Service Sector Plummets, Wall Street’s Favorite Candidates, Investors Flee Japan, China Storm Worsens, and More!

by Addison Wiggin & Ian Mathias

  • U.S. service sector’s monumental plunge… well past typical recession levels
  • Latest poll shows economic concerns as No. 1 issue heading into Super Tuesday
  • Are Democrats bad for business? Top Wall Street contributors give surprising answer
  • Hedge fund financing flees Japan… Chris Mayer on the opportunities that still remain
  • China’s winter weather worsens… how this harsh storm is quickly becoming China’s “Katrina”

The U.S. service sector, savior of American consumerism, and roughly 90% of the American GDP, plunged into contraction during January for the first time in five years. The Institute for Supply Management reported early this morning its nonmanufacturing index dropped from 54 in December to 41 in January. That’s a monumental change. A score of 49 or lower represents “contraction” within the sector. January’s score of 41 is the first below 50 since March 2003. And the lowest reading since 2001.

The number is so bad, in fact, the ISM released its data at 9 a.m. EST this morning, an hour and change ahead of schedule, in an effort to quell any leaks that might spook the stock market. In spite of an early release, the Dow opened down over 200 points.

The average reader of The Washington Post has a more pessimistic view of the American economy today than at any time over the past 15 years, says the Post this morning.

80% of the people selected for the poll rated the economy as “not so good” or “poor.”

30% are bearish about their investments and financial prospects in 2008

60% believe America is already in a recession.

39% of those polled cite the “economy and jobs” as the No. 1 issue in the current presidential campaign, up 10% in the past three weeks alone, and more than double those who call the war in Iraq the No. 1 concern.

Only 19% view the economy in a positive light — the lowest level since June 1993.

These numbers come out just in time for Super Tuesday. More than 1,700 delegates are up for grabs in Democratic primaries and caucuses around the country today. Over 1,000 will stand up and be counted for Republican candidates.

Yawn.

Conventional wisdom will tell you “Democrats are bad for business.” Looking at the top campaign contributions so far during this primary season, Corporate Americans are gluttons for punishment:

Oil has declined steadily this week. Light sweet crude is down around $88 this morning. The market appears to be waiting and wondering if a U.S. or global slowdown will affect consumption. Or… if the Fed is willing to crush the dollar enough to hike the price past $100.

The dollar posted some big gains this morning on news that eurozone service industries have themselves shrunk to three-year lows. The dollar index rallied over half a point, to 76, this morning, sending the euro back down to $1.46.

“$1.4684 is a far cry from 82 cents, eight years ago!” comments Chuck Butler in a reminiscing frame of mind.

The euro could “experience a problem when the European Central Bank (ECB) finally gets around to cutting rates this spring,” Mr. Butler speculates. “The dent could take the euro to 1.40. But after getting past the initial blow of having lower rates, calmer heads will prevail and use this lower level as a springboard to push the euro higher. This is when I believe we will see 1.50, but not before suffering some rough times.”

Gold continued to fall in overnight trading, too. New York opened at $888 this morning… still a fair shot higher than the $253 we remember back in 1999. Buy.

Hedge fund investors yanked $7.7 billion out of Japanese funds in 2007 — over 20% of the nation’s total hedge fund industry.

Given the poor performance of the Nikkei et al., Nipponese hedge funds shed nearly $11 billion last year. Investors in such funds are no strangers to losing money. Japan’s 2006 performance was equally disappointing.

“All that pessimism creates some nice prices,” Chris Mayer comments. “I was in Manhattan on Friday attending an investment conference. One of the speakers was Jean-Marie Eveillard, a legendary investor who runs the First Eagle Global Fund. His favorite idea was to invest in Japan. He likes the ‘world-class manufacturers’ — some of them trading for cash on the books.

“Let’s face it — people in Japan live well,” Mayer adds. “They are relatively rich and live long lives. Unemployment is 3.8%. Crime is low. Japan is still the second largest economy in the world. It’s still home to many world-class companies. Infrastructure is good. There is a large and comfortable middle class.

“For the first time in a long while, Japanese real estate is rising. Plus, in Tokyo, the real estate market is strong. There are few vacancies. The prospect for increases in earnings looks good as old leases roll off.”

For Chris’ favorite Japanese real estate play, see your latest Mayer’s Special Situations alert.

Moody’s proposed a new rating system for CDOs and other complex debt securities today. Good timing there.

The new system would distinguish these securities from more legitimate bonds by rating them with a system of 21 numbers — not the traditional 21 letter system of AAA, AAA-, AA and so on.

Yeah… like it’s going to make a difference now.

Congress passed a bill yesterday making the words “In God We Trust” more prominent on the nation’s new dollar coin.

The motto was formerly etched on the narrow edges of the new coin — a creative touch meant to dissuade counterfeiters and provide more room for art on the face. Now, by law, it will return to the fronts and backs of the coins.

The provision was earmarked to a $555 billion spending bill.

Hmmn. Let’s see. The dollar index is down over 10%. And by the government’s own calculations, U.S. inflation jumped 4.1% in 2007 — the largest rise in 17 years. Fourth-quarter inflation soared past 6%. Seems like Congress ought to be a little less concerned with what’s written on the darn thing… and a little more concerned with what it’s worth. Yeah?

As we reported Friday, China is dealing with a nasty squall of winter weather. But just how bad is it? Probably worse than you think… check this out:

“I cannot help but say the media are out of control,” writes a reader. “They announce that Exxon Mobil, the second largest corporation in the land, made obscene profits of $1,300 per second, or about $78,000 per minute.

“How can they not make the dramatic announcement that the federal government deficit-spent at a rate 12 times as high, or over $1 million per minute? Or that the 2007 federal spending of $2.8 trillion is over $5 million per minute?

“Talk about obscene.

“We should remember the wise words of Cicero when he said: ‘The budget should be balanced. Public debt should be reduced. The arrogance of officialdom should be tempered, and assistance to foreign lands should be curtailed, lest Rome become bankrupt.’”

“The actual deficit for 2008 will be about $500 billion more,” writes another, “than the projected deficit of $410 billion. Please take a look at the table below from the U.S. budget Web site. The Bush administration’s projection of the 2008 budget deficit of $410 billion is off by about $500 billion — if the budget shenanigans of the past few years are any guide.

“Before you write me off as another nut, look at the bottom line in the table in the column ‘Debt at start of year.’ You will see that at the start of fiscal 2007, the debt was $8.451 trillion and that the debt at the end of the year was $8.949 trillion. The difference — that is, the real deficit — was $497.1 billion.

“Yet the government announced late last year that the deficit in fiscal 2007 was $162 billion. The difference between the actual $497 billion and the announced $162 billion is $335 billion. Remember, these numbers come from the official government Web site.

“The $335 billion credit to the budget was something you might find in Oz-land: the interest on the total obligation of the government to the Social Security Trust Fund, which is about $4 trillion (the interest rate was apparently something like 8%). The government’s own stats (below) show that the actual deficits have been $498-594 billion per year since 2003, far higher than the announced deficits.

“Please tell your readers that the government includes nonexistent credits in its numbers every time it announces the budget deficit. We are in even deeper doo-doo than we thought. I thank you, and so will your readers.”

U.S. federal deficits versus increases in the federal debt

“Regarding the ins and outs of the distribution of I.O.U.S.A.,” writes a reader, “I think you should take it that your loyal fans — and I’m one of them — won’t mind how you distribute your new movie, just so long as they can view or buy/download a copy ASAP.

“This story is a universal one: As you and Bill Bonner keep reminding us, there are people in every country (just about) who’ve been spending way ‘too much money they don’t have, on stuff they don’t need.’ Here in Ireland, we’ve raised this notion to a fine art and achieved (sic) a personal income-to-debt ratio in the region of 165% — which far exceeds the borrow-and-spend orgy that’s gone on in the U.S. or U.K. Most of this debt is tied up in housing (though we’ve built up prodigious amounts on credit cards, too) that is now sharply falling in value.

“There’s a much-quoted expression here that in regard to both our style of capitalism and our social attitudes, the Irish are ‘closer to Boston than Berlin.’ I don’t think Irish audiences will have any difficulty ‘getting the point’ of your movie or applying its lessons.”

The 5 responds: Slainte! We’re working on it. We’ll keep you posted.

Best,

Addison Wiggin,
The 5 Min. Forecast

P.S. As we write to you this morning, the Dow is down well over 200 points…today’s ISM reading has brought recession woes back to full force. While U.S. investors seem to spend every trading day “waiting for the other shoe to drop,” our international investing adviser Chris Hancock has found a global niche immune from the credit crisis… one that he thinks “could be the most persistent and reliable market boom in a decade.” You can learn about it here.


rspertzel

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