized water thermal neutron reactors are easier to control than fast neutron reactors, making them inherently more safe, for several reasons.
“Secondly, while fast breeder reactors do, in fact, create additional fuel for a while, it does not eliminate the waste problem. No fission nuclear reactor eliminates waste. Whenever an atom is split, it releases energy (the point of the whole thing), electromagnetic radiation (like X-rays), neutrons and other small particles. The biggest pieces left after the atom is split are called fission fragments. These pieces of the divided atom are highly radioactive elements, some of which are radioactive for a long time. Strontium 90, for instance, has a half-life of 10,000 years. Whenever a nuclear reactor is operated at significant power levels, large amounts of radiation from the fission process are released, and that radiation irradiates and makes radioactive most substances around the power core, including the materials of which the reactor is made and the cooling medium.
“I have been watching the nuclear industry since the mid-’60s, and nobody has a good solution for what to do with the radioactive waste from nuclear fission reactors, both solid and liquid. The federal government has spent billions to construct a storage site for radioactive waste products at Yucca Mountain in Nevada, but legal roadblocks prevent its use, and many question its effectiveness, in any event. In the meantime, radioactive waste from weapons production and early nuclear power activities continue to migrate from their storage sites to water tables and rivers in numerous locations.
“This is a major problem, and it is why I am totally against building any sort of nuclear fission power plant until we find a viable method for the disposal of the inevitable radioactive wastes created by their operation. Let’s keep the facts straight.”
The 5 responds:
Thanks for setting us straight… sir.
Regards,
Addison Wiggin
The 5 Min. Forecast
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ADDITIONAL RESOURCES:
Mish’s Take on Citi’s New Bailout Fund
Why oil shot up yesterday
PetroChina’s rise to #1