by Addison Wiggin & Ian Mathias
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The 5 translates the latest “Fed speak”… stagflation still around the bend?
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Average Thanksgiving feast will cost 11% more this year
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Dollar visits new lows, pushes oil to $99
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How school teachers and firemen could be stung by an SIV sell-off.
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1 in 10 hedge funds to fail, says industry insider
The Fed released the minutes from its last meeting yesterday. Apparently, the decision to cut rates was a “close call.” Only one member voted not to send the dollar to the depths of oblivion. The rest agreed to do so reluctantly.
During the meeting, the FOMC members “viewed financial markets as still fragile,” says the release, “and were concerned an adverse shock… could further dent investor confidence and significantly increase the downside risks to the economy.”
Translation: Subprime is a bigger threat to investment bank balance sheets than expected. One more piece of bad news and investors won’t be helping us buy our yachts anymore. That could, in turn, be bad for everyone else.
“With real GDP likely to expand below its potential over coming quarters,” the release continues, “recent price trends favorable and inflation expectations appearing reasonably well anchored, the easing of policy at this meeting seemed unlikely to affect adversely the outlook for inflation.”
Translation: The economy is addicted to cheap credit. Since subprime put the squeeze on credit markets, we have cut interest rates. So far, cuts don’t seem to be causing prices to rise too much for ordinary folks. But it’s likely to slow the economy down, a little.
The Fed lowered its 2008 growth forecast from 2.5-2.75% to 1.8-2.5%.
According to futures contracts, “investors” are betting a 92% chance the Fed will cut rates again on Dec. 11.
Yet the view from the cheap seats still looks like increasing inflation and slowing growth… stagflation, if you will.
“I’m going to go to war with the Fed!” decrees Chuck Butler, with our most outspoken critique. “Our central banker has lied to us! At the Fed’s last meeting, it told us the risks were balanced between growth and inflation…
“Hmmm… If that’s so… Then why did it lower its forecasts for growth next year and suggest that expansion won’t reach its trend rate until 2009? I’ll tell you why… Because it knew it all along, and was hoping to get this news swept under the rug.”
“Reasonably well anchored” inflation has driven the cost of the average Thanksgiving dinner up 11% this year, reported the American Farm Bureau yesterday. Prices rose over $4 per family, sending the national average dinner price up to $42.26 for a meal for 10.
This one won’t get a pardon…
U.S. stocks registered modest gains yesterday. The Dow and S&P 500 rose about 0.4% while the Nasdaq squeaked out a 0.1% gain.
The dollar, on the other hand, sank to new record lows. The dollar index found a new low at 74.9 this morning. The euro traded as high as $1.48 overnight, up over a cent and a half since Monday. The pound regained some ground of its own, climbing back to $2.06.
But the “carry trade” currencies grabbed the big headlines, once again. The yen rallied versus all 16 major trading currencies to 108 — a two-year high. The Swiss franc leapt to highs of its own. At 1.105 per dollar, the franc joins the club of current all-time highs versus the greenback.
And with another record low for the dollar came more record high oil prices. Oil traded as high as $99.29 yesterday, its all-time intraday high. Aside from the latest surge in dollar weakness, two significant refinery outages seemed to be all the news traders needed to propel oil prices to new highs.
As we write, oil has backed off its high to about $98 per barrel.
Gold prices went through the roof yesterday and overnight. Gold pulled itself out of its $775 gutter and rallied $30, to $805. Prices have now stabilized around $800.
The number of potential defaults on home loans “will be significantly bigger” in 2008 than this year, suggested Treasury Secretary Hank Paulson yesterday. Thanks for staying on top of things, Mr. Secretary.
Investment management monolith BlackRock will probably be the steward of the $75-100 billion SIV-saving superfund created by Bank of America, Citi and J.P. Morgan Chase. In the interest of “fairness,” BlackRock analysts will evaluate the prices of distressed SIVs entering the fund and ultimately decide when to sell them back to the market and at what price.
While BlackRock’s involvement is supposed to make this whole SIV superfund more impartial and objective, we’re yet to be impressed. For starters, 49% of BlackRock is owned by Merrill Lynch. And BlackRock CEO Larry Fink was practically the inventor of the mortgage-backed security… that’s what a normal person would call a “conflict of interest.”
The fund may be up and running by January.
“SIV debts could be a disaster for public investment pools,” Mish Shedlock of The Survival Report tells us. According to a recent Bloomberg special report, thousands of school, fire, water and other local districts in the U.S. are invested in state/county-run investment pools.
Many of such pools are infested with SIV debt once thought to be investment grade, but now suspected to be filled with subprime-backed securities. Public fund managers have historically modeled their funds after private money market funds… now the same toxic debt that plagues the likes of Citigroup and Merrill Lynch is jeopardizing in excess of $200 billion in public investment pools.
“The people managing those pools had absolutely no idea what they were buying,” says Mish. “No doubt they all thought they were geniuses, too, even as every single one of them blindly bought anything top rated as if there were no risk to the extra yield they were receiving.
“This is yet another painful lesson in the well-established concept of ‘there is no free lunch.’”
“No doubt this will lead to calls for government regulation of the rating agencies, when it was government sponsorship of the big three rating agencies that created the problem. This disaster for public schools is just another in a long list of reasons why it’s time to break up the credit rating cartel.”
Mish has created quite a SIV-proof portfolio for his Survival Report readers through a system of puts and shorts in the banking sector. Some are still below their “buy” price: [
More than one in 10 of all hedge funds will go out of business this year, suggests Peter Clarke, CEO of Man Group — the world’s largest hedge fund manager.
“Historically, the hedge fund world has seen somewhere between 5-7% attrition rate in terms of funds closing or ceasing business; I would expect to see that, and this is a pure guess, of course, maybe reaching twice that,” suggested Clarke in this morning’s FT. Clarke expects the “quiet withering” of hedge funds to continue into 2008 as low performance and the worsening credit crisis dim investor interest.
Yesterday, we looked at some $38 billion in bonuses given out by Wall Street firms this year. Today, we’ve got another one… a signing bonus worth $15 million and then some.
Merrill Lynch’s new chief John Thain received a 1.8 million stock option/500,000 stock unit bonus for joining Merrill. At current share prices, that’s a $28 million gift. What’s more, if Thain can bring Merrill stock back up to its YTD high of $98, that bonus will grow to over $140 million. If he can’t, well… he’ll just have to settle with his $750,000 salary and $15 million cash signing bonus.
Where are the customers’ bonuses?
“You did not really answer the question,” opines a reader in response to yesterday’s discussion of Hugo Chavez. “Why do you call a democratically elected president a dictator? By the way, this is not a polemical question; I truly would like to understand why most journalists in America call him a dictator.”
“Chavez is a dictator,” writes another reader, inadvertently answering for us. “Anyone who thinks differently is obviously either a proponent of his form of Marxist/fascism (or is it fascist/Marxism?) or an ill-educated twit.
“President for life. Eliminate your protagonists using thugs and violence or confiscation by decree. Shut down any media that won’t parrot the Chavez line. Nationalization of value from those who have invested their money and efforts. Using the army and refusal to pay fair market value for the nationalized values.
“Chavez, like his mentor Castro, is a cheap, murdering, Latin American dictator from a long line of cheap, murdering, Latin America dictators. It is sad that the Venezuelan people will have to suffer for his ego.”
We’ll leave you to mull over this debate as you digest your holiday bird. We’ll talk on Monday.
Happy Thanksgiving,
Addison Wiggin
The 5 Min. Forecast
P.S. Some breaking news from our small-cap research desk: One tiny company controls the technology that could be in 80% of new cars in less than a decade. A pair of recent contracts pushed the stock up 195% in the last four weeks…
It only gets more exciting from here — one small sector of the industry this company leads could grow 510-fold every year for the next 10 years. A respected transportation authority recently stated that 228,000 hybrid electric vehicles have been sold in the United States so far this year.
Let’s put that number in perspective: Normally, 1-1.5 million cars and trucks are sold in the U.S. each month.
But — here’s the kicker — a major research firm has predicted that by 2015 — as many as 80% of all vehicles sold could be hybrid electrics! Our small-cap sleuth Greg Guenthner will be filling you in on details later today… look for them.