Fortunes await the wise during stock market’s “biggest challenge” since 2000-2001
Citi’s troubles just beginning… Why the words “level 3” might soon be infamous
Gold busts through $820… but one major investment bank calls for $750 by 2008
Oil traders’ eyes on Mexico… Diesel’s all-time high… Jet fuel propels rising airfares
Ron Paul sets a record of his own… even professional wrestlers support the good doctor
The more things change, the more they stay the same.
On Feb. 15,1999, then Treasury Secretary Robert Rubin participated it what we may call the most wildly arrogant cover Time has ever published:
Rubin, Greenspan and Summers: The Committee’s work is never done
Apart from the obvious hubris of this cover, we include this picture because we are students of irony.
As you know, Rubin has been called on again… this time to save Citigroup from its exposure to subprime lending. Rubin will temporarily replace the rapidly departing Chuck Prince as CEO.
And what a mess he will face. According to a MarketWatch article, Citigroup now holds over $134 billion in what it calls “level 3 assets.”
“Level 3” is Citi’s most frightening valuation of assets. From its own 10-Q filing with the SEC: “Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.” (Citi added the emphasis, not us.)
In other words, Citi owns “$138 billion in assets” void of any reliable price, because no one is crazy enough to buy them. The last time we heard talk like this was when Bear Stearns told its fund’s investors that its assets were literally worthless.
The subprime debacle is just another in a long line of ‘liquidity’ crises that define Rubin’s post-’80s career. He talks candidly about them — Mexico, 1994; South Korea and the Asian Contagion, 1997; Russia and Brazil, 1997-1998; LTCM, 1998 — in his book In an Uncertain World, in the documentary Commanding Heights and in the interview we did with him for our own upcoming book and documentary.
The irony: When the Time cover was published, the Committee to Save the World and the editors of Time thought they were out of the woods. The U.S. stock market collapsed a year later. And the rest is recent history. Welcome back, Bob. As the Chinese say, “May you live in interesting times.”
Citigroup’s barrage of bad news pulled the U.S. markets down about 1% by early afternoon yesterday. Traders recovered a bit by the closing bell… but the Dow lost 0.4%, while the Nasdaq and S&P 500 fell 0.5% each.
“In the unwinding of the mortgage bubble, the stock market faces its biggest challenge since the unwinding of the tech bubble in 2000,” writes Chris Mayer this week to his Capital & Crisis subscribers, echoing our own sentiments. Greenspan went on record in early September saying he thought this episode would go down in history as one of the greats along with the 1837 and 1907 banking crises.
But it’s not all bad. “Painful as it may be in the short term,” Mayer cautions, “markets like these carry the seeds of fortunes. Think if you could roll back the clock to 2000 and 2001 and you knew what you know now. You’d make a bundle. You’d be beside yourself with giddiness about how much money you’d make.
“The point is that even in that tough market, there were lots of things to buy. There are surely such winners-in-waiting in today’s stock market, too. We just have to find them.” Chris has packed the C&C portfolio with a litany of such goodies. You can find them here.
Yesterday’s drama in the stock market fueled another sell-off for the dollar. The greenback fell against all 16 actively traded currencies yesterday. Amid the carnage, the euro set another record high by digging a tad deeper into the $1.45 range. Likewise with the pound and yen, both furthering their distance from the dollar in their respective $2.08 and 114 handles. The loonie ticked up to another new high of $1.08.
And surprise, surprise… the dollar index struck a new all-time low this morning… 76.0.
Gold soared to fresh 27-year highs overnight. In Hong Kong and London, gold rocketed up a staggering $15 and currently trades around $822 for immediate delivery.
Analysts at UBS upgraded their one-month forecast to $850. “With the two external drivers of gold, a weak dollar and strong oil, together conspiring to lift the metal higher,” said UBS analyst Robin Bhar, “we are now in range of a move to the all-time nominal high.”
But what then? “Assuming that $850 trades,” says Bahr, “a scramble for upside could see gold push higher still. But one thing is sure, once the dust settles, gold will likely correct sharply lower.” UBS’ three-month forecast for gold remains the same — $750.
In the economy, U.S. service industries grew at a faster pace in October than in the previous month says the Institute of Supply Management. The ISM’s index of nonmanufacturing businesses rose to 55.8 from 54.8 in September, defying analyst expectations of a drop to 54. Like the ISM’s other indexes, any score over 50 indicates growth within the charted industry.
Nonmanufacturing businesses now make up nearly 90% of the U.S. economy.
Beazer Homes and Hovnanian Enterprises, two of the biggest homebuilders in the nation, both revealed troubling preliminary earnings figures today.
Beazer disclosed that year-over-year home closings fell 39% in its fiscal fourth quarter. New home orders fared even worse, falling 53% over the same time period. The company announced today that it would be forced to cut 25% of its work force, about 650 jobs, and also suspend dividends for shareholders.
Hovnanian barely fared better this morning when it announced similar setbacks. The homebuilder said home sales were down 19% year over year during its fiscal fourth quarter. Net contracts fell as well, down 10%. During the same time, cancellations amounted to 40% of gross contracts… yikes.
Light sweet crude, which retreated after striking the record high of $96, is back up to $96. On the heels of an “output suspension” by Petroleos Mexicanos, Mexico’s largest oil company, most traders expect a disappointing Energy Department inventory announcement tomorrow. The general assumption is that without Mexico’s help, the U.S. will struggle to maintain inventories.
Last week, the inventory report shot crude futures up $4 per barrel. Look for tomorrow’s report to do the same.
And we’ve got a new fuel topping the “all-time” list. Diesel fuel prices hit an all-time high this morning. With a national average price of $3.30 per gallon, diesel has never been so expensive — even adjusted for inflation.
Prices for both unleaded and diesel each rose about 14 cents last week alone. Unleaded prices, at an average of $3.01, are about 20 cents short of their own all-time high. In October, prices rose an average 25 cents per gallon across the nation.
Rising fuel prices have finally caught up with the airline industry. American Airlines has announced a $20 fare increase on all U.S. round-trip flights. The airline cited rising oil prices as the sole driver behind the hike.
AA’s hike comes on the heels of almost every major airline hiking prices in October. Continental, Delta, Northwest, US Air, United, AirTran and Alaska Air have all hiked prices by a similar margin.
And who can blame them… American Airlines recently told the LA Times that a 1 cent/gallon increase in the price of jet fuel adds $30 million to its annual expenses. Officials at American also guessed that the rise in crude oil prices since “the summer” will cost the company more than $1 billion.
Last week, the Air Transport Association estimated higher fuel prices drove second-quarter costs up 5.6%… double the expense that airlines suffered the same time last year.
We’re putting the finishing touches on a new investment service we’re calling Energy & Scarcity Investor. In it, you’ll find investments that are most likely to soar in this age of rapidly increasing energy demand… and dwindling resource supply. Your first shot at the service comes this week: Friday. Look for it.
Presidential candidate Ron Paul raised an impressive $4.2 million yesterday, the biggest single-day funding for a Republican candidate ever.
Funding for Paul was almost entirely derived from this site, which we mentioned to you yesterday. Paul supporters wished to commemorate Guy Fawkes Day by boosting the Ron Paul revolution with a massive funding drive.
Only Hillary Clinton and Barack Obama have ever amassed more campaign funding in a 24-hour period.
And we couldn’t resist adding this nugget… one of Paul’s biggest supporters is professional wrestler Sean Morley. By day, Morley plays the character of a porn star turned WWE wrestler named Val Venis.
Val executing his signature finishing move… “the money shot”
But by night, Morley is, well, a big fiscal nerd not unlike your editors. He pens a blog called The Freetarian, where he giddily endorsees Ron Paul, maintains a national debt clock and records liberty-focused podcasts.
“Back when ‘Japan Inc.’ was on the rise,” a reader reminisces in light of our coverage of the rapidly ascending Chinese economy, “a friend of mine was the manager of a foreign company’s office in Asia. Being a single young fellow, he was a regular frequenter of the local clubs. One evening while enjoying the company of a bevy of young ladies, he excused himself momentarily. On his return, the ladies were all gone. Later, when the manageress passed by he asked her what had become of the girls. She replied, ‘While you were away, some Japanese came in and, well, the girls know you white guys don’t have any money.’ Now there’s a rude awakening.
“Sadly, I fear a new generation of Americans will now feel that sting. Riding high today, shot down tomorrow.”
The 5 Min. Forecast