Credit Crisis Returns, One Sector on the Rise, One Sector Likely To Fall, Canary in a Coal Mine, and More!

by Addison Wiggin & Ian Mathias

  • Financial crisis back in focus… AIG and Barclays unload nasty earnings reports
  • Another canary in a coal mine… Wal-Mart says consumers are pulling back
  • Housing’s surprise data point… plus a homeowner survey almost too insane to be true
  • One overlooked market sector starting to make a comeback
  • Bill Bonner’s latest buying opportunity
  • Plus, Byron King on an industry ready to “take a breather”

Remember the “credit crisis”? The one that had investors and homeowners spooked last week? Apparently, a few rallies in the stock market and a dead cat bounce in the dollar index is all it takes for CNBC et al. to develop a serious case of amnesia.

Fortunately, there are Wall Street banks to keep us sober. AIG, the world’s biggest insurer, unloaded a doozy of an earnings report yesterday: It announced a $5.3 billion loss for the second quarter and threw in $6 billion in write-downs for good measure. Both numbers were larger than analysts expected.

Like a mob of angry crank addicts, investors reacted violently, beating AIG down 8% aftermarket and another 9% at the opening this morning.

Soon after the opening, Barclays joined the fray. The massive U.K. bank announced $4.7 billion in “impairment charges” and a 35% drop in profits in the first half. The mob soon grew tired of beating on banks, though. After a sharp drop, Barclays is back to even as we write.

The real “shock” on Wall Street today comes from Wal-Mart.

Throughout the credit crunch, Wal-Mart’s been the beacon of hope for stock investors. By the opening today, WMT shares had outperformed the S&P by over 30%:

Unfortunately, the world’s biggest retailer is on the front lines of the consumer spending slowdown. Same-store sales rose a meager 3% in July year over year.

Whose fault is that? Well it must be the government’s, right?

“With the end of the stimulus checks,” explained CEO Eduardo Castro-Wright, “we know consumers are spending more cautiously, and we continue to see a pronounced paycheck cycle at the end of the month.”

We really need to get Nancy Pelosi on the case. The next round of stimulus checks should be hitting the printing presses RIGHT NOW! What are they waiting for?! Don’t they know that Wal-Mart sales account for over 10% of all retail sales in the U.S.? Jeez, c’mon!

WMT shares are down 5% so far today, headlining a broad sell-off of stocks.

Overall, the Dow opened down 120 points.

Pending home sales unexpectedly shot up in June, cheered the National Association of Realtors (NAR) today. You can almost hear the sigh of relief they stapled to the back of the report. Contracts for home purchases popped 5.3% in the month, to their highest level since October 2007. Phew. Notably, pending home sales in the South shot up nearly 10%. Yay.

Still, nationwide, contracts are down 12.3% from this time last year. Boo.

40% of U.S. homeowners believe their home is worth more today than it was a year ago, says a recent poll by the real estate Web site Zillow. We read this report and, frankly, assume these guys must be drinking their own rum punch. According to the poll:

62% of those surveyed say their house’s selling price has at least stayed the same.

and 75% believe their home price will appreciate between now and early 2009

Yet 42% of those surveyed said home prices in their neighborhood have dropped and will continue to do so.

Hmmmn… when we scratch these numbers out on the back of our own mortgage bill envelope, they don’t seem to add up. Maybe all we need is some of that punch.

Bill Miller was fired yesterday, sort of.

The legendary fund manager will keep his desk at Legg Mason, but the Massachusetts state pension fund gave Wild Bill the ax. The $50 billion fund booted Miller in favor of — get this — a fund that simply tracks the Russell 3000. In other words, the fund is betting Miller will continue to underperform the market.

Miller made his name beating the S&P 500 for 15 straight years. But since 2005, he’s been out to lunch. Miller has been buying some of our favorites — Yahoo, Citi, Freddie Mac, AIG and Merrill Lynch — all the way down… and continues to do so.

“Biotechs are starting to gain some momentum,” reports our small-cap analyst Jim Nelson. “Over the past few weeks, biotechs have outperformed the rest of the market in a big way:

“Investors have beaten down Biotechs in the past few years, but now we’re seeing investors starting to take notice. A few weeks ago, Big Pharma went headfirst into this recent breakout. Switzerland-based Roche Holdings offered to buy up the other 44% of Genentech Inc. that it didn’t own.

The news of this possible deal sent shares flying 15% overnight. Just a few days ago, Bristol-Myers Squibb offered to buy ImClone Systems — a small $5 billion biotech — for $60 per share. While that one was instantly rejected, it did send ImClone shares flying, giving investors a nice 40% one-day gain.

“All these deals,” Nelson says, “are also bringing new interest to the industry. Investors, who had previously forgotten about the pharmaceutical industry, are just now starting to jump back in. Smart money says we have a long way to go from here.”

If you’d like to try your hand at Biotech investing, we recommend you check out Breakthrough Technology Alert.

The dollar continues to rise. The dollar index has perked up to 74.3 today, a full point higher than Monday’s close.

Oil continues to fall. Light sweet crude shed over $2 yesterday as the dollar strengthened, but has already climbed back up to $120. Nevertheless, as oil struck $117, we note it had fallen 20%. Heh… who’d have thought oil would be flirting with a bear market in 2008?

Well, Byron did. “I think the energy sector is in for a breather,” forecasts Mr. King from his “2008 Energy and Geology Tour.”

“Within the past eight days, I’ve driven from Washington through Idaho and into Montana. Then I traveled across Alberta and Saskatchewan, and down into North Dakota. I’m astonished at how much of the trip involves driving past energy projects of one sort or another.

“You surely know that the banking and housing sectors have tanked. Energy was one of the few bright spots in the North American economic landscape. But even energy is starting to feel the pinch.

“For many energy firms, one of the key problems is just plain getting financing. Banks are no longer in the lending business. Many banks are in the survival business. When the banks get some new capital in their vaults, they don’t lend it out. They keep it to beef up their reserves. And even energy is getting strangled in this environment.

One of the Byron’s favorite “resources in the ground” companies just fell to a “screaming buy.” To find out which one, look here .

Gold is still slowly trending down today. An ounce goes for $880 as we write.

“Will we ever have an opportunity to buy gold below $900?” Bill Bonner asked us few days ago. “Now we have our answer — yes. Will we have an opportunity to buy gold below $800? We will have to wait for the answer to that one. But our guess is no. Because a bigger correction still lies ahead – a correction of the post-Bretton Woods, dollar-dependent, faith-based monetary system.

“We treat our dollars like we treat our salads: There’s no sense in saving them. Not that we have a prejudice against the greenback. We feel the same way about the euro. And the pound. It’s all funny money as far as we’re concerned. In a correction, the real cost of things goes down. Because there are fewer people with the desire and the means to buy things. So we’d expect the price of gold to go up — since it must become more valuable compared with the things it will buy.”

The Dubai government has purchased a controlling stake in Cirque du Soleil. Dubai World — the government-controlled UAE entertainment biz — bought 20% of the freakishly impressive sideshow yesterday.

Heh… Muslims are going to LOVE Cirque du Soleil

Dubai World will help Cirque set up permanent shop in the UAE, where the Canada-based company will perform on Palm Jumeirah, that man-made island in the shape of a palm tree, from 2011-2026.

“Wow, that guy Gartman takes the cake!” exclaims a reader in response to our coverage of Dennis’ thoughts yesterday. “OK, so his call to sell gold was timely, but will he get back in at the right time, or will he just suffer another whipsaw?

“Then, there’s his totally incredible comment about shorting Toyota, which has been making among the best cars and trucks in the world for about 100 years, and going long Harley, which for the same period has been making primitive noisy clunkers that are only now beginning to show some signs of modernity. And this is because potential Harley buyers will want to save on gas?

“But Harleys cost a fortune! Buy a few 10-year-old Camrys, and get 30 mpg, and just throw them away when they wear out (which will be a long time), for the price of one noisy, kidney-bruising Harley. Good grief, Dennis!”

The 5: Umn. We know a couple of people who own Harleys. But that’s about it. Toyota announced earnings today… and they stunk.

“I wonder why there is so much exclusion of the middle,” ponders our last reader after our comments regarding socialism yesterday. “There are very few Americans who want socialism, including socialized bank losses for shareholders. There are very few who want a pure survival of the fittest economy. What we want is a market-driven economy where everyone plays by the same rules. That doesn’t include the point-of-the-gun-driven economy. We don’t want the guy who says, ‘I’ll pay you $180,000 of your $200,000 asking price,’ as he shoots others coming to negotiate.

“Hey, that’d be pure free market. We have to have laws for people and regulations for businesses; why is that concept so hard to grasp?”

The 5: It’s hard to grasp because the regulations change on a dime, at political will. If the rules of the game are known in advance, then it’s a fair game. If Congress can bail out some, but not others, based on some backroom deals between the parties and their lobbyists, then it makes regulation and government bad guys — not the good guys they all pretend to be.


Addison Wiggin

The 5 Min. Forecast

P.S. I.O.U.S.A. got a nice write-up on the front page of the business section of The Washington Post today. Frank Ahrens, the writer of the piece, characterized the making of the film and its objectives very well. Check it out here. And if you haven’t located a theater near you for the premiere on Aug. 21, but would like to come, you can do so here.

One reader told us she’s besting the Canadians… there are no theatres in the state of Wyoming screening the movie, so she’s traveling 350 miles to one that does. Thank you!


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