Household Worth Down $7 Trillion, Retail Sales, Yen Soaring, FOMC to Slash Rates, and More!

by Addison Wiggin & Ian Mathias

  • U.S. household worth down $7 trillion… credit crisis decline blows by tech bust losses
  • Retail sales better than advertised… Rob Parenteau on why you should still be concerned
  • Steve Sarnoff on trading the week ahead… all eyes on the FOMC
  • The well-known currency on the verge of a 13-year high
  • White House hints at automaker rescue… but do they even have the power?

  Here we go… Ecuador announced they’ll default on nearly $4 billion in “sovereign” debt yesterday — the first country to go into default thanks to the credit crisis.

The sudden decline in oil prices was all Ecuador could take. Bond traders are now fearful that Venezuela, Bolivia or Argentina will follow suit.

  Here in the U.S., net worth has fallen over $7 trillion from its peak in the third quarter of 2007. That’s about 9%. During the recession in 2001-2002, following the tech bust, household net worth fell 6.2%.

Merrill Lynch released a report Friday projecting net worth in the U.S. will decline by $10 trillion in 2008 alone.

  One major contributor: American homeowners will lose more than $2 trillion in 2008 — just in home values. According to a study from Zillow, an online real estate appraiser, the average home value is down 8.4% so far this year.
If Zillow’s projection is correct, about 11.7 million homeowners owe more on their mortgage balance than their home is actually worth.

If you’re curious, the worst performing market was Stockton, Calif., where home prices are down 32% year over year. The best was Jacksonville, N.C., where prices have risen almost 5%.

  Retail sales in the U.S. fell 1.8% in November , the Commerce Dept. announced late last week. That’s the fifth consecutive month of decline, but not quite as nasty as October’s 2.9% plunge.

Still, the numbers are a little misleading. Gas and auto sales dropped 22% and 25%, respectively, dragging the rest of retail down with it. Sales of electronics, appliances and furniture rose.

  Consumers who bother to answer surveys say they’re in the dumps this season. Despite hitting a temporary bottom in November, the University of Michigan/Reuters consumer sentiment index scored 59 in December — less than 4 points from a 28-year low.

“The drop in retail sales,” says Rob Parenteau, “points to a consumer rapidly heading toward a bare-bones budget, and the University of Michigan consumer expectations results for November show no relief ahead. Aggressive price discounting is not generating enough of an offsetting gain in sales volumes to keep retailer revenues from contracting.

“We expect widespread retail bankruptcy announcements to ramp up after year-end, which in turn will impact job losses and commercial real estate as malls go dark.”

  "If we are lucky,” J.P. Morgan CEO Jamie Dimon said last week, while accepting an award for leadership at the Waldorf Astoria in NYC, “we will have two more quarters of this and we will start to see a recovery. It’s possible it’s going to get worse and we’re in for a tougher time.”

Dimon suspects the remainder of this downturn will be, “unemployment driven. Unemployment will drive commercial losses, real estate losses, all consumer products’ losses.”

  Bank of America, another financial “winner” of this credit crisis, announced plans to lay off 35,000 employees. Cuts will be slow and steady over the next three years, as the integration of Merrill Lynch “forces” BoA to cut almost 11% of its staff.

  The stock market staged a surprising rally Friday despite all the lousy news. The Dow and S&P 500 ended up 0.7% while the Nasdaq shot up 2.1%.

For the week, major indexes were left almost exactly unchanged. The Dow, for example, registered a loss of 6 points.

  “Despite the bleak economic picture,” notes our short-term adviser Steve Sarnoff, “stock and commodities charts are showing improved underlying support. On Friday, stocks were set for a breakdown. Futures were indicating an early drop of around 400 points for the Dow industrials. Global stocks were down sharply on news of Madoff’s giant Ponzi scheme and the collapse of the auto bailout in the Senate. The market opened lower, but not nearly as low as indicated, and fought back to close with a gain.

“This type of positive character of the behavior of market price indicates the likelihood of higher prices down the road. Risk remains that the rally may sputter and run out of gas, but it is my opinion that we are more likely to see a holiday gift-wrapped burst higher. Shorts may scramble to cover, as others fly in on fear of missing the rally.”

  This week, all eyes are on the Fed . The FOMC will meet today and tomorrow, and futures in Chicago indicate the near certainty of a 50-point rate cut.

In fact, the same gambling pits in the Windy City give 70% odds that the Fed will slash 75 points… to a remarkable lending rate of 0.25%. It has worked so well in Japan over the past decade and a half, why not try it here?

We expect a relatively quiet equity market till Tuesday at 2:15. Should the Fed appease the market and cut 75 basis points, the U.S. would have the lowest interest rates since at least 1954, when the Fed began targeting them.

  “You could gamble on an adverse reaction in Treasuries on Dec. 16,” Parenteau chimes in for a second time this Monday, “if the Fed gets more explicit about end of fed funds rate cuts/onto official quantitative easing mode. But my own sense is the economic data are going to print so horrendous into the first quarter of 2009 that equities sell down again.

“This is getting deadly serious, I’ve never seen anything like it, and it’s global. Default-free Treasuries will still get snapped up at ridiculously low yields. And if the Fed does cut 50 points, a lot of money is likely to migrate out of money market funds into some part of the Treasury curve.”

In other words, the bubble in Treasuries likely has room to grow.

Currency traders are finally starting to price government intervention into the greenback. The dollar index has fallen around 6 points from its two year high set Nov 21, to 82.6 today. Since that high, according to Bloomberg, the dollar has fallen against all 16 popularly traded currencies.

Thus, we’re seeing some new levels for foreign paper. The euro has climbed a dime from its November low, to $1.35 today, an eight-week high. The pound, dogged by a truly lousy British economy, is still low for credit crisis standards, at $1.51. The yen, as we noted last week, has been the darling of the dollar decline. One greenback can now get you only 90 Japanese yen. It rallied up to 88 last week, a 13-year high.

“The swings in the currency market are ripe for trading,” says Bill Jenkins, master of the Master FX Options Trader. Bill’s been leading Agora Financial Reserve members to gains of 100%, 33% and 23% while the stock markets have been getting pummeled this fall. You can learn more about receiving the Master FX OT free with your Reserve membership, here.

  On a weaker dollar, oil is back up to $48 a barrel. And gold is flirting with a one-month high of $827 an ounce.

  And (sigh) the great gasoline decline has come to an end. After 86 straight days of falling prices at the pump, the national average gas price inched higher both Saturday and Sunday. It’s holding steady today at $1.66 a gallon.

  If you seek market-moving news this week, keep an eye on the White House and any announcement of TARP funds being used to keep the Big Three afloat.

“Because Congress failed to act,” said Treasury spokeswoman Brookly McLaughlin, “we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry.”

While they haven’t stated it explicitly, the Bush administration has essentially vowed not to be left holding the bag while the automakers go under. “Policymakers are convinced,” notes Dan Amoss, “that a GM bankruptcy would be so devastating to employment and consumer psychology, so I doubt they will let it happen. At the very least, the process will be managed so it doesn’t happen too quickly.”

Unfortunately, for them, the congressional act that created the TARP program doesn’t allow the Treasury to give any of that money to GM, Ford or Chrysler … so they’ll have to do some fancy Bush-era legal wrangling to pull off this political stunt.

  “I don’t think that Chris Mayer’s comments ,” writes a reader, “about the ‘seen and unseen’ missed the boat at all.

“I don’t think that the philosophy of the ‘seen and unseen’ is about chain reactions. Money being used to help auto-related industries is money not being used to help renewable energies industries, for example.

“In Henry Hazlitt’s words, should we break windows to help the glass-related industries? What we see are the industries being helped; what we don’t see are the other industries that are not being helped.”

  “Your reader’s comment,” writes another, referring the same piece of mail, “on the law of unintended consequences arising from an auto industry blowup seems to have his viewpoint stuck in one direction, since for every unintended action, there is also an opposite and equal reaction.

“For example, the loss of GM might add a bevy of new Toyota plants in Alabama. The $14 billion not wasted on the bailout could build just that many more bridges, with ripple effects to the steel industry, concrete, etc. Bankruptcy permits the automakers to clean up their contractual and legacy costs, which would otherwise ultimately drown them sooner or later. So even though all Americans hate to see their fellow workers out of work and suffering, sometimes we come to the point where we just have to move on. Your whole prior commentary about the piano business tells the same tale from another perspective.

“Finally, I offer the hypothesis that perhaps there has just been a huge amount of posturing by everyone: After all, Senate leader Reid ‘owed’ the unions an effort to save their jobs, as did the Democrats in the House. Maybe even the automakers are filled with crocodile tears, just going through the motions.

“Bankruptcy does not wash the companies down the toilet; it saves whatever is worth saving, and just the parts that belong in the toilet go accordingly. Then they can leave bankruptcy, flushed, so to speak, with the potential for success.”


Addison Wiggin
The 5 Min. Forecast

P.S. “Sorry to hear about the missing cord of wood ,” writes a reader who hails from the frozen north woods. “That takes some nerve — used to take my brothers and I a couple of hours to stack a cord, I vaguely recall. I guess if you have a truck full of people, unstacking goes a lot faster. I also remember the harder cusses in New England in the ’70s used to place a stick of dynamite in the middle of their cords, just in case somebody wanted to take their cord for a ride. Yankee justice, I suppose. Might come in handy in the days ahead.”

P.P.S. We don’t normally include links to surperfluous stories pursued by CBS … but having a couple shoes hurled at your president, lame duck or not, is fairly entertaining. So for this one, we make an exception… take a look.


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