Jobs Surprise, Fed’s Balance Sheet, An Energy Investment, Financial Mergers, and More!

  The American economy lost 159,000 jobs in September
— the ninth straight month of job losses. Never has the U.S. lost jobs this many months in a row without falling into recession.

The Labor Department reports September had the largest number of lost jobs since “the recession that wasn’t” back in 2002-2003.

The government says year-to-date job losses exceed 760,000… far greater than the numbers reported by employment consultants ADP on Wednesday.

Who are you going to believe?

  “This is huge!” declared our gold adviser Ed Bugos this morning. A consummate observer of Federal Reserve releases, Ed was, apparently, groping the latest data all night. “The news that should be driving gold prices to the moon is out!

“The Federal Reserve has just expanded its balance sheet more in one month than it has in almost all of its first 86 years of existence. I am not kidding. Its assets, which represent the cumulative reserves the Fed has ‘created,’ totaled less than $700 billion at the turn of the millennium, and continued to expand by about $50 billion per year after that, up until this month.

“In September alone, reserve bank credit inflated by almost $600 billion. It is a record, and has already affected the monetary base.

“Up until September, the Fed has been careful to sterilize its liquidity provisions by selling Treasuries or reverse repos or simply by lending its securities off balance sheet. So while it has extended credit since August 2007, it has not monetized much of the liquidity. But the NET factor of increase to reserve bank credit for the month of September was about $170 billion. That is money created out of thin air… unsterilized.

“This number is unprecedented. It is difficult to predict gold’s short-term response to this shock, but the market cannot ignore the fundamental effect of this crackup for long. With interventions like this, we should get a few more $100-up days soon enough.”

Gold trended down yesterday with other dollar-denominated commodities. An ounce is $10 cheaper today, at $940. We suspect that’s a buying opportunity. If you’d like some help picking the best gold stocks, be sure to check out Ed’s Gold & Options Trader.

  Fed “discount window” loans hit a record high this week too.
Traditional loans to commercial banks jumped to $49 billion outstanding as of yesterday. Borrowing by brokerages at the Fed’s new primary dealer credit facility jumped to $152 billion, also a record.

  Nevertheless, the dollar continued to rise yesterday and this morning.
The dollar index scores nearly 80.8 today.

  “The rally in the dollar and Treasury securities might seem crazy,”
writes our managing editor Chris Mayer, “but I think it’s explained by the extremes of fear we see in the market. People just want safety. They just want to be sure they will get their money back. That explains why the yield on one-month Treasury bills fell to zero at one point during the recent panic. In fact, according to The Wall Street Journal: ‘A few times toward the end of the quarter, investors were willing to pay more for one-month Treasuries than they would get in return when the notes matured — in effect saying that a small known loss beats any uncertainty.’
 
“The demand for Treasuries is very strong right now — the Treasury could easily finance that $700 billion bailout with paper. Heck, in this market, it could probably sell trillions of Treasuries. Again, look at the puny yields — which reflect strong demand.

“On the last day of the quarter, the 10-year note hit 3.83%. It’s incredible. If you bought the 30-year T-bond a year ago — which most people thought was a dumb bet — you would have netted a 16% return one year later, as rates fell and your bond price rose. Not bad, huh?
 
“This rush for safety is also rallying the U.S. dollar. Despite all its flaws and all that it’s been through, when people are scared, they want the old greenback. Cash. Commodities, meanwhile, have sold off something fierce.
 
“Until the wave of bank failures and credit scares dies down, I don’t think we’ll see these trends reverse anytime really soon. What we have is a sharp countertrend in a long-term inflationary and commodity bull market.”

In other words, these are extraordinary times. Buyer beware.

  Wells Fargo announced a surprise merger with Wachovia this morning.
Wells, another of Warren Buffett’s holdings, knocked Wachovia right out of Citigroup’s feeble grip.

On Monday, the FDIC shoehorned an “agreement in principle” for Citi to buy Wachovia’s banking operations for about $1 a share. The folks at Wachovia were less than thrilled with that deal and have agreed to an all-stock, no-FDIC merger with Wells Fargo. Wells will raise up to $20 billion by issuing common shares so it can absorb Wachovia for a $15 billion stock merger.

Wachovia’s shares doubled to $6 on the news. Go, market… boo, government.

  Elsewhere in the bizarre world of finance… a major bank has predicted — what’s this — PROFITS for the current quarter?

UBS, the Swiss mega-bank, predicted it will post a small profit on Nov. 4. And project a net profit for 2009, too. Hmmmn…. we’ll have to check back on this dubious forecast. UBS reported sizable losses in the last two quarters, writing down some $42 billion over the last year.

  Despite all the hot air puffing south of The 5, the U.S. stock market is still suffering to the north. The Dow fell 348 points yesterday,
or about 3.2%. The S&P fared worse, down about 4%. The Nasdaq dropped 4.5%.

The three worst performing sectors in yesterday’s session were energy, materials and industrials, in that order. Financials were a distant fourth. Hmmmn… that looks like our second buying opportunity of the day…

  “How can you invest for the long haul in a climate like this?”
Byron King asked his readers this week. “It would help to find something that doesn’t swing wildly in just a couple of months. In the world of oil, there’s at least one thing that doesn’t change. That is, much of the world’s oil moves by tanker ship.

“In fact, about 62% of the world’s oil — over 2 billion barrels per year — is transported via tanker ships. As the accompanying map shows, the tanker routes of the world are pretty much where you would expect. Most of the exported oil moves out of the Middle East and West Africa toward North America, Europe and Asia. The rest of the world’s oil moves by pipeline, mostly through Eurasia and Russia.

“The cost to hire a tanker is called the charter rate. This rate varies according to the size and the characteristic of each tanker and the general availability of ships. That is, in a tight market, shipowners can command higher charter rates.

“Also, due to the banking meltdown and tight credit situation worldwide, it is now much more difficult and expensive than before for shipping companies to finance existing vessels or new construction. So the result is a looming capacity shortage for tankers.

“As long as people continue to use oil — a safe bet — there will be some consistency to the tanker business. Load. Sail. Unload. Turn around. Sail back. Do it again.” Byron just gave Outstanding Investments readers the story on his favorite oil tanker business, along with the ticker and his “buy up to” price. If you’re not currently a subscriber, check it out here.

  The Trendsetter State could be signaling tough times to come across the nation. California Gov. Schwarzenegger is pulling a page from Wall Street’s book and has warned Treasury Secretary Paulson that California might need a $7 billion shot in the arm.

“The credit crisis has frozen investment and commerce,” Arnold told Hank yesterday, “forcing businesses and families to stop purchasing goods and services. This has resulted in tens of thousands of lost jobs and billions of dollars in lost tax revenue.

“California is so large that our short-term cash flow needs exceed the entire budget of some states… Absent a clear resolution to this financial crisis… California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal Treasury for short-term financing.”

  “Seriously, has no one noticed,”
asks a reader, “that the Constitution provides, explicitly, that all spending bills must originate in the House? No such bill has been passed by the House, so how does the Senate get off passing it? It has originated in the Senate! I’m not even sure the House can properly consider such a bill that originates in the Senate, because it is beyond the authority granted the Senate by the Constitution! I guess in an ‘emergency,’ you have all the authority you can get away with. All you have to do is say that it was urgently needed.”

The 5 responds:
Oh, we noticed. They threw in some extracurricular protections for the Treasury secretary too. Check these out:

“(2) LIMITATIONS ON EQUITABLE RELIEF. –

(A) INJUNCTION. — No injunction or other form of equitable relief shall be issued against form of equitable relief shall be issued against the secretary for actions pursuant to section 101, 102, 106 and 109, other than to remedy a violation of the Constitution.

(B) TEMPORARY RESTRAINING ORDER. — Any request for a temporary restraining order against the secretary for actions pursuant to this act shall be considered and granted or denied by the court within 3 days of the date of the request.

(C) PRELIMINARY INJUNCTION. — Any request for a preliminary injunction against the secretary for actions pursuant to this act be considered and granted or denied by the court on an expedited basis consistent with the provisions of rule 65(b)(3) of the Federal Rules of Civil Procedure, or any successor thereto.

(D) PERMANENT INJUNCTION. — Any request for a permanent injunction against the secretary for actions pursuant to this act shall be considered and granted or denied by the court on an expedited basis. Whenever possible, the court shall consolidate trial on the merits with any hearing on a request for a preliminary injunction…”

  “Thanks, Gang of 5,”
writes another. “Yesterday’s article shows exactly what has gone wrong with our whole congressional process. The litany of crap that has been added to the bailout bill shows everything that is wrong with the process.
 
“Examples:
 
‘Sec. 309. Extension of economic development credit for American Samoa.’ Why just Samoa?

‘Sec. 310. Extension of mine rescue team training credit.’ What the hell has this got to do with mining???’

“The Congress is totally off its rails. Time to impeach or vote out every one of the incumbents.”

  “Just what real voice do we the public have in response to this obscene betrayal of the public trust by Congress?”
asks another outraged reader.

“Besides themselves, do these criminals have any interest in America?

“The American public is so splintered up by these charlatans that we have no effective voice at all. If our president weren’t so spineless, he would send this pathetic, wrongheaded bill right back to them to have it stripped of all its ‘earmarks’ (what a cozy little unencumbered, hopefully inoffensive name). Unfortunately, I feel the president, whom I have supported all along, is more interested in his reputation than our economy. I don’t think he really understands what money is… I love my country, but I curse its representatives and hope the House will straighten this out, as it did last week.”

The 5:
“Some have labeled these apparent policies the ‘socialization of risk’ or ‘Wall Street socialism,” Kevin Phillips writes in the preface to his book Bad Money
. “A better explanation is that the elements of the U.S. government decided, back in the late 1980s, that finance, not manufacturing or even high-technology, had to be the sector on which Washington would place its strategic chips — would ‘pick as a winner’ in the parlance of that era. Farms and factories were expendable, but certain banks and other financial institutions could not be allowed to fail.”
 
We just started reading Bad Money. It’s great. We love it so much we’re going to try to reach Kevin Phillips to help us re-establish the Strategic Investment franchise. Let us know what you think…
 
Cheers,
 
Addison Wiggin
The 5 Min. Forecast
 
P.S. Our film opens in Seattle this weekend,
at the AMC Loews Uptown 3. Patrick Creadon, the director, will be at both screenings, both nights. He’ll have complimentary copies of the book on hand and said if you’re still hanging around after the last screening on Saturday, he might even take you out and buy you a beer.
 
We’ll also be screening the film at the New Hampshire Film Festival on Oct. 17 and 19. We’re planning a few book signing events and other local events. The festival takes place in Portsmouth. We hail from Stratham, the next town over, so this should be a good local event.
 
Good timing, too… the federal debt crossed the $10 trillion threshold yesterday. The National Debt Clock in Times Square, which features prominently in the film, will have to stop or be replaced… the current one doesn’t have enough spaces to accommodate tens of trillions of dollars.