Bold Bank Forecasts, Why Bear Stearns Still Matters, Fed’s $1 Trillion Folly, China Rattles Oil Market, and More

by Addison Wiggin & Ian Mathias

  • Global banks issue stern warnings… “panic” and “catastrophe” around the corner
  • Ed Bugos on Fed policy… Bernanke talks the talk, but will he walk the walk?
  • Two Bear Stearns fund managers arrested… Chuck Butler on why it matters more than you think
  • Fed passes a dire benchmark… $1 trillion of loans and securities pumped into financials
  • China nixes fuel subsidy, U.S. stock and commodity markets react
  • Plus, the ETF debate rages on… readers weigh in

At least two banks are willing to “tell it like it is”:

“A very nasty period is soon to be upon us — be prepared,”
reads the latest release from the Royal Bank of Scotland. Its hotshot credit analyst Bob Janjuah predicted a 22% crash for the S&P 500 by September:

“The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets.”

For what it’s worth, Janjuah suggested his clients remain in cash. If they must invest, he says, “focus on quality, short durations, noncyclical defensive names.”

If the Fed doesn’t raise rates soon they, “could trigger another ‘catastrophic’ event,” continues a Morgan Stanley report in the same spirit.

“We see striking similarities between the trans-Atlantic tensions that built up in the early 1990s and those that are accumulating again today. The outcome of the 1992 deadlock was a major currency crisis and a recession in Europe Painful macro adjustments are likely to take place. Pegs to the euro could be questioned.”

Man words like “nasty,” “panic,” “catastrophic,” “crisis” and “painful.” Not your typical snorefest banking forecasts. Sounds like the Mogambu Guru
has picked up some attentive new readers (ANRs).

“As a rule,” says Ed Bugos, “the Fed talks tougher than it is capable of acting, especially with a new administration around the corner.

“Bernanke has nothing more in mind than taking away the interest rate stimulus, as Greenspan did after 2004 — gradually and marginally if that! What’s more, the consensus doesn’t expect any action near term. Ultimately, his resolve rests on the correctness of his premise — that the risks to economic growth have abated.

“The Fed is not ideologically equipped to tackle rising unemployment and rising prices. Do you really think it is going to hike rates while stocks are reeling?”

As most fund managers prepare to adjust their portfolios, two former Bear Stearns fund managers are preparing for stints in prison:

Ralph Cioffi and Matthew Tannin, the men behind the two Bear Stearns funds that started the credit crisis back in summer 2007, were indicted yesterday.
Federal prosecutors claim they have a “mountain” of evidence that the two managers knew their funds were doomed, but intentionally misled investors to stave off sudden withdrawals. Both men face several charges of conspiracy and fraud.

“Do they matter?” asks Chuck Butler. “Well… When you’re a country such as the U.S., depending on the kindness of foreigners to buy its assets to finance its gargantuan deficit, it SHOULD matter! If those foreigners don’t feel as though the assets they are buying have credibility, they won’t buy… And that leads us back into the circle of when you can’t finance your deficit, you have to either raise interest rates aggressively or continue to allow a general debasement of your currency.”

Moody’s has finally downgraded the credit ratings of MBIA and Ambac.
Moody’s cited changes in both companies’ “financial flexibility” and said the credit outlook remains “negative” for both.

While the ratings of the bond insurers remain “investment grade,” they no longer carry the coveted AAA seal of approval.

The U.S. stock market is reacting accordingly. Dire financial predictions and buoyant oil prices have traders slamming the sell buttons today the Dow breached the 12,000 level at this morning’s open, falling 130 points at the bell.

Adding to today’s volatility, it’s another “quadruple witching” day. Contracts for index futures, index options, stock futures and stock options all expire today. Such days occur only four times a year, and if traders are on the wrong side of a trade (say, going long the S&P), they’ll have to scramble to cover this afternoon. We’ll give you the blow-by-blow on Monday.

(BTW, the best way to ensure that you don’t get sucked down with the undertow is to follow the advice of all our editors here at Agora Financial… and this month we’ve made it really easy and inexpensive to do just that. Get the details here.)

Yesterday’s stock market was a bit more optimistic.
The Dow and S&P 500 inched up 0.3%, mostly on lower oil prices (see below). The Nasdaq leapt 1.3%.

Gold has stayed pretty steady amid all the turmoil.
It’s trending up this morning on market mayhem about $905 as we write.

The dollar is getting hit hard this week. The dollar index has shed a full point since Monday,
owing most of its fall to the budding theory that the European Central Bank will begin hiking rates long before the U.S. It scores 73 even this morning.

The Federal Reserve is still printing, dollar be damned. The Fed handed banks another $75 billion in short-term loans in its latest TAF auction this week. And we saw another TSLF come and go yesterday the Fed exchanged $36 billion in U.S Treasuries for untradeable assets yesterday. All in less than 30 minutes, we hasten to add.

We recently crunched the numbers on these TAF and TSLF offerings… combined, the Fed has doled out over $1.07 trillion in loans and Treasury notes.
You wouldn’t know it by looking at this week’s financial news though. Not a peep from CNN, New York Times, WSJ, FT, CNBC nothing. Nada. Zilch. Too busy covering Tiger Woods’ knee injury.

Hours after we told you about China’s booming SUV market
yesterday the Chinese government has sharply increased the prices of gas and electricity.
The retail price of diesel and gasoline shot up 16-18% overnight in China, as did tariffs on electricity and jet fuel. Gas is now about $3.83 a gallon there.

China is now the eighth Asian nation to nix fuel subsidies in the past month.

We have to wonder when are we going to see some “blood in the streets” in China? Inflation there is at 8% and growing. Food and water are becoming increasingly expensive and scarce. The Chinese stock market is completely in the crapper. Human rights are still a major issue. Tens of millions of Chinese people are being displaced by rural development and natural disasters. Millions more are about to get the shaft so that tourists can enjoy the Olympics and now gas is suddenly 16% more expensive. China may be the growth story of the future, but it sounds like living there in the present well sucks.

Oil fell $5 on the news.
The “red nation” is the world’s second largest consumer of oil, and its sudden shedding of fuel subsidies seems reason enough to sell the black goo. Light sweet crude fell as low as $131.

Just another buying opportunity, evidently the price of oil is already back up to $135 this morning on news of more militant attacks in Nigeria and a threatening Israeli military exercise.

The price of oil “could soon reach $200,”
suggested Hugo Chavez. Our favorite nation-crusher said yesterday that the “fair price” of oil was closer to $100 a barrel. But, he thinks U.S. threats toward Iran and general “bad management” of the U.S. economy could send oil prices past $200.

Gas prices in the U.S. stood still for the third day in a row.
It’s still $4.07 a gallon for the cheap stuff.

Delta Air Lines announced it’ll cut capacity by another 3% this year.
The company had already unveiled plans to slash domestic capacity by 10% in the second half of this year now Delta says higher jet fuel prices have forced another round of cuts.

And we’ve heard of fuel surcharges for all sorts of planes, trains and cruise liners but this brand of surcharge is new to us:

Some Georgia drivers will soon pay an additional “fuel surcharge” on their next speeding ticket.
The city council of Holly Springs, GA passed a $12 addition to all speeding tickets to help their local cops offset $4 gas. Representatives of the 7,700 Holly Springians say the surcharge will generate an extra $26,000 a year.

“I have no doubt that ‘green’ energy is the wave of the future,”
writes a reader, “and that it will come to occupy a prominent place in our future. As much, at one time or another, could be said of the bicycle, the railroad, the airplane and the radio — not to mention the Internet.

“As an investment thesis, however, there is no clear way to play this. As most investors in bicycles, railroads, airlines and dot-coms learned the hard way, technology is very hard to invest in, because by the time a promising technology comes to fruition, another, superior technology may already be ready to displace it. And green energy plays will turn out to be either technology investments (with all the attendant risks) or commodity, low-barrier-to-entry businesses. A precious few will work out, and investors in the others will, in the time-honored tradition of technology investors, turn out to have taken a very expensive, if not enjoyable and exciting ride.

“The best one can hope to do in the ETFs is to ride an occasional wave of euphoric buying or, on the short side, desperate selling.”

“I am very skeptical of those gold- and silver-backed ETFs,”
opines another reader. “If it is true that they must hold the actual bullion for all of those shares they sell, when the government wants to confiscate your bullion, it has to go to only that ONE vault! Think about that one.”

“Gold and silver ETFs are backed by the physical commodity,”
writes a reader. “Due to their fee structures, they do not move hand in hand with the commodity markets, but they are still a good way to have a semblance of those commodities in retirement accounts, as an example. Incidentally, GLD now has options, so you can buy puts and calls. SLV hasn’t progressed to that point yet.

“As for ETNs, these are another animal altogether. Scrutinize the ETNs carefully. Among other things, they all depend on the company underwriting them. I believe there is a credit component based upon the underwriter. Personally, I have owned physical precious metals, futures, options and ETFs. You have to determine what your reason for holding them is, as well as the best way to do that, depending on your investment goal for that particular account. I like ETFs better than mutual funds for retirement accounts — the fees are less, and you can sell them more easily and even protect your positions with puts and calls.”

“Love The 5, guys and gals,” declares our last reader. “I too have done some research on the ETFs
and have come to the conclusion that if the sponsors (read BSC) decide to go belly up, all investors will lose their money, regardless of profits. The counterparty agreements are loaded with rhetoric regarding these risks. Unfortunately, nobody ever reads these when they take the plunge, seeking big profits as advertised by the sponsors! I also am very leery of any derivative products put out by Wall Street, as they are usually guaranteed to make profits for the few, rather than the masses that they are sold to.

“The derivative and credit markets are in an abysmal state these days, and if you learn anything, it is to avoid credit risk going forward. It is my firm belief that we are nowhere near done with this crisis yet, but then again, you knew that at The 5 because you have been writing about it longer than I have been thinking about it. I’m short and gone to cash, but not using the short ETFs!”

Have a nice weekend,

Ian Mathias
The 5 Min Forecast

P.S. If you’re near Washington, DC this weekend, don’t miss the screening of I.O.U.S.A.

at the Silverdocs film fest. The Washington Post said that of the 108 documentaries at the festival, I.O.U.S.A. is one of the five must-see flicks. See for yourself,


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