Market Goes Limit Down, U.K. Recession, Next Equity Trend, Gold Investors Beware, and More!

by Addison Wiggin & Ian Mathias

  • Market crashes “limit down”… what’s behind today’s bottom retesting
  • Blame the U.K….  latest British data point pushes salt into global market wounds
  • Home sales surprisingly spike… why the housing bottom is still to come
  • Chris Gaffney explains wild global currency swings… and how long they’ll last
  • When investors return, what will they buy? Chris Mayer identifies a coming equity trend
  • Plus, Ed Bugos’ list of what gold bulls should NOT do during this downturn

  Before the U.S. stock market opened this morning, futures fell “limit down”… meaning they were falling so fast the Chicago Mercantile Exchange shut off trading.

The Dow, for example, fell 550 points pre-market this morning, triggering the 5% limit set for the fourth quarter.

  Indeed, the Dow actually fell over 400 points within minutes of the opening bell — a lousy open, for sure, but still a rather orderly march for the exits, given the usual state of things during this credit crisis. As we write, it’s off its lows, to roughly a 300-point loss.

  Lousy earnings reports in the U.S. kicked off selling in Asia overnight. Manufacturers and traders there fear myopic and retarded economies in the West will mean less export profits for them. This morning, for example, Sony cut its annual profit forecast in half. The stock fell to a 13-year low.

The major indexes in Japan, South Korea and India fell about 10%. Things got so heavy in Seoul regulators stopped trading for half an hour so traders could go outside and grab a quick smoke before losing their shirts all over again.

  The economy shrank for the first time in 16 years in the U.K., say bean counters for the Office for National Statistics this morning. The British economy is contracting at 0.5%. Barring alien intervention in the fourth quarter, it looks like the U.K. will ring in New Year ’09 languishing in a technical recession:

  As you might expect, that news didn’t go over well. At the close, the FTSE 100 had plummeted 5%. Europe’s two other big indexes mimicked their global counterparts… France fell 3.5%. Germany dropped 5%.

  Here in Canada, the TSX opened down over 7%. But the big news north of the border this morning?

“Greenspan Admits ‘Mistake’ on Bank Regulation,” reads the subhead. We’re in Toronto, speaking to the press and attending a few opening screenings of I.O.U.S.A. in Canada. The mainstream financial press has greeted Greenspan’s testimony before Congress yesterday with glee.

  Back in the U.S, options on the Fed’s lending rate now say there’s a 100% chance the central bank will cut 50 points, to 1%, by the end of the year. In fact, traders are giving 26% odds for a 75 bps cut. And so it goes.

  Existing home sales in I.O.U.S.A. staged a surprising 5.5% rise in September. The latest from the National Association of Realtors beat Wall Street estimates by rising to an annual sales rate of 5.1 million units. That’s a 13-month high.
Year over year, and we haven’t said this since we began writing The 5, existing home sales were UP… by 1.4% from last September.
Unfortunately, a closer look at the data isn’t so inspiring. 4.2 million homes still sit unsold, a 9.9-month supply. Distressed sales, like foreclosures and short sales, accounted for 40% of all sales activity during the month. That was reflected in the new median sales price for existing homes, down 9% from this time last year.
At $191,600, the average existing home is now priced at 2004 levels. We’re not ready to call a bottom… not by a long shot. But now that the most euphoric period of the housing boom has been wiped out, we’re starting to wonder how much there will be to go. We’ll pull some charts together over the weekend…

  Investors around the globe continue to race out of equities and into Treasuries and cash. The yield on a 30-year bond dropped as low as 3.8% this morning — its lowest since the bond’s inception in 1977. As fear pervades the markets… U.S. government debt is booming!

The dollar index, too, is up another point and a half today, to more than a two-year high, 86.5. The euro is still near a two-year low, but now even lower, at $1.28. The pound fell a staggering 5%, breaching the $1.60 mark for the first time since 2003. It’s rallied back a bit since, to around $1.62.

  Only the Japanese yen has managed to top today’s U.S. dollar rally. Panicked carry traders and the risk averse have fled their positions and bought back the yen. Now at 93, the yen is at its strongest against the greenback since 1995.

“Institutional investors and hedge funds,” explains EverBank’s Chris Gaffney, “are having to pay down some of the loans that they have taken out over the past few years. These investors had been rolling over loans in the lower-yielding currencies of the yen, franc and dollar in order to pick up the ‘carry’ between these low-interest loans and their higher-yielding investments.

“Now, due to the credit crunch, the banks are not renewing these loans, and the institutional investors have to sell investments and buy back the yen, franc and dollar in order to pay off the banks. In addition to the flow of funds to pay off these bank loans, investors are also having to purchase dollars to make up for the losses that they are incurring on U.S. dollar-based mortgage investments and credit default swaps…

“No one knows how long this will last. As long as the losses keep mounting on Wall Street, and volatility continues, investors will continue to have to buy dollars. I know this isn’t helpful to readers who want someone to tell them right when the bottom is, but anyone who tells you they can predict these markets is delusional. I can only tell you that at some point, the deleveraging will be complete and the markets will start trading back on fundamentals. The fundamentals are not good for the U.S. dollar, as we continue to increase debt and widen our deficits.”

  “When cash re-enters the stock market,” suggests Chris Mayer, “there will be a hunt for effective leadership.”

“It seems each week there’s a story about a change in leadership at one big company or another. Sometimes it’s just time for a new person to take the helm, like Delta Air Lines’ Richard Anderson. Or sometimes it’s a question of performance, like when Paul Pressler stepped down as head of Gap. But more and more often, there’s a scandal involved. Take Gregory Reyes, former CEO of Brocade Communications, who was convicted of securities fraud, among other charges.

“I expect several more stories like this to come to light in the next few months. And with them, a new trend will emerge. Investors will demand companies hire reputable, upfront CEOs. They’ll also flock to companies that already have proven management teams in place.

“Bruce Berkowitz, manager of the Fairholme Fund (one of my favorites) sums it up nicely: ‘We tend to be more about the jockey than the horse… You don’t have to predict the future if you know the company has the assets and the management to do well in difficult times. I believe that’s when the seeds for exceptional performance are planted.’

“Obviously, if you have a great jockey on an old nag ready for the glue factory, there is only so much anybody can do. So if you can find a nice pile of assets and couple that with a great jockey, then you can have something special.”

Talented owner-operators are a core theme in Chris’ Capital & Crisis portfolio. For accurate guidance through these tough markets… give Chris a try.

  Gold is living up to its role as a hedge against risk and a save haven for bearish investors. Instead of soaring amid the mayhem — it’s breaking even. The spot price sank as low at $680 this morning, a 13-month low. But as we write, gold has rebounded to yesterday’s level of $705 an ounce.

  “I believe the gold juniors offer the best value for your paper dollar going forward,” says Ed Bugos of the violently beaten-down junior mining sector. The Canadian Venture Index, the bellwether of juniors, is down a nauseating 70% from its 2007 high.

Ed’s Gold & Options Trader readers know which juniors to buy during today’s crash (you could too, by subscribing here .) But if you aren’t ready to dive in, Ed sent over another of his famous lists… this time what gold bugs should NOT do:

  • Don’t be overly short the stock market at this stage of the collapse.
  • Don’t slow down your gold buying just because the market is down. Buy a lot of gold — coins and bars. Buy as much as you can before it breaks through $1,000. Then hide it.
  • Don’t buy the GLD streetTRACKS, unless you’re just trading.
  • Don’t buy gold from your bank.
  • Don’t put all your eggs in one basket. Diversify your wealth between tangible assets, like gold, silver and platinum, or even real estate, and continue selectively accumulating bargains in the equity sphere. Diversify geographically.
  • Don’t invest more than 20% of your wealth in junior miners. It is not a safe-haven panacea. The rewards are potentially high, but the risks are, too.
  • Don’t keep all your wealth in gold, because the government will one day probably come for it.

  OPEC cut production by half a million more barrels per day than we expected. But traders don’t seem to care about the 1.5 million bpd slash. Oil is down another $3 today, to $62 — a 17-month low.
Gasoline passed a milestone of its own overnight. At $2.78, you’ll spend less on a gallon of gas today than you would have a year ago.

  “I very much enjoy the rock ‘n’ roll asides you pepper The 5 with occasionally,” writes a reader of our Rainbow reference Wednesday . “Clearly, you are ‘rock ‘n’ roll children.’ I think more than a few of your readers are too, who enjoy your references to bands such as Rush and Rainbow as a ‘rainbow in the dark’ among the doom and gloom market news.
“All the lyrics to that Rainbow song (1981, by the way) are eerily relevant these days, almost as much so as Tower of Power’s ‘Only So Much Oil in the Ground.’ History repeats.
“Speaking of which, it’s no surprise insiders can’t time the market. They never have been able to, even with their obvious advantages. Recall all the insider buying and stock buybacks in very shoddy companies all the way down. No different than the sovereign wealth funds, et al. To suggest otherwise is to ignore history. Investors do so at their peril.
“Count me among those that are pretty tired of hearing about Buffett.”

The 5: We did say “Can’t Happen Here” was “’70s-era” rock ‘n’ roll. Given the guitar-hero antics of the band, we stand by the description. Maybe we should poke around for some Joe Jackson lyrics on the economy… or the Cars.

We’ve got lots more to say about Buffett… 120 minutes of interview transcripts with him, in fact, published in the book . But we hear ya… and for the time being, we’ll spare you.

  “Dollars to doughnuts, he did not even watch it,” writes a reader about the letter we received from Barack Obama yesterday.

“In other words (yawn),” writes a second, speaking for the pretender to the throne, “I found a drawer I could lose it in.”

“Is it properly written?” asks a third. “Seems like it should have read, ‘I would LIKE TO take…’ The way it reads to me, he is stating he would, but on second thought… maybe not, but thank you anyway for your thoughtfulness. Must be that spell-checker issue again… and obviously, he did not read it prior to signing it. Too busy campaigning, I suppose.

“Just wait until the aftermath of the elections and he has a moment to REALLY take a look at what your team put together! He will be giving a second thought to the job he has undertaken! Keep up the good work!”


Addison Wiggin
The 5 Min. Forecast

P.S. If you’re in Toronto tonight, you can catch us at the Carlton Cinema. There are four screenings of the film — at 2 p.m., 4:45 p.m., 7 p.m. and 9:30 p.m. — the last two with Q&A sessions afterwards with yours truly. C’mon by, if you can.
The film is opening in Vancouver at the Empire Granville 7, too.

Patrick Creadon (the director) and I will also be attending a screening of the film at Columbia University at 5pm on Sunday. We’ll be at Lerner Hall at the southeast corner of 115th and Broadway. If you want to check it out, it’s invitation only… so ask nicely, here.  
P.P.S Here’s what The Globe and Mail had to say about the film:

A documentary about the U.S. addiction to debt, I.O.U.S.A. could have easily taken the title of another movie released this week, What Just Happened? The website for the film already sounds quaint: “Wake up America,” it declares. “America is on the verge of a financial meltdown.”

Ah, those good old days on the verge. Though it is presented as an economic primer, the only part I’m sure I understood, amid the historical clips, flow charts and cartoons of mountains of debt, was an excerpt from Saturday Night Live. The skit featured Chris Parnell as a TV pitchman selling a new financial self-help book entitled Don’t Buy Stuff You Cannot Afford. (“We can put it on our credit cards!” potential customer Steve Martin exclaims.)

I.O.U.S.A. was made by Patrick Creadon, creator of the crossword puzzle movie Wordplay, who has a degree in cinematography, not economics. The movie, which was released at the Sundance Festival this year, is based on Empire of Debt by Addison Wiggin and Bill Bonner (publisher of the website ).

The film also relies on the insights of a couple of economic Cassandras who have been predicting disaster for several years. The most prominent is David M. Walker, until recently the U.S. comptroller-general. Walker is fairly well-known: CBS’s 60 Minutes dedicated a segment to him last year. The other is the lanky, Tab-swilling, folksy Robert Bixby, who provides some comic relief. He’s the head of the non-partisan Concord Coalition. The pair have been touring the United States for the past couple of years on their Fiscal Wake-up Tour, issuing warnings of impending financial collapse and the end of the American empire.

The movie includes testimony from a long list of economic experts, including former federal reserve chairman Paul Volcker (under Bill Clinton), former treasury secretary Paul O’Neill (under George W. Bush), billionaire investor Warren Buffett and Texas congressman Ron Paul, who all emphasize that a growing national debt and unpaid future promises for social security and medicare point to future ruin.

Is there an ideological agenda here? Perhaps there are two of them. Wiggin (who serves as one of the film’s producers) and Bonner’s Empire of Debt came from a libertarian perspective – free-marketers who lament America’s interventionist government and imperial ways, although the movie’s audience is probably anti-Bush liberals. George W. Bush is hammered for doubling the debt load with his high-spending, low-taxing ways.

Though the extravaganzas of the Iraq war are listed, it appears to represent only a small percentage of the overall debt load, nothing, for example, compared with health care. Predictably, W provides a suitably jaw-dropping sound bite: Asked if the country is heading for a recession, Bush answers: “Ask the economists. I think I only got a B-minus in economics. But I got an A-plus in cutting taxes.”

By the same logic, president-in-waiting Barack Obama, who promises no new middle-class tax increases, seems to be playing the same denial game.


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