3x More Losses Expected on Wall Street, Middle East Buys Visa, China’s Huge Advantage, and More!

by Addison Wiggin & Ian Mathias

  • Another bank estimate of total subprime losses… why at least half of the writedowns are yet to be booked
  • How have your investments performed over the last nine years? A surprising rundown of the major asset classes
  • The foreign nations that quietly bought a lion’s share of Visa
  • How the world’s biggest currency reserve nearly doubled over the last year
  • Oil shoots back up to $105… which billionaire energy investor is calling $100 the new base line

U.S. financial institutions will lose up to $460 billion by the time the subprime crisis ends, a team of quants at Goldman Sachs figure. That’s about three times the carnage we’ve already seen.

That makes three “when it’s all said and done” estimates from Wall Street banks thus far: the $285 billion lowball from S&P, this $460 billion middle-ground Goldman prediction and the moonshot $600 billion call from UBS. But even the lowball estimate from S&P would mean we’re less than halfway through the market tumult.

Given those numbers, our estimate of 70,000 heads a-rollin’ on the Street may be a bit light.

Deutsche Bank provided its own cautious outlook this morning.

“Continuing difficult market conditions,” reads its annual report, published yesterday, “may require us to write down the carrying values of some of our portfolios of assets, including leveraged loans and loan commitments.”

The bank copped to $3 billion in net exposure to toxic U.S. mortgage-backed securities. And suggested it might fail to meet some 2008 profit targets.

Given all this rosy news, the FDIC said yesterday it intends to more than double its bank failure division. John Bovenzi, its COO, intends to add 140 employees responsible for handling bank failures and crises.

The FDIC currently has 76 banks on its “problem institutions” list. Since the ’80s, around 13% of the banks on that list bite the dust each year. Our guess, 2008-2009 will blow the curve on that average.

Stocks traded mostly flat in the U.S. yesterday. Investors shrugged off the ugly Case-Shiller home price index data — and one of the worst consumer confidence readings in recorded history — leaving the Dow to close unchanged. The S&P inched up 0.5%. The Nasdaq fared best… up 0.6% at the close.

Speaking of flat index returns, we can’t help but nick this chart from today’s Wall Street Journal. Had you invested in a variety of assets this time nine years ago, here’s how you’d be sitting today:

Interesting, too, how our editors specialize in four of the best five sectors. Hmmmn…

And one last interesting twist on Visa’s IPO last week. Five of the 11 largest allocations of “V” shares were purchased by investors in the Middle East.

The Kuwaiti government is rumored to have scooped up an $800 million stake in Visa flotation. The Dubai Investment Authority, along with other Arabic sovereign wealth funds and private investors, purchased the rest.

For what it’s worth, Middle Eastern buyers outnumbered Asian and European shareholders combined… only investors in the U.S. purchased more of Visa’s historic float.

“Orders for Durable Goods in U.S. Unexpectedly Fell” reads this morning’s Bloomberg headline. “Unexpectedly,” we suppose, if you’re an ostrich. Orders for goods meant to last two or more years fell 1.7% during February, the Commerce Department reports this morning. A battery of unnamed economists were expecting a rise of 0.5%.

Most notably, orders for machinery goods fell over 13% during the month — the largest monthly decline since the Commerce Department started keeping track in 1992.

New home sales fell to their slowest pace in 13 years during February, reports the Commerce Department today. Sales dropped 1.8% during the month, to an annual clip of 590,000 — the worst since 1995.

Median sale prices sank, as well, down 2.7% year over year, or by about $6,000, to $244,100.

The dollar has all but given back last week’s gains. The dollar index has shed 2 points since Monday, ringing in this morning at 71.7, levitating ever so precariously above its all-time low.

The euro surged a penny overnight, to $1.57, on dollar weakness and an unexpected increase in German business confidence. The yen rallied to 99 this morning.

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The top five foreign holders of U.S. debt — Japan, China, the U.K., Brazil and “oil-exporting nations” — were all net buyers of U.S. Treasuries in January. During the fall, all of these countries were dumping Treasuries like garbage trucks at the New York landfill.

But current foreign buying trends indicate a shift. Through two months of heavy U.S. Treasury buying, for example, China has now repurchased all the U.S. debt it sold in 2007 and now holds a multiyear high.

This is the same nation, mind you, that threatened to use its “nuclear option” on August 9, 2007 and sell its holdings en masse — thereby crushing the U.S. economy.

China’s total foreign exchange reserves grew by a stunning $118 billion in the first two months of 2008, China Business News reports today. That’s a 7% increase. And it brings China’s total reserves to some $1.6 trillion, an amount equivalent to Brazil’s entire GDP, and far and away the largest in the world.

Last year, China’s forex reserve grew by 43%, or $462 billion. If China’s economy keeps growing, in spite of the Communist Party’s best efforts to slow it down, you’re only going to see these reserves increase.

Gold is still rebounding from last week’s correction. From Monday’s lows of $905, spot prices have inched their way back up to just shy of $950 an ounce this morning.

“I haven’t seen anything,” writes our friend James Turk at goldmoney.com, “to change my view that the dollar is on the same downward path. For this reason, it is better to own metal than paper.”

Oil crept up a bit yesterday and overnight, to about $101 this morning. But then, the U.S. Energy Information Association delivered traders a surprise: a 3.3 million barrel drop in the weekly supply. The price leapt 3 bucks, to $105, within minutes.

For what it’s worth, legendary energy investor T. Boone Pickens reversed his oil position yesterday.

The billionaire investor had been shorting light sweet crude through the first quarter, a position that had much of the energy world convinced $100 barrels wouldn’t last long. It’s also a position that kicked Boone’s BP Capital Energy Equity Fund in the teeth. It was down 14% in the last two months.

“I think I made a mistake,” the Texas octogenarian told a CNBC cheerleader by way of explanation. “I thought oil in the second quarter could come off $10, but I don’t think that’s going to happen. In the second half, you’re going to see oil above $100. The major oil companies have peaked on their production. It’s awful hard for them to add to their reserves and their production.

“Look at the producer countries. They have all kinds of reasons to keep the price up and they’re going to keep the price up. The only way I could see [oil dropping to $50] is a global recession… a serious global recession.

“I don’t believe I will ever see $50 oil ever again.”

Gas rebounded a cent yesterday, to $3.26, just shy of the record high set last week. Once again, The 5’s inbox was awash with gasoline-related comments:

“What all of those Europeans fail to understand,” opines one reader, “is that in America, we have to drive much longer distances, because our built environment in the past 50 years has been predicated on cheap oil. Most Americans do not have the option of walking to the market or downtown. I have a friend in Brussels who plans for a 100-kilometer trip as if she were driving from Maine to California. We will or would drive that far to go to a good restaurant. This is the fine kettle of soup America finds itself in! We have no one to blame but ourselves.”

“Sooner rather than later, the USA will also join the $8 per gallon club,” writes another. “In my humble opinion, there are two ways to get there. Either you pay the additional $4 to the oil-producing countries, or the USA slaps an (additional?) gasoline tax of $2 on every gallon and puts the money into an ‘infrastructure fund’ to keep your roads and bridges in a decent state of repair.

“The difference $2 would make? Oil prices will drop substantially when the markets realize that the USA is finally doing something (anything!) to rein in consumption.”

“There is a price at which gasoline will start to erode usage,” suggests our last reader today. “I was in the coffee business. In the 1970s, green coffee, because of successive droughts in Brazil, reached the unheard-of price of $3.33 per pound.

“When the coffee inventories were worked off — in three-four months — and were replaced by the new, higher-cost green coffee, it became immediately apparent that the user found ways to stretch the product to make up in part for the higher price. More water per pound; finer grind to give a higher yield with less coffee; and, of course, the substitution of other beverages, tea and soft drinks being the most common. As much as coffee is ‘addictive’ and its use is considered to be immune to price, it turned out not to be true. Coffee volume plummeted, only to be revived when some years later, the price of green coffee went back to normal levels.

“People get accustomed to a price level with which they are comfortable. In the case of coffee, the change was abrupt and caused dislocation in the market. With the price of gasoline, it resembles the story of the frog: If you put a frog in boiling water, it will jump out. BUT if you put a frog in lukewarm water and bring the water to a boil gradually, the frog will stay put and be cooked alive. The gasoline user is being cooked alive, gradually.

“But unlike the frog, he/she will survive and drastically cut their consumption. Price does matter. It may be the only way to release the country from dependence on foreign oil.”


Addison Wiggin
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