Ireland’s Issues, Obama Outlaws Fiscal Responsibility, Stop Losses, a Tough Crowd and More!

by Addison Wiggin & Ian Mathias

  • Is Ireland going the way of Iceland? A St. Patty’s Day look at the Emerald Isle
  • Obama administration outlaws paying back debt?
  • Poll says unemployment is Americans’ No. 1 worry… is the worst still to come?
  • Chris Mayer on using stop losses… or not
  • Big data surprise… what’s behind the biggest boom in housing starts since 1990
  • Plus, The 5 meets our toughest crowd to date… details of our latest I.O.U.S.A. screening

What’s the difference between Iceland and Ireland? “One letter and six months,” or so goes a joke making its way around the Internet.

Race to Zero

Aye, on this St. Patty’s Day, the Emerald Isle is suffering the mother of all hangovers: the embodiment of a boom gone bust.

With official unemployment now over 10%, GDP shrinking at a 6.5% clip, a proper housing crash and a 10% federal budget shortfall, Ireland has seen its glory days crumble into one of the eurozone’s most beaten-down economies.

Ratings agencies are on the verge of downgrading Ireland’s sovereign debt, which will assuredly make the whole matter even grimmer.

The opening joke is so pointed, Irish Finance Minister Brian Lenihan is now on a global PR tour to help rekindle the world’s love of shamrocks and Guinness. Despite Lenihan’s denials, many expect the IMF to swoop in and become Ireland’s banker of last resort. A reader pins the blame squarely on the leprechaun, below.

Back in I.O.U.S.A., the federal government wants to outlaw fiscal responsibility:

The Obama administration has forbidden the state of South Carolina to use its stimulus money to pay off its debts. Gov. Mark Sanford sought a wavier last week that would allow him to use a quarter of his state’s federal stimulus — about $700 million — to pay off state debt.

The Democratic National Committee responded to his request with a series of TV commercials on South Carolina stations besmirching Sanford’s judgment and accusing him of “playing politics” with the stimulus money.

White House Budget Director Peter Orszag responded today, reminding him that the stimulus bill is a federal law… and the law prohibits using stimulus money — i.e., your tax dollars — to pay off debt. Doing so, said the White House, would prompt a legal response.

Oy. So now it’s illegal to disagree with them.

Perhaps the current administration should ask American newspapers about paying off debt… we suspect they would give Mr. Obama a straight answer.

The Seattle Post-Intelligencer will print its last issue today, making it the biggest paper to fall victim to the credit crisis. The paper will endure on the Internet… a trend we expect to see more of in the near future.

The P-I lost $14 million last year. Hearst, its publisher, insists that it couldn’t find a buyer and couldn’t afford to keep the P-I on the payroll. Seattle’s other major paper, the Times, is in dire straights, too. Thus the question emerges… will the city on the Sound be the first major city in the U.S. to have no print paper at all?

Unemployment is the most important issue facing the nation, a CNN poll says today. 36% of respondents say job loss is our most pressing economic dilemma, the clear majority. Inflation was second, home prices third. That’s interesting, especially considering the same poll CNN conducted this time last year, when inflation was the “people’s” top economic concern… namely, gas prices.

And in a broader view, its clear “the economy” is the great concern of Americans: 63% said the economy caused most of their worries. Health care was a distant second, at just 9%.

Last week, we saw the first signs of the foreclosure crisis getting worse because homeowners have lost their jobs, rather than due to risky bets with adjustable-rate mortgages. We suspect once the unemployment foreclosure cycle really kicks in… it will take a lot more than forced stimulus spending to stop.

Stocks ended their winning streak yesterday. Major indexes looked like they were ready for another day of gains… the Dow climbed over 150 points during President Obama’s attack on AIG execs and the launch of his plan to prop up American small businesses.

The buzz quickly wore off, however, and traders sold, mostly financials — the very stocks that led the market last week. The Dow and S&P 500 finished just below break-even, while the Nasdaq and Russell 2000 fell almost 2%.

When the next bear leg gets traction, you can expect it to find all-new lows once again.

“The idea that stop losses protect you is a bit oversold,” writes Chris Mayer with a bit of market advice for the next leg down. Stop losses are a popular mechanism in the newsletter industry. “They would protect you if you got stopped out and stayed out. But no one ever does that. You get stopped out on one idea and roll into another idea. Get stopped out again and repeat. After three 25% stop losses, you’re down 60% on your initial capital. I don’t know why that’s so much better than holding one stock you know and riding it down 60%.

“Stop losses are more for traders, which I am not. I’d rather spend a lot of time understanding what I own and hang onto it as long as I think it’s still a good deal. My first reaction when something I like drops 25% is to think that perhaps I should buy more. Just a different philosophy, that’s all.

“I take my cues from my many years studying the great investors — Warren Buffett, Charlie Munger, Peter Lynch, John Neff, Bruce Berkowitz, Joel Greenblatt, Marty Whitman, Seth Klarman and many others. I’ve never heard any of them using stop losses.”

As has been its yen, when the stock market faltered, the dollar strode a little more confidently. The dollar index sank as low as 86.6 yesterday, but it’s back up to 87 and change as we write.

“For a number of months, we have beaten the drum on dollar strength,” writes our currency adviser, Bill Jenkins. “And while I don’t think it is over yet, it does appear that there are some chinks in the armor and cracks in the dam.

“Our forecast for the British pound sterling over the short term is for more strength relative to the U.S. dollar. Here’s why: Recently, it hit a multiyear low (the lowest in the last 24 years). We had a really decent bounce off of there, 1,500 pips or so, and then dropped again. This time we did not match the previous low, although we came close. Since the bounce off of that second pivot, we are looking to make a move higher in the pound.

“Should this continue to materialize, we may be putting in a double bottom. Even if not, there may be enough worry about the dollar to get traders trying to form one. Also, the relative strength index has been declining and shrinking at the same time, indicating that the current trend may be weakening.

“The pound is currently trading around $1.41. My first target for this would be $1.45.” If you’re not already, you can pick up trades from Mr. Jenkins at this address.

Gold remains at a standstill today. You can pick up an ounce for about $915, just a few bucks cheaper than yesterday.

Oil, on the other hand, seems to have found some strength in the dollar’s weakness. Crude is up about $1.50 as we write, to just over $48 a barrel. There’s been more than one rumor floating around about a new cut from OPEC, and this morning’s surprise housing stat certainly helped renew optimism for U.S. demand.

February housing starts surprised analysts yesterday, with our first nugget from the data cupboard. The Commerce Dept. says construction on new homes soared 22% in the month, the first uptick since June 2008 and the biggest jump since 1990. Multifamily units led the way, with a whopping 82% increase in new construction.

The number is probably an outlier caused by extreme builder withdrawal in December and January. Applications for new permits for future builds climbed just 3% in February. We still don’t see enough evidence to call a bottom.

Wholesale prices rose in February for the second straight month, the Labor Dept. says today. Their producer price index (PPI) ticked up just a hair, 0.1% in the month, led mostly by a 1.3% gain in energy costs.

For the time being, the Federal Reserve can still claim the U.S. dollar is deflating… over 12 months, the PPI is down 1.3%.

The credit crisis has caused a boom in early do-it-yourself tax returns. Fifty-two million returns have already been flied, says the IRS, a 6% jump, likely due to hard-hit taxpayers looking for a fat return.

What’s more, over 18 million tax returns were filed on home computers as of last week, up 20% compared with last year. Professionally filed tax returns are down from last year.

“The Irish banks,” writes a reader from the Emerald Isle, “were not brought down by subprime lending (and their ugly sisters, the derivatives that were spun off those loans), but by reckless lending to property developers AND delusional, greedy home buyers who didn’t just borrow to build and buy in Ireland during the so-called Celtic Tiger era, but all over the world. The Irish were actually the biggest property investors in the U.K. and Europe by 2005 because we sucked up the bank-spin that we were the second richest people in the world (after the Japanese — ha) because of our huge property-based asset wealth. (Ha, ha.)

“Now the bubble is just a bitter memory and house prices have crashed, the exchequer finances have been decimated (our national budget is 55 billion euro; tax returns are down 20 billion euro!) and the Irish government and the European Central Bank are propping up the bank failures by nationalizing and recapitalizing them.

“People have a notion of how costly to future generations this is going to be; and now they are also thinking that despite these efforts, the banks could still fail. Shareholders have already been wiped out… but what about our savings, they ask? All the Irish-owned bank deposits are already covered by a 100% state guarantee and the non-Irish ones have a 100,000 euro guarantee.

“Personally, I doubt if the guarantee is worth the paper it’s written on… we don’t have a printing press anymore in Ireland. Instead, euros are printed in Frankfurt by the European Central Bank on behalf of all the EU member states. The cost of issuing Irish bonds is still on the rise.

“Finally, here’s a laugh. Our political leadership is so bereft of ideas that the trade unions are the ones producing agendas for change… and the Irish people are desperately hanging on O’Bama’s every inspirational word.”

Addison Wiggin

The 5 Min. Forecast

P.S. For over 10 years, we’ve been speaking in public all over the world. We’ve addressed Washington-based journalists at the National Press Club, gotten mocked by TV anchors on CNN and Fox, worked with arrogant writers (who are a protected species) in France, guided a bus load of aggressive speculators in China, answered skeptical film crowds at both of the national party conventions and at film festivals across North America… But last night, we met our toughest crowd to date: the residents of the Edenwald Retirement Community in Towson, Md. We screened I.O.U.S.A. and then I took questions.

When I first started in the newsletter business lo 16 years ago, one of my mentors at the time shocked me by predicting that in my lifetime, we’d witness a revolution in the U.S. — and that my generation would resort to euthanizing his because we simply couldn’t afford the promises the federal government had already put on the books. I don’t think we’re quite there yet. But last night, I was reminded of his prediction. The emblem of this revolution won’t be pitchforks and torches, however, but walkers and orthopedic canes.

One gentleman, a 91-year-old former VIP with Legg Mason, approached me as I was leaving the room. “I didn’t agree with most of what you said, young man. But you are an eloquent speaker and I appreciate that.” He is a “big fan” of Bernanke, he said. And believes the TARP money will be paid back, with interest. Another gentleman accused us of selling out to the “do-nothing” crowd and reserved a few choice expletives for Pete Peterson. A third, said we had no idea what we were talking about and that Obama would save us all. Oy. Still a fourth kept repeating the refrain, “Yeah, but what can I do about it?”

Unfortunately, nothing, we replied.


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