by Addison Wiggin & Ian Mathias
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Now it’s really a bear market… last major index takes the 20% tumble
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Just how far will they fall? The 5 examines the history of bull and bear markets
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“Insolvent” Fannie & Freddie on verge of collapse… Amoss with two consequences of a likely bailout
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Consumers feelin’ the pain…foreclosures skyrocket, gas usage falls
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China’s imminent energy emergency
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Plus, The 5 needs your help… our humble request, below
Deja vu all over again… welcome to the bear market, take two .
U.S. stocks took another dive yesterday. A late session sell-off pushed most major indexes down over 2%. With the S&P 500’s 2.3% fall, it now enters official bear market territory. It’s down over 20% from its 2007 high, along with the Dow, Nasdaq… hell, just about every broad index.
Any money invested in the S&P 500 since July of 2006 is gone… erased… nixed.
And if history is any guide, the S&P will fall at least another 10%. Last week , we looked at the Dow’s performance during bear markets. Today, we learn that the average S&P 500 bear market falls over 30% and lasts 386 days. We nicked this table from Bespoke Investment Group… definitely worth a quick study:
Once again, Fannie Mae and Freddie Mac led the U.S. market into the fray. Shares of the two companies plunged yesterday… Fannie fell another 13%, while the more vulnerable Freddie shed 24%.
The drama came courtesy of Fannie Mae’s latest debt offering… the company “paid a record-high interest rate (relative to Treasury yields) to sell $3 billion of new two-year notes,” explains our investment director Eric Fry in this morning’s Rude Awakening. “In bond market parlance, Fannie paid 74 basis points over Treasuries — or triple the spread it paid two years ago. 74 bps over Treasuries would not be a newsworthy item, if not for the fact that investors have spent most of the last two decades believing that the bonds issued by Fannie and Freddie were ‘as good as Treasuries.’”
Put another way, “Congress ought to recognize that these firms [Fannie and Freddie] are insolvent,” said former Fed President William Poole yesterday. “[Congress] is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer.”
Poole, who left the Fed in March, cited simple “fair value accounting” in declaring Fannie and Freddie bankrupt. For example, Freddie owed $5.2 billion more than its assets were worth in the first quarter. Fannie Mae isn’t far behind.
We’ve said it more than once before, but it bears repeating — ad nauseam… Fannie and Freddie hold combined liabilities of over $5 trillion!
“That ‘giant sucking sound’ you hear,” says Dan Amoss, “is Fannie and Freddie threatening to drag the entire financial system down with them. ‘Agency’ bonds, issued or guaranteed by Fannie/Freddie, are literally everywhere throughout the banking system. Both companies, leveraged 100+ to 1, are the ultimate examples of how financial companies are screwed once assets go bad and they need more equity capital… the longer they wait, the more expensive it will be (as Bear Stearns and Lehman Brothers found out).
“Until we see how the federal government will respond to the Fannie and Freddie capital situation, I think we’re in a free fall. An explicit guarantee from the government in the coming weeks could be a catalyst for a huge short-covering rally in the financials and an explosion in gold prices — since it should be obvious how such an action would increase the Fed’s balance sheet, along with the future supply of dollars.”
Of course, you don’t have to wait for the “giant sucking sound.” Dan’s found a way to help turn the dark side of the markets into some giant gains. The Strategic Short Report portfolio is up over 70% this year… take a minute to look here for the details.
Gold is off to the races this morning , partly due to the turmoil caused by Fannie and Freddie. The spot price is up $20 from yesterday’s highs, to $945 as we write.
The dollar dealt with some selling pressure last night, but it is getting a bit of a lift today on Ben Bernanke’s scheduled testimony before Congress. We’ll let you know what he said, and how it moved the markets, tomorrow.
Take this for what its worth… “I think there’s more [bad news] to come,” said media mogul Rupert Murdoch this week. “It’ll take a year to shake out.”
But it’s not just investors feeling the pain of this bear market… 71,563 homes were repossessed in June, nearly three times the foreclosures in June 2007. According to a RealtyTrac report this morning, June’s tally brought total first-half foreclosures to a stunning 343,159. That’s a 136% increase from the first half of ’07. Notices of foreclosures, like defaults, auction sales, etc., climbed 53% during the period.
Gasoline consumption fell 3.3% during the first week of July, to the lowest level in five years. Not since 2003 did so many Fourth of July drivers limit their consumption. What’s more, supply of our nation’s favorite fuel rose dramatically during the week. Yesterday’s Energy Department supply report showed stockpiles had grown over 1 million barrels during the week, to way above last year’s levels.
Yet despite signs of lower demand and higher supply, the national average gallon of gasoline still costs a record $4.10 today.
The oil market is at a standstill today, as well . Light sweet crude sells for $137.
China is facing an energy crisis far more urgent than here in I.O.U.S.A. Chinese electricity usage has soared to a five-year high, all while Chinese coal reserves are plummeting. According to AFP, 64 of the 541 state-controlled electricity plants have less than a three-day supply of coal. 181 had less than a week’s reserves. We remind you, this is all before millions of tourists flood the country for the upcoming Olympic Games. This could get very interesting.
Elsewhere in the red nation, we hear the Chinese sovereign wealth fund is ready to invest in markets around the world. The China Investment Corp. (CIC) said yesterday that it will soon begin investing up to $90 billion in “global equities.”
Also on the SWF front, the Chrysler Building is officially owned by the UAE today. We mentioned this pending sale last month. Well… today it’s official. Abu Dhabi Investment Council bought the Manhattan landmark for an estimated $800 million.
So far this year, Middle Eastern investors have snatched up $1.8 billion of commercial real estate in the U.S., more than any other region.
“I don’t think that there is anyone who writes or reads this column,” writes a reader, “who believes that this [TAF and TSLF] money will ever be repaid. It is a good way to nationalize banks, housing and, in the end, some industries with this single move. A bunch of birds with one big friggin’ rock (BFR). The airlines are theirs for the taking. Pretty soon, the boys will have their own little labor camp reaching from sea to shining sea.”
The 5: We’d like to think people of the U.S. wouldn’t allow it, but anything’s possible. To be sure, though… we won’t be at all surprised if a few of those banks and brokerages go under before they’re able to pay back their debts to the Fed. And nice usage of a Mogambo -style abbreviation (MSA).
“I hate to jam a pickle in your creme brulee,” writes another, this one referring to our wind energy coverage yesterday , “but that $1 trillion-plus Pickens says is a one-time shot is a bad dream. Let’s say you put a jungle of whirling blades on a hillside in North Dakota and the breeze is a lazy 5 mph. Then dark clouds start rolling in; lightning starts popping; it starts to rain; and then, seemingly out of nowhere, a funnel appears and screams across the hillside.
“After all the commotion subsides, the hillside is populated with a bunch of tall white poles and a mile or two away is a pile of big white sticks. Needless to say, these aren’t going to whirl again. Along with the destruction of all those whirligigs, it put a thumb on the grid and collapsed it, and now millions of folks are in the dark.
“With all due respect to Mr. Pickens, forests of windmills are not the answer. Not only are they uglier than sin, but the effects on our feathered friends are incalculable. Drilling is the answer — the more, the better, and the sooner, the better. The price of oil will drop once the rest of the world sees that we are determined to stop relying on them for our energy needs.”
The 5: You lost us at “jam a pickle”…
“Mr. Pickens is correct: We need to invest in alternative energy,” writes another, “but I am not sure about the natural gas part. Of course, he has money invested in it, so he likes it. Most houses are heated by natural gas, and then there are a thousand or so power-generating plants that use natural gas. Not sure I want cars to run on the stuff, driving both the price of my heating and electric bill up.
“Mr. Pickens would make out both ways, also. He makes big profits on higher natural gas prices, and since that raises the cost of electricity, he makes higher profits on his wind turbine-generated electricity…
“BTW, that high-wind corridor also generates lots of tornadoes. Wonder how far and fast those rotors will fly in a 250 mph wind. I have visions of them sticking in houses here in Ohio or sinking tankers in the Atlantic, LOL.”
Thanks for reading,
Ian Mathias
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