China’s Market Deflating, Rice Skyrockets, Bear CEO Cashes Out, and More!

by Addison Wiggin & Ian Mathias

  • U.S. markets fall while China soars… but is your money still better off in the Far East?
  • Another commodity skyrockets… why this latest run-up might put blood on the streets
  • Tech losses continue, Nasdaq falls… but one report shows the potential for massive tech rebound
  • Former Bear CEO cashes out… how much Jimmy Cayne lost, and what it means for the future of BSC
  • The first subprime accounting snafu emerges… how KPMG might be the next Arthur Andersen

 

Stocks on Wall Street took a beating yesterday, but on the other side of the Earth, the Shanghai exchange soared… up nearly 5%.

Rumors suggest the Chinese government may enable gamblers worldwide to trade futures on the Shanghai Composite. And up she went.


If you haven’t been paying attention, the mainland Chinese market has been witnessing some serious bloodletting for the past five months. The Shanghai Composite is down 40% from its all-time high set in October 2007.

In the last month alone, the SSE has suffered a textbook 10% correction:

After putting U.S. markets to shame in 2007, Chinese stocks are looking less attractive by the day in 2008. If you’ve got the cajones to trade futures on that market, more power to you.

Also of concern in the Far East, rice prices skyrocketed overnight. Since we mentioned the rising cost two weeks ago, rice has risen as much as 30%.

Yesterday alone, traders goosed the price double digits after Egypt — a leading rice producer — announced a ban on rice exports. Global stockpiles have dropped to levels not seen since Carter entered the Oval Office.

Following Egypt’s decree, the Philippines announced a massive purchasing plan to shore up reserves. India installed additional restrictions on rice exportation. Vietnam officials vowed to cut exports, and Cambodia followed suit.

China, as we’ve come to expect, added its own twist. The government promised to pay farmers more than market price for their rice in order to grow stockpiles. They’ll need extras supplies for the Olympic hordes they’re pining to impress.

Thus, the price of Thai rice, the global benchmark, has doubled since January.

Rice trades a bit differently in the U.S. But a quick look at futures in Chicago and we think you’ll get the idea:

The price has doubled, to $19 per 100-pound contract, in a little over 15 months. At this pace, you’ll see blood in the streets in many of the world’s poorest nations before the end of the year.

The U.S. stock market resumed its losing ways yesterday. The Dow and S&P 500 both fell around 1%. In keeping with the trend, a down day for the Dow spelled an even worse day for the Nasdaq. The tech index fell nearly 2% on a Google downgrade and poor earnings guidance from Oracle.

J.P. Morgan released its 2008 Global Internet Snapshot this morning. It paints a surprisingly optimistic future for global “tech.” Here are some highlights:

Cell phones: For every 100 U.S. citizens, 77 have a cell phone calling plan. In Italy and Hong Kong, there are 135 mobile subscriptions for every 100 people. The global average? Only 41 out of every 100 citizens subscribe to cell phone service.

Mobile phone users are growing at an annual rate of 27%… Indian cell phone users grew by 84% last year alone. Computers: For every 100 Americans, there are 80 PCs. Global PC ownership is a humble 13 for every 100.

Internet: 1.3 billion people now have reliable access to the Internet, thanks to an annual growth rate of over 20% during the last eight years. Yet global Internet advertisers spent only $40 billion last year, 6% of the total estimated worldwide advertising expenditure.

If the global economy doesn’t melt down completely, cell phones and computers still look like a long-term growth opportunity. The trick is finding the right players.

Former Bear Stearns bridge champion and part-time CEO Jimmy Cayne sold every last one of his BSC shares yesterday. Cayne unloaded some 5.7 million shares at $10 a pop for a net “profit” of $61 million.

In a shocking twist, Bear stock fell about 4.5% in aftermarket trading.

Two years ago, Cayne became the first Wall Street CEO to own a $1 billion stake in his own company. Now that he’s cashed out and the stock has ticked down… what are the odds of J.P. Morgan continuing to woo the failing bank above $10 per share?

The Fed took on $75 billion worth of mortgage-related securities in exchange for U.S. Treasuries yesterday.

In its first and much hyped TSLF, our lender of last resort allowed banks and brokerage houses to unload their toxic mortgage-related investments for government debt… for a mere 0.3% rate of interest. We’re sure our grandchildren will thank you for the effort when they get the chance.

In a related story, the dollar index remains a point above its historic low at 71.5.

Still, don’t rule out the good ol’ U.S. of A. just yet.
According to KPMG, one of the “big four” accounting firms, only Mexico and Canada offer a cheaper place to do business. The U.S. ranked seventh in this same study two years ago. KPMG cites the plunging dollar as the predominant reason behind its No. 3 ranking this year.

For what it’s worth, the stewards of the survey also say the U.S. is the cheapest place in the world to make cars.

However, it sounds like KPMG may have more to worry about than inexpensive parts and labor.

New Century — the subprime lender that bit the dust last April — has been the target of a U.S. Justice Department probe. As many expected, government lawyers found that New Century “engaged in a number of significant improper and imprudent practices related to its loan originations, operations and financial reporting.”

But the real kicker is they also say KPMG’s accounting practices contributed to New Century’s demise “by enabling them to persist and, in some instances, precipitating the company’s departures from applicable accounting standards.”

Thus, most of the 450 companies and individuals currently suing New Century can now sue KPMG for “professional negligence.” You can also count on a whole firestorm from Wall Street, since KPMG kept New Century’s books on the wrong side of the margin for most of 2006.

Deep pockets: KPMG employs about 123,000 accountants, attorneys and office clerks. The firm cleared about $20 billion in fees last year.

Crude oil gained a few more bucks yesterday and overnight, to just short of $108 per barrel this morning. Buying momentum was in place since Wednesday’s worse-than-expected U.S. supply report. Then this happened:

That’s a major Iraqi oil pipeline in Basra, not long after being bombed by “insurgents.”

To be expected, traders bought first and asked questions later, pushing crude up $2 yesterday. But despite the panic, the pipeline will be repaired quickly and exports will hardly be affected. As we write, the fear premium is backing out of crude prices, and they’re settling in around $106.

After inching up all week, gold opened down this morning in New York. At the opening, it fell $25, to $930.

Gas prices, however, have continued to creep higher. The current national average is $3.27, about half a cent off its all-time high.

Delta Air Lines tacked on another fuel surcharge yesterday. It’ll now cost you an extra $10 to fly with the Atlanta carrier. According to farecompare.com, the average fuel surcharge on domestic U.S. flights has grown from typically nothing at the beginning of 2007 to about $50 today.

The Reuters/University of Michigan “consumer sentiment” survey released today confirms the gloom we reported from the Conference Board on Tuesday. The sentiment index fell to 69.5 in March, from 70.8 in February.

“A recession has occurred whenever the sentiment index has declined as much as it has fallen during the past year,” said Richard Curtin, the director of the survey, “including the recessions occurring from the mid-1950s to the early 2000s.”

Before the late Dr. Kurt Richebacher died, he used to lament how American economists had come to rely on surveys, like the consumer sentiment index, for their analysis. “What the hell do consumers know about the economy?” he would grumble in his German accent.

As if to prove his point, despite what they told the Conference Board and quants from the University of Michigan, consumers spent 0.1% more last month than they did in January. Consumer income also rose 0.5% during the month, up a mite from what the economists who were polled on the subject expected.

“So the Commerce Department says GDP grew at 0.06% in the fourth quarter,” writes a reader. “Didn’t it really mean to say Bush and his cadre of liars ‘ordered’ GDP to have been positive for the quarter? Since George is oblivious to the facts, he was no doubt informed that two quarters of negative GDP growth have historically meant bad news for the economy.

“Add that to two consecutive negative ISM and employment reports and you have recession spelled out in capital letters. Since he and Paulson have spent considerable time in front of the cameras telling us how wonderful the economy is, a negative GDP would have made them look like even bigger liars than is already obvious to even the most casual of observers.”

The 5 Responds: C’mon, now. The 5 is a place for civilized discourse. No need to hurl epithets at the commander in chief and his henchmen.

Apparently, Korean economics are so sound,” writes another, responding to yesterday’s statement that the South Koreans will begin lightening their load of U.S. debt, “they can turn away from U.S. investment. That is great! It gives us the opportunity to help our own economy:

“1. We still maintain a rather healthy U.S. military presence in South Korea, and if we bring those troops home, I am sure the Korean economy can fill the gap with native South Korean troops. Think of how much our spending could be reduced. That also would relieve some of the strain on our military, which many believe is spread too thin.

“2. Rather than allow the Korean auto industry to further destroy the U.S. auto business with cheaper imports, we could impose some realistic tariffs on its vehicles imported to the U.S., and that would also provide some funding to our government coffers and help reduce the U.S. tax burden.

“Besides, I never really liked kimchi.”

The 5: Yeah, that’s what the world economy needs, a good bout of fearful retrenchment. Bring it on.

Cheers,

Addison Wiggin
The 5 Min. Forecast

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