Slow Motion Crash, A Buying Opportunity, Oil Forecast, Lawyer Fees, and More!

by Addison Wiggin & Ian Mathias

  • Just how low could the Dow fall? How does 3,843 sound?
  • The other bear market… Byron King on oil’s precipitous decline
  • Chris Mayer with a “crisis proof” asset class
  • Another coming bull market for your investigation: lawyer fees
  • Plus, readers rush in in defense of short sellers

The Dow fell another 678 points yesterday … leaving it below 9,000 for the first time since 2003. The old bag fell 458 points in the last 60 minutes alone.

The Dow is down an impressive 21% in the last seven trading days. For comparison’s sake, the Black Monday crash of 1987 saw the DJIA fall 22.6% in one day. The crash of 1929 consisted of back-to-back drops of 12% and 11%.

So while this one has been more of the slow-motion variety, make no mistake — this week stacks right up there with the best of them.

Where to from here? Looking at a multiyear chart — with the exception of September 2002, when the Dow hit 7,500 and change, and again in January 2003 — you have to go all the way back to 1997 to see the Dow below these levels.

If, for arguments sake, investors were to sell off all the way back to levels last seen before Greenspan first warned of “irrational exuberance” in the stock market, you’d be looking at the Dow somewhere around 3,843, where it sat in January 1995.

Oy. After a rough week, you want to see a solid rally on Friday. If not… Monday could be brutal. “At the same time,” asks our trusty sidekick Ian, “who would want to go into this weekend long?”


No surprise the VIX hit another all-time high. The measure of market volatility in the Chicago options pits soared to a score of 64.9 yesterday, the highest in its 18-year history. This morning, it hit 70. Again, for comparison’s sake, after Sept. 11, the VIX was in the 40’s… after the LTCM bailout in 1998, it hit 49.

As has been the habit of late, stock market drama in the U.S. spread to Asia overnight.
In fact, markets on the far side of the planet experienced nothing short of bedlam… Japan’s Nikkei 225 suffered its worst single day since 1987, falling nearly 10%.

Plummeting commodity prices helped push the Australian market to its worst single day ever. The ASX 200 fell 8.3% in what investors are already dubbing an Australian “Black Friday,” mate. Hong Kong and Singapore managed to get away with “only” 7-8% losses.

Mainland China proved to be the best performer, down a mere 3.6%.

Same story in Europe. London’s FTSE fell 5%, France and Germany dropped 7%.

Every major European market has fallen at least 21% in the last five days alone.

Extreme volatility has been giving a rash to regulators all over the world. In Russia, they’ve halted trading indefinitely. Same in the Ukraine. Thailand halted for 30 minutes this morning. Likewise, the schnitzels in Vienna. Indonesia halted today, all day, for the second day in a row.

And in Iceland, oy, their currency doesn’t actually have any value at the moment, so they’ve stopped trading for the day too.

But truth be told, stocks aren’t the only bear market worth watching:

Oil has fallen about $14 this week alone. According to the Energy Dept.’s surprisingly robust inventory report on Wednesday, the weak economy has caused U.S. demand to pull back. The government cut its 2009 demand projection, again, this time by 140,000 barrels a day.

“Oil will drop under $70 within a month,” forecasts Byron King. “And we’ll probably see $65 oil sometime within the next two months.

“The declining price is entirely demand driven. The markets are looking at the future and seeing a world economic slowdown. Well, that’s too mild. It’s more like the headlights gouging furrows in the asphalt as the brakes come slamming on. Really, I have not felt such deceleration since the day my radar detector beeped on the Pennsylvania Turnpike. I hit the brakes, and still the state trooper clocked me at 89 miles per hour. (Is that all? I thought.)

“But OPEC is meeting on Nov. 18. And the wheels are already turning for a cut in OPEC output. OPEC wants to see oil well above $80 — preferably in the $90s — because the member nations cannot collectively make their own petro-welfare payrolls without it.

“We ought to see a year or so of “moderate” oil prices, in the $80s and $90s. But stand by. When (if?) the world ever gets the economic wheels turning again, rising demand will RAPIDLY and ABRUPTLY encounter the realities of depleting resources.

“Any current slowdown in capital investment in the oil patch will be reflected in lower world oil output within 18 months. So just as the recession starts to end, the world will encounter the next energy price run-up.”

One benefit of the slowdown, gasoline is down another 5 cents today — over 30 cents a gallon in the last 30 days — to $3.35 a gallon. But we should see it drop further still. When oil was $82 a barrel this time last year, gas was well below $3 a gallon.

Gold and silver are perhaps the only winners in this tumult. Gold shot up as high as $930 this morning in Asian trading, but as we write, it has retreated to around $900 an ounce. Silver has stabilized just below $12 an ounce, after a nasty decline through most of the third quarter.

And as shaky as the dollar’s foundation is, it’s still seen as the world’s “safest” currency during this crisis. The dollar index is up a full point from yesterday, to about 81.8.

Major currencies have had mixed results in the last 24 hours. The euro is still at $1.35. The pound is a few cents lower, at $1.70. The yen continues to be the standout… it’s at 99 versus the dollar, its highest level since March.

“Buy timberland,” suggests Chris Mayer. There’s no shortage of crisis this week, and thus Chris finds himself awash with opportunity. So why buy the woods?

“Timberland is like a cassoulet — that French wonder of a slow-cooked stew brimming with pork, pork sausages, duck, beans and much more — that gets better after a long simmering on the stove. So, too, is time the friend of the timberland investor.

“Timberland, besides its perennial appeal (stemming from its long-running track record of happy returns), is timely now, too. It’s a crisis-proof investment, because the growth of the trees does not move in step with economic cycles. You don’t have to harvest when demand is soft. You let them grow and the trees will become more valuable anyway. Bigger trees equal more dollars.

“Also, lumber has not yet really joined in the commodity cycle. Its pricing lags that of many other commodities. Lumber pricing lags even competing building materials. The gap among lumber prices and concrete and steel, for example, is as wide as it’s been in 20 years. So timberland — a growing scarce resource — ought to participate sooner or later.”

Chris maintains an investor’s “CODE” well suited for the current crisis: C – Cheap. O – Owner-operated. D – Disclosures are transparent. E – Excellent financial condition. While no investor has been immune this week, we think there are numerous, once-in-a-lifetime values in Chris’ Capital & Crisis portfolio, and they can be yours for a very reasonable price. Click here to get the details.

Looking for another sector to buy? We offer this off-the-cuff tip: Buy lawyers.

Lehman Bros. bankruptcy attorneys, Weil, Gotshal & Manges, are charging the bankrupt firm $950 an hour. UCLA law professor Lynn LoPucki recently estimated total fees for the Lehman bankruptcy to exceed $900 million, by far the most expensive bankruptcy of all time.

LoPucki also suggested that if Lehman’s filing lasts as long as Enron’s bankruptcy (a horrific 956 days) and uses as many firms as Global Crossing did (43 different legal teams, accountants and financial advisers), the price tag will likely exceed $1 billion.

“I’m a short seller,” responds a reader to yesterday’s inbox, “and I’m curious why the other reader thinks I am destroying people’s investments. I don’t recall going out and setting any factories on fire or putting a 10-gauge shotgun to some banker’s head and forcing him to make moronic investments. If he’s going to crucify me, why not crucify all the long sellers who pushed up real estate prices so high that only the rich or fools with good credit could afford to buy? Why is this guy whining when your newsletter told him over and over and over again that he could make money shorting this market?

“You guys criticized him for lack of imagination, but he doesn’t even need that to make a buck. You guys furnished me with the imagination, and I made a decent buck. Sounds like another egalitarian who wants us to all have the same meager hand-to-mouth existence, with no hope of moving further than our peers.”

“It just might be that this reader is confused,” adds another, “about the difference between legitimate short selling and naked short selling, as are many, I suspect. Your defense of legitimate shorting is right on the money — in which the short seller must first borrow the stock that he wishes to sell from his broker. In this case, he would likely have done enough due diligence to know that he is selling a weak stock that has not yet been recognized as such by the market. He is, indeed, doing us a favor.

“The naked shorter, on the other hand, hurts his target company and its shareholders by simply ordering shares sold he has not borrowed and does not own. What this does is artificially increase the float of company shares, thus driving the price down. Since he is not borrowing in advance, there is no limit on how many shares he can dump onto the market, driving share price down far below its fundamental value. This practice has become far too common, and has been winked at and ignored by the authorities for too long. These kinds of naked shorting attacks have been particularly hurtful to startup companies that may well have a sound business plan, but are defeated by naked shorters.

“Too bad the press and authorities refuse to recognize the difference.”

“I’m sure my thinking about the value of the dollar must be wrong,” writes our last, “so perhaps you can help me out with why?

“If the bear market has destroyed $7.4 trillion, then all the extra liquidity that the Fed has been pumping in doesn’t even get us back to anywhere near to close to the money supply we started with before the crisis. So the dollar increasing in value is not so strange, is it?

“Or another way to look at it, it’s increased in value versus equities and most commodities lately, so it’s not so surprising that it has increased in value against other currencies too.”

The 5 responds: We share your confusion, somewhat. It appears that during this crisis, the “flight to safety” trade is still cash, in the form of dollars and U.S. Treasuries. The 3-month T-bill is still offering historically low yields. In a way, it’s reassuring. Maybe it’ll encourage Congress and the Fed to straighten out the books and restore fundamental value… naah… who are we kidding?

Once a clear trend breaks out, and investors start scooping up bombed-out value plays on the NYSE again, you’re going to see investors dumping those short-term notes, and the dollar demise will resume.


Addison Wiggin

The 5 Min. Forecast


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