by Addison Wiggin & Ian Mathias
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Government’s first guess at cost of Fannie and Freddie rescue
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U.S. credit card industry suffers major setbacks… while China’s plastic population shoots through the roof
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Financials still feeling the pain… but one chart shows investors are calling for a bottom
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Zimbabwe bills enter new realm of absurdity… meet the new $100,000,000,000 note
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First copper pipes, then grave-site vases… now this? The latest — and most dangerous — victim of the commodity boom
The Fannie Mae and Freddie Mac bailout could cost taxpayers as much as $100 billion.
The media has been guessing at the number for some time. But this estimate comes from the Congressional Budget Office today… the first “official” price tag the government is willing to cop to.
In a typically obscure press release, the CBO gave a less than 50% chance that the Treasury’s proposed rescue will cost more than $25 billion, and a 5% chance it would rack up a $100 billion tab. As with most CBO forecasts, this one came with a huge asterisk:
“Conditions in the housing and financial markets could deteriorate more than already reflected on the GSEs’ balance sheets, and such continuing problems would increase the probability that this new authority would have to be used."
The CBO, it’s worth pointing out, is still projecting a balanced federal budget by 2012.
American Express, the biggest U.S. credit card company by purchases, reported some very tough times today. Second-quarter profits fell 37% from this time last year, as the company says it is suffering worse-than-expected consumer defaults.
“By almost any measure, the U.S. economy and business environment are much weaker than the assumptions” the company made at the start of 2008, said CEO Ken Chenault today.
Profits in Amex’s U.S. card business are down an incredible 96% from a year earlier. (Geez, we better make sure they can still float the hotel rooms here in Vancouver.)
On the other side of the world, the total number of Chinese bank cards, including debit cards, are up nearly 30% year over year. According to Asia Times, there are over 1.5 billion of them floating around the country now.
“1.58 billion cards in the hands of Chinese shoppers is a lot,” writes the mighty Mogambo Guru, “and is equal to five cards for every man, woman and child in America! That’s buying power!” What’s more, as the Mogambo explains in his latest missive , officials in Beijing are aiming to more than double credit card usage in cities, from 10% of all purchases in 2005 to a near-term goal of 30%.
The real kicker… despite having a current credit line of over $92 billion, Chinese credit card holders have racked up only $10 billion in consumer debt. We can’t wait to see this ratio in 2025… maybe the mandarin edition of I.O.U.S.A. is slowly writing itself.
Wachovia turned in an ugly second quarter this morning, too. We’ve been writing to you all earnings season of the “bad, but better than expected” bombshells being dropped by financials, but there’s no silver lining to be found for Wachovia. The bank lost nearly $9 billion in the second quarter, revenue fell 13% and the bank said it would be cutting its dividend again… all far worse than Wall Street wonks expected.
Wachovia shares fell nearly 10% premarket. Look for more today.
But… “take a look at this chart,” reads a note from our newest options adviser, Wayne Burritt.
Despite our hesitant long-term outlook for financials yesterday , Wayne wants to remind us that in the short term, “money is simply gushing into financial ETFs. In fact, during the first five months of this year, assets under management at financial ETFs soared an average of 199%, compared with a year ago. In May alone, they increased a stunning 237%!
“I’m not talking chump change, either. Since the beginning of the year, financial ETF assets have averaged $12.9 billion. And in May, that number was up to $13.3 billion!
“These huge increases occurred during the peak of the credit crunch. And that means that, in spite of the bad news, many investors saw big value in the financial sector and were buying financial ETFs to prove it.”
From a trading perspective Wayne says he’s bullish on the sector, but one call option in particular has him especially excited. Gain access to his pick, along with the rest of the Easy Money Options portfolio, here.
The stock market was a bit of a yawn yesterday. With no big data points or earth-shattering news hitting the tape, the Street had little more to trade on than slightly higher oil prices and some earnings reports. In the end, most major indexes suffered very small losses.
Ditto with the dollar. The dollar index kept in a relatively tight range yesterday, around 72 even. As we write, we’re seeing the greenback firm up on some reassurances from Fed Governor Plosser and Treasury Secretary Hank Paulson. Check back tomorrow for the highlights.
02:19 A $100 billion bill? Zimbabwe is in a world of pain:
The 12-figure note went into circulation over the weekend. Since the official inflation rate in Zimbabwe has ballooned to somewhere around 2,200,000% (not a typo) the new note is worth… drumroll please… barely one U.S. dollar.
In December of last year, the Zimbabwean central bank started printing $250,000 bills to keep up with demand. That’s a ridiculous note, to be sure, but compared with today’s $10 billion mint… it’s almost literally worthless. Ugh… Mugabe’s gotta go.
Oil jumped up a few bucks yesterday as Tropical Storm Dolly approached the Texas coast . But today, we read Dolly is expected to miss the lion’s share of oil and gas installations and might not even muster hurricane speeds. That’s chopped another $5 bucks off the front-month light sweet crude contract.
Oil now sells for about $126 a barrel, a six-week low.
Gasoline is backing down too. The national average is back down to $4.05 a gallon today… a cent lower than yesterday and a nickel from its record high.
“If you’re bullish on natural gas, now might be a good time to pick up some shares of your favorite players,” reports the Chris Mayer. Looking for opportunity amid crisis, as always, Mr. Mayer sent over this chart yesterday…gas prices have “taken a beating,” he says:
Chris has several natural gas picks in the Special Situations portfolio, several now selling at a discount. Get into the portfolio by subscribing, here.
Gold has enjoyed a slow and steady rise so far this week . The spot price is up over $15 since Sunday. This morning, it opened in NYC at $970.
We told you about the sudden rise of grave robbers a few weeks ago… now smelters have a new target: fire hydrants.
Well, the brass nuts the hold them together actually. The AP reports that, as brass’s smelt value has nearly doubled this year, a big hydrant nut can net you a cool $7. Thefts are up in cities across the country.
(We have to wonder… does the AP’s coverage and subsequent syndication on every cheesy local news broadcast across the country just make this sort of thing worse? We had no idea the five-pound brass nut on a fire hydrant was worth $7… or the brass vases in front of graves melt for $10 a pop. When the world’s biggest news source reports “free money” sitting on nearly every street corner in the country… think thefts will rise or fall?)
“There’s another crop like jatropha,” writes a reader responding to yesterday’s inbox , “that is highly productive for seed oil, and a number of other things. Industrial hemp has a high yield of oil per acre, which could make it the best crop for biodiesel fuel. It has a short growing season, and it grows with virtually no chemical pesticides and herbicides. Its long taproot and chemical-free growing process make it good for the soil it grows in. The stalks can be used for a multitude of fiber applications, from cloth to paper.
“The farming of hemp could open up economic opportunities here, too. If we are to get serious, we will look at this crop as a possible part of our solution to our environmental, economic and energy problems. Not through endless studies, but from practical application on the free market.”
“With all this discussion about biofuels lately, why hasn’t anyone proposed HEMP?” asks another. “It’s a weed, it’s indigenous to America and Asia and it’s extremely efficient. Perhaps it’s the Puritans that are still running this country that don’t have a stomach for something that’s actually old-fashioned?”
“I foresee, in the near future, a reversal of Mexican immigrants coming to this country,” writes another reader. “Mexico, like most oil-producing countries, is sitting on a pile of petro dollars, the value of the peso is climbing while the dollar continues to fall and better-paying jobs are vanishing or losing their future promise in this country.
“Well-off retirees are selling their homes in Baja California and moving to Baja Mexico. They get the same Pacific view and climate for half the cost, and without the exorbitant California taxes…and $5 a gallon gas. Cancer care is widely available from American doctors in their clinics using both standard and alternative treatments not allowed by the AMA or FDA. American car manufacturers will continue to produce vehicles there while laying off American workers, and American corporations and wealthy Americans will continue to search for tax havens there. If this does not help the Mexican economy, which is doing pretty well without their help, there will always be jobs provided by Mexican drug cartels, whose business is guaranteed by the American "war on drugs," which seems to do little other than feed them and gobble up enormous amounts of the taxpayers’ money. Adios, mis amigos!”
The 5: Maybe… but what happens when those petro dollars run out? We’ve mentioned in these pages before Mexico’s oil production is in a scary state. At the current rate of depletion of the Cantarell oil field, Mexico will become a net importer of oil within four years. Since its government derives over 40% of its entire federal budget from petro revenues… could get ugly pretty quick.
Hasta manana,
Ian Mathias
The 5 Min. Forecast
P.S. The Symposium is about to officially start. As we’re sending you your daily forecast, Addison is about to take the stage to get this show on the road. Then we’ll hear from Bill Bonner, Rick Rule, Chris Mayer, Eric Fry, Dan Denning, Bud Conrad and Matt Badiali… then the biggest cocktail reception we’ve seen in a long time… then the world premiere of the final cut of I.O.U.S.A .… then a Q&A with Addison and David Walker, former U.S. comptroller general and now head of the Peter G. Peterson Foundation. And that’s just the first day! We’ll write you tomorrow with all the highlights.
P.P.S. We’ve met a slew of 5 Min. readers already here in Vancouver. Agora Financial readers are some busy folks, to say the least, and it’s always a pleasure to hear you spend a part of your day reading The 5. If you see one of your loyal editors shuffling around today, please say hello!