by Addison Wiggin & Ian Mathias
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How to profit in 2009: Think like a Fed governor
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A “mere” 25 banks failed in 2008… proof that the FDIC expects many more next year
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Retail on the brink… preliminary reports suggest holiday consumption even lower than anticipated
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So who will thrive in 2009? An unsavory list of stocks prime to benefit from a lousy economy
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Middle East moving markets… why news from Kuwait and Gaza is affecting your portfolio today
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Byron King on the $200 billion consumer bailout Congress never passed
“The key to approaching 2009,” writes Dan Amoss today, kicking off our week of New Year forecasts, “is to view everything form the perspective of the Treasury and the Fed, as distasteful as that may be. Everyone knows that the real economy stinks and we have too much debt. I doubt everyone realizes just how extreme Treasury/Fed will be in using the deficit and the paper money system to stop the Great Depression 2 scenario.
“I expect the inflationary bailout initiatives to start attacking deflationary forces from the ‘flank,’ to use a military term. The banking system destabilized because its collateral — houses and mortgage backed securities — collapsed in 2008. While the authorities may not be able to reinflate old bubbles, I’m betting they can employ cheap Treasury financing to cushion the decline. This involves refinancing homeowners out of toxic mortgages into conventional mortgages. They’ll also find some way to deal with the problem of negative home equity, even if it involves highly inflationary tactics like Treasury assuming losses from principal reductions via Fannie and Freddie, and if foreigners balk at absorbing new Treasuries, the Fed will monetize them. If so, we could see a fast track to the gold and oil bubbles that I predicted last year.
“In markets, it’s far too easy and popular to be bearish on everything but Treasury bonds, so odds favor a sharp rally in early 2009 — a rally in the S&P 500, led by stocks with the most sustainable fundamentals, including energy, commodities and infrastructure. Stocks with weak fundamentals may participate, but quickly roll over as economic reality sets in. Many will go to $0 in bankruptcy.”
The Fed’s latest bailout target? GMAC, the financial arm of GM. Bernanke and company granted GMAC the mythical status of “bank holding company” late last week. Like Goldman Sachs and American Express, GMAC is set to join the group of about-to-fail financials given last minute access to the Fed’s discount window, and potentially TARP funding.
That’s great news if you’re in GM’s corner. GMAC handled roughly 35% of GM’s retail loans in 2007. Thus, a GMAC failure would be, umm, less than ideal for the doomed automaker. Shares of GM popped 13% Friday on the news.
But GMAC isn’t an official bank holding company yet. Part of the Fed’s deal stipulated that GMAC successfully conduct a complicated debt-for-equity exchange by midnight Friday. Long story short, that deadline came and went, and GMAC spokespeople won’t say if they pulled it off.
Twenty-five banks went under in 2008. We’re surprised to report the FDIC had a quiet Christmas weekend, without a single last-minute financial failure. And given their propensity for weekend takeovers, we’ll guess that there will be no more bank closures in 2008.
Granted, 25 is the most since the S&L crisis that plagued the ’80s. We set some records in 2008 too, like Washington Mutual, the biggest bank failure ever. But still, just 25 banks… doesn’t that feel a little too easy?
The FDIC thinks so — 171 institutions remain on their “problem list.” They’ve already doubled the budget for 2009, to $2.2 billion. According to American Banker, most of that money is headed to the FDIC’s “resolution and receiverships” division, which plans on hiring another 800 bean counters to help deal with rising bank failures.
We expect a healthy share of retail failures in 2009 too. The latest shred of evidence: From Dec. 1 to Christmas Eve, total retail sales (excluding autos) fell 8% year over year. That’s even worse than November’s 5.5% plunge.
We admit, these MasterCard stats are skewed. If you factor out gasoline, retail sales are down “just” 2.5% in November and 4% in all but the last week of December. But even without gasoline sales… once the final tallies come in, we suspect this Xmas retail activity will be declared the worst on record.
And if you thought wealthy shoppers and high-end retailers were immune to this holiday funk, you were wrong. Check out this interesting breakdown from today’s WSJ:
No surprise, the National Retail Federation is the latest group to beg for a government bailout. The country’s laregest retail trade oganzation petitioned Barack Obama last week to add a series of tax-exempt shopping days to his “New New Deal” stimulus package. The NRF wants three 10-day periods of tax-free shopping in 2009, which the group estimates would save consumers up to $20 billion.
As evidenced by our coverage above, consumers failed to open their wallets when retailers offered huge, desperate holiday discounts… why would they rush into stores for a 6% tax break?
So who will thrive in this retail apocolypse? If you insist on consumer names, the people at breakingviews.com might be on the right track. Behold its “Poor Getting Poorer Index.” As the site describes it, “a basket of 22 equal-weighted stocks that includes the retailers, white-label manufacturers, repossession agencies, dollar stores, pawnshops and other public companies poised to capitalize on rising poverty.”
Over the last 12 months, this motley crew index is up 9%. Considering the S&P 500’s 40% fall over the same period… not too shabby.
Stocks muddled through last week, ending down just a bit. Low volume and more weak economic news pushed the Dow down 0.7% for the week. The S&P 500 fared worse, down 1.7%, and the tech-heavy Nasdaq kept with its volatile ways, falling 2.1%.
This morning, it’s looking about the same. Stocks are slowly drifting down, led mostly by this bit of news:
The government of Kuwait backed out of a $17 billion deal with Dow Chemical today. The Kuwaiti Cabinet said they feared the worldwide slowdown could bring “unpredictable consequences to any global firm” and that the deal was just too risky. Now that oil’s under $40 a barrel, we suspect they’ll be spending petrodollars a bit more thoughtfully.
The two groups were planning to establish the world’s largest maker of polyurethane.
The price of oil soared 8% this morning after Israel’s somewhat-surprise attack in Gaza over the weekend. While Israel and Hamas renew their battle over the holy land, oil traders are a bit worried about Middle Eastern supply chains. Oil was due for a day up anyway… this morning’s rally snapped a nine-session losing streak.
Thus, light sweet crude popped to just over $40 a barrel.
Gas prices, on the other hand, have found a new credit crisis low. The national average fell for its 10th consecutive day this morning, to $1.61. You’d have to travel back to February 2004 to find gas that cheap… amazing. Prices are down over 60% from July’s record high of $4.11.
“The U.S. Energy Dept. statistics state,” writes Byron King, “that the nation burns about 9.4 million barrels of gasoline per day. That’s about 395 million gallons (at 42 gallons in a barrel). Let’s say a gallon of gasoline is $2.75 cheaper than it was back in July, when I was paying $4.40 per gallon. Take 395 million gallons per day times $2.75 savings per gallon. That’s almost $1.1 billion PER DAY that U.S. consumers are saving at the gasoline pumps. That’s over $32 billion per month of savings, or about $200 billion over six months.
“$200 billion? As the saying goes, ‘Show me the money.’ In a sense, the world oil industry has given the American people a huge tax cut. Or call it a ‘bailout bill’ for consumers, except that Congress did not borrow the money to fund it. And that $200 billion is not just money coming out of the hides of Big Oil and those betes noires like Exxon Mobil or Chevron. No, this is a $200 billion cheap-oil tax cut paid for by the sheiks of Araby, Mr. Putin of Russia, Generalissimo Chavez of Venezuela and Mr. I’m-a-Dinner-Jacket of Iran. Could not happen to a nicer bunch, eh?
“So American consumers are receiving a benefit that could be worth, say, $200 billion over six months. But there’s no addition to the national debt, and it’s being paid for by people we don’t like very much. Win-win, right? That’s the best kind of tax cut.”
Of course, cheap oil and gas have downsides too. For Byron’s full account, read your latest Outstanding Investments alert.
The violence in Gaza gave traders another reason to sell the dollar today. As we write, the dollar index is down a full point, barely clinging on to 80.
The Russian ruble remains the currency headline of late. Last month, the Russian government snipped the trading band between the ruble and a basket of other currencies… considering the crashed prices of oil and gas, the ruble deserves to be taken down a few notches.
The Russian currency has since plummeted to a four-year low versus the dollar and an all-time low compared to the euro. This morning, it’s down another 1.5%
The sum of today’s entire issue equals a nice day for gold. For all that we’ve mentioned above, the spot price is up $30 from Friday’s close, to $880 an ounce.
“I think 2009 will be a wall-to-wall year of pain and languor,” writes a reader offering his New Year forecast. “But I can’t imagine how the bottomless bailouts and desperate war against deflation don’t undo the dollar to even greater levels. Gold will come back more than it has by the fall, if not a little earlier, when the Obama “honeymoon of hope” starts to wane.
“It will take longer for oil to rebound, because that needs the economy to look like it’s warming up again. But the Peak il problem is still out there unresolved. And even though this would be the right time to invest in a disciplined way in energy alternatives (when there’s some breathing room in the energy prices), we will face that issue again, and even more bluntly than before. Buy oil now while it’s cheap.
“Likewise, I can’t help but think that as much as the “E” in P/E is going to suffer over 2009, those companies that have the cash and business advantages will rise once again. Buying now might be buying before a further drop. But prices on a lot of stocks are already good. Catching a lot of future upside would be worth, probably, even a little more of the more immediate downside. If you’re buying with your eyes open.”
The 5: Sounds about right.
“So your parent company’s home office,” writes our last reader, referring to last Tuesday’s issue , “is two blocks out from the red-light district… Am I the only one saying, ‘Now that explains a lot’?”
The 5: Heh. Well, it was our first headquarters here in “Charm City.” We’ve since moved to a slightly more comfortable locale. And that same red-light district is about one block from the mayor’s office, most of the city government and courts and police HQ. That should “explain a lot” about Baltimore too.
Thanks for reading,
Ian Mathias
The 5 Min. Forecast
P.S. Don’t forget, today is your last chance to save 50% on our shiny new currency letter, Master FX Options Trader. After midnight tonight, we’ll jack up the price quite a bit. So if you’re interested, now’s the time… details here.