Records Left and Right, Bargain Buys, Banks Offer Unlimited Money, Break From Shorting, and More!

by Addison Wiggin & Ian Mathias

  • Another history-making day for the Dow… what’s the “record high” this time?
  • Banks of the world promise “unlimited” dollars for struggling financials… seriously
  • Markets soar… but The 5 examines the real barometer of the current credit crisis
  • Dan Amoss gives up shorting (for a day)… why our resident short seller just told readers to go long
  • Chris Mayer finds investment opportunities he’s been searching for “my whole career”

  It’s not every day the Dow trades in a 1,000-point range. In fact, Friday was the first in history.

From down 7% to up 1% before 10 o’clock? Then back down to a nasty 7% loss, to a 2% gain, then to near break-even? If that isn’t the epitome of investor uncertainty, we don’t know what is.

  Hence, this promise from the cabal of G-7 central banks this morning: “unlimited liquidity.” How they must snicker when these announcements make their way out on the wire.

  In conjunction with the Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank told their banking constituents this morning they are now “able to borrow any amount they wish.” Last week, the ECB said banks can have unlimited euros in each of its scheduled auctions.

Banks must bring “appropriate collateral” for these bottomless loans. But considering what the central bank currently accepts as collateral, that ought to be easy enough.

This is a great gig. Bernanke and company offer an unlimited quantity of dollars in exchange for other currencies (swap lines) so that banks can borrow the greenback — miraculously, still the reserve currency of the world. Funding periods will cover seven-, 30- and 84-day loans. And each will be doled out at a fixed rate — not in priced-by bids — to assure even the most skeptical spectator that the offer is completely devoid of capitalist spirit.

The Bank of England also announced some super-sized nationalizations today. Much like the plan rumored to be on deck in the U.S., the Royal Bank of Scotland, Lloyd’s and HBOS will cede majority stakes to the U.K. government in exchange for a $64 billion bailout.

The U.K. government as of today will own no more than 60% of each company. Thus, perhaps it’s a bit unfair for us to label them “nationalizations.” Nevertheless, Gordon Brown now owns seats on the board of each company, has fired the CEOs, has announced his intention to limit executive compensation and has ordered Lloyd’s and HBOS to merge. Sounds pretty state owned to us.

Notwithstanding the long-term implications of these central bank interventions, this is the first move to have a real effect on interbank lending — the real source of the current crisis. The three-month London interbank offered rate (Libor) edged down 7 points today — its biggest drop since March.

But if you’re a big multinational bank and you want to borrow dollars overnight… it will still cost you 4.75% off the top — a full 3.25% higher than what the Fed would prefer. The Libor was only 0.82% higher than the Fed overnight on the day Lehman collapsed.

  “In my view, the oceans of new fiat money will chase scarce assets: energy and resources,” writes our resident short seller, Dan Amoss. “It will stave off the deflationary depression scenario, but not reinflate the credit/housing bubble.

“Since we could be on the verge of the biggest reversal in history in resource stocks, I recommended a call option in Friday’s Strategic Short Report alert. It’s hard to imagine recommending a put right now, when I’m almost certain it’ll lose value in the coming weeks.
“We may retest the lows in the stock market, but if interbank lending rates compress, I think we’ve seen the lows in resource stocks. I’m looking forward to this earnings season more than any in my career. We’ll find out just which companies will be able to deliver decent earnings in 2009, and which ones will just try to survive.”

BTW, the call Dan recommended went for around $5 when he recommended it before the market’s close on Friday. As we write, it’s just below $9. Not bad for a one-day trade. To learn more, check out Dan’s latest alert here.

  Still, stock markets around the world are feigning confidence in central bank bravado this morning.

Asia got a nice kick in the pants. Indexes in Hong Kong soared about 10%. India jumped 7%, Australia is up 5% and just about every other market enjoyed a nice day in the black. We’re really starting to pity Japan… after its worst week ever, the Nikkei 225 was unable to participate in today’s rally. Japanese traders were off on holiday.

European traders went ga-ga for the coordinated central banking efforts. Markets in Austria, Germany, France, Switzerland, Span and Belgium rallied over 10%. The U.K. is the laggard of the bunch, rallying “only” 8%.

The Dow opened up 425 points and as we write has pushed past a 500-point gain. The S&P is enjoying a similar day in the sun. And it certainly needs it… the S&P 500 fell 18.2% last week — its worst week ever.

  “It’s not your fault the S&P 500 is off more than 42% in the last year,” consoles Chris Mayer. “You’ve done the right thing, investing in companies with real assets, cash flows and strong insider ownership at good prices. Our companies are not AIGs and Merrill Lynches. Our companies will be around when the cycle turns, as cycles always do.

“I’ve recently been rereading Ben Graham’s Security Analysis because McGraw-Hill published a sixth edition with new commentary by great investors, including Seth Klarman and Bruce Berkowitz.

“Anyway, I love how Graham finds little anomalies and writes about them in his book. Take Wright Aeronautical in 1922. Graham points out how it was an $8 stock earning $2 per share and paying out $1 in dividends. That was a P/E of 4 and dividend yield of 12.5%. Plus, the company had $8 of cash in its treasury and no debt. Graham, in his usual understated way, writes, ‘Analysis would readily have established that the intrinsic value of the issue was substantially above the market price.’ Yeah, I’ll say! (By 1928, the stock was $280 per share — a 35-bagger.)

“I used to read Graham and think to myself, Wow, imagine finding bargains like those. All my career, I’ve looked for those kinds of things. Well, I’m finding bargains like that today.

“If you have some cash you can afford to risk, you are one of the lucky ones, because there are some bargains out there today.”

Chris listed several solid buys in his latest issue of Capital & Crisis, including an “incredible income” stock — a rock-solid recourse play that currently yields over 20%! Get all the tickers, here.

  The dollar index is down almost 2 full points from its Friday high, to around 81.2 as we write. The euro is up 3 cents, to $1.36. It will be interesting to see how long the “flight to safety” trade in the U.S. dollar holds out. Not long after the election, we suspect.

And now that the U.K. government can skim profits from RBC and Lloyds, traders have bid up the pound 4 cents, to $1.74. And as risk aversion starts to re-enter the market this morning, the yen carry trade is perking up, and thus the yen is a bit weaker… 100 for $1.

  Gold was holding steady during the worst of the equity bust last week. But the past few days, we’ve seen it shed about $100, to $820.

Traders speculate the “bottom is in” for equities. We’re not so sure…

  Oil continues to trade predictably, if not inversely, to the dollar. It’s up $2 this morning, to $80 a barrel.

  Gasoline fell another 10 cents over the weekend, to a national average of $3.20 today. That caps the largest two-week drop in price since the inception of the Lundberg Survey — a poll of gas prices around the country.

“If crude oil prices don’t spike" a statement issued by Lundberg read, “we can expect further price cutting for two reasons: Gasoline demand will continue to shrink in our weak economic condition, and retailers, who have been receiving deep buying price cuts, will be anxious to pass through any further price cuts they receive quickly. They need the sales."

We may see gas as low as $3 by December, they say.

  “The only way that oil will reach $65 dollars,” writes a reader, “is if there are more liquidations to come from the hedge funds, Lehman and such. And it had better happen before Obama and Congress get to work after the election and start really pumping the money in the system — but then, that could happen this weekend.
“The new Congress will be all about health care (mini bubble) and alternate energy (next BIG bubble).
“The boyz this weekend will guarantee everything but fresh vegetables: two stimulus checks — one now, one in July — all the banks flushed with cash and taking the charters away from those that don’t lend — complete with a playbook for the first quarter.”

  “Regarding the dollar strength,” adds another, “I think it is due to the short-term environment of the market. Many Americans had their investments overseas and in other stock markets. With the stock market crisis — especially when it started to deepen in August/September — Americans have started to pull their money out of those countries and get their dollars safe back home, hence making the currencies in those countries fragile.

“I think it’s more other currencies weakening than the dollar strengthening. In the medium term, once the flow of dollars comes into USA, the demise of the dollar should continue its trend: downward.”

The 5: We suspect you’re right.

Addison Wiggin
The 5 Min. Forecast

P.S. Following a screening of I.O.U.S.A. at the New Hampshire Film Fest, in Portsmouth, on Friday evening this week, we’ll be hosting a short reception and book signing at a pub across the street from The Music Hall. The folks at Muddy River have been kind enough to host the reception gratis:

Sen. Judd Gregg, the senior Republican senator from New Hampshire — who despite appearing in the film championed the recent bailout bill in the Senate — will participate in the question-and-answer session following the film. We suspect it will get interesting.

P.P.S. David Walker was on Bill Maher’s show on Friday evening. The show was posted to YouTube Saturday… since then, over 25,000 have viewed it. That’s good stuff. We posted it for your viewing pleasure here .


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