by Addison Wiggin & Ian Mathias
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Trade deficit soars… how the latest reading is all the more remarkable
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Moody’s threatens to downgrade U.S. credit rating… Mayer on how the loss would be “far from symbolic”
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Bernanke speaks… equities, currencies and commodities react. Details below…
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Countrywide’s big bailout… World’s biggest bank to the rescue
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Plus, the $2,500 that might just change the world…
The U.S. trade deficit widened by a greater-than-expected margin yet again in November, the Commerce Department reported this morning. U.S. trade deficit rose by $63 billion, over $5 billion more than expected by economists.
That’s a 9% jump from the last month — the highest level since September 2006. Much of November’s deficit rise was attributed to record high oil prices — up 53% year over year.
The annual trade gap through the end of November swelled to $650 billion.
This huge deficit is made all the more remarkable by one fact: The U.S. has also enjoyed the ninth consecutive month of record high U.S. exports. Arthur Laffer and a slew of neocon economists would argue that growing exports and an expanding deficit are both symbols of economic prowess.
Either that, or the dollar is falling off a cliff and the oil price is skyrocketing.
“The U.S. credit rating is at risk,” reports Chris Mayer this morning.
Citing a Moody’s report yesterday, Mayer suggests what we’ve tried diligently to document in our documentary. According to Moody’s, unless the U.S. can curb booming health care and Social Security spending, it could lose its AAA credit rating by 2017. If the government were to lose the ranking — which it has held since 1917 — confidence in the U.S.’s ability to pay back debts will be seriously damaged, and the U.S. economy could face a ginormous slowdown.
“The loss of the AAA rating is far from just symbolic,” warns our Chris Mayer. “Current holders of U.S. government debt include foreign central banks, huge pension funds and sovereign wealth funds. Some of these investors will invest only in AAA-rated securities.
“When I read stories like this, it makes it harder than usual to stomach election-year politics. Is anyone paying attention to how much the government spends? Maybe with the market tanking, people will start to think about money again… and look less graciously on those who spend it so carelessly.”
Ha. It ain’t a problem until it’s a problem… then it’s a really big problem. And that’s what history labels a financial crisis.
“We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,” said Fed chairman Ben Bernanke in prepared remarks yesterday. While Bernanke reiterated that the Fed does not believe the economy will slip into recession, few could disagree that this was his most bearish outlook to date.
“Downside risks to growth have become more pronounced. Notably, the demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets. In addition, a number of factors, including higher oil prices, lower equity prices and softening home values, seem likely to weigh on consumer spending as we move into 2008.”
And for what it’s worth, “substantive additional action,” was completely interpreted by Wall Street as at least a 50 bps rate cut. Futures listed on the Chicago Board of Trade now price a 92% chance that the Fed cuts by 50 bps on Jan. 30.
Bernanke’s comments saved the market yesterday. Within seconds of the breath leaving his yap, the Dow recovered from 100 points down… and ended the day 1% higher. Wall Street sure loves an accommodating Fed chairman.
The S&P 500 gained 0.8%, and the Nasdaq closed up 0.5%.
Another bit of news helped spur the rally, too. Bank of America will buy Countrywide for $4 billion, or about 7 bucks per share, the bank confirmed this morning. By acquiring Countrywide’s portfolio of mortgages, BoA will become, by far, the biggest mortgage lender in the country. According to third-quarter origination stats from MortgageDaily.com, the bank now controls $142 billion in home equity financings. Wells Fargo takes second place, at $68 billion.
BoA had already lost $1.4 billion of its $2 billion “bailout” of Countrywide back in August… we’re getting the sneaking suspicion that Countrywide will bleed Bank of America for billions more before it returns to profitability.
Should Countrywide CEO Angelo Mozilo leave the company (or get fired), he’ll pocket a $115 million severance package.
Mozilo’s reward for stewardship of Countrywide into the head winds of subprime hell will include $87 million in salary advances, two separate pensions worth $24 million, health care for life for him and his wife, three free years of “financial planning benefits,” free trips on the company jet and his country club bills until 2011.
In the last year alone, CFC stockholders are down over 84%, and about 11,000 Countrywide employees have lost their jobs.
Hmnnn…
Merrill Lynch will announce an additional $15 billion write-down in its earnings statement next week, reports The New York Times. Even the bravest of Wall Street analysts had predicted no more than $12 billion in additional fourth-quarter write-downs for the bank. Don’t be surprised when Merrill announces worse-than-expected fourth-quarter losses as well.
So… coupled with third-quarter write-downs of over $46 billion, total industry losses — by the end of the fourth-quarter earnings season — will easily surpass the $100 billion mark… ouch.
Rumors abound that Merrill will seek at least $4 billion more in sovereign wealth fund (SWF) investments on top of the $4.4 billion it received from Singapore’s Temasek in December.
Currency traders heard Bernanke’s speech too… and sold the dollar off in droves. The dollar index, seemingly on the verge of a small rally, fell off a cliff:
Aided by the European Central Bank’s decision to hold rates steady, the euro marched from $1.46 back to $1.48. The yen crept up to 108. Even the Swiss franc enjoyed the ride… it’s heading toward parity with the U.S. dollar too. Currently, the creamy chocolate franc trades for 91 cents.
The pound has broken ranks with the dollar entirely.
Since November, the pound’s gone nowhere but down, falling a dramatic 16 cents in about two months. As our friend Chuck Butler put it in today’s Daily Pfennig, the pound “has been beaten like a rented mule lately.”
Gold saw the last visible effect of Bernanke’s comments yesterday. Speculators drove the spot price as high as $897… it has since steadied, trading between $890-895.
Indian automaker Tata unveiled the Nano yesterday, quite possibly the world’s least expensive car. For a about $2,500 bucks, this beauty could be yours:
Labeled “the people’s car,” the Nano will be made and produced almost exclusively in India. Tata estimates seven of every 1,000 Indians own a car. With 1.1 billion people in the country… looks like the market could be huge.
Make no mistake, Indians will get what they’ll pay for… the Nano comes equipped with a 0.6 liter engine, a top speed of 60 mph, no air bags, no passenger-side mirror, no power steering, no radio, no A.C. and one windshield wiper.
Tata plans on making 250,000 Nanos by July 2009, and if successful, plans to market the car in Latin America, Southeast Asia and Africa. In a related note, Tata is also a leading candidate in line to take Jaguar and Land Rover off Ford’s hands. Heh… interesting times.
We’ve been in and out of Tata a few times for good money. With this news hitting the major media and the Indian market as frothy as it is, we’d be wary of buying again right now. But it’s definitely a stock worth watching.
“Beats me,” writes a reader, “why any firm would want to pander to Tony Blair’s vanity and egomania by employing him part time to the tune of a (reported) $500,000 per year. Doesn’t JPM have enough so-called experts?”
The 5 responds: Hmmn… we invited Tony Blair to be in our movie, too. It wasn’t necessarily for his expertise.
As an aside, we learned yesterday that the premiere for the movie at Sundance on Jan. 19 is sold out. We’re not sure, but we think that’s a good sign. There are several other screenings that still have tickets, if you or someone you know is interested.
“Wall Street’s biggest brat, Jim Cramer,” writes a reader “was on the Today show in Fluff-merica yesterday wearing his biggest pouty face. His latest railing? We should be as indignant as he is because Fed governors aren’t elected officials. All this, I suspect, because his pals on the Street haven’t been bailed far enough out by more and more rate cuts.
“Funny, I don’t remember hearing about the need to turn these into elected positions when rates were dropping precipitously.
“Meanwhile, in the midst of daily declines in the Dow, I saw the congenitally bullish Larry Kudlow on some show bellowing, ‘Goldilocks is alive!’ He reminded me of that Iraqi military propagandist standing on a pile of rubble shouting, ‘We are defeating the Great Satan’ as U.S. tanks were about to roll over him.
“What’s with these people? They act like they’ll lose their jobs if the Dow goes down.”
Have a good weekend,
Addison Wiggin
The 5 Min. Forecast
P.S. You’ve got just a few more days to take advantage of our three-month trial offer of Energy & Scarcity Investor. ESI features the fast-moving small-cap energy plays of our oil adviser Byron King. Check it out now,
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