Return of Subprime, China Targets the Dollar, Scary Oil Trend, Rise of Potholes and More!

by Addison Wiggin & Ian Mathias

  • Proof that Detroit still doesn’t “get it”… and why the auto crisis is far from over
  • China’s quest to usurp the dollar… strikes deals with Argentina, South Korea, Indonesia and more
  • Byron King unearths a disturbing trend in the oil patch
  • Stocks soar on data, mark to market rule change… a quick-and-dirty explanation below
  • Alan Knuckman on the rise of American potholes… why commodity holders will benefit


  So… this is how we get the economy “back on track”: GMAC, an auto financer 49% owned by GM, announced today it would start loaning to subprime borrowers again. The group said it will roll out a $5 billion line of credit to new car buyers over the next 60 days, now including those with credit scores below 620.

Why? To meet President Obama’s deadline and prop up next quarter’s earnings report — a last-ditch effort to avoid bankruptcy.

GM sales crashed 45% in March compared to 2008. No word on what happens when this group of fictitious subprime buyers can’t pay for their cars either. More on the more probable “prepackaged bankruptcy” route from a reader below.

  Meanwhile, China quietly announced it has agreed to a $10 billion currency swap with Argentina this week. Aside from being a vote of confidence in the other’s currency for both nations, the move allows either nation to trade and invest in the other without having to buy dollars to finance the transaction.

“This measure will play a positive role,” said one of China’s state-run newspapers, “in improving regional currency stability, preventing financial risk and reducing the spread of the crisis at this extraordinary time when the financial crisis is growing daily."

Its deal with Argentina marks China’s sixth multibillion-dollar currency swap, the first in Latin America. 

  China is also stealthily securing its place as a “buyer of last resort.” The Chinese government has made several agreements with South Korea, Malaysia, Indonesia and Belarus this year. If any of the nations faces severe financial strife, China has agreed to lend yuan, instead of the IMF swooping in with fistfuls of greenbacks.

  The Dow popped 2% yesterday, with most other indexes close behind. Just after we finished writing The 5, pending home sales, ISM, construction spending and auto sales data hit the tape.

Curiously, even though they were all pretty lousy, each of ’em beat the Street’s expectations. Here’s the quick and dirty:

  • Auto sales crashed 37% in March year over year. But the seasonally adjusted annual sales rate came in around 9.8 million, nearly a million more than the previous too months and well over the Street’s best guess
  • Pending home sales inched up 2.1% in February. The National Association of Realtors’ pending home sales index was expected fall below January’s record low. Traders saw hope, even if the number increased only because prices have dropped so low
  • The Institute for Supply Management (ISM) says American manufacturing improved slightly last month. Its gauge of the matter rose — drumroll — half a point in March, to 36.3. That’s a far cry from the 50-or-higher growth range, but Wall Street is willing to accept even the slightest pulse at this point
  • Even U.S. construction spending fell slower than expected last month. The Commerce Dept. announced yesterday that spending fell 0.9% in February, half the 1.8% investors were expecting.

  “You’re seeing encouraging signs of improvement in our markets,” suggested Treasury Secretary Geithner yesterday from the G-20 meeting in London, capitalizing on the array of less-gloomy-than-thought reports. “There is a very powerful program of stimulus already in place. You can see some early signs of traction in some economies already from that.”

(For good measure, Mr. Geithner tossed this one out for the future sardonic joke file: “We have a strong independent Federal Reserve,” he said, “with a very strong mandate from the Congress, and they will do what’s necessary to keep inflation low and stable over time.”)

  So confident are the wonks in the Bernanke/Geithner prescription for recovery that they’re now worried it may be too much, too soon!

"If the United States experiences a too rapid recovery,” forecasts a Conference Board report today, “there may be a risk of another recession in 2010.” The group, famous for its consumer sentiment surveys, is worried a “double dip” recession is in the cards. Huge stimulus spending now might spur the U.S. economy into a brief period of growth, but would also crowd out private participation and “fuel expectations for a return to inflation, adding to the uncertainty concerning the pattern and path of economic recovery.”

Whether we endure a second recession in 2010 or not, the Conference Board expects GDP to contract 2.6% this year… the biggest economic shrinkage since 1946.

  Those good vibrations from U.S. data and Tim Geithner wiggled across the Pacific as we slept and Asian stocks got a nice bump. Highlights include Hong Kong up 7.4%, Singapore up 6%, India up 4.5% and Japan up 4.4%.

  Under pressure from, um… everyone, the U.S. Financial Accounting Standards Board eased rules that force banks to value assets at what the market is willing to pay.

HA! What a silly concept. During a crisis, wouldn’t it be better to let banks value their assets each month based on what they think they should be worth? Of course it would.

Under the new rules, a company no longer has to alter the price of assets on its books if those assets were sold in a “distressed” manner. Only an “orderly” sale of assets would prompt the holder to mark it down (or up). Right.

The major indexes loved it… they’re up over 2% on the news.

  Despite signs of life earlier this year, the IPO market remains dead in the water. Several companies tried, but only one U.S. company raised enough capital to go public in the entire first quarter of 2009. In the whole world? Two companies.

But there is some hope. The one U.S. company that managed to float, Mead Johnson Nutrition (pediatric goods), is up 15% from its February issue price. And 29 other companies have filed the paperwork to go public on a U.S. exchange.


  The spot price of gold fell in tandem with stocks’ rise yesterday. It dropped over $25, to below $900, and it’s still falling. .

  The dollar is down today, but for none of the reasons listed above. The European Central Bank cut its main lending rate again today, but not by as much as the world was anticipating. The ECB edged down 25bps, to 1.25%. The Street wanted 1%. So traders are buying euros and selling their dollars. The dollar index dropped a point, to 84.6.

  Oil is climbing up as a result. Circa early 2008, traders have decided today that a weak dollar means higher oil prices (who’d have thought?), and thus light sweet crude is up 7%, back to $51 a barrel.

And going higher:

“The North American rig count has plummeted,” says Byron King, citing a recent Oil & Gas Journal report. “If you do just the raw math, the rig count has declined by over 14 rigs per week, or two per day, for over a year. This week, the number of working land rigs in the U.S. dropped below 1,000 for the first time in many years, to 991.

“Numbers for offshore drilling declined by three rigs, to 40 in the Gulf of Mexico. Among the rigs still working, the number drilling for oil increased by two, to 217. Those drilling for gas were down 47 units, to 810.

“The decline in rigs will eventually lead to tighter supplies.” And higher prices. And record profits. Again. Byron’s on top of the story — including a select portfolio of stocks — in the aptly named Energy & Scarcity Investor. If you’re interested, you can still get 50% off the publication price, but you must respond by midnight tonight. Details below.

  “Repeated freezing and thawing cycles in the Midwest,” reports our resource man Alan Knuckman, “are having a major impact — most notably, potholes. The cycle works like this: cold weather with freezing conditions, road salt melts the ice, but corrodes everything and cracks the pavement, snow falls again, repeat.

“Last year, many cities stopped repaving or repairing roads because of the high crude prices making asphalt extremely expensive. With crude oil remaining solidly around $40-50 for now, springtime works projects are on the table to provide employment and patch up holes big enough to break axles.

“This pothole brigade has led to filling over 280,000 holes since December and is on pace to break repair records. Some of the state of Illinois stimulus money will be spent on road improvement, and 1,500 jobs are planned in the city of Chicago alone.

“Demand for all kinds of commodities will pick up — if not, the demand for moon buggies will. The upside target of $75 remains in crude, with infrastructure roadwork one of the driving-related demand factors.”

  And speaking of potholes:

KFC is offering to repair as many as 500 potholes in five different U.S. cities. The company slams a “Re-freshed by KFC” stamp on top (which washes off after a few rains), and by the power of goodwill, you are inspired to buy a bucket of extra crispy.


“Everyone could use a little help during these tough economic times,” said FKC marketing VP Javier Benito, “and this initiative… is our way of carrying on Col. Sanders’ legacy.”

Heh. Advertising on potholes… only in America.

  “Hey, 5,” a reader writes responding to yesterday’s reader attempt to express dissatisfaction with the U.S. from outside its borders, “you cannot just let someone condemn the USA without an appropriate response. The Canadian said, ‘You never cared about our well-being either.’ This is absolutely and patently absurd.”

“Please bring to this unhappy Canadian’s attention,” writes another, “the fact that Canada, despite being a great nation, has its economic success export driven with the USA. Consequently, the demise of the USA does not bode well for Canada.”

“Pretty smug of you, Wiggin!” writes a third, a little more vociferously, “so another Canadian assh*le gets his rocks off and earns your ‘HEH’!

“We’re the Canadians’ top trading partner, by far… or don’t you know that? You write more stupid articles than a high school dropout, and you have the bleeping nerve to quote a Canadian yet. We should close off our northern borders and see how long the losers north of us beg, ‘NO MAS!’


“Disgusted with The 5 Min. Forecast at last. Cancel ASAP.”

The 5: Touched a nerve, have we? We received a number of e-mails similar to these, many of which were about as factually based as the Canadian’s original. Whether the sentiment expressed is “true” or not is practically immaterial. It’s out there.

And… by the way… I am a high school dropout.

  “My first reaction was the same as The 5,” writes a reader in response to Wagoner’s dismissal at GM. “The U.S. government should not be making management decisions.

“However, late Monday, when the White House released info that it was inclined toward a bankruptcy solution, it became clear why Wagoner is out. He has consistently said that bankruptcy is not a solution. He has defended his position by saying people would not buy cars from a bankrupt company and the supply chain would immediately collapse, destroying 2 million jobs.

“The Obama administration has made many mistakes; however, this does not appear to be one of them. It has taken steps to shore up the suppliers with credit, and assured Americans that if they buy cars, the warranty will be honored. Having done that, it is now in a position to move GM in and out of bankruptcy quickly. Had Wagoner stayed with his position that bankruptcy is not an option, the strategy would not work. They could not have a leader at GM that did not agree with the strategy. I have liked the prepackaged bankruptcy solution from the beginning. They may well get this one right.

The 5: Perhaps.

Thanks for reading,

Addison Wiggin

The 5 Min. Forecast

P.S. This is your last chance to get 50% off Energy & Scarcity Investor. Our offer is linked to an EPA ruling, which we expect to be announced as early as today. Should the EPA mandate come to fruition, Byron’s “grizzly power” play will achieve critical support. If you subscribe to Energy & Scarcity Investor by midnight tonight, you’ll get the details AND save 50% off the normal price. Learn more, here.



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