Fed Panic, World Markets Fall, “The Other Shoe Drops,” Mexican Real Estate, and More!

by Addison Wiggin & Ian Mathias

  • Markets of the world endure massive sell-off… worst single day in decades
  • Panic at the Fed! Bernanke cuts rates by 75 bps… evidence that traders are STILL unsatisfied
  • Dan Denning with proof that “the other shoe is dropping”
  • There’s always a bull market somewhere… cliche, but true. Our nod to a booming market off the radar
  • In the mailbox… the CEO compensation debate rages on
  • Plus, a Sundance update: I.O.U.S.A. getting rave reviews, standing Os… but we’re not out of the woods yet


Let your crash flag fly, baby…

While U.S. markets took the day off yesterday, the world’s investors decided to sell their stocks… and lots of ’em. After two trading days in Asia, most benchmark indexes are down about 10%.

In Hong Kong, the Hang Seng Index has tumbled over 14% in the last two days. Australia had its worst single day in 20 years early this morning, falling over 7%.

Likewise in Japan and China. The Nikkei 225 fell almost 6% last night alone — its biggest one-day drop in a decade. The Shanghai Composite fell over 7%. After nearly doubling in 2007, the Shanghai Composite has kicked off 2008 down 13%.

“There is no reason at all to allow the worries of the Western world to overwhelm us,” argued Indian Finance Minister Chidambaram yesterday. He chose to halt trading in Mumbai for an hour after sellers pushed the market down over 10% within minutes of the opening bell. Traders took his advice to heart… sort of. The Sensex managed to lose just 7.2%.

Europe fared only marginally better. Monday selling there was similar to Asia’s… British markets fell 5.5%, while France’s and Germany’s stocks lost about 7%. Today, however, unlike their Eastern counterparts, European markets have somewhat stabilized.

Now it’s America’s turn. Futures traders have sold the Dow down over 500 points… and most benchmarks are down 4-5%. Today is going to hurt.

But not if Ben Bernanke has anything to say about it. His brood at the Federal Reserve announced a surprise 75 point rate cut this morning — the biggest since 1984.

The fed funds rate now stands at 3.5%. The fed discount rate will also be cut by 75 bps, down to 4%.

Such is the Fed’s first emergency rate-cutting action since Sept. 17, 2001. Traders, it seems, are still unsatisfied… futures in Chicago are still pricing in a 100% chance of a 50 bps cut after the FOMC meeting next week.

In other words, the market wanted at least 100 bps today. Heh… Bernanke, we suspect, is having a tough day:

Bernanke: Another 100 bps from full-on fetal position

“Despite the carnage, I would remind you that market prices are just that,” asserts the unsinkable Chris Mayer. “They are not always well-reasoned opinions of value. As I go through our portfolio, I find a lot of value in what we own. I think we should stick with our picks. Now is really the time to build new positions…

“I imagine most investors are fearful about hanging onto stocks after January’s icy gale frosted their portfolios. Nonetheless, I believe hanging on is the right thing to do if you are a long-term investor. We’ve all been through this before — as recently as 2000-2002, in fact. And if you think back to that time, you surely know that any number of stocks you could’ve bought or held would’ve handed you awesome gains in just a few years.

“If days like yesterday send you into fits of rage and bouts of depression, you ought to sell down to a point where you are comfortable. Otherwise, chin up.”

Decades of corporate banking and private investing have given Chris a remarkable eye for finding truly valuable long-term investments. He’s recently revealed the secrets of his success in his first book: Invest Like a Dealmaker. It’s absolutely worth a read… check it out on Amazon here.

“The other shoe is dropping,” asserts Dan Denning,
“the one that acknowledges that something is fundamentally different about the world.

“The price of money is going up. So is the perception of risk. One visible clue is the yen. It’s getting stronger. That’s bad news for emerging markets and speculative assets. Traders borrow in yen (where interest rates are low) to invest in higher-yielding assets like the Australian dollar. Yen strength means global investors are in full flight from riskier assets.

“As you can see above, the yen is getting stronger against a basket of foreign currencies, especially against the dollar and the euro. The stronger the yen gets, the weaker you can expect global stock markets to be. You can see that yen strength began right as the credit crisis hit in July.

“Since then, with one brief pause, traders have been getting out of risky positions and into… into what? That’s a question you might want to ask whoever runs your mutual funds.”

The dollar, surprisingly, is holding its ground. The greenback actually rallied strong up until this morning’s opening bell — the dollar index had risen to 77 on Monday. In theory, the Fed’s sudden 75 bps cut this morning should send the dollar index to the woodshed. But the index has held fast, falling only half a point.

Similarly, the euro sank as low as $1.44 as markets of the world sold off on MLK Day, and has rallied back only 2 cents today in light of the Fed’s emergency rate cut. As we mentioned above, the yen is the currency world’s big winner this week, up to 106.

Ambac’s credit rating has finally been cut. Fitch announced on Monday that it has chosen to cut the embattled bond insurer’s debt rating by two levels, from AAA to AA. If Ambac’s stock weren’t already toxic enough, now it may be unable to write top-ranked bond insurance… a practice that makes up 74% of its revenue.

The downgrade “reflects the significant uncertainty with respect to the company’s franchise, business model and strategic direction,” Fitch reps said. The market arrived at this conclusion months ago… Ambac debt, and debt of just about every similar bond insurer, has been priced at junk levels since the fourth quarter of 2007.

Moody’s and Standard & Poor’s, the other major credit raters, are both currently reviewing Ambac’s ratings. Moody’s has already hinted that it may downgrade debt from MBIA, Ambac’s chief competitor, later this week.

Talk about bad timing… Bank of America and Wachovia both announced terrible fourth quarters this morning. Both banks revealed almost 100% drops in year-over-year earnings, thanks to the typical array of subprime losses, choppy markets and bad bets.

Bank of America wrote down $5.2 billion of CDOs, over 76% more than its CFO Joe Price predicted in November. Wachovia took a $1.7 billion write-down. Wachovia reps also announced that they’ve set aside another billion and change for future losses. And after their acquisition of Countrywide in current market conditions, we suspect BoA is planning on more big short-term losses, as well.

Seriously… could there be a better time to be shorting stocks? If you’re not on board with Dan Amoss’ new Strategic Short Report, you’re missing out on huge profit opportunities. Sign up here.

Yet as the world busts, we the eternally optimistic assert there must be a boom somewhere… and it’s in Mexico. Mexican real estate is set up for an incredible bull market: Despite six consecutive years of economic growth and global falling interest rates, only 6% of the nearly 26 million homes in Mexico are financed with mortgages. Here in good old I.O.U.S.A., 67% of homes are financed. Mexicans, it seems, subscribe to some pretty wild and crazy housing mentalities… most homes there are either inherited, bought outright with cash or built by hand.

Consequently, those that do choose to borrow money to buy a Mexican home tend to pay it back. Delinquency rates in Mexico were below 4% in the third quarter of 2007, well below the U.S.’s 5.6%. Sooner or later, more Mexicans will borrow money to buy a home. Assuming Mexican lenders continue to stay out of the ARM and subprime madness that is currently crushing the U.S. economy… could be some money to be made in Mexican real estate.

Commodity prices have suffered wild swings as the world’s markets violently contract. Oil’s price has fallen down to 87 bucks per barrel on the probably broken theory that a U.S. recession would stifle demand. Light sweet crude now rests at six-week lows.

Gold sank with the rest of the world’s markets yesterday, opening as low as $850 this morning. But as we write, the shrewd are coming to their senses. Gold regained $40 in early U.S. trading… it now trades for $890.

“I love the idea that the check is in the mail from the feds,” a reader writes. “If what they say is true, they will be sending married couples $1,600 — that means that the wife and I will be able to pick up nearly two more nice shiny gold eagles. When you get lemons, make lemonade.”

The 5 responds: Amen.

“Was it not the U.S. Congress back in the 1980s that felt that CEO salaries should have compensation limits,” writes a reader, furthering our CEO salary discussion, “and therefore passed legislation preventing Corporate America from writing off as an expense CEO salaries greater than $1 million?

“Of course, whenever government meddles in the affairs of the free market, a work-around is always — read, always — achieved, and so was born what is now commonplace, nonsalary or stock/options-based compensation models (which companies could expense, mind you). So all of you who complain incessantly about CEO compensation can thank none other than the U.S. Congress for the arguably out-of-kilter compensation models that currently exist. Let’s see what Congress comes up with this time that the free market will inevitably find a way around soon after the legislation is passed!”

“I agree that there are a lot of overpaid corporate executives,” comments another reader, “but there are also a lot of overpaid people in other fields of dreams.

“As a stockholder for many years and in many companies, I always read and vote the proxy statements, and I occasionally wince (with envy) at the total compensation numbers. Then I read about a young man in his 20s who is paid a ridiculous amount of money for playing a game that teenagers play for free and I say to myself, ‘Is this not a great country, or what?’”

“Your reader who opined that CEOs are overpaid and that subsequently they should be paid on an average dictated by shareholders clearly does not like the free market or true capitalism,” opines our last reader.

“If you don’t like the high salaries that these guys are earning (while simultaneously steering their respective ships straight into the rocks), then don’t invest in the companies they control. If what they are doing is still too much for you to bear, then by all means short the stock.

“Let the free market dictate their fate, and for crying out loud, don’t give any more ammunition to Congress or any of the leeches that exist in the system, whose sole purpose is to ‘correct the wrongs of society’ based on what they perceive to be wrong.

“If we go down this track, we may as well just welcome in socialism and be done with it. Aaaghhh!!”

Best Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. During these times of true market crisis, there is simply no quicker way to hedge losses in your long-term portfolio than by shorting the market’s most hated stocks. Take action here.

P.P.S. We’re in the thick of things here at Sundance. While we’ve yet to land a distribution deal, we’ve had a couple of warm receptions, including a standing ovation at our screening in Salt Lake City on Sunday. indieWIRE.com, the independent film industry’s leading blog, called our movie “crucial viewing for anyone who claims to care about America.”

We’ve got another screening today… then we head back to Baltimore. With any luck, by the time we write tomorrow, we’ll have a good deal in place.

For your entertainment pleasure, here are the stars we’ve run in to:

Dennis Quaid
Sarah Jessica Parker
Thomas Haden Church
David Arquette
Jack Black
Paul Giamatti
Bruce Willis
Morgan Spurlock
Some girls from the last season of The Real World


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