Official Recession, Black Friday, Mortgage Rates, Huge Stock Rally, and More!

by Addison Wiggin & Ian Mathias

  • U.S. officially in recession… for the past year
  • Markets stage best week since Great Depression… Chris Mayer on how to invest now
  • Black Friday shopping stats better than expected… but is it “all clear” for holiday retail?
  • Dollar pops, commodities fall… two oil bigwigs give their fair-value oil forecasts
  • Mortgage rates finally drop… Rob Parenteau on the Fed action that’s actually “helping” consumers

  Welcome back, we hope you enjoyed your holiday.

While the American Farm Bureau Federation, which has been keeping track for the past 23 years, says the average cost of a Thanksgiving feast rose 5.6% from last year, the folks at Barron’s would like to you take comfort in knowing that “the cost to feast on your turkey and the trimmings when adjusted for inflation is actually less than it was 20 years ago — a year after the 1987 crash — by 8%.”

If you still have leftovers, they should taste even better knowing that, eh?

  For our part, we spent the weekend in Montreal, Quebec. We attended a couple of screenings of I.O.U.S.A. at the old Forum, where the Montreal Canadiens used to play. We can remember as a kid listening on the radio when the Boston Bruins would get into fights at the Forum. Now the building has been converted into a wreck of a monument to consumer spending.

The “new” Pepsi Forum sports 22 stadium-seating theatres, a myriad of theme restaurant chains, a comedy club and souvenir stores out the wazoo. It was described as a “ghost town” by one of the locals. Indeed, the ghosts were palpable. The audiences were half what we’d seen in Toronto a couple of weeks ago.

Granted, the film didn’t get much play in the news this time around. Two of the victims in Mumbai over the weekend were local Montreal celebrities.

“See that Mumbai disaster?” Chris Mayer wrote by IM after we got back to Baltimore this morning. “We stayed at the Taj Palace Hotel on our trip there last fall. Incredible to see it in flames. I don’t know how this is going affect premium travel anytime soon. The mood is definitely shifting.”

  The shifting mood in the American economy was “officially” sanctioned today by the National Bureau of Economic Research (NBER), the folks who are tasked with identifying, declaring and revising recessions and growth in the economy. The group declared that expansion ended — and recession began — a year ago this month.

The U.S. economy enjoyed a 73-month stint of growth, dating back to November 2001, the NBER release states. While the U.S. has yet to suffer back-to-back quarters of declining GDP, the usual litmus for a recession, the NBER used this definition instead:
“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”

The kicker: the peak of employment was reached in December 2007… it has been declining every month since.

  Last week, including the last five trading days, was the best the stock market had seen in 75 years. After sinking to an 11-year low on Nov. 20, the S&P 500 boomed for the mother of all bear market rallies… check it out:

From Friday to Friday, the S&P jumped 19%. The Dow followed close behind, up almost 17%. If you can call this period a “week” (since traders took Thursday off), it’s the best since the Great Depression. It’s also the first five-day winning streak for both the Dow and S&P 500 since July 2007.

  “Even though the market crash has created a lot of bargains,” notes Chris Mayer, “I think the market still looks treacherous. The biggest risks now are financial, such as the inability of a company to finance itself through this crisis.

“Financial strength is not an unlimited reservoir, and many companies never had much to begin with. Even those that looked OK months ago are now scrambling. Something might look dirt-cheap, but if it can’t make it through the credit crisis, it’ll get a lot cheaper.

“What we want are stocks like camels. They can cross the desert without needing to refuel. At least with these stocks, even if the prices go down a bunch, you have a good shot at making your money back, and then some, later. You could still wind up with a good return over a period of years. You can’t do that if the thing dies in the desert.

“So financial strength is going to be very important in 2009. I also think it will be crucial to stay in needed industries and industries that have a clear and bright long-term future, as opposed to businesses that can grind to a practical halt.”

BTW, Chris’s installment of the free Emergency Retirement Recovery Series Webinar is still available for viewing until midnight tonight. You can check it out here.

  The Dow’s pest performer last week? Citigroup, up 120%. If that’s not proof of a sucker rally… than we don’t know what is.

  As we mentioned above, Black Friday was better than expected, sort of. For the first time since 2001, even the media’s most verbose cheerleaders were bracing for the first sign of a bitter holiday shopping season. But they didn’t quite get it.

In fact, at face value, it was the best Black Friday on record. Here’s a rundown:

Of course, these numbers are still a little misleading. Shopper volume increased 17% from last year, but according to ShopperTrak, sales increased only 3%. Most marquee retailers staged some incredible promotions, even for Black Friday standards. According to Tracy Mullin, president of the National Retail Federation, “This could be the most heavily promotional Black Friday in history.”

Earnings season for retailers in the fourth quarter will tell the real story. Many economic quants are expecting GDP to drop 3-4% by the end of the calendar year.

  One shopper was trampled to death a Wal-Mart on Long Island. Seriously, are holiday discounts really that important?

  The stock market has already overcome its Turkey Day tryptophan high and has completely shrugged off the better-than-expected Black Friday figures. The Dow opened down over 300 points this morning.

  The dollar index rallied again this morning on stock market weakness … it’s up a point and a half from Friday’s low, to about 87.

  And as is its wont, gold plunged almost $50 this morning on the opposite side of the dollar trade. The yellow metal is down from its weekend (and one-month) high of $822. You can now score an ounce for just $775.

  All commodities are feeling the greenback’s wrath today. Oil is down $3 from its recent high, now back to $50 a barrel.

Oil is under selling pressure today from OPEC today, too. The global cartel announced this weekend that it has decided to leave production rates unchanged until the next meeting, Dec. 17.

"A reasonable price for oil is $80 a barrel,” opined Iraqi oil minister Hussein al-Shahristani after the OPEC meeting. He later said that “Iraq would support a decision by OPEC to cut output either here or in Algeria.”

“We believe the fair price for oil is $75 a barrel," said Saudi King Abdullah in a similar vein on Saturday. “The price between 70-80 [dollars a barrel] is the one encouraging in investment and developing new or current oil fields," he said. "It falls below 70, the investment would freeze, which will lead to a crisis in supply in the future."

  But until OPEC shuts off the pumps, gas here in I.O.U.S.A. still feels crazy cheap. The national average price at the pump is down for the 75th day in row, to $1.82 a gallon. That’s the cheapest national average since December 2004. Only Alaska, Hawaii, New York and D.C. still feature an average price above $2.

  More bad news on the housing front: New home sales have fallen to their lowest level since 1991. Sales of new houses fell 5.3% in October, to an annual rate of 433,000, the lowest level in 17 years, said the Commerce Dept. last week. The median sale price fell 7% from the same time last year, to $218,000. That’s a four-year low.

  Mortgage rates plummeted last week after the Fed’s latest intervention . The national average 30-year fixed fell from 6.3% last week to around 5.7% today, with many brokers around the country reporting teaser rates as low as 5.2%, said last week.

“The Fed has committed to soaking up $100 billion in direct obligations of government-sponsored entities (GSEs),” explains Rob Parenteau, with his eye on the frozen credit markets, “which will make a substantial addition to the current holdings of agency debt of $12.5 billion. In addition, the Fed will take on another $500 billion of agency-backed mortgage-backed securities over the next year through select asset managers. Essentially, the Fed has taken care of the need for an explicit guarantee of GSE debt.

“The move marks an escalation in the Fed’s campaign to break the credit logjam. If we don’t get refis up on this move, we can expect Congress will begin to insist on lending quotas on the next set of tranches of TARP recapitalizations for banks.”

  “Regarding the graph of housing prices ,” writes a reader, “which you included in your 5 Min. Forecast sent out on Nov. 25., using the information in this graph and information on the consumer price index from the BLS, I have calculated that nationwide home prices are now 63% higher than in January 2000, but the CPI index is now 30% higher than in January 2000.

“This means that the home prices need to decline another 20% to make average home prices the same ratio to the cost of living index that they were in January 2000. Therefore, for home prices to again be affordable, we can expect that home prices will continue to decline for more than another year, unless some government bailout program reinflates home prices.”

  “I remember when $1 billion sounded like a lot of money,” reminisces another. “Now it sounds like chump change. Can you imagine a bank getting a chance to ask for a handout and taking only $1 billion? They’d look so pure of heart their stock would quintuple overnight.

“What’s amazing is I know where they’re getting this money — taxpayers, the printing presses and more borrowing from overseas — but I still feel compelled to ask over and over in my head, ‘Where on Earth are they getting all this money?’”

  “I have to agree,” writes a reader responding to this issue , “with your assessment of American politics (I’d add poly meaning ‘many’ and ticks being bloodsucking insects). However, neither a plutocracy nor a kleptocracy accurately assesses our current loathsome state; we need a combination of the two, perhaps a pluto-kleptocracy. After all, the ruling wealthy class who already have more money than God are still robbing us blind.”

The 5: Unfortunately for all, they’re likely to destroy even that money which they already have.


Addison Wiggin
The 5 Min. Forecast

P.S. Tomorrow, as you may have noticed we like to do in December, we’ll be reopening our Agora Financial Reserve for membership. Details are forthcoming…

P.P.S. Anyone who is truly concerned with the receding U.S. economy ought to have driven from New Hampshire to Baltimore yesterday. The trip, which normally takes seven-eight hours, took 13. We were in bumper-to-bumper traffic from I-93 north of the tollbooths in Manchester, N.H., until 1-695, the beltway around Baltimore. It rained the entire way, too.

There aren’t too many places on Earth, we suspect, where you can be in bumper-to-bumper traffic for 13 hours straight.


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