Markets Sink… can the Fed Save Them? Washington’s Subprime Bailout, Time to Buy Dollars? Death of the Pay Phone, and More!

by Addison Wiggin & Ian Mathias

  • Markets end recent rally… John Williams on “the problem” that still remains
  • Washington prepares subprime mortgage bailout… legit fix, useless Band-Aid or blatant rip-off?
  • Dollar continues to hold its ground… could the greenback stage a comeback?
  • U.S. automakers suffer second-ever loss to foreign manufacturers… details below
  • How AT&T is helping put hookers and Agent 86 out of work
  • A frontline reader account of the Venezuelan reform vote… plus, some of the most bizarre subprime advice we’ve ever heard

Even though the Fed’s decision is still a week away… looks like the rate cut buzz has already worn off. The U.S. stock markets ended their four-day rally yesterday as the Dow and S&P fell about 0.5%, the Nasdaq by 0.9%.

“The problem for the Fed remains,” we reported’s John Williams as saying yesterday. “The underlying difficulties have not changed, and any central easing will do little to spur business activity, while intensifying dollar dumping.

“The economy already is in recession, but few in the markets or politics are willing to admit it. Such is normal in this phase of a downturn. Mr. Bernanke certainly is aware of the business contraction, but he is afraid to admit that he should keep interest rates relatively high in an effort to hold the dollar and to prevent a systemic meltdown. The Fed continues in a no-win situation.”

But the Fed isn’t the only quasi-governmental structure trying to monkey with the markets. “Yesterday morning,” reports Eric Fry in this morning’s Rude Awakening, “the Treasury secretary proposed a weird kind of mortgage bailout plan that strenuously avoids helping the neediest individuals…but does not neglect to bail out the institutional owners of mortgage-backed securities

“Under the cynical guise of ‘helping the little guy,’ the secretary tosses the little guy back onto the streets, while committing every imaginable governmental resource to helping borrowers ‘with steady incomes and relatively clean payment histories’…

“The Paulson bailout scheme merely transfers the wages of financial sin from Merrill Lynch and Citigroup to the American taxpayer,” our Rude commentator concludes.

“If Paulson’s plan moves ahead, the wages of financial sin would also smite American dollar, the American tax code, the American legal system and the entire fabric of the American sense of ‘fair play.’ The ludicrous plan perpetuates the recent governmental propensity to reward recklessness by punishing prudence.”

Much to our delight, Eric’s scathing critique of the housing bailout doesn’t stop there… if you missed the full monty, check out this morning’s Rude Awakening here.

A reader comments, too… below.

Not to be outdone, Hillary Clinton announced a housing bailout plan of her own yesterday. In a letter sent to Secretary Paulson, Clinton proposed a 90-day moratorium on subprime foreclosures and a whopping five-year rate freeze for holders of ARMs.

And to top it all off… Clinton called for a $5 billion fund to help the communities hit hardest by the coming fallout. How that money will be spent is anyone’s guess… but rest assured, it’ll be your money that fills the coffer.

The election year, 2008, is going to be fun… politicians tripping all over themselves to provide solutions about things they know nothing about.

And why not? Aside from the 2 million homeowners facing an ARM rate reset this year, a recent WSJ poll shows that “the economy” is rapidly becoming the most important issue for voters in 2008.

U.S. manufacturing grew at its slowest pace in 10 months during November, the Institute for Supply Management said yesterday. The ISM’s factory index fell to 50.8, just one tenth of a point lower than it was in October. Once the index sinks below 50 — and it will — the ISM will officially deem the manufacturing sector to be in “contraction.”

Import automakers outsold the “big three” domestic manufacturers in the U.S. in November — only the second time on record that foreign cars outsold domestics.

Final figures are not yet available, but the margin of victory is clearly narrow… foreign automakers may have outsold domestics by only a few thousand cars and trucks. While not nearly as dramatic a victory as July of this year (domestic brands had 48% of U.S. sales) it is telling nonetheless.

U.S. automakers have already begun announcing drastic production cutbacks during what many predict to be a devastating 2008… GM said yesterday it will cut production by 11%, while Ford will scale back by 7%… ouch.

Owing to subprime exposure, hedge funds had their worst month this November since the tech bust of 2000. The Global Hedge Fund Index, published by a firm called Hedge Fund Research, lost 2.6% last month, its biggest lost since April 2000.

But the dollar held its ground overnight. The dollar index has managed a bit of a dead cat bounce, coming off the Thanksgiving all-time low of 74.4 to about 76 even this morning. But the euro still trades for about $1.46, the pound for $2.06, and the yen for 109. Could this greenback “strength” be the beginning of a dollar comeback?

“I have seen story after story the past five days regarding a dollar rebound in 2008,” Chuck Butler writes this morning, echoing our sentiments from yesterday.

“I wonder, besides the fact that the dollar’s slide has been exaggerated at times, just what fundamental reason warrants a dollar rebound in 2008. Is it a three-year thing? 2002 the dollar goes into the weak trend, and sees a bounce in 2005, only to resume weakness in 2006 and 2007. Maybe the dollar does get a breather in 2008…

“And then maybe it doesn’t! I mean, look at the landscape! The Fed will close out 2007 with a rate cut next week and will most likely cut three more times in 2008. How are these rate cuts going to help the dollar? I believe the dollar is not out of the woods.”

Our friend Dennis Gartman was on CNBC recently saying he’s buying dollars. He was a fairly avid dollar bear this summer. So, looks like we might be setting up for a nice dollar rally… on sentiment, followed by a renewed downturn on the fundamentals. Proceed with caution. Timing is everything.

Last night, oil and gold both stemmed the bleeding… and cauterized their recent losses. Gold rallied a good $30 from yesterday’s N.Y. opening price to about $796 this morning. Oil pushed back into the $89 range.

“Many commodities, including gold and oil, might fall again in the short term,” warns our resource man Kevin Kerr. “But I think in 2008, we will see them all rise again, especially grains.

“We will see prices for grains simply continue to surge,” said Kevin in his latest musing to Resource Trader Alert readers. According to our Maniac Trader, crop shortage, biofuel demand and continued growth from emerging economies could push agricultural commodity prices up as much as 50% in 2008.

“There are a lot of mixed messages out there right now, so be careful what you believe. Supply/demand balances in many ag markets are very tight, which could make for some wild price swings. I am pretty confident that we can count on one thing in 2008: more volatility.”

AT&T announced this morning that as of 2008, it will abandon its pay phone business. Starting next year, AT&T will sell all of its 65,000 pay phones. While this will be only a small dent in the million-plus pay phone market, it’s another brick in the wall for an industry in rapid decline:

According to the LA Times, only 5% of American households don’t have reliable access to a cell phone or land line. Just this morning, Nokia estimated that over 4 billion people will own a cell phone by 2009. Looks like pimps, prank callers and superheroes will soon have to find new offices.

“I’m disappointed!” cries a reader. “You failed to note the irony of Golden Slacks (sic) advocating shorting gold to its clients…. but I wonder what Golden Slacks is buying?

“After all, is this not the same Golden Slacks that sold toxic debt instruments to its trusting clients, whilst its own financial analysts were predicting the failure of the same instruments — leading the gold diggers to short the very products it was telling its clients would produce fabulous returns?

“I really don’t understand why anybody even bothers to credit Golden Slacks with any remaining integrity, and reports its opinion or recommendation on anything… The best punishment for it would be for the press to completely ignore anything it says or does, treating it as the third-rate operation that it has proven itself to be.”

The 5 Responds:
Who are you calling “the press”? If you’re looking for public Goldman flogging, check out Ben Stein’s latest column in The NY Times.

“I have been a mortgage banker for 34 years,” writes another, this time taking issue with the White House drive to save mortgage lenders from clients who cannot pay their ARM reset rates. “My partners and I sold the bulk of our assets and laid off our staff in late 2005, since we could not compete with fraudulent lenders or get business from fraudulent realtors without putting our assets at risk — the very best decision we ever made.

“There is only one way to stop the lenders that want to penalize the borrowers and the government agencies: The one word is “bankruptcy”… Most borrowers with proper legal counsel can walk away owing the bank nothing. They can even walk away with their equity (if any), depending on the state’s homestead laws. I tell all borrowers that are abused to walk away. It makes no sense to pay for a house that had only an inflated value due to the realtor’s or lender’s fraudulent practices.

“You can get a credit card the day after bankruptcy. Most mortgage lenders do not consider a foreclosure as reason to decline a loan after you have re-established credit for two-three years. Stop paying these jerks and stop waiting for them to screw you again… you will be money ahead, and I guarantee they will clean up their act with no government intervention.”

The 5 responds:
(Hey, Ian… did we just advocate readers declare bankruptcy?)

“You got it right,” writes a Venezuelan reader, referring to our comments on Chavez’s loss in Venezuela’s constitutional referendum over the weekend. “The slim margin is only in Chavez’s head. Chavez negotiated with the opposition. That’s why the results weren’t out until 1 a.m., when they should have been given at 9 p.m. The deal was to acknowledge defeat, but only if the opposition agreed to telling the world it was by a small margin. True enough, there was a lower-than-expected voter turnout, but the real percentages were more around 58/42, at least.

“One other media nonreported event: All major cities erupted into celebration last night. Even at 2 a.m. on a Sunday night, people were out in the streets honking horns and chanting. There were even fireworks all over, and for several hours. During the last election, all cities and towns were dead quiet.

“It’s probably the first time that antidepressant sales have dropped in some years.

“Thanks for telling it like it is.”

The 5 responds:
One bad consequence of the election? We can no longer refer to Chavez as a ‘dictator’ and elicit negative e-mail from 5 readers. We rather enjoyed that practice.

Thank you for reading,

Addison Wiggin
The 5 Min. Forecast

P.S. There are only 183 seats left…
Gunner’s guide to Pink Sheets and bulletin board stocks is only hours away from being plumb full of registrants. If you want to join the most revolutionary and aggressive small stock research advisory in the market, better hop to it.


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More