by Addison Wiggin & Ian Mathias
- Global banks alone lose over $4 trillion… on track to eclipse total tech bubble losses
- Another nasty credit crunch byproduct… public schools set to jack up tuition fees
- How Tim Geithner sparked a market rally
- Dan Amoss and Byron King on a government decree that will change the energy industry
- Frank Holmes on the coming oil supply shortage
Banks, brokerages, fund managers… you name the financial firm… they’ve now seen nearly $4.1 trillion in digits evaporate since the beginning of the credit crunch, says the International Monetary Fund (IMF) this morning.
More than half the losses — $2.7 trillion — were sustained by U.S. firms. So far, global financial losses in this bust are almost equal to the entire market cap crunch of the tech bust early in the century:
In an effort to paper over the losses abroad, the IMF has already funded over $55 billion in emergency loans to European nations including Hungary, Serbia, Romania, Iceland, Ukraine, Belarus and Latvia.
Last week, Mexico became the first Latin American country to put up the white flag, asking for a $47 billion line of credit. Just yesterday, Columbia followed suit, seeking $10.4 billion. We’ll go out on a limb here… they won’t be the last.
Naturally, the U.S. will try to chase this bad money with… more bad money. The U.S. Treasury will need to sell a record $2.4 trillion in debt during the fiscal year 2009, says a report from UBS today. Provided, of course, they can find buyers.
From October of last year (the start of fiscal 2009) through last December, the Bush administration went out with a bang, issuing $569 billion in notes, bills and bonds. In the first quarter of this year, the Obama crew bumped the fiscal year tab up over $1 trillion, with $493 billion in debt sales.
UBS expects debts sales at an even greater pace during the second half of the fiscal year, thanks to rising unemployment and a subsequent fall in tax revenue… and all the troublesome multibillion-dollar bailouts yet to come.
Yet even with all those debt sales, the Congressional Budget Office (CBO) still projects a $1.85 trillion budget deficit this year. These numbers are starting to make the Bush administration look like fiscal saints… hard as it is to believe we’d ever be writing that!
Stocks enjoyed a nice bump yesterday, thanks mostly to this guy:
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Geithner and Code Pink… could Washington be any more annoying?
Wall Street has been fretting the May release of the “stress tests” Treasury Secretary Timothy Geithner has been braying over since he assumed his position at the Treasury. Considering the wave of smoke-and-mirror “profits” they’ve been reporting this month, they probably should be.
But here, the G-man put some of those fears to rest: “Currently,” Geithner testified before Congress, “the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.”
Do you suppose he mean the same regulators who never saw this crisis coming? Doesn’t matter anyway… any bank failing to “pass the test” will be given a “series of options” to stay afloat.
Traders loved it. The major U.S. indexes climbed around 2%, erasing about half of Monday’s rout.
But the rally was fleeting. This morning, Wells Fargo announced a surprising 52% jump in net income during the first quarter. Normally, that kind of leap would have investors cheering and drinking and buying.
But as with the banks we reported last week, Wells’ first-quarter earnings surprise looks like a one-time thing — in this case, its acquisition of Wachovia’s assets. Shares of WFC opened down 5%.
Soon after, Morgan Stanley dropped a bomb of its own. The investment bank announced a $177 million loss in the first quarter — about seven times larger than traders were expecting. Bank officials also announced an 81% dividend cut. Shares of MS dropped 8% on the news.
The Dow is fighting to break even as we write.
Baltimore’s own T. Rowe Price revealed today that it isn’t immune to the credit crunch. The firm, which has consistently touted its conservative approach, saw profits fall 68% in the first quarter, year over year. Coupled with a 33% decline in assets under management (from their 2007 peak), T. Rowe said it would have to layoff over 5% of its work force.
Somehow, though, that’s considered good news for the brokerage. Shares of T. Rowe are up 3% today.
Oil traders are taking a break from selling today. After sinking as low as $46 yesterday, light sweet crude is back up to just under $48.
“The economic slowdown has reduced demand for oil and natural gas,” notes Frank Holmes, a perennial favorite at our Investment Symposium in Vancouver, “but the supply-and-demand fundamentals are tightening, rather than loosening. This is because supply has been declining at a greater rate than demand.
“OPEC has cut its production by more than 2 million barrels per day, and its members have been surprisingly disciplined about not cheating on quotas. Hundreds of gas wells in Texas have been shut in and petroleum companies have slashed their capital budgets. This year’s spending on oil and gas exploration and development is expected to be down 20% from 2008.
“The chart below shows world oil supply growth going back to 2005. This year, PIRA sees a slight increase from non-OPEC suppliers and a dramatic drop-off from OPEC in the first quarter. For the rest of the year, both producer groups are expected to be significantly negative.
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“It’s also important to point out that it is much cheaper and easier to cut supply than to bring that same supply back on line. Demand for commodities will likely be hastened by the trillions in stimulus spending by the United States, China, Europe and others. When that happens, there’s a good chance of a supply shortage.
“Here’s a comparison to give you an idea of the scale of supply constraints. Between 1975 and 1985, non-OPEC oil supply grew more than 30%. In the latest five-year period, non-OPEC suppliers boosted their output by only 1.5%.”
Frank seems to always be armed with a flurry of compelling charts like you see above… one of the reasons he’s routinely noted as a fan favorite at our Vancouver event. If you haven’t made plans to join us this summer, better start soon. Seats are filling quickly.
The EPA has initiated its first attempt at fomenting an energy revolution. The group formally ruled “greenhouse gasses” a toxic threat to the public’s health last week.
“This development,” explains Dan Amoss, “along with the climate change legislation making its way through Congress — means that by the end of 2009, it will be more expensive for utilities to produce electricity from coal.
“Despite the fact that natural gas is a carbon-based fuel, its consumption is likely to expand even faster in the future as a result of legislation that assigns a price to carbon emissions. For each unit of electricity produced, gas-fired plants produce far less carbon dioxide than coal plants. So natural gas-fired electricity will take market share away from coal at a fairly rapid clip over the next few years.
“The market will recognize this rising demand for natural gas and should start incorporating it in the form of higher prices for natural gas futures by the end of 2009. It’s also likely that the market will gradually award higher multiples for exploration and production (E&P) stocks like PetroQuest — as it did between 2004 and the peak in summer 2008.”
“From the days of the Babylonians,” adds Byron King, commenting on the real motive behind the new ruling, “government has always been about control. As I understand things, the Babylonians invented the first forms of arithmetic just so that the government could keep count of the farm output. And since ancient days, people who go into government have always looked for new and improved ways of exercising control.
“One of the key targets of government regulation these days is energy. Energy offers control to the control freaks. Energy offers a lot of cash flow to tax as well. And controlling energy lets government affect social behavior. I believe that no level of government will back off anytime soon from the unfettered desire to control things. So we had better get used to investing in that kind of political climate.
“Right now, there’s a strong push from government to control carbon dioxide emissions, that EPA ruling being a prime example. It’s the whole ‘climate change’ argument. Climate change may be a valid concept. It may be bogus. It gets into some pretty complex science and long-term models, so I won’t go into details. Just suffice to say that the government is now on track to regulate CO2 down to your home water heater, fireplace and lawn mower.”
Are your investments prepared for such regulations? If not, be sure to check out Byron’s Energy & Scarcity Investor.
State budget shortfalls are likely to cause a spike in public university tuition costs next year. Public tuition is expected to bump 5-6% for the 2009-2010 school year, at least.
"State budgets are in turmoil," says Terry Hartle of the American Council on Education. "It’s a balancing act. Just about every revenue source that colleges have is under distress."
Uh, that would include the wallets of those families seeking degrees, wouldn’t it?
“My dad came out of the Depression madder than hell,” a reader writes. “World War II had something to do with it also. I suspect that we will see a new set of young people madder than hell when we get out of this mess. The flower children will be gone and hardworking Americans will move to the front and reinvent America and its can-do attitude.
“I’m already madder than hell… wonder if that puts me on a terrorist list?”
“I have spent the past 13 years traveling to Cuba extensively,” writes another, this one responding to Chris Mayer’s optimistic outlook for new policies regarding the communist isle. “I speak fluent Spanish and have written a book about my life there. You are simply dreaming if you think there will be opportunities there anytime soon. It is actually more repressive under Raul. I was in Trinidad, a gorgeous old colonial city four hours from Havana. A friend asked us to bring garlic and onion if we found any in Sancti Spiritus, which was only 25 minutes away. It turns out that there were warehouses full of the stuff, but they could not transport it to Trinidad. A new law requires all municipalities to be self-sufficient in food production.
“On the highway out of Havana, we stopped to buy some delicious peanut candy. The sellers hid in the bushes and were extremely cautious. The police were using rental cars to appear as tourists, setting up sting operations to bust candy sellers! That’s how much they hate capitalism.”
The 5: We have to ask… why spend 13 years traveling there, then?
“Thank you,” writes a third, “for the inclusion of the Dr. Evil picture in yesterday’s edition of The 5. As a recently unemployed Web ‘guru,’ that provided the first good belly laugh I’ve had in the last week. Perfect and apropos. Keep up the good work.”
Cheers,
Addison Wiggin
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