Goldman and Lehman Suprise, Market Forecasts, Big Commodity Pullback, and More!

by Addison Wiggin & Ian Mathias

  • 75% of all Americans claim the U.S. is in recession… the real driver behind our gloomy outlook
  • Better-than-expected I-bank earnings shock Wall Street
  • Chris Mayer’s market outlook, and how he plans to survive coming volatility
  • Afraid to buy stocks? You’re not alone… proof of record cash positions on the Street
  • Commodities stage steep pullback… Kevin Kerr on how to trade the correction


More than three out of four Americans believe the country is in recession, says USA Today this morning. That’s the worst reading of this particular Gallup Poll since September 1992.

One big driver of the gloom is the destruction of the housing market. New construction on single-family homes fell 6.7% in February, to the slowest rate in 17 years. According to the Commerce Department, housing starts have slowed to an annual rate of 707,000… a level last seen in 1991.

Since the peak two years ago, new home starts are down 62%.

Building permits, the best indicator of future housing starts data, also plunged in February. Permits fell 7.8% in the month to an annual rate of 978,000, also a 17-year low and the steepest monthly decline since 1995.

Goldman Sachs and Lehman Brothers both shocked Wall Street this morning with much-better-than-expected first-quarter earnings. Goldman said it earned $3.23 a share in the first quarter, beating estimates by about 25%. Lehman did the same, reporting earnings about 13% higher than the Street expected.

The news from Lehman was particularly well received. The market was anxiously awaiting Lehman to suffer a fate similar to its infamous counterpart Bear Stearns. Traders had barraged Lehman shares over the past week, sending LEH from $48 to $21 in the last five days.

But on the news this morning, shares in LEH have rebounded nearly 70% from Monday lows, to $36.

Still, both banks show over a 50% year-over-year net decline in first-quarter earnings — a long, long way away from the profitability they enjoyed just a year ago.

Nevertheless, markets skyrocketed this morning on the Lehman and Goldman news. The Dow surged over 200 points on the open.

The opening rally this morning furthers some good will mustered by investors midday yesterday. When the Dow, S&P and Nasdaq all opened the week with 1.5%+ losses… and given the Bear news … we were ready to let the crash flags fly. But traders, like consumers, held their ground. The Dow actually mustered a gain of 0.2% by the day’s end.

“It’s big mess,” our Chris Mayer told CNBC yesterday, referring to the Bear debacle, “and it’s going to take time to sort out. In the meantime, it’s going to weigh on the market. We’re likely to see some screwy prices as hedge funds and other leveraged players face forced liquidations. The fall in prices itself will also shake loose additional sellers as fear starts to take hold.

“That creates opportunity for investors who take a cooler view of things. Just as that huge gap opened up on Bear, there are other gaps that open up on the upside. In other words, there are stocks that dealmakers would pay considerably more to own getting tossed overboard in a panicky market.

“Studies show that after compounding, 90% of the return on stocks is generated on just 1.5% of the days the exchanges are open. So things can snap back quickly. I think if you’re going to put money in this market now, you’ve got to be patient and willing to give ideas some time.”

Chris’ book Invest Like a Dealmaker shows exactly how the richest investors in the world keep calm in times like this — and dive in for incredible bargains when the time is right. It’s worth the read.

Prices at the wholesale level jumped 0.3% in February. “Core inflation,” stripped of food and energy costs, and regarded by the Fed as the accurate measure of rising prices, actually shot up 0.5% — its biggest monthly leap in over a year.

Over the past 12 months, PPI is up 6.4%, with energy goods (up 19%) and food (up 6%) leading the way.

Yet as the Fed meets today, fed funds futures in Chicago are pricing in a near 100% chance of a 75-point cut today, about a 50% shot at a full 100-point slash.

Anything less than 75 points and you can expect mayhem on the corner of Wall and Broad streets in Lower Manhattan.

“The Fed has been playing the equivalent of Whac-A-Mole,” said Former Fed Vice Chairman Alan Blinder yesterday, “as financial turmoil keeps cropping up in new and unexpected places. Yet many of the problems facing [the economy] are beyond its reach.”

“When you have Fed insiders describing what they do as an arcade game,” suggests Christopher Hancock, “in which players try to hammer down plastic critters that randomly pop out of holes, you’ve got to wonder where’s the safest place to put your money.”

The yield on a three-month U.S. Treasury bill fell to a 50-year low yesterday. The 13-week T-bill, widely considered the ultimate in “safe” investments, yielded a pathetic 0.6% yesterday.

In other words, more investors are sitting on the sidelines than have been since Elvis was gyrating in front of his ladies.

The dollar backed off yesterday’s all-time low… but only by a smidge. The dollar index, after striking a new all-time low of 70.6, returned to 71.2 this morning. Light volume suggests traders are holding their breath until Bernanke exhales his own today.

“These aggressive moves by the Fed have all but sealed the fate of the U.S. dollar,” says our friend at EverBank, Chris Gaffney. “Currency traders have continued their assault on the greenback, and there is currently no rescue in sight. I don’t think even Hank Paulson can seriously talk about a strong dollar policy anymore.

“They have, obviously, thrown inflation concerns and concerns about the weakening currency out the window and are just trying to keep the U.S. economy from falling off the precipice. I think we have, unfortunately, already fallen off, and the currency traders look like they agree.”

“I myself watch very closely the development in the world economy and the U.S. economy,”
said Chinese Premier Wen Jiabao today, “and I’m deeply worried.”

Wen at the NYSE… quite literally keeping an eye on the U.S. economy

“What concerns me now is that the U.S. dollar is depreciating continuously, when the U.S. dollar will reach the bottom in this depreciation process, what kind of monetary policy the U.S. government will adopt and where the U.S. economy is heading.”

“China’s economy is already tied to the globalized economy,” said Wen. “All kinds of changes and fluctuations in the international economy will inevitably be reflected on China’s own economy.”

Oil finally took a breather yesterday. After touching another record high of $111, light sweet crude fell a good 4%, its worst one-day performance since August.

Thus, oil opened in aftermarket trading at $105 and is trending up to $105. A 75-point cut by the Fed today should kick the dollar in the groin and drive oil back up toward record highs overnight.

Despite oil’s pullback, U.S. gasoline prices attained another record high yesterday. The national average price at the pump has jumped about 1 cent a day for the past week and now rests at a record $3.28.

The U.S. Energy Department forecasts a national average of $3.48 by the end of spring. Bummer.

Gold sold all the way back to $996 last night. In fact, Just about every commodity under the sun got hammered yesterday. The Reuters Jefferies CRB Index — a measure of 19 different commodities including metals, oil, grains and meats — fell 5%. That’s the worst daily percentage loss in about 40 years.

A slowing economy in the U.S. could be putting a damper on demand for commodities. At the same time, financial institutions may be trying to liquidate positions in order to raise capital to shore up their balance sheets. Either would cause a correction in the index.

Either way, it was well overdue. The CRB has had quite a run:

“Am I worried?” Kevin Kerr asks himself. “No, not at all. I knew a correction would come. I’m still very happy we purchased some long-term options.

“Under no circumstances should you panic or start fretting over this kind of correction. That would be a huge mistake. Sure, it’s no fun to see an option lose value, but if you begin to think of it as an actual loss, you are going to have a very tough time trading options.

“As an active investor, the best thing to do now is what we have been doing. Take profits when we can keep the portfolio light and nimble, add when we see good opportunity and never trade beyond our means.”

Visa still plans on floating its initial public offering tomorrow. All signs leading up to this event suggest Visa’s IPO will be the largest in U.S. history, perhaps the world. Still, it ought to be interesting. The world’s largest credit card company floating during the height of one of the worst credit crunches in U.S. history. You can’t buy drama like that…

We’ll keep an eye on it. More tomorrow.

“You let ‘California Homeowner’ off too easy in Monday’s 5,” opines a reader. “For one thing, people who can’t pay mortgages can’t stay in their houses, and the bulk of jobs created in California over the past 10 years have been in home marketing and construction, so you can figure on a bunch of foreclosures from that crowd. Add to that the number of second homes and speculator-owned homes and you have a lot fewer than ‘99%’ of owners happy to stay put.

“Obviously, ‘California’ is whistling past the graveyard, because if he’s owned his home for 25 years and had its value drop below what he owes on it more than once, it means he’s been sucking out his equity for 25 years.

“I’ve owned a house in California for 25 years, and it’s paid for.”


Addison Wiggin,
The 5 Min. Forecast

P.S. Despite gold’s pullback last night, there are still very good reasons why its bull run still has good legswe explore nine of those reasons here.


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