The Bailout, A Sector to Buy, A Sector to Short and More!

  • The mighty bailout is approved, goes to vote… what it means for the future of I.O.U.S.A.
  • Chris Mayer on why commodities are still a buy
  • Europe feels the pain… euro banks, lenders and insurers in deep trouble 
  • U.S. banking system changing rapidly… two mega-banks bite the dust
  • Dan Amoss picks a new sector to short
  • Plus, U.S. Mint suspends sales of 24-karat gold coins

  As you’ve surely heard by now, the fix is on. Republicans and Democrats alike have gotten their mitts on the $700 billion bailout proposed by the Bush administration. Details are still emerging, but Congress is expected enact the measure into law sometime this week. Lucky you…

  “When the government spends more money and creates more dollars,” laments our Chris Mayer, “it’s like a company doing a massive share offering. It dilutes the value of everyone’s holdings. Same assets, but a lot more claims against those assets. So a diluted dollar is one that buys less.

“The dollar is on its way out after decades of careless stewardship by the U.S. government. The real world of things ought to hold its value against this depreciating currency.”

Take a look at this chart:

Commodities will be a great place to be when this inflation finally becomes obvious to everyone. The above chart divides the CRB commodity index by the S&P 500 and shows you how much stock you can buy with a fixed basket of commodities.

“As you can see,” says Mayer, “the long-term average for this chart is about 1.5. During the inflationary 1970s, the number spiked to 4 and was consistently better than 2. So to get to a higher ratio, either stocks have to fall or commodities have to rise. It will probably be a bit of both.

“But the chart starkly shows why commodities look like a good bet. Commodity stocks are the next best thing.”
If it’s safe, value-oriented resource and asset-heavy stocks you seek, you should check out Chris Mayer’s Paycheck Portfolio, here.  

  “The U.S. will lose its status as the superpower of the world financial system,” German Finance Minister Peer Steinbruck now infamously forecast late last week.

“Ten years from now, we will see 2008 as a fundamental rupture. I am not saying the dollar will lose its reserve currency status, but it will become relative.”

The U.S. has been “irresponsible” with its financial regulation, Steinbruck went on to say. This sort of laissez-faire ideology “was as simplistic as it was dangerous… This largely underregulated system is collapsing today. This world will become multipolar… the world will never be the same again.”

No word, as yet, from Steinbruck on problems plaguing the economy he’s meant to oversee.

  Friday’s seizure of Washington Mutual held the record for “biggest U.S. bank failure” for barely three days… sort of.

This morning, The FDIC announced that Wachovia is the latest victim of the credit crisis. The FDIC insists Wachovia didn’t “fail.” Apparently, it’s coined another term to describe an institution so desperate that it seeks immediate government protection.

Like JPMorgan Chase’s absorption of WaMu on Friday, the government has tapped Citigroup to overtake on Wachovia. Citi could lose as much as $42 billion from bad loans in Wachovia’s $312 billion loan pool. The FDIC has promised to absorb any additional losses. Aside from real estate and brand names, Citi also gets the $400 billion worth of Wachovia deposit accounts.

Hmmn… wasn’t it only a week ago that Wachovia was negotiating to buy Morgan Stanley?

  Markets around the world are reacting to this grand U.S. rescue and nonfailure of Wachovia by selling off… again. Markets in Japan, Korea and Australia ended down 1-2%.

  European stocks are suffering a crisis of their own. Aside from the bad juju seeping out of the U.S., here’s a quick rundown of the drama coming from the eurozone this morning:

Fortis, one of the region’s biggest banks and insurance providers, failed. The governments of Belgium, the Netherlands and Luxembourg pumped a combined $16 billion into Fortis to keep the business on life support

The U.K. treasury seized another mortgage lender. Seven months after taking over Northern Rock, the British government has seized Bradford & Bingley, the nation’s biggest lender to landlords. Spanish financial Banco Santander picked up B&B’s retail division for $1 billion
German real estate giant Hypo Real Estate Group needed a $50 billion injection from various private companies and the German government

Glitnir, a Icelandic bank down on its luck, was nationalized too. Another billion dollars down the tubes.

And so it’s tough to blame European traders for selling their euro stocks. Just about every index was down over 4% there this morning. Major indexes in Vienna and Amsterdam all but crashed, falling over 8%. Oslo and Brussells fell by 7%. Ouch.

Hmmmn… should we reprise Herr Steinbruck’s comments from above here… or leave well enough alone?

  Stocks are off to a bad start in the U.S. this morning, too. Traders wanted a bailout bill passed by this morning. But all they got was an agreement to agree. Throw in WaMu and Wachovia… et voila, the Dow fell nearly 300 points out of the gate today.

(As we were about to click send, the Dow had raced down to – 600 points for the day. Looks like this Congressional bailout isn’t such a “sure thing.” Much more on this, tomorrow.)

  “This month, we are going to sell short one of the most overvalued retail stocks in the market,” Dan Amoss told his Strategic Short Report readers last week. While only SSR subscribers have the ticker, it’s worth noting that Dan has set his sights outside the financials again.
“For starters, complacency reigns in many parts of the analyst community. Many retail stock analysts still expect the companies on their coverage lists will grow earnings at 10% or 15% annual rates over the next five years in a nice, linear fashion.

“But think about it… The public’s fear about the economy has accelerated in recent weeks as the Wall Street crisis has become front-page news. Expect lower discretionary spending in the coming months, and every retailer will feel at least some pinch in the coming months. Since the next few months happen to be the crucial holiday shopping season, that could be disastrous for struggling retailers. Now is a great opportunity to short retailers, like the one I just recommended to Strategic Short Report readers, whose entire year depends on sales between September-December.

“What’s more, many retailers use operating leases to finance the store base. After paying suppliers, employees, landlords, creditors and the tax man, struggling retailers will be left with precious little cash to return to shareholders. A slower consumer economy could easily shut down a trickle of free cash flow.”

  No surprise, really, that U.S. second-quarter GDP was revised down on Friday. The American economy grew at an annual rate of 2.8% during the second quarter, the Commerce Department said, not the 3.3% it first guesstimated.

  But amazingly, the dollar is rallying again. The dollar index is up a full point from Friday, now to around 78. Evidently, bank failures of this magnitude were expected here in the States, but the euro turmoil this morning has traders flocking to the world’s great reserve standard.

The euro has given up nearly all of last week’s record-breaking rally. One euro now goes for $1.44, down 2 cents from Friday’s prices. The pound is down 3 cents, to $1.80. The yen is steady — in fact, a bit stronger than normal — at 105.

  Also for the “Say What?” file this morning, consumer sentiment is at its highest level since February. According to the latest Reuters/U. of Michigan survey, consumer confidence grew to a score of 70.3 in September, well above 63 in August. Even crazier, the latest September projection came in lower than expected… Wall Street wanted a score of 71! U. of M. will finalize September’s score in few weeks, with all the madness of the last week factored in. Needless to say, look for the gauge of confidence to decline.

  Commodities are getting shellacked this morning. We’re back to the “strong dollar and weakening global demand” argument again. Oil is down $6, to $100 a barrel, for example. Most other kinds of “stuff” are getting similarly slammed… except:

  Gold is holding its ground today . In fact, gold popped up $20 this morning as the market plummeted. The same way oil is reverting to a thought process of old, gold seems to be regaining its role as a “flight to safety.” As we write, you can still get an ounce for a little less than $900.

  And by some freakish coincidence, as the market for gold ramps up, the U.S. government has suspended sales of its most popular 24-karat gold coin.  
The 24-karat American Buffalo is in such high demand — the government says — that the Mint has simply run out. The U.S. Mint sang the same tune for the 1-ounce American Eagle coins back in August. After running out of Eagles, the Mint suspended sales and later reopened the market to only “designated dealers.”

As of last week, the Mint had sold over 164,000 American Buffalo coins in 2008, up 54% from the same time last year.

  “You know, this sounds like a reasonable business plan, all angst aside,” writes a reader of the imminent government bailout. “Buy low and sell high, right? These assets are at a low. Uncle Sam can hold these indefinitely, or sell them as the value rises. At minimum, I think by creating a market and buying, it will stabilize and set a benchmark for buyers and sellers.

“Now, what I truly fear is that the government considerably overpays for these products… now, THAT would be the bailout everyone is railing against. Paying 60-70 cents on the dollar would reward those who took the risk and leave such a small margin for profit for us taxpayers that losses are practically inevitable.

“Here’s a scenario. The government truly pays pennies on the dollar, say, 10-30 cents for assets backed by HOMES, real property with PEOPLE in it, who want to work and want to stay and will bleed, sweat and cry to save their piece of the dream. Then the government modifies the mortgages…say, to 4.5% and 80%, or lower, or to 50 cents on the dollar, maybe a 50-year mortgage, whatever it takes, right? I am sure that a 10-30-cent investment can, in all probability, double…and the homeowner could be saved. Wow, the government could profit off this, the taxpayer could profit, the banks would take a loss? Whoa, sounds too good to be true…
“Maybe Paulson is going to run the Treasury like he ran Goldman, looking for an opportunistic profit. I mean, the guy already has money and rich friends and power… what else could be added? I’ll tell you, a LEGACY… and at this point, either it’s going to be robbed from the poor and given to the rich and protected, the elite plan… or MAYBE… it could be the plan that saved America. The plan that snubbed the excesses of greed and predation and turned the tables on the debt and increased ownership of homes, and maybe even turned the American juggernaut into the most profitable business in the history of the world…”

The 5: Oy. Here’s the problem. There is no price for these “crap sandwiches” right now. Nobody wants them. Which means that no matter what price the government comes up with to pay for them, they’re immediately at a loss. This garbage about the taxpayers standing to make money over time is fiction. The underlying asset for these pieces of paper is a foreclosure slip headed off to the county for auction. Who is going to determine what constitutes 4 or 5 cents on the dollar? Who is going to reprice them at 50 cents? The bureaucracy rising to meet the demands of that first $50 billion disbursement alone will be staggering.

Our dear friend the late Dr. Richebacher must be glad he shed his mortal coil before all of these things he predicted came to fruition…

Addison Wiggin
The 5 Min. Forecast


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