Citi Drops the Bomb, Inflation at 26 Year High, More Recession Signs, Bush Begs OPEC, and More!

by Addison Wiggin & Ian Mathias

  • U.S. markets stage strong comeback… back to normal or sucker rally?
  • Citigroup drops the bomb… a quick and dirty account of the latest carnage below
  • Inflation at 26-year highs, retail sales slump… is anyone not calling for recession?
  • Bush pleads for more oil… why the Saudis won’t be saving us this time
  • Can’t afford your new home? Burn it down… Foreclosure arsons flaming up across U.S.


You know you’re hurting when IBM posts your most exciting news of the day….

The U.S. stock market rallied yesterday, sending the Dow and Nasdaq up about 1.5% and the S&P 500 up just over 1%. Nearly the entire day’s gains were fueled by an early-morning earnings announcement from IBM. Big Blue beat fourth-quarter earnings estimates by a handsome margin.

But we’re willing to bet very few people noticed this: IBM’s outsized profits were the result of currency moves in its global sales.

“If you take out the currency component,” Chuck Butler from EverBank points out, “IBM’s sales increased 4%, not the 10% for revenues expected. Even big old (boring) IBM can make some money in the currency markets!”

In all, the move shows how desperate the Street is for good news.

And with good reason. Citigroup announced a cornucopia of bad news this morning:

– $18 billion write-down
– $12.5 billion cash infusion from outside investors, including Government of Singapore Investment Corp, Saudi Prince Alwaleed bin Talal and former Citi CEO Sandy Weill
– 41% dividend cut
– 70% decline in year-over-year revenue
– a 4,200 job cut — at minimum
– $9.8 billion net loss — the biggest quarterly loss in the bank’s 196-year history.

Merrill Lynch, Wells Fargo, JP Morgan and Washington Mutual all report earnings this week. While Citi is expected to be the worst of the bunch, similar write-downs and losses are practically guaranteed.

When the dust settles, this might be the worst quarter for financials since the Great Depression.

Rep. Henry Waxman, chair of the House Oversight and Government Reform Committee, has requested Chuck Prince, Stan O’Neal, and Angelo Mozilo to testify at a House hearing next month.

Congressman Waxman wants to ask these former Citi, Merrill and Countrywide CEOs if their bloated salaries and severance packages were “justified in light of your company’s recent performance and its role in the national mortgage crisis.”

It’s so easy to be cynical about Congress on this one… we’ll have to pass. At least it will make for interesting TV.

Neither is there any relief in sight for the economy:

Inflation, for example, at the wholesale level rose to 26-year highs in 2007, reports the Labor Department this morning. While the producer price index managed a tiny 0.1% fall in December, the government reported this morning that total 2007 producer inflation rose to 6.3%, a level not achieved since 1981.

The retail season was rather anemic, too. Total monthly retail sales fell 0.4% in December, says the Commerce Department today. The “biggest shopping month of the year” proved to be the sharpest monthly decline in retail sales in six months. November sales were revised down to a 1% gain, from a previously recorded 1.2%.

And if that didn’t fan the recession fire enough, the National Retail Federation also lowered its 2008 sales forecast to 3.5% — its weakest pace in six years.

And the Baltic Dry Index, which is a measure of freight costs for shipping dry goods like coal and grains, just recorded its biggest two-day drop since its inception back in 1985. It’s now down about 30% from its all-time high in November.

“The slowdown in freight has devastated the shippers,” comments Chris Mayer.“Take Excel Maritime, which was $80 in October… It’s about $30 today. That’s pretty typical. Most shipping stocks have been cut in half. Just another point of evidence that a recession is hitting the U.S.”

The mainstream seems to be taking notice too:

According to The Economist, almost 60% of Americans believe we are in recession.

“High energy prices can damage consuming economies,” President Bush mumbled under his yarmulke today while on a trip to the Middle East. “When consumers have less purchasing power, it could cause the economy to slow down.”

“I hope OPEC nations put more supply on the market,” he suggested. “It would be helpful.”

Aside from threatening Iran, President Bush was visiting the Middle East in hopes of negotiating an OPEC output increase. Iraq is not a planned stop on his itinerary.

Saudi Arabia, perhaps OPEC’s most powerful constituent, will not increase output for the sake of the U.S. economy.

“A recession in the U.S. is very significant to the oil market and demand,” says Saudi oil chief Ali Al-Naimi. “I’m sure that no one would look with pleasure upon a recession in the U.S. But we will raise production when the market justifies it. This is our policy.”

Even if Saudi Arabia could increase their oil output, which is a debate in and of itself, they won’t be doing so for the sake of U.S. consumers. “Over the years,” the sheik continued, “the U.S. has played an important… and appreciated role in the development of Saudi Arabia. However, some people mistakenly think that the [relationship] is controlled by how much oil the United States imports from Saudi Arabia.”

Take that, W.

Gold popped as high as $914 yesterday, setting yet another record high.

There are few assets outperforming gold during this rocky first month of 2008. While the U.S. stock market has fallen 4-5%, gold is up over 8% since Jan. 1.

“The new gold futures exchange in Shanghai,” comments Ed Bugos on our mention of the new exchange yesterday, “is designed for retail investors. According to press reports, the exchange traded one-third of the average Comex daily trading volume on its first day and gold was trading at the equivalent of $1,000 per ounce.

“That’s a $100 premium over the international gold price.

“The Chinese exchanges are still cut off from the rest of the world, which is the reason for the discrepancy. But there is little doubt in my mind that besides the debt crisis and the central bank response, the launch of futures trading in gold on the SFE last week is responsible for the bullish take off in gold this month.”

U.S. mutual fund investors will likely be hit with the biggest tax bills in market history this April.

According to the Financial Times, American mutual funds will most likely ring in a record $350 billion in capital gains taxes for their 2007 performance. Despite a rocky second half, 2007 mutual fund investors will pay more in taxes this year than during the height of the tech boom, whether they sold their positions or not… ouch.

The spike in foreclosures heated up another trend in housing last year: arson.

Allstate has seen a significant spike in arsons among homes in foreclosure, reports Fortune magazine. In California, one of the states hit hardest by the subprime crisis, “questionable” residential fires increased by 76% in 2007.

With “untold thousands of homeowners struggling with ballooning subprime mortgage payments,” reads a report from the Coalition Against Insurance Fraud, “fraud fighters are watching closely for a spike in arsons by desperate homeowners who can no longer afford their home payments.”

Apparently, this is a common problem when the housing market slows down. Go figure.

“Today’s news about Citi,” writes an overseas correspondent, “was enough to inspire me to move another huge chunk of our savings out of Citibank and into another account.

“I also noticed Citi is seeking more sovereign wealth money — from Abu Dhabi — after being rejected for same from China, which is no longer interested. Wow. Beijing thinks Citigroup stinks so much they don’t even want it.”

Yesterday, a reader wrote: “There is not a shred of fiscal conservativeness among the current batch of presidential candidates.” And then the mail came…

“Obviously, the only information he’s been fed is from the biased, tightly controlled media,” says one reader. “As everyone should know, Ron Paul is the ONLY true fiscal conservative running for president. And he IS running for president! He wants to repeal the income tax, the inflation tax and the 16th Amendment.

“Of course, along with this, he will drastically reduce government spending. I’m sick of people whining about the government, the taxes and the welfare state and then refusing to vote for a stellar candidate when given the opportunity. The whiners will get what they deserve if their whining is not accompanied by action. Do you really, truly want change? Then quit whining and vote Ron Paul for president.

“If there is to be any shred of financial hope for the USA within the next four years,
writes another, “it lies in Ron Paul winning the election. If not, the fiscal calamities promised by this and other prognosticating readers are essentially guaranteed

“Ron Paul,” writes a third, “has very sensible ideas, including the unusual notion that elected representatives, who swear to uphold the Constitution, should actually do that.”

And so on… we received about 30 responses similar to these.

The 5 responds: Here’s the problem. Yesterday, Paul Krugman, writing in The New York Times responded to the increased fear among Americans that the economy is heading into recession.

“Since this is an election year,” Krugman writes, “the debate over how to stimulate the economy is inevitably tied up with politics. And here’s a modest suggestion for political reporters. Instead of trying to divine the candidates’ characters by scrutinizing their tone of voice and facial expressions, why not pay attention to what they say about economic policy?”

He then goes on to review the economic policies of all the candidates. Except one. He conveniently forgets to mention Ron Paul. The only candidate who has actually ever studied or remotely understands economics… and the country’s biggest economic populist (blowhard) doesn’t even mention him.

What can you do? Lest we begin to sound like a recording, the country will need a financial crisis before people are willing to listen to ideas like those espoused by Dr. Paul. And… if current trends are any indication, it looks like it’s going to get one. Probably a doozy.


Addison Wiggin,
The 5 Min. Forecast

P.S. If you’re interested in joining us in Vancouver this summer, today’s your last chance to take advantage of our early registration pricing. We’ll hold our annual Investment Symposium in late July again this year at the lovely Fairmont Hotel, Vancouver. If you’re already thinking about being a part of this incredible event, sign up today and save yourself a couple hundred bucks. See you there…

P.P.S. Thought you might get a kick out of this… we’ve seen several folks looking for tickets to the premiere of I.O.U.S.A. on Craigslist in Salt Lake City. Reminds me of my misspent youth searching for tickets outside sold-out Grateful Dead shows.

By the way, if you do have tickets, or know of someone who does, please stick around after the premiere for a Q&A session. David Walker, the federal government’s chief accountant, and Bob Bixby, director of the Concord Coalition, will be there to field the tough questions. Not exactly Jerry Garcia and friends we know, but should still prove to be a stimulating evening.


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