More Pain to Come for Financials, Fed Hints at Rate Hike, Gas Prices at Another High, Addison on Time Cover, and More!

by Addison Wiggin & Ian Mathias

  • Bear Stearns officially dead… how the same warning signal that presaged its demise is flashing again
  • Dan Amoss on one financial teetering on the brink of collapse
  • Fed gov. says rate hikes coming “sooner, rather than later”
  • Gas at another all-time high… French protesters take to the streets
  • The 5 sits with Alan Greenspan… an interview highlight below
  • Plus, the AF Art Department takes it up a notch… a good-humored rendition you can’t miss

The 85-year “legacy” of Bear Stearns officially ceased today. A special group of BSC shareholders met this morning and approved J.P. Morgan’s offer of $10 a share for the whole firm.

Sayonara, BSC.

Perhaps not so ironically, the “credit default” swap market — the same beast that foreshadowed Bear’s demise — is signaling more trouble to come: The cost to insure debt issued by Lehman Brothers and Merrill Lynch is skyrocketing.

Credit default swaps on Merrill Lynch are up 50% since April. The same measure for Lehman Bros. has nearly doubled.

In words you and I might use at a bar, the likelihood of Lehman Brothers being unable to pay its debts has doubled in less than two months. That’s not good.

And as if we needed more confusing bad news from Wall Street, this morning, The Wall Street Journal accused Citigroup, UBS and J.P. Morgan of lying about their lending rates during the credit crisis in order to preserve their reputations.

The NYC rag says that earlier this year, the banks reported artificially low costs for Libor — the rate at which banks lend to each other. Such sandbagging would make the banks appear less desperate for cash than their counterparts.

The Libor is usually seen as an accurate indicator of the cost to borrow money. Banks around the world use it to gauge how much they should charge for corporate and consumer loans. If the WSJ calculations are correct, this Libor manipulation cost the financial industry $45 billion in mispriced loans.

“The worst is not over,” says our financial analyst Dan Amoss, taking issue with the popular media perception that the credit crisis has bottomed out and the banks are on the mend.

“Most of Wall Street’s moneymaking machines have shut down. Mortgage securitization activity has gone kaput, while IPO and M&A activities are sputtering. Billions of dollars of future write-downs and losses are still buried inside Wall Street’s balance sheets.”

Should Wall Street banks continue to be forced to write down mortgage-related losses, many firms are so undercapitalized even the sound parts of their businesses are at risk…

“Lehman’s equity (in yellow), for example,” explains Mr. Amoss, “supports just a tiny sliver of its towering liabilities. Lehman’s ‘leverage ratio’ amounts to about 32 times equity. That means Lehman’s assets can fall only about 3% in value before their equity is wiped out.”

Yet shares of Lehman Brothers have shot up 30% from their 2008 lows.

“These dramatic rallies support the popular thesis that ‘the worst is over’ for the financial sector. But they also provide attractive short-selling opportunities for if you believe the worst is yet to come.”

For more see: The Bear Market Strategy

The Commerce Department bumped up its first-quarter estimate of U.S. GDP growth to 0.9% this morning.
Really?! That’s 50% higher than
their initial guess of 0.6% … not nearly the recession most Americans believe the economy is in.

When Commerce Department quants finished giving the numbers their quarterly massage, they discovered the trade deficit for the first quarter was much smaller than they expected. And that “exports” accounted for a larger-than-expected increase in GDP.

Likewise, due to inflation concerns, we suspect, consumers spent a mere 1% more year over year during the first quarter… their smallest contribution to the nation’s GDP since 2001.

Still, even if the government’s assessment is correct, coupled with fourth-quarter growth of 0.6%, the U.S. has just experienced its slowest quarter-by-quarter expansion in five years.

“If inflationary developments and, more important, inflation expectations continue to worsen,” warned Dallas Fed chief Richard Fisher yesterday, “I would expect a change of course in monetary policy to occur sooner, rather than later, even in the face of an anemic economic scenario.”

The Fed governor warned a San Francisco conference yesterday of the “sinister beast” that is inflation. According to Fisher, the perma-hawk on the Fed’s board of governors, the Fed is ready to quell this beast the moment it gets out of their control.

“Even the perception,” says Fisher, “that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens, should it take root, is a paramount risk to the long-term welfare of the U.S. economy. The Federal Reserve will never let this happen. It is not an option. Ever. Period.”

An entertaining aside: Richard Fisher helped us prepare for our interview with Alan Greenspan yesterday. Patrick, the film’s director, met Fisher during an I.O.U.S.A. screening at the Dallas International Film Festival. Then hit him up for comments on the questions we were ready to fire Greenspan’s way.

Fisher particularly liked this one: “Is it fair to say that Fed policy has had a dramatic impact on the nation’s savings rate?” Greenspan’s careful response below…

One more pearl from Fisher’s speech yesterday. When making a point — that deficits put “pressure on central bankers to adopt looser monetary policy” — Fisher proposed his estimate for the current total debt created by unfunded liabilities like Medicare and Social Security:

$99 trillion

“Doing deficit math is always a sobering exercise. It becomes an outright painful one when you apply your calculator to the long-run fiscal challenge posed by entitlement programs. Were I not a taciturn central banker, I would say the mathematics of the long-term outlook for entitlements, left unchanged, is nothing short of catastrophic.”

Following Fisher’s comments, currency traders bid the dollar up. The dollar index edged a few points higher, to 72.9. The euro, as it’s wont to do when the dollar rises, slipped another cent, to $1.55. The pound and yen stayed put at $1.97 and 105, respectively.

Wall Street suffered through another dull day of flatness yesterday. A bad but still better-than-expected durable goods report kept the mood optimistic. But the Dow, Nasdaq and S&P 500 all ticked up less than half a point.

Gold’s recent downtrend remains intact this morning. The precious metal has been shaving off about $15 each day this week. Today it trades around $885.

Crude oil has bounced off its Wednesday low of $126. The light sweet goo trended up all day yesterday and this morning, and then a not-so-hot inventory report shot futures up a few bucks. The Energy Department said crude supply declined by 8 million barrels last week… traders were expecting a 750,000 barrel increase. That’ll do it… oil costs $131 as we write.

U.S. gas prices hopped up another penny this morning to a national average of $3.95 a gallon. Now 25% higher than this time last year, gas has struck a record high 22 days in row.

This morning, French truckers took a cue from their English brethren and staged a nationwide protest. Farmers, fisherman and “lorry drivers” blocked roadways, barricaded refineries and shut down fuel depots… all in protest of skyrocketing petrol prices. In some locations, the protests became so heated that riot police fired tear gas at demonstrators. Ho-hum.

Jet fuel has risen to $170 a barrel. That’s a scorching 98% increase from this time last year. According the International Air Transport Association, the rise in jet fuel costs is on track to cost the global airline industry an extra $72 billion this year.

We found another victim of new airline fees this morning: Frontier Airlines has begun charging hunters an extra $25 to bring antlers onboard. The once $75 fee is now an even $100. The bankrupt airline is taking drastic measures to recoup fuel costs, the higher “antler tax” being one of many.

Frontier also plans to charge $25 for a second bag, cancel half-price infant seats, stop taking bookings for traveling pets and up the fee for kids traveling alone. That oughta fix everything.

We haven’t spoken to our resident man-in-arms Jim Amrhein about the antler fee… but we assume he’s not happy.

So we asked Alan: “Is it fair to say that Fed policy has had a dramatic impact on the nation’s savings rate?”

You’ll recall yesterday we e-mailed you about Dr. Greenspan’s contention that the era of low interest rates over which he presided was due largely to the end of the Cold War and the fall of the Iron Curtain.

We paraphrase the rest of his response from memory: In an era of low interest rates, the nation’s savings rate has been abnormally low, as well. Rather than save a portion of their incomes at low interest rates, Americans have opted to divert a portion of their income into their 401(k)s and homes. As capital gains from these two assets classes slow down, Dr. Greenspan expects the traditional “savings rate” to tick back up… as a larger portion of incomes are diverted back into savings accounts.

He added, in the face of the dire fiscal policy of the federal government, there’s only so much monetary policy can do to shore up the currency in which people are trying to save.


Addison Wiggin,
The 5 Min. Forecast


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