by Addison Wiggin & Ian Mathias
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Foreclosures nearly double in October… housing bottom still nowhere in sight
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Beige Book depicts an uneasy Fed… plus Bernanke’s right-hand man gives a big nod to December rate cuts
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Yet multiyear-high GDP?! Details on the latest government number fudging
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Gold and oil prices swing violently… Doug Casey on how to ride out the commodity roller coaster
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Japan’s luxuries market quickly approaching insane highs… how do you fill a 10-story jewelry shop?
Foreclosures in the U.S. rose 2% in October, up to 224,451 for the month, a staggering 94% higher than the same time last year. That’s one foreclosure for every 555 homes in the country in just one month.
And while the U.S. economy “continued to expand during the survey period of October through mid-November,” says the Fed’s Beige Book release yesterday, “at a reduced pace compared with the previous survey period.”
Among the 12 districts, “Seven reported a slower pace of economic activity while the remainder generally pointed to modest expansion or mixed conditions,” said the report. Among those mixed conditions:
A) Demand for residential real estate remained quite depressed
B) Relatively soft retail spending
C) Mild inflation… except, of course, for food and energy.
Not a real rosy picture from the Fed for last month’s economic activity. And yet the stock market rallied big, big, big. Economic data, trends, write-offs, the dollar, oil prices… all be damned. To understand why, let’s take a short, entertaining detour.
On Sept. 18, Alan Greenspan was on Comedy Central’s The Daily Show pushing his book The Age of Turbulence. At 4:15 minutes into the interview, this exchange took place:
Jon Stewart: “When you lower interest rates, it drives money to stocks and lowers the return people get on savings.”
Alan Greenspan: “Yes, indeed.”
Stewart: “So they’ve made a choice — “We would like to favor those who invest in the stock market and not those who [save]…”
Greenspan: “That’s the way it comes out, but that’s not the way [the Fed] think[s] about it.”
Stewart: “Explain that to me. It seems to me that we favor investment, but we don’t favor work. The vast majority of people work, they pay payroll taxes, and they use banks. And then there’s this whole other world of hedge funds and short betting… y’know, it seems like craps. And they keep saying, ‘No, no, no, don’t worry about it, it’s free market, that’s why we live in much bigger houses.’ But it really is, it’s the Fed, or some other thing, no?”
Greenspan: “I think you’d better reread my book.”
Stewart: “Am I wrong that we penalize work by not making the choice to…”
Greenspan: “What a sound money system does is to stabilize all the elements in it and reduce the uncertainties that people confront. One thing all human beings do when confronted with uncertainty is pullback, withdraw, disengage, and that means economic activity, which is really dealing with people, just goes straight down.”
Putting aside the question of whether we actually have a “sound money system” or not… let’s see how Greenspan’s comments stack up to yesterday’s market events…
Yesterday, Don Kohn, the heretofore barely known Vice Chairman of the Federal Reserve…
This guy…
…broke ranks with the Fed’s formerly lily white reading of the U.S. economy.
“Uncertainties about the economic outlook are unusually high right now,” he said. “In my view, these uncertainties require flexible and pragmatic policymaking — ‘nimble’ is the adjective I used a few weeks ago.” He also said, “The nature of financial market upsets is that they substantially increase the risk of such especially adverse outcomes while possibly having limited effects on the most likely path for the economy.”
When asked about the moral hazard of a Federal Reserve that saves Wall Street banks from their stupid bets, Kohn answered: “We should not hold the economy hostage to teach a small segment of the population a lesson.”
Translation: The No. 2 guy at the Fed admits:
A) His economic outlook is unusually uncertain
B) Poor stock market conditions don’t help an economy headed for recession
C) And, while he knows the meaning of “moral hazard,” he doesn’t think it’s an issue…
And that’s all it took…
The U.S. markets shot up… big time. The Dow rose 331 points, or nearly 2.6%, to its second-best single-day jump of the year. The S&P 500 followed suit, adding 2.9%. The Nasdaq outperformed nearly all sectors… launching 3.2%.
Coupled with Tuesday’s gains, markets staged their best two-day performance since October 2002.
But Goldman Sachs wants even more… “The increased risk of recession is likely to lead the FOMC to cut its federal funds rate target to 3% by mid-2008,” Goldman Sachs wrote to its investors recently, with a more temperate approach to a similar request made in Cramer’s now infamous tantrum this summer. “We believe such aggressive action is necessary to counteract the effects of the housing downturn and the associated credit crunch.”
The way things are going, their wish is the Fed’s command.
Yet according to ebullient quants at the Bureau of Labor Statistics, everything’s just peachy. Gross domestic product (GDP) in the third quarter grew at an unanticipated rate of 4.9%, they crowed this morning.
That rate beats the government’s own forecast by a full 1% and marks the strongest quarterly economic growth since the same quarter in 2003, and the second-best GDP reading since the height of the tech boom in early 2000.
Peachy. These numbers seem so clearly disconnected from reality… oy. We’ll follow up tomorrow.
U.S. corporate profits fell by $19.3 billion in the third quarter — a rate equal to a 4.8% annual decline. That follows on the heels of a big $94.7 billion increase in the second quarter.
“The decline in profits doesn’t include massive write-downs taken by banks to account for losses in subprime mortgages and related derivatives,” says MarketWatch this morning. Those write-downs are “treated as losses on the balance sheet, but not as losses in profits from current production.”
The dollar continued its recent rally yesterday. The euro fell lower in the $1.47 range. The pound stripped down to $2.06, and even the recently invincible yen gave back a little, resting at 110.
But at the same time, the Canadian and Australian dollars were able to stop their recent bloodletting. The loonie lost parity at 99 cents, albeit briefly, before stabilizing back at $1.00. The aussie held its ground too… and managed to add a few pips for a 88 cent close.
Oil prices plummeted yesterday, falling as low as $90 per barrel. For starters, the Energy Information Administration reported that crude supply fell 400,000 barrels last week, 100,000 less than analysts expected.
Then “We are prepared to raise our production to supply oil when and wherever required,” OPEC President Mohamed Al Hamli said. “There’s nothing on the agenda, [but] we are willing to supply more to the market.”
Coupled with a bright and cheery day on Wall Street, traders had every reason to sell down oil prices to just below $91.
Consequently, gold’s rally stopped dead in its tracks. Spot prices for immediate delivery fell from Tuesday’s high of $827 all the way down to $799 as we write this morning.
“The action in the gold market was pretty predictable,” writes Doug Casey. “Oil was off big time, and the dollar showed some signs of life. But in the main, investors were dumping everything in order to invest in the revitalized stock market, which soared despite plenty of negative economic news.
“The disconnect between equities and reality could not be more marked than it was yesterday, but many are worried that the flight to safety may have been overdone and are shifting their money over to paper.
“Overall, there seems to be a general obliviousness to the fact that, if the Fed makes investors happy by cutting interest rates… that’s a longer-term bullish development for gold, because of the inevitable inflationary spike the move will cause.”
In fact, oil prices were already back up to $94 in morning trading here in the U.S. Nothing like a good pipeline fire to change your mind about short-term prices.
An explosion at an Enbridge pipe in Minnesota halted delivery from several major Canadian refineries overnight. The pipeline typically pumps up to 2.2 million barrels of oil into the U.S. each day. “All our lines are shut down until we can safely start up the system,” Denise Hamsher of Calgary based Enbridge said Thursday. “At least one or two lines will be shut down for quite sometime.” Unfortunately, two Enbridge workers were killed during the blaze.
Following on the heels of Arabian action early this week, the Chinese are gearing up for some big purchases on Wall Street.
“Currently, because of the subprime issue,” Lou Jiwei, head of China’s $200 billion sovereign wealthfFund (SWF), told attendees at a banking conference in Beijing this morning, “some big financial institutions have reported problems. I have noticed that some sovereign wealth funds have injected capital into them. They are not doing so for the public good, but from a long-term investment perspective. They are stabilizing the market. China Investment Corp will also do the same thing.”
Yeah… “market stabilization”… that’s what we’ll call it. “Deus ex machina,” is what our friend Dan Denning, musing over things down under, calls it.
Currently, China’s SWF has earmarked over $67 billion for overseas investments, and Lou added that the fund has not ruled out buying direct stakes in American companies.
Across the globe, SWFs have made $33 billion in deals so far this year, says The New York Times. That’s up 32% from last year. Over one-third of such investments involved U.S. companies, and over half of the $33 billion has come from Middle Eastern nations. Salaam.
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Troubled Internet broker E*Trade received a $2.5 billion injection from the Citadel Investment Group this morning. Thus, Citadel has effectively bought out E*Trade’s $2.2 billion charge resulting from a plagued asset-backed securities portfolio. E*Trade CEO Mitchell Caplan announced his resignation in conjunction with Citadel’s saving grace. E*Trade, seemingly, is now out of the woods.
Shares rose as much as 23% in pre-market trading this morning. Good scoop if you bought at pre-holiday lows.
Home prices in the U.K. dropped 0.8% in October, the biggest monthly decline since June 1995. Likewise, U.K. loan origination fell from 100,000 to 88,000 in October, the largest fall in 10 months.
Still, the average English home still costs $381,000… about $175,000 more than the typical home here in the states.
Both Nationwide and HSBC predicted yesterday that 2008 will mark the first year since 1992 that home prices fail to rise in England. In fact, HSBC analysts suggested that home prices there are 30% overvalued and due for a stiff correction.
Rate cuts on the way in London Town, too, we suspect.
We leave you today with a sign of the times: Luxury jewelry manufacturer and vendor Bulgari just opened its largest store in the world… in Ginza, Japan.
The 10-story Bulgari Tower opened yesterday, featuring a glass facade, swanky rooftop lounge, top-floor panoramic restaurant, cafe, gourmet chocolate shop and 10,000 square feet of jewelry-selling decadence.
“Japan remains an enormous market,” said Bulgari CEO Francesco Trapani yesterday from the tower’s “bridal floor” — an entire level of the building dedicated to engagement rings and wedding bands — “the biggest market in the world. It’s very important to be a leader here.”
For what it’s worth, the Bulgari Tower is located on the same block as some equally new (and plush) Tiffany & Co. and Cartier shops.
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. The documentary film we’ve been mentioning from time to time in these pages has met with some early success.
Among 935 documentaries submitted for competition at the Sundance Film Festival, ours was one of 16 chosen for competition. The film’s title, as you may already know, is I.O.U.S.A. We’ve been working with director Patrick Creadon, who had early success himself with his first film, Wordplay — a documentary about The New York Times crossword puzzle editor Will Shortz.
We note that the themes among some of the other films submitted are quite familiar to The 5… the war in Iraq, resource wars in the Congo, oil and greed in America, a global water crisis… it should prove to be an interesting event. The festival takes place Jan. 17-27.
P.P.S. We’ve written more than a few e-mails we wish we could “unsend.” Whether written in an angry haste or a victim of the dreaded accidental “reply all,” a regrettable e-mail is ushered along by the Web gods with the same lightning speed and no-take-back permanence as all other electronic notes. If this hasn’t happened to you yet… well… it will.
Our colleague Greg Guenthner has found an incredibly small company that claims to have invented “unsend” e-mail technology… a program that will give users total control over their e-mail, even after it’s sent. If you’d like to learn more about this company or, better yet, invest in it before it explodes onto a major index, check out Gunner’s Bulletin Board Elite. Playing orphaned micro caps are one of the only ways to capture those mythical three-, four-, even five-digit short-term gains. Click here to learn more about BBE.
ADDITIONAL RESOURCES
Doug Casey on the latest resource movement
U.S. GDP revised up to 4.9% for third quarter
Middle East dominates sovereign fund deals