Stock and Bond Markets Make History, What to Buy Now, Central Bank Bailouts, AIG, and More!

by Addison Wiggin & Ian Mathias

  • Markets stage biggest dive since Sept. 11, 2001… Mayer on how to build a fortune as stocks fall
  • Central banks of the world open the floodgates… The 5 rounds up the wash of liquidity around the globe
  • All eyes on AIG… the imminent fate of the world’s biggest insurer
  • Oil continues to plummet, but we’re paying 18 cents more at the pump?
  • T-bonds set a record of their own… Bill Bonner on the future of U.S. IOUs

  After its worst daily performance since Sept. 11, 2001, the U.S. stock market has “retested” credit crisis lows — and failed. 

Yesterday alone, the Dow fell 4.4%. The S&P 500 plunged 4.7% to a two-year low. The Nasdaq got off easy, falling only 3.6%. The Dow is 23% off its record high, set less than a year ago.

  But before you get too blue this morning, check out how the U.S. markets stack up versus the world over the last 52 weeks:

  “This market just keeps getting better and better,” says Chris Mayer, “or worse and worse, depending on your perspective.

“If you’re a long-term buyer of securities, you’ve got to love and get excited about these markets. It’s during times like this when all those guys you read about (Buffett, Templeton, et al.) made their best investments. Of course, it’s no fun going through it, especially in light of our existing holdings — just a lot of damage on that front in such a short amount of time.

“During times like this, there are no ‘safe’ stocks, in the sense that the prices can’t go down. Nearly everything goes down when the market averages fall 20% or more. Anyone tells you to buy safe stocks, hit ’em over the head with a book. There are a lot of great companies out there, I certainly agree. And many great buys. But they are safe only insofar as their businesses are highly unlikely to suffer some permanent impairment — like a bankruptcy or major loss.

“But nobody can predict stock prices with reasonable accuracy. There are too many factors — and too many variables — involved. But if you buy what’s cheap and looks to have long-term trends behind it, you ought to do all right. Panic selling on days like this is almost always is a bad idea. I suspect, a year or two from now, we’ll look back on some of the prices offered in the market today and wish we’d bought more.”

Low on debt, clear of troubled sectors, lots of assets, run by the “serially successful”… these are the kinds of equities Chris is packing into the Special Situations portfolio. If you’re looking for a safe place to ride out the storm, MSS is a great place to start.

  The Federal Reserve gave the banking system a $70 billion shot in the arm yesterday. That number too is the “most since Sept. 11, 2001.” The Fed accepted another $50 billion in repurchase agreements this morning.

In light of the crisis on Wall Street, you may have forgotten the Fed meets today to masticate on monetary theory. Futures in Chicago give 63% odds the Fed will cut its lending rates by 25 points — an act that was all but “impossible” a few weeks ago.

  The Bank of Japan followed the Fed’s lead overnight and injected $24 billion into Japanese money markets. The Bank of England offered around $50 billion in three-day funds. The ECB coughed up just short of $100 billion this morning.

  Last night, the People’s Bank of China cut its lending rate for the first time in six years.

Over the past 18 months, we’ve reported countless attempts from the Chinese government to cool their economy. They’ve raised required reserve ratios more times than we can count. They’ve hiked lending rates. They’ve changed trading rules to make it harder for the market to soar higher.

Today — suddenly — China is desperate to stimulate its economy. The “People’s Bank” cut its rate by 0.27%, to a still lofty 7.2%.

The move provided no confidence for Chinese investors, or most investors in Asian markets, for that matter. The Shanghai Composite fell 4.4% overnight. Taiwan dropped nearly 5%. Hong Kong is down 5.4%. South Korea has plummeted 6%.

And after another 5% loss of its own, the Nipponese Nikkei is now at a three-year low.

  Benchmarks in France, Germany and the U.K. all fell 3%.

  So… as the dog of monetary policy chases the tail of crashing markets around the globe, investors in the U.S. today have their eyes on AIG.

The world’s biggest insurer was downgraded by every major ratings agency last night, and now has until tomorrow to raise anywhere from $14-75 billion dollars. AIG stock fell 61% yesterday, and was cut in half again this morning premarket. You can buy a share of AIG for less than your morning coffee today…

But as we write, rumors abound that the Fed has agreed to pony up the cash AIG needs. The Dow has rebounded from a 150 deficit to 75 in the black. More news to come… stay tuned.

  We’re beginning to see the true shades of Lehman Brothers’ books this morning. Having gone under with over $639 billion in “assets,” the investment bank’s demise earns it the title of biggest U.S. bankruptcy of all time… hands down.

Still, as we noted yesterday, $613 billion of that is good ol’ American capitalist debt.

  Goldman Sachs picked a fitting day to announce quarterly earnings of its own. The bank beat Street estimates by posting a profit — albeit 71% less of one than last year. Goldman “guidance” suggested it’ll be “more cautious” during this “tough environment.” Heh… perversely, that’s the kiss of death for any financial this year.

  Mayhem on the Street continues to steal the spotlight from oil’s notable retreat. Light sweet crude is down another $4, to $91 a barrel, today.

Your favorite oil cartel, OPEC, cut its global growth estimate for 2009 from 1.17% to 1.02%. The group cited an “unexpectedly strong decline in oil demand in North America." Really… you don’t say.

  While Hurricane Ike didn’t faze oil prices, it wasn’t above messing with gas distribution around the continent. The national average for gas is up 18 cents since Friday, to $3.85 today. The 6-cent jump on Sunday was the biggest one-day leap since Hurricane Katrina.

In February, the last time oil was $91 a barrel, gasoline was barely $2.95 a gallon. Hmnnn…

  Retreating oil, and, until recently, gas, will give the Fed some convenient legroom today. Consumer prices registered a 0.1% decline in August, reported the Labor Department this morning — the first monthly decline in nearly two years.

The decline can be exclusively attributed to “energy” costs… they dropped 3.1% in August.

Still, the Fed’s “core” CPI rose 0.2%. Food, apparel and recreation costs all rose 0.5% in the month. Medical costs were up 0.3%. Rents climbed 0.3%. So Bernanke and friends aren’t exactly out of the woods yet.

  The U.S. dollar has stayed steady since its weekend retreat. The dollar index remains close to yesterday’s levels, at 78.8.

  Gold is holding its ground, too, even if it is lower than we’d like to see. An ounce of Midas’ favorite metal fetches $780 in NYC today.

  The bond market had a historic day of its own yesterday. The yield on the 30-year note dropped to its lowest level in 30 years. But even that’s an understatement. The government began issuing T-bonds regularly only in 1977.

“Investors tend to go from one extreme to another,” explains Bill Bonner, attempting a forecast of his own. “At once, they are afraid of credit… and then, they feel as though credit were their best friend in the world. And they go from feeling very optimistic about the future… to feeling very pessimistic. These feelings have market consequences. When they are upbeat and sans soucis, they are willing to lend at very low rates of interest, for example. Why not? They’re sure they’ll get their money back. And when they are feeling lucky, they’ll invest in wild-eyed schemes and half-baked projects too. Everything is going their way; so why not?

“But then, the mood changes. The schemes fail. Money is lost. And gradually, people come to believe that the future holds more bad days than good ones. Yields rise — as they ask for higher rates of interest before lending money. Not only are they afraid that they may not get their money back, they’re also afraid that the money they get back may not be worth as much as the money they lent out. At the peak of the yields cycle in ’82, for example, investors wanted 14% interest before they’d lend money even to the U.S. government!

“When they get gloomy, they want higher cash dividends from their stocks too. Gone are the days when they believed they could just buy stocks and get rich. They come to believe that if a stock is not paying its way — with dividends each year — out it goes. During the Great Depression, for example, stock market investors sold stocks down to such a low level that they paid an average dividend of more than 10%.”

  “I believe that Canadian energy and metal stocks are a bargain this week,’ writes a reader. “Consider that the Canadian dollar is still below par with the U.S. dollar even though the Canadian economy is fundamentally better. Canada is resource rich. At this time, with the North American markets so far in the Dumpster, if I was a sovereign wealth fund, I would be looking for buying opportunities — particularly something that has downstream tangible value. Abu Dhabi said it wasn’t interested in finance stocks, but made no reference to other investment sectors. And what better way to do it than to turn U.S. Treasury bills (someone has to start asking if they can possibly keep their value) into Canadian resource investments, and to do so with U.S. dollars before the exchange rate reverses.”

The 5: At our Investment Symposium in Vancouver this year, Rick Rule gave “guidance” of his own on timing your resource purchases… you’ll find our synopsis here.

  “I love Jim Rogers’ commentaries,” writes another, objecting to a reader dissing the globe-trotting, bow tie wearing capitalist. “Please ignore that bozo who objects to Rogers because he’s smart enough not to buy into that brain-dead U.S. nationalism that permeates the American populace. I left the U.S. in ’89 and I have never regretted it. Americans as a whole don’t have a clue about the rest of the world.”

   “Stop all those Jim Rogers and China bashers,” requests another. “Those who call China totalitarian and say Jim Rogers has no credibility are not only insane, but intellectually retarded. America will surely go down faster if there are more of this kind of people. Please stop the attacks of these people in your 5 Min. Forecast. We need more educated and intelligent comments.”

  “Your reader that laments Jim Rogers for ‘abandoning’ his country,” writes our last reader, “is, unfortunately, symptomatic of many people in the West who are wedded to the idea of a nation state. Since when did the U.S. make Jim Rogers rich?

“People like Jim Rogers, or any other smart businessmen for that matter, have actually made the U.S. rich, not vice versa. A simple understanding of economics would be worthwhile, I think. Furthermore, since when is a sheer accident of birth a prerequisite that you be loyal to your country of birth?

“This same reader is probably the same sort of moron who would lament a North Korean for being patriotic to the regime there. Sheeshh!!”

Regards,

Addison Wiggin
The 5 Min. Forecast

rspertzel

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