Global Rate Cut, New SWF Target, Short Ban to Expire, and More!

by Addison Wiggin & Ian Mathias

  • Central banks announce historic intervention, fix easy money crisis with more easy money
  • Markets react, except Japan… how a Nipponese economy might be the future for I.O.U.S.A.
  • Short ban expires… are we better off, or worse?
  • The latest U.S. target of SWF dollars… definitely not a financial
  • Ed Bugos on the “icing on the cake” for gold investors
  • Housing data stage big upside surprise… why it happened and will it last

  What remedy soothes a crisis begat by loose lending? Why, more looseness, of course!

The world’s central banks colluded overnight… and announced a massive global lending rate cut this morning. The Federal Reserve slashed 50 points from its overnight rate. The central banks of Europe, Canada, England, Sweden and Switzerland all followed suit.

Lest we’re mistaken, this is the first global intervention in the history of modern central banking.

The Fed is now lending money at an official rate of 1.5%. The media likes to say Bernanke’s got “six bullets left” now, as in six more 25 basis point cuts. But really, it’s more like two. Below 1%, the dollar sheds its reserve currency status… and becomes the carry trade currency of the world.

Come in, Tokyo!

  A sign of things to come? The poor Japanese were among the only nations unable to “celebrate” the global rate cut.

Japan’s Nikkei 225 had closed down a nasty 9.3% — the worst single day for Japanese investors since “Black Monday” 1987 — before the central banks announced the news. The Nikkei is down 24% in the last two weeks. The Nikkei 225, which scored almost 40,000 at its high in the late ’80s, now flirts with 9,000.

  Much of the drama in Japan was in reaction to U.S. trading yesterday. Major indexes plunged again on Tuesday. The Dow lost another 508 points, or 5.1%. We looked back over the last year and dug up some Dow stats for you this morning. Have a seat…

* Yesterday’s close takes the Dow back more than 5 years, to Sept. 30, 2003
* Just five days into the official fourth quarter, the Dow is down 1,400 points, or 13%
* The Dow is now down 33% from its record close — one year ago this week
* Since the House approved the “rescue” plan, the Dow has had its worst back-to-back streak since 1937…

The S&P fell 5.7%. The Nasdaq dropped 5.8%.

  This morning, markets reacted to the global rate cut intervention just as they did to the Fed’s announcement Monday. The Dow was down almost 200 points premarket, but quickly reversed to a 200-point gain before the open, only to fall 400 points back down to minus 200 minutes after the bell. At this rate, we’re going to need a neck brace.

  Notwithstanding today’s stomach-turning swings, U.S. retirement accounts have lost some $2 trillion over the last 15 months. According to the latest from the Congressional Budget Office, 401(k) plans, which are the primary savings accounts for 60% of the American work force, were hit the hardest. In all, the CBO said yesterday that public and private pension funds, as well as private retirement accounts like 401(k)s, were down an average 20% since mid-2007.

  The SEC will lift its ban on shorting nearly 1,000 financials tonight. The SEC fulfilled its promise last week to end the prohibition early if Congress passed the bailout bill. So after the market close tonight, it’s on. But will anyone even care?

The ban "did more to destroy investor confidence than anything,” says famous short seller and activist investor Bill Ackman. “Short sellers have been blamed for bringing down the market, but since the ban, the markets have been falling even further, which means ‘the longs’ are selling now."

Ackman, most known for his tireless shorting of MBIA, took a huge long position in Wachovia last week after Citi’s bid for $2.2 billion was announced.

“At market bottoms,” we quoted Dan Amoss three weeks ago, “short sellers provide a huge amount of demand for stocks when they buy to close out short positions. Without this buying pressure, the market could possibly go ‘no bid’ at crucial peaks of fear.”

Heh. Sound familiar?

  Just out of curiosity this morning, we sought out the best and worst performing sectors over the last 12 months:

Worst: Dow Jones U.S. Mortgage Finance Index, down 95%.
Best: Dow Jones U.S. Brewers Index, up 17%.

That pretty much sums it up, eh?

  Now that Middle Eastern SWFs have lost their taste for U.S. financials, they’ve shifted their aim to a different sector: chip manufacturing.

The UAE Abu Dhabi fund invested $8 billion in U.S. chip manufacturer AMD today. The two will create a new company with these petrodollars called the Foundry, which will focus on the actual manufacturing of semiconductors and computer chips.

“This is the biggest announcement in our history," said Dirk Meyer, CEO of AMD.

According to a recent report from the U.S. Government Accountability Office, SWFs invested $43 billion in U.S. businesses from January 2007-June 2008

  Well, at least all this deflation on Wall Street has one positive effect. Ben Bernanke yesterday: “The outlook for inflation does look better, there’s a lot of uncertainty though, I think we have to be careful not to declare victory too soon.”

  “For gold investors,” Ed Bugos writes us this morning, “this Fed action is icing on the cake. I can’t help but think that in less than a year, Bernanke has turned the Federal Reserve into a hedge fund… watch them issue their own negotiable paper next — Federal Reserve Savings Bonds!

“The assets of the ‘fund’ currently include Treasuries, some of which are short positions (swapped out), some gold and defunct currency items, agency debt, repurchase agreements from various financial companies, term loans, a piece of Bear Stearns and AIG debt and foreign currency paper. Before long, the fund will add mortgages and consumer debt… ha, give me a piece of that!”

“Before this crisis, the Fed it could only buy Treasuries. Its liquidity injections were effectively limited to reserve bank credit. Today, it can shovel money out of many other doors too, including its direct line to many primary nonbank dealers (broker-dealers and other financials), mortgage lenders and guarantors, money market funds, car and consumer finance companies, the government and so on. It is widely backstopping risk taking, and multiplied the ‘Greenspan put.’
“The only window it hasn’t opened is a direct line to consumers. I’m sure it’ll think of something.
“In light of all this, and the explosion in the Fed’s balance sheet in recent weeks, who can take the deflation case seriously? All the indications of a massive reinflation effort are under way, and the results are coming in clear as day.”

  Gold is up $30 from yesterday’s high, to around $910 as we write.

  The dollar has been trending down this week. After peaking at 81.6 Monday, the dollar index has slowly shed about a point, to 80.8 as we write. The index barely flinched when the world’s central governments announced their rate cuts… evidence that currency traders had already baked lower lending rates into the dollar’s price. Must be reading The 5. 

  After selling down a few bucks yesterday, oil was standing still today at $89 a barrel. Commodities aren’t as violently out of favor today as they’ve been recently, and without much movement in the dollar, oil was ready to take a breather… until the inventory data arrived this morning.

An extra 8 million barrels of the stuff is floating around this week compared with last, said the Energy Dept. Taken as a sign of demand suppression, oil is down another $3 bucks as we write, to $86.

  We don’t mind gas prices falling 4 cents overnight, to a national average of $3.44 today. That’s a five-month low.

  Consumer credit fell $7.9 billion in August, the biggest drop in the history of the Federal Reserve’s bookkeeping. That’s also the first monthly decline since January… of 1998! Quite a streak.

U.S. consumers now owe a mere $2.57 trillion in credit debt, excluding their mortgages.

  And it’s not all bad news today… pending home sales jumped 7.4% in August. The National Association of Realtors this morning said that homes under contract to be sold rose to an indexed score of 93.4, the highest level in over a year. Polled economists were expecting a drop of 1.8%.

NAR chief economist Lawrence Yun attributed the spike to an “unleashing of pent-up demand. Home buyers in July were hampered by overly stringent lending criteria in the months before the government takeover of Fannie Mae and Freddie Mac.” We’re curious to see if homebuyers “unleashed” the same fury in September as the market fell off a cliff.

  “Leaving aside the likelihood,” writes a reader responding to yesterday’s 5, “that most of that 60% of Americans probably don’t know the difference between a recession and a depression and couple it with the news that Cramer has finally thrown in the towel, that’s got to be one of the biggest bullish signals we’ve had for a long time.”

The 5: Cramer does seem like he should be a contrarian indicator extraordinaire. And he’s been wrong a lot. But even before he said it, we were thinking the Dow should bottom out somewhere around 8,000… which would be another 20% down from here.

  “My husband, Kelly Ulrich, has the most listened to radio show in Kansas City,” writes another. “Yesterday, Matt Damon called in to promote Kelly gave I.O.U.S.A. a plug, and then asked why neither of the candidates will even address the issue of our looming national debt. Damon said he hadn’t seen your movie, but noted that under Clinton, we had a budget surplus, which is why we need to vote for change!

“It was a remarkably political exchange for Top 40 radio. It doesn’t look like the movie is in theaters here any longer, but I thought you’d like to know that you got a mention.”

The 5: Yay. Matt Damon commented on our movie. We have arrived, Hollywood.


Addison Wiggin,
The 5 Min. Forecast

P.S. Are you profiting from the market’s decline? Strategic Short Report readers have been brilliantly hedged during this downturn… their average closed position locked in 94% gains this year. Open positions are up another 51%, on average.

We’re inclined to think there’s more downside to come, and more profits for SSR subscribers. But even if we’re wrong, there’s no reason not to be prepared. Have Dan Amoss show you how to protect your wealth as markets fall, here.

P.P.S. If you’re reading this in Washington, D.C., take a break for lunch at the National Press Club. We’ll be there with David Walker, talking about I.O.U.S.A. and the mess we’re all in.


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