Paulson reworks financial bailout: New targets for investment… even you can apply!
Markets plummet… Bill Bonner on when stocks will be cheap enough to buy
OECD predicts global recession… Germany admits contraction has already begun
Wall Street CEOs forecast “rapid,” “deep” U.S. recession
Joel Bowman on a peculiar hissing sound emitting from the Middle East
For an erudite debate over the Paulson doctrine, we turn to our friends at The Onion this morning:
It’s not any more complicated than that, is it?
Indeed, Paulson and company announced a TARP switcheroo yesterday. Now the Treasury’s Troubled Asset Recovery Program (TARP) is suffering a serious case of the STD “mission creep.”
Instead of purchasing troubled assets from banks, the Treasury, as of this morning, plans to continue investing directly in banks, using your money, encouraging them to lend more. Jump-starting a market for mortgage-backed securities is apparently too tricky… better to give money to the banks that got us into this mess in the first place.
And with the remaining TARP funds, Secretary Paulson suggested the government provide more easy money for student, auto and mortgage loans… even credit card relief.
But… what about the ambiguously named “troubled assets,” we ask hesitantly? Perhaps we shouldn’t take their acronym so literally. The troubled asset appears to be the U.S. consumer.
Really… TARP funds are so accessible you can get an application on the Internet.
Here’s an idea: Fill out an application with whatever kind of BS data you prefer and send it in. If you can get a hold of some of the relief funds, we’ll publish your results… if for no other reason to illustrate how goofy this whole idea has become.
The stock market hated Paulson’s announcement. Aside from an initial lack of transparency for the allotted bailout funds, now the Treasury seems uncertain as to how to proceed? Forget it… the Dow plummeted another 4.7% yesterday, to 8,282, about 100 points away from a five-year low.
“At these prices, many investment pros are ready to get back in,” notes Bill Bonner. “Stocks are a bargain, they say. You get more value for money than you got in years, they point out. ‘Both my money and my mouth say the same thing,’ adds Warren Buffett: ‘Buy equities.’
“The stock market bulls aren’t necessarily wrong. But we announced a ‘Trade of the Decade’ in 2000 — sell stocks, buy gold. The decade has a few more months to run, so we’ll stick with it. At the beginning of this decade, you could get about 40 ounces of gold for a unit of the Dow stocks. Now, you barely get 12. If you’d done the trade and stuck with it, you’d be up about 200%.
“Besides, it looks to us as though the Dow is going to drop below 5,000 before this is over. Dividend yields have risen to almost 4%. When the dividend yield reaches 6%… and you can trade 1 ounce of gold for the entire Dow… call us.
“In the meantime, we still think it’s a good idea to take advantage of the low price of gold.”
Gold is cheaper than usual today. The spot price is down almost $50 since Monday, to about $710 as we write.
If you’re looking to dodge the 2009 recession, consider moving to… ummm… the moon. At least, that’s the vibe we’re getting from the Organization for Economic Cooperation and Development this morning.
The OECD forecast today that GDP will contract by an average 0.3% in all of its 30 member countries… with few exceptions, the 30 biggest economies in the world.
Specifically, the OECD says the U.S. will contract 0.9% next year. The eurozone will fare a bit better, shrinking 0.5%. Japan, already in recession, will contract another 0.1%. Should the OECD’s forecast come true (which wouldn’t surprise us one bit), it would be the first time since the oil shocks of 1974 that all three of these regions suffered recessions simultaneously.
Unfortunately, the OECD has been pretty generous with its GDP forecasting this year. As late as June, the group suggested the worst of the credit crisis was over and forecast 1.7% growth for its 30 member nations.
Germany, Europe’s biggest economy, entered recession this morning. The country revealed a 0.5% third-quarter contraction. Coupled with the country’s second-quarter GDP reading of negative 0.4%, Deutschland is officially recessing. Even if the German economy manages to rebound this quarter (ha!), this will still go down as the worst German contraction since 1996.
“We think [the U.S. recession] could be deep; we don’t know how deep," suggested a cryptic Jamie Dimon today, CEO of JPMorgan Chase. "We think the economy could be worse than the capital markets crisis."
We’re not exactly sure what Dimon is saying, and suspect neither is he. But if the Dow has dropped 37% and he suspects the economy is worse… well, that can’t be good.
“Right now,” echoed John Thain, head of Merrill Lynch, “the U.S. economy is contracting very rapidly. We are looking at a period of global slowdown. This is not like 1987 or 1998 or 2001. The contraction going on is bigger than that. We will, in fact, look back to the 1929 period to see the kind of slowdown we’re seeing now.”
Yet the good old I.O.U.S.A. still turned in a $56 billion trade deficit in September — down 4% from August, the Commerce Dept. announced today.
But before we get our knickers all in a twiddle, the trade deficits’ improvement can be attributed almost entirely to a record decline in fuel import prices. The average cost of an imported barrel of oil fell 12% during the month, the most ever. In fact, all imports declined by a record 5.6%.
If the trade deficit were contracting because of increased production in the U.S., that would be cause enough for knickers-twiddling. Alas, excluding petroleum, the deficit actually widened by about $2 billion in September. Sales of American-made products overseas fell to their lowest level since the Sept. 11 attacks.
The crack in the facade of American consumer “wealth” has become a gaping crevasse. “In 42 years of retailing," said Brian Dunn, COO of Best Buy, “we’ve never seen such difficult times for the consumer… Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we’ve ever seen."
The company dropped a doozy of an earnings announcement yesterday, which the market translated as a bellwether for the consumer at large. Same-store sales fell 7% in October, and Best Buy officials suggested they could fall another 15% by year-end. The company slashed its earnings expectations for fiscal 2009 (ending in February) by nearly 30%.
Best Buy, mind you, is an industry leader.
Still, the mighty consumer hasn’t tapped out quite yet. Wal-Mart was, yet again, the darling of an otherwise very ugly day in the market Wednesday. The world’s No. 1 retailer managed to increase profits 10% in the third quarter. The company pocketed $3.1 billion in the quarter, a cool $300 million better than the same time in 2007.
But even Wal-Mart is bracing shareholders for a rocky 2009. The company trimmed fourth-quarter same-store sales expectations to as little as 1% growth.
Understandably, currency traders have relaxed their dollar-buying frenzy. Even the most headstrong dollar bull must be a little nervous this week, and thus, the dollar index has kept to a tight range since we wrote you last. It’s still at a lofty 87.5.
As equities fell yesterday, most commodities followed suit. Oil fell again, to as low as $57 a barrel.
“Current energy prices are just too low to support the level of energy investment that the world needs going forward,” insists Byron King, yesterday’s IEA report in hand. “Meanwhile, the U.S. government is spending trillions of dollars forward just to bail out the banks and bankers, not one of whom runs pump jacks.
“The IEA estimates that the oil industry will have to invest over $350 billion per year to counter the steep rates of decline in output. And even that will not be sufficient to maintain levels of output for traditional forms of crude oil. Thus, much of the future investment will have to go toward extracting other kinds of hydrocarbon substances.
“In its World Energy Outlook, the IEA categorically states that ‘Current global trends in energy supply and consumption are patently unsustainable.’
“There’s not much wiggle room in that statement. According to the IEA, despite the recent fall in oil prices, the medium- and long-term outlooks for energy supply are grim. Conventional oil output is destined to decline. Demand will still grow, however, especially in the developing world. And the twain shall meet only by prices rising to clear the market. ‘It is,’ as our Arab friends like to say, ‘written.’”
And over in the UAE… a loud hissing noise. “Dubai finally joined the elite of the elite when it comes to embarrassing market meltdowns,” writes the Rude Awakening’s Joel Bowman from his UAE pad. “After plunging over 16% in the first two trading days, Dubai’s DFM Index may now rub shoulders with the likes of Russia, Iceland and Ukraine in the illustrious ‘Sub-60% YTD Club.’
“Such a calamitous collapse wouldn’t have been possible without insidious government intervention into the everyday life of the economy. Distortion of market fundamentals, rent caps, wage manipulation, ongoing ‘Emiratization’ of the labor force, bloated welfare programs, intervention into the banking and construction sectors, nationalization of the emirates’ resources and the blatant and severe restrictions on freedom of the press have all played their part.
“Even the mighty Dubai real estate bubble is making a resounding pop. According to The National newspaper, ‘Residential prices for Emaar Properties’ signature Downtown Burj Dubai development have fallen by at least 22%, with reductions of up to 50% within the Burj Dubai tower itself.’
“Local real estate brokers are trying to sure up investors who, having sensed that the game might be up, are scrambling for the door, selling at and even below zero-premium. Such a panicked exodus must have seemed so unlikely when the centerpiece tower sold out in record time. (The tower is not even due for completion until late next year!)”
Our last item today you may want to place in your “it could be a whole lot worse” file. No matter how bad your portfolio’s been slammed this year, you’ve probably done better than this heavy hitter:
Sheldon Adelson, head of Las Vegas Sands was once the third richest man in America.
Not a big believer in diversification or hedging, Adelson put his life’s fortune in LVS stock. It was $144 a share in October 2007… it’s barely $5 today. That’s a $30 billion loss for Sheldon. His fortune has been reduced to a “mere” $2 billion.
Forbes says barring a spectacular turnaround in December, he’ll be the biggest annual loser ever in their “400 Richest” list.
“Please! I beg you,” writes a very enthusiastic reader this morning, “just give me a crack at the reader with a bias toward American-made autos. I have a bone to pick with him/her AND the U.S. auto industry, particularly Ford. Back in the 1980s, when Ford came out with the Taurus, I was talked into buying one, as my father-in-law had worked for Ford. I’ll save you the long, sad tale but bottom line, the car literally fell apart at the seams with me having to pour hundreds of my hard-earned 1980s dollars into fixing the hunk of junk. When we traded it in, to get rid of it, the car had not even broken 90,000 miles and the dealership we dealt with was embarrassed it couldn’t offer but just $75 for it on trade-in. We didn’t bother to tell them we were inwardly thrilled to not have to pay them to take it off our hands!
“I say all this to make my point that during the entire time we had problems with the American ‘Made With Pride’ piece of junk, I contacted Ford dealerships, spoke with personnel at the Hapeville plant that built the Taurus and even wrote to HQ in Michigan. Their response? Lots and lots of sympathy, but ZERO results. I swore then I would N-E-V-E-R in my lifetime buy another Ford product. The next new car I purchased was a 1993 Honda Civic VX, which I still drive for a 120-mile per day commute. It gets 40 miles per gallon on average and is approaching 300,000 miles! Best damn investment I EVER made!
“So anytime a ‘fellow American’ talks to me about poor-mouthing American automakers, I let ’em have it. As far as I’m concerned, Ford and its employees STOLE money out of my pocket and put it into theirs because they didn’t make good on their part of the trade, and I don’t give a rat’s tail about how good their products are today — point being they owe me a car for free over a five-year period with ALL major repair work covered at THEIR expense, JUST TO BREAK EVEN, before earning a chance at being considered for future auto purchases.
“Well, Ford? (Silence.) Hmm, I didn’t think so. All four vehicles I own are Japanese made, and I couldn’t be happier! So don’t give me that ‘fellow American’ crap, you thieves! You did it to yourself, you idiots!”
The 5: Yikes…
“There you go again throwing that xenophobia charge around,” writes another, apparently monitoring our use words that begin with the letter ‘x.’ “How is it xenophobic for the commenter who prefers his/her Cadillac CTS to challenge (with source citations) your contention that foreign cars are of better quality? Sure he/she is emotional, but you cherry-picked certain tangential claims made and focused instead on only part of the argument.
“I really am interested in how you see this as xenophobic. It seems, rather, that you have your own emotional knee-jerk reaction to anyone who might be challenging your quasireligious devotion to free trade and all that it entails, including, but not limited to, free labor trade and, thus, open borders. The arc of American history is not the whole of history. Yet you undoubtedly would characterize previous generations of Americans as morally deficient for their preference for things American, cultural and otherwise. But history is replete with examples of empires whose decline was at least partially caused by a refusal to engage in a little protectionism, again, cultural and otherwise.
“If markets were truly free worldwide, then perhaps your points would ring a little less hollow, but when it’s a one-way street, the lopsided current account balance and consumer- (rather than production-) based economy that we now have leads inexorably to said decline and implosion from within.”
The 5: Amen to that.
The 5 Min. Forecast
P.S. This is your last chance to save a ton of money . Bulletin Board Elite is half off its normal price until midnight tonight. Get the details on this rare offer, here.
P.P.S. And we have to pass on this little nugget: a feedback page for the RNC . Pretty telling.