Asia Dumps U.S. Treasuries, A Tech Sector Destined to Surge, Beige Book Recap, Southern Water Wars, and More!

by Addison Wiggin & Ian Mathias

  • Central banks dump U.S. Treasuries at record rate… why another record’s in store next month
  • Shanghai Composite sheds 3.5%… the looming catastrophe that could lower it 50%
  • Asia’s newest growth market… 700% is just the beginning
  • Slumping profits, growing layoffs, downgraded bonds… just another day in the banking sector
  • How bad is the Dixie drought? Southern governor defies the Army!
  • Oil touches $89… Byron King on the real reason the gooey stuff won’t back down

The Fed published its Beige Book yesterday — a record of economic activity in the regions served by the member banks. Last month, we suggested this mind-numbing report be renamed the “Lily-White Book.” October’s report makes us want to second our nomination:

“Economic activity continued to expand in all districts in September and early October,” says the book’s executive summary, hinting at the drama inside, “but the pace of growth decelerated since August… Reports were uneven and suggest growth was slower in September and early October…”

We thought that was about all we could handle. But then the Lily-White Book went on to describe current growth trends as “mixed,” “moderate” or “modest,” depending on the region. We were blown away. We could hardly put the thing down.

Most contributors to the book “indicated a higher-than-usual degree of uncertainty about the outlook for economic activity.” Many firms are “still wary that credit tightening and slowing construction might slow activity in their industry.”

Oh, man, what a page turner. Scintillating. If you ever have as much fun on your job as we have on ours… watch out.

In August, the central banks of Japan, China and Taiwan sold U.S. Treasuries at the fastest rate in as many as seven years. Taiwan cut nearly 9% of its Treasury holdings, its biggest sell-off since 2000. China shed more than 2%, their biggest move since 2002. And Japan dumped 4% of their U.S. Treasures… their largest reduction since 2002.

In all, Asian banks dumped about $52 billion in U.S. Treasures in the final weeks of summer. Not a gigantic sum, considering they own about $1 trillion more, but indicative of a trend.

Globally, central banks dumped about $163 billion in U.S. Treasuries. Not since Russia’s 1998 default have U.S. Treasures been sold at such a pace. And these numbers are from August — before the Fed cut the overnight rate by 50 points. We won’t be surprised if next month’s TIC looks as frightening, or worse.

The Shanghai Composite plummeted 3.5% last night, highlighting yesterday’s most dramatic market action. The Hong Kong Hang Seng index climbed 0.6%. Rumors abound that arbitrage trading between the two markets may soon be allowed. Many Chinese shares are also listed on Hong Kong’s market, but stocks in China typically trade at a premium of nearly 50% over the same shares in Hong Kong.

Even with yesterday’s haircut, the Shanghai Composite is up over 120% this year. Hong Kong is up a mere 47% year to date.

“China’s online population has increased 486% since 2000,” writes Jim Nelson, “but it still has only 12.3% of its population online. India is even more astounding. With growth of 700% in the past seven years, still only 3.7% of the population has Internet access.”

“Digital subscriber line (DSL) subscriptions are increasing exponentially around the world,” continues Jim. “The total DSL market is currently around 193 million subscribers, and is estimated to become as large as 353 million by 2011.

“If you factor in the rate of Internet penetration in China and India, those numbers could more than double. If penetration rates go to only 50% (the U.S. has a 70% rate) and just half of those people choose DSL, that’s 612 million DSL users in these two Asian countries alone.”

In today’s Penny Sleuth, Jim paints a compelling investment picture for DSL companies, and includes an opportunity to play the trend.

Elsewhere abroad, you can add Libya to the ranks of formidable sovereign wealth funds (SWFs). The oil-rich nation kicked off its $40 billion SWF today, saying that it plans to open offices in London and Tripoli and will invest mostly through Western banks and institutions. The fund’s chief executive says he will invest primarily in real estate and hopes to accrue enough capital to venture into private equity. Well… we’d rather have Libya investing and in the game than stockpiling weapons and harboring terrorists.

In New York, bad news prevails. JP Morgan Chase reported a 70% decline in year-over-year profits in the third quarter yesterday. The bank had to endure a $2 billion write-down at the hands of the usual suspects — falling leveraged loan values and bad subprime bets. “Clearly, there are still a lot of issues out there that will take time to resolve,” commented CEO James Dimon, “there is a lot of risk on the balance sheet.”

Bank of America announced 32% fall in third-quarter profits. Like others before them, BoA cited trading losses, write-downs, bad subprime bets… stretch, slurp, yawn.

Morgan Stanley announced a new wave of layoffs yesterday. The investment bank will cut 300 more jobs, mostly from fixed income units in the U.S. It’s closing in on 1,000 layoffs since the mayhem in August.

And for what it’s worth, the SEC has launched an “informal” investigation into Countrywide CEO Angelo Mozilo’s stock sales this year. Mozilo has sold some $130 million in CFC stock in 2007. Add another line to Mozilo’s list of “things that will keep me awake at night.”

“What the hell is an ‘informal’ SEC investigation?” asked Ian this morning after finding this nugget. “Is it like causal Fridays? They search your office in jeans?”

We didn’t know what to tell the lad.

Standard & Poor’s downgraded another $23 billion in bonds yesterday, too. Over 1,700 bonds were given the ax. Most shockingly, 39 of such bonds were once rated AAA, S&P’s highest distinction. Of those 39, several were marked down as low as “A.”

If credit market woes are making you nervous about domestic bonds, this may be of some use: Last week, the SPDR Lehman International Treasury Bond ETF was launched — the first-ever international bond ETF available to U.S. investors. The ETF will track “fixed-rate local currency sovereign debt of investment-grade countries outside of the U.S.” according to Might be worth a look.

Domestic markets finished oddly mixed yesterday. The Dow dropped about 0.2%, while the S&P 500 rose by the same measure. The Nasdaq proved to be the star of the show, registering a full 1% gain on positive earnings from Intel and Yahoo, among others. eBay also beat Wall Street estimates in an aftermarket earnings release.

The Southeast U.S. is still plagued by an “exceptional” drought, says the National Weather Service. This level — the Weather Service’s highest — covers most of Georgia and has left parts of the state with a mere 81 days of water supply left.

Georgia’s state government has “As if this mess weren’t interesting enough, the Army Corps of Engineers recently “sidestepped” Georgia Gov. Sonny Perdue’s orders to stop draining Georgia’s water reserves. The Army Corps needs Georgia’s reserves for Florida and Alabama, which are also drought ridden. Of course, Perdue sees this water as state property, and yesterday threatened legal action.

Record low water levels at Lake Carter, not far from Atlanta. That’s a dock, not a patio.
A legal battle over water? There are many more of these coming down the pike, we’re afraid. If you haven’t read it yet, Chris Mayer and Eric Fry completed a massive water report over the summer they’ve dubbed “Blue Gold.” You can find it here.

Oil hit $89 bucks intraday yesterday.

“Many news reports attribute the recent rising prices for oil and gold to tensions in the Middle East,” writes our oilman Byron King. “Specifically, Turkey is threatening to invade northern Iraq and chase down some border-crossing Kurdish guerillas that have been launching attacks on Turkish territory.

“This may, in fact, be the immediate reason why the prices for oil and gold are rising. But this reason is far too facile, if not convenient. The root cause is the declining value of the dollar. That’s a far more profound reason than a border clash between two countries in the Middle East.

“The rising prices for oil and gold are reflective, generally, of the world’s desire to accumulate scarce and precious goods in the here and now, as opposed to holding depreciating dollars for some unknown future.

“Our view at Outstanding Investments is that the Federal Reserve made a monumental strategic and monetary error when it lowered its key interest rate benchmark by 50 basis points last month. The markets of the world have been bailing out of the dollar ever since, and the long downward slide of the buckaroo is far from over. Keep this in mind as you deploy your investment funds.”

Are you ready for the coming oil war?

“I don’t have a problem with the 66-year-old reader spending his share of the Social Security dole,” writes a reader. “He worked for it, and damn well deserves it. What I do have a problem with is the simple-minded, get-re-elected-at-any-cost sellouts that call themselves our representatives in Congress (both sides of the aisle), who have no problem giving government bond IOUs to the Social Security account, which are fast becoming worthless paper notes themselves, just like our U.S. dollar!”

“You’re looking at Social Security all wrong!” exclaims another reader. “It used to be that couples had children, in large measure, so that the children would take care of their parents in their old age. But now, most children don’t take their parents in, but rather expect them to live on their own and take care of themselves. All Social Security has really done is institutionalize the ‘supporting your parents’ concept and create a (huge) funding pool for ‘parent care.’

“Of course we all know you’ll never ‘collect what you’ve put into the system’; however, you are currently supporting your parents by paying your FICA taxes. The only significant change over the past century is that now you send to money off to the government single-payer intermediary, rather than using the money directly to take care of your parents individually.”

The 5 responds:
We hardly need remind you that “change” was compulsory. What if we still want to take care of our parents? Can we opt out?

“The biggest problem with the Social Security/Medicare issue,” writes a third reader, “is all the extra ‘entitlements’ that have been developed over the years. I was ‘entitled’ to go to work every day for the last 39 years or so to earn a living and contribute to ‘the system’ so every one else who had a different ‘entitlement’ could receive it.

“I just retired this year at 64 and am enjoying receiving the ‘dough’ I sent in. But I was also told that I cannot make any wages (investment monies don’t count) above about $13,000! Well, that’s not really true, I CAN earn as much as I want above the $13,000, BUT the S.S. ‘administration’ will TAKE BACK $1 OF EVERY $2 I CONTINUE TO EARN!

“Absolutely astounding.

“Plus, Social Security waits until the following calendar year to deduct this sum from my benefits, meaning I can live high on the hog this year, but OH, BOY, next year, I will get walloped! So I will continue to not work; not contribute anymore to help fund the system; and then when I turn 66, I can go back to work and make as much as I can and STILL receive the benefit of the monies I contributed. I say get rid of the corruption in the entitlement programs and we could all breath a little easier.”

The 5 responds:
In the first press conference of his second term, George W. Bush boasted he had built up enormous “political capital” by winning the election and he “intended to spend it” by tackling Social Security. He gave a few stump speeches in the ensuing months… but soon gave up. Apparently, he found it easier to defend an illegal war, torture and domestic spying than tackling entitlement reform.

One of the objectives of David Walker and the Concord Coalition Fiscal Wake Up Tour
is to create an environment where politicians don’t get punished for making “hard choices”: reforming Social Security and Medicare. We wish them luck. And quietly suspect it will take a financial crisis to get any real “reform” done. Nobody wants a crisis. But by definition, it arises when an unsustainable system ceases to function.

We ain’t broke yet.

For now, people would rather hear big promises of salvation from the federal government. And there is no shortage of dingbats willing to make them. Even as the baby boomers are on the cusp of collecting benefits from a system that holds only IOUs from the federal coffers, Hillary Clinton wanted to give $5,000 to every new baby born in the U.S.


For the record, we know she rescinded her proposal. But she did so only after the trial balloon developed a slow leak and she realized buying votes is not quite that straightforward. We don’t expect her to give up trying, though. Spending other people’s money is just too much fun.


Addison Wiggin,
The 5 Min. Forecast

Bond ETFs Debut on Wall Street
Fiscal Wake Up Tour
Beige Book: Housing Woes Add To Uncertainty
Investing in Water



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