10.2% Unemployment, Fannie Mae Gets Worse, The Danger of Cash and More!

by Addison Wiggin & Ian Mathias

  • Unemployment scene gets worse by all measures… The 5, John Williams share favorite job metrics
  • It’s possible — Fannie Mae gets even worse… more big losses, another bailout and a new foreclosure scheme
  • Commercial real estate poll sees no recovery till 2011… Dan Amoss’ CRE forecast, below
  • Market wavers, but should you sell? Marc Faber on the dangers of fleeing to cash
  • Plus, gold hits another record… why $1,100 is more interesting than $1,090

  We’ve said it before, and again, but it still bears repeating: The real barometers of this recession are employment and housing… and both fronts aren’t looking so hot today.

  More than one in every 10 Americans is out of work, the Labor Department reluctantly reported this morning. The official unemployment rate jumped from 9.8% to 10.2% in October. Not only is that the highest in 26 years, but it blew Wall Street clear out of the water — they had priced in a rise to 9.9%.

The Labor Department announced more job losses than expected as well — 190,000 lost jobs, instead of the anticipated 175,000. The number puts to rest a desperate hope from a few months back — that August’s surprisingly small job loss would mark one of the final months of contracting employment.

That brings the total to 15.7 million officially unemployed Americans, a record 35.6% of which have been out of work for more than six months.

The U6 unemployment number — our preferred gauge, which includes a broader section of the jobless and underemployed — soared half a percentage point in just one month, to a record 17.5%.

  “Help-wanted advertising is contracting,” reports John Williams of Shadowstats, with one of his preferred employment metrics. “The Conference Board’s newspaper help-wanted advertising index for September (a leading indicator to October’s employment report) fell to a new record low of 9, from the prior low of 10 that had held for the preceding four months. This new 58-year low is a very negative signal for background employment conditions.

“While some of the weakness in this index of recent years has been due to ads shifting from newspapers to the Internet, near-term relative changes remain significant indicators of pending employment activity. The Conference Board’s online help-wanted advertising also has been in monthly decline, with year-to-year change for new ads down 24.6% in October, versus an annual decline of 25.7% in September. The declining online data are leading indicators of activity to both the October and November employment reports.”

  Lest you think we only tell one side of this story, a glimmer of hope from today’s jobs report: Temp agencies added 34,000 jobs in October, the first statistically notable increase since the recession officially kicked off 22 months ago. Temps have been decent leading indicators for the employment scene in the past, so we’ll keep an eye on ’em.

  The housing front ain’t pretty this morning, specially Fannie Mae’s ugly mug. The lender of last resort (not coincidentally now the largest dealer of U.S. home loans) turned in a $19 billion quarterly loss yesterday. Surprise, surprise… its government receivership has made Fannie WORSE, as it is now forced to accept more bad loans and participate in foreclosure prevention programs — the two major sources of its third-quarter loss.

Moments after its earnings announcement, Fannie asked the government for another $15 billion bailout. It’ll get it, which will bring its taxpayer tab up to $60 billion. The company is eligible for up to $200 billion in bailout bucks before further congressional approval is required. We’ll go way out on a limb here and forecast that Fannie will devour every last cent.

  How desperate have Fannie and the federales become? Fannie Mae introduced a nationwide “Deed for Lease” program yesterday, where homeowners about to be foreclosed can transfer ownership to Fannie Mae and then rent the property from a third-party management company.

It’s a sweet deal for homeowners on the verge, but the same “extend and pretend” mentality we highlighted yesterday. Fannie gets to keep more cheap foreclosure properties from hitting the market by playing landlord for a year or so… surely, by then it’ll have all blown over, right?

  46% of commercial real estate professionals say the CRE market will not rebound until 2011, says a poll released yesterday by LoopNet, an online CRE marketplace. 53% expect further price declines of 11% or more. “Lack of access to debt financing” was the No. 1 cited barrier to recovery.

“The only way we’ll see a sustained bottom in commercial real estate values,” writes Dan Amoss, “is if we see a few hundred billion dollars in new equity come into the sector in order to recapitalize underwater properties. As this happens, the original equity holders will be massively diluted or wiped out; the banks holding the mortgage will take a haircut; and these banks will restructure that property’s mortgage after an equity infusion from new owners (or, in some cases, from the old owners, if they can come up with lots of cash).

“With a downward adjustment in expectations for 2010 GDP, investment appetite for commercial real estate — an economically sensitive asset — should weaken once again.”

With Dan’s help, you can profit as commercial real estate comes back down to reality… learn how here.

  All the news above is of little concern to the market today. The S&P opened down a bit on the surprisingly bad jobs report, but as we write, all major indexes are hovering around break-even.

“Negative employment reminds everyone,” adds Dan Denning, “that this recovery (if it can properly be called that) is still largely a jobless one. The process of reducing household debt is going to take years, and not months, if households can’t grow their incomes. Real wage growth (adjusted for inflation) is pretty hard to come by in most of the Western world, unless you run a bank.

“All this adds up to lower household spending ahead. How much further ahead can stock prices get of corporate profits that may never materialize? We’ll see. But valuations are already stretched. Investment adviser Jeremy Grantham reckons fair value on the S&P 500 is around 860 — or 24% lower than yesterday’s close at 1,066.”

But before your slam the sell button today, think about this… is selling stocks for dollars really the best move at this junction?

  “There is a risk in holding cash,” answers Dr. Marc Faber, our keynote speaker at last summer’s Investment Symposium, “when governments want to silently expropriate the working and middle class by creating fiscal deficits and inflating the quantity of money and credit.

“It could always be argued that with cash, ‘something’ can always be acquired (goods, services or assets), whereas with stocks, bonds, commodities or properties, they would first need to be liquidated (possibly at a loss) before funds would be available with which to buy ‘something.’ That is correct.

“But investors could also lose their cash or may be forced to liquidate it at a loss. Complete loss of cash occurs when a financial institution fails (and the government doesn’t step in with a bailout). Taking a loss on cash also occurs when a currency depreciates against asset prices or goods and service prices (loss of purchasing power, commonly called ‘inflation’).

“Consider someone who, at the beginning of 2009, was sitting on a million dollars in cash and intended to purchase a house in Canada for his retirement. Hearing all the negative stories about the property market, he refrained from buying the house. Unfortunately, he kept his funds in U.S. dollars. Today, his U.S. dollar cash trove would be worth 17% less in Canadian dollar terms because of the U.S. dollar’s depreciation against that currency.”

As you’d expect, this is a small portion of a very large and complex argument from Dr. Faber. Since it’s our nature to cut to the chase, here’s his conclusion: “I am still leaning toward the view that longer-term investors should overweight equities outside the US.”

For much more from the good doctor, check out The Daily Reckoning next week… we’re about to publish an exclusive interview with Faber in which he predicts the dollar will revert to its intrinsic value within 10 years… maybe five..

  The dollar index is right at yesterday’s levels, around 75.7.

  But interestingly, gold is inching higher. The spot price found itself another record high this morning — $1,100 an ounce. We suspect when the gold mania really starts to heat up, the spot price will decouple from just about everything… the dollar, stocks, bonds, etc. Interesting to see hints of that behavior today. For all the market swings this week, gold hasn’t really given up an inch.

  Last today, an attempt to restore balance: Yesterday, we gushed a bit over China… how Disney, with the freedom to open a theme park anywhere in the world, chose Shanghai as the most promising location. Today, we noticed this Drudge Report bit: After an “accidental” beating death, the Chinese government has decided to ban physical punishment for those deemed “addicted to the Internet.” This is just a few months after Chinese officials banned shock therapy for the same “disorder.”

Evidently, the Chinese government has caused a wave of concern among parents that the Internet is poisoning the Chinese youth. Hundreds of youth camps have sprouted up in response, offering extreme military discipline as treatment… for an Internet addiction? Crazytown… 

  “Really enjoying The 5 Min. Forecast,” a reader begins. We’d like to interrupt this gentleman to add that flattery, while not necessarily encouraged, is welcome by your 5 Min. editors.

“On your point about ‘extend and pretend’ and banks rolling over loans, it is worth pointing out that this happens in a lot of parts of the world as a standard way to hide bad debt. In particular, I have China in mind. I worked for one of the bulge bracket investment banks for 15 years (but I’m one of the good guys — honest), and in ’04-’06, I was in the team that did due diligence on one of the big four Chinese banks, prior to my employer making a substantial pre-IPO ‘strategic’ investment (since sold for a quick buck due to a precarious post-crisis financial position — how very strategic… but that’s another story).

“Anyway, these banks are basket cases (the Chinese ones, that is — much worse than even the Western ones). Stuffed full of nonperforming loans, with lending directed by government to favored industries (think Lloyds and RBS government-mandated lending quotas in the U.K. now… scary) and virtually no understanding of accounting, let alone risk management… Add balance sheets that are growing by 20-40% per year and you have a scary mix. One of their favorite tricks for hiding bad loans was (is?) continually rolling over one-year loans to bust companies — i.e., ‘extend and pretend,’ as you put it.”

  “What silver lining do you see?” a reader writes on our blog, “in giving businesses that were profitable in 2003-07 refunds on the taxes they paid for those years just because they lost money in 2008-09? If they were profitable, they should pay taxes. You seem disgusted by the extra government charity toward the unemployed, but find something good about a refund that businesses don’t deserve. What’s that logic? I enjoy your daily column; keep up the good work.”

The 5: Thanks.

Our logic: We’d rather see the government give back what it’s taken before distributing more handouts (financed by more taxes). Unemployment benefits are fine, but 99 weeks of them? C’mon.

Have a nice weekend,

Ian Mathias

The 5 Min. Forecast

P.S. Just a few days left on our big discount for Master FX Options Trader. In our opinion, editor Bill Jenkins has the best of both worlds here… the ample liquidity of the FOREX market plus the limited risk and huge profit potential of options. If you’re looking to try your hand, this is a great chance.


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