Cyclo-cross, SWF Rescue Attempts Gone Awry, China’s $586 Billion Stimulus Package, and More!

by Addison Wiggin & Ian Mathias

  • The cyclo-cross illustrates our quickly crashing market
  • Sovereign wealth funds giving up on their rescue attempts
  • China creates its own $586 billion stimulus
  • Greg Guenthner talks about “low” oil prices…and short-term opportunities
  • Restructuring the AIG bailout plan

We’re out of the gate little slow on this Monday, but for good reason. Extreme Ian, our trusty steed, crashed in a cyclo-cross race this weekend and is nursing a concussion.

Never fear, however, cyclo-cross, it turns out, makes a fitting metaphor for today’s stock market. The following video will help illustrate:

Cyclo-cross: An Hour in Hell

Ian has apparently won a few of these crazy races on the circuit this season.

Investors slogging through the mud this morning, helped the Dow open up 153 points. But then they had to jump off and deal with the manmade hurdles on the track. It’s down 17 points, as we write. 

Here’s one of them: Circuit City filed for bankruptcy. After losing money in 5 of the last 6 quarters, Circuit city says it will have to shutter 155 stores in order square up with more than 100,000 creditors. They plan to eliminate 17% of their US based workers.

Stock in Circuit City fell more than 50% on the news. You can now pick up a share at the super low discount price of just thirteen cents.

Then investment banks across the board, threw up a few more, this morning. Banks in the lower Manhattan region are planning to cut some 70,000 jobs over the next quarter.

“Executives and analysts,” says the Financial Times this morning, who tabulated the results, plan to eliminate “redundancies” and to pile on this latest number on the estimated 150,000 jobs already lost by the financial sector worldwide.

As sorry as you may be to hear this, investment bankers and traders – those who’ve been bitten hardest the frosty capital markets and the “collapse in takeover and financing activity” – will be the first to leave the track.

Sovereign wealth funds (SWFs) – the ambulance chasers of this credit crisis tricycle wreck – seem to be losing their appetite for rescuing distressed financial institutions… and “for investing in US and developed markets generally” says a Morgan Stanley report this morning.

The investment bank says: “Lower oil prices, lower export growth rates, capital flight and new domestic fiscal needs may lead to a less rapid pace of asset accumulation for sovereign wealth funds.” At the beginning of 2008, SWFs had nearly $3 trillion in assets under management. Paper losses on their considerable investments have reduced that amount to $2.3 trillion.

Morgan Stanley reduced their forecast for SWFs. At one point they thought these players would have $10 trillion under management by 2011. Now they’re projecting it won’t reach that level until 2015. “If at all,” we can’t help but add.

Hedge funds didn’t fare so well in last month’s race, either. Fund managers lost an aggregate 5.4%, the firm Hedge Fund Research by way of The New York Post this morning. In September and October, the industry lost more than 10% and it is now down over 15% percent year over year.

Chinese officials hope to inject a little adrenaline into their team of bike riders… China announced a 4 trillion-yuan – $586 billion – stimulus package of their own this morning. The news help boost light sweet crude oil up more than 7 percent. Copper had a banner day, too. It rose over 7 percent as well.

China, the world’s second-largest oil consumer, said yesterday it will spend a big chunk of its yuan on new housing and infrastructure projects, thus boosting demand for iron ore, crude oil and copper.

Oil also gained after Saudi Aramco, the world’s biggest state oil company, told South Korean and Japanese refiners it would cut December supplies. So far, Russian officials have declined to follow the lead of Opec leaders like Hugo Chavez to put the kibosh on oil production.

"Low" oil prices and an uncertain economy have created a, perhaps limited, buying opportunity for a group of offshore drillers… shares in many of them have been pummeled off their summer highs. 

“We’ve found a no-brainer offshore driller,” writes our small cap explorer Greg Guenther. “The value is obvious for those willing to look beyond the immediately reality that oil is not gaining 5% a day on a regular basis anymore. 

“We’re not talking about an unproven technology or some endless exploration boondoggle here. This is real oil under the sea being pumped out the old fashioned way. Look – oil has made investors money time and time again. And as much as we appreciate a huge shift in public attitude toward renewables, old-school oil isn’t going anywhere for quite some time. And these tiny companies that are capitalizing on the ‘scraps’ on and offshore in North America have the potential to be very successful for years to come. 

“The company that has obtained several offshore drilling locations – one that had been shut for almost a decade. The oil is there… it’s just a matter of pumping it out. The company has already brought an older platform back to life. Now, they’re producing oil and record revenues, while continuing exploration and additional drilling.” For more, be sure to check out Gunner’s latest BBE.

The U.S. dollar was a bit dazed and confused while riding against its competitors last night. The euro traded up slightly to $1.27 from Friday’s close. The yen ticked down to 98 and change. In Canada, the loonie gained a penny… across the big brackish pond, the British pound lost one.

In a dash for the lead spot in the pelleton, gold gained nearly $20 rising to $753 an ounce… up from $735.25 late Friday.

The grease on the chain of the economy, the London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars dropped to the lowest level in four years.

The rate slid almost 6 basis points to 2.24 percent today, the lowest level since Nov. 5, 2004, according to British Bankers’ Association data. It was the 21st consecutive decline.

The overnight rate rose 2 basis points to 0.35 percent, still 65 basis points below the Federal Reserve’s target rate.

Looks like the bailout plan for AIG is getting restructured already.

“To improve AIG’s chances of repaying its debts,” notes Bloomberg this morning, “the U.S. will reduce the $85 billion loan to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by the company, the Federal Reserve said today in a separate statement.

“The first rescue plan wasn’t sustainable,” Edward Liddy, AIG’s CEO, said during a conference call today. AIG’s third-quarter loss equaled $9.05 a share and compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a statement. Losses in the past year erased profit from 14 previous quarters dating back to 2004.

AIG stock rose 10% on the news from the Fed… up to a whopping $2.33. At this time last year, they were at $56 and change.

U.S. automakers – fearing that investors will lose a taste for their lot altogether – are continuing to beg Nancy Pelosi for a bigger share of the bailout package than they were originally allotted. Here’s a better idea: Why don’t they just make cars that people want?

Meanwhile, hybrid car and powertrain maker AFS Trinity is pulling out of the 2008 auto show in L.A. saying that “show management ‘muzzled’ them by disallowing claims that their highly modified Saturn Vue plug-in hybrids can achieve 150 mpg.”

AFS Trinity’s statement reads: “carmakers continue to seek tens of billions of taxpayer dollars, ostensibly to develop fuel-efficient vehicle technologies, but their conduct is evidence they are reluctant to embrace solutions they didn’t invent.”

The car show management’s beef with the 150 mpg claim is simple. In order to achieve the optimum gas mileage the cars must be “driven 40 miles per day for 6 days and then 80 miles on one day of the week.” If driven in exactly this manner, they use 2 gallons to go 300 miles… or roughly 150 mpg.

That would be great if you lived exactly 20 miles from your work.

“The reader that claims that advancements in the robotics field are going to cause unemployment needs a lesson in history,” writes a reader.   “We have been through the industrial revolution, computer revolution and countless other technological advancements and miraculously we (most) still have jobs.  Yes there may be people that temporarily lose their jobs in specific fields, but with every door that closes another one opens.  Are we supposed to prohibit technological advancements if they threaten certain unskilled jobs?”

“In 1999 Bill Clinton signed the bill repealing the Glass Steigal Act,” writes another searching in the dark for the jugular, “separating the investment houses (banks) from our normal regulated banking system. The only bad thing is the Republican lead Congress sent it to him. Why has this not been in the headlines.  Did McCain vote for it?”

The 5: This is our favorite part of the economic cycle. When the bubble is growing everybody loves it… when it bursts, people just want to know where to stick the knife in.

“I had the opportunity today to view the IOUSA movie in San Antonio, Texas,” writes a third continuing the same vein, “The audience was small (matinee), comprised 1/2 of 35+, and 1/2 of college age students some of whom were taking notes! While I thought the documentary was good – I feel that you made two mistakes that greatly decreased the impact of your message.
 
“The first mistake was the partisan nature of the documentary.  I am not suggesting that you are Democrat or Republican – only that the documentary was very Pro-Clinton and Anti-Bush.  While your commentary in the past has shown that you hold no regard for Bush et al, this came out in the movie in a big way.  How did it detract?  Well, whenever you ripped Bush by producing some failing number, the college crowd cheered and jibed and the older crowd grumbled – mainly at the younger crowd. 

“When Clinton came on, the college crowd was slightly more quiet, but the older crowd grumbled louder – probably because they despise Clinton.  In fact, what could have alleviated most of this ‘old vs young’ turmoil would have been to focus the Clinton-era success on Newt Gingrich and the Bush-era failures on Pelosi, Reid and Franks.  Just a thought, but remember, I bet that many of the young watching this documentary do not realize that federal spending is initiated in the halls of Congress – not the Oval Office.  You could have enlightened the public with more teaching.
 
“Furthermore, if you wanted to be fair, then you would have had to focus on the fact that while Bush presided over the housing crisis and bank deregulation, Clinton presided over the stock bubble – which burst just before Bush was taking over. While the economy hurt McCain this time it likely hurt Gore last time.  Also, before harping on Iraq, you would have to mention as an aside, that the Trade Towers likely occurred secondary to Clinton’s refusal to address previous attacks like that against the Cole in Yemen.  In other words, while you have your leaning and I have mine, neither had a place in this movie. 

“You should have focused on Congress, many of whom the general public could not name.”

The 5: Funny, we just ran a note from a reader on Friday who accused us of the opposite leanings… being too RNC and not enough DNC. Maybe all this leaning is why Ian crashed over the weekend.

The real problem seems to be with the film’s distribution:

“You’re not only have viewing problems in Concord,” another chimes in “you’re have problems in Chesterfield, MO (suburb of St. Louis).   I received an email from you stating that I.O.U.S.A. was showing at the local AMC theater in the Chesterfield Mall. I could not find any listings for times in the paper, the ‘St. Louis Post-Dispatch’. We decided to drive to the theater to ask for the show times and were informed by a ticket taker that ALL AMC theaters in St. Louis are in a labor dispute with the Post-Dispatch. Therefore, there is absolutely NO advertising for your movie in the St.Louis. My husband, my mother (age 90) and I took in the 5:00 PM showing.  We were the only people in the entire large theater.
 
The 5: Hmmm… well, at least she finishes with:  “We were very impressed with the film and think substantial efforts should be made to get it into schools and colleges.” 

Thanks for reading… and taking the time to find the movie in theatres,

Addison Wiggin,
The 5 Min. Forecast

P.S.: In the meantime, the film has apparently been “certified fresh” by the independent film website RottenTomatoes.com. “Certified fresh” means it has received at least 40 media reviews… 90% or more of which are positive. I don’t follow Rotten Tomatoes, but when Patrick, the director, e-mailed the news to me he ended with a “congratulations!” so I’m assuming that’s a good thing.

With that, I have a small favor to ask. If you have read the companion book, and honestly liked it, or believe the complete transcripts of all the interviews we conducted are helpful… would you mind reviewing the book on Amazon and saying so?

The latest one posted gave us a 3-star rating and complained that we referred to Empire of Debt too many times. That would be a valid critique, of course, except for the fact that we only refer to Empire of Debt in the introduction to the book… meaning that’s all they read before posting a reveiw. Oy.


rspertzel

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