Argentine Crisis, Big U.S. Dollar Rally, Insider Failure, Dividends to Fall, and More!

by Addison Wiggin & Ian Mathias

  • The ghost of America’s future visits Argentina… markets crash, government scrambles
  • Chris Mayer on how even insiders can’t predict this market
  • Bill Bonner on why stocks are now better than cash
  • S&P dividends to fall to historic lows… yet latest study shows S&P company CEO pay at record?
  • U.S. dollar soars… why the greenback’s flying high in the face of probable U.S. recession

  The Argentine stock and bond markets crashed yesterday. The market plummeted 11%, and bond yields soared 7%, to an annual yield of 24%. The country is on the verge of collapse.

Beset with debt and overcome by its bond obligations, the Argentine government nationalized $30 billion in private pension funds yesterday. 

Fifty-five percent of those pensions are government debt holdings… and now that Argentine leaders have seized them, they can essentially write them off. The rest of the holdings they’ll use to finance debt payments and keep the government running. 

Argentina is the second largest economy in South America. It is one of the world’s top five exporters of beef, soy, corn and wheat. Still can’t afford to keep the lights on. Argentine citizens are being asked to suspend reality and trust the government is good for the money when they’re ready to retire.

Hmmmn… puts us in mind of that ’70s-era Rainbow rock ‘n’ roll tune “Can’t happen here, can’t happen here. All that you fear, they’re telling you, can’t happen here.”

  85% of Americans believe the country is “moving in the wrong direction,” says the most ambiguous Associated Press survey we’ve ever read. Half of the people interviewed told the AP they’re worried about keeping on top of their mortgage, loan and credit payments. Another 70% are anxious about their stocks and 401(k)s.

Thirty-three percent of all Americans are worried about losing their jobs.

  As if on cue, Yahoo! announced plans to slash 10% of its work force yesterday, about 1,500 employees. That’s on top of the 1,000 it cut earlier this year.

“Thousands” of Merrill Lynch employees could lose their jobs when the firm merges with Bank of America, CEO John Thain said Monday. Merrill gave 500 traders the boot yesterday, and Thain made it clear that more layoffs would come.

New York City may lose as many as 165,000 jobs by the time this crisis is all said and done, says NYC Comptroller William Thompson.

  Forty-one states and D.C. reported net job losses in September. In August, only 18 states reported losses. If you want a job, stay out of Rhode Island… the unemployment rate is 8.8% there — the highest in America.

  The U.S. stock market started with a panic yesterday, but managed to avoid an Argentine-style rout. The ghost of Lehman Bros. haunted the market for most of the morning… Lehman credit default swaps were settled yesterday, and the Dow plunged 200 points in anticipation of the pennies-on-the-dollar mayhem.

The Lehman settlement ended up a “success”: $6-8 billion switched hands, but no blood was shed. Still, earnings disappointments were widespread, from Freeport-McMoRan to DuPont, Texas Instruments and Caterpillar. In the end, the Dow fell 2.5%, the S&P 500 3% and the Nasdaq 4.1%.

  “This market has taken even insiders by surprise,” Chris Mayer. “If you read my book Invest Like a Dealmaker, you already have some appreciation for this, but we’re seeing again the limits of insider insight in this market.

“One of the best examples is the executive team at Wachovia. They bought more than $30 million worth of stock this year, only to see the shares down 80%. Another great example is Aubrey McClendon of Chesapeake Energy Corp. He was a major shareholder in his company and had been a steady buyer of stock. At the peak, he owned more than 5% of the company, some 33.5 million shares.

“Problem was he bought at least some of that on margin. In other words, he borrowed the money. When the stock fell dramatically — like nearly everything else — he had to sell out most of his holdings to meet margin calls. The stock was $74 in July. It’s $18 today.

“So there you go. As I have said before, what we are going through now is a history-making crash. There is a reason it caught so many people by surprise — it hasn’t happened before, not quite in this way.”

  “Stocks will probably do better than cash over the next 10 years,” opines Bill Bonner, “but mostly because cash will probably do very badly. Our guess is that everything will do better than cash. Except bonds — which represent cash deferred into the future.

“When Mr. Market goes into a sulk, he takes a long time to come out of it. Real bear markets last 10… 15… 20 years. Judging by the meltdown in the financial sector and the rapid losses we’ve seen over the last three weeks… we have a real bear market on our hands…

“With no more easy credit available to them, consumers are doing what they have to do — they’re cutting back. How much? For how long? No one knows the answers to those questions, but our guess is this: more and longer than you thought.”

  Dividends paid by S&P 500 are likely to fall another 10% this quarter, S&P forecast yesterday. Should that occur, it would mark the biggest quarterly decline in dividends since Eisenhower was in the Oval Office half a century ago.

  But despite dividends falling to 50-year lows, total compensation for CEOs of S&P 500 companies rose 22% by the end of 2007. Hmmmn…

A study released by the Corporate Library yesterday said the average CEO salary for an S&P company exceeded $2 million, up 7.5% from last year. Throw in some stock and option packages, golf club memberships, limo service and daily “massages” and the average muckity pulled in an extra 22% last year.

On average, operating earnings of S&P companies fell 5.9% last year.

  The Federal Reserve announced another new loan facility yesterday, this one with a $540 billion coffer. In its third effort to prop money market funds, the Fed said yesterday it will provide up to $540 billion in loans for its “Money Market Investor Funding Facility.”

JPMorgan Chase was asked to run the facility, which will buy CDs, bank notes and commercial paper from funds struggling to meet redemption requests.

  Recent extreme volatility in the markets has been great for some folks. The Chicago Board Options Exchange reported a 56% increase in net income in its third-quarter earnings announcement yesterday. Quarterly revenue is up 24%.

If you’d like to learn how to contribute to its earnings spike, while earning some “coin” yourself, check this out.

  French President Sarkozy suggested today that European nations create their own sovereign wealth funds. Sarkozy noted that many blue chip European companies are selling for pennies on the dollar, and that it would be best if European nations buy them up before the oil-rich Middle East swoops in.

“I wouldn’t want to see European citizens wake up in a few months and discover that a European company is owned by non-European investors who bought at a rock-bottom price,” Sarkozy, current holder of the 27-nation European Union’s presidency, said. “The opportunity might be there to create our own sovereign wealth funds.”

Not his only good idea…

Does he mean saving money to invest, so that the fiscal future of the nation doesn’t end up in foreign hands? Sounds crazy…

  Oil continues to get shellacked despite OPEC’s emergency meeting today. While the cartel is widely expected to cut production, a strong dollar, waning demand and the prospect of a deep recession here in the U.S. has pushed crude prices down to $68 a barrel.

Much of the current mood can be attributed to a MasterCard survey released yesterday. According to the credit card company, consumer gasoline demand dropped 6.4% last week from the same time last year. That’s the 26th-straight week of falling demand, claims MasterCard.

  And gas is even cheaper today. The national average fell another 3 cents overnight, to $2.85 a gallon.

  The dollar boomed to a two-year-high versus the euro overnight. It’s back up to a five-year bender against the pound. At 85.8, the dollar index is itself at two-year nosebleed heights.

  Every major European economy will enter recession in the next 12 months, forecast the International Monetary Fund Tuesday. For the whole zone, the IMF expects 1.3% growth this year and an anemic 0.2% growth rate for 2009. The group had a particularly gloomy forecast for Ireland and Italy, suggesting they would be the first to report contracting economies.

The IMF also forecasted lower inflation for Europe, and, consequently, the likelihood of further ECB rate cuts… not exactly bullish news for the euro.

The euro, now at $1.28, crashed 5 cents overnight. The pound is down to $1.62. The British currency is down 12 cents this week and likely to tank further after gloomy Bank of England chief Mervyn King warned yesterday that a British recession is likely.

The yen is still popular with the risk averse. It trades at 100 versus the dollar today.

  Oh to be a gold investor this morning… the yellow metal got $20 cheaper today. The spot price dropped to $755 an ounce.

  “Your reader is way off base in regard to Warren Buffett and his motives ,” suggests a reader, responding to yesterday’s inbox. “Buffett has proven to be a man of integrity, candor and insight for 40 years. He lives in the same house he bought 50 years ago and takes a modest salary in the neighborhood of $100,000 per year. Has no stock options, bonus or golden parachute. He has no yachts, race cars or homes on the Mediterranean or any other conspicuous consumption. Has made multimillionaires out of his early investors buying solid American companies, for the most part, and hanging onto them. In recent years, he has given all his Berkshire holdings to charity to be distributed over the next decade.

“I personally believe that he would never say something that he knew to be self-serving, at the risk of his reputation. When he says stocks are cheap, he means just that. If he had said that a year after the bottom, one could question his motives, but if anything, we are at or near the bottom, and he does not want to see America damaged by fear and panic.”


Addison Wiggin
The 5 Min. Forecast

P.S. “It’s obvious I’m never going to get to see I.O.U.S.A. in my current lifetime,” writes another reader, who calls himself the Olde Grumpp. “I’m nearly 800 years old now. My doctor, who says I’m dying in a stable condition, wants me to avoid things that get me upset. So I’ve written off I.O.U.S.A. By the time I get to see it, if ever, the content will be obsolete.

“I’ve written in several times and asked about a DVD. I even offered last time if you’ll send me a 35 mm print, a simple DVD master can be ready over a weekend to go to the pressing factory. It doesn’t take months. But nothing.

“So I give up. I’m not leaving Montana and driving hundreds of miles to another city. The film will never be shown here.

“I’m adding my voice to yesterday’s reader, with whom I concur, who asks you to stop talking about Buffett. I’d like you to just stop talking about I.O.U.S.A. The election’s days away… after that, it won’t matter.”

The 5: Wait, don’t die yet, ye Olde Grumpp. I have the digital samples on my desk. We’re approving them today. They’ll be printed immediately and available… with any luck by Friday. Stay tuned. Please.

P.P.S. Oy. Technology never lives up to its promise. We believe we’ve fixed the problems with our first episode in the free Webinars, the Emergency Retirement Recovery Series … if you follow this link you can view the seminar at your leisure until 11 a.m., Tuesday, Oct. 28.

Go ahead, as Joe said yesterday, “We dare you to blow up our servers again.”


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