Year of the Scandal, Housing Data Worsens, Jobs Outlook, Free Money, and More!

  If anything, 2008 has devastated the average investor’s faith in financial services. Bear Stearns, Lehman, AIG, WaMu, Fannie and Freddie and now this whole Bernie Madoff mess… and these are just the worst of ’em.

So it’s no wonder 74% of respondents to a CNN poll this week say, “Madoff’s behavior is common among financial advisers and institutions.” Put another way, three quarters of America thinks most of Wall Street is a giant Ponzi scheme.

The result: Wall Street will be seeing a lot less of Joe Six-pack’s dough in 2009.

In the same survey, CNN asked what each respondent would do with $1,000 that they couldn’t spend or use to pay off debts: 45% said they would deposit it in a bank, and 29% said they would stash it somewhere in the house. Only 24% would buy stocks or bonds.

The late Dr. Richebacher lamented the increased reliance on the financial industry as the engine of the American economy. He called it “late degenerate capitalism” and forecast for many years that the collapse of U.S. housing would mean the end of American — nay, Anglo-Saxon — leadership in the world.

Perhaps he was onto something.

  As a consequence, a record number of mergers and acquisitions were canceled in 2008.

The young “masters of the universe” walked away from 1,309 M&A deals at a value of $911 billion, says the financial data keeper Dealogic — more than a 50% increase in busted deals from 2007.

Base materials giant BHP Billiton gets the prize… their withdrawal from the $147 billion Rio Tinto deal marked the biggest in modern history.

The total value of global M&A is “only” $3.2 trillion year to date, down 29% from all of 2007.

  U.S. companies will shed at least another million jobs in 2009, according to a forecast from outplacement firm Challenger Gray & Christmas.

Roughly 2 million jobs have been lost since December 2007, the “official” start of the recession. If you ask us, we’d be lucky to get away with just a million more.

“It will take time for any stimulus measures to work their way through the economy," John A. Challenger, chief executive of Challenger, Gray & Christmas, said in a statement. "Even if the measures work, it could take several more months for consumers and Corporate America to regain confidence and begin spending again.”

The firm predicts healthy job growth and an expanding economy are just around the corner… sometime around 2013.

  And with that, it’s official… for now, at least. The  U.S. economy contracted 0.5% in the third quarter, the government announced this morning. That marks the “final” reading for the quarter, until the Commerce Dept. has the opportunity to revise it again in January.

  Home prices fell 13.2% in November, the biggest year over year decline on record. According to the National Association of Realtors today, the median home price for an existing home fell 13%, to $181,300, during the month. That’s the biggest dive since the NAR started keeping track in 1968.
 
 The pace of existing home sales fell more than expected in November too. Sales sank 8.6% year over year, to an annual pace of 4.4 million sales.

  In light of the coming holiday, the Commerce Dept. decided to print the new home sales number today also. New home sales fell 2.9% annually, to a seasonally adjusted rate of 407,000… the lowest since 1991.  
There is currently an 11-month supply glut of both new and used homes.

   Alas, U.S. consumer confidence unexpectedly improved in December, with one major caveat. The University of Michigan sentiment survey rose from 55 to 60, the highest level since September.
 
However, "absent the gain due to unusually steep pre-holiday price discounts,” the survey’s stewards warn, “the sentiment index would be virtually unchanged.”

  The Obama “New New Deal” will likely be necessary just to keep public works projects clipping along at a normal pace. Out goes Wall Street… in comes Washington.

Over 5,000 public transportation projects around the country will run out of money before their completion, says the American Association of State Highway and Transportation Officials. Why? Ummm… why not? Budget shortfalls, lower tax revenues, frozen credit lines, lack of investor interest in muni bonds, so on and so on.

“Projects not currently under construction,” said Jeffery Caldwell of the Virginia Dept of Transportation, “or significantly far in the development process were either delayed or completely removed from plans for future construction.”

  The year 2008 will also mark the first annual loss for Toyota in 70 years, the company forecast yesterday. Company officials confirmed yesterday that no automaker is totally immune too this crisis, as the Japanese automaker forecast a $1.7 billion loss for the fiscal year ending March 31.

It’s the first genuine loss in Toyota’s history, as the previous one in 1938 occurred barely a year after the company began selling cars. And it’s quite a swift departure from eight consecutive years of record profits… including $28 billion in 2007.

  Oil futures fell again yesterday, this time to $39 a barrel. Like last week, yesterday revealed no signs of economic rebound for the world’s major oil consumers in 2009. And until there is, we expect crude prices to remain suppressed.

  The dollar is still slowly trending up after last week’s tremendous fall. The dollar index goes for 81 today, roughly half a point higher than yesterday. Gold has kept to a pretty narrow range so far this week, too. You can still pick up an ounce at yesterday’s price, around $845.

  Stocks drifted down yesterday during a predictably low volume session. While markets remain open and functional this week, much of Wall Street is either on vacation or running skeleton crews. Thus, the Dow trended down to a 0.7% loss, led by growth-oriented stocks — energy, materials and automakers.

This morning, the market’s on track to rebalance yesterday’s losses. The Dow opened up about 0.7% after GDP came in as expected and with the absence of any truly tragic news.

  The rates on a two-year Treasury note have fallen below 1% for the first time ever. The government auctioned off $38 billion worth of two-year paper yesterday at an astounding 0.92%, an all-time low.

Other government bonds remain at or near record lows. Three-month bills yield just 0.04%. One-years go for 0.4%. Five-year notes come with a mighty 1.4% coupon. And for the privilege of borrowing your money for an entire decade, the government will give you a 2.1% return.

As we wrote The 5 today, the government auctioned off another round of 4-week notes. The yield? Nonexistent… 0.00%.

  “The Fed’s stunning rate cut to a ‘range’ of 0.0-0.25%,” writes our currency trader Bill Jenkins, “marks a new era in Fed policy, and moves us a giant leap toward an official rate of 0%. So here is today’s burning question. How smart do you have to be to borrow money for your business at 0%, and then be able to use that to make money?

“Put another way, let me share a personal story with you. Years ago, I listened to a real estate investor lecturing on the virtues of real property. He was extolling the benefits of the $1 house program, which was run here in Baltimore and in other cities around the country. Essentially, the government would sell you houses for $1, you would fix them up and the profit from the resale would be yours. Most folks are familiar with this ‘giveaway.’ The lecturer’s question to his audience was as follows.

"‘Anybody here smart enough to buy a house for $1 and be able to turn a profit?’ The whole crowd shouted, ‘YES!’ So then he said, ‘Well, why haven’t you done it?’ His point was that most people didn’t lack the opportunity, just the motivation. He was an excellent speaker, and had the crowd eating out of his hand the rest of the session. But he was right. And to this day, I’ve been troubled by his question. And his assumptions…”

[Ed note: Curiously, Bill Bonner, the founder of Agora Inc ., was one of the folks with the motivation to buy two buildings in a, shall we say, ‘interesting’ part of Baltimore just two blocks from the red-light district, and paid only $2 for them. Those buildings were the founding locations of Agora in Baltimore.]

  Shoplifting arrests have risen 10-20% across the country, The New York Times reports today. While stores expect greater theft around the holidays, the NYT reports today that the recession has made 2008 thefts more frequent and widespread than usual.

“More people are desperate economically, retailers are operating with leaner staffs and police forces are cutting back or being told to deprioritize shoplifting calls,” said Paul Jones, a VP at the Retail Industry Leaders Association.

  “It turns out,” writes a reader, “that the union labor costs only 10% of each car, while management and supervisors cost 20%. They actually make the same number of cars they did 15 years ago with less than half the number of manufacturing workers. I guess it’s pile-on-the-working-class time while, as usual, it’s the higher-ups that are not only responsible, but actually cost more as a percentage of each car. The union workers DON’T make THAT much. They average about $28 per hour in wages plus benefits. The bogus $75 per hour number includes all the retiree pensions they didn’t pay in when they should have.

“Everybody talks about the legacy costs. Is it the worker’s fault that the government allowed the automakers and other large companies to not pay in what they owed for pensions when they owed it? Instead, they took that pension money and invested it overseas in an attempt to become importers. They spent it creating jobs in Mexico and China. Now they don’t have it. They DID before they blew it.
 
“The new Japanese plants in the U.S. actually pay as much for labor, on average, as the unionized workers at their American competition. That’s the only reason they’ve avoided becoming unionized. In addition, Japanese companies and other competitors have home governments that pay for health care and pensions for the workers in those countries. Plants are opening in Canada, instead of the U.S., because Canada pays for health care. Of course, they are more competitive.
 
“The idea that the working class is not only responsible for the mess that we’re in, but should shoulder the burden of our dying auto companies is insane. The Republicans didn’t block the auto bailout based on free-market principles. A memo they circulated shows that they only want the auto companies in bankruptcy because they see it as the way to defeat the unions, by forcing concessions and allowing the auto companies to dump their obligations.”

  “The fools at the Big Three,” adds another, “whether they be union workers or management, along with the federal government fail to understand that capitalism and its subliminal affects can’t be outmaneuvered that easily with their bailout using taxpayer’s hard-earned money. I simply refuse to buy a Big Three auto because of their meddling. I’ll let them try to figure out if that is cause or effect.”

The 5: We were on the local NPR station last week discussing the auto “bailout” with MotorWeek’s John Davis. It struck me how fascinating this story is. It plumbs the depths of so much of the American character: credit binging, class war, arrogance, ignorance and hypocrisy. Love it.

“I may be going to hell in a bucket,” wrote John Perry Barlow once, “but at least I’m enjoying the ride.”

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. A curious thing happened here in the Baltimore HQ this morning. We learned you could vote for I.O.U.S.A. on the Critic’s Choice Web site. When we first looked, we were in fourth place among five nominees, with 12% of the vote. After passing around the link to a few of our colleagues, we jumped up to first, with 40% of the vote.

Apparently, not a lot of people have voted yet. Still, if the Critic’s Choice is all that its Web site cracks it up to be… we’ve got a real shot at an Oscar nomination. Wouldn’t that be something?

If you saw the movie, genuinely like it and want to help it, you can vote here too . It’s free, and you don’t even have to register or give your e-mail address.

If you didn’t like the film, we suppose you could always vote for Roman Polanski or those old geezers singing Nirvana.