Bizarre Market Rebound, Housing Hits Depression Era Lows, The Biggest Fraud in History, and More!

by Addison Wiggin & Ian Mathias

  • It’s official… 2007: The worst year for housing in most of our lifetimes
  • U.S. markets awake from the dead with surprise rally… Dan Amoss on yesterday’s sudden sea change
  • Tentative deal reached on U.S. “stimulus package” — can $600 save the economy?
  • The biggest financial fraud in the history of banking… how one man squandered over $7 billion of other people’s money
  • “Have you thought about packing heat?” we’re asked in light of our new controversial movie… The 5’s response below


2007 proved to be the worst year for housing in decades, perhaps since the Great Depression, the National Association of Realtors finally admitted this morning.

Existing home sales fell again in December, this time by a more-than-expected 2.2%. Thus, for the whole year, home sales dropped 13% — the largest annual fall since 1982. What’s more, the median price for a single family home fell 1.8% for the year, to $217,000 — the first annual decline since the NAR began keeping track in 1968.

Lawrence Yun, the NAR’s chief economist, went on to tell CNN that 2007 was likely the first decline in housing prices for an entire year since the Great Depression.

Dow traders enjoyed a wild ride yesterday. Of course, unless you’ve been passed out for the last day and a half, you already know that. Still, the 625-point swing from bottom to top yesterday was the second largest in the Dow’s history.

News from, of all places, the New York State Insurance Dept. may have fueled the surge into profitability yesterday. The NY regulators met with bond insurers and their customers late in the trading day to discuss ways of stabilizing the insurers, says the Financial Times.

While no concrete plan was announced, rumors alone sent financials through the roof. Ambac and MBIA rose 71% and 32%, respectively. Just about every bank also rallied on the news.

Yesterday morning kicked off in a fashion we’ve become quite accustomed to in 2008 — down sharply. After a brief rally, the Dow and S&P 500 sank to about 2.5% losses. Just when market makers seemed ready to surrender to another day of steep losses, everything you thought you knew about markets reversed.

Financials, homebuilders and retail rallied — big time. Energy and tech plays, some of the leaders of 2007, fell off a cliff. When the dust settled, major benchmarks not only regained their losses, but surged way into profits. Both the Dow and S&P 500 finished with over 2% gains.

So we ask, what are they smokin’ over there on Wall Street? Not even a surprise 75-point rate cut could push stocks into the black on Tuesday… what market force could be powerful enough to snap such a strong selling trend?

“Yesterday had all the signs of a temporary market bottom,” says our own Dan Amoss. “Sentiment readings simply got too bearish. Stocks with sustainable fundamentals might have bottomed, but I expect more pain for stocks on the wrong side of the credit bubble.

“As for MBIA and Ambac, the short trade in these stocks had simply become too crowded — so crowded that mere rumors of an orchestrated bailout prompted a massive short squeeze. I doubt the investment banks can or will come up with anywhere close to the rumored $15 billion, considering their own capital shortfalls. Plus, any capital that’s raised will likely go to the insurance subsidiaries, not the publicly traded holding companies.”

Dan’s no stranger when it comes to shorting stocks. His open short positions in Strategic Investment – up an average of 100% – have inspired him to launch the Strategic Short Report. Find out how you can profit from falling stocks here.

“In a way, I wish markets would have dropped more,” admits our editor at large Chris Mayer. “Get it over with, I say. The market can be such a drama queen, moping around for months on end. I’m ready to buy some new things.

“But… the market didn’t fall further. So, what do we do today? Keep cool and maintain your composure. As John Maynard Keynes once said: ‘I consider it the duty of every serious investor to suffer grievous losses with great equanimity.’

“No one knows if we’re anywhere near a bottom, of course. Don’t believe the ones who tell you otherwise. We’re all in the dark on that. But we can manage our accounts intelligently. We can look for values where we find them. We can take the long view.”

Chris’s new book is out… in it he reveals the source of his inner calm in the midst of the storm. Check it out: Invest Like a Dealmaker.

Meanwhile, Congress and the Bush administration have completed their simple plans to meddle in… umn, provide “stimulus” to the economy.

Somehow, they’ve come to the conclusion that giving $600 to every U.S. citizen is the right number… just enough to save the economy. According to the plan, each child under your roof could entitle you to an extra $300, with a cap of $1,200 per family.

But if you make more than $75,000 a year — forget you. You don’t need an extra 600 bucks… or you might be inclined to — gasp — save it. Then what good would it do?

Meanwhile, right on time, the Congressional Budget Office predicted today that the U.S. budget deficit will expand to $219 billion in 2008 — a nice jump from the $163 billion deficit recorded in 2007.

The CBO, as per their usual methods, left out a few dollars in its 2008 predication. Namely, the $100 billion “stimulus” package announced moments ago. And the off-budget billions consumed in Iraq and Afghanistan.

Heh. This is like a slow-motion car wreck. Horrible and fascinating all at once.

The Law firm Bingham McCutchen is the top-paying company in America in 2007, reports a Forbes survey this week. According to the magazine, the average employee there banks over $211,000 per year, with the average starting salary coming in around $160,000.

Google was once again named as the overall best company to work for.

French bank Societe Generale sheepishly announced this morning that one trader has lost the bank $7 billion over the past year. 31-year-old Jerome Kerviel somehow bypassed the bank’s risk management division, fooled his investors and placed what the bank called huge long positions in “plain vanilla futures hedging on European equity market indices.”

Anyone long in just about any equity market these days has lost their shirt… and Soc Gen has been no exception. The bank announced that it was forced to unwind these trades on Jan. 21 for a loss in the $7 billion ballpark — the largest trading loss, by one person, in history. Impressive.

The Chinese economy expanded at 11.2% in the final quarter of 2007, say wonks on the other side of the planet. While Chinese GDP did shrink ever so slightly from the third quarter, down 0.3%, growth there is still nothing short of stunning.

The Chinese government has predicted continued economic expansion in 2008, by at least 10%.

The dollar index stayed at 76 yesterday, mostly unfazed by the market turmoil. Yet this morning, it’s showing signs of weakness — more on that tomorrow.

Resources have staged a small rally… oil is up to $87 per barrel and gold has clawed its way back to the $900 range.

“What’s your take on the public reaction to I.O.U.S.A. when it’s released for general distribution?” asks a reader. “Have you thought through the consequences?

“The public doesn’t react pragmatically or rationally to bad news. It’s always an emotional meltdown followed by Uncle Sam coming to rescue us from the crisis, or so people think.

“But if Uncle Sam (code for GWB and Congress), big business and the banking industry are seen as the problems, whom will the people turn to? The timing of your film could trigger public demand for a socialist state run by liberals where all of our needs are cared for fairly and equitably by who else? Mother Hillary.

“I’m getting worried. As actor Jack Nicholson so eloquently put it, ‘You can’t handle the truth!’ Neither can the masses who live from paycheck to paycheck.

“P.S. Have you thought about packing heat? Some “federalista” out there just might not like what you have to say.”

The 5 responds: Foolish as we are, we still believe that this is our country — not theirs — and we can damn well say whatever we please about the government, federalistas be damned. Packin’ heat might not be a bad idea. But personally we’ve always been inclined to agree with Bulwer-Lytton, who famously said, “The pen is mightier than the sword.”


Addison Wiggin
The 5 Min. Forecast

P.S. If you’re a movie buff, you’ll get a kick out of this: After each screening of I.O.U.S.A. at Sundance, we’ve done Q&A sessions with the audience. On Tuesday, after a screening in front of about 350 people, a scruffy, heavyset gentleman in the front row raised his hand… and then asked for the microphone to address the crowd.

“‘The Dude,’ ladies and gentleman,” Patrick said, apparently an acquaintance of the man. “Jeff Dowd.” A smattering of applause followed.

Mr. Dowd lumbered up to the stage and proceeded to chastise the crowd for participating in this “speculative” economy and not understanding that the solutions to our deficit crises are right under our noses. Dowd, it turns out, while a co-founder of the Sundance Institute, is also the inspiration for the character The Dude in the Coen Brothers film, The Big Lebowski.

The Dude’s father is an economics professor at Cornell — and, according to his vociferous son, has written the definitive tome on debt crises and how to get out of them. In this case, The Dude recommends we focus our attention on the “green technological revolution”… kick our addiction to consumerism and the military-industrial complex… and begin building products at home again that we can use and reuse in our own communities.

“Where are we going with this?” Patrick whispered.

“I dunno…” I replied… “but who cares? It’s The DUDE!”

We’ve been filming our Q&A sessions for posterity’s sake. You can bet this one will end up on the “bonus” selections on the DVD. The DUDE!


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