End of the Recession, Middle of the Banking Crisis, TARP Dividends and More!

by Addison Wiggin & Ian Mathias

  • Reliable indicator says recession might be over… can it be trusted this time around?
  • Dan Amoss on the Western banking crisis that’s still alive and kicking
  • Seeking diverse income investments? Jim Nelson says buy ADRs
  • U.S. government profits over $6 billion from TARP… so who gets the proceeds?
  • Plus, one commodity hitting generational highs that still might have room to run


  Is this leg of the Great Recession over? Or has the government duped us yet again?

Capacity utilization inched up a few tenths of a percent in July, the Fed proclaimed today. American companies utilized 68.5% of their productive potential, up from June’s record low of 68.1%. We have a particular affinity for this D-list data point… aside from measuring our collective utility, it’s a worthy economic indicator:

So is this it? Despite so many other feelings to the contrary, is the recession (as we know it) over?

The reason behind capacity utilization’s meager rise provides the best answer: July’s improvement was driven entirely by auto manufacturers coming back to life. They had to bump up production 20.1% to keep up with the initial response to “cash for clunkers.”

  Even though it’s not legit, we wouldn’t be surprised if we are at or near the technical end of this recession. Between all the government stimuli and manipulation, the political pressure on the current administration to “do something,” this massive bear market stock rally and Uncle Sam’s inclination to fudge economic data… would you really be surprised if this thing ends in theory long before it’s over in practice?

Of course, the National Bureau of Economic Research (NBER) will be of no help. Having no interest in real-time forecasting, they won’t officially call an end to this recession until it’s long past. It took until December 2008 to tell us that this whole mess started in December 2007. Heh… by the time the NBER calls an end to this one, we might have begun another.

“My vote: April 2009,” says a de facto member of The 5 Min. crew, Dave Gonigam. “Protestations of the NBER’s independence notwithstanding, I think the political pressure will be too intense to allow anything more than the current postwar record of 16 months.”

  57% of economists already believe the recession has ended, according to a Wall Street Journal survey published this week. Another 23% think it’ll be over in the next couple months.

  Hong Kong announced today that its economy has stopped contracting. Just like France and Germany yesterday, Hong Kong unveiled surprise GDP growth in the second quarter. The Hong Kong economy popped up 3.3% from the first quarter to the second, double Bloomberg’s estimate and its first GDP growth in a year.

“The worst is over for the global economy,” Li Ka-shing (Hong Kong’s Warren Buffett) declared, with this important caveat: “It’s too optimistic to say the global economy has reached a turning point. The degree of decline has shrunk, but that doesn’t mean it has stopped shrinking.”

  The U.S. banking crisis isn’t over yet, a Bloomberg study implicitly declared today. According to Bloomie, over 150 publicly traded U.S. banks have 5% or more of their total holdings in nonperforming loans.

“At a 3% level, I’d be concerned that there’s some underlying issue, and if they’re at 5%, chances are regulators have them classified as being in unsafe and unsound condition,” Walter Mix, former commissioner of the California Department of Financial Institutions, told Bloomberg.

If the paper is right, those 150-plus banks are sitting on $193 billion in deposits. If just 7% of them fail, it’ll wipe out the FDIC’s deposit insurance fund. Also, the 19 stress-tested, too-big-to-fail banks aren’t included on the list.

305 financial institutions are currently on the FDIC’s “problem list.”

  “Right now, the market has priced bank stocks for perfection, but the earnings outlook remains bleak,” Dan Amoss tells us. “Investors are excited about the wide yield curve that’s enabling banks to borrow at ultra-low rates and lend at much higher rates. But starting a few years ago — and going forward a few more years — losses on loans made during the bubble will matter more than the wide yield curve. More bank failures, capital shortfalls, dividend cuts and shareholder dilution are in the cards for most bank stock fans.

“For example, the banks are delaying recognition of losses on underwater mortgages, precisely because they have the green light from regulators to try to ‘earn their way out’ of their credit losses over time (i.e., ration credit for borrowers at high interest rates, stiff savers with low CD rates and pocket the spread).


“Trouble with this scenario is unless the auditors signing off on bank balance sheets want to risk lawsuits, they will FORCE banks to disclose delinquencies in at least the footnotes in their 10-Qs. A rules-based system is still at the core of bank accounting, meaning that at the very least, banks will have to disclose delinquencies, regardless of whether they plan to pray for recovery of loan value and restoration of principal and interest payments or write it off entirely.

“Because bank stocks usually act as a canary in the coal mine, a continued bear market in banks translates into a continued bear market in most other stocks. The evidence tells me we’re experiencing a bear market rally, not a new bull market. The promoters of the idea that this is a new bull market are ignoring one of the worst enemies of stocks: uncertainty. Right now, especially considering aggressive government policies, uncertainty about the future business environment is very high.”

Dan just selected one bank that seems destined to suffer the scenario he explained above. It’s a big bank — one you likely know — that he believes is about to give shareholders the shaft… and shorts a big payday. As part of a very special offer, we’re willing to give you the ticker for just $1. We think you’ll find his analysis so profitable, you’ll subscribe soon after. So check out this screamin’ deal here

  Consumer sentiment took a surprise tumble in early August, the University of Michigan says today. Their gauge of consumer feelings fell from 66 to 63, much to Wall Street’s surprise, which expected a rise to 68.

  Consumer inflation just registered its largest annual decline in 59 years. The Consumer Price Index has fallen 2.1% over the last year, says the labor Department today.

But this is interesting: The “core index,” which strips out food and energy, is up 1.5% on an annual basis. This is the measure the Fed is supposed to use when determining interest rates… we’ll see if they turn a blind eye in order to maintain the status quo.

  Stocks rose yesterday to a fresh 2009 high. The S&P 500 inched up 0.7%, to 1,012, its highest level since October. Traders are taking those profits off the table today, using that consumer sentiment number as an adequate excuse. The S&P is down over 1% as we write.

  On the other side of the world, Chinese stocks just finished their worst week since February. The Shanghai Composite fell 6.6% this week, scaling back its YTD return to “just” 67%. Down 10% from its Aug. 6 high, the index is technically in correction. As we mentioned in detail Tuesday, traders are worried that the booming Chinese economy is growing bubbly with easy money without export support.

  After selling off over the last 48 hours, the dollar is holding steady today. The dollar index fell nearly a full point from Wednesday’s high, to 78.4. It’s hanging out there as we write.

  “Income investors that want to diversify out of the dollar, you should buy American Depositary Receipts,” says Jim Nelson of Lifetime Income Report. ADRs, if you are unfamiliar, are certificates issued by U.S. banks that represent shares of a foreign company. While ADRs are denominated and traded in dollars, and also pay dividends in dollars, they don’t have the usual fees and hassles associated with buying shares on foreign exchanges.


“This is the theme we have been hitting the hardest in recent months. ADRs have been a cornerstone of Lifetime Income Report. From the very first issue, we had at least two ADRs in our portfolio. This month, we are adding another.

“There’s a huge reason why we buy ADRs, instead of the currencies themselves. Instead of just the upside of foreign currency to U.S. dollars, we also get the benefit of fast-growing emerging markets and mega income from international players.

“Foreign markets, especially now, have huge dividend yields. The U.S. is near the bottom of the list of places for income investors to look. The smart money is in companies staying out of the dollar.”

Which ADRs does Jim recommend? Find out here.

Speaking of dividends, the U.S. government is already sitting on $6.8 billion in dividend and interest payments on TARP loans. Of course, the debate over what to do with TARP “profits” is already under way. Barney Frank and his brood want to dump it into a foreclosure prevention fund. And Republicans — who suddenly started caring about deficits this year — want to pay down our debts. We say, might as well hand the whole thing over to China… it’s their money anyway.

  Commodities are under pressure today. Oil is down almost $3, to $68 a barrel, thanks mostly to the sudden drop in the consumer sentiment survey. Gold’s down too, by $10. An ounce goes for $945 as we write.

  Sugar is still proving to be the commodity of the year. With futures contracts now at 22 cents a pound, the sweet stuff is up 88% this year, to a 28-year high. Brazil, the world’s biggest sugar producer, is struggling with wet weather and diverting much of the crop yield to ethanol production. India, the world’s second biggest producer, is strapped with exceptionally dry weather. And just like that — poof, supply shortages. 

A coalition of U.S. food manufacturers has already begged the USDA to ease import quotas, saying in a letter that without such deregulation, “consumers will pay higher prices, food manufacturing jobs will be at risk and trading patterns will be distorted.”

So is it too late to get in? “The market has more potential for upside than downside,” said Cyrus Raja of Al Khaleej Sugar, the world’s largest refiner. 

“Sugar is certainly going to go much, much higher during the course of the bull market,” opines Jim Rogers.

Have a great weekend,

Ian Mathias

The 5 Min. Forecast

P.S. There’s no need to sugarcoat this offer: $1 gets you Dan Amoss’ latest and greatest financial short play, plus one month of Strategic Short Report. If this sort of thing isn’t for you, fine. But otherwise, what are you waiting for? This is the cheapest chance to check out SSR… do so, here.


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