Huge UBS Losses, Stimulus Finalized, Markets Rally, Trade Deficit Narrows, and More!

by Addison Wiggin & Ian Mathias

  • European bank takes Citigroup-sized subprime loss, announces first-ever yearly net loss
  • Guv’ment to the rescue! Paulson peers into his crystal ball while Bush throws $170 billion at looming recession
  • Global market rally… the surprising U.S. sector leading the way
  • Major market forecasters call for Dow 18,500… details and The 5’s rebuttal below
  • Plus, more from Chris Mayer on “the biggest economic story of the 21 century”


Swiss banking monolith UBS announced its first-ever yearly net loss this morning. It’ll close the books on 2007 down $4 billion.

Including today’s announcement of over $13 billion fourth-quarter mortgage-related write-downs, UBS racked up over $18 billion in such losses in 2007. Only Citigroup, with $21 billion, and Merrill Lynch, at $19 billion, can claim larger annual losses.

Spokespeople for UBS guessed 2008 would be “another difficult year.” We think they could be right…

But not if Hank Paulson and George W. Bush have anything to say about it: “After years of unsustainable home price appreciation, our economy is undergoing a significant and necessary housing correction,” Hank Paulson told Congress.

“The housing correction, high energy prices, and capital market turmoil are weighing on current economic growth,” he said. “I believe that our economy will continue to grow, although its pace in coming quarters will be slower than what we have seen in recent years.

“While we are in a difficult transition period as markets reassess and reprice risk, I have confidence in our markets. They have recovered from stressful periods in the past, and they will do so again.”

For his part, Bush affixed the presidential seal to the super-hyped “economic stimulus” package that wisped through the minds of Congress last week.

The president’s John Hancock formally brings the $170 billion bill into law. Practically every member of America’s lower and middle classes can now count on at least a $300 check from Uncle Sam sometime this summer.

There. That should fix this whole inflationary recession mess right up.

The U.S. stock markets staged a rally in support of “free money” politics. The Dow and S&P 500 rose 1.4% and the Nasdaq shot up 2.3%. Surprising retail growth launched markets into gains, while oil and energy stocks kept the party going.

“Consumers have continued spending,” reprises Chris Gaffney from his EverBank World Markets trading desk this morning, “with the advanced retail sales in January surprising the markets with an increase of 0.3%, versus expectations of a drop of 0.3%.

“But evidence is mounting that the plastic-fueled spending spree won’t last. In December, an average of 7.6% of credit card loans were either at least 60 days delinquent or had gone into default, up from 6.4% a year earlier. This trend is alarming, and with further weakening of the U.S. economy, consumer credit could become the next ‘big story’ to hit the markets.”

But who’s fussing about all that? Really. What a downer. Today, the Dow can now celebrate its first three-day winning streak of 2008.

And what’s this? Homebuilder stocks are on a roll.

While even the rosiest of optimists struggle to call a bottom to the housing market, Wall Street has officially labeled homebuilder stocks oversold… at least for now. The S&P Homebuilders Sector Spider (XHB) is up around 30% in the past month.

Even after the marketwide shellacking in early January, the ETF is up 7% year to date… particularly impressive given the S&P 500’s 7% YTD fall. Individual players like Toll Bros. and Hovnanian are up even bigger from early-year lows, 40% and 96%, respectively.

“What took us into this malaise will be what takes us out,” legendary fund manager Bill Miller wrote to his Legg Mason Value Trust shareholders. “Housing stocks peaked in the summer of 2005 and were the first group to start down. Now housing stocks are one of the few areas in the market that are up for the year.”

We must be nearly out the woods then, eh?

Maybe. S&P analysts downgraded another 66 CDOs yesterday, worth about $6.7 billion. The agency has now cut ratings on over 1,567 tranches… look for more write-downs from financials in the next wave of earnings announcements.

Still, glue-sniffing analysts from Morningstar released a three-year prediction for the Dow yesterday. They expect the U.S. benchmark index will rise 50% by 2011, to 18,500.

Their logic? “The Dow was trading at a very hefty 17% discount to our estimate of its fair value,” writes Morningstar’s Jeffrey Ptak. “The Dow hasn’t looked this cheap to us since September 2002, when the index stood at 7,592 (three years later, it had risen to 10,569).

“When we take the Dow’s market price and fair value estimate together with its 9.7% weighted average cost of equity… it translates to a 17% annualized expected return. In other words, this is the return an investor would reap if the prices of the Dow’s components converged to our fair value estimates over a three-year holding period.”

Sounds peachy, doesn’t it? “Fair value” is, of course, in the eye of the Morningstar beholders. But here’s the real gem of the forecast:

“Notice… we’re not guesstimating the short-term direction and level of interest rates, the trajectory of the dollar, the size of the trade deficit and so forth. Nor are we shortcutting our way to a forecast by, say, ginning up an aggregate earnings growth projection or trying to handicap where earnings multiples and yields are likely to settle in three years. Methods like these are notoriously imprecise. So we don’t use them.”

We love it. If it’s imprecise, get rid of it. And why not? If we’ve learned anything from the past 12 months, it’s that the Fed, the dollar, trade deficits and earnings have nothing to do with stock prices. Nothing at all.

If you’re a subscriber to Morningstar and you buy this line of reasoning: Good luck.

There was some good news about the trade deficit this morning. The U.S. December trade deficit came in at $58.8 billion — a good $5 billion below expectations. Those numbers make 2007 the first year since 2001 that the U.S. did NOT break its own record-high trade deficit reading. The trade deficit fell 6.2%, to a wee $711.6 billion last year… the largest decline since 1991.

On average, every American man, woman and child spent $8,350 on imported goods in 2007.

Sen. Chuck Schumer, God’s “gift” to American protectionism, threatened legislation yesterday that would limit the investment powers of sovereign wealth funds.

“Sovereign wealth funds need to assuage concerns that they will manage their investments in terms of political or economic power objectives,” Schumer declared unilaterally. “The alternative I fear is restrictions on sovereign wealth fund investments in the United States.

“The initial focus of Congress is correctly on the transparency of these funds and whether that is best achieved voluntarily working through the IMF or, if that doesn’t work, through legislation. My preference would be for the former, but we may have to consider the latter.”

Renewed U.S. market mojo spread across the Pacific last night, as practically every Asian market enjoyed handsome gains. Japan fared best… news of Japanese GDP growing twice the rate expected shot the Nikkei 225 up over 4%.

For what it’s worth, Japan’s economy is now growing at a 3.7% annualized pace, nearly four times as fast as the U.S.

Australia’s benchmark index rose well over 2%. The Hang Seng soared to 3.6% gains, while the Shanghai Composite crept up 1.1%.

India’s recently bombarded Sensex recovered some of its losses yesterday… due, no doubt, to readers of The 5. As you may recall, we released an embargoed report on India’s “Golden Quadrilateral” yesterday… boom! …the Sensex jumped up over 4%.

“I have lived in India for two months,” responded a reader immediately after the report’s arrival. “I would be very careful about investing there for the long haul. Even the ocean near all big cites stinks like excrement. The roads and transportation systems are badly underdeveloped. Their rivers are really still mostly sewers. The main glacier in the Himalayan mountains that provides all the water for the entire Ganges River will be all gone in two decades. There are not enough new roads to handle the new $2,500 cars made in India that people will soon be buying by the millions.


And you thought your morning commute was bad… traffic in Mumbai

“Industrially young countries are like people: They evolve in the same way. India and China are in many ways like the young industrial U.S. was between 1880-1929. The U.S. had five depressions in that period. China and India may well precipitate a worldwide depression in 2011 economically and especially environmentally.”

The 5 responds: “Heh,” writes Chris Mayer, recently back from his investment tour there, “I can attest to the pollution. The air quality in India is stifling in the big cities. And walk by any open body of water and the smell is overpowering. I can also attest to the bad roads. It took me nearly six hours by car to get from Jaipur to Agra on poor roads where people, ox carts, camels and oncoming cars seemed to wander everywhere.

“But having said all that… everyplace has its problems, and therein lies the opportunity. India already has embarked on a massive road-building project. Numerous companies and projects are in the works to capitalize on India’s water issues.

“Of course, India is a volatile market. It’s not for the faint of heart. Nasty corrections and spills are inevitable. But I feel pretty good about the long-term picture. It’s like the toothpaste is out of the tube. India — nor China, for that matter — is not going to retreat back into its shell. And the impact of its joining the global economy is the biggest economic story of the 21st century so far.”

Don’t miss Mayer’s full report on India, including the only three stocks you need to add to your portfolio to capture lasting gains there. It moves markets.

“As you noted,” writes another reader, unveiling an oddity about the retail numbers that sparked a Wall Street rally yesterday, “absent gasoline and auto, January retail was 0%. Why, then, don’t they have a ‘core retail’ number to go with ‘core inflation’? And if the economy is doing so well, why don’t they express retail sales in units other than inflated Bush dollars? Excluding food and energy sales, I would guess that retail was down a lot.

“What is the real situation at Wal-Mart and Macy’s? Did they sell more clothes, more jewelry or more accessories? I spent a lot more in retail last month than I did in January ’07, but I didn’t eat any more eggs, meat, cheese, milk, lettuce or apples, and I did not drive any farther to get to and from work, though it cost over $60 to fill the tank. I am now back to reading the weekly grocery store advertisements before I decide where to shop.”

The 5 responds: Hmnn. Why would the government alter data that would make it seem less capable? Heh.

For the record: Wal-Mart reported a 0.5% increase in same-store sales… no doubt an effect of rising costs, as you point out. January sales slowed to 0.2%. Macy’s, on the other hand, announced a 7.1% decline in January sales this week, laid off 2,300 employees and had its credit rating reduced to BBB- by S&P.

Happy Valentine’s Day, shoppers,

Addison Wiggin
The 5 Min. Forecast

P.S. Volatile markets like the ones we’ve seen so far in 2008 are a dream for options traders. As we reported yesterday, recommendations made in Options Hotline by Steve Sarnoff have gone up as much as:

  • 300% on Bristol-Myers Squibb March $25 calls on Jan. 29, 2007
  • 220% on American Standard April $45 calls on Feb. 26, 2007
  • 165% on Monsanto April $55 puts on March 5, 2007
  • 130% on Allstate April $60 puts on March 14, 2007
  • 107% on Exxon Mobil May $80 calls on May 20, 2007
  • 151% on Schlumberger August $80 calls on June 22, 2007
  • 283% on TLT September $89 puts on June 12, 2007
  • 122% on Target October $65 calls on July 12, 2007
  • 225% on Intel July $22.50 calls on July 17, 2007
  • 205% on Coca-Cola September $55 calls on Aug. 9, 2007
  • 612%…and still counting on Newmont Mining December $45 calls on Nov.8, 2007
  • 114% on General Electric $40 calls on Oct. 2, 2007
  • 366% on SPY $152 puts on Nov. 12, 2007
  • 137% on Merrill Lynch $55 calls on Dec. 10, 2007.

Steve had no less than 13 triple-digit winners in 2007. So we’re keeping our eye on him in 2008 too. If you’d like a trial run with Options Hotline, you can give it a go here.



Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More