by Addison Wiggin & Ian Mathias
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Credit crunch crushes two more banks… why 5 Min. readers saw it coming
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Congress passes housing bill, awaits Bush approval… $800 billion asterisk snuck into the fine print
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Want to see I.O.U.S.A.? Your first (and maybe last) chance to score tickets
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Dan Amoss with the No. 1 theme from the Agora Financial Investment Symposium
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Byron King on the future of oil prices… his short- and long-term outlooks below
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Plus, even the fashion industry knows we’re screwed… Depression-era garb back in style
The credit crisis claimed its sixth and seventh victims while you enjoyed your weekend. First National Bank of Nevada and First Heritage Bank of Newport Beach both failed late on Friday. The FDIC swooped in to their rescue, but didn’t perform its usual song and dance… the government regulator made good on all insured deposits by selling them to another private bank, Mutual of Omaha. Even though the FDIC was able to charge Mutual of Omaha a 4% premium on the failed banks deposits, the FDIC said its weekend activities still set it back $862 million.
Of course, all this was no surprise to you… both banks are owned by First National Bank Holdings, which occupied a high rung on our recent list of banks likely to fail.
And while you were reading your Sunday paper, Congress passed what Ambrose Evans-Pritchard calls “the most far-reaching rescue package for America’s financial system since Franklin Roosevelt’s New Deal.”
Indeed, the Senate fast-tracked the housing rescue bill over the weekend. The current rendition is not unlike the one OK’d by the House last week … $300 billion for homeowner relief, unlimited money for the Treasury to bail out Fannie and Freddie.
With the Senate’s Sunday approval, only President Bush’s signature stands in the way of this monstrosity becoming law. We’ve already heard from Dubya’s office that the president will begrudgingly sign the bill as soon as possible. Ugh…
"This bill has moral hazard written all over it: We are letting a monster loose," said representative Jeff Flake, R-Ariz., one of the very few congressional opponents of the bill.
Hmmm… and isn’t this interesting: Congress snuck a dramatic hike of the federal debt ceiling into the approved housing rescue. When the bill is signed to law, the federal debt “limit” will be hiked $800 billion, to $10.6 trillion. Funny, last week the Congressional Budget Office estimated the Fannie/Freddie rescue would cost $100 billion, at most. Coupled with the rest of the housing rescue, Congress has given themselves a $400 billion cushion… wonder why?
(Not a peep on this matter from CNBC today, by the way. They spent the whole morning teasing the winners of their million dollar stock trading challenge.)
Speaking of intelligent government spending, the Bush administration projected today that the 2009 budget deficit will set a record $490 billion. In his last fiscal year in office, Dubya will easily oust the previous record of $413 billion… set by himself in 2004. You can count on the 2009 deficit actually being more than forecast, as the current projection doesn’t fully account for the war in Iraq or the possibility of a recession. Awesome.
The 2008 fiscal year, ending in October, is still on track to produce a deficit around $400 billion. We’ve said it a million times… GW seems perfectly on track to achieve his goal of balancing the budget by 2012. All the next president will need to do is cut government spending by more than $100 billion every year for his entire first term.
Tickets for I.O.U.S.A. go on sale today. Man… could there be a better time to see a movie about government fiscal immorality?
So here’s the deal… as of now, there will be one nationwide showing of the film. It’ll be on August 21st. You can find out where it’s playing and buy tickets by visiting this site and plugging in your zip code.
It’ll be a cool show, not only will you get to see the documentary in a theater near your home, but we’ll be simulcasting an incredible discussion afterwards… live with Warren Buffett, Pete Peterson and David Walker. This will be a one time event that’s not to be missed.
What’s more, the success of the 21st will largely dictate the film’s future syndication across the county. If it does well, there will be more shows in theaters. If it doesn’t, off to TV and DVD land. So… buy a damn ticket! Buy two. Buy tickets for your family, your friends. Buy em as a gift. Buy two hundred and host an I.O.U.S.A. party at your local theater.
No kidding, we need your help. This will be the public’s first and maybe only shot at seeing the film on the big screen. Spread the word, and find out where you can see I.O.U.S.A. here.
“The ‘smart money’ is getting out of, or selling short, the long Treasury bond,” reports our strategic short seller Dan Amoss from the Investment Symposium in Vancouver. If there was a theme to the 2007 conference, it was to buy gold. Looking back… that was a pretty good move. This year, the theme, by far, is short U.S. bonds.
“Since bond prices move in the opposite direction of yields, shorting Treasuries means you’re betting that rates will rise. This doesn’t mean you think the Federal Reserve will hike interest rates. The Fed does not currently influence long-term interest rates. Foreign creditors and bond fund managers do.
“Those who advocate shorting bonds are saying that foreign holders of U.S. dollar assets are getting nervous about U.S. dollar inflation. If these investors grow more concerned about inflation over the next couple of years — as they should — they will not buy bonds as aggressively as they had in the past. Instead of habitually buying low-yielding bonds, they will wait until prices fall (and yields rise), thus demanding higher rates to compensate for the risk of future inflation.”
Dan gave his subscribers not one, but two ways to short the long-term bond market. For his advice, along with the rest of his high-performance short advice, get your copy of Strategic Short Report.
Also, you can get yourself a recording of our annual event, here.
The stock market seems a bit worried about the above news today. The Dow opened down about 40 points or so this morning and is down 150 points as we write. The big market story today is the impending float of private equity giants Kohlberg Kravis Roberts. KKR originally filed to go public in June 2007, but was likely put off by rival Blackstone’s spectacularly horrible IPO. Evidently, KKR sees today as a more favorable time to float, and plans to do so by the fourth quarter.
"I do not think that the head winds have diminished," said Minneapolis Fed Presdient Gary Stern today. "If anything, I think that they are picking up a little steam." In an interview with the FT, the Fed president said he expects “some disappointments in the next two or three quarters in terms of growth… It is a little bit more of an open question on inflation."
Bank-to-business lending is drying up. Commercial business loans and commercial paper issuance have declined 3% over the last year. That might not seem like much, but it’s a $90 billion decline… the biggest of its kind since 2001.
New home sales fell 0.6% in June, a 33% year-over-year decline. The median new home price fell too, says the Commerce Department, by 2%, to $230,900. The latest government data showed a continued deepening in the housing bust… coupled with the existing home sales data released Thursday, a bottom to this bust is still nowhere in sight.
But there were some silver linings to the latest new home sales report. It would appear the pullback in housing starts has finally hit the glut of vacant homes… the supply of new homes fell to 426,000. That’s the lowest level since 2004, the 14th straight monthly decline and the biggest year-over-year drop in 45 years.
Still… there’s a 10-month supply of new homes on the market.
Oil is back up a buck today. Light sweet crude is trading for $124 as we write, well below its $147 high set earlier this month. We learned today, according to the Commodity Futures Trading Commission, that American funds have shifted to a net short oil position for the first time in 17 months.
Also, gasoline in the U.S. has fallen below the $4 mark. Prices have dropped quite a bit, in fact… down 5 cents since last week, to $3.95 today. That’s about 15 cents from the record high.
“Oil might drift down to $100 or $110 per barrel in the next month or two,” says Byron King. “You might be paying $3.50 for gasoline again.”
“There’s a general psychology in the market that the world is on the cusp of a significant economic slowdown. To me, that’s a short-term issue
“Europe is already there, what with the German economy slamming on the brakes in the past couple of months. The U.S. is showing weakness in some sectors (not all, by any means). And post-Olympics, watch for China to take a breather from its sprinter-like pace of economic growth. So I think that is why traders are selling oil down. The price is falling in the short term.
“Yet some sectors (like airlines) have been rallying like it’s the Second Coming. It goes to show that we live in a ‘trader-driven’ world, and not a world that is friendly for long-term investment.
“But I have some news for all the airline stock buyers out there. These dropping oil prices are just short-term phenomena. In the medium and long terms, energy prices WILL be higher. That is just plain baked into the cake. World population is growing. The developing world is developing. The resource base is fixed, and badly underinvested, looking ahead.”
The dollar has kept to a pretty tight range over the past week, despite oil’s strong retreat. We’ve seen the dollar index hover around 72.7 for some time now.
And the gold trade has cooled off a bit too. After some hefty losses, spot prices were $920-930 throughout the weekend.
Last, even the fashion industry is forecasting tough times ahead. An article in the New York Post this morning cites a growing trend of “distinctly Depression-era” inspired fashion popping up in popular outfitters like H&M, Gap and Banana Republic. If you (or your parents) still have some newsboy caps, baggy dress pants and pinstripe vests boxed up, might be time to dust ’em off… they’re popular again:
"We associate the newsboy look with urban poverty — street kids of the 1930s," said Daniel James Cole, a professor at the Fashion Institute of Technology. "Given that we’re in an unstable economy and an uncertain political landscape, it’s possible that a retro style has come back as a way to connect with our heritage."
“So our kids should all start learning Chinese, says Jim Rogers,” writes a reader responding to Rogers’ speech at the Investment Symposium. “Will that be more valuable than the Japanese language skills that guys like Rogers were advising Americans to learn back in the ’80s? The Japanese were the ‘unstoppable’ ones then, America was ‘finished,’ yet again. At least Japan had trappings of a democracy to sustain it as it fell flat on its financial face. But don’t worry, Jimbo — when China goes to the hell it deserves, the Singapore armed forces will be there to protect you, your assets and your Mandarin-speaking loved ones. And if it comes to it, that sad relic, the West, will let you back in… if you can get out.”
“I applaud The 5’s question,” writes another, “about where in the Fed’s charter does it say they have to save the world. Indeed, why have they taken it upon themselves to bail any entity out?
“Of course, it has its agendas and allegiances for doing so, but that does not make it right.Bailing bankrupt entities out is certainly not the Fed’s purpose or job. I will refrain from passing judgment on the way they are handling these complex problems. However, I will say things would be much better if they paid more attention to the problems they are supposed to be concerned about and stopped bailing out bankrupt entities that they have no business doing.
“Not only is it a ‘moral hazard,’ as some public figures have stated, but it makes everything else they do questionable too.”
“Why shouldn’t the Fed save the world?” asks the last reader. “Because economic chaos leads to violence. The citizens of the first-world countries are not used to any kind of hardship. If things look bleak and there’s no food on the table, Mr. Common Man is going to get a gun and head for the rich side of town, and he won’t be afraid of pulling the trigger on the ones he blames for starving his family.”
Thanks for reading,
Ian Mathias
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