European Recession, Russia in Trouble, China’s Housing Market, Oil Perspective, Warren Buffett and More!

by Addison Wiggin & Ian Mathias

  • Forget Fannie and Freddie… The 5 packs the passport for a global economic roundup
  • Which three major euro economies will fall into recession by 2009
  • Russia desperate to buoy stock market… suggests pumping SWF dollars to save investors
  • China’s housing market takes a frightful turn… will the red nation go the way of I.O.U.S.A.?
  • Mexican billionaire makes contrarian bet on legendary U.S. organization
  • Byron King with an important perspective on oil prices, and oil headlines

 

  How about a break from Fannie Mae and Freddie Mac today? We, and the rest of the world, have said enough already this week. And we promise there’ll be much more to say in the future.

So let’s start with a look abroad. We must say… the view isn’t so pretty.

  Germany, Spain and Britain will all fall into recession this year, says the latest from the European Commission, the economic data arm of the EU. We brought you the commission’s gloomy eurozone growth forecast yesterday. Today, the details are looking even more dramatic:

According to EU statistics, Germany experienced two consecutive quarters of economic contraction between April and September, a technical recession. Outside the EU’s commission, we see similar indicators. For example, the Ifo Institute announced today that German consumer sentiment has fallen to a five-year low.

Similarly, the EU forecasts Spain and Britain will experience at least 0.1% “negative growth” in the last two quarters of this year. They might be right… in national measurements of GDP, Spain, Britain, and France all missed growth estimates in the second quarter.

  The Russian stock market is looking so desperate the government is considering using sovereign wealth fund money to prop up investors. Russia’s energy intense market has gotten slammed since oil’s big summer pullback. Coupled with a globally unpopular war in Georgia, a quick look at the RTS Index says it all… money is racing for the exits in Mother Russia.

The RTS Index fell 7% on Tuesday, as commodities retreated, global markets declined and credit conditions in Russia worsened. “President” Medvedev responded by pumping $10 billion in the market to improve liquidity, the biggest such cash injection in over a year. Russian investors returned that favor by selling the market down another 5% yesterday.

So this morning, Finance Minister Alexei Kudrin said he is mulling “a proposal to place pension fund money and national wealth fund money on the domestic market.”

Using SWF profits to prop up domestic equities? It’s a brave new world.

  China is showing signs of an ailing housing market. Chinese property prices are officially growing only 1% faster than last year’s pace — reason enough for the growth-obsessed nation to worry. We snagged a chart of the Chinese property price index over the past few years. This might be an unfair comparison, but we can’t help but look at this chart and think of the S&P/Case-Shiller Home Price Index here in the U.S.:

So Chinese home price growth is plummeting this year as quickly as it skyrocketed last year. This morning’s New York Times also causes concern over the health of China’s housing market. According to the rag, sales volume is falling “precipitously” in many regions, and prices are yet to fully react.

While it fails to exceed the magnitude of the subprime swill in the U.S., it’ll be interesting to see if home prices in the red nation go the way of I.O.U.S.A. Add in China’s plummeting stock market and weakening export economy… we’re inclined to think Chinese housing has some more room to fall before the next leg up.

  Investors pulled nearly $30 billion out of emerging market bond and equity funds from June-August, says EPFR Global today. That’s the biggest dollar amount of redemptions in at least 13 years, when the research firm started keeping track.

The MSCI Emerging Markets Index fell to 850 this week, its lowest level in a year and a half.

  In the Gulf of Mexico, Hurricane Ike is setting his sights on the U.S. oil patch. The hurricane swept close to the U.S. coast overnight and has already triggered the shutdown of 7% of the country’s oil and gas output. Forecasters now predict Ike will make landfall in Texas on Friday or Saturday as a Category 3 hurricane, which poses an obvious risk to the litany of refiners there. Four refineries on the coast have already shut down as a precaution.

Over 15% of U.S. natural gas and 25% of its oil is produced in the Gulf.

  So logically, crude oil is down a few bucks today, to $100 a barrel. Oil traders seem unfazed by Ike’s towering presence. The demand issue is moot today too.Yesterday’s weekly inventory report from the Energy Department showed far bigger declines in oil and gas stockpiles than the Street had anticipated. But before traders could buy back in, Saudi oil officials announced they would be willing to ignore OPEC’s order to cut production. If you’re buyin’ oil, Saudi Arabia will pump as much as you can carry home.

So all that’s moving energy markets today is the U.S. dollar. More on that in a minute. But first, we wonder, why does oil continue to plunge today in the face of so many bullish indicators?

“Oil has not plunged,” Byron King corrects us.

“This time last year — September 2007 — a barrel of oil cost about $80, and rising. I remember being in Houston in October 2007 — sitting about 10 feet from T. Boone Pickens and his wife — when oil crossed the $90 mark for the first time. Pickens commented, ‘We’ll see $100 oil before we ever see $80 again.’

“Pickens was right. Today, a barrel of oil is trading for about $107, or about a 33% increase year over year. That’s no plunge.

“Oil is down 27% from its recent high. But that’s after more than doubling in the past year. So the recent price retreat is not a plunge. It’s just a correction within a long trend of rising prices for energy.”

  Also catching headlines in the oil patch today — and you’ll NEVER believe this — the government officials who handle energy royalties in the U.S. have been accused of corruption . Gasp!

The media is shocked to learn this morning that at least 13 members of the government’s Minerals Management Service are accused of accepting gifts from major energy companies, including vacations, dinners, drugs and sex. Frankly, we’re shocked that’s all they were caught doing.

“It’s open season,” notes Byron, “on the idea of leasing and energy development on federal lands. There’s a clique out there — the usual suspects — that is looking for any reason to derail the energy development process for fossil fuels. What better way to do this than to highlight how the ‘process is broken.’ OK, a few people are crooked… so that means we can’t do what the energy developers want to do, right? Screw that ‘Drill, drill, drill’ stuff, eh?”

  As we mentioned, the dollar rally is forging ahead again today. The dollar index surpassed that 80 mark we told you about yesterday and now scores 80.2, a one-year high. The euro has fallen to $1.39, nearly a one-year low. At $1.74, the pound is just a breath away from a 2½-year low.

And the Japanese yen continues to buck the trend. $1 can score you 106 yen today, the highest exchange rate for the Japanese currency since July.

  Dollar buyers are brushing off today’s trade balance report. The dollar barely responded to news of the biggest U.S. trade deficit in 16 months. The deficit increased 5.7% in July, to $62.2 billion, $4 billion larger than Wall Street anticipated.

  If you’re short gold, or looking to buy the stuff at a discount, you’ve had a hell of a week. The precious metal is down again today, this time by another $20, to $750. That’s about $50 short of a one-year low.

  Stocks continued their erratic ways yesterday. After some big swings up and down, the Dow finished up 0.3% and the S&P 500 rose 0.6%, while the Nasdaq enjoyed 0.8% gains. Investors found some comfort in the Lehman Brothers announcement to spin itself off and clear up its balance sheet.

But today, those plans are being exposed for what they are… just plans. Without tangible hope in sight, Lehman is back in the doghouse today. The company was slammed with several brokerage downgrades this morning, and opened down 44%. Ouch. Other financials, like AIG and Washington Mutual, are feeling the pain today too.

  We told you about a wave of post Fannie/Freddie regional bank failures on Tuesday. Well, Warren Buffett is telling you the same thing today.

Kansas Bankers Surety, a Berkshire-owned insurer, has been given orders to stop selling private bank insurance above the FDIC-guaranteed amount. KBS refused to say whether the order came straight from Buffett.

Eleven banks have failed already this year, including one a stone’s throw from KBS — Columbia Bank & Trust of Topeka.

  Elsewhere in the world of billionaire decision making, SEC filings show that Mexican mogul Carlos “Slim” Helu bought 6.4% of The New York Times Co. Slim, arguably the richest man in the world, made most of his money in telecom, but has a history of buying against the grain. Take a look at a five-year chart of NYT, and you’ll see he’s certainly not going with the crowd on this one: 

His previous U.S. investments include Saks, Altria, MCI and Global Crossing.

  “Bill Gross,” writes a reader, “along with a cartel (domestic banks, foreign banks, domestic pension funds, foreign pension funds, foreign central banks and SWFs) blackmailed Paulson and Bush into the Freddie/Fannie takeover. ‘Either give the FNM and FRE bonds Treasury AAA backing,’ they said, ‘or we will send your GSE and Treasury yields through the roof.’ Paulson faced the American public with his tail between his legs, acting like the takeover was a choice, while Gross showed up on CNBC with a big grin on his face, knowing full well he colluded in the cornering. What a patriot… what a sin!”

  “Amazing how you seem to consistently pay homage to Bill Gross,” writes another. “He’s a self-serving, whiny suck-teat, but you can’t seem to get enough of him. I used to find you entertaining, but you’re boring me now!!!”

The 5: Whoa… easy. We just call ’em the way we see ’em. We typically pay attention to anyone with over $800 billion under management. They tend to move markets.

Second, whether or not you agree with Gross (in some regards, we don’t), he’s got a nice batting average over the last year… This time in 2007, he called for a 10% drop in home prices, the worst asset deflation since the Great Depression and a unwinding of “financial structures and derivatives that have yet to be discovered by the public.”

Also, in the past 12 months, he warned presidential candidates of the debt crisis, acknowledged that inflation is out of control in the U.S. and forecast the specifics of the Fannie and Freddie bailout. And if he made a buck in the process, we find it hard to hold it against him.

He’s been wrong, too — for sure. But we’d rather present it all to you and let you think for yourself. By the way, how can you — literally — exclaim you’re bored? That’s funny.

  “I hear all this bickering,” writes our last reader, “from readers about the Fannie/Freddie bailout and our current state of financial affairs. Sure, you can blame the Fed, the Congress, the president (and you’re right — it enabled this to happen for decades), but the fault lies with you all!!

“You, the American voter, continue time and again to re-elect these corrupt malcontents into office! Nancy Pelosi, Barney Frank, Ted Kennedy, Harry Reid, Charles Schumer, John McCain, etc., are all career politicians! George W. has served two terms! You, the people, keep re-electing career criminals to rob you of your life’s savings and destroy all hope of prosperity for your grandchildren. You, the people, in your apathy and ignorance shoulder ALL the blame for this mess.

“Why should career politicians change their ways? They have a great racket going. They are lining their pockets to the tune of millions. Until the people send a message by voting out at least 85% of the incumbents in Congress, NOTHING WILL CHANGE!”

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

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