by Addison Wiggin & Ian Mathias
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Mortgage rates plunge to record lows… but are they at the bottom?
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Overlooked details from Friday’s jobs news… troubling signs from retail and energy sectors
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Rob Parenteau charts a different way to view the S&P… could the worst be over?
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Russia/Ukraine gas conflict ends… who “won” the latest resource skirmish
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Bill Gross’ sad-but-true guide to 2009… how to invest amid rife market manipulation
If you’ve got money, credit and patience, today is your cheapest opportunity buy or refinance a house in at least 38 years.
The 30-year fixed-rate mortgage carries a rate of 5.01% this morning, the lowest rate of its kind since at least 1971, when Freddie Mac started keeping track. Since the peak of the credit crisis in late October, the 30-year mortgage has plunged almost 1½ percentage points, even past its 5.8% average this time last year.
Yet mortgage applications are only at a six-year high, according to the American Bankers Association. Rates will probably get even lower, consumers suspect, at least until there are some signs of home price stability here in I.O.U.S.A. We agree. The government has already set a goal of 4.5%, and with news like you’ll read below, the market won’t put up a fight.
Friday’s jobs report was even worse than it seemed. For starters, the retail sector shed 66,600 jobs in December — what should have been the best month of the year. Instead, retailers posted their worst December sales growth since 1969, and cut jobs for the 13th month in a row. If they couldn’t profit during Christmas… ummm… the first quarter of 2009 could be horrible.
Also, we note the world’s top two oil service companies — Schlumberger and Haliburton — have announced their first sizable job cuts of the credit crisis.
“That’s bad,” Byron King somberly explains.
“We already have an aging work force in the energy industry. Over 50% of the work force is eligible to retire within the next 10 years. So it’s imperative that the industry hire and train new people. But SLB and HAL are doing the opposite. If you get rid of the oldsters (they’re old & expensive), you lose the corporate knowledge that you need for training. If you lay off the ‘last hired’ (they’re young and don’t know squat), then you don’t have anyone left to train. Something’s gotta give here…
“It’s not like Schlumberger and Halliburton don’t know this. So would they be laying off people if their forecasts were sunny for the coming months or the next year or two? No. If things looked like they were picking up, they’d keep the people so they have enough work force to do the work. They’re laying off because they see a significant period of slow business. Which if you’re SLB or HAL, means less well drilling. And that’s bad for U.S. energy output. Fewer wells mean, eventually, less output, which means scarcity and higher prices.”
And which companies will profit from such an environment? Look no further than Byron’s Energy & Scarcity Investor.
Elsewhere in the oil patch, Russia’s gas dispute with the Ukraine is over for now. After almost a week without Russia’s precious fuel, the EU essentially forced Ukraine to make a deal. The exact terms of the agreement are yet to be revealed — they may never be — but we feel safe jumping to this conclusion: The whole ordeal began when Russia accused Ukraine of stealing gas and demanded higher prices, and we suspect the Ukraine yielded on at least one of these matters.
“Energy, too, is its own kind of capital,” Dan Denning notes. “Vladimir Putin is reminding everyone of that again. Russia supplies Europe with 25% of its natural gas, and 80% of that gets to Europe via Ukrainian pipelines. The Russians say the gas is being siphoned off illegally and then sold at a higher price. Maybe it is. Maybe it isn’t. Who knows?
“The real issue is control of the energy resource and the network for transporting it. One is no good without the other. Both are critical, and happened to be owned by competing interests. And if you’re at the tail end of a long energy logistics network (like, say, the UK), you’ve got troubles.”
Yet for all the troubles in this world, oil is markedly cheaper today. From around $50 two weeks ago, it’s back to just $38 a barrel this morning.
The Dow ended down 1.6% Friday after another dismal jobs report. For the week, most indexes fell 4-5%. The Nasdaq managed the “best” week of the index bunch, down 3.8%
By one metric, the future shouldn’t be TOO terrible for U.S. equities. Check out this chart, sent over by Rob Parenteau of The Richebacher Letter:
“The contraction of the total value of the equity market relative to GDP,” notes Rob, “has reversed nearly the entire premium introduced during the New Economy bubble years.
“If there is a reversion-to-the-mean process under way with respect to the equity market capitalization-to-GDP ratio, the most violent part of the move must be behind us. Given the severe recession developing before our eyes, however, we are in no rush to be buried beneath a landslide of earnings shortfalls, employment reductions and bankruptcy announcements.
“A fiscal push in early 2009 may help stabilize or improve the near-term earnings growth expectations held by professional equity investors, which are already much lower than those offered by brokerage house equity analysts. But the larger question remains: If financialization is not going to be the growth driver for the U.S. economy, what will take its place? If credit booms and busts are going to be restrained by a stripped-down financial system, especially one that is heavily regulated, what will drive earnings growth?”
In 2009, the savvy investor will “confront the reality that is, not the one that should have been,” opines Bill Gross in his monthly investment outlook.
Gross says the key to profits this year is to “shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond. Anticipate, then buy what they buy, only do it first: agency-backed mortgages, bank preferred stocks and senior bank debt; Aaa asset-backed securities such as credit card, student loan and auto receivables.
"These have been well-advertised PIMCO strategies over the past six months, but there are others in clear sight. An Obama administration will quickly be confronted by the need to provide those hundreds of billions of dollars to states and large municipalities. Their requests total nearly a trillion dollars and to think California or NYC would be allowed to fail is, well — unthinkable. Municipal bonds then, selling at historically high ratios relative to U.S. Treasuries, offer attractive price appreciation potential, or at the very least a defensiveness with high carry that a 2½% 10-year Treasury cannot…
“As an additional strategy, global bond investors should recognize the value in high-quality investment-grade corporate bonds in many markets. Yields of 6%-plus for intermediate maturities are still common and readily available.”
Dollar buyers seem unfazed by the U.S.’ precarious future. The dollar index rallied steadily through the weekend, from Friday’s low of 81.6 to 83 as we write. The media pundits tell us this morning that the dollar is stronger because Friday’s jobs report wasn’t as wretched as many feared.
So gold is being punished for the dollar’s latest strength. The spot price took a dive at the opening of the New York market today, falling to $830. That’s about $35 short of Friday’s high.
In our mailbox today: A staggering hodgepodge of some truly bad ideas.
“If there must be a refund and/or stimulus check given to the American people,” writes a reader, “then it shouldn’t be for some lousy $500. What is that going to accomplish? If you really want to get things up and running, then give every taxpaying household and those on permanent disability a check for $150,000. Most people would either pay down or pay off their mortgages and other loans, which then, in turn, would help the banks and lending institutions. The money would get back in the system where it needs to be. And if it doesn’t work? Well, at least we had fun trying to jump-start America. Kind of like a last call on the Titanic, eh?”
“Instead of giving that tax rebate,” writes another, “to be used only for American-made products, as your reader mentioned, due to the fact it doesn’t help out most retailers, give every taxpayer $600 in the form of a gift card just like sold at most retail stores these days. Let’s call it a ‘Stimulus Card.’
“The government would issue through a TARP recipient bank (they owe the taxpayers huge already). The card would have no cash value, so can be used only for purchases or deposits on products (food, restaurants, down payment on a car, toys, clothes, ANYTHING — but due to the nature of gift cards, they can’t be banked, so they wouldn’t be used to pay existing bills, just by the nature of the card (most people, including myself, used the last $600 government stimulus check to pay bills, not spend on new items).
“Put an expiration date of three-six months max on them… to be sure people spend them timely. 100% bang for the buck. To prevent mail theft, the card has to be activated from the phone number used on your tax return or by calling and giving information only Uncle Sam knows. If lost or stolen, just call and cancel and government can reissue a new one, just like stores do already. The systems are in place. Now that wasn’t so tough was it?
“Here’s a way,” suggests our last, “to come to grips realistically with the housing foreclosure scenario that is getting worse nationally: Let the federal government put every house that has a mortgage in line for a federal reserve mortgage. The present owner signs over his house to the FRM agency and is relieved of paying off the mortgage, but has the lifetime right to occupy the property as his principal residence, provided he pays all property taxes and maintenance costs to meet neighborhood standards. The homeowner has given up the right to sell or rent or gift or will the property; the FRMA owns the property. The original mortgage lender takes the loss for tax purposes.
“Of course, many tweaks to the above would need to be in order. But the ultimate justice would be that the mortgage lenders have to live up to the market risks, just as the homeowners unable to pay the mortgage loan will have to forego whatever they paid into the date of federal takeover. All such property becomes publicly owned, a national asset against the national debt. My guess is that this kind of bailout would be acceptable to the American public.”
The 5: $150,000 in cash, a $600 gift card and a “free” house. What could possibly go wrong?
Thanks for reading,
Ian Mathias
The 5 Min. Forecast
P.S. If you haven’t checked out our latest free “Webinar,” you’re missing out. One of our options analysts, Wayne Burritt, describes the framework of his “income on demand” strategy. If you’re looking to recoup losses from 2008 and build positions in your favorite 2009 names, this is the way to do it. Watch his free presentation, here.