Another Emergency Sunday Fed Meeting, New Hope for Bear Stearns and the U.S. Market, Time to Buy Gold?, and More!

by Addison Wiggin & Ian Mathias

  • Fed, J.P. Morgan and Bear Stearns conduct another secret Sunday meeting… the fruits of their labor below
  • Which major lender is taking an all-or-nothing stand today… and what shareholders can expect
  • Rumors abound of global central bank bailout… the one nation we wish would get on board
  • Latest housing data provide pleasant surprise… how to interpret today’s existing home sales shocker
  • Gold bounces off last week’s lows… Ed Bugos on whether to buy now or wait for another pullback


Yesterday, for the second week in a row, the Fed gathered by phone on a Sunday and engineered a new plan to bail out Bear Stearns. Not since Paul Volcker was in full inflation-fightin’ mode in the early ’80s has the Fed been so vigilant.

Never has the Fed had to make an announcement on Easter Sunday. Mon dieu.

This time around, however, the eggs might be a little harder for J.P. Morgan execs to find. Rather than the 2 bucks per share they were promised last week, Bear shareholders are demanding $10… five times their original bid.

In the end, J.P. Morgan may end up paying over $1 billion for Bear Stearns.

But here’s the part that drew Ben Bernanke away from his spiral ham. The Fed is balking at the new asking price. When they thought they were ponying up $234 million in funds to J.P. — that was one thing. Now, at four times the lend, Uncle Ben and friends are getting cold feet.

Charles Kindleberger, in his 1978 classic Manias, Panics and Crashes, suggested the Fed should be “the lender of last resort” and come to the aid of firms in crisis. But in order to avoid “moral hazard,” they should remain impartial and not tip their hand.

Looks like we’re getting a firsthand look at what impact an impartial Fed may have. Bear isn’t out of the woods yet.

Still, the market loved the idea that Bear Stearns’ portfolio of mortgage-backed trash might have an asking price after all. The Dow shot up 200 points at the open.

Thornburg Mortgage will make its own last stand today. The company announced last week that it will offer $1 billion in convertible securities this morning.

Should the company fail to raise the billion bucks, all signs point to bankruptcy. If they succeed, Thornburg might be able to keep creditors at bay. TMA shareholders will likely get screwed either way. Thornburg shares will either go to $0, or a successful offering will increase TMA common shares by some 500% and dilute current holdings to, well, damn close to $0.

Goldman Sachs and Lehman Brothers have been put on “credit watch negative” by Standard & Poor’s…whatever that means. According to the once omniscient ratings agency, “our current expectation is that net revenue could decline” for the two investment banks.


The Fed, the Bank of England and the European Central Bank are rumored to be assembling a comprehensive strategy to ease suffering in global meltdown. The three banks, says a mysterious report in the Financial Times over the weekend, may implement a worldwide buyback program for troubled mortgage-backed assets.

Naturally, the FT did not name its sources or provide specifics. And naturally, spokespeople from all three central banks denied the paper’s report. Perhaps they’re testing the waters with the help of some compatriots on the inside at the salmon-colored rag.

Maybe they should be taking up the idea with the Bank of Japan, too. According to a report released by the BoJ Friday, net assets held by Japanese households fell in 2007 for the first time in five years. The total value of Japanese household assets was $15.5 trillion in 2007, down from 2006 and its first annual drop since 2002.

You may recall Frank Holmes’ warning from last week. If there’s another “shoe to drop,” we won’t be at all surprised if it falls from a Japanese foot.

U.S. existing home sales data surprised markets this morning with a 2.9% rise.

Purchases jumped nearly 3% from January to February, to an annual rate of 5.03 million, said the National Association of Realtors. With February’s rise, the existing home sales data have finally broken their six-month losing streak. Supply reports were looking better too… inventory fell 3%.

But the good news ends there.

The current rate of new home sales is now about 24% slower than at this time last year. And the median sales price for an existing home has fallen 8% — the steepest decline since the NAR started keeping track in 1968. The average used house now sells for $195,900.

And while inventory numbers did improve, there’s still a 9.6-month supply of empty houses on the market.

The condominium market isn’t in much better shape. Condominium inventory has skyrocketed to an all-time high. Should condo construction halt this minute, there’d still be an over 10-month supply — the largest stockpile since the National Association of Realtors has been keeping records.

These charts come courtesy of The Wall Street Journal:

Chicago will add over 6,000 condos this year, despite its over 5,000 current supply. Atlanta and Phoenix will both add 4,000 new condos to their already frothy markets. And Miami and Fort Lauderdale, kings of condominiums, will add more than 10,000 new condos this year, market be damned.

Look for these inventories to become even more bloated.

And since so many condo purchases are, well… ill advised, condo mortgages have the highest levels of property loan delinquencies.

Still, despite the trouble in the mortgage and housing markets, the majority of Americans expect 2009 to be a turnaround year for the U.S. economy. According to the latest CNN poll, while 75% of Americans think current economic and market conditions are “poor,” over 60% say the same conditions will be “good” next year.

The dollar, as if to echo this fuzzy feeling, continued its recent comeback over the weekend. The dollar index jumped up to 73 on Sunday, before returning to around 72.8 this morning.

The index is now about 2 full points above the all-time low set this time last week. Work it.

The euro, on the other hand, has been steadily sold. Now at $1.53, the Esperanto currency is nearly a nickel off its high from last week. The pound has stood still at $1.97, and the yen has weakened just a bit, to 100 this morning.

If you’re looking to play the currency market without the typical massive margins required for forex trading, we can offer you an exclusive look at a new resource set up by EverBank’s foreign currency trading desk today. You can research all of the 16 tradable currencies and bet for or against each performance versus the greenback. EverBank has assembled specific CDs for nearly every major currency and, as you know, offers the easiest way to diversify out of the dollar on the Internet. Take a look: For this week only, you won’t find this resource mentioned anywhere else but here in The 5.

Gold rebounded off its recent bottom today. After falling over 8% last week, gold shot up over $25 this morning and is currently trading for about $925.

“Usually, when the market liquidates like that, it has more to go in the short term,” comments our gold man Ed Bugos. “Thus, the current bounce could be a simple retracement that will fail at $1,000.

“There have been instances when you saw a record down day that did not turn into an intermediate correction, but these are usually one-day wonders. The current downturn is, therefore, technically ominous. And when you look at the fact that most juniors and small caps didn’t participate in the last $400 in light of these other things, the chalk marks suggest more downside likely.

“But despite all of this, I am still looking for an explosive climax in gold this year to end the advance that started in August, which was kicked off by the U.S. credit crisis. That story is not over, and it’s going to continue to fundamentally drive gold’s value higher.”

For specific advice from Ed, including his favorite “Vancouver LEAPERS,” read this.

Oil also steadied its sudden retreat this morning. Having plunged below $99 last week, oil is priced back at the $100 mark this morning.

OPEC, for its part, seems just fine with keeping the status quo.

“Prices will continue to be high, and the prices for the rest of the year will be between $80-110,” decreed OPEC President Chakib Khelil on Saturday. “There are big pressures on OPEC, and some consuming nations would like to present OPEC as being behind current high prices… but the truth is that the current prices are linked to the U.S. economic problems, as well as to the value of the dollar.”

“Oh, we’re in the early innings of a long-term bull market for oil,” Byron King said on CBC this morning.

“The latest oil pullback is a shakeout, really… it’s the end of the quarter and time to lock in some profits before the end of March. Things went too far too fast. We had to have a pullback. But in the long term, it’s really a simple global supply-and-demand argument.” If you’d like to check out Byron’s full interview, click here.

U.S. gasoline prices have backed off their record highs, too. Now at $3.26, the average price at the pump is just a couple cents shy of its recent all-time high.

Elsewhere in the world, gas prices have continued to skyrocket. On Friday, gas prices in the U.K. hit a record 106 pence a liter for unleaded, 114p for diesel. If our bar napkin math is adding up right, that’s nearly $8 per gallon for the cheap stuff. More on this below…

Last, the NCAA basketball tourney — better known as “March Madness” — is expected to cost American businesses over $1.7 billion this year. According to a study from Challenger, Gray & Christmas, “unproductive work time” caused by college basketball-related distractions will affect as many as 38 million employees.

Judging by the laptops surrounding the only TV in our Baltimore office, we’re guessing Agora Financial is doing its part. We had all our money on UMBC going the whole way… oh well.

“What kind of smug, smartass remark is that?” asks a reader, responding to our tongue-and-cheek dismissal of a CNN report suggesting that Americans would stop driving altogether if gas prices hit $8 per gallon.

“From the sound of it, I’d give a dollar to a dime you actually WANT and would be happy for gasoline to hit 8 freakin’ dollars per gallon. Don’t you realize how many millions upon millions of people would be financially devastated by that? Just because you can afford ridiculously high fuel costs doesn’t mean everyone can.

“Even public transportation, which mostly the poor, the disabled, the elderly and low-wage workers use, will become impossibly expensive should fuel go that high. Having been in lower-income brackets for most of my life, I empathize with the working poor, whose efforts are rewarded with exiguous wages.

“It seems you could use a lesson in ‘noblesse oblige’…a little compassion for your fellows is warranted — but of which, I suspect by the tone your remark, there is none.”

“$8 a gallon and you’ll quit driving?” teases another reader, inadvertently justifying our remarks. “I tell you, you don’t know when you have it good! On this side of the pond, in the U.K., we already have 110.9 pence per liter diesel. For those of you who don’t like math, at $1.98 per £1, that’s $8.30 per gallon.

“We’re grumbling, but we’re paying.”

“If the Fed can supply limitless amounts of cash,” asks our last reader, “and is willing to take basically any type of collateral (I believe it’ll now accept more than just mortgage-backed bonds) from banks and now investment banks, can’t those entities simply exchange all their garbage for cash or Treasury securities, solving the asset quality issue for them?

“Then, if these ‘loans’ can be rolled over into perpetuity, doesn’t this resolve the solvency issue for them, as well? It seems to me that it’s the Fed that will be left holding all the useless, marketless crap. Yes, all this money creation should cause massive inflation, but so far, it seems the Fed isn’t all that concerned about the inflation issue.

“Is it just that the Fed can’t print enough to sop up all the toxic soup? Are the amounts simply too large, or am I missing something else? I keep reading about the Fed taking this garbage onto its balance sheet. Does it actually have to balance its books? It seems nonsensical. If it can simply create the money out of thin air, it can always offset any losses it may take on this spurious collateral.”

The 5: You got it. The Fed keeps printing, your guv’ment keeps spending:

Courtesy of Kevin Kallaugher of The Economist

To be fair, the Fed has put a $200 billion ceiling on these exchanges, but will likely extend them ad nauseam if the going gets really tough. They aren’t buying assets, just holding them as collateral for the short-term loans they provide to struggling financial institutions. The TSLF exchanges those mortgage-backed securities with U.S. Treasuries — IOUs they’re all too happy to pass onto the next generation.

Have a nice Monday,

Addison Wiggin
The 5 Min. Forecast


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