Congress OKs housing bailout. The taxpayer cost? Unlimited…
President Bush offers “drunk” explanation for economy, Federal Reserve releases equally useless Beige Book
James Howard Kunstler on the likely future of U.S. housing
Oil correction continues… Byron King on crude’s recent decline
Rick Rule’s four reasons why the commodity bull market’s got room to run
Plus, two contrarian indicators spark… an airline that actually makes money and a short seller changes his ways
The House of Representatives has approved $300 billion in consumer mortgage relief AND an undisclosed — literally unlimited — amount of funding to rescue Fannie Mae and Freddie Mac.
Seriously… $300 billion and a blank check.
Under the proposed law, the U.S. Treasury will be allowed to loan Fannie or Freddie an infinite amount of money. The bill will also allow Fannie and Freddie to take on even more mortgage risk. The $300 billion spent to refi at-risk U.S. mortgages will likely be securitized by Fannie and Freddie. But the small print on the bill shows the House is also moving to permanently increase the cap on the size of mortgages Fannie and Freddie can guarantee — from $417,000 to $625,000.
Legislation was fast-tracked after President Bush said yesterday that he has withdrawn his long-standing veto threat of the package. In other words, this thing might actually happen.
“This is the most important piece of housing legislation in a generation," Sen. Chris Dodd said. Ugh… that it is.
The proposed housing bill is currently 700 pages long. What good could possibly come of 700 pages of legislation?
“Wall Street got drunk,” thoughtfully explained President Bush yesterday to a “private” audience. Heh… when the most quoted man in the world asks reporters to turn their cameras off, you can bet that’s a cue to keep the tape rolling.
“That’s one of the reasons I asked you to turn off the TV cameras — it got drunk and now it’s got a hangover," Mr. Bush said at the fundraiser in Houston. "The question is how long will it sober up and not try to do all these fancy financial instruments?
"And then we’ve got a housing issue. Not in Houston, and, evidently, not in Dallas, because Laura’s there trying to buy a house.”
“The housing boom is not going to resume,” opined James Howard Kunstler before Symposium attendees yesterday. “The homebuilders are going down, and they’re not going to come back. It’s done, its over. The suburban experiment is over.
“I don’t know what the city of the future will be like, but I believe larger cites will condense at their centers, but get smaller as a whole. Forget about the skyscraper and condo tower. Don’t even think about buying a condo in one of those things. They will be useless in the age of expensive energy.
“Our cities are where they are because they occupy important sites. Something will be in these places, but not the metroplexes of the 21st century that we’ve known them to be. We’re going to have to move a lot more things on water than we do now. We’re going to have to put back the piers and the docks and the sleazy places for sailors.”
(At least according to today’s existing home sales data, Kunstler’s dead on. It’s horrific…more on that tomorrow.)
Yesterday’s Fed Beige Book release affirmed everything you already know to be true: "The pace of economic activity slowed somewhat since the last report" issued in June, read the report. Consumer spending is “sluggish or slowing.” Retail sales are “weak or falling.” Inflation-wise, "overall price pressures [are] elevated or increasing." And the Fed went waaaay out on a limb and guessed that "some escalation in prices was expected within the next year."
Oil remains at yesterday’s prices today… $127 a barrel as we write.
“Oil was climbing too far, too fast,” says Byron King. “What seems pretty clear is that at $140, a lot of things in this world just don’t work anymore. Airlines are, obviously, one business not built around highly priced oil. Worldwide, 24 airlines have gone bankrupt so far this year.
“But there are other parts of the transport system, the food system and the economy that are cratering with the oil run-up. Sure, a lot of things don’t work well even with oil at $130, $120 or $110. But that’s not the point. It seems that above $140, the developing world just stops developing. We saw pain at $100 and above. We were beginning to see true demand destruction above $140. So oil pulled back, and perhaps it will for a while.”
Gasoline is still retreating. The national average price at the pump today is $4.02. That’s about eight cents off its high.
Gold continued to trend down over the last 24 hours. You can now pick up an ounce for $920.
“The gold trade is not looking great today,” says Ed Bugos. “Support above $940 broke down. For the moment, that simply puts a question mark around the bullish reversal in mid-July, when it broke through $950, suggesting another run at the $1,000 level. The bulls are abandoning this attempt, and will have to regroup for another.
“The main factor underpinning this move is the market’s shift in focus to reports of declining oil demand, a potential recovery on Wall Street and the Fed’s rhetoric about raising rates as the economy recovers. Traders are aborting the short financials/long gold trade.
“The long-feared correction in oil and the bounce in the dollar are working themselves out too, in investors’ minds, at least.
“There is significant intermediate support for gold above $890, so the chart is still in good shape.
“Gold is likely to drift toward $890 in choppy trade over the next few weeks, and then take another run at $1,000. I wouldn’t expect more than one or two more attempts at that level before the breakout. Consequently, I’d still rather be bottom-fishing gold than the financials.”
“I think the resource bull market is still a trend in motion for four reasons,” Rick Rule told us this morning.
“1. Commodities are priced in U.S. dollars. I believe, for all the reasons you know, that the value of the U.S. dollar is declining. Even if commodities hold their real value, they will rise in price, thanks to the dollar.
“2. The commodities bull market is also intact because we are operating after a 20-year bear market. That’s 20 years of underinvestment, and in a very capital-intensive, laborious industry. We are living off reserves and resources discovered and developed 20-40 years ago… supply increases will take time, they will take billions of dollars and they will be hard fought.
“3. Western demand is no longer important… emerging markets now drive global demand. As these counties become a little freer, they become a lot richer. As poor people become less poor, their increased income requires much more ‘stuff,’ while our increases in wealth require almost no additional resources. When poor people grow wealthy, they want cars and refrigerators. When Americans get money, they buy iPods.
“4. Governments are trying to protect you from yourself. They will exacerbate shortages… 75% of the economic surplus in the oil and gas industry, of the free cash flow, is expropriated by government. Because energy prices are up, you have to tax it. Deprive the industry of the companies that can increase supply — somehow, that solves the problem. It’s makes no sense, but that’s the way it goes.”
(Don’t forget, you can get all of Byron’s and Rick’s pearls of wisdom, including dozens of the specific names they’ve given for their favorite junior mining and energy stocks, by taking advantage of our Symposium-price offer for the CD or MP3 set .)
As commodities go down here in the short run, the dollar continues to go up. The dollar index has maintained its momentum from earlier this week and scores at 73 even as we write.
The U.S. stock market enjoyed another rally yesterday. Oil fell slightly… coupled with the housing bailout package approved by the House, investors had enough courage, or bad sense, to push major indexes higher. But only slightly. The Dow rose 0.2%, the S&P 500 was up 0.4% and the Nasdaq shot up a full point.
It’s a different story today, though. The market is being bogged down by the latest from Ford. The automaker announced a staggering $8.7 billion loss… just a bit lower than its $750 million profit this time last year.
Along with the announcement, Ford says it’s slashing production of big trucks and SUVs, cutting more jobs, closing plants and on and on. While it’s not a huge surprise to you, traders on the Street are racing for the exits.
Ford stock is down 10%, as we write, and is dragging the Dow down with it. It shed 100 points at the open.
Southwest Airlines reported a 22% increase in year-over-year revenue yesterday.
The airline’s aggressive energy hedging over the past few years has paid off spectacularly. Since 1998, the airline has saved $3.5 billion via its fuel-hedging program… $3.5 billion that most other airlines are losing this year, at least. It’ll likely feel the pinch in a few years when the hedges run out, but until then, Southwest remains the only profitable airline in the U.S.
The stock has rallied 5% for the week… 27% so far this year. But we wouldn’t recommend it. “The U.S. airline industry will be dead in 36 months,” prophesied James Howard Kunstler at the Symposium yesterday. Heh… mark your calendars.
The most prolific short seller of the subprime housing bust has called a bottom in financials.
John Paulson, the most successful hedge fund manager of 2007, announced today he plans to start a fund that will lend to cash-strapped banks. There’s no word how much of his $33 billion coffer Paulson will dedicate to the cause. The real details have yet to be disclosed… but we think it’s worth noting, nonetheless.
“In yesterday’s 5, the comment was made about gas pump manufacturers,” writes a reader. “saying that since most pumps will register only up to $9.99, they may have to make some new ones. I believe they will not make new ones, but simply change from selling by the gallon to by the half gallon, quart or liter.
“I recall very clearly, even though I was in a stupor most of the time, when I was stationed in northern Thailand in 1975. Gasoline was being sold there by the liter. At the time, it was around 20 baht, roughly $1, per liter. Yes, that equates to $3.79 per gallon, 33 years ago. At the same time, gasoline in the U.S. was floating between 55-75 cents per gallon. Nice comparison, eh? I wonder what the price of gas in northern Thailand is now? We’ll just adapt as they did and purchase our fuel in smaller quantities. Then continue to gripe about it.”
Thanks for reading,
The 5 Min Forecast
P.S. As we’re wrapping up today’s 5, Jim Rogers is taking the stage for the marquee presentation of the 2008 Investment Symposium. We’ll deliver some highlights tomorrow, but if you want to hear all his thoughts — including the investment ideas and economic predictions of all our speakers — get your hands on a conference CD or MP3 set.
As we’ve mentioned, we’re offering them now before the Symposium concludes at a special discount to readers of The 5. Grab your discount here.