Markets of the World Fall, Buffett on the U.S. Recession, The Subprime-Proof Bank, and More!

by Addison Wiggin & Ian Mathias

  • Markets of the world fall… how ripples in the U.S. turned to tsunamis abroad
  • Buffett says U.S. in “common-sense” recession… the Oracle’s gloomier-than-usual words of wisdom below
  • U.S. manufacturing sinks again… can the consumer keep the U.S. economy afloat?
  • Dollar falls to a fresh record low, but euro retreats, too… which currency caused the latest dollar smackdown?
  • Kevin Kerr on the commodity “bubble,” with a way to play one resource set to boom in 2008
  • The mega-bank that actually grew in 2007, and why it will continue to grow for years to come


The Dow, S&P 500 and Nasdaq fell 2.6% on Friday, setting off a wave of weekend divesting across the globe.

Grim news set the stage early. If you recall from Friday’s forecast, AIG posted an $11 billion loss, UBS predicted some $440 billion more in banking subprime losses this year, Ambac ran into some fund raising issues and earnings from Dell, well… they stunk.

At the opening this morning, the S&P 500 was down 16% from its all-time high set in October.

India’s Sensex got hit the hardest overseas, shedding 5.1%. The Sensex’s 900-point fall was its second-worst single day in history. Japan fell 4.5% to a five-week low itself. Benchmarks elsewhere in Asia fared marginally better. Shares in Hong Kong, Australia and South Korea fell around 3%.

Only Shanghai weathered the storm. In fact, as the rest of the world plunged, China rallied. The Shanghai Composite ended up over 2%.

“I think from a common-sense standpoint,” Warren Buffett told CNBC this morning, the U.S. is “in a recession.”

The Oracle of Omaha was uncharacteristically gloomy this morning… maybe it’s because he was on TV at 5 o’clock in the morning, slugging back Cherry Cokes.

Buffett singing the blues…

While Buffett noted that the current market environment is “nothing like ’73 or ’74,” investors should not rule out the possibility of a sharp economic downturn. “I find more things to look at now than I did six months or a year ago,” he noted, but “stocks are not cheap.”

On Friday, in the annual Berkshire Hathaway letter to shareholders, Buffett happily reported an 11% gain for the year. Led mostly by gains in his insurance businesses along with good years for Coca-Cola and Procter & Gamble, Berkshire net worth rose over $12 billion in 2007.

“Our base of assets and earnings is now far too large for us to make outsized gains in the future,” Buffett commented with characteristic modesty. “It’s a certainty that insurance industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise. Berkshire’s past record can’t be duplicated or even approached.”

Also, the letter notes Berkshire made $100 million on the Brazilian real last year. Berkshire stock has gone up 21% every year since Buffett took over the company 44 years ago.

The Chicago manufacturing index fell to a low not seen since 2001 on Friday.

The Chicago-area “manufacturer purchasing activity” fell from 51, to 44, in February — way lower than quants and wonks alike thought it would. Dropping below the 50-point line signals increased uncertainty and forecasts “negative growth” — an oxymoron only a two-armed economist could dream up.

Likewise, the Institute for Supply Management reported a worse-than-expected February manufacturing report this morning. The ISM’s monthly manufacturing index fell from 50.7, to 48.3.

Still, according to the ISM, history shows that the U.S. is not in an official “recession” until the index nears 41… as manufacturing has never been a smaller part of the U.S. economy.

Contrary to a recent increase in consumer spending, consumer sentiment is waning.

U.S. consumer sentiment in February fell to a score of 70.8, reports Reuters and the University of Michigan. Consumers haven’t been this bummed out about their prospects since Dubya’s father was asking people to read his lips. Reuters and the University of Michigan cited the first monthly drop in employment in four years — and rising gas prices — as the two key contributors to a worse-than-expected February.

Coupled with the Conference Board’s sentiment survey from last week — at five-year lows — it’s almost safe to say that U.S. consumers are starting to fear an economic downturn. When (or if) they’ll start acting like it… your guess is as good as ours. The following may, at some point, be of concern, too…

The U.S. dollar struck a fresh record low again early this morning.
The dollar index declined to 73.4… but it wasn’t against the euro this time. In fact, the eurozone currency fell a penny, to $1.51. Lo and behold, it was the yen’s turn to take a few shots at the punch-drunk dollar.

The Japanese currency strengthened over 2 full points in as many days, to 103. That’s more than a three-year high versus the dollar.

The dollar index is down 13% over the last 12 months.

“The thing that put the dollar on the greased skids last week,” our currency sage Chuck Butler reminds us, “still exists this week. And that, simply put, is the fact that the Fed is going to cut rates even further.”

And they plan to do more than just cut rates. The Fed will auction off some $60 billion more in short-term loans this month.

As a “service” to the U.S. economy, the Fed will print $30 billion fresh dollar bills for auction on March 10, and then again on March 24, and then lend them to banks at rates that no normal consumer or small business could ever attain.

Gold rallied to yet another record high this morning on word of a weaker greenback. The precious metal shot up to $984 per ounce in Hong Kong trading. Silver prices followed suit, rallying to even greater 27-year highs. It’ll now cost you a cool $20 to score an ounce of silver.

Meanwhile, oil backed off its recent $103 high as the U.S. market sold everything in sight. Some “soft” commodities, namely wheat, have retreated from record highs lately, as well.

“I am hearing talk of a commodities bubble,” says our resource man Kevin Kerr. “But then again, I have been hearing that for about three years now. The fact of the matter is that we are not in a bubble, a 1970s flashback or a hysteria. No, this is a global growth story of unprecedented proportions.”

Kevin tells us that while some resources that have experienced explosive growth may cool, previously less favored commodities will quickly catch up.

“The cotton market has been very depressed the last few years due to high carryover stocks and lower global demand. All that may be changing. Farmers in key cotton-growing states are rejecting the idea of continuing to grow cotton and are opting for more profitable crops that have lower input costs.

“We are already seeing buying interest come back into the cotton, but it is still underperforming the other highflying grains. I would look at buying either call options or futures on the December 2008 cotton (CTZ8).”

Global banking monolith HSBC posted a multibillion-dollar gain and overall growth for 2007.

Annual profits rose 10% for the U.K. bank, to $24 billion, said the bank this morning. That’s up $2 billion from 2006, despite a $17 billion subprime-inspired write-down. HSBC is one of the few banks embroiled in the mortgage-backed fandango to come out ahead for the year.

“While the banking industry is rapidly consolidating worldwide, few global banks operate in all the areas that HSBC does, such as Hong Kong, the United Kingdom, the United States, Latin America and Asia,” says Chris Hancock of HSBC, a Free Market Investor pick.

“This geographic spread enables the bank to offer cheaper and better service to multinational corporations operating in rapidly growing Asian and Latin American economies. We believed emerging market growth combined with HSBC’s forthright disclosure to subprime exposure early on showed a bank with a solid earnings stream that was willing to fess up to its American mistakes. To us, it basically valued its long-term reputation above a ‘tell only if you’re caught’ approach that other banks seem to employ.

“I believe the day of the small-town bank has come and gone. The future in banking will rest on international institutions that can successfully offer their customers global products at a local price. Brand recognition will play a major role in achieving this. And you’ll be hard-pressed to find a more recognizable banking brand than HSBC.”

“It was heart wrenching to read of the entrepreneur,” responds a reader to The 5’s inbox on Friday, “whose interest in his trade was destroyed by our confiscatory tax system. It would be wonderful if we could all be freed of any obligation to finance the system we live under. The U.S. government in the past seven years has progressed well down that road by borrowing to support our many needs and desires, rather than burdening citizens with the true cost of its follies.

“Sadly, there are a few problems with this approach, one of which is that the cost of servicing all this federal debt already consumes a major fraction of our ‘tax take.’ In stagflation, tax revenues drop, while debt service goes up. Who wants to lend to a borrower who’s using the proceeds to pay debt interest? We could find ourselves obliged to stop borrowing, and actually start paying our way.

“Taxes will surely have to rise. Perhaps all our entrepreneurs will then decide to quit. I hope not.”

“Just wait until the average Joe and Jane,” says another reader, “who have worked their butts off all their lives for retirement find out that the Social Security is not there for them when they need it and all the money that they thought they had saved for their old age has been devalued enough that they’ll be eating cat food and sleeping in alleyways.”

The 5 responds: We were in a framing shop yesterday, picking out a frame for the signed marquee poster of I.O.U.S.A. we displayed at Sundance. Proud as we might be of our movie, one of two women helping us chose matting and glass kept chuckling to herself over the fact that we were even having the item framed.

“Why isn’t anyone doing anything about the recession?” asked the less interested of the two.

“Because, this isn’t a real recession,” replied the other, smirking. “This is the annihilation of the middle class. If you don’t have any money, like us, what do you care?”

It was odd. And way out of context. But shows, we suppose, that people are talking. Too busy keeping our kids from glomming sticky Starburst fingers on the store’s merchandise, we only listened.

So it goes.


Addison Wiggin,
The 5 Min. Forecast


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