Global Markets Tumble, A Record-Huge IPO, Carry Trade Unwinds, Jay-Z’s Euros, and More!

by Addison Wiggin & Ian Mathias

  • Markets fall around the world… the bloody recap, plus the diamond stock in the rough
  • Ever-rising consumer credit sparks what could be the biggest IPO in U.S. history
  • Massive carry trade unwinding… Yen sees 18-month highs versus the greenback
  • UAE goes on jumbo jet buying binge… makes aviation history
  • What do Jay-Z and Canadian hockey players share in common?



The U.S. markets took it on the chin Friday. The Dow fell 1.7%. The S&P lost 1.4%. The Nasdaq shed a notable 2.5%. Likewise, Asian markets took a beating this morning:

Japan’s Nikkei 225 fell 2.5%, to a 16-month low, on bearish U.S. sentiment coupled with a notably strong yen (more on that below).

Australia’s S&P/ASX 100 fell only 1.4%. Selling pressure may have been relieved by what appears to be progress in the never-ending BHP/Rio Tinto deal.

Chinese officials Saturday looked to one-up the U.S.’s lousy financial news by increasing bank reserve requirements for the ninth time in 2007. Such news piggybacked an already gloomy Friday and sent the Hang Seng and Shanghai Composite plunging.

“China has frozen its proposal to allow mainland citizens to buy shares in Hong Kong,” writes Chris Hancock to his Free Market Investor readers.

“The reasons vary, but we still view this decision as a temporary setback. Inflationary pressures in China keep rising. Beijing needs some type of slow deflation on domestic prices, both for securities and goods and services. The PetroChina listing on Shanghai this week helps drain liquidity, but it’s not the end-all solution.

“Allowing domestic savings to make their way to Hong Kong markets seems like a natural step. Whether it happens again today or next year… remains to be seen.”

Pundits back here in the U.S. pointed their fingers on Friday at poor results from Qualcomm and Fannie Mae and loan losses at Wachovia for this latest unease on Wall Street. But Merck, whose stock rose 2%, was one of the few big names in the black. The drug company announced it may have finally closed the book on the Vioxx fiasco… Merck wrote a check for $4.8 billion on Friday and thus settled almost all remaining Vioxx lawsuits.

Gold prices have fallen dramatically since our last dispatch on Friday. From the start of Asian trading Sunday to this morning’s trade in N.Y., gold prices have gone nowhere but down… losing $30 over the weekend. As we write, an ounce will cost you $802.

We suspect high gold prices spurred a bout of profit taking, but are also curious to see if $800 sets up as a new support level for the curious ancient currency.

Consumer credit debt, excluding mortgages, rose to $2.49 trillion in September, the Fed reported earlier this month. Borrowing increased at its slowest pace since April, at an annual rate of 1.8%. Auto loans slowed most dramatically. “Nonrevolving” loans rose at a rate of 0.3%, a big drop from 6.4% in August.

Revolving credit — that’s Fed-speak for credit cards — rose at a rate of 4.4% in September, also down quite a bit from the 9.3% hike in August.

All in all, Americans borrowed some $3.7 billion in September. That number is down sharply from the August pace of $15 billion. We’re expecting declining debt numbers to dampen consumer spending during the holiday season. If you’re an investor in big retailers, which are already taking it in the shorts, you might want to plan accordingly.

And right on schedule… SEC filings on Friday revealed Visa will go public early next year. The credit card company plans to raise a whopping $10 billion for its IPO, which would be the second largest initial offering in U.S. market history. Visa undoubtedly wishes to walk in the footsteps of MasterCard, whose stock has nearly quadrupled since its IPO in May 2006.

For what it’s worth, Visa processed 44 billion transactions worth $3.2 trillion last year… nearly double that of rival MasterCard. When the bankers start selling off shares of their own companies… then it might be a sign the credit bubble is coming to an end.

The Japanese yen rallied against all 16 actively traded currencies in weekend trading. Notably, for our purposes, it crossed the 110 threshold versus the U.S. dollar for the first time since May 2006.

“The trigger for this round of ‘yen carry trade’ reversals,” writes EverBank’s Chris Gaffney, “was Morgan Stanley’s downgrading of HSBC Holdings Plc because of mortgage defaults. This downgrade hit the markets just as Deutsche Bank AG announced that losses from falling values of subprime mortgages will likely reach $400 billion worldwide.

“Credit concerns caused a mass exodus from the carry trades as investors sold higher-yielding investments and paid off the loans that they used to purchase them.”

We’ve been working with the EverBank crew on a special report detailing the “unwinding of the yen carry trade.” As the yen rises, we expect many of the currencies that have benefited from low Japanese interest rates will begin to fall. Notable among them are the kiwi dollar and the Icelandic krone. Our report is close to completion… it will be free… but we still have a little time before the trade is relevant. Just a heads-up.

Elsewhere, the U.S. dollar managed to pull itself out of the dumps… sort of. After the dollar index struck a vertigo-inducing low of 74.9 on Friday, traders booked profits and brought the dollar back to a “still nauseating, but not as bad” 75.7 this morning.

The euro hit record highs versus the greenback on Friday, at $1.47, but has since retreated to $1.46. The British pound fell from 27-year highs of $2.11 to $2.08 this morning. Likewise with the loonie… down to $1.06.

The Canadian dollar is still up a staggering 22% versus the greenback this year alone.

“Higher Canadian Dollar Is Costing NHLers,” headlines the CanWest News Service this morning. Canadian hockey players, who are paid in dollars by the U.S.-based National Hockey League, have effectively taken a 20% pay cut this year.

“Well, five years ago, I was making $900,000 (U.S.),” says Mike Fisher, star center for the Ottawa Senators. “I was making as much then as I am now at $1.5 million (U.S.) this year, simply because of the Canadian dollar. So it’s almost the same.”

For a broader perspective, the Senators currently have a $48 million salary cap. Today, that can buy them about 44 million loonies worth of players. In 2002, the same amount would net over $77 million Canadian worth of NHL talent. Could a rift develop between Canadian and domestic hockey teams over plummeting dollar value? We’ve heard crazier ideas…

First supermodel Gisele Bundchen… and now Rap legend Jay-Z. His latest video shows him sporting thick stacks of euros… rather than dollars.

A man ahead of his time: Jay-Z’s briefcase full of 500 mark euros, from his “Blue Magic” video

We’re guessing the hip-hop videos full of bikini girls rolling in American dollars are on their way out of style. Even rappers are getting the picture… it’s not cool to be holding dollars anymore. And if you think these guys can’t move markets, ask brands like Crystal, Bentley and Nike. Jay-Z is also a brand director for Budweiser.

In a “fiat world” — where confidence and fashion dictate the value of a currency — having supermodels and pop icons dis the dollar is probably not a good thing.

Airlines in the Persian Gulf ordered 140 planes at a cost of nearly $40 billion Sunday in what will likely go down as the biggest single-day airplane buying binge in history. Gulf nations made a clear statement on the first day of the Dubai Airshow… big oil can buy some big planes.

Emirates Airline, the UAE’s star carrier, announced it had bought 93 commercial aircraft, raking up a bill of about $23.4 billion, coupled with an option it purchased (for $12 billion) to buy 50 more Airbus planes.

“Emirates is making aviation history,” Chairman and chief executive Sheikh Ahmed bin Saeed Al-Maktoum said in the statement. “This is the largest-ever aircraft commitment in civil aviation made by any airline in a single order.” Emirates Air now claims to have 246 aircraft, worth over $60 billion.

With oil hovering around $100 a barrel…and the sheiks strutting their stuff… it might be a good bet for investors to look at technologies helping the U.S. wean itself from foreign oil dependence. Our Byron King is doing just that… read his latest find here.

Writes a reader over the weekend: “The reader who mentions that $9 trillion in national debt compares favorably to corporate debt because the national debt is ‘only’ 65% of national income is buying into a red herring argument.

“Our government’s ‘income’ (total 2007 receipts) is only $2.4 trillion, not $13 trillion, which is the total economic output. Therefore, our CURRENT ACCOUNT DEFICIT of $9 trillion is 375% of ‘income.’ If you use GAAP accounting and our true $55 trillion deficit, our debt is 2,292% of annual ‘income,’ an amount that is nearly, if not completely, insurmountable.

“This is like saying it doesn’t matter that a person earns only $24,000 per year yet is $550,000 in debt because their neighborhood’s total economic output is $10 million per year! What does your neighborhood’s output have to do with your debt? Likewise, what does national GDP have to do with our collective debt when our collective annual income is less than 27% of our current debt and only 4.4% of our total government obligations?

“Oh, yeah… that doesn’t consider any personal or corporate debts! Ugh. Math’s a bummer, and all debts are repaid one way or the other — with interest. Witness the falling dollar.”

The 5 Responds:
Math is a bummer. We took the easy road by pointing out to the reader on Friday
that the growing national debt is “immoral” because it sticks future generations with the bill. Today we hang a little hard math on that answer:

“David Walker’s truth is spelled out in the numbers,” writes the blogger Peter Sims, likening the U.S.’ looming fiscal crisis to “The Next Inconvenient Truth.” “Most glaring, while the national debt is currently roughly $9.0 trillion, that figure does not include future obligations for Social Security, Medicare and Medicaid.”

David Walker is the nation’s chief accountant and directs the Government Accountability Office. It’s his report card on the nation’s finances Congress is supposed to heed each year.

“According to Walker,” Sims paraphrases, “over the next 75 years, the gap between what has been promised for these entitlement programs and how much in dedicated revenue is likely to be received is a mind-boggling $38.8 trillion. That figure, which Walker calls ‘implicit exposures,’ represents the amount of money we would need today, invested at Treasury rates, to pay for future entitlements. For perspective, that gap represents a burden of over $128,000 for every man, woman and child in the United States, and total national household net worth is $53.3 trillion, so the magnitude is very significant.”

Walker and Bob Bixby of the Concord Coalition feature prominently in the film we just submitted to the Sundance Film Festival last week. Through its Fiscal Wake Up Tours, the Concord Coalition’s been trying to get voters to ask tough questions… and create an environment in which politicians can address Social Security, Medicare, Medicaid and the federal debt without getting crucified by the press or their own constituents.

It’s hard not to be cynical about the chances for success.

Maybe, just maybe, with the help of popular culture, the tides are beginning to change. The Telegraph in London picked up on the Gisele Bundchen theme we published here in The 5 last week and cited Empire of Debt, our book with Bill Bonner, in the article. You can read the article here.


Addison Wiggin,
The 5 Min Forecast

The Next Inconvenient Truth
China puts Hong Kong share plan on ice
Yen Rises to 1 1/2-Year High Against Dollar on Risk Reduction


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