How to Spot the Bottom… Then What to Buy, Home Prices Crash, Has China Peaked? And More!

  • Home prices fall… again. The latest record-setting swan dives
  • Chris Mayer on how to spot the bottom… and what to buy when it comes
  • World’s biggest companies hold shockingly little cash… global market in the hands of Buffett, China
  • But can China capitalize? Byron King on how China has “reached its pinnacle”
  • Russian professor predicts end of U.S. by 2010… will Houston be taking orders from Mexico City?
  • Plus, your prophecies for 2009… and The 5’s editors issue a forecasting challenge

  Like a crackhead kicking a trash can reverberates through your hangover headache, the folks from the S&P/Case-Shiller Home Price Index updated their data this morning:

“Home prices are back to their March, 2004 levels,” reports David Blitzer, one of the index’s stewards. “Both composite indices and 14 of the 20 metro areas are reporting new record rates of decline. As of October 2008, the 10-City Composite is down 25.0% from its mid-2006 peak, and the 20-City Composite is down 23.4%.”

Phoenix, Las Vegas, San Francisco, Miami and LA remain the worst housing markets in the country, in that order. Dallas and Charlotte are the “bright” spots, having fallen only 3-4% annually.

The entire financial world had placed a wild bet that house prices in the U.S. would go up indefinitely. The year 2008 will go down in history as the year that proved them wrong… and then all hell would break loose.

  The reverberations will continue to reach far and wide in 2009. As a sign of things to come, the first post-Christmas retail bankruptcy occurred Monday. “Parent Co.,” an ironically named retailer of children’s products, filed Chapter 11 yesterday. Our bold, out-on-a-limb forecast for the day: They will not be the last.

Parent Co. joins the ranks of well-known bankrupt retailers like Circuit City, Boscov’s, Sharper Image, Mervyn’s, Linens ’n Things, Whitehall Jewellers and Steve & Barry’s

  “If some miracle doesn’t happen,” notes Bill Bonner, “this will go down as the worst year in Wall Street history. Worse than ’29? A lot worse.

“1929 had been a big winner for investors before the crash began in the last quarter. When the champagne was finally poured on New Year’s Eve, investors were less than 10% below where they began the year.

“This year has been all bad. Investors are looking at a loss over 40%. The typical investor in the stock market has probably lost half his money.”

  U.S. indexes showed no indication of a year-end miracle yesterday. The Dow inched down steadily as the day progressed, fueled mostly by Middle Eastern news — Kuwait’s broken deal with Dow Chemical and the war in Gaza.

Without any compelling reasons to buy, most major indexes drifted down about 0.3%.

  History suggests sluggish and lame markets can — and do — last for much longer than most investors believe is possible. Exhibit A: The Japanese stock market closed out 2008 this morning — its worst year ever — long after its equity and real estate bubbles popped in the early ’90s.

Despite the Nikkei 225’s 1.3% rise today, the index fell 42.1% for the year. The closest comparison would be the 39% annual dive in 1990, after the great Japanese stock bubble popped so magnificently. Still, even compared to that incredible fallout, 2008 takes the cake.

The Nikkei closed today at 8.859. Another 10% or so, and the Japanese market will be flirting with a 25-year low. How does one say “ouch” in Japanese? Itai!

  Rather than commit hari-kari… let’s do something unusual and try to think, umn, positive… it is the holidays, after all. How will we know when the bear market is bottoming? And what should we buy when it does?

“Normalized earnings for the S&P 500 could be $60-70,” Agora Financial’s managing editor, Chris Mayer, opined this morning, taking a shot at an answer.

In layman’s terms, that’s a possible low of 600-700 for the S&P 500… 30% lower than it is today.

“The S&P at 600 is entirely possible,” Mayer continues. “So we could have more room to go. But it doesn’t have to go there. Signals to watch — when earnings stop falling quarter to quarter. I actually think we’ll see a big rally early 2009 a la 1930, when the Dow was up 48% from its bottom by April. Big rally coming, and that will be your last chance to dump your weaker holdings.

“If you are going to invest in stocks in 2009,” Mr. Mayer suggests, “stick with hard assets, management teams with proven track records, strong balance sheets and businesses with good disclosures (i.e., no black boxes or funny business). Ag-related stocks will have a good year, I think — fertilizer stocks, in particular. Oil stocks will come back, too, particularly oil field service stocks.

“Natural gas stocks will do even better, particularly the low-cost producers.

“I think now is a good time to pick up India’s blue chips, if you can sit with them for a while. I like emerging markets still. This is a pause, and not the end, of the emerging market growth story. It’s much bigger than most people think. India has less exposure to exports than China, has a lot of savings, little debt, a very young population (half under the age of 25) and some leading companies dirt-cheap…

“Lots of problems, to be sure, as all emerging markets do, but India will come back.”

  Of the 100 biggest companies in the world by market value, only 29 are in a net cash position — more liquid assets than debt.

Here are the top four, as listed by the Financial Times:

Berkshire Hathaway — $106 billion in net cash
Bank of China — $101 billion
Industrial and Commercial Bank of China — $89 billion
China Construction Bank — $82 billion

If this isn’t a sign of the times, we don’t know what is.

  But “the Chinese growth miracle has reached its pinnacle,” opines our Byron King, contrary to the evidence above.

“During the run-up to the Olympics, the Chinese government closed tens of thousands of factories in and around Beijing, just to control the air emissions and help to create blue skies for the Olympiad. It seemed to work as pageantry. By the time the marathon runners were trotting past the Great Hall of the People, Beijing looked like a picture postcard in its splendor.
“But how many of those closed factories have not yet reopened? All across China, we now learn, several hundred thousand factories are closed, with numerous millions now unemployed. All across the Middle Kingdom, owners and investors are closing factories faster than they are opening new ones. The export-led model of development has hit the rocks. Exports are down, incomes are falling, labor strife is up. This is bad for social harmony.
“It will doubtless get worse in 2009. Yet the larger truth is that China’s problem is part of a global phenomenon. From New York to London to Dubai to Shanghai, trillions of dollars of global capital have vanished — wrecked by deleveraging and associated market losses. The global banking system is in ruins. Trust is ofttimes gone, and scarce in the best of cases. Capital flows are being interrupted by new Chinese Walls the likes of which not even ancient emperors could have dreamed.

“With the export model broken, the mercantilist money machine is also perturbed. This will impact — negatively — Chinese willingness to continue to buy U.S. Treasuries. Which will impact — negatively — the U.S. ability to fund its chronic national deficits and long-term debts.”

  The other hallmark drama for the year continues unabated. The U.S. Treasury piled us all deeper in debt last night when it threw GMAC a $6 billion life preserver.

Turns out the auto loaner couldn’t wait for its “bank holding company” upgrade from the Fed. Thus, Paulson and company were “forced” to pull another $6 billion from the TARP to keep GM’s financial arm afloat. $5 billion will be loaned straight to GMAC, and the government will get an 8% coupon. The other billion goes to GM, which has been ordered to increase its 49% stake in GMAC.
The results of GMAC’s huge debt-to-equity exchange Friday are still a mystery. Judging by the Treasury’s sudden injection, it didn’t go so well.

  Unfortunately, the initial phase of Paulson’s bailout plan, the clunkily acronymed TARP, is already out of money. The $6 billion going to GMAC is actually money that’s already been allocated toward the bank recapitalization project.

If Congress does not approve the second half of the TARP bailout, the Treasury will bounce some pretty large checks.

  Following events from a safe distance, a former Russian KGB analyst says the outlook for Americans is dire. And predicts the breakup of the United States by mid-2010.

"There’s a 55-45% chance right now that disintegration will occur," Igor Panarin told The Wall Street Journal this morning. "One could rejoice in that process. But if we’re talking reasonably, it’s not the best scenario — for Russia."

“Mr. Panarin posits,” according to the WSJ, “that mass immigration, economic decline and moral degradation will trigger a civil war next fall and the collapse of the dollar. Around the end of June 2010, or early July, he says, the U.S. will break into six pieces — with Alaska reverting to Russian control.”

But the professor is not necessarily happy about it. “Though Russia would become more powerful on the global stage,” he says, “its economy would suffer because it currently depends heavily on the dollar and on trade with the U.S.”

Hmmn… we’re trying to imagine some cowboy from Bakersfield submitting to Chinese rule. Or a Texan taking his orders from Mexico City. Heh.

  After briefly falling below 80 yesterday, the dollar index has stabilized around 80.6 today.  
The euro and pound are on the verge of parity for the first time ever. The pound, slammed by a large U.K. recession, housing crisis and lower-than-normal rates, has weakened to 98 pence per euro. Year to date, it’s down 25% versus the multination currency.

The approaching parity is reflected in the dollar exchange, as well. A euro today goes for $1.40… the pound a “mere” $1.45.

  Commodity traders are taking profits today after Monday’s rally. Oil jumped as high as $42 a barrel, before retreating to $38.
Ditto with gold. It rose as high as $885 yesterday, but goes for just above $870 as we write.

 “I believe oil and gold are the places to start getting well positioned in for 2009,” writes a reader, “if one hasn’t already. Oil especially is being primed for a V-shaped recovery. If investors are paying attention, they understand that the unrealistically low price of oil is just that — unrealistic.

“Many oil and gas exploration and production projects have been shelved due to the financial crisis and falling price. Some major oil exporters have exhausted their reserves, Mexico being one. Oil exploration and production require oil prices to be over $100 to be profitable. OPEC drastically cut production levels, due to falling demand. Problems of shortages and spiking oil prices are looming.

“Gold is also primed for a spike as the bailouts and stimulus package get under way. Great way to make up for the losses in 2008 if you’re ready for the ravages that will come along with this!”

  “I believe 2009,” writes a reader with his own year-end forecast, “is going to be the beginning of a ‘rich get richer’ story that will reach levels never previously even imagined. This is how I see it playing out. There are many solid companies that have more than sufficient cash to get through the upcoming tough times, but are trading at huge discounts to their historic value. At the moment, the real estate- and energy-related sectors seem to have more of these companies than some other industries, but they exist everywhere. As is often the case, Mr. Market has overreacted and taken down the good with the bad.

“I predict that once there is even a hint that the economy is starting to turn around, there will be a flood of leveraged buyouts whereby those with access to cash will be buying the best companies for a fraction of even their future one-three-year value. And the banks will rush in to provide the financing with the cash they got from the Fed and currently have sitting on the sidelines.

“Bottom line is that Joe the Plumber will find out about a year from now that the only companies still in his portfolio are the companies that the buyout companies did not want. For buyout firms like KKR and Carlyle, this is going to better than robbing a bank, since it is legal. I suggest you provide some guidance as to how to share in this upcoming M&A activity.

“Even a master list of companies that are beaten down but still are earning good money and have plenty of cash would be a start.”

The 5: We’re on it.


Addison Wiggin
The 5 Min. Forecast

P.S. While we’re at it, we’d like to propose a little contest. Some background: Yesterday, we were in LA recording some last-minute commentary for the bonus features being released with the PBS Home Video edition of the I.O.U.S.A. DVD. In preparation, we had a short conversation with Bob Bixby, executive director of the Concord Coalition and one of the protagonists of the film. He suggested that the projection of a $1 trillion deficit for the federal government in 2009 is extremely “conservative.”

Patrick Creadon, the film’s director, said he thought it would come in at $1.3 trillion. I reminded him that if you include all the bailout funds, stimulus packages and structural imbalances of the federal budget, the feds have already spent over $2 trillion in FY 2008. We were going to arm-wrestle… but then thought of a better idea: Let’s hold a contest among readers of The 5.

Who can guess the deficit in 2009? We’ll have to pick a date for final entries… cook up some ground rules… and establish a nice prize for giving it a shot. But if we’re going to witness the financial destruction of the great American republic, we might as well have some fun doing it. You game?

P.P.S. Don’t forget, you’ve got less than three days to take advantage of our deepest discount of the year. Learn about this massive savings, here.


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