E-Trade in E-Trouble, Staggering Oil Stats, U.A.E. at “Crossroads” with the Dollar, Cooling China, and More!

by Addison Wiggin & Ian Mathias

  • Could the country’s most popular online broker be going bankrupt?
  • Markets dive deeper into the mortgage “black hole”… a global recap below
  • Who owns the world’s oil? A troubling chart reveals the new era of state-owned goo
  • Dollar rallies hard, the UAE could care less… GCC countries take another step away from the dollar peg
  • Stratfor on the only way China could cool its white-hot market


E-Trade had a “case of the Mondays” yesterday.

Citigroup analyst Prashant Bhatia not only downgraded E-Trade’s stock, but hinted that the popular brokerage firm might go bankrupt.

According to Bhatia, E-Trade’s overgrown mortgage arm is holding about $3 billion in asset-backed securities and $30 billion in home loans. If a significant portion of customers were to withdraw their deposits, E-Trade might be unable to cover its mortgage bets. The company holds an estimated $29 billion in customer accounts, half of which are under $100,000 and protected by the FDIC.

Some 70% of the firm’s assets are hinged on mortgages or mortgage-backed securities. Execs at E-Trade admitted on Friday that write-downs are on the way. The SEC has launched an inquiry


On the news, E-Trade stock lost nearly 60% of its value overnight, tumbling $8.59, to $3.55. But bankruptcy? One unnamed entity is betting “no way.” It bought 30 million E-Trade shares after market yesterday. Shares are back up to $4 in trading this morning.

“The mortgage black hole,” said Blackstone CEO Tony James yesterday as he announced Balckstone’s net loss of $113 million for the third quarter, “is worse than anyone saw. Deeper, darker, scarier. [The banks] are now looking at new reserves, and my sense is they don’t have a clear picture of how this will play out and confidence is low.”

Newly minted Blackstone stock fell 8% on the news.

And on the ratings front, Fitch downgraded an additoinal $37.2 billion in CDOs yesterday. As we warned you on Friday, the rating agency picked 84 tranches from its “negative watch” list and downgraded them all in one fell swoop. Only 66 still remain.

The U.S. stock market fell again yesterday. Economists honored our veterans yesterday by not releasing any data points… thus, market makers were left to their own devices. The result was a slow but steady sell-off.

But given all the black marks offered up from the mortgage business, it could have been worse. The Dow fell 0.4%… the S&P 500 lost 1%… and the Nasdaq dropped nearly 2%.

Across the Pacific, the Shanghai Composite fell about 0.6% — its fifth consecutive day in the red. Mainland China’s benchmark index has fallen over 12% already this month… 8% in the last week of trading alone.

Maybe consumers will ride to the rescue again this holiday season. The University of Michigan’s American Consumer Satisfaction Index was released this morning. Shockingly, third-quarter scores were almost identical to those of the third quarter of 2006.

In fact, with a score of 75.2, consumers are 1% more “satisfied” now then this time last year. Whether consumers are blind to the coming slowdown or the frontline economy isn’t as bad as it seems… who knows? We’ll have to wait and see. Until then, our money’s on the former.

Light, sweet crude fell $2, to $92 per barrel, today.

“There will be absolutely no discussion” of a production increases when OPEC meets this weekend, said Saudi Arabia’s oil minister Ali Naimi this morning.


The Energy Information Administration (EIA) reported yesterday that OPEC will rake in a record $658 billion in oil revenues this year, up 9% from 2006. If oil remains at current prices, the EIA estimates OPEC profits will soar 16% in 2008.

“We are interested in making the world economy grow because prosperity ensues from that growth. We have no interest in seeing [it] regress,” Naimi concluded, implicitly suggesting that $100 oil won’t curb world demand.

On the other hand, the International Energy Agency (IEA), not to be confused with the EIA above, revised its demand forecasts yesterday, suggesting that near-$100 oil prices will significantly depress demand.
The IEA cut fourth-quarter demand forecasts by 570,000 barrels per day, to 87.1 million. It also reduced 2008 estimates by about 300,000 barrels per day, to 87.7 million.

Who’s right… the EIA or the IEA?

Maybe to you and me, it doesn’t matter in the long run. “Nation-states control 75% of the world’s oil,” reports Chris Mayer. Check out this table:


“For all of the railing people do against the big oil companies such as Exxon Mobil and Chevron, this table gives you another picture entirely,” continues Chris.

“Exxon Mobil is a giant oil company in the minds of most people. It is the most valued company in the world, judged by market capitalization. I have a few left-leaning friends who love to pound the oil companies at any opportunity. They love to complain about how much money the oil companies make and how much influence they have.

“Well, based on the above, they ought to be complaining about foreign governments more so than private oil companies.” Of all the oil-controlling states listed above, how many would you consider to be on good terms with the U.S.?

Heh… interesting times lie ahead, no doubt.

And not that they have a huge effect on oil prices, but these don’t exactly help, either:

Oil spills in stereo… tankers spilling their black gold in San Francisco and Russia

Neptune and his brood had it out for oil tankers last week. First, a South Korea-bound container ship ran into the Bay Bridge during a typically foggy day in San Francisco. The ship spilled some 58,000 gallons of bunker fuel.

And on Sunday, the Black Sea swallowed up as many as 10 ships, including a tanker filled with 1.3 million gallons of fuel oil — half of which is already in the water. Another ship had about 7,000 tons of sulfur aboard, which also went into the drink… yummmm.

“New Zealand legislators are trying to completely ban dirty power plants in the small island nation in less than 20 years,” reports Greg Guenthner from the alternative energy front. “The government is hard at work on a 10-year ban of the construction of any new coal or gas power plants.

“The Kiwis are hoping to have 90% of the country’s power generated by renewable sources by 2025. According to Bloomberg, state-owned power plants in New Zealand are already banned from building gas-fired plants. Soon, a decision will be made on whether to extend this ban to private companies.

“It’s an ambitious plan. And a sign of the worldwide attitude changes on the future of fossil fuels and those pesky carbon emissions.”

California has enacted similar legislation. By Dec. 31, 2010, energy companies in that state will be required to produce 20% of its electricity from alternative energy sources. Scientists from MIT say that one of these untapped energy sources is capable of producing 2,000 times the amount of electricity that the entire U.S. consumed in 2005…

Our Byron King has isolated one “pure play”… in which your stake of $100 shares can be had for just for only $38. You can learn about it here.

Gold showed strong signs of resistance at the $800 level overnight. The metal continued yesterday’s slide to as low as $792, but was quickly brought back above $800 and traded for about $805 throughout the Hong Kong and London sessions. But this morning in New York, prices plunged as low as $796. Can gold retain its $800 footing? We’ll let you know tomorrow.

The dollar rallied with a vengeance yesterday. This morning, it’s up big against all 16 of the major trading currencies — except the yen.

The pound fell from $2.09, to $2.05 — its biggest one-day fall versus the greenback in over three years. The loonie took quite a shot as well, falling 3 cents to $1.03. The euro fell a full cent, to $1.45.

Still, central banks around the world are nervous about the latest bout of dollar weakness.

“We have reached a crossroads now with a further deterioration in the U.S. dollar and expected further weakening of the U.S. economy,” said UAE central bank chief Sultan Nasser al-Suweidi this morning. “We see the development in the U.S. dollar, the decline of the U.S. dollar value, as a problem for the single currency, and that might lead us to take the decision to move away from the single currency peg to a multicurrency basket.”

Suweidi went on to say that he has yet to draw up a specific plan to drop the dollar peg, and would not do so without the support of the GCC.

Inflation in the UAE hit a 19-year high of 9.3% last year, and is already growing at over 10% this year.

In China, “A consensus is beginning to emerge for more pronounced central government action to accelerate the appreciation of the yuan,” reports our friends at Stratfor.com, in light of Monday’s reserve requirement ratio (RRR) hike for Chinese banks.

Recall that this recent hike in reserve requirements is the ninth of its kind this year… The Chinese are desperate to prevent a crash in their uber-hot stock market.

“Aside from RRR hikes,” says Stratfor, “Beijing is using limited interest rate hikes, new central bank note issuances and direct administrative actions, such as eliminating export tax rebates, to contain the situation — though the impact to date has been limited. Other countries typically can resolve this conundrum by raising interest rates. In China’s case, however, Beijing’s iron grip on the yuan limits its ability to maneuver.”

“The $9 trillion national debt is not ‘the government’s’ debt,” writes a reader incapable of giving into reason. “It is the COUNTRY’S debt. In the extreme case of the government having zero tax revenue, the country would still produce goods and services and would be able to borrow money based upon the GDP generated. Therefore, the ratio of national debt to GDP is the correct one to use.

“As for the &38 trillion (or whatever figure — who knows?) Social Security, Medicare and Medicaid debt, this is not ‘debt’ in the same way that the national debt is ‘debt.’ These are promises that have been made to current and future generations and as such can be cancelled at the whim of politicians. If it is not possible to pay these ‘debts,’ then they will not be paid — it is as simple as that. I am not saying that this is not a problem — it is a very serious one — but it is extremely misleading to classify this as debt equivalent to the national debt — it is clearly not the same thing.

“The national debt as a percentage of GDP has certainly been a lot higher in the past (for example, after World War II), and the economy and stock markets have subsequently performed very well. In fact, some of the worst times for the economy and stock markets have been periods following a reduction of the debt (as a percentage of GDP) — a recent example would be 2000-2002, following the budget surplus of the late ’90s.

“It is quite possible that reducing the debt is actually bad for the economy, because America is actually under-indebted and needs MORE debt, not less.”

The 5 Responds:
Are you running for the Republican Party nomination in ’08?

Good grief,

Addison Wiggin
The 5 Min. Forecast

Dollar slide takes UAE to crossroads on FX peg
E*Trade Going Out Of Business?


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