by Addison Wiggin & Ian Mathias
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Another multibillion-dollar write-down hits the Street
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China gets chopped in two… Shanghai Composite erases 2007 gains
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Rice at another record high… U.N. warns of coming “silent famine,” food rationing hits U.S. soil
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Kevin Kerr’s “Farm Tour 2008” — the Manic Trader’s advice on how to trade today’s market
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Euro near $1.60… global finance chiefs grow tired of the declining dollar
Bank of America announced a nearly $2 billion write-down and a 77% decline in year-over-year profits this morning. The names and numbers in this crisis are becoming a blur, aren’t they? For armchair analysts like us, it’s getting a little annoying.
Still, net income for BoA rang in at 23 cents per share — barely half of what the Street expected. The company said it has ramped up “loan loss provisions” nearly sixfold, to about $6 billion.
“These results clearly did not meet our expectations,” Chairman and CEO Kenneth Lewis said in a statement. “The weakness in the economy and prolonged disruptions in the capital markets took their toll on our performance.”
Yeah, that’s right, it had nothing to do with your bad investment decisions…
But never fear, the S&P 500 and Dow each rallied in the face of a multibillion-dollar write-down from Citigroup on Friday. In fact, financials of all toxic investments led the way to nearly 2% gains in both indexes.
On the tech side, the uber-bloated Google surged some 20% on good earnings and took the Nasdaq with it, up 2.6%.
For the week, major indexes were up well over 4%, their most uppity week since February.
Earnings for Dow components American Express, Merck, McDonald’s, AT&T, DuPont, Boeing, 3M and Microsoft all come this week. Also, Yahoo, Apple, Hasbro. Mattel, Pulte Homes and UPS. Could be a doozy. But if the pattern holds, these stocks will all rally unless one or more of them declare bankruptcy… or worse. Losses in the billions are greeted as good news these days.
We’ll let you know if there are any entertaining surprises.
The Shanghai Composite fell another 4% on Friday.
The Chinese index is down about 50% from its October high. All of 2007’s magical gains? Poof! Gone. Sorry.
This is what $2.5 trillion in paper gains looks like… on the way up… and the way down.
“The correction in Chinese stocks was bound to happen,” says our
Christopher Hancock, keeping his eyes peeled on the exchange there. “Every asset has an intrinsic value. What someone is willing to pay for an asset is another story. The price-to-earnings ratio has fallen on the Shanghai market to 35 times announced income, from a peak of about 70 times last year. But 35 times current earnings is still expensive.
“A fund manager in Asia I know says the risk stigma surrounding Asian investments still looms large — despite the fact that the world’s most risky assets at the moment are Western banks.
“Our Hong Kong recommendations offer much less risk than many U.S. blue chips. They maintain rock-solid balance sheets. They operate in one of the world’s most capital-friendly environments. Government policies that inhibit growth aren’t much of a concern, if any. They have bank accounts rife with money to spend in Asia… not America. And their diversity ensures that income streams aren’t tied to any one business in particular.
“We like our chances…”
Light sweet crude rose to new highs this morning. Three events helped:
*OPEC minister Chakib Khelil denied rumors that OPEC would soon increase production — assuming they could if they wanted to
*Nigerian rebels sabotaged a Royal Dutch Shell pipeline, reducing its capacity by about half a million barrels a day
*Then, a 150,000-ton Japanese oil tanker was attacked off the coast of Yemen.
Et voila… crude oil pops to $117 a barrel. If you’re keeping score at home, oil is up about 23% year to date.
As luck would have it, gasoline followed suit. AAA says gas hit a dizzying $3.50 this morning nationwide. That’s 63 cents higher than a year ago. You may want to subscribe to Outstanding Investments to help recoup some of the dollars you’re hemorrhaging at the pump.
“The new VeraSun Janesville facility is huge,” reports Kevin Kerr from his “Farm Tour 2008.”
The Maniac Trader in farm country… checking on his crops
This VeraSun facility will pump 110 million gallons of ethanol a year when it’s complete. The beast will devour 39 million bushels (over 2.1 billion pounds) of corn — doing its part to cause food riots in Egypt and across the Middle East.
“Here in my native state,” Kevin reports in Minnesota, “it’s in the 40s and rainy — not good planting weather at all,” writes Kevin. “Farmers are getting a bit nervous, because they have a lot of corn to get in the ground.
“I never claim to be an expert on farming, but I sure do learn a lot from my farmers network, and that’s why I come here. Three years ago, when I first came out here on my tour, corn was trading around $2.50. Nobody in the mainstream press even mentioned corn. But my farmers told me to buy it.
“Now the landscape is changing, and so is the idea of corn-based ethanol being the panacea the government sold it as. The writing may be on the wall for corn-based ethanol.”
So how should you trade in these conditions? “Be nimble.” He told Forbes last week, “It’s not a ‘bargainfest’ anymore. Three years ago, we bought corn for $2.50 a bushel. Now it’s $6. It’s still a buy, but it’s not as attractive. So there are no longer the deals. There is more risk involved. This is tougher trading.”
Kevin’s current corn position is up 70% in less than three months. If you’d like to try your hand at trading commodities, we suggest you ride along with our Manic Trader in Resource Trader Alert.
Meanwhile, “There’s a risk of a silent famine,” U.N. Food Program’s Paul Risley said today. “If you’re making $1 a day, $2 a day, somewhere near the bottom of the economic scale, a sudden doubling of the price of rice or of wheat is going to make it impossible for you to put food on the table.”
Rice keeps finding new highs every day, as well. Futures in Chicago rose to $24 and change on Friday, another record high.
Indonesian officials (presiding over the world’s third largest rice-exporting nation) announced over the weekend that any surprise surplus from this year’s rice crop would not be exported. China, Egypt, India and Vietnam have all said the same.
Even in the U.S., food rationing is becoming a reality, as much as the mainstream media would like to pretend it’s not. The lead story on Drudge today suggests Costco and other food wholesalers have begun to quietly limit purchases of flour, rice and cooking oil.
“Due to the limited availability of rice,” reads a sign in a California Costco, “we are limiting rice purchases based on your prior purchasing history.” Interesting times…
After a brief rally last week, the dollar index dropped back to 71. We thought the dollar would rally this spring on sentiment alone, but as far as dead cat bounces go… this one went splat.
Right now, the dollar looks like it’s consolidating nicely for another leg down.
“I see no room for an interest rate cut at the moment,” bluntly opined ECB bigwig Klaus Liebscher late on Friday, in reaction to last week’s inflation report in the eurozone.
Consequently, the euro found itself three-tenths of a cent shy of another all-time high this morning. We’ll be looking at $1.60 before the week’s out, for sure. Just give the Fed a moment to catch its breath. Heh.
At 103, the yen’s been weakening steadily lately as stock market strength emboldens carry traders of the world. The pound and loonie seem stuck at current levels, both trading around $1.98 and 99 cents for the past few weeks.
Oops, as we said… the Fed handed out another $25 billion in U.S. Treasury notes last week. On Thursday, Bernanke and company successfully exchanged tens of billions “worth” of mortgage-backed securities for U.S. Treasury debt. For a modest 0.1% fee, financial institutions were able to unload their toxic investments and get IOUs backed by American taxpayers in return.
Since the beginning of this “credit crisis,” the Fed as successfully exchanged about $159 billion in these TSLFs and lent out some $310 billion via its TAFs. We hasten to add privately profiting hundreds of millions of dollars in the process.
The U.S. Federal Reserve is setting the pace for other central banks around the world, too, most notably in other English-speaking countries.
Bank of England Governor Mervyn King announced today that the central bank would swap about $100 billion in U.K. bonds for mortgage-backed securities. According to King, interbank lending has all but ground to a halt. The BoE is ready to come to the rescue with bonds in hand.
“There is no arbitrary limit on this, so it could well go higher,” King told reporters
of the $100 billion glass ceiling. Yeah, we suppose it will.
“Authorities Lose Patience With Collapsing Dollar,” headlines the No. 1 story this weekend on the Telegraph’s Web site. Jean-Claude Juncker, Luxembourg premier and the eurozone’s de facto CFO, fired a shot across the Fed’s bow over the weekend, hinting that euro powers are ready to try and halt the demise of the dollar.
“The moment will come,” warned Juncker, “where the exchange rate level will start to cause serious harm to the European economy.” At last week’s G-7 meeting, Italian and French presidents Silvio Berlusconi and Nicolas Sarkozy made similar statements, calling for the ECB to adopt the sort of “dual mandate” employed above by the Fed and now the Bank of England.
You may recall September 2000, when world central banks united in a euro-buying spree, which buoyed the currency as it was first getting its sea legs.
We say why not? Go for it with the greenback, too. About 53 trillion smackeroos should do the trick. Give or take a trillion. Bring it on.
After sinking to $910 on Friday, gold steadied at $920 this morning.
Prescription drug sales in the U.S. grew at their slowest pace ever recorded in 2007. According to IMS Health, a pharmaceutical market intelligence group, Big Pharma in the U.S. grew 3.8% during the year — the worst growth rate since they started keeping track in 1961.
Emerging markets including China, but excluding Japan and Latin America, grew more than three times as fast as the U.S.
Even so, as good, bloated citizens should, consumers in U.S. still ingest more drugs than anyone and comprise more than 40% of global sales. Consumers in America spent over $285 billion on their collective medicinal habit last year alone. Gimme drugs…
“Hey, why stop there?” asks a reader of those in favor of a universal health care system. “The auto industry is a mess right now. Let’s socialize the auto industry. Then all those laidoff autoworkers would be guaranteed a paycheck, and maybe the price of cars will go down. What about the housing industry? That’s a mess. Let’s socialize lending and building. Then everyone would be guaranteed a place to live. Hey, food is also costing us way too much money. Let’s socialize that. Then we’ll all have plenty to eat. Wow… what a great idea. We’d have food, shelter, a car, a job and great health benefits! Are you people listening to yourselves? This is socialism!
“I am self-employed. I have seven kids. I’m 38 years old. I pay $1,000 per month for health insurance. That doesn’t include maternity or dental. I hate it! But I deal with it, and I try to make my situation better every day. It’s my responsibility to improve my situation — not the government’s.
“People, pull your hand back, and close it. Stop looking for handouts. Get your butt out there and do something about it. Health care is NOT a right. If you keep giving the government more power and authority by demanding that it take care of you, then you will have given away your liberty and freedoms that your forefathers fought, bled and died for.
“If this course (in general) continues, you will have sold your birthright for a bowl of ‘pottage.’ Your freedoms will be gone and your country will be bankrupt! This is the land of opportunity,’ not the land of ‘entitlement.’”
“Many doctors barely get paid enough from Medicare to cover their own expenses and break even,” writes another reader. “Many doctors, including myself, are opting out of Medicare because we can’t afford to stay in it. If you think doctors are the cause of the problem with rising health care costs, take a look at your last hospital bill. I guarantee you that the physician portion is miniscule compared with the hospital and drug costs. I get paid $6 from Medicare to read a chest X-ray…
“It’s not the doctors who will suffer, it’s the patients, because eventually, Medicare patients will not be able to find a doctor. If you want to point the finger, maybe you should look to Washington, HMOs and drug companies. Doctors only want to make a living and do what they are trained to do: take care of patients without some politician or HMO telling them how to do it.”
“Taking money from someone by force,” writes a third, “and enrolling them in a particular health care program is wrong. It is stealing. Even if the person is better off with the prescribed health care program, it is still stealing. If I steal $1,000 from someone, and then invest it in their behalf, even if I double their money, I am still a thief…
“I don’t mind if other people want universal health care, as long as we are given the option to opt out. This means that if I sign a document refusing the coverage, then I don’t have to pay one dime. This also means that if I show up at a government health care facility bleeding, they are within their moral and legal rights to not treat me, even if I am bleeding to death. No matter how badly we may need a good or service, we have no right to steal. Stealing is stealing. History has shown time and again that when individual property rights are not respected, then poverty, misery and poor health always follow.”
Regards,
Addison Wiggin
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