Markets Fall, Fed Injects $41 Bln, An Asian Small Cap Play, Blazin’ Up at Bear Stearns, and More!

by Addison Wiggin & Ian Mathias

  • The $41 billion news that should have been on the front page
  • Explanations behind yesterday’s 2.6% market losses
  • Jobs report shocks analysts… We pick apart the latest BS from the BLS
  • The Death of Detroit: Surprising stats on the fall of U.S. auto employment
  • Finally… a way to play small-cap opportunities in Asia
  • Down a few billion? Cope the Bear Stearns way… play some bridge, smoke a joint

Still pining for the 50-point rate cut, the Dow and S&P 500 each shed a remarkable 2.6% yesterday. Exxon Mobil kicked off the day’s mourning with lower-than-expected earnings. Of the Dow’s 30 components, only Microsoft finished the day in the black.

For its part, the Nasdaq dropped 2.2%. But despite all the moaning on CNBC, the big news from yesterday got nary a mention on television.

“Yesterday’s biggest news got the least attention,” writes Dan Denning, eyeballing the U.S. economy from his faraway perch in Melbourne,Australia. “Little noticed and lightly reported in the aftermath of yesterday’s post-rate cut rout is this item: The Federal Reserve injected $41 billion into the American financial system in three separate open market operations yesterday.”

Not since Sept. 19, 2001, has the Fed injected so much cash in one day. The Fed goosed the markets then in response to Sept. 11. So what could possibly warrant such a massive injection now?

Here’s one possibility: The market for commercial paper has fallen 26% since the beginning of the credit debacle in August.
Sizeable losses in such a short time have mortgage companies, lenders and banks strapped to find sources of funding.

Citigroup, for example, was rumored yesterday to need a whopping $30 billion to keep some of its funds afloat. If other banks and lenders are anything like Citi, we’re sure the bat phones were all alight at the Fed. “Faced with falling asset values and a tight credit market,” comments Denning, “Citigroup, perhaps, turned to the only source of funding left in the market yesterday: the Fed, the lender of last resort.”

Rumors are circulating that Citigroup may be forced to cut dividends to help preserve capital. The stock got whacked for 7%, making it one of yesterday’s biggest losers.

The fever leapt across the Pacific in Asian trading overnight. Hong Kong’s Hang Seng lost 3.2%. Markets in Japan, China and Australia all lost roughly 2%, as well. Sellers then took the long walk straight to Europe, where French, German and English benchmarks fell nearly 1%.

Gold prices, however, held up respectably well amid the global stock sell-off. Gold dipped low as $780 on what we assume to be profit taking, risk aversion, and good old “throwing the baby out with the bathwater.” But by midafternoon, gold regained its footing in domestic trading and marched higher all night. Gold currently trades for $792 per ounce for immediate delivery.

The dollar weakened against 13 of the 16 actively traded currencies last night. After taking profits and pulling the euro well off its all-time high on Wednesday, euro traders have since placed more bets against the dollar. The euro trades at $1.44 this morning.

The pound pushed even further into the $2.08 range overnight, making a pint at the pub a remarkable 1.5% more expensive this Friday evening than it was on Monday. The yen regained its stance at 114.

The Bureau of Labor Statistics claimed that 166,000 jobs were added to the American economy in October. This morning’s number doubles analysts’ expectations of 85,000 added jobs. According to the BLS, unemployment stayed the same, at a rate of 4.7%.

Given the shenanigans between the August and September reports, we’re not sure what to make of this. Vancouver veteran Dennis Gartman was on CNBC’s Squawk Box this morning offering similar suspicions.

“These numbers are no more believable than were the fudged GDP data,” adds stats watchdog John Williams of, “but they do happily confirm to the markets that the Fed does not need to ease again. In the current environment, key data continue to appear to be managed, as a tool for financial market support operations.” More to come, for sure…

Currency traders must have been skeptical of the BLS numbers, too. Ten minutes after the BLS release this morning, the dollar got whacked down to another all-time low. The dollar index is almost at 76 flat this morning.

Chrysler announced it would cut 11,000 workers from their payroll yesterday, citing sagging sales and energy costs. Coupled with February’s cut of 13,000 jobs, Chrysler has now slashed 30% of its 2006 work force this year.

GM delivered similar news recently, saying it would cut 3,000 jobs from its work force. This is particularly surprising in light of GM’s 30,000 layoffs in 2005… you’d think it would be running out of workers soon.

Ford announced this morning its sales dropped for the 12th month in a row, so you might expect similar job cuts to follow from them…

Analysts at Bespoke Investment Group fused together the current/historical S&P/Case-Shiller home price index scores with the CME Housing futures prices and came up with these forecasts:

These charts reflect a combination of historical data on home prices and what Wall Street Traders are expecting for home prices for the next five years. Good luck if you’ve been under the impression that real estate always goes up.

How your home could be worth 43% less by 2011

Where is the housing crisis hitting hardest? Mississippi. At least according to one source called the “housing misery index.”

“Readers who are old enough,” writes Dave Gonigam, blogging on the subject in the Desidooru Saloon, “might remember talk in the 1970s of the ‘Misery Index,’ a combination of the inflation and unemployment figures. Now Orange County Register real estate columnist Jon Lansner has come up with what he calls the “Housing Misery Index” — a combination of the unemployment rate and the mortgage delinquency rate.

“By this measure, Mississippi, with an unemployment rate of 6% and a delinquency rate over 9% (!) is in the worst shape, followed by four Great Lakes states — Michigan (no big surprise), Ohio (ditto), Indiana and Wisconsin. California ranks 26th by this measure, Nevada is 30th. The states in the best shape are Idaho, Montana and — taking the top spot — Hawaii.” Post your comments here

If the housing market, the jobs picture or even the fateful demise of the U.S. dollar has you down, you may want to deal with crisis as Bear Stearns CEO James Cayne allegedly does: by smoking pot.

“Bear CEO’s Handling of Crisis Raises Issues,” reads the front page of this morning’s Wall Street Journal. In the article, the WSJ accuses Cayne of doing little more than playing golf and bridge and smoking pot during the B.S. crisis during July.

“In the critical month of July, he spent 10 of the 21 workdays out of the office, either at the bridge event or golfing, according to golf, bridge and hotel records,” says the paper. The article goes on and on with the accusations… that he’s a frequent marijuana smoker, that he leaves the office for days, weeks without taking a cell phone or laptop.

Cayne denies it all. At least what he can remember of it.

Here’s some good news if you’re interested in keeping some of your money… by investing overseas. The London Stock Exchange Group Plc. (LSE) and the Tokyo Stock Exchange Group Inc. (TSE) inked a deal to form a new market for emerging Asian companies this week.

“One of the most frustrating realizations of the past few years,” comments our Penny Sleuth Jim Nelson, “has been how difficult it is for small-cap investors to invest in the growing markets of Asia. Many Chinese companies currently don’t meet the requirements of the larger exchanges. They rarely release financial information in English and, when they do, it’s not consistent enough.”

“What’s more, most Asian startups also trade over the counter, which is an unregulated practice that scares many would-be investors away. A new exchange gives these companies a new place to raise capital and investors a new way to confidently invest their money.

“The new market should come online at the end of 2008. So for now, all we can do is speculate. But however this plays out, it’s big news for us small-cap guys.” We’ll keep an eye on this for you, too.

Learn more about our penny stock strategy here.

“I have been in Dubai all week on business and met several Europeans who relocated expressly for tax reasons,” writes a reader commenting on our friendly 5 tax debate. “Today, 82% of the population are expatriates, and they’re streaming in at the rate of 25,000 per month. Why? The average finance salary is $500,000 tax-free, and the quality of life is equivalent to anything in the West. Adjusted for federal, state, property, AMT and sales taxes, that’s at least $1 million pretax in America; I can’t speak for the Europeans.

“Ask anyone from New York or New Jersey and they can give you countless examples of friends who fled their local property tax hell in favor of Connecticut. State to state is certainly different than country to country, but tax competition is real and already impacts Americans’ living choices.

“If you think they won’t move to Dubai next because they haven’t yet, you’re basing the future on lagging indicators. The leading indicators — the Rangel tax proposal, looming entitlements coming due and the twin deficits — all point to a worsening situation for American taxpayers, and an increasing incentive to renounce citizenship.”

Or if you’re not up for relocating to Dubai, you could take an alternate route, as this next reader suggests: “Fourteen years ago, at age 47,” he writes, “I decided that the burdens of federal, state and local income taxes made it not worthwhile to work. Having accumulated an all-too-modest combination of nest egg and investment prowess, I decided to move to a no income tax state and learn to live on less. Best decision I ever made. It’s no fun working hard to support those who don’t. Hey… if you can’t beat ’em, join ’em.”

The 5 responds:
Sounds like you might need a good stash yourself.

Enjoy your weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. Don’t forget… midnight on Monday will be your last chance to subscribe to The Emerging Capital Report at our heavily discounted rate. For your first recommendation, editor Jonathan Kolber has found one of the biggest opportunities for individual investors to profit from the Internet since the “Roaring ’90s.” You can read more about this $4 stock and The Emerging Capital Report here.

Housing Prices Projected to Fall Through End of Decade
Bear CEO’s Handling Of Crisis Raises Issues

Report Sends Citi’s Stock to Four-Year Low
Job Cuts at Chrysler Go Even Deeper Than Expected


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