Bill Passes, Markets Crash, Dollar Booms, Commodities Sink, A Silver Lining, and More!

  Traders in Asia didn’t like the plan much either.

And why would they? Still nursing their decades-old debt hangover, Japan is facing (yet another) recession. The Shanghai Composite — despite a recent rally — is still a stomach-turning 60% off its record high. And generally speaking, the Asian export miracle is losing its shimmer in the face of economic anxiety around the globe.

  In Europe, consumer panic has “forced” the Irish, Danish and Greek governments to guarantee all private bank accounts. Officials in Germany are neck deep in a $67 billion bailout of Hypo Real Estate, one of the country’s major mortgage and private lenders.

The Belgians have orchestrated a bailout of their biggest bank, Fortis. To its chagrin, no doubt, the French bank BNP Paribas picked up the troubled Belgian bank at fire sale prices, a la Bear Stearns/J.P. Morgan.

Trading in Russia was halted today after shares on the ruble-dominated MICEX fell 15.4% by 1:35 Moscow time. The dollar-denominated RTS fell 14%. The RTS is down over 60% from its peak. 

Here’s how things look to the East:

  Not wanting to be outdone, the Dow raced down 275 points at the opening bell this morning. As we write, the Dow had fallen below the 10,000 mark for the first time in four years. As of this writing, it’s down over 500…

  In response to this global race to the bottom for equities, the Fed — once again — eased restrictions on lending. Banks can now score up to $150 billion at the Fed’s 84-day fund actions, or TAFs. Total TAF assets outstanding can now exceed $600 billion.

The Fed intends to offer $600 billion in 84-day loan auctions in the next two months. By the end of the year, if everything goes to schedule and none of these loans get paid back until the end of their maturity, the Fed could have $900 billion in outstanding loans on its books — $100 billion shy of $1trillion. Oy.

Ben Bernanke also announced the Fed would begin handing out interest on the reserves each bank is required to store at its local Federal Reserve branch. How thoughtful….

  “Thank God for the bureaucrats, the economists, the Wall Street pros,” Bill Bonner spake, on behalf of investors everywhere this morning. “They’re going to ‘rescue’ us.”

“But wait a minute: Wasn’t it the U.S. government that set up Fannie and Freddie with an implied guarantee? Wasn’t it the SEC that was set up to regulate Wall Street and prohibit the sale of slimy ‘investments’? Weren’t these same economists the ones who thought the U.S. financial system was the best in the world… because it was so ‘dynamic… inventive… and flexible?’

“Isn’t it the Fed itself that has been lending money below the inflation rate since 2002? And wasn’t that the major source of ‘liquidity’ that created such a huge credit bubble? And wasn’t Hank Paulson the head man at Wall Street’s most go-go firm when all this stuff was going on? Do you remember hearing him warn investors or lawmakers that the whole Vesuvius of hyper credit was going to blow up? We don’t…

“Yes, dear reader, as predicted in these pages … we are witnessing an epochal shift — from capitalism to socialism… from markets to politics… from subtle swindle to naked larceny… from white-collar grifters to stickup men… from slick fraud to brute force.

“And then… who will rescue us from the rescuers?”

  Hmmmmn… 138 companies cut their dividend in the third quarter, Standard & Poor’s reported this morning. That’s six times the mere 21 that cut during the same period last year.

S&P said the U.S. market has just limped through the worst September for dividends since at least 1956, when the company started keeping track.

  According to Hedge Fund Research, the average fund fell 8.6% last month – the worst decline since the group started in 1990.

For the most glaring example of just how cruel tight credit markets can be to those who rely on the cheap stuff… we only have to look at Greenlight Capital. David Einhorn, the now famous short seller who made truckloads on shorting Lehman Bros. and Allied Capital, lost about 13% in September. Despite the best market for short sellers in decades, he’s at a net negative for the year.

No doubt he’ll make it up when he returns to the tables in Vegas.

  Only the breadth of investor angst surprises us this morning. While traders sought comfort in hard assets and commodities during the first leg of the credit crisis earlier this year, that’s not the case this time around.

As we mentioned last week, basic materials, energy, resources and agriculture — all some of our favorites — are getting slammed.

  “This is severe,” says Chris Mayer. “This is the real deal. And I think it is possible good companies could go down as the credit markets lock up. Just Friday, the Financial Times reported ‘a virtual funding freeze… has affected even top-rated companies such as General Electric… and AT&T.’

“It’s a dangerous time. The fear out there is extreme. That explains why the yield on 1-month Treasury bills fell to zero at one point during the recent panic. Investors just wanted safety. They didn’t care about yield. They wanted a place to put their money where they can be sure they will get it back.

“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.”

  The dollar is, in fact, rising again today. The dollar index is up 5 points from its late-September low, up a full point since Friday. At 81.2, the dollar is at its highest level in 13 months… all the dollar drama of the last year has been undone — amazing.

As you’d guess the euro is in trouble. It’s down to a 14-month low versus the dollar, at $1.35. The pound, at $1.75, is at 2006 levels. And as global risk aversion seems to be peaking, the carry trade is dead in the water. Thus, the yen is sitting pretty at 102, a seven-month high.

  Gold is rising too. The spot price is up $30 today, to $860.

  But as the dollar gains momentum, oil continues to fall. Now just below $90 a barrel, it looks like we’re in another winter lull for oil prices. Coupled with the oppressively bearish attitude toward commodities at the moment, we dare not call a bottom to crude prices. In fact, we wouldn’t be surprised to see the price dip down to the $60s before this countertrend plays out. 

“The approved version of the bailout bill DOES extend the production tax credit (PTC) for renewable energy by one year,” notes Byron King, finding a silver lining for energy investors today.
 
“Under current tax law, the PTC will expire on Dec. 31, 2008. Any renewable energy system that is not installed and running by the end of this year will not benefit from the PTC. This is negative toward the economics of renewable operations. It’s bad for future investment in renewable energy systems.

“The American Wind Energy Association recently published an estimate that after Dec. 31, 2008, investment in renewable systems could fall by as much as 50% without the PTC. This would play havoc with the energy investment cycle and all but shut many things down next year. Losing the PTC will strangle the vendor base, disrupt the work force and curtail future output.

“So there is at least one good thing about the gigantic bailout bill that was just passed through Congress. At least it’s positive for ESI readers, since it legislates another year of PTC to the renewable energy industry. The PTC provisions are very good for the geothermal companies.”

Byron’s got a hefty share of geothermal companies in his Energy & Scarcity Investor portfolio. And if you’re not a subscriber, you’re in luck… the bear market has brought many of these plays back to levels ripe for reinvestment. Get more on ESI, here.

  “I am not the fan of Ayn Rand I once was either,” responds a reader, Atlas Shrugged in hand. “Nonetheless, she had quite a few things pegged: ‘Watch money,’ she said. ‘Money is the barometer of a society’s virtue. When you see that trading is done not by consent, but by compulsion — when you see that in order to produce, you need to obtain permission from men who produce nothing — when you see that money is flowing to those who deal not in goods, but in favors—when you see that men get rich more easily by graft than by work, and your laws no longer protect you against them, but protect them against you — when you see corruption being rewarded and honesty becoming a self-sacrifice — you may know that your society is doomed.’"

  “Is there no way” asks a reader, “to attach a name and a face of a senator to each and every one of the riders on the bailout bill? I swear, those congressional clowns should at least have to see the feathers and smell the tar. Before the November elections would be a good time to know.”

The 5: In due time. Meanwhile, here are some kudos for the few senators who voted no:

Allard (R-CO)Barrasso (R-WY)Brownback (R-KS)Bunning (R-KY)Cantwell (D-WA)Cochran (R-MS)Crapo (R-ID)DeMint (R-SC)Dole (R-NC) Dorgan (D-ND)Enzi (R-WY)Feingold (D-WI)Inhofe (R-OK)Johnson (D-SD)Landrieu (D-LA)Nelson (D-FL)Roberts (R-KS)Sanders (I-VT) Sessions (R-AL)Shelby (R-AL)Stabenow (D-MI)Tester (D-MT)Vitter (R-LA)Wicker (R-MS)Wyden (D-OR)

The rundown of the House vote can be found here.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Turnout for the film was decent in Seattle over the weekend. At least until the citywide power outage slowed things down a bit. Heh.

P.P.S. If you’ll be in the D.C. area this Wednesday, please come by the National Press Club. David Walker and I will be commenting on the bailout plan and offering a few comments about the second presidential debate.  See details here.