Worst Consumer Confidence Since 70’s, Behind the Market Rally, Wall Street Job Losses, Gas Prices, and More!

Your average American hasn’t been this worried about their short-term economic future since Nixon was entertaining the nation with lies about the break-in at the Watergate Hotel in Washington, D.C.

The “expectations index,” the Conference Board’s measure of consumers’ six-month outlook, fell 10 points, to 47, this morning — its lowest level since 1973. At the same time, consumer confidence plummeted to a five-year low. The March consumer confidence index dropped 12 points, to 64.5, the lowest reading since March 2003.

“Looking ahead,” said Lynn Franco, steward of the index, “consumers’ outlook for business conditions, the job market and their income prospects is quite pessimistic and suggests further weakening may be on the horizon.”

The S&P/Case-Shiller home price index rubbed a pinch of salt into that wound this morning too.

The January home price index showed annual declines around 11%, the worst ever recorded in Case-Shiller’s 21-year history. Of the 20 reporting major metropolitan areas, only one managed to improve: Charlotte, N.C. Sixteen others posted record-low annual declines.

“Unfortunately, it does not look like early 2008 is marking any turnaround in the housing market,” suggested David Blitzer of S&P, who co-sponsors the index, “after the declining year recorded throughout 2007. Home prices continue to fall, decelerate and reach record lows across the nation. No markets seem to be completely immune from the housing crisis.”

Not that the stock market took any notice yesterday. In fact, rather than deal with their immediate woes, investors got high off a couple of small bits of news. The optimistic home sales stats we reported yesterday gave housing sector stocks a boost. The sweetened offer for Bear Stearns gave most financials a kick, too.

But news from luxury jewelry maker Tiffany & Co. — widely expected to suffer during the recession — really got the Street dancing. The weak dollar, say Tiffany’s execs, and growing global markets have boosted foreign sales enough to cover lackluster sales in the United States. Retailers across the board rose on the news.

Housing, financials and retailers rally… et voila, you’ve got yourself a party. The Nasdaq gained 3% yesterday. The Dow and S&P 500 managed 1.5% gains each.

A handful of markets in Asia kept the drinks flowing long after-hours. The Hong Kong and Australian markets, both of which took Monday off, caught up with U.S. gains, jumping 6.4% and 3.7%, respectively. In Bombay, the Sensex shot up over 6%, its second best day in 2008.

Last night’s Taiwanese performance was so-so, but we pause this morning to note the 4% gain Monday following on the election of Ma Ying-jeou — a leader expected to bring greater economic engagement with China.

Despite these quick-hit rallies, the financial industry, and all of New York City for that matter, are bracing for more job losses. Firings this week at Citi, Lehman Bros. and Morgan Stanley bring the number of heads facing the guillotine to 34,000 since the subprime revelation began nine months ago.

To put that into perspective, in the nine months following the tech bust in 2000, 40,000 heads rolled. The subprime mess is officially approaching the tech bust in breadth and scope. Goldman Sachs and Citi have pledged at least 6,000 more each. And who knows how many of the 14,000 remaining Bear Stearns employees will remain after the deal with J.P. Morgan finally goes through.

A recent report from UBS suggested that the firing on Wall Street has only half begun, meaning we could see upward of 70,000 job losses before the crisis ends. Again, for perspective, two years after the tech bust, the financial industry had shed over 90,000 jobs.

As with the tech bust, losses this time around are likely to spur significant economic hardship in the city. In 2007, the finance industry accounted for over 30% of all wages earned in New York City, says today’s New York Times. According to the paper, each Wall Street job supports around three workers in other sectors. Mercedes salespeople, real estate agents and coke dealers, take note.

But here’s the rub. Unlike the tech bust, during the mortgage crisis fallout, it won’t be just Wall Street scions and their New York dependents struggling to find employment.

Today, given the slowdown in the housing and mortgage markets, only 59% of American employers plan to hire 2008 college gradates this year, down 17% from 2007. What’s more, according to Monster Worldwide’s annual survey, 29% of employers say they are “unsure” about hiring new grads — twice as many as responded this way last year.

Pollsters at Monster say about half of all 2008 college grads plan on moving back home after graduation — more than double the 22% who had the same plan in 2007. That can’t be good for family balance sheets already strapped preparing for retirement.

But it’s not just happening here in the States. “The outlook for the economy is always uncertain,” acting Bank of Japan Governor Masaaki Shirakawa said yesterday of the Japanese economy, “and uncertainty is particularly high now… we should not have any preconceptions and should act flexibly by examining risks and the feasibility of our economic forecast.”

“Japan is looking cheap,” notes Chris Mayer, always seeking opportunity during times of duress. “On a price-to-book basis, Japan is at 1.4 — making it the cheapest market among the major economies. The U.S., by comparison, is at 2.5. When you break it down, parts of Japan are even cheaper than that. According to The Wall Street Journal, three-fifths of the companies on the Tokyo Stock Exchange trade for a price-to-book of less than 1.

“Yes, Japan has all kinds of problems. It’s held in such contempt that the papers treat a falling Japanese market as obvious and inevitable. Thursday’s WSJ began one news story with: ‘Wednesday’s rally by Japanese shares is unlikely to be sustained.’ Mind you, the reporter was talking about a 2.5% gain on Wednesday.

“Japan has opened up as a really interesting possibility. Japanese stocks are down 30% since June. Of all the major market indexes, Japan has performed the worst. If you want to be contrarian these days without hurting yourself, trying to catch falling knives in the financial sector, there is no better bet than Japan.”

Chris’ best Japanese plays are still a buy in the MSS portfolio… check ’em out here.

The dollar abandoned its recent strength yesterday and overnight.

The dollar index’s latest comeback peaked at 73.2 Sunday night and has since shed a full point, to 72.2, this morning. The euro snatched back its losses from last week and is back up to $1.55 this morning. The pound is just a breath from $2, and the yen remains at 100.

Adding to the dollar’s demise, the Fed announced today it successfully injected another $50 billion in the U.S. economy via short-term loans.

In its eighth TAF since December, the Fed handed out 28-day loans at a remarkable 2.6% rate, the lowest yet. Eighty-eight banks put in bids totaling over $77 billion. No word as to whether these banks were in dire need of the cash, a la Bear Stearns, or just lapping up cheap and easy money while they can.

Either way, Uncle Ben has lent some $260 billion to the banking system in the last three months.

Gold held its ground overnight. Since bouncing off its recent near $900 bottom, the precious metal has steadily risen to $930.

“In the very short term,” our gold adviser Ed Bugos predicts, “we could see more consolidation between the recent low and $1,000 — perhaps as the Dow retraces higher another few hundred points — before the breakout in gold that surprises everyone this spring/summer.

“I don’t see anything worse than $850 right now, primarily for two reasons: Gold is still the most undervalued commodity and, second, current events continue to draw the spotlight to the gold part of the commodity story. Investors should hold their gold-related large caps, write some insurance on them and start accumulating their favorite junior miner and small-cap assets.”

For the “Vancouver LEAPERS” Ed recommends, don’t miss this report.

Like gold, oil stood mostly still yesterday. The market still prices a barrel of light sweet crude at around $100. In light of this morning’s consumer confidence news, we don’t expect any big upside moves for a little while.

National average gas prices backed off a bit yesterday, says AAA this morning. The average price at the pump is now $3.25.

“It never ceases to amaze me,” writes a reader, “that there are still people out there who don’t realize, believe or accept that gas WILL get to $8 per gallon. In the past, people would adjust their behavior to reality. Now they actually believe that some magical entity — government, the economy — can and will ‘fix’ the problem.

“Any lower-income person who does not have plans to move close enough to their place of work to walk rather than commute in a car is just plain downright foolish. Wages will not keep up with costs. Fuel will get expensive — if and when it is available. The Great Nanny Government can’t fix this problem. Worse, it’s not even trying.”

“At $8 per gallon, gasoline will be 50 cents per cup,” another reader writes. “That’s cheap. How much energy is there in a cup of coffee, for which we readily pay well upward of a dollar? Back in the 1930s, Buckminster Fuller thought that gasoline should cost $1 million per gallon because it contains so much potential for work and is, of course, irreplaceable. Have you ever run out of gas and had to push your car off the road? Not easy. How long would it take you to push it 25 miles? Unless it’s all downhill, you couldn’t do it. But a gallon of gasoline will take you and your 3,000 pounds of steel and plastic 25 miles in about half an hour. Where did you say you were going?”

“In Finland, we pay already $8.90 per gallon and keep on driving,” writes yet another. “The rest of the Europe is not too far behind us.

“But that’s not what is bad about this situation; we pay $5.52 as tax per gallon to the government! So let’s stop blaming the Arabs, that they take us to the cleaners. Actually, it’s our own government who robs us at the gas pump. The Arabs, transportation, refineries and gas stations will split the rest. Over 60% is tax.

“And I am not sure if the tax is fixed or if it’s a percentage of the gas wholesale price; if it’s a percentage, then the government makes more every time the gas price goes up.”

AMR Corp., owners of American and American Eagle airlines, estimated it will spend $9.3 billion on fuel in 2008, up 38% from 2007 and a billion dollar more than the company estimated in January. AMR said yesterday it expects to pay nearly $3 a gallon for jet fuel this year… and buy upward of 3.1 billion gallons by December.

Standard & Poor’s cut AMR’s credit outlook almost immediately, warning investors: “If crude oil averages about $97 per barrel, as we currently forecast, and further fare increases become progressively more difficult to achieve because of the weak economy, AMR could lose more than $1 billion this year.”

If you’re planning any trips overseas, we suggest you book soon.

Best regards,

Addison Wiggin,
The 5 Min. Forecast