Market Looks to Retest, Soros on the “Superbubble,” Biggest LBO Ever, Kerr on Oil, and More!

by Addison Wiggin & Ian Mathias

  • Wall Street sells off… major indexes look ready to retest credit crisis lows
  • George Soros on the “superbubble” about to pop, and the likely aftermath
  • Goldman Sachs, Citi issue dark news… more cuts and dismal forecasts from the world’s biggest financials
  • What credit crisis? Canadian schoolteachers organize biggest leveraged buyout in history
  • Kevin Kerr on oil: How the Jeddah meeting and the greenback are moving markets today
  • Plus, the return of Ross Perot, charts and all

  “The 2008 Credit Crisis,” take two… action.

The stock market suffered another sell-off on Friday. If you recall, the Dow and S&P 500 fell 1.8% and the Nasdaq plunged 2.2%. While the size and scope of the down day weren’t too remarkable, a quick look at chart of the Dow tells the important story… it’s time for some bottom testing:

According to Dow traders at least, we’re back to the Bear Stearns weekend. Not since then has owning this particular index been so unappetizing. Fear and uncertainty have returned in force, and the market looks ready to test the notion that “the worst is over.”

Year to date, the Dow and S&P 500 are down over 10%. The Nasdaq is close behind, at 9%.

  The market will have a slew of data to digest this week, little of which is likely to bode well for the major indexes.

We’ll see consumer confidence tomorrow. Durable orders, oil inventories and the FOMC’s policy statement come out Wednesday. Thursday, we’ll get the final second-quarter GDP reading and new home sales data, and, finally, some personal income and spending numbers on Friday. Of course, we’ll let you know how it all turns out.

  “To expect [to come] out of the recession by the end of the year, I find that inconceivable,” George Soros told The Wall Street Journal over the weekend. Still promoting his latest book, Soros told the rag what he expects of the U.S. once this “superbubble” has popped.

“I think that the decline in housing prices is going to be more precipitous and go further than people currently expect…I can envisage a very broad range of scenarios. One would be a very prolonged worldwide recession. I cannot imagine a replay of the ’30s. But you can have a muddle-through replay of the Japanese scenario, 10 years of stagnation.”

  The credit crisis will not peak until the first quarter of 2009, predicted Goldman Sachs last week. According to the latest forecast from the world’s biggest investment bank, financials around the world will need to raise an additional $65 billion by this time next year to cope with losses.

Financials have raised an estimated $120 billion in emergency funding in the past three quarters. Using Goldman’s forecast as a guide… that would put us around two-thirds of the way through this mess.

Goldman also downgraded price targets for 14 financials and lowered its own 2008 earnings forecast.

  We can’t help but agree with Goldman’s forecast. The market seems to be similarly disposed as well… the KBW Bank Index, a compilation of the biggest 20 banks in the States, remains in free fall:

  Citigroup and Goldman Sachs are both firing 10% of their investment banking divisions. Citi has officially announced that over 6,000 of its investment banking employees will be out of work starting today. And this morning, the Financial Times said the same of Goldman Sachs, without citing a source.

By our best estimation, Wall Street has cut over 80,000 jobs since the start of the credit crisis. For reference, around 90,000 financial jobs were lost after the tech bust.

  But none of this seems to be bothering Bill Gross… Pimco Total Return, the world’s biggest bond fund, is still buying up debt from Citigroup, Morgan Stanley, Goldman Sachs, Deutsche Bank and Banco Santander.

Gross told Reuters last week that the debt of such mega-banks remains “high quality” and that he believes they represent good long-term value.

  Some Canadians don’t seem too worried, either. As the U.S. credit market withers, two Canadian organizations are conducting the biggest leveraged buyout in history.

The Ontario Teachers’ Pension Plan fund is on the verge of spending $51 billion to buy BCE, Canada’s biggest telecommunications business. The teachers will need to borrow up to $35 billion to complete the purchase… should it occur, it would be the biggest leveraged buyout ever. The Supreme Court of Canada put its seal of approval on the LBO on Friday, and The Globe and Mail reports negotiations are “surprisingly cordial.” All signs are pointing to the deal going through by August.

An amalgamation of Canuk teacher retirement funds being used to leverage the biggest buyout ever… for a phone company? Strange.

  Oil is back up to $135 this morning, adding to the sour mood on Wall Street. The hyped meeting of the world’s major oil producers and consumers in Jeddah over the weekend ended up being a bit of a yawn. Saudi officials promised to ramp up production… they will — as they’ve said before — increase output from 9 million bpd to 9.7 million bpd by July.

That’s about all that came from the weekend meeting. Representatives from all over the world talked about supply, demand, speculators… that sort of thing. We’ll kick “quote of the weekend” honors to U.S. Energy Secretary Samuel Bodman:

“We spent 30 years digging ourselves into this hole… it won’t be solved soon."

  Traders responded to the meeting by keeping oil prices at $135-136 a barrel. Military “exercises” in Israel seemed to overshadow the Saudi production boost almost entirely.

  “I don’t know what people were really expecting to hear from this meeting,” Kevin Kerr told CNBC this morning. “The Saudi increase won’t hurt, but it’s really nothing. Every time the U.S. visits, Saudi Arabia gives us a little bone to take home… but it’s really not going to have any impact at all. This market is about dollar weakness, and much of it will hinge on what the Fed does this week. I think the market expects the Fed to do nothing, so I don’t see much reason for oil to move either direction anytime soon.

“For the rest of the year, without a stronger dollar, the speculative market will continue. If the dollar doesn’t get stronger, oil should hit $150 by 2009. $20-25, maybe more, of this market is based on speculation. So if we get some dollar strength, we’ll look for investors to flee and a new baseline around $100.”

The dollar is staging a small rally today. The dollar index ticked up to 73.6, mostly due to a weaker euro. The mulitnation currency plunged this morning as the latest German investor confidence report scored its lowest since 2005. The euro now sells for $1.54. The pound fell a cent too, now barely holding onto $1.96. The yen is a bit stronger, at 107.

  Speaking of the dollar, it looks like Addison’s got a new ally in the fight against fiscal irresponsibility: Ross Perot, the master of all things charted, has launched

If you recall, the two-time presidential candidate focused most of his campaigns on reducing federal spending… a message that seems more relevant today than in 1992. The Texan gazillionaire doesn’t seem to have changed a bit, and now he’s launched a site on government overspending “even Forrest Gump could understand.” If you’d care to learn more about that sort of thing, or just assure yourself you’re smarter than Mr. Gump, visit the new site here. It’s worth a read.

  Gold fell of a cliff this morning. As the dollar strengthened, gold traders raced for the exits, knocking almost $30 off the spot price at the New York open. Gold’s stabilized a bit since, and trades for $880 as we type.

  The national average gas price remains at $4.07 today, less than a cent from its all-time high.

  So it’s little surprise… Amtrak just had its best month on record. May was the best month in the history of the U.S. rail company, both in revenues and in number of passengers carried. That’s especially remarkable, considering that train traffic in May is usually lower compared to the rest of summer.

Amtrak is on track to carry 27 million people by the end of the year, up 2 million from 2007. After 37 years of dismal earnings and over $30 billion in federal aid, Amtrak looks poised to finally start moving forward… hell, maybe even turn a profit!

  The price of corn has backed down a bit, too . After its record run to above $7.50 a bushel, corn futures in Chicago opened at $7.21 today.

  And its that time of year again… if you’ve got an extra $650,000 and an empty stomach, you can vie for an exclusive lunch date with Warren Buffett.

Bidding began on eBay last night for the Oracle’s annual charity lunch. The winner and seven of his/her friends will get a lunch with Buffett at Smith & Wollensky’s in NYC. Mohnish Pabrai, a legendary investor himself, won last year for a mere $650,100. Proceeds go to charity, of course. We’ll let you know who’s the lucky winner this year next Monday.

If you happen to win the auction, we know two editors who would make excellent company. Just putting that out there…

  “I have some substantial holdings of GLD and SLV,” writes a reader, furthering our ETF discussion. “And yes, I’ve thought of the ease of confiscation of their holdings, and also the possibility of bankruptcy by the backers of these ETFs. But it doesn’t even have to get that cataclysmic.

“What if the markets start dropping a lot and they shut down the exchanges for a few days? What if the dollar starts dropping a lot and they shut down trading in GLD or SLV for a while? Or even something much milder? What if the trading is so hot and heavy the systems get so overloaded that it’s hard to trade? It happened in Canada awhile back on a few busy days when it was hard to put in buy or sell orders for anything. Of course, under those circumstances, it might also be hard to put in an order with your local coin or bullion dealer. Still, I’m becoming less comfortable with my paper holdings and may trade them for the real stuff.”

  “I own physical gold and silver. It’s just in the ground,” writes another. “Why would anyone take possession of these bar metals, or even the ETFs? The government doesn’t have to confiscate metals. It just has to declare they’re not legal tender, with the exception of already issued legal coins.

“The best way to own these is with mining stocks. If the price goes up, the companies should be worth more. They will take care of the holding and selling of it for me.”


Ian Mathias
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