Home Prices Plummet, Citi Rescue, Behind the Market Rally, Great Depression Lesson, and More!

by Addison Wiggin & Ian Mathias

  • Housing bust worsens… biggest annual drop in home prices — ever.
  • Add another bank to the taxpayer bailout bill… details behind Citi’s weekend rescue
  • Obama picks economic team members, markets rejoice… our thoughts on his curious choices
  • Dan Amoss with a little-discussed FDIC rule change that will “make financial market history”
  • Gold rebounds strongly… Ed Bugos with short-term forecasts and price targets
  • Chris Mayer on getting rich in the Great Depression, and applying those lessons to today

   Lest we forget what begat the crisis, here’s a reminder: The average existing home sold for 11.3% less in October 2008 than the year before — the largest year-over-year decline since the National Association of Realtors (NAR) started keeping track in 1968.

Yet over the past decade, the global financial system — nay, the consumption habits of the entire West — had been retooled on the false assumption that real estate and housing would not fall in value.


  Not that it was hard to see coming: “Hold onto your wallets,” we wrote in early 2005, “Like it or not, your life — and the lives of over 72 million Americans — is about to change dramatically.

“After 10 years of unprecedented growth, the bottom is about to fall out of the U.S. housing market. The dominoes in this horrific game have already begun to fall…starting with Fannie Mae’s self-destruction.

“A total of $2.5 trillion — or more — will be wiped away. But — as awful as that sounds — that’s not the worst of it. Because of the enormous house of cards created by Fannie and the U.S. government over the past 10 years, the entire U.S. financial system is in jeopardy.”
Uhh… at the time, the report was dismissed as “doom mongering.” If you hadn’t seen one of the hundreds of thousands of e-mails we sent out at the time, now would be a good time to revel in the irony.

  Despite Secretary Paulson’s claim he would lock up remaining TARP funds for the next administration, the Treasury Dept. named Citigroup as its latest target for quasi-nationalization last night.

In a hasty Sunday deal that has become the hallmark of the “credit crisis,” Citi managed to talk itself into a massive government aid package.

Here’s the meat of it:

The Treasury, FDIC and Federal Reserve promise to backstop Citi’s $306 billion worth of troubled assets. Citi’s on the hook for the first $29 billion in losses, and the government is essentially on the hook for the rest

The Treasury will write Citi a check for $20 billion, in addition to the $25 billion Citi’s already received from the TARP

In return, the government gets $27 billion in preferred Citi stock. $20 billion for the second stimulus check, $7 billion as compensation for backstopping all those bad assets. This breed of Citi stock will pay an 8% dividend and comes with warrants to buy $2.7 billion more in the future.

The deal also insists the Citi pay no more than a 1-cent dividend over the next three years (except for the government’s shares, of course). Employee compensation will also be drastically reduced.

  Investors bought shares of Citi this morning like Michael Moore at the doughnut shop. C jumped 61% at the market’s open this morning, bringing shares up to a whopping $6 a pop.

Another 500% to go and everything will be “normal” again.

  The Dow itself shot up over 250 points within the first hour of trading, and is still up there as we write. Most of the equity love today is coming from Citi, but much is also left over from the market’s manic Friday.

  After a week of nasty sell-offs and bottom testing, the market was looking for a reason to pop, and they found it in this guy:

The face worth 500 Dow points

Timothy Geithner, a Robert Rubin protégé, was named the next secretary of the Treasury. Traders liked the pick:

  Geithner heads up an all-star cast of Rubinites: Larry Summers will serve atop Obama’s National Economics Council and Peter Orszag will be the White House budget director. As such, the three Obama appointments ought to lean toward balancing the federal budget, limiting spending growth and encouraging free trade.

But does it make anyone else cringe today that Rubin is still the director and senior counselor of Citigroup? We wonder what the “Big 3” CEOs, who left Washington empty-handed last week think of the new triumvirate.

Welcome to the age of plutocracy in America.

  On cue, the FDIC changed a rule last week, which allows bank holding companies — like Citi — to issue debt backed by the U.S. government.
“This is a watershed moment in financial market history,” says our short-side analyst, Dan Amoss. “The flat-lining credit markets will get a major jolt now that the FDIC is insuring the issuance of new bank debt. This is yet another massive subsidy to the banking system courtesy of those hoarding U.S. Treasury bonds and dollars (whether they know it or not).

“In short, banks that could only issue bonds at 8% or 9% will now be able to issue bonds at much lower rates. They’ll look to make highly profitable new loans with the money they raise. Bloomberg reports — citing analysts at Barclays Capital — that ‘banks, which haven’t sold dollar-denominated bonds since September, may raise $400-600 billion under the program within six months.’

“Even Citigroup, which has weakened to the point that it’s on government life support, will now be able to borrow at much lower interest rates.”

Dan’s short-side readers netted another triple-digit gain on Friday by following machinations just like this one. They brought in 220% in five months by betting against PNC Financial. If you’re interested in taking part, look here.

  Three regional banks failed over the weekend, too: Downey Savings and Loan and PFF Bank & Trust, both from California, and Community Bank of Georgia. The FDIC managed not to do any of the heavy lifting on these three, as U.S. Bancorp snapped up the over $16 billion in assets of the two California banks and Bank of Essex now controls Community Bank of Georgia.

Thus far, 22 banks have now fallen victim to the credit crisis… a far cry from the 10,000 or so that bit the dust in the ’30s. But heck, who says we’re not trying?

  “The U.S. monetary base is now growing at an annual rate of 75.5%,” reports John Williams.
“For the two weeks ended Nov. 19, total reserves of depository institutions surged to $652.9 billion, up from $415.7 billion in the prior period. The latest numbers are up nearly 15-fold from August’s monthly average of $44.6 billion, prior to the Fed’s extreme liquefaction in response to the current intensification of the systemic solvency crisis…

“Against the prior two-week period, the St. Louis Fed measure gained 19.1%. Year-to-year growth rose to 75.5%, from 48.2% in the period before.”

We’re watching these numbers with the intensity of a child who’s seen a dwarf for the first time. In the battle against “deflation,” we’re expecting the government’s excessive bailout strategy to be akin to setting a match to tinder.

“There is hardly a government in the world that has not in some way intervened to resist liquidation,” the writer Garet Garrett wrote back in 1933, “but the American government, the only one with a strong tradition against it, has been the least restrained of all.”
The more things change… the more they stay the same.

  The dollar index dropped a point and a half, to 86.5, as investors rushed back into equities on Friday and this morning. Oil is up $2, to a mere $52 a barrel. Gasoline feels stupid cheap, this morning. At $1.90 a gallon, the national average has fallen 68 days in a row.

  “Friday was a good day for gold bulls,” reports our gold analyst Ed Bugos. Indeed, gold popped $60 on Friday, to just under $800 an ounce. And this morning, it’s up another $20. While it might not feel like it, the yellow metal has been up three weeks in a row and is now a little over one-month highs.

“The gold stocks were the best performing equities on the big board Friday and today, too. The Citi news might have been a catalyst. One thing’s for sure. The bears needed a rally too. They couldn’t push much through $700 with everything so oversold and such strong support there. The question is whether it is more than a retracement rally set to feel out resistance in the downtrend — a windup, if you will — before plunging to new lows.

“I don’t think so, but I’m biased by the fundamentals. However, $825-850 is intermediate resistance, and the low $900s is the reversal point for the downtrend that started in March. If it gets through there, the technicians won’t wait for it to break through the old high at $1,040 to pile in.

“Gold stocks are in exactly the right place. They’re cheap now, and they are getting the dual benefit of falling cost inflation and a strong selling price for the wares they sell. There are a lot of stocks selling at cheap valuations today, but probably fewer with as strong prospects for growth in cash flows looking forward.”

  “Floyd Bostwick Odlum started his investing career in 1923 with $39,000,” writes Chris Mayer, plumbing history in search of alternative ways to play this crazy market to your advantage, “In a couple of years, he turned that into $700,000 through some savvy investing in deeply undervalued stocks and other securities. Odlum was on his way. All told, in about 15 years, he parlayed that $39,000 into over $100 million ($1.5 billion in today’s dollars).

“His big score came after the Crash of 1929. Odlum bought busted-up investment trusts. He found companies trading for less than the value of the cash and securities they owned. So he bought them, liquidated them and then took the cash and did it again… and again. Of course, to do this, he had to have a little money at the bottom. And he did.

“Odlum was either lucky or prescient, because he avoided much of the pain of the 1929 Crash by selling some of his investments beforehand. So he had some $14 million in fresh cash to take advantage of opportunities. He was also debt free.

“So immediately, two recurring themes surface: cash rich and debt free. It holds for individuals and companies, too. The survivors — and success stories — all had that mighty underpinning to build on. But Odlum’s basic idea is the one I talk about in my book Invest Like a Dealmaker. You buy stocks when you find they are trading for less than they would be in the private markets. Ken Fisher, author of 100 Minds That Made the Market, had this to say of Odlum: ‘He basically demonstrated the ability to arbitrage the value spread between the public and private markets.’

“As Odlum’s career shows, now is the time to be extra alert to new opportunities just like the ones he found in the 1930s. These investments can be the seeds of your own fortune.”

There’s still time to catch Chris’ installment of the Emergency Retirement Recovery Series. Sign up here — it’s free.

  “I am not a brilliant economist,” writes a reader, bravely admitting to what many will not, “but if we want to help the housing and stock market, shouldn’t our pols in Washington declare a long-term capital gains tax holiday for the next year? In other words, any capital investment purchased during the next year would enjoy zero long-term capital gains for as long as you hold the asset?

“We need to get money off the sidelines, and this may help those teetering on the fence. Investors knowing that any long-term gain would be taxed at zero may be incentivized to move.”

The 5: Absolutely. But what in the news makes you think they think at all like we do?


Addison Wiggin
The 5 Min. Forecast

P.S. The latest installment of our free Emergency Retirement Recovery Series will be aired today at 3:30 p.m. EST. Chris Mayer’s at the helm of this edition, and his crisis investing advice is not to be missed. It will be available for your viewing pleasure — for free — for the rest of the day… but you might want to check it out now, while the market is still open. Click here for the details.

P.P.S.  While the Citi rescue was going down, GW was off in Peru solidifying his status as the ultimate lame duck — and denying he knew anything about another bailout.


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