Stocks give back all of Monday’s massive gains… what’s behind the quick return of market pessimism
A precious, little-known commodity that’s currently selling “dirt-cheap”
OPEC cuts production, says global growth slowing… EU slashes 2008 GDP forecasts
Former Fed chairman unleashes barrage of economic forecasts
Plus, the biggest winner (so far) of the Fannie and Freddie seizure
Not bullish, not bearish. The post-Fannie-and-Freddie world is looking, well… bulimic.
It was fun while it lasted, no? Buyers binged on the equities market Monday morning. “Hurrah! Fannie and Freddie have been saved!” they rejoiced. But the party ended yesterday, just as quickly as it had begun. The buzz has worn off. All that remains is an even bigger mess.
So traders purged Monday’s excesses. The Dow and Nasdaq fell around 2.5% yesterday, while the S&P 500 plunged 3.4%. “Naturally,” the Dow surged back up 100 points this morning.
The real driver of yesterday’s return to market pessimism? Lehman Brothers.
Long story short, Lehman is as close to going out of business as ever. The firm is still gripped by credit- and mortgage-related losses. Its merger with a government-owned bank in Korea is now rumored to have fallen through. S&P has threatened to cut ratings, again. And the market is terrified that the U.S. government is not willing (or even able) to bail out ANOTHER “too big to fail” financial.
Heh… and to quell investor fears, Lehman announced a $3.9 billion loss and a big dividend cut this morning. The firm also said it will auction Neuberger Berman, one of its core investment businesses. Additionally, Lehman will spin off its commercial mortgage assets into a new public company.
LEH plummeted 45% yesterday and opened flat this morning. Since February 2007, Lehman shares have fallen 91%, wiping out $40 billion in shareholder value. Our in-house short seller, Dan Amoss, told Strategic Short Report readers to buy puts on Lehman… which they sold in August for 462% gains.
So what’s an investor to do? “Buy farmland,” suggests Chris Mayer. But our counselor of all things capital and crisis isn’t interested in the farmhouses or livestock… not even the crops.
“There’s a growing shortage of quality topsoil around the world. Quality soil is loose, clumpy, filled with air pockets and teeming with life. It’s a complex microecosystem all its own. On average, the planet has little more than 3 feet of topsoil spread over its surface.
“The problem is that we’re losing it faster than we can replace it. We lose topsoil to development, erosion and desertification. In the U.S., the National Academy of Sciences says we’re losing it 10 times faster than it’s being replaced. The U.N. says that on a global basis, the rate of loss is 10-100 times faster than that of replacement.
“And replacing it isn’t easy. It grows back an inch or two over hundreds of years. Fertile soil — good dirt — may become more important to land values than oil or minerals in the ground.”
Chris’ Special Situations readers own two companies with huge farmland assets around the world… a great way to “buy farmland” without taking out another mortgage. As you’ve probably heard by now, subscriptions to Mayer’s Special Situations are currently 50% off the normal price. But at midnight tonight, that offer is off the table. Click here to seize this opportunity, before the price goes back up.
Investors found no comfort in their commodity investments yesterday, either. Gold suffered a swift sell-off in the U.S. trading session, falling $20. Asians and euros pulled out overnight, as well, and this morning, gold was another $10 lower, at $775.
Oil fell a few bucks yesterday, but stabilized after OPEC announced a production cut. The oil cartel surprised the market early this morning by announcing a 520,000-barrel-per-day production slash. Such a cut brings OPEC output back to September 2007 levels. Light sweet crude now trades at $104, just above a five-month low.
OPEC "has ensured that the oil market is well supplied,” read the organization’s statement, “and has enabled inventories to be built up to comfortable levels in terms of forward demand cover.” A “weakening world economy” has crippled demand, OPEC chiefs say, and current output levels are no longer unnecessary.
The European Union slashed its 2008 growth forecast today. The EU now expects this year’s growth in the 27-country bloc to ring in at 1.4%, a sharp decline from its April forecast of 2%. The group also bumped up inflation expectations, from 3.6% to 3.8%.
The commission behind the report provided no specific forecasts for 2009. But “a significant downward revision” is likely, said the group, when the 2009 forecast is formally published in November.
“The real interesting question at the moment,” opined Alan Greenspan to CNBC yesterday, “why is the economy in the world still in positive territory?
“The United States is weakening, obviously, and it’s stagnant,” Greenspan said. “But we’re holding up, and the developing world, while coming down from its dramatically rapid rates of increase, has slowed, as well. And so, I think the real interesting question is why are we doing as well as we are?”
And the answer’s in my new edition of The Age of Turbulence!
Greenspan said — again — that the U.S. still has a “50% or more” chance of entering recession. He also forecast (gotta sell those new paperbacks) “when we get beyond this [financial crisis], I think we’ll see a re-emergence of inflation, which we have not seen for years.”
The U.S. housing market has taken another turn for the worse. Pending home sales fell 3.2% from June to July, reports the National Association of Realtors. Year over year, the NAR’s index for homes under contract to be built is down 6.7%.
“Buyer confidence remains low,” said the typically cheery Laurence Yun, chief economist for the NAR. “Even with the Treasury Dept.’s direct intervention in the secondary mortgage market, it is unclear if we will go back to sound normal underwriting criteria, or if it will remain overly stringent. The housing market outlook is very cloudy.”
The dollar rally took a breather today. The dollar index backed off a bit from yesterday’s high, just under 80. As we write, the index is hovering at 79.4.
The Fed auctioned another $25 billion in a TAF Monday. Demand was overwhelming, as usual. Banks asked for $6 billion more than the Fed was willing to lend.
Did your bond investments profit $1.7 billion Monday? Bill Gross’ did. Pimco, the world’s biggest bond fund manager, scored at least a $1.7 billion payday earlier this week, when the government seized Fannie and Freddie.
Gross had slowly but surely converted 69% of his “Total Return Fund” to mortgage debt, specifically Fannie and Freddie paper. This huge bet with the planet’s biggest bond fund paid off (big-time) when the Treasury announced that Fannie and Freddie bonds would be honored.
Gross’ bond fund consequentially saw a record one-day rise… of a mighty 1.3%.
Heh… and you might recall us quoting Gross last week, clamoring for “policies that open up the balance sheet of the U.S. Treasury” to prevent a “financial tsunami.” Looks like he had more than just the welfare of U.S. homeowners in mind.
“Shouldn’t those golden parachutes for the Fannie Mae and Freddie Mac CEOs,” writes a reader, “fail to open now that they are bankrupt? Seems to me that when most companies go into receivership, all contracts are canceled and the courts decide who gets what. If they still get theirs, the citizenship should holler loud and long. If the judges and our congressmen start getting bad press, they’ll turn their backs on the golden boys in a heartbeat, and maybe this will set a precedent for settlements in future high-level bankruptcies. Yes, the courts should take of this without our prodding, but here in the United States, even our courts are manned by populists.”
“Its not just two former CEOs of FNM and FRE to blame,” says another. “It is members of Congress like Barney Frank, who accepted millions in ‘bribes’ from the lobbyists for these GSEs. The politicians enriched and lined their own pockets to loosen all regulations on FNM and FRE and compelled them to buy endless amounts of subprime crap. Barney Frank, Nancy Pelosi, Harry Reid and other corrupt politicians declared to the masses that ‘Every American should have the right to own their own home’ while the politicians knew people with no income, no jobs, no money to put as downpayments and no way of making the mortgage payments should ever have been given mortgages. These politicians bear a heavy responsibility for this unfolding disaster. Unfortunately, no one ever seems to be held accountable for their words or their actions.”
“What astounds me,” writes a third, “as I read the comments from readers on the Freddie and Fannie fiasco, is that there are not more people in this country who are outraged. What is wrong with the American people? With the obvious collusion between the scum in the government, the investment banks and the Fed, one would think people would be damn near up in arms! What’s it going to take to rouse the American people from their slumber and really, really do something about the crap that’s going on in this country??? $23 million to absolute failed idiots — unbelievable! And to top it all – it’s we who are paying this bill! Wake up, America!”
“How old are the readers of The 5?” asks our last reader. “You all seem to be surprised that Dan Mudd and Richard Syron are walking away with millions. I thought every adult knew the adage that it pays to be an insider. What would be the point of being an insider if you didn’t fleece the general public? This might not be capitalism at its best, but it is surely human nature at its most typical.”
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