Another Market Correction, Goldman Calls Recession, Mayer on Nat Gas, Restaurants Suffer, and More!

by Addison Wiggin & Ian Mathias

  • Market falls, enters another correction… is a bear market around the corner?
  • Countrywide stock crashes… a blow-by-blow of this heavyweight knockout
  • Restaurants face stiffest head wind in years… outlook at all-time low
  • Buffett’s latest gamble… can the world’s greatest investor save our struggling municipalities?
  • Plus, Chris Mayer on one of the “best buys” for early 2008

The Dow and S&P 500 fell 1.8% yesterday. The Nasdaq dropped 2.3%. For the year — just five days of trading — the Dow and S&P are down 5%, while the Nasdaq has shed 8%.

Factor in the fourth quarter of 2007 and welcome to yet another technical correction. The Dow, S&P and Nasdaq are all down over 10% since their “highs” in November. The Nasdaq, the gem of most of 2007, is now down about 16% since late October, only a few percentage points away from a technical bear market.

Any and all gains made by the three indexes in 2007 are now gone. Poof… like they never happened.

Afternoon selling came at the expense of Countrywide Financial.

The New York Times, doing what it does best, kicked it off with a heart-manipulating expose accusing Countrywide of fabricating lending documents and burning blue collars in western Pennsylvania.

Then Lehman Bros. did what it does best… After a wicked session of dart throwing and chicken bone reading, analysts there decided to downgrade CFC stock. Their analysis suggested that Countrywide would never be able to return to former profit levels.

After that came the rumor. CFC, whispered traders, was about to declare bankruptcy. The stock got taken to the woodshed. By the end of the day, CFC stock had fallen 28%, to 5 bucks and change. Countrywide shareholders are down 80% since this summer.

“There is no substance to the rumor that Countrywide is planning to file for bankruptcy,” a spokesperson from the company shot back, “and we are not aware of any basis for the rumor that any of the major rating agencies are contemplating negative action relative to the company.”

CFC investors should be familiar with that one… they heard it at $30 and $18 and $11. And this morning, CFC opened down another 15% right off the bell. They wouldn’t be straying too far from the script if Mozilo and his brood denied bankruptcy rumors all the way to $0.

If you’re keeping score at home, Survival Report readers are up over 400% on their CFC puts.

Adding to the unease on Wall Street, the National Association of Realtors said pending homes sales fell in November. The NAR’s pending home sales index fell 2.6%, to a score of 87.6. The decline was nearly 2% worse than analysts expected and abruptly ended the index’s two-month marginal rise.

While it was at it, the NAR slashed its existing home price forecast for the current quarter, down to a year-over-year decline of 5.3%. Only one month ago, the NAR predicted a 2.5% drop… is anyone even listening to these clowns anymore?

At the same time, restaurants across the country are facing their worst market in at least four years, reports the National Restaurant Association. The NRA’s performance index dropped to 99 in November, the association recently reported, down 1% from October and its lowest level since 2003.

The index is based on the responses to eight questions of the monthly Restaurant Industry Tracking Survey. The most telling facet of the index proved to be the Expectations Index, which dropped below 100 for the first time in the index’s history. In no time in the NRA’s history have restaurant operators been so pessimistic about the next six months.

The U.S. economy will fall into recession in 2008 and the Fed will reduce rates to 2.5%, predicted a Goldman Sachs report this morning. In a letter to clients, the bank suggested that 2008 GDP will rise by only 0.8%, while unemployment will climb as high as 6.5%.

To prepare for this contraction, the wonks at GS suggest their clients look to health care, consumer staples, energy and utilities and avoid consumer discretionary, financials, industrials, materials and information technology.

We have other suggestions… in fact, we’re collaborating to release a “digest” of our best investment recommendations on a monthly basis. We haven’t completely baked the idea, but thought you may find this useful. Would that be of interest to you?

“I’m optimistic about the economy,” President Bush said yesterday when asked about one of the worst first weeks of market activity in the history of the stock market. “I like the fundamentals, they look strong.”

“But there are new signals that cause concern,” admitted the president, specifically mentioning the “new” decline in the housing market… and sounding an awful lot like the NAR. Heh.

Just off the top of our heads, we can think of a couple other issues that might be stressing the market out… a worsening credit contraction, the collapse of the financial sector, two market corrections in the last six months, the dollar’s decline to an all-time low, oil at $100, gas over $3, unemployment at 5% and rising, food prices at all-time highs, the national debt cresting $9 trillion… $47 trillion more in unfunded entitlement programs… that’s just off the top of our head.

“In times of uncertainty,” said the president, returning to his key talking point, “it seems like Congress ought to be sending a message that we’re not going to raise your taxes in the next three years by making the tax cuts permanent.”

The president’s insistence on tax cuts calls to mind the infamous Grover Norquist who once famously spat: “My goal is to cut government in half in 25 years, to get it down to the size where we can drown it in the bathtub.” For what it’s worth, Norquist, a Republican strategist, interned for our founder Bill Bonner back in the day, at National Taxpayers Union.

The trouble with the tax cuts is not so much that they put more money in the hands of the “rich” whoever the hell the “rich” may be. But as Monday’s CBO report indicates, federal spending keeps rising… by the billions. The greatest victim of the current financial direction is the nation’s currency… and, consequently, those folks who are trying to make a living with it… or, God forbid, save for their future.

Here in Baltimore, the city government is suing Wells Fargo for “predatory” lending practices. The city claims Wells targeted poor minority neighborhoods with high-risk and unfairly priced loans. Specifically, the city is accusing the lender of practicing “reverse redlining” by intentionally stripping black neighborhoods of their equity by selling them exploitive loan products — a practice outlawed by the Fair Housing Act.

This is the same city, mind you, that bragged about the sudden rise of homeownership over the past years, even in downtrodden neighborhoods. More than one Baltimore mayor has padded his or her resume with “boisterous growth” in 2005.

The practice of bundling loans and selling them in the secondary mortgage market for a profit is also condoned… even encouraged by… Fannie Mae and Freddie Mac, the two federal government-sponsored entities (GSEs) set up to facilitate this exact practice.

O, the hypocrisy that gets revealed when a market heads south! This story is long from over. If Baltimore is successful — and history and politics would suggest it has a good chance — you can expect a lawsuit like this one in a city near you.

The man behind Wells Fargo has his attention fixed elsewhere, however. Warren Buffett’s new municipal bond insurer made its first sale yesterday. Goldman Sachs bought insurance from Buffett on $10 billion worth of bonds issued by New York City.

Not unlike J.P. Morgan during the 1907 banking crisis… the legendary investor of today is swooping in to save the government’s bacon. While insurers like MBIA and Ambac are literally on the brink of insolvency, look for Berkshire Hathaway to cherry-pick the best munis and make themselves a pretty penny.

Buffett’s licenses allow him to insure munis only in New York state, but the Oracle of Omaha has already applied to work in California and Puerto Rico.

Gold continued its recent moonshot yesterday, closing at a record high $877 in New York. Overnight, the hip hop “grill” accoutrement reached $890 — surpassing the 1980 intraday high of $875.

Heavy profit-taking saturated the market’s open in New York this morning, bringing the precious metal back down to a mere $875.

In dollar news, the greenback staged a small rally this morning, regaining about half a point on the dollar index, to 76.4. The euro was hit the hardest, sliding back down to $1.46. The pound and loonie didn’t fare much better and fell to $1.95 and 99 cents, respectively. Only the yen held its ground, standing fast at 109.

“I think natural gas is cheap,” says Chris Mayer, offering a REAL course of action in these tumultuous times. “I think it’s one of the best buys on the menu right now.”

Another warm winter has pinned down natural gas prices. Here in Baltimore, we walked to lunch yesterday in T-shirts… it was 70 degrees in January. We’ve all heard this story before… demand slumps, inventories rise, prices fall.

“So even though the price of oil soars, the price of natural gas languishes. Old salts steer by the lights of a roughly 6-to-1 ratio between the prices of oil and natural gas. Today, that rate is closer to 13-to-1. There are a few things that make me comfortable with the idea that those rich natural gas inventories won’t last much longer.

“For one thing, as Grant’s recently pointed out, Americans are living in bigger and bigger houses. Natural gas is a popular fuel to warm them. If the forecasters are wrong and we get a good old-fashioned cold winter? The imagination reels. Suffice to say, the price of natural gas will rise.

“The second big issue is the new energy bill, which was kind to ethanol, to put it mildly. The bill requires a fivefold increase in ethanol production by 2020. The popularity of ethanol is one of the best things that ever happened to the natural gas industry.

“That’s because ethanol is a great natural gas guzzler. Most ethanol distilleries burn it to make ethanol. And we have many new ethanol facilities coming online in 2008 — the vast majority of them will burn natural gas.”

Chris gave the nod to his favorite natural gas play in his latest edition of Capital & Crisis… check it out while it’s still below his buy price. Not a subscriber? C’mon… get with the program.

“J.P. Morgan added mortgage jobs because it is in (relatively) good shape,” opined a reader in response to yesterday’s 5. “It intends to take market share away from weaker institutions. Jamie Dimon is an opportunistic investor par excellence.”

The 5 responds: It might be a little soon to take bets on the mortgage market… we’ve got more resets, foreclosures, lawsuits and disgust to process yet.

Best regards,

Addison Wiggin,
The 5 Min. Forecast

P.S. As we mentioned before, Wall Street is fully coming around to the investment trends of 2008. When big names like Goldman Sachs tell their clients to invest in the energy sector, big money usually follows. Now is a better time than ever to prepare for a new wave in energy investments… we suggest taking advantage of our free three-month trial of Energy & Scarcity Investor. For all of Byron’s small-cap energy plays, including an array of booming geothermal picks, click here.

P.P.S. Michael Masterson, our friend and mentor, just published his new work, Ready, Fire, Aim, which has already hit No. 1 on Amazon’s list for business success books. Check out the latest from Michael here.


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