Fed Says Credit Crisis Not Over, Merrill’s Bizarre Buyout, More Housing Gloom, I.O.U.S.A. Questions, and More!

by Addison Wiggin & Ian Mathias

  • Fed cranks up the insanity… extends emergency lending facilities, introduces options on TSLFs
  • The bizarre Merrill Lynch/Singapore/private equity conundrum… truly stranger than fiction
  • Chris Gaffney on the dollar “bear trap” about to be sprung
  • Housing still yet to find a bottom… two data points suggest deepening crisis
  • Plus, your I.O.U.S.A. questions… answered!

  The Fed announced today the credit crisis is far from over. In fact, banks will still be desperate for cash till at least 2009.

Why else would Ben Bernanke and crew extend their newfound lending facilities to January 2009? The Fed announced this morning it will extend its TAFs and TSLFs to the end of the year. Combined, both measures have lent out over $1.4 trillion to struggling financials in the past seven months… safe to say this will at least be a $2 trillion endeavor when it’s all said and done.

And get this… not only will the cash keep flowing, but investment banks will be able to buy options on future loan programs. So if a brokerage house can’t unload enough toxic investments before a quarterly earnings report, it can buy options to exchange asset-backed securities at a later date. Incredible, isn’t it? So much for the free market…

  Another story you’ve got to know is the latest deal with Merrill Lynch and Singapore’s SWF, Temasek Holdings. This isn’t your average bailout.

Late Monday, Merrill announced it would take an additional $5.7 billion write-down and need over $8.5 billion in emergency funding. Such funding would come via yet another stock offering… enter Temasek. The SWF will invest another $900 million in Merrill.

You may recall the Singapore SWF had already invested $5 billion in Merrill, an investment that has accrued a roughly 50% paper loss. Part of that initial investment was a peculiar clause: When Temasek bought 9% of Merrill in December for $48 a share, the SWF insisted that if Merrill sold any new shares within one year, the American investment bank would have to pay Temasek the difference. Shares of MER barely sell for $25 today.

So for $900 million, Temasek will get $3.4 billion “worth” of new Merrill shares. Temasek now probably owns more than 10% of Merrill… look for Washington to get very interested in this deal, very soon.

  And there are even more slimy details of the Merrill announcement we can’t help but mention. Merrill also announced it would sell a $30 billion portfolio of collateralized debt obligations to a private equity firm named Lone Star. Lone Star will pick up the $30 billion in CDOs for a remarkable 22 cents on the dollar, or about $6.7 billion. Only two weeks ago, Merrill valued those exact same CDOs at $11 billion… funny how a few billion bucks can disappear like that.

And the last note on Merrill, we promise… the deal between Merrill and Lone Star was financed, of course. But we learn today the lender was… Merrill Lynch! Merrill will lend $5 billion to Lone Star for the $6.7 billion purchase. Ipso facto, Merrill has done little more than move $5 billion in risky loan-based investments into $5 billion in risky loans. Seriously, what planet are we on?

  The stock market mysteriously celebrated the Merrill Lynch news yesterday. The Street is once again under the illusion that financials are purging the last of their troubled assets… as they did in the fourth quarter of 2007… and the first quarter of 2008… and the second quarter of 2008. Major indexes more than recovered from Monday’s losses, as the Dow, S&P 500 and Nasdaq all rose over 2.3%. For its part, Merrill rallied 8%.

We’re seeing a strong rally in place today too. Stocks are on the up and up, thanks to this morning’s ADP jobs report. The company claims the private sector added 9,000 jobs in July. After six straight months of net job losses, traders are hoping this ADP report is hinting that the government’s official job count on Friday will also be positive. We’ll see…

  Falling oil prices aided the market’s rise this week, too. Oil shed another two bucks, to $121, this time on news that tensions in Libya have cooled off. The market is getting pretty lathered up over oil’s latest correction… maybe to an absurd extent. Here’s one of the more perverse charts we’ve seen in a while:

Off all the stocks in the world, Exxon Mobil is dwelling near a 52-week low. We’ve lost count of how many consecutive quarters Exxon has reported record-setting profits… but the Street doesn’t seem to care. You can now pick up a share for July 2007 prices, when oil was about $75 a barrel. Of course, a lot more goes into the price of XOM besides oil prices, but still…

  Gas prices are down again today. The national average is now $3.92 a gallon.

  Which explains why the latest consumer confidence reading registered a small improvement. Slightly lower energy prices coupled with what’s left of a stimulus check buzz lifted the Conference Board’s July gauge of consumer confidence to a score of 51.9. That’s less than a point higher than June’s 51, the lowest level in 16 years.

  “The dollar bulls took control of the currency markets yesterday,” reports Chris Gaffney from his EverBank desk, “after the U.S. consumer confidence numbers looked slightly less awful than expected.”

Indeed, the dollar soared versus the euro, up over 2 cents in its biggest one-day move in two months. You can score one of those today for $1.55. The pound suffered too, down to $1.97. The yen is a bit weaker, at 108.

“I just have to believe this is a bear trap… and one that will take no prisoners once it gets sprung! There’s no end in sight for the U.S. housing recession, and deteriorating credit conditions for consumers and banks will definitely prolong a period of slow economic growth. I believe the best way for investors to withstand this economic storm is through proper diversification of their assets. Both currencies and precious metals should be a part of your portfolio in order to protect your purchasing power. Don’t be fooled by the latest rally in the stock market. Unfortunately, the bad times aren’t over yet.”

Chris, Chuck Butler and the rest of the EverBank crew just came up with another cool currency basket CD. It’s called the Debt Free Index CD . They bundled the currencies of five countries with strong balance sheets and no deficits: the yen, Swiss franc, real and Singapore and Aussie dollars. Learn about this smart way to diversify your holdings, here… it’s currently available only to readers of The 5.

  The stronger dollar is pushing down gold . The spot price is barely clinging to $900 as we write.

  Also making a splash this week is the latest home price index . The swan dive continues…

As with every month so far this year, there was no bright side to the May rendition of the S&P/Case-Shiller home price index. The 10-city composite showed an annual price decline of 16.9% and the 20-city gauge is down 15.8% — both record low declines. All 20 reporting cities are posting an annual decline in home prices, 10 of which are in double digits, nine at all-time lows.

“Since August 2006,” said David Blitzer of S&P, “there has not been one month where we have seen overall price increases.”

  What’s more, annual mortgage applications fell 14% last week, to their lowest levels since 2000. According to today’s report from the Mortgage Bankers Association, mortgage activity is plunging… loan requests down 8% from last year, original applications down 14%, refi applications down 29%. The only thing up is mortgage rates. A 30-year fixed averaged 6.59% last week, a one-year high.

  Thus, we’re not surprised to hear President Bush signed the much-hyped housing rescue bill today. We’ve wasted enough energy harping on this legislation already, which you can read here and here. God help us…

  Maybe this crib can get a complimentary refi from Uncle Sam:

That’s one of the phenomenal Extreme Makeover: Home Edition homes. The TV show goes around the country, finds the most tragic, strife-stricken families in the U.S. and builds them an ultra-cush new house. 1,800 volunteers built this fully furnished house for a struggling Georgia family… the show even raised enough money to pay all the taxes and utilities on the house for decades and create a fund to send the kids to college.

That was in 2005; now the place is up for foreclosure. The happy owners took out a $450,000 loan against the property and blew it.

“Every day,” reads The Washington Post, “we are greeted with fresh evidence of the great American fire sale. If it was wrong to think the economy could go on forever subsisting on money that no one actually had, then it was wrong to think there was something wonderful about watching shows where people got houses for nothing, and then expect them to live happily ever after.”

Heh… Amen. And they say we’re the gloomy ones?

“It seems to me the most basic solution to our future problems,” writes a reader, “food shortages, commodity shortages, energy crises, shrinking aquifers and water wars, conservation, pollution and even global warming ( if it really exists) — lies in reducing the rate of human reproduction in the world. I know that it is one of the most sensitive, politically incorrect subjects, but overpopulation is the basis for most dire predictions. Yet I never see it mentioned or discussed in public.”

The 5: Now you have.

  “I see that on Aug. 21, I.O.U.S.A. will be out in general release to the public,” notes a reader. “May I suggest to the Libertarian Party that this would be the perfect time to start advertising itself in the ads that always appear just before the movie is about to start? I can’t think of a better time to begin a new recruitment drive.”

The 5: Perhaps, but you might be surprised. I.O.U.S.A. is about as free from political banter as the topic allows, libertarian ideals included.

  “I.O.U.S.A. is $19 a ticket in my hometown,” writes another. “And you think we’re going to bring our friends and family? There probably isn’t even any gratuitous nudity to justify paying the price and going out on a Thursday night. Can we expect to see it at Blockbuster or Netflix in the fall? Or perhaps as the Agora Financial Reserve Christmas gift?”

The 5: Expect nothing. As we mentioned Monday, future distribution deals largely hinge on the success of this special event on Aug. 21. There will likely be DVD distribution in the future, but if you don’t blow the dust off your wallet and show up on the 21st… who knows?

We admit it’s less than a bargain, but for $5-10 more than you’d spend to see The Dark Knight, you can experience a one-of-a-kind event… our very best effort to wake the U.S. from its fiscal coma, plus live thoughts from three very heavy economic hitters. We like to think this is bigger than just a night’s entertainment. It’s the fruits of a very long labor, one that you — as a reader of The 5 and other AF products — have helped shape with your daily comments and questions.

In fact, Addison’s just informed me that if you can show proof of purchase to the event, he’ll spring for a free year of our flagship publication, Strategic Investment. Just forward the confirmation email for your tickets to customerservice@agorafinancial.com . If you already subscribe to Strategic, we’ll extend your subscription a year, a $99 value. And if you’re one of our valued AFR members, we’ve got a special surprise. Forward the ticket to the above address to find out what it is.

And if you can find the theaters that Greg Grillot and/or Joel Bowman will be visiting, we’d say you have a damn good chance at seeing some gratuitous nudity, too.

Get your tickets, here.

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. You only have two days left to save a ton of money on your Bulletin Board Elite subscription . To celebrate its one-year anniversary, we’ve slashed the price of our most popular microcap investing advisory… click here to get a 50% discount. Our offer ends Thursday. 


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