by Addison Wiggin & Ian Mathias
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The Fed’s first credit crisis lawsuit… who’s suing and why
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AmEx, Fannie Mae unload more financial follies… government “fixes” problem with more taxpayer dollars
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Chris Mayer with a credit crisis byproduct (and opportunity) that could affect the entire world
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China announces big stimulus plan… so why did commodities fall?
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A hefty chink in Dubai’s armor
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Plus, Dan Amoss with a once-favored investment theme due to be back in the spotlight soon
Here’s a curious development that may be worth watching: Bloomberg is suing the Federal Reserve.
Last week, we took a look at the Fed’s bulging $2 trillion balance sheet. And if you’re a long-suffering 5 Min. reader, you know our futile recounting of the weekly Fed lending programs… all the abbreviations and acronyms: TAF, TSLF, PDCF, CPFF, TARP, etc.
Well, the folks at Bloomberg dared to do the right thing last week: demand the Fed tell us where this money is going. With few exceptions (namely, the TARP, Fannie, Freddie and AIG), the Fed lends in secrecy. They’ll say how much they dole out each week, but never name names. Nor will the Fed reveal the specific loan collateral they’re now accepting, or their valuations of these toxic assets that no one else will buy.
Bloomberg is tapping the Freedom of Information Act to try to force disclosure. Good luck.
In the meantime, the Fed has given American Express carte blanche access to the array of Fed lending programs. Like Goldman Sachs and Morgan Stanley, the Fed will allow AmEx to call itself a “bank holding company” so it can gain access to both the Treasury’s TARP bailout and the Fed’s lending facilities.
The Fed fast-tracked AmEx’s application after it reported a 24% decline in third-quarter profit and said it will fire 10% of its employees. Hmmmn…
Let’s see, what else is the government doing with your money? Oh, here’s one… Fannie Mae revealed a $29 billion quarterly loss yesterday.
Under the guidance of the government, Fannie lost $9 billion in housing-related losses, and then another $21 billion after the group altered its accounting practices. That must have been some alteration.
Fannie’s new executive team also warned that they will likely tap into the government’s $100 billion backstop next year. But if the company continues on its current trajectory, says CEO Herb Allison, "or to the extent that we experience a liquidity crisis that prevents us from accessing the unsecured debt markets, this commitment may not be sufficient to keep us in solvent condition…”
In other words, as with the restructured loan AIG and the Fed announced yesterday, Allison’s warning $100 billion probably won’t be enough to save Fannie’s bacon.
Are we detecting a pattern here?
“The credit crisis is even affecting the world’s ability to produce food,” warns Chris Mayer.
“It’s harder for farmers to get credit for next season’s crop, especially farmers overseas. They need fertilizer, seed, fuel and more. The net effect might be lower planting of key grains even as world inventories of these grains hover near historic lows. Bloomberg reports that global inventories of corn, wheat and soybeans are the second lowest they’ve ever been since 1974.
“All the while, the credit crisis threatens next year’s crop in many critical grain-growing regions. In Russia, for example, cash-starved banks have cut off funding for the industry. The head of the Russian Grain Union says, ‘Many farmers probably won’t be able to borrow money for the spring sowing.’ This is important because Russia is no lightweight in the grain division. It produces 9% of the world’s wheat, for instance.
“Even if demand growth for grains slows, it’s not likely that those low global grain inventories will improve. PotashCorp CEO William Doyle presented the nearby chart (‘Tight Grain Markets’), which might seem a little busy, but I think it shows you how much of a hole the grain markets are in. For instance, the five-year average growth rate in grain demand is 2.6% per year. Even if grain demand fell to 2% per year, we’d still need record production to keep grain inventories from falling further.
“I think the future is still bright for agriculture and all that it entails. I think the fertilizer companies look cheap again.” For a few worth looking into, see: The Endless “Paycheck Portfolio”
The credit markets are still showing some signs of improvement. The London Interbank Offered Rate (Libor) dropped again this morning. The three-month rate for banks to lend U.S. dollars to each other fell to 2.18%, from 2.24% Monday — less than half the 4.82% during the worst of the crisis a month ago.
But that’s far from an all-clear signal. The Fed’s target rate is 1%. And the overnight Libor increased slightly again last night, to 0.35%, above Monday’s record low of 0.32%. Also, the Libor-OIS spread is still at 1.69%… a mite higher than the 0.1% back in September.
Starbucks announced today a venti-sized problem. Its profits had plummeted 97% from the third quarter of 2007.
For all its corner locations across this hot, flat and crowded globe, the company managed to book just $5.4 million in profits in the third quarter, awarding investors with a penny per share. The company said much of the increased expenses over the past three months came from closing 600 stores…
No, we prefer our coffee with a little anarchy on the side. Lately, we’ve been required to bring our own mugs to Red Emma’s. Otherwise, they won’t serve us.
The global package humper DHL bowed out of the U.S. market yesterday. The German-owned company said it will kick nearly 10,000 employees to the curb here in North America and exit the domestic-only shipping services.
Good thing we still have the American-owned, Memphis-HQ’d FedEx, huh? Yeah, that’s right… TEAM AMERICA! I think you know what that means.
Oops… the U.S. Postal Service is downsizing too. The government agency says it’s looking into 40,000 employee layoffs — or about 6% of its work force. “Just what we need, isn’t it?” we paraphrase Jay Leno, “40,000 disgruntled Postal employees?”
The commodities market showered love all over China’s $586 billion stimulus package we mentioned yesterday.
But then traders had second thoughts. “Hmmmn…” they seemed to say, “if the Chinese stimulus packages is as ‘successful’ as the U.S. variety, well, there’s not too much to get excited about.”
Just as quickly as they came back in vogue yesterday, commodities are out of style today.
Oil, for example, is back down to $59 a barrel — a new 18-month low. China gave oil a $6 boost early yesterday, but all gains were erased by the N.Y. Merc Exchange opening today.
Oil’s autumnal decline has landed like a salty finger in a frothy beer in the UAE: The Dubai stock market has fallen flat. Stocks are down 16% over the past two days… 7% today alone.
You’d think that the La-La Land of the “world’s biggest” everything, 24/7 air conditioning, Mercedes in every garage and super-sized (super-leveraged) building projects would be hit hardest during this global retraction… but up until this week, Dubai’s been showing remarkable resistance.
Booms this big always end in tears. Caveat emptor.
“The signal of oil supply constraints could become much louder after tomorrow,” forecasts Dan Amoss. “On Nov. 12, the International Energy Agency (IEA) will publish a very important report. Few media outlets have mentioned it yet, but it could have a huge effect on the 2009 stock market.
“This report, the World Energy Outlook 2008, will contain a thorough field-by-field analysis of production trends at the world’s 800 largest oil fields. Hopefully, the IEA will finally lay to rest the widespread misconception that oil producers can ramp up supply at the flip of a switch.”
The Financial Times recently secured an early draft of the IEA report. If you didn’t catch that sneak peak, here’s the gist: The WEO report will likely say that output from the world’s oil fields, even the most established and reliable, is declining faster than expected. This problem will require, according to the FT’s preview of the report, ‘a significant increase in future investments just to maintain the current level of production.’
“When the final draft of this report is published,” adds Dan, “its key conclusions will probably flood the media airwaves. An annual decline rate between 6-9% will spur trillions of dollars of new investment over the next decade.
“Depletion of the existing oil supply base — as an investment theme — may finally get the attention it deserves.”
Gold is getting slammed now, too. The spot price shot up almost $20, to $765, yesterday, but gave back all of its gains by the end of the session, and is even lower today. An ounce is going for $725 this morning… and falling.
The dollar index reversed trends yesterday and is quickly approaching a one-month high, trading at 86.6.
Thus, its competitors are getting a swift kick in the business end of their trousers. The euro is down 2 full cents, to $1.25. Ditto with the pound, down to $1.54.
And oh, the poor loonie… the Canadian dollar’s been suffering some huge swings lately as oil gyrates. It’s on the wrong side of that trade today, down more than 5 cents from yesterday’s high, to 83 cents.
The yen is hangin’ tough around 97.
The excitement over China’s stimulus package quickly fizzled yesterday in the world’s stock markets, too. Traders were high on the plans coming out of the Far East in early trading and pushed the Dow up over 150 points. But the buzz wore off as news from the likes of GM, AIG and Circuit City hit the wire. The Dow ended down nearly a percent. The S&P 500 and Nasdaq fared even worse, falling 1.2% and 1.8%, respectively.
Today, AmEx, Starbucks, Toll Bros. and Las Vegas Sands have added to the pall. The Dow continued down at the opening… a 250-point loss out of the gate. It’s still there as we write.
“It was very interesting to read your remarks,” notes a reader. “‘Why don’t [U.S. car manufacturers] just make cars people want?’
“Gee… why didn’t someone think of that before? The American car industry did just that, built large SUVs and trucks that people wanted. That was the only way the companies could produce a profit, considering the cost of labor and benefits that were once heralded by our very own government as the wave of the future for all domestic companies. Laws were passed protecting the unions, which still ensure pay and benefits for two full years even if a plant is shut down. There is no way our domestic manufacturers can compete with cheaper imports, facing that kind of uneven playing field.
“Go into manufacturing facilities and look at the percentage of import vehicles, purchased at much lower prices, and then ask the poor individuals facing layoffs from overseas manufacturers why their jobs are at gone. They will look at you with blank stares on their faces. Go to Japan. They will not drive an American vehicle, not because of price or quality, but because of loyalty to their own brands. Get real!!
“Yes, we probably will see the Big Three become the nonexistent three, along with all the banks and investment bankers. But it will not be because of poor quality; it will be because of unfair trade practices and inconsistent, displaced American loyalties.”
The 5: And poor quality… the hangover from planned obsolescence. We’re still driving a 1994 Honda Civic with over 200,000 miles on it. It needs very little maintenance, and when I turn the key, it starts. What can be more American than exercising a right to choose which product to buy?
The fact that high gas prices drove sales from 18 million cars down to 12 million cars in less than two years helps prove our point. The auto industry is too big, bloated and regulated to shift gears with market demand. Management has little recourse but to lobby for a bridge loan from another bloated, ill-fitting, wealth-leeching behemoth while they get their act together.
“Here in Michigan,” writes another, “we were making cars and trucks people wanted until high oil prices and the mortgage fiasco froze credit markets and reduced the American economy to a crawl. What’s the cause of high oil prices? Lack of a coherent energy policy that Washington has had more than 30 years to fix. How much time does it need?
“What’s the cause of the credit freeze? Primarily toxic mortgages loaned by bankers (with a gun held to their head by Bill Clinton in the late 1990s) to people who couldn’t pay them back. Include the banking industry and government-approved lending practices that rivaled the Chicago commodity market in terms of leveraging on-hand deposits and it was just a matter of time before the house of cards fell.
“Now add to this witch’s brew federal government regulation of the auto industry and a lack of right to work laws, which has enabled the UAW to hold OEMs hostage for health and retirement programs that foreign OEMs don’t have to pay. Since when does government know how to build anything except a pyramid of debt? Is it any wonder that the foreign car companies locate in the Southern U.S. and avoid unionized northern states like the plague?
“I’ve worked in this industry for more than 30 years. The people I know work their butts off but are hamstrung by the government and the unions. If the auto industry in America dies, the government will have killed it, and 10% of the nation’s economy will die with it. For those who want the auto industry to die, be careful what you wish for. A nation without a manufacturing base is a third-world nation with no future.”
The 5: Amen to that. We covered your sentiments exactly in Empire of Debt.
Enjoy your Veterans Day,
Addison Wiggin
The 5 Min. Forecast
P.S. Three years ago, when we published The Demise of the Dollar , a book covering many of these same themes, we knocked Harry Potter off the No. 1 spot on Amazon’s best-seller list. Today, we’re in a fierce battle with another boy wizard. Barack Obama’s The Audacity of Hope has been trading the No. 1 spot on the Amazon list with our own I.O.U.S.A. for the better part of a week. As we write, we’re in the No. 3 spot… Obama’s got two books in front of us. Grrr…