Total Cost of Subprime Crisis, Bernanke Translations, Gold About to Breakout, Natgas, and More!

by Addison Wiggin & Ian Mathias

  • Bank estimates total cost of subprime crisis… you might want to sit down
  • The latest doom asset-backed security class, and why you should care
  • Bernanke speaks… the sound bites that caused worldwide sell-off
  • Gold enters another noticeable trend, breakout seems imminent
  • Natgas hits 15-month high… Chris Mayer on why it’s still cheap

The U.S. subprime and credit crisis has cost the world over $7.7 trillion, says a report released yesterday by Bank of America. The bank estimates 14.7% of the world’s market capitalization has simply vanished since peaking in October.

If that estimate holds true, the mortgage crisis will go down in history as more financially significant than Wall Street’s “Black Monday” in 1987, the Long-Term Capital Management disaster of 1998, any of the massive international currency crisis’ in the last 20 years… it will be even more financially destructive than the Sept. 11 attacks.

A report by S&P last week suggested that global stock markets lost $5.2 trillion in January alone.

And we’re not out of the woods yet… home prices fell during the last quarter of 2007 by a national median of 5.8%, the worst fall since the National Association of Realtors started keeping track in 1979.

Compared to the same time in 2006, the national average price fell from $219,000 to $206,200 in the last quarter. Of the four regions of the U.S., the West got it the worst — an 8.7% drop, says the NAR. Prices dropped 4.8% in the Northeast, 5.4% in the South and 3.2% in the Midwest.

Bank auto loans, too, are getting the squeeze. Car loans delinquent for at least two months hit a 10-year high in January, reports Fitch Ratings Thursday. Why should you care? Well, as with mortgage-backed securities, there’s a bevy of auto asset-backed securities stuffed into retirement funds around the globe.

According to Fitch, 0.7% of all auto asset-backed securities contain loans at least two months in delinquency. That’s a 12% rise from December and a 44% jump year over year. Over 4% of subprime auto loans are delinquent, the highest percentage since 1997.

Subprime mortgages have been grabbing all the headlines, but the truth is the credit squeeze runs deep.

Still paying that loan? Don’t worry, just default. Everyone does it.

“We’re clearly on the edge,” former Fed Chair Alan Greenspan said in a speech yesterday. Chances of a recession are now “50% or better.” We’ve been tracking Greenspan’s recession-o-meter since he went on tour promoting his book. We started with “almost 50%” and then moved to “50%” .This morning, we seemed to have tipped the scales to the dark side.

“The outlook for the economy has worsened in recent months,” admitted the sitting Fed Chairman Ben Bernanke before Congress yesterday, “and the downside risks to growth have increased.”

The U.S. economy will not go into recession, but endure a period of “sluggish growth,” said the chairman, “followed by a somewhat stronger pace of growth starting later this year.” But “the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or… credit conditions may tighten substantially further.”

Umn… weren’t these the very concerns he’s testifying about?

Minutes later, after acknowledging the “steep run-up” in energy prices and the “exceptionally rapid” rise of food prices, the Fed chairman suggested, “Inflation expectations appear to have remained reasonably well anchored.”

To sum up: The economy is slowing, housing and wages are “deteriorating,” credit is increasingly hard to come by, food and energy are going through the roof. But inflation is contained. And the economy is just fine.


Wall Street was surely listening when Bernanke threw this in: The Fed will “act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.”

Translation: If you continue to make bad bets like you did when you shipped mortgages and jobs overseas… no biggie, we’ve got your back. We’ll continue to cut rates.

Not surprisingly, the dollar sold steadily
overnight. The dollar index dropped below 76 again. The euro, despite a sluggish eurozone GDP report, rallied back to a skosh below $1.47. The pound trades for $1.96 this morning. The yen stayed put at 107.

“Canada’s trade surplus narrowed last month,” writes our friend Chuck Butler this morning. “That’s not good!” Chuck, we’ve come to accept, is a self-proclaimed loonie lover.

Canada’s trade surplus narrowed to C$2.4 billion in December, as exports slowed. “That’s the smallest trade surplus Canada has posted since November 1998,” Chuck points out. “This trade report drives home the point that the head winds from the slowdown in the U.S. are filtering into the growth outlook for Canada. And probably gives a green light to the Bank of Canada to cut rates again soon.

“This news won’t carry through as good for the loonie. So… be careful there. Yes, commodity prices are still rising and that puts a floor under the loonie. But you’d hate to see it fall to the floor!”

The U.S. stock market renewed its losing streak across the board yesterday. The Dow and S&P 500 fell about 1.4%, while the Nasdaq shed 1.7%. These markets were on the brink of break-even until Bernanke got on the mic. Traders sold off with every word from the Fed chairman… and then continued for the rest of the day.

Moody’s cut bond insurer FGIC’s AAA credit rating. FGIC, perhaps the least known of the “big three” bond insurers, saw its “insurer financial strength” rating chopped six notches, to A3. Moody’s also slashed FGIC’s debt rating to Ba1, officially making FGIC’s debt “junk” rated. Ouch…

Moody’s also said that while Ambac and MBIA are still under review, their ability to cover the bonds they insure and pay back debt was significantly better than FGIC’s.

This morning, Eliot Spitzer, now governor of New York, suggested the bond insurers had better get their act together or he was going to have the state take them over.

Oil traders appear to be the only ones who took Bernanke’s comments en verite. They bought his premise that the U.S. might avoid recession, and then bought the black goo. Coupled with Japan’s strong GDP growth, oil traded to more than a one-month high this morning — $96.

Gold traders have been lulled this week, keeping a tight range around $910. But if you’re a chartist, take note. Gold has begun another consolidation period, similar to what we saw back in November, when gold was trading at $800:

Think another postconsolidation rally is imminent? All the factors that made gold attractive at $800 are still in place. At the very least, look for big movements in gold soon… one way or another.

Natural gas advanced to a 15-month high in New York yesterday. Delivery for March shot up 4.6%, to $8.77 per million Btu, yesterday on news of exceptionally low natural gas reserves.

“I think natural gas is cheap,” Chris Mayer told The 5 back on Jan. 9 of this year. Citing both a deceptively warm beginning to the winter and growing reliance on natural gas to produce the U.S. demand for electricity, Chris called natural gas “one of the best buys on the menu right now.”

His call was right on. Since the beginning of the year, natural gas has shot up over 12%… and looks to continue for the short term, at least. Chris just sold his natural gas play, CNX Gas, for a 43% gain after Consol offered to buy it. Another play he’s recommended, Canadian Natural Resources, is up 30% after his recommendation… our friends at The Rude Awakening helped Mr. Mayer issue a rebuy on Canadian this morning. Check that out here.

“I agree that those Morningstar folks must be smoking some kind of illegal stuff,” writes one reader in response to Morningstar’s call for Dow 18,500. “I’d suggest that the more informed out there review some of the economic conditions brought on by political/business policies that occurred in the middle to late 1920s. While doing this review, they might also review some of the quotes by some of the leading forecasters about where the Dow was going to be in 1930… The similarities are chilling!”

“I’ll be so grateful for that $300,” says a reader of the economic stimulus. “If it comes in May, I can send it right back to the feds to cover a fraction of my quarterly estimated tax payment for June. The good news is I’m expecting to pay less in federal taxes this year because by driving down interest rates to help imprudent lending institutions, the feds have decreased my T-bill income by 60%!”

“So there is a ‘whopping’ 1.3% foreclosure rate now, eh? Wow,” writes a reader. We suspect sarcasm. “That still leaves a paltry 98.7% that are not foreclosed on. The sky is falling. Wake me up if it gets to 10% or 15%.”

The 5: Hmmm… RealtyTrac reports 1.3% accounts for 1.7 million U.S. foreclosures. 10% would be something like 11 million foreclosures in one year. The average household contains 2.5 people, according to a recent U.S. census. So… a little back-of-the-envelope math here… That’s roughly 27 million folks without a home.

If the foreclosure rate hits 10%, we won’t have to wake you up. They will:

Whiskey & Gunpowder’s Greg Grillot sends this parting shot before you begin your weekend: “Goldman Sachs saved its a$$ last year because those smart dudes shorted the mortgage market, right? And yet other parts of the company were long the same market. Sounds like a bit of an identity crisis, yes? Check out one of the perks you get if you work for Goldman:

“Another Goldman Perk: Sex Changes”

Enjoy yourself,

Addison Wiggin
The 5 Min. Forecast

P.S. You still have time. While you’re enjoying your weekend, consider our limited offer to try Options Hotline free for 4 months. We’ve showed you editor Steve Sarnoff’s impressive 2007 winners all week… this will be your last chance to test drive his 2008 picks at such a discount. The offer ends Monday. Ciao.

Learn more here.


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