Markets Fall, Commercial Real Estate Crisis, Bhutto & Markets, and More!

by Addison Wiggin & Ian Mathias

  • World markets wind down 2007… The major index that took the biggest hit
  • Oil prices charge to $97… Why Kerr says the Bhutto assassination was only a minor factor
  • Mish pinpoints the next sector setting up for a housing-like tumble
  • China’s year-end decree… Could it spell U.S. protectionist retaliation for ’08?
  • Plus a reader’s rant… When statistics defy real-world experience


Markets stumbled around the world yesterday. In the U.S., the Dow and S&P experienced a perfect storm of market-breaking activity: rising energy prices, very low volume and weak economic data put both indexes down 1.4%. The Nasdaq took the news a bit worse, falling 1.7%.

In Pakistan, following the assassination of the former prime minister, authorities closed their equities markets until the new year in an effort to pacify panic sellers. Indian investors, despite their proximity to yesterday’s violence, were unfazed. Mumbai’s Sensex index fell less than 0.05%.

Japan’s Nikkei 225 fell again, by 1.7%. Japanese markets will be closed until 2008, and thus, Japan’s benchmark index will finish 2007 down 11%… perhaps the world’s worst performing index.

China, too, registered a loss for the day… the Shanghai Composite dropped 0.7%. But unlike their neighbors to the east, we doubt Chinese investors will be booking too many losses this year. The Shanghai Composite is on track to end the year up 95-100%.

By the time markets opened in Europe, the strife in Pakistan was practically a nonevent. Trading was mixed… London and France both registered small losses, while the German DAX managed to finish up 0.2%.

U.S. demand for durable goods in November rose slightly, reported the Commerce Department yesterday. Orders for products expected to last at least three years rose only 0.1% last month, far below the 2.2% increase predicted by economists.

The report records the first increase in orders in four months.

Oil prices climbed all day yesterday — up to $97 a barrel — after the Energy Department reported a sixth consecutive weekly decline in oil inventories.

“Clearly, the Bhutto assassination shocked the markets,” says our Maniac Trader Kevin Kerr, “but Pakistan is really not a player in the oil market. I don’t think this is going to play out in oil prices, unless we see activity ramp up from al-Qaida or continued terrorist attacks in the region.

“In terms of geopolitics affecting the oil market, the Turks bombing the Kurds had a lot more impact on oil prices than Bhutto’s assassination, as horrible as it may be.”

As we reported yesterday, immediately after Bhutto’s murder, the gold market surged from $822 to $834. As we write, gold’s trading at $838 an ounce.

On the other hand, the dollar got shellacked overnight. The dollar index lost its grip on the 77 mark, falling all the way to 76.3. The euro led the charge, rallying nearly 2 cents since Wednesday’s close, to just over $1.47 this morning. The pound followed suit and now trades a breath below $2. The yen jumped to 113.

“Commercial real estate in the U.S. is in deep trouble, too” opines The Survival Report’s Mish Shedlock, following up on our report of the S&P/Case-Shiller residential index yesterday.

Shares of Centro Properties Group, the fifth largest owner of U.S. shopping centers, crashed by 90% last week. The group had recently acquired another mega-player in the U.S. mall industry, New Plan Excel. Centro’s plan was to fund the acquisition by selling its boatloads of commercial mortgage-backed securities (CMBSs)… but, umn… nobody wants to by them.

“The asset-backed commercial paper market is dead. Centro is just another in the growing list of casualties,” says Mish. Over $225 billion in CMBSs were issued between 2002-2007, multiples higher than at any other time in history. And just like with the consumer mortgage-backed security market this summer, buyers of CMBSs have stopped buying, but sellers have yet to re-evaluate their true worth.

“This is exactly the same environment that preceded the housing plunge. Transactions dried up, inventories rose and sellers waited patiently to get their price. They never did. The winners recognized conditions had changed and bailed for whatever they could get.”

Mish called the CMBS crash nearly a year ago at a spring gathering of our editors. He’s just one of our Reserve analysts to be hot on current trends. For a full account… and our best offer of the holiday season… see the Agora Financial Reserve, open for membership until midnight on Jan. 1.

New home sales in the U.S. fell by a more-than-anticipated 9% in November, reports the Commerce Department this morning. While it was at it, the department downwardly revised October’s sales as well. New homes are now selling at an annual rate of 647,000… down 34% from last year.

And despite it all, consumer confidence rose in December for the first time since July. According to yesterday’s Conference Board release, the consumer confidence index has risen to 88.6, from November’s 87.8.

Even the mythical “analysts” forecast another monthly decline, to 87 even. But as they have countless times before, the mighty American consumer pulled though.

The Chinese government blocked a proposed sale of a Chinese company to Microsoft this morning. Sichuan Changhong Electric, China’s second largest television producer, was poised to sell 15 million of its own shares to Microsoft China.

What would our world be like if the U.S. government had the temerity or gumption to block the sale of pre-IPO shares of Blackstone to the Chinese sovereign wealth fund?

Yeah, we don’t roll like that. God help us if Chuck Schumer and Lindsey Graham get their way, eh?

Chuck and Lindsey, the U.S.’ foremost protectionists

“Geez. Generally, statistical evidence is supposed to trump anecdotal evidence,” writes a reader in response to yesterday’s Kudlow-inspired assault. “But what do you do when the statistics just run counter to what you can see if — like at least a few people I know — you prefer walking around with your eyes open? I spend most of my time these days outside the country. Perhaps when I come home, the changes that seem so stark to me appear only gradual to those living in the thick of it.

“Low inflation, including food and energy? How about gallons of premium gas topping $3.50? Gallons of milk in the mini-mart flirting with $4.50? Main courses in small-town restaurants, upscale or not, hitting $35? Houses in a full-bust property market still selling for double and more what they were listing for just three-five years ago?

“A growing economy? ‘For Sale’ and ‘For Rent’ signs everywhere, and properties that stay in the listings for five and six months at a clip (we watch). Meanwhile, job ‘growth’ claims confound me. If we’re adding 100,000 real jobs a month, I’d be amazed to see where. The lists of thousands who have lost their jobs, I’m sure, feel much more real to those families affected.

“Meanwhile, I’m a sole proprietor and pay $1,300 a month for a healthy family of four in health insurance. If we were to come back here to live, we’d pay close to $20,000 per child in child care. And more if we wanted to send them to a school where their chances of learning to read were higher than nil. Low tax rates? Maybe compared with Sweden and France.

“But if you count the dozens of little stealth charges, both public and private, along with the erosion of our savings courtesy of the waning dollar, most Americans are being ‘taxed’ to the breaking point. Even if they don’t realize it’s happening. Even if one could rationalize we’re not paying for it, you can be damn sure our children will.

“Anybody trying to spit-shine those realities with some clever calculating is not only manufacturing a false picture of the facts, in my mind, they’re doing considerable harm by diverting our attention from fixing the problems, or at least positioning ourselves securely to deal with them as they come.

“And anybody who eagerly swallows those statistics up because it’s the story they want and need to hear… well, I’ve got a bridge for sale you might want to take a look at. It’s a guaranteed steal.”

The 5 responds: Amen.

Happy New Year,

Addison Wiggin
The 5 Min. Forecast

P.S. Don’t forget… At midnight on Jan. 1, the doors to the Agora Financial Reserve slam shut. You’ve got less than five days to take advantage of our most valuable and comprehensive investment service. Click here to beat the New Year rush.

Commercial Real Estate Transactions Plunge
China Blocks Changhong Sale to Microsoft
Disappointing rebound for durable goods


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