FDIC Spills the Beans, Hiding From the Recession, Short the Pound, The Bank of Montreal and More!

by Addison Wiggin & Ian Mathias

  • Banking crisis still in full swing, says FDIC…
  • But wait: One area of rising wages and ample employment
  • Byron King on an employment misconception: Lots of lost jobs aren’t coming back
  • “Cash for clunkers” winds down… The 5 details its controversial “success”
  • Bill Jenkins lists the many reasons why you should short the pound
  • Plus, the mob surrounds our inbox… letters and responses on Ted Kennedy, Amoss’ latest short sell


  We begin a litany of happy news today, with this nugget: The American banking system is not improving, the FDIC reports.

This morning, the government agency added 111 more lenders to its “problem bank” list, which now stands at a 15-year high of 416 banks. That’s nearly $300 billion in combined assets at risk. As always, the FDIC will not name names, lest the list might actually become useful.

What’s more, as we forecast Monday, the FDIC’s deposit insurance fund took a major hit in the second quarter. Even after raising $5.6 billion in replenishments, the fund fell from $13 billion to $10.4 billion. We hasten to add this still doesn’t account for the roughly $7 billion in losses occurred by the Colonial and Guaranty failures.

In all, FDIC insured banks reported a $3.7 billion net loss in the second quarter, only the second quarterly loss reported in the last 18 years.

The FDIC can borrow up to $500 billion from the Treasury for future bank failures and deposit rescues… hard to believe that they won’t be tapping that backstop soon.

  Numbers are starting to trickle in for the “cash for clunkers” — the popular life-support program for another American industry:

  • Program participants snapped up 690,000 new vehicles, at a government (read: taxpayer/China) cost of $2.9 billion
  • Toyota was the biggest winner of the program, accounting for 19% of the market share and 2 of the top 3 best-selling models.
  • Japanese manufacturers sold 41% of the new cars and trucks, more than any other nation. That’s actually a bit higher than their 34% average market share of sales in the first half of 2009
  • U.S. auto still did all right. The Big Three snatched up 38% of sales
  • GM sold the most among U.S. manufacturers, the second most among all automakers.

“This is a win for the economy, a win for the environment and a win for American consumers,” beamed the transportation secretary, Ray LaHood. Yeah, leadership in action.


  As if that’s not enough, check out this chart produced by the Bureau of Economic Analysis and Cato Institute:

A decade ago, the average federal civilian employee earned 66% more than the typical 9-5 shlub. Today, that gap in compensation is now more than double the average.


  Meanwhile, 570,000 once-privately employed Americans filed a new claim for unemployment benefits last week. First-time initial claims fell by 10,000 from the previous week, not as big a drop as the Street anticipated. Continuing claims fell too, by 119,000, to a total of 6.13 million.

  “Many of the recent job losses are permanent,” Byron King hastens to add. “They’re structural. It’s not just the good old days, when the company said, ‘Go home and we’ll call you back in a few months.’ No, in many cases, the jobs are gone forever.

“It’s not just factory jobs, either. Those jobs were the first to go. The U.S. economy lost millions of its old-line factory jobs over the past 25 years or so. It brought us into the age of the Rust Belt. Some economists and deep thinkers bragged about how this was somehow ‘good’ for America. (Call me old-fashioned, but I could never quite figure that out.)

“Now people with white collars are getting hit with permanent job losses in sectors like banking and law. Many parts of the nation’s financial districts are the new Rust Belts of America.

“There are former lawyers waiting on tables, stealing jobs from the traditional class of table servers, starving artists. At many silk-stocking firms, even the formerly sacrosanct legal “billable hour” is under attack. And I know doctors and architects who’ve been laid off.

“So joblessness is up, and it’s not about to come down anytime soon.”

  "If one considers the people who would like a job but have stopped looking,” said Atlanta Fed chief Dennis Lockhart yesterday, “and those who are working fewer hours than they want, the unemployment rate would move from the official 9.4% to 16%.”

Heh. Did you get that? A Fed chief just suggested real unemployment is 16%, 70% worse than advertised.

Hmmn… if a growing number of the population is working for the government at higher-than-market rates… and another growing portion is asking the government for assistance while looking for work elsewhere… and 54% of the population is already getting more money back from the government than they pay in… and the only incentives for buying stuff like cars and houses come from tax breaks at the expense of future generations… and the bank system is still on life-support… makes one wonder how are we going to get out of this mess?

  The U.S. economy contracted at an annual rate of 1% in the second quarter, the Commerce Department guessed today for a second time.


The Street was braced for a revision down on this second look at 2Q GDP, but Uncle Sam decided to leave it at 1%. The report claimed that inventories were cut more than previously reported, which is also giving hope that there is less excess inventory to burn through in the current quarter.

  The dollar has staged a small rally on the GDP news. The dollar index jumped a quick half a point and registers around 78.5. as we write.

  “I think the British pound is in for trouble,” writes our currency trader Bill Jenkins. He sent us this bulleted breakdown of the pound’s woes yesterday:

  • Inflation is falling (since October 2008), which generally means no forecast for a rise in rates. No rising rates means no attraction for investors
  • U.K. exports have hit the skids for the period going back to November. In spite of the flattening out over the last couple reporting periods, there is no recovery here
  • Industrial production in the United Kingdom has maintained double-digit losses since January. Without production, nothing sells. No sales… no income. No income… no jobs
  • Thus, the unemployment rate has been rising every month since January. Nearly 1 in 5 households are living on government benefits, with nearly 2 million children living in homes where no adult is working
  • The Bank of England recently announced an extension of its quantitative easing program
  • There are still rumblings about sovereign credit rating cuts. If these things do not change going forward, that axe will certainly fall.

“It is impossible to say if the pound has been stretched to its final limit. But try as they might, the sterling bulls have not been able to really stretch it much farther from this consolidation level in the last 90 days or so.”

Looking at the charts, Bill told us his pound target is around $1.55, down about 4% from today’s price. But with the power of currency options, potential profits are vastly greater…If you want to trade this developing trend, get Bill’s help here.

  “You did irreparable damage to your credibility with the Kennedy comments,” a reader writes in response to yesterday’s issue. “He was highly respected by both parties. Best not to say anything than take the opportunity to slip in political spin. Your guys lost – get over it!”

The 5: Our guys? We weren’t even aware we had any representatives of our point of view in the Senate.

  “Ted Kennedy was a politician,” another reader writes. We have long forgotten what that truly means. He knew honest negotiations and had friends and respect on both sides of the aisle. Sad to say you can’t let partisan politics aside to even acknowledge the passing of a true statesman. That’s sad.”

  “I’ve struggled to read through The 5 lately,” adds another, “mainly because of the frequent fantasyland exuberance for unworkable free markets that can’t exist in any society in any country at any time. Today, I was enticed in by the reference to Ted Kennedy, curious to see how you handled it and wondering how you might spin free markets, socialism and Ted Kennedy into some froth of self-assured arrogance that you have command of all things economic and how to save the world.

“I was pleasantly surprised. Byron’s note, while not very insightful, was fair and spot on. But no matter what you might have felt or said in private, you handled it with class.”

The 5: Ummm… thanks? Byron’s forecast is already coming true. Yesterday, Sen. Byrd proposed the new health care bill be named in Kennedy’s honor.


Ian Mathias

The 5 Min. Forecast

P.S. “I am sorry but you missed this one badly,” a reader writes of Dan Amoss’ much-ballyhooed put that we released on Monday. “Your hype has to be controlled. One would have thought that based on your information Bank of Montreal would have announced results much worse than estimated. Instead, it beat estimates. This just makes me mad, and I lost a lot of bucks on this trade, and I am not willing to risk waiting around for the next quarterly report. Who would, with the relatively positive news that BMO released yesterday? Just disgusting! Shame on you.”

The 5: The cat is out of the bag on Bank of Montreal. We tried to keep a lid on the story for paying subscribers, but details ended up being spread all over the Internet, including a blog at The Globe & Mail, Stock Gumshoe and short bits reported in Bloomberg and Reuters.


But if you’re waiting for us to issue a “mea culpa” and hang Dan out to dry — that’s not going to happen. We think his analysis is first-class, and the nature of this speculation still gives investors time to profit. It’s only over if you sold in a panic.


Of course, there’s always a chance Dan’s pick is either too early or wrong. That’s the nature of speculation. If you can’t stomach trading swings and a potential loss, buy Treasury bonds. (Heh, even that might not pan out.) There are quite a few people who appreciate Dan’s efforts, yours truly included.


If, on the other hand, you’re actually interested in a thorough and clearheaded exploration of BMO’s latest earnings report — including questions Dan has regarding loan loss provisions and "tier one capital" — see your latest Strategic Short Report alert.

By the way, Dan’s on a plane right now. But by e-mail this morning, he said he’s got his eye on anther bank — this one a smaller American bank. He’ll be sending his recommended put soon…from the frying pan into the fire.


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