Credit Crisis Sequel, Global Bank Bailout, Emerging Markets Still a Buy?, Gas Wars and More!

by Addison Wiggin & Ian Mathias

  • Ghosts of the fourth quarter haunt global financials… so begins the second act of the credit saga
  • Even the IMF needs a loan… $150 billion to back up struggling emerging markets
  • Not so fast, says Mayer… emerging markets will remain drivers of global growth
  • Jim Nelson with an industry likely to boom in 2009
  • Wayne Burritt’s short-term trading advice… with S&P 500 price targets
  • Plus, Russia-Ukraine gas dispute not yet over… a reader provides firsthand account

 And… action.

Fourth-quarter earnings season is in full swing. Many investors seem to have forgotten over the past few weeks, but American financials still look… umn, bad. Here’s the quick and dirty:

  Citigroup, once the world’s second largest bank, is getting dismantled. The pieces are going to the highest bidder, whether the buyer can afford it or not. The mega bank announced yesterday that it has jettisoned Smith Barney into the arthritic hands of Morgan Stanley.

Citi will still hold a 49% stake in the brokerage service. And the Citi/Smith Barney/Morgan Stanley venture will create the world’s biggest brokerage firm — comprised of 20,000 brokers and have over $1.7 trillion under management — but for their sake, we hope they conjure up a catchier brand name.

Still, today, Citi is planning further bust-a-moves. A New York Times article claims the company will soon attempt to split itself in two, separating “core” and “noncore” (aka profitable and notprofitable) segments of the business. Robert Rubin, who among other things helped create this “supermarket” model for Citi, resigned last week. CEO Vikram Pandit will likely follow soon.

Why the mess? Despite selling off its assets and getting over $45 billion from the government’s handout program, Citi is still expected to post a $10 billion loss for the fourth quarter… possibly more.

  But the trouble isn’t relegated to Brooks Bros. snoots in New York. HSBC, Europe’s biggest bank, will need to cut its dividend in half and raise $30 billion to stay afloat, analysts at Morgan Stanley predicted today. According to Morgan’s report, profits at HSBC will decline “sharply” this year and not recover until 2011.

HSBC stock fell over 8% in European trading.

  German giant Deutsche Bank braced investors today for a $6.3 billion fourth-quarter loss. The bank said it will likely turn in a loss of $5.1 billion for all of 2008.

  Even the British bank Barclays, which has been on a buying spree of late, will slash another 2,100 jobs. In part due to its acquisition of a bankrupt Lehman Bros., Barclays said today it will fire about 7% of all its bankers and back-office workers.

  The International Monetary Fund (IMF) is even asking for emergency loans, for crissakes.

“The world economic outlook for 2009 will not be good," IMF Managing Director Dominique Strauss-Kahn warned. The IMF is expected to release its global growth projections for 2009 this week, and Kahn suggested yesterday they won’t be pretty. He predicted a “significant” increase in total global financial losses and write-downs — which have already crested $1.4 trillion.

To combat this worsened forecast, Strauss-Kahn is asking countries of the world to “find an extra $150 billion” to cushion the hit on more impoverished and susceptible economies. The IMF wrote checks totaling $41 billion in November, the biggest monthly bailout tab in its history. If you happen to “find” a couple billion in your couch cushions, let Dominique know.

  “Despite a depression unfolding across the globe,” insists Chris Mayer, “emerging economies will still be areas of strength. ‘Emerging economies’ reliance on America is often exaggerated,’ writes The Economist over the weekend. It points to a global share of exports around 20% — a number that hasn’t budged much in a decade. Nonetheless, the longer-term trend is clear: Most of the world’s growth is coming from emerging markets. See this next chart, from The Economist:

“I think this is a trend that will continue. Much of the fast action will happen overseas. Companies without exposure to these economies will simply not grow as fast as those with exposure. All things being equal, I’d rather own a company that makes something Asia needs than one that only caters to North America or Western Europe.

“Also in the emerging market camp’s favor: relatively low debt levels and higher savings rates than the U.S. Not all of them, of course. Some, like Hungary and Estonia and Turkey, have huge debts. But Asia generally shines in this department.”

  Back in I.O.U.S.A., we’ve received even more assurance that taxpayer money is in good hands. Tim Geithner, the incoming Treasury secretary and thus head of the IRS, owed over $43,000 in back taxes.

Evidently, he was under the impression working for the IMF makes contributing to Social Security and Medicare an optional affair. What a mess. These guys aren’t even in office yet.

“As America’s economic situation worsens,” notes our small-cap sleuth Jim Nelson, “payday loan shops are cashing in.”

“Many view payday loan shops as corrupt, greedy modern-day loan sharks. In some instances, that’s simply not the case. These loan companies are providing a needed service. No one likes to hear of families being turned out of their houses because of missed mortgage payments. Cash advance businesses offer a solution to these millions of families.

“Instead of eviction, one solution for a working family is to take out a short-term seven- or 14-day payday loan. Obviously, this is the last option. But faced with foreclosure, it’s becoming a more frequently used solution for many who never thought they’d be in that position.

“Many households are taking out payday loans to fund unexpected expenses, too. With more families living paycheck to paycheck than ever before, even paying for the basics is becoming difficult.”

Jim’s found a small company that provides these services, “with a guaranteed flood of business around the corner.” He’s talking about tax refund advances… what should be a frighteningly popular option this year. If you’d like to learn more, check out PSF.

  In a similar fold, have you seen this commercial yet?

Hyundai has it bad, but the American consumer has it worse… so the ad execs for the South Korean automaker came up with this clever scheme: Buy a Hyundai today, and if you “lose your income” over the next year, you can bring it back. They call it the “Assurance Program.”

Deflation… bring it on.

  In the stock market, major indexes snoozed all day yesterday. The old bats are resting up before the bulk of fourth-quarter earnings announcements hit the fan. The Dow lost a little bit, 0.3%. The S&P 500 finished flat, and the Nasdaq edged up 0.5%. Whatever.

  “The U.S. stock market continues to meander in sideways trading action,” notes Wayne Burritt, with some bigger-picture perspective.

“As you can see from this daily chart of the S&P 500 — a good surrogate for the broader U.S. stock market — price action over the last week has unfolded as I anticipated : The market is stuck in a near-term trading range.

“In fact, after hitting an upside range limit of 944 last week, the S&P got busy retreating to the downside. It’s now poised to retest intermediate lows in the 857 area. If that breaks, a move to the lower bound of its intermediate term range — 741 on the S&P — is certainly in the cards.

Now, while that’s surely not the uptrend we’re all looking for, don’t forget that the market has shaped this trading range in spite of simply terrible fundamental news. And that shows uncommonly strong market character, a factor we didn’t see much of last year.

“So where do we go from here? Like a star athlete that’s hit a slump, the stock market is trying its best to wage war and move to the upside. Until we get some positive fundamental data points — especially on the housing front — it’s going to have a tough time breaking out to the upside. And that means that sideways chop will likely hang around for a while.”

  This morning, the Dow opened down 150 points, largely because of this:

  Retail sales plunged 2.7% from November to December, the Commerce Dept. said today. Factor out auto sales, and it’s a 3.1% fall — the biggest drop in 17 years history, and twice as bad as the Street anticipated.

Year over year retail fell 9.8% — another record plunge.

For all of 2008, retail sales fell 0.1%, the first full year decline since the Commerce Dept. started keeping track in ’92. Retail sales have fallen six months in a row, the longest losing streak on the books.

  Yet that little green slip of paper we call a dollar continues to defy gravity. Despite all the gloom and doom sputtering from every corner of the financial press, the dollar index is up another half a point this morning, to 84.5.

Yesterday, we read a review of our book The Demise of the Dollar on the sycophantic syndication site Seeking Alpha, in which the reviewer called comments like the above “anti-dollar.” How, we wanted to ask, can you be against a currency? He then accused us of “hating” the Federal Reserve. How can you hate a bank? Some people, we’ve learned after 16 years in this business, are just idiots.

  Gold, which according to the above reviewer we “love,” remains suppressed. The spot price has been stuck at $820 over the last 36 hours.

  But oil is bucking the trend. Even though the dollar is still rising, crude has inched back up to $37 a barrel. You can thank OPEC… the cartel is saber rattling again today, and for some reason, the market has decided to listen. We’ve heard a couple warnings from Saudi Arabia lately, all suggesting the country is ready and willing to cut production more than OPEC decided at its last meeting, in December. Leaders from Saudi and Venezuela are reiterating the same today.
Also attributing to the rising cost of energy, it looks like the Russian gas conflict with Ukraine might not truly be over. The two nations signed a deal and made nice in front of the cameras, but the spigots are still running dry. Several regions of the EU are still without Russian gas, now for the seventh day in a row.
Russia says the gas is flowing but the Ukraine won’t open its network of pipelines. The Ukraine says there is no gas to be distributed… grab a beer, kick back and watch from a distance… this one isn’t over yet.
But maybe not that far a distance? Russian President Medvedev suggested yesterday that Ukraine was “dancing” to Washington’s music. The plot thickens…

  “I have been doing business,” writes a reader, “in Eastern Europe since 1991 — sales of oil and gas equipment, projects, etc. Some of my customers are intimately knowledgeable (with the carnal type of knowledge) of the purchase of Russian/Ukrainian gas.
“Here in our Western system, when the gas product is passed from one company to the next, we use a protocol known as a ‘custody transfer.’ Gas is measured, often by both sides, using specially approved and calibrated flow measurement devices. In addition, the gas is also analyzed with a gas chromatograph to establish the quality of the gas. Here, we are more interested in buying Btu (or gigajoules) than simply a volume of gas. Producers are paid for what they produce and discounted based on the quality of the gas they sell. High-quality gas commands a higher price that low-quality gas…
“In the Russian ‘system’ — the seller tells you how much you bought, and, further, how much you will pay for the gas that (supposedly) arrives into your country.
“So imagine the scenario: Russia sells gas to Ukraine — Ukraine transports the gas to Western Europe and marks up the product prior to sales. The gas routing passes through several former Warsaw Pact countries or is fed via feeder lines into nearby countries — Romania, Hungary, Bulgaria, etc.

“Imagine further that gas sold to these feeder-line countries have absolutely no say on custody transfer or absolute knowledge of the volume of gas that they are actually receiving. Ukraine will not put custody transfer flow measurement in the cross-border locations. Nor will it allow customer countries to measure the incoming gas and honor the amounts. ‘You pay for what we say you get’ is the approach. ‘And if you don’t like it, get your gas elsewhere!”

“The only likely reason for this insistence on the status quo is the ‘shrinkage’ that is actually occurring inside Ukraine. Who knows what corrupt officials are making a profit off the ‘stolen gas’ — that Romania et al. are paying for?

“So it may be a mistake to accuse Mr. Putin of being the cause of the problem . X amount of gas crosses the Ukrainian border on the Russian side and X minus Y (in-country shrinkage) crosses the border on the other side…

“Of course, this shouldn’t matter to Mr. Putin — if the gas is actually bought and paid for by the Ukrainians prior to being marked up and sold to the European customers. But it certainly matters to the countries that are being held hostage — paying world prices for gas while only getting a partial delivery on their investment… and not being able to do anything about it.”

The 5: Thanks for the insight.

Addison Wiggin
The 5 Min. Forecast

P.S. Heh…

I.O.U.S.A. and its creators are “anti-investment, anti-Social Security, anti-Medicare…" write a bunch of clueless nitwits from They go on to suggest that we espouse a "post-partisan, non-ideological zeitgeist,” ironically on a news site called Liberal Oasis. We’re not even sure what they mean, but it kind of sounds like a compliment, although we suspect otherwise. 

The group is angry at CNN for broadcasting the film twice this weekend, and is demanding equal airtime to broadcast “public investment strategies that will put our economy back on a sound footing.”  

Since they were so thoughtful, we thought maybe you’d like to contact them too and share a few words, here. But be nice… if attacking our little film is all these guys can come up with, they must be hurting.


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