by Addison Wiggin & Ian Mathias
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Brace yourself for “government stimulation”… policymakers to the rescue!
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MBIA sinks deeper into the abyss… Buffett on the “poetic justice” being served to financials
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Euro now accepted at froufrou NYC shops… and anarchist Baltimore java pits
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Eric Fry on the coming commercial real estate collapse
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Washington ramps up SWF fear rhetoric… how the decision to allow foreign investments was made for you long ago
By a vote of 81 to 16, the Senate passed the much hyped “economic stimulus package” yesterday. So prepare to be stimulated.
Senators added a few extra greenbacks to the bill, meant for Social Security recipients and disabled veterans, bringing the grand total to $168 billion. The bill still needs to be signed into law by President Bush, but with his penchant for spending… it’s a no-brainer.
“We are making history,” gleamed Nancy Pelosi. “What has passed the Congress in record time is a gift to the middle class and those who aspire to it in our country.”
Mr. and Mrs. America… ready to stimulate
Yeah, a gift… $168 billion added to the national tab. Thanks, Nancy. Congress has taken $168 billion and thrown it “into a mud puddle,” commented Sen. Bob Corker, according to The New York Times.
On the news, stocks snapped their three-day losing streak. The Dow finished up 0.4% for the day. The Nasdaq closed up 0.6%. And the S&P 500 — the “big winner” — rose 0.8%.
In December, consumer borrowing eased to its slowest pace in eight months, reported the Fed yesterday. Consumer borrowing increased 2.1% during the month, by $4.5 billion.
The very fact that the general populace and news networks like CNN consider $4.5 billion in monthly consumer borrowing to be evidence of “sluggish economic activity” is a testament to the times, isn’t it?
U.S. consumers now owe their respective lenders over $2.5 trillion, excluding mortgages.
Echoing the latest consumer data, Wal-Mart released a pretty anemic earnings report this week. The U.S.’s most prominent retailer saw just 0.5% growth in January. According to Retail Metrics, January retail sales rose a sluggish 0.2%.
Bond insurer MBIA printed an extra 82 million in stock yesterday in an effort to quickly raise capital. Clearly desperate to maintain its AAA rating, MBIA hopes to raise about $1 billion during the offering… which will presumably be used to back insured bonds entering default.
That’s just super news for the few remaining (read: “insane”) MBIA stockholders: Shares are down over 10% on the news. Now around $12 per share, MBIA stock has fallen nearly 80% since October 2007.
“It’s sort of a little poetic justice,” Warren Buffett commented earlier this week, “in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end.” The Oracle was less than sympathetic when asked about the financial world’s rise and fall courtesy of complex mortgage-backed securities. We can’t help but expect MBIA and the likes of other insures to take a few more forced swigs before the “crisis” is all over.
Regarding his long-term outlook, Buffett was as cautiously bullish as always: “I wouldn’t quite call it a credit crunch. Funds are available… Money is available, and it’s really quite cheap because of the lowering of rates that has taken place…
“What has happened is a repricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago.” Buffett has been mostly unfazed over the turmoil among financials. Instead, he cites the dwindling value of the dollar as his most serious concern.
“Buffett did not say the dollar would be ‘worthless,’ a reader corrects us. “He said it would be ‘worth less.’ A significant distinction, wouldn’t you say? Don’t believe everything reported on CNBC.”
The 5 responds: Like much of the financial community, we ate a little crow on this one. It was actually Dow Jones Newswires that misquoted Buffett and ran the “worthless” bit on MarketWatch, where we picked it up. Buffett then called CNBC, which happily interrupted its coverage to help him clarify such a “significant distinction.” Unfortunately, we had clicked the send button long after we caught wind of the correction.
We liked our version better.
Speaking of our “worth less” dollar, the greenback continued to buck its losing trend yesterday and furthered its recent rally. Rate cuts from the Bank of England and some atypically softer language from the European Central Bank sent both currencies tumbling — the pound fell deeper into $1.94, the euro to $1.44, and the yen finally let go of 106… it’s trading now for 107.
If you’re a dollar newshound, you’ve no doubt heard this Reuters story from this week: Numerous highbrow shops in Manhattan have begun accepting euros. From wine shops to antique stores, a growing number of the elite-serving NYC business are accommodating euro-holders, due much to the fact that the dollar’s current differential with the euro is attracting more European shoppers to the Big Apple.
And we’re proud to see that our neighboring co-op anarchist coffee shop, Red Emma’s, is now also accepting euros. Aside from selling the best coffee in Baltimore, Red Emma’s also stewards one of the most, umm, atypical bookshops in town. Subjects range from how-to guides on forming revolutionary militias, books about the benefits of transexuality in the 21st century, advice on overcoming various forms of oppression, to vegan cookbooks and the like.
There’s a small chance that the “euro-carrying” crowd may be akin to the patrons of this type of coffee shop/bookstore… but we suspect Emma’s posted the “Now accepting euros” sign just to piss people off.
On the other hand, “A crippled finance industry cannot be good for midtown Manhattan rental rates,” Eric Fry says, “or for the rest of the nation’s commercial real estate market. The imploding finance sector is a nationwide crisis — one that undermines the viability of almost every capitalistic endeavor, especially endeavors like buying and building commercial real estate.
“For the moment, commercial construction spending remains robust. But this apparent strength owes a larger debt of gratitude to the hopeful expectations of 2005 and 2006 than to the grim realities of 2008. Commercial projects operate on a much longer timeline than residential projects, due to the onerous permitting and approval processes. So many of today’s commercial construction sites are merely the gestation of ideas conceived two-three years ago.
“That’s why we would expect the commercial construction trend to begin mimicking the sickly trend of its residential counterpart… especially because the economy is slowing and the nation’s banks already hold too many commercial loans on their books.
“Commercial real estate loans are dicey assets to hold in a slowing economy. A developer’s hoped-for occupancy projection can vanish faster than morals at a frat party. So the hoped-for cash flows don’t flow and, eventually, the banks become the proud owners of empty office buildings. Because of this risk, banks tend to curtail their commercial lending at the first sign of recession… or at least at the second or third sign. They’re banks, after all.”
“In Brazil and Argentina, you have one of the few places left in the world where you can acquire large tracts of land that can support large-scale agriculture,” writes Chris Mayer, always seeking the next opportunity around the bend. “Already, the two countries produce about one-third of the world’s agricultural commodities. As China is the world’s workshop and India its back office, so has South America become its breadbasket.”
Brazil is the world’s largest producer of coffee, sugar cane, ethanol and fruit juice. It is also near the top in soybeans, beef, poultry and tobacco. Its agricultural sector alone has grown at a 5%-plus clip since 1999. “That’s pretty good for such a big sector. Agriculture represents about 8% of the economy, employs one-quarter of its work force and supports some 8 million enterprises.”
Similarly, Argentina is also a leader in beef and grains — it is the largest consumer of beef on a per capita basis in the world. In beef production, Argentina is behind only Brazil and Australia. Argentina is also a major producer of soybeans, wheat, sorghum, rice, barley, lemons, apples, peaches, pears and more.
“But — as hard as this may be to fathom — there is the potential for so much more,” adds Chris. “The rise in the living standards of hundreds of millions of people in China and India, the resulting shift in dietary habits and the global push for alternative fuels derived from agricultural products put South America in the catbird seat. As an investor, I think I’d like to own companies that make the stuff that everybody else wants to pay more for. So it’s not hard to see why I should gaze at those lush farmlands in South America.”
As it turns out, another of South America’s greatest assets is fresh water. Chris has capitalized on the increased global importance of such a valuable commodity in his Special Situations portfolio. Learn about it here.
As expected, Congress got together for a good old-fashioned protectionist rally yesterday during its “U.S.-China Economic and Security Review Commission.” Highlights include the following sound bites:
“Instead of rescuing our economy, these investments only deepen America’s insecurity, forcing the U.S. further into debt to foreign interests,” declared Ohio Democratic Rep. Marcy Kaptur. “More often than not, these deals are presented as purely financial when they are, in fact, political and strategic.”
“We cannot keep selling off our country,” said Sen. Jim Webb. “We need to ensure that our laws and policies distinguish between politically motivated sovereign investment and commercially motivated sovereign investment.”
“We are concerned that if the government from which we seek assistance is also controlling the entity under investigation, the nature and extent of the cooperation could be compromised,” said Linda Chatman Thomsen of the SEC, concerned that SWF leaders will be prone to insider trading and abusing their ties to state governments. (Much as our very own national leaders are already behaving.)
“We cannot allow uncontrolled investments in the U.S. for the sake of satisfying the greed of U.S. investors,” adds a reader e-mail in The 5’s inbox. “Some Americans would sell their mother to the highest bidder. The example here is China, and they have just been named as the greatest spy threat to the U.S.
“If China is allowed to invest in the U.S., when this is all over in the future, we could find that we don’t have control over our country, and we could face a huge military threat from them.”
The 5 responds: The government whored out the fiscal future of the U.S. a long time ago. China could cash in all those T-bonds and crush this economy, anytime they feel like it. Get used to it.
As if to spite the naysayers on Capitol Hill, China’s SWF, China Investment Corp., announced today it may invest $4 billion in the private equity firm JC Flowers.
If the deal goes through, Flowers will set up a portfolio for the Chinese SWF that will invest solely in distressed financial institutions. Thus, China would be buying up stakes in American businesses a bit more indirectly and giving a piece of the profits to Flowers, itself an American institution. Feel better now?
Have a nice weekend,
Addison Wiggin
The 5 Min. Forecast
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