$9 Trillion in Debt, Market’s Fall, WaMu’s Nightmarish Day, A Short-China Play, and More!

by Addison Wiggin & Ian Mathias

  • How yesterday marked another milestone in America’s infamous fiscal history
  • Domestic markets fall… what fueled yesterday’s selling fire
  • Asian markets follow suit… introducing a new way to profit from a possible Asian collapse
  • Attorney general sets WaMu in his sights…
  • “Energy prices are entirely too high,” says the White House… you don’t say?
  • 4.2 million “date-rape toys” made in China recalled in the U.S.


The U.S. national debt officially passed $9,000,000,000,000 yesterday. That’s trillion with a “T”… heh heh.


There were no newspaper headlines to commemorate the affair. No breaking news from the national debt clock in Times Square. Nine trillion dollars… just another stat for the official registry. Who really cares about these things, anyway?

“Deficits don’t matter,” the vice president assures us. “It’s a national debt… we owe it to ourselves… we don’t ever have to pay it back,” our textbooks tell us in school. (The sarcasm is ours, not theirs.)

This little milestone prompted us to look at the latest figures accounting for foreign holdings of U.S. debt. According to U.S. Treasury figures published on Oct. 16, by August of this year, foreign investors and central banks owned a whopping $2.23 trillion of U.S. Treasuries.
Again, that’s trillion with a “T”…

Japan and China head up the list, with over $585 billion and $400 billion, respectively. The U.K., “Oil Exporting Countries” and Brazil round out the top five.

Curiously, Japan and China have been net sellers of U.S. debt for most of this year. Japan started unloading back in January, China in May. But at the same time, both the U.K. and Brazil have been loading up… together, they added over $246 billion in the 12 months from August 2006-August 2007.

After a tough day for the dollar yesterday, traders took some profits and allowed the dollar to get up off the matt and brush itself off.

The euro retreated back to $1.46, as did the Canadian dollar… back to $1.08. The pound, for its part, held its ground at $2.10.

As expected, carry trade currencies fared well overnight as risk appetite shrunk amid plunging markets. The yen rallied to the 112 mark… a three-month high. The Swiss franc registered substantial gains as well, rallying as high as $1.13, a 12-year high versus the greenback.

For its part, the U.S. stock market resembled Japanese fishermen killing dolphins yesterday — it produced a sea of red. The Dow shed 2.6%.
Not a single Dow company registered a gain… in fact, all 30 amassed losses of at least 1%. If you’re wondering why, read yesterday’s 5
. The Nasdaq lost 2.7%, and the S&P 500 lost just short of 3%.

Wednesday’s biggest sob story came from the nation’s biggest savings and loan, Washington Mutual. WaMu announced that they expect a $1.1-1.3 billion loss in this quarter and the same in the first quarter of 2008. They’ve also got the hounds on their tail.

“Our expanding investigation into the mortgage industry has uncovered that Washington Mutual improperly pressured appraisers to provide inflated values that best served the lender’s interest,” the pompous New York Attorney General Andrew Cuomo said yesterday. “Knowing this, Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals.”

Cuomo went on, using fun words like “collusion” to describe WaMu’s practices of pressuring real estate companies to inflate home appraisals. He concluded his press statement by issuing subpoenas like they were bonuses at a holiday party. Fitch downgraded WaMu to “Negative” with breathtaking speed… the stock fell 17% by the closing bell.

Morgan Stanley, the nation’s second biggest securities firm, also had little reason to be proud. They announced a $3.7 billion loss in the past two months. And AIG, one of the nation’s largest insurers, joined the fray… but they’re lucky — they lost only $864 million.

“Funny how in today’s atmosphere,” comments Ian, “we haven’t been paying much attention to losses that don’t hit the billion-dollar mark. AIG’s loss would have been big news earlier this year. Today it’s just a footnote.”

And truth be told, it’s a shot in the dark, compared with a few other audacious Wall Street figures… like Goldman Sachs’ bonus payout this year.

Goldman earmarked almost $17 billion for compensation and benefits for the first nine months of 2007. If all Goldman employees were to pool their pay and bonuses until Independence Day, they could collectively purchase Bear Stearns.

Goldman Sachs remains the most prominent of the big banks that claim they remain untainted by subprime. We’re not holding our breath.

The stock massacre traveled across the Pacific overnight. Here’s the bloody wrap-up:

Australia’s S&P/ASX 100 fell 2.6%
Hong Kong’s Hang Seng closed down 3.2%
Japan’s Nikkei 225 dropped 2%
The Shanghai Composite took the cake, crashing a solid 5%.

And with the nasty decline in Asia comes our “opportunity of the day”… This morning, ProShares launched two new short ETFs: UltraShort FTSE/Xinhua China 25 and UltraShort MSCI Japan. Both ETFs are the first of their kind, designed to profit if Chinese or Japanese markets fall.

If you’re one of the many calling for the sudden cooling of the red-hot Chinese market, here’s a chance to put your money where your mouth is. But buyer beware… the “ultra” tag is far from simple marketing. Both ETFs are double leveraged. In other words, a 5% decline in the Xinhua 25 (the Chinese version of the Dow) would reap 10% profits for UltraShort investors… and vice versa.

“Today marks the central bank meetings of both the Bank of England (BOE) and the European Central Bank (ECB),” reminds EverBank’s Chuck Butler. “As I’ve said before, we could see a rate cut from the BOE, although I’m of the belief it will wait, while the ECB is a ‘no-go’ on rates, for sure.

“ECB President Jean-Claude Trichet would love to hike rates because he knows all too well that $98 oil is going to haunt his inflation scene… But… economic growth is slowing in the eurozone, so he’ll have to let the strong euro do his dirty work. It’s a good thing the euro doesn’t sing… I’m a fool to do your dirty work, oh yeah… I don’t want to do your dirty work no more…”

We’ll update you on the euro-scene in tomorrow’s 5 minutes.

“Unseasonably Higher, Gas Prices Add to Strain on U.S. Consumers,” reads a headline in today’s New York Times. Joe Consumer is currently suffering a triple whammy of high energy costs — average prices for heating oil, gasoline and diesel are now all over $3 per gallon.

According to the Energy Information Administration, consumers have never had to face the $3 mark for these fuels at the same time.

“Energy prices are entirely too high,” commented White House spokesperson Dana Perino yesterday, “and really affecting small businesses and families all across America, not to mention our economy.”

Perino: Mistress of the Obvious

Uh, thanks Dana… glad to see someone in the White House has her eye on the ball. She went on to repeat the administration’s hope that lawmakers can move a bill that cuts U.S. dependence on foreign oil and boost domestic sources of energy.

“Congress hasn’t acted on that,” Perino said “we’d like them to do that as soon as possible… They’re not moving aggressively on this.”

How exactly would that bill read, we wonder? They want Congress to make it illegal to use foreign oil? Huh?

Oil prices backed off their $98 highs, to $96.50 yesterday. The Energy Department inventory report showed a smaller decline than expected, and thus saved the $100 barrel for another day. Crude oil supplies fell 821,000 barrels last week, far better than the 1.5 million barrel drop expected by analysts.

Gold prices stayed relatively steady in spite of yesterday’s market volatility. The precious metal trades this morning at $840.

Yesterday, you may recall, we left you with the story of a popular Australian toy contaminated with a “date rape” drug by Chinese manufacturers. Well… the toys are in America this morning, too:

U.S. officials have recalled some 4.2 million “Aqua Dots” sets from American shelves. Once ingested, they, too, contain a chemical that will convert into GHB, a popular date-rape intoxicant.

“It’s comforting to know that we are able to outsource the poisoning of our pets and children and achieve it in a much more cost-effective way,” writes a reader.

“I am not surprised. A relative (shirttail) of mine is working as a consultant in China, and on a recent trip home, he explained that the Chinese are very dubious of our intentions when we try to explain how NOT to do things. Their response almost to a fault is ‘Why do you not want us to get ahead?’ They seem to feel that when we explain that doing things in a certain way is dangerous or unhealthy, we are making it up just to keep them back.

“Why do I keep getting the feeling that their whole thing is going to collapse in on itself like a house of cards?”

The 5 Responds:
Maybe it will.


Addison Wiggin
The 5 Min. Forecast

P.S. The trends are definitely in our favor.
With oil teasing the $100 mark, we couldn’t have picked a better time to be launching the Energy & Scarcity Investor.

Our Harvard-trained geologist Byron King has prepared a short list of high-end energy picks — too small and illiquid for our Outstanding Investments — that will help you stay on the right side of rising energy costs and developments in the alternative energy field. We begin accepting charter memberships to the elite ESI tomorrow. Stay tuned.


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